Kostolac lignite power plant, Serbia

On January 19th 2015, the Serbian parliament voted on the ratification of a USD 608 million loan agreement from the China ExIm Bank for its construction. Previously in November 2013, the Serbian Government had signed an agreement with China Machinery Engineering Corporation (CMEC), which would implement the project.

There are already existing units Kostolac A1, A2, B1 and B2 and Drmno and Cirikovac open cast mines at the site.

Serbia relies on lignite for around 70 percent of its electricity production, which poses challenges for the country in switching to a low-carbon economy in line with EU policy. It also poses problems in terms of climate change resilience, as the floods in 2014 have shown (see below).

Successful court challenge sent improper Environmental Impact Assessment back to the drawing board

The first environmental impact assessment for Kostolac B3 was approved in December 2013. It lacked any analysis of transboundary impacts, even though the site is just 15 km from the Romanian border, and suffered from numerous other deficiencies. It was therefore challenged in court by the Serbian Center for Ecology and Sustainable Development – CEKOR.

In June 2016 the court ruled that CEKOR’s arguments were valid and that the decision should be revoked. By this time, however, the decision had already expired and the environmental assessment has had to be started again.

Espoo Convention breached by Serbia in the Kostolac B3 Environmental Impact Assessment in a transboundary context

The Kostolac site is just around 15km from the Romanian border and even nearer to the River Danube, yet Serbia had not notified potentially affected Parties, i.e. Romania about the plans for the new plant and mine.

At its 33rd meeting held in March 2015, the Espoo Convention Implementation Committee noted that the construction of one block at the Kostolac lignite power plant was an activity listed in Appendix I to the Convention and that the likelihood of a significant adverse transboundary impact could not be excluded.

On those grounds, the Committee decided to begin a Committee initiative under paragraph 6 of the Committee’s structure and functions. The Committee asked Serbia to proceed with the notification under article 3, paragraph 1, as soon as possible.

In his letter, the Chair also urged Serbia to comply with its obligations under the Convention. This is the first time that the Committee has opened an initiative related to cross-border impacts of a coal fired power plant, thus opening an interesting precedent for the numerous coal plants being planned across the Balkans which often cut corners in legislative implementation.

The case was closed at the Committee’s 36th meeting (pdf) in September 2016, after the Serbian Ministry of Environment had indeed sent a notification to the Romanian Environment Ministry to inform about the reopening of the environmental impact assessment and seek the confirmation from the neighbouring country about the intention to be part of the transboundary impact assessment.

The Romanian Ministry has created a dedicated section on its website regarding this project, but so far no documents have been submitted for consultation.

No environmental assessment required for mine expansion

The Drmno mine only has approval for production of 9 million tonnes of lignite per year and needs to expand to 12 million in order to feed the new plant. However in 2013 the government decided that no environmental impact assessment would be necessary for the mine expansion.

Serbia’s Parliament fast track ratification of the loan – a procedure subject to European institutions’ criticism

This year's European Parliament resolution on the EC's progress report criticises Serbia's lack of progress with renewable energy, while it also expresses concern that most laws in Serbia are adopted under the fast-track procedure, not always allowing for sufficient stakeholder consultation.

The fact that the extraordinary session to ratify the contract between the Serbian and Chinese governments was announced less than twenty-four hours in advance is an outrageous attempt to bypass public debate while making major commitments.

State aid incompatible with the Energy Community Treaty

Serbia, as a signatory to the Energy Community Treaty, must follow EU legislation on state aid. This regulates the ways that state resources can be used to support undertakings, in order to avoid distorting competition and cross-border trade.

The Serbian Government has agreed to provide loan guarantees for commercial loans for the Kostolac B3 unit. As well as the financial difficulties in doing this, sovereign or sub-sovereign loan guarantees have to comply with certain conditions, such as not exceeding 80% of the value of the loan and being paid for by the project promoter at market rates. It is not clear whether this is the case with Kostolac.

In addition, on December 29, 2011 a contract was signed between the Government of the Republic of Serbia and Chinese Exim Bank, for USD 293 000 000 – 85% of the cost of the full project Phase 1 - envisaged for reconstruction of blocks B1 and B2 of TE-KO Kostolac, construction of a desulphurization system, building of a landing dock on the Danube and construction of railway infrastructure.

In this contract, the Republic of Serbia is the borrower, responsible for paying back the loan amount, while TE-KO Kostolac, part of the state-owned electricity company Elektroprivreda Srbije (EPS) is named as the end-user of the funds.[1] Thus the state takes on all the responsibilities connected with paying back the loan and gives EPS an advantage over potential competitors. This scheme was continued in December 2014 when the Serbian state signed the USD 608 million with China ExIm Bank for the new plant.

Notes

1. The Law on the ratification of the contract is available at: http://www.istinomer.rs/wp-content/uploads/2015/11/Prilog-1-Zakon-Garanc...