Asian Development Bank wins $690 million in funding for ASEAN green recovery, coal phaseout

The Asian Development Bank (ADB) said it secured fresh funding to develop post-pandemic green infrastructure projects and expedite the phaseout of coal power in Southeast Asia.

Four donor countries and organizations pledged $665 million to ADB's Green Recovery Platform (GRP), according to the Manila-based development bank.

Also, Japan committed $25 million in seed money to the ADB's Energy Transition Mechanism (ETM), which could eventually retire 30 GW of coal power in Indonesia, the Philippines, and Vietnam and reduce their combined CO2 emissions by 20%.

The announcements made this week came as rich nations scrambled to fulfill their $100 billion-per-year climate finance promise to developing countries in the hope of achieving a successful COP26 outcome.

"Southeast Asia is one of the most vulnerable regions in the world to climate impacts," ADB President Masatsugu Asakawa said in a speech during the UN summit in Glasgow 2 November. "We need ambitious climate projects…We also need to address the key challenge of financing."

The Association of Southeast Asian Nations (ASEAN) needs $210 billion per year to build low-carbon, climate-resilient infrastructure during the energy transition, according to ADB estimates. The current funding gap exceeds $100 billion per year.

In a bid to promote such infrastructure projects as Southeast Asia recovers from the COVID-19 pandemic, ADB aims to raise $7 billion in capital via the GRP eventually, Asakawa said.

"The platform will provide financing and technical assistance to reduce investment risks and catalyze public and private financing for green infrastructure projects that create jobs and bolster growth," he added.

"It will also support the efforts of ASEAN developing member countries to reach their climate goals under the Paris Agreement and help them strengthen green capital markets, such as by expanding the issuance of green and climate bonds," he said.

For now, the UK government has promised to contribute £110 million ($151 million), Italy's state lender Cassa Depositi e Prestiti €132 million ($155 million), the EU €50 million ($59 million), and the Green Climate Fund $300 million.

"Co-investing with our friends in Asia…will help the world meet its climate goals," UK Foreign Secretary Liz Truss said at COP26. "[It] will also drive growth in developing countries by supporting high-quality infrastructure deals, in line with international standards."

The GRP will be integrated with ASEAN's Catalytic Green Finance Facility, established by the ASEAN Infrastructure Fund and managed by ADB.

The facility, designed to accelerate green infrastructure investments in Southeast Asia, has already received $1.4 billion in cofinancing commitments from the ADB, Agence Française de Développement, the European Investment Bank, the German state-owned KfW, and the South Korean government since 2019.

Less reliance on coal

Separately, the ADB said it has won a $25-million grant from the Japanese government as seed financing for its ETM.

"Japan has been emphasizing the importance of transition finance…especially in Asia and the Pacific region, where countries are heavily reliant on coal-fired electricity," said Masato Kanda, vice minister for international affairs at the Japanese finance ministry.

"I believe that our grant contribution will become seed money to attract much larger amounts of donor contributions and private investment," he said during a press conference 3 November.

Under the mechanism, the bank is aiming to raise capital from multilateral banks, private institutional investors, and philanthropic contributors to establish two multi-billion-dollar funds.

The first will be a carbon reduction fund, which will acquire and operate young coal power plants with a low cost of capital provided by ADB partners. As owner, the fund will close those plants within 15 years.

Theoretically, commercial operators would otherwise have kept those plants running throughout their normal lifespans of 40-50 years. Such facilities require longer operation periods to achieve their target returns due to higher capital costs.

The second is a clean energy fund that will develop renewable power projects, whose output will replace that of retiring coal plants.

The ADB, which proposed to end coal financing in May, does not plan to hold equity in the reduction fund. But it is open to participating in the energy fund.

Having completed a $4.05-million technical study earlier this year, the bank will aim to accelerate the early retirement of five to seven coal plants in Indonesia and the Philippines in the ETM's pilot stage. The pilot project will last for two to three years.

Indonesia, Southeast Asia's largest economy and coal consumer, said in its latest Nationally Determined Contribution that coal will still account for at least 25% of its power mix in 2050. The share stands at over 50% currently.

That said, there are media reports suggesting that the country could phase out coal power by 2040 with international financial aid.

The new mechanism is "an ambitious plan that will upgrade Indonesia's energy infrastructure and accelerate the clean energy transition toward net-zero emissions in a just and affordable manner," Indonesian Finance Minister Sri Mulyani Indrawati said.

IHS Markit data showed coal accounted for 55% of the Philippines' power generation in 2019. But the country announced a moratorium on new coal plants last year.

"ETM has the potential to accelerate the retirement of coal plants by at least 10 to 15 years on average," Filipino Finance Secretary Carlos Dominguez said.

ADB's eventual goal is to retire 50% of the coal fleet in Indonesia, Vietnam, and the Philippines over the next 10 to 15 years. This could cut 200 million metric tons of CO2 emissions per year.

Questions remain

The bank's ambition appears to be dwarfed by five G20 members' $8.5-billion finance package to trigger South Africa's shift from coal to renewables in the next five years, though.

Representatives from HSBC, Prudential, Bezos Earth Fund, the Rockefeller Foundation showed up at the ADB press conference as interested stakeholders from the private sector. But the ADB said they have yet to firm up any financial commitments to the mechanism.

Environmentalists and financial experts praised the bank's intent, but stressed that the ETM needs to be carefully designed to achieve actual decarbonization effects.

In an open letter dated 1 November, a group of nearly 70 non-profit organizations—including Greenpeace's Indonesia branch—said the ADB did not fully develop the financing idea and should not publicize it during COP26.

"Communities and civil society and people's organizations have had little opportunity to engage the ADB's processes of formulating the ETM," they said. "There remains no clarity as to…how the ETM would avoid creating incentives for operators of older coal plants to extend their planned lifespan in the expectation of receiving finance."

"Operators of [coal plants could] continue with their projects, knowing that the risks of stranding assets and potential losses will be mitigated by a buy-out scheme," they added.

The Institute for Energy Economics and Financial Analysis (IEEFA) estimated that for the early retirement of half of the coal plants in Indonesia, Vietnam, and the Philippines, the ETM's total size would need to be somewhere between $30 billion and $55 billion. This does not take into account the replacement green energy costs.

"The funding that would be needed to support the scale up of this program is dramatically higher than existing ADB clean energy financing programs," the think tank said in a research note.

"Given the gap between current funding levels for energy transition in Southeast Asia and the commitments that would be needed to turn an ETM into a viable catalyst for decommissioning, stakeholders would be right to stress test any statements concerning the timing or funding levels," it added.

IEEFA data shows 65.6% of the installed coal power capacity in Indonesia, 83.8% in Vietnam, and 56.9% in the Philippines are no more than 10 years old. This presents the ADB with challenges in offering sufficient financial incentives to their operators.

"The stakes are high for all concerned because implementation challenges could rob the ADB of credibility and block funding for other, high-impact clean energy funding strategies," IEEFA noted.

"The question now is whether the ADB and potential donors can adapt this concept for the complicated realities of Southeast Asia's growing power markets, and whether they can meet the higher standards of governance and transparency required by stakeholders as markets navigate the transition to net zero," it added.

Posted 03 November 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability