By Eric Francia
MANILA, Philippines — The beginning of a year typically ushers renewed hope, and I believe that there is much to be hopeful for. The recently concluded COP28 held in Dubai signaled the “beginning of the end” for the fossil fuel era. For the first time ever, signatories of the United Nations Framework Convention on Climate Change (UNFCCC) penned an agreement to “transition away from fossil fuels in energy systems, in a just, orderly and equitable manner.” The parties also agreed to the tripling of renewable energy capacity and doubling of energy efficiency improvements by 2030. This puts the onus on UNFCCC signatory nations, which includes the Philippines, to set ambitious goals and initiatives to shift energy systems from fossil fuel to renewables, and help attain the 1.5-degree temperature limit.
In the case of the Philippines, the country has a liberalized power sector and a well-functioning electricity market. Amidst steady growth in electricity demand and continuing moratorium for the construction of new coal plants, the country’s power supply situation is expected to remain relatively tight in the short to medium term. The country continues to rely on fossil fuel, including coal fired power plants (CFPP) which account for more than half of the country’s supply. As such, the Department of Energy (DOE) is empowering the private sector to make choices related to transitioning from fossil fuel to renewable energy, “encouraging a voluntary early and orderly decommissioning or repurposing of coal-fired power plants, while securing a stable supply and addressing the climate emergency by ramping up our renewable energy target of (35 % share by 2030 and) 50% share by 2040.”
ACEN, the listed energy platform of Ayala Group, is leading the charge in the energy transition in the Philippines and around the region. We established Ayala’s energy platform from a standing start in 2011. By 2019, fossil fuel power plants accounted for over 70% of ACEN’s portfolio while renewables capacity was only at around 150MW. Over the last five years, we accelerated the scale up of renewables, growing 30x to 4500MW of renewables capacity and accounting for 98% of the company’s generation portfolio. ACEN aspires to reach 100% renewable generation by 2025, 20GW renewables capacity by 2030, and net zero GHG emissions by 2050.
Aside from scaling up renewables, ACEN is also pioneering initiatives in early coal retirement. The company successfully implemented the world’s first market-based Energy Transition Mechanism (ETM) which reached financial close in November 2022. The transaction involved the divestment and committed early retirement of the 246MW South Luzon Thermal Energy Corp. (SLTEC) coal plant, and its transition to cleaner technology by 2040 when the CFPP completes 25 years of operations. As the operating life of CFPPs typically reach up to 50 years, the groundbreaking ETM initiative potentially reduces up to 25 years or 50 million tons of carbon emissions. The ETM was supported by debt from BPI and RCBC, and equity investments from insurance companies such as GSIS and Insular Life.
While the 2040 CFPP retirement plan is laudable, it may not be enough to meet our climate goals. ACEN recognizes the position of International Energy Agency (IEA), that is, if we are to attain the 1.5 degrees limit, the world would need to reduce coal emissions by 55% between 2022 and 2030. This would certainly be challenging for Southeast Asia which has the fourth largest CFPP installations globally, a growing demand for electricity, and have among the youngest CFPP fleet with an average age of under 15 years. With that said, this should not be a reason for Southeast Asian companies to do nothing. To this end, ACEN gave itself the option or the right to reacquire the SLTEC coal plant as early as 2030, in the event that the right mechanism to incentivize accelerated CFPP retirement emerges.
Such mechanism is taking shape in the form of Transition Credits (TC). TCs are high-integrity carbon credits that are granted to projects that enable the early retirement of CFPPs and their replacement with clean energy, while ensuring a just transition. The mechanism did not occur overnight; we can trace its roots to the landmark COP21 Paris agreement, with Article 6 allowing the international transfers of carbon credits to help countries achieve their emission targets, and the creation of a market mechanism to enable and incentivize private sector to participate in decarbonization initiatives. Implementing rules of Article 6 were subsequently agreed in 2021 during COP26 in Glasgow. This has therefore set in motion pioneering initiatives in the carbon markets space.
I recently came back from COP28 in Dubai with much hope and motivation. In advance of the Parties’ landmark agreement to transition away from fossil fuels, ACEN, together with Rockefeller Foundation’s Coal to Clean Credit Initiative (CCCI) and the Monetary Authority of Singapore (MAS) announced an exciting collaboration to implement the world’s first coal-to-clean credit pilot project. The initiative will help road test the new methodology being developed by CCCI, and hopefully jumpstart the market for transition credits. MAS also signed a second pilot project with the Asian Development Bank involving a coal plant in Mindanao.
This puts Singapore and the Philippines at the forefront of this groundbreaking initiative, which if proven to be successful and scalable, can be a game changer in the energy transition space and championing climate action.
Singapore is the first country in Southeast Asia to put a price on carbon through a carbon tax regime. Singapore’s carbon tax is expected to reach SGD 50-80 per ton (USD 38-60) by 2030. In contrast, Europe’s Emissions Trading Scheme (ETS), which uses a “cap and trade” system, has carbon price currently hovering at around Euro 80 per ton. While Singapore-based companies are encouraged to reduce their direct carbon emissions and therefore reduce their carbon tax liabilities, companies are allowed to offset a portion of the carbon tax through the purchase of high integrity carbon credits from international carbon markets. Japan also has its own initiative through the Joint Crediting Mechanism (JCM), which provides carbon financing to partner countries which includes the Philippines. Hopefully, carbon schemes in Europe and other countries will also tap into international carbon markets under Article 6 of the Paris Agreement. This presents a significant opportunity for emerging markets such as the Philippines to leverage carbon financing and enable the accelerated transition from fossil fuel to clean energy.
ACEN’s pilot project seeks to increase its ambition by accelerating the transition of SLTEC coal plant to cleaner energy by 2030, ten years earlier than what is already an aggressive retirement schedule. Proceeds from Transition Credits will help fund (1) replacement cash flows and asset write-off from the early CFPP retirement, (2) subsidy to ensure affordability of clean and reliable energy replacement (ie. renewables integrated with energy storage), and (3) the just transition of affected communities and workers, as well as the responsible decommissioning of the CFPP.
The Philippines’ competitive market structure arguably presents an opportunity for the private sector to move faster and leverage carbon financing opportunities potentially ahead of counterparts from regulated markets. If scaled successfully, this new mechanism can attract multi-billion dollars worth of inflows into the country that will help fund our energy transition, create new green jobs, boost the economy and help the country attain its goal of reaching 50% renewables share by 2040. With two horses in the race and possibly more to follow, the Philippines has the opportunity to demonstrate to the world that transition credits is a compelling mechanism that can and should be leveraged to accelerate the transition from fossil fuel to renewables, and swiftly build momentum around the landmark COP28 agreement. Isn’t this something to be hopeful for?