Early Phase-Down of Coal Plants: The Role of Development Finance Institutions

Many governments have committed to stop building new coal-fired power plants both domestically and abroad, but the greatest emissions reductions would be achieved through the early and permanent retirement of coal units.

While many development finance institutions (DFIs) have pledged to halt public finance into new coal-based electricity generation, decarbonization of existing coal plants is yet to receive sufficient attention. DFIs are uniquely poised to play a key role in endeavors such as early phase-down of coal plants given their distinct mandate to prioritize development and provide public goods. Furthermore, the ability of DFIs to supply concessional finance and tolerate high levels of risk makes them well equipped to play a role in phasing down coal-based power generation.

Apart from some pilot initiatives, however, the direct engagement of DFIs with the decarbonization of coal plants has been limited. What, then, are scalable methods and tools that DFIs can employ to assist countries in endeavors to transition away from coal-based power generation? And what policy recommendations can help DFIs and governments retire coal plants effectively and efficiently while ensuring a just energy transition and economic development?

A new report from the Boston University Global Development Policy Center synthesizes the discussion and key findings from a November 2023 workshop where practitioners and researchers explored options to decarbonize coal plants, in particular premature coal plant closure.

The first part of the workshop delved into DFIs’ experiences with early coal plant phase-down up to this point and the lessons learned. Participants assessed various policy options that have been advanced in recent years and discussed their scalability and replicability in similar and different contexts. The second part centered on available models and tools that DFIs have at their disposal and how these can contribute to a just energy transition. The discussion focused on frameworks to prioritize coal plants for decarbonization, methods to evaluate the costs and benefits of DFIs’ involvement and financing mechanisms. These frameworks, models and tools have the potential to support a just transition for all.

Key findings:

• Early phase-down of coal plants can take several forms, such as mothballing, retirement and repurposing a plant with renewable capacity.
• A one-size-fits-all approach is not appropriate. Solutions need to be tailor-made to tackle context-specific barriers that exist in phasing down coal plants, with some of the most crucial ones being energy security concerns, foregone profits, as well as political feasibility.
• Scalability is a crucial for coal plant phase-down initiatives to have meaningful impact.
• DFIs possess a unique role in fostering an enabling environment to cease operation of coal units, involving activities such as capacity building, long-term planning and policy formulation.
• DFIs can be instrumental in financing the early phase-down of coal units as first-movers and have a diverse set of promising tools at their disposal.
• Several considerations and prerequisites are key, including the need for more concessional finance, the imperative for transparency and just transition frameworks.

Based on the main findings, the authors formulated three key policy recommendations for DFIs to support governments in their low-carbon and climate-resilient development, in particular by decarbonizing coal plants.

Key policy recommendations:

• A just, orderly and equitable phase-down of existing coal infrastructure should form a centerpiece of DFIs’ climate strategies, supporting governments in accelerating renewable energy generation and economic diversification.
• DFIs should support an enabling environment for coal plant phase-down and shape the market for other financial institutions to engage in coal plant decarbonization.
• Strategies for the phase-down of coal plants should be scalable and built around concessional and grant financing mechanisms.

In line with these recommendations, DFIs can make use of their expertise and experience to assist countries in their low-carbon transition endeavors while ensuring economic development, in particular through support in the early phase-down of coal units.