Indonesian facility shows cutting coal is a hard sell for banks

A midsized, 11-year-old coal power station in West Java is an unlikely bellwether for global climate finance.

Cirebon-1 helps keep the lights on and factories whirring in the port city it is named after, a few hours’ drive east of Jakarta. Like much of the coal fleet that generates some 60% of Indonesia’s electricity, the plant is young, built with the help of Korean and Japanese capital during the coal boom of the 2000s and 2010s. Now it is set to close early, sparing the planet millions of tons of carbon dioxide — and becoming a beacon for the energy transition.

If, that is, a credible deal can be struck between the plant’s current investors and the Asian Development Bank (ADB), which is spearheading the program, plus others including large private sector lenders like HSBC Holdings. whose participation would make the deal a model for others to follow. Months of negotiations have demonstrated how hard it is in practice to persuade financial heavyweights to back the early retirement of coal — despite optimistic corporate pronouncements.

An acceptable, transparent agreement to close Cirebon would mark significant progress in the global effort to cut emissions and avoid the worst case scenarios for climate change. Establishing a repeatable model for closing coal plants in the region is critical: If Asia’s coal plants continue to operate as planned, they will consume two-thirds of a fast shrinking carbon budget.

Cirebon is just the beginning. This week, an investment plan is due for a $20 billion climate finance package, the Just Energy Transition Partnership, or JETP, signed by Indonesian President Joko Widodo and U.S. President Joe Biden in Bali in November. The entire project hinges on the ability of deals like this one to "crowd in,” or encourage, private capital. So far, however, few details have been made public. Meanwhile, the world is moving fast towards missing crucial climate finance goals. According to BloombergNEF, annual green investments need to almost triple to nearly $7 trillion by 2030 to hit net zero emissions by mid-century.

Over recent years, the highest-profile efforts have focused on stopping new coal power development. The more pressing conundrum now is how to phase out a vast existing fleet, especially in resource rich, growing economies like Indonesia. Asia’s coal plants account for a third of the region’s total emissions, and they are young. In Indonesia, around 75% were built after 2005. Without phaseout deals like the one being negotiated for Cirebon, they could keep burning coal for decades.

And there’s another catch. Even when an agreement is possible, the process is painfully slow. If all goes to plan, Cirebon would close by 2037. That saves at least five years of emissions, assuming a 30-year official lifespan, and likely far more, given that power plants often operate for decades beyond their stated deadline. But that’s also 14 years and many millions of tons of carbon dioxide away.

There are many Cirebons to be worked through — in Indonesia alone nearly 90 plants were operating in August last year, including those owned by state utility Perusahaan Listrik Negara and independent producers, as well as captive plants, which are owned by and serve industrial operations. More are in the pipeline.

"From a climate point of view, the ideal time frame would be tomorrow, or today if we could make it,” said David Elzinga, a senior energy specialist at the ADB who has been working on the Cirebon project. "But we have to consider that capital has been invested.”

The idea behind early phaseouts in general and the Cirebon deal in particular is simple enough. Closing coal plants early requires money, as investors need to be compensated for the loss of future earnings. That is not a cost that emerging economies can, or want to, shoulder alone.

"While we are in the midst of discussions on funding the energy transition and shutting down coal plants, the costs of doing so is high,” Erick Thohir, Indonesia’s minister of state-owned enterprises, said in an interview last week. "At the end of the day, it’s how fast we want to do the transition. If the money comes today, transition will be faster. If the money comes later on, it will be slower. That’s a fact.”

The theory is that rich governments and multilateral lenders help by providing low-cost grants and loans, which are then blended with market-rate funds from large banks, lowering the overall financial burden. That either allows a coal asset to be refinanced, so investors can hit targets early and accept premature closure — as in the Cirebon case — or for it to be bought, and then wound down prematurely.

This is the same thinking that underpins the JETP, with which the Cirebon deal would overlap. Half of the money in that package will come from the Group of Seven countries plus Norway; the other half will come through large financial institutions like HSBC and Citigroup — institutions that have often made their own pledges to cut emissions — under the Glasgow Financial Alliance for Net Zero (GFANZ).