A man stands on an escalator ahead of the G20 summit in Nusa Dua, Bali, Indonesia, November 13, 2022. REUTERS/Ajeng Dinar Ulfiana

Indonesia, the Asian Development Bank and a private power firm are teaming up to refinance and prematurely retire a coal-fired power plant, the first such project under a groundbreaking carbon emissions reduction programme, they announced on Monday.

The 660-megawatt Cirebon 1 power plant in West Java would be refinanced in a $250 million to $300 million deal on condition that it be taken out of service 10 to 15 years before the end of its 40- to 50-year useful life under a memorandum of understanding (MOU), Asian Development Bank (ADB) officials said.

The Manila-based multilateral lender and Indonesian Finance Minister Sri Mulyani Indrawati announced the MOU with independent power producer Cirebon Electric Power in Bali on the sidelines of the G20 leaders summit.

The deal, final details of which would be refined under the MOU, could eliminate as much as 30 million tonnes of greenhouse gas emissions over a 15-year period - the equivalent of taking 800,000 cars off the road, ADB estimates.

The agreement is the first under the ADB's Energy Transition Mechanism (ETM), an initiative to blend private investment funds, public finance and philanthropic donations to buy up or refinance coal power plants in Southeast Asia to retire them early as the region shifts to renewable energy sources.

The ETM project, first reported by Reuters 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 altering the economics of coal plant operations.

"The problem of legacy coal-fired power in Southeast Asia qualifies as one of the single biggest problems for the energy transition, if not the world," ADB regional vice president Ahmed M. Saeed, told Reuters in an interview.

"With this announcement, we're taking the first steps in what was an ambitious project and making it real," he added.

SAME OWNER, SHORTER LIFE

The deal does not change the ownership structure for the 12-year-old Cirebon 1 plant, a key power supplier to Jakarta with a 30-year supply contract to state grid operator Perusahaan Listrik Negara (PLN).

Instead, it would compensate owner Cirebon Electric for the present value of foregone profits from the plant's early retirement with a new, lower-interest concessional loan arranged through ADB's private sector arm, said David Elzinga, ADB's senior climate change energy specialist.

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 a number financial firms and philanthropic groups have expressed interest in participating in the transaction.

The deal also marks a shift of the initial ETM concept of an "acquire and retire" model to a "refinance and accelerate retirement" model, Saeed said, adding that Cirebon, whose shareholders include Japan's Marubeni Corp and Korean Midland Electric Power Co, was motivated to take an active role in the transition rather than simply offload the plan.

"It became clear that it's a simpler structure to leave the existing owner in place," Saeed said. "And so we could deliver economic value through financing as opposed to a change in equity ownership."

The ADB officials said they expect the Cirebon deal to give private investors more confidence to explore future participation, and that the development finance institution's leadership may help shield them from any negative public perceptions regarding new investments in coal financing.

The deal comes amid growing calls for multilateral development banks to stretch their balance sheets and harness more private sector capital to finance the massive investments needed to fight climate change. The World Bank is due to produce an evolution roadmap to meet these challenges in December.