Rethinking coal: lessons from the Song Hau 2 termination
Sizeable coal power projects are costly and heavily reliant on foreign capital, but international investors are increasingly hesitant to finance coal projects.
As the dust settles on the Song Hau 2 coal power deal, its cancellation sends a clear message: Southeast Asia is pivoting away from coal. With rapid urbanisation and rising energy demands, the region faces a choice – cling to the past or embrace a cleaner future. The market seems to have made up its mind.
Last month, the Government of Vietnam issued a notice of termination on the Song Hau 2 coal power project – a decade-long endeavour backed by a Malaysian firm and Eximbank Malaysia – citing unresolved financing issues.
Just weeks before the termination, the Energy Shift Institute warned that the project threatened Vietnam’s Just Energy Transition Partnership (JETP), potentially risking US$15.5 billion in critical energy transition support.
What can the markets learn from this? Here are the key takeaways.
Lesson 1: Coal is quickly losing strategic importance in Vietnam’s energy future
Vietnam’s decision to scrap Song Hau 2 marks a turning point: coal is becoming much less of a priority in the country’s energy system. The capital markets need to wake up to this reality or risk pouring resources into deals that are destined to fail.
The signs were clear in Vietnam’s Power Development Plan 8 (PDP8), published in May 2023, and its prior draft iterations from 2022. PDP8 highlighted the need for coal power generation to be capped at 30.2 gigawatts by 2030, aligning with its JETP commitments.
A detailed review of PDP8 reveals that the Song Hau 2 project did not make it onto the list of “important power source projects” that make up the 30.2-gigawatt cap.
Southeast Asia faces a complex energy landscape. The region is not only navigating the energy transition but also grappling with rapid urbanisation, growing energy demand, geopolitical challenges, and aspirations to move into middle-income economy status.
Its absence from a list of strategic projects indicates it had lost its priority status within Vietnam’s energy planning several years before. Instead, Song Hau 2 was categorised as “challenging”. Other coal power projects, which faced a similar downgrade, were also scrapped or converted to gas.
The project’s backers should have seen the writing on the wall or reaffirmed with the government before committing any financing to the project. While it could be argued that the Government of Vietnam should have been more explicit about its stance, the broader trends were already clear, and pre-investment due diligence should have anticipated these moves.
Vietnam is shifting gears, prioritising other sources of energy over coal.
Lesson 2: Don’t be fooled by technology labels
After our initial commentary, we received enquiries from the market about the “ultrasupercritical” (USC) label of Song Hau 2, implying its mark of importance to Vietnam. This is a misunderstanding. The USC label is simply a coal technology. It does not suggest its significance to the market.
According to the IEA, USC plants operate at higher temperatures and pressures, achieving some operating efficiency compared to subcritical and supercritical plants, and translates to lower carbon dioxide (CO2) emissions per unit of electricity generated.
But while the USC coal technology is more efficient than older coal plants, it is still a major emitter. The reality? USC coal plants emit 720-870 grams of CO2 per kilowatt-hour – around 15-30 per cent reduction in emissions compared to subcritical and supercritical technologies, but still far above the near-zero emissions from renewables. Despite efficiency gains, a USC coal plant is still unappealing to a market seeking to decarbonise.
Additionally, according to the Japan Coal Energy Center, USC coal plants have been operating since the early 2000s, underscoring that this technology is far from new, and do not represent a meaningful innovation or align with current energy trends.
Pivoting back to Vietnam, the claims that Song Hau 2 would have “greatly reduced emissions” for the country were highly exaggerated.
Lesson 3: Southeast Asia is moving on from coal, despite a lack of clear pathway
Southeast Asia faces a complex energy landscape. The region is not only navigating the energy transition but also grappling with rapid urbanisation, growing energy demand, geopolitical challenges, and aspirations to move into middle-income economy status. While some may interpret these dynamics as a continued need for coal-fired power, recent developments suggest otherwise.
The termination of the Song Hau 2 is not an isolated case. The cancellations of the Vinh Tan 3 project in Vietnam, Cirebon 3 in Indonesia, Sual 2 in the Philippines, and Krabi in Thailand all tell the same story: coal is losing its investment case. And it signals a broader shift. Even as countries in the region take time to finalise their public decarbonisation plans, their actions are speaking louder than words—governments are increasingly deprioritising coal.
The Asean Centre for Energy (ACE) recently advocated for coal to remain a significant part of the region’s energy mix for longer than the IEA anticipates, citing the need for reliable baseload power and social and economic considerations.
The ACE report also questioned the Asean Sustainable Finance Taxonomy’s stringent criteria to recognise coal power generation as a “sustainable investment” and, at its report launch event, suggested amendments to the taxonomy to ensure abated coal power projects can secure financing.
However, ACE’s stance, along with the challenges of securing financing for coal power projects like Song Hau 2 in Southeast Asia, confirms that deal flow and capital are not supporting a theory that coal expansion – or extension – is needed.
Sizeable coal power projects are costly and heavily reliant on foreign capital, but international investors are increasingly hesitant to finance coal projects – regardless of whether coal power generation is labelled as a “sustainable investment” in regional taxonomies.
The direction of travel in Southeast Asia is unmistakable. The coal industry, and its supporters, need to adapt, and fast.
