Invest in People to Reap the Benefits of the Energy Transition
Innovative financing will be essential to ensure the shift from coal to clean energy provides a just transition for workers and communities.
Last year at COP 27, South Africa launched its Just Energy Transition Investment Plan (JET IP), setting out the scale of need and investments required for the five-year period 2023–2027 to support its decarbonization commitments — almost $100 billion. Indonesia and Vietnam are expected to release their energy transition investment plans in the run-up to COP 28 following the record-setting $44 billion committed by the public and private sectors under the Just Energy Transition Partnership (JETP) to help these three countries transition to clean energy. Against this backdrop, we take stock of how the “just” aspect of the energy transition is being considered, looking at how just transition activities have (and haven’t) been funded to date, and offer key considerations for just transition financing.
The Importance of Planning for a Just Transition
Without thorough planning and sufficient resources, the coal-to-clean transition could harm workers and communities that depend on fossil fuels. Ensuring that people are not left behind in the transition to a zero-carbon economy has led to wide consensus on the need for a “just transition.” While a just transition will mean different things to different communities, what is broadly agreed on is the need to ensure that the energy transition creates opportunities for workers and local communities and that the benefits of the transition are equitably distributed.
Though countries have started exploring pathways to reach net zero, planning for just transitions still lags behind. According to the International Energy Agency (IEA), only five of the most coal-dependent countries, representing 4 percent of the world’s coal workers, have started discussions on just transition policies for the workers and communities affected by transitions away from coal.
As countries and companies are planning their transition to clean energy, it will be critical for them to elevate and consider just transition elements as integral to their energy transition planning process, starting with early and sustained engagement with relevant stakeholders to define and agree on a just transition plan. This was an important foundation for the JETP in South Africa. Leveraging several years of research, policies, and consultations with a diverse group of stakeholders, South Africa developed its just transition framework which lays out a shared vision for shifting to an equitable, zero-carbon economy and identifies key policy areas and principles to achieve this.
Five important considerations for just transition financing
Governments, utilities, and coal plant owners will need to prioritize policies and financing for just transition activities. Important just transition financing considerations include the need to:
- Define financing needs and responsibilities — engage with communities to define what needs support and clarify who can and should provide capital for those activities
- Consider the equity implications of the financing — such as who pays for just transition costs in order to avoid creating or reinforcing inequities and ensure that the benefits of the energy transition are distributed
- Consider the risks to underfunding or creating further financial challenges — ensuring capital is available when it is needed and that financing mechanisms do not entrench existing challenges (debt burden/liabilities, financial burden)
- Ensure that disbursal/repayment needs of financing mechanisms match the expected financial profile of just transition activities — which means that financing should be available when it is needed, and any repayment of financing should align with the timing and magnitude of expected economic gains from just transition investments
- Build governance, monitoring, grievance, and evaluation mechanisms — to ensure proper implementation of just transition activities
The Huge Shortfall in Just Transition Financing
Figuring out how those just transition plans will be financed is also a critical part of ensuring success — and one where there’s been a considerable gap to date. The World Bank has estimated that managing the social impacts of coal power plant and mine retirements in developing countries will cost $50 billion a year between now and 2040. Evidence we’ve seen so far indicates that financing mobilized to date is chronically insufficient to cushion the negative social impacts of the coal-to-clean transition. For example, within the $8.5 billion JETP deal for South Africa, less than 1 percent ($50 million) of the funds will go to addressing just transition needs. However, the country estimates that more than $6 billion will be needed between 2023 and 2027 to fund just transition activities across three main areas: skills development, economic diversification and innovation, and social investment and inclusion.
Understanding Just Transition Financing Needs
While just transition activities will be context-specific and vary across geographies, we see three broad areas that will require financing: 1) relief for impacts immediately following coal plant retirement, 2) remediation and reclamation of fossil fuel sites as a foundation for economic recovery, and 3) reinvestment into fossil fuel communities to diversify the economic base. Importantly, financing is needed not just immediately after a coal plant retires, but requires sustained support in the lead-up, during, and well after retirement.
Mobilizing capital for just transition activities has proven challenging, in part because just transition activities may not generate typical financial “returns” (or at least not immediately). As a result, we’ve seen a strong role of government programs, grants, and concessional debt in many coal-to-clean deals to date. In the Eskom Just Energy Transition Project in South Africa to decommission and repurpose the Komati power station, $47.5 million in grants and concessional debt will play a key role in financing just transition activities. These funds have been allocated to providing support for workers, community development and economic diversification, and stakeholder engagement.
Through the Inflation Reduction Act (IRA), the biggest investment in clean energy and climate solutions in American history, the United States is reinvesting in energy communities. Through a new loan program, the Energy Infrastructure Reinvestment program (EIR), the US Department of Energy’s Loan Programs Office (LPO) can provide financing for up to $250 billion in low-cost loans for qualified projects that support the transition to cleaner energy and the economic revitalization of coal communities where plants are retired. Through the EIR, coal plants can be successfully redeveloped into new assets that bring renewed economic opportunities.
The Need for Innovative Financing Mechanisms for the Just Transition
Though such public finance-led programs will necessarily play a leadership role in the just transition, mobilizing additional capital will be critical given the scale of financing needed. Financiers will need to adopt innovative financing mechanisms, including scaling up private capital.
In Chile, sustainability-linked financing is being leveraged by both government and the private sector to accelerate the energy transition, including a groundbreaking $2 billion sovereign sustainability-linked bond (SLB) issued in March 2022 and a $400 million sustainability-linked loan from the International Finance Corporation (IFC) to ENGIE Chile with targets to decommission or reconvert the company's remaining coal generation assets, incorporate renewable energy to the national electric system, and address gender equality gaps in the energy sector. In June 2023, Chile updated its sovereign SLB Framework to include a social key performance indicator (KPI) focused on promoting gender equality, specifically on increasing the percentage of women board members.
In 2022, Enel became the first company in Chile to retire all its coal-fired power plants, using its balance sheet to support a just transition for the workforce, community, environment, and local economy of the city of Coronel. In the United States, PNM, a utility in the state of New Mexico, used securitization to retire the San Juan generating station and mine, setting aside transition assistance funds to support affected workers and the community.
Another emerging source of funding for just transition activities is carbon credits — revenues from the sale of credits generated from the avoided emissions of renewable energy projects being used to support workers and communities affected by the energy transition. This would mark a major shift in carbon markets today, moving social impact from a “co-benefit” to being an integral and necessary part of any coal-transition transaction that wanted to utilize carbon credits.
While it may not deliver traditional financial returns, investing in communities and workers can pay dividends. It will take innovative approaches to unlock these opportunities. The initial numbers for just transition funding may already be cast in JETP investment plans, but as we move from numbers on pages to steel in the ground, we must find ways to test — and prove — strategies to mobilize additional capital for the just transition.