Webinar Summary – From First Movers to Market Shapers: The Many Roles of Development Finance Institutions in the Early Phase-down of Coal Plants

By Samantha Igo

On Thursday, April 11, the Boston University Global Development Policy Center (GDP Center) hosted a webinar to discuss findings from a recent report on the role of development finance institutions (DFIs) in the early phase-down of coal plants. The webinar featured a presentation on the report from Niccolò Manych, GDP Center Post-doctoral Research Fellow, with interventions from Tsitsi Musasike, Professor of Global Development Policy at the Frederick S. Pardee School of Global Studies and Core Faculty Member with the GDP Center; Joan Miquel Carrillo, Blended Finance Lead Investment Officer at IDB Invest and Jiaqi Lu, GDP Center Senior Academic Researcher with the Global China Initiative (GCI). Rebecca Ray, also a GCI Senior Academic Researcher, moderated the discussion.

Manych opened with a brief overview of the report, which was based on a November 2023 workshop hosted by the GDP Center with over 30 researchers and practitioners. Coal plant phase-down can have several benefits for host countries, including reducing emissions and fiscal burdens for state-owned enterprises as well as environmental and social benefits. However, a disorderly phase-down can result in energy insecurity, job losses, increased electricity costs and slowed economic development.

DFIs are well poised to mitigate these potential risks, notably because of their ability to tolerate high levels of risk and provide concessional finance. Despite this, DFI involvement in coal phase-down has been relatively rare, and this report sought to provide knowledge that could facilitate DFIs’ increased engagement on coal phase-down. He went on to note that DFIs supporting early phase-down should be part of a ‘virtuous cycle,’ where the phase-down is one component of a holistic plan to aid governments in the energy transition.

Manych defined ‘early’ phase-down as being “before reaching the envisaged lifespan [of the plant] without intervention.” Options for phase-down include ceasing operation, such as temporary breaks in operation where the plant is kept intact or full retirement where the plant is dismantled. Other options where the plant may continue operation include retrofitting with improved technology or implementing carbon capture and storage. Coal plants can also be fully retired, but as Manych explained, the barriers to phase-down can be extensive, spanning financial, legal, socio-economic and political hurdles.

There are some, but relatively limited, existing DFI-led phase-down initiatives, such as Engie Energía Chile with IDB Invest and the Climate Investment Funds (CIF) which is replacing coal units in Tocopilla, Chile with wind farms. Drawing on these existing initiatives and interventions from the November 2023 workshop, Manych highlighted three key areas of DFI support for early phase-down: creating an enabling environment, where DFIs are providers of capacity, funding and technical assistance; shaping the market to incentivize engagement of other financial institutions; and providing asset-level financing and de-risking instruments.

These three roles must then also be supported by core considerations and governance principles. DFIs must consider feasibility (such as legal aspects), climate impact (such as ensuring emission mitigation is permanent), socio-economic impacts (such as energy security) and financing (such as ensuring financing is concessional). The transition must also be governed in an orderly way, with full transparency and scalability to replicate these approaches in other contexts.

Ray then moved the webinar into a panel discussion. She first asked Musasike how DFIs can support coal phase-down in the southern African region. Musasike noted that South Africa is a great case study because it is recently going through a de-commissioning, re-powering and re-purposing approach, rather than exclusively de-commissioning. She emphasized that significant financial resources are necessary for such a method, and the Presidential Climate Commission recommended that the de-commissioning component should be funded by the utility, with the re-powering and re-purposing funded by the private sector.

Next, Lu spoke on the role of Chinese DFIs in supporting government efforts to implement coal phase-down. He explained that early coal phase-down is consistent with the principle of the Belt and Road Initiative (BRI) International Green Development Coalition. Based on past coal phase-down experience, especially in the US and Europe, coal-fired power plants can be shut down much faster with the right market pressure if DFIs continue to invest in both renewable energy and the electricity grid.

Carrillo then offered his insights on how IDB Invest has made the best use of its resources to support coal phase-down. He opened his remarks by acknowledging that coal phase-down is one of the most complex developmental challenges that he has faced in his career, with the need to get actors to not do something creating unique challenges. He provided three ideas on what IDB Invest has done as a DFI working on this issue, and what can be done in the future.

First, for any type of energy transition, there must be private-public cooperation and mutual understanding. Second, the public sector must be the one to ensure the resiliency of the system throughout this transition, including investments or conciliary services that must be in place before any de-commissioning takes place. Finally, the public sector should also lead the social aspects of the transition.

Carrillo explained that, ultimately, the issue of early coal-phase down is an issue of subsidies, which can help accelerate the timeline of a phase-down. But there is also an aim to do this at the least cost possible for the country’s taxpayers, which requires addressing how the system can become more resilient and sustainable after the transition. To this end, he explained how IDB Invest is exploring ways to incorporate an additional income for coal-power plant owners to accelerate their retirement.

Following this intervention, all four speakers offered their thoughts on ensuring coal phase-downs that are just and equitable. Manych underscored that transitions should be just and equitable across three levels: the country level, the community level and the individual level. This is why the enabling environment that DFIs can facilitate, thus ensuring that various safeguards are in place before coal plants are retired, is so important.

For Musasike, it means consultation very early in the process with all the involved stakeholders as well as follow-through on stakeholder engagement to ensure that actions are aligned with conversations that have happened with community members.

Lu answered from a justice perspective and discussed three levels of justice. First, the international community should continue to support developing countries with financial and institutional resources to phase down coal power plants earlier. Second, at the domestic level, international support, including from non-governmental organizations, can support building government capacity to create the enabling environment necessary for this process. Finally, there should be political justice for workers in the coal industry and their investors.

Finally, Carrillo emphasized the need to plan ahead, before the de-commissioning takes place, to prepare the local economy before the transition. On this, he noted that coal transition requires both gradualism and flexibility. Just transition components can also be built into additional income instruments, creating innovating financing mechanisms that can sustainably support local governments and communities throughout the process.

The Q&A portion of the discussion included questions on the applicability of findings to phasing down other fossil fuels like liquified natural gas, how the private sector has partnered with DFIs in de-commissioning and re-purposing coal plants, how to confront political barriers when coal is a key source of revenue for some economies, and more.

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