MELBOURNE: The Asian Development Bank’s (ADB) plan to retire coal plants early may hinge on whether investors can be encouraged to put money back into fossil fuels in the near-term for a better long-term outcome, climate fund advisors said.
Reuters reported on Monday the ADB’s plan to refinance and then prematurely retire a coal-fired power plant in Indonesia’s West Java to reduce carbon emissions.
The deal is the first under the ADB’s Energy Transition Mechanism (ETM) that would blend private investment funds, public finance and philanthropic donations to transition to cleaner renewables by shuttering coal plants in Southeast Asia, a region heavily dependent on the more polluting fuel.
The plan has been met with optimism by some climate financiers, who warn they are awaiting more detail, particularly around the renewables mix to replace the coal power and comes as other investors have turned away from fossil fuels altogether.
“Well-structured project finance deals usually find money. The question will be is it sufficiently climate positive in the medium to long term to mitigate the fact that it is effectively investing in coal in the short term?” said Nikki Kemp, a director with the World Economic Forum’s Centre for Nature and Climate.
Under the plan, the Indonesian government, the ADB, and private power producer Cirebon Electric Power would refinance up to $300 million for Cirebon’s 660-megawatt coal-fired power plant on condition that it be taken out of service 10 to 15 years before the end of its 40- to 50-year useful life.
Replacing the amount of power with renewables will be a challenge.
The project would need to build around 1.3 gigawatts of wind and solar generation, as well as a 100-megawatt battery, by 2042 to generate the equivalent steady power equal to the Cirebon plant with zero emissions, said Tim Buckley, a director at think-tank Climate Energy Finance in Sydney.
Indonesia, ADB launch first coal power plant retirement deal
“If this can be legally structured as part of the ADB’s ETM, this is an excellent first example of how the developed world can help finance decarbonisation of energy in emerging markets whilst also ensuring energy security and reliability,” he said.
Arthur Simatupang, chairman of the Independent Power Producers Association of Indonesia cautioned that Indonesia needs to accelerate the development of renewable energy power and tap international funds before focusing on the phase out of existing power.
“Early retirement is just one side, the one that needs to be increased is accelerating renewable energy generation,” he said. “Industrialization and downstreaming in the future will require no small amount of energy.
This is where the private sector role needs to be increased,“ he said.
David Elzinga, the ADB’s senior climate change energy specialist, agreed that Indonesia’s power system needs to be modernised so it can integrate more renewable generation and the bank is talking to a number of possible investors interested in the Cirebon deal and its business model.
Sean Kidney, the Chief Executive of Climate Bonds Initiative, which promotes energy transition investments, said the ADB’s plan is sign of good progress.
Investors will “seek assurance that the deal delivers on its climate objectives, supports transition and does not have a negative impact on workers and communities,” he said.
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