RusHydro (HydroOGK) - Modernization Loan

complete

Financing of the refurbishment of several units of the 10,000 MW Volga-Kama hydro cascade and development of renewable sources of energy. The proposed project is fully consistent with the Bank’s Strategy for the Russian Federation BDS/RF/00-1 (Final). “In the context of its existing loan to RAO UES, the EBRD has signed a memorandum of understanding with the Russian authorities to work together towards reform of the electricity sector in a way which promotes transparency and competition. The EBRD will continue to proactively promote reform of this sector, particularly through its membership on the restructuring committee”. The Project is also in line with the Bank’s Energy Operations Policy in promoting renewable sources of energy. In particular, the policy directs the Bank to engage in “policy dialogue with local authorities to develop suitable market-oriented regulation and incentives in support of renewable energies”. The proposed loan to Hydro OGK will be a logical continuation of Bank’s involvement in sector restructuring and market establishment, as well as efficiency improvement of the existing generation facilities, in particular, the hydro portfolio. The Federal Hydroelectric Power Generation Company (OAO Hydro OGK) was established in December 2004 as 100% subsidiary of RAO UES, one of the Bank’s key clients, with the aim to own and operate the hydro generation facilities of Russia. At the completion of the consolidation process, the company will own and operate 23 large scale hydro facilities and will be the largest power generator in Russia responsible for supplying 15-20% of the power market in Russia. Senior Debt Facility of up to RUB 6.3 bln (190 million Euro equivalent) (to be syndicated for a minimum of 50%) to finance infrastructure upgrade/refurbishment. RUB 11.4 billion. Project summary Hydro OGK is a 100% owned subsidiary of RAO UES of Russia and the Company charged with the ownership and operation of hydro power stations in the Russian Federation. HydroOGK currently operates hydropower plants located throughout Russia with 21,350 MW of installed capacity that account for around 10% of the installed capacity of the Russian Federation. Upon completion of the company’s consolidation, HydroOGK will operate hydropower plants with 27,273 MW of installed capacity. The project is to finance the upgrade/refurbishment of existing infrastructure owned by the company, mainly the Volga-Kama cascade. This includes nine hydro power plants of the Volga-Kama cascade, many of which date from the middle of last century and are in need of repair and upgrade. The planned project will include installation of new transformers, turbines, new pressurised oil filled cable power lines as well as security and automated control systems. The Bank will provide finance for part of an overall modernization programme being undertaken by Hydro OGK at existing facilities in Russian Federation. The Bank’s financing of the proposed projects will not involve any change of the hydro regimes or construction of new hydrological structures (such as dams) or new generating assets. 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 hydro plants is focussing mainly on rehabilitating and modernizing existing facilities, which are associated with a number of environmental issues, which can be readily identified, assessed and mitigated as part of an Environmental Analysis. As part of the environmental due diligence an Environmental Audit and Analysis was undertaken by an independent consultant. A separate technical and safety review was also undertaken. Key environmental issues and mitigation The key environmental issues for existing hydrogeneration plants are normally associated with the impact such plants can have on local hydro regimes, fish management as well as risk of oil leakage from existing machines. The impacts are greatest during any development and change of operational regime. The environmental due diligence confirmed that the project is structured in accordance with best international practice and will enable the facilities to attain both EU and Russian Federation environmental and safety standards. The Company has spent considerable effort in maintaining its existing structures and day-to-day environmental management. The ongoing investment programme will enable the facilities to be further upgraded, ensuring that they continue to meet best international practice as well as Russian Federation environmental and safety standards. The Bank will monitor the project through among others the procurement programme, which will enable the selection of appropriate technology and equipment, which meets both EU and Russian standards. A corporate environmental, health and safety review was undertaken of the Hydro OGK as part of the due diligence. This included review of corporate EHS structure, operational and development control and management. The company is implementing an environmental management system based on policy requirements from RAO UES of Russia and is implementing new procedures and guidance for the sector. The Bank will work with the company in developing new guidance as appropriate. Environmental opportunities The proposed project is expected to bring significant environmental and energy efficiency benefits, as new state-of-the-art energy efficient generating units will replace old inefficient units and therefore provide more reliable and efficient electricity generation utilizing existing infrastructure. The increased power generation capacity of the existing HPPs creates an opportunity to lower carbon emissions per unit of electricity generated on macro level by increasing the share of renewable energy in the grid and by reducing the need for additional fossil-fuel based power generation capacity or even by substituting some of the existing capacity. The project will therefore yield possible carbon reduction opportunities. The Project will also reduce oil leakage from existing units. Summary of Environmental Action Plan The Company will be required to adhere to Russian Federation environmental, health and safety regulations and EU environmental standards. All relevant permits will need to be obtained during the modernization process. An Environmental Action Plan (EAP) has been developed following the due diligence and is being agreed with the Company. The EAP will address, inter alia, the overall management of the environment, health and safety issues at the corporate level as well as individual sites. 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 individual plants and will meet with the Company’s EHS management on an annual basis. Under this proposed financing, the Bank will also provide TC support for the development of necessary regulatory and legal infrastructure for renewable energy. The primary focus is currently on the wind as most promising in the Russian geographical and climate context.