Episode 2: Towards a Just Energy Transition

Full transcript

Ivy Kuo: Hello, I'm Ivy Kuo, Asia Pacific ESG leader at PwC, and you're listening to ESG: Defining Asia Pacific's Future. This podcast series provides insights on the latest sustainability trends in the region to help you solve today's challenges and prepare to take on tomorrow's.

In this second season, we focus on Asia Pacific's just transition to net zero. I'm delighted to introduce you to PwC's expert in this topic, Kirsty Haymon.

Kirsty Haymon: Thanks Ivy for the introduction. There's an increasing call to action to ensure that the shift to net zero is fair and inclusive. In this second season, we'll be exploring how stakeholders can achieve an environmentally sustainable global economy while also ensuring no one gets left behind.

We have a great lineup of speakers covering topics from energy, justice, and human rights to community resilience and workforce transformation. Our guests will be sharing their views on Asia Pacific's just transition and the strategies being deployed in the region to drive inclusive opportunities for those most impacted by the shift away from carbon intensive activities. Please note that the opinions expressed in this podcast are solely those of the speakers and do not reflect the views or opinions of any organisations with which they may be affiliated. 

Let's get started!

Kirsty Haymon: Welcome to the second episode on Asia Pacific's just transition. Today's discussion focuses specifically on the energy transition and the particular challenges around managing the shift to net zero in a region experiencing energy security issues and wider social inequities. We have two guests who will share their practical experience and progress so far in driving decarbonization efforts in the energy sector. 

My first guest is Charlotte Wolff-Bye, Vice President and Chief Sustainability Officer of PETRONAS, Malaysia's state-owned energy company. The second is Eric Francia, Chief Executive Officer and President of ACEN, Ayala Corporation's energy platform headquartered in Manila. Great to have you both with us today. 

Charlotte, thanks for your time today. You are not new to the challenges and complexities of developing sustainability strategies to drive decarbonization, having done this for a number of companies before, but you are relatively new to the region. What changes and what modifications are you really seeing that companies are going to need to make in the Asia Pacific region?

Charlotte Wolff-Bye: Well, thank you Kirsty for this very big question really. Of course, there is no net zero without Asia. Asia very much needs to be part of the fold in decarbonizing its energy system just like the rest of the world. But the energy sector really needs to transform radically across the world and there's a major shift that's required. I guess this is what we refer to as the energy transition. 

Now, what is driving that shift? Of course, climate change, but also technological advancement. Here in Malaysia, what does it mean? PETRONAS is the custodian on Malaysia's hydrocarbon resources, and we have a clear approach in this regard. Twofold, actually. Reduce operational emissions, but also growing clean energy solutions. In a way, the approach is not that different from other regions, it's just that we maybe start from a different... The starting point is different, and regulation is different, and the drivers are a little bit different.

Climate change is very real in this region. I would say Southeast Asia, in particular, is very vulnerable to climate change, but technological advancements are also available here. 

What are we doing as a company here? We are reducing our own emissions and we have clear approaches here. It's around energy efficiency and then in oil and gas production, reducing flaring and venting, also electrification, as well as deploying carbon capture and storage. 

But on the other side, we also see the big growth opportunity. This is critical for the region because especially Southeast Asia is a growing region. It'll be, I think, the fourth-biggest economy in the next few decades with the third-biggest workforce in the world, so there need to be many new opportunities and prospects in this energy transition. I would say that the approaches are very similar to other countries, but the drivers are a little bit different. Regulation's different, carbon pricing isn't so prevalent in the region, but we all want the same future, which is a decarbonized economy across the whole.

Kirsty Haymon: Thanks, Charlotte. We'll come back to that carbon pricing with our second guest. I know this is very close to his heart. 

Turning now to Eric, thanks again for joining us. You've been with ACEN since its inception in 2011 and have really seen a significant shift. It was back in 2016 where I think 90% of your energy generation was from fossil fuels. You are now at a point where you are almost achieving 100% renewables, way ahead of what you had originally planned. Tell us what have you been doing over the last few years and what we can expect from ACEN in the coming years.

Eric Francia: That's right, Kirsty. Quite a fascinating journey thus far. We're relatively young. As you said, we started ACEN in 2011 as part of the Ayala Group's energy platform. We had always aspired to be a sustainable company, given that Ayala has always been at the forefront of sustainability. 

But having said that, well, our very first investment at the time was a modest 33 megawatt wind farm, a 50% stake in a 33 megawatt wind farm. That's how we started, $12 million, very modest. But as you point out, by 2016, we were at more than 90% thermal and only around less than 10% renewables. We saw the world shifting at the time. It was still a tad early, but we made that bold step of pivoting and starting to divest our coal and thermal business and reinvesting all the proceeds into renewables. We saw that renewables were getting more and more competitive, more scalable, and hopefully, more reliable, although the jury's still out until we see the energy storage being competitively priced but we can have a discussion on that as well.

In the last five, six years, we've transformed our portfolio from being Filipino-focused to having a wider regional footprint. We're now in Indonesia, Vietnam, India, Australia. Recent entry in Laos to serve Vietnam, doing cross-border energy transactions. Recently we also entered the U.S. and a couple of other markets in the offing. We've also shifted from thermal to predominantly renewables. We're now 98% renewable generation, targeting for 100% by 2025. We've also, of course, committed to net zero by 2050. 

We've recently also announced our bold aspiration of reaching 20 gigawatts of renewables by 2030. We're now at around 4.2 gigawatts of attributable capacity. We've come a long way from our first 33 megawatt investment. We're now at 4,200. We believe that we've got what it takes to grow 5X to 20 gigawatts by 2030. It's not going to be easy, but I think with the vastness of the opportunity and challenges of energy transition, I think we have no choice, frankly speaking, but to get there.

Kirsty Haymon: Certainly a lot of opportunities in the region for energy companies like yourselves. You've both gone through in some detail about the investments that you are making, looking at new ways of generating power innovations in technology. But let's come back to the just transition. 

Charlotte, in terms of PETRONAS, what are you really doing in terms of how these impacts on the changes that you are making as a business, the planning that you are doing around your workforce and the implications for your value chain?

Charlotte Wolff-Bye: In one way, I guess I could say it's still early days. The world is still very much reliant on hydrocarbon and other fossil fuels, but it's changing rapidly. I just saw some research stating that US$1.1 trillion has been invested in renewables and electric vehicle infrastructure over the last year, which is on par with other energy infrastructure investments. Actually, it's coming along very nicely now. 

But to reach a net zero goal, the world needs to triple these investments before 2030. We can expect a big ramp up in these investments. Of course, that will then change how we both produce and consume energy. It's not just for the producers, the whole of society needs to change. That's very clear.

I think what's very interesting here, Malaysia government policy talks about this in great detail around moving people onto public transport, circular economy, business models, et cetera. It really talks about a new set of skills and prospects for an economy. 

What does that mean actually from an employee perspective? In PETRONAS, we call it ‘retooling human capital’. We are looking at our strategy and then mapping the skillset that we require going forward for existing business, but also for the growth business, which I already laid out about renewables, biofuels, and CCS (Carbon Capture and Storage), and so on. There's an area where, obviously, you can reskill. For instance, if you are a subsurface engineer, then you were perhaps trained to find oil and gas prospects under the crust of the earth. Now we need to learn not just how to pull it out, but also how to capture CO2 and sequester it in permanent geological structures. 

Reskilling is very critical. It's not like you can replace your whole workforce overnight. That's not the desire either. Reskilling is important, but we obviously also need new skills. I think, here, it's very important to work with universities and training academies to make sure that there is a whole pipeline of new talents coming through. 

But one thing which is common I think for all developments right now is digitalization. And a big data, and the skills to analyse data, those are skills that are, I would say, universal and required in most jobs going forward. 

But I also wanted to highlight that whilst there's a lot of technical skills where we move from molecules to electrons that we need to nurture and make sure are available in the marketplace. In a company like PETRONAS, we also need other types of skills, such as biologists, for instance, and as we are moving into nature-based solutions to help preserve and conserve nature and biodiversity around us. So there's a whole set of opportunities, I think, for a lot of different skill groups, but it's important to map these and try to somehow forge as orderly transition as possible. But I think industry working directly with educational institutions will sort of help that.

Kirsty Haymon: Eric, we know that you've divested some of these heavy emitting assets and you've also managed the processes Charlotte has outlined in terms of how-to re-skill those individuals and absorb them into your emerging generating capacity and technologies. Talk us through a little bit about that process.

Eric Francia: Yes, as part of our transformation from shifting from thermal to renewables, Kirsty, we got a lot of mixed feedback from our investors, our ESG oriented investors. There's a camp of course that hailed the shift from thermal to renewables, but others called us out in terms of, "Okay, but aren't you just passing the problem, those emissions, to somebody else?" And worse, if we sold to, for example, an unlisted company or a company who has less transparency, and arguably less responsibility, in terms of running those thermal plants and would run it forever to maximise their investment, "Aren't you supposed to address that?" 

So that gave us a pause and it was a dilemma. If we divest these thermal assets, one could argue it was not the most responsible thing to do. If we didn't divest it and run it ourselves, we don't become investible and we wanted to attract the capital to expand renewables. If we just shut it down overnight, it would also be irresponsible to do that, because the grid still needs it and there's shareholder value to protect.

So we were struggling with this dilemma. That's why we were appreciative that the Asian Development Bank, for example, started to push this notion of Energy Transition Mechanism, or the ETM, from a couple of years ago. So that was sort of a light bulb moment for us, and we thought that was the answer in terms of how to further our transition, so it's a responsible divestment of a coal plant. And we were so excited about this idea that we did it with much speed and agility. And I'm happy to note that we closed the world's first ETM, Energy Transition Mechanism, last November of 2022. Real financial close, we got the proceeds and we are already redeploying all of the proceeds into renewable energy projects.

Well, there's a lot of nuances, the devil in the details, because it did entail sponsor support. We remained as the offtaker, for example, otherwise these financial institutions would not be comfortable. We had to make sure that there was a robust operation and management, operations and maintenance, oversight from us, given that we had the expertise and so forth.

And to your point, we also wanted to make sure that the employees, the jobs, are not only secure, but these can be transitioned over time to green jobs, given that we have the commitment to buy back the plant to shut it down and transition it to a cleaner technology. 

And we committed to this by the year 2040, which is the 25th anniversary of the coal plant. So as you know, coal plants typically last for 50 years, that's the average retirement age of coal plants in the US. We said we'll draw a line in the sand and our coal plant, with this divestment, will only live up to 25 years, and we will make sure that it gets shut down and transitions to a cleaner technology.

So as you can imagine, a just energy transition is required to make sure that the new technology is put in place, that the capacity is not lost. That's why we have to replace it with renewables and firming capacity, that the jobs are not lost, that they get transitioned to green jobs, and we've had examples already of people transitioning to some of our renewable energy projects, and the community does not lose all of the revenues. There has to be a transition in place to make sure that the local community is taken care of as well.

Kirsty Haymon: Thanks Eric. And I think this is really important for a region like Asia-Pacific where we need regional examples of what works here from companies like yourselves. And I think you're both particularly challenged, if I may say, in terms the multiple demands that you have in terms of operating in countries that have high energy and security, we mentioned this at the beginning, trying to enter into new technologies and invest in innovation, all the while trying to also then maintain the employment of your both indirect and your direct workforce. 

Charlotte, can you talk to us a little bit more around how PETRONAS is managing to strike that balance? And again, I understand it's early days, but what might we envisage seeing, in terms of some of the examples you are investing in around race to decarbonization and the access that you are providing to SMEs (small and medium enterprises) to finance? I think this is a particularly interesting case that our listeners would be keen to hear about.

Charlotte Wolff-Bye: Yes, this is an era of innovation if you like, and new collaborations and new value chains are being developed. It's a very exciting time, I must say, to be in the energy industry right now, because it's all changed and it's incredibly exciting. The whole sector is evolving. But I think what's... You were pointing to energy security, and if I may just mention a few points around that, because what we learned over the last year is that energy security is the bedrock for economic progress, and that means it's also the bedrock for climate action. And even in the Paris Agreement, I think it's in the preamble, it talks about climate action must go hand in hand with poverty alleviation and other actions. On its own climate action won't succeed, so it's so important that you understand that you have a system-thinking around this.

Now, us as a company, we don't play the whole role. We are the custodians of hydrocarbon resources and support and supply that to Malaysia and other customers around the world. But we have this two-prong approach now, which is about reducing emission in our own production and operations, but then also to invest in this new value chains. 

So how do we do that? What's quite interesting is we have set some very bold, ambitious targets for reducing emissions. We've actually set a target to peak our emissions at the end of next year, so in 2024. And that's a very, very bold ambition.

Now we don't have all the solutions at hand, so what we did was we ran an open innovation challenge called Race2Decarbonise. So we worked with university partners and other partners all around the world to promote the idea, assist us in reducing our carbon emissions, and we were overwhelmed by the response. We had entries from over, I think, 25 countries around the world, and there were juries and technical teams going through each of the entries. And we had many, many winners, if you like. And we will now commit to deploy some of these innovations that came through the open innovation challenge.

Now on vendors, being a national company, we play a really important role in promoting industrial development in the country, especially in the oil and gas services and equipment industry. And of course here what we do, we drive innovation and promote opportunities for local companies to expand and develop. And this is so important, as part of nation building, if you like.

We've actually worked with financial institutions to establish a vendor financing programme, and this is to assist Malaysian oil and gas services and equipment providers to basically have access to funding to diversify into clean energy value chains and adopt sustainability practises. 

We've also worked with vendors to identify barriers and help define opportunities for greater ESG adoption among local businesses. And there's also a lot of work around capacity building and engagement, and to strengthen resilience during this energy transition that would obviously rumble on for decades ahead. So vendor development programmes for small, mid-sized enterprises is really an important effort from our side, alongside everything else we are doing, as we are evolving our business.

Kirsty Haymon: Thanks, Charlotte. Eric, let me just come back to you for a moment. We've heard around the role of the private sector, and you all are taking so many key steps. What else needs to be done from the banks as well and the courage that they need to engage with this process, to allow you to continue to invest in the way that you are?

Eric Francia: Yes, I think the whole initiative, whether it's private sector-led or all these multi-lateral support on the just energy transition. It's still early days, but holds much promise, but the jury's still out. But we're very supportive of this, and hopefully this first deal would be a proof of concept that this can work and this is scalable.

It's not going to be easy, but I think there has to be a concerted effort to make it happen. It is our belief that to make this energy transition happen in an accelerated way, we cannot only focus on scaling up renewables and the appropriate technologies that come with that, but also, we need a methodical plan to retire these coal plants, especially in an area like Southeast Asia, where we still have a large fleet of coal plants that are relatively new. We also operate in Australia and coal plants there are typically reaching the 40, 50 years of age, and it's just natural for them to retire them economically, physically, it's just the right thing to do.

That's why I think these JETP (Just Energy Transition Partnership) initiatives are appropriate for countries like Philippines, Indonesia, Vietnam, because we do have a lot of coal plants that were just built in the last decade or so. 

So, I think we need to plan for that, we have to have the right mechanisms. One of the mechanisms that we're hopeful that would be rolled out, apart from financial institutions and even insurance companies encouraging private sector to do what we have done, like the early retirement of the coal plant, is the carbon markets.

So, up to now, I'm not aware of any carbon market mechanism that gives credit to early coal retirement. And I know there's been initiatives in terms of pushing for this, and we are one of those strong advocates that would hope for a carbon credit mechanism for early coal retirement.

Charlotte talks about carbon capture, which is great if we can really scale that up, but I always put this metaphor, that an early coal retirement, coupled with the development of new renewable capacity that's dispatchable, hopefully with battery storage and so forth, you bundle that with an early coal retirement, achieves the same effect, which is zero emissions, but you're still retaining those much needed gigawatt hours into the same grid.

And I think that combination deserves carbon credit, no different than a carbon capture deserving a carbon credit. So hopefully, it's a lot of work in progress here, but we're working with the various sectors and interest groups to make sure that these mechanisms are in place to really facilitate a more methodical coal retirement and energy transition initiatives.

Kirsty Haymon: Charlotte, are there other incentives that the private sector might need to drive this change? Again, we see a lot of owners being put onto these companies to manage the diversification, investing in new areas. This is a lot of pressure. What support is needed?

Charlotte Wolff-Bye: If only we all knew what the perfect function or equation would be for this. It's clear that developing countries can't adopt the same tools and mechanisms that work in developed countries. It's a matter of what, around affordability. Carbon pricing is deemed to be the most effective way of decarbonizing economies because it drives a behavioural change. And where you have cap and trade schemes with a relatively high carbon price, such as the European Union, I think it peaked at 110 Euros a tonne recently, it does change behaviour. But in a region such as Southeast Asia, that would not be affordable.

So, whilst carbon pricing still will play a very important role, but we need to think about other aspects as well. And I think Eric points out a very important point, vision and resources are not enough. You need incentives and how can you construct those incentives that you can actually accelerate and scale up those technologies that would be in support of your net zero strategy.

And I think for Southeast Asia, we probably need to think a little bit more about how we can construct incentives that would really drive the right behaviour, just as Eric said. Coal is an affordable source of energy right now, it is available and probably doesn't swing trade balances that much because it's available locally or nationally. So what's the incentive actually to change fuel sources? These are important questions and I think more discussions and research need to go into them, because without incentives it doesn't work. 

And I think now in the US they have an Inflation Reduction Act that offers a lot of opportunities for companies to really focus on renewables and decarbonization. And we see a whole host of announcements of new investments as a result, incentives really matter, it's just how you construct them so that they have the desired effect.

Kirsty Haymon: I think also, coal keeps people employed at the moment, which when you're trying to maintain that level of socioeconomic development, there is potentially a gap or a decline if the training and the upskilling process isn't managed and then you fall back on social protection. So again, these cumulative impacts of companies transitioning in this way can also have much wider effects, both positive and negative.

Eric, you mentioned that one of your drivers in terms of your ongoing involvement with the South Luzon Project was around some pressure that was put on ACEN. Tell us precisely what mechanism you have in place to ensure that this driver around ongoing economic inputs, ongoing employment, and that taking this project off your books, you still have an involvement and a responsibility around.

Eric Francia: Yes. I think there are three important features or nuances on what makes this structure work for all the stakeholders. So three key features of this ETM transaction. One is the offtake arrangement. No investor, be it debt or equity investor will invest in this, other than a strategic investor who would then not agree to shut down the plant. So, we really targeted predominantly financial investors who would want steady, predictable returns. So I think the offtake arrangement is very important. We as ACEN took that responsibility.

The second important element is the operations and maintenance (O&M) agreement. So again, we need to be careful here, because we want to make sure that we abide by the carbon accounting rules that we cannot exercise control. So the O&M team comes with a divestment through the sale, the 200 strong people are now not supervised by us, but there is an oversight agreement to make sure that the plant continues to be run safely, reliably, and efficiently. So, there is an O&M contract with ACEN.

But I think one important aspect of that contract, is that we have the ability to be engaged with the 200 plus people, employees of SLTEC (South Luzon Thermal Energy Corporation), to provide opportunities, especially the younger ones who have a full career ahead of them, more than the 17 years that SLTEC (South Luzon Thermal Energy Corporation) will be running, to make sure that over time they get transitioned to other green projects. It also helps sustain the viability of the coal plant, because what you don't want to happen is that, it's a dying business, it's got a termination date and no one wants to join it anymore, because no one wants to join a company that you know will shut down. So you need to also give employees a roadmap, a path that if they join this company, that there's a future for them.

And then the third component, again, our call option. Our ability to take back the plant to do what is right, which is to shut it down at our committed date and transition into a cleaner technology. And again, transmission connectivity is one barrier in our energy business. So to have a grid connected power plant is quite valuable. There is value there, and I think that our ability to get back that plant at a future date is also, there's a lot of value. 

While it is a groundbreaking deal, my guidance to the team is, our job is not done, there's a lot to be done on the just energy transition engagement with the community, with the people, with the broader ecosystem and creating all of these mechanisms to accelerate further this transition.

Kirsty Haymon: Thanks, Eric. One final question to you both. We know that we are lagging particularly in this region in terms of achieving those nationally defined contributions at the speed in which they're currently aimed. So tell us from your company's perspective, what are the biggest challenges that you have today in this transition to ensure that the process is a just one? Charlotte, can I go to you first?

Charlotte Wolff-Bye: Yes, of course. There's challenges every day, but we just... I think the most important thing is to incorporate these sustainability issues into normal business risks and just address them as business as usual, contexts that are changing, competitive landscape is changing. Make sure that you have resourcing and people in post to address these things and to understand what's going on and how you can best prepare for it.

So in a way, I would say there's no one big challenge, but I would say of course, that the difference from previous big shifts in industry or economy, let's take digitalization or mobile telephone, they were actually private sector driven. The innovation came from labs that then moved into entrepreneurs and entrepreneurial businesses that kind of develop that space. The difference here is for the world to decarbonize, it's a top-down policy. It does require a conducive policy and environment. So that I would say is a challenge. How do you inform what policy you need to succeed in the energy transition? I think the industry doesn't always have those answers, and the government doesn't either.

So you really need to collaborate in a very different manner with all the constituents in the sort of energy spectrum to make sure that you have the right systems in place and the policy and the regulation to drive the right behaviour. 

So, sorry, very long response there, but I must emphasise that as a business opportunity the energy transition is an unprecedented opportunity. This is a once-in-a-generation opportunity generation opportunity. A lot of money will go into the next generation of energy systems. Prepare your business for that and you can have a slice of it. That's kind of how I see it.

Kirsty Haymon: Charlotte, thanks. And we talk in our next podcast a little more around these challenges of transitioning workforces and the incentives that are required to do that. 

Eric, for you in the Philippines, and obviously, working regionally and expanding all the time, you are moving ahead of some of what these policy requirements are in some countries. How do you manage this as a regional platform, and what are the challenges for ACEN in this space?

Eric Francia: Yes. I think one of the advantages of having geographic diversification is each market is different, obviously, different policies, different market structures, so we can really focus on where the opportunities and actionable opportunities are, right?

So one day we were very busy in Vietnam because that was where the action was, and another day it's really doubling down on the Philippines and so forth. So we can shift and also diversify the risks and so forth. But I think number one, obviously policy differs by country. We've seen how Vietnam really forged ahead with renewables with a very strong feed tariff policy.

Now the Philippines has its second wind, if you will, of renewables given the aggressive green energy auction targets. The Philippines just validated that foreign ownership can be 100% for renewables. So that's good news for global competitors and partners. So I think that the Philippines government is doing the right thing to sort of push the envelope on renewables. But again, each country is different.

In terms of the people I think given our very bold aspirations, people are always the constraint, right? It's a relatively new industry. Renewable is really just scaling up. It's just starting to scale up. So there is still a catch-up. And we also compete with other sectors, right? Professional services, financial services, engineering services and so forth. So there is a war for talent, if you will, and there's a re-skilling element and so forth. 

Finally, technology, as Charlotte mentioned, is hopefully going to be a key enabler or unlock a lot of the opportunities. And by technology, we're really rooting for advancements in offshore wind, floating solar and the like, because we will need to scale up solar and wind and land may not be enough. We have to tap other surfaces such as the water surface.

Energy storage, I couldn't overemphasize the critical importance. I don't see a net-zero or a successful energy transition without a successful energy storage, including battery storage because the grid limitation and the intermittency of renewables will have to be resolved through battery storage. And I couldn't agree more with Charlotte that this is a fascinating time to be in the industry in the midst of this global phenomenon, multi-decade phenomenon of energy transition.

Kirsty Haymon: Fantastic. And I couldn't agree with both of you more. Certainly a very interesting time for all of us in this business. Thanks again to you both for sharing a vision for the region's energy transition. 

Charlotte, you mentioned the opportunities presented particularly in Southeast Asia and the support being provided to bring value chains along, which is so important in developing economies where they contribute substantially to GDP (Gross Domestic Product) and employ the majority of the workforce. 

Eric, you've provided an insight into the rapid shift of ACEN into renewables, which has culminated in the world's first energy transition mechanism deal and how responsible divestment can allow for continued energy security, ongoing employment, and available capital to redeploy into renewable technologies. 

This highlights the key role that financial institutions need to play to plan and assist with phase outs and divestment, particularly as coal plants continued to be built. And we'll be exploring this further in one of our upcoming podcasts.

And finally, to drive the change that is needed, we need the right people in the right place at the right time and with the right skills. Join us in our next podcast to hear more on the workforce transformation that is central to achieving the region's net-zero ambition.

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