LONDON / MELBOURNE – Financial firms including UK insurer Prudential, lenders Citi and HSBC and BlackRock Real Assets are drawing up plans to speed up the shutdown of coal-fired power plants in Asia to reduce biggest source of carbon emissions , five people familiar with the initiative said.
The new proposal, which includes the Asian Development Bank (ADB), offers a potentially workable model and early discussions with Asian governments and multilateral banks are promising, the sources told Reuters.
The group plans to create public-private partnerships to buy the plants and shut them down within 15 years, much earlier than their usual lifespan, giving workers time to retire or find a new job and allowing countries to switch to renewable energy sources.
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It aims to prepare a template 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 AfDB executive told Reuters that a first purchase under the proposed program, which will include a mix of equity, debt and concessional financing, could take place as early as next year.
“If you can find an orderly way to replace these plants sooner and pull them out sooner, but not overnight, it opens up a more predictable and much bigger space for renewables,” Donald Kanak told Reuters , Chairman of Prudential’s Insurance Growth Markets. .
Coal-fired power plants are responsible for around a fifth of global greenhouse gas emissions, making them the biggest polluter.
The proposed mechanism involves raising low-cost blended finance that would be used for a carbon reduction facility, while a separate facility would finance revolving incentives.
HSBC declined to comment on the plan.
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Finding a way for developing countries in Asia, which has the world’s newest fleet of coal-fired power plants and more under construction, to make the most of the billions already spent and switch to renewables has been proven a major challenge.
The International Energy Agency expects global demand for coal to grow 4.5% in 2021, with Asia accounting for 80% of that growth.
Meanwhile, the International Panel on Climate Change (IPCC) calls for a drop in coal-fired power generation from 38% to 9% of global generation by 2030 and to 0.6 % by 2050.
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The proposed carbon reduction facility would purchase and operate coal-fired power plants at a lower capital cost than commercial plants, allowing them to operate with a larger margin but for less time to generate similar returns.
The cash flow would make it possible to repay the debt and the investors.
The other facility would be used to boost investment in renewable energy and storage to support the energy load of power plants as they grow, thus attracting funding on its own.
The model is already familiar to infrastructure investors who rely on blended finance in so-called public-private agreements, backed by government-funded institutions.
In this case, development banks would take the greatest risk by agreeing to take the first losses as holders of junior debt as well as accepting a lower return, according to the proposal.
“For this to be viable on more than one or two factories, you have to bring in private investors,” Michael Paulus, head of Citi’s Asia-Pacific public sector group, who is involved in the Citi, told Reuters. initiative.
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“There are some who are interested but they’re not going to do it for free. They might not need a normal 10-12% return, they can do it for less. But they won’t accept. not 1 or 2%. We’re trying to find a way to make it work. “
The framework has already been presented to ASEAN finance ministers, the European Commission and European development officials, said Kanak, who co-chairs the ASEAN Center for the Sustainable Development Investment Partnership.
Details that remain to be finalized include how to encourage owners of coal-fired power plants to sell, what to do with power plants once they retire, rehabilitation requirements, and the possible role of power credits. carbon.
The companies aim to attract finance and other commitments at COP26, when governments will be asked to commit to more ambitious emissions targets and increase funding for countries most vulnerable to climate change.
The administration of US President Joe Biden has reinstated the Paris climate agreement and is pushing for ambitious carbon cuts, while in July US Treasury Secretary Janet Yellen asked the heads of major banks organizations, including the AfDB and the World Bank, to develop plans to mobilize more capital to tackle climate change and support emission reductions.
A Treasury official told Reuters that coal-fired power plant retirement plans were among the types of projects Yellen wants banks to pursue, adding that the administration is “interested in accelerating coal transitions” to combat the climate crisis.
As part of the group’s proposal, the AfDB has allocated around $ 1.7 million for feasibility studies covering Indonesia, the Philippines and Vietnam, to estimate the costs of an early shutdown, which assets could be acquired, and engage with governments and other stakeholders.
“We would like to make the first (coal-fired) acquisition in 2022,” AfDB vice president Ahmed M. Saeed told Reuters, adding that the mechanism could be extended and used as a model for other regions. , if successful. It is already in discussions to extend this work to other Asian countries, he added. To take 50% of a country’s capacity earlier at $ 1 to $ 1.8 million per megawatt, Indonesia would need a total installation of around $ 16 to $ 29 billion, while the Philippines would need about $ 5 billion to $ 9 billion and Vietnam about $ 9 to $ 17 billion, according to estimates from Prudential’s Kanak.
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One of the challenges 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 has to pay. We absolutely have to make sure that we are not paying the polluter, but rather for an accelerated transition, ”he said.