GEF STRATEGIC PARTNERSHIP FOR THE DEVELOPMENT OF GEOTHERMAL ENERGY IN EUROPE AND CENTRAL ASIA BRIEF ON THE FRAMEWORK OF THE PARTNERSHIP AND THE WORLD BANK-GEF GEOTHERMAL DEVELOPMENT FUND 1 Table of Contents 1. THE CHALLENGE: RENEWABLE ENERGY RESOURCE DEVELOPMENT IN ECA COUNTRIES..............................3 2. GEOTHERMAL RESOURCE DEVELOPMENT AND ITS BARRIERS ........................................................................3 3. WORLD BANK-GEF INVOLVEMENT TO DATE AND THE CALL FOR NEW APPROACHES ...................................6 4. THE STRATEGIC PARTNERSHIP FOR GEOTHERMAL ENERGY DEVELOPMENT...................................................6 4.1 Objectives of the Proposed Strategic Partnership.................................................................................7 4.2 Elements of the Proposed Strategic Partnership...................................................................................9 5. WORLD BANK-GEF FUND FOR GEOTHERMAL ENERGY DEVELOPMENT & LOCAL FINANCING MECHANISMS10 5.1 The World Bank-GEF Geothermal Energy Development Fund (GeoFund) ......................................10 5.2 Investment Mechanisms in participating ECA Countries...................................................................12 5.3 Advantages of the Proposed Systematic Approach and Expected Activities .....................................12 5.4 Justification ........................................................................................................................................14 6. IMPLEMENTING THE GEOTHERMAL ENERGY DEVELOPMENT FUND (GEOFUND) IN ECA..............................15 6.1 Introduction ........................................................................................................................................15 6.2 Role of the Bank.................................................................................................................................16 6.3 Types of Projects ................................................................................................................................16 6.4 Leveraging..........................................................................................................................................17 6.5 Replicability .......................................................................................................................................17 6.6 Monitoring and Evaluation.................................................................................................................17 6.7 Progress Reporting .............................................................................................................................18 6.8 Investment Project Eligibility.............................................................................................................18 6.9 Project Cycles.....................................................................................................................................19 7. STATUS OF PROJECT PIPELINE DEVELOPMENT ..............................................................................................20 8. PROGRAM AND MONITORABLE PROGRESS INDICATORS................................................................................22 9. CONCLUSIONS ...............................................................................................................................................25 ANNEX 1: STRATEGIC PARTNERSHIP FOR GEOTHERMAL ENERGY DEVELOPMENT: ITS PARTICIPANTS AND INSTRUMENTS 26 ANNEX 2: WORLD BANK-GEF FUND FOR GEOTHERMAL ENERGY DEVELOPMENT: ISSUES AND QUESTIONS.29 ANNEX 3. BULGARIA GEOTHERMAL PROJECT........................................................................................................34 ANNEX 4.1. POLAND: STARGARD GEOTHERMAL PROJECT.....................................................................................40 ANNEX 4.2. STARGARD GEOTHERMAL BUSINESS PLAN.........................................................................................57 2 1. THE CHALLENGE: RENEWABLE ENERGY RESOURCE DEVELOPMENT IN ECA COUNTRIES The countries of Europe and Central Asia (ECA) are rich in both traditional and renewable energy resources (RERs). However, so far these countries have not taken advantage of their RER wealth, with modern RERs typically representing less than 2% of total primary energy use (the present use in OECD countries is almost 7%; the target in the EU for 2010 is 12%). Large investments are required if the Region is to realize its potential. The World Summit on Sustainable Development (WSSD) in Johannesburg (September 2002) has recognized the many benefits, which RERs, including geothermal energy, can bring to the fore in the development of sustainable and environmentally friendly energy use. The forum strongly encouraged increasing development of RERs with the most important objectives being to mitigate the risk of climate change through reduced CO2 emissions, and to reduce local and regional air pollution. Assisting its client countries in the development of their sustainable energy resources is an important part of the World Bank's mandate. This has been stressed in a number of the Bank's strategic documents, including its Environment Strategy, the strategic document entitled "Fuel for Thought: an Environmental Strategy for the Energy Sector", the Energy Business Renewal Strategy, and ­ most recently, in the World Development Report 2003 (August 2002). Over the past ten years, the Bank, in close cooperation with the Global Environment Facility (GEF), has developed a sizeable RER lending portfolio. However, projects were identified largely on an ad hoc basis, without a systematic approach. The Bank and GEF have recognized that a systematic approach in the support of developing strategies for RER use is essential. Mechanisms need to be developed to systematically support the identification, preparation, and implementation of RER projects. This is even more important when considering the typically high up-front costs and related up-front risks of RER projects on the one hand and the major beneficial externalities of use of RERs on the other, which present energy markets typically do not recognize. Indeed, the first order of business is the identification and removal of barriers relevant in the context of different RERs. As different types of RERs have different uses and are facing different risks and barriers, development of strategies needs to be energy resource specific. This proposal focuses on geothermal energy development in the countries of the Europe and Central Asia Region (ECA), which has a large potential in the Region. The strategy and mechanisms presented in this framework document aim to begin the process of developing a systematic approach to supporting geothermal energy (GE) in ECA. 2. GEOTHERMAL RESOURCE DEVELOPMENT AND ITS BARRIERS At present, geothermal use in ECA Countries is small, representing only about 15% of total world use of GE for direct heating application (over 2000 MWt) in a Region highly dependent on 3 heating during wintertime, and only about 0.5% of total world use for electricity application (43MWe). Yet, the potential of GE for district heating and, to a lesser extent, for electricity generation is large. Potential GE resources in ECA countries represent 17% of the world's resources. Technically feasible extraction of energy during the next 10 to 20 years is more than 1.2 billion tons of oil equivalent. The economic potential is also very large (see the recent World Bank Strategy Paper on increasing use of geothermal energy in ECA Countries: "Fire Without Smoke", dated October 22, 2002). However, the financial potential cannot be tapped, as easily as there are major barriers to development, while major externalities would have to be monetized, to account for the substantial global and local benefits. In the ECA countries, drilling for oil and gas during the 1970s and 80s proved the existence of major GE resources in practically all ECA countries. Suitability for electricity generation from GE has been identified in Hungary, Turkey and Russia. It is estimated that Hungary and Turkey could generate about 10% of their total present electricity needs from geothermal energy. Russia has extensive geothermal resources, including the capacity to generate electric power, and that has seen substantial development in the Far Eastern Russia. Here, existing and planned geothermal power plants are scheduled to generate electricity with an installed capacity of 205 MWe by 2005, but the potential is much larger. Direct geothermal use applications in Russia, excluding the Russian Far East, are principally in space and district heating (110 MWt), with even higher utilization for greenhouse heating (160 MWt), industrial processes and balneology. Poland's geothermal potential is located along a broad band from Southern Poland to Northwestern Poland, permitting practically all towns in that area to be heated by GE (about 25% of total heating needs). Bulgaria has already substantial use of geothermal energy for balneology and greenhouse heating, and would like to expand the use to heat a number of cities. Based on a recent application for support, Bulgaria has obtained a PHRD grant of US$770,000 to systematically assess the country's geothermal resources and to help prepare two geothermal projects. Indeed, in most of the ECA countries there is a pipeline of geothermal projects, which, however, have difficulties to materialize because of problems and barriers, discussed below. There are at least two major barriers to RER development in ECA countries, and another two major ones with regard to development of geothermal energy in particular. The first two are related to: (a) A lack of expertise and know-how about RER among energy sector decision makers at Government-, industry- and local consulting services' levels; and (b) Issues of ECA countries' energy markets, including poor energy policies (e.g. high subsidies for fossil-fuels; energy tariffs not covering costs), inadequate legal, regulatory and institutional frameworks, leading to uncertainties in the industry and a bias in favor of fossil fuels. In addition, as RER projects are typically small as compared to the large fossil-fuel-based projects, their relative transaction costs are high, thereby discouraging Government officials from supporting such projects, and impeding small investors from opting for RER technologies. Regarding geothermal energy, the key barriers to more dynamic development are, in addition to the above general issues, two technology-inherent barriers: 4 (a) High up-front costs relative to conventional technologies (due to the need of identifying the geothermal deposits and drilling the wells to bring the geothermal waters to the surface, as well as to re-inject them after energy extraction); and (b) The associated geological risks of the drill holes not penetrating the geothermal layer at its optimal location, or not encountering as favorable yield, volume, temperature or geo- physical and geo-chemical parameters in the reservoir, as were prognosticated prior to drilling, or running into problems of re-injection due to scaling, poor absorptive capacity of the geologic strata into which spent waters are injected, and related issues. These problems have been addressed in some OECD countries with provision of some grant funding to "monetize" externalities, and with partial risk guarantees (e.g. France provided such a guarantee since the first oil crisis in the 1970s) to allow small investors to obtain market-based commercial bank credits in spite of the up-front risk. BOX 1: Geothermal Energy and Related Up-front Risk Geothermal energy has been used for bathing and washing since the dawn of civilization in many parts of the world. It was first in the 20th century that geothermal energy was harnessed on a large scale for space heating, industry, and electricity generation. At the end of the 20th century, geothermal resources have been identified in over 80 countries and there are quantified records of geothermal utilization in 58 countries in the world. Today, mostly hydrothermal resources are being used on a commercial scale for electricity generation and as a direct heat source. World-wide, almost 50 Terawatt-hours of electricity are being generated and about 50 Terawatt- hours of heat are being used per year. To promote geothermal energy development, a thorough knowledge and data base of the geological structure, and occurrences of geothermal reservoirs of the country is needed. Access to, and compilation of relevant data on geothermal resource occurrences from national institutions (research groups, academia, oil and gas companies, etc.) is important in order to help determine the location of important geothermal reservoirs. Thus, the first order of business should be the generation of a country's reliable estimation of economically recoverable resources in view of current technological limitations on their development and in terms of market dynamics. Initial geological investigations at a potential project site, and the first exploratory and/or production well are rather costly and involve a significant exploration risk relating to the chance that: · At the projected subsurface horizon the exploration or production drilling would encounter insufficiently large reservoirs of geothermal waters or even a "dry" well; · The temperature of waters would be lower than predicted; · The quality of waters would require special treatments ­ to reduce corrosion, to filter out suspended solids, to remove dissolved minerals (TDS), or to inhibit so-called scaling of well casings which would gradually inhibit flow; · Too much captive CO2 might be released from particular geothermal systems; and · The yield of the aquifer would be too low due to insufficient porosity and permeability of the reservoir rocks. These are concerns for exploration and production wells. Injection (re-injection) wells may also experience problems such as: · Insufficient ability of the reservoir rocks to absorb the returned cooled waters due to low permeability; or · Thermal drawdown, resulting from the re-injected cooled water, which propagates to the production wells in doublet operations. 5 3. WORLD BANK-GEF INVOLVEMENT TO DATE AND THE CALL FOR NEW APPROACHES In the past, the World Bank, in close cooperation with GEF, has developed a sizeable RER lending portfolio. With regard to GE, the Bank and GEF have been involved, during the last 10 years, in a number of geothermal district heating operations: Lithuania (Klaipeda); Poland (Podhale, Mszczonow, Skiernewiece, Stargard, Kolo); Slovak Republic (Kosice, Trvdosin); Czech Republic (Decin); Bulgaria; Hungary; Georgia; Armenia. Of these, four are completed or in advanced stages of implementation, with the others in various stages of preparation. Projects were identified largely on an ad hoc basis, without a systematic approach. In some countries, these projects have been integrated well with the mainstream of the Bank's policy dialogue with its clients, and may have contributed to the removal of some barriers to the use of RERs. However, generally these small and scattered projects typically were not able to contribute to the removal of major barriers to RER development, including the leverage of policy reforms that could benefit all alternative energy projects or establish a better foundation for future similar projects in any given country. The Bank and GEF have recognized that a systematic approach in the support of developing strategies for RER in general, and for GE in particular, is essential. Mechanisms need to be developed to systematically support the identification, preparation, and implementation of RER projects. This is even more important when considering the typically high up-front costs and risks of RER projects on the one hand and the major beneficial externalities of use of RER on the other, which present energy markets typically do not recognize. The development of a systematic mechanism to support GE, notably with a partial risk guarantee, TA and contingent grant or low- cost loan windows, has been pursued with the support of the GEF to address the main problems described above. In close cooperation with GEF, the World Bank therefore developed a strategy to systematically support GE promotion and development. This work culminated in the strategy paper entitled "Fire Without Smoke". The objectives, scope and actions under this strategy are the basis for this Framework Brief. 4. THE STRATEGIC PARTNERSHIP FOR GEOTHERMAL ENERGY DEVELOPMENT A number of countries in the ECA Region have approached the World Bank, GEF and other donor agencies, notably UNDP, UNEP and EBRD, with requests to help support geothermal development. The most recent requests received by the World Bank came from Bulgaria, Hungary and Russia, although there were proposals received earlier from Poland, the Czech Republic and the Slovak Republic. The concerns of decision makers as well as potential project promoters were how to address the issues of high up-front costs and geological risks of geothermal projects in markets that are characterized by: 6 (a) Distortions working in favor of fossil fuels and against the use of RERs; (b) Short term commercial bank funding; and (c) Stiff requirements for collateral or loan securities. On the other hand, they recognized the substantial benefits potentially available from geothermal projects but did not see possibilities for risk mitigation, long term funding availability and possible up-front contingent grant or low-cost loan funding to help monetize benefits. In early 2001, the World Bank proposed to the GEF Secretariat a first concept of the proposed Partnership. This concept has matured as a result of discussions held with (a) Decision makers in interested client countries, (b) Officials of bilateral funding sources, and other GEF implementing and executing agencies, notably EBRD, UNDP and UNEP; (c) Private project promoters in several client countries. 4.1 Objectives of the Proposed Strategic Partnership The Strategic Partnership for Geothermal Energy Development (the Partnership) is designed with the common goal to systematically promote the use of geothermal energy in the Region through assistance in barrier removal, provision of financial support, and provision of technical assistance in project preparation and implementation. Partners will be the participating countries in the ECA Region, the World Bank and GEF, International Financial Institutions (IFIs) such as EBRD and other financial institutions focusing on ECA Countries, UNDP and UNEP, as well as multilateral and bilateral donors. The Partnership will be open to any of the ECA Countries. The Strategic Partnership would involve: (a) Provision of technical assistance and capacity building to transfer know-how and to establish a geothermal data base and capacities to develop and implement GE, (b) Support of capital investments in GE, (c) Development of reforms of the energy market related policies, legal regulatory and institutional framework, and (d) Monitoring of trends of use of GE and more generally RERs during the period of 2001- 2007 in participating ECA countries. Under the framework of the Partnership, the World Bank and GEF will take the lead to set up the World Bank-GEF Geothermal Energy Development Fund (GeoFund ­ see Chapter 5 below) which will provide (a) A TA Window, (b) A partial risk guarantee window to mitigate against the geological risks, and (c) An investment finance window with contingent grants or low cost funding to help monetize externalities of geothermal projects. 7 Other partners of the Strategic Partnership could be providing support for policy and institutional reforms, project preparation and implementation as well as co-financing for geothermal investments. A graphical illustration of the partnership and its instruments is contained in Annex 1. It clearly shows the potential participants of the Strategic Partnership; the GeoFund to be set up by the GEF and World Bank and its instruments; and the complementary support of other partners. The Strategic Partnership's primary global objective is to reduce emissions of greenhouse gases (GHGs) in the interest of climate change mitigation through implementation of geothermal projects. Thus, the Partnership through its technical assistance, capacity building, support of barrier removal and hands-on assistance in project funding would help participating countries in the Region in their efforts to reduce the emissions of greenhouse gases in compliance with their commitments to the Kyoto Protocol. It is well known, that ECA countries are large emitters of these gases on a per capita basis. Among the parallel national and local objectives the most important are to: · Change the current unfavorable investment and incentive conditions and create an enabling environment in participating ECA countries that fosters the development of renewable energy and notably geothermal energy utilization for heating and power generation applications through barrier removal and through providing financial, methodological, informational, and institutional support; · Promote an indigenous, sustainable, and clean energy resource; and · Foster reduction of local and regional pollution from district heating systems and combined heat and power plants. Through the formulation process of developing the strategy and mechanism for an effective Partnership, five objectives with indicators of success have been established and should be endorsed by participating client countries (so far, Bulgaria, Czech Republic, Hungary, and Slovak Republic have endorsed). These objectives are listed in Box 2. BOX 2: Objectives/Indicators of Success for the Development of Geothermal Energy Objectives Indicators 1. In support of the development of RERs, By 2007, participating ECA countries have reviewed participating ECA client countries endeavor to their energy sector policies and related legal, improve their energy sector policies, as well as regulatory and institutional frameworks and have legal, regulatory and institutional frameworks to identified key barriers to RER development. They reduce the bias in favor of fossil fuels. have undertaken or at least initiated reforms to reduce those barriers. 2. Participating ECA Countries know their potential Through systematic gathering and review of all for economic geothermal development. pertinent data, participating countries have established a comprehensive data base by 2005, allowing delineation of potential geothermal resources in comparison with potential energy demand in the designated areas. 3. Participating ECA Countries have established By 2007, participating ECA countries have built a comprehensive knowledge of geothermal potential cadre of geothermal specialists familiar with and technology to systematically promote geothermal potential and technology to systematically 8 development of economic projects. promote development of economic projects. 4. Participating ECA Countries are committed to During the period until 2007, participating ECA reduce CO2 emissions through increasing use of Countries have identified and are implementing about geothermal energy in substitution of fossil fuels. 10 geothermal projects designed to achieve a cumulative reduction of 6 million tons of CO2 over the life of these projects. The Partnership consists of two elements, which are designed to assist ECA client countries in developing geothermal energy in a systematic manner. Each element (see Chapter 2 below) should receive the support of the participating countries. In support of the agreed strategic elements, the abovementioned GeoFund will be set up under the Strategic Partnership in support of barrier removal, project identification, and support to promote and implement economically feasible projects. 4.2 Elements of the Proposed Strategic Partnership The proposed Strategic Partnership would provide technical assistance and capacity building for policy and institutional support, project development and preparation, and project financing. Thus, the following two elements are distinguished to constitute the basis of operation for the proposed Strategic Partnership: (a) Technical Assistance and Capacity Building in participating client countries towards: · The identification of barriers to development and their prioritization and mitigation and/or removal to help promote RERs and notably geothermal energy and to help reduce transaction and investment costs; · The assessment of economically producible geothermal resources in order to comprehend the range of resource types and locations; · The promotion of use of geothermal energy; (b) Investment Mechanisms to help finance geothermal energy projects in participating ECA countries. These would support geothermal development in countries of the ECA Region according to the framework described in this paper. The Technical Assistance and Capacity Building Elements are aimed at addressing, in the first place, the barriers against use of RERs. Energy sector policies and legal, regulatory and institutional frameworks in participating ECA Countries will be reviewed systematically to identify key barriers towards use of RERs in participating ECA Countries and to develop policy reforms and framework improvements which would reduce the bias in favor of fossil fuels. Development of use of RERs, including GE, will be monitored. Secondly, the knowledge barriers related to availability of geothermal resources, modes of occurrence, and methods of utilization will be addressed. Thus, the existence of geothermal resources in the participating ECA Countries will be confirmed or demonstrated in the context of establishing a systematic data base. This will be done by local geological institutions or associations and, if need be, supported by technical assistance from the GeoFund and/or local and bilateral sources. The variety of uses of identified or estimated GE and opportunities for further utilization will be 9 enumerated and established by the sme teams. In this context, the economic feasibility of developing these resources will also be established. Thirdly, feasible geothermal projects, thus identified, will be supported with technical assistance and capacity building, assisting project promoters to implement and operate their investments into geothermal energy. The Technical Assistance and Capacity Building Element will be supported out of the Technical Assistance Window of the proposed World Bank-GEF Geothermal Energy Development Fund (GeoFund) (see chapter 5 below). 5. WORLD BANK-GEF FUND FOR GEOTHERMAL ENERGY DEVELOPMENT & LOCAL FINANCING MECHANISMS The central idea of the proposed Partnership addresses the need for innovative financing of projects. Two types of mechanisms will achieve this aim: (a) A World Bank-GEF Geothermal Energy Development Fund (GeoFund) which can provide technical assistance for geothermal project identification and preparation, is prepared to provide a partial risk guarantee for meeting geological risks, and can also provide contingent grant, low-cost loans and, on exceptional basis, grant financing1 to help monetize global environmental externalities. The GeoFund will be administered by the World Bank; (b) Investment Mechanisms in participating ECA Countries to help fund geothermal projects. These would be country-specific depending on the extent and sophistication of participating countries' financial markets, as well as financial strengths of project sponsors. 5.1 The World Bank-GEF Geothermal Energy Development Fund (GeoFund) The World Bank-GEF GeoFund is designed as a market intervention responsive to medium-/ long-term market conditions existing in the participating countries. The paramount objective of the GeoFund is to build sustained market capacity to develop and finance geothermal projects on commercial terms using local private capital. Its' three principal instruments are discussed below: · The TA window of the GeoFund will address in the first place barriers that retard the use of RERs and geothermal energy. It will, thus, work with participating governments to identify the barriers, determine their resolution queue and devise means to implement improved policies, legal, regulatory and institutional frameworks. Participating countries would carry out the identification of barriers, and delineate ways of addressing them. The TA window will also help to set up geothermal databases and atlases, and will identify and prepare/implement geothermal projects. The amount of the TA Window is proposed 1It is envisaged that the GeoFund will provide mostly contingent grants or loans. However, countries with very weak financial markets, such as Central Asian countries, may be eligible for partial grant financing. Criteria and conditions for grant financing will be defined during project preparation (with PDF-B funding). 10 to be US$ 5 million. The TA window might obtain co-financing from IFIs, multilateral and bilateral donors. · The partial risk guarantee facility of the GeoFund will partially insure project promoters/investors against the short-term, up-front geological risk of exploration (not finding a suitable geothermal deposit), and/or the long-term geological risk of facing a deposit with lower-than-estimated temperature, higher than estimated mineralization, or difficult re-injectivity. In the case of long term geological risks, the partial risk guarantee might provide for a stream of pre-defined payments over some time (typically until LT loans have matured), to make up for lower than estimated revenues, and/or higher than estimated operating costs. Thus, the facility will be a partial risk facility with well- defined (covenanted) risk coverage. The guarantee facility will be partial, to motivate project sponsors to carry out a sound and thorough geological investigation and avoid moral hazard. The main purpose of the partial risk guarantee facility is to provide help to project promoters to obtain adequate commercial lending for their project. The reserves of the facility will earn interest while no covenanted event occurs, thus compensating investors in part against outlays occurring when a covenanted risk materializes. The risk mitigation of the partial risk guarantee facility should attract private and public investors to proceed with their projects and enable them to attract commercial loans with interest rates at the low end of the lending rate range, and with a sufficiently long repayment schedule. This, in turn, should allow resulting project cash flows to service annual loan repayment obligations comfortably. The partial risk guarantee facility will be designed to compensate investors or their commercial banks in case of specified risks materializing. The exact scope of risks and levels of guarantees, as well as the related structure, modus operandi, and legal underpinnings of the facility will be worked out during project preparation, with the support of a GEF PDF-B preparation grant. Issues and questions relating to the facility are summarized in Annex 1. · The investment funding window would provide contingent grants, low cost loans or, in limited cases, grant financing, thereby covering a part of the project cost through monetization of external benefits. This window would therefore help to overcome financial barriers. The amount and mode of allocation of these funds will depend, inter alia, on the financial market conditions in the country (e.g. need for a demonstration project), the ability of utilities to attract commercial financing and incremental costs and externalities of the project2. The contingent grants would be particularly important where, due to distortions in the energy and financial markets, only pilot projects could be implemented to serve as demonstration projects highlighting the substantial benefits of geothermal energy development. The funds of the investment funding window are considered to compensate project promoters for the substantial externalities of geothermal projects by monetizing the associated benefits. Of course, they would only supplement investors' equity funds and commercial loans. Detailed eligibility criteria for projects to draw on the funding window and the operations of the window (revolving fund?) will be developed under the PDF-B grant. 2Countries with very weak financial markets and high barriers may require limited grant financing for investment in order to develop viable projects. Terms and conditions for grant financing will be further developed during project preparation with support from the PDF-B grant. 11 5.2 Investment Mechanisms in participating ECA Countries Financing Mechanisms in participating client countries will be identified with the help of PDF-B support during the early phases of the Partnership Program, under which the funding of geothermal investments would be facilitated. Thus, in participating ECA Countries with advanced and well functioning financial markets, suitable commercial banks, investors or creditworthy utilities might easily be identified to help fund specific projects. On the other hand, in countries with poorly functioning financial markets, local or foreign project investment companies or similar institutions might have to be identified, which could function as the needed financial mechanisms. These would identify, prepare and implement geothermal projects to take over the burden of investments into the new heat or power facilities from the typically struggling district heat and power utilities. 5.3 Advantages of the Proposed Systematic Approach and Expected Activities The proposed approach of setting up the GeoFund with TA, partial risk guarantee facility and a low-cost investment funding window under the Strategic Partnership would also allow to combine World Bank and GEF expertise and funding with funding and know-how from bilateral sources (e.g. EU, Scandinavia, Austria, Denmark, Germany) and domestic energy- and environmental sources. The systematic approach would further address a common problem of the ECA Region (obsolete, inefficient district heating and power generation, local air pollution) as well as the global problem (GHG emissions) through utilizing the geothermal energy potential available in the Region, and through bringing into the Partnership the policy-, financial-, managerial-, technology-, market-, and other expertise and abilities spread across the region. Once successfully developed, a similar approach could be developed for other RERs. The World Bank and GEF will take the lead in establishing the World Bank-GEF Geothermal Energy Development Fund, thereby fostering cooperation among client countries and bilateral donors for developing geothermal resources. The partial risk reduction/guarantee scheme to be organized into a partial guarantee window and combined with project development assistance (TA Window and contingent grant or low-cost loan support for specific projects) will help to attract investors, donors and commercial banks, which so far are shying away from relatively small projects which they consider risky. Bilateral participants in the Strategic Partnership may complement this effort by parallel co-financing TA & Capacity Building efforts as well as the proposed funding mechanisms. The World Bank-GEF Geothermal Energy Development Fund, complemented by the bilateral donors will thus promote geothermal project development in participating ECA countries directly and indirectly ­ through a number of activities aiming to: · Review barriers to development of RERs in each country; develop and implement mechanisms to address the barriers in a coordinated way; · Work with local and national legislative and regulatory bodies for better understanding of the benefits of geothermal energy, demonstrating benefits, and showing approaches to amend rules; · Contribute to the assessment of geothermal resources through comparing geothermal maps and relating them to the existing heat demand centers and district heating systems; 12 · Foster geothermal energy development and associated DH development in ECA Countries through realistic, operational action plans that build on and complement existing national strategies; · Assist the countries in identifying potential investment projects; · Develop comprehensive business plans that, beyond existing technical geothermal (feasibility) studies, address institutional, financial and socio-economic issues; · Identify suitable project financing mechanisms in ECA countries as required; for example, project investment companies could be identified, which would prepare and implement the geothermal projects and get compensated for that work through lease contracts or off-take agreements; these could be supported by IFC or EBRD, or similar multilateral or bilateral institutions; · Work with local commercial banks and other financial institutions to involve them in financing of geothermal projects; · Work with local utilities to overcome objections, lack of understanding of technology and benefits to their operations; · Exchange technical information among project development offices and companies for capacity building through workshops, conferences, and professional contacts. Resulting action plans, business plans, investments, and geothermal operations will use the experience of existing national strategies, as well as completed and ongoing activities. Additionally, beyond the drawing on the GeoFund and local commercial investment mechanisms, the countries of the region may consider various other complementary forms of environmental project finance, e.g., "green" investment funds, leasing, environmental and ethical banks, environmental funds, and the mechanics of energy service companies (ESCOs) for modes of alternative financing and for potential co-investments. The World Bank-GEF Fund for Geothermal Energy Development is proposed to be funded by GEF for a total of US$25 million to be allocated to the three windows of the partnership as follows: · Technical Assistance Window: US$ 5 million; · Partial Risk Guarantee Facility: US$10 million; · Investment Finance Window: US$10 million. The World Bank-GEF, in using this funding, would provide commitments to assist participating client countries in the ECA Region to (a) help identify barriers to RER utilization and to help overcome them; (b) help setting up systematic data bases for geothermal energy resources and assist in the identification of projects; (c) assist in the preparation and implementation of economically feasible projects through technical assistance, provision of partial risk guarantees and some contingent grant or low-cost loan funding to monetize externalities. 13 It is expected that bilateral donors or local funds would provide further grant funding for geothermal development in the order of up to US$ 25 million. The modalities of the co-financing arrangements would have to be established on a project by project basis. In total, for every US$1 from GEF, an overall contribution of US$8 or more could be expected from other sources, including IFIs and commercial banks for the implementation of geothermal projects. Thus it could be expected that a total of US$ 200 million in project finance would be put together to fund about 10 to 15 projects over the next five to eight years. Due to replication and an expected "snow-ball effect", additional projects would be likely in the participating countries. As the partial guarantee facility would only disburse money in case of geological problems, the probability of which is considered less than 10%, the actual leverage is likely to be considerably higher than 1: 8. The GeoFund is to be set up as soon as possible. Its funding is proposed to be provided in three tranches. The first tranche, proposed to amount to US$5 million is to establish the TA window with an initial amount of US$1 million, the partial risk facility (PRF) with US$2 million, and the investment finance window (IFW) with US$2 million. The second tranche to be made available after a full report on the progress of TA applications and project preparation/funding could then amount to US$12 million (TA: $2m., PRF: $5m., IFW:$5m). It would be expected to be called upon in 2004-2005 depending on progress and results of Tranche 1. A third tranche of US$8 million (TA: $2m., PRF: $3m., IFW: $3m.) will then be requested on the basis of the progress and results of Tranche 2. 5.4 Justification One of the Project's principal objectives is to facilitate the creation of an enabling business/regulatory environment in selected countries of the ECA region in which the development of geothermal energy becomes attractive to investors. In this way, the Project directly supports the GEF Operational Program #6: Promoting the adoption of renewable energy by removing barriers and reducing implementation costs. In so much as the construction of geothermal plants requires the upgrading/modernization of existing district heating networks, or combined heat and power plants, the Project also supports the removal of barriers to energy efficiency and energy conservation, although this is not formally claimed here. In addition to meeting eligibility criteria related to GEF Operational Program #6 the Project responds to such strategic priorities of GEF as: · Increasing the availability of financing for energy efficiency and renewable energy investments, enterprises and intermediaries, with priority on leveraged private finance: one key objective of the Project is to facilitate the access of geothermal investments to financing through the GeoFund to be established under the Program; · The support of scale-up and replication programs for the demonstration of specific technologies and specific financing modalities, such as contingent financing, incremental risk financing, the financing of alternative feasibility studies, and the development of public-private partnerships: This strategic priority is observed by the Program's regional scope that encompasses a number of countries and investment projects and places high emphasis on demonstration effect and replicability; 14 · Joining renewable energy to income generation: the Project demonstrates the sustainable application of geothermal energy for such income generating uses in the agricultural sector as green house heating and fish farming. 6. IMPLEMENTING THE GEOTHERMAL ENERGY DEVELOPMENT FUND (GEOFUND) IN ECA 6.1 Introduction The Geothermal Energy Development Fund (GeoFund) is a novelty and has to be established, with scope, structure, legal underpinning and modus operandi to be developed in detail. For that purpose, a PDF-B grant has been requested from GEF and is expected to become available in end-March 2003. That funding should allow inter alia to consult in detail with other multilateral donors (e.g. EBRD, as well as UNDP and UNEP), bilateral funding sources (e.g. EU, Scandinavia, Austria, Denmark, Germany), the insurance industry, as well as participating ECA Countries to define its exact scope, structure and modus operandi, as well as the way these other bodies might participate in technical assistance, capacity building and project funding. In particular, for the partial guarantee window the detailed procedures, risk-covering guarantee arrangements, as well as their legal framework will have to be worked out in detail (see Annex 2 for a list of issues and questions which require resolution prior to setting up the facility). The requested PDF-B grant will help to answer these questions. The GeoFund would fund investments in geothermal energy use for three purposes (see also Section (6.3) below): (a) Electricity generation, (b) District heat provision, as well as (c) Such applications as greenhouse heating, wood drying, and balneological use in participating client countries, and (d) Any combination of (a) to (c). It is expected that the majority of geothermal projects (maybe 60%) would involve district heating facilities. Only 20% of projects are expected to deal with electricity generation and the remaining 20% would involve other uses. Most projects would involve a combination of district heat provision and other applications (combination of (b) and (c)). Typically most projects involving electricity generation would be in combination with district heating. Projects would be selected by the World Bank from the proposals submitted by participating ECA Countries, according to specific, pre-approved eligibility criteria (see Section (6.8) below). The list of criteria and their detailed establishment would be developed with the help of the PDF- B grant. The list would include: designation of the project as priority investment by the country; potential for replicability and commitment to specific activities that help promote replicability; country commitments to policy/legal/institutional reforms related to energy sector market improvement; GEF focal point endorsement; and acceptable level of co-financing secured. 15 The concept for a World Bank-GEF Geothermal Development Fund was first endorsed by the World Bank ECA Management in June 2001 and more recently in October 2002. Following CEO endorsement of the GeoFund (after completion of the PDF-B), projects to be funded under the GeoFund that are requested through the World Bank would be approved and implemented following standard World Bank procedures for GEF projects (see Section (6.9) below). Approval by GEF of GeoFund projects, however, would follow a streamlined procedure through delegation of approval authority to the GEF CEO by the Council. Replenishment of the Partnership Geothermal Development Fund (second and third tranche) will be based on a progress report to the Council with information on the status of implementation of the GeoFund, (see Section (6.9) below) the overall leveraging ratio achieved to date and the project pipeline built up by then. 6.2 Role of the Bank The World Bank would have a very important role in helping to promote geothermal energy use in participating client countries of the ECA region. Thus, the World Bank would commit to: (a) Incorporating in its country dialogue with each participating client country policies that address and help reduce barriers against use of RERs, (b) Promoting inclusion of RERs development in the on-going Country Assistance Strategy (CAS) development processes, and (c) Using the Bank's comparative advantage to help mobilize funding and engage other donors/partners as well as commercial banks to help to achieve a complete financing plan for a given project. Large geothermal projects, particularly those involving electricity generation, might be supported by a World Bank loan if requested by the country/project sponsor. 6.3 Types of Projects As already mentioned above (Section (6.1)), there would be three types of projects: (a) Electricity generating projects in places where the geothermal reservoir promises sufficiently high temperatures to achieve that goal. Likely candidate areas for such projects would be in several parts of Russia (Kamchatka), in Hungary, Turkey and possibly in Romania and the Slovak Republic; (b) Fuel substitution projects in existing district heating facilities will be the most likely projects; in these cases geothermal energy would be to a large extent substituted for an existing fossil fuel source; these have a good potential throughout most of the ECA countries; and (c) Geothermal energy projects for the purpose of heating of individual housing blocks (not involving DH networks), of greenhouses, of wood drying chambers, as well as spas and other balneological facilities. Of course, any combination of the three above project types is conceivable. In many cases, a cascading approach might be used where geothermal resources would be cooled down in 16 successive stages (industrial heating, heating of housing, heating of greenhouses, heating of balneological facilities, etc.), before being re-injected. 6.4 Leveraging The GeoFund would aim at leveraging GEF funds against other sources of funding at an aggregated overall program ratio of 1 to 8 (GEF: US$25 million, other sources: US$ 175 million; in total, for about ten projects estimated to cost about US$200 million). It is expected that low- cost funding could become available on a ratio of 1 to 2 (GEF and other sources, including bilateral sources and domestic sources). The other parts (6 to 7 parts) would be coming in the form of equity contributions from project sponsors and other investors and, in the form of loans from multilateral and bilateral donors, as well as commercial banks, whose entry would be facilitated through the partial risk guarantee mechanism under GEF funding. The minimum leveraging rate required for individual projects is 1:5. Distinction needs to be made here between, on the one hand, GEF sources in the form of a partial risk guarantee which do not directly contribute to a project's financing plan and therefore should have a very high leveraging ratio depending on actual payout for unsuccessful projects, and, on the other hand, other GEF sources (TA, contingent grant funding, or low cost funding), which directly contribute to a project's financing plan. Taking only the latter funding (about US$15 million), the leveraging would exceed 1 to 13 for those funds. Only in cases of extreme difficulties, that is, when financial market distortions are extreme, or utilities are extremely weak, should a ratio of 50% of outright local and bilateral grants and GEF contingent grants in the total financing plan be considered (remainder equity and loan financing). 6.5 Replicability Replication of geothermal projects is expected to be facilitated because there is: (a) Only a limited number of project types and configurations; (b) A growing removal of barriers towards use of RERs and notably geothermal energy in participating client countries; (c) An increasing knowledge and improving data base on the potential of geothermal energy in a participating country and movement towards a systematic approach towards project identification under the Partnership Program; (d) An increasing capacity and know-how of mastering geothermal technology, project preparation and implementation; and (e) Increasing use of carbon trading, bringing monetization of global externalities; this will further enhance the potential for geothermal development. 6.6 Monitoring and Evaluation Each individual project will have its own monitoring indicators, benchmarks, and monitoring plans to confirm actual carbon reduction achieved, as measured against a project-specific 17 baseline. This is very important globally in that cost-effectiveness indicators (US$/CO2 removed) will be established through the GeoFund for different project types and situations, which will be used in possible future applications by GEF and by the international community as non-recipient countries enhance their actions to reduce carbon emissions. This work will extensively draw on the experience made with monitoring and reporting in the Poland Podhale Geothermal Project around Zakopane and Nowy Targ. 6.7 Progress Reporting A progress report on the Strategic Partnership for Geothermal Development and the World Bank-GEF Geothermal Development Fund will be submitted to GEF Council when resource commitments (tranches) are requested. Reporting will consist of progress to date on program leveraging targets, description of the project pipeline and the stage of development of each project proposal, as well as coordination among partners. Progress in the implementation of individual projects will be reported annually to the GEF Secretariat through the Progress Implementation Report (PIR) exercise. 6.8 Investment Project Eligibility The list of project eligibility criteria and their detailed establishment would be developed with the help of the PDF-B grant. At this writing it is proposed that Project proposals from participating ECA Client Countries will need to fulfill the following basic eligibility criteria for financing under the Partnership Geothermal Development Fund: Thus, project proposals should: · Be one of the three eligible project types or a combination thereof, as described in Section (6. 3) above; · Be in line with country energy sector priorities; · Provide CO2 reductions of at least 5,000 tons of CO2 annually, as calculated on the basis of a project-specific baseline; · Have secured financing to cover non-incremental project costs and ensure that the minimum leveraging requirements are met (Section (6.4) above) by the time of CEO endorsement; · Have applied for additional financing (including the GeoFund) to assure a complete financing plan; · Adhere to the principles of the GEF Operational Program, notably OP6 for climate change mitigation; · Submit an endorsement from the proposing country's GEF Focal Point; Furthermore, whenever a project has a potential for additional environmental benefits (e.g. local or regional or trans-boundary air pollution reduction), the existence of such additional benefits will be a positive factor, but will not constitute per se an eligibility condition. In all cases the reduction of CO2 emissions is the essential eligibility condition for the projects. 18 6.9 Project Cycles Technical assistance (TA) funding would be made available for the review of barriers against use of RER, including GE, and for the development of proposals of reforms of policies, legal, regulatory and institutional frameworks, as well as for development of geothermal databases and project pipeline development. In that sense the GEF funded TA would contribute significantly to capacity building to allow future identification and development of geothermal projects. TA funding would come from the TA Window of the GEF resources. Projects will be identified by the proposing country, with assistance from the World Bank and/or other eligible financiers or investors. The World Bank could assist countries by providing TA funding out of the TA window and/or by mobilizing donor support for strengthening their institutional capacity for project identification, development and/or implementation. Regarding Project finance (partial risk-guarantee and/or contingent grant or low-cost loan funding), ex ante, no portion of the GEF funds in the partial risk guarantee window and the investment fund window will be earmarked for any individual country or any specific project. However, TA funds might be earmarked early to get the capacity building process underway in certain countries. All eligible countries will have an equal opportunity to benefit from the GEF allocation to the Partnership Geothermal Development Fund and will be encouraged to submit project proposals. Project proposals submitted by participating countries will each be considered based on merit. In the interest of speedy advancement of investments, funds will be made available to countries on a "first come first served" basis in line with standard project processing procedures, assuming that the projects meet the eligibility criteria. Eligible projects (see Section (6.8) "Eligibility Criteria" above), will be prepared and appraised under standard World Bank procedures before being submitted to the GEF Secretariat for GEF CEO approval. Project Concept Notes (PCNs) will be submitted by potential investors or project sponsors to the World Bank for screening against GeoFund eligibility requirements and for assistance in elaboration of project designs. Revised Project Concept Notes will subsequently be submitted to the GEF Secretariat for approval by the World Bank GEF Regional Coordinator on a rolling basis following standard procedures for "GEF pipeline entry". A PCN should indicate whether or not a PDF-B (preparation grant) will be requested. Projects under the GeoFund will not be submitted to the GEF Council for approval through standard work programs at Council Meetings or Intersessionals. Rather, upon completion of project preparation, the World Bank will submit projects to the GEF CEO for endorsement following streamlined procedures similar to procedures for GEF medium sized projects. If found satisfactory, the GEF CEO will approve individual projects up to the funding limit of the GeoFund tranche(s). Subsequently, projects will be approved by the World Bank according to World Bank procedures. Project implementation will follow standard World Bank proceedures, including environmental/social, financial management, procurement and disbursement procedures. A plan for TA activities for early capacity building that are not part of individual investment projects will be detailed under the PDF-B grant just requested and will be submitted for CEO endorsement at the time of endorsement of the GeoFund. If the GeoFund co-finances with another IFI which has executing agency status with the GEF (i.e. under the expanded opportunities policy such as EBRD), the management arrangements will 19 follow existing procedures established for World Bank and Executing Agency Cooperation. For example, standard project appraisal procedures and fiduciary requirements of the applicant executing agency and not the World Bank will be in effect. PDF-B submissions to GEFSEC in this case will also be handled by the Executing Agency instead of the World Bank. The World Bank's role with respect to such Executing Agencies will be to provide guidance to the applicant Agency on project eligibility, and reporting vis-a-vis the Partnership; to ensure coordination with the overall GeoFund's activities, to include the status of these projects in routine reporting of the Partnership; to ensure that monitoring and evaluation aspects of these projects are consistent with other Partnership proposals; and to act as the GEF Implementing Agency for the project. When the Geothermal Development Fund co-finances with other donors and agencies where there is no prior agreement for cooperation on the GEF, the GEF components of these projects will be processed as a standard World Bank GEF operation. 7. STATUS OF PROJECT PIPELINE DEVELOPMENT There are a number of countries in which the concept, objectives and modalities of the Strategic Partnership and its TA Window and Geothermal Development Fund (Partial Risk Guarantee Window and Contingent Grant or Low-Cost Loan Window) have been discussed and partially or fully endorsed. These countries are Bulgaria, the Czech Republic, Hungary, Poland, the Slovak Republic and Russia. In all these countries, there is at least one geothermal project under preparation which could be of prime interest to the Partnership and for which the countries have sought support. · In Bulgaria, two projects are under consideration which would be designed to substitute geothermal heat for coal/fuel oil firing in existing district heat systems in the cities of Velingrad (medium sized) and Separeva Bania (small). A PHRD grant of US$770,000 will help the Ministry of Environment and Water Resources (MoEW) to carry out a review of policies, institutional, legal and regulatory frameworks as well as environmental and social aspects with regard to renewable energy and notably geothermal energy, will undertake a geothermal resource review in the country, and will help to prepare the projects. The Kyoto Protocol and national criteria for risk assessment and mitigation will be applied for the assessment of the opportunities for one small and one medium sized Joint Implementation Project. Main efforts will focus on: (a) resource evaluation; (b) assessment of available technologies; (c) environmental compliance requirements; (d) market research; (e) status and analysis of legal and regulatory framework; (f) analysis of financial options including JI mechanisms; (g) project ownership and project management appraisal; (h) project feasibility; management of the exploration risk; (i) reservoir evaluation and re-injection testing as needed; 20 (j) engineering and construction; (k) product marketing, pricing and competition. A preparation mission was in the field in January 2003 and has initiated the preparation of comprehensive feasibility studies for the Velingrad and Separeva Bania Geothermal Projects. · In the Czech Republic, there is a project under advanced implementation in Decin where the support of the Strategic Partnership might be coming late. However, other geothermal projects are under preparation. · In Hungary, a number of very promising geothermal resources with temperatures in excess of 130 degrees centigrade, and therefore suitable for electricity generation (Type 1 of the project categories) are under consideration. The Hungarian Government has requested World Bank-GEF support for project preparation. The private oil and gas company MOL, which owns all oil and gas wells in Hungary, has indicated readiness to cooperate with the Partnership. Of the countries in Central and Eastern Europe, Hungary has progressed most in developing policies which foster renewable energy resources, including special pricing arrangements in support of RER generated electricity. · In Poland, there are two projects under preparation or early implementation (Stargard in the northwest of Poland, and Kolo in Central Poland) which will substitute geothermal energy for coal firing in well run municipal district heat systems. Poland has developed a detailed geothermal resource atlas and has started to systematically overlay the map, indicating cities with DH systems with the geothermal resource map, thereby identifying potential projects. The previous Polish Government had approached the World Bank- GEF to support these efforts and had pledged funds for the partnership to make its own expertise available to other countries in the Region. Discussions with the new Government are underway to revive that initiative. Moreover, both Project are expected to only call for a partial risk guarantee from the GeoFund, once established. · In the Slovak Republic, a very promising geothermal deposit has been identified near the city of Kosice and has been confirmed by initial exploratory drillings funded by the EU. This project would provide fuel substitution (geothermal for coal) in the city's existing DH system and possibly could generate electricity as well at attractive tariffs, provided certain externalities are monetized. This would mean a hybrid between type 1 and 2 of the above project categories. This project would be a public /private joint venture and would be comparatively large (US$ 50 million investment) requiring substantial loan financing. The Government had previously indicated that it was interested for the World Bank to take the lead in this project and would be prepared to provide a Government guarantee for a World Bank loan. There is also a very small Project in Trvdosin (south side of the Tatry mountains), which would require a partial risk guarantee to obtain commercial loan financing. · In Russia, there are a number of promising geothermal deposits, some of which are allowing production of electricity. A recent geothermal power generation project in Kamchatka is funded by EBRD which, with the Russian sponsor, was proposing the Partnership support for a second project in the same area, also to be supported by EBRD. Other possibilities are in the pre-Caucasus region of southern Russia, at the Lake Baikal 21 and in various other parts of the country. As the winters are particularly cold and long in some of those regions, the geothermal base load for heating of nearby cities would be large as well, allowing for substantial electricity generation. Those projects would also mean hybrids between type 1 and 2 of the above project categoriesThere are a number of other countries where geothermal resources are particularly promising, but where investment has been limited because of the technology inherent barriers (particularly lack of know-how and lack of up front funding with partial risk guarantees). These countries would very likely join the Partnership as soon as it gets underway. Recently, the National Strategy Study for greenhouse gas reductions in the Ukraine identified a number of promising geothermal projects. There are several opportunities in the Trans-Carpatian Mountains. And recently Georgia has indicated interest in geothermal development. The latter could be co-financed by substantial bilateral support from Germany to develop renewable energy resources. 8. PROGRAM AND MONITORABLE PROGRESS INDICATORS The following overview would give an idea about a possible program with required activities, outcomes, proposed responsibilities, costs (with indication of financing source) and tentative timing. This is under the assumption, that the Strategic Partnership materializes and the World Bank-GEF Geothermal Energy Development Fund (the GeoFund) would be established. TABLE 8.1 PROPOSED PROGRAM AND MONITORING TABLE Strategic Actions FY2003-2007 Responsible Financed Objectives Outcomes Needed Outputs InstitutionCost (US$000) by Removal of: Better Workshops 4 workshops; for World Bank 250 GeoFund / Geothermal understanding EU accession Bilaterals Technology of the technical countries , Russia Inherent and economic and Ukraine, Barriers potential of Central Asia, (IB): geothermal Caucasus Region, Technical energy in ECA and Turkey and member (FY2004 to 2006) Scientific countries Barriers Geothermal Country 4 country World Bank/ 1,000 GeoFund / data bases, assessment of assessments GeoFund/ Bilaterals geothermal geothermal (FY2004 to 2006) Country atlases potential Government Increased Capacity 4 Workshops World Bank/ 250 GeoFund/ External capacity and building within (FY2004 to 2005) GeoFund/ Bilaterals barriers cooperation Government Country (EB): within Government Institutional governments , Policy, Priority list of Country 4 country World Bank/ 500 GeoFund/ Legal and barriers and assessment of assessments GeoFund/ Bilaterals Regulatory program of barriers to RE (FY2004 to 2006) Country Barriers barrier removal use Government 22 Strategic Actions FY2003-2007 Responsible Financed Objectives Outcomes Needed Outputs Institution Cost (US$000) by Improved TA to five In-house advisors in World Bank/ 1,000 GeoFund / energy Governments relevant ministries GeoFund/ Bilaterals strategies, to help for one year each in Country policies and introduce 4 countries Government funding sector reforms, (FY2004 to 2006) mechanisms; improve incentives for taxation RE and (favoring RE geothermal and GE use), energy use providing other incentives Increased Capacity 4 Workshops GeoFund/ EU/ 250 GeoFund/ capacity in the building for (FY2004 to 2006) Bilaterals Bilaterals private sector developers and investors, Increased Capacity 4 Workshops GeoFund/ EU/ 250 GeoFund / capacity in the building for (FY2004 to 2006) Bilaterals Bilaterals public sector local utilities (particularly and local and public utilities) regional Governments Financial Provision of Workshop World Bank 100 GeoFund / Investment Sector ready to incentives for (FY2004 ) Bilaterals Risk and support RE and RE and GE, Financial geothermal Establishment Barriers: energy use of partial risk (IB) and guarantee fund, (EB) work with local commercial banks and investors Funding of GeoFund GeoFund World Bank/ 30,000 GeoFund / Investment Geothermal Project established to GEF/EU/ plus Bilaterals Risk and Projects preparation, provide TA, Partial Bilaterals Financial feasible coordination of Risk Guarantee Barriers: donors, legal Fund and low-cost (IB) and agreements funding for GE (EB) development (FY2004) Funding of Project Two national (or World Bank/ Low-cost GeoFund, Geothermal Investment one regional) IFC/ EBRD/ contribution Investors Projects Companies' Project Investment EU/ from GeoFund: such as IFC, feasible in preparation, Companies Governments/ 2x$3 million, EBRD, countries with coordination of identified and Private Equity from Private healthy utilities investors & promoting projects Investors Investors Investors donors, legal (FY2004 to 2005) 2x$12million agreements 23 Strategic Actions FY2003-2007 Responsible Financed Objectives Outcomes Needed Outputs Institution Cost (US$000) by 4 Geothermal Project 4 projects National 10,000 National Investment preparation, (guarantees from Project Project Projects drillings, well GeoFund), TA for Investment Investment processed and testing preparation, Companies Companies completed or implementation (PIC) under active from GeoFund implementation (FY2004 to 2007) Loans for 4 projects IFIs, Local 30,000 IFIs, Local project (guarantees from FIs, PIC FIs implementation GeoFund), TA for implementation from GeoFund (FY2004 to 2007) Support 4 projects Bilaterals, 10,000 Bilaterals, through (FY2004 to 2007) EcoFunds, EcoFunds, bilaterals, PIC etc. Ecofunds etc. Support 4 projects World Bank / 5,000 World Bank through PCF (FY2004 to 2007) PCF/ PIC / PCF during project operations Support 4 projects Bilaterals/ 5,000 Bilaterals through other (FY2004 to 2007) PIC JI institution Funding of Project Project Investment World Bank/ Low- GeoFund, Geothermal Investment Companies IFC/ EBRD/ costcontribution Investors projects Companies' identified and EU/ from GeoFund: such as IFC, feasible even in preparation, willing to promote Governments/ 2x$2 million, EBRD, countries with coordination of projects Private Equity from Private yet "shaky" investors & (FY2006 to 2007) Investors Investors 2x$10 Investors utilities donors, legal million agreements 5 to 8 Project 3 projects in World Bank, Low-cost GeoFund/ geothermal identification, advanced GeoFund, PIC contributions PIC/ IFIs & projects preparation and preparation phase or (if already from PIC/ LFIs/ identified and feasibility even early established), GeoFund Bilaterals/ under studies, drilling implementation, utilities $10m., loans of EcoFunds, preparation or of wells, another 5 in project $45m., support etc. PCF JI- early establishment pipeline from bilaterals Bilaterals implementation of funding (FY2005 to 2007) $15m program Note: The barriers highlighted to be removed in the strategic objectives column, relate to the barriers identified in the Geothermal Strategy Paper. Timing of the first four projects up to Board presentation (and in some cases beyond) would be between FY04 and FY07. These would be prepared during phase 1 of the Partnership, to be supported by the first tranche of GEF Funding. Project investment companies, or similar financial mechanisms, where necessary, would be identified to help promote projects. The second batch of projects could follow until FY2012, so that by then (ten years from now) at least 10 projects (with an investment volume of about $200million would be fully implemented, and another 10 would be in various stages of processing, bringing the total to about $400 million. 24 9. CONCLUSIONS The endorsement and support of the Strategic Partnership for the Development of Geothermal Energy and the GeoFund concept as well as the approval of the first tranche of the GeoFund by GEF will give a strong signal to potential participating countries that TA will become available, that partial risk guarantees can be supplied to geothermal investments, and that some contingent grant or low-cost loan funding might also be made available for such investments. Approval of the first tranche of the GeoFund by the GEF Council will also help begin to steer co-financing by other donors to investment objectives of that renewable energy resource. It is expected that private sector interest and action will also be catalyzed through the presence of the Partnership. As an important model for a more programmatic investment approach in the area of Renewable Energy Resource Development, it will serve as a model for the future, in line with GEF commitments and trends to move toward support of other renewable energies (e.g. biomass use). Access to these funds in the medium and long term will give leverage to environmental governmental bodies, local governments and investors into sustainable energy resources in their efforts to cooperate with their respective ministries of finance in implementing highly beneficial RER projects with large social externalities. This should assist in moving renewable energy use, and thereby the regional/global environmental agenda, to a higher rank in national investment priorities. Moreover, a regional partnership will help to foster cooperation among participating countries, thereby building know-how and expertise on a local and regional level and thus reducing transaction costs. We are hereby requesting GEF Council's approval of the Strategic Partnership for the Development of Geothermal Energy in ECA and approval of the first tranche of US$ 5 million of the Geothermal Development Fund. 25 ANNEX 1: STRATEGIC PARTNERSHIP FOR GEOTHERMAL ENERGY DEVELOPMENT: ITS PARTICIPANTS AND INSTRUMENTS OBJECTIVES OF THE PARTNERSHIP The Strategic Partnership for Geothermal Energy Development (the Partnership) is designed with the common goal to systematically promote the use of geothermal energy in the Region through assistance in barrier removal, provision of financial support, and provision of technical assistance in project preparation and implementation. PARTICIPATION IN THE PARTNERSHIP (SEE GRAPH ON FOLLOWING PAGE) Potential Partners in the Partnership will be: (a) Participating client countries in the ECA Region; (b) The World Bank and GEF; (c) Other International Financial Institutions (IFIs), such as IFC and EBRD; (d) UNDP and UNEP; (e) Multilateral and bilateral donors; (f) Other Institutions (Utilities, Investors, Commercial Banks, Carbon Finance Institutions, etc.) The Partnership will be open to any of the ECA Client Countries and its institutions. Instruments set up by the World Bank and GEF Under the framework of the Partnership, the World Bank and GEF will take the lead to set up the World Bank/GEF Geothermal Energy Development Fund (GeoFund) (big arrows from World Bank and GEF indicate the intellectual and financial support given to the GeoFund. The GeoFund will provide: (d) A Technical Assistance (TA) Window; (e) A Partial Risk Guarantee Window to mitigate against the geological risks, and a. An Investment Finance Window with contingent grants or low cost funding to help monetize externalities of geothermal projects. The TA Window will provide technical assistance for preparing and implementing Policy and Institutional Reforms. Thus it could help identify policy and institutional barriers towards increased use of renewable energy and notably geothermal energy, could present proposals for improvements of policies, legal, regulatory and institutional frameworks, and could help to implement the Government's reforms. The TA Window will also help to establish geothermal data bases, will assist in identifying economically feasible projects, and will help to prepare and implement such projects 26 (establishment of feasibility studies, business plans, social and environmental safeguard measures, procurement plans, project implementation plans, monitoring and reporting). Thus of the three windows of the GeoFund, the TA window is the only one which has an arrow pointing to the Government Reforms and one, pointing to the Projects to be financed (see Graph below). The Partial Risk Guarantee Window of the GeoFund will partially insure project promoters/investors against the short-term, up-front geological risk of exploration (not finding a suitable geothermal deposit), and/or the long-term geological risk of facing a deposit with lower- than-estimated temperature, higher than estimated mineralization, or difficult re-injectivity. In the case of long-term geological risks, the partial risk guarantee might provide for a stream of pre-defined payments over some time (typically until LT loans have matured), to make up for lower than estimated revenues, and/or higher than estimated operating costs. Thus, the facility will be a partial risk facility with well-defined (covenanted) risk coverage. The guarantee facility will be partial, to motivate project sponsors to carry out a sound and thorough geological investigation and avoid moral hazard. The main purpose of the partial risk guarantee facility is to provide help to project promoters to obtain adequate commercial lending for their project. The Investment Funding Window would provide grants, contingent grants or low cost loans, thereby covering a part of the project cost through monetization of external benefits. This window would therefore help to overcome financial barriers. The amount and mode of allocation of these funds will depend, inter alia, on the financial market conditions in the country (e.g. need for a demonstration project), the ability of utilities to attract commercial financing and incremental costs and externalities of the project. Other partners of the Strategic Partnership could be providing support in the form of funding and/or technical assistance for policy and institutional reforms. It is in this context, that UNDP and UNEP could play a very important role: They have carried out many relevant studies relating to barriers towards renewable energy in many ECA countries, could continue this work, and could nudge the Governments towards reforms, in close cooperation with the World Bank and GEF. They could also help with technical assistance to identify projects and to advance project preparation and implementation. Other partners may contribute co-financing for geothermal investments. Thus, investors, utilities, and/or project investment companies might provide project promotion and equity finance, IFIs and commercial banks, as well as local environmental facilities could provide grants, low cost loans or simply commercial long-term loans to help put the financing plan together. The dotted arrows in the Graph, coming down from the Strategic Partnership towards Policy and Institutional Reforms, as well as towards Projects to be financed indicate that any partner in the partnership, willing and able to support those efforts with TA and/or funding, may do so, assuming that Government decision makers, and project promoters welcome such support and assistance. The following Graph illustrates the different partners, instruments, and flows of support and funding: 27 STRATEGIC PARTNERSHIP FOR THE DEVELOPMENT OF GEOTHERMAL ENERGY Client UNDP World GEF EBRD, Multilaterals, Countries UNEP Bank Other Bilaterals, IFIs Others Geothermal Energy Development Fund Partial TA Risk Investment Window Guarantee Finance Window Window Policy & Institutional Projects Reforms to be Financed Government- Utilities, Frameworks & Investors, -Institutions Banks, etc. ANNEX 2: WORLD BANK-GEF FUND FOR GEOTHERMAL ENERGY DEVELOPMENT: ISSUES AND QUESTIONS NATURE OF THE PROPOSED SCHEME Among the three components conceived under the proposed Geofund, the creation of a partial risk guarantee (PRG) facility to provide a direct intervention to lower the barriers for commercial investment flows to geothermal development ventures would be most innovative yet technically challenging task. If this type of guarantee facility proves effective on a self-sustainable basis, it will be replicated on a broader scale, and will eventually be converted into a commercially viable insurance scheme. Like any insurance or guarantee schemes which are designed to be self- sustainable, the key element would be the pricing of instrument which would compensate the insurance/guarantee payout in the event of risk occurrences over time. However, given the proposed objective of the guarantee facility, providing a cover for geological risk, and the apparent absence of availability of similar insurance products on commercial terms, it may not be entirely practical to assume that the proposed facility be designed as self-sustainable. Therefore, it is recommended that a reality check with commercial insurers and financial institutions be conducted to set the current state of the market straight. The following exercises would help envision the overall scope of what the Geofund could achieve. · There are existing cases of similar geological insurance schemes in France and Iceland. It would be useful to learn how these schemes are designed (risk coverage, pricing, funding structure, etc.) and how they have performed. · It would be also helpful to discuss with private insurance underwriters regarding the feasibility of such geological risk insurance in general and the nature of risks involved from insurer's point of view. · It would be critical to identify the bottleneck of private investment flows under the current market, whether it is because of the nature of risks, lack of critical mass for commercial insurance, prohibitively high insurance premium, etc. OVERALL SCHEME DESIGN The partial risk guarantee facility could provide a geological risk cover either directly at the project level or indirectly through the project investment company (PIC) which would invest in multiple number of geothermal projects. PIC could be funded by the grant fund and other cofinancing partners including multilateral financial institutions. At an early stage of establishing the Geofund with the initial GEF contribution of $25 million and $10 million allocation to the PRG facility, the benefit of creating PIC for each country as a beneficiary of the PRG facility would be limited. PIC should bring a greater efficiency gain in the Geofund scheme when the size of the entire fund grows overtime along with the number of underlying geothermal projects. Particularly, PIC will be effective in screening the candidate projects with local knowledge and technical expertise developed through technical assistance support from the Geofund. It is 29 estimated that the drilling cost on the single project site cost approximately $1 million. Given the size of initial funding of the PRG facility of $2 ­5 million, it seems realistic to start the commitment of PRG facility with a few pre-identified candidate projects. When applying the PRG facility for the commercial funding of PIC, it must be ensured that the applicability and coverage of PRG facility should be determined based on the amount of risk exposure of commercial lenders by valuing all risk enhancement measures embedded at PIC through equity investment, subordinated debt and grant fund contribution. Provision of PRG cover for commercial lending to PIC or for PIC's lending (if it is capable) to a geothermal project would require additional consideration in risk evaluation in order to avoid over-guarantee which will lead to inefficient use of GEF resources. When the specific country situation requires the establishment of PIC: · Objective and scope of responsibilities of such PIC need to be clearly set. · Funding structure needs to be designed to leverage commercial financing through equity contribution, senior-subordinate structure, and with possible use of PRG cover in mind. · Operation and management of the PIC in each country would require separate set of guidelines and operational manual reflecting individual country's conditions and available capacity. DESIGN OF PARTIAL RISK GUARANTEE FACILITY Beneficiaries of guarantees: The objective of PRG facility is to promote private investment flows to geothermal energy development. Local (or foreign) commercial financial institutions which have interest in geothermal energy development projects are expected to be main beneficiaries of the PRG facility. Geothermal energy projects are typically sponsored by local private companies and local government enterprises such as district heating companies. These sponsors finance their geothermal energy investments through various channels including budget funding, equity, borrowing from commercial source, or borrowing from public sources, etc. Commercial source of financing may also take various forms including corporate lending to private sponsors, project finance, lending to local government or government enterprises, etc. While commercial project finance might be a pure form of financing solely relying on geothermal risks, there have been very few existing cases. It would be more pragmatic to keep various other forms of financing options open for consideration as beneficiaries of the PRG facility. However, the catalytic function of the facility in mobilizing new source of financing needs to be fully exploited to maximize the mobilization of private capital. A market study with potential geothermal sponsors would be useful to identify the bottleneck in financing and frontiers to be extended by the PRG facility, and to determine the eligibility in terms of beneficiary, type of financing instruments, or other associated conditions. Risks and coverage: Broadly, two types of risks could be covered under the PRG facility; geological and technical risk of drilling the first well (exploration risk), and insufficient thermal energy recoverable over the life of the well (re-injection risk). An exploration risk cover will compensate a part of the cost of drilling in the event of hitting dry well. A re-injection risk cover will compensate a part of revenue loss caused by the insufficient heat energy recovered from the well during the expected life of the well. Re-injection risk seems more difficult to assess because of its long-term nature, and will expose the PRG facility to a greater amount of potential payout. 30 With the limited resources available under the PRG facility, re-injection risk cover may be provided during the critical phase of operation for a short duration with lower coverage ratio. Otherwise, covering potential revenue loss for the life of the investment recovery period could eat up entire resource of the facility in a single transaction. In order to control the risk undertaken by the PRG, workable selection criteria need to be formulated based on the study of existing geological data available in the drilling area. The geological data of the drilling area need to be assessed by the independent expert or appraiser in terms of the exploration and re-injection risks. Technologies deployed for exploration and extraction will also need to be taken into consideration when assessing these risks. It is not yet clear how much data would be sufficient to justify the commitment under the PRG facility. Excess requirement would discourage the willingness of private sponsors to tap the facility and reduce its utility. Practical balance could be found by building up the experience. Coverage ratio is another important element. Providing 100% cover against all the losses suffered by the project sponsors or financiers would not create much additionality, and may raise moral hazard situation. The risk must be shared between the facility and the sponsors. With appropriate share of the risk rest with sponsors, it will work as a strong incentive to conduct due diligence effort on their part, and eventually will reduce the likelihood of guarantee payout. Applicable coverage ratio may be determined project by project based on the principle of minimum necessary to attract project sponsors who are reluctant to commit their investment at the threshold. Sustainability and leverage: With the total initial contribution of $10 million, the PRG facility will not be able to cover large number of projects. The size of total available coverage will depend on the coverage ratio for each transactions and turnover ratio of the entire facility. For exploration risk cover, the facility could be used like a revolving facility thereby multiplying the size of resources available from the given amount of allocation. Leveraging effect under re- injection risk cover will be more limited because of the longer commitment period. On the other hand, depending on the frequency of occurrence of payout events, the facility could deplete its resources rather quickly. Only new incoming revenue to compensate such cash payout is guarantee fees charged to each transaction. The level of guarantee fee could be set conservatively (at high level) so that the facility become financially self-sustainable. However, such conservative level of fee may become prohibitively expensive and possibly make the facility virtually uneconomical for sponsors and financiers to tap. Pricing of the PRG facility could be set at such level which would at least induce the beneficiary's economic interest, and needs to be adjusted as the facility builds up its track record. Currency issue: The drilling expense incurred and project revenues generated at the geothermal energy ventures will most likely be denominated in local currency. Correspondingly, guarantees issued under the facility will need to be denominated in local currency, too. The PRG facility, to be funded in US dollars, will be inherently exposed to currency risk. It is generally assumed that the value of local currencies tend to depreciate against the U.S. dollars over time. Currency risk in the countries where project located does not seem to impose a major financial risk to the PRG facility. Minor currency risk could be managed and offset by setting aside a fraction of resources as a contingent reserve. Alternative forms of enhancement: Assumption is made that the PRG facility be funded by the GEF grant, whether in the form of cash reserve or contingent fund, as a guarantee fund for 31 geological risks. As the private insurance market develops in the area of geothermal energy risk, the PRG facility could be used as a first-loss component to enhance the participation of private insurers covering the pool of geothermal projects. This will become possible when the geothermal risk insurance products develops in the market. Once the private insurance market catches up, the risk/return profile in the geothermal risk insurance will become more transparent, and which would allow the PRG facility intervene more efficiently. Summary term sheet: For indicative purpose, preliminary terms of conditions of the guarantee products under the PRG facility are summarized below. More detailed product design needs to be developed in consultation with potential beneficiaries and private risk insurance experts. Total amount: US$ 10 million equivalent Availability of the facility: To be determined [as long as the resource is available] Type of guarantees: Exploration risk cover Re-injection risk cover Single guarantee limit: US$ [1] million equiv. for exploration risk US$ [2] million equiv. for re-injection risk Currency of guarantees: Local currency or other hard currency Guarantee coverage: Exploration risk cover up to [50]% of cost of drilling Re-injection cover up to [30]% of revenue loss for maximum [3] years during the operational period but not exceeding the amount of new investment Eligible type of investment: New investment in geothermal energy development in equity an/or debt Eligible beneficiaries: Private sector entities or [municipal enterprises ] Guarantee fees: [2]% p.a. on the guaranteed amount payable upfront Other conditions: Selection of project is subject to the guidelines approved by the World Bank and GEF 32 ANNEX 3 BULGARIA GEOTHERMAL PROJECT DRAFT PROJECT CONCEPT NOTE 33 ANNEX 3. BULGARIA GEOTHERMAL PROJECT UTILIZATION OF GEOTHERMAL WATERS FOR SPACE HEATING IN THE TOWN OF SAPAREVA BANIA, BULGARIA OVERVIEW OF THE BULGARIAN GEOTHERMAL RESOURCES AND THEIR UTILIZATION3 The Republic of Bulgaria is rich in geothermal waters. The temperatures range from 20 to 100 degrees C. For about 25% of the total discovered flow rate the temperature is 40-50 degrees C and for 3.6% the temperature is higher than 80 degrees C. The total installed capacity of the geothermal systems (as of 1999) is 95.35 MWt. The largest installed capacities (up to 15 MWt) of geothermal systems for space heating and air-conditioning were realized in northeastern Bulgaria along the Black Sea coast. In southern Bulgaria the number of geothermal stations is much greater, but all of them are of smaller installed capacity ranging from 0.2 to 1 MWt. The first experiments with utilization of geothermal energy for heating were realized in Bulgaria within the period 1950-1980 on the geothermal reservoirs in southern Bulgaria (towns of Kustendil, Sapareva Bania, Velingrad, etc.). They were based around the mineral springs and today operate as spa centers year round. Direct schemes for space heating, greenhouses and swimming pools were constructed. The choice of those sites was based mainly on the comparatively high water temperature (above 70 degrees C). Direct schemes for geothermal energy utilization have been built at various geothermal sites all over the country. In direct systems, the geothermal water enters directly into the heating equipment of buildings and greenhouses, systems for domestic hot water preparation, and swimming pools. Direct schemes have several shortcomings. They do not provide the required thermal comfort in the buildings. Scaling along the inside surface of the heating systems occurs, which hampers the heat exchange process. Corrosion harms the heating systems. The chemical composition of the geothermal water for medical treatment changes. The life time of the heating equipment is short. Most geothermal stations for space heating and air conditioning operating on the indirect scheme assisted by heat exchangers and heat pumps were designed and constructed during the decade 1980 ­ 1990. The collapse of central planning after 1989 resulted in lack of investments for new capital-intensive projects. In the period 1995 ­ 1999, a few small space heating systems (0.25 ­ 0.4 MWt) were built under the PHARE program, some of them in southern Bulgaria (e.g., in the 3Petrov, P, et al, 1999. 34 Velingrad area) The adoption of the new concept concerning the utilization of thermal waters for different purposes, including space heating (the Concession Law), opens up new opportunities for geothermal energy utilization in Bulgaria. A PROJECT IDEA FOR SAPAREVA BANIA4 The town The town ("obschshina") of Sapareva Bania (pop. 9,200) is situated in a valley at the foothills of the Rila mountains about 100 km south of Sofia. The town has been known for its hot mineral springs for centuries. Today, it is one of the biggest spa centers in the country. Several buildings in the town are heated by geothermal energy - all of them public buildings such as the sanatorium, public baths, and a kindergarten, as well as greenhouses. The public buildings represent the larger heat loads in the town. The baseline fuel used by public buildings is an expensive diesel fuel (a.k.a. nafta) at 75 Eur cents/liter. With diesel fuel this expensive, a switching to geothermal reduces the cost of heat supply and has brought short payback periods. Besides diesel fuel, coal is currently used to heat public buildings here. The individual buildings (households) are using coal and wood. A gas pipeline is 3 or 4 km away, but the option of connecting to it is apparently too expensive if all the costs involved are considered (Bulgaria is buying gas from Gasprom at the border price of about $120/TCM). In Sapareva Bania (or anywhere else in Bulgaria), reinjection of geothermal water is not practiced. The geothermal water, after withdrawal from the geothermal reservoir, is passed through a 741 kW plate heat exchanger at the site of well W-4 (the "Geyser"), then sent on to the consumers (sanatorium, etc.), for bathing, etc., and eventually the used water is discharged into a river when it is about 25 degrees C. HEAT DEMAND The expected future consumers of geothermal energy and their heat loads are shown in the table below. Consumer Heat load, kW 1 The sanatorium of the Ministry of Health 750 2 The polyclinic and the Public bath 150 3 The surgery building and canteen 250 4 The holiday house of the Bulgarian Cooperative Union 500 5 The Seven Rila Lakes restaurant 250 6 The holiday complex of the National Insurance Institute 700 7 The Germanea holiday house 450 8 The House of Culture 550 9 School 600 10 Greenhouses (1.5 ha) 4500 11 Department store 400 4Complex Utilization of Geothermal Water in the Town of Sapareva Bania (SW Bulgaria). UNESCO Venice Office (ROSTE), 1999. 35 12 The Municipality 55 13 Diana R, Ltd. (former Rila enterprise) 150 14 Kindergarten 550 TOTAL: 9855 All the buildings listed above are publicly owned and belong to the Ministry of Health, the Municipality and other public institutions. The private housing sector in the town comprises 1413 single-family to three-storey buildings. Possible additional consumers of geothermal energy are the owners of large modern buildings currently under construction. INDICATIONS OF GEOTHERMAL POTENTIAL The total geothermal potential of the Sapareva Bania field is estimated at 30-35 l/s (110- 125m3/h) of thermal water and 10-12 MW thermal capacity. The existing geothermal wells capture only a small part of this potential capacity, but give a strong indication of a good economic potential as artesian water of about 100 degrees C is found in the territory of the town, and the source of the water is not too far from the surface (the main existing well is 458 m deep). A complete utilization of the geothermal field can be achieved through a new drilling and the introduction of a more efficient technology. A new heat distribution network also needs to be built, but no transmission pipeline construction is needed since the geothermal heat source is located in immediate proximity of the downtown area. THE PROPOSED PROJECT The scheme under consideration for the expansion of the existing geothermal plant envisage building an installed capacity of 10.9 MWt. With the available energy consumers the produced energy will be 71.3 TJ/year. Installed capacity 10.9MWt Produced thermal energy 71.3TJ/year Energy selling price 27US$/MWh Revenue from energy sold 534600US$/year Expenditures on fuel, electric power, O&M and labor 102484US$/year Net profit 432116US$/year Initial capital investment cost 2697000US$ Cost of installed capacity 248US$/kW Simple payback period 6.2years FIRR 16% The following three-stage investment program has been proposed. · First stage (without new wells). Water and energy production are realized through the existing well W-4 and to a small extent from wells W-1, W-3, and one natural spring. The total average annual capacity of all sources in self-flow regime is 16.5 l/s (59 m3/h), out of which 13 l/s comes from well W-4. A proper regulation of W-4 exploitation can 36 increase the quantities of geothermal water up to 21 l/s (75 m3/h) at peak hours during the winter season. · Second stage (with new wells). The geothermal water production is based on one or two new directional (inclined) wells which cross the hotter and more permeable part of the geothermal discharge zone. Provided the geomorphology of the terrain is correctly used, the exploitation can be carrier out in a self-flow regime. An annual production of not less than 25 l/s (90 m3/h) geothermal water with temperature 100-105 degrees C can be expected. During winter 32 l/s (115 m3/h) could be obtained, and 18 l/s (65 m3/h) in summer. · Third stage. A still more efficient system of self-flowing wells and wells with pumping out regime can be drilled, obtaining temperatures of 105-110 degrees C . A complete extraction of the geothermal resources and a seasonal use of its static and storage reserves would be achieved. The average annual production of thermal water would reach 35 l/s, with the peak production reaching 45-50 l/s. BARRIERS TO PROJECT IMPLEMENTATION Availability of financing on affordable terms is the principal barrier to the implementation of this and similar projects in Bulgaria. Even though the project may have a "win-win" nature (i.e., high rate of return plus environmental benefits), financing is difficult to obtain. The Municipality is looking for opportunities of concessional funding from bilateral and international organizations. The option of taking a credit from a commercial bank is considered to be the last resort option because commercial banks charge an 18% interest and require a collateral of at least 200%. A municipal guarantee could potentially be a solution, but such guarantees are not practiced. Thus, provided that the technical issues are resolved and the economic analysis confirms an attractive economic rate of return on the investment, Sapareva Bania is an excellent case for support from the GEF-supported GeoFund Program. It is a small project in a small town (village) which, based on its own resources, could not accomplish a major conversion to geothermal heat, even though it boasts one of the hottest thermal water sources in Europe. POSSIBLE IMPLEMENTATION ARRANGEMENTS A feasibility study for the Sapareva Bania project idea will be conducted under a Climate Change Initiative Grants program financed by the Japanese Government (a special window of the PHRD project preparation program). The feasibility study should answer the questions of technical and economic feasibility of the project. The technical issues to be considered will include the issue of scaling control. The pipes used under the direct scheme have had to be frequently replaced due to mineral deposit material accumulating inside the pipes. The economic feasibility analysis will determine whether the costs of the project and, in particular, the relatively high costs of constructing a new heat distribution network, in combination with the costs of scaling control and probable need for reinjection of geothermal water back into the reservoir (instead of discharging it into the river), will not be prohibitively high. The study will also consider the relatively low heat load density of the town5 and the technical feasibility of an 5If the heat load density proves to be a critical barrier, other similar locations may be considered. E.g., in and 37 integrated system for the whole town, which will depend on the size and other physical dimensions of the geothermal reservoir. Support from GeoFund with a partial guarantee against unsuccessful development (drilling) results will be considered if the prospects of technical and economic feasibility of the project are found attractive. In the implementation arrangements that will be put in place, the Municipality will play a key role, however, a proactive commercial entity in charge of project implementation may also need to be found or established. around the town of Velingrad (130 km south of Sofia), the heat load density is higher and the town has a population of about 25,000, while the geothermal water resources are similar to those found in Sapareva Bania. 38 ANNEX 4 THE REPUBLIC OF POLAND STARGARD GEOTHERMAL PROJECT DRAFT PROJECT CONCEPT NOTE 39 ANNEX 4.1. POLAND: STARGARD GEOTHERMAL PROJECT PROJECT CONCEPT NOTE IDENTIFIERS BANK PROJECT ID: N.a. PROJECT NAME: Poland Stargard Geothermal Project GEF PROJECT ID: P075046 DURATION: 2 years IMPLEMENTING AGENCY: The World Bank EXECUTING AGENCY: Geotermia Stargard sp.z.o.o. REQUESTING COUNTRY Poland ELIGIBILITY Ratified UNFCCC on July 28, 1994 GEF FOCAL AREA Climate Change GEF PROGRAMMING FRAMEWORK Operational Program 6: Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs. COST AND FINANCING (MILLION US$) BASE PROJECT: National Fund Grant (approved) 1.70 18% DEPA Grant (approved) 0.45 5% Foreign loans (NEFCO & Others) 0.71 8% Local commercial loans (Banks, National Fund, Wojewodship Fund) 4.89 53% Equity & Cash Generation 1.45 16% TOTAL Project Finance 9.20 100% GEF: GeoFund Support for an Int. Info Center for Geoth. Energy 0.30 3% GRANDTOTAL 9.50 103% GEF would also provide a partial risk guarantee (up to US$3 million) for the geothermal loop. Note: The Commercial loans would include low cost loans from Polish institutions. OPERATIONAL FOCAL POINT ENDORSEMENT Name: Prof. Maciej Nowicki, Title: President, EcoFund, Warsaw Organization: EcoFund, Warsaw Date of Endorsement: _________ 40 IMPLEMENTING AGENCY CONTACT Helmut Schreiber, ECSIE Hschreiber@Worldbank.org +1/202/473-6910 Victor Loksha Vloksha@Worldbank.org +1/202/473-5807 Christian Duvigneau Jduvigneau@Worldbank.org +1/202/473-3560 INTERNATIONAL OBLIGATIONS OF POLAND IN THE AREA OF CLIMATE PROTECTION Poland signed the United Nations Framework Convention on Climate Change (UNFCCC) in June 1992 in Rio de Janeiro. The Convention was ratified by the Sejm (the Parliament) of Poland on July 28, 1994. Poland signed the Kyoto Protocol in November 1998. Its target is to reach a reduction in emissions of GHG by 6% from the 1988 (base year) level by 2010. Poland's Second National Communication (NC) on Climate Change characterizes the district heating sector as an area of focus with respect to increasing energy efficiency and bringing down emissions of greenhouse gases (GHG). It also proposes to increase the utilization of renewable energy resources (RERs) from presently around 3% of total primary energy consumption. The energy law of 1997 calls for 7.5% use of RERs by 2010. In the context of EU accession the country has committed to increase the use of RERs to 7.5% by the time of accession, and to 12% by 2010. 1. THE PROJECT 1.1 Background Geothermal energy is a potentially significant contributor to the reduction of greenhouse gas emissions in Central and Eastern Europe (CCE). As this geothermal energy is abundant in the region and as these countries have extended district heating networks, geothermal energy has great potential as a substitute to coal and other polluting fuels. From a technological point of view, the technology is mature, robust, and can be commercially viable in an enabling regulatory and market environment. As the operating cost of a geothermal system is relatively low, the costs of heat produced from a geothermal source are competitive once the basic infrastructure is in place. However, the initial up-front capital costs for both exploration and development often create a substantial first-cost barrier. Effective regulatory mechanisms for monetizing the environmental externalities are also lacking in most CEE countries, putting clean energy at an additional false disadvantage vis-ŕ-vis traditional fuels. In the transitional economies of CEE, the governments are often unaware of the benefits of this indigenous resource, and local energy policy, pricing, and legal structures are not sufficiently conducive to attracting geothermal project developers. While there is significant private sector interest, private investors are hesitant to take the risks of geothermal resource development in the absence of proper incentives. 41 The World Bank, with grant support from the GEF, is financing a large geothermal project in southern Poland in the Podhale region (Podhale Project). This Project, which is currently under implementation, has helped to overcome some of the barriers described above. The Government of Poland (GOP) is now very well aware of the potential, and, with the help of the Podhale Project, the GOP seems willing to take some of the up-front risk through financial support of such projects through the state administered National Fund for Environmental Protection. The private sector, however, is still very reluctant to participate in geothermal projects in Poland and CEE in general. The Podhale Project, for example, is carried out with almost no support from the private sector and relies heavily on grants and equity contributions from the National Fund. The implementing company of the Podhale Project is more than 90% publicly owned, with the National Fund as the main shareholder. Thus, despite the example of the Podhale Project, there are still considerable barriers for private investors, particularly for small and medium enterprises (SMEs), to undertake such projects. The availability of local currency financing, long-term project debt financing, or any type of guarantees to the developer is limited. Under the proposed Strategic Partnership for Geothermal Energy Development in the ECA Region and its World Bank/GEF sponsored Fund for Geothermal Development (GeoFund) (described in a separate document), a GEF-supported partial risk guarantee facility would be set up in order to enable private developers of geothermal energy to obtain financing on appropriate terms. This would be one of the first GEF-supported energy projects with a contingent financing element and the first such project in the geothermal sector. The details of the contingent financing element will have to be worked out during project preparation. It is proposed that the Stargard Project would the first Project to benefit from this new facility. The risks related to the first production well have been successfully overcome by now (the production well has been completed, with encountered reservoir characteristics equal or better than estimated. However, the reinjection well has not yet been drilled. The satisfactory operation of the geothermal loop is not secured until the reinjection well has been drilled and tested. It is not until the reinjection well is drilled that the following can be verified: (i) the aquifer in the injection well has a satisfactory transmissivity; (ii) the aquifer in the injection well is in contact with aquifer in the production well (to be proved by pumping from the one well and observing the pressure in the other well). In addition, tests must be done to avoid corrosion, precipitation or fines migration, and thus, after the initial tests, the geothermal loop should operate for some time to verify that such problems will not materialize or that they can be solved at a reasonable cost. This should be done before a full-scale project is established. It is expected that, with the help of the guarantee facility of the GeoFund, it will be possible to obtain favorable financing for the full scope of the Project despite these risks. 1.2 Summary Project Description (details in Section 6.8) Stargard Szczecinski (Stargard), the second largest city in the Szczecin-Woiewodship with a population of almost 75 thousand people, is located in the north-western part of Poland, about 36 km east of Szczecin and about 190 km east-north-east of Berlin. Population density in Stargard is about 2,300 people per square kilometer. 42 Stargard has a well-developed district heating system that supplies more than 50% of the heat demands of the City. The total heat supply is from an efficient coal-fired boiler plant with a total capacity of 116 MWt. The annual peak demand for the district heat (DH) system is presently about 85 MWt and annual heat demands ex-plant are around 850 TJ. Heat demands have been reduced by nearly 20% in the last few years due primarily to efficiency improvements on the supply and demand side and warm winters. Heat distribution is through a 35 km network that includes about 240 substations. Both space heating and potable hot water are supplied. Heating of households and industrial consumers, not connected to the district heating system, is supplied by individual boilers and stoves fired primarily by coal. Less than 3.0 percent of the total heat demand in Stargard is met by gas or oil- fired systems. The City of Stargard is located on top of a major geothermal deposit estimated to contain vast amounts of geothermal waters of up to 90 degrees centigrade at a depth of 2600 - 2700 m. Private investors from Poland and Denmark have formed a joint venture company to exploit this deposit and to replace a substantial portion of coal-generated heat by clean geothermal energy. The new company, Geotermia Stargard (GS) has concluded an off-take agreement between GS and the local DH Company PEC, for 310 TJ of heat per year at a price of PLN14.83/GJ (2002- terms; equivalent to US$3.54/GJ) which is highly competitive. The blend of Polish and Danish efforts to develop renewable energy resources is much appreciated by the Polish Government and is supported by the Polish National Fund for Environmental Protection and Water Management (NFOSiGW) as well. The Wojewodship Fund for Environmental Projection has also expressed interest in participating. This would be the second geothermal project funded by GEF in Poland. The first, the Podhale District Heat (DH) and Environment Project is a big investment (about US$100 million), and is unique, in that it connects two separate towns (Zakopane and Nowy Targ) to a common DH network, which has to be built anew (except for an existing network in Nowy Targ). Moreover, the Podhale Project also benefits from an exceptionally high geothermal water quality with an extremely low mineralization (almost drinking water quality). The proposed Project in Stargard, on the other hand, is very different. The Project is: (a) Of rather small nature (blow US$ 10 million); (b) To provide base-load heat to a large and well-run DH-network which does not require much of a new investment; (c) Highly replicable due to the fact that the underlying geological structure, relatively high degree of mineralization is more representative of most geothermal resources in Poland and elsewhere in ECA Countries. A large number of small and medium-sized towns with DH networks, located on top of the geothermal band which stretches from the Slovak Republic, via Podhale, South Poland, across Central Poland, to north-west Poland, and further to north-east Germany and Denmark can learn from this Project. Similar deposits in western and southern Russia, the Ukraine, and Central Asia would allow replication of the Project there. The Project includes the provision of an international information center proposed to be funded by GEF. 43 1.3 Project Objective The local objectives of the Project are to provide clean heat to Stargard residents at a cost that is competitive with the existing, quite efficient coal-fired system. The reduction of local air pollution is considered an important local objective. The national objectives are diversification of energy supply, development of a sustainable geothermal industry, reduction of local and regional air pollution. The global objective is to achieve GHG reductions through: (i) the introduction of cost-effective geothermal energy in the City of Stargard, thereby reducing the need for coal-fired heat generation; (ii) an increased market penetration of geothermal heat generation in Poland, and consequent reduction in greenhouse gas emissions from heat generation. In addition, the Project would serve as a pilot under the Geothermal Energy Development Facility for Central and Eastern Europe and utilize its partial guarantee mechanism to attract commercial lending on suitable terms. Thus, the Project would contribute to the removal of barriers faced by geothermal project investors in accessing appropriate instruments of the financial market. This makes the Project consistent with the objectives of GEF OP-6: "Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs." 1.4 Sector Context The energy sector of Poland has been and still is undergoing a gradual transformation which can be characterized by four principal developments, namely continuing sector reform including privatization, declining use of coal but increased use of gas, promotion of energy efficiency and energy savings, and increased use of renewable energy resources for district heat and power generation. These are discussed in more detail in the following paragraphs. Energy Sector Reform has started in 1990 with the beginning of Poland's major economic restructuring program and, in the first place, and with the help of the World Bank, EU and bilateral donors, has developed blueprints for restructuring, commercialization of enterprises, de- monopolization, introduction of arms-length regulation and privatization. Whereas commercialization of most energy sector enterprises was completed in the early 1990ies, restructuring of sub-sectors took much longer. The restructuring of the hard coal sector, characterized in the early 1990s by over-capacity and over-employment, only started in 1998 and has achieved considerable progress, allowing some of the coal mining companies to become profitable after many years of losses. A new energy law was promulgated in late 1997 and encourages use of Renewable Energy Resources. A regulatory framework of the Energy Sector, postulated under the new energy law, was introduced in 1997 with the creation of the Energy Sector Regulatory Agency, which has developed licensing and tariff monitoring in district heat and power sub-sectors. Privatization has achieved good progress in the petroleum sector, and only limited progress in the power- and district heat sub-sectors, with gas and coal sector still working on developing viable privatization concepts. Sector reform is expected to continue in the future. GoP is evaluating (a) the role and scope of private sector participation in the coal sector and the gas sector, (b) improved sector regulation, (c) further decentralization and de-monopolization of the sector, and (d) increased use of RERs. 44 Hard Coal consumption is on the decline in Poland although it still accounts, together with stable lignite use, for almost two thirds of primary energy use. Coal will be the most important energy source in the power sector for years to come. Hard coal exports have declined to some extent since the late 1980ies and have been maintained during the 1990ies at levels between 20 and 30 million tons to provide employment to redundant miners, however at growing losses. Only with the recent recovery of international coal prices this situation has slightly improved, but coal exports (possibly with the exception of some high quality steam coal and coking coal) are mostly not going to be economic for Poland in the medium term. Natural Gas, presently representing only about 20% of primary energy resource use in the country, is likely to be the primary growth engine of Poland's energy sector for the foreseeable future, although the country relies to over 60% of total consumption on gas imports. Increasingly gas is going to be used in household heating, combined heat and power plants, as well as in peaking power production. To decrease the risk of supply interruptions, the country is in the process of diversifying its supply lines through additional pipelines linking the country with further resources in Russia as well as the north sea (Danish and German links). Gas prices are no longer controlled by Government, and a new pricing policy is under implementation. Energy Efficiency and Energy Savings have been discussed since the beginning of economic and energy sector reforms, but progress in the first half of the 1990ies was very limited. Since then, Poland has moved to world prices of energy in most of its energy sub-sectors and this has been the strongest driving force to move toward improved energy efficiency and energy conservation. In addition there have been incentives and grant support to improve energy efficiency. Although only a fraction of the power and district heat sector has been privatized and the process continues to be slow, the energy enterprises have undertaken major efforts to increase efficiency on the supply side through plant modernization and network improvements. This has also helped them to meet at the same time tightening environmental standards, which are being aligned with EU standards in the context of the EU accession efforts. The demand side improvements have been more difficult, and much scope remains. However, through actions such as PR campaigns, labeling of consumer equipment, building codes and material standards, industry and consumers have started to be more energy conscious and to make concerted efforts to conserve energy. This is particularly manifest in the district heating sector where a combination of higher tariffs, policy measures and incentives, as well as consumer education have contributed to significant declines in heat demand. The continuously declining heat load faced by district heat enterprises, who managed to maintain their customers, illustrates the efforts undertaken by these customers to reduce heat consumption through better regulation, investment in insulation and state-of-the-art internal heat distribution systems. Renewable Energy Resources (RERs): According to the energy law promulgated in late 1997, the GoP encourages the use of RERs. Thus, it has maintained a target of meeting at least 7.5% of its primary energy needs from RERs by the year 2010, as opposed to less than 3% presently. Based on studies of Government institutes as well as private consultants, there is good scope to develop geothermal energy in a broad band across Poland from the southern Podhale area, across the center, and to the north west of the country. Poland's resolve to increase the use of renewables is driven in part by environmental considerations, and in part by an interest in diversification of energy supply. The power- and district heating sub-sectors contribute about 70% of total carbon emissions in the energy sector, the largest source in Poland. The country has a strong interest in climate change mitigation, which is also encouraged by the EU. The power 45 sector, and even more so the district heat sector in winter, play an important role in generating local air pollution which still is significant, even when compared with the increasingly polluting transport sector, and with the industrial sector. The recognition of the need to develop diverse energy sources, and therefore RERs, remains, given the declining role of domestic coal and the increasing importance of mostly imported gas. This is further encouraged and even increasingly postulated by the EU, which targets 22% of total primary energy use in the form of RERs by 2020. It is recognized that the development and use of RERs as an important potential industry sector worthy of development, given large unemployment, particularly in smaller communities and rural areas. 1.5 Ongoing/Planned Programs and Lesson from Earlier Projects Geothermal resources of the low-temperature, low-enthalpy type are known to exist in a broad band across Poland, stretching from the central south (Podhale Region) across central Poland west of Warsaw to the northwestern region of the country. The low-enthalpy, high salinity geothermal fluids are suitable mostly for space heating, greenhouse agriculture and recreational purposes. The exploitability of these geothermal waters has been proven already by the geothermal base load plant in the Podhale valley, which will heat the cities of Zakopane and Nowy Targ with several villages in between. This Project is supported by a Bank Loan and a GEF grant. Lessons from this Project regarding geological risks, technology, geothermal operation, and environmental considerations are being applied in the Stargard Project. Lessons from the Lithuania Geothermal Project in Klaipeda, mostly on the geotechnical and technical side, will also be taken into account in Project design and execution. 1.6 Link to CAS Priorities/Bank Program The last two CAS documents (dated 11/13/02 and 04/14/97, Document Nos. 24783-POL and 16484-POL), and an intermediate update in August 1999 (Document No. 19749-POL) emphasize the country's goals of EU accession. In that context, private sector promotion as well as environmental sustainability and continued energy sector reform are being emphasized. These goals call for actions including development of RERs and improvement of energy efficiency. The connection with GEF-funded activities in the climate change focal area is also emphasized. However, the emphasis of the Bank is now on quick and simple projects with definite demonstration effect, easy replicability, on dissemination of results, and with the Polish Project sponsors increasingly taking the lead in project identification and preparation. Sustaining private sector growth is another area of emphasis in the above CAS documents. The proposed Project is an excellent example of a small private sector enterprise willing and able to prepare and implement the Project (provided that some of the investment risks and related up-front financing barriers can be overcome). The small company Geotermia Stargard blends Polish expertise with Danish know-how, pooling international resources for the development of renewable energy resources and for the good of the Project. 46 1.7 Global Operational Strategy/Program objective addressed by the Project The Project would serve as a pilot under the Geothermal Energy Development Facility for Central and Eastern Europe and utilize its partial guarantee mechanism to attract commercial lending on suitable terms. Thus, the Project would contribute to the removal of barriers faced by geothermal project investors in accessing appropriate instruments of the financial market. This makes the Project consistent with the objectives of GEF OP-6: "Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs." 1.8 Project Scope and Description The proposed Project will establish a geothermal base-load heating plant with an installed capacity of about 14 MWt to supply about 12 MWt. The Project will consist of two components: (a) the "underground plant" consisting of a new geothermal doublet (production well and re- injection well, drilled to a depth of about 2600 ­ 2700 m) which will be located close to the existing coal-fired DH-plant; and (b) the "above-ground plant" and connections, comprising a plant building which will house heat exchangers, electrical equipment and installations, process equipment and controls, as well as internal piping; and the connection to the existing district heating (DH) network of Stargard. A new administrative building is also included in the scope. According to the results obtained from the recent drilling of the production well, the geothermal doublet is expected to yield about 180 m3/hour of geothermal water from the geothermal deposit located at a depth of about 2600 ­ 2700 m, and with a temperature of about 90 degrees centigrade at the well head. A connecting pipeline will link the already completed production well with the directional (inclined) reinjection well, which still has to be drilled. The geothermal water will pass directly through heat exchangers and then will be reinjected in the second well of the doublet, thus forming a closed-loop primary system. The geothermal system will supply about 310 TJ per year ex plant through a connecting transmission pipeline into the DH Network of Stargard, representing about 36 percent of total annual demand of the system. The existing coal-fired boilers will be maintained by the DH Company PEC of Stargard. They will continue to be used to supply the remaining needs of district heat for the town (intermediate and peak load), therefore running much less time than at present, and will provide the needed backup to the geothermal system in case of minor geothermal outages. Thus, the Project will provide for two wells (production well and reinjection well forming one doublet), a submersible pump, the connecting pipeline between the two wells, heat exchangers, DH circulation pumps, electrical installations, a control system, a refurbished plant building, a new administrative building, the land for the geothermal wells and plant, as well as a transmission pipe to connect to the existing district heat system. The Project also envisages setting up an international information center to disseminate knowledge of the project in the interest of project replication. The Project could be expanded later through addition of heat pumps, which would further exploit geothermal heat. But that possibility is not included in the present Project. Miscellaneous cost items include monitoring of execution and early operation, dissemination of results to assure the demonstration effect and ease of replication, as well as technical assistance for upgrading financial management systems, and auditing of the company. 47 1.8.1 Capital Costs and Financing Required The Project is estimated to require a total financing of about US$9.2 million including physical and price contingencies, working capital and interest during construction. In addition, a technical assistance component of about US$0.3 million is proposed to be funded from the TA Window of the proposed GeoFund. Further, a partial risk guarantee of up to US$ 3 million in support geological risk mitigation is to be provided under the partial risk guarantee window of the GeoFund. Base cost estimates for the Project, essentially prepared by Houe&Olsen, the Danish consulting firm, with inputs from Eko-Inwest of Poland, the Project investors, were reviewed and updated in late 2002, in light of the latest geothermal base-load plant experience in Zakopane. Base costs have been updated to mid-2002 levels. The Project cost estimates, amounting to PLN 36.9 million (US$8.8 million) equivalent, include physical contingencies of 20% on the remaining geothermal well (reinjection well), and 10 % on the surface plant and connections to the PEC grid. The investments have been started and are scheduled to be completed in late 2003. Price contingencies of about 6.5% also have been included in the total Project costs. Miscellaneous expenses of PLN 1.3 million for (a) monitoring air pollution reduction and calculating actual CO2 reductions, (b) costs for an environmental assessment, and (c) dissemination- and public relations (PR) expenses have also been included. Incremental working capital for this green field Project, essentially to cover costs of receivables as well as spare parts & materials inventory are estimated to amount of PLN 0.4 million, whereas a preliminary calculation of interest during construction yields PLN 0.96 million. Thus, total financing required amounts to PLN 38.2 million (US$9.1 million) excluding PLN 2.6 million already spent in Project preparation costs. In addition, the above-mentioned technical assistance of about US$0.3 million for helping to set up the proposed international information center are accounted for, bringing the grandtotal of required investments to US$9.5 million. The cost estimates are illustrated in the table below: 48 Stargard Geothermal Project: Capital Cost Estimates 2003/01/02 Description Local Foreign Total Total Units PLN mio. PLN mio. PLN mio. US$ mio. Wells ("Underground Plant") 22.0 1.6 23.6 5.63 Geothermal Plant & Connections ("Above-Ground Plant") 6.3 1.8 8.1 1.93 Subtotal Wells and Plant 28.3 3.4 31.7 7.57 Monitoring, Dissemination, EIA 0.3 0.9 1.2 0.29 Total Base Costs 28.6 4.3 32.9 7.85 Physical Contingencies 3.5 0.5 4.0 0.96 Price Contingencies included in above data Total Project Costs 32.1 4.8 36.9 8.81 Incremental Working Capital 0.4 0.0 0.4 0.10 Interest During Construction 0.8 0.2 1.0 0.29 Total Financing Required 33.2 5.0 38.2 9.20 Establishment of an International Information Center 1.3 0.30 1.8.2 Financing Plan The financing plan, shown below, relies to 23% on grants (US$ 0.45 million from Danish bilateral funds, as well as a grant of PLN 7.1 million (US$ 1.7 million) from the National Fund for Environmental Protection and Water Management (NFOSiGW)) to help prepare the project and drill the first well. These grants have already been spent. Loan financing of PLN 23.5million will cover 61% of total financing needs. This includes two foreign loans totaling about Pln 3 million (US$0.7million equivalent) from the Nordic Environmental Finance Corporation (NEFCO) and from IOE, as well as local commercial loans (about PLN 20.5 million) from commercial banks, and preferential loans from the NFOSiGW and the Wojewodship Fund. The commercial loans would be secured by the proposed partial risk guarantee facility included under the proposed Geothermal Energy Development Fund (GeoFund). Finally, company resources in the form of equity are to cover 15% of total financing required. Internal cash generation is estimated to contribute about 1% of total investment. The total funding would cover the US$ 9.2 million of total Project financing required. In addition GEF would be asked to provide US$ 0.3 million of grant and technical assistance funds to assist in the setting up of the International Information Center for Geothermal Energy Development which would help to disseminate knowledge and know-how to help replicate the Project elsewhere. 49 Stargard Geothermal Project: Financing Plan 2003/01/02 Description Local Foreign Total Total Total Units PLN mio. PLN mio. PLN mio. US$ mio. % Grants DEPA-grant (approved) 0 1,9 1.9 0.45 5% NF-Grant (approved) 7.1 0 7.1 1.69 19% Subtotal Grants 7.1 1.9 9.0 2.14 23% Loans Foreign Loans. (NEFCO & Others) 0 3.0 3.0 0.71 8% Commercial loans (from local Banks, National Fund, Wojewodship Fund 1/ 20.5 0 20.5 4.89 53% Subtotal Loans 20.5 3.0 23.5 5.60 61% Own Funds Equity (Actual and Planned) 2.8 2.8 5.6 1.34 15% Cash Generation During Construction 0.5 0 0.5 0.11 1% Subtotal Own Funds 3.3 2.8 6.1 1.45 16% TOTAL Financing Available for the Stargard Project 30.9 7.6 38.5 9.18 100% GEF Funding from the GeoFund to help establish an International Information Center for Geothermal Energy Development 2/ 1.3 0.30 3% Note 1: The commercial loans could include low cost loans from environmental institutions. Note 2: In addition to the above, the GEF would support a partial risk guarantee which would guarantee re-injectivity of the second well and the sound operation of the geothermal loop (up to US$ 3 million). 1.8.3 Sustainability and Risks Geothermal plants are characterized by a long live-cycle and low operating costs, but require an initial high investment, of which the geothermal wells typically cost over 50%. The risks relate in the first place to the geology of the geothermal reservoir. Once this reservoir has been tapped by the production well, and the availability of geothermal flows at estimated characteristics (temperature, yield, mineralization, etc.) has been established, the main geological risk is reduced considerably. There remains a risk that reinjection may be more difficult than estimated but that risk is smaller than that of the first well in the normal reservoir. The first well has been proving the good parameters of the resource (better than estimated). The other risk is the off-take of the geothermal heat by the DH company PEC of Stargard at a reasonable price. This risk is covered by the off-take agreement, which is valid for 24 years from July 2002, and guaranteeing a price adjusted by the increase of the average retail price per Gigajoule year after year. Thirdly, the technological risk is fairly small as the technology is well known and proven in many countries. The risk of corrosion of the closed geothermal loop (pipes, filters, pumps, heat exchangers) from high degrees of mineralization of the geothermal water can be minimized through well known technology to neutralize the aggressiveness of the brine and to avoid oxygen from entering the closed loop. The following table illustrates the risks and mitigation: Risk Risk Rating Risk Minimization measures 50 Production well is dry or has lower than N Based on the recently obtained results of the expected yield and temperature production well drilling, this risk has not materialized. Reinjection well shows lower than M Use appropriate techniques to increase estimated injectivity injectivity. The global environmental benefits of the M The Project entity will offer its verifiable carbon Project are not monetized thus rendering emission reductions to the Prototype Carbon the Project less financially viable than Fund. similar projects using fossil fuels The above risks deter commercial lending M Partial risk guarantee facility would underwrite to the Project on acceptable terms the risk related to the functionality of the geothermal loop. Mineralization of the geothermal water is M Use of appropriate techniques to prevent higher than estimated; minerals are oxygen from entering the closed-loop-system corrosive and add neutralizing chemicals, preventing scaling and "fall-out". Investment costs higher than estimated M Cost estimates have used generous physical contingencies on wells (20%) and other equipment (10%) and have allowed for price contingencies (6.5%). Sales to PEC Stargard, GS' only M GS and PEC Stargard have concluded a firm customer, are not materializing at agreed off-take agreement over 24 years. Even if rate overall heat load of PEC declines, geothermal heat covers base load at prices below PEC average costs Sales price of geothermal heat is lowered N PEC Stargard and GS have agreed a price unilaterally by PEC adjustment formula which is an integral part of the off-take agreement Overall Risk Rating M 1.8.4 Estimated Incremental Costs and Amount of CO2 Reduction The Project will reduce 857,000 tons of CO2 at a unit abatement costs of $2.25 per ton over the lifetime of the Project, estimated to be 25 years. If the Project were proposed to the GEF as a short-term CO2 mitigation measure, this could translate into grant support of US$1.9 million. Stargard Geothermal Project: Incremental Cost Analysis Matrix Item Base Proposed Difference Investment ('000 US$) 863 7,850 6,987 Operating Costs ('000 US$) 26,248 21,190 -5,058 Total Costs ('000US$) 27,111 29,040 1,929 Emissions (metric tons of CO2 ) 2,987,200 2,130,200 857,000 Incremental Cost per ton of CO2 2.25 However, the current proposal within the context of the Strategic Partnership for Geothermal Energy Development and the World Bank/GEF Geothermal Energy Development Fund 51 (GeoFund) will not involve providing a grant for the carbon reductions. Instead, the partial risk guarantee facility would be used. The guarantee facility could be a partial risk facility with well- defined (covenanted) risks to be covered. The money would earn interest while is it not called for, thus compensating for the outlays occurring when a covenanted risk materializes.6 1.8.5 Project Implementation and Start-up Implementation has already started in September 2001, with the drilling of the first well completed in early 2002. Final commitment of financiers could not be achieved, however, as there remains the risk of the second well. Procurement for the second well has been completed and led to a contract signature in summer 2002, but effective only after financing has been secured. Here the partial risk guarantee could be crucial to complete the financing plan for the Project. Assuming that the financing plan could be completed before the summer of 2003, the second well could be completed in about September 2003. Assuming execution to that schedule, the plant could first deliver geothermal heat in November 2003, i.e. in time for the heating season 2002/2003. The financial projections assume 25% of heat sales in 2003, and 100% in 2003 thereafter based on the contractual sales of 310,000 GJ per year. Calendar Year 2001 2002 2003 2003 2003 2003 Quarter all all first second third fourth Duration of the Project in Months 3 6 9 12 15 18 Drilling First Well X XX Procurement Second Well XX Drilling Second Well X XXXXXXXXXX Buildings X XXXXXXXXX Equipment "Above Plant" X XXXXXXXXXX Installation XXXXXXX XXX XXXXXXXXX Start-Up The graph dramatically illustrates the problem of the promoter/investor of not being able to close the financing plan because of lack of a guarantee facility. Had the GeoFund been available in mid 2002, this very promising Project could be starting up right now, i.e. almost one year earlier than projected now. It is estimated that almost a year will have been lost because of lack of closure of the financing plan, assuming that a partial risk guarantee could be made available during Mai 2003! 6As an option, one could conceive of a contingent grant facility with the grant disbursed to the investor to execute his project. If the project is successfully completed, the contingent character of the grant calls for repayment (with or without interest). 52 r aticm and caligool It de al land fo eht of . wi low- rm ich tial of a is d a ces Po done heot wh tans with nglo an of ur ni ons.it : syste ge in eht fo ge sub tp ge-dirb rof dr plicatedre sos ilityb tantial ofgnrieh n esatr nceptoc gn rwa caol atio ility nci of ces, oni conce fo ng gn ely be rm already onst s tial cati ailab project. nci ack ght iourav nafi ber Replica Subs The cataloging gat foin pyalh is dem av ent sourer mean tenop repl technical the The securi nafi project relativ ybap raist can ithw of num eht is l t ghhi ebl eth eht skri is fi tne ot al eht are by of ce.r nao y gndiu capit ept be neware of ghhi su and ot of resou facilit be stmevin ncl(i able fficien stlu essedr ilityb conc al instituti al ot era res ina nabilityi de eht ) ot herm nabilityi tee de herm itialin s rd onsitubri e. 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STARGARD GEOTHERMAL BUSINESS PLAN POLAND GEOTHERMAL PROJECT STARGARD SZCZECISKI DRAFT BUSINESS PLAN STARGARD SZCZECISKI JANUARY 2003 57 page 58 / 87 TABLE OF CONTENTS · COMPANY DESCRIPTION .............................................................................................................................60 · ......................................................................................................................................... LEGAL DESCRIPTION 60 · ..............................................................................................................BUSINESS HISTORY AND DESCRIPTION 60 · ..............................................................................................................................................CURRENT STATUS 61 · ..................................................................................................................................................FUTURE PLANS 61 · ...........................................................................................................................................KEY MANAGEMENT 62 · MISSION AND VISION...................................................................................................................................62 · ........................................................................................................................................ MISSION STATEMENT 62 · ..............................................................................................................................................COMPANY VISION 63 · PRODUCT AND SERVICE DESCRIPTION .......................................................................................................65 · ..........................................................................................................OVERVIEW OF PRODUCTS AND SERVICES 65 · ..............................................................................................................PRODUCT AND SERVICE ADVANTAGES 65 · ............................................................................................................... PRODUCT DEVELOPMENT ACTIVITIES 67 · INDUSTRY ANALYSIS....................................................................................................................................68 · ....................................................................................................................................... INDUSTRY OVERVIEW 68 · .................................................................................................................................................. HEAT MARKET 70 · .......................................................................................................... HEAT MARKET - TRENDS AND GROWTH 70 · TARGET MARKET ........................................................................................................................................71 · ..................................................................................................................................MARKET DEMOGRAPHICS 71 · .......................................................................................................MARKET TRENDS AND GROWTH PATTERNS 71 · .......................................................................................................................... MARKET SIZE AND POTENTIAL 72 · SALES PLAN..................................................................................................................................................74 · COMPETETIVE OVERVIEW ..........................................................................................................................76 · .......................................................................................................................................DIRECT COMPETITORS 76 · ....................................................................................................................................INDIRECT COMPETITORS 76 · ............................................................................................................................ COMPETETIVE ADVANTAGES 77 · OPERATIONS PLAN ......................................................................................................................................77 · .................................................................................................................................LOCATION 77 · ...............................................................................................................PROPERTY OWNERSHIP/LEASE TERMS 77 · ....................................................................................................................................................... EQUIPMENT 78 · ...................................................................................................................................... PURCHASING POLICIES 79 · .....................................................................................................................................................THE PROJECT 80 · .........................................................................................................................QUALITY CONTROL MEASURES 81 · ........................................................................................................................ ADMINISTRATIVE PROCEDURES 82 · .................................................................................................................................. STAFFING AND TRAINING 82 · ...................................................................................................................MANAGEMENT CONTROL SYSTEMS 84 58 page 59 / 87 · .................................................................................................................................ORGANIZATIONAL CHART 84 · MANAGEMENT TEAM ..................................................................................................................................84 · ........................................................................................................................................SUPERVISORY BOARD 84 · ......................................................................................................................................MANAGEMENT BOARD 84 · .................................................................................................................PROFESSIONAL SERVICE PROVIDERS 85 · FINANCIAL PLAN..........................................................................................................................................85 · ..................................................................................................................... CURRENT OWNERSHIP SUMMARY 85 · ..................................................................................................................... PLANNED OWNERSHIP SUMMARY 85 · .......................................................................................................................................FINANCIAL SUMMARY 86 · ..................................................................................................... FUNDING REQUEST/TERMS OF INVESTMENT 86 · ..........................................................................................................................SOURCES AND USES OF FUNDS 86 · ................................................................................................................PROJECTED FINANCIAL STATEMENTS 86 · .................................................................................................................................FINANCIAL ASSUMPTIONS 86 · ................................................................................................................................... BREAK-EVEN ANALYSIS 86 · ............................................................................................................................................FINANCIAL RATIOS 86 · APPENDICES.................................................................................................................................................86 · ...........................................................................................................................................................PICTURES 86 · ..........................................................................................................BUSINESS LOCATION SITE INFORMATION 86 · ..........................................................................................................................................LEGAL DOCUMENTS 87 · .....................................................................................................................................OTHER CRITICAL DATA 87 59 page 60 / 87 2. COMPANY DESCRIPTION 3. LEGAL DESCRIPTION The Heating Services Company "GEOTERMIA Stargard" was founded by notarial act dated on February, the 24th of 1999, Repertory A No 2411/1999, and registered in the District Court in Stargard Szczeciski on March the 1st of 1999 as the Limited Liability Company with site in Stargard Szczeciski , 5a at Cieplna Street. The Company was established for implementation and operation of geothermal system, as well as selling geothermal heat to the district heating system owned by PEC Stargard Sp. z o.o.7 in Stargard Szczeciski. The Company is a polish law company, in accordance with the act of trading companies dated 15.09.2000. The scope of the company's activity, according to the company's articles is: - mining regarding geothermal water heat extraction, - heat production, - gas production using industrial methods including gas fuels distribution, - electricity production. The activity of the company is concerned with energy and mining sectors, therefore the company is subject to the regulations of the Energy Law dated 10.04.1997 and the Mining and Geological Law dated 04.02.1994. 4. BUSINESS HISTORY AND DESCRIPTION The initial shareholders of the company "GEOTERMIA Stargard" were: - Difco Energi A/S, Nyhavn 31G, 1051 Copenhagen (Denmark): ­ 80%, - Przedsibiorstwo Uslug Inwestycyjnych ,,EKO-INWEST" S.A. Szczecin, 70-780, Mczna 4: ­ 10%, - Scandinavian Energy Group ApS Vegendalvej 18, 7700 Thisted (Denmark): ­ 10%. However due to Difco Energy's business crisis on the Western and Central Europe's market, the shareholder had to sell out its shares to P.U.I."EKO-INWEST" S.A. according to resolution of the shareholders' extraordinary meeting dated 27.01.2000. 7PEC Stargard Sp. z o.o. - The District Heating Company Stargard Ltd. 60 page 61 / 87 5. CURRENT STATUS "GEOTERMIA Stargard" Sp. z o.o. is presently owned by the following shareholders: 50,1% P.U.I. EKO-INWEST S.A. ul. Gerarda Merkatora 7 70-676 Szczecin Poland 49,9% SEG ApS (Scandinavian Energy Group ApS) Vegendalvej 18 7700 Thisted Denmark The share capital amounts to PLN 2.805.000,00. P.U.I. EKO-INWEST S.A. was established in 1991 from a state-owned enterprise. The field of operation of EKO-INWEST includes the area of heat engineering, including construction of one of the most modern geothermal heat plants in Europe, located in Pyrzyce approx. 30 km from Stargard Szczeciski. SEG ApS was founded in 1992 with the aim to handle turnkey contracts for construction of geothermal production plants, gas-fired plants, absorption heat pump installations (LiBr/water) and absorption chiller installations (LiBr/water). 6. FUTURE PLANS It is planned to gain new shareholders and to raise the company's share capital up to PLN 5.605.000,00. % Shareholders Unit Equity 25,1% P.U.I. ,,EKO-INWEST" S.A. th. PLN 1.405 25,0% Scandinavian Energy Group ApS th. PLN 1.400 25,0% NEFCO + IŘ8 th. PLN 1.400 BB INVESTMENT Sp. z o.o. 25,0% or th. PLN 1.400 BIO-Energia ESP Sp. z o.o. EQUITY TOTAL th. PLN 5.605 8The shareholders can provide subordinated loans instead of coordinated equity. 61 page 62 / 87 TABLE 1:PLANNED SHARES IN GEOTERMIA STARGARD COMPANY IN 2003 7. KEY MANAGEMENT The Management Board is represented by: The Chairman of the Board ­ Mr Tomasz Wit Kozlowski, Dr.Sc.Eng. The Vice Chairman of the Board ­ Mr Lars Toft Hansen, M.Sc.Eng. General Director ­ Mr Zdzislaw Malenta, M.Sc.Eng. 8. MISSION AND VISION 9. MISSION STATEMENT To improve the condition of the environment in the region of Stargard and surroundings the local authorities decided to use local sources of geothermal waters, which would significantly reduce coal consumption as well as harmful pollution emissions. The GTN company from Neubrandenburg, Germany, worked out a study named ,,Geothermal Assistance in Assessing a Geothermal Potential in the North-West Poland, notably for the cities of Szczecin and Stargard Szczeciski" in 1998. The study, which was financed by the World's Bank and the PHARE Fund (PHARE Project No ZZ96.03, Contract No 96.1031.00), fully proved earlier assessments concerning the possibility of effective utilization of local geothermal water resources with a temperature of 95ş - 100oC to support the local district heating system. The planned Project i.e. the construction of a geothermal intake is provided for in the local `Heat Supply Plan for the Town of Stargard Szczeciski' adopted by Resolution No. III/27/98 on 15 December 1998 by the Town Council of Stargard Szczeciski. The construction of a geothermal heat plant will reduce by 35% annually dust and gaseous emissions to the atmosphere from the existent coal-fired heat plant PEC Sp. z o.o. Essential additional effects are:- - demand for heat in summer time totally met (commissioning out of the coal-fired plant of PEC); - reduction of the coal consumption by ca. 15,000 Mg as compared to the Drwg. for 1999; provision of opportunities in terms of available time for indispensable modernisation of the existent coal-fired burners of PEC Sp. z o.o. . 62 page 63 / 87 Legend: Above 50ş (in the Lower Credaceous or Jurassic formations) 20 - 50ş (in the Lower Credaceous or Jurassic formations) 20 - 72şC (in the Tertiary and Mesozoic formations of Podhale region) FIGURE 1: GEOTHERMAL WATER RESOURCES IN POLAND In connection with the above the Heating Services Company "GEOTERMIA Stargard" Ltd., whose main purpose is building the geothermal heat plant, was founded. Project Objectives: The local objectives of the Project are to provide clean heat to Stargard residents at a cost that is competitive with the current efficient coal system. The reduction of local air pollution is considered an important local objective. The national objectives are diversification of energy supply, reduction of local and regional air pollution, and of greenhouse gases (GHG), and development of a sustainable geothermal industry. The global objective is to achieve GHG reductions through: (I) the introduction of cost- effective geothermal energy in the City of Stargard, thereby reducing the need for coal- fired heat generation; and (II) an increased market penetration of geothermal heat generation in Poland, and consequent reduction in greenhouse gas emissions from heat generation. 10. COMPANY VISION For further development, the Company plans to expand its activities through building a Result Dissemination Center as well as a Rehabilitation and Recreation Center in the vicinity of the Geothermal Heat Plant. 63 page 64 / 87 STAGE I: Geothermal Plant with a Capacity of 14,0 MW The proposed Project will establish a geothermal base-load heating plant with an installed capacity of about 14,0 MWt . The Project will consist of two components: (a) the "underground plant" consisting of a new geothermal doublet (production well and directional re-injection well) which will be located close to the existing coal fired DH- plant; and (b) the "above-ground plant" and connections, comprising a plant building which will house heat exchangers, electrical equipment and installations, process equipment and controls, as well as internal piping; and the connection to the existing district heating (DH) network of Stargard. The production well of the geothermal doublet is expected to yield about 300 m3/h of geothermal water from the geothermal deposit located at a depth of 2.672 m, and with a temperature of about 90 degrees centigrade at the well head. The geothermal water will pass directly through heat exchangers and then will be re-injected in the second directional well of the doublet, thus forming a closed- loop primary system. The geothermal system will supply about 310.000 GJ per year through a connecting transmission pipeline into the DH Network of Stargard, representing about 35 percent of total annual demand of the system. The existing coal-fired boilers will be maintained by the DH Company PEC Stargard. They will continue to be used to supply the remaining needs of district heat for the city (intermediate and peak load), therefore running much less time than at present, and will provide the needed backup to the geothermal system in case of minor geothermal outages. Until now "Geotermia Stargard" Company finished drilling of the first production well GT-1 with a depth of 2670 m and performed a test pumping which proved good hydro- geological conditions to extract and use the hot geothermal water for heating purposes. Additionally, P.U.C. "Geotermia Stargard" signed a long-term heat purchase agreement with the local district heating company PEC Stargard in 1999 for delivery of all geothermal heat produced for the next 25 years. At present, we prepare drilling of the second directional injection well GT-2, with a length of 2960 m. STAGE II: Result Dissemination Center (International Information Center for Geothermal Energy Developoment) The Result Dissemination Center is proposed to be financed from a grant of the Global Environment Facility (GEF). The center will be situated close to the geothermal plant. The main idea of this center is to promote and disseminate environmental education and research. The Center will include a conference-room for about 30 persons with a possibility of audio-visual presentations, material-engineering laboratories and CO2 monitoring system. After stage II is completed the "GEOTERMIA Stargard" plans to offer professional consulting services in the field of extraction and utilization of renewable geothermal energy resources. STAGE III: Rehabilitation and Recreation Center P.U.C. "GEOTERMIA Stargard" Sp. z o. o. strongly supports the idea of erection of a Rehabilitation and Recreation Center in the close vicinity of geothermal plant due to the fact that additional low-temperature geothermal heat could be sold to the center for HVAC9 purposes. 9Stands for Heating ­ Ventilation ­ Air -Conditioning 64 page 65 / 87 The center will use therapeutic properties of the brine from the production well GT-1. The rehabilitation part will comprise health care services such as hydrotherapy, physiotherapy, laser therapy, krio-therapy, inhalations, massage and others. The recreation part will consist of swimming-pools, hydro massage, water-chute facilities and hotel rooms. After the second stage is built and commissioned, then the separate company ,,GEOTERMIA ZDROWIE" will be founded. The new company will manage the object and offer large scale medical and recreation services. "GEOTERMIA Stargard" will deliver additional geothermal heat for center exploitation and maintenance needs, and the brine as a medium for balneological purposes. A new company "GEOTERMIA ZDROWIE" Ltd. will soon be established with the Municipality and EKO-INWEST S.A. as shareholders. The Municipality will contribute with land adjacent to the geothermal plant. The new company will be responsible for project preparation and future operation. The idea is to use cheap geothermal heat for heating purposes. 11.PRODUCT AND SERVICE DESCRIPTION 12. OVERVIEW OF PRODUCTS AND SERVICES The company provides three following income sources: - sales of geothermal heat, - sales of CO2 emission reduction, - the future planned sales of brine for the balneological purposes as well as additional low-temperature heat. 13. PRODUCT AND SERVICE ADVANTAGES Advantage of the Project is using the "clean energy" and its positive influence on the environment. Building of a geothermal plant in Stargard Szczeciski will reduce air, soil and water pollution on a large area of the Westpomeranian Voivodship. It will be also an example to follow for other cities and regions in using unconventional, environmentally friendly renewable energy. 65 page 66 / 87 Heat customers Geothermal water Injected water Geothermal water reservoire Figure 2: Scheme of the geothermal plant It is planned that the yearly geothermal heat production supplied to the district heating system will be approx. 290.000 ­ 310.000 GJ/a, which is about 35,75 ­ 38,2% of total heat produced by PEC Stargard (811.212 GJ/a). It will reduce fine coal consumption and coal burning products' emission. In relation to year 2000 the coal savings will be 14.569 ­ 15.589 Mg. From a technical point of view the Stargard geothermal plant will be simpler and less complicated than any other geothermal plants being in operation in Poland (Pyrzyce, Podhale, Mszczonów). The plant will mainly consist of a direct geothermal water ­ DH water heat exchanger. The production of geothermal heat at a level of 290.000 ­310.000 GJ/a will be received by Przedsibiorstwo Energetyki Cieplnej [Heat Distribution Operator] of Stargard Szczeciski (the PEC's premises are sited on the opposite site of the Cieplna Street). Application of the renewable energy resource of geothermal energy will benefit the Stargard Szczeciski area by decreasing the emission of polluting elements like CO2, CO, SO2, NOx and dust. Utilization of geothermal energy in Stargard Szczeciski rests in harmony with the ecological policy of the Polish government, where actions focusing on increasing the proportion of environmentally friendly energy resources are preferred. Increasing the use of environmentally friendly energy resources also demonstrates Poland's intentions to meet demands of the International commitments, European Union etc. The geothermal system is expected to supply PEC Stargard Sp. z o.o. with approx. 310.000 GJ per year substituting 15.589 tons of coal which will cause the following reductions of harmful emissions. 66 page 67 / 87 Reductions in Emissions 500 400 300 200 100 0 th. Tons/a Tons/a Tons/a Tons/a Tons/a CO2 SO2 NO2 CO Dust Legend: Thus far quantity of pollution's emission Forecasted (final) quantity of pollution's emission DIAGRAM 1: DIAGRAM OF CHANGES IN POLLUTIONS' EMISSION AFTER IMPLEMENTATION OF GEOTHERMAL HEAT PLANT 14. PRODUCT DEVELOPMENT ACTIVITIES Currently, drilling of the production geothermal well GT-1 was realized in March 2002. The Contractor of these works was the company NAFTGAZ, Wolomin. The Contractor was selected in a National Competitive Bidding procedure according to the Public Procurement Law. The geological assistance was performed by Geological Company POLGEOL S.A. from Warsaw ­ selected in tender too. The connection 2 x DN 350 to district heating net was made in June 2002. The tender for execution of the injection geothermal well GT-2 was realized in July 2002 according to National Competitive Bidding procedure. The second geothermal well GT-2 will be drilled by the company NAFTGAZ, Wolomin. The Contractor is ready to start the works after it receive information from Investor about financial closing of the investment. 67 page 68 / 87 15.INDUSTRY ANALYSIS 16. INDUSTRY OVERVIEW The energy sector of Poland has been and still is undergoing a gradual transformation which can be characterized by four principal developments, namely continuing sector reform including privatization, declining use of coal but increased use of gas, promotion of energy efficiency and energy savings, and increased use of renewable energy resources for district heat and power generation. These are discussed in more detail in the following paragraphs. Energy Sector Reform has started in 1990 with the beginning of Poland's major economic restructuring program and, in the first place, and with the help of the World Bank, EU and bilateral donors, has developed blue prints for restructuring, commercialization of enterprises, de-monopolization, introduction of arms-length regulation and privatization. Whereas commercialization of most energy sector enterprises was completed in the early 1990ies, restructuring of sub-sectors took much longer. The restructuring of the hard coal sector, characterized in the early 1990ies by over-capacity and over-employment, only started in 1998 and has achieved considerable progress, allowing some of the coal mining companies to become profitable after many years of losses. A new energy law was promulgated in late 1997 and encourages use of Renewable Energy Resources. A regulatory framework of the Energy Sector, postulated under the new energy law, was introduced in 1997 with the creation of the Energy Sector Regulatory Agency, which has developed licensing and tariff monitoring in district heat and power sub-sectors. Privatization has achieved good progress in the petroleum sector, and only limited progress in the power- and district heat sub-sectors, with gas and coal sector still working on developing viable privatization concepts. Sector reform is expected to continue in the future. GoP is evaluating (a) the role and scope of private sector participation in the coal sector and the gas sector, (b) improved sector regulation, (c) further decentralization and de-monopolization of the sector, and (d) increased use of RERs. Hard Coal consumption is on the decline in Poland although it still accounts, together with stable lignite use, for almost two thirds of primary energy use. Coal will be the most important energy source in the power sector for years to come. Hard coal exports have declined to some extent since the late 1980ies and have been maintained during the 1990ies at levels between 20 and 30 million tons to provide employment to redundant miners, however at growing losses. Only with the recent recovery of international coal prices this situation has slightly improved, but coal exports (possibly with the exception of some high quality steam coal and coking coal) are mostly not going to be economic for Poland in the medium term. Natural Gas, presently representing only about 20% of primary energy resource use in the country, is likely to be the primary growth engine of Poland's energy sector for the foreseeable future, although the country relies to over 60% of total consumption on gas imports. Increasingly gas is going to be used in household heating, combined heat and power plants, as well as in peaking power production. To decrease the risk of supply interruptions, the country is in the process of diversifying its supply lines through additional pipelines linking the country with further resources in Russia as well as the 68 page 69 / 87 north sea (Danish and German links). Gas prices are no longer controlled by Government, and a new pricing policy is under implementation. Energy Efficiency and Energy Savings have been discussed since the beginning of economic and energy sector reforms, but progress in the first half of the 1990ies was very limited. Since then, Poland has moved to world prices of energy in most of its energy sub- sectors and this has been the strongest driving force to move toward improved energy efficiency and energy conservation. In addition there have been incentives and grant support to improve energy efficiency. Although only a fraction of the power and district heat sector has been privatized and the process continues to be slow, the energy enterprises have undertaken major efforts to increase efficiency on the supply side through plant modernization and network improvements. This has also helped them to meet at the same time tightening environmental standards, which are being aligned with EU standards in the context of the EU accession efforts. The demand side improvements have been more difficult, and much scope remains. However, through actions such as PR campaigns, labeling of consumer equipment, building codes and material standards, industry and consumers have started to be more energy conscious and to make concerted efforts to conserve energy. This is particularly manifest in the district heating sector where a combination of higher tariffs, policy measures and incentives, as well as consumer education have contributed to significant declines in heat demand. The continuously declining heat load faced by district heat enterprises, who managed to maintain their customers, illustrates the efforts undertaken by these customers to reduce heat consumption through better regulation, investment in insulation and state-of-the-art internal heat distribution systems. Renewable Energy Resources (RERs): According to the energy law, promulgated in late 1997, the GoP encourages the use of RERs. Thus, it has maintained a target of meeting at least 7.5% of its primary energy needs from RERs by the year 2010, as opposed to less than 3% presently. Based on studies of Government institutes as well as private consultants, there is good scope to develop geothermal energy in a broad band across Poland from the southern Podhale area, across the center, and to the north west of the country. Biomass is already used in rural areas throughout Poland in traditional ways, but could be exploited more in centralized district heat and for certain agro-industrial uses. Wind energy is considered for certain areas along the Baltic Sea where the potential is comparable to Denmark's and North Germany's potential. Solar energy use is largely limited to small electric use at decentralized locations as well as for warm water heating. Unfortunately the energy law does not provide for price advantages of decentralized heat and power generation, as is the case in several EU countries as well as in Hungary, and which would allow to monetize some of the environmental benefits. Moreover, heat and power prices are still experiencing some hidden subsidies which contribute to make the use of RERs un-economic. Only through the "monetization" of environmental benefits through grants can this obstacle be overcome at this time. Nevertheless, Poland's resolve to increase the use of renewables is driven in part by environmental considerations, and in part by an interest in diversification of energy supply. The power- and district heating sub-sectors contribute about 70% of total carbon emissions in the energy sector, the largest source in Poland. The country has a strong interest in climate change mitigation, which is also encouraged by the EU, to which Poland intends to accede. The power sector, and even more so the district heat sector in winter, play an important role in generating local air pollution which still is significant, even when compared with the increasingly polluting transport sector, and with the industrial sector. The recognition of the need to develop diverse energy sources, and 69 page 70 / 87 therefore RERs, remains, given the declining role of domestic coal and the increasing importance of mostly imported gas. This is further encouraged and even increasingly postulated by the EU, which targets 22% of total primary energy use in the form of RERs by 2020. It is recognized that the development and use of RERs as an important potential industry sector worthy of development, given large unemployment, particularly in smaller communities and rural areas. 17. HEAT MARKET For the objects equipped with an installation and receive devices the heat energy is supplied from following sources: - district heating network, - local and individual boilers heated by: - coal, - coke, - high ­ methane natural gas, - burning oil, - from the heat and power station of Sugar factory ,,Kluczewo". According to current requirement for heat energy, town infrastructure and building equipment the heat consumption was as follows (estimated data for year 2001): - district heating network: 900.000 GJ, - power-station "Kluczewo": 243 000 GJ, - local and individual sources: 423 000 GJ, - oil boiler-houses: 17 000GJ, - gas boiler-houses: 36 000 GJ, - others: 3 000GJ. 18. HEAT MARKET - TRENDS AND GROWTH The development of heating network market foresees that by year 2004 the heat energy circulated in the district heating system will be delivered to additional new buildings in Stargard Szczeciski including Hospital and new communal and private houses. It is foreseen that the old boiler-houses will be shut down. Further development of district heating net of 10 -15 km is assumed for next years. The basic energy source for the town is a boiler (coal) plant PEC at Nasienna 6 street and it will remain the basic source. Therefore the Geothermal Plant will be one of main heat acquisition sources for the city of Stargard Szczeciski. Besides, the local authorities do not plan to build any new conventional or alternative heat source in the nearest future (decade). 70 page 71 / 87 19.TARGET MARKET 20. MARKET DEMOGRAPHICS The final receiver of geothermal heat will be PEC Sp. z o.o. in Stargard Szczeciski, which will distribute the heat to individual consumers through district heating network. Stargard Szczeciski (Stargard), the third largest city in new West Pomeranian Voievodship with a population of almost 75 thousand people, is located 36 km from Szczecin and 180 km from Berlin. Stargard and Szczecin together form the agricultural and industrial centers of Western Pomerania and are important rail and road communication nodes. Primary economic activity in these cities includes food, clothing, electric machinery, building and tourism industries. The city of Stargard is an important industrial and economic center in region. Several of institutions and works (Sugar Plant "Kluczewo", Grain Factory, PKP) are situated there. Stargard is also an important national and international road and rail crossing. Insert Figure 3: Location of Stargard Szczeciski 21. MARKET TRENDS AND GROWTH PATTERNS The type of consumers is divided into: - a private consumer sector, - an industrial consumer sector. According to economical recession some large production companies (like Luxpol, Pollena) which used to receive much heat were closed. Hence, the demand for expensive conventional generated heat was decreased. Simultaneously the cooperatives and private customers started to invest in thermal insulation of buildings, for decrease the heat losses. So the building termoisolation has increased, the heat losses have decreased, and then the demand for thermal energy has come down average about 3,0 ­ 6,0 MW. 71 page 72 / 87 A table and a diagram below indicate heat supply generated by PEC in years 1996 - 2001 Year Heat Production [GJ] 1996 1 104 677 1997 933 455 1998 912 699 1999 862 319 2000 811 212 2001 900 020 Table 2: Heat energy production by PEC Stargard in years 1996-2001 Heat production in years 1996 - 2001 1200000 1000000 800000 earsY 600000 400000 200000 0 1996 1997 1998 1999 2000 2001 Quantity of produced heat Heat production (GJ) Diagram 2: Heat production in years 1996 ­ 2001. 22. MARKET SIZE AND POTENTIAL Heat energy in Stargard Szczeciski is used for living, communal and industrial purposes. Finally, used for heating rooms, sanitary water, for ventilation and air- conditioning, and also for technological and industry processing purposes. The share of heat energy consumers from district heating network in Stargard Szczeciski depends of objects' purpose as follows: - habitable buildings (societies, communal and private, which is 72% of all habitable objects in city) - 58%, - works (PKP (Polish National Railways), telecommunication, post, municipal communication works, hotels, shops, services, etc.) - 15%, - institutions and public services (hospitals, ambulatories, schools, other education objects, police, sport centers, cultural centers, museums, institutions, and military objects) - 17%, - industry - 10%. 72 page 73 / 87 Industry 10% Habitable Institutions and buildings public services 58% 17% Works 15% Habitable buildings Works Institutions and public services Industry Diagram 3: Heating energy reveivers' structure in Stargard Szczeciski The heat demand for separate groups of consumers is as follows: - habitable buildings: 135,7 MW, - works: 21,4 MW, - health-care: 5,0 MW, - education: 12,1 MW, - industry: 100,5 MW, - institutions and public services: 7,5 MW, which gives total value of approx. 282,0 MW. 73 page 74 / 87 Institutions and public services 3% Industry 36% Habitable buildings 47% Education 4% Works Health-care 8% 2% Habitable buildings Works Health-care Education Industry Institutions and public services Diagram 4: Heating power structure demand for separate groups of consumers in Stargard Szczeciski Analyzing the above date of heat production we can observe that the demand of heat in years 1999-2000 had a decreasing trend caused by industrial recession and local policy of introducing heat loss reducing systems. Beginning from year 2001 we can see an increasing trend in heat demand resulted from connected of new consumers to the heating network and also resulted from introduced the central potable hot water systems for consumers who used to use local gas boilers. It is expected that in next few years trend-line will hold the growing tendency. 74 page 75 / 87 23.SALES PLAN "GEOTERMIA Stargard" Sp. z o.o. will finance its investment by sales of the complete heat production to the PEC Stargard Sp. z o.o. based on a twenty-five years off-take agreement signed on 17 August 1999. "GEOTERMIA Stargard" Sp. z o.o.'s heat sales price was established at 13,00 PLN/GJ (excluding VAT) for the year 2000 with the price regulation mechanism for the next twenty five years depending on the average heat sales price from PEC to the consumers. Price calculation GS - means Przedsibiorstwo Uslug Cieplowniczych Geotermia Stargard Sp. z o.o. PEC - means Przedsibiorstwo Energetyki Cieplnej Sp. z o.o. The start heat sales price from GS to PEC in the amount of 13,00 PLN/GJ (net) shall be valid till the end of the year 2000. The way of regulation of the heat sales unit price from GS to PEC in the following years. n - means the following number above the year 2000 (where ,,n" takes values of 1,2,3 ....). CGS2000+n - heat sales unit price from GS to PEC in the year ,,2000 +n". C2000 PEC +( n-1)- average annual price of 1 GJ of heat which is paid to PEC by the consumers in the year ,,2000+(n-1)" CPEC CGS 2000+n = 13,00 2000+(n-1)[PLN/GJ] (1) C1999 PEC C2000+( PEC = P2000+(n-1) n-1) [PLN/GJ] (2) I2000+(n-1) C1999 = PEC P1999 [PLN/GJ] (3) I1999 where: P1999 , P2000+(n-1) - mean respectively PEC income from the sale of heat from the district heating network to which the geothermal heat shall be delivered in the year ,,1999" and in the following years. I1999 , I2000+(n-1) - mean respectively the amount of heat in GJ sold by PEC from the district heating network to which the geothermal heat shall be delivered in the year ,,1999" and in the following years. An example of the price calculation for the years 2001 and 2002. 75 page 76 / 87 CGS = 13,00 C2000 PEC [PLN/GJ] C2001 PEC [PLN/GJ] 2001 CGS = 13,00 C1999 PEC 2002 C1999 PEC In the event that the PEC price is decreased, the GS price shall also be decreased according to the formula (1). The formula (1) shall be valid at all times as long as it is not prohibited by State Authorities. GS shall not be able to increase its price higher than that calculated according to the formula (1) even if State Authorities allows it. The price of 1 GJ Years produced heat energy in PLN 2000 13,00 2001 13,91 2002 14,83 2003 TABLE 3: PRICE CALCULATION OF THE GEOTHERMAL HEAT IN YEARS 2000-2003 The geothermal system is expected to supply PEC Stargard Sp. z o.o. with approx. 290.000 - 310.000 GJ per year. · COMPETETIVE ANALYSIS 24. COMPETETIVE OVERVIEW The district heat industry in the area of Stargard Szczeciski is a monopolized market (PEC Sp. z o.o). The PEC Company is local distribution company and direct heat supplier to individual receivers as well as the owner of transmission grid including installations, heat thermal centers in the city. 25. DIRECT COMPETITORS The direct competition concerns the situation when the market consists of few economical subjects who compete between and their activities are similar. In case of market which concerns the only one company, there are no objectives to analyzing the direct competition. 26. INDIRECT COMPETITORS The heat and power plant at ,,Kluczewo" sugar factory can be recognized as the indirect competitor. Opposite to PEC the heat and power plant "Kluczewo" is owned by sugar factory and as a part of its activity sells heat to the district heating network. The heat and power plant is located in the south part of the city a few kilometers from built-up area. The heat and power plant works only during sugar campaign (from a half of September to 76 page 77 / 87 end of December) and in this period excess of produced heat power (1,5 MW) can be delivered to district heating net. The 90 % of the produced heat is used for process purposes and for heating the sugar factory buildings. The heat plant is the conventional plant powered by 3 steam boilers. There are no potential heat consumers near the plant area. The possibility of connecting the plant to the district heating network not only during the sugar campaign requires a complete modernization of object (installation of heat exchangers and connection to district heating network by means of new pipelines of 2500 m length). However, the owner of the plant is not able to realize that investment himself at this moment and the city of Stargard has not allowed for this investment in its investment schedule. 27. COMPETETIVE ADVANTAGES The competitive advantages of geothermal Project are: - The customer (PEC) is located near to heat plant, - low operating costs of the plant, - possibility of exploitation the plant for a long period, - the guarantee for sale of whole heat production, - besides, in the nearest future the city of Stargard does not plan any investment of building a new heat plant on the city site (according to Heat Supply Plan for Stargard Szczeciski where it is planned that no new station of heat combustion and heat utilization from bio-fuels and trashes will be built). · OPERATIONS PLAN 28. LOCATION The designed facilities of the geothermal plant are located within Circuit No. 5 of the Town of Stargard Szczeciski (north-westerly part of the Town). The basic components of the Project, i.e. GT-1 exploitation borehole, brine retention reservoir, and heat plant main building and administrative building are sited on Lot No. 34 at 5a Cieplna Street. In the nearest vicinity of the Geothermal Plant (Lot No. 34) there are:- - at the northern side the Rubber Processing Works at 7 Cieplna Street; behind them industrial-storage terrains and further on fields, a railroad and residential estate ­ W. Kossak's Settlement stretch; - at the eastern side, on the opposite side of the Cieplna Street ­ PEC and the Clothing Works and Meat Processing Plant; - at the southern side - the premises of the Metal Work, Clothing Production Works, greenery; - at the western side ­ greenery. 29. PROPERTY OWNERSHIP/LEASE TERMS 77 page 78 / 87 According to Notarial Deed Roll A 3854/2001, Lot No. 34 at 5a Cieplna Street with an area of 1.0522ha is the property of the company "GEOTERMIA Stargard" Sp. z o.o. 30. EQUIPMENT According to the technical specification the plant will be equipped as follows: Summary and specifications of process equipment and ancillary equipment For investment works preceding the planned Project (the works under Concession No. 9/2001/p dated 21 May 2001) Pos. Particulars Pcs Placement/location Specifications 1 2 3 4 5 Earth reservoir covered 1 Brine retention reservoir 1 Lot No. 34 with geo-membrane, vol. 3,500m3 Submersible pump ­ Lot No. 34. GT-1 Capacity Q 200- 2 multiple stage centrifugal pump, el. motor with a 1 research and 250m3/h, H 200-300m, frequency converter exploitation borehole Nel. 115-330kW 3 Filter 5 On GT-1 research and Throughput Q 50m3/h exploitation borehole per one filter, filter bag Wash-down water pipeline Lot Nos. 39/9-39/8- Plastic pipeline ND 4 from GT-2 borehole to the 1 39/10-40-38-136-1024- 150mm, L 870m, pdesign brine retention reservoir 129-130-127, the pipeline to be laid in soil 6bar Steel pre-insulated Lot Nos. 39/9-39/8- pipeline, surplus for 5 Geothermal water 39/10-40-38-136-1024- rust 5mm, ND 200mm, pressurised return pipeline 1 129-130-127, the L 920m, pdesign 16bar, pipeline to be laid in soil leakage detection system 7 Valves, controls and instrumentation, etc. set pdesign 16/40bar 78 page 79 / 87 For the planned Project of constructing a 14.0MW geothermal heat source Pos. Particulars Pcs Placement/location Specifications 1 2 3 4 5 Between GT-1 borehole Steel pre-insulated 1 Geothermal water pipeline, surplus for operational pipeline 1 and the thermal heat plant building rust 5mm, ND 200mm, L ...m, pdesign 16bar Titanium plate heat 2 Heat exchanger 1 Thermal heat plant exchanger, rating Q building 13.2MW, pdesign 16bar 95/42oC ­ 40/92oC Between the thermal Steel pre-insulated 3 Network water pipeline 2 heat plant building and pipeline, ND 300mm, L PEC, laid in soil 470mm, pdesign 10bar Capacity Q 100- 4 Network water circulating Thermal heat plant pumps 2 building 125m3/h, H 15-20m, Nel 7.5-15kW Between thermal heat Plastic pipeline ND 5 Diluted geothermal water discharge pipeline 1 plant building and ...mm, L 600m, pdesign Uslugowa Street 6bar 6 Valves, controls and instrumentation, etc. set pdesign 10bar 7 Heat meter 1 Thermal heat plant building Q 500m3/h, pdesign 10bar Pumps on the pressurised Capacity Q 100- 8 return borehole, el. motor On GT-2 pressurised with a frequency converter 2 return borehole 125m3/h, H 100-200m, (if necessary) Nel ...kW All equipment components must be in compliance with the international branch standards. 31. PURCHASING POLICIES HOUE & OLSEN A/S from Thisted Denmark concluded a Technical Assistance Agreement with the Danish Environmental Protection Agency on 16th July 2001 for preparation of the technical documentation of the project. The beneficiary of this Technical Assistance is P.U.C. "GEOTERMIA Stargard" Sp. o.o. The Project Management activities concerning obtaining necessary permits and approvals (concessions, building permits, etc.) including a day-to-day site supervision of the building process are performed by P.U.I. EKO-INWEST S.A. from Szczecin, Poland under the signed agreement with P.U.C. "GEOTERMIA Stargard" Sp. z o.o. on 30th September 2000. 79 page 80 / 87 The first geothermal well GT-1 was drilled by NAFTGAZ Wolomin, Poland and fully completed in March 2002. The company was selected in a National Competitive Bidding Procedure according to the Public Procurement Law. The Geological Assistance for two wells (GT-1 and GT-2) is performed by POLGEOL from Warsaw, Poland. The company was selected in a National Competitive Bidding Procedure according to the Public Procurement Law. The same company that drilled the first well will be responsible for drilling of the second geothermal well GT-2 which will be of a directional type. Additionally, the contract also includes laying of a 4,0 km long brine discharge PE pipeline to the Ina river. The Company was selected in a National Competitive Bidding Procedure according to the Public Procurement Law. The Company responsible for construction of the surface geothermal plant will be selected in a National Competitive Bidding Procedure as a turn-key contractor in early 2003. There will also be organised a competitive bidding procedure for delivery and installation of a submersible pump unit. It is planned to inimitably make a national bidding procedure and if no bidder is chosen then a closed international bidding procedure will be applied. 32. THE PROJECT The proposed Project will establish a geothermal base-load heating plant with an installed capacity of about 14,0 MWt.. The Project will consist of two components: (a) the "underground plant" consisting of a new geothermal doublet (production well and directional re-injection well) which will be located close to the existing coal fired DH- plant; and (b) the "above-ground plant" and connections, comprising a plant building which will house heat exchangers, electrical equipment and installations, process equipment and controls, as well as internal piping; and the connection to the existing district heating (DH) network of Stargard. The production well of the geothermal doublet is expected to yield about 300 m3/h of geothermal water from the geothermal deposit located at a depth of 2.672 m, and with a temperature of about 90 degrees centigrade at the well head. The geothermal water will pass directly through heat exchangers and then will be re-injected in the second directional well of the doublet, thus forming a closed-loop primary system (see below). To PEC Boilers Return from Town m.s.c. From PEC to Town Supply to Town 80 page 81 / 87 86 C o 40 C o PEC System GS System DHW Pump 87 C o 41 C o 12,7 MW Heat Exchanger Filter Units 8 m Production Submersible Directional Well Pump Injection Well GT-1 H = 227 m GT-2 2.672 m deep Q = 300 m3/h TVD 2.450 m Inclination 29,5o MD 2.960 m 1 500 m Figure 4: Technological scheme of geothermal heating plant in Stargad Szczeciski The geothermal system will supply about 310.000 GJ per year through a connecting transmission pipeline into the DH Network of Stargard, representing about 36 percent of total annual demand of the system. The existing coal-fired boilers will be maintained by the DH Company PEC of Stargard. They will continue to be used to supply the remaining needs of district heat for the city (intermediate and peak load), therefore running much less time than at present, and will provide the needed backup to the geothermal system in case of minor geothermal outages. Thus the project will provide for two wells (production well and re-injection well forming one doublet), submersible pump, the connecting pipeline between the two wells, heat exchangers, DH circulation pumps, electrical installations, a control system, a refurbished plant building, a new administrative building, the land for the geothermal wells and plant, as well as a transmission pipe to connect to the existing district heat system. The project could be expanded later through addition of heat pumps, which would further exploit geothermal heat. But that possibility is not included in the present project. 33. QUALITY CONTROL MEASURES The supervision of whole period of investment works will be realized by authority representatives and branch inspectors from P.U.I. "EKO-INWEST" S.A. which is the 81 page 82 / 87 Contract Engineer. Simultaneously all Contractors working on the Plant site are responsible for control of their works according to suitable rules of civil, mining, water and power energy laws and Quality Control certificates. During assembly plus in particular executive phases and during commissioning of individual Plant parts, suitable tests will be made to guarantee proper quality of finished works, free of any equipment defects. In production phase suitable documents and quality certificates and test results will be required. According to the rules, the quality of executed works and used components will be checked during final acceptances of finished particular civil phases and during final acceptance of whole object. 34. ADMINISTRATIVE PROCEDURES Administrative procedures at the stage of erection a geothermal plant in Stargard Szczeciski are as follow: - a concession for the reservoir assessment number 9/2001/p issued by the Minister of Environment dated 21.05.2001; - a decision number 320/2001 from 12 October 2001 concerning the space development conditions, - a decision issued by Minister of Environment dated 08.04.2002 changing concession for the reservoir assessment about drilling the one doublet of geothermal wells. - 07.2002. - Report on the Project's impact upon the environment at the stage of changing decision of conditions for the development and exploitation of land - a decision number 270/2002 dated 30.08.2002. changing the decision about space development conditions number 320/2001, issued by City Council in Stargard Szczeciski ­ Department of Space Management ­ concerning erection of brine pipeline to river Ina. - a decision of Stargard's Governor dated 16.10.2002 permitting to put the sewage in the form of salty waste geothermal waters into surface waters. - a decision of Stargard's Governor dated 16.10.2002 permitting to make a pipe culvert under the Ina river - application for a building permission submitted to a Stargard City Council on 7 January 2003, - application for the concession of producing and selling geothermal heat energy will be fold till the end of March 2003. 35. STAFFING AND TRAINING As basis for the training courses shall be a detailed user manual specific for this plant. This training course shall be divided into two sections: A special training course for the leading staff. This course shall focus on the deeper understanding of the PLC and SCADA software and the actual application software 82 page 83 / 87 interlocking and control algorithms. This training course shall further teach the staff how to design and develop reports and trend curves. A general training course for the daily operation staff. This course shall focus on the daily plant operation and how to utilise the SCADA system in supervision, fault finding trouble shooting and plant maintenance. The courses shall be performed in Stargard and as a part of the commissioning and starting-up of the plant. During the first month of the normal operation the SCADA, the contractor shall be present permanently in Stargard during the normal working hours to assist the staff in utilisation of the SCADA system facilities. The Supplier shall organize training courses for the Purchaser's staff according to the training program provided by the Supplier. The trainees will comprise responsible individuals of the Purchaser's staff and the staff of local contractors. All training courses shall take place in Stargard, Poland, and room(s) for the courses will be provided free of charge by the Purchaser while other facilities, equipment etc. necessary for implementing the courses shall be provided by the Supplier. Training shall be performed before delivery of the equipment described enabling the Purchaser's staff as well as contractors for installation to store, install, operate and maintain the equipment properly. The training course shall be attended by five (5) trainees and shall take place during installation and commissioning of the goods delivered. The objective of the Supplier's training is to provide the trainees with such skills that they are in full command of all aspects of the operation and maintenance of the components/equipment supplied. The Supplier shall assign qualified and competent trainers/instructors having performed similar tasks at similar conditions. It is important that the trainers and trainees are fully confident with the Technical Manuals of the components/equipment and that these manuals are used and incorporated in the training. The manuals used for the training shall be final with regard to installation, operation and maintenance exclusive of material certificates, test certificates etc. Training and training materials shall be in Polish. The Supplier shall cover all expenses for translation and interpreters. Training material used shall be furnished to each trainee. The Bidder shall with its Bid include a program for the courses and the training, and the program shall contain but not necessarily be limited to the following: Purpose of training scope and methodology (theoretical, practical training, and use of the Technical Manuals). Persons to be trained (categories, number, qualifications of trainees, etc.). List of persons in charge of training, and training experience record. Time schedule, training methodology and subjects to be dealt with during the training. Program for examination and certification of the trainees. 83 page 84 / 87 In the schedule of prices, the Bidder shall inform the total prices being the full remu- neration for the training program. There will be also organized trainings in Thisted, Denmark, and in Pyrzyce. 36. MANAGEMENT CONTROL SYSTEMS After erection a geothermal plant Geotermia Stargard will start up the process of introducing the Quality Management System in accordance with the requirements of international standards ISO. 37. ORGANIZATIONAL CHART A staff of eight persons is budgeted for, inclusive of the mandatory mining engineer (geologist) Geotermia Stargard Sp.z.o.o. Board Managing Director Geology Technology Economic Subsurface Surface Billing (geologist) (mechanical, Accounting electrical, etc.) Selling FIGURE 5: ORGANIZATIONAL CHART ·MANAGEMENT TEAM 38. SUPERVISORY BOARD According to the company's article there will be founded supervisory board while new shareholders come up to the company and it will be composed from sharholders' representatives. 39. MANAGEMENT BOARD The Management Board is represented by: The Chairman of the Board ­ Tomasz Wit Kozlowski, Dr.Sc.Eng. The Vice Chairman of the Board ­ Lars Toft Hansen, M.Sc.Eng. General Director ­ Zdzislaw Malenta, M.Sc.Eng. 84 page 85 / 87 40. PROFESSIONAL SERVICE PROVIDERS During the project realization "GEOTERMIA Stargard" consults high-class specialists in geology, heating, civil works and drilling. The project advisors are among the others specialists from Academy of Mining and Metallurgy, Kraków and Polish Academy of Sciences. The geological assistance is performed by Geological Company POLGEOL S.A., Warszawa, the company specialised in geothermal projects in Poland, and Danish Oil and Natural Gas Company (DONG), Denmark. 41.FINANCIAL PLAN 42. CURRENT OWNERSHIP SUMMARY The shareholders structure of the on January the 10th 2003: % Shareholder Unit Equity 50,1% EKO-INWEST th. PLN 1.405 49,9% SEG th. PLN 1.400 Total Equity th. PLN 2.805 TABLE 4: COMPANY SHAREHOLDERS ON JANUARY THE 10TH 2003 43. PLANNED OWNERSHIP SUMMARY % Shareholders Unit Equity 25,1% P.U.I. ,,EKO-INWEST" S.A. th. PLN 1.405 25,0% Scandinavian Energy Group ApS th. PLN 1.400 25,0% NEFCO + IŘ th. PLN 1.400 BB INVESTMENT Sp. z o.o. 25,0% or th. PLN 1.400 BIO-Energia ESP Sp. z o.o. Total Equity th. PLN 5.605 85 page 86 / 87 TABLE 5: THE PLANNED STRUCTURE OF THE SHAREHOLDERS 44. FINANCIAL SUMMARY See the attached Financial Model 45. FUNDING REQUEST/TERMS OF INVESTMENT See the attached Financial Model 46. SOURCES AND USES OF FUNDS See the attached Financial Model 47. PROJECTED FINANCIAL STATEMENTS See the attached Financial Model 48. FINANCIAL ASSUMPTIONS See the attached Financial Model 49. BREAK-EVEN ANALYSIS See the attached Financial Model 50. FINANCIAL RATIOS See the attached Financial Model 51.APPENDICES 52. PICTURES In enclosure: - the photo documentation of the drilling and civil works. 53. BUSINESS LOCATION SITE INFORMATION - A Copy from the perpetual register KW 77320 dated 09.10.2002. 86 page 87 / 87 54. LEGAL DOCUMENTS - The Agreement of partnership, - A Copy from the national court register concerning the information about the company, - Confirmation of a NIP/tax identification number/, - Confirmation of a REGON/statistic identification number/. 55. OTHER CRITICAL DATA - The Financial Model, - The Grant Agreement signed between Geotermia Stargard and National Fund for Environmental Protection and Water Management dated 27.12.2001. - The Grant Agreement signed between Geotermia Stargard and Danish Environmental Protection Agency/DEPA/ dated 16.07.2001. - The Letter from National Fund for Environmental Protection and Water Management dated 12.06.2002. - The Letter from Voivodship Fund for Environmental Protection and Water Management dated 08.03.2002. - The Letter from Nordic Environment Finance Corporation /NEFCO/ dated 18.06. 2002. - The Aide - Memoire signed between Geotermia Stargard and Prototype Carbon Fund dated 17.06.2002. - The Agreement signed between Geotermia Stargard and PEC dated 17.08.1999 for connection of heat source to the district heating network. 87