Exclusive: Citi, HSBC, Prudential’s incubation plan for coal-fired closure in Asia


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


Clara De Nina and Melanie Burton

London/Melbourne (Reuters)-Financial companies including the British insurance company Prudential (NYSE:), banks Citi and HSBC, and BlackRock (NYSE:) Real Assets are making plans to accelerate the closure of Asian coal The speed of power plants to reduce the largest source of carbon emissions, said five people familiar with the initiative.

Sources told Reuters that new proposals, including the Asian Development Bank (ADB), provide a potentially viable model, and early negotiations with Asian governments and multilateral banks are promising.

The group plans to establish a public-private partnership to acquire these factories within 15 years, and close them within 15 years, which is much earlier than their usual life, to give workers time to retire or find new jobs, and allow countries to switch to new jobs. renewable energy.

Its goal is to prepare a model for the COP26 climate conference in Glasgow, Scotland, in November.

The move came when commercial banks and development banks were under pressure from large investors to stop financing new power plants in order to achieve climate goals.

An ADB executive told Reuters that the first purchase under the proposed plan will include equity, debt and concessional financing, and may be done as early as next year.

Donald Kanak, chairman of Prudential Insurance Growth Markets, told Reuters: “If you can think of an orderly way to replace these factories more quickly and decommission them as soon as possible, but not overnight, this will be possible. Renewable energy opens up a more predictable and larger space.”.

Coal-fired power generation accounts for about one-fifth of the world’s greenhouse gas emissions, making it the largest source of pollution.

The proposed mechanism needs to raise low-cost hybrid financing for carbon emission reduction facilities, while separate facilities will fund renewable incentives.

HSBC declined to comment on the plan.

Developing countries in Asia have the world’s newest coal-fired power plants and more power plants under construction. How to make full use of the billions of dollars already spent and switch to renewable energy has proven to be a major challenge.

The International Energy Agency predicts that global coal demand will increase by 4.5% in 2021, with Asia accounting for 80% of the increase.

At the same time, the International Panel on Climate Change (IPCC) called for reducing coal-fired power generation from 38% of global power generation to 9% by 2030, and to 0.6% by 2050.

Make it feasible

The proposed carbon abatement facility will purchase and operate coal-fired power plants at a lower capital cost than commercial power plants, allowing them to operate at greater profit margins but with shorter operating times to generate similar returns.

The cash flow will pay off debt and investors.

Another facility will be used to initiate investment in renewable energy and storage to take over its energy load as the power plant develops, thereby attracting funds on its own.

Schematic diagram of energy conversion mechanism https://fingfx.thomsonreuters.com/gfx/ce/znpnednywvl/ETM2.png

This model is already familiar to infrastructure investors, who rely on mixed financing in so-called public-private transactions and are supported by government-funded institutions.

According to the proposal, in this case, the development bank will assume the greatest risk, agree to bear the primary debt holder’s first loss and accept a lower return.

Michael Paulus, the head of the Citi Asia Pacific Public Sector Group who participated in the plan, told Reuters: “In order for more than one or two factories to work, you must attract private investors.”

“Some people are interested, but they will not do it for free. They may not need a normal return of 10-12%, and they may spend less money. But they will not accept 1% ​​or 2%. We are trying to find out Some way to make this work work.”

The framework has been submitted to the ASEAN Finance Minister, the European Commission and European Development Officials, and Kanak is the co-chair of the ASEAN Center for Sustainable Development Investment Partnership, he said.

Details that have yet to be finalized include ways to encourage coal-fired power plant owners to sell, how the power plant will be treated after decommissioning, any repair requirements, and the possible role of carbon credits.

The goal of these companies is to attract funding and other commitments at COP26, when governments will be required to commit to more ambitious emission targets and increase financing for the countries most vulnerable to climate change.

The administration of US President Joe Biden has rejoined the Paris climate agreement and is pushing for ambitious reductions in carbon emissions, and in July, US Treasury Secretary Janet Yellen told the Asian Development Bank The heads of major development banks, including the World Bank, formulated plans to mobilize more funds to tackle climate change and support emissions reductions.

A finance ministry official told Reuters that the coal plant decommissioning plan is one of the types of projects Yellen hopes the bank will implement, adding that the government is “interested in accelerating the coal transition” in response to the climate crisis.

Asian steps

As part of the group’s proposal, ADB has allocated approximately US$1.7 million for feasibility studies covering Indonesia, the Philippines, and Vietnam to estimate the cost of early closure, what assets can be acquired, and engage with the government and other stakeholders .

“We hope to make the first (coal power plant) acquisition in 2022,” ADB Deputy President Ahmed Said told Reuters, adding that if successful, the mechanism could be scaled up and used in other regions Template. He added that it is already discussing extending this work to other countries in Asia.

To phase out 50% of a country’s capacity in advance at a price of US$1 million to US$1.8 million per megawatt, which means that Indonesia will need approximately US$1.6 to 29 billion in facilities, while the Philippines will need approximately US$50 to 9 billion, and Vietnam will need approximately US$50 to 9 billion. Between 9 and 17 billion U.S. dollars. Prudential’s Kanak estimates.

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

“Polluters should pay is a long-standing principle. We need to make absolutely sure that we are not paying for polluters, but for accelerating transformation,” he said.

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