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
Singapore, 26 Sep 2023… The Monetary Authority of Singapore (MAS) and McKinsey & Company today jointly published a 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.
2. 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
3. To address this, the 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 with cleaner energy sources. The key elements of this approach are:
- To retire a CFPP early, it is important to quantify the economic gap
The economic gap represents the forgone revenues arising from retiring a CFPP ahead of the end of its existing PPA.as well as the financing needed For the purposes of acquiring or refinancing the CFPP.for the transaction to be viable. For example, the economic gap to retire a The financing in this example A crediting methodology will set the conditions under which carbon credits can be issued and how emissions reductions are quantified. Several methodologies for similar form of transition credits are currently under development, such as the Coal to Clean Credit Initiative.the early phase-out of CFPPs. It makes clear that such a attempt to develop a new carbon credit methodology
- creates risks and uncertainties, as transition credits will only be issued much later when the emissions reductions are verified.
4. 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.
5. As next steps, MAS 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 .
6. 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
7. 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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