Cirebon case shows closing coal plants proves a hard sell for big global banks | Eko Listiyorini, Norman Harsono & Faris Mokhtar / Bloomberg

An average-sized, 11-year-old coal power plant in West Java is an unlikely indicator for worldwide climate finance.

Cirebon-1 plays a crucial role in ensuring that the port city of Cirebon stays illuminated and its factories continue to operate smoothly. Located a few hours' drive east of Jakarta, this power plant has been aptly named after the city it serves. It is part of Indonesia's coal fleet, which contributes to about 60% of the country's electricity generation. Constructed with financial assistance from Korea and Japan during the coal industry's boom in the 2000s and 2010s, Cirebon-1 is relatively new. However, plans are underway to shut it down ahead of schedule. This decision will not only save millions of tons of carbon dioxide emissions but also serve as a symbol of progress towards a more sustainable energy future.

If a viable agreement can be reached between the current owners of the plant and the Asian Development Bank, leading the initiative, as well as other major private lenders such as HSBC Holdings Plc., whose involvement would set a precedent for similar deals. Despite positive statements from companies, months of negotiations have revealed the challenges of convincing influential financial institutions to support the early abandonment of coal.

A viable, clear understanding to shut down Cirebon would signify a notable advancement in the worldwide endeavor to decrease emissions and prevent the most dire outcomes of climate change. Establishing a method that can be replicated for shutting down coal plants in the area is essential: if the coal plants in Asia persist with their intended operations, they will utilize two-thirds of a dwindling carbon allowance.

Cirebon is only the start. This week, a $20 billion climate finance package called the Just Energy Transition Partnership (JETP) is set for an investment plan. It was signed by Indonesian President Joko Widodo and US President Joe Biden in Bali last November. The success of the entire project depends on deals like this one attracting private capital, also known as "crowding in". So far, not much information about the plan has been released. Meanwhile, the world is quickly approaching the point of missing crucial goals. According to BloombergNEF, annual investments in green initiatives will need to almost triple to around $7 trillion by 2030 in order to achieve net-zero emissions by the middle of the century.

In the past few years, the most prominent endeavors have concentrated on halting the establishment of new coal power production. However, at present, the more urgent predicament revolves around gradually eliminating a significant number of already existing power plants, especially in developing economies abundant in resources such as Indonesia. Coal plants in Asia are responsible for one-third of the region's overall emissions, and they are relatively new. In Indonesia, approximately 75% of coal plants were constructed after 2005. Unless agreements to phase them out, similar to the one being discussed for Cirebon, are reached, these plants could continue to burn coal for many more years.

There is another issue to consider. Even if we can reach an agreement, the process moves at an agonizingly slow pace. If everything goes according to the plan, Cirebon would shut down by the year 2037. This would prevent emissions for at least five years, considering its official lifespan of 30 years, and probably even longer since power plants tend to operate for many decades beyond that. However, we still have to wait for 14 years and deal with the release of millions of tons of carbon dioxide during this time.

In Indonesia alone, there were almost 90 Cirebons in operation by August last year. These Cirebons belonged to various entities, such as the state utility PT Perusahaan Listrik Negara, independent producers, and captive plants serving industrial operations. Additionally, there are more of these Cirebons being planned for the future.

According to David Elzinga, a senior energy specialist at the ADB who has been involved with the Cirebon project, the most desirable timeframe, considering the climate impact, would be tomorrow or even today if it were possible to achieve. However, we must take into account the money that has already been put into it.

The concept behind initiating premature shutdowns, both in a broader context and specifically with respect to the Cirebon agreement, is fairly straightforward. To cease operations of coal power plants before their intended lifespan necessitates financial resources, since investors must be remunerated for the foregone profits. This is a burden that emerging economies cannot bear independently, nor do they desire to do so.

"In the ongoing talks about financing the shift to renewable energy and closing down coal power plants, the expenses involved are significant," stated Erick Thohir, Indonesia's minister responsible for state-owned enterprises, during a recent interview. "Ultimately, the speed at which we can accomplish this transition depends on the availability of funds. If financial support is provided promptly, the transition process can be expedited. Conversely, if funds are delayed, the transition will be slower. This is an undeniable reality."

The idea is that wealthy governments and international financial institutions aid by offering inexpensive gifts and credits, which are subsequently mixed with funds at regular interest rates from major banks, reducing the overall financial strain. This arrangement allows either the restructuring of a coal asset, enabling investors to achieve their goals ahead of schedule and agree to an early termination, as seen in the Cirebon scenario. Alternatively, it facilitates the purchase of a coal asset, which is then brought to an early conclusion.

This aligns with the core ideology of the JETP, which coincides with the Cirebon agreement. The financial package will be funded by a combination of the Group of Seven nations, including Norway, and prominent financial institutions such as HSBC and Citigroup. These institutions are part of the Glasgow Financial Alliance for Net Zero and have frequently committed to reducing greenhouse gas emissions.

However, affluent governments, international financiers, and major financial institutions must also participate.

In an ideal situation, according to Alice Carr, who serves as the executive director for public policy at GFANZ, the major banks would embrace profitable investments that are in line with their net-zero objectives. This would provide countries with a significant influx of funds, enabling them to expedite the process of eliminating coal and avoiding the most catastrophic impacts of climate change. Ultimately, this outcome would be advantageous for all parties involved.

"We are aware that it is challenging to achieve success," stated Carr, who is not associated with the Cirebon undertaking, even though GFANZ participates in the JETP. "However, it is essential for us to gain experience through practical implementation, as there is an excess supply of coal that we need to manage."

In many parts of the globe, the use of coal as an energy source is gradually diminishing. However, it is worth noting that the ease of phasing out coal in certain countries, such as the United States and Germany, has been facilitated by various factors, including the age of the plants, market arrangements, and generous financial support.

There have been previous instances in Asia, but none with the intricate and ambitious international framework being discussed in West Java.

Cirebon has many advantages as a test case. It is privately owned, which means it is not affected by the political issues surrounding state-owned assets. The ADB is helping with its refinancing and early retirement through the Energy Transition Mechanism program, and they have the necessary financial resources to support the transition if others are unable to. The plant's owners from Japan, Korea, and Indonesia are also supportive. Importantly, even though power demand in the country is increasing, closing the plant will not result in a power shortage as there is extra capacity on the Java-Bali grid.

A Cirebon agreement is also cost-effective. The ADB estimates that closing it prematurely could result in a financial loss of up to $300 million, which is a small amount compared to the $1.1 trillion invested worldwide in the shift to low-carbon energy sources last year, as reported by BNEF. Furthermore, this amount is also significantly less than the trillions of dollars that Indonesia requires to achieve net zero emissions.

The initial challenge has been finding a way to reimburse the investors of Cirebon - a group consisting of Marubeni Corp. from Japan, ST International Corp. from Korea, Korea Midland Power Co., and PT Indika Energy from Indonesia - for their financial losses. It is probable that this compensation will be in the form of a single dividend payment, which would cover the current worth of the money lost. Although some stakeholders of the 660-megawatt supercritical plant may choose to relinquish their shares, it is not mandatory for all of them to do so. The investors have acknowledged that they are currently engaged in discussions, but they have chosen not to disclose any further information regarding the matter.

The larger issue lies in finding ways to guarantee that the funds provided by ADB spark a significant increase in investments from worldwide financial institutions.

There is an inherent risk present in the growing market that needs to be acknowledged — financial institutions require greater profits when dealing with countries that are deemed economically or politically unstable, and this principle even applies to Indonesia, which holds a BBB rating. Shareholders' interests continue to be a responsibility for investors.

According to Colin Chen, who is the head of ESG finance in the Asia Pacific region for MUFG Bank, Indonesia has attained an investment grade rating. Therefore, there are various funding options available. However, he also mentioned that there are certain limitations. Not every project will receive the necessary funds. Chen explained that if we follow the traditional commercial approach, only financially viable deals will be considered, leaving a significant number of transactions unaddressed. This is the primary focus of JETP and the related discussions; to offer alternative solutions for such cases.

Negotiators also have to contend with institutional regulations that prohibit the funding of coal projects. In recent times, the quantity of banks ready to provide financial support to fossil fuel endeavors has significantly decreased due to political and investor influence. The investment in new coal mines has declined, and there is little interest in phasing them out completely. However, a minority are more flexible, permitting the financing of coal operations that aid in a timely retirement. GFANZ has suggested guidelines for financial institutions to consider.

"Merely disassociating oneself from funding these coal plants will not put an end to their existence," stated Ravi Menon, leader of the Monetary Authority of Singapore and chairman of the APAC Network Advisory Board for GFANZ, during a meeting in Singapore in June. "Our approach involves embracing coal in order to suffocate its operations."

The information about the Cirebon deal, which is supposed to be examined and replicated, is not yet known if it will be publicly disclosed. This brings up concerns about transparency, as there are agreements that prevent information from being revealed. Indonesian coal has strong connections to political and financial authorities, highlighting the importance of holding them accountable. This also explains why it has been difficult to replace the dirtiest fossil fuel. Even in the JETP deal, there is the possibility of using captive coal.

Aditya Lolla, an Ember analyst specializing in Asia, mentioned that there is a dearth of understanding regarding the exact details of these agreements. While discussions are occurring privately, the public is still unaware of the specifics, resulting in a slight imbalance of information.

The discussions in Cirebon mark the beginning of a lengthy procedure, serving as an initial agreement to test the feasibility. The presence of the adjacent Cirebon-2, a bigger and more modern facility, serves as a constant reminder of this fact.

"Unit-2 will prolong what is expected to conclude," remarked Kris Herwandi, a 33-year-old offspring of sugar farm laborers residing in a nearby village, who is currently pursuing a postgraduate degree. "Instead of solely prioritizing investors' profits, let us consider the destiny of the local community."

However, if there is no investment from private sources, these endeavors will not be able to expand on a national or global level. Additionally, the agreement in Cirebon has managed to navigate around the regulations in Indonesia regarding the sale of government-owned assets, which is a significant obstacle that the JETP will eventually have to face.

If the JETP investment strategy shows advancement and explains the involvement of private funds, it could position Indonesia as a leader in climate finance. A previous JETP has faced political instability in South Africa, where persistent power outages have decreased enthusiasm for any form of energy restructuring.

Ember's Lolla expressed that there is a growing push for blended finance and the premature phasing out of coal. The gradual advancement in this area holds significance.

Michael R. Bloomberg, the creator of Bloomberg News' parent company Bloomberg LP, serves as co-chair of GFANZ. He has pledged a sizable $500 million to Beyond Carbon, a movement striving to shut down all coal-fired power plants in the United States by 2030 and put a halt to the establishment of new natural gas-powered facilities. Additionally, he has initiated a global campaign aimed at closing one-fourth of the world's remaining coal plants and scrapping all proposed coal facilities by 2025. This information has been compiled with the help of Clara Ferreira Marques, Harry Suhartono, Heesu Lee, and Shoko Oda from Bloomberg.

Photo credits: Muhammad Fadli/Bloomberg In the picture, it shows that Muhammad Fadli is the one responsible for capturing this image which is being used for Bloomberg.