Unique: Citi, HSBC, Prudential hatch plan for Asian coal-fired closures

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

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By Clara Denina and Melanie Burton

LONDON / MELBOURNE (Reuters) – Financial firms including UK insurer Prudential (NYSE :), lenders Citi and HSBC and BlackRock (NYSE 🙂 Real Assets are developing plans to accelerate the shutdown of Asia’s coal-fired power plants to help lower the largest source of carbon emissions, said five people with knowledge of the initiative.

The novel proposal, which includes the Asian Development Bank (ADB), offers a potentially workable model and early talks with Asian governments and multilateral banks look promising, the sources told Reuters.

The group plans to form public-private partnerships to buy up the works and dismantle them within 15 years, much earlier than in their usual life, to give workers time to retire or look for new jobs, and the countries enable the transition to renewable energy sources.

The aim is to complete a model for the COP26 climate change conference to be held in Glasgow, Scotland, in November.

The initiative comes from the fact that, under pressure from major investors, commercial and development banks are withdrawing from financing new power plants in order to achieve the climate targets.

An ADB manager told Reuters that an initial purchase under the proposed program, which will include a mix of equity, debt and concession financing, could be made as early as next year.

“If you can find an orderly way to replace these assets sooner and retire them sooner, but not overnight, that opens up a more predictable, massively larger space for renewable energy,” said Donald Kanak, chairman of Prudential’s Insurance Growth Markets, opposite Reuters.

Coal-fired power plants are responsible for around a fifth of global greenhouse gas emissions, making them the largest polluter.

The proposed mechanism involves the procurement of low-cost blending finance that would be used for a carbon reduction facility, while a separate facility would finance incentives for renewable energy.

HSBC declined to comment on the plan.

Finding a way to make the most of the billions already spent and switch to renewable energy has proven to be a major challenge for developing countries in Asia, which has the world’s newest fleet of coal-fired power plants and more are under construction.

The International Energy Agency expects global coal demand to grow 4.5% in 2021, with Asia accounting for 80% of that growth.

Meanwhile, the International Panel on Climate Change (IPCC) is calling for coal-fired power generation to be reduced from 38% to 9% of global electricity generation by 2030 and to 0.6% by 2050.

MAKING LIVABLE

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

The cash flow would repay debt and investors.

The other facility would be used to boost investments in renewable energy and storage, to take on the energy burden of assets as they grow, and to attract funding themselves.

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

The model is already known to infrastructure investors who rely on blended finance for so-called public-private deals, which is supported by state-funded institutions.

If so, the development banks would take the greatest risk by agreeing to shoulder the first loss as subordinated debt holders and accepting a lower rate of return, the proposal said.

“To make this workable in more than a plant or two, you need to attract private investors,” Michael Paulus, head of Citi’s Asia-Pacific public sector group involved in the initiative, told Reuters.

“There are some who are interested, but they won’t do it for free. They might not need a normal 10-12% return, they might do it for less. But they won’t accept 1 or 2%. We’re trying to get one.” Finding way to get this to work. “

The framework has already been presented to ASEAN finance ministers, the European Commission and European development officials, said Kanak, co-chair of the ASEAN hub of the Sustainable Development Investment Partnership.

The details that have yet to be determined include ways to encourage coal-fired power plant owners to sell, what to do with the plants after they are closed, whether remediation requirements and what role carbon credits could play.

Businesses want to raise funding and other pledges at COP26, which calls on governments to commit to more ambitious emissions targets and increase funding for the countries most vulnerable to climate change.

The administration of US President Joe Biden has re-joined the Paris Agreement and is pushing for an ambitious reduction in carbon emissions, while US Treasury Secretary Janet Yellen in July called on the heads of major development banks, including the ADB and the World Bank, to work out plans for more capital mobilize to combat climate change and support emissions reductions.

A Treasury official told Reuters that coal-fired shutdown plans are among the types of projects Yellen wants the banks to pursue, adding that the government “is interested in accelerating coal swaps” to address the climate crisis to manage something.

ASIA STEPS

As part of the group’s proposal, the ADB allocated approximately $ 1.7 million to feasibility studies for Indonesia, the Philippines, and Vietnam to assess the cost of an early closure, what assets could be acquired, and to engage with governments and other stakeholders in To get in touch.

“We aim to make the first (coal) acquisition in 2022,” ADB Vice President Ahmed M. Saeed told Reuters, adding that if successful, the mechanism could be scaled up and used as a template for other regions. There is already discussion about expanding this work to other countries in Asia, he added.

Shutting down 50% of a country’s capacity prematurely at $ 1 million to $ 1.8 million per megawatt suggests Indonesia would need about $ 16 to 29 billion in total, while the Philippines would need about $ 5 to 9 Billion US dollars and Vietnam would be around 9 to 17 billion US dollars, estimates by Prudentials Kanak.

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

“There is a long-standing principle that the polluter should pay. We absolutely have to make sure that we are not paying the polluter but paying for an accelerated transition, ”he said.

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