HSBC, Standard Chartered and Of America aim to finance coal retirement in Indonesia

HSBC Holdings Plc, Standard Chartered Plc and Bank of America Corp are among the banks seeking to participate in Indonesia’s first early retirement deal on coal, a sign that major lenders are increasingly willing to make the fossil fuel investments needed for Indonesia. Global energy transition.

The three banks have proposed to help finance the accelerated closure of the Cirebon-1 coal-fired power plant in West Java, according to three people familiar with the process who requested anonymity while discussing the private deliberations. Mitsubishi UFJ Financial Group Inc., a fourth person said. It is also in discussions about participating but has not yet made a formal offer.

Spokespeople for HSBC, StanChart, BofA and MUFG declined to comment on the pending Cirebon deal.

After lengthy deliberations over how the deal would work, momentum has been building over the past few months. The increased bank interest follows the signing of a non-binding agreement in December between the Asian Development Bank, Indonesian state-owned utility PT PLN, the Indonesia Investment Authority and the plant’s owners, which include Marubeni Corp, PT Indika Energy and Korea Midland. Energy company

Cirebon is one of hundreds of coal-fired plants that supply power to homes and industry across Southeast Asia. Closing them early would require refinancing initial investments, and development banks and private financial institutions have agreed to work together to do this, including under the auspices of multilateral climate aid packages known as Just Energy Transition Partnerships.

In practice, efforts to mix private capital with public financing have encountered difficulties. International banks say these deals are risky, and there is little precedent. Many lenders are also prohibiting coal financing as part of their climate commitments.

The Asian Development Bank, which is leading the Cirebon deal, was preparing to arrange the financing itself. This has changed now. In response to the January RFP, ADB received strong interest from commercial banks and is now in the process of selecting lenders. A company spokesman said it expects to close the deal by June.

The plan is to convert a large portion of the factory’s equity into debt, in order to finance one-time dividends to compensate investors for future income loss. Financial institutions would lend at market rates, and the Asian Development Bank would mix that with existing funds to make the debt cheaper than it would have been otherwise, which in turn would make it repayable over the short life of the plant.

The goal now is “how do we now move from policy to implementation” and “the specific transactions that will get us there this year in Hong Kong,” Surendra Rocha, co-chief executive officer of HSBC’s Asia-Pacific region, said last Tuesday at the Climate Business Forum.

The goal for Standard Chartered is “to be part of the foundational opportunities that will really be the ones that others can design in the future,” Marissa Drew, the bank’s chief sustainability officer, said in an interview in Hong Kong. Kong event. “He was excited.”

Rocha and Drew were speaking in general terms and did not discuss any Cirebon-related conversations.

The closing of Cirebon would be the second market-based deal to retire a coal plant ahead of schedule in an emerging market – and the first to involve international financial institutions. In 2022, ACEN and Filipino investors used the Asian Development Bank’s Energy Transition Mechanism to refinance the Southern Luzon Thermal Power Company’s coal plant, halving its life expectancy.

For the world to keep global warming within safe limits, all coal-fired power plants must close by 2040. But 75% of them have no plans to do so, according to the Global Energy Monitor. Coal plants in Asia alone are expected to consume two-thirds of the rapidly shrinking global carbon budget.

Reaching an agreement to close Cirebon early could help spur broader progress on Indonesia’s JETP project, a $20 billion climate finance package launched in 2022. This project – and others like it in South Africa, Vietnam and Senegal – hinges on The ability of such deals to attract private capital.

“This is about catalyzing a new kind of solution to a problem we all know exists,” said Alice Carr, executive director of public policy at the Glasgow Financial Alliance for Net Zero, which leads a private finance working group for the Indonesian bank. GTB. “It’s a very difficult challenge.”

Financial institutions are certainly grappling with this, said David Elzinga, senior energy specialist at the Asian Development Bank. “It is absolutely necessary to achieve climate goals, but it is complicated,” he said.

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