Indonesia, the Asian Development Bank (ADB) and a private energy company are teaming up to refinance and prematurely retire the country’s first coal-fired power plant under an innovative new energy reduction project. carbon emissions that goes from concept to reality on Monday.
The 660-megawatt Cirebon 1 power plant in West Java would be refinanced in a $250-300 million deal on the condition that it be taken out of service 10-15 years before the end of its 40-50 year life under a memorandum of understanding (MOU), ADB officials said.
The Manila-based lender and Indonesian Finance Minister Sri Mulyani Indrawati will announce the memorandum of understanding with independent power producer Cirebon Electric Power on Monday in Bali on the sidelines of the G20 summit.
The deal, the final details of which would be refined under the MOU, could eliminate up to 30 million tons of greenhouse gas emissions over a 15-year period, the equivalent of taking 800,000 cars off the road, ADB estimates.
The deal is the first under the ADB’s Energy Transition Mechanism (ETM), an initiative to combine private investment funds, public finance and philanthropic donations to buy or refinance coal-fired power plants in Southeast Asia to retire them early as the region switches to renewable energy. sources.
The ETM project, first reported by the Reuters news agency last year, was developed by ADB with input from private sector firms including Prudential, Citi and Black Rock to eliminate decades of future carbon emissions by disrupting the economy. of coal plant operations.
“The legacy coal power issue in Southeast Asia qualifies as one of the biggest issues for the energy transition, if not the world,” ADB regional vice president Ahmed M Saeed told Reuters in an interview.
“With this announcement we take the first steps of what was an ambitious project and we make it a reality,” he added.
The deal does not change the ownership structure of the 12-year-old Cirebon 1 plant, a key power supplier to Jakarta with a 30-year supply contract with state-owned grid operator Perusahaan Listrik Negara (PLN).
Instead, it would compensate owner Cirebon Electric for the present value of profits lost from the plant’s early retirement with a new, lower-interest concessional loan arranged through ADB’s private-sector arm, said David Elzinga, a senior specialist in ADB climate change energy.
The deal will include funds from Indonesia’s $500 million allocation from the Climate Investment Fund, but the structure is still coming together, Elzinga said, adding that ADB had initially requested a $50 million contribution from the fund.
ADB also said that several financial firms and philanthropic groups have expressed interest in participating in the transaction.
The deal also marks a shift from the initial concept of ETM from an “acquire and withdraw” model to a “refinance and accelerate withdrawal” model, Saeed said, adding that Cirebon, whose shareholders include Japan’s Marubeni Corp 8001. T and Korea’s Midland Electric Power Co, was motivated to take an active role in the transition rather than simply downloading the plan.
“It became clear that it is a simpler structure to leave the existing owner in place,” Saeed said. “And so we could deliver economic value through financing rather than a change in equity ownership.”
ADB officials said they hope the Cirebon deal will give private investors more confidence to explore future involvement, and that the development finance institution’s leadership can help shield them from any negative public perceptions regarding new investments in carbon finance.
The deal comes amid growing calls for multilateral development banks to stretch their balance sheets and harness more capital from the private sector to finance the massive investments needed to combat climate change. The World Bank is due to produce an evolution roadmap to meet these challenges in December.
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