How to Finance Early Coal Retirement in Developing Countries

The science and economics are clear: The era of coal power must end.

Not only is coal the most carbon-intensive fuel source, but cleaner options like renewable energy are now more cost-effective in most markets. According to the International Energy Agency, the world needs to cut 90% of coal use by 2050 and phase out all unabated coal power plants by 2040 to achieve net-zero emissions and avoid the worst impacts of climate change.

But while the science is clear, the logistics are not. Some countries have made considerable progress toward a cleaner power sector — Belgium, Austria and Sweden have already fully phased out coal, while others are rapidly scaling up renewables — but many nations are still heavily reliant on coal. In Indonesia and South Africa, for example, coal still fuels over 50% of all power generation.

In coal-dependent, resource-strapped nations, retiring fossil fuels without harming communities or economies is not just a complex social and political challenge; it’s also a financial one. These countries need more financing and alternative energy solutions, while at the same time, many have young coal fleets and new plants still under development. These plants are expected to operate for decades and risk becoming “stranded assets” if they retire early.

To be successful, therefore, coal retirement plans must be tailored to national contexts, keeping not only political stakeholders in mind but financial ones, too.

A Case Study in Coal Retirement

The Just Energy Transition Partnership (JETP) was launched in 2021 to help developing nations end their reliance on fossil fuels — especially coal — and shift to cleaner energy sources. The initiative seeks to finance a fair and equitable low-carbon transition, with developed nations, multilateral development banks and other donors providing funding for coal retirement, expansion of clean energy, and transition support for fossil fuel workers and dependent communities.

The G7 nations (Canada, France, Germany, Italy, Japan, the UK and the U.S.) initiated JETP with an initial focus on South Africa’s energy transition. More recent JETP programs include Indonesia, Vietnam and Senegal. (Although Senegal, which is primarily dependent on oil rather than coal, will face a different set of barriers in its transition.)

So far, G7 nations and other donors have pledged $46.7 billion to support these countries’ decarbonization efforts. Transition plans will be constructed by country governments alongside G7 partners and their public-sector entities responsible for international loans and grants — for example, in the U.S., the International Development Finance Corporation.

With finance already flowing and planning underway, JETP countries can provide a case study to the world as it works to phase out coal power. Here, we share key finance considerations for current and potential JETP members as these nations design their transition plans.

1) Coal-dependent Countries Need More Financial Assistance

The first and most pressing thing developing countries need to phase out coal is more financial support. The JETP initiative was designed to help close this gap, but current financing packages fall substantially short of what’s needed.

South Africa, for example, needs an estimated $98.7 billion for its energy transition between 2023 and 2027. Its present JETP package includes only $8.5 billion for the next five years, a mere fraction of the required amount. Similarly, JETP promised $20 billion to Indonesia, while the Indonesian government estimates that $600 billion is needed to decommission just 15 GW coal power (33% of the country’s coal power capacity) and add a similar amount of renewable capacity by 2050.

JETP partners must make bigger financial commitments and undertake concrete actions to deliver that finance. Individual partner countries and institutions should establish clear financing targets through comprehensive assessments of JETP countries’ energy transition plans, considering the costs of decommissioning coal power infrastructure and integrating renewable energy capacity. Fostering public-private partnerships and exploring innovative financial mechanisms such as de-risking tactics can help mobilize private resources in addition to grant and concessional finance.

2) Younger Coal Fleets Pose Unique Challenges

The age of coal fleets varies significantly among countries, with some relying predominantly on coal plants more than 2-3 decades old while others are more heavily invested in coal fleets under 10 years old or still in development. Coal plant age influences future revenue expectations and, in turn, retirement timelines.

In general, the older a plant is, the cheaper it will be to retire, because more of its initial investment has already been recouped. Aging fleets also primarily use subcritical boiler technology, which is the least efficient (most polluting) way to generate coal power. Taken together, these considerations mean retirement of older plants should be prioritized where possible.

South Africa has the oldest coal fleet among JETP countries, with 74% of its coal plants over 20 years old. This means it can and should take the lead, being more aggressive in phasing out and repurposing these facilities. The country’s Just Energy Transition Investment Plan charts a path to close nine of its 15 plants by 2035; other countries should watch closely as the plan is implemented and learn from its successes or pitfalls.

By contrast, Vietnam and Indonesia rely on younger fleets, with the majority of their coal plants being less than a decade old. To keep pace with global climate targets, most of these plants under 10 years old must be retired by the time they are about 25, which presents unique challenges. Investors expect revenue for decades and younger coal plants often have higher outstanding debts and expected returns. In addition, these plants primarily use more efficient technology which, while less polluting, requires a higher upfront investment. This can complicate the financial design of early retirement plans.

Due to their higher initial cost and longer operating horizon, early retirement plans for young coal fleets must incorporate additional considerations and compensations for creditors and project companies. This could include crafting policies that allow investors to recover a portion of their investment through government grants or concessional finance. Nations like Indonesia and Vietnam will need additional financial support to retire young plants early and compensate relevant stakeholders. And corresponding investments in renewable energy sources and infrastructure will be needed to replace coal and meet increasing electricity demand.

Some initiatives currently underway can be looked to as examples, including the repurposing of coal plants into renewables (such as in Spain) and refinancing strategies like the Asian Development Bank’s (ADB) Energy Transition Mechanisms. The latter focuses on using concessional and commercial capital to accelerate the retirement of fossil fuel power plants and replace them with clean energy. ADB’s initiative is supported by the JETP and can be leveraged as a key implementation mechanism in Asian countries with young coal fleets.

3) Coal Plant Ownership Must Be Considered in Financing Agreements

Designing effective coal retirement schemes will also hinge on who owns a nation’s coal power plants, which varies widely by country. Indonesia and Vietnam, for example, have a significant presence of international independent power producers (IPPs), which are typically private owners from other countries. South Africa’s coal plants are almost entirely controlled (97%) by the state-owned utility Eskom.

State-owned entities allow governments to have a direct influence on a plant’s operations, up to when and how it closes. This direct control might enable a more streamlined transition away from coal, as seen in the case of South Africa’s Eskom, where the government decided to decommission nearly half of its coal capacity by 2035. However, even a centrally led approach may face external challenges: The government has since indicated it may delay retiring these plants to address electricity shortages.

In countries with substantial private participation like Indonesia and Vietnam, the landscape is more complex. Governments must prioritize negotiations with IPPs to avoid breaching contractual obligations. These contracts specify stakeholder responsibilities and afford limited flexibility for things like government-mandated retirements without compensating for investors’ losses. Negotiations between governments and corporations will play a pivotal and likely more challenging role in facilitating early retirements in these countries.

The ADB is currently exploring the early retirement of the first IPP-owned coal-fired power plant in Indonesia, which could provide valuable lessons.

4) Coal Retirement Plans Must Support a Just Energy Transition

Timelines and investors aren’t the only factors that matter when figuring out how to finance early coal retirement. Countries must also work towards a just transition which accounts for the direct impact of coal retirement on labor, employment and local economies, as well as the ripple effects these changes can have on individuals and communities whose livelihoods depend on fossil fuels.

Financiers and policymakers should actively contemplate how to address these potential challenges. Beyond funds allocated for the technical aspects of coal retirement, additional financial resources will be necessary to address socioeconomic concerns. These will vary by country and location, but can include:

• Environmental restoration: The environmental impacts and degradation caused by coal-fired power generation or mining may be significant. While costly in the short term, restoring the local environment may be necessary to enable communities to find economic alternatives to coal mining or power.
• Supply chain businesses and employees: Coal-fired power generation and mining operations often support a network of local businesses and employment within their supply chain, from coal transportation to electricity delivery. As a coal plant winds down, these businesses may experience revenue losses and potential job cuts. Mechanisms such as subsidies and/or workforce training programs will be needed to mitigate the economic and social impacts of this shift.
• Gender-based support: The economic impacts of the transition away from coal will be different for men and women. There is still considerable gender segregation in labor markets in addition to a persistent gender wage gap. Women often have less access to resources to support adaptation and may experience greater obstacles to recovering their livelihoods. Ignoring these inequalities in transition plans risks exacerbating them.
• Government revenue loss: Governments may face potential revenue losses due to the reduction of tax that would have been collected from retired of coal plants. This could negatively impact both local and national finances, leading to reduced funding for social services and communities. Identifying new tax sources, such as repurposing coal plants or new renewable energy plants, can help mitigate these financial impacts.
• Community support: Infrastructure provided by fossil fuel producers may be supporting vital social services such as health care, childcare, education and small business finance. Governments should make sure they include finance to support these facilities post-coal closure.
• Consumer energy burden: Access to affordable energy should also remain a priority during the transition. As they move toward cleaner energy sources, countries must protect low-income households and vulnerable populations from shouldering a disproportionate burden of energy costs.

To assess and address these potential issues as they begin designing coal retirement plans, governments should foster active engagement and participation of local communities, allowing their voices to shape the decision-making processes. This inclusivity will help address local concerns and needs, promoting a fair and equitable transition for all.

What Comes Next for Coal-dependent Countries?

Governments in all countries must act now to phase out existing coal power plants and immediately halt plans to develop new ones. The diverse and complex landscape of coal-fired power plants across the JETP countries and other coal-dependent nations calls for tailored and comprehensive strategies to ensure a successful energy transition.

The right approach to retiring coal and the appropriate next steps will vary based on each country’s individual needs. For example:

• South Africa, with its older coal fleets and state-controlled plants, has already planned to close nine out of 15 coal plants by 2035. However, it needs more external support with financing mechanisms, such as Eskom’s proposed sustainability-linked loans, to accelerate the retirement timetable and to repurpose plants. Given that ongoing electricity shortages could delay these plans, JETP support must focus on increasing the deployment of renewables and other, cleaner energy sources. This can help address the nation’s power crisis and improve communities’ welfare while keeping coal retirement plans on track.
• Indonesia and Vietnam face more challenges due to their younger, IPP-owned coal power plants. Governments should renegotiate contract terms to avoid unnecessary contract breaches and lawsuits and seek resources from donor countries or multilateral development banks to explore financing options for retirement, as with the ADB’s Energy Transition Mechanism.

By taking these actions, JETP countries may overcome the significant challenges posed by their diverse coal fleets and move towards a cleaner, more sustainable energy future. And they can pave the way for other countries to do the same.