Briefing on the European Investment Bank’s new screening and assessment criteria for energy projects Ingrid Holmes (E3G) and Stephen Tindale (Centre for European Reform), 17 July 2013
The European Investment Bank’s new screening and assessment criteria for energy projects is welcomed as a significant step forward in moving the European Union to becoming a low carbon economy while generating sustainable growth and jobs. We recommend that Directors accept the proposals, with some adjustments. These are:
To accept the proposals to continue to support both mature and emerging renewable as a high priority. To strengthen the Energy Efficiency White list proposals to give specific mention to deeper retrofit programmes where they can be economically justified on the basis of avoided supply-side investments. To endorse the introduction of an Emissions Performance Standard but tighten the level to at least 450 gCO2/kWh and ideally 350 gCO2/kWh in the interests of longterm economic efficiency. To discard the island/isolated electricity system exemption on the grounds that this is not a necessary or effective way to achieving a broader European single market for energy. To discard the peaking plant exemption outright or alternatively tightening conditions to require applicants to demonstrate how the resources operational characteristics address the local or system requirements for flexible capabilities (e.g. ramping abilities, fast-start capability, on-off cycling) that enable reliable system operations in light of expected energy production from variable renewables. To discard the contribution to poverty alleviation exemption on the grounds that while poverty alleviation is a critical part of the EIB’s external action mandate, it is access to electricity (not to coal per se) that delivers growth and alleviates poverty.
1
1. Introduction On 24 June 2013 the European Investment Bank (EIB) released its proposals for updating its screening and assessment criteria for energy projects “EIB and Energy: Delivering Growth, Security and Sustainability”1. This was circulated to Directors with the expectation that the proposals will be discussed and voted on at the next Directors meeting on 23 July 2013. As the European Union’s (EU’s) policy bank the EIB’s activities are steered by the EU policy landscape – which for the energy sector is currently in flux. For example, discussions about 2030 climate and energy targets are underway2, proposals to backload and strengthen the EUETS have just been voted through by the European Parliament3 and the new Energy Efficiency Directive is in the process of being transposed into European law4. The EIB’s decision to review and suggest changes to the way energy projects are assessed and selected for financing is therefore timely. The EIB states that the new document:
Incorporates views on future EU energy policy developments; Is designed to ensure that the Bank’s activities are consistent with EU policies; Is focused on sectors that have the greatest investment needs and/or are the highest policy priorities or where the EIB can have the highest value-added.
This briefing note focuses on three key areas of the new proposals:
Support for renewables; Support for energy efficiency; Support for fossil fuel investments.
2. Proposals for supporting investment in renewable energy The EIB proposes to continue to support investment in renewables both inside and outside the EU to help meet 2020 objectives and, through playing a role in scaling up renewable technologies in the earlier stages of deployment, accelerate cost reductions and improve their affordability5. In 2012 investment in renewable energy declined by 36% in the EU, due
1
http://www.eib.org/about/partners/cso/consultations/item/public-consultation-on-eibs-energy-lendingpolicy.htm 2 European Commission (2013) Green Paper: A 2030 Framework for climate and energy policies 3 http://www.europarl.europa.eu/news/en/pressroom/content/20130701IPR14761/html/Parliament-backsplanned-temporary-boost-to-CO2-permit-price 4 http://ec.europa.eu/energy/efficiency/eed/eed_en.htm 5 The EIB also argues that renewables are important for reducing EU dependency on fossil fuels, enhancing energy security and breaking the link between economic growth and environmental degradation. In 2011 about 900 ktoe of the EU’s energy was imported. At $111 bbl (average spot price of Brent in 2011) this equates to 6.2% of EU GDP. Source: Eurostat, EC Economic and Financial Affairs, Energy Information Administration, BP
2
primarily to regulatory uncertainty6. This has been reflected in reduced volumes of EIB lending to this sector as fewer projects come through. Regulatory uncertainty has resulted from the ongoing economic crisis in many parts of Europe and increasing Government concerns about the cost of supporting renewable energy through incentives schemes. However, as the EIB points out in its document, it is as a result of government support that more mature renewable technologies are now showing very significant cost reductions. For example the costs of photovoltaic technology fell 50% in the period 2008-2011, and average operational and maintenance contracts for onshore wind farms fell by nearly 40 percent during 2008-2012 due to tight competition and better turbine performance7. The EIB also notes that one of the challenges in delivering affordable renewable energy is the non-level playing field created by continued fossil fuels subsidies. These continue to distort the market, reducing the investment case for renewable energy. Thus, what is ‘economically justified’ should be considered by Directors in this broader context Recommendation: Directors should accept the EIB’s proposals to continue to support both mature and emerging renewable as a high priority and as set out in the document.
3. Proposals for supporting investment in energy efficiency financing As stated by the EIB, investing in energy efficiency to reduce energy consumption remains the most cost-effective way for the EU to meet its energy and climate objectives and create local employment. The investment needs out to 2020 could be €85bn per year, with €60bn per year required for buildings8. But it remains a hard-to-finance sector due to multiple market failures including lack of information, split incentives, high transaction costs etc. The EIB proposes to respond to the challenge by significantly evolving its approach to lending to this sector and the new opportunities that should emerge for financing as a result of implementation of the Energy Efficiency Directive. The EIB states it will:
Mainstream energy efficiency considerations into all the projects it finances. Provide support for market development through providing technical assistance (for example ELENA etc)and developing financial instruments (such as the new Deep Green suite of products) to support project developers/finance providers. Streamline its approach to providing finance to national or regional programmes by introducing a ‘White list’ approach. This will presume in favour of providing financing to programmes provided certain conditions are met. It will rely on national/regional
6
REN (2013) Renewables Global Status Report. See http://www.ren21.net/REN21Activities/GlobalStatusReport.aspx 7 BNEF (Bloomberg New Energy Finance). 2012. “Wind farm operation and maintenance costs plummet.” Press release 8 European Commission (2012) Financial support for energy efficiency in buildings
3
governments developing energy efficiency investment programmes that include provisions for monitoring and evaluation of supported investment to ensure investments are economic. Provide market support by softening the economic assessment criteria for promising emerging energy efficiency technologies and initiatives where they are linked to the delivery of EU policy (for example zero carbon homes) and/or are supported by government policies.
Recommendation: Directors accept the EIB’s proposals, which provide an opportunity to ensure greater flows to capital to secure the benefits of energy efficiency. It is also suggested that the White list proposals be strengthened (new text underlined) to state that “where, following an analysis of the proposed schemes to be promoted under the programme (for example loft insulation or more comprehensive packages of multiple measures), economically justified components/packages would be considered to be acceptable for EIB financing on an ex ante1 basis—a “white list” approach that also recognizes the need for more comprehensive treatment at each building in order to meet national programme carbon reduction targets. 1
provided they can be justified economically, in line with general criteria that also reflect the avoided system costs from such energy efficiency investments.
4. New proposals for screening fossil fuel investments EIB financing of fossil fuel generation has declined from 21% of energy lending in 2007 to 6% in 2012. While 70% of this went to combined cycle gas turbines (CCGT), unabated coal and lignite plant were also financed – with a total volume of €1.88bn over this period. This has drawn criticism. While gas is likely to be an important transition fuel in many Member States, unabated coal and lignite plant have no place in the near zero emission power sector that the European Council has agreed is needed in 20509. In response, the EIB proposes to adopt new screening criteria for fossil fuel power projects to ensure projects financed ‘do not “lock in” carbon emissions above the level consistent with climate targets’. To do this, it proposes introducing an emissions performance standard (EPS) that will defines a limit of gCO2 emitted per kWh electricity generated. The EPS as proposed is a 'backstop measure': projects that meet the EPS will not necessarily receive
9
European Commission (2012) Energy roadmap 2050. See http://ec.europa.eu/energy/energy2020/roadmap/index_en.htm
4
loans. They will also be assessed using economic criteria, including the shadow carbon price of €28/tCO2 in 2013, rising €1 each year to €45/tCO2 in 203010. In combination the EPS and shadow carbon price mean unabated conventional coal and lignite plant are unlikely to be considered. However, for certainty of outcome, there are two key areas where consideration should be given to strengthening the proposals:
The level at which the EPS is set. The exemptions.
4a. The EPS level The EPS as currently proposed will leave the option open for the EIB to finance some high efficiency coal (and potentially lignite) with heat recovery (i.e. combined heat and power) and/or with biomass co-firing11. Given the urgency of the climate change challenge and the current debate underway on how the European Union regulations will be strengthened to respond to this, there is scope to tighten this standard to anticipate forthcoming European legislation. The proposed EPS has been calculated using the emission reduction trajectory defined in the EU Emissions Trading Scheme. This trajectory aims for a 70% reduction in carbon emissions in 2050 compared to 1990 levels. However, the European Council has repeatedly stressed its commitment to delivering at least 80% economy-wide greenhouse gas emission reductions and a near zero power sector by 205012. This would indicate a steeper emissions reduction curve and in interim EPS of 450 gCO2/kWh – 100 gCO2 lower than that currently proposed13. This is in line with current emission performance standards proposals for the UK (450 gCO2/kWh) 14 and USA (454gCO2/kWh)15. Consideration could also be given, in the interest both of tackling climate change and of long-term economic efficiency, to adopting a standard of 350 gCO2/kWh – benchmarked to 10
The EIB uses a ‘shadow carbon price’ that is much higher than the current carbon price. In 2010 the central estimate was €25 per tonne. The methodology can be seen here http://www.eib.org/infocentre/publications/all/economic-appraisal-of-investment-projects.htm 11 The policy as currently defined will also keep the door open for coal and possibly lignite power plants with carbon capture – which does have a role on the EU’s near-zero power system – and gas-fired power and combined heat and power plants, which are important transition technologies. 12 This is the level indicated as being required in the European Commission’s Roadmap to 2050. Current discussions about 2030 targets is based on this analysis and the approach to transposing ambition into European and Member State law. 13 The current EUETS trajectory requires 1.74% annual emission reductions to 2050 (70%). To deliver a ‘near zero’ emission power sector in 2050 will require a trajectory of 2.6% annual emission reductions to 2050. 450 gCO2/kWh will shift EIB lending toward assets that better fit with this more ambitious trajectory. 14 See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/48367/5315-aidememoire-on-emissions-performance-standard.pdf The proposals are going through a legislative process now. 15 See http://www.whitehouse.gov/the-press-office/2013/06/25/fact-sheet-president-obama-s-climate-actionplan and http://www.wri.org/stories/2012/04/summary-epa-proposed-performance-standards-power-plantghg-emissions The proposals do not need a legislative process to implement.
5
CCGT. Power stations may be operational for up to 35-50 years16, so this approach would ensure that that in the face of increasing constraints on greenhouse gas emissions early retirement of productive assets could be avoided. Table 1. Deciphering EPS standards EPS level (g CO2/kWh) 150 350
Impact on fossil fuel technology deployment Screens out all gas and coal unless deployed with CCS Benchmarked to best available technology CCGT. Screens out coal and lignite-fired plant and older inefficient gas-fired plant* 450 Benchmarked to old CCGT. Screens out coal and lignite-fired plant and older inefficient gas-fired plant* 500 Screens out coal and lignite-fired plant and older inefficient gasfired plant* 550 Benchmarked to advanced supercritical coal with 20% biomass. Screens out coal and lignite-fired plant* *Coal and inefficient gas can still be deployed but will require increasing proportions of biomass cofiring and/or CCS as the EPS is tightened17. Lignite can possibly be deployed but will require very high levels of biomass co-firing. Recommendation: The Directors should endorse the introduction of an Emissions Performance Standard but, in the interests of long-term economic efficiency, tighten the level to at least 450 gCO2/kWh with consideration given to tightening it to 350 gCO2/kWh. 4b. Exemptions There are significant concerns about energy security in Europe. Energy security has a variety of meanings, including access to uninterrupted energy supplies, affordable energy supplies and energy supplies sourced from within national boundaries. For this reason, as a priority the EIB should clearly define what is meant by this term. For the purposes of this briefing it is taken to mean ensuring that access to energy is uninterrupted. The EU electricity system is undergoing a process of significant technological transformation that will affect how energy security is achieved. The transformation is being driven in part by the need to address climate change, but also environmental protection requirements18 and the European ambition to deliver a single market for gas and electricity by 2014. The European single market in particular is a work in progress. National market and network operation rules are being harmonised and there is a focus on greater cross- border infrastructure investment, which the EIB will need to play an active role in facilitating. Thus
16
Analysis by Ecofys indicates the lifespan of power plant is between 35-50 years, depending on the technology deployed. See http://www.ecofys.com/files/files/ecofys_2009_scenarios_on_eps_eu_power_sector.pdf 17 http://www.ecofys.com/files/files/ecofys_2009_scenarios_on_eps_eu_power_sector.pdf 18 Driven by the Large Combustion Plant Directive following from that the Industrial Emissions Directive
6
how energy security is delivered in coming years will look very different to how it is delivered today. The EIB document suggests three cases in which that investment in fossil fuel plant that breach the prescribed EPS (i.e. coal and lignite-fired plant) could be justified. They are:
Projects within the EU that contribute to security of supply for island/isolated energy systems. Projects within the EU that contribute to security of supply by financing peaking plant. Projects outside the EU where it can be demonstrated the projects will have a significant and material positive impact on poverty alleviation and economic development.
Each of these proposed exemptions are addressed in turn. Security of supply for island/isolated energy systems - In 2011 Heads of Government at the European Council agreed that no Member State would remain isolated from European Gas and Electricity Markets by 2015. This will require new infrastructure to connect Cyprus and Malta to the rest of the network. It is implausible that new investments in coal and lignite could become operational before this timeline. In addition, neither Cyprus nor Malta currently uses coal for electricity generation. Recommendation: Directors should discard the island/isolated energy system exemption on the grounds that it is not a necessary or efficient route to achieving a broader European single market for energy. e ur t o supp nan n peak n p ant It is suggested that exemptions could be made within the EU for peaking plant but is doubtful that coal/lignite-fired power plants would be able to undertake this role. With renewables providing an increasing share of electricity requirements in future, we are moving away from a world in which peaking plant are the only answer to balancing the energy system. Balancing will require resources with highly flexible capabilities, including demand response technologies. Coal plant are insufficiently flexible (and it is also arguable that gas-fired plant will similarly not be flexible enough) to have the fast, long-sustaining, reversible and flexible ramping and load following characteristics required to deliver the “security of supply” needs of our evolving electricity system19. Recommendation: Directors should discard the peaking plant exemption outright. Alternatively the following text could inserted to tighten up conditions. “Requests for exemptions to the EPS guideline based on security of supply grounds, including from peaking 19
See http://www.raponline.org/featured-work/beyond-capacity-markets-delivering-capability-resources-toeuropes-decarbonised-power and http://www.raponline.org/featured-work/making-germanys-energiewendeenergy-transition-a
7
plant, will need to demonstrate how the resources operational characteristics address the local or system requirements for flexible capabilities (e.g. ramping abilities, fast-start capability, on-off cycling) that enable reliable system operations in light of expected energy production from variable renewables.” ontr u on to povert a ev a on The energy landscape globally is changing rapidly and on a global basis. In response to the blight of poor air quality substantively created by coalfired power generation China is focused on developing plans to shift from coal to cleaner energy sources including gas and renewables20. Africa has access to vast renewable and natural gas resources that present opportunities for growth and poverty alleviation in the continent21. As stated by the World Bank, there is abundant potential in energy-poor countries to harness low-cost renewable energy sources (notably hydropower and geothermal) that are competitive today with conventional thermal power generation22. To allocate resources to coal instead of these cleaner technologies is not an effective utilisation of the scarce public finance sources available to the continent. Recommendation: The Directors should discard the contribution to poverty alleviation and economic development exemption on the grounds that, while these aims should be a core priority of external action lending, it is access to energy, not to coal per se, that delivers these outcomes. See Annex for some examples of restrictions on lending to coal/lignite projects by public and private financing institutions. 6. Recommendations In 2013 the EIB’s capital was increased by €10bn, with the stipulation that the Bank use this capital to increase support for projects that deliver EU resource efficiency, strategic infrastructure, small and medium-sized enterprises (SMEs) and innovation and which have a positive impact on growth. The priority for the EIB should be to focus on investments that deliver long-term value to the EU in these areas. The current review of the criteria under which the EIB lends to energy projects is welcome, but we recommend that Directors focus on tightening up some of the language on lending to energy efficiency projects and also lending to fossil fuel power projects. The rationale for tightening the screening criteria for fossil fuel power projects now is in the precedent set by the EIB’s 2006 Energy Policy Review. This Policy anticipated new developments in EU energy and climate policy and moved in advance of legislation being finalised. The EIB’s 2013 review of energy project screening is similarly being proposed in
20
Discussions with NDRC and Shanghai DRC in July 2013 See http://www.ey.com/GL/en/Industries/Oil---Gas/Natural-gas-in-Africa-frontier-of-the-Golden-Age and http://www.afdb.org/en/knowledge/publications/oil-and-gas-in-africa/ 22 World Bank (June 2013) Toward a Sustainable Energy Future for All: Directions for the World Bank Group’s Energy Sector 21
8
advance of changes to EU energy and climate policy being finalised. However, given the general direction of travel has already been agreed by the European Council – i.e. 80-95% emission reductions in 2050 including a near zero power sector – we advise that the EIB increase the ambition in its proposals. The EPS should be set, as a minimum, at 450gCO2/kWh and consideration given to moving to 350 gCO2/kWh. The three proposed exemptions, for islands, peaking plants and where there is no alternative for poverty alleviation should be removed or substantively tightened as suggested. It will also be important that Directors keep the energy lending screening criteria under active review. As the EU adopts new legislation, the EIB should promptly change its lending criteria.
9
Annex. Examples for coal/lignite lending proposals/policies in other financial institutions World Bank Group The World Bank Group (WBG) is currently reviewing its energy lending policy new and proposals will go before the Board in July 201323. The proposals set out an increased emphasis on energy efficiency, renewables and gas. On coal, the document states that: “The World Bank Group will help clients identify alternatives to coal power as they make transitions toward sustainable energy. The World Bank Group will cease providing financial support for greenfield [new] coal power generation projects, except in rare circumstances where there are no feasible alternatives available to meet basic energy needs and other sources of financing are absent. Private sector finance will be the preferred option, but where the World Bank Group does engage, the existing screening criteria for coal projects will apply24.” The rare circumstances will include projects where coal is used for heat, captive power, and chemical needs and difficult to substitute in industrial operations. The WBG also will continue to finance investments in various industrial and commercial processes—such as steel, cement, and other manufacturing operations and states it will do this “while seeking gains in energy efficiency and employment of best practices”. Projects using coal for district heating or for CCS could also be included. Thus, while not ruling out lending to coal plant entirely, the WBG is moving to tightening up lending criteria. It expects the private sector to lead on financing any such projects and will consider providing financing only if there to be a demonstrable developmental impact from project and use of best available technology. European Bank for Reconstruction and Development (EBRD) The EBRD has been consulting its member countries during 2013 about a new energy policy, and aims to get a new policy adopted by December 2013. No draft is available at the time of writing. Nordic Investment Bank Since March 2012 the Nordic Investment Bank has a policy that it will not knowingly finance, directly or indirectly, projects involving … new base load power plants with an installed capacity above 50 MW(e + th) mainly fuelled with coal or fuels with a similar fossil carbon dioxide intensity.”25
23
World Bank (June 2013) Toward a Sustainable Energy Future for All: Directions for the World Bank Group’s Energy Sector 24 See Operational Guidance for World Bank Group Staff: Criteria for Screening Coal Projects under the Strategic Framework for Development and Climate Change. The existing screening criteria for coal projects were published in 2010. They state that alternatives to coal will be fully considered first. But “fossil fuels, including coal, will continue to play an important role in the primary- energy mix of developing countries. 25 NIB, ‘Sustainability policy and guidelines’, March 2012
10
HSBC HSBC does not lend to coal projects with carbon emissions above 550 gCO2/kWh (or 850 gCO2/kWh in developing countries). However, this applies only to projects above 500 MW capacity26. Portigon In 2010 West LB (now Portigon) introduced a policy that sets new conditions for lending to coal projects., It was further strengthened in 2012 and requires borrowers to provide third party expert reports confirming that there is no feasible less greenhouse gas intensive alternative/fuel/energy source. It also requires all projects use Best Available Technology as defined by the EU.
26
HSBC (2011), ‘Energy Sector Policy’, January http://www.hsbc.com/1/PA_1_1_S5/content/assets/csr/110124_hsbc_energy_sector_policy.pdf
11