INTERVIEW: Transition credit issuance to take time, but offtake agreements can be signed early -- South Pole

It will take a few years to issue and deliver to the market transition credits, which are carbon credits issued to finance the early closure of coal-fired power plants, but interested participants can consider signing offtake agreements before that, Frédéric Gagnon-Lebrun, global senior director for Policy & Strategy, South Pole, said in an interview.

The world's largest carbon credit issuer Verra launched May 6 a methodology to issue credits from the early retirement of coal-fired plants and their replacement with renewable energy. South Pole, one of the world's largest carbon project developers, played the technical leadership role in this methodology's development.

Gagnon-Lebrun said rigorous eligibility criteria have been set to safeguard the integrity of transition credits.

Eligible coal plants need to be connected to the grid. The plants need to be in regulated power markets or have long-term purchase agreements in place. They should be profitable up to their initial retirement dates to justify that without financial support from the carbon market, the coal plants would have continued to operate until the expected retirement dates, he said.

Furthermore, the methodology required participating plant owners, either private companies or public utilities, to fully and properly decommission the coal plants as well as commit to "no new coal," Gagnon-Lebrun said, adding that this is to prevent the retired plants from being replaced with new coal-fired ones.

The methodology also imposed unprecedented requirements for supporting the affected workers and communities, asking project proponents to track key indicators like the number or the percentage of workers who are reskilled or trained for a new job in a different sector, he said.

The transition credits will only be issued after a coal-fired power plant is retired. "It takes time to retire a coal plant, as you can imagine. So, we're not expecting carbon credits to scale and to really come to market before a few years. I'd say, three to four years," Gagnon-Lebrun said.

However, upfront finance is essential to decommission coal plants, invest in renewable energy capacities, cover foregone revenue streams that the plant would have had, and develop just transition programs for affected workers and communities, he noted.

The upfront finance can be supported by long-term offtake agreements. Such agreements can be signed before the issuance of transition credits, based on estimated emission reductions.

Offtake agreements always have "risk and reward," he said. "The carbon credits are issued on what is really implemented and verified, not based on the estimations upfront."

"So, if you don't ramp up renewable energy as fast as you said, you're not going to get the same volume of emission reductions and carbon credits at the end."

Flexible requirements for renewables

The methodology set a minimum requirement that renewables need to cover at least 40% of the retired coal-fired plant's generation capacity by the end of the initial crediting period.

"We indeed wanted to make sure that there was flexibility in the use of the methodology and the replacement by renewable energy, so that it could be applied to lots of different contexts around the world. We did not want to make a 100% requirement a barrier to decommissioning coal plants," Gagnon-Lebrun said, noting that plant owners will receive more transition credits and revenues from carbon markets if they manage to go beyond the minimum bar.

The methodology also addressed emissions from other sources, like other coal-fired or gas-fired plants connected to the grids, given that the renewable capacity replacement is intermittent, he added.

"And that is done in a very conservative manner in the methodology to make sure that we effectively overestimate how much other sources of electricity production might [be used to] cover the lost capacity from closing the coal plant."

Mobilizing capital

"We will need to scale the demand and make sure that buyers understand the role that transition credit can play, as well as securing higher prices than what we are seeing in the voluntary market for those transition credits to really take off," Gagnon-Lebrun said.

Demand could come from corporates in voluntary carbon markets, sovereign buyers leveraging the UN's Article 6 mechanism, and airlines under the Carbon Offsetting and Reduction Scheme for International Aviation, he said.

For plants that have already been covered in some existing finance programs, like Indonesia's and Vietnam's Just Energy Transition Partnerships, or the Asian Development Bank's Energy Transition Mechanism, transition credits will be a complementary instrument to enable the respective coal plants to retire ahead of schedule, he added.

Platts, part of S&P Global Commodity Insights, assessed CORSIA-eligible carbon credits at $22/mtCO2e on May 8.