Blog entry

EU Recovery funds: where is the support for District Heating?

The text was originally published at https://energypost.eu/

With an average heating season lasting 200 days, Latvians need to keep warm. More than half (58%) of Latvia’s primary energy consumption is used for heating. Not only are the type of system and boiler efficiency important for effective heat supplies, but the energy source or fuel is also crucial.

Although most of Europe has turned its focus to meeting its heating needs through individual heating units powered by electricity, Latvia has a well-established, efficient and well-monitored central heating system that has the potential to boost the local economy by using locally-produced, renewable resources.

Modernising Latvia’s district heating system

A new briefing from Bankwatch and Green Liberty analyses district heating projects implemented in Latvia with the support of EU funds over the past 20 years. Thanks to this support, many changes have been made to Latvia’s district heating system in the last two decades, including renewed and expanded networks, new efficient boilers and a switch across most of the system from gas and other, dirtier energy resources to biomass.

Such investments not only make district heating more efficient and less polluting, they also make it more attractive financially. As a result of these upgrades, district heating can be the most affordable form of heating and provide full service for customers with stability, safety and comfort at the best value for money.

Gas versus ‘renewable’ woodchips

Using fossil gas for district heating has for too long continued to receive direct and indirect financial support in Latvia. In addition to its negative consequences for the climate emergency, fossil gas also threatens Latvia’s energy independence, because it is still mainly imported from Russia. There has been a lot of greenwashing around fossil gas in Latvia for the last decade, including state support mechanism for green electricity that leads to support for fossil gas as a mandatory procurement component.

Switching to renewables is absolutely an improvement, but the only problem here is that the ‘renewable’ source most commonly found in Latvia is solid biomass or woodchips. Including more renewable sources in the energy balance will help Latvia to achieve its climate and energy policy goals, and Latvia already has substantial wood resources available locally and a thriving forest industry.

The EU does have sustainability requirements for the use of woodchips as biomass that should limit when it can be considered a renewable resource. These can be found in a 2010 report on the sustainability of biomass for use in heating and cooling, as well as in the draft EU Taxonomy for sustainable finance.

Our briefing demonstrates a predictably significant trend towards biomass use in Latvia. But the question remains for how long and at what cost can biomass be considered the solution.

Solar powered District Heating

Latvia should instead focus on its well-established heating network and efficient production of heat. Instead of locking in fossil gas and unsustainable biomass as the sources for district heating, Latvia needs to consider other innovations that will keep district heating using renewable sources, while also moving it away from reliance on biomass.

Latvia already possesses a good example of a modern and super-efficient, low-emissions technology system, t he solar district heating plant Salaspils Siltums, which generates an estimated 12,000 KWh of power per year.

Inspired by the vast deployment of solar collectors in Denmark, Salaspils’ system was built in less than six months. Total project costs were just over EUR 7 million, of which the EU’s Cohesion Fund co-financed EUR 2.73 million. The plant provides all of the district heating capacity, which covers 85% of the municipality of about 18,000 people.

Other district heating innovations, like building the system as an energy-hub, implementing grid stability mechanisms or developing centralised heating and cooling systems, can be implemented in the future, provided there is political will and available financing.

EU Recovery Funds: inadequate long-term solutions

Latvia has an opportunity to really push the country towards a green and just transition, as it is set to receive up to EUR 1.9 billion from the new EU Recovery and Resilience Facility. Yet though a spending plan for the new recovery funds is currently being drafted, environmental groups warn that the current drafts don’t include adequate long-term solutions for curbing emissions or improving energy efficiency.

On 24 February, twenty Latvian environmental groups sent a letter to the European Commission expressing their concerns with the country’s draft recovery plans. The letter points to the limited funding for energy efficiency measures, which are a necessary complement to all well-functioning district heating projects.

No support for District Heating

Moreover, the draft plan does not include any support under the climate goals for district heating projects, which is a massive missed opportunity. Addressing climate and energy issues in Latvia cannot exclude heating, which has the largest impact on energy consumption. Funding is needed not only for developing non-emissions technologies but also for connecting new customers to district heating systems and for installing filters to minimise dust from using biomass.

Opening the recovery planning process to public consultations and including more ambitious climate goals and projects is crucial if Latvia wants to seize this historic opportunity and build back better. Earmarking funds from not just the Recovery and Resilience Facility but the country’s whole allocation from the upcoming EU budget can lead to innovation, improved energy efficiency and ultimately create a Latvian model of an efficient, effective district heating system.

Why is the EU’s house bank still hiding one-third of its lending?

The European Investment Bank (EIB) uses various intermediaries – commercial banks, state development banks and private equity funds – to help reach smaller clients than it could otherwise attract. Such lending has doubled in the last 15 years, in 2019 accounting for about a third of the Bank’s EU operations.

In 2020, the EIB Group provided more than EUR 30 billion for small and medium enterprises alone, which does not even cover the full range of intermediary lending.

Despite years of requests from civil society and the European Parliament, the public still has almost no idea what happens to this money.

Small is not always beautiful

The common wisdom is that this is low-volume financing that has little potential to cause harm. But where it has been possible to track the financing, this has proven to be wishful thinking. First, according to the EU’s definition, small and medium enterprises can employ up to 249 employees, and mid-caps up to 3000, which means the projects are not always small.

Second, small projects can still be damaging. Bankwatch’s research has revealed EIB intermediaries’ role in environmental damage by small hydropower projects in southeast Europe. The EIB has financed more than 25 such plants through financial intermediaries since 2010, but the exact number remains unknown.

Ilovac in Croatia is an example of a plant built in a Natura 2000 protected area without an adequate environmental assessment, but civil society groups became aware of the EIB’s role only after it was built. The situation is similar for the Blagoevgradska Bistrica cascade in Bulgaria, which received a loan from the EIB in 2012; the EIB disclosed this information only in March 2020.

The Vinča waste incinerator project in Belgrade, Serbia, is also an intermediary project. Paradoxically, the EIB had declined to finance it directly, as it would likely interfere with Serbia’s ability to meet EU recycling targets when it becomes a member, but the EIB-financed Marguerite II Fund has remained a shareholder in the project company.

Many private equity funds do disclose their investments. But for lending through commercial or state development banks, it is often argued that such loans are commercially confidential. Yet, slowly, the tide is turning. International financial institutions are starting to realise the risks posed by financial intermediary investments, and the EIB is falling behind its peers.

The EIB’s current approach

The EIB’s current Transparency Policy only commits to disclosing summarised information on intermediated lending, with country and sector breakdowns. Its Environmental and Social Handbook 2013 appears to go further, requiring intermediaries to disclose at least environmental information. However, Bankwatch research on commercial and state intermediaries in southeast Europe has not found a single instance of this happening in reality.

In January 2019, Bankwatch lodged a complaint to the EIB’s Complaint Mechanism on the Bank’s failure to disclose information on financial intermediary investments and to contractually require financial intermediaries to do so. This eventually led to the disclosure of the clients and loan amounts for some, but far from all, of the EIB’s intermediated hydropower investments in southeast Europe.

Interestingly, recognising the ongoing controversy around hydropower, in 2019, the EIB’s Hydropower Guidelines made a step forward, stating that: ‘Where the EIB is providing financing to an FI [financial intermediary], the FI will disclose the list of hydropower projects it is financing on its website.’

No improvements in the new draft policy

But the EIB’s amended Transparency Policy takes a step backwards compared to this, making no reference to any mechanism by which the EIB will either proactively disclose financial intermediary projects itself, nor by which it will ensure that intermediaries do so – even for high-risk sectors.

In reality, it brings no improvements compared to the current practice of assessing information requests on intermediated lending on a case-by-case basis. This in no way addresses the need to proactively disclose information on sub-projects so that any concerns can be brought forward before environmental or social damage is done.

High time for the EIB to open up on intermediated lending

With its ‘case-by-case, on request’ approach, the proposed draft leaves the EIB far behind its peers. The International Finance Corporation (IFC) and European Bank for Reconstruction and Development (EBRD) have both committed to improve disclosure for financial intermediary loans in higher-risk sectors, while the Asian Infrastructure Investment Bank (AIIB) is currently considering doing so. The Green Climate Fund (GCF) is way ahead of any of these, disclosing all medium and high-risk sub-projects before signing.

The definition of higher-risk sectors varies by bank, but usually includes all projects which are subject to Environmental and Social Impact Assessment, plus other project types which have the potential to cause damage.

Against this background, as well as its aspirations to become the EU development bank, it is imperative that the EIB finally tackles the issue of financial intermediary disclosure. For private equity investments there is no excuse not to require all sub-projects to be disclosed, and for intermediary banks, the EIB needs to at least start with medium- and high-risk projects.

International financial institutions’ disclosure on bank intermediary lending

The EIB needs to commit to proactively disclose basic project information and environmental information on financial intermediary projects, starting with projects appearing in Annex I and II of the EU Directive on environmental impact assessment, as these are the most environmentally risky projects. This should preferably happen before the sub-project is signed, to allow any concerns to be raised by the public at a stage when issues can still be resolved.

This publication was produced in collaboration with EuroNatur in the frame of the joint research and advocacy work on hydropower finance and subsidies.

The right to access information: Transparency is a two-way process

The text was originally published at: https://www.publishwhatyoufund.org

In November 2020 the first Finance in Common Summit took place, and a joint declaration was published by all the public development banks in the world. The preamble of the joint declaration reads as a significant commitment to transparency and inclusive, sustainable development:

“We, PDBs, [also] commit to act as responsible and transparent institutions, and to develop international cooperation, sharing best practices to improve the sustainability, transparency and quality of our financing” and “Particular attention will be paid to community-led development and the respect of the rights of indigenous people”.

Taken at face value it looks like public development banks have turned a corner, but to what extent are these lending institutions really interested in devolving power to project-affected communities, and to respecting their right to access information so they are able to give informed consent for development projects that will affect their lives?

This blog unpacks the reality against the rhetoric of the PDBs and outlines some areas where we think transparency and the right to information need urgent attention.

Transparency and disclosure or the right to information

Transparency and the right to information are distinct concepts, though not mutually exclusive.

Transparency and disclosure are top-down approaches, where power-holders (in this case the PDBs) may bestow transparent open systems on ordinary people and the intended recipients of development projects. The issue is therefore around “power” – who are the power-holders and who are the power-givers?

Access to information, on the other hand, is clearly articulated in Article 19 of the Universal Declaration of Human Rights and the International Covenant on Civil and Political Rights. It’s not an optional “nice-to-have” for development bank project lenders and their clients. Rather, it is an essential tool that bestows a duty on the PDB and empowers ordinary people to demand accountability from governments and publicly funded PDBs. The right to information provides essential facts that benefit communities and makes it more difficult to hide abuses of power and other illegal activities, as citizens can access key facts and data from power holders.

Transparent processes and stakeholder engagement also benefit PDB plans and assessments as impacted communities often possess information and experiences that can inform the better design of PDB projects. For this, timing is crucial – people need to know about the planned developments before the heavy machinery is at their door.

Transparency needs to be a two-way process which allows communities to co-create their development pathways, rather than have projects imposed on them without adequate information.

Fran Witt and Fidanka Bacheva-McGrath

People centred vs client oriented

For project-affected communities, right to access to information is about ensuring that communities have the information, power and resources to determine their own development paths and priorities and can hold PDBs accountable.

In reality, project-affected communities and CSOs often have very limited access to project information, which is in violation of their right of access to information. For example the 2020 IFC/MIGA Compliance Ombudsman Office Review Report asks that the IFC and the CAO clarify circumstances around client confidentiality. It also means that disclosure and safeguard standards are weak, thereby sparing the company from accountability to communities.

PDBs not only have to inform the public of their own activities, but they also should be transparent about the companies, projects, and governments in which they invest. This is where the issue of client confidentiality becomes a sticking point for information disclosure by PDBs, because of concerns that public information could give a competitor an advantage. PDBs need to assess whether to publish information by taking into account the broader benefits of transparency to public trust and markets, and not just commercial harm caused to the contractor.

A new trend is PDB corporate level lending to energy utilities, extractive and agribusiness companies. In such projects, the investment is not directed at specific physical assets, such as mines or meat production facilities, but at debt restructuring or bond issuance. There is a loophole in PDB safeguards and transparency policies, so it is considered that communities who are affected by the client’s operation have no say and can be denied their right to information. This is highlighted in the Compliance Review Report on the EPS Restructuring project and CEE Bankwatch Network blog post.

PDBs also need to create an “enabling environment”, where staff are adequately trained and resourced to carry out inclusive public consultations, ESG assessments, and monitoring and evaluation (and not outsource this work to consultants, private companies or clients), and ensure there are obligations for client compliance.

The weak governance and low capacity of clients, especially public sector borrowers, is also a barrier to transparency when PDBs delegate the responsibility for disclosure on supposedly “low risk” projects. For example, urban modernisation projects with city authorities or public services companies can significantly impact access to shelter and water, but they are considered “low risk”. (A recent CEE Bankwatch Network study focuses on some of the issues this has caused for EBRD and EIB investments in the Western Balkans and Eastern Neighbourhood.) Thus assessments of affordability of public services, or of gender based violence and harassment risks, would not be disclosed to affected people and vulnerable groups. Capacity building for clients and shared responsibility for disclosure are the way forward, in addition to redefining the risk categorisation of PDB projects.

Clients and Financial Intermediaries (FI) should be required to commit to the same publicly available ESG standards of PDBs or national governments (whichever is the stronger). Currently scrutiny of what PDB funds achieve in terms of ESG standards largely ends once funds are provided to an FI and PDBs do not ask for an assessment of development outcomes achieved by a given sub-project. If the right to information is to be respected, then all initial contracts with clients need to be reformed so that they include ESG obligations, and legal right to remedies, as well as stipulating greater disclosure of gender impacts.

Conclusion

The emphasis of transparency in PDB terms is towards the banks and investors and much less towards the right to access to information of communities, and this needs to be redressed. PDBs should therefore reflect on transparency for who and to what end. Transparency needs to be a two-way process which allows communities to co-create their development pathways, rather than have projects imposed on them without adequate information.

Divide and Rule: EBRD and EC decision-making on Corridor Vc South Mostar investments should not marginalise opponents of the valley route

JP Autoceste reported on Friday that “representatives of Serb returnees from the City of Mostar expressed full support for the construction of the subsection Mostar South – Kvanj Tunnel”. This is misleading to say the least. What is worse, it deliberately excludes the view of those opposing the valley route and clearly it attempts to marginalise these people as a result. It is a textbook neocolonial technique to divide and rule (Divide et impera – the maxim thought to be conceived by Philip II the Macedon and used successfully by emperors like Julius Caesar and Napoleon.

In this day and age, especially when dealing with emancipated communities who know their rights, this technique undermines the very concepts of meaningful consultation and inclusive stakeholder engagement. But no surprise, it is just another example when the EBRD diggs deeper when it finds itself in a hole (both Nenskra and Amulsat come to mind as cases where project promoters deepen conflicts in communities instead of looking to build consensus).

Connecting or Dividing

The Bankwatch report “Connecting or Dividing?” summarizes some of the factors that might lead to tremendous impacts on the local population and the environment, such as lack of public consultation and transparency in the process of the route selection, failure to address the needs and interests of vulnerable groups, including war returnees, as well as the risks for the biodiversity of the surrounding ecosystems of the rivers Buna and Bunica posed by the route. The report is the result of the fact-finding mission to the South Mostar section of Corridor Vc conducted by Bankwatch team in October 2020 as well as the following desk research of the Environmental and Social Impact Assessment (ESIA) for sub-section Mostar South interchange to tunnel Kvanj released in July 2020.

The same issue “FBH – Part 3 – Operation Change Report” was on the agenda of the last Board meeting on 10 February but the decision on this issue was postponed. This happened not without the help of Bankwatch and local community representatives who consolidated advocacy efforts to persuade the Board to suspend the decision on the South Mostar section loan for Corridor Vc. Bankwatch released a letter to the EBRD Board members following the response from the EBRD Management regarding our report. The request is for the compliance review on the project to run its course.

Accountability and redress at work

Right now the EBRD’s Independent Project Accountability Mechanism (IPAM) is in the middle of a compliance assessment, part of a compliance review, which should analyze the current project compliance with the EBRD policies and standards.

IPAM is supposed to release its Compliance Assessment report in March and commence the review in April. The delay of the loan approval until the IPAM comes up with its recommendation is important. In case IPAM identifies non-compliance, the EBRD should take actions to deliver redress and bring the project into compliance with its environmental, social and transparency standards. In view of the alleged shortcomings of the public consultations to date, this can be an opportunity to take into account the interests of the local affected communities and conduct proper public consultations. It will also allow for a more thorough environmental and social impact assessment and mitigation planning, in order to prevent the negative impact on the critical habitat and vulnerable people.

IPAM has a clear mandate to request a pause in the decision-making, as the EBRD’s Accountability Policy states:

“at any time during the processing of a Request, IPAM believes that serious and irreparable harm will be caused by the Bank’s continued processing of the Project or disbursements in respect of the Project, IPAM may make an interim recommendation for remedial actions by the Bank, including a suspension of further Bank processing of the Project or the suspension of disbursements. ”

IPAM should warn the Board of the serious and irreparable harm that can be caused on the local communities, if the EBRD and its client will not take immediate actions to include all stakeholders in a transparent and meaningful consultation.

It is of crucial importance to restore the trust of the local community in the EU decision-making mechanisms and the safeguards of the EBRD, as the international community is contributing to the implementation of strategic projects, like Corridor Vc, and the development of post-war Bosnia and Herzegovina. European and multilateral financing should not allow the destruction of what was rebuilt with tremendous efforts of the international community and the local people’s own resources. An alternative does exist and EBRD decision-makers need to explore its viability as a way to protect local communities and nature from further harm.

Public partnership is a precondition for a green recovery

Bankwatch, together with the Green 10, have submitted an open letter to the vice-presidents of the European Commision demanding stronger guidance and enforcement of the public partnership principle by Member States during the ongoing recovery fund planning.

Member States are now drafting their recovery plans and outlining how they intend to spend EU funds for investments and reforms to deliver a green and digital recovery. These should be submitted by 30 April, after which the European Commission will assess how well these respond to the green and digital investments and reforms priorities.

Public participation will be a decisive part in delivering this green and sustainable recovery across Europe. Giving citizens a strong role in the selection and development of future investment priorities will in turn allow the public to really drive the environmental, climate and biodiversity ambition that is currently lacking. Citizen ownership of this transition will be especially important for the younger generations, who will be covering the debt and inheriting the consequences of the political choices made today.

Lacking guidance

Yet so far, the European Commission has only released unclear guidelines mentioning that Member States “should” conduct public consultations, without committing to refuse the plans if they were not properly consulted. There is also no obligation for Member States to conduct Strategic Environmental Assessment, usually required to determine whether activities and projects financed by EU funds and investments will have a significant adverse impact on the environment, a serious concern given the rushed and hasty nature of this investment programme.

Both Member States and the Commission have a political incentive to quickly greenlight projects in order to get investments flowing rapidly, thus resulting in plans which will not achieve the environment, climate and biodiversity objectives and instead result in lock-ins in the very near future.

Throughout this region and beyond, the consequences of inadequate public participation and consultation are becoming clear. The draft plans that have been released only reflect the view of a few government-aligned state actors, neglecting the broader needs of the public and the environment. For instance in Romania, the plan foresees considerable funding for the refurbishment and modernisation of existing hydropower capacities, which completely overlooks the country’s potential of other, more environmentally-friendly renewable energy sources.

Why this matters

Our analysis from November 2020 already found that the proposed plans fall significantly short of the EU’s much needed 2030 energy and climate targets, a direct result of failing to consult with the public and stakeholders. Unfortunately, there has been little improvement since then. Even though new draft plans are being constantly released, they are still not being properly consulted with the public, consequently falling short on environmental ambition.

The clock is now ticking for significant improvements to be made. The next few months will be a make or break moment; without citizen scrutiny and oversight over planning and implementation, Member States will use these funds to further finance business as usual projects, severely impeding the EU’s key environment, biodiversity and climate objectives.

We must not use the extraordinary funding now available to invest in unambitious solutions. The first step to avoiding this is by allowing citizenship and stakeholder engagement in the making of these plans to help recover from the COVID crisis while opening better and more sustainable prospects for future generations.

12 years and counting: Pollution control investment at Bosnia’s Ugljevik coal plant still showing no results

The Western Balkans’ highly polluting coal fleet needs to be phased out as soon as possible, but given coal’s high share of generation in some of the countries, interim pollution control investments are still needed in selected plants. Top of the list is the Ugljevik power plant, in Bosnia and Herzegovina, which is among the region’s most polluting plants in terms of sulphur dioxide.

Yet 12 years after the financing contract was signed, the much anticipated operation of the desulphurisation (de-SOx) equipment at the Ugljevik power plant, in Bosnia and Herzegovina, is becoming a test for everyone’s patience. It was meant to help bring the plant into compliance with the legal emission values, but it seems this is not going to happen any time soon.

Financed by a loan from the Japan International Cooperation Agency (JICA) signed as long ago as 2009, works on the de-SOx equipment started only in 2017 and test operation began in December 2019. We hoped that in 2020 SO2 emissions would finally be significantly lower, showing good use of the EUR 85 million investment.

However, in February 2020 it was revealed that there was a technical problem. The plant’s dust filters, overhauled more than three years ago by the Czech company Termochem, at a cost of approx. EUR 10 million, were faulty, and their proper functioning is a precondition for desulphurisation. The plant operator spent some additional EUR 100,000 on a study that would show how to address the problem.

In recent weeks, local media have reported that even further delays are expected, as the plant doesn’t have an operating permit for the new installation. RiTE Ugljevik, the power plant operator, is still seeking “technical assistance” to obtain the permit. This assistance would add some extra EUR 100,000 to the costs of this project, and even in the most optimistic scenario, it is not likely to happen before the end of 2021.

In 2019, the plant’s SO2 emissions breached its individual ceiling by almost 10 times, with over 88 thousand tonnes emitted, and its dust emissions were also double the allowed ceiling.

Modelled health impacts of Ugljevik’s emissions in 2016 – before any of the rehabilitation works had begun – showed the plant could be responsible for as many as 635 premature deaths per year and an estimated economic impact of up to EUR 1.45 billion a year. These numbers are likely similar today, considering the equipment is still not functional.

Governments in the Western Balkans have known since the signing of the Energy Community Treaty in 2005 that they need to take measures to limit pollution from their coal power plants. In 2018, the Large Combustion Plants Directive entered into force in the countries of the Energy Community, but a Bankwatch report from June 2020 showed that sulphur dioxide (SO2) emissions from coal power plants in the Western Balkans, which are included in National Emissions Reduction Plans, breached the combined national ceilings by 6 times, for the second year in a row.

While SO2 pollution in the European Union has significantly decreased in the last two decades, thanks to the very same legislation and strict enforcement, in the Western Balkans only baby steps have been made towards compliance. And even those are not yet delivering results.

Ugljevik’s is the second costly environmental improvement that is failing to deliver results in the Western Balkans.

Serbia took out a USD 293 million loan from the China Exim Bank for a complete overhaul of the Kostolac B1 and B2 coal-fired units in December 2011. This was meant to equip the two units with de-SOx and bring the plant’s emissions in line with the legal obligations under the LCPD. The works were declared completed in 2017, but the plants’ emissions in 2019 were still at 79,113 tonnes, ten times the legal annual ceiling. It is still not clear exactly what the problem is.

Delays in desulphurisation works at the Nikola Tesla A power plant in Serbia are also unnecessarily prolonging the plant’s health impacts. A loan for a desulphurisation project was signed in 2011, but the announcement of the start of works only came in 2019 and according to the project’s financier, Japan’s Export Credit Agency, rehabilitation would only be finalised by 2022.

Such blatant wasting of public money and disregard of laws call for decisive and immediate action. Earlier this month, the Energy Community Secretariat issued a warning to all four Western Balkan countries which operate their coal power plants under the National Emissions Reduction Plan (NERP) derogation over their failure to comply, and a formal infringement procedure is expected to be initiated soon. Those responsible for failed projects and disregard for the rule of law must be held accountable. But the pollution also needs to be cut immediately. Until the overhaul projects start delivering results, the only solution to limit these plants’ harmful health impact is to reduce working hours in order for them to remain within their annual emissions ceilings.

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