SHARM EL-SHEIKH, Egypt – The Asian Development Bank (ADB), the Indonesian government and a power plant company said on Monday they are working on a deal for the early retirement of a polluting coal power plant.

ADB hopes this will be the first of many such deals that would dramatically cut greenhouse gas emissions in Asean countries.

The proposed deal is the first in Indonesia under ADB’s Energy Transition Mechanism (ETM) that aims to finance the early retirement of coal power plants in the region, speed up the switch to green energy and meet climate targets.

The final details are still being worked out. But under a memorandum of understanding (MOU) signed in Bali on the sidelines of the Group of 20 (G-20) leaders’ summit, the 660MW Cirebon 1 power plant in West Java would be refinanced in a US$250 million (S$343 million) to US$300 million deal that would pay for the plant’s retirement 10 to 15 years before the end of its useful life.

Coal plants typically have a 40- to 50-year operational life. The Cirebon plant, owned by Cirebon Electric Power, is contracted to deliver electricity until 2042, by which time the plant will be 30 years old. 

Retiring it 15 years early could cut up to 30 million tonnes of greenhouse gas emissions, the equivalent of taking 800,000 cars off the road, ADB estimated.

Attending the MOU signing were representatives of ADB, Cirebon Electric Power, Indonesian state power utility PLN and the Indonesian Investment Authority.

The transaction structure is not yet finalised, and a number of financial entities and philanthropies have expressed interest in participating in the transaction, ADB said.

The ETM combines private investment funds, public finance and philanthropic donations to buy up or refinance coal power plants in South-east Asia.

Burning coal is a major source of greenhouse gas emissions and air pollution globally, particularly in South-east Asia where coal is a key source of energy.

Indonesia, the world’s top thermal coal exporter, is heavily dependent on coal for power generation, and in recent years has dramatically expanded its fleet of coal power plants at an environmental and health cost.

About 60 per cent of the nation’s electricity is generated from coal, and the government has said it needs external financing to cut coal use and boost green energy investments.

ADB regional vice-president Ahmed Saeed said the ETM, which was launched a year ago, was still evolving, but he hoped it would become a regional model to fast-track coal-plant retirements.

In an interview at the COP27 climate talks in Egypt, he said the initial idea was to acquire and retire plants early.

But the bank and its investors are finding it simpler to refinance and accelerate retirement of power plants, many of which have high levels of debt.

This involves buying out the plant’s debt while leaving the current owner in place.

In a briefing on the Indonesia MOU, Mr David Elzinga, ADB’s senior climate change energy specialist, said the deal would include funds from Indonesia’s US$500 million allocation from the Climate Investment Funds. But he added that the exact structure of the financing was still being worked out.

Mr Elzinga said the ETM was a learning process. “We’re trying to address the climate problem in an innovative way and learning a lot as we go along,” he said.

ADB is discussing possible deals with other power plant owners in Indonesia and the Philippines under the ETM, he added, but it is too early to say when the next deal may be announced.

The aim is to complete a number of deals during the current pilot phase of the ETM, perfect the model, then scale up in a few years’ time, said Mr Elzinga.

In October, Indonesia’s Minister for Energy and Mineral Resources, Mr Arifin Tasrif, told The Straits Times the government had identified 32 older-generation coal-fired power plants for possible closure.

This could help the nation meet its key climate target of net-zero emissions by 2060.

Mr Arifin said the government had been conducting an exercise to see which power plants could be closed five to 10 years before the end of their operational lifespan.

Monday’s ETM announcement also comes ahead of a separate programme expected to be announced this week.

According to Bloomberg News, the United States, Japan and other countries are finalising a deal that would offer at least US$15 billion to help Indonesia speed up coal plant retirements. The “just energy transition partnership”, or JETP, could be announced during the G-20 summit in Bali.