GLOBAL ENVIRONMENT FACILITY Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Project Document April 1996 Public Disclosure Authorized
THE WORLD BANK GEF Documentation
The Global Environment Facility (GEF) assistsdeveloping countries to protect the globalenvironment in four areas:global warming. pollution of internationalwaters, destructionof biodiversity.and depletion of the ozone layer. The GEF is jointlyimplemented bytheUnited Nations DevelopmentProgramme, theUnited NationsEnvironment Programme, andthe World Bank.
GEF Project Documents - identifiedby a greenband - provideextended project- specificinformation. The implementing agency responsible for each project is identifiedby its logoon the cover of thedocument.
GlobalEnvironment Division EnvironmentDepartment WorldBank 1818H Street,NW Washington,DC 20433 Telephone:(202) 473-1816 Fax:(202) 522-3256 Report No. 14614 LT
Republic of Lithuania Klaipeda GeothermalDemonstration Project
Project Document May 1996
Natural ResourcesManagement Division Country DepartmentIV Europe and Central Asia Region CURRENCYEQUIVALENTS
Currency Unit = LithuanianLitas (LT) US$ 1 = 4 Litai (May 1994 - to present) LT 1 = US $0.25
FISCAL YEAR
January 1 - December 31
WEIGHTSAND MEASURES
ha Hectare kg Kilogram kWh Kilowatt hour kWh = 3.6 x 106 Joules 103Joules = 0.28 Wh mD milli Darcy
ABBREVIATIONS
C' 2 Carbon Dioxide EG Enterprise Geoterma EJ Exajoules = 1018Joules FSU Former Soviet Union GEF Global EnvironmentFacility GHG GreenhouseGases GJ Gigajoules = 109Joules GOL Governmentof Lithuania HFO Heavy Fuel Oil ICB InternationalCompetitive Bidding iS InternationalShopping KDHE Klaipeda District Heating Enterprise LPC Lithuania Power Company MOE Ministry of Energy MOEP Ministry of EnvironmentalProtection MOF Ministry of Finance MOK Municipalityof Klaipeda MW Megawatt NO, Nitrous Oxides PIP Project ImplementationPlan PIU Project ImplementationUnit PJ Petajoules = 1015Joules PSC Project Steering Committee SOE State Owned Enterprise SO2 Sulfur Dioxide TJ Terajoules = 1012Joules TPM Total ParticulateMatter UN/ECE United Nations EconomicCommission for Europe CONTENTS
PARTI: ProjectSummary ...... i
PartH: TechnicalAnnexes...... 1
I. BACKGROUND . A. COUNTRY CONTEXT. I B. SECTORALCONTEXT .I C. BANK STRATEGYAND EXPERIENCE. 6
II. THE PROJECT.. 8 A. PROJECTORIGINS AND FORMULATION. 8 B. PROJECTRATIONALE. 8 C. RATIONALEFOR GEF INVOLVEMENT. 9 D. PROJECTOBJECTIVES. 9 E. PROJECTCOMPONENTS AND DESCRIPTION.10 F. COST ESTIMATES.12 G. PROJECTFINANCING ARRANGEMENTS .12 H. PROCUREMENT.14 1. DISBURSEMENTS.18 J. ENVIRONMENTALASPECTS .20
III. PROJECTIMPLEMENTATION ...... 21 A. ENTERPRISEGEOTERMA ...... 21 B. PROJECTSUPERVISION ...... 23 C. ACCOUNTSAND AUDITS...... 23
IV. FINANCIALASPECTS .25 A. BACKGROUND.25 B. FINANCIALFRAMEWORK FOR THE GEOTHERMALSECTOR .25 C. FINANCIALSTANDING OF DISTRICTHEATING .26 D. FINANCIAL/CONTRACTUALARRANGEMENTS FOR PROJECTOPERATIONS27
V. PROJECTJUSTIFICATION AND RISKS .. 29 A. PROJECTBENEFITS .30 B. PROJECTECONOMIC COSTS .30 C. ECONOMICRATE OF RETURN.31 D. PROJECTRISKS AND SENSITIVITYANALYSIS .32 ANNEX 1: CALCULATION OF INCREMENTAL COST AS BASIS FOR GEF GRANT
ANNEX 2 TECHNICAL ASSISTANCE PROVIDED UNDER DANISH GRANT
ANNEX 3: DESCRIPTION OF THE GEOTHERMAL RESOURCES AND THE GEOTHERMAL LOOP
ANNEX 4: ENVIRONMENTAL REVIEW
ANNEX 5: DETAILED IMPLEMENTATION SCHEDULES
ANNEX 6: MONITORING AND EVALUATION
CHARTS: Chart 1: Project Elements .1...... 1 Chart 2: Project Supervision Plan ...... 24
TABLES: 1.1 Emissions from Burning Fuel ...... 5 2.1 Project Cost Summary by Project Sub-Component ...... 13 2.2 Financing Plan by Financier ...... 14 2.3 Financing Plan by Fiscal Year ...... 14 2.4 Procurement Arrangements ...... 16 2.5 Summary of Procurement Packages ...... 17 2.6 Disbursement by Year ...... 18 2.7 Financing Plan by Disbursement Category ...... 18 2.8 Estimated Schedule of Disbursements ...... 19 3.1 Project Implementation Schedule ...... 22 4.1 Enterprise Geoterma - Financial Highlights ...... 25 4.2 Lithuania State Power System 1994 Income Statements ...... 27 5.1 Annual Reduction in Fossil Fuel Usage and Emissions ...... 30 5.2 Cost Comparison - Fossil Fuel vs. Geothermal Heat ...... 31 5.3 Heating Fuel Reference Prices ...... 31 5.4 Economic Rates of Return ...... 32 5.5 Variations of ERR depending on Changes in Aquifier ...... 33 5.6 Sensitivity Analysis - Economic Rate of Return (%) ...... 34 PART I: PROJECT SUMMARY
REPUBLIC OF LITHUANIA Klaipeda Geothermal Demonstration Project Grant and Project Summary
GEF Focal Area: Climate Change
GEF Financing: US $ 6.9 million (grant)
Financing Plan: Local Foreign Total ---- US $ million
IBRD (loan) 0.21 5.69 5.90 GEF (grant) 6.90 6.90 MOE, Denmark (grant) 0.20 2.30 2.50 EU-Phare (grant) 0.12 0.12 Government of Lithuania 2.60 2.60
TOTAL PROJECT COSTS 3.01 15.01 18.02
Grant Recipient: Republic of Lithuania
Grant Beneficiary: Enterprise Geoterma (EG)
Economic Rate of Return: 11.7% (including national and global environmental benefits)
Environment Category: B ii
THE REPUBLICOF LITHUANIA KLAIPEDAGEOTHERMAL DEMONSTRATION PROJECT
1. Background. The Bank's overall strategy in Lithuania is to support the country's efforts to accelerate structuralreforms leading to a full transition to a market-basedeconomy and, at the same time, to support efficient investmentsin high priority sectors to facilitate a return to economicgrowth. The recently completed Public Expenditure Review, jointly prepared by the GOL and the Bank, highlightedthe need to support priority investmentsin energy, transport, and environmentalservices. The proposed Project is in line with the National Energy Strategy, which supports the developmentof indigenousand renewableenergy sources. The use of geothermalenergy as a replacementfor imported fossil fuels in district heating systems could ultimately replace up to 50% of current fuel consumption.
2. During 1989-1993a Danish consultantgroup financedby the Danish EPA carried out a comprehensivestudy to determine the size and quality of geothermalresources in Latvia and Lithuania and to assess the potential for utilizinggeothermal energy to replace currently used fossil fuel for heat generation. Becausethe temperatureof the water resourcesis between 30-95°C, the energy can only be used for heating and would normallybe financiallyunviable without accessto a district heating system. Additionally,the high cost of drilling operations could only be supportedby a large consumer, such as a district heating system. The study confirmed that substantial geothermal aquifers occur within the Devonianand Cambrian strata, and it identified a number of cities where the use of geothermalenergy could substitutefor fossil fuel up to 50% of energy consumption. The study also determinedthat the largest and most promising storage areas are located in Lithuania.
3. The findingsof the study underscorethe existence of a significantindigenous resource. The GOL requestedthe Danish EPA to extend the Baltic Geothermalstudy to include the preparationof a feasibilitystudy for constructionof a geothermaldemonstration plant in Klaipeda,which was identified as being the best locationfor a demonstrationproject. The city of Klaipedais situatedon the Baltic Coast on the mouth of the Kursiu Lagoon. With its populationof 204,000, Klaipedais Lithuania'sthird largest city. The town has an existing district heating network with a related annual heat demand (1994) of 5,600 Terajoules(TJ), which is expectedto increaseto 7,500 TJ by year 2000. The study indicatedthat a suitablysized demonstrationplant could provide about 10 % of the heat demand to the KlaipedaDistrict Heating System. Energy could be extracted from the geothermalwater by using heat pump technology based on absorptionheat pumps. The feasibilitystudy also determinedthat by reducing the temperature regimein the districtheating network, an additional24% of geothermalenergy could be extractedwithout any additionalinvestments in the geothermalplant. The proposed geothermal plant would produce 530 TJ without a reductionin the networktemperature. This energy amount correspondsto about 16,500tons of oil or 19.5 million mi3 of natural gas. An assumption is made that reduction of the network temperaturewill be implementedin the next energy/districtheating project, and this could result in a production of 650 TJ/year.
4. The proposed Project would be the first geothermalproject to supply heat to a district heatingsystem in the BalticStates. It is also the first geothermalproject financedby the Bankwhere the geothernal energy is transferredto a district heatingsystem by use of heat pump technology. The Project is considered a nationalpriority, and is in compliancewith the NationalEnergy Strategy's stated aim of developing indigenous energy resources. It also reduces environmental impacts, both localized air pollution (particulates and sulfur dioxide) and those with broader impacts, such as emissions of greenhousegases (GHG) and sulfur dioxide (SO2) which are covered by internationalagreements ratified by the GOL, the Montreal Protocol, and the Frameworkfor ClimateChanges Convention. The Project would reduce the emission of greenhousegases from the boiler houses in Klaipedaby about 10%. The Hii feasibilitystudy also showed that future utilizationof geothermal energy is the least cost alternativeof all indigenousenergy resources when comparedto peat and wood chips.
5. There is also a potential for a larger impact if the technicaland economicexploitation of this resource is confirmed. Geothermal heat could be expanded to eighteen larger urban areas with existing district heating networks. Of these, seven have been included in the Danish study. The collectiveannual heat demandof these urban areas amountsto approximately50 Petajoules,or 13.5x105 MWh. As the heatingnetworks are technicallycompatible, the prospect for replicabilityof the proposed geothermalproject is good. Continueddevelopment of the Lithuanian geothermalresource, to cover up to 20% of the district heating demand, would carry inherent annual reductions in the CO2 emissions related to heat productionon the order of 750,000 tons. The correspondingreduction in the SO2 emission amounts to 22,000 tons. The savings, if all eighteen systemswere to use geothermalenergy, would be equivalent to about 300,000 tons of HFO, with a total annual value of US $29 million, based on the current border price of US $95 per ton.
6. The best use of the geothermallow temperaturewater is in connectionwith a large energy consumer, such as district heating systems. Due to similar geological formations in East European countries and other Former Soviet republics,and extensiveuse of district heatingsystems for heat supply in these countries, the future use of geothermal resources must be considered as very likely. Furthermore, the resources in these other countries are regarded as even being of a higher quality, that is, larger resources at a higher temperature. It is foreseen that the extraction of the geothermal energy can be obtainedwith lower investments,as the transfer technologymight be based on a heat exchanger instead of heat pump technology. In Ukraine and Georgia the temperature is high enough to produce electricity from the geothermal resource in some locations. The Project could therefore become a reference project for further development of similar geothermal energy resources in the region and worldwide.
7. Proiect Obiectives. The main objectivesof the proposed Project are: (a) to demonstrate the feasibility and value of using low temperaturegeothermal water as a renewable indigenousenergy resource for use in district heatingsystems; (b) to reduce emissionof greenhousegases (GHG) and sulfur dioxide (SO2) by replacinggas and heavy fuel oil (HFO) with a S-content of 3.5%; and (c) to promote sustainablemanagement and the developmentof environmentallysound and non-pollutinggeothermal resources. The Project would contribute to energy security highlighted as a priority in the National Energy Strategy, and it would demonstrate the feasibility of developing the indigenous Lithuanian geothermal resources.
8. Proiect Description. The Project would consistof two componentsto optimizeuse of the availablegeothermal energy resourcesin Klaipeda: (a) a TechnicalAssistance and TrainingComponent provided under a Danish Grant, and (b) an InvestmentComponent for implementationof the Klaipeda GeothernalDemonstration Plant, financedpartly by grants from the Global EnvironmentFacility (GEF) and the European Union (PHARE), and a loan from the Bank. The DemonstrationPlant component would includeinvestments in productionand injection wells, above ground facilities, and piping for the entire extractionand connectionsto the district heatingsystem. The TA componentwould include:design of the necessaryequipment for extractionand transferof geothermalenergy to the districtheating system; preparation of a detailed drilling program; managementsupport to EG for Project implementation; training of local personnel; and supervisionof Project implementation.
9. The proposedProject involvesthe circulationof 42 °C geothermalwater from 1200meters depth in the Devonian stratum, via a closed geothermal loop, utilizing heat exchangersand absorption heat pumps for the retrieval and subsequentsupply of heat into the existing district heating system in iv Klaipeda. The geothermalwater wouldbe extracted from two productionwells, and returned to the same depth with reduced temperature. The Project is based on well establishedtechnology and the utilization of proven operationalequipment. Geologicalrisks are negligible.
10. Project Financing. The project cost is estimated at US $18.02 million equivalent, with a foreign exchangecomponent of US $15.01 million includingcontingencies, or about 83% of the total project cost. The Bank would finance US $5.9 million (32.7% of total project costs). The loan would be repaid by the GOL over 20 years including5 years grace with repaymentscalculated on an annuity basis at the Bank's standard variable rate of interest.
11. The GEF would cofinancethe project with a grant of US $6.9 million, equal to 38.1 % of total Project cost. This would cover agreed upon incrementalcosts as described in para. 14. Parallel cofinancing on a grant basis by the Government of Denmark (US $2.5 million equivalent) and the European Union (US $120,000 equivalent) comprises about 14.5% of total project costs. The local counterpart contribution of LT 10.4 million or US $2.6 million equivalent would be provided by the GOL. A breakdownof costs and the financingplan are shown in ScheduleA. Amountsand methods of procurementand disbursementsand the disbursementschedule are shown in ScheduleB. A timetable of key project processing events and the status of Bank Group operations in Lithuania are given in SchedulesC and D, respectively. A map is also attached(No. 27165). The Staff AppraisalReport, No. 14584 LT, dated September 1995, is being distributedseparately.
12. Rationalefor GEF Financing. The involvementof the GEF (and the World Bank) in the proposed project would provide an opportunityto support Lithuanian efforts to reduce dependenceon imported fossil fuels for heating, and improve national environmentalquality through the reduction of greenhousegases and SO2. In the absence of such involvement,it is unlikelythat the country would be able to mobilize the technicalassistance and financial resources required to implementa demonstration project of this nature.
13. The project would provide a mechanism for the GEF to test the feasibility of low temperature geothermal energy as a means of reducing greenhouse gas emissions, and reduce the dependenceon fossil fuels in district heatingsystems. With successfulimplementation, the Project could serve as a paradigmfor other successorstates to the Former Soviet Union, all of which have extensive district heatingsystems and extensiverenewable geothermal energy resources. The project is eligible for GEF funding as it conformsto the Guidancefor progranmmingGEF Resources in 1995 in that: (a) it is sustainable; (b) it is a national priority in the National Energy Strategy; (c) it provides the means of abatingGHG at a cost below US $25 per ton carbon; (d) it includes an essentialtransfer of technology; (e) it would develop an indigenousand renewableenergy resource; and (f) it would demonstratethat a further extraction of geothermal energy is achievable,when combined with other energy conserving measures in the Klaipedadistrict heating system.
14. IncrementalCost. The calculationof the incrementalcost is described in the Technical Annex. However, to prepare this calculationthe investmentcost for the geothermal plant was assessed at US $16.3 million, as the ICB-proceduresare expected to reduce the actual cost. The NPV at a discountrate of 10% is US -$5.6 million based on this investmentcost (withoutincluding environmental benefits) and on the provision of 530 TJ/year of heat supply over 25 years through a planned mix of heavy fuel oil and natural gas. The investmentcost has, due to changes in the Yen-dollar relationship, been re-assessed at US $17.6 million. The alternative cost is the investment cost of the Project plus annual operations and maintenancecharges for the geothermal installation,converted to present value terms at a 10% discount rate. The differenceof US $6.9 million (17.6 - 16.3 + 5.6 million) represents the increment to be covered by GEF. v 15. Project Sustainabilitvand Participation. Importantelements in assuring sustainabilityof the Project include: (a) timely implementationof an Action Plan for further developmentof identified geothermal resources by LSPS/EG, which would promote the establishment of an autonomous and efficient company;and (b) developmentof a realistic tariff structure for transferring extracted energy to district heating companieson a wholesalebasis.
16. Participatory Approach. The preparation of the Project has been carried out in close cooperationwith the Ministryof the Environment,the LSPS, the EG, and the KDHE, and has been based on several feasibility studies and reports prepared by consultantsfinanced by the Danish Government. The Bank has been highly involved in the preparationof the terms of referencefor the detailed studies related to Project design and implementation.
17. The Project has received broad television and print media coverage because of its innovative aspects. The Municipalityof Klaipedahas been involved in the discussions and analyses undertakenthus far. It is expectedthat the Municipalitywill hold additional consultationsprior to, and during, Project implementationwith local NGOs and users of the heating system.
18. Lessons Learned. Bank experiencein geothermalenergy projects in Central and Eastern Europe is limitedto ongoingpreparation work in Poland and Slovakia. In Poland, a project in Zakopane (US $130 million) has been identified, as well as two projects in Zyrardow outside Warsaw (US $60 million) and in Szczecin(US $120 million). In Slovakia, a project in Kosice (US $120 million) has been identified. All projects would use geothermal water at a temperatureof 85 - 95°C (higher temperatures than wouldbe used in the KlaipedaGeothermal Demonstration Project), and the heat would be transferred using existingdistrict heating networks through the use of heat exchangers. The Bank's experiencein implementinggeothermal projects is currently limitedin regard to power producingplants such as Olkaria in Kenya(US $59.9 million)for generationup to 45 MW of electricity, and the recentlyapproved project in the Philippines(US $305 million) partly financedby GEF, for generatingup to 700 MW of steam to be producedat Leyte and transported to Cebu and Luzon.
19. The Projectwas reviewedby a geothermalengineer/energy planner from the STAP roster in February 1995. His commentswere supportiveof the Project, especiallywith regard to is potential demonstrationimpact in the region.
20. Project Supervisionand Implementation. The MOE would provide overall supervision of the Project, coordinate the actions of funding organizationsand local implementingagencies and manage the interactionswith the Bank. The Director of EG and his staff would be responsiblefor the implementationof the Project. To facilitateits implementation,including institutional strengthening, EG would be provided Project implementationsupport, and EG would be assisted, as required, by non- residentinternational consultants to supportthe preparationof technicalspecifications, bidding documents, tendering, bid evaluation, contract awards, supervisionof civil works and equipment installation,and follow-up activities. A number of indicators to monitor and evaluate the project progress during implementationhave been indentified. These indicatorsare presented in Part 2, Annex7.
21. Project implementationwould be expectedto begin in January 1996 and would be carried out over a three-year period. Detailed schedules of the Project Implementationare presented in the TechnicalAnnex, and will be discussed during negotiations.
22. Agreed Actions. Submissionof a business plan for EG is a conditionof negotiation. Prior to Board presentation,the followingconditions apply: (a) evidencethat EG has been corporatized as a joint stock company; (b) submissionof an independentlyaudited opening balance sheet of EG vi certifiedby the financialdirectors of EG and LSPS; (c) submissionof a draft "take or pay" contract for the wholesaleof geothermalenergy to KDHE; and (d) transfer of license for EG to produce energy from the geothermalplant. Conditionsfor effectivenesswould include: (a) submissionof satisfactoryevidence that all conditionsprecedent to effectivenessof the grants from cofinanciershave been fulfilled; and (b) execution of subsidiaryloan agreementbetween GOL and EG.
23. EnvironmentalAspects. The proposed Project would have only positive environmental impactsas no emissionswould be generatedby the Project, and it would also significantlyreduce the use of fossilfuels in affectedareas. Due to higher price for natural gas comparedwith HFO with high sulfur content (3.5%), it is anticipatedthat the geothermalenergy from the Project would reduce both oil and gas consumption. The Project would result in annual reductions in emissionsof CO2 and NO, by 47,800 and 1 ton(s) respectively if natural gas is replaced, and 51,940 and 110 tons respectively if HFO is replaced. In addition the replacementof HFO would result in an additional reduction of SO2 of about 1160 tons per year. The proposed Project has been placed in environmentalscreening category "B". An environmentalreview consistentwith the provisionsof the World Bank's OperationalDirective 4.01, "EnvironmentalAssessment" and the applicableenvironmental procedures of the GOL is presented in the TechnicalAnnex.
24. Monitoring and Evaluation. The generationof the extracted heat will be continuously monitored on a daily basis, to assure that EG would be paid correctly in regard to delivered heat. Furthermore, parameters such as the amount of extracted geothermal water, and temperature of the geothermalwater and in the network return water, would also be monitoredon a daily basis to make it possibleto evaluate further energy transfer to the DH company. Based on the delivered heat, it would be easy to calculate the replaced amount of fuel and with it linked emission of C02, SO2, NOR,and particulate matter.
25. Proiect Benefits. The project would demonstrate whether Lithuania's substantial geothermal resources can be commercially developed, specificallyfor the purpose of utilizing these relativelylow temperature,environmentally benign resources.These resourceswould be used in existing district heating systems using technology already being employed in other district heating systemns (Denmark,Germany, and Sweden). The proposedproject would also establishthe institutionaland policy framework for promoting the further development of geothermal energy. Specific project benefits include: (a) reduction in noxious emissions of C02, S02, NOx and particulate matter; (b) the cost- effectiveutilization of an indigenousenergy resource (whichis also recommendedin Lithuania's Energy DevelopmentProgram); (c) savingsin foreign exchange;and (d) more reliablefuel suppliesto supplement importedfuel presently used for heating purposes.
26. The project is estimated to have an economicrate of return (ERR) of 9.8% if national environmentalbenefits are included(4.7% if national environmentalbenefits are excluded). The ERR increasesto 11.7% if the global benefits of CO2 reductionare also includedin the analysis. A GEF grant of US $6.9 million, approvedfor the project, would allow the project to remain financiallysustainable (that is, to cover its operatingand capital costs). Any subsequentgeothermal plant would draw on the lessons learnedfrom this demonstrationproject and would be justified on its own economicand technical merits.
27. Project Risks. Underscoringthe demonstrationcharacter of the Project, the main risks include:
* TechnicalRisks: lower than expectedsupply of geothermal energy (amount of water and water temperature);and vii ImplementationRisks: a longer implementationperiod due to limited implementationcapacity; and a limited administrative capacity in Lithuania for future development of the geothermal resources.
These risks would be reducedby: (a) carefulmonitoring during drilling of productionwells to ensure that geothermalwater is drawn from the optimal temperaturewithin the aquifer; (b) ensuringthat appropriate project managementarrangements are in place in a timely manner; and (c) preparing and executing a sound Action Plan for developmentof the EnterpriseGeoterma (EG). Furthermore,there is an economic risk that the price of available HFO would fall to the point where its use would be competitive with geothermal resources. Given the global outlook for fuel oil prices this is unlikely. Moreover it is anticipatedthat the LithuanianMinistry of EnvironmentalProtection will penalizethe use of the available HFO of relativelyhigh sulfur content. In this event, the economicsof the Project will becomeeven more attractive.
28. The proposed demonstrationproject is experimental,and meets GEF investmentcriteria. The ERR for a subsequent plant would dependent on actual investment costs based on Lithuanian engineeringand construction,aquifer temperatures,return networktemperatures, and future fuel prices, among other factors. Due to these uncertainties,a second plant therefore may or mnaynot be justified on economic grounds. Much experience would be gained by implementationof the Demonstration Project, therefore if the Governmentwould request financingfor a second plant, the Bank would make an independentassessment of that plant's economic and financial viability based on the information gathered at the time of the financingrequest. The Governmenthas been apprised of these issues and agrees to proceed with the investmentin the DemonstrationPlant based on the full understandingof the risks. viii SCHEDULE A
REPUBLIC OF LITHUANIA
KLAIPEDA GEOTHERNIALDE IONSTRATIONPROJECT
ESTIMATEDCoSTrS AND FINANCING PLAN
US S Million % Local Foreign Total Foreign
EstimatedProiect Cost /a
DrillingOperabton 0.18 1.73 1.91 91% Completionof Wells 0.00 0.69 0.69 100% Controland Evaluationof Drilling Operations 0.00 0.15 0.15 100% Buildingand Civil Works 0.36 0.16 0.52 31% Connectionto Boiler House and Extemal Pipeline 0.54 0.19 0.73 26% Heat Exchangers 0.04 0.67 0.71 94% AbsorptionHeat Pumps 0.30 6.04 6.34 95% Filters, Valves and Intemal Piping 0.08 0.74 0.82 90% Power,Control and Regulation 0.09 0.63 0.72 88% Project ImplementationSupport 0.12 0.12 0.24 50% Training,Technical Assistance,& Supervision 0.16 2.10 2.26 93%
Base Cost for GeothermalDemonstration Plant 1.87 13.22 15.09 88%
PhysicalContingencies 0.09 0.66 0.75 88% Price Contingencies 1.05 0.73 1.78 41%
TOTAL PROJECTCOST 3.01 14.61 17.62 83%
InterestDuring Construction 0.40 0.40 100%
TOTAL FINANCING 3.01 15.01 18.02 83%
Financing Plan Local Foreign Total - US $ Million
I8RD (loan) 0.21 5.69 5.90 GEF (grant) 6.90 6.90 Ministry of Environment,Denmark (grant) 0.20 2.30 * 2.50 EuropeanUnion - Phare(grant) 0.12 0.12 Govemmentof Lithuania 2.60 2.60
Total 3.01 15.01 18.02 a/ Excludingtaxes and duties SCHEDULE B ix Page I of 2 REPUBLIC OF LITHUANIA
KLAIPEDA GEOTHERIAL DEMONSTRATION PROJECT
SUMMARYOF PROPOSED PRocuREmENT ARRANGEMENS
Project Element ICS-WB ICB-GEF Other N.B.F. Total Cost
Civil Works and Larger Equipment
Dilling Operabon 2.12 2.12 1.87 1.87 Buildingand CivilWorks 0.75 0.75 0.23 .023 Connectionto Boiler House and Extemal Pipeline 1.09 1.09 0.22 .022 Hoat Exchangers 0.82 0.82 0.75 0.75
Absorption Heat Pumps 3.63 B) 3.63 i) 7.25 3.37 3.37 3.37 3.37 Smaller Equipment
Complebon of Wells 0.75 0.75 0.75 0.75 Filters, Valves and Internal Piping 0.96 0a96 -.0.82 0.82 Power, Control and Regulabon 0.86 0.86 0.86 0.86 Project ImplementabonSupport Office Equipment 0.09 0.09
Consultant Services
Control and Evaluaton of Drilfing Operations 0.16 - 0.16 0.16 0.16 Project ImplementatonSupport Staffing 0.22 0.22
Training,Technical Assistance, & Supervision 2.55 2.55
Total Procurement
Total 7.28 7.32 0.16 2.86 17.62 The Bank 5.50 5.50 TheGEF 6.74 0.16 690
Loan Service DuringConstnrcbon Interestand CommitmentFee 0.40
Total Financng 18.02 The Bank 5.90 The GEF 6.90 -
N.B.F. * Not Bank FInaned Bank Low FPinnced Preunument GEF Fhiwn:d ProcFu1@rlt AzIng to Bank Guidelnesfor Use of Coneul' (Augus Jel) - US 30.15 frJUlon 1) The hvasrnert t7u fo0 abopthon h_c prnp qualy awed betwen W nd GEF. asthewr arn conbibuton J Identil. X SCHEDULE B
Page 2 of 2
Disbursement Categories and Loan Allocation (US S Million)
Project Element IBRO Percentof Expenditure Amount % to be Financed
Civil Works and Larger Equipment
Buildingand CivilWorks 0.23 31% (100%of fOreignexpenditure) 80% of local expenditure Connectonto BoilerHouse and ExtemalPipeiine 0.22 20% (100% of foreign expenditure) AbsorpbonHeat Pumps 3.37 46% (50% of foreignexpenditure)
Smaller Equipment Filters,Valves and Intemal Piping 0.82 85% (100% of foreign expenditure) Power,Contol and Regulabon 0.86 100%(100% of foreign expenditure) 100%of local expenditur
InterestCost During Constructon 0.40 100%
Total DIsburement 5.90 100%
EstimatedLoan Disbursements (US$ million)
Quarter Loan Disbursement Cumulative SinceApproval This Quarter Cumulative Total %
FY 1997 September,1996 0.01 0.01 0 December,1996 0.01 0.02 0 March, 1997 0.05 0.07 1 June, 1997 0.18 0.25 4 FY 1998 September,1997 0.39 0.64 11 December,1997 1.65 2.29 39 March, 1998 0.07 2.36 40 June, 1998 1.82 4.18 71 FY 1999 September,1998 1.72 5.90 100 December,1998 0.00 5.90 100 March, 1999 0.00 5.90 100 June, 1999 0.00 5.90 100
Loan Closing Date July 31, 1999 SCHEDULE C xi
REPUBLICOF LITHUANIA
KLAIPEDAGEOTHERMAL DEMONSTRATION PROJECT
TIMETABLEOF KEY PROJECTPROCESSING EVENTS
(a) Time taken to prepare the Project: 22 months (Feb. 1994 - Nov. 1995)
(b) Proposed by: Ministry of Energy, Lithuanian Power Company, Klaipeda District Heating Enterprise, and Enterprise Geoterma (using consultants financed by the Danish Government)with Bank assistance.
(c) First Bank Mission: February 1994
(d) Appraisal Mission: March 1995
(e) Negotiations: November 1995
(f) Planned Date of Effectiveness: June 1996
(g) List of Relevant PCRs and PPARs: None
The Project was prepared by Anders Haildin (EC4NR), Task Manager. The DepartmentDirector is Basil Kavalsky,and the Division Chief is GeoffreyFox. xii SCHEDULE D
REPUBLIC OF LITHUANIA
KLAIPEDA GEOTHERMAL DEMONSTRATION PROJECT
STATUS OF BANK GROUP OPERATIONS as of December 31, 1995
Loan No. Fiscal Borrower Project US $ million amount Year Loan Undisbursed
3524-LT 1993 Government of Lithuania Rehabilitation 60.0 1.1 3737-LT 1994 Government of Lithuania Power Rehabilitation 26.4 26.4 3816-LT 1995 Government of Lithuania Klaipeda Enviromnent 7.0 6.7 3866-LT 1995 Government of Lithuania Entprs. & Fin. Sect. 25.0 25.0 3963-LT 1996 Government of Lithuania Siaulai Environment 6.2 6.2'
Total 124.6 65.4 of which repaid - - Total disbursed 59.2 a not yet effective
STATUSOF IFC OPERATIONS as of March 31, 1996
Fiscal Year Obligor Business Original Gross Commitments IFC Loan IFC Equitv Participants Total 1996 Litekas Ir. Textiles 10.24 1.00 0.00 11.24 Calw A.B. Less cancellations, terminations, 10.24 1.00 0.00 11.24 repayments, sales Total commitmnents now held b/ 0.00 0.00 0.00 0.00 Total pending commitments now held b/ 10.24 1.00 0.00 11.24 Total pending commitrnents 0.00 0.00 0.00 0.00 Total commitments held and pending 10.24 1.00 0.00 11.24 Total undisbursed commitments 10.24 0.00 0.00 11.24
a/ Gross commitmentsconsist of approvedand signed projects. b/ Held commitmentsconsist of disbursedand undisbursedinvestment. PART II: TECHNICAL ANNEXES
I. BACKGROUND
A. CountryContext
1.1. Lithuania is the southernmostBaltic country. It covers an area of 65,200 km2, with a populationof about 3.8 million. During the Soviet period, Lithuania had a strong economy, based on specializedindustries and agriculture,which was fully integratedinto the larger Soviet system. Since the restorationof Lithuanianindependence in 1991, the country has undertakena major program of political and economicreforms, which has brought it from a centrally planned economy to a transitional market economy.In this process, it has experiencedadjustment shocks common to many economiesin transition, characterized by a significant decline in economic productivity and high inflation rates. The gross domesticproduct (GDP) also declined sharply as a result of the collapse of trading relations with Russia and other former Soviet Republics.
1.2. The Government of Lithuania (GOL) has been pursuing economic reform and stabilization, includingprice and trade liberalization.A formal macro-economicprogram was launched in 1991, supportedby two IMF standby arrangements(in October 1991 and October 1993), and more recently an EFF program (ongoing). Since then, Lithuania has been successfulin containingmonetary expansionand fiscal deficits. Lithuania introducedthe nationalcurrency, the Litas (in July 1993), which has been tied to the US Dollar since April 1994 (4 Litas (LT) = US $1). Inflationhas been reduced from an annual rate of 1,020% in 1992 to about 30% in 1995, and is projected to decline further thereafter. The introduction of a currency board system in April 1994 has been effective in ensuring continued macroeconomicstability. The estimated per capita income level was US $1,350 in 1994. The Bank expects the Lithuanian economy to continue to recover. GDP growth rate was 3% in 1995, and is expectedtp stabilize around 5 % in the mediumto long term.
1.3. The Bank's overall strategy in Lithuania is to support the country's efforts to accelerate structuralreforms leadingto a full transitionto a market-basedeconomy and, at the same time, to support efficient investmentsin high priority sectors to facilitate a return to economicgrowth. To date the Bank has provided the GOL with a RehabilitationLoan (No. 3737-LT) of US $60 million in October 1992 (whichclosed on December31, 1995), a Power RehabilitationLoan (No. 3524-LT)of US $26.4 million in January 1995, the KlaipedaEnvironment Loan (No. 6401-LT) of US $7 million, the Enterprise and Financial Sector Assistance Loan (No. 3866-LT) of US $25 million in April 1995, the Siauliai EnvironmentLoan (No. 3963-LT) of US $6.2 million in December 1995, and the Private Agriculture DevelopmentLoan (No. 3996-LT)of US $30 million in April 1996.
1.4. The Public ExpenditureReview completed in 1994, jointly prepared by the GOL and the Bank, highlightsthe need to support priority investmentsin energy, transport and environmental services. The proposed Project is regardedas a priority by the GOL, in line with the National Energy Strategy, which supports the developmentof indigenousand renewableenergy sources.
B. Sectoral Context
Energy Sector
1.5. Overview. Lithuania's economy is challenged by six major problems in the energy sector: (a) high energy intensity and the need for energy efficiency and conservation; (b) limited domestic energy resources, which currently supply only 2% of total energy demand; (c) almost total dependenceon imported fuels from Russia and thus a vulnerability to serious supply disruptions; (d) declining exports owing to economic contractionand disruption of trade in the region; (e) rapid energy price escalationand difficultyin passing price increasesthrough to final consumers; and (f) issues related to the environmentand to the safety of the Ignalina nuclear power plant. Faced with these challenges, the Governmentof Lithuania (GOL) announceda National Energy Strategy in late 1992 based on cost recovery, energy conservation,and the developmentof indigenousresources.
1.6. Energy Consumption. Lithuania's economy is highly energy-intensive: at 1.5 kg of oil equivalentper US $1 of GDP in 1990, it is several times higher than in other industrializedeconomies. This is due to unrealistic energy pricing, inefficientmethods of energy production and use, high system losses, obsolete equipment, and inadequatemaintenance of facilities.
1.7. Lithuania's primary energy consumptiondropped by 51 % between 1991 and 1993 (from 15 to 7.2 Mtoe), largely as a result of economic contraction, which in itself was influencedby steep increases in the price of energy. In the same period, the energy mix changed substantially. The share of natural gas declined from 27% of primary energy consumptionin 1991 to less than 17% in 1993. Nuclear power increased its share from 23 % to 33 %. The share of oil products in the primary energy supply initiallyfell from 44% to 37% between 1991and 1992, but rose to 42% in 1993because of a glut of heavy fuel oil (HFO) in the market, making it especiallyattractive to purchase, especiallygiven the higher cost of natural gas.
1.8. Domestic Energy Resources. Despite substantial excess capacity in oil refining and electricity generation, Lithuania has very limited primary energy resources. There is some potential to develop local resources further, particularlyonshore and offshore petroleum (about 50 and 100 million tons respectively), natural gas, and geothermal fields. The country also has some peat deposits, and renewable resources such as forest waste, which could play a role in the fuel mix. The advantage of exploitinggeothermal resources when geothermal water is re-injected into the aquifer, is that there are no adverse environmentalimpacts from utilizing this resource, compared to those of other national resources.
1.9. InstitutionalSetting. The Lithuanian energy sector remains largely state-owned with control exercised principally by the Ministry of Energy. The main operating organizations are the Lithuanian Power Company (LPC), Ignalina Nuclear Power Plant, Lithuania Gas, Lithuanian Fuel, MazeikiaiOil Refinery, KlaipedaOil Export Company, the regional gas distribution companies,and a number of research and constructioncompanies. With a few exceptions,enterprises are designatedas SpecialPurpose State-ownedEnterprises, thereby giving the Governmentgreater power to intervene in the managementof state-ownedenterprises (SOEs).
1.10. LPC is the cornerstoneof the electricitysubsector, controllingelectricity generation, the transmissiongrid, inter-companytrade and externalcontracts. LPC determinesthe amount of electricity to be produced by its generating plants, contracts for fuel allocations, and pays its generators for electricity based on production costs. All of Lithuania's district heating (DH) companiesare also under LPC control. LPC has a large number of heat-only boilers providing heat under its district heating affiliates. Combinedheat and power stations also provideheat to the district heating networks, although the recent drop in electricity demand has made this source of heat less economic than running heat-only boilers and supplyingelectricity from the nuclear power plant at Ignalina.
1.11. Enterprise Geoterma (EG), which will be responsible for the implementationof the Project, was earlier a branch of LPC and responsiblefor the developmentof the Lithuanian geothermal Background 3 resources. By Governmentdecree no. 1609 December 22, 1995, EG was corporatizedand established as an independentclosed joint stock company, with the Government as the majority shareholder. EG became registered as a legal entity March 1, 1996 at Vilnius City Council; registration no. AB96-269.
1.12. Lithuania is in the process of establishing regulatory bodies concurrently with commercializationof the energy sector. An interim body, the Energy Pricing Council, has been establishedto submit pricing proposals to the Cabinet. An Energy Agency has been created to help collect data and draft policy for the Government.
1.13. District heating systemssupply a major part of residentialareas and industrieswith heat. Residentialareas (26 million m2 of housing) obtain hot water at a maximumtemperature of 1500C, and many industries are supplied with steam. The annual heat production delivered to the district heating systems is approximately 100 PJ, of which about 25 PJ are produced as steam for industry. The residential heat consumptionof 2.4 GJ/m2 is more than double that of Western Europe, as a result of poorly insulatedbuildings and the poor conditionof the district heating systems. In 1993, the total fuel consumed in district heating systemshad fallen to 0.74 bcm of gas and 0.9 million tons of heavy fuel oil (HFO)--a drop of 0.3 bcm and 0.3 million tons respectively from 1991. This decrease reflects significantlylower industrial consumption,and constrainedsupply to residential consumers. The share of DH in final energy consumptionactually rose from 22% to 24% between 1991 and 1993, however, due to a drastic declinein electricityproduction. The vast majorityof this heat was produced in heat-only boilers.
1.14. District Heating. The principal problems in the district heating systems are: (a) heat production plants rely on heat-only boilers (HOB), fueled by natural gas or HFO, to provide 70% of annual heat production,which is substantiallyless efficientthan usingheat from combinedheat and power plants; (b) the systemsare run in "constant-flowoperation mode", making load dispatchingand consumer heat regulation(and therefore metering)impossible, and leadingto excessivelyhigh power consumption of water pumps; and (c) the pipe systemssuffer from a monthlyloss of 100-400%of total networkwater volume, whereas a 5-15% monthly loss is the norm in modern, pre-insulatedpipe systems. Basedon a 200% monthly water loss, heat loss from a network can be estimated as 8 GJ/year/m3 of network volume. In general, measures such as modificationof network connectionswould enable a reduced network temperature, resulting in significantenergy savings, and it has been agreed with the MOE (in March 1995)that such networkmodifications are a priority in Klaipeda. However, the above-mentioned problems would not be addressedunder the Project, as it is focusing on a much more narrow aspect concerningfossil fuel substitution.
1.15. The GOL has been subsidizingdistrict heating consumptionthrough a combinationof cross subsidiesfrom electricity and direct operating subsidies. Residentialconsumers are also partially compensatedfor that part of their heat bill which exceeds 15% of the household income. This direct subsidy, through LSPS, is capped at an estimated average consumptionlevel based on the cost to heat 15 square meters per resident and an extra 15 square meters per dwelling. In addition, the GOL announced in late 1993 that it would enforce payment of the heating bills by linking it to electricity supply. There are still several inherentproblems with this systemof subsidization:there is no guarantee that cross subsidieswill meet expectedtargets, and the consumercompensation scheme is designed for a certain level of heat use which may not be possible to provide in all areas. Given the different subsidies, the system is administrativelycomplex, and is subsidized even at full tariff level before compensationis provided. 4 Chapter I
Environmental Sector
1.16. Background. Environmentalproblems in Lithuaniaare moderatein number and severity. Most pollutionproblems, particularly air pollution, are concentratedin urban areas and in industrial and energy facilitiesthroughout the country. Municipaland industrialdischarges and agriculturalrunoff into the north Baltic coast, Nemunas river, and Kursiu lagoon have caused serious pollution in these waterbodies. Agriculturalrunoff contributes40-50% of the nutrient load.
1.17. Lithuanian energy production and consumption, together with industrial plants, have historicallybeen responsiblefor the majorityof air pollution in the country. Lithuanianhealth authorities report health effects associated with air pollution (particulates, sulfur dioxide, and nitrogen oxides), principally heart and respiratory diseases. In urban areas and towns, locally significant air quality problems occur during the winter heating season as a result of heavy fuel oil used in low-efficiency boilers used for district heating and building heating. Aggregate air quality data suggest that problems are especiallyhigh in Kaunas, Klaipeda, Siauliai, and Vilnius. While levels of air pollution in general have declined during the last 2-3 years, due to decrease in economicactivity, they should be expected to increase in the medium-to-longerterm perspectiveas the economic recovery occurs, unless energy conservationmeasures are adopted, use of fuel is switchedto less polluting fuels, and actions are taken to control pollution.
1.18. A major concern is the safety of the nuclear power plant, Ignalina, which supplies 90% of electricity requirements, but does not comply with international standards. The international communityand the Group of Seven (G-7) industrializedcountries have requested that the nuclearplants of Sovietdesign that lack the required safety provisionsbe retired as soon as possible, taking into account energy demandin the country and alternativesources of power supply. The Ignalinanuclear power plant is scheduledto be closed by 2008 at the latest.
1.19. Country EnvironmentPolicy and Strategy. Environmentalpolicy is characterizedby a combinationof administrativeprocedures, legislation,and standardsthat were in use when Lithuania was part of the Soviet Union and some new laws and provisionsstipulated by the GOL. Nationalobjectives are to: (a) create a legal system which would support more effectiveenforcement of environmentallaws and regulations;(b) establisha systemof environmentalstandards reflecting European norns; (c) develop an effective monitoring system; (d) improve the system of market based incentives; and (e) join basic internationalagreements and conventions.
1.20. Currently, there are eight laws directly related to environmentalprotection. The General EnvironmentalProtection Law, passed in 1992, is the core of the system and is complementedby a Lithuanianenvironmental assessment procedure. Nine other complementarylaws are under preparation and review. The most importantof these are the Law on EnvironmentalImpact Assessment and the Law on Waste Management. Lithuania is a party to a number of internationalenvironmental conventions and treaties. It is also active in the EnvironmentalAction Program for Central and Eastern Europe and the environmentalworking groups of the United Nations EconomicCommission for Europe (UN/ECE).
1.21. A national environmentalstrategy is being prepared by MOEP, over the past year, by a joint Lithuanianand Irish consultantteam with financingfrom the EU-PHAREprogram. It outlines a program of short- and long-term actions. An important part of this strategy would be the emphasison actionsto reduce the generationof pollutionat source. This study will be completedby September1995. Background S
As mentioned in para. 1.7, there is a trend toward replacing Table 1.1: Emissions from Burning Fuel natural gas with HFO, based on Emission (kg/GJ) slightly higher prices for natural gas than for HFO. This trend is CO2 NO. SO2 TPM definitely a negative one from an Natural Gas 34GJ/ton 71.18 0.1 - - environmental standpoint as HFO emits much higher levels HFO 4OGJ/ton 78.4 0.4 1.8 0.1 of C0 2, NOR, SO2, and TPM (Table 1.1).
Geothermal Sector
1.22. Back,eround. Geothermal water constitutes an enormous potential reserve of energy, which varies in temperature depending on the geological formation and depth. In the Baltic region, access to geothermal water is quite easy, as the drilling depth can be limited to about 800-1200 m in the Devon stratum, where the temperatures are between 25-50°C. Temperatures between 75-85°C can be found at a depth of about 2000 m (in the Cambrium stratum), but the availability of sufficient amounts of water is questionable; that stratum is not recommended for extensive use until further data can be developed.
1.23. The resource for the proposed Project is situated in a series of Lower Devonian aquifer sands underlying the district of Klaipeda, at a depth of about 1,200 meters. These sands are extensive and their properties (thickness, porosity, permeability, sand consolidation, etc.) in the Klaipeda area (based on well tests, core samples and other data) appear to be good to excellent. Being of a sedimentary origin, the properties of the aquifer sands are predictable and may be extrapolated over a large area, thus the heat reserves can be determined with a good degree of confidence.
1.24. During 1989-1993 a Danish consultant group financed by the Danish EPA carried out a comprehensive study (Baltic Geothermal Energy Study) to determine the size and quality of geothermal resources in Latvia and Lithuania and to assess the potential for utilizing geothermal energy to replace currently used fossil fuel for heat generation. With the temperature of the water resources being between 30-95°C, the energy could only be utilized economically for heating requiring access to a district heating system.
1.25. The study confirmed that substantial geothernal aquifers occur within the Devonian and Cambrian strata, and it identified a number of cities, where the use of geothermal energy could substitute for fossil fuel for up to 30% of energy consumption, dependent on the actual aquifer temperature. The study also determined that the largest and most promising storage areas are located in Lithuania.
1.26. The findings of the study underscores the existence of a significant indigenous resource and are briefly described as follows:
The technical supply of geothermal energy within the Lithuanian border is about 345 Exajoules (345x10l8 J) or 96x109 MWh. The economical heat resource is 230 Exajoules or 64x109 MWh. Of this amount, about 69% is located in the Devon stratum. In terms of fossil fuel, this would 6 ChapterI
correspond to 6.8 billion tons of oil equivalent (TOE) or an economic asset value of approximately US $640 billion based on the current fuel price of US $95 per ton.
* The geothermal area in Klaipeda covers 144 square km. The actual geothermal aquifer is at a depth interval of 1,010-1,348 meters, with a permeability of 1,300 mD, and a temperature of 420 C. Klaipeda was found to have superior aquifer conditions, and sufficient geothermal temperature conditions to allow for a demonstration of the extraction of geothermal energy. The estimated supply of economical geothermal energy resource accessible for Klaipeda is 0.5 Exajoules or 139x106 MWh, with an estimated economic value of US $1.4 billion.
* The annual heat demand in Klaipeda based on the existing district heating system is 5,600 Terajoules (5,600x10 2 J) or 1.56x106 MWh. The proposed Project is based on meeting about 10% of the current heat demand for Klaipeda, 530 Terajoules or 1.43xl05 MWh, with an estimated economic value of US $1.5 million per year.
1.27. Based on the study, on August 17, 1993, the GOL issued Decree 631, granting a permit for implementation of the geothermal demonstration plant. This permit, valid for three years, was granted to the Lithuania Power Company (LPC). LPC was simultaneously granted the exclusive right to produce heat energy in the plant for 25 years, and to supply the energy to the Klaipeda district heating network. In addition, the Enterprise Geoterma (EG), a branch of LPC, has a license permitting the search for, and exploitation of, geothermal resources. This license, and right to produce energy from the geothermal plant have by Decree 1609, issued on December 22, 1995, been transferred to EG. Furthermore, the new EG's Articles if Association, registered on March 1, 1996, describes the commercial-economic activities related to the Lithuanian geothermal resources.
C. Bank Strategy and Experience
1.28. The recent Energy Sector Review prepared by the World Bank (May 1994) highlighted the following needs: (a) to target limited investment resources to improve production efficiency; (b) to set price incentives to promote conservation; and (c) to improve the security of fuel supplies. The Review recognized the benefits of geothermal energy for application in district heating.
1.29. The Bank's environmental strategy in Lithuania is to support implementation of a limited number of priority environmental investments which have significant impact and are complemented by support for institutional strengthening activities. The Bank strategy recognizes the need to support preventive measures to avoid adverse environmental impacts, through the use of policy and regulatory measures. The Bank also seeks to develop projects which can provide the basis for the effective mobilization of resources from other international financial institutions, bilateral donors and nongovernmental sources.
1.30. Bank experience in geothermal energy projects in Central and Eastern Europe is limited to ongoing preparation work in Poland and Slovakia. In Poland, a project in Zakopane (US $130 million) has been identified, as well as two projects in Zyrardow outside Warsaw (US $60 million) and in Szczecin (US $120 million). In Slovakia, a project in Kosice (US $120 million) has been identified. All projects would use geothermal water at a temperature of 85 - 950C (higher temperatures than would be used in the Klaipeda Geothermal Demonstration Project), and the heat would be transferred using existing Background 7 district heating networks through the use of heat exchangers.
1.31. The Bank's experiencein implementinggeothermal projects is currently limitedin regard to power producingplants such as Olkaria in Kenya (US $59.9 million) for generationup to 45 MW of electricity, and the recently approved project in the Philippines(US $305 million) partly financed by GEF, for generatingup to 700 MW of steam to be producedat Leyte and transported to Cebu and Luzon.
1.32. The involvementof the Bank and the Global Environmental Facility (GEF) in the proposed Project would provide an opportunity to support Lithuanian efforts to reduce dependenceon imported fossil fuels for heating and improve national environmentalquality through the reduction of localizedair pollution (particulatesand SO2 ) and improve the global environmentthrough the reduction of greenhousegases. In the absenceof Bankand GEF involvement,it is unlikelythat the country would be able to mobilizethe technicalassistance and financialresources required to implementa demonstration project of this nature.
1.33. This involvementhas already resulted in establishing the implementingagency as a separatelegal entity under Lithuanianlaw, developinga businessplan for the company's involvementin the developmentof Lithuania's geothermalresources, and contractualarrangements for long-termsupply of geothermalenergy to a district heating companyas well as eventualfuture private sector participation.
H. THE PROJECT
A. Project Origins and Formulation
2. 1 The GOL requestedthe Danish EPA to extendthe BalticGeothermal Energy Study(para. 1.24) to include the preparationof a feasibilitystudy for the constructionof a geothermaldemonstration plant in Klaipeda, which was identified as being the best locationfor a demonstrationproject. The city of Klaipeda is situated on the Baltic Coast on the mouth of the Kursiu Lagoon. With its population of 204,000, Klaipedais Lithuania's third largestcity. The town has an existingdistrict heating networkwith a related annual heat demand (1994) of 5,600 Terajoules (TJ).
2.2 The study indicatedthat a suitablesize of the demonstrationplant could provide about 10% of the heat demand to the KlaipedaDistrict Heating System. Energy could be extracted from the geothermalwater by using heat pump technologybased on absorptionheat pumps. The feasibilitystudy also determined that by reducing the temperatureregime in the district heating network, an additional 24% of geothermalenergy could be extractedwithout any additionalinvestments in the geothermalplant. The proposed geothermal plant would produce 530 TJ annually without reduction of the network temperature. This energy amount correspondsto about 16,500 tons of oil or 19.5 million mi3 of natural gas.
2.3 Preparationof the proposed Project includedan identificationmission in February 1994, a pre-appraisal mission in September 1994 and an appraisal mission in March 1995. In between, a number of preparatoryfield visits were made to review specificissues in combinationwith other missions to the Region. These missions and visits have also includedthe participationof representativesof the Ministry of Environmentof Denmark.
B. Project Rationale
2.4 The proposed Project would be the first geothermal project to supply heat to a district heating system in the Baltic States. It is also the first geothermalproject financedby the Bank, where the geothermalenergy is extractedfrom an aquifer with a temperatureas low as 42-50°C,and transferred to a district heating system by use of heat pump technology.
2.5 The Project is considered a national priority, and is in compliance with the National Energy Strategy's stated aim of developingindigenous energy resources. It also limits the environmental impacts, both localizedair pollution(particulates and sulfur dioxide) and thosewith broader impacts, such as the emissionsof greenhousegases (GHG) and sulfur dioxide (SO2)which are covered by international agreements ratified by the GOL, the Montreal Protocol, and the Framework of Climate Changes Convention. The Project would initiallyreduce the emission of greenhousegases from the boiler houses in Klaipedaby about 10%.
2.6 The feasibility study, supported by the Danish EPA (para. 2.1), shows that the geothermal energy, comparedto other indigenousenergy resources such as peat and wood chips, has a much larger developmentpotential, and a lower heat generation cost based on a production capacity of The Project 9
530 Tl.'
2.7 There is also the potential for a larger impact if the technicaland economicexploitation of this resource is confirmed. Geothermalheat could be expanded to eighteen larger urban areas with existing district heating networks. Of these, seven have been specificallyincluded in the Danish study. The collective annual heat demand of these seven urban areas amounts to approximately50 Petajoules, or 13.5x105MWh. As the heatingnetworks are technicallycompatible, the replicabilityprospects of the proposed geothermal project are good. Continueddevelopment of the Lithuaniangeothermal resource, to cover up to 20% of the district heating demand, would carry an inherent annual reduction in the CO2 emissions related to heat production on the order of 750,000 tons. The correspondingreduction in the SO2 emission amounts to 22,000 tons. The savings, if all eighteen systems were to use geothermal energy, would be equivalentto about 300,000 tons of HFO, with a total annual value of US $29 million, based on the current border price of US $95 per ton.
C. Rationale for GEF Involvement
2.8 The Project would provide a mechanism for the GEF to test the feasibility of low temperature geothermal energy as a means of reducing greenhouse gas emissions, and reduce the dependenceon fossil fuels in district heatingsystems. With successfulimplementation, the Project could serve as a paradigm for other FSU republics with extensive district heating systems and renewable geothermalenergy resources.The Project is eligible for GEF fundingas it conformsto the Guidancefor ProgrammingGEF Resourcesin 1995 as follows: (a) it is sustainable;(b) it is a nationalpriority in the National Energy Strategy; (c) it provides the means of abating GHG at a cost below US $25 per ton of carbon; (d) it includes an essential transfer of technology; (e) it would develop an indigenous and renewableenergy source; and (f) it would demonstratethat a further extraction of geothermal energy is achievablewhen combinedwith other energyconserving measures in the Klaipedadistrict heating system. The high potential of reducinggreenhouse gases led the GEF Councilto approvea US $6.9 million grant on May 5, 1995 for the incrementalcosts of making the demonstrationplant financiallyviable. The calculationof the incrementalcost is described in Annex 1.
D. Project Objectives
2.9 The Project has the followingmain objectives:
* to demonstratethe feasibilityand value of using low temperaturegeothermal water as a renewable indigenousenergy resource in district heating systems;
* to reduce the emissionof greenhousegases (GHG)and SO2 by replacinggas and heavy oil (mazut with a S-contentof 3.5%); and
It shouldalso be mentionedthat peat is not considereda renewableresource, and the limitedamount available has been allocatedfor the industrialand agriculturalsectors. Feedingthe boiler with woodchips would requirea thinningof all forestedareas in Lithuania,which wouldbe unrealistic. Woodchips should be used for smallerboilers in the vicinityof forests. 10 Chapter II
* to promote sustainablemanagement and the developmentof environmentallysound and non- polluting geothermal resourcesboth in a national and regional perspective.
E. ProjectComponents and Description
2.10 Project Description. The proposed Project would be developed as an environmental/energymanagement project in the city of Klaipeda.The Project has two complementary components:
(a) TechnicalAssistance and Training Componentfor:
* design of the geothermal loop includingall necessaryequipment for extracting the heat from the geothermal water and transferring it to the district heating system;
* preparation of detailed drilling, testing, and completionprograms;
* managementsupport for project implementation,including support in preparing tender documents, and constructionsupervision; and
* training of Lithuanian staff and managementin the operation of a similar geothermal plant in Thisted, Denmarkto optimizethe transfer of technology.
(b) InvestmentComponent for:
* establishmentof two production wells and one injectionwell;
* above ground facilities includingbuilding and necessary equipmentsuch as absorption heat pumps, heat exchanger,and auxiliary equipmentfor control and regulation of the plant and the heat transfer to the district heating system; and
- piping between productionwells and geothermalplant, and betweenthe geothermalplant to the injection well, and piping between the geothermalplant and the district heating network.
A summary of the elementsof the proposed Project is provided in Chart 1 and further details concerning the TA componentare given in Annex 2.
2.11 Technology. The proposed geothermalproject involves the circulationof 600 m3/h of 42°C geothermal water from about 1,200 meters depth via a closed geothermal loop, utilizing a heat exchangerand heat pumps for the retrieval and subsequentsupply of heat into the existingdistrict heating network in Klaipeda. The geothermalwater wouldbe extracted from two productionwells and returned with reduced temperaturesto the samnedepth to maintainformation pressure and to avoid creating water pollutionproblems. The technologyproposed for utilizationof the availablelow temperaturegeothermal heat in existing district heating networks is well developedand is being employedin several European towns and cities. A more detailed descriptionof the proposed geothermalplant is presented in Annex 3. Chart 1 LITHUANIA- KLAIPEDAGEOTHERMAL DEMONSTRATION PROJECT Klilpede GeothermalDemonstration Plant Component IKGDPC) in US $ MllHon
Local Loan Grant Total Element Benefits ContrN_tIon
2.6 World GEF: 17.62 Drillingoperation 1.91 Project would providefor the cost-effectiveutilization of an Bank: 5.9 indigenousenergy resource. Replacementof fossil fuels for 5.9 Denmark: Completionof wells 0.69 heatingpurposes will resuhIn savingsin foreignexchange. 2.5 Considerablelocal and globalenvironmental benefits will be EU-PHARE: Controland evaluationof drillingoperations 0.1 5 achievedthrough the reductionof CO., SO2, TPM, and NO, 0.12 emissions. Buildingand civil works 0.52
Connectionto boiler houseand external pipeline 0.74
Heat exchangers 0.71
Absorptionheat pumps 6.34
Filters, valves, and internalpiping 0.82
Power, control andregulation 0.72
Projectimplementation support 0.24
Training,Technical Assistance, Contract Project would provideopportunity for Lithuarnanexperts to Coordination& Supervision 2.26 developnew skills in the planning,procurement, implementation, and constructionsupervision of subsequentprojects.
BASECOST 15.09
Physicalcontingencies 0.76
Pricecontingencies 1.78
Total InvestmentCost 17.62
Interest DuringConstruction 0.41
Total ProjectCost 18.03 12 Chapter II
2.12 The region was intensivelyinvestigated and explored in search of gas and oil fields. The geological and petrophysical information from more than 400 boreholes have been compiled and evaluated, and the predicted findings are described in para 1.26. The geotechnicaland geothermal informationlinked to the actual locationsof the demonstrationplant indicate that up to 850 m3/h could possibly be extracted from the two productionwells and the temperatureof the geothermalwater could be as high as 48°C. An increasein temperaturewould give an additional20 TJ/C, and increasedwater extractionswould result in an additional85 TJ/ 100m3/h. Furthermore, if the networktemperature regime were to be discarded as a result of expectednetwork modifications,a larger amount of energy could be extracted from the geothermalwater.
2.13 Drilling will be undertakenusing traditionaldrilling mud (water based bentoniticmud). The risk of severe drilling fluid loss to the aquifer zone and drilling "blindly" is not anticipated. Such problems are encountered in highly fractured geothermal zones associated with faults and volcanic activity, and not in the zone under consideration. Due to its sedimentaryorigin and the total absence of organic material, the aquifer water is unlikely to contain H2S, CO, or hydrocarbons.
2.14 There are technicalrisks, however,which justify starting first with a demonstrationplant. They are: (a) the sustainablelevel of geothermalwater that can be extracted;and (b) the temperatureof the geothermalwater. Even if the plant design is very conservativeand robust, these risks would result in a lower than expectedamount of geothermalheat being extracted. To reduce the impactof these risks the feasibilitystudy is based on an energy extractionwhich is about 30% less than anticipatedmaximum output.
2.15 ImplementationSchedule. Project implementationwould be expectedto begin June 1996 and would be carried out over a three-year period.
F. Cost Estimates
2.16 The total cost of the Project is estimated to be US $18.02 million or LT 72.08 million equivalent, including contingencies,but excluding taxes. The estimated cost distributed among project subcomponentsis shown in Table 2.1.
2.17 The total base cost is estimated at US $15.09 million. Physical contingencies are estimatedat US $0.75 million. Price contingenciesbetween January 1, 1995 and December 1998 would amount to approximatelyUS $1.78 million or 11.2% of base cost plus physical contingencies. Total contingencies represent 16.8% of the base cost. The foreign exchange component is estimated at approximatelyUS $15.01 million includingcontingencies, or about 83% of the total project cost.
G. ProjectFinancing Arrangements
2.18 FinancingPlan. The proposedIBRD loan of US $5.9 millionwould financeabout 32.7% of total Project costs. The loan would be repaid by the GOL over 20 years including5 years grace at the Bank's standard variable rate of interest. The Project 13
Table 2.1: Project Cost Summary by Project Sub-Component
-Litas Million - - US S Million - local foreign total local foreign total
Drilling Operation 0.72 6.92 7.64 0.18 1.73 1.91 Completion of Wells 0.00 2.76 2.76 0.00 0.69 0.69 Control and Evaluation of Drilling 0.00 0.60 0.60 0.00 0.15 0.15 Operations Building and Civil Works 1.44 0.64 2.08 0.36 0.16 0.52 Connection to Boiler House and 2.16 0.76 2.92 0.54 0.19 0.73 External Pipeline Heat Exchangers 0.16 2.68 2.84 0.04 0.67 0.71 Absorption Heat Pumps 1.20 24.16 25.36 0.30 6.04 6.34 Filters, Valves, and Internal Piping 0.32 2.96 3.28 0.08 0.74 0.82 Power, Control, and Regulation 0.36 2.52 2.88 0.09 0.63 0.72 Project Implementation Support 0.48 0.48 0.96 0.12 0.12 0.24 Training, Technical Assistance and 0.64 8.40 9.04 0.16 2.10 2.26 Supervision Base Cost for Geothermal 7.48 52.88 60.36 1.87 13.22 15.09 Demonstration Plant
Physical Contingencies 0.37 2.64 3.02 0.09 0.66 0.75 Price Contingencies 4.22 2.91 7.13 1.05 0.73 1.78 Total Project Cost 12.07 58.44 70.51 3.01 14.61 17.62 Interest During Construction 1.63 1.63 0.40 0.40 WB-financed Total Financing Required 12.07 59.85 72.14 3.01 15.01 18.02 Note: Figures may not add up due to rounding off the nearest decimal point.
2.19 The Global EnvironmentFacility, GEF, would cofinancethe project with a grant of US $6.9 million, equal to 38.1 % of total Project cost. Parallel cofinancing on a grant basis by the Governmentof Denmark(US $2.5 million equivalent)and the EuropeanUnion (US $120,000 equivalent) comprises about 14.5% of total project costs. The local counterpartcontribution of LT 10.4 million or US $2.6 million equivalentwould be provided by the GOL. Satisfactoryevidence that all conditionsof the Bank loan and the grantfrom Denmark have beenfulfilled would have to be submittedprior to the effectivenessof the GEF grant. In addition, it should be agreedthat the MOE would annually identify its counterpart contribution, including EG's recurrent costs during the construction period. The sununarized financingplan presented in Table 2.2 includes the proceeds of the Bank loan, the GOL's contributionand cofinancing. 14 Chapter 11
Table 2.2: Financing Plan by Financier
Financiers Local US % Foreign US % Total US % $ million $ million $ million
IEBRD(loan) 0.21 7 5.69 38 5.90 33 GEF (grant) 6.90 46 6.90 38 Danish Ministry of Environment 0.20 6 2.30 15 2.50 14 (grant) EU-Phare (grant) 0.12 1 0.12 1 Government of Lithuania 2.60 87 2.60 14 Total 3.01 100 15.01 100 18.02 100
Table 2.3: Fnncing Plan by Fiscal Year (US $ million)
Financiers 1997 1998 1999 Total
IBRD (loan) 0.25 3.92 1.73 5.90 GEF (grant) 2.78 4.12 0.00 6.90 Danish Ministry 1.50 0.71 0.29 2.50 of Environment (grant) EU-Phare (grant) 0.10 0.02 0.00 0.12 Government of 1.07 1.37 0.16 2.60 Lithuania
Total 5.70 10.14 2.18 18.02
2.20 Onlendine Arrangements.The Governmentwould onlend proceeds of the Bank loan for EG, under terms and conditions satisfactory to the Bank. As a condition of effectiveness of the GEF grant, subsidiary grant agreement have to have been executed between the Government and EG. The Governmentwould furthermorechannel the GEF grant to EG without adding any charges to the grant.
H. Pro6uement
2.21 Procurementunder parallel cofinancing arrangements (US $2.62 million)would be carried out throughtied procurementin accordancewith procurementregulations of the Governmentof Denmark, and the EU-PHAREProgram. All goods and works to be financedfrom the GEF grant proceeds would be procuredin accordancewith the Bank'sProcurement Guidelines (January 1995), includingamendments as of the loan signing date, using standard Bank bidding documents. Procurementwould be undertaken in the followingmanner: The Project 15
(a) All contractsfunded by the Bank and GEF which are estimatedto cost more than US $250,000 equivalentper contractwould be procured followingInternational Competitive Bidding (ICB). The Borrower would use the Bank's Standard Bidding Documents for Supply and Erect Contracts. Eight contracts totalling US $14.6 million would be for: (a) drilling operations to establish production and injectionwells; (b) well completion;(c) building and civil works; (d) connectionto boiler house and external piping; (e) absorption heat pump; (f) heat exchangers; (g) filters, valves and internal piping; and (h) control and regulation equipment, and would be awarded under ICB. Such contracts would include all goods and civil works necessary for componentimplementation. The proposedprocurement arrangements are describedin Table2.4.
(b) Packagesprocured through ICB would accountfor 100% of the total value of the BankLoan and 92.1 % of the total value of the GEF grant. Invitationsfor bids would be grouped in sizeablebid packages to enhance competition and benefit from economies of scale in bid prices. The proposed packages for ICB procurementare described in greater detail in Table 2.5.
(c) One contract for consultantservices, financedby the GEF, for control and evaluationof drilling operations (US $0.16 million) would be procured through shortlistingand competitiveselection accordingto Bank Guidelinesfor Use of Consultants(August 1981).
2.22 Procurement training was provided by the Bank's Procurement Specialist for representativesof the MOE, LSPS, KDHE, and EG. TENA (the procurementunit of LSPS) would be involved in the preparation of bidding documents and procurement arrangements, and already has experience in the preparation of procurementdocuments in accordanceto Bank standards. In addition, to build up EG's procurement capacity, provision of international technical assistance for Project implementationprovided under the Danish grant should ensure adequateadministration of procurement (see Annex 2).
2.23 ProcurementReview. All ICB procurementpackages for goods and civil works valued at US $250,000 or more would be subject to the Bank's prior review and approval, in accordancewith paragraphs2 and 3 of Appendix1 of the Bank's ProcurementGuidelines. All prior review itemnswould cover 100% of the total amount of the loan and the 92.1 % of the GEF grant. The prior review threshold for consultantservices is US $100,000 for firms, and US $50,000 for individuals. Other loan-funded activitieswould be subject to the Bank's post review during the supervisionof the project, in accordance with paragraphs3 and 4 of Appendix 1 of the Guidelines.
2.24 All documentsrelated to the GEF financedconsulting services as well as the Terms of Reference(TOR) for TechnicalAssistance provided under the grants from Denmarkand EU-Pharewill require review by the Bank.
2.25 Procurement Monitoring. Procurementdata would be collected and recorded for: (a) prompt reporting of contract award informationby the Borrower; (b) comprehensivequarterly reports to the Bank by the Borrower; and (c) revised timing of procurement actions, including advertising, bidding, contract award, and completiontime for individualcontracts. 16 Chapter II
Table 2.4: Procurement Arrangements
ProjectElement ICB-WB ICB-GEF Oter N.B.F. TotalCost
Civil Works and LargerEquipment
DrillingOperation 2.12 2.12 1.87 1.87- Buildingand Civil Works 0.75 0.75 0.23 0.23 Connectionto BoilerHouse and Extemal Pipeline 1.09 1.09 0.22 0.22 HeatExchangers 0.82 0.82 0.75 - 0.75 AbsoptionHeat Pumps 3.63 3.63 1) 7.25 3.37 - 3.37- 3.37 3.37 SmallerEquipment
Completionof Wells 0.75 0.75 0.75 0.75- Filters,Valves and Intemal Piping 0.96 0.96 0.82 0.82 Power,Control and Regulation 0.86 0.86 0.86- 0.86- ProjectImplementation Support OfficeEquipment 0.09 0.09
ConsultantServices
Controland Evaluation of DrillingOperations 0.16 0.16 0.16 0.16 ProjectImplementation Support StaffiRng 0.22 0.22
Training,Technical Assistance, & Supervision 2.55 2.55
Total Procurement
Total 7.28 7.32 1) 0.16 2.86 17.62 The Bank 5.50 * 5.50 The GEF 6.74 0.16 6.90 -
InterestDuring Construction 0.40 '
Total 18.02 The Bank 5.90 TheGEF 6.90-
N.B.F.* NotBank Flnd BankLoan Flnunced Ponut - GEFFinanced P.remflt Accordingto BankGuidelines for Use do ConuUtInts (August1961)= US $0.16 mrblhon 1) TheInnt ccoat r abswponheat pumps s equalyr bewuanwe andGEF. as dr fœnandIc4nuuanIs 1U. The Project 17
Table 2.5: Summary of Procurement Packages
Est.Cost Procurement Preparatonof TenderDoc Bid Contract Contract Sub-Components US $ MiUlion Method BiddhgDocs Issues Submittd Signed Completion
Civil Works and LargerEquipment
DrillingOperation 2.12 ICB Aug 15,95-Apr1,96 Apr 16,96 Jun 14,96 Aug 1,96 Dec30,96 Buildingand Civil Works 0.75 ICB Sep2,-Oct 29,96 Oct30,96 Doc31,96 Feb 13,97 Jul 28.97 Connectionto BoilerHouse and Extemal Pipeline 1.09 ICB Jan 1-Mar17,97 Mar 17,97 May19,97 Jul 18,97 Feb28,96 HeatExchangers 0.82 ICB Jan1-Mar 31,97 Apr 2,97 Jun 4,97 Sep2,97 Oct 2.96 AbsorpfionHeat Pumps 7.25 ICB Jan 1-Mar31,97 Apr2,97 Jun 4,97 Sep2,97 Oct2,98
Smaller Equipment
Completionof Weils 0.75 ICB Aug 15,95-Apr1,96 Apr 16,46 Jun 14,96 Aug 1,96 Dec30,96 Filters,Valves and Intemal Piping 0.96 ICB Jan 1-Mar31,97 Apr 2,97 Jun 4,97 Sep2,97 Oct2,98 Power,Control and Regulation 0.86 ICB Jan 1-Mar31,97 Apr 2,97 Jun 4,97 Sep2,97 Oct2,98 ProjectImplementation Support OfficeEquipment 0.09 N.B.F. tbd tbd tbd tbd Dec31,96 iConsultant Services
IControland Evaluation of DrillingOperations 0.16 shortlisting Aug 15,95-Apr1,96 Apr 16,96 Jun 14,96 Aug 1,96 Dec30,96 iPrject ImplementationSupport Staffingof PIU 0.22 N.B.F. tbd thd tbd thd Dec31,98
Training,Technical Assistance, & Supervision 2.55 N.B.F. N/A N/A N/A NIA Dec31,98
Total 17.62 18 Chapter 11
I. Disbursements
2.26 The proposed Project is expectedto be disbursedover a period of four (Bank)fiscal years (1996-1999)with an estimatedclosing date on July 31, 1999. Disbursenents per year are shown in Table 2.6. Table 2.7 shows the disbursement, per fiscal year, of all the financier's contributions for the project. Descriptionsof all the Bank loan and GEF grant proceeds and forecasts of expenditureand disbursementfor the proposed Project are shown in Table 2.8. The disbursementschedule is shown in Table 2.9.
Table 2.6: Disbursement by Year (US $ MMilion)
Bank Fiscal Year 1997 1998 1999
Annual 5.70 10.15 2.17 Cumulative 5.70 15.85 18.02 Cumulative % of Total 31.63 87.95 100.00
Table 2.7: FinancingPlan by DisbursementCategory
Project Element IBRD GEF Local Contribution Amount % Amount % Amount %
Clvil Works and Larger Equipment
Drilling Operation 1.87 27.12 0.25 10.62 Buildingand Civil Works 0.23 3.91 0.52 22.06 Connectionto Boiler House and Extemal Pipeline 0.22 3.73 0.87 36.63 Heat Exchangers 0.75 10.90 0.07 3.04 Absorption Heat Pumps 3.37 57.10 0.52 21.98 3.37 48.81
Smaller Equipment Completionof Wells 0.75 10.82 Filters, Valves and Intemal Piping 0.82 13.93 0.13 5.67 Power,Control and Regulation 0.86 14.55
Consultant Services
Control and Evaluationof Drilling Operations 0.16 2.35
Loan Service Cost During Construction 0.40
Total Disbursement 5.90 100.00 6.90 100.00 2.36 100.00 The Project 19
Table 2.8: EstimatedSchedule of Disbursements
Quarter LoanDisbursement Cumulative Disbursementprofile SinceApproval ThisQuarter Cumulative Total% Sector Sector" Regional*r
FY 1997 September,1996 0.01 0.01 0 December,1996 0.01 0.02 0 0 0 0 March,1997 0.05 0.07 1 June,1997 0.18 0.25 4 3 6 3 FY 1998 September,1997 0.39 0.64 11 December,1997 1.65 2.29 39 6 14 10 March,1998 0.07 2.36 40 June,1998 1.82 4.18 71 14 30 18 FY 1999 September,1998 1.72 5.90 100 December,1998 0.00 5.90 100 26 38 26 March,1999 0.00 5.90 100 June,1999 0.00 5.90 100 42 54 46
Loan Closing Date July 31, 1999 * AflRegoions - subseor set- power All Regions- subsedor set - miningand extraction Region- sector set - energy
2.27 The proceeds of the Bank loan and the GEF grant would be disbursed against:
(a) For goods: 100% of foreign expenditures,100% of local ex-factoryexpenditures and 80% of local expendituresfor other items procured locally;
(b) For works: 100% of foreign expendituresand 80% of local expenditures;and
(c) 100% of expendituresfor consultancyservices and training.
All cofinancerswould manage their own disbursements.
2.28 Disbursement requests would be prepared and submitted to the Bank by EG. It is expected that EG staff would attend disbursementtraining courses organizedby the Bank.
2.29 Disbursementwould be made against standard Bank documentation.The documentation to support these expenditureswould be retained by EG for review by Bank supervisionmissions and verificationby externalaudits. Disbursementrequests would be fully documentedexcept for expenditures under contractsfor goods and equipmentvalued at less than US $250,000 equivalent, where statements of expenditure (SOE) would be used. The minimum size of the application for direct payment and issuance of a special commitmentis US $100,000 equivalent.
2.30 To facilitate Project implementation,the Borrower would establish a SpecialAccount in one of the major foreigncommercial banks on terms and conditionssatisfactory to the Bank to cover the Bank's share of expenditures.The authorizedallocation would be US $500,000, representingabout four 20 ChapterII months of average expendituresmade through the Special Account. During the early stages of the Project, the initial allocationto the SpecialAccount would be limited to US $250,000. However, when the aggregatedisbursement under Loan has reachedthe level of US $2,000,000, the initialallocation may be increased to the authorized allocation of US $500,000 by submitting the relevant applicationfor withdrawal. Applicationsfor replenishmentof the SpecialAccount would be submittedmonthly or when one-third of the amount has been withdrawn,whichever occurs earlier. Documentationrequirements for replenishmentwould follow the standard Bank procedure as described in the DisbursementHandbook, Chapter 6. In addition, monthlybank statementsof the SpecialAccount which have been reconciledby the Borrower would accompanyall replenishmentrequests. During negotiationsthe termnsand conditions of the establishmentand operationof the SpecialAccount were set forth.
J. EnvironmentalAspects
2.31 Preparationof the proposed Project has includedan environmentalreview consistent with the applicable procedures of the GOL and the provisions of World Bank Operational Directive 4.01, "EnvironmentalAssessment" for a category "B" project. As the Project would not generate waste or any emissionsto either air or water, the review has been basedon gatheredinformation about environmental benefits as a result of reduced consumptionof fossil fuels. Implementationof the Project would result in improvementof ambientair qualitythrough annual reductionsin emissionsof CO2 and NO, to the amount of 47,800 and 310 tons respectively if natural gas is replaced, and 51,940 and 265 tons respectivelyif HFO is replaced. In addition, the replacementof HFO would result in an additional reduction of SO2 of about 1160 tons per year. The reduction of S02 and NO, would result in an improvement of the ambient air quality at the national level, while the reduction of CO2 is regarded as a global benefit, thereby also making the project eligible for GEF funding. Annex 4 summarizesthe findings of the environmentalreview. Attached as Annex 5 is the Bank's EnvironmentalData Sheet.
2.32 EG has received all routine approvalsfor constructionof the geothermalplant, including the local electricity company and the water and sewage company. EG has also received a formal environmentalimpact clearance from the Ministryof the Environment. The Ministryof Constructionand Urban Development,will issue the permissionto start construction.
III. PROJECT IMPLEMENTATION
A. Enterprise Geoterma
3.1. The implementing agency for the Project will be the closed Joint Stock Company EnterpriseGeoterma (EG). Its staff was previouslyemployed by the LithuanianPower Company(LPC), within which it constituted a unit entrusted with the promotionof geothermal energy. EG was formed through a Governmentdecree dated December22 1995. The majority shareholderof the companyis the Governmentof Lithuania (GOL) through its Ministry of Energy. LPC remains a minority shareholder of the company.
3.2. The focus of the company is the developmentof the geothermalresources in Lithuania. To that end, EG will act as project promoter, developerand operator/administrator.Given the financial constraintson the company,it intends initiallyto focus on the implementationof the Klaipedageothermal project. Subsequently,and subject to accessto soft financing,it will promote other projects in Lithuania (such as developmentof the Vidmantaiwells or a new geothermalfacility at Silute). The companyhas, as a middle term goal, to becomea provider of expertise in geothermal energy and the utilizationof hot industrial waters, and operate not only in Lithuania, but also in the other Baltic countries.
3.3. The shareholders' agreementbetween GOL and LPC dated February 15, 1996 provides that the initialcapital of the companywill be LT 5.8 million. The companywill issue 0.58 million shares with a par value of LT 10 each. The initial contributionto the capital is to be paid for by March 1, 1996. It is expectedthat the capital contributionof LPC, of LT 2,793,800 LT, will be in kind (essentially the two geothermal wells at Vidmantai referred to above), and will not increase in the future. On the other hand, the Government is expected to contribute initially LT 3.0 million, and during project implementation,will contribute an additional45.5 million LT. As a result, the Governmentshare will increasefrom 52% in early 1996 to 94%. Each percentage in shareholding gives the right to appoint a Director to the company's Board. While EG has been set up as a closed joint stock company, the Shareholders' Agreementprovides that the acquisitionof shares is open to new investors under certain conditions.
3.4. EG has a Board of Directors comprising five members, of which three represent the Governmentand the others LPC. The Chairman of the Board is the Undersecretaryof the Ministry of Energy. The Board meets about four times annually.The Board determinespolicy and has the authority to approvethe annualwork program and the budget, to approvethe appointmentof senior personnel, and to approve the interim and annual accounts of EG. The day to day managementof the company is delegated to the ManagingDirector.
3.5. Project Implementation.EG will be responsiblefor Project implementation. EG will be assisted, as required, by internationalconsultants to support the preparation of technical specifications, biddingdocuments, tendering,bid evaluation,contract awards, supervisionof civil works and equipment installation,and follow-upactivities.
3.6. Otherspecific responsibilities of the EG under supervisionas a closedjoint stockcompany are the following:
(a) improve and finalize TORs, preparation of short-lists, and technical evaluation of TA proposals received; 22 ChapterIII
(b) preparation of detailed specifications and procurement documents for approved equipment lists, review of bid packages and evaluation of offers received;
(c) prepare and submit disbursement requests to the Bank and bilateral donors;
(d) monitoring of detailed procedures, implementation schedules, and program(s);
(e) review of physical targets and preparation of revised estimates of financial resources needed to support future actions;
(f) liaise with the Bank and other involved agencies for Project administration and supervision matters;
(g) prepare and distribute consolidated periodic reports to the MOE, MOF and other participating institutions, including the Bank, reflecting: (i) the status of implementation progress, problems encountered and corrective actions needed; and (ii) current costs of each Project sub-component and estimated costs of completion;
(h) ensure the timely preparation and submission to the Bank of annual audit reports of Project expenditure, including Statements of Expenditure (SOEs) and accounts; and
(i) prepare a draft Project Completion Report (PCR) within six months after the completion of the Project.
3.7. Table 3.1 provides a summary implementation schedule and detailed schedules are presented in Annex 6. Project inplementationschedules will be confirmedduring negotiations.
Table 3.1: Project Implementation Schedule
1995 1996 1997 1998 I0 Name Qtr2 atr3 Dir4 Otri 1a2 1Otr3 Ctr4Itri C1i2 1tr 3 O4dT11 Otr2 Tr3otr,4 otrI I DrlINngoperations U1 5 12,9 2 CornipU ofwelts 8U15 12/9 3 Controland evauation of drlflngoperations g,1 _2/9 4 BuNdlng& cMI works 7/1 728 5 Connedto boilerhoue& externalpipeline 11/ m 8 Hestexchangers 1119130 7 Absorptionheat pumps 111 10Q 8 Fllter, vatles andIntemrl piping 111 9no 9 Power,control and regulation 11
10 TnFlng & TAprovided by Doanes 10/2 12/31 ProjectImplementation 23
B. ProjectSupervision
3.8. The proposedProject would be supervisedby Bankpersonnel from both headquartersand the Riga and Vilnius officesof the RegionalMission for the Baltic Countries. In addition,representatives of the Danish EPA would also participate in supervision missions. A proposed supervision plan is presented in Chart 2.
3.9. Recognizing that the proposed Project would be the first Bank project in Lithuania involvinginstallation of sophisticatedmechanical and electrical equipment for transferring geothermal energy to a district heating system, it is anticipatedthat it would require significantsupervision (about 20 sw/year). This supervision would be particularly intensive during the first two years when considerableinput would be required for engineeringand procurementaspects. In later years, supervision would be reduced to about 15 sw/year.
3.10. A mid-tern review would be conductedto evaluateproject progress and assess the status of actions to be undertaken to ascertain a successful Project implementationand to strengthen EG's managerialcapacity for further developingthe geotherrnalresources of Lithuania. The loan agreement would includeprovisions which allow the Bank, in consultationwith the Borrower, to make adjustments in the details of these items and the schedule for their implementation.
3.11. Giventhe essentialrole program monitoringand evaluationplay in determiningthe impact of a given interventionon developmentobjectives, a number of indicators will be used to monitor and evaluate progress during the implementationof the Klaipeda Geothermal Demonstration Project. However, the progress of these indicators would be evaluated in relative, not absolute, terms. During supervision,a selectednumber of commercial,operational, financial and environmentalindicators would be monitored in accordancewith Project objectives. These indicatorswere identified during appraisal, and are described in detail in Annex 7.
C. Reports, Accounts and Audits
3.12. EG, would prepare semi-annualprogress reports on each project component,estimated and revised costs, schedule, objective, and activity (starting from Loan Effectiveness).
3.13. To monitor the financial performance of EG assurances should be obtained during negotiationsthat: (a) it will submitnot later than October 31 of each year its operatingand capitalbudget, as well as the budget of the Project for Bank approval;(b) it will submit on a semi-annualbasis financial progress reports in whichthe actual results would be comparedwith the Budgets; and (c) it will appoint independentauditors satisfactoryto the Bank to audit its accounts, as well as its Project accounts on an annual basis, and the audit reports will be submittedto the Bank within six months of the end of the fiscal year; the audit reports will contain a separate opinionon compliancewith the financial covenantsunder the Loan.
3.14. To monitorproject implementation,during negotiations,agreement will be sought that EG will submitProgress Reports on a quarterlybasis and a CompletionReport in accordancewith Bank Guidelines. 24 Chapter I1
Chart 2: SupervisionPlan during Implementationof the KialpedaGeothermal Demonstration Project
Approx. Activity Organization InvolvedSpecialists - Staff Weeks Total Date TM FinAnal Econom DH-SpecEnv Spec DisbSpec ProcSpec Jun-96 Supervision1 HeadQuarter 2 1 '1 1 1 6 ProjectStartup Res.Mission 1 1 2 DanishEPA 1 1 EU-Phare 1 1
Oct-96 Supervision2 HeadQuarter 2 1 1 1 5 Res. Mission 1 1
Jan-97 Supervision3 HeadQuarter 2 1 1 4 Q Res. Mission 1 1 DanishEPA 1
Jun-97 Supervision 4 HeadQuarter 1 1 1 3 Res. Mission 1 1 Danish EPA 1 1
. Sep-97 Mid-TermReview HeadQuarter 2 1 1 1 1 6 Res. Mission 1 1 2 Danish EPA 1 1 EU-Phare 1 1
Jan-98 Supervision5 HeadQuarter 2 1 1 1 5 Res. Mission 1 1 2
Jun-98 Supervision6 HeadQuarter 2 1 1 4 Res.Mission 1 1 2
Oct-98 Supervision7 HeadQuarter 2 1 3 I 41I Res. Mission 1 1 2
Dec-98 Supervision8 HeadQuarter 2 1 1 4 Res.Mission 1 1 DanishEPA | 1 EU-Phare | 1
|* Feb-99 ProjectCompletion Head Quarter 2 2 4 Report Preparation Res.Mission I 1 IV. FINANCIALASPECTS
A. Background
4.1 The executingagency for the projectwill be the newlycreated EnterpriseGeoterma (EG), whose staff was previouslyemployed by a branch of the LithuaniaPower Company(LPC). EG is a joint stock company,whose majorityowner is the Governmentof Lithuaniaand in which LPC has a minority stake (para. 3.3). The company has only one significant asset, i.e. two wells drilled, but not completed at Vidmantai, at a cost of about US$0.7 million. These wells will constitutethe contributionof LPC to the equity of the company. The opening BalanceSheet of EG, confirmedby the Financial Directors of EG and LPC, was recently received and found satisfactory.
4.2 The heat output resulting from the Project will be used by the KlaipedaDistrict Heating Enterprise(KDHE), a branch of LPC. The financial standingof LPC and KDHE is critical to the future performanceof EG, given that it will be the sole buyer of heat, once the Project has been commissioned The financial records of KDHE are incomplete as, for instance: (a) services provided by LPC headquartersare not charged;(b) branchesdo not have assets registers; and (c) branchesdo not have their own capital. Under the circumstances,special contractualarrangements had to be elaborated to protect EG's investmentin the Project (see section D).
B. Financial Framework for Enterprise Geoterma
4.3 EG at present does not have any externalsource of revenues. As a result, during Project implementation,it needs externalsupport. To that end, the Governmenthas agreedto supportEG through annual grants sufficientto cover its operatingexpenses during Projectimplementation.
4.4 Once the Project is commissioned,EG will sell heat to KDHE, a branch of LPC. Important assumptionsmade are that: (a) in the coming years, EG will be solely concerned with the implementationof the proposed Project (to be fully-financedby external sources); (b) EG will not undertakeany new ventures and/or incur borrowingsbeyond those contemplatedfor the Project; (c) the Project will be built within the estimated costs and time framne,and yield the anticipatedbenefits; and (d) the sellingprice of heat will be US$100/tonof mazut equivalent.The resulting financialprojections can be summarizedas follows in Table 4.1:
Table 4.1 Enterprise Geoterma - Financial Highlights 1999 2000 2001 2002 Energy Sales (Gcal) 126.8 126.8 126.8 126.8 US$thousand revenue 1,634 1,634 1,634 1,634 Operating Expenses 1,204 1,582 1,601 1,616 Interest 271 438 425 406 Net Income 113 (386) (391) (388) Operating Ratio 0.7 1.0 1.0 1.0 Debt:Debtand Equity 47% 47% 47% 46% DebtService Coverage Ratio 2.9 1.4 1.1 1.1 4.5 As the above table indicates,following project completion:(i) EG will operateat a loss, but have a positiveoperating income; (ii) its debt equity ratio will remain adequate,below 50:50; and (iii) 26 Chapter IV most importantly, it will have a positive cash flow, yet its debt service coverage ratio will remain modest, of the order of 1.1. The financial prognosis would have been more encouraging had EG not been subjected to a flat tax equivalent to 1% of its gross assets, which will account for more than 10% of its revenues.
4.6 EG's financial performance in its initial years will undoubtedly be precarious, particularly given its reliance on a single Project to achieve financial security. Furthermore, the company will confront specific financial risks related to Project construction (cost overruns, delays, geological risks etc.) and operation (performance of geothermal wells, cost of inputs' ). In order to mitigate the financial risks, the Project is to be largely financed by equity (67%). Furthermore, during negotiations EG agreed to: (i) submit not later than October 31 of each year its operating and capital budget, as well as the budget of the Project for Bank approval; and (ii) not to enter into new geothermal ventures, and/or incur new long term debt without the prior agreement of the Bank Given these assurances, the financial risks related to EG's operations have been reasonably mitigated.
C. Financial Standing of District Heating
4.7 Another area of concern is the financial standing of the district heating enterprise KDHE, which will use the output of the Project. In recent years, LPC has been operating at a loss, largely attributable to the district heating operations. This is illustrated by LPC's financial results for 1994 in Table 4.2. The main cause for the losses has been the insufficiency of the residential heat tariff in relation to the cost of fuels. The Government is aware of the problem, and has significantly increased those tariffs from 19 LT/Gcal in 1993, to 37 LT/Gcal in 1994 and 83 LT/Gcal in 1995. Nevertheless, one has to recognize that: (a) according to Government estimates, district heating already accounts for 15% of consumers' income;2 (b) individual household extensions are not equipped with meters or regulators so that consumers cannot control their consumption in accordance with needs; and (c) district heating enterprises are not yet equipped to operate on a commercial basis. As a result, at this juncture, losses from the district heating activity are expected to be covered by a combination of a surcharge on electricity tariffs and Government subsidies3.
4.8 In this respect, within the framework of the Power Rehabilitation Project4 the Government and the Bank agreed that: (a) for all practical purposes, power and heat tariffs, together with Government subsidies, will be sufficient to cover costs and allow a reasonable return on investments; and (b) subsidies will be gradually phased out. As indicated in Table 4.2, LPC made a loss in excess of US $77 million in 1994. Government subsidies amounted to US $22 million. The gap was covered essentially by borrowings and delayed payments to suppliers. In November 1995, the Government and LPC submitted a financial action plan to the Bank having as an initial target cost recovery, and aiming to rehabilitate the sector's finances in the medium term. LPC has so far made improvements in regard to collection of
I In particular,electricity will account for 65% of the cost of operatingthe plant, and in excess of 25% of EG's operating expenses. 2 The Governmentsubsidies low incomehouseholds for the portionof the heat bill (heat and hot water)which exceeds 20% of income. 3 Industrialtariffs, at 75 LT/Gcalbroadly cover costs. 4 Loan 3524-LTof May 24, 1994 Financial Aspects 27
Table 4.2: Lithuania State Power Company 1994 Income Statements (US $ mallon),
Electricity Heat Consolidated
Sales Volume (TWh) 7.6 Heat (MGcal) 12.7 Average Revenue per Unit US 2.3c per Kwh US 10.7c Mcal
Revenues 172.2 135.8 307.9 Add: Heat Subsidies 21.5 21.5 Expenses Fuel 22.1 149.8 171.8 Salaries and Wages 19.5 15.7 35.2 O & M 28.0 47.4 75.5 Ignalina Purchases 93.5 0.0 93.5 Other 1.1 1.0 2.1 Depreciation 12.6 7.5 20.1 176.8 221.4 398.2 Less Interest 8.9 0.1 9.0
Net Income (13.4) (64.3) (77.7) 'At the average exchange rate of 4.00 Litas/US S energy debts.
4.9 In addition, the systemic issues of the District Heating sector in Lithuania - including tariffs, operational efficiency, and ownership -- are expected to be addressed under the Second Energy Project currently under preparation. In this respect, LPC is expected to submit to the Bank a program for the transfer of district heating systems to district/municipal, and/or private sector ownership. Furthermore, it is also understood that municipalities have expressed interest in owning heat supply assets for providing heat to their constituents. This could prove a better institutional framework in the long term, provided that the heat supply activity is financially viable.
D. Financial/Contractual Arrangements for Project Operations
4.10 Once the project is commissioned, EG will sell heat to KDHE, a branch of LPC. Given the high investment being contemplated for the geothermal plant and the project being designed to provide heat to KDHE, a take or pay contract between EG and KDHE, on behalf of LPC, has been entered into. The contract provides that, over a 25 year period, KDHE is, under normal circumstances, obligated to accept a quantity up to an amount equal to the base load heat demand over the year: currently equal to 475 GWh corresponding to an effect of 55.8 MW or 48 Gcal/h. The price to be paid will be based on actual heat production cost (border price, custom duty, transport, storage, handling in Klaipeda, 28 ChapterIV
environmental fees) for KDHE during the previous quarter, inclusive of taxes. The contract also specifies that the obligation to purchase will start on January 1, 1999. This contract ensures that EG, upon Project completion, will have a ready buyer for its heat, and secures the price at which it will be compensated. In this respect, this sets an important precedent for the future of the geothermal activity in Lithuania. During negotiations it was agreed that LPC will take all necessary measures to ensure that KDHE complies with its obligations under the take or pay contract. V. PROJECT JUSTIFICATION AND RISKS
5.1 The proposed geothermaldemonstration project is aimed at: (a) developingan unutilized indigenous energy resource which would mitigate the emission of green-housegases (GHG); and (b) demonstratingthat the resource can be used cost-effectivelyto partially replace fossil fuels in the district heating (DH) systemsin Lithuania. Developmentof indigenousgeothermal resourcesis an integral part of Lithuania's Energy DevelopmentProgram as it would reduce the country's dependenceon energy imports (over98 % of primary energy is imported)and also mitigateenvironmentally damaging emissions. In the base case, it is expectedthat 530 Terajoules (TJ) of geothermal energy can be reliably extracted and delivered to the Klaipeda DH system. Additional amounts of heat could be extracted, without additionalinvestment or operatingcosts in the geothermalplant, if: (a) the temperaturein the geothermal aquifer is at the higher end of the range expected; and (b) the DH system is itself rehabilitated and modifiedto improve its operatingefficiency, thereby loweringthe temperatureregime in the networkand increasingthe utilizationlevel of geothermalenergy. Under optimal conditionsthe annual energy yield could reach 650 TJ.
5.2 The replicability of the proposed demonstration plant, from economic, financial and technical points of view, can be fully assessed only after the demonstration plant is operational. However, it is expectedthat a subsequentplant could be built at a lower capital cost by maxniizing local engineeringand other technicalskills developedthrough transfer of technologyunder the demonstration project. The economic analysis has been done for the demonstrationplant and for a subsequentplant built at a lower capital cost, assumingthe base case scenario of 530 TJ/year heat extraction. Additional scenarios,reflecting both down-siderisks and the possibleadditional benefits, have been incorporatedinto the sensitivityanalysis (Tables 5.5 and 5.6).
5.3 The basic conclusionsderived from the economicanalysis are:
* Demonstration Plant: Without taking into account environmental benefits, the proposed demonstrationplant is not economicallyviable. However, grants from the GEF and the Danish EPA, aimed at promoting GHG mitigating technologies, would allow the project to meet its recurring costs and debt-serviceobligations under the expectedcircumstances. In order to yield a real economicrate of return (ERR) of 10%, energy extraction shouldbe raised to 780 TJ/year or the price of the fuel substituted(mazut) would have to be 50% higher than the $100/ton level anticipated. It is estimatedthat this extractioncould be achievedunder the "best case" technical scenario under which: (a) geothermal resources were at 48 °C instead of 42 IC assumed in the base case (to be confirmedthrough the demonstrationplant); and (b) priority investmentswere undertaken to improve the efficiencyof the district heating systems to which geothermal heat would be supplied(this is to be implementedunder a separateproject for which Banksupport has been sought by the Governmentof Lithuania).
* SuccessorPlant: Based on expectedreductions in capital costs and stable fossil fuel prices (US $100/ton of mazut), any successorgeothermal plant would need to supply at least 660 TJ/year in order to yield an ERR of 10%. This is within the range of technicalpossibilities (Table 5.5). Modificationsto the DH networks, expected to be undertakenin the near future, by themselves are expected to have an ERR above 20%, and would allow this level of geothermal heat extraction. Alternatively,mazut prices would need to be 25 % higher than the level anticipated to yield an ERR of 10%. If these heat extraction or fossil fuel price thresholds were not met, specific policy interventions such as environmentaltaxes on fossil fuels, or direct production 30 Chapter V
subsidies,would be required to replicatethe demonstrationplant economically(not considering the environmentalbenefits) and financially.
A. Project Benefits
5.4 Both mazut (heavy fuel oil with 3-3.5% sulfur) and natural gas are presently used in Lithuania's DH systems. The economicvalue of geothermalenergy is based on substitutingfreely traded mazut (the dominantfuel), the price of which is presently market based in Lithuania. The efficiencyof mazut boilers (around 85%) and the operating costs of delivery, storage, etc. (5% of fuel price) have been added to the fuel price. Nationaland global (carbon mitigation)environmental benefits have been added to the basic benefits of fossil fuel substitution. Additionalbenefits wouldinclude the development of an environmentallyattractive indigenousand renewableenergy resource and a slight improvementin energy independence(over 98% of fuels are presently imported). Cost estimates are largely based on imported equipmentand technicalassistance for the demonstrationplant, and a reductionin these costs through the expandeduse of local resources for any successor plant. Valuationof benefits is based on:
* Mazut: The average price of mazut delivered to Klaipedain 1994 was US $66/ton (about the same as 1993). Local prices increasedin early 1995 to about US $110-115/tonand dropped to around US $90-95/tonby mid-March. Average Rotterdamprices over the last six months were US $107/tonfor 1% sulfur heavy fuel oil and US $95/ton for 3 % sulfur mazut (both cif). Based on these prices and recent price trends, it has been assumedthat the price of mazut (3 % sulfur) will reach about US $100/ton (in January 1995 dollars) by 1998, the time the proposed plant starts operating. This is comparable with the present price of natural gas in Lithuania (US $90/thousandcubic meters), which has remained relativelystable over the last two years.
* Environmental Benefits: Based on Bank estimates for similar projects in other comparable countries, the following values have been used: SO2 - US$ 600/ton, NO, - US $250/ton, and particulates - US $1000/ton, CO2 - US $7/ton (US $25/ton of carbon). Mitigation of carbon emissions is assumedto be a global, and not a national, benefit.
5.5 Estimatedreductions in mazut and natural gas, and the relevant pollutant emissionsare presented in Tables 5.1.
Table 5.1: Annual Reduction in Mazut or Natural Gas Usage and Emission Fuel Annual Reduction, tons/yr
Scenario Cost ($) Redn. CO2 SO2 NO PM Mazut 100/ton 16,563 tons 51,940 1,160 110 18 Natural Gas 90/tcm 19,485 tcm 48,000 0 0.05 0 Value,$/ton 7 600 250 1000
B. Project Economic Costs
5.6 CapitalCosts (all costsin constant March 1995 US $). As this is a demonstrationproject, investmentand start-up costs are estimatedto be substantiallyhigher than for a subsequentplant, which Project Justificationand Risks 31 would employ a greater proportion of local engineeringand technical inputs based on the transfer of technology achieved through the demonstration project. Investment costs (including physical contingencies)are estimatedat US $16.3 million for the demonstrationproject and US $13.0 rnillionfor a subsequentplant. Base costs include engineeringand technicalassistance, drilling of production and re-injectionwells, and plant construction. Past explorationcosts are treated as "sunk" costs; additional exploration costs are not expected as the resources are well-documented.
5.7 Operatingand Maintenance(O&M) Costs. Costs were suppliedby consultantsand consist mainly of electricity (for pumping and circulation), maintenance,and salaries. The economicprice of electricity has been assumedat US cents 4.0/kWh (this would be higher if nuclear plant retirementcosts were included). Annual O&M costs are estimated at about US $0.51 million for the first 2 years during which internationalTA is required, and US $0.45 million after that.
5.8 Capital and O&M costs per unit of geothermal heat utilized are sensitive to the level of heat extracted from the geothermal water. These costs are compared in Table 5.2.
Table 5.2: Cost Comparison - Mazut vs Geothermal Heat Cap. Cost Geothermal, $/GJ Mazut, $/GJb Scenario MM$ Cap' O&M Total w/o Env w/Env Demo Only (530 TJRY) 16.3 3.40 0.85 4.25 3.08 4.46 Post-Demo (530 T1/Y) 13.0 2.70 0.85 3.55 3.08 4.46 Amortized over 25 years at a discount rate of 10%. b Without and with national environmental costs and a mazut price of US $100/ton.
5.9 Because of the high capital costs per unit of heat extracted (Table 5.2), the economic viabilityof geothernal energy in Lithuania is sensitiveto the quantity of heat extracted and the price at which it is sold. As the sales price is linked to the prevailing market price of mazut (or natural gas). Referenceprices (excludingenvironmental costs) are presentedin Table5.3 for comparisonwith the costs of geothermal heat production shown in Table 5.2.
Table 5.3: Heating Fuel Reference Prices (excluding environmental costs) Natural Gas based Heat Mazut (3.5% S) based Heat Price, $/tcm $/GJ Price, $/ton $/GJ 90 3.06 70 2.16 100 3.40 80 2.46 110 3.74 90 2.77 120 4.08 100 3.08 130 4.42 110 3.39 Reference heat-equivalentprices include a boiler efficiency and handling cost factor of 85 % for natural gas and 80% for mazut.
C. EconomicRate of Return
5.10 The base case economic rates of return, based on the annual replacementof 530 TJ of mazutby geothermalenergy, are presented in Table 5.4 and the conclusionsare presented in para. 5.16. The detailed analysis is presented in Annex 1.4. 32 ChapterV
Table S.4: Economie Rates of Return
Scenario Capital Cost Economic Rate of Return (%)
million W/o Env. w/National env. w/global env. USS' benefits benefitsb benefitsC
Demo. Plant (530 TJ/Y) 16.3 4.7 9.8 11.7 Future Plant (530 TJ/Y) 13.0 6.8 12.5 14.8 Excluding price contingencies b National environmental benefits include reductions in S02, NO., and particulate emissions Global environmental benefits include national benefits and reduced CO2 emissions
D. Project Risks and Sensitivity Analysis
5.11 Technical Risks. The geothermal resources in the region have been extensively explored and are well documented. Also the technology proposed for utilization of the available low-enthalpy geothermal heat in existing district heating networks is well developed and is being employed in several European towns and cities. However, location-specific technical risks remain connected with the geothermal resources and the condition and operation of the DH system to be supplied. Specific sub- surface risks are related to: (a) the sustainable level (rate) of geothermal water that can be extracted; and (b) the temperature of the geothermal water. These risks can only be fully assessed through undertaking the demonstration project. However, no limitations are expected in the rate of extraction and the temperatures are expected to be in the 42° to 480C range.
5.12 Above surface uncertainties are mainly associated with the temperature of the return water in the DH system and the amount of make-up water added to the system (as both these streams are to be heated by the extracted geothermal heat). The lower the return temperature and the greater the level of make-up water, the higher the amount of geothermal heat which can be utilized, thereby improving the project's economic viability. General efficiency enhancing rehabilitation of the DH system is expected to reduce the average return temperature and reduce the level of make-up water.
5.13 The amount of geothermal energy that is expected to be utilized (with no increase in capital and operating costs) under different possible scenarios of aquifer temperatures and return water temperatures are presented below in Table 5.5.
5.14 The other main project risks stem from possible cost overruns, delays in plant commnissioning, and a fall in the prices of the fossil fuels to be partially substituted by the extracted geothermal heat. The implementation related risks have been addressed through appropriate start-up assistance and by establishing EG as an independent, commercially managed coroporation. Fuel prices are hard to predict, but have remained above the "switching" value of US $92/ton of mazut from January to May 1995 (Table 5.6(b)). Additional project risks include the inability of the geothermal heat supply company EG to recover its supply costs from the DH company, and be financially viable and independent to pursue the further commercialization of geothermal energy in Lithuania and elsewhere. Risks associated with cost recovery and the financial viability of the Project, will be mitigated through a heat supply contract between EG and the KDHE which provides EG with the cash flow needed to operate independently and pursue the future development of geothermal energy. Project Jusdficationand Risks 33
5.15 SensitivityAnalysis: Base case benefits are conservativewith respect to the amount of heat that can be extracted from the demonstration and successor plants. Aquifer temperatures are assumed to be at the low end of the range expected, and larger amounts of geothermal water could be obtained. Environmentalbenefits havebeen excludedfrom the sensitivityanalysis but, if included,would substantiallyincrease the ERR as seen in Table 5.5. The economicsensitivity of the proposed Project, and any successor plant, has been assessedconservatively by: (a) determiningthe values for geothermal
Table 5.5: Variation of ERR with Changes In Aquifer and Network Return Tempeatur
Geothermal Plants Network Indoor Aquifer Yield Economic Rate of Return (%) Return Temp. Temp. TJ/year Temp. °C °C Range 42- 480C w/o Env. Nat'l. Global Benefit Env. Env. Benefit Benefit
Demonstration Plant
Investment US $16.3 million (excl. price contingencies) Basic Design (Base Case) 40-50 18 42 530 4.7 9.8 11.7 45 590 6.2 11.9 14
48 650 7.5 13.4 15.6
Current Situation 35-55 15 42 570 5.8 11.4 13.5 45 630 7.1 12.9 15.1
48 690 8.3 14.4 16.7
MNCC Inplemented 30-35 18 42 650 7.5 13.4 15.6 45 710 8.6 14.8 17.1 48 710 9.8 16.2 18.6 Subsequent Plant
Investment US $13 Million (excl. price contingencies) Basic Design 40-50 18 42 530 6.8 12.5 14.8
45 590 8.5 14.9 17.4
48 650 9.9 16.7 19.2
Current Situation 35-55 15 42 570 8 14.4 16.7
45 630 9.5 16.1 18.6
48 690 10.8 17.8 20.4
MNCC implemented 30-35 18 42 650 9.9 16.7 19.2 45 710 11.3 18.3 21.6
48 770 12.5 19.9 22.7 34 Chapter V heat extraction,capital costs and mazut prices whichwould yield an ERR of 10% (switchingvalues); and (b) determining the impact on the base case ERR if average mazut prices remained depressed (at 85% of the expectedlevel). Worst and best case scenarios, under which heat extraction remains at the base- case level, and capital costs and mazut prices vary simultaneouslyby ± 10% and ± 15% respectively, have also been considered. As a separate case, capital costs for the demonstrationplant have been reducedby the foreign grant contributionof US $9.5 million in order to test whetherthe proposedproject can cover its recurring costs and debt-serviceobligations under the sensitivityscenarios considered. The analysis is presented in Table 5.6(a) and (b).
Table 5.6 (a): Sensitivity Analysis Heat Base Capital Costs Subst. Fuel Price TJ/Y ERR % +10% -10% +15% -15% Demonstration Plant Heat Extraction Rate (TJ/Y) and ERR (%) 530 4.7% 4.4% 5.8% 6.6% 2.9% Individual Switching Values (for 10% FIRR) 780 $9.8 million S 150/ton 'Worst Case' ERR: +10% Cap. Costs/ -15% Fuel Price 530 < 2.1% 'Best Case' ERR: -10% Cap. Costs/+15% Fuel Price 530 < 7.7%
SuccessorPlant Heat ExtractionRate (T/Y) and ERR (%) 530 6.8% 6.1% 8.1% 9.0% 4.8% IndividualSwitching Values (for 10% ERR) 660 $ 9.8 million $ 125/ton 'Worst Case' ERR: + 10% Cap. Costs/-15%Fuel Price 530 < 4.0% > 'Best Case' ERR: -10% Cap. Costs/+ 15% Fuel Price 530 < 10.2%
Table 5.6 (b): Indicative Financial Sustaiaabilityof Demonstration Plant Heat Base CapitalCosts Subst. Fud Price TJ/Y FIRR % +10% -10% +15% -15% DemonstrationPlant - excluding foreign grants Heat ExtractionRate (TJ/Y) and FIRR (%) 530 11.5% 10.3% 12.8% 14.0% 8.8% IndividualSwitching Values (for 10% ERR) 485 $9.8 million $ 92/ton 'Worst Case' FIRR: +10% Cap. Costs/ -15% Fuel Price 530 < 7.8% 'BestCase' FIRR:-10%Cap.Costs/+15%FuelPrice 530 c 15.5%
5.16 The following key conclusionscan be derived from the sensitivityanalysis:
(a) The demonstrationplant will need grant funds in order to be financiallysustainable; grant funds already secured would allow the plant to cover its recurring costs and debt service obligations. The plant could maintain a 10% financial rate of return on its non-grant capital if total capital costs increasedby 15%, fuel prices dropped by 8% (to US $92/ton), or heat extraction dropped to 485 TJ/year.
(b) Under the base case scenario, a successor plant would need to extract at least 660 TJ/year of geothermalheat in order to yield an ERR of 10% (excludingenvironmental benefits). This level of extraction is within the range of technical possibilities when pursued in combinationwith Project Justificationand Risks 35
expected network modifications. Its achievement could be better defined through the demonstrationplant and further facilitated through efficiency-enhancingnetwork modifications. Under the best scenario expected,geothermal heat production would be about 770 TJ/year. The successor plant is sensitive to changes in capital costs and the prices of substitute fossil fuels. A reduction in capital costs by 25% (to US $9.8 million excludingprice contingencies)or an increase in substitute fuel (mazut) prices to US $125/ton (in constant 1995 US $) would be needed to yield a 10% ERR. These switchingvalues are not expected to be reached.
5.17 Impacton Energy Imports. Lithuania's low temperaturegeothermal resources would be utilized mainly to complementcentralized district heating systems by substitutingpart of the base load supply presently provided by fossil fuels. It is estimated that about 10% of this heat supply in about seven cities could be substitutedby geothermalenergy. Based on a total productionof 51,014 TJ of hot water from centralizedheat-only boilers in 1994, geothermal energy could conceivablyreplace 5,000 TJ (about 120,000 toe) of imported fossil fuels, or about 2% of total 1994 fossil fuel imports.
5.18 Economic PerformanceCriteria. Specificparameters which will be monitored during project implementationbecause of their potentialimpact on the economicviability of the proposed Project (and any subsequentgeothermal plants) will include: (a) capital and operating costs; (b) sales price of geothermal energy; (c) quantity of geothermal heat extracted and sold; and (iv) operatingconditions of the DH system needed to optimize the use of geothermal energy.
ANNEX 1
CALCULATION OF INCREMENTAL COST
AS BASIS FOR GEF GRANT
Annex 1 LITHUANIA
KLAIPEDA GEOTHERMAL DEMONSTRATION PROJECT
CALCULATION OF THE INCREMENTAL COST TO BE COVERED BY GEF
1. The fundamental basis for estimating the incremental cost is to compare the proposed project with an alternative way for producing the same amount of energy. At an early stage of project preparation the use of other energy resources such as peat, wood chips, coal, gas, and low sulfur oil was compared with the energy (500 TJ) produced from the geothermal water. To also include the issue of sustainability the study included a geothermal plant implemented with Lithuanian planning based on the Technical assistance provided under the project. The result of the study was as follows:
Energy Production Investment Annual ERR excl. Env. Alternative Cost US $M O/M Cost US $M Benefits
HFO (1% sulfur) 0.7 1.68-1.71 14.4 Coal 2.3 1.51-1.55 11.0 Natural Gas 0.6 1.99-2.00 < < 0 Peat 5.6 1.32-1.37 6.3 Wood Chips 7.8 2.43-2.47 < < 0 Geothermal Demo 17.0 0.64-0.78 3.4 Geothermal Sub-sequent 9.6 0.44-0.60 15.2
2. The purpose of the study was not to look into alternative fuels in detail, and therefore the comparison was based on only necessary investments in the existing boiler house, where the geothermal plant will be built, to accommodate other types of fuel. The revenues of heat produced by the different energy sources was based on US $110/ton. The results were only used to justify the subsequent project preparation, because the subsequent plants do have an advantage compared to all the other alternatives.
3. Among the energy sources listed above only peat, wood chips, and geothermal water are indigenous. Peat is not renewable, and furthermore, the sparse peat resources has been allocated for the agricultural sector and should not be regarded as readily available. The arnounts of wood chips are limited in Lithuania, and are mainly available in the Eastern part of the country, which results in quite costly transportation costs. Furthermore, to feed the boiler in Klaipeda with wood chips to produce the 500 TJ would require that all Lithuanian forests be included in the thinning operations.
Amount of fuels replaced by geothermal energy
4. The heat demand for Klaipeda is currently 5600 Terajoules (TJ), and is expected to increase to about 7,500 TJ by year 2000. The heat is delivered by the Klaipeda District Heating Enterprise and generated by the use of mazut (Russian heavy fuel oil with a sulfur content of 3.5%), and natural gas. 2
5. The geothermaldemonstration plant wouldproduce 500 TJ by extracting this energy from geothermal water using of absorption heat pump technology. Use of electrical heat pumps is not a competitivealternative due to the already increased electricitytariffs.
6. The extracted energy will replace an equivalent amount of energy produced from fossil fuels in boilers with an efficiencyof 80%. The extracted 500 TJ correspondsto an annual reduction of 15625 ton of mazut or 18.382 million m3 of natural gas. The current fuel mix for heat supply is 65% mazut and 35 % natural gas, which is used as the base for calculatingthe amount of fuel replaced by the geothermal energy.
Mazut Natural gas Demand covered by 325 TJ 175 TJ Energy content in 40 GJ/ton 34 GJ/1000 m3 Energy replaced at 80% efficiency 10,156 ton 6,434 M m3
Reductionof CarbonDioxide Emission
7. Basedon the assumptionthat the geothermalenergy would replaceeither mazut or natural gas the over the lifetimeof the project (25 years), the reductionin carbon dioxide would be 1.225 million ton and 1.132 million tons respectively,(reductionis based on 3,136 kg C02/ton of mazut, and 2,463 kg 3 C0211000 m of natural gas). The actual fuel mix gives a reduction of 1.196 million tons over the lifetime of the project.
IncrementalCost rmancedby GEF
8. The investmentcost for the GeothermalDemonstration Plant was originally estimatedat US $17.6 million, which is the investmentused in the PID and the WC SAR. This cost has recently been reassessed, and is currently expected to be reduced to US $15.6 million due procurement under InternationalCompetitive Bidding (ICB), and reevaluationof the basic cost estimate.
9. The investmentwill includethe followingsub-components: US $M 1) Drilling Operations and Well Completion 3.00 2) Control and Evaluationof Drilling Operations 0.12 3) Buildingand Civil Works 0.61 4) Connectionto Boiler House and External Pipeline 0.70 5) Absorption Heat Pumps 7.00 6) Power Control and Regulation 0.80 7) Project ImplementationUnit 0.27 8) Design and TechnicalAssistance 2.50 TOTAL INVESTMENT COST 15.60 3
Assumptionsfor calculationof IRR without environmentalbenefits
1) Project lifetime 25 years 2) Investmentcost US $15.6 million 3) Recurrent cost US $0.71-0.84 million 4) Revenues are equal to projected cost for fuel saved 5) Recurrentcost includesreplacement of certain equipment,to maintain the investmentsin full operation
10. The IRR of the GeothermalDemonstration Plant is 4.2% based on an investmentof US $15.6 million and a reduction of fuels in correspondencewith the actual fuel mix. To achieve an IRR of 10% the investmenthas to be reduced to US $8.6 million.
11. Basedon the calculationsof IRRwithout environmentalbenefits, the incrementnecessary to make the demonstrationplant defendableas an investmentreducing the global warming effects of carbon dioxide, is estimatedat US $6.9 million. The reduced emissionof CO2 during the lifetimeof the project is, as mentionedin paragraph 7, 1,196 milliontons. The cost effectivenessof emissionsreduction is calculatedat cost of US $5.85/ton CO2 or US $21.45/ton C.
Sustainability
12. The future developmentof the geothermal resources is dependent on the possibility of implementingsimilar plants at a lower cost, as it cannotbe expectedthat grant support would be available after the implementationof the demonstrationplant.
13. During the preparationof the project it becomesclear that a reduced temperatureregime in the district heating network would increasethe energy extractionfrom the geothermalwater without any increase in investmentand operationalcosts. In order to maximizeutility, the overall World Bank Project includes another componentwhich will finance the modificationof network connections(sub- stations).
14. The Modificationof Network ConnectionsComponent, MNCC, will finance exchange of all sub-stationsin the networkat a cost of US $8 million, and give an IRR of over 20%. In view of the very high IRR, it must be anticipatedthat this kind of measures will be implementedin all district heating systems. The resulting reduced temperatureregime will enablean increasedextraction of energy from the geothermalwater with 24 %, which means that the amount of energy in future installationswill be 620 TJ instead of 500 TJ.
15. The LithuanianDesign Institutehas calculatedthe investmentfor subsequentplants build entirely in a Lithuanianconcept, after having received the training included in this project, at US $9.6 million. This cost will be re-examinedin the very near future. However, assumingthat the investment may increase by 25% to US $12 million, the investmentbased on an extraction of 620 TJ is still acceptable. The IRR for investmentsof US $9.6 million and US $12.0 million is 13.0% and 10.2% respectively.
ANNEX 2
TECHNICAL ASSISTANCE PROVIDED UNDER THE DANISH GRANT
Annex2
Technical Assistance Provided Under the Danish Grant
Background
1. The Danish Environmental Protection Agency has offered parallel financial support for the implementation of the Klaipeda Geothermal Demonstration Project up to US $2.5 million. The Danish support has been referred to as the technical assistance component (TAC) under the Klaipeda Geothermal Demonstration Project, comprising four major fields of activity. These are:
a) Project steering, coordination, and supervision of the implementation and start-up of the demonstration plant;
b) Engineering and specifications with regard to the aquifer development and surface demonstration plant;
c) Procurement and contracting with regard to required goods and services; and
d) Training of Lithuanian State Power System and Enterprise Geoterma staff for the purpose of sustainable operation and maintenance of the demonstration plant.
An important goal under the Danish Project support is to provide the TAC in a manner which allows continued geothermal development in Lithuania, both in Klaipeda as well as other urban areas in western Lithuania. This requires detailed documentation and thorough reporting procedures in step with plant development.
Danish Environmental Protection Agency Organization of Danish Assistance
2. Dansk Olie & Naturgas A/S Danak Olie Og Naturgas A/S (DONG) will be project manager for the Danish ProjectManagement Engineering consulting group providing assistance for the I planning, implementation, and start-up of the PetrcleumGeology Houe &Olsen I/S Klaipeda Geothermal Demonstration Plant. InvestigatorsApS Engineefing DONG will be assisted by two sub-contracted Wells,construction Surfaceplant companies, Petroleum Geology Investigators and Houe & Olsen (see Box 1).
Scope of Work Figure1
3. The implementation and start-up phase of the Klaipeda Geothermal Development Plant is expected to take three years subsequent to the Bank's approval of the Project. The Danish project support consists of approximately 25,600 man-hours 2 of work, includingDanish on-site supervisionwith regard to the drilling, testing, and completion of the geothermal wells as well as for the constructionand installationof the geothermal surface plants. The various work tasks and activitiesare summarizedas follows:
* Agreements
* Main plant design
* Drilling, testing, and completionof wells;
* Approvals, includingenvironmental and safety aspects;
* Design/technicalspecifications;
- Mechanical - Electricity and control - water and sewage - district heating connection - pipeline between wells - building
* Bidding, purchase and contract documentation;
* QA, QC, and follow-upon construction;
* Training of operatingpersonnel at Thisted geothermalplant (Denmark);
- Hook-up, test, and commissioning;
* Assistanceduring start-up; and
* Assistanceduring production.
4. Project Steering and Coordination. Danish project steering, coordination, and participationin the projectimplementation are assumedas mandatoryrequirements for the Danish project support.
5. The project steering comprisesmanagement of the Danish project group in addition to the advisoryfunction to be providedto the LithuanianOwner/Operator (Enterprise Geoterma) with a view to a time and cost effective operation.
6. The project managerwill ensureeffective liaisonbetween the Lithuanian/Danishproject groups and the parties providing financingto the project, and will coordinate the project with other related activitiesof technical/economicinterest that could improve the geothermalheat generation. The total manpower requirementwith regard to project steering and coordinationis estimated at 5,600 man- hours.
7. On-sitesupervision by the Danish consultantson behalf of the Operator is planned both 3 with regard to the drilling, testing, and completionof the geothermalwells as well as for the construction and installation activities required for the implementationof the geothermal production and injection plants.
8. Reporting. Adequate documentationwith regard to the progress of the project is considered a basic requirement for proper steering and coordinationof the project. It is of particular importancefor project sustainabilityand continuedgeothermal development elsewhere in Lithuania. IN
Table 1: DanishProject Support, Manpower (man-hours) Allocation 1995 1996 1997 1998 Total Steering & Coordination 500 1700 1800 1600 5600 Reporting 100 700 700 500 2000 Supervision 0 1800 2100 1700 5600 Engineering 700 4200 3400 500 8800 Procurement 300 800 700 200 2000 Training & Education 0 0 600 1000 1600 Total 1600 9200 9300 5500 25600
additionto routinelyprepared and issued monthlyprogress reports, a number of completionreports (well completion, construction,and installation)as well as a final project implementationreport are required. Based on a manpower requirement of 70 man-hoursper month for documentation/reportingactivities, the total project support for this componentis assessedat 2,000 man-hours.
9. The manpower requirementunder the Danish financial support for the implementation of the KlaipedaGeothermal Demonstration Project is summarizedin Table 1, allocatedto work category and year of activity. 10. SuDervisionQA/OC. Basedon the Lithuanianestimate with regardto the implementation of the geothermal wells, a total manpowerrequirement for full-time on-site supervisionis estimated at 1600 man-hours. The on-site supervisionwith regard to constructionand installationof the geothermal plants is planned to extend over approximately 18 months and require 4,000 man-hours of work, includingthe installationand tuning of the absorptionheat pumps. The engineeringdepartment in DONG is ISO 90001 certified and relevant QA/QC procedures will be applied to the project.
11. Engineerin,i. The detailedengineering and specificationspresent the mosttime consuming activity under the Danish project support and comprise 8,000 man-hoursthat can be divided into two parts:
a) The preparation of the drilling, testing, and completion programs for the two geothermal production wells, the single injectionwell, and the specificationsrequired for the procurement of pertinentequipment, services, and consumables.The drilling operations are currently planned 4 to take place with mixed Lithuanian/Westernequipment, services, and consumables. Including aquifer formation, evaluationof this work is estimated to take 1,700 man-hoursto complete.
b) A total of 7,100 man-hours is estimated with regard to the performance of the program engineering and specificationsrequired for the construction, installation, and start-up of the geothermalplant, i.e., includingman-hours for technicalsupport (drafting, computerprocessing, and analysis, etc). 12. Procurement. Assumingsingle stage procurementwith regard to all the above items, it is estimatedthat it would require a total of approximately2,000 man-hoursof work to assist Enterprise Geotermato prepare, issue, review, and negotiate the final contractswith the pertinent bidders.
13. Trainingand Education. The work activitiesdescribed above will be closely coordinated with the LithuanianOperator. Hence a large portion with regard to the transfer of methodologyand knowledge will be on-the-job training. In this context, training and education will be an important componentin conjunctionwith the plannedprocurement of Western goodsand servicesunder the project. The training and educationprovided by the contractorswill also include in-housecourses, workshops, and small seminars. Such educationalactivity is more or less standard procedure amnongthe contractor companiesconsidered for participationin the project.
14. An important part of the training and education component comprises the on-the-job training and education for operation and maintenanceof the geothermal plant. The operation of the absorptionheat pumps is a finely tuned operationand requires well-trainedand dedicatedpersonnel. This part of the training componentwill be initiatedat the Thisted GeothermalPlant in Denmark and will be followedup with the start up of the KlaipedaGeothermal plant. Based on the allocationof two Danish engineersduring six monthsfor trainingpurposes, it is estimatedthat this componentwould require 1,600 man-hoursof Danish project support.
15. The training and educationwill be given with a view to make it possible for Enterprise Geotermato operatethe demonstrationplant and erect more geothermalplants in Lithuania. The Danish consultancyassistance will thus include training of personnel within Enterprise Geoterma concerning planning, erection, and operationof a geothermalplant.
16. The training for the planning and erection of the plant will primarily be implemented throughjoint work during the design, specification,procurement, and supervisionphases, but it will also includesome training in the use of a Western computeraided design tool such as Autocad (Autocad LT is expected to be given to Enterprise Geotermaas part of the technologytransfer).
17. The operating training will primarily include training at the Thisted Geothermal DemonstrationPlant with courses and participationon the daily operation of the plant. The opening training will also include assistance with the writing of an operations manual and assistance in the operation of the KlaipedaGeothermal Demonstration Plant during the start up phase.
18. Goals and ExpectedResults. The goal of Danish support is to assistEnterprise Geoterma with the successfulplanning, erection,start-up, and operationof the KlaipedaGeothermal Demonstration Plant. A further goal is to make it possible for Enterprise Geotermato erect more geothermal plants in Lithuania with greater Lithuanianparticipation.
The assistancefrom the Danishproject group to Enterprise Geotermaand the experience 5 gained through the KlaipedaGeothermal Demonstration Project, togetherwith the training and education planned for the Project, is expectedto make it possible for EnterpriseGeoterma to:
a) Erect the KlaipedaGeothermal Demonstration Plant successfully;
b) Avoid start-up problems;
c) Avoid operation problems such as sand production, pump break downs, corrosion, loss of injectivity, and down time;
d) Obtain an optimized operationof the plant with a maximizedgeothermal heat production;
e) Plan, design, erect, and operate new geothermal plants with higher Lithuanian content and participation; and
f) Eventuallyparticipate in geothermalprojects outside Lithuania.
ANNEX 3
DESCRIPTION OF THE GEOTHERMAL RESOURCES
AND
THE GEOTHERMAL LOOP
ANNZX 3
LITHUANIA
KLAIPEDA GEOTHERMAL DEMONSTRATION PROJECT
DESCRIPTION OF GEOTHERMAL RESOURCES AND THE GEOTHERMAL LOOP
GENERAL
Geothermalenergy is natural heat, stored in mobile fluids present in geological strata, at temperature above the annual average values. Low temperature geothermal energy, below 100 degree Celsius 'IC', is widespread all over the world and is exploited for district heating, agriculturaland industrialuse by extractingthe heat from the subsurfacefluids. The development of such energy is generally connectedto several factors: geologicand thermal conditions,climate, industrial and technologicaldevelopment etc.
Low temperaturegeothermal energy technology is well proven and is operationalin several European countries: Iceland; Sweden; Denmark; France; Italy; CIS etc. for a variety of uses but essentiallydistrict heating and agriculture. When used for residential or district heating systems, the geothermalsource substitutebasically for the fuel in the conventionalsystem. Heat is generally extracted from the geothermalwater by heat exchangers,but higher efficiencyheat pumpsbecome essential for low temperature source to allow recovery of sufficient amount of heat from the geothermal fluid. Developmentof low temperaturegeothermal projects is strictly dependent on the proximity of end-users, because long distance transportationis not economicalas heat losses and insulationcosts would render the project uneconomical.When convertinga heating system to geothermal,the additionalcosts neededare representedby drillingof productionand disposalwells to re-injectspent water, heat exchangersand pumps, and modificationsto the distributionnet work which are often necessary.
The proposed project consistsof a pilot "demonstration"plant representingthe first phase in the developmentof relativelyextensive geothermal resources for space heating in Klaipedaand other urban areas in Lithuania. It represents an important pilot phase in the more general Power and Heating RehabilitationProject with an objective to: establish the feasibility and economic viabilityof exploitinggeothermal resources for districtheating; reduce the dependenceon imported fossilfuels for power generationand heating;and contributeto the mitigationof the environmental impact of carbon, sulfur and nitrogen oxides emissions.
RESOURCE ASSESSMENT
In Lithuania, geothermalpotential is confinedto the Cambrianand Lower Devonianwhich underlie most of the Lithuanianand Latvianterritories, at depth ranging from 2000 to 900 meters. In the Klaipeda area, the above aquifers are encounteredat depth of 2000 and 1200 meters respectively.The lower Devonianhas far superior supplypotential and would be the main resource for the present development.
Geothermalresource evaluationwas undertakenby an independentconsultant (Petroleum Geology Investigators "PGI" of Denmark), in collaborationwith the Danish Geological Survey, on the basis of data collectedfrom some60 wells drilled to explore for hydrocarbonsin Lithuania. The estimates were made using volumetric calculationsin accordancewith procedures approved by the conmmissionof EuropeanCommunities for the transformationof hydro-geothermaldata into energy resources.Estimates for Lithuaniaindicate a heat resourcepotentil from the Cambrianand Lower Devonian of some 345 Exa Joules 'EJ' (1018Joules), equivalent to 96 trillion Kwh, assuming a heat extraction down to a temperature of 15 IC. In terms of fossil fuel, the above potential correspondsto about 8600 million TOE'.
In Klaipedaarea, the economicgeothermal heat resourcesare estimated at about 1460peta Joules (PJ= 1'5 J), based on a resource area extending2 km beyond current city limits, and an average aquifer temperature of 42 IC. Assumingthat a fraction equivalent to 30% of the heat would be extractedfor the district heatingnet work, the geothermalresources available at Klaipeda are estimatedat about440 PJ. Suchheat reserveswould sustain some 80 years of heat supplybased on a total annual heat demand in Klaipeda of 5.6 PJ. The proposed demonstration project is designed to cover of about 10% of the current heat demand in Klaipeda, 0.53 PJ per annum, equivalent to 1.43xI05 MWh. The main parameters considered in the above estimates are summarizedin the table below:
Estimate of Heat Resources: KlaipedaArea Main Parameters
Net Sand Thickness (m): 142 Porosity (%) 26 Permeability(mD)1300 Average Aquifer Temperature(OC) 42 ResidualWater Temperature(IC) 18 Average Surface Temperature(OC) 7.5
Heat-In-PlaceHIP, (PJ)1460 RecoverableHeat Reserves(PJ) 440
Source: PGI and Dansk Olie og Naturgas A/S
The main geothermalaquifer zone in Klaipedais situatedin the LowerDevonian Formation at an averagedepth of about 1250below ground level (GL). The zone is subdividedinto two main units: Dlkm and Dlgr, each composedof series of sand horizons, predominantlyfluvio-deltaic to shallow marine in origin. The cumulativegross thicknessof aquifer sands in the Klaipedaarea is about 250 meters and the net sand thicknessis about 140 meters. The aquifer sands are generally characterizedby favorablepetrophysical properties and are very prolific: sand porosity rangesfrom 15 to 30%; and permeabilityranges from 0.5 to 3.2 Darcies.
Assuming an energy content of 40 GJ per ton of oil. The aquifer water is neutraland containsabout 96 gram per liter of salt (sea water contains 35 gramnper liter), mainly of sodium chloride. The presence of hydrogen sulfide (H2S) has never been detected while drilling into the geothermal zone or from water samples obtained from the Devonian aquifers in wells drilled in Lithuania. The averagecomposition of the geothermal water in the Klaipeda area is given in the table below:
Aquifer Water Composition- DevonianAquifer KlaipedaArea (Well Vilkyciai-3)
Compound mgr/liter
Bicarbonate:HC03- 81 Chlorine: Cl- 60350 Sulfate: S04-- 1115 Bromine: Br- 368
Sodium: Na+ 24100 Potassium: K+ 645 Calcium: Ca"+ 6750 Magnesium:Mg++ 2170 Strontium: Sr++ 197 Iron: Fell 1 Total Mineralization 95777 pH 7.1
PROJECTDESCRIPTION
The project consistsof recoveringheat from hot water producedfrom the Lower Devonian aquifer sands. The water is then circulatedthrough a closed loop in a doublet, production-injection well, configurationcomprising heat absorptionpumps and heat exchangersto extract a fraction of the heat carried by the geothermal water. The heat recovered is then injected into the existing district heating network in Klaipeda. In essence, the geothermal loop replaces part of the boiler function in the conventionaldistrict heating system.
The project comprises two main components: development and construction of the geothermal loop mentionedabove, which entails the drilling of three wells and the constructionof heat recovery facilities; and training and technicalassistance to guarantee a smooth and timely project implementation,and technicaltransfer to facilitatethe future developmentof the Lithuanian geothermal resources. The loop is designed based on the same concept used at the Thisted geothermal plant in Denmarkwhich is now in operationsince 1984. This design has been chosen because of the close similaritiesof aquifer parameters (petrophysicalproperties, depth and water temperature)at Klaipedaand Thisted. GeothermalLoop
The geothermalloop entails the followingcomponents:
Drilling- A total of three wells will be drilled under the project: two production wells to supplysome 600 m3/ hour; and one re-injectionwell to circulatethe cooled water back to the same aquifer. The wells will be completedwith 95/8 inch production casing and would be equipped with a submersiblecentrifugal electric pumps havinga capacity of 0.27 MW each capableof delivering some 300 m3 per hour. The two production wells will be drilled with a distance of about 200 meters between them. The wells would be deviatedfrom the vertical in order to attain a horizontal departure, at the aquifer level, of about 400 to 500 meters. This would maximizethe area drained by each well resulting into higher well productioncapacity. In addition,drilling the two wells from the same surface locationminimizes surface piping which would reduce cost and heat losses.
The re-injectionwell will be drilled in an inverted line drive configurationrelative to the production wells at equal distanceof 800 to 1000 m from the production wells, at the main aquifer level. Such spacing between the injector and producers is required in order to delay the arrival of the re-injectedcooled water into the productionwells and to allow longer time for the water to be reheated in contact with the reservoir rock. The re-injectionwell will be equipped with a surface pump of sufficientcapacity to re-inject all the cooled water back into the same aquifer zone.
Heat RecoveryFacilities: Heat is extractedfrom the geothermalwater using an absorption heat pump and heat exchangers. The configurationof the heat absorption pump comprises an evaporator,an absorber, a condenser,a working fluid regenerator,and heat exchangers.The pump uses lithium bromide (LiBr) solution as the heat absorbentworking fluid. The aquifer water from whichheat is to be recovered,is causedto flow through an evaporator,while the hot water utilized for district heatingis circulatedseparately in the absorberand condenser,which would transfer the heat extracted from the geothermal water to the district heating system.
The absorptionheat pump is driven by 150-160OC hot water from a boiler, which is part of the district heating system. The heat suppliedby the boiler to operate the pump would then be transferred to the district heating network together with the extracted geothermal heat. The absorptionheat pump used in the project is characterizedby very small power consumptionand operating cost.
The geothermalloop is designedusing corrosion resistant materialsfor piping, weldingand valves. The piping material is made of diffusionproof carbon steel and the valve installedare air proof. The geothermal water circulatedinto the system will be pre-filteredto avoid depositionof scale. The loop will be operatedat over-pressureto eliminatethe entry of oxygenfrom the air into the system. Over-pressurein the loop will be maintainedduring stoppageusing pressured nitrogen cylinders. The abovedesign concept, togetherwith very low CO2 contentand H2S free geothermal brine, is expectedto lead to a corrosion rate of less than 0.1 mm/year. The experience gained, during the past decade, from the GeothermalDemonstration plant at Thisted in Denmark has proved the above design to be reliable and cost effective.
The main components and the general layout of the geothermal loop for the Klaipeda geothermal demonstrationplant are shown schematicallyin the figure below. Klaipeda Project: Main Components and Layout of Geothermal Loop Winter Conditions
LJF=1I | Genertor 23.6 MW BoileM
Conden-Absorber 39.9 NW
Evapraor 16.3
15.66 MW
Production Wells Inpedc Wcll 600m 3 / Hour 600 d / Hour
ANNEX 4
ENVIRONMENTAL REVIEW
ANNEX 4 Lithuania
KlaipedaGeothermal Demonstration Project
EnviromnentalReview
A. Overview
1. Introduction. Preparationof the proposedProject has includedan environmentalreview consistent with the applicableprocedures of the GOL and the provisions of World Bank Operational Directive 4.01, "EnvironmentalAssessment" for a category "B" project. As the Project would not generate waste or any emissions to either air or water, the review has been based on informationabout environmentalbenefits as a result of reduced consumptionof fossil fuels.
2. Consultationprocess. The environmentalreview for the proposed project was prepared in coordinationwith Enterprise Geoterma(EG). EG will obtain the routine approvals for construction of the geothermalplant, includingapprovals from the local electricitycompany and the water and sewage company. Geoterma is in the process of requesting a formal environmentalimpact clearance. Upon completion,the Ministry of the Environmentwill then check whetherimpacts are correctly assessed, and whether mitigation measures are adequate. Finally, the Ministry of Constructionand Urbanistics will issue the permission to start constructiononce all approvals are in place.
B. Current EnvironmentalConditions in Klaipeda'
3. Environmentalquality problems are not as severe in Lithuania as those encounteredin other countries of the FSU and eastern Europe. The decline in economicactivity over the past five years has corresponded with a drop in industrial activity and energy use, resulting in an overall decline in pollution. However, in smallercities dominatedby a single large manufacturingfacility, emissionsfrom these plants are still high enough to result in adverse health impacts. This is, for example, true of Jonava, where a significantlyhigher incidenceof children's respiratory disease and eye disease has been reported. 2
4. However, it appears that the concentrationof most pollutants has dropped, with the exception of NO2, which has risen in almost all cities since 1991. This can be attributed to an increase in vehicular emissions, which is estimatedto cause 70% of air pollution in cities (Lithuania Ministry of Environment).
5. Klaipeda's main pollution problem in previous years was caused by an industrial plant that produced batteries. This has been temporarilyclosed down, due to limitationsplaced on industrial output. Today whatever air pollutionproblems exist are principally caused by traffic congestion in the
I Water pollutionis not discussed,as it is irrelevantto the use of geothermalenergy in this case.
2 EnvironmentalAction Programme (EAP) for Centraland EastemEurope, EnvironmentDivision, Technical Department, Europe and CentralAsia, MiddleEast andNorth AfricaRegion, The World Bank,Washington, D.C., March 31, 1994. Also Air and WaterQuality Permitting in Lithuania,W. Harrington,Resources for the Future, Washington,D.C., September1993. - ii - older parts of the city. Many district heating substationsin the city center are old and inefficient,which exacerbatesthe situation.
6. According to Ministry of Environment figures for Klaipeda (1993), the average concentration of main pollutants in Klaipeda was low and did not reach the Highest Permitted Concentration(HPC). However, the accuracyof these figures cannot be independentlyverified. The average concentrationof sulfur dioxide was 0.005 mg/m3 and the maximum concentrationwas 0.123 mg/r 3. (This does not exceedWHO guidelinesof 125 microgramsper cubic meter.) Concentrations showed no increase over 1992. Concentrations were higher in winter, which can be attributed to increased use of electricity and heating. The average concentrationof NO2 in the town center and the 3 industrialsite was 0.03 mg/r . The maximumamount of NO2 was registeredin the town center (because of intensivetraffic) and reached 0.32 mg/r3 , which is 3.8 times higher than HPC. Throughout the rest of the town, the maximumconcentration ranged from 0.15 to 0.20 mg/m3, 1.8 to 2.4 times HPC. (The WHO does not issue an annual guideline, but the EU annual limit value for nitrogen dioxide is 200 microgramsper cubic meter, which is clearly exceededin Klaipedafor much of the time). The average 3 contributionof CO2 was 1 mg/r . The concentrationof CO2 only exceededHPC once in 1993, when it reached 7 mg/e3. Klaipedacompared favorably with other regions of Lithuania, in terms of both average and maximum concentrationsof sulfur dioxide and CO2. However, it recorded the highest maximum concentrationsof NO2 in 1992 and 1993. Informationon PM1O was not available.
Health Impacts
7. According to the best availablescientific evidence, most health damage from exposure to sulfur dioxide is causedby brief exposures to high ambient concentrations,as opposed to long term exposureto low averageconcentrations. Therefore,the maximumconcentrations observed in Klaipeda, and the higher level concentrationin winter poses a health hazard.
8. Recentepidemiological surveys performed in the United States have establisheda linkage between excess mortality and exposures to low levels of PM1, and for sulfate particles (formed from sulfur dioxide).3 These studies appear to indicate that that there may be no safe threshold levels below which health damage does not occur, and that health effects have a linear relation to ambient concentrations. Other studies have demonstratedsimilar linkages. Ostro (1994)4, reviewed studies of premature mortality, finding an averageeffect of 0.96 percent increase in mortalityper 10 micrograms per cubic meter of PMIo. Ostro also reviewsstudies that detailthe observationof effects of sulfur dioxide on the respiratory system within short term exposures.
9. The epidemiologicaleffects of nitrogen dioxide are more uncertain, and are primarily linked to exposureof children to indoor gas stoves. Effects from outdoornitrogen dioxide have not been established(Ostro 1994).
3 "An Association between Air Pollution and Mortality in Six U.S. Cities", New England Journal of Medicine 329 (24):1753-9, D.C. Dockery, C. Pope, X. Xu, J. Spengler, J. Ware, M. Fay, B. Ferris, and F. Speizer 1993. This study makes reference to 18 earlier studies.
4 EEstimatingthe Health Effects of Air Pollutants-A Method with an Application to Jakarta. Bart Ostro, World Bank Policy Research Working Paper 1301, May 1994. - iii -
10. Regulations. Every industrialenterprise, utility, and heating company must request an emissionpermit, for which there is no charge. The permit is issued by the regional Departmentof the Environment. If the permitted amount of emissionsis exceeded,in terms of tons/year, a fine is imposed (collectionrates are unavailable). The fines differ accordingto substance,and are indexed to inflation four times a year. Permitted concentrationsof pollutantsare determinedaccording to the State Control Regulationson StationarySources of Air Pollution, issued by the Ministry of Environmentin 1992, in accordancewith Order 97. New HPC standardswill be issued on January 1, 1996, and will be applied to all new and rehabilitatedboilers. In cases where boilers use two or more different kinds of fuel, standards for complexpollutant emissionswill be higher.
C. ProjectDescription
11. The proposed Project will be developedas an environmental/energymanagement project for the city of Klaipeda.The Project has two components:
(i) TechnicalAssistance and Training Component:
* design of the geothermal loop includingall necessaryequipment for extracting the heat from the geothermal water and transferring it to the district heating system;
* preparation of detailed drilling, testing and completionprograms;
* management support to the Project implementationfor Enterprise Geoterma, includingsupport to LSPS/TENA in the preparationof tender documents;
* trainingof Lithuanianstaff and managementin operationof the geothermalplant in Thisted, Denmark to maximizethe transfer of technology;and
* supervision of the implementationof the project including installation of the geothermal loop as well as undergroundwork.
(ii) InvestmentComponent:
* establishmentof two production wells and one injection well;
* above ground facilities including building and necessary equipment such as absorption heat pumps, heat exchanger, and auxiliary equipmentfor control and regulationof the plant and the heat transfer to the district heating system; and
* piping betweenproduction wells and geothermalplant, as well as piping from the geothermal plant to the injectionwell, and piping between the geothermalplant and the district heating network. - iv -
D. EnvironmentalImpacts
12. The Project has overwhelmingly positive environmental impacts. The negative environmentalimpact occasionedis minimal: the disposalof residues(drilling mud, formationwater and diesel) from drilling operationsduring implementation. Risks associatedwith the production of CO2 or H2s (hydrogensulfide) are very low as the resource is of a sedimentary origin. Contaminationof the aquifer with sulfate-reducingbacteria is very unlikely because the production and re-injectionof water is carried out via a closed loop, which is designed to eliminate the entry of oxygen and bacterial contamination. H2S or acid fluids are generally encountered in geothermal systems associated with volcanic activities. Other risks such as subsidenceof the overlying terrain are virtually non-existent-- becauseall water producedis re-injectedinto the aquiferto maintainthe formationpressure at its original value.
13. Implementationof the KGDP would result in improvementof ambient air quality through annual reductions in emissionsof CO2 and NO, to the amount of 47,800 and 310 tons respectivelybased on replacementof natural gas, and 51,900 and 265 tons respectivelyif HFO is replaced. In addition the replacementof HFO would result in an additionalreduction of S°2 of about 1160 tons per year.
14. The economicbenefits of reducing CO2, NO,,and SO2 emissionshave been calculatedon the basis of mitigationcosts and are valued as follows:
CarbonDioxide Mitigation: An economicvalue of US $7/ton of CO2 (US $25/ton of carbon) reductionhas been assumedbased on values employedin other similar projects. It is indicative of the level of GEF grant financingpossible for greenhousegas reductionprojects. Pending any regional environmentalcooperation agreement between Lithuania and Western Europe, and rationalizationof carbon taxes in Europe, the economicvalue of CO2 mitigationto the Lithuanian economy is assumedto be equal to the level of grant fundire' that has been made availablefor CO2 mitigation. Carbon (C) emissions from natural gas are estimated at 19.45 kg/GJ.
NO1 Mitigation: Marginal abatementcosts, estimatedat around US $250/ton of NO, are used as a proxy for mitigationbenefits. Abatementcosts typically range from US $250 to US $1000 per ton of NO, removed in other parts of the world depending on the baseline level of NO, emissions, capacity factors, fuel, and capital investment required. Since Lithuania's present emissions(baseline) are relativelyhigh, low cost technologies(low temperatureburner nozzles, air control monitors, etc.) can be employed to significantly reduce emission levels. NOx emissionsfrom natural gas combustionare low and estimated at 0.0001 kgs/GJ.
Sulfur Dioxide Mitigation: An economic value of $600 per ton of sulfur dioxide has been assumed, and is derived from the range of values estimated in damage studies performed in industrializedand developing countries. This estimate has been employed based on values calculated for Poland, a country with similar geographic, environmental, and economic conditions.
15. Lithuaniais a signatoryof the UnitedNations Framework Convention on ClimateChange (UNFCCC), and as such has demonstrateda willingnessto support projects resulting in greenhousegas reduction. Moreover, an anticipatoryapproach towards the possible adoption of a carbon tax by the - v -
European Union will facilitate Lithuania's adjustment to the added costs of such a tax, were Lithuania to join the EU.
16. Both from the perspectives of limiting health damage, and from assumed public willingnessto comply with future environmentalpolicy, the proposed geothermal project would have beneficiallocal results. In order to fully assessthe benefits in reducedhealth damage, data for PM1 O,and information on health and labor costs is necessary. However, it is clear that given high short term concentrations of sulfur dioxide, the reduction of sulfur dioxide emissions (in the case of mazut replacement)could only be benign. Given the tighter standards to be enforced in 1996, and a possible stricter enforcementof the prohibitionof the use of mazut with a Sulfur content greater than 2.5%, the use of geothermal energy would make it easier for KDHE to meet standards.
E. Proposed Mitigation Actions
17. Protection of drinking water zones. The consultantshave estimated the salinity of the geothermalwater in Klaipedato be 8.8% by weight. Therefore, it is importantthat the water does not flood farm land or enter groundwater. The use of a closed loop system will avoid such leakages. Geothermal water which is used to clean up the pipe system prior to re-injectionwill lead to the sea through the sewer system. Drinking water zones will be protected by a cement casing. Basinsand pits on the well site will be sealed off, and measureswill be taken to avoid residue spills during testing and production. Solid wastes from the drilling operation will be deposited in suitable controlled landfills.
18. Blow out prevention. The likelihoodof gas or oil presence in the Devonianaquifer zone is consideredvery small. Nevertheless,the casing and cementingprograms are designedto resist a blow- out from the Devonianaquifer.
19. Prevention of gas release. If necessary, measures will be taken to prevent gases from being releasedfrom geothermal water in the sewer. Water destined for the sewer will first be sprayed into a basin in which it slowly runs towards the inlet pipe of the sewer system, in order to release combustiblegases, if present. The absorption heat pump does not utilize CFC gas, but a LiBr-water solution, and therefore does not lead to gas leakage to the atmosphere.
F. Environmental Monitoring and Institutional Issues
20. Discussionshave been held betweenthe consultantsand the LithuanianGeological Survey, the LithuanianEnergy Agencyand the Ministry of the Environment. The GeologicalSurvey expressed its support for the project, and offered assistance as required. The Survey provides government supervisionwith regard to the exploitationof Lithuanianunderground resources. Pending the receipt of an orderly drilling proposal, the Survey will be able to provide clearancewithin a month. The Ministry of the Environment provides government supervision with regard to an environmentallyacceptable drilling operation. The Ministry has expressedconcern that installationof the wellhead be adequately performed. It has also stressed that measuresbe taken to prevent gas entering the sewagesystem. These concerns have been addressed, and follow-upwill be closely monitored.
ANNEX 5
DETAILED IMPLEMENTATION SCHEDULES
Appendix I - Table A Lithuania: Klaipeda Geothermal DemonstrationProject ImplementationSchedule: Drilling Operation
95 1 1996 1 1997 1998 ID TaskName JTATSIOINIDJIFIMIAIMIJJIAISIOINIDJFMAMI J JAISOINIDJIFIMIAIMIJ|JIAISIOINID|J|F 1 Preparation
2 Developdrilling program 15
3 Developtender documents 11/15 4/2
4 Procurementnotice in developmentbusiness 11/30
5 Submittender documents
6 Evaluatebids and negotiate
7 Contractsigning 8/1 8 Implementation
9 Establishment 812 92 10 Drill injectionwell 9/3 10/8
11 Drill productionwell 1 10/9 117
12 Drill productionwell 2 11/8 1
KlaipedaGeothermal Demonstration Task Summary _ RolledUp Progress StartDate: 7/3/95 Progress RolledUp Task Task Manager:Anders Halldin Milestone *Rolled Up Milestone o Appendix I - Table B Lithuania: Klaipeda Geothermal Demonstration Project Implementation Schedule: Completion of Wells
95 | 1996 1 1997 ] 1998 ID Task Name Duration JAS INDJ IFIMIAIMIJ J IAISIINIDIJ IFIMIAIMIJ J IAISIINIDJ IFIMIAIMIJ JAISO 1 Preparation 27Wd
2 Completeprogram & equipmentlist 66d
3 Developtender documents 100d
4 Procurementnotice in developmentbusiness Od
5 Submittender documents Od
6 Evaluatebids and negotiate 33d
7 Contractsigning Od
8 Implementation 70d
9 Completeinjection well 26d
10 Completeproduction well 1 22d
11 Completeproduction well 2 22d
56
12
KiaipedaGeothermal Demonstration Task Summary RolledUp Progress StartDate: 7/3/95 Progress RolledUp Task TaskManager Anders Halldin Milestone *Rolled Up MilestoneKo Appendix I - Table C Lithuania: Kiaipeda Geothermal Demonstration Proiect Implementation Schedule: Control & Evaluation of Drilling Operations
1996 | 1997 1998 ID TaskName A|S|O|NIDIJIFIMIAIMIJ|J |AISIOINIDIJIFIMIAIMIJ JIAISIOINID|JIFIMIAIMIJ J ASIOINIDJFM I Preparation _ ;
2 Developterms of reference 1
3 Shortlistand prepare tender documents 4/2
4 Submittender documents
5 Evaluatebids andnegotiate 6/1
6 Contractsigning
7 Implementation
8 Controlof productionwell 1 913 1/8
9 Controlof productionwell 2 10/9 1/7
10 Controlof injectionwell 11/8 129
56
12
KlaipedaGeothermal Demonstration Task Summary _ RolledUp Progress StartDate: 9/1/95 Progress RolledUp Task Task Manager:Anders Haladin Milestone *Rolled Up Milestone'% AReRndix I - Table D Lithuania: Klaipeda Geothermal Demonstration ProJect Implementation Schedule: Building and Civil Works
1996 F M A 1997 1998 1 1999 ID Task Name J |FIM A|MIJ |JIASIINIDIJ IFIMIAIMI IJ ISIOINIDIJ IFIMIAIMIJI|J IAISIOINIDIJ |FIMIAII J| 1 Preparation
2 Design& developstandard equpment list 912 9/27
3 Developtender documents | 10/29
4 Procurementnotice in developmentbusiness 71 l 5 Submittender documents | 6 Evaluatebids and negotiate
7 Contractsigning
-8 Implementation !, 1 9 Detaileddesign
10 Supplyand erection 4/30 7/28
KlaipedaGeothermal Demonstration Task Summary RolledUp Progress StartDate: 3/1/96 Progress RolledUp Task TaskManager: Anders Halldin Milestone *Rolled Up Milestone Appendix I - Table E Lithuania: Klaipeda Geothermal Demonstration Project Implementation Schedule: Connection to Boiler House and External Pipline
_'l1997 | 1998 1999 ID Task Name NTD|J|F|M|A|M|J|J|A|S|O|N|D|J|F|M|A|M|J|JIA||O N|D|JIFIMIAIMIJ J|A|S|O|N|D|JIFIM| M 1 Preparation
2 Developstandard equipment list & completionpla
3 Developtender documents
4 Procurementnotice in developmentbusiness
5 Submittender documents
6 Evaluatebids andnegotiate
7 Contractsigning 7/18 41
12
KlaipedaGeothermal Demonstration Task Summary _ RolledUp Progress StartDate: 7/1/95 Progress RolledUp Task TaskManager Anders Halkdin Milestone *Rolled UpMilestone K> Appendix 1 - Table F Lithuania: Klaipeda GeothermalDemonstration Project ImplementationSchedule: Heat Exchangers
1997 1 1998 1 1999 2 ID TaskName O|N D)J FIMIA M J JIAISIOIN D J F MIA M J JIAISFOTNTDjJ F MIA M J JIAISIOIN DtJIF MIA MIJ I Preparation
2 Develop& specifystandard equipment list 1 3 Developtender documents 2/7 h12 4 Submittender documents
5 Evaluatebids andnegotiate
6 Contractsigning 91
7 Implementation
8 Detaileddesign 9/2 10/31
9 Supplyand erection 11/3
56
12
KlalpedaGeothermal Demonstration Task Summary RolledUp Progress StartDate: 10/1/96 Progress RolledUp Task TaskManaer.,AndesHaldinMilestone RolledUp Milestone AppendixI - TableG Lithuania:Kialpeda Geothermal Demonstration Project ImplementationSchedule: Absorption Heat Pumps
1996 1 1997 1998 .1999 ID Task Name J|F|MIA|M|J|FJTIAISIOINIDIJ IFIMIAIMIJIJ IAIFSIOINIDIJ IFIMIAIMIJ|J IAISI°INIDIJI IIMIAIMIJ |J |A I Preparation ,
2 Develop 8 specify standard equipment list1/ 24:
3 Develop tender documents ,21
4 Procurementnotice in DevelopmentBusines '*1 5 Submittender documents
6 Evaluatebids andnegotiate
7 Contractsigning
8 Implementation
9 Detaileddesign
10 Supplyand erection 56
12
KlaipedaGeothermal Demonstration Task Summary RolledUp Progress Start Date:7/1/96 Progress RolledUp Task Task Manager:Anders Halldin Milestone *Rolled Up MilestoneK) Appendix I - Table H Lithuania: Klaipeda Geothermal DemonstrationProject ImplementationSchedule: Filters, Valves and Internal Piping
96 | 1997 1 1998 ] 1999 ID TaskName JASOINIDJ IFIMIAIMIJ JIAISOINIDJ FIM|AMJ J IAISIOINIDJ IFIMIAIMIJ J IAISOINIDJ FM 1 Preparation
2 Develop& specifystandard equipment list 1
3 Developtender documents 2/18 3117
4 Procurementnotice in DevelopmentBusine
5 Submittender documents
6 Evaluatebids andnegotiate 5/19 8/15
7 Contractsigning i8/15 8 Implementation _
9 Detaileddesign 8
10 Supplyand erection 9/30
KlaipedaGeothermal Demonstration Task Summary RolledUp Progress StartDate: 7/1/96 Progress RolledUp Task TaskManager: Anders Halkdin Milestone *Rolled UpMilestone Appendix I - Table I Lithuania: Klaipeda Geothermal DemonstrationProject ImplementationSchedule: Power, Control and Regulation
96 1 1997 I 1998 : 1999 ID TaskName JAS|JO v M A|M|J IJ AISIOINID JIF|MIAIMIJIJIAISIOINID JIFIMIAIMIJ|J|A|S|O|N|D|J FM 1 Preparation
2 Develop& specifystandard equipment list 1 2114
3 Developtender documents 2/18 3/17 4 Procurementnotice in DevelopmentBusine
5 Submittender documents
6 Evaluatebids andnegotiate
7 Contractsigning
8 Implementation
9 Detaileddesign
10 Supplyand erection
56
12
KlaipedaGeothermal Demonstration Task Summary RolledUp Progress StartDate: 7/1/96 Progress RolledUp Task TaskManager: Anders Halidin Milestone *Rolled Up Milestone Appendix I - Table K Lithuania: Klaipeda Geothermal DemonstrationProject Training and Technical Assistance Provided by Danish Ministry of Environment
I 11996 | 1997 1 1998 ID Task Name OND|J F|M|AMJ JIAISIOINIDIJ F|MA|M|J |JIAISIOINIDIJ F|M|A|M|J |J AISOINIDIJ FIM|A I Preparation I y
2 Developdetailed terms of reference 1/30
3 Formallyevaluate technical assistance & trainin 1/ 511
4 Contractsigning
5 Implementation
6 Twinningand technical assistance 52 12/31 7 Monitoring _
8 Monthly progress reports | I il l l l l l
KlaipedaGeothermal Demonstration Task Summary RolledUp Progress StartDate: 10/2/95 Progress RolledUp Task Task Manager:Anders Halidin Milestone *Rolled Up Milestonec2 ANNEX 6
MONITORING AND EVALUATION
Annex 6
MONITORING AND EVALUATION
A. Actions to Monitor DevelopmentObjectives
1. Project monitoring indicatorswere developedduring appraisal in order to enable tracking of Project inputs on key developmentobjectives throughout the Project cycle. At rhe mid-termreview, the need to fine-tune or restructurethe Project design will be based on the data received from these indicators.
B. Project Indicators
2. Given the essential role program monitoring and evaluationplay in determining the impact of a given intervention on developmentobjectives, a number of indicators will be used to monitor and evaluate progress during the implementationof the Klaipeda Geothermal DemonstrationProject. However, the progressof these indicatorswould be evaluatedin relative, not absolute,terms. During supervision,a selectednumber of commercial,operational, financial and environmentalindicators would be monitored in accordancewith Project objectives.
(a) Commercialindicators
Extraction of geothermal energy is expected to be larger than described due to higher temperaturein the aquifer, and actions to improvebuilding insulationare expectedto reduce the network return temperature. These deviations will be continuouslymonitored and recorded as they will have a clear impact on the sale of heat.
(b) Operationalindicators
* Heat extracted from the geothermal water and delivered to the network will be monitored and compared with actual aquifer temperature and temperatureof the return network water.
* It should be demonstratedthat the use of geothermalenergy has resulted in a reduction of use of imported fossil fuels.
(c) Financial indicators
* The transfer price for geothermalenergy between EG and KDHE would be monitored in accordancewith the Loan Agreement.
The followingstandard financial indicators, in addition to the internal rate 2 of return, would be monitored:
An OperatingRatio (ratio of operatingcosts to operatingrevenues, including depreciation and interest costs, but excluding debt service payments)not to exceed 85%;
A Debt Service Coverage Ratio (the extent to which internal cash generation covers total debt services) not to fall below 1.5; and
A Current Ratio (current assets divided by current liabilities) not to fall below 2.0.
(d) EnvironmentalIndicators
* Operationalperformance and level of air pollutant reductionachieved by the geothermal demonstration plant will be recorded as a result of geothermal energy delivered to KDHE, and based on the actual mix of fuel (natural gas and HFO) used for heat generation. 21 2? S LITHUANIA KLAIPEDAGEOTHERMAL DEMONSTRATIONPROJECT
o SelectedTonns
1 Distrid Headquarters O Gtes oFNalional ImportanceVentspil igj^j UrbanAreas ProlededAreas Elevationsin Meters: 51 - 150 Talsi L_^ 151- 250 Main Roads Railroads Distrid Boundaries InternalionalBoundaries Kulri LATVIAJ < J-rmala
a,... , '. \t
52.2*ad&,, 0/ °r°&ea o {) \ Jo i ki
Liepjoia;-,si< rsb.t aJbf X d0oM1 ) M lei l\ >
Palanga ! \ <|Sk~~~~~~~~- IT UANIA vi | oigk
Nida~~retnga - ~~~~I '-- - '1V' - _,/ -,,
Nid' '' X l -S'-f<
4 4 ~~~~~~~~~~~~~~~2 -^m 23 ; (-
g1 X i ~~~~~~~~~~~~~~~~~~Jurbarkasf
X r.G RUSSIAN >t FEDERATION i Kaliningrad o 0 3 ° 5 / _/C t coMrrs 33 M11i5~~~~~~~~~~u0 10 20 J. l Vilkoviskis) / 21' 272 IQIaanodJ7 * |Zim 1 I LMAl I N Ie ci . cI T'y C:*r)-r t; tPL- . 1 e I X , T 71T3?Tl2j: r-,l.