More regulatory support is needed to encourage the use of transition credits in Asean’s decarbonisation process
MAS report notes that governments play a pivotal role in setting baselines and creating an enabling environment for coal phase-out
[SINGAPORE] The energy transition momentum in South-east Asia has reached a milestone, as a coalition convened by the Monetary Authority of Singapore (MAS) looks to translate its last few years of work on transition credits into concrete projects and transactions.
During the first week of the United Nations’ climate change conference – known as COP30 – held in Belem, Brazil, MAS released a report highlighting ways in which coal plant owners, financial institutions and carbon project developers can structure transition credits transactions.
But without the right regulatory environment to support the development of renewable energy in South-east Asia, the use of transition credits to enable the early shutdown of coal plants might be limited.
Transition credits were first proposed by MAS and McKinsey in 2023 as a means to compensate coal plant owners for income lost when their plants are closed early.
These credits would be generated when a coal plant is retired earlier than scheduled and replaced by renewable energy.
The idea was for this new class of credits to increase the economic viability and scalability of early-retirement projects, which have long struggled to take off.
Due to the young age of many coal plants in Asia, it was deemed necessary to bring about the early phase-out of coal plants at scale – instead of letting them run their course – to prevent the locking-in of decades of carbon emissions.
Asia accounts for 50 per cent of global greenhouse gas emissions, of which a third is from coal plants.
MAS launched the global coalition – known as Traction – at the end of COP28 to identify mechanisms for transition credits to be utilised as a credible financing instrument.
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Transition credits were also being piloted at two coal plants in the Philippines, most notably the South Luzon Thermal Energy Corporation plant formerly owned by Acen, the energy arm of Philippine conglomerate Ayala Corporation.
Uncertainty in regional market
However, criticisms have emerged from various groups on the use of transition credits. Issues surround the accuracy of the quantity of avoided emissions, and whether the funds used to compensate plant owners could be used to open another coal plant elsewhere.
Some have questioned the rationale of developing a new and complicated asset class to facilitate the region’s decarbonisation, instead of doubling down on building up its renewable energy market, especially considering that these sources, particularly solar, are now among the cheapest.
However, after two years of work, the governments of Singapore and the Philippines, as well as Singapore investment company Temasek and 18 other entities comprising seven commercial banks, have stepped forward to declare their support of these transactions.
They said they will be looking to participate in these projects through offtake, financing and underwriting arrangements.
Besides attempting to shore up market confidence – and therefore, demand – for this nascent asset class, the MAS report also identified about one-third of coal-fired power plants in Asia as having the potential to generate this new class of credits.
With a total generation capacity of about 207 gigawatts, this translates to emissions reductions of about 1 gigatonne of carbon dioxide equivalent annually, which could form a potential supply pipeline of transition credits.
However, it remains unclear how much of these can actually result in transactions.
The MAS report noted that governments in general play a pivotal role in setting baselines and creating an enabling environment for coal phase-out by increasing transparency in national energy plans and policy interventions in the form of carbon regulations and grid upgrades to improve market readiness.
Unfortunately, South-east Asia is not exactly known for providing that supportive environment, especially when it comes to renewable energy.
Several renewable energy players have exited some regional markets in the last few years, including Equinor, Orsted and, most recently, EDP Renewables, citing regulatory uncertainty around project development.
This includes challenges around the issuing of land permits, restrictions on foreign ownership of renewable energy projects, and the lack of grid capacity and transmission infrastructure.
Without an enabling environment to develop South-east Asia’s renewable energy market, it is unclear how effective transition credits would be in facilitating the region’s decarbonisation.
At the end of the day, the value of transition credits lies in enabling the replacement of coal with renewable energy. Otherwise, they are just another financial product with no real-world impact.
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