Joint implementation and its pilot phase in Bulgaria

Dimitar Doukov,
Center for Energy Efficiency (EnEffect)

1. BULGARIAN POLICY TO ADDRESS CLIMATE CHANGE

Bulgaria signed the Framework Convention on Climate Change (FCCC) in Rio de Janeiro and ratified the Convention in March 1995. It also signed the Kyoto Protocol and can keep its commitment to maintain its greenhouse gas (GHG) emissions below those in the base year. Pursuant to Article 4 of the FCCC, Bulgaria adopted 1988 as a base year, which is representative of the overall national development potential and more appropriate for comparisons in the long term. The agreed target for Bulgaria under the Kyoto Protocol during the first commitment period (2008-2012) is an 8 percent reduction, amounting in real terms to 626,025 million tons of CO2 equivalent.

The underlying principles of the national climate change policy were developed on the basis of Bulgaria's desire to join international efforts towards solving climate change problems to the extent possible given the national economy and with an eye toward attracting foreign investments that might promote implementation.

The main share of GHG emissions in Bulgaria comprise energy related CO2 emissions, and their share is expected to increase further if the current energy intensive production pattern is not replaced by energy-efficient options. Consequently, the focus of GHG mitigation policies and measures in Bulgaria is to improve energy efficiency and thus mitigate GHG emissions (mainly CO2 emissions) in the energy sector and in energy-related activities in other sectors of the Bulgarian economy, including the household sector. The priority focus on the energy sector does not preclude opportunities to reduce GHG emissions in other sectors of the national economy, such as transport, industry, agriculture, construction, etc.

The Bulgarian national policy to address climate change is developed and coordinated by the Ministry of Environment and Waters (MEoW). The basis and the framework of this policy are officially stated in the First and the Second National Communications (1996, 1998) , elaborated by an Interministerial Committee supported by independent organizations and experts and under the coordination of the MEoW. The State Energy and Energy Resources Agency, the State Energy Efficiency Agency and the Ministry of Industry are important actors on this committee.

The MEoW developed an Action Plan in September 1999. It is expected that it will be approved by the Council of Ministers and will become an official document of the Government.

2. JOINT IMPLEMENTATION MECHANISM: AN ADVANTAGE FOR BULGARIA

Preliminary studies show that it would be difficult for Bulgaria to achieve the Kyoto reduction target. It will be necessary to pursue consistent policy and to apply new measures to reduce GHG emissions once the nation's economic recovery begins. The projected overall GHG emissions for the first commitment period (2008-2012), according to the baseline scenario for energy sector development, exceed the Kyoto reduction target by about 10 percent. When compared to the projected emissions, the reduction target is not achievable using either the baseline or the intermediate scenarios of the country's development. Major roadblocks to achieving the target are associated with the lack of funds to support mitigation measures and projects. International collaboration and partnership are therefore considered essential for meeting the reduction target. (1)

The Joint Implementation (JI) mechanism, recommended by the UNFCCC and reaffirmed by the Kyoto Protocol, is considered a useful tool for enabling the country to fulfill its commitments. With respect to JI, the viewpoint of the Republic of Bulgaria, stated in the National Communications, is as follows:

• JI is economically effective because it allows achievement of least-cost maximum global reduction of GHG emissions;
• JI mechanisms would facilitate penetration of state-of-the-art technologies into the country;
• JI is a voluntary activity under the responsibility of two or more parties that has to be undertaken and/or accepted by the governments of the two counterparts.

The JI mechanism corresponds to the national priorities of restructuring the national economy, increasing the competitiveness of Bulgarian products in international markets, and attracting foreign investment to the country during the transition period. JI also has the potential to bring priorities together from an environmental and economic point of view. The investing country achieves greenhouse gas abatement at a lower cost while, for Bulgaria as a host country, JI offers the prospect of improving the local environment and encouraging economic growth. As Bulgaria is interested in joining the European Union (EU), these measures would also help the country come closer to meeting the existing policies of the EU.

There is no specific legislation in Bulgaria in support of JI activities. However, the existing legislative situation is not an obstacle for the implementation of JI projects.

An important facet of JI projects in Bulgaria is that conditions in the country allow exclusive possibilities for reduction of the emissions of carbon dioxide and other greenhouse gases at much lower costs than would be needed for attaining the same results in the developed European countries. JI is, in the Bulgarian economic situation, an attractive business. Payback periods are shorter than five years. Savings in capital investment, due to energy efficiency measures, are estimated at 1.3 times the cost of those energy efficiency measures. (3)

3. ACTIVITIES IMPLEMENTED JOINTLY IN BULGARIA

3.1. The Political Approach
Bulgaria expressed readiness to participate in the initial pilot phase of JI - the Activities Implemented Jointly - in order to show its interest in the mechanism and to gain experience. It was also expected that the AIJ projects would help to involve the business community and to increase confidence in the economic, technical and environmental benefits of the projects.

The MEoW, in its capacity as designated national authority for AIJ, established contacts with a number of Annex I countries with developed market economies: The Netherlands, Italy, Norway, etc.

The negotiations between the governments of Bulgaria and the Netherlands led to the signing of a Framework Letter of Intent. Some further activities followed, which led to the start of the only Bulgarian AIJ project. The collaboration between the two governments became a catalyst for Bulgarian activities in the field.

3.2. Institutional Set-up
The JI/AIJ activities are currently coordinated by a small unit within the Air Protection Department of the MEoW. The unit involves a senior expert, who is the national contact for the UNFCCC, as well as several supporting experts. The activities of the unit are complemented with the support of experts from other relevant institutions. Decisions on selection of projects are taken after coordination with the appropriate ministries and governmental agencies through official correspondence.

The necessity of establishing a specific unit for regulation of JI activities on the national level is well understood. Specific support for institution-building is expected from the Dutch government. The Dutch Ministry of Environment suggested defining a study to facilitate the formulation of methodology, criteria, rules and procedures regarding Bulgarian and Dutch JI activities. The study will recommend the structure and functions of the JI unit which will later handle overall national JI activities. There have also been discussions about establishing a Steering Committee to make final decisions and a Consultancy Group for project preparation in accordance with international requirements.

3.3. Criteria for Project Selection
There are no officially accepted and announced criteria for JI project selection. However, the following recommended criteria for JI were outlined by the Bulgarian MEoW at the Dutch-Bulgarian workshop on JI in November 1998:

• Project investment should be grants, not loans; and projects should not be commercially feasible.
• Projects should be supported by national priorities facilitating the process of transition to a market economy and economic development.
• National climate change policy efforts should not be decreased because of JI.
• Environmental impact assessment of the projects is desirable.
• Existing foreign aid must not be replaced by JI.
• Local experts should be involved in JI projects.
• A reliable GHG inventory is needed for the establishment of baselines.
• Economic agreements on JI should last for a maximum of ten years.
• Credits should be formally approved on an annual basis, based on project emission reductions.

These criteria reflect, to a great extent, both the specific national priorities during the transition period and the international requirements for JI projects. At the same time, some of the criteria mentioned (the first one for example) should be further discussed and developed.

3.4. Projects Proposed and Selected
Following the priority focus of JI activities in Bulgaria on the energy sector - the producer of the largest share of GHG emissions in the country - the first projects selected and proposed by the government for AIJ involved district heating companies.

The project in Pleven DHC was selected as an example that identifies aspects important for capacity building in the context of the JI process. The complete procedure of establishing a baseline, monitoring results, etc. will be implemented within the project.

3.5. Public Awareness
Although JI is an economically feasible way for Bulgaria to reduce GHG emissions, awareness about the benefits of JI is limited. More work needs to be done to increase public knowledge about the JI mechanism, especially among the business community, which is expected to initiate JI projects .

Information dissemination and promotion should become one of the tasks of the JI unit. Nongovernmental institutions and organizations should be involved in the process. Currently, a very limited number of NGOs are working in the field of JI.

4. THE AIJ PILOT PROJECT FOR THE PLEVEN DISTRICT HEATING COMPANY

The governments of Bulgaria and the Netherlands have signed a Memorandum of Understanding to set up pilot JI projects by the year 2000. An energy efficiency project for the state owned District Heating Company (DHC) in Pleven was chosen for such a project. The district heating company in Pleven supplies heat and hot water to residential customers and heat and steam to industrial customers. Electricity produced is sold to the national grid.

Through a combination of technical innovations and strategic economic and financial input, the project attempts to address greenhouse gas emissions at two essential points. Under the project, the DHC management will be provided with the technical tools to monitor, measure and regulate the production and distribution of heat. At the same time, a set of economic and financial monitoring tools to measure and monitor the overall performance of the Company itself will be developed.

4.1. Current Situation
The company's operational capacity is presently based on 3 steam boilers of 75 t/h each (Belarus), 2 steam boilers of 125 t/h each (Czech), 3 turbines of 12MW (Russian) and 2 water boilers of 100 Gcal/h. Feedstock is natural gas. Fuel oil with 3.5 percent sulphur is used as substitute in case of storage of gas supply. Distribution of heat and hot water is affected through two major lines, with 1,270 substations and a total length 165 km. Industrial steam is supplied via six steam mains to 32 industrial companies. Electricity supply to the national grid takes place at the factory gates.

The production process is based on supply of heat and hot water - mainly for domestic supply to some 36,500 apartments - and steam for industrial supply. Sixty-four percent of production goes to residential customers and 36 percent to industrial ones. The electricity is a by-product which has to be supplied to the national grid at a fixed price.

Residential consumers pay a fixed price for their energy consumption, which is presently below cost level. The DHC is paid a subsidy by the government for the total supply to residential customers. Prices have been increased regularly over the past few years and further increases will be affected until, by 2001, residential prices will be at cost level plus a small margin. All government subsidies will be eliminated by the end of 1999. The price for electricity to the national grid is below the cost, but this will be reviewed by the government during 1999.

4.2. Project Description

Objectives
The main objective of the project is to increase the efficiency of the steam boilers by 2-3 percent, and the overall efficiency of the DHC by 7 percent. Implementing the steam boiler efficiency measures will result in a 3,500 tonne reduction in annual emissions of carbon dioxide in flue gas. In accordance with the Memorandum of Understanding, the reduced carbon dioxide emissions will be shared between Bulgaria and the Netherlands.

Energy Efficiency Measures
The project includes the following priority energy efficiency measures:

• A new monitoring and control system for steam boiler No.4, which will control:
  • The ratio of gas/air based on oxygen content in the flue gas.
  • The temperature and pressure of the overheated steam.
  • The level of water in the drum.
  • The flow of the overheated steam (replacement of the flow transmitter).
  • The quality of water in the drum.
• Monitoring of all relevant analogue and discrete parameters of the Industrial Software system.
• New instruments, valves and a new monitoring and control system for steam boiler No.5, which will control at least the same parameters as the system for steam boiler No.4.
• Measurement of the carbon oxide content in the flue gas of steam boilers No.4 and No.5.
• Measurement of outgoing steam in the main pipelines to the industries and the hot water heat exchangers. The measurements will be connected to the new monitoring and control system, in order to optimize steam production.
• Upgrading of the level measurement and control in the degasification units for the feed water system.
• Measurement and control of the main parameters of turbines No.2 and No.3.
• The new equipment, monitoring and control system will be supplied by the Dutch party.

Project Cost
The total cost of the project is US$ 480,000, which will be covered by the Dutch party. The project cost includes hardware, consultants, baseline study, monitoring study and training components.

Implementation
The present members of the consortium - comprised of Tebodin, TNO, EWR and TETIVA - for the AIJ project in Pleven will have the following responsibilities:

• Tebodin Consultants & Engineers (The Netherlands) will be responsible for project management. Tebodin will make a business plan, coordinate the design and implementation of the hardware and software in the project and execute procurement.
• TNO (The Netherlands Organization for Applied Scientific Research) will be responsible for AIJ procedure.
• TETIVA Ltd. (Bulgaria) will be involved in the engineering phase, and is responsible for supervision of the installation phase. TETIVA will also be involved in the baseline study and monitoring of the AIJ procedure.
• EWR (The Netherlands) will be involved in the training program in the area of building structure, measurement of the heat and energy consumption, and maintenance.

4.3. AIJ Procedures
A registration was submitted at the Joint Implementation Registration Centre in the Hague immediately after the approval of the Inception Report.

As a follow-up, the general information provided will be supported by a baseline study through measurements and/or calculations. This study will produce a document which establishes an objective, systematic and reproducible review of the situation regarding greenhouse gas emissions and other environmental aspects, before the start of the AIJ project.

After technical implementation and the transfer of know-how, the reduction in greenhouse gas emission and other pollutants should be demonstrated during a period of monitoring, using a study to produce a report on the new situation.

4.4. Strategy of the State Energy and Energy Resources Agency for the DH sector

Price Policy
The main steps of the price policy will be:

• Regular increase of residential prices for district heating. This process, which began in 1997, should begin to cover costs. Efficient production should be reached by the end of 2001. At the same time, the generic subsidy to the heat supply companies will by then be completely dismantled.
• Prices for supply to industrial customers is to be freely negotiated between the supplier and buyer. The price for electricity supply to the national grid will be increased up to a level that at least covers production cost, in order to give the district heating companies an incentive to produce electricity.

Redirecting the state subsidy from the district heating companies to low income individual customers will require a substantial reduction of the transmission losses from 20 percent to about 10 percent on average. Due to the present technical state of production at the distribution network DHC Pleven has a rather high cost price compared to other DHCs in the country.

Transfer of ownership from the State to the Municipality
There will be a step-by-step transfer of the ownership of the district heating companies from the state to the private sector and the municipalities:

• By the end of 1999, all activities that are not directly related to heat and power production and distribution (including maintenance activities) will be set up as independent legal entities and will be privatized.
• Opening of the privatization procedure for DHCs is expected by the end of 2000.

The Municipality of Pleven expects to be granted ownership rights over Pleven DHC. The municipality has worked out a master plan for the Pleven energy supply, of which about 90 percent will be related to the role of the Pleven DHC. It should serve as a basis for the decisions on the development of and future investments in the DHC.

Presently, about 56 percent of all housing that could be connected to the DHC network has been connected. Work has begun on the connection of a new residential area in the city, which includes about 25,000 people. The construction of a new main pipeline and 24 new substations has been contracted. The new houses should all be equipped with individual metering and individual control systems. All schools in Pleven will be equipped with thermal regulation valves.

4.5. Conclusions

• The project is in its Initial Stage of Baseline Study, so the approach for baseline identification cannot yet be ascertained. The baseline study is to be carried out in full conformity with the relevant guidelines of the JI Registration Centre in The Hague.
• The project respects the requirement for additionality. Otherwise the activities included in it would not be implemented.
• The basis for the calculations of the environmental effects and their additionality is not clear from the available information. It is not clear whether the calculations take into account the influence of any other technical measures expected to be implemented during the project lifetime. This is important because the measures included in the AIJ project are limited to measurement and control.
• The second stage, a monitoring study, will start from the beginning of the year 2000. After completion of this stage, information about the project as a pilot project for AIJ will be disseminated.
• The accepted principle for distribution of emission credits is not clear.
• Information about the project is not sufficiently available either to the parties that might be interested in such projects or to the public.

5. GENERAL CONCLUSIONS AND RECOMMENDATIONS

Climate change and JI are relatively new policy concerns for Bulgaria. This could be said for environmental protection activities in general prior to the political changes in 1989. The rapid progress in the country's environmental policy during the past few years, and the success that Bulgarian authorities have achieved in this area, give grounds for optimism that there will be real progress in the area of climate change as well.

It is clear that the Bulgarian government has to speed up the development of further policies to address climate change, including the JI mechanism. The opportunities to gain experience and to build institutional and personal capacity during the JI pilot phase were not effectively utilized. There were some factors that acted as barriers to this process. These were mainly the national economic crises and their influence on all sectors and on the investment climate in the country.

In this situation, international support proved to be a factor of crucial importance and an incentive for JI/AIJ policy elaboration and domestic actions. It is obvious that some impending local actions should be undertaken in order that international support can be effective:

• The infrastructure needed for day-to-day co-ordination of the JI activities and for the selection of priorities and projects should be established as soon as possible. To establish this infrastructure, increased efforts toward capacity building are necessary.
• Uncertainties about procedures for implementing JI projects should be resolved.
• The criteria for selection and the rules for development of JI projects and the role of different actors in the process should be elaborated after an open public discussion.
• National methodology for project baseline identification and measurement of emissions reduction should be developed and implemented.
• In the future, JI should include a major role for private companies, in order to improve the investment climate. This also reaffirms the importance of public and private cooperation.
• Success factors for JI projects include local incentives.
• More active information dissemination to companies and NGOs should be considered.

References

• Second National Communication on Climate Change, Republic of Bulgaria, Ministry of Environment and Waters and Energoproekt PLC, April 1998.
  
• Minutes from the Bulgarian-Netherlands Workshop "Capacity Building for Joint Implementation in Central and Eastern Europe", 19-20 October 1998, Sofia, Bulgaria.
  
• Netherlands Report on Activities Implemented Jointly: Lessons Learned, March 1999.
  
• J.J. de Wilde et al. Inception Report: Joint Implementation Project DHC Pleven, Bulgaria, The Hague, 29 March 1999.
  
• N. Dimov, Deputy Minister of the Environment and Waters, Welcome Address to the Bulgarian-Netherlands Workshop "Capacity Building for Joint Implementation in Central and Eastern Europe", 19-20 October 1998, Sofia, Bulgaria.
  
• Christo Christov, Bulgarian Climate Change Policy, Bulgarian-Netherlands Workshop "Capacity Building for Joint Implementation in Central and Eastern Europe", 19-20 October 1998, Sofia, Bulgaria.
  
• National Environmental Strategy, MEoW, 1992, revised in 1994.
  
• National Strategy for Development of Energy and Energy Efficiency until 2010, Sofia, August 1998.