Early retirement for Philippine coal plants significantly cuts CO2 emissions, avoids stranding risks

London, 18 January, 2024 - Early retirement of coal supply agreements in the Philippines can avoid 290 million ton of carbon dioxide (CO2) emissions, nearly double the country’s annual CO2 emissions. Buyouts for early retirement, however, could cost between USD19,198 per megawatt (MW) to USD2.8 million/MW–signalling the need for clear policy directions to stay aligned with the Paris Agreement by incentivising early movers for coal retirements.

As of 2022, the country’s power profile remains dominated by coal with an installed capacity of 12.2 gigawatts from 58 coal units, covering 43.9% of the energy mix.

On average, coal retirement costs USD140 per ton of carbon dioxide (tCO2) to buy and replace coal plants for carbon reduction, comprising USD41/tCO2 to end existing supply agreements and $99/tCO2 to replace them with solar plus storage systems. This is according to data from the Coal Asset Transition (CAT) tool, an open data project from climate analytics non-profit TransitionZero that aims to provide policymakers and industry leaders with plant-level data to analyse the impact and potential for coal plant refinancing.

Amid high marginal abatement costs due to the country’s tariff structures, TransitionZero found early coal retirement by five years and replacement with renewables could be feasible with tailored deal structures, robust selection criteria, and incentives for early movers under the Philippine Energy Transition Plan (PETP).

Without early coal retirement mechanisms, the Philippines will only see the existing coal fleet retire between 2047 and 2051. The International Energy Agency suggests that developing countries need to phase out coal by 2040 to keep Paris Agreement goals on track. Lack of abatement measures also exposes businesses to the risk of stranding due to changing regulatory, business, and political climate, while exposing consumers to the impacts of high coal prices.

Isabella Suarez, Southeast Asia lead at TransitionZero, said: “The Philippine energy transition is a complex undertaking that requires evidence-based planning and policies. The recent extended blackouts in Panay have exposed the need for upgrades in the power system and a diversified energy mix. Coal plants coming offline in megawatts affect the overall stability of the system, at the expense of consumers and the economy. The Philippines will need to make critical policy decisions for the early retirement of the coal fleet to be not only feasible, but imperative for businesses. Recent initiatives, including the PETP and GEAP-2 place the country in a good position to start its transition away from coal and embrace a more ambitious approach on clean energy.”

Matt Gray, CEO and Co-founder of TransitionZero, said: “Our data highlights that policy incentives to jumpstart coal retirement and refinancing options must account for the complexity of the Philippine market and its players. Retirement deals and refinancing mechanisms need to be bespoke and tailored to the local context. A robust selection criterion backed by data is necessary to inform transition schedules and facilitate access to appropriate transition finance. This could include prioritising plants with expiring power supply agreements, those with the highest emissions intensity, or with the lowest availability factors.”

Power plant candidates for early coal retirement

One of the examples presented in TransitionZero’s analysis involves a potential retirement setup for the Cebu Energy Development Corporation (CEDC), one of the most polluting power plants in the country. Given the plant's recent commercialization date, a two-tiered approach might be suitable: Shutting down one unit after four of its PSAs conclude in 2025, followed by buying out five years of the VECO-CEDC contract to decommission the remaining unit by 2030/2031. This approach maintains one coal plant in operation to offer ancillary services, ensuring grid stability, covering CAPEX, and allowing more time to implement alternative generation solutions.

Other feasible candidates for early financing include the Quezon power plant (QPPL) and SEM-Calaca Power Corporation (SCPC) coal plant.

TransitionZero emphasises that refinancing should be designed to foster investments in clean energy. By channelling resources into clean energy projects and grid enhancements, distribution utilities, electric cooperatives, and consumers can benefit from a more cost-effective system, making early retirement arrangements more viable and equitable.

Full findings can be accessed here.

About TransitionZero

TransitionZero is a climate analytics non-profit established in 2021. We build accessible, auditable and open energy transition planning products, supporting mission-aligned organisations. For more information on how your organisation or initiative can access our data and analytics, visit our website or contact us.

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