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Biomass Energy for Heating and Hot Water Supply in Belarus
PROJECT BRIEF
- IDENTIFIERS:
Project NameBelarus: Biomass Energy for Heating and Hot Water Supply
UNDP/GEF PIMS Number1893
Duration48 months (October 2002 to September 2006)
GEF Implementing AgencyUnited Nations Development Programme (UNDP)
Executing AgencyCommittee on Energy Efficiency
Requesting CountryBelarus
EligibilityBelarus ratified the UNFCCC on 9 May 2000
GEF Focal AreaClimate Change
GEF Programme FrameworkOP#6: Promoting the adoption of renewable energy by removing barriers and reducing implementation costs
- SUMMARY
The proposed project will address the reduction of greenhouse gas (GHG) emissions in Belarus by increasing the capacity of the government to support biomass energy projects and the capacity of customers to finance and implement them. This project will focus on the following objectives: 1) strengthening institutional capacity to support biomass energy projects; 2) establishing a track record for investments in sustainable biomass energy projects, including both fuel supply and demand; 3) developing straightforward financial “starter” mechanisms in a challenging investment climate that will allow continued financing for biomass energy projects; and 4) overcoming negative perceptions of biomass energy and provide public and private investors with much-needed market information. First, the project will address lack of biomass project experience by facilitating the investment of USD 2.1 million by the Committee on Energy Efficiency and USD 3.4 million by the private and public sectors by 2006 in biomass energy projects. The project will also address financial barriers by establishing a revolving fund with initial capitalization of USD 1.54 million that will be based in part on the GEF contribution and dedicated to the support of biomass energy. Direct fossil fuel savings as a result of this programme represent approximately 1.08 million tonnes of CO2 reduction over a 15year period. Thus, for a GEF contribution of USD 3.129 million, the cost per tonne of CO2 reduced is USD 2.9. Estimates of the potential impact on wood-fuel use resulting from this project total an additional annual amount of 895,000 tonnes of CO2 by 2015.
- COSTS AND FINANCING (USD MILLION):(USD 1 = approx. 1750 Belarussian Roubles[1])
GEF financing:
Project3.129
PDF B0.245
Co-financing:
Committee on Energy Efficiency2.130
Local organisations (companies, municipalities) 1.780
In-kind contributions:
Committee on Energy Efficiency0.062
Local organisations1.590
Total excluding PDF8.691
TOTAL PROJECT COSTS8.936
- OPERATIONAL FOCAL POINT ENDORSEMENT (see Annex D):
Name:Mr. Vasily Podoliako, Title: First Deputy Minister
Organisation:Ministry of Natural Resources and Environmental Protection
Date:7 May 2002
- IMPLEMENTING AGENCY CONTACTS
Neil BuhneResident Representative, UNDP
Susan LegroUNDP/GEF Regional
TABLE OF CONTENTS
1PROJECT OVERVIEW
2BACKGROUND AND CONTEXT
3BARRIERS
4OBJECTIVES
4.1Overall objective
4.2Specific objectives
4.3GEF rationale......
5PROJECT COMPONENTS/ACTIVITIES AND EXPECTED RESULTS
5.1Component 1: Institutional Capacity Development
5.2Component 2: Technical Capacity Development
5.3Component 3: Financial Capacity Development
5.4Component 4: Information and Outreach to Increase Awareness
6RISKS AND SUSTAINABILITY
6.1External Risks
6.2Internal risks
6.3Sustainability
7STAKEHOLDER PARTICIPATION AND IMPLEMENTATION ARRANGEMENTS
7.1Stakeholder participation
7.2Implementation arrangements
8INCREMENTAL COSTS AND PROJECT FINANCING
8.1Incremental Costs
8.2Project Financing
9MONITORING AND EVALUATION
ANNEX A: Incremental cost
ANNEX B: Project planning matrix
ANNEX C1: STAP review
ANNEX C2: Response to STAP review
ANNEX D: Operational Focal Point Endorsement
ANNEX E: Overview of boiler houses between 0.5 and 10 MW
ANNEX F: Wood waste availability in Belarus
ANNEX G: Overview of relevant regulations
ANNEX H: Selection of project sites and evaluation criteria
ANNEX I: Investment project site fact sheets
ANNEX J: CO2 emission calculation
ANNEX K: Signed letters of intent
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Biomass Energy for Heating and Hot Water Supply in Belarus
1PROJECT OVERVIEW
There are over 10,000 boiler houses with capacities below 10MWth that provide district heating and process heat in the Republic of Belarus, where the majority of these (65%) burn heavy oil (mazut), diesel and coal, and the remainder burn natural gas. The combustion of these fossil fuels leads to high levels of greenhouse gas (GHG) emissions since boilers are frequently inefficient because of age (commonly 20 to 30 years old), and operate far below their design capacities (as a result of reduced industrial demand). Belarus depends heavily on imported fuels (over 85% of total energy consumption comes from foreign sources), so the energy sector also places a considerable financial burden on both the public and private sectors and slows economic growth. A comprehensive market and resource study, which was carried out within the framework of the PDF B project (BYE/00/G42), indicates that about 2,000 boilers sized between 0.5 and 10 MWth burning coal or heavy oil are suitable for conversion to wood fuel. On the supply-side, approximately 6 million cubic meters of wood-waste, which are currently unused, could be used as fuel, increasing to 6.7 and 8.3 million cubic meters in 2005 and 2015 respectively. The principal barriers to be addressed in achieving this potential, which are described in this project brief, were identified in the course of the PDF B project, and they will be tackled through the proposed project activities. In particular, the proposed activities will remove barriers related to perception and awareness, organisation, technical capacity, and financing.
The expected direct results of the successful implementation of the current proposal will facilitate the investment of USD 2.1 million by the Committee on Energy Efficiency and USD 3.4 million by the private and public sectors by 2006. A revolving fund (with initial capitalization of USD 1.54 million) dedicated to the support of biomass energy will be established, based on part of the GEF contribution. It is expected that by the end of 2006, the key elements will be in place for the sustained development of wood-fuel supply and the implementation of biomass-fuelled boilers in Belarus, able to respond to an increasing demand for biomass heating. Direct fossil fuel savings as a result of this programme represent approximately 1.08 million tonnes of CO2 reduction over a 15year period. Thus for a GEF contribution of USD 3.129 million, the cost per tonne reduced CO2 is USD 2.9. Based on realistic estimates of the potential impact on wood-fuel use resulting from this project (beyond existing plans of the Belarussian government) reductions could amount to an additional annual amount of 895,000 tonnes of CO2 by 2015 (from reductions representing a coal equivalent of 400,000 tonnes, with an estimated 330,000 coming from mazut, 20,000 from gas, and 50,000 from coal-fired boilers).
The GEF support is requested to cover the incremental costs of activities that facilitate the development of the biomass heating market through a barrier removal process whereby, by means of selected investment projects, biomass boilers of 38,000 tce/year would be installed during a 4-year period, and initiatives undertaken to overcome barriers in fuel supply through both project implementation and planning. Without the proposed GEF support the increase in uptake of wood energy is unlikely to be efficient, sustainable and cost effective, and it is unlikely to occur in the near future, resulting in an energy-intensive and costly pattern that will hinder ongoing economic reforms.
2BACKGROUND AND CONTEXT
Belarus, which borders Poland to the west, Russia to the east, Ukraine to the south, and Latvia and Lithuania to the north, has few traditional energy resources and is therefore highly dependent on imports. Natural resources are limited, and, apart from small deposits of natural gas, oil and peat, the most important natural resource are the forests, which cover 36% of the country. Winters are cold and summers are cool and moist, and there is a great need for heating during the winter months. The country is divided into 6 oblasts (districts), and one municipality (consisting of the capital Minsk).
Belarus was one of the Soviet Union's major industrial republics, specialised in the production of machinery and equipment and, although industry has declined significantly since independence from the USSR in 1991, heavy industry and manufacturing continue to make an important contribution to the economy. Belarus has retained close political and economic ties with Russia, and has signed a treaty on a two-state union that envisions greater political and economic integration. Belarus suffered greatly from the 1998 financial crisis in Russia but is recovering with a GDP growth of 6% in 2000. The industrial sector continued to be the source of this growth, at 10.3 in 1999 and 8 percent in 2000.
Investment climate
Inflation, although still the highest in Eastern Europe at approximately 100% in 2000, has decreased significantly from the 1999 level of 251%, and this trend appears to be continuing in 2001 and 2002. This barrier to (international) lending and investment is somewhat overshadowed by a number of other disincentives including a lack of protection of property rights and an unfavourable business environment. In spite of this there have been a number of very positive developments with, for example, the unification of official and market exchange rates in September 2000, and government commitments to improvements in conditions for entrepreneurs. Investments in all sectors, including the energy sector, have been hindered by low levels of privatisation, lack of a commercial financial infrastructure, the high cost of capital, and perceived risk on the part of investors.
Energy sector
Energy resources such as oil and gas are limited in Belarus, and the country is highly dependent on imports. In 1999, 88% of total energy consumption in Belarus came from foreign sources, most of this in the form of natural gas from Russia. These imports are purchased in part for hard currency, which gives the current government very strong economic and political incentives to reduce energy consumption.
Belarus’ oil consumption is more than four times its oil production, despite a 50% reduction in the country's oil consumption in the past eight years: since 1992, Belarus’ oil consumption has dropped dramatically, from 375,000 bbl/day to just 188,000 bbl/day in 2000. In spite of this, Belarus must import 75% of its oil, almost all of which comes from Russia. Belarus has two refineries (the Naftan and Mazyr refineries), but despite high oil prices that have increased Russian oil exports, Belarussian refineries received reduced supplies from Russia during much of 2000 because the Belarussian government lacked the funds to pay Russia for oil deliveries. There are plans to upgrade the two refineries significantly to improve oil-processing effectiveness, the quality of oil products, and export potential. This will mean a significant change in the fractions of heavy and light oils, which could have serious consequences for the availability of heavy (mazut) oil, frequently used in boilers.
Belarus is also heavily reliant on natural gas imports from Russia, and it produces less than one fiftieth of the natural gas that it consumes each year. Due in part to an inadequate payment recovery from consumers, the country has built up large arrears to Russian gas supplier Gazprom in spite of a favourable purchase price of approximately USD 30 per 1,000 cubic metres (in comparison, Russia charges Ukraine approximately USD 50 per 1,000 cubic meters and Lithuania USD 76 per 1,000 cubic meters of gas). Payment recovery has been changing for the better and Belarus has paid for 100% of gas purchased in 2001, partially in cash and partially with supplies of material resources (farm produce is exported to Russia under barter deals) to settle current payments and to cover existing arrears. The gas debt to Russia has been reduced from USD 244 million in early 2000 to approximately USD 200 million by the end of 2001.
One of the reasons that Russia charges Belarus lower prices for gas is that Russia receives reduced tariff rates for its gas that transits Belarus to customers in Western Europe. Belarus is also gaining importance as a major transit point for other Russian energy exports. Approximately 50% of Russia's net oil exports go through Belarus, and this fuel is not subject to export duties due to the Russian-Belarussian Union agreement. In addition, Belarus is hoping to benefit as a transit country for Russian electricity being exported to Europe.
Belarus has a power-generating capacity of 7,700 MW. Fossil fuels account for 99.9% of the total generation of 25.7 TWh (2000) of electricity, with natural gas-fired power plants accounting for 90%, oil-fired plants accounting for 10%, and hydropower plants just 0.1%. Approximately 25% of the electricity demand is met through the import of electricity from Lithuania and Russia, another source of hard-currency expenses for the government.
Heat and Hot Water Supply
Heating and hot water is predominantly supplied through two types of district heating systems: 1) large combined heat and power (CHP) systems and heat-only boilers operated by the state energy company “Belenergo”, which has 23 CHP plants, and 35 regional boiler houses with capacities from 80MW to 700MW; and 2) smaller, heat-only boilers operated by the Ministry of Communal Services or other Ministries, state industrial enterprises, and private companies. The Belenergo CHP plants and boilers are predominantly fuelled by natural gas (90%). The Ministry of Communal Services owns about 1,700 heat-only boiler-houses with an average installed capacity of 5MW. Of these, 50% are gas-fired, 40% run on heavy oil, 6% on coal, and the remainder on peat and wood. Individual municipalities operate the boilers of the Ministry (with the Ministry of Communal Services providing political and administrative services), and financial resources come via municipal budgets. In addition to the boilers of the Ministry of Communal Services, there are about 10,000 boiler houses below 10MW heat capacity under the ownership of other Ministries, state and private industrial enterprises, as well as schools, hospitals and sanatoriums, and include approximately:
- 5,300 boiler houses with an installed capacity less than 0.5 MW,
- 3,350 boiler houses with an installed capacity from 0.5 to 3 MW,
- 740 boiler houses with an installed capacity from 3 MW to 5 MW, and
- 580 boiler houses with an installed capacity from 5 to 10 MW.
These boiler houses operate on natural gas (35%), heavy oil and diesel oil (30%), and coal, peat and wood (35%), are typically 20 to 30 years old, are operated below their design capacity (meaning low efficiencies), and rely on boilers made from cast iron, which are prone to starting problems. Boilers operated by both state and private industrial enterprises, in addition to providing heat for their own needs, usually provided heat and hot water to surrounding apartment buildings or the ministry of communal services in cities and villages.
Heat tariffs vary considerably from one city to another, as does the degree of cross-subsidy from industry and budget entities (those that receive money from state budgets) to residential consumers. With a few exceptions, industry and government customers subsidise residential consumers to meet the production cost of the respective regional/district utility or boiler to which they are all connected. Heat tariffs declined in Belarus following the decline of the purchase price for Russian natural gas during the last few years. At present, the average cross-subsidy for heat consumption is 2.4 USD/GJ (10 USD/Gcal). Non-payment for electricity and heat from end-consumers amounted to USD 110 million in 2000. This reduces the incentive for new investments in heat and hot water production since there is, in some areas, little hope of recovering the costs.
Outside the larger cities it is not uncommon that during summer months hot water is provided only on weekends. The reasons for this include fuel shortages (meaning that fuel, when available, needs to be stored for the winter months when supplies are scarce), and high fuel costs. Because of the high and unsustainable level of cross subsidies there is a strong incentive at the government level to find lower cost fuels, and consequently fuel for a number of manually stoked coal and peat-fired boilers have been substituted by wood fuel. Unfortunately, this practice has led most often to low combustion efficiencies because of incorrect air-fuel ratios. The Ministry of Communal Services has converted 120 boiler houses in this way, and is using an increasing amount of wood for fuel (2.7% of their energy mix was from wood in 1999, 3.5% in 2000, and 4.0% in 2001, according to official statistics). It should be stressed that, although no detailed analysis has been made, this fuel substitution approach can in no way be considered sustainable from a climate change perspective since low efficiency wood combustion releases high levels of products of incomplete combustion (more complex hydrocarbons such as methane) with high global warming factors. Local experts claim typical efficiencies in the range of 55 to 60% (as opposed to modern biomass boilers which typically operate in the 80 to 85 % efficiency range).
With respect to future fuel availability, there is growing pressure in the supply of heavy oil for mazut boilers (mazut being the heavy fraction resulting from the refining of crude oil) and this is likely to worsen if the proposed upgrade of the oil refineries goes ahead since the proportion of heavy fraction produced by the refineries is then expected to decrease from the current level of 40% to a level of 20%. The supply of natural gas and coal depends on the ability to pay, since both fuels are imported.
A comprehensive market study carried out within the framework of the PDF B project resulted in a database of 5,000 boiler houses in the 0.5 to 10 MW range. An analysis of the database shows that the Ministry of Communal Services owns approximately 27% of boiler houses in this size range, with 20% in the agricultural sector, 21% in the social sector (education and health), and 32% in industry (see Annex E for additional details).
Biomass Resources
In the Soviet period, Belarus was an important centre for the processing of wood, most of which came from Russia. Following independence, Belarus has become more self-sufficient, and now makes use of its own forests for the wood-processing sector. Forests cover approximately 36% of Belarus, and there is an estimated annual increase in biomass resources of 25 million compressed cubic meters per year. As a result of the Chernobyl catastrophe in 1986, economic activity on 36,000 hectares of forests is banned due to the high degree of contamination, but this represents less than 1% of the total forest cover[2]. The planned volume of uncontaminated wood cut is 10.8 million cubic meters for 2001 made up of 5.8 million cubic metres as timber for export or processing, and 5million cubic meters as firewood in logs. A detailed resource analysis of wood-waste availability, carried out under the PDF B, shows the technical potential as 6.1 million cubic meters in 2001 (see Annex F for details). This wood-waste comes predominantly from harvesting, forest management, and, to a much lesser degree, from wood processing.