Governments need to balance the needs of a growing economy with climate demands
IRON GRIP
The coal industry, its lobbyists and long-term contracts continue to control the market, making its removal much more difficult STRANDED ASSETS
Financial institutions are turning their backs on coal investments, putting projects at risk KEY QUOTE
Something is changing, but there is still a huge coal extraction sector
In Europe, the use of coal for power is at its lowest level in many decades. In Southeast Asia, however, the reverse is true. Coal generation has boomed over the past decade, as governments seek to provide power to a rapidly growing population and fuel economic growth, aided by plentiful domestic reserves in the region. Financial and technological support from China, Japan and South Korea, in particular, have helped these developments across the whole region, as have public sector finance, powerful coal lobbies and favourable policies. “This is a region that is developing rapidly and its energy demand is increasing rapidly,” says Jason Veysey of the Energy Modelling Programme at the Stockholm Environment Institute (SEI), an international non-profit research and policy organisation, who has recently finished a project with the government of Laos and United States Agency for International Development (USAID). 
“The countries are pushing to see how they can deliver low-cost electricity to support [their] economic development… the environment sometimes takes a backseat to the economic development imperative. Coal is a resource that’s available in this region,” Veysey says, especially in Indonesia, Thailand and Vietnam. “The regulators believe in coal—they believe it’s a tested technology and the coal lobby is intense in some of these countries,” he adds. In Indonesia, for instance, several consecutive administrations have identified electrification as one of the key pillars to support the industrialisation and growth of the domestic economy, and with it, improve the standard of living for its citizens, says David Rimbo at EY Indonesia, a business advisory firm. This led to a surge of independent power plants (IPPs) being built, “primarily based on “affordable” Chinese coal-fired technology in order to leverage on the abundance of thermal coal in Indonesia,” Rimbo says. In Vietnam, too, the need to keep the cost of electricity low has been a factor in keeping coal generation in operation, says Durand D’souza, a data scientist at Carbon Tracker Initiative (CTI). Hydropower and coal dominate the country’s centrally planned grid. However, the situation is changing as governments recognise the need to decarbonise. “By 2025, all the coal plants in Vietnam will be more expensive to run than renewable energy,” D’souza says. SHRINKING PIPELINE The fate of pipeline projects is increasingly uncertain, as climate change pressures drive capital out of fossil fuels. According to a September 2021 report from think tank E3G, the coal project pipeline in Southeast Asia has shrunk by 63% since 2015 as the region’s governments are increasingly re-thinking their coal plans. A BNEF report in 2020 found that just over 65 gigawatts (GW) of coal-fired power was set to be built in Southeast Asia in the ten years from 2019—with 55.8 GW of that in Vietnam (30 GW) and Indonesia (25.8 GW). “[Indonesia’s state-owned power company] PLN currently says that, by 2056, it will phase out all its coal-fired purchase agreements,” BNEF’s Allen Abraham says. But this means “there is still time for projects to come online before 2025 and then stay online until 2055.” “PLN could still be on a pathway to carbon neutrality by 2060, but emissions from the power sector might continue to rise through 2030… emissions reductions will ramp up only around 2040 and the last coal PPA expires in the 2050s,” he adds. In a shift from the past, when state-owned enterprises funded the majority of coal power, investment for new coal plants is now more the responsibility of the private sector. However, BNEF’s report found that a large share of the proposed sites is yet to reach financial close and may struggle to. 
STATIC PIPELINE
Just over 65 GW of coal-fired power was set to be built in Southeast Asia in the ten years from 2019—with 25.8 GW of that in Indonesia
SLOW SHIFT IN FOCUS “The trend has been enormously bullish for exiting coal,” says Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics & Financial Analysis (IEEFA), whose research has, as of September 2021, found 180 financial institutions with formal policies to stop funding coal projects. “The global capital flight from coal has been catastrophic and it’s getting critical for the industry.” More than 25 financial institutions in Asia have either announced or strengthened policies to quit investing in coal in the first nine months of 2021, Buckley says—up from 15 in all of 2020, and six in 2018. Crucially, a growing number of institutions in Japan and South Korea are adopting such stances; along with China, these three are the biggest institutional investors in coal in the world and particularly Southeast Asia, he says. “Once a bank or insurer or asset manager pledges something… it’s not just a hollow comment—it’s a legal commitment signed off by the board and CEO, and it’s a mandate for the staff to act on it,” Buckley says. While some institutions have deliberately chosen to move away from supporting coal, such as Marubeni, others are scrambling, says Buckley, citing the governor of the Japan Bank for International Cooperation (JBIC) who publicly pledged to cease investing in new coal projects, forcing his team at the export credit agency to rapidly pull together a policy in the space of a week. “JBIC does have a policy, but they’ve not been very rigorous in looking for an off-ramp or applying it respectively,” says Buckley. “The inertia in these organisations is high, so unless you have a formal policy… the ball keeps rolling.” This in turn leads to projects which have been under development for a few years still being finalised, rather than abandoned. “Post Fukushima, the Japanese government is a closet coal lover,” Buckley adds. “It’s struggling to get out of it.” Net-zero pledges from governments of Japan, South Korea and China are changing things. As of September 2021, all three have pledged to stop funding overseas coal projects, although only South Korea’s took immediate effect in April 2021. Japan’s cessation kicks in from 2022, while President Xi Jinping of China made the surprise announcement to cease overseas investments in coal at the UN General Assembly in September 2021, but with no details about the policy’s implementation. COSTLY TRANSITION Despite the shifting economics and investment environment, Southeast Asia’s energy transition will not be as simple as just switching to cheaper forms of electricity and turning off the coal plants. Caroline Chua at BloombergNEF (BNEF) in Singapore says a lot of Indonesian and Vietnamese coal plants have long-term power purchase agreements (PPAs) structured with a capacity payment to recoup the capital investments. “Terminating these contracts can be very costly,” she says. One solution could come from the Asian Development Bank (ADB), Chua adds, which is looking at the possibility of buying coal plants to retire them early. An ADB spokesman confirms the bank is developing an Energy Transition Mechanism, which will focus on Indonesia, the Philippines and Vietnam. It is still in its early stages, with the bank in the process of finalising a pre-feasibility study which includes plant-level modelling, and a regulatory and policy review, he says. This will then be followed by an in-depth feasibility analysis. GET OUT CLAUSE “Existing contracts or projects underway won’t be reneged on,” says Buckley, unless the investor can find an exit caveat. But those projects which have reached financial close are likely to still go ahead. “The question is how long have these projects been in the pipeline. Name a project that’s new in 2020 or 2021—very few new ones have progressed,” he adds. CTI’s D’souza believes many planned coal plants are on shaky ground. “If one of the financiers pulls out, they’ll struggle to find another,” he says. As it stands investments in new coal-fired plants are already a huge risk. “New projects are expected to run for 30-40 years,” he explains. “They’re unlikely to run for that long, but that’s how they’re financed.” The risk of the assets becoming stranded is increasing quickly. A CTI report from June 2021, which D’souza co-authored, calls for the cancellation of all new coal projects, warning that investors otherwise face $150 billion in value destruction. “Even under business-as-usual the vast majority of new projects do not look financially viable,” the report says, noting that new renewables are already cheaper than 77% of the global coal fleet in operation, a proportion which is set to rise to 98% by 2026 and 99% by 2030. 
POLICY PROMOTION Policy changes could accelerate the move to renewables in the region. Lorenzo Sani, also at CTI, notes that Indonesia has set a goal to achieve net-zero emissions by 2060. “It could be quite ambitious, but if you still have a lot of coal in 2050, it seems unrealistic,” he says. Added pressure is coming from the international community with the global shift away from coal, resulting in a fall in demand for coal exports from Indonesia, Sani says. This led the government to try to balance support for the domestic industry with a need to be environmentally conscious. Chua points to a moratorium on new coal projects in Indonesia, applying to those that have not secured financing or signed a PPA. “Until two or three years ago, Indonesia’s goal was to expand quickly to provide power to a growing population,” says Sani. But now the country is increasing its awareness of environmental concerns within the power sector and notes that the government is looking more at solar power. “Something is changing, but there is still a huge coal extraction sector,” he says. The country has also set a goal to have nearly a quarter of its power sourced from renewables by 2025. Analysis by BNEF suggests this could be met entirely via solar PV by adding 18 GW. “While that would amount to a 100-fold increase in solar capacity from 154 megawatts (MW) installed today, the target is achievable as PV can be deployed quickly. Solar PV is the most economic clean energy technology that Indonesia can rapidly deploy,” the firm says in a September 2021 report. For this to happen, Chua says the regulatory framework also needs to change, with the current renewables regulations forcing them to compete with subsidised coal. Furthermore, only [Indonesia’s state-owned power company] PLN can sign a PPA with an IPP, limiting route-to-market opportunities for smaller renewables projects. VIETNAM LOOKS TO SOLAR There is a similar dynamic in Vietnam, Chua adds, with only state-owned utility EVN able to sign offtake agreements with IPPs, although there is some discussion about a pilot programme to enable solar and wind projects to contract with corporate off-takers. Vietnam is also moving fast with policies and programmes to boost its renewables installations and reduce coal. Its latest power development plan, released in February 2021, envisages coal’s share shrinking from 34% in 2020 to 27% by 2030. No new coal plants, besides those under construction or under financing, will be permitted, while gas-fired capacity will grow nearly five-fold by 2030, to 28-33 GW—from 15% of the country’s power supply to 23%. Wind power will see dramatic growth, from 600 MW to 19 GW by 2030. Storage solutions in the form of batteries and pumped hydro are also in the plan. “Vietnam has been the most exciting country in [Southeast Asia] in 2019 and 2020,” says IEEFA’s Buckley. In 2019, the country’s installed utility-scale solar capacity grew ten-fold, reaching 4.4 GW and was the largest installer of rooftop solar in 2020 in the region, going from zero to 9 GW, he says. INDIAN LESSONS One way to accelerate the transition in Southeast Asia is to copy India’s use of reverse auctions for renewable energy tenders. This process delivers the lowest cost to consumers and helps to eliminate corruption, which has plagued past fossil fuel power developments, Buckley says. Vietnam’s energy ministry has been inundated with 50 GW worth of wind proposals—if only half of these can be built it would be transformational, he adds. “We expect Vietnam to be the top wind installer in 2021 and 2022 and we expect it to be the biggest offshore wind installer in 2023 to 2028,” Buckley notes. Financial support is expected to come from traditional coal supporters Japan and South Korea, particularly for large-scale offshore wind projects. Currently, the cost of offshore wind in the country ranges from $60-80/MWh, on a par with coal generation using imported fuel. D’souza says the Vietnamese government is offering “very generous” feed-in tariffs for offshore wind to get the industry started. “We’ve seen in the UK and Denmark that the cost falls dramatically once the industry is established,” he adds. “There is an opportunity here for Vietnam to leapfrog other nations in the region on offshore wind.”
LAOS LAGS BEHIND In Laos, however, the future of coal is less clear. The country is currently home to just one coal project—the 1.9 GW Hongsa Mine Mouth power plant, which began operating in 2016. Its ownership is 80% Thai and nearly all of its output is exported across the border to neighbouring Thailand. Just 100 MW is reserved for domestic supply. SEI’s Veysey says the same is true with many large-scale hydropower developments in Laos, with power exported to Thailand, Vietnam, Myanmar and Cambodia. Typically, what happens is an investor will approach the Laotian government and offer funding to invest in an export power project, with some of the output diverted for domestic use as well as money to use for local development, says Veysey. Ultimately, the government could be tempted to continue with this business plan and allow more coal projects. A further 3 GW of coal generation capacity is expected to come online by 2025, which will be evenly split between the domestic and export markets, says Veysey. An additional 1 GW is being planned for post-2025, mainly for domestic consumption. “[The government’s] argument is this is cheaper. The cost of power is paramount in Laos,” he says. RENEWABLES RETICENCE While the country has good hydro reserves, many of the easier and cheaper projects have been realised, he says. Modelling by SEI and USAID looked at coal, solar, hydro and wind out to 2050, with different externalities. “Renewables outcompetes coal on cost alone,” Veysey says. “It would be a no-regrets decision for them to invest in solar. I don’t know if that will be enough to change the political dynamic, but we have at least provided the evidence to make that case,” he says. In 2019, the ADB found Laos only had 32 MW of installed solar with a further 68 MW planned to come online by 2020. Any scaling up of solar “will require institutional and financial resources to support grid integration studies, site assessments, and cost-benefit analyses”, the bank’s report says. Part of the challenge is wariness by utilities over managing a system with more renewables and having to manage flows and backup generation. “Increasingly, utilities understand this but they’re still cautious,” Veysey continues. “In Laos, they’re not wild about moving away from an easily dispatched resource to one with more intermittency.” The country’s hydropower reserves may help smooth the transition, but the operators would need to change how they use the reservoirs. Releases of power must be timed to balance fluctuations in solar and wind output, which in turn requires developing the right market incentives, Veysey says. A planned interconnector running from Laos through Thailand and Malaysia to Singapore, which will export power from the north to south, could bring some maturity to the market. The reservoirs “are batteries – you can’t fully control how they recharge, but they’re batteries that can and should be used to support a transition to cleaner energy,” Veysey says. Ultimately, the decisions taken will need to address common problems: population growth, economic development, and climate change. “A lot of the Southeast Asian countries are facing a growing population and growing power demand,” says Chua. “They need to find solutions and balance.” •
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Katie Kouchakji