Eastspring, Reviva launch coal phase-out strategy

[SINGAPORE] Eastspring Investments and Reviva Transition Partners say they are jointly developing a new private equity strategy that uses actively managed direct investments in coal-fired power plants to hasten their retirement.

Eastspring, the asset management arm of insurance group Prudential, will source for deals. Reviva, an Abu Dhabi-based private equity firm focused on the coal transition, will provide technical expertise such as investment structuring, coal decarbonisation, thermal asset management and catalytic partnerships.

It appears to still be early days – there is no mention of any specific funds or timelines in the announcements. The collaborators say that they are currently “engaging capital providers and coal asset owners”.

Coal-fired plants are among the world’s largest sources of greenhouse gases, and are especially troublesome in Asia and South-east Asia, where many of the plants are relatively young and could be spewing out greenhouse gases for decades unless they are retired early.

A key cog in the Eastspring-Reviva strategy is taking direct stakes in some of these plants. “By directly managing assets, owners have been able to deliver commercial transitions that balance financial returns and tangible impact,” the collaborators say.

Private-equity financing for coal phase-out would be distinct from the market’s prevailing line of attack, which is predominantly through debt and grants – and grossly insufficient.

Data compiled by researchers at the Carnegie Endowment for International Peace show that amounts committed under the multilateral Just Energy Transition Partnership (JETP) programmes fall far short of estimated costs.

A crucial limitation with debt-based financing is that debtholders have only so much control over what management does, which leads to structural distrust between the financiers and the financed.

That distrust can handicap a complex, impact-driven deal such as the early retirement of a coal plant in Asia, because lenders seeking reassurance might demand too much from cost-sensitive borrowers.

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But it is also generally true that if a solution were so simple, someone would already be doing it. While direct equity investment might be potentially more effective than debt investing at driving the energy transition, coal phase-out faces many challenges that the Eastspring-Reviva strategy will have to overcome.

A fundamental one is building stakeholders’ consensus about priorities.

In December, Indonesia announced that it would cancel the early retirement of the Cirebon-1 coal plant over costs. This was the most advanced project under the Indonesian JETP deal, and its collapse was the latest setback for the JETP programme. Progress on Vietnam’s JETP deal has also been slow.

The multi-billion-dollar, government-to-government JETP deals seem to tick many boxes, yet clear success has been elusive. Even worse, the Indonesian about-turn has raised existential questions about the future viability of JETP.

One problem that JETP faces – and Eastspring-Reviva may face – is confusion about the purpose of coal phase-out, especially when phasing out coal is seen through the lens of justice.

The just transition concept strives to ensure that social and economic needs are considered alongside decarbonisation. For example, a coal plant should not be shut down without addressing the energy needs and costs of affected communities.

The Carnegie researchers argue that the JETP programme has to decide on a core priority – whether that is a narrower goal of energy emissions reduction or a broader objective of economic transformation.

The researchers explain that different stakeholders in the JETP agreements have different priorities, and that creates problems because JETP has limited resources and cannot pursue both objectives at the same time.

“If JETPs are to be successful, the relevant parties must come to a sharper understanding of what ‘success’ entails,” the researchers write.

Eastspring and Reviva are likely to face the same issue. They and their investors will have to be on the same page in terms of how impact is measured and what goals are important.

When money has been deployed, the expectations of government and community stakeholders must be managed as well. Shutting down a working power plant without a well-supported plan for replacing it is, very simply, unfeasible.

Questions about purpose will be important as well when it comes to making a return.

The recent development of transition carbon credits could allow a private-equity investor to sell carbon credits for reduced emissions from retired coal plants, but buyers must be comfortable making that trade.