The need for sustainability premium of the early retirement of coal plants: Evidence from Indonesia

Bahar Celikkol Erbas, Niccolò Manych, Kevin P. Gallagher and Rishikesh Ram Bhandary

Energy Policy, 2025, vol. 207, issue C

Abstract: To fulfill climate commitments and attain net zero emission goals, there is a global effort to retire coal fired power plants (CFPPs) early. Carbon prices alone are insufficient to retire CFPPs early. Financial tools capturing all sustainability aspects are needed. Development finance institutions (DFIs) have important roles in implementing these tools and facilitating early retirement of CFPPs. This study creates a novel financial tool, ‘sustainability premium’ based on a Cost-Benefit-Analysis (CBA) capturing sustainability aspects of early retirement. The sustainability premium can be used alone or with carbon credit prices in early retiring CFPPs. The CBA is applied to the Tenayan Riau CFPP in Indonesia based on three scenarios: business-as-usual where the plant continues to operate (BAU), early retirement without any substitute (RE) and with a renewable alternative (AR). BAU and RE impose significant welfare costs on Indonesia. Welfare loss is roughly seven times smaller in AR than RE. The benefits in AR include improvement in public health, water quality, visibility, and smog and carbon emissions. The sustainability premium can be adjusted for retirement age to provide enough incentives and used with carbon credit schemes to make early retirement welfare enhancing. DFIs can use the sustainability premium in just energy transition.

Keywords: Sustainability premium; Coal power plant retirement; Cost-benefit analysis; Development finance institutions (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:207:y:2025:i:c:s0301421525003179

DOI: 10.1016/j.enpol.2025.114810

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