Ep46 Climate finance addressing coal plants, ft Christoph Nedopil Wang, Griffith Asia Institute

The phase-out of coal-fired power plants in Asia Pacific presents a significant challenge, requiring a delicate balance between environmental sustainability and economic feasibility. In this discussion, we are joined by Dr Christoph Nedopil Wang of the Griffith Asia Institute, who delves into case studies from Pakistan and Vietnam, offering valuable insights applicable to other Asian electricity markets. Notably, the conversation will explore innovative financial mechanisms that could facilitate the early retirement of coal plants while mitigating potential financial burdens.

Resources: China coal exit: Opportunities for China-led financing of early phase down of coal-fired power plants in Pakistan and Vietnam.

ABOUT CHRISTOPH. Professor Christoph Nedopil is the Director of the Griffith Asia Institute at Griffith University in Brisbane, Australia. He is also a Visiting Professor at FISF Fudan University, Shanghai, Acting Director of the Green Finance & Development Center at FISF Fudan University, and a Visiting Faculty at Singapore Management University (SMU). Christoph regularly provides advisory to governments, financial institutions, enterprises, and civil society on sustainable development issues. He is the lead author of the UNDP SDG Finance Taxonomy, the Innovative Climate Finance Solutions report for the G20 in Indonesia, and the Green Development Guidance of the BRI Green Development Coalition under the Chinese Ministry of Ecology and Environment. He has authored four books and published articles in Science and other leading journals. Christoph serves as board director in scaling sustainability in businesses and finance. Christoph is quoted regularly in Financial Times, The Economist, Reuters, Bloomberg, and other major outlets. Before joining Griffith University, he served as Founding Director of the Green Finance & Development Center and Associate Professor at the Fanhai International School of Finance (FISF), Fudan University and previously as Founding Director for the Green BRI Center at the Central University of Economics in Beijing. He worked with the World Bank in over 15 countries and was a Director in the German development agency GIZ. Christoph holds a Master of Engineering and a PhD in Economics from the Technical University Berlin, as well as a Master of Public Administration from Harvard Kennedy School.

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Transcript

NOTE: THIS TRANSCRIPT IS AUTOMATICALLY GENERATED AND MAY CONTAIN ERRORS. REFER TO RECORDING FOR ACCURACY.

Welcome to the Asia Climate Finance podcast, where our host and his guest discuss and evaluate climate business and climate finance issues and trends. Please support us by liking and subscribing to the podcast. Also, please note the disclaimers at the end of the show. Here is your host, investor analyst and author, Joseph Jacobelli. 

Hello there and welcome to episode 46 of the Asia climate finance podcast. Today we talk about a very key subject in climate business and finance in Asia, and it's the phase down of coal-fired power plants, which is a very controversial and high-profile subject in many jurisdictions in the Asia Pacific region.

Our guest is Dr Christoph Nedopil Wang from Griffith University. He's the director of the Griffith Asia Institute in Brisbane, Australia. So we talk about two kind of sample markets, which is Pakistan and Vietnam. And we talk about how power plants could be retired early in those particular to markets.

And the interesting take there is that it would not be at a massive loss and even could generate some financial gains. Please enjoy the show. Hello again, and welcome to episode 46. Of the Asia climate finance podcast. Today. We have a professor and Dr Christoph Nedopil Wang, and I hope I'm not completely killing the name here from Griffith University down in Australia.

Hello, Christoph. How are you? Hi, Joseph. Very nice to be here. Thank you very much for making the time. I really appreciate it. And again, apologies for killing your name. My, my, my German is not that great. You did it perfectly. Oh, thank you. Thank you. Thank you. So I, the reason why we're speaking today is, is about a paper that you, you, you wrote.

You wrote with some other authors, but could we first start with a little bit about you and a little bit about the Griffith Asia Institute, Christoph? Absolutely. Yeah, it's first of all really a great pleasure to be here and I really appreciate all the work that you've been doing to talk about Asia and climate finance.

 So really, really great stuff there. For all the listeners, you should go back and listen to some of the great work. But yeah, the Griffith Asia Institute is the Griffith Asia Institute which I have the pleasure of being a director of is an institute at Griffith University here in Brisbane Queensland, Australia.

 And we have about 130 members in the institute 80 faculty members and 50 external members that are working on a number of different topics to drive sustainable development across Asia and the Pacific and one of the big topics to drive sustainable development in the region. Is the energy transition or more broadly the green transition off the region that includes energy, but all the jobs and the question of how we finance all of this particularly in the mitigation space.

So how do we move from brown to green in the energy space? And I think it's also part of what we're discussing here, but, but there's also other topics that are really prevalent in our research that includes digital inclusion. Adaptation, finance, biodiversity, finance peaceful coexistence. These are all broad and important topics.

 I think that really define the future of how we see and work and live in Asia and the Pacific. And Australia in many ways is a core part of the Asia Pacific region. I've been only at Griffith University for the last nine months. So I came back to Australia after about 20 years. I've lived here in 2005 and have been previously for the last six years in China, first in Beijing and then in Shanghai.

That's a long way to go from Australia to China. People don't realize how far it is, although it's in the same kind of region and continent. That is so true. That's great. That's a really great introduction, great work. that you're doing at the Griffith Asia Institute. So the paper that came out in March of this year, just a couple of months ago, is called China Co exit Opportunities for Channel Ed Financing of Early Phase Down of Co fired Power Plants in Pakistan and Vietnam.

So, first of all, it is a mouthful, but I think it is an important mouthful because it tells you exactly what's going on in the paper. Give us first, maybe a quick brief on the coal plant situation in Asia, in, in general at a very high level, please, Christoph. 

Yeah, sure. So first of all, I also want to acknowledge the co-authors and co-conspirators in this.

Work, which is climate smart ventures, an advisory on financial transactions located in Singapore and the Philippines and particular Lawrence on and, and the whole team. And then also this work was done together with the green finance and development center at food on university in Shanghai. 

And so the premise that we looked at, at this paper is to understand whether China has any. opportunities to retire some of the coal-fired power plants it has built over the last couple of years, and in particular kind of in the whole wake of the Belt and Road Initiative how, whether these coal-fired power plants can be retired early and at what cost or potential benefits for current financial sponsors. 

And One of the questions that we tried to answer at the beginning was that we know that in some of the countries, in particular, Pakistan, the bills for the coal-fired power plants have often actually not been paid. And so the cash flows of these coal-fired power plants are much lower than projected, even though they might be producing power, electricity.

 They're not necessarily getting paid. And with Pakistan's government's financial issues, and so it's a sovereign debt issue. It's also not that the sovereign guarantees that have been provided to these coal-fired power plants. Can be utilized so easily. Then we came to the questions like, does it make sense even for financial institutions or the co fired operators and owners to think about how to retire them early?

 And this was in, in many ways, the motivation with then the broader outlook. China has a number of different coal-fired power plants outside of China. Can a similar model be applied to other coal-fired power plants? And one of the things that I think is different from previous studies that have often focused on older coal-fired power plants with a notion that it's particularly the older coal-fired power plants that have been written off or kind of has been fully paid off that can be retired more easily, because it's kind of just owner operated model.

We also really specifically looked at younger coal-fired power plants. So we did a mix of coal-fired power plants in these countries. So six altogether, three in each country. To really get a mix of kind of small and larger and coal-fired power plants and the smaller ones should be easier to retire just because it's you don't have to replace them.

You don't have such a high replacement cost. And so it might be politically also more pliable to do that. And then we also looked at different age brackets of this coal-fired power plant. What did you pick specifically Pakistan and Vietnam, Christoph? We could have picked other countries, but Pakistan was picked because in many ways Pakistan can serve as a role model for other BRI countries, Belt and Road Initiative countries. 

Pakistan and China have this very special relationship called the China Pakistan Economic Corridor, CPAC, that has served as a, I think, cornerstone of what the Belt and Road Initiative is, or could be, or wants to be. In the other country Vietnam we chose because it has kind of doesn't have this problem as Pakistan has what I mentioned before with sovereign debt issues has a more ambitious green energy plan and also last year, then published the PPA, the power development plan eight.

So there were some, some good reasons to look at Vietnam as well. There are other countries that I think could have been chosen as well, like Indonesia. To give you one example where China also owns and operates a number of coal-fired power plants, but you just have to make a choice at some point.

I think the model overall that we developed and the detail that we developed is very easily applicable also to a number of other coal-fired power plants. That's great. So if we can talk about the kind of key area of what one of the key areas of The paper which is, you know, how do you retire early or face down a coal-fired power plant Without incurring massive losses or even having a financial a financial gain Could you could you take us through that and I guess there are two sides to it.

There's an asset Level side to it and there's a financial Engineering side to it. So maybe we can talk about both of those aspects Right. So what we did is to really try to get all the relevant data to do a cash flow analysis over the next couple of years of these coal-fired power plants at different capacities, but mostly kind of using as many real data that we know from the PPA and the power purchasing agreement as possible.

And then we kind of understood what is the. Value of the coal-fired power plants. So all of the revenues minus all of the cost. And then you can calculate, obviously, an enterprise value for this specific coal-fired power plant. And what we did then to evaluate whether it's possible to retire coal-fired power plant early is two things.

Number one is we just looked at the asset itself, so the coal-fired power plant. And number two, we also looked at the coal-fired power plant plus a replacement investment, particularly in solar and wind. And so the first step in this looking only at the assets, we said, if We know that these coal-fired power plants have a specific capital structure, which is partly known but partly also estimated because we don't know how much of the depth it has already been repaid and just kind of to get give everybody a feeling kind of usually large infrastructure projects like a coal-fired power plant has a And capital structure that is 25, 25 percent equity and 75 percent debt.

So that's kind of just a rough estimate. There are, of course, variations, but this is kind of the assumptions that we started with, which is a very typical financing structure. And then we know that the debt is being paid down over a specific period. Of time. We know how much the interest rates are typically.

So this is often kind of accessible information that we use that real information. And then kind of, we know how much financing cost accrue over the lifetime. And we looked at the not the technical lifetime of the power plant, but the contractual lifetime. So the 25 years typically of a power purchasing agreement. 

They're like, great. So if you know the financing cost and we say we are doing a refinancing of the coal-fired power plant, because suddenly. We promise investors, if you refinance this coal-fired power plant, you can make sure that this coal-fired power plant gets retired early. All you have to do is to reduce the financing cost from the current financing cost.

So for example, if you have just used a calculation example, if you have a 10 percent interest rate on your debts currently for the runtime, and you say like, let's shave off a percentage point through some. Credit enhancements, some blended finance inclusion off development banks, or even some philanthropies that are willing to finance an early retirement, you can shave off a percentage point off these 10%.

And therefore your financing costs massively decrease because again, it's 75 percent particularly at the beginning 75 percent that most of the cost is financing cost for coal-fired power plants. And so if we refinance against the promise and so that's green finance 101 against the promise to become greener.

Then investors might be actually willing to provide financing against the promise to retire early. And the result of this I think is extremely promising. What we found is that, of course, through a reduction of the financing cost, you can pay out all the investors and retire early at the same time.

So all the investors will get exactly what they expected, and you can retire early. Because overall, the cost for kind of operating this coal-fired power plants will be lower and therefore you will make your revenues and kind of your revenue targets and enterprise value and goals earlier than previously.

So, we at zero cost for the Owners and operators, you can retire the coal-fired power plants between five and nine years earlier than currently planned. That's really fantastic work. Could you talk a little bit about some of the financial instruments that could be available? I think you mentioned some concessional loans credit enhancement mechanisms, And innovative financing instruments like debt for climate swaps. 

 Could you perhaps just very quickly talk about, talk about these financing instruments? Right. So I think there are kind of also overall, there are a number of challenges to implement this finding the right financial structure for it is definitely one of the challenges. So, because all of the different investors have different financing instruments that they can offer, so a development bank might offer some concessional financing, some concessional loan, potentially even some equity financing. 

Then the typical bond investors would say like, Oh, okay, great. Let's have a green bond. But we also know that some of these instruments are more difficult. To actualize in countries like Pakistan just because the political and economic risks are continuing to be very high. So therefore kind of having some form of credit enhancement mechanisms, for example, if you think about this, the development bank, it could be even a Chinese development bank could provide credit guarantees to outside investors.

So if it's a green bond being issued. For this plan, who's going to guarantee the investors that they'll get their money back, particularly in Pakistan, that has seen some of the repayment issues. But if a trustworthy development bank, including again, Chinese development banks or policy banks would get involved and provide credit guarantees or other credit enhancing mechanisms.

This could ideally also lead to more investor appetite to go on such a green bond or other green credit instrument. Blended finance, very similar in the end, blended finance structured finance so trying to mix up more concessional and more private sector capital in order to reduce the financing cost.

Overall, what we know also over the kind of, with more experience in the climate finance and green financial markets, the green financial instruments at issuance tend to be lower cost than, for example, vanilla bonds. So if you have two very similar type of bonds from the same company with the same maturity and so on.

 By now, often investors are willing to accept a lower rate of return for that green bond over a very kind of non-green bond by display, very similar or the same issue. And so through issuances of these or utilization of these green financial instruments the idea is to reduce financing costs.

Now, you also mentioned debt for climate or debt for renewable swaps and that's a very interesting and kind of thought experiment at this point in time. Not because debt for climate swaps don't exist. Quite the contrary. We have seen a number of debts for climate swaps. The challenge right now is that China it's not. 

not has not really come forward with a strategy, how to more structurally address sovereign debt issues. Which China is a very big bilateral lender, including in Pakistan. So it's like a lot of government-to-government lending. And that includes also the sovereign guarantees that the Pakistan government has given to China to finance the coal-fired power plants.

So Pakistan, in fact, owes. China a lot of money. A debt for renewables or a debt for climate swap would, so to say, write off some of the debt that Pakistan owes to China. China against the promise, for example, to retire early. Now, China has not really been extremely forthcoming about a strategy to apply such step for climate or for nature swaps.

 Although there has been significant movement definitely over the last year, I've also been involved working with the Chinese government. And Chinese stakeholders on developing strategies around depth for nature and depth for SDG swaps, that it could include the depth for climate swaps. But at this time, I think it is still more conceptual than practical.

Whereas the green financial instruments and credit enhancement is much more tried and tested. I'm not sure if you're able to answer the following question, Christoph, as a follow up. But have you looked at some of the financial institutions that are, that would be involved at the multilateral level like ADB or AIB or at the China level, like, you know, the China Export Bank or other state-owned financial institutions?

Are they, what kind of? On the multilateral side, would they be interested, do you think they would be, you know, willing to, to take, to take part in that and on the state owned financial institutions in China, do you really think they've got a good understanding about the whole kind of, you know, Energy transition and the importance of the face down, et cetera, et cetera. 

It's a very difficult question. It's a very good question. So there are four levels. So you have to, of course, the multilateral development banks. So Asian development bank has been engaged in Pakistan, for example, with the energy transition mechanism to evaluate feasibility of early call retirement. I think an Asian development bank or other, Multilateral development banks that are not the AIIB, the Asia, Asian Infrastructure Investment Bank which is out of China.

So ADB, World Bank, I think would be, it would be more difficult to engage them to retire Chinese owned coal-fired power plants that have a lot of arrears. So, particularly in Pakistan. So, because they are not, they are not interested in paying our Chinese investors. Particularly kind of, as there's a lot of sovereign debt involved as well.

So it's not a purely commercial transaction. Then you have AIAB, which in general could be very it could be feasible for AIAB to get involved. They are very interested in also applying innovative financing instruments to accelerate the green energy transition. So there is, I think, good possibility for AIB to evaluate such a proposal.

The Chinese policy banks, there's actually four levels, the Chinese policy banks like China Export Import Bank, and China Development Bank. They are, I think, not unwilling, but it's kind of, for them, it's often a very political decision as well. And particularly in the China Pakistan relation, a lot of things are both political and political. 

And financial. So in particular, when sovereign debt is involved. So I think there is more than the willingness of the China Development Bank or China Exit Bank. It's also the very high-level political willingness to kind of consider such moves. The issue with such moves for China is if it does it in Pakistan, what does it do in other countries?

And I think one of the discussions that we are also having with the Chinese, I just like, it's actually not a disadvantage to any of you. If you are really able to apply such financial instruments and such a financial structure as we suggested, nobody's going to make a loss. You're actually, everybody's kind of better off.

 Not actually for a climate swap, but through refinancing and credit enhancement mechanisms, you can actually make everybody better off. And so I think there's More opportunities than not. I think there's a lot of evaluations and kind of discussions that need to be had to really build the capacity but also understand some of their challenges that We might not really see at this time And then finally you have the Chinese commercial banks, which are as you say often state owned not all Particularly the ones that are engaged in overseas financing are typically state owned they're different from the policy banks, often much more nimble, still very much risk averse as any large financial, financial institution worldwide would be.

 And they are generally interested to also potentially explore new financing instruments and also potentially early retirement of coal-fired power plants, because they also know that. actually repayment issues with the current structure. And one of the reasons, particularly for Pakistan, why there are such high Economic risk in the existing coal-fired power plants is because a lot of the coal is being imported in U.

S. dollars. So the Chinese, the Pakistani coal-fired power plants need coal from overseas, and that is paid in U. S. dollars. And Pakistan just does not have enough U. S. dollars, particularly as long as it's in a sovereign debt branch, and so that has Led to very high cost and very challenging financial situations for some of the coal-fired power plants.

So the private financial institutions might even have a stronger interest in retiring existing coal-fired power plants earlier. Also because it provides new opportunities for new investments, replacement investments. I hope that answers your question. Yes, it does. No, no, it's an extremely interesting kind of take that you have on that.

One side question is, what about the capacity building? Because one thing which is very, very close to my heart is the fact that the whole energy transition, whether it's the climate business side or the climate finance side, is not necessarily Widely understood, I wouldn't say endorsed, sometimes not widely endorsed, but even if sometimes it is endorsed, the kind of understanding of the mechanics are not really, are not really quite there yet.

So, when you're talking about, you know, using. The kind of repowering the coal-fired power plant to put in some renewables, do the institutions that you've spoken to really fully, fully understand and fully endorse that? Or. Do you think that we're still a little bit of a lag in terms of capacity building? 

I think that's a very good question. I think there are a number of different issues with regards to capacity and fully recognizing also that I think there's a lot of things going on. Where even us kind of that are busying themselves a lot with climate finance and particularly also in Asia. I also definitely also always need more capacity.

So kind of always speaking kind of maybe even with one eye or even blindly myself. But what I, what I noticed is that there is a lot of work on building capacity. Around Asia. Sorry. To give you an example, we are very engaged with a program called the Australian Awards Program that builds capacity for Asian partners and with Asian partners.

It's really kind of mutual capacity building as well on climate finance. So we just finished a course for South Asia and Mongolia and are now in the Philippines. Sorry, Indonesia to really work with local stakeholders. To build capacity on climate. So there is a lot of climate finance changes and developments.

So we, there's always need for capacity building. I must say that Chinese side has built a lot of capacity over the last years in many regards to Chinese financial institutions, you know, very well. And by now how to finance energy. And this is, by the way, a big change also to five years ago when we worked on greening the Belt and Road Initiative.

And a lot of the risks that the Chinese investors saw was like, yeah, all this green technology is not really tested. And now there's a lot more involvement in the green energy financing. The Capacity that is often more challenging is not the financial capacity, because the big challenge is actually all the technical planning capacity.

So, one of the challenges when retiring a coal-fired power plant is the financing. The other challenge is, how do we replace it? You cannot just easily make a like for like replacement because you might not have the sun, or you might not have kind of for solar or the wind to just replace it. And you don't also need different space for solar and wind, and then you need distribution and transmission network that is different.

So there are a number of non-financial capacity gaps that need to be addressed as well. And then you have to political ramifications. So coal plants are often co owned or co-operated by state owned companies or linked directly to the government. And so there is also a political interest to somehow keep them alive, because, you know it might make provide the government also with or at least kind of the people to specific people in government responsible for the coal-fired power plant might provide them some political opportunities as well.

So, there are a number of different hurdles. And I haven't even talked about just transition and kind of the people that are actually employed in the coal-fired power plants. So, there are a number of different capacities. Issues. How to just transition issues that go beyond the climate finance. Again, I think in the climate finance, just a lot going on and definitely always capacity building gaps, which we know, but there's also a lot of work happening in terms of building this capacity.

No, that's great. I think we should have a. Podcasts specifically about how important or the central role of education. When it comes to the energy transition, because as far as it's the basics of basics, but I know I'm preaching the convert given, given All our listeners are also already mostly converts. 

That's true. That's true. Yeah. I mean, I know there's a lot of initiatives and a lot. All over. Yeah, I think even in China, there's quite a few institutions. There's one, for example, called the Capacity Building Alliance of Sustainable Investment based in Beijing that is doing quite a lot of work.

And he's just one of many, but one very last question, and I'm going to put you on the spot if I can, Christoph now, because I know you're not, you're not a consultant. You don't make projections and, and forecasts, et cetera, et cetera. But. Based on, you know, the work that you've done for this paper and the other work that you've done, if you were to get your crystal ball out and just completely guess the general trajectory and direction of the phase down of coal-fired power plants what do you think is the trajectory over the next, you know 25 years for, for, for that? 

Wow. I kind of, I have a, I stay away from trajectories, but I do have a wish. We find good solutions that can be scalable. And I think kind of this pre financing option is one to scale retirement of coal-fired power plants. One of the challenges and one of the wishes that we have is to find a fair valuation of these coal-fired power plants.

This is probably the trickiest proposition of them all. Which we also see right now, they're playing out in Indonesia with the retirement of the Cerro Bon plant. There's different methods and different results, obviously, but once we have figured this out and it can be scaled. My hope is that in. 

Eight years, 10 years, the race to green. Has become so rapid that everybody's just trying to retire them early. So you will see kind of this kind of, it's almost like a kind of a diamond. So very slow start. And then suddenly everybody's trying to race to retire the coal plant early because the prices are just dropping right now.

You're still getting very good money for the retirement of coal-fired power plants. A couple of years, you will probably not get a lot of money anymore. So that's my hope. And then you'll have the bottom of the diamond, you'll have a couple of coal-fired power plants that will still be operating and actually also be pretty.

Valuable because they are in very specific locations where kind of, or kind of provide some really interesting kind of peak load for, for the, for the grid. But these are a few remnants. But I do hope that we'll see this diamond, really this race to retire in a couple of years where actually the prices will drop.

 Rapidly for the retirement of coal-fired power plants, also because the renewable prices have dropped so much. So, just to give you an example, last year, the per megawatt cost of a Chinese solar panel dropped by 30 percent again. So that's kind of this, this consistent reduction of cost of solar panels. 

 And we hope we are in some way seeing that also for, of course, for the battery technologies it's, it's, it's just has been continued for the last decade. And so the competitiveness of green energy is just marvellous, which again, ideally starts this race to retire coal plants earlier. Thank you.

Ideally, a wish not a, not a projection. I think it's I have a bias, I know, but I think it's pretty much the trajectory in my, in my, in my, from my perspective anyway. Christoph, I really want to thank you so much for today and for your time and for all of the insights and the link to the paper is actually in the show notes for everybody.

So thank you very, very much, Christoph. I really appreciate it. No. Thank you. Thank you so much for having me. Really enjoyed the conversation and keep up the good work that you're doing and looking forward to our next discussion and always kind of also good to get your opinion. You have been working on this very deeply and kind of talk to so many people.

So always good when you interject in the conversation with your expertise as well. Really appreciate it. Absolutely. Absolutely. Thank you again, Christoph. Thank you for listening to this episode of the Asia Climate Finance Podcast. Please note that the Asia Climate Finance Podcast is presented for educational purposes only. 

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