How blended finance partnerships will accelerate Asia's energy transition

Across Asia’s emerging economies, governments are responding to the climate crisis with bold commitments to transition to net zero emissions in the coming decades. The switch from coal power to clean energy, however, will take time, enormous amounts of capital and careful risk management.

Blended finance initiatives, which combine commercial capital with official aid or donations, will be part of the solution. By bringing public and private partners together, programmes like the Just Energy Transition Partnerships (JETPs) in Indonesia and Vietnam aim to accelerate the process.

Together, the JETPs form part of a much wider need for finance to be channelled towards the transition agenda, however they do mark an important step.

Their objective is to boost funding for clean energy and support the early retirement of coal power plants. Perhaps most importantly, they aim to create a template for risk-sharing that can further unlock and mobilise capital to help drive emissions reduction across other carbon-intensive sectors.

Indonesia and Vietnam signed JETPs in late 2022. In each case, a group of G20 governments have committed billions of dollars to catalyse the transition – USD10 billion for Indonesia and USD7.75 billion for Vietnam. Private financial institutions have pledged to mobilise at least the same amount. HSBC is participating as a mobiliser and provider of private capital in alignment with its commitments as a member of the Glasgow Financial Alliance for Net Zero (GFANZ), a group of financial institutions committed to accelerating decarbonisation¹.

“Companies and investors can expect these initiatives to unlock more capital for renewable energy development as policymakers and state-owned utilities focus on the development of clean power,” he adds.

The transition away from coal fired power sector is a crucial requirement in the transition to Net Zero and is the key target for the JETPs.

The need for action is urgent. Indonesia generates more than 60% of its electricity from coal-fired power stations, while over 80% of Vietnam’s coal power plants are less than 10 years old². Indeed, Asia has the world’s youngest fleets of coal-fired power plants, according to the International Energy Agency (IEA), and such facilities have an average life of 30-40 years³⁴. This leads to the need to be smart, and quick, about the scheduling of individual plants to be retired to drive the best emissions reduction outcome.

Taking less efficient coal power plants offline ahead of schedule would clearly have a positive impact on Asia’s emissions, but this needs to be aligned to the creation of the low carbon energy replacement as well as addressing the impact on supply chains, investors, and local communities if the programme is to secure wide support.

The JETPs aim to facilitate early coal retirements by creating a framework for the public sector and private investors to work together.

The support of the public sector is seen as crucial in giving all stakeholders including private investors the confidence that their funds will go towards a genuine reduction in carbon emissions, without causing negative social impact. Without proper safeguards, there is a risk of “emissions leakage” – that the decarbonisation impact will be later reversed, as well as a risk of job and income loss in affected communities. Blending finance from public and private sources can help accelerate the shift away from coal by reducing the cost of capital, thereby shortening the payback period of a power station and hence inducing investors to accept an early retirement of their asset.

Reducing the financing cost is made possible by “risk-sharing” with Governments, philanthropic foundations or development banks utilising several approaches including grants, concessionary capital or guarantees in different forms.

These partnerships create a range of opportunities for companies and investors:

1. Power producers. JETPs aim to retire coal plants early by providing a mechanism to replace lost earnings and unwind long-term commercial contracts. This will give the owners and operators of coal plants more options to exit their investments and recycle their capital into other – less carbon-intensive – assets. It also reduces the risk that thermal power plants will become “stranded” assets on their owners’ balance sheets.
2. Renewable energy developers. Companies that build, own or operate renewable power plants may be able to secure additional investment, as well as gain opportunities to lease land or grid connections from thermal power operators as a result of national energy plans that have increased focus on the development of renewable resource.
3. Institutional investors. Sovereign wealth funds and pension funds may see an opportunity to acquire thermal power assets and wind them down under their stewardship mandates. Asset managers could also provide long-term debt funding to support the decommissioning of coal power plants by helping to optimise their owners’ capital structures and reduce overall financing costs. Sustainability-linked instruments could also play a role here in aligning the interests and commitments of all parties.
4. Financial institutions. The JETP format aims to attract more private capital to the energy sector, both for the early retirement of coal power and the scaling up of renewables. By investing alongside the public sector, net zero-aligned banks and other financial institutions make a substantial impact on emissions reduction in the real economy. A robust risk mitigation framework is key to ensuring that coal phaseout transactions are credible and do not conflict with institutions’ own net-zero policies.
5. Insurers and guarantors. Credit enhancement, through insurance or payment guarantees, can support the energy transition by mitigating the risk of investment in the power sector. Public sector entities have a key role to play where there may be gaps in the commercial market. There is an opportunity for innovative insurance mechanisms to support transition financing in many Asian markets.

GFANZ is working on voluntary guidance for financial institutions looking to support the early retirement of coal-fired power plants in Asia and published the recommendations for consultation at the inaugural GFANZ APAC Summit during Ecosperity week in Singapore in June⁵.

HSBC co-led the workstream that developed the guidance and is working to drive dialogue and feedback to help steer the consultation. Comprising 10 recommendations across a three-step process focusing on credibility, impact and accountability, this robust voluntary guidance aims to drive capital to where it will be most effective in delivering real-world decarbonisation in Asia.

While JETPs are significant, they are only one part of the energy transition and a first step on Southeast Asia’s road towards net zero. In Indonesia, for example, the programme aims to cap emissions from the power sector at 290 million tonnes of CO2 in 2030, down from the current forecast of 357 million tonnes. The IEA calculates that ASEAN needs to scale up energy investments from around USD70 billion to USD190 billion a year by 2030 to meet its climate targets.

It will take time to turn the pledges of the JETPs into real investments in decarbonisation, but companies and investors across the energy value chain can expect these partnerships to result in positive shifts and outcomes. Once the first pilot transactions provide a proof of concept, the JETPs have the potential to transform supply chains, cash flows and valuations across the energy sector.

These ground-breaking partnerships between governments and the private sector are an essential tool in tackling some of the biggest challenges in the energy transition. As the pace of change accelerates, companies in Southeast Asia’s energy sector need to ensure they are prepared for a surge in activity.

Today we finance a number of industries that significantly contribute to greenhouse gas emissions. We have a strategy to help our customers to reduce their emissions and to reduce our own. Find out more: https://www.hsbc.com/who-we-are/our-climate-strategy