No fewer than five new coal-fired power plants, most of them potentially funded by Chinese state banks, are being considered in Bosnia & Herzegovina. Two of these projects – the seventh unit at the existing Tuzla plant and the brand new Banovici plant – are just 30km from each other, raising serious questions about their economic rationale. 

From the Chinese side the rationale is clear: industrial over-capacity at home has forced its engineering conglomerates to seek out opportunities abroad, resulting in intense competition to build new power plants even in the small Balkan economies. 

It’s less clear how Bosnia, population 3.8mn, which already produces more electricity than its needs, can afford the new power plants currently being promoted, even if only some of them get built. Its government is keen to invest into new capacity both to replace ageing infrastructure and to further increase exports. However, information on the economics of the new plants, especially taking into account carbon costs, as well as their environmental impact, has largely not been disclosed. 

Neither Tuzla 7 nor Banovici is currently under construction but, after switching adherence from one project to the other for several years, the Bosnian authorities appear equally keen on both Chinese-funded projects. 

A consortium comprising China Gezhouba Group and Guangdong Electric Power Design emerged as the preferred bidder for Tuzla 7 back in 2014, after Japan’s Hitachi withdrew from the race. State power utility Elektroprivreda Bosne and Hercegovine (EPBiH) signed an engineering, procurement and construction (EPC) contract with the consortium followed by a framework loan agreement with Chinese Exim Bank. 

Numerous questions surround the Tuzla 7 project, not least how the construction price was brought down from the original €785.7mn to the €722mn more recently stated by EPBiH director Bajazit Jašarević. Hitachi dropped out, at least partly because of the lack of economic feasibility, though also because of the political upheavals in the country at that time. 

Yet arguably the most serious problem facing Tuzla 7 is the plan for another 350MW plant at the nearby Banovići mine, also in the Bosnian Federation. Another state company, RMU Banovići, is understood to want to build the plant to ensure there is a buyer for its coal, and signed its own agreement with China's Dongfang in 2015, as the company beat its compatriots Shanghai Electric Group Company and China Gezhouba Group Company for the deal. Dongfang said at the time the agreement was signed that it would bring “impetus to the economic advancement of B&H as well as wellbeing to local people”.

However, the plans for the two almost adjacent projects were heavily criticised in a May 2017 Bankwatch report. “There appears to be a serious lack of energy planning and co-ordination between the Tuzla 7 and Banovići projects. It is very unlikely that two plants within just a few kilometres of one another can both be feasible, yet the [Bosnian Federation] government has so far supported both projects,” the report says. 

The watchdog’s research coordinator Pippa Gallop describes the two as a “strange pairing”, telling bne IntelliNews, “There is no justification for having both”.

What’s especially perplexing is that both projects are backed by different Chinese companies, and have loan offers from two different Chinese policy banks, apparently acting in direct competition with each other. This is despite the fact that the so-called “policy banks” – banks that are state owned or state controlled – require top-level sign off for their investments. 

“We are seeing fierce competition between these two projects, with two Chinese construction companies backed by different state loans from China … In such a little geographic area, we see a very high concentration of Chinese projects, often in competition against one another,” says Bankwatch public finance policy officer Wawa Wang, who notes that like many of the power plants planned in Bosnia and other Western Balkan countries “the numbers simply don’t add up”. 

Bosnia already has coal-fired power plants in Tuzla, Kakanj, Gacko, Ugljevik and Stanari, while generating around half of its electricity from hydropower. In addition to the Tuzla and Banovici projects, there are also plans for new units at Ugljevik, Kakanj and Gacko, although not all of these are moving forward at the moment.

Chinese investors are again involved. The Ugljevik 3 unit in Republika Srpska is being promoted by Russian billionaire Rashid Sardarov's Comsar Energy, but, if it goes ahead, it would be built by China Power Engineering and Consulting Group Corporation (CPECC). Meanwhile, the recently completed Stanari lignite power plant was financed by the China Development Bank and built by Dongfang. 

According to Pippa Gallop of Bankwatch, the plans are “completely out of scale with both energy demand and with what [Bosnia] could actually afford”. With the exception of Ugljevik, the new power plants would be built by state-owned companies and state guarantees for the loans would most likely be required.

Bosnia is the most extreme example of an intense concentration of coal power projects, but new coal power plants are being considered across the Western Balkans, despite requirements for would-be EU member states to curb emissions. They include the new Kostolac B3 lignite plant in northeast Serbia, financed by China Exim Bank and being built by China’s CMEC, and Pljevlja 2 in Montenegro, for which Podgorica is eyeing Chinese funding after the Czech Export Bank said it would not back the project. There are also plans for a new unit at the Rovinari lignite power plant in EU member state Romania. 

Chinese banks have become virtually the only option for governments and state power companies in countries from the region hoping to find backers for investments in coal capacity, after multilateral development banks decided in 2013 to stop financing new coal-fired power plants. The lack of economic viability has, meanwhile, ruled out financing from commercial banks. 

Chinese banks are not exclusively targeting coal projects; they are interested in a variety of potential investments across the energy and infrastructure sectors. Indeed, in 2016 China became the world's largest investor in renewable energy, putting to work a total of $102.9bn, including $32bn overseas, the Institute for Energy Economics and Financial Analysis (IEEFA) said in a January report. “Chinese companies and institutions are increasingly looking overseas for opportunities in renewable energy development,” the report noted. 

However, with a strong impetus to look for investment opportunities abroad, and local actors eager to secure funding, within the Balkans Chinese banks have effectively become the financiers for coal projects by default. “Most concerning for the Balkan region and beyond is that the financing of state-owned energy companies focusing on coal projects is enabling a very unfortunate trend of Chinese financing dictating the fuel choice of those countries. Without [Chinese] money they wouldn't be able to develop those projects in the first place,” says Wang. 

Even though Chinese banks are wooed by local governments and utilities, these investments – in the Balkans and elsewhere in the world – also have substantial benefits for Chinese companies. With Beijing trying to tackle pollution at home, investments are increasingly being redirected towards renewables and away from more polluting fuel sources. The “war on pollution” has also led to the authorities ordering polluting plants to suspend work to allow them to meet tough emissions targets. 

All this has left its engineering companies in need of new revenue sources, ideally from projects overseas. It’s also part of a broader trend for Chinese companies to seek opportunities abroad since the country’s gradual economic slowdown, as it can no longer rely on growth based on low-cost labour. 

For this reason, according to Wang, Chinese interest in coal power plants even in the tiny Western Balkans economies is intense. “For each of these [coal power plant] projects in the Balkans we saw nine to 11 Chinese companies competing against one another in the first round of the tender,” she says. 

“That goes to illustrate there is a very urgent need for China to export its over-capacity especially in the power generation sector, considering China is reining in its own operation of power plants and coal mines … Obviously all this equipment needs to get built somewhere else.” 

This is not limited to the Balkans, according to Wang, with Southern Asia (especially Pakistan), Southeast Asia and African countries “seeing a similar tend in countries with indigenous coal or coal ports, which allows very uneconomic projects to take place … Chinese coal projects are simply mushrooming in Pakistan – which relies on imported coal – after the signing of the China-Pakistan economic corridor agreement.” 

This is in contrast to the recent rhetoric from China of its commitment to fighting climate change and speeding up the shift away from fossil fuels, after President Donald Trump announced the US would withdraw from the Paris climate change agreement. The EU and China responded by affirming their commitment to the agreement, and on June 12 China even signed a low-carbon agreement with the US state of California, bypassing Washington.

However, while China is investing in renewables and cutting back coal generation at home, state-controlled banks continue to fund new coal power plants abroad. “There is definitely a schism between what Beijing is saying on the record, and its financing and enabling the export of the coal industry and equipment overseas,” comments Wang. “We are not seeing [Chinese] statements and aspirations transposed into operational policies.”

It’s not clear if or when Beijing will act decisively to rein in financing for coal projects abroad, given its commitments to addressing climate change. For now, the economic rationale for Chinese policy banks to invest into Balkan coal projects remains strong; the longer term economic and environmental consequences for local economies will most likely be less positive.