Indonesia, the Asian Development Bank (ADB) and a private energy company are working together to refinance and early phase out the first coal-fired power plant in a groundbreaking new project to cut carbon emissions, which is moving from concept to reality on Monday.
The 660-megawatt Cirebon 1 power plant in West Java would be refinanced under a $250-300 million deal on the condition that it be completed 10-15 years before the end of its 40-50 year useful life, according to a memorandum of is decommissioned understanding (MOU), ADB officials said.
The Manila-based lender and Indonesian Finance Minister Sri Mulyani Indrawati will announce the MoU with independent power producer Cirebon Electric Power on Monday in Bali on the sidelines of the G20 summit.
The deal, the final details of which would be refined as part of the MOU, could save up to 30 million tons of greenhouse gas emissions over 15 years – the equivalent of taking 800,000 cars off the road, ADB estimates.
The agreement is the first under the ADB’s Energy Transition Mechanism (ETM), an initiative to combine private investment funds, public funding and philanthropic donations to buy out coal-fired power plants in Southeast Asia or refinance them for early retirement when the region shifts to renewable energy surrounds sources.
The ETM project, first reported by Reuters last year, was developed by ADB with input from private sector companies such as Prudential, Citi and Black Rock to eliminate decades of future carbon emissions by changing the economics of coal-fired power plant operations .
“The problem of aging coal power in Southeast Asia is considered one of the single biggest problems for the energy transition, if not the world,” Ahmed M. Saeed, regional vice president of the ADB, said in an interview with Reuters.
“With this announcement, we are taking the first steps in and implementing an ambitious project,” he added.
The deal does not change the ownership structure of the 12-year-old Cirebon 1 plant, a key electricity supplier for Jakarta with a 30-year supply deal with state grid operator Perusahaan Listrik Negara (PLN).
Instead, it would compensate owner Cirebon Electric for the present value of lost profits from the early shutdown of the plant with a new, lower-interest preferential loan being arranged through ADB’s private sector, said David Elzinga, ADB’s senior climate change energy specialist.
The deal will include funding from Indonesia’s $500 million Climate Investment Fund allocation, but the structure is still coming together, Elzinga said, adding that ADB originally requested a $50 million contribution from the fund.
ADB also said a number of financial firms and philanthropic groups have expressed interest in participating in the transaction.
The deal also marks a shift from ETM’s original concept of a “buy and retire” model to a “refinance and accelerated retirement” model, Saeed said, adding that Cirebon, whose shareholders include Japan’s Marubeni Corp. 8001 .T and Korean Midland Electric Power-owned Co, was motivated to take an active role in the transition rather than simply scrapping the plan.
“It became clear that leaving the existing owner in place is a simpler structure,” Saeed said. “And so we could achieve economic value through the financing, as opposed to a change in ownership.”
ADB officials said they expect the Cirebon deal will give private investors more confidence to consider future participation and that the development finance institution’s leadership can help shield them from negative public perceptions regarding new investments in the country to protect coal financing.
The deal comes amid growing calls for multilateral development banks to stretch their balance sheets and mobilize more private sector capital to finance the massive investments needed to tackle climate change. The World Bank is expected to produce a development roadmap in December to address these challenges.
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