EIB hints that it will fund energy infrastructure shortfall

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This article is part of our special report Efficient EU budget 2014-2020.

SPECIAL REPORT / Officials from the European Investment Bank (EIB) have given the strongest indication yet that they will fill a €3.25 billion hole in EU plans for modernising the continent’s creaky power infrastructure.

Last month, the EU announced a list of 250 ‘projects of common interest’ (PCIs), such as cross-border transmission lines, fuel pipelines and gas storage terminals. 

These would glide through permit-granting procedures in three years, enjoying increased access to preferential EIB loans and capital guarantees, in the form of project bonds, risk capital or enhanced loans.

The €9.1 billion proposals were meant to leverage another €200 billion of private sector revenues, integrate Europe's energy networks and end its ‘energy islands’, thus increasing security of supply.

But in tough budget negotiations, the scheme's funding was cut by over a third, raising questions for some about its viability.

Asked by EURACTIV how much of the shortfall the EIB could stump up, Richard Willis, a bank spokesman suggested that as a "priority" area, it may be a lot.

“Over last five years, the EIB has provided €60 billion in loans to energy infrastructure projects,” he said. “Over the next seven years, I would expect something similar – or more – given the increased lending capacity of the bank, and that a quarter of that is intended to support energy infrastructure.”

Bank lending would be increased by 2017 in ways that leveraged twice as much investment from other sources through mechanisms such as project bonds, he added.

The EIB's statement was welcomed by Darryl Murphy, the partner of global infrastructure at KPMG, global audit, tax and advisory firm tax

"The proposed contribution from the EIB to the priority projects is a positive step and many of these projects will be welcomed by the private sector financing market who are ready to work alongside the EIB," Murphy said.

Following a protracted EIB energy lending policy review this summer, “we would expect 90% of the bank’s energy lending in the coming years to focus on support for renewables and the associated infrastructure,” Willis said. The lion’s share of this would be spent in Europe.

Fossil fuels generation

But green campaigners say that most of the projects singled out by Brussels as PCIs are conduits for fossil fuel electricity generation, whether gas pipelines and storage terminals, or oil projects. 

Some 108 of the PCIs are exclusively gas and oil infrastructure builds, while the rest will often facilitate fossil fuels in more general electricity-based projects.

“These plans are presented as tools to, amongst other thing, facilitate the transition to a low-carbon economy, yet some of the projects could actually compromise Europe’s efforts to limit the impacts of climate change by undermining resilience,” said Martina Mlinaric, a senior policy officer at the European Environmental Bureau (EEB), a green pressure group.

A European Commission report by the consultants Booz and Company, which EURACTIV has seen, describes the scenario chosen for gas demand in the years to 2030 as “aggressive, given the recent developments of the European market”.

The EU expects gas demand to increase almost twice as fast, as the International Energy Agency does, and this expectation informs the PCI selection process.

Yet “a high demand scenario will overestimate the need for infrastructure and a low scenario will underestimate this need,” the paper says. Europe’s gas industry is currently losing a market turf war with cheaper US coal imports, partly due to its index linkage to oil.

Although it emits around than half the carbon dioxide of coal or oil, gas still pollutes much more than renewable energy sources.

As well as renewables, Willis said that the EIB was mandated to fund energy security and storage projects in its lending criteria. But this is not the only bone of contention facing the PCIs.

'Controversial projects'

Environmental hackles have also been raised by alleged secrecy in Brussels about project selection and the inclusion of projects such as one creating reservoirs in a pristine part of the Austrian Alps, which critics say could damage biodiversity and local livelihoods.

“We have to tackle climate change, secure our energy supplies and protect nature,” said Ivan Scrase, a senior officer for BirdLife. “We need some major energy investments, and that requires popular support, but what we don’t need is lists containing lots of controversial projects drawn up hastily behind closed doors.”

The PCIs, which will be updated biannually, will benefit from streamlined environmental assessments, amongst other things.

Niina Honkasalo, an adviser to Europe’s electricity association, Eurelectric, told EURACTIV that “in the long term we think it is important that there is progress on the power sector infrastructure as it is needed to integrate renewables.” She declined to comment on whether the proposed share of gas and oil projects was appropriate. 

Smart grids

Some clean energy enthusiasts were disappointed by the EU proposals neglect of smart grids.

Willis said that smart grid initiatives would remain a “key focus” of EIB lending, even though just two of the 250 projects in contention for a place on a final list to be announced in 2014 will be smart grids. 

“I can’t comment on Commission funding,” he said, “but we clearly recognise the contribution of smart grids elements, and the recent large loans to utility companies in Europe which have covered smart grids.”

“There may well be larger (EIB) lending which will focus exclusively on smart grids,” he added. “In our discussions with utilities across Europe, smart grids are clearly a focus.”

Darryl Murphy, the partner of global infrastructure for KPMG sent EURACTIV a statement saying: "There remains a large amount of private capital to be invested in the form of both debt and equity and the current market frustration across Europe ironically remains the lack of dealflow. However, the key to many of these projects is to establish the optimal regulatory and delivery methods to support these projects, if the projects are well structured then the financing will follow. It is also important to focus on the funding of these projects ie who will actually pay for the infrastructure and in most cases the answer is the consumer and hence Governments need to be clear in how this is articulated to their citizens."

EU leaders agreed in December 2008 a fiscal stimulus package representing around 1.5% of EU GDP, or €200 billion. The package was adopted on the basis of a European Commission proposal presented the month before, and which appears to have contained the genesis of money announced in the Commission's infrastructure plan.

This proposed that, for the first time, the EU should spend €9.1 billion from the 2014-2020 budget to leverage the much-greater infrastructural investments needed. However, in tough budget negotiations, a third of the proposed sum was cut.

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