For the last several years, clean energy transitions have often positioned early retirement of coal-fired power plants as part of larger decarbonization efforts. Coal power plants operate for decades; so if they can be shut them before the end of their anticipated economic lives it will reduce emissions while clearing out space for more investment in renewable energy.
In theory, it is a fine idea. In practice, there are numerous obstacles to implementation, and high-profile clean energy initiatives, such as Indonesia’s Just Energy Transition Partnership (JETP), are only now coming to terms with them. The reality is that the early retirement of coal-fired power is, for what should have been obvious reasons, proving to be very difficult.
When private developers enter a market like Indonesia or Vietnam and build coal-fired power plants, they typically do so only after signing a long-term contract with the local utility first. These contracts can run for 25 years or longer, and they guarantee the utility will buy electricity from the developer at a fixed price over a certain period of time.
If a government wants to retire a coal-fired power plant before the end of its useful life, it needs to change the terms of this contract first. Otherwise, why would the management, investors and lenders that have potentially sunk billions of dollars into a project with the expectation that it will run and generate returns for 25 years agree to shut it down early?
Electric utilities can simply break the contracts and change the terms unilaterally. But governments in emerging markets are especially keen to avoid this option as they fear it will deter future investment if they become known as a place that doesn’t honor contracts.
That means in order to change the terms of the contracts, shareholders and the management of coal-fired power plants need to be offered a sufficiently attractive incentive to shut down early. The Asian Development Bank created a facility called the Energy Transition Mechanism or ETM to do just that.
From the get-go, it was very unclear how this would actually work. One option was for the ETM to refinance the debt of privately owned coal power plants at a lower rate of interest. Lower interest payments would increase operating income, meaning shareholders could be paid back on an accelerated schedule and would then agree to shutter the plant early. In Indonesia, where the state-owned electric utility PLN owns and operates a large fleet of coal-fired power plants, an idea was floated to simply compensate PLN in exchange for shutting down some of its coal capacity.
But when the investment roadmap was unveiled for Indonesia’s JETP, which is a $20 billion fund from foreign partners earmarked for clean energy investment, early retirement of coal-fired power plants was almost entirely missing. As it turned out, almost none of the foreign partners and lenders in the JETP were willing to do what was required to make these deals happen. Many countries have specified that financial commitments made under the JETP cannot be used for the early retirement of coal power. PLN’s proposal to close down 4,000 MW of coal capacity within seven years was basically rejected and the ETM is currently negotiating to retire two coal-fired power plants (one owned by PLN, one by private developers) with a combined capacity of 1,700 MW. If everything goes according to plan, the plants will cease operations in 2037 just a few years ahead of schedule. That hardly seems like a game-changer.
So why did this idea falter? The obvious answer is that if utilities are unwilling to unilaterally break contracts with owners and management of coal-fired power plants, then in order to induce early closure someone needs to buy them out. Cloak it in whatever language you want about just transitions and emissions reduction, but the bottom line is these entities are motivated by profit and they expect a certain return on their investment. If the goal is to reduce emissions by shutting them down early without breaking the contract, someone needs to pay.
When confronted with this reality, hardly anybody wanted to pay. Many lenders balked because it is politically unpalatable to be seen doling out money to owners of coal-fired power plants. And while there may have been disagreement about how PLN was valuing its assets when determining compensation, the real head-scratcher here is that whoever came up with this idea of retiring coal-fired power plants early appears to have fundamentally misunderstood what they were proposing and what it would take to translate the idea into reality.