Romania - Fourth Power Project

Document of The World Bank f CIL, FOR OFFICIAL USE ONLY Report No. 3013-RO ROMANIA STAFF APPRAISAL REPORT ON FOURTH POWER PROJECT November 21, 1980 Projects Department Europe, Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ROMANIA CURRENCY EQUIVALENTS Currency Unit = leu, lei (plural) lei 181/ = US$1.00 leu 1 = US$0.0556 lei 1,000,000 = US$55,556 US$1 = lei valuta 4.47 WEIGHTS AND MEASURES m = meter = 3.28 feet km = kilometer = 0.62 mile m3 = cubic meter = 1.31 cubic yards kWh = kilowatt hour = 3,414 British thermal units GWh = Gigawatt hour = 1 million kWh TWh = Terawatt hour = 1 thousand GWh kW = kilowatt = 1 thousand watts MW = Megawatt = 1 thousand kW GW = Gigawatt = 1 thousand MW kVA = Kilovolt-ampere = 1 thousand volt-ampere MVA = Megavolt-ampere = 1 thousand kilovolt-ampere kV = kilovolt = 1 thousand volts t = metric ton (tonne) = 1.1 US tons = 2,204.6 pounds = 1,000 kg Mt = Mega metric ton = 1 million tons h = hour toe = ton oil equivalent kcal = kilocalorie = 3.968 BTUs (British Thermal Units) Gcal = Gigacalorie = 106 kcal gcc = gram of conventional coal = 7.0 kcal GLOSSARY OF ABBREVIATIONS ISPE - Institutul de Studii si Proiectari Energetice (Institute of Power Studies and Designs) ISPH - Institutul de Studii si Proiectari Hidroelectrice (Institute of Hydro- electric Studies and Designs) MChI - Ministry of Chemical Industry MEE - Ministry of Electrical Energy MFCM - Ministry of Forestry Economy and Construction Materials MM - Ministry of Mines, Petroleum and Geology MMI - Ministry of Metallurgical Industry RE - ROMELECTRO (Foreign Trade Procurement Enterprise of MEE) CIPEET - Centrala Industriala de Producere a Energiei Electrice si Termice (Indus- trial Central for the Production of Electrical Energy and Heat) CIRE - Centrala Industriala de Retele Electrice (Industrial Central of Power Network Enterprises) DEN - Dispecerul Energetic National (National Electrical Energy Dispatch System) EU - ENERGO-UTILAJ (Enterprise for Construction and Erection Tool Supply of the MEE) FYP - Five-Year Plan IB - Investment Bank (the Borrower) ICEMENERG - Electrical Energy Research Institute IRE - Interprindere de Retele Electrice (Transmission and Distribution Enterprise) SCP - State Committee of Prices SPC - State Planning Committee TCH - Trustul de Constructi Hidroenergetice (Trust for the Construction of Hydropower) GOVERNMENT OF ROMANIA Fiscal Year January 1 to December 31 1/ Appraisal estimates have been made at the 18 lei/$ exchange rate. During negotiations, the Romanian delegation was not able to confirm that the exchange rate would be changed from 18 to 15 lei/$ on January 1, 1981. Subsequently, the Bank was officially informed that such change will be made and the Romanian equalization fund abolished as of January 1, 1981. The estimate of foreign cost in equivalent $ is not affected by the new rate. Other effects from the change are minor. They would reduce the total cost estimate in equivalent lei marginally by about 4.5%, have a somewhat favorable effect on cash generation and improve the return on investment by about 0.4%.  FOR OFFICIAL USE ONLY ROMANIA STAFF APPRAISAL REPORT ON FOURTH POWER PROJECT MINISTRY OF ELECTRICAL ENERGY (MEE) TABLE OF CONTENTS Page No. I. THE ENERGY SECTOR ....................................... 1 A. Sector Organization .......... ... ..........1. B. Energy Resources ................................... 2 C. Energy Supply and Use ...... ........................ * 3 D. Energy Policy and Strategy ..... .............. 4 E. Sector Issues ....... ................. 5 1T. THE POWER AND HEAT SUBSECTOR ..... ....................... 6 A. Subsector History Overview ..... ..............6 B. Subsector Organization ..... ............... 7 C. Subsector Activities ...........8......... 8 D. Achievements After 1960 ..... ...............9 (a) Overview ....................................... 9 (b) Hydropower and Generation-Mix .... .............. 10 (c) Transmission System Growth ...... .............. 11 (d) International Interconnections .... ............. 11 (e) Electric Energy Savings ..... .................. 1 (f) Access to Service and Rural Electrification .... 11 (g) Current Status of Subsector .... ................ 12 E. Subsector Policy and Strategy ..... .................. 12 F. Planning of Power and Heat Supply ........ .. ......... 14 G. Tariff Levels and Structure ........... .. ............ 14 H. Subsector Performance and Issues ......... .. ......... 16 I. Role of the Bank in Subsector .......... .. ........... 17 III. THE BORROWER AND PROJECT ENTITIES ....................... 18 A. Investment Bank (IB) - The Borrower .... ............. 18 B. Project Entities .................................... 19 (a) Ministry of Electrical Energy - (MEE) .... ..... 19 (b) National Electrical Energy Dispatch System - (DEN) ...................................... 19 (c) Industrial Central for the Production of .. Electrical Energy and Heat - (CIPEET) ........ 20 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -. ii - TABLE OF CONTENTS (Continued) Page No. (d) Industrial Central of Power Network Enterprises - (CIRE) .20 (e) Trust for the Construction of Hydro Power Projects (TCH) .21 (f) Staff Training Facilities ..21 IV. THE DEMAND FOR ELECTRICITY AND HEAT AND MEANS OF MEETING IT. 22 A. Planning and Forecasting .22 B. Load Growth Forecast .22 C. Power and Electrical Energy Balances .22 D. Heat Supply .23 V. THE PROJECT .23 A. Objectives . 23 B. The 1980-1985 Subsector Program .24 C. Project Description .24 D. Engineering and Status of Project Elements ............. 25 E . Cost Estimates .25 (a) Program (1980-1985) .25 (b) Project (mid-1980 - mid-1983) .26 F. Financing .27 G. Implementation .28 (a) Responsibility for Program/Project Implementation . 28 (b) Procurement .28 H. Disbursements .29 I. Environmental Aspects ............................. 30 J. Project Risks and Uncertainties .31 VI. FINANCIAL ASPECTS ..32 A. Past Financial Performance .32 B. Future Financial Performance .32 C. Project Financing Plan .33 D. Accounts and Audit .35 E. Insurance .35 VII. PROJECT JUSTIFICATION .35 A General .35 B. Least Cost Solution .38 C. Return on Investment Program .38 VIII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATIONS . .39 FIGURE 1.1 Forecast of Net Primary Energy Production and Consumption  - iii - TABLE OF CONTENTS (Continued) CHARTS 1.1 Organization of Ministry of Mines, Petroleum and Geology 2.1 Ministry of Electrical Energy (MEE) Organization Chart 3.1 Ministry of Electrical Energy, National Energy Dispatch (DEN) Organization Chart 3.2 Industrial Central For Production of Electric Power and Heat (CIPEET) Organization Chart 3.3 Industrial Central for Transmission and Distribution of Power (CIRE) Organization Chart ANNEXES 2.1 Functions of MEE's Organizational Units 2.2 Reduction of MEE System Losses, 1965-1979 2.3 Development of Access to Electricity Service 4.1 Generating Capacity, Energy Production, Peak Load and Load Factor, 1976-1985 4.2 Sector Generation and Sales, 1972-1985 4.3 MEE Interconnected System, Planned Generation Reserve at Maximum Annual Peak 4.4 MEE Interconnected System, Planned Generation Reserve at Mid-Year Peak Load 4.5 MEE's Interconnected System - Net Capacity Additions - 1977-1985 5.1 Construction Program of MEE Centrals (CIPEET, CIRE) and DEN 5.2 Project Cost Estimate for July 1, 1980 - June 30, 1983 Time Slice of CIPEET, CIRE and DEN Investments 5.3 List of Goods to be Financed from Loan Proceeds 5.4 Technical and Economic Indicators for the Major Power Plants to be Completed 1980-1985 5.5 Estimated Disbursement Schedule 6 List of Annexes and Attachments on Financial Aspects 7.1 Comparison of 1978 and 1980 Projections of Added Installed Capacity, Production, Investment 7.2 Return on Investment 7.3 Construction Expenditures - Summary MAP IBRD 10830 Ri   ROMANIA STAFF APPRAISAL REPORT ON FOURTH POWER PROJECT MINISTRY OF ELECTRICAL ENERGY (MEE) I. THE ENERGY SECTOR 1/ A. Sector Organization 1.01 The State Planning Committee (SPC) coordinates energy planning and expansion in Romania, carried out by the following Ministries with regard to the respective subsector concerned: Ministry of: Area of Responsibility of Subsector Mines, Petroleum and Geology Extraction of oil, natural gas, (Ministry of Mines - MM) anthracite, coking coal, coal, lignite, bituminous and carboniferous shale. Electrical Energy (MEE) Electrical energy and heat. Chemical Industry (MChI) Petroleum refining and petrochemicals. Metallurgical Industry (MMI) Coke and coke-oven gases, coal-tar. Forestry Economy and Construction Wood. Materials (MFCM) Operating efficiencies in the power subsector are some of the highest anywhere notwithstanding multi-responsibility for sector planning, due to an integrated approach to the use of energy at national and Romanian regional levels (para 1.03) and the legal obligation to comply with the plans. 1.02 The MM (Chart l.l)--with the Industrial Centrals for coal and other mining activities directly under the Minister, and with seven directorates for oil and gas, geology, technical development/planning, finance, organization/ training, investment and international economic cooperation--has responsibility for production of fuels and their processing and transport. The fuels are delivered to the end users at set quotas and fixed prices. For natural gas 1/ Further information on the sector is given in Report No. 1601-RO of March 31, 1978 entitled "Romania - The Industrialization of an Agrarian Economy under Socialist Planning" - mainly in Volume II, pages 267 to 288, Chapter XIV - "Consumption and Production of Energy Resources".  -2 the MM ensures compliance of individual consumers with assigned quotas (paras 2.18-2.20). The MEE (para 2.03) is responsible for planning of system expansion and the design, construction and operation of generating plant and transmission and distribution systems. It receives coal and gas for its production of heat and electricity from the MM and fuel oil from the MChI. The MMI supp;ies waste heat in form of industrial gases for electricity and heat production by the MEE thermal plants. The MChI processes all crude oil, associated natural gas liquids and part of natural gas supply into petroleum products and chemicals for sale in domestic and foreign markets. Similarly the MMI and MFCM are in charge of production and marketing of the products under their responsibility. 1.03 The 1973 oil crisis had led to establishing the "Permanent Commission for the Coordination, Guidance and Control of Fuel, Electricity and Heat Consumption" late in 1973. The work, under its coordination, has produced the strategy and policy discussed in paras 1.09-1.11. The Commission is also instrumental in expediting the ongoing revision of the 1981-1985 Five Year Plan (FYP) for the sector, precipitated by Romania's recent loss of oil supplies from Iran and Iraq. B. Energy Resources 1.04 The primary energy sources of Romania consist of crude oil, natural gas (including that associated with oil extraction), coal, anthracite, coking coal, lignite, brown coal, bituminous and carboniferous shale, and hydropower. Wood for fuel is still available in the countryside. There are important hydropower resources, and there is a geothermal potential, probably of low temperature, that could possibly be developed for space heating. 1.05 Regarding thermal energy, Romania was one of the world's early (since 1857), large-scale producers and exporters of petroleum. Before World War II it ranked among the five largest producer countries. But in recent times consumption caught up with supply and it has had to import crude oil from OPEC sources to maintain its traditional and profitable export of refined products. While no figures are published by the Government, it is likely that present known producible petroleum reserves amount to around 100 to 200 million tons (Mt) 1/, and gas reserves could be of the order of 500,000 million m. 2/ Coking coal in exploitable quantities is limited 3/; with 3,600 to 4,700 kcal/kg it has about half the heat value of imported hard coal. To feed mainly its steel industry demand, Romania has a long term joint investment with a coal supplier in the eastern USA. The main, economically exploitable lignite 4/ 1/ About 700 to 1,400 million barrels; production of oil in 1979 was around 14 million tons (Mt). 3 2/ 1979 production of gas was around 2,800 million m. 3/ Total hard coal production in 1979 was around 6 Mt. 4/ 1979 production of lignite was around 15 Mt.  -3. deposits are in the south-western part of Romania. The lignite has only about a quarter of the specific heat content of imported hard coal, has a high ash content and is uneconomical to transport over some distance; most of it is, therefore, used in large power plants to produce electricity and, in accelerat- ing degree, heat (para 4.05). Carboniferous shales are found in the Anina- Oravitsa region together with coal deposits; ash content is very high (up to 85%) and specific heat content only about 1/4 of imported hard coal. While the mineable coal reserves could be considerably less and no figures for bituminous shales (assumed to be in the order of 200 Mt) are available, the official estimates of the coal reserves are as follows: -----------Million Tons--------- Proven Probable Possible Anthracite 14.0 1.3 8.2 Coking Coal 18.7 325.6 52.7 Bituminous Coal 39.0 711.3 85.2 Lignite and Brown Coal 360.4 386.2 68.1 Source: MM. 1.06 The hydropower resources of Romania are estimated to be 12,300 MW, capable of generating 37,000 GWh per annum from some 630 sites. 1/ Only 75% of this is economically feasible for development at the present time, the remaining 25% being described as technically feasible . Also, Romania's five plants on the Danube, being developed jointly with Yugoslavia and Bulgaria, should produce 2,400 MW and 12,300 GWh per annum. About 2/3 of the economically feasible hydropower capacity has been developed. The government expects the full hydropotential to be tapped by the end of the 1990s. C. Energy Supply and Use 1.07 Romania became a net importer of energy in 1972/73 and of oil and oil products in about 1976. Currently, the country still meets more than 80% of its energy needs from domestic oil and gas resources. Natural gas has been and is the most important source of primary energy; it accounted for 44% of total consumption in 1975, oil for 33%, coke and coal for about 19% and hydroelectricity for only about 3%. Domestic production of crude oil is slowly decreasing despite intensive secondary and tertiary recovery efforts. 1/ 1979 production of hydroelectric energy was 11,239 GWh or 17.3% of total electric energy generated.  - 4 - The increase in the supply of other domestic sources of primary energy--coal, lignite, bituminous shales and hydropower, consequently, continues to be given priority. Low productivity and labor unrest in the coal mining sector have in the past affected low-grade coal supply and consequently the power sector performance. To fill the energy demand/supply gap, Romania will have to import substantial amounts of its commercial energy needs by 1985, mostly in the form of crude oil and increasingly of high grade coal. The use of wood as a household fuel is still widespread; local peat deposits are not regarded as economically exploitable. Although the discovery of oil and gas off-shore in the Black Sea has been announced, the size of the resource is not yet known. Figure 1.1 shows projections to 1990 of the net primary energy produc- tion, indicating the strong reduction in hydrocarbons and the gap between requirements and domestic resources. 1.08 Despite Romania's successful energy conservation program, energy demand in Romania increased rapidly from 6.8 million tons of oil equivalent (Mtoe) in 1950 to about 61 Mtoe in 1977, as a result of rapid industrialization and may reach 78 Mtoe in 1980. Efforts since 1974 had reduced energy consump- tion as reflected in the energy/GDP ratio. By 1980, Romania was planning to save 8 Mtoe in the industrial sector and 5 Mtoe through increased waste heat recovery. Further savings are resulting from the measures introduced in July 1979. However, to cover the additional petroleum supply gap resulting from the loss of contracts with Iran, Romania concluded a limited supply contract with the USSR in 1979. The oil supply situation has worsened further due to the Iran-Iraq crisis. D. Energy Policy and Strategy 1.09 Since the mid 1960-s, the Government's most important energy policy objectives continue to be: (a) to increase output of primary energy to cover the requirements to a maximum from internal resources, primarily coal and hydropower; (b) to intensify efforts in conservation of hydrocarbon resources, including likely through retrofitting of industrial boilers to burn coal in addition to those for power and heat of MEE included in the FYP; and direct their use to production of petrochemicals; (c) to increase efficiency in the utilization of plant capacity and also in the consumption of users; and (d) to expand oil and gas exploration, particularly in offshore areas. The Government's strategy continues to be to make fullest use of indigenous resources and, more recently--with Canadian help--to develop nuclear power. A first 600 MW unit of Canadian supply is planned to be commissioned about 1985. Canada is expected to provide financing in the order of Can $1.0 billion to assist the first phase of Romania's nuclear program. The total program is expected to provide about 2,840 MW by the end of the 1980s.  -5- 1.10 In the power subsector, because of the integrally-planned approach to expand and operate the economy, Romania has reached an exceptionally high level of integrated multipurpose use of primary thermal energy for the produc- tion of electricity and heat which is mostly centrally produced and rationally distributed for consumption; this seems to be the reason for the very high efficiency in the countrys use of such energy. The recent worldwide concern for energy conservation is now leading other parts of the world to increasingly adopt an integrated multi-purpose energy use (including of normally "wasted" heat) which is planned to be further expanded in Romania under its 1981-1985 FYP. Some 35% of central heating is derived from co-generating plants in the country and it has exported this technology to other countries, as Romania manufactures co-generating units up to 150 MW. 1.11 The centrally-planned system has allowed Romania to take drastic and very early steps (in comparison with most other countries) to conserve energy on a large scale. The 1979 measures, strongly enforced by quotas, have led to immediate reduction of energy use. Heating and lighting of factories and offices were lowered to minimum levels; use of private and official passenger cars was drastically curtailed and the cost of petrol increased; heat that would usually be wasted in conventional condensing power plants is recovered and channelled to provide process heat, hot water and space heating. For the latter, new users are found in large scale greenhouses, when a power plant has to be located away from industry and population near low-grade coal deposits. To reduce hydrocarbon use in existing, older vintage electricity and heat generating stations, the Government plans now to provide for further fuel oil savings by adding new coal based co-generation stations. E. Sector Issues 1.12 In addition to growing energy imports, the major issue is the need for a speedy improvement in specific energy consumption in order to reduce the relatively high per capita consumption of energy which has resulted from the structure of industry and its high share in the Romanian economy. In the 1981-1985 FYP period, the Government intends to reduce per capita consumption but the reduction will be slow because: (i) the technology used in the Romanian industry is relatively energy intensive as, until recently, domestic energy sources were relatively abundant and imported technology was also energy intensive ; and (ii) much plant and equipment uses less efficient processes than the more advanced technology in other countries. Also, until recently, physical production targets were the over-riding concern of the plan under the gross production concept; it had been generally more important to produce the goods than to produce them efficiently. Beginning in 1979, Romania introduced a net production concept into the Plan which emphasizes value added. This, and Romania