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Sustainability

Funding for new coal projects drying up fast in Southeast Asia as climate pressures mount

Funding for new coal projects drying up fast in Southeast Asia as climate pressures mount

A coal-burning power plant can be seen behind a factory in the city of Baotou, in China's Inner Mongolia Autonomous Region. (Photo: Reuters/David Gray/File)

BANGKOK: An exodus of financing for new coal projects in Southeast Asia is heaping pressure on new regional coal power projects and the companies and governments hoping to persist with burning fossil fuels for energy. 

The Asian Development Bank (ADB) delivered yet another blow to regional coal financing when it announced last Friday (May 7) that it would conditionally cease funding new coal-fired power stations as well as coal mining and oil and natural gas production and exploration.

It follows a raft of Southeast Asian banks and development banks and export credit agencies (ECAs) from China, Japan and South Korea pulling their support for dirty energy generation, as ambitious climate change targets filter through the sector.

“The money is drying up. Coal financing has fled, globally. Insurance, debt, equity, everywhere. The last man standing was the ECA’s of China, Japan and Korea,” said Tim Buckley from the Institute for Energy Economics and Financial Analysis (IEEFA).

“If these banks all stop financing, coal is dead because coal is not bankable without government subsidised finance,” he said.

ADB announced a major - but expected - shift in policy following mounting demands for it to cease supporting projects not aligned with tackling climate change. 

"Coal and other fossil fuels have played a large part in ensuring access to energy for the region's economic development, but they have not solved the energy access challenge, and their use harms the environment and accelerates climate change," the bank said in its new draft energy policy, while not ruling out supporting natural gas projects in the future, under certain conditions.

READ: Locals fear water conflict as new industrial boom arrives along Thailand’s eastern seaboard

The development bank said that it has invested US$42.5 billion in the energy sector across the region between 2009 and 2019, but last invested in a new coal plant eight years ago in Pakistan. Last month, it pledged to target US$80 billion in climate financing by 2030.

It follows pledges from the Japanese and South Korean governments to end or tighten the financing of overseas fossil fuel plants, which includes projects in the ASEAN region, as both countries upped their climate change target commitments last month.

Smoke and steam billows from the coal-fired power plant owned by Indonesia Power, next to an area for Java 9 and 10 Coal-Fired Steam Power Plant Project in Suralaya, Banten province, Indonesia, Jul 11, 2020. (Photo: REUTERS/Willy Kurniawan)

Globally, coal funding is on life support - funding for new projects dropped in 2019 to the lowest levels seen in a decade. Yet Southeast Asia remains a holdout on the trend, contributing to the growth of a commodity fast reaching its expiry date.

It means that some countries will continue to persist with coal as long as they can. And despite all the financial headwinds, Fitch Solutions analysis does not predict coal demand to peak until 2028, and new coal projects still account for more than an estimated 40 per cent of total power capacity in Asia’s power project pipeline.

“Coal will remain the dominant generation source in the regional power mix, despite its share falling slightly over the coming decade,” said Sabrin Chowdhury, a senior commodities analyst at Fitch Solutions.

“This is largely due to several governments across the region retaining an ongoing commitment to coal, as it remains the most practical means to stimulate affordable electricity generation growth at the pace and scale needed by many emerging markets in the region at present,” she said.

SHIFTS IN ASEAN

With construction pending on large planned plants in Vietnam, Indonesia and the Philippines, the region risks remaining one of the final frontiers for new coal, while at the same time, many countries elsewhere are rushing to divest from proposed coal infrastructure and decommissioning existing and increasingly unviable operations.

According to Fitch Solutions, Indonesia ranks 10th and Vietnam 16th globally in terms of percentage of electricity generation from coal in 2020.

“Going forward to 2030, we expect Indonesia to take 6th and Vietnam 10th position respectively. While this definitely means these two countries are among the global laggards in shedding fossil fuel dependence, they are certainly not extreme outliers,” Chowdhury said.

Coal barges are pictured as they queue to be pulled along Mahakam river in Samarinda, East Kalimantan province, Indonesia, Aug 31, 2019. (REUTERS/Willy Kurniawan)

Indeed, IEEFA’s Tim Buckley is encouraged about the fast changes he is seeing in Vietnam, and the impressive amount of renewable energy being installed.

“Over the last six years, ASEAN has been a world laggard in renewables, totally. I think everything changed last year with Vietnam,” he said.

“Vietnam is a brilliant example, the lead example of how fast ASEAN countries can build energy security. They can use global capital to do it, they can do it on a scale that no one thought was possible and they can help solve global climate change.”

Vietnam has the fastest growing energy demand in the world, and while its raw coal capacity is forecast to increase in the coming years, as a percentage it is being far outweighed by new solar and wind installations.

“For large fast growing economies, all types of fuel including coal will need to grow in absolute terms. Especially for those that are running high risk of power supply shortages, and those that come with abundant, affordable, reliable, domestic resources,” said Shirley Zhang, a principal analyst at APAC Coal Markets.   

READ: Indonesia is poised for EV riches as Tesla circles, but a nickel rush could hurt the environment 

But like everywhere, financial and environmental considerations are starting to make an impact in Vietnam. Mitsubishi recently pulled out from the Vinh Tan 3 coal-fired power plant project over climate concerns, and Greta Thunberg is among the critics campaigning for the state-backed Vung Ang 2 project to also be mothballed.

While government support remains strong for coal - as well as LNG as a transition fuel - still it is mooting dropping 15 GW of coal capacity from its future pipeline. Balancing the environment with pressing needs to avoid power shortages and securing domestic energy security will be key challenges for Vietnam in the next decade.

Walking away from coal plants - which have a long tail before they become operational - is also problematic, for investors and hosts alike.

“There is a substantial amount of capacity under construction at present, and it is unclear how the government will halt the development of these projects without incurring significant compensation costs,” Chowdhury said.

Regardless, shuttering new projects is a regional movement. According to Global Energy Monitor (GEM), there has been an 80 per cent decrease in planned new coal construction from five years ago in four countries - Vietnam, as well as Indonesia, the Philippines and Bangladesh. It estimates just 25.2 GW remaining to be installed in future years with 62 GW to be cancelled.

“In Southeast Asia the prospects for coal power are bleak and are largely concentrated in a handful of countries. New coal projects are doomed to be hopelessly uneconomic in the near future if they aren't already,” said Bob Burton, the editor of CoalWire at GEM.

“Until recently, utilities and governments had a range of international banks and export credit agencies vying to provide support for new coal projects. That era is rapidly coming to an end,” he said.

Indonesia's energy mix is dependant on coal-fired power plants. (Photo: Kiki Siregar)

While Vietnam is seen as making strong steps towards renewables, the progress is less pronounced in coal-export dependent Indonesia. 

The government is aiming to further boost domestic coal demand as it looks ahead to a near future where its exports are in jeopardy due to the clean energy wave. As a result, coal will become an even more prominent part of Indonesia’s power mix by the end of the decade.

Fitch Solutions forecasts thermal coal consumption to increase by 88 per cent in the country, or around 53 million tonnes, between 2020 and 2030.

“I’m not suggesting that Indonesia is going to see the light and save the world on climate. They’re a coal baron ... it’s not going to go away from coal any time soon,” Buckley said.

The country’s performance on renewables remains jittery, and environmental considerations “shouldn’t be any hindrance” in the years ahead due to the ongoing importance of promoting coal, Chowdhury says.

Despite strong state backing, international investors - namely from the increasingly climate-sensitive north Asia - are looking to wind up their commitments in Indonesia too. 

CHINA "WILL CHANGE EVERYTHING"

China is seen as prolonging the lifespan of coal at the same time as it takes a leadership role in developing the technologies and infrastructure to replace it. The policies it forms and investment directions it takes have a great influence over what happens elsewhere, including Southeast Asia.

It is largely responsible for global emissions rocketing back up in 2021, with international coal and gas use this year set to exceed 2019, pre-COVID-19 levels, according to the International Energy Agency (IEA). 

China ramped up its own coal outputs in the immediate aftermath of the pandemic, as it looked to stimulate its economy to power domestic growth. It commissioned 38.4 GW of new coal plants last year - 76 per cent of the global total number of new plants for 2020 - eclipsing the 37.8 GW capacity of plants decommissioned globally, mostly in the United States and Europe.

More than 80 per cent of the projected growth in coal use is set to come from Asia, the IEA reported, and that growth is being led by China. But these increases are only in the short term.

China’s mid-term plans look to eviscerate the dirty technologies it has relied on in the past. It is the driver of the global renewable industry growth, which is forecast to be 40 per cent higher in 2021 than predicted a year ago.

President Xi Jinping has pledged to wean China off coal but a top climate official said Beijing will continue to finance such plants abroad. (Photo: AFP/JOHANNES EISELE)

Its biggest polluters - massive state power enterprises - are stepping into line to deliver a greener vision espoused by President Xi Jinping and setting their own targets for peak emissions by 2025, ahead of China’s overall ambition to reach net zero by 2060.

“That is a profound pledge and it will change everything. In China, like any country, the left hand doesn't always agree with the right hand and there are inconsistencies and there’s a lack of transparency. But I’m actually really bullish about what China is doing,” Buckley said.

“I’ve been very skeptical of the western alarmism that China is going to keep on polluting, keep on destroying the planet and destroying their own nation at the same time as pretending to be a green player. 

“They’re the world leaders in wind, in solar, in grids, in nuclear, in hydro, in electric vehicles, in batteries, in rare earths, in lithium ion; in other words in every industry of the future that is critical for the world to decarbonise,” he said.

READ: Commentary - Indonesia’s coal industry is on its last legs

Over recent years, China has projected its power policies onto Southeast Asia via its ambitious Belt and Road Initiative. In terms of finance, globally the project has injected US$245.8 billion into energy finance, based on data from the Global Development Policy Center at Boston University.

Of that, the majority was put into fossil fuels, and less than 1 per cent into solar infrastructure. Investments into wind and biomass were even lower.

With this energy policy ostensibly on hold for the past two years, Buckley believes a resurrection of the programme could soon be a catalyst for massive renewables spending in countries open to diversifying and modernising their energy mix with China’s help. 

“At the end of the day, finance is incredibly powerful and I’ve been waiting for this tipping point to be reached,” he said. “We reached it faster than I thought we would.”

Source: CNA/jb

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