The Energy Transition Mechanism (ETM) is an innovative programme being developed by the Asian Development Bank (ADB) to accelerate the retirement and repurposing of existing coal power plants and fund the development of clean energy replacement capacity across Asia, with an initial focus on Southeast Asia. Its goal is to provide a suite of financial models flexible enough to be scalable, not just to the wider Asia Pacific region, but also beyond.

The idea for the ETM was proposed in 2020 by Don Kanak, Chairman of Prudential Insurance Growth Markets and Co-Chair of the Steering Group of the SDIP ASEAN Hub. The ADB subsequently led an informal working group of financial institutions established by SDIP, and announced, at COP26, a partnership with the governments of Indonesia and the Philippines to launch a feasibility study and develop a series of ETM pilot transactions to accelerate the retirement and repurposing of 5-7 coal-fired power plants in those countries over the next 2-3 years.

Case study

Energy Transition Mechanism in Southeast Asia

Key elements

• The ADB-led ETM Southeast Asia programme is initially focused on Indonesia, Philippines and Viet Nam. Activities include identifying coal-fired power plants (CFPPs) for early retirement and repurposing under the pilot, and designing relevant transaction models to suit diverse assets and country contexts.

• Once asset-level technical/financial analysis, and just transition plans for affected communities are established, an ETM Fund would bring together public and private finance, such as: multilateral bank (including concessional lending and/or first-loss guarantees), other investors with low cost of funds, such as developed country governments and national development finance institutions; and domestic and international private sector institutional investors.

• ETM Fund will comprise the following two facilities:

1. The Carbon Reduction Facility (“CRF”) to fund the early retirement or repurposing of the CFPPs on an accelerated basis while keeping in mind replacement capacity from clean energy projects.

Three transaction models are being developed:

• Acquisition Model: Under which the ETM shall acquire the share capital in the CFPP and assume the role of the owner and operator of the acquired plant. The funds will be available at a concessional rate under the ETM framework, thereby allowing the ETM to utilize the concessional financing for early retirement of the acquired coal plants. The ETM shall agree on an early retirement date with the country’s utility and shall operate the plant until such decided date. Upon reaching the said date, the CFPP shall be shut down or repurposed.
• Synthetic Model: Under this model, the ETM shall invest senior/junior debt and/or other mezzanine capital into the CFPP, while the equity ownership and operational responsibility of the plant is retained by the current CFPP owner. The investment from the ETM may be used to replace/pay off the existing lenders in the project or infused as mezzanine debt which would be junior to existing senior debt in the project. The funds will be available at a concessional rate under the ETM framework, thereby allowing the ETM to utilize the concessional financing for early retirement of the acquired coal plants. Under this mechanism, the ETM shall agree on an early retirement date with the country’s utility and existing CFPP operator. Upon reaching the said date, the CFPP shall be shut down or repurposed.
• Portfolio Model: Under the Portfolio Model, the ETM shall provide funding to the corporate entity which owns the CFPPs. The funds are intended for the scale up of renewable energy infrastructure and related grid upgrades that will replace CFPPs that are to be retired on an accelerated timeline. The corporate sponsor shall guarantee that the greenfield clean energy projects will be built, and coal plants retired ahead of schedule.

2. The Clean Energy Facility (“CEF”) to develop and fund the new renewable energy generation projects, energy storage infrastructure, and requisite grid upgrades. The CEF will provide finance, technical assistance and know-how to the host country to accelerate renewables, build storage, and upgrade power grids. 

To ensure power supply certainty, the CFPP in the CRF will be retired. 

Benefits of this structure 

• The ETM is a scalable, collaborative mechanism developed in partnership with developing countries that will leverage a market-based approach to accelerate the transition from fossil fuels to clean energy while leveraging public, private, and concessional capital.

• Multilateral bank involvement ensures appropriate governance and legal structure to ensure monitoring and follow-through.

• As an independent investment facility with various types of donors and stakeholders, the ETM is not tied to the debt limits or credit worthiness of any particular government or corporate entity.

• The dual-facility structure (CRF & CEF) helps ensure energy security by linking the retirement date of the carbon-intensive power asset to the development timeline of clean energy replacement capacity. This also gives stakeholders time to facilitate a just transition for affected workers and communities.

Enabling conditions 

• Host country has ambitious but realistic national climate commitments and national energy strategy.

• ETM plans must include moratorium/freeze on construction of new coal power plants.

• ETM has access to low cost of funds, so role of developed countries, MDBs, DFIs, etc. is critical (e.g., low cost finance).