A new study by the Institute for Energy Economics and Financial Analysis (IEEFA) demonstrates that investing in coal-to-clean energy transitions, as opposed to solely focusing on decommissioning coal plants, presents a more lucrative and beneficial approach.
The report proposes a model where renewable energy assets are gradually phased in alongside a gradual reduction and closure of coal-fired power plants. This strategy suggests that rethinking the closure of coal plants can unlock new opportunities.
Coal-to-Clean Transitions: A Global Opportunity
By analyzing case studies across various countries, the Institute identified specific instances where coal-to-clean transactions could be economically viable and practical before 2030.
Their research indicates that the profit margins from renewable energy assets can, under certain conditions, cover the costs of closing a coal plant and still generate profits for power plant operators.
The IEEFA study revealed that only 10% of existing coal power capacity is scheduled for decommissioning by 2030. Many current decommissioning initiatives rely heavily on philanthropic funding, concessional finance, or government subsidies.
However, the report focused on identifying coal assets that could be economically decommissioned with minimal subsidies and prioritized those with potential for impact before 2030.
Attractive Business Case for Shutting Down Coal Plants
A key finding of the report is that over 800 coal power stations in emerging economies could be replaced by renewable energy sources profitably.
Paul Jacobson, a guest contributor to the IEEFA and author of the report, emphasized that replacing aging coal plants with large-scale solar and storage systems presents a compelling business case, offering substantial economic potential for emerging markets.
The deals resulting from coal-to-clean transitions can cover all associated costs, including site decommissioning, recovery of equity losses, financing for power purchase agreements (PPAs), construction and development of renewable assets, retraining of coal plant workers, and grid infrastructure upgrades to accommodate variable renewable energy sources.
Case Studies and Success Stories
The report highlights case studies in Botswana, Colombia, Morocco, Romania, and Thailand to illustrate the feasibility of this approach. In each case, the economics demonstrate that if renewables become operational between 2026 and 2028, the projects can completely eliminate carbon dioxide emissions from those assets by 2029.
While coal-to-clean transitions are profitable without subsidies for the analyzed projects, resources for identifying similar opportunities and supporting local teams in creating bankable business cases are limited.
This presents an opportunity for philanthropic organizations, private financial institutions, and development banks to fund dedicated teams that can assess the viability of such transactions, mitigate risks, and transfer them to developers.
Large-Scale Approaches and National Priorities
The report suggests that large-scale renewable buildout programs are more likely to be viable than smaller transactions. These larger approaches can become national priorities, leading to long-term cost efficiencies and the development of a local employment base.
The report identified two cases where economic viability posed a challenge. In Morocco, the economics for replacing a 1.4 GWh coal plant operational since 2018 were not feasible before 2030. Achieving the required $2.1 billion reduction in investment costs for the Safi power plant presented significant challenges.
Solutions for Challenging Cases
To address these challenging cases, the report suggests a combination of subsidies, debt write-downs, delaying coal plant closure to the early 2030s, reducing or eliminating storage capacity, and utilizing carbon credits.
However, measures like drastically reducing battery storage to make solar power a baseload source could create additional problems, especially for countries like Morocco, which is projected to have no reserve margin by the 2030s.
For these projects to become viable before 2030, reductions in investment costs, discounts in the cost of capital, public or philanthropic grants, or increases in wholesale power prices are necessary.