Asia’s Energy Transition Imperative:
Shifting from Coal to Clean Energy

Asia’s Energy Transition Imperative:
Shifting from Coal to Clean Energy

Asia’s Energy Transition Imperative: Shifting from Coal to Clean Energy

2023 was the warmest year on record – average temperature increased 1.2°C above the 20th century average.[1] Time is running out to limit global warming to “well below” 2.0°C above pre-industrial levels and the higher aim to limit temperature increase to under 1.5°C, based on the targets established by the Paris Agreement.[2]

Coal Remains Prevalent, But Renewables Surging

Coal is a major driver of global warming that must be addressed, particularly in Asia. In 2022, worldwide coal demand reached a record high amidst a global energy crisis, and the International Energy Agency (IEA) has predicted that 2023 will yet again beat the prior year’s record.[3] While coal demand has fallen in the US, EU, and other advanced economies, demand continues to rise in Asia, which accounts for 80% of worldwide coal use.[4] China, India, Indonesia, Vietnam, and the Philippines alone account for over 70% of global coal demand, offsetting decreases at the global level.[5] Coal has been the primary fuel for electricity generation in Asia, and electricity demand in the region continues to grow due to rapid industrialization and urbanization, population growth, and rising standards of living. See Figure 1. Eighty-four percent of the global electricity demand increase from 2015 to 2022 is attributed to Asia, according to data from Ember.[6] Moreover, a number of coal plants are still “young” or are being newly built in the region, and could have operational lifespans lasting as late as 2060.

Figure 1: Asia Electricity Generation by Source

Source: Ember Electricity Data Explorer [7]

Although coal has remained prevalent, renewable energy capacity has had significant growth in recent years. Global annual renewable capacity additions set a new record, increasing almost 50% to nearly 510 gigawatts (GW) in 2023.[8]

  • China: Of the 510 GW renewables added globally in 2023, China alone installed over half.[9] China more than doubled its solar capacity last year and wind power capacity increased 66% from the year prior.[10] Around 30% of its electricity generation comes from renewables.[11]
  • Southeast Asia: In 2023, solar and wind capacity increased 20% in Southeast Asia. The region is on track to beat its 35% renewable energy target for 2025 and nearly double its installed solar and wind capacity in the next two years.[12]
  • India: India increased its renewables capacity by approximately 8% in 2023, ranking it fourth in renewable installed capacity globally.[13] Twenty-two percent of India’s power generation is currently from renewables.[14]
 

The results as such are mixed, with renewables expanding but continued growth of coal in Asia.

Pathways for Energy Transition

Given the continued reliance on coal, countries will have to take bold action to reduce greenhouse gas (GHG) emissions and meet their net zero targets. The question then becomes – how can Asia sufficiently draw down its coal and continue its renewables expansion, while meeting its economic needs in a just and orderly manner?

Some countries and stakeholders in the region have begun planning and implementing initiatives for this energy transition to cleaner energy. There is no one-size-fits all approach with such diverse contexts within each country, and there are a variety of tools in the tool box to consider. These include the following and are not mutually exclusive: National policy targets and reforms to facilitate the transition, coal to clean utility-level energy transition, industrial decarbonization, grid upgrades and transformation, and availability of transition finance. See Figure 2.

Figure 2: Energy Transition Components

Moreover, innovation and multilateral partnerships are quickly changing the landscape of what is possible in energy transition. For example:

Energy Transition Mechanisms: The Asian Development Bank (ADB), which pioneered the concept of the Energy Transition Mechanism (ETM) in 2021, describes it as “an innovative model which [uses] blended finance to accelerate the retirement of coal power plants and develop green, renewable energy to replace it.”[15] ETMs decommission individual power plants, and as such, they are tailored to the political and economic conditions of the specific countries they are in.[16]

Just Energy Transition Partnerships: Also in 2021, South Africa launched the first Just Energy Transition Partnership (JETP), a financing mechanism through which wealthier countries fund a coal-dependent country on its transition to clean energy, while addressing the social impacts of the transition. Since then, Indonesia, Vietnam, and Senegal have each launched JETPs. Funding can be provided through grants, loans or investments.[17] Power asset owners can establish their own Just Energy Transition (JET) programs as distinct from formal JETPs, in their effort to shift from coal to clean energy and address the social consequences of the transition.

Coal Asset Transition Accelerator: A global platform, the Coal Asset Transition Accelerator (CATA) serves to empower coal asset owners, alongside government financiers and local stakeholders, to put in place financial mechanisms that will support the acceleration of the transition away from coal in a just and inclusive way.

Transition Credits: The Monetary Authority of Singapore (MAS) recently launched the Transition Credits Coalition (TRACTION) and two pilots to develop transition credits for the early retirement of coal-fired power plants (CFPPs) in Asia. MAS describes transition credits as “high-integrity carbon credits generated from the emissions reduced through retiring a CFPP early and replacing this with clean energy sources.”[18] These would serve as a complementary financing instrument to reduce the economic gap for the early retirement of coal plants.

Solar energy

Just Energy Transition Partnerships: Also in 2021, South Africa launched the first Just Energy Transition Partnership (JETP), a financing mechanism through which wealthier countries fund a coal-dependent country on its transition to clean energy, while addressing the social impacts of the transition. Since then, Indonesia, Vietnam, and Senegal have each launched JETPs. Funding can be provided through grants, loans or investments.[17] Power asset owners can establish their own Just Energy Transition (JET) programs as distinct from formal JETPs, in their effort to shift from coal to clean energy and address the social consequences of the transition.

Coal Asset Transition Accelerator: A global platform, the Coal Asset Transition Accelerator (CATA) serves to empower coal asset owners, alongside government financiers and local stakeholders, to put in place financial mechanisms that will support the acceleration of the transition away from coal in a just and inclusive way.
Transition Credits: The Monetary Authority of Singapore (MAS) recently launched the Transition Credits Coalition (TRACTION) and two pilots to develop transition credits for the early retirement of coal-fired power plants (CFPPs) in Asia. MAS describes transition credits as “high-integrity carbon credits generated from the emissions reduced through retiring a CFPP early and replacing this with clean energy sources.”[18] These would serve as a complementary financing instrument to reduce the economic gap for the early retirement of coal plants.

How Climate Smart Ventures is Taking Action

Climate Smart Ventures (CSV) is an advisory firm advancing the energy transition in Asia. Our expertise and projects span coal to clean utility-level energy transition, industrial decarbonization, grid transformation, transition finance, and government-level policy recommendations. We conduct market analysis, due diligence, and feasibility studies for decarbonization projects for power asset owners and other stakeholders, as well as deal structuring, capital raising and execution for such projects. Ecosystem building and collaboration are key elements of our firm, and we are engaged in various capacities with each of the initiatives mentioned above.

Based on our current read of the market, accelerating the transition from coal to clean while ensuring that it is just and managed will require more surgical approaches at the system and power portfolio level, so as to increase chances of mobilizing pilot transactions.

Key themes of our work focus on the following:

1. Mobilizing Quick Wins

Emerging feedback from stakeholders in 2023 indicated that initiatives around coal plant managed phase-outs (MPOs) and ETMs in Asia run the risk of becoming quite “generic” and “high level,” with too much emphasis on investor perspectives and limited applications to actual power plant owners and operators. This further validates the need to support power companies, governments, and key stakeholders with portfolio level strategies and scenario development bespoke to the realities of interested first movers. This means a heavier emphasis on exploring “quick-wins” such as transitioning captive coal and diesel, financing renewable energy pipelines bundled with coal transition, or even enhancing existing ETM pilots should be more systematically undertaken.
aerial view of thermal power plant, industrial landscape,China

Emerging feedback from stakeholders in 2023 indicated that initiatives around coal plant managed phase-outs (MPOs) and ETMs in Asia run the risk of becoming quite “generic” and “high level,” with too much emphasis on investor perspectives and limited applications to actual power plant owners and operators. This further validates the need to support power companies, governments, and key stakeholders with portfolio level strategies and scenario development bespoke to the realities of interested first movers. This means a heavier emphasis on exploring “quick-wins” such as transitioning captive coal and diesel, financing renewable energy pipelines bundled with coal transition, or even enhancing existing ETM pilots should be more systematically undertaken.

2. Building a Robust "RE" Replacement Thesis

Questions on the reliability, security and sustainability of having high levels of renewable energy (RE) to replace coal-fired power plants (CFPPs) in emerging market grids have been a concern hampering the development of robust MPO pilots with clear “retire and replace” modalities. Governments and stakeholders agree on the importance of renewable energy deployment, but strategies around the configuration and timing of RE replacement continue to be controversial. This will need to be addressed from a very practical lens of considering “packaged” solutions that can be fit-for-purpose to specific grid situations, portfolio compositions, and market structures (e.g., liberalized versus government controlled power markets and grids).

Questions on the reliability, security and sustainability of having high levels of renewable energy (RE) to replace coal-fired power plants (CFPPs) in emerging market grids have been a concern hampering the development of robust MPO pilots with clear “retire and replace” modalities. Governments and stakeholders agree on the importance of renewable energy deployment, but strategies around the configuration and timing of RE replacement continue to be controversial. This will need to be addressed from a very practical lens of considering “packaged” solutions that can be fit-for-purpose to specific grid situations, portfolio compositions, and market structures (e.g., liberalized versus government controlled power markets and grids).

3. Setting the Agenda for Transmission and Transition (Grid Transformation and Just Transition)

In addition to RE replacement, concerns over addressing the “Energy Trilemma” (finding the balance between energy reliability, affordability, and sustainability) alongside coal retirement are also growing. Grid integrity and modernization are important to systems more reliant on variable RE, which additionally requires add-on services to make 24/7 power possible (e.g., ancillary, back-up services). While basic principles such as grid security and mitigating the impacts of coal retirement on labor and affected communities are slowly emerging, the agenda around a just and managed transition for developing markets remains abstract and qualitative. There is increasing demand for an approximation on transition costs to include grid transformation as well as downstream and upstream economic and social costs. These in turn will unlock deeper policy conversations regarding who pays for and who is responsible for addressing such needs to further build confidence in driving more transactions.
High voltage poles at sunrise. Electricity generation business. Energy demand.

In addition to RE replacement, concerns over addressing the “Energy Trilemma” (finding the balance between energy reliability, affordability, and sustainability) alongside coal retirement are also growing. Grid integrity and modernization are important to systems more reliant on variable RE, which additionally requires add-on services to make 24/7 power possible (e.g., ancillary, back-up services). While basic principles such as grid security and mitigating the impacts of coal retirement on labor and affected communities are slowly emerging, the agenda around a just and managed transition for developing markets remains abstract and qualitative. There is increasing demand for an approximation on transition costs to include grid transformation as well as downstream and upstream economic and social costs. These in turn will unlock deeper policy conversations regarding who pays for and who is responsible for addressing such needs to further build confidence in driving more transactions.

4. The Future of Transition Finance

There is both strong concern and interest among select portfolio owners and investors, such as multilateral development banks, institutional investors and infrastructure investors, on how MPOs and ETMs can evolve out of their dependence on concessional finance. More deliberate discussions that “reimagine” a more sustainable future for transition finance weaned away from concessional and grant funding, will now need to be kick-started among key stakeholders with focus on generating and sandboxing “new” terms and conditions, risk/return considerations, structures, and other value drivers to respond to the needs of transitioning thermal power at scale in emerging markets, moving past “pilots.” Hand in hand with the “Mobilizing Quick Wins” thematic, CSV’s efforts for “The Future of Transition Finance” would be to originate among Asia’s first movers potential deals for energy transition in the region, and on a non-binding basis, solicit potential funding or partnership from commercial and non-commercial “transition” investors. By doing so, a more programmatic approach is established to concentrate efforts to structure transactions and test modalities, ensure deals are screened under a clear investment framework based on certain principles and criteria, funnel deals to potential investors, and explore follow-through options.
Illustration for environmental concept Green business or investment An endless circular economy The icon on the infinity symbol has a green background.

There is both strong concern and interest among select portfolio owners and investors, such as multilateral development banks, institutional investors and infrastructure investors, on how MPOs and ETMs can evolve out of their dependence on concessional finance. More deliberate discussions that “reimagine” a more sustainable future for transition finance weaned away from concessional and grant funding, will now need to be kick-started among key stakeholders with focus on generating and sandboxing “new” terms and conditions, risk/return considerations, structures, and other value drivers to respond to the needs of transitioning thermal power at scale in emerging markets, moving past “pilots.” Hand in hand with the “Mobilizing Quick Wins” thematic, CSV’s efforts for “The Future of Transition Finance” would be to originate among Asia’s first movers potential deals for energy transition in the region, and on a non-binding basis, solicit potential funding or partnership from commercial and non-commercial “transition” investors. By doing so, a more programmatic approach is established to concentrate efforts to structure transactions and test modalities, ensure deals are screened under a clear investment framework based on certain principles and criteria, funnel deals to potential investors, and explore follow-through options.

Illustration for environmental concept Green business or investment An endless circular economy The icon on the infinity symbol has a green background.

The following is a sampling of some of our projects:

  • Completing pre-feasibility studies for energy transition mechanisms for Indonesia, Philippines, Vietnam, Pakistan, and Kazakhstan. Developing an analysis framework of coal plants and inputs on potential financing.
  • In the Philippines, supporting a number of major utilities and corporations in firming up decarbonization and energy decentralization plans, including identifying leverage points for sustainable financing.
  • In Indonesia, co-leading successful discussions with Independent Power Producers (IPPs) and PLN, Indonesia’s state-owned electricity company, to develop IPP-led ETMs to complement existing national initiatives.
  • Developing a just energy transition program with ACEN for an existing coal plant ETM in the Philippines, in partnership with the Coal Asset Transition Accelerator (CATA).
  • Leading a study on the requirements of solar and battery energy storage systems that would be needed for the Philippines to rely on renewable energy as a 24/7 secure power source.
  • Establishing a guidebook and pilot partnerships for modernizing and hybridizing underserved and off grid areas in the Philippines.
  • In India, exploring early retirement options for state-owned coal plants through solar power and battery storage.
  • Developing financial pathways for leveraging traditional and innovative finance modalities to accelerate the transition of China funded coal plants in Southeast Asia.

The energy transition is well underway in Asia, but we are at a critical juncture. The opportunity is now to spur Asia’s dynamic economies towards a cleaner energy future.

Notes

[1] NOAA National Centers for Environmental Information, Monthly Global Climate Report for Annual 2023, published online January 2024, retrieved on January 25, 2024 from https://www.ncei.noaa.gov/access/monitoring/monthly-report/global/202313.

[2] United Nations Framework Convention on Climate Change (UNFCCC), Paris Agreement (2016), https://unfccc.int/sites/default/files/resource/parisagreement_publication.pdf

[3] IEA (2023), Coal 2023, IEA, Paris https://www.iea.org/reports/coal-2023/executive-summary, License: CC BY 4.0

[4] The Climate Group, “Speeding up Asia’s Energy Transition,” April 25, 2023, https://www.theclimategroup.org/our-work/news/speeding-asias-energy-transition

[5] IEA, Coal, accessed January 25, 2024, https://www.iea.org/energy-system/fossil-fuels/coal

[6] Ember, Asia, accessed January 25, 2024, https://ember-climate.org/countries-and-regions/regions/asia/

[7]  Ember, Asia, accessed January 25, 2024, https://ember-climate.org/countries-and-regions/regions/asia/

[8] IEA (2024), Renewables 2023, IEA, https://www.iea.org/reports/renewables-2023/executive-summary, License: CC BY 4.0

[9] Xinhua, “China Contributed Half of Additional Global Renewables Capacity in 2023: NEA,” January 25, 2024, https://english.news.cn/20240125/92f9dde568ce47a58e38adb973d86c1f/c.html.

[10] China Daily, “China Drives World Renewables Capacity Addition in 2023,” January 13, 2024, https://english.www.gov.cn/news/202401/13/content_WS65a22a99c6d0868f4e8e30aa.html

[11] Reuters, “Explainer: The numbers behind China’s renewable energy boom,” November 15, 2023, https://www.reuters.com/sustainability/climate-energy/numbers-behind-chinas-renewable-energy-boom-2023-11-15/.

[12] Carbon Brief, “Wind and Solar Capacity in Southeast Asia Climbs 20% in just One Year, Report Finds,” January 17, 2024, https://www.carbonbrief.org/wind-and-solar-capacity-in-south-east-asia-climbs-20-in-just-one-year-report-finds/

[13] India Ministry of New and Renewable Energy, “Year End Review 2023 of Ministry of New & Renewable Energy,” January 3, 2024, https://pib.gov.in/PressReleasePage.aspx?PRID=1992732.

[14] CNBC, “Coal free by 2070? India’s Push Toward Renewables Won’t Stop Coal Reliance for the Next Two Decades,” November 2, 2023, https://www.cnbc.com/2023/11/03/india-push-toward-renewables-will-not-stop-coal-reliance-for-20-years.html.

[15] World Economic Forum, “Energy Transition Mechanism (ETM) for Southeast Asia: Partnership Launch,” November 3, 2021, https://intelligence.weforum.org/monitor/latest-knowledge/de61c710b27945f6add9fe1e90f706e8.

[16] The Diplomat, “The Asian Development Bank’s Energy Transition Mechanism,” August 31, 2022, https://thediplomat.com/2022/08/the-asian-development-banks-energy-transition-mechanism/

[17] Green Network Asia, What is Just Energy Transition Partnerships? March 2, 2023, https://greennetwork.asia/news/what-is-just-energy-transition-partnerships/

[18] Monetary Authority of Singapore, “ MAS Launches Coalition and Announces Pilots to Develop Transition Credits for the Early Retirement of Asia’s Coal Plants,” December 4, 2023, https://www.mas.gov.sg/news/media-releases/2023/mas-launches-traction-and-announces-pilots-to-develop-transition-credits

1. Mobilizing Quick Wins

Emerging feedback from stakeholders in 2023 indicated that initiatives around coal plant managed phase-outs (MPOs) and ETMs in Asia run the risk of becoming quite “generic” and “high level,” with too much emphasis on investor perspectives and limited applications to actual power plant owners and operators. This further validates the need to support power companies, governments, and key stakeholders with portfolio level strategies and scenario development bespoke to the realities of interested first movers. This means a heavier emphasis on exploring “quick-wins” such as transitioning captive coal and diesel, financing renewable energy pipelines bundled with coal transition, or even enhancing existing ETM pilots should be more systematically undertaken.
aerial view of thermal power plant, industrial landscape,China

Emerging feedback from stakeholders in 2023 indicated that initiatives around coal plant managed phase-outs (MPOs) and ETMs in Asia run the risk of becoming quite “generic” and “high level,” with too much emphasis on investor perspectives and limited applications to actual power plant owners and operators. This further validates the need to support power companies, governments, and key stakeholders with portfolio level strategies and scenario development bespoke to the realities of interested first movers. This means a heavier emphasis on exploring “quick-wins” such as transitioning captive coal and diesel, financing renewable energy pipelines bundled with coal transition, or even enhancing existing ETM pilots should be more systematically undertaken.