A spate of environmental activism in the run-up to the COP27 climate summit has seen soup, mashed potatoes, maple syrup, and oil splattered over artworks in galleries around the world. The protests, whose professed aim is to put an end to the use of fossil fuels, have garnered much public attention — and the jury is still out on their impact.
Meanwhile, a much less splashy event in the battle against carbon emissions took place in the Philippines, when a coal-fired power plant 90 kilometres south of Manila became the first asset at the centre of a transition finance model designed to shut down fossil fuel energy sources before the end of their planned life cycle, as part of a shift to clean power.
Last week, that plant was joined by another in Indonesia, the Cirebon-1, in West Java, which has been targeted for early closure under the Just Energy Transition Plan (JETP): a G7-led, $20 billion programme that supports the Asian Development Bank’s (ADB’s) Energy Transition Mechanism (ETM).
The idea of paying enterprises and other parties not to engage in certain activities is not new, but initiatives with such scope as the JETP and the ETM have much more ambitious goals than previous schemes.
“Plans like this have been happening for a long time,” Liza Jansen, head of responsible investment at Prudential, told AsianInvestor. “You have schemes like debt-for-climate swaps and debt-for-nature swaps, where some of a government's sovereign debt is cancelled on the promise that it begins reforestation, for example. Those schemes have been relatively small. We need a much larger scale for climate change.”
The ETM is nothing if not that, at least in its aims. Using blended finance, it is designed to provide a mechanism that accelerates the retirement of coal-fired power plants and replaces them with clean power generating capacity. The initiative was announced last year, but the Cirebon-1 plant shutdown is likely to be the first instance of its successful implementation.
Perhaps no countries are in greater need of such new financial architecture to underpin the clean-energy transition than those such as Indonesia and others in developing Asia.
“In a developed market such as the US or the UK, for example, energy demand tends to grow at a fraction of GDP growth — say, 0.6 or 0.7 times GDP — but it's quite a different situation in emerging markets, where energy demand grows at a multiple of GDP growth,” David Smith, a senior investment director at asset manager Abrdn, told AsianInvestor. “So, if GDP is growing at, say 5%, energy demand growth could be 7.5%.”
Jansen said the age of fossil fuel energy sources in Asia was another factor that made their decommissioning and replacement with clean energy a priority.
“Coal-fired power plants are relatively young in Asia,” she said. “The average age of coal power plants in Asia is around 12 years, but they operate for over 40 years in general, so it's going to be very challenging to meet the goals of the Paris climate agreement if you don't come up with a system to retire them early.”
That view was echoed by Alexander Chan, head of ESG client strategy for Asia-Pacific (Apac) at asset manager Invesco, who said that energy transition was of critical importance for the region due not only to the fact that fossil fuel assets in the region were in earlier stages of their operating life cycles, but also to issues involved in a “just” transition that took account of the economic and employment impacts of early fossil fuel retirement.
“A more unique financing structure is required,” he told AsianInvestor. “We think this partnership, using a blended finance approach, is important.”
COALITION OF THE WILLING
The ADB is leading the financing of the Cirebon-1 accelerated coal retirement project, but it is looking to scale the ETM programme, as well as to bring other investors on.
“At this stage, we’re very much looking to find a coalition of the willing,” David Elzinga, senior energy specialist (climate change) at the ADB, told AsianInvestor. “These are new approaches, and ADB is taking the lead, but we have significant interest from other investors, including banks, other asset investors, as well as philanthropies.”
He said that among various types of investors for engagement in the short and long term, the ADB had identified pension funds as suitable candidates in the long term for involvement in ETM arrangements.
“They have the right type of investment products that have very low risk appetite and very long time horizons,” he said. “These products can really fit, but I think the ADB needs to prove [the ETM] out first.”
Jansen said that despite their promise, financing arrangements such as the ETM would require a change of mindset among some investors due to the fact that they involve investing in, rather than divesting from, fossil fuels.
“I think one of the challenges that such schemes will face in getting asset managers and asset owners to be involved is that even if you invest in the early retirement of coal, this is an investment in a coal plant,” she said. “Most global asset owners have a divestment policy for coal, so they're not allowed to invest anymore. Any investment in a very carbon-intensive company right now — even though it might have a good decarbonising intention and transition plan — will increase your current carbon footprint.
“There have been cases of investors being called out for greenwashing, so that's one of the reasons why there's quite a reputational risk now, investing in this, even though it will have a high impact in terms of reducing carbon emissions.”
Elzinga said investors had expressed interest in mechanisms such as the ETM to help clean up the energy industry, but they had concerns over how these would relate to their current climate commitments.
“We need investors to say, ‘Look, I'm going to apply some real rationale and sense to this discussion. I can see I've made steps to talk about divestment and net-zero, and now I'm going to just nuance that or make that more sophisticated to really make a difference’,” he explained.
“And it's going to take a bit of guts — it's going to take a willingness to have some pushback. But if they're committed, they'll go through. Some of them might have to change their covenants and renegotiate them. That's hard work, but this has to be done. We absolutely need to find viable approaches that result in emissions reduction, and divestment in itself does not result in emissions reduction.”