Scaling Financing for Coal Phase out in Emerging Economies 2025

Bridging the economic gap: Financing levers for early phase-out1 The challenge of closing large numbers of CFPPs early in EMDEs, many of which are relatively young, is substantial. Early phase-out necessitates bridging the economic gap between the value a plant would have generated in a business-as-usual (BAU) scenario and the value it will deliver if its retirement date is brought forward. The younger the plant is, the harder it is to retire as the return on investments is due over its expected lifetime. Dealing with this fundamental issue is key to incentivizing asset owners to engage in retirement discussions. Yet, the overall cost of closing this gap could be enormous. In recent years, several pilot initiatives have identified financing mechanisms to deal with this issue. These aim to enable early retirement while ensuring asset owners are not negatively impacted financially. Broadly, these pilot transactions rely on one of two means to do this: –Lowering the cost-of-capital: Reducing an asset’s overall cost of capital, also known as the weighted average cost of capital (WACC), reduces the amount of interest to be paid. This frees up cash flows, enabling an asset owner to realize equity value earlier, thereby facilitating earlier closure of the plant. Reducing the cost of capital often relies on blending commercial and concessional financing (the latter is financing on below market rates from institutions such as multilateral development banks). The ACEN South Luzon Thermal Energy Corporation (SLTEC) transaction in the Philippines, and the Asian Development Bank (ADB)’s planned Cirebon-1 transaction in Indonesia under its Energy Transition Mechanism (ETM), are working to facilitate early retirement in this way (see Box 1). –Transition credits: A new class of carbon credits designed specifically to support early retirement of CFPPs, transition credits compensate asset owners for the economic value they forego when they retire earlier than planned. Buyers of transition credits are likely to be corporates interested in voluntary carbon offsets, as well as governments pursuing decarbonization goals.13 Rockefeller Foundation and the Monetary Authority of Singapore (MAS) are working to use transition credits to bring forward the retirement date of the SLTEC asset beyond the date achieved through the original ACEN transaction (see Box 1). Pioneering transactions provide a route map for early retirement BOX 1 Several pilot transactions demonstrate the viability of CFPP early-retirement approaches in real-world contexts: –In Chile, a $125 million loan package from the Inter-American Investment Corporation (IDB Invest) and Clean Technology Fund (CTF) incentivized the energy company Engie to shut down two CFPP units in Tocopilla in northern Chile two years ahead of schedule. It did this by lowering the interest rate of the loan, in return for emissions avoided from the CFPP shutdown, to help fund a 162MW wind power plant.14 –In Indonesia, the 660 MW Cirebon-1 CFPP could be retired nearly seven years earlier than planned under the Asian Development Bank’s (ADB) energy transition mechanism (ETM) using refinancing. A non-binding framework agreement was signed at COP28 by ADB, Indonesia’s power utility PT PLN, independent power producer (IPP) PT Cirebon Electric Power and Indonesia Investment Authority, the country’s sovereign wealth fund. This set the groundwork for a deal currently in negotiation, which could see the plant retired in 2035 instead of 2042.15 –In the Philippines, in 2022, ACEN, the energy arm of Ayala Group, announced the divestment of the SLTEC CFPP , using refinancing with cheaper debt and equity from Philippines- based banks and institutional investors. The transaction brings forward the plant’s retirement date to 2040.16 ACEN, in partnership with Rockefeller Foundation and MAS, is now working with the Coal to Clean Credit Initiative (CCCI) to further accelerate the closure date to as early as 2030 using transition credits.17 Scaling Financing for Coal Phase-out in Emerging Economies 7