Report No. 10143-BUL

BulgariaEnergy Strategy StudyApril 30, 1992Industry and Energy Operations DivisionCountry Department I MICROFICHE COPYEurope and Central Asia Region

Report No. 10143-BUL Type: (SEC)

FOR OFFICIAL USE ONLY MOOSE, J. / X33035 / H3 129/ EM5IV

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency unit = lev (plural leva), abbrev. LvUS$1 - 17.5 average 1991

WEIGHTS AND MEASURES

1 Megawatt (MW) = 1,000 kilowatts (103 kW)1 Gigawatt (GW) = 1 million kilowatts (106 Kw)1 Gigajoule (GJ) = 239,000 kilocalories (kcal)1 Terawatt (TW) - 1 billion kilowatts1 kilovolt = 1,000 volts1 kilocalorie (kcal) = 3.968 British Thermal Units (btu)1 Gigacalorie (Gcal) = 1 million kilocalories1 Joule (J) = .24 calories1 Gigajoule - 109 joules or .948 million btu1 Petajoule (PJ) 1015 joules or 34,129 tons of coal

equivalent (tce)1 kilogram (kg) = 2.2 pounds (lb)1 tonne (metric ton) = 1,000 kg = 2,205 lb

1 meter (m) = 3.281 feet (ft)1 kilometer (km) - 1,000 m = 3,281 ft1 cubic meter (m 3 ) = 35.31 cubic feet (ft3)1 billion m3 (bcm) = 35.3 billion ft3

GROSS HEAT VALUES OF FUELS

Hard coal = 25 GJ/tonneLignite = 6 GJ/tonneCrude oil = 10,200 kcal/kgGasoline = 10,500 kcal/kgNatural Gas 8,000 kcal/m3

ACRONYMS

CEC Commission of European CommunitiesCMEA Council of Mutual Economic AssistanceCOE Committee of EnergyCOM Council of MinistersCOMGEO Committee of Geology and Mineral ResourcesCHP Combined Heat and PowerEIB European Investment BankEBRD European Bank for Reconstruction and DevelopmentIAEA International Atomic Energy AgencyIEA International Energy AgencyIPS Interconnected Power System (of CMEA)NEC National Electric CompanyOSART Operational Safety Assessment Review Team (of IAEA)SO2 Iulfur DioxideUCPTE Union for the Coordination of Production and Transport of

Electricity (West European Grid)WANO World Association of Nuclear Operators

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

FOREWORD

This report is based primarily on the findings of a mission led byMr. James Moose which visited Bulgaria in September-October 1991. Bank staffmembers participating were Messrs. Adamantiades, Ansari, Hendriks, Lovei andHughes. In addition, Messrs. Falkenberry, Stewart and Tunnah joined the missionfrom USAID; Messrs. Schmitt, Forsbach and Schoddart represented the GermanGovernment; Mr. Moore represented the IAEA; Mr. Foster participated from the IEA,and Mr. Logberg participated on behalf of the Danish Government.

The report was thon updated based on a mission which visited Bulgariain January 1992 and which consisted of Bank staff members, Messrs. Moose, Sharma,Ansari and Adamantiades. At that time the report was also discussed with theBulgarian Government.

The report provides information on the situation of the energy sectorin early 1992. It indicates what the major issues are, what has beenaccomplished and what needs still to be accomplished and in so doing it providesa suggested strategy for the sector. However, the Bulgarian energy situation ischanging very rapidly as the energy sector is reorganized, energy prices areincreased sharply, autonomous energy operating companies are created and thehistoric trading arrangements with the former Soviet Union for energy suppliesdiminish in importance. Furthermore, the Bulgarian Government has moved and ismoving very rapidly to implement certain proposals, discussed in earlier draftversions of the report, with which they are in agreement. Therefore, certainsections of the report, especially those dealing with energy pricing, are likelyto be outdated relatively rapidly. However, the underlying structure of thesector, with its associated problems, has developed over many years and thereforemost of the issues discussed in the report, and the general suggested strategy,are likely to be valid for an extended period.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

BULOARtA

ENERGY STRATEGY STUDY

Table of Contents

P!age No.

I. EXECUTIVEg SUNMARY . . . . . . . . . . . . . 1

A. Background . . . . . . . . . . . . . . . . . . . . . . . . 1B. Current Situation/Systemic Issues . . . . . . . . . . . . 2C. General Strategy .... . . . . . . . . . . . . . ... 3D. Specific Issues . . . . . . . . . . . . . . . . . . . . . . 4

E. Energy Demand Forecast . . ....... . 12

F. Summary Policy Matrix . . . . . . . . . . .. . 14

II. MACRO ECONOMIC SITUATION AND LINRAGES TO THE ENERGY SECTOR 15

A. Macroeconomic Situation .......... . . . .15B. Energy Intensiveness and Imports . . . . . . . . . . . . . 17C. Patterns of Fuel Use .. .... . .. 18D. Fiscal Aspects . . . ........ . 19E. Bilateral Trading Arrangements with the U.S.S.R. . . . . . 20

III. CURRENT SITUATION OF THE ENERGY SECTOR . . . . . . . . . . 21

A. Sector Organization . . . . . . . . . . . . . . . . . . . 21B. Pricing of Energy ............ . 24

C. Energy Price Regulation ........... . 28D. Resources . . . . . . . . . . . . . . . . . . . . . . . . 29E. Capacity Utilization . . . . . . . . . . . . . . . . . . . 30F. Environmental Impacts ...... ........... . . 30

IV. PETROLEUM ......... . . . . 32

A. Demand for Petroleum Products . . . . . . . . . . . . . . . 32B. Oil and Gas Exploration and Production . . . . . . . . . . 32C. Refineries . . . . . . . . . . . . . . . . . . . . . 35D. Marketing and Distribution ............ . 39

V. NATURAL GAS . . . . .41

A. Consumption . . . . .. . . . . . 41B. Supply .......... . 42C. Transmission Sye tem ...... ................ .43D. Pricing of Gas . . . . . . . . . . . . . .. . 44E. Means of Payment . . . . .44

F. Profitability and Organization . . . . . . . . . . . 45

VI. COAL AND URANIUM . . . . . . . . . . . . . . . . . . . . . 47

A. Uses of Coal. ................. 47

B. Coal Resources . . . . . . . . . . . . . . . . . . . . . . 48C. Coal Production . . . . . . . . . . . . . . . . . . . . . . 49D. Coal Companies . . . . . . . . . . . . . . . . . . . . . . 52E. Coal Imports . . . . . . . . . . . . . . . . . . . . . . . 53F. Uranium . . . . . . . . . . . . . . . . . . . . . . . . . . 53

VII. ELECTRIC POWER INDUSTRY . . . . . . . . . . . . . . . . . . 54

A. Background . . . . . . . . . . . . . . . . . . . . . . . . 54B. Electricity Usage . . . . . . . . . . . . . . . . . . . . . 55C. Electricity Production . . . . . . . . . . . . . . . . . . 56D. Capacity . . . . . . . . . . . . . . . . . . . . . . . . . 57E. Nuclear Power . . . . . . . . . . . . . . . . . . . . . . . 59F. Fossil Fuel Fired Power Plants . . . . . . . . . . . . . . 65G. Hydropower Plants . . . . . . . . . . . . . . . . . . . . . 70H. District Heating . . . . . . . . . . . . . . . . . . . . . 72I. Electricity Costs, Financial Position . . . . . . . . . . 73J. Interconnections, Imports and Exports . . . . . . . . . . . 74K. Organization of NEC, Technical Assistance Needs . . . . . 75L. Strategy Summary.. ................. 76

VIII. ENERGY CONSERVATION . . . . . . . . . . . . . . . . . . . . 78

A. Industry . . . . . . . . . . . . . . . . . . . . . . . . . 78B. Residential and Public Buildings . . . . . . . . . . . . . 78C. Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . 80

IX. THE DEMAND FOR ELECTRICITY AND OTHER FUELS . . . . . . . . 82

A. Aggregate Demand Equations -Electricity . . . . . . . . . . 82B. Inter-industry Approach . . . . . . . . . . . . . . . . . . 83C. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . 87

ANNEXES:

I. Summary of the IAEA Report on the Safety of the Kozloduy Nuclear PlantII. Statistical Annex on PetroleumIII. Statictical Annex on CoalIV. Statistical Annex on ElectricityV. Statistical Annex on EnergyVI. Maritza East MinesVII. Forecasting Model

MAP: IBRD No. 23399R

SYNOPSIS

Under the Communist Governments from 1946 to 1989, Bulgaria had a

highly centralized economic system with virtually complete state control of theeconomy. The Government used its position to encourage rapid industrialization.It also followed a very energy-intensive development strategy, favoring energyintensive industries and keeping domestic energy prices low. This strategy wasfollowed in spite of the fact that the country is very poorly endowed witheconomic energy resources. The results of this strategy are that: 1) Bulgaria'senergy use per unit of output is 25-35% higher than for comparable marketeconomies; 2) 75-85% of its energy is imported, mostly from the former USSR; and

3) energy is its largest import accounting for 23% of total imports in 1990.

A coalition government came into power at the end of 1990 and beganto implement a comprehensive econo;-ic program designed to brake the economic

decline which was underway and to begin the restructuring of the economy alongmarket lines. The achievements of the coalition were significant and in theenergy area included sharp increases in energy prices in both February and June1991 and the partial liberalization of petroleum product prices which are

currently subject only to a market-related ceiling prices. As a result of theOctober 1991 election, a new government was formed in November 1991 which hasundertaken major reorganizations in the sector especially in the electricity,

district heating and coal subsectors. Bulgaria still has, however, a number ofproblems in its energy sector including: 1) heavy reliance on imports especiallyfrom the former USSR (mainly the Russian Federation and Ukraine); 2) a less than

acceptable degree of safety at the country's large nuclear plant at Kozloduy;3) shortages of domestically produced fuels due to inefficient coal mining or in

some cases lack of domestic economic coal reserves; 4) dispersed responsibilityfor the sector with no single governmental agency having responsibility forpolicy, oversight or coordination; 5) sectoral operating companies which still

do not fully operate as commercial entities; and 6) environmental problemscreated by energy production and transformation.

This report summarizes the energy problems faced by Bulgaria and

recommends a general strategy with the following major components: 1) The pricesfor electricity, heat and coal (which are still set by the government) should beraised and an energy regulatory authority established to set prices for the

natural energy monopolies (gas, electricity and heat transmission anddistribution); 2) conservation should be encouraged through government policiesand programs because it is likely to have a high economic and financial rate ofreturn as well as environmental benefits; 3) those energy units which are leastsafe, mainly Kozloduy units 1 and 2, should be made much safer either by beingpermanently closed, or if this is not feasible they should be retrofitted toachieve acceptable safety standards, following the recommendations of an outsidepanel of experts; 4) units 3 and 4 at Kozloduy should be retrofitted to achieve

international safety standards on the same basis; 5) domestic production of

energy must be expanded through increased coal output and expanded explorationfor oil and gas; 5) energy units need to be rationalized and rehabilitated; 6) an

energy agency needs to be established to provide oversight and coordination for

the sector; 7) the operating companies in the sector must be encouraged tooperate more commercially with incentives for management and more delegation of

authority; and 8) over time, as feasible, sector operating organizations should

be joint-ventured and/or privatized.

I. EXECUTIVE SUMMARY AND CONCLUSIONS

A. Background

1.01 Bulgaria under the Communist Government (1946-89) had a highlycentralized economy and all economic activities were controlled by the state withminor exceptions. The Government used its control over the economy to promotea rapid expansion of industry, especially heavy industry. The economy was alsocharacterized by major price distortions, direct state control over resourceallocation and heavy reliance on trade with other members of CMEA, primarily theformer Soviet Union. Economic growth appears initially to have been fairly rapidas labor was shifted from agriculture to industry, but it slowed steadily,especially in the 1980s, as many of the problems common to centrally plannedeconomies began to brake economic performance.

1.02 Under the Communist Government the country also followed a veryenergy intensive development strategy in spite of the fact that Bulgaria ispeculiarly lacking in economic energy resources, which consist primarily of asingle large deposit of low grade, high sulfur lignite. This strategy was basedon the availability of imports of energy from the former USSR at generally quitefavorable prices, development of nuclear power and maintenance of low domesticprices for energy. The primary results of the strategy are that: 1) Bulgaria hasa highly energy intensive GNP with energy use per unit of output which is 25%-35%higher than for a comparable market economy; 2) 75%-85% of energy is imported-largely from the former USSR; 3) energy imports are the largest single importitem, accounting for about 23% of 1990 imports; 4) until early 1991 energy wasgenerally priced very low, in many cases below cost; and 5) investment in energytransformation, primarily electric power plants, was very large exceeding 20% oftotal investment in the latter half of the 1980's.

1.03 Economic performance deteriorated rapidly, starting in late 1989 butwith the deterioration accelerating in 1990, as a result initially of theuncertainties created by the overthrow of the Communist Government in late 1989,delays in implementing reforms and adverse external shocks. Perhaps the mostimportant of these external shocks was the collapse of the CMEA trade andpayments arrangements, under which Bulgaria had imported most of its materials,including energy supplies, and exported most of its products. The Government wasunable to offset this shock by imports from market economies since foreignexchange resources were very limited and the country did not have access tovoluntary capital inflows after suspending foreign currency debt payments inMarch 1990. The Socialist Government which replaced the Communist Government atthe end of 1989 took limited steps to address the deteriorating situation and theeconomy was allowed to drift. As a result, GNP declined by 12% in 1990 with thedecline gaining momentum as the year progressed.

1.04 A coalition government was formed at the end of 1990 and began toimplement a comprehensive far-reaching economic program designed to brake theeconomic decline and initiate the transition to a market economy. As part of the

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overall liberalization of economic activity, most prices were entirelydecontrolled, while prices of a small group of energy products includingutilities were adjusted sharply upwards. Energy prices were raised in February1991, by 125%-1325% depending on the product, and again in June 1991 by 70-120%.These price increases basically eliminated the long-standing underpricing ofpetroleum products and natural gas and sharply reduced the underpricing ofelectricity, heat and domestic coal. Currently, petroleum product prices are setby a market related formula while natural gas prices are tied to petroleumproduct prices. However, electricity, heat and coal prices are set by theCouncil of Ministers based on a mixture of political considerations and costinformation.

1.05 A major objective of the coalition government was to break up thestate-owned monopolies which existed in the energy sector and to begin theirprivatization. This was not accomplished due in large part to internaldisagreements within the coalition. As a result of the October 1991 elections,the position of those groups most committed to moving towards a market economywas strengthened and at the beginning of 1992 several of the state-ownedmonopolies were broken up including those concerned with district heating,electricity and coal; and hydrocarbon exploration and development. However, onlyvery limited progress has been made in privatizing the organizations in thesector. Moreover, the New Government still faces a number of very difficultissues in the sector as is indicated below.

B. Current Situation/Systemic Issues

1.06 Energy demand in Bulgaria has begun to decline sharply, largely asa result of: 1) the major increases in energy prices in 1991 discussed above, and2) the sharp decline in GDP both in 1990 (about 12%) and 1991 (preliminaryestimate of about 23%). There have also been some energy supply problems,(see paras 1.07 and 1.08 below). As a result of these factors, energyconsumption declined by 10% in 1990 with another decrease of about 24%anticipated for 1991 when final figures become available. However, the energyintensity of the Bulgarian economy does not appear to have decreasedsignificantly and the economy remains a very inefficient energy user.

1.07 Because of its relatively high energy requirements (relative to GNP)and its very limited domestic energy resources, Bulgaria remains very dependenton energy imports. In 1990, imports of crude oil and petroleum products supplied36% of energy requirements, imrorted natural gas supplied 18%, imported coalsupplied 11%, imported electricity about 1.5% and nuclear power (which operateson imported fuel) 13 %. (See Annex V for detailed energy balances). Energyimports including nuclear fuel were thus 80% of energy consumption with theremaining 20 % consisting of domestic coal (18.5 %) and hydro (1.5%). As waspointed out above these energy imports represented about 23% of total imports in1990 and probably a somewhat larger share of total imports in 1991. The greatmajority of these imports come from the former USSR (mostly the RussianFederation and Ukraine) including most of the petroleum, all of the gas, all ofthe imported coal, almost all of the electricity and all of the nuclear fuel.This high level of energy imports remains a continuing problem for the countrybecause of: 1) Bulgaria's very limited capacity to earn convertible currency topay for imports; and 2) the increasing unreliability of supplies as a result ofthe political and economic problems of the former USSR.

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1.08 Bulgaria also has a number of interrelated problems in its domesticproduction of energy. These consist primarily of: 1) a less than acceptabledegree of safety at the Kozloduy nuclear plant; 2) environmental problems atcertain thermal electric plants; 3) shortages of domestically produced fuels dueto inefficient coal mining or lack of economic coal reserves; 4) some uneconomicor worn out power plants; and 5) inefficient organizational structures andprocedures. Probably the most important of these problems currently is thesafety issue at the Kozloduy nuclear plant discussed in paragraphs 1.16-1.18below.

C. nalStrateg

1.09 The New Government has the opportunity to adopt an improved strategyfor the energy sector. The objective of this new strategy should be to reduceenergy consumption and produce a more efficient, less polluting and safer sector.Based on discussions with energy officials in Bulgaria, it appears there shouldbe eight major components to this strategy which are:

- Energy prices should be decontrolled except for the prices chargedby natural monopolies such as electric power, heat and natural gasutilities. The prices charged by these companies should be set bya regulatory authority based on cost and efficiency considerations.However, even before this new arrangement is established, it isclear that the prices for electricity, heat and coal, which arebelow costs, should be raised.

- Conservation, which has very attractive economic rates of return,should be strongly encouraged both through higher prices asindicated above and also through government policies and programs.

- Those energy units that are least safe, Kozloduy units 1-4, need, assoon as possible, to be shut or upgraded to an acceptable level ofsafety, depending on the costs of retrofitting and a safety reviewby a panel of independent experts, and the safety and environmentalaspects of other units that will remain in operation, should beimproved.

- Energy operating units need to be rationalized with those unitswhich are uneconomic phased out, the efficiency of the economicunits increased and high priority projects completed.

- Domestic production of energy: mus.c be made more efficient andexpanded.

- The operating entities in the sect;..r need to function more likecommercial companies and less like government departments, withincentives for management to operate the companies more efficiently,more delegation of authority to plant managers, better accountingand control systems and boards of directors with a high degree ofautonomy. This should occur as soon as possible and is largelyunrelated to ownership of these entities.

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The sector needs an energy agency to develop sectoral policy andprovide oversigh.; and coordination. Currently, there is no agencycovering the entire sector.

Sector organizations should be joint ventured and/or privatized overtime as this becomes feasible,

D. Specific Issues

1.10 There are several specific issues connected with this generalstrategy. These issues are discussed below.

1.11 Pricin, While there has been great progress in decontrolling pricesin Bulgaria, there has been less progress in the energy sector which, unlikeother sectors, still has partial price controls. Within the energy sector therehas been considerable progress towards decontrolling petroleum and natural gasprices. The prices of major petroleum products are currently set by a formulathat ties the retail prices of these products to world market prices with a onemonth lag. The price of natural gas in 1991 was set based on the cost ofimported natural gas from Russia, subject only to oversight by the Commission onPrices, the price control authority. However, this price turned out to be fairlyunstable due in part to changes in the value of the clearing dollar used in thebilateral trading arrangement with the Russians (see para 2.20) and therefore in1992 the price of gas is being set based on the cost of imported heavy fuel oil,its closest competitor in the industrial market. On the other harLd, the pricesof electricity, district heat and coal are fixed by the Council of Ministerswith some input from the Commission on Prices.

1.12 The Government should free petroleum prices as soon as the monopolypetroleum product retailer, Petrol, is partially privatized and competition iscreated in the retail market. (Moreover, the Government might want to considerincreasing petroleum excise taxes if needed for fiscal reasons, since these arelow by West European standards.) Coal prices should also be freed as soon ascompetition is created in that industry. In addition, the Government needs toestablish an independent energy regulatory authority to regulate energy utilityinvestments and prices, perhaps building on the experience acquired by theCommission on Prices. This Authority would determine heat and electricity pricesbased on efficiency and cost considerations. It is also recommended that naturalgas prices be set by this Authority based on the costs of imported natural gas.The current (early 1992) system of basing them on the cost of heavy fuel oil,should be phased out especially as the trading arrangements with the formerSoviet Union stabilize.

1.13 It will be necessary to raise both electricity and heat pricessignificantly. These prices were increased very sharply in both February andJune 1991, amounting to a total price increase of roughly 1000% for heat and 600%for electricity, but are still below costs, which have also increased verysharply as a result of local inflation, the depreciation in the value of the levaand the end of relatively inexpensive energy supplies from the former USSR. Theaverage price of electricity should be increased by at least 35% to coverreported costs (which underestimate depreciation) while heat prices should riseclose to 90%. Furthermore, the longer the price increase is delayed the larger

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it will naed to be to offset the continuing impact of inflation and devaluation.Finally, prices charged households for electricity and heat should be increasedmore than prices charged industry since underpricing, relative to cost, is fargreater for the household sector than for industry.

1.14 It may be politically feasible to raise electricity prices in thenear term since the required price rise is far less than occurred earlier in1991. However, raising the price of heat to households is likely to be much moredifficult politically for three reasons. First, the price increase per unit oftheat supplied (Gcal) needs to be much larger than for electricity as pointed outabove. Second, there is a major issue of fairness and effectiveness sincehouseholds individually have no control over their heating bills which are notbased on their actual heat consumption but on a measure of average heatconsumption. Third, the combination of low district heat prices and the lack ofa connection between heat bills and consumption, has caused district heat usersto consume much more heat per housohold than non district heat users andtherefore a large price rise would lead to a major increase in their outlays onheat relative to their incomes. It may be necessary, therefore, to have aninterim period with formal subsidies for heat supplied to households, whileprices are raised to cover costs. This interim period should, however, berelatively short. Also, for the pricing mechanism to work properly it will benecessary to start to measure heat use in individual households or small groupsof households. Industrial heat prices are already much closer to costs and therequired price increase is likely to be much smaller.

1.15 Conservation. The potential for saving energy in Bulgaria is quitelarge. Energy audits of industrial plants carried out by USAID/Bulgarian teamsrevealed short term energy savings opportunities, largely through improvementsin operations and maintenance with little or no investments, averaging 12% forelectricity and 10% for thermal energy. Estimates of the longer term energyconservation potential in industry total at least 35% of current levels of bothelectricity and fuel use. Some capital investments would be needed in the longerterm, but paybacks should prove very attractive, typically under two years.There is also a very large potential in the household and communal (publicbuildings, shops) sector where work done by a Danish/Bulgarian team indicates thepotential for very substantial conservation in the space heating area. It isestimated that space heating requirements could be cut by 40-50% through betterinsulation, better construction materials and better heating systems. Rates ofreturn on investments to reduce space heating costs would be quite high.Moreover, Bulgaria has an advantage in encouraging household conservation in thatabout 80% of its housing stock is privately owned and mostly owner occupied soinvestments in reducing energy consumption in dwellings usually benefit the owneras well as the occupant. Finally, there is considerable potential to save energyin the district heating systems which are inefficient and have large heat losses.In general, experience in market economies and the preliminary analyses carriedout in Bulgaria, indicate that the economic returns from energy conservationinvestments are high and often exceed those from investments in energy producingor transforming facilities. While the sharp recent increases in energy priceswill be the primary means of encouraging energy conservation, the Governmentshould also help accelerate it by providing information and developing programsto encourage conservation. Experience in market economies again J.ndicates thatoutside assistance is very useful in supplementing the conservation incentiveprovided by higher prices, especially in the case of households.

1.16 Kozloduy NAclejar lant. This plant currently has 3,760 MW of nominalcapacity, consisting of four VVER-440 model 230 units (units 1-4) each withcapacit) of 440 MW, and two VVER-1000 units (units 5 and 6) with 1000 MW capacityeach. These units are all Soviet designed and built, pressurized water reactors;in 1990 they supplied 38% of Bulgaria's electricity. There has been considerableinternational concern about the safety of the VVER-440 model 230 design sincethese plants lack safety features considered mandatory by internationalstandards, including redundant systems for high pressure injection of coolant incase of a large pipe break in the system, backup feedwater circuits and acontainment structure. As a result of this concern the International AtomicEnergy Agency (IAEA) has carried out a review of all VVER-440 model 230 unitsboth in Bulgaria and elsewhere. The IAEA's on site inspection of Kozloduy wascarried out in June 1991 and that Agency found, in addition to the known designdeficiencies, the operational practices and material conditions at the plant tobe very poor. The IAEA stated that "continued operation of units 1-4 would beimprudent". In early July, an international meeting was held in Vienna todiscuss the Kozloduy situation. This meeting decided that the Commission of theEuropean Communities (CEC) should develop and finance an emergency assistanceprogram for Kozloduy which it has done. This emergency assistance program,amounting to 11.5 million ECU, combined with a major effort on the part of theBulgarian authorities has led to significant improvement in the materialcondition of units 3 and 4. Work on units 1 and 2 began in the latter part of1991 and is expected to be completed in the rill of 1992. Moreover, as a resultof this program and Bulgarian efforts, management and morale at the plant havealso improved though further progress is still needed. However, the basic designproblems remain and training is still lagging.

1.17 Bulgarian authorities currently cannot close Kozloduy because of thelarge share of electricity which comes from the plant and the low reliability ofmost of the country's other supplies of electricity. However, certain steps canand should be taken to improve safety at Kozloduy. The following approach istherefore suggested:

The probabilistic safety study for units 1 to 4, which is largelycomplete, indicates that for an investment of about $100-$200million, the risks of a severe accident at Kozloduy could be sharplyreduced. The suggested safety improvements include seismicupgrading of structures and equipment, fast acting valves, diverseemergency supplies systems, emergency monitoring and a filteredvented confinement system. This study, after review by independentexperts, should be further developed.

- Units 1 and 2, which are undergoing repairs are the oldest units(approaching 20 years) and have significantly fewer safety featuresthan units 3 and 4. Closure of these units would be the mostprudent course of action. However, the possibility of retrofittingthese units and reaching acceptable standards of safety, based onthe study described above, cannot be excluded. If, however, thiscourse of action is undertaken it should be done based on therecommendations of a panel of independent experts.

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- Units 3 and 4, which are newer and have somewhat better safety

systems and better seismic protection, will need to be retrofittedto attain acceptable standards of safety, again with the agreementof a panel of independent experts.

- There should be an acceleration of managerial and personnelimprovements. These would include more authority given to plantmanagement, more attention paid to maintenance, development of a

safety culture, improved training, improved operating and accident

procedures, and better living conditions in the Kozloduy area. Therecent large salary increases for key operating staff, however, isa step in the right direction.

- A probabilistic safety study should also be done for units 5 and 6to identify and prioritize the needed investments to significantlyimprove the productivity and safe operation of these units. Thismight include improved instrumentation and control, leak detectors,and possibly a system to control the reported core instability ofthese units.

- A decommissioning study for units 1 and 2 should be undertaken toplan for the removal. of fuel and subsequent dismantling of the unitswith due respect to cost minimization and public safety.

1.18 With the steps outlined above, the risk of a major accident at

Kozloduy could be reduced to a level that may be acceptable to the internationalcommunity and the Bulgarian regulatory and governmental authorities. At the sametime, very large safety investments on units 1 to 4 in the form of fullcontainment structures and vastly increased redundancy, which are unlikely to beeconomic and which Bulgaria can ill afford, would be avoided.

1.19 Insurance/Power Imports. Bulgaria's electric power supplies arefairly unreliable since: 1) the country relies heavily on fuels and evenelectricity imports from the former USSR and is therefore affected by the turmoilin that area; 2) has problems of various sorts at many of its thermal (fossilfuel) power plants; and 3) has the above mentioned safety problems at theKozloduy nuclear plant. In this situation, it is recommended that Bulgariaarrange backup electricity supplies from some of its neighbors. Given that

Bulgaria is currently making a major effort to allay international safetyconcerns, the international community may want to continue to assist withfinancing these power imports as was done by the CEC early in 1992.

1.20 Sulfur dioxide. Bulgaria is a leading emitter of S02 relative to itsGNP, though much less so relative to population or land area. The main sourceof emissions is thermal power plants, especially the three plants at the MaritzaEast mining and power complex. However, the Maritza East plants, which areequipped with extremely tall stacks, do not appear to be causing a significantpublic health or environmental problem in Bulgaria. While in the longer run itmight be advisable to install desulfurization equipment at these plants, in thenearer term this does not appear to be advisable from a Bulgarian point of viewgiven: 1) the high cost of such equipment ($200-300/kW); 2) the extreme shortageof foreign exchange and severe lack of capital in the country; 3) the lack ofapparent public health effects from current 502 emissions at these plants; and4) the severe public health and environmental problems in a number of other parts

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of the country which urgently require investments. If the internationalcommunity were to decide that, because of the impact of the SO2 emissions onother countries as well as Bulgaria, desulfurization equipment was justified,then it should be prepared to provide grants or near-grants for much of thesecosts given Bulgaria's poor financial condition and shortage of funds. Thisappears to be occurring now with the CEC considering a partial grant for aninitial desulfurization unit at Maritza East.

1.21 Fuel Shifts/Closures. The Bobov Dol power plant, one of Bulgaria'slarger thermal plants, has restricted output because of a shortage of local coal.In addition, the local coal is highly abrasive and is shortening the life of theplant. It is recommended that this plant shift primarily to an alternate fuelsource. This could be imported coal or even more likely gas, since a major gastransmission line is within 5 km. This latter fuel would also reduce thenegative environmental impact of the plant. The Ruse power plant, which is inpoor condition and in a heavily polluted area, should be studied to see if itshould be rehabilitated or retired. If the power from this plant is needed andrehabilitation appears to be economically justified, then it may be worthwhileto shift it to gas for environmental reasons and because of fuel supply problems.These potential shifts to gas (if it can be secured) or imported coal at BobovDol and Ruse would of course have a negative impact on the balance of paymentsthough this would be partly offset by reduced Ukrainian coal imports at Ruse andthe possibility of power exports from these plants (see para 1.25).

1.22 Power Plant Project Completions. A number of projects in variousstages of construction were stopped due to the financial constraints caused bythe decline in Bulgaria's economy. Completion of two of these projects, however,were identified as having high economic rates of return because they are closeto being finished and would contribute significantly to Bulgaria's electricityindustry. These projects are; 1) unit 8 at the Maritza East II power plant(210 MW) where much of the construction is done and the equipment which is onsite is deteriorating; and 2) the Chaira pump'.d storage project which is neededfor peaking purposes and almost completed. Recently the EIB and EBRD have agreedto finance the completion of unit 8 at Martiza East II. The Bulgarianauthorities are planning to complete Chaira 1 and 2 (2x 216 MW) in 1992. Units3 and 4 at Chaira (2X 216 MW) are also needed, though not quite as urgently as1 and 2, and financing for them is under discussion.

1.23 Coal. The majority of Bulgaria's coal mines appear to be uneconomicand plans for restrtcturing and closing mines need to be developed. Theirimplementation should proceed in line with social safety net plans for mineworkers. However, the main mining complex in Bulgaria at Maritza East, whichprovides 75% of the country's coal output, is almost certainly economic. Outputthere needs to be expanded to satisfy the three mine mouth power plants locatedat the site and the briquette factory. It is estimated that with improvedmanagement, including more authority for operating management at the site andbetter motivation of the work force, output could be increased by 20%. Inaddition, better mine planning and completion of certain capital projects couldfurther improve output and efficiency.

1.24 Oil and Gas Production. Current oil and gas production in Bulgariais virtually negligible, despite considerable investments in exploration andproduction over a number of years. One of the major reasons for this may be thecountry's lack of modern technology and equipment especially in seismic

-9-

interpretation and offshore drilling. Given the current economic situation, thecountry does not have adequate funds to buy such technology and equipment or toinvest in exploration and production. Therefore, the government has adopted thecorrect approach of attracting foreign oil companies to undertake this activity.So far, eight agreements have been signed for exploration offshore in the BlackSea or on the Black Sea Coast of Bulgaria. This approach of attracting foreignoil companies, through joint venture arrangements or simple concessions, shouldnow be expanded to cover the entire country, not limited as it is currently justto the Black Sea Coastal Area. Also, the existing legal and contractualframework for exploration and production has a number of gaps and should beimproved with the assistance of a qualified legal expert.

1.25 Excess Energy Transformation Capacity. Bulgaria potentially hasconsiderable excess capacity in its energy transformation industries, namelyrefineries and electric power plants. This has developed because of: 1) the highlevel of investment in these industries especially power plants; and 2) the sharpdrop in energy consumption which has occurred and which will continue (though ata much slower pace) due to the lagged impact of the recent major energy priceincreases. For example, the country has installed domestic generating capacityof about 12,000 MW and another 800 MW has been available contractually in thepast from Ukraine. Peak domestic demand is only 55-60% of this amount anddeclining, leaving in theory substantial excess capacity for export. In realitya substantial part of Bulgaria's installed generating capacity is not availablebecause of fuel shortages, operational problems and other factors. However, ifthe type of program suggested above is undertaken with increased coal output,plants shifted to more reliable fuels, improved operations and projectscompleted; the country should have substantial available excess generatingcapacity. This capacity could then be used to: 1) eliminate net imports ofelectricity from Ukraine except on an emergency basis since these are fairlyexpensive (5.1 cents/kWh in 1991); and 2) begin exports to Bulgaria's neighboringcountries with the most likely candidate being Greece. Net exports would,however, only occur during a limited interim period of around 5 years sinceBulgaria does not have a long term competitive advantage in electricityproduction. Exports can occur given the current electrical interconnection toGreece, but would be much easier if Bulgaria were able to join the West Europeaninterconnected power system (UCPTE) of which Greece is a member. Bulgariacurrently has excess refining capacity and will probably have it for the rest ofthis decade. Processing arrangements for u.se of part of this capacity have beenestablished, but these arrangements should be expanded to cover the entirecapacity of the refineries with the resultant products exported.

1.26 Company Operations. The operations of all energy sector companiesin Bulgaria need to be improved with the companies starting to function ascommercial entities rather than government departments. This has very highpriority. Four major steps need to be taken. First, these companies need to bemade quite autonomous. This is underway with the creation of independent iimitedliability companies and joint stock companies, but needs to go further includingultimately the privatization of many of these organizations (See para 1.29).Second, senior management of these companies must be given incentives to make thecompanies profitable. A very useful first step in this direction is underwaywith the planned introduction of performance contracts for senior management.Third, more authority within these organizations must be delegated to plantmanagers who must also be held responsible for their actions. This is not donecurrently and plant managers in many cases have little authority to deal with

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their operating problems and therefore take very limited responsibility forsolving them. This latter problem is particularly acute in the electric powerindustry where it is reaching critical proportions and interfering withproduction. Finally, all of the energy sector companies need better accounting,operating and control systems as well as the development of a strategic planningfunction in order to improve their performance as commercial entities. This isparticularly the case with the national refining company, Neftochir., which willhave to compete with refineries in market economies, but also applies in theelectricity and gas areas.

1.27 Sector Organization. The sector consists of a number of differentoperating companies and institutions reporting to different ministries or to theCouncil of Ministers directly. A single energy agency is needed to help developsectoral policies and to provide coordination and oversight for the sectoralcompanies and institutions. It is recommended that this agency be either aministry by itself or a major part of a ministry and that it have oversightresponsibility for the entire sector including a link to the energy regulatoryauthority even though the latter body should be established as an independententity.

1.28 Sectoral companies and institutions in many cases also needreorganization to function more effectively in a market economy. In theimmediate past (1991 and earlier) the primary problems were that: 1) sectoralinstitutions combined what are generally viewed as governmental functions withoperating functions, while these should be separated; and 2) sectoralinstitutions often covered too broad a range of activities and were too large,which reduced their efficiency. The Bulgarian authorities were well aware ofthese problems which were discussed with the Bank. In an effort to solve them,major reorganizations occurred at the beginning of 1992 which generally improvedthe situation. However, the pendulum shifted somewhat too far in the otherdirection. For example, until the beginning of 1992 the largest organization inthe energy sector was the state electric power, district heat, and coal companywhich was somewhat misleadingly called the Committee of Energy (COE). Thisorganization produced 84% of the country's electric power, mined all of its coaland was the major supplier of heat to households and industries. It alsoperformed various governmental functions such as running an energy inspectorate,which had the right to levy fines, and assisting with energy policy. At thebeginning of January 1992 the COE was broken into over 40 separate organizations.One of these organizations is still called the Committee of Energy (COE) and,though much smaller, carries out the old COE's governmental functions and reportsto the Council of Ministers. The most important successor organization, however,is the National Electric Company (NEC) which produces about 80% of the country'selectricity and is responsible for all transmission and distribution ofelectricity. In addition the old COE was split into 16 mining companies,22 district heating companies and several other organizations. While thisreorganization was a good idea and discussed with the Bank, it went somewhatfurther than desirable particularly in the coal mining area where three separatemining companies were created at the Maritza East lignite deposit, which shouldbe exploited for economic and environmental reasons by a single company. Asimilar situation has occurred with the former Committee of Ceology and MineralResources (Comgeo) which combined the functions of a geological survey, a landmanagement organization for the government, an operating oil and gas company, anoil service company and a mineral exploration company. While Comgeo c'Learly needreorganizatien, it has been split into too many pieces. The governmental

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functions have remained with the new Comgeo, but the operating functions havebeen split among nine organizations several of which are very small and unlikelyto be viable.

1.29 Ownership. The operating companies in the energy sector should overtime be privatized or joint ventured since there is no reason for governmentownership as long as a regulatory authority exists to prevent these companiesfrom exploiting their monopoly positions. The Government and the Comgeo havealready started this process by creating joint venture oil and gas explorationcompanies for the Black Sea Coastal Psgion. The Government has also proposed toprivatize or joint venture half of the service stations in the country and thisshould be done as soon as possible. The refineries in Bulgaria, especially thelarge refinery at Burgas, should be joint ventured since these refineries haveto compete on world markets and neLd the commercial skills which a foreignpartner could bring. Bulgargaz, the state gas transmission company which iscurrently profitable, should be privatized, probably by sale to the public,during the next several years though this is less urgent. In the short term, itwould be difficult to privatize or joint venture most coal mines or power plantssince they are mostly unprofitable and require a subsidy. However, once pricesare allowed to rise to cover costs and the mines or power plants becomeprofitable this issue can be revisited. Finally, district heating systems areinefficient and are likely to require large subsidies for an extended period, soit may be quite difficult to joint venture or privatize them. Since thesesystems only serve 16% of households, primarily in the cities and larger towns,the central Government is proposing, as was discussed with the Bank, to let thesecities and towns take over their local district heating systems. The centralGovernment could then gradually phase out its subsidies for these systems withmore of the burden taken by the tax payers of the cities and towns which usedistrict heat.

1.30 Investments. Substantial investments are needed in Bulgaria's energysector to enhance safety, increase non-nuclear electricity output, improveefficiency and reduce environmental impacts. The highest priority investmentsare at the Kozloduy nuclear plant where technical assistance and new capitalinvestments are needed to enhance safety. A large part of the technicalassistance is probably available from outside donors such as the CEC, WANO (WorldAssociation of Nuclear Operators) and various bilateral sources. Substantialcapital investments will also be needed to implement the recommendations of theprobabilistic safety studies mentioned in paragraph 1.17. Very preliminaryestimates are that the most cost effective capital investments for unit 1 to 4,in terms of increasing safety, would be about $100 -$200 million, mostly foreignexchange. The lower end of this range would cover many of the new safetyinvestments while the higher end could cover limited replacement of certainexisting equipment. This sum would be in addition to the CEC program. For units5 and 6 incremental investments of at least $30-$50 million and perhapssignificantly more, mostly foreign exchange, would be required for safety.Finally, about $15 million in foreign exchange and perhaps $12 million in localcurrency is required to improve radioactive waste handling at Kozloduy.

1.31 The next most important investments are those required to increaseoutput at the existing thermal plants. These iLivestments would includeincreasing domestic coal output at the Maritza East Complex, shifting fuelsources at certain plants (Bobov Dol and possibly Ruse) in order to improve fuelavailability and reduce pollution and undertaking some rehabilitation of existing

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thermal plants. Investment studies have not yet been done, though some areunderway. However, total investments in this area are thouglht to be in the rangeof $200-$400 million. Expansions of capacity in the energy sector are likely tobe fairly limited given the large amount of excess capacity which currentlyexists (see paragraph 1.25). However, the Chaira 1, and 2 and to a lesser extent3 and 4, pumped storage units should be completed as well as unit 8 at MaritzaEast II power plant (see paragraph 1.22) since they are likely to have high ratesof return. Costs of completing these projects are likely to be around $80-$100million excluding flue gas desulfurization at Maritza East which is not urgentlyrequired but for which partial grants may be available (see paragraph 1.20).Finally, a start should be made on investments in energy conservation probablyinitially by improving the efficiency of the district heating systems. Theseconservation investments are likely to have high rates of return, but will bemore difficult administratively to implement. Costs for the completerehabilitation of the Bulgarian district heating systems are likely to be atleast $200-$400 million, but the work can and probably should be undertaken instages in order to gain experience. As funds become more readily available thereare further investments which, though somewhat less urgent, would be quitevaluable. These include: 1) improvements and repairs in the gas transmissionsystem; 2) the development of natural gas distribution systems for cities andtowns in Bulgaria so that this fuel can be used directly by households andcommercial establishments; and 3) various capital projects for the refineries toallow them to operate more efficiently and produce cleaner fuels.

E. Energy Demand Forecast

1.32 As a part of this strategy study, short and medium term forecasts ofenergy demand for Bulgaria were prepared. Two approaches were used. The firstapproach is based on the use of short and long term forecasting equations topredict aggregate electricity demand. These equations were estimated for a largesample of Eastern and Western European countries over the period 1960-88 and takeinto account the dynamics of adjustment in electricity demand to changes inprices and economic activity. The second approach, which is only suitable formedium and longer term forecasts, relies on detailed industrial data and takesinto account interfuel substitution by sector and the likely changes inindustrial structure as well as macro-economic developments and price effects.Using this second approach three scenarios were prepared (base case, low priceresponse, high price response) which differ based on the assumptions used aboutthe price elasticities of aggregate energy demand. Both approaches use the sameset of macro-economic forecasts namely, GDP decreases by about 33% between 1989and 1991 but a recovery begins in late 1992-early 1993 with moderate economicgrowth initially and growth accelerating to slightly over 5% a year in the latterhalf of the 1990's. Also, in both approaches all forecasts of energy demand arerelative to energy demand in 1989, the last "normal" year.

1.33 Depending on the approach used and also the scenario adopted in thecase of the second approach, somewhat different forecasts of energy consumptionare obtained. For electricity, taking into account the strengths and weaknessesof the different approaches, it is estimated that demand will decline about 25%between 1989 and 1992, about 35% between 1989 and 1995, but only about 15%between 1989 and 2000. For coal, gas and petroleum the inter-industry approachwas used exclusively and in the base case scenario it shows decreases of about40% by 1995 for coal and gas consumption and about 30% for petroleum; while by

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the year 2000 the decreases are about 55% for coal, 33% for gas and 11% forpetroleum (see table 9.2). The COE has prepared energy demand forecasts usingdifferent assumptions and has projected significantly smaller decreases in theconsumption of electricity (see para 9.19). All of the forecasts, however, agreethat there will be a sharp drop in energy consumption in Bulgaria as a result of:1) the recent declines in GDP, 2) major increases in energy prices, and3) economic restructuring. The pattern of decline though differs substantiallybetween fuels depending on the assumptions made about a number of macro-economicand micro-economic variables.

__________ SUMMARY ENERCY P'OIICY MARIX FOR MAJOR ISSUhS

l l l RECOMMENDED F(OUCYACTIONS TAREJ ISSUES RECEN POUCY ACIONS| IMMEDIATE WffTUN 1 YEAR I MEDUM TERM ULTMATE GOAL

L ENERGY PRICING

Petroleum Prices set by government, Domestic prices tied to World Demonopolize retail outlets Decontrol prices Consider higher excise taxes Decontrolled, competitiveoften below cost Prices market

Electricity Prices increased 70% in June Increase prices to cover costs Start restructuring tariffs Tariffs to equal LRMC Regulated utilityhigher for households, lowerfor industry

Heat Prices increased 70% in June Raise prices to reduce losses Increasing control by [feat meters for households I) municipal servicemnunicipalities or small groups, prices to or 2) regulated utilities

cover costsCoal Prices raised 70-80% in June Raise prices to cover costs Decontrol aUl prices except Decontrol briquette prices Deontrolled, competitive

I______________________ ________________________ briquettes m arketNatural Gas oil-based pricing system -Regulatory review of prices cost based pricing system Regulated utility2. SAWIY _ _

Units I and 2 Safety concerns at Units being rehabilitated evaluate options, given age and Units shut or safety Units shut or safety Units decommissioned orKozloduy Nuclear Plant condition of units investments started investments completed operating safely

Units 3 and 4 Rehabilitated units Safety study completed Safety investments started Safety investments completed Units operating safely

Units 5 and 6 Started Unit 6 Start safety study Safety investments financed Satety investments completed Units operAting safelyEntire plant Raised salaries for operating Increase authority and Resolve most of major Improved training through Plant operating safely

personnel responsibility of management management and personnel use of simulatorsl___________________ _____________ _________ ____________________ _ problem s _r_bem

3. ORGANIZATION i

Energy agency Lack of coordination and Proposal to establish energy Establish agency with Energy agency fully EnergD agency established as Competent ministryoversight in sector agency for coordination, conservation office functioning a ministry or as major part of providing oversight,

oversight a ministry coordination

Energy regulatory Energy prices set by Establish energy regulatory Regulatory authority fully Regulatory authority futly Effective energy regulatoryauthority Council of Ministers authority to set utility prices functioning trained authority/utilities

commission

Operating energy Companies do not act in Reorganization of operating More authority and Improved budgeting, Privatization/joint ventures Energy companies incompanies commercial manner companies responsibility to companies and accounting control systems in exploration, refining and private sector with possible

operating managers gas transmission companies exception of district heatcompanies

4. OTHER

Non-nuclear power Low power output from Studies of issue proposed to Studies to begin as soon as Studies completed; Thermal plants and mines Efficient non-nuclear powerplants/mines thermal plants be funded by AID, TDP, possible investment program rationalized and sector with export capacity

CEC, Bank developed rehabilitated, major projectsconipleted

Standby Unreliable power supplies Power imports financed by Negotiate contract for Emergency supply Standby power source nopower/insurance in short run CEC emergency supply arrangements arrangement functioning longer needed.Oil and gas Unsuccessful oil and gas Eight joint venture Hlire legal expert to assist with Joint venture exploration - Greatly eypanded

exploration for many exploration agreements for oil and gas laws agreements for all pans of oroduction of oil and gas.years coastal area country

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II. MACROECONOMIC SITUATION AND LINKAGES TO THE ENERGY SECTOR

A. Macroeconomic Situation

2.01 Background. Bulgaria is a lower middle income country with apopulation of about nine million. Practically all segments of economic activityare controlled by the state, with the exception of small family plots inagriculture and private housing. Under the Communist Government (1946-89), astrongly centralized economic system was used to promote the expansion ofindustry at the cost of Bulgaria's comparatively competitive agriculturalactivities. The development of the industrial sector was heavily influenced byBulgaria's strong ties with the CMEA block and, in particular, the Soviet Union.The latter country was Bulgaria's major market and the source of inexpensivefuels and other raw materials.

2.02 Since the 1950's, the Bulgarian economy had developed within aneconomic system characterized by massive price distortions and direct statecontrol over resource allocation. Although recorded output growth continued toremain positive in the 1980's (about 3% per annum), many of the problems commonto centrally planned economies began to constrain economic performance. In 1989,GDP declined by 0.3%, the first officially acknowledged decline since the SecondWorld War. The decline reflected the continued poor performance of agricultureand a marked slow-down in industrial growth during the second half of the decade.At the same time, increases in money wages, the expansion of credit, andextensive price controls led to the emergence of a large monetary overhang andshortages of goods.

2.03 Economic performance deteriorated rapidly in 1990, due to acombination of adverse external shocks, the effects of the fall of the CommunistGovernment in November 1989, and delay in implementing the required economicreform measures. The initial disintegration of CMEA trade and paymentsarrangements during 1990, coupled with the overall contraction of East Europeaneconomies, disrupted supplies of vital imported inputs (most notably oil from theUSSR) and caused a considerable decline in Bulgarian exports. The Government wasunable to offset this shock via imports from convertible currency countriesbecause access to voluntary foreign capital inflows was cut following theGovernment's inability to service existing debt obligations. In March, theGovernment unilaterally suspended foreign currency debt payments. The Gulf crisisworsened the external situation, through higher oil prices, the curtailment ofoil supplies from Iraq, and a sharp reduction in trade with both Kuwait and Iraq.On the domestic side, the political changes that began in late 1989 causedconsiderable economic dislocation and uncertainty. While the SocialistGovernment, which replaced the long-established Communist Government, took somesteps to address the deteriorating economic performance, no significant economicchange materialized, and the economy was allowed to drift, governed by neithera central plan nor market mechanisms.

2.04 As a result of these developments, economic deterioration in 1990 wasquite marked. GDP declined about 12% led by industry which declined about 16%.Energy consumption fell 10%. Inflation accelerated to 26% (64% by year-end),fueled by both increases in nominal wages and the large monetary over-hang. The

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general government budget deficit (on a cash basis) also increased markedly from1.4% of GDP in 1989 to 8.5% in 1990. This increase reflected lower revenues,primarily from the profit tax, and higher expenditures. Shortages of goods atofficial prices became endemic and black market prices increased. Formalrationing of basic goods was introduced, gasoline sales were periodicallysuspended, and some foodstuff exports were banned. Finally, Bulgaria's externalposition deteriorated further in 1990, due to a decline in convertible currencyexports, a bunching of debt payments, lack of access to foreign capital, and thevirtual depletion of foreign exchange reserves. (At the end of 1990 Bulgaria'sconvertible currency debt was about $10.3 billion, mostly short term andequivalent to about 52% of GDP or 321% of annual convertible currency exports,while foreign currency reserves were under $200 million.)

2.05 Following the collapse of the Communist regime at the end of 1989,Bulgaria's first free, multi-party elections were held in June 1990, with the ex-Communist Party or Bulgarian Socialist Party (BSP) winning a narrow majority overthe Union of Democratic Forces (UDF) and other new non-communist parties. As aresult of opposition to the BSP government, in large part because of the poor anddeteriorating economic conditions described above, a coalition Government wasformed at the end of 1990 with the specific mandate to implement a radical andcomprehensive economic reform program and to pass a new Constitution.

2.06 Recent Developments. On coming to power in January 1991, the newgovernment began quickly to implement a comprehensive, far-reaching economicreform program designed to limit the current economic decline and to initiate thetransition to a market economy. A radical reform program was necessary becausethe very poor initial economic conditions left the authorities with little or noroom to maneuver. In the initial phase, the Government focussed its efforts ona stabilization program designed to quickly reduce economic imbalances to asustainable level and create a set of market-based relative prices. Thisstabilization program was necessary in order to establish an overall economicenvironment capable of supporting the systemic reform of the real economy. Themain policy instruments used to achieve the stabilization objectives have beena tight incomes policy and restrictive monetary policy supported by increasedinterest rates. The Government has also adopted a unified market based floatingexchange rate, removed all controls on domestic prices except energy productsincluding utilities, and reduced barriers to international trade. In addition,the Government set an ambitious target of sharply reducing the budget deficit(on cash basis) from 8.5 percent of GDP in 1990 to near balance in 1991.

2.07 The Government also turned its attention to the more complex and timeconsuming issues related to creating the basic regulatory and incentive frameworkfor the development of a market economy. As state ownership was widespread, andthe exposure to markets relatively small, this transformation would necessarilytake time. Nevertheless, the authorities have made significant progress inpassing the necessary legislation and building the institutions required toinitiate this process. In the area of privatization the authorities have passeda far reaching land reform bill. The authorities also initiated a program forthe sale of small enterprises and the assets of large firms via auctions thoughthis was suspended awaiting the passage of a comprehensive privatization law.In the area of demonopolization the authorities have made significant progressin breaking-up monopolies, particularly in the transport and trading areas, andin certain energy areas (see para. 3.05 below). Finally, a Competition Law, aCommercial Code, and a Foreign Investment Law have been passed.

. 17 -

2.08 The economy in 1991, however, contracted at a faster pace thaninitially envisaged under the stabilization program, due to the collapse inexports to the former CMEA countries, a sharp contraction in domestic demand andthe lower-than-anticipated access to foreign financing. Output is now estimatedto have declined by about 23% in real terms in 1991. Unemployment has increasedsignificantly, from 1.6% at the beginning of the year to 10% by December, withanother 2% of the work force on unpaid leave. Following the major priceliberalization in February 1991, monthly inflation slowed dramatically in thefollowing months to around 3% per month, before picking up slightly in the lastfew months. Measured real wages fell by about 34% in the course of 1991, butthis needs to be interpreted in the context of a large rise in wages in the lastquarter of 1990 and the use of official prices in the base period. Bulgariacontinues not to have access to foreign (private) commercial lending due to themoratorium on foreign debt payments and the shortage of imported inputs isconstraining economic activity.

2.09 Despite the worsening economic situation in 1991, the Governmentcontinued to implement its economic reform program, although the pace of reformslowed markedly after July as the various political parties began to positionthemselves for the elections. The elections were held October 13, 1991, and theposition of the former non-communist parties, especially the UDF (Union ofDemocratic Forces), was strengthened. The new UDF Government led by PrimeMinister Filip Dimitrov was elected on November 8. It is expected that as thenew government gains experience the program of continuing prudent macroeconomicpolicies and adopting a basic regulatory and incentive framework to support amarket-oriented economy will accelerate, including pressing ahead withprivatization and enterprise restructuring.

2.10 Bulgaria's need for foreign capital to rebuild its economy continues at atime when the country's access to foreign capital markets is extremely limited.The moratorium on payments on practically all debt obligations to foreign privatebanks, has effectively closed access to voluntary commercial bank lending.Official debt obligations, including arrears, were rescheduled by the Paris clubwith the expectation that further rescheduling agreements will be requested. Asa result of the debt situation and the further decline in the capacit:y of theeconomy to service its debt obligations in 1991, Bulgaria's ability to borrow isvery limited and the country must carefully allocate its funds to thoseactivities and investments with the highest economic and social returns.

B. Energy Intensiveness and Imports

2.11 Bulgaria has historically followed a very energy intensivedevelopment policy. The emphasis has been on development of heavy industrieswith the energy for these industries largely imported at favorable prices fromthe Soviet Union. This policy had three results which increased energyintensity. First, the share of industry in GDP in Bulgaria (48% in 1986) hashistorically been higher than in most Western countries and industry tends toconsume more energy per unit of output than other components of GDP such asservices. Second, Bulgaria has a higher share of energy intensive industriessuch as organic and inorganic chemicals in total industrial output. Third, thetechnology used in Bulgarian industry is generally much less energy efficientthan the technology now used in the West (see para 8.02). As a result, theenergy intensiveness of Bulgaria's GNP (energy consumption per unit of GNP) is

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20-25% higher than for a comparable market economy when national incomes arecompared on the basis of purchasing power parities and 35% or more higher whennational incomes are compared on the bar-is of conventional exchange rates,

2.12 As a result of Bulgaria's energy intensive economy and very limiteddomestic energy resources, most energy has to be imported. These energy importsconsist of over 99% of the oil and gas used by the economy, about 40% of the coalconsumed on a heating value basis, 8% of the electricity and 100% of the nuclearfuel. Using the normal convention which treats nuclear power as a domesticenergy resource no matter what the source of the nuclear fuel, Bulgaria importsabout 67% of its energy supplies. If, however, domestically generated nuclearpower were to be considered as an import because the fuel is imported then about80% of the country's energy supplies are imported with the remaining 20% beinglocally produced, from lignite and a limited amount of hydro capacity. Eitherone of these figures is a high level of import dependency, especially for aneconomy which is so energy intensive. Most of these energy imports (85-90%) arefrom the former USSR, primarily from Ukraine and the Russian Federation. As aresult of this combination of energy intensity and import dependence, Bulgaria'senergy imports are a relatively large share of its total imports amounting to 23%in 1990 ($1.9 billion equivalent).

2.13 So far the energy intensity of Bulgarian GDP does not appear to havedecreased, with energy consumption and output falling at the same rate.(declines of 10% in 1990 and an estimated 24% in 1991 for energy usage, comparedto 12% and 23% for GDP). However, this pattern should start to change in 1992as a result of the lagged impact of the large energy price increases whichoccurred in February and June 1991 and further price increases expected in 1992.Reduction of energy consumption and therefore of net energy imports is likely tobe an important component of any improvement of Bulgaria's balance of trade.

C. Patterns of Fuel Use

2.14 The pattern of fuel use in Bulgaria is significantly different fromthe West. The main area of difference is in the use of gas (see Chapter V). inmost western industrial countries gas is used in industry, in power generationand by households and the service sector. In Bulgaria it is almost entirely usedin the industrial sector and in power generation including district heatingplants (many of the latter being combined heat and power (CHP) plants). Powerplants and district heating plants in 1990 consumed 42% of the country's gassupplies while industry especially the chemical industry, consumed 54%. Theshares change from year to year, but industry and power generation togetherregularly consume 96% of the country's gas supply with a negligible amount beingused in services and households. Furthermore, this lopsided pattern of usagewill not change rapidly since Bulgaria lacks a distribution network for gas sothat it cannot currently be supplied to most households and commercialestablishments. Indirectly, of course, the household and service sectors usesome gas since part of the electricity they consume and part of the heat suppliedby district heating plants, comes from gas. Even taking this indirect use intoaccount, however, the use of natural gas in Bulgaria is still heavily skewedtowards the industrial sector and power/heat generation.

2.15 A second important area of difference in fuel use patterns betweenBulgaria and most Western industrial countries is in the use of petroleum. In

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most Western industrial countries a high proportion of total petroleum supplies,often 30-40% or more, are used in the transport sector for automobiles, trucks,ships and aircraft while the proportion of petroleum supplies used in industryis much lower around 15-25% or so. In Bulgaria, the situation has historicallybeen reversed with over 40% of petroletum supplies used in industry and perhaps15% used in transport. Some of this difference arises from the fact thatindustrial enterprises in Bulgaria probably rely more on their own transportservices than would be true in market economies and thus their use of transportfuels is classified under industry rather than under transport. However, thegreat majority of the difference results from the large amount of energy consumedby industry in Bulgaria, a significant part of this energy being petroleumproducts especially heavy fuel oil.

D. Fiscal Aspects

2.16 The energy sector contributes around 7-8% of government revenuecurrently, largely in the form of excise taxes paid on sales of petroleumproducts. These excise taxes, at least on transport fuels, are very low by WestEuropean standards. The excise tax on gasoline in Bulgaria is 35% and on dieselfuel it is 25% while the corresponding figures for West European countries arebetween 100% and 250%. (For example in the fourth quarter of 1990 the averageGerman excise tax on gasoline was about 155%, the U.K. excise tax was similarwhile the Italian tax was about 248%). This leaves considerable latitude for theGovernment of Bulgaria to increase these excise taxes substantially while stillhaving them remain below most of Western Europe.

2.17 The main energy organization in 1991 that required a subsidy was theCommittee of Energy (COE) which was the state power, heat and coal company (seepara 1.28). The prices for heat, coal and electricity are set by the Council ofMinisters (COM) and in 1991 were set below costs. The COM increased prices inthe first half of 1991 very substantially but these increases were not sufficientto cover electricity and heat costs, which had also increased sharply, largelydue to the high import component of energy supplies combined with the devaluationof the currency. The COM instead in 1991 provided the COE with a subsidy ofaround 2.5 billion leva to cover its losses. The COE was on average "marginally"profitable during the past six years with losses in 1985, 1990 and 1991 andprofits in the other years. However, these profits provide a very low rate ofreturn on the large amount of capital invested in the company. The Committee ofGeology and Mineral Resources, (see para 1.28), which is also unprofitable,remained part of the state budget in 1991 presumably because of its role as ageological survey and land management company and therefore did not receive asubsidy. All the other important energy organizations did not require subsidies.

2.18 The situation in 1992 will be similar to 1991. Large subsidies willbe required for some of the successor organizations of the old COE, primarily thedistrict heating companies and some of the coal mines. The amount of therequired subsidies will depend on how much energy prices (coal, electricity,heat) are increased and when this increase will occur. Also, the amount of thesubsidy paid from the State budget will depend on the degree to which theorganizations in the energy sector engage in cross-subsidization. For example,the coal mines at Martiza East will be very profitable this year and profitsgenerated from them could be used by the Government to subsidize loss making coalmines and/or other energy sector organizations. Given these uncertainties, a

- 20 .

wide range of required subsidies for the energy sector from the 1992 budget arepossible, ranging from around 1.5 billion leva to over 3.0 billion leva.

2.19 In the past major energy investments, most of which were in the powersector, were financed from the state budget. This has now stopped. However, asa result of past financing from the budget the COE had debts of about 7 billionleva to the Government and to various state owned banks. (This debt is beingallocated among the successor organizations of the COE, though NEC has receivedmost of it.) The debts of the other energy sector organizations are much smallerthough the state gas company has a debt of close to 3 billion leva to a stateowned bank which was accumulated as part of a bilateral arrangement for gassupplies with the Russians.

E. Bilateral Trading Arrangements with the former USSR

2.20 As was pointed out in paragraph 2.12, Bulgaria imports most of itsenergy and most of this comes from the former USSR. These imports were paid forthrough a bilateral clearing arrangement under which Bulgaria imported mostlyfuels and other raw materials from the USSR, while the USSR imported a range ofgoods from Bulgaria including agricultural products, intermediate products andfinished goods. All of the goods included in this arrangement were priced indollars based on world market prices, but each country was expected to importabout the same value of goods from the other country and thus, there was supposedbe no net transfer of funds. Through late August 1991, the Bulgarian authoritiesset the prices the Bulgarian firms had to pay in leva for imports from the USSRequivalent to world market prices by converting dollar prices in the bilateralclearing arrangement (the so-called clearing dollars) to leva at the freelyfloating exchange rate. At the end of August 1991, since Bulgaria was developinga surplus in its bilateral trade arrangements with the USSR, the COM arranged fora cut in the leva price of imports from the USSR in order to encourage importsand reduce the surplus. This was done by using a higher leva/dollar exchangerate for the leva in converting the dollar prices in the bilateral tradingarrangement into leva. This meant that the prices of Soviet fuels supplied toBulgaria in the latter part of 1991 were set (in leva) below world market prices,which produced some distortions in Bulgarian domestic energy prices especiallyin natural gas prices (see para 1.11).

2.21 Future developments in this bilateral trading arrangement are veryimportant to the Bulgarians given their current dependence on imports and theirshortage of hard currency. However, arrangements are made much more difficultby the dissolution of the USSR. Bulgaria is currently in the process ofdeveloping new bilateral trading arrangements with the major successor states tothe USSR, primarily the Russian Federation and Ukraine.

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III. CURRENT SITUATION OF THE ENERGY SECTOR

A. Sector Organization

3.01 The main sector operating organizations are the National ElectricCompany (NEC), Neftochim, Petrol, Toplivo, the Maritza East Mines, Bulgargaz, theSofia Energy Company and the Oil and Gas Exploration and Production Company. TheNEC was briefly described above (para 1.28) and is the state power companyproducing about 80% of the electricity consumed in Bulgaria. Neftochim is theprimary state refining company operating the large refinery at Burgas. Petrolis the monopoly petroleum product distributor and gasoline marketing organizationwhile Toplivo, which has activities outside the energy sector, markets coal,propane/butane and briquettes to the household sector. The three Maritza EastMines are by far the largest and most profitable coal mines in Bulgaria producing75% of the country's coal output from the large Maritza East deposit. Bulgargazis the state gas transmission company while the Sofia Energy Company is by farthe largest district heating system in Bulgaria and supplies 75% of thepopulation of Sofia with heat. Finally, the Oil and Gas Exploration andProduction Company has just recently been spun-off from the Committee of Geologyand Mineral Resources (COMGEO) and is the sole Bulgarian oil and gas company,though it produces very little of either commodity (see chapter 4). Some of theabove operating organizations report to ministries others report to Committeeswhich in turn report directly to the COM. There is no Ministry of Energy nor anycentral organization coordinating activities in the sector or providing oversightfor the sector as a whole.

3.02 Rather, there are several different organizations responsible fordifferent parts of the sector. The Ministry of Industry, Trade and Services hasresponsibility for: 1) gas transmission (Bulgargaz); 2) refining (Neftochim, twovery small refineries); 3) petroleum distribution and transport fuels marketing(Petrol); and 4) marketing of household fuels (Toplivo). The Committee of Energy(COE) has oversight and policy responsibility for the electricity subsector, coalmining and district heating. It is entirely independent of any ministry andreports directly to the COM. COMGEO, which has policy and oversightresponsibility for oil and gas exploration and production and mineralsexploration, is also independent and reports to the COM. The only organizationwhich appears to be responsible for the sector as a whole is the so called"Commission to the Council of Ministers on Energy and Raw Material Supplies forthe Country". This is basically a standing committee of the COM and is composedof representatives of various ministries and energy organizations. It has nostaff and meets only as required for dealing with immediate crises. It is notdesigned to and cannot provide longer term policy, coordination or oversight forthe sector.

3.03 The creation of a national energy agency in Bulgaria has beenproposed, which would have responsibility for the various energy sectororganizations. The initial component of this proposed agency would be the staffof the COE. In addition the units of the Ministry of Industry, Trade andServices which deal with energy issues would be incorporated into the new agency.It is recommended that in addition to these two components. COMGEO. and theCommission on Prices be incorporated into the new agency. The Commission onPrices, a governmental group charged with overseeing prices and regulating energy

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monopolies, could then form the basis for creating a utility regulatoryauthority, which would be independent, but connected to this energy agency. Theenergy agency would have oversight responsibility for all energy sectororganizations which were not yet privatized. However, these organizations wouldoperate as commercial entities in the emerging market economy with largelyautonomous boards of directors appointed by the Government. After privatizationall energy sector organizations should be independent and private utilities wouldbe regulated by the new regulatory authority.

3.04 The exact structure of the new energy agency is under discussion.The initial proposal was to create an energy agency at the committee levelreporting to the COM. A ministry of energy, a ministry of energy and naturalresov rces or a ministry of industry -nd energy would all be preferable so thatthe head of the energy agency would . a minister and a member of the COM. Inthe latter situation, energy issues are likely to receive higher levels ofattention.

3.05 At the beginning of 1992, there were major reorganizations of muchof the energy sector of Bulgaria (see para 1.28). In general, thesereorganizations went in the right direction, but they have gone somewhat too far.The old COE which carried out governmental functions as well as producing 84% ofthe country's electricity, all of its coal and running almost all of the districtheating systems in the country, w.s split into over 40 new organizations. Thisreorganization was correct in th&_ it separated the operating organizations (NEC,coal mines, district heating companies) from the governmental functions(oversight, policy, coordination). (These latter functions for coal,electricity, district heating remained with the new COE.) However, too many neworganizations were created especially in the coal subsector where the MartizaEast Mines were split into three separate mining organizations. This isinefficient economically and environmentally since, in order to maximizeefficiency and minimize environmental damage, the Maritza East Coal deposit mustbe exploited by a unified organization according to a single set plan. A similarsituation occurred with Comgeo which was split into a new Comgeo, which is agovernment organization with governmental functions, and nine operatingcompanies, most of which are not viable. It is recommended that in future,energy organizations which are scheduled to be reorganized. be split into fewerand more economically viable companies and that organizational studies be carriedout of the coal mining subsector and the successor organizations of the oldComgeo in order to improve subsector organizatinn.

3.06 Operations. Under the regime which existed in Bulgaria until the endof 1989, decision making was centralized largely in Sofia. Top operatingmanagement was given limited authority and even less incentive to improveperformance. Over the past two years, the top management of most energy sectororganizations has been given increased responsibility though this should befurther expanded. However, as of yet management has been given little incentiveto improve performance and their incomes are largely unaffected by performance.The government is in the nrocess of creating performance contracts for upperlevel management. which are very much needed. and should help provide suchincentives. .-In addition, however., ithin energy sector organizationsresponsibikiv and authority has to be delegated downwards to a greater extent.Plant managers must have authority tP.,.take. the-actionm needed for safety and theproper operation of their plantr, They must also be heid responsible for theoperation of those plants and given some performance incentive such as bonuses.

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Chart 3.1:Current Organization of the Energy Sector

[ COUNCIL OF MINISTERS ]-----------TI------------

r-----------___ r---- ----------- _____

COMMITTEE COMMITTEE MINISTRY OF COMMISSIONOF ENERGY OF GEOLOGY [INDUSTRY ON PRICES

NATIONAL OIL & BULGARGAZELECTRIC CO. GAS E&P ________________________ COMPANY ------- ______________ ---------- NEFTOCHIMCOAL ---------------MINES MINERAL____________ EXPLORATION -------- 1__

COMPANIES PETROL

DISTRICT 1___________COMPANIES COMPANIES RARE EARTHI1____________- ------------ METALS J

Proposed Organization of the Energy Sector

[-COUNCIL OF MINISTERS … 1

[ I ~ENERGYENERGY ............. REGULATORY IAGENCY AUTHORITY

-I-----------l -- I- l -- ---- I-- -- l 1u--.---Iu.m 1 ----OIL & COAL PETROL NEFTOCHIM| NATIONAL 1 [BULGARGAZ| DISTRICTGAS E&P MINES [ j lELECTRIC CO. [ J[HEAT

COMPANY L---- ----- --------- ------------- --------- COMPANIES_______- ---------

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B. Pricing of Energy

3.07 The energy sector is the only sector currently where prices aregenerally still controlled. The degree of control, however, varies greatlywithin the sector. As was pointed out in paragraph 1.11 above the prices ofelectricity, coal and heat are set by the Council of Ministers (COM) and havebeen generally set below costs. The prices of petroleum products on the otherhand are partially liberalized with a ceiling price determined by world productprices. Finally, natural gas prices in 1991 were set based on the costs ofRussian gas imports but this mechanism was change in early 1992 and they are nowtied to the price of Heavy Fuel Oil. These price setting mechanisms arediscussed in considerably more detail below.

3.08 Electricity. The COM sets electricity, heat and coal prices basedon a recommendations from the Commission on Prices. The COM, however, is notbound to accept the recommendations of the Commission on Prices and instead hasfixed these prices, which are quite politically sensitive, based on a mixture ofeconomic and political considerations. Nevertheless, the COM has increasedelectricity prices very sharply since July 1990, first in February 1991 andsecond in June 1991. As of January 1992, average industrial electricity priceswere 787% higher than in July 1990 while average household electricity priceswere 647% higher (see table 3.1). While the COM fixes the average electricityprice, the Commission on Prices and the COE together work on the structure of thetariffs used for electricity which will produce the average price. For industry,a three part tariff is used with three different charges (peak, day, night)depending on the time of day. For households, a two part tariff is used for mosthouseholds (day, night) with a single tariff, .28 lev/kWh (1.5 cents/kWh at theaverage 1991 exchange rate of 17.5 leva per dollar) used for those householdswhich do not have time of day meters. The current average price for industrialusers is .461 lev/kWh (2.5 cents/kWh) and for households it is .284 lev/kWh (1.6cents/kWh).

3.09 The current average industrial price for electricity is somewhatabove the average cost of electricity, as estimated by the COE, for 1991 of .344lev/kWh (1.9 cents/kWh) while the current average household price is below. Inaddition, the COE's estimate of the 1991 average cost of electricity is almostcertainly below the actual current cost of this electricity. The main problemis depreciation which in the COE's estimate of cost, is based on the historicalcosts of capital invested. These historical costs are far below not only thecurrent replacement costs of this capital, due to the 90% depreciation in theforeign exchange value of the leva over the past two years and the high rate ofinflation, but also probably below the cost of maintaining the generatingcapacity of the company. Also, the costs of certain fuels and other inputs isunderestimated due to the radical changes in prices and exchange rates which haveoccurred in 1991. While the data do not exist to make all of the requiredcorrections it is likely that the actual average cost of electricity at thebeginning of 1992 was around .55 lev/kWh (3.0 cents/kWh) and possibly higher.The average long run marginal cost of electricity is probably similar thoughsomewhat higher. It should not be as high as in most market economies since newcapacity will not be needed for some years. (A detailed study needs to be doneto develop a plan to produce the lowest long run marginal generating cost for thecountry over time). This means that electricity prices for both industry andhouseholds are almost certainly below average long run marginal cost and shouldbe increased. It also means that electricity prices for households are much

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further below average long run marginal cost and for this reason would need tobe increased more than the prices for industry.

3.10 Not only are current electric prices generally too low, but thecurrent tariff structure creates a distortion. Prices for electricity suppliedto industry should be generally less than prices for households (rather than moreas in Bulgaria), because it is generally less expensive to supply industries.There are a number of reasons for this which include: 1) significant economiesof scale in supplying large quantities of electricity to a single location whicharise from the use of high voltage lines with lower transmission losses; 2) animproved load factor; 3) lower coincidence with the system peak. This distortionin the Bulgarian tariff structure, created by pricing electricity to industryhigher than to households, is growing worse since over the past year industrialelectricity prices have been increased more rapidly than household electricityprices. This distortion is then a second strong reason for the COM to increaseresidential electricity prices more rapidly than industrial prices in the future.

3.11 The electricity tariff structure in Bulgaria could also be improvedby adding a kW charge to the tariff structure for industrial users. Theseindustrial users should not only be charged depending on the time of day andtheir energy consumption but also depending on their maximum power usage in termsof kW.

3.12 District Heat. District heating plants supply about 22% ofBulgaria's households consumption of heat (mostly hot water), and about 58% ofBulgarian industries' heat requirements (hot water and steam). These heatingplants primarily produce steam and hot water, but some are also CHP units,producing power. Some of the largest industrial plants which use the steam haveheat meters to measure what they receive but many of the smaller plants do not.Moreover, households do not have heat meters and are billed for their heat on thebasis of the cubic meters of space in their apartments or houses. The price ofdistrict heat, which is set by the COM, was increased very sharply in bothFebruary and June of 1991 (see Table 3.1) but is still on average far below cost.The COE estimated that its average revenue from supplying heat was 152 Lv/Gcal($2.0/GJ) in 1991 while the average cost to supply this heat was 266 Lv/Gcal($3.53/GJ). This average cost estimate is low since it underprices fuels andcalculates depreciation based on historical costs, as is the case withelectricity. The actual average cost is probably closer to 300-325 Lv/Gcal($4.00-4.30/GJ) as would be the long run marginal cost. (A detailed study alsoneeds to be done of this issue.) However, it is clear that average heat pricesneed to be raised, more so even than electricity prices.

3.13 The current (January 1992) price of heat to households, 85 Lv/Gcal($1.13/GJ), is substantially below the price of heat to industry, 281 Lv/Gcal($3.73/GJ) with the differential between these two prices being far higher thanfor electricity. The price of heat to households is kept very low for politicalreasons and is less than half the fuel cost of producing the heat (much of whichis gas). However, sharply increasing heat charges for households is difficultnot only politically, but in terms of fairness, since any individual householdhas little or no control over the amount of heat for which it is billed. Also,the impact of higher household heat prices on conservation is limited sinceresidential bills for heat are largely unconnected to the amount of heatconsumed. It is important. in order to have the market mechanism work properlyin this area. that: 1) heat use in individual households, or possibly in small

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groups of households. be measured and used as the basis for heat charges: and2) that households be billed the long-run marginal cost of this heat. (The longrun marginal cost for heat, however, is likely to exclude the cost of most newconstruction since new district heating systems probably have very questionableeconomics.) A relatively limited interim period may be required during whichheat prices for households would be raised, subsidies for heat phased out andimproved metering systems installed. Industrial prices for heat are much closerto costs and though they may need to be raised, the price increase could beimplemented much more readily since it is much smaller.

3.14 Coal. The COM sets a reference price fcr Bulgarian coal, based inpart on recommendations from the Commission on Prices. This reference price isfor a good quality coal with a heating value of 7000 kcal/kg. Bulgarian coals,however, are of much poorer quality than the reference coal and so their actualprices are set relative to the reference coal by the COE, with the agreement ofthe Commission on Prices. For example, the heating value of Bulgarian coalsranges from 1,200 kcal/kg. to 5,500 kcal/kg, and so the prices of these Bulgariancoals have to be set relative to their heating value as well as taking intoaccount other factors such as moisture, ash etc. Altogether there are around 400different prices for coal. The prices of imported coals are not controlledexcept for the very small amount sold on the retail market, which have the sameprice control arrangements as for Bulgarian produced coals.

3.15 Coal reference prices were increased sharply in both February andJune of 1991 (see table 3.1). The current reference prices for Bulgarian coalare 485 Lv/T ($0.92/GJ) for sale to industry and 375 Lv/T ($0.71/GJ) for sale tohouseholds. Industrial companies are expected to pay transport to their plantsfor the coal they use. The great bulk of Bulgarian coal is used for powergeneration by NEC which pays the industrial price or 485 Lv/T ($.92/GJ).Nevertheless, this price is below the cost of producing coal which on average inBulgaria is currently about $1.80/GJ. However, this cost is raised sharply bythe fairly large number of currently uneconomic mines which exist in the country(see Chapter VI). The main mining complex in the country which produces about75% of output (by weight), Maritza East, has a reported cost of about $0.6/GJ anda real estimated cost of about $1.1/GJ which could probably be lowered. Thus,the industrial price of coal, though low, is not as far below costs as it mightfirst appear.

3.16 The reference price of coal for consumers is, however, setsubstantially below cost. This reference price of 385 Lv/t is for coal at thewarehouses of the country's monopoly retail coal distributor, Toplivo. Thiscompany in turn pays the mines based on a reference price of 260 Lv/t ($0.49/GJ),using the margin of 115 Lv/t to pay its own distribution costs. This price atthe mine mouth is quite low and almost certainly below the costs of Bulgarianmines even if they were run much more efficiently. The bulk of Bulgarianproduced coal used by the household sector is not used directly in the form ofcoal but rather is used in the form of briquettes. These are made from coalproduced at the Maritza East briquette plant. The briquettes have a heatingvalue of 4300 kcal/kg and are sold by Toplivo at its warehouses at 214 Lv/t($0.66/GJ). It is estimated that they cost about 900 Lv/t to produce.

3.17 In 1991 the old COE received a subsidy from the government, part ofwhich was to cover its losses on coal and briquette production which areestimated to have been around 500-600 million Lv. Clearly. coal and briguette

- 27 -

prices. especially for households. should be increased steadily. In additioncoal production costs should be lowered by closing uneconomic mines. Also, itis anticipated that any import organization with the necessary funds will infuture be able to import coal. If this occurs as anticipated, the governmentshould start removing price controls from coal beginning with the industrialsector.

3.18 Petroleum. For the more important petroleum products, ceiling pricesfor final sales are determined monthly based on a formula devised by theCommission on Prices. This formula relates local Bulgarian retail product pricesto world market prices with a one month lag. The formula has built into itestimates of freight, insurance and the dollar/leva exchange rate and alsoprovides for import duties and excise taxes. The formula also has a built inmargin designed to cover distribution costs, selling costs (if any) and providea small profit. Sellers are still free to sell at less than the ceiling priceestablished by this formula, but since petroleum sales are still a state monopolythere is no incentive to do so. The prices produced by this formula exceed cost,but they provide a very slim refining margin for the Burgas refinery, whichsupplies most products. Also, these petroleum product prices, especiallygasoline, are relatively low by world standards since the Bulgarian excise taxis low. As gasoline service stations are privatized (under the government'seconomic reform program) and free imports of petroleum products are allowed.Drice controls on petroleum products should be removed. The present pricecontrol formula should be an interim step in the process of freeing petroleumproduct prices.

3.19 Natural Ras. Natural gas prices in 1991 were not controlled directlyby the government, though they were subject to oversight by the Commission onPrices. Gas prices were set by Bulgargaz, the state gas transmission company,and consisted of the price that Bulgargaz paid the Russians for gas plus a smallmargin to cover Bulgargaz's costs and the fee paid the Romanians for moving theRussian gas across Romanian territory. However, these gas prices expressed inleva changed drastically over the course of 1991 due to : 1) the indexation ofRussian gas prices( which are denominated in dollars) to world petroleum productprices, which fluctuated unusually widely as a result of the Gulf War; and 2)changes in the leva dollar exchange rate in part emerging from bilateral tradingconsiderations (see para 2.20 ). As a result of these fluctuations in gas pricesthe government at the beginning of 1992 decided to set the sales price of naturalgas by Bulgargaz as 10% less than the price of heavy fuel oil on a heating valuebasis. The price of heavy fuel oil in Bulgaria is in turn determined by thepetroleum product pricing formula discussed in para 3.18 above. While it isunderstandable that the Bulgarian authorities were concerned about thefluctuations in the leva price of natural gas, nevertheless the sales price inBulgaria for this gas should be based on its costs not a hypothetical relationto heavy fuel oil prices. The heavy fuel oil formula pricing for gas will attime produce incorrect economic signals and lead to distortions. It isrecommended that the pricing of natural gas move back to a cost based system assoon as possible.

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Table 3.1BULGARIA ENERGY PRICESJune 1990-June 1991

1990 1990 1991 1991 1991 1991June July Feb. June Feb. June

percentage changeIn leva per unit from June 1990

Gasoline A-86 (tonne)Industrial Use 420 580 2150 4715 412 1023Househotd Use 1240 2200 4950 9430 299 660

Electricity (1000 kWh)Industrial Use 52 52 271 461 421 787Household Use 38 38 167 284 339 647

Heating t1000 kcal)Industrial Use 18 18 165 281 817 1461Household Use 10 10 50 85 400 750

Propane-Butane (tonne)Industrial Use 250 650 2650 5760 960 2204Household Use 315 1000 3000 6400 852 1932

Brown Coal (Tome)IndustriaL use 20 20 285 485 1325 2325Household use 28 28 210 375 650 1239

C. Energy Price Regulation

3.20 While the Rrices of petroleum products and coal should be graduallyfreed from g-overnment control, certain energ-y s9ector activities will remainnatural monopolies and their prices should be regulated. These activities are:1) electricity transmission and distribution: 2) gas transmission anddistribution: and 3) district heating- systems. Also, electricity z-eneration-willremain largely a monoRoly, under current organization proposals, and thereforethe prices charged for electricity should also be regulated. This means that theNEC, Bulgargaz and the district heating companies should all be consideredutilities and regulated as such. A brief discussion of the requirements for aBulgarian utility regulatory authority follows below.

3.21 The goal of utility regulation is to assure the highest qualityservice to the consumer at the lowest feasible price. One of the requirementsfor this is that the regulated utility companies must be allowed to earn areasonable rate of return on their investments so that they can maintain theirfacilities, raise capital in the capital markets and provide part of their ownfinancing for replacement and appropriate expansion. Also, the regulatoryauthority is required to insure that the utilities' expenditures are prudent andthat its investments are "used and useful." Finally, the regulatory authoritymust insure that tariffs for each consumer classification are reasonable giventhe costs of servicing that classification and the services provided.

3.22 The regulatory authority must also achieve a high level of publicconfidence. In order to do this, it needs to be independent, objective andtransparent. The regulatory authority must be independent and seen to beindependent of special interests, especially of the organizations which are beingregulated. The authority must make objective decisions based on law, regulations

- 29 -

and the available data and its conclusions must follow logically from theseelements. Finally, the authority must be transparent in that it consults withall major interested parties including, of course, the organization beingregulated, and that it publishes all of its major decisions including how thesewere arrived at.

3.23 There are two basic approaches to utility regulation. One approachis a loose approach where the utility has a high degree of flexibility in itsactions subject only to limited constraints imposed by the regulatory authorityand oversight by that authority. An example of this type of approach is the newregulatory systems which have been introduced into the U.K. Close to the otherend of the spectrum is the tight regulatory approach which is more characteristicof the U.S. In the U.S. approach, the regulatory authorities do a very thorougheconomic analysis of the utilities and have numerous hearings in order to settariffs and determine the needed investments by the utilities. There areadvantages and disadvantages to both approaches to utility regulation, but thereis considerably more experience with the tight regulatory approach. TheBulgarian government should look at both approaches, perhaps even have a studydone of them, before it decides which approach to adopt.

3.24 Bulgaria has the beginnings of a regulatory authority in the form ofthe Commission on Prices, which oversees utility prices and makes recommendationson them to the COM. The Commission, however, in its most recent form is very newand so far: 1) has limited skills and experience in utility regulation; and 2) istotally subject to government control. Both of these aspects should be changed.The Commission or its successor, the proposed national energy regulatoryauthority, should seek technical assistance, probably from a bilateral donor, inthe design and implementation of a utility regulatory system. The donor selectedshould be one whose approach to regulation is in agreement with the approachadopted by Bulgaria. Second. any regulatory authority should be made asindenendent of the government as possible. Often in market economies this meansthat the top management of the regulatory authority should have a high degree ofjob security and cannot easily be removed by the government. In Bulgaria thisprobably implies that top management of the regulatory authority have fixedlonger term appointments which should be made by the Council of Ministers or thePrime Minister. The regulatory authority would be largely independent of theenergy agency but should coordinate with it.

D. Resources

3.25 Bulgaria has very few domestic energy resources. Proven oil and gasreserves for the country, have declined for a number of years and are only about3 million tonnes of oil equivalent, which is very small--less than three monthsnormal hydro-carbon consumption for Bulgaria. Hydropower potential is alsolimited since most of Bulgaria's rivers are small and the only really largeriver, the Danube, has a fairly small drop in altitude where it forms Bulgaria'snorthern border with Romania. The country has significant but very low gradecoal reserves. These reserves including lignite are around 2.5 billion tonnesof which 2.2 billion tonnes are lignite in the Maritza East deposit. About 90%of these reserves have a heating value of only 1,200-1,500 Kcal/Kg., which is,for example, 20-25% of the heating value of internationally traded steam coal.In addition these lignite reserves have a very high sulfur content.

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E. Capacity Utilization

3.26 While not necessarily a long term characteristic of Bulgaria's energysector, there is currently and will be for at least 5 years substantial excesscapacity in the sector, though not all of this excess capacity is immediatelyavailable. The excess capacity is caused largely by the decline in consumptionof most forms of energy in Bulgaria brought on by the drop in industrial output,the decline in Bulgarian real incomes and the sharp rise in energy prices whichhave occurred over the past year in the country. Much of this capacity is not,however, readily available due to operating problems which need to be resolvedor investments which need to be completed. However, these problems can beresolved and/or investments completed and Bulgaria could become a net exporterof transformed energy (electricity, oil products) though it will remain a largenet importer of unprocessed energy (oil, coal, gas) for the foreseeable future.(See paras 1.25, 4.11 and 7.11)

F. Environmental Impacts

3.27 The energy sector in Bulgaria is a major contributor to pollution.The main pollutant produced by the energy industry is sulfur dioxide emissionsfrom lignite fired power plants. Bulgarian lignite has a high sulfur content of2.0-2.5%, which given the very low heating value of this fuel is equivalent to8-10% sulfur coal. Sulfur dioxide emissions from power plants in 1989, most ofwhich came from burning lignite, were about 1.3 million tonnes. Total sulfurdioxide emissions for the country were about 1.7 million tonnes which includesnot only power plants but also household and industrial use of high sulfur fuelsprimarily lignite and briquettes. This level of emissions makes Bulgaria a veryintensive polluter relative to its GNP, one of the most intensive in the world,though less so relative to its population or area. However, unlike some otherEastern European countries the sulfur dioxide emissions by power plants do notappear to be one of the most important public health problems of the country nordo the towns close to the main power plants have the highest ambient levels ofsulfur dioxide. This is largely because the Maritza East power complex, whichexploits the local lignites and is by far the largest polluter, is located somedistance from the major cities, on the Thracian plain, and is equipped with someof the tallest stacks on the Balkan peninsula (325 m). In general, the powerplants contribute to the dust problem, which is a major issue in certain cities,though they do not appear to be the major cause of this problem since most largeplants are equipped with efficient electrostatic precipitators.

3.28 While the main environmental issues associated with the energy sectorare air pollution, especially S02 discussed above, and nuclear safety which isdiscussed in chapter 7, there are several secondary issues which are worthstressing. First, the production and use of briquettes for home heating whichis discussed in paragraphs 7.33-7.35 is a significant source of pollution. Thebriquette factory, which is quite old, produces a large amount of particulatesthough fortunately it is located in a rural area. The combustion of thesebriquettes, which contain 4.5% sulfur, produces substantial amounts of SOZ andparticulates in the towns and villages where they are burned. Second, theNeftochim refinery complex at Burgas is a major contributor to the 650 thousandm3 of wastewater which are discharged daily on the Bulgarian coast of the BlackSea. However, the total Bulgarian contribution to Black Sea pollution is dwarfedby the 800 million m3 of polluted water delivered to the Black Sea by the main

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rivers in its northwest quadrant (Danube, Dniester, Dnepr). Third, mining at

Maritza East has disturbed about 13,000 hectares of land so far of which 3,000

have been recultivated. It is estimated that all mining, quarrying and

construction operations together in Bulgaria have adversely affected about 89,000

hectares or somewhat less than 1% of the surface area of the country.

Considerably more information on the environmental problems of Bulgaria, both

those associated with energy production and transformation and the majority which

are not connected with the energy sector, is contained in the recent Environment

Strategv Study for the country (Report No 10142-Bul, dated March 17, 1992)

prepared jointly by the Bank, the U.S. Government and the Government of Bulgaria.

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IV. PETROLEU

A. Demand for Petroleum Products

4.01 Bulgaria imports almost all of its petroleum since domesticproduction is negligible (see para. 4.05 below). This petroleum is imported inthe form of crude and refined in Bulgaria (para. 4.09) or directly imported asproducts. Typically about 90% of petroleum is imported as crude and most of therest is imported as heavy fuel oil.

4.02 Approximately 36X of Bulgaria's primary energy demand is met bypetroleum products. The main products used are: 1) heavy fuel oil, 2) dieseloil, 3) gasoline, and 4) gas oil, in that order. Heavy fuel oil (residual fueloil) is used throughout the industrial sector and in power and heat generation.Consumption of this product represents normally close to 40% of total petroleumproduct consumption. Diesel fuel is used primarily in transportation (trucks)and in the agricultural sector where much of the farm machinery is dieselpowered. In the past when Bulgaria had access to larger amounts of relativelyinexpensive Soviet crude, the main refinery at Burgas also used to export dieselfuel. Gasoline is used for private cars, very few of which are diesel, and inthe past was also exported. Gas oil or light fuel oil is used in industry,through not as widely used as heavy fuel oil, and before the 1991 price increaseswas widely used by households for heating. Details on the use of all of theseproducts are provided in Annex 2. In addition to these major products there area number of other uses of petroleum products in Bulgaria including petrochemicalintermediates, lubes, jet fuels, kerosene, LPG etc.

4.03 Consumption of petroleum products has dropped fairly sharply as aresult of the decline in GDP in Bulgaria, the drop in personal incomes and thesharp increase in petroleum product prices which have occurred. This decline inconsumption has been across all products and was about 19% in 1990 relative to1989. A further significant decline occurred in 1991 and it is anticipated thatthe total decline in petroleum consumption 1989-95 as a result of the drop inoutput, restructuring of the economy and price rises will be on the order of 30-35%.

B. Oil and Gas Exploration and Production

4.04 Exploration. Bulgaria's exploration history began early in thiscentury in a modest way. More serious activity was launched after World War II.However, the results of these efforts have been limited in scope and notcommensurate with the sums spent. On average over the past decade, domesticproduction has been less than one percent of total consumption, even thoughduring the same period, there has been a considerable level of investment, seeTable 4.1.

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Table 4.1 Capital Investments for Exploration a/(in '000 Leva)

Actual Allocation1988 1989 1990 1991

1. Geological Exploration for 128,284 126,636 101,608 142,459of which Oil and Gas 63,000 60,500 51,600 83,000

Minerals 55,284 66,136 50,008 59,454

2. Machinery & Equipment 18,829 12,260 14,600 1,500(Imported and Domestic)

3. Construction and Erection 376 339 182 4524. Exploration - Design Work 460 296 381 x5. Other Expenses 1,501 56 15 48

Total Capital Investment 145,450 139,587 116,786 144,450

a/ By sources of funding:

1. From state budget 120,600 121,023 89,000 135,0002. Own sources of

financing 28,850 18,564 27,786 9,450

4.05 Production. In 1990, production was 64,000 tons of oil and 13million cubic meters of gas (see Table 4.2), having declined for a decade. In1991, COMGEO sustained its normal exploratory efforts and investments in levathough these fell sharply in real terms due to the rapid price inflation. In1992, exploration will be carried out by the new Oil and Gas Exploration andDevelopment Company and its investment is likely to be quite low in real termsdue to budget constraints. Comgeo's forecasts of production, however, remainrelatively optimistic and indicate a continuing decline in production from theestablished fields and small increases from recent discoveries as shown inTable 4.3 below.

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Table - 4.2: Domestic Production of Oil and Gas

Year Oil, (t) Gas Equivalent Oil, (t)thousands m3

1981 200,052 137,024 332,1261982 200,483 80,924 281,4571983 142,150 56,600 198,8101984 140,072 47,002 187,0541985 105,150 20,482 126,5061986 93,295 17,138 111,2691987 84,681 13,293 98,8691988 77,381 10,229 88,5431989 72,812 9,308 83,0171990 64,000 13,610 78,073

Total 1,585,724

Table 4.3: Oil and Gas Production Forecast

Year Production from Production from Total ProductionOlder Discoveries Recent Discoveries

(toe) (toe) (toe)

1991 70,000 - 70,0001992 60,000 150,000 210,0001993 55,000 150,000 205,0001994 50,000 200,000 250,0001995 45,000 200,000 245,0001996 40,000 200,000 240,000

Total 1,220,000

4.06 The allocation by government of additional funds for explorationwill, by itself, be of only limited usefulness, for a number of reasons includingthe Bulgarian industry's lack of state-of-the-art exploration skills especiallyin seismic interpretation and in offshore drilling and production. TheGovernment and COMGEO have therefore adopted an important new approach:attracting foreign oil companies to participate in high risk exploration for oiland gas in Bulgaria. This approach has so far been successful with eightagreements having been signed, mostly with large firms, for exploration of blocksoffshore in the Black Sea and onshore the Black Sea coast of Bulgaria. The majorexploration activity should begin in 1992 with seismic exploration followed bythe drilling of exploratory wells. This approach should be expanded to cover theentire country and not limited as currently to the Black Sea area. Also, while

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this approach is a good one, it is prudent to seek the professional views of anindependent consultant regarding the hydrocarbon prospects of Bulgaria, based onimplementation of integrated regional basin studies. The results of thehydrocarbon study would then be made available to interested companies. The Bankand COMGEO management have agreed that the study should be undertaken as soon aspossible.

4.07 In addition to the technical aspects, it is also important toestablish a well defined legal and contractual framework for attracting foreignexploration risk capital. The existing legal and contractual framework for oiland gas exploration in Bulgaria has a number of gaps. COMGEO attaches highpriority to this matter and is planning to obtain the services of a qualifiedlegal expert this year to assist with improving this framework. The Bankstrongly supports this step and will provide assistance as needed.

4.08 Institutional Restructuring. COMGEO has had a large reduction inforce, but at the end of 1991 still had a very large labor force (around 8,000)considering its extremely limited expioration and production activities. Toimprove the performance of this organization the government, at the beginning of1992, began to reorganize it. This reorganization split the old Comgeo into:1) 9 companies, which are engaged in hydrocarbon exploration and production,minerals exploration or services for exploration and production; and 2) the newComgeo which is a combined land management and geological survey department forthe government. These changes are aimed at introducing market discipline,increasing efficiency as well as separating governmental and commercialfunctions. However, the changes fragmented the old Comgeo into too manycompanies, most of which are inviable. While the oil and gas company which wascreated (the Oil and Gas Exploration and Development Company), is reasonable theother 8 companies, which are engaged in various mixtures of services forexploration and production and exploration for minerals on their own, shouldprobably be rationalized and combined. Furthermore, the Oil and Gas Explorationand Development Company should develop a privatization plan. A review of thereorganization of COMGEO by organizational consultants would be useful and thetop management of Comgeo have decided to undertake such a study with Bankassistance.

C. Refineries

4.09 Bulgaria has three refineries located respectively at Burgas, on theBlack Sea Coast, and at Pleven and Ruse on the Danube plain in the northern partof the country. The Burgas refinery accounts for about 85 % of the country'srefining capacity with the other two refineries being very small with uncertaineconomics.

4.10 Burgas. The Neftochim refining-chemical complex at Burgas is themajor source of refined products for Bulgaria. This 12 million metric ton peryear cracking refinery, with petrochemical and plastic derivative plants, has an"effective" capacity of about 7 million tons per year due to the bottleneck ofthe Fluid Catalytic Cracking Unit (FCC). Further, crude capacity utilization issimply topping/crude distillation processing and is very likely inefficienteconomically in that high value FCC feed is used ultimately to produce lowervalue heavy fuel oil. Though the country's product demand is skewed stronglytowards heavy fuel oil, it is probably more economic to import heavy fuel oil

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than to produce it by operating in a topping mode at the refinery. Details onthe capacity of the refinery are provided in Table 4.4 below.

Table 4.4: Burgas Refinery CaRacity

Unit Capacitymillion t/year thousands bbl/day

Atmospheric Distillation 12.0 235Vacuum Distillation 3.7 80Catalytic Reforming 0.6 15Hydro-Treating 1.4 30Catalytic Cracking 1.5 32Alkylation 0.5 0.2Visbreaking 1.5 32MTBE 0.08 0.2

4.11 Crude throughput for Bulgaria at Burgas (excluding processingarrangements) was about 13 million tonnes in 1988 and 1989, about 8.2 milliontonnes in 1990 and approximately 4.7 million tonnes in 1991. This decline is dueto reduced Soviet deliveries, the country's limited ability to buy crude, reducedproduct demand and a very sharp drop in exports by the refinery for its ownaccount. Today, roughly half the crude is imported by Neftochim, from the formerUSSR (medium sweet) or elsewhere, and half is obtained through processingagreements with international trading companies (light sweet and heavy sour),which makes partial use of the spare refining capacity. In the processing deal,the Burgas refinery processes the crude and purchases the fuel oil for foreignexchange, allowing unleaded gasoline, diesel and other products to be exported.This provides foreign exchange revenue (the processing fee) and flexibility inimporting required products. Details of the product slate produced by the Burgasrefinery are given in Table 4.5 below.

4.12 The chemicals complex at Burgas refinery is based on an ethylenecracker and an aromatics reformer, both feeding naphtha. Basic petrochemicalsproduced include: Butadiene, benzene, toluene, ortho-xylene, para-xylene,styrene monomer, phenol, ethylene glycol, acetone, acstaldehyde, and normalparaffins. Polymers produced include: polyethylene, polypropylene, polystyreneand styrene-butadiene rubber. This is a wide range of petrochemicals, most ofwhich are produced in moderate amounts.

4.13 While most of the chemical units are fairly old and the technologyused is not the most up-to-date, product quality is generally good. The productsare sold domestically and also into export markets. Because of the lack offoreign exchange for crude oil, Burgas is entering into petrochemical processingagreements with foreign companies which provide naphtha and receive back a mixof chemicals and polymers for export and pay a processing fee.

4.14 A joint venture is being considered with a foreign group which willprovide most of the capital to totally modernize part of the existing chemicalplant with the derived product being exported, so enabling the capital to be

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repaid as debt or dividends over a period of time. The government should alsolook at the possibility of joint venturing all or parts of thisrefinery/petrochemical complex.

Table 4.5: Oil Processing and Petroleum ProductsNeftochim - Burgas

1988 1989 1990(thousands of tonnes)

InputsCrude Oil 12,883 13,144 8,278Low Octane Gasoline 234 197 130Heavy Fuel Oil 91 240 120Total Inputs 13,208 13,580 8.528

OutputsLight Products including: 7.963 8,209 4.901

Gasoline 2,087 2,166 1,297Low Octane Gasoline for Exports 192 216 n.a.Naphtha for the Petrochemical Industry 714 703 588Naphtha for Solvents (Products) 29 29 16Motor Diesel 3,377 3,501 1,890Light Fuel Oil 1,129 1,112 828Jet Fuel 330 372 203Kerosene 5 6 6Propane/Butane 100 103 74

Heavy Fuel Oil 3,698 3,818 2,539Lubricants 192 178 138Bitumen 521 519 384Associated Gas (Flared) 833 857 566

Total Outputs 13.208 13.580 8.528

4.15 Pleven. This is essentially a lube refinery which also rmakes somegasoline, diesel, fuel oil and asphalt. This small, 1.2 million tonnes per yearrefinery, ran about 0.8 million tonnes per year in 1991, primarily due to reducedlube demand. Details on the refinery are provided in Table 4.6 below.

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Table 4,6: Pleven Refinery Capacity

-----------Capacity-----------Unit million t/year thousands bbl/day

Atmospheric Distillation 1.2 26.0Vacuum Distillation 0.6 11.5De-asphalting 0.2 3.5Phenol Extraction 0.4 7.0Dewaxing 0.28 6.5Hydro-treating 0.22 5.1Blending Lubes 0.21 4.2Catalytic Reforming 0.3 6.5

4.16 This refinery was designed to run local low sulfur crude, but littlewas discovered. Low sulfur light crude is shipped to Burgas, transferred to asmaller tanker, shipped to Varna, transferred to rail cars and moved to therefinery. Heavy naphtha and vacuum resid are railed to Pleven from the Burgasrefinery for reformer feed and asphalt production, respectively. Export baseoils are trucked to the Danube and shipped by barge. Export wax is railed out.Electrical power is generated on site and surplus power is sold into the stategrid. Given the very small size of this refinery and the expensive and complextransportation routes that have to be used to get crude into the refinery andproducts out of it, the economics of continuing to run Pleven need to becarefully evaluated. It may be viable, but only as a lube refinery since it isunlikely it could compete with the Burgas refinery or imports in supplying themajor product markets.

4.17 Ruse. This refinery is tiny and is scheduled to be shut. About100,000 tons per year of local crude is processed. Used lube oils were processedby recycling into base oils. The used lube oil will, when the refinery is shut,be blended into residual fuel oil.

4.18 Pricing/Margins. Retail prices of gasoline, diesel, fuel oils andpropane/butane are set monthly according to a formula established by theCommission on Prices (see para 3.18). The retail prices are based onMediterranean spot product prices plus freight, duty and taxes and a fixedmarketing and distribution margin. This results in a very tight margin for therefineries on these products. Jet fuel, asphalt, lubes, etc. are priced by therefineries with a ceiling of cost plus a specified percentage. Under thiscurrent pricing system the Burgas refinery is just covering cash costs, thoughthis is not only a result of the tight pricing system, but also inefficienciesat the refinery and its relatively lower levels of capacity utilization.

4.19 Crude Purchases/Trade. Chemimport, a government company, continuesto buy the Russian crude, charter tankers, sell Burgas export chemicals and buycrude and fuel oil under a bid system utilizing funds provided under the Bank'sSAL loan. Neftoimpex, a similar company to Chemimport, handles the Burgas crudeprocessing agreements and is owned almost entirely by Neftochim. Both of thesetrading companies should be privatized early in the privatization process since

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as service organizations/trading companies with limited fixed assets, theprivatization process should be easier and in any case both organizations alreadyhave staffs which are business oriented.

4.20 Outlook. Refining is the industry in the energy sector of Bulgariawhich will be faced with the most significant direct foreign competition as thecountry makes the transition to a market economy. It should become relativelysimple to import petroleum products to Bulgaria in competition with the productsproduced by the refineries, primarily the Burgas refinery. Given this situationthe refineries, but again especially Burgas. have an urgent need to adopt themanagement techniques and approaches used in market economies. The refineriesshould operate as commercial entities attempting to make a profit, without anyday to day interference by the government. This would involve giving themanagement of the refineries more authority than they currently have, providingthem with an incentive for being profitable and holding them responsible. Theproposed performance contracts are a good first step in this direction.

4.21 In addition, the refineries require technical assistance in at leastfour specific areas. First, the chemical and refinery plant operators needtraining in how to minimize operating costs. This could be done by experiencedoperators used to market-driven operating criteria in a relatively limited amountof time. It should be accompanied by investments in small energy saving devicessuch as monitors and automatic controls. Second, accounting Rrocedures at therefineries need to be improved so they can ascertain the profitability of variousoperations and options. Refineries operate on small margins and a good costaccounting system is required to estimate profitability. Third, Burgas. likeother refinery-chemical complexes, requires a sophisticated computer simulationmodel (linear program) of the complex for planning and operating purposes.Finally, the refineries need to develoR strategic Rlans taking into account theeconomic and political environments they may face over the next 5 to 10 years.

4.22 While the immediate need is for the technical assistance outlinedabove and possibly some additional working capital, in the longer term there areat least three major capital projects at the Burgas refinery which may beattractive and should be studied assuming that the long term economic viabilityof the refinery's continued operation is confirmed. These are: 1) an expansionof the FCC unit, to reduce the current effective bottleneck at the refinery andallow a more sophisticated product slate to be produced; 2) heavy fuel oil(resid) desulfurization capacity in order to allow the refinery to produce lowersulfur heavy fuel oil; and 3) completion of the high density polyethylene unit.

D. Marketing and Distribution

4.23 The distribution and marketing monopoly is Petrol, a state owned-company with about 530 service stations retailing gasoline, diesel and lubes.Average volume is 3,000 tonnes per year of gasoline (80,000 gallons/month) withabout 30% of the stations averaging 4,500 tonnes per year (125,000gallons/month). Volume per station is thus relatively high. The Governmentplans to privatize somewhat over half of these service stations. A privatizationplan has been developed which would involve sales of stations to privateindividuals and companies and joint ventures with private companies for otherstations. In the spring of 1991, the privatization process started with the saleof 4 stations. It was then stopped. The Bank strongly encourages the Government

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and Petrol to move ahead with this privatization plan. which has beensignificantly delayed. In addition, the Government and Petrol should Drivatizesome of the storage capacity (see below) which provides products for thesestations.

4.24 Petrol has 105 storage depots/terminals located near the major townsthroughout the country with storage capacity for gasoline and diesel ranging from1,500 cubic meters to 250,000 cubic meters (400,000 US gallons to 65 million USgallons). Total capacity is 2.5 million cubic meters (650 million US gallons).This is equivalent to around 50 days of sales and is more than adequate. Petrol,however, uses only a part (30% or so) of this storage with the rest beingcurrently empty or used by others such as the military. Gasoline, diesel andfuel oil are supplied from Burgas to the storage depots by rail. A pipelineconnects Burgas to the large Sofia depot but only carries diesel. Trucks areused to move product from the depots to the stations and to large customers.Before the sharp decline in the Bulgarian economy, Petrol used to sell about 9.5million tonnes per year of petroleum products consisting of heavy fuel oil,diesel, gas oil and gasoline, almost all of which went through these storagedepots.

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V. NATURAL GAS

A. Consumption

5.01 Bulgaria on average consumed about 6.5 billion cubic meters of gasa year during the past four years. This represented 16-19% of its energyrequirements, see Table 5.1. Almost all of the gas is used by industry. Thelargest gas user in 1990 was the district heating plant/ power plant area whereit was used to generate steam for district heating and/or to produce electricity.The second largest user was the refining and chemicals industry where gas is usedin the Burgas Refinery as a source of heat and at various chemical plants bothas a source of heat and as a chemical feedstock. Other significant users aremetallurgical plants and the building materials industry. The table below showsfor 1986-1990, the amount of gas consumed by industry.

Table 5.1: Gas Supply and Usage(in billions cubic meters)

1986 1987 1988 1989 1990

Sources of GasImports 5.68 6.07 6.25 6.83 6.83Production 0.02 0.01 0.01 0.01 0.01Beginning Storage 0.46 0.60 0.76 0.61 0.87

Total Sources 6.16 6.68 7.02 7.45 7.71

Uses of GasPower Plants/District Heat 1.04 1.20 1.82 2.03 2.88

Refining/Chemicals 2.43 2.59 2.39 2.38 1.86Metallurgy 0.77 0.73 0.76 0.79 0.75Building Materials 0.83 0.85 0.88 0.82 0.78Glass/Chinaware 0.29 0.30 0.31 0.31 0.29Other 0.20 0.25 0.25 0.25 0.23

Total Consumption 5.56 5.92 6.41 6.58 6.79

Ending Storage 0.60 0.76 0.61 0.87 0.92

Total Uses 6.16 6.68 7.02 7.45 7.71

5.02 Gas usage has grown steadily in Bulgaria. In 1986, gas represented15% of the country's energy consumption while by 1990 it was up to 18% of energyconsumption. This expansion in gas usage occurred because of increased gasconsumption to generate heat and electricity, more than offsetting a decline ingas usage by the refining/chemical industry. The increase in gas consumption in

- 42 -

the electricity/heat area is due to: (i) shortages of other fossil fuels suchas domestic coal and imported petroleum supplies; and (ii) the availability ofgas from the Soviet Union, Bulgaria's sole supplier, on favorable terms. On theother hand, the decline in gas usage in the refining and chemical industries islargely due to the contraction in the Bulgarian economy over the past two years.

5.03 It is likely that, aside from generation of electricity and heat, theconsumption of gas in the industrial sector of Bulgaria will decline as theeconomy restructures. Gas is used in a number of heavy industries which arelikely to reduce their gas consumption as they; 1) improve their efficiency byusing less raw material inputs including gas, and/or 2) contract as a result ofthe restructuring of the economy. There is, however, significant potential forincreasing gas usage in the power plants (see Chapter VII). Several major powerplants, particularly Bobov Dol and Ruse, could be converted to gas with varyingdegrees of effort. This conversion would potentially be justified onenvironmentAl grounds at Ruse while at Bobov Dol the primary objective would beto supplement or replace local coal sources which are close to exhaustion. Thereare, however, considerable uncertainties associated with the Russian gas now thatthe Soviet Union has disintegrated and a decision may well be made to wait formore experience with Russian supplies before planning any plant conversions.Moreover, it is likely that whatever conversions of power plants do occur, theywill not be sufficient to offset the decline in gas usage in other parts ofindustry and thus that total gas consumption will decline in the next few years(see Chapter IX).

5.04 Almost no gas is used by the household sector directly. There areno cities with gas distribution grids for supplying households and commercialestablishments. Thus the only use of gas by households is indirect, in the formof hot water produced by gas-fired district heating systems or electricityproduced from gas. For those cities or suburbs which are not equipped with adistrict heating system, gas distribution systems may well prove more economicthan a new district heating system. This is because the energy losses in a gasdistribution system are likely to be lower than in a district heating systemwhere losses occur at the boiler and throughout the distribution system. Inaddition gas is far more versatile than hot water since it can be used forcooking. In this connection the pilot project to introduce Bulgaria's first gasdistribution system into the town of Samakov, represents a significant stepforward. It will provide useful information on the costs of creating suchdistribution systems as well as some preliminary information on how much gas willbe used once a distribution system is in place. It is likely, however, thatgiven the current economic conditions in Bulgaria, initial gas usage in this townwill be much lower than would be the case under more normal circumstances.

B. Supplv

5.05 Virtually all of the gas used in Bulgaria is imported from the formerSoviet Union, mainly from the Russian Federation. Domestic production currently,and for the past 5 years, has been less than 1% of Bulgaria's supply.Alternatives to Russian supplies are very limited. One potential alternativewould be discoveries in the newly granted concession areas both offshore in theBlack Sea and onshore; however, this supply is highly uncertain at this stage.Also in the longer term the much discussed Iranian/European line may transitBulgaria providing an alternative gas source. However, for the next several

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years and perhaps much longer, Bulgaria will have no viable alternatives toRussian gas supplies.

5.06 There is a risk in this situation of an interruption of Russian gassupplies which cannot be entirely avoided. (The current risks appear to be mostacute from political turmoil and from pipeline corrosion.) However, it can bepartially mitigated in two ways. First, the country should continue to encouragethe develoRment of gas transit arrangements such as those which exist for Turkeand are under construction for Greece (see para 5.07). While these are not atotal guarantee of Russian supplies they should serve to increase the prioritythe Russian Federation assigns to keeping Bulgaria supplied with gas. Second.Bulgaria should investigate increasing its current gas storage capacity of around1 billion mi3 . Substantial amounts of gas in storage could help offset anytemporary problems with Russian supplies. It is not necessary that Bulgaria ownthe gas in storage. It could be owned by the Russians and used by them to offsetany supply interruptions and to help satisfy peak demands from their customers.If it was used for this latter purpose, they would be able to charge a premiumfor this gas.

C. Transmission System

5.07 Bulgargaz, the state owned gas transmission and distributionmonopoly, has built and operates the gas transmission system of the country. Thesystem is approximately 2,000 km, in length, consisting of 28 to 40 inch linesfor transmission and 4 to 20 inch lines for distribution to industry. The maindomestic transmission lines are approximately 28 inch (720 mm) in diameter andrun through the Danube plain to the north of the Balkan mountains and through theThracian plain to the south, joining in the vicinity of Sofia. The domesticsystem is able to supply gas to major industries located throughout the countryincluding Sofia, Plovdiv, Burgas and Varna. The system, however, does not havethe ability to supply industries situated in more isolated locations away fromthe two main transmission lines.

5.08 Bulgargaz also transports Russian gas from the Romanian border to theTurkish border. The gas destined for Turkey is carried via a 260 km, 48 inch and40 inch, pipeline belonging to Bulgargaz and a transit fee equal to a percentageof the throughput is charged. This fee is paid in gas. Bulgargaz is quiteadvanced in having a similar transit arrangement established for moving Russiangas to Greece. The company is building a 40/28 inch pipeline largely parallelto its existing system to deliver the gas to Greece and ultimately to Yugoslavia.The line is made up of three segments of about 600 km utilizing initially the 500km under utilized capacity of the existing lines and about 100 km of 28 inch linefrom Stanke Dimitrov to the Greek border. This pipeline will initially carryabout 1.5 billion cubic meters of gas a year, but could easily carry much more.Bulgargaz will be paid a transit fee in kind for carrying the gas to Greece whichwill be similar to the fee paid for carrying gas to Turkey. The company willfinish the pipeline through Bulgaria in the summer of 1992. However, Greece islagging behind in the construction of its segment of the pipeline and it isunlikely the entire pipeline will be completed before 1994 at the earliest.Bulgargaz is also planning to use the main part of this pipeline in Bulgaria tosupply two of the Yugoslav Republics, Macedonia and Serbia. This part of theproject is, however, being delayed until the Yugoslav political situation isclarified.

44 -

D. Pricing of Gas

5.09 The price that Bulgargaz pays the USSR for gas is set quarterlyaccording to the value of an index based on the price of petroleum fuels with aone quarter lag. For example the price that Bulgargaz was paying the USSR forgas in the second quarter of 1991 was US$104 per thousand cubic meters. This wasdetermined by multiplying the base price for gas established in the contract byan index whose value was in turn determined by the first quarter 1991 prices of1% sulfur heavy (residual) fuel oil, 3% sulfur heavy fuel oil and gas oil. Thesecond quarter natural gas price of US$104 was rather high because the firstquarter 1991 petroleum product prices were inflated by concerns about the GulfWar. A more "normal" price for gas is in the US$90-95 range per thousand cubicmeters. Even this price, however, is fairly expensive though the high "cost" islargely offset by the attractive payment terms provided by the Russians(see paragraphs 5.11-5.14 below). All gas prices are based on a standard heatingvalue for gas of 8 million kcal per thousand cubic meters and if the gas has ahigher or lower heating value the price is adjusted accordingly. Finally, thecost of gas to Bulgargaz includes not only the price paid the former USSR but atransit fee paid to Romania for delivering the gas to the Bulgarian border.

5.10 The price at which Bulgargaz sold gas to its Bulgarian customers in1991 was its cost of gas in dollars as explained above, with a modest mark-up tocover its operating costs and the Romanian transit fee. This price was thenconverted to levas for any given month by multiplying the dollar price of gas forthat month by the dollar/leva exchange rate used in the bilateral tradingarrangement withthe Russian Federation(the clearing dollar exchange rate, seepara 2.20). Because this arrangement produced considerable variations in the levaprice of gas in 1991 (from 2028 leva in the second quarter to 998 leva in thefourth quarter - largely due to changes in the value of the clearing dollar), theGovernment decided at the beginning of 1992 to in future price gas at 10% lessthan 3.5% sulfur heavy fuel oil on a heat equivalent basis. There isconsiderable danger to the company in the longer term from such a pricing systemsince depending on the differential between the cost of Russian gas and the levaprice of natural gas determined by the heavy fuel oil formula, Bulgargaz couldhave major losses or less likely, be very profitable. Pricing of natural gasshould therefore be shifted back to a cost based system. Furthermore. since mostof the volatility in leva gas prices is caused by the use of the clearing dollarexchange rate to convert dollar gas prices to leva prices, instead the actualmarket rate for the dollar, which is less volatile, should perhaps be used forthis conversion.

E. Means of Payment

5.11 There are three means of "payment" used by Bulgargaz for Russian gas.It pays for part of the gas in leva, part of the gas it receives as settlementfor a debt owed by the former USSR and the final part is the Turkish gas transitfee which is paid in kind. For example, in 1990 imports of Russian gas were6.8 billion cubic meters. Of this total 5.5 billion were paid for in leva,1.0 billion were received as partial repayment of the Soviet debt and 0.3 billionwas the Turkish gas transit fee.

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5.12 The gas which is paid for in leva is part of the bilateral clearingarrangement with the Soviet Union and now the Russian Federation described inpara 2.20. Under this arrangement Bulgargaz pays Chemimport, a government ownedimport-export organization, for the gas in leva at the clearing dollar exchangerate and Chemimport settles its accounts primarily by exporting various productsusing the money paid by Bulgargaz to pay for these exports.

5.13 The gas which Bulgargaz gets for debt settlement is a repayment ofthe debt which the former USSR owes to Bulgaria for its assistance in buildingthe Yamburg gas pipeline. This pipeline delivers Russian gas to Western Europeand some of the civil engineering and construction on the line was done byBulgarian construction companies. (There is also some continuing work being doneon the Yamburg line by Bulgarians.) The Bulgarian participation in constructionof the pipeline was organized and "financed" by Bulgargaz with the funds providedby the Bulgarian Government, first directly and later through Biochim Bank. Asa result, the Government of the USSR built up a debt to Bulgaria (Bulgargaz)which is being settled in gas. In 1991, Bulgargaz received about 2.9 billioncubic meters of gas from the USSR to service this debt. These payments willincrease to 3.75 billion cubic meters per year during the period 1992-96. It isexpected that the debt will be repaid by the end of 1996 though this will dependon the price of gas. Bulgargaz uses its receipts from the sale of the gas toBulgarian consumers to service the debt it owes Biochim Bank and indirectly thegovernment. This gas is a low cost gas source for Bulgargaz since debtrepayments are modest relative to the value of gas received.

5.14 The Turkish gas transit fee is a fraction of the gas transported,paid in kind. It amounts to around 0.3 billion cubic meters per year. Thetransit fee for gas going to Greece will be similar and should by 1995 provide0.1-0.2 billion cubic meters a year of gas to Bulgargaz out of which the companywill have to service its costs of building the line to Greece.

F. Profitability and Organization

5.15 Bulgargaz under "normal conditions", such as those which existed in1991, is quite profitable. This is primarily because it should sell gas at closeto its marginal cost of gas, the cost of the Russian gas it purchases, while itsaverage cost of gas is substantially below its marginal cost because of the gasit receives as debt repayments and as transit fees. In 1990 profits pre-tax were41 million leva, on revenue of about 760 million leva, or about US$19 million atthe average 1990 exchange rate of 2.11 leva per dollar. The company paid taxesof 25.6 million leva in 1990 and in addition through retained earnings anddepreciation was able to finance all of its capital investments includingstarting construction of the pipeline to Greece. However, the new gas pricingformula with gas tied to heavy fuel oil prices, creates a considerable danger forthe company since it is now possible for the company's gas sales price to be muchless than its average cost of gas and, therefore, it could be very unprofitable.In the short run (next four years) this danger is unlikely to materialize sincethe company's average price of gas will be very low because more than half of thecompany's gas will be obtained through debt repayments and transit fees. In thelonger run the heavy fuel oil pricing formula may well produce a domestic salesprice for gas below the cost of Russian gas.

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5.16 The management of Bulgargaz are experienced pipeline operators andused to operating in a system in which the company's objective was simply totransport increasing volumes of gas. With the shift from a command and controleconomy to a market economy and the likely major changes in the gas markets (seepara 5.02-5.04), the objectives of the company will become far more complex aswill the challenges it faces. In these circumstances, the company needs to:1) develop a strategic planning capacity which it currently does not have:2) develop a more commercial approach to its operations: and 3) strengthen itsaccounting and financial functions. Also, the government should at some pointprivatize Bulgargaz. There is no reason to have it government owned if acompetent utility regulatory authority is created, as is currently planned, toprevent Bulgargaz from exploiting its monopoly position. Rather, it isrecommended that the shares in Bulgargaz be sold to the public after the companyhas become more commercially oriented and there has been some experience with theoperations of the regulatory authority.

47

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VI. COAL AND URANIUM

A. Uses of Coal

6.01 Consumption of coal in Bulgaria reached its historically highestlevel in 1987. In that year, 40.5 million tonnes of coal were consumed.Thereafter, consumption has declined. In 1990, consumption was 35.1 milliontonnes, representing, at an average heating value of 10.5 GJ/t (2,500 kcal/kg)for both imported and domestic coal, about 370 PJ. As is the case in othercountries, generation of electricity (including combined heat and powergeneration) is the most important use of coal in Bulgaria, representing in 1990about 29 million tonnes, or 250 PJ of coal input (more than 80% of total coalconsumption in terms of tonnage, or nearly 70% in terms of heat content,Table 6.1). Industrial and household uses of coal, although not insignificant,are relatively small compared to other Eastern European countries. A briefanalysis of the 1990 consumption for the three major uses is presented below.More detailed figures are presented in Annex III.

Table 6,1: Major Uses of Coal (1990)

Tonnage Heat Contentmill. t % PJ %

Power & Heat 29.4 84 250 68Industry 3.6 10 80 22Households 2.2 6 40 10

Total 35.1 100 370 100

6.02 Power and Heat. In 1990, Bulgaria used 29.4 million tonnes (about250 PJ) of coal for generation of electric energy in the country's large thermalpower plants and for generation of steam or hot water in smaller combined heatand power plants (CHP plants). It is estimated that about 96% of the coal isused for power generation, and only 4% for heat generation. The major coalconsuming power plants, all belonging to NEC, are: the three Maritza East powerplants, Varna, Bobov Dol and Ruse. They consume in total 28 million tonnes ofcoal. In addition, there are the Republika (Pernik), Maritza 3 (Dimitrovgrad)and Stojanov (Sliven) CHP plants, consuming 1.4 million tonnes of coal. The mostimportant fuel is the low grade local lignite, representing about 60% of coalconsumption on a heat content basis. It is followed by imported hard coal,representing 28%, and low grade local sub-bituminous coal, representing 12% ofconsumption.

6.03 Industry. In 1990, Bulgaria used 3.6 million tonnes (about 80 PJ)of coal in industry. The largest share, 2.0 million tonnes (50 PJ), is used ascoking coal for the steel industry. There are practically no more coke imports;all the coke needed for the blast furnaces is now produced from coking coal inBulgaria. The remainder of coal used in industry, 1.6 million tonnes (30 PJ),

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is scattered throughout a wide range of industries, the most important of whichis the chemical industry (in particular fertilizers), consuming 0.7 milliontonnes, or nearly half of the industrial use without steel. Other relativelyimportant consumers are the cement and tobacco processing industries, each usingabout 0.2 million tonnes of coal. Textile and wood processing industries eachconsume about 0.1 million tonnes. Another 0.3 million tonnes are used by a largenumber of very small industrial consumers. The dominant coal type used inindustry is imported hard coal, representing 87% of consumption on a heat contentbasis. Local lignite, sub-bituminous and bituminous coal represent the remaining17% in about equal shares.

6.04 Households. In 1990, Bulgarian households used 2.2 million tonnes(about 40 PJ) of coal. Locally manufactured lignite briquettes from Maritza Eastare the dominant fuel type, representing 1.5 million tonnes (27 PJ). Local lumpsub-bituminous coal and lignite also are used in households, representing 0.5million tonnes, of which about one half is washed at the mines (Bobov Dol andPernik) and the other half is raw coal in relatively large lumps. Only a veryminor amount of imported hard coal, less than 0.1 million tonnes, or 2% of theimported quantity, is used in households.

B. Coal Resources

6.05 Bulgaria is relatively rich in low grade lignite and sub-bituminouscoal, but poor in higher quality coal reserves. The minable reserves of thepresently active coal mining areas are listed in Table 6.2. Ihile these reservesmay be recoverable with present technology, a significant portion probably cannotbe recovered economically. In addition to the reserves listed below, there isa relatively new discovery of high quality hard coal in the northeastern part ofthe country. However, those reserves occur at great depth (about 2,000 m) andare, therefore, not economically recoverable.

Table 6.2: Bulgarian Coal Reserves

Minable Present LifetimeReserves Production(mill. t) (mill. t/year) (years)

Lignite 2,350 28 85Sub-bituminous Coal 210 5 40Bituminous Coal 10 <1 40Anthracite 1 <1 20

6.06 The reserves of the major types of coal in active mining areas arebriefly described below:

- Lignite reserves occur in two regions of the country: in centralBulgaria, near Stara Zagora; and in western Bulgaria, mainly westand south of Sofia. The central Bulgarian reserves are dominated bythe large, open-pit minable deposit of Maritza East, which alone

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represent 2.2 billion tonnes, or 95% of all Bulgarian lignitereserves. A significant amount of these reserves are located undervillages and towns, and at this stage it is uncertain whether thatportion will ever be exploited. However, during at least the nexttwenty years, exploitation is expected to continue under the presentrelatively favorable conditions, without major resettlements. NearMaritza East are the much smaller reserves of the Marbas undergroundmines, which probably cannot be exploited economically. The lignitereserves of western Bulgaria are about 70 million tonnes, or only 3%of the country's lignite reserves. A major portion of thesereserves may not be economically recoverable.

Sub-bituminous coal reserves occur in western Bulgaria, at BobovDol, Pernik and Pirin, and in eastern Bulgaria, north of Burgas.The Bobov Dol reserves, at 160 million tonnes, are by far thelargest, representing 75% of sub-bituminous coal reserves. Most ofthe Bobov Dol reserves are probably not economically recoverable.Possibly, also a portion of the other sub-bituminous coal reservesmay not be economically recoverable.

Bituminous coal reserves occur only in central Bulgaria, north ofStara Zagora. Reserves are limited to about 10 million tonnes.Probably none of these reserves can be mined economically.

Anthracite reserves occur only at a small deposit north of Sofia andare limited to only 1 million tonnes, which probably are noteconomically recoverable.

C. Coal Production

6.07 Buliarian coal production reached its historically highest level in1987. In that year, 38.4 million tonnes of coal were produced. Thereafter,production has been declining. In 1990, mine production was 31.7 million tonnes(equivalent to 29.4 million tonnes sales), representing, at an average heatingvalue of about 7.1 GJ/t (1,700 kcal/kg), 235 PJ. Lignite mining is predominant,with 27.8 million tonnes, or 84% of production on a tonnage basis and 77% on aheat content basis (Table 6.3). A more detailed overview of coal production fromall mines and key data are presented in Annex III. The main characteristics ofthe major mines and principal issues are described further below.

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Table 6.3: Coal Production (1990)

Production Heating Heat ContentValue

mill. t % GJ/t PJ %

Lignite 27.8 84 6.4 180 77Sub-bituminous Coal 4.9 15 10.3 50 21Bituminous Coal 0.3 1 13.3 4 2Anthracite <0.1 <1 17.3 1 <1

Total 33.0 100 7.1 235 100

Nlote: All figures refer to run-of-mine production. Saleable production is 3.6 million tonnes lower (2.4 milliontonnes lignite losses from briquetting, 1.0 million tonnes rejects from washing sub-bituminous coal,and 0.2 million tonnes rejects from washing bituminous coal).

6.08 Maritza East. At this site there are three large open-pit mines ofabout equal size and adjoining each other. Production from the first minestarted in 1960; the other two mines followed at intervals of about 5 years. Thehighest production, 27.2 million tonnes from all three mines, was achieved in1987. In 1990, production was 25.1 million tonnes. Production was insufficientto cover local consumption (three major power plants and the briquette factory)and some lignite has been imported from western Bulgaria. The lignite producedat Maritza East is by far the lowest-cost coal in the country and is likely theonly economic coal resource in the medium/long-run. In early 1992 the costs ofthis coal according to the COE , who understate depreciation by us.ng historicalcosts, were about 76 lev/t ($3.5/t), or, at a heating value of 6.2 GJ/t, $0.6/GJ.A more reasonable cost estimate might be around $6.6/t using a higher estimateof depreciation but even this only amounts to about $1.1/GJ. For comparison, thecost of internationally traded coal delivered at Maritza would be about $2.5/GJ.

6.09 Mining conditions are relatively favorable: the overburden to coalratio is 4-5 cubic meters per tonne, there is a single coal seam of about 20meters thickness; overburden and coal are relatively easy to dig; there is nogroundwater problem; and the terrain is easily accessible. Continuously workingbucket wheel excavators are employed to remove overburden and coal in all mines.Transport is either by train or conveyors. For the excavators which dischargeonto a conveyor, 3,000 to 3,500 hours per year of operating time are achieved,equivalent to an availability of 35-40%. In Western Europe, comparable systemsare running at 55% availability. Furthermore, it also appears that the hourlyoutput of the machines is no fully utilized. In total. an increase in theannual coal production of about 20% appears feasible without adding major neweguipment. simply by obtaining a higher utilization of the existing equipment,This is feasible even taking into account the more difficult soil conditions inBulgaria.

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6.10 The prime objective of mine management should be to achievesubstantial productivity increases. The additional coal output could be used inthe power plants. It appears advisable to shorten the present 12-hours shifts;they are probably one of the reasons for low productivity. Such changes as wellas specific organizational and managerial improvements to shorten downtime arevery difficult to implement, since present practices have been in existence formore than 30 years. A process of motivating all levels of management and workersfor this task must be set in motion. Supportive know-how transfer is alsoreguired.

6.11 Another area of improvement is medium/long-term mine planning.There may be an opportunity to reduce future land use. In this context, theurgency of completing or eventually modifying two projects for increasedoverburden conveying and stacking, which were started but never completed, shouldbe reviewed. (Contracts for equipment supply were signed and partly executed,but suspended for lack of finance.) Again, technical assistance would berequired. More details on possible rehabilitation measures and the technicalassistance to support them, are presented in Annex VI.

6.12 Bobov Dol. The Bobov Dol underground mines were built in the late-60s/early-70s to fully supply the new Bobov Dol power plant from the nearby sub-bituminous coal deposit. However, in 1990 only 1.5 million tonnes were produced,of which 1.3 million were sent to the power plant, representing only about halfof the plant's consumption in that year. The remaining coal was supplied fromseveral small mines over distances of up to 100 km. There are five smallunderground mines at Bobov Dol, which are connected underground. The minesoperate under extremely difficult geological conditions. The production costsof Bobov Dol coal, on a heat basis, are more than 4 times as high as the cost oflignite from Maritza East. By international standards, most of the Bobov Dolcoal production is uneconomic. There is also a safety risk in the operation ofthe mines due to high methane emissions.

6.13 Given the existing infrastructure and thesevere social Droblemsconnected with mine closures, a suitable restructuring program should be adopted,aimed at optimum utilization of existing installations and significant reductionsof costs. The program should include concentration of the mining operations inte most favorable mining- sections. closure of uneconomic mines or mine sections,increased output from the best mininmg units. organizational and managerialchanges for increased efficiency. rationalization and simplification of transportand infrastructure, improvements to the washing plant to reduce ash content inthe power plant coal. and an action nlan to solve the labor redundancy problem.Technical-assistancefor formulating such a program should be obtained.

6.14 Other Coal Mines. The Maritza East and Bobov Dol mines account, ona tonnage basis, for 82% of domestic coal production. There are 12 other mines,mostly underground mines, which account for 18% of the coal production, but 50%of employment. Most of these mines have unfavorable geological conditions, lowcoal quality, and high production costs. There are normally considerabletransport distances between mines and consumers. Only two mnines (Pernik andBalkanbas) have a washing plant.

6.15 Three mines in western Bulgaria (small oporn-pit mines Chukurovo, BeliBrec and Stanjanci, all located relatively close to Sofia) have production costswhich are lower than the cost of coal imports. Only the coal from Chukurovo has

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a quality suitable for the Bobov Dol power plant; however, due to very limitedreserves, production cannot be expanded. Coal from the other two mines is lowgrade lignite, and marketing appears to be a real problem (presently, part of theoutput is being shipped to Maritza East).

6.16 The other nine mines have production costs which exceed the cost ofcoal imports, often by a very substantial margin. The worst case appears to bethe bituminous coal mine Balkanbas, which produces coal at seven times the costof imports. Mine labor productivity and washing plant yield appear to beextraordinarily low. Three other very high cost mines are the Marbas andBistrica underground lignite mines and the Svogue anthracite mine. These fourmines (including Balkanbas) are likely to remain uneconomTc under any scenario.Of the other five, there might be some mines which could become economic throughcost reduction measures, productivity increases and concentration of operations,though this would be very difficult given the poor quality of the reserves.

6.17 Furthermore, a reduction of coal output, aside from Maritza East,will be required, not only to reduce financial losses, but mainly because demandfor coal is likely to decline. This will occur for three reasons. First, as theBulgarian economy restructures, industries are likely to use less coal and otherraw materials per unit of output since the prices of these inputs have increasedvery sharply. Second, it is anticipated that certain power plants and otherfacilities may shift to gas or possibly imported coal in order to obtain morereliable fuel supplies. Finally, given a choice, users will likely prefer higherquality more environmentally friendly fuels than domestic coal. Because of thisexpected decrease in consumption, glans for restructuring and closing minesshould be elaborated. Their implementation should piroceed in line with socialsafetz' net Rlans for mine workers, Even if in the short-run. major personnelreductions are not feasible. there are some ways to imRrove the presentsituation, Strict policies of not replacing natural turn-over of staff and notove,r-staffing grodHction- could be aRplied. In individual cases. Im2rovements maybe achieved through concentration of mining operations. rationalization of coaltransport. and spinning-off of services.

6.18 For some mines it may be worthwhile to investigate the feasibilityof extracting methane gas through wells drilled from the surface, if aid for sucha study could be found (the technology has been developed in recent years on acommercial basis in the USA). If such an investigation is carried out, it shouldbe extended to known coal deposits which are presently not being mined.

D. Coal Companies

6.19 In the past all of the coal mines were owned by the Committee ofEnergy which also was responsible for almost all district heat and electricityproduction. At the beginning of 1992 the 16 coal mines were set up as16 separate companies. The three mines at Maritza East each became a separatecompany inspite of the fact that they exploit a single deposit and theiroperations are tightly interconnected (see para 3.05). This separation makesoperation of the mines more difficult, makes long range planning extremelydifficult (since the mines' long range plans are intertwined and have to betightly coordinated), adds to adminis,rative costs and adds to environmentalproblems since there is no longer a single entity responsible for resolving suchproblems and each mine has to deal with its problems in isolation. It is

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strongly recommended therefore that the three mines be reunited into a singleentity.

E. Coal Imports

6.20 In 1990, Bulgaria imported 5.9 million tonnes of hard coal from theSoviet Union, representing only 17% of coal consumption in terms of tonnage, but39% in terms of heat content. About 3.0 million tonnes were used for powergeneration, mainly at the Varna power plant, but partly also at the Ruse powerplant. About 2.8 million tonnes were used in industry, of which 1.9 million tonsas coking coal for the steel plants and 0.5 million tonnes in the chemicalindustry. The remainder of the imported coal was used for cement production,tobacco processing, other industries, and, to a small extent, in households.Imported steam coal originates from the Donetsk basin of Ukraine. It is a lowvolatile, anthracitic coal with a heating value of 24 GJ/t (5,700 kcal/kg), anash content of 15-20%, and a sulphur content of 2.5%. While the quality is goodcompared to the locally produced coal, it is significantly below the standard ofinternationally traded coal in world markets.

F. Uranium

6.21 Uranium has been mined in Bulgaria for the past 30 years by RareEarth Metals Company. The total production has always been sold to the SovietUnion through barter trade arrangements. The last uranium sales were made in1990, when the Soviet Union stopped purchases. Since then, stocks in Bulgariahave accumulated to 250 tonnes metal content, representing about 70% of previousannual production.

6.22 The Bulgarian uranium occurrences contain ore of low grade and miningis extremely scattered. There are three mining areas of about equal size andabout equal output; around Sofia, in the Southwest (Pirin district), and incentral/eastern Bulgaria (Stara Zagora district). These three areas have a totalof 17 small mining operations consisting of 6 underground mines, whichcontributed about one third to the country's production, and 11 in-situ leachingoperations (with wells drilled from surface) which contributed about two thirdsof production. The produced concentrate (yellow cake) is of relatively lowgrade. All local operations are uncompetitive in the international uraniummarket since there is a surplus of yellow cake worldwide and prices aredepressed.

6.23 A mine closing and restructuring program has started and is beingcontinued. The Company presently: (a) engages people in cleaning-up andreclaiming the sites of shut-down operations; and (b) tries to develop newactivities outside uranium mining. So far, three sites have been reclaimed. Thework is becoming more difficult now, in particular because ground water pollutionposes a major problem. Relatively few people can be engaged in clean-up work,and this only temporarily. In developing new activities, the Company has madesome progress in engaging people in civil construction. It also developed threesmall projects outside mining, which it thinks are viable, but which can employonly 500 persons. There are further ideas for small projects in mining and rawmaterials production, such as mining of precious metals and tungsten andproduction of rare earths and gypsum. The viability of these projects isuncertain. Through 1991 the Company basically maintained its historicalemployment level, but this is becoming more and more difficult.

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VII. ELECTRIC POWER INDUSTRY

A. Background

7.01 Electric energy in Bulgaria comes from a number of different sourcesand is widely used in industry and by households. The main sources ofelectricity in 1990 were production by the COE (about 84%), production byindustrial plants (about 8%), and net imports from the USSR (about 8%). The COE(now NEC) in turn during the past two years (1989-90) has on average generated36% of its power from the Kozloduy nuclear power plant, 35% from power plantsburning Bulgarian coal, 18% from plants burning imported (Ukrainian) coal, 6%from thermal power plants burning heavy fuel oil or gas, and 5% from hydro.

7.02 The industrial sector is the single largest consumer of electricitywith the largest industrial users being the refining/chemicals industry and theferrous metals industry. Households are also major consumers of electricityusing it for heat as well as for lighting and cooking. Communal use ofelectricity (commercial buildings, public buildings) is also quite significant.

7.03 In the sections below, considerably more detail is provided on thevarious aspects of the electricity industry. These include: 1) usage ofelectricity, 2) production of electricity, 3) capacity, 4) nuclear power,5) thermal power, 6) hydroelectricity, 7) district heating, 8) costs ofproduction, 9) imports and exports and 10) a recommended strategy for the sector.

Table 7,1: SUPPLY AND DEMAND FOR ELECTRIC ENERGY, 106 kWh

1985 1986 1987 1988 1989 1990

1. Electricity generated 36,944 37,442 39,038 40,682 39,978 38,380by COE

2. Electricity generated 4,688 4,378 4,435 4,339 4,281 3,751by Industrial powerplants

A. Gross generation 41,632 41,820 43,473 45,021 44,259 42,131(1+2)

3. Imports 5,959 4,571 4,673 4,450 4,937 5,387

B. Total Supply (A+3) 47,591 46,391 48,146 49,471 49,196 47,518

C. Exports 1,655 599 324 304 548 1,597

D. Domestic Use (B-C) 45,936 45,792 47,822 49,167 48,648 45,921

4. Power Station Use 4,544 4,595 4,766 4890 4,725 4,625

5. Transmission & 4,016 4,170 4,413 4,794 4,656 4,443distribution losses

E. Station Use and 8,560 8,765 9,179 9,684 9,381 9,068Losses (4+5)

Net Domestic Distribution 37,376 37,027 38,643 39,483 39,267 36,853(D-E)

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B. Electricity Usage

7.04 Total usage of electricity by Bulgaria (including usage by powerplants, transmission and distribution losses and exports) grew fairly rapidlyuntil about 1984 when it attained 49.3 billion kWh. Over the following fouryears it grew hardly at all reaching 49.5 billion kWh in 1988, which is the alltime peak. In 1989 total usage of electricity eased to 49.2 billion kWh followedby a modest decline to 47.5 billion kWh in 1990 (see Table 7.1). a

7.05 The main users of electricity in Bulgaria are: the industrial sector,households, the COE itself, and communal use. Industrial sector use ofelectricity over the period 1988-90 averaged around 20.4 billion kWh a year. Themain industries consuming electricity are refining and chemicals, metallurgyincluding both ferrous and non-ferrous metals, and machine building. Altogetherthese three industries account for about 60% of total industrial consumption ofelectricity. Electricity use by households averaged around 10.2 billion kWh overthe 1988-90 period and continued to grow throughout this period largely as aresult of the high prices and reduced availability of other fuels. Almost allBulgarian households have access to electricity for lighting purposes, the greatmajority of the households cook with electricity and a significant part of themheat with electricity especially in the areas where district heating is notavailable. The COE's own use of electricity at the power plants and transmissionand distribution losses averaged about 9.3 billion kWh per year over the 1988-90period. Of this total, 4.7 billion kWh or 11% of gross generation were the powerplant's own use of electricity. This is somewhat high and indicates inefficientequipment and operations at power plants. 4.6 billion kWh were transmission anddistribution losses averaging 11% of net generation including net imports. Thisagain is higher than would normally occur in well operated and maintainedelectricity systems and indicates suboptimal operation of the transmission anddistribution system. However, this performance still compares favorably withmany other distribution systems in less developed or non-market countries.Details of electricity usage are provided in Table 7.2 below.

7.06 Use of electricity in Bulgaria, after declining modestly in 1990, isnow dropping sharply and will decrease further. In 1991, domestic consumptionof electricity was 14% below 1990. This is due to: 1) the decline in industrialoutput and real incomes that occurred in Bulgaria and 2) the sharp increase inelectricity prices that occurred from January to July 1991. Further, though moremodest, decreases in electric demand are expected in 1992 and to a lesser extentin later years, due to: 1) the above factors working their way through theeconomic system; and 2) the impact of anticipated further sharp increases inelectricity prices. In addition, the restructuring of the Bulgarian economy mayalso contribute to the decline in electricity use. It is anticipated that thetotal decline in usage from 1989 to 1995 will be around 35%, with somewhat underhalf of this decline occurring in 1991. Chapter IX provides additionalinformation on the likely decrease in electricity use and in the use of othertypes of energy.

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Table 7.2POWER OVERVIEW,109 kWh

1988 1989 1990

Sources of PowerElectricity Generation 45.04 44.33 42.13Imports 4.45 4.93 5.39

Total Sources 49.49 49.26 47.52

Uses of PowerIndustry 21.15 20.77 19.38of which:

Ferrous Metallurgy 3.03 2.98 2.92Non-Ferrous Metals & Non-Metallic 1.91 1.86 1.78MineralsMachine Building 2.03 2.21 2.11Refining/Chemicals 6.37 5.96 5.35Building Materials 1.40 1.31 1.16Food 1.45 1.52 1.31

Other Industry 4.96 4.93 4.75

Construction 1.14 0.99 0.90Agriculture 1.10 1.07 0.99Transport 1.32 1.32 1.30Residential Consumption 9.94 10.18 10.47Exports 0.30 0.55 1.60Transmission & Distribution Losses 4.79 4.66 4.44Street Lighting 0.36 0.40 0.38Use by power plants 4.90 4.84 4.62Communal Use 4.49 4.48 3.44

Total ConsumDtion 49.49 49.26 47.52

C. Electricity Production

7.07 Table 7.3 below shows electricity production by source for 1980,1985, 1989 and 1990. A clear trend emerges from these figures which is therising production of electricity from the Kozloduy nuclear power plant and itsincreasing share in total Bulgarian production, partially offsetting thedecreasing production of hydroelectricity and its declining share of totalproduction. The reasons for this trend are very clear. Starting in the early1970's Bulgaria began to emphasize nuclear power to offset its lack of domesticenergy resources. In 1974 the first reactor at the Kozloduy nuclear plant wascommissioned: a Soviet designed VVER-440 model 230 with 440 MW of grosscapacity. This unit was followed over the next 16 years by units 2, 3, 4 and 5at Kozloduy with the capacity of the plant rising in large increments. A furtherunit, unit 6, started preliminary operations in 1991 (though by early 1992 it hadnot yet been commissioned) bringing total nominal capacity of the plant to3,760 MW. In the 1980's, while this nuclear expansion was underway, Bulgariaexperienced a long period of lower than normal rainfall which reduced the outputof the hydroelectric plants. These two offsetting factors resulted in the rising

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share of nuclear in total power generation and the falling share of hydro. Theshare of fossil fuel fired (thermal) plants dropped also, though not as muchproportionally as hydro, because electricity output from the thermal plants wasrelatively constant while total electricity output was increasing. Output fromthermal plants remained relatively constant in spite of the fact that the nominalcapacity of these plants was steadily increasing.

Table 7.3ELECTRICITY GENERATION IN BULGARIA (mil. kWh)

Committee of Energy plants Share in total installed capacity,

Year Total Nuclear Thermal Hydro Total Industrial Nuclear Thermal HydroElectricity Power

Generation plants

1980 34,833 6,165 20,326 3,713 30,204 4,629 17.7 71.7 10.6

1985 41,632 13,131 21,577 2,236 36,944 4,688 31.5 63.1 5.4

1989 44,328 14,565 22,722 2,691 39,978 4,350 32.9 61.0 6.1

1990 42,130 14,665 21,863 1,851 38,379 3,751 34.8 60.8 4.4

7.08 Chart 7.1 Chart 7.1:provides additional ELECTRICITY GENERATION BY FUEL TYPE, 1990 (mill. kWh)information on thefuels used by the COE Nuclear power planis(now NEC) to generate 3a2%electricity inBulgaria in 1990. The 14,66Kozloduy nuclear plantprovided about 38% ofthe electricity,domestic lignite(mostly the Maritza HFOIaasEast Complex, see Domeslic coal 7,005 Hydropoweplanbelow) provided 34.7%, 34.7% 4.8%imported coal (mostlyused at the Varnaplant) provided 18.3% Imported coaland there were small 18.3%amounts generated byfuel oil, gas andhydro plants.

D. Capacity

7.09 At the end of 1990, total generating capacity owned and operated bythe COE was 10,115 MW. This consisted of 5,380 MW from fossil fuel fired plants,2,760 MW from the Kozloduy nuclear plant and 1,975 MW from hydro power. In 1991,an additional 1,000 MW of capacity was added at Kozloduy as unit 6 came on streamand there were some minor changes in thermal capacity. This brought the COE's

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nominal capacity to 11,055 MW. (The COE would argue that since unit 6 was notcommissioned, though operating, and had to undergo further testing, it should beexcluded and nominal capacity at the end of 1991 was really only 10,055 MW.) Inaddition, there is about 1,100 MW of capacity from industrial companies and800 MW has been under contract from the former USSR ,now Ukraine. This meansthat in theory Bulgaria has access to about 13,000 MW of capacity from allsources. Table 7.4 below shows the capacity controlled by the COE at the end of1990 and 1991. (More detail is available in Table A.4.1, Annex IV.) With thereorganization of the COE at the beginning of 1992, NEC, the primary successorcompany, received all of the major power plants and the hydro plants with a totalcapacity of 10,323 MW while 11 CHP plants with total capacity of 732 MW becamepart of independent district heating systems.

Table 7.4CAPACITY OF POWER PLANTS CONTROLLED BY THE COE

Capacity (MW)1990 1991

Thermal plants

Maritza East I 270 200Maritza East II 1,178 1,230Maritza East III 840 840Varna 1,260 1,260Bobov Dol 630 630Ruse 400 400other thermal plants 802 760

Total thermal plants 5,380 5,320

Rozloduy Nuclear Plant 2,760 3,760

Hydropower 1,975 1_975

Total Capacity

7.10 In theory the 13,000 MW of capacity ( now from NEC, the industrialplants, district heating systems and dedicated Ukrainian supplies) should providemore than adequate generating capacity for the country. The all time peak powerdemand in Bulgaria, 8332 MW in 1989, was far below this capacity level thoughthis peak may have been somewhat reduced by "voluntary" power rationing on thepart of consumers. Moreover, demand for electricity has declined significantlysince the 1989 peak and is expected to decline further. Thus, in principle,there should not be a problem of capacity to meet peak power demands. However,due to problems with the various power sources, available capacity issignificantly below the theoretical 13,000 MW. For example, at the Kozloduyplant unit 5 is somewhat unreliable due to problems with its (non-nuclear) steamgenerators. Units 1 and 2 are currently undergoing major overhauls and notavailable. Unit 6 is still undergoing testing and has not been certified for

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full power. On the thermal side, coal is probably not available to operate BobovDol at much more than 210 MW and coal mining problems will reduce availablecapacity at the three Maritza plants by at least 400 MW less than their nominalcapacity. Imported coal supplies and pollution problems at Ruse will reduceoutput there by about 200 MW or perhaps more and the imported coal supplies forVarna are uncertain due to problems with coal supplies from Ukraine. Also,several of these thermal plants need to be rehabilitated. Hydropower suppliescannot be relied upon except to a limited degree since there is often a shortageof water while Ukrainian electricity supplies are rapidly becoming moreuncertain. Once all of these impediments are taken into account, the Bulgariandemand and supply situation for electricity appears to be fairly tight andsomewhat uncertain. However, a number of the problems impeding electricitygeneration can and should be solved as is discussed below.

E. Nuclear Power

7.11 Background. The only nuclear plant in Bulgaria is owned by NEC andis situated at Kozloduy, about 220 km north of Sofia on the Danube river. Itcomprises 4x440 MW and 2xlOOO MW units with a total installed capacity of3760 MW. All units are pressurized water reactors (PWR) utilizing slightlyenriched uranium as fuel and common water as moderator and coolant. The four440 MW units--units 1, 2, 3 and 4--were commissioned in the years 1974, 1975,1980, and 1982 respectively. Unit 5 (VVER-1000) was commissioned in December1988. Unit 6 is operating at partial output, but as of early 1992 the Committeefor the Peaceful Uses of Atomic Energy. the Bulgarian nuclear regulatory agency,had not yet allowed it to attain full power and it had not been officiallycommissioned.

7.12 The performance of units 1-4 over the past few years has been quitegood: for example, the average plant load factor for units 1-4 was 79.6% in1987, 76.0% in 1988, and 71.2% in 1989. The performance of unit 5 over the quitelimited time period in which it has been operating has not been as good, duelargely to initial problems with the steam generators. The Kozloduy plant isbeing used as a baseload supplier and has a good record of unplanned reactorscrams (2-3 per reactor per year.)

7.13 The Kozloduy units 1 to 4 are of the early VVER-440/V230 design,developed by the Soviets in the 1960s and 1970s. They are known to have a numberof design deficiencies. Along with other units of the same type,1 they havebeen the focus of international concern during the past year (see paras. 7.16-7.21 below). In addition, a number of managerial, training and material problemsexist at these units. While the VVER-1000 units do not have the same designdeficiencies as the VVER-440's, they have instrumentation and controldeficiencies, steam generator problems and suffer from many of the samemanagerial, training and material problems as the VVER-440 units (see paras.7.26-7.27 below).

In addition to the Kozloduy units 1.4, the following units of the same type are still in operation: at Bohunice,Czechoslovakia, 2 units; at Novovoronezh, Russia, 2 units; and at Kola, Russia, 2 units. The three units atGreifswald, Germany and the two units in Armenia, have been shut down.

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7.14 The COE had planned for a second nuclear power site on the Danube atBelene, consisting of two VVER-1000 units in phase 1 and two additional units inphase 2. A considerable amount of equipment was ordered and paid for which wasto be used for unit 1 and some construction at the site has taken place.However, in view of: 1) the drastic political changes which have occurred in thecountry, 2) safety concerns about nuclear power, and 3) the major economicchanges which are ongoing in the country and will result in lower electricitydemand, the Government of Bulgaria decided to postpone indefinitely any furtherwork at Belene. The Bank strongly supports this position.

7.15 Safety Concerns about Design of VVER-440's/IAEA safety review. Asa result of international concern about the safety of the design of the WVER-440,model V230, the International Atomic Energy Agency (IAEA), at the urging of itsmembers, organized a concerted effort to perform a comprehensive review of theproblem and to make appropriate recommendations. This effort, initiated in 1989as an extra-budgetary activity of the Agency, consisted of the followingcomponents:

a) a generic design review, performed in February 1991,

b) site visits and evaluations, and

c) a comprehensive report presenting conclusions and recommendationsDecember 1991.

7.16 The generic review process of the Agency, with the cooperation of theSoviet designers, concluded (as anticipated) that the design of the VVER-440model 230 lacks many important safety features considered mandatory byinternational standards. These include lack of: redundant systems for high-pressure injection of coolant in case of a large pipe break in the system, backupfeedwater circuits, and a full-scale containment structure that can withstand asubstantial overpressure resulting from an accident. In particular, the reviewdetermined that the design lacks three important properties considered essentialin international standards, i.e., redundancy, diversity, and segregation ofsafety systems. This lack makes the safety systems particularly vulnerable tosimultaneous failure caused by the same cause or mode. The system layout givespoor protection against internal and external hazards like fires, floods,earthquakes etc. The original plant design was applied initially exclusively tolow-seismicity sites in accordance with Soviet regulation. (Unfortunately, thisassumption does not apply at Kozloduy, though the plant is not in a particularlyhigh seismicity Zone by Bulgarian standards.) Heavy reliance was also placed onoperator control which increases the need for skilled operators and raises theprobability of human error.

7.17 On the other hand, the IAEA review also recognized that the designof the units has certain redeeming features. The design was quite conservative,providing large thermal margins, sturdy fuel design, a large volume of waterabove the reactor core, and very large steam generators with large amounts ofwater for heat removal which would last for several hours even without activecirculation. However, these conservative features, although providingconsiderable credit in any safety evaluation, would not be able to mitigateagainst a large pipe break of the primary circuit or other severe accidentscenarios.

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7.18 The IAEA review recognized that there exist significant differencesin the details of the design among the various plants of the same general design,owing to variations in the actual design used, site characteristics, or to laterbackfitting measures. However, these differences are generally not major andhave a secondary impact on safety. In addition to the design deficienciesidentified, it is generally recognized that there are other and in some ways moreimportant safety problems at some of these plants including: 1) deficiencies inthe quality of materials; 2) lack of quality assurance during construction; 3)poor instrumentation and control design and operation; 4) poor operator training;5) inadequate maintenance procedures; and 6) inadequate management structure.

7.19 The IAEA review also identified a number of investments which wouldbe needed in most of the VVER-440 plants. These investments were classified intothree categories:

Category I: Immediate need.Category II: Within two years.Category III: Longer than two years.

In Category I, the following needs were identified:

(a) leak detection devices in the primary circuit to allow shutdownbefore a catastrophic failure (because this model has only a limitedcapacity for emergency coolant injection in the case of a largebreak);

(b) upgrading of instrumentation and control systems, including powercontroller, control room instruments, miscellaneous detectors, andoperator aids.

In Category II, the following items were included:

(a) simulators for operator training;(b) auxiliary and emergency feedwater systems;(c) improved fire protection;(d) thermal hydraulic analyses;(e) probabilistic safety analyses, level I (i.e., to the probability of

core meltdown); (this item includes information of categories I, II,and III).

In Category III, the following were included:

(a) upgrading of steam generator systems performance;(b) confinement system evaluation and possible upgrading.

7.20 After much of the work on the generic review had taken place, aspecific site visit was carried out by an IAEA team at Kozloduy in June 1991.The team found that, in addition to the expected design deficiencies, operationalpractices and macerial conditions of the plant were very poor. Safety equipmenthad been allowed to deteriorate, fire hazards existed, morale was very poor,personnel were not adequately trained or led and management was demoralized withlittle authority to act. The IAEA in its report on the site visit stated that

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"continued operation of the plant would be imprudent" until these conditions hadbeen corrected. (For more details on the IAEA's findings at Kozloduy, seeAnnex I.)

7.21 Emergency improvement program for Kozloduy. The internationalcontern created by the IAEA's review of the VVER-440 model 230 reactors andspecifically its report on Kozloduy culminated in a meeting in Vienna on July 9,1991 at which international emergency assistance was decided for Kozloduy. TheCommission of the European Communities (CEC) was designated as the focus of thiseffort and was asked to coordinate, finance and administer the emergency program.The CEC allocated 11.5 million ECU for this purpose. The program has fivecomponents and is primarily implemented by the World Association of NuclearOperators (WANO). The components are:

a) Urgent Housekeeping Program, is executed by a team of about 15foreign personnel experienced in power plant operations, andcovering urgently needed actions to correct the material conditionsat units 1-4 in Kozloduy that were identified by the IAEA SafetyReview Mission in June, 1991.

b) Twinning Arrangement, is primarily implemented by foreign personnelfrom the nuclear power plant at Bugey (France) to improve managementand organization, safety culture, staff professionalism, operationaland maintenance methodologies, quality assurance (QA) programs, andsupervision of implementation of agreed actions.

c) Six-Month Safety Assessment and Improvement Program is implementedby expert personnel from Europe and to a lesser degree the US. Thisprogram is for the urgent resolution of basic safety issues such asreactor pressure vessel and primary circuit integrity, accidentanalysis, confinement leak tightness, simulator training, andanti-seismic measures. It includes the initiation but not thecompletion of the very important task of writing new procedures fornormal and emergency operations.

d) Technical Assistance to the Committee on the Peaceful Uses of AtomicEnergy (the Bulgarian Nuclear Regulatory Authority) by Europeannuclear regulatory experts. The Committee is receiving guidance onstrengthening and extending its capability in establishingstandards, monitoring compliance at the plant, and enforcing theregulations in every aspect of plant operations.

e) A Study of Bulgaria's Electricity situation in the short run wasundertaken by Eurelectric, a consortium of European Electric PowerCompanies.

While this program was designed as a short run effort to improve the conditionof the Kozloduy plant, it may continue in some form over a longer period giventhe deep-seated nature of some of Kozloduy's problems. At present, Bulgarianauthorities are reviewing with the CEC the effectiveness of this short termprogram, particularly the effectiveness of the technical assistance provided thusfar.

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7.22 As a result in part of the IAEA report on Kozloduy and the Viennameeting, the Bulgarian authorities agreed to take corrective measures in a phasedprogram, first to upgrade unit 4 followed by unit 3 and, when work on these twounits was completed, to perform the upgrading of units 1 and 2. A cleanupprogram was carried out on unit 4 by the COE during July and August 1991.Surveillance tests were performed, electrical connections repaired, maintenancecarried out and equipment properly labelled. Unit 4 was then restarted. Similarwork has been carried out on unit 3 which resumed operation in November 1991.As unit 3 was restarted, unit 1 was shutdown for extended maintenance and unit2 was shutdown for maintenance and the annealing of the pressure vessel.

7.23 Proposed Investment Program for Units 1-4. Two safety orientedinvestment plans have been proposed for units 1-4 at the Kozloduy nuclear plant.The first plan was prepared by the former management at Kozloduy with the helpof a Bulgarian engineering firm and was completed in December 1991. This planhas several weaknesses. First, on some technical issues the proposal containsspecific plans for resolution, but most of the issues are mentioned only ingeneral terms without clear ideas on how to proceed. Second, the plan mixestogether inexpensive near term measures and very costly reconstruction projectswithout making a clear distinction based on speed and cost. Third, some of theproposed reconstruction projects also do not take into account the specificdesign features of the VVER 440 type plants, and thus might not increase safetyat all. This plan is therefore not an adequate basis on which to proceed.

7.24 The second plan is the result of a probabilistic safety upgradingstudy undertaken by US/UK consultants working for the Bulgarian authorities.This plan , while it is not yet fully complete, indicates that for an investmentof about US $100-$200 million the risks of a severe accident with units 1 to 4could be reduced to a small fraction of their current level. The investmentswhich would be included in this plan include seismic upgrading of structures andequipment, fast acting isolation valves, diverse emergency supplies systems,emergency monitoring and a filtered-vented confinement system. The cost of theseinvestment, would probably be towards the lower end of the cost range shownabove. However, additional and complementary investments are likely to berequired including replacing certain equipment at these units consisting of anumber of valves, pumps, automation equipment and controls; which would bring thecosts towards the upper end of the range shown above. Since units 1 and 2 aresignificantly older than units 3 and 4. have fewer safety features. less seismicupgrading and would be the most expensive to retrofit: the most prudent courseof action would be to shut these units instead of retrofittin.jb them.This wIi l ldallow concentrating the available funds and skilled manpower on units 3 and 4which are newer. However, units 1 and 2 may be neede4 ..or some time due to theproblems Bulgaria has with its thermal and hydro plants and the increasingunreliability of imports from the forner Soviet Union. Thereore. thepossibility of retrofitting these units in order to reach acceptable standardsof safety cannot be eliminated.--f.bowever, this coursehof action-is adoptedit should be done based on the recommendations of a panel of independent eL .

7.25 Status of the VVER-1000's. Units 5 and 6. Although these units a-reof a later vintage, better designed, and are equipped with the necessaryredundant safety systems required by western standards, iuclutding a fullcontainment structure, they have material problems in the horizontal steamgenerators where cracks have developed in certain cases. Work on the steam

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generators, consisting of repair and heat treatment followed by inspection, havebeen completed for both units and it is thought this will prevent the futureoccurrence of cracks. It is also known that the instrumentation and controlsystems are not up to modern standards and it has been reported that the reactorcore presents stability problems which may interfere with the economic and stableoperation of the units.

7.26 An IAEA Operational Safety Assessment Review Team (OSART) hasreviewed units 5 and 6 and confirmed that the main deficiencies are not in thedesign area but rather are in the areas of management, personnel training,adequate incentives for performance, operating procedures, and regulatorymeasures. Perhaps the single most important area, which affected all the unitsat Kozloduy, was the salaries paid to skilled workers, i.e. shift supervisors andlicensed control room operators, and to managers. These were quite low, but havevery recently been sharply increased. Nevertheless, there remain very poor socialand living conditions in the town of Kozloduy (very limited social facilities,lack of a hospital, poor housing, etc.) making it more difficult to attract andTetain skilled staff at the power plant. Furthermore, plant management has notbeen fully empowered to take action on these problems. It is clear that the payand living conditions_of the em loyees must be attractive and that managementauthority and responsibility must be enhanced,

7.27 Investment Program for Units 5 and. Since the initial capitalinvestment has already been made, any incremental investment should be incorrecting, if need be, any additional defects and improving the operation of theplant. The steam generator problem was discussed above. A possible new projectfor plant upgrading is to install improvements to the Instrumentation and Control(I&C) systems. These improvements would include (presently not available) corepower monitoring systems and the replacement of other measuring and controldevices with equipment of higher reliability and accuracy. The proposed_I_J9systems would be useful and provide an enhnemet_of the operational safet ofthe units. A preliminary estimate of the foreign cost is around US$30-50million. In addition.J it iJ stigpested that a comprehens e study be undertakento determine -if a cost-effective investment can be mwdein a combination ofsoftware and bardware to maximize nroductivL yas well as stable e ration of thetwo 1000 MW units,

7.28 Balioactive Waste Mangement, There are two major waste managementproblems at Kozloduy. These are: a) low and intermediate level waste (LILW)treatment and storage, and b) spent fuel storage. There is inadequate space forstorage of these wastes as well as inadequate means for treatmnent and processing.Proposals from three suppliers were originally received for the procurement ofa treatment facility to handle LllW frorn all 6 units and one of thc suppliers hasbeen selected. The cost of this facility is expected to be US$10.5-11.! million.It is urgent that some means be found to handle the additional LILW since thecurrent LIMW storage facility is alinost full.

7.29 Storage for spent fuel elements is also a problem. 'the former SovietUnion has, within the past 18 mnonths, discontinued its previous practice oftaking back all the fuel supplied by them at no cost to the power station. Inaddition to the storage pool at each tunit, there is a centralized spent fuelstoraige pool ait Ko2loduy, coimpleted £n 1989, wlhich is capable of storing 5,040fuel elements or about 6.5 years worth of fuel discharge, including fuel fromunits 1-4 as well as tnits 5 and 6. Hlowever, in order to accommodate the fuel

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from the VVER-1000 units certain hardware modifications would need to be made,requiring an investment of about US$4 million (US$2 million in foreign exchange).In addition, technical means must be devised for safe storage of the very longcontrol rod elements from the VVER-1000 units. This would require an estimatedadditional US$4 million (US$2 million in foreign exchange).

7.30 The total waste management program at Kozloduy, in the next two tothree years, would require the expenditure of about US$27 million of which aboutUS$15 million would be in foreign exchange, Such a program is needed onoperational, health and environmental grounds and should be included in anyshort-term investment program for the power sector.

F. Fossil Fuel Fired Power Plants

7.31 Background. Fossil fuel fired power plants or thermal plantscontrolled by the COE (now NEC) at the end of 1990 had a capacity of 5,380 MW orabout 55% of the total capacity of the COE; while at the end of 1991 thermalcapacity controlled by the COE had declined slightly to 5320 1MW but due to theadvent of unit 6 at Kozloduy it was only 48% of total capacity. The utilizationrate for these thermal plants was about 46% in 1990 and somewhat lower in 1991(an estimated 42%) with this lower level of utilization due primarily to fuelshortages and secondarily to various types of other operating problems such asthe poor conditions of certain plants. About 85% of Bulgaria's thermal powercapacity is in the six largest power plants which are the Maritza East Complex(Maritza East I, II and III), Varna, Bobov Dol and Russe. These plants arediscussed in considerably more detail below.

7.32 The Maritza East CompleX is a grouping of three power plants andtlhree captive lignite mines and is the country's most important thermal powerproducer. Total installed capacity is 2,270 MW. Power generation in 1990 was10.6 TWh, representing a 55% utilization rate of installed capacity. The fuelused is the low grade Maritza East lignite with a heating value of 1,500 kcal/kg,30% ash and 2-5% sulphur. Reported 1990 production costs are about 0.04 leva/kWh(2 UScts/kWh) at the average 1990 exchange rate. This tndoubtedly understatesproduction cost by underestimating depreciation (see para 3.09). Estimated 1991production costs (Table 7.5) are somewhat higher, around 2.4 cents/Kwh, but stilltoo low. The major problem at this power comnplex is the inability of the lignitemines to produce adequate quantities of lignite. These mines often supply onlyabout 80% of requirements resulting in lower production of electricity (seeparas. 6.08.6.11). It is important that coal suprlies be increased since Maritzashould operate at closer to an 80% utilization :ate than the 55% it typicallyachieves. Increased output from the Maritza East Complex would also redcuce thepressure on the Kozloduy nuclear plant to produce electricity. The majorcharacteristics and issues of the three plants are described below.

7.33 tai- a E: 1I Pn Maritza East I (formerly FirstKomsomslska) is the oldest plant at Maritza East, having started operations in1958 and with some units having completed more than 200,000 hours of operation.Two units have already been shut down, For safety reasons, the remaining boilersare operated at reduced temperature and pressure. The usable installedelectrical capacity is presently 200 MW (4 x 50 MW), compared to a nameplatecapacity of 270 MW.) Electricity is a byproduct of the steam generated fordrying of lignite prior to briquetting. Abotut one third of the energy is

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transformed into electricity in the cogenerating units, while two thirds are usedfor briquetting since the Maritza East I plant has become mainly a steam supplierfor the briquette plant, and its future is linked to the future of lignitebriquetting.

7.34 In general, briquettes pose a twofold problem: they are expensiveand a burden to the envirorment. In Bulgaria, the environmental damage bybriquettes is particularly high, due to the high sulphur and ash content ofBulgarian lignite. Also they are expensive to produce (see para. 3.16) and aninferior means of heating. In the longer run, briquettes will probably be phasedout. Consumers will shift to the use of natural gas, imported high quality coaland light heating oil, supported by improvements to home and apartmentinsulation. For Maritza East I the following longer run scenarios, all of whichwould probably lower output rates, are conceivable:

(a) The existing facilities are kept operating for a period of about 5+years and then closed. Due to the old age of the existing boilersthere is a safety risk involved in keeping them operating, whichcould be significantly reduced during the envisaged time period byfurther lowering the temperature, reducing production, andintroducing a continuous electronic monitoring of steam pipeexpansion. The lignite plant would continue vo operate during thissame time period. At the end of the time pe&iod it is hoped thatbriquettes would no longer be needed.

(b) If it appears that briquettes will continue to be needed, then a newmethod of producing them might prove advantageous. As proposed bya Dutch firm, lignite could be pressed cold and wet in a new press(such as those used for concrete blocks) with subsequent stackingand air drying. This method would replace the existinginstallations. In addition to lower energy consumption andrelatively low inkvestment costs, the new method would have severalother advantages. Limestone could be added prior to pressing, withthe likely effect that about one third to half of the sulphurcontained in the lignite would be bound in the ash. The press couldbe erected at a different location, reducing lignite transportationcosts by avoiding cross traffic from Mines 1 and 2, and thus alsofacilitating future mine development. By selecting an interlockingshape of the briquettes, stacking them on palettes and packagingthem in plastic foil, transport losses could be reduced and consumerconvenionce increased. In this situation there would be no need forMaritza East I to continue to supply the briquette factory and thispower plant could be phased out as soon as some other method wasfotnd of supplying its fairly small local district heat load.

(c) The existing old boilers at Maritza East I could be replaced with afluidized bed boiler of about 200 t/h steam gencrating capacity.While technically proven, this alternative miglht be uneconomic, dueto the heat constumption and high capital costs. It would also nothave the envirownental advantages of thc cold-pressing miethod thoughit would be more environmentnlly advantageous than the existingsystem,

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7.35 Presently, field and other tests are being carried out in Bulgariaon the cold-pressing method of producing briquettes. If the results areencouraging. a technicalleconomic evaluation of the cold pressing method shouldbe carried out, followed by a feasibility study which would evaluate the need forbriguettes in the future, the costs of producing them with this method and theenvironmental advantages of so doing.

7.36 Maritza East II. This plant started operation in 1968 and consistsof 4 older units of 150 MW and 3 units of 210 MW. Construction of Unit 8,another 210 MW block, is advanced, but was interrupted due to lack of finance.The presently installed capacity is 1230 MW (4 x 150 and 3 x 210 MW). Out ofthis capacity, 600 MW (the four 150 MW units) are basically operated on a reservebasis, due to shortages of coal and the poorer condition and lower efficiency ofthese units. Given the advanced state of construction of unit 8. the weatherrelated deterioration of equipment for it which has been delivered but not vetinstalled. and the possibility of exporting electricity: priority has been givento its completion with the EIB and EBRD having now agreed to finance thiscompletion. . Furthermore, operation of an additional 210 MW unit is preferableto operation of the old 150 MW units, which consume 2.4 kg of coal per kWhgenerated, whereas the 210 MW unit would consume only 1.9 kg. Moderninstrumentation and automatic control should further improve the efficiency ofUnit 8.

7.37 The old 150 MW units could probably continue to serve as reserveunits for another 10 years with appropriate maintenance and possibly a minorrehabilitation program. In the long run it appears advisable to evaluatecostlier bui.. more efficient rehabilitation, such as conversion of the existingold boilers to bubbling fluidized bed boilers or, more drastically, replacementof existing boilers with circulating fluidized bed boilers.

7.38 Maritza-East II,. This plant, formerly known as Dimo Dichev, startedoperating in 1980 and is the latest of the Maritza East plants and the newestthermal power plant in the country. The nameplate installed capacity is 840 MW(4 x 210 MW). The plant operates satisfactorily and requires no urgentinvestments. Only spare parts availability and maintenance should be improved.The-previously lat nad expansion_of t e coal Storae area anppearrs to be exnenisiveajd-qt-of hi-h-priority. The design shouil e-reviewed wit articular viewto better utli zing thL_mine for coa straRe-and blending.

7.39 Air-Qitnlity. The combined capacity of the three power stations(2,270 MW) is the largest concentration of thermal power generation in thecountry. Although visible dust emissions from the stacks are moderate and thepresence of sulphur in the air is not noticeable, there is concern about airquality and the total volume of pollutant emissions due to the size of theoperations and the poor quality of the lignite.

7.40 The electrostatic dust precipitators (ESPs) appear to work reasonablywell. They are designed conservatively and are provided with appropriatecontrols. Satisfactory dust removal has been achieved, but to maintain andImprove the ESP performance level, imnprovemnents in maintenanec and operation aredesirable. For dispersion of remaining emissions, in particular of sulphurdioxide, the Maritza plants have been equipped witlh utnusually htigl stacks(325 m). There is no flue gas desulpliurization. Measurements indicate that theImpact on the plants' surroundings is acceptable, at least in comparison to the

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other environmental problems in Bulgaria. Therefore flue gas desulfurization.which would be quite expensive ( $200-300/kW) is not recommended at this timeunless it is funded by grant or near grant funds (see Annex VI).

7.41 Varna. The Varna power plant is the country's largest single thermalpower plant and was built in two equal stages. The first stage startedoperations in the mid-60s, the second in the mid-70s. The installed capacity is1260 MW (6 x 210 MW). The power generation in 1990 was 6.3 TWh, representing 70%utilization of installed capacity. The older first three units fire low volatilecoal imported from the Donetsk basin of Ukraine. The newer three units aredesigned to either burn Donetsk coal or natural gas. The amount of gas burnedis minor; only low-cost buffer gas is used when available. The reportedproduction costs in 1990 were about 0.03 leva/kWh (1.5 UScts/kWh) while theestimated 1991 costs are 2.3 cents/Kwh. Both of these figures are unreasonablylow, due primarily to an extremely low estimate of depreciation (see table 7.5).

7.42 The older units at Varna have accumulated a large number of operatinghours and there is a need for a rehabilitation program. However, the scope ofthe program should be carefully scrutinized to ensure that it is economic.Certain items, however, stand out as most probably being justified and theseinclude boiler rehabilitation with high temperature steels, diagnostic equipment,new electrostatic precipitators, and high-quality switchgear equipment to replacepresently unreliable equipment.

7.43 The ash from the plant apparently has a high carbon content,indicating inefficient combustion. Since the plant has access to gas. it wouldbe advisable to evaluate the effectiveness of redesigning the burners to includeboth burner modification for low-N0 emissions and the addition of gas to assistin more complete combustion of the volatile-deficient coal. Such a modificationmight produce considerable savings by economizing on coal use in addition toenvironmental benefits. The latter would include reducing particulate emissionsand diminishing the pressure on the electrostatic precipitators.

7.44 Coal supplies from Ukraine (about 2.3 million tons per year) havebeen an increasing constraint in the past, are currently unreliable and have anuncertain future. The Varna plant could increase its output significantly ifsufficient coal could be landed. A study should be done of possible coalsources, the types of coal they produge the ices Lnd cLsts and the freightto-get tm to Varna.A-review-of the ongoinp coal storage extension might alsobe -icluded in the_study. Finally. the-eurrent deepenin_ of the-access canal toallow the use of_larger ships to unload coal. at possibly considerable freigtsavings. is a major step in the right diKection with which the Bank is in fullegreement.

7.45 Bobov Dol. The Bobov Dol power plant, constructed in the early 70s,is the country's third largest thermal power plant. The installed capacity is630 MW (3 x 210 MW). The power generation in 1990 was 1.9 TWh, representing 35Xutilization of installed capacity. The fuel used is low grade local sub-bituminous coal with a heating value of 2,400 kcal/kg, 52% ash and 2% sulphur.

7.46 The main problem of the Bobov Doi power plant is the local coalsupply, in terms of quantities, quality innd costs. The tni£ns at LoboAv [ol cannotexpand production, due to difficult geologic conditions, to meet the powerplant's requiremenits for fuel. Neither can the coal be obtained from other small

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mines in western Bulgaria for similar reasons. The low grade sub-bituminous coalat Bobov Dol is very high in ash with highly abrasive properties. Utilizing thisfuel has resulted in derating of the units, poor availability and unreliabilityof the boilers. Coal washing at the Bobov Dol mine to reduce the ash content ofthe coal is therefore needed if coal supplies from this mine are to be continued.Depending on the form of the sulfur in the coal, cleaning of the coal may alsoreduce the sulfur content to some extent. Finally, the costs of coal productionat the Bobov Dol mines are four times those at Maritza East on a heat basis andmost of the mines are uneconomic.

7.47 Due to the inability of local mines to supply sufficient coal atacceptable quality and costs, the Bobov Dol power plant should at least partiallyshift towards burning alternative fuels. In the medium term, the operation ofone unit at the power plant would be sufficient to use the economically extractedcoal from the Bobov Dol mines; two units could then be converted to either burnimported coal, transported from the Black Sea by rail, or natural gas from apipeline at only 5 km distance from the plant. These alternatives should beevaluated, including the capacity of the pulverizers to handle imported coal ,andthe increasing uncertainty about the supplies of gas from Russia.

7.48 Ruse. This is one of the older thermal power plants. The installedcapacity is 400 MW (2 x 30, 2 x 60 and 2 x 110 MW). Two steam producing boilers(50 tons/hr each) and hot water boilers (100 Gcal/hr) for district heating in thetown of Ruse were added in 1978/80. The power generation in 1990 was 0.7 TWh,representing 20% utilization of installed capacity. The plant burns the sameDonetsk coal as the Varna plant, which is shipped directly from Ukraine insea/river barges without transshipment.

7.49 The plant is in very poor condition. It is plagued by a variety ofproblems including serious design errors, poor construction, low quality ofcooling water, and poor condition of mechanical equipment (e.g. valves).Improvement of the technical status of mechanical (and perhaps also ofelectrical) equipment at the plant would have a beneficial effect on plantavailability and productivity. As with most of the thermal power plants inBulgaria, fuel supplies are also an issue at Ruse. Aside from the uncertaintiesof coal supply, as in the case of Varna, the coal conveyance system does notfunction properly. The system, including its conveyor belts, may have to bereplaced, possibly with imported equipment.

7.50 A study needs to be done of the cost of rehabilitating Ruse. whetherthe rehabilitation is justified economically and what fuel or fuels the plantshould use. A gas pipeline has been constructed to bring Russian gas to the areaand its capacity would allow for gas use by both industry and the power station.The power station could be fired by gas or even better become dual-fired, usingeither gas or imported coal. Both of these options would most likely improve theenvironment. Dual firing would also provide the freedom to choose the properfuel mix depending on relative prices, availability and environmental conditions.

7.51 Other Power Plants. There are no other thermal power plants forelectricity generation printarily. There are however 12 combined heat and power(CHP) plants with a total installed electric capacity of about 800 MW, or 15% ofall tliermnal generatitng capacity. They are all part of district heating systemsand designed to produce heat with electricity as a by-product. In 1990, theycontributed 8% to total thermal power generation. Most of these plants use gas

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and secondarily oil. In the reorganization which occurred at the beginning of1992, 11 of these plants became part of independent district heating systems andonly one (Dimitrovgrad) remained with NEC.

7.52 Five of these plants (Republika, Dimitrovgrad, Sofia, Kostov andPlovdiv) have an installed capacity of 100 MW or larger. Two of these (Republikaand Dimitrovgrad) are fired with local coal. There is one more coal fired CHPplant (A. Stoianov, at Sliven), which has an installed capacity of 30 MW. Thecoal delivered to these plants (from the Pernik, Marbas and Cherno More mines)is of low quality and production costs are high due to poor geologicalconditions. Many CHP plants are poorly maintained and operate inefficiently.Studies need to be done of whether it would be better to rehabilitate these coalfired CHP plants and provide controls (or other means) to reduce their negativeimpact on the environment, or whether it would be better to replace them entirelywith gas fired CHP plants with the latter probably being combined cycle plantsto increase efficiency . It may also be attractive to replace some of the oldergas-fired or oil-fired CHP plants by combined cycle plants,

C. Hydropower Plants

7.53 There are 1975 MW of hydroelectric capacity in Bulgaria, making upapproximately 18% of the COE/NEC's total installed capacity. Altogether thereare 87 operating hydroplants, however, the 11 largest plants have 77% of thecapacity. The largest single hydropower project is the Belmeken-Sestrimo- Chairahydropower complex (Rila complex) located in the Rila mountains. It currentlyhas 735 MW of capacity split into three separate plants (Belmeken, Sestrimo,Momina Klisura) and accounts for 37% of Bulgaria's hydro capacity. The secondbig 'nydio- power complex is the so called Vatcha or Rhodope complex located in theRhodope Mountains with four operating power plants (Dospat-Teshel, Devin,Antonivanovtsi, Krichim) and total capacity of 380 MW. The third large complexis the Arda river complex with three power plants (Studen Kladenets, Ivailovgradand Kardzhali) with a total capacity of 274 MW. The available hydrocapacitydepends largely on the water supply in the reservoirs. In the winter of 1991-92available hydroelectric capacity was between 750 and 900 MW, well below the totalinstalled capacity, due to the drought in Bulgaria in 1990 and earlier whichresulted in the partial depletion of the reservoirs. These capacity figures arebased on normal operations on a monthly basis that would meet spring minimumreservoir levels needed for municipal and agricultural supply. In fact,instantaneous capacity can and d4-d increase to approximately 1500 MW or above,though at a penalty to generation during other periods if minimum reservoirlevels are to be met.

7.54 . In 1990, which as was pointed out above was a dry year, hydroelectricplants in Bulgaria generated 1.9 TWh, 4.8% of total electricity generation by theCOE and 4.4% of total electricity generated in the country. Based on the ratedcapacities of installed units, hydroelectric plants should generate 4.5 TWh inaverage precipitation years and 1.9 TWh in dry years. It appears that theeconomically exploitable hydropower potential in Bulgaria is approximately 10-12TWh. However, this figure depends very much on the changing economics ofhydropower and the value of the services it provides in addition to energy someof which are; instantaneous start-up, operational flexibility, load-followingcapability, peaking operability in a stop-start mode, and load management throughpumped storage.

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7.55 Considerable hydropower capacity is under construction or design inBulgaria. Pumped storage capacity of 864 MW are under construction at Chairawhich is part of the Belmeken-Sestrimo..Chaira complex. The first two units atChaira, 2x216 MW, are almost complete and NEC has indicated that they will becompleted by the end of 1992. The other two units, also 2x216 NW, are scheduledto be completed in 1994. Estimated costs for completing these plants areapproximately US$9 million for Chaira units 1 and 2 and US$23 for Chaira units3 and 4 most of which is local costs. The Tsankov Kamak project (part of theVatcha complex) is under design and would provide 420 MW of pumped storage at acost of US$208 million. Plants planned to the year 2010 include an additional3,100 MW that would generate 10 TWh and would cost an estimated US$3 billion todevelop.

7.56 Completion of Chaira 1 to 4 should be and are a high priority projectfor NEC, There are several reasons for this. First, these units providepeaking capacity though, as is standard with hydro peaking units, at the cost ofa loss of 20%-30% of the electricity used. S-:cond, these units could help serveas a spinning reserve in case one or more of the units at Kozloduy or a majorthermal unit elsewhere has to be taken off line. Given the fairly small storagecapacity of the Chaira reservoir the four units could not operate for more than8.5 hours so that their main value as a reserve would be to replace one or morenuclear or thermal units temporarily, while alternative electricity sources werebeing found or these down units were repaired. Third, by performing thesefunctions the Chaira pumped storage units also would improve system stability.Fourth, these units by improving system stability would assist Bulgaria ineventually joining the Western grid or UCPTE (see para 7.69). Finally, theamount of funds necessary to complete these units appears to be relatively small.While these arguments apply to all four units the case for rapidly completingunits 1 and 2 is somewhat stronger than for 3 and 4. These first two units arecloser to completion, will cost less to complete and will make a large initialcontribution to peaking capacity, spinning reserve and system stability. Chairaunits 3 and 4 are further from completion, and the system requirements for theseunits are less well defined though they would undoubtedly be very useful oncecompleted. On the other hand, it would probably be cheaper to complete 3 and 4after 1 and 2 rather than breaking off work and resuming it at a later time.

7.57 A current problem facing the hydroelectric sector, as with othersectors, is the compartmentalized economy and the lack of authority at thleoperational level. In the area of compartmentalization, responsibility for thevarious aspects of water resource management are rigidly separated te such anextent that sensible integration of management and allocation of resources isdifficult. The Dams and Cascades Company manages the water collection facilities(intakes, drop shafts, and the like) and water conveyance facilities (tunnels,canals, ditches, flumes, and the like), while the power company receives waterat the intakes and delivers it at the afterbays. The agricultural interests(Irrigation Systems Company) and municipalities (Water Supply and SewageCompanies) receive and manage water at their intakes. The Committee for the Usesof Water allocates water resources among competing uses (the normal prioritiesare; 1 municipal water supply, 2 - agriculture, and 3 power supply). Thiscompartmentalized system does not maximize the economic value of Bulgaria'srelatively scarce water and hydroelectric power resources. Rather it results inthe country's hydroelectric operations becoming relatively more baseloadedbecause of greater agricultural and municipal requirements. Reorganization ofthe water resource allocation and management process, includingincentives for

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rational consumption of water by all users, would alleviate some of the waterlimitations. Furthermore, the adverse effect of the timing of water deliveriesto downstream users could be mitigated by downstream reservoirs to smoothdeliveries,

7.58 Management at the hydropower plants suffers from the same lack ofauthority and to a lesser extent responsibility, as is the case with Kozloduy andthe thermal plants. Lack of sufficient spare parts and the inability of plantmanagers to obtain them quickly either from the local or international marketoften results in plant unavailability which is costly to the economy. To improveperformance at these Rlants. more authority to make decisions and implement themwill have to be granted the operating managers. This authority would have to begranted within the general constraints of a budget and the operational managementshould be held responsible for their plant's performance.

H. District Heating

7.59 Bulgaria has well-developed district heating systems in most majorcities and towns. These district heating systems provide steam and hot water toindustry and hot water to households both for heating and for general householduse. It is estimated that in 1990 about 58% of industries' heat consumption wassupplied by centralized district heating systems and about 22% of the householdsand communal sector's consumption of heat was met by these systems. However, theshare of the population which uses district heating systems is only about 16%,but they use more heat than the rest of the population, probably because it isvery underpriced (see para. 3.12).

7.60 The major district heating systems in Bulgaria were in the past runby the old COE. At the beginning of 1992 these district heating companies (26)became independent companies with the idea that they would eventually becontrolled by the municipalities. In addition to the former COE systems, variousindustrial firms and to a lesser extent municipalities operate heat plants thoughthey tend to be much smaller than the former COE plants. The industrial plantssupply steam for their own use with some of the steam sold to other industriesclose-by. These industrial plants provide the bulk of the heat sold in theindustrial market. Most of these heating plants are fueled with gas or residualfuel oil.

7.61 Operation of district heating systems is a loss making activity andfinancial losses have been sustained for the past several years exceeding 1 bil.leva in 1991. This is because: 1) the price of this heat is set far below costby the COM; and 2) the district heating systems have high heat losses. The priceof steam is set somewhat higher than the price of heat supplied as hot water, butstill the average price of heat sold to industry by the COE is below costs whilethe price of heat supplied to households is only a small fraction of costs. Heatprices should therefore be increased. For industries this is relativelystraightforward, for households it is much more difficult since individualhouseholds have no control over the amount of heat for which they are billed(see para. 3.13). In addition heat losses need to be substantially reduced inthe district heating systems. The Sofia district heating system, by far and awaythe largest such system, estimates heat losses of around 30%-35%. Actual lossesmight be even higher since metering in the district heating systems is quitelimited and losses are estimated, based on sample measurements and water losses.

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It is likely that investments to reduce heat losses and improve metering in thedistrict heating systems especially in Sofia, would produce high rates of return,iven the inefficienc of these systems. This return is likely to take the formof reducing financial losses, and therefore required subsidies, in these systems;since the financial losses this year are likely to approach or exceed 2 billionleva, even with substantial price increases, and these losses may well continuefor some time.

I. Electricity Costs, Financial Situation

7.62 Costs of Electricity. The COE has provided estimated 1991 costs ofproduction by power plant for the major plants. These are shown in Table 7.5below. There are two major points to be made about these costs. First, they arelow expressed in dollar terms. This is largely because: 1) depreciation isbased on the historical costs of the power plants expressed in leva which is farbelow the replacement costs of these plants due to the rapid inflation which hasoccurred in Bulgaria; 2) wages are currently very depressed; and 3) there is nocharge for capital, such as for example interest, built into these costs.Nevertheless these costs may not be too far from the short run marginal cost ofproducing power in Bulgaria which is low at present due to excess capacity.Second, as indicated in Table 7.5, the costs of electricity produced in hydropower plants and nuclear power plants are lower than the costs of electricityproduced in thermal power plants. In the case of nuclear power this is probablybecause the depreciation charge per kWh for the plant is extremely low absolutelyand relatively , reflecting the erosion of the book value of the plant byinflation and the lack of provision for eventual decommissioning costs. However,hydropower is usually one of the lowest cost power sources in most countries andtherefore the relative cost shown here (relative to thermal power) is probablyroughly correct, though the absolute price is almost certainly low.

Table 7.5ESTIMATED COSTS PER KWH GENERATED 1991 (cents/kWh)

Plant or Power Source cost of whichper kWh fuel deprec. other

Kozloduy 1.15 0.94 0.05 0.16

Maritza East I 2.86 2.55 0.08 0.23Maritza East II 2.39 2.23 0.06 0.10Maritza East III 2.25 2.11 0.04 0.10Varna 2.30 2.24 0.01 0.05Russe (east) 3.57 3.27 0.06 0.24Bobov Dol 2.05 1.84 0.03 0.18

Belmeken-Sestrimo-Chaira (Rila) 1.21 1.09 0.03 0.09Vatcha (Rhodope) 0.60 0.48 0.01 0.11

Source: Conmmittee of Energy (leva cost converted to dollars)

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7.63 Losses. The COE estimates that their average cost of providingelectricity in 1991, taking into account losses at the power plants and intransmission, was about 3.44 leva/kWh or about 1.9 cents per kWh. Their averagereceipts are estimated at 3.07 leva/kwh or about 1.7 cents per kWh. This excessof costs over price produces a loss for the COE on electricity production ofabout 1 billion leva for 1991. This entire loss is due to the household sectorwhich is charged far less than cost. Currently this sector is charged on average.284 leva/kWh (1.6 cents/kWh) but as late as May 1991 households were onlycharged .167 leva/kWh (0.9 cents/kWh). To eliminate the losses on electricityproduction by . the household sector should at least be charged the average costof electricity production and distribution even though this sector should inreality be charged more than the average cost since it is more expensive tosuply electricity to households than to industries.

7.64 In 1992 losses at NEC will depend on a number of variables, butshould not be as large as the losses sustained by the COE on electricityproduction in 1991. Under the right circumstances NEC may even be profitable.The key variable is of course the increase in electricity prices in 1992 and whenit occurs. An increase of at least 35% is needed and as soon as possible. Thelonger the price increase is delayed, the larger the price increase which willbe needed. Another key variable is depreciation. If NEC continues to depreciateits plants based on historical costs as the COE did in 1991, then costs in 1992will be much lower than if depreciation is based on revalued assets (which ismuch more realistic). A third variable is the cost of fuels including importedcoal, gas and electricity. Finally, the amount of electricity imported has animportant impact on results.

J. Interconnections. Imports and Exports.

7.65 The Bulgarian power system is connected by electric transmissionlines with all neighboring countries (Romania, Turkey, Greece, and Yugoslavia)and with Ukraine. These allow the importation of power but only theinterconnections to Ukraine, Turkey, and Romania have significance at the presenttime. Power can currently be imported from Ukraine through one 750 kV and one400 kV line. Although the connection to Ukraine has a capacity of about 3150 MW(1350 MW for Bulgaria, 800 MW to Romania, and 1000 MW for reserve to cover thepossible outage of the 1000 MW Kozloduy unit), in the past only a maximum of 2000MW could be obtained from the former USSR with which Bulgaria had a one-year(renewable) contract for 800 MW. In 1990 when the supply arrangement with theUSSR was functioning normally, net imports from the USSR, which wereapproximately equal to total net imports, were about 3.77 billion kWh or about8% of Bulgaria's electricity supply and payment for the electricity was made aspart of Bulgaria's bilateral clearing arrangement with the USSR. In 1991,preliminary indications are that net imports will be about the same level as in1990 and again mostly from the USSR or its primary successor in this arrangement,Ukraine. Looking ahead, however, Bulgarian imports under this arrangement arelikely to decline since Ukraine appears to have strict limits on how muchelectricity it can or will supply.

7.66 The interconnection to Romania, near Kozloduy, (2x 400 kV) serveslargely as a means of channelling to Romania power coming through Bulgaria fromUkraine. In 1990, however, Bulgaria was in addition a net exporter to Romaniaon its own account of about .54 billion kWh, which was part of a barter

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arrangement for some badly needed spare parts. The trade in electricity withGreece and Yugoslavia is normally fairly small.

7.67 Imports of up to 400 MW have been made from Turkey (over a400 kV; line to the Maritza East area) originating from a new 1200 MW gasturbine/combined cycle plant (Babaeski) operating on gas imported by Turkey fromthe USSR which transits Bulgaria. In 1990 Bulgaria received net imports fromTurkey of .50 billion kWh which were paid back in 1991. At periods of peakdemand in Bulgaria, Turkey is likely to have excess capacity available of which400-500 MW could be supplied to Bulgaria. However, this power is quiteexpensive. Nevertheless, it is important for the NEC to formalize a relationwith Turkey for emergency power as a form of insurance.

7.68 The interconnections to the USSR and Romania are in parallel(synchronized systems) whereas those to Yugoslavia and Greece are operated on the"isolated island" principle which allows synchronized operation of an isolatedpart of one power system with the other. This is necessitated by the fact thatBulgaria (as well as the other countries of the former CMEA) belongs to theEastern Europe interconnected system known as IPS or more informally as MIR(Peace); whereas Greece and Yugoslavia belong to the Western Europeinterconnected system known as UCPTE. The difference in the standards of the twosystems does not allow synchronization of the systems at the present time.Turkey, on the other hand, is not a member of either system and operates its ownindependent power grid. This gives more flexibility to interchange power witheither system. However, being a member of a large system has major advantagesin that the immediate availability of power through the system interconnectionscontributes to a higher reliability than would be the case without them and, ifrationally utilized, also to a more economic operation of the interconnectedsystem.

7.69 Bulgaria is in tripartite negotiations with Greece and Yugoslavia forenhancing future exchanges, strengthening of the interconnections and possiblesynchronization. This would require the adoption by Bulgaria of the UCPTEstandards including adequate generating capacity, peaking units, and frequencyand voltage regulation. At present it is questionable whether Bulgaria couldmeet these standards. There have also been discussions between UCPTE and IPSabout establishing closer links and eventually even synchronizing the twosystems. It seems unlikely that this will develop rapidly enouglh to be of muchuse to Bulgaria.

K. Organization of NEC. Technical Assistance Needs

7.70 As was discussed (in paras. 1.28 and 3.05) a major reorganization ofthe former COE at the beginning of 1992 created: 1) the National Electric Companyor NEC, which has 94X of the old COE's generating capacity, and all of itstransmission and distribution assets; 2) 26 district heating companies;3) 16 coal mines; 4) the new COE, with governmental functions only; 5) 7 serviceorganizations; and 6) a briquette factory. This was a major step forward in thatit: 1) separated governmental functions from operating functions; 2) createdautonomous companies; and 3) further separated operations by industry rather thantrying to combine different industries in a single company or companies. It did,however, create a large number of new and inexperienced companies.

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7.71 NEC, which is the main successor organization to the old COE in termsof operations and the dominant company in the electricity industry, is quitesimilar to a typical western utility at least in concept. It is autonomous, hasit own board of directors (called the Supervisory Board) and is supposed tooperate like a commercial western utility. However, its staff has no experiencein such a mode of operation. The companY therefore needs a considerable amountof technical assistance. (Which is also true of many of the other newcompanies.) The most important area in which technical assistance is requiredis the organization of the companydresponsibilities of various levels of management. Also, assistance is neededwith a number of commercial operational issues such as management informationsystems especially accounting, billing and cash management. Other areas in whichassistance is needed include investment decision making and strategic planning.Such technical assistance would greatly accelerate the pace at which NEC evolvesfrom being part of the government as it was in the past, into a fully functioningcommercial utility.

L. Strategy Summary

7.72 The government, has correctly taken the first required step inimproving the operations of the electricity subsector by breaking up the old COEand creating a focussed electric utility, the NEC. A second imRortant step isto improve the internal organization of the new company so that plant managementhas increased authority. responsibility and incentives and fewer decisions aremade in Sofia. Third. the whole organization should be made more effective andproductive through better accounting. budgeting and control systems and animproved organizational structure. Out of this process of reorganization andrestructuring should emerge a much leaner, more responsive and efficient electricutility.

7.73 At the same time that the company is being reworked managerially, itneeds to rationalize its electricity production capacity. There are four mainthrusts to this rationalization which are: 1) increasing utilization of existingplants: 2) completing Rlants under construction: 3) improving the safety orshutting still other plants: and 4) eliminating electrical energy imports andbeginning exports.

7.74 First, the capacity availability at existing power plants must beincreased. Bulgaria has potentially available close to 12,000 MW of domesticpower (see para. 7.10) but is experiencing power rationing when demand is onlyslightly over half of that level because a large part of this potential capacityis not in fact available. The key problem is a lack of fuel for most of thefossil fired power plants. though there are other problems including the need torehabilitate certain units. Two basic approaches are suggested for handling thefuel problem. First. at the Maritza East Complex, mine production has to beincreased largely through better planning and organization. but also by someadditional investments (para, 6,08-6.11). Second, for plants which lack domesticfuel sources or are facing limited domestic supplies (Ruse. Bobov Dol). it wasrecommended-that the plants investigate SWitching to another fuel source (paras.7.47, 7.50). The major alternatives are imported coal and natural gas. Naturalgas is the most environmentally desirable fuel source, though unfortunately nota completely reliable one given that the sole source of this gas is the formerSoviet Union.

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7.75 Second, there are several proiects which were at an advanced stagewhen Bulgaria entered its current economic crisis and could be completed atfairly low cost. Perhaps the two most important such projects are unit 8 at theMaritza East II power plant (para. 7.37) and Chaira units 1 to 4 (para. 7.56).Both of these projects should be completed. The EIB and EBRD have recentlyagreed to fund the completion of unit 8 while NEC is planning to finance thecompletion of units 1 and 2 at Chaira this year. Completion of Chaira Units 3and 4 has not yet been financed though these units are not as urgently requiredas 1 and 2.

7.76 Third, at the same time that the country tries to increase theavailability of its existing power plants and complete existing power projects,it should increase the safety of existing units. The primary units concerned areKozloduy units 1 to 4 which are the older nuclear units and lack many safetyfeatures common to newer units such as adequate capacity and redundancy ofsafety systems and a full containment structure. The most prudent course ofaction would be to close units 1 and 2 which are older than 3 and 4 and havefewer safety features. However. given the country's current need for these unitsand the possibility of retrofitting them economically to reach acceptablestandards of safety. continued operation of these plants cannot be ruled out.However, continued operation of these plants if it wer?e to occur, would re uirethat they be: 1) retrofitted to achieve acceptable levels of safety: and 2) thatthis be done based on the recommendations of a panel of independent experts.,Units 3 and 4. which are newer and have safety systems with more redundancy thanunits 1 and 2. could in all probability be raised economically to a safety levelthat would allow them to operate for a number of years, This should beundertaken as soon as possible again with the approval of a panel of experts.Units 5 and 6 are newer and represent a maior asset of the system and everyeffort must be made to ensure their baseload operation at a high level ofstability and availability. A moderate investment program would greatly assistwith this purpose. Above all. the safe operation of_the nuclear units willreguire highly trained personnel. well defined procedures. close manapementattention and the development of a safety culture,

7.77 Finally, after its generating capacity is rationalized. Bulgariashould still have more generating capacity than it needs internally, given thatelectricity consumption is expected to decrease (para. 7.06). 2 This excesscapacity would allow the country to: 1) reduce or eliminate bulk electricityimports though links should be maintained so that imported power would beavailable in an emergency; and 2) begin electricity exports to members of_theWestern grid, UCPTE, and possibly to other East European countri6s if they needit. Bulgaria does not have a natural comparative advantage in electricityproduction, because it has such limited domestic energy resources. However, itshould take advantage of the large generating capacity which has been created inthe country over the past decades.

2 Bulgaria's current nominal generating capacity is about 12,100 MW thoughactual available capacity is significantly lower. Nominal capacity shoulddecrease somewhat over the next several years through rationalization thoughavailable capacity would decrease much less if at all due to improvements inplant availability. During this same period, demand will drop sharply fromits all-time peak of 8332 MW in 1989. The result of these two factorsshould be the creation of a significant amount of available unused capacity.

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VIII. ENERGY CONSERVATION

8.01 There is great potential for reducing energy consumprion in Bulgariasince in the past there has been very little effort to do it. This chapterdiscusses the potential for conservation both in the short and longer term andsome of the steps the government could take to assist with conservation.

A. Industry

8.02 Bulgarian industry is generally fairly energy inefficient. This isindicated by the macro-economic data, which show that Bulgaria uses substantiallymore energy than it should, given its level of output and that most of this finalenergy consumption is in the industrial sector. It is also indicated by theavailable data on specific industries which show that energy consumption per unitof output in industries is far above Western European and U.S. levels. Forexample, Bulgaria requires at least 35% more energy to produce a tonne of pigiron, 32% more energy to produce a tonne of cement and 67% more energy to producea tonne of cardboard than would be the case in Western Europe. Thus, thepotential for energy saving in industry is quite large and this is the case inboth the short run and the somewhat longer term.

8.03 Potential energy savings in the short run appear to be quitesignificant based on the audits which were conducted in 1991 of industrial plantsas part of a project funded by USAID. These audits revealed short run energysavings opportunities averaging 12% for electricity and 10% for thermal energy.These savings correspond to measures requiring little or no capital investment.Many of the measures recommended are largely improvements in operationalmanagement procedures and in maintenance. In those cases where investment isrequired, the payback periods are less than 6 months and sometimes as little asseveral weeks.

8.04 In the longer term, over say 6 to 10 years, energy conservationsavings in industry could reach a total of at least 35% of current levels of bothelectricity and fuel use. To reach these levels, increasing capital investmentswill be needed, but paybacks should prove attractive for most enterprises:paybacks for typical conservation actions will generally be under 2 years. Therisks involved with such investments will be minimal as they will consist of wellknown and proven measures, for which much of the equipment and materials shouldbe derived from domestic sources, at least in the medium term.

8.05 It should be pointed out that the above estimates for energyconservation potential in industry, are in broad agreement with those put forwardby the Inspectorate for Energy Utilization (part of the COE) who have recentlyundertaken a study on the subject. However, the estimates for short termsavings, based on the USAID sponsored audits, are a little higher.

B. Residential and Public Buildings

8.06 The potential for saving energy in the household and communal (publicbuildings, shops) sector are similarly large. The total ener.gy consumption forspace heating in this sector was reported to be 120 PJ for a heated area of

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200 million M2 in 1988, in a joint Danish/Bulgarian study (Birch and Krogboe andthe Ministry of Construction, Sept. 1991). Assuming the degree days3 for theheating season are 2520 (the actual figure for Sofia), this corresponds to 237 kJper M2 per degree day. Figures for the USA and Sweden are 160 and 135 forexisting housing stock and the averages for new stock are 100 and 65respectively. Best available modern technology gives arLund 35 KJ per MZ perdegree day. Thus, the potential for energy saving in the erea of space heatingis quite large.

8.07 This same Danish/Bulgarian study also provided considerableinformation as to where some of these potential savings are located and roughindications of the investments required and paybacks assuming electric heating.Table 8.1 below shows the more important areas of saving, the investment cost ofimplementing these savings measures, the annual savings expected from them andthe payback from these investments in years. The economic payback period wouldprobably be less than half the number shown in the table based on pricingelectricity at its long run marginal cost.

Table 8.1:ENERGY SAVINGS MEASURES IN BUILDINGS

Cost Savings PaybackMeasure (mill. leva) (GWh) (years)

Insulation of valves, schools 20 160 0.5

Window seats, apartments 150 900 1.0

Thermostatic radiator valves, apartments 400 1,200 1.5

Balcony retrofit, apartments 2,520 1,400 4.0

Low emission venetian blinds, apartments 1,200 1,245 4.0

8.08 Another major source of energy saving is the district heatingsystems. These tend to be fairly energy inefficient with losses throughout thesystems. These losses occur in the boiler, in the hot water distribution systemitself and at the apartments where there is no incentive to control heat usageand limited capacity to do so. These losses at each stage are multiplied by thelosses at the next stage to get the total system efficiency and as a result theoverall heat losses in such a system can be quite high. A study of the districtheating,systems in Bulgaria needs to be undertaken which would estimate theirefficiency. make suggestions about how they could be improved and develop a longrange strategy for them. This study should especially concentrate on thedistrict heating system in Sofia which is by far the largest. In addition . while

3 Degree days is a measure of the extent of cold weather during the heatingseason. For each day during the heating season the average outsidetemperature is subtracted from the outside temperature at which heating isnot required. This is a degree day. The sum of all degree days during theheating season is then a measure of coldness, closely related to heatingneeds.

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this study is underway. the district heating systems. especially Sofia. need toundertake a number of simple investments in order to reduce heat losses andinrove the operations of their systems,

8.09 The potential for energy conservation in buildings in the short runat low cosu may be similar to the potential for such savings in the industrialsector, that is 10-12%, and in the longer term there is of course even morepotential for conservation. However, the savings are likely to come more slowlythan for industry. First, households will be slower to conserve because:1) households using district heat have no incentive to conserve since they arenot billed on their own heat usage; 2) based on Western experience, householdsare not as aware of energy saving options or as prepared to adopt them asindustry; 3) materials for undertaking conservation measures (insulation, windowsealant, thermostatic radiator valves) are expensive and sometimes difficult toobtain. On the other hand, Bulgaria does have the major advantage that at least80% of its housing stock is privately owned and mostly owner occupied, so thatinvestments in energy savings in a dwelling generally benefit the owner of thedwelling. Second, communal buildings will be slower to conserve since theygenerally lack incentives to do so.

C. Mechanisms

8.10 The main mechanism for encouraging conservation will be the muchhigher prices for energy paid by industries and households and in the case ofindustry the removal of the soft budget constraint as these firms arecommercialized and eventually privatized. However, there ar- a number of stepswhich the government can take to assist the process of conservation. Some of themore important of these are discussed below.

An energy conservation office within the new energy policy agencyshould be established to coordinate and promote energy conservationactivities. This office would also carry out studies of energyconservation issues and provide technical assistance on energyconservation to other parts of the government.

- BuildinDgcodes should be redrafted to include energy conservationspecifications.

- Energy Audits could be provided at low cost to households and smallestablishments by the electric and district heating utilities.There is currently such a program for larger industrialestablishments, but it was largely ineffective in the past becausethere was no incentive to conserve energy.

- Programs should be developed to encourage small scale energyconservation investments. One type of program which is becomingcommon in the U.S. is to have the utility (electric company ordistrict heating company in Bulgaria) undertake certain smallerenergy savings investments on behalf of its household and retailcustomers and then to include that investment in its rate base. Asecond, though probably less effective method, is to provide lowercost energy saving loans through the banking system.

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- Specialized studies need to be undertaken of various conservationrelated problem areas. A study of district heating systems wasmentioned above. In addition, a number of other studies need to beundertaken including one of the buildings materials industry toascertain what can be done to provide more energy efficientmaterials (for example more and better quality insulating material)to the construction industry. The studies would then providerecommendations on methods to solve these problems.

8.11 The preliminary data for Bulgaria. outlined above, and westernexperience both indicate that some of the most attractive investments which -illoccur as a result of the sharp hike in enerpx prices will be in the area ofenergy conservation. Conservation, also, is perhaRs the best way to reduceenergy associated pollution.

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IX. THE DEMAND FOR ELECTRICITY AND OTNER FUELS

9.01 Two approaches have been followed in attempting to forecastelectricity and total energy demand in Bulgaria over the medium term. The firstapproach is based on short and long run forecasting equations which predictaggregate electricity consumption using data on macroeconomic variables andelectricity prices tc industrial users. The equations were estimated for a largesample of East and West European countries over the period 1960-88 and takeaccount of the dynamics of adjustments in electricity demand in response tochanges in economic activity. The second approach relies upon more detailedindustrial data and takes account of inter-fuel substitution by sector as wellas the macroeconomic development of the country but it is not as suitable as thetime series equation for making short term forecasts.

A. Aggregate Demand Eguations-Electricity

9.02 The key features of the first approach, using aggregate forecastingequations, are:

(a) Centrally planned economies consume approximately 50% moreelectricity than market economies with similar levels of GDP perperson and prices. It is assumed that this excess for Bulgaria willbe eliminated over the decade beginning in 1991.

(b) The share of industry in total CDP in Bulgaria is high relative tocomparable market economies. This will decline gradually over thenext decade and will thus reduce any growth in the demand forelectricity due to changes in income per head.

(c) The long run income elasticity of electricity consumption is 0.8,while the short run income elasticity is 1.0 for market economiesbut only 0.4 for centrally planned economies.

(d) The long run price elasticity of electricity consumption is quitelow at -0.25 while the short run price elasticity is negligible.

9.03 The year 1989 is used as the base year for the forecasts since it isthe last year in which the situation might be described as normal. The forecastsobtained from the aggregate equation for the decline in electricity demand overvarious time periods are as follows:

1989 - 1992 - 29%1989 - 1995 - 44%1989 - 2000 - 47%

9.04 There is some uncertainty about the projection for 1992 because itis obtained from the short run dynamic forecasting equation. This requires anassumption about the outcome for 1991, since the model allows for a differingrates of adjustment in response to external shocks. The above forecast was basedon the best information available in early October 1991 and it projects a further

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decline in electricity demand equivalent to 9% of the 1989 level during thecourse of 1992.

9.05 Using the aggregated demand equation approach, the gradualelimination of the characteristic excess level of electricity demand associatedwith centrally planned economies combined with the reduction in the share ofindustry in GDP means that there is likely to be no aggregate growth inelectricity demand between 1995 and 2000 despite a projected real growth rate of5.3% p.a. for the economy over that period. (However, as is pointed out in paras9.01 and 9.15, the aggregate demand approach is inferior to the inter-industryapproach, below, for long term projections.)

B. Inter-industry Approach

9.06 The second approach to forecasting electricity and energy demandrelies upon the analysis of the inter-industry demands for output and energy.It is described in some detail in Annex VII.

9.07 Short Term. In using this approach to forecast energy demand in theshort term it is assumed that there is no response to the increase in energyprices in the sense that energy inputs per unit of output remain constant.However, the decline in industrial output, especially in energy intensivesectors, leads to a large decrease in the industrial demand for energy. Theresulting short term demand declines for the main forms of energy are:

Change 1989-92

Coal - 30%Gas - 33%Oil Products - 22%Electricity - 25%

9.08 These forecasts, and the ones that follow, refer to final energydemand that is to say the demand for energy outside the energy conversionindustries, i.e. oil refining and electricity generation, since the conversiondemand depends upon the way in which the non-conversion demand for energy isfulfilled.

9.09 Medium and Long Term. In constructing medium and longer termprojections there are many factors which are likely to influence the compositionand level of energy consumption. This analysis will focus on four of the mostimportant sources of change:

(a) Until early 1991 Bulgaria maintained energy prices which were wellbelow those charged in Western Europe. A move from low energyprices to a level and structure of energy prices similar to thoseprevailing in Western Europe will reduce energy consumption.Further, though smaller, adjustments would follow as the compositionof production and consumption adjust to a new set of relative pricesreflecting the higher cost of energy.

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(b) The stabilization program which has been implemented in Bulgaria hasled to a sharp decline in total industrial production and GDP overthe period 1989-91 combined with a shift in the composition of finalexpenditure away from government consumption and investment. Growthin GDP is expected to resume in 1993 and gradually accelerate as thestabilization process comes to an end averaging around 5% per yearin the period 1995-2000 ( See Annex VII). The scale and compositionof these macroeconomic adjustments which are occurring and willpersist over the next few years will have a significant effect ontotal energy use.

(c) A long term process of industrial restructuring is occurring inBulgaria in response to changing trade relations with the formerSoviet Union and Western Europe. The ultimate shape of theindustrial sector cannot be forecast with any confidence since awhole variety of factors may play an important role in determiningthe changes which will occur. To put the analysis of industrialrestructuring on a systematic basis it is based on some work onindustrial competitiveness in several East European industry whichprovides a comparative assessment of the industries that are likelyto expand or contract in the light of available data on their recenteconomic performance. Industries- -aggregated into sectors accordingto the 3 digit ISIC classification --are ranked in terms of theircompetitiveness as measured by an index of their domestic resourcescosts of production. This index is obtained from the ratio of theirvalue-added at world prices to their value-added at domestic prices.It is assumed that resources will be transferred from the leastcompetitive sectors to the most competitive sectors over the period1989-1995 such that the sectors accounting for the least competitive20% of output contract by 50% while the sectors accounting for thenext 20% of output contract by 25%. At the other end of the scalethe sectors accounting for the most competitive 20% of output areassumed to grow by 50% and those in the next quintile grow by 25%.(See Annex VII for details on the industries which are expected togain and lose through industrial restructuring.) Of course, theoutcome will not be as neat as these assumptions imply, but theyprovide a reasonable basis for comparing the impact of industrialrestructuring on total energy consumption across several countries.

(d) The composition of primary energy used for electricity and heatgeneration (treated as a single sector in the model) is likely tochange in a systematic manner as a result of the possible closure ofold generating capacity, shifts in fuel use and a possible decisionto close some of the less advanced nuclear units. The model makesthe following assumptions about the changes which will affect thedemand for primary energy until 2000:

(i) The net volume of primary electricity production - from hydroand nuclear power - plus net imports will remain constant.This implies that the additional contribution of electricitygenerated from units 5 & 6 at Kozloduy (relative to 1989) isused to reduce or phase out some of units 1-2 and/or to reduceimports or expand exports.

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(ii) Transmission losses and own power consumption within thegenerating vstem are assumed to decline from 19% of finalelectricity consumption to 10% in 2000 which figure is moreconsistent with Western experience.

(iii) There is a gradual shift from a reliance upon lignite or coaltowards gas in fossil fuel generation. This may occur eitherbecause of the conversion of base-load capacity to gas orbecause the probable shift in the load curve from off-peak topeak periods (due to an increase in the shares of theresidential and service sectors at the expense of industrialdemand) is met from gas-fired peak load capacity.

9.10 The magnitude of the response of energy demand to much higher pricesis crucial in constructing the forecasts. Three scenarios have beeninvestigated.

(a) Scenario A - the main projection - assumes that the priceelasticities of aggregate enerry demand are -0.15 in the industrialsector and -0.05 in the housenold sector up to 1995 while for theperiod to 2000 they are assume to be -0.25 and -0.15 respectively.It allows for substitution between fuels in the industrial sector inresponse to their relative price changes after 1995. This leads toa shift away from coal and gas towards petroleum products andelectricity.

(b) Scenario B - the low response projection - assumes a very limitedaggregate response to the real increases in energy prices with priceelasticities of -0.05 for industry and -0.05 for households up to1995 with elasticities of -0.15 and -0.05 respectively to 2000. Inthis scenario there is no inter-fuel substitution in the industrialsector.

(c) Scenario C - the high response projection - is the same as ScenarioA up to 1995 but then assumes a higher price response after 1995with prices elasticities of -0.50 for industry and -0.15 forhouseholds up to 2000. This scenario also allows for considerableinter-fuel substitution within the industrial sector.

9.11 In all of the scenarios the household price elasticity of demand forelectricity and heat is assumed to be one-half of the household price elasticityfor other fuels. This is because households face such a large increase in thereal price of electricity and heat (over 400%) that it is not reasonable to usean elasticity obtained from the analysis of much smaller price changes.

9.12 Changes in total demand for the four main fuels have been forecastunder these scenarios for the period 1989-2000. The results are shown inTable 9.1.

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Table 9.1:Projections for Final Energy Demand, 1989.2000

% Changes in Final Energy DemandMain Projaction Low Response High Response

19891995 1989-2000 1989-1995 1980-2000 1989-1995 1989-2000Coal 28 -- 56 -18 -5 -26 -86Gas 48 -62 -43 -35 -48 -69Oil Products -26 -9 -24 -8 -26 -17Electricity -32 -15 -27 -16 -32 -14

9.13 The differences between the scenarios emphasize the importance of thespeed with which enterprises substitute fuels whose prices have declined inrelative terms, i.e. oil and electricity, for those which are now more expensivein arriving at medium term energy demand forecasts. However, at a minimum theestimates suggest that the demand for electricity will be 27% lower in 1995 thanthe level in 1989. Apart from electricity the most striking aspect of theseprojections is the very large decline in the final demand for gas (that isexcluding gas demand in power stations and refineries) that is expected. Thisis entirely a consequence of changes within the industrial sector since it is notpossible at present to produce sensible e-stimates of the rate at which gasconsumption in the household and service sectors might expand once a decision ismade to invest in the necessary distribution networks. However, the projectionsdo indicate that in theory the decline L.A industrial consumption of gas willrelease sufficient supplies to allow for rapid growth in the household andservice sectors use of gas.

9.14 Using the assumptions concerning primary energy use for electricitygeneration which were outlined in paragraph 9.09 above, projections for the totaldemand for fossil fuels in primary energy use have been made. These are shownin Table 9.2.

Table 9.2:_Projections for Primary Energy Demand, 1989-2000

% Changes in Primary Energy DemandMain Projection Low Response rHigh Response

1989-1995 1989-2000 1989-1995 1989-2000 1989-1995 1989-2000Coal -43 -55 -36 -32 -43 -73Gas -41 -33 -35 -10 -41 -45Oil Products -29 *11 -25 -10 -29 -19

9.15. The impact of the large decline in the demand for gas from theindustrial sector is mitigated by the switch from coal to gas for electricitygeneration. Nonetheless, there is still a large decline in total gas demand upto 1995. Under the main projection there is a slow recovery in the second halfof the decade, but, unless the price response is very low, total gas demand willstill be at least one-third lower in 2000 than in 1989. There is an even morerapid decline in the total demand for coal throughout the decade but this is notsurprising since it conforms with a general pattern of change that is likely tooccur throughout Eastern Europe, mirroring the decline which occurred in WesternEurope from 1960 to 1980.

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9.16 In interpreting these projections it is useful to bear in mind therelative importance of the main factors which determine the changes in energydemand in the model. Annex VII including figures Al and A2 show in some detailhow the projections for final and primary energy demand in 1995 are made up. Thefigures show that it is the macro-economic changes which are the most importantinfluence on total energy demand up to 1995. Higher energy prices also lead toa significant decline in energy consumption. but their full effect is only feltin the second half of the decade. (This corresponds to what we know from themarket economies about the relative importance of price and income in short andlong run changes in total energy demand.) Finally, shifts in the composition ofindustrial output may reduce energy demand significantly. However, the patternof changes in production is mixed and the overall impact on energy demand is lesscertain.

C. Conclusions

9.17 Electricity. As might be expected, the two approaches (aggregateforecasting equations and inter-industry modeling) generate rather differentestimates of the change in the demand for electricity over the medium termbecause they focus on different aspects of energy demand and differ in theirassumptions about the speed of response to changes in energy prices. Takingaccount of the various factors which are likely to influence the demand forelectricity in the medium term, the government should probably use the followingworking assumptions about electricity demand:

Reduction over 1989-1992 25%Reduction over 1989-1995 35%

The differences between the projections for 2000 yielded by the two approachesarise because the industrial model takes account of inter-fuel substitutionwithin the industrial sector, whereas the simple time series model is not ableto capture such changes in the composition of energy use. Hence. it isreasonable to conclude that the reduction in electricity demand over the period1989-2000 will be of the order of 15%. On the basis of current trends andinformation, it is very unlikely that the total demand for electricity willrecover to match the level in 1989 before 2005.

9.18 Using different assumptions, primarily about the response ofelectricity demand to higher prices, the COE has developed different demandforecasts for electricity. While they agree with the two approaches above inforecasting a decrease in electricity demand from the 1989 level, their forecastscall for a decline in consumption of 15% by 1992, 12% by 1995 and 6% by 2000.These forecast seem rather bptimistic given the large price increases and majorrestructuring anticipated for the Bulgarian economy.

9.19 Gas. Coal and Oil. The main projections shown in table 9.2 above arereasonable working assumptions about the likely changes in demand for gas, coaland oil over the time periods 1989-95 and 1989-2000. Over this period demand foroil declines least, partially because it was less underpriced in lQ89 than someof the other fuels and partly because relatively more of it is used in areas(households, transport) which are somewhat less impacted by the decline inindustrial output. Demand for coal declines the most since it tends to lose outin competition with better quality fuels such as gas, petroleum and electricity.

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9.20 Strategic Implications. The large reductions in energy demand inprospect over the next 4-5 years have major implications for the strategicplanning of the energy sectors. The following should be particularly noted:

(a) In principle, there should be a substantial margin of excesselectricity generating capacity. This means that there should be norequirement for significant investment in providing new generatingcapacity for some years. Investment will largely be limited to: 1)the rehabilitation of existing plants; 2) safety investments; 3)completion of certain projects under construction; and 4) thepossible conversion of some capacity from local coal- or oil-firedunits to gas or imported coal firing.

(b) The large decline in the demand for gas from the industrial sectorwould permit a substantial reduction in the cost of gas purchases onthe balance of payments. However, on environmental grounds it wouldbe preferable to reduce use of lignite and briquettes and toencourage households and other non-industrial sectors to switch fromthese fuels to gas for space heating and other purposes. This wouldinvolve a significant investment in developing a gas network toserve residential and commercial premises. The cost of thisinvestment would almost certainly be justified in terms of theconsequential improvements in air quality, especially in largerurban areas.

(c) The load curve for electricity demand is likely to display a muchmore marked peak in future as residential consumption grows relativeto industrial demand. This means that it may be necessary to investin the provision of more peaking capacity in the electricity systemwhile reducing the requirement for base load capacity.

(d) Changes in the patterns of both electricity and gas consumptioneither seasonally or between day and night times means that themanagements of the electricity and gas enterprises must develop newtariff structures which take proper account of differences in themarginal costs of meeting demand in peak and off-peak periods. Thiswill involve a proper seasonal pricing structure for gas, whichmight allow the chemical industry to use gas as a feedstock duringthe summer period, and more sophisticated pricing for electricity.

(e) Finally, in view of the large changes which are occurring in theBulgarian energy situation and the importance of these changes, itis unfortunate that there is no group in the government to produceforecasts of the likely development of energy demand by fuel to beused as input in the formulation of appropriate strategies for thesector. It is important that the proposed energy agency should giveattention to the formation of a unit which would be responsible forproducing such forecasts and for helping formulate policies based onthese forecasts.

m: \ecl1i*\J\bul. e*y

ANNEX IPage 1

SUMMARY OF IAEA REPORT ON THE SAFETY OF THE KOZLODUY NUCLEAR PLANT

Introduction

1. The Soviet-designed reactors VVER-440, model 230 have recently becomethe focus of international concern as it became clear that, although thesereactors have operated at a high level of availability, their safety systems donot comply with international standards and could not cope with a severe accidentof the magnitude usually assumed as bases for design in western countries. Inaddition, safety practices in Central and Eastern European countries are notknown, in general, to follow the strict standards of international practice.

2. As a result of this international concern and with the encouragementof its members, the International Atomic Energy Agency (IAEA) launched an(extrabudgetary) Program on the Safety of VVER-440/230 Nuclear Power Plants withthe objective of determining more precisely the nature and extent of the safetyrisks and providing advice to countries in which such reactors are found onmeasures to improve their safety and hence reduce risk to acceptable levels. TheProgram included the Kozloduy Nuclear power plant in Bulgaria as well as theother VVER-440/230 plants in Bohunice (CSFR), Novovoronezh, and Kola (USSR).

3. The Program was designed to consist first of a "Generic DesignReview". This was held in Vienna in February 1991, in which the conceptualdesign of the VVER-420/230 plants was reviewed by a group of 32 internationalexperts working together with 25 Soviet specialists. The second phase of theProgram consisted of a series of site missions to all the affected plants. Theobjective of these missions was to assess both the design and the operations ofthe visited plant, taking into consideration plant specific conditions,including improvements introduced in individual units. From the assessments,both plant specific and generic recommendations have been developed, which shouldassist each country to take decisions on how to achieve the objective of a higherlevel of safety.

IAEA Review of Kozloduy

4. At the request of the Government of Bulgaria, the InternationalAtomic Energy Agency (IAEA) conducted a safety review mission to the Kozloduynuclear power plant, units 1 to 4, during the period 3 to 21 June 1991. Thirteeninternational experts and IAEA staff participated in the review covering elevendifferent areas. Experts were recruited from Canada, Finland, Spain, SouthAfrica, Switzerland, United Kingdom and the United States, in addition to fourIAEA staff. Together they represent more than 250 years of nuclear experiencein eight different countries.

5. Eleven areas were the subject of in-depth reviews by the team:Management, Organization and Administration; Training and Qualification;Operations; Maintenance; Fire Protection; Emergency Planning; Core Design; SystemAnalysis; Component Integrity; Instrumentation, Control and Electric Power; andAccident Analysis.

ANNEX IPage 2

6. During the three week mission the team of experts held detaileddiscussions with their counterparts, observed activities in the plant and insupport organizations, and visited areas and equipment in the plant related totheir review topics. In addition to daily briefings with their counterparts, thehighlights and main conclusions of the review were presented to plant management,nuclear regulators and the Bulgarian Government.

Plant Description

7. Units 1 to 4 of the Kozloduy nuclear power plant started commercialoperation in July 1974, November 1975, January 1981 and June 1982, respectively.These units are VVER-440 (440 MW), model 230 pressurized water reactors (PWR).Each unit supplies two turbine/generators; condenser cooling is provided by waterdrawn from the Danube river. The nuclear steam supply system consists of sixloops connected to the reactor pressure vessel, employing large horizontal steamgenerators, one reactor coolant pump per loop, connecting pipes with a diameterof 500 mm, and a pressurizer with relief and safety valves. The reactor pressurevessels are clad with stainless steel. Each loop can be isolated from thereactor by valves located in both legs (hot and cold) of the loops. Each unitsupplies two 220 MW turbines with saturated steam at a pressure of 4.3 MPa (43bar).

8. Safety cooling of the reactor is accomplished by operation of a highpressure safety system, which includes two independent groups of safety pumps.Each group consists of three pumps. Suction of pumps are connected to areservoir of 800 m3 borated acid solution. This reservoir also supplies thespray system for the hermetic zone of the reactor. Units 3 and 4 have also alow-pressure safety injection system that is not available in units 1 and 2. Theredundancy of the high-pressure injection system of these earlier units is notas high as that of units 3 and 4.

9. The following paras present the main results of the IAEA mission toKozloduy in the eleven areas of review and the most important recommendationswhich address the most acute problems identified by the mission.

Main Conclusions

10. The "Generic Design Review" of the WVER-440/230 had alreadyidentified several important weaknesses of these reactors generally: lack of acontainment structure, insufficient capacity of safety water injection system tocope with the largest pipe break and, more generally, insufficient diversity,redundancy, and physical segregation of safety systems. With these alreadyexisting design weaknesses, it is imperative that the highest levels of materialconditions and operations and maintenance performance are sustained. Operationalaspects on which one would expect the greatest emphasis are: operator trainingfor normal and emergency response actions, testing and maintenance of safetyequipment, and meticulous attention to cleanliness in rooms in which safetyequipment are housed.

ANNEX IPage 3

11. The expected attentior to the above matters was not found atKozloduy. Instead, the mission uncovered many areas of serious concern on whichit recommended urgent action:

12. The material condition of the plant and plant equipment wasunacceptable. Poor material conditions were observed in all areas includingthose related to safety. The condition of affected equipment was such thatcorrect operation in accident conditions could not be guaranteed. Until suchimpediments to safety were removed, it would be imprudent to operate any of theunits 1 to 4.

13. Lack of safety culture. The present state of Kozloduy including thepoor material conditions were essentially due to a lack of safety awarenessbrought about by focussing attention on maximizing power production at theexpense of maintaining in good condition safety and emergency systems. Thisunbalanced emphasis is the antithesis of the 'culture' that is zcessary toensure nuclear safety. A new safety culture must be established and take rootin Bulgaria: one that eliminates the bias towards maximum energy production andgives first consideration to safety. This culture must eventually permeate allaspects of business in the Bulgarian nuclear community, encompassing theGovernment and its organizations, the regulators, and the operating company.

14. A poor attitude towards industrial safety exists at Kozloduy. Theunacceptable material conditions prevailing at the plant contribute to safetyhazards. Many instances of hazardous conditions that pose a safety threat toworkers and visitors were encountered.

15. Inadequate regulatory oversight. The system of inspections carriedout by the regulatory body of Bulgaria, was not able to identify any of theglaring deficiencies and enforce the necessary corrective actions. The training,role, preparation, and authority of the inspectors should be reviewed and theregulatory function should be restructured and strengthened.

16. Inadeguate training of oRerators is one of the most seriousweaknesses at Kozloduy. The absence of a strong centralized training functionhas resulted in:

o no mechanism to ensure an appropriate standard of quality of thetraining programs across the various departments;

o the construction of the NPP training center, which began in 1975,being far from complete;

o the NPP not having the necessary training facilities or instructorsto develop and deliver structured lectures;

o no assurance that each trainee will systematically receive thetraining required to perform adequately all the activities associatedwith his position;

ANNEX IPage 4

o control room operators and shift supervisors not receiving simulatortraining before their qualification;

o in spite of a strong emphasis on qualification and requalificationexaminations, the unstructured and unauditable nature of the systemdoes not lend itself to a consistent standard.

17. Poor normal and emergency procedures. This area of safety deficiencydoes not guarantee proper operator action under normal operation or dur!ng anemergency. Efforts to improve these procedures in cooperation with the WorldAssociation of Nuclear Operators (WANO) should be maintained. In this effort,the development of new technical specifications must be completed to include,among other things, acceptance criteria for all periodic tests. Beforeintroduction of the technical specifications all operators need to be trained intheir use.

18. Poor maintenance Drocedures. Greater attention is needed byoperators to identify and report defective equipment for corrective maintenance.Maintenance standards should be raised by improving the format, content andcontrol of maintenance procedures. Related to this area is the need to introducea quality control organization and a comprehensive program for requalificationof equipment upon co4npletion of maintenance. A mechanism to simplify thepresently cumbersome and bureaucratic process of spare part procurement must bedeveloped to avoid a future shortage of spares or the unavailability of spareswhen needed.

19. Existence of fire hazards stemming from poor housekeeping andcleanliness standards was found. For example, oil spills being unattended andcombustible materials, such as rags and wood laying in piles around the plant,increase the fire risks. Fire detection and fire fighting equipment were alsofound deficient.

20. Inadeauate emergency plan. A plan does exist but is inadequatelysupportedby procedures and hence ineffective. Also, the off-site emergency planis based on a very large release of radioactivity, the scientific basis of whichhas not been established. The off-site plan should recognize smaller accidents.with a limited range of hazards. Also related to on-site and off-siteemergencies is the inadequate stock of direct reading dosimeters for effectivecontrol under emergency conditions. There is no continuous measurement of windspeed and direction.

Design Deficiencies

21. In the design area, the identified weaknesses of Kozloduy were, asexpected, mainly the same as those for all the reactors of the VVER-440/230 type.Aspects deserving special attention are:

o regarding the nuclear core, basic information has yet to be providedby the Soviet designers to allow an evaluation of the real coredesign margins. The installation of in-core flux detectors was

ANNEX IPage 5

recommended;

o lack of basic information was also evident in the area of componentintegrity, although the team in charge is conducting substantialwork in this area;

o there is a large amount of uncertainty concerning reactor vesselembrittlement, and the concept of leak-before-break, the single mostimportant safety issue in the area of hardware. For this reason andin the absence of strong technical justifications, it is believedthat vessel annealing of Unit 2 should not be postponed after autumn1991. The plant management is planning to shut the unit down and toproceed with the annealing procedure as soon as units 3 and 4 arefully operational.

22. In the area of lg.tems, including instrumentation and control (I&C)and emergency electric power, the same generic problems as in other VVER 440/230units have been found. These are:

o insufficient redundancy - for instance: a single relay failure canprevent the containment spray system from starting when called upon;

o insufficient diversity or segregation of redundant safety-relatedequipment; contrary to accepted practice, these are generallyinstalled close together in the same area;

o no equipment qualification for harsh environment.

23. Inadeguate confinement structure. A containment structure that canwithstand significant pressure resulting from a severe accident clearly does notexist. In addition, the leak rate of the existing confinement building isclearly excessive; major leak paths should be identified and sealed. Thepossibility of upgrading the existing structure with a filtered-ventedinstallation should be investigated to see if it is cost-effective since it isexpected to reduce significantly the release of radioactive materials to theenvironment in case of a severe accident that might damage the core and breachthe primary pressure system.

24. Accident Analyses. Although analyses do not improve safety per se,they provide valuable guidance as to development of accident scenarios, point toareas of weakness, suggest methods at prevention, and are the basis for operatoraction to mitigate consequences. The mission found that a very limited set ofaccidents have been analyzed at Kozloduy. Furthermore, most of the analysesconcern the more modern units 3 and 4 and not the older and more safety-deficientunits 1 and 2. The scope of the accident analysis needs to be extended and thework should be carried out. Personnel and computer resources available forperforming the required accident analysis are however, very limited and need tobe enhanced.

ANNEX IPage 6

25. Most of the analyses already performed indicate the need for majorplant improvements such as installing hydroaccumulators, fast-closing mainsteamline isolation valves and improvements of the confinement systems. Theanalyses also show the inability of the confinement system to limit radioactivereleases to the environment when the break size clearly exceeds the design basisvalue, which is a pipe of 32 mm in diameter.

m:\moose\.nnexI .nuo

ANNEX 11Table A.2.1

BULGARIAENERGY STRATEGY REPORTCrude Oil Overview 1988-1990(millions of tonnes)

1988 1989 1990

Sources of Crude OilImports 12.84 12.95 8.55Production 0.08 0.07 0.06Beginning Storage 0.25 0.19 0.16Total Sources 13.17 13.22 8.77

Uses of Crude OilReflning/Chemicals 12.88 13.14 8.48Exports 0.06 0.04 0.00Other (statistical diff.) 0.03 -0.12 0.12Total Consumption 12.97 13.06 8.60

Ending Storage 0.20 0.16 0.17Total Uses 13.17 13.22 8.77

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ANNEX llTable A.2.2

BULGARIAENERGY STRATEGY REPORTGasoline Overview(millions of tonnes)

1988 1989 1990Sources of GasolineImports 0.029 0.009 0.015Production 2.086 2.166 1.297Beginning Storage 0.076 0.083 0.086Other Sources 0.065 0.011 0.194Total Sources 2.256 2.268 1.591

Uses of GasolineIndustry Total 0.122 0.134 0.126

Machine Building 0.023 0.026 0.025Electronics 0.007 0.009 0.009Refining/Chemicals 0.009 0.016 0.009Wood 0.014 0.015 0.015Food 0.025 0.026 0.024Other Industry 0.042 0.041 0.044

Construction 0.142 0.142 0.124Agriculture 0.103 0.110 0.113Transport 0.142 0.149 0.129Households 0.692 0.778 0.765Exports 0.742 0.650 0.185Conversion Losses 0.008 0.009 0.019Other 0.219 0.208 0.069Total Consumption 2.173 2.180 1.530

Ending Storage 0.082 0.085 0.060Total Uses 2.255 2.268 1.591

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ANNEX IITableA.2.3

BULGARIAENERGY STRATEGY REPORTDiesel Fuel Overview(millions of tonnes)

1988 1989 1990Sources of Diesel FuelImports 0.005 0.014 0.005Production 3.376 3.502 1.889Beginning Storage 0.371 0.349 0.358Other Sources 0.044 0.114 0.388Total Sources 3.796 3.979 2.640

Uses of Diesel FuelIndustry 0.286 0.289 0.263

Mining '0.23 0.023 0.022Metallurgy 0.012 0.012 0.004Non-ferrous Metals 0.026 0.027 0.026Machine Building 0.038 0.035 0.034Refining/Chemicals 0.016 0.018 0.016Building Materials 0.028 0.030 0.029Wood 0.017 0.018 0.018Food 0.102 0.097 0.084Other 0.024 0.029 0.030

Construction 0.245 0.244 0.225Agriculture 0.445 0.456 0.437Transport 0.809 0.794 0.715Households 0.017 0.035 0.077Exports 1.516 1.761 0.498Other 0.293 0.221 0.302Total Consumption 3.611 3.80J0 2.517

End Storage 0.175 0.179 0.123Total Uses 3.786 3.979 2.640

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ANNEX IIT.b2 ..4

BULGARIAENERGY STRATEGY REPORTAviation Kerosene Overview(million of tonnes)

1988 1989 1990

Sources of Aviation KeroseneProduction 0.330 0.372 0.203Beginning Storage 0.129 0.121 0.163Other Sources 0.029 0.022 0.059Total Sources 0.488 0.515 0.425

Uses of Aviation KeroseneTransport 0.306 0.294 0.306Other 0.124 0.149 0.075Total Consumption 0.430 0.443 0.381Ending Storage 0.058 0.072 0.044Total Uses 0.488 0.515 0.425

bulgi 9a.wk1

ANNEX IITable A.2.5

BULGARIAENERGY STRATEGY REPORTGas Oil Overview(millons of tonnes)

198 1989 1990

Sources of Gas OllProduction . 1.129 1.112 0.827Beginning Storage 0.166 0.130 0.133Other Resources 0.005 0.015 0.007Total Sources 1.300 1.257 0.967

Uses of Gas OilPower Plants/Dlstrict Heat 0.020 0.017 0.013Industry 0.323 0.321 0.269

Machine BulildIng 0.062 0.064 0.055Eleronics 0.012 0.013 0.016ReflnlnglChemicals 0.021 0.026 0.021Building Materials 0.038 0.033 0.026GlaWsChinaware 0.018 0.013 0.016Textles 0.018 0.018 0.018Food 0.087 0.083 0.065Other 0.067 0.071 0.052

Construction 0.051 0.047 0.037Agriculture 0.080 0.077 0.066Transport 0.026 0.025 0.021Households 0.645 0.592 0.460Other 0.025 0.047 0.009Total Consumption 1.170 1.126 0.876

End Storage 0.130 0.131 0.091Total Uses 1.300 1.257 OM?

bulg2l a.wkl

ANNEX IITable A.2.6

BULGARIAENERGY STRATEGY REPORTHeavy Fuel Oil (HFO) Overview(millions of tonnes)

1983 1989 1990

Sources ot HFOImports 1.043 0.994 0.861Production 3.698 3.822 2.478Beginning Storage 0.726 0.582 0.582Other Resources 0.266 0.198 0.278Total Sources 5.733 5.596 4.199

Uses of HFOPower Plants/District Heat 0.902 0.749 0.641Industry 3.38 3.483 2.762

Non-Ferrous Metals 0.1014 0.101 0.083Machine Building 0.233 0.264 0.219Refining/Chemicals 1.129 1.251 1.015Building Materials 0.278 0.244 0.175Wood 0.188 0.181 0.151Paper 6.285 0.273 0.197Glass/Chinaware 0.104 0.091 0.091Texfiles 0.157 0.159 0.133Food 0.699 0.673 0.551Other Industry 0.203 0.246 0.147

Construction 0.061 0.077 0.059Agriculture 0.233 0.265 0.235Transport 0.318 0.346 0.26Exports 0.01 0.008 0.008Other 0.385 0.234 -0.127Total Consumption 5.287 5.162 3.838

End Storage 0.446 0.434 0.361Total Uses 5.733 5.596 4.199

bulg23a.wk1

ANNEX IIITable A.3.1

BULGARIAENERGY STRATEGY REPORTCoal Consumption in 1990

- LOCAL COAL IMPORTED COAL TOTAL

UigrJt, Sub-biluminous Bltuminous Anthracite

Mt GJn Pi Mt GJA PJ Mt Gilt Pi Mt GiA Pi Mt Gilt Pi Mt Gilt Pi

POWER & HEATMaritza East 22.5 6.1 136 22.5 6.1 136Varna 2.5 23.8 60 2.5 23.8 60Bobov Dol 0.3 9.3 2 2.1 9.5 20 2.3 9.5 22Russe 0.5 23.8 12 0.5 23.8 12Republika 0.7 10.7 8 0.7 10.7 8Maritza 3 0.7 7.3 5 0.7 7.3 5A.Stojanov 0.2 11.7 2 0.2 11.7 2Sub-total 23.4 6.1 144 2.9 9.9 29 0.03 18.5 1 3.0 23.8 71 29.4 83 245

INDUSTRY bl bI btSteel 0.1 25.7 2 1.9 25.0 46 2.0 24.3 49

Chemicals 0.2 7.S 2 0.5 25.0 14 0.7 21.9 15Cement 0.1 15.5 2 0.1 25.0 2 0.2 19.2 4

Tobacco 0.1 7.9 1 0.1 25.0 3 0.2 1&0 4

Textile 0.1 15.5 2 0.1 15.5 2Wood 0.1 7.9 1 0.1 7.9 1Paper 0.02 18.5 1 0.0 1s5 IOther 0.1 7.9 1 0.2 25.0 4 0.3 19.9 5Sub-total 0.5 7.9 4 0.2 15.5 3 0.1 25.7 2 0.02 1&5 1 28 25.0 59 3.6 22.3 79

alHouseholds 1.6 18.1 30 0.5 19.2 9 0.1 25.0 3 2.2 18.7 41

TOTAL 25.5 6.9 177 3.6 11.4 41 0.1 25.7 2 0.05 1&5 2 5.9 24.4 143 35.1 10.4 366

al thereof 1.5 Mt lignite briquettesbI estimated heating value for Industrial coal types

annex1.wkl

ANNEX 111-BULGARIA Table A.3.2ENERGY STRATEGY REPORT

Coal Production & Key Data. 1990

Mineable Production Average Oualty ol Run-of-Mine Coal Production Co Personnel ProcductiityReserves (fun-of-mine) Heating VaL Ash Sulphur tl q/Mt yrs Mt PJ kcatlkg G.t 9 % °h Lit SIGJ no. nisUGNITE

Maritza East 2230 89 25.1 at 156 1.490 6.2 32.4 5.2 12.6 1.0 14.060 6.6Marbas 43 42 1.0 7 1.740 7.3 47.6 6.3 58.4 3.8 4.070 0.9Chukurovo 8 14 0.6 5 2.230 9.3 44.6 0.7 19.4 1.0 650 3.3Stanlancl 19 42 0.4 3 1.660 6.9 24.6 27 13.4 0.9 260 6.4Bell Brec 26 47 0.6 4 1.80 7.9 29.6 2.7 12.0 0.7 370 5.5Bistrica 21 525 0.04 1 2.390 10.0 36.8 3f6 179.5 8.6 530 0.3Kamina 4 111 0.04 1 2.530 10.6 32.9 0.8 65.6 3o 140 1.0Sub-total 2351 85 27.8 179 1.540 6.4 33.0 5.0 14.7 t.1 20.080 5.1SUB-BITUMINOUSBobow Doi 163 87 1.9 bl 20 2.510 1Ce5 52.5 2.0 69.6 4.1 6.710 1.0Pernik 25 11 2.3 d 22 2.240 9.4 56.8 1.5 48.0 2.4 5.420 1.6Oranovo 9 42 0.2 3 2.850 11.9 31.1 1.9 68.8 28 970 0.8Pidrn 2 9 0.2 4 3,630 15.2 31.8 2.7 105.0 3.3 1880 0.5Cherno More 15 62 0.2 3 2810 11.7 44.2 4.3 80.8 3.3 1.200 0-7Sub-total 214 44 4.9 50 2.470 10.3 52.2 1.9 69.3 3.2 16,180 1.1BITUMINOUSBalkanbas 13 45 0.3 dl 4 3.170 13.3 54.9 2.4 495.8 17.8 3.300 0.3ANTHRACITESvogue 1 20 0.05 1 4.150 17.3 40.6 0.9 172.4 4.7 570 0.3TOTAL 2579 80 33.0 ei 234 1.690 7.1 36.1 4.6 27.4 1.8 40.130 30a/ Including 3.9 Mt feedstock for briquette manufacture (briquette yield 1.5 Ml)bI 0.2 Mt rejects Included (washing plant recovery 78%h)cl 0.8 Mt rejects Included (washing plant recovery 67%h)cl 0.2 Ml rejects Included (washing plant recovery 33%h)el saleable product Is 3.6 Mt lower (2.4 Mt losses for briquette manufacture & 1.2 Ml washing plant rejectsI/ average 1990 exchange rate of 2.1 U$ assumedgl tons per manshlft. 270 manshifts per year assumed

ANNEX IVTable A.4.1

BULGARIAENERGY STRATEGY REPORTAverage Annual Installed Capacity of Power Plantsbelonging to the Committee of Energy (In MW)

Power plants 1986 1987 1988 1989 1990

Perva Komsomolska 500 S00 500 350 270Maritza-Istok 2 1,020 1,020 1,020 1,020 1,178Dlmo Dichev 840 840 840 840 840Bobov Dol 630 630 630 630 630Republika 150 150 150 112 100Pernik 25 25 25 25 25Maritza-Istok 3 170 170 170 170 170Avram Stolanov 30 30 30 30 30Sofia 150 150 1S0 144 144T.Kostov 120 120 175 186 186Plovdiv 160 160 160 160 160Varna 1,260 1,260 1,260 1,260 1,260Russe Istok 400 400 400 400 400Russe Zapad 4 4 4 4 4Kazanlak 12 12 12 12 12Shumen 18 18 18 18 18Gabrovo 18 18 18 18 18Pleven 36 36 36 36 36Total Thermal 5,442 5,442 5,497 5,314 5,381

Total Hydro 1,975 1,975 1,975 1,975 1,975Total Nuclear 1,760 1,781 2,760 2,760 2,760Total Capacity 9,177 9,198 10,232 10,049 10,115

Source: Committee of Energy: Directorate for Economic Planning

bulg1 2.wkI

ANNEX IV3ablef A.L.2_

BULGARIAENERGY STRATEGY REPORTOutstanding Loans to the Committee of Energy as of Dec. 1990(millions leva)

Electricity Heat Coal Total

Bank Loans 2,362.89 180.98 449.48 2,993.35

Loans from the Statefor completed constructlon 572.59 76.43 281.68 930.70

Loans from the Statefor uncompleted projects 2,245.70 _ 214.96 438.69 2,899.35

Total 5,181.18 472.37 1,169.85 6,823.40

Source: Committee of Energy

Bulgl 0.wk1

ANNEX IVTable A.4.3

BULGARIAENERGY STRATEGY REPORT1nformation on the Committee of Energy for the Period 1985-190

1985 1986 1987 1988 1989 1990

Av. Retail Price for 1 kWH in leva 0.036 0.052 0.053 0.052 0.052 0.052Cost for 1 kWH in leva 0.036 0.037 0.038 0.039 0.040 0.045Av. Retail Price for 1 Gcal in leva 16.189 16.008 16.195 17.640 17.740 17.466Cost for 1 Gcal in leva 22.778 23.002 28.960 27.148 28.533 31.990

Revenues from Electricity (thousands leva) 1,296,073 1,784,097 1,876,238 1,923,471 1,931,392 1,834,930Expenditures for Electridty (thousands leva) 1,272,878 1,277,465 1,371.224 1,424,192 1,476,838 1,595,585Proft from Electricity (thousands lava) 23,195 506,632 505,014 499,279 454,554 239,345

Revenues from Thermal Energy (thousands leva) 214,881 224.688 246,397 281,987 273,269 247,878Expenditures for Thermal Energy (Ihousands leva) 302,333 322,858 440,597 433.989 439,528 454,003Loss from Thermal Energy (thousands leva) (87,452) (98,170) (194,200) (152,002) (166.259) (206,125)

Profit/Loss in thousands of leva (135,414) 377,836 180,764 166,587 76,727 (308,352)(includes other items)State Subsidies (thousands of leva) 146,384 42.500 407.998

Total Loans Obtained from State andBanks on December 31 (thousands of Leva) 3,023.555 2,923,327 4,288,257 5,199,622 5,980,182 6,823,397

Source: Committee of Energy

m:%moose%bul7.wk1

ANNEX IVTable A.4.4

BULGARIAENERGY STRATEGY REPORTTable of the Cost of Ekectrcity by Power Plant, 1986-1990

1966 1987 1988 1989 1990Net Net Net Net NetPowwl plant * Output 11 Cost Output 1! Cost Output 1/ Cost output Ul Cost Output 1! Cost(mI. kWh) | (tvKMW) (mil. kWh) (tv/kWh) (mil. kWh) (v/kWh) (mil. kWh) (lv)kWh) (mil. kWh) (Iv/kWh)

Thermal:Peiva Komsornolska 1.753 0.038 1,598 0.039 1,359 0.040 1.149 0.042 846 0.045Mariza-istok 2 3.130 0.045 3.887 0.042 4,056 0.042 4,317 0.041 4,497 0.045Dimodichev 4.258 0.034 4,597 0.035 3.799 0.036 4,435 0.035 3,920 0.037Bobov Dal 2.387 0.031 2.363 0.031 2.026 0.327 2.183 0.033 1,722 0.038Republika 250 0.060 335 0.053 309 0.056 207 0.078 179 0.085Pernk 13 0.092 5 0.143 9 0.135 0 0.230 1 0.101Marlza 3 470 0.049 512 0.049 262 0.064 228 0.069 228 0.074AvramStolanov 113 0.049 117 0.047 94 0.044 90 0.046 113 0.064Solla 393 0.031 435 0.044 446 0.038 340 0.038 420 0.039T. Kostov 318 0.025 238 0.040 358 0.034 535 0.033 485 0.034Plovdiv 173 0.029 198 0.035 216 0.035 213 0.039 138 0.048Vama 5.641 0.030 5.663 0.031 5,355 0.030 5.374 0.030 6,850 0.032Russo Istok 1.062 0.039 896 0.041 751 0.043 589 0.048 544 0.054Russo-Zapad 5 0.062 4 0.091 2 0.121 1 0.289 7 0.084Kazanlak 28 0.030 35 0.037 33 0.037 33 0.038 23 0.052Shumen 30 0.371 29 0.050 33 0.040 35 0.039 34 0.043Gabrovo 33 0.029 34 0.033 35 0.341 31 0.048 26 0.059Pleven 69 0.037 52 0.058 57 0.045 54 0.045 52 0.050

Total Hydro 2.317 0.014 2.529 0.013 2S86 0.013 2.681 0.012 1.843 0.021Total Nuclear 11.166 0.010 11.510 0.012 14.756 0.017 13.480 0.018 13.496 0.019

Source: Committee of Energy

11 Net output excludes plants' own use of electricity.

butg9.wk1

ANNEX IVTable A.4.5

BULGARIAENERGY STRATEGY REPORTCapacity of Major Hydro Plants

AverageInstalled Net No. of annual

Plant capacity Head Discharge sets output(MmW (m) (m8/sec.) (GWh)

Belmeken / pumped storage 375.0/110.0 690.0 62.5 3+2 570.0Sestrimo 240.0 534.0 56.6 2 265.0Antonivanovtsi (pumped storage) 160.0 111.8 160.0 3+1 178.6K. Georgiev 125.0 580.0 25.0 5 360.4Momina Kllsura 120.0 251.0 56.6 2 126.8Ivailovgrad 108.0 45.3 279.0 3 181.0Kurdzhali 106.4 80.5 178.0 4 69.7Krichim 80.0 162.0 61.0 2 166.8Devin 80.0 138.0 72.8 2 132.5Aleko 64.8 265.0 30.0 3 147.0Studen Kladenets 60.0 59.5 120.0 4 194.5

Source: Committee of Energy

mAmoose\tab_a4_5

BULGARIAENERGY STRATEGY REPORT

Energy Balance Sheet(in Terajoules)

………--- --- -- --- ---- - ---- -------------- --- - - -- ----------……… - -…---- ---

1910 19l1 1952 1913 19a4 1985 1956 lIS8 I911 19sf 1990-------------------------------------------------------

--- --- -

losestic sDurces 369165 385082 413576 431501 434956 415449 43091 4417203 465121 451116 418056

Coal 22U301 2209U8 239544 239721 239905 229593 256092 266909 247379 246330 223817

Other solid lutis '1j6 3719 5356 5276 5321 522 81429 5440 1602 8331 6015

Liquid uel 14903 1211 5211 5830 5745 4311 3159 3490 3161 29Bt 2544

Other 11 1172j5 147504 157465 117614 1t0979 173023 162052 165364 205119 193524 1t560

Imports 938504 951886 923334 922871 996526 3014115. 1004135 97975 9690714 9536t5 797933

Liquid fuel 619221 611451 563525 563295 612244 609445 61554 603653 515414 591430 421967Froo CIIEAFros other countries

Gas 1377140 151357 164512 167407 155325 115603 193223 206555 212632 232424 227353

Fros C1EAFrom other countries

Other primary energyisports 181543 115570 194194 391969 195957 219667 195017 373164 1619758 15931 145613

Exports 130491 11t071 79174 96955 94513 306195 304425 106451 103613 109256 32158Liquid fuels 128719 115474 12564 59114 84475 105357 103556 105105 100229 106501 30364Gas 1694 1261 963 1501 1753 1141 542 746 975 632 151Solid fuels - 336 6215 5634 5257 - - - 2479 215) 1643

Change in stocks -17020 16862 4925 23173 -2176 -12203 -22395 -7622 20271 4937 9086

looestic use of primaryentrgy 21 1360155 12361759 1265090 125O596 1334193 1311066 1301953 1331105 1353790 1330512 1192917

for electricity and heatenergy generation(including hydrp-and nuclear pouerl 384905 435653 460003 4Ip780 495359 476371 t15173 503152 513151 506514 495211

For other purposes 775250 121106 505087 799516 136414 834695 522780 827923 815033 523671 697706

Of uhichl - .

ly industry 510276 551022 50017 550215 575635 568233 565533 560926 575285 542255 491339 CD

ly agriculture 33153 3341 411789 35864 35321 35441 3509 36434 37935 42670 31340 >

ly households 10414 65236 71016 65529 7212 14245 74116 71125 76114 d2131 70741

1/ Incl. prisary energy equivalent for the energy prodpction Is UPS and IPS21 Visible consumption: domestic sources * import - export * or - change in itocks

3ULGARIA: ENERGY BALANCE 1990.stimates in thousands of tonnes of coal equivalent

Coal ICrude LPG Gaso- Diesel Gas Heavy Kero- Otler Natur. Hydro, Electri- Heat TotalOil line Fuel Oil Fuel sene Petrol. Gas Nucl. city

Oil Prod. &Oth.Domestic Production 7692 87 - 15 5898 385 14078Imports 4714 12459 23 7 1199 7515 O 662 26578Exorts -1 -278 -7261 -11 - 0 -196 -1212Stock Changes_ _ 70 -15 O 39 342 61 233 175 -63 0 843StockbCe angesr70 - 0 291 565 10 3- 7 87 . 1341TOTAL INPUT 12476 12531 -1 75 189 71 1808 262 7466 5898 4 3Petroleum Refineries 0 -12357 114 1946 2752 1205 3452 299 1616 - -6 -874Electricity & Heat Generation -8089 -0 -19 -893 -2712 -5898 5178 6157 -6276Coal Mining and Transformation O- 76 -1114 -35Own Uses & Losses _ -29 . -1114 00 -2042Other -175 -5 -13 177 -15 0 178 146TOTALSUPPLY s s I . . 98 ; I 56 4 s

'; $,6 t.

TOTAL' FINALCQS.UMPION 487 _~ T.1 . -~i 4 14F qW 56 161e'i6 7 1 T359 '3Q 328TOTAL INDUSTRY 2436 0 32 192 383 348 3809 O 1084 4695 0 2053 4280 19311Iron & Steel 1582 0 6 621 0 359 222 2789Chemicals 1 489 ;4 23 31 1414 - 882 2646 0 657 1615 7772Non-Fer-ous Metals 6 38 116 14 0 218 70 463Construction Materials l lS.O 42 38 244 - 859 0 143 1673Glass 13 1 14 23 127 345 0 62 67 652Metal Products & Engineering 15 38 50 80 305 o 80 0 266 549 1382Food, Drink & Tobacco 115 1 36 122 95 767 - 43- O I11 718 Xi39Paper, Pulp & Printing 15 O 274 0 59 175 523Wood & Wood Products 15 0 23 26 210 0 47 182 503Textiles, Clothing & Leather 30 0 26 185 0 81 349 672Indusby n.e.s. 55 0 82 76 55 166 202 86 - 99 821TOTAL TRANSPORT 8 O 194 1042 31 362 450 0 160 35 2282TOTAL OTHER 1943 0 76 1503 1077 820 410 0 493 45 0 2145 1505 10016Construction -I 1 186 328 54 82 493 11 0 110 96 1372Agriculture 24 170 637 96 327 216 1470Services and Other 823 25 0 416 759 2023IHouseholds 1084 75 1148 112 670 - - 1619 434 5151NOT SPECIFIED O O 1041 38 110 39 O 0 1 -8 >

Sources: Central Statistical Office, Committee of Energy, mission estimates

ANNEX VIPage 1

MARITZA EAST POWER COMPLEX

1. This annex discusses two aspects of the Maritza East Power Complex. Theseare: a) rehabilitation of the mines to increase coal output and therebyelectricity generation from the power plants; and b) the issue of sulfur dioxideremoval at this complex.

A. Rehabilitation of the Maritza East Mines.

2. In the past, coal supply has fallen short of the requirements of theMaritza East power plants, probably by about 20%. To secure the necessaryproduction under all scenarios especially taking into account the potential toexport some electricity, it is absolutely necessary to improve productioncapabilities of the mines. The objective would be efficient mine operation withhigh equipment utilization. In the unlikely case that less coal is demanded bythe power plants, the planned working time could be shortened.

3. A technical assistance program, specifically aimed at increasing equipmentavailability and output at the mines should be implemented. Specific areas tobe covered should be defined after an audit by technical experts, based on ananalysis of the planned and unplanned downtime for operational, mechanical andelectrical reasons. Emphasis should be on organizational and managerial changes.The technical assistance program would comprise: periodic site visits by expertsto advise and follow-up on the implementation of recommended steps; extendedstays of key technicians to assist in controlling the execution of particularlydifficult tasks; and training courses for key Bulgarian staff.

4. There will probably be a need for some auxiliary equipment to improve theavailability and utilization of the existing major mining equipment units. Thisauxiliary equipment could include items such as belt cleaning devices,instrumentation for improved surveillance of conveyors and trains, control andcommunication equipment, specialized workshop equipment and tools. Expert adviceon selection and justification of such equipment is needed.

5. Land use at the mines and reclamation of mined land is becoming anincreasingly important political issue. Presently, mining operations are spreadover a large area; in particular, dumping of overburden outside the pit limitsis scattered over several areas, occupying a large amount of land. A mining planfor the next 20 years should be prepared with special emphasis on minimizing thefuture use of new land for mining purposes and increasing the rate of reclaimingmined land for return to the public. The plan should include proposals forbetter shaping of mined land, quality improvements to reclaimed surfaces andoptimal final use of the returned land. There may be a possibility to acceleratethe transition from dumping the overburden outside the pit limits to dumpinginside the pit limits. Gradual replacement of rail transport by conveyor

ANNEX VIPage 2

transport is likely to facilitate the transition. Conveyor transport also haseconomic advantages: production statistics of the Maritza mines demonstrate thatutilization of the excavators discharging onto conveyors is consistently about40 % higher than utilization of the excavators loading railway wagons. The newmining plan should also elaborate the future mining of the coal pillar leftbetween Pits 1 and 2. In this context, the possibilities of rationalizing thecoal transport by arresting briquette manufacturing at Maritza 1 should beconsidered. It is essential that the new mining plan be prepared as one commonmaster plan for all three mines.

B. Sulfur dioxide Emissions

6. The sulfur dioxide emission problem at Maritza East is discussed in theBank's Environmental Strategy Study for Bulgaria (page 12). This complex is thelargest producer of sulfur dioxide in Bulgaria at about 700,000 tonnes per yearor close to half of the country's sulfur dioxide production. This S02, however,does not appear to have a large impact on the ambient air quality. The closestsettlement to the complex is Golubovo and the annual average ambient S02concentration in this town, 95 micrograms per cubic meter in 1989 and similaramounts in other years, is lower than in a number of other cities and towns inBulgaria ; for example Asenovgrad (485 micrograms/m3), Dimitrovgrad (119),Plovdiv (306), Srednogorie (440). It is also not that far above the U.S.standard of 80 micrograms/m3. This relatively favorable result occurs becausethe Maritza complex uses very high stacks for dispersion and is situated on aflat plain with no inversion problem. The S02 problem , on the other hand, inother parts of Bulgaria is, in many cases, much worse because of: a) industriesand households burning high sulfur coal in towns without the use of high stacksand; b) the location of some of these cities and towns, which are surrounded bymoutntains or close to mountains and therefore the S02 tends to get trapped orconcentrated.

7. It is recommended that Bulgaria undertake a study of how to reduce thesulfur emissions from burning local coals (especially the Maritza East coals) inpower plants, industries and households. It is likely, however, any majorinvestments in SO2 removal that the Government of Bulgaria should decide to make,and these will be limited by Bulgaria's difficult economic situation, beconcentrated on improving conditions in the cities with high ambient SO2

concentrations. This is not to say that flue gas desulfurization technology atMaritza East is not needed, but rather it is of lesser importance given S02problems, heavy metal emissions and other serious environmental problemselsewhere in the country that are discussed in the Environmental Strategy Study.

8. There are other actions that can be taken which could reduce S02 emissionsat Maritza East at much lower cost than flue gas desulfurization. The first ofthese is improving the efficiency of the plants. By doing this it is possibleto reduce fuel usage and thus S02 emissions. There are a number of steps whichtypically can be taken to reduce fuel usage (lower the heat rate) which include:a) reduction of excess air in the furnace; b) prevention of air leakages through

ANNEX VIPage 3

good sealing of all the boilers, ducts etc.; c) fine grinding and predrying oflignite before combustion; and other similar steps. This improved efficiency canpotentially have a major impact on the emissions. A second possibility is toshift power production at the margin to cleaner plants. In the Maritza case,however, this has very mixed benefits since the cleaner plants are likely to:a) use more expensive imported fuels or b) be nuclear plants. Finally, theMaritza East Complex itself could be shifted to a cleaner fuel such as gas, butthis would be a major step in increasing the country's reliance on the USSR andhave a major negative impact on the balance of payments.

ANNEX VIIPage 1

INTER-INDUSTRY PROJECTION MODEL

1. The model combines elements of input-output analysis with two stage costfunctions based on the KLEM translog specification. The upper stage expressestotal costs in terms of price indices for capital, labor, an energy aggregate anda materials aggregate. The aggregate energy price index is in turn based on atranslog cost function of the separate prices of coal, gas, petroleum productsand electricity. The materials aggregate is based on the composition of non-energy material inputs for each sector in the input-output table without anysubstitution, so that materials inputs are all assumed to increase or decreasein the same proportion.

2. The model is based on a 48 sector disaggregation of the economy. It hasbeen designed to focus on the role of industrial energy consumption and on linksbetween energy use and the environment, so the disaggregation reflects this setof priorities. The 48 sectors include 4 energy sectors (coal, gas, petroleumproducts and electricity), 31 manufacturing sectors (based on the 3 digit ISICclassification with a further breakdown of the food processing sectors 311/312to give 6 food manufacturing sectors), and 13 other sectors covering agriculture,mining, construction, transport and various services.

3. The model uses projections for 1992 based on the current estimates of adecline in GDP of 35% over 1989-92. The short term projections from the inter-industry model are, in addition, based on the estimates of industrial productionby sector for January-August 1991 relative to 1989.

4. The medium term projections used in the model assume that real GDP growthgradually accelerates from 1992 and then averages slightly over 5% a year in theperiod 1995-2000. In terms of the components of GDP, the medium term projectionsassume that real personal consumption declines least as a result of theconversion of the economy to a market mechanism and recovers most rapidly,exceeding its 1989 level by 10% in 2000. Real government consumption declinesmost rapidly and in 2000 is still 31% below its 1989 peak. Exports and grossfixed investment also decline rapidly and in 2000 are still 17% and 11%respectively below their levels in 1989. (All of the projections used in themodel are taken from a base case scenario. There is also a low case scenariowhich assumes the Bulgarian economy is constrained by a severe lack of foreignexchange and as a result has lower levels of GDP in 1995 and 2000 than forecastin the base case. This low case scenario would imply even lower levels of energydemand than those forecast in chapter VIII.)

ANNEX VIIPage 2

5. The logic of the projections works as follows:

(a) Exogenous price changes including those for energy, imported inputs,labor plus the impact of changes in taxes falling on producers arecombined with the cost functions to estimate the changes in theaverage producer price for each sector.

(b) Changes in aggregate materials and energy price indice6 for eachsector are computed from the new producer and energy prices. These,together with any price changes for labor and capital inputs, areused to compute new input coefficients for material, energy andfactor inputs.

(c) The macroeconomic projections are used to project final demand withan appropriate allowanace for changes in the composition of householdconsumption in response to changes in energy and other prices.Gross output for each sector is then estimated from the revisedinput-output matrix computed in the previous stage.

(d) The electricity industry is treated specially. It is assumed thatall adjustments in electricity supply affect fossil fuel generation,by holding the contribution of net imports and generation fromnuclear and hydro stations constant in absolute terms. It isassumed that between 1989 and 2000 the average level of powerstation and transmission losses is reduced to 10% of electricityconsumption outside the energy-conversion industries. Finally, itis assumed that there will be a gradual shift in fossil fuelgeneration from coal and oil towards gas as old generating plant isreplaced by new capacity.

6. The energy price elasticities discussed above refer to the own-priceelasticities in the KLEM cost functions or in household demand. In theprojections to 1995 it is assumed that the fuel composition of energy demand ineach sector does not change, but the projections to 2000 take account of inter-fuel substitution as well as changes in the overall energy intensity ofproduction. The cross-price elasticities for the KLEM model are based on aconsensus of estimates for the manufacturing sector in Europe and North America.

7. In addition to the energy forecasts contained in chapter VIII, the modelalso produces estimates of industrial competitiveness. These estimates areconstrained by the quality of the data available and by the possibility that someindustries may manage to improve their performance sufficiently to competeeffectively in international markets. Subject to those qualifications the mainlosers include:

ANNEX VIIPage 3

TextilesLeather and footwearBasic Chemicals especially fertilizersPottery and ceramicsCementMetal productsTransport equipment

while the gainers include:

Oils and fatsWood productsOther chemicalsPlastic productsNon-iferrous metallurgyElectrical goods

The most important feature of these shifts for the analysis of energy demand isthe switch from energy-intensive industries such as basic chemicals and cementtowards some light industrial sectors. The main impact of this shift is seen inthe demand for natural gas which decreases sharply because of the large declinein chemical production which depends upon gas as a feedstock.

Figure Al - Sources of Decline in Final Energy Demand up to 1995(Decline in final energy demand as % of 1989 level)

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Figure A2 - Sources of Decline in Primary Energy Demand up to 1995(Decline in primary energy demand as % of 1989 level)

% Decline50

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