Discovering and using renewable energy resources instead of polluting power station chimneys
Financing the Transition from Coal to Clean Energy
Sharing Insights and Experiences from Global Leaders
It is becoming clear that an accelerated coal-to-clean transition in the global electricity system is both necessary and feasible. Commitments to cease new coal investments are critical in the near-term but insufficient to meet global emissions reductions required by the end of this decade.
According to Carbon Brief, any viable pathway to 1.5°C before 2030 requires a rapid decline in coal emissions. Coal transition needs to be completed in OECD countries before this decade is over and in the rest of the world by 2040. At the same time, economic viability of operating coal plants is declining rapidly: by 2025, 78 percent of coal plants globally will be more expensive to operate than building new renewable energy with storage. And yet, global coal transition within 20 years is far from a foregone conclusion.
Coal Phaseout Around the World
Governments are slowly starting to shift their attention to the phaseout of existing coal. Nearly 60 percent of operating coal across developed countries has either retired since 2010 or is scheduled to retire by 2030. President Biden recently announced that the United States should have 100 percent clean energy by 2035. In the EU, 15 countries have made coal phaseout announcements, 14 of which occur before 2030. Peru committed to complete coal phaseout by 2022. Canada has had a coal-free-by-2030 commitment since 2018.
And yet, these countries represent only a portion of the global coal fleet. The majority of coal plants worldwide still have no phaseout date. Ambition and commitments for a decisive coal transition must grow rapidly if we are to maintain any hope of aligning with a 1.5°C pathway. The most prominent organization working globally on the issue of government commitments to transition from coal is the Powering Past Coal Alliance (PPCA), a coalition of stakeholders, including governments, subnational entities, and businesses, committed to transitioning away from coal-powered energy in a sustainable and inclusive way.
PPCA has just completed its first global Summit. The Summit’s overarching goal was to bring together governments, academics, and investors, as well as energy, health, and just transition experts to enhance and accelerate international commitment to global coal phaseout in the lead-up to COP26 this November. The Summit introduced ten new PPCA members and hosted various sessions that explored practical ways in which countries can forge viable and holistic pathways away from coal. To support this dialogue, RMI organized and led a panel webinar titled “Exploring Financial Mechanisms for Early Coal Retirement.”
The Critical Role of Innovative Financing
RMI’s event brought together stakeholders from governments, public finance institutions, the private sector, donor countries, trade unions, and utilities, in addition to experts from Poland and South Africa, to share their perspectives and experiences from working on approaches to an inclusive coal transition.
Danish Climate Ambassador Tomas Anker Christensen opened the session by urging nations to have a detailed plan, asset by asset, as well as precise policy measures, to enable policymakers and investors to make the right decisions and create viable coal transition plans. He stressed that what developed nations are doing will be of little importance unless everyone else joins the coal transition movement.
Participants elaborated on multiple successful mechanisms already in practice for an early and just coal phaseout, including the following:
- Uday Varadarajan, principal at RMI, gave an overview of multiple mechanisms already in use around the world for an accelerated coal transition that include appropriate support for workers in the coal industry to reskill and transition to sustainable sectors, including ratepayer-backed securitization.
- Colorado State Senator Christopher Hansen provided a more in-depth use case for securitization, explaining its application in Colorado and the process for securing buy-in to pass the legislation. He highlighted that securitization allowed the state to address parallel issues: replacing dirty, uneconomic coal plants and building communities, while also handing out savings to ratepayers as green alternatives became cheaper than incumbent coal-powered electricity.
But securitization is far from the only financial approach to enable coal transition while supporting workers and communities.
- Fernando Cubillos, head of energy at IDB-Invest, explained the mechanics behind a carbon finance approach used in Chile, in collaboration with Engie, to retire coal plants and replace them with clean energy.
- Donald Kanak, chairman of Prudential Insurance Growth Markets, gave an overview of energy transition mechanisms and their applicability to emerging economies. Emerging economies are the home of most existing and planned coal-fired electricity and therefore the key to an accelerated global energy transition.
- Mafalda Duarte, head of Climate Investment Funds (CIFs), provided an overview of the CIFs’ Accelerating Coal Transition Investment program. She stressed the growing role of MDBs in coal phaseout in developing countries and explained that focusing only on building new renewable energy will not be sufficient to meet our climate objectives.
The second half of the panel centered around practical applications of these financial mechanisms in new geographies that rely heavily on coal, such as Poland and South Africa.
- Grove Steyn, managing director of Meridian Economics in South Africa and Pawel Czyzak, head of energy modeling at Fundacja Instrat in Poland provided helpful (and hopeful) backgrounds on South African and Polish opportunities and challenges for coal retirement, highlighting possibilities for action and the importance of international community engagement and support.
- Alison Tate, director of environment and social policy at the International Trade Union Confederation, ended with a pledge to put people first and ensure just transition for workers and communities. “We need to worry about stranding people, not just stranding assets,” Tate said. “We have to be wary of intergenerational unemployment as a consequence of coal phaseout and its effect on workers and communities.”
A Sustainable Way Forward
Innovative financial mechanisms have a critical role to play in smoothing the just and inclusive transition from coal to clean energy. They can help address political barriers, accelerate capital flowing to clean energy infrastructure, and, most importantly, ensure we continue to invest in people and communities. Finance is, however, only one part of the broader set of actions and activities needed to put global coal use on a pathway to 1.5ºC.
Building on the ideas, experiences, and challenges shared by the group of leaders who participated at the Summit, RMI is focused on advancing our work on innovative financial mechanisms. We will be partnering with governments, financial institutions, utilities, and other industry and labor experts to develop new financial mechanisms, evaluate their application in different markets and geographies, and scale our insights through global platforms, programs, and networks.