HSBC, StanChart, BOA aim to finance Indonesia coal retirement

HSBC Holdings, Standard Chartered (StanChart) and Bank of America (BOA) are among the banks seeking to participate in Indonesia’s first early coal retirement deal, a signal that big lenders are increasingly willing to make the fossil-fuel investments necessary for the global energy transition.

The three banks have proposed to help finance the accelerated closing of the Cirebon-1 coal-fired power station in West Java, said three people familiar with the process, who asked not to be named discussing private deliberations.

Mitsubishi UFJ Financial Group also is in discussions about participating, but has not yet made a formal pitch, a fourth person said.

Spokespeople for HSBC, StanChart, BOA and MUFG declined to comment on the pending Cirebon transaction.

Gaining speed

After drawn-out deliberations on how a deal would work, momentum has built over the past few months.

The growing bank interest follows the signing of a non-binding accord in December 2023 between the Asian Development Bank (ADB), Indonesian state-owned utility PLN, the Indonesia Investment Authority and the plant’s owners, which include Marubeni, Indika Energy and Korea Midland Power.

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Cirebon is one of hundreds of coal-fired plants that power homes and industry across South-east Asia.

Shutting them early requires refinancing the initial investments; development banks and private financial institutions have agreed to work together to do so, including under the auspices of the multilateral climate aid packages known as Just Energy Transition Partnerships (JETPs).

In practice, efforts to blend private capital with public financing have struggled. International banks say the deals are risky, and there is little precedent. Many lenders also prohibit coal financing as a part of their climate commitments.

ADB, which is leading the Cirebon deal, had been preparing to organise the financing on its own. That has now changed. In response to a request for proposals in January, ADB received robust interest from commercial banks and is now in the process of picking lenders. It expects the deal to close by June, a company spokesperson said.

The plan is to convert a significant chunk of the plant’s equity into debt, in order to fund a one-time dividend to compensate investors for future loss of income.

Financial institutions would lend at market rates, and ADB will blend that with existing funds to make the debt cheaper than it otherwise would have been, which in turn makes it repayable during the shortened life of the plant.

The goal now is “how we now take it from policy to execution” and “specific transactions that get us there this year”, Surendra Rosha, HSBC’s co-chief executive for the Asia-Pacific region, said last Tuesday (Feb 27) at the Climate Business Forum in Hong Kong.

For StanChart, the intention is “to be a part of the seminal opportunities that really are going to be the ones that can be modelled by others in the future,” Marisa Drew, the bank’s chief sustainability officer, said in an interview at the Hong Kong event. “We’re excited.”

Both Rosha and Drew were speaking in general terms and did not discuss any talks involving Cirebon.

Knock-on effect

Closing Cirebon would be the second market-based deal to retire a coal plant ahead of schedule in an emerging market – and the first to include international financial institutions.

In 2022, ACEN and Filipino investors used the ADB’s energy transition mechanism to refinance the South Luzon Thermal Energy coal plant, cutting its projected lifespan in half.

For the world to keep global warming within safe limits, all coal-fired power plants must shut by 2040. But 75 per cent have no plans to do so, according to Global Energy Monitor. Asia’s coal plants alone are set to consume two-thirds of the fast-shrinking global carbon budget.

A deal to shut Cirebon early may help spur broader progress on Indonesia’s JETP, a US$20 billion climate-finance package launched in 2022.

That project – and similar ones in South Africa, Vietnam and Senegal – hinge on the ability of deals like this to attract private capital.

“This is about catalysing a new type of solution to a problem that we all know is there,” said Alice Carr, executive director of public policy at the Glasgow Financial Alliance for Net Zero (GFanz), which is leading a private finance working group for the Indonesian JETP.

“It’s a very difficult challenge.”

Financial institutions are certainly wrestling with this, said David Elzinga, principal energy specialist at ADB. “It’s absolutely essential to meet climate goals, but it’s complicated,” he said.

GFanz is co-chaired by Mark Carney, who is the chair of Bloomberg’s board and a former Bank of England governor, and Michael R Bloomberg, the founder of Bloomberg News parent Bloomberg LP. BLOOMBERG