World Bank decides to stop financing coal-fired power plants

EXIM Bank follows suit. India unfazed by decisions. Other poor developing countries may be hit

By Uthra Radhakrishnan, Soma Basu
Published: Friday 19 July 2013

A World Bank report supports use of natural gas as being the least-cost means of providing flexible electricity supply on account of its low footprint when compared to coal (photo: Meeta Ahlawat)

Coal power plants in developing countries are in the line of fire. On Thursday, the US Export-Import Bank, or the EXIM Bank, decided not to fund a 1,200 MW coal power plant in Vietnam (see box). Two days ago, the World Bank too voted in favour of not funding new coal power plants in developing countries. This put an end to the long-debated issue of where the World Bank should draw a line between its overarching development goal of ensuring energy access to the poor and its more recent position on addressing climate change concerns.

It may be no coincidence that these decisions come just weeks after US President Barack Obama in his speech on climate change indicated a shift in US policy on coal, both domestically and internationally. After calling on federal agencies to place a cap on both existing and new coal plants in the US, the president made his intentions clear. “I’m calling for an end of public financing for new coal plants overseas—unless they deploy carbon-capture technologies, or there’s no other viable way for the poorest countries to generate electricity.  And I urge other countries to join this effort,” Obama had said.

The World Bank’s policy change as stated in its energy group’s guiding document, titled “Towards a sustainable energy future for all”, reads somewhat similar. “The WBG (World Bank Group) is committed to maximizing synergies between economic development and climate change mitigation. The WBG will cease providing financial support for green field coal power generation projects, except in rare circumstances. Considerations such as meeting basic energy needs in countries with no feasible alternatives to coal and a lack of financing for coal power would define such rare cases.”

Vietnam power project takes the hit
The Ex-Im Bank’s vote on the ‘Thai Binh 2 power plant’ at Vietnam is crucial since it is the ‘first crucial test’ of President Obama’s shift in policy towards ending financing to coal plants overseas. Earlier in the week, leading environmental organisations in the US had written a letter to the President demanding that the Vietnamese plant should be voted against as it “would use outmoded subcritical boiler technology, a violation of your (President’s) Climate Action Plan and the Export-Import Bank's environment policy.” While it may be small victory for the environmental organisations, its consequences on Vietnam will unfold soon.
Another area of overlap between the US president’s promise and the Bank’s changing policy relates to natural gas. Just prior to his statement on coal, Obama had this to say about gas: “To help more countries transition to cleaner sources of energy, we’re going to partner with our private sector to apply private sector technological know-how in countries that transition to natural gas.  We’ve mobilized billions of dollars in private capital for clean energy projects around the world.” The World Bank report too supports natural gas as being the least-cost means of providing flexible electricity supply on account of its low footprint, compared to coal.

Impact of decision on India

Despite the bank’s overall quantum of funding in developing countries being significant, Indian officials seem unfazed by the decision. “World Bank’s support to projects all over the world is very small. If they do not fund projects, it certainly doesn’t mean that people would stop coal projects. They cannot dictate our policy,” said Sanjay Garg, director (multilateral division), Union ministry of economic affairs. “Besides,” Garg adds, “there is nothing new in the decision. They had stopped funding coal projects in the last couple of years (in India). With this new resolution, the mechanism to fund would perhaps become more stringent.”

Even to the finance ministry, the decision “hardly matters”. “We finance most of the energy needs ourselves and do not depend on other countries. Coal is the most important energy resource, especially when we do not have natural gas reserves or hydropower potential like Brazil. With relation to the GDP, our emissions are lowest in the world. We would be looking forward to explore opportunities in clean coal,” said Dipak Dasgupta, principal economic advisor to the Union ministry of finance.

While this decision of the World Bank may not affect India, there are other poor developing countries that will be negatively impacted. Hervinder Singh, vice president of mining at Jindal Steel and Power Limited, is concerned that the company’s investments in western and northern Africa will be heavily affected by the World Bank decision. He explained that since these countries are still very poorly developed and power deficient, their investment ratings and hence, lending rates, are high. “Multilateral agencies such as the Asian Development Bank and World Bank fund 70 per cent of the cost of these projects. Even with substantial incentive from the government, we would still need a third party guarantee for these projects to continue the project. The World Bank decision means they would no longer provide guarantee for projects. This will adversely affect projects under negotiation,” said Singh.
Even as the ramifications of the decision are being widely discussed, there is a lot of discussion happening on the reasons that led to the decision. More so, since the Bank, only two years ago, approved a US $3.75 billion loan for the world’s seventh largest coal power plant in South Africa.

Did WB really make a policy leap?

Developing countries, including China and Brazil, have long protested a blanket ban on coal funding in developing countries. Several developed countries on the other hand gradually raised their voices on conflicting policy issues within the Bank. These voices, including one of the Bank’s largest donors, the UK, pointed to the Bank’s support of low-carbon development as well as the Bank being one of the largest international lenders to coal plants. “World Bank’s recent change in attitude is because of the protests it has been facing from various quarters. The argument that World Bank will not fund coal projects to control emissions is shallow. It is trying to shift accountability,” said Joe Athialy, South Asia coordinator for Washington-based non-profit, Bank Information Centre (BIC).
For some, however, this decision was long overdue. Srinivas Krishnaswamy of Vasudha Foundation, a non-profit in New Delhi, said even though the Bank’s decision is a good one, it need not have taken them three years to agree on a decision. “They had very similar language back then, agreeing to look at coal on a case-by-case basis. The whole process went into a limbo in between,” he said.

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