Are Multilateral Development Banks funding an expansion of ‘captive’ coal power plants in the name of decarbonisation?
In recent years, several Multilateral Development Banks, like the World Bank Group, have made welcome commitments to shift their funds away from coal power. However, research published this week by Recourse, Trend Asia and Inclusive Development International has found that loopholes in these commitments may still put MDBs at risk of financing ‘captive’ coal units for industrial uses. Unless these loopholes are swiftly closed, at a time when captive coal is set to expand in support of booming transition minerals industries, then these publicly funded institutions could find themselves embroiled in projects that cause serious harm to people and planet, despite their ostensible role in the energy transition.?
What is captive coal?
Captive coal units are dedicated coal power plants that support one or more industrial facilities (as opposed to feeding power into the grid). Captive power units, which can also run on other fossil fuel or renewable energy sources, usually provide power or heat to these facilities, to process or produce a commodity. In previous decades, captive coal units have commonly been deployed in the production of cement, steel and aluminium, but can also be used in the chemical, textiles, paper and other industries.?
In the coming decades, captive coal is set to become much more common. The global production of steel and aluminium is predicted to increase by 2050 as a result of growing demand from developing countries and their potential role in the green energy transition. But, increased demand for these metals will be far outstripped by the demand for so-called transition minerals - such as copper, lithium, nickel and cobalt - which are crucial to the technology used in electric vehicles (EV) and renewable energy systems. As a result, there will be significantly increased demand for industrial facilities, such as smelters and refineries, that can extract, process and prepare these minerals for use in EV batteries, wind turbines, solar panels, and so on.??
That being said, it is not a given that smelters and refineries must be powered by captive coal units, and the recent (and planned) expansion of captive coal has taken place under very specific circumstances. Much of this expansion has taken place in Indonesia, a country with the world’s largest nickel reserves and a booming nickel industry. In 2014, the Indonesian government banned the export of raw, unprocessed nickel in order to retain more value from its trade by instead processing the metal within Indonesia and selling higher value, processed nickel overseas (in some cases directly to EV manufacturers). The number of nickel smelters has quickly grown across the country, many of them powered by dedicated captive coal units, and many more are planned in the next decade. Captive coal currently represents around half of Indonesia’s total coal capacity, but nearly 70% of future coal expansion plans.
The boom in captive coal will come with huge risks, not just to communities and biodiversity in the vicinity of the units, but also to the climate. While nickel smelters are ostensibly created in support of decarbonisation efforts, their impacts have been shown to be hugely harmful to people and the environment. The coal units which power these smelters, although sometimes smaller than standalone, grid-connected power plants, still contribute significantly to air and water pollution and make a significant cumulative impact to climate-busting carbon emissions. In fact, while Indonesia is set to significantly reduce its coal capacity from a planned 40.6 GW in 2030 to 24.6 GW in 2045 (under its infamous JETP deal), this will be more than replaced by captive coal, which is set to expand from 14.2 GW to 32.7 GW in the same period. That means that any emissions reductions achieved under the $20 billion JETP deal could be wiped out by the simultaneous expansion of captive coal, meaning that global temperatures would still be well on track to increase by more than 1.5oC above industrial era levels.?
Why are MDBs at risk of funding captive coal?
As mentioned above, many MDBs have made commitments to stop funding grid-connected coal. However, these commitments tend to apply only to some of an MDB’s portfolio, and in several cases they explicitly state that they do not apply to captive coal units for industrial use.
For example, the World Bank’s 2013 commitment to only fund coal in the rarest of circumstances explicitly states that it does not apply to instances in which “coal is used for heat, captive power, and chemical needs”, and as such “the WBG will continue to finance investments in various industrial and commercial processes—such as steel, cement, and other manufacturing operations”.?
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Similarly, when the International Finance Corporation (IFC, the Bank’s private sector arm) introduced a commitment in 2020 to encourage its financial intermediary clients to gradually phase coal power out of their portfolios, it stated that the approach did not apply to “captive coal-fired power plants used for industrial applications such as mining, smelters, cement or chemical industries, etc.”. Furthermore, the much lauded commitment from a group of MDBs in 2023 to align their portfolios with the Paris Agreement, committed only to stop funding coal for power generation, and did not include a blanket ban on funding captive coal.
While these loopholes may appear hypothetical, they have already allowed several projects to be financed that have caused demonstrable harm to communities and the environment.?
As our research highlights, the IFC has indirectly financed one coal-powered nickel smelter on Obi Island in Indonesia, owned by private developer Harita Nickel. The IFC has an equity stake in a financial intermediary, Hana Bank Indonesia, which financed the smelter in 2022. As a shareholder of Hana Bank Indonesia, the IFC is exposed to all of the bank’s financing activities. In response to our research, the IFC said that these funds did not necessarily support the coal unit. However, while it was not (publicly) specified what proportion of Hana Bank Indonesia’s loan for the smelter would be used to finance the captive coal unit, it is also clear that the smelter would not function without it, and that Hana Bank Indonesia (and by extension IFC) bears a responsibility for making both the smelter and the captive coal unit financially viable.?
The IFC has also invested in another financial intermediary, Indonesian bank OCBC NISP, to support climate projects. Less than a year after that investment, OCBC NISP contributed to a loan for another of Harita Nickel’s smelters. In response to our research, the IFC said that it was confident that the loan to OCBC NISP had not been used to finance any nickel smelters or captive coal related projects. However, it also acknowledged that IFC’s coal exclusion, which is written into legal contracts with borrowers to ensure they do not fund grid connected coal, does not apply to captive coal projects. Without being able to review the legal contract that IFC agreed with OCBC NISP, as it is not disclosed publicly, it is impossible to verify whether the IFC is exposed to this project or not. However, it is clear that there is a weakness in the IFC’s approach to phasing out coal from its portfolio if it does not tell clients to stop financing captive coal projects - especially those who are demonstrably doing so!?
The IFC is missing an opportunity to be a standard setter and to use its leverage, at the point of investment, to encourage the financial sector away from coal-powered industry and towards cleaner, greener alternatives.?
How should the MDBs do things differently?
There is therefore a clear rationale for the World Bank Group to do things differently. The simplest changes would be for the IFC to amend its Green Equity Approach, and for the World Bank to amend its approach to energy investments, to ensure that it stops financing all forms of coal power, both for energy generation and industrial use, as well as the projects that are reliant on coal power. While our research found that the Asian Infrastructure Investment Bank’s policy is stronger in this regard, the Asian Development Bank’s energy policy is currently vague on whether captive coal is included within its definition of coal projects.?
More importantly, all three banks should make improvements to how they make and disclose financial intermediary investments, to improve transparency and accountability. MDBs must ensure that their coal exclusion policies apply to all types of direct and indirect investments, including their various bond and capital markets projects. They should all publish the name, sector and location of all high and medium risk projects supported through financial intermediaries, to enable the public tracking and analysis of their financing commitments. And the MDBS should also contribute to remediating any harms caused by existing or future financial support for coal power projects, captive coal projects, or projects reliant on captive coal.?
Perhaps most importantly, however, MDBs need to rethink how they approach risk when it comes to their portfolios. Rather than trying to protect themselves from reputational risk through various complex financing techniques and frameworks, MDBs should be seeking to reduce any risks to people and planet that their investments entail - especially those conducted via financial intermediaries. Instead of protecting themselves from exposure to coal in opaque legal contracts, MDBs should be using their investments as an opportunity to encourage financial sector clients to stop funding captive coal and instead finance greener, cleaner alternatives. Efforts are already underway in Indonesia to decarbonise industry, but this will not happen quickly enough if MDBs are still financing projects that rely on coal.?