Kostolac B3 lignite 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. In spite of high level support and Chinese financing, the project is plagued by concerns over pollution, State aid and legal challenges.

Background

Serbia relies on lignite for around 70 percent of its electricity production, which poses challenges in switching to a sustainable low-carbon economy in line with EU policy. It also poses problems in terms of climate change resilience, as the floods in 2014 showed (see below). 

Nevertheless, the Serbian government and state-owned utility Elektroprivreda Srbije (EPS) plan to build more coal plants. Top of the list is Kostolac B3 near Pozarevac.

The construction of the 350 MW lignite power plant 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.

Would you trust these companies to build a new coal plant?

The Kostolac B3 chimney may be under construction, but EPS and CMEC are yet to get the desulphurisation unit working that CMEC built several years ago at the existing Kostolac B1 and B2 plant. The whole desulphurisation project has been marked by back-to-front processes, but is getting more mysterious as time goes on.
Construction was already underway in June 2015, before the environmental impact assessment (EIA) procedure for the desulphurisation unit was anywhere near concluded. The public debate on the EIA took place on August 18, when the unit was already half-built. The construction permit for the desulphurisation unit was issued on 31.8.2015, in record time after the public EIA debate.
On 18 July 2017, the Serbian Prime Minister announced the completion of Kostolac desulphurisation unit, yet as of January 2020, it is still not operating. 
As a result, in 2018 Kostolac B’s emissions were the highest of any coal plant in the Western Balkans, and were 14 times above the plant’s allowed emissions ceiling.
The Serbian authorities have stated that the landfill needed to receive the gypsum waste from the desulphurisation unit is not ready. But does really take so long to dig a hole and line it?
To add to the mystery, in December 2019, the Serbian Ministry of Environmental Protection opened a public consultation on a new environmental impact assessment for the desulphurisation unit, despite it having been built for two and a half years already. 
Whatever is going on, it does not inspire confidence in EPS and CMEC, nor in the Serbian government’s ability and willingness to enforce the law. Under these circumstances, surely it would be better to get the desulphurisation unit at the existing plant to work, rather than pushing on with the construction of a new plant?

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.

As of January 2020, the project continues to accumulate legal challenges and other issues, but EPS seems determined to go ahead. 

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. This is currently subject to a complaint to the Energy Community Secretariat by Serbia’s Center for Ecology and Sustainable Development (CEKOR) and Bankwatch.

Successful court challenge and Espoo Convention complaint sent Environmental Impact Assessment back to the drawing board

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 CEKOR and at the Espoo Convention by Bankwatch Romania. 

At its 33rd meeting held in March 2015, the Espoo Convention Implementation Committee noted that the construction of a unit at the Kostolac lignite power plant was an activity listed in Appendix I to the Convention and that the likelihood of a significant adverse transboundary impact could not be excluded. 

Therefore, the Committee asked 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 has opened an initiative related to 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.

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

Not in line with the latest EU pollution control standards

In 2017, the EU updated its industrial emissions rules (the so-called LCP BREF), which Kostolac B3 will be obliged to abide by upon Serbia’s entry into the EU, if not before. However, the air emissions limits in the Kostolac B3 environmental assessment are not in line with the new standards. As an EU accession country, Serbia needs to make sure that any new plant is in line with these standards or it risks being landed with expensive retrofit costs later on.

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 forbid this kind of payment. 

At the same time, the project’s sensitivity analysis, which does include carbon costs, leaves no doubts that even a low CO2 price is enough to render the plant uneconomic.

EBRD inability to raise its client’s standards

EPS’ lack of respect for Serbian and EU legislation are particularly frustrating given that it is a long-term recipient of EBRD financing, most recently through a corporate restructuring loan approved in 2015.

In spite of its goals to promote green economy transition, the EBRD has so far not succeeded in persuading its Client to act in line with Serbian and EU law, or in steering it towards a coal-free future. For this reason a complaint was submitted by CEKOR and Bankwatch in early May 2018 to the EBRD’s project complaint mechanism. Regrettably, the compliance review did not examine the main clause of the EBRD’s environmental and social policy that was alleged to have been breached, thus resulting in an unjustified conclusion that non-compliance had not been established.