8 September 2025
Accelerating Chile’s Coal Phaseout Through Innovative Transition Pathways – Key Insights from a New Commercial Study
Accelerating Chile’s Coal Phaseout Through Innovative Transition Pathways – Key Insights from a New Commercial Study
Lawrence Ang, Managing Partner
Kyle Constantino, Associate
Ruth Reyes, Marketing Associate
Chile is positioning itself as a global frontrunner in the shift from coal to clean energy. Renewables provided 70% of the country’s electricity last year, compared to 47% five years ago.¹ Its progress is driven by a combination of strong policies, ambitious clean energy targets, and abundant renewable resources that continue to draw strong investment.
In 2019, the Chilean government and major energy companies signed a voluntary agreement to retire or repurpose its remaining 28 coal-fired power plants (CFPPs) units by 2040. Since then, 11 CFPP units have been retired, and nine others have committed to closure or conversion timelines. However, eight units from three CFPPs, Cochrane, Santa Maria, Guacolda, with 1.7 GW of coal capacity still lack a definitive retirement plan. How can Chile meet its 2040 target, and what lessons can be applied to other countries in their coal to clean transition?
To tackle these questions, a consortium composed of Climate Smart Ventures (CSV), Climate Action Teams (CAT), the Coal to Clean Stewardship Fund (CCSF), and Dictuc (a knowledge and technology transfer company associated with Pontificia Universidad Católica de Chile), conducted a technical study that was released on May 30. Titled “Developing Pathways for Accelerating the Transition of Select Coal-Fired Power Plants in Chile,” this technical and financial analysis was commissioned by CAT with support from the Coal Asset Transition Accelerator (CATA).
The study explored decommissioning options through various approaches including refinancing, repurposing, co-firing with ammonia, and utilizing transition credits. The study used a modeled “archetype” CFPP, a representative model synthesizing shared characteristics from the three remaining CFPPs, to model the different scenarios.
Unlocking Early Transition Potential
The developed methodology assesses the financial viability of early coal plant retirement by comparing its value against continued operation under a business-as-usual (BAU) scenario. The goal is to achieve “value neutrality” in the year of transition, ensuring that the present value of future cash flows from early closure equals or surpasses that of continued operation. The evaluation considers key criteria such as full repayment of plant-level loans, coverage of dismantling costs, just transition efforts, regulatory compliance, and the valuation of avoided operating years or emissions. This framework is key to understanding if and how Chile can accelerate its coal phase-out.
The analysis followed a structured three-step process:
- Data Review: Review of available plant-level and industry data, including emissions profiles, capital structures, and market projections.
- Assumption Development: Development of assumptions, business models, and financial projections for a 15-year-old 100 MW archetype CFPP, reflecting potential transition options.
- Scenario Analysis: Conducting scenario analyses to assess whether early retirement could be achieved without financial loss to asset owners.
The analysis explored the managed phaseout (MPO)² of the archetype CFPP with various transition scenarios that are currently being explored by asset owners, to gauge their potential impact on accelerating coal phase-out.
- Refinancing: Optimizing debt structure to reduce financing costs.
- Ammonia Co-Firing: CAPEX investment in ammonia co-firing to reduce CFPP emissions for remaining operational life.
- Repurposing: Converting CFPP sites to battery energy storage systems (BESS) or synchronous condensers (SYNCON) to enhance post-retirement value.
- Transition Credits: Compensating asset owners for the financial impact of accelerated retirement through the use of high-integrity transition credits. The transition credit price is computed based on the Free Cash Flow to Equity (FCFE) that needs to be compensated per year of additional accelerated transition.
Key Findings and Path Forward
The study yielded compelling insights into Chile’s ability to go coal-free, as illustrated in Table 1 below. A higher equity IRR indicates a more profitable investment, as it signifies a greater annual rate of return over the life of the project.
Table 1: Archetype Coal Plant | Transition Options Financial Analysis
- Refinancing is a critical enabler for an accelerated CFPP transition. Refinancing enhances the financial viability of retiring the plant by increasing leverage and reducing the cost of debt to below current market rates. This approach offers asset owners a strong financial case to begin transitioning away from coal earlier, and an opportunity to invest in low-carbon technologies.
- Repurposing the CFPP site to synchronous condenser and BESS would present a financially viable transition pathway for CFPPs. Grid-forming technologies like synchronous condensers and BESS offer a practical transition post-CFPP. This approach allows asset owners to sustain returns, maximize existing infrastructure, and maintain employment, all while meeting system needs. Their adoption, however, hinges on supportive market mechanisms.
- Transition credits may further accelerate and increase ambition in CFPP phase-out. Transition credits can bridge the financial gap between BAU and the higher upfront costs of cleaner alternatives, especially in commercially difficult cases. Enabling mechanisms, like a domestic carbon market, Article 6 framework, and approved carbon accounting and project methodologies, are crucial for their potential in Chile.
- Co-firing with green ammonia would not be financially viable despite its technical potential. Uncertain high capital and fuel costs could limit the viability of ammonia co-firing as a transition strategy. Based on the assumptions considered, while co-firing can reduce emissions, it would not create additional value nor significantly accelerate the transition timeline.
- Different financing structures and approaches can be explored to finance and activate the transition. To finance the transition, various structures can bridge the gap between independent power producers (IPPs) and capital providers, considering their participation limits and exposure to coal and renewable projects. Transition credits can also attract new partners by monetizing the emissions reductions from early coal retirement, thereby generating additional years of avoided emissions.
These insights have been gained through extensive stakeholder engagement, including two country visits. These visits facilitated direct discussions with key stakeholders such as the Ministry of Energy, IPPs like AES Andes, Guacolda, and Colbún, and civil society organizations. This collaborative approach ensured that the analysis and recommendations were practical and grounded in Chile’s current energy landscape.
With CATA’s support, CSV and its partners successfully mobilized interest from IPP owners to explore managed phase-out and energy transition pilot projects. The technical assistance provided also helped secure support from other key players in the Chilean power sector, establishing a foundation for long-term collaboration.
Looking ahead, key next steps include assessing how the archetype transition pathway model can be applied to guide MPO and energy transition pilots for the remaining CFPPs, continuing engagement with regulators and market actors, and leveraging lessons learned to inform future policy recommendations.
This study provides a practical and scalable framework for accelerating coal phase-out, not only in Chile but also for other emerging economies committed to a sustainable energy future.
Download the slide presentation below.
Footnotes:
¹ Chile surpasses 40% wind and solar for the first time in December, Ember, January 10, 2025, https://ember-energy.org/latest-updates/chile-surpasses-40-wind-and-solar-for-the-first-time-in-december/?utm_source=chatgpt.com.
² An MPO refers to the credible, financeable strategies for the early-retirement of high-emitting assets.
About Climate Smart Ventures
Climate Smart Ventures (CSV) is an advisory firm advancing the energy transition in Asia. Our expertise and projects span coal to clean utility-level energy transition, industrial decarbonization, grid transformation, transition finance, and government-level policy recommendations. We also provide ESG and sustainability advisory services, focused on decarbonization and management of environmental and social impacts. Ecosystem building and collaboration are key elements of our firm, which partners closely with the region’s leading corporates and power portfolio owners, investors, off-takers, and others. For more information, visit our website https://climatesmartventures.com.