Bundle clean-energy projects with early coal phase-out deals to bump up economic viability: panellists
BUNDLING the development of renewable-energy infrastructure alongside the early retirement of coal-fired power plants is imperative if the commercial viability of such deals is to be improved, said panellists in a discussion on Wednesday (Jun 21).
Blended finance – a mix of public, private and even philanthropic funds – could well be the way to help owners and operators of coal plants lower lending rates for their investments into renewable energy, in exchange for the early closure of their coal assets, the panellists said at the discussion organised by Asia Research & Engagement (ARE).
Regulators and industry players have touted blended finance as an important mechanism through which emerging markets can fund their transition from burning dirty fossil fuels to generating cleaner, renewable forms of energy.
Panellist Lawrence Ang, managing partner of Climate Smart Ventures, said: “By retiring a coal plant early, you’re technically destroying value… So why would (plant owners) do that?
“The argument is: ‘Well, I’m going to (offer) financing, and as part of my funding to you – this blended-finance facility – I would fund a renewable replacement cheaper than if you were funding it yourself. But in return, we would ask you to retire your coal plant earlier.’”
Bundling a renewable-energy project with early coal phase-out in a blended-finance structure also helps sweeten the deal for these plant owners. This is because blended finance enables them to lower the costs of financing the renewable-energy portion of such bundled deals; they would have to pay normal rates if domestic banks fund their standalone renewable-energy projects.
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The market for financing renewable energy is already mature – even in emerging markets. This is in contrast to more than a decade ago, when multilateral banks were willing to give loans – at concessional rates – to power developers seeking to build solar or wind farms at a time when banks were trying to kickstart the renewable-energy market in South-east Asia.
Ang said: “What’s different this time around is that I’m bundling renewables development with coal retirement. That’s special.”
Being able to reduce the cost of capital through blended finance is especially important for renewable-energy investment, because such projects have high upfront costs, though their operating expenses are low, noted director of energy transition at ARE, Kurt Metzger, the other speaker on the panel.
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Regulators in this region, as well as industry associations for the financial sector, have been pushing to get private-sector players to take part in early coal phase-out projects. Once considered a pariah in the world of sustainable financing, such deals have gradually gained greater market acceptance in the last year, alongside the increasing focus on transition finance.
The Asean Taxonomy – the regional grouping’s classification system that defines the activities that qualify for sustainable financing – added coal phase-outs to its list of eligible activities in March.
The Monetary Authority of Singapore said last month that it would delay the roll-out of Singapore’s taxonomy to give time for consultations on the inclusion of coal phase-outs; the Asia-Pacific chapter of the Glasgow Financial Alliance for Net Zero (GFanz) has also launched a consultation paper on this.
Despite several initiatives aimed at providing better guidance for banks and ensuring credibility in such transactions, a big piece of the puzzle – the commercial viability of such transactions – has not yet been resolved.
Thus far, there are very few early coal phase-out projects in South-east Asia, though more are expected with the launch of the Just Energy Transition Partnerships (JETP) with Indonesia and Vietnam.
In the case of Indonesia, the problem in structuring early coal phase-out transactions as a bundled deal with renewable energy projects lies in its policies and regulatory environment.
Metzger pointed out that independent power providers are generally not allowed to enter into direct power-purchase agreements with end-users, because power generation is dominated by PLN, the state-owned utility company. Its national grid infrastructure is also still unable to accommodate renewable-energy sources.
Given that Indonesia has been unable to structure early coal phase-out transactions with renewable-energy development, the investment proposition for such deals in the country is very challenging, noted Ang.
“Indonesia is a hard market because without the renewable-energy component to help you make up for the value loss, they’re going to have to make up the value loss from cheaper refinancing – and that has to happen from new players, who might want to take on the old debt. So they have to really drop their cost of debt down to get some value compared to the current debt they’re servicing,” he added.
However, Ang noted that in markets outside Indonesia, such bundling has already taken place. For example, in the Philippines, where the power-generation market is liberalised, energy company ACEN – which fully divested from one of its coal plants last November through an energy-transition mechanism – was swapping the value derived from its renewable-energy assets with the loss from its coal plant.
Outside South-east Asia, there are examples of plant operators issuing sustainability-linked bonds to finance their renewable-energy projects at a lower cost, in return for shutting down their coal assets.
Nonetheless, there is a growing recognition of the need to pair renewable-energy projects with early coal phase-out among some Indonesian policymakers to attract investors, said Ang.
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