Pioneering Change: Coal-to-Clean Energy Success Stories

Financial institutions (FIs) are stepping in with coal transition mechanisms (CTMs), financial tools designed to help overcome challenges such as high capital costs and the insulation of coal assets from competition. These tools have enabled early coal plant retirements in various markets worldwide. This article presents case studies on the successful early retirement of coal plants, including the Tocopilla power station in Chile, the Logan and Chambers generating stations in the United States, and the Calaca SLTEC power station in the Philippines, each highlighting innovative financial mechanisms and lessons applicable to emerging markets. Given that the power sector accounted for nearly 44% of global CO2 emissions in 2021, with coal-fired power being the primary source, its phaseout is crucial for climate goals. However, this transition is complicated by long-term contracts, the role of coal in national economies, and other barriers. CTMs help address these challenges by facilitating a shift to cheaper, cleaner renewable energy. This article examines successful coal retirement projects, offering insights for replicating these mechanisms in other markets to scale the transition.

Case Study 1: Tocopilla Units 14 and 15 — Results-Based Loan Incentive (Chile)

In 2021, Engie Energia Chile (EECL) and IDB Invest closed a deal to finance a 151 MW wind farm and incentivize the early retirement of coal units 14 and 15 at the Tocopilla power station. The concessional loan included a results-based mechanism that reduced interest payments based on carbon savings. Key enabling factors included Chile’s coal phaseout policies, a strong appetite for the transition from customers, and favourable economics for renewable energy. The total syndicated loan value was $125 million, with $74 million from IDB Invest and $36 million from the China Fund for Co-financing in Latin America.

Case Study 2: Logan and Chambers — Renegotiate, Refinance, Redevelop (USA)

In 2022, private equity firm Starwood Energy Group accelerated the retirement of the Logan and Chambers coal plants by 30 months through the renegotiation of power purchase agreements (PPAs), refinancing project-level bonds, and plans to redevelop the sites into grid-scale battery storage facilities. Atlantic City Electric (ACE), the off-taker, saved $30 million in customer costs by terminating the PPAs early. The $200 million refinancing was structured with institutional debt from MetLife Investment Management, which facilitated the early retirement. The redevelopment aligns with New Jersey’s Energy Master Plan, which promotes energy storage.

Case Study 3: SLTEC — Project Sale to Special Purpose Vehicle (Philippines)

In 2022, ACEN Corporation sold its equity stake in the South Luzon Thermal Energy Corporation (SLTEC) coal plant to a special purpose vehicle (SPV), enabling the plant’s retirement by 2040—25 years earlier than initially planned. ACEN’s strategy involved lowering the plant’s capital structure cost by using lower-cost debt and equity from domestic institutional investors. The SPV was capitalized with $247 million in debt from local banks and $67 million in equity from investors. This sale allowed ACEN to reinvest in renewable energy while fulfilling its PPA obligations. The transaction provides a model for managed phaseout in other markets.

Conclusion

The case studies highlight the effectiveness of CTMs in facilitating early coal plant retirements. Across all cases, key enabling factors included the lower cost of clean energy, strong interest from off-takers and sponsors, the ability to navigate regulatory barriers, and the perceived credibility of the financial mechanisms. The innovative financial tools used in these projects can serve as replicable models for future transactions in various geographies, helping to accelerate the global transition from coal to clean energy.

This article is based on the report “Coal-to-Clean Success Stories” authored by Shravan Bhat, Lila Holzman, Dhroovaa Khannan, David Lone, Iliad Lubis, and Tyeler Matsuo. Published by RMI, with support from Bloomberg Philanthropies.