ADB’s coal retirement scheme is high-risk: analyst

Implementation challenges could lead to a loss of credibility for the bank.

Asian Development Bank’s plan to help speed up the retirement of high emissions coal-fired power plants in Southeast Asia comes with a high risk, according to a report by Institute for Energy Economics and Financial Analysis (IEEFA).

The report’s co-author, Melissa Brown, said this announcement sets the stage for a transformation of the Asian multilateral development bank’s (MDB) role in guiding power infrastructure development in the region. 

With several other financial firms, ADB plans to build public-private funding vehicles to buy coal-fired power plants and retire them within 15 years to allow countries time to switch to renewable energy.

“COP26 is driving a new round of policy work by the MDB’s, and ADB is working hard to have a compelling solution on the table for donor nations to support,” said Brown.

The 2021 United Nations Climate Change Conference or COP26 is scheduled to be held between 31 October and 12 November this year.

Brown said that ADB has an important role to play because donor nations have struggled to find fundable transition initiatives in Southeast Asia’s strategically important energy growth markets, including the Philippines, Vietnam, Indonesia, and in South Asia, Bangladesh.

The ADB proposes an energy transition mechanism (ETM) focused on coal retirement. The report said that the ETM has the potential to be an innovative effort to match new sources of blended finance with high priority steps that Southeast Asian countries could take to decarbonize.

The report also added that ADB’s ETM program will inevitably be assessed based on its ability to build on new financial market trends and accelerate the reduction and elimination of climate risks for the stakeholders they serve.

“To meet these expectations and have a catalytic impact, the projects undertaken should also meet the highest standards of market governance and align with credible international coal phase-out goals. The stakes are high for all concerned because implementation challenges could rob the ADB of credibility and block funding for other equally important high impact clean energy funding strategies,” Brown said.

Critical issue

Another hurdle that ADB has to clear is the critical question of how much money would be needed to position an ETM program for success.

According to IEEFA’s report, if the goal was to use the ETM facility to support the early retirement of half of the coal fleet in Indonesia, the Philippines, and Vietnam, the total facility size could balloon to as much as $30b to $55b.

“The funding needed to support the scale-up of this program is dramatically higher than existing ADB clean energy financing programs,” report co-author Grant Hauber added.

Haiber said that matching the expansive goals in the ADB’s USD4.05 million technical assistance program with efforts to mobilize tens of billions of dollars from a mix of donor nations and financial investors would be ambitious under any circumstances.

“It will naturally raise questions about how this process can be managed to ensure that other, potentially more cost-effective proposals are not crowded out,” Hauber added.