So-called “transition credits” could be sold to incentivise owners of coal-fired power plants (CFPPs) to retire their assets early and replace them with renewable energy. These high-integrity carbon credits could plug an estimated US$70 million ($95.76 million) economic gap arising from retiring a CFPP with a 1-gigawatt (GW) capacity five years earlier.

These findings were released in a working paper by the Monetary Authority of Singapore (MAS) and McKinsey & Company on Sept 26, which sets out how high-integrity carbon credits can be used as a complementary financing instrument to accelerate and scale the early retirement of CFPPs. 

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The paper posits that credits generated from the early retirement of a CFPP and its replacement with a cleaner energy source demonstrates irreversible action to reduce emissions at source. Hence, transition credits could be classified as high-quality credits that are unique from existing avoidance credits.

There are more than 2,000 CFPPs in Asia, which are less than 15 years old on average. They emit about 7.2 gigatons of carbon dioxide (CO2) annually, or about 20% of the world’s annual energy-related CO2 emissions.

In the absence of mandatory managed phase-out requirements, stakeholders of CFPPs have “little motivation” to shorten their existing power purchase agreements, says MAS. 

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/news/sustainability/mas-launches-public-consultations-coal-phase-out-voluntary-code-conduct-esg?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>MAS launches public consultations on coal phase-out, voluntary code of conduct for ESG rating agencies</a>

Asia’s “large and young fleet of CFPPs” means additional financing mechanisms are needed to improve the economic viability of such transactions and to attract “significant” private capital, adds the financial regulator. 

Addressing climate change is paramount, says Oliver Tonby, senior partner at McKinsey & Company. “One-fourth of global emissions are from coal power, with three-fourths from Asia. Urgent collective action is required to retire Asia’s [more than] 1,500GW of young coal plants. Innovative financing mechanisms, such as carbon credits, could potentially enable such transactions at scale.”

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/news/sustainability/retiring-coal-fired-power-plants-mother-all-transitions-mas?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Retiring coal-fired power plants is the 'mother of all transitions': MAS</a>

That said, investors were cautious when discussing transition credits, say the paper’s authors. “The time lag between funding the early retirement and the credit issuance raised concerns such as what would happen if the retirement does not happen, how one would estimate future prices in an untested market and would transitions qualify against carbon emission reduction requirements.”

The paper also flagged reputational risks and the lack of an established global standard for such credits. 

In turn, innovative financing and insurance solutions, such as new insurance products or a futures market, could be explored to “lessen these uncertainties”, note the authors. 

A “combination of different undertakings” could enable greater market adoption of this new form of credits, says MAS. “These include the relevant government’s agreement to enforce CFPP closures or insurance solutions to mitigate political risk that could lead to delays in the generation of carbon credits.”

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Hence, MAS and McKinsey have also published a template for engaging four principal stakeholders: capital providers, carbon credit off-takers, power off-takers and renewable energy asset owners.

The “standardised checklist” includes a cashflow model to compute the economic gap that could potentially be covered by transition credits, and a list of documents required to execute such a transaction.

See also: <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='https://www.theedgesingapore.com/news/sustainability/mas-launch-consultation-qualifying-managed-phase-out-coal-fired-power-plants?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>MAS to launch consultation on qualifying managed phase-out of coal-fired power plants</a>

In order to achieve a successful energy transition in Asia, the region must develop effective and scalable financing mechanisms to catalyse early phase-out of CFPPs, says Leong Sing Chiong, deputy managing director (markets and development) at MAS. 

“Today’s launch marks the beginning of a multi-year journey to pilot a broader, market-driven approach to finance the early retirement of CFPPs at scale,” says Leong. “This requires close collaboration among key stakeholders — asset owners, carbon credit buyers, financial institutions, multilateral development banks, credit methodology developers and international standard setters — to road test the approach and develop rigorous solutions suitable for broad based market adoption.”

MAS invites interested parties to join a coalition to identify suitable CFPPs and pilot transition credits into the early retirement of CFPPs. “These pilots — successes and failures — will give us the data and experience needed to refine our ideas and prepare for large-scale implementation.”

‘Mother of all transitions’

MAS managing director Ravi Menon has called accelerating the retirement of CFPPs the “mother of all transitions”. The regulator launched in June a consultation on its proposal to include the managed phase-out of CFPPs in the Singapore-Asia Taxonomy, which will be launched later this year.

According to the MAS, these coal-fired power plants must be economically viable, replaced by clean energy with equivalent electricity capacity, phased out by 2040 and not have a total operating duration exceeding 25 years, among other criteria.

The plant owner must also commit to no new development of coal-fired power plants and a transition plan to reach full alignment to 1.5°C by 2030.

In May, MAS’s chief sustainability officer Gillian Tan spoke about the economics of retiring CFPPs. “The economic viability of it is an issue… A lot of early phase-out models [are] very much premised on us being able to bring the costs of borrowing down such that you can buy out the incumbents, and then bring the lifespan down.”

The industry needs to find innovative ways to solve those challenges, said Tan, such as using carbon credits to “sweeten the economics slightly”.

'Transition credits' could sweeten deal for early retirement of coal-fired power plants: MAS, McKinsey paper

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