China’s export insurance giant is taking a risk on coal

A planned capacity expansion puts the Celukan Bawang project and others at high risk of underutilization.

Worldwide, a growing list of insurers now refuse to cover coal projects, citing risks from climate change and overcapacity. But Sinosure, the sole underwriter of coal-fired power plants along China’s Belt and Road Initiative (BRI), has yet to show any indicator of leaving coal behind.

Backbone of the Belt and Road

China’s foreign direct investment has more than doubled over the past three years, with much of it funneled into energy development. Coal has dominated these investments, combining coal-rich resources in many Belt and Road countries and China’s coal tech.

Observers tend to focus on the role of financiers and power companies in overseas coal projects, but the importance of insurers should not be overlooked. Because insurance is a prerequisite for obtaining a loan on an overseas investment project, support from an insurer is needed for a project to move forward.

State-owned China Export & Credit Insurance Corporation, known as Sinosure, acts as gatekeeper of energy investments along the BRI. Sinosure is China’s only policy insurer to cover overseas coal-fired power projects, meaning that overseas coal power projects require a green light from Sinosure to go ahead. By the end of 2018, Sinosure had underwritten 28 gigawatts of coal power capacity worldwide, exceeding the entire coal capacity of Australia.

Data compiled from CoalSwarm’s Global Coal Plant Tracker and Sinosure promotional materials.

What are the risks?

While Sinosure appears to weigh climate change and overcapacity relatively low in its project assessments, in the longer term, these factors pose a major risk to the insurer.

Governments are increasingly implementing carbon taxes and carbon trading schemes, driving up the operational costs of coal-fired power plants. At the same time, public concern about air pollution is on the rise, adding pressure to tighten standards and phase out highly-polluting projects, as in China. Because this is considered a political risk, losses fall on the insurer.

At the same time, in much of the world, renewable energy is now cheaper than coal. Competition from renewable energy means that coal power utilization hours are falling, and the risk of coal projects becoming stranded assets continues to grow. More than 40% of global coal power capacity operates at a loss, according to a recent study from Carbon Tracker. The authors estimated that this figure could reach 72% in little more than two decades time.

These risks are already visible in Belt and Road countries. One example is Indonesia, where new coal-fired power plants are in the pipeline despite overcapacity. Research from IEEFA shows that plans for coal power expansion in Indonesia would lock energy utility Perusahaan Listrik Negara (PLN) into payments on unused capacity for decades to come.

Sinosure has underwritten at least five coal-fired power projects in Indonesia, including Celukan Bawang coal plant in Bali, which went into operation in 2018. Although current power capacity in Java-Bali is sufficient to meet electricity needs through 2026, more capacity is planned.

The planned capacity expansion puts the Celukan Bawang project and others at high risk of underutilization. If an electricity rate is not paid as agreed upon or a power development plan is changed due to grid overcapacity, losses typically fall on the insurer.

Leaving Coal in the Dust

A growing number of insurers are catching on to the danger of coal. In 2015, French insurer Axa became the first global company to divest from coal, following up with further restrictions on coal financing in 2018. Nineteen other global insurance firms have since followed suit.

Japan’s Nippon Life Insurance announced in July 2018 that it would stop underwriting new coal-fired power projects both at home and overseas. By the end of 2018, three Japanese insurers had divested from coal power.

Because Sinosure is state-owned, its portfolio reflects government strategy rather than solely market forces, and in the short term, it may be able to absorb more risk. But with 28 gigawatts of coal capacity around the world, the potential for Sinosure to see serious losses from coal remains alarmingly high.

On the other hand, the scale of Sinosure’s investment means that even a small internal policy change has the potential to bring major progress. Weighing climate and overcapacity risks more heavily in project assessments could tilt the global balance away from coal.