How coal phase-out commitments can be turned into action in pursuit of Net Zero

Coal-fired power plants remain the largest source of greenhouse gas emissions, responsible for a fifth of global annual emissions. The International Energy Agency states that achieving Net Zero by 2050 requires the phase-out of all unabated coal-fired power generation by 2040. Yet, coal remains deeply embedded in the global energy system, particularly in emerging and developing markets where over 75% of coal capacity is concentrated. Even as countries commit to cleaner energy, the economic role of coal continues to drive policies that sustain its use through favourable tariffs, long-term power-purchase agreements, and subsidies, effectively insulating it from market pressures. Without adequate incentives, many coal assets will stay operational for another 20 to 30 years. Transitioning the ~6,500 coal-fired units globally will also require significant financing to unwind existing asset-level financial agreements and mitigate the impacts on livelihoods and energy security.

The Carbon Trust has been working to accelerate the transition to low carbon energy for over 20 years. It has supported the Asian Development Bank (ADB) with pre-feasibility work for its Energy Transition Mechanism across Indonesia, Vietnam, the Philippines, Pakistan and Kazakhstan. The Carbon Trust is a core delivery partner of the Coal Asset Transition Accelerator (CATA). This philanthropically funded initiative provides technical assistance to scope, design and deploy high-quality asset-level coal transition mechanisms internationally.

Coal assets can be discussed as a homogenous group; however, their varying characteristics mean their optimal coal phase-out pathways are quite different. Age, size, role in the grid, operating costs and financing structure are all factors that play a role. Here we look at age to determine how different levers, including financial mechanisms, should be deployed across a coal fleet to meet a country’s coal phase-out target.

Older, less efficient assets should either be phased out of the energy mix by increasingly cheaper renewables or become uneconomical to run with the implementation of regulations. Many existing and well-understood policy interventions could accelerate their closure, including air quality restrictions, lowering borrowing costs and advancing domestic carbon pricing (driven in part by the EU Carbon Border Adjustment Mechanism coming online). Such policies must advance rapidly to ensure that older assets are phased out within the next decade.

Medium-aged plants can be retired early and replaced with renewable energy on accelerated timelines. To achieve this, financing would need to be restructured or additional financing secured to replace lost revenues from the operation of coal plants and fund the development of replacement capacity. A strong commitment to renewables will help unlock the investments required for these plants to be phased out within the next 20 years.

Large, younger plants could be repurposed or retrofitted using coal transition mechanisms, enabling them to continue to operate with lower emissions intensity and eventually be decommissioned. In this context, financing represents a capital investment in the asset aimed at changing its operation, redefining its role in the electricity system, and altering its revenue stream. This will influence the risk profile and appetite of potential investors, who will need confidence in the revenue model, which in turn will depend on a supportive policy and regulatory environment to make these projects bankable. Building investor confidence in the asset’s ability to operate with lower emissions intensity in the system will be critical to securing the financing necessary to transition these plants within the next 30 years. Retiring these assets completely in the short term should be explored, but it will likely be a lot more expensive than older plants due to their relatively large financial costs. Concessional finance could be used to support these coal transition mechanisms, where necessary, to meet coal phase-out targets.

Innovative finance mechanisms will need to be designed considering the different funding profiles of the assets. These will need to be flexible and tailored to the asset, with proper safeguards in place to ensure they will truly contribute to a low-carbon transition. There are currently common challenges with financing the coal transition. Below, we make recommendations of how it’s possible to make progress despite these challenges by fostering innovation and collaboration.

Transitioning away from coal involves significant upfront investment to retire or repurpose existing coal plants. So too, for building out renewables and expanding network capacity. It can be prohibitive, especially in developing markets where resources are constrained, and the cost of capital is greater due to weaker institutional frameworks and higher financial risks.

Recommendations:

Many international standard-setters do not make any allowances for financing coal. For example, the current methodology for financed emissions does not account for potential avoided emissions associated with financing early coal retirement. Similarly, the EU Green Taxonomy imposes a blanket ban on coal. This discourages financial institutions from making these investments as the benefits cannot be justified within widely used reporting metrics.

Recommendations:

Evaluating the ambition and credibility of a utility’s transition plan is another significant challenge that can deter investors. Ensuring that a coal phase-out plan is credible and actionable is essential for confidence in its implementation and effectiveness in reducing emissions. In addition, at the country or fleet level, the closure of coal plants may result in the development of new or intensified fossil fuel operations or encourage the extension of coal plant operations in anticipation of further financial support. In supporting an asset-level transition, we must ensure we are supporting overall emissions reductions.

Recommendations:

CATA’s technical assistance, delivered through technical and local partners, has supported plants and governments in the Philippines, Colombia, Chile, Indonesia and South Africa, with $1.68 million in philanthropic funding deployed to date. CATA invites stakeholders interested in beginning their asset-level transition to reach out and explore potential support options.

Acknowledgements:

The authors would like to thank colleagues from the Carbon Trust for their contributions to this article, including Andrew Lever, Director of Energy Transition, Lindsey Hibberd, Associate Director and George Mowles-Van Der Gaag, Senior Manager.