How financing coal retirement mechanisms can unlock the clean energy transition

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Joanna Messing, Chief Executive Officer, Growald Climate Fund, Andrea Guerrero Garci, Director of Field Innovation, Growald Climate Fund

At COP 28 in Dubai, 130 countries pledged to triple renewable energy by 2030. Their ambitious commitment reflects the need to transform the world’s energy systems to clean power, not only to slash emissions today, but also to generate enough clean electricity to meet increased needs coming tomorrow from the electrification of sectors like transport, buildings and industry, as well as energy access.

While the conversation around climate action is often framed as a challenge or a burden, transforming the electricity sector also offers opportunity. The opportunity to invest in the energy system of the future – powered by abundant clean energy, with multiple co-benefits of clean air, clean water and a safer climate.

Though the trajectory of most of the world’s energy sector is headed toward clean energy, the transition is not happening at the speed or scale required. Transition finance – financing that enables the transition of fossil fuel assets to clean energy – is particularly key to reduce bottlenecks and speed transition in the electricity sector alongside an increase in financing for clean energy.

Coal retirement mechanisms for clean energy transition

Amid the growing landscape of innovative efforts to unlock finance for the transition to clean energy, some of the most promising bottom-up solutions are coal retirement mechanisms (CRMs).

These innovative financing mechanisms aim to retire individual coal plants ahead of schedule, i.e. before their lifespan is complete, and enable the transition to clean energy.

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If done well, CRMs that use transition finance offer benefits for investors, the public and climate, avoiding large amounts of emissions, expanding renewable energy and supporting a just transition for coal workers and communities.

Initial pilot CRMs can demonstrate workable models and spur innovation across the transition finance landscape.

Transition finance for individual plants happens within the context of work at a state and regional level, where utilities are looking at a broader transition; and at a national level, where policies, subsidies, and broader economic impacts are engaged; and at a international level, where agreements on just energy transition partnerships (JETPs) and development finance are struck.

Early insights and lessons around CRMs

As part of our work across the landscape of clean energy transition, Growald Climate Fund supports research and development efforts around CRMs.

Growald is a founding funder, together with IKEA Foundation and the Pooled Fund on International Energy, of the Coal Asset Transition Accelerator, a technical assistance and knowledge sharing facility body for facility-level work on coal retirement.

We also work with the World Economic Forum on CRMs and clean energy scale-up as part of Giving to Amplify Earth Action (GAEA), an initiative for public-private-philanthropic partnerships.

Here’s what we’ve learned:

1. CRMs need to be embedded in sectorial and economy-wide action

CRMs should also be integrated into broader, government-led efforts such as JETPs or similar sectorial or economy-wide transition or renewable energy expansion plans that are in line with International Energy Agency (IEA) dates –2030 for Organisation for Economic Co-operation and Development (OECD) countries and 2040 for non-OECD – as well as targets for clean energy expansion to ensure that any coal plant retirements are replaced with clean energy.

2. The details of each deal matter

While each deal is unique, they all need an objective assessment of the asset/portfolio that includes:

• A realistic review of the expected retirement date, to ensure that deals truly shorten the plant lifetime/hasten retirement and don’t create perverse incentives.
• An assessment of the electricity replacement to ensure that clean energy replacement is possible, that the profits/value that will come from clean energy development are factored into the economic valuation, and that the power grid will remain stable during and after retirement.
• A robust financial valuation that includes an assessment of issues like physical climate risk, stranded asset risk and environmental liabilities that might decrease value, an assessment of positive future economic value from economic transition or other economic uses for the plant or its location, as well as an assessment of the financial viability of the plant, as many plants are financially stressed.
• An assessment of relevant policies and subsidies, because sometimes the ability of an asset to transition is complicated by power purchase agreements, mis-aligned subsidies, or other policies that could be negotiated with governments.

3. There are multiple financing options for CRMs

At this stage, we need to pilot several different approaches to financing and scale those that are most replicable, and not depend on any singular approach.

4. To be successful, CRMs must include workers in the equation

Not only is a people-centred just transition fair, failing to consider workers’ livelihoods in coal retirement mechanism design can create social and political opposition.

Collaboration key to leveraging private capital

Public development banks, development finance institutions, and impact investors play a vital role in leveraging private capital.

Governments play a key role in providing overall policies and regulatory environments that support the transition, ensure power system balance, and support a just transition.

Meanwhile, philanthropic capital can be most strategically deployed as technical assistance (for research, modeling, and expertise), supporting just transition efforts for facility workers (such as reskilling or upskilling), or for community engagement processes to ensure transparency and inclusion.

Discover

How is the World Economic Forum facilitating the transition to clean energy?

The Fostering Effective Energy Transition 2023 report showed that after a decade of progress, the global energy transition has plateaued amid the global energy crisis and geopolitical volatilities.

The World Economic Forum’s Centre for Energy and Materials is driving the transition to a “fit for 2050” energy system. It is a cross-industry platform building new coalitions and delivering insights required for a sustainable, secure and just energy future.

Learn more about our impact:

• Clean energy in emerging economies: We are advancing country-specific renewable energy finance solutions for four of the biggest emerging and developing economies: India, Brazil, Nigeria and Indonesia. In the latter, a new solar and battery initiative is bringing 15MW of clean energy to the East Sumba region – enough to power 4,000 homes and avoid 5.5KtCO₂ yearly emissions.
• Energy Transition Index: We have measured the progress of 120 countries on the performance of their energy systems, enabling policymakers and businesses to identify the necessary actions for the energy transition.
• Mining and metals blockchain: We released a proof of concept to trace emissions across the value chain using blockchain technology, helping accelerate global action for country-specific financing solutions.
• Clean power and electrification: We are accelerating the adoption of clean power and electric solutions in the next decade to help increase clean energy consumption threefold by 2030.

Want to know more about our centre’s impact or get involved? Contact us.

This maximizes the impact of scarce philanthropic funds and lays important groundwork for how different players can best organize to complement each other’s strengths.

We have only just begun to tap the potential of CRMs and other innovations in financing the clean energy transition. Now is the time to scale it up – and everyone has a role to play. It is easy to identify the challenges. The invitation is to see the opportunity and to innovate together.