In recent years, Indonesia and Vietnam have become the hot countries for China to invest in coal power projects, which is the main reason for this paper choosing these two countries as the focus of study. South Asia and Southeast Asia are the two primary regions for China’s overseas investment in coal power projects, which can be attributed to their relatively stable political environment, fast-growing economy, and geographical proximity to China and accounted for 57.11% and 22.75%, respectively, of China’s total coal power installations in “Belt and Road” countries. The coal power investment in South Asia was mainly concentrated in India, accounting for 90.35% of the region, but China’s participation in India’s coal power is mostly through equipment export, and the investment in coal power projects is mainly concentrated in Southeast Asia. Moreover, due to policy changes in India and the economic development in Southeast Asia after 2010, China’s participation in coal power generation in South Asia has gradually decreased, and participation in Southeast Asia continues to increase. By the end of 2016, Indonesia and Vietnam were the first and second largest installed capacity countries in Southeast Asia, respectively [
41] (
Figure 4 and
Figure 5), and Chinese finance supports 30% of all coal-fired capacity under development in Vietnam and 23% in Indonesia [
7].
In addition, from the present study of power development in Indonesia and Vietnam, coal power in these two countries will experience big developments and attract great investment from China due to vast market demand and national policy support. Wang and Xu focused on the electricity market in Indonesia including power installed capacity and electricity consumption, grid status, power planning, electricity price, and the Indonesian State Power Corporation (PLN) operation status [
42]. Wang et al. analyzed Indonesia’s power investment environment and the investment prospects of various power stations [
43]. Utama and Ishihara and others predicted the future power demand trends in Indonesia [
44]. Liu et al. [
45] and Niu et al. [
46] pointed out that Indonesia is one of the key overseas resource-target areas for Chinese coal-fired power companies. Tran-Quoc et al. proposed a method to improve voltage stability through downconverter technology in Vietnam [
47]. Finenko A and Thomson E proposed that coal power would become the most important source of electricity in Vietnam in the next 10 years [
48] and Sebastian et al. expected Vietnam’s power installed capacity to increase five-fold from 2013 to 2030 [
49].
4.1. Stress Test Factors
Due to the different risk factors, coal power projects in Indonesia and Vietnam face different environmental risks (
Table 2).
The following is a detailed analysis of these risks in terms of the five stress test factors.
(1) Coal price
Changes in coal prices directly affect the fuel cost of the plant, which will cause changes in enterprise value and IRR. Coal price is influenced by the richness of the coal resources, the quality of the coal, and the mining conditions where the coal power projects are located.
Indonesia is a coal exporter with abundant coal resources. By 2017, the reserves of coal resources were about 22.6 billion tons, accounting for 2.2% of the world’s total reserves. The reserve-production ratio was 49 [
50]. The reserves of coal are mainly distributed in the two islands of Sumatra and Kalimantan. Indonesia has a complete range of coal storage, mainly lignite, sub-bituminous coal, bituminous coal, and anthracite. The coal metamorphism is graded from medium to low, with high moisture, low ash (usually less than 10%), low sulfur (usually less than 1%), and high volatility. In 2017, Indonesia’s coal output was 407 million tons, and domestic coal consumption was 85.8 million tons, accounting for 32.63% of primary energy consumption (BP Statistical Review of World Energy 2018). Most of the coal mines are open pit mines. However, with the increase of mining volume, open pit mines will gradually decrease, as will the difficulty of future mining, so coal prices will rise slightly.
Compared with Indonesia, Vietnam’s coal resources are more inadequate. By the end of 2017, the reserves of coal were only 3.36 billion tons including hard coal, lignite, and peat. In 2017, Vietnam’s coal production was 31.95 million tons, basically thermal coal. Coal consumption was 42.3 million tons, and 39% of the electricity was supplied by coal. However, Vietnam’s power planning goal is that by 2020, the total installed capacity of coal-fired power reaches 26 gigawatts, and the power generation reaches 131 billion GWh, accounting for 49.3% of all types of electrical energy. According to the Green Innovation and Development Center (Green ID), Vietnam’s coal power generation will reach 137 million tons of standard coal in 2030, with a coal import ratio of 75.7% (
Figure 6) [
51]. The expansion of the scale of coal power development in Vietnam will increase its reliance on imported coal, which will increase coal prices.
(2) Utilization hours
Coal-fired planning risks include three areas: coal-electricity construction economics, coal-fired power adequacy, and resource constraints. Investment in coal-fired power projects in the “Belt and Road” countries needs to consider the feasibility of project construction, the economics of operation, and the power demand and supply. This paper focused specifically on the economics of project operation, and the impact of the utilization hours of coal-fired projects based on the power installation plan of the “Belt and Road” countries.
Recent years have seen an improvement in Indonesia’s investment environment and a growth rate of around 5% in domestic economics. Additionally, with increases in population and electrification, the demand for electricity has continued to increase. According to the forecast of Perusahaan Listrik Negara (PLN), Indonesia’s electricity demand will grow at an average annual rate of more than 7.5% from 2015 to 2025, and power users will increase by 21.7 million (
Figure 7) [
52]. Coal power development ranks as one of the top in Indonesia’s power development plan, while coal-fired power generation accounts for more than half of the total power generation. As of April 2017, Indonesia’s coal power has developed 23,345 MW, accounting for 51.2% of total installed capacity. The 2016–2025 plan states that by 2025, the newly installed capacity of coal-fired power stations will be 34,800 MW, accounting for 43% of new installed capacity. However, Indonesia’s coal resources are unevenly distributed. The cost of coal-fired power generations is lower and the scale of generation is more expanded in resource-rich areas. However, with the slowdown in the growth of power demand and the development of renewable energy, there will be overcapacity risks in coal-fired power projects in these areas, which will also result in a decrease in utilization hours.
Like Indonesia, the recent years have seen continued growth in electricity demand and expanded installed power capacity in Vietnam. In 2016, Vietnam’s total installed capacity of electricity reached 41.29 GW, of which coal-fired installed capacity reached up to 14.44 GW, accounting for 35%. Coal-fired power has become the main new power source in recent years (
Figure 8). However, unlike Indonesia, Vietnam’s coal is mostly imported, which results in higher risks. Vietnam is vigorously developing renewable energy such as wind, solar and biomass in order to protect national energy security and respond to changes in the global climate. If it succeeds in finding a suitable alternative energy source, its dependence on coal power will be reduced. Then, coal-fired power projects may run into the risks of overcapacity, and the utilization hours will also be decreased.
(3) Exchange rate
The transaction of electricity is conducted in local currency for coal power projects developed by China in the “Belt and Road” countries. Therefore, the value of the local currency directly affects the revenue of enterprises. The exchange rate of the Indonesian rupiah (IDR) is highly volatile. Due to the Asian financial crisis in 1998, the U.S. dollar (USD) relative to the IDR rose to 12,000. After that, the global financial crisis in 2008 caused the exchange rate to rise to 12,300 [
53]. In 2018, the Federal Reserve continued interest rate hike and the sharp depreciation in the currencies of emerging economies resulted in another sharp depreciation in the IDR. On October 2, the exchange rate of the Indonesian rupiah relative to the USD relative to the IDR reached 15,048, which rose above 15,000 for the first time [
54]. Affected by several economic fluctuations, the exchange rate of the Chinese Yuan (CNY) relative to the IDR has also experienced great fluctuations since the beginning of the 21st century (
Figure 9) [
55].
Despite the value of the Vietnamese Dong (VND) being relatively stable, it faces the risk of currency depreciation because Vietnam’s exports account for a high proportion of GDP (gross domestic product) (more than twice that of Indonesia) and some merchants tend to make the VND exchange rate lower. At present, the exchange rate of the USD relative to the VND has remained at around 3500 (
Figure 10).
(4) Environmental requirements
In operation, coal-fired power plants generate pollutants including nitrogen, sulfur-containing substances, and soot. As shown in
Table 3, many countries have regulated the limits of the pollutant discharge of coal-fired power plants. However, Indonesia, Vietnam, and other “Belt and Road” countries have lower pollutant-discharge standards compared to China and Western developed countries. As coal-fired power projects in these countries at present do not have any problem of environmental taxes, the company can obtain higher returns with lower protection expenses.
In response to environmental pressure and NDC commitments, Indonesia and Vietnam will raise their environmental standards and impose environmental taxes in future. The coal-fired power projects should not only raise their own technical standards, but also increase expenditure on environmental protection and taxation. However, this will increase the project’s expenses. In this case, these countries need to provide electricity price subsidies to the coal-fired power project, otherwise, the enterprises will have to take on more financial burdens.
(5) Carbon tax
On 5 October 2016, about 200 countries jointly adopted the Paris Agreement at the Paris Climate Conference and formulated an institutional arrangement to deal with climate change. The purpose was to control the global average temperature increase within 2 °C in this century and strive for 1.5 °C. To this end, all countries have set their own NDC goals. By 2030, these countries will raise the carbon emission standards for coal-fired power projects in order to fulfill their goals. Power companies must seek strategies to deal with carbon and environmental risks, which will bring about increased costs and reduced profits due to the addition of environmental taxes.
Indonesia’s NDC goal is to control greenhouse gas emissions within 2.881 billion tons and to reduce it by 29% in 2030 under the current scenario BAU (Business As Usual). It can be inferred from the carbon intensity of coal-fired power in Indonesia in 2015 that the carbon emissions of coal-fired power in Indonesia will be around 330 million tons at that time. If Indonesia improves the technical level and energy efficiency of the coal power plants, it will reduce the carbon emission intensity of coal-fired power to 850 g/kWh. In 2030, the carbon emissions of coal-fired power will be 264 million tons, which will be 0.66 billion tons lower. The contribution rate to the unconditional reduction of the 29% target is 21%, and the contribution rate to the conditional reduction of 41% target is 16.6% (
Figure 11) [
57]. According to the findings of IRENA’s study, in 2030, Indonesia’s total carbon emissions of energy-related industries (electricity, industry, transportation, and construction) in the BAU scenario will be 1.253 billion tons, and the carbon emissions in power industry will be 605 million tons, among which the carbon emissions of coal and electricity will be 330 million tons (estimated results), accounting for 26.3% of the total carbon emissions of energy-related industries. Comparing the proportion of coal-fired carbon emissions and the contribution rate of emissions reduction, the reduction of coal-fired carbon emission intensity to 850 g/kWh is still insufficient to complete the emissions reduction task.
Vietnam’s NDC goal is to reduce the carbon intensity of GDP by 20% in 2030 compared to 2010, with the ultimate goal of 30%. The carbon intensity of GDP has remained around 0.9 kg/USD in recent years (
Figure 12). Assuming that Vietnam can maintain a growth rate of 6.8% and achieve the goal of reducing carbon intensity by 20% by 2030, Vietnam needs to obtain 526 billion yuan of GDP with 625 million tons of emissions in 2030. This is difficult for Vietnam if it continues to develop coal power.
4.2. Stress Test Scenario
Before setting the stress test scenario, we first calculated the enterprise value and internal rate of return of the average level of coal-power investment projects in these two countries and selected two typical coal power projects (the GH EMM Indonesia Project and Vietnam Vinhtan Coal Power Project) for comparative analysis. The GH EMM Indonesia Power Plant is the first coal-electricity integration project invested by the Shenhua Group overseas [
58]. In 2017, it was successfully awarded three awards for Indonesia’s “Five Best Power Enterprises”, “Five Best Innovative Power Enterprises”, and “Five Best 100 MW Power Enterprises”, and won the “Best Innovative Power Enterprise of 2017” for Indonesia. The Vietnam Vinhtan coal-fired power plant is the largest coal power project invested by Chinese enterprises in Vietnam [
59]. It is also a key production capacity cooperation project in the five-year development plan of the China–Vietnam economic and trade cooperation and the five-year plan of onshore infrastructure cooperation [
60]. The data under the relevant reference value are shown in
Table 4.
The results show that coal power investment in Indonesia has a relatively high profit state: the enterprise value was 5.436 billion yuan and the IRR was 13.95%. The GH EMM power plant had a low cost of coal (uses inferior lignite), so the overall income was higher than the average level of Indonesia’s coal power investment. The enterprise value of coal power in Vietnam was calculated to be 25.285 billion yuan by using the discounted free cash flow approach, and the IRR was 12.35%. The Vietnam Vinhtan power plant’s revenue was in line with the average level.
Next, we examined the capacity of the power plants to withstand environmental risks. We estimated how the five stress factors influenced the corporate value and internal rate of return in both optimistic and pessimistic scenarios.
Table 5 presents the values set for the five stress factors on both optimistic and pessimistic scenarios. (1) Coal price. Indonesia is located in coal-rich areas, thus has no risk of change in coal price, so we set some fluctuations based on Indonesian coal prices in recent years. Vietnam’s coal relies on imports, so the coal price of Vietnam may increase. This paper selected the global average price of steam coal (
$80 per ton) and assumed that its calorific value was 5500 kcal [
61]. (2) Utilization hours. The changes in the utilization hours of the coal power plants in two countries are consistent: it will increase in recent years, but tend to decrease in the long run. (3) Exchange rate. Indonesia’s exchange rate in the optimistic scenario was relatively stable, and the lowest value in recent years was set for the pessimistic scenario. Fluctuation in Vietnam’s exchange rates is small, so a slight variation exists between the optimistic and pessimistic scenarios. (4) Carbon tax and environmental requirements. Indonesia and Vietnam have a certain gap with China in terms of power development, considering that they are both developing countries and are currently facing pressure to achieve the NDC goals. Under the pessimistic scenario, the carbon tax and environmental tax were set according to the pilot data of China’s early carbon market, and assumed that the government will not subsidize desulphurization, denitrification, and dust removal. Under the optimistic scenario, the carbon price and environmental protection tax were appropriately reduced. At the same time, it was assumed that the government would provide some subsidies toward the cost of environmental protection. The data were also set according to the data of China’s electricity market. Considering that the carbon market in the “Belt and Road” countries has just started, our consideration of carbon price and environmental protection tax was relatively low. For example, the cost of power generation in China has increased by nearly 10% from the relatively low emission standard to the current ultra-low emission standard [
9]. However, a direct assumption of 10% growth is not particularly realistic in the near to medium term for “Belt and Road” countries.