The ADB’s plan to help phase out coal may not achieve much
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The Asian Development Bank and other financial institutions will take an ambitious proposal to end Southeast Asia’s coal addiction to the CoP-26 climate talks. They want to speed up the shift away from this dirty fossil fuel by buying out coal-fired power plants and closing them early, while fostering green alternatives. Good news, given that the ADB only formally stepped back from funding the black stuff this year, but it’s at best a fragmentary fix.
Indonesia, the Philippines and Vietnam, its three pilot countries, have young power plants, opaque long-term pricing agreements, and do not yet make carbon emissions sufficiently costly. Unlike other parts of the world where early-retirement plans have been tested, incentives may not suffice for operations to be sold. To be clear, the developing world needs support to accelerate the energy transition. It’s also true that financial ingenuity is vital to harness the power of capital markets. But as the plan’s detail are laid out, institutions supporting it, like Prudential and HSBC Holdings, must acknowledge the limits and pitfalls of theoretically neat financial solutions.
There’s no doubt about what’s at stake. Global coal use in electricity generation must fall by 80% below 2010 levels by 2030 to avert climate disaster. But while much of the world has shifted, Indonesia, Vietnam and neighbours have been growth hotspots. Most new coal-fired generation is in developing Asia. Coal capacity doubled in Southeast Asia since 2010.
There are signs of change as funding dries up, but it’s too slow. The fuel is still perceived as inexpensive and reliable, despite renewable energy now being frequently cheaper. Even as Indonesia moves towards a modest carbon tax and increases investment in green energy, domestically mined coal remains critical to employment and exports. Vietnam has backed wind and solar energy, but just recalibrated coal reduction targets in its latest power development plan, at the expense of wind. It’s a hard addiction to kick.
The ADB-backed plan makes a straightforward case. It envisages an investment fund that would buy and retire coal-fired power plants over 10 to 15 years, instead of the 3-4 decades of their life. Another portion of funds would support sustainable energy and related infrastructure. It’s an appealing idea. But can it reach anything like the required scale?
The first problem is that coal-fired facilities have a lifespan of more than 30 years. The weighted average age of plants is seven years for Vietnam and 12 for Indonesia and the Philippines, according to the Institute for Energy Economics and Financial Analysis. If capacity is added as planned, the figures will all stand below 10 years in 2025. That adds to the impetus for a buyout solution, but makes it far more costly. Worse, there are long-term power-purchase agreements, with opaque guarantees that protect operators’ revenue and make it hard to establish buyout price and incentives. Those would have to be unpicked, but at what price? Will operators end up being compensated for bad fossil fuel bets? And if only the remaining plants are targeted, are they the right plants to make a difference, and isn’t it better to push those out?
The next hiccup is the need for real support from the region’s governments, which set the rules of the game. They must commit to advanced phase-out targets, muscular independent regulators and carbon pricing, for the buyouts to make a difference. Any plan will require transparency in markets used to the opposite. That’s not a given.
There are other questions, such as how the fund will structure pricing, how it will choose the assets it buys and why 10 to 15 years is an adequate time frame to run down coal plants. That works for investors, but is it the right choice for the planet?
The proposal isn’t complete, nor is the ADB ignoring shortcomings. David Elzinga, senior energy specialist for the bank, told me it was never intended as a silver bullet, and would be used alongside other initiatives. A paper published in April candidly lays out the complexity of the region’s power systems and the barriers to scaling up renewables. But when the blueprint is presented at Glasgow, those limitations need to be made clear. There must be a subsequent effort to tackle moral hazard and consider the opportunity cost. Not every climate fix is a good one. The risk with impracticable proposals is that they end up like the worst environmental, social and governance investing—they make good investors feel great but not much difference.
Southeast Asia needs a push, but we must recognize a complex reality. Billions are needed for other efforts, from grid investment for improved efficiency and enabling more renewables, to plentiful financial support for green energy. Without those, there’s little hope of a swift transition, let alone a fair one.
Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues
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