Towards a decarbonised future
The European Investment Bank has set out a strategy for lending that will support the EU’s goal of decarbonising the economy by financing investments that cut emissions, combat climate change and support alternatives to fossil fuels.
As scientific evidence on the catastrophic impact of greenhouse gas emissions has become more conclusive over recent years, so targets for decarbonisation have become progressively more ambitious. It is now more than a decade since the European Union agreed on its 20-20-20 energy and climate targets. This aimed at reducing greenhouse gas emissions by 20% on 1990’s levels, increasing the share of renewables in the EU’s energy mix to 20%, and boosting energy efficiency levels by 20%.
These goals, considered ambitious at the time, were later surpassed by new targets to reduce greenhouse gases to 40% of 1990 levels, lift the share of renewables to a minimum of 32% and generate energy savings of at least 32.5%.
More recently, the adoption of the European Commission ’s Clean Planet for All vision has embraced the objective of achieving a “prosperous, modern, competitive and climate neutral economy by 2050”. Unveiled ahead of the COP24 UN Climate Summit in Katowice last November, this highly ambitious blueprint for decarbonisation recognises that if global warming is to be restricted to a maximum of 1.5 degrees, emissions will need to reach a net zero level within the EU by 2050.
The EU Climate Bank
The EIB’s approach to energy lending has evolved over the last decade in tandem with the EU’s increasingly uncompromising decarbonisation goals, with almost a decade now having passed since the bank last supported a coal-fired power project. Between 2013 and 2017, meanwhile, more than 80% of the Bank’s energy lending was devoted to renewable energy, energy efficiency and modern electricity networks.
As it reinforces its credentials as the EU’s Climate Bank, however, the EIB is now intensifying its commitment to decarbonisation. This commitment will take shape in a new energy lending policy, following the most comprehensive public consultation ever undertaken by the Bank. This foresees a phase out of support to energy projects reliant on unabated fossil fuels — upstream oil and gas extraction, natural gas infrastructure, power generation or heat based on fossil fuels.
“We as the EU bank have a duty to focus on the longer-term challenge and investment needs of the energy sector,” explains vice president Andrew McDowell for energy at the EIB who has overseen the review. “As a result, all the bank’s lending activities in the energy sector must be fully aligned with the Paris Agreement. We know these are ambitious and profound objectives, which are challenging for our own shareholders but this is the moment to act.”
Edward Calthrop, senior economist in the energy team at the EIB, also recognises that this direction of travel implies virtually zero emissions from the EU’s power sector by 2040. Decarbonising energy supply to meet even the 2030 targets, meanwhile, calls for at least a doubling of today’s EU renewable power generation capacity.
Meeting this requirement is well beyond the resources of an individual multilateral development bank such as the EIB, which has lent, on average, between €12bn and €14bn per year to the energy sector over the last five years. “It is clear that the vast bulk of investment in renewable power generation will need to come from the private sector,” says Calthrop. “This means that the volume of the EIB’s lending is probably a less important metric than its risk sharing and advisory work.”
The EIB’s president, Werner Hoyer, emphasised the importance of promoting the institution’s role as the “crowding-in bank” when he addressed the United Nations General Assembly recently in New York. “By working with our public and private [sector] partners we aim to help unlock more than $1.1tr of investment by 2030,” he said. “This will include a marked increase in support for climate adaptation and resilience.”
Increasingly competitive renewables
McDowell says that he is optimistic that the targets set out by the EU and the EIB are achievable. “A decade or so ago, the central question was whether or not it would be possible to generate sufficient volumes of electricity from renewable sources at a cost that would make them competitive with conventional sources,” he says. “This is a question that has now been unambiguously answered.”
Compelling evidence of how competitive renewables have become was provided this summer, when the most recent auction of solar energy in Portugal established a new world record. One of the 24 licences on offer in Portugal was sold for €14.76 per megawatt hour. “To put this into perspective, when I worked on my first solar project at the EIB in 2010, we were looking at prices of as much as €600 per megawatt hour,” says Calthrop.
Wind is another renewable energy source that has taken giant strides in terms of its competitiveness relative to fossil fuels over the last decade. Calthrop says that while onshore wind has been competitive for many years, the main discussion today is focused on the economics of offshore wind.
“As with solar, in some countries we have seen a spectacular transition towards wind,” he says. “In the Netherlands and Germany, for example, we are seeing projects being brought forward without any government support which are now selling electricity into wholesale markets on a competitive basis.”
Making solar and wind plants competitive in their own right is half the battle. The point has now been reached where in a number of regions, and during certain periods of the day, month and year the EU can be reasonably confident about generating plentiful supplies of cost-effective, renewable power. The challenge now, is to find ways of capturing and transferring that power to other energy carriers for residential and industrial use across the wider economy. This raises questions around the financing of storage projects as well as demand response initiatives to make markets smarter.
A just transition
Question marks over storage and transmission of renewable power is one reason why exiting fossil fuels is not simply a matter of throwing a switch or establishing decarbonisation targets. Especially in countries and regions that have traditionally been highly dependent on coal mining, the ramifications of embracing a future free of fossil fuels are complex and extensive.
“Multilateral public investors like the European Investment Bank have a significant contribution to make here,” McDowell says. “Our financing and advice must be directed at investments that cut emissions and combat climate change and at supporting alternatives to fossil fuels. Global investment in research and development in renewable energy is still much too low. The global number in 2017 was $32bn, of which $22bn was provided by governments. That is half of what the EU automotive industry alone invests each year in R&D.”
He adds: “Crucially our investments must create the jobs and growth in the renewable energy and energy efficiency sectors that will ensure the transition leaves behind no part of our societies and no region of the world. To make this work, there has to be substantial thinking on the principles and guidelines followed by major investors.”
The requirement to accelerate this process is particularly compelling in the economies of Central and Eastern Europe, which accounted for about 86% of the EU’s hard coal production in 2018, according to Eurostat.
Recognising this acceleration, 10 EU member states will be supported by the EU’s Modernisation Fund. Part of the EU Emissions Trading Scheme (ETS), this is a mechanism designed to support investment in small-scale energy projects, improvements in energy efficiency and the modernisation of energy systems in member states with a GDP per capita below 60% of the EU average.
The fund is being financed via the auction of up to 2% of the total EU ETS allowances, which for the period between 2021 and 2030 are estimated to be worth between €6.2bn and €9.3bn.
The EIB will have a key role to play in assessing projects applying for funding under the ETS scheme. As to its direct funding of energy projects designed to accelerate the process of decarbonisation in the EU, Calthrop explains that under the Bank’s Energy Transition Package, it proposes to relax its rule of limiting its financing of individual projects to 50% of the total project cost. “We’re proposing that in the countries eligible for the support of the Modernisation Fund, this should be increased to 75% for energy projects,” he says.
There is a more intractable long-term issue that will need to be addressed as the process of phasing out of fossil fuels gathers momentum. This is the social impact that the decommissioning of coal mines and other sources of heavily polluting power will have in areas that have traditionally depended on these economic activities. Across 12 member states in the EU, 41 regions still mine coal, providing a livelihood for about 240,000 people.
McDowell says: “The EIB is keenly aware of the social dimension associated with the accelerated exit from fossil fuels and is supportive of the concept of a ‘Just Transition’. Indeed, it is an integral part of the new policy and the incoming European Commission’s proposed Green Deal, which we as the EU bank will play a pivotal role in delivering. The ‘Just Transition’ concept aims to provide a framework for discussions on the development of an equilibrium between sustainability and fairness for those who stand to lose out.
“As a bank whose roots are based on supporting cohesion in Europe, we absolutely need to do everything we can to help those countries and regions that are potentially the most exposed to the process of transition from a social perspective.”
This is a message that has been transmitted loud and clear by the Bank’s president. “At EIB, we have been supporting this ‘Just Transition’ for a long time,” Hoyer said in Paris in September. As an example, he pointed to the work that the bank has been doing over the last 20 years with the Polish municipality of Katowice, which in 1998 was the first Polish municipality to sign a loan agreement with the EIB.
“Our €205m of loans [to Katowice] have contributed to its successful transition from stagnating coal-mining town to vibrant urban centre, offering new business opportunities and a healthier environment for its citizens,” added Hoyer.
Notably, however, the EIB’s lending aimed at cushioning the socioeconomic impact of transition has not been restricted to Central and Eastern Europe. Recent initiatives financed by the bank have included those supporting rehabilitation of brownfield areas in Brandenburg, the transformation of the former coal-mining town of Essen, and the replacement of dirty heating systems with clean ones in the Irish county of Tipperary.
These projects all underscore the inseparability of decarbonisation and social development, which are at the heart of the EIB’s energy lending strategy. “Achieving the objectives of the Paris Agreement and addressing climate change requires a profound transformation of our economy and our society,” said Hoyer at a recent meeting in Zagreb ahead of Croatia assuming presidency of the EU in 2020. “We simply cannot shoulder the costs of inaction.”
Further reading from the EIB