Philippine Energy Policy Wiki

Energy Transition Mechanism (ETM)

Status
operative
Confidence
high

A financing mechanism combining public and private investment to retire coal-fired power plants (CFPPs) and diesel-based plants earlier than their scheduled end-of-life, replacing them with renewable energy. The Philippines has two documented ETM implementations as of 2023: the ACEN SLTEC (market-based, first in the Philippines) and the ADB Mindanao CFPP (development-bank-led) [PEP 2023-2050 Vol. I, pp.35–36, 2023; PEP 2023-2050 Vol. II, pp.125–126, 2023].

Mechanism Structure

ETMs combine debt and equity from public and private sources to fund the early retirement of fossil-fuel plants. Revenue from the mechanism compensates the retiring entity for remaining economic value. The retiring company divests the plant, which is decommissioned ahead of schedule. A well-structured ETM requires [PEP 2023-2050 Vol. II, p.125, 2023]:

  • An offtake/risk-allocation contract to ensure predictable plant cash flows (lowering cost of capital)
  • An O&M agreement to maintain plant reliability and provide investor comfort
  • A call option for the transition operator to repurchase and facilitate decommissioning

Philippine Cases

ACEN — South Luzon Thermal Energy Corporation (SLTEC)

ACEN Corporation — the renewable energy platform of the Ayala Group — pioneered the first market-based ETM in the Philippines with the early retirement of the South Luzon Thermal Energy Corporation (SLTEC), a 246-MW coal-fired power plant in Batangas [PEP 2023-2050 Vol. II, p.125, 2023].

ACEN corporate context: 4,500 MW capacity across the Philippines, Australia, Vietnam, Indonesia, and India. Corporate objectives: 100% renewables generation by 2025, 20 GW RE capacity by 2030, net-zero by 2050 [PEP 2023-2050 Vol. II, footnote 147, 2023].

Expected outcome: Reduction of 50 million tons of carbon emissions over the plant’s remaining life. ACEN is also applying the ETM approach to its remaining diesel power plants [PEP 2023-2050 Vol. II, p.125, 2023].

Financing structure:

  • Debt: local private banks
  • Equity: Government Service Insurance System (GSIS) and private companies

Three enabling contracts:

1. Administrative and Management Agreement (AMA) — the offtake contract. ACEN remains the offtaker of SLTEC for 25 years, until 2040. The AMA was amended to allocate key risks to ACEN as offtaker: technical, operating, capital costs, market, and fuel. This risk allocation ensures consistent and predictable cash flow to the CFPP, decreasing the cost of capital and enabling the ETM transaction [PEP 2023-2050 Vol. II, p.125, 2023].

2. Operations and Maintenance Services Agreement (OMSA) — signed between SLTEC and ACEN. Ensures the plant operates safely, reliably, and efficiently. Three key functions:

  • Provides comfort to investors and lenders on asset management and operations
  • Helps SLTEC attain desired outcomes and realize the upside that ACEN has assumed
  • Enables ACEN to help CFPP workers transition into green jobs by integrating them into ACEN’s growing RE ecosystem

[PEP 2023-2050 Vol. II, p.125, 2023]

3. Call Option — grants ACEN the right to repurchase SLTEC between 2030 and 2040. This allows ACEN to facilitate the early retirement of SLTEC and its transition to cleaner technology by 2040. With transition credits, ACEN can further accelerate retirement to as early as 2030 [PEP 2023-2050 Vol. II, p.126, 2023].

Post-retirement scenarios under consideration:

  • Convert SLTEC into a large battery to support the Luzon grid
  • Establish a green manufacturing facility
  • Other applications in close collaboration with LGU and stakeholders

[PEP 2023-2050 Vol. II, p.126, 2023]

ADB — Mindanao CFPP

The Asian Development Bank (ADB) is implementing an ETM for a Mindanao CFPP operating under a build-operate-transfer (BOT) arrangement. Target retirement: approximately 2026 — five years before the BOT agreement ends [PEP 2023-2050 Vol. II, p.125, 2023].

Transition Credits

Private companies are exploring transition credits as an alternative mechanism to facilitate early coal retirement, integrated into the ETM framework. Transition credits aim to leverage carbon finance for the gradual replacement of CFPP capacity with RE, ensuring a fair transition by:

  • Guaranteeing the cost of substitute energy
  • Facilitating fair transitions for impacted workers and local communities

Aggressively developing RE sources enables replacement of lost generation from the retiring CFPP [PEP 2023-2050 Vol. II, p.126, 2023].

Quantification methodology: Emerging methodologies emphasize the remaining term of the PPA as the basis for financial value and mitigating carbon emissions — suitable for regulated markets (e.g., Vietnam, Indonesia) or for PPAs with retail clients in liberalized markets like the Philippines [PEP 2023-2050 Vol. II, p.126, 2023].

Article 6.2 of the Paris Agreement: Allows countries to exchange carbon credits and other units directly with each other through bilateral agreements. Transition credits can address both compliance and voluntary markets; leveraging Article 6.2 enables corresponding adjustments and bilateral agreements with other countries to strengthen credit integrity [PEP 2023-2050 Vol. II, p.126, 2023]. See Carbon Markets and Transition Credits for the full carbon market typology and Philippines status.

Carbon Markets

Carbon markets — compliance, voluntary, and Article 6.2 bilateral mechanisms under the Paris Agreement — are key financing enablers for ETMs and transition credits. For detail on market types, the Korea K-ETS reference model, Article 6.2 framework, transition credit valuation, and Philippines status, see Carbon Markets and Transition Credits .

Energy Resiliency Financing

Strengthening energy infrastructure resilience requires investment in adaptation and mitigation through a range of funding mechanisms, including PPPs and innovative financing platforms [PEP 2023-2050 Vol. II, p.127, 2023].

International climate finance: DOE committed to fostering partnerships with government agencies, development partners, and international funding institutions to access:

  • Green Climate Fund (GCF)
  • Global Environment Facility (GEF)
  • Adaptation Fund (AF)
  • Climate Technology Center and Network (CTCN)
  • Loss and Damage Fund (LDF)

Disaster Risk Financing and Insurance (DRFI ): An innovative mechanism that shields energy infrastructure and systems from potential disruptions while cushioning the rate impact on consumers. DOE committed to establishing mechanisms and guidelines to strengthen DRFI practices within the energy sector, ensuring accessible funding sources for resilience while incorporating safeguards against misuse [PEP 2023-2050 Vol. II, p.127, 2023].

CIF Accelerating Coal Transition (ACT) Program

In October 2021, the Philippines was selected to develop an Investment Plan (IP) for the Climate Investment Funds (CIF) Accelerating Coal Transition (ACT) Program, administered through the Asian Development Bank (ADB). The ACT aims to: tackle governance, people, and infrastructure barriers; fill funding gaps for coal transition strategies; build local/regional support; and accelerate retirement of coal assets (mines and power plants) while enabling new economic activities [PEP 2023-2050 Vol. III, Section E, p.65, 2023].

Eligible ACT-supported infrastructure includes: mine closure, plant decommissioning, reclamation and repurposing, repowering with RE and storage, ancillary services, energy efficiency, and biodiversity.

Two MDB Missions were conducted in partnership with DOF and DOE in August 2022 and March 2023 to prepare the Investment Plan for access to CIF ACT concessional funding. As of the PEP’s writing, the CIF Clean Technology Fund (CTF) Trust Fund Committee was reviewing a proposal for a 6-month extension on the IP submission deadline, with focus on coal power plant repurposing [PEP 2023-2050 Vol. III, p.65, 2023].

Policy Context

ETMs operate alongside — and extend — the 2020 coal moratorium . The moratorium prohibits new coal projects but allows existing plants to continue operating. ETMs offer a voluntary, market-based pathway for retiring existing CFPPs before their scheduled end-of-life — a pathway the moratorium alone does not create. Both CES-1 and CES-2 scenarios in the PEP depend on voluntary CFPP retirement and repurposing to achieve their RE share targets [PEP 2023-2050 Vol. I, p.35, 2023]. See Voluntary CFPP Retirement and Repurposing and Nationally Determined Contribution (NDC) — Philippines for the GHG accounting context.