Editorial: EIB New Lending Policy Too Narrow [LNG Condensed]
The European Investment Bank’s new lending policy, adopted November 14, focuses on essential areas in the fight against climate change, which is laudable. However, it represents a narrowing of ambition, which potentially ignores both security of supply concerns and the utility of existing gas grids in a sustainable energy future. This goes against International Energy Agency (IEA) recommendations that an ‘all of the above’ strategy is required.
The new policy consists of four elements.
Ending financing for fossil fuel projects from January 1, 2022, which in effect means natural gas projects as this is where the bulk of the EIB’s funding has previously been targeted; an acceleration of funding for clean energy innovation, energy efficiency and renewables; unlocking €1 trillion ($1.1 trillion) of climate action and sustainable investment up to 2030; and aligning all financing activities with the goals of the Paris Agreement on Climate Change from the end of 2020.
EIB funding has aided the construction of LNG import terminals in the Baltics and the construction of new pipelines and improvements to the existing European grid, which have been crucial in addressing the long-running aftermath of the Russia-Ukraine gas crises. These have still to reach their denouement regarding the Ukraine-Russia gas contract, which expires at the end of the year, and construction of the much-delayed Nord Stream 2 pipeline under the Baltic Sea to Germany.
These investments have been driven by security of supply concerns, aiming to reducing eastern Europe’s excessive dependence on a single gas pipeline supplier – Russia – and thereby improving the energy security of all European countries to the west.
However, they have positive and immediate shortterm climate change benefits as well. Poland’s continuing dependence on coal-fired power generation is also in part a product of its concerns over Russian gas supplies. Providing an alternative source of gas allows gas-to-coal switching, in addition to the growth of renewable energy sources.
There is a strong argument that coal-to-gas switching is in alignment with the goals of the Paris Agreement on Climate Change because of the immediate and lasting greenhouse gas (GHG) emissions reductions it can achieve. It is a solution complimentary to, rather than in competition with, the growth of renewable energy.
The North/Baltic Sea region is also the epicentre of LNG adoption as a shipping fuel, for which there are at present few other low carbon alternatives. This has been driven by the desire to reduce sulphur and nitrogen oxide emissions and particulates, but increasingly as a means to reduce GHG emissions as well. LNG in shipping may not be the end goal, but it is an essential part of the early stage solution to shipping emissions. Other technologies, such as hydrogen and electric batteries, remain decades away from mass deployment.
LNG supply networks which facilitate the uptake of LNG in shipping require bulk entry points. This is also true of LNG in long-distance road haulage. Although the EIB’s support for electric buses is very positive, a focus on electrification will not address on the short timescale required the broader problems of emissions from commercial transport, which are much more significant than those from personal transportation.
Moreover, utilisation of gas grids for the transmission of hydrogen and renewable gas depends at least initially on the continued bulk provision of natural gas. Gas grids will not be maintained, extended and improved on the basis of higher-cost green gas, which will piggy-back on the substantial sunk investment in the existing network. This is a low-cost, low emissions solution, but one that depends on natural gas distribution infrastructure.
But the most significant ramification of the EIB’s decision are the what ifs? What if all multilateral lending agencies gradually adopt similar policies? This would threaten coal-to-gas switching in south and southeast Asia where capital scarcity has traditionally meant a much greater dependence on multilateral funding for major energy projects.
The IEA has consistently argued that there is no silver bullet in the fight against climate change and that an ‘all of the above’ strategy is required. The EIB’s funding decision focuses on key areas which the IEA has highlighted of particular concern, for example energy efficiency and the strengthening of electricity grids, which are unquestionably essential.
However, a narrowing of its focus potentially sidelines major opportunities in the areas where natural gas provides a lower carbon alternative to oil and coal, facilitates the future adoption of lower or zero carbon gases, and works symbiotically with the electricity sector, providing the bulk energy flexibility and long-term storage which current renewable technologies cannot yet supply.
LNG Condensed Volume 1, Issue 11 - November 2019 - now available.