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European Investment Bank Adopts New Energy Lending Policy

On 14 November 2019, the Board of Directors of the European Investment Bank (“EIB”), the world’s largest multilateral bank, adopted a new Energy Lending Policy (the “Policy”), which aims to end EIB investment in the majority of fossil fuel programs by the end of 2021. The Policy signals a change in the flow of capital from multilateral banks into greener energy investments and seeks to incentivize technological innovation. The plan is ambitious and will be a key consideration for energy companies seeking funding from the EIB going forward.

Background: The EIB’s Energy Lending Policy

Over the last five years, the EIB invested approximately $72 billion (€65 billion) in the energy sector, with large sums dedicated to renewable energy, energy efficiency, and energy distribution. EIB’s energy project funding has historically favored renewable projects but has also invested in fossil fuel projects. The NGO Bankwatch estimates that the EIB invested nearly $15 billion (€13.5 billion)  in fossil fuel projects between 2013 and 2018. The recently published Policy, however, marks an ambitious shift away from fossil fuel funding, and towards enhanced environmental sustainability and climate action.

The Policy is best understood against the backdrop of broader EU leadership on climate action. The Policy aligns itself with the goals of the Paris Agreement and praises more ambitious EU goals regarding emissions. The EU has adopted targets for 2030 to reduce greenhouse gases by 40% compared to 1990 standards, to reach a 32% share of renewable energy consumption, and to achieve energy savings and an energy efficiency target of at least 32.5%, although it is unclear what the intended baseline would be for such savings. The Policy shows the EIB’s desire to help achieve these goals and to operate within the legislative framework of EU Directives and Regulations that are seeking to achieve them. While the EIB acknowledges that the majority of investment will need to come from the private sector, it sees its role as a public bank supportive to meeting this challenge. The Policy also highlights the importance of investment outside the EU and uses the UN Sustainable Development goals as a guide for its investments outside the EU.

Policy Highlights: The EIB’s Energy Lending Policy

The EIB highlights four themes which are the core components of the Policy, and which the EIB intends to use for appraising potential projects:

  1. Energy Efficiency: To achieve EU goals and increase energy efficiency investment, EIB will finance up to 75% of the eligible portfolio capital costs of energy efficiency projects (both within and outside the EU), will continue to support small and medium-sized enterprises, and will invest in energy efficient buildings through the establishment of a European Initiative for Building Renovation.
  2. Decarbonize the Energy Supply: EIB, through the support of renewable projects, increased cooperation between EU Member States, and investing in new technologies in conjunction with the Renewable Energy Directive uses the theme of decarbonizing the energy supply in order to meet targets. The EIB’s new lending policies will focus on investing in new technologies with the view to double or triple the capacity in renewable power generation. The early development of new technologies will increase industrial learning and promote future cost reduction in the long term. The EIB also importantly states its support for low carbon gases such as hydrogen, biogas, and synthetic gases.
  3. Supporting Innovation and New Energy Infrastructure: The EIB supports market-driven energy infrastructure and specifically highlights the potential of new technologies in battery storage, demand response, and decentralized energy sources, as well as the use of tailored instruments related to trends in digitalization and decentralization.
  4. Securing the “Enabling Infrastructure”: The EIB states its intention to continue to support electricity transmission and storage projects and says that it will give ‘high priority’ in its investments to projects that will ease the integration of renewables into the electricity market. In addition to this, the EIB will offer support to new and existing gas network projects for the transportation of low-carbon gases such as hydrogen, will finance the expansion and rehabilitation of heat networks, and will provide project preparation and implementation support to public authorities and promoters developing strategies to decarbonize district heating systems.

To meet the EU targets and goals of the Paris Agreement, EIB estimates that approximately $310 billion (€281 billion) must be allocated toward energy efficiency projects within the EU per year, while approximately $438 billion (€396 billion) per year must be allocated towards the second goal of decarbonizing the energy supply. In addition to this, investment in the power grid will need to be increased by 70% in the decade 2021-30 to reach $65.5 billion (€59 billion) per year. The EIB has stated that it will unlock an impressive $1.1 trillion (€1 trillion) between 2021 and 2030, which the EIB considers the minimum amount necessary to meet the EU targets and the goals of the Paris Agreement.

Implementation: Anticipated Financing & Outreach

To reach these goals, EIB is expecting to provide financing both directly through long-term loans and indirectly, through guarantees, equity and receivables financing. EIB will also support new sources of financing such as mortgage-based lending and securitization.

In addition to their financial support for projects in alignment with the Paris Agreement and EU goals, the EIB also supports strengthening dialogue with EU Member States and other actors in the energy sector to create national plans to help EU Member States in making energy transitions and meeting national-level targets.  The EIB also plans to create an “Energy Transition Package” for those EU Member States where traditional energy industries provide local employment, thus easing the economic risks of a transition away from fossil fuels for states which would traditionally struggle with such shifts.

Remaining Role of Fossil Fuels

After 2021, the EIB indicates that it will not finance coal, gas or oil projects.  Coal financing was largely phased out by the last EIB Energy Lending Criteria published in 2013, but the move away from gas and oil projects is a new and more significant shift. However, the 2021 target does not represent the end of fossil fuel funding completely.  As an exception, the Policy permits the continued funding of:  (i) projects already under consideration, (ii) projects on the European Commission list of ‘Projects of Common Interest’, subject to certain exceptions, and (iii) energy producers emitting less than 250 grams of carbon dioxide per kWh.  The EIB also will maintain its support of the development of low-carbon fossil fuel projects and infrastructure, such as hydrogen, biogas and synthetic gas.

Expected Impact of the EIB’s Energy Lending Policy

It is unclear what impact the EIB’s funding shift may have on fossil fuel investments more broadly. Although the EIB’s recent $15 billion (€13.5 billion)  investment in fossil fuel companies seems significant, other investors, including commercial banks, private equity funds and certain global development institutions, are far more prolific in their support.  However, the impact of the Policy goes beyond simple capital flow choices.  The EIB acknowledges that as a public bank, it may invest in areas which the market may fail to consider and thus may close investment gaps currently existing for needed technological innovation.  Also, other multilateral banks may follow the EIB’s lead, causing larger shifts in investment that may eventually be mirrored by the private sector. The EIB’s policy shift, coupled with shifting European climate politics (for example, a spike in climate activism, the prominence of climate debate in recent Canadian and UK elections, and introduction of a European “Green New Deal” proposal) sends an indication of potential upcoming regulatory and financing trends supporting a transition to a more low-carbon economy.

Conclusion

The Policy represents a clear dedication by the EIB to mobilize financial resources to support climate-conscious projects around the world, while acknowledging the continuing importance of supply security, economic growth and social impacts involved in funding.  The EIB accepts the role that natural gas will continue to play in helping to decarbonize the energy sector past 2030, but shows a willingness in its role as a public bank to tackle the climate issue head on by phasing out support for the production of oil and natural gas, as well as traditional gas infrastructure. EIB also intends to focus its attention on the production of alternative low carbon gases and their integration into the energy system. The future effects on private sector behavior and investment remain to be seen, as do the potential actions of other multilaterals and non-EU states. However, the clear alignment of the EIB with the goals of the Paris Agreement and the more ambitious EU 2030 targets could indicate the beginning of further evolution of broader European climate action.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.