Energy financiers in Asia must stop supporting region’s costly addiction to LNG and coal power

Development banks should be funding Asia’s clean energy transition – not saddling countries with cripplingly expensive and outdated fossil fuel infrastructures

Simon Nicholas

Published: 9:00pm, 18 Apr, 2021

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“Gas is over,” proclaimed European Investment Bank chief Werner Hoyer at the beginning of this year as he stated the bank’s vision to end the unabated use of fossil fuels. European officials have since called on the World Bank to phase out lending for gas projects globally, and to end support for coal and oil. US President Joe Biden, meanwhile, pledged in the early days of his presidency to end public finance for fossil fuel development overseas.

Policy changes on fossil fuel financing have not been confined to the West. Japan Bank for International Cooperation, the export credit agency, has said it will stop financing coal-fired power overseas – a huge announcement as Japan has been a major backer of coal -fired power across developing Asia.

This followed similar policy changes at several of Japan’s commercial banks, including Sumitomo Mitsui Banking Corp and Mizuho Bank, as well as companies. In February, Mitsubishi Corp pulled out of a major coal power project in southern Vietnam and pledged to stop engaging in new coal projects overseas.

Multilateral development banks have been slow to join the trend. But they are increasingly feeling the heat of marked policy movements from Asian banks and pressure from the West. Next in the spotlight will be the Asian Development Bank, which is due to release a new draft of its decade-old energy policy from this month.

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For many countries in Asia, fossil fuel projects are increasingly a fiscal burden, especially as new technologies such as wind and solar rise in quality and fall in cost. Many, including Bangladesh, Pakistan and Indonesia, have too much coal power capacity, so plants are made to operate sub-optimally and receive government subsidies in compensation. In Pakistan, these “capacity payments” are set to reach US$10 billion per year by 2023, a massive fiscal burden.

A similar problem will occur with infrastructure related to liquefied natural gas (LNG), particularly in light of highly volatile prices. Skyrocketing LNG prices during northeast Asia’s cold snap in January had an immediate impact on developing nations, with many tenders for LNG shipments to Bangladesh and Pakistan cancelled. Without a reliable and affordable source of LNG, gas infrastructure goes idle, which must be relieved by further subsidies and electricity price rises.

The energy minister of the world’s largest LNG exporter, Qatar, has warned of further price spikes, while S&P Global Ratings updated its oil and gas industry risk assessment from “intermediate” to “moderately high” in January.

LNG investment decisions across Asia are likely to be affected as higher fossil fuel prices kill long-term demand and make renewable energy seem even cheaper. Around US$50 billion of LNG projects across Vietnam, Bangladesh and Pakistan are at risk of cancellation because of increasing price volatility.

A widespread power outage in Rawalpindi, Pakistan, on January 10 left millions of people in darkness. Photo: AP

Bangladesh’s five-year plan (2020-2025) notes that further reliance on imported LNG and coal will mean having to charge higher power tariffs or increase subsidies (or both) – an unsustainable burden. It also points out the subsidies have held back renewable energy development in Bangladesh, which already has too much power capacity.

Many of these issues are also present in Pakistan, where the financial crisis in the power sector is substantially worse. Debt caused in part by subsidised fossil fuels and overcapacity payments is expected to reach more than US$17 billion by the end of this financial year. Power tariffs were increased significantly for a second time this year to try and arrest the growing debt as Pakistan comes under pressure from the International Monetary Fund to increase tariffs further. Pakistan has also approached China for debt relief on its coal power loans.

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It came as little surprise last December when Prime Minister Imran Khan said that Pakistan “will not have any more power based on coal”. This followed the cancellation of several planned coal power plants, most recently in June 2020. There is talk of more cancellations this year.

It is clear that the funding that has enabled developing Asian nations to become more reliant on coal and LNG is contributing to worsening energy sector financial crises. Further reliance on coal and LNG will lead to ever larger and unsustainable fossil fuel subsidies and rising power tariffs. Both threaten to hold back development.

Multilateral development banks should not be in the business of hindering Asian nations’ development by saddling them with outdated fossil fuel infrastructures and their corresponding fiscal burdens. Cheaper, cleaner and more reliable renewables should be at the front of development banks’ energy financing in Asia.

Simon Nicholas is an energy finance analyst at the Institute for Energy Economics and Financial Analysis