Kostolac B3 power plant, Serbia
Serbia’s state-owned utility Elektroprivreda Srbije is planning a new 350 MW lignite plant at Kostolac in the country’s north-east. The project is receiving high level support and Chinese financing, but is plagued by concerns over its economics, pollution and legal irregularities.
We closely follow international public finance and bring critical updates from the ground.
The new 350 MW Kostolac B3 lignite power unit, which as of early 2022 is under construction, is the second phase of a project implemented by the China Machinery Engineering Corporation (CMEC) and financed by the China EximBank.
The first phase, for which a USD 293 million financing contract was signed between the Government of the Republic of Serbia and Chinese Exim Bank on 29 December 2011, consisted of modernization of the existing units Kostolac B1 and B2, construction of a desulphurization system, a landing dock on the Danube and railway infrastructure.
The experience with Kostolac B desulphurisation fails to inspire confidence
However, although the desulphurisation unit at Kostolac B was officially declared complete on 18 July 2017, it only started test operations in October 2021, and as of early January 2022 it still has no operating permit. It is unclear whether it is CMEC or EPS at fault as the Serbian authorities have provided very little information on what is going on. Whatever the cause, it hardly inspires confidence in unit B3.
Due to the lack of functional desulphurisation, in 2020 Kostolac B’s emissions were 12 times as high as the plant’s allowed emissions ceiling. For more on the existing units and the never-ending desulphurisation saga, see here.
No tender procedure, no parliamentary scrutiny
In November 2013, the Serbian government signed an agreement with CMEC for the construction of the new unit, B3. No tender procedure took place. Instead, the Chinese and Serbian governments signed an intergovernmental agreement freeing joint projects from tender obligations – a move which would not be allowed under EU law.
A second, USD 608 million loan was signed between the Serbian government and the China EximBank in December 2014 for the new unit and expansion of the Drmno open cast lignite mine, whose annual production would increase from 9 to 12 million tonnes.
On 19 January 2015, the Serbian parliament voted on the loan ratification in an extraordinary session announced to the public less than 24 hours in advance. It includes several problematic elements, including stipulating that any arbitration would be carried out in Beijing.
No CO2 price taken into account
A summary of Kostolac B3’s feasibility study from 2015 shows that the calculations did not take any carbon price into account, despite Serbia’s EU accession ambitions. The study explains that carbon costs had been left out on the assumption that they would be covered by the State. In practice, however, State aid rules that apply to Serbia as a signatory to the Energy Community Treaty would not allow this.
At the same time, the project’s sensitivity analysis, which does include carbon costs, leaves no doubt that even a low CO2 price is enough to render the plant uneconomic.
No environmental assessment for mine expansion
The Drmno mine currently produces around 9 million tonnes of lignite per year and needs to expand to 12 million in order to feed the new plant. In 2013 the government decided that no environmental impact assessment would be necessary for the mine expansion. In 2021 the Energy Community Secretariat opened a dispute settlement case against Serbia on this issue.
Successful legal actions result in new environmental assessment
The first environmental impact assessment for Kostolac B3 was approved in December 2013. It lacked any analysis of transboundary impacts, even though the site is just 15 km from the Romanian border, and suffered from numerous other deficiencies. It was therefore challenged in court by Serbia’s CEKOR and at the Espoo Convention by Bankwatch Romania.
At its meeting in March 2015, the Espoo Convention Implementation Committee agreed to ask Serbia to comply with its obligations under the Convention and to notify Romania about the environmental impact assessment. This was the first time that the Committee had opened an initiative related to the cross-border impacts of a coal fired power plant.
In June 2016 the Serbian administrative court ruled that CEKOR’s arguments were valid and that the decision to approve the environmental assessment should be revoked. By this time, however, the original decision had already expired and the environmental assessment had to be started again.
A new environmental impact assessment process was carried out in 2017, also with transboundary consultations, and approved in September. However it still suffered from a number of weaknesses such as failure to ensure that the planned plant complies with current EU pollution standards, the so-called LCP BREF, and failure to address the concerns of residents of the village of Drmno regarding their health and property damage from vibrations and ground subsidence. Therefore CEKOR has again challenged the decision in court – which as of January 2022 is still pending.
Mystery construction permit
Just weeks later after the environmental assessment was approved, on 20 November 2017 – and a few days before the China-Central & Eastern Europe summit in Budapest – it was suddenly announced that construction of Kostolac B3 was starting. Surprised, CEKOR requested the building permit. However the permit was for the B3 chimney only, not for the whole plant. And it is dated July 2017, before the environmental assessment was even completed.
In fact, the building permit for the main boiler and other key parts of the power plant were only issued in April 2019, when the chimney was already at an advanced stage of construction.
Risks from flooding
During the tragic floods that hit the Balkans in 2014 the Kostolac B power plant narrowly avoided being flooded thanks to the tireless work of plant workers, firefighters and civilian volunteers. While their efforts were successful that time – unlike at Kolubara and Nikola Tesla, which were seriously affected by the floods – at the end of July 2014 in a separate flooding incident unit A2 at Kostolac was closed for several days and the Drmno mine was partially flooded.
Such vulnerabilities have not been taken into account while planning the new unit.
EBRD in Serbia: Don’t use floods to prop up coal Press release | July 7, 2014