Power Banking

Power Banking

A major showdown is under way at the World Bank over a coal-fired power plant under construction in South Africa, which if approved would be the largest and dirtiest investment project the bank has ever financed. The fight pits big developing-world governments and economic development advocates, who argue that the plant is essential to growth and poverty reduction, against those worried about climate change, who contend that the bank should not support carbon-spewing power.

The bank’s shareholders — primarily developed-country governments — are caught in between. Their vote on the $3.75 billion package, expected April 8, will not only determine the course of this one project, but will influence how global institutions balance their current core priorities with climate change going forward. The debate raging over this plant is a case-study in how multilateral organizations adapt (or don’t) their central missions to the emerging focus on climate change. How will these global heavyweights balance their primary goals — for the World Bank, enabling development — against the trade-off of pumping more carbon into the atmosphere? In this case, the bank’s shareholders should say yes now, but reinforce a cleaner future direction.

The fight over the Medupi plant, a 4.8-gigawatt behemoth — equal to more than 10 percent of South Africa’s current generating capacity, roughly equivalent to five nuclear plants — is unfolding against the backdrop of two crises. The first is a crisis in South Africa’s electricity sector. The country is plagued by chronic power shortages, which are only projected to get worse, crippling economic growth.

When plant construction started in 2007, Eskom, the South African utility that is building it, expected to pay for it through a mix of rate increases, government money, and private financing. But the 2008 financial crisis, combined with mismanagement and poor planning, has left the project unable to tap sufficient private capital. As a result, Eskom turned to the World Bank to keep construction on track.

If this were the entire picture, the case for approving the loan might be relatively straightforward (though mismanagement and corruption would still have to be taken into consideration).

Instead, the debate over Medupi’s fate is unfolding against a second crisis in global climate-change policy. Governments are struggling with the task of shifting their economies onto a cleaner, less carbon-intensive trajectory, and the World Bank, with its dominant position in shaping developing-country economies, could be a critical tool in that effort.

Given that, backstopping Medupi would seem to be taking things on the wrong track. Indeed, many argue that the World Bank should instead fund a mix of renewable energy and energy-efficiency projects to close South Africa’s power gap.

This is superficially appealing, but it is the wrong way to go. There are simply no alternatives that could provide power at anywhere close to the same cost as Medupi, particularly given that the plant is already partially built. Moreover, the relatively small scale of the renewable energy business (particularly in Africa) would make it impossible to deliver the same capacity as Medupi in the same amount of time.

Perhaps surprisingly, the World Bank loan would also deliver real if admittedly limited benefits for renewable energy. Eskom’s original project was focused purely on coal. The new loan, in contrast, would include 100 megawatts of wind and 100 megawatts of solar energy (each equivalent to about a tenth of a nuclear plant).

Although a fraction of the generating capacity of the overall project, these numbers are big in the renewable-energy world. The proposed solar project, in particular, would be the biggest solar-power project connected to the grid in a developing country. Projects of this size would help build technical and regulatory capacity in South Africa, bringing down the cost and risk for future renewable-energy projects, thereby encouraging South Africa’s clean-energy transition.

If the World Bank refuses to fund the Medupi plant, the most likely outcome isn’t more clean energy, but rather a financial arrangement that neglects it. European export credit agencies might step in, but public opposition would probably be strong. China might come to the table, but most likely without any clean-energy benefits. Alternatively, South Africa could try to fund the project itself, but at the expense of other development efforts (and without the renewable-energy components). The bank, meanwhile, would damage its relationship with South Africa and much of the broader developing world, making it more difficult for it to engage developing countries in promoting climate-friendly growth.

The bank’s shareholders should thus say yes. Yet in a world where climate is becoming increasingly important, it cannot let the Medupi situation be the template for future business. Shareholders should emphasize that this is an exceptional circumstance: To the extent that they are necessary, major coal-fired power projects in wealthier developing countries normally can, and should, be financed through private banks.

The World Bank should gradually transition to a model that supports expanded generation only in states that do not promote inefficient consumption — something South Africa has failed to do by subsidizing a bloated industrial sector. Indeed the bank should consider further linking its support for energy projects to pro-clean-energy policy reforms in recipient countries, in order to boost its long-term impact.

Such steps are important not only in their own right, but because other international institutions will undoubtedly look to the bank for cues. Last December’s U.N. climate negotiations in Copenhagen made clear that there will be no single answer to the climate challenge. A proliferation of initiatives and institutions is much more likely. And because new institutions are so difficult to establish, policymakers will likely turn to existing ones, such as the World Bank, for solutions.

We recently published a study that surveys existing institutional capacity to deal with climate change. Two findings stand out: There is an extraordinary amount of capacity out there waiting to be tapped — but doing so will increasingly create tensions of the sort that the World Bank is addressing this week.

The World Trade Organization (WTO), for example, will need to balance an open trading system with carbon tariffs that might be part of national climate-change policies. The G-20 will decide how much time to devote to climate as it still struggles to get a grip on the global financial system. Development efforts by organizations like the U.N. Development Programme will need to incorporate climate risks into their activities, as will disaster relief agencies like the World Food Programme. The International Atomic Energy Agency will face pressure both to facilitate the spread of near-zero-emissions nuclear power and to clamp down on nuclear proliferation.

These institutions will need, in each case, not only to balance competing priorities, but also to maintain strong relations with the states they seek to influence. Just as the World Bank would have little leverage over South Africa if it alienated it through its decision on Medupi, the WTO will have little influence on states that decide that the WTO is out of touch with current reality. The G-20, meanwhile, would have little power if its developing-country participants decided that it was focusing too much on climate change and not enough on their own immediate economic priorities.

All of which reinforces the importance of this Thursday’s vote on Medupi. The world will not succeed at tackling climate change if it attempts to make it its sole priority — but it will also fail if its international institutions continue with business as usual. This Thursday’s vote, and the World Bank’s strategy going forward, will be an early indicator of how the world will handle this tension. But it will certainly not be the last time it will need to be addressed.