PROJECT BRIEF
1. Identifiers
Project Number
Project NamePoland - Geothermal and Environment Project
Duration9 years
Implementing AgencyThe World Bank
Executing AgencyGeotermia Podhalanska
Requesting CountryPoland
EligibilityRatified UNFCCC on July 28, 1994
GEF Focal AreaClimate Change
GEF Programming FrameworkShort-term Response
2. Summary
With the objective of reducing greenhouse gases, the proposed Project would assist the Government in exploiting developing the countries geothermal resources to establish in the Podhale region of Southern Poland a new district heating system with supplementary gas-fired peaking capacity. Specifically, the proposed Project provides for: (a) drilling five geothermal wells including; two for production and three for re-injection, in addition to the two doublets already in place; (b) installing a new base-load district heating plant with a capacity of 60 to 70 MW for heat generation; (c) installing two new natural gas-fired peaking plants at Zakopane (42 MWt) and Nowy Targ (12 MWt); and (d) developing the district heating net work (about 100 km), including the geothermal circuit, transmissions and distribution pipelines, and consumer connections.
3. Costs And Financing (Million Us$)
GEF:- Project:US$ 5.40 million
Subtotal GEF:US$ 5.40 million
Co-financing:
Geotermia Pohalanska US$ 7.50 million
National Environmental FundUS$ 3.20 million
Internal Cash GenerationUS$ 1.90 million
EkofundUS$ 1.30 million
Local Loan FundsUS$ 1.90 million
IBRDUS$ 44.00 million
European Union
Phare ProgrameUS$ 8.00 million
Phare 2 (under discussion)US$ 10.00 million
Danish Ministry of Environment ProtectionUS$ 1.50 million
Total US$ 84.70 million
4. Associated Financing(US$ million): n/a
5. Operational Focal Point Endorsement:
Name:Wojciech PonkiewskTitle:GEF Political Focal Point
Organization:Ministry of Foreign Affairs Of Date: March 8, 1999
the Republic of Poland
6. IA Contact:Mahesh Sharma, Sr. Regional Coordinator,
Eastern Europe and Central Asia, Tel: (202) 473-2296
Fax: (202) 522-3256, E-Mail:
1
A:Project Development Objective
The primary development objective of the Project is to reduce air pollution caused by local coal-fired boilers supplying heat to the area through the increased utilization of clean energy resources such as geothermal heat and natural gas in the Podhale region of Southern Poland. The associated global environmental objective is to reduce CO2 emissions in order to directly or indirectly help Poland meet its international obligations under UNFCCC. In addition to these environmental objectives, an important economic development objective of the Project is to promote the role of the private sector through demonstrating the mutual benefits from a joint district heating development project involving the private sector, multiple international agencies, and the municipalities. The project expects to deliver heat at a competitive cost with conventional sources when sufficient funding is obtained to fully monetize the environmental benefits.
Replacing polluting fuels will provide clean air for the inhabitants, increase the efficiency of the local heating systems and provide greater comfort with less effort. As a result, the Podhale area would become more attractive for tourism including the proposed Winter Olympics. In addition, significant reductions in respiratory disease are anticipated from the decreases in emissions of particulates from coal and coke combustion. Finally, the proposed improvements will also reduce the environmental damage to the biota in the neighboring national parks and protected areas. These benefits plus any cost savings realized constitute the local benefits from the project.
The reduction of greenhouse gas (GHG) emissions such as CO2 provides an additional motive for the Government of Poland to pursue the Project. It is expected that, for the whole area to be covered by the Project, over a period of 20 years of full operation (2005 – 2024) and a ramp-up period (1995 – 2004), CO2-emissions can be reduced by 2.5 million tons. These reductions of CO2 could help Poland meet its international obligations under the UNFCCC.
Finally, the Project will promote the development of private, or mixed (private and municipally owned), utility companies that operate on the basis of non-subsidized energy prices. This objective is supported by the Government of Poland and by the Bank as it conforms to GOP policies promoting the development of independent and privately-owned utility companies to serve public needs.
With geothermal energy, the emissions of particulate matter can be reduced by 18.3 thousand tons and sulfur dioxide by 34.5 thousand tons over the project life (1995-2024). The winter time ambient concentrations of total suspended particulate matter in Zakopane can be cut by as much as 2/3 from the present level of approximately 100 ug/m3.
B:Strategic Context
1.Sector-related Country Assistance Strategy (CAS) goal supported by the project:
The CAS for Poland was published in document number 16484-POL. The latest formal discussion of the CAS was in May 1, 1997.
Achieving environmental sustainability is a major development goal in the current CAS, including the issue of reducing emissions from many small, dispersed sources such as domestic heating (CAS, para 46). The environmental goals addressed by the Project are closely linked to the EU accession standards, which are also set as an important development benchmark in the CAS. It is proposed that the Bank, in collaboration with EU-PHARE, assist Poland in planning investments that will maximize progress toward the environmental goals (set by national laws, EU directives and international agreements), and work on strengthening the capacity of municipalities to finance investments needed to carry out their environmental responsibilities (para 48). This seminal Project offers a rich blend of environmental and economic outputs and a co-financing structure that contributes directly to the CAS goals for Poland.
The GEF goal of promoting low carbon technologies meshes with Poland’s commitment under UNFCCC to reduce CO2 emissions by 6.0% from 1990 levels by 2010. Poland ratified the UNFCCC on July 28, 1994. The GEF grant to this project is a short-term response measure which means that the carbon reductions achieved will be low cost and low risk and that the National Communication identifies carbon mitigation as a priority.
The Podhale geothermal Project also has a link to the CAS objective of sustaining private sector growth. Promotion of growth in needed infrastructure through expanded private sector investment is identified as a CAS objective in Para 37. A geothermal project is indicated in the proposed lending program for Poland as one of the key actions required on the part of the Bank to promote crucial reforms aimed at improving the environment for private investment and sustainable growth (Table 1, “Poland - Country Assistance Strategy Matrix, 1998 - 2000”). While the initial investments in the project have been dominated by public funding, Geotermia Podhalanska intends to use margins for repurchase of the stock from the public owners – especially the National Fund. Over time Geotermia is committed to increased private ownership.
2.Main sector issues and Government strategy:
The Government of Poland has made much progress in Achieving Environmental Sustainability, especially in establishing short- and medium-term priorities; in preparing for the requirements of the EU environmental directives; in establishing environmental standards and a system of fining polluters; and in funding environmental projects. The Bank supports the medium-term priorities that are reinforced by the EU accession standards. These include support in planning investments that maximize progress toward meeting environmental goals. However, the energy sector in the project area is still dominated by use of small, inefficient coal and coke boilers for heating of individual households. The resulting air pollution during the heating season has harmful effects on human health and probably constrains tourism development, the mainstay of the region’s commerce. The wish to hold the 2006 Winter Olympics in Zakopane adds significance to the issue.
The Government’s medium to long term Energy Policy and Strategy call for energy security through cost-effective supply, at socially acceptable prices, and in an environmentally sustainable manner. These goals have been pursued consistently by the various Governments since the major economic reform of 1990 was launched in Poland. The Energy Policy and Strategy is largely in line with the strategy of the European Union (EU) for the energy sector.
In the network fuel subsectors (gas, electricity, district heat) average prices are increasingly reflective of economic cost. Explicit subsidies for municipal district heating tariffs were eliminated by the Government as of January 1, 1998. Cross-subsidies for small users of electricity and gas have been reduced. The primary energy pricing issue now relates to the need to internalize the environmental benefits of clean technologies. This project provides ample opportunity to demonstrate how this can be rationally achieved.
The Bank has supported the reorientation of the Polish energy sector toward a market structure since 1989 through a combination of policy support, technical assistance and lending operations. These were designed to assist the Government and energy sector participants to:
(a)phase out energy-related subsidies as well as cross-subsidies between industrial and household energy consumers;
(b)lead toward decontrol of energy prices which should reach economic levels, and provide incentives for energy efficiency improvements;
(c)improve economic efficiency in the supply and use of energy;
(d)mobilize additional domestic and foreign private capital for investment; and
(e)address environmental issues.
The Government established aProgram of Sector Reform with the help of the World Bank/ESMAP which called for de-monopolization and restructuring in environmentally sustainable ways; commercialization and eventual privatization; decontrol of prices; and establishment of a new regulatory framework. The pricing and sector reform process has consistently moved in the right direction although some components of the reform program have been implemented faster than others.
Nevertheless, it is recognized by the Government that implementation of the Program of Sector Reform needs to be speeded up. Key challenges are related to:
a)the slow establishment of secondary legislation (in the wake of the New Energy Law which became effective in 12/97) and the regulatory framework;
b)a lack of competition given continued monopolistic structures and centralized thinking in state-owned enterprises, cartel-like behavior and price controls;
c)maintenance of inefficient capacities and over-employment in certain sub-sectors;
d)a hesitation to call for vigorous privatization, including invitation of foreign capital; and
e)a large backlog of environmental improvements of existing facilities.
As Poland enters a more determined phase of discussions to lead toward accession to the EU, these issues are becoming more urgent. Accession requirements in the energy sector call for resolution of these issues.
3.Sector issues to be addressed by the project and strategic choices:
The principal sector issues addressed by the Project are those of environmental sustainability. However the Project’s blending of economic and environmental rationales; the substantial involvement of private initiative and foreign capital; and the commitment to cost-covering tariffs are also signal models for future projects in Poland and elsewhere in eastern Europe.
Belonging to both the energy and environmental sectors, the Project demonstrates accelerated transfer of responsibilities from the central Government to local jurisdictions, while promoting replacement of polluting fuels with clean energy. The Government encourages development and/or expansion of district heating on the basis of clean fuels (gas, geothermal, biomass etc.), and encourages district heating companies to improve efficiency with assistance from the National Fund for Environmental Protection and Water Management. The Fund has been a major contributor to the Project since 1995.
Privatization and competition to move prices closer to economic costs have been recommended by the Bank. The Project meets these objectives reasonably. It is a mixed public-private sector development Project that has to compete against suppliers of other types of fuels including natural gas, fuel oil, and clean coal. Over time, the emphasis on private ownership will be increased. The project tests the social effects of increasing energy prices to economic levels. The tariffs set for geothermal heat will reflect economic costs once environmental benefits are credited.
c:Project Description Summary
1. Project components
The proposed Podhale Geothermal District Heating Project aims to exploit a rich reservoir of hot water to establish a new geothermal district heating system with supplementary gas peaking plants. The service area would extend about 14 km from the production wells to the City of Zakopane and about 7 km in the opposite direction from the well field to Nowy Targ. The main project components are:
(a)drilling five geothermal wells including two for production and three for reinjection in addition to the two doublets already in place. The production wells will extract low-enthalpy (~ 86°C temperature) geothermal waters in the Podhale basin to cover the base load heat demand for the entire project service area including both Zakopane and Nowy Targ;
(b)constructing a new base-load district heating plant with a capacity of approximately 60 to 70 megawatts (MW), with about 1,075 terajoules (TJ) of heat provided from geothermal sources;
(c)constructing new peak load natural gas plants in Zakopane (42 MWt) and Nowy Targ (12 MWt) with production of about 305 TJ of heat;
(d)developing the district heating network (about 100 km), including the geothermal circuit, transmission and distribution pipelines, and connections to individual households and other consumers.
(e)monitoring and reporting the global benefits from the project (carbon emission reduction), including the introduction of suitable performance indicators, as well as institutional and technical arrangements to monitor their achievement.
The geothermal plant would initially provide geothermal energy to the towns of Zakopane (1999), Bialy Dunajec (1998), and Banska Nizna (1995). Koscielisko and Poronin would be connected in 2002 and 2000 respectively. Three district heating boiler houses in Nowy Targ would be connected in 2001 and Szaflary would gain access in 2000. These cities and villages are all in the central valley of the Podhale basin. The model developed in these cities and towns can then be quickly adapted for use in other localities with geothermal resources, such as the towns of the eastern and western valleys of Podhale.
The estimated costs by component are summarized in the following table.
Component / Category / Indicative Costs (US$M) / % of Total / Bank financing / % of Bank financing / GEF financing / % GEF financing(US$M) / (US$M) / (US$M)
Production Plant / Physical / 42.6 / 50.3%
Transmission-Distribution Plant / Physical / 23.9 / 28.2%
Tatry Boiler House Conversions / Physical / 1.0 / 1.2%
Subtotal: / 67.2 / 79.7% / 32.3 / 48% / 5.0 / 7.4%
Contingencies: / 9.6 / 11.3% / 5 / 52%
Interest during construction / 6.2 / 7.3% / 6.2 / 100%
Incremental working capital / 1 / 1.2% / 0.5 / 50%
Monitoring and evaluation of global benefits / Institutional / 0.4 / 0.5% / 0.4 / 100.0%
Total / 84.7 / 100% / 44.0 / 52% / 5.4 / 6.4%
The institutional component of the project aimed at monitoring and reporting the global benefits will be based on a monitoring and evaluation protocol for carbon reduction projects, which will be developed by GEF in the context of other carbon mitigation projects and studies. The objective is to make a credible assessment of the carbon reduction benefits, which in turn would help establish the potential for a broader introduction of geothermal district heating in Poland and elsewhere in Central and Eastern Europe.
2.Key policy and institutional reforms to be sought:
The Project clearly is motivated by both environmental and economic concerns. The proposed financing plan covers nearly 34% of the cost with grants from the European Union, PHARE, the Danish Ministry of Environmental Protection, Polish Ekofund and in the form of assumed GEF grants. The emphasis placed by carbon interests on assuring additionality substantially increases the importance of quantifying the environmental benefits derived from the project. Local environmental benefits are to be internalized before global credits are awarded. The evaluations to this point indicate that available funding from other agencies (especially from the European Union) will exceed the measured local environmental benefits and would likely cover the additional benefits to tourism and to nearby biota. This tie between grant funding and environmental accomplishment is an important precedent that could materially impact the planning process for other projects in Poland and throughout Eastern Europe. Care should be taken to deliver clear and intended messages in this policy area.
The next measure which would help the Project and would be consistent with the policy changes sought by the Bank, is the gradual reduction of Governmental shareholding in Geotermia Podhalanska, as now represented by the National Fund. This would invite more private investment and ensure greater autonomy for the company. Geotermia Podhalanska has expressed the desire to use retained earnings for the repurchase of stock initially purchased by the National Fund to substantially reduce if not eliminate their share holdings. During the appraisal mission the Bank shall confirm plans of the government for divestiture.
Finally, the commercial-scale introduction and demonstration of economically viable geothermal energy utilization will have an indirect impact not only on policies of the Government of Poland but undoubtedly on neighboring countries’ decision-makers as well. The success of the Project should generate confidence in similar projects considered by local authorities elsewhere in Poland and throughout Eastern Europe.
3.Benefits and target population:
Four major groups will benefit from the changes to geothermal heating. More than 4,200 individual households are expected to convert to geothermal. Their choices will reflect their desires for cleaner and more comfortable heat that requires less labor. They will also avoid any replacement investments for new boilers for the next twenty years. Finally, they will avoid use of high cost electricity for summer water heating when their coal or coke boilers would not be operating. Similarly, 172 larger loads are expected to convert for similar reasons. Twenty-four boiler houses that were previously operated by Tatry but are now part of the merged Geotermia Podhalanska company will be converted to geothermal to improve efficiency, reduce labor requirements, and substantially reduce emissions. Nowy Targ is expected to convert three boiler houses to geothermal for both environmental and economic reasons.