Climate Finance and Development Assistance against Coal Revival in Developing Countries 

Two trends with opposite impacts on GHG emissions are currently observable in power investment in developing countries: Zero emission renewable energy continues to grow fast while numerous high carbon coal projects are reported, in particular in Asia and Africa.  Forecasts expect these trends to remain active.  Stakeholders and observers hold very different views especially on the role of coal.    Development cooperation is in the fray of controversy. Climate finance and development assistance need to support countries to keep coal at bay by demonstrating viabilty of affordable reliable low carbon power, not just financing low carbon projects.

The trends seem stable:  In its medium term market (until 2020) report, IEA projects (in the base case) a fast expansion of RE generation (by approximately 1500 TWh over 2013) in non-OECD countries  compared to an addition  of only  half that capacity in OECD countries. For the same period, IEA projects an expansion of more than 3000 TWh conventional generation in non-OECD countries and, only 100 to 200 TWh more conventional generations in OECD countries.  This additional electricity in non-OECD would mainly come from coal fired generation, although natural gas would provide some of it in Latin America, North Africa and Middle East where it is available from regional resources.  The remarkable feature is that both resources groups, renewables and fossils are increasingly applied for power generation in the same countries and regions.  China is leading on both fronts with India and other South- and South East Asian countries, South Africa but also Northern African countries like Morocco and Egypt behind.

Longer term projections also from renewable-energy specialist Bloomberg NEF indicate that both these trends will continue, when business as usual. RE capacity additions – in particular in small scale solar PV - keep soaring, but fossil fuel capacity additions remain stable, and only fall in towards 2040.  According to them, natural  gas will not be the ‘bridge fuel’  except in some countries, which leaves coal power for much of the actual electricity generation, with rising  power sector GHG emissions.

IEA has recently come up with a new long term scenario based on what was known at the time about the INDC Intended Nationally Determined Contributions (INDCs) prepared for the Paris climate conference. This scenario confirms the continuous increase in coal power in the regions mentioned above until 2030 despite the much faster growth in RE power generation.  In view of the INDC scenario missing the 2^o target,  IEA  looks for measures to do more and suggests a bridging strategy which includes “progressively reducing the use of the least-efficient coal-fired power plants and banning their construction”  , which is small comfort as more efficient super-critical coal plants still emits  over 800  gCO2/kWh.

In the meantime, China has provided its INDC and confirmed  that more coal capacity will be built. China has promised though, at these will not use more than approximately 300 g coal per kWh, which means that at least super-critical technology will be used.  It is by no means certain that other countries will adopt the same criterion. China says nothing about efforts to restrict its overseas financing arms,  let alone  power equipment manufacturers or developers to such maximum when participating in projects in other countries.  So we may see  cheaper subcritical technolgy  with limited SO2, NOx and particles  emission mitigation offered and built around the world,  supplied from Chinese,  Indian and other manufacturers.  

The development banks take a divergent position on eligibility of coal plants,  between ‘No on principle, with exceptions ‘– ‘Yes, if emission limits are complied with’ – ‘Yes, if least cost with carbon price internalisation’.  The respective Board of Directors adopt projects and also bank policies, which means that the struggle between diverging positions of shareholder countries plays out  within this decision body of the Development Banks, apart from controversial positions within the bank staff and presidencies. It seems that African AfDB is determined to continue financing coal, as do Islamic IDB and Asian ADB, reluctantly. Inter-American IDB has emitted limits for eligibility (no subcritical) already in 2009. The European EIB wants even stricter limits. EBRD attributes a cost to GHG emission and local emission and includes it into the project cost calculation which is then compared to cost of alternative projects.  World Bank has recently abandoned that economists’ approach and will in the future finance coal power only in exceptional circumstances, according to the climate envoy.  Most prominent among the Development Bank and being trustee of many specific funds, the WB – and industrial countries as main shareholders – are criticized for this.

Coal industry  holds the argument, that it would be better for the development banks to remain involved in the financing, in order to make sure that better technology is used, since coal plants will anyway be built.   An even stronger argument comes from the US coal industry, which is fighting for survival because of the weak global  coking coal demand and reduced demand for steam coal in the US: “Coal power reduces energy poverty”. Both arguments have been used before, e.g. in favor of financing large hydro in Africa, in favor of WB participation in oil exploration and production in countries with governance issues.  The results are not convincing. The argument of coal against poverty has been repudiated by WB climate envoy pointing out the social cost of local emissions. Experience also shows that decentralized energy development is a better way to provide access to modern energy in developing countries than building large central power stations which need an integrated grid to reach the poor.

Development countries, though, do have a legitimate desire for more and low cost energy, if not for energy access yet for the urban and industrial development. Unfortunately, there is widespread reservation as to whether fluctuation power supply from renewable energy is fully suitable for this.  This challenge needs an answer, also in view of coal industry and equipment manufacturers trying to nourish the doubts and profit from them.

The kind of answer is defined by the question. The tasks are:   ‘demonstrate convincingly, that a coal revival is not the only path to a low cost reliable power supply’ and  also ‘demonstrate that the a coal revival has disadvantages other than for global climate’. That means for climate finance and development assistance first of all that that the whole power system in the respective countries including the micro-grids needs to be considered and not just the possibilities to increase renewable power.  The countries’ power system authorities need to know their realistic options for a low carbon system. They need to have at least an indicative plan, where in the system new RE capacity could be invested and when and which, matching with dispatchable low carbon technologies including poly-generation of heat, cold and power,  and flexibility capacity including storage.   The falling cost of RE opens options to actually have a low cost affordable power system.  How can the grid be expanded and micro-grids and decentralized generation be integrated from bottom-up?  The power system operators need to know how to deal with variable RE power to put it to full use it in co-operation with other low carbon technologies.    

One experience from past climate finance is that individual RE-power projects can have very high transaction cost and relatively little overall  GHG emission impact in particular when coal plants are built in the same country at the same time.  Thus, concentrating on framework conditions in the energy and finance sectors and capital markets to have more low carbon investment and in particular private fund investment in RE power is a logical step. But it is still too narrow-focused.  

The public funds in the climate funding  should be used to accommodate and make low cost,  low carbon,  sufficient and reliable system viable, including  capacity development in flexible power system planning and operation and also including appropriate investment in grids and flexible power.  The private funds may also be involved in debt financing of grids but may rather be directed to equity and debt financing of investment in generation.