China - Waigaoqiao Thermal Power Project

Report No. PIC4006 Project Name China-Waigaoqiao Thermal Power Project (@#) Region East Asia and Pacific Sector Thermal Project ID CNPE44485 Borrower People's Republic of China Implementing Agency Contact: Mr. Zhang Fulou Shanghai Municipal Electric Power Company 181 Nanjing Dong Road Shanghai, China Beneficiary Shanghai Municipal Electric Power Company Financing Plan Million US$ IBRD 400.0 Shanghai Municipal Electric Power Co. 216.2 East China Electric Power Group Co. 108.1 Shenergy Company Limited 216.2 Local Banks 703.8 Cofinancing 500.0 Total 2144.3 Background 1. China Power Sector. China is currently the world's second largest producer of electricity. During the 1980-95 period, installed generating capacity increased from 66 gigawatts (GW) to about 217 GW, and electricity generated increased from 300 terawatt hours (TWh) to 1,007 Twh, at annual growth rates of 8.3 and 8.4 percent, respectively. Successful measures to improve the efficiency of electricity use continue to be implemented in attempts to reduce the need for new generating capacity, as is installed by the low 0.86 elasticity ratio of electricity demand growth to GDP growth achieved by China during 1980-95. Nevertheless, China's economic development continues to be restrained by electricity shortages and bottlenecks in the transmission system. It is estimated that generating capacity must increase by between 15 to 20 GW per year for the next five years if the shortages are not to become more acute. 2. China recently undertook two important steps in legal and regulatory reform agenda for the power sector. First, the Standing Committee of the 17th session of the National People's Congress passed the first 'Electricity Law of the People's Republic of China', which became effective on April 1, 1996. Second, the State Council (a) approved the creation of the National Grid Company which will operate the future (inter-regional) transmission network; and (b) proposed for consideration by the National People's Congress a restructuring plan that provides for abolition of Ministry of  Electric Power (MOEP) and transfer of regulatory and policy functions to the State Economic and Trade Commission (SETC), the State Planning Commission (SPC), and the China Electricity Council. A National Power Cooperation of China has been created and entrusted with the ownership functions of the central government and development of the inter-regional transmission systems. 3. Several joint venture companies have been established to build several power plants with capacity ranging from 40 to 700 MW. Two major joint venture projects have been recently approved in Shangdong (Rizhao coal-fired power plant - 2x350 MW) and in Shanghai Municipality (Zhedian gas turbines plant - 4x100 MW). Build, operate and transfer (BOT) schemes have also been introduced in China, most notably the privately financed Shajiao B and Shajiao C thermal power plants in Guangdong Province, respectively commissioned in 1986 and 1996. Another major BOT project sponsored by two international consortia was approved by SPC in 1993 in Fujian Province (Meizhouwan coal-fired power plant - 2x350 MW). The process of international competitive tendering for projects has also begun. SPC approved the Laibin B project in the Guangxi Zhuang Autonomous Region to be the first power project to pilot the international competitive bidding framework. SPC invited 12 of 31 companies/consortia that sought prequalification to bid competitively for the Laibin B project. Six international consortia participated in the competition. Bids were opened in May 1996 and an 18-year concession was awarded to the winning consortium on November 11, 1996. Bids will be shortly issued for the Wangchen project in Hunan Province. 4. China's Power Sector Policies. National policy placed primary emphasis on the addition of 300 MW- and 600 MW-units in the system. The Government also would like to begin construction of even larger units to achieve economies of scale. The policy is aimed at improving the efficiency of the generation system, reducing generation costs and minimizing adverse impacts on the environment. However, new projects have lagged behind demand, largely due to difficulties in mobilizing the necessary large investment resources for new capacity based on large units. A disturbing consequence is that some local governments, pressed by acute shortages of electricity, are continuing to invest in large numbers of new, small, coal-fired power plants based on obsolete, polluting technology, in unit sizes of 50 MW or less. 5. China has a sound record of energy/electricity conservation. Various measures to improve the efficiency of electricity use have been introduced in attempts to reduce the need for new generating capacity. These measures have been successful, as is indicated by the low ratio of elasticity of growth in electricity demand to GDP growth of 0.86 achieved during the last decade. However, energy/electricity conservation programs have been based primarily on policies - 2-  and programs appropriate for the previous planned economy. The Government is now promoting a shift in the energy conservation programs to rely more on market-based incentives and introduce innovative and commercially-based contractual and financing mechanisms. The Bank will assist the Government in furthering these objectives through a stand-alone project (FY98). 6. The Government is continuing to encourage efficient energy use through energy price increases. Significant progress has been made in many ways to simplify the tariff, improve its structure and bring it into line with costs. Consumer prices for electricity now reflect economic costs reasonably well in many provinces. However, there is a need for price increases to meet long-run marginal costs in some provinces, especially those where generation is mostly based on hydropower and/or power sector reforms are progressing at a slower pace. 7. The Shanghai Municipal Power Grid. The Shanghai Municipal Power Grid (SMPG) is an important part of the East China Grid which covers the provinces of Jiangsu, Anhui, and Zhejiang and the Shanghai Municipality. Greater Shanghai is one of the main load centers of the East China Grid. The effective capacity of SMPG at the end of 1995 was 6,828.5 MW and the maximum demand experienced was 6,916 MW. The peak demand on the grid is projected to increase to 11,600 MW by the year 2000 at an annual average growth rate of 10.9%. There is therefore an urgent need to increase the supply capabilities of the grid to reduce power shortages. 8. As Shanghai is at the forefront of China's reform, SMEPC was selected by the Ministry of Electric Power (MOEP) to be listed as a pilot shareholding company in 1992. However, it did not materialize because of the unfavorable international stock markets and tight control of the expansion of the domestic markets. In 1995, MOEP decided to reform the sector following the purchasing agency model to allow private involvement only in power generation. SMEPC therefore submitted a revised reform plan, including listing of its generation assets, to MOEP in November 1995. MOEP approved the listing plan and allocated a quota of RMB 30 million for domestic shares to SMEPC in April 1996. An additional quota of RMB 30 million is expected to be allocated by Shanghai Municipality. To prepare for the listing, SMEPC employed a reputable international accounting firm to reconstruct its financial statements in accordance with international standards. Recently, SMEPC was selected by the State Council as one of 38 enterprises eligible for public listing on the overseas stock exchanges. 9. In the past few years, taking the opportunity of the increasingly market-oriented environment, SMEPC borrowed twice, $50 million in each transaction, from the syndication markets to finance the construction of Waigaoqiao phase I and - 3 -  the associated transmission line (220 kV) in the Pudong area. Recently, it formed a joint venture (The Shanghai Zhadian Gas Turbine Power Generation Co. Ltd.) with GE Capital of USA to have built a 4x100 MW combined cycle power plant. Project Objectives 10. The primary objectives of the project are to: (a) increase electricity supply to reduce the acute power shortages in Shanghai through development of two very large coal-fired thermal units; (b) develop a program to apply for the first time in China the 'bubble concept' for cost effective air quality management within Shanghai Municipality; (c) support the ongoing power sector reform by restructuring SMEPC in line with the power sector reform strategy; encouraging private sector involvement through listing of the generation company; and rationalizing the tariff structure as well as adjusting the tariff level to accommodate the stricter sulfur dioxide emission standards; and (d) promote an innovative and diversified financing model for a large infrastructure project and improve the access of power entities to international financial markets. Project Description 11. The proposed project is intended to support economic investments to augment power supplies while at the same time developing a cost-effective approach to control the sulfur dioxide emissions in the Shanghai area and advancing the sector reform program. The major investment components will be in: (a) the power station and associated transmission line construction; (b) application of the most suitable desulfurization technologies in the existing priority (more polluting) power plants; and (c) technical assistance to support reform and institutional strengthening. 12. The Waigaoqiao Power Station. The Waigaoqiao Power Plant is located in the Pudong New Area of Shanghai at the mouth of the Yangtze river, which is about 18 km away from the city center. Following the completion of the first phase of the Waigaoqiao power plant (4X300MW) in 1997, SMEPC plans to initiate the second phase of development of the site through the construction of two coal-fired supercritical units of 900-1000 MW each, followed by a third and final phase of installation of another 18,00-2,000 MW. 13. The station will be the first two supercritical coal- fired units of 900-1000 MW in China. This very large thermal unit is a new technology in China. There are only 27 coal- fired thermal power plants of this size currently under operation and another 11 under construction, all in the US, Japan, and Germany. The selection of a unit size and type which has not yet tried in the country for this plant is based on an extensive evaluation of all technically possible options to optimize the development of the site (located in Pudong, - 4 -  one of the fastest growing areas in the world) and meet the very strict environmental standards of the Shanghai area. During the evaluation, the following parameters were considered: (a) steam condition - super-critical or sub- critical; (b) type of turbine - tandem compound or cross compound; (c) unit size -4X90OMW, 4X1000MW, or 5X600MW; and (d) type of boiler - variable pressure or constant pressure. 14. Pudong, where the power plant is located, is an industrial area experiencing rapid development and electric load growth. The plant site has had most of the necessary infrastructure in place as this is the second phase construction. Thus, installing more capacity at Waigaoqiao will increase overall energy efficiency and make an optimal use of the site. Due to the scarcity of suitable sites and the high cost of land in Shanghai, and in Pudong in particular ($150-300 per square meter), the available sites must be developed to their full potential. A study conducted jointly by the East China Electric Power Design Institute and Sargent and Lundy concluded that 900-1,000 supercritical units will provide the most economic efficiency for coal-fired generation units for the Waigaoqiao site. 15. SMPG is currently the size of a typical medium sized utility in the US and by the year 2000, it will be the size of a typical large utility in the US. Many of the medium sized utilities in the US have units that are 900 MW or greater, and aost all of the large utilities in the US have units of 900 MW or greater. A 900 MW unit represents 11.8t of the current (1995) available capacity of SMPG and 2.7w of the current available capacity of the ECEPG, but less than 7t of the total planned available capacity of the SMPG and less than 2t of the ECEPG by the time the first unit would be placed in service. Therefore, the addition of either a 900 MW or 1000 MW unit to the SMPG and ECEPG will have no impact on system stability. 16. The generating units of the proposed project will be designed to burn good quality coal produced at the Shenmu and Dongsheng mines in Shaanxi Province and Inner Mongolia Autonomous Region (heating value of 5,445 kcal/kg, 0.43 sulfur content, 11-15 W ash content for design coal and 0.63w sulfur content for check coal). Under the proposed project, a coal quality monitoring system and an on-line performance monitoring system will be provided to ensure optimum operation of the plant and advanced maintenance methods to be introduced. 17. All power generated by the plant will be fed to SMPG and is intended primarily for supply to Shanghai. The plant will be connected to the grid through two 500 kV transmission lines. The Yang Hang - Yang Gao 500 kV line, which is currently in the planning stage, will be looped into the plant site. The proposed project includes construction of the 500 kV transmission line (2 circuits x 50 km) with associated substations. -5-  18. The proposed Waigaoqiao project is well within the Chinese National Standards for sulfur dioxide emissions (5.29 to 7.9 actual versus 10.03 tons/hr allowed), the Bank current guidelines (20.8 tons/hr) and the draft Bank guidelines (11.66 tons/hr). Therefore, flue gas desulfurization equipment will not be installed initially but space will be provided for their subsequent installation if required by future environmental standards. However, the proposed project will include an environmental component to reduce sulfur dioxide emissions in existing priority plants by at least the same amount emitted by the proposed project. Low NOx burners will be provided and high efficiency Electrostatic Precipitators (ESP) will be installed to meet Chinese emission standards and the Bank's guidelines. 19. The Environmental Protection Program The proposed project will provide support for one of China's first major initiatives to control sulfur dioxide emissions from thermal power plants. In the past, sulfur dioxide emissions control measures in China's power sector have been limited primarily to control of coal quality and a few pilot projects in flue- gas desulfurization (FGD) and fluidized-bed combustion, primarily in areas reliant on very high-sulfur coal. Following enactment of new national legislation on air pollution control, expanded efforts to control overall sulfur- dioxide emissions will need to be undertaken in East China, where low-sulfur coals dominate, but the density of coal consumption causes excessive ambient sulfur dioxide concentrations. Shanghai Municipality has taken a lead role in this effort, by enacting new local regulations and developing a new program of pollution control investments. Shanghai's program, the first of its kind in China, will include new, and critically important, retrofit investments for sulfur dioxide control in existing power plants causing severe air pollution problems in the Shanghai area. 20. The proposed project includes approximately $120 million (excluding IDC) of investment to reduce sulfur dioxide emissions in existing and highly polluting Shidongkou Phase I power plant. The objective is to achieve the greatest emission reductions in Shanghai's power sector at the lowest cost, through analysis of the overall sulfur dioxide emissions in Shanghai, and the most cost effective measures to reduce ambient concentrations (e.g., the 'bubble' concept). The selected FGD system represents state-of-the-art, commercially proven technology, and will be designed for 90 percent removal of sulfur dioxide. FGD will not be installed at Waigaoqiao, given Waigaoqiao's use of low sulfur coal and the fact that emission and ambient standards are not violated without FGD. Therefore, such investment is highly uneconomic compared to other sulfur dioxide control investments in Shanghai's power industry. However, due to the project's desulfurization control investments in Shidongkou, the addition of 2,000 MW of power capacity at Waigaoqiao will result in zero or negative growth in sulfur dioxide concentrations in Shanghai. - 6 -  21. Technical Assistance to Support Sector and Tariff Reforms. SMEPC is currently embarking on a restructuring program. The main elements of the restructuring program are: (a) Unbundling and structural separation of generation from transmission and distribution: SMEPC will be structured as a limited liability company for transmission and distribution. It is planned that by June 1998, all generation will be separated from transmission and distribution. The objective of this unbundling is to create a purchasing agency structure which will encourage investment in generation, and allow SMEPC to focus on the efficient operation of the monopoly transmission and distribution network. The complete structural separation of generation from transmission would create a framework for competitive procurement of future generation and efficient production. All non-core business of SMEPC will be transformed into profit/cost centers or subsidiary companies by February 1998. (b) Efficient wholesale generation tariffs: A revised system of wholesale electricity tariffs would be devised for power purchase from each generating plant on the system. These tariffs would be based on a two-part tariff that would encourage efficient dispatch and overall economic efficiency. All power will be purchased by SMEPC on the basis of wholesale contractual arrangements. Revision of wholesale electricity prices for all generation, based on government approved principles, and signing of power purchase agreements with all generation plants are planned to take place in December 1997 and February 1998, respectively. All generators on the system will be treated equally and dispatched on a nondiscriminatory basis. (c) Private Financing of Generation: The generation assets in the Shanghai power sector will be examined and restructured to form viable generation company or companies for subsequent listing on domestic and/or international stock exchanges. The SMEPC was also selected by the State Council in January 1997 as one of thirty eight enterprises eligible for public listings on foreign stock exchanges. Public listing of the generation company/companies with a more diversified ownership will also make raising debt easier in the long- term. 22. Specialized financial and restructuring advisory technical assistance for implementation of the planned structure reform, as well as the formation of the generation companies and their listing will be provided under the proposed project. The detailed terms of reference will be developed by an international advisory team to be recruited by SMEPC -7-  Beneficiary 23. The beneficiary will be the Shanghai Municipal Electric Power Company (SMEPC). SMEPC is an experienced borrower and has implemented a Bank financed project, Wujing Thermal Power Project, with great success. As previously described, SMEPC will be restructured under the proposed project. In the course of implementing the overall reform plan of SMEPC, a Waigaoqiao generation company will be established. The potential shareholders for the company are SMEPC or the new generation company to be established, East China Electric Power Group Company (ECEPGC), and Shenergy Company Limited (Shenergy). Therefore, the financing provided by the latter two parties to the proposed project are structured as convertible loans to SMEPC. Both ECEPGC and Shenergy are well established companies. Shenergy is a listed company on the Shanghai Stock Exchange. They maintain the option to convert their contributions to the project into equity shares at the time when Waigaoqiao is to be incorporated. Project Costs and Financing 24. The total financing requirements (including IDC of $358.9 million equivalent), are estimated at $2,144.3 million equivalent. The local costs estimated at $956.9 million equivalent and IDC for the local and a part of IDC for foreign loans estimated at $287.4 million equivalent will be financed by: (i) SMEPC self-generated funds; (ii) convertible loans from Shenergy and ECEPGC; and (iii) commercial loans from two local banks. Financing from the first two sources, $540.5 million equivalent, will constitute about 30 percent of the total project cost and represent about .2 percent of the total financing required. The remaining financing requirements of about $703.6 million equivalent will be covered by borrowings from two local commercial banks arranged by the SMEPC, Shenergy, and ECEPGC. 25. The foreign exchange required for the project ($828.5 million) and a part of IDC (about $71.5 million) together estimated at $900 million will be financed by the proposed Bank loan of $400 million and co-financing of $500 million. The Government and SMEPC will explore co-financing options: (i) export credits for a part of major equipment in the amount of approximately $155 million upon the selection of lowest evaluated bidder scheduled in October 1997; (ii) Japan EXIM's untied loan in the amount of up to $50 million equivalent under Accelerated Co-financing Facility for the environmental protection component; and/or (iii) commercial co-financing. MOF would become a Chinese counterpart (the borrower in the case of buyer credits) in export credit financing and the borrower for JEXIM loan for the Project. Under the proposed qualification criteria for the major equipment packages, including turbine generator and boiler, it is expected that all the eligible suppliers are able to arrange export credit co-financing. Informal sounding with Japan EXIM for the - 8 -  possible provision of an untied loan has already been initiated. 26. It is expected that the Government would tap the commercial market after the approval for the proposed loan by the Board, after the exploration of export credits/official co-financing, and by the time of actual disbursement for the major equipment scheduled to start in late 1999. The Bank will provide the co-financing framework (provision of an optional cross default clause) for such borrowing by the Government. The Bank will also consider the provision of a partial credit guarantee, at then minimum necessary level, if such a guarantee would be required by the Government due to market conditions at the time of its financing for the Project. Such guarantee operation, if any, would be sent to the Board for approval on a stand-alone basis. Project Implementation 27. SMEPC will be responsible for construction and operation of the Waigaoqiao Phase II Thermal Power Project. SMEPC has had substantial experience in power generation, transmission and distribution, and has been operating Shanghai Municipal Power Grid since 1986. It also has operating experience of supercritical units (2x600 MW coal-fired thermal units at Shidongkou II). Preparatory works including access roads and construction power supply started in January 1997 and have been progressing satisfactorily. The feasibility study report was prepared by East China Electric Power Design Institute (ECEPDI) in December 1993 and was updated in May 1996. Based on the feasibility study, SMEPC and ECEPDI completed a concept design report in August 1996. The bidding documents for the procurement of the main boiler and turbine-generator packages prepared by China Electric Power Technology Import and Export Corporation with the assistance by international engineering consultants are scheduled to be issued in April 1997 and opened in August/September 1997. The commercial operation of the first generating unit is expected in May 2003 and the second unit in May 2004. Project Justification and Benefits 28. Alternatives. The Waigaoqiao project was selected for implementation as the result of a least-cost generation expansion study for the East China power grid undertaken by the Beijing Energy Research Institute (BERI). Since there is no hydroelectric potential in the East China region, practical alternatives to the proposed thermal power station are: (a) coal-burning thermal power stations near Shanghai, the major demand center; (b) mine-mouth power stations in Shanxi Province; and (c) combined cycle plant fueled by either LNG or distillate (diesel) fuel oil. The study shows that it is far more economic to generate electricity close to the load center than it is to transport the electricity to the load center. Generation from combined cycle plant is more expensive than -9-  the Waigaoqiao alternative because of higher fuel costs, despite the better fuel-conversion efficiency of the combined cycle. Moreover, power exchange within East China Grid has also been considered in the study. The specific Waigaoqiao site was chosen because of its location at the mouth of Yangtze River, its favorable topographic and geologic conditions, and because, if appropriate consideration is given to plant design and implementation, the overall adverse environmental impact would be low. The proposed project remains the first choice for investment in the least-cost investment program under a variety of sensitivity analyses. 29. Economic Justification and Benefits. The internal economic rate of return (IERR) for the proposed project was calculated based on the estimated plant gate power price of 47 fen/kWh (in 1995 prices) in 2003, the first year of operation. this estimate is based on existing policies for pricing of power output from new power plants and currently paid by SMEPC to most recent coal-fired base load power plants. It yielded an IERR of about 19.3 percent. This IERR, based on revenues generated by the new power plant rather than the economic value of a shortfall in electric power supply, underestimates the economic benefits of the project. If the cost of the installation of the FGD in Shidongkou power plant is added to cost of the power plant without consideration of the benefits of reduction in sulfur dioxide emissions, the IERR would be reduced to 18.2 percent. Environment and Resettlement 30. Environmental Assessment and Management Plan. In accordance with Bank OD 4.01 (Environmental Assessment), the project has been assigned to Category A. A draft Environmental Assessment Report has been prepared by ECEPDI and SMEPC with the assistance if an international consultant specializing in environmental issues related to thermal power plants and submitted to the Bank for comments. The report evaluated the environmental impact of the station not only for the two units (1,800 - 2,000 MW total) included in the project, but also at its projected maximum ultimate capacity of 5,200 MW. It will assure that: (a) all environmental aspects are satisfactorily addressed and in compliance with all Chinese and World Bank environmental regulations, policies and procedures; and (b) the project has been designed and will be implemented in line with modern concepts of environmental management. 31. Resettlement Aspects. The project design focused on minimizing the scope of resettlement. Where land acquisition and demolition of existing housing are unavoidable, the resettlement action plan (RAP) provides for replacement of housing, alternative employment, infrastructure, services and other resources. The project requires: (a) acquisition of about 1,272 mu of land, (b) demolition of about 41,000 square meters of floor space; (c) relocation of 273 households and 17 - 10 -  town or village enterprises. Overall, about 1,298 people will be affected by the project. Resettlement for the 500 kV transmission lines has been undertaken under another project. Arrangements for reallocation, prepared in collaboration with local authorities and the population affected by the project, will be in line with Chinese national and local policies. Sustainability and Risks 32. Financial sustainability of the project is ensured through suitable financial performance covenants. Moreover, existing pricing policy ensures that project costs will be fully recovered and passed on to the consumers. For example, the average tariff for Waigoqiao phase I power plant was 57 fen/kWh in 1996. The market for the power is guaranteed because of the acute shortages in the Shanghai Municipality. Suitable performance monitoring indicators have been developed which will allow impending major problems to be detected and corrective measures taken if necessary. 33. Cost overrun risks have been minimized through thorough review of international costs for similar projects and costs of existing 600 MW super-critical in China, especially the Shidongkou phase II power plant in Shanghai. The risk of delay in project construction due to project management shortcomings is minimal because of the recognized considerable skills and experience of SMEPC's engineers, managers, and local and international engineering consultants. The risk of non performance in the environmental and resettlement area has been addressed by the establishment of appropriate monitoring organizations and procedures. More importantly, sensitivity analyses show that even in the case of substantial increase in the cost, the project would remain economically viable. 34. Delay in implementing power sector reforms in an efficient and timely manner represents a risk that can jeopardize the progress toward more openness and efficiency of the sector and more fiscal and managerial autonomy of SMEPC. This risk is minimized by the strong commitment of Chinese to reform both at the central and municipal level. This risk is also addressed through provision of required technical assistance and adequate monitoring of implementation of the agreed upon reform plan during the project cycle. 35. The economic and financial risks would be minimal. In view of advanced preparatory works, risks associated with project construction, cost overruns, and implementation delays are within reasonable limits and manageable with the agreed supervision and involvement of competent consultants. Particular attention will be given to the safety aspects of the project, and to capability and performance of major contractors. Contact Point: Public Information Center The World Bank - 11-  1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending March 14, 1997. - 12 -