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Cheap coal for Europe comes at high price for Ukrainian people

Last week I visited the Burshtyn and Dobrotvir coal power plants and the surrounding communities in western Ukraine. The power plants and the dark smoke rising from their sad chimneys have been part of the landscape for so long that they have become part of the scenery. People know that the pollution can’t be good for their health, but they don’t feel they have the power to do anything about it. And officials will tell you that they comply with their environmental permit.

Things are ‘absolutni normalna’.

While electricity is relatively cheap in Ukraine, it comes at a great environmental and health cost. None of the coal-fired power plants in Ukraine have any sulphur oxides and nitrogen oxides pollution control, while the equipment that filters ash at these plants have seen quite a few decades of operation.

At the same time, much of this electricity is wasted, with energy efficiency levels far below European standards. The amount of energy spent in Ukraine to produce 1 dollar of gross domestic product (GDP) is three times the European Union average, while Ukrainian carbon dioxide emissions per unit of GDP are the highest in Europe (Source: UKEEP, 2009). Despite these losses, coal power plants are still able to sell electricity at very low prices due to the country’s state aid regime.

Electricity goes to Europe

In western Ukraine, the coal power plants Dobrotvir and Burshtyn are connected to the European grid and export part of their electricity to countries like Hungary, Slovakia and Romania. In 2013, Ukraine exported some 4,300 GWh of electricity (mainly to Hungary) which would be the equivalent of a 500 MW net capacity power plant operating 24 hours a day throughout the year for export only. If the 500 MW power plant were new, it would ‘only’ cause 17 premature deaths each year; if it’s Ukrainian power plants from the 70s, you can’t really tell.

These power plants wouldn’t be allowed to operate in the European Union because of their emissions, or they would have a strict deadline to close down. In some countries, their low efficiency could make their electricity so expensive that they would not be able to compete with other sources like wind power.

But because of the coal subsidies in Ukraine, EU countries can import coal-based electricity at a price 25-50% below even the domestic price in Ukraine. (In 2013 the UA domestic wholesale price for electricity was EUR 0.07 per kwh. The export price was between EUR 0.035 and EUR 0.0525 per kWh.)

Difficult choices

Would you still pollute the air for your countrymen if the electricity you produce is not used by your people? Apparently, yes. It isn’t an easy choice. It’s a profitable business, it keeps jobs in mining and power plant operations while the premature deaths, respiratory and cardiac diseases aren’t visibly connected with air pollution from your power plant.

Should you still buy the electricity, in Hungary for example, if you knew that it comes from power plants that wouldn’t be allowed to operate in Hungary because they create too much pollution? Well, I think you shouldn’t, there’s no middle ground there.

Serbian government props up almighty coal

Since 2006 when the Energy Community was founded and its member countries committed to adhere to EU legislation on state aid, the Serbian government has provided several forms of support for the Kostolac lignite power plant and mines company, part of state company Elektroprivreda Srbije (EPS), and is now planning to provide further support by approving loan guarantees in the National Assembly for the construction of the 350 MW Kostolac unit B3.

A project that is currently being undertaken by China’s CMEC is the reconstruction of existing blocks B1 and B2 at the Kostolac power plant. It was the Serbian government, not EPS, who signed a contract for a USD 293 million loan (85 percent of the project value) from the China ExIm Bank.
Since part of the project consists of transportation infrastructure – a landing dock on the Danube and railway infrastructure – it is also possible that a clause from an annex (pdf) to the 2009 Serbia-China agreement will be applied, exempting the import and supply of goods and services for the project from VAT and customs duties.
What is still coming up is the construction of a new 350 MW unit at Kostolac B and expand the Drmno lignite mine, for which the Serbian government in November 2013 signed a contract with CMEC. The project depends on financing from the China ExIm Bank and unnamed commercial banks, and on a state guarantee from the Serbian government for these loans. The 2014 Serbian state budget allocates two guarantees for the project – USD 107 million for un-named commercial banks and USD 608 million for the China Exim Bank.

The state support for Kostolac outlined in the new report (pdf) is just one example of how Serbian state authorities are systematically propping up an already almighty coal industry. If plans for a new energy strategy for Serbia are anything to go by (discussions are ongoing about the blueprint for the energy sector for the period 2015-2025), Serbian authorities also plan to continue with this kind of support for the dirtiest of fossil fuels into the next decade.

On a path prone to disaster

Serbia, as a member of the Energy Community, has committed to abide by the EU’s complex rules on subsidies and it is not yet clear whether the support outlined above is in line with these. But in any case, as a candidate country for EU accession and a member of the Energy Community, Serbia needs to increase its energy efficiency and reach a renewable energy target of 27 percent by 2020. This implies a decrease in the percentage of coal in the energy mix.

But these are not the only reasons to pursue such a path. Serbia, like all of south east Europe, is vulnerable to natural disasters, including those exacerbated by climate change such as floods, heat waves, cold waves, droughts and forest fires. This May’s tragic floods – which claimed at least 51 lives and led to the evacuation of nearly 30,000 people from flooded towns and villages in Serbia alone – propelled the issue into the global headlines, but extreme weather events have been increasing in frequency for years already.

Among others, between 2000 and 2010 eight serious flood events affected 51 290 people and killed four (pdf), while a 2012 drought led to the loss of 45 percent of Serbia’s maize crop (pdf).

With each disaster costing huge amounts of money to clear up, Serbia, like other countries in the region, needs to be quicker in recognising its self-interest in slowing climate change and making its infrastructure more resilient to extreme weather events.

In this respect, lignite power stations are problematic in both cause and effect. On one hand, coal is the biggest contributor to climate change (IEA, pdf). At the same time, coal power plants are vulnerable to extreme weather, as the recent Serbian floods showed, in which two pits of the Kolubara open cast lignite mines were completely flooded – with estimated costs of EUR 100 million – and electricity generation was cut by 40 percent at the height of the floods. While a mammoth effort to stop the Kostolac B plant from being flooded was ultimately successful, here too it was a close shave and could easily have resulted in generation capacity being shut down.

At the other end of the scale, coal power generation is also extremely water-intensive and – like hydropower and nuclear – vulnerable to drought. Some countries have started to recognise this problem (pdf) however in south east Europe the discussion so far on drought has centred almost exclusively on hydropower.

The positive flip-side is that non-hydropower renewable energy is both a climate change mitigation tool and an adaptation one, since it is decentralised and with the exception of biomass has no CO2 emissions during operation, and energy efficiency measures are better still. Yet Serbia, along with its neighbours, consistently treats these as a side salad rather than the main dish.

After the recent floods it is high time for Serbia to think again about its energy strategy – a new one of which is currently in its draft stages – and avoid tragedies recurring again in the future. But as money often ends up being the defining factor in what goes ahead and what doesn’t, CRTA’s new report (pdf) gives every reason to re-think state support for the coal sector whether or not Serbia opens up its draft energy strategy for discussion again.

Will Georgia go green after EU association agreement?

At the moment in Georgia, we have too many cases in which infrastructure projects are implemented without regard for the environment and our people, and this is most obvious when it comes to hydropower projects.

Georgia has huge potential to develop energy produced from hydropower, and numerous dam projects are popping up all the time. Some of the most ambitious government plans include the construction of the 700 MW dam at Khudoni, a 450 MW cascade at Namakhvani, and 282 MW dam at Oni.

These plans, however, are happening in a very weak legal environment, with poor project planning often occuring from the onset. Georgia’s legislation does not address the issue of involuntary resettlement caused by infrastructure projects. The Environmental Impact Assessment (EIA) system is ineffective, in terms of providing the public with information and opportunities for public participation. Also an unclear legal rights regime offers next to no protection for communities that make customary use of the land that traditionally was in their hands. Unregistered land plots can be grabbed by investors for infrastructure projects. At the same time, promoting alternative sources of energy other than hydropower is difficult, because no legal regime is in place to ensure the development of energy efficiency or renewable energy programmes.

The result looks a bit like the Wild West, where unwieldy investors face off against people that have no choice but to rebel. And the consequence, often, is repression by authorities.

In March, 500 villagers protesting against the 185 MW Shuakhevi hydropower plant were forcefully dispersed by policemen and special forces. In Svaneti, people who have strongly opposed the construction of the Khudoni dam have been systematically sidelined by authorities and investors.

In May, a tragic landslide caused by huge floods at the Dariali dam site killed a number of workers. But this type of accident could have been avoided, if a proper Environmental Impact Assessment would have been conducted. Such an assessment would have identified different geological risks and as such, the current project site would necessarily have needed to be ruled out.

This is why our environmental legislation needs to improve. We need to think seriously about the impacts caused by this type of infrastructure and ensure that we only build projects that are useful for our people and in harmony with nature. Adopting more of the EU acquis would definitely improve our environmental legislation.

Expert proposals for Energy Community improvements are a promising step forward

South and eastern European member countries of the Energy Community may soon have to be much more ambitious about environmental standards in the energy sector. This is because the Energy Community, the body that aims to create a common energy market between the EU and some of its neighbours, may be about to introduce more of the EU environmental acquis into its Treaty.

The Energy Community brings together Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Moldova, Montenegro, Serbia and Ukraine – and soon also Georgia – with the stated goal of extending EU internal energy policy to south east Europe and the Black Sea region. The Energy Community Treaty sets out, among others, which energy-related parts of EU legislation have to be adopted by the participating countries.

Six months ago, an expert group was commissioned by the Energy Community to review the institution’s set-up and working methods and to propose directions of reform. In its final report (pdf) presented today in Vienna, the so-called High Level Reflection Group says that much more of the EU environmental legislation should be adopted by Energy Community members, as well as procurement legislation and improvements in monitoring and enforcement.

This represents an important turning point for the Energy Community’s future. In our view, the key pieces of legislation proposed by the expert group to the Energy Community are those concerning:

industrial emissions and the adoption of the “best available techniques” requirements for power plants,
public procurement in the energy sector,
ambient air quality

There is also a proposal to use the EIB’s energy policy to screen investment projects for compliance with the EU’s long-term energy goals, which is a good step forward.

This increased focus on environmental issues at the Energy Community comes also as a result of the institution taking into account the views of NGOs, including those of CEE Bankwatch Network (pdf). The expert group even recommended that NGOs are included as non-voting representatives in the institutions of the Energy Community – this is an excellent opening to civil society we very much commend!

Of course any law is only as strong as its implementation, and this is where problems have hit the Energy Community so far. The expert group has recommended that financial assistance be conditioned on implementation of EU legislation and that the Secretariat’s capacity for monitoring and investigation should be strengthened. It is also proposed that the current dispute settlement mechanism – in which the Ministerial Council has to judge its own members’ performance in certain cases – is gradually changed to an independent court.

The proposals are a very good start for the discussion on the extended Energy Community Treaty. At the same time, a group of NGOs today also presented its own vision (pdf) about the future of the Energy Community. While there is a good deal of overlap, the expert group omitted some of the environmental acquis that we find important in preventing harmful impacts from the energy sector. Among these are norms and regulations concerning:

the impacts of power plant operations on water quality: Water plays a crucial role not only in hydropower generation, but also in extraction, cooling and processing in coal power. This could be addressed by adopting Directive 2008/105/EC, which establishes concentration limits in surface waters for pollutants including heavy metals and radioactive materials;
waste from extractive industries connected to energy generation, ie. coal mining:. This aspect is currently covered in EU member states by Directive 2006/21/EC;
climate change: there is an urgent need for binding greenhouse gas emission reduction targets in the revised Treaty, to enable those countries who are planning to join the EU to meet their upcoming obligations;
power plant operation: particularly hydropower or wind power, but also coal power plants can have a serious impacts on plants and animals. These could be tackled by integrating Directive 92/43/EEC on the conservation of natural habitats and of wild fauna and flora into the acquis. This Directive establishes the Natura 2000 network of protected areas which helps to prevent harmful impacts from infrastructure projects.

The plan now is to develop the expert group’s proposals further and approve the changes to the Treaty at the 2015 Ministerial Council meeting. The challenge now is to build consensus on the proposals among the Energy Community member governments who will cast their votes on the future of the energy sector next year. Considering the decades-long impacts of energy investments and the urgency of addressing climate change, biodiversity loss and air quality, it is in all of our interests to raise environmental standards and improve the rule of law in the Energy Community as soon as possible.

Big plans for a small country – Montenegro’s draft energy strategy

Looking at the Montenegro government’s draft White Paper on the country’s Energy Development Strategy until 2030, due to be approved on June 19, you would never think that this is a country of around 650 000 people that plans to join the EU within six years.

Why? One reason is that the amount of planned electricity generation infrastructure is reminiscent of a bigger country. Three new major projects are planned to be carried out simultaneously during the next few years – the Pljevlja II coal power plant (220-250 MW) and Moraca (238 MW) and Komarnica (168 MW) hydropower plants – which seems ambitious to say the least, especially considering that the last tender for Moraca hydropower cascade failed in 2011 when not a single investor applied.

New website for coal campaigners

Because of some investors’ undiminished appetite for financing coal power, Bankwatch created an interactive toolkit that explains how to contact the investors behind a project, which policies guide their decisions and how best to influence them.

KINGSOFCOAL.ORG

Why does Montenegro need so much electricity? The short answer is that it doesn’t. For decades Montenegro’s electricity demand has been largely dictated by the Podgorica Aluminium Factory – KAP – which has at times used around 40 percent of the country’s electricity. But the company has been in long-term decline and has been bankrupt since last year. Undeterred, the government’s draft White Paper sees the factory working at half capacity during the coming years.

Another driver for the ambitious plans is economic growth – notoriously hard to predict – which the White Paper puts at 3.7 percent from 2010 until 2015. But so far Montenegro’s annual GDP growth hasn’t hit that figure even once since 2010, let alone averaged it, and according to the EBRD’s (pdf) and the World Bank’s current forecasts it doesn’t look like it will do so by 2015 either.

Even that electricity that Montenegro does use could be reduced significantly if more attention was paid to residential energy efficiency and stopping wasteful practices such as using electricity for heating, yet the government is not pursuing this potential with anything like the zeal it reserves for new large infrastructure.

In addition to overestimating domestic demand, the Montenegro government is set on positioning the country as an ‘energy hub’ with spare electricity to export to its Balkan neighbours and Italy. This might be fine if it had a vast supply of clean energy sources to export environmentally benign electricity from, but this is not the case. The Moraca and Komarnica dams are both highly controversial due to their impacts on protected natural areas, and one of the planned sources of electricity for export is none other than the Pljevlja II lignite power plant. The town of Pljevlja is already choking from years of lignite pollution and its inhabitants can hardly be expected to be thrilled at the prospect of a new lignite plant that will export the electricity and leave the pollution behind.

The existing power plant in Pljevlia.

Much of the draft strategy also overlooks EU rules and obligations, even though decisions taken now will only just be being implemented when Montenegro joins the EU, assuming it manages to enter by 2020 as planned. Montenegro has adopted a renewable energy target of 33 percent by 2020 as part of its Energy Community obligations, but it names Moraca and Komarnica as important for achieving it, even though the same document says they will be ready in 2021 and 2022 respectively. The strategy foresees an increase in greenhouse gas emissions until 2030, in a period when the EU as a whole plans to decrease its emissions by 40 percent compared to 1990 levels. And the Industrial Emissions Directive, which should play a decisive role in decisions about the planned and existing Pljevlja power plant units, is treated as something hardly worth mentioning.

In short, the draft strategy is outdated before it has even been approved. Rather than rushing ahead with it, the Government should scale down its ambitions to something more achievable and befitting of an ecological state.

Transition triumphs and traps – Assessing Poland’s recent economic journey, and where it goes next

This article was published in Issue 59 of our quarterly Bankwatch Mail.

Read it in full

Some interesting cross-cultural and ideologically various perspectives were due to bounce around during the discussion, and we kicked off with a look at the so-called ‘Polish economic miracle’ that has seen the country enjoy the fastest rates of growth in Europe over the last two decades (over four percent a year), become the sixth largest economy in the EU, and resulted in living standards more than doubling between 1989 and 2012.

Just how miraculous has this economic miracle been?

Aleksander Nowacki: I hesitate to bring up personal anecdotes, but I remember being sent as a child to buy bread. My mother said to me that in the morning it cost 2,000, so she was giving me 4,000 at 3pm to be on the safe side. I ended up coming home without bread, as the price had more than doubled since the morning. When we talk about living standards, it’s not good just to talk about income per head. We also need to look at the fact that while the Polish economy in 1989 was maybe not as bad as Germany in the early 1920s, it was in terrible shape: there was hyper-inflation and the economy was collapsing.

About the participants

Aleksander Nowacki, who has reported for the Financial Times among other publications during his career, was born in Warsaw, and experienced higher education in the UK in the 1990s and 2000s.

Gavin Rae, a native of Birmingham in the English Midlands, moved to Warsaw in 1996 and currently teaches at the city’s Kozminski University.

And the fact that Poland is now one of the most developed countries in the world is, in some ways, miraculous, though there was nothing really miraculous about it – just hard work, and some luck, such as joining the EU.

Gavin Rae: I’ve lived in Warsaw pretty much permanently since 1996, and I’ve seen considerable changes in that time. I think the term ‘miracle’ involves an element of hyperbole, but it can be looked at as a positive example only really within the context of the post-socialist transition. In general, I would say that the post-socialist transition in eastern Europe has been a complete disaster. That isn’t supposed to be a justification of what existed before, but when you look at many of the ex-Soviet states, the declining GDP and living standards have been of an unprecedented scale in peacetime history.

When you look at Poland within this, of course, there has obviously been a much better experience, where GDP has risen significantly, living standards have risen, and so on. However, even within this, when you look at the very large deactivation of labour, the decline in many public services, particularly in health and pensions, and rising inequality, then I think that the Polish transition has not been the unprecedented success that the present government would like to portray it as.

AN: I would disagree quite strongly with some of these points. Regarding what Gavin describes as declining standards in public services such as health, between 1989 and 2010, average life expectancy grew in Poland by seven years – that’s much higher than the global average. The number of infections in hospitals was cut, I think, to 20 percent of what it had been in the eighties. The quality of health care is a lot higher than it was in the eighties: you don’t now get patients lying in beds in corridors, as was very common in the 1980s. We’ve also seen very significant advances in, for example, the treatment of and facilities for disabled people.

As for inequality, while economic inequality has indeed increased, in the eighties what we had in Poland and elsewhere in the region was ‘hidden’ inequality. In a socialist economy, how much money you had didn’t influence your position in society, or even your economic position. It was all about your contacts. So people who had contacts in the party, contacts in certain companies, could access goods that money couldn’t really purchase. So actually we had incredible inequality not in terms of income disparity but in availability of goods, and that was hidden. The inequality we have now is more transparent.

GR: To come back on health, I can agree that the system in Poland in the 1980s was particularly bad. But look at some of the figures: there are fewer doctors now in Poland than there were 20 years ago, there are fewer dentists, fewer nurses, fewer public hospitals. And we can see the health system now increasingly failing. That is of course not to say that things were great 25 years ago, and now they’re bad.

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