Coal Financing in Europe: The Banker’s Dilemma

The European Union faces great challenges in balancing the demand for a secure and stable supply of electricity with commitments to deep and rapid reductions in greenhouse gas emissions. The future of coal-fired power plants (CFPPs) is at the centre of these conflicts over energy security and climate change.

This report is the result of dialogue with leading private European banking institutions to map the landscape of their current policies on investment in coal-fired power plants (CFPPs). Drawing on this research and discussions from a workshop held at Chatham House in September 2011, this paper highlights key policy questions for banks and other financial institutions.

Key Points:

+ There is a policy inconsistency between EU and national climate protection commitments (which both require deep emissions reductions), and decisions by the utilities to build more CFPPs (which will inevitably increase emissions and atmospheric concentrations). The underlying risk and reputational issues are of increasing concern, including to investors.

+ Despite a marked slowdown of investment in CFPPs in the EU, interest from utilities remains in them as a source for electricity. This particularly applies to the use of soft coal or lignite that is often mined and used locally.

+ Considerable new investment is needed in the power sector in Europe to replace retiring capacity and infrastructure and to meet EU environmental legislative requirements.

+ Banks are now recognizing the importance of developing specific policies on the financing of CFPPs as a means of informing their clients and the public of their views on the risks and conditions for engaging in the financing of CFPPs.