Joint Implementation and industrial energy efficiency Alchevsk Steel Mill Modernization

1
Joint Implementation and industrial energy
efficiencyAlchevsk Steel Mill Modernization

• Grzegorz Peszko
• Senior Environmental Economist
• Sustainable Development Department, Europe and
  Central Asia
• The World Bank

2
Steel sector background

• Ukraines steel sector very competitive due to
  rich and cheap iron ore and coke.
• Steel products account for 36 of Ukrainian
  exports and 25 of industrial production.
• Ukraine 7th largest steel producer in the world
  and 3rd largest exporter after Japan and Russia.
• Export 74 of output in 2004.
• Historically high steel prices encourage
  modernization investments in the sector world
  wide.

3
Project owner OJSC Alchevsk Iron and Steel
Works AIWS

• Key employer in Alchevsk city (24 thousand
  employees from 118 thousand inhabitants).
• Typical post-soviet vintage of technologies and
  depreciation high energy intensity and poor
  general environmental performance relative to
  comparable facilities in OECD countries.
• Main shareholder Industrial Union of Donbas, one
  of the largest industrial groups in Ukraine
• IUD acquired steel plants in Hungary and Poland
  that facilitate access to EU export market

4
Project context

• JI project is a part of the wider modernization
  program of the whole iron/steel production
  process which started in 2004

• Objectives of modernization
• More efficient technologies
• improved environmental performance
• Improved process efficiency
• increased capacity
• upgrade the quality and range of steel products

5
Generic steel mill production process
Alchevsk JI project focus
6
Baseline Scenario
Project Scenario
Project boundaries
7
Technical scope

• Elimination of existing old Open Hearth Furnace
  and Blooming Mill
• Installation of two LD Converters
• Installation of a twin ladle furnace (300 t / 50
  MVA)
• Installation of a Vacuum Tank Degassing Plant
• Installation of 2 Continuous 2-strand Slab
  Casters
• Reconstruction and installation of new oxygen
  blocks

All this with 2 times increased steel output!
8
Emissions reductions

• Emission Reduction Units (ERUs) 934 thousand
  tons CO2 eq./year (4.67 million tons over a five
  years )
• Sources of emission reduction
• reduced use of natural gas in open heart furnaces
  in comparison with converters,
• reduced use of blast furnace gas in blooming mill
  with saved gas utilized in an existing on site
  combined heat and power plant to replace natural
  gas and grid electricity,
• reduced use of raw materials, energy and steel in
  converters and continuous casting.

9
Investment analysis Financing

• Total project cost 944 million
• Financing 30 equity, 70 loans
• Evolution of the debt structure reflects a
  growing confidence of financial institutions in
  AISW and its shareholder IUD
• 2003 Euro 140M trade finance package for new
  equipment by the Swiss trading company,
• 2003 Euro 350 million 3-years finance facility
  was syndicated by Societe Generale some for
  CAPEX,
• 2004 long term US100 million direct loan and
  250 million syndicated lending facility for
  CAPEX
• 2006 US 200 million raised from the consortium
  of Ukrainian commercial banks

10
Role of carbon finance

• Sale of ERUs US14 million per year, between 2008
  and 2012 (US70 million total).
• ERU roughly 7.4 of investment cost
  (undiscounted), but less than 1 of total
  operational revenue
• Only 1 million ton (about 20 of total) will be
  sold to the Netherlands European Carbon Facility
  through the World Bank.
• NECF absorbs project development and
  determination risks hence its price NECF lower
  than expected average sale price. Other buyers
  anticipated to pay more for lower risk once the
  project is successfully determined and ERPA
  signed.

11
Financial analysis

• Relatively high financial rates of return (FIRR)
  both for baseline and project scenarios
• FIRR for baseline (29.5) higher than for
  project, with or without carbon revenues
• NPV of the project is larger than in the baseline
  
• Volatility of slab prices have significant impact
  on financial performance of the project
  (sensitivity analysis).
• Carbon finance has small impact on FIRR, but its
  significance would increase if slab prices fell
  (risk cusion).

12
Baseline is technically feasible, with less risks
and higher financial return

• Implementation of the project is financially
  attractive to AISW, but rehabilitation of
  currently used older technologies (OHFs and ingot
  casters) is even more financially attractive and
  less risky
• Open heart furnaces (OHFs) represent obsolete
  technology by international standards, but are
  still a typical business practice in Ukraine and
  Russia
• So large-scale project has not been implemented
  in the steel sector of Ukraine before.
• Construction risks and operational risks high and
  well managed by project company

13
Barriers that would prevent project implementation

• Financing has been the main barrier for the
  project. With a total investment of US943.7
  million, the project ranks among the largest
  investments made by private investors in Ukraine,
• Domestic bank credit small and short term
• Foreign finance of Ukrainian corporate entity on
  such a scale still uncommon
• Carbon finance revenue provide additional early
  cash flow less dependent on commercial risks
• Additional comfort for lenders through due
  diligence by the carbon investors and the World
  Bank.
• Improved environmental performance also important
  factor to undertake project (civil society and
  access to EU market)

14
Value added of carbon finance

• JI was crucial in making this project financeable
• AISW would not implement the project without
  considering carbon finance

15
Contact

• Grzegorz Peszko
• Senior Environmental Economist, ECSSD
• Europe and Central Asia Region
• The World Bank
• 1818 H Street N.W., Mail H5-503
• Washington, DC 20433 USA
• gpeszko_at_worldbank.org
• Phone [phone]