Capitalizing on Coal: Early Retirement Options for China-Financed Coal Plants in Southeast Asia and Beyond

China is not alone in directing public financing to new coal-fired power across the globe. Yet, China’s development finance institutions have played a significant role in commissioning and financing over 39GW of currently operating overseas coal power plants, largely in South and Southeast Asia within the past two decades.  

If these plants are assumed to have operating lifetimes of 30 years, they would exist beyond the International Energy Agency’s (IEA) 2040 phase-out target, outlined in the IEA’s Net Zero Emissions by 2050 Scenario (NZE 2050). To realize their climate ambitions and limit the social costs of climate change, China and host countries alike will have to consider early retirement of coal plants still in existence beyond 2040.

In a new working paper, Alex Clark, Abhinav Jindal, Gireesh Shrimali, Cecilia Springer and Ryan Rafaty analyze early retirement options for Chinese financed subcritical and supercritical coal power plants in three countries—Pakistan, Indonesia and Vietnam. For these countries, Chinese finance has enabled a significant proportion of currently operating coal plants, while power markets remain highly regulated and electricity demand is rapidly rising. 

Main findings:

• If avoided carbon emissions are valued at $100/tCO₂, the global economic and social benefits of retiring Chinese overseas coal plants ten years early could be $200 billion. 
• An interest rate/equity return requirement subsidy approach allows a plant to be retired 20 years early for $151 million, 20 percent less than the cost of a full buyout at $184 million. 
• The price on avoided emissions required to fully fund a subsidy for retiring a plant 20 years early is $12.5/tCO₂, falling to $2.8/tCO₂, if retired ten years early. 
• Subsidizing investor returns may be a more effective use of concessional funding than full buyouts in securing early retirement, especially in the context of countries with growing electricity demand and relatively early-stage renewable energy buildout.
• Providing an interest rate subsidy sufficient to allow early retirement, but for a long enough period of time to allow the host country to invest in replacement capacity, may be a workable solution. 
• Debt-for-carbon swaps may also be a viable means of financing plant retirement and can fully compensate debt or equity holders at a carbon price of less than $20/tCO₂, whether or not a market for avoided carbon emissions exists by the time the plant does retire.

Since most of the coal plants’ debt and equity liabilities have not been paid off and they operate in regulated markets where the instruments applied to date to accelerate coal retirement are either not present or too politically disruptive to stand a reasonable chance of implementation or success, these solutions are ​​unlikely to arise domestically of their own accord. The authors argue early retirement of Chinese financed coal plants will likely require more active engagement by Chinese lenders and equity holders in renegotiating outstanding debts, lowering the cost of borrowing where appropriate and subsidizing interest payments where possible or agreeing to the transfer of debt and equity ownership to other institutions.