MANILA, Philippines — Just over a decade ago, the Manila-based energy company ACEN  was looking for the fastest, most reliable way to meet surging power demand in the Philippines.

Back then, before the cost of solar and wind began dropping precipitously, the company decided the only financially-viable option was coal, according to ACEN president and CEO Eric Francia. So, in 2014, despite growing global unease about fossil fuels, ACEN began generating electricity — and greenhouse gas emissions — at a new plant in the south of the island of Luzon with an estimated lifespan of about 40 years.

Now, just a decade later, that same plant — officially known as the South Luzon Thermal Energy Corporation — is at the center of a novel strategy to use carbon credits to help wind down newer coal plants long before they would close otherwise.

“We hope to achieve the early close-down of about 60 coal power plants,” Elizabeth Yee, executive vice president of programs at the Rockefeller Foundation, a New York-based global nonprofit that is involved in the project, told a recent conference in Singapore. Most of the targeted plants are in Asia.

The effort is one of the region’s highest profile attempts to mitigate the climate damage from recently-built coal plants while still meeting Southeast Asia’s burgeoning energy needs. These young coal plants with decades still ahead of them are among the biggest decarbonization challenges the world faces in meeting its climate goals.

A young fleet

A report by the Monetary Authority of Singapore and the consultancy McKinsey & Company shows how far the region has to go in its energy transition: The region’s nearly 2,000 coal power plants account for about 60% of Asia’s energy consumption (compared to a global average below 36%). And they emit more than 7.2 gigatons of carbon dioxide a year, about one fifth of all carbon dioxide emitted globally from energy use, the report said. More than 80% of the 8.4 million people employed globally in the coal industry are concentrated in Asia.

As aging coal plants are being phased out in the developed economies of the United States, Europe and Australia, Asia’s coal plants are collectively the world’s youngest. Plants in Southeast Asia have an average age roughly below 15 years, in an industry where plants often last 40 to 50 years. Most of these plants were brought online in a surge of building as the region became a major player in global manufacturing of everything from cars to iPhones.

That’s led demand for coal in Southeast Asia to grow 53% since 2015, compared to just 1% globally, according to a United Nation’s study. With most countries seeing rapid growth in energy use but only just beginning to look seriously at renewables, eliminating those existing coal plants is one of the knottiest challenges of the energy transition.

The vast majority of coal plants in Southeast Asia are either built and owned by governments or with government contracts that guarantee income for the expected life of the plant, even if it closes early. In some countries, the government controls energy prices.

All of this makes closing down coal plants, with or without replacement clean power, extremely difficult.

Shut down efforts

Despite these challenges, Southeast Asian countries have become the focus of efforts by some wealthy countries to help pay for the early closure of coal plants in the region, both with direct payments and through carbon credits.

At a meeting of the Group of Seven industrialized nations in Jakarta in 2023, for example, the United States and Japan agreed to funnel more than $20 billion into phasing out coal plants in Indonesia. Another deal offered Vietnam more than $15 billion to phase out coal plants and replace them with clean energy.

But both countries’ programs have been largely stalled, in part because of their plans to continue building new coal plants to meet rapidly expanding energy needs.

Other efforts in the region are looking at other models, including leveraging carbon credits.

ACEN has been transitioning its operations fully to clean energy; for the past five years it has struggled to get the South Luzon coal plant off its books and closed down by 2030. It didn’t want to simply sell off the plant to another company that would operate it until the 2050s, Francia, the CEO, has said.

“We want the divestment of coal plants to be done in a responsible way,” he told the conference in Singapore.

As part of its effort to divest from the Philippines plant, ACEN, owned by the Manila-based conglomerate Ayala Group, has entered into a complex deal to create carbon credits in exchange for shuttering the South Luzon plant.

In this deal, the global philanthropy powerhouse Rockefeller Foundation, working with the Monetary Authority of Singapore and the city state’s Climate Impact X carbon trading exchange, has agreed to pay to develop carbon credits that represent the 19 million tons of carbon emissions that will not be emitted as a result of the plant closing earlier than planned.

Rockefeller plans to sell the credits to companies or other institutions looking to offset their own emissions as part of what it calls its Coal to Clean Credit Initiative. The proceeds would be paid to the owners of the power plant for the revenue lost after the 2030 shutdown.

The Asian Development Bank (ADB) is leading two similar efforts under a program it calls its Energy Transition Mechanism (ETM), including one in the Philippines. There, it’s working with the national government to close down another coal plant (different than ACEN’s South Luzon plant) about 15 years early with financial support from carbon credits generated and sold with the help of the Monetary Authority of Singapore.

Challenges remain, including negotiating with government owners and guaranteed payment contracts. But the ADB hopes to eventually focus on coal plants in Kazakhstan, Pakistan and Vietnam as well. The efforts to shut down the two plants in the Philippines have raised new hopes that carbon credits could generate new cash flows to pay off investors so the early phase outs can work.

“This additional funding stream brings in new dynamic private capital from a much more diverse set of investors,” said Andrew Jeffries, an economist who heads the effort for the ADB. “It’s critical.”