Considerations of asset lifespan and utilization BOX 4. Results from the modelling point to the importance of asset valuations being both climate-ambitious and fair to the asset owner in terms of realistically reflecting what will happen to an asset’s ability to generate revenue as the energy transition unfolds. This is important for delivering deals that make good use of both commercial and concessional resources, as well as providing early signals to the market to enable planning. A more nuanced understanding of what will happen to CFPP assets going forward could help build consensus as to what constitutes a realistic and fair asset lifespan and utilization profile for CFPP valuation. Many EMDEs have taken the important step of introducing moratoria on construction of new CFPPs.27 Beyond this, some of the most powerful tools at governments’ disposal to accelerate the coal-to-clean transition are policies and regulations that make coal-based generation less valuable and more costly going forward. This includes mandating a maximum lifespan for an asset, after which it must close down, introducing carbon pricing or taxation, and stricter pollution and environmental controls, and more broadly committing to a transition away from coal power generation over time. These policies will encourage asset owners to consider alternative options since they raise the costs a CFPP faces. Ideally, the lifespan set by government should get incrementally shorter over time, reflecting an acceleration in uptake of renewable energy in the market, availability of new solutions, and the ability of a grid to accommodate and run higher penetration of variable renewable energy. Such a “ratcheting effect” is being used by the German government’s reverse auction system to incentivize asset owners to come forward sooner in return for higher compensation for closing early.28 This could translate into retirement deals offering asset owners incrementally smaller shares of the remaining equity value, for example, 95%, 90%, 85% and so on, the slower they are to come forward. This would incentivize early uptake.29 Access to finance 2.4 While the re-gearing approach has the advantage of using only commercial financing at market rates in the capital stack, some financiers may require additional payment assurances to be comfortable with lending. An important area of focus, therefore, is the means to provide these protections, and if they entail costs, how they will be paid for and how they compare against concessional financing requirements in the capital stack. Coal power typically has a high marginal cost. It is therefore vulnerable to being pushed down the dispatch hierarchy as cheaper alternatives become more regularly available. As such, some commercial financing institutions may find it more challenging than others to lend for CFPP early retirement. Constraints are particularly pronounced when a portion of CFPP revenue is expected to be generated on the spot market, or relies on extension of a PSA or power purchase agreement (PPA) that has yet to be realized (as has been assumed for the purpose of this study), because revenue is not backed by a contract. Increasing gearing and lengthening loan tenors may accentuate these risks for some lenders. Higher debt levels mean higher fixed costs and lower ability of equity to absorb loss. Longer loan tenors mean lesser likelihood that contractual backing to debt and revenue streams will be exposed to increased competition from alternatives. International commercial banks may find these risks difficult to accept without payment assurance. Domestic lenders, in contrast, with greater knowledge of and comfort in the local electricity market, are more likely to be more tolerant of these risks. These obstacles are not insurmountable, but may require alternative kinds of contracting or guarantees. Some suggestions are outlined in the table below. Scaling Financing for Coal Phase-out in Emerging Economies 17

Scaling Financing for Coal Phase out in Emerging Economies 2025