Scaling Financing for Coal Phase out in Emerging Economies 2025

The business case for asset owners BOX 3. Asset owners face an uncertain outlook for their CFPPs. As the energy transition accelerates, more consistent availability of cheaper renewables generation will increasingly outcompete CFPPs that have high fuel and operational costs. This will result in reduced CFPP utilization and a consequent hit to revenue generation, particularly when power is sold on a spot market. Government policy and regulations, such as carbon pricing or stricter environmental controls, will also impose costs on asset owners and squeeze profits. Early CFPP retirement can help asset owners deal with these downside risks if early payouts such as those explored in this study enable them to monetize value earlier than originally planned. This allows asset owners to hedge against the risk of stranded assets and diminishing revenue streams because the portion of the plant’s equity value collected early will no longer be at risk. The timing and scale of reinvestment that a CFPP asset needs to remain efficient and operational – including capital expenditure on equipment overhaul that can be costly – will also be important to this equation, since such expenditure will count against the cash flows that accrue to the asset owner. This can also help tackle a core challenge inhibiting the transition away from coal: the need to develop a strong pipeline of viable and bankable CFPP early-retirement projects. Better incentivizing asset owners to consider early retirement would facilitate delivery of the costly technical and financial analyses needed to build a strong pipeline of CFPP phase-out projects. Upfront equity returns Asset owners receive substantial equity payout upfrontRisk mitigation Early equity payout de-risks future CFPP revenue flows exposed to stranded assets and diminishing revenuesImproved competitiveness Enhanced capacity to borrow on ESG (environmental, social and governance) aligned markets Newer plants may be most suitable for financial re-gearing-based transactions with no concessional capital. With substantial remaining revenue still to be monetized, these plants have large remaining equity value. Debt refinancing requirements are therefore higher. This equates to very considerable concessional needs if blending is used to reduce the cost of debt. However, plants with a long remaining operational life (over 16 years) and high capacity (above 400 MW in the analysis) offer high abatement impact from re-gearing and loan tenor extension alone. The ability to extend the loan tenor for a newer plant increases substantially because the plant’s long life raises the re-gearing impact. Also, newer plants have yet to realize a substantial portion of their future revenue. They therefore have higher incentives to take an early payout, given uncertainties regarding their future cash flows. Older and smaller plants, in contrast, may provide better targets for concessional financing. With high proportions of their revenue already realized (since the plants are older) or with smaller revenue expectations overall (in case of smaller plants), lower volumes of concessional capital will have greater impact on overall cost of capital. This means greater abatement impact, and a higher likelihood that abatement will be delivered sooner. Focusing scarce concessional resources on older and smaller plants could also help deliver demonstration projects. These will be critical to showing the feasibility of different phase-out pathways, and demonstrating options available to asset owners looking to move away from their coal operations. Older plants are also nearer the end of their economic lives, and therefore have potential to deliver abatement impact earlier than newer plants. Importantly, plants with no remaining debt, which is one plant in the analysis, do not present good options for re-gearing. This is because all the new lending is used to fund the payout of the asset owner. Scaling Financing for Coal Phase-out in Emerging Economies 16