Scaling Financing for Coal Phase out in Emerging Economies 2025

Payment assurance through contracts or guarantees TABLE 1. Mechanism to address riskDescription Alternative contracting against revenue streams Ancillary services support grid reliability, frequency response ensures system balance by adjusting to frequency fluctuations, and congestion services manage transmission bottlenecks to optimize power flow. These are all ways to contract generation, with ancillary service market, frequency response and congestion market contracts helping to build a bankable stack of revenue streams. Capacity market Capacity market contracts could provide alternative payment assurances to lenders. Some CFPP capacity would remain available to the system, but standing idle, with asset owners remunerated based on installed capacity, instead of generation. This can also help governments concerned about the impact of CFPP retirement on energy security. It allows governments to mitigate risks of energy insecurity, but with limited or no emissions from CFPPs. It could also facilitate early retirement planning, helping to stagger retirement dates for asset owners, though it would result in additional costs to government because it pays for power it does not use. Such an approach would entail risks from a climate perspective, given limited safeguards against a plant being returned to full use, for example, in the event of a change of government. Revenue guarantees A multilateral development bank (MDB), government or philanthropic guarantee could back payments against any non-contracted revenue. Depending on the coverage needed, payment guarantees are likely to be high-cost and therefore may run into scalability challenges. This may risk tying up large quantities of public or philanthropic capital, which could be better spent elsewhere. Loan service guaranteesTailored loan repayment guarantees to individual lenders may provide more affordable and targeted guarantee solutions. Even if this covers only a small portion of the loan required by the transaction, this could encourage domestic banks to come in if it brings a large international bank to the table. Contracts for difference Following a contracts for difference model, a guarantee system based on an agreed baseline spot price could provide a cost-effective means to deliver payment assurance, where revenue will be generated on the spot market. A guarantor would top up payments when the actual price is lower than an agreed baseline price, with a borrower paying back the difference when the actual price paid is higher. Use of guarantees also poses risks that scarce concessional capital will end up being used to compensate lenders or asset owners if the CFPP performs less well than expected. If a CFPP goes out of business or generates less revenue than anticipated in the retirement deal, scarce concessional financing would be left compensating lenders anyway. Given the likelihood that power sector economics will change, there is also a possibility that mechanisms to de-risk future revenues could keep a plant operating longer than it otherwise would. If, for example, a government were to introduce a reverse auction to retire plants early, a guarantee might end up being used to back value that might not actually exist. As such, it is preferable to limit guarantee use as far as possible. Mobilizing complementary coal phase-out tools 2.5 Clearly, financial re-gearing can provide a means to accelerate retirement of some kinds of plants. However, addressing the overall scale of the challenge will require a broad set of solutions. It will be vital for governments to introduce policies and regulations that make coal power generation less valuable and more costly, such as environmental and pollution controls, carbon pricing or taxation, and capping the lifespans of CFPPs, as well as those that address barriers to scale-up of clean alternatives. In any event, the financial restructuring solutions discussed on this paper will only be applicable to some kinds of plants in certain circumstances, and all 10 CFPPs in the analysis continue to operate into the 2030s and 2040s. This is a substantial improvement on their existing closure dates and, for many CFPPs, delivers retirement consistent with comparative transactions (such as the Philippines SLTEC transaction), and sometimes better. Further accelerating the retirement dates of these plants, and enabling early retirement of CFPPs not suitable for restructuring, or those with larger remaining equity value still to be recouped, will require additional kinds of capital and financial solutions, particularly concessional financing and transition credits. Two approaches in particular stand out as warranting further discussion and focus: –Combining refinancing with transition credits: The possibility for transition credits to be combined with refinancing, as being explored currently by ACEN, Rockefeller and MAS (mentioned above) Scaling Financing for Coal Phase-out in Emerging Economies 18