(Bloomberg) -- Lenders to power producers see momentum building in development of a novel form of carbon credits intended to advance the phase out of coal-fired power capacity.
Entities including the Monetary Authority of Singapore have advocated the introduction of transition credits, the sales of which would help offset a shortfall in revenue from power assets that are shuttered ahead of schedule.
Consumption of coal, which accounts for the largest share of the world’s power sector emissions, rose to a record last year driven by growth in China and India. Global ambitions to exit the fuel will rely on strategies to shift Asia’s developing economies to cleaner alternatives, and to manage the closure of a fleet of plants that remains relatively young.
“The only real practical solution to this is to find a financially sustainable way to close them down early. Then the question is — who’s going to pay,” said Tan Su Shan, head of institutional banking at DBS Group Holdings Ltd., which has worked with Indonesia’s government on the accelerated retirement of coal plants.
Closing down a 1 gigawatt plant five years early would require about $310 million of financing, McKinsey & Co. and Singapore’s central bank calculated in a report last year on development of the new credits.
A credit price at around $25 to $35 a ton is likely to be effective, DBS’s Tan said Wednesday at the Bloomberg Sustainable Business Summit. “Around that ballpark seems to be okay, it seems to work financially,” she said.
Philippines-based Acen Corp.’s plant in South Luzon is among facilities being targeted under pilot projects aiming to test strategies to accelerate coal closures.
Acen is working with Singapore’s central bank to “take that operating life, which right now ends in 2040, and potentially use transition credits to bring it up to 2030,” Jaime Urquijo, chief sustainability and risk officer at the energy company’s parent group Ayala Corp., told the summit.
As Singapore’s carbon tax is set to rise to between $30 and $60 by 2030 and companies are allowed to offset 5% of their taxable emissions via carbon credits, a transition credit would likely need to be cheaper to be attractive to purchasing firms, Urquijo said separately in an email.
The current cost of ensuring a “just and managed transition” of Acen’s plant is estimated at $40 to $60 per ton, he said.
About 30 partners including Temasek are also working with MAS on trials of the strategy. There’s also building interest in the potential to develop and trade transition credits, according to Patrick Lee, Standard Chartered Plc’s chief executive officer for Singapore and ASEAN.
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“Where there are projects which can generate carbon credits, we would look to see how these can be monetized as part of the financing, to channel more funds into these projects,” he said. “We would also like to see how these can be traded, as creating a liquid secondary market should help support the primary markets too.”
--With assistance from Sheryl Tian Tong Lee.
(Adds Acen’s comment on pricing in ninth paragraph.)
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