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Montenegrin power plant feasible only with creative accounting


The project preparations for the 254 MW Pljevlja II have been going on for years. Elektroprivreda Crne Gore (EPCG) and its main shareholder, the Montenegrin government, desperately want the project to go ahead, while the other major shareholder in EPCG, Italy’s A2A, is not keen due to the project’s poor economics. This has led to a stalemate which has lasted for at least a year and a half. But now, suddenly, there’s a huge rush.

In October there is a general election. And at the beginning of next year, new OECD rules on coal plant financing by export credit agencies kicks in, meaning that if financing for the Pljevlja II lignite power plant is not agreed by the end of this year, the Czech Export Bank, which is likely to be the main financier of the project, will have to pull out.

EPCG hasn’t been idling during this stalemate. As well as the never-ending negotiations with A2A and the preferred bidder Škoda Praha from the Czech Republic, the company has commissioned three new studies to bolster its claim that the project is feasible.

  • Fichtner, a company which previously found that some of the coal reserves around Pljevlja are not economically feasible to exploit, has now been engaged to show the opposite.
  • Poyry has been hired to forecast electricity prices in order to see whether a new plant would be feasible in the long-term.
  • Deloitte’s task, using the data from the first two, has been to establish the plant’s overall feasibility.

EPCG and the Montenegrin government have been delighted to announce that the studies show the project is feasible.

But actually, they don’t.

The full studies have not been published, but a comprehensive presentation (in the local language) of the Deloitte study shows the main findings.

And true enough, the phrase “it can be concluded that the project is feasible” does appear on the presentation.

But that’s where the feasibility ends and the creativity begins.

1) The study assumes that the Montenegrin government will manage to negotiate a delay in implementing the EU Emissions Trading Scheme (ETS) until at least 2026. Delayed implementation of ETS has not been the practice so far for states acceding to the EU in recent years and it is unclear why Montenegro should be an exception. Perhaps the Montenegrin government is counting on free emissions allowances, but these are in general no longer available for the power sector.

2)The forecast wholesale electricity prices seem very high, reaching 97 EUR/MWh by 2040 without inflation, compared to current prices of 39 EUR/MWh in Montenegro cited by an EPCG representative on 18.07.2016.

And this is where the real weirdness begins. The study takes a price 10% lower as a basis for calculations in order to appear “conservative” in its calculations. This price is still quite high and may never materialise. But more intriguing is that the calculations, for no clear reason, couple this “conservative” 10% lower electricity price with a 10% lower CO2 emissions price in the name of making a “conservative” calculation.

This is in fact the opposite of conservative, because lower CO2 costs do not pose a risk to the plant, but rather help it become feasible. So a lower electricity sales price and a higher CO2 price would form a more conservative scenario, not a lower electricity sales price and a lower CO2 price. I find it difficult to believe that Deloitte don’t know this, so it looks like a case of creative accounting to me.

Even with this bizarre coupling, if the wholesale price of electricity turns out 20% lower than expected (and the CO2 price turns out 20% lower lower), the investment is unfeasible. So if the CO2 price rises as expected, presumably the investment would be even more sensitive to lower than expected electricity prices. Considering the inexact nature of such forecasting, this seems quite a possible scenario.

3) It is assumed that production costs at the captive lignite mines will be reduced from 24.21 EUR/tonne in 2015 to 17-17.5 EUR/tonne in 2027. However it is far from certain that such significant cost cuts will be achieved, and even 17.5 EUR/tonne is on the high side for lignite mines in eastern Europe, according to a 2014 EY benchmarking study. In order to reach the desired cost of production from the mine, the number of workers would have to be reduced by almost half. It is not clear whether there is any plan to ensure that this happens in a just and socially sensitive manner.

4) VAT is not expected to be paid on the equipment for the power plant. This is in line with recent changes to Montenegrin legislation, but decreases the investment’s value for the state and raises issues about state aid.

So, in summary:
If Montenegro somehow manages to delay the implementation of the ETS until 2026 and
If electricity prices more than double by 2040 and
If CO2 costs are 10% lower than projected and
If Pljevlja mine manages to reduce production costs from 24.21 EUR/tonne to 17.5 EUR/tonne within the next ten years and
If no VAT is paid for the EPC contract,
Then the Pljevlja II power plant might just turn out economically viable.

That’s a lot of “ifs”.

No wonder A2A is not very interested. But it also raises the question of why the Montenegrin government is so desperate to push through this project, despite its obvious weaknesses?

As is often the case with the Balkan energy sector, special interests and corruption come to mind. The fact that the Prime Minister’s brother, Aco Đukanović owns an 11% share in the Pljevlja lignite mine raises obvious red flags. With interests like these involved, the government’s ability to balance public and private interests is highly compromised.

Montenegro’s decision-makers – as well as the Czech Export Bank which is considering financing the project – would be well advised to examine the project documentation with a fine-toothed comb and see the numbers for what they are – a desperate attempt to make a rotten project palatable.

Ombudsman asks European Investment Bank to act on conflicts of interest issues

In a letter to the President of the European Investment Bank from July 22, the European Union’s Ombudsman Emily O’Reilly has asked the bank to review its governance arrangements to help prevent potential conflicts of interest in the bank’s governing bodies.

Noting the wide range of operations of the bank, including lending for large scale projects “such as expansion of energy distribution networks, renewable energy projects, modernisation of transport infrastructures and broadband investments”, the Ombudsman observes that “this requires effective mechanisms to assess and prevent possible conflicts of interests within governing bodies”.

Going into more detail, O’Reilly identifies a number of shortcomings in conflict of interest provisions in the two main governing bodies of the EIB, its Board of Directors, responsible for approving strategic and operational decisions, and its Management Committee, handling the day-to-day management.

To address these, the Ombudsman among others requests the EIB to “specify how conflict of interest assessments are performed before members of the Board of Directors and Management Committee [the two main governing bodies] are appointed”. She also points out that the level of detail that new members of governing bodies have to disclose seems either insufficient or not in line with the practices in other international financial institutions.

Also in contrast to the EIB, Board members at other public financial institutions such as the World Bank and the European Bank for Reconstruction and Development “may not engage in any outside activity without prior authorisation of the relevant Ethics Committee”.

Lobbyists in the EIB’s Board of Directors

The Ombudsman’s initiative is not coming out of the blue considering revelations about corruption cases with the alleged involvement of former EIB director Mihai Tanasescu in Romania and former Vice-president Magdalena Álvarez Arza in Spain. According to Irish media, the EIB’s current Irish Director John Moran is actively lobbying for the American ride-sharing company Uber.

For the EIB to work in the interest of European citizens, the EU bank needs to adopt stricter provisions to prevent conflicts of interest and “revolving doors” practices by its high-level staff. The Ombudsman initiative is therefore much welcomed by transparency advocates.

A ray of light for communities in Serbia’s coal heartland


Spanning over 60 square kilometers, Kolubara is home to one of Europe’s largest open cast lignite mines which feeds four nearby power plants (Nikola Tesla A, Nikola Tesla B, Kolubara A, and Morava) with a total installed capacity of 3255 MW, all operated by the national power utility Elektroprivreda Srbjie (EPS).

Through the years the expansion of the mines has been enabled primarily by successive loans from the European Bank for Reconstruction and Development. The village of Vreoci, 60 kilometres south-west of Belgrade and sandwiched between two of the mines, is one of the most heavily affected among the mining regions across the Western Balkans.

Deceived by authorities and financial institutions equally with promises of fair relocation, the 3000 strong community has only witnessed their lives change for the worse in the last decade, while coal excavators have been eating their way into the land closer and closer to their homes.

“Our houses suddenly began to crack since the beginning of this year, and we are threatened from one side, they cut off our water, our wells have dried up and now we are dependent on the water the mining company delivers in tanks every day,” Darko Živković, a resident of Vreoci, told Al Jazeera in October 2015.

The lignite pit has already reached the Živković family’s backyard, and they are concerned that unless they move out soon, their house will simply collapse on them. But they are not the only ones.

The fate of the village of Vreoci has been hanging on a thin string called “The Blue Book on Resettlement” since 2007. This is a document co-signed by the Serbian Government, the national power utility EPS, and the local council of Vreoci. The Blue Book sets out the guidelines for resettlement of the residents of Vreoci and was supposed to be fully implemented by the end of 2015. This has not happened.

So, Darko Živković and his family decided they had enough and filed a lawsuit against EPS. The court ruling, delivered in mid-June, orders the energy utility to urgently expropriate their land so that they receive a compensation that would allow them to start a new life in a new place. While there might be a rather long back-and-forth process, this momentous ruling is a breakthrough in a painful saga lasting for at least 10 years. Not least, this decision creates an indisputable precedent for at least another hundred families who have signed a petition to be collectively resettled. It also shows that the Blue Book must be implemented.

In the 10 last years, over one thousand residents from Vreoci have been demanding to be resettled as an integral community. They invoked rules laid down by the government and by international financial institutions to ensure that this process be carried out justly, completely, and that their chosen economic means of survival would, at the least, be equivalent to what it was before relocation. These rules are also intended to ensure that they receive adequate compensation for any loss of land, resources and jobs, and to rebuild their homes.

The Živković family now stands as an icon of a David against Goliath battle, paving the way for many other families in Vreoci whose life has been put on hold for years by wrong priorities of the authorities in Serbia who have been placing coal before people.

Last week this development was complemented by another first-of-its-kind in Kolubara when the Energy Community’s secretariat decided to open an infringement case against Serbia for failing to comply with state aid legislation. Formally announced last week, this is the first such dispute under the Energy Community Treaty. In its communication to the Serbian government, the secretariat addresses four state guarantees for loans from international financial institutions to EPS for projects in the Kolubara mining basin.

These recent developments are but the latest reminders for the Serbian government that further investing in coal only spells trouble for the country and its people.

New mudflow hits Georgian village as rainy season reveals poor assessment of hydropower plans


In the night of June 30, strong mudflow hit the village of Nakra in Upper Svaneti, in Georgia’s Caucasus mountains, damaging several properties and destroying two bridges. Caused by torrential rains the mudflow from the Lekvedari river brought large amounts of silt and stones close to the village center.

The natural catastrophe occurred at a time when geological surveys are underway for the construction of a tunnel and a 13m high dam to derivate water from the Nakra river to the planned Nenskra dam about 4 km upstream of the village.


A video from the June 30 mudflow. (by Nino Vibliani)

According to locals, the mudflow is one of multiple proofs for the geological sensitivity of the area which is not fit for a dam. Geological instability combined with a dam would pose a significant threat to their lives, they say. The Nenskra dam is currently under consideration for financing among several international lending institutions, including the European Investment Bank, the European Bank for Reconstruction and Development and the Asian Development Bank.

Background: Nenskra dam

Locals protesting against the planned Nenskra dam.

More about the project

People in Nakra have raised their concerns continuously with the dam’s promoters – the Korean K-Water and the Italian subcontractor Salini Impregilo. They fear that, if the derivation channel is built on the Nakra river, the river will be left with too little water to transport sediments brought by its tributaries. Currently, the Nakra River flow is strong enough that it washes the debris away from the village. But once most of the river’s water is being diverted, the debris might block the river stream and cause flooding of the Nakra village.

Svaneti is a geologically sensitive mountainous area prone to landslides and mudflows, and the situation around the planned reservoir and the village of Nakra is critical. The 80 or so households in the village have already suffered from geological instability in the past. The Nakra river and its tributaries bring debris and floods nearly every year. A mudflow of even bigger scale occurred on the Lekverari river in 2001, washing away a plot of land. In 2010, the Leknashera river, another mudfow river upstream of the Lekverari, completely covered the cemetery and agricultural plots in the village.


Multiple houses in Nakra have cracks and other damage caused by landslides.

While the developers acknowledge this risk, the project documentation offers neither thorough examination of the geology nor a detailed mitigation plan. According to a review (pdf) of the Nenskra Environmental and Social Impact Assessment (ESIA), the geological hazards and potential adverse impacts on locals have not been properly evaluated. In spite of this, the Ministry of Environment issued a positive ecological expertise report on the project, effectively giving it a green light.

Distant communities unite in their struggle

As the rainy season comes to Georgia, it reveals the poor assessment also for other hydroelectric plants under development in the country. Earlier in June mudflow from the Devdoraki glacier hit the Dariali gorge in the Kazbegi region and washed away a road and facilities of the Dariali and Lari hydroelectric plants.

Residents from Kazbegi who oppose the Dariali hydropower plant met the villagers affected by the Nenskra dam on July 3 to demonstrate their solidarity and support. The meeting took place in Chuberi, a community to host the Nenskra dam power house and to suffer of economic displacement. Kazbegians described their personal experience with hydropower plants and the negative effects these have had on their lives. They also encouraged the people from Chuberi and Nakra to continue defending their interests and engage with the international financiers of Nenskra dam.

Following the meetings, the student movements “Green Fist”, “Auditorium 115” and “Georgian Young Greens” from Tbilisi joint the villagers in a protest action at the dam’s construction site. Witnesses reported that police forces intimidated the drivers of buses that were to bring students to the construction site, but that the action was nonetheless held peacefully with approximately 300 participants.

During the action, the Chuberi locals repeated their demands that:

  • Project alternatives are being assessed that do not require the flooding of the gorge;
  • A cost-benefit analysis of the project is prepared for the country, region and the community;
  • An independent review of the geological risks is carried out and made public by independent experts who are not commissioned by the company;
  • Open public hearings are held to discuss the project with all interested stakeholders, including independent experts, national and international NGOs.

As opposition to hydropower developments becomes more and more widespread in Georgia, the government and international financiers of the projects should be wary of alienating communities across the country and postpone further new hydro constructions until a proper, environmentally and socially acceptable strategy has been developed for the country’s energy and hydropower sectors.

Read more

Hydropower development in Georgia, overview >>

Khudoni hydropower plant >>

Nenskra hydropower plant >>

 

Campaign update: Georgian mountain communities consider restoring long abandoned tradition to tackle threats to their land


Georgia’s indigenous Svans, an ethnic subgroup in Georgia’s Caucasus mountains with their own language, laws and traditions, are considering restoring a traditional council to debate energy and extraction projects that are set to disturb their ancestral lands. A decision is expected for July 3 to establish the Svan assembly – lalkhor – to discuss the ownership of customary lands that are under threat from mining exploration and massive hydropower developments planned on the Enguri river and its tributaries.

The proposal to re-establish the traditional lalkhor was made at a closed meeting of Svan elders on June 12 in Khaishi, the gateway to Upper Svaneti, a beautiful mountainous region roughly the size of Mallorca that is largely covered by a planned national park. Representatives of 17 villages want to resort to the long abandoned tradition to respond to the growing pressure on their lands. A Svan assembly, so their hope, would increase their impact on the decision making over their region’s development and help contest the Georgian government’s, investors’ and international lenders’ neglect of engaging locals.

Living in isolation on the southern slopes of the Caucasus mountains, generations of ethnic Svans have depended on the customary lands they have used for subsistence farming, livestock grazing and forestry. Arguing that the loss of ancestral land would mean the loss of their culture and livelihoods, Svans have taken a firm stance against the threat of economic displacement caused by large-scale infrastructure development.

Community opposition and protests

For nearly ten years, Svans have struggled to defend their lands from flooding by the planned Khudoni dam that would displace approximately 2000 people. Most recently, Svan communities protested against a gold mining project in the village of Eli and against the 280 MW Nenskra hydropower plant in Chuberi and Nakra. The protest against the Nenskra dam resulted in the arrest of eight people by special police forces. The project is currently considered for financing by multiple international lending institutions including the European Neighborhood Investment Facility, the European Investment Bank, the European Bank for Reconstruction and Development and the Asian Development Bank.

In a common position that participants agreed upon during the meeting in Kaishi, the Svan elders announced their categorical no to the Khudoni hydropower plant and demanded that local communities are consulted before any new energy project is proposed in the region. They also declared that the development of the Upper Svaneti region should explore eco-tourism, promote agriculture, small enterprise and contribute to the development of community-based renewable energy schemes instead of large hydroelectric plants.


People in Khaishi gathering while the meeting’s outcomes are announced (June 12).

It’s raining dams in Upper Svaneti

As many as 35 hydropower plants could be built in the next years in Upper Svaneti, an estimate made on the basis of feasibility studies, concessions and memoranda of understanding awarded by the Georgian government. About 27 of these are large hydropower plants whose capacity exceeds 10 megawatts. The locals claim the massive scale hydropower development would have serious ecological consequences and inflict irreversible damage on their traditional livelihoods.

In the villages of Chuberi and Nakra, families have already seen their property degraded by preparatory works on the Nenskra dam, including drilling and construction of access roads. For many of the families, grazing is a vital source of subsistence as their households have no stable income apart from elderly people’s pensions.

It is no wonder then that protests continue and local opposition is becoming more persistent with every passing day. Authorities and financiers must take heed of locals’ demands if only to avoid further escalation.

Read more

Hydropower development in Georgia, overview >>

Khudoni hydropower plant >>

Nenskra hydropower plant >>

 

Campaign update: environmental and health impacts of Serbian planned coal power plant Kostolac B3 discussed in court hearing

The possible cancellation of the Serbian government’s decision to construct a new 350 MW unit at the Kostolac B lignite power plant was discussed on June 23 at the national administrative court of Serbia. Bankwatch member group CEKOR filed the case in June 2014 after serious flaws and inconsistencies in the Environmental Impact Assessment (EIA) had not been addressed in the final report approved by the government in December 2013.

If the court’s decision, expected by the end of summer, is positive, it could require the project promoter, state-owned energy company Elektroprivreda Srbjie (EPS), to address all problematic aspects in a new EIA procedure. EPS is currently in the scoping phase for a new EIA decision after the original EIA expired in December 2015 according to Serbian regulation because the project hasn’t progressed since then.

In their complaint, CEKOR pointed to several missing aspects in the assessment, including a cost-benefit analysis, environmental and health impacts data, project alternatives scenarios, a review of cumulative impacts, and the lack of a cross border impact analysis on Romania whose border is only 10 km away from the power plant. (An ongoing investigation at the Espoo Convention Implementation Committee (pdf, page 7) is dealing with the cross-border aspect.)

More than two years after the Kostolac B3 project received a go-ahead from the Serbian Ministry of Energy, the life for communities around the project site has become almost unbearable, with health problems, damages to real estate and other problems becoming a daily challenge. The construction of the new unit comes in a package with the 30% expansion of the Drmno mine over the next years as well as the construction of a railway to transport coal from the mine to the power plant. Essentially, the villages of Drmno and Stari Kostolac would be trapped inside a triangle between the railway, the mine and the power plant.

Although the mine expansion and the railway construction should be seen as integral parts of the Kostolac B3 project, their environmental and social impacts of have not been assessed. This is all the more worrisome in view of the drama that the communities in another Serbian mining region, Kolubara, have been going through for over 10 years. In and around Vreoci, over 3000 people have been left in limbo, with restricted access to running water, noise, vibrations, air pollution and fear of what the next day will bring, as a result of extensive mining operations. A fair resettlement, the main request of the local community for these past 10 years, has still not been granted by the Serbian authorities and EPS.

The case of Kostolac B3 and Drmno is now shaping up to become a similar controversy.

The results of a recent sociological survey (pdf, [sr]) by Prof. Ksenija Petovar [1] that included 162 (or 65.9%) of the registered 246 households illustrate the bleak reality in Drmno:

  • 80% of households have one or more members suffering from chronic and/or frequent illnesses.
  • All but one respondents agree that the proximity of the Drmno mine and the activities of the lignite power plant have caused indisputably adverse health impacts.
  • Almost all respondents (except for two) said they suffer from different types of negative impacts and damage to their property, deriving from the activity of the mine and power plant.
  • Nearly 80% of the interviewees (78.7%) confirmed the presence of cracks in their houses (on walls, ceilings, pillars and roofs), as well as on sidewalks and other concrete surfaces in their backyards.

In addition to physical damage and destruction of their property, respondents also cite many other damages and impacts on their lives in the village: the noise of trucks, excavators and other heavy vehicles that operate 24 hours a day, conveyor belts transporting coal, coal crushers and other machines.

„All of us have health-related problems. Our houses crack. It’s not healthy to live in these cracked houses and who will buy our houses if they are one kilometer away from the power plant, where the pollution is biggest?“

Dragan Milenković, villager of Drmno

Wrong priorities

Social and environmental impacts of coal power production seem only secondary to Serbian authorities. Drmno is one example too many that this development path is a dangerous one for Serbian citizens, despite assurances that it is in their best interest.

During last week’s hearing, in reference to the issue of cross-border impacts on Romania, CEKOR was accused to “care more about the health of Romanians, than about the jobs for Serbians”. But while the often-cited job argument is becoming obsolete if people are too sick to work, it also never was an either-or decision.

With mounting evidence of the huge environmental, health and economic costs of coal power, Serbian authorities and the financiers of Serbia’s energy sector, including the European Bank for Reconstruction and Development, should look to investments in renewables and energy efficiency, which also require a workforce but without the devastating and uneconomic side effects of coal.

Notes

1. CEKOR commissioned the survey to the sociologist Dr. Ksenija Petovar, retired professor of architecture and geography, who was part of the team who designed the “Blue book of resettlement of Vreoci”, a document co-signed by the government, the local community council and EPS.