In the Indonesian province of West Java, about three hours’ drive along the coast from Jakarta, sits a 660-megawatt coal-fired power plant called Cirebon-1.
When it reached financial close in 2010, it did so under the independent power producer (IPP) model in Indonesia, backed by PT Cirebon Electric Power (CEP) and a range of Asian joint venture partners including Japan’s Marubeni.
It is contracted to keep burning coal and delivering electricity until 2042, after which you’d normally expect a plant of this age to be recontracted for another 10 or 20 years: well into the second half of this century.
But now it won’t. And this is telling.
The size of the transaction is less relevant than the ability to demonstrate that this approach is viable and can be replicated with other plants in Indonesia and in other countries
On November 14, the Asian Development Bank and key Indonesian partners including CEP and national electricity utility Persero signed a memorandum of understanding to explore early retirement of Cirebon-1.
If it works, it will be the first coal-fired power plant owned by an IPP to be put out of its misery by the ADB’s Energy Transition Mechanism.
This is an important idea, intuitively sensible but logistically difficult and without any of the clean-green glory of building a solar plant or offshore wind farm.
Achieving energy transition is not just about building renewables but also about shutting down existing coal plants, which is easier said than done: anyone who relies on that plant for supply can’t be left without power, livelihoods have to be considered, and there are interested parties to be compensated.
But the ADB’s ETM seeks to get its hands dirty and make this happen. It is a regional blended finance programme to develop an accelerated schedule for plant retirement and subsequent replacement with cleaner power.
Replacement plans
We don’t yet know if or when this MoU will succeed, and therefore what it will save in emissions. If, say, the plant was to be retired permanently in 2037, for example, it would probably reduce its operating life by at least 15 years. ADB estimates that would reduce total greenhouse gas emissions from the plant by 30 million tons, the equivalent of taking 800,000 cars off the road.
Part of the agreement will involve developing a plan for replacement power, and the partners are considering several renewable technologies as well as distribution and transmission system upgrades. The hope is that as energy and battery storage costs decline, replacement electricity can be provided at a cost that is at least equal to, or hopefully lower than, contracted tariffs.
The ADB will also need to consider Cirebon-1’s 200 employees.
The financing structure is expected to be between $250 million and $300 million, although the ADB appears a little queasy about focusing on this: “The size of the transaction is less relevant than the ability to demonstrate that this approach is viable and can be replicated with other plants in Indonesia and in other countries,” it said today.
The idea of blended finance is that it will include concessional capital – such as donor-supported funds – and the ADB’s Private Sector Operations Department. The hope is that the private sector can be engaged to assist in deals like this.
Sweet spot
Now, any such bank wants to make a buck, but perhaps there’s another way to look at it: might participation in financing to shut down coal plants be considered a carbon offset?
Indonesia has launched its own ETM Country Platform, which is a government financing and investment framework to fund and manage energy transition in the country. The ADB is focusing here and in the Philippines as it looks for more plants to refinance and shut down.
Cirebon-1 happens to be a sweet spot: an interested owner, a middle-aged plant, with a financial structure suitable for refinancing, a project company with an active corporate social responsibility programme, and a reasonable pattern of community engagement.
Energy transition programmes tend to get a bad rap from non-governmental organizations. There are shouts about greenwashing and demands that coal plants be shut down today. But look around Asia, the population, the standard of living in many places, the energy and employment needs. It is fanciful to shut down all plants in an instant.
Getting there needs a plan, multiple stakeholders, and, unavoidably, time. The energy transition is not all about beautiful pictures of wind farms in clear blue skies. It is complex, messy and difficult.
