Accelerating the retirement of coal-fired power plants is a critical decarbonisation lever.

• Asia accounts for 50% of global greenhouse gas emissions, of which a third is from coal-fired power plants.
• If these plants operate as planned, they will exhaust about two-thirds of the carbon budget that we have remaining to keep the rise in global temperatures from increasing to within 1.5 degree Celsius.

However, phasing out coal is particularly challenging for Asia in three ways.

1. First, the scale: Coal accounts for nearly 60% of power generation in the region. Asia’s energy demand is projected to increase by two-and-a-half times by 2050, on the back of economic development, population growth, and urbanisation.
2. Second, the downstream social impact: Coal economy is also a key source of employment, particularly among the developing nations. Based on IEA’s estimates, of the 8.4 million employed globally across the coal value chain, more than 80% of these individuals are in Asia.
3. Third, the profile of Asia’s coal: Asia’s coal plants are young, less than 15 years old on average. This makes the economics of phasing out coal more challenging, especially as new coal plants continue to be built to keep pace with energy demand.

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.

In September 2023, MAS and McKinsey & Company jointly published a working paper setting out how high-integrity carbon credits (termed as “Transition Credits”), arising from the emissions reduced through retiring a CFPP early and replacing with cleaner energy sources, can be utilised as a complementary financing instrument to accelerate and scale the early retirement of CFPPs. The credits must be aligned with globally recognised standards such as the Core Carbon Principles (CCPs) set out by the Integrity Council of Voluntary Carbon Market (ICVCM) and other Article 6 integrity requirements, as mandated by the United Nations Framework Convention on Climate Change (UNFCCC). MAS will explore ways for transition credits to align with the CCPs, in consultation with the ICVCM.

Simplified cashflows from early retirement of illustrative CFPP in Indonesia by 5 yearsNPV for business as usual; calculated based on expected net earnings based on the existing PPA of the CFPP. Illustrative numbers are based on the following key assumptions: 1GW Indonesia subcritical plant at 50% capacity factor, with an age of 10-12 years, 15 years PPA tenure remaining, early retirement by 5 years, and cost of capital in local currency at 8-9%

Source: MAS and McKinsey working paper economic model

A whole-of-system approach is needed to develop transition credits into a viable market solution. To further develop the approach and establish solutions for Transition Credits, MAS launched the Transition Credits Coalition (TRACTION) with the support of industry partners. MAS also collaborated with partners to test the feasibility of integrating transition credits for early CFPP retirement through pilot projects. 

Media Releases

• MAS media release, published on 4 December 2023, on MAS Launches Coalition and Announces Pilots to Develop Transition Credits for the Early Retirement of Asia’s Coal Plants
• MAS media release, published on 26 September 2023, on MAS and McKinsey Explore the Use of High-integrity Carbon Credits to Accelerate and Scale the Early Retirement of Asia’s Coal-fired Power Plants

Related Resources

• MAS and McKinsey Joint Working Paper on Accelerating the Early Retirement of Coal-Fired Power Plants through Carbon Credits
• Update on progress of pilot projects at FAST Conference 2024: From Commitment to Action: Accelerating Change through Transition Credits | Ecosperity Week 2024 (youtube.com)