China - Second Power Project

Document of The World Bank FOR OFFICIUL USE ONLY //t/ -2 YS/3- C>-9t- Repwt No. 5147-CHA STAFF APPRAISAL REPORT CHINA SECOND POWER PROJECT January 22, 1985 Projects Department East Asia and Pacific Regional Office Thbis docmnt has a resfticted dbstibutio ad may be wed by recipiens only in the peformanc of t ofridcil dutie Is contetsmay not oerie be dscsed wihout Wedd Bank athorzaion.  CURRENCY EQUIVALENTS Currency - Yuan (Y) US$1.0 = Y 2.60 1 Yuan (Y) = US$0.3846 1 Yuan = 100 fen (As. of November 1984) Fiscal Year (FY) 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) kW = Kilowatt (1,000 watts) kV = Kilovolt (1,000 volts) kVA = Kilovolt-ampere (1,000 volt-amperes) .VA = Megavolt-ampere (1,000 kilovolt-amperes) MW = Megawatt (1,000 kilowatts) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ECEPA - East China Electric Power Administration ECEPDI - East China Electric Power Design Institute ECPS - East China Power System GOC - Government of China IAEA - International Atomic Energy Agency JPEPB - Jiangsu Provincial Electric Power Bureau MOCI - Ministry of Coal Industry MOF - Ministry of Finance MWREP - Ministry of Water Resources and Electric Power MOPI - Ministry of Petroleum Industry PCBC - People's Construction Bank of China SAA - State Audit Administration SEC - State Economic Commission SEPSB - Shanghai Electric Power Supply Bureau SPC - State Planning Commission  FOR OMCIAL USE ONLY CHINA SECOND POWER PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. Is THE ENERGY SECTOR..........................* ................. 1 A. Overview ............... ..................... ....... ..... 1 B. Resource Endowment ..............................***... 1 C. Sector Problems and Policies .........................0...... 2 II. THE POWER SUBSECTOR ..............................*.*** _ 3 A. Background ................................ ............... 3 B. Institutious ....................................................... 3 C. Trfs................................ 4 D. Manpower and Training ..................... .......... 4 E. Planning and Investment ................. .... ..... ......... 5 F. Subsector Policy and Strategy ......................... 5 C. Subsector Problems ....* ............................................ 6 H. Role of the Bank ......................................... 7 III. THE BENEFICIARY ............. .. ..... .... ........ 7 A. Legal Status, Organization and Management ................ 7 B. Staffing and Training *....** " 8 C. Accounting Arrangements . ........................... we 8 D. Audit .................... 9 E. Tariffs ................................................. o 9 F. Billing and Collection .. .. ...... ... ... .. ....... 10 Go Isrne....... 10 IV. THE POWER MARKET AND THE PROGRAM ............................. 11 A. The East China Power System ............ ....... 11 B. The Jiangsu Power Grid ........................... 11 C. Load Forecast ............................ ..... 12 D. The 1984-90 Program . .. ........ ...... 13 This report was written by K.C. Ling, Keith Thomas, Weigong Cao and Ivy Cheng, who appraised the project in March 1984 with the assistance of Dennis Leong, Transmission Line Consultant. This docamnt has a resticted distbution and may be used by recipients only in the performance of their officil duties. Its contents May not otherwise be discosed without World Bank authorization.  - ii - Page No. V. THE PROJEC. ................................................ 15 A. Background ...............................* ******** *s* *6..... 15 B. Project Objectives ...... ....o......... *.. ........ 15 C. Project Description ............................. ........ 16 D. Cost Estimates......................... ..................... 17 E. Financing Plan.......... ........... ............. 66 19 F. Construction and Supervisio ...................... .0........ ... 20 G. Procurement ................. ....0-00 .................. 21 R. Implementation Schedule.o..... .. . . .... 22 I* Disbursement osessoosees.o.oooes.so..........................e 22 J. Monitoring and Reporting ....... ................o ......... 22 K. Ecology ................. . ... ... 0-.-... .......... 22 L. Technical Assistance on System Planning .................. 23 M. Operations and Maintenance .......................*...... 23 No Risks................................................... 23 VI. FINANCIAL ANALYSIS ........... 56.....*.............. o...... ...... 24 A. Background ....... 000o..e.*... ................. ........ O.... 24 B. Past Results and Present Position ................... . 24 C. Future Financial Performance... .......................... 25 D. Financial Covenants..... ................................... 27 VII. ECONOMIC ANALYSIS.....o....................... 28 A. Project Justification .................................. . 28 B. Least Cost Studies ............................ 66......... 29 C. Economic Rate of Return .....o...............o...* ........ 30 VIII. AGREEMENTS REACHED AND RECOMMENDATIONS ...............oosesoo 30 ANNEXES 1. Commercial Energy Balance 2. Major Generation Projects under Construction 3. Installed Capacity, Electricity Generation and Sales for the Power Subsector 4. Electricity Generation by Region and by Type of Plant  ANNEXES (Cont'd) 5. Electricity Tariff - JPE?B 6. Installed Capacity, Energy Generation and Sales for JPEPB 7. Major Cenerating Facilities of the East China Power System 8. Energy Consumption by Category of Consumers 9. Balance of East China Power System Load and Capability 10. Terms of Reference for Consulting Services 11. Project Cost Estimates 12. Disbursement Schedule 13. Income Statements (1979-83) - JPEPB 14. Balance Sheets (1979-83) - JPEPB 15. Forecast - Income Statements (1984-90) - JPEPB 16. Forecast - Balance Sheets (1984-90) - JPEPB 17. Forecast - Funds Flow Statements (1984-90) - JPEPB 18. Assumptions Used for Financial Forecasts 19. Economic Rate of Return 20. Selected Documents and Data in the Project File CHARTS 1. Organization of MWREP 2. Organization of JPEPB 3. Development Program of East China Power System 4. Project Implementation Schedule MAP East China Power System  -iv- CHINA SECOND POWER PROJECT Loan and Project Summary Borrower: The People's Republic of China Beneficiary: Jiangsu Provincial Electric Power Bureau (JPEPB) Amount: $117 million Terms: 20 years, including 5 years of grace, at standard variable interest rate Relending: The proceeds of the loan will be onlent from the Government to JPEPB under a subsidiary loan agreement, with a 20 year term, including 5 years of grace and an interest rate of 8.5% p.a. JPEPB will bear the foreign exchange risk (between the dollar and the Borrower's currency). Project Description: The project comprises the construction of a 500 kV transmission line from Xuzhou to Shanghai, installation of 5 s-ubstations and provision of associated equipment, consultant services and training. The project seeks to support industrial growth in East China by facilitating bulk power transfer between optimal generating sites and demand centers. It provides for the transfer of tech- nology in extra high voltage (ERV) line and substation design, construction, operation and maintenance, overall system planning, investment programming and financial planning and control, and presents an opportunity for cofinancing. The project faces no special risks. Cofinancing has been secured from the Italian Government (US$10 million).  Estimated Costs: Local Foreign Total '($ million) 500 kV transmission line 64.6 32.1 96.7 500 kV substations 42.0 60.4 102.4 Tele-control & tele-communication equipment 0.9 6.4 7.3 Installation, commissioning and testing equipment 1.5 5.6 7.1 Engineering & consultant services 5.3 1.0 6.3 Training 0.3 2.6 2.9 Base Cost 114.6 108.1 222.7 Physical contingencies 11.8 5.3 17.1 Price contingencies 5.9 19.6 25.5 Total Project Cost 132.3 133.0 265.3 Interest during construction 7.9 9.6 17.5 Total Financing Required 140.2 142.6 282.8 Note: Identifiable taxes and duties are about $9.2 million; the total project cost net of taxes and duties is $255.8 million. Financing Plan: Local Foreign Total - -X$ million)- Source IBRD 117.0 117.0 Bilateral credit - 10.0 10.0 Local banks 140.2 11.2 151.4 Government - 4.4 4.4 Total 140.2 142.6 282.8 Estimated Disbursements: Bank FY 1985 1986 1987 1988 1989 ~~~- - ($ million -- Annual 4.5 25.5 45.0 35.0 7.0 Cumulative 4.5 30.0 75.0 110.0 117.0 Economic Rate of Return: 14.0%  CHINA SECOND POWER PROJECT I. THE ENERGY SECTOR A. Overview 1.01 China is the fourth largest producer and third largest consumer of commercial energy in the world. Coal is by far the most important source (70% of total production in 1982), but oil production has increased rapidly since 1972 to become an important source of both commercial energy (22% in 1982) and of export revenue (accounting for about one quarter of the total). About 20% of oil production and 1% of coal production is currently exported. Natural gas, hydroelectric power and small quantities of s4,le oil and geothermal power constitute the balance of commercial energy.- Noncommercial energy resources supply energy equivalent to about 40% of commercial production. Commercial energy production grew at 10% p.a. from 1952-75, but the growth rate has fallen since then and between 1979 and 1981 it declined by 2.1%. This trend was reversed in 1982, commercial energy production rose by 5.6% in 1982 and 6.7% in 1983. 1.02 China's achievements in developing energy resources over the past three decades have been impressive. Production of coal has increased from some 60 million tons in 1952 to 715 million tons in 1983. During the same period power generating capacity increased from about 2,000 Mw to 76,440 MW. Oil production increased from about 0.1 million tons in 1950 to 106 million tons in 1983. These developments notwithstanding, the future prospects remain uncertain. The major oil fields, which together account for about 90% of China's oil production, have peaked. Only a few, new discoveries have been made. Rapid expansion of the coal industry faces very difficult problems in terms of investment, location and transportation. The remoteness of large hydro sites from load centers and the relatively large capital requirements and long gestation period of major hydro projects preclude sizeable increases in hydropower's share of energy production in the near term. B. Resource Endowment 1.03 china is well endowed with primary energy and has abundant resources in terms of coal, hydrocarbons, oil shale and hydropower potential. Coal and lignite reserves are concentrated largely in the north and northeast, which represent about 70% of the total recoverable reserves in China (640 billion tons). While future plans call for increasing coal production significantly by such measures as opening new mines and increasing mechanization, transport (essentially railroad capacity) appears to be the single most important 1/ See Annex 1, Commercial energy balance for 1980, 1982, and 1985.  constraint to achieving this objective. Proven recoverable reserves of oil are estimated at about 1.8 to 2.5 billion tons in the onshore regions and 4-8 billion tons offshore. Recoverable gas reserves are about 130 billion cubic meters. Reserves of oil shale are estimated unofficially at 400 billion tons. Current production of shale oil from the Liaoning and Guangdong mines is about 300,000 tons p.a. China's exploitable hydropower potential, among the largest in the world, is estimated at 1.9 million GWh per year; present hydro generation is about 86,450 GWh. Verified uranium reserves in China are sufficient to sustain 15,000 MW of nuclear power for 30 years. Much of China remains to be surveyed for uranium, but abundant thorium resources are known. While geothermal phenomena are abundant in the mountainous southwestern part of the country, geothermal energy has not been developed to a significant extent and its role is likely to remain limited. As in other developing economies, noncommercial fuels such as crop residue and animal waste are used extensively, especially in rural areas. China has pioneered and is now the leading producer of biogas. 1.04 China's energy resources are not evenly distributed. As much as 75% of the known commercial energy in terms of coal and oil is in the north and northeast, which have nearly 30% of China's population and more than 45% of gross industrial output. The east, with one-fifth of the total population and 30% of industrial output, is almost devoid of any energy resource. In the southwest, there is considerable hydropower and coal potential, but the central south is largely bereft of energy resources except for some hydro potential. Northwest China has considerable coal and oil resources but most of these are in such remote and sparsely populated areas that development would be extremely difficult and slow. C. Sector Problems and Policies 1.05 China's level of commercial energy consumption is very high in relation to its economic activity. Indications are that there is substantial potential for improvement in industrial energy efficiency in China. The Government is well aware of this problem and is according energy conservation equal priority with increasing energy production. 1.06 Under the Sixth Five-Year Plan, (1981-1985) the Government is putting major emphasis on the development of the energy and transport sectors. Although several coal and hydropower projects were postponed in 1981 because of overall investment reductions, energy investment has since been restored to the previously planned level. Progress is being made in building a number of hydroelectric and thermal power stations, developing open pit and underground coal mines, and increaseing the capacity of transport facilities for coal handling. To accelerate petroleum development, the Government has invited foreign oil companies to help develop both offshore and selected onshore areas with difficult drilling conditions. 1.07 In the short run, the Government is trying to ease the problem of energy shortages through energy conservation policies and programs. They comprise a mix of administrative measures and price incentives. Cutbacks in plan allocations of energy to major industrial users appear to have been the principal measure thus far. Energy consumption norms have been reduced and  - 3 - more strictly applied. Some very inefficient plants have been closed down. Oil-fired units are being converted to coal-firing to the extent possible. Fifty-five energy conservation centers have been established to provide enterprises with technical assistance in improving energy efficiency. These programs have resulted in energy savings estimated at 35 million tons of standard coal equivalent in 1980 and 26.5 million tons in 1981. About half of these savings, however, have been due to the shift in the industrial structure from heavy to light industry. There is still much potential for further energy-saving efficiency improvements in such industries as iron and steel, non-ferrous metals, chemical products, fertilizer and thermal power genera- tion. Some price increases have also been effected. In 1979, the prices of coal and natural gas were raised. More recently, special subsidies on diesel fuel for certain users were eliminated, an excise tax of Y 70 per ton of crude and heavy oil (burned as fuel) was introduced and marginal coal prices to industrial users have been increased. However, the present price structure is not sufficiently conducive to energy conservation. Further increases in the price of coal combined with increases in the price of petroleum products for industrial users would be necessary. High industrial electricity rates would also encourage conservation and provide resources for capacity expansion, thereby helping to eliminate the chronic electricity shortage, which accounts for a loss of about 20% in industrial production. II. THE POWER SUBSECTOR A. Background 2.01 Power development in China has registered high rates of growth during the last three decades. Of the total installed capacity of 76,440 MW in 1983, 32% was hydro and 68% was thermal. Total electricity generation has increased from 4,310 GWh in 1949 to 351,440 GWh in 1983. Annual per capita generation of electrical energy has grown from 8 kWh to 348 kWh during the same period. In 1982, power accounted for about 24% of the total commercial energy consumption (see Annex 1). Power is distributed through 32 grids, of which 13 (representing over 80% of the total capacity) exceed 1,000 MW each. Six of these are regional grids; the remainder serve individual provinces at smaller areas. Energy sales in 1983 reached 301,600 GWh, having grown at an average 14% since 1949. 78% represented industrial consumption, 15% agricul- tural, 1% transportation and 6% residential and urban commercial. About 60% of the population has access to electricity. Annex 3 summarizes the growth of capacity and sales since 1949, and Annex 4 shows the regional distribution of generation. B. Institutions 2.02 There are three principal ministries responsible for the energy sector: the Ministry of Water Resources and Electric Power (MWREP), the Ministry of Coal Industry (MOCI) and the Ministry of Petroleum Industry  - 4 - (MOPI). Following the reorganization of the Government in 1982, MWREP oversees all aspects of water resource management and electric power development including policy making, system planning, and the design, construction and operation of power and water resource projects of regional importance. Under MWREP, there are six regional power administrations which coordinate operations and load dispatching of the regional power grids and formulate long-term development plans for approval by MWREP and the State Planning Commission (SPC). Below the regional administrations are 16 provincial power bureaus operating as regional grids, while ten other power bureaus still operate in isolation (see Chart 1, Organization of MWREP). C. Tariffs 2.03 Electricity tariffs have in general remained constant since 1953. Through minor regional adjustments over the years, they have become reasonably uniform all over the country except in the northeast where historically they have been lower. However, special reduced rates are from time to time introduced to help new industrial and agricultural users in the initial years of their establishment. Hence, the average revenue per unit has been declin- ing due to increased consumption by these groups. The national average was about 976 fen/kWh (US