South Korean President Moon Jae-in and his administration have maintained a strong stance to combat climate change since taking office in 2017. Moving away from coal-powered electricity was one of the policy pledges.

The direction was reinforced when Moon announced Korea’s goal to meet net-zero by 2050 at the UN National Assembly last year, and again when Korea hosted the P4G Seoul Summit in April.

Away from the Blue House though, the Korean government, state-run entities and policy banks are still building, operating and financing coal-fired power plants abroad. As the economics of electricity production shift toward renewables, at least some of these facilities look set to lose money - as well as being at odds with the President’s avowed determination that Korea will do its best to do its part in the world deal with the existential threat of climate change.

Jawa 9 and 10, two new coal-fired power plants planned to be completed in 2025 in Cilegon, northwestern tip of the Java Island, Indonesia, are the prime examples. The building of the two new coal plants was approved at the state-run Korea Electric Power Corporation (KEPCO) board meeting in June 2020.

At that time, public enterprises were required to obtain a green light at a preliminary feasibility test for projects worth KRW 50 billion (USD 43.6 million). This requirement was relaxed in November 2020.

A state-run think-tank, the Korea Development Institute (KDI) concluded the two plants would show a net loss after it ran the numbers in a preliminary feasibility test in 2019. KEPCO submitted a revised plan in 2020, but the KDI again estimated that the project would end up with a net loss of KRW 49 billion after 30 years of operation. 

Despite these conclusions, the project was approved by the KEPCO board and its financing was done in November last year. Two Korean policy banks famous for heavy coal financing in their portfolios, the Export-Import Bank of Korea (Korea Eximbank) and the Korea Development Bank (KDB), decided to lend.

As a result of cross-border reporting with Tempo and Waseda Chronicle -- two investigative newsrooms in Indonesia and Japan -- the Korea Center for Investigative Journalism(KCIJ)-Newstapa reported that Cirebon 1 coal-fired power plant in Indonesia has harmed residents’ health by not installing environmental facilities that are required to be installed in Korea. 

The plant was jointly financed by South Korean and Japanese policy banks and operated by Korean state-run Korea Midland Power Corporation(KOMIPO). 

After their success with Cirebon 1, the Korea-Japan consortium started planning out the 2nd plant in 2015. According to Indonesian news reports, the construction of Cirebon 2 plant was 85 percent complete in September last year. The new coal plant is slated to begin operating in 2022. 

Unlike the Cirebon 1 power plant, which has generated multi-billion won operating profit every year, experts believe the second plant may not be as profitable. 

The second plant’s profitability came into question in November 2017 when Indonesian media revealed the local government was renegotiating electricity unit prices for new coal power plants. 

When an independent power generator - oftentimes foreign companies - exports a power plant in Indonesia, the company signs a power purchase agreement (PPA) with the sole purchaser of power in Indonesia. This is PLN, an Indonesian state-run company. Once the agreement is signed - generally for a term of 20 to 30 years, the PLN must buy electricity at a unit price promised at the time of signing the agreement. 

A KOMIPO board meeting document from 2015 shows an agreement was drafted in which PLN promised to buy electricity from Cirebon 2 plant at 6.391 cents per kilowatt hour. However, after two years, PLN officials were quoted in Indonesian press, saying the PLN has asked a number of power plants including Cirebon 2 to renegotiate the agreements. The renegotiation for Cirebon 2 resulted in a new unit price of 5.5 cents per kilowatt hour, down 0.8 cent from the initial contract.

KOMIPO said it “has never been asked for a price renegotiation” when KCIJ-Newstapa reporters asked for confirmation. However, Indonesian government officials told a different story. 

“We’re doing (it by) business by business scheme. Most of them (agreements with IPP operators do) their own negotiations and deals,” Schneider Siahaan, the Director of Strategy and Financing Portfolio at Indonesian Ministry of Finance, said in an interview with Newstapa in March 2018, emphasizing that the renegotiations were not done with government pressure. “If a business says no, the government can’t do anything.” 

Cirebon 2 plant’s internal rate of return for KOMIPO calculated with the initial unit price was 12.83 percent, according to the agreement document. If the unit price of electricity is cut 1 cent per kilowatt hour, this rate of return also reduces.

“The 1 cent cut accounts for about 10 percent of the initial price, so the rate of return will be reduced by at least 1.2 percent from the initial 12.83 percent,” Attorney Noh Jong-hwa of Solidarity for Economic Reform, said. “But I think the rate will decrease by more than 1.2 percent.” 

This means that if the Cirebon 2’s revenue drops by 10 percent with no changes in operating cost, the operating profit will show a greater drop.

Noh added that “above all, this profitability analysis hadn’t even reflected any costs on carbon emissions and other environmental impact.”

On September 19, 2017, Indonesian Minister of Finance sent a letter to the Energy Minister that the nation’s electricity sales forecast was likely to be lower than forecast but it was not going to raise prices. 

In the letter, the Finance Ministry concluded that the PLN must adjust its business plans as the PLN’s financial status was likely to worsen due to the circumstances, raising its default risk.

In response, the Energy Minister ordered PLN to cancel coal-fired power plant projects, which hadn’t started construction, and renegotiate power purchase agreements to cut the prices PLN would pay for on-going projects like Cirebon 2.  

In March 2018, the Energy Ministry and PLN announced that they were postponing or cancelling plans for new coal power plants. The completion of Cirebon 2, which was slated for2018, was postponed until 2022.

The Institute for Energy Economics and Financial Analysis, a U.S.-based institute, concluded the key reason for PLN’s financial deterioration was the Indonesian government, which had overestimated its demand for electricity. 

The Indonesian government has strengthened regulations on coal power plants funded by independent power producers - often foreign consortiums - over the past decade. 

Unlike Cirebon 1, which will remain the property of theKorean and Japanese consortium at the end of the 30-year contract, newer coal power plants like Cirebon 2 will be transferred to the Indonesian government at contract end, in this case, after 25 years. 

If power plants are forced to stop operating in circumstances like a pandemic or natural disasters, the Indonesian government used to make up the losses to the coal plant operators. However, This compensation obligation is not offered to newer coal plants. 

Due to the government’s reduced support of coal plants, Korean operators face shrinking profits and the Korean policy banks see uncertainty over debt recovery rise.

Above all, the latest - and most significant unfavorable factor for Indonesian coal plants is the government’s support on renewable energy.

Coal power accounted for nearly 60 percent of Indonesia’s total electricity production by the 2010s. However, the nation’s plan to reduce coal power and drastically increase the portion of renewables is getting more ambitious every year.

In its mid-to-long-term power supply plan RUPTL, Indonesia planned to produce 30 percent of total electricity with coal-fired power and 23 percent with renewables in 2025. It also planned to reduce this portion of coal-fired power to 25 percent and boost renewables to 31 percent by 2050. 

Last year, the Indonesian government relaxed regulations for those independent power producers investing in renewable power plants, so they will be able to retain  ownership after the contract ends. It also announced its joint project with the International Energy Agency to attract foreign private investors to local renewable power projects.

PLN recently announced that it would gradually retire its coal-fired power plants in an effort to reach net-zero carbon emission by 2060. 

Coal power is losing ground globally. Nordea, the largest financier in Northern Europe, has been encouraging its clients to withdraw from coal power businesses. In October 2020, KEPCO and Samsung C&T received a letter about this, too.

Eric Pedersen, Head of Responsible Investments of Nordea, said that the financiers urged its clients to divest coal from their business portfolio, because the production cost for renewable energy is dropping and that all countries will be under greater pressure to keep the commitment in the Paris Agreement. 

“We thought this is something that will probably lose a lot of money, and this was the symbol of the kind of things that need to stop,” Pedersen said at an interview with KCIJ-Newstapa reporters. “This investor movement against coal is a very big thing. For us, we started it in 2015 by excluding coal mining companies from our portfolios, and have tightened rules for the past years.”

“A country like Korea or Japan can give aid or favorable loans to Indonesia or Vietnam, but what they’re doing is financing something that will be closed very soon, which will make losses for the government institutions,” Pedersen added. 

In its report, a U.S.-based asset manager Northern Trust concluded that because the production cost of renewable energy will keep falling, almost three quarters, or 73 percent, of Indonesian coal-fired power plants will be more expensive to operate than renewable power plants. 

In addition to Cirebon 2, there are more Korea-financed new coal-fired power projects in Indonesia and Vietnam, which may face unfavorable power purchase agreements and price competition with renewable plants. 

KEPCO, the state enterprise which builds and operates power plants abroad, announced in October last year that it will not plan any more new coal-fired power plants overseas. The company said it will convert its new Philippines coal power project into an LNG project and suspend a South Africa coal power project. 

However, this didn’t mean KEPCO has cancelled all new coal power projects.

The company plans to complete and start operating Cirebon 2 of Indonesia and Nghi Son 2 of Vietnam by 2022. 

Jawa 9 and 10, and Vung Ang 2 of Vietnam, both of which are still in a very early stage of construction, have been successfully financed by policy banks such as Korean Eximbank and Japan Bank for International Cooperation. The three new coal units are slated to complete in 2024 and 2025. 

“We decided to keep a few coal power plants considering trust with the counterpart government and business partners, and coal power businesses’ ecosystem,” KEPCO said.

The operating losses of Jawa 9 and 10, which are expected to occur during its 30-year contract, were estimated to be about USD 43.58 million. The loss for Vung Ang 2 during its 25-year contract is estimated to be about USD 84 million, the South Korean state-run institute KDI wrote in its business feasibility reports.