Comments on the Second Draft of AIIB Energy Strategy

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The Asian Infrastructure Investment Bank (AIIB) issued the AIIB Energy Strategy (Issue Note for Discussion) in October 2016 and held two rounds of public consultation in late 2016 and early 2017 respectively.We believe the document will play a constructive role in AIIB’s future energy investment. We expect AIIB to remain open to discussions, participation and supervision and joint research of stakeholders, just as the approach it has taken in holding the public consultation across the world.

Greenovation Hub

March 9, 2017

The Asian Infrastructure Investment Bank (AIIB) issued the AIIB Energy Strategy (Issue Note for Discussion) in October 2016 and held two rounds of public consultation in late 2016 and early 2017 respectively. In December 2016, AIIB extracted and published the core elements of all 44 submissions. In January 2017, AIIB issued the revised Energy Strategy (hereinafter referred to as the “draft”). We noticed that the draft expanded from 12 pages to 25 pages, indicating that AIIB has done substantial supplementing and revising work. We appreciate that AIIB held two rounds of public consultation, paid great attention to the comments of the first round and made revision and response accordingly. Our comments on the second draft are as follows:

 

1. On objectives and guiding principles

We appreciate AIIB's support for international commitment, including SE4ALL, the Paris Agreement and the SDGs (especially the Goal 7 to ensure affordable, reliable and sustainable and modern energy access for all). We applaud AIIB’s in-depth understanding and analysis of energy status in Asia. In the draft, AIIB highlights the features of energy sector of this region -- rapid growth of fossil energy output, low yet surging per capita energy consumption and high carbon intensity. Like in most non-OECD countries, Asia’s top priority is to ensure affordable, sustainable and reliable energy supply. Therefore, Asia is facing almost all the outstanding energy challenges, including achieving regional sustainable energy supply and reducing pollution and emissions caused by fossil energy use. AIIB’s energy strategy must meet three objectives, namely, securing energy supply, developing clean energy and accelerating the shift towards renewable energy. AIIB has a clear understanding about the current situation.

 

Article 17, 18 and 19 of the draft outlines the goals of AIIB’s energy strategy. However, we believe that the expression is rather oriented towards purposes and norms. Therefore, we suggest AIIB set more specific binding targets and develop an implementation roadmap. As a new multilateral financial institution, AIIB has fully realized the energy challenges in Asia, and thus needs to set more aggressive and quantitative goals, including but not limited to: reducing carbon intensity of this region, cutting the share of fossil fuels in the primary energy structure and increasing the percentage of renewable energy in the primary energy structure. Meeting these quantitative targets hinges on adding renewable energy supply and effectively improving energy efficiency through more proactive project investment.

 

2. On coal power investment

Article 36 mentions AIIB’s attitude towards coal power investment, namely, carbon efficient oil and coal-fired power plants will be considered in the following cases:

  • The project will replace the existing less efficient capacity;
  • The project is are essential to the reliability and integrity of the system;
  • There is no viable or affordable alternative exists in specific cases, particularly in low-income countries.

We also listed coal power investment policies of other traditional multilateral development financial institutions in recent years:

 

 

These coal power investment policies clearly show that the entry into force of the Paris Agreement has accelerated the global action to meet emission reduction goals. Shifting away from fossil fuels, coal in particular, has become the top priority for countries to move towards clean energy. Developing countries including China are also suffering from serious air pollution caused by coal burning. Against this background, coal-related investment, coal power in particular, is highly sensitive. In recent years, multilateral financial institutions have aligned their attitudes towards coal-related investment, which means they oppose this investment in general, but can regard it as a transitional solution based on real development needs. We see this attitude as pragmatic, indicating that many development financial institutions including AIIB have been concerned about the potential financial risks of coal power investment.

The AIIB’s draft lists more specific conditions of making selective investment on coal power projects compared to other three multilateral financial institutions, but clear definition is still absent, which may result in inadequate evidence for making “necessary” coal power investment. We suggest AIIB further define coal power investment decision making, including:

 

 

 

In addition, as de-carbonization sweeps across the globe, coal power is becoming stranded assets in many regions due to energy structural adjustment, rising comprehensive cost and tightening of environmental constraints. We strongly recommend AIIB to step up research of assessment models on the emission level and economic viability of energy investment, and improve the risk management system of energy infrastructural investment. AIIB also touched on the necessity of strengthening assessment research in the draft. We are interested to work with AIIB to improve relevant economic assessment methods.

 

3. On nuclear power

We appreciate AIIB’s attitude of opposing nuclear power.

 

4. On hydropower

Article 34 of the draft outlines AIIB’s attitude towards hydropower, and suggests environmental, social and economic friendliness be taken into consideration. We recommend further clarification, especially the irreversible ecological impact and the tough challenge of massive displacement associated with large-scale hydropower projects. In key transboundary basins of Asia, we suggest not support large-scale hydropower projects. Small hydropower projects must go through strict environmental evaluation and AIIB needs to further clarify the methods, contract organizations and key indicators of environmental evaluation.

 

5. On opportunities and challenges of energy efficiency and power transmission and distribution projects

In its roadmap, AIIB mentions energy efficiency and power transmission and distribution projects. It is really necessary for Asia to step up support for power transmission and distribution projects and de-centralization power system. We appreciate that in the policy document, AIIB not only calls for building more power transmission and distribution projects that are smarter and more disaster resilient, but also demonstrates its willingness to assist relevant countries to meet the goal of application. AIIB has drawn the following lessons on energy financial policies: Power transmission and distribution projects need to integrate technical factors and management, network efficiency and consumer empowerment, going beyond technical and financing issues. Renewable energy and energy efficiency projects (most on the demand side) are often sporadic, which require special technology and financial intermediary agencies. Energy efficiency projects often need financing design according to real situation based on a long-term, comprehensive and elastic energy efficiency framework, and require the participation of local financial institutions. Oil and gas exploitation projects can notably enhance energy security but must be assessed in a cautious and comprehensive way.

 

AIIB places great emphasis on this aspect and recognizes the challenges at the same time. It admits frankly that its capacity is not yet strong enough to provide technical assistance but will bridge the gap through cooperation with various partners. The complex nature of energy efficiency and power transmission and distribution projects requires special teams to make assessment and implement the project. Therefore, we suggest AIIB start to build the team as soon as possible, establish local expert networks in major investment areas and coordinate the work of in-house and local experts. Apart from technical experts, it should also carry out policy dialogue with local partners and provide targeted technical consultation. This is also a good experience of traditional multilateral financial institutions in energy investment areas.

 

6. On relations with other financial institutions and capital markets

 

We appreciate the clear attitude of AIIB of not supporting policy financial instrument or sectoral credit at the preliminary stage of project, which will help AIIB maintain its policy norms and keep a clear judgement of the financial situation of the projects it invest in. However, we believe that cooperation with local financial institution is crucial. For instance, one of the outstanding experiences of the CHUEE energy efficiency financing project of IFC is that through knowledge, experience and financial support, IFC helped local financial institutions play a big role in financing and project management and made good use of local experience. At the meantime, strong partnership with other financial institutions could be risky. For instance, some investment projects are not directly covered by AIIB’s evaluation and risk management. Therefore, AIIB must define boundaries and create a clear work mechanism.

 

Meanwhile, AIIB also welcomes cooperation with existing multilateral development banks to enhance the viability of project investment. It also draws on good practice across the world on environmental and social safeguard policies. We also noticed that in the draft AIIB highlights its expectation to cooperate with GCF and GEF, which is worth recognition. We suggest that AIIB:

  • To maintain dialogue with other multilateral development banks in a wide range of areas regarding tackling climate change and meeting sustainable development goals, and establish and improve its own governance mechanism;
  • To cooperate with local commercial banks prudently, foster partners with shared energy strategy and jointly invest in renewable energy sector to reduce investment risk and remove market barriers;
  • To directly manage environmental and social risks in any cooperation investment project, which is indispensable

 

7. On information disclosure and access to information

 

Regarding private capital involvement and cooperation with other financial institutions as mentioned in the draft, timely and adequate information disclosure and access to information will be conducive to decision making and risk control of AIIB’s energy project investment. This means:

  • For energy project directly invested by AIIB, it should disclose adequate information related to the project and its environmental and social impacts in a timely manner.
  • AIIB should adopt unified and standard information disclosure requirement for all potentially involved partners

We believe that this is crucial for ensuring positive climate, environmental and social benefits and for communities impacted by investment projects. We are willing to work with AIIB to improve relevant information disclosure standards.

 

8. On indicator framework on project input and output evaluation

 

We appreciate AIIB’s proposal of a project input and output framework in the annex and its attempt to include specific indicators. This framework is worth improving and breaking down in practice, including relative level of energy efficiency enhancement, leveraging private capital and reducing investment risks in investment and financing of renewable energy transition. We are ready to perfect this framework with AIIB.

 

In summary, we expect that AIIB will build on the comments and recommendations of various parties so as to finalize and publish the draft at an early date. We believe the document will play a constructive role in AIIB’s future energy investment. We expect AIIB to remain open to discussions, participation and supervision and joint research of stakeholders, just as the approach it has taken in holding the public consultation across the world. In more extensive investment and financing activities, independent and professional third-party organizations can provide verification service and supervision with an environmental and social perspective which is crucial for creating a proper financing mechanism and good project governance. We share AIIB’s recognition of energy and infrastructure challenges in Asia, and we are both committed to meeting the goals in the Paris Agreement. We are ready to discuss, study and improve long-term economic assessment, analysis and evaluation of comprehensive benefits of energy investment and risks and the implementation of policies concerning environmental and social security and information disclosure issued by AIIB. We look forward to meeting our shared goals soon with these efforts.

 

Related Materials:

1. AIIB Energy Sector Strategy: Sustainable Energy for Asia Discussion Draft for Consultation (Jan 2017) (AIIB)

2. Submission of Greenovation Hub on the Establishment of AIIB (G:Hub)

3. AIIB and Global Sustainable Development (G:Hub)

4. AIIB Topic I—A Preliminary Analysis on the Environmental and Social Framework (G:Hub)

5. AIIB Topic II-Partners, First Batch of Projects and Supporting Policies (G:Hub)

 

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