While the loan is still likely to be approved on April 6 by the World Bank board, it has revealed the deep fissures between the world's industrial powers and developing countries over tackling climate change.

Both camps failed to reach a new deal in Copenhagen in December on a global climate agreement because of differences over emissions targets and who should pay for poorer nations to green their economies.

Some $3 billion of the loan to South African power utility Eskom will fund the bulk of the 4,800-megawatt Medupi coal-fired plant in the northern Limpopo region and is critical to easing the country's chronic power shortages that brought the economy to its knees in 2008. The rest of the money will go toward renewables and energy efficiency projects.

The battle playing out in the World Bank was prompted by new guidance issued by the U.S. Treasury to multilateral institutions in December on coal-based power projects, which infuriated developing countries including China and India.

The guidance directs U.S. representatives to encourage "no or low carbon energy" options prior to a coal-based choice, and to assist borrowers in finding additional resources to make up the costs if an alternative to coal is more expensive.

In a letter to World Bank President Robert Zoellick, board representatives from Africa, China and India said such actions "highlighted an unhealthy subservience of the decision-making processes in the bank to the dictates of one member country".

GOING GREEN

South Africa, together with Brazil, is a leader among developing countries in fighting climate change and foresees a peak in its greenhouse gas emissions between 2020 and 2025. By contrast, the United States is the only major developed nation with no legal target for cutting its own emissions.

To be fair, the Obama administration wants to cut emissions by 17 percent from 2005 levels, or about 4 percent below 1990 levels by 2020, but that plan is stalled in the U.S. Senate.

Britain is better off in lecturing about clean energy -- its emissions were 19.5 percent below 1990 levels in 2008 -- and closure of coal mines and a shift to natural gas primarily for economic reasons explain a large part of the fall.

Eskom has proposed to develop Medupi with the latest supercritical "clean coal" and carbon storage technologies available on the market, which is used by most rich countries.

Still, Medupi will be a major polluter that could make it harder for South Africa to meet its emissions targets.

A U.S. Treasury official told Reuters the United States was in the process of reviewing the Eskom proposal and will develop a position that "is consistent with administration policy and with facts surrounding the project."

World Bank Vice President for Africa, Obiageli Ezekwesili, said South Africa's energy security was key because the country's growth, or lack of it, was felt throughout Africa.

"There is no viable alternative to safeguard Africa's energy security at this particular time," she told Reuters. "This is a transitional investment that they are making toward a green economy and that should count for something."

But the politically connected Center for American Progress in Washington argued in a report last week that the World Bank is a standard-setter for development banks and should push sustainable economic development models in client countries.

"This is a problem for an institution with the moral and financial responsibility to foster large-scale investment in sustainable economic development," it said.

It said the U.S. should press the point in negotiations over a general capital increase for the World Bank, which ponies up billions of dollars a year to fight global poverty.

Environmental groups argue that the Bank shouldn't be allowed to manage a Clean Technology Fund for donors while also funding coal plants that emit tens of millions tons of harmful carbon emissions into the atmosphere.

It is not the first time the Bank is facing a backlash over its support for coal-fired projects. Last year, it backed India's Tata Ultra Mega supercritical coal-fired plant, one of the world's top 50 greenhouse gas polluters.

LOW-EMISSION PATH

Steve Lennon, Eskom's managing director for corporate services, said while Medupi involved a significant chunk of coal, there were also elements of the project that would meet South Africa's Copenhagen commitment.

"The package of projects that we are applying for the funding for is part of South Africa's long-term climate change mitigation scenario, all aimed at putting the country on a low emissions path in the future," said Lennon, who was part of a high-level Eskom delegation who visited Washington recently.

David Wheeler, an environmental expert at the Center for Global Development, said the World Bank should press Western donors to fund the cost gap to help South Africa afford an alternative to coal.

"This recalls a central problem at Copenhagen: ample rhetoric about the need for carbon mitigation in developing economies, but little actual willingness to finance the extra cost of clean technology for countries that remain very poor," he added.

(Additional reporting by Agnieszka Flak in Johannesburg, Editing by Jackie Frank)

Reuters