Five Ways to Finance Early Coal Phaseout

Financial institutions can accelerate the early closure of coal power plants while funding clean energy projects for the affected communities.

Coal plants are designed to operate for 50+ years. Many of them are going to be operating well past 2050. Our planet’s carbon budget can’t afford that — and judging by how expensive and risky coal plants are, neither can our wallets. So, what should we do?

Retiring coal is a complex problem, which is why we’ve made slow progress even though cleaner and cheaper alternatives exist. The world has built a fleet of coal plants that communities and workers now depend on for taxes and jobs. These plants carry long-term financial obligations to lenders and investors and revenue streams for coal suppliers. In other words, even though running coal plants makes little climate or financial sense, many stakeholders have an interest in their continued operations that can’t be ignored.

So, we must close coal plants early, but need to do so in a way that’s just and equitable to local communities and workers. Shutting down coal plants without compensating the affected workers, financiers, and tax-bases may be economically and politically disastrous. And simply getting big global financing institutions to stop investing in coal does not guarantee those plants will close, because the new groups that will finance coal in their place rarely have climate aspirations, let alone commitments.

Rather than simply divesting from coal, we actually need big banks and investment firms to help phase out coal through innovative funding strategies and a focus on funding a “managed phaseout.” RMI’s latest working papers provide guidance for how financial institutions can do this.

“Managed phaseout” is when the coal plant owner, its financiers, the buyer(s) of the electricity, the seller(s) of the actual coal, the operator of the electric grid, the local government, the environmental regulators, the plant workers, and impacted communities agree to shut down the plant sooner than initially planned and replace it with new, clean energy. Getting this diverse group of stakeholders to coordinate requires compromise and compensation. The financial sector can help and efforts are underway around the world.

Let’s assume we own a teenage coal plant and that we will need $100 million in flexible financing to do a managed phaseout by 2025. This $100 million could pay for things like compensating local workers, communities, and suppliers as well as knocking down the plant and turning it into something like a solar farm or a data center with battery storage. The plant would have needed to run until 2050 to recover its costs and fulfil its contractual obligations, but with this $100 million now, we can bring forward retirement by 25 years. We could get some of that $100 million just by renegotiating better deals than the original ones we signed (e.g., negotiating lower-priced contracts).

There are a lot of ways financial institutions can help us get this $100 million quickly and thereby accelerate plant retirement. It won’t be easy, and we may not get the entire $100 million from one source. Our bankers may need to use every trick in the book. Here are five financing mechanisms to help us get our $100 million.

1. Managed transition vehicles involve selling the plant to someone else who agrees to shut it down early if we promise we’ll invest their money into renewables. The new buyer, among other things, may be able to get lower-cost financing than us or may have lower operating costs, meaning they don’t need to run the plant for 50 years to make their money back like we do. The Philippines has just rolled the world’s first such managed transition vehicle off the production line.
2. With coal retirement credits, someone agrees to pay us for all the emissions we would save from the plant not burning coal from 2025 to 2050. It’s a new field and unsurprisingly, there’s a lot still left to iron out. For example, how do they know our plant wouldn’t have gone bankrupt and closed down in 2030 anyway? In Chile, they’ve found an elegant workaround, by paying the coal plant owner for coal emissions savings through a loan for a new wind farm. The sooner the coal plant owner stops burning coal, the less they will have to pay back on the wind farm loan.
3. Supposing we’re already paying back a loan for the coal plant, and we get a new loan with a much lower interest rate. We can use the savings from the lower interest payments to reduce customer bills and fund our managed phaseout. This is essentially what ratepayer-backed securitizations are — and several deals have already been done.
4. With a power hedge, a bank that has an electricity trading desk guarantees us a fixed payment if we generate solar power, for example. These guaranteed payments can get us a cheap loan (sometimes from the same bank that gave us the hedge) to build the new solar project on or near the site of the old coal plant while retaining many of the existing staff.
5. Concessional financing is when a development bank and/or a philanthropic foundation gives us a grant or a low-interest rate loan because it cares more about us transitioning the coal plant than it cares about making a profit. It’s especially useful when our project is relatively risky (maybe it’s never been done before or our future revenues aren’t guaranteed). The grant or low-interest loan doesn’t even need to cover the entire $100 million; if it covers enough that private investors feel comfortable they won’t lose their money, we may get a large “blended” finance package that blends this concessional financing with private money.

These are just a few ways that finance can help accelerate managed coal phaseout — there’s more on how we can deploy and measure that financing in new working papers published by RMI’s Center for Climate-Aligned Finance.

For the financial sector, managed coal phaseout is a once-in-a-generation opportunity to serve their power sector clients, replace coal with renewable energy, and ensure the energy transition is just and equitable. As banks get ready to fund these deals, coal plant owners and policymakers must get bankable deals ready. It won’t be simple, but if we all push in the same direction, we can do this.