Document of The World Bank Report No. 13887-RO STAFF APPRAISAL REPORT ROMANIA POWER SECTOR REHABILITATION AND MODERNIZATION PROJECT AUGUST 9, 1995 Infrastructure Operations Division Country Department I Europe and Central Asia Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
Report No. 13887-RO
STAFF APPRAISAL REPORT
ROMANIA
POWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
AUGUST 9, 1995
Infrastructure Operations DivisionCountry Department IEurope and Central Asia Region
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Currency Equivalents
Currency Unit LeuLei (plural)
Value of US$1.00 in Lei (average)
1993 (January) Lei 4801993 (December) = Lei 12761994 (April) Lei 16501994 (December) = Lei 17741995 (July) Lei 2020
Measures and Equivalents
1 Kilovolt (kV) = 1,000 volts (V)1 Megawatt (MW) = 1,000 kilowatts (kW) = 1 million watts1 Kilowatt-hour (kWh) 1,000 watt-hours1 Megawatt-hour (MWh) 1,000 kilowatt-hoursI Gigawatt-hour (GWh) 1,000,000 kilowatt-hours1 Terawatt-hour (TWh) 1,000,000,000 kilowatt-hoursI Ton of Oil Equivalent (TOE) 10 million kilocaloriesI Teracalorie (TCal) = 1,000 million kilocalories
Principal Abbreviations and Acronyms used
CC - Commercial CompaniesCCSER - Council for Coordination, Strategy and Economic ReformCHP - Combined Heat and PowerCRP - Corporate Restructuring ProgramDSCR - Debt Service Coverage RatioEBRD - European Bank for Reconstruction and DevelopmentEDC - Export Development Corporation of CanadaEIB - European Investment BankEU-PHARE - European Union Phare ProgramGOR - Government of RomaniaIAEA - International Atomic Energy AgencyICG - Internal Cash GenerationJ-EXIM - Japan Export-Import BankMAPPM - Ministry of Water Resources, Forestry and Environment ProtectionMEDIO - Medio Credito Centrale - Italian Bank of Export CreditsMoF - Ministry of FinanceMol - Ministry of IndustriesMMPS - Ministry of Labor and Social ProtectionMT - Ministry of TourismMVA - Million Volt-AmperesNOX Nitrogen OxidePID - Project Implementation DepartmentRA - Regie AutonomeRAL - Regia Autonoma de LigniteRENEL - Regia Autonoma de Electricitate (Romanian Electricity Authority)ROMAG - Nuclear Fuel Processing CompanyS02 Sulphur DioxideUSAID - United States Agency for International Development
RENEL -- Fiscal Year
January 1- December 31
POWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
STAFF APPRAISAL REPORT
Table of ContentsPage No.
LOAN AND PROJECT SUMMARY ....................................... i
I. MACROECONOMIC SETTING AND THE ENERGY SECTOR .................. 1A. Macroeconomic Setting ....................................... 1B. The Energy Sector ........................................... 1
II. THE POWER SECTOR ........................ 7A. Institutional Setting .......................................... 7
RENEL Organization and Management ........................... 7RENEL Personnel and Staffing ................................ 8Institutional Reform Measures ................................. 8
B. Power System Operations and Performance ........................... 9Existing Facilities ......................................... 9Generation ............................................. 9Transmission and Distribution Networks ......................... 10Technical and Operational Efficiency Improvement Measures ... ......... 10
C. Electricity and Thermal Energy Pricing ............................. 11Electricity Pricing ........................................ 11Thermal Energy Pricing .................................... 13
D. Demand for Electricity and Heat ................................. 13Past Electricity Consumption and its Characteristics .................. 13Forecast Electricity Demand ................................. 14Past Supply and Consumption of Thermal Energy .................... 15
E. Power Sector Investment ...................................... 16Mol's Investment Program .................................. 16
F. Private Sector Development .................................... 17G. The Bank's Role and Strategy ................................... 17
The Bank's Role ........................................ 17
III. THE PROJECT .. 20A. Project Objectives .......................................... 20B. Project Description ......................................... 20
Financial Organization ..................................... 30Billing and Collections ..................................... 31Insurance ............................................. 32
C. Past Performance .......................................... 32RENEL Receivables and Payables ............................. 33Targets for RENEL Accounts Receivable and Payable ................. 35Actions to Resolve RENEL Arrears Situation ...................... 35
D. RENEL Investment Program and Financing .......................... 36E. Financial Forecasts ......................................... 37
Financial Impact of Nuclear Power Generation on RENEL .............. 38
V. PROJECT JUSTIFICATION ...... ........... ....................... 39A. Rationale for Bank Involvement ................................. 39B. Generation Capacity ......................................... 39C. Least-Cost Analysis ......................................... 39D. Lignite to Imported Hard Coal Conversion .......................... 41E. Rate of Return Analysis ...................................... 42F. Other Benefits ............................................. 42G. Sensitivity Analysis ......................................... 42H. Sustainability ............................................. 43I. Risks .................................................. 44
VI. AGREEMENTS REACHED AND RECOMMENDATIONS .................. 45Agreements reached with GoR ................................ 45Agreements reached with RENEL .............................. 46Condition of Loan Effectiveness ............................... 47Recommendation ........................................ 47
ANNEXES
Annex 1.1 Proven Reserves of Commercial Energy . .48Annex 1.2 Energy Price Movements and Comparison with Import Parity Prices ... . 49Annex 2.1 RENEL's Organization Structure in 1995 ....... .. ............ 50Annex 2.2 Power Generation Facilities ...... ...... .. ................ 51Annex 2.3 The Cernavoda Nuclear Power Project ........ .. ............. 53Annex 2.4 Structure of Electricity and Heat Prices ....... .. ............. 55Annex 2.5 Daily Load Curves and Annual Load Duration Curve ..... ........ 58Annex 2.6 Electric Energy and Power Balance (1989-2000) ..... .. .......... 60Annex 2.7 Proposed RENEL Investment Program ....... .. ............. 62Annex 2.8 Statement of Policies for the Power Sector ...... .. ............ 63Annex 3.1 Detailed Description of Rehabilitation Candidates ..... .. ......... 69Annex 3.2 Project Cost Estimates ....... ...... .. .................. 78Annex 3.3 Project Implementation Plan ........... .. ................ 84Annex 4.1 RENEL's Historical and Projected Cash Flows .... .. 19.......... lAnnex 5.1 Analysis of Project Justification .......... .. .............. 118Annex 6.1 Documents in Project Files ............ .. ................ 132
MAP IBRD - 24989
This document is based on the findings of an appraisal mission which visited Romnania in October1994, consisting of Messrs./Mmes. Sam O'Brien-Kumi (Task Manager), Arabela Aprahamian (ProjectOfficer), Bernard Baratz (Principal Environmental Specialist), Hernan Garcia (Principal PowerEngineer), Luiz Gazoni (Senior Power Engineer), Raghuveer Sharma (Senior Financial Analyst), andJohn Gunning (Thermal Plant Specialist-Consultant). Peer reviewers were Messrs. Roy Pepper(Principal Industrial Economist), Charles Woodruff (Senior Financial Analyst), Winston Hay (SeniorPower Engineer), and Kashinath Sheorey (Senior Power Engineer). The division chief is RicardoHalperin and the department director is Rachel Lomax.
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ROMANIA
POWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
Loan and Project Summary
Borrower and Beneficiary: Regia Autonoma de Electricitate (RENEL-Romanian ElectricityAuthority)
Guarantor: Romania
Loan Amount: US$110 million
Lending Terms. Twenty years, including five years grace period at the Bank's standardvariable rate of interest.
Project Objectivesand Description: The objectives of the proposed Project are to:
(a) support the government's program to reform the power sector inaccordance with its overall economic reform objectives;
(b) meet the demand for electricity and thermal energy in aneconomic manner by rehabilitating thermal generation capacity;and
(c) lay the foundation for the future development of the sector in aninstitutionally, economically, and environmentally sustainablemanner.
The proposed Project would comprise.
(a) Power Sector Reform Program (about US$4.3 million). Underthis component, technical assistance will be provided to theGovernment of Romania (GoR) through the Ministry ofIndustries (Mol) to: (i) carry out and implement a Study ofOptions of Long-Term Structure for the Power Sector;(ii) develop and implement an appropriate legal and regulatoryframework for the sector to attract private investments; and (iii)establish a long-term least-cost power sector investmentprogram, and carry out an electricity and thermal energy pricingstudy and implement its recommendations;
(b) Thermal Plant Rehabilitation Program (about US$344.8million). This component includes equipment, services andtechnical assistance to be provided to RENEL to: (i) rehabilitateabout 1,445 MW of its existing thermal generation capacity;(ii) convert about 200 MW of its existing lignite-based thermalcapacity to coal use; and (iii) reduce the pollution impact ofthermal plants; and
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(c) Corporate Restructuring Program (about US$14.8 million).This component will provide technical assistance to RENEL to:(i) streamline the utility to focus on electricity and thermalenergy generation, transmission, and distribution; (ii) createcost/profit centers for the generation plants and distributionsubsidiaries; (iii) design and implement management systems(for operation and maintenance management, financial and costaccounting, human resources, materials management, andcorporate planning system); (iv) improve metering, billing andcollection system; (v) design hydropower plant, and transmissionand distribution network rehabilitation programs; (vi) retire oldand inefficient thermal units; and (vii) improve environmentalmanagement and occupational health and safety.
Benefits and Risks: The quantifiable benefits arise from: (a) avoided cost ofreplacing about 1,445 MW of thermal capacity to berehabilitated (which otherwise would have to be retired beforeyear 2000); (b) lignite to hard coal conversion to curtailuneconomic transportation of lignite; (c) improvement in fuel useefficiency, and increased unit availability and production ofelectricity and thermal energy. The economic rate of return onthe physical components is about 21 %. Cost savings throughmanagerial and operational efficiency improvements are alsoexpected. In addition, the Project will lead to improvement inthe environment through reduction in air pollution.
The main risk associated with the proposed Project relates topossible failure to move forward in the implementation of thesector reform and the corporate restructuring program . Toaddress this, some important upfront actions have been taken.They include: (a) the appointment by GoR of a high level Inter-Ministerial Committee to oversee the Study of Options of Long-term Power Sector Structure, and the initiation of the Study; and(b) issuance of a Statement of Power Sector Policy whichincludes the Government's declaration to separate the nuclearpower activities from RENEL into an independent public entity.In addition, a review would be conducted each year to assessprogress in achieving the development objectives of the projectand to consider need for further policy actions and/or projectrestructuring.
A second concern is the possible inability of RENEL to mobilizethe funding required for the project in a timely manner. Asregards counterpart funding, this risk is mitigated by the upfronttariff increases already implemented and the measures already inplace and to be instituted to eliminate arrears, as well as themeasures to be implemented under the Project to improve billingand collection. Close monitoring of performance is planned.
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As regards cofinancing, GoR and RENEL have committed tosecure co-financing by December 31, 1995 and there has beensatisfactory progress in this regard.
Project Cost and Financing:
Project Cost (U$ Million)
Local Foreign Total
Sector Reforms 0.5 3.8 4.3
Thermal Plant Rehabilitation 120.8 224.0 344.8
Corporate Restructuring 1.6 13.2 14.8
Total 122.9 241.0 363.9
Financing Sources (US$ Million)
ForeignLocal US$ million Total
RENEL 122.9 2.1 125.0
IBRD - 110.0 110.0
EIB - 23.1 23.1
EBRD - 54.4 54.4
EU-PHARE - 3.6 3.6
USAID - 2.9 2.9
OTHER - 44.9 44.9
TOTAL 122.9 241.0 363.9
Estimated Disbursements of Bank Loan (US$ Million)
POWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
I. MACROECONOMIC SETTING AND THE ENERGY SECTOR
A. Macroeconomic Setting
1.1 Following the overthrow of the communist regime in December 1989, the new Government ofRomania (GoR) initiated a reform program aimed at transforming Romania into a market economy.The reform program included price liberalization, redefinition of the role of the Government to givepublic enterprises more autonomy, the promotion of a commercial orientation in public enterprises byreclassifying them into "regies autonomes" (RAs) and "commercial companies" (CCs), with the intentthat the latter be privatized; and an ongoing program of enterprise privatization.
1.2 This reform program was supported by the IMF with a Standby Arrangement (SA) in early1991 and by the Bank with a Structural Adjustment Loan (SAL Loan No. 3481-RO), following theadoption of a stabilization program. Much of the reform agenda initiated to establish laws,institutions, and policies of the market economy is now complete, including the establishment of atwo-tier system of banking, reform of the role of the Government and introduction of a modem taxsystem, the freeing of most prices and progress towards the elimination of subsidies, the adoption of atariff-based trade regime with low tariffs, and the development of a framework for privatization ofstate-owned enterprises. There has been considerable expansion of private sector activity, includingin agriculture. Presently the Bank is preparing a Financial and Enterprise Sector Adjustment Loan(FESAL), which is designed to assist the Government in its plans to reform the banking system,deepen the privatization process, accelerate the restructuring of government-owned enterprises andpromote financial discipline.
1.3 A major turnaround of the economy occurred in 1993 with a positive 1 % growth in GDP,the first time since 1988. This was followed by about 3.4% growth in GDP in 1994. The maincontributors to the growth in 1994 have been agriculture and the services sectors; industry alsoregistered a modest growth. The share of industry has declined to 40% in 1994 from 54% in 1989,and that of agriculture has risen to about 24% from 19.6% in the 1980s, while trading activities havealmost doubled since 1989. In 1996-2000, GDP is projected to grow at a trend rate of about 5% peryear. Agriculture and services are expected to be the leading growth sectors. Industry is expected toexpand in the light manufacturing and export oriented branches, and to contract in the uncompetitivemetallurgical and chemical branches. As a result of the structural changes, the intensity of energy usein the economy is expected to decline.
B. The Energy Sector
Introduction
1.4 The energy sector has been shaped by the past industrialization policies. It is a vital sector ofthe economy. It accounted for 46% of total industrial sector investment in 1990, and for nearly100% in 1992-1994 due to the nuclear power development program (see Annex 2.3). As a result of
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the high energy intensity of the economy and the continued declines in known reserves of oil and gas,energy imports absorbed about 26% of export revenues in 1993 despite a depressed level of demand.
Energy Resources
1.5 Romania has considerable reserves of primary energy (natural gas, lignite and coal, oil andhydropower potential). Reserves of natural gas are about 510 million tons of oil equivalent (TOE).Proven reserves of lignite are about 600 million TOE; hard coal about 330 million TOE; and oilabout 200 million TOE. The total hydropower potential is about 40 terawatt-hours (TWh) per year, ofwhich 12 TWh per year is already developed. Uranium deposits exist but the level of reserves is notpublished. However, the government's nuclear power development program is based on using it asthe main source of fuel. Oil shale and geothermal reserves are known to exist, but their extent isunknown. Renewable energy resources in bio-mass and fuel wood are abundant, while geothermal,wind and solar energy are of relatively less significance. Levels of reserves of commercial energyresources are provided in Annex 1. 1.
Institutional Setting
1.6 As part of the economic reform measures introduced in 1990, the energy sector wasreorganized by establishing separate autonomous state enterprises, Regies Autonomes (RAs), for theproduction and supply of energy products and commercial companies (CCs) for support services andactivities. This enabled the Government to separate policy and regulation from operational functions,and to bring about accountability and commercial orientation to the energy sector. The RAs and CCshave been formed out of the departments of the former ministries. RAs are state holding companiesfor enterprises considered strategic by the Government of Romania such as electric power, oil, naturalgas, lignite, coal, etc. The CCs are joint stock companies which have been established under thecommercial law.
1.7 Sector Organization: The sector is still predominantly state-owned under the supervisoryresponsibility of the Ministry of Industries (Mol), which formulates policy and strategy. Operationalresponsibility rests with the RAs and the CCs. The main RAs and CCs are:
(a) Romanian Electricity Authority (RENEL), which is responsible for production,transmission and distribution of electricity, as well as production and bulktransmission of heat;
(b) Regie Autonome for Natural Gas (ROMGAZ), which is responsible for theexploration, production, transmission, and distribution of natural gas;
(c) Regie Autonome for Petroleum (PETROM), which is responsible for exploration,production, and supply of crude oil, transmission of associated natural gas toROMGAZ;
(d) Regie Autonome for Lignite (RAL), which is responsible for the production andmarketing of lignite;
(e) Regie Autonome for Hard Coal (RAH), which is responsible for the production andmarketing of hard coal;
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(f) Romanian Refinery Company (RAFIROM) is a holding company of the oil refineries;it is responsible for the allocation of crude oil to the refineries, management andcoordination of refinery activities; and
(g) Romanian Petroleum Distribution Company (PECO), which is responsible for thedistribution and retail sale of petroleum products.
Energy Pricing
1.8 Policy and Price Adjustments: After the 1989 revolution, in line with its policy of priceliberalization under the macroeconomic reform program, the Government initiated actions to raiseenergy prices to import parity levels. As a result, within a period of about two years, significantreal increases of the order of 10-15 fold were made to most energy prices, except natural gas andhousehold fuels. The traditional non-tradeables, lignite and low grade local coal, were priced atparity with tradeable hard coal on a heat equivalent basis. Under the SAL that was approved in June1992, the GoR agreed that:
(a) crude oil, and petroleum product prices will be maintained at international levelsthrough periodic adjustments for exchange rate and international price changes;
(b) lignite, local coal, electricity and thermal energy prices will be maintained in realterms through periodic adjustments for exchange rate changes;
(c) the price of natural gas to non-household consumers will be raised monthly by$4/thousand cubic meters (103m3) from about US$60/103 m3 until parity with the FOBMediterranean price of fuel oil (1 % sulphur content) on heat equivalent basis isachieved; and
(d) the gradual elimination of the subsidies to households for energy.
Despite the persistent high inflation, the conditionalities were substantially met by the Government,first in February 1993 when all subsidies to households on energy, with the exception of thermalenergy and natural gas, were eliminated and later in April 1994, which enabled the release of thesecond tranche of the SAL. Prices were adjusted to import parity levels in June 1995 in fulfillment ofthe requirement under the SAL. Table 1.1 compares prevailing prices with import parity. Annex 1.2shows the movements in energy prices since November 1990. A separate discussion of electricity andthermal energy prices is provided in paragraphs 2.20-2.25.
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Table 1.1: Comparison of Domestic Energy Prices with Import Parity*(June 1995)
As % Of: S:;ENERGY PRODUCTS US$"' Imonrt Parivy PriCe
Crude Oil (Price to Refineries)Domestic 93.0 95Imported 130.0 100
Electricity Price (kWh) IXAverage 0.050 100High Voltage 0.047 93Medium Voltage 0.055 105Low Voltage
i. Households 0.024 48ii. Others 0.066 133
Thermal Energy (Gigacalories) ***Industry 23.0 160Household 7.3 52
* Using an exchange rate of 1,900 Lei/$. All prices (except household prices) include 18% value added tax (VAT).** Based on FOB prices in Western Europe of internationally traded hard coal,adjusted for heating value.*** As % of marginal fuel cost.
Electricity price is compared to US cents 5/kWh, representing the import price during the winter season.
Sector Issues, Government Policy and Strategy
1.9 Issues: The main issues in the energy sector are.
(a) high inefficiency of energy use due to old and inefficient technologies, and to thedilapidated state of assets, compounded by poor operations and maintenance;
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(b) excessive vertical integration of enterprises, absence of a competitive environment,and inadequate regulatory systems;
(c) lack of economic criteria in planning and investment selection;
(d) over-employment, and operational inefficiencies;
(e) weak financial position of sector entities, and the accumulation of inter-enterprisearrears; and
(f) environmental pollution.
1.10 Government Strategy: The government strategy to address these issues has been to:(i) introduce a sector reorganization to separate policy and strategy from operational functions,followed by present plans to allow for the participation of public and private independent operators ina competitive environment; (ii) implement energy price reforms to align prices with economic costs;(iii) critically screen the energy sector investment program to limit it to the highest priorityinvestments; and (iv) develop a program for the rehabilitation of the existing energy supplyinfrastructure. The Governrent should now develop long-term programs for fundamentalrestructuring of the sector. This would involve the implementation of further policy and institutionalreforms.
1.11 The short and medium term measures are aimed at conservation in primary energy use,reduction in losses, improvement in the quantity and reliability of energy supplies to final consumers,and reducing the sector's pollution impact on the environment. The long-term measures would bringabout the break-up of sector monopolies, downsize enterprises and operations, and introducecompetition with the appropriate legal and regulatory systems to enhance the participation ofindependent operators, both public and private, in the sector. In addition, they are expected to bringabout improvements in corporate governance, and institute modern management, accounting andfinancial systems. Finally, ongoing privatization programs in the industrial sector and productionshifts away from heavy industry, in response to market forces, should result in progressive reductionin the energy intensity of the economy and increased end-use efficiency.
1.12 The implementation of the strategy by the Government has been hampered by lack ofconsensus on the proposed policy changes, and limited local expertise, especially regardingmanagement and financial systems.
1.13 Bank Assistance Strategy: The Bank's Country Assistance Strategy (CAS) for Romania ispresented in the Memorandum of the President (MOP) dated March 14, 1994 on the Petroleum SectorRehabilitation Project. It is aimed at supporting the GoR to achieve macroeconomic stability andimplement systemic reforms, particularly in creating the institutions fundamental to the operation ofthe market economy. This includes establishing property rights, privatization, tax and tariff reforms,establishing a modern financial system, strengthening the social safety net, developing legalinstitutions, and improving public administration, continuing the process of sectoral restructuring andadjustment in the industrial, agricultural and energy sectors; and enhancing long-term growth anddevelopment prospects through projects in education, social welfare, and infrastructure.
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1.14 Within the framework of the CAS, the Bank's assistance to the energy sector is geared topromote fundamental reforms designed to support its rehabilitation, improve its efficiency, andeventually attract private investments to the sector. Loan 3723-RO approved by the Bank in 1994 isaimed at providing such support in the upstream petroleum sector. The proposed Power SectorRehabilitation and Modernization Project will be directed to the power sector, to assist theGovernment to develop and implement a sound policy and strategy to achieve these objectives.Future lending to the power sector is planned, and would be contingent upon satisfactory progress inimplementing the policy reforms to be initiated under the proposed Project.
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II. THE POWER SECTOR
A. Institutional Setting
2.1 The Ministry of Industries (Mol), created in 1990, has overall responsibility for the powersector. Mol is divided into 4 departments each headed by a Secretary of State, reporting to theMinister of Industries. The Secretary of State for Energy has the principal role in setting the policiesfor the power sector, (in addition to petroleum and other primary energy) while the Secretaries ofState for Restructuring, Strategy and Reform make sporadic interventions. The Secretary of State forEnergy has under him a director general for electric power, oil and gas, who is responsible for policyand strategy formulation, and for regulation of the sector.
2.2 Other GoR Ministries involved in the power sector are: (a) the Ministry of Finance (MoF)which, through its Pricing Office, sets electricity prices, and is represented on the AdministrativeCouncils of each of the RAs; (b) the Ministry of Water Resources, Forestry and EnvironmentProtection (MAPPM), which has a role in controlling environmental pollution in the country; and(c) the Ministry of Labor and Social Protection (MMPS), which is concerned with worker health andsafety issues, and with the social impact of any significant staff reductions resulting fromreorganizations; and (d) GoR's Council for Coordination, Strategy and Economic Reform, (CCSER)which is responsible for economic restructuring.
2.3 Responsibility for public electricity and thermal energy generation, transmission, anddistribution is with RENEL. RENEL was created in 1990 from the former Ministry of ElectricalEnergy in accordance with Law 15/90. RENEL inherited the traditional role of production andsupply of electricity and thermal energy, as well as detailed engineering design and construction,foreign trade, research and development (R&D), and nuclear power development functions. By now,some of the construction and foreign trade departments have been spun off into independentcommercial companies. At the same time, the nuclear fuel processing enterprise, ROMAG, and theenterprise producing heavy water for the Cernavoda nuclear power plant were fully integrated intoRENEL. In addition to RENEL, some large state-owned industrial plants also own co-generationplants and sell electricity and thermal energy directly to other industries, and to municipalities.
RENEL Organization and Management
2.4 In line with the recommendations of a corporate restructuring study carried out with the helpof foreign consultants (financed by EU-PHARE), RENEL was reorganized in late 1992 to give it acorporate form. Corporate policy-making is vested in a eleven member Board of Administration(Board of Directors), of which the President of RENEL is the Chairman. In addition, the Board ofAdministration comprises representatives of the Government, the financial institutions, the fuelsuppliers, and consumers. Day-to-day affairs are the responsibility of RENEL Management,comprising the President (designated as Director General) and five Deputy-Director Generals - oneeach for: generation, transmission and distribution, nuclear power group, strategy and development,finance, and human resources. Structurally, RENEL comprises the headquarters, thirty-six branches,(each managing a power station), the Cernavoda nuclear power subsidiary, the fuel and heavy waterprocessing subsidiaries, and forty-two electricity transmission and distribution subsidiaries dividedalong the lines of the forty-two administrative Judets (Counties). The organization structure ofRENEL is shown in Annex 2.1.
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2.5 The reorganization of RENEL separates, in theory, the corporate policy-making fromcompany management and also from operations. However, in practice, there is little separationbetween corporate policy-making and management, because a number of vice-presidents are alsomembers of the Board of Administration. In addition, the present policy attempts to centralizedecision making. This is not desirable since RENEL is too large to be run efficiently in a centralizedway. Moreover, in a number of important policy matters RENEL still depends on decisions taken atthe government level. However, the operational units (the thirty-six generation plants and forty-twotransmission and distribution units), which are called subsidiaries, are profit centers and are requiredto maintain records accordingly and this provides a basis to promote decentralization.
RENEL Personnel and Staffing
2.6 Since 1990, RENEL has been implementing a program of gradual reduction in its labor force.By end-1994, a total reduction of about 48% (from about 200,000 to about 105,000) in the laborforce had been achieved, mainly through the separation of some of the construction and repairsubsidiaries into independent public commercial entities (para. 2.4), but also through reductions inunskilled labor. By end-1995 the labor force is expected to be further reduced to about 99,700.
2.7 Compared to international norms, RENEL is still overstaffed. The ratio of installed powercapacity (MW) per thousand employees in RENEL is 198 (compared, for example, to 308 in Turkey,603 in Poland or 770 in EdF-France). The overstaffing is mainly in the labor category (skilled andunskilled) which account for 75 % of the staff. Many of these staff (more than 50%) are engaged insupport activities, such as detailed engineering and design, research and development, repairs andconstruction works and manufacturing which are normally not part of a power utility.
Institutional Reform Measures
2.8 GoR and RENEL have decided to address the above structural and overstaffing problems inRENEL by implementing a corporate restructuring program. The program, to be implemented underthe proposed Project, would involve:
(a) separating nuclear activities into a different entity, reporting directly to Mol;
(b) retiring old and inefficient units to reduce operating costs and working capital;
(c) spinning off of construction, repair, and manufacturing subsidiaries and theengineering and technical institutes into independent commercial companies;
(d) creating cost/profit centers based on viability and to correspond to the variousoperations (generation, transmission and distribution) in each of the generation plants(or a group of plants to ensure viability), a separate cost/profit center for thetransmission network, and several cost/profit centers for the distribution activities;
(e) designing and implementing a long-term Human Resources plan, including programsto reduce excess staff;
(f) implementing management tools, such as financial accounting, cost accounting,materials management, corporate budgeting planning systems; and
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(g) adopting financial performance criteria, first at the headouarters level and gradually atthe cost/profit center level.
B. Power System Operations and Performance
Existing Facilities
2.9 Romania's installed power generating capacity is 21,808 MW, of which RENEL's totalinstalled power generating capacity is 20,281 MW (93%). The remaining generating capacity isowned by industries, municipalities and independent rural cooperatives. In the RENEL system,hydropower capacity accounts for about 28%; lignite and coal-fired for about 42%; and oil and gas-fired for about 30%. Approximately 38% of RENEL installed thermal capacity (5,080 MW out of14,829 MW) is in cogeneration, i.e. combined heat and power (CHP) plants. The structure ofinstalled power generating facilities in the country is provided in Annex 2.2.
2.10 Romania has extensive interconnected power transmission and distribution networks of totallength of about 592,000 kin, and total transformer capacity of about 172,000 MVA. The networksencompass the entire country such that accessibility to electricity is nearly 100%. RENEL operatesabout 74% of the network, comprising the following transmission voltages - 750 kV, 400 kV, 220kV, and 110 kV; and the subtransmission voltage of 60 kV; and about 50% of the distributionnetwork in the 20 kV, 10 kV, 6 kV, 1 kV, and 400 kV volts. The rest of the distribution network isoperated by industrial plants and rural cooperatives in their designated supply areas.
2.11 RENEL operates five regional load dispatching centers, including the national center inBucharest for management of the system load, and for international electricity exchanges. TheRomania transmission network is linked by tie-lines with Ukraine at 750 kV and 400 kV; two lines at1 10 kV with Moldova; one 220 kV line with Hungary; one 750 kV, two 400 kV, and one 220 kVlines with Bulgaria; and one 400 kV, and four 110 kV lines with the former Yugoslavia.
2.12 A significant characteristic of Romania's power system is its high base-load requirements,primarily due to the large industrial consumption. In 1994, the base load requirement (in winter)amounted to 78% of the system gross peak demand of 8,600 MW. The co-generation and the otherthermal units are operated to meet base load requirements, and the hydropower units, complementedby imports are used to meet peaking requirements. Although the installed capacity is more than twicethe peak demand, RENEL is unable to meet its peak and has had to resort to imports of electricity(Table 2.1). The constraints in meeting demand are primarily due to operational problems, which arediscussed below.
Generation
2.13 Thermal Plants: RENEL is barely able to obtain about 6,000 MW of dependable continuouselectric power output during the winter season from its installed thermal capacity of 14,602 MW dueto the poor operating state of the thermal plants, which is mainly attributable to: (a) plant design andconstruction deficiencies, including use of poor grade construction materials; (b) inadequatemaintenance; (c) use of low grade fuels, which often do not meet plant design specifications; and(d) improper operations and management practices.
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2.14 As a consequence of the above, most thermal plants, especially the lignite fired units, sufferfrom: (a) frequent and prolonged outages resulting in low availability rates (of about 30% on theaverage); (b) low fuel use efficiencies ranging between 18% and 24%, compared to design levels of28%-34% (about 46% for the co-generating units); (c) lower power output than rated design capacity,with capacity factors (utilization of available capacity) of about 32%, which is very low; and(d) degraded and poor performing pollution control equipment. If the current operation andmaintenance practices continue, estimates indicate that the dependable firm thermal capacity woulddecline to about 3,500 MW by the year 2000.
2.15 Hydropower Plants: RENEL's hydropower power plants are in a slightly better operatingcondition than the thermal plants. However, the hydropower plants are not operated in accordancewith an optimal regime, because thermal generation is cut back in autumn (to conserve fuel for thewinter) and the storage reservoirs are discharged during these times (prior to the winter season) toalso meet the base load. This renders the hydroplants incapable of meeting the peaking requirementsduring winter. A number of the main plants/units, some of which have been in operation for the past20 years, need urgent rehabilitation.
2.16 Nuclear Power: The first unit of a 5x700 MW nuclear power station at Cernavoda is plannedfor commissioning towards the end of 1995, after many delays. The continuation of investments inadditional units, for which some of the infrastructure has been constructed, is subject to economicjustification. The technology is based on CANDU-6 nuclear reactor of Canadian design, usingnatural uranium as fuel and heavy water as a coolant and moderator (which would be suppliedlocally), and a General Electric Turbogenerator. Engineering services and project management arebeing provided by a consortium of Atomic Energy of Canada (AECL), and Ansaldo-Impianti of Italy,which will also continue with operational management services for 18 months after commissioning totrain Romanian staff in the operation of the station. The International Atomic Energy Agency (IAEA)has conducted separate inspections of the construction of Unit 1, and has found the works satisfactory.A post-commissioning inspection by IAEA is expected in 1996. Further discussion is provided inAnnex 2.3.
Transmission and Distribution Netivorks
2.17 The power networks also suffer from inadequate maintenance due to lack of spares and agedequipment, especially, at the medium and low voltage levels. RENEL transmission system hasadequate carrying capacity for the foreseeable future, but several areas need upgrading andreinforcement. The load dispatching system equipment is old (1970 vintage) and would cease to befunctional in the next five years. RENEL distribution network suffers from high technical losses(about 15%) due to overloading of substations and lines, as they were not designed to meet recentincreases in consumption at the low voltage level. In addition, inadequate metering, billing andcollection practices are causing additional (non-technical) losses.
Technical and Operational Efficiency Improvement Measures
2.18 RENEL's and GoR's immediate priority should be the improvement of the technical andoperational efficiency of the existing power system. In this regard, RENEL should:
(a) undertake economic rehabilitation of the existing thermal power plants, reduce theirpollution impact and implement measures to improve technical operations and maintenance;
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(b) accelerate the mothballing and retirement of inefficient generation units (of about3,000 MW by year 2000), thereby reducing operating costs (including personnel) andworking capital (fuel inventories and spares);
(c) undertake measures to ensure the adequacy and quality of its fuel supplies, whichwould require building the necessary handling and storage infrastructure and developarrangements for advance procurement of fuels to build up stocks for the winterseason;
(d) design and implement a rehabilitation program for the hydro electric power plants;and
(e) design and implement rehabilitation and reinforcement programs for the transmissionand distribution networks, and modernize the load dispatching system.
In the medium term, it is expected that the GoR will implement a competitive environment withprivate sector participation in generation, which would provide the incentives for further efficiencyimprovements.
2.19 The physical components of the proposed Project are aimed at financing the rehabilitation ofRENEL's thermal plants; and at helping the design of rehabilitation programs for hydropower plants,and transmission and distribution networks. GoR has already agreed with the Bank to undertake aFuel Options Policy Study under the Petroleum Sector Rehabilitation Project (Loan 3723-RO), whichwould provide the inputs to develop an optimal strategy for meeting RENEL's fuel needs.
C. Electricity and Thermal Energy Pricing
Electricity Pricing
2.20 As part of the price liberalization program, and in accordance with the agreement with theBank under the SAL (para 1.8), since 1990 electricity prices have been set and maintained in dollarterms to reflect the cost of imported electricity, as a proxy for the opportunity cost of supply from theRENEL system. However, there have been long periods of decline in real electricity price levels,which necessitated periodic large increases to bring the tariffs back up to the targeted levels.RENEL's tariff structure does distinguish between various voltage levels, and provides for time-of-day and for seasonal tariffs. RENEL also applies a demand charge and a separate energy charge forcustomers (mainly industries) where a specific power level is contracted by the customers. The tariffstructure is provided in Annex 2.4.
2.21 RENEL tariff regime has the following drawbacks:
(a) residential customers pay only 32% of the price of other low voltage customers, andabout 46% of the price to industrial customers, even though the cost of supply to theresidential customers is the highest;
(b) RENEL's cost-of-supply information, either in financial or economic terms, is veryweak and unreliable. Consequently, it is not possible to: (i) allocate costs betweenheat supply and electricity supply; (ii) distinguish between generation, transmissionand distribution costs; or (iii) provide for the right categorization by customercharacteristics, especially at the medium and low voltage levels;
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(c) RENEL lacks adequate metering equipment to ensure the accurate application ofdemand and energy charges in accordance with the tariff structure; and
(e) as a consequence of economic restructuring, RENEL's load curve is assuming adouble hump shape - some industries are no longer running multiple shifts and as aresult the morning peaks have become high relative to the high evenings peaks, whichhave also become sharper. However, RENEL is applying its peak tariffs (as in theold days) only in the evening times.
To address the issue under (a), at negotiations, it was agreed that GoR will progressively reduce thelevel of cross-subsidization of electricity price paid by households over a period of four years from thedate of this Agreement, so as to ensure that by December 31, 1999, all such subsidies shall have beeneliminated (para 6.2 p9).
2.22 In March 1994, GoR reviewed its electricity pricing policy with the Bank, in the context ofthe release of SAL's second tranche. As a result of the review, agreement was reached with the Bankto set the prices to reflect an average of US$50/MWh equivalent (including 18% VAT). In addition,GoR agreed to:
(a) prevent deterioration in the average level, by automatically adjusting the prices to anaverage of US$50/MWh when, on the basis of the average exchange rate prevailing inthe preceding month, the average price had fallen to or below US$46.25/MWhequivalent; and
(b) review and make adjustments, as necessary to the electricity prices of US$50/MWh,whenever the international prices of fuels used by to RENEL are changed.
Over time, the agreement under SAL has been found to cause some problems. On the one hand, ithas some times required price adjustments during the winter season, which caused a negative socialreaction. In addition, since the formula required maintaining the price in dollar terms, from time totime concerns were raised about the management of the exchange rate during the winter season,during which the resistance to price adjustments was perceived to be stronger. The Bank consultedthe Fund on these issues and to overcome them, at negotiation the Government agreed to maintainelectricity prices corresponding on average to not less than the equivalent of US$50/MWh (includingVAT), through periodic adjustments to the consumer electricity prices in accordance with a timetableacceptable to the Bank (para.6.2 (g)). It was further agreed that the first such increase, after the onealready implemented in June 1995, will take place in April 1996 followed by another one inNovember 1996. Thereafter the Government will adjust tariffs as required twice a year, in April andin August. These dates have been selected to facilitate the timing of the increases. Furthermore, inorder to ensure that RENEL's finances will not be negatively affected, RENEL and the Govermnenthave also agreed to the financial covenants which are discussed in para. 4.22, which provide forfurther tariff increases if needed. At present, the Government is in compliance with its commitments.Furthermore, the Goverment has agreed to adjust pursuant to guidelines acceptable to the Bank theconsumer electricity prices if changes to the level prevailing on the date immediately preceding theadjustment of consumer electricity prices shall have occurred in the international market prices of themain fuels (coal, natural gas, and fuel oil) used by RENEL for power generation (para 6.2 (g)).Presently the tariff covenants are in compliance; the latest increase of 15% took place in June 1995.
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2.23 In addition to maintaining the levels of electricity prices as above, GoR will carry out anElectricity and Thermal Energy Pricing Study with the help of experienced consultants, andimplement the study's recommendations to provide a sound economic basis for setting electricity andthernal energy prices that would promote efficiency, ensure sector viability, provide incentives forthe participation of private operators in the sector and take account of social and equity concerns. Atnegotiations, the GoR agreed that (i) by September 30, 1995, or such later date as the Bank mayagree, it will appoint consultants, whose qualifications and terms of reference shall be satisfactory tothe Bank, to carry out an electricity and thermal energy pricing study; (ii) promptly upon itscompletion, discuss with the Bank the findings and the recommendations of the study; and (iii)according to a timetable acceptable to the Bank provide to the Bank a satisfactory program for theimplementation of the actions agreed as a result of said study and discussions with the Bank (para 6.2(h)). This study should be completed by September 1998, since it must draw upon the findings of theleast-cost power generation development study that is also to be carried out under the project (para.2.37 (b)). These covenants are to be complemented by a financial covenant that requires adjustmentof the average tariff level beyond the level set under SAL if needed to achieve a self-financing ratioof not less than 30% of RENEL's capital investments (para 4.22). At present, the average tariff levelrequired under SAL is adequate to achieve the degree of self-financing proposed above, and theanalysis of RENEL financial prospects indicates that it would allow for an acceptable financialevolution (paras. 4.19 - 4.22).
Thernal Energy Pricing
2.24 RENEL sells thermal energy at bulk prices to the various municipalities and large industrialconsumers. Retail prices are set by the Government in collaboration with the municipalities. Since1990, thermal energy prices have been increased by about 20 fold to non-residential consumers, andabout 8 fold to residential consumers. Although, the actual cost of service is unknown, the price toindustrial consumers does cover variable operating costs, including fuel. Price to residentialcustomers is significantly below cost of service, necessitating Government budget subsidies which arepaid to the municipal heat distribution entities. The current price to industrial and commercialcustomers is about US$19/gigacalorie, including VAT, compared to US$7.3/gigacalorie to residentialcustomers, who are exempted from VAT.
2.25 The structure of bulk heat supply prices is relatively simple (see Annex 2.4). It comprises amaximum demand charge based on the delivered pressure, and energy charges. However, due to lackof appropriate metering, sales are billed on energy. A major issue affecting heat pricing is theallocation of production cost between electricity and heat from co-generating sources. In addition, thecost structure of transmission and distribution is not known. Furthermore, there is no distinction inprices to reflect cost of supply by season, even though there are significant differences in seasonalsupply costs.
D. Demand for Electricity and Heat
Past Electricity Consumption and its Characteristics
2.26 Intensity of electricity use is very high compared to other countries, both because of the highproportion of industrial consumption, and the inefficient use by industry. Consumption peaked in1989 at 71.4 TWh following about 2.3% average annual growth rate since the early 1980s, but hassince declined to about 43 TWh in 1994. Until 1989, industry accounted for 75-78% of total
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consumption due to the priority given to industry in the allocation of electricity, households accountedfor 6-8%, and the remainder went to other sectors, i.e agriculture, transport and communications, andservices. However, by 1994, due to the structural changes in the economy that resulted in a declinein industrial output, the lifting of restrictions on household use, and the steep price increases toindustry, industry's share in consumption declined to about 64%, and household consumption rose toabout 15% of total consumption.
2.27 Annual maximum power demand ranged between 10 TW and 11.3 TW in the 1980s, butdeclined to about 7.9 TW in 1994, for the reasons given above. The demand profile shows a highload factor (ratio of average to peak energy), with annual load factor of about 75%, and daily loadfactors on winter work days of nearly 90%, indicative of the dominance of industry in consumption.Table 2.1 summarizes past supply and consumption trends. The characteristics of the demand areillustrated by the daily load curves and the annual load duration curve in Annex 2.5.
Table 2.1: Electricity Supply and Consumption, 1975-94 (TWh)
2.28 The Bank has prepared forecasts of demand for electricity up to 2005, which are based on theassumption of declining electricity use intensity in the productive sectors due to the changing structureof the economy. For households, the forecasts take into account the effects of the lifting of the limitson use of electricity by households, the increasing use of electricity for space heating due to thefailures of the district heating system, and the effects of expected increases in personal incomes withreturn to steady economic growth as from 1996 onwards, as well as the expected increases inhousehold tariffs. The demand forecasts are tentative, since the economy is still in the midst of atransformation process, and the structure that will emerge is only starting to take shape.
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2.29 The net effect of the above is that future electricity demand is unlikely to exceed the 1990levels until 2003-2005. Table 2.2 shows the electricity demand forecasts. Annex 2.6 provides pastand forecast electric energy and power balances.
Table 2.2: Summary Results of Electricity Demand Forecasts
Estimated Forecast1990 1995 2000
Industry 41.3 29.4 29.0
Residential 5.3 7.0 8.7
Others 10.3 8.1 12.3
Total Net Consumption (TWh) 56.9 44.5 50.0
Gross Generation + Net Imports(TWh) 70.4 58.1 61.9
Maximum Demand (TW) 10.7 8.2 9.1
System Annual Load Factor (%) 79.0 73.0 71.0
Past Supply and Consumption of Thermal Energy
2.30 In 1980-90, total heat production from thermal plants ranged between 150-170 thousandteracalories p.a. depending on the severity of the winter season. RENEL accounted for about 40% oftotal supply from its CHP and hot water boiler plants. The rest was provided by industrial self-generation, and by peaking hot water boilers operated by the municipalities. RENEL sells processsteam and thermal energy at bulk transmission to large industries, and to the municipal distributingcompanies, who operate distribution network in their respective municipalities.
2.31 Forecast Demand for Thermal Energy: Similar assumptions as for electricity demand aremade in forecasting the future demand for heat by the productive sectors. Demand by householdstakes into account the combined effects of increased urbanization and new housing developments.Similarly, projected demand is not expected to reach the 1990 level until after 2005. Forecasts,summarized in Table 2.3, include losses in the primary and secondary distribution systems.
Table 2.3. Summary Forecast Thermal Energy Demand in Thousand Tera-Calories (TCal)
Actual Estimated Forecast
Total Production 1989 1990 1995 2000 2005
of which: 168 155 124 134 149
RENEL 65 62 48 55 67
Municipalities and Autoproducers 103 93 76 79 82
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E. Power Sector Investment
Mol's Investment Program
2.32 The sector investment program for the period 1995-2000 originally prepared by Mol andRENEL envisaged a total expenditure over the period of about US$7.9 billion (January 1994 prices),including about US$2.2 billion for the nuclear power development program, which is not realistic.Since the above amount is not economically justified, and furthermore cannot be funded, the GoRhas:
(a) scaled down the proposed sector investment program in conventional power facilitiesdrastically (to about US$2.32 billion (Annex 2.7)), and agreed at negotiations toestablish priorities on the basis of a least-cost investment program to be prepared withthe help of consultants (para 2.37 (b));
(b) decided that RENEL's medium term investments will be limited to rehabilitationinvestments (generation, thermal and hydro; transmission and distribution networks;load dispatching); and environmental improvement (new ash disposal systems anddeposits, land reclamation, and monitoring), and the completion of high priorityunfinished hydro and the thermal power projects at advanced stages of completion,since at the current tariff levels RENEL can only invest about US$300 million peryear on average and still maintain a reasonably satisfactory financial position (para4.22);
(c) agreed to meet the remaining local cost to complete Unit 1 of Cernavoda, the NuclearPower Station, as well as moderate expenditures needed to preserve the works alreadycompleted on Units 2-5, from the state budget;
(d) agreed not to undertake new investments for Units 2-5 of the Cernavoda NuclearPower Station until their justification is established on the basis of a system-wideleast-cost analysis mentioned in (a) above;
(e) agreed to continue to implement measures underway for the future interconnectionwith the Western European Power Interconnection System (UCPTE), and to improvethe ties with neighboring countries to enhance Romania's participation in a widerregional power market, which would provide for greater security and reliability ofsupply to meet the demand in the most economic manner; and
(f) agreed to implement measures to reduce the environmental impact of the powersector.
Agreement on the power sector's medium-term investment program has been reached, and an annualconsultation with the Bank on the program will ensure that future changes are justified and financiallyviable (para 4.18). For the longer term, the proposed least-cost development program will serve as abasis for investment decision making (para 2.37 (b)).
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F. Private Sector Development
2.33 The Government recognizes that in order to implement the medium term investment program,and for the longer term needs of the sector, substantial investments will be necessary. Hence, giventhe constraints on public finances, there is no option but to attract private investments, includingforeign investments, to the sector. This approach should also spur efficiency improvements throughcompetitive pressure. Therefore, the GoR plans to implement reforms to the sector organization andits legal and regulatory framework to create conditions for competition, and the participation ofprivate operators. In this regard, GoR has agreed to:
(a) carry out a study of options of the long-term structure for the power sector (theOptions Study) with the assistance of consultants (para. 2.37 (c)). The Options Study,which is being funded by the United States Agency for International Development(USAID), has already been launched, it would be completed by September 1996 andits implementation would begin immediately thereafter. Terms of reference for theOptions Study were agreed at negotiations; and
(b) reform the legal and regulatory framework for the sector; for this purpose, the GoRhas been preparing a draft electricity law, which it will complete following itsdecision on the long-term structure of the power sector, and thereafter submit toParliament for its consideration no later than December 31, 1996. The law isexpected to provide for competition in the sector, demonopolization, transparentregulations, and conditions for private sector participation in power activities. Inaddition, the law is expected to: (i) provide for creation of an independent nationaltransmission company that would deal evenhandedly with publicly-owned, as well asprivate generators and distributors; (ii) permit a wide range of schemes for privatesector participation, both local and foreign in power generation (self producers,cogenerators, and independent producers) and eventually in distribution; (iii) permitpartial or total privatization of government-owned power generation and distributionfacilities; (iv) provide for the creation of an independent regulatory body, and theprinciples of its operation; and (v) define principles and procedures for settingelectricity prices and for transmission wheeling charges, when these would beapplicable, and for the development of power purchasing agreements.
G. The Bank's Role and Strategy
The Bank's Role
2.34 The role of the Bank in the Romania power sector dates from July 1974 when the first loan ofUS$60 million equivalent (Loan 1028-RO) was made to the Government for the First Turceni PowerProject for the construction 4x330 MW lignite-fired power station and associated transmissionfacilities. This was followed by three additional loans for the construction of the Mare-RetezatHydropower Stations, the Second Turceni Power Project of 4x330 MW, and a mix of thermal andhydropower plants in the Government's 1980-83 power development investment program. By 1985when the Government decided to repay all Bank loans, Bank financial assistance to the sector hadreached US$300 million equivalent.
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2.35 The Bank has been working closely with the Romanian authorities in the identification ofissues, delineation of the strategy and in the analytical work to identify the policy choices that theGovernment needs to adopt. The Bank has also assisted in the preparation of the terms of referencefor the various studies (for example: for electricity and thermal energy pricing, least-cost investmentprogram and the Options Study), as well as in the preparation of a draft electricity law.
2.36 The strategic and policy choices discussed in the previous paragraphs represent, in the Bank'sview, a comprehensive set of actions to address the critical issues faced in the power sector.However, the approval of the set of actions and, even more importantly, their implementationrequires the involvement of other GoR agencies, such as the Ministries of Finance, Industries, Justice,Environment, and Social Protection. The Government has confirmed its long-term policy objectivesfor the power sector in a Statement of Power Sector Policy (Annex 2.8). A strategy document toimplement the Government's policies for the sector has also been furnished to the Bank.
2.37 Furthermore, in order to ensure that the development objectives of the proposed Project areachieved in a timely manner, the GoR has agreed to:
(a) i) promptly after the commissioning of the first unit of the Cernavoda nuclear powerstation, inform the Bank of the commission of said unit; (ii) over a period of 18months after the commissioning of said unit, take all necessary measures, agreeable tothe Bank, to separate all nuclear power activities from the power activities of theBorrower; and (iii) no later than 20 months after the commissioning of said unit,establish an independent public entity to carry out such nuclear power activities) (para.6.2 (e));
(b) i) by September 30, 1995, or such later date as the Bank may agree, appointconsultants whose qualifications and terms of reference shall be acceptable to theBank to carry out a long-term least-cost power generation development study; and (ii)promptly upon its comnpletion, discuss with the Batik the findings and recommendationsof said study (para. 6.2 (i));
(c) i) appoint consultants, whose qualifications and terms of reference shall besatisfactory to the Bank to carry out a study of options of long-term structure for thepower sector, and ensure its completion by September 30, 1996, or such later date asthe Bank may agree; ii) no later than three months after the conclusion of theassessment of the options of the long-term sector structure (Phase I of the study), orsuch later date as the Bank may agree, inform the Bank of its decision on the selectedlong-term structure for the power sector in Romania; (iii) complete a draft electricitylaw for submission to the Romanian Parliament no later than December 31, 1996; iv)no later than three months after the submission to the Government of the consultants'final report on the study, provide to the Bank an action program satisfactory to theBank for the implementation of the long-term sector structure; and v) implement theaction program (para. 6.2 (b)); and
(d) review annually with the Bank, no later than October 31 of each year, the progress inthe implementation of the Power Sector Strategy and the policy framework, and takecorrective actions and policy measures to ensure the achievement of the strategicobjectives stated in the Power Sector Strategy (para 6.2 (d)).
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The Bank's Strategy
2.38 The proposed Project is in line with the Bank's power sector policy. The strategy of the Bankis to promote and support fundamental reforms to bring about effective competition and participationof private operators in the sector, while bringing about efficiency improvements in the developmentand operations of the power sector as quickly as possible. The proposed Project will also serve toprepare the ground through studies for continuing the restructuring in a second phase, which isexpected to be supported by a follow-up project.
2.39 The Bank will adhere to two main principles in assisting Romania's power sector. First,because of the large financing requirements, the Bank will work with other multilateral and bilateralcofinanciers to prepare, finance, and implement projects in the sector. Second, the institutionalreforms will be deepened under each operation. Experience has shown that due to difference in theway in which country stakeholders view sectoral and institutional reforms, even agreed actions aresometimes not implemented as expected or are delayed. Therefore, there is a need not only to agreeon a long-term strategy for the power sector, but also to spellout the progress in the reforms expectedfor the Bank's continued involvement in the sector. Accordingly, a follow-up project in the powersector would be contingent upon satisfactory implementation of the policy reforms and in thecorporate restructuring of RENEL supported under the proposed Project.
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III. THE PROJECT
A. Project Objectives
3.1 The objectives of the proposed project are to: (a) support the government's program to reformthe power sector in accordance with its overall economic reform objectives; (b) meet the demand forelectricity and thermal energy in an economic manner by rehabilitating thermal generation capacity;and (c) lay the foundation for the future development of the sector in an institutionally, economically,and environmentally sustainable manner.
B. Project Description
3.2 The proposed Project would comprise:
(a) Power Sector Reform Program (about US$4.3 million), under which technicalassistance will be provided to Mol to: (i) carry out and implement a Study of Optionsof Long-Term Structure for the Power Sector; (ii) develop and implement anappropriate legal and regulatory framework for the sector to attract privateinvestments to the sector; and (iii) establish a long-term least-cost power sectorinvestment program, and carry out and implement an electricity and thermal energypricing study;
(b) Thermal Plant Rehabilitation Program (about US$344.8 million), which includesequipment, services and technical assistance to RENEL to: (i) rehabilitate about 1,445MW of its existing thermal generation capacity; (ii) convert about 200 MW of itsexisting lignite-based thermal capacity to coal use; and (iii) reduce the pollutionimpact of thermal plants; and
(c) Corporate Restructuring Program (about US$14.8 million), under which technicalassistance will be provided to RENEL to: (i) streamline the utility to focus onelectricity and thermal energy generation, transmission, and distribution; (ii) createcost/profit centers for the generation plants and distribution subsidiaries; (iii) designand implement management systems (for operation and maintenance management,financial and cost accounting, human resources, materials management, and corporateplanning systems); (iv) improve metering, billing and collection system; (v) designhydropower plant, and transmission and distribution network rehabilitation programs;(vi) retire old and inefficient thermal units; and (vii) improve environmentalmanagement and occupational safety and health.
The Power Sector Reform Program was discussed in paragraph 2.33, and RENEL CorporateRestructuring Program is outlined in paragraphs 2.8 and 4.4. The Thermal Plant RehabilitationProgram is briefly discussed below. Detailed description of the units that are to be rehabilitated isprovided in Annex 3.1.
Thermal Plant Rehabilitation Program
3.3 The Rehabilitation Program was prepared on the basis of a detailed technical inspection andfeasibility study of rehabilitation of eleven representative thermal generating units in RENEL system.
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The inspections and the feasibility study were carried out by a consortium of internationalconsultants. The criteria for selection of the representative unit candidates were based on age, unitsize, type of technology and operational condition. The methodological approach called for thedetermination of the level of rehabilitation that was economically justified as part of the least-costsolution to meeting demand.
3.4 The inspection enabled the determination of costs and benefits associated with three levels ofrehabilitation: Level 1 for 7 years life extension; Level 2 for 15 years life extension; and Level 3 for25 years life extension. To determine the appropriate level of rehabilitation for each representativeunit candidate, a lifetime cost analysis was undertaken. The analysis was based on comparison ofalternatives over a reasonably long period (25 years), to bring the alternatives to a commnon basis.The alternatives considered were: (a) no rehabilitation or replacement; (b) rehabilitation to level 1; (c)rehabilitation to level 2; and (d) rehabilitation to level 3. As a result of the analysis, an optimummedium term (1994 - 2000) thermal plant rehabilitation program was developed. The program is tobe implemented in two phases, Phase I and Phase II. A select number of units of total installedcapacity of about 1,445 MW at six power stations would be rehabilitated in the Phase 1. In addition,about 200 MW of lignite based capacity at two power stations will be converted to coal usage.
3.5 The equipment and systems to be rehabilitated under the program will include: boiler plantand combustion system, turbine-generator plant, electrostatic precipitators, fuel feed system, watertreatment system, controls and instrumentation. The program will also include the improvement ofoperation and maintenance practices and environmental management, and development of safetyprocedures for the power plants personnel. The Rehabilitation Program will result in increasedavailability of plant; improved fuel use efficiency; increase in output: extension of the useful life ofthe plant; pollution reduction; and increased worker health and safety.
3.6 The Rehabilitation Program is a complex undertaking and will require technical know-howand project management skills that are currently unavailable in RENEL. Therefore, RENEL will hirean experienced consulting firm as the "Engineer" for the Rehabilitation Program. The Engineer'sresponsibility will be to provide RENEL with engineering, procurement, and project managementservices. The Engineer's services will be financed by the proposed Bank loan and the process ofselection of the "Engineer" from a shortlist of firms/consortia, from whom proposals were invited, iscurrently in progress by RENEL. The appointment of the Engineer in a timely manner is critical tothe success and timely implementation of the Rehabilitation Program.
C. Project Costs
3.7 The detailed estimate of the total cost of the proposed Project is provided in Annex 3.2, and issunmmarized in Table 3.1. It will amount to about US$363.9 million, including physical and pricecontingencies of US$65 million (about 18% of total costs), and taxes and duties of about US$24million (7% of total costs). Direct and indirect foreign exchange costs amount to US$241 million(about 66% of total costs) and local costs amount to about US$122.9 million equivalent (about 34%of total cost). The estimates of base costs for the technical assistance components were developed bythe mission, based on similar projects in Romania and in other eastern European countries. The costsof the Rehabilitation Program are consultants' estimates. A physical contingency level of 15% hasbeen included in the physical components of the proposed Project.
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Table 3.1: Project Cost Summary al
US$ million
Cost Item. Local Foreign b/ Total
A. Thermal Plant Rehabilitation:Bucharest South 11.2 19.0 30.2Isalnita 35.1 50.6 85.7Deva 24.6 42.0 66.6Palas 3.8 9.0 12.8Braila 9.8 17.5 27.3Brazi 8.2 12.3 20.5Conversion to hard coal 4.0 16.0 20.0Environrmental 0.4 3.9 4.3Monitoring Prog. 1.5 13.5 15.0Engineering & Proj. Man.
Subtotal 98.6 183.8 282.4
B. Technical AssistanceSector & Corporate
Restructuring 1.0 6.6 7.6Metering, Billing & Collection 0.3 2.3 2.6Other Studies and Training 0.5 5.3 5.8
Subtotal 1.8 14.2 16.0
Total Base Cost c/ (Jan. 1995) 100.4 197.9 298.4Physical Contingencies 14.9 29.8 44.8Price Contingencies 7.5 13.4 20.7
Total Project Cost 122.9 241.0 363.9
a/ Figures may not add due to rounding.b/ Direct and indirect foreign exchange cost.c/ Includes taxes and duties.
The price contingencies are computed based on the following MUV11 indices: 1995=2.0%;1996=2.5%; 1997=2.7%; 1998=2.5%; 1999=2.6%; and 2000=2.7%. Interest duringconstruction (IDC) is not included, because RENEL's accounting policies do not allow forcapitalization of interest charges. Therefore, total project costs are the total financing requirements.
Unit Value index of manufactured exports from 5 industrial market economies to developing countrieson CIF basis: Source: The World Bank
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D. Project Financing
3.8 The financing plan for the proposed Project, summarized in Table 3.2, calls for financing thelocal costs of the Rehabilitation Program from RENEL's internal cash generation. The foreign costsof the Rehabilitation Program, and costs of the Reform Program and RENEL Corporate RestructuringProgram will be financed by a combination of loans and grants from multilateral and bilateralagencies. The foreign financing is expected to be provided by EIB for US$23.1 million equivalent(about 7% of total financing requirements) for the Bucharest South Units 3 & 4 (2x 100 MW); EBRDfor US$ 54.4 million equivalent (about 15% of total financing requirements) for the Palas Units 1 and2 (2x5OMW), Braila Unit 1 (210 MW), Brazi Unit 8 (200MW), and part of the associatedEngineering and Project Management Services, and the Metering and Billing and Collection Program;and the proposed Bank loan of US$110 million (30% of total financing requirements) for Isalnita Unit7 (330 MW); Deva Unit 1 (210 MW), part of the Project Management and Engineering Services, theRENEL Corporate Restructuring Program, the Power Plant Maintenance System Overhaul and theEnvironmental Monitoring System. The grant portion of the financing package, which will financepart of the technical assistance, will be from EU-PHARE for US$3.6 million equivalent, and fromUSAID for US$2.9 million. Contacts are under way with the Export-Import Bank of Japan (JEXIM)for US$44.9 million equivalent (about 12% of total financing requirements) for financing for theDeva Unit 2 (210 MW) and for the lignite to coal conversion of lasi and Suceava.
3.9 RENEL ought to be able to finance the requisite local costs from its internal cash generationprovided that it improves its collection record and limits its investments to the agreed levels (ChapterIV). As regards foreign cost, USAID and EU-PHARE have confirmed their willingness to financethe identified technical assistance components. EIB and EBRD confirmed their participation in theproject financing in 1995, while JEXIM has been approached by RENEL, and is evaluating theinformation received from the Government as well as other financing requests by the Government.JEXIM participation, if and when confirmed, is likely to be under parallel financing to beadministered by the Bank. EIB and EBRD's participation will be under parallel financingarrangements, as they will be financing separate units for rehabilitation under their own procurementguidelines. A consequence of these financing arrangements is that it is not necessary that the entirefinancing package for the project be in place now. At negotiations, GoR and RENEL undertook tosecure all the cofinancing needed by December 31, 1995 or such later date as the Bank may agree(para 6.2 (a)).
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E. Procurement
3.10 RENEL has had limited exposure to international procurement in general, and to Bank-financed procurement in particular, though it has purchased spare parts funded by Loan 3363-RO(Technical Assistance and Critical Imports Project). The close working collaboration betweenRENEL and the Consultant to be selected to provide engineering and project management services(para 3.6) and active Bank supervision would seek to strengthen RENEL capabilities in internationaland Bank procurement. The procurement arrangements are designed to take into account theparticipation of multiple financiers with their respective procurement guidelines (para. 3.9) as well asRENEL project management capabilities. The Rehabilitation Program (comprising equipment,materials, services and technical assistance), for which most of the procurement activity will takeplace, will be procured under a turnkey approach. One general contractor will be selected for each ofthe thermal power plants/units to be rehabilitated to provide the supply, erection and commissioningservices and guarantees/warranties for performance. This approach will save time and effort (thatwould otherwise need to be sper.t by RENEL and its Engineer on the tendering process and oncoordination between suppliers of different equipment, materials and services). For the turn-keycontracts to be financed by the Bank, contractors will be selected through pre-qualification proceduresand ICB in accordance with Bank guidelines.
3.11 The project elements, estimated costs and the procurement arrangements for those elementsfinanced by the Bank are summarized in Table 3.3. Goods and services to be financed throughcofinancing are shown under the non-Bank Financed (NBF) column. Four packages (Annex 3.3) intotal value of about US$321.7 million will be procured under the ICB procedures of the Bank andthose of the other cofinanciers. All goods, equipment, and services to be financed from the Bankloan proceeds would be procured in accordance with the Bank's Guidelines for Procurement, datedjanuary 1995. Romanian goods for supply under ICB procedures of the Bank would receive apreference in bid evaluation of 15% of the CIF price or the prevailing customs duty applicable tonon-exempt importers, whichever is less, in accordance with World Bank Guidelines. Forprocurement of Bank-financed goods, equipment, and services, country-specific standard biddingdocuments will be used. For supply, erect, and turnkey contracts, the Bank's Standard BiddingDocuments, including amendments as of loan signing date would be used. Engineering consultingand technical assistance services financed by the Bank will be selected in accordance with the"Guidelines for the Use of Consultants by the World Bank Borrowers and by the World Bank asExecuting Agency" (August 1981), and by using the Bank's Standard Contract Form for Employmentof Consultants. The process of selecting the Engineering Consultant is currently in progress.
3.12 All bidding packages for goods and associated services financed by the Bank would be subjectto the Bank's prior review of procurement documentation. All documents relating to procurement ofconsulting services to be financed from proceeds of the loans of the Bank and JEXIM (assumingRENEL's loan request is favorably considered, see para. 3.9) would be subject to the Bank's priorreview and approval, including the qualifications, experience, terms of reference and selection criteriaof the proposed consultant(s).
,A
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Table 3.3 Summary of Procurement Arrangements a!
ICB OTHERS c/ NBF bi TOTAL
Turn-key Contracts for Power PlantRehabilitation 146.7 175.0 321.7
Note: Figures in parenthesis are the respective amounts financed by IBRD.
af Figures may not add to totals due to rounding.b/ Non-Bank Financed, include equipment and materials to be financed through cofinancing (EIB and EBRD) using their
respective procurement guidelines, and possibly JEXIM using World Bank guidelines.c/ Consultants - Procured using Bank's Standard Guidelines for Consultants.dl For studies and training
3.13 As a consequence of the above procurement approach, contracts with an estimated value ofabout US$153.7 million (about 42% of the total project cost) would be financed under the Bank's ICBprocedures and this amount would increase to US$218.5 million if JEXIM funding is obtained. Forthe turn-key contracts, the Bank will have packages/sub-packages with a total value of US$146.7million. In addition, there will be one package for the power plant maintenance system overhaul forUS$3.0 million and one other package for environmental monitoring system for US$4.0 million.Consultancies for engineering and project management services, and for technical assistance for thesector reform, corporate restructuring of RENEL, studies and training will total about US$30.5million, of which the Bank-financed portion would be about US$17 million. The engineering andproject management consultant selected in accordance with Bank Guidelines will be financed by theBank and the EBRD. In addition, two technical assistance services for the implementation of thecorporate restructuring program and for the audit of RENEL's financial statements in total value ofabout US$5.4 million would be financed by the Bank, for which consultants will be selected on the
26
basis of shortlists of firms (para. 3.6). The non-bank-financed portion is expected to follow theprocurement procedures established by cofinanciers (EIB, EBRD, EU-PHARE and USAID).Procurement under JEXIM financing is expected to follow Bank procedures (para 3.9). Procurementpackages and schedules for monitoring of procurement activities are provided in Annex 3.3.Procurement will be closely monitored by the Bank as part of Bank supervision of the projectimplementation. Within the framework of the project reporting (para 3.21), RENEL will be sendingto the Bank, periodically, the updated status of procurement, packages and costs.
F. Disbursements
3.14 The Bank funds would be disbursed against: (a) 85% of the cost of goods and associatedworks and services with respect to turn-key contracts and (b) 100% of the cost for consultingservices. Expenditures amounting to a maximum of $5 million (5 % of the loan amount), incurredwithin the 12-month period prior to loan signature and referring to consultant services, equipment andmaterials contracted under Bank procurement guidelines, would be eligible for retroactive financing.The schedule of disbursements for the proposed Bank Loan is summarized in Table 3.4. It indicatesa disbursement period of five years from the approval date of the loan. This schedule is based on theBank's "all sectors" standard disbursement profiles for loans to Romania which is judged to be thebest fit for this project for which disbursement will be for rehabilitation, instead of new powerplants. The physical completion of the project is expected by June 30, 1999, the guarantee period ofthe last unit to be rehabilitated will run to the beginning of FY 2000. The closing date for theproposed Loan should then be set as June 30, 2000, about six months after the estimated completionof the guarantee period of the last unit to be commissioned under the Project. The detaileddisbursement profile is provided in Annex 3.3
Table 3.4: Estimated Disbursement Schedule
FY96 FY97 FY98 FY99 FY00
Annual 20.0 40.0 30.0 18.0 2.0
Cumulative 20.0 60.0 90.0 108.00 110.0
3.15 Disbursements for all contracts for goods and consulting service contracts above US$250,000would be fully documented. All other contracts would be disbursed against Statements ofExpenditures (SOEs). The supporting documentation will be retained by RENEL and be madeavailable for review by Bank supervision mission and auditors. To facilitate the implementation ofthe project, RENEL agreed at negotiations to open and maintain a Special Account with the NationalBank of Romania or anothler acceptable commercial bank in Romania on terms and conditionssatisfactory to the Bank (para. 6.3 (a)). The authorized allocation for the special account would beUS$5 million, representing the estimated average expenditures for a four-month period for itemsfinanced by the Bank. The initial deposit will be limited to US$1 million and the remaining portionof the authorized allocation will be released when disbursements reach a level of US$18 million.Applications for replenishment of the Special Account would be submitted on a quarterly basis orwhen one-third (1/3) of the amount deposited has been withdrawn, whichever occurs earlier. Allapplications for direct payments or special commitments must be for an amount not less than 20% of
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the special account deposit. In addition to documentation requirement stated above, eachreplenishment application will be supported by monthly bank statements of the special account whichhave been reconciled by RENEL. During negotiations, RENEL agreed to have the Special Accountand the project accounts audited and to submit to the Bank, six months after the end of each year,the audit report for the past year. (para 6.3(a)).
G. Environmental Aspects
3.16 Environmental Category. In accordance with OD 4.01 (Environmental Assessment), theproposed Project has been assigned to Category B, since the project will improve the environmentalperformance of thermal power generation operations at a number of specific power stations. Anenvironrnental analysis (EA) has been completed by foreign consultants for the Government andRENEL which analyzed the magnitude of potential impacts of the proposed Project (Annex 3.3; paras.11-16).
3.17 Mitigating Measures. The measures included in the Project to mitigate any serious pollutionimpacts from the future operations of RENEL after the rehabilitation are as follows:
(a) introduction of low NOx burners and improvements in combustion systems will leadto reductions of NOx emissions in addition to the elimination of the problem of severecorrosion and damage to steam boilers;
(b) improvements in fuel use efficiency through the rehabilitation of major unitcomponents - boilers, turbines and generators - will lead to decreases in fuelconsumption and associated pollutant emissions;
(c) conversion to use of imported (low sulfur) hard coal at eleven lignite-fired units (foreconomic reasons) will lead to reductions in all pollutant emissions from these units;
(d) conversion to use of low sulphur fuel oil (< 1% sulfur) instead of high sulphur fueloil (3-5% sulfur) also containing high levels of corrosive impurities (notablyvanadium) will lead to significant reductions in SO2 and will also improve operationallife and performance of boilers, and save on maintenance costs. As soon aspracticable, RENEL should substitute low sulphur for the high sulphur fuel oil in theoil -fired steam boilers to be rehabilitated; and
(e) rehabilitation and upgrade electrostatic precipitators will reduce dust and particulateemissions.
In addition, a number of old and inefficient thermal units will be retired (Annex 3.3), which willresult in further overall emission reductions. All these measures will lead to reductions in emissionsof nitrogen oxides by about 46%, sulphur dioxide by about 47%, dust particulates by about 61 %, andcarbon dioxide by about 28% from the rehabilitated units (Annex 3.3). It is estimated that the costsof equipment specifically designed to improve environmental conditions amount to about US$18million.
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3.18 Agreement has been reached with the Government and RENEL on a comprehensive programof pollution monitoring by RENEL to complement the monitoring by the other government agencies(Ministry of Health, and the Ministry of Waters, Forestry and the Protection of the Environment).Under the Project, RENEL will procure the necessary monitoring equipment and the requisite trainingfor implementation of the program (Annex 3.3). In addition, technical assistance will be providedunder the Project for institutional strengthening in environmental management and for occupationalhealth and safety improvements (Annex 3.3).
3.19 RENEL will adopt all the necessary measures to improve occupational health andsafety, which is currently a major issue within the power stations. At negotiations, RENEL agreed toprovide to the Bank a program for improvements in environmental management in RENEL, includingthe establishment of a department devoted to environmental concerns, the definition of its mainfunctions and of its relations with the other departments. A training program for staff members of thisoffice was agreed upon at negotiations. By December 1, 1995, RENEL should appoint consultants,under terms of reference satisfactory to the Bank, to assist in implementing the systems, includingtraining of RENEL staff, and assistance in implementing occupational health and safety programs atheadquarters and all thermal power generating facilities, including training of RENEL staff. Thesecommitments have been included in the Project Implementation Plan (Annex 3.3).
H. Project Implementation
3.20 Implementation responsibility for the Power Sector Reform Program will be with GoR,through CCSER and Mol, while the Thermal Plant Rehabilitation Program and CorporateRestructuring Program will be with RENEL. RENEL has set up a Project ImplementationDepartment (PID) to oversee the implementation of its components of the Project. The organizationalchart and the functions of the PID are provided in Annex 3.3, pages 24-25. Both Mol and RENELwill need considerable amounts of technical and consulting assistance for implementing the variouscomponents of the proposed Project. The technical assistance program is provided in Annex 3.3.The qualifications and the timetable for appointment of the consulting engineer and the terms ofreference for the services, and those of the other consultants to be engaged under the technicalassistance program, have been decided during appraisal of the Project. At negotiations, RENELagreed to take all necessary measures to ensure that the Project Implementation Department willcontinue to be adequately staffed andfunded in a manner satisfactory to the Bank (para 6.3 (g)). Asdiscussed earlier, there is a need for transfer of know-how, mainly from the consultants to be hired tohelp in implementation, to the staff of Mol and RENEL so that they can take greater preparatory andimplementation responsibilities in the future. It would, therefore, be essential that Mol and RENELensure active participation of the local counterpart teams in the activities of the consultants. Inaddition, the Project components are sufficiently complex that they warrant special and focusedattention on a day-to-day basis. Finally, each of the project's components have different stakeholdersin the country and there is a need to build consensus at various steps to ensure successfulimplementation. Therefore, the following actions have been taken to help ensure successful projectimplementation:
(a) GoR has established an Inter-Ministerial Steering Committee to oversee theimplementation of the Study of Options of Long-Term Structure for the Power SectorStructure, for which the MoF's Directorate General for Energy will serve as the
29
Secretariat and has also appointed the local counterpart team for the Study(para 2.37(c)); and
(b) RENEL has appointed a Corporate Restructuring Committee under the President-Director General to oversee the design and implementation of RENEL CorporateRestructuring Program.
In addition, at negotiations the GoR and RENEL agreed to carry out the proposed Project with duediligence and efficiency and in confornity with appropriate practices, and shall provide promptly asneeded, the funds, facilities, services and other resources required for the purpose. In this regard,GoR and RENEL agreed to secure all financing for the project by December 31, 1995 or such laterdate as the Bank may agree (para 6.2 (a)).
Project Implementation arrangements are discussed in detail in Annex 3.3.
1. Project Monitoring and Bank Supervision
3.21 The proposed Project will need to be monitored closely to ensure successful implementation.The requirement to engage qualified engineering consultants for the rehabilitation of the thermalplants should help with physical implementation. However, there is a need for the top managementof Mol and of RENEL to also focus on the respective project components, because there are anumber of interim decisions that will be required to be taken to ensure progress of implementation inaccordance with the planned schedule. For example, Mol will need to decide, once the relevantstudies are completed, as to how the sector will be structured over the long term, and how therestructuring would be accomplished. Also, RENEL will have to make decisions during theprocurement process and during the corporate restructuring process. In view of their limitedexperience in the implementation of complex projects, and lack of experience dealing withinternational financial institutions, close monitoring of their compliance with the agreed commitmentsis necessary. In addition, the financing agencies, including the Bank, will require periodic reportingby the beneficiary on the project's progress. A format for reporting to the Bank was discussed andagreed with RENEL at appraisal. At negotiations, the reporting requirements were confirmed. Anoutline of the Format is provided in Annex 3.3. To enable such monitoring, RENEL agreed atnegotiations to furnish to the Bank: (i) by October 31 each year beginning with 1995, for the Bank'sreview, the draft of a rolling five-year corporate plan setting forth for each year (a) the agreedmedium-term investment program, the sources of financing of said investment program includingborrowing needs, and tariff levels and structures; (b) the financial targets, supported by financialprojections showing compliance with agreed financial performance criteria; (c) the progress in theimplementation of the Corporate Restructuring Program; and (ii) by December 31 of each year,beginning with 1995, the final rolling five-year corporate plan, incorporating the Bank's comments onthe previous draft, and approved by GoR (para 6.3(e)).
3.22 Staff inputs required for supervision are estimated at about 30 staff weeks for the first yearand an average of 25 staff weeks for each of the subsequent years. Details of both the Borrower andBank staff inputs required were discussed at appraisal. All major contracts are on a turnkey basis,(para. 3.10), and the project can be implemented successfully once these contracts are awarded.Therefore, a measure of success of the project implementation will be that all major contracts forrehabilitation of power plants are awarded by March 1997. Project implementation arrangements arediscussed in greater detail in Annex 3.3.
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IV. FINANCIAL ASPECTS
A. Background
4.1 RENEL's financial affairs are largely governed by Law 15/1990, which governs all RAs. Asregards RENEL, Law 15/1990 stipulates, among other things that:
* RENEL should meet from its revenues all costs, including those required to be paidunder the Tax on Profit law;
* in addition to 38% tax on taxable income, 90% of the net profit after taxes, should bepaid into the state budget;
* the revenue and expenditures of RENEL are a part of the State's budget and will haveto be approved by the Government; and
* new investments and disposal of old assets requires the Government's approval;.
In addition to Law 15/1990, Law 776 of November 1991 stipulates that electricity and thermal energyprices will be approved by the Ministry of Finance; Law 66/1993 requires RENEL management toenter into a management contract with the GoR on an annual basis; and special ordinances have beenenacted to address the issue of the systemic inter-enterprise arrears which affects RENEL (paras.4.12-4.17). Accordingly, although RENEL Board of Administration has the power to set corporatepolicy, critical decisions such as electricity and thermal energy pricing, investment levels, borrowinglevels, disposal of profits and senior staff appointments are actually taken by the Government itself.The proposed project seeks to expand the capacity of RENEL to act autonomously within a legalframework that promotes accountability.
B. Financial Management
Financial Organization
4.2 RENEL's financial management function is the responsibility of the Deputy Director General.The 36 generation subsidiaries and the 42 transmission and distribution subsidiaries maintain separateaccounts, as required by law. In addition, there are four accounting units for the Research Institutes,and 4 more for the nuclear construction group. The individual subsidiary's accounts are prepared atthe local level and consolidated at headquarters. Only the Income Statement and Balance sheet areprepared for the utility.
4.3 The problems encountered in RENEL's accounting and financial management function are: (a)RENEL's present financial accounting system is primarily cash-based and owing to bad recordkeeping prevalent throughout the company, the financial information RENEL generates is unreliable;(b) even though RENEL is required by Law 82 (the Accounting Law) to maintain its accounts inaccordance with generally accepted accounting principles, RENEL has not developed a modernelectric utility accounting system appropriate for its size and functions; and (c) RENEL does not havean appropriate cost-accounting system, which is necessary to: (i) assess the appropriateness of tarifflevels and structure; (ii) assess the cost-of-supply of electricity separately from thermal energy; and
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(iii) distinguish between costs of generation, transmission and distribution; (d) basic accountingpractices, such as depreciation of assets, are manipulated to show minimal profits, in order to avoidtax payments (para. 4.1) to the GoR; (e) the aggregate value of RENEL's plant, equipment and otherfixed assets is questionable, since no reliable records are maintained for the most part and the valuesdo not reflect the operational capability of these assets, many of which should be scrapped; and (f)there is no long-term operational and financial planning, except the annual budget, whose periodicreview involves mainly physical targets.
4.4 To overcome the above critical deficiencies, as well as to address the structural problems inRENEL (para 2.6) and overstaffing (para 2.8), the utility needs to implement a comprehensiveCorporate Restructuring Program, which will comprise the following phases: (a) restructuringRENEL to spin-off non-core and non-conventional electricity utility activities and establishment ofcost/profit centers; (b) modernization of financial accounting system to a standard appropriate for thesize and function of RENEL; (c) development and implementation of a cost accounting system; (d)physical verification of fixed and current assets, establishment of asset registers and preparation offinancial statements; (e) assessment of human resources availability and requirement, andimplementation of programs to reduce staff while filling the skills gaps; and (f) implementation of acorporate budgeting and planning system. RENEL would require consultant assistance for designingand implementing the requisite management systems, for which financing is included under theproposed Project. Terms of reference for the Corporate Restructuring Program have been agreedwith RENEL. RENEL has agreed to completely implementt, before December 31, 1997, or such laterdate as the Bank may agree, the Corporate Restructuring Program described above, with theassistance of consultants whose terms of reference and qualifications are satisfactory to the Bank(para 6.3(h)). It was also agreed that RENEL shall: (i) have its records, accounts andfinancialstatements, for each fiscal year beginning with 1995, audited, in accordance with appropriateauditing principles consistenitly applied, by inidependent auditors acceptable to the Bank; (ii) furnish tothe Bank as soon as available, but in any case not later than six months after the end of each year:(A) certified copies of its financial statements for such year as so audited; (B) the report of such auditby said auditors, of such scope and in sulch detail as the Banik shall have requested; and (iii) furnishto the Bank such other information concerning said records, accounts and financial statements as wellas the audit thereof as the Bank shall request (para 6.3 (a)).
Billing and Collections
4.5 RENEL has approximately 250,000 industrial and commercial customers who account forroughly 80% of its electricity sales. These customers are billed monthly on the basis of meterreadings. Collection is made through the local banking system. RENEL also has about seven millionresidential customers who are dealt with by about 100 offices around the country. Billing is doneonce every two months. Collections are made in cash at each of the respective offices, and by meterreaders during meter reading.
4.6 Billing and collection by RENEL is hampered by: (a) very old metering equipment, in needof urgent replacement; and (b) by law, the penalties for late payment cannot exceed the original billamount, which may not be enough incentive for payment when the delays are very long due toinflation. Therefore, there is often no strong incentive to make payments on time, resulting in loss ofreal revenues to RENEL. To address these issues, RENEL will implement a Billing and CollectionModernization Program under the proposed project. This Billing and Collection ModernizationProgram, which will include both equipment installation and technical assistance, will be : (i) based
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on a recently completed study carried out by foreign consultants under Swiss Government funding andBank supervision; (ii) funded by EBRD; (iii) focused firstly on the Bucharest distribution system;and (iv) later expanded to the entire RENEL system. At negotiations, RENEL agreed to implementthe Billing and Collection Modernization Program for its Bucharest distribution system by December31, 1997, in a manner satisfactory to the Bank with the help of Consultants recruited by September30, 1995. This is provided in the Project Implementation Plan (para.6.3 ()).
Insurance
4.7 The current practice in Romania (and in RENEL) is for the companies to bear the risks of anydamages to assets and personnel as and when they occur. However, the Government of Romaniaintends to issue decisions and/or decrees to require the companies to establish insurance arrangementsas per standard industry practice internationally. Accordingly, RENEL plans to establish a self-insurance scheme to cover the risks to its assets, as is the standard practice for many electricityutilities around the world. Such self insurance scheme will be established soon after: (i) RENEL hascompleted the physical verification and valuation of its assets (which is part of the CorporateRestructuring Program under the Project); and (ii) the Government of Romania has issued themeasures referred to above. For these reasons, the current practice of RENEL is consideredacceptable until the two events mentioned above have occurred.
C. Past Performance
4.8 RENEL's operational performance during 1992 - 1994 is summarized in Table 4.1 andprovided in more detail in Annex 4.1. In view of the unreliability of the financial statements,particularly asset accounting (including depreciation); and in view of the high inflation levels thatprevailed during the period, RENEL's past performance is analyzed in US$ cash flows terms.
Table 4.1: RENEL Operational Performance in 1992 - 1994(US$ Million)
Working Ratio (%) 91.7 90.0 91.2Debt Service Coverage (times) 14.9 8.1 2.1Internal Cash Generation (% of 31.0 36.9 10.5
1/ excluding depreciation.2/ Net of VAT
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4.9 During 1991-94, RENEL's electricity sales declined by about 16% (from 51,531 GWh in1991 to 47,178 GWh in 1992 and to 43,300 GWh in 1994) as the economy and, in particular, theindustrial sector (which accounts for nearly 80% of RENEL's electricity sales), continued to decline.In addition, RENEL realized a lower than targeted average revenue (US$33.7/MWh in 1992,US$34.9/MWh in 1993 and US$40.3/MWh in 1994, against targeted level of US$42.4 net of VAT),due to some delays in adjustments in electricity tariffs in an environment of high inflation. Moreover,as a consequence of the large proportion of thermal plant generation, higher than normal fuelconsumption, and other operational inefficiencies, including overstaffing, RENEL's cash operatingcosts could not be reduced, even though sales declined. As a result, RENEL's operating margins wereslim as indicated by the working ratio, (i.e. the ratio of its cash operating costs to its operatingrevenue), which averaged just over 90% during the three years. In addition, RENEL experiencedsignificant cash flow constraints, caused primarily by the systemic inter-enterprise arrears problemprevailing in Romania. To compound the problems, RENEL continued with high investment levels ofUS$523 million in 1992 and US$444 million in 1993, mainly for the construction of the Cernavodanuclear power station.
4.10 As a consequence of cash flow constraints, RENEL has had to resort to short-term borrowing(less than one year) to meet local costs of investments. As a result, RENEL's debt service coverageratio (DSCR) declined from 14.9 in 1992 to 2.1 in 1994. RENEL's internal cash generation (ICG)ratio (the ratio of its internal sources of funds to annual investments) was satisfactory at 31 % in 1992and 37% in 1993 primarily because: (a) RENEL had a very low overall debt burden resulting in lowlevels of debt service (US$12 million in 1992, and US$26 million in 1993); and (b) RENEL, kept itsworking capital increases to a minimum by not maintaining sufficient operating inventories and by notsettling its accounts payable (particularly to fuel suppliers and transporters) on time. However, theICG was about 10% in 1994 owing to a three-fold increase in debt service, which in turn is aconsequence of RENEL having to start repaying the loans on the Cernavoda nuclear power plant.
RENEL Receivables and Payables
4.11 Given electricity's critical role in the economy and the fact that RENEL system is dominatedby thermal power generation capacity, it is not surprising that RENEL suffers from, and contributesto, the systemic inter-enterprise arrears problem in Romania. RENEL's main consumers are heavyindustry (metallurgical, chemical) for electricity and local governments for thermal energy. Theheavy industrial sector is in a very weak financial situation owing to high levels of inefficiencies, lackof market(s) for their products, and the downturn in the economy. Local governments face difficultbudgetary problems and are unable to meet their payments for energy supplies to municipal and socialservices. Therefore, as RENEL customers delay paying their electricity and thermal energy bills,RENEL responds by delaying payments to its suppliers, mainly for fuels, - coal/lignite, fuel oil andnatural gas. To address the inter-enterprise problem, in particular, and to improve financial viabilityof critical RAs in general, the Government in September 1994 issued Decree 499/1994, placing fiveRAs, including RENEL, under a special surveillance program.
4.12 RENEL's Accounts Receivable: Table 4.2 provides a breakdown of RENEL's accountsreceivable as of March 16, 1995, by age; type of service; and type of debtor.
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Table 4.2: RENEL Accounts Receivable as of March 16, 1995 (Lei billion)
1. Receivables by Age
< 30 days 30 - 60 days 60 - 180 180 - 360 days 1 > year Total
267 190 271 173 35 936
29% 20% 29% 18% 4 % 100%
2. Receivables by Type of Service
Electricity Thermal Energy Other Services Total
620 310 6 936
66% 33% 1% 100%
3. Receivables b- Type of Debtors l_l
Industrv Agriculture Local Government Others Total
509 106 260 61 936
54% 11% 28% 7.1% 100%
RENEL's receivables amount to lei 936 billion (2.5 months of 1995 projected sales) of which Lei 669billion (1.75 months of 1995 sales are in arrears (i.e. outstanding for more than 30 days). RENEL'sthermal energy receivables, which account for 33 % of overall receivables, are a larger problembecause the thermal energy is sold mainly to the district lieating companies of the municipalities, whoin turn supply to households. The district heating companies are unable to fully collect the bills ontime from their consumers and in turn fail to pay RENEL. RENEL's largest debtors are thegovernment owned industrial plants, all of them under Mol, which amount for 66% of RENELreceivables. Among the industries, metallurgical are the biggest debtors accounting for 39% ofindustry receivables (17% of overall), followed by petrochemical industries accounting for 30% (15%of overall). The second largest set of debtors is the local governments, who account for 28% ofoverall debts. The Bucharest municipality alone accounts for 90% of receivables from localgovernments, or 25 % of overall debts.
4.13 RENEL's Accounts Payable: Table 4.3 provides RENEL's accounts payablebreakdown by creditor and levels of payable owed by RENEL, as of March 16, 1995.
Table 4.3 RENEL Accounts Payable as of March 16, 1995(Lei billion)
AccountsPayable from
Accounts RENEL inMonthly Average 1/ Payable months of
Fuel Sales to RENEL from Fuel SalesCreditor (1994) RENEL (1994)
ROMGAZ (Gas) 36 277 7.7
RA (Lignite) 60 146 2.4
RAH (Hard Coal) 20 30 1.5
RAFIROM (Fuel Oil) 19 96 5.0
SNCFR (Coal Transport) NA 22 N.A.
I/ These figures are somewhat misleading as there is a strong element of seasonality in fuel purchases, which are higher during wintermonths.
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The above five fuel suppliers to RENEL account for 77% of the utility's accounts payable. It shouldbe noted that normally RENEL will become, cyclically, either a net creditor or a net debtor. At theend of summer, RENEL will be a net debtor, since during summer, RENEL's electricity and thermalenergy sales are low (resulting in lower billing and lower collection); and towards the end of summer(August/September), RENEL will start incurring higher fuel costs to build up stocks for the winter;and at the end of winter (March/April), RENEL will be a net creditor, as electricity and thermalenergy sales will peak during winter and fuel expenses start declining.
Targets for RENEL Accounts Receivable and Payable
4.14 From a utility point of view, RENEL's accounts receivable level of about 2.5 months'average sales is high but within acceptable boundaries. However, given the size of RENEL withinthe Romanian economy (RENEL revenues of about US$2.3 billion in 1994 are equivalent to over10% of GNP), a 3-month accounts receivable level would imply an amount equivalent to over 2% ofGNP. Therefore, RENEL's accounts receivable level has a considerable macroeconomic significanceand should be reduced to the minimum level possible. In this regard, there is a level below which theutility's accounts receivable cannot be reduced, due to the logistics of billing and collections - RENELbills its major industrial customers every month, and allows them a month to pay. For its lowvoltage consumers, particularly households, RENEL bills them once every two months and allows amonth for payment. Given the 80:20 ratio of high/medium voltage to low voltage consumers, theminimum level of accounts receivable below which RENEL probably cannot go at present is about 60days' sales. Therefore, in a first stage RENEL should aim at reducing and maintaining its accountsreceivable level at 2 months' sales. In terms of accounts payable, it is normal for a utility to maintainits dues to suppliers at one month's supply. RENEL should target to maintain its accounts payable tofuel suppliers at one month's average fuel bill or as per agreed terms in the supply contracts.
Actions to Resolve RENEL Arrears Situation
4.15 Most of RENEL's high/medium voltage industrial customers, who are the worst offenders,are state-owned. Prior attempts at resolving the problem of unpaid bills by such customers have notsucceeded because of political interference, arising from social considerations (since cutting electricitysupply to industrial customers in arrears results in production stoppages, which reflects, in turn, onemployment); and lack of sufficient financial discipline. At present, RENEL is implementing a veryaggressive program to improve collections. However, additional arrangements must be implementedto promote discipline, both by RENEL customers and by RENEL itself. Also, separate arrangementsmust be devised for commercial businesses (commercial companies and other regie autonomies) whomust face market discipline and local governments, who cannot be shut down. This means that GoRwill have to play a critical role in the resolution of the inter-enterprise arrears problem, including theinstitution of measures to prevent recurrent build-up of arrears.
4.16 To address the problem of RENEL arrears, a set of actions, collectively called the FinancialRecovery Plan (FRP) is being developed by RENEL and the GoR, under the proposed Financial andEnterprise Sector Adjustment Loan (para 1.2). RENEL's FRP would be the front-end portion -- i.e.the first year -- of the Corporate Restructuring Program concentrating on the financial improvementsin 1995 only; and focuses on short-term measures that would achieve reduction in expenditures,increase in cash revenues and reduction in arrears on both accounts receivable and payable. In itsdialogue on financial discipline issues, the Bank has emphasized the distinction between the stock ofarrears and new bills.
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4.17 To ensure RENEL's financial solvency, GoR agreed to take all necessary actions to ensurethat GoR's departments, agencies and enterprises as well as local governments settle RENEL'selectricity and thermal energy bills within 60 days of the date of such bills. In addition, REAELagreed to ensure that (i) the receivables on its electricity and thermal energy sales to the privatesector, including households will not exceed two months' sales to such customers; and (ii) it will settleits bills to its fuel suppliers as per contractual terms (para. 6.2 (c)). This is an ambitious objective,given the financial problems faced by RENEL's largest customers. To achieve it, the Goverrnenthas provided assurances to the Bank that it will take all necessary measures to ensure that customersin significant arrears that do not pay their current bills on time will be disconnected or will be subjectto progressively increasing electricity supply cuts. Also, the Treasury will change its administrativeregulations to enable it to pay RENEL directly from the budget allocations of agencies that are notpaying on time. Finally, it is expected that under the FESAL a financial relief fund will beestablished to provide some limited assistance to selected firms that meet stringent criteria to helpthem pay their current electricity bills. The issue of old arrears needs to be resolved through directnegotiations between RENEL and its customers, leading to partial cancellation or extended repaymentperiods based on a realistic assessment of their capacity to pay. It was agreed that RENEL shall haveprovided to the Bank satisfactory evidence that it has concluded enforceable arrangements for debtrepayment with each of its customers listed in an Annex to the Power Sector Strategy (para 6.4) as acondition of loan effectiveness.
D. RENEL Investment Program and Financing
4.18 At negotiations, the GoR and RENEL confirmed the medium-term (1995-2000) power sectorinvestment program. It is estimated to amount to about US$2,323 million in nominal terms,comprising US$1,607 million in foreign exchange costs (72%). In accordance with the Government'sstrategy for the Power Sector (para 2.33), RENEL's investment priority will be: (i) rehabilitation ofexisting supply facilities in generation, transmission and distribution; (ii) the completion of highpriority unfinished hydro and thermal plants at advanced stages of completion; (iii) expansion andreinforcement of the power transmission and distribution network and modernization of the loaddispatching system for energy management applications; and (iv) heat transmission system,environmental pollution control and land reclamation. It is crucial for RENEL to focus on thermalplant rehabilitation investments in the next 3-4 years, and on other rehabilitation investments duringthe subsequent years. GoR and RENEL agreed to review with the Bank, by October 31 of each year,the medium-term investment program, including the sources of financing, and to take the views of theBank into account in modifying the investment program (paras 6.3 (e)). RENEL Investment Programfor the period 1995-2000 is provided in Table 4.4.
Table 4.4 RENEL Investment Program (1994-2000)(US$ Million)
4.19 RENEL's investments should only comprise the proposed investments discussed above. Tofinance the local costs of these levels of investments, RENEL may not be able to borrow domesticallysince the domestic financial markets are shallow relative to RENEL's needs. Therefore, RENELaims to finance all of its local costs of investments from its internal cash generation (ICG). Also, inview of the separation of nuclear activities, the nuclear power investments, and the associated debtservice obligations will be the responsibility of the GoR and the new nuclear power entity (para 2.38(a)).
4.20 Under the above-mentioned planning environment, the forecasts of operational and financialperformance of RENEL during 1995 - 2000 are summarized in Table 4.5, and provided in detail inAnnex 4.1. RENEL's sales of electricity are expected to grow by about 2.4% each year until 1998;and then increase at about 2.2% per year, to reach a level of 50,000 GWh in the year 2000. Theserates are lower than the expected economic growth of about 5%, as energy intensity is expected tofall. Thermal energy sales are assumed (conservatively) to remain constant at 45,105 Gcal/yearthroughout the forecast period. As a consequence, growth in operating revenue, from US$2.37billion in 1995 to US$2.7 billion in the year 2000, will come primarily from growth in electricitysales, since average electricity tariffs are expected to be maintained at about US$50/MWh, inclusiveof VAT. However, the cash operating costs (i.e., other than depreciation), are expected to increase ata slower rate than revenues, as an outcome of implementing the FRP and of reductions in fuel costdue to efficiency improvements under the Project. Therefore, RENEL's working ratio is expected toimprove somewhat to 88.8% in the year 2000.
4.21 In 1995, the utility's ICG will be about 23%, as a result of slightly higher sales, and removalof Cernavoda nuclear power development expenditures from RENEL's investment program.RENEL's ICG in 1995 would have been higher if the tariff increases, which were due at thebeginning of 1995, had been effected on time (tariffs were adjusted to US$50/Mwh in June 1995).RENEL's ICG will range between 30% and 45% in the remaining part of the forecast period, for anaverage of about 38%, which is sufficient to cover the local cost of its investments. As RENELincurs significant levels of debt to finance its investment program, its debt service coverage ratio(DSCR) will decline. However, RENEL will still be able to achieve DSCR levels of above 1.5,which is satisfactory.
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Table 4.S: RENEL Operational Performance in 1994 - 2000(US$ Million)
Working Ratio (%) 92.3 89.0 89.0 88.8 89.1 88.8Debt Service Coverage (times) 2.1 3.7 2.9 2.4 2.1 1.8Intemal Cash Generation (%) of investments 22.7 31.8 45.4 37.8 34.1 33.3
4.22 Given that RENEL will have to operate under a "de-facto" price cap regimne during the forecastperiod, the utility will have to take steps to improve and maintain its financial viability (e.g. meet all ofits operating costs and finance a reasonable portion of its investments) and creditworthiness (e.g. be ableto comfortably service its debt after meeting all operating costs). RENEL agreed to: (a) produce, foreach of its fiscal years after its fiscal year 1994, funds from internal sources equivalent to no less than30% of the average of RENEL capital expenditures incurred, or expected to be incurred, for that year,the previous fiscal year and the next following year; (para 6.3 (b); and (ii) take such measures as may benecessary to ensure that the estimated net revenues shall be at least 1.5 times, in 1995 and eachsucceeding fiscal year, the estimated maximum debt service requirements of RENEL for any such fiscalyear on all debt of RENEL (para 6.3 (c)).
Financial Impact of Nuclear Power Generation on RENEL
4.23 The separation of nuclear power activities into an independent public entity (para 2.37 (a)), andthe establishment of a Power Purchase Agreement (PPA) between this new entity and RENEL will havean impact on RENEL finances and, therefore, on its tariffs, if RENEL is to achieve the financialperformance criteria stated earlier. Since the price of purchased power from the new nuclear entity hasyet to be set, several levels of nuclear power prices to RENEL were examined for their impact onRENEL's retail electricity tariffs.
4.24 Such analyses show that if the nuclear power purchase price is US cents 3/kWh (which is justbelow RENEL's average cost of US cents 3.09/kWh of hydro and thermal electricity generated), RENELcan achieve its planned financial performance targets with an average price of about US$42.4/MWhequivalent. However, if the nuclear power purchase cost is higher, for example in the US cents 4-6/kWhrange, then RENEL tariffs need to be increased beyond planned levels, since the power purchase cost willexceed RENEL's own generation costs by higher and higher amounts. Since the PPA between RENELand the nuclear entity needs to be satisfactory to the Bank, the Bank's review of the proposed powerpurchase agreement (PPA) between RENEL and the new nuclear power entity, will focus, among otherthings, on ensuring appropriate level of the power transfer price (an artificially low price would require agovernment budget subsidy to the nuclear power entity, and a transfer price above RENEL's cost ofgeneration will require increases in RENEL tariffs to its customers).
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V. PROJECT JUSTIFICATION
A. Rationale for Bank Involvement
5.1 The CAS submitted to the Board with the Petroleum Sector Rehabilitation Project on March 14,1994, mentions the support of reforms in the power sector as one of the priorities in the Bank lendingprogram for 1994 - 1997. The Bank's involvement would be critical to steer the development andimplementation of market oriented sectoral policies and institutional reforms. The proposed Project is inline with the agreed strategy of promoting efficiency of energy use as a way of conserving scareresources, while reducing environmental pollution. The Bank's experience in power sector reformsworldwide will contribute to the development of a sound legal and regulatory framework. The Bank willbe instrumental in mobilizing cofinancing. Furthermore, the Bank's involvement will contribute tomeeting the structural reform objectives under the SAL, specifically in reducing the budget deficit throughrationalization of the power sector investment program; and maintaining the momentum of liberalizationof energy prices. Future Bank lending to the sector is envisioned, contingent upon satisfactory progressin the implementation of policy reforms.
5.2 The physical component of the Project is the least-cost solution to meet the demand for electricityin comparison with all the alternative feasible options considered, including imports of electricity.Sensitivity analysis carried out to establish the robustness of the economic solution on the basis of thetechnical and economic risks that could arise with the implementation of the Project, confirmed therobustness of the economic solution. The following sections explain, in summary, the justification.Further details are provided in Annex 5.1.
B. Generation Capacity
5.3 The future electricity demand profile indicates that for the foreseeable future the system's priorityrequirement will continue to be base load, as opposed to peaking capacity requirements. However, thedependable output of the thermal plants, which provide base load, is rapidly declining. The Bankestimates that dependable thermal capacity would decline from the current level of about 5,500 MW toabout 3,500 MW by year 2000, if no rehabilitation takes place, and if current poor operations andmanagement practices continue. The thermal capacity that will be reinstated through the rehabilitationprogram will restore firm base load capability to meet demand through year 2000.
C. Least-Cost Analysis
5.4 The results of a preliminary study of Least-cost Power Generation Development, carried out byconsultants for RENEL in 1992, assigned priority to the rehabilitation of existing generating facilities.The follow-up technical inspection and feasibility study of rehabilitation (para. 3.3 - 3.6) to complementthat finding showed that the plants are in much more degraded and unsafe operating condition thanassumed in the least-cost study, and urgent rehabilitation is needed to prevent further rapid decline inoutput and availability of base load capacity, and to improve operational safety.
5.5 To establish that the proposed rehabilitation program is the least- cost solution, it was comparedto other options of providing base load capacity. The comparison shows that the rehabilitation of the
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thermal units is economically more favorable than alternatives which include: (a) completion of Units 2and 3 of the Cernavoda nuclear power plant and of unfinished hydropower plants, with storage reservoirs,on firm energy capability basis; and (b) gas fired combined-cycle alternative. The time constraint inmaking capacity available is an added advantage of rehabilitation over new units. The possibility ofimports of electricity from Ukraine was examined, but was disregarded because it would be moreexpensive than the production from the rehabilitated units, and in addition, it could not be relied upon asa source of firm continuous supply to meet base-load requirements. However, during critical periods ofdemand, when some of the large units would be under rehabilitation, imports may be needed tosupplement local supply. Table 5.1 provides the comparison.
Table 5.1.' Comparison of Highest Cost Rehabilitation Candidatewith Other Options
US Cents/kWh (Life-time Costs at 10% Discount Rate)
Isalnita a/ 4.4Cernavoda Unit 2 6.8Cernavoda Unit 3 6.9Dimbovita Hydropower Plant b/ 6.2Bistra Hydropower Station b/ 9.4Combined Cycle 5.5Electricity Imports 5.2
a/ Highest cost rehabilitation candidate.b/ On the basis of estimated firm energy production capability.
5.6 There are uncertainties concerning the additional cost of completion of the Cernavoda nuclearpower units, which should be established by a detailed engineering assessment. In addition, the costs donot include de-commissioning and spent fuel disposal costs, which are considered to be high. Finally, noaccount has been taken of the longer time required to complete Cernavoda Unit 2 compared with the timeneeded to rehabilitate Isalnita, but this consideration also favors rehabilitation. Considering the urgentneed for firm based-load capacity in the system the lowest cost of rehabilitation, and the aboveconsiderations, rehabilitation of Isalnita is the preferred option.
5.7 Even with the reinstatement of capacity that the rehabilitation provides, the power system may bebarely able to meet the expected demand. Table 5.2 compares available dependable continuous poweroutput with demand on the system by year 2000.
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Table 5.2: Dependable Continuous Power Output and Demand (MW)
Actual Estimated1992 2000
Maximum Thermal Plant PowerOutputPre-rehabilitation (MW) 5,500 3,500
Reinstatement of Capacitythrough rehabilitation - 2,320a/
Other RENEL Rehabilitation - 600
New Plant Additions(i) Cernavoda Unit 1 - 660(ii) Turceni 8 - 270(iii) Other Thermal - 180
Total Thermal 5,500 7,530
Firm Hydropower Output 2,000 2,000
Total Firm Dependable Capacity 7,500 9,530
Maximum Demand 9,500 9,100
Imports/(Reserve margin) 2,000 (430)
-/ Capacity to be reinstated by entire rehabilitation program of RENEL including theproposed project
D. Lignite to Imported Hard Coal Conversion
5.8 The technical inspection and feasibility study conducted on the lasi cogeneration lignite fired unitwas to establish the technical and economic merits of conversion of 11 similar units (1 lx50 MWcogeneration) to use of imported hard coal as the primary fuel. The results confirmed the technical andeconomic justification for such conversion. An additional important benefit is the reduction in airpollution and lower volume of ash disposal that the conversion would bring about.
5.9 The economic merit is the curtailment of the uneconomic transportation of lignite over longdistances (300-600 km). At the lasi power station the economic cost of lignite delivered is aboutUS$25/ton compared to the delivered cost of imported hard coal through Constanza port of aboutUS$50/ton. To establish the economic merit of the conversion, the present value of economic cost oflignite at the power station over the life of the unit was compared with the present value of theincremental capital and fuel costs for the conversion over the same life of the unit on heat equivalentbasis. The former was estimated at US$140 million compared with US$60 million for the latter. Inaddition, operation and maintenance costs will be lower in the case of the conversion.
5.10 Similar analysis has been extended to the other 10 units at the different locations in the NorthEastern part of the country. The conversion of the units, apart from the environmental benefits, providesa least-cost means of serving the same quantity of thermal energy and electricity demand.
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E. Rate of Return Analysis
5.11 The rate of return on the investments in the rehabilitation component is estimated to be about 21%compared to the estimated long-term opportunity cost of capital to Romania of about 10%. The analysisfollows the traditional approach of comparing quantifiable incremental costs and benefits to the powersystem of the rehabilitation program. The estimates of investment costs and of fixed operation andmaintenance costs are based on the estimates of the consultants that conducted the feasibility study. Fuelcosts are estimated at improved unit efficiencies resulting from rehabilitation, and fuel was valued atborder prices. Allowance was made for the incremental cost to the power system as result of a unit beingon outage for rehabilitation by increasing the output of less efficient power units to replace the output ofthe units under rehabilitation. The incremental cost (outage cost) was based on the additional fuel andother variable operating costs to the power system. All costs were expressed in economic terms and inprices of January 1994.
5.12 The quantifiable benefits comprise: (a) fuel savings from improved unit efficiency;(b) increase in electricity production resulting from increase in power output, and improved availability ofthe rehabilitated units; (c) savings in consumption of support fuel, natural gas and fuel oil, in the ligniteand coal fired units through improved loading of units, and reduction in stops and starts of the units;(d) improvement in quantity and reliability of heat supply, which is captured through credit of theefficiency of cogeneration to electricity production.
5.13 Incremental electricity sales were valued at an average electricity price of US cents 5/kWh, theagreed annual average price which the Government has committed to maintain in real terms over the year.Since price is a poor proxy for benefits, as it fails to capture the consumer surplus, this method ofcalculation underestimates the economic rate of return on the project. Details are presented in Annex 5.1.
5.14 For the conversion, incremental costs consist of the capital cost of the conversion and theassociated fixed operation and maintenance costs. The benefit is the savings in cost of fuel delivered, andoperation and maintenance costs.
F. Other Benefits
5.15 Other benefits, which are not readily quantifiable, are associated with the improvements in thequality of the environment, mainly the reduction in air pollution that the rehabilitation will bring about.Additional benefits will arise from improvements in management and associated operational costreductions arising from the corporate restructuring program.
G. Sensitivity Analysis
5.16 The Base Case analysis already takes account of possible delays in project implementation byconsidering implementation over five years instead of three years in which the proposed rehabilitationprogram would normally be implemented and completed. Sensitivity analyses were carried out to test therobustness of the economics of the project as follows: (i) a 20% increase in capital costs could arise inrehabilitation work of this nature due to greater than expected plant deterioration that might be uncoveredduring implementation; and (ii) considerations that the rehabilitation might not achieve the expectedimprovements in fuel use efficiency and availability, thus leading to higher fuel consumption and that thetargeted level of output and reliability may not be achieved. Reduction of 10% in fuel use efficiency and
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in expected availability improvements are assumed. Additional sensitivity tests were conducted to assessthe impacts of extreme conditions on project economics. For the economic rate of return to fall to about10% (switching value analysis) a combination of the following changes would have to occursimultaneously, which is unlikely: (i) a two-year delay in project completion; (ii) a 20% increase incapital costs; (iii) a 10% reduction in the expected improvements in fuel use efficiencies (alreadyconservatively assumed); and (iv) a reduction of about 10% in the expected power output and availabilityof the rehabilitated units.
5.17 The results of the analysis shown in Table 5.3 indicate the robustness of the rate of return in theface of increased capital costs and reductions in fuel use efficiency, and electricity production. The rateof return is most sensitive to the reduction in expected output and unit availability.
Table 5.3: Results of Sensitivity Analysis
RoR
Base Case 21
(a) 20% increase in capital cost 18
(b) 10% reduction in fuel efficiency 17
(c) 10% reduction in availability 15
(d) Reduced Project Scope 18
(e) Combination of (a) (b) and (c) 10
5.18 A further sensitivity analysis was carried out on the base case to show the effect of a reducedproject scope arising from unavailability of the cofinancing now being sought from JEXIM. In thiscase, the rehabilitation program will exclude the second thermal unit at Deva (210 MW) and theconversion of 200 MW of lignite based capacity to imported coal use proposed for JEXIM financing(para 3.8). This would penalize the power system through a net incremental benefit foregone due tothe reduced rehabilitation scope, and the non-conversion of the isolated power stations from lignite toimported coal use. The economic rate of return in this case is estimated to be about 18%.
H. Sustainability
5.19 Training in management and in modern corporate and financial systems will be provided; this,in addition to the initiation of the long-term reform measures is expected to help the benefits of thecorporate restructuring of RENEL. Achievement and sustainability of the benefits from the physicalcomponents of the Project will be highly dependent on three main factors. These are: (a) the qualityof materials used and quality of construction (b) the effectiveness of the project implementation; and(c) improvements in post rehabilitation operation and maintenance. The poor practices in these areasin the past have been the principal causes of the rapid and premature deterioration, and the poorperformance of thermal power plants, which have necessitated the proposed rehabilitation project.
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5.20 The lessons learnt by the Bank and the Romanians from the past have been taken intoaccount. The establishment of a well structured project implementation department with experiencedforeign technical advisors and consultants will ensure quality of both materials used and construction,and would ensure efficient project management and execution through new methods and technologiesthat would be introduced. Factory acceptance tests and other measures have been incorporated in theproject implementation to assure quality of materials. Through the contractual arrangements,construction and erection will be undertaken by experienced contractors with proven track record.The computerized plant maintenance program, complemented by three years supply of essential spareparts with the associated training of RENEL staff is aimed at enhancing plant maintenance, whichwould be sustained by the improvements in the financial position of RENEL. The program forimproved environmental management will contribute to sustaining the environmental benefits of theproject. All these measures are to be complemented by active Bank supervision of the projectimplementation. With these measures, the benefits of the Project would be achieved and sustained.In the long run, sustaining the institutional and policy achievements will be contingent upon thegovermment's continued commitment to a market economy.
1. Risks
5.21 The main risk associated with the proposed Project relates to the implementation of the sectorreform and restructuring program. To address this, some important upfront actions have been taken.The actions include: (a) the appointment by the GoR of a high level Inter-Ministerial Committee tooversee the Study of Options of Long-term Power Sector Structure and the initiation of the Study; (b)the issuance of the Statement of Power Sector Policy by the Govermnent stating the government'smedium to long-term reform policy objectives for the power sector, and the Strategy Document thatoutlines how the policy framework will be implemented. A review would be conducted each year toassess progress in achieving the development objectives of the project and to consider need for furtherpolicy actions or project restructuring (para 2.37 (d)).
5.22 A second concern is possible financial risk due to the inability of RENEL to mobilize thecounterpart funds adequately and timely. This risk is mitigated by rate increases alreadyimplemented, and the measures to be implemented under the Project to improve billing and collection,and reduction of arrears. Close monitoring of performance is planned. A third concern relates to theavailability of cofinancing. However, progress in this regard has been satisfactory and both EBRDand EIB are at an advanced stage of project preparation. Even if confinancing is not fully secured,such as if JEXIM confinancing does not materialize, the restructured project would still beeconomically and technically viable, as shown by the sensitivity analysis (para. 5.18).
5.23 Another concern is project implementation risk pertaining to the capacity of RENEL toimplement a complex and demanding project. This is being addressed through a well staffed ProjectImplementation Department that has already been set-up (para 6.3(h)), and by using the turnkeycontract modality to procure the rehabilitation of each of the power plants, which will reduce the needfor detailed involvement of RENEL in the works. In addition, the process of selecting a reputableengineering consultant (the Engineer) by RENEL for the engineering and project management servicesis nearly completed. Hence, the risk has been mitigated as much as possible.
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VI. AGREEMENTS REACHED AND RECOMMENDATIONS
6.1 During negotiations agreements were reached with the GoR (the Guarantor), and RENEL (theBorrower) on the conditionalities of the Guarantee and Loan Agreements. These are listed below.
Agreements reached with GoR
6.2 The GoR agreed to:
(a) carry out or cause to be carried out the proposed Project with due diligence andefficiency and in conformity with appropriate practices, and shall provide promptly asneeded, the funds, facilities, services and other resources required for the purpose.In this regard, GoR has agreed to secure all the financing for the project by December31, 1995, or such later date as the Bank may agree (para 3.20).
(b) (i) appoint consultants, whose qualifications and terms of reference shall besatisfactory to the Bank, to carry out a study of options of long-term structure for thepower sector, and ensure its completion by September 30, 1996, or such later date asthe Bank may agree; (ii) no later than three months after the conclusion of theassessment of the options of the long-term sector structure (Phase I of the study), orsuch later date as the Bank may agree, inform the Bank of its decision on the selectedlong-term structure for the power sector in Romania; (iii) complete a draft electricitylaw for submission to the Romania Parliament no later than December 31, 1996; (iv)no later than three months after the submission to the Government of the consultants'final report on the study, provide to the Bank an action program, satisfactory to theBank, for the implementation of the long-term sector structure; and (v) implement saidaction program (para 2.37 (c));
(c) take all necessary measures to ensure that its departments, agencies and enterprises, aswell as local authorities, settle RENEL electricity and thermal energy bills within nomore than 60 days from the date of such bills (para 4.17);
(d) review annually with the Bank, no later than October 31 of each year, the progress inthe implementation of the Power Sector Strategy and policy framework, and shall takecorrective and other policy measures to ensure the achievement of the strategicobjectives set in said Power Sector Strategy (para 2.37 (d) and 4.18);
(e) (i) promptly after the commissioning of the first unit of the Cernavoda nuclear powerstation , inform the Bank of the commissioning of the said unit; (ii) over a period of18 months after the commissioning of said unit, take all necessary measures,agreeable to the Bank , to separate all nuclear power activities from the poweractivities of RENEL; and (iii) no later than 20 months after the commissioning ofsaid unit, establish an independent public entity to carry out such power activities(para 2.37 (a));
(f) will progressively reduce the level of subsidization of electricity price paid byhouseholds over a period of four years from the date of this Agreement, so as toensure that by December 31, 1999, all such subsidies shall have been eliminated (para2.21);
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(g) maintain consumer electricity prices corresponding on average, to not less than theequivalent of US$50 (including VAT) per megawatt-hour through periodic adjustmentsto the consumer electricity prices in accordance with a timetable acceptable to theBank; and also to adjust pursuant to guidelines acceptable to the Bank the consumerelectricity prices if changes to the level prevailing on the date immediately precedingthe adjustment of consumer electricity prices shall have occurred in the internationalmarket prices of the main fuels (coal, natural gas, and fuel oil) used by RENEL forpower generation (para 2.22);
(h) (i) by September 30,1995, or such later date as the Bank may agree, appointconsultants, whose qualifications and terms of reference shall be satisfactory to theBank, to carry out an electricity and thermal energy pricing study; (ii) promptly uponits completion, discuss with the Bank the findings and recommendations of said studyand (iii) according to a timetable acceptable to the Bank, provide a satisfactoryprogram for the implementation of the actions agreed as a result of the study and thediscussions with the Bank (para 2.23); and
(i) (i) by September 30, 1995, or such later date as the Bank may agree, appointconsultants, whose qualifications and terms of reference shall be satisfactory to theBank, to carry out a long-term least-cost power generation development study; and (ii)promptly upon its completion, discuss with the Bank the findings and therecommendations of said study (para 2.37 (b)).
Agreements reached with RENEL
6.3 During negotiations, RENEL agreed to.
(a) open and maintain a Special Account with the National Bank of Romania or anotheracceptable commercial Bank in Romania on terms and conditions satisfactory to theBank and, appoint auditors whose qualifications and terms of reference are acceptableto the Bank to audit its annual accounts and the records and accounts of the SpecialAccount, and furnish to the Bank within six months after the end of the year a copyof the audit report on the annual accounts, and of the audit report on the SpecialAccount (paras 3.15 and 4.4);
(b) produce for each of its fiscal years, after its fiscal year 1994, funds from internalsources equivalent to no less than 30% of the annual average of the Borrower's capitalexpenditures incurred, or expected to be incurred, for that year, the previous fiscalyear and the next following year (para 4.22);
(c) take such measures as may be necessary to ensure that the estimated net revenues shallbe at least 1.5 times (in 1995 and each succeeding fiscal year) its estimated maximumdebt service requirements for any such fiscal year (para 4.22);
(d) ensure that (i) receivables on its electricity and thermal energy sales to private sector,including households, will not exceed the average of two months' sales to suchcustomers; and (ii) payables to its suppliers will be made according to the respectivesupplier contract (para 4.17);
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(e) furnish to the Bank (i) by October 31 of each year beginning with 1995, for theBank's review the draft of a rolling five-year corporate plan setting forth for eachyear, the agreed medium term investment program and the sources of financing,financial targets with supporting financial forecasts showing compliance with theagreed financial performance criteria, and the progress in implementation of theCorporate Restructuring Program; (ii) by December 31 of each year beginning with1995, the final rolling five-year corporate plan, incorporating Bank comments on theprevious draft, and approved by the GoR (para 3.21);
(f) carry out the proposed Project with due diligence and efficiency and in conformitywith appropriate administrative, financial, engineering, environmental and publicutility practices, and promptly provide, as needed, the funds, facilities, and otherresources required for the purpose; and in accordance with the agreed ProjectImplementation Plan (para 3.20);
(g) RENEL shall take all necessary measures to ensure that the Project ImplementationDepartment will continue to be adequately staffed and funded in a manner satisfactoryto the Bank (para 3.20); and
(h) RENEL shall: (i) by September 30, 1995, or such later date as the Bank may agree,appoint consultants, whose qualifications and terms of reference shall be satisfactoryfactory to the Bank, to undertake the operations listed in paragraphs (i) to (iv) of theCorporate Restructuring Program, and have operations completed by December 31,1997, or such later date as the Bank may agree (para 4.4); (ii) by January 31, 1996,or such later date as the Bank may agree, appoint consultants whose qualificationsand terms of reference shall be satisfactory to the Bank, to undertake operations listedin paragraph (v) of the Corporate Restructuring Program (para 4.4); (iii) according toa timetable acceptable to the Bank, undertake the operation listed in paragraph (vi) ofthe Corporate Restructuring Program (para 2.19); and (iv) by December 1, 1995, orsuch later date as the Bank may agree, appoint consultants, whose qualifications andterms of reference shall be satisfactory to the Bank, to undertake the operations listedin paragraph (vii) of the Corporate Restructuring Program (para 4.4);
Condition of Loan Effectiveness
6.4 A condition of loan effectiveness is that RENEL shall have provided to the Bank satisfactoryevidence that it has concluded enforceable arrangements for debt repayment with each of its customerslisted in an Annex to the Power Sector Strategy (para 4.17).
Recommendation
6.5 Based upon the agreements reached, the proposed Project is suitable for a Bank loan ofUS$110 million equivalent to the Regia Autonoma de Electricitate (RENEL-Romanian ElectricityAuthority) for a twenty-year term, including a five year grace period at the Bank's standard variablerate of interest.
48 Annex 1.1Page 1 of 1
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
PROVEN RESERVES OF COMMERCIAL ENERGY
PR~~MA1IY SOURCES I 00 PHYSICAL UNITSt0 TONS OF t0 0 *OIL EQ IVALE T
a) Natural Gas
-proven -517 billion cubic meters 443
-probable -200 billion cubic meters (24-71)
Ib) Crude Oil
-proven -200 million tons 200
-probable -100 million tons 100
c) Lignite -billion tons 600
Id) Hard Coal -500 million tons 330
e) Hydropower potential
49 Annex 1.2Page 1 of 1
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
ENERGY PRICES MOVEMENTS AND COMPARISON WTH IMPORT PARITY PRICES
: : Nov. - Nov May May Aug Nov -June::::I9 - 09 I 2 1993 1994 i M
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
THE CERNAVODA NUCLEAR POWER PROJECT
1. The Cernavoda nuclear power project was started in the mid-1970's by the Government ofRomania, with Canadian and Italian financial assistance of about US$400 million in suppliers creditsfor the initial phase of construction of a 5x700 MW power station. The technology is based onCANDU-6 nuclear reactor of Canadian design, using natural uranium as fuel and heavy water ascoolant and moderator, and a General Electric Turbogenerator. Engineering services and projectmanagement were to be provided by a Consortium (AAC) of Atomic Energy of Canada Limited(AECL), and Ansaldo-Impianti of Italy. Equipment and materials were to be mainly of foreignorigin.
2. Construction commenced on all 5 units in 1980, but attention was focused on Unit I after1985, by which time the civil works construction on all the units had reached various stages ofcompletion. Following the decision of the Govermnent to prepay its foreign debts, it was decided tocomplete the project using primarily local inputs. As such, all foreign contracts on the project wereterminated. From hence, construction proceeded slowly due to shortages in funding and lack ofexperience.
3. In 1990, the new Government, in the face of difficulties in continuing with projectconstruction, sought Canadian and Italian Governments' financial assistance in a loan of US$415million - US$315 million from Canada, and about US$100 million from Italy - mainly to financeengineering management services by AECL and Ansaldo-Implianti and for 18 months operational andmanagement services by the consortium after commissioning of the unit. At that time, construction ofUnit I was about 55-60% complete, Unit 2 about 31%, and the rest were at much lower levels ofcompletion. At that time, about US$1.2 billion was needed to complete Unit 1. Following initialreview to ensure that previous construction works met required engineering and safety standards,work has proceeded relatively smoothly on Unit 1 with temporary suspension of work on the otherunits. Orders for equipment that had been placed with local firms for Unit 2 proceeded. Accordingto RENEL, nearly 70% of the equipment for Unit 2 ordered before 1991 have been completed anddelivered to site. By September 1994, construction of Unit 1 had reached about 95% completion andwas expected to be commissioned by April 1995. At present, all works are expected to be completedwith the first delivery of power to the national power transmission grid in November 1995, andcommissioning is scheduled for March 1996, when commercial operation could start. RENEL is nowseeking joint ventures with foreign investors for build-operate-and-transfer (BOT) arrangements orother types of non-recourse financing, in which payment would be made to the foreign partners inelectricity supplies, to complete Unit 2.
4. The construction of Unit 1 has been accorded a national priority status, and initially, it wasthe intention of the Government to finance the entire development, including the debt serviceobligations, from the state budget. However, since 1992, the Government has not been able to meetthe obligations in view of the budgetary constraints. As such, RENEL and other state agencies havebeen called upon by the Government to fill in the local financing gap. Factories commissioned toprovide equipment and materials for the project are granted preferential access to credits and foreignexchange.
54 Annex 2.3Page 2 of 2
5. The Atomic Energy Agency (IAEA) has conducted separate inspections of the construction ofUnit land has found the works satisfactory. Most of the recommendations of the IAEA have beenfully complied with. The rest are gradually being implemented. A post-commissioning inspection isexpected in 1996.
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
ELECTRICITY TARIFF STRUCTURE(Effective June 6, 1995)
Voltage Level Prices for the active electric power Prices for thereactive electricpower delivered
l_____________________________________ ._________________ ____________ to the consum ersA. Differentiated binomial rate B. Differentiated C. Simple binomial D. with a monthly
monomial rate rate Common medium powermonomial factor less thanrate 0.92
For demand For energylei/kW/year lei/kWh lei/kWh lei/kWh lei/kWh lei/kVarh v
Peak Off- Peak Off- Peak Off- For ForHours Peak Hours Peak Hours Peak subscribed Energy
3. High voltage 142560 61404 149.6 54.8 183.1 68.2 107.388 65.3 84.1 8.4
(110 kv andhigher) J
_ Po R
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
STRUCTURE OF HEAT PRICES(Effective June 6, 1995)
Thermal Energy on Consumers and resellers connected to the output of the Consumers and resellers connected at the transport networks*pressure levels cogeneration plant or thermal plant*
Rate for maximum thermal Rate for Energy Rate for maximum thermal Rate For Energydemand contracted per year power contracted per year
Lei/year lei/Gcal For 1 Gcal/h lei/year lei/Gcal
-industrial consumers x 22260 x 24860-domestic consumers x 10050 x 11230
2. steam, according tothe pressure: 18818844 28996 27094500 30603
3. Unreturned condensed and demineralized water 2890 lei/cubic m.4. Unreturned hot water and demineralized water 1350 lei/cubic m.* The development levy is included in the price of heat
X a
" N)
W1 >
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
A VERA GE ELECTRICITY AND THERMAL ENERGY PRICES(Effective June 6, 1995)
A. ELECTRICITY PRICES
CONSUMER CATEGORY Lei/KWh US Cents/KWh
Average Consumers 95.11 5.0
High Voltage 88.50 4.6
Medium Voltage 104.98 5.5
Low Voltage 126.51 6.7
Households 46.0 2.4
B. THERMAL ENERGY PRICES
U1
Lei/Gcal US$ Gcal
Steam (pressure up to 19 Atmopheres)for Industry 19.0
(i) Consumers connected at plant gate (Industry) 39,714 20.94
(ii) Consumers connected to transmission 44,480
network 23.4
Hot Water (Household) 13800 7.3
Footnote: 1. Exchange rate Lei 1900/US$
2. Prices to all consumers other than households includes 18% VAT.
0Q
1-h N)
Annex 2.558 Page 1 of 2
RONM AMA
POWER SECTOR REHABITATION AND MODERNTZATION PROJECT
ROMANIA - RENELDAILY LOAD CURVE - (SUMMER)
_ _ _ _ _ _L_ t X I I 1_ _ _1
7c,:7.2 _ _ [
5.4 _ _ _ __ _ _ _
o 0 c 12 16 20 2-
.TI.E (HOURS)
O SUMMER c-1) SUMMER c-2) 0 SULA.JER b-1) A SUU.JER b-2)
ROMANIA - RENELDAILY LOAD CURVE - (WINTER)
7
O 4 e 12 17 20 24
TIME (HOURS)
ROMANIA
POWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
ANNUAL LOAD DURATION CURVE10
7
VIN. 5a M00
3
2
1
1 2 3 4 5 6 7 8 9 10 1 1 12 MiLi
MonthsOQ~
Non RENEL Plants Cod'i Hydrocarbon r Hydro Imports
0
60
Annex 2.6Page 1 of 2
RomaniaPower Sector Rehabilitation and Modernization Project
* Rehabilitation and improvement for heating transmission systems.** Includes ash-handling and disposal systems, land reclamation, and other pollution abatement measures. Includes cost of environmental
measures under proposed Project (See Annex 3.2).ox
0l
63 Annex 2.8Page I of 6
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
STATEMENT OF POLICIES FOR THE POWER SECTOR
February 23, 1995
Mr. Michael WiehenDirectorEurope and Central Asia Department IThe World Bank1818 H St., N.W.Washington, D.C. 20433
Re: Statement of Policies for the Romanian Power Sector
Dear Mr. Wiehen,
The Government of Romania (GoR), through its Ministry of Industries (Mol) and theRomania Electricity Authority (RENEL) with the assistance of Bank staff, has completed preparationof the propose Power Sector Rehabilitation and Modernization Project (the proposed Project), forwhich we have request Bank assistance in its financing and implementation. This project isdesigned to support a comprehensive reform of the power sector to bring about efficiencyimprovements, and to provide for reliable electricity supply at least-cost, while addressingenvironmental concerns.
In support of the above request, I hereby outline the GoR's policies and objectives for theelectricity sector and the program of actions (Attachment A) the GoR is committed to take to achieveits objectives.
Power Sector Policy and Strategy
The main objectives of the GoR's policy are to meet electricity demand in the most economicmanner, to improve the efficiency of the sector, and to improve reliability of supply. The strategy toachieve these policy objectives calls for the:
* implementation of radical, comprehensive and stepped reforms to the sectororganization and its legal framework which will create conditions for effectivecompetition;
* adaptation of the sector institutions to a market-oriented economy through corporaterestructuring to ensure autonomy and accountability;
* adoption of least-cost development program which considers all feasible alternatives,including resources available to the country, including rehabilitation andmodernization of existing g facilities and demand side management;
* implementation of pricing policies that would ensure sector economic viability andprovide private sector participation;
64 Annex 2.8Page 2 of 6
* establishing conditions for Romania's greater participation in a larger regional powermarket in Europe; and
* taking of actions to minimize environmental impact and promote conservation.
Sector Reforms
The GoR is committed to fundamental, comprehensive and stepped reforms in the powersector. In 1990, in order to separate policy and strategy functions from entity operations andmanagement, the GoR created RENEL, as an autonomous public electric power utility. Additionally,a number of actions to restructure RENEL are to be continued as an integral part of the proposedProject. A further step to bring about the desired improvement in efficiency is to create conditionsfor the participation of independent operators, both public and private, in a competitive environment.This will require the implementation of fundamental reforms to the sector structure and regulatoryframework.
TO develop a sound basis for carrying out the reforms, the GoR has decided to engage theservices of International Consultants to undertake a "Study of Options for the Long-Term Structure ofthe Power Sector" (the Study). The Study will evaluate, starting from the existing strategy for theenergy sector, alternative forms of sector structure presenting advantages and opportunity of theproposed alternatives, and their associated legal and regulatory aspects. The GoR has established aHigh Level Interministerial Committee to oversee the Study on its behalf. The GoR will reviewprogress periodically, as well as discuss the results of the Study with the Bank following itscompletion. The GoR will analyze the final report, and will decide on the solution for restructuringthe sector. The solution will be implemented in agreement with a stepped action plan,, which will beestablished in consultation with the Bank. The GoR has agreed the terms of reference for the Studywith the Bank, and secure funding from the United States Agency for International Development(USAID).
Electricity Law
To provide the legal basis of the reform, and to create the enabling conditions for theparticipation of publicly-owned and private independent operators in a competitive environment, theGoR is preparing an Electricity Law (the Law). In the process of preparing the Law, the GoR isensuring that its policy objectives are duly reflected in the draft, and the rules of the Study can beproperly implemented.
To this end, the Law will:
* define the roles of the Government as policy maker, as the owner of the publicutilities, and as regulator;
* assure the introduction of competition in the generation sector for increasing efficiencyand will permit the participation of both public and private producers;
* define the segments of the industry that would be subject to the law, and defineprinciples of granting concessions and setting electricity prices;
* provide for the establishment of an independent regulatory body.
Annex 2.865 Page 3 of 6
Since the preparation of the law will be furnished after the final decision regarding thestructure adopted by the Government in legal terminology and will permit a wide rage of schemes forthe participation of the private sector. Following approval of the Law by our Parliament, the GoRintends to seek Bank assistance to help develop detailed regulations for the power sector and toestablish the Regulatory Body.
Corporate Restructuring of RENEL
Based on its own strategy for the energy sector, the GoR endorsed the program of corporaterestructuring proposed by RENEL into a modern, commercially viable public utility. As a first step,to focus RENEL's activities on the primary activities of electricity and heat production and supply,part of the non-core activities of its engineering and technical institutes and of construction, repairsand manufacturing subsidiaries will be separated into independent commercial companies. Inaddition, all nuclear power activities will also be separated into an independent public entity. ThisGovernment Decision and the logistical and legal actions to effect separation will be formally issuedby the Government in accordance with the timetable agreed with the Bank. In the medium term, theprogram will include the improvement of RENEL's management, mainly the accounting and financialsystems, and will be implemented with the assistance of foreign consultants. In the transition periodto corporation, management contracts have been introduced as a means of improving performance,profit and responsibility within the RENEL.
Pricing
In order to promote the efficiency of the sector, as well as to provide incentives for privatesector participation, the policy of GoR is to set electricity prices to all consumers to reflect theeconomic costs of supply. However, for social reasons the Government wishes to protect low incomehouseholds from large price increases, and pricing policies would be designed with this considerationin mind. To establish the basis for future pricing setting, the GoR has decided to undertake anElectricity and Heat Pricing Study with the assistance of consultants. In the interim period, priceswill be set in accordance with the agreement with the Bank under the Structural Adjustment Loan(SAL) to maintain their levels in real terms at an average of US$50/MWh, including VAT.
Inter-enterprise arrears
The Gor has taken measures that will lead to the graDual reduction of inter-enterprise arrearsand to the prevention of any re-emergence of them. RENEL has prepared a Financial Recovery Planthat includes the necessary measures to achieve this objective. The GoR will strictly enforcecompliance with those measures. Under the FRP, RENEL will reduce operating costs and minimizearrears from its customers.
Sector Investments and Development Plans
The GoR has established that rehabilitation of the existing power supply facilities provides themost cost effective means of restoring capacity and improving and simultaneously reducing the powerplants' impact on the environment. The GoR, therefore, gives a high priority to the economicrehabilitation, and has prepared a medium-term (1994-2000) rehabilitation and modernizationprogram with a total cost of US$2.1 billion. The first phase of this program, which will alsoinclude retirement of old and inefficient units, is to be implemented under the proposed Project withfinancial assistance from the Bank and the other multilateral agencies. Meanwhile, the GoR will
66 Annex 2.8Page 4 of 6
undertake a Least-Cost Power System Development Study, with the assistance of consultants, toestablish the basis for the long-term development of the sector t meet future demand in the mosteconomic manner. The study will examine the economic merits of all feasible alternatives, includingfurther rehabilitation of existing plants, completion of the suspended thermal and hydropowerprojects, and also units 2-5 of the Cernavoda Nuclear Power Plant, and new feasible alternative plantcandidates
The GoR will discuss the results of the study with the Bank, and will adopt the optimalinvestment program as a basis of the future development of the sector.
Under the proposed Project the GoR together with the Bank will carry out annual review onongoing an planned investments in the sector, including the sources of financing.
Energy Conservation
Because of our past industrialization strategy, which was based on the development of energy-intensive industries, and the lack of incentives to use energy efficiently, our intensity of energyintensity is one of the highest in Europe. The GoR recognizes the high economic and environmentaldividends to the country of reducing energy intensity. Our strategy to reduce energy intensity focusesboth on the supply and demand sides. On the supply side, the rehabilitation and modernizationprogram for existing facilities will lead to substantial reduction of losses. On the demand side, webelieve that correct pricing policies, and the on-going macroeconomic reform measures, will play animportant role in conserving energy. Additionally, our pursuit of industrial restructuring andprivatization will lead to significant energy savings.
In addition, it is the intention of GoR to promote aggressive public awareness of the benefitsof conservation, for which the Romanian Agency for Energy Conservation was established, in 1991.
Environment Protection
The GoR strongly believes that sustainable development requires environmental protection.The Government has developed an environmental strategy with the assistance of the World Bank, andother international agencies. The Government intends to implement the measures stated in strategydocument in the most economic manner, in order to minimize the environmental impact of theproduction and use of electricity. The ecological aspect of the proposed Project is in conformity withthis strategy.
Conclusion
The GoR is confident that the program outlined above will have a very positive impact on thecountry's macroeconomic prospects. The Government is convinced that the implementation of theProject is absolutely necessary for future efficient operation and development of electricity sector andundertake the support of the World Bank for the program, through this and future projects, and looksforward to a continued cooperative and successful dialogue which will assist in placing Romania on apath to stable and sustained economic growth.
Your sincerely,
Mircea CoseaMinister of State
Chairman of the Council for Coordination,Strategy and Economic Reform
1. SECTOR REFORMS To provide the necessary elements for a. TOR agreed with the Bank in April, 1995. Continue implementation oftaking decisions to support fundamental reform.
(a) Study of options for the reform of the sector aimed for b. A High-Level Interministerial Commnittee to oversee the Studylong-term power sector introducing competition and the on behalf of the GoR; established a local Interministerialstructure. participation of Counterpart Working Group.
independent operations.c. Concluded arrangements for funding with USAID in March1995.
d. Initiate study in July 1995.
e. Decide future sector structure, and initiate actions ondevelopment of regulatory framework by January 1997 establish,including creation of the regulatory agency.
f. Complete study by September 1996, and initiate discussion ofresults with World Bank, USAID by November 1996.
(b) Electricity Law To define the legal framework for Submit Draft Law satisfactory to the Bank to the Romania Passage of Law byoperation, management and Parliament by Parliament and its adoption.development of the power sector, the December 31, 1996.role of the Government and of theeconomic agents involved, to establishthe mechanism of price setting andconcessions, to createconditions for the participation of bothpublic and private and privateindependent producers, to provide theestablishing of an independentregulatory body in order to increase theefficiency.
DEVELOPMENT b. Appoint consultants by September 1995. program by end-1996. co
STUDYc. Complete Study by September 1996.
d. In interim, conduct annual reviews on October 31 of eachyear of medium-term investments with the Bank.
a.
x0
Annex 3.169 Page 1 of 9
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
DETAILED DESCRIPTION OF REHABILITATION CANDIDATES
Braila
1. The power station is located on a 21 hectare site within the Chiscani agriculture area, approximately 13km south of the town of Braila. Considerations in the siting of the station were the proximity of the RiverDanube for supplies of cooling water, access to the rail network for delivery of fuel oil and easy access to thegas supply system.
2. Commissioning of Units 1 and 2, each of 210 MW capacity, took place during 1973. Unit 3 also of210 MW capacity was commissioned in 1974 and the final phase to date, Unit 4, of 330 MW capacity, wascommissioned in 1979. The total station capacity is therefore 960 MW. There is space to extend the generatingcapacity further by adding on to the turbine room and boiler house adjacent to Unit 4 and there exists a spareflue gas duct entry point to further utilize No. 2 chimney.
3. Unit 1 consists of two Ramzin type once through boilers each with an output of 325 tons per hour at540°C, 137 bar supplying steam to a three cylinder reheat turbine. The boilers are designed for firing oil andgas. The turbine systems include eight stages of feedwater heating and three off-takes for district heating. Therated output of the turbine generators is 210 MW without any extraction for district heating. Cooling water andraw water for the water treatment plant is taken from the River Danube and no cooling towers are installed.Power is generated at 15.75 kV and 50 Hz and supplied to the switchyard at 220 kV via the generatortransformer. The generator cooling system utilizes hydrogen and water.
4. The first three units were of Russian design; two half-duty boilers are provided for eachturbine-generator. Unit 4 is of Romanian manufacture based on a Deutsche Babcock boiler design and a RateauSchneider turbine design. All the boilers are of once-through type, and are designed to burn both oil and gas.
5. Commissioning of Unit 1 was completed during 1973 and full design output was achieved during themanufacturer's performance tests. The boilers were not fired on oil in the first two years and since then theratio of gas/oil firing has been in the ratio of about 77/23 percent heat input for Unit 1.
6. In the period 1985-1992 (inclusive), the unit operated for an average of 80 percent of each year at anaverage capacity factor of 64 percent. The highest availability occurred in 1983 when the unit operated for 98percent of the year at an average capacity factor of 86 percent. The unit has operated for 134,467 hours untilbeing shut down for maintenance on 16 March 1993.
7. The majority of operational problems on units 1-3 have been on the boiler plant and most of theseboiler problems are associated with oil firing.
8. Unit 1 at Braila (and by extrapolation Units 2 and 3) are generally fit for continued service. Theyrequire new burner systems, increased surveillance and some replacement of high temperature piping and for oilfiring the fitting of sootblowers and improved steam air heaters. The turbine needs some repairs to each of thecylinders, and the generator needs a new exciter and some attention to the hydrogen sealing systems. Thecondensate system requires replacement of many valves and some improvements to the design and control of thefeed water heaters. The control systems should be totally replaced and a major upgrade of the chemical servicesis required.
Brazi
9. Brazi Power Station is located approximately 12 km south of the city of Ploiesti and forms part of anindustrial complex of oil refineries and chemical plant. A prime consideration of the siting of the power station
70 Annex 3.1
Page 2 of 9
was the availability of refinery crude and a natural gas supply from the adjacent oilfields. Water supply to thesite is provided from two sources. Boreholes supply 1/3 of station needs while the nearby river Prohovasupplies the remaining 2/3 of requirements. The industrial complex is situated on the main rail link betweenPloiesti and Bucharest.
10. The Brazi installation consists of two power stations. Brazi 1, the older site, consists of nineboiler/turbine units, the first of which was commissioned in 1961 (Unit 1) and the last (Unit 9) in 1972.
11. Units 1-4 at Brazi 1 are 50 MW back-pressure units supplying process steam to the local refinery andhot water (via steam/water heat exchangers) for district heating in Ploiesti. Units 5 and 6 are 100 MWgenerating units while Unit 7 is a further 50 MW back-pressure unit supplying process steam. Units 8 and 9are identical 200 MW generating units of a prototype design.
12. Brazi 2 Power Station consists of one 50 MW back-pressure turbine supplied by two boilers of 420 t/hcapacity. In addition, there are four boilers of 100 t/h capacity and three boilers of 105 t/h capacity supplyingsteam at 16 bar for the district heating scheme.
13. Two smaller boilers of 50 t/h supply process steam at 35 bar, and one auxiliary boiler of unknowncapacity is available for site services.
14. Brazi Unit No 9 comprises of a single boiler of 675 tfh capacity supplying steam to power a 200 MWturbine-generator set.
15. The boiler is of a La Mont design and includes an economizer, superheater, reheater and regenerativeair heater. Although designed to be fired on Romanian fuel, supply problems have led to the use of lowergrade imported fuel with a consequential deterioration in combustion parameters.
16. The steam turbine consists of single high pressure, intermediate pressure and low pressure cylinderswith the steam being exhausted to an underslung dual flow condenser. Bled steam is extracted from variouspoints for use in the unit's five low pressure heaters, deaerator and two high pressure heaters which raise thetemperature of the feedwater prior to feeding it into the boiler.
17. Electricity is generated at 15.75 kV/50 Hz and supplied to the switchyard via the generatortransformer. The generator cooling system uses hydrogen circulated within the stator casing.
18. Unit No. 9 at Brazi I power station has only operated for the equivalent of eight years in its 20 yearhistory. Since being commissioned in 1972, the unit has experienced a number of problems which haverestricted operational times to those listed below.
19. Although it has been reported that the majority of problems experienced on the plant have beenassociated with the boiler and fuel systems, aspects relating to unresolved design features, the use of unsuitablefuel oils and the unavailability of fuel oil have also contributed to the low service factor.
Deva
20. The power station is located on a 231 hectare site 7 km from the town of Deva in the South Eastempart of Transylvania. Considerations in the siting of the station were access to the rail network for delivery of
7 1 Annex 3.1Page 3 of 9
coal from the mining areas of the Valea Jiuliu basins and proximity to the Mures River for supplies of coolingwater.
21. Construction of the station commenced in 1964 with the commissioning of the first stage of four Unitsin the period 1969-1971. Unit 5 was commissioned in 1977 while the final development was the commnissioningof Unit 6 in 1980. The total design and supply of the first stage was from the USSR, while stages 2 and 3include equipment of Romanian manufacture.
22. The six units are each of 210 MW output and are arranged for independent operation with a combinedoutput of 1,260 MW. All Units are virtually identical and consist of two boilers each supplying steam to asingle 210 MW turbine generator.
23. The boilers are of the once-through type and include an economizer, superheater, reheater and tubularair heater and precipitators.
24. The boilers are designed for firing coal having a heating value of about 3500 kCal/kg (15.4 MJ/kg)with natural gas or fuel oil as a supplementary fuel for start up and flame stabilization.
25. Each turbine consists of one high pressure cylinder, one intermediate pressure cylinder and one doubleflow low pressure cylinder. Steam is exhausted to a split condenser with bled steam extracted to four lowpressure heaters, a deaerator and three high pressure heaters. Bled steam from the intermediate pressurecylinder also passes to heat exchangers that heat the circulating district heating water.
26. Condenser cooling water is provided from the river or from forced draught evaporative cooling. Make-up water is supplied from the river via a common water treatment plant and each Unit is fitted with acondensate polishing plant.
27. Power is generated at 15.75 kV, 50 Hz and supplied to the switchyard at 220 kV viagenerator transformers. The generator cooling system utilizes demineralized water for stator cooling andhydrogen for rotor cooling. The generator is directly driven from the turbine at 3000 rev/min. Power isexported to the grid at 110 kV and 220 kV.
28. Development of Mintia power station at Deva, in Transylvania commenced with the construction of thefirst four 210 MW brown coal fired units in the late 1960s. Design, manufacture and construction supervisionwas almost entirely by manufacturers from the former USSR, and in common with much Russian equipmentwas generally extremely robust. Although automatic control systems were included, the Russian technology isof a type that was outmoded by Western European standards even when new. Each Unit consists of twoonce-through Benson type boilers supplying steam to a single reheat turbine.
29. Unit 1 started operation in 1969 closely followed by Units 2-4. Subsequent development sawcommissioning of two further 210 MW Units (5 and 6) in 1977 and 1980 basically to the same design, but witha much higher Romanian content. The station therefore now consists of six similar units with a combinedcapacity of 1260 MW.
30. Unit 1 turbine has generally operated whenever available since commissioning and has run for 171, 000hours to date. The boilers have run for 164,000 and 161,000 hours to date having on occasions being shutdown for repairs or to reduce generation while the turbine remains on load.
31. Overall availability has averaged about 85 per cent with an average capacity factor of about 60 percent. The station claim the Unit is still able to generate 210 MW when required although average output whenoperating is considerably below this and full load was not observed during the inspection period.
32. Operating data have not shown discernible trends in the last few years. Major renovations occurred in1988 followed by continuous operation at low load in 1989. In 1990 and 1991, there were periods of standby
72 Annex 3.1Page 4 of 9
and plant outages. Performance in 1992 to the time of the outage was better than the immediately precedingyears. Over the life of the station the availability has remained high whereas there has been some decline incapacity factor. This would seem to indicate that the output of the Unit has in fact deteriorated.
33. Fuel supply quality has varied over the years, often due to non technical decisions. However, thestation now seem to be obtaining fuel of a quality suitable for the Units. Gas consumption has averaged about25 per cent of total fuel usage and is judged to be higher than necessary to sustain the coal flame.
34. The record of runmning hours indicates that most outages were planned. However, the durations andfrequency are erratic and indicate that regular schedules of planned maintenance have not necessarily beenadhered to. There are several maintenance activities such as the frequent replacement of pump impellers that,while not considered a problem by the power station staff, cause excessive maintenance activities. Many ofthese types of problem would be overcome by the use of good quality replacement parts or by eliminating thecause of the problem.
35. The site is well placed in regard to the rail system, river water supplies and the local load demands formetal ore mining and general industry. The long established mining industry and what was perceived to be ahigh level of education and generally well organized local infrastructure in the district should ensure a suitablesource of personnel for the plant. The general impression was of a keen and interested staff endeavoring tooperate as well as possible in difficult circumstances. However, the future will require enhanced personneltraining and a more reasoned financial approach to preventative maintenance and plant item replacement.
Bucharest South
36. The Bucharest South combined heat and power station is located on a 60 hectare site on the southeastside of the city of Bucharest, approximately 15 km from the city center. The station is located close to the railnetwork for delivery of fuel oil, and to the electrical power and district heating loads in the city of Bucharest.Construction of the station commenced in 1965, with the installation of two 50 MW combined heat and power(CHP) sets. The second phase of construction, in 1967 added two further CHP sets of 100 MW capacity. Thefinal phase of construction in 1978, increased the capacity of the station to a total of 550 MW, with theinstallation of two 125 MW CHP sets. Unit 3 and 4 are of similar design and layout.
37. Bucharest-Sud Unit 4 comprises a 420 tonne per hour boiler supplying steam to a common range and a100 MW turbo-generator.
38. The boilers are of the conventional steam drum type with double gas pass, and include an economizer,furnace, superheater, and rotary regenerative air heater.
39. The boilers are designed for the firing natural gas and fuel oil. The original design allowed for 100 percent capacity on gas. Full production on natural gas only has not been achieved since the time of theperformance tests, as there has not been sufficient gas available. This is a result of rapidly escalating gasdemnand, mainly for fertilizer production, without a corresponding development of the gas supply system.
40. The turbine consists of a single high pressure cylinder, a single intermediate pressure cylinder and asingle double flow. Low pressure cylinder. Steam is exhausted to a split condenser and bled steam is extractedto four low pressure heaters, a deaerator, three high pressure heaters and a district heating system. Condensercooling water is provided from evaporative cooling towers.
41. Make-up water is extracted from the industrial network of the district heating system which takes itssupply from the nearby Cernica Lake and the Arges river. Additionally, the facility exists to extract make upsupplies from the town drinking water system. The make up water requirement is supplied from a commonwater treatment plant comprising pre-treatment, coagulation, softening and demineralization facilities.
73 Annex 3.1Page 5 of 9
42. Power is generated at 10.5 kV and 50 Hz and supplied to the switchyard at 110 kV via the generatortransformer. The generator cooling system utilizes hydrogen and water.
43. Construction of Unit 4 commenced in 1965 with commissioning completed during 1967. Design of theboilers was by CKO and that of the turbine generator by Turbomotorii Zavod (TMZ), both of Russia. Fulldesign output was achieved during the manufacturers' performance tests and after some initial problems averageannual output of around 90 MW, or 90 per cent of design, was achieved in the late 1960s with the turbineoperating some 8085 and the boiler operating some 7966 hours per year. Since that time the average annualoutput has slowly declined, although the annual running hours have remained fairly constant. At present, neardesign output is occasionally achieved but is not usually sustained for more than about one hour.
44. The RENEL electrical system was operated between 47.5 Hz and 48.5 from 1983 to 1989, and this hashad an effect on the condition of some equipment.
45. The Unit first generated significant power in November, 1967. Full design output was achieved duringthe manufacturers performance tests, and following some initial problems an average annual output of 90percent was achieved in the late 1960s and early 1970s.
46. Since that time, the boiler has operated for around 81 percent of every year and the turbo-generator foraround 76 percent of every year at an in service average load of 61 MW. The boiler and turbo-generator haveaccumulated some 182,000 and 176,000 hours of operation, respectively to date.
47. Since the exhaustion of plant spares from the original suppliers, more reliance has, by necessity, had tobe placed on locally produced equipment of less than adequate quality. This has led to ever increasingmaintenance problems which often have a knock on effect, resulting in problems elsewhere on the plant.
48. Over the years, various parts of the plant have been modified or taken out of commnission. This hashad an effect on operational flexibility and plant efficiency to varying degrees. However, to reinstate the plantas new may not be necessary or cost effective. A review of the heat cycle and mass balance in relation to theanticipated operating regime and fuel quality is required before committing to major expenditure.
49. The quality of fuel oil supplied to the station varies from day to day, but is invariably worse thandesign, with a significantly higher sulphur content. The low quality of the fuel represent a major impediment tothe achievement of full power, while the high sulphur content results in increased levels of corrosion andenvironmental pollution.
50. The original design allowed for 100 percent firing of natural gas and fuel oil. However, fullproduction on gas in isolation is seldom achieved, as gas is no longer regularly available in sufficient quantities.
51. The turbine has operated for an average of 76 percent of the time in the twenty-four years of operation,and as it is believed that it has always been run when available this equates to the overall availability. Theoverall capacity factor for the unit has averaged 61 percent over the operating period.
52. The boiler has slightly higher operating hours at 81 percent over the twenty-four years of operation.Again, this is assumed to equate to the actual availability. The capacity factor for the boilers is not known.
53. Overall, the site is well placed in regard to the rail system, river water supplies and district heating andelectrical load center of Bucharest. The level of industry in the district, and the universities should ensure asuitable source of personnel for the plant, where the general feeling was one of a keen and interested staffendeavoring to operate the plant as efficiently as possible in difficult circumstances. If plant is enhanced,however, personnel training and a more disciplined approach to preventative maintenance will be required in thefuture.
74 Annex 3.1Page 6 of 9
54. The conclusion of the investigations and detailed discussions with the station staff is that Bucharest-SudUnit 4, (and by extrapolation Unit 3), could be subject to major plant failures in the next five years with thepotential to put future viability of the unit in question. However, a moderate level of rehabilitation work in thenext few years could allow for many years of continued operation.
55. From the technical evaluation, it is concluded that medium-term rehabilitation, giving 5-15 years oflife, would require almost as much investment as a full life extension of 15-25 years.
56. It is also important to note that several items of plant may require redesign or modification from theoriginal. This could necessitate the recalculation of the unit heat balance and the establishment of a substantiallevel of confidence in the quality and availability of the fuels to be utilized for future operation. In view of theage of the plant, a return to the as-built condition is not necessarily a practical or sensible solution.
57. The specification and procurement procedures for high quality materials, spares and replacementequipment needs to be established together with appropriate quality control and assurance. The currentphilosophy of repair needs to change from the frequent and repetitive on-site repair with inferior materials andfacilities to one of infrequent replacements with high quality reliable equipment. Personnel training needs to beincreased to reflect modern best work practices and operating methods.
Isalnita
58. The power station is located on a 52 hectare site within the Isalnita industrial complex, approximately10 km north west of the city of Craiova. The station is located close to the rail network for delivery of lignitefrom the mining areas of the Oltenia basin; to the River Jiu for supplies of cooling water; and to the electricalpower and district heating loads in the Craiova district.
59. Construction of the station commenced in 1964, with the installation of two 100 MW condensing setsand three 50 MW combined heat and power (CHP) sets. The second phase of construction, in 1967-1968,increased the capacity of the station to a total of 1030 MW, with the installation of two 315 MW condensingsets and an additional 50 MW CHP set.
60. Isalnita Unit 7 (and, similarly Unit 8) comprises two boilers each supplying steam to a single 315 MWturbine generator.
61. The boilers are of the Benson, or once-through, type and each includes an econornizer, superheater,reheater and rotary regenerative air heater.
62. The boilers are designed for firing lignite and/or natural gas. The design allowed for 100 per cent gasfiring but this has not been achieved since the time of the performance tests (1969), as there has not beensufficient gas available. This is a result of rapidly escalating gas demand mainly for fertilizer productionwithout a corresponding development of the gas supply system.
63. The turbine consists of a single high pressure stage, a single intermediate pressure stage and two lowpressure stages. Steam is exhausted to a split condenser and bled steam is extracted to three low pressureheaters, a deaerator and six high pressure heaters. Condenser cooling water is provided from the river andevaporative cooling towers.
64. Make-up water is supplied from the River Jiu via a common water treatment plant. Units 7 and 8 areeach fitted with a condensate polishing plant.
65. Power is generated at 24 kV and 50 Hz and supplied to the switchyard at 220 kV via the generatortransformer. The generator cooling system utilizes hydrogen and water.
75 Annex 3.1Page 7 of 9
66. Construction of Unit 7 commenced in 1967 with commissioning completed during 1969. Design of theboilers was by MAN of West Germany and that of the turbine generator by Rateu-Schneider of France. Fulldesign output was achieved during the manufacturers' perfornance tests and after some initial problems averageannual output of around 250 MW or 80 per cent of design was achieved in the early 1970s with the unitoperating some 8000 hours per year. Since that time the average annual output has slowly declined although theannual running hours have remained fairly constant. At present near design output is occasionally achieved, butis not usually sustained for more than about one hour.
67. Coal quality varies from day to day and is usually less than that on which the design was based. Thestation staff attribute this as the major impediment to achieving full power. Although the availability appearsgood there are numerous short duration shut downs of one half of the boiler pairs which considerably reducesoverall output.
68. The main plant, that is the boilers and turbine generator set, were designed and manufactured inWestern Germany and France respectively, the boilers being of the once-through design. The plant representsan advanced design with high steam conditions and having accumulated some 186,000 operating hours, thematerials in the areas designed to time dependent criteria, eg creep or fatigue, will have consumed a highproportion of their design lives. Thus, while it will be possible to maintain the unit in operation with normaloverhauls, and piecemeal replacements, as and when failures of different sections occur, if the plant is to have asustained extension to its operating life, fairly substantial replacements of essential components will benecessary.
69. The fuel used in the boiler plant is predominantly lignite with high moisture and ash contents which hasresulted in the milling and burner systems becoming dilapidated and requiring urgent attention leading torenewal, preferably with re-designed equipment. The abrasive character of the ash in the fuel has also resultedin severe erosion of furnace, superheater, reheater and economizer tubes and extensive renewal of these sectionsis recommended.
70. Similarly, the abrasive fuel has resulted in extensive wear in the airheaters and the induced draft fans,the erosion of the latter being accelerated because of the inadequate electrostatic precipitator plant. Renewal ofthe precipitators and of the draft plant is recommended for extended service and it is essential that earlyattention be given to the precipitators with a view to providing plant of adequate size and performnance.
71. In general, the turbine is in good condition but in accordance with the previous remarks, attention willhave to be given to the time dependent areas in order to give a substantial extension to the service life. Themain areas involved would be the high temperature bolts, steam chests, journal and thrust bearings but detailedexamination should also be made periodically of the rotors and cylinders, to ascertain the stage at which renewalmight be desirable to give extended life and better thermal performance.
72. The condenser and feed systems are in reasonable condition subject to their having complete routineoverhauls and replacement of some detailed sections such as the air extraction system, and the cooling waterscreening system should be re-instated in order to improve condenser performance.
73. Both the stator and the rotor require rewinding. The auxiliary electrical systems within the boiler andturbine house were found to be generally in poor repair and in need of major refurbishment, the protectionequipment is obsolete and in need of replacement and the standby generator requires a full overhaul.
74. The quality of coal delivered to site has resulted in the coal handling plant requiring extensiverefurbishment and in many cases some new equipment. Extensive belt renewal will be necessary, and we alsothink that the hydraulic couplings in the motor drives should be renewed with advantage to the operators.
75. The control systems are out of date, in very poor condition and the majority of the control loops are nolonger capable of automatic operation. With such an advanced design of main plant it is essential that urgentattention be given to the control system and indeed that the entire system requires replacement by equipment of
76 Annex 3.1Page 8 of 9
modem reliable design. The availability of a satisfactory control system would have very valuable influences onthe efficiency of operation of the plant and of the safety of the installation.
76. With advanced steam cycle conditions, it is essential that adequate water treatment plant and chemicaldosing facilities are available. The make up water and the cooling water for this site are both extracted fromthe River Jiul with high suspended solids. This together with the inadequate water treatment plant results inunsatisfactory operation and therefore we recommend that an extensive renewal and rehabilitation exercise beadopted for the water treatment plant and chemical services.
77. Apart from the boiler unit where there is a severe deterioration evident arising from the quality of thefuel with highly abrasive properties, and which will necessitate extensive replacement, and some re-design ofthe firing equipment, the remainder of the plant is basically in an operable condition. However, because of theextended number of hours of operation, it is evident that attention will be needed to all of the plant ifoperational reliability is to be sustained and a satisfactory life extension achieved; an example is therecommended rewinding of the generator stator and rotor.
78. Furthermore, in order to achieve reliability attention needs to be given on an urgent basis to some ofthe ancillary equipment, in particular the controls and water treatment plant.
Palas
79. Palas Power Station is located in the industrial area situated to the south of the city of Constanta. Fueloil is supplied by twin 219 mm OD x 2.5 km long pipelines from Oil Terminal SA who are located within thesame industrial area. °
80. Construction of the station commenced on 1 March 1966 with the installation of two50 MW combined heat and power sets. The second phase of the construction in 1974 to 1979 increased thecapacity of the station to a total of 250 MW (215 MW power) with the installation of a 115 MW/150 MWcombined heat and power set.
81. The Unit 3 boiler is a 115 MW/150 MW once through design with reheat by Mannesmann RohrbauAG of Dusseldorf, West Germany and built under license by Vulcan, Bucharest.
82. The boiler is designed to fire on fuel oil and rated at 525 tonne/hour of steam at 192 bar at atemperature of 5400C. It is a pressurized fumace design and does not have induced draught flue gas fans. Theturbine was the first of three of this particular design manufactured by IMGB Romania and is rated at 150 MWor 115 MW plus 165 GCal/hour thermal output for district heating. Unit 3 is a three cylinder tandemcompound machine with reheat, seven stages of feed heating and two bleed points for district heating supply.
83. Power is generated at 15.75 kV and 50 Hz supplied to the indoor substation at 124 kV via thegenerator transformer. The generator cooling system utilizes hydrogen and water.
84. Commissioning of Unit 3 took place in 1979 and we understand from the station that the boiler hasnever achieved its rated output of 525 tonne/hour of steam.
85. The unit has operated for a total of 29,927 hours which is only about 12 percent of its design life. Itwas last operated in May 1992 for 6 hours.
86. The machine has been subjected to some 200 starts and the total number of forced outages of the unit is182. Most of the outages have ben attributed to the boiler with approximately 80 to the turbine and associatedplant. However, the majority of the latter outages originate from boiler problems.
87. Shut-downs have been mainly attributed to high vibration levels on the turbine and boiler tube failuresmainly in the vaporizer (furnace) and superheater areas. From the first run-up, bearing vibration levels were
7 7 Annex 3.1Page 9 of 9
very high, particularly at the low pressure bearing pedestal No. 6. The vibration levels recorded were in therange 70 jtm pk/pk - 160 um pk/pk and although several strip-downs have taken place in the last ten years, nosignificant improvement has been achieved.
88. Unit No 3 has never operated satisfactorily and it has only run for approximately 12.5 percent of thedesign life.
89. The boiler requires significant rehabilitation work in order to provide an improved performance.
90. The turbine also requires rehabilitation in order to provide a critical speed well removed from therunning speed. This may entail provision of a complete new high pressure rotor.
91. Most of the balance of plant is in a satisfactory condition for continued service, as would be expectedafter only 29,000 hours operation. However, close attention should be given to the water treatment plant inorder to provide the high purity make-up water required for a once-through boiler.
Conversion to coal
92. The boiler plant of four units in two power stations (Iasi II and Suceava ) will be redesigned to allowfor coal firing instead of the present local lignite. This conversion will comprise, among other things,modifications/redesign of the coal mills, bunkers, thermal loads, burning system, evaporation sections, airflow,electrofilters, ash handling and the replacement of the control of the units. The summary description of thepower plants is given below.
ISl 11
93. Iasi II is a CHP plant located in a 49 hectare site within the city of Iasi in the north-east of Rormania. Itprovides electricity at 110 kV to national grid and hot water to the Iasi city district heating system.
94. The power station comprises of two boilers designed by ICPET ( Design Institute for Thermal Plant)to produce up to 420 tonne/hour of steam at 137 bar, 540 degrees C. The boilers were manufactured by Vulcan.The two turbines were manufactured by IMGB; both are rated at 50 MW. The generators are hydrogen cooled,75 MVA, .8 power factor allowing for 60 MW of output. The first boiler was commissioned in 1986 and hasoperated for 37700 hours; the second 1988 and 27600 hours respectively. They were designed to fire lignite of1550 kcal/kg (net) with fuel oil support. The fuel oil capability is 50% of the boiler load, but the plant normallyoperates with 10% oil and 90% lignite. Oil support is required all times. There are six beater type coal mills ineach boiler.
Suceava
95. The power station is located on a 45 hecatre site near the city of Suceava in the north of Romania. Theunits have similar design and same manufacturers as lasi II. The first unit was commissioned in 1987 and has34700 hours of operation; the second 1989 and 27100 respectively.
78Annex 3.2
Page 1 of 6
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
PROJECT COST ESTIMATES
Capital cost estimates were made by the Consultants who inspected the sample units to provide forextension of the life of the units by 50,000, 100,000 and 150,000 hours. The original estimates reflect early1993 price levels (updadated to January 1995), and they presuppose procurement by ICB with the contractorsimproving their competitive positions by making use of the low cost local industry and labor whenever qualitycan be assured.
The basic estimate comprise the capital expenditure on the dismantling and removal of equipment to bereplaced, on the renovation, where appropriate, of existing equipment and on the provision and installation ofreplacement equipment. The details of the repair and renewal work to be done, as identified by the Consultantsduring inspection work, are set out in the Consultant's report in the Project file.
The estimates of basic cost have been arrived at in a two-stage process. First, costs were estimated byreference to the Consultants' own database and by inquiry of Western manufacturers. It is noted, however, thatvirtually all the inspected plant was designed and manufactured in Romania or elsewhere in Eastern Europe.Costs in Eastern Europe in general and in Romania in particular, are lower than in Western Europe. TheConsultants have attempted to quantify the likely effect on prices of the above indicated local participation.Budget prices received from Romanian enterprises, and other information indicate a discount relative toWestern prices of up to 30 percent. From the Consultant inspection work in the power stations, however, itwas verified that quality control in the power engineering sector in Romania is, or was, poor. On the otherhand, based on brief visits made to Romanian factories, it is believe that they are capable of matching thestandards of their Western counterparts; but in doing so, the Consultant expect some diminution in the currentprice advantage. Therefore, it is reasonable to allow for a discount of 20 percent relative to Western prices forpower plant equipment, except for such equipment as controls and instrumentation, which should be specified tobe of Western origin.
For life extensions of 100,000 and 150,000 hours cost estimates include the installation of low NOxburners and, for lignite/coal burning plant, complete rehabilitation of the precipitator plant. For life extent of50,000 hours, the provision made depend on the efficiency of the existing burners and precipitators. There wasno allowance for the retrofitting of FGD equipment. Engineering, project management and site supervision wasestimated at about 6 percent of base cost.
Discussions with Romania equipment manufacturers and local quality assurance groups revealed that theforeign contents of locally manufactured equipment in order to meet international standards of quality, would behigh, as much as 40-50% of the original estimates of the local costs. The foreign exchange cost componenttakes account of the indirect foreign exchange cost due to the foreign inputs for local manufacture. As a result,the foreign exchange costs account for about 65 % of the total base cost for the various units to be rehabilitated.
Physical contingencies of 15 percent were used all through the rehabilitation works. This high value isdue to the uncertainty inherent to these type of estimation. For example, the Consultants did not have theopportunity to see all plant dismantled, or to carry out non-destructive tests (NDT) and other evaluations on allthe potentially critical high temperature or high stress areas. This high contingencies is intended to cover costsof additional work that might come to light by the time the specifications are being prepared or during the actualexecution of the work, in addition to covering the uncertainties in the basic cost estimates.
Price contingencies are calculated by applying the Index of Unit Value of Manufactured Exports (fromthe G-5 countries) to the base cost plus the physical contingencies in accordance with Bank methodology.
ROMANIAPower Sector Rehabilitation and Modernization Project
Project Cost Estimates (IJSS rnillions)
FY95 FY96 FY97 FY98 FY99 FYOO TOdCod Itemi Local Fordgn Tu local Foreign Total Loca Foreign Tdael Lo1 Foreign Totld Ial Foreign Toa Local Foreign Todl LAoal Foreign Tod
' Ned to Update Local inflalin figures for Romanim.
PLANT REHABILITATION
FY95 FY96 FY97 FY98 FYss FY00 TotalCod Item Local Foreign Total Locd Foreign Total Local Foreign Total Lo Foreign Total LoA Foreign Total Local Foreign Total Local Foreign Total
1. The objectives of the proposed project are to: (a) support the government's program to reformthe power sector in accordance with its overall economic policy objectives; (b) meet the demand forelectricity and thermal energy in an economical manner by rehabilitating thermal generation capacity;and (c) lay the foundation for the future development of the sector in an institutionally, economically,and environmentally sustainable manner.
Project Description
2. The proposed Project would comprise: (a) Power Sector Reform Program to: (i) carry outand implement a Study of Options of Long-Term Structure for the Power Sector; (ii) develop andimplement an appropriate legal and regulatory framework for the sector; (iii) establish a long-termleast-cost power sector investment program, and (iv) carry out and implement an electricity andthermal energy pricing study; (b) Thermal Plant Rehabilitation Program where equipment, servicesand technical assistance will be provided to RENEL to: (i) rehabilitate about 1,445 MW of its existingthermal generation capacity; (ii) convert about 200 MW of its existing lignite-based thermal capacityto coal use; and (iii) reduce pollution impact of thermal plants; and (c) Corporate RestructuringProgram where technical assistance will be provided to RENEL to: (i) streamline the utility to focuson electricity and generation plants and distribution subsidiaries; (ii) create cost/profit centers for thegeneration plants and distribution subsidiaries; (iii) design and implement management systems (foroperation and maintenance management, financial and cost accounting, human resources, materialsmanagement, corporate planning systems); (iv) improve metering, billing and collection system; (v)design transmission and distribution network rehabilitation programs; and (vi) retire old andinefficient thermal units; and vii) improve environmental management and occupational health andsafety.
Project Financing
3. The financing plan for the Project is summarized in the table below
4. Implementation responsibility for the Power Sector Reform Program will be with Mol whilethe Thermal Plant Rehabilitation Program and Corporate Restructuring Program will be theresponsibility of RENEL. RENEL has established a Project Implementation Department to carry outall rehabilitation and renovation works at its plants and transmission systems. The following actionshave also been taken to ensure successful project implementation:
(a) GoR has established an Intenninisterial Steering Committee to oversee the design andimplementation of the Power Sector Reform Program, for which the MoI's DirectorateGeneral for Electricity and Thermal Energy will serve as the secretariat,;
(b) RENEL will ensure that the Project Implementation Department in RENEL willcontinue to be adequately staffed and funded in a manner satisfactory to the Bank;
(c) RENEL has established a Corporate Restructuring Committee under the President tooversee the design and implementation of RENEL Corporate Restructuring Program;
(d) RENEL has prepared a program for improvements in environmental management inRENEL, including eventually, the establishment of a department devoted toenvironmental concerns, the definition of its main functions and of its relations withthe other departments. By December 1995, RENEL will appoint consultants, underterms of reference satisfactory to the Bank, to assist in implementing the systems,including training of RENEL staff, and assistance in implementing occupational healthand safety programs at headquarters and all thermal power generating facilities,including training of RENEL staff
5. The role of the Bank during project implementation is in section H of Chapter 3 of the SAR.A first measure of success of project implementation will be that all major contracts for therehabilitation of power plants are awarded by March 1997.
Implementation Plan
6. The time-bound detailed implementation plan for each project component, including technicalassistance and training is provided in the tables attached to this Annex showing the Schedule ofprocurement actions, including targets dates for each package under the project;
7. Detailed project cost estimated are provided in Annex 3.2, and forecast disbursement for eachitem financed under the project are provided on page 10;
8. Provisions for setting up project accounting and financial management are found in Chapter 4of the SAR. The establishment of the Special Accounts are in Chapter 3 of the SAR.
Project Monitoring and Bank Supervision
9. To enable monitoring GoR and RENEL will prepare quarterly progress reports on therespective components. In addition, RENEL will be asked to: a) prepare beginning with financialyear 1996, a rolling 5-year corporate plan each year; and b) recruit internationally reputable privateauditors to audit the utility's financial accounts and corporate performance. The form, content andtimetable for the submission of these reports to the Bank will be confirmed with Mol and RENELrespectively at negotiations.
86 Annex 3.3
Page 3 of 25
10. Implementation Plan-Main Schedule:
These are provided on pages 4-9.
Engineering Services
CONSULTANT CONTRACTING - SCHEDULE
LOI/TOR finalized * 09.30.94 (a)
LOI sent out * 11.14.94 (a)
Clarifications Conference 2 12.16.94 (a)
Visits to Sites 15 12.30.94 (a)
Submission of Offers * 02.20.95 (a)
Evaluation 95 06.16.95 (a)
Bank Review 30 08.15.95 (a)
Invitation to Negotiate * 08.17.95
Negotiations 11 08.28.95
Review of Draft Contract by the Bank 10 09.07.95
Contract Signature * 09.11.95
Mobilization of the Consultant 10 09.21.95
Start * 09.22.95
(a) - actual * - milestone
PREQUALIFICATION OF GENERAL CONTRACTORS - SCHEDULE
1. Study of Options of the Long-Term Power Sector Structure
Completion of Terms of Reference (TOR) November 30, 1994Appointment of Inter-Ministerial Committeeand Local Counterpart Team November 30, 1994
Issue of TOR & appointment of Consultant by USAID March 20, 1995Initiation of Study July 27, 1995Commence field work September 1995Completion of Phase ( Diagnostic Analysis) March 31, 1996Government Decision on Sector structure June 30, 1996Action Report August 30, 1996Final Report September 30, 1996
2. Long-Term Least Cost Power Generation Development Study
Completion of TOR August 31, 1995Issue Invitation for Proposals September 15, 1995Receipt of Proposals October 30, 1995Consultant Mobilization/ Start of Work November 29, 1995Completion of Phase I ( Data Book) January 20, 1996Submission of Draft Report April 30, 1996Final Report June 30, 1996
3. Electricity and Heat Pricing Study
Completion of TOR August 30, 1995Issue Invitation for Proposals September 15, 1995Receipt of Proposals October 30, 1995Evaluation of Proposals and Approval November 20, 1995Mobilization/Start of Work December 14, 1995Phase I ( Load Research) Report June 30, 1996Start Phase 11 (Determination of Cost of Supply) September 4, 1996Phase 11 Report December 20, 1996Start Phase III ( Tariff Design) February, 1997Phase III & Draft Final Report May 1997Final Report August 30, 1997
4. Power Transmission System Reinforcement and Expansion Feasibility Study
Completion of TOR August 30, 1994Issue Invitation for Proposals September 15, 1994Receipt of Proposals October 30, 1994Evaluation and Approval January 30, 1994Negotiations & Contract Award November 30, 1994Mobilization/ Start of Work March 10, 1995Draft Final Report September 1995Final Report November 15, 1995
5. Feasibility Study of Power Distribution System Rehabilitation, and Preparationof Distribution Master-Plan
9 5 Annex 3.3Page 12 of 25
Completion of TOR September 29, 1995Issue Invitation for Proposals October 30, 1995Receipt of Proposals December 30, 1995Evaluation and Approval March 30, 1996Negotiations & Contract Award February 15, 1996Mobilization/Start of Work March 30, 1996Phase I Report (Feasibility Study) September 30, 1996Phase II Completion ( Master-Plan) December 20, 1996Draft Final Report January 30, 1997Final Report April 15, 1997
6. Environmental Management
Completion of TOR March 30, 1995Issue of Invitation for Proposals September 30,1995Receipt of Proposals October 30, 1995Evaluation and Approval November 15, 1995Negotiations & Contract Award December 10, 1995Mobilization/Start of Work January 1, 1996Completion of Assignment July 30, 1996
7. Training in Occupational Health and Safety
Complete TOR March 30,1995Issue of Invitation for Proposals September 30, 1995Receipt of Proposals October 30, 1995Evaluation and Approval November 15, 1995Negotiations & Contract Award December 10, 1995Mobilization/Start of Work January 1, 1996Completion of Assignment July 30, 1996
8. Training for Power Plant Operators
Complete TOR June 30, 1995Issue Invitation for Proposals July 24, 1995Receipt of Proposals September 25, 1995Evaluation and Approval October 22, 1995Negotiations and Contract Award December 9, 1995Mobilization/Start of Work Jan 2, 1996Complete Phase 1 ( On-site training) June 20, 1996Complete Study Tours August 20, 1996
10. Assessment of Hydroplant Rehabilitation Completion of Unfinished Hydro & ThermalProjects
Complete TOR August 30, 1995Issue Invitation for Proposals September 30, 1995Receipt of Proposals November 15, 1995Evaluation of Proposals and Approval December 15, 1995Negotiations and Contract Award January 15, 1996Draft Report July 10, 1996Final Report September 10, 1996
TECHNICAL ASSISTANCE COMPONENT
ITEM OBJECTIVE DURATION STATUS ESTIMATED COST IMPLEMENTINGAND FINANCING AGENCYAGENCY.
Study of Options of To assist the Government of September 1 1995 - Study to be launched in July US$2.7 million Interministerial
Long-Term Power Romania in defining a September 1996. 1995. Committee of the
Sector Structure, structure of the power sector United States Agency Government,
including the legal and that will create conditions for for International assisted by the
regulatory aspects. the eventual participation of Development Local Counterpartindependent public and private (USAID). Team
operators in a competitiveenvironment.
Long-Term Least-Cost To provide economic basis of September 1995- TOR agreed at negotiations. US$600,000. Ministry ofPower Generation future investments in September 1996 Industries, and
Development Study. development of power EU-PHARE/OTHER RENEL.
generating capacity.
Electricity and Heat To provide basis of setting September 1995 - June TOR agreed at negotiations. US$600,000/OTHER Ministry ofPricing Study. prices for economic efficiency 1996 for the load research Finance, Ministry
and sector viability. and study of consumer USAID. of Industries, andcharacteristics; from RENEL.September 1996 - June1997 for the study anddevelopment of tariffstructure, and pricingsystem.
(D
o xIh
Corporate Restructuring To bring about efficiency Start of implementation Corporate Restructuring US$5 million, to be RENEL/
Program of RENEL improvements and commercial with assistance of foreign Program and Terms of financed under the PID/Corporate
orientation and accountability consultants by October Reference for Consultant Bank loan; and $1 Restructuring
of RENEL, through 1995, and complete already developed and rnillion by RENEL Committee.
organizational and mnanagerial implementation by June agreed upon. Selection of (Total US$6 million).
improvements, modernization 1998. Consultant by Septemberof accounting and financial 1995.systems, revaluation of assets,down -sizing operation byspinning off of non-coreactivities into independentcommercial companies,separation of nuclear poweractivities into an independentpublic entity.
Auditing of 1995 To establish RENEL's To be completed in six Draft TOR pi-,pared and US$600,000. To be Project
Financial Statement financial position on the basis months, starting June agreed with tie Bank. financed under the Implementation
of internationally accepted 1996. Bank loan for the Department (PID),
accounting practices, and to Technical Assistance and RENEL
train RENEL staff in the and the Critical Accountingpreparation of financial Imports Loan; Department.
statements in accordance with (TACI);
international accountingpractices.
Power Transmission To establish economic basis of To be completed in 9 Evaluation of consultants US$500,000, financed PID.
system reinforcement rehabilitation improvements in months, starting March, proposals completed in late by EU-PHARE.
and expansion the power transmission 1995. October 1994, Contractfeasibility study network. award expected by January
1994.
Feasibility study of To establish technical and To be completed in one TOR for Consultants US$2 million, to be PID.
power distribution economic basis of rehabilitation year starting March 1996. prepared and agreed with the financed by EU-
system rehabilitation, and improvements in the power Bank. PHARE in two
and preparation of a distribution network stages. First stage to
Master-Plan for power cost $US 1I.1 million
distribution system. for feasibility study.(Do w
Envirornmental To strengthen capability in To be completed in six TORs prepared and agreed US$250,000 to be PID.
Management RENEL for Environmental months, starting with the Bank. financed by EU-
Impact Assessment studies, air November 1995. PHARE.pollution modelling, datacollection analysis, formulationof R&D programs, capacitybuilding and organizationalimprovements for effectiveenvironmental management
Occupational Health and To reduce occupational health Indefinite in Romania. TORF prepared and agreed US$500,000 to cover PID.
Safety Training and safety risks in RENEL's Services of external with bank. services ofoperations through training. Occupational health and advisor/trainer, and
safety advisor/trainer will study tour by RENELbe for 5 months. staff. To be funded
by EU-PHARE.
Fuel Sourcing and To provide RENEL with the Six months duration, Draft TOR prepared and US$300,000 to be PID.
Supply Study, including basis for developing a starting July 1995. agreed with the Bank. funded by EU-assessment of storage comprehensive strategy on fuel PHARE. c
infrastructure, and procurement and supplyalternative means offuel transportation
Assessment of To establish their economic Nine months from TOR agreed at negotiations. US$500,000. EU- PID
Hydroplant merit in sector development January 1996 to PHARE.
Rehabilitation & program. September 1996.Completion ofUnfinished Hydro andThermal Plants.
Training for Plant To enhance operation and About seven months (4 TOR completed. US$500,000. EU- PID
Operators maintenance of power plants. on-site in Romania, 3 for PHAREstudy tours).
Footnote:
(D
ono x
99 Annex 3.3Page 16 of 25
LOAN DISBURSEMENT SCHEDULE
Bank Fiscal Year Cumulative Disbursementsand Disbursements
Semester Ending SJS M) $ M) (9% of Total)
FY 1996
December 31, 1995 2.0 2.0 2.0
June 30, 1996 18.0 20.0 18.0
FY 1997
December 31, 1996 22.0 42.0 38.0
June 30, 1997 18.0 60.0 54.0
FY 1998
December 31, 1997 17.0 77.0 70.0
June 30, 1998 13.0 90.0 82.0
FY 1999
December 31, 1998 13.0 103.0 94.0
June 30, 1999 5.0 108.0 98.0
FY 2000
December 3 1, 1999 2.0 110.0 100.0
ENVIRONMENT
11. A comprehensive Environmental Strategy Paper (ESP)' was prepared by the Bank and the Govemment,with the participation of other intemational bilateral and multilateral agencies in 1992, to define anenvironmental strategy for Romania that will (i) in the short term, reduce, in the most economic manner,current and likely severe impacts of environmental degradation on human health; and (b) build up a frameworkwhich will foster a long term economically sustainable environment. The environmental aspects of the proposedProject are designed to meet these objectives. An environmental analysis (EA) was prepared by foreignconsultants for the Government to assess the magnitude of potential environmental impacts of the proposedproject and to recommend measures to include in the Project to mitigate any serious pollution impact fromfuture operations.
12. Against the above background, the EA has analyzed the extent of the pollution impact due to therehabilitation and life extension, and actions on fuel switching, and unit retirement program. At some of theindividual power plants, the combined effects of higher availability, increased power output at will lead to slightincreases in emissions even at improved fuel use efficiencies, whereas at most others the incremental pollutionwill be less. The net effect is dramatic reductions in the emissions of all pollutants. Table I comparesemissions levels pre- and post-rehabilitation. The EA proposed mitigating measures that are to be implementedunder the proposed Project are identified below.
1/ Romania Environmental Strategy Paper - Report No. 10613-RO dated July 31, 1992.
100 Annex 3.3Page 17 of 25
Recommended Mitigation Measures and Monitoring
Mitigating Measures
13 The technical and economic solutions that will be implemented as part of the rehabilitation activitieswill lead to reduction of pollution. These encompass:
(a) introduction of low NOx bumers and improvements in combustion systems will lead toreductions of NOx emissions in addition to the elimination of the problem of severe corrosionand damage to steam boilers;
(b) improvements in fuel use efficiency through the rehabilitation of major unit components -boilers, turbines and generators- will lead to decreases in fuel consumption and pollutantemissions;
(c) conversion to use of imported (low sulfur) hard coal at 11 lignite fired units primarily foreconomic reasons will lead to reductions in all pollutants from these units.
(d) conversion to use of light fuel oil (about 1 % sulphur content) instead of heavy fuel oilcontaining sulphur of 3-4% and high content of corrosive impurities (notably vanadium), toimprove operational life and performance of boilers, and save on maintenance costs will leadto significant reductions in NOx and S02. Recognizing the cost savings and the environmentalbenefits, RENEL had agreed to switch to use of light, fuel oil presently used in its oil-firedboilers.
14. As a specific environmental improvement measure, rehabilitation and modemization of ESPsat Isalnita, Deva, and at the stations to be converted from lignite to hard coal to raise operational efficiencylevels to 98-99%, will reduce fly-ash and particulate emissions.
15. In addition, the above measures will lead to reductions in CO2 emissions, and Romania's contribution toglobal warming. Since Romania is net importer of transboundary S02 emissions, these actions will lead toRomania improving its transboundary pollution impact relative to the other countries. Estimates of AnnualPotential Pollutant Emission Reductions are provided in Table 1.
Table 1. Summary Estimates of Annual Potential Emission Reduction(thousand of tons)
No% CO2 SQ .. ... D..... .... t.
Initial Level 125067 38344075 777288 250097
Plant Retirement 16773 6932611 179040 37268
Fuel Switching 6988 405711 145695 6507
Boiler Rehabilitation 11769 3274241 39130 71403
Low NO, Bumer 35771 0 0 0
ESP Rehabilitation 0 0 0 36632
Total Reduction 5.......i 0 0 . 37325 : 10612563 . ..... .... - ......36 I
101Annex 3.3
Page 18 of 25
Environmental Category
16. In accordance with OD 4.01 (Environmental Assessment), this project has been assigned to Category B.Since the project seeks to improve environmental performance of thermal power generation operations at anumber of specific stations, this rating is deemed justified. Results presented in Table 1 support this view. Theenvironmental analysis discussed earlier was designed to establish how these improvements were to beaccomplished in the most cost-effective manner.
UNIT RET77REMENT AND MOTHBALLING (PRESERVAT70N) PROGRAM
1993 1994 1995 1996 1997 1998 - 199 2000Tucemi MB
(2 x 330)Rovinari MB
Unit 1, 2, 3 (2 x 200)
(1 x 330)Insalnita R R R R
(1 x 50) (1 x 50) (I x 100) (1 x 100)Doicesti R
(3 x 30)Ovidiu R R
(3 x 12)Paroseni R
(3 x 50)Oradea R R
(1 x 25) (1 x 25)Comanesti R
(2 x12)Fintinele R R R
(4 x 25) (I x 50)
R(1 x 100)
Brazi R R R R
(1 x 50) (1 x 50) (1 x 50) (1 x 50)Galati R R
(1 x 60) (1 x 100)Borzesti R
(3 x 25)Iasi R R
(1 x 25) (1 x 25)Arad R
(1 x 25)MB = Mothballed (out of operation and placed in preservation).
R = Retired (out of operation).
102 Annex 3.3
Page 19 of 25
TECHNICAL ASSISTANCE FOR TRAINING IN ENVIRONMENT MANAGEMENT
A. Institutional Strengthening
The following program of training and institutional strengthening for the Environment Department has beenagreed upon:
C lArea of training Number of staff Duration(weeks)/ Cost (000 US$).....-....... V enue E
Environment' Assessment 20 3/Romania 20.0
Monitoring Equipment Selection and Use (to be included in equipment purchase)
Air Pollution Modelling 4 2/Overseas 44.0
Pollution Control 8 3/Overseas 70.0Equipment Technology
Occupational Health and 300.0Safety Training 2/Overseas
Computers, software, literature, professional journals 41.0
GRAND TOTAL 550.0
B. I Environmental Monitoring
Monitoring equipment for air quality and water quality will consist of four vans. Two additional vansfor emission monitoring will be provided under the current EIB loan with RENEL. As part of theTA program in Environment Management, staff of RENEL will receive training in the preparation ofenvironmental monitoring plans in accordance with international practice. Subsequent to the training,RENEL will submit a satisfactory environmental monitoring plan to the Bank. A description ofequipment and associated costs are presented below.
103 Annex 3.3
Page 20 of 25
Ambient Air Quality Monitoring Mobile Vans
Item Quantity Cost (US$) Total (000 US$)
So, 2 12,500 24.00
NOx 2 15,000 30.00
CO 2 14,000 28.00
Ozone 2 14,000 28.00
TSP* 2 6,100 12.20
THC** 2 16,100 32.20
Met*** 2 15,000 30.00
Calibrator 2 16,100 32.20
Zero Air 2 5,520 11.04
Data System 2 8,500 17.00
Manifold 2 2,500 5.00
Cables 2 1,500 3.00
Miscellaneous 2 29,325 58.65
Consumables 2 9,775 19.55
Recorders 2 7,820 15.64
Truck 2 31,625 63.25
TOTAL 470.91Total suspended part
** Total Hydrocarbons*** Meteorology
104
Annex 3.3Page 21 of 25
Water Quality Monitoring Mobile Vans
Item Quantity Cost (US$) Total (000 $US)
Shelter 2 30,590 61.18
ICAP 2 85,000 170.00
Spectrophotometer 2 25,000 50.00
Organics GC* 2 100,000 200.00
**AA w/ Graphite 2 85,000 170.00
Furnaces 2 10,000 20.00
Distiller 2 21,900 43.80
Meters (pH, etc.) 2 12,500 25.00
Digestion Unit 2 22,500 45.00
Glassware 2 75,000 150.00
Data System 2 15,000 30.00
Hoods/Benches 2 29,400 58.80
Cold Storage 2 25,000 50.00
Lab Support Equipment 2 21,275 42.55
Miscellaneous 2 10,000 20.00
Truck 2 31,625 63.25
TOTAL 1,199.58
Training and Installation 368.70
Spare Parts 553.60
GRAND TOTAL 2592.80
* Gas chramatograph. ** Atomic Absorption.
B.2. Occupational Safety and Health
Item Quantity T Cost (000 US$)
Hydrogen Detector 20 12.50
Hydrogen Sulfide Detector 50 50.00
Methane Detector 50 50.00
Mobile van (dust, noise, asbestos etc.) 541.00
TOTAL 653.50
GRAND TOTAL 3246.30
105
Annex 3.3Page 22 of 25
PROJECT IMPLEMENTATION DEPARTMENT (PID)
The PID is managed by a Director under the Director General for Engineering and Research.The Director will be responsible for all matters related to the implementation of the project includingoverall project management, engineering, procurement, overseeing site construction, testing,commissioning and handing over to operations. The Director will be assisted at Headquarters inBucharest by four Divisional Deputy Directors.
- Deputy Director for Power Generation Engineering responsible, with the EngineeringConsultant, for the technical specifications of the project, for providing engineeringoverall supervision, inspect the works at factories and site, interpret drawings,establish test procedures, give opinion on claims by the contractors, care for theapplication of the environmental, health and safety regulations;
- Deputy Directors for Transmission and Distribution Engineering, the same as aboveregarding Transmission and Distribution;
- Deputy Director for Procurement and Contracts responsible for the supervision of allthe procurement activities putting together the complete bidding documents for eachpackage, advertisement of tenders, prequalification procedures, bid appraisal, awardrecommendations, contract discussions, contract monitoring and closing. TheProcurement and Contracts Deputy Director will be represented in all planningactivities of the Department proving inputs in this area of expertise. This Managerwill also monitor closely all the activities of the project that have a bearing on theprocurement and on the contracts' economy.
D Deputy Director for Budget and Finance will be responsible for the overall anddetailed planning activities of the Department together with the Engineering andProject Management Consultant. He will be responsible for the timely provision ofresources (staff and financial ) to the project, budget and cost control as well as themonitoring of the project activities.
The Head office staff will be assisted at the sites by Site Managers who, together with theConsultant, will supervise the Contractors. The Site team under the Site Manager may vary from siteto site but will always include a planning engineer in charge of closely monitor the project siteactivities. The team may include, as needed, mechanical and electrical engineers as well as supportfrom accountants and secretarial staff.
A Quality Assurance group will work directly under the Department Head so that itsrecommendations are necessarily considered in the development of project. For specific and difficultproblems the Department Head may convene "ad hoc" technical advisory groups to recommendsolutions. Organizational chart of the PID is attached.
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
ORGANIZATION CHARTPROPOSED PROJECT IMPLEMENTA TION DEPARTMENT
DEPIJTY DIRECTOR GENERAL i:t :|
7:::: :FOR::::: : :ii:
DEPARTMENT FOR RESEARC}I AND ENGINEERING
AD IIOC LOCAL DIRECTOR ENGINEERINGTECHNICAL ADVISORY _ _______:___|| CONSULTANTS
GROUP
7 ::QUALITY
ASSURANCE
: 0:0GROUF::7
I~~~~~~~~~
________________________________________ Manager for
Manager for Power Manager for Transmission Procurement Manager for
Generation Engineering I | Distribution Engineering I and Contracts Budget & Finances
Mechanical Engineering Electric Lines & Inside & Outside Planning
______________I_ Station Engineering Procurement
Construction & Installation I I A Programming & Monitoring
I ~~~Engineering IPower SystemsCntuto
I ~~~~~~~~~Engineering Monitoring
Electrical Engineering I s Budget & Control CostsElectrical Engineering l Technical Assistance
Automations & Adjustment Programs Renumerstion
Site Manager Contractor |D
o x
Site Manager Consultant Power Plant Operations |
& Maintenance Liason "
Site Manager RENEL & Functional Personnel
107
Annex 3.3Page 24 of 25
OUTLINE OF THE QUARTERLY PROGRESS REPORT
RENEL is required to submit Quarterly Progress Reports (QPR) the Bank on the implementation ofthe Project. The QPRs will be based on the consultants reports on the various project components.The QPRs will cover the following:
Thermal Plant Rehabilitation and Conversion
I1. Summary of Project Contracts and activities during the quarter.
2. Statement on planned and actual project physical implementation, including procurement,manufacturing, and construction at site. Explanation of deviations.
3. For each unit to be rehabilitated/boiler to be converted:
3.1 Contractor's progress to date:
DesignDismantlingOff-site manufacturing and refurbishmentOn-site refurbishmentRe-erectionCommissioning and performance testing.
3.2 Consultant's activities, progress on:
definition of scope of workpreparation of tender documentsprequalification of tendersreview of tenders receivedaward of contractreview of contractor's design, refurbishment proposalssite activities.
3.3 Key events - comparison of actual with planned progress.
3.4 Identification and discussion of areas of concern
3.5 Technical Matters
3.6 Variations to Contract:
Agreed to datesPossible future dates
3.7 Project Cost Report
Cost estimates, including comparison to last estimate.
108Annex 3.3
Page 25 of 25
Monthly disbursement by contract and by cofinancier.Outstanding amounts to be disbursed
Appendices Contractor's Report
. Photographs
. Cash Flow forecast
. Staffing -contractor and consultant
. register of documents
. programs
. inspection report and release notes.
Corporate Restructuring and Sector Reforms
1 . Summary of Decisions and Activities under RENEL's Restructuring Program.
2. Performance Indicators for RENEL administrative units, including financial indicators.
3. Reporting on Sector developments.
109 Annex 4.1POWER SECTOR REHABILITATION AND MODERNIZATION PROJECT Page 1 of 9
RENEL'S HISTORICAL AND PROJECTED CA SH FLOW(In US$ Million)
2. Electricity Sales Forecast: Derived from the Electricity Balances provided in AttachmentI to this Annex.
3. Thermal Energy Sales: To remain constant at the 1994 level, as it is a by-product ofelectricity generation and no new thermal energy or CHPplants are to be installed.
4. Electricity Revenue: Derived from the Electricity sales and the net electricity tariffsof US$42.37 MWh, kept constant through 2000.
5. Thermal Energy Tariffs: Derived from the thermal energy sales and thermal energytariffs of US$11.40/GCal on average, kept constant throughoutthe forecast period.
6. Other Operating Revenue: Includes income from contractual services provided byRENEL for auto-producers, rental income, etc. Expected toincrease by 10% from 1994.
7. Fuel Costs: Derived from (i) the consumption of fuel in each plant, takinginto account the efficiency improvements; and (ii) theprevailing prices of fuels in Romania, which are providedbelow:
Annex 4.1Page 3 of 9
Local Hard Coal 31,241 18.5
Average Transport Cost - Local 7,786 4.6
Imported Hard Coal 35,379 21.0
Average Transport Cost - Imported 11,364 6.7
Lignite (per ton) Local 19,857 11.8
Average Transport Cost - Local 4,988 3.0
Imported Lignite 36,644 21.7
Average Transport Cost - Imported 9,214 5.5
Fuel Oil (per ton)
Local Fuel Oil 130,198 77.1
Average Transport Cost - Local 0 0
Imported Fuel Oil 140,499 83.2
Average Transport Cost - Imported 0 0
Natural Gas (per 1000 cu.M)
Local Natural Gas 102,673 60.8
Average Transport Cost - Local 0 0
Imported Natural Gas 118,209 70.0
Average Transport Cost - Imported 0 0
The above fuel prices are expected to remain stable in US$ terms. Thedetails of fuel consumption by type of fuel and the resulting FuelCosts, are provided in Attachment 2 to this Annex.
8. Power Purchase Cost: No imports are envisaged during the forecast period, and RENEL willbuy electricity from the (to be separated) nuclear entity form 1996onwards. For the base case, a US cents 3/kWh power purchase cost isassumed.
9. Salaries and Wages: For 1995, salaries and wages would account for 0.75 US cents/kWhsold (i.e. 10% lower than 1994 to take into account a 10% reductionin personnel in 1994), and would remain at these levels in constantUS$ terms thereafter, which means a reduction in salaries and wagesequal to the annual international inflation. From 1996 on, the salariesand wages of nuclear personnel is excluded.
10. Operations & Maintenance: In 1994, 0 & M expenses amounted to 0.40 US cents/kWhand this level is expected to remain stable.
112
Annex 4.1Page 4 of 9
11. Other Operating Costs: Includes management overheads, travel, training andmiscellaneous operating expenses; expected to increase by 2%each year.
12. Debt Service: Service of existing debt projected on the basis of contractualterms and the debt service on future loans are on the basis ofprevailing terms which are provided in Attachment 3 to thisAnnex. From 1996 the debt service on Cermavoda loans isexcluded.
13. Income Taxes: RENEL is liable for taxes at 38% of taxable income, plus90% of net profits have to be paid to the Government.RENEL and Mol have avoided payment of these high levels oftaxes by artificially increasing the operating costs by a"Development Tax" through specific legislation. TheDevelopment Tax, which in effect is additional depreciation,was 8% of revenues in 1993 and was increased in 1994 to12%, to avoid taxes and to leave resources for investments.MoF tacitly approves the idea of a development levy, since thepresent Romanian income tax laws do not allow for aninvestment allowance. Therefore, it is assumed that RENELwill not be liable for income taxes throughout the forecastperiod.
Total 260.2 250.3 338.5 466.9 509.3 407.9 350.0 2322.9
117 Annex 4.1Page 9 of 9
RENEL's Financial Performance Criteria and Definition of Terms used
RENEL will be required to: (a) meet, each year beginning 1995, from its internal sources,at least 30% of its average annual capital expenditures (averaged over the previous, current and theimmediate next years), and (b) ensure that RENEL's DSCR is not less than 1.5. The definitions ofterms used are:
(a) capital expenditures include all investments related to RENEL's electricity and thermal energyoperations. Interest and other charges to construction shall be excluded.
(b) Local costs of its capital expenditures are the expenditures incurred by RENEL inlocal currency (Lei) for local materials, goods, services, environmental abatement,rehabilitation, new capacity development, etc.
(d) internal sources of funds means the difference between: the sum of net revenues ofRENEL and reductions in working capital other than cash; and the sum of debt-service and increases in working capital other than cash.
(e) Net revenues are the difference between: the sum of revenues from all sourcesrelated to operations and net non-operating income; and the sum of all expensesrelated to operations including administration, adequate maintenance, taxes andpayments in lieu of taxes, but excluding provision for depreciation, other non-cashoperating charges and interest and other charges on debt.
(f) Net non-operating income is the difference between: revenues from all sources otherthan those related to operation; and expenses; including taxes and payments in lieu oftaxes, incurred in the generation of revenues from all sources other than those relatedto operations.
(g) Total operating expenses include all expenses related to operations, includingadministration, adequate maintenance, taxes and payments in lieu of taxes, andprovision for depreciation, but excluding interest and charges on debt;
(h) Working capital other than cash means the difference between all current assetsexcluding cash and current liabilities.
(i) Current assets excluding cash means all assets other than cash which could in theordinary course of business be converted into cash within twelve months, includingaccounts receivable, marketable securities, inventories and prepaid expenses properlychargeable to operating expenses within the next fiscal year.
(j) Current liabilities means all liabilities which will become due and payable or couldunder circumstances than existing be called for payment within twelve months,including accounts payable, customer advances, debt-service requirements, taxes andpayments in lieu of taxes and dividends.
(k) Debt service requirements is the aggregate amount of repayments (including sinking-fund payments if any) of, and other charges on, long-term debt.
(I) Long-term debt is the indebtedness of RENEL, with the foreign portion appropriatelyrevalued, which has a maturity of more than one year.
118 Annex 5.1Page I of 14
ROMANIAPOWER SECTOR REHABILITATION AND MODERNIZATION PROJECT
ANALYSIS OF PROJECTJUSTIFICATION
Introduction
1. The analysis of economic justification is carried out in two stages. The first stage establishesthat the proposed Project is the least-cost means of meeting the demand for electricity and thermalenergy, and of restoring dependable base-load capacity in the power supply system, compared toother alternatives feasible options considered, including electricity imports. The second stageestablishes that the investment in rehabilitation of the selected thermal units is economically profitable,in that the rate of return is in excess of the long-term opportunity cost of capital to Romania.
2. Analysis of future demand for electricity and thermal energy is based on the assumption thatin view of the economic transformation that is still going on, which will reduce the energy intensity ofthe economy, demand will remain depressed below the 1990 levels until about year 2005. Theprojected demand has been used to evaluate the economic merits of the Project in terms of need andits timing.
Least- Cost Analysis
3. The results of the preliminary Least-cost Power Generation Expansion study carried out byconsultants for RENEL assigned priority to the rehabilitation of existing power generating facilities.To complement this finding, and to properly establish the merits of rehabilitation among thealternatives considered in the least cost analysis, the detailed technical inspection and feasibility studyof thermal units/plants rehabilitation (discussed in Chapter III) was undertaken by consultants forRENEL. The study was focused on thermal plants because of their critical importance in providingbased-load capacity, and the rapid deterioration in their operational performance.
4. The study concluded that the thermal plants are in a more degraded and unsafe operatingcondition than assumed in the least-cost study, and as such unless urgent rehabilitation is undertaken,a number of them would cease to be operational within the next five years, and the generating systemwould begin to experience serious deficiencies in base-load capacity as early as 1995. The futureelectricity demand profile indicates that for the foreseeable future, the system's priority need willcontinue to be base load capacity, as opposed to peaking capacity, because of the continuing relativelyhigh proportion of industrial demand.
5. The methodological approach of the feasibility study called for detailed inspection,includingnon-destructive testing (NDT) of materials, assessment of creep damage, remnant life analyses ofparts of unit components and auxiliary plant items. This was to determine the level of economicrehabilitation necessary to achieve life extension levels compatible with the current status of theplants/units. The inspections enabled the determination of costs and benefits associated with threelevels of rehabilitation as follows:
* level 1 - rehabilitation for 7 years life extension (50,000 hours of operating duty);
* level 2 - rehabilitation for 15 years life extension(100,000 hours of operating duty); and
119 Annex 5.1Page 2 of 14
* level 3 - rehabilitation for 25 years life extension(150,000 hours of operating duty).
6. The feasibility study was conducted on eleven representative thermal units selected on thebasis of type of technology, unit size, fuel type, age, and operating history. The criteria and selectionwas based on an initial field survey carried out by the Bank and consultants. The representative unitcandidates were:
Unit size Fuel type Operational In-serviceStation Name (MW) (Primary) Type Year
Isalnita 315 Lignite condensing 1967Rovinari 330 Lignite condensing 1979Braila 330 gas co-gen (CHP) 1979Braila 210 gas co-genBrazi 200 HFO condensing 1972Palas 50 gas co-genPalas 150 gas co-gen 1979Deva 210 hard coal condensing 1969Braila 210 HFO/gas co-gen 1973Palas 50 gas co-gen 1970Bucuresti Sud 100 HFO/gas co-gen 1967
7. In determining the appropriate level of rehabilitation for each representative unit candidate, alifetime cost analysis was first undertaken. The lifetime cost analysis was considered appropriatesince the preliminary least-cost analysis had already enabled comparison between the plants/units.The analysis follows a conventional approach, based on comparison of alternatives over a reasonablylong period, to bring the alternatives to a common basis in terms of power and energy capability forcomparison. The alternatives considered comprised: (a) no rehabilitation or replacement with analternative new plant; (b) rehabilitation to level 1; (c) rehabilitation to level 2; (d) rehabilitation tolevel 3, using the associated incremental capital, operating and maintenance costs.
8. The evaluation considered:
* a lifetime of 25 years. If the unit' without or with rehabilitation, is expected to havea shorter life, then a notional replacement plant is allowed for in the cost stream;
* capital costs include the cost of notional replacement plant at the expiry of the life ofthe existing plant. Any such new plant is assumed to have the same net output as theplant it replaces, and is costed accordingly;
* a capital credit is allowed in respect of the unexpired life of any plant at the end ofthe 25 year life;
* in some cases, rehabilitation is expected to lead to an increase in the sent outcapability of the unit, i.e a recovery of lost output. Some credit is due on thisaccount. This credit is calculated as a debit to the un-rehabilitated unit: a notionalcapital cost is debited to the relevant lifetime costs, the cost being proportional to theshortfall;
120 Annex 5.1Page 3 of 14
* if the un-rehabilitated unit is incapable of matching the energy output of therehabilitated unit (because it is de-rated) then the energy shortfall is calculated at theenergy cost of the unrehabilitated unit. The reasoning behind this approach is that, ina well run system, there should be no other unloaded unit of lower operating cost.Therefore, the shortfall must be made up by a unit of equal higher operating cost;
* fuel costs are calculated on an annual capacity factor of 60 percent, i.e on the basisthat the plant will be operating as base load plant;
* the cost of operation and maintenance is calculated according to normal planningprocedures, taking into account the type of plant and the fuel; and
* the total costs are present valued to a common date employing a range of discountrates and the lifetime cost of energy is deduced.
9. Capital Costs: The capital cost estimates comprise expenditure on dismantling and removalof equipment to be replaced, provision of equipment, materials, engineering services and on-sitesupervision and installation of replacement equipment. The estimates of cost of replacementequipment take into account that some manufacturing of equipment will be done in Romania, butallow for imports of necessary foreign inputs, application of Western standards of design, qualitycontrol of materials and workmanship for the construction as well. The cost estimates includephysical contingency of about 15% compared to 5-10% for new plants. For rehabilitation to levels 2and 3 life extension, the costs include installation of low NoX burners, and for the lignite/coal firedunits complete rehabilitation of electrostatic precipitators. No allowance is made for installation offlue gas desulphurization (FGD) equipment.
11. Annual Fixed Operation and Maintenance Cost: This is calculated as percent of total capitalcost of a new plant alternative of the relevant fuel type and capacity. The estimates used are: for gasfired unit (1.9%), and about 2% for oil and lignite/coal.
12. Fuel Costs: Local lignite and coal costs to RENEL comprise the marginal cost, ex-mineplus rail transport cost to the plant. Imported hard coal is priced at CIF Constanza plus localtransport cost. Fuel oil is priced at import parity plus local transport cost. To minimize the corrosiveeffects, and reduce operating costs, the oil fired units would switch to fuel oil of 1 % sulphur content.Natural gas is priced at import parity plus local transmission costs. Table 1 summarizes fuel pricesand fuel data.
121 Annex 5.1Page 4 of 14
Table 1- Fuel Prices and Fuel Data
Heavy Fuel Oil
Lignite Hard Coal 1% 3.5% s. l%s Gas
Price Ex-mine $/t 15.0 - - - -
Border Price $/t - 40 85 110 -
Border Price $/1000 Nm3 - - - - 90
Calorific Values
HHV kjlkg 8800 - - - -
HHV kJ/Nm3 - - - - 37150
LHV kj/kg 7300 24000 42600 42600 -
LHV kj/Nm3 - - - - 33500
Specific Price (LHV) USc/MJ 0.20 0.167 0.2 0.258 0.27
12. Unit Efficiency: Due to lack of metering, reported unit efficiency had been treated withcaution. Consultants estimates of efficiency to be expected after rehabilitation are in accordance withvalues to be expected from plant in good condition, properly operated, having regard to the type ofplant and expected mode of operation as a base load plant. The efficiency rates are based on annualaverages. For the co-generation units, the higher efficiency is allowed for by transferring the benefitas heat producers to their role as electricity producers.
13. Availability: As with efficiency, consultants estimates of the future availability of the unitswithout rehabilitation are based on statistical evidence. For post-rehabilitation, is based on intendeddegree of reliability, with adjustment for regular scheduled maintenance and forced outages of about 8weeks and 2 weeks respectively leaving 41 week (7,000 hours) availability, 80%, per year.
14. Remaining life: The list of items to be replaced, repaired and overhauled commensurate witheach level of rehabilitation was identified for each unit candidate. For the oil and gas fired unitsrehabilitation to level 3, is possible because most major components of the unit have been previouslyreplaced.
15. Annual capacity factor: This is based on the assumption that the units will be operated asbase-load units at an annual capacity factor of 80% - equivalent to annual operation over 7000 hoursat an average output of 75% of rated capacity.
16. Benefits: The potential quantifiable benefits of rehabilitation are:
* increased availability;
* increased efficiency;
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* longer life; and
* increased power output.
These are estimated for each level of rehabilitation.
17. Utilizing the above information, the following alternatives were evaluated on the basis of lifecycle costs to determine whether to proceed with rehabilitation or not:
* no rehabilitation;
* rehabilitation to level 1;
* rehabilitation to level 2; and
* rehabilitation to level 3.
The results are:
* rehabilitation is the preferred option compared to new plant alternative;
* co-generation units yield lower costs than electricity only units;
* for oil and gas fired units, level 3 yields the lowest life cycle costs; and
* the difference in capital costs between levels 2 and 3 is relatively small exceptfor lignite and coal-fired units for which the greater life extension of level 3implies the need to install flue-gas desulphurization units. Capital costs oflevel I rehabilitation is markedly less than level 2 or 3, but economic benefitsare more than proportionally lower.
18. The general conclusion from the above is that a significant number of thermal units could becandidates for rehabilitation. To arrive at the optimum number of candidates, the following factorswere considered:
(a) pollution impact, necessitating that coal fired units be limited to level 2 rehabilitation;
(b) risk of under-performance of units with design problems. Units with history ofreliable performance were given priority in the selection; and
(c) social issues such as the need to service district heating systems, and the care of theenvironment. Gas fired cogeneration units were accorded highest priority.
19. The results showed that the gas-fired units are the highest in ranking, followed by oil-firedcogeneration units, and the condensing solid fuel-fired units as lowest in ranking. These are shown inTable 2.
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Table 2 - Rehabilitation Program
Life Cycle Cost Rehabilitation
Station USc/kWh Level
Bucuresti Sud (2x100 MW) 2.85 3
Palas (IX 50 MW) 2.54 3
Palas (lx15O MW) 2.68 3
Braila (2x 210 MW) 3.50 3
Deva (2x210 MW) 3.52 2
Isalnita (2x315 MW) 4.40 2
Brazi (2x200 MW) 3.80 3
20. The above program will reinstate about 2,320 MW of firm dependable base load capacity thatwould otherwise be lost without rehabilitation. To establish that the proposed rehabilitation programis the least- cost solution, it was compared to other options of providing base load capacity. Thecomparison shows that the rehabilitation of the thermal units is economically more favorable thanalternatives which include: (a) completion of Units 2 and 3 of the Cernavoda nuclear power plant andof unfinished hydropower plants, with storage reservoirs, on firm energy capability basis; and (b) gasfired combined-cycle alternative. The time constraint in making capacity available is an addedadvantage of rehabilitation over new units. The possibility of imports of electricity from Ukraine wasexamined, but was disregarded because it would be more expensive than the production from therehabilitated units, and in addition, it could not be relied upon as a source of firm continuous supplyto meet base-load requirements. However, during critical periods of demand, when some of the largeunits would be under rehabilitation, imports may be needed to supplement local supply. Table 3provides the comparison.
Table 3. Comparison of Highest Cost Rehabilitation Candidate with Other OptionsUSCents/kWVh (Life-time Costs at 10% Discount Rate)
Isalnita a/ 4.4Cemavoda Unit 2 6.8Cemavoda Unit 3 6.9Dimbovita Hydropower Plant b/ 6.2Bistra Hydropower Station b/ 9.4Combined Cycle 5.5Electricity Imports 5.2
a/ Highest cost rehabilitation candidate.b/ On the basis of estimated firm energy production capability.
21. There are uncertainties concerning the additional cost to completion of the Cernavoda nuclearpower units, which should be established by a detailed engineering assessment. In addition, the costsdo not include de-commissioning and spent fuel disposal costs. It is highly improbable that importednuclear fuel will be used in Cernavoda since the local mining and fuel processing infrastructure hasnot been established.
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22. Even with the reinstatement of capacity that the rehabilitation provides, the power system maybe barely able to meet the demand. Table 4 compares available dependable continuous power outputwith demand on the system by year 2000.
Table 4 - Dependable Continuous Power Output and Demand (MW)
i i i Q ~~~Actual E sti0mate; 1992 2000
Maximum Thermal Plant Power OutputPre-rehabilitation (MW) 5,500 3,500
Reinstatement of Capacitythrough rehabilitation - 2,320
Other RENEL Rehabilitation - 600
New Plant Additions(i) Cernavoda Unit 1 - 630(ii) Turceni 8 - 270(iii) Other Thermal - 180
Total Thermal 5,500 7,530
Firm Hydropower Output 2,000 2,000
Total Firm Dependable Capacity 7,500 9,530
Maximum Demand 9,500 9,100
Imports 2,000 430
Lignite to Imported Hard Coal Conversion
23. The technical inspection and feasibility study conducted on the lasi cogeneration lignite firedunit was to establish the technical and economic merits of conversion of 11 similar units (1 lx50 MWcogeneration) to use of imported hard coal as the primary fuel. The results confirmed the technicaland economic justification for such conversion. An additional important benefit is the reduction in airpollution and lower volume of ash disposal that the conversion would bring about.
24. The economic merit is the curtailment of the uneconomic transportation of lignite over longdistances (300-600 km). At the lasi power station the economic cost of lignite delivered is aboutUS$25/ton compared to the delivered cost of imported hard coal through Constanza port of aboutUS$50/ton. To establish the economic merit of the conversion, the present value of economic cost oflignite at the power station over the life of the unit was compared with the present value of theincremental capital and fuel cost for the conversion over the same life of the unit. The former wasestimated at US$140 million compared with US$60 million for the latter. In addition, operation andmaintenance costs will be lower in the case of the conversion.
25. Similar analysis has been extended to the other 10 units at the different locations in the NorthEastern part of the country. The conversion of the units, apart from the environmental benefits,provides a least-cost means of serving the same quantity of heat and electricity demand.
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Rate of Return Analysis
26. The rate of return on the investments in the rehabilitation component is estimated to be about21 %. Computations are provided in Table 6. The analysis follows the traditional approach ofcomparing quantifiable incremental costs and benefits to the power system of the rehabilitationprogram. The estimates of investment costs and of fixed operation and maintenance costs are basedon the estimates of the consultants that conducted the feasibility study. Fuel costs are estimated atimproved unit efficiencies resulting from rehabilitation, and fuel prices reflect border prices.Allowance is made for outage cost, which represents the incremental cost to the power system of unitsbeing taken out of service for rehabilitation, and their outputs replaced by increasing the output ofless efficient thermal power units in the system. The estimate of the outage cost is based on theadditional fuel and other variable operating costs of the less efficient units. The outage costs areestimated as follows:
All costs are expressed in economic terms and in prices of January 1994.
26. The quantifiable benefits comprise: (a) fuel savings from improved unit efficiency; (b)increase in electricity production resulting from increase in power output, and improved availability;(c) savings in consumption of support fuel- natural gas and fuel oil- in the lignite and coal fired unitsthrough improved loading of units, and reduction in stops and starts of the units; (d) improvement inquantity and reliability of heat supply, which is captured through credit of the efficiency ofcogeneration to electricity production.
27. Incremental electricity sales is valued at the average electricity price of US cents 5/kWh, theagreed average price under the SAL, which the Government is committed to maintain in real termsthrough periodic adjustments for exchange rate changes, as a proxy for the benefits of electricityconsumption.
Other Benefits
28. For the conversion, incremental costs consist of the capital cost of the conversion and theassociated fixed operation and maintenance costs. The benefit is the savings in cost of fuel delivered,and operation and maintenance costs. An added benefit (not quantified) is the reduction in pollutionthat the conversion will bring about.
29. Other benefits, which are not readily quantifiable, are associated with the improvements in thequality of the environment discussed earlier, mainly the reduction in air pollution that therehabilitation will bring about. Additional benefits will arise from improvements in management andassociated operational cost reductions arising from the corporate restructuring program.
Sensitivity Analysis
30. Sensitivity analysis was carried out to test the robustness of the economics of the project. A20% increase in capital costs could arise in rehabilitation work of this nature due to greater thanexpected plant deterioration that might be uncovered during implementation. Other considerations arethat the rehabilitation might not achieve the expected improvements in fuel use efficiency andavailability, thus leading to higher fuel consumption, and that the targeted level of reliability may notbe achieved. Reduction of 10% in fuel use efficiency and expected availability improvements are
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assumed. The robustness of the project economics was examined under the extreme condition of allthose effects occurring simultaneously, which is considered to be highly unlikely. Even under suchhighly unlikely conditions, the rate of return would still be about 10%, and this figure does notinclude benefits that cannot quantified, including consumer surplus and environmental benefits.Hence the economic justification of the project is considered to be robust.
32. The results of the analysis shown in Table 5 indicates the robustness of the economic rate ofreturn in the face of increased capital costs and reductions in fuel use efficiency and electricityProduction, as well as at the lower electricity price. Detailed calculations are presented in Tables 6-10.
Table 5 - Results of Sensitivity Analysis
NPV (US$000) RoR (%)
Base Case 272 21
(a) 20% increase in capital cost 229 18
(b) 10% reduction in fuel efficiency 185 17
(c) 10% reduction in availability 126 15
(d) Reduced Project Scope 187 18
(e) Combination of (a), (b) and (c) 0 10
Calculations are provided in Table 6-10.
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Table 6 - Economic Rate of Return Analysis - Base Case
(US$ Million - January 1994 Price)
Fuel andOther
VariableCapital fixed Outage Operating Total Total Net
Year. Cost O & M Cost Costs Cost Benefits Benefits1995 3.50 3.50 -3.50
