ADB ‘Open’ to Coal Plant Lending, But Doubts Economics: Q&A 

By Vandana Gombar, BloombergNEF. This article first appeared on the Bloomberg Terminal.

The Asian Development Bank is in the process of finalizing an energy strategy to “reflect the new reality in today’s world,” Yongping Zhai, ADB’s energy sector group chief told BloombergNEF in an interview. This includes the dramatic decline in the cost of renewables, and the opportunities presented by technologies such as hydrogen, energy storage, micro-grids, artificial intelligence, blockchain, carbon capture and storage.

The bank’s aim is to support “Asian developing countries in their low-carbon transition,” Zhai said. ADB had a climate financing target of $6 billion for 2020, which it actually ended up meeting in 2019. Though overall climate financing then contracted to $4.3 billion in 2020 according to initial estimates, the share of energy increased to $2 billion.

“Last year was an exceptionally difficult year for many of our member countries, and they sought more support for renewable energy and energy efficiency,” said Zhai. ADB’s total financing for all sectors in 2020 jumped to $31 billion (from $22 billion in 2019), with over half going as direct support for Covid-19 response.

Under the current policy, ADB is open to financing coal projects, though the last one it financed was in 2013 in Pakistan. “In ADB, we apply a shadow price of carbon of $36.30 per ton (in 2016 prices), increasing by 2% annually in real terms as a social cost of greenhouse gas emissions. If I apply this shadow price, I am not sure any coal power plants would pass on economic criteria,” Zhai said.

The bank’s current blacklist includes upstream exploration activities for fossil fuels, and nuclear. It selectively supports gas projects: “We have to make sure that our investment in gas should not be stranded because of future evolution of competitive renewables, or carbon pricing,” Zhai said. “Gas is not only about power. It is used in cooking also. China was successful in making air quality much better in Beijing as it converted all coal stoves for heating and cooking in surrounding areas to gas.”

Some of the significant renewable energy projects in ADB’s pipeline include off-grid solar electrification in the border districts of Afghanistan, solar power plants in Uzbekistan and Turkmenistan, an electric bus project in Indonesia and Nepal’s Dudh Koshi hydropower dam.

Read the Q&A below.

Q: What is included in the $2 billion climate financing for energy in 2020?

A: Climate financing includes climate mitigation (renewable energy and energy efficiency), as well as climate adaptation. The latter totaled $80 million, while the balance was invested in renewable energy and efficiency. A solar project in Vietnam and a utility-scale battery storage project in Mongolia were among the highlights last year.

If a solar project costs $100 million, then $100 million counts towards climate financing. For the brownfield expansion of a natural gas plant, which involves improvement in efficiency, the share of improvement can be considered as climate financing.

ADB’s energy financing over 2009-2020 totaled $43 billion, of which $23 billion was in clean energy. The rest mainly went to transmission and distribution to integrate renewable energy and expand energy access.

Q: What is the climate financing target for this year?

A: In terms of climate financing commitment, we are guided by our ‘strategy 2030’. For 2019-2030, the target is to provide $80 billion of climate financing – not broken down on a yearly basis.

Last year, over half of ADB’s overall financing of $31 billion was emergency budgetary support to our member governments for Covid-19 pandemic response. There was also very specific targeted support for the energy sector. During the initial months, when China’s Wuhan city was completely locked down, ADB provided a loan to the Wuhan branch of China Gas Company to ensure continued gas supply to hospitals, industries, and households. We also provided support to certain energy utilities that were facing cash flow issues due to the lockdown. These were commercial loans, so priced near-market rates, though our terms tend to be favorable compared to commercial banks.

Q: ADB is in the process of reviewing its energy policy, and has sought comments from everybody. What triggered this unprecedented level of consultation?

A: Consultation has been a part of any major ADB policy-making process. This time, we want to learn more. We want to listen more, because the energy system has evolved so much. We have consulted different stakeholders, including our shareholders, global NGOs, startups, innovators, energy scholars and development partners.

In the ongoing review process, we would like to take into account things that we did not know in 2009, when the earlier policy was finalized. At the time, the Paris climate agreement was not signed, and there were no sustainable development goals. The new policy will reflect:

1. The dramatic decline in cost of renewable energy, as it has become competitive in kilowatt-hour terms

2. Emerging technologies: hydrogen, energy storage, micro-grids, carbon capture and storage, blockchain and others

3. Compliance with global commitments on climate and sustainable development

4. Support to Asian developing countries in their low-carbon transition

The new policy has to reflect the new reality in today’s world. Our target is to submit the new policy to the board of directors by the end of the year.

Q: Given the amazing pace of change in costs and technologies in the energy sector, shouldn’t 10-year energy plans for countries be a thing of the past? Shouldn’t the planning function be far more dynamic?

A: I agree with you 50%. Indeed, the energy sector is very dynamic, and there will be emerging technologies, but global commitments are long term, and stable. Countries like China, Japan and South Korea have announced carbon neutrality targets for the next 30 or 40 years. Maldives has made a very ambitious announcement to be carbon-neutral by 2030 with support of development partners. I see more countries committing to carbon neutrality or an accelerated low-carbon transition. Our policy should have a long-term vision to support the long-term commitment of our countries. On the other hand, I agree energy policy should also reflect the evolving nature of the energy sector. The policy will be long-term, but the ‘implementing guidelines’ of energy policy will be much more dynamic and should be reviewed regularly.

Q: How has ADB’s financing evolved over the years? Can you share some recent examples of innovation in financing?

A: We provided $4.2 billion in energy financing in 2020, of which about half was for renewable energy and energy efficiency. It is a very small fraction of the overall requirement of Asian developing countries. We have to consider how we add value with these limited resources to better help our member countries. Everything commercial banks would do, we will not do. Besides, I have a series of criteria to decide on investments:

  • Whether the project contributes to SDG7 [Sustainable Development Goal 7] in terms of providing energy access and how many households will be connected?
  • Whether this project reduces CO2 emissions or GHG emissions. How many tons?
  • How much of the ADB loan is counted as climate finance?
  • Whether there is an element of innovation in project design, technology, business models, or financing instruments?

In Mongolia, we supported the first utility-scale battery storage project. That will increase renewable energy use by providing a large amount of regulation reserve, load-shifting capacity, and emergency back-up.

We are also trying to support new technologies through the newly created ADB ventures – a technology fund that will mainly invest in early-stage startups and focus on companies that can address climate change and empower women.

We have also launched innovation challenges through grants. For example, artificial intelligence that can be used to ensure energy demand-side management, affordable clean energy for heating and cooking, renewable energy based micro-grids with storage in remote islands, and disease-resilient air conditioning.

Energy efficiency financing is much more challenging but one successful example is in India where ADB’s support to Energy Efficiency Services Limited(EESL) supported demand-side energy efficiency investments in several Indian states. This made possible more efficient LED municipal street lighting equipped with remote operating technology, plus more efficient domestic lighting by replacing incandescent lights with LEDs, and more energy-efficient agricultural water pumps.

Results-based lending is another way to scale up support to energy efficiency projects. With this, fund disbursements are linked to the achievement of agreed program results (loss reduction, energy savings) rather than to expenditures, as with project lending. This incentivizes countries to focus on results during the design and implementation of government programs, while promoting institutional development, enhancing development effectiveness, and supporting better coordination.

Q: How do you see the future role of coal and gas power? What is on ADB’s blacklist now?

A: Under the current policy, we don’t lend for upstream exploration activities of fossil fuels, and we don’t finance nuclear. On coal, we are open under the current policy in exceptional cases, when coal power is to meet the basic needs of households for energy access, and efficient technology is used. The last coal project we financed was in Pakistan in 2013.

There is also an economic dimension to the future role of fossil fuels. If, as bankers, we know that an investment in fossil fuels – whether coal or gas – will become a stranded asset, then we will not go ahead with it. In ADB, we apply a shadow price of carbon of $36.30 per metric ton (in 2016 prices), increasing by 2% annually in real terms as a social cost of GHG [greenhouse gas] emissions. If I apply this shadow price, I am not sure any coal power plants would pass on economic criteria.

Q: In your opinion, should natural gas be the transition fuel of choice?

A: ADB stands to support its member countries’ development needs. Currently, there is a demand for natural gas projects from developing countries. In Bangladesh for example, by converting a single-cycle power plant to combined-cycle gas power, we increase efficiency by 40-50%, reducing GHG emissions per unit of power produced.

While I don’t see any coal projects in our lending pipeline, there are a few natural gas projects. We consider Paris alignment in evaluating these projects, i.e., whether by doing such a natural gas project, the country remains on track with its nationally determined contributions (NDCs), and most efficient technologies are deployed. Gas is flexible, it can also complement renewable energy.

Gas is not only about power. It is used in cooking also. China was successful in making air quality much better in Beijing as it converted all coal stoves for heating and cooking in surrounding areas to gas. There is an economic dimension for gas projects, and we have to make sure that our investment in gas is not stranded because of future evolution of competitive renewables, or carbon pricing.

Q: What are the new demands on ADB emerging from your member countries?

A: They want knowledge on policy and technology options. They want to know about the best practices being followed by other countries in the energy sector. How can they improve their planning process? How they can strengthen institutional capacity? ADB plays an important role in knowledge provision and knowledge sharing.

We prepare handbooks on different technologies such as energy storage, smart grids, hydrogen, energy efficiency and carbon capture. In some countries, we are already seeing that they don’t really need ADB for money, as commercial banks are there with enough liquidity. As a development bank, I think we should focus more on supporting our member countries in preparing their long-term development masterplans and roadmaps. We are currently preparing an energy outlook and roadmaps for 2030, 2040 and 2050 for Asian sub-regions and selected countries: China, India, Indonesia, Bangladesh, Vietnam and Pakistan, on how they can meet their SDG goals as well as their NDC ambitions. What are the policy and technology options? What are the financing costs? Who can finance? This knowledge input is as important as providing direct lending. These roadmaps will help our member countries prepare for COP26 and enhance their climate ambitions.

Comments on:

Clean air as a priority: ADB is active in supporting clean air quality improvement in its member countries. In China for example, ADB has provided loans of $300-$500 million every year since 2015 to support improved air quality in the Beijing-Tianjin-Hebei (BTH) region. These projects were instrumental in contributing to the significant improvement of air quality through a combination of policy actions and clean energy solutions (coal to gas, or coal to electricity). ADB is now sharing China’s experience in other countries to replicate the success.

Carbon capture and storage: If we want to be carbon-neutral, particularly in Asia where 60% of power is coming from coal, carbon capture will have to be in the picture. We are providing technical assistance to China, India, Indonesia, and Bangladesh for capacity building, and we have identified a few specific cases for actual piloting. We are preparing feasibility studies for physical construction in China and Indonesia. In India, we are looking at carbon capture and utilization in an oil refinery. Asian countries needed to prepare for CCUS, because we will have to use it one day to achieve carbon neutrality.

Global power inter-connections: As a development bank, we are very active in supporting sub-regional power interconnections. In the Mekong sub-region for example, we host a secretariat to support power trade within those countries, including southern China. We have similar initiatives in South Asia, Central and West Asia, and even in Northeast Asia. I had a meeting with sponsors of the proposed Australia-Singapore sub-sea interconnection to learn more about the project, which may also benefit Indonesia. We are also supporting gas pipelines, such as TAPI [Turkmenistan-Afghanistan-Pakistan-India]. We hope it will move ahead soon.

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