Credits Start the Clock on Asia’s Transition from Coal

New instruments are raising hopes of early retirement for Asian plants, but Old King Coal is being resuscitated temporarily in the US.

While long-industrialised countries are struggling to administer the last rites to ageing and uneconomic coal-fired power plants, developing nations with younger fleets are adapting familiar tools to build transition momentum.

Transition credits – a derivative of carbon credits – are being touted in Asia-Pacific as a way of incentivising owners to close plants early, shortcutting the increasing cost-competitiveness of renewable energy alternatives. Proponents include the Monetary Authority of Singapore (MAS) and the Asian Development Bank.

A recent report from the Institute for Energy Economics and Financial Analysis (IEEFA) said transition credits have the potential to establish “realistic carbon price benchmarks” and stimulate market development in the region.

But this endorsement came with a number of caveats.

“Transition credits are a potential solution, but not yet a golden one,” said Ramnath Iyer, IEEFA‘s Sustainable Finance Lead for Asia, pointing to the fungibility problem facing the nascent market.

Pilot projects have not yet brought transition credits to market amid concerns that the widely varying emissions profiles of different plants – deriving from operating lifespan, jurisdiction, or even type of coal used – will make it difficult for investors compare like with like.

“There is a risk that no two transition credits can be treated the same,” Iyer told ESG Investor. “Markets thrive on liquidity, uniformity and size.”

Efforts to shorten the operating life of Asia’s 5,000-strong fleet of coal-fired power plants – which provide around 60% of the region’s power generation – coincide with policy reversals in the US which could offer a stay of execution to a sector that generates less than 20% of the country’s electricity, having produced half in 2000.

Earlier this month, US President Donald Trump signed an executive order aimed at boosting coal production. But this ran counter to sentiment on the demand side, where large corporates have further distanced themselves from the fuel via new commitments to avoid electricity generated by co-firing facilities.

Gaining TRACTION

In several countries, notably in Asia, it has proved hard to close coal-fired power plants early because of high costs, covering compensation for foregone future revenues, as well as the investment needed to replace them with renewable energy sources.

The average age of coal-fired power plants is 15 years, with many financed on the basis of generating power – and revenue – for 40-50 years.

Transition credits are similar to carbon credits, representing emissions avoided through early plant closure. IEEFA said the instruments faced “valuation and replicability challenges”. But if these can be overcome, they could attract a broad range of financial market participants through carbon credit portfolios, impact investing programmes, or blended finance structures.

MAS, Singapore’s central bank, has led the charge, having launched its Transition Credits Coalition (TRACTION) at COP28 to explore their feasibility via two pilot projects in the Philippines. One these aims is to bring forward the retirement of a facility in the Batangas province – owned by the energy unit of conglomerate Ayala – ten years ahead of the expiry of its purchase power agreement (PPA), potentially saving 19 million tonnes of CO2.

In recognition of the need to deliver high-integrity instruments, the initiative has sought to leverage the work of standard setters and verification bodies from the carbon markets in the development of robust and transparent methodologies for transition credits.

In an interim report, TRACTION underlined the need for “clearly defined and rigorous standards” to support the development of transition credits, flagging the demonstration of additionality and the incorporation of social impacts as key issues. It also said scalability depended on the development of risk mitigation solutions, for example to address project delays, as well as close understanding of investor motivations.

Government stimulus

The scalability challenge for transition credits also relies on there being a pipeline of sufficiently similar projects to foment investor appetite.

IEEFA’s Iyer said central banks and governments must create the conditions to generate demand and supply of transition credits.

“If Singapore comes in and does the due diligence as a buyer, that will add a lot of credibility to the market,” he said, noting that the first transaction in the market will be critical to stimulating private investor demand.

“Asset owners can play a crucial role too, both in helping the market grow, but also in lending the credibility needed to accelerate market growth,” added Iyer.

GenZero, a decarbonisation-focused investment firm backed by Singaporean state investor Temasek, is involved in the Ayala pilot project.

Government input is required at a number of levels, suggested Iyer. As well as effectively underwriting and structuring transactions – setting the price and methodology for transaction credits – policymakers can provide the necessary incentives to plant owners.

“PPAs give lenders confidence to lend to projects that require high capex upfront. Changing them is not easier as they represent the owners’ main defence against forced shutdown,” he explained. “A lot comes down to government intent.”

In addition to working with owners to agree how losses are shared from early shutdowns, governments can reduce these by playing an active role in making renewable energy available and affordable, Iyer notes.

Paddy McCully, Senior Analyst at Reclaim Finance, said these kinds of policy interventions are critical to the pace of coal phase-out, but warned that transition credits face both generic challenges shared with carbon credits, as well as specific issues tied to existing pilot projects.

In the first instance, he flagged grounds for uncertainty over the number of emissions that would be avoided by bringing the Batangas plant closure forward by a decade. To calculate the number and value of credits accurately, one would need certainty that the already-condemned facility would have continued to operate to 2040 and the level of power it would have generated.

“Generally, in countries where you start to see a big increase in renewables, the number of hours a year the coal plants run starts to decline,” he said.

McCully also said the motivations of those involved in developing and trading credits were not aligned with accurate assessments of emissions saved.

“Everybody involved in facilitating the transaction – sellers, buyers, consultants, and validators – has an interest in generating as many offsets as possible,” he said. “There’s a huge amount of literature on carbon markets of all types showing that the amount of offsets is exaggerated across the board – and the same dynamics are likely to happen in this.”

Stay of execution

Coal has been in steady decline in the US in recent decades, losing out to first to fracking and then renewable energy sources on cost, representing a diminishing proportion of power generation across almost all states.

But the industry’s cause has been taken up by Republican politicians at state and federal level. In November 2024, 11 state attorneys general filed a complaint alleging asset managers BlackRock, Vanguard and State Street had collectively used their shareholder influence at listed US coal firms to suppress supply, in line with their public commitments to support the goals of the Paris Climate Agreement.

As well as boosting coal production, Trump’s executive order aims to prolong the life of facilities due for retirement, reclassify coal as a critical mineral, and permit new leases. This was signed alongside an order to explore and overturn state-level legislation that limits use of fossil fuels on climate grounds.

BMI, a unit of data and insights provider Fitch Solutions, said the actions would have limited long-term effect, noting coal “will continue to decline due to its inability to compete from a cost perspective”, especially in US regional electricity markets with carbon pricing mechanisms.

Separately, a group of corporates has committed to no longer use electricity sourced from co-firing plants, which burn coal alongside renewable sources. The 400 members of global corporate renewables initiative RE100 were previously permitted to claim renewable electricity use from co-firing involving coal.

“Businesses can accelerate the global transition to 100% renewable electricity directly, through adding renewables to the grid and purchasing renewable power, or indirectly by sending a signal to markets and policymakers that the demand for renewable electricity is growing,” Ollie Wilson, Head of RE100 at Climate Group, told ESG Investor.

“Coal co-firing isn’t sustainable, we can’t allow it to lock coal into grids for years to come and divert finance and focus from the transition to renewables. It’s time to kick coal out of the energy mix for good,” he added.

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