Ukraine - Krivoy Rog Power Plant Rehabilitation

Report No. PIC4154 Project Name Ukraine-Krivoy Rog Power Plant... Rehabilitation Region Europe and Central Asia Sector Electric Power & Other Energy Project ID UAPA9109 Borrower Ukraine Implementing Agency Joint Stock Company "Dniproenergo" Mr. V.P. Bondarenko, Director General 2, Plotinnaya St., Zaporozhye 330000, Ukraine Tel: 380-612-570-781 Fax: 380-612-583-380 Date This PID Prepared November 14, 1996 Projected Appraisal Date November 29, 1996 Projected Board Date March 13, 1997 Sector Background 1. The installed electricity generation capacity of the Ukrainian Power System (UPS) is about 53,000 MW. It consists of 14,000 MW of nuclear capacity, located in five plants with a total of 15 units in operation. There are more than 40 thermal (fossil fuel) power plants with conventional steam cycle technology, with over 110 generating units and a total capacity of 32,000 MW, of which 4,000 MW are combined heat- and-power units. Hydro capacity is close to 5,000 MW, installed mostly in 9 plants with a total of 100 generating units. The capacity of industrial power plants is about 2,000 MW. The total effective generating capacity of the system is about 50,000 MW, due to the derating of older plants. Most older fossil fuel plants (about 23,000 MW) use coal as their primary fuel, but need gas or mazut for co-firing. About 5,000 MW of power generation as well as most of the combined heat- and-power plants run on gas or mazut as main fuels. 2. In the past, Ukraine had eight vertically integrated regional monopolies that were responsible for electricity generation and high- and low-voltage network operations in their respective regions. In May 1994, the President of Ukraine issued Decree No. 244 "On the Market Transformation of the Power Sector of Ukraine" which stipulated the unbundling of the power sector and the development of a competitive national wholesale market for electricity. As a result of this decree and other similar acts of government, Ukraine's power sector is organized as follows: The 14 largest thermal power plants are operated by four state joint stock generation companies under the Ministry of Power and Electrification (Minenergo): Dniproenergo operates three plants (8,400 MW total capacity), Donbassenergo operates five plants (7,770 MW), Tsentrenergo operates three plants (7,800 MW), and  Zakhidenergo also three plants (4,680 MW). Two joint stock companies operate the 8 hydropower stations on the Dnieper river and the three hydropower stations on the Dniester river. A state grid company owns and operates the high-voltage network (220 KV and above). Twenty seven joint stock companies (oblenergos) operate the low-voltage networks and some generation capacity in the oblasts and two city administrations (Kiev and Sevastopol). The nuclear power plants are operated by the State Committee for Nuclear Energy (Goskomatom). By December 1, 1996 a nuclear generation company EnergoAtom will be established on the basis of the country's five nuclear plants, which will continue to have certain rights of a legal entity. A National Electricity Regulatory Commission (NERC) was established in 1995. NERC issues and monitors licenses for electricity generation, high voltage transmission, low voltage distribution, and tariff and non-tariff supply. NERC's task is also to promote competition, protect consumers, oversee the operation of the electricity market and regulate prices for high- and low-voltage network operators. Generation companies, the grid company and oblenergos signed the Energomarket Members Agreement (EMA) on March 23, 1996 The EMA assigns the task of operating and administering the wholesale electricity market (called Energomarket) to the National Dispatch Center (NDC), a state owned company. The wholesale market started to operate on April 10, 1996. NDC's main functions include: (i) the control and financing of the high voltage grid; (ii) the purchase and dispatch of power capacity and electricity; (iii) the purchase of ancillary system services; and (iv) the administration of the settlements system (including the administration of market funds). Technical and financial market operations are governed by a set of market rules described in the EMA. The price of electricity purchased from thermal (and later also from nuclear) power plants is set on the basis of a bidding process. In addition to determining in every hour the system purchase and selling prices, NDC continues to be responsible for generation plant scheduling and dispatch, and the maintenance of system stability. Under the Market Fund Procedure (to be introduced by November 22, 1996), NDC's settlements responsibilities include creating payments orders and clearing payments among market participants. 3. The Government is in the process of developing a privatization program for the power companies, recognizing that (i) privatization is a natural extension of the power sector restructuring process; and (ii) privatization can attract much-needed investment resources. The power generation companies are to be privatized on a case-by-case basis, with each privatization plan to be submitted to the Cabinet of Ministers for final approval. According to the latest plan, the state would retain a -2 -  51- stake, and the remaining shares would be sold to (i) holders of privatization and compensation certificates (23%); and (ii) strategic investors, including foreign companies, for investment commitments (269). 4. Thermal power plants account for about 60% of the installed power plant capacity in Ukraine. Most of the power units have 200 MW or 300 MW rating. The thermal plants are generally old and many are approaching the end of their design lives. In addition, they are using substantially lower grade coal than for which they were designed and thus require large amounts of gas or oil to maintain combustion. As a result of burning off-design coals and the poor condition of many of the plants, a large number of coal-fired units had been derated by a total of 2,600 MW or 11% of the country's thermal generating capacity. Fluegas emissions are either uncontrolled (S02 and NOx) or inadequately controlled (particulates). The Government of Ukraine has identified the improvement of the country's thermal generating plants, including their environmental performance, as one of its highest priorities in the energy sector. 5. Krivoy Rog GRES is a coal-fired power station with 3,000 MW installed capacity (10x300MW), located in Zelenodolsk (Dnipropetrovsk region) and operated by Dniproenergo Joint Stock power company, based in Zaporozhye. Because of derating, the current operating capacity is only 2,600 MW. A number of Krivoy Rog units are nearing their design lives and vital components are at the end of their safe metallurgical life. The Station's environmental performance is inadequate. Serious deterioration in reliability of equipment has adversely affecting unit generating capacity, availability and efficiency. Rebuilding or replacement of some of these components is necessary for the continued economical, reliable and environmentally sustainable operation of this plant. Objectives 6. The main development objectives of the proposed project include support for: (i) the full implementation of the ongoing power market reforms; and (ii) transforming Dniproenergo into a commercially oriented and financially viable modern utility; (iii) implementing the sector investment plan leading to the closure of the Chernobyl nuclear power station as agreed between the Ukraine and the G-7 by financing a priority project, which is part of the plan; and (iv) rehabilitating a total of 900 MW generating capacity at Krivoy Rog GRES. Specific technical objectives include: (i) extending the life of three 300 MW power units by at least 15 years; (ii) increasing power output through improved unit availability and thermal efficiency; (iii) reducing operating and maintenance costs; (iv) improving load-following capability; and (v) improving the environmental performance of the plant. Description 7. Six thermal power plants have been identified by the Ministry of Power and Electrification (Minenergo) as possible investment targets. Of these six plants, detailed rehabilitation feasibility studies were -3 -  carried out for Krivoy Rog GRES. Based on these studies, the major components of the proposed project are: General Station Rehabilitation. This includes upgrading of fuel receiving and handling facilities, including installation of a new crane; rehabilitation or replacement of parts of the electrical system, including transformers, switchgear, cables, circuit breakers; installation of automatic dispatch controls; upgrading of water treatment and waste water disposal; installation of ash, S02 and NOx measuring devices; and upgrading of service facilities; Boiler Rehabilitation (Units 6,7,8). This includes reconstruction of pulverizers and the air and flue gas system; improvement of casing and insulation; replacement of high pressure parts; upgrading/replacement of main and reheat steam piping; reconstruction of feedwater system; replacement/reconstruction of electrostatic precipitators; upgrading of instrumentation and control; and installation of emission measuring instruments; Turbine-Generator Rehabilitation (Units 6,7,8). This includes replacement of governors, controls, medium and high pressure cylinders, condenser tubes and screens; and reconstruction of condensate pumps, heaters and motors; Replacement of Generator for Unit 2; and Consulting Services. These include support for project preparation and implementation, corporate restructuring and institutional strengthening, including organizational streamlining, introduction of modern utility management practices, management development and staff training, upgrading of financial management, and privatization. 8. Environmental Aspects. With respect to its environmental impact, the proposed project has been classified in the World Bank as category B, under which an environmental analysis is required. The project is designed to bring about a substantial improvement of air quality in the Krivoy Rog region, which is regarded as one of the most polluted regions in Ukraine. The estimated reductions are 12,000 tons of S02, 5,000 tons of NOx, and 28,000 tons of flyash emissions per year. In accordance with the environmental regulation of the Government of Ukraine, the Ecological Assessment of the project by the appropriate regional environmental office is in progress. In October 1996, a preliminary official approval was granted by the Dnipropetrovsk Environmental Inspectorate. 9. Benefits. The proposed rehabilitation extends the life of three 300 MW units by at least 15 years. It is expected to increase: (i) generating capacity for the total plant from 2,600 MW in 1998 to 2,993 MW in 2001 and thereafter; (ii) annual availability by about 4t percentage points; and (iii) overall plant thermal efficiency by 5.2%. The rehabilitation also reduces operating and maintenance costs, and improves operating safety and environmental performance. Additional Company-wide benefits are to be derived from the institutional - 4 -  (corporate restructuring) support program of the project. 10. Financing. The total financing required is estimated at US$278.4 million equivalent. A proposed World Bank loan of US$166.0 million would finance: (i) about 75t of the costs of equipment and goods; (ii) part of consulting services for project implementation (if additional grant financing cannot be mobilized); and (iii) interest during construction. The loan would have a maturity of 17 years, including a five-year grace period. A grant of US$2.5 million equivalent was approved by the Government of Canada to finance a major part of consulting services for project preparation and implementation. About US$68 million equivalent, or 24t of total financing, would come from local funding. The Borrower of the Bank loan would be Ukraine, whose Government (Ministry of Finance) would onlend the proceeds of the Bank loan to Dniproenergo under a sub-loan agreement. Terms of the subsidiary loan would be identical with those of the Bank loan, except for the additional interest rate margin to cover guarantee fees and the cost of loan administration for the Government. 11. Implementation. Project implementation would be the responsibility of Dniproenergo. An Inter-Ministerial Working Group was established for the coordination of the project within the Government. A Minenergo Project Coordinator manages the project approval process between GOU agencies and Dniproenergo, and between Minenergo and the Bank. A Project Management Unit was established at Dniproenergo to direct and supervise project preparation and implementation. A Project Implementation Unit (PIU) was established at Krivoy Rog GRES. The PIU is assisted by SaskPower Commercial under a Government of Canada grant. The Bank loan is expected to be disbursed over a period of five years (1997-2001). It is estimated that about 88t of equipment financed from the Bank loan would be procured under international competitive bidding. Sustainability and Risks 12. While the project does not pose significant technical risks, it faces some of the risks inherent in transition economies. The main risk relates to the financial capacity of Dniproenergo to mobilize local funding for the project and to repay the Bank loan. The financial projections indicate that Dniproenergo is financially capable of repaying the loan and maintain a reasonable debt service coverage ratio if its cash flow improves. In particular, arrears should be reduced, timely payment of billings enforced, and cash transactions increased over barter transactions. These are largely beyond the control of the Company and will be determined by the performance of the Ukrainian economy, government policy, and the electricity market reforms currently underway. The necessary actions include: (i) significant improvement in the timeliness of payments by the National Dispatch Center (NDC) of the amounts owed to the Company for power delivered; and (ii) an increase in the future selling price of electricity to offset rising fuel costs and to provide for required maintenance and rehabilitation of power units. These financial risk factors are addressed under the Bank's recently approved Electricity Market Development Project. 13. Another potential risk is that project implementation and project costs my increase because of the beneficiary's inexperience in - 5 -  implementation of Bank projects. This risk will be mitigated through the careful planning of activities that are on the critical path, and by providing technical services to the PIU in procurement, contract management, supervision and quality control. Poverty Category and Gender Issues 14. Not applicable. Program Objective Categories and Participation 15. By increasing the availability of electricity (a crucial input for most economic activities) while upgrading and improving the emission control equipment, the project would support environmentally sustainable development. The proposal for the project originated in the power industry. The Beneficiary will be responsible for the preparation of all project components, ensuring a strong sense of ownership. Due to the nature of the project, there is no need for public consultations. Contact Point: Istvan Dobozi, Task Manager EMTIE The World Bank 1818 H Street N.W. Washington D.C. 20433 (202) 473-2147 (tel) (202) 477-0686 (fax) 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 December 6, 1996. - 6 -