“The insurance industry plays an important role in all of this”
Risk Management News
By Kenneth Araullo
In the field of energy, coal remains king, powering 34% of global needs in 2020. In China alone, there are more than 1,100 coal power plants, where the country has attracted significant attention because it allows the local energy sector that can build more. as two new coal power plants per week by 2022. It is no exaggeration to say that with these numbers, the energy transition for a cleaner, decarbonized future is still far away.
That being said, there are efforts being made here and there to make up for the gap in renewable energy, and this comes from some of China’s closest neighbors: Southeast Asia. It is through these efforts that the global insurer WTW recognizes the potential of the region as a figurehead in the initiative for a decarbonized future, as demonstrated by the recent success of its Power and Energy Conference in Manila.
At the center of the convention, which carries the theme of energy transition, is located an emerging technology, and a rather radical proposal in efforts to de-risk the energy sector: investment in coal power plants, effectively buying them, with the understanding that they will retire earlier than if they stayed with their current owners.
This proposition is called the energy transfer mechanism (ETM), and for the better part of the WTW conference it was subject not only to surprise, but also to some scrutiny. Developed by the Asian Development Bank (ADB) as part of its efforts to accelerate the green transition in Southeast Asia, the goal of the ETM is to support the financing of the early retirement of coal power plants, with certain safeguards to protect those who may be affected.
ACEN and SLTEC – a proof of concept
ETM has proven its value in the space, especially as a driver of the plans of the Ayala energy firm ACEN in the field of renewable energy. In their presentation during the conference, ACEN chief administrative officer JP Orbeta said that ETM allowed them to acquire the South Luzon Thermal Energy Corporation (SLTEC) and its thermal power plant. A relatively young plant that began operations in 2015, ACEN’s ownership means it will retire in 2040; in comparison, a fossil fuel power plant has an average lifespan of 46 years.
“In October 2021, ACEN committed to reach net zero by 2050,” said Orbeta. “The question we have is how we transfer our generation portfolio to 100% renewables – we set that goal in 2025. getting the right valuations for our thermal assets. Mostly, because there is no one who wants to touch coal properties.
Orbeta’s last statement echoes the Philippines’ continued ban on coal plants during the tenure of incoming President Ferdinand Marcos, Jr. This means that apart from the plants that have already been approved, there will be no new coal plants in the country. By 2021, more than 40 countries have agreed to phase out their use of coal power in an effort to reduce the risk of climate change. As part of the initiative, banks, and to some degree insurers, began to see coal assets as a liability that goes against ESG principles.
“The ADB’s idea at Cop26 about the energy transition mechanism interested us, and so we started looking at that. This is why we are proud to say that we have completed the first marketplace energy transition mechanism for retirement of our 246MW coal plant – called South Luzon Thermal Energy – in 2040,” said Orbeta.
In the case of ACEN, ETM provides the company with a way to contribute significantly to the energy transition while covering the requirements in terms of supply chain. Until now, the Philippines suffers from a chronic lack of energy, and because of this, the immediate loss of a source of power – whether it is fossil or renewable – would be a huge blow to the sector. The use of ETM, however, gives ACEN the opportunity to use the plant with the understanding that it will retire early in its life, and hopefully give renewables time to catch up in terms of infrastructure.
There are issues, of course, as Orbeta says it’s a test to sign up to ACEN’s board for what could be considered an untested and risky venture. There are many risks involved, especially regarding existing workers, and what will happen to them once the plant is decommissioned. In this regard, Orbeta cited the Just Transition framework, which states that corporate responsibility will be fundamental, especially with regard to the local economy that will ultimately be affected once the plant closes.
“There are still challenges”
Apart from the risks, while this seems to be a good solution to the risks caused by the continued use of fossil fuels, there are some in the conference that list some obstacles to its adoption. WTW global head for natural resources Graham Knight, in a separate interview, said new technologies always have their own set of risks.
“In terms of the availability of risk transfer, the insurers, of course, operate on the first understanding of the data on what the flow of losses is. Where we operate today is more advanced and uses different technology. With that comes the different risks, known risks and unknown risks. Therefore, this is the time for us as mediators and as insurance partners to develop and provide the necessary solutions needed by those client to facilitate the energy transition,” Knight said.
Surprisingly, there are even some in the renewables sector who are asking for a more realistic, trusted take on new technologies like ETM. In another separate one-on-one, Gerry Magbanua, president of Alternergy, a local pioneer in the renewable energy sector, said that equilibrium is needed to make the energy transition as possible.
“I think there’s always a balance that needs to happen. Whether it’s an aggressive or conservative approach … there’s a transition that needs to happen, but it needs to be in a smooth way. Even if we want renewables to be dominant power source, there are still challenges. In general, while we should try to fast track the transition, we still need to work through the steps that need to be taken – critical infrastructure, and everything that needs that happens – to make all these technologies come true. Support still needs to happen to move towards that goal,” said Magbanua.
As such, he commended SLTEC for its “noble” efforts to be part of the energy transition and hoped that more would 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 important part of the energy transition movement.
“The insurance industry plays a key role in all of this,” Magbanua said. “I know the struggles of fossil fuel companies to continue to be assured, especially since they provide more than half of all the power in the country. We all recognize the need for these technologies… Until with that commitment to the transition, I believe there will always be room for insurance companies to continue to support these technologies. Everyone in the energy sector needs this support for the energy transition journey.”
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