Retiring coal plants

by Rey Gamboa (The Philippine Star), 17 Aug 2021

For years now, environmental activists have been pressuring the finance sector to withhold their banking services on fossil fuel-based power generating projects as a way of slowing down the construction of multi-million dollar projects. Generally, this call had failed; for banks, the opportunity to make big money is just too irresistible to ignore.

More recently, though, new indicators are making it easier for banks to turn away from energy projects that burn fossil fuels – coal, oil, and natural gas – and instead, to consider the monetary opportunities that renewable energy projects offer. No pangs of conscience or an admission of the devastating effect of fossil fuels on the environment is apparent here, however.

In developing and emerging economies where growth rates are highest, new power projects are still needed to sustain progress. While fossil fuels have been considered as the cheapest energy source in the past, this has now changed to favor renewables.

A recent report released by the International Renewable Energy Agency (IRENA) showed that an increasing number of renewable power generation projects added last year were, in fact, cheaper than those powered by fossil fuels.

More data and research supplied in a blog published in Our World in Data showed that over the last decade, the price of electricity from solar and wind declined by 89 and 70 percent, respectively, to levels far cheaper than coal, which had been the long-standing flag bearer among fossils.

Irreversible shift to renewables

The trend is seen as irreversible, mainly because renewables have reaped the advantage of technological improvements that have made possible cheaper mass production. Add to this the fact that renewables use an energy source that is virtually free, and their levelized cost of energy drops significantly compared to fossils.

Take the example of solar. The cost of photovoltaic models that capture the sun’s energy and convert it to electricity are now a fraction of what it was a half century ago, making it the world’s lowest electricity source today at $40 per megawatt hour compared to coal’s $109.

No wonder that many countries are now ditching planned fossil energy-powered generating plant projects in favor of renewables – and the Philippines is no exception. Last year, Ayala Corp.’s energy arm, AC Energy, announced it would make a full exit from coal projects by 2030.

And just last month, the DOE released the names of three projects of San Miguel Corp.’s SMC Global Power Holdings Corp. that were delisted from the lineup of proposed coal power plants for the country, a signal that the Philippine conglomerate was also withdrawing from coal.

The low cost of renewable energy, however, is just part of the plausible reasoning behind these two big companies’ moves. In 2017, in line with the Renewable Energy Act, electricity producers were required to source or produce at least one-third of their electricity requirements through renewable sources.

The exodus of big companies from coal projects is being cheered on by environment activists who decry “dirty” energy projects as not just harmful to local residents’ health – even with the new circulating fluidized bed coal-firing technologies, but also because of the greenhouse gas emissions that aggravate global warming and climate change.

Reduced power rates

The impact of a significantly reduced cost in solar and wind energy is timely, but more importantly, opens a window that could bring down the country’s current power rates, now regarded as one of the highest in the region.

I remember a number of years ago how Oscar Reyes, then CEO of Meralco, explained the solid economics of coal use by its sister company in power generation as reason for the construction of several plants despite the strong community protestations. Then, renewables was still a costly option. Today, the situation has completely reversed, with renewables being the cheapest source of energy.

Of course, we may not immediately see power rates drop, even with new solar or wind power projects coming on stream, and this is because our energy mix is still predominantly fossil-fuel based, with coal as the preference because of its lower cost.

Phase-out scheme

Even as the DOE announced a moratorium on the construction of new coal-fired thermal plants last October, the country still has a sizeable number in existence – and good for a couple of decades. For this, the Asian Development Bank’s scheme to retire coal plants would be most welcome.

For now, the Philippines is on a shortlist of countries being considered, alongside Vietnam and Indonesia, for a workable “buy-back” plan that would hinge on the cooperation of owners of existing coal plants, a robust financial feasibility plan during the phase-out transition, and a renewable power plant replacement plan.

So far, the ADB has successfully corralled a number of private sector banks that are enticed by a framework that unleashes cheap development money to finance the acquisition of existing coal plants, and the eventual investment spending for a new power plant.

The Philippine government should make a strong pitch to be part of the proposed ADB scheme. Compared to Vietnam or Indonesia, the Philippines would need only $5 billion to $9 billion to buy out half of its coal generating capacity, whereas the other countries would required double or more.

The ADB wants to get the scheme gaining ground by next year with the first buy-back deal signed and sealed. A successful template where coal plants could successfully be retired in 15 years should convince more banks to adopt the framework, and more importantly, dissuade them from entertaining new fossil fuel-based power plant financing initiatives.