CHRISTOPH NEDOPIL, LAWRENCE ANG, MATT CARPIO AND MENGDI YUE |
The early retirement of coal-fired power plants (CFPPs) is becoming a critical topic in global energy transition discussions. While much of the existing literature focuses on the economic costs or speculative financial gains tied to carbon trading, our study contributes a novel perspective by evaluating the financial impacts of retiring younger, Chinese-sponsored coal plants in emerging Asian economies, specifically Vietnam and Pakistan. This analysis is based on real financing strategies relevant to investors rather than theoretical models.
Financial viability of early retirement
Our research demonstrates that early retirement of CFPPs, particularly when paired with lower-cost refinancing and renewable energy (RE) investments, is not only financially feasible but can also enhance enterprise and equity values for current financiers. We compared the values generated by the original Power Purchase Agreements (PPAs) with those generated through refinancing at lower interest rates (1% lower in Vietnam and 0.49% lower in Pakistan) and bundling with RE investments. The results indicate that, under various future scenarios, refinancing and RE bundling offer significant financial advantages, particularly for younger CFPPs with higher debt burdens and financing costs.
Country-specific considerations
For Pakistan and Vietnam, these findings are particularly relevant. In Pakistan, issues such as circular debt and payment delays make the early phase-down of CFPPs financially viable, provided there is available cash for payments and local RE investments. In Vietnam, the recent Power Development Plan (PDP8) outlines clear trajectories for CFPP repurposing and retirement, although the competitiveness of new Feed-In Tariff (FIT) rates remains a concern.
Strategic recommendations
To capitalise on these findings, we recommend that local stakeholders, international and Chinese funders explore the use of refinancing in combination with concessional finance tools. Financial instruments such as green bonds, green credit with lower interest rates, and blended finance mechanisms could be employed. These instruments could be further supported by credit enhancements like insurance and guarantees, provided in exchange for commitments to early CFPP retirement and RE bundling.
Given the significant involvement of Chinese policy banks and the guarantee structures in Pakistan and Vietnam, sovereign debt conversion or debt-for-climate swaps could accelerate CFPP retirement. Additionally, direct incentives for equity owners through grant-based equity injections could further enhance the financial attractiveness of early retirement, particularly in a rising interest rate environment where new financing is more expensive.
Broader economic and environmental benefits
Beyond the financial gains, early CFPP retirement aligns with broader economic and environmental goals. It reduces climate risk, potentially lowers electricity costs, and contributes to public health by cutting coal-related pollution. For China, this approach could also boost the export of RE technologies, reinforcing its position as a global leader in this sector.
The need for immediate action
The study underscores the importance of taking immediate action on refinancing for CFPP retirement, ideally coupled with RE bundling. While immediate refinancing does not necessitate immediate retirement, it provides a window—often more than a decade—to plan and implement social and technical measures that ensure a just transition and grid sufficiency.
Future research directions
Future research should focus on exploring the interaction between finance and law to address investor protection issues and identifying the most effective financial instruments for this transition. Additionally, multidisciplinary research that includes technical and social feasibility studies will be crucial to ensuring that CFPP retirement is both economically viable and socially just.
By integrating these financial strategies and policy recommendations, stakeholders can effectively accelerate the transition from coal to renewable energy, creating significant value for investors while contributing to global decarbonisation efforts.
Professor Christoph Nedopil is Director, Griffith Asia Institute, Lawrence Ang is Director, Climate Smat Ventures, Singapore, Matt Carpio and Mengdi Yue are members of the Green Finance and Development Center, China.
This article is a synopsis of the journal article “Can investors benefit from the early retirement of coal plants: A plant-level analysis of Chinese-sponsored coal stations in Vietnam and Pakistan” published in Energy Policy, Volume 193.
