Wed. Oct 27th, 2021

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© Reuters. SHEET PHOTO: A pile of coal in an active coal mine located next to a new solar power development plant in Hurley, West Virginia, USA, on May 11, 2021. REUTERS / Dane Rhys

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By Clara Denina and Melanie Burton

LONDON / MELBOURNE (Reuters) – Financial companies, including UK insurer Prudential (NYSE :), lenders Citi and HSBC and BlackRock (NYSE 🙂 Real Assets, are designing plans to speed up closure of Asian coal-fired power plants to reduce the largest source of carbon emissions, said five people with knowledge of the initiative.

The new proposal, which includes the Asian Development Bank (AfDB), offers a potentially viable model and early talks with Asian governments and multilateral banks are promising, sources told Reuters.

The group plans to create public-private partnerships to buy the plants and liquidate them within 15 years, well before their normal lives, giving workers time to retire or find new jobs and allow countries to move to renewable energy sources.

Its aim is to have a model ready for the COP26 climate conference to be held in Glasgow, Scotland, in November.

The initiative comes as commercial and development banks, under pressure from large investors, withdraw from financing new power plants to meet climate goals.

An ADB executive told Reuters that a first purchase under the proposed scheme, which will include a mix of equity, debt and dealership financing, could arrive as early as next year.

“If you can find an orderly way to replace these plants sooner and remove them sooner, but not overnight, it will open up a more predictable and massively larger space for renewable energy,” he told Reuters Donald Kanak, president of Prudential’s Insurance Growth Markets. .

Coal energy accounts for about one-fifth of the world’s greenhouse gas emissions, making it the largest pollutant.

The proposed mechanism involves increasing the low-cost combined funding that will be used for a carbon reduction facility, while a stand-alone facility would fund renewable incentives.

HSBC declined to comment on the plan.

Finding a path for the developing nations of Asia, which has the new global fleet of coal plants and more under construction, to take advantage of the billions already spent and switch to renewable energy has proven to be a major challenge.

The International Energy Agency expects global coal demand to increase by 4.5% in 2021, and Asia will account for 80% of that growth.

Meanwhile, the International Panel on Climate Change (IPCC) calls for a 38% to 9% drop in coal-fired electricity generation in the world by 2030 and 0.6% in 2050.

MAKE IT VIABLE

The proposed carbon reduction facility would buy and operate coal-fired power plants at a lower capital cost than is available for commercial power plants, allowing them to operate with a wider margin but for less time to generate similar yields.

Cash flow would amortize debt and investors.

The other facility would be used to initiate investments in renewables and storage to take over the energy load of the plants as it grows and will attract funding on its own.

Illustration of the energy transition mechanism https://fingfx.thomsonreuters.com/gfx/ce/znpnednywvl/ETM2.png

The model is already familiar to infrastructure investors who rely on combined financing in so-called public-private agreements, backed by government-funded institutions.

In this case, the development banks would assume the greatest risk by agreeing to assume the first loss as junior debt holders and accept a lower return, according to the proposal.

“To make it viable on more than one or two plants, you have to get private investors,” Michael Paulus, head of Citi’s Asia-Pacific public sector group, which is involved in the initiative, told Reuters.

“There are some who are interested in it, but they won’t do it for free. They may not need a normal return of 10-12%, they can do it for less. But they won’t accept 1 or 2%. We are trying to find out some way to make it work “.

The framework has already been presented to ASEAN finance ministers, the European Commission and European development officials Kanak, who co-chairs the ASEAN center of the investment association for sustainable development.

Details yet to be finalized include ways to encourage coal plant owners to sell, what to do with plants once removed, rehabilitation requirements, and what role carbon credits can play.

Businesses aim to attract funding and other commitments to COP26, when governments will be asked to commit to achieving more ambitious emissions targets and increase funding for countries most vulnerable to climate change.

The administration of the President of the United States, Joe Biden, has re-entered the Paris climate agreement and is committed to an ambitious reduction in carbon emissions, while in July, the Secretary of the United States Treasury, Janet Yellen , told the heads of major development banks, including the AfDB and the World Bank, to draw up plans to mobilize more capital to fight climate change and support emission cuts.

A Treasury official told Reuters that plans for the removal of the coal plants are among the types of projects Yellen wants banks to pursue, adding that the administration is “interested in speeding up the transitions of the coal “to deal with the climate crisis.

ASIA PASSAGE

As part of the group’s proposal, the AfDB has allocated approximately $ 1.7 million to feasibility studies covering Indonesia, the Philippines and Vietnam, to estimate the costs of early closure, what assets could be acquired, and to collaborate. with governments and other stakeholders.

“We would like to make the first acquisition (coal plant) in 2022,” ADB Vice President Ahmed M. Saeed told Reuters, adding that the mechanism could be expanded and used as a template for other regions. , if successful. He added that he is already in discussions about the extension of this work to other Asian countries.

Withdrawing 50% of a country’s capacity prematurely between $ 1 million and $ 1.8 million per megawatt suggests that Indonesia would require a total installation of approximately $ 16 billion to $ 29 billion, while the Philippines would be between $ 5 billion and $ 9 billion and Vietnam, between $ 9 billion and $ 17 billion, according to Prudential’s Kanak estimates.

One of the challenges that needs to be addressed is the potential risk of moral hazard, said Nick Robins, a professor of sustainable finance at the London School of Economics.

“There is a long-standing principle that the polluter must pay. We must absolutely make sure that we do not pay the polluter, but we pay for the accelerated transition,” he said.



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