‘Blended financing’ eyed as coal-to-RE transition aid

SINGAPORE—Blended financing can help encourage power industry players to retire their coal plants early and develop renewable energy (RE) projects for a lower cost, energy transition experts said.

As its name suggests, blended financing mixes public and philanthropic investments to encourage private funding in developing countries and help achieve sustainable development goals.

Climate Smart Ventures managing partner Lawrence Ang explained that blended financing could accelerate just energy transition when donors or lenders offer debt that matured longer and had lower interest rates, compared with power asset owners funding RE projects themselves or getting funding from commercial banks at a much higher cost.

In exchange, power developers will have to retire their coal plants earlier than they had originally intended.

“The difference this time around is that we’re bundling renewables development with coal retirement. That’s special,” Ang said at a decarbonization forum organized by Singapore-based research and investor relations firm Asia Research & Engagement (ARE).

While he recognized that some energy industry players were wary about the risks of retiring their coal plants years earlier due to potential revenue loss, Ang noted that they could get more income in the long run by bundling fossil fuel phaseout with with cheaper RE development.

“There’s nothing unusual about going to the bank if you’re a major developer and you’re asking for financing for an RE plant. But the banks are going to give you normal market rates for that,” he said.

In the Philippines, bundling has proved to be an emerging energy transition mechanism (ETM).

Ayala-led ACEN Corp. in 2022 completely divested its stake in a 246-megawatt coal-fired power plant subsidiary South Luzon Thermal Energy Corp., slashing the plant’s operating life by half and allowing its early retirement.

ACEN, the listed energy platform of the Ayala group, received P7.2 billion from the transaction and the amount will be reinvested into its RE projects.

This ETM was developed by multilateral lender Asian Development Bank to “significantly shorten the life of legacy coal-fired power plants and unlock new investments in sustainable and renewable energy.”

Developers want more

At the same time, some RE developers in the country are fighting for higher rates for the development of clean energy projects due to higher costs, specifically for the Department of Energy’s (DOE) Green Energy Auction Program.

This was where blended financing could come in, according to Kurt Metzger, ARE director of energy transition.

The problem, however, is that there is “very limited” blended financing in Asia. Metzger said blended finance transactions in the region totaled 107 since 2013, representing about $20 billion, or only 11 percent, of global blended finance transactions.

This is far behind Sub-Saharan Africa, which represents around 40 percent of the global total.

“The region is lacking an experience in doing blended finance so we need to get expertise to help do that,” Metzger said.

The Philippines ranks third in Asia for having the most amount invested into blended financing at $5.1 billion, behind Indonesia and Vietnam at $12.1 billion and $5.6 billion, respectively.

The country is still largely dependent on coal. Coal still contributes nearly 60 percent to the Philippine energy mix, while renewables only contribute 21 percent, data from the Institute for Energy Economics and Financial Analysis show.

Energy Secretary Raphael Lotilla himself has said that it would be difficult to retire the Philippines’ coal plants, adding that “there is no way of denying that we need them still.”

“But we placed them in a trajectory that is clear, that overtime they are going to be replaced. We suffer under no illusion that in order to meet the desire to reduce greenhouse gas emissions, we will be able to close them down overnight,” he said at a recent forum.

“The growth in demand will be replaced with RE and more efficient power plants and greener sources of energy,” Lotilla added.

The DOE is hoping to increase the share of renewables to 35 percent by 2030 and 50 percent by 2040.

The solution, Metzger explained, is to implement policies that will encourage various sectors to work together and “build guardrails to make sure that transactions are done right.” INQ