On 17 November 2015, members of the Organisation for Economic Cooperation and Development (OECD), which are party to the OECD Arrangement on Officially Supported Export Credits (the Arrangement), agreed to a new sector understanding that limits the availability of export credit finance for less environmentally friendly coal-fired power projects (the New Sector Understanding). The New Sector Understanding is due to come into force in January 2017.
The members of the OECD that have signed up to the New Sector Understanding are Australia, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland and the United States. The New Sector Understanding is likely to have a notable effect on the availability and terms of OECD export credit financings.
However, it remains to be seen whether local commercial banks and development finance institutions in countries that are party to the Arrangement will align their approach to financing coal-fired power projects with that of the participating OECD export credit agencies.
In addition, given that there are only certain OECD export credit agencies which are party to and bound by the New Sector Understanding, project companies may still seek export credit financing from OECD export credit agencies which are not bound by the New Sector Understanding, or from countries like China and India.
The New Sector Understanding distinguishes between different types of coal-fired power projects. For instance, distinctions are made between:
- size: Large (>500MW), medium (≥300 to 500MW), and small (<300 MW) coal-fired power projects;
- technology: Ultra-supercritical, supercritical and subcritical technology; and
- development: The levels of development in the project country.
The limits imposed by the New Sector Understanding can be summarised as follows:
- where a coal-fired power project utilises ultra-supercritical technology, it remains eligible for export credit financing subject to a maximum 12-year repayment term, irrespective of the size of the plant;
- where a coal-fired power project utilises supercritical technology, medium and small plants will be eligible for export credit financing, provided that such support is subject to a maximum repayment term of 10 years and the project satisfies one of the applicable location criteria; and
- where a coal-fired power project utilises subcritical technology, small plants will be eligible for export credit financing, provided that such support is subject to a maximum repayment term of 10 years and the project satisfies one of the applicable location criteria.
At present, it is not clear whether the New Sector Understanding will have the desired effect of facilitating a movement towards more efficient and cleaner power generation technologies. Local commercial banks and development finance institutions in countries that are signatories to the New Sector Understanding may see a spike in demand for coal-fired power project financing, which they may be more than happy to meet. It is also possible that those OECD export credit agencies not bound by the New Sector Understanding, or countries without an export credit agency, will increase funding to the sector, both of which would dampen the affect of the New Sector Understanding.