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