AZDRES Power Plant Rehabilitation

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JSC Azerenerji, the state-owned power utility in Azerbaijan Republic, is seeking the Bank financial support for the rehabilitation of eight units of 300MW dual fuel (heavy fuel oil/natural gas) fired at AzDRES power plant. The plant is located near the town of Mingechaur, 300 km west from the capital Baku. It has been in operation for more than 20 years and requires urgent modernisation. The asset is of significant importance for the country because it supplies the majority of the electrical energy consumed in Azerbaijan and the region. The objectives of the project are to increase the plant’s overall efficiency to bring the operation back to its design capacity and to enhance its reliability. The project will also have a significant beneficial impact to the environment by reducing plant emissions and improving the plant’s fuel use and efficiency. EBRD financing will be prioritised for use on the rehabilitation of the turbine equipment and implementing environment improvement measures. Own finance from Azernerji will be used to finance urgent civil works for both a chimney and a cooling water tunnel. Due to an increase in project costs, the EBRD loan amount is expected to increase from USD 115 million to USD 207 million. The projected Board date for the loan extension is September 18, 2007. The proposed project will contribute to ensuring the long term financial viability of the electricity sector in Azerbaijan which is heavily subsidized at the present time. In addition to improvements in plant efficiency and reductions in Azerenerji’s cost structure brought about by project implementation, the Bank will also be working with the Azeri Authorities to facilitate necessary adjustments in electricity tariffs with the aim of introducing full cost recovery for the sector. This effort will be made taking into account affordability constraints posed by local household incomes and is therefore expected to be implemented gradually. JSC Azerenerji, the state-owned power utility in Azerbaijan Republic. The Bank has agreed to lend 115 million USD to Azerenerji backed by a Sovereign Guarantee from the Azeri State. An additional USD 92 million is planned due to increased project costs. The total project cost is 232 million USD excluding taxes and custom duties. This figure is revised from the original estimate of USD 140 million. Environmental classification and rationale The project was screened B/1, requiring an Environmental Audit and Environmental Analysis in line with the Bank’s Environmental Policy and Public Information Policy. The modernisation of existing power units focussing mainly on improvising energy efficiency and operational control is associated with a number of environmental issues, which can be readily identified, assessed and mitigated as part of an Environmental Analysis. An Environmental Audit and Analysis was undertaken by an independent consultant and Members of the Bank’s Environment Department visited the site in 2004. Key environmental issues and mitigation The key environmental issues are air emissions associated with the use of heavy fuel oil and/or gas. Due to the nature of fuel mix and site location, emissions from the plant are not judged as a having a significant adverse impact. The plant’s main emissions are associated with Sulphur Dioxide (SO2) and Nitrous Oxide (NOx) emissions. The plant already relies on low sulphur fuel, which is locally availability (0.2% sulphur). The planned modernization will also upgrade existing boilers inclusive of the existing primary NOX control systems and the installation of low NOx boilers at the plant. This will improve the performance of the plant. The plant has made an assessment of the impact on local air quality, and the modelling did not identify any exceedance of national or EU ambient air quality standards as a result of operating the power plant. As part of the investment programme an environmental management system and continuous monitoring will be incorporated into day-to-day operations during the implementation of the modernization programme. Water consumption and wastewater discharges are a significant issue as the plant has an open circuit cooling systems. The plant will review and upgrade the existing cooling systems, although it is likely to remain an open once-through system. Discharged water is used mainly for irrigation purposes, and there have been no reported environmental issues. As part of the Action plan this issue will be further reviewed. The plant is not associated with significant waste disposal problems due to the nature of fuel used. However, some hazardous and non hazardous waste needs to be disposed in licensed landfills. At present his is not well organized, and much of the waste ends up in the municipal landfills. As part of developing an environmental action plan this will be addressed to reduce environmental and human risk. Contaminated land was not judged as a significant issue at this plant. Asbestos is used at the plant, and the modernization programme will include the development of an asbestos management plan to address this issue. Overall, health and safety culture at the plant is poor and needs to be upgraded as part of developing and environmental, health and safety management system. Environmental opportunities The proposed project is expected to bring significant environmental benefits as the upgraded plant will have a higher overall efficiency and substantial improvement will be made to the environmental management and operation of the plant. The increase in efficiency and fuel switching is likely to lead to significant emission reduction and possible carbon reduction opportunities. The ERBD is progressing this issue as a CDM project, and anticipates a significant amount of emission reductions to result from the project. Summary of Environmental Action Plan The company will be required to adhere to Azeri environmental, health and safety regulations and EU environmental standards. All relevant permits will need to be obtained during the modernization period. An Environmental Action Plan (EAP) has been developed following the due diligence and is currently being discussed. Around EUR 3 million has been earmarked for environmental improvements. The EAP will address inter alia air emission control, need for continuous air monitoring systems, asbestos management, house keeping, and the overall management of the environment, health and safety issues at the power plant and associated auxiliary operations. An environmental management system will be developed at the plant within the next 2 years. Disclosure of information and consultation In the context of the EBRD’s participation in the project, the Company will release locally a summary of relevant environmental issues associated with the project and summarise mitigation measures, action plans and other initiatives agreed Monitoring and reporting The Company will monitor the environmental impact of its operations in accordance with national law and regulations. The Bank will evaluate the project's compliance with the applicable environmental and social requirements during the lifetime of the project by reviewing annual environmental reports prepared for the project covering: (i) ongoing performance of project-specific environmental, health and safety activities as reflected in the results of periodic and quantitative sampling and measuring programmes, and (ii) the status of implementation of environmental mitigation and improvement measures. The Bank’s representatives will also conduct periodic site supervision visits when deemed appropriate. If required, the Bank will carry out monitoring visits to the plant. USAID is providing direct assistance to Azerenerji in preparing the Project feasibility study as well as the tender documents for the project.