Buying to retire – energy transition mechanism and its role in de-risking the energy sector

"The insurance industry plays a vital role in all of this"

Buying to retire – energy transition mechanism and its role in de-risking the energy sector

Risk Management News


In the realm of energy, coal remains king, powering 34% of global needs as of 2020. In China alone, there are more than 1,100 coal power plants, with the country attracting significant attention as it permitted its local energy sector to build as many as two new coal power plants per week in 2022. It’s not an exaggeration to say that with these figures, the energy transition for a cleaner, decarbonised future is still some way off.

That said, there are efforts being made here and there to make up for that renewable energy gap, and it comes from some of China’s closest neighbours: Southeast Asia. It is through these efforts that global insurer WTW has recognized the potential of the region as a figurehead in the initiative for a decarbonised future, as demonstrated by the recent success of its Power and Energy Conference in Manila.

At the centre of the convention, which bears the theme of energy transition, lies an emerging technology, and a somewhat radical proposition in the efforts to de-risk the energy sector: invest in coal power plants, effectively buying them out, with an understanding that they will be retired earlier than if they remained with their current owners.

This proposition is called the energy transition mechanism (ETM), and for the better part of the WTW conference it has been subject to not only amazement, but some scrutiny as well. Developed by the Asian Development Bank (ADB) as part of its efforts to speed Southeast Asia’s green transition, ETM’s goal is to support the financing of the early retirement of coal power plants, with specific safeguards in place in order to protect those that will be affected.

ACEN and SLTEC – a proof of concept

ETM has already proven its worth in the space, notably as a driver for Ayala energy firm ACEN’s plans in the realm of renewable energy. In their presentation during the conference, ACEN chief administrative officer JP Orbeta said that ETM has allowed them to acquire the South Luzon Thermal Energy Corporation (SLTEC) and its thermal power plant. A relatively young plant that started operations in 2015, ACEN’s ownership means that it will retire in 2040; comparatively, a fossil fuel power plant has an average lifespan of 46 years.

“In October 2021, ACEN committed to reaching net zero by 2050,” Orbeta said. “The question that we had is how we transition our generation portfolio to 100% renewables – we set that goal to 2025. One of the challenges that we had is, at the time, when we were looking at market conditions, we weren’t getting the right valuations for our thermal assets. Largely, because no one wanted to touch coal assets.”

Orbeta’s last statement echoes the Philippines’ continued ban of coal plants as incoming President Ferdinand Marcos, Jr. came into office. This essentially meant that excluding plants that have already been approved, there will be no more new coal plants in the country. In 2021, more than 40 countries agreed to phase out their use of coal power in an effort to minimize the risk of climate change. As part of the initiative, banks, and to some degree insurers, have started to look at coal assets as a liability that goes against ESG principles.

“ADB’s idea in Cop26 about energy transition mechanism intrigued us, and so we started looking at that. It’s why we’re proud to say that we’ve completed the first marketplace energy transition mechanism for the retirement of our 246MW coal plant – which is called the South Luzon Thermal Energy – by 2040,” Orbeta said.

In ACEN’s case, ETM provided the firm with a way to contribute significantly to the energy transition while covering what was needed in terms of supply chain. To this day, the Philippines is suffering from frequent energy shortages, and as such, an immediate loss of a source of power – regardless of whether it is fossil or renewable – would be a huge blow to the sector. Utilizing ETM, however, gave ACEN the opportunity to utilize the plant with the understanding that it will be retired earlier in its lifespan, and hopefully give renewables time to catch up in terms of infrastructure.

There were issues, of course, as Orbeta said that it was an ordeal to have the ACEN board sign up for what can be considered an untested and risky venture. There were a lot of risks involved, especially regarding the existing workforce, and what would happen to them once the plant has been decommissioned. Regarding this, Orbeta cited the Just Transition framework, stating that corporate responsibility will be fundamental, especially with regards to the local economy that will ultimately be affected once the plant shuts down.

“There are still challenges”

Risks aside, while it may seem like a great solution to the risks posed by continued use of fossil fuels, there are some in the conference who have listed some barriers to its adoption. WTW global head for natural resources Graham Knight, in a separate interview, said that new technologies always come with their own set of risks.

“In terms of the risk transfer availability, insurers, of course, operate on prior data understanding on what the trend of losses have been. Where we’re moving into now is much more advanced and using different technology. With that comes different risks, risks that are known and risks that are unknown. So, this is a time for us as intermediaries and as insurance partners to step up and provide the necessary solutions that those clients are going to need to accelerate the energy transition,” Knight said.

Surprisingly, there are even some in the renewables sector who have asked for a more realistic, grounded take on new technologies such as ETM. In another separate one-on-one, Gerry Magbanua, president of Alternergy, a local pioneer in the renewable energy sector, said that an equilibrium is needed in order to make energy transition as just as possible.

“I think that there’s always going to be a balance that will need to happen. Whether it’s an aggressive or conservative approach … there’s a transition that will need to happen, but it has to be in an orderly fashion. As much as we’d like renewables to be the dominant source of power, there are still challenges. Overall, while we should try to fast-track the transition, we still need to work through the steps that need to be made – critical infrastructure, and everything else that needs to happen – to enable all of these technologies to be realized. Support still needs to happen to transition towards that goal,” Magbanua said.

That said, he did praise SLTEC on its “noble” efforts to be part of the energy transition and hoped that many more consider it in the future. Magbanua also called on the insurance industry for its support in the initiative for a decarbonized future, calling the sector an integral part of the energy transition movement.

“The insurance industry plays a vital role in all of this,” Magbanua said. “I know the struggles of fossil fuel companies to keep being insured, especially as they provide more than half of all power to the country. We’re all recognizing the need for these technologies … As long as there is that commitment towards the transition, I believe that there will always be room for insurance companies to keep supporting these technologies. Everyone in the energy sector is going to need this support for the energy transition journey.”

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