Understanding the Legal Implications of Early Decommissioning: Case Studies of Foreign-Invested Coal Power Plants in Asia

This Working Paper is part of Belt and Road within Finance. Reach out to an Initiative Expert for more information.

To limit global temperature rise to 1.5°C and prevent the most catastrophic impacts of climate change, early decommissioning of unabated coal-fired power plants in all countries by 2040 is critical. For carbon-intensive emerging markets and developing economies, this early retirement process will be far from simple. In countries like Indonesia, Pakistan, and Vietnam there are many relatively young coal-fired power plants (CFPPs) that pose a particular challenge. Often these plants were built with substantial financial support from foreign investors, complicating a host-countries' efforts to phase out coal.

This research shows that the legal frameworks governing these coal plants pose a significant barrier to early retirement efforts and that host countries face large financial penalties if they move to break the legal contracts surrounding these plants. The courts of arbitration that see these cases often levy onerous fines that countries in already precarious financial positions simply cannot afford to take without risking their own financial stability.

Without both financial and legal support and the renegotiation of these contracts, it is unlikely that climate targets can be met within the necessary timeframes.

Key Findings:

• Early decommissioning of CFPPs involves navigating the complex legal framework of CFPPs.
• Host countries could have to compensate foreign investors or project companies if they mandate early decommissioning of CFPPs, introduce new laws or policies causing increased operation costs, such as mandatory carbon pricing, or reduce the utilization level of CFPPs.
• International legal and financing support as well as coordinated efforts between host governments and foreign investors are necessary to help countries advance their climate agendas.

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