Contracts that outlast climate goals
Across Asia, utilities are tied to coal far longer than climate policy or market trends would suggest. Decades long power purchase agreements keep coal plants running even when cheaper wind and solar power are available on the grid. In Southeast Asia, between 50 percent and 100 percent of coal fired capacity is covered by such deals, with roughly nine to 18 years still to run on average, according to data shared by the Powering Past Coal Alliance. The result is a paradox. Renewable electricity is scaling up, yet coal generation remains stubbornly high because contracts require buyers to pay coal plants regardless of whether their power is needed.
That contractual lock in is showing up in regional generation data. Coal’s share of Southeast Asia’s power supply has climbed from about 35 percent to roughly 45 percent over the past decade, even as the global share of coal in electricity has slipped from about 39 percent to around 34 percent. Clean power still lags. Renewables produce roughly 26 percent of the region’s electricity, well below the global average of about 41 percent. The gap represents lost opportunity, both for cutting carbon pollution and for lowering system costs as solar, wind, and storage continue to get cheaper.
The challenge is not only technical. It is also legal and financial. Coal contracts were designed to guarantee steady income for plant owners and stable jobs for workers. If utilities curtail contracted coal output to make room for renewables, they risk penalties or must keep paying fixed charges on coal plants that sit idle. Those liabilities can run into billions of dollars across a national fleet, which explains why grid operators often curtail wind or solar first, even if that means paying more for power.
How take or pay deals work
Most coal projects in emerging Asian markets were financed on the back of long term power purchase agreements. Many include so called take or pay provisions that require buyers to pay for a minimum volume or capacity whether or not the plant runs. The intent was to overcome investment risk by assuring revenue for 20 to 30 years. That structure fit the old model of operating big, steady coal units as the backbone of the grid. It is poorly matched to a modern system where variable renewables supply a growing share of electricity and where grids need flexibility more than fixed output.
Breaking or renegotiating these deals is hard. Contracts vary widely, but penalties for shortfalls are common. Where projects involved foreign lenders and investors, power contracts may be paired with government support agreements that include strong protections for investors. Those can trigger compensation claims if policies force early plant retirement. Governments that are wary of investor disputes often hesitate to mandate closures even when climate strategies say they must.
Curtailment is spreading across the region
When contracted coal output soaks up headroom on the grid, renewable plants get turned down. Curtailment, the practice of deliberately reducing renewable generation, is becoming more frequent. In China, where clean power additions have surged, output from coal and gas plants still rose by 7.3 percent in October on a year earlier. Analysts warn that long term coal commitments are contributing to curtailment of solar and wind. Wood Mackenzie projects average solar curtailment above 5 percent in 21 provinces over the next decade. Major economies across Asia Pacific, including Japan, Australia, and India, have reported higher renewable curtailment in the past year as well.
Curtailment has direct costs. Investors in wind and solar see lower revenues than expected. That can dampen future investment. It also hurts consumers because the system ends up paying for more power than it needs, both to honor coal contracts and to compensate renewable projects that cannot deliver their full output. The longer inflexible coal contracts persist, the greater the risk that clean energy assets will be underused and that system costs will rise.
A grid built around inflexible plants
Coal units were engineered to run steadily for long stretches and are costly to ramp up and down. Renewable generation, by contrast, is variable. Matching the two requires better scheduling, more storage, and contracts that value flexibility. Without those changes, dispatchers often keep coal units running to avoid contractual penalties and technical stress, then curtail solar and wind during midday peaks or windy nights. A modern grid needs demand response, interconnection upgrades, flexible gas peakers in the short run where needed, and increasingly, batteries. Equally, it needs legacy contracts that allow coal output to shrink when renewables are abundant.
Country snapshots
The coal contract puzzle looks different in each market, but several patterns recur: long residual contract terms, high fixed charges, and policy uncertainty around retirement financing. Here is where key countries stand.
Indonesia
Indonesia relies heavily on coal and has a large fleet of plants backed by long term agreements. The government has announced goals to wind down coal, and a multibillion dollar Just Energy Transition Partnership was designed to help. Progress has been uneven. Plans to retire around 6.7 gigawatts of capacity by 2030 are at risk amid slow disbursement of international financing. The state utility, PLN, still pays for unused capacity at some plants because of overbuilding during the last investment cycle, a burden ultimately carried by consumers and the state. Analysts at Ember say a 2040 coal phase out would require coal retirements on the order of 3 gigawatts each year and a rapid buildout of renewables, especially solar plus batteries, so that clean power reaches roughly 65 percent of the mix by 2040. Indonesia is also testing early retirement transactions, including a deal linked to the Asian Development Bank’s Energy Transition Mechanism. The model relies on refinancing coal assets at lower cost, paying back investors sooner, and shutting units earlier than the original contract allowed.
Vietnam
Vietnam signed high level pledges to shift from coal to clean energy, and its investment climate is comparatively favorable. Concerns about power shortages have kept policymakers cautious about closing coal units too quickly. Researchers suggest the most practical near term steps are to stop adding new coal capacity, make better use of existing renewables, and reform contracts so that coal plants can run fewer hours without triggering penalties. The aim is to keep the lights on while making space for more wind and solar and reducing the risk of curtailment.
Philippines
The Philippines banned new coal projects in 2020, but plants already in the pipeline proceeded, complete with long life contracts. The GNPower Dinginin facility in Bataan illustrates the lock in. Terminating a large coal contract early can cost hundreds of millions of dollars once outstanding debts, taxes, and lost profits are included. Those costs typically flow through to ratepayers. State owned entities hold a significant share of coal assets across Southeast Asia, and unlike richer countries that have public agencies to buy out contracts, many governments in the region lack the fiscal space to do so. That is why blended finance and multilateral support are critical to any retirement plans.
India
India is expanding solar and wind capacity fast, yet state buyers are still preparing new long term deals with coal generators. As clean generation grows, retailers face a risk of paying large fixed charges on underused coal assets. Think tanks, including Ember and Climate Trends, argue that distribution companies need to redesign resource plans and shift to flexible contracting so that clean power can be prioritized when available. Without that shift, curtailment and stranded asset risks will grow.
Money, law, and who pays
Behind every coal plant sits a financial structure. In many cases, foreign investors and lenders backed the projects, and host governments supported them through contracts and guarantees. Research by the World Resources Institute highlights a difficult reality. Many investment agreements require host governments to compensate investors for policy actions that lead to early closure. That is a powerful disincentive to act quickly. Governments with limited fiscal space are unlikely to take on large compensation liabilities, and they are reluctant to invite investor disputes before international tribunals. The legal design of yesterday’s investment regime was not built with climate goals in mind.
Still, pathways exist. Governments can lead structured negotiations that bring in all stakeholders, including plant owners, lenders, and development banks. Home countries of major foreign investors, such as China, Japan, and Korea, can help, especially given that state backed banks from those countries financed many coal units in Southeast Asia. Multilateral development banks can provide concessional capital, legal support, and risk insurance to unlock stalemates. Early retirement is rarely possible without compromise on all sides, but precedents are emerging, including deals in Indonesia and Chile that link lower interest rates to faster emissions cuts.
Why early retirement keeps stalling
The idea is simple. Shut plants early and replace them with clean energy. In practice, someone must pay to compensate investors for lost years of operation, or the contract terms must be changed. Donor rules have limited the use of public funds for buying out coal assets. Private lenders face reputational risks when paying coal owners to close plants. Those constraints have slowed early retirement programs and forced planners to focus on other tools, like accelerating renewable additions while trying to reduce coal plant run time under existing contracts.
How to unlock contracts without blowing up budgets
New financial and legal tools are designed to restructure coal contracts so clean power can scale at lower cost. Analysis by RMI outlines three practical routes. The first is early termination of a coal power purchase agreement by refinancing the asset and paying back investors more quickly, with the plant retiring years ahead of schedule. The second is replacing the coal contract with a clean energy contract so that debt service and earnings are tied to new renewables and storage that fill the gap. The third is restructuring the coal contract to reduce emissions before closure, for example by lowering minimum offtake, reducing must run hours, and aligning payments with actual dispatch while setting a firm retirement date.
These approaches rely on coal transition mechanisms that blend concessional loans and commercial capital to keep costs manageable for consumers and taxpayers while holding investors roughly whole. Some structures, like managed transition vehicles, can create multi year windows for transition, during which clean capacity is built and coal run time falls sharply. With the right policy support, these tools can unlock emissions cuts of 80 percent or more at specific plants, and in some cases above 90 percent. The key is to design packages that are bankable and that align incentives across utilities, plant owners, lenders, and regulators.
Make contracts flexible
Contract flexibility is just as important as financing. Power purchase agreements signed in a coal centric era often assume baseload operation and high capacity factors. In a renewables first system, those features become liabilities. Regulators can require that new and renegotiated contracts include economic dispatch rights, lower minimum offtake levels, performance payments for flexibility rather than fixed output, and the ability to pause coal output when renewable generation is abundant. Transmission investment and regional interconnection can expand the market for surplus solar and wind. Storage and demand response can shift consumption to times when renewables are strong.
Use transition credits and carbon markets
Early retirement deals are easier to finance when avoided emissions have value. Transition credits tied to verifiable shutdowns can reduce the cost of refinancing and retirement. Programs like the Asian Development Bank’s Energy Transition Mechanism aim to combine lower cost capital with measurable emissions reductions and clear retirement timelines. Careful design is essential so that credits reflect real, additional cuts and so that communities around plants see tangible benefits.
Energy security and jobs
Concerns about reliability and employment weigh heavily in the coal debate. Those are solvable problems with planning. Reliability requires more than baseload units. It requires resources that can respond quickly to changes in supply and demand. Batteries, flexible gas capacity where needed as a bridge, grid reinforcements, and better forecasting all help. Policy can require coal units to operate more flexibly in the near term, lowering minimum stable loads and enabling faster ramping so that less renewable output is wasted.
A just transition must be part of every plan. Coal dependent provinces and communities need investment in new industries, training, and targeted support. Retirement schedules can be sequenced to minimize social disruption. Where plants pose significant local health risks, early action can deliver immediate benefits. Support for workers and affected businesses should be built into transition financing, not treated as an afterthought.
Are these plants really too young to retire
A frequent claim is that Southeast Asia’s coal fleet is too young to close. New analysis undercuts that assumption. Global Energy Monitor projects that the average age of coal units in Southeast Asia will reach about 28 years by 2040, putting most plants within typical retirement windows if policies steer the system toward clean power. Stopping the addition of new coal is essential. If no more capacity is added, only a small portion of the fleet would be under 20 years of age by 2040. Financial studies also show that with the right policy and financing, it can be cost effective to retire some units in their mid teens and replace them with renewables and storage, without raising wholesale prices.
Christine Shearer, who manages the Global Coal Plant Tracker at Global Energy Monitor, pushed back on the idea that youth is destiny for the region’s coal units.
Christine Shearer, Global Energy Monitor: “The notion that Southeast Asian coal plants are too young to retire is a misconception.”
That view aligns with the lived experience in other regions where coal has exited quickly once contracts and policy aligned. The next step for Southeast Asia is to turn pilot transactions into scalable programs and to ensure that new contracts, whether for coal or clean power, build in flexibility from day one. Without reforms, the region risks paying for coal plants twice, once in fixed charges and again in the price of underused renewables. With reforms, the region can cut emissions faster, attract investment, and improve public health while keeping the lights on.
What to Know
- Between 50 percent and 100 percent of Southeast Asia’s coal capacity is locked into power purchase agreements with nine to 18 years left on average.
- Coal’s share of power in Southeast Asia rose to about 45 percent in the past decade, while the global coal share fell to around 34 percent.
- Renewables supply roughly 26 percent of Southeast Asia’s electricity, compared with about 41 percent globally, in part because coal contracts crowd out clean power.
- China, Japan, Australia, and India have reported increased renewable curtailment as long term coal commitments limit grid flexibility.
- Breaking coal contracts triggers penalties and compensation claims, especially where foreign investors have protections, which slows early retirement.
- Indonesia’s coal phase down plans face funding delays, and analysts say a 2040 exit requires retiring about 3 gigawatts of coal each year and ramping renewables to around 65 percent of the mix.
- RMI and others outline tools to unlock contracts, including early termination, replacement with clean energy contracts, and contract restructuring to cut emissions.
- Transition finance and carbon credits can lower retirement costs, while new contract rules should prioritize flexibility and economic dispatch.
- Global Energy Monitor finds the average age of Southeast Asia’s coal plants will approach common retirement ages by 2040, making earlier closure feasible under the right policies.
