18 April 2019
This week saw Singapore’s two biggest banks -Oversea-Chinese Banking Corporation (OCBC) and DBS – commit to an endpoint for their lending to new coal power plants.
On Monday, OCBC CEO Samuel Tsien told media: “We won’t do any new coal-fired power generation plants in any countries, except for the power projects that we are already in, or we have committed to. We hope that by doing this, we are encouraging the governments to do facilitating, arrangements for the countries to move from coal to renewable.”
On Thursday, DBS published a statement on its website titled “Our Approach to Financing New Coal-Fired Power Plants”, saying: “…we have decided to cease financing new CFPP in any market regardless of the efficiency of technologies used, after honouring our existing commitments. The last of these existing commitments is likely to be completed by 2021.”
As this analysis explains, DBS and OCBC now hold some of the most progressive policies to restrict lending to coal power, with potentially massive implications for the direction of energy finance. However, with the world’s chances to avoid catastrophic climate change on a knife-edge, the decision to stay involved in three new coal power projects is another three strides towards global warming’s cliff edge.
Since the withdrawal of European and US-based banks from lending to new coal power stations, finance to coal in Asia has been dominated by banks from China, Japan, Korea and Singapore, with London- and Hong Kong-based HSBC also playing an important role.
Singaporean banks play an important role in complementing financiers from Japan, Korea and China, which typically back coal power projects in order to support companies from the same countries and to assert geopolitical influence.
Assuming the involvement of DBS and OCBC in banking syndicates for new coal power would remain important in the future, these policy moves could impact tens of gigawatts (GW) of new coal power plants in the ASEAN region, making the announcements a massive game-changer for the future of energy finance in Asia.
According to the global coal plant tracker, there are 48 GW of new coal power plants proposed in Indonesia and Vietnam. DBS and OCBC just limited their involvement in potentially dozens of new coal power plants to just three.
Three more coal power plants is still too many
The world has passed the point where any new coal power plants could be considered compatible with meeting the goals of the Paris Agreement. This has been established by research such as that of Oxford University, which found that “Even if all currently planned projects are immediately suspended, up to 20% of global fossil-fuel generation capacity would still have to be stranded (that is, prematurely decommissioned, underutilized, or subject to costly retrofitting) if humanity is to meet the climate goals set out in the Paris Agreement.”
Last year, IEA chief executive Fatih Birol said about meeting the Paris Agreement goals: “We have no room to build anything that emits CO2 emissions.” However, this was to keep global warming to less than 2ºC, not the 1.5ºC that marks the uppermost ambition of the Paris Agreement.
The IPCC’s special report on holding global warming to 1.5ºC found that to meet this goal, the world would need to have phased out coal power completely by 2050. Any new coal power plant built today would not be able to see out its typical economic life in a scenario where the goals of the Paris Agreement are met.
According to scenario modelling by UTS researchers, “In the 1.5°C Scenario, the phase-out of coal and lignite power plants is accelerated, and a total capacity of 618 GW—equivalent to approximately 515 power stations (1.2 GW on average) — must end operation by 2025.”
DBS remains involved as a financial adviser for the Java 9 and 10 project in Indonesia, while both DBS and OCBC are named among the syndicates looking to finance the Van Phong 1 and Vung Ang 2 projects in Vietnam. Combined, these projects would add another 4.5 GW of new coal power, capable of releasing one billion tonnes of CO2 into the atmosphere over a 40-year operating life.
All three projects also carry other severe environmental, economic and social risks, including a lack of proper and independent community consultation, the release of pollutants that are up to 9 times higher than those of power plants in wealthier Asian countries, the involvement of financially challenged engineering companies such as Korea’s Doosan Heavy, and exacerbating issues of electricity oversupply and the need for state-run utilities to pay for polluting power that may not even be able to be used.
Staying in coal not based on climate science
These new policies, which allow DBS and OCBC to maintain involvement in several proposed coal-fired power projects, have nothing to do with climate science and everything to do with the fact that they simply happen to already be involved in syndicates discussing finance.
Both banks mentioned being “committed” to these remaining projects. That reflects the fact that when banks are in a syndicate, talking with other banks and a project sponsor about financing a project, it is not simple to get up and walk away immediately.
However, there are milestones and review points that give banks the opportunity to exit a syndicate and walk away from a project they had been in talks to finance. DBS did exactly this with the Vinh Tan 3 power station in Vietnam in July 2017, with one source stating it was “unable to agree to terms of the roughly $2 billion non‐recourse loan.”
Standard Chartered dropped out of the Nghi Son 2 power station last year, which it assessed as non compliant with its policy at the time, and exited prior to the deal being finalised. Many banks have made similar decisions.
One example of such a milestone is the recent announcement that the Vung Ang 2 project would change an important type of technology employed – something that should trigger a new environmental and social impact assessment, and an opportunity for banks to reconsider their position in the deal.
DBS has said it expects the last of its existing commitments to be completed by 2021. But with Van Phong 1, Vung Ang 2 and Java 9 and 10 facing strong resistance from local and international campaigns, DBS may need to choose between changing the date it ends coal finance or walking away from the deals.
Comparing DBS and OCBC’s policies to other Asian banks
Both OCBC and DBS have joined Standard Chartered when it comes to new coal power lending. Last year Standard Chartered updated its power generation policy saying it would not finance any new coal-fired power projects, yet grandfathered in the likes of Vung Ang 2 which it is also part of the syndicate to finance, along with Vinh Tan 3, another Vietnamese coal power project.
Standard Chartered, OCBC and DBS now lead other Asian banks on coal power. HSBC last year announced it would end financing to new coal power stations all over the world, but bizarrely created loopholes for itself to finance coal power in three countries: Bangladesh, Indonesia and Vietnam. These carve outs attracted criticism, with one Vietnamese clean energy advocate labeling the decision racist. HSBC also faced scrutiny from shareholders over the policy at its 2019 AGM.
The three main Japanese commercial banks, MUFG, SMBC and Mizuho, have made statements that suggest they would only lend to projects that used the more efficient ultrasupercritical technology, or have CO2 emissions intensities that match this technology type. However, they are all involved in the Van Phong 1 project, which uses less efficient technology, making it difficult to take the Japanese banks at their word.
Chinese banks are required to follow guidelines such as the Green Credit Directive, but there are no known exclusions by Chinese banks when lending to coal power.
Elsewhere in Asia, Singapore’s other main bank – UOB – has failed to move its policy to match DBS and OCBC. Mr Eric Lim, UOB head of group finance and chairman of the environmental, social and governance committee, said “…we prohibit new financing of sub-critical coal-fired power plant projects”, but the bank would remain open to funding supercritical or ultrasupercritical projects that met their emissions intensity threshold of no more than 830 g/CO2 per megawatt-hour.
There are no known coal power lending restrictions from Malaysian banks Maybank or CIMB, which also participate in coal power lending.