MAS and McKinsey investigate carbon credits to phaseout Asia’s coal power plants

The Monetary Authority of Singapore (MAS) and McKinsey & Company 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 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.

The paper examines the use of high-integrity carbon credits as a solution to bridge the economic gap in early retirement of Coal-Fired Power Plants (CFPPs). This approach involves quantifying the economic gap and financing required for early retirement, with, for instance, a 1 GW CFPP requiring around US$70 million per GW and estimated financing of US$310 million per GW. Transition credits, aligned with Core Carbon Principles, can help reduce this gap by generating revenue from emissions reductions through early retirement, contingent on host jurisdictions committing to not build new CFPPs and ensuring accurate emissions measurement. Additionally, mitigating transaction risks and implementing measures for a just transition are essential considerations for successful market adoption of this approach.

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 next steps, 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 were carried out to-date with industry practitioners across the carbon credit, energy financing, and project development space. 

Mr 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. This requires close collaboration among key stakeholders- asset owners, carbon credit buyers, financial institutions, MDBs, credit methodology developers and international standard setters, to road test the approach and develop rigorous solutions suitable for broad based market adoption. We look forward to working with like-minded partners to bring this to fruition.”

Mr Oliver Tonby, Senior Partner, McKinsey & Company, said, “Addressing climate change is paramount. One-fourth of global emissions are from coal power, with three-fourths from Asia. Urgent collective action is required to retire Asia’s 1,500+ GW of young coal plants. Innovative financing mechanisms such as carbon credits could potentially enable such transactions at scale. We believe this paper provides a globally relevant and economically viable approach for coal decommissioning, aligned with Just Transition principles. A practical pilot can enact these principles, curbing emissions and expediting the shift away from coal, which is vital for the 1.5°C pathway.”

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