Scaling Financing for Coal Phase out in Emerging Economies 2025

Illustration of financing approaches analysed FIGURE 3 The analysis also considered the need to build a business case for asset owners to commit to early retirement. It therefore prioritized delivery of equivalent equity value to the asset owner against a business-as-usual scenario (no financial loss), and included an upfront payout to the asset owner in return for agreeing to retire early. This early payout can support asset owners in mitigating exposure to risks stemming from increased competition from other power generation types as the transition unfolds, and increase the value delivered by the transaction by monetizing a portion of the asset’s equity value earlier than previously anticipated (see Box 3). It could also be linked to commitments to re-invest in clean energy, or not to re-invest the funds in fossil fuels.Three financing levers were considered to lower an asset’s overall cost of capital, and thereby enable early retirement: 1. Refinancing existing debt with new, lower cost debt, achieved by blending concessional and commercial financing. 2. Financial re-gearing by replacing more expensive equity with debt. 3. Extending the payback period of new debt provided to the asset compared with its existing debt to two years before the early retirement date (loan tenor extension). Refinancing with cheap debt and re-gearing delivers early payout, while enabling early retirement and delivering the same net present value vs business as usual (BAU) Pre-investment Post-investmentDebt rate concession approach% CFPP1 Debt (8%) Equity (12%)WACC1 = 9.6% 60% 40%CFPP1 Debt (5.5%) Equity (12%)WACC = 8.1% 60% 40%– Blended finance is used to refinance existing debt in the coal power asset – Lowering the cost of debt gives an opportunity to the asset owners to achieve their value early and retire the plant early – In the blended finance facility, commercial debt is senior debt2 Pre-investment Post-investmentGearing increase approach CFPP1 Debt (8%) Equity (12%)WACC = 9.8% 55% 45%CFPP1 Debt (8%) Equity (12%)WACC = 6.8% 80% 20%– Increasing gearing in the coal power asset is done using commercial debt – The additional debt helps give an early payout to the asset owners and lowers the overall cost of capital, resulting in early value retrieval for asset owners and earlier retirement Note: 1. Weighted average cost of capital; 2. Senior debt is debt that gets priority in repayment Source: Coal-to-Clean Initiative illustration Scaling Financing for Coal Phase-out in Emerging Economies 9