Modernization of TUZLA Thermal Power Plant as Stimulus to Economic Development of B&H

Bosnia and Herzegovina (B&H) has undergone significant changes since its independence. In the early 1990s, brutal destruction of the economic potentials of the B&H society took place, and from a country with industrialized economy, B&H was brought to pre-industrial times. Economic capabilities were destroyed, human resources weakened, business links broken, while the knowledge and skills necessary for the economic development were lost. In addition, just after the war, B&H went through a transitional process during which the remaining surviving economic capacities experienced a slow and inefficient ownership transformation from social to private ownership, leaving behind industrial graveyards and extreme unemployment. The lack of an adequate business climate, the weak potential of domestic private capital, high unemployment rate, low purchasing power and the continuous political crisis did not allow B&H to achieve its economic potentials based on its geostrategic location, natural resources and skilled and resourceful labor force.

The B&H energy sector can play a key role in the economic development of the country. The structure of the energy sector in B&H is relatively favorable when it comes to renewable energy sources with a share in total electricity production of 30-35% depending on the hydrology of a year. There are clear indications of trends that in the coming period, the presence of electricity generated from wind and sun will have its place in B&H. Nevertheless, the most important source in the production of electricity in B&H so far has been coal, and will be in the next 50 years. The economic activity of TPP facilities together with coal mines constitute 22% of the gross domestic product of B&H, and they have great importance in creating socio-economic stability of the B&H society, bearing in mind that only mines of Elektroprivreda B&H Concern employ 16 thousand workers.  Although fossil fuel production is a strategic business branch in B&H, it faces major internal and external challenges.

Internal challenges are the result of action of various determinants over the past time, including the socio-historical context through which B&H has passed, and the lack of readiness of socio-political actors to make timely strategic decisions when it comes to the development of the electricity and energy sector.

The first internal challenge is the obsolescence of production capacities. Namely, the existing generation capacities of thermal power plants in B&H were mostly built in the 70s of the past millennium, even earlier, and their useful life is nearing completion, thus endangering the energy stability of the country. For example, The TPP Tuzla’s 110 MW capacity Unit 3 was built in 1966 and pursuant to the business standards it was supposed to shut down in 2015. Though still operating, this block exposes the electrical and energy system of B&H to the risk of instability and jeopardizes the continual electricity supply from domestic sources to end-users.

The second internal challenge is the high degree of pollution of the environment during the production of electricity from the existing thermal power plants. Old technologies did not have a focus on the environmental care and emissions of harmful particles and gases are twenty times larger than the acceptable level. For example, the TPP Tuzla’s 215 MW capacity Unit 6 was built in 1978, whereby contributing to the emission of SO2 at a value of 4150 mg/Nm3, NOx at a value of 700 mg/Nm3, and solid particles at a value of 150 mg/Nm3, and pursuant to business standards it should be closed in 2030. These are very high, bearing in mind the European Union Directive 2010/75 / EU which defines the acceptable emission standard of the following values SO2 ≤ 150 mg/Nm3, NOx ≤ 200 mg/Nm3, and solid particles ≤ 10 mg/Nm3.

The third internal challenge that faces this sector is the extremely low efficiency of existing thermal power plants. Namely, modern electricity generation in the average thermal power plant has a degree of usability of 40%. If the waste heat is not used for district heating by means of a heat line, the greater part of it is lost through the cooling towers. Currently, the degree of usability or net efficiency of Tuzla TPP Units no. 3, no. 4, no. 5, and no. 6 are 26.5%, 28.2%, 29.9% and 33.9% respectively, so that the average efficiency of the thermal power plant is about 30%. This mode of production is inefficient because of the unacceptably high amount of coal consumed in the production of electricity, which also entails unnecessarily high emissions of harmful substances into the environment.

The fourth internal challenge is the extremely high production cost of electricity in existing thermal power plants in B&H. Namely, the obsolescence of installations that were technically depreciated long time ago, require frequent interventions in regular and extraordinary maintenance, while the excessive coal consumption and low efficiency also unnecessarily increase the production cost of electricity. Therefore, the inefficient allocation of resources in existing generation of electricity through outdated thermo-units in the long term prevents the development of investment capacity of the energy sector in B&H, and the burden is ultimately borne by end consumers. If we also add inadequate quality of coal itself due to outdated technology of coal exploitation, poor management of the production process and significant redundancies in mines, squandering of financial resources is more than obvious, and all this is ultimately reflected in the final production price of electricity that is long-term unsustainable.

Something good out of bad is that the existing power plants are worn out, and by shutting them down most of the identified internal challenges will die out as well. Of course, the problems will disappear under the condition that new plants are built in accordance with the acceptable characteristics defined by the European Union standards.

The BiH power sector also faces external challenges. External challenges may not be influenced, they need to be understood and one must be strategically trained for the sake of painless confrontation with the same, and the design of various strategies that will turn specific challenges into business opportunities through the allocation of existing resources and the realization of upcoming investments. Namely, the B&H energy sector, as part of a significantly integrated energy region of South East Europe, is harmonizing its energy legislation and policy with the European Union, which is the result of the accession process to the European Union through the Energy Community Treaty and the Energy Union Initiative.

The three main goals of the European Union’s energy policy are security of supply, competitiveness and sustainability. The security of supply is achieved through the liberalization of the energy market. Deregulation encourages competition that leads to a noticeable reduction in operating costs in the manufacturing sector, which is why there is a thorough restructuring of production. As a result of the process, many production units (power plants) are temporarily or permanently closed. In the process of liberalization, plants with high operating costs are particularly affected because they are unable to withstand competition.

Sustainable economic development of mankind implies efficiency in production and consumption of electricity.  The energy efficiency is a collection of measures and actions in all areas of life, the ultimate goal of which is to minimize energy consumption, provided that the level of work and living remains the same or improves. It is not just mere energy saving that involves renunciation but its efficient use that contributes to improving the quality of life and work, as well as greater competitiveness of production. Raising awareness of energy efficiency aims to change the worldview principles and has a significant impact on behavioral patterns when it comes to energy consumption in the everyday life of an individual, including standards in the construction of residential, institutional and manufacturing facilities. The method of electricity generation must also be aligned with the standards of emission of harmful gases in the environment, the intensity of carbohydrate consumption and the improvement of production technology in order to maximize resource utilization.

Given the above mentioned internal and external challenges facing the energy sector in B&H, the fundamental question arises as to why the decision-makers that are so important for the society are late in modernizing energy capacities in order to overcome the identified challenges. There are justified reasons for this. Due to the destruction that the B&H energy system experienced during the war, including the unnatural partition into three ethnically separated TSOs, some time had to be spent in their consolidating and qualifying for capital investments. This process could have been much faster indeed if there were no frequent changes of political actors in power, which tended to get the preparation and realization of mega investments in the energy sector back to square one. Disorientation of political actors in realization of given investments has jeopardized the very reputation of B&H as seen by serious global competitors who expressed their misunderstanding of irrational delays in the realization of investments, although the key preconditions for the same have been secured for years.

The Construction Design of Tuzla Thermal Power Plant Unit 7 is a unique illustration of the aforementioned slowness in realization. This 450 MW replacement unit for four old units with a total power of 364 MW is a co-generation plant that will supply heat energy for the district heating of the City of Tuzla, Lukavac and Živinice. Fossil fuel to be burned into the power plant will annually amount to 3 million tons of lignite derived from the surface mining of Dubrava and Šikulje as part of the Kreka mine. Modern Power Technologies (BAT) will be used for the erection of this power plant to ensure that the emissions of all pollutants are below the permissible limit values and require EU legislation, while the efficiency level in the condensing system will exceed 42%, and when it comes to the co-generation variant, calculations show that efficiency increases at considerably higher levels.

After several years of tender procedures and negotiations on the model of construction and financing of power plant, there has been agreed a model of realization with a consortium led by China Gezhouba Group Corporation (CGGC), a renowned Chinese corporation that is present in over 80 countries of the world with the aim of implementing demanding energy projects. The key characteristics of the project are that Elektroprivreda BiH will be the sole owner of the given thermal power plant while the Chinese corporation will build the same according to the EPC system (turnkey) in the period of 56 months. The financial structure is closed so that Elektroprivreda B&H will provide 15% of the total funds necessary for the given investment which contract value is EUR 785.650.000. The remaining 85% of the investment will be financed on the basis of the preferential loan principle for customers for a period of 15 years with a five-year deferred repayment period of the loan, at an interest rate of 2% p.a. with a 0.25% management fee and 0.25% fee for commitment to the project of the Chinese EXIM Bank. The specific financing will be secured by the sub-sovereign guarantee of the Government of the Federation of Bosnia and Herzegovina, the escrow account for the proceeds under the contract on electricity purchase with Elektroprivreda B&H and the guarantee of Elektroprivreda B&H. Independent external consultants have determined the financial sustainability of the project where the internal rate of return (IRR) is projected at 11.63%.

This will surely be the largest post-war investment in B&H, which will have far-reaching positive consequences for the B&H power system, but at the same time it will represent the most powerful impetus to the economic development of our country by creating direct and indirect jobs during construction of the plant, where local subcontractors and local labor force will be significantly involved. Following the initial start-up and simultaneous modernization of the Kreka mine, there will be created preconditions for a continuous long-term employment of highly educated staff, thereby saving the endangered jobs of the mining population. The quality of life in the Tuzla basin will be well repaired as emissions of harmful gases and co-generation heating of large urban areas will experience significant improvements in relation to the existing situation. The effects that will be achieved when collecting direct and indirect tax revenues will provide visible improvements in all spheres of life funded by budget funds. The profitability of mines and thermal power plants will create preconditions for the accumulation of capital that will be allocated to new capital investment thus strengthening the competitive position of the B&H energy sector in relation to competitors from the region and the European Union. Therefore, we have a right to look forward to the upcoming start of the realization of this strategically important project for B&H.

 

 

 

Amel Kovačević
Amel Kovačević

Amel Kovačević je diplomirao i magistrirao ekonomiju na Međunarodnom islamskom univerzitetu u Maleziji. Obnašao je visoke funkcije u nekoliko finansijskih institucija u BiH, te predavao na nekoliko visokoškolskih ustanova. Bio je ambasador BiH u Kini u periodu od 2010. do 2013. godine. Bavio se međunarodnim konsaltingom, a trenutno je ministar finansija u Vladi Kantona Sarajevo.

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