Coal to Clean Credit & Renewable Energy Transition Initiative Assessment

GLOBAL INITIATIVES TOWARDS THE EARLY RETIREMENTS OF COAL FIRED POWER PLANTS

The urgency to address climate change and achieve global climate goals hinges significantly on the phase-down of coal in the coming decade. More than 90% of existing coal plants are shielded from competition due to regulations or long-term contracts, creating a lack of financial motivation for early retirement and their operation as planned could deplete two-thirds of the remaining carbon budget to limit the rise in global temperatures.

Asia faces a unique set of challenges in transitioning away from coal. With coal constituting nearly 60% of power generation in the region and energy demand projected to increase by two-and-a-half times by 2050.

In June 2023, The Rockefeller Foundation and Global Energy Alliance for People and Planet (GEAPP) introduced the Coal to Clean Credit Initiative (CCCI), an effort to set a global standard for carbon finance, incentivizing a just transition away from coal-fired power plants to renewable energy in emerging economies. Supported by Climate Policy Initiative (CPI), RMI, and South Pole, CCCI is collaborating with the Government of Indonesia to develop a roadmap for generating coal-to-clean credits

In September 2023, a working paper by The Monetary Authority of Singapore (MAS) and McKinsey & Company introduced Transition Credits and launched the Transition Credits Coalition (TRACTION), a collaborative effort with industry partners to develop solutions for utilizing transition credits as a credible financing instrument.

In December 2023, during COP 28, CCCI, with support from The Rockefeller Foundation, announced a collaboration with ACEN Corporation to explore a pilot project in the Philippines, potentially becoming the world's first coal-fired power plant to retire early using transition credits.

TWO METHODOLOGIES UNDER PUBLIC CONSULTATION

Currently, there are two methodologies undergoing public consultation within the framework of the two most established Standards.

Verra has conducted its first public consultation on a draft developed by the Rockefeller Foundation-led Coal to Clean Credit Initiative from December 4, 2023, to January 16, 2024. Another public consultation by Verra will follow, incorporating initial feedback into the draft methodology.

The Gold Standard has introduced a methodology concept in March 2023 and is inviting input from stakeholders through a 30-day public consultation. Gold Standard is actively collaborating with various working groups to support the goal of decommissioning existing coal power plants, including its involvement in the Glasgow Financial Alliance for Net Zero (GFANZ) and their Managed Phaseout of Coal Power Generation in APAC work group.

GOLD STANDARD :

Operating coal fired thermal power plants are commercial assets providing continuous economic gains to their stakeholders i.e. shareholders, investors, employees, contractors, vendors etc. who would be needed to be compensated to facilitate their accelerated phase-out.
The chosen renewable energy (RE) technology, intended to replace the coal-fired thermal power plant, faces implementation challenges, including financial, technical, capacity, market, and policy-related issues. To address these obstacles and ensure commercial sustainability, an extra revenue stream may be necessary during the operational lifetime, especially in debt servicing years.

CARBON MARKET WATCH / GOLD STANDARD ANALYSIS

1. DESCRIPTION OF THE METHODOLOGY

CARBON MARKET WATCH :

Risk of double claiming arises if the entity providing additional financial support seeks to (partially) claim the emission reductions achieved by the project. In such cases, the activity owner would only receive credits proportionate to its financial contribution relative to the total financing requirement.

2. PROJECT TYPICAL ACTIVITY

GOLD STANDARD :

A baseline plant would mean:

The power plant operates on coal as a primary fuel with other fossil fuels used only as secondary fuels.
The plant has a history of successful uninterrupted commercial operation of at least three years at the time of evaluation.
The plant shall be free of any mandate for an early closure and is expected to run through its remaining life time.
Historical techno-commercial operating data is available for projecting future commercial gains and baseline GHG emissions.
Phase-out (retirement) means stopping the commercial operation of a power plant having a remaining lifetime of at least five years and dismantling/decommission it so that it cannot be commercially operated anytime in future.

CARBON MARKET WATCH :

This definition will leave room to include plants that are not economically viable and therefore would not be additional to close. One element that should be considered to determine the eligibility of a plant is therefore the level of utilisation of its capacity. For example, a plant could be in constant operations for three years, but at a very low capacity. If it runs at, say, 10% of its capacity, this indicates that the economic case for running the plant is not good.

3. RES REPLACEMENT

GOLD STANDARD :

A project RE power plant would mean:

RE here means energy generation using RE technology solutions commercially available in the region.
Project plant is of an equivalent capacity to the baseline plant. Equivalent capacity here means capacity at a minimum electricity generation in kWh equal to that by the baseline plant.

CARBON MARKET WATCH :

This not a sufficient definition and will leave room for interpretation. Either the technologies that qualify have to be defined (solar, wind, geothermal among others, but certainly excluding gas and BECCS), or an emissions' performance standard (EPS) criterion has to be given

4. ADDITIONALITY

GOLD STANDARD :

Baseline plant:

Has been under uninterrupted operation in the most recent three years
Is not under any mandate to retire prior to its end-of-life or at least not earlier than five years. That the baseline Remains commercially competitive under the prevailing market conditions and is expected to continue to operate for its remaining life-time.
Its replacement with a new RE plant face barriers and need additional support to overcome the barriers.

Project plant:

The project plant may or may not be additional.
In case the returns from the project plant are below the benchmark return and the project plant qualifies the additionality test, additional revenue can be sought to support it.

CARBON MARKET WATCH :

Baseline plant:

A power purchasing agreement (PPA) should be required to demonstrate how long it has in 'remaining life
The phase-out ‘barriers’ need to be clearly identified and defined
It will be very difficult to anticipate the market conditions of a plant over several years. The current political and energy landscape is extremely fragile and fast-changing. External events can have extreme impacts on competitiveness as well (as the Russian invasion of Ukraine, or the covid-crisis, have shown, for example).

LESSONS FROM : EARLY COAL PLANTS RETIREMENT

As conversations and technical analyses on coal phase-out carbon credits unfold, promising opportunities arise for similar credits tied to fossil fuel supply. However, potential pitfalls must be carefully anticipated and mitigated :

1. Strong ecosystem: Prominent entities and institutions have initiated discussions on leveraging carbon credits to expedite the phase-out of coal-fired power plants. This involves tapping into technical expertise, financial institutions, and identifying potential pilot sites.

2. VCM potential: Gold Standard and Verra are currently developing methodologies, indicating the potential integration of fossil fuel-related carbon credits into the Voluntary Carbon Market

3. Point of attention: The primary concern for such initiatives lies in additionality, especially given the fragility and rapid changes in the current political and energy landscape like the Russian invasion of Ukraine has highlighted.