Embarking on a new journey to retire coal-fired power plants early
Coal constitutes the largest contributor to energy-related carbon emissions on a global scale. In Asia alone, carbon emissions from 2,000 coal-fired power plants (CFPPs) are responsible for nearly emitting ~7.2 Gt of carbon dioxide which accounts for 20 percent of the world’s total emissions. These plants are young, with an average age of less than 15 years and have long-standing power purchase agreements. While various efforts are currently underway to promote the early decommissioning of CFPPs, these will take time and are challenging to scale.
Taking an initial step toward accelerating change, the Monetary Authority of Singapore (MAS), and McKinsey & Company jointly published a working paper proposing an end-to-end approach that uses transition credits to effectively retire CFPPs early. Speaking at the launch of the paper at MAS on September 26, MAS’ Leong Sing Chiong, Deputy Managing Director for Markets and Development, outlined how this approach could speed up the move to retire coal plants early that in a way that is credible and effective. Such a bold recommendation, said McKinsey’s Senior Partner Vishal Agarwal as he shared the findings of this paper, is but the start of a journey where stakeholders who share a commitment to building a future with sustainable energy are called to do their part. This paper, he mentioned, is not an end in itself but a tool for engagement, to open conversations that can lead to action.
Solutions and insights are discussed across four key areas in the paper and form an integrated framework:
- The economics of retiring CFPPs early: The extent to which transition credits could potentially close the economic gap that might arise from early retirement transactions.
- Carbon credits as an instrument for early retirement: Unpacking what’s needed for transition credits to be considered a credible financing tool, which would include ways to scale them and to unlock demand from buyers.
- Financing early retirement transactions: Identifying barriers to financing such transactions with transition credits, and suggesting potential solutions to overcome these barriers, including ways to mitigate risk.
- Early retirement project development and integrity: Illustrating possible transaction structures and appropriate safeguards in line with Just Transition principles, as well as identifying stakeholders needed to enable such transactions.
Accompanying this paper is a template detailing steps and offering sample tools that market participants can use to assess and execute the early retirement of CFFPs as well as a cashflow model for computing the economic gap that transition credits could potentially reduce, and a list of standardized documents required to execute such a transaction.
The next step is to get this initiative moving. McKinsey’s Partner Asilah Azil moderated a panel with MAS’ Gillian Tan, Marisa Drew from Standard Chartered, Jackie Surtani from Asian Development Bank and DBS’ Helge Muenkel, which expressed great optimism for its possibilities. The panel unanimously shared the need to act collectively and adopt an ecosystem approach, while also showing clear awareness of the challenges on the road ahead—including the need to establish market confidence, a clear and transparent playing field, high-integrity carbon credits and ultimately to persuade the many players already invested and dependent on coal to make the shift to cleaner energy. Crucially, the panel agreed on the importance of working together with a wide variety of stakeholders to find solutions and learn by doing. Interested parties are invited to join a coalition of partners to further validate this approach and identify suitable CFPPs to pilot it with.
Read the full paper here.
Parties interested to be part of the coalition or have potential pilot projects are invited to write to transition_credits@mas.gov.sg.