SINGAPORE
The South Luzon Thermal Energy Corporation coal-fired power plant in Batangas, the Philippines, is expected to be retired by 2030. PHOTO: ACEN
Cheryl Tan
Correspondent
ST
Sep 01, 2024
SINGAPORE – The Republic is pioneering a new type of financial instrument that could help South-east Asia speed up its move away from coal plants towards more climate-friendly sources of energy.
Transition credits come from closing coal plants earlier so that less planet-warming gases are released into the atmosphere.
Each credit represents one tonne of planet-warming emissions that is prevented from being released. Buyers – such as governments and companies – can buy these credits to shrink their carbon footprint to meet their net-zero emission claims.
On Aug 16, an agreement was signed by Temasek-owned investment platform GenZero, infrastructure company Keppel and Acen, the energy unit of Philippine conglomerate Ayala Corporation, to study the development of a first-of-its-kind transition credit project in the Philippines.
The project entails retiring a South Luzon coal plant in Batangas city in 2030 – 10 years ahead of schedule – and replacing it with a solar plant and a battery storage system.
The Straits Times unpacks what transition credits are and the role they can play in weaning South-east Asia off coal.
Q: What are transition credits and how can they help?
A: Transition credits are a new class of carbon credits generated from the reduction in emissions when coal plants are retired early and replaced with clean energy sources.
Conventional classes of carbon credits typically come from carbon dioxide being removed or reduced through the planting of new trees, for example.
Coal is responsible for powering many South-east Asian economies because of rising energy demand due to population growth and significant economic development.
But it is the largest source of carbon emissions globally.
Phasing out the 2,000 coal plants in the region will help to cap global warming at 1.5 deg C above pre-industrial levels – the threshold which climate scientists say can help ward off catastrophic climate impacts.
The sale of transition credits can expand the available financing mechanisms for phasing out coal plants, since any investor can buy these credits to offset its emissions, said Mr Sharad Somani, partner and head of KPMG’s environmental, social and governance arm in Singapore.
But many of the region’s coal plants are young – less than 15 years old on average. As they have a lifespan of 40 to 50 years, it makes little financial sense to shut them down ahead of time.
Strategies to encourage operators to do so have focused on blended financing, where coal plant owners are given concessional capital, in the form of grants or interest-free loans, for example.
Such capital usually comes from governments, multilateral development banks and philanthropic organisations.
The concessional capital may attract more private capital from banks and investors with deeper pockets but a lower risk tolerance.
However, it is still challenging to raise sufficient private capital to finance these transactions – and this is where transition credits come in.
The Aug 16 agreement follows the Monetary Authority of Singapore’s (MAS) launch of a Transition Credits Coalition, or Traction in December 2023. The initiative, backed by nearly 30 members, including the Asian Development Bank (ADB), Temasek and DBS Bank, studies the challenges of retiring coal plants early in Asia and proposes solutions.
At that time, MAS said it had identified two pilot projects in the Philippines to test the use of high-integrity transition credits in coal phase-out deals. The central bank told ST that the projects will test the viability of transition credits in different scenarios.
Cheryl Tan
Correspondent
ST
Sep 01, 2024
SINGAPORE – The Republic is pioneering a new type of financial instrument that could help South-east Asia speed up its move away from coal plants towards more climate-friendly sources of energy.
Transition credits come from closing coal plants earlier so that less planet-warming gases are released into the atmosphere.
Each credit represents one tonne of planet-warming emissions that is prevented from being released. Buyers – such as governments and companies – can buy these credits to shrink their carbon footprint to meet their net-zero emission claims.
On Aug 16, an agreement was signed by Temasek-owned investment platform GenZero, infrastructure company Keppel and Acen, the energy unit of Philippine conglomerate Ayala Corporation, to study the development of a first-of-its-kind transition credit project in the Philippines.
The project entails retiring a South Luzon coal plant in Batangas city in 2030 – 10 years ahead of schedule – and replacing it with a solar plant and a battery storage system.
The Straits Times unpacks what transition credits are and the role they can play in weaning South-east Asia off coal.
Q: What are transition credits and how can they help?
A: Transition credits are a new class of carbon credits generated from the reduction in emissions when coal plants are retired early and replaced with clean energy sources.
Conventional classes of carbon credits typically come from carbon dioxide being removed or reduced through the planting of new trees, for example.
Coal is responsible for powering many South-east Asian economies because of rising energy demand due to population growth and significant economic development.
But it is the largest source of carbon emissions globally.
Phasing out the 2,000 coal plants in the region will help to cap global warming at 1.5 deg C above pre-industrial levels – the threshold which climate scientists say can help ward off catastrophic climate impacts.
The sale of transition credits can expand the available financing mechanisms for phasing out coal plants, since any investor can buy these credits to offset its emissions, said Mr Sharad Somani, partner and head of KPMG’s environmental, social and governance arm in Singapore.
But many of the region’s coal plants are young – less than 15 years old on average. As they have a lifespan of 40 to 50 years, it makes little financial sense to shut them down ahead of time.
Strategies to encourage operators to do so have focused on blended financing, where coal plant owners are given concessional capital, in the form of grants or interest-free loans, for example.
Such capital usually comes from governments, multilateral development banks and philanthropic organisations.
The concessional capital may attract more private capital from banks and investors with deeper pockets but a lower risk tolerance.
However, it is still challenging to raise sufficient private capital to finance these transactions – and this is where transition credits come in.
The Aug 16 agreement follows the Monetary Authority of Singapore’s (MAS) launch of a Transition Credits Coalition, or Traction in December 2023. The initiative, backed by nearly 30 members, including the Asian Development Bank (ADB), Temasek and DBS Bank, studies the challenges of retiring coal plants early in Asia and proposes solutions.
At that time, MAS said it had identified two pilot projects in the Philippines to test the use of high-integrity transition credits in coal phase-out deals. The central bank told ST that the projects will test the viability of transition credits in different scenarios.
Carbon financing could retire dozens of coal plants in S-E Asia by 2030: Rockefeller Foundation
The South Luzon project is one of the pilots. The 246MW coal plant, which will be retired in 2030, will be replaced with a 400MW mid-merit solar power plant with battery storage, an Acen spokeswoman told The Straits Times.
Mid-merit plants can adjust their output throughout the day depending on electricity demand.
The capital investments are estimated at US$1.5 billion (S$2 billion), said the spokeswoman, adding that the electricity output from the renewable energy facility will be equivalent to the amount generated by the coal plant. Solar energy generated by a solar farm may not reach its maximum output throughout the day due to rain or cloudy weather.
“It takes around three years to build a plant of this scale, hence construction is expected to start by 2028 or earlier,” she added.
For the second pilot, the ADB said it has been appointed by the Philippines to retire a 200MW coal plant in Mindanao five years early in 2026. The current power-purchase agreement for the plant ends in 2031, although the plant has a technical life up to 2046.
A spokesman for the Rockefeller Foundation, also one of MAS’ Traction partners, said: “Transition credits can cover costs that private and concessional capital cannot cover, such as lost revenues to plant owners, the premium associated with investing in replacement assets, such as battery storage, and the just transition costs.”
A just transition entails protecting the rights of workers and communities in the green transition. This could involve retraining or upskilling coal plant workers, for example.
Q: How should these credits be priced?
Acen’s outlook on the transition credit pricing is based on Singapore’s carbon price, which will be set at between $50 and $80 per tonne by 2030, said its spokeswoman.
“While it is still early in the development of the pilot initiative, Acen is optimistic that the transition credits can be viable at these pricing levels,” she added.
Mr Mikkel Larsen, a carbon market expert and an executive director of Singapore-based carbon exchange Climate Impact X, estimates that for a start, the pilot projects could possibly cost around US$30 per tonne of emissions.
But to scale up the phase-out of the rest of the region’s coal plants, the price of these credits could go up to US$40 to US$50 per tonne, he added.
Given the region’s relatively young fleet of coal plants, the early phase-out of each one could cost around US$20 per tonne, while building the replacement renewable energy plant could add another US$20, taking into account the infrastructural changes needed to manage grid instability.
The just transition element will add further to the cost, he added. This can include reskilling workers, for example.
Acen’s spokeswoman told ST that capital to build the renewable plant will come from investors such as Acen, and potential partners. This will include bridge capital that will be refinanced by future proceeds from transition credits.
She noted that if the plant is to be retired by 2030, the crediting will happen between 2031 and 2040.
Potential buyers of the credits include the Singapore Government and carbon tax-liable companies which can use the credits to offset up to 5 per cent of their taxable emissions; provided that the credits meet certain eligibility criteria.
For this to happen, both the Singapore and Philippine governments must enter into a bilateral carbon credit trade agreement, in which both sides agree that emissions reductions are not counted twice.
This means that if Singapore buys transition credits from the Philippines, this same amount of emissions must be “added back” to the Philippines’ inventory.
A memorandum of understanding was signed by both countries earlier in August for this purpose.
ADB senior markets development advisory specialist Dion Camangon told ST that it is supporting the Philippine government to build capacity and set up the arrangements to authorise cross-border carbon transfers, in parallel with the development of a carbon market policy framework.
Q: What will be done to ensure that the credits truly benefit the climate?
To ensure investor confidence, the transition credits’ methodology must be able to address and mitigate potential risks, particularly surrounding the permanence of the plant’s closure, said DBS chief sustainability officer Helge Muenkel.
The two largest carbon accreditation agencies – Gold Standard and Verra – are developing their own standards for transition credits, which can be applied to the two pilot projects under Traction.
Referring to the South Luzon coal plant, Mr Frederick Teo, the chief executive of GenZero, noted that there are several transition credit methodologies in development, but none has been finalised.
Conducive environments critical to unlocking finance for South-east Asia’s green transition: Panellists
“We are closely tracking these developments and will select the most appropriate methodology at a later stage, one that is robust and implementable... We may also consider going beyond what the methodologies require to tighten safeguards,” he added.
Broadly speaking, transition credit methodologies should address issues such as ensuring additionality, which means proving that the coal plant’s closure would not have happened without financing from transition credits. This would exclude loss-making coal plants, for example.
Permanence is another criterion, where developers must ensure that the coal plant is permanently shut down and prevent leakage. This ensures that the coal plants owners do not end up building new coal plants elsewhere after shutting down a particular plant.
No comments:
Post a Comment