China - Yanshi Thermal Power Project

L N -3t433-CH)4 Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10201-CHA STAFF APPRAISAL REPORT CHINA YiANSHI THERMAL POWER PROJECT December 17, 1991 Industry and Energy Operations Country Department II East Asia & Pacific Regional Office This document has a restticted distribution and may be used by recipients only in the performance of their officilI duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of October 31, 1991) Currency = Yuan (Y) Y 1.00 = 100 fen $1.00 - Y 5.38 Y I - $0.19 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES km - Kilometer (= 0.62 miles) kWh - Kilowatt hour (= 860.42 kcals) GWh - Gigawatt hour (1,000,000 kilowatt hours) TWh = Terawatt hour (1,000,000,000 kilowatt hours) kW = Kilowatt (1,000 watts) MW = Megawatt (1,000 kilowatts) GW = Gigawatt (1 million kW) Kcal = Kilocalorie (= 3.97 British thermal units) kV = Kilovolt (1,000 volts) kVA Kilovolt-ampere (1,000 volt-amperes) MVA = Megavolt-ampere (1,000 kilovolt-amperes) GVA = Gigawatt-ampere (1 million kVA) mg = Milligram m3 Cubic meter toe = Tons of oil equivalent ABBREVIATIONS AND ACRONYMS USED CcEPA - Central China Electric Power Administration CCPG - Central China Power Grid EPPEI - Electric Power Planning and Engineering Institute GOC - Government of China GNP - Gross National Product HIPDC - Huaneng International Power Development Corporation HAB - Henan Audit Bureau HPEPB - Henan Provincial Electric Power Bureau HPG - Henan Power Grid IAEA - International Atomic Energy Agency LRMC - Long Run Marginal Cost MOE - Ministry of Energy MOF - Ministry of Finance MWREP - Ministry of Water Resources and Electric Power PCBC - People's Construction Bank of China SAM - State Audit Administration SEIC - State Energy Investment Corporation SPC - State Planning Commission SWCEPDI - Southwest China Electric Power Design Institute WREPERI - Water Resources and Electric Power Economic Research Institute  FOR OFFICIAL USE ONLY CHINA YANSHI THERMAL POWER PROJECT Loan and Proistt Summary Borrowers People's Republic of China Beneficiary: Henan Provincial Electric Power Bureau (HPEPB) Amount: $180 million equivalent Tormes 20 years, including five years grage, at the standard variable interest rate. Onlendina Termat The proceeds of the loan will be onlent from the Government to HPEPB under a subsidiary loan agreement, with a 20-year term, including five years grace and at the Bank's variable interest rate. HPEPB will bear the foreign exchange risk and the commitment charges. Proiect Objectives and Descritiont Principal project objectives are tot (i) alleviate the acuto power shortage of a major load center in Central China by providing additional generating capacity in an onvironmentally and economically sound manner; (ii) support the national policy of locating thermal power plants at mine-mouths or close to coal mines; (iii) introduce up-to- date methods for investment planning, tariff study, and system operation; (iv) assist in transferring modern technologies and construction/management practices for large thermal power plants; (v) enhance institutional development of HPEPB ay strengthening its organization through staff training and introducing principles of economic efficiency and pricing; (vi) provide technical assistance in: project design and implementation; prudent financial management; and efficient operation and maintenance of the power system; and (vii) contribute to further improvement of the environmental aspects of HPEPB's thermal power stations, including a monitoring program. The proposed project is located about 90 km west of Zhangzhou in Henan province. The project would includet (i) extension of the existing Yanshi Thermal power plant by installing two 300 MW generating units; (ii) construction of five 220 kV transmission lines (about 350 km long) with associated substations; (iii) provision of technical assiotance for project engineoring, a tariff study and a tariff action plan for the Henan Power Grid (HPG) (iv) a monitoring program for environmental protection, and (v) a training program for upgrading the technical, financial and management skills of HPEPB staff. This document has a retricted 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.  Benefit. and Risks: The project will help to relieve the power shortages in Henan in the 1990s, thereby supporting planned industrial growth and improved living standards for the population. An economic analysis of the project, based on optimizing the Henan power system has confirmed that there are no better alternatives than the proposed project in meeting future power demand. The extension of the existing Yanshi power plant provides the most efficient and effective method of augmenting base load capacity. Also, the project will contribute to institutional development by strengthening the managerial and technical capabilities of HPEPB. The technical and economic feasibility of the project has been well established. No major risks, including environmental problems, are foreseen. Construction risks are within reasonable limits and should be manageable with the continuous supervision arrangements. The economic risks, if any, should be minimal. The project has been designed taking into account the requirement that the environmental impact from operating the station not exceed the internationally accepted norms. An environmental monitoring program will be included in the project. HPEPB will also replace the precipitators for the existing 2x200 MW units with high efficiency electrostatic precipitators.  Estimated Costs: Local Foreign Total -- ($ million) ------- Civil works 44.1 6.4 50.5 Plant equipment and materials 57.4 159.9 217.3 Transmission system 26.1 - 26.1 Environmental protection 0.2 0.1 0.3 Training 1.3 1.0 2.3 Tariff study 0.5 - 0.5 Engineering and construction management 17.0 1.2 18.2 Base Cost 146.6 168.6 315.2 Contingencies Physical 14.6 8.4 23.0 Price 13.8 3.0 16.8 Total Pro1ect Cost la 175.0 180.0 355.0 Interest during construction IBRD loan - 48.1 48.1 Local loan 56.5 - 56.5 Total Financin Reguired 231.5 228.1 459.6 Proiect Financina Plan: IBRD loan - 180.0 180.0 SEIC loan 115.8 32.1 147.9 Provincial government loan 115.7 16.0 131.7 Total 231.5 228.1 459.6 Estimated Disbursements: Bank FY 1993 1994 1995 1996 1997 1998 - _______-------- ($ million) -------------- Annual 44.2 79.9 40.6 6.6 5.3 3.4 Cumulative 44.2 124.1 164.7 171.3 176.6 180.0 Economic Rate of Return: 16 percent /a The project is exempt from taxes and duties.  - 1 - CHINA YANSHI THERMAL POWER PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE ENERGY SECTOR . . . . . . . . . . . . ......... . 1 A. Overview . . . . . . . . . . . . . . . . 1 B. Energy Sector Issuas . ....... *....... 4 C. Energy Sector Strategy .. ...... 7 D. Bank Role in the Energy Sector . 7 II THE POWER SUBSECTOR . . . . . . . . . . . . . . . . . . . . . 9 A. Background . . . . . . . . . . . . . . . . . . . . . . . 9 B. Institutions, Planning and Technology Transfer . . . 10 C. Power Pricing . . . . . . . . . . . . . 12 D. Subsector 8ssues and Strategy .. .. .13 E. Role of the Bank in the Power Subsector 13 III. THE BENEFICIARY . . o . . . . . . . . . . . . . . . . . . . . 15 A. Legal Status and Organization ... .. ...15 B. Management . . . . . . . . . . is 15 C. Staffing and Training & . a . . . . . . . 16 D. Planning, Budgeting and Control . . . . . . . . . . . 16 E. Accounting .. .. * . & 17 F. Auditnn . . . . . . . . . . . . is 17 G. Electricity Tariffs . . . 19 H. Billing and Collections . . . . 19 I* Insurance a . . . . . . . . . 21 J. Distribution System . . . . ... .. . .. .. . . 21 IV. THE POWER MARKET AND THE PROGRAM 9999. 9999.9999 22 A. The Central China Power Grid .9999999999999 22 B. The Henan Power Grid .................. 22 C. Load Forecast . . . . . . . .............. . 23 D. The Power Development Program (1991-2000) . . . 25 This report is based on the findings of an appraisal mission which visited China in September 1988 and a post-appraisal mission in September 1991. The report was prepared by V. Mastilovic (Task Manager), W. Cao (Senior Power Engineer), B. Baratz (Principal Environmental Specialist), S. Kataoka (Senior Power Engineer), n.E. Sun (Finanial Analyst), 0. Koenig (Economist), and K.C. Ling (Consultant). Peer reviewers comprised: C.K. Chandran (Principal Engineer), S. Shum (Senior Financial Analyst), and N. Anderson (Senior Project Officer). The Acting Division Chief is B. Kafka and the Department Director is S.J. Burki.  - ii - Paxe No. V. TE PROJECT . . . . . . . . . . . . . . . . . 26 A. Project Objectives . . . . . . . . . . . . 26 B. Project Description . . . . . . . . . . . . 26 C. Cost Estimate . . . . . . . . . . . . . . . . . . . 29 D. Financing Plan . . . . . . . . . . . .... . . . 30 E. Procurement . . . . . . . . . . . . . . . . . . . . 31 F. Project Implementation . . . . . . . . . . . . . . 33 G. Disbursement ... . . . . . . . . . . . . . . . . . . 34 H. Monitoring and Reporting . .# .. . .. . . . . . . . . . 34 1. Environmental Considerations . . . ... . . . . 34 VI. FINANCIAL ASPECTS.. . . . . . . . . . . . . . . 36 A. Introduction.. . . . .36 B. Financial System . ............. ... .. .. 36 C. Past and Present Financial Performance. . . . . . 36 D. Financing Plan . . . . . . . . . . . . . . . . . . 38 E. Future Finances 4..4...4......... 39 VII. JUSTIFICATION . . . . . . . . . . . . . . . . . . . . . . . 42 A. Need for the Project 42 B. Least Cost Studies 43 C. Economic Rate of Return ..... .43 D. Risks . * . . . . . . . . . . . . . . . . . . . .. 44 VIII. AGREEMENTS REACHED AND RECONMENDATION . . . . . . . . . . . . 45 ANNEXES 1. Installed Capacity, Electricity Generation, and Sales in the Power Subsector .... . ..... . . . .. 444...... 46 2. Growth Index for Electricity Generation and Primary Energy Demand . . . . . . . . . . . . . . . . . . . . . . . 47 3. Electricity Consumption by Sectors . . . . . . . . . . . . 48 4. Major Ongoing Hydzo and Thermal Power Projects . . . . . . 49 5. Performance Indicators for Henan Power System . . . . . . 51 6. PPEPB Staffing . . . . . . . . . . . . . . . . . . . . . . 52 7. Planning, Budget and Control of Chinese Power Bureaus . . 53 8. HPEPB Electricity Tariffs . .... 56 9. Major Generating Facilities in Henan Province 57 10. Energy Consumption by Category of Consumer . . . . 60 11. Power Development Program of HPG (1991-2000) . . . . . . . 61 12. System Demand and Energy Balance of HPG . . . . . . . . . . 62 13. Training Program ...................... 63 14. Action Plan for Power Tariff Structure Improvements 70 15. Terms of Reference for the Tariff Study . . . . . 72 16. Terms of Reference for Consulting Services . o . 74 17. Project Cost Estimates . . * . . * . . . . . . . . . . .. 76 18. Procurement Schedule . . . . . . . . . . . . . . ... . . 77  - lli - ANNXES (cont'd) 19. Key Dateo of Project Implementation . . . . . . . . . . . . . 78 20. Disbursement Schedule . . . . . . . . . . . . . . . . . . . . 79 21. Air Quality Analysis . . . . . . . . . . . . . . . . . . . . 80 22. Summary of Environmental Mitigating Measures . . . . . , . . 81 23. Environmental Monitoring Program . . . . . . . . . . . . . . 83 24. Financial System Followed by Chinese Power Bureaus . . . . . 89 25. Annual Financial Statementso ... . . . . . . 92 26. Calculation of Economic Rate of Return . . . . . . . . . . . 115 27. Selected Documents and Data Available in the Project File . . 119 1RARTS 1. Organization Chart of MSE 2. Organization Chart of SEIC 3. Organization Chart of HPEPB 4. Project Implementation Schedule IiP IBED 21114R Yanshi Thermal Power Project  CHINA YANSHI THERMAL POWER PROJECT I. THE ENERGY SECTOR A. Overview 1.1 China has made remarkable progress in developing its energy resources over the last four decades and became the third largest producer of commercial energy in the world. In that period, the output of coal has increased at an average annual rate of 9.1 percent, crude oil production at 19.3 percent, and electricity generation at 13.1 percent. In 1990, the coun- try's primary commercial energy supply amounted to 727 million tons of oil equivalent (toe) Coal is the most important source of commercial energy, accounting for about 74 percent of the total. Oil accounts for 19 percent of the total and provides about 7 percent of the country's export earnings. Hydroelectric power (4.6 percent), natural gas (2 percent), and small quanti- ties of shale oil and geothermal power make up the balance. Noncommercial energy, equivalent to about one-third of commercial energy production, is very important in rural China. 1.2 In 1990, China's final consumption of commercial energy was esti- mated to be about 686 million toe. The largest consumer of commercial energy is the industrial sector (62 percent), followed by households (24 percent), services (9 percent), and agriculture (5 percent). About 20 percent of oil and 2 percent of coal production currently are exported. Coal and its by- products meet 70 percent of the fuel requirements for industry and power gen- eration, provide 60 percent of the raw materials for chemicals, and satisfy 80 percent of the commercial energy needs of househol's. The country also ie the third largest consumer of commercial energy in the world. Still, energy consumption per capita is low--about 0.6 toe, or one-third of the world aver- age. Energy Resources 1.3 Coal. China has large coal deposits with recoverable reesarves of about 900 billion tons, of which 30 percent are proven. There are now twelve provinces and autonomous regions with more than 10 billion tons of coal reservesl Shanxi and Inner Mongolia each have reserves of over 200 billion tons. In 1990, the country produced 1.1 billion tons of raw coal, of which it exported only 16 million tons. By the year 2000, China aims to produce 1.4 billion tons of coal a year. Coal is produced in many provinces, and the amount and quality may vary. The best quality coals are found in North China, which is also the region with the largest coal surplus. However, insufficient transport capacity makes it extremely difficult to move coal from mines in North China to the large consuming centers in Southeast, Central, and East China. The safety and environmental problems associated with coal minirg and utilization also are serious (paras. 1.17 and 1.19).  - 2 - 1.4 Hydroelectric Potential. China is rich in water resources and has a long tradition of harnessing them for energy and other uses. The country's hydroelectric potential is estimated at 1,900 TWh a year, but only about 9 percent of it has been developed. Most of the potential is located in four major river basins in the Southwest (70 percent) and Northwest (12 percent), about 1,500 km away from the main demand centers. The long gestation period for hydroelectric projects also has inhibited the more rapid development and utilization of hydroelectric resources. 1.5 Crude Oil. China's ultimately recoverable reserves of crude oil have been estimated at some 80 billion tons, of which 16 percent are proven. The country produced 138 million tons of crude oil in 1990, and the target output for the year 2000 is 200 million tons. In view of the natural decline in production from existing aging fields, it seems unlikely that this produc- tion target can be met. China'e: refining capacity is the sixth largest in the world and allows it to produce a relatively high share of high and medium distillates. 1.6 Natural Gas. China's rnatural gas resources are estimated at 33 tri- llion cubic meters (m3), of which 2.6 percent are proven. About 50 percent of the gas produced is nonassociated gas. In 1990, China produced 15 billion m3 of natural gas. The target output for the year 2000 is 25 billion m3. Most of the gas is used as feedstock for fertilizers and petrochemicals. 1.7 Biomass. Firewood and crop stalks account for 57 percent of the 224 million toe of rural energy supplies. About 70 percent oE all fuelwood is used for cooking. Some areas of the country have been suffering from serious deforestation, stemming primarily from fuelwood collection and land clearing for various purposes. The estimated offtake of fuelwood is 230 million tons (91 million toe), or 2.6 times the sustainable amount. The Government is taking various measures to address this problem, such as encouraging more efficient use of wood, planting trees, improving management of natural forests and wood lands, making greater use of charcoal, and subatituting coal for wood. China also produces many agricultural residues which are used as fuel. 1.8 Nuclear Energy. Known uranium reserves in China are sufficient to sustain 15,000 MW of nuclear power capacity for 30 years. In 1991/92, China plans to commission Qinshan nuclear power plant (300 MW), located near Shanghai. In 1992/93, Daya Bay nuclear power plant (2x900 MW) shoul.0 'e com- missioned; 70 percent of its output is intended for nearby Hong Kong. The construction of a few additional plants is planned before the year 2000, pri- marily in regions which lack coal and hydroelectric resources. 1.9 Other Energv Resources. Other energy resources play a small role in energy supply and are used mostly in remote areas. Geothermal energy has been found in more than 3,000 locations covering nearly all provinces and autono- mous regions. The Yangbajing geothermal power plant, located in Tibet, sup- plies about 50 GWh a year, or about 20 percent of the electricity consumption in Lhasa's power system. Although wind and solar energy have promising pros- pects (e.g., wind in Inner Mongolia), they are not expected to affect the overall supply of energy significantly during the next two decades. Unoffi- cial estimates of oil shale suggest that deposits are large, but little is exploited because of lack of technology.  -3- Insetitutio of the Energy Sector 1.10 In 1988, the Ministry 's :gy (MOE) was established to manage and develop the energy sector. Its foramation was intended to reduce the duplica- tion and overlapping responsibilitei .f the former ministries in charge of coal, petroleum, and nuclear power. MOE also was given responsibility for electric power, formerly held by the Ministry of Water Resources and Electric Power (MWREP). The new ministry has primary responsibility for planning and establishing policieo and regulations to promote the rational development and use of energy resources. Under MOE are various companies and administrations responsible for operations in individual energy industries. Chart 1 shows the organization of MOE. 1.11 The State Energy Investment Corporation (SEIC) was established dur- ing the same period to handle project financing in the coal and electricity nidustrios. SEIC is responsible for onlending funds for projects of national importance and representing the Government in the joint financing of projects with other parties; it is expected to operate as a revenue earning entity. Petroleum and nuclear power investments are covered under separate corpora- tions. Both MOE and SEIC operate under the purview of the State Planning Commission (SPC), which has ultimate authority for project approval, budget allocations, and financing arrangements. Enerty investments 1.12 Most investments in enetgy supply go to support projects with long gestation periods. Energy investments for the 1980s were planned based on an expected economic growth rate of 7.5 percent a year. Actual economic growth rates exceeded this target by an average of 2.5 percent a year, (4.5 percent in peak years). Also, industrial growth far exceeded what had been planned. The discrepancy between projected and actual growth rates has exacerbated the energy shortages that already existed at the start of the decade. China faces an additional difficulty in developing its relatively abundant energy resources, as many of the resources are located far from consumption areas and must be tr& sported over long distances at high cost. In recent years, the Government I7,J thus given priority to shifting resources into bottleneck sec- tors such as energy and transport. 1.13 In 1989, China dedicated 3.4 perc..nt and 1.3 percent of its Gross National Product (GNP), respectively, to develop infrastructure for energy production and transportation. It invested a total of Y 44.6 billion ($12 billion) in energy supply, representing 29 percent of state capital construc- tion. In the early 1980s, energy supply investments accounted for 21 percent of state capital construction. The shares of power and petroleum investments have increased s4nce 1988 to 62 percent and 22 percent, respectively. State coal investment has declined (to 16 percent) but this decline has been offset by an increase in investment by coal collectives. About 20 percent of the investment requirements of the Chinese energy sector are met by foreign loans and direct investments. Direct foreign investment has financed most offshore petroleum exploration to date, although recent trends indicate a decline in direct investment for this purpose. On the other hand, there has been an increase in suppliers credit and bilateral lending for the petrochemical and power industries.  B. EnerRg Sector Issues 1.14 In addition to the already noted energy shortages, the main energy sector ivouea are: (i) the high energy intensity of the Chinese economy; (ii) the dominance of coal use and associated environmental problems; (JAI) the nneed to improve scale and technology in energy industries; (iv) the :I.nadequA.y of eniergy pricing policies; and (v) the weak investment funding oystem. Intensity of Ener y_Use i.1l In 1983, China's consumption of commercial energy was estimated at 1.5 toe per $1,OOu of GNP. That high a level of energy intensity was due to the emphasis placed on heavy industry, the small scale of industrial units, and the raw materials and technologies employed. In the late 1970s, the Gov- ernment began to address the inefficiencies in the economy by insLituting regulations on energy use, establishing conservation centers to provide tech- nical assistance, and allocating a larger share of investment funds for indus- trial modernization, particularly for projects which contributed to energy conservation. The elasticity of energy consumption with respect to GNP growth, whtich averaged 1.74 from 1952 to 1977, was reduced to 0.5 in the '980s. In 1989, the country's energy intensity was 1.1 toe, a 27 percent reduction from the 1980 level. It is estimated that technical and operational improvements and the closure of some inefficient small-scale plants are responsible for about 70 percent of the energy savings. and the shift in the output mix of the economy for the other 30 pere;--t. The efficiency gains have been evenly spread over heavy and light industry. Despite these 4.mprovements, China's energy intensity is still high. A target of the Eighth Five-Year Plan (1991-95) is to reduce it further by 10 percent. More energy could be saved by increasing the scale of operations, employing more efficient operatirng practices, and using more modern technologies in energy intensive industries. The Dominance of Coal and Related Environmental Problems 1.16 Unlike the situation in most countries, the electric power subsector is not the largest consumer of coal in China. Industrial use of coal is much greater. The growth of coal consumption in the household sector also has been strong, due to urban population growth and the increasing use of coal in rural areas. Moreover, there is considerable latent energy demand in the residen- tial sector, primarily for space heating, as present heating arrangements meet only minimal needs. 1.17 Many of the environmental problems in China are related to the coun- try's heavy use of coal and the dispersed, small scale application of coal in industry and households. Environmental problems occur at every stage of the coal chain: mining and disposal of mine waste, coal washing, transport and handling, processing and combustion, and ultimately ash disposal. Water pol- lution occurs both in mining regions and in dense urban areas, caused by prob- lems in disposing of coal mining and processing wastes and the coal ash remaining after combustion. In many large cities, ambient concentrations of particulates and sulfur dioxide are very high. The concentration of particul- ates is the most serious problem; it is largely related to the extensive use of coals, their high ash content (20-30 percent), and the often incomplete  -5- combustion due to poor matching of coal qualities to boilers u(id. The aver- age sulfur content of the coal is relatively low (in the rai,ge of 1.2- .7 per- cent), but because coal is used so extensively sulfur emissions aref -Incrcas- ing. Moreover, some provinces use coal which has a very high sulVtll contont. 1.18 The environmental implications of continued increases iu croal uss are sobering. They highlight the need for stronger regulatory enforvtciao.nt and more resources devoted to investments to conserve coal and mitigatcf : t