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(Corrects date to April 26)
* New funding for coal-burning utility agreed in February
* Warsaw's commitment to coal expansion lowers risk for investors
* Lenders have pledged to shun coal for sake of climate
* But coal-burning utilities can still borrow for other purposes
By Agnieszka Barteczko and Barbara Lewis
WARSAW/LONDON, April 26 (Reuters) - Many Western banks and finance institutions have pledged to divest from coal, but this has not stopped at least one Polish utility that is expanding its use of the fossil fuel from securing funding through banks and the European Investment Bank.
The institutions say the money will not be used for coal-related projects, but campaigners say it will in effect free up other funds to go into expanding coal-fired power stations, making a nonsense of the pledges.
Furthermore, the difficulty of making a profit from coal-fired electricity appears to play little or no role in lending decisions, reflecting the fact that Warsaw has set coal-burning targets for the utilities as a way to protect 80,000 jobs in Poland’s coal mines.
Public pressure in the West to stop funding the most polluting of fossil fuels was at its greatest around the time of the U.N.-sponsored Paris Agreement on climate change in December 2015, resulting in numerous pledges to quit coal.
On the surface, this was a blow to the newly elected Law and Justice government's plans to support the building of new coal-fired power stations.
But the government's commitment to its coal sector, which shows no sign of diminishing, has in effect reduced the risk of investing in it.
The power company Energa, which is reviving a project to build a 1 GW coal-fired power plant in Ostroleka, northeast Poland, issued a 300 million euro ($324 million) eurobond in February, with the help of JP Morgan Chase and BNP Paribas.
JP Morgan Chase said it had stated the bond could not be used for coal, while BNP Paribas did not respond to a request for comment.
BNP Paribas has previously said it will no longer finance coal-fired power plants in high-income countries, and will only support coal in emerging economies on certain conditions.
Asked if the borrowing would help to build the Ostroleka plant, which would power 200,000 apartments, Energa said it would be spent on "general corporate needs" and distribution.
It also said it was planning to issue hybrid -- debt and equity combined -- bonds, backed by the European Investment Bank.
The CEE Bankwatch Network, a non-government body that monitors financial institutions' activities in central and eastern Europe, says there is no guarantee that Energa's bonds will not be used for coal-burning.
"The EIB loan could eventually help the company finance its controversial new 1,000 MW coal-fired power plant in Ostroleka," Bankwatch said.
It has written to the EIB asking it not to finance Energa unless the company shelves plans to build Ostroleka, which will burn up to 2 million tonnes of coal a year from the state-run mining firm PGG, Poland's biggest.
But an EIB spokeswoman told Reuters the bonds had been approved by the bank's board of directors and should be signed off in the coming weeks.
She said the financing was exclusively for the modernisation and extension of Energa's distribution network in 2017-2019. This is before the planned start of construction on the Ostroleka plant, which is due to come online in 2023.
Several European banking sources, who spoke on condition of anonymity, said it was clear that lending to one part of an integrated utility could free up funds in another.
"Banks agree to provide financing for energy groups only on condition that it will be spent on distribution networks or renewables. But this helps the energy companies to find money for the coal projects," one of the sources said.
"The people working in banks have their goals, too. If they have an opportunity to win a big financing project, they often go for it, especially since there is plenty of money on the market that needs to be spent."
And the economics of coal appear to play only a secondary role for the banks.
Bartlomiej Kubicki, analyst with Societe Generale, said that, with current carbon emission permit prices, electricity would have to fetch 200 zlotys ($50.58) per megawatt hour for a coal-fuelled power plant to break even in Poland, well above the current power exchange price of around 160 zlotys ($41.22).
But at a conference last month, Deputy Energy Minister Grzegorz Tobiszowski said: "We promised that we will make coal mining, which is and for years will remain the basis of Poland's energy, profitable, competitive and developing. We believe that Polish coal mining has the potential to become the basis for a modern Polish economy."
To encourage utilities to invest in new coal-fuelled power stations, Poland has announced plans for a "capacity market", effectively a subsidy that rewards power producers not only for the electricity they generate, but for the capacity they hold.
A draft law on the plan is expected to be ready around June, although it could run into opposition from the European Union.
PGE, Poland’s biggest power company and owner of the world's biggest lignite-coal-fuelled power plant in Belchatow, has a 34 billion zloty ($8.7 billion) investment plan, which includes the construction of a 1.8 GW coal power plant in Opole by 2019.
The firm, whose operations also include power distribution, secured a large amount of funding just before the Paris Agreement was signed, in the form of two bonds program worth 2 billion euros and 5 billion zlotys ($1.3 billion) in 2014 and September 2015 respectively.
But even since Paris, PGE spokesman Maciej Szczepaniuk said that, "despite the intensive black PR, we have not observed a deterioration in our cooperation with banks".
PGE and the state-dominated gas company PGNiG were among state-run companies that last year helped to bail out PGG, the coal miner.
PGNiG chief financial executive Michal Pietrzyk said the move "did not have a negative impact on our relations with banks".
However, there are some signs that foreign investors cannot always be won over.
The utility firm Tauron, admittedly Poland's most indebted energy firm and the one with the oldest assets, says it has begun to find financing difficult.
"Whenever we approach a financial institution, the first question is about coal," said its chief financial officer, Marek Wadowski.
He said the company had turned to environment-linked "green bonds" to finance wind farms and distribution links.
"Our aim is to improve our image outside Poland, as we realise we are not positively perceived." (Additional reporting by Marcin Goclowski in Warsaw and Susanna Twidale in London; Editing by Kevin Liffey)