By Cecilia Springer
China leads the world in domestic renewable energy installation and low-carbon manufacturing and is increasingly positioning itself as a climate leader through its development financing in the Global South.
However, China has built and financed a large number of coal plants abroad, predominantly in low- and middle-income countries in Asia and Africa. Most of these coal plants are only a few years into their expected decades-long lifetimes, meaning that if projects continue as planned, they will continue to operate past 2040, the year when unabated coal power must be phased out to meet 2050 climate targets.
A new policy brief by the Boston University Global Development Policy Center makes the case that early retirement of overseas coal plants would bring health and climate benefits, bolster China’s global green reputation, reduce financial risks for Chinese financiers and companies, and build momentum for clean energy investment.
Several financial mechanisms are available to enable the early retirement of coal plants that can be grouped into three sets. The first set of mechanisms lowers the cost of debt with approaches such as modifying the terms of existing outstanding debt held by asset owners or offering new, lower-cost loans or bonds. The second set aims at bringing down the cost of equity by transferring ownership of the plant. Asset management companies (AMCs) or funds, including managed transition vehicles (MTVs), are viable options to execute such transactions. The third set builds on maximizing future cash flows. Additional or alternative revenue can be generated through monetization mechanisms, including for health benefits or carbon dioxide emissions mitigation through carbon credits.
Although there are a growing number of global initiatives aiming to support the early retirement of coal plants, there are several underexplored barriers to early retirement, including legal risks. Host countries may bear the brunt of legal risks from early retirement of coal plants, especially in cases where guarantees for power purchase have been issued (as in Pakistan). China may also directly bear the risks of private investors’ complaints for investor-state dispute settlement (ISDS) cases wherein a Chinese-financed coal plant has other private equity investors. Taken together, these legal risks for host countries and China must be considered in the design of any early coal plant retirement programs.
Note: Capacity per host country is split by status, such as Under Planning, Under Construction and Operating grouped by unit age. The US, Singapore and Australia were excluded.
Which coal plants may have the lowest barriers to early retirement? A retirement framework can help identify which of China’s overseas coal plants should be retired first. Two key criteria are the age of a plant, which can affect the financial viability of early retirement, and its size (i.e., electric generating capacity), which drives environmental impacts. For overseas coal plants that have received Chinese finance, we identified coal-fired power generating units in Vietnam, Indonesia, and Brazil that may be most ready for retirement. China’s overseas equity-financed plants are newer on average, but we also identified units in Indonesia, Cambodia, and Malaysia that may have a larger potential for early retirement via the second set of mechanisms.
Chinese policymakers and development finance institutions (DFIs) are well-poised to assist host country governments in their early coal plant retirement efforts.
First, it is essential to halt the construction and commissioning of new coal-fired units, which would otherwise not be compatible with global climate targets, and China has made commitments in this regard.
Additional recommendations for China include exploring options with Chinese state-owned enterprises and financial stakeholders, engaging in bilateral and multilateral dialogues with governments and utilities, providing assistance in prioritizing and developing practical solutions for plant retirement, and establishing long-term bilateral agreements focused on sustainable development and energy transition.
Doing so will align Chinese financed overseas infrastructure with the greener development goals that China has adopted in recent years.
Cecilia Springer is a non-resident senior fellow with the Global China Initiative at the Boston University Global Development Policy Center and a principal at Global Efficiency Intelligence, leading research on industrial decarbonization. Follow her on X: @han_cecilia.
