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What is ETM? How Asia and the Pacific can make a clean energy transition
22 October 2021
VP Ahmed M. Saeed
Asian Development Bank
As the source of half the world’s greenhouse gas emissions, Asia and the Pacific can only realize its climate goals if it transitions away from a large source of those emissions—coal energy—and toward cleaner, renewable energy.
To accelerate this transition, the Asian Development Bank (ADB) is working with Indonesia, the Philippines, and Viet Nam to study the feasibility of a program called the Energy Transition Mechanism (ETM).
The pilot study aims to lead to the formation of an ETM facility in each country—comprising public, private, and philanthropic financing—to purchase coal-fired power plants in order to accelerate their retirement and help jumpstart reliable and affordable clean energy.
ADB Vice-President Ahmed M. Saeed joins ADB Insight to discuss how ETM came about, how the program would work, its potential for reducing greenhouse gas emissions, and its role in the broader fight against climate change.
Nisha Pillai (host): Hello and welcome to ADB insight. I'm Nisha Pillai. As we know, the Asia Pacific region is a driver for global economic growth, but that comes at a cost, because 50% of global greenhouse gas emissions also come from the Asia Pacific region, the bulk of it from coal-fired power stations. The only way to meet the Paris agreement goals to limit global temperature increases to one and a half degrees is to massively cut back on coal.
That's where an idea called ETM comes in. It stands for Energy Transition Mechanism, and it will set up funds to purchase coal-fired power stations, and then bring forward their retirement to replace them with cleaner, renewable alternatives. ADB is studying the feasibility of ETM right now in three countries in Southeast Asia. The idea is also drawing support from investment funds and global philanthropies.
So let's find out more about its potential. I'm pleased to say that we're joined now by the ADB VP Ahmed Saeed. VP Saeed, good to have you with us. So where did the ETM idea come from in the first place?
VP Saeed: Well, I think it was Churchill who famously said that victory has a thousand fathers and because we're still in the early days of making ETM a reality and success, I guess it's appropriate that it only has three. The first is the recognition that coal-fired power is an enormous problem - in fact, one of the few problems that may be able to lay claim to be the biggest problem in the world. And in Asia where the battle for climate change will be won or lost, it’s a particularly pressing issue. In many of the countries where ABB is engaged, coal-fired power remains a large part of the energy mix, and in fact, it's going up. So, the recognition that this is an enormously important problem that deserves attention, I think is the first origin.
The second is the realization that addressing this problem is going to take creative, constructive and elegant solutions, and in fact will require us to use tools like blended finance, which let us bring together a coalition of various actors, market participants, philanthropy, concessionary, capital governments to create mechanisms that incentivize the private sector to achieve our public aims.
And then the third specific origin, the specific father of ETM, is a gentleman named Don Kanak, who began his career as an environmental activist, and had a long and successful tenure in financial services, and who brought together these experiences to make a specific proposal. ADB has had the opportunity to take this idea forward, to engage our member countries, to engage donor governments, to engage the private sector, to do technical work in order to make this a reality. And really not a moment too soon, because not only is coal-fired power ruining the planet, it's also going to become fast and economical and overtaken by renewables, which are becoming cheaper and less expensive every day.
We've seen that developed countries are having significant success in reducing coal-fired power, but in countries in the developing world it is proving to be a much more complex and intractable problem. And so we're already getting individuals and institutions from other regions asking us about what we're doing at ETM. And we see this as a solution that's ultimately scalable to other regions of the world, and that can also provide a mechanism and a path for them to deal with this very important and very complex and pressing global issue.
Nisha Pillai: So, if it has this kind of potential, how would it actually work in practice? Could you walk us through the basics?
“ADB really has this very strong convening authority, which allows it to sit at the intersection of a number of different actors. And the most important intangible asset we have that I think we bring to this process is trust: we don't have any agenda other than good outcomes for our countries and for their citizens.”
VP Saeed: The ETM will in fact, be made up of two separate funds. The first is something we're calling a carbon reduction fund and the second is something we're calling a clean energy fund. The purpose of the carbon reduction fund is to provide a blended finance mechanism, one that brings together, as I said, a variety of different actors in order to incentivize the early retirement of coal-fired power assets. And the basic way we do this is by lowering the cost of capital for this behavior in a way that allows us to reduce by an equivalent number of years the operating life of coal-fired power assets. And so that's the carbon reduction facility, the one that will be taking coal out of the mix. Now, one of the great benefits of that, in addition to the fact that we will have removed coal-fired power, is that we enormously increase the scope for renewables. And so the second fund, the clean energy fund, will invest in the growth and expansion of renewable power to replace the dirtier power that we will be hopefully taking out.
Nisha Pillai: Interesting that you have this two-pronged approach, VP Saeed. Now at the moment, the ADB is involved in three feasibility studies, in Indonesia, the Philippines, and in Viet Nam. Why did you choose these particular countries?
VP Saeed: For the three countries that you mentioned— Indonesia, Philippines, Viet Nam— coal-fired power is an enormous problem. In Indonesia it's 60% of the energy mix, in the Philippines and in Viet Nam it's over half. In many countries in our region coal continues to go up, but the countries are very serious about achieving their nationally determined contribution targets under Paris (Agreement), and this is a way for us to work with them to help them achieve a common objective in a way that's consistent with their development trajectory and objectives.
Nisha Pillai: And what will the ADB's actual role be here? Will it be buying the coal-fired power stations itself?
VP Saeed: It's very unlikely that ADB will hold equity in the reduction fund. We do anticipate being very actively involved in the clean energy fund that will finance the expansion of renewables. I think that this is an interesting project in many ways. One of course is its objectives, which are very important, but it's also very important because it represents a new way of doing business.
What we're trying to do here is to leverage the intangible assets of our institution, the knowledge we have of specific subjects, such as carbon trading and offsets; the knowledge we have with specific countries, including Indonesia, the Philippines and Viet Nam. We've been involved in the energy sector, in Indonesia for over 50 years. We're based in the Philippines where we have been for over 50 to 60 years and of course we've been engaged with Viet Nam since that country's economic reopening. And it also allows us to leverage our reach as an institution. ADB really has this very strong convening authority, which allows it to sit at the intersection of a number of different actors.
And the most important intangible asset we have that I think we bring to this process is trust: we don't have any agenda other than good outcomes for our countries and for their citizens. If I may add one very important, additional point, one of our core objectives as an institution at ADB is sustainable and inclusive development. And so we're very focused on ensuring that the transition from traditional power sources to renewables is one that fully accounts for the interests of the various communities and especially traditionally marginalized communities within our member countries. And so it's a very, very important priority for our institution to ensure that the ETM mechanism, as well as other efforts around our institution, both in energy transition and other areas are consistent with assuring a good outcome for all members of communities that will be affected. And that can be part of a just transition solution.
“If we look just at our target pilot countries, Indonesia, Philippines, and Viet Nam, our objective is to reduce their coal-fired power by 50%. That's 200 million tons of CO2 a year, the equivalent of 61 million passenger cars.”
Nisha Pillai: It sounds like you think there's a lot of potential in ETM. How much of a game changer do you think it could be?
VP Saeed: If we look just at our target pilot countries, Indonesia, Philippines, and Viet Nam, our objective is to reduce their coal-fired power by 50%. That's 200 million tons of CO2 a year, the equivalent of 61 million passenger cars. Just the pilot alone can be one of the largest sources of carbon offsets in the world. But we think that much more is possible. We think that this is a structure that can be replicated and scaled, not just across our region, but also in other regions. We also think that this represents a different way of doing business, as I said. And that way of doing business, I believe, is going to grow increasingly important as we move forward.
The reality is that if anything has changed in the development landscape over the last 20 years, it is that there's a much broader array of actors that share the objectives of our institution. And ETM represents an example of a way for us to collaborate with these actors towards a common purpose and for us as a group to achieve more than would be possible for any one of our institutions or organizations alone. And so I think our ambitions are very large. They're both to make a significant dent in a very important problem first in our region, and then to set a precedent for the world, but also to demonstrate that there's a new way of doing things that can be applied to more than one complex and urgent and pressing global concern.
Nisha Pillai: Fascinating interview, VP Saeed. Thank you so much for sharing your analysis and your ambitions with us.
VP Saeed: Thank you very much.
Nisha Pillai: Thank you indeed to everyone for joining us on this episode of ADB Insight. I'm Nisha Pillai, goodbye for now.