Kragujevac District Heating Project

Location:

Serbia

Project number:

52593

Business sector:

Municipal and environmental infrastructure

Notice type:

State

Environmental category:

B

Approval date:

23 Jun 2021

Status:

Signed

PSD disclosed:

21 Jan 2021

Project Description

Provision of a sovereign loan of up to EUR 18 million to the Republic of Serbia (the "Client") consisting of 2 tranches: 1) up to EUR 14 million to be committed at signing (the "Tranche 1") and 2) an uncommitted tranche of up to EUR 4 million, to be committed at Bank's sole discretion following completion of due diligence (the "Tranche 2").

The loan proceeds of Tranche 1 will be used for: 1) decommissioning of old coal boilers from the district heating ("DH") system in the city of Kragujevac (the "City"), 2) installation of new natural gas based hot water boilers, with a total capacity of 110MW, and 3) project supervision. The loan proceeds of Tranche 2 will be used for: i) rehabilitation of the ash disposal site, and ii) related procurement and implementation support, and works supervision.

Project Objectives

The Project will enable the full elimination of coal from the City's district heating system and will significantly improve the air quality of the city due to the central location of the coal boilers being replaced. The Project will serve as a foundation for future investments in introducing renewable energy sources and energy efficiency measures, which will be assessed through the TC-funded support. The Tranche 2 investment will support the remediation of the ash disposal site located within the complex of District Heating Company ("Energetika"), which is the source of major environmental risk in the City. The Project will improve the air quality by eliminating sulphur oxides and particulate matter emissions and significantly reducing nitrous oxide emissions. 

Transition Impact

ETI score: 80

The expected transition impact of the Project is derived from Green quality through vast environmental benefits arising from reduction of CO2 (66 per cent), sulphur oxides (100 per cent), nitrous oxide (89 per cent) and particulate matter emissions (100 per cent), water savings (55 per cent), and overall energy efficiency improvement of the district heating system. The Project will also allow the elimination of the generation of new quantities of ash and slag and related water contamination, and support remediation of the ash disposal site.

Client Information

SERBIA SOVEREIGN

The borrower is the Republic of Serbia. The Project will be implemented by the Ministry of Environmental Protection, supported by Energetika.

EBRD Finance Summary

EUR 18,000,000.00

Up to EUR 18 million sovereign loan

Total Project Cost

EUR 18,000,000.00

Up to EUR 18 million

Additionality

Financing Structure: EBRD offers financing that is not available in the market from commercial sources on reasonable terms and conditions.

Standard-setting: The client seeks/makes use of EBRD expertise on best international procurement standards and higher environmental standards above 'business as usual'.

Knowledge, innovation, and capacity building: EBRD provides expertise, innovation, knowledge and/or capabilities that are material to the timely realisation of the project's objectives, including support to strengthen the capacity of the client.

Environmental and Social Summary

Categorised B (2019 ESP). The environmental and social due diligence (ESDD) for Tranche 1 was carried out by an independent consultant in accordance with ESD Covid-19 guidance; it included the review of an information package supplied by the client and site visits (by a local team due to COVID-19 travel restrictions) of the boilers site. The environmental and social (E&S) risks and impacts associated with providing a loan for the replacement of coal boilers by gas boilers (total capacity of 110MW) are site-specific, readily identified and will be managed by the implementation of a robust Environmental and Social Action Plan (ESAP). ESDD confirmed that the Tranche 1 Project is structured to meet EBRD PRs.

The results of the ESDD indicated that Energetika operate in line with the Serbian requirements; they will nevertheless be required to align their corporate E&S management systems with the Bank's Performance Requirements. The main E&S risks are (i) the storage of ash (produced as a result of burning coal for the existing boilers) at the main plant; (ii) air emissions from the future gas boilers (and overall alignment with EU Best Available Techniques), since compliance of the design documents with EU IED Directive has to be confirmed; and (iii) potential collective dismissal for manual labour workers due to the Project implementation. These last two risks will be managed through the ESAP which will have to be agreed with the Client before Board, and with specific covenants to be added in the Loan Agreement. A Technical Cooperation (TC) screening study will be developed to identify options for recycling and disposal of fly ash and slag; the preferred option will be subject to a dedicated ESDD before Tranche 2 is committed. Overall, the Project is expected to result in a reduction of CO2 emissions of about 60,000 t/a.

Energetika has a management structure in place to ensure compliance with the national regulation. The national Environment Impact Assessment (EIA) is being developed by Energetika to obtain the environmental permit for the Project. The ESAP requires the development of an integrated health, safety, social and environmental (HSSE) management system, as well as a Construction Environmental Management Plan (CEMP) for the gas boilers and a Decommissioning Plan for the coal boilers.

Energetika HR policies are compliant with national legislation and main ILO conventions. Energetika have signed two collective bargaining agreements with two active Unions; according to the ESDD, the Company is cooperating well with the Unions. Energetika currently employ 380 persons; 120 are engaged as "manual labour" workers. Should this manual labour workforce have to be reduced due to the Project implementation, Energetika will have to develop a Retrenchment Plan in line with PR2 for EBRD review.

Reports on emissions to air and wastewater quality are regularly submitted by Energetika to the national Environmental Protection Agency; some non-compliances have been observed. It is not unusual for old coal fired boilers to not comply with the national regulations on air pollutants emissions; the coal boilers in the main location Zastava will be replaced as part of the Project. Similarly, wastewater discharged from Zastava are 100% generated by the old coal fired technology; it will be replaced by natural gas and hot water (not steam), which is another benefit of the Project. The requirement that the gas boilers final design specifications include alignment with the EU Best Available Techniques (as described in the Large Combustion Plant BAT Conclusions) will be covenanted. Physical improvements to waste storage and segregation on site are captured in the ESAP, following inadequate waste management practice that was identified during the site visit.

The main environmental concern from the Project is an ash pile stored outdoor at main plant (approx. 40,000 t) due to lack of a suitable disposal route and lack of financial resources. As the pile is not covered, it poses risks to human health due to air-borne distribution of the ash particles. Complaints have been received by Energetika with regards to this issue, from both employees and the nearby general public. The Project will help addressing this issue by (i) stopping the production of slags and ashes by the replacement of coal boilers under Tranche 1, and (ii) identifying the most appropriate option for the safe recycling/disposal of the ashes and financing the implementation of this option under Tranche 2. An additional dedicated ESDD will be conducted on Tranche 2 option, and the ESAP will be revised accordingly. The ESAP also requires a site wide risk-based intrusive ground investigation to ascertain the extent of soil/groundwater contamination once the ash has been removed. Previously, disposal has also been made to landfill sites (offsite) and private land plots; some of them are currently under rehabilitation.

The H&S team at the Company appears well resourced. A programme of risk assessments is in place, and a program of safety audits is undertaken by a team in the Safety Department. No formal process for monitoring contractor H&S performance was identified during ESDD, and a respective corrective action is included in the ESAP. It is unlikely that asbestos is present in the Zastava building, since it was rebuilt in 1999. The ESAP also requires to install automatic leakage detections systems in all facilities that utilise natural gas, and to develop and implement a Plan to control and/or reduce methane leakages.

The Project involves the installation of boilers within the boundaries of the existing site in an urban and industrial context; additional land is not required to replace the boilers. The Project is not expected to have an impact on biodiversity (there is no protected area in the vicinity of the site) nor on cultural heritage. A grievance mechanism process is currently in place and is available on the company's website. *The majority of complaints received over the past 3 years were related to the poor air quality caused in the City by their coal-fired boilers. A Stakeholder Engagement Plan (SEP) has been developed during ESDD. The SEP and a Non-Technical Summary (NTS) will be disclosed by the DH Company.

Due to the sector and risks identified during ESDD for this Project, the Bank will monitor closely the implementation of the ESAP, through review of annual Environmental and Social Reports (AESR) as well communications with the Company and site visits, as necessary.

Technical Cooperation and Grant Financing

  • TC1: Technical due diligence and advance procurement support, including a technical and economic review of any proposed works or designs and providing support in preparing the tender documents, evaluation of tenders and the contract award.
  • TC2: Environmental and social due diligence including preparation of all environmental and social aspects of project implementation. 
  • TC3: Technical and environmental screening study on identification of options for recycling and disposal of fly ash and slag produced by coal plants and heating boilers in Serbia. 

Post Signing:

  • TC4: Assessment of renewable DH potential, to analyse the potential for utilisation of renewable and urban waste heat in the DH system in Kragujevac, as well as potential for DH expansion. 
  • TC5: Technical, environmental and social due diligence for Tranche 2. Based on the output of TC3, detailed due diligence will be undertaken for the selected option for the City of Kragujevac. 

Company Contact Information

Srdjan Djokic
sdjokic@energetika-kragujevac.com
+381658779655
www.energetika-kragujevac.com
Prvoslava Rakovića 4A, 34000 Kragujevac, Serbia

PSD last updated

26 May 2021

Understanding Transition

Further information regarding the EBRD’s approach to measuring transition impact is available here.

Business opportunities

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General enquiries

Specific enquiries can be made using the EBRD Enquiries form.

Environmental and Social Policy (ESP)

The ESP and the associated Performance Requirements (PRs) set out the ways in which the EBRD implements its commitment to promoting “environmentally sound and sustainable development”.  The ESP and the PRs include specific provisions for clients to comply with the applicable requirements of national laws on public information and consultation as well as to establish a grievance mechanism to receive and facilitate resolution of stakeholders’ concerns and grievances, in particular, about environmental and social performance of the client and the project. Proportionate to the nature and scale of a project’s environmental and social risks and impacts, the EBRD additionally requires its clients to disclose information, as appropriate, about the risks and impacts arising from projects or to undertake meaningful consultation with stakeholders and consider and respond to their feedback.

More information on the EBRD’s practices in this regard is set out in the ESP.

Integrity and Compliance

The EBRD's Office of the Chief Compliance Officer (OCCO) promotes good governance and ensures that the highest standards of integrity are applied to all activities of the Bank in accordance with international best practice. Integrity due diligence is conducted on all Bank clients to ensure that projects do not present unacceptable integrity or reputational risks to the Bank. The Bank believes that identifying and resolving issues at the project assessment approval stages is the most effective means of ensuring the integrity of Bank transactions. OCCO plays a key role in these protective efforts, and also helps to monitor integrity risks in projects post-investment.

OCCO is also responsible for investigating allegations of fraud, corruption and misconduct in EBRD-financed projects. Anyone, both within or outside the Bank, who suspects fraud or corruption should submit a written report to the Chief Compliance Officer by email to compliance@ebrd.com. All matters reported will be handled by OCCO for follow-up. All reports, including anonymous ones, will be reviewed. Reports can be made in any language of the Bank or of the Bank's countries of operation. The information provided must be made in good faith.

Access to Information Policy (AIP)

The AIP sets out how the EBRD discloses information and consults with its stakeholders so as to promote better awareness and understanding of its strategies, policies and operations following its entry into force on 1 January 2020. Please visit the Access to Information Policy page to find out what information is available from the EBRD website.

Specific requests for information can be made using the EBRD Enquiries form.

Independent Project Accountability Mechanism (IPAM)

If efforts to address environmental, social or public disclosure concerns with the Client or the Bank are unsuccessful (e.g. through the Client’s Project-level grievance mechanism or through direct engagement with Bank management), individuals and organisations may seek to address their concerns through the EBRD’s Independent Project Accountability Mechanism (IPAM).

IPAM independently reviews Project issues that are believed to have caused (or to be likely to cause) harm. The purpose of the Mechanism is: to support dialogue between Project stakeholders to resolve environmental, social and public disclosure issues; to determine whether the Bank has complied with its Environmental and Social Policy or Project-specific provisions of its Access to Information Policy; and where applicable, to address any existing non-compliance with these policies, while preventing future non-compliance by the Bank.

Please visit the Independent Project Accountability Mechanism webpage to find out more about IPAM and its mandate; how to submit a Request for review; or contact IPAM  via email ipam@ebrd.com to get guidance and more information on IPAM and how to submit a request.

 

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