Smoke sign: India has 195 thermal energy plants | Photo credit: Nagara Gopal
The early closure of coal-powered energy plants will have the achievement of global climatic objectives, that is, net emissions of zero to contain increasing temperatures at 1.5-2 degrees C higher than averages prior to industrialization. But cutting the useful life of a plant is an expensive matter. Enter ‘transition loans’ as a potential solution.
According to a report from the Institute of Energy Economy and Financial Analysis (Yeefa), transition loans are a new category of carbon credits. The objective is to monetize the reduction of emissions achieved through the early closure of coal power plants and their replacement with clean energy sources. According to the report, these credits could close the economic gap in the transition of clean energy of Asia.
He thought that there are carbon markets, there is no market at this time for reduced carbon through off plants or early coal. But that is because many countries do not close early coal.
India currently has 195 thermal plants in operation. He has closed 56 coal force plants, according to Niti Aayog data.
The IEEFA report shows that the early closure of coal plants faces ‘substantial economic obstacles and extensive financial requirements’.
Cause or inertia
Most coal energy plants operate in highly regulated markets. “This of the isolated plants of the market forces due to the property of the Government, the long -term energy purchase agreements or the subsidies,” says the author of the IEEFA report and the leader of sustainable finance of the Institute (Asia), Ramnath N iyer.
Power purchase agreements sometimes extend to 25 years. The closure of a plant could trigger penalty clauses and other blocked financial costs, which leads to significant losses for investors and lenders. For profitable plants, it also implies giving up future cash flows. Investors should be compensated to stimulate investments in replacement plants that use renewable energy.
Transition credit flow
Assigning financial value to saved emissions when closing an early plant, helps create a new financial instrument with variable income potential, says Iyer. Income “could be distributed to investors depending on their risk return preferences” by transitioning of coal plants to renewable energy, according to the report.
Transition loans could be used as a guarantee for loans, attracting capital and debt investors for new projects.
But the success of the mechanism would depend on the prices of the credits.
Price credits
The assessment of a transition loan extends to the exchange costs, and the age profile and emissions of each plant, says Iyer. “According to several studies and pilot projects, the estimated range for these credits is $ 11-52 per metric ton or equivalent carbon dioxide (MTCO2E) Avoid,” he adds in the report.
Iyer suggests that with the fall in the cost of renewable investment and energy, the early closure of coal plants and clean energy replacement is becoming more economical. “Transition loans can be particularly useful in situations in which the leveling cost of energy for a new plant -based plant is higher than that of a renewable project, but the marginal cost in the short term of a plant based on existing fossils is LOER. These are presses plants.
Despite their potential, transition loans can face several challenges. “Establish consistent and scalable mechanisms for the replicability and power of prices. Also, therefore, the precise estimate of the social and economic costs associated with the transition, ensuring a fair transition for the affected communities and workers, would be the iytes.
Execution or rules
Operationally, challenges may arise regarding the authenticity of applicants. After all, if an owner of a coal -based energy plant turns off his unit, he wins credits and sets in another place or sells his equipment to others, not that would not defeat the purpose?
“Maybe we should think about it. But for now, what worries us is the (prevention) of the use of coal as a source of energy,” says Iyer, while asking for “strict monitoring of this diversion potential.”
“Such a robust monitoring mechanism must be supervised by some authority,” he says.
Second, governments must present themselves to offer guarantees. Iyer says: “The real evidence is whether it would be a subscription child. Let’s say, the central government of a country or a local guarantee (change)?”
If the beneficiary of a transition credit mechanism violates the terms, who is the fault? “That is a very complicated process, which requires a guarantee of the host government. What is clearly necessary is that the varying parties join. It needs the buyer, the seller, the third party verifier and the authorities.”
Commercial credits
The transition loan is meean to be treated as well with any other carbon credit, says Iyer. “You are not buying just for a coal mine, or an energy plant. You are saving the emissions that come to the atmosphere … If someone is costing to buy it as a displacement, it is fine.
He points out that the Singapore government has ruled that up to 5 percent of the carbon tax of an entity can be paid by buying compensation, so it is a recognized displacement.
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Posted on April 27, 2025