Indonesia, ADB launch first coal power plant retirement deal

 Indonesia and the ADB have signed the world's first agreement to phase out coal-fired power plants.

Financing for the West Java-based Cirebon 1 power station would be restructured on the condition that it shut down operations 10 to 15 years earlier than planned.

On Monday, an innovative new carbon emissions reduction project involving Indonesia, the Asian Development Bank (ADB), and a commercial power provider advances from concept to reality, with the first coal-fired power station being refinanced and retired early.

In a statement, ADB officials announced that the 660-megawatt Cirebon 1 power plant in West Java would be refinanced in a $250-300m agreement on the condition that it be decommissioned 10 to 15 years before the end of its 40 to 50-year useful life.

The deal, the specifics of which would be ironed out under the MOU, has the potential to reduce greenhouse gas emissions by as much as 30 million tonnes over a 15-year period, which is the same as removing 800,000 automobiles from the road.

First of its kind, the agreement is part of the Asian Development Bank's Energy Transition Mechanism (ETM), which aims to combine private investment funds, public finance, and philanthropic donations to acquire or refinance coal power plants in Southeast Asia so that they can be shut down sooner in preparation for the region's transition to renewable energy sources.

ADB and private sector corporations including Prudential, Citi, and Black Rock created the ETM initiative to avoid decades of future carbon emissions by changing the economics of coal plant operations. The project was originally revealed by the Reuters news agency last year.

"The problem of legacy coal-fired power in Southeast Asia ranks as one of the single biggest problems for the energy transition, if not the globe," Ahmed M Saeed, ADB regional vice president, told Reuters in an interview.

After saying, "With this announcement, we're taking the first steps in what was an ambitious idea and making it true," he emphasized the significance of the move.

The 12-year-old Cirebon 1 plant, a vital power supplier to Jakarta with a 30-year supply contract with state grid operator Perusahaan Listrik Negara, would retain its current ownership structure following the transaction (PLN).

According to David Elzinga, ADB's senior climate change energy specialist, the organization plans to compensate plant owner Cirebon Electric for the present value of foregone profits from the plant's early retirement by means of a new, lower-interest concessional loan arranged through ADB's private sector arm.

Elzinga stated that the transaction's form is still being finalized, but that ADB had initially asked a $50 million payment from the Climate Investment Fund as part of the deal.

According to ADB, several financial institutions and nonprofit organizations have indicated an interest in taking part in the deal.

Saeed noted that Cirebon, whose shareholders include Japan's Marubeni Corp 8001.T and Korea's Midland Electric Power Co, was motivated to play an active role in the transition rather than simply offload the plan, and that the deal marked a shift from the initial ETM concept of a "acquire and retire" model to a "refinance and accelerate retirement" model.

Saeed explained that the current owner should be kept since "it is a simpler arrangement." Thus, "economic value" could be delivered through financing rather than a shift in share ownership.

Officials from the Asian Development Bank (ADB) have stated that they anticipate the Cirebon deal will give private investors more confidence to explore future participation and that the development finance institution's leadership may help shield them from any negative public perceptions regarding new investments in coal financing.

Massive investments are required to combat climate change, and this agreement comes at a time when there are calls for multilateral development banks to expand their balance sheets and tap into more private sector resources. In December, the World Bank plans to release a plan for advancing to address these difficulties.


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