GNPower Dinginin is one of the Philippines’s newest and biggest coal-fired power plants. The $1.7bn facility is located in Bataan, on the island Luzon. Construction began in 2016 and it was launched commercially late last year.
Plans are underway for a second 668 megawatt unit to increase the total capacity to 1,336 Megawatts. Like other coal plants in the Philippines, GNPower Dinginin materialised years before President Rodrigo Duterte’s administration banned new coal projects in 2020. Since the ban doesn’t apply to existing ventures, young facilities such as GNPower Dinginin ensure that coal will remain the Philippines’s primary energy source for years to come.
Not only is this bad news for climate action, it also doesn’t make economic sense as global energy demand slows and renewable energy prices fall, climate economists have warned. It is impossible to keep the Philippines, and other countries in Southeast Asia, from moving faster to phase out coal. This rigid financing model ensures that coal plants are active for many decades.
Under power purchase agreements (PPAs), which are in widespread use across the region, utility companies pay coal plants to generate power for a 20 to 30 year period irrespective of external factors – a scenario known as a “coal lock-in”.
“Asian emerging markets are risky investments, which is why investors and project developers require financial incentives and higher returns on equity while investing in these markets,” Haneea Isaad, an energy finance expert at the US-based Institute for Energy Economics and Financial Analysis (IEEFA), told Al Jazeera.
GNPower Dinginin holds PPAs in place with 30 utilities as well as two retail electricity providers. Because these contracts are long-term, they protect coal plants against market pressures. This means that owners don’t have the incentive to shut down plants with guaranteed returns. Utility PPAs can be costly as utilities pay more for coal than for increasingly affordable renewables.
According to a report by the International Renewable Energy Agency, (IRENA), more than 60% of the new renewable power generation that will be added in 2020 will cost less than the cheapest fossil fuel option. Building new renewable energy capacity would be cheaper than continuing to operate 39 percent of the world’s existing coal capacity, according to a 2020 report by the Rocky Mountain Institute, Carbon Tracker Initiative and Sierra Club.
According to the International Energy Association, global electricity demand will slow from 2022 to 2024. It is expected to grow at an average annual rate of 2.7 per cent in 2021 and 6 percent in 2021. More than 90% of this demand can be met by renewables like solar and wind.
It can be costly to terminate a PPA before it is due. The utility will have to pay the outstanding taxes, bank loans, equity capital investment, and compensation for the lost profits to the coal plant developer. According to IEEFA analysis, a $1bn-coal plant could have a 20-year PPA. Early termination can cost the utility between $555m-845m.
According to David Elzinga of the Asian Development Bank, senior energy specialist, these costs are likely to be passed onto consumers in the form higher electricity prices.
“There’s the climate angle but there’s also the cost of power production to keep in mind. The risk of doing nothing is thus significant from both a climate and financial perspective,” Elzinga told Al Jazeera.
Early PPA termination on the buyer’s end, which is usually a state-owned company in emerging Asia, “could hurt investor confidence and lead to less deals reaching financial closure,” the IEEFA’s Isaad said. In Indonesia – the world’s biggest thermal coal exporter – and Vietnam, roughly 60 percent of coal-fired assets are owned by state-owned entities, Isaad said.
PLN, Indonesia’s state-owned power company and the world’s 15th biggest owner of coal power plants, has pledged to retire three of its plants by 2030 and shut the rest by 2055 but cannot cancel its PPAs, Rida Mulyana, director general of electricity at the Ministry of Energy and Mineral Resources, told local media last year. Mulyana said that PLN could negotiate with investors and producers.
While rich countries such as Canada have government agencies that buy out PPAs, many cash-strapped economies can’t afford that option.
The Philippines’s government agency that privatises and manages the debt of state power assets is unable to buy out coal plants without “long-term and low-cost funds,” the Manila Bulletin quoted the agency’s board chairman, Carlos G Dominguez III, who is also the Philippines’s finance secretary, as saying last year.
‘Challenge for lenders and owners alike’
“Refinancing coal power plants will be a challenge for lenders and owners alike as environmental constraints put pressure on future financing pathways,” Ken Lee, senior analyst at Wood Mackenzie in Singapore, told Al Jazeera.
Blended finance programs which tie a refinancing mechanism such as green bonds or ratepayer backed bonds to reinvestment of clean energy have been lauded as a solution. The ADB’s Energy Transition Mechanism, announced last year, aims to retire 50 percent of coal-fired power plants in Indonesia, Vietnam, and the Philippines over the next 10 to 15 years – a goal that requires $30bn-60bn in financing based on calculations of $1m-$1.8m per megawatt, Elzinga said.
He stated that the Philippines, Vietnam, Indonesia and Vietnam are all younger, which means they have more longevity and greater financial value. ADB plans to use concessional loans from the governments and donor community, as well as market-based financing in its pilot phase.
Private players have shown interest in Prudential and Citi, HSBC, BlackRock Real Assets, and Prudential. Investors may be more satisfied if international carbon markets emerge, as per the Paris Agreement.
Placing a financial value on carbon emissions avoided by the early closure of coal plants could reduce debt levels and lower overall risk – a factor underpinning the InterAmerican Development Bank’s $125 million package to Chilean utility ENGIE Energía last year that has been billed as the world’s first pilot project to monetize the cost of decarbonization.
With more than 40 countries pledging to phase out coal power at November’s Cop26 conference, energy transition schemes such as the ADB’s are likely to be closely monitored by governments, utilities and consumers alike.
“Companies, over the last few years, have had shareholder pressure to exit coal so getting them to invest in coal plants might attract criticism but we’re asking companies to invest for the sole purpose of retiring these facilities,” Elzinga said. “It would be much easier if we asked them to invest in renewables but that wouldn’t resolve coal’s lock-in issue.”