PROJECT INFORMATION DOCUMENT (PID) - World Bank



PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB2286

|Project Name |Electricity Generation Rehabilitation and Restructuring Project |

|Region |EUROPE AND CENTRAL ASIA |

|Sector |Power (100%) |

|Project ID |P085561 |

|Borrower(s) |ELECTRIK URETIM AS (EUAS) |

|Implementing Agency | |

| |Elektrik Uretim AS (EUAS) |

| |Inonu Bulvari. No: 27 |

| |KLMN Blok, Bahcelievler |

| |Turkey |

| |06490 |

| |Tel: 90-312-212-14-23 Fax: 90-312-212-53-03 |

| |muzaffar.basaran@.tr |

|Environment Category |[X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) |

|Date PID Prepared |March 28, 2006 |

|Date of Appraisal Authorization |March 27, 2006 |

|Date of Board Approval |June 1, 2006 |

1. Country and Sector Background

Country Economic Overview

▪ The Turkish economy has rebounded from the serious 2001 crisis the consequences of which were very serious. By the end of 2001, the currency had devalued by 50 percent, nominal interest rates were about 100 percent, and the banking system had virtually collapsed.

▪ GNP growth has been strong since 2001 at 8 percent in 2002, 6 percent in 2003, 10 percent in 2004 and about 5.5% last year. Inflation is under control reaching single digits (7.7%) in 2005, the lowest in Turkey for 35 years.

▪ Several factors contributed to the improved macroeconomic performance, key amongst them being: strong fiscal discipline which has allowed the maintenance of a large primary surplus on the order of 6.5 percent of GNP; on-going structural reform; and political stability since 2002.

▪ The EU’s decision to open accession negotiations with Turkey in October 2005 has been an important signal to financial markets and has created a firm anchor for the country’s development and structural reforms in the years ahead.

Electricity Sector Reform

▪ The Government has embarked upon a comprehensive reform and restructuring program of the electricity sector to create a liberalized, efficient and economic sector. This was initiated by the Electricity Market Law (Law No. 4628) promulgated in February 2001. The principles and goals of the reform program defined by this Law are substantially in line with EC Directives (1996/92/EC and 2003/54/EC) concerning rules for the internal market for electricity.

▪ Turkey is a signatory of the Athens Memoranda of 2002 and 2003 that the EC initiated to develop the regional electricity market in South East Europe and eventually integrate it with the internal electricity market of the European Union. The 2002 Athens Memorandum initiated the regional market development process commonly referred to as the “Athens process”. A more detailed version of the memorandum was signed in 2003, which is referred to as the Athens Memorandum 2003, and supersedes the 2002 document. While other regional members signed the Treaty on October 25, 2005, Turkey did not, owing to reservations on some of the Treaty provisions. With the EU decision of October 3, 2005 to begin negotiations for full accession, reservations on the Treaty now become intertwined with the negotiations on the Energy Chapter of the Acquis Communautaire. Turkey however remains committed to, and continues to implement the provisions of the Treaty and the 2003 Athens Memorandum.

▪ Functional and corporate restructuring of the sector – The electricity sector has been restructured into a generating corporation EUAS, a trading corporation TETAS, a transmission corporation TEIAS, a distribution corporation TEDAS and regional distribution companies (DISCOs). The regional distribution companies are being prepared for privatization.

▪ Regulatory Authority – Turkey has set up an independent regulatory authority, the Energy Market Regulatory Authority (EMRA) with jurisdiction over electricity, gas and petroleum. EMRA has powers over licensing, tariff setting and customer service issues.

▪ Retail Competition in Electricity – Consumers whose annual consumption exceeds 6.0 GWh can choose their own supplier – this represents more than 30% of the total Turkish electricity market.

▪ Competitive Market Structure – Market simulations are in progress to introduce a competitive bilateral contract market with a balancing and settlement system. TEIAS, the transmission company is the independent system operator, and will also be the market operator. The market is expected to provide the necessary price signals for potential new generation.

The key medium term issues facing the Turkish electricity sector include:

▪ Ensuring supply security – Electricity demand has been growing at about 6 percent per annum between 2002 and 2005 and the Government anticipates that it will accelerate over the next decade closer to the long term average of about 8% (The Government is also considering a low growth case where demand growth remains about 6%). In any case, capacity increases on the order of 1,500-2,000 MW per annum are forecast to be required from around 2009-2010 onwards. The issue of concern is that there although licenses have been issued for about 6,000 MW of new capacity (of which 4,000 MW is for small hydro and wind) presently little new construction has been started. These problems are largely linked to the on-going market implementation which has not yet led to the formation of creditworthy private distributors who can contract for new capacity and/or electricity offtake. In order to strengthen supply security, the implementation of the market and privatization of distribution are vital. The Bank team is working with the Government on a policy note on addressing supply security in parallel – this study focuses on the near term solutions as well as more systemic solutions for the medium term.

▪ Accumulated arrears in the electricity utilities – Operating revenues at all the publicly-owned electricity and gas sector companies in Turkey are inadequate to meet their longer term level of operating costs and expenditures. The problem is mainly in the distribution business managed by TEDAS. As of 2004, the theft and loss percentage is 18.5% of purchases by TEDAS. Due to these problems there is a 25-27% shortfall in payments for purchased electricity by TEDAS which in turn cascades as revenue shortfalls to all the upstream electricity and gas businesses. The Government is studying various alternatives to deal with the problem of accumulated arrears.

▪ Transition to compliance with European internal market and environmental standards – Turkey is committed to the principles of the Athens memorandum, even though it did not sign the Treaty in October 2005. Although Turkey has begun implementing fundamental structural reforms in its power sector, some of which are more advanced than required from the EU’s perspective, there are several areas, such as the timeframe for complete retail market opening that Turkey has reservations on. Turkey has already allowed significant retail market opening with eligibility for consumers whose annual consumption exceeds 6.0 GWh (this is more than 30% of the total Turkish market). Turkey is perhaps only second to Romania in the degree of market opening amongst all SEE countries. The results have been positive from the point of view of attracting new capacity and ensuring better supply quality for these consumers. However, in order to free up all the existing consumers, several fundamental changes are required in the sector, most critical among these being the improvement in distribution system losses and payment discipline. The Government is currently preparing for the privatization of distribution, which is seen as an important solution for these improvements. Privatization however, has been delayed for several reasons, chief among them being the delays in creation of the electricity market, and the finalization of a privatization mechanism that is consistent with the market structure and operation, as well as legally permissible.

2. Objectives

The development objective of the project is to improve supply security during the reform transition and restructure the state-owned generation business into corporatized entities.

Achievement of these objectives will be monitored through the following indicators:

a) Progress in rehabilitation of Afsin-Elbistan A Power Plant;

b) Progress in creation of generation companies (Gencos) from EUAS and finalization of transitional contracts with distribution companies; and

c) Improvement in dust emission levels.

3. Rationale for Bank Involvement

The proposed Energy Liberalization Project is an important complement and extension of the World Bank’s program of lending and advisory support to the Turkish energy sector. This Project will address issues related to:

▪ Achieving security of supply over the medium-term; and

▪ Supporting the implementation of reforms in the electricity generation sector.

Achieving security of supply over the medium term – As discussed above, Turkey is likely to face growing shortages of energy in the 2009-2011 period depending on the pace of growth in demand. In the absence of large scale private investment in the near term, the rehabilitation of existing generation capacity by EUAS will be the fastest and the most cost-effective way of providing available capacity and improving reliability. As our economic and financial analyses demonstrate, the rehabilitation of Afsin-Elbistan A power plant is the least cost alternative for incremental generation and can be completed in about 2.5-3 years, thus being the quickest source of additional energy. This rehabilitation would give the Government some additional time to analyze its options for bringing in new capacity over the medium term. Through engaging in this rehabilitation project therefore, the Bank would support one of the most critical investments in the sector at this stage.

The Bank is uniquely placed to support the implementation of the reform program in the generation sector – The Bank has been advising the Government on its reform program over the past years, and will continue to do so. In addition, the project can focus on several aspects of financial, accounting, operational and organizational restructuring which will have to be completed to establish the generation companies (Gencos) and prepare them for privatization. The Bank will also provide assistance to explore options for bringing in additional generation consistent with the evolving competitive market over the medium term. Given the Bank’s institutional knowledge, and given the close relationship that the Bank has with the Turkey energy sector, the Bank would be ideally placed to provide support to the reform program through the project.

The project will help in improving environmental compliance – The rehabilitation will include investments which will substantially reduce dust emissions, a significant problem in the area. In addition, through its dialog with the Government, the Bank has helped accelerate a review of existing thermal plants, which has led to the Government to decide to implement flue gas desulphurization units (FGDs) after a reasonable transition period. These investments are consistent with the EU requirements.

4. Description

The Project has two components:

Component 1 – Afsin-Elbistan-A Rehabilitation

The main component of this project is the rehabilitation of Afsin-Elbistan A Power Plant. The Afsin Elbistan generation complex which includes Afsin Elbistan A and the newly commissioned Afsin Elbistan B, is the largest thermal generation complex in Turkey. Afsin Elbistan A has a capacity of 1,355 MW (3x340 MW + 1 x335 MW) and its four units were commissioned between 1984 and 1987. Performance of the Afsin Elbistan A units in terms of efficiency and availability has deteriorated sharply because of inadequate maintenance. Current available capacity is about 85% of its original installed name-plate capacity.

This component will include:

(a) Repair, replacement and upgrade of the power plant systems to restore reliability, availability, power output and improve plant efficiency.

(b) Implementation of environmental protection systems and monitoring – new electrostatic precipitators (ESPs) will be installed to reduce and bring dust and particulate emissions within the Turkish Emission limits. Power plant dust emission from Afsin Elbistan A is the most significant environmental problem from the complex. In addition, continuous environmental monitoring and data logging equipment will be provided and implemented. Environmental monitoring practices will be revised and training will be provided.

(c) Improvements in plant operation and maintenance practices that are critical to keep the plant in good operating condition with high availability after rehabilitation. These will include procedures and systems for: equipment monitoring; historical data analysis for predictive maintenance; and maintenance scheduling. In addition, staff training programs to enhance operational and maintenance practices will be implemented.

(d) Implementation of control systems to meet UCTE standards for primary and secondary frequency control – these systems would allow the power plant to meet the standards established by the Union for the Coordination of Transmission of Electricity in Europe (UCTE). Meeting these standards would help Turkey in being certified to operate synchronously with the South East European Electricity network.

This component will also include support services for project implementation. This will be in addition to the project management services that will be provided by RWE International.

Component 2 – Support for Financial and Operational Restructuring of the Generation Business

This component will focus on supporting EUAS in restructuring its generation business into financially and operationally viable portfolio generation companies and a hydro corporation. This work will create the basis for undertaking the future privatization of these generation entities. The PHRD grant for the preparation of this Project has been utilized to begin this work. Consultants have analyzed different portfolio configurations based on criteria such as fuel mix, load following capabilities and financial viability, and have also prepared draft transition contracts between GENCOs and TETAS/ distribution companies. Based on this work, the Government has decided on 6 portfolio companies, and these have been earmarked as separate units within EUAS, in addition to the residual EUAS Hydro. The Project proposes to assist in completing this work, focusing on aspects of financial and operational restructuring of the companies to create them as viable business units.

The Project will also provide support, if necessary, to EUAS and the Government to implement mechanisms to address generation supply security needs in the period beyond 2008. The initial work on assessing options and strategies is being funded through separate grant funds.

5. Financing

|Source: |(Euro million) |

|BORROWER |100 |

|INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT |280 |

| Total |380 |

6. Implementation

During project preparation the Japanese Government provided a PHRD grant which was used for the initial feasibility study and for preparation of the EIA for the project. The Government of Japan has also provided funds for the construction of Afsin-Elbistan B power plant, adjacent to Afsin-Elbistan A. This former plant shares some of the same infrastructure as Afsin Elbistan A. In addition, PPIAF grants and the Spanish Trust Fund are being used for supporting the overall reform program, which also includes support for the initial work on restructuring of generation, and preparation of transition contracts between the generation and trading businesses.

The project will be implemented by EUAS and a special Project Management Team (PMT) has been established to oversee the implementation. Further, for Component 2, there is likely to be significant oversight from the Ministry of Energy and Natural Resources. The rehabilitation will be carried out by one contractor who will be overseen by the PMT aided by EUAS’ consultants, RWE, who will report to the PMT and EUAS top management. In addition, there will be considerable focus given to the monitoring of the environmental impacts of the project and the plant in general, either as part of the implementation consultant contract, or as a separate contract. Because of the importance of this project to EUAS and to Turkey, EUAS management will follow its progress closely.

7. Sustainability

The project is considered sustainable for the following reasons:

(a) Long-Term Competitiveness – The rehabilitation aims to extend the plant’s economic life by at least 20 years and will result in Afsin-Elbistan A being one of the least cost sources of base load power in Turkey. Apart from being an important facility to provide incremental capacity and energy to mitigate anticipated supply shortfalls in the next few years, this plant will be preferentially dispatched over the long-term, since it will have low incremental costs and therefore will rank very high in the merit order.

(b) Experienced Project Manager to Supervise Implementation – During implementation, EUAS will be assisted by RWE in supervision of the works. RWE is amongst the most experienced consulting engineers on lignite plant maintenance and rehabilitation and this is expected to speed decision making on technical issues and choices that arise during the rehabilitation process, thereby reducing delays and maintain the project on schedule.

(c) Focus on O&M Practice Improvement – The project also includes in its scope, improvement in O&M practices in the plant, which will ensure that the plant is well-maintained after rehabilitation.

(d) Adequacy of Fuel Reserves – The lignite reserves at Afsin-Elbistan are approximately 2.6 billion tons and both the Afsin-Elbistan A and B power plants together, operating at full capacity, are projected to use around 37 million tons per year. Thus, the reserves at Afsin-Elbistan will be adequate for the two existing plants and also accommodate further capacity expansion.

8. Lessons Learned from Past Operations in the Country/Sector

Project design and preparation have benefited from the extensive experience that the Bank has in developing large infrastructure investment operations, and specifically in rehabilitation of generating plants. These include:

a) Comprehensive feasibility and technical review The scope of the rehabilitation component has been developed based on a comprehensive feasibility study and technical review. The initial pre-feasibility study was done by Chubu Electric from Japan in 2004. This study established the broad scope of the rehabilitation needed based on a technical and economic assessment. This work clearly established the economic benefits of the rehabilitation. The Bank’s power engineers reviewed the pre-feasibility report and assisted EUAS in defining the terms of reference for the detailed engineering study. The detailed engineering study was undertaken by RWE Consulting Engineers, Germany, an established engineering firm and an affiliate of a large electric utility which operates a number of lignite fired power plants and mines, and also has significant experience in lignite plant rehabilitation. The detailed engineering study provided a full assessment of the power plant systems which require rehabilitation. The detailed feasibility study was reviewed by the Bank’s power engineering team. This review provided important inputs to the decisions on what is required and what is optional, and enabled EUAS to finalize the scope and cost estimates for rehabilitation.

b) Focus on addressing environmental issues systemically The EIA for this project analyzed the current and forecast (modeled) performance of the plant with regard to sulfur dioxide and dust emissions, and their impact on ambient air quality, and the requirement for an FGD. Largely as a result of this analysis, the Government has carried out a review of existing thermal power plants and evaluated the alternative of installing FGDs on them. The Government has processed a regulation which will provide each thermal plant with a transition period for implementing the FGD. As a result, Afsin A will have a transition of 5 years for installing the FGD (This is considered as the next phase of the project). The rehabilitation of the plant will improve the plant’s environmental compliance especially in the area of dust emission, which has been identified, during public consultations, as the most significant environmental problem from the power station in the vicinity.

c) Flexibility in policy dialogue and recognition of macroeconomic priorities The project has chosen flexibility in carrying out the policy dialogue on reforms in the Turkish electricity sector, as opposed to the use of hard policy conditionality within the loan. Ongoing loans carry conditionality, and in recognition of the fact that Turkey, as an EU candidate country, is in the midst of negotiating the European Acquis on Energy, separate Bank conditionality in this loan was not considered critical. The project is therefore designed to support the Bank’s overall dialogue on the reform program which is consistent with the EU Acquis and being carried out in parallel (supported by ongoing loans and grants).

d) Adaptation of procurement arrangements to suit specific circumstances EUAS and the Bank team evaluated the option of carrying out the rehabilitation using a number of procurement packages, covering respectively, the firing system, piping, balance of plant mechanical, balance of plant electrical, electrostatic precipitator, control and instrumentation, ash and coal handling, civil works, and plant chemistry. This option was deemed unsuitable and EUAS and the Bank team chose to adopt a single supply and installation contract for the entire rehabilitation (except the turbines which are being rehabilitated separately by the original manufacturer of the turbines under a continuing service agreement), because this gives better control over implementation progress, and it reduces problems due to weaknesses, or delays, in integration across different packages.

9. Safeguard Policies (including public consultation)

During public consultations as part of the EIA process, dust emissions were cited by the local populace as the most significant environmental impact in the vicinity of the plant. The project therefore, includes rehabilitation of the electrostatic precipitators (ESPs) which will reduce dust emissions from current levels of 400-6000 mg/Nm3 to 100 mg/Nm3 in accordance with Turkish regulations. The Turkish standard is the same as the relevant EU standard as well as the World Bank guidelines for dust emission for a plant with the size and fuel type such as that of Afsin Elbistan A – the ESPs are however being designed to reach 50 mg/Nm3, more conservative than EU and World Bank standards on dust emission.

|Safeguard Policies Triggered by the Project |Yes |No |

|Environmental Assessment (OP/BP/GP 4.01) |[X] |[ ] |

|Natural Habitats (OP/BP 4.04) |[ ] |[X] |

|Pest Management (OP 4.09) |[ ] |[X] |

|Cultural Property (OPN 11.03, being revised as OP 4.11) |[ ] |[X] |

|Involuntary Resettlement (OP/BP 4.12) |[ ] |[X] |

|Indigenous Peoples (OD 4.20, being revised as OP 4.10) |[ ] |[X] |

|Forests (OP/BP 4.36) |[ ] |[X] |

|Safety of Dams (OP/BP 4.37) |[ ] |[X] |

|Projects in Disputed Areas (OP/BP/GP 7.60)* |[ ] |[X] |

|Projects on International Waterways (OP/BP/GP 7.50) |[ ] |[X] |

Project construction activities will present minor potential environmental issues associated with the movement of men, equipment and materials. Typical issues are dust, exhaust gases from combustion engines, noise, disposal of materials (hazardous and non-hazardous), etc. All of these issues are of limited duration, confined to the plant boundaries, and/or are readily managed with standard good engineering and construction practices. During operation, environmental issues are largely beneficial, particularly the benefits accrued with more efficient particulate removal. When the FGD system is installed, disposal of gypsum may be an issue if markets in the construction materials sector do not develop to the extent of utilizing all the generated waste. Depending on the FGD technology selected, water consumption and wastewater discharge are potential environmental issues requiring effective mitigation. However, the gypsum is non-hazardous and in fact, its alkaline matrix will effectively inhibit mobilization of most trace metals preventing their migration into the environment.

10. List of Factual Technical Documents

Final Feasibility Study – RWE

Environmental Impact Assessment Report – Cinar and KEMA

11. Contact point

Contact: Ranjit J. Lamech

Title: Task Team Leader

Tel: (202) 473-3282

Fax: (202) 477-1386

Email: Rlamech@

12. For more information contact:

The InfoShop

The World Bank

1818 H Street, NW

Washington, D.C. 20433

Telephone: (202) 458-4500

Fax: (202) 522-1500

Email: pic@

Web:

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

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