On March 20, 2024, three specialists convened at a virtual Expert Exchange entitled Financing the Early Retirement of Coal-fired Power Plants to present initiatives, financial instruments, and information-providing tools for accelerating the phase-out of coal-fired power plants (CFPPs). Many CFPPs must be shut down before the end of their technical lifespan if the climate targets under the Paris Agreement are to be met.

Research insights

Many countries have made net-zero commitments in their nationally determined contributions or pledged to decouple energy production from carbon dioxide (CO₂) emissions. Phasing out coal is an essential step towards achieving these targets, and many countries have initiated this process or will be starting it in the coming years. Given that many CFPPs, particularly in the Global South, have opened in the last 10–20 years, many must now be shut down before their normal operational lifespan of about 40 years, thus rendering their owners unable to fully amortise the costs of building them.

In most countries it is profitable to replace operating CFPPs with renewable energy sources even before the power plants have reached the end of their life. However, barriers to this transition include market inflexibilities, such as long-term contracts, and the right of CFPP owners to compensation if their plants close early. Additionally, the costs of converting to renewable energies are highly dependent on the cost of financing, since running costs are marginal and the initial investment constitutes almost the entire total expenditure. Many countries in the Global South, however, lack access to capital with favourable conditions, and they are confronted with high interest rates that make replacing CFPPs with renewable energies uneconomical.

Climate financial mechanisms (CTMs) are a group of technical and financial instruments that have been developed to support the transition from coal to renewable energies. They pass on the favourable rates of multilateral development banks (MDBs) to countries and companies that must normally bear higher interest rates, and they utilise resources from development finance institutions (DFIs), national governments, international funds (such as the Climate Investment Funds), and private finance institutions working alongside MDBs to use models of blended finance for coal phase-out.

Moreover, new open source-based tools can deliver information on the cost structures of the power sector and, therefore, allow better decisions on investment in early retirement. Such new initiatives and offers by countries, multinational institutions, think tanks, and NGOs will bring more dynamism into the process. Innovative financial instruments can be used further to finance a socially just transformation of the energy system.

Key takeaways

• Existing CFPPs can be replaced competitively by renewable energy sources. The cost of compensating owners for these plants and the conditions for financing the investment in renewables and just transition processes are key for transforming the energy system.
• CTMs can support the early retirement of CFPPs. Private finance from capital markets is merged with resources from MDBs, DFIs, and international funds.
• CTMs can help energy companies transform their business models to renewables energies. Other models buy CFPPs from owners to retire them early or offer the owner refinancing using favourable rates from MDBs to negotiate a shorter life period in return.
• Social justice, as well as offering workers and local communities alternative options for their livelihoods, should be addressed in CTMs to ensure a just transition.

Speakers

Julia Skorupska, Powering Past Coal Alliance
Isabella Suarez, TransitionZero
Oliver J. Herrmann, Climate & Company
Götz von Stumpfeldt, GIZ (introduction and moderation)

See the full presentations here:

See the full recording here:

Read more from our Expert Exchange series: Skilling, Upskilling and Reskilling for a Just Transition in Coal Regions