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Coal Phase-out Negotiations Needed for Net Zero

Alongside stranded asset dangers for investors, the early closure of emerging markets’ coal fleets leaves countries open to legal, financial risks. 

Foreign investors in coal-fired power plants (CFPPs) across Asia have been advised to open the door to renegotiation to ensure the climate commitments of host governments can be realised. 

Alongside the expected risk of stranded assets for investors, the early phase-out of coal exposes host countries to legal and financial risks, according to recent research by the World Resources Institute (WRI). 

Specifically, the premature closing of young CFPPs across Asia will breach host governments’ contracts with foreign investors, meaning they are entitled to a payout. This creates a strong disincentive for governments to align with global climate commitments and close coal plants early, the report warned. 

“There is widespread recognition of the risks investors face from exposure to coal,” said Shuang Liu, China Finance Director at the WRI, told ESG Investor. “But legal protections for foreign investors pose significant barriers to the early retirement of coal.” 

As such, host countries will need to renegotiate these contracts, drawing on financial and legal support from development finance institutions, multilateral development banks, other governments and private sector investors, Liu said. 

Early exit fee 

The countries featured in the report’s three case studies – Indonesia, Pakistan and Vietnam – are part of either a Just Energy Transition Partnership (JETP) or Asia Development Bank (ADB) Energy Transition Mechanism (ETM). Each of them has an installed CFPP capacity of around 10 gigawatts (GW), with foreign investors backing 40% of this. 

The coal fleets of these countries are very young. In Indonesia and Vietnam, the average coal plant age is under 11 years, whereas in Pakistan it is four years. 

“Governments can raise awareness by coming to investors with proper incentives – potentially including offers to trade early retirement for help repurposing coal plants or scaling up renewable energy with permits or subsidies,” Liu said. 

Such a deal was struck in Indonesia, with the ADB and a local independent power producer agreeing to a framework to retire and transition the Cirebon-1 coal plant by the end of 2035, with a total refinancing package worth an estimated US$325 million. The deal will ensure investors their promised returns, while contributing to the Indonesian government’s climate commitments. 

“While international financiers will play an important role, the host country also needs to come up with strong policies to manage the move away from coal and manage the financial risks,” said Christina Ng, Managing Director of the Energy Shift Institute, an Asia-focused energy finance think tank. 

Ng said a host government’s energy plans should include short-term and specific targets for renewable energy, grid updates and phasing-out goals, while systems are put in place to buy out coal plants or restructure their financing, with clear rules on how to handle any financial losses incurred by shutting these plants early. 

The International Energy Agency has said the world needs to cut 90% of coal use by 2050 and phase out all unabated coal power plants by 2040 to achieve net zero by the mid-century. 

This week, a group of NGOs has published the first Metallurgical Coal Exit List (MCEL) – a public database of coal companies that are expanding their metallurgical coal mining activities. 

“The allocation of losses on the coal plant phaseout [is] a critical issue. Whether it’s investors, governments, or taxpayers/energy consumers, no party is inherently at fault, yet someone will bear the burden,” said Ng.  

“If investors incur losses, it could harm the host country’s reputation and discourage future investment. Conversely, if governments absorb the losses, the financial impact may ultimately fall on taxpayers and energy consumers.” 

More broadly, the Energy Charter Treaty (ECT) also poses complications. Signed in 1994, the ECT is a legally binding agreement that promotes international cooperation in the energy sector, offering protection to foreign investors in energy and requiring that all investors be afforded the same advantages as local companies.  

An increasing number of countries – including the EU – have exited the ECT, arguing that the treaty does not align with the goals of the Paris Agreement. 

Room for improvement 

Host governments subject to a JETP should draw on the financial and legal support these agreements offer when renegotiating with foreign investors, the report suggested. 

JETPs were first launched in 2021 to help developing nations end their reliance on fossil fuels and transition to cleaner energy sources, by providing funding from developed nations, the public sector and private investors. 

Indonesia’s JETP was finalised at the Bali G20 summit in 2022 with a US$20 billion public and private financial commitment. It aims to reduce CO2 emissions from the power sector to 290 million metric tonnes (MT) by 2030 and retire coal-fired power by 2040. 

The estimated remaining value of existing coal plants in Indonesia amounts to almost US$15 billion. 

The country’s government has estimated it needs US$600 billion to decommission 15 GW of coal-fired power and replace this with a similar amount of renewable capacity.  

The renegotiation of foreign investors’ CFPP contracts would “smooth the transition” from coal to clean energy in countries targeted by JETPs, like Indonesia, the WRI said. 

Currently, despite a recent update issued by developed nations involved in JETPs in Indonesia and elsewhere, progress on existing frameworks has been slow and fraught with complications.  

In November, India and prospective donor countries shelved a deal to forge their own JETP to support the country’s transition efforts, citing complications with existing partnerships. 

India increased its coal production by 12% in 2023-24 compared to 2022-23, with the government aiming for a 7% annual production increase. This would lead to 1.5 billion tonnes in domestic coal production by 2030. 

“It is in investors’ economic interest to renegotiate [CFPP contracts] early – and, where possible, transition their energy sector focus to renewables,” WRI’s Liu said.  

“More and more investors and financial institutions are aware of this. Coal is losing its competitiveness, including with renewable energy, in Asia and elsewhere. 

“Investors who take the initiative are likely to get a better deal in compensation now, before the bottom falls out from coal.” 

The post Coal Phase-out Negotiations Needed for Net Zero appeared first on ESG Investor.

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