Coal or no coal: A balancing act for MDBs

In August last year, South African President Jacob Zuma opened the first generating unit of the Medupi Power Project, which is expected to be the fourth biggest coal-fired power plant in the Southern Hemisphere when fully operational.

Designed to address South Africa’s chronic power shortages, the Medupi Power Project only went ahead in April 2010 when the World Bank signed off on $3.8 billion in financing for the project. World Bank officials stressed that its financing was needed at a time when South Africa had difficulty accessing global capital markets in the wake of the global financial crisis.

Several of the World Bank’s major shareholders, including the United States and United Kingdom, opted to withhold support out of concern over the project’s climate impacts, echoing reservations among civil society and environmental groups.

“Without actions to offset the carbon emissions of the Medupi plant, the project is incompatible with the World Bank's strategy to help countries pursue economic growth and poverty reduction in ways that are environmentally sustainable,” the U.S. Treasury Department said in a statement at the time.

Coal is one of the cheapest energy sources, but has the highest carbon content of all fossil fuels. For many years, it was viewed as the most viable, low-cost option for developing countries that need affordable energy so multilateral development banks directed large amounts of financing to coal projects worldwide.

In the run-up to the historic Paris climate agreement adopted last month which called for “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development,” MDBs, however, have been facing intense pressure to minimize coal financing in their portfolios.

In 2013, the United States and United Kingdom, both of which are leading shareholders at the world’s MDBs, announced that they would oppose MDB financing for coal-fired power plants except in narrowly defined circumstances. Last year, members of the Organization for Economic Cooperation and Development agreed to curb export financing for coal-fired power plants.

The rising skepticism over coal among major MDB shareholders has made borrower countries reluctant to approach them for coal financing.

“It is the opposition from the U.S. and others saying no to coal, and other governments saying they will block international multilateral banks from doing coal projects that prevented other countries from coming to us,” Anthony Jude, director of the Asian Development Bank’s energy division, told Devex.

Citing the climate impacts of coal, MDBs have unveiled more selective and rigorous coal financing standards and policies over the past several years. A quick look at these policies suggests that MDBs will be able to support coal in far more limited circumstances than in the past.

World Bank: According to its 2013 energy sector strategy, the World Bank will only provide financing for coal projects in rare circumstances. According to a bank representative, those rare circumstances would include situations when there is a lack of feasible alternatives to coal or a lack of financing for coal power.

Asian Development Bank: ADB’s 2009 energy policy states that the bank will selectively support coal-fired power plants if cleaner technologies are adopted and adequate mitigation measures are incorporated into project design. ADB’s Jude clarified that the bank will now only support coal projects that use high-efficiency and low-emissions technologies.

African Development Bank: AfDB’s 2012 energy sector policy provides that the bank will only support coal when such financing is determined to have a strong development impact and, at the same time, environmentally responsible, among other conditions.

European Bank for Reconstruction and Development: EBRD’s 2013 energy sector strategy states that the bank will not finance investment in coal except in rare and exceptional circumstances where there are no feasible alternative energy sources.

Inter-American Development Bank: IDB’s 2009 guidelines on coal-fired power plants dictate that the bank will only support plants that are designed to use high-efficiency and low-emissions technologies.

European Investment Bank: In 2013, EIB introduced an emissions performance standard which effectively means that the bank will not be able to lend to most coal-fired power plants.

The end result of these policies and strategies has been a marked decline in MDB financing for coal-fired power plants. According to figures compiled by the Natural Resources Defense Council, MDB financing for coal-fired power plants stood at $1.5 billion between 2011 and 2014, compared with $12.2 billion in the previous four-year period.

In fact, in the past four years, MDBs have signed off on financing for a new coal-fired power plant only once: a $900.5 million loan approved by ADB in 2013 for the Jamshoro Power Generation Project in Pakistan. ADB’s Jude contended that the project provided Pakistan with the “least cost supply option” to address its energy needs. The U.S. abstained on the World Bank vote on the Medupi Power Project in 2010, but the Obama administration, in line with its overall tougher stance on coal, voted no on the Jamshoro Power Generation Project.

Devex has also learned from officials at ADB, EBRD, IDB and EIB that none of these MDBs are currently considering financing for coal-fired power plants, but a World Bank representative confirmed, that the highly controversial “Kosovo C” coal project remains under consideration by the bank. The representative stressed that the bank will make no decision on the project until all environmental, social, technical and economic analyses have been completed.

AfDB approved $2.6 billion in financing for the Medupi Power Project in South Africa in 2009, months before the World Bank moved forward with its own loan. Since then, neither the World Bank nor the AfDB have approved financing for a new coal-fired power plant, but according to Kurt Lonsway, manager of environment and climate change at AfDB, the bank is considering additional financing for the Medupi Power Project.

As capital markets rebound from the global financial crisis, analysts expect that MDB loans for coal-fired power plants will remain few and far between for the foreseeable future.

“Every few years, there might be one coal project in one of the MDBs,” Scott Morris, senior fellow at the Center for Global Development, predicted. “They’ve basically said that only when we’re satisfied with these pretty strict standards will we move forward. That, in practice, means we won’t see many of these.”

Private finance for coal has long dwarfed that of the MDBs and the gap seems to have widened since the MDBs began to roll out more rigorous coal financing policies. In 2013, commercial banks alone financed a record $88 billion in coal projects worldwide. Coming off the Paris talks, many of the world’s largest private banks have also pledged to cut back on financing for coal.

The prospect that the newly launched China-led Asian Infrastructure Investment Bank will become a key player in the coal financing landscape could diminish interest in MDB financing for coal in Asia-Pacific even further. Projecting itself as a more flexible institution than the World Bank and ADB, AlIB has reportedly signaled that it is open to financing coal-fired power plants in both India and Indonesia.

Reflecting that demand for coal remains strong in some emerging economies, both India and Indonesia have recently announced ambitious plans to boost their coal production. The latest global coal forecast from the International Energy Agency, released last month, anticipates that the decline in coal demand in Europe and United States through 2020 will be more than offset by growth in India and Southeast Asia.

MDB officials make clear that they remain open to supporting borrower countries’ coal infrastructure needs — but only if their rigorous coal lending standards are met.

“We don’t close the door to coal by saying no coal is wrong. There isn’t a development bank that should be doing that,” said ADB’s Jude. “If those countries need coal, then they have to do proper, cleaner coal technology.”

An EBRD representative echoed this sentiment, but emphasized that the bank’s renewable energy investments were now outpacing its financing for fossil fuels. In support of the global commitment to mobilize $100 billion in climate finance by 2020, MDBs across the board have ramped up their renewable energy investments in recent years.

“The strategy says we can only finance coal where there is no viable alternative,” said the EBRD representative. “Such places do exist, but even in Mongolia, the most obvious one, the only energy generation we have done so far is wind power.”

AfDB officials have consistently gone further than their peers in publicly affirming the rights of borrower countries to use coal. In fact, despite the lull in its coal financing since the Medupi Power Project, AfDB still considers coal a priority sector in its energy portfolio, the only one to do so among the MDBs.

“Africa cannot be told at this point that they do not have the right to look at all of their energy sources,” said AfDB’s Lonsway.

Africa’s coal supply, which is concentrated in Southern Africa, represents a third of the continent’s electricity production. Only Asia and Oceania record a higher share (59 percent) for coal in its electricity production.

Both Lonsway of AfDB and Jude of ADB emphasized that they are concerned that coal plants built in borrower countries without MDB financing may not adhere to the same level of social and environmental standards as required by MDBs’ safeguard policies.

Jude cited the example of the Philippines where the Aquino administration has recently come under fire from civil society and environmental groups for its decision to move forward with the construction of 29 new coal-fired plants. The vast majority of these plants are expected to be privately financed.

“That’s where the dangers come, when they do it themselves, some of the safeguards have been cut. Technologies aren’t being done properly,” said Jude.

Even as he acknowledged that possibility, CGD’s Morris argued that it would be foolhardy for MDBs to rollback their restrictions on coal financing in an effort to become more attractive to borrower countries.

“They’re not going to the MDBs unless they’re doing something highly expensive,” Morris asserted. “If you have access to private financing, you are probably relying on them for projects like this anyway.”

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