JERA Inc Co. Transition Bond
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Every month, Climate Bonds brings you analysis of the transition finance market, highlighting bonds and projects designed to finance the transition to a green economy and assessing the credibility of their plans. |
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The latest from transition finance markets: JERA's Transition Bond
Every month we bring you our analysis of key issuances from the nascent SLB/transition markets, focusing on their climate mitigation credentials against our Five Hallmarks for Credible Transitions framework.
The transition label as applied to bonds and other debt instruments is intended for assets and activities in the hard-to-abate sectors, that meet a Paris-aligned transition pathway. Climate Bonds sector criteria for Steel, Basic Chemicals and Cement will be finalised in 2022.
A brief technical primer Co-firing is the combustion of two or more fuels at the same time, in the context of this bond’s use of proceeds, ammonia/hydrogen with coal. Thermal power generation is where heat is converted into electricity, often through steam. This can refer to coal, gas, or in this context, coal with ammonia or hydrogen. Supercritical coal plants are a type of coal plant more efficient than traditional coal plants. Ultra-supercritical coal plants are a step more efficient. Despite being marginally more efficient, these coal plants will not mitigate air pollution or GHG emissions.
Selection of the issuance
This month we are looking at the recent JPY2bn (USD15.7m) issuance from JERA in two tranches, in five-year and 10-year tenors - the first Japanese electric-utility company transition bond. This comes amidst several other landmark debut transition bond issuances in Q1 2022: from Japan Airlines and Tokyo Gas, and an upcoming Transition-linked bond (both UoP and performance-linked structure) from Eneos.
JERA is a joint-venture between Japan’s first and third largest energy companies, and collectively counts as the country’s leading corporate CO2 emitter, responsible for about 15% (169 MtCO2e) of Japan’s total annual emissions. JERA’s Transition bond comes on the heels of Japan’s Ministry of Economy, Trade and Industry’s (METI) Basic Guidelines on Climate Transition Finance in May 2021, as well as the selection and publishing of JERA’s transition finance programme as a ‘model case’ of transition finance.
This issuance also comes after JERA announced its 2050 carbon neutrality pledge in 2020, which includes a commitment to decommission all ‘inefficient’ (below supercritical) coal-fired plants by 2030, and plans to replace them with co-firing plants with ammonia and hydrogen, reaching 20% ammonia in 2030 and 100% by 2040; with no concrete targets for hydrogen co-firing. |
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Deal Information
Full name |
JERA Co Inc |
Amount Issued |
JPY2bn (USD16m) |
Country of Risk |
Japan |
Issuer Type |
Non-Financial Corporate |
Issue Date |
24 May 2022 |
Maturity Date |
24 May 2027
24 May 2032 |
Transition Bond Framework |
Link |
Second Party Opinion |
DNV Japan (Link) |
Use of Proceeds Categories |
Projects contributing to zero CO2 emission thermal power. |
The expenditures related to demonstration projects of fossil fuels and ammonia/hydrogen co-firing. |
The expenditures related to decommission of inefficient thermal power plants, with the aim of replacement for high efficiency thermal power plants. |
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JERA Co Inc: Climate Bonds’ Summary View
JERA’s Transition bond issuance will help leverage the UoP model to drive capital to specific Transition assets and activities, alongside other issuers and issuances from Japan. Climate Bonds supports the use of the UoP structure, given its success in the GSS bond market, for transition finance. To enable market expansion, we are also developing UoP criteria for various sectors in transition: Cement and Basic Chemicals criteria have completed public consultation, and Steel is now open for comment.
However, we strongly encourage JERA and other potential transition bond issuers to raise their level of ambition: while the decommissioning of coal plants by 2030 is worth support and excitement, we strongly oppose the use of combustion plants, as well as the continuation of ultra-supercritical (USC) coal plants, neither of which aligns with a net zero future. To meet its decarbonisation pledges and commitments, JERA needs to urgently re-frame its transition plans around net zero targets, as well as to increase its share of power generation from renewables. |
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Hallmarks of a Credible Transition |
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Paris Aligned
JERA has set targets to reach zero emissions by 2050, reduce coal emission intensity 20% by 2030, and reduce domestic emissions 60% by 2035, with reference to the Japanese government’s target to reduce emissions 46% by 2030 (all against a 2013 baseline). This is in part due to METI’s Transition Roadmap for the Electricity Sector’s technological pathway encouraging investment in ammonia-firing and hydrogen-firing thermal power plants.
However, JERA’s targets fall short of what is required for a net zero pathway. TPI’s 1.5-degree pathway for electric utilities calls for a 73.9% reduction in emissions intensity by 2030, and an 86.9% reduction by 2035 (against a 2013 baseline). The IEA’s NZE2050 makes clear that 2035 is when emissions from electricity generation will need to reach net zero in advanced economies. Additionally, JERA’s 2035 target does not include emissions from its overseas assets.
Contradicting both of the above pathways, as well as its own decarbonisation targets, JERA is continuing to develop and acquire additional coal and gas power stations domestically and overseas. JERA’s LNG assets alone include some 11.6GW of installed capacity (as well as LNG terminals) in countries such as Australia, Bangladesh and Vietnam, much of which is only expected to enter operation in the second half of the 2020s.
While the Japanese government’s introduction of sector-specific decarbonisation pathways is undoubtedly a powerful and helpful programme to help provide guidance and catalyse the deep decarbonisation required, Climate Bonds opposes the inclusion of co-firing thermal plants as part of this pathway.
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Robust Plans
Currently, JERA’s thermal plants make up about 20% (58.9 GW) of Japan’s coal power generation and creates about 15% of Japan’s total GHG emissions, of which 2.2GW is supercritical and below. JERA’s transition plan relies on the use of ammonia and hydrogen co-firing thermal plants, reaching 20% ammonia by 2030 and 100% by the 2040s.
A 100% ammonia or hydrogen thermal plant could potentially produce no carbon emissions, but does produce substantial amounts of nitrous oxide (NO2), a 298 times more potent greenhouse gas than carbon dioxide. Net zero targets should also cover life cycle emissions, meaning that targets should also include Scope 3 emissions, wherever possible.
There are also substantial issues with burning ammonia or hydrogen to generate electricity: the production of ammonia and hydrogen both require high levels of energy and release CO2, all while there is no commitment thus far from JERA to use ‘green’ ammonia or hydrogen only. It takes 14.38 MWh of electricity to produce one metric tonne of ‘green ammonia’, which in turn only produces 5.16 MWh of electricity, and only 1.96 MWh in a coal plant. This makes it an incredibly inefficient way to generate electricity, producing significant amounts of GHG emissions each step of the way.
These inefficiencies drive further life cycle emissions for fuel sources of energy generation, increasing JERA’s Scope 3 emissions, and causing further fossil fuel lock- in and the risk of stranded assets.
Climate Bonds recognises that Japanese geographical challenges make ammonia and hydrogen attractive alternatives, but JERA should not rely on ammonia and hydrogen co-firing for the core of its power generation to meet its net zero targets. We encourage JERA to instead invest its and the Japanese government’s capital in renewable energy sources, such as offshore wind. Currently, renewable energy counts for about 1% of JERA’s total installed capacity. |
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Implementation
Despite weak plans, JERA has strong governance systems to take the business’ sustainability into account. This includes a Sustainability Promotion Committee and an attached Executive office, with an environmental sub-committee amongst others.
JERA also announced in May 2022 that it will expand its CapEx programme to JPY1.4tr (USD11bn), of which JPY650bn (USD5.1bn) will be dedicated to decarbonisation. |
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Reporting
Despite weak plans, JERA has strong governance systems to take the business’ sustainability into account. This includes a Sustainability Promotion Committee and an attached Executive office, with an environmental sub-committee amongst others.
JERA also announced in May 2022 that it will expand its CapEx programme to JPY1.4tr (USD11bn), of which JPY650bn (USD5.1bn) will be dedicated to decarbonisation. |
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As usual, don’t hesitate to get in touch with feedback
‘til next time,
Climate Bonds team |
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