Financial alchemy in Slovenia's energy sector still results in lignite, not gold

Last week the Slovene government gave the go-ahead for the signing of a state guarantee contract with the European Investment Bank on the TES 6 project (more background on the guarantee on this blog). This came after months of debate about whether the project meets the conditions the government set, such as setting a ceiling on construction costs, ensuring a stable lignite price from the nearby Velenje mine, achieving a certain level of profitability, keeping CO2 levels at a certain level etc.

In an attempt to convince everyone that these conditions will indeed be met, the Sostanj management had to come up with yet another investment plan (pdf), the fifth such document for the project.

Since the economics of TES 6 has never been convincing and are only likely to get worse with the long delays that have plagued the project, Focus and Greenpeace Slovenia have commissioned an analysis of the investment plan by economist Dr Aleksandar Kešeljević from the University of Ljubljana. The result shows, among other things, that:

• A reduction in the electricity price by just 10 percent would cause the project to be unprofitable.
• There is an increased risk of higher financing costs, because compared with the fourth investment plan an increased proportion of the loans for Sostanj 6 have now floating interest rates, i.e. that can change with the rest of the market.
• A reduction in coal prices to the level planned in the fifth investment plan is difficult to achieve, especially as so far there has been no long-term coal supply contract concluded with the Velenje coal mine.
• If the price trends for CO2 emission credits are in accordance with the EU’s long-term goals to reduce greenhouse gas emissions, the project value is strongly negative in all scenarios.
• There is an unproven and unrealistic assumption of increasing efficiency.

In going ahead with the state guarantee, the Slovene government has recognised some of these problems and tried to solve them by moving the goalposts:

• Where it previously said that the coal price must not go above EUR 2.25 per gigajoule (even though it already is), it has now signed a contract with the Sostanj management that says it must not go above EUR 2.73.
• Where it previously said a discount rate of 9 percent must be used for project calculations, the contract says that there must be 9 percent capital return, which is quite a different thing.
• And where the government previously said the total investment cost should be in line with the investment cost from the third investment plan (EUR 1,12 billion in constant prices / almost EUR 1,19 billion in current prices), the contract says it should be kept below EUR 1.3 billion.

The state guarantee contract still has to be approved by the European Investment Bank itself and ratified by the Slovene parliament, so it will be interesting to see whether either of these bodies is willing to accept the Sostanj management and Slovene government's attempts to hide the mess they've created with the Sostanj 6 project.

However, one thing is for sure. As both the EBRD and the EIB are currently undertaking their energy policy reviews, they would do well to look at Sostanj and the trail of destruction - environmental and economic - and alleged corruption it is leaving in its wake and learn the lessons from it.

The EBRD, in particular, is planning to back at least two more lignite power projects in south east Europe, possibly more. Does it seriously believe that a close look will not uncover similar problems, perhaps even additional ones, to those at Sostanj?