ACEN, the energy platform of the Ayala Group, based in Philippines, has a commitment to 100% renewables generation by 2025 and 20 GW renewables capacity by 2030. In November 2022, ACEN, announced the full divestment of the South Luzon Thermal Energy Corporation (SLTEC) coal plant leveraging ADB’s Energy Transition Mechanism (ETM). This transaction will enable the early retirement of 246 MW coal plant in Batangas, Philippines.
The coal plant’s operating life of up to 50 years will be cut in half, as ACEN commits to retire and transition the plant to a cleaner technology by 2040. The scheme should avoid up to 50 million metric tons of carbon emissions.
Case study
World's first Energy Transition Mechanism (ETM) transaction, South Luzon Thermal Energy Corporation
Key elements
The process involved $245 million debt financing provided by the Bank of the Philippine Islands and Rizal Commercial Banking Corporation, and $66 million in equity investments from the Philippine Government Service Insurance System (GSIS), The Insular Life Assurance Company, Ltd. (InLife), as well as coming from a newly established Special Purpose Vehicle called ETM Philippines Holdings, Inc., for a total deal value of $312 million. The establishment of this Special Purpose Vehicle was instrumental in that it allowed ACEN to sell all its shares in the coal power plant to ETM Philippines Holdings Inc., while the latter acted as a vehicle facilitating investors engagement in this transition project. In exchange for its divestment, ACEN received $129 million from the transaction for reinvestment in the company’s renewable energy projects. The balance of proceeds was used for refinancing debt and transaction fees.
To enable the ETM, SLTEC’s capital structure was optimized through the refinancing of its project finance loan. The debt was upsized and lengthened to optimize capitalization, and this allowed partial return of capital to ACEN. The remainder was then taken up by equity investors, which ensured a competitive cost of capital for SLTEC.
Benefits of this structure
ACEN’s ETM follows principles from the Council for Inclusive Capitalism’s Just Energy Transition Framework:
• Universal Net Zero Energy - ACEN can transition SLTEC to cleaner technology. Replacing SLTEC with renewables requires ~1 GW of new solar and wind; ACEN expects over 10x this when SLTEC is retired.
• Workforce evolution - To be achieved through continuous plant hiring from the local community, training and reskilling, and rotations to ACEN renewable energy facilities.
• Community and resilience - Since SLTEC is one of Calaca, Batangas’ largest taxpayers, ACEN will assess and mitigate the ETM’s impact alongside local stakeholders, part of which is the prospective transition of SLTEC to newer and cleaner technology.
• Collaboration and Transparency - A Just Transition plan will be shared with key stakeholders to ensure adequate output to replace foregone coal capacity, in cooperation with the Philippine Department of Energy (DOE). Key learnings will be shared with industry peers and other organizations.
Enabling conditions
• Alignment with strategic priorities of home entity (Ayala Corporation) which had a legacy of investments in clean energy in the region.
• The two lenders (Bank of the Philippine Islands and Rizal Commercial Banking Corporation) had to carve out special policies surrounding the ETM structure given that both were previously operating under a model restricting investment in the coal industry.
• Financial infrastructure maturity and agility to support SPV’s, coupled with domestic and international financing channels.
• Localized insurance support via Government Service Insurance System (GSIS) and the ability to acquire sufficient insurance coverage for the duration of the repurposing execution.
• Equity investors from financial services / insurance industry were instrumental in getting the structure off the ground.
• ACEN remained the offtaker of the power which helped ensuring the financial structure would be viable in the eyes of debt and equity providers.
• An operating and maintenance agreement was put in place to ensure that the plant is run safely, reliably, and efficiently throughout the duration of the retirement journey.