In Southeast Asia, decades-long agreements are hampering the move away from coal | Energy
GNPower Dinginin is one of the newest and largest coal-fired power plants in the Philippines. Located in the province of Bataan on the island of Luzon, the $1.7 billion facility began construction in 2016 before launching commercial operations late last year.
Plans are underway to add a second 668 megawatt unit which would bring the total capacity to 1,336 megawatts. Like other coal-fired power plants in the Philippines, GNPower Dinginin materialized years before the administration of President Rodrigo Duterte banned new coal projects in 2020. Since the ban does not apply to existing companies, start-ups such as GNPower Dinginin ensure that coal will remain the main energy of the Philippines. source for years to come.
Not only is this bad news for climate action, but it also doesn’t make economic sense as global energy demand slows and renewable energy prices fall, climate economists have warned. Preventing the Philippines and other Southeast Asian countries from phasing out coal sooner is a rigid funding model that ensures coal-fired power plants stay active for decades.
Under power purchase agreements (PPAs), which are widely used in the region, utility companies pay coal-fired power plants to produce electricity for a period of 20 to 30 years, regardless of be the external factors – a scenario known as ‘coal foreclosure’.
“Asian emerging markets are risky investments, which is why investors and project developers need higher financial incentives and returns on equity when investing in these markets,” Haneea Isaad, finance expert energy at the American Institute for Energy Economics and Financial Analysis (IEEFA), Al Jazeera told Al Jazeera.
GNPower Dinginin has PPAs with 30 utilities and two retail power providers. The long-term nature of these contracts protects coal-fired power plants from market pressures, which means owners have little incentive to shut down plants that produce guaranteed returns. In many cases, PPAs are unprofitable for utilities because these companies pay more for coal than they would for increasingly affordable renewables.
More than 60% of renewable energy generation added in 2020 costs less than the cheapest new fossil fuel option, according to a report released last year by the International Renewable Energy Agency (IRENA). According to a 2020 report by the Rocky Mountain Institute, the Carbon Tracker Initiative and the Sierra Club, it would be cheaper to build new renewable energy capacity than to continue to operate 39% of the world’s existing coal capacity.
Global electricity demand is also expected to slow between 2022 and 2024, growing at an average annual rate of 2.7% from 6% in 2021, according to the International Energy Association (IEA), with more than 90% of this demand can be met by renewable energies such as solar and wind.
Early termination of a PPA can be an expensive process, leaving the utility to recover outstanding taxes, bank debts, capital investment and compensation to the coal plant developer for loss of profits. In the case of a $1 billion coal plant with a 20-year PPA, early termination could cost a utility between $555 million and $845 million, according to an IEEFA analysis.
These costs are likely to be passed on to consumers in the form of higher electricity prices, according to David Elzinga, senior energy specialist at the Asian Development Bank (ADB).
“There is the climate angle, but you also have to keep in mind the cost of electricity production. The risk of doing nothing is therefore significant both from a climate and a financial point of view,” Elzinga told Al Jazeera.
Early termination of the PPA on the side of the buyer, which is usually a public company in emerging Asia, “could damage investor confidence and lead to fewer deals reaching financial close,” IEEFA’s Isaad said. In Indonesia — the world’s largest exporter of thermal coal — and Vietnam, around 60% of coal-powered assets are owned by public entities, Isaad said.
PLN, Indonesia’s state-owned power utility and the world’s 15th-largest owner of coal-fired power plants, has pledged to retire three of its plants by 2030 and close the others by 2055, but cannot cancel its PPAs, Rida Mulyana, director general of electricity at the Ministry of Energy and Mineral Resources, told local media last year. At best, PLN can negotiate with investors and power producers, Mulyana said.
While wealthy countries like Canada have government agencies that buy out PPAs, many cash-strapped economies cannot afford this option.
The Philippine government agency that privatizes and manages the debt of state energy assets is unable to buy coal-fired power plants without “low-cost, long-term funds”, the Manila Bulletin quoted the president. of the agency’s board, Carlos G Dominguez III, who is also the Philippines’ finance secretary, as reported last year.
“Challenge for lenders and owners”
“Refinancing coal-fired power plants will be a challenge for lenders and owners alike as environmental constraints put pressure on future funding avenues,” Ken Lee, principal analyst at Wood Mackenzie in Singapore, told Al Jazeera.
Blended finance programs that tie a refinancing mechanism, such as green bonds or taxpayer-guaranteed bonds, to reinvestment in clean energy were presented as a possible solution. The AfDB’s Energy Transition Facility, announced last year, aims to decommission 50% of coal-fired power plants in Indonesia, Vietnam and the Philippines over the next 10-15 years – a goal that requires funding $30 billion to $60 billion based on calculations of $1 million to $1.8 million per megawatt, Elzinga said.
Factories in Indonesia, Vietnam and the Philippines are younger and therefore have more life and more financial value, he said. The AfDB is seeking to use concessional loans from governments and the donor community as well as market-based financing for its pilot phase.
So far, private players seem interested in Prudential, Citi, HSBC and BlackRock Real Assets, all of which are said to be in talks with the AfDB. The emergence of international carbon markets, as foreseen by the Paris Agreement, could ease the deal for investors.
Putting a financial value on the carbon emissions avoided by the early closure of coal-fired power plants could reduce debt levels and reduce overall risk – a factor underpinning the Bank’s $125 million package development project at the Chilean utility ENGIE Energía last year, which was touted as the world’s first pilot project to monetize the cost of decarbonization.
With more than 40 countries pledging to phase out coal power at November’s Cop26 conference, energy transition programs such as the AfDB’s are likely to be watched closely by governments, utilities and utilities. consumers.
“Companies, over the past few years, have come under pressure from shareholders to exit coal, so getting them to invest in coal-fired power plants could draw criticism, but we ask companies to invest for the sole purpose of removing these facilities,” Elzinga said. “It would be a lot easier if we asked them to invest in renewables, but that wouldn’t solve the coal foreclosure problem.”