Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2243-RO ROMANIA SECOND TURCENI THERMAL POWER PROJECT STAFF APPRAISAL REPORT December 19, 1978 Projects Department Europe, Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ROMANIA CURRENCY EQUIVALENTS Currency Unit leu, lei (plural) lei 18 US$1.00 = leu 1 US$0.0556 lei 1,000,000 US$55,556 US$l lei valuta 4.47 in convertible currency terms WEIGHTS AND MEASURES m meter = 3.28 feet km = kilometer 0.62 mile m3 = cubic meter 1.31 cubic yards kWh = kilowatt hour = 3,414 British thermal units GWh = Gigawatt hour = 1 million kWh kW = kilowatt = 1 thousand watts MW = Megawatt 1 thousand kW kV = kilovolt = 1 thousand volts ton = metric ton (tonne) = 1.1 US tons = 2,204.6 pounds 1,000 kg kg/cm2 kilogram per square centimeter m3/s cubic meter per second hr = hour toe ton oil equivalent a/ = per annum GLOSSARY OF ABBREVIATIONS MEE - Minislaubii Energiei Electrice (Ministry of Electrical Energy). CIPEET Centrala Industriala de Producere a Energiei Electrice Si Termice (Industrial Central for Production of Electric Power and Heat). CIRE Centrala Industriala de Retele Electrice (Industrial Central for Transmission and Distribution of Power). ISPE Institutul de Studii si Proiectari Energetice (Design Institute for Thermal Studies). ROMENERGO Foreign Trade Procurement Enterprise. GOVERNMENT OF ROMANIA Fiscal Year January 1 to December 31 ROMANIA FOR OFFICIAL USE ONLY SECOND TURCENI THERMAL POWER PROJECT Table of Contents Page No. I. THE POWER AND ENERGY SECTOR ... I A. Romania's Energy Sector .. Energy Resources ..1 Organization of the Energy Sector 2 Past Growth of Energy Consumption. 2 National Energy Policy .. 2 Forecast Energy Supply and Demand . . 2 B. Romania's Power Subsector. 3 Organization... 3 Tariffs ....................................... 3 Planning ....................................... 4 Existing System and Development Program . . . 4 Role of the Bank ........................ 5 The Borrower .. .6 The Project Entity . . 6 Table 1.1 - Composition of Primary Energy Supply, 1965 and 1975 ....... 7 Table 1.2 - 1976-80 Plan Production Targets for Primary Energy. 8 Table 1.3 - MEE Interconnected System, Installed Generation Capacity (MW), 1977 9 Table 1.4 - Sector Generation and Sales, 1970-1977 .10 Table 1.5 - Forecast Sector Generation and Sales, 1978-1985 ............................. 11 Table 1.6 - MEE Interconnected System, Generation Reserve Planning, 1978-1985 ........... . 12 Table 1.7 - Sector Investment Program 1978-1985 13 Table 1.8 - MEE Interconnected System Planned Capacity Additions, 1978-1985 ... ...... 14 Figure 1.1 - MEE Organization Chart ............... . 15 Figure 1.2 - CIPEET Organization Chart ............. 16 Figure 1.3 - CIRE Organization Chart .............. . 17 II. THE PROJECT ............................................. 18 Description of the Project .............................. 18 Fuel Supply ............................................. 18 This report was prepared by Messrs. A. Roa (Engineer), P.A. Cordukes (Financial Analyst), I.I. Elwan (Economist). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Continued) Page No. Estimated Project Cost .................................. 18 Project Financing Plan .................................. 20 Environmental Considerations ...................... 20 Implementation .......................................... 21 Procurement ............................................. 21 Disbursement ............................................ 22 Risks .............................................. 22 Table 2.1 - Estimated Disbursement Schedule ....... 23 Annex 2.1 - Summary of Lignite Mining Consultant's Report ................................ 24 Annex 2.2 - Development of Project Cost Estimate 26 Annex 2.3 - Technical and Economic Indicators for the Project ........................... 30 Annex 2.4 - Supply Contracts Expected to be Awarded to Foreign Bidders .... ................ 32 Figure 2.1 - Estimated Project Implementation Schedule ...... ..... ....... 33 III. FINANCE ................................................. 34 Past Performance and Present Position of the Sector ..... 34 Financing Plan .......................................... 36 Future Financial Position ............................... 38 Accounts and Audit ...................................... 38 Table 3.1 - Income Statements (1975-85) .... ....... 39 Table 3.2 - Balance Sheets (1975-85) .... .......... 40 Table 3.3 - Sources and Applications of Funds (1975-85) ............................. 41 Annex 3.1 - Notes and Assumptions for Financial Forecasts ............................. 42 Annex 3.2 - Financial Plan Indicators for Power Sector ................................ 46 IV. ECONOMIC JUSTIFICATION .................................. 47 Least-Cost Alternative .................................. 47 Economic Rate of Return ................................. 47 Table 4.1 - Calculation of Return on Investment ... 48 Table 4.2 - Forecast Economic Dispatch and Fuel Savings ............................... 49 Annex 4.1 - Assumptions Used for Calculation of Economic Rate of Return .... ........... 50 V. AGREEMENTS REACHED AND RECOMMENDATIONS .... .............. 52 Annex - Selected Documents and Data Available in the Project File .... ............... 53 Map IBRD 10830R Map IBRD 10831R CHAPTER I THE POWER AND ENERGY SECTOR A. Romania's Energy Sector Energy Resources 1.01 Romania was one of the world's first oil producers and still meets more than 80% of its energy needs from indigenous oil and gas resources; however, production is declining despite intensive secondary and tertiary recovery efforts. By 1985, 50% of Romania's commercial energy needs may have to be imported, mostly in the form of oil. This situation has led to inten- sive efforts to develop all other indigenous energy resources, including hydropower, coal, lignite, and bituminous shales. 1.02 The published guidelines for the preparation of the 1981-85 Plan dictate continued enforcement and improvement of conservation and efficiency measures in the energy-consumptive sectors. These were initiated in 1973 and are implemented through a highly-structured program consisting of reviews of all industrial and chemical processes and production plans by special commit- tees seeking conservation opportunities, in accordance with the directive by the State Planning Commission to reduce oil imports and use imported oil only for petro-chemicals (see Economic Report, No. 1601-RO, March 31, 1978). 1.03 The guidelines indicate also large investments in resource explora- tion development e.g. "drilling to great depths", but details are lacking. Although expensive, this is not to imply that these developments are neces- sarily uneconomic--the studies for the proposed bituminous shale based power plant at Anina, for instance, indicate that the cost is competitive with other power resources being developed in Romania, which themselves are competitive with generation based on imported oil. 1.04 Wood is still quite widely used in Romania as a domestic fuel for cooking purposes. It is assumed that the availability of wood as fuel is limited and that it will stabilize at somewhat over 3 million tons annually on a sustainable yield basis. Other materials such as maize stalks and corncobs are used for domestic fuel in rural areas but no estimate of the quantities involved is available. Romania does possess some peat deposits but these are apparently not considered to be economically exploitable. 1.05 More detailed information on the power/energy sector is given in previous appraisal reports (Turceni Thermal, Loan 1028-RO; Riul Mare-Retezat Hydro, Loan 1242-RO), and an energy sector survey undertaken in connection with the basic economic mission in October/November 1976. Organization of the Energy Sector 1.06 No single entity is responsible for energy in Romania. Responsi- bility for the sector rests with the Ministries of (i) Mines, Petroleum and Geology; (ii) Electrical Energy; (iii) Chemical Industries; (iv) Metallurgical Industries; and (v) Forestry Economy and Construction Materials. The State Planning Committee is responsible for coordinating energy planning in addition to arbitrating differences between Government Ministries. Past Growth of Energy Consumption 1.07 Energy demand including wood and other "non-commercial" fuels in Romania has risen dramatically over the last three decades as a result of the policy of rapid industrialization; from about 6.8 million tons oil equivalent (toe) 1/ in 1950 to about 52.1 million toe in 1975. (No statistics are avail- ab:Le for 1976 and 1977, but best estimates are 56 million toe and 61 million toe respectively.) 1.08 Prior to 1950, oil and oil products supplied most energy needs. The development of heavy metallurgical industries, primarily iron and steel increased consumption of coke and coking coal and prompted rising imports of the!se fuels starting in 1955. Natural gas from the Transylvanian Basin became increasingly important starting in 1960 and by 1965 became the largest single source of energy in the Romanian economy. Current consumption of natural gas is about 36 billion cubic meters/a. The changing structure in the primary energy supply is brought out in Table 1.1. National Energy Policy 1.09 The national energy policy contained in 1976-1980 Plan can be summarized as follows: (a) maximum reliance on domestic production of primary energy resources; (b) priority in the development of coal, hydroelectric and nuclear power, while utilizing hydrocarbons preferably as raw materials for the chemical industry; and (c) greatly increased utilization of indigenous solid fuels having low calorific value (lignite and bituminous shales). Forecast Energy Supply and Demand 1.10 The 1976-1980 Plan specific production targets for the four prin- cipal forms of energy show that electricity and coal are the fastest growing during the five years (Table 1.2). 1.11 Energy consumption is expected to increase to 78 million toe by 1980. Plans for massive expansion of metallurgical and petrochemicals indus- tries will increase consumption substantially. Consumption estimates are conservative as they include planned savings through higher efficiencies in the industrial sector (about 8 million toe) and increased waste heat recovery (about 5 million toe). 1/ One ton oil equivalent, toe = 10.6 million kilocalories. B. Romania's Power Subsector Organization 1.12 Romania's power subsector is effectively managed by the Ministry of Electrical Energy (MEE) through a board comprising the Minister, three Deputy Ministers and the various directors of subordinated organizations. Up to October 1, 1977, all MEE generation, transmission, and distribution facili- ties were the responsibility of a single entity, the Industrial Central for Electric Power and Heat (CIEET). Under the present organization, CIEET has been replaced by two entities; Industrial Central for Production of Power & Heat (CIPEET) in charge of power generation and district heating stations, and Industrial Central for Transmission and Distribution of Power (CIRE), in charge of bulk transmission and distribution. Figure 1.1 shows MEE's latest organization chart and Figures 1.2 and 1.3 CIPEET's and CIRE's respectively. 1.13 Another recent development, also affecting the power subsector, is the general restructuring of Romania's economic and financial system announced by the President of Romania in February 1978. Among other reforms, enter- prises would have a greater responsibility for their own financial and operat- ing performance, production planning, and marketing at home and abroad. State funds would still be available to the enterprises. These changes will be put into effect beginning January 1, 1979. At the moment, it is unclear how much decentralization will actually take place and because of the uncertainties this appraisal does not take the proposed changes into account. Tariffs 1.14 Tariffs are approved by the Council of Ministers and are uniform throughout the country. Until January 1, 1977 they had been virtually unchanged since 1963 except for some restructuring in 1974 to introduce dif- ferential tariffs for low, medium and high voltage consumers. However, from January 1977, electricity prices were reduced 28-30% and thermal energy rates about 7% (para. 3.02). This reduction was part of a general restructuring of the prices to the manufacturing sector of inputs from the basic industries (e.g. power, mining, petroleum, metallurgy, chemicals, etc.). The purpose of this restructuring was to increase the profitability of end users, i.e., manu- facturers. The effect of this change has been to reduce average revenue per kWh sold from about 0.321 lei or US 1.6 cents equivalent to 0.237 lei or US 1.3 cents equivalent. This price restructuring has not significantly altered the electricity consumption pattern. Large industrial consumers increased their usage slightly from 70% of total consumption to 71% between 1976 and 1977. On the other hand domestic consumers increased their proportion from about 9% to 10% in the same period, even though the domestic price of electricity was not changed. 1.15 In recent years, rates have adequately covered operating and admin- istration costs and provided a reasonable portion of future investment needs. The tariff structure includes time-of-day rates, differential peak and off- peak demand and energy charges and other elements of marginal cost pricing - 4 - conducive to efficient allocation of resources but it has not been possible to confirm positively that the rate structure reflects the marginal costs of supply in the absence of a comprehensive study of actual and planned system costs in Romania. However, the elements of the tariffs and penalties imposed for excessive use (para. 3.05) give the tariffs a strong marginal-cost based flavor. Illustrative of the span of tariffs, the average cost of electricity to domestic consumers is about 80% above that paid by large industrial con- sumers who utilize about 50% of electricity sold in Romania and who benefit from the most favorable tariff rates. No future increases in rates are planned but they are likely to be necessary during the 1981-85 Five-Year Plan because of the higher cost and newer technology of the plant planned for construction in this period. Planning 1.16 Mathematical models to evaluate and compare alternative power sys- tem development patterns have been used by MEE for more than 10 years. A paper describing the Romanian planning models was presented at the June 1969 Power System Computation Conference in Rome, under the title "Models for the Study of Power System Development by Means of Digital Computers". The paper described a linear program to determine the least-cost development plan. The plan is updated from time to time to supply current information to the overall national planning process conducted by the State Planning Committee. A least- cost development study was received by the Bank in July 1977. Subsequent review revealed the study was highly constrained by resource availability and technical alternatives. All solutions selected lignite capacity up to the maximum available and kept nuclear capacity to a reasonable minimum. The net effect of the study was, then, to make only marginal determinations, in this case the division between hydro and nuclear 1/ capacity. However the deficien- cies pointed out by the Bank were clarified after detailed discussions with the Romanians and the resulting development program has been recognized by the Bank as the least-cost option within the context of Romanian economic policy. Nevertheless, further work is being done to improve planning by (i) incorporat- ing in the model benefits other than power, and (ii) reviewing carefully cost estimates and technical proposals for the marginal hydro projects. Existing System and Development Program 1.17 In 1977, Romania's interconnected generating capacity 2/ was 13,184 MW; 2,951 MW consisted of hydro and 9,487 MW of thermal plants belonging to MEE. The rest, 746 MW, were mostly thermal captive plants operated by auto- prcducers (Table 1.3). System peak was 9,360 MW and total gross generation 1/ Romania is actively negotiating for a nuclear plant based on Canadian technology, but the construction schedule has not yet been determined. However, given the growing energy deficit it is likely that nuclear power will figure prominently in Romania's long-range energy program. 2/ 97% of Romania's total installed capacity is interconnected. and purchases 61,595 GWh. MEE plants generated 56,551 GWh, auto-producers 3,306 GWh and imports amounted to 1,738 GWh. Exports were 1,882 GWh. 1.18 Sales in 1977 were 49,690 GWh, an increase of only 4.4% over 1976, compared to an average annual growth of sales of 10.0%/a for 1970-1976 (Table 1.4). This marked drop in the rate of load growth was probably caused mostly by the simultaneous occurrence of (i) a slowdown in construction activities as a consequence of the March 1977 earthquake; (ii) reduced consumption in irrigation pumping due to favorable rainfall; and (iii) impact of strong con- servation efforts (para 1.02). Table 1.4 also shows the marked reduction in transmission and distribution losses obtained through energy conservation measures since 1973. 1.19 The projected consumption figures prepared by the mission are based on national planning targets and imply average annual load growth of 6.1%/a for 1978-85 (Table 1.5). The estimate reflects slower industrial load growth (5.3%/a in 1978-1985 against 11.3%/a in 1970-1977) in line with an expected slowdown in the industrial production growth rate and planned strong conser- vation measures by Government throughout the economy. 1.20 Power system expansion plans follow a least-cost development program within national energy policy objectives (para. 1.09) and take into account adequate system reserve planning and performance criteria (para. 1.16). Table 1.6 shows MEE's generation expansion plan for 1978-1985. Total estimated subsector investment for 1978-1985 shown in Table 1.7 is 141,424 million lei (US$7,857 million), not including investment in distribution facilities at the local level in municipalities--total distribution investment could be esti- mated at about twice the figure shown for distribution in the table. Distribu- tion construction in the municipalities is carried out by construction units within each distribution enterprise. These units are self-accounting and financed from local funds. Of the invesment shown, 36%, 51,483 million lei (US$2,860 million), would be for 8,490 MW of thermal plants (Table 1.8); 42%, 59,483 million lei (US$3,305 million), would for 4,066 MW of hydro plants and the other 21%, 30,200 million lei (US$1,678 million), would be for bulk trans- mission and distribution, dispatching and other sector investments under MEE. 1.21 The large amounts shown for generation expansion reflect the current emphasis being given to accelerated construction of high cost, multipurpose hydro installations under the development program entrusted to MEE. Role of the Bank 1.22 The Bank has made two loans for power in Romania. Loan 1028-RO ($60 million) in 1974 for the first stage of the Turceni Thermal Power Project (1,320 MW) and associated transmission, and Loan 1242-RO ($50 million) in 1976 for the Riul Mare-Retezat Hydro Power Project (355 MW at Retezat plus 14 MW at Clopotiva, downstream). In addition to providing needed base load generation to the system, the first loan contributed to the transfer of up-to-date indus- trial technology. Manufacture of the boilers, turbines and generators is taking place in Romania using modern, proven designs acquired through licensing agreements with foreign manufacturers. The second loan helped finance a key - 6 - component of a cascade development designed to supply hydro peaking power to the system. 1.23 Progress on the first Turceni stage can be considered good in spite of an overall nine months' delay to date. Construction problems are well under control. No major additional delays are foreseen and the last of the four units is expected to start up in December 1979. 1.24 The Riul Mare-Retezat Hydro-Power Project, on the other hand, has been plagued by recurrent shortages of tunneling manpower. Start-up of the first unit in the Retezat station is likely to be 10-12 months late. To prevent further slippage manpower deficiencies are expected to be offset by introduction of a tunnel boring machine starting in early 1979. The Borrower 1.25 The Borrower for the proposed loan would be the Investment Bank, which is the specialized agency, under the Ministry of Finance, for investment projects in all sectors of the economy except agriculture (including water resources) and food processing. It has a large technical and economic staff with branch offices in all districts of the country. The Investment Bank's involvement in investment projects commences in the preparation phase of a project; its staff appraises all major investment projects technically and financially and recommends approval or otherwise of their financing to the Council of Ministers. When a particular project and its financial plan has been approved by the Council of Ministers, all major funds are channeled through the Investment Bank in accordance with the approved financial plan. All payments for the execution of a project have to be authorized by the Investment Bank which keeps separate accounts for each category in the finan- cial plan for every enterprise. It is the Investment Bank's obligation to ensure that a project is executed according to the financial and technical data included in the final technical and economic study approved by the Council of Ministers. Its inspectors check whether the project is proceeding according to the schedule approved in the Plan. The Project Entity 1.26 Turceni enterprise, one of the generating enterprises reporting to CIPEET (para. 1.12) will be responsible for Project implementation. This enterprise was established in 1973 by decree of the Council of Ministers specifically for the Turceni Thermal Power Plant Project and is currently carrying out the first stage of construction (4x330 MW) under Bank financing (para. 1.22). 1.27 The manager of the Turceni enterprise is responsible for the admin- istration, recruitment and training of future plant operating personnel. Training is arranged with the aid of technical schools, universities, on-the- job training at existing power stations and by association with the erection staff during the final stages of the Project through start-up and commercial operation. 7 Table 1.1 ROMANIA SECOND TURCENT THERMAL POWER PROJECT Composition of Primary Energy Supply, 1965 and 1975 (Thousand Tonnes Oil Equivalent) Percentage of Total Percentage of Total Energy Source 1965 Primary Energy Supply 1975 Primary Energy Sup-ly Solid Fuels (a) Domestic Production Coal and Anthracite 2,363 7.4 3,449 5.8 7,ignite 920 2.9 3,354 5.7 Brown Ccal 101 0.3 111 0.2 Bituminous Shale wood 604 1.9 740 1.3 Subtotal Domestic Production 3,988 12.5 7,654 13.0 (b) Imports Metallurgical Coke 658 2.0 1,795 3.0 Washed Coal and Anthracite 533 1.7 1,826 3.1 Subtotal TIports 1,191 3.7 3,621 6 Total Solid Fuels (Net Domestic Consumption) 5,179 16.2 11,275 19.1 Hydrocarbons (a) Domestic Production Crude Oil 12,571 39.2 14,590 24.,7 Natural Gas Liquids 410 1.3 452 0.8 Natural las 13,605 42.4 25,608 43.3 Subtotal Domestic Production 26,586 89.9 40,650 68.8 (b) Imports Crude Oil _ _ 5,085 8.6 Natural Gas Subtotal Imports _ _ 5,085 8.6 (c) Exports Crude Oil Natural Cl-s 154 0.5 -149 0.2 Petrole,im Products 5,849 18.2 6,182 20-5 Subtotal Exports 6,oo3 18.7 6,331 10.7 Total Hydrocarbons Supply 26,586 82.9 45,735 77.4 Electrical Energy Domestic Production (Hydropower) 226 o.7 ,956 5.3 Imrorts 59 0.2 113 2 Txports (126) .(.4) (655) (1.1) Net Electrical Energy Supply 159 0.5 i,414 2.4 30,800 96.1 50.260 8e. _ Total Domestic Energy Production 1,250 3.9 8,819 14.9 Total Energy Imports Tctal Primary En-rgy Supply 32,050 100.0 59,079 100.0 Total Energy Exports 6,129 19.1 6,936 11.6 TOTAL. DOMESTIC NERCY CCNSUM?TION 25,921 80.9 52,093 88.2 SOURCE: Economic Report on Romania. World Bank Report No. 1601-RO, March 31, 1978 December 1978 -8- Table 1.2 ROMANIA SECOND TURCENI THERMAL POWER PROJECT 1976-1980 Plan Production Targets for Primary Energy ---1976------ 1977 1978 1979 1980 Ilan Actual -------------Plan--------------- Electric Energy (TWh)./ 57.5 58.3 63.1 65-67.7 70-73.4 75-78.8 Coal tnet) (Million tons) 29.6 28.1 33.5 38-40,7 45.5-48.2 53-56.6 Petroleum Extracted (million tons) 14.7 14.7 14,8 15.1 15.3 15.5 Methane Gas Extracted (billion m3) 26.8 36.5 27.8 26,8 26.8 26.8 -~~~~~~~~~~~~~~~~~~~~~~~~~~ 1/ No complete statistics available beyond 1976. 21 Gross generation figures. SOURCE: Economic Report on Romania, World Bank Report No. 1601-RO, March 31, 1978. December 1978 - 9 - Table 1.3 ROMANIA SECOND TURCENI THERMAL POWER PROJECT MEE Interconnected System, Installed Generating Capacity, 1977 1977 (M) Total installed capacity in interconnected system 13,184 Total MEE, 12,438 of which: A) hydro 2,951 B) thermal 9,487 of which: i) coal fired, 4,184 of which: - straight condensing 3,731 - heat and power 453 ii) gas and oil fired, 5,194 of which: - straight condensing 2,575 - heat and power 2,619 iii) combustion turbine plants 109 (GWh) Gross Generation, 59,857 of which: MEE Thermal 46,751 MEE Hydro 9,800 Autoproducers 3,306 SOURCE: MEE December 1978 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Sector Generation and Sales, 1970 - 1977 (GWh) 1970 1971 1972 1973 1974 1975 1976 1977 1) Net generation by auto-producers 2,874 2,944 2,971 2,958 2,742 2,930 3,104 3,306 2) Consumption by auto-producers 2.869 2,937 2,963 2,948 2,735 2,922 3,093 3,306 3) Balance, sold to NEE 5 7 8 10 7 8 11 - 4) Net generation, MEE stations 29,713 33,810 37,735 40,962 43,373 47,594 51,593 52,853 5) Imports 28 64 411 251 785 502 684 1,738 6) Total delivered to NEE system 29.746 33.881 38.154 41223 44165 48104 5228 54591 7) Station use, district heating plants 816 821 1,048 1,095 1,143 610 588 926 8) System (T&D) losses, 1! 3,316 3,611 4,238 4,627 4,281 4,059 4,111 3,975 as % of 6 11.1 10.6 11.1 11.2 9.7 8.4 7.9 73 9) MEE sales, 25,614 29,449 32,868 35,501 38,741 43,435 47,589 49,690 of which: - industrial 16,727 18,966 21,034 23,068 26,304 30,363 33,287 35,472 - transport & telecommunications 659 778 813 984 1,116 1,321 1,487 1,626 - construction 662 707 718 852 890 978 1,016 1,199 - agriculture 710 835 992 1,334 2,027 2,014 2,521 2,481 - municipal services 2,204 2,431 2,688 2,281 2,007 2,035 2,883 2,229 0 - residential 2,239 2,513 2,887 3,183 3,257 3,717 4,255 4,801 - exports 2,413 3,219 3,736 3,799 3,140 3,007 2,140 1,882 1/ Progressive T&D loss reduction reflects strong conservation efforts after 1973. SOURCE: MEE data December 1978 ROMAN IA SECOND TURCENI THERMAL POWER PROJECT Forecast Sector Generation and Sales, 1978 - 1985 (GWh) --------------_------------F o r e c a s t------------------------------ 1978 1979 1980 1981 1982 1983 1984 1985 1) Net Generation by auto-producers 3,760 3,900 4,100 4,250 4,400 4,600 4,800 5,000 2) Consumption by auto-producers 3,530 3,630 3,820 4,000 4,150 4,370 4,520 4,740 3) Balance, sold to NEE 230 270 280 250 250 230 280 260 4) Net Generation, MEE Stations 57,054 60,817 65,411 69,279 73,878 78,466 81,132 86,340 5) Imports 250 250 250 250 - - - - H 6) Total Delivered to MEE System 57,534 61.337 65,941 69,779 74,128 78,696 81.412 86,600 7) Station use, district heating plants 1,002 1,070 1,186 1,223 1,299 1,379 1,427 1,518 8) System (T & D) losses, 3,832 3,867 4,055 4,184 4,445 4,719 4,882 5,193 as % of 6 6.7 6.3 6.1 6.0 6.0 6.0 6.0 6.0 9) MEE Sales, of which: 52,700 56,400 60,700 64,372 68,384 72,598 75,103 79,889 - industrial 37,019 39,382 41,987 44,086 46,291 48,605 51,035 53,587 - transport & telecommunications 1,757 1,944 2,243 2,467 2,714 2,985 3,284 3,612 - construction 1,317 1,475 1,664 1,968 2,226 2,423 2,636 2,860 - agriculture 2,887 3,151 3,545 3,856 4,280 4,660 5,070 5,500 - municipal services 2,448 2,615 2,822 2,912 3,082 3,355 3,651 3,960 - residential 5,272 5,833 6,439 7,083 7,791 8,570 9,427 10,370 - exports 2,000 2,000 2,000 2,000 2,000 2,000 - - 5 SOURCE: Mission estimates based on MEE data. 7Le ember l97b ROMANIA SECOND TURCENI THERMAL POWER PROJECT MEE Interconnected System, Generation Reserve Planning, 1978-1985 1978 1979 1980 1981 1982 1983 1984 1985 Installed capacity as of Dec. 31, MW 14,674 15,660 17,101 18,748 20,211 21,803 22,721 25,218 Available capacity 1 at maximum peak load - MW 14,144 15,384 16,501 18,300 19,698 20,850 22,380 24,069 Maximum peak load MW 10,025 10,750 11,660 12,740 13,974 15,235 16,300 17,740 Reserve fDr unavailable power & station deratings MW 930 950 1,050 1,100 1,150 1,200 1,250 1,310 Effectively available power MW 13,214 14,434 15,451 17,200 18,548 19,650 21,130 22,759 Load reserve MW 225 233 242 253 265 277 207 299 Reserve for planned MW 1,524 1,999 2,013 2,415 2,580 2,609 2,573 2,768 repairs at peak load Reserve for new units breaking-in periods MW 725 600 609 770 620 300 790 680 Reserve for unplanned MW 715 852 927 1,022 1,109 1,149 1,100 1,272 repairs Total reserve at peak MW 4,119 4,634 4,841 5,560 5,724 5,615 6,080 6,329 load % 29.1 30.1 29.3 30.3 29.0 27.0 27.2 26.3 Total reserve on MW 4,649 4,910 5,441 6,008 6,237 6,148 6,421 7,478 Dec. 31 x 31.4 31.3 31.8 32.0 30.8 28.8 28.3 29.7 X 1/ Based on expected annual maintenance cycle. H SOURCE: MEE December 1978 S . ROMANIA SECOND TURCENI THERMAL POWER PROJECT MEE Investment Program 1978-1985 (Million Lei) 1978 1979 1980 1981 1982 1983 1984 1985 1978-1985 TOTAL 10,570 10,893 11,711 14,200 17,300 21,200 25,900 29,650 141,424 of which: - thermal plants 4,393 4,070 4,620 5,100 6,100 7,370 9,500 10,330 51,483 - hydro plants 3,176 3,765 4,100 5,900 7,650 9,680 11,600 13,870 59,741 - transmission 1,965 1,879 1,765 1,900 2,100 2,400 2,650 2,800 17,459 w - distribution 1,000 1,150 1,200 1,250 1,400 1,700 2,100 2,600 12,400 - dispatching and other -- 36 29 26 50 50 50 50 50 341 December 1978 / H~ ROMANIA SECOND TURCENI THERMAL POWER PROJECT MEE Interconnected System Planned Capacity Additions, 1978-1985 (MW) 1978 1979 1980 1981 1982 1983 1984 1985 1978-1985 TOTAL 1,558 999 1,477 1,789 1,502 1,219 1,457 2,555 12,556 of which: A) hydro 148 289 357 349 472 379 757 1,315 4,066 B) thermal, 1,410 710 1,120 1,440 1,030 840 700 1,240 8,490 of which: a) coal-fired 860 660 920 1,290 930 720 340 340 6,060 b) oil/gas-fired 550 50 200 150 100 120 360 900 2,430 SOURCE: MEE December 1978 0' ROMANIA MINISTRY OF ELECTRICAL ENERGY ORGANIZATION CHART MANAGING COUNCIL OF THE MINISTRY EXECUTIVE BOARD] MINISTER OF~~~~~~~~~~~~~~~~~~~~~~ ELECTRICAL ENERGY z DEPUT TEMLUDIESIPUTY DEPUTY FEETRCDSACHDSRBUINO PWR e MIIS - MINIITE MINISTERE POE0ET(IET)CNE CR)i OPERA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ INVESTMENTO OPRTO ANDEPLANNING/ ORGANIZATION F RENMNT A N T T CO ATRUCTIONUTOMEVELOPMENT PERSONNEL AND FOR OURELNTINS E DPRMNSDEPARTMENTS MECHAIA EATET RIIGDEPARTMENTS DEPARTMENTS SERTRA AND ECTI CLTRI EOUiPMENT DEPARTMENTS _- TINDUSTRIAL CENTRAL - 'DESION INSTITUTE INDUSTRIAL CENTRAL FOR NATIONAL FOR TRANSMISSION AND w FOR THERMAL)STUDIES IISPE PRODUCTION OF ELECTRIC DISPATCO DISTRIBUTION OF POWER z POWER & HEAT ECIPEETN CENTER _CIRERIC -DESIGN INSTITUTE FOR HYDRO STUDIES IISPHI CENTER POR TRAINING TRANISSIONTE z PROFESSIONAL STAFF SUBS-TATION TRUST ITEMI -HYDRO CONTRUCT ION "'ROMENERGO' FOREIGN 0 TRUST STCHR - INSTITUTE FOR ELECTRICAL AT 'THERMAL CONSTRUCTION AND THERMAL ENERGY RESEARCH - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~SUPPLY ENTERPRISE POR zz TRUST (TELl POWER SYSTEMS RECORDS CENTER CENTRAL & ELECTRIAL GRID o 'ELECTRIO-MECHANICAL -INSTITUTE FOR MODERNIZATION ENTERPRISE FOR METAL F-~ TRUST ITENMI OF ELECTRICAL EGUIPMENT CONSTRUCTION & to HEAVY EQUIPMENT -NUCLEAR POWER PREFABRICATION0 CUNSi1HUCTION ENI ERPHISE, ENTERPRtISES RETRAINING CENTER U0 JOINT SECRETARIAT FOR TECHNICAL MUSEUM POWER PLANTS ON THE DANUBE U.ts D-rectly Con-erned With The Toreeni P.1oecr World Bnk - 19139 ROMANIA INDUSTRIAL CENTRAL FOR PRODUCTION OF ELECTRIC POWER AND HEAT (CIPEET) ORGANIZATION CHART | ASSEMBLI F THE WORKING PEOPLE WORKING PEOPLES' COUNCIL I EXECUTIVE BOARD |GENFRAL MANArLtHll |PLA-INNILPOLND DIRECTOR OF OPERAT IONS AND DIRECTOR! OF COMMERCIAL CH IEF GENERA7ION MAINTENANCE INVESTMENTS DIRECTOR ACCOUNTANT ENTERPRISES TEHIA DIVISION lCMMRIA 2GNEAIO -TE CHNICAL DIVISION _INVESTMENT AND SUPPLY SERVICES FINANCE, ECONOMIC FOR OPERATION AND CONSTRUCTION ANALYSIS AND FINANCIAL MANUFACTURING RELIABIITYOF POWER SERVICES FUELANDTRANSPORT CONTROL DEPARTMENT < AND RTPAIR P~ANTS FULNTASOTENTERPR ISES ELECTRICALAND POWER PLANT ACCOUNTING MECHANICAL EDUIP- EOUIPMENT DEPARTMENT MENT MAINTENANCE SERVICES E, POWER STA rON __ RESEARCH COMPUTERS DESIGN OF NEW TECHNOLOGY 1 G--reaI Manager is a Deputy Minister pf the Miristry ol Electrical Energy World Bank 19138 V -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ROMAN IA INDUSTRIAL CENTRAL FOR TRANSMISSION AND DISTRIBUTION OF POWER (CIRE) ORGANIZATION CHART ASSEMBLY OF THE WORKING PEOPLE WORKING PEOPLES' COUNCIL EXECUTIVE | BOARD l | MANi GERt/ | ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~NERRIE PLANNING ANDM DEVELOPMENT_ |PERSONNEL L _PO_LICYr DIRECTOR ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~ ~ ~~~~~~~~~~~~~~~~~~~~ADRPI OF L | l l ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ETERPRSISESIO LMAINTENANCE |LIVESTMENTS |LDIRECTOR LACCOUNTANT | DISTRIBUTION| TECHNICAL DIVISION INVESTMENT ELECTRIC POWER AND FINANCE, ECONOMIC Er . FOR AUTOMATION SERVICES HEAT SUPPLY ANALYSIS AND FINANCIAL AND QUALITY CONTROL DEPARTMENT CONTROL DEPARTMENT i ELECTRIC NETWORK -TECHNICAL DIVISION PLANNING & DESIGN EXPORT-IMPORT, ACCOUNTING FOR OPERATION AND SUPPLY DEPARTMENT DEPARTMENT RELIABILITY OF NETWORK E SUPPLY AND TRANSPORT - NETWORK EQUIPMENT SERVICES MAINTENANCE NETWORK RESEARCH EDESIGN OF NEW TECHNOLOGY 11 General Manager is a Deputy Minmnter of the MlnistrV of Electrical Energy. World BanE - 19137 CI. rF In I- - 18 - CHAPTER II THE PROJECT Description 2.01 The Second Turceni (Turceni II) Thermal Power Project comprises: (a) a thermal power station with four 330-MW lignite-fired units delivering 7,920 GWh/a to the interconnected sys- tem at a plant factor of 74%, as an extension to the first 4x330-MW Turceni stage (Turceni I) under construction in southwestern Romania with Bank financing (Loan 1028-RO). (b) about 288 km of 400-kV transmission lines connecting Turceni with Cluj via Rovinari (Map IBRD 10830R). 2.02 Fuel supply and site facilities (railroad, river diversion, ash handling, etc.) will be as provided for in Turceni I (Map IBRD 10831R), but will involve opening of additional new mines both open cast and underground (para. 2.03). Fuel Supply 2.03 In addition to lignite, the basic fuel, Turceni plant will also burn fuel oil for start-up and stabilization of lignite burning at partial load. Tuarceni II will require about 11 million tons/a of lignite and 0.8 million tons/a of fuel oil. Adequacy of lignite supplies for the life of the station was ascertained as detailed in the report from Mr. P.W. Rickes, lignite con- sultant to the appraisal mission. A summary of the report is included as Aninex 2.1. 2.04 Total annual lignite consumption is estimated at 55 million tons/a starting in 1984/1985 for all existing and presently planned lignite-fired stations--Turceni I and II (8x330 MW), Rovinari (1,770 MW), Craiova (1,035 MW)--and a number of small industrial plants and other minor consumers. Lignite production from existing known deposits would be capable of supplying the total estimated consumption for at least 60 years. The Government and the Borrower confirmed that they will provide semi-annually lignite production figures for the preceeding 6 months and estimated production for the 6 months iimmediately following. The first of these statements would be expected by August 31, 1979. Estimated Project Cost 2.05 The following is a summary of the Project cost estimate: -19 - -----Million Lei------ US$ Million equivalent Local Foreign Total Local Foreign Total (a) Thermal Power Station (4x330 MW), base cost /_ 5,450.2 1,540.5 6,990.7 302.8 85.6 388.4 Contingencies Physical 545.0 154.0 699.0 30.3 8.5 38.8 Price - 224.5 224.5 - 12.5 12.5 Subtotal 5,995.2 1,919.0 7,914.2 333.1 106.6 439.7 (b) Transmission Lines & Substations (288 km, double circuit, 400 kV), base cost /1 533.8 155.2 689.0 29.6 8.6 38.2 Contingencies Physical 53.4 15.6 69.0 3.0 0.9 3.9 Price - 16.7 16.7 - 0.9 0.9 Subtotal 587.2 187.5 774.7 32.6 10.4 43.0 TOTAL ESTIMATED /2 PROJECT COST 6,582.4 2,106.5 8,688.9 365.7 117.0 482.7 /1 At late 1978 prices. /2 For construction period 1977-1984. The estimated foreign exchange requirement, US$117 million, 1/ covers the cost of direct imports and foreign exchange costs of local supplies. The proposed loan (US$70 million) would finance about 60% of this cost. Local costs are based on existing contract prices which are not subject to escalation. There- fore, no local cost price contingency is included. Escalation of foreign cur- rency costs was taken as 9% for 1977, 7% for 1978, 6.5% for 1979 and 6.0% for 1980 through 1984 and applied to direct import items and imported materials and components for locally supplied goods. A 10% physical contingency was applied to both local and for ign currency costs in line with experience in the first stage of Turceni. Details of the development of the Project cost estimate are given in Annex 2.2. At negotiations, the Government clarified 1/ The foreign exchange Project cost estimate is made up of direct import assemblies (10.0% of total foreign exchange cost), imported components for incorporating into Romanian-made equipment (63.9%), indirect foreign exchange expenditure for depreciation of manufacturing and construction equipment (2.6%), imported automotive fuel and lubricants (2.3%), and reinforcing and structural steel (21.2%). - 20 - that import duties have been imposed on equipment and machinery imports since 19)74. Accordingly, taxes and duties are included in the local currency portion of the Project cost estimate based on the approved ceiling for direct imports (US$8.9 million, para. 2.15) and applicable import taxes and duties 1/. On the other hand, local turnover taxes are not applicable to transactions between state-ow ied enterprises and are therefore omitted. 2.06 The generating component of the Project is estimated to cost 7,914.2 million lei (about (US$440 million) or about 5,996 lei/kW (US$333/kW). Given the circumstances in Romania, this cost is reasonable. Piroject Financing Plan 2.07 The Project represents about 8% of the MEE's investment program which is expected to cost about 112 billion lei (US$6.2 billion equivalent) during the construction period of the Project through 1984. It will be financed principally from State Budget allocations. The MEE expects that the Turceni enterprise will also provide part of the financing for this Project from its internal funds (i.e. benefits and depreciation). These internal sources are planned to become available beginning late in 1978 or earlier in 1979 after commissioning of the first unit of Turceni I but no specific amounts have been provided in Romania's current 5-Year Plan 1976-80. The decision of the Council of State (Decree No. 239 dated July 26, 1977), which inicludes the technical and economic indicators for the Project (Annex 2.3), constitutes the Government's authorization for the Project's construction and the expenditures to be incurred. Submission of an official copy of this decision to the Bank is a condition of loan effectiveness. 2.08 The proposed Bank loan of US$70 million is expected to finance about 14% of the estimated cost of the Project. The loan would be made to the Inivestment Bank which would make the proceeds available to the Turceni enter- prise on the same terms. It has been assumed that the Bank loan would be for 15 years including a 3-year period of grace. As was the case under the first two power loans, the Investment Bank would meet the debt service up to the time the project enterprise begins producing revenues and has further agreed that the sum of the annual benefits and provisions for depreciation of the Turceni enterprise would, after 1981, be sufficient to cover the debt service payments on both Bank loans for Turceni. 2.09 No cost overrun is expected. However, should additional funds be required, they would be provided in the first instance from resources of the MEE or, if they proved to be insufficient, from the State Budget. Any foreign exchange risk related to the Bank loan would be borne by the Invest- ment Bank. 1/ An average of 15% ad valorem. Import duties range from zero to 35% for thermal power plant components, with most values falling between 11% and 17%. - 21 - Environmental Considerations 2.10 Remedial measures to minimize undesirable consequences of large scale mining and lignite-fired power generation are being undertaken. Follow- ing established practices, mine overburden is to be dumped in worked-out areas and the land leveled and replanted. Station design includes high stacks equipped with electrostatic precipitators to comply with Romanian clean air standards. These standards prescribe a maximum daily average concentration of sulphur dioxide of 0.25 mg/m3, the maximum momentary SO2 concentration is not to exceed 0.75 mg/m3, non-toxic suspended powder should not exceed 0.15 mg/m3 and surface deposition of ash emitted with flue gases should not exceed 200 tons/km2/a. Slag and ash will be pumped in fluid suspension to the nearby, barren Ceplea Valley (about 5 km away) capable of accepting dumpings from the 2,640 MW station for about 30 years. Implementation 2.11 Design engineering is complete and construction of the second Turceni stage is proceeding immediately following the first stage. Building extension and foundations for the second stage are approximately 25% complete. Work is progressing satisfactorily and the first unit (No. 5 unit not financed by the Bank) is expected to start up in June 1980. Civil works and instal- lation and erection are under the Thermal Construction Trust and Electro- Mechanical Construction Trust respectively. Project management is under the Turceni enterprise assisted by the Design Institute for Thermal Studies (ISPE) acting as consultants; and the Investment Bank also monitors performance during construction. In addition, ISPE provides overall project supervision and start-up engineering. Figure 2.1 shows the estimated Project construction schedule. 2.12 Romania's construction industry is highly efficient and no delays are foreseen. Development of new mines should present no problems (para. 2.03). Open-cast mining employs large, electric powered bucket-wheel exca- vators manufactured in Romania to German designs. No problems in meeting delivery dates for these key items are foreseen. The above implementation arrangements are the same as were made for Turceni I. In view of the rela- tively good progress of Turceni I (para 1.23) they are considered to be satisfactory for this Project. Procurement 2.13 Contracts for civil works--not being financed by the Bank--have been negotiated with the Thermal Construction Trust as an extension of ;he work in progress for Turceni I. Installation and erection will be carried out by the Electro-Mechanical Construction Trust under similar conditions. Both trusts are specialized contractors with a wealth of experience in similar work in Romania. These arrangements have been proven effective in the past and are considered satisfactory for the Project. - 22 - 2.14 Contracts for three (3) complete turbine-generator sets and minor electrical and mechanical equipment (valves, instrumentation and controls, hydraulic couplings etc.) to be financed from the proposed loan would be awarded through international competitive bidding (i.c.b.) under the Bank's Guidelines for Procurement. Due to the competitiveness of the Romanian thermal power equipment manufacturers, it is expected that the contract to supply the turbine-generator sets will be awarded to Romanian suppiiers. On the other hand, the contracts for the balance of i.c.b. items totalling about $8.9 million (Annex 2.4) are expected to go to foreign manufacturers. Fcir bid evaluation, a domestic preference of 15% or the applicable customs duty, whichever is the lesser, would be granted to participating Romanian manufacturers. Bidding documents for all items were reviewed by the mission before being issued. Bid openings were scheduled between September 18 and October 3 for the minor items, and October 4 for the turbine-generators. Turbine-generator bids were opened on schedule. Three bidders participated. Bid evaluation is expected to take 3-4 months and contract award made about mid-February 1979. To help maintain the proposed implementation schedule (para. 2.11) advance contracting of the minor items (not to exceed US$8.9 million) has been allowed. Delivery schedule for the three (3) turbine- generator sets is not as critical (para 2.11), however, and no advance con- tracting would be required in their case. 2.15 Decree No. 239 of the Council of State approving the Project (para. 2.07) sets the limit on the amount of foreign exchange to be expended by MEE on direct imports of goods from convertible currency countries at US$8.9 mil- lion. This limit may be exceeded should the cost of imported equipment prove to be higher than estimated for the minor components and also in the event that a foreign supplier wins the contract for the three turbine-generators. Under such circumstances, MEE is expected to apply promptly to the higher authorities for removal of the US$8.9 million limit as required to ensure Project implementation within the conditions set out in the Loan Agreement specifying the eligibility of funds for disbursements. The Investment Bank has undertaken to take measures for increasing the US$8.9 million limit if it becomes necessary. Disbursement 2.16 Disbursement of the proceeds of the loan would be for (a) 72% of for- eign expenditures and 72% of ex-factory cost of locally manufactured items in the case of the three turbine-generators, and (b) 100% of foreign expendi- tures in the case of other equipment for the thermal power station. The expected disbursement schedule is shown in Table 2.1. Unused portions of the proposed loan, if any, due to project cost savings would be cancelled. The closing date would be December 31, 1982. Risks 2.17 No special risks are foreseen. The borrower (Investment Bank) and executing agencies (Turceni Enterprise and ROMENERGO) have performed well under the previous loan for the first stage of Turceni (Loan 1028-RO). No difficulties are expected in fuel supply or other operation aspects. - 23 - Table 2.1 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Estimated Disbursement Schedule US$ Million Bank Fiscal Year Cumulative Disbursements and Quarter Ending at the End of the Quarter 1979 June 30, 1979 6.2 1980 September 30, 1979 13.1 December 31, 1979 17.2 March 31, 1980 33.2 June 30, 1980 39.2 1981 September 30, 1980 52.1 December 31, 1980 59.2 March 31, 1980 63.1 June 30, 1980 67.6 1982 September 30, 1981 68.5 December 31, 1981 70.0 December 1978 - 24 - ANNEX 2.1 Page 1 of 2 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Summary of Lignite Mining Consultant's Report The following summarizes the situation of lignite supply for Turceni thermal power plant: (a) lignite deposits comprise sufficient, economically and tech- nically mineable reserves for the supply of all power plants in Oltenia region in operation or planned, for their total expected useful life; (b) the coal demand of all consumers will amount to approximately 55 million tons/a from 1984/1985 onwards; (c) the planning and development of the number of mines correspond to an annual output of 55 million tons coal/a; (d) installation and erection work in progress as well as the planned date of completion of the equipment correspond to the required capacity increase; (e) construction of mining equipment is mainly effected under the management of Krupp (Federal Republic of Germany) and similar firms from the German Democratic Republic. Adequate instruc- tion and training of Romanian engineering personnel is being carried out by Krupp and future production on their own seems feasible; (f) the solution of problems still existing in the open-cast mines could lead to cost reductions. Special attention should be directed to the mixture of coal rich in ash or coal poor in ash, in order to supply the boilers with a fuel having a calorific value as constant as possible; (g) mining techniques both for the open-cast operation and for the deep mining are in line with the latest technical developments; (h) additional investment to supply the second stage of Turceni power plant amounting to approximately 11 billion lei, seems to be very high. Nevertheless, provision for these funds is included in the national budget; (i) production costs will rise from approximately 84 lei/ton in 1978 to approximately 126 lei/ton in 1980, and later decrease to approximately 92 lei/ton with increasing production. These figures are relatively low; - 25 - ANNEX 2.1 Page 2 of 2 (j) the sale price is determined by the State and remains unchanged at 107 lei/ton; and (k) freight costs amount to 12 lei/ton between the Jilt basin and the power plant Turceni by railway. They are paid by the power plant. In sum, it can be concluded that the fuel supply for the Turceni power plant, both for the first and second extension stages, can be regarded as secured. No special risks on account of fuel supply are acknowledged. ROMANIA SECOND TURCENI THERMAL POWER PROJECT Development of Project Cost Estimate - Million Lei ------ Million US$ Equivalent Local Foreign Total Local Foreign Total Base Prices, late 1978 A) Thermal Power Station - civil works 829.8 212.5 1,042.3 46.1 11.8 57.9 1 - boilers 1,168.4 717.0 1,885.4 64.9 39.8 104.7 N - turbine-generators 1,901.5 566.7 2,468.2 105.6 31.5 137.1 - miscellaneous electrical and mechanical equipment 567,5 11.4 578.9 31.5 0.6 32.1 - automation 276.6 15.2 291.8 15.4 0.8 16.2 - fuel handling 416.5 9.4 425.9 23.1 0.6 23.7 - water treatment (reduced size) 18.2 - 18.2 1.0 - 1.0 - ash disposal 132.3 8.3 140.6 7.4 0.5 7.9 - commissioning and supervision 70.0 - 70.0 3.9 - 3.9 - training 29.9 - 29.9 1.7 - 1.7 - engineering 39.5 - 39.5 2.2 - 2.2 Subtotal 5,450.2 1,540.5 6,990.7 302.8 85.6 388.4 B) Transmission Lines & Substations 288 km, double circuit, 400 kV 533.8 133.2 667.0 29.6 7.4 37.0 Turceni-Rovinari-Cluj Total Base Cost 5,984.0 1,673.7 7,657.7 332.4 93.0 425.Li Q H > 0~ SOURCE: MEE December 1978 ROMANIA SECOND TJRCENI THERMAL POWER PROJECT Development of Project Cost Estimates, Local Currency, Firm Prices Not Subject to Escalation Work in Progress as of 12/31/78 1979 1980 1981 1982 1983 1984 1978 -1984 A) Thermal Power Station (4x330 MW) 430.6 861.1 1,351.7 1,351.7 937.4 490.4 27.3 5,450.2 Physical Contingency, 10% 43.1 86.1 135.2 135.2 93.7 49.0 2.7 545.0 Total Thermal Power Station 473.7 947.2 1,486.9 1,486.9 1,031.1 539.4 30.0 5,995.2 B) Transmission Lines and Substations (288 km, double circuit, 400 kV) - 160.1 213.5 160.2 - - 533.8 physical contingency, 10% - 16.0 21.4 16.0 - - - 53.4 Total Transmission Lines and Substations - 176.1 234.9 176.2 - - - 587.2 Total Local Currency Project Cost 473.7 1,123.3 1,721.8 1,663.1 1,031.1 539.4 30.0 6,582.4 SOURCE: MEE December 1978 N) n X 0 N)h ROMANIA SECOND TURCENI THERMAL POWER. PROJECT Development of Project Cost Estimates. Foreign Currency, Including Escalation (Million Lei) Work in Progress as of 12/31/78 1979 1980 1981 1982 1983 1984 1278 -1984 A) Thermal Power Station (4x330 MW) 1. Not subject to escalation 1/ 12.5 25.0 39.2 39.2 27.2 14.2 0.9 158.2 Physical contingency, 10% 1.3 2.5 3.9 3.9 2.7 1.4 .1 15.8 Subtotal 13.8 27.5 43.1 43.1 29.9 15.6 1.0 174.0 2. Subject to escalation 2/ 94.7 220.9 346.7 346.7 240.5 125.8 7.0 1,382.3 Physical contingency, 107 9.4 22.0 34.7 34.7 24.1 12.6 0.7 138.2 Subtotal 104.1 242.9 381.4 381.4 264.6 138.4 7.7 1,520.5 Escalation factor 3/ - 0.0325 0.09695 0.1628 0.2325 0.3065 0.3849 - Price contingency 10.9 7.9 36.8 62.0 61.4 42.5 3.0 224.5 Total Thermal Power Station 128.8 278.3 461.3 486.5 355.9 196.5 11.7 1,919.0 R) Transmission Lines and Substations (288 km, double circuit, 400 kV) - 46.6 60.2 46.6 - - - 155.2 Physical contingency, 107 - 4.7 6.0 __- 15.6 Subtotal _ I __Aa~~____ .7-- 1. Subtotal - 51.3 6'o.2 51.3 - - - 170.8 escalation factor 3/ 0,0325 0.09695 0.1628 price contingency - 0.7= 6,69 8.4 Total Transmission Lines and Substations - 53.0 74.8 59.7 - _ - 187.5 Total Foreign Currency Project Cost 128.8 331.3 536.1 546.2- . 355,9 196.5 11.7 2,106.5 11 Jncludes manufacturing license fees and depreciation of imported manufacturing plant and construction equipment. 2/ Direct imports (151 million lei) and materials and components for locally produced items (1,047.8 million lei), total 1,198.8 million lei valued as of January 1, 1977. 31 For 9% price contingency in 1977, 7%/ in 1978, 6.5% in 1979 and 6% in 1980-1982, according to best available information. SOURCE: MEE r l December 1978 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Summary of Project Cost Estimates (Million Lei) Work in Progress as of 12/31/78 1979 1980 1981 1982 1983 1984 1g7*8 1984 A) Thermal Power Station (4x330 MW) LC 473.7 947.2 1,486.9 1,486.9 1,031.1 539.4 30.0 5,995.2 FC 128.8 278.3 461.3 486.5 355.9 196.5 11.7 1.919.0 T 602.5 1,225.5 1,948.2 1,973.4 1,387.0 735.9 41.7 7,914.2 '0 B) Transmission Lines and Substations (288 km, doubt circuit, 400 kV) LC - 176.1 234.9 176.2 - - - 587.2 FC - 53.0 74.8 59.7 - - _ 187.5 T 229.1 309.7 235.9 - - - 774.7 Total Estimated Project Cost LC 1,123.3 1,721.8 1,663.1 1,031.1 539.4 30.0 6,582.4 FC __ 331.3 536.1 546.2 355.9 196.5 11.7 2,106.5 T 602.5 1,454.6 2,257.9 2,209.3 1,387.0 735.9 41,7 8,688.9 SOURCE: MEE December 1978 M 0c -30 - ANNEX 2.3 Page 1 of 2 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Technical and Economic Indicators for the Project The main technical and economic indicators for the Project contained in Decree No. 239 dated July 26, 1977 approved by the Council of State of the Socialist Republic of Romania are: 1. Total value of the investment 6,386 million lei of which construction 2,743 million lei equipment 3,277 million lei other expenses 1/ 366 million lei 2. Total installed capacity 1,320 MW 3. Annual production of electric power 8,580 GWh/a 4. Electric power to be delivered to the system 7,920 GWh/a 5. Electric power cost 0.210 lei/kWh 6. Plant investment cost 4,838 lei/kW 7. Total value of imports 198 million lei from convertible currencies 160.2 million lei (US$8.9 million) from socialist currencies 41.4 million lei 2/ 8. Specific fuel consumption for power delivered 364 gr cc-/kWh 9. Total personnel to be employed for operation = 1,100 of which workers = 1,015 10. Specific index of personnel 0.83 men/MW installed 11. Commissioning dates for the units Unit 5 - June 1980 Unit 6 - June 1981 Unit 7 - December 1981 Unit 8 - June 1982 1/ Includes 211 million lei physical contingency. 2/ cc = Conventional coal, 7,000 kcal/kg - 31 - ANNEX 2.3 Page 2 of 2 12. Time to implement project - 50 months 13. Period to reach full capacity - 3 months 14. Period to achieve other indicators - 12 months - 32 - ANNEX 2.4 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Supply Contracts Expected to be Awarded to Foreign Bidders US$8.9 Million Estimated Total 1. Lot -- forged parts and connecting pieces for high-pressure piping 2. Lot -- steel pipe and elbows with basalt lining 3. Lot - gate and stop valves 4. Lot -- safety valves 5. Lot -- check valves 6. Lot -- control valves 7. Lot -- hydraulic couplings 8. Lot -- ash and slag handling equipment 9. Lot -- asbestos compensators 1O. Lot - electric drives for motor operated valves II. Lot -- control and measuring instruments 12. Lot -- electric hoists ROMAN IA SECOND TURCENI THERMAL POWER PROJECT Estimated Project Implementation Schedule ACTIVITY\YEAR 1977 1978 1979 1980 1981 1982 1983 1984 Engineering & Supervision Site Preparation, Civil Works, Equipment Installation and L Erection and other Field W Actinities Delivery of Romanian Equipment Dehvery of rmported Equipment Testing & Commissioning Unit #5 Unit #6 Unit t7 Unit 8 World Bank -19170 - 34 - CHAPTER III FINANCE Past Performance and Present Position of the Sector 3.01 Under the first two loans for power, the financial performance of the electricity sector in Romania has been remarkably stable despite the energy crisis; one of the principal reasons being the introduction in 1973 of strict controls on the consumption of electricity and other forms of energy. Although sales growth was sluggish at 4.7%/a in 1973, it picked up to 9.1%/a in 1974. The rate of return on average net fixed assets in 1973 and 1974 was between 8% and 9%. Despite the disastrous floods of 1975, these trends in the rate of return and sales growth were maintained in 1975 and 1976 as the rate of return remained within the 8-9% range and sales increased 12.1% and 9.6% respectively. 3.02 However, there were problems within the economy which led the Romanian authorities to introduce radical changes effective January 1, 1977. Firstly, the tax on invested funds which had been introduced in 1974, was becoming an increasing burden on all capital intensive sectors. In the case of the power sector, it amounted to about 4%/a of net fixed assets and work- ing capital. At the same time the comprehensive review and re-structuring of prices which had been carried out over the previous 2-3 years had apparently not been fully effective in reducing distortions in certain sections of the economy. Accordingly strong measures were taken which have substantially changed the financial performance of the electricity sector: (a) electricity rates were reduced about 28% and rates for the sale of thermal energy by about 7%. The average revenue per kWh sold fell from 0.322 lei in 1976 to 0.237 lei in 1977; (b) depreciation rates were reduced by increasing the average life of depreciable assets. This reduced the average depre- ciation rate from 3.4% in 1976 to 2.5% in 1977; and (c) the tax on invested funds was abolished. 3.03 The result of these changes in terms of net income to the electric- ity sector was small since the reduction in tariffs was more than offset by the reduced depreciation charges and the repeal of the tax on invested funds. These changes were not confined to electricity enterprises; similar measures wiere taken in all basic industry sectors: mining, machine building, metal- lurgy, chemicals and petroleum. However, for the electricity Central, - 35 - they produced only a 2.1% rate of return in 1977. 1/ On the other hand the level of cash generation from internal sources rose to 40% compared to only 35% in 1976. This increased contribution to investment was achieved because of lower investment expenditures, largely delays in installing new plant to which the 1977 earthquake would have contributed, and the reduction in the annual contribution from net income to the State Budget. 3.04 Since the last power loan was approved in April 1976 (Loan 1242-RO), there has been no significant change in the financial position of the sector. It has no long-term debt other than the Bank's two previous loans. Sales growth in 1977 did fall off somewhat (to 4.4%/a) following the severe earth- quake in March as restoration work delayed completion of new irrigation and industrial plants. Fixed assets continue to be valued at historical costs. This valuation is appropriate given the continuing low level of inflation in Romania. The State Budget still provides 50-60% of investment needs, the Bank loans now represent about 5% and, as previously mentioned, internal sources provide about 35-40%. 3.05 The financial performance and position of the electricity Centrals is considered satisfactory, despite the 1977 reforms. Contributions to the State Budget were reduced by the elimination of the tax on invested funds and the lower distribution from net income, but these have more than matched the reduction in revenues from the sale of electricity and thermal energy. The net result has been a small but significant improvement in the levbl of self- financing (para. 3.03). The low rate of return performance should be ignored since prices in Romania do not nor are they intended to reflect more than the cost of supply plus a small margin of profit for specified purposes. Power prices have been trimmed by removal of taxes and contributions to the budget but are still expected to yield a mark-up on cost of 8-10% per year to cover bonus payments to the workers, and to provide funds for housing, repayment of loans, social and cultural activities. Any surplus is available for financing new works. Power prices represent a resource transfer price which has no relationship to the normal demand and supply mechanism or role in the allocation of resources. In practice, costs are tightly controlled and have been virtually unchanged in terms of cost per unit sold since 1974. Savings through increased efficiency, although not directly identifiable in the income statements, are a significant factor in holding cost increases in check. Continuing emphasis is being placed on reduction of losses in power plants, in the transmission and distribution systems and on the reduction of energy waste in industrial processes (Tables 1.4, and 1.5). Penalties amount- ing to as much as 200% of the cost of electricity are imposed on consumers who exceed their planned electricity allocation. All these factors point to the growing efficiency of the electric power industry in Romania. It also is important to keep in mind that the electricity sector is an integral part of 1/ The large change in the rate of return accompanying the small movement in net income occurred because the tax on invested funds was previously treated not as an operating expense but as an interest charge. There- fore, the net effect of the January 1, 1977 measures was to reduce operat- ing income and, hence, rate of return while net income changed little. - 36 - Romania's centrally planned economy under which all enterprises conform to national development plans which are financed from the State Budget. Since 1977, power prices have been set to minimize the contributions by power sector enterprises to the budget in the form of taxes and payments from surplus income. This was done to allow the industrial, agricultural and manufacturing enterprises to increase their profits but at the same time to transfer the point of collection of revenues from the state to the industrial and manufac- turing enterprises since they will be subjected to a new and progressively heavier rate of taxation on surplus income. In essence, part of the former earnings of the power sector are being transferred to the industrial and manufacturing sectors. For this reason, the performance of the power sector cannot be reviewed in isolation from the rest of the economy, but a review of the entire Romanian productive sector is beyond the scope of this report. Financing Plan 3.06 The forecast sources and applications of funds for the electricity sector during the project construction period (1978-84) are given below: 1978-84 Sources of Funds (Millions of Lei) % Internal Sources Benefits Reinvested 13,163 12 Depreciation Reinvested 25,100 22 Sales of Scrap 422 1 Gross Internal Sources 38,685 35 Less: Debt Service ( 1,810) (2) Net Internal Sources 36,875 33 External Sources State Budget Allocation 72,253 64 Investment Bank Loans 607 1 Existing IBRD Loans 779 1 Proposed IBRD Loans 1,260 1 Total External Sources 74,899 67 Total Sources of Funds 111,774 100 Construction Requirements Proposed Second Turceni Thermal Power Project /1 8,897 8 Other Construction 102,877 92 Total Construction Requirements 111,774 100 /1 Includes interest during construction on proposed Bank loan of 208 million lei. - 37 - 3.07 The financing plan is almost identical with the one presented in the appraisal report for the last power loan; the "Appraisal of the Riul Mare- Retezat Hydropower Project (Report No. 1103-RO). It will require about 112 billion lei (US$6.2 billion equivalent) for financing construction require- ments and be financed 33% from own sources of the electricity sector, 64% from the State Budget, 2% from IBRD loans and 1% from Investment Bank credits. 3.08 The financing plan for 1978 through 1980 is based on the MEE's latest estimates made during the appraisal (June 1978) and reflects the 1978 annual plan and the revised outlook for the two remaining years of the 1976-80 5-Year Plan period. For the period 1981-85 for which no formal 5-Year Plan forecasts have been prepared, the plan is based on the NEE estimates but duly modified to reflect the Bank's lower expectation with respect to growth of the power market through 1985. 3.09 The availability of internal sources of funds for meeting 33% of investment needs through 1984 is doubtful. The source of this uncertainty is the planned introduction of new procedures for increasing the role and auton- omy of enterprises in Romania especially with respect to planning and manage- ment, including allocation of their internal sources of funds and the distri- bution of net income. These procedures were first announced by President Ceausescu in February of 1978 and are planned to become effective in 1979. Under the present system the enterprise has little control over these matters with plans being set and approved by the State. However, under the new system, the worker's councils will be given greater responsibility for planning and distribution of income. Instead of paying depreciation and a pre-planned portion of net income to the State, 1/ depreciation will be retained by the enterprises and a tax on net output will be paid to the Republican budget and to the local administration budgets. Net income will be used firstly for repayment of loans and then for payments of workers' bonuses. Increases in working capital funds, housing, social and cultural activities will be met according to each enterprise's plan from net income. The remainder of net income will be available for financing new investment. The Romanians never- theless expect the level of self-financing to be more or less unchanged since all that is being changed is that taxes and payments to the State are being reduced to meet expenditures formerly financed from the central budget but which will now be financed instead by each enterprise. However, whether this will be so or not is not yet clear. Until the laws putting into force the various changes are enacted and the 1981-85 plan is drawn up, it will not be possible to determine clearly their full impact. From the point of view of the Bank and its concern for sound financial planning in the power sector, it would be expected that any reduction in the availability of the enterprises' own sources of funds would be made up from the State Budget. Since this is the only recourse to the Romanians, no specific undertaking to this effect has been sought. 1/ Enterprises in Romania have customarily paid monthly to the Investment Bank a twelfth of the planned annual depreciation expense. - 38 - Future Financial Position 3.10 The financial forecasts 1978-1985 and the assumptions on which they have been based are given in Tables 3.1, 3.2 and 3.3, and Annex 3.1. Elec- tricity prices and operating costs through 1985 are not expected to change significantly. The income statements show that the rate of return on average net fixed assets and working capital funds will be 2.3% in 1978 gradually declining to 1% in 1985. The operating ratio will be 89% in 1978 rising to 94% in 1985 and the profit margin will exceed the 8-10% rarnge set by Romania's planners, except in 1985 when it is only expected to be 6.3%. At the same time, the MEE is expected to finance 42% of its investment needs in 1978 gradually reducing to 31% in 1985. 3.11 Although the rate of return performance is low, it is not considered to be a relevant measure of the efficiency or the financial performance of the Romanian power sector (see para 3.05). Efficiency is better measured by the indicators which the Romanians now use for monitoring performance. In the future, there are plans to improve the economic and financial indicators used by all sectors as part of the general process of increasing the autonomy of enterprises. Financial performance is best looked at in terms of cash generation. As in the case of previous loans where it was established that the Bank's conventional financial covenants were unnecessary, no specific financial covenants have been sought. Instead the Bank has obtained the same undertakings relating to cash generation as were given for the previous power loan (Loan 1242-RO). These confirm that the Government plans for the power sector to generate 30% of its own investment capital up to 1985. Despite the planned changes in the role of power enterprises, this is still a realistic planning objective. However, the Government and the Investment Bank have confirmed that information on the planned and actual performance measured by indicators which are used or planned for adoption by the MEE will be furnished to the Bank as part of the Project information requirements to be included in the Investment Bank's annual financial report to the Bank. The indicators are expected to provide additional data on the sector's operating performance and efficiency. A list of these indicators is given in Annex 3.2. Accounts and Audit 3.12 Although there was a delay in the submission of the audit reports for 1977, the auditing provisions for the previous power loans have been retained, excep, that the time for submission has been extended to six months in accordance with other recent Bank loan agreements with the Investment Bank. These provisions require that the financial statements of the Central, the Proj- ect enterprise and the Investment Bank be audited each year by the Ministry of Finance and furnished to the Bank within 4 months of the end of each fiscal year. However, since there are now two centrals (para 1.12) the Government and the Investment Bank have agreed that the audit report will be based on the consolidated accounts of the two power centrals. ROMANIA SECOND TURCENI THERMAL POWER PROJECT Income Statements (1975-85) (in millions of lei) - ---------- ACTUAL ----------- -F----------------------------------- FORECAST --------------------------------------- 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Year Ended December 31 Electric Energy Sales (GWh) 43,435 47,589 49,690 52,700 57,240 60,470 64,372 68,384 72,598 75,103 79,889 Average Revenue per kWh (lei) .321 .322 .237 .237 .238 .238 .238 .247 .247 .247 .247 Operating Revenues Sales of Electricity 13,955 15,342 11,772 12,510 13,645 14,415 15,900 16,891 17,932 18,550 19,733 Sales of Neat 1,590 1,664 1,482 1,713 1,882 2,051 2,128 2,298 2,479 2,675 2,871 Other )perating Revenues 1,100 1,277 1, 422 1454 1,433 1574 2,747 289 28 2,539 Total Operating Revenues 16,645 18,283 14,676 15,677 16,960 18,040 20,775 22,o84 23,301 24,oo6 25,143 Operating Expenses Operation, Maintenance and Administration 3,379 3,703 3,869 4,025 4,234 4,544 5,793 5,813 6,026 6,234 6,551 Parchased Power 157 393 747 83 93 93 94 68 69 70 71 YEel 5,462 5,955 6,195 7,137 8,013 8,528 9,463 10,121 10,745 lo,965 11,584 Depreciation 2,704 2,906 2,388 2 2,950 3,180 3,507 3,828 4,248 4,720 5,331 Total Operating Expenses 11,70? 12,957 13,199 13,912 15,290 16,345 18,857 19,830 21,088 21,989 23,537 Operating Income 4,943 5,326 1,477 1,765 1,670 1,695 1,918 2,254 2,213 2,017 1,606 Other Income 113 110 42 127 137 150 138 162 177 154 lo9 Gross Income 5,056 5,436 1,519 _,892 1,807 1,845 2,056 2,416 2,390 2,171 1,715 Interest IBRD Loans - - 110 130 171 222 260 255 247 233 220 ) Other Interest 3,106 3,400 - - - - - Gross Interest 3,106 3,400 110 130 171 222 260 255 247 233 220 Leen Interest Charged to Construction - _ (llo) (130) (171) (222) (176) (173) - - - Net Interest 3,106 3,400 - - 84 82 247 233 220 Net Inlcome 1,950 2,036 1,519 1,892 1,807 1 5 1,972 2,334 2,143 1,938 1,495 Rate of Return % Average Net Fixed Assets in Service and Actual Working Capital 56,347 61,786 68,984 78,507 87,356 94,686 103,344 114,351 128,349 145,952 165,401 Operating Income as a 55 'Thereof 8.8 8.6 2.1 2.2 . 9 1.8 1.9 2.0 1.7 1.4 1.0 Operating Ratio 70 71 go 89 go 91 91 90 91 92 94 Rentability (Profit. Margin) 13.2 12.4 11.5 13.6 11.8 11.3 10.1 11.7 10.0 8.7 6,3 le-erner 1975 H3 ROMANIA SECOND T7URCENI THERMAL POWER PROJECT Balance Sheets (1975-85) (in millions of lei) ---------- - ACTUAL ------------- -------------------------------------------- FORECAST --------------------------------------_-_ 1975 1 97(6 1977 1978 1979 1980 1981 1982 1983 1984 1985 Assets Fixed Assets Fixed Assets in Service (at cost) '87,3S8 86,059 9'7,286 110,436 120,481 130,951 144,001 160 011 179,721 203,881 228,301 Less Aco-ojulated Deoreciation (2066) (23,123) (25,334) (8178) (31,128) (34,308) (37 815) (4it43) (45891) (50,611) (55,942) Net Fixed Assets in Service 57,672 62,936 71,952 ,50 89 353 96, i06,18 1;8 iriBBO 153:270 172,359 Work in Progress 18 ,842O,484 20 211 16,97,363 17,903 13,583 19,463 20,593 25,213 Total net Fixed Assets 76,514 83,420 92T83 99,179 106,287 114,006 124,089 136,951 153,293 173,863 197,572 Current Assets Cash at R,ank 232 239 3014 350 375 400 473 512 550 580 619 Flael and MaLterial Stocks 1,491 1,890 2,013 1,613 1,766 1,913 2,223 2,386 2,579 2,754 2,991 Accouslts Receivable 835 408 521 630 640 730 851 921 991 1,045 1,114 Total Current Assets 2,558 2,537 2,838 2,593 2,781 3,043 3,547 3,819 4,120 4,379 4,724 Total Assets 79,072 85,957 9S.o1 101,772 109,068 11'7,049 127,636 140,770 5713 742 Liaillities Equity and Borrowings Fixed Assets und 57,634 62,893 71,900 82,178 89,271 95,505 104,192 115,280 130,91.1 150,525 169,778 TInvestment Bank Loan 38 43 52 80 82 85 84 87 92 97 118 IBRD Loan No. 1028-RO 1,053 1,025 994 961 926 388 IBRD Loan No.1242_R0 885 852 8i6 777 735 Proposed IBRD Loan ______ __-___ 1,155 1,050 945 340 Total Equity and Borrowing 57,672 62,936 71,952 82,258 89,353 96,643 106,186 118,368 133,830 153,270 172,359 Sources of Investments Internal Cash Ceneration (Reinvested) 4,174 4,545 3,908 4,473 4,627 4,887 5,424 6,061 6,556 6,860 7,147 State Budget Allocation 11,614 13,462 13,926 9,091 8,358 8,810 9,421 10,656 10,953 11,665 15,534 Accounts Payable Construction 2,914 1,760 1,043 1,700 1,750 1,700 1,798 1,866 1,954 2,o68 2,532 TBRD Loans i4o 717 1,334 1,652 2,159 ,966 1,260 - - - - Total Sources of Investments 18,842 20,484 20,211 16,921 16,934 17,363 :17,903 18,583 19,463 20,593 25,213 SourcesL of orki5 Capita: i'urking Capital Fund 1,062 1,127 1,071 1,0714 1,180 1,278 i,485 1,595 1,724 1,841 1,999 Short Tarm Loans 368 355 469 328 370 410 444 479 516 551 587 Total Sources of Working Capital 1,430 1,482 1,540 1,402 1,550 1,688 1,929 2,074 2,240 2,392 2,586 Current Liabilities Accounts Payable-Oerations 875 '796 1,280 908 930 1,110 1,236 1,329 1,432 1,510 1,627 Customer Deposits 253 259 18 283 251 245 382 416 448 477 511 Total Current Liabilities 1,128 1,055 1,298 1,191 1,231 1,355 1,618 1,745 1,880 1,987 2,138 Total liabilities 79 07. 15,957 001 1 78 1 4 2 December 19778 , ROMANIA SECOND TURCENI THERMAL POWER PROJECT Sources and Applications of Funds (1975-1985) (in millions of lei) - ACTUAL ----------- ------------------------------ - FORECAST ---------------------------------------------------- Year Ended December 31 1975 976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1978-85 Sources of F, nds Internal Cash Generation Operating and Other Income 5,056 5,436 1,519 1,892 1,807 1,845 2,056 2,416 2,390 2,171 1,715 16,292 Tess Benefits Distributed (679) (1,419) (28) (131) (176) (184) (206) (240) (248) (229) (193) (1,607) Benefits Reinvested 4,377 4,017 1,491 1,761 1,631 1,661 1,850 2,176 2,142 1,942 1,522 14,685 Depreciation Reinvested 2,663 2,908 2,388 2,667 2,950 3,180 3,507 3,828 4,248 41,720 5,331 30,431 Sales of Scrap, etc. 47 55 29 50 46 46 61 68 74 77 81 503 Total Internal Sources 7,087 6,980 3,908 4,478 4,627 4,887 5,418 6,072 6,464 6,739 6,934 45,619 External Sources State Budget Allocation 5,699 5,890 5,089 5,623 5,747 5,972 8,716 11,475 15,152 19,568 23,100 95,353 Investment Bank Loans 60 411 63 80 82 85 84 87 92 97 118 725 I3rD Loan No. 1028-R0 140 577 365 106 106 ITBD Loan No. 1242-Ro 252 346 207 120 673 Proposed IB0D Loan 310 756 1941 1,260 Total External Services 5,899 6,508 5,769 6,155 6,346 6,933 8,994 11,562 15,244 19,665 23,218 98,117 Total Sources 12,986 13,43 8 9,677 10 973 11,820 11,412 _ 21 ,708 ______ 30,152736 ____________ ______ ______ _____ ______ 17,6311 21,708 21==26,10114 _ 11,3 Applications of Funds Construction Requirements (Incluiding interest Chlarged to Construction) 9,839 10,059 9,640 10,570 10,893 11,711 14,200 17,300 21,200 25,900 29,650 141,424 Debt Service Amortization of Loans 41 29 37 63 80 109 128 252 261 271 282 1,446 Interest on IBRD Loans - 130 171 222 260 255 247 233 220 1,738 Tnterest on Other Loans 3,106 3,400 - - - - - Less: Interest Doring Construction _____ ____ (130) (171) (222) (176) (173) _ _ _ (872) Total Debt Service 3,147 3,429 37 63 80 109 212 334 508 5o4 502 2,312 Total Applications 12,986 13,488 9,677 10,633 10,927 11 820 _1_7,6 26,404 _ _,152 143,736 ~~=4_ =,L_ ~ ~ ~ ~ ~ ~ ~ = 11112 7,31 21,70 26,4011 3=0,52 1113,736 % Contribution to Investment 40 35 40 42 42 41 37 33 28 224 22 31 De2ember 1978 5r rD - 42 - ANNEX 3.1 Page 1 of 4 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Notes and Assumptions for Financial Forecasts A. Income Statement 1. Electricity Sales are based on forecast growth in electricity sales of 6.1% in 1978, 8.6% in 1979, 5.6% in 1980, 6.5% in 1981, 6.2% in 1982, 6.2% in 1983 and 3.5% in 1984, 6.4% in 1985. Details of forecast generation and sales are shown in Table 1.5. Electricity tariffs are assumed to be constant through 1981 and in 1982 the average revenue per kWh sold is planned by the Romanians to be increased from 0.238 lei per kWh in 1981 to 0.247 per kWh in 1982, an increase of 3.8%. 2. Sales of Heat were assumed to be at constant prices (i.e. 37 lei per gigacalorie) Romania's sales estimates are: 1978 1979 1980 1981 1982 1983 1984 1985 46.3 50.9 55.4 57.5 62.1 67.0 72.3 77.6 3. Other operating revenues include: (a) Income from sales of steam, industrial water and ash; and (b) Revenues from the manufacturing/repair enterprises. 4. Other Income includes net income of the distribution construction units (Santier Constructu Montaj - SCM) which are self-accounting and inde- pendent from the enterprises. 5. Operating Expenses (a) Operation, maintenance and administration expenses are based on the average cost per unit sold estimated by the MEE as follows (in lei per kWh); 1978 1979 1980 1981 1982 1983 1984 1985 .076 .074 .075 .090 .085 .083 .083 .082 No escalation in costs has been provided for since prices are fixed. Savings expected to be achieved through reduction of losses and increased efficiency will be passed on in the former of higher benefits to workers. - 43 - ANNEX 3.1 Page 2 of 4 (b) Purchased power comes from three distinct sources: (i) imports from neighboring countries with whom trans- mission lines are interconnected; (ii) surplus power from auto-producers largely that of the Ministries of Chemical Industry and Heavy Machinery which generate power for heating purposes; and (iii) electricity generated during the commissioning of new plant (operating costs are capitalized after off- setting revenues received). (c) Fuel costs are based on MEE estimates as follows (in lei per kWh sold). 1978 1979 1980 1981 1982 1983 1984 1985 .136 .140 .141 .147 .148 .148 .146 .145 No escalation in costs has been provided for since prices are fixed. Fuel prices used by the MEE are: (i) lignite, 103-109 lei per ton; (ii) brown coal, 122-146 lei per ton; (iii) coal, 264-396 lei per ton; (iv) bituminous shale, 101 lei per ton; (v) crude oil, 414 lei per ton; and (vi) natural gas, 200 lei per thousand cubic meters. (d) Depreciation is calculated using the conventional straight-line method. The following annual average percentage rates of depre- ciation which were based on MEE's estimates, have been used: 1978 1979 1980 1981 1982 1983 1984 1985 2.41% 2.45% 2.43% 2.44% 2.39% 2.36% 2.32% 2.34% The above figures include depreciation on the assets of the manufacturing/repair enterprises, but not on the distribution construction units. Depreciation on assets used by the dis- tribution construction units which operate within each distri- bution enterprise is not included since these units are self- accounting. - 44 - ANNEX 3.1 Page 3 of 4 6. Interest Interest and commitment fees on the existing IBRD loans have been provided for acc.rding to the terms of the loans. In the case of the pro- posed loan, a rate of 7-1/2% has been assumed. Interest has been charged to work-in-progress up to the commissioning dates for the Bank financed projects. There exists the possibility that interest and commitment fees on IBRD loans will be financed from Investment Bank credits until the plants are commis- sioned. These credits would be on the same terms as the Bank loans. After commissioning they would be repaid from income earned by the Projects. How- ever, since these arrangements have not been confirmed all interest charges are assumed to be financed by the MEE. This was the procedure adopted for earlier Bank loans for power. B. Balance Sheet 7. Fixed Assets Assets are valued in respect of their foreign content when financed from the proceeds of a Bank loan at the existing agreed conversion rate for traded goods plus the duty applicable except where items manufactured or similar to those manufactured in Romania are imported in which case they will be valued according to the Romanian catalogue price (internal prices) plus duty. However, they no longer use the Romanian internal price for goods manu- factured in Romania which are financed from the loan but the foreign trade price converted at the current conversion rate for traded goods. All other fixed assets are valued at construction cost. Investments made by other Ministries and vice versa, as they are generally not known, have been ignored. It is expected they would largely offset each other. Net fixed assets in service correspond to the total of equity and borrowings. 8. Work in Progress Finance for capital work in progress comes from three sources: internal cash generation, state budget allocations and investment creditors. The sum of these sources is equal to the work-in-progress figure in each year of the forecasts. 9. Current Assets and Current Liabilities Forecasts are based on estimates projected by the MEE. Undistri- buted benefits at year end have been included under accounts payable - operations and enterprise current balances are included under accounts receivable. 10. Sources of Working Capital Funds are provided to each enterprise by the National Bank for work- ing capital to meet costs of production. They take two forms; a working capital fund which is fixed annually based on the minimum "normal" working - 45 - ANNEX 3.1 Page 4 of 4 capital required during the year and short-term loans which are drawn as required to meet any excess. Short-term loans are made available from the National Bank at rates of interest around 2-5% for periods up to a maximum of one year. They are repaid from benefits. C. Sources and Applications of Funds 11. Benefits reinvested is the balance remaining to meet debt service and internal requirements after deducting benefits distributed from operating and other income. Benefits distributed comprise: state budget allocations, annual bonus distribution to workers, increase in working capital funds, pay- ments for modernization of plant, social welfare and the reserve fund. New procedures for the distribution of benefits have been outlined but their impact is not reflected in these forecasts. 12. Depreciation Similarly, with depreciation, an assumption was made that all depre- ciation moneys paid to the Investment Bank by the enterprises of the Indus- trial Central would be reinvested in the sector. It is expected that depre- ciation will, in future, be retained by the enterprises and distributed accor- ding to the new procedures for distribution of benefits. However, in the case of fixed assets that have reached the end of their useful life, depreciation charges are no longer made. This is in accordance with revised procedures and rates introduced from January 1, 1977. 13. Sales of Scrap are derived chiefly from materials used on investment projects. These funds are paid directly to the National Bank and are not treated as income in the income statement. 14. The construction requirements and sources of funds included in the sources and applications of funds statement relate only to centrally planned investments. Movements in working capital are not planned beyond one year and decentralized investments (for example: most distribution construction) are excluded since the MEE has no reliable means of determining their extent. - 46 - ANNEX 3.2 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Financial Plan Indicators for Power Sector Existing Indicators 1. Expenditure (in lei) per 1,000 units of production. 2. Revenue (in lei) for each kWh sold. 3. Value of benefits (net income). 4. Value of production sold. Planned New Indicators 1. Labor productivity expressed in net output and in physical terms as work time consumed per unit of product. 2. Co-efficient of utilization of materials; norms and standards of consump- tion for fuel and energy. 3. Personnel standards. 4. Profit and net output obtained per 1,000 lei of fixed capital. - 47 - CHAPTER IV ECONOMIC JUSTIFICATION Least-Cost Alternative 4.01 The Project is the next step of generation in MEE's least-cost development program in line with Romania's aims to maximize utilization of available lignite and keep nuclear capacity to a reasonable minimium (para 1.16). Economic Rate of Return 4.02 The incremental supplies of electricity to consumers represent the main benefits of the Project, but in the first few years of operation there are also fuel savings through substitution of Project output for generation from older, less efficient plants (Annex 4.1). The reduced electricity rates intro- duced by Government decree in 1977 understate the value of the incremental sales, since prior to 1977 consumers had demonstrated that they were willing to pay the higher rates then in effect for comparable quantities of elec- tricity. The 1976 average revenue of 0.322 lei/kWh is therefore regarded as a more adequate measure of consumers' willingness to pay than the current aver- age revenue of 0.237 lei/KWh resulting from the lower rates in effect since January 1, 1977. The resulting economic rate of return is at least 6.4%. This figure is comparable to the base case economic rate of return calculated for the previous power loans for Romania: (i) Riul Mare-Retezat, 6.5%, and (ii) Turceni I, 8.6%. For Turceni II, the rate of return is sensitive to changes in average revenue. A 10% decrease in average revenue drops the rate of return from 6.4% to 2.5%. On the other hand, a 10% increase in Project capital costs drops the rate of return only from 6.4% to 5.4%. 4.03 The return on investment for the Project calculated in accordance with the above methods cannot be used to judge the efficiency of resource allocation in Romania nor the extent to which tariff levels succeed in convey- ing to power consumers the value of the resource inputs used for production of electricity. Allocation of resources in Romania is not based on prices that reflect market scarcities but is based on a material balance technique. Available resources are allocated in accordance with the production needs to meet the objectives of the development plan. Prices in Romania are set by the Government's Committee for Prices and are used to measure performance of productive enterprises and the degree to which they achieve plan targets. TABLE 4.1 ROMANIA SECONED T-lUlCE-JN THERMAL POWER PROJECT Calculation of Return on Investment --------------------------------------- Million Lei --------------------------------------------- Capital Costs Operation & Maintenance Benefits Incremental Economic T & D @ Incremental Sales Fuel Savings Net Generation Sales Dispatch Plant 0.02462 lei/ @ 0.3220 lei/kWh @ 0.3159 lei/ Year (GWh) (Gwh) (GWh) Generat.ion Transmission 0 & M Fuel kWh Sold Sold kWh Gen. 1977 - - - 164.9 - - - - 1978 - - - 426.6 - - - - 1979 - - - 1,183.0 220.1 - - - 1980 - - - 1,857.0 293.4 - - 1981 1,980 699 1,281 1,857.0 220.4 79.2 304.9 16.2 211.6 404.7 1982 5,940 4,619 1,321 1,287.8 - 237.6 914.7 106.9 1,398.1 417.3 1983 7,920 7,638 282 673.8 - 316.8 1,219.6 176.8 2,311.9 89.1 1984 7,920 7,920 - 37.6 _ 183.3 2,397.2 1985 - - - - 1986 - - - - - 1987 - - - - - _ 1988 - - - - - _ 1989 - - - - - 1990 - - - - - _ 1991 - - - - - 1992 - - - - 1993 - - - - - 1994 - - - - _ 1995 - - - - - 1996 - - - - - 1997 - - _ 1998 - - - - 1999 - - - - _ 2000 - - - - _ 2001 - - - 2002 - - _ 2003 - - _ 2004 - - - - _ 2005 - - - _ 2006 - - - - _ 316.8 1,219.6 183.3 2,397.2 Notes: 1. All costs and benefits alre expressed in 1977 prices. 2. Average revenue is based on pre-1977 tariffs used as a proxy for the consumers' willingness to pay - tariff levels were lowered in 1977. 3. Average plant operation and maintenance cost is estimated to be approximately 0.04 lei/kWb (US$0.002/kWh). 4. Fuel at 364 grams conventional coal (7,000 koal/kg) average net station heat rate and 107 lei/ton of lignite (1,700 - 1,800 kEcal/kg). 5. Transmission and distribution (T & D) cost is estimated at 0.02462 lei/kWh (US$0.00137/kWh). 6. Allows for f°b transmission and distribution losses, 7. Derived from the savings in fuel oil stemming from the integration of the plant into the power generation system of Romania. December 1978 - 49 - TABLE 4.2 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Forecast Economic Dispatch and Fuel Savings 1978 1979 1980 1981 1982 1983 1984 1985 Net Generation, GWh, 57,054 60,817 65,411 69,279 73,878 78,466 81,132 86,340 of which: A. Hlydro 10,200 10,600 11,800 12,800 13,500 14,500 15,900 17,500 B. Thermal, 46,854 50,217 53,611 56,479 60,378 63,966 65,232 68,840 of which: i) Existing plant 43,794 43,386 43,000 41,719 40,398 40,116 38,467 35,710 ii) New plant, 3,060 6,831 10,611 14,760 19,980 23,850 26,765 33,130 of which: Turceni It - - - 1,980 5,940 7,920 7,920 7,290 Other plant 3,060 6,831 10,611 12,780 14,040 15,930 18,845 25,840 Increment (decrement) over previous year - Existing thermal plant - (408) (386) (1,281) (1,321) (282) (1,649) (2,757) - Turceni 11, - - - 1,980 3,960 1,980 - - of which: - Economic dispatch - - - 1,281 1,321 282 - - Incremental Sales - - - 699 2,639 1,698 - …-------------- --------------- -- Million Lei - Fuel Savings at 0.3159 lei/kWh (234 gr oil/kWh and US$75/ton oil) - - - 404.7 417.3 89.1 December 1978 - 50 - ANNEX 4.1 Page 1 of 2 ROMANIA SECOND TURCENI THERMAL POWER PROJECT Assumptions Used for Calculation Economic Rate of Return 1. Measurable Benefits These refer to the segment of the Project benefits that are measure- able in money terms. Two streams of measurable benefits are used in the analysis: (a) the revenue accruing from the sale of output, and (b) the economic value of the fuel saved (Table 4.1). (a) Revenue Accruing from Sales of Output: The average revenue (ratio of revenue from sales and net electricity sold) calculated at pre-1977 rates is used as a proxy for the consumers' willing- ness to pay. The reduced electricity rates introduced by Govern- ment decree in 1977 understate the value of these benefits, since prior to 1977 consumers had demonstrated their willingness to pay the higher rates then in effect for comparable quantities of elec- tricity. (b) Fuel Savings: While the Project is intended primarily to help meet system load growth, Turceni II capacity will be added in blocks of generation larger than required just for that purpose during the first three years of Project operation (1981-1983). Therefore, during that period some of the Turceni II output will result in displacement of generation from older, less-efficient plants (Table 4.2) as determined through economic dispatch of available system generation, with corresponding savings in fuel costs. These savings would be the difference between the cost of the additional lignite required by Turceni (0.154 lei/kWh) and the value of the reduction in fuel consumption at the displaced plant (0.316 lei/kWh). 2. Measuraele Costs The measurable costs consist of two categories: fixed costs and variable costs. The former does include the capital cost and the cost of replacing the capital equipment. The latter encompasses all costs that vary with the level of output such as lubricants, fuel, operation and maintenance costs, etc. - 51 - ANNEX 4.1 Page 2 of 2 (a) Fixed Costs: These include two streams, the costs of construct- ing the power plant and the costs of erecting the segment of the transmission network that would connect the power plant to the national power system. (b) Variable Costs: These include three streams: the operation and maintenance costs, the fuel costs, and the costs of transmission and distribution. (i) Operation and Maintenance Costs: The cost of operation and maintenance per unit of output (kWh) used is 0.04 lei (US$0.0022/kWh). This is based on the historically observed operation and maintenance costs for the entire thermal generating system in Romania. (ii) Fuel Costs: The Project would be fueled by domestically produced lignite. The location and quality of Romania's lignite deposits render their development for export un- economic. However, these deposits are sufficient to meet Romania's future lignite requirements (power secto and other industries) for approximately the next 60 years. For the analysis, the price of lignite is set equal to the incremental cost of extracting and delivering an addi- tional ton of lignite to the power plant (107 lei/ton, based on 1977 Romanian internal prices which were provided by Mr. P. Rickes, consultant to the Bank). (iii) Cost of Transmission and Distribution: The cost of trans- mission and distribution at each voltage level was not readily available, consequently, a proxy for that cost was derived for the analysis. A fixed cost for transmission and distribution of 0.0246 lei (US$0.00137) was attributed to each unit of output (kWh) produced by the power plant. (iv) Transmission and Distribution Losses: 6% of net MEE deliv- eries to the system. - 52 - CHAPTER V AGREEMENTS REACHED AND RECOMMENDATIONS 5.01 During negotiations, agreement was reached on the following prin- cipal issues: (a) the Government and the Investment Bank confirmed that they will provide semi-annually lignite production figures for the preceeding 6 months and estimated production for the 6 months immediately following (para 2.04); (b) the Investment Bank has undertaken to take measures for increasing the US$8.9 million ceiling on foreign exchange expenditures for the Project if it becomes necessary (para 2.15); (c) the Government clarified that the Project cost estimate includes import duties and taxes (para 2.05); (d) the Government confirmed that it plans for the power sector to generate 30% of its own investment capital up to 1985 (para 3.11); (e) the Government and the Investment Bank have confirmed that they will furnish to the Bank additional indicators on the sector's operating performance and efficiency (para 3.11); and (f) the Government and the Investment Bank have confirmed that the audit report for the power sector will be based on the consolidated accounts of the two power centrals (para 3.12). 5.02 Submission to the Bank of a copy of the technical and economic indicators for the Project would be a condition of loan effectiveness. 5.03 Agreement having been reached on the principal issues, the Project is suitable for a Bank loan of U$$70 million to the Investment Bank with the guarantee of the Republic of Romania. An appropriate term for the loan is 15 years, including 3 years of grace. The loan is expected to become effective within 3 months of loan signing. -53- ANNEX ROMANIA SECOND TURCENI THERMAL POWER PROJECT Selected Documents and Data Available in the Project File A. Selected Reports and Studies Related to the Sector Al - Study on the optimum structure of the thermal and hydropower station development program of Romania, set up on the basis of the linear programming mathematical model. MEE, Bucharest, July 1977. A2 - Methodology for the determination of capacity reserves neces- sary in electrical systems for covering capacities out of operation in breakdowns and for ensuring the safety of power supply. MEE, Bucharest. (No date) B. Selected Reports and Studies Related to the Project Bi - Data and Economic and Technical Elements Concerning the Feasibility of the Turceni Thermal Power Station Scheme. MEE, Bucharest. (No date) B2 - Mining of Brown Coal (Lignite) in the Romanian province of Oltenia with special regard to supply for Turceni Thermal Power Plant. Rheinbraun Consulting GmbH, Cologne, Federal Republic of Germany. June 2, 1978. B3 - Some technical and economic data related to Turceni II power plant. Investment Bank, Bucharest, February 6, 1978. C. Selected Working Papers Cl - Development of Project cost estimates and construction schedul- ing. December 19, 1978 A4 I IBR Q8 P _IZ2° D { roL wv 24 nOWR/DhNAlT DvM' 4 g SS2 JULY IOWA , THERMAL POWER STATION EXTENSION 400 VZiDOD JOIDh 0npvbvhe \> U 5' 5 8 i / T THERMAL POWER STATIONS HYDRO POWER STATIONS SUBSRTATIONS 40040 TRIONOMINSION1 LINET 400VT RANSOSNON LIN HO RTNAi OPERATING ST 2200H 1-40v TRRANSMISSION LINES EUROEIAN RISHWAYHO MAJOR NOTIONAL HIGHRWAYS -\ ' -IRNATRIIAT IL R sANAIES ® POROVINCIAL CAPITALS M NIEIPAOLITIES MiNTII L. IULIA LECTRICITY SYSTEM 0 OhI M v __g9 )W L / 1/34 X s r leLcUnEsTll . ! t ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Av GUI XGCD~~~~~~~~~~~~~~~~~~~~~~~~~LAVT 5\2R IA. T AN I WY)? ATIA SYCANA > ~~~~~~~~POLAND 7 * 0'-'OsXa-~ U. S. S. R. U.,Soo." 'f TO^ 5,"""o (7LJ NGjX //t<02-J~gE2 -J 7 U \ a / < \\ rAQ \\t ' \\( If \t \~N.. A~I = 0 9 7 4 1~~~ ~ ~ ~ ~~~~~ ~~ ~ ~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ \% 7 r= 2 -7. crJR O M A,N I A ,k.~~~~~~~~~~ ~ ~ ~ ~ ~ ~ "'-* ~~~~~~~~~~45* SUBSTATION 220S110K . 6 B C BUCIAROE PESTEANA SA-DANEST _ROT- C UARAI L S 0 ~~~~~~ B~~lack Sea 5<~~~~~5e 1B N~~~~ UT L A 7 R U IY30_A 2\|9- \tit orret___>