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Business risk and Covid-19 are pushing Asian financiers away from coal

Coal divestment plans from three major Japanese banks and South Korea’s pledge for a similar policy proposal are part of a growing investor backlash due to costs of building coal power plants amid sluggish electricity demand.

The use of coal as an energy source is steadily declining in the US and Europe, but coal mining and the construction of coal-fired power plants continues across South and Southeast Asia.

The technology and funding comes primarily from three countries — South Korea, Japan, and China — and is destined to nations including Indonesia, Vietnam, Bangladesh and the Philippines. Each of the latter has more than 10,000 megawatts (MW) of coal-fired power plants in various stages of development.

But there are signs this trend might finally be changing.

In the past few months, perhaps spurred by economic concerns due to the Covid-19 pandemic, Japan’s three main private coal financing banks — Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group (Mizuho) and Sumitomo Mitsui Financial Group (SMBC) — have announced plans to gradually reduce coal investments. This was followed, in July, by Japan’s government announcing it would tighten public financing criteria for coal plants overseas, impacting state-funded entities such as the Japan Bank for International Cooperation.

And, in April, after a historic victory in mid-term legislative elections, South Korea’s ruling Democratic party released a policy proposal for a “Green New Deal” that, at the time, included provisions to eliminate most coal financing. This intention was reinforced July 28 when Democratic party lawmakers proposed a package of bills aimed at banning the public financing of overseas coal projects.

I think China will be the last country [financing] coal power in Asia. How much they care about that remains to be seen.

Simon Nicholas, energy finance analyst, Institute for Energy Economics & Financial Analysis (IEEFA)

“It’s very significant because those Japanese banks have historically been amongst the biggest financing of coal fired power in Southeast Asia,” said Simon Nicholas, an energy finance analyst at the Institute for Energy Economics & Financial Analysis (IEEFA), a US-based think tank. “South Korea, too, definitely does seem to be moving away from the financing of coal overseas with this Green New Deal.”

While the details are still being set, analysts say these moves could negatively impact the financial prospects for future coal power plant development across the Asia-Pacific region, the last major growth market for the fossil fuel.

It could also increase pressure on China, which faces several key decisions on the future of its massive Belt and Road Initiative, under which several coal projects are being pursued.

“I think China will be the last country [financing] coal power in Asia,” Nicholas said. “How much they care about that remains to be seen.”

Financial and climate concerns

For several years, Japan, South Korea and China have been the primary financiers of coal-fired power plants in emerging markets, accounting for more than 80 per cent of global coal investment.

Until this year, the East Asian nations proved resistant to campaigns focusing on the climate and environmental impacts of coal mining, production and burning. In recent years, however, there has been an increasing focus on financial risk. Coal plants are expensive to build, have high operating costs and are increasingly unlikely to be utilized at their full capacity now or in the future; in many countries, electricity supply is already outstripping demand. Asian banks, however, have been slow to respond to these concerns.

Politicians see overseas coal financing as a rescue operation, or job protection opportunity.There’s a lack of understanding of the economics of coal and climate change.

Jiseok Kim, climate and energy specialist, Greenpeace Korea

“Korea’s financial sector is late to grasping the declining competitiveness of coal power both in Korea and in developing countries,” said Sejong Youn, director of the overseas coal finance program at Solutions for Our Climate, a South Korean NGO. “There is still the misconception that fossil fuel power projects are necessary in developing countries despite cost trends showing otherwise.”

The same is true in Japan, where investors played a role in pushing banks to shift from business-as-usual investments.

“Pressure from civil society and investors have definitely been key in making the three Japanese banks realise business-as-usual investments in coal projects and companies is not acceptable anymore, neither from an environmental, financial or reputation viewpoint,” said Hanna Hakko, senior energy campaigner at Greenpeace Japan.

In South Korea, it is unclear how the promises of the Green New Deal will be followed through by the ruling government. Thus far, little has changed. A decision in May to bail out Doosan Heavy Industries & Construction, the country’s largest coal plant manufacturer, was heavily criticized for its environmental and financial implications. Then, in late June, the majority state-owned utility Korea Electric Power Corporation, known as KEPCO, decided to move forward on a plan to finance two coal plants in Indonesia despite concerns over profitability and environment. Kepco has also said it is considering investing in the controversial Vung Ang 2 coal plant in Vietnam.

“Politicians see overseas coal financing as a rescue operation, or job protection opportunity,” said Jiseok Kim, climate and energy specialist at Greenpeace Korea. “There’s a lack of understanding of the economics of coal and climate change. If they knew how risky building a new coal power plant in 2020 is, they might have second thoughts.”

Additional pressure on financiers

While activists welcomed the Japanese banks’ statements on coal finance, they are concerned that the impact will be limited due to numerous loopholes. There are also concerns that Japan’s move, along with South Korea’s, would not affect plants currently planned or in pre-construction. That is why anti-coal advocates are maintaining pressure.

At Mizuho’s recent general meeting in late June, the company faced a shareholder climate resolution that would have required the company to “disclose climate risks and publish a plan to ensure its investments are aligned with the Paris Agreement.” It failed, but received 34.5 per cent of votes — far more than expected.

“Seeing as the resolution got quite high support, and the shareholder movement on climate change is only getting stronger, the banks should be thinking about how to respond to that proactively on their own terms,” Hakko said. “Otherwise they might find themselves with new shareholder resolutions in their hands next year.”

The role of investors in driving action could have an impact in South Korea too, as BlackRock, which recently put forth a climate plan, is a major shareholder in KEPCO and has even expressed concern about its overseas coal investments.

“They do seem to be genuinely concerned with the way KEPCO is going with its overseas coal projects,” Nicholas said.

The Covid-19 pandemic is also having an impact on energy markets around the world. While the dramatic drop in oil prices got the most attention, thermal coal prices have also fallen significantly. The International Energy Agency (IEA) expects global coal consumption to decline by 8 per cent this year, the largest drop since 1945. This adds to existing concerns about overcapacity in several countries.

“Covid-19 is reducing power demand, and the overcapacity situation is getting worse,” Nicholas said. “Countries are having to make capacity payments to coal plants, which are sitting there underutilized.”

If Chinese, South Korean and Japanese financial institutions fail to fully shift from financing coal, the decision may be made by the host countries. Some, like Pakistan, may be unable to follow through on projects due to financial concerns. Overcapacity has already led Bangladesh to pause approval of new coal power plants, while Vietnam is increasingly promoting renewables alongside coal.

“These are among the few remaining countries in Asia that I consider to be a potential growth market for coal exporters,” Nicholas said, adding that if they shift, it could dramatically change coal’s growth prospects.

Also worth watching is if China follows through on statements to expand green investments in Belt and Road projects overseas, and is willing to refinance, or drop, financing for coal plants overseas.

“It’ll be interesting to see how China will respond,” Nicholas said. “How heavy handed versus how sensitive they will be to these issues that Covid-19 is now making worse.”

According to IEEFA, the coal market responds slowly to investor actions, as shifts in production and usage take time to filter through the system. That is why the impact of Japan’s moves, and the pandemic, on Asia’s coal industry and the countries still planning more coal-fired plants is far from clear. But the signs all point toward a financial reassessment as key actors, both on the investor side and in host countries, have big decisions to make.

This story was published with permission from Mongabay.com.

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