Indonesia needs financial institutions to create innovative compensation mechanisms for its early coal phase-out as it would likely threaten jobs, profits for asset owners and energy supply.
The early retirement of coal-fired power stations is one of the hardest decarbonisation projects to finance as it is tantamount to "destroying value" since these are "perfectly good assets making energy people are willing to pay for," Indonesia's deputy co-ordinating minister of maritime affairs and investments in infrastructure and transportation Rachmat Kaimuddin said at the Singapore International Energy Week that began on 23 October.
Such a project represents a negative return on investment for any potential sponsor, which means that grants or deep concessional finance is needed, he said. One of the ways to make the early phase-out more viable is for plant operators and their lenders to restructure agreements on paying back capital costs for a plant. But this could be challenging as many institutions have set rules to no longer finance coal projects, so financial institutions need to be more open to any investment that lowers emissions, he said.
The global community needs to recognise that developing countries require different policies compared with developed nations, Kaimuddin said. Indonesia has "limited fiscal ability" and has invested a lot in fossil fuel capacity in the past two decades, which makes prematurely phasing out power stations very challenging.
Jakarta aims to remove up to 6.7GW of coal-fired generation capacity by 2040 and completely remove coal-fired power from its generation mix by 2058, as part of its net zero by 2060 target.
But Indonesia requires $12 trillion worth of investment between 2022 and 2050 to finance its energy transition away from coal, the country's deputy minister for the co-ordinating ministry for maritime and investment affairs Septia Hario Seto said last month.
Other countries in southeast Asia are similarly dependent on coal-fired power as it accounts for 60pc of power generation in the region, according to the Monetary Authority of Singapore's (MAS) chief sustainability officer and assistant managing director Gillian Tan. Phasing out power assets is made harder by the fact that power demand is projected to increase by 2½ times up to 2050. Coal plants in the region are generally less than 15 years old and around 80pc of the world's 8mn people employed in the coal-fired power sector live in Asia, she added.
"We are actually battling basic economics," Tan said, as most plants have long-term power purchase agreements, meaning they could continue making money for another 20-40 years. It could require as much as $500bn to decommission coal-fired power plants in Asia, she added.
One option to improve the economics of phasing out coal could be the generation of carbon credits from early retirement as an alternative source of revenue, Tan said, but admitted that recent controversies around voluntary carbon credits could pose a challenge. There would need to be a balance between sufficiently rigorous checks and not making projects difficult to implement, she said.
MAS wants to trial such a project and is seeking to work with plant owners, methodology developers, governments and philanthropic financiers to develop a viable transition credit market, Tan added.
