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* Initiative aims to secure funding at COP26 summit
* ADB preparing feasibility study on early closures
(Adds Citi declines to comment further)
By Clara Denina and Melanie Burton
LONDON/MELBOURNE, Aug 3 (Reuters) - Financial firmsincluding British insurer Prudential, lenders Citi and HSBC andBlackRock Real Assets are devising plans to speed the closure ofAsia's coal-fired power plants in order to lower the biggestsource of carbon emissions, five people with knowledge of theinitiative said.
The novel proposal, which is being driven by the AsianDevelopment Bank, offers a potentially workable model and earlytalks with Asian governments and multilateral banks arepromising, the sources told Reuters.
The group plans to create public-private partnerships to buyout the plants and wind them down within 15 years, far soonerthan their usual life, giving workers time to retire or find newjobs and allowing countries to shift to renewable energysources.
It aims to have a model ready for the COP26 climateconference which is being held in Glasgow, Scotland in November.
"The private sector has great ideas on how to addressclimate change and we are bridging the gap between them and theofficial-sector actors," ADB Vice President Ahmed M. Saeed said.
The initiative comes as commercial and development banks,under pressure from large investors, pull back from financingnew power plants in order to meet climate targets.
Saeed said that a first purchase under the proposed scheme,which will comprise a mix of equity, debt and concessionalfinance, could come as soon as next year.
"If you can come up with an orderly way to replace thoseplants sooner and retire them sooner, but not overnight, thatopens up a more predictable, massively bigger space forrenewables," Donald Kanak, chairman of Prudential's
Coal-fired power accounts for about a fifth of the world'sgreenhouse gas emissions, making it the biggest polluter.
The proposed mechanism entails raising low cost, blendedfinance which would be used for a carbon reduction facility,while a separate facility would fund renewable incentives.
HSBC
Finding a way for developing nations in Asia, which has theworld's newest fleet of coal plants and more under construction,to make the most of the billions already spent and switch torenewables has proved a major challenge.
The International Energy Agency expects global coal demandto rise 4.5% in 2021, with Asia making up 80% of that growth.
Meanwhile, the International Panel on Climate Change (IPCC)is calling for a drop in coal-fired electricity from 38% to 9%of global generation by 2030 and to 0.6% by 2050.
MAKING IT VIABLE
The proposed carbon reduction facility would buy and operatecoal-fired power plants, at a lower cost of capital than isavailable to commercial plants, allowing them to run at a widermargin but for less time in order to generate similar returns.
The cash flow would repay debt and investors.
The other facility would be used to jump start investmentsin renewables and storage to take over the energy load from theplants as it grows, attracting finance on its own.
The model is already familiar to infrastructure investorswho rely on blended finance in so-called public-private deals,backed by government-financed institutions.
In this case, development banks would take the biggest riskby agreeing to take first loss as holders of junior debt as wellas accepting a lower return, according to the proposal.
"To make this viable on more than one or two plants, you'vegot to get private investors," Michael Paulus, head of Citi'sAsia-Pacific public sector group, who is involved in theinitiative, told Reuters.
"There are some who are interested but they are not going todo it for free. They may not need a normal return of 10-12%,they may do it for less. But they are not going to accept 1 or2%. We are trying to figure out some way to make this work."
Citi declined further comment.
The framework has already been presented to ASEAN financeministers, the European Commission and European developmentofficials, Kanak, who co-chairs the ASEAN Hub of the SustainableDevelopment Investment Partnership, said.
Details still to be finalised include ways to encourage coalplant owners to sell, what to do with the plants once they areretired, any rehabilitation requirements, and what role if anycarbon credits may play.
The firms aim to attract finance and other commitments atCOP26, when governments will be asked to commit to moreambitious emissions targets and increase financing for countriesmost vulnerable to climate change.
U.S. President Joe Biden's administration has re-entered theParis climate accord and is pushing for ambitious reductions ofcarbon emissions, while in July, U.S. Treasury Secretary JanetYellen told the heads of major development banks, including ADBand the World Bank, to devise plans to mobilize more capital tofight climate change and support emission cuts.
A Treasury official told Reuters that the ADB's plans forcoal plant retirement are among the types of projects thatYellen wants banks to pursue, adding the administration is"interested in accelerating coal transitions" to tackle theclimate crisis.
ASIA STEPS
As part of the group's proposal, the ADB has allocatedaround $1.7 million for feasibility studies covering Indonesia,Philippines and Vietnam, to estimate the costs of early closure,which assets could be acquired, and engage with governments andother stakeholders.
"We would like to do the first (coal plant) acquisition in2022," ADB's Saeed told Reuters, adding the mechanism could bescaled up and used as a template for other regions, ifsuccessful. It is already in discussions about extending thiswork to other countries in Asia, he added.
To retire 50% of a country's capacity early at $1million-$1.8 million per megawatt suggests Indonesia wouldrequire a total facility of roughly $16-$29 billion, whilePhilippines would be about $5-$9 billion and Vietnam around$9-$17 billion, according to estimates by Prudential's Kanak.
One challenge that needs to be tackled is the potential riskof moral hazard, said Nick Robins, a London School of Economicssustainable finance professor.
"There's a longstanding principle that the polluter shouldpay. We need to make absolutely sure that we are not paying thepolluter, but rather paying for accelerated transition," hesaid.
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^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Additional reporting by David Lawder in Washington; Editing byAmran Abocar and Alexander Smith) ((melanie.burton@thomsonreuters.com Twitter: @MelanieMetals;+613 9286 1421; Reuters Messaging:melanie.burton.thomsonreuters.com@reuters.net))
