Navigant Research Blog

Seeking Cleaner Alternatives, Lenders Pass On Coal

Richard Martin — December 27, 2013

It’s one thing when environmental groups, street protesters, and politicians oppose the expansion of your industry.  It’s a whole different matter when the financial community stops investing in it.

That’s what’s happening to the coal industry today, as multilateral development banks, government funding institutions, and commercial lenders cool to the idea of financing new coal power plants.  The latest signal came in mid-December, when the U.S. Export-Import Bank issued new funding guidelines that will effectively end its financing for new coal-fired plants, except in rare circumstances.  From 2010 to 2013, the Ex-Im Bank provided more than $2 billion in financing for coal plants, according to the Natural Resources Defense Council (NRDC).

In July, the Bank canceled funding for a new coal plant in Vietnam – a nearly unprecedented move.

The move will “add to the growing list of public finance institutions that will stop using public funding to support overseas coal power plants,” the NRDC’s Jake Schmidt noted in a blog. Those institutions include the World Bank, which in July announced a new policy to shift resources away from fossil fuel projects and toward renewable energy; the U.S. Treasury Department, which said in October it is “ending U.S. support for multilateral development bank (MDB) funding for new overseas coal projects except in narrowly defined circumstances;” the European Investment Bank, which in July introduced a new Emissions Performance Standard that effectively rules out coal funding; and the European Bank for Reconstruction and Development, whose board voted in December to scrap funding for most coal projects.

Risk and Reward

Commercial lenders are gradually following suit.  Private sector investment in the U.S. coal industry sank 50% from 2011-2012, according to the Coal Finance Report Card, which is produced by the Rainforest Action Network and two other environmental groups.  Wall Street firms Goldman Sachs and Citigroup have both recently released reports questioning the growth of the global coal industry, and Deutsche Bank has forecast that coal’s share of U.S. energy generation will fall to 20% by 2030, from around 45% today.

These moves reflect a broad recognition that the risks of investing in coal – from tightening government regulations, public opposition, and the long-term damage of global climate change – are eroding both the private financial return and the wider social benefits of new coal investments.

“Banks are becoming more aware of the harms caused by coal and the risks associated with an industry in decline,” Ben Collins, the lead author of the Rainforest Action Network, told Bloomberg News.

However, these shifts also include some inherent contradictions.  Almost all of the new policies from multilateral lending institutions include exceptions for countries where “no feasible economic alternative options” exist to coal-fired generation.  In practice, that is likely to include much of the developing world.  What’s more, these policy shifts, in general, do not eliminate funding for coal mining.

In China, Little Choice

Several big international lenders, including the Japanese Bank for International Cooperation and Development, Nippon Export Investment Insurance of Japan, and the Kreditanstalt für Wiederaufbau in Germany, have not announced coal funding bans, meaning that capital for these projects may still be available from other sources.

Finally, three-quarters of the 1,200 proposed coal plants in the world, according to the World Resources Institute, are in China and India – countries that have historically not relied on international funding for big new infrastructure projects and that may well not need overseas lenders to proceed with their coal plant plans.  Despite the official announcements, the world is in the midst of a coal boom that may not be slowed because First World banks turn up their noses at funding coal plants.

“China’s main resource is coal,” Zou Ji, the deputy director of China’s National Center for Climate Change Strategy, said in an interview with the website China Dialogue earlier this year.  “Moving to clean energy is a massive challenge. Meanwhile, we still need to urbanize and educate hundreds of millions of rural residents. Quality of life needs to be improved.”

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