Severstal: the making of a landmark deal

By Mike McDonough

Severstal steel deal

In the latest in a series of projects with Russian steelmaker Severstal, the EBRD is providing a €600 million package to help finance a range of energy efficiency measures at the company’s Cherepovets plant.

With its colossal appetite for power and heat, the steel industry is a prime target for energy-saving initiatives and nowhere is this truer than in Russia and Ukraine, where low energy costs have long fostered wasteful practices on a massive scale. That is why a team of EBRD staff worked for a year and a half with Russian steel giant Severstal on one of the biggest industrial energy efficiency projects ever funded by a development bank.

Severstal is one of four companies that dominate Russia’s steel sector and its energy requirements are astounding. Its main plant at Cherepovets in north west Russia, which accounts for 16 per cent of Russian steel production, consumes six million megawatt-hours of electricity per annum, which is more than Moldova uses in a year. Yet electricity and gas satisfy only around 40 per cent of the plant’s energy needs: the remaining 60 per cent comes from coal. As coal also constitutes a key ingredient in the chemistry of steel, there is limited scope for reducing the amount used in the steel-making process.

EBRD programme boosts energy efficiency

Cherepovets does, however, offer ample opportunities for cutting its electricity and gas consumption. The EBRD’s team worked with Severstal to develop a programme to cut back its energy use and reduce greenhouse gas emissions while also saving money and improving the reliability of its power supply. “Until then, Severstal had dealt with energy efficiency projects from a maintenance perspective, for example if a boiler broke down, but not with the specific intention of saving energy,” says Peter Hobson, EBRD’s Senior Banker in the Energy Efficiency Team. “We showed them that an investment could be repaid in as little as one year for some of the projects and that this would be very attractive in the context of rising energy prices.”

Signing the loan, Alexey Mordashov, Severstal CEO, said: “The ERBD loan recognises our efforts in these key areas and provides us with the impetus to reduce our energy consumption.” The €700 million that Severstal is investing in energy efficiency – of which €600 million is being provided by the EBRD – will fund 11 different projects at Cherepovets over the next two to three years. These include the construction of a new high-efficiency combined cycle gas turbine; a system for collecting waste gases for use in power generation; and the modernisation of boilers and substations. In addition, the company will implement an Energy Management System (EMS) to measure precisely how much energy is used throughout the plant and to continuously set targets for cutting consumption.

“The EMS is one of the smaller projects in terms of capital expenditure,” says Senior Engineer Ioannis Papaioannou from the EBRD’s Energy Efficiency Team. “But it is the most important single project because it is a strategic investment aimed at helping the company to approach international good practice.”

The cumulative effect of these projects will be a 10 per cent reduction in the amount of electricity used in Cherepovets and a 3.5 per cent cut in the amount of natural gas consumed. Furthermore, the plant will generate 75 per cent of its electricity, up from the current level of 50 per cent. Carbon dioxide emissions, meanwhile, are expected to fall by around one million tonnes a year, which is equivalent to the domestic CO2 emissions of a city the size of Manchester.

Cherepovets and EBRD overcome challenges

While the projects funded by the deal featured many technical challenges, financing the loan presented its own hurdles. The EBRD is syndicating € 450 million to 18 commercial banks. Calyon, ING and Raiffeisen have partly underwritten the syndicated loan.

“It was a difficult syndication to arrange,” says the EBRD’s Senior Syndications Manager Joerg Zinnecker. “It clashed with the beginning of the credit crisis and even without the credit crunch the tenor and margins were quite aggressive.” After some negotiation, however, the banks were keen to be a part of the project. “It is very attractive for commercial banks to be connected with an energy efficiency loan,” Mr Zinnecker adds.

“It is a very good marketing tool for them.” The end result is an energy efficiency loan which, according to Chris Beauman, the EBRD’s steel industry specialist, provides “a role model for other loans”. The project is expected to have a significant demonstration effect on numerous smaller companies in the region. As Mr Beauman says: “The objective is to help the Bank replicate this loan, although not necessarily on the same scale, and to get it into the culture of Russia and Ukraine that energy efficiency is a good thing to do.”