Singapore Regulator Floats High-Integrity Carbon Credits to Expedite Closure of Asia’s ‘Young’ Coal-Fired Power Plants

The Monetary Authority of Singapore (MAS) and McKinsey & Company have jointly published a working paper setting out how high-integrity carbon credits can be utilised as a complementary financing instrument to accelerate and scale the early retirement of coal-fired power plants (CFPPs).

The paper explores the conditions for generating such carbon credits and identifies what is needed to develop a high-quality market for such credits.

The MAS says managed phase-out of CFPPs is critical for Asia’s energy transition and must take place alongside the development of clean energy sources. In the absence of mandatory managed phase-out requirements, stakeholders of CFPPs have little motivation to shorten their existing power purchase agreements (PPAs).

Notwithstanding existing efforts to finance the early retirement of CFPPs, the large and young fleet of CFPPs in Asia means that additional financing mechanisms are needed to improve the economic viability of such transactions and to crowd in significant private capital at scale.

To address this, the MAS and McKinsey paper explores the use of high-integrity carbon credits to reduce the economic gap for early retirement of CFPPs. It considers the possible generation of “transition credits”, arising from the emissions reduced through retiring a CFPP early and replacing it with cleaner energy sources. The key elements of this approach are:

  • Quantifying the economic gap – To retire a CFPP early, it is important to quantify the economic gap as well as the financing needed for the transaction to be viable. For example, the economic gap to retire a CFPP with a 1-gigawatt (GW) capacity five years earlier will be US$70 million per GW. The financing in this example is estimated at US$310 million per GW.
  • Leveraging transition credits – The revenues from the sale of transition credits could reduce the economic gap from retiring a CFPP early. These credits must be of high integrity which includes alignment to the Core Carbon Principles set out by the Integrity Council for the Voluntary Carbon Market. The paper does not attempt to develop a new carbon credit methodology for the early phase-out of CFPPs. It makes clear that such a methodology should include commitments by the host jurisdiction not to build new CFPPs, and provide for the accurate measurement and monitoring of actual emissions reduced.
  • Mitigating key transaction risks – The long-term horizon of such transactions creates risks and uncertainties, as transition credits will only be issued much later when the emissions reductions are verified. A combination of different undertakings could enable greater market adoption of this new form of credit. These include the relevant government’s agreement to enforce CFPP closures or insurance solutions to mitigate political risks that could lead to delays in the generation of carbon credits.
  • Just Transition – It is crucial to assess and implement measures to mitigate potential harm to livelihoods and communities arising from the early retirement of CFPPs. This includes accounting for such costs in the financing of early CFPP retirement.

A Multi-Year Journey

MAS and McKinsey have also proposed a template that provides detailed steps and sample tools for market participants to assess and execute such transactions. This includes a cashflow model to compute the economic gap that could potentially be covered by transition credits and a list of standardised documents required to execute such a transaction.

As the next step, MAS invites interested parties to join a coalition of partners to further validate this transaction approach, and identify suitable CFPPs to pilot integrating transition credits into the early retirement of CFPPs. This builds on the extensive engagements that have been carried out to date with industry practitioners across the carbon credit, energy financing, and project development space.

Leong Sing Chiong, Deputy Managing Director (Markets & Development), MAS, said, “To achieve a successful energy transition in Asia, we need to develop effective and scalable financing mechanisms to catalyse early phase-out of CFPPs. 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.