Structured Finance for Energy Transition

Structured finance — often called project finance or limited-recourse finance — is a common means of developing large, capital-intensive assets like power plants and pipelines. Project finance isolates risk at the project level and supports lending with long-term contracts that provide stable, predictable revenue.

When attached to a coal-fired power plant or other fossil asset, the same long-term contracts that give creditors assurance of debt repayment also insulate the facility from market forces that would otherwise justify its replacement with clean energy alternatives. This circumstance poses a barrier to cost-effectively mitigating carbon pollution.

In this report, we present a scenario for restructuring the contracts supporting the coal-fired Red Hills Power Plant in Mississippi, retiring the plant seven years early, and financing a replacement portfolio of clean energy. Our financial model shows that this new commercial arrangement could create financial benefits for all Red Hills stakeholders (amounts are in net present value in 2025 US dollars):

• $37 million in savings to electricity customers, who exit an above-market power contract and gain access to cheaper clean energy
• $150 million to bondholders (mostly life insurance companies), in the form of a risk-adjusted balloon payment to exit their investment early
• $255 million for an up-front termination payment to the Mississippi Lignite Mining Company, which sells coal to the facility under a long-term contract. This payment could be reinvested in clean energy, following the recent examples of Peabody Coal and Hallador Energy
• $137 million to plant and mine workers, whose salaries are funded through a transition period

Beyond the Red Hills facility, there are dozens — perhaps hundreds — of project-financed fossil assets operating today in the United States that are insulated by their long-term contracts from the competitive forces of clean energy. Globally, there are thousands of such assets. We hope this study inspires further work to calculate the size of the opportunity to restructure these projects, replace them with clean energy, and distribute the financial value unlocked by the restructuring to all stakeholders, including ratepayers, workers, and communities.