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ADB mechanism will buy out coal power in southeast Asia

A new programme announced at COP26 plans to speed up progress away from coal-fired power in Indonesia and the Philippines by buying out plants, shutting them down, and helping to provide a cleaner alternative.

Smoke and steam billows from the coal-fired power plant owned by Indonesia Power, next to an area for Java 9 and 10 Coal-Fired Steam Power Plant Project in Suralaya
Smoke and steam billow from a coal-fired power plant in Indonesia, where 62% of electricity comes from coal. Photo: Reuters

If you can’t coax Asian nations off coal-fired power as quickly as you need to, buy the plants and shut them down yourself while funding a better alternative. That’s at the heart of a new model announced at COP26 led by the Asian Development Bank alongside the governments of Indonesia and the Philippines.

It’s a bold approach to a considerable problem: 25% of annual global emissions come from coal-fired power plants; and half of all global greenhouse gas emissions originate in the Asia Pacific region. And the problem isn’t getting any better on its own, as 90% of young coal-fired power plants, defined as those which became operational in the last 20 years, are in Asia.

In Indonesia, 62% of electricity comes from coal, and in the Philippines 57%, with energy demand in Asia expected to double by 2030. Consequently, new coal-fired plants are still being built in southeast Asia while the climate emergency calls for the very opposite response.

[The scheme] has the potential to accelerate the retirement of coal plants by at least 10 to 15 years on average
Carlos Dominguez, Philippines secretary of finance
Carlos Dominguez.jpg

Neither country is blind to its responsibilities – the Philippines announced a moratorium on new coal-fired plants in 2020, and Indonesia plans to phase them out in order to reach carbon neutrality by 2060 – but for faster progress, some intervention is required.

In this first pilot programme, called an Energy Transition Mechanism (ETM), five to seven coal-fired power plants will be retired or repurposed as renewable energy generators. The mechanism is made up of two funds: one to buy up the power plants without waiting for them to reach the end of their lifespan, and one to develop new clean energy investments in generation, storage and grid upgrades in order to help with the consequent shortfall.

The buying of the dirty plants is a little more complicated than just paying a government or owner and shutting the thing down. ADB vice president Ahmed Saeed describes it as a blended finance mechanism to “incentivize the early retirement of coal-fired power assets. And the basic way we do this is by lowering the cost of capital for this behaviour in a way that allows us to reduce by an equivalent number of years the operating life of coal-fired power assets.” But it is, when it comes down to it, about “taking coal out of the mix” – and by doing so, increasing the scope for renewables.

The first seeding for the mechanism is a $25 million grant from Japan’s ministry of finance, but the ADB describes the two funds as multi-billion-dollar vehicles which will be funded by multilateral banks, private institutional investors, philanthropic contributions and other stakeholders.

When fully scaled up, the aim is to retire 50% of the coal fleet of 30 gigawatts in the two countries, plus hopefully Vietnam, in the next 10 to 15 years. The ADB says the reduction in carbon dioxide emissions annually would be equivalent to taking 61 million cars off the road. “As it grows, ETM has the potential to become the largest carbon-reduction programme in the world,” the ADB says.

High-level support

The seniority of the people who lined up in Glasgow to endorse the new mechanism is telling. US secretary of the Treasury Janet Yellen gave a presentation, as did Indonesian minister of finance Sri Mulyani Indrawati and Philippines secretary of finance Carlos Dominguez, plus senior government figures from Japan, the UK, Denmark and Pakistan. A host of others sent messages, including Michael Bloomberg, HSBC CEO Noel Quinn and figures from the Rockefeller Foundation and the Bezos Earth Fund.

Their presence reflects the necessity of reducing coal-power use in Asia, and finding a way to meet the soaring energy needs on the continent with renewable alternatives. In prepared remarks, Dominguez said, “ETM has the potential to accelerate the retirement of coal plants by at least 10 to 15 years on average”; while Mulyani called it, “an ambitious plan that will upgrade Indonesia’s energy infrastructure and accelerate the clean-energy transition toward net-zero emissions in a just and affordable manner.”

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Masatsugu Asakawa, ADB

ADB president Masatsugu Asakawa said Indonesia and the Philippines, “have the potential to be pioneers in the process of removing coal from our region’s energy mix, making a substantial contribution to the reduction of global greenhouse gas emissions, and shifting their economies to a low-carbon growth path.”

A feasibility study is under way to identify candidate coal plants, design transition activities and finalize the financial structure, the ADB said. The hope is that, by increasing demand for clean energy, ETM will help crowd in investment in cost-effective renewable generations, and support technologies such as smart grids, hydrogen and electric vehicles. Clearly scalable in Asia, it is hoped the same model could be applied in Latin America and Africa.

After all, when it comes to hunting emitters, coal-fired power is considered big game. “Coal-fired power is an enormous problem,” says Saeed. “In fact, one of the few problems that may be able to lay claim to being the biggest problem in the world. And in Asia, where the battle for climate change will be won or lost, it’s a particularly pressing issue.”

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