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Coal bad bank fund dangles complex climate kudos

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A coal stacker pours coal into piles ready for export in Newcastle, Australia, February 20, 2008. REUTERS/Mick Tsikas

MELBOURNE, Aug 5 (Reuters Breakingviews) - Financial wizardry may have conjured a way to accelerate reducing carbon emissions. The Asian Development Bank and the UK’s Prudential (PRU.L) are devising a plan to buy Asian coal plants, shut them down early and foster renewable energy, according to a Reuters exclusive on Tuesday.

It’s still in the planning stages, with the idea being to pitch it at this November’s United Nations COP 26 climate conference in Glasgow. But the basic principles look sound and relatively straightforward.

The partners would set up a special-purpose vehicle to buy coal plants in perhaps 10 low- and middle-income Asian countries, including Indonesia, Vietnam, Pakistan and the Philippines. Meanwhile, with each host country’s backing, it would encourage the erstwhile owners and others to invest in green power.

At $1.4 million per megawatt – the current mid-point price to value these predominantly new power stations, per Prudential – this would require $120 billion. That excludes India’s huge coal assets, which are older and possibly cheaper to buy, according to the UK insurer.

One idea is for governments and development banks to provide “concessional” equity with no direct financial return. The fund could then borrow at market rates from institutional investors – marketing them as “green transition” bonds to up the appeal. Assume five-to-one leverage, and that’s $20 billion of government-like support – a fifth of what developed countries have already pledged to developing economies annually. With a lower cost of funds than current owners, the ADB’s vehicle could use power-plant revenue to pay back investors within 10 years to 15 years, compared with the three decades or more of operational life remaining.

That would stop vast amounts of carbon being released into the atmosphere while also encouraging new jobs in renewable energy. The bragging rights success would convey ought to have financiers flocking to participate – BlackRock (BLK.N), Citigroup (C.N) have already given verbal support.

But it requires ADB, Prudential and partners to get comfortable with various risks. The project’s stakeholders will have to ensure decarbonising countries aren’t left with insufficient energy capacity. Emissions reduction won’t happen if panicked states turn coal plants back on rather than invest in green energy.

Meanwhile, refusing to finance coal has become the hallmark of many banks’ and investors’ sustainability pledges. Climate-purist activists could slate them for making profits from transition bonds, especially if they still think a 15-year phase-out is too slow. That makes the goal of climate kudos more complex.

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CONTEXT NEWS

- The Asian Development Bank and Prudential are spearheading a plan to buy coal-fired power plants in Asia, close them early and encourage investment in renewable energy, Reuters reported in an exclusive on Aug. 3. Citigroup, HSBC and BlackRock have voiced support for the idea.

- Asia is home to some of the newest coal plants in the world, with a remaining operational life span of 30 years or more. The plan under development would run them for 10 years to 15 years and then close them.

- The fund would target low- to middle-income countries in the region which already have coal-fired power plants, are planning to build some, or both. The ADB is currently conducting feasibility studies in Indonesia, the Philippines and Vietnam.

- The goal is to pitch the project at the United Nations COP 26 climate conference in Glasgow this November and to close the first deal in 2022.

Editing by George Hay and Karen Kwok

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