Category: Retiring Emitting Assets

Lower Hanging Fruit in Filipino Coal Retirement

Exhibit: Economic Value of Filipino Coal Power Plant PSAs
($/ton CO2 on Left Hand Scale; $MM/MW on Right Hand Scale)

Key Points: A study of the costs to retire coal plants in the Philippines finds low hanging fruit. The economic value of the PSAs, a linchpin in the cost to buy them out, is less than $30/ton of avoided CO₂ for just over ½ of the fleet. The study comes as momentum is building for coal plant retirement financing solutions, including carbon crediting.

A study last month of the costs of early retirement of coal fired power plants (CFPPs) in the Philippines. TransitionZero, a climate analytics not-for-profit assessed the cost of retiring all of the Philippines coal fired power plant (CFPP) fleet. Specifically, it reviewed the economic value remaining in the 209 existing Power Supply Agreements (PSAs) that govern the price of power paid to plant operators. The economic value in the PSAs should have a large bearing on the (negotiated) cost to buy out the PSAs, which is critical to utilities/governments if they are to retire their CFPPs early.

The study comes as there is some momentum building in CFPP closure in the country. At COP28 the Rockefeller Foundation’s Coal to Clean Credit Initiative (CCCI) and Monetary Authority of Singapore (MAS) announced (somewhat overlapping) exploratory programs for single plant closure. Both announced that they are working with ACEN Corporation of the Philippines to consider use of such credits as part of the early closure of the South Luzon Thermal Energy Corporation (SLTEC) coal plant. (For more of an update on CFPP retirement financing momentum see here.) The Philippines does not have a Just Energy Transition Partnership that (begins to) structure international support for its transition, but it is looking to partner with the World Bank and other development agencies.

The most significant cost of retirement is generally the cost to buy out Production Service Agreements (PSAs) with owners/operators of the CFPPs. For perspective, the actual cost of retiring a CFPP (decommissioning, dismantling, etc.) in the Eastern Hemisphere has been estimated at $58,000 per megawatt (MW). Per the TransitionZero study, 70% of the Philippines’ plants have a economic value over $500,000 per MW (and the highest is $2.9MM per MW). See Exhibit. Although the cost to buy out PSAs and to retire a CFPP is by no means the only criterion for prioritizing plant closure, this (wide range of) expense can no doubt inform that process.

~55% of CFPP generation in the Philippines could be retired for a cost per avoided CO₂ that is well within current carbon costs. The TransitionZero study suggests that if PSA buyouts occurred at their economic value, ~55% of CFPP generation could be replaced for below $30/ton of avoided CO₂. See Exhibit. For reference, this is below carbon pricing in most Western compliance markets (e.g. the European ETS is currently $68/ton) and well below more recent estimates of the Social Cost of Carbon, including the U.S. EPA’s late 2022 estimate that started at $190ton).

Details from the TransitionZero study:

• The Philippines has 58 coal “units” (many CFPPs are comprised of multiple units) in operation with 12.2 Gigawatts of capacity. There are a total of 209 signed PSAs that represented ~2/3 of generation (in 2022). The economic value of all the PSAs is estimated at $7.1B.
• ~20% (from eight coal units) of the country’s coal fired power generation could be retired for less than $10/ton of avoided CO2, with an estimated value of $275MM;
• ~55% (from 26 units) for less than $30/ton with value of $1.8B; and
• ~75% (from 39 units) for less than $60/ton with value of $3.3B.

We believe the costs to retire coal should be considered separately from the costs to replace the power. It is worth noting that TransitionZero concludes that the cost of retiring the Filipino fleet of CFPPs is $140/ton of avoided CO₂. This includes the cost of replacing the capacity with solar and battery storage.

Although it is helpful to understand that the total costs to a country/power system includes replacement power, it is important to keep the analyses separate. This is because, most importantly, combining these costs, as is done in the TransitionZero exercise, accounts for only the capital costs of the solar and battery systems; it does not address, for example, operating costs savings of renewables relative to CFPPs. At the same time, the total capital requirement includes far more than just replacement power. For example, grids will require significant investment as well, in new transmission lines to connect the new sources of power (if different than CFPP sites) and frequency regulation to handle intermittent power.

February 5, 2024

Coal retirement updates from COP28  

Source: Pioneer Press

Key Points: Actors in coal plant early retirement signaled progress at COP28. ADB’s ETM hit a milestone. Carbon offset initiatives announced (1) individual plant pilot programs and a draft methodology, with the suggestion that crediting might accelerate retirement by 10 years vis-a-vis refinancing alone, and (2) a framework for jurisdictional level crediting.

The grind for ADB’s first Energy Transition Mechanism (ETM) continues. ADB signed a framework agreement with Cirebon Electric Power for the early retirement of its Cirebon-1 plant. This follows a Memorandum of Understanding (MOU) signed last December by the parties, which include Indonesian utility Perusahaan Listrik Negara (PLN) and the Indonesian Investment Authority (INA). The latest announcement lacks details; along with the long wait, this hints at the challenges in coming to terms. The release did, however, mention that the transaction is to be finalized in 1H2024 and that the retirement date was pushed forward to 2035 from the MOU’s indicative 2037. Please see here for more detail on last year’s MOU and background on the ETM concept.

Carbon crediting as a financing supplement to close single plants… COP28 also marked some progress in using carbon offset credits to fund closing coal plants. The Rockefeller Foundation’s Coal to Clean Credit Initiative (CCCI) and Monetary Authority of Singapore (MAS) announced (somewhat overlapping) exploratory programs for single plant closure. Both announced that they are working with ACEN Corporation of the Philippines to consider use of such credits as part of the early closure of the South Luzon Thermal Energy Corporation (SLTEC) coal plant.

The programs’ collaboration with ACEN follows that company’s late 2022 refinancing of SLTEC in the world’s first and so far only ETM (that was also notable because it included no concessional financing). The COP28 CCCI announcement suggests that the credits enable the SLTEC plant to retire a decade earlier (by 2030) vs. last year’s announcement.

Separately in the announcements, CCCI is working with carbon standard setter Verra to issue the world’s first transition credits. (Verra has published its Draft for Public Consultation of the methodology.) And MAS’s announcement notes that its coalition will explore another pilot in the Philippines island of Mindanao in collaboration with ADB and using ETM.

…And also at a “system” level. The Energy Transition Accelerator, which was introduced at last year’s COP, published a “core framework” for jurisdictional-scale (e.g., country-wide) transition credits to help finance energy transitions. The program offers the benefits, relative to individual plant crediting, of working at significantly larger scale and addressing risks of leakage (i.e., that power foregone from retired coal plants will be replaced by power that is generated from other fossil-based plants). The ETA states in its framework that any credits are to be contingent on the implementation of a Just Energy Transition Partnership (JETP) — a nation (or subnational)-wide plan for transition to clean energy. JETPs, bespoke agreements that are now in five countries, are anchored by planned international concessional funding, which is then to be supplemented by significant private financing.

12/12/2023

Indonesia Navigates Energy Transition Planning

Exhibit: Envisioned Funds Flows for Indonesia Energy Transition

Source: Government of Indonesia, Ministry of Finance

Key Points: Indonesia has delayed release of its Just Energy Transition investment plan. The issues create a laundry list of the challenges such plans face, although a draft points to some progress/concessions. A related carbon credit program may be announced by year-end. Meanwhile, the first Energy Transition Mechanism also needs to be finalized.

Indonesia JETP investment plan release delayed. Originally scheduled for release August 16, Indonesia’s Just Energy Transition Partnership (I-JETP) Secretariat announced instead that publication of its US$20 Billion (B) investment plan would be delayed until later this year. The Secretariat did submit a draft to the Indonesian government and I-JETP partners. The rationale for the delay is the need for more time to develop a “technically credible pathway,” although press coverage/analysis also credited the delay to:

• Expensive financing (1): insufficient inexpensive financing being offered, including specifically that too little was in the form of grants (0.8% of the total $20B as of June 2023);
• Expensive financing (2): concern that the loans at commercial rates would now be prohibitively expensive in light of the higher global interest rate environment
• Just Transition concern: the need for (more) community involvement
• Investor community perception: feedback from some commercial lenders that they are reluctant to be seen as funding coal plants, even if it is for early retirement (which suggests that the I-JETP must still “build the book” to fund the $10B of the $20B package that is to come from commercial sources).
• Broadening the scope: to include what are known as “captive” plants — coal plants that are to be built to provide power specifically for metal smelters (Indonesia is planning to build 34 smelters across different minerals to add to the 19 currently operating as the country seeks to retain more of the value from its mineral resources, including through processing).
• (Perhaps) too much to focus on: rather than trying to figure out spending the $20B, at least at least one Indonesian official has encouraged focusing on the nearer term (next 2 years), on how to spend the first $2B, and on solidifying governance of the program.

The Indonesian government appears open to making a concession on local content rules. It was reported that the draft investment plan includes the recommendation for Indonesia to relax its local content rules for solar power production, which require 70% of the materials to be made locally, until 2025 when local PV manufacturing is expected to commence.

A carbon credit initiative to supplement JETP funding to be announced by year end. The Deputy Head of the I-JETP Secretariat noted in late July that carbon credits are likely going to be necessary as part of funding and that he thought a “mechanism” for crediting would be ready by late this year. This was consistent with earlier messaging from the Indonesian government in the sense that it planned/intended that its financial contributions to funding the energy transition would be recouped through credit offset sales (see Exhibit, steps 7 and 8).

To offer some additional perspective, indicative financing arrangements, set by the government of Indonesia, Asia Development Bank (ADB) and the World Bank Group (WBG), called for the Government of Indonesia to contribute $1.3B of a total $5.1B in an initial phase of spending (in this iteration, the WBG’s Climate Investment Fund is to provide $0.5B, MDBs are to provide $2.1B and private capital is to provide $1.2B). This phase is designed to retire up to 3 GW of coal fired plant capacity, along with repurposing the site, supporting grid stability, and investing in Just Transitions for affected communities. As depicted, the carbon avoidance crediting would flow to the Indonesian government to recoup its investment.

Meanwhile, the partners are still working on finalizing the first ETM transaction. The JETP model envisions shutting down coal plants early using a financial mechanism, executed at either an individual plant level or at a corporate level to encompass multiple plants. This mechanism is referred to as an Energy Transition Mechanism (ETM). The first proposed ETM is in Indonesia; a Memorandum of Understanding (MOU) was signed with the Independent Power Producer owner/operator in November 2022 for the plant, Cirebon, 1 to be refinanced with ~US$300 Million of lower cost debt in exchange for a commitment to close the plant early.  Per an ADB presentation in late June, Feasibility, Just Transition, and Strategic Environmental & Social Assessment reports were all still pending and all needed to finalize the agreement.

JETP Background. JETPs are financing cooperation mechanisms to help coal-reliant countries transition to cleaner energy. The goal is for the specified countries to develop their own comprehensive transition plans and that initial, catalyst funding is to be provided by a set of donor countries. The first JETP announced was for South Africa in late 2021, with financing support to be provided by the U.S., France, Germany, the UK, and the European Union. South Africa published its corresponding investment plan for the first five years of its transition path in late 2022. A second tranche of transition countries were announced in 2022 for Indonesia, India, Senegal, and Vietnam, with the donor pool expanding to include Multilateral Development Banks (MDBs) and development finance agencies. The Energy Transition Accelerator, announced by the U.S. at last year’s COP, may also tie in with JETPs.

ETM Background. The ETM was conceived as a mechanism to encourage the early retirement of coal fired power plants and (possibly) help fund power generation replacement with zero-emissions sources. ETMs are expected to include (1) running the coal plant for some period of time to continue to support the financial returns of the plant owners, (2) some low cost (concessional) financing to allow owners to retire the plants earlier than originally intended (while preserving financial returns) and (3) possibly some form of carbon mitigation-based financing, perhaps through the sale of carbon offset credits or from philanthropic sources. ETMs can “house” single coal plants or multiple and are an expected tool in the JETPs.

8/30/2023

ETMs Progress and Appear to Evolve

Key Points: November’s MOU for an Energy Transition Mechanism to accelerate closure of a coal fired power plant in Indonesia marks progress on the second ETM and the first to use concessional capital. Notably, it does not involve a change in ownership, which suggests greater capital efficiency. The first ETM, in the Philippines, was executed in early November.

Memorandum of Understanding signed to accelerate the retirement of coal plant Cirebon-1.  The Asia Development Bank (ADB) signed the MOU with plant owner Cirebon Electric Power (CEP), the Indonesian utility Perusahaan Listrik Negara (PLN) and the Indonesian Investment Authority (INA). Executing on an agreement to close the coal fired power plant (CFPP) would mark the first use of concessional capital to fund the financial mechanism, known as the Energy Transition Mechanism (ETM). Concessional capital is expected to be an important element (to lower financing costs) in adding scale to ETM-based CFPP closures. See last paragraph for an ETM concept description.

In a change from the original ETM concept, CEP appears set to remain the owner. With details still needing to be sorted, ADB did provide some general guidelines in its communications. These included an indicative closure year of 2037 (25 years after operation start vs. a notional life of at least 40 years) and indicative new financing of US$250-300 Million. (We understand further that the final terms may be adjusted over time as it will depend on decommissioning and/or repurposing costs borne by CEP, which will be decided as it gets closer to the plant’s decommissioning date.) ADB indicates that it is providing the funds, including concessional capital (some of which is from the Climate Investment Fund) and from its private sector operations department.

It appears there is to be no change in ownership and new funding would all be in the form of debt, which makes it different from the original ETM concept and the recently executed ETM transaction in the Philippines (see below). Thus, it is (only) the interest expense savings from the refinancing that compensates CEP for profits foregone due to early plant closure. (We can imagine the interest arbitrage has narrowed given higher recent borrowing rates; presumably that has a bearing on closure timing and/or how much concessional capital is required.)

With that said, we note with interest INA’s involvement, which suggests that equity could play role in the final terms. Private capital is actively monitoring ETM progress, but the announcement seems to confirm the supposition that private investors are more likely waiting on the model to be established — and perhaps for a few deals to be executed and for clear taxonomy “accepting” coal transition financing.

There has been one completed ETM transaction to date. ACEN Corp., a subsidiary of the Ayala Group, sold the South Luzon Thermal Energy Corp (SLTEC), which owned a single CFPP, into a special purpose vehicle (SPV) called ETM Philippines in early November for US$129 Million (~US$500/KW of capacity). The plant is to be retired by 2040, 15 years ahead of its technical life, and repurposed. ACEN has indicated it intends to use the proceeds from the sale to invest in more renewable generation. Notable in the transaction was that it did not include any concessional funding (from multilateral development institutions).

ETM description. An ETM is a financial mechanism that seeks to offset the foregone profitability for the owner of early closure of a CFPP. As originally envisioned, the plant is sold into a Special Purpose Vehicle, which creates the potential for new ownership and a payout to the current CFPP owner, and recapitalized — plausibly from a traditional structure that has considerable equity to one that is debt-heavier. And it envisions using concessional capital as needed to lower the cost of borrowing to save on financing costs. An ETM may include a separate structure to build replacement (renewable) power generation; it is plausible that such an additional element may create more opportunity for the investors to earn a return on their capital.

December 6, 2022

As Public Funding Commences for Abandoned Well Program, Private Capital Can Help

U.S. State Eligibility for Initial + Formula Grants to Clean Up Orphaned O&G Wells 

Key Points: Initial funding eligibility for U.S. states for Oil and Gas well cleanup was announced at the end of January. We maintain the view that a “carbon avoidance credit” — a tradable carbon offset — tied to plugging abandoned wells could let private capital subsidize these public funds. In a PA example, the offsets could generate ~15% of well costs.

Initial grants and first phase of formula grant eligibility announced. At the end of January, The U.S. Department of the Interior announced the first phases of funding availability to clean up Oil and Gas (O&G) wells, part of the $4.7 Billion in total funding allocated to create this program under the Bipartisan Infrastructure Law.

The announcement addressed two of three authorized types of grant funding: 1) Initial Grants, which are a flat $25 Million per eligible state (26 states have engaged thus far), designed to help them establish clean-up programs and commence plugging wells; and 2) Formula Grants, which are allocated to the states based on a combination of the number of documented orphaned O&G wells in the state (private lands only), the number of jobs lost from March 2020 through November 2021 and the estimated cleanup costs per well in each state. Only the first phase, or $500 Million, of Formula Grants have been authorized thus far, but the eventual combined total of Initial + Formula Grants is to be $2.6 Billion (see the above chart for estimated allocations by state). The last grant type is Performance Grants to which $1.5 Billion is allocated; the balance of the $4.7 Billion reflects allocations to Federal and Tribal land well clean-up.

The opportunity for private capital to help subsidize the costs. As we addressed recently, abandoned wells have been shown to have consistent levels of methane emissions that are inexpensive to measure. Proper closure of these wells therefore creates a measurable benefit in terms of permanent GHG avoidance, which suggests they can constitute attractive carbon offsets. As illustrated in the above referenced article, avoided methane for an abandoned well in PA, priced comparably to recent trades on CBL Nature-Based Global Emissions Offsets (a voluntary market) suggests carbon offsets could fund ~15% of estimated plugging costs for that well.

The scope of the abandoned well problem in the U.S. The EPA has estimated there are 2.1 million unplugged abandoned O&G wells in the U.S. (for comparison, the 26 states’ Notification of Interest identified ~130,000 wells, which highlights the important challenge of well discovery in the program). The EPA has further estimated that average emission per well is 0.13 metric tons of methane per year. For more context on the abandoned well problem and current consideration of how to avoid adding more orphaned wells, please see a recent report by the Payne Institute here.

2/18/2022