Study on the Environmental Improvement Project in Bitola City The Former Yugoslav Republic of Macedonia SUMMARY. February 2012.

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1 STUDY ON ECONOMIC PARTNERSHIP PROJECTS IN DEVELOPING COUNTRIES IN FY2011 Study on the Environmental Improvement Project in Bitola City The Former Yugoslav Republic of Macedonia SUMMARY February 2012 Prepared for: The Ministry of Economy, Trade and Industry Prepared by: Yokogawa Electric Corporation

2 (1) Background and Necessity of the Project The Republic of Macedonia (hereinafter referred to as "Macedonia") is making efforts for intensifying the environmental regulations toward accession to the EU. To reduce the atmospheric contamination as part of these efforts, the existing thermal power plant is required to meet the SO 2 emission standards (400 mg/nm 3 ) and others. If the target cannot be achieved, the power plant is subjected to operation shutdown. However, there has not been much progress in the environmental emission measures in the power plant. In the Bitola coal thermal power plant (hereinafter referred to as "Bitola TPP") under this Project, installation of a flue gas desulfurization system (FGD) is essential for continued plant operation. In the meantime, this power plant accounts for appropriate fifty percent of the overall power generation capacity of Macedonia for 2010 (approx. 1,400 MW), supplying over seventy percent of the generated power. This is one of the important power plants essential to ensure the stable power supply in this country. Possible shutdown of the operation of this power plant may have a serious impact on the power supply of this country. Meeting the emission standards through implementation of this Project is urgent and indispensable from the viewpoint of both environmental protection and power supply in this country. The Balkan Peninsula where Macedonia is located is called the "powder keg of the world", and has been repeating a confused history. Stability of the former Federal Republic of Yugoslavia is a great concern for the international society. Hopefully, peace will be further established and stability in the entire southeastern Europe will be ensured by contribution to the reconstruction of the social infrastructure and social services in this country through supply of the yen credits to this Project. (2) Basic Policy for Determining the Content of the Project Based on the available information on the current situation of the units of the Bitola TPP and related information and data collected so far, this survey will make an overall study on the introduction of the FGD and others, and will select the optimum unit for implementation of a yen credit-based project from the viewpoint of effect and efficiency. After that, a detailed technological study will be made on the FGD method and construction method for the selected unit, and specific facility designing will be implemented to meet the requirements of excellent cost-performance efficiency and the shortest possible construction period. Further, evaluation will be made on the impact of this Project upon environmental and social aspects. A survey will be conducted on the directives on the Environment Impact Assessment (EIA) in this country, and a study will be made on the measures required to meet the EIA standards. Further, consultation and study will be made on the procurement of funds required for implementation of this Project, implementation schedule and implementation framework. In response to the Macedonia request for yen credit, efforts will be made to explain the Project to the related agencies of the Government and to get cooperation. The FGD installation Project for the Bitola TPP to be proposed in this yen credit-based Project conforms to the policy for EU accession of this country and requirements of the sustainable development project in the energy and environmental sectors. The need for this Project in this country and the significance of the yen credit project are considered very important. This Project is intended to improve the environment, and does not bring about substantial profits. Thus, the conventional method for financial and economic analysis may not be directly applicable to this Project. However, we believe that alternative analysis will be possible, for example, by qualitative calculation of the environmental improvement achieved by the project implementation and avoidance of a possible levy on contamination or possible operation shutdown of the power plant. Further, the risk and problems that may be involved in the implementation of the project will also be assessed. (3) Project Overview This Project (proposed Project) is intended to ensure that this power plant will meet the environmental standards in conformity to the EU standards through installation of an FGD in the Bitola TPP, the biggest power plant of this country, located in Bitola, the central city of economy and industries. This survey is planned to examine the current situation of the existing power generation facilities (SO2 emission concentration, FGD installation site, etc.) and to study feasibility as a project. 1

3 Implementation body: Existing facilities: Fuel: Newly installed facilities: Total project expenditure: Elem Power Producing Company (hereinafter referred to as "ELEM") Coal fired thermal power generation facilities, 225 MW three facilities, where the main facilities were manufactured in Russia, and commencement of commercial operation started in 1982, 1984 and 1988, respectively. Brown coal produced at the adjacent Suvodol coal mine (Suvodol) FGD and others Approx. 20 billion yen (for three facilities) Bitola TPP (with an overall rated generation capacity of 675 MW) is the greatest coal fired thermal power plant in Macedonia. It is composed of 225 MW three units of power generation plants. The major facilities are made in Russia, and commencement of commercial operation was started in 1984, 1984 and 1988, respectively. The ELEM as an owner of this power plant has determined a policy of introducing environment improvement facilities including the FGD. However, ELEM has no experience of introducing an FGD. It is difficult for the ELEM alone to implement specific technological studies and facility designing. Further, the situation is very pressing for this country which is making efforts to gain EU membership. With consideration given to these factors, this survey is intended to make an overall study on the method of introducing the FGD in the Bitola TPP and to select the optimum unit for implementation of the yen credit-based project from the viewpoint of effect and efficiency. After that, an FGD introduction work plan will be worked out. The limestone gypsum method will be used for desulfurization. This method is most widely used throughout the world and has a high degree of reliability. Further, the Japanese manufacturers have rich experience in this method. The limestone produced in this country will be used as the material. The space of the FGD installation space is restricted by the current layout requirements of the existing facilities. In the limestone gypsum method, a space-saving type FGD method will be selected. At the same time, facility designing will be implemented to meet the requirements of excellent cost-performance efficiency and the shortest possible construction period. (4) Implementation schedule When installation of this exhaust gas desulfurization facility is to be covered by the yen credit project, the total work implementation period will be 51 months which can be broken down as: 15 months for the signing of agreement between the Government of both partner countries, selection of consultants, preparation for signing of EPC agreements (E: Engineer, P: Purchase, C: Contract packaged for construction work and selection of EPC contractors), and 36 months for construction of the exhaust gas desulfurization facilities. For the details of the implementation schedule, see the Implementation Schedule of Chapter 6. (5) Feasibility of Yen Loan Application and Implementation, Reasons, and Future Measures to be taken Macedonia is planning to gain EU membership. Introduction of the FGD in the Bitola TPP is one of the top priority requirements for EU accession. This Project is expected to provide a gigantic step forward in the economic development of this country, and to make a significant contribution to the "Establishment of Peace (Stability throughout the Entire Southeastern Area)" which is one of the biggest tasks in the new ODA master plan. It should be noted that the yen credit project for this country include a Zletovica water use improvement project (9.6 billion yen) for This Project is considered to be the optimum candidate for the next-term yen credit project in terms of both the timing and size of the project. Based on the understanding that the stability and development of this country are important for the stability of the entire Balkan area, policy consultation was made in 1994 and technological cooperation was started in the Japanese economic cooperation. In the first grant aid of loans, a non-project grant aid and an aid to the medical equipment and material improvement plan were provided in A great number of grass-roots grant aids of loans have been extended after Further, in the aid for the countries receiving an influx of refugees resulting from Kosovo crisis during n the period, a total of

4 billion yen was provided, including aid to support medical equipment and material supply as well as food production increase, and non-project type grant aid. Japan is one of the countries having given the greatest volume of aid. The aids having been supplied by Japan include the repayable aid of loans amounting to billion yen for "Zletovica water use and improvement plan", the grant aid of loans of billion yen (a total up to fiscal 2009) and technological cooperation of billion yen (a total up to fiscal 2009). In response to the request from the Government of this country for the Zletovica water use and improvement plan, the yen credit was extended in November 2003 to assist in the overall development plan intended to supply water for the households, industries and irrigation in four cities and their suburbs on the eastern part of Macedonia, as well as to generate hydraulic power. Table 1 shows the performances of yen credit for Zletovica water use and improvement plan. Table 1 Performances of yen credit for Zletovica water use and improvement plan. Item Description Promotion of the agricultural and industrial development in this area by ensuring a stable supply of sanitary drinking water to the eastern area of Macedonia to improve the living environment of the local inhabitants Overview suffering from chronic shortage of water, and supply of agricultural and industrial water (yen credit to be extended to multipurpose dam, water intake and driving channel) Interest 1.5% per year Conditions for aid Repayment period Procurement conditions 25 years (including the 7-year grace period) General untied Source: JICA Project Basic Information For the Bitola TPP included in this Project, the EBRD is currently making a survey for the environmental improvement project plan. This is a survey for project planning intended to implement an overall efficiency improvement and renovation work (total project expenditures amounting to 35 MEUR (approx. 4.2 billion yen)) in the Bitola TPP. In this survey, another environmental improvement work (total project expenditures amounting to 190 MEUR (approx billion yen)) is proposed and recommended. However, this proposal is currently placed outside the range of the project plan due to the intention of the ELEM and an implementation body. The above-mentioned efficiency improvement and renovation work are currently in the phase of implementation supported by the EBRD funds. The environmental improvement work including the installation of the FGD which will be essential in future is considered to have been placed outside the range due to the credit line of EBRD and a shortage of self-financing capability on the part of the implementation body. Actually, the implementation body expresses a strong desire for implementation of this environmental improvement work by yen credit. Table 2 shows the progress of the activities of the authorities concerned and implementation body in Macedonia. Table 2 Progress of Activities of Authorities Concerned and Implementation Body in Macedonia Authorities Concerned Implementation body Progress of activities Ministry of Environment It was unofficially decided that the SO 2 level Bitola TPP should comply with according to the EU Environmental Criteria was 200 mg/nm 3. ELEM Phase 3 (this project) is lower than Phase 2 in priority of implementation. It is not included in ELEM s three-year investment plan. Ministry of Economy This project is not included in the Macedonian investment plan. Ministry of Finance The budget for this project has not yet been earmarked. Boiler rehabilitation project is planned to be implemented prior to this project, and it is necessary to induce 3

5 the Macedonian side to implement this project prior to boiler rehabilitation project, or both in parallel. For the details of the feasibility of yen loan application and implementation, reasons, and future measures to be taken, see the Action Plan and Problem in the Request for Yen Loan of Chapter 10. (6) Possibility of Participation by Japanese Companies and their Advantages in Terms of Technology Considering the level of technological sophistication and the track record of supply, FGD technology of the Japanese manufacturers is fully competitive with that of Western counterparts. As many of the Japanese local municipalities have their own environmental rules and regulations, the Japanese FGD manufacturers are required to meet the environmental standards that are much more rigorous than those of the countries in Europe and America, and this has elaborated and matured the Japanese FGD technology. As mentioned before regarding the technological feasibility, various types of FGD techniques have been established. The FGD technology of the Japanese companies, which has been refined over long years to withstand the rigorous Japanese environmental standards, has achieved the world s highest level of sophistication not only in terms of facility performance but in terms of comprehensive performance including operability (such as highly-automated operation and high facility operation ratio) and maintainability. It more than matches the FGD technology of the rivals in Europe and America, and the Japanese FGD manufactures are providing their technology on a worldwide basis under license and other contracts, having won orders for FGD facilities successively in Europe. The method of desulphurization that is the most suitable for this project is the wet limestone-gypsum method. This research has confirmed that this method is the world s most field-proven desulphurization technique, and that it is the area in which the Japanese manufactures excel. Furthermore, the energy efficiency of the Japanese equipment-intense industries is a definite advantage that Japan can boast of to the world. For the details of the possibility of participation by Japanese companies and their advantages in terms of technology, see the Technical Advantages of Japanese Company of Chapter 8. (7) Problems Involved in Implementing Project Shown below with regard to risk and its prospects for approval hinder the realization of the project management in the country. ELEM, which is an organization under the control of the Ministry of Economy, submits a mid-term investment plan to the Ministry of Finance via the Ministry of Economy, and develops its activity plan and budget of each fiscal year with the approval of the investment plan by the Ministry of Finance. With regard to the rehabilitation and modernization plan for the Bitola TPP (Phase 2: life prolongation and efficiency improvement of boilers, and NO x emission reduction measures), which has higher priority than this project (Phase 3), part of the necessary funds have not been raised, and ELEM is looking for a donor to finance the project though the contractor has already been selected unofficially. If Phase 2 does not progress as planned, it is feared that the scheme of the Phase 3 project will be affected and need to be reconsidered. ELEM already submitted the three-year investment plan to the Ministry of Finance of Macedonia via the Ministry of economy. However, the application for the approval of the investment plan for implementing this Project has not been filed to the Ministry of Economy. In order for this Project to be implemented, such application should be filed as soon as possible so that the Ministry of Finance can earmark the budget for this Project in a timely manner. The following risk with respect to hinder the path leading to the request and its implementation by the country management yen loan. The project of installing flue gas desulfurization equipment does not intend to produce new or increased economic profit. On the contrary, it requires capital investment and operation cost. In this respect, yen loan offered by the Japanese side at a low rate of interest with long-term repayment option including initial moratorium is considered to fit the needs of the Macedonian side. Prime Minister in Macedonia, Nikola Gruevski visited Japan on 29th November 2011 and met with Prime Minister, Noda about yen loan for Bitola TPP desulphurization by rehabilitation, so called FGD project at the place by word of mouth. 4

6 Hereafter it is necessary to make Ministry of Finance in Macedonia request yen loan to Japanese government officially. That there is a plan that describes the Finance of Ministers, to sell to the private sector about 49% of the shares of ELEM in Business Forum was held at JETRO on November 30. Specific plans at the moment but it does not exist. Provision of yen loan after privatization, the government guarantee will be attached, and that the government is the majority shareholder and is a condition of ODA loans. Hinder the realization is shown below with respect to risk and its approach to the country management for the project formulation. Macedonia has received financial assistance under bilateral aid scheme with European countries as well as from the World Bank and EBRD. In the case of this project, public fund raising is considered on a priority basis due to the high level of investment amount expected to be required. The possibility of using private funds still remains, but it will not be the first choice for the time being. In the case of a relatively large investment project such as this project, it is expected that ELEM will request for the provision of both technology/hardware and necessary funds in combination. Though the necessity and effectiveness of this project are sufficiently recognized by ELEM, however, the calculation and proposal of appropriate total investment amount will be our key tasks to be fulfilled. (8) Map of the Project Implementation Site in the Host Country Fig. 1 shows the location of Bitola in Macedonia. Fig. 1 Location of Bitola in Macedonia Skopje Bitola Source: Bitola TPP 5