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UK limitation on coal funding could close door on controversial coal plant

  • 20 Nov 2013, 16:00
  • Robin Webster

The World Bank may finally close the door on financing a controversial coal power plant in Kosovo following news that the UK government is to limit funding for coal-fired energy in the world's poorest countries. 

Today's announcement by energy minister, Ed Davey, follows similar moves by the USA and Nordic countries over the last couple of months. The richer countries' more restrictive policies may start to change the lending strategies of international banking institutions. 

The UK currently funds coal power plants abroad through these so-called Multilateral Development Banks (MDBs) - institutions where a group of countries get together to lend money for development projects abroad. For example, the World Bank has funded 29 coal power plants since 1994, according to NGO the World Resources Institute, and the European Bank for Reconstruction and Development (EBRD) has financed nine. 

The UK's new lending conditions 

Speaking at UN climate talks in Warsaw, Davey argued it's "completely illogical" for developed countries like the UK to continue to provide financing for coal power plants abroad while shifting to a greener economy at home. 

Davey says the UK will now only consider MDB proposals for financing coal plants in the world's poorest countries "where no other economically feasible alternative exists". 

The government has created seven conditions those coal projects would have to meet. It will only lend to projects: 

  • in world's poorest countries, where gross national income per head is below $1,945;
  • that have a "compelling" impact on poverty reduction; 
  • where full consideration has been given to low-carbon alternatives;
  • which are part of a credible low-carbon development pathway, and meet environmental and social standards;
  • where a risk assessment of long-term financial viability has been undertaken;
  • where the best available technology is used;
  • where an assessment has been carried out of the technical, economic and financial feasibility of attaching carbon capture and storage technology to clean up the plant's emissions. 

Influencing who international institutions lend to 

The UK's policy is important because it forms part of a wider shift away from rich countries providing financing for coal. 

There have already been moves in this direction. In July, the World Bank announced it would only provide funding for new coal power plants in "rare circumstances" and in August the European Investment Bank (EIB) also introduced restrictions

Earlier this year, the USA and the Nordic countries announced they would no longer provide lending for new coal power plants through the MDBs. So the UK could now form a part of a strong coalition on the board of these international institutions, blocking them from financing new coal power plants. These countries are all major donors and are therefore very influential. 

Petr Hlobil, who campaigns on international financing for NGO CEE Bankwatch, says

"This is quite important from our perspective … it puts the UK in the same category as other countries we would expect to be pushing for opposition to coal projects".  

No coal in Kosovo? 

Hlobil suggests the UK announcement may affect lending decisions for specific projects - for example whether the World Bank lends money for a controversial proposal to build a coal power plant in Kosovo. The plant would be powered by lignite - a particularly polluting fuel - and is opposed by civil society groups. 

Although the World Bank has already restricted funding for coal projects, its position isn't as strong as the UK's - and it hasn't yet made a decision on the Kosovan coal plant. The UK's new policy may make it impossible for government representatives in the World Bank to support the project - partly because Kosovo doesn't meet the UK's criteria for what constitutes a poor country. 

Coal is still growing

The news has pleased climate campaigners, but it's unlikely to mean the end of new coal power plants around the world. 

Last year, coal was used to generate 41 per cent of the world's electricity, according to the World Coal Association - contributing significantly to world emissions. This includes 81 per cent of China's electricity. The International Energy Agency believes that "unless dramatic policy action occurs", coal use is going to go on increasing around the world. 

And a lot more coal is currently in the pipeline. There are at least 1,199 coal plants planned around the world at the moment, according to the World Resources Institute. In contrast, it calculates international financial institutions like the World Bank and national governments have financed just 156 in the last decade. 

So the UK's new policy may be more important symbolically than for what it will mean in practice for coal power plants on the ground. Its investment only amounts to a drop in the ocean in relation to the number of planned coal power plants.

That signal to investors could be important, however. Goldman Sachs recently concluded "the window for thermal investment in coal" is closing around the world - partly as a result of the change in Western government's lending policies. It argued that the number of new plants being built around the world is likely to decline over the next decade as the fuel becomes less economic. The message sent by changing government policies could be an important part of the story. 

But will this be enough? Despite the changes, a lot more action will probably be needed to restrict the growth of coal if the world is to meet its climate goals

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