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f/t >,/+i7Li/C - DRocumentof The World Bank Public Disclosure Authorized FOR OFJICIJALUSIE ONLY MICROFICHE COPY 1eport No. 1OO<-(;IS -ype: (SAR) ReportNo. 10071-CS GRAY, DALE/ X32692 / RI2017 / IA4EE Public Disclosure Authorized STAFF APPRAISAL REPORT CZECH AND SLOVAK FEDERNALREPUBLIC POWER AND ENVIRGNNENTAL IMPROVEMENT PROJECT FEBRUARY21, 1992 Public Disclosure Authorized Public Disclosure Authorized Energy and Environment Operations Division Central Europe Department Europe and Central Asia Region This document has a restricted dIsnibution aid may be a*sedby recipients only in the performance of their official duties. Its contents mnaynot otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT Currency Unit : Koruna (Kcs) USS1.00 = 28.0 Kcs (September 1991) WEIGHTS AND MEASURES 1 Megawatt (MW) 1,000 kcilowatts (103 kW) I Gigawatt (GW) = 1,000,000 kilowatts (106 kW) 1 Terawatt (TW) 1 billion kilowatts (109 kW) 1 Megawatt-hour (MWh) 1,000 kilowatt-hours (103 kWh) 1 Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours (106 kWh) 1 Terawatt-hour (TWh) 1 billion kilowatt-hours (109 kWh) 1 Megavolt-ampere (MVA) = 103 kilovolt-Amperes (103 kVA) 1 kilocalorie (kcal) - 3,968 British Thermal Units (btu) 1 Gigacalorie (Gcal) = 1,000,000 kilocalories 1 Joule = 0.24 calories 1 Gigajoule (GJ) - 239,000 kilo-alori.es 1 Petajoule (PJ) = 1015 joule or 34,129 tons of coal equivalent 1 Terajoule (TJ) = 1012 joule or 34.1 tornsof coal equivalent 1 kilogram (kg) = 2.2 pounds (lb) 1 ton (metric ton) = 1,000 kg = 2,205 lb 1 meter (m) = 3.281 feet (ft) 1 cilometer (km) - 1,000 m = 3,281 ft 1 cubic meter (m) - 35.31 ft3 GROSS BEAT VALUES OF FUELS Hard Coal = 25 GJ/Ton = 5,975 kca!/Kg Lignite - 12 GS/Ton = 2,868 kcal/kg Crude Oil = 11,100 kcal/kg Heavy Fuel Oil = 10,400 kcal/kg Natural Gas = 8,200 kcal/m3 ACRONYMS BCM : Billion Cubic Meters CEZ : Ceske Energeticke Zavody (Czech Power Enterprise) CHP : Combined Heat and Power (plants) CMEA : Council of Mutual Economic Assistance CPP : Czech Gas Company CSFR z Czech and Slovak Federal Republic DH : District Heating EIA : Environmental Impact Assessment ERR : Economic Rate of Return ESP : Electrostatic Precipitators FGD : Flue Gas Desulfurization FME : Federal Ministry of Economy GDP : Gross Domestic Product HOB : Heat Only Boilers ICB : International Competitive Bidding LRMC : Long-Run Marginal Cost mtpy : million tons per year SAL Structural Adjustment Loan SEP Slovensky Energeticky Podnik (Slovak Power Enterprise) SO2 Sulfur Dioxide SPP Slovak Gas Company toe tons of oil equivalent TRANSGAS : Tranzitni Plynovad (Natural Gas Transit Enterprise) UCPTE : Union for the Coordination of Production and Transmission of Electricity VUPEK : Vuzkumny Ustav Palivoeuergetickeho Komplexu (Research Engineering and Consulting Institute) FISCAL YEAR January 1 - December 31 FOR OFFICIALUSE ONLY CZECH AND SLOVAK FEDERAL REPUBLIC POWER AND ENVIRONMENTAL IMPROVEMENT PROJECT Table of ContentB Page No. LOAN AND PROJECT SUMMARY . (i) I INTRODUCTION ............... ... .* 1 II THE ENERGY SECTOR . 4 A. Background. ......... 4 B. Resources and Status of Development ... 4 C. Energy Balance ... 7 D. Energy Sector Institutions ... 8 E. Pricing Issues .1.0. lo ZII THE POWER SUBSECTOR . 13 A. Overview .......... ... .... ... 13 B. Organization ....... ... .. .. ... .. 14 C. Regulatory Framework .... .. .. 16 D. Existing Electric Power Facilities and Operations. 17 E. Coal Use and Environmental Impacts. .1 F. Electricity Demand and Demand Management .22 G. Electric Power Investment Program .23 H. Electricity Pricing ... 25 I. Rationale for Bank Involvement .26 J. Bank Activities in the Energy Sector .27 IV THE BORROWER AND THE BENEFICIARIES .28 V THF PROJECT . 31 A. Project Objectives and Scope .. .. 31 B. Project Description .31 C. Project Cost and Financing Plan .34 D. Project Preparation .35 E. Project Implementation and Construction Schedule . 36 F. Environmental Considerations .37 G. Procurement .... .... 38 H. Disbursements . 39 I. Retroactive Financing .40 J. Risks .40 This report is based on the findings of missions which visited the Czech and Slovak Federal Republic in June 1991 and September/October 1991. The mission comprised Messrs. D. Gray (Task Manager), A. Roa (Power Engineer and Procurement Specialist), A. Halildin (Environmental Specialist), K. Jachoutek (Economist), T. Markus (Financial Analyst) and J. Cai (Economist). The report was issued by the Energy and Environment Division (B. Montfort, Division Chief) of the Central Europe Country Department (K. Dervis, Diiector) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. VI FINANCIALASPECTS . 41 A. Accounting and Auditing Framework. 41 B. Past-FinancialPerformance . 41 C. Financial Projections . 42 VII ECONOMIC JUSTIFICATION. 45 VIII AGREEMENTSREACHED AND RECOMMENDATION . 49 ANNEXES Annex 1.1 DocumentsAvailable in the Project File Annex 2.1 Energy Balance 1990 Annex 2.2 Energy Pricing Policy Portion of SAL Annex 2.3 Energy RegulatoryPortion of SAL Annex 3.1 Planned Capacity Retirement Annex 3.2 Planr:d Installationof FGD's and Improved ESP's Annex 3.3 Emission Standardsfor Power Plants and Draft Environmental Regulations Annex 3.4 List of Power Plants Annex 3.5 Damaging Effects of Air Pollutionon Human Health and Forests Annex 3.6 ElectricitySales 1979-89 (MWh) Annex 3.7 CSFR ElectricityConsumption/Forecast 1991-2000 Annex 3.8 Power Sector InvestmentProgram Annex 3.9 Nuclear Power InvestmentProgram Annex 3.10 Average ElectricityTariffs (1989-91) Annex 3.11 ElectricityPricing and Marginal Cost Annex 3.12 Coal Prices and Costs Annex 4.1 CEZ OrganizationalChart Annex 4.2 Draft Terms of Reference for Accounting and FinancialManagement InformationSystems Study Annex 5.1 Detailed Project Cost Annex 5.2 Detailed Cost Estimate for FGD Installationat Prunerov II Annex 5.3 Project ImplementationSchedule Annex 5.4 DisbursementSchedule Annex 6.1 CEZ - Historical Income Statements,1987-1990 Annex 6.2 CEZ - HistoricalBalance Sheets, 1986-1989 Annex 6.3 Notes and Assumptionsfor FinancialProjections Annex 6.4 Table 1: CEZ - ProjectedIncome Statements,1991-1997 Table 2: CEZ - Projected Fund Flow Statement,1991-1997 Table 3: CEZ - ProjectedBalance Sheets Annex 7.1 Power Sector InvestmentOptions with PollutionReduction Annex 7.2 CEZ InvestmentProgram: InternalRate of Return MAPS IBRD 23371R IBRD 23372R CZECH AND SLOVAK EgErAL REPUBLIC POWE AND ENVIRONMENTAL I-MENT PROJECT STAFF APPRAISAL REPORT Loan and Proi2et Stumma- BORROWER: Czech Power Enterprise - Ceske Energeticke Zavody (CEZ) AMOUNT: US$246 million equivalent TERMS: Fifteen years, including five years of grace. PROJECT OBJECTIVES: The objectives of the project are to improve power plant efficiency; to reduce air pollution in northern Bohemia, and thereby improve the environment and health of the local population; to modernize the transmission system; and to facilitate interconnection of the (EZ and German power grido. These objectives will be accomplished in the context of overall reform of the energy sector. To this end, the project will: (a) reduce total consumption of pollution-causing lignite through power plant efficiency improvements; (b) curtail power plant SO2 emissions by means of flue gas desulfurization; (c) reduce dust and fly-ash pollution from power plants; (d) increase the reliability, efficiency and economy of the CEZ transmission system; and (e) assist in improving investment planning and corporate management and organization. PROJECT DESCRIPTION: The proposed project includes: (a) installation of equipment and operational improvements at the Prunerov II power station and other large CEZ power plants to reduce lignite consumption; (b) installation of flue gas desulfurization ecqipment (FGD) at Prunerov II; (c) improvements and equipment for dust collection, i.e., electrostatic precipitators at the worst polluting CEZ power plants; (d) modernization of five 400-kV substations and construction of a short 400-kV transmission line; and (e) ccn,ulting services and staff training. ii - BENEFITS: The overall result of the project will be a reduced lignite fuel cost in electricity generation, a large reduction of SO2, a substantial reduction of dust and fly-ash, and lower cost, more reliable power exchanges. The total reduct'.on in SO2 from the proposed installations (FGDs and efficiency improvements) will be about 218,000 - 235,000 tons/year. This reduction will not only help to restore the damaged environment in the northern Bohemia region, but also reduce the total amount of S02 in Czechoslovakia to an amount that will, in corbination with other measures, facilitate adherence to the Helsinki-Protocol and pollution reduction commitments. Savings Zrom plant efficiency investments are lignite fuel savings of US$20 to 40 million/year from a reduction in lignite use of 1.2 to 1.9 million tons/year, and associated reduction of 28,C00 to 45,000 tons/year of SO2. The net reduction of S02 emissions at Prunerov II is estimated at around 190,000 tons/yr (out of the total 218,000 to 235,000 tons/year of S02 reduced under the project). Based on the total SO2 emission in CSFR recorded in 1989 (2.65 million tons), the installation of FGDs covered by this project component will reduce emissions in CSFR by about 7%, and in relation to the Czech Republic by about 10%. In northern Bohemia, the most polluted region in CSFR, the proposed FGDs will reduce SO2 emissions