The Future of Transition Finance
Initiative
Addressing the Risk-Return Dilemma & Unlocking
Capital for the Coal to Clean Energy Transition
The Future of Transition Finance
Initiative
The Future of Transition Finance
Initiative
Addressing the Risk-Return Dilemma & Unlocking
Capital for the Coal to Clean Energy Transition
Addressing the Risk-Return Dilemma & Unlocking
Capital for the Coal to Clean Energy Transition
Climate Smart Ventures (CSV) has launched a new report and initiative focused on scaling transition finance to accelerate Asia’s shift from coal to clean energy. The report, titled The Future of Transition Finance in Asia: Addressing the Risk-Return Dilemma & Unlocking Capital for the Coal to Clean Energy Transition, is designed as an industry consultation paper.
“The battle against climate change will be won or lost in Asia and Pacific. If emissions from existing coal power plants are not addressed, the region will fail to meet the Paris Agreement targets.”
– Asian Development Bank
“The battle against climate change will be won or lost in Asia and Pacific. If emissions from existing coal power plants are not addressed, the region will fail to meet the Paris Agreement targets.”
– Asian Development Bank
The report addresses a critical challenge in the region’s energy transition: the “risk-return dilemma” faced when retiring coal-fired power plants (CFPPs) before the end of their technical lifespan. It delves into how this dilemma unfolds and demonstrates how transition finance can act as a powerful value driver, capable of bridging the risk-return dilemma when a CFPP owner might otherwise not be incentivized to retire a plant earlier than originally planned.
The report includes the following sections:
- CFPP phase out in Asia and the risk-return dilemma
- The role of concessional funding in supporting transition finance
- Case studies – a review of different approaches with and without concessional finance
- Existing and potential transition finance strategies and instruments to unlock a coal to clean energy transition
- Field questions on the future of transition finance
Download the report here.
The Risk-Return Dilemma
The risk-return dilemma arises because in several jurisdictions in Asia, CFPPs are still expected to generate significant value in the short-term, and yet on the other hand, the market can also be viewed as rewarding companies that are increasingly diversifying into other generation technologies, specifically, renewables.
Analysis from the report shows that companies with lower emissions intensity tend to average higher in terms of their EV/EBITDA, as indicated by the trendline where market performance of a portfolio goes down as emissions intensity increases.
SCATTER PLOT OF 5 YEAR AVERAGE EV/EBITDA VS 3 YEAR AVERAGE
EMISSIONS INTENSITY OF SELECT POWER COMPANIES
SCATTER PLOT OF 5 YEAR AVERAGE EV/EBITDA VS 3 YEAR AVERAGE EMISSIONS INTENSITY OF SELECT POWER COMPANIES
The Potential of Transition Finance
A core argument of the paper is that transition finance can effectively re-calibrate the commerciality of a coal-to-clean transition if it achieves at least two inter-dependent outcomes, partial value realization and value creation.
A number of transition finance strategies and instruments are emerging, like sustainability-linked bonds (SLBs) and transition bonds. These and even more novel/potential approaches, such as Infrastructure Investment Trusts (InvITs) and transition credits, are discussed in this paper.
EXAMPLES OF EXISTING AND POTENTIAL TRANSITION FINANCE
INSTRUMENTS AND VEHICLES
- Refinancing as the “last lender” to activate a coal fired power plant’s early shutdown
- Use-of-proceeds green bonds/loads, sustainability bonds, sustainability linked bonds/loans, transition bonds
- Senior/mezzanine loans that incorporate some element of transition from fossil fuels to clean energy
- Private equity, venture capital, and transition-focused buyout funds
- Risk-oriented junior equity
- “Stewardship” equity
- Infrastructure funds, across asset classes, investing in energy transition projects and companies
- REITs incorporating projects within their broader portfolio that improve energy efficiency and expand capacity for renewable energy sources
- REITs transitioning privately owned utility or captive coal-fired power plants
- Potential for REITs to facilitate commercial synergies for the development or redevelopment of power-related infrastructure capable of incorporating the economics of the coal-to-clean transition
- Securitizing cash flows of CFPPs or bundled renewable energy projects via asset backed security structures or general securitization structures with the intention of early retirement of owned CFPPs
- Transition credits, currently under development and in a piloting phase, are high-integrity carbon credits generated from the emissions reduced through retiring a coal-fired power plant early and replacing it with clean energy sources
- Dedicated financing for just transitions, such as through bonds or other financial instruments to fund transition activities for communities and workers upstream and downstream, which has the added effect of relieving pressure from capital limited for use towards the early retirement and replacement of CFPPs only
- Guarantee facility by MDBs
- Short to medium-term trade finance and supply chain finance facilities. This facility is currently being developed by MDBs which could partially cover operating expenses as part of the transition in a more competitive manner.
Source: Climate Smart Ventures, The Future of Transition Finance in Asia Report
The Future of Transition Finance Initiative (FTFI)
To further drive momentum for financing Asia’s shift from coal to clean energy, CSV is launching a year-long “Future of Transition Finance Initiative” (FTFI). The initiative comprises four phases, the first of which is the publication of the consultation paper.
The Future of Transition Finance Initiative is comprised of four phases
1.
Release consultation paper with background information and field questions
(September 2024)
2.
Engage key stakeholders to gather input and foster solutions
(October-December 2024)
3.
Mobilize first movers and first mover transactions via a Coal to Clean First Movers’ Sandbox
(January 2025 Onwards)
4.
Share follow-up insights to contribute to industry learning and adaptation
(January-June 2025)
The consultation paper strives to be sufficiently comprehensive to start the conversation, serving as a launchpad for gathering insights from a diverse range of stakeholders. It includes a set of “field questions” that are intended to spark dialogue and encourage the exploration of potential solutions. Insights gathered through this process will be shared to contribute to industry learning and adaptation.
A primary objective of this initiative is to mobilize first movers and facilitate real transactions that accelerate the closure of CFPPs. To support this effort, Climate Smart Ventures has launched the Coal to Clean First Movers’ Sandbox (The Sandbox).
Stakeholder collaboration
If your organization or company is interested in co-hosting a workshop, engaging in one-on-one consultations or small group meetings, participating in The Sandbox, or simply learning more about the FTFI and how you might get involved, please reach out to Farzana Hoque at farzana@climatesmartventures.com.