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 Tocopilla Units 14 and 15 — Results-Based Loan Incentive. 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 Tocopilla Units 14 and 15 — Results-Based Loan Incentive. Other coal-to-clean case studies can be found here.

In 2021, IDB Invest (a member of the Inter-American Development Bank group) and Engie Energia Chile (Engie or EECL) closed a deal to finance 151 megawatts (MW) of the Calama wind farm and incentivize the early retirement of units 14 and 15 of Engie’s Tocopilla coal plant. The accelerated decommissioning of these Tocopilla units is indicative of EECL’s response to stated interest and pressure from both the government to phase out coal power and from its industrial customers (mostly copper mining companies) to provide lower-cost power.

IDB Invest (the lender of record) structured and proposed a blended finance package, which incentivized EECL (the borrower) to retire operating coal assets early via a concessional debt tranche in the financing package. The loan financed the construction of new renewable generation rather than explicitly refinancing or retiring coal assets — however it was structured so that the earlier the operating coal assets were shut down, the lower the amount of interest of the concessional tranche EECL would need to pay at maturity of the loan. The amount of the interest rate reduction depends on a pre-agreed carbon price multiplied by a capped volume of carbon saved via early retirement. Additional details on the Tocopilla coal units can be found in Appendix Exhibit 1.1.

• Chile’s top-down coal phaseout policy fostered buy-in from private players to retire coal-fired power plants.
• The financing mechanism was designed and organized by a proactive and innovative multilateral development bank (MDB) — in this case IDB Invest — that pitched the idea to a willing international asset owner.
• Climate Investment Funds (CIF) provided a concessional tranche that unlocked results-based carbon finance for new renewable generation tied to the early retirement of coal assets.
• A combination of FI appetite for transition in Chile and credit-worthy borrowers (EECL) and offtakers (industrial customers) allowed for Power Purchase Agreement (PPA) renegotiation and low-cost debt to finance the transaction.
• Chile created a market environment that enabled greater renewable energy (RE) penetration and, at the time of the transaction, the economics of RE generation were favorable compared to that of coal power.
  • At the time of the transaction, new RE PPAs were cheaper than high-priced legacy coal PPAs, giving generators and their customers incentive to renegotiate PPA terms. In the 15 years before the transaction, the Chilean government introduced new market mechanisms and policies and invested in central grid expansion and interconnection — all of which drove down the price of renewables.
  • Government-backed “investor roadshows” for renewables helped spread awareness and confidence. This led to sufficient competition in Chile’s power auctions and eventually drove down wholesale power prices.

The debt arranged from IDB Invest to EECL is valued at $125 million, with a $74 million senior loan from IDB Invest, a $36 million loan from the China Fund for Co-financing in Latin America (managed by IDB Invest), and a $15 million concessional loan from the CTF (managed by IDB Invest).

The CTF loan is structured as a bullet at maturity loan with a two-tiered interest rate structure – first, a floor fixed interest rate of 1% payable semiannually and, second, the difference between the first rate and the equivalent fixed rate of the commercial tranche provided by IDB Invest, which would be deferred and capitalized to become payable at maturity of the loan.

A carbon payment mechanism is embedded in the CTF loan’s interest payment at maturity and is defined by the product of the abated carbon emissions from early retirement and a pre-agreed upon carbon price of $3/ton to be deducted from the deferred and capitalized amount payable at maturity. To ensure additionality, EECL is only credited for abated emissions before the units’ May 2024 initial voluntary commitment. Although the emissions numbers are still being verified (see for IDB Invest’s methodology on emissions accounting), RMI’s preliminary calculations estimate between 500,000 and 700,000 tons of abated carbon emissions through the early retirement of unit 14 in June 2022 and unit 15 in September 2022. Using these numbers, EECL would not have to repay $1.5–$2.1 million of the interest payment at maturity.

IDB Invest arrived at this concessional loan mechanism by first attempting to assign value to the emissions reductions (early retirement of coal units), in the absence of a regulated carbon market in Chile. As a result, IDB Invest proposed this mechanism to use the more traditional lever of concessional debt and innovate by embedding the carbon price in the loan. The carbon price of $3/ton was determined via a price-discovery exercise between IDB Invest and EECL, under the principle of minimum concessionality. If Chile establishes a regulated carbon market in line with Article 6 of the Paris Agreement, the loan facility will still secure EECL the agreed-upon floor carbon price. However, if a potential carbon market prices coal transition carbon credits higher than $3/ton, then the carbon floor price mechanism will no longer hold, and in exchange, EECL will share a fraction of the additional profits with the CTF. See below for an illustration of the transaction structure.

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.

Exhibit 1.1: Tocopilla Coal Asset Details 

Exhibit 1.2: Average Electricity Award Prices by Year 

Please see RMI’s Fossil Fuel Transition Strategies report for more details and a deep dive on the EECL transition. Included is the chart below, which shows the effect of 2015’s hourly-time block supply auction reforms on average electricity award prices in Chile.