The proposed 600MW coal plant at Termoelektrarna Sostanj in Slovenia will replace five less-efficient units, which had reached the end of their lifespans.
But it will burn lignite – a high-carbon brown coal – in quantities sufficient to use up all the country's permitted carbon emissions quota by 2050, according to Jernej Stritih, director of Slovenia's governmental office for climate change.
The EU's 2050 roadmap envisages an 80-95% reduction in greenhouse gas emissions by all member states.
Two thirds of the Sostanj project's €1.2 billion cost will be accounted for by a €550 million loan from the European Investment Bank (EIB) and €200 million of loans from the European Bank for Reconstruction and Development (EBRD), under the EU's Emission Trading Scheme (ETS).
EurActiv understands that the decision at the EBRD was taken only after a lively discussion which ended in disappointment for the team of economists who initially reviewed the Sostanj modernisation plans.
Objections were raised about the impact of such funding on the development of renewable energy in the Balkans and Sostanj's lack of connectivity to regional electricity grids.
For the EIB, the project would lead to a 28% reduction in carbon intensity, compared to the five units it was replacing, and so was more energy efficient, said Ducan Ondrejicka, an EIB press officer.
In August 2010, the ex-Slovenian prime minister Anton Rop was appointed vice-president of the European Investment Bank. Ondriejicka said the decision was related to an agreement made to appoint vice-presidents from new member states in 2004.
"This was not a matter for the bank but the member states," he said.
Piotr Trzaskowski of environmental pressure group Bankwatch described the European funding of Sostanj as "outrageous".
"They're discussing a national climate strategy in Slovenia but if this project is built, long-term de-carbonisation won't make any sense," he said. "It will just be dirty business as usual."
Fears are also rife that a green light to the project could open the door for similar funding of plants in neighbouring countries such as Poland. If that happened, "it would make a laughing stock of the EU's climate goals," Trzaskowski said.
So far though, no European banks have offered Poland funding and, as one banking source put it, "private investors can see which way the wind is blowing on coal plants".
Gridlock in parliament
The Sostanj modernisation is currently gridlocked in Slovenia's parliament, where it has become a political football between the governing party and the opposition. A parliamentary vote is expected later this month.
"We obviously would encourage member states to move to the cleanest technology possible and to meet all their targets," EU Environment Comissioner Janez Potočnik's spokesman Joe Hennon told EurActiv.
"But the point is that it is not breaking any laws and so it is up to the member states," he added.
The European Commission has publicly ruled that the Sostanj plant does not breach the Environmental Impact Assessment Directive.
Behind the scenes though, the Slovenian commissioner is thought to oppose the financing of such coal plants, which he views as counter to the EU's 2020 objectives.
Diplomatic sources suggested to EurActiv that larger member states had put pressure on Potočnik during past furores over coal subsidies.
EU clean bill of health
But with Sostanj, Hennon stressed that the EIB had already given the plant a clean bill of environmental health.
"The bank is supposed to have a structured view on all the investment criteria and if you're eligible for its funding then you need to be using the best available technology," he said.
He added that when carbon capture and storage (CCS) technology became commercially available, the Commission would expect Slovenia to make use of it.
Environmentalists question whether the current state of the technology – and Slovenia's geology – would ever allow CCS to be deployed at Sostanj.
For the moment, the funding of the project under the EU's emissions trading scheme (ETS), which was intended to encourage moves toward clean energy, is only stoking disenchantment among the Slovenian environmentalists who were supposed to be its allies.