Kosovo Lignite Power Initiative Proposed Lignite Power Development Project (LPDP) Economic Analysis

Transcription

1 1 Kosovo Lignite Power Initiative Proposed Lignite Power Development Project (LPDP) Economic Analysis I. Background 1. The proposed project will generate substantial benefits to Kosovo, many of which can be measured in money terms. Specifically the following have been quantified: A. The development of the new mine to supply lignite to Kosovo C will generate royalties to the government as well as taxes on profits 1. B. Kosovo C, which will operate as an IPP, will produce electricity both for export and domestic consumption and will pay tax on any profits generated. C. The electricity production of Kosovo C will replace a combination of load shedding and imports of power for domestic consumption. Since the plant has lower production costs than the imports it replaces or the load shedding that it avoids, there will be benefits to domestic consumers and to the authorities 2. D. Both the mine and the electricity plant will create employment in the country. Since there is considerable unemployment (only 49 percent of the working age population is active), the project will generate employment benefits to the public. 2. These are the direct benefits of the project and are considered in Section II. In addition, the substantial investment made by the private sector ( 300 million for the mine and about 770 million for the power plant) will boost overall investment and generate additional growth in the economy. These indirect benefits are considered in Section III. 3. The increased production from Kosovo C will generate emissions of local pollutants as well as Greenhouse gases (GHGs). The plant can be considered as replacing another potential source of generation, which may be oil or gas based and the net effect of the plant is the difference between the two. The net damages from local pollutants (mostly on human health) can be measured in physical and monetary terms and the differences in GHGs can also be accounted for in money terms. The net damages also depend on the type of lignite plant chosen. A supercritical configuration for example would have lower GHG emissions, which could be credited to the enterprise. The discussion of the local and global environmental issues is presented in Section IV. 4. The government revenues from the mine and plant will boost the budget but their contribution to the sustainable development of Kosovo and to the alleviation of poverty will depend on how they are spent. Section V discusses alternative mechanisms for the management of funds from special large-scale natural resource projects and looks at their likely impacts on 1 Although the new mine will also serve Kosovo B, and generate some benefits related to that, this appraisal has only included the benefits and costs associated with Kosovo C. 2 To the extent that domestic consumption is subsidized the benefits will go to the authorities; to the extent that it is not the benefits will go to the consumers.

2 2 the economy and society. Finally Section VI provides some summary of the main findings of the economic analysis. 5. It should be noted that in carrying out this analysis one is looking much further ahead than is usually the case in macroeconomic assessments. Kosovo C will not start operating until 2013 and will continue to be active for 40 years. It is impossible to make credible forecasts of the economy that far ahead. All that one can do is to look at plausible scenarios and estimate the possible effects of the project on them. a) Direct Economic Benefits 6. The four direct economic benefits listed above are each considered in turn below. It is assumed for this analysis that the mine and the power plant start operations in The life of the plant is taken as 40 years. A 12 percent discount rate is applied unless otherwise stated. A. Government Revenues from the Mine 7. Vattenfall has carried out a detailed analysis of a new mine to serve a power station with 600MW capacity. It shows an investment of 300 million in constant prices over the period , with the bulk of the outlays being made in The main option regarding royalty on the operations is 25 eurocents per metric ton in 2008, rising at 2 percent p.a. over the life of the mine 3. A second option, however, is also under discussion, which will provide revenue of 50 eurocents per metric ton and that is also considered. 8. In addition a tax of 20 percent on normal accounting profits is assumed. The latter will depend of course on the future price of lignite. Here three scenarios are considered: (a) a price of 7/ton in 2008, rising at 2 percent p.a. (Scenario 1); (b) a price of 8.05/ton in 2008 rising at 1 percent p.a. (Scenario 2) and (c) a constant price of 9.22/ton (Scenario 3). 9. On the basis of the estimated production and financial data the project generates royalties of 1.8 million in 2013, rising to a maximum of 2.8 million in 2038 with a 25 cent per ton rate. It generates double that with a 50 cent per ton rate. Using a 12 percent discount rate the present value of the royalty amounts to about 7-14 million. The estimated tax revenues will vary according to the royalty rate. See Table 1 for details. We note that: (a) With a 25 eurocent per ton rate the tax revenues amount to 7-8 million in present value terms, across the three scenarios. Scenario 1 has the lowest revenues in the early years, scenario 3 has the highest revenues in those years and scenario 2 lies somewhere in between. (b) With a 50 eurocent per ton rate the tax revenues amount to 5-6 million in present value terms with the same relative variation across the three scenarios. 3 All tons referred to in this section are metric tons.

3 3 Table 1: Tax and Royalties from the Mine Operation Mn. Royalty Rate = 25c/Ton Royalty Rate = 50c/Ton Receipts 2013 NPV at 12% to 2038 Royalty Tax Revenue Total Royalty Tax Revenue Total To put these figures in perspective, total budget revenue in 2005 for Kosovo was set at 640 million. So in 2013 the revenues from the mine operations, which could be in the range of 2.5 million (with the low royalty), would amount to around 0.4 percent of total revenues for With the higher royalty, the revenues would amount to about 0.6 percent of 2005 revenues. 11. As far as the government is concerned, the higher royalty rate appears beneficial from a revenue point of view. The higher rates could, however, result in liquidity problems for the mining company, perhaps in the early years. It would also result in slightly higher lignite prices if the company that ran the mine maintained the expected rate of return on capital of 12.2 percent that it is being considered as a required rate. Hence with the higher royalty rates, the price of lignite to the power company has been adjusted accordingly in the next section. B. Operations of Kosovo C 12. The new TPP will have a capacity of two units of 300 MW i.e. 600MW, coming on stream in 2013 and generating 4,468 gwh a year. The first call on the electricity will be to fill the domestic supply-demand gap. What is left over may be exported. The generation costs for the new plant will depend on the price of coal and, corresponding to the three scenarios considered above, the unit cost in the pre-feasibility study is estimated at between 4.5 and 5.0 euro cents per kwh in 2013 with a lignite price based on a royalty of 25c/ton; and about 0.3 percent higher with a lignite price based on a royalty of 50c/ton 4. Costs are assumed to increase at the rate of inflation of 4 percent thereafter. The Energy Sector Review has estimated the price of imported electricity at 4.5 eurocents per kwh in 2003 (which would escalate to 6.8 eurocents by 2013 based on a 4 percent p.a. inflation rate). Exports, however, would have a lower price, as transmission costs are not included from the Kosovo border. Taking such costs as 15 percent of total costs, the price received by exporters is taken as 5.78 eurocents per kwh. Domestic prices are taken at the unit costs estimated above, which includes an element of profit. These calculations were carried out by the financial analysts on the team, based on a model developed by Electrowatt-Ekono. 13. The profits of the IPP operating Kosovo C are taxed at 20 percent, yielding a benefit to the budget of Kosovo. 4 The impact of the higher royalty on the price of lignite was calculated by Vattenfall as part of the analysis of the mining operations.

4 4 C. Savings in Imports 14. With the IPP project Kosovo will import less power and will depend more on domestic power, which is cheaper. This difference is a benefit to society: either to consumers who will pay less for the electricity, or to the government, who will have to provide a smaller subsidy to the electricity consumers. The relative sharing of the benefits is not determined in this analysis. It depends on how future domestic tariffs evolve and how factors such as billings and collections are improved. 15. The resulting revenues from the taxes and import savings are shown in Table 2. Government revenues in 2013 from taxes on the new private power company amount to 7.2 million with the lower royalty rate and 5.6 million with the higher royalty rate. Hence some of the gains in the royalty income with the higher rate are counteracted by the loss of income from the power company, which pays lower taxes due to the higher cost of lignite. The benefits in saved costs from imports in the first year are 4.1 million (low royalty) and 3.9 million (high royalty), which are lower than the tax revenues in the initial years but become much more substantial in the later years (when the entire output from the plant replaces imports). Hence the NPV of the savings are in the range of 154 to 162 million, making the total benefits from the two sources around million in 2013, and million over the whole life of the power station. Table 2: Tax Revenue and Savings from Reduced Imports from the New Power Station Mn. Royalty Rate = 25c/Ton Royalty Rate = 50c/Ton 2013 NPV at 12% to 2038 Tax Revenue from Company Savings in Imports Total Tax Revenue from Company Savings in Imports Total D. Employment Benefits 16. Given the high level of unemployment in Kosovo, it is reasonable to assume that the labor demand from this project will reduce unemployment by the same amount. Estimates indicate that the mine will create about 1000 jobs and the TPP will create about 200 permanent jobs (i.e. for the duration of the project). In addition the TPP will create some jobs for the actual construction of the plant. 17. To the permanent jobs can be added a multiplier i.e. additional employment created by the impulse generated from the initial demand. Typical multipliers for mining projects are around 2.2, implying an additional 2.2 jobs for every initial job. With this factor, we have additional employment of around 3,000-4,000 jobs in 2013 and afterwards, with some fewer jobs prior to that.

5 5 18. One way to include the benefits of job creation is to take a portion of the salaries paid to the individuals. If a shadow wage of 0.5 is taken, it implies that about half the salary is an additional benefit to the person. The other half is compensation for the activities he or she has to give up to undertake the employment. We are not aware of an estimate of the shadow wage for Kosovo, but a figure of 0.5 would not be unreasonable in the present circumstances. To be conservative, however, we have applied a shadow wage rate of 0.7. If that is taken as the value to be applied, and taking average salaries as 4236 in , rising at 8 percent p.a. to 2014 and 3 percent thereafter (recall that inflation is assumed as 2 percent), we get employment benefits starting at 1.5 million in 2007, rising to 8 in 2013 and further thereafter. E. Summary of Direct Benefits 19. A summary of the direct benefits at a 12 percent discount rate is presented in Figure 1 for the case of the lower royalty. Just under half the benefits come from the savings in costs of imports, and about 40% of the direct benefits to Kosovo come from taxes paid by the TPP. Employment generation benefits account for around 10 percent and only 2 percent are attributed to mining royalties (with the low royalty rate) and about 2 percent to the taxation of the mining activities. With the higher royalty, the share of revenue from mining royalties increases to 4 percent while total benefits are virtually the same. 20. The distribution of the benefits is not so easy to establish. The government should gain at least 147 million over the period to 2038, or just over 42 percent of all benefits. In addition it will almost certainly gain somewhat from the reduced cost of imported power and somewhat from the employment generated. In terms of the government s revenues, however, the project will add a small amount to the figures likely to prevail in Relative to the 2005 budget the revenues in 2013 would amount to 10 million or about 1.5 percent. Figure 1: Benefits from LPDP: Royalty 25c/Ton Royalty on Production Tax Rev. from Mine Profits Tax Rev. from Power Plant Reduced Losses from Imports Employment Benefits 5 The average salary figure for 2005 was This has been increased at 8% nominal to 2007 (the first year of employment effects) to get 4,236.

6 6 21. The costs of achieving these results include the cost of the Bank s TA project ($8 million or 6.7 million), plus some modest outlays by the government. It is not really meaningful to report a rate of return on the program based on the TA expenditures, as the latter are necessary but not sufficient to produce the results that have been described. Nevertheless we can take some comfort from the fact that the present value of the benefits estimated above is significantly above the costs when the former are discounted at 12 percent Spreadsheets of the calculations of the direct economic benefits are given in Annex I. III. Indirect Economic Benefits 23. The development of the lignite mine and the construction of the TPP will inject around 1.1 billion into the Kosovo economy over a six period This is a substantial increase in overall investment compared to the recent figures. In 2004 (the last year for which full data are available) investment expenditures amounted to 587 million, of which nearly 60 percent were in the private sector. Assuming that the TPP and the mine add million in the peak years, they will increase total investments by 30 to 50 percent. This will undoubtedly provide some impetus to economic growth in the territory. The Bank s MTEF analysis estimates growth in the Kosovo economy of percent in 2007, rising to percent in The lower growth rates are based on a scenario in which final status and reforms are delayed; the higher growth rates assume more timely progress in these areas. (Table 3). Table 3: Real Growth Rate in Kosovo Macro Scenario Macro Scenarios 3 and Source: MTEF, World Bank, In order to analyze the impacts of the project we make the following assumptions 7 : a. Scenario 1 GDP growth rates do not incorporate investments being considered under this package. b. The investments will add to the capital stock, which has an incremental capital-output ratio of 5 i.e. an increase in the capital stock of 5 euros increases potential GDP by 1 in the following and subsequent years. This is a typical value for the incremental capitaloutput ratio in countries in the early phases of economic growth. 8 6 If an IRR is required for the Bank s investment it comes out at around 65%. 7 A more sophisticated model, based on a RMSIM or a CGE is not feasible given the lack of data. The analysis presented here is intended to be indicative and can be taken further, but one should remain aware that much of the data is preliminary and likely to change. 8 Simon Kuznets, Population Capital and Growth, Heinemann, London, 1973.

7 7 c. The capital stock has a depreciation rate of 3 percent initially, decreasing over time to 2 percent. The higher earlier depreciation rate reflects the fact that some of the existing capital stock is inappropriate for the present composition of desired output. d. Of the investments in the mine 65 percent will be imported from outside the territory. In the case of the TPP this share will be around 90 percent. e. Growth rates in the period without the project will be the same as the growth rate in 2010 i.e. 3.2 percent 25. The resulting changes in GDP can be seen in Figure 2, where we compare the GDP in the MTEF scenario 1 with the new GDP figures. By 2013 GDP is about 123 million or 4 percent higher than without the project. The average annual rate of growth of GDP without the project over the period is 3.2 percent. With the project it is 3.6 percent. Details of the macroeconomic calculations are given in Annex II. Figure 2: Impact of Projects on GDP Mn. Euros GDP Without Project GDP With Project 26. The results of this analysis were subjected to some sensitivity analysis in terms of the baseline growth rate but the relative impact of the project did not change much as a result. Likewise different values of the ICOR change the results only slightly a higher ICOR yields lower benefits in terms of growth. Hence the basic result appears to be reasonably robust that a project of this magnitude, if implemented successfully, will have a significant impact on the economy off Kosovo remains valid. IV. Environmental Costs and Benefits Methodology 27. In order to estimate the environmental effects of the project we need to compare the emissions from the project and their consequences with those arising from the best alternative source of power. What is needed therefore is to carry out runs of an air dispersion model, for

8 8 the different configurations of the new plant and to make an assessment of the impacts in physical and monetary terms. The changes concentrations of pollutants within and outside Kosovo are to be measured and the impacts of these changes in terms of health (morbidity and mortality) to be calculated. These then have to be compared with those of the most likely alternative source of power. 28. The model used here is the latest dispersion modeling (ECOSENSE) developed and maintained by the University of Stuttgart, along with epidemiological studies to make the estimates in physical terms. The results of this model have been combined with the latest values of health damages to calculate the damages in money terms. 29. For the estimation of the health impacts, socio-economic data on population affected was required. This was obtained from local databases and, when these were not available, from European databases. 30. The physical and monetary estimates of the environmental damages of the plant were carried out by the consultants for the main configuration of the plant, with 600 MW generated. Two comparator plants were considered a heavy oil and a combined cycle gas turbine. A summary of the results of the analysis shows the following (Table 4). The details are provided in Annex III. Table 4: Environmental Impacts of Operating Kosovo C Versus Alternative Lignite Fuel Oil Gas Sub Critical Super Ultra Super Critical Critical Years of Life Lost/kWh 9.96E E E E E-08 Environmental Cost Eurocent/kWh CO2 emissions Kg/kWh Net Env. Cost wrt fuel oil Mn. Euros/Yr Net Env. Cost wrt CCGT Mn. Euros/Yr Net CO2 Cost wrt fuel oil Mn. Euros/Yr Net CO2 Cost wrt CCGT Mn. Euros/Yr It is estimated that about 90 percent of the damages will arise outside Kosovo, due to the small areas of the country and the substantial dispersion of the emissions. The costs are based on European studies of the value of lost life years, costs of illness. In Kosovo different costs may apply, but since Kosovo impacts only account for 10 percent of all impacts, making an adjustment for this difference is unlikely to change the picture. 32. The climate costs of GHGs are based on the marginal avoidance costs for meeting the Kyoto target, which are currently around 19/t CO2-equivalent.

9 9 33. The table shows that a sub-critical lignite plant has environmental costs of about 0.5 million higher than a fuel oil plant and about 23.2 million higher per annum than a CCGT. In terms of CO2 and other GHG emissions (CH4 and N2O are included in the calculations), the subcritical lignite plant has an annual cost of about 18 million more than fuel oil plant and 51 million higher than a CCGT. 34. Comparing the subcritical and critical and ultra critical versions of the lignite plant, we see significant environmental and climate benefits. The critical version generated health costs that are 1.4 million lower than the subcritical version while the ultra critical version has costs that are 3 million lower. In addition, assuming a price for carbon of 19/ton the critical version could produce savings in GHGs of around 4.5 million while the ultra critical version could produce savings of around 8 million. These savings compare with an investment cost difference between the subcritical and super critical versions of around 38 million and between the subcritical and supercritical versions of around 76 million. V. Impact of the Project on Social Programs in Kosovo and Allocation of Royalties to a Dedicated Fund 35. The analysis above shows that the project will increase government revenues both through higher tax receipts from the mine and the TPP, as well as through the royalties. These increases will start in We do not have a baseline government budget figure for that year. For 2009 the IMF projection is for a consolidated government budget of 915 million. If this increases in line with GDP projections as assumed in the previous section we can expect a without project total budget of about one billion euros in The project will provide additional income in that year of million in the form of royalties and perhaps as much as million in the form of higher corporate tax receipts. Although valuable, these amounts are relatively small additions to the budget. 36. In spite of the relatively minor additions to the overall budget, the contribution of the project to social programs could be significant. The need for such programs is certainly great. It is estimated that 37 percent of the population lives in poverty, with around 15 percent in extreme poverty (about 285,000 people). The Bank s MTEF projects a budget for social protection in 2010 of between 131 and 137 million, depending on which macro scenario prevails (see para. 22). The royalties from the mine could be set into a special supplementary fund dedicated to poverty alleviation and social protection. The addition of 1.8 to 3.5 million in 2013 would provide a further 1.5 to 3 percent to that budget. Within the overall social protection budget, the social assistance program accounts for about 28 percent and is targeted at a subset of the poor and extremely poor households. Although the scheme does by and large focus on poor households, not all such households are covered. Indeed only about 16 percent of the poor and 22 percent of the very poor receive benefits from the program (World Bank MTEF, 2005). Addition resources from a Royalty Fund could make a useful contribution if they were allocated as recommended by the Bank in its MTEF.

10 In addition to the royalties from the mining of coal, one can expect an increase in government tax receipts. The final determination of where these are channeled to social assistance, infrastructure investment or better provision of public services is a is a matter for the government of Kosovo. It would be reasonable to assume, however, that some of the additional revenues would be allocated to social assistance and related programs. 38. The question of whether sources of revenue such as the mining royalties should be earmarked for specific programs is a controversial one. In general, good practice in public finance avoids such earmarking. Government income should be spent in accordance with overall priorities and not be constrained by earmarked funds. 39. At the same time, there is a widespread recognition of the special nature of the extractive industries and, following the Extractive Industries Review the Bank s management has recognized the principle that communities should benefit from projects that affect them. Its support for extractive industry (EI) projects aims to ensure good practice approaches to local recruitment and training, and the development of local suppliers and downstream industries. Good practice will also include components that directly benefit local communities, such as access to health services, community funds, vocational training, general education, and infrastructure. The Extractive Industries Transparency Initiative (EITI), launched by the UK Prime Minister, Tony Blair in 2002, complements the Extractive Industries Review by requiring increased transparency relating to revenues from mining operations. 40. While there is broad agreement on the principles of better management of EIs for sustainable development, it is less clear what these goals imply in terms of management of the funds generated from the EIs. Some countries have set up, at one time or another, special national funds into which the royalties from the operations of the EIs are paid, and which are used to meet stated social and economic goals. These include countries as diverse as Norway, Jamaica and Kuwait 9. The success of the funds has, however, varied and one cannot conclude that the establishment of such funds is either necessary or sufficient to ensure that state revenues are used in the long term public interest. What is more important is to ensure accountability of public expenditures in general, including disclosure of revenues from the EIs, and their allocation to various programs. 41. In the case of Bank supported projects, assistance for more sustainable use of EI revenues is provided through the new ComDev facility, which provides support in the form of helping identify local suppliers for the operations, thereby increasing local content; providing entrepreneur training and access to finance for local SMEs; empowering local communities to help them become more effective partners; improving local and regional governance; enhancing the capacity of the local community to manage the social impacts of the EI and improve the management of environmental assets. The project team is currently discussing the possibility of including this project in the ComDev pilot program. 9 In developing countries special funds are often raided in times of crises and not replenished. The Jamaica fund for revenues from Bauxite, established in the 1960s was effectively used up during the macroeconomic crises of the 1970s and then dissolved.

11 Other means of ensuring that revenues from EIs are spent in pursuit of social objectives include prior agreement with the country on the use of these revenues. Such agreement would form part of the conditionality for the project. Such agreements have been introduced in other Bank projects, such as the Chad-Cameroon pipeline, but they are facing considerable problems because of a failure of the government to respect the agreement. In the case of Kosovo, agreements on monitoring of the revenues in accordance with the EITI and commitments to ensuring that adequate benefits flow to affected communities would certainly be put in place. Whether there is a need for an earmarked fund to manage all the mining revenues in accordance with an agreed expenditure plan is not clear at this stage. Further review on the quality of public finance accountability and management is needed and is ongoing. VI. Conclusions 43. The proposed project can be expected to yield a number of direct benefits to Kosovo. First the mine will provide royalties to the government, ranging from 1.8 to 3.5 million in 2013, the first year of operations of the mine and the TPP. In future years these royalties will increase with inflation. In addition the profits from the mine will provide tax revenue of around million in Second the TPP will generate significant profits tax, which could be as much as 6-7 million in the first year of operation. Third, Kosovo will benefit from savings in imports of power from outside, which cost more than the power generated from the project. These savings will initially be around 4 million, but they will increase over time as the project is increasingly dedicated to providing domestic power. 44. In addition to these direct fiscal benefits, the project will create employment of about 3,000-4,000 in 2013 and afterwards, with some fewer jobs in the preceding three years. Valuing these jobs with a shadow wage of 0.7 would imply benefits of around 8 million in The increased investment in the economy will also generate higher growth. Based on a simple ICOR model (anything more complex is not possible given the lack of data), the project would boost growth in the period by 0.4 percent per annum, resulting in GDP that is about 123 million higher in 2013 than it would be without the project. 46. There will be some environmental consequences of the operations of the lignite mine and the TPP. These depend on what alternative the lignite TPP is compared with. If the alternative is a heavy fuel oil plant, the environmental costs of the subcritical version of the lignite plant are only slightly higher. Moreover the supercritical and ultra critical versions have lower environmental costs than the heavy fuel oil alternative. If, however, the alternative is CCGT, the lignite plant does have higher environmental costs of about one eurocent per kwh. As far as GHGs are concerned, the subcritical lignite plant has a climate cost of around 17 a year million compared to a fuel oil plant and 50 million a year compared to a CCGT. These calaculations assume a price for carbon of 19/ton, which is about the current market price in the European emissions trading system. It is also worth noting that at this price the critical version could produce savings in GHGs of around 4.5 million while the ultra critical version could produce savings of around 8 million.

12 47. Finally there are issues related to how the additional funds from the project would be managed. The royalties could make a small contribution to the social assistance programs, adding about 1.5 to 3 percent to the expected level of those programs. Other revenues would also contribute to increased spending on poverty alleviation. It is not clear, however, whether the funds generated from the project should be earmarked for specific uses, apart from proper management of the mining operations in accordance with good practice. It is possible that the Bank could support the integration of the project into the local community through the ComDev, and that option is being explored. 12

13 13 ANNEX I: Direct Economic Benefits DETAILS OF FLOWS TO GOVERNMENT FROM AN EXPORT PROJECT RELATIVE TO IMPORTED POWER VERSION1: VATTENFALL + MISSION IMPORT AND EXPORT PRICE DATA. KOSOVO C EXPORTS RESIDUAL. 25 Cent/Ton Royalty NPV Coal Production Mn. T/Yr Royalty on Production Mn. Euros Tax on Income from Mine Scenario 1 Mn. Euros Scenario 2 Mn. Euros Scenario 3 Mn. Euros Output from Kosovo C New Lignite Mine GWh Domestic Demand GWh Other Domestic Production GWh Kosovo B GWh Kosovo A GWh Total Other Domestic Production GWh Net Exports GWh Income & Taxes Based on PEIR Energy Sector Review and on Mission Net Income from Exports Scenario 1 Base Mn. Euros Scenario 2 Base Mn. Euros Scenario 3 Base Mn. Euros Net Income from Production of Kosovo C Scenario 1 Base Mn. Euros Scenario 2 Base Mn. Euros Scenario 3 Base Mn. Euros Additional Tax Revenue to Government (PEIR Based) Scenario 1 Base Mn. Euros Scenario 2 Base Mn. Euros Scenario 3 Base Mn. Euros Losses on Imports Saved With TPP Imports Gap W/out TPP GWh Actual Imports Attributable to TPP GWh Savings in Import Subsidies or Loss to Consumers Mn. Euros Scenario 1 Base Mn. Euros Scenario 2 Base Mn. Euros Scenario 3 Base Mn. Euros

14 14 Annex II: Macroeconomic Analysis of Kosovo C Project OTHER IMPACTS OF MINE AND KOSOVO C DEVELOPMENT Figures are in Mn Euros constant prices unless otherwise stated. YEAR Without Project Scenario IMF Cons 2003 Prices GDP 2,454 2, Investment Depreciation Capital Stock Net Investment Projected Change in GDP Actual Change in GDP Additions from Project Investment Depreciation New Capital Stock Net Investment Projected Change in GDP New GDP % Increase 3% 6% 4% 4% 4% 4% Investments in the Operation TPP MINE Total Annual Rate of Growth %

15 15 Annex III Environmental External Cost due to Lignite Power in Kosovo EcoSense Calculations for the planned new Lignite Power Station in Kosovo Bert Droste-Franke, IER University of Stuttgart Introduction In order to meet the EU requirements in terms of emissions in the energy power sector in Kosovo, a new lignite power plant is planned. Based on first data on the power plant which should include two blocks of 300 MW and meets the limits of the Large Combustion Plant directive, an estimation of external health effects and the related external costs from the new plant was performed in this project. For the assessment of external costs the bottom-up impact pathway methodology developed during the ExternE project series was applied. The concentration response functions and monetary values used correspond to the latest knowledge in this area (European Commission 2005). Basic Methodology and Adjustments for the Application of EcoSense in Kosovo 1.1 The Impact Pathway Assessment Methodology The Impact Pathway Assessment is a bottom-up-approach in which environmental benefits and costs are estimated by following as far as possible the Impact Pathway from source emissions over air quality changes to physical impacts, before being expressed in monetary benefits and costs. For a detailed description of the methodology see European Commission (2005). The EcoSense model used for the project is an integrated software tool for environmental impact pathway assessment which has been developed and reviewed by experts within the EC ExternE and GARP projects (European Commission 1996, European Commission 1999a, European Commission 1999b, European Commission 2000). It has already been used within numerous national and international studies. EcoSense provides harmonised air quality and impact assessment models together with a database containing the relevant input data for the whole of Europe. The impact categories that should be considered for the current study are shown in Table 1.

16 16 Table 1 Health and environmental effects which are related to emissions of SO 2, NO X, NH 3, NMVOC and primary particles and could be included in the current analysis by using the EcoSense model. Impact Category Pollutant Effects Human Health mortality PM a 10 O 3 Reduction in life expectancy due to short time exposure Reduction in life expectancy due to long time exposure Human Health morbidity PM 10 O 3 Respiratory hospital admissions Restricted activity days Minor restricted activity days Bronchodilator usage Cardiac hospital admissions Cough days Cases of chronic bronchitis Lower respiratory symptoms a particles with an aerodynamic diameter < 10 µm, including secondary particles (sulfate and nitrate aerosols) 1.2 Data and Configuration of the EcoSense Version Applied for the Assessment Basic Geographical Model Structure The atmospheric modelling within EcoSense is performed on a grid. The basic model applied for the analysis is the one adapted for Ukraine (Droste-Franke and Friedrich 2004). The modelling grid corresponds to the EMEP-50 grid which also used for EcoSense Europe, but shifted a bit into the South-Eastern direction. It represents a 50 to 50 km 2 grid in the original polar stereographic projection. Figure 1 shows the spatial resolution of the grid in the Kosovo area Air Quality Models The air quality models applied for the damage estimations are the same as in other EcoSense versions, the Windrose Trajectory Model (WTM) and the Source Receptor Ozone Model (SROM). The WTM is an user-configurable trajectory model based on the Windrose approach of the Harwell Trajectory Model developed at Harwell Laboratory, UK (Derwent et al. 1988, Derwent and Nodop 1986). The Source Receptor Ozone Model is a model which estimates ozone concentration by using source-receptor matrices. These were derived from results of the EMEP Ozone Model for different reduction scenarios (Simpson et al. 1997). The model is based on the EMEP iteration model developed by David Simpson (Simpson and Eliassen 1997). More detailed information on the used models can be found in the publications to the ExternE projects (European Commission 1999a, European Commission 1999b, Friedrich and Bickel 2001).

17 17 Figure 1 Current administrative units implemented in EcoSense for Kosovo and its neighbour countries Baseline Emission Data Data background emissions of SO 2, NO X, NH 3, NMVOC, and CO in Europe and of PM 10 in Ukraine on the EMEP 50 grid was taken from UNECE/EMEP emission database (EMEP 2003). The base year was Meteorological data Data on wind speed, wind direction and precipitation needed for the regional air quality model WTM were taken from EMEP. The base year for the data is Population data As population in Kosovo the number of inhabitants was assumed which represents the latest available data. The remaining data on total population in Europe is based on the data implemented in EcoSense which was taken from Eurostat statistical database.

18 18 Data on different risk groups for Kosovo were provided by the project partners. Table 2 shows the values applied in this study. A correction of the concentration-response functions for long term exposure would require detailed life-table data and was out of the scope of the current study. Where such adaptation could not be done, the most up to date assumptions for Europe average values have been applied (European Commission 2005). Figure 2 Population data for Europe implemented in EcoSense Table 2 Assumed risk group percentages referred to the total population in Kosovo and the rest of Europe considered for the calculations. In cases for which no data were available from the partners for Kosovo, European values were applied (e.g. for the share of asthmatics in the population) Risk Group Factor Risk Group EU Factor Risk Group Kosovo Age 5 to % 22 % Age 15 to % 61 % Age 18 to % 65 % Age > % 48 % Age > % 6 % Age > 18 with chronic respiratory symptoms 25 % 22 % Age 5 to 14 with asthma 2 % 4 % Age > 20 with asthma 4 % 2 %

19 Exposure Response Functions and Monetary Valuation The concentration-response functions as well as the monetary valuation applied in the project refer to the latest findings in the ExternE projects (European Commission 2005). The list is given in Table 3. Table 3 Concentration-Response functions and monetary values according to the most actual review of the ExternE team (European Commission 2005). Health Effect Pollutant a Concentration- Response- Factor Acute mortality - Years of life lost due to acute exposure Chronic mortality - Years of life lost Risk Group Monetary Value [Euro 2000 ] O3 0.03% All PM E-04 All (YOLL) due to chronic exposure New cases of chronic bronchitis PM E-05 Age > Respiratory hospital admissions O3 1.25E-05 Age > PM E-06 All 2000 Attributable emergency cardiac hospital admissions PM E-06 All 2000 Restricted activity days PM E-02 Age 15 to Minor restricted activity days O3 1.15E-02 Age 18 to Cough days O3 9.30E-02 Age 5 to Symptom days (Lower respiratory symptoms including cough) PM E-01 Age > 18 with chronic respiratory symptoms Days of Lower respiratory symptoms O3 1.60E-02 Age 5 to (excluding cough) Days of Lower respiratory symptoms, PM E-01 Age 5 to including cough, in children in the general population, i.e. extra symptoms days Days of bronchodilator usage O3 7.30E-02 Age > 20 1 with asthma PM E-02 Age > 20 1 with asthma PM E-02 Age 5 to 14 with asthma 1 a the PM10 values can be directly applied on secondary sulfate aerosols. Before they are applied to nitrates, these have to be divided by a factor of two. 38

20 20 Results The new power plant analysed in the project is a lignite power plant with two blocks at 300 MW. The capacity factor was given as 38 percent. It was assumed that it will be built close to the area of the current Kosovo B power plant. The stack height was assumed to be above 100 meter. Please note that a detailed analysis close to the source is not possible with the applied models, because the grid resolution of the model is about 50 to 50 km 2. However, it was found out during the ExternE project series, that the regional models applied in this study for high stacks result in general to good estimates of the exposure including the exposure close to the source. The emissions of the power plant as assumed in the calculation are listed in Table 4. The emissions per kwh were estimated by Blesl (2006) on the basis of the provided reports (European Agency for Reconstruction 2005a/b). A mixture of the planned technologies of pulverised fired and circulating fluidized bed boilers was assumed. In order to assess the emissions of particles with an aerodynamic diameter smaller than 10 m a fraction of 90 percent was assumed (Pregger 2006). Table 4 Emissions per kwh and per year derived from the specifications of the planned lignite power plant in Kosovo by Blesl (2006). Substance emitted Emissions per electricity produced [mg/kwh el ] Emissions per year [metric kilotonnes per year] NO X SO Particulate Matter (PM) NMVOC CO CH N 2 O Based on the recommendations from the ExternE project for the valuation of CO 2 a value of 19 Euro per metric tonne of CO 2 equivalent emission should be applied as central value (European Commission 2005). This value is based on the marginal avoidance cost estimates for meeting the Kyoto target. A similar value has been reflected in the prices of the tradable emission permits for CO 2. As a lower bound cost value damage cost estimates considering effects which can be assessed with a reasonable certainty are recommended. These amount to about 9 Euro/t CO2- equivalent. Applying these values together with the greenhouse gas potentials of CH 4 (= 23 t CO2- equivalent/t CH4 ) and N 2 O (= 297 t CO2-equivalent /t N2O ), external costs of 41 to 87 million Euro 2000 were assessed from the emission numbers in Table 4.

21 21 Table 5 Physical health impacts and damage costs caused by the assumed new lignite power plant planned in Kosovo Physical Impacts Damage Costs [Euro 2000 ] Health Effect Pollutant a In Kosovo Outside Kosovo In Kosovo Outside Kosovo Years of life lost due to short term O exposure Years of life lost due to long term PM exposure New cases of chronic bronchitis PM Respiratory hospital admissions O PM Attributable emergency cardiac hospital admissions PM Restricted activity days PM Minor restricted activity days O Cough days O Symptom days (Lower respiratory symptoms including cough) PM Days of Lower respiratory symptoms O (excluding cough) Days of Lower respiratory symptoms, PM including cough, in children in the general population, i.e. extra symptoms days Days of bronchodilator usage O PM PM Total All a PM10 includes primary emitted particles as well as secondary nitrate and sulfate aerosols. The results of the calculation of effects due to ambient air pollution are shown in Table 5. Damage costs of 31 Million Euro 2000 per year have been estimated in total. 2.7 Million Euro 2000 of these occur in Kosovo directly. The largest share of the external costs represent years of life lost due to long-term exposure by particles, followed by restricted activity days and new cases of chronic bronchitis. All in all the effects due to particle exposure are contributing with about 98 percent to the damage costs.

22 Figure 3 Increase in Concentration of primary and secondary PM 10 caused by NO X, SO 2 and primary particle emissions from the planned new lignite power plant in Kosovo 22

23 23 Figure 4 Health impacts in Europe caused by primary and secondary particles (PM10) caused by emissions from the planned new lignite power plant in Kosovo. The accumulated exposure which is proportional to the health impacts is shown Figure 3 shows the concentration increase of particles caused by the power plant. The highest increase is observed around the source. However, concentration increases have been assessed also for the neighbour countries in Europe and also quite far away form Kosovo, including small increases even in Poland, Ukraine, and parts of Russia. Figure 4 shows the average exposure of the total population with primary and secondary PM 10 resulting from average operation. It gives a good impression of the distribution of human health impacts caused by the emissions of the plant. Comparison with alternatives The above analysis was conducted for the plant that is being proposed. In order to calculate the true environmental impacts, however, we need to look at an alternative. In this case two alternatives are considered: a heavy fuel oil plant and a combined cycle gas turbine (CCGT). Data on these alternatives are given in Table 6. The implications in terms of environmental impacts and GHGs emitted are given in Table 7.

24 24 Table 7 shows that a sub-critical lignite plant has environmental costs of about 0.5 million higher than a fuel oil plant and about 23.2 million higher per annum than a CCGT. In terms of CO2 and other GHG emissions (CH4 and N2O are included in the calculations), the subcritical lignite plant has an annual cost of about 18 millionmore than fuel oil plant and 51 million higher than a CCGT. Comparing the subcritical and critical and ultra critical versions of the lignite plant, we see significant environmental and climate benefits. The critical version generated health costs that are 1.4 million lower than the subcritical version while the ultra critical version has costs that are 3 million lower. In addition, assuming a price for carbon of 19/ton the critical version could produce savings in GHGs of around 4.5 million while the ultra critical version could produce savings of around 8 million. Moreover the GHG savings could be realized through one or other channels of the carbon market. Table 6: Emissions and Other Data for diffeent Alternatives to Lignite TPP. Oil heavy Gas Lignite normal Supercritical Ultrasupercritical Emissionfactor [kg/tj] PM PM PM NO SO Size fraction PM10 86% 100% PM2.5 76% 100% Pollutant output [mg/kwh_ges] PM PM PM NO SO Efficiency 38% 55% 38% 40% 42% Pollutant output [mg/kwh_el] PM PM PM NO SO Annual emission [kt/year] PM PM PM NO SO Sources: United States Environmental Protection Agency (EPA): Compilation of Air Pollutant Emission Factors. AP-42, Fifth Edition, Volume I: Stationary Point and Area Sources. Office of Air Quality Planning and Standards, Washington Kumar, N.; Lurmann, F.W.: User s Guide to the UAM-AERO Model. Sonoma Technology, Inc., STI UG, Santa Rosa Thomas Pregger (2006), Analysis of Rentz report on emission factors. Personal communication Rentz, O., Karl, U., Peter, H. (2002). Ermittlung und Evaluierung von Emissionsfaktoren für Feuerungsanlagen in Deutschland für die Jahre 1995, 2000 and 2010 Forschungsbericht , Umweltbundesamt Deutschland Blesl, M. (2006) Calculation of emissions per kwh for the new lignite power plant in Kosovo. IER University of Stuttgart, Personal Communication