The global power sector’s transition from “coal to clean” will be critical to meeting urgent climate targets but must be managed carefully to ensure the transition supports economic development. For a just coal-to-clean transition, existing coal assets must retire earlier than originally planned. This managed coal phaseout requires strategic financing to execute, which can be further complicated by tight balance sheets, a high cost of capital, and coal’s near-complete insulation from competition. Despite such barriers, financial institutions (FIs) are stepping in to make just coal-to-clean transactions happen.

Carefully constructed financial tools called coal transition mechanisms (CTMs) can help generators, electricity customers, and the public overcome these complications and realize the benefits of cheaper clean energy. In the past few years, the first wave of FIs has begun to capitalize on the opportunity to enable early coal plant retirement through the use of CTMs in various markets globally. The continued deployment of CTMs to accelerate the energy transition is especially critical in emerging markets and developing economies (EMDEs), as a significant amount of financing will be needed to enable a managed and just coal transition. Although we have seen billions of dollars committed to coal transition globally, most of that finance has not yet been deployed (and not at scale).

With these case studies, RMI highlights lessons learned from the first few successful transactions and the enabling factors they relied on to promote increased awareness and use of such factors for managed phaseout transactions moving forward. Specifically, we have showcased managed phaseout transactions that enabled the early retirement of coal plants:

1. Tocopilla power station in Chile, where a results-based concessional loan tranche tied to emissions reductions helped retire coal units early while building new renewable capacity.
2. Logan and Chambers generating stations in the United States, where institutional investors refinanced project debt to enable early retirement.
3. The Calaca SLTEC power station in the Philippines, where the owner sold its equity stake in the plant to investors who could lower the cost of capital and accelerate the plant’s retirement.

These case studies demonstrate innovative and potentially replicable approaches to utilizing CTMs that could apply in diverse geographies and market structures, most notably in emerging and developing economies.^[1]

These case studies highlight the key factors that enabled early retirement as examples so that others can carry over these learnings and contextualize them for new markets and future transactions. Across all these case studies, we identified the following enabling factor themes:

1. Clean energy was often cheaper than operating coal or existing coal Power Purchase Agreements (PPAs) in the market at the time of transaction.
2. There was a strong appetite for transition from offtakers and project sponsors.
3. The initial coal asset owners were independent power producers (IPPs) able to navigate potential regulatory barriers to transition.
4. A lower cost of capital was secured in the financing mechanism.
5. There was perceived credibility in the financing mechanism, initial project sponsor, and/or clean energy replacement enabled by early retirement.

[1] The material for the case studies was compiled from a combination of qualitative research using information in the public domain and interviews with stakeholders that financed, designed, or assisted in these transactions. Below, please find our case study ACEN — Project Sale to Special Purpose Vehicle. Other coal-to-clean case studies can be found here.

Reducing emissions from the power sector is key to meeting climate targets — in 2021, the power sector accounted for nearly 44% of global CO₂ emissions. As global access to electricity expands and countries turn to electrification as a means of decarbonization, the need for a rapid power sector transition becomes more imperative.

Core to this challenge is the transition away from coal-fired power, which accounted for 73% of the sector’s greenhouse gas emissions in 2021. Utilities and independent power producers (IPPs) worldwide are wrestling with the coal-to-clean transition, especially how to enable the managed phaseout of coal assets. This managed phaseout of coal is complicated by long-term contracts to purchase electricity from coal plants, utility incentives and regulation, the role of coal in supporting national economies and local livelihoods, and other factors. Given these hurdles, well-designed financial structures called coal transition mechanisms (CTMs) can help generators transition away from coal and unlock the benefits of cheaper, cleaner renewable energy sources.

Over the past few years, the first wave of financial institutions (FIs) has begun to capitalize on the opportunity to enable early coal plant retirement using innovative financial mechanisms in markets like Chile, the United States, and the Philippines. As early-stage pilots, each of these mechanisms were designed to meet the needs of specific market and grid conditions.

To scale coal managed phaseout from these first few pilots to the hundreds of gigawatts (GW) needed to meet climate targets, these transactions must become less risky, more replicable, and better able to attract private finance. These case studies highlight the key factors that enabled successful early coal retirement projects. The intention is that key stakeholders in the energy transition (FIs, national and sub-national governments, utilities and IPPs, etc.) can adapt and apply these lessons to create an enabling environment in new markets, mobilize increased private FI participation, and rapidly scale these types of transactions. Below, please find our case study ACEN — Project Sale to Special Purpose Vehicle. Other coal-to-clean case studies can be found here.

In 2022, ACEN Renewables (energy subsidiary of the Philippines-based conglomerate Ayala Group), offtaker of the 246 MW (net) South Luzon Thermal Energy Corporation (SLTEC) coal plant, closed a deal to fully sell its equity in the plant to a special purpose vehicle (SPV) and thereby reduce the plant operating life by 25 years, to 2040.

ACEN had originally planned to sell off the asset to a buyer that was willing to own and operate the plant for its expected remaining lifetime, as the company wanted to pivot toward 100% renewable energy by 2025. A combination of investor pressure to avoid continued plant operation after divestment and ambition from ACEN leadership to be a leader in the clean energy transition led to the decision to explore managed phaseout opportunities as a potential path to get the plant off ACEN’s balance sheet. ACEN therefore pursued investing in renewable energy and selling its equity stake in SLTEC to investors with lower return hurdles, enabling the plant to retire earlier than scheduled. Additional details on the SLTEC coal units can be found in Appendix Exhibit 3.1.

• The quality and experience of the initial project sponsor (ACEN) and its parent company (Ayala Group) mitigates risk: As a major Philippines conglomerate, Ayala Group has a history of strong financial standing.
• ACEN already had a corporate target for 100 percent renewable energy by 2025, a commitment to a just transition, and an ambitious CEO that wanted to be a leader in the energy transition. ACEN’s equity divestment of SLTEC also freed up capital — proceeds from the transaction have been earmarked by ACEN for reinvestment in renewable energy projects.
• Having multiple contracts helps mitigate risk: ACEN is contractually obliged (through a Power Purchase Agreement, or PPA) to offtake power from SLTEC until 2040, which lowers risk for financiers (and likely system operators/regulators). Similarly, ACEN’s O&M contract with SLTEC mitigates operational and reliability risk for lenders.
• The SPV structure mitigates risk:
  • The SPV re-levered the capital structure of SLTEC by replacing higher-cost equity with lower-cost debt and equity (specifically longer-term debt) from institutional investors. Before the SPV, SLTEC had a debt/capital ratio of 0.58, which increased to 0.79 post-transaction.
  • ACEN followed the Asian Development Bank’s (ADB’s) energy transition mechanism structure, giving them a credible template to sell to investors. ADB itself was not involved in the transaction.
• The presence of strong and supportive domestic financial institutions (FIs), both debt and equity, enabled the transaction to close efficiently, as this avoided the lengthier due diligence and risk assessment processes sometimes associated with international capital. Notably, these domestic FIs were willing to provide debt and equity financing on a coal asset for approximately 18 years until early retirement, which would not be possible for any international FIs with coal exclusion policies.
• ACEN and project partners were explicit about emphasizing the role of investors in allowing the coal plant to retire early. This gave the SPV lenders an unofficial “carve-out” for having a coal asset on the books, protecting them from potential pushback on coal investment.

ACEN sold 100% of its equity in the plant to an SPV capitalized by multiple lenders and equity sponsors. The SPV was capitalized by a 0.79 debt/capital ratio, with $247 million debt combined from RCBC ($123.5 million) and BPI ($123.5 million). The remaining $67 million in equity was bought by institutional investors with a competitive cost of capital: Insular Life Insurance ($9 million), the Philippines GSIS ($40 million), and EPHI ($18 million) — GSIS’ shares are preferred equity, sitting in the mezzanine tranche between senior debt and the other (common) equity. EPHI is a holding company under ACEN, allowing the original owners to retain a stake in the asset and generate revenue through continued plant operation. A visual depiction of the SPV capital structure can be found in Appendix Exhibit 3.2.

The above pilot along with others that can be found here have laid the blueprint for how well-designed, specific financial mechanisms can help accelerate the coal-to-clean transaction and unlock the benefits of clean energy. However, scaling from a few pilots to the effort required to meet ambitious climate targets requires more easily replicable models for early coal asset retirement. These case studies highlight lessons learned from past transactions and the enabling factors they relied on to promote increased awareness and use of such factors for managed phaseout transactions moving forward. Across all highlighted case studies, we identified the following enabling factor themes:

1. There were underlying coal asset and electricity market characteristics that made coal asset transition attractive.
   1. Clean energy was often cheaper than operating coal or existing coal PPAs in the market at the time of transaction. In Chile, the national government made efforts to drive down the price of clean energy by introducing new market mechanisms, enacting favorable policies, and investing in central grid expansion and interconnection. With Logan and Chambers, both plants were under high-priced long-term PPAs with the offtake utility.
   2. There was a strong appetite for transition from offtakers and project sponsors. With both Tocopilla and Logan and Chambers, the fact that the cost of clean energy was cheaper than what respective offtakers were paying for electricity through their long-term coal PPAs sparked these offtakers’ appetite. Engie built new renewable assets with proceeds from the transaction and Lotus Infrastructure now has plans to build large, utility-scale battery storage on the site of the former coal plants. With SLTEC, the initial project sponsor (ACEN) is contractually obliged through a PPA to offtake power from SLTEC until 2040, which lowered risk for financiers (and likely system operators/regulators). Although ACEN has not yet announced specific plans for replacing SLTEC’s generation, they intend to invest proceeds from the CTM into renewable generation, and CEO Eric Francia has been vocal about his belief in the growth of and the investment opportunity in renewables.
   3. The initial coal asset owners were independent power producers (IPPs) able to navigate potential regulatory barriers to transition. In each of these cases the coal assets were originally owned by IPPs who sold power to offtakers via PPAs, which allowed for bilateral renegotiation of contract terms. Additionally with Logan and Chambers, Starwood Energy was able to gain state-level regulatory approval for PPA renegotiation and early retirement upon the verification of ratepayer savings as a result of the transaction.
2. A lower cost of capital was secured in the financing mechanism. Engie secured concessional debt tied to the early retirement of Tocopilla units 14 and 15 via a blended finance package from the IDB Invest, and Starwood Energy refinanced the original Logan and Chambers project debt with (presumably) cheaper debt from institutional investors. ACEN sold all its equity stake in SLTEC to a special purpose vehicle capitalized by low-cost debt lenders and equity sponsors.
3. There was perceived credibility in the financing mechanism, initial project sponsor, and/or clean energy replacement enabled by early retirement. The CTM that financed the Tocopilla transaction was designed and organized by IDB Invest, a well-known multilateral development bank. Additionally, Engie’s large presence in the Chilean market and strong credit rating ensured credibility. With Logan and Chambers, plant owner Starwood Energy was a high-quality sponsor with a large power generation portfolio and decades of experience as a power plant owner. Similarly in the Philippines, plant owner ACEN is the energy subsidiary of the Philippines-based conglomerate Ayala Group, which has a history of strong financial standing. In each of these cases, the original asset owner has either already stood up replacement clean generation (Engie) or plans to invest in new clean energy projects (Lotus and ACEN), enabled by the early retirement of the coal assets.

By analyzing the carefully constructed financing mechanisms that enabled these pilots, we have identified replicable formats that can serve future transactions in diverse geographies with coal capacity that can be retired. Given the speed with which such transactions must scale, it is crucial to continue iterating on and sharing best practices of innovative managed phaseout.

RMI is grateful to Bloomberg Philanthropies for their generous support of this work.

Exhibit 3.1: SLTEC Coal Asset Details

Exhibit 3.2: SLTEC SPV Capital Structure