How to strike a balance between energy transition and security

As the energy industry comes under intense scrutiny for their role in the energy transition and energy price shocks, what are their key challenges as the risk landscape evolves?

To gain insights on this and discuss possible solutions, energy companies, regulatory bodies, financial institutions, and insurance firms came together in Dubai for Marsh’s Energy Industry Conference in February 2023, one of the world’s leading industry forums for risk issues. Key speakers included John Doyle, President and CEO, Marsh McLennan, Carlos Aboitiz, Chief Corporate Services Officer, Aboitiz Power, and Eric Francia, President and CEO, ACEN.

Here are the key takeaways for energy and power companies operating in Asia:

Powering a fair and just energy transition while ensuring security

Even as the industry shifts towards greener energy sources, it is clear that thermal and fossil energy sources will remain vital in ensuring energy security. Rather than abandoning traditional sources entirely and immediately, industry players are challenging the insurance market to find a more inclusive way to enable the energy transition.

As Carlos Aboitiz notes, power developers in Asia are compelled to help ensure energy security domestically, even as they deploy significant capital towards renewable projects. As a major power generation player in the Philippines, Aboitiz Power called on the insurance industry to understand the nuances of how climate actions are impacting different communities, particularly in relation to the varying stages of socioeconomic development. Aboitiz proposed that such nuances should be taken into consideration when implementing climate mitigation and adaptation measures and in calibrating insurance capacity for thermal assets.

Meanwhile, operators in Asia, such as Aboitiz and ACEN, are looking for alternative ways to keep a thermal plant operating, such as via an energy transition mechanism, but support is still required from the insurance markets.

Case study: ACEN charts a way forward

Comprising 4,000 megawatts of renewables — focused on solar and wind energy — currently operating or under construction, ACEN is at the forefront of transition efforts. While the corporation has set a target of ramping up renewable capacity by five times to 20 gigawatts by 2030, Eric Francia shared that:

“While ACEN is strongly committed to transitioning out of coal-fired generation, we believe that this must be done in a responsible way. In an emerging market such as the Philippines where coal plants are still inevitable for the next few decades, we must take into account the constraints in power supply and the economic relevance of thermal plants in the near to medium term. With this in mind, we implemented a Just Energy Transition by adopting the principles of the Energy Transition Mechanism, a framework promoted by the Asian Development Bank, as a responsible divestment of our thermal assets and transition to cleaner technology.”

The Energy Transition Mechanism (ETM) framework is a scalable, collaborative and market-based approach to accelerate the transition from fossil fuels to clean energy. ACEN completed the full divestment of the South Luzon Thermal Energy Corporation coal plant using the ETM framework, the first of its kind in the world. This landmark transaction will enable the early retirement of the 246 MW coal plant in Batangas, Philippines. Under the structure, the coal plant will be retired by 2040 and transitioned to a clean technology, thereby reducing its operating life of up to 50 years by half. This will help avoid or reduce up to 50 million metric tons of carbon emissions. This mechanism, which involved debt financing and equity investments, generated ₱7.2 billion in proceeds for ACEN which will be reinvested into renewable energy projects.

Key drivers of ACEN’s success:

Ensuring an effective workforce evolution, community resilience, and collaboration with stakeholders, especially obtaining support from financiers who had already implemented policies banning coal investment.
Optimising the capital structure, by refinancing existing debt and optimising the balance sheet of the asset, thereby recycling funding for renewable projects.
Ensuring adequate risk identification, allocation, and mitigation.

Opportunities and risks of adopting new technology

New technologies such as offshore wind, hydrogen and battery energy storage systems have emerged, bringing forth risk challenges — such as grid connectivity and the reliable supply of raw materials — that need to be addressed to ensure commercial viability, reliability and sustainability.

Although insurers can choose to balance their risk exposures with regard to emerging technologies, investors and developers cannot adopt these technologies unless they are able to access and secure insurance capacity. Despite insurers’ transition pledges and net-zero plans, investors and developers alike have reported challenges in accessing favourable pricing, wordings, and capacity.

As John Doyle noted, “we need to mainstream transition finance and transition insurance”. A robust partnership between the energy and power industry and the financial and insurance markets is essential to facilitating a responsible and socially equitable transition.