Reducing Greenhouse Gas Emissions through the Use of Biomass Energy in Northwest Slovakia Sub-regional Workshop for GEF Focal Points in Europe and the CIS Dubrovnik, Croatia February 2009 Slovak success story

Basic project information Objective: To reduce GHG emissions and to promote the adoption of renewable energy sources GEF implementing agency: UNDP Total budget (MSP): US $8.5 mil. US$ 973,500 GEF grant, US$ 7.5 mil. co-financing Duration: 3 years March 2003 – December 2006 (finished 3 months earlier)

Country background Project area: Žilina and Trenčín Regions in the northwest part of the country covers 6, ,502 square kilometers (23 % of Slovakias area) 52 % of the region is densely forested compared with 40% forest density for the entire country At the time of project approval, more than 2,000 sawmills, forestry companies, and wood processing firms active in the region produce over 200,000 tons of biomass residuals annually The project was designed to use these wood residuals

Project outcome 1 Create a sustainable wood pellet market in the region of Northwest Slovakia. construct a Central Processing Unit (CPU) for wood-pellet production, create a transport system for wood- waste residue supply and pellet delivery, Create a sufficiently large customer base to ensure adequate cash flow.

Project outcome 2 Provide a replicable, economically viable, and environmentally friendly source of heat in 44 public buildings Replace existing coal/coke boilers with wood-pellet fired boilers. Upgrade of the heating system One of the public buildings heated in Stará Ľubochňa (Sanatorium Fatra)

Project outcome 3 Contribute to increase of biomass use as fuel source for heating Awareness raising Acquisition of new customers replacing coal/coke boilers resp. connected to the established pellet boiler rooms

Implementation arrangements National Execution National Executing Agency: Ministry of Environment of the SR Supervisory role National Implementing Agency: BIOMASA association Day-to-day management

Project budget

Key results tons CO2 saved annually tons of fossil fuels consumption annually replaced by consumption of tons of pellets in boilers operated by BIOMASA Further reduction of fossil fuels can be assumed in other boiler rooms that purchase BIOMASA pellets (sales in Slovak and foreign markets).

Boiler rooms supplied by heat and pellets from BIOMASA Association

Wood pellet market Pellet production unit constructed within 20 months after the project start 2005 production – 3,800 tons 2007 production – 12,000 tons (full capacity) 20,000 tons of wood waste from the region re-utilized long term contracts for: heat delivery (25) Sale of pellets (30) wood waste residue purchase (30) BIOMASA Offices and Central Processing Unit

Heating system reconstruction 44 new pellet automatic boilers installed 100 coal/coke boilers in 54 old boiler rooms replaced by modern pellet automatic boilers (from 7 kW to 2,5 MW) Boilers centrally operated and maintained, pellets supply centrally managed - system of heat supply from BIOMASA (full service to members instead of pure sale of pellets) Better heating quality in buildings Energy efficiency measures, modernization and regulations of heating systems (regulating valves, windows, doors and radiators replacement additional thermal outside insulation) New heating operational regulations introduced Heating costs savings (20-30%) One of the boilers installed in Slanicka Osada

Increased use of biomass for heating 20 other new businesses, public buildings and households outside the projects converted to pellets and are regularly supplied by pellets from BIOMASA 12 new consumers replaced their fossil boilers and are connected to BIOMASA heat supply system Some elements of the system for pellet delivery

Challenges to financial planning 3. The extensive exchange rate fluctuation on the USD between 2000 and 2004, the final amount received from GEF in USD converted to SKK was much lower than the planned amount 1. The dramatic change in the price of the saw dust raw material; 2. The higher than expected investment costs.

Challenges to financial planning 2 4. Financing through several financial grants, which needed to be synchronized EU Program LIFE Environment Austrian Environmental fund managed by Kommunalkredit Public Consulting bank loan (higher than planned) Conditions of other donors resulted in the need to complete the project earlier

Challenges to financial planning 3 5. Need for additional sources of financing to cover: the higher investment project costs The drop-out of GEF sources extreme exchange rate changes from the project planning phase to the end of its implementation) the originally planned co-funding (Danish Fund) lost as a result of significant delays with the GEF approval processes Slovakia was not eligible any more

Opportunities and challenges not addressed The speeding up and scaling up of the market transformation process for biomass in Slovakia will largely be dependent on the emergence of a more enabling policy environment for alternative energy sources to natural gas in Slovakia. The design of the project could have been more robust to include a separate high level policy dialogue component to ensure that adequate market incentives are in place at the national level to support the efforts in production and awareness raising by BIOMASA.

Opportunities and challenges Survey on SK situation in 2006 (BIOMASA, 2007) total production capacity in Slovakia: 72,000 tons per year for 2006, actual production: 45,000 tons per year, pellet consumption estimated at 9,000 tons per year, local market for pellet production developing slowly Production to rely on export market

Sustainability continued and financially viable operations at BIOMASA – so that pellet remains a credible energy source in the national market ability of BIOMASA to sustain its cash flow amid depressed pellet prices Difficult predictability of cash flow in a market not yet mature Increasing production capacity on the global market decreased the price on the external market Local price has to compete with subsidized natural gas price Warm winter in 2006 further depressed the demand (and price) for pellets

Problem With adequate cash flow, a producer would wait until the pellet price goes up again - within the year and over the years BUT BIOMASA does not have the cash flow does not have storage capacity Subsidizes the heating price to members from the pellet production operation

Measures to improve sustainability Subsidies for heat prices for BIOMASA members reduced Expanding BIOMASA pellet storage capacity at the Central Processing Unit Set up an emergency line of credit to help to overcome fluctuations in the price for pellets in its first few years of full operation, so that it capitalize on seasonal price fluctuations rather than be a victim of them

Lessons learnt 1 Overdesign of old boilers capacity 29 MW of old boilers replaced by 13 MW of new pellet boilers the first phase boilers were significantly over-dimensioned realized demand only being 2/3 of what was predicted In the second phase load calculations were reduced by 30% the second phase boilers still have a significant reserve capacity. negative impact on cash flow management unit cost associated with the reduction of CO2 emission

Lessons learnt 1 – Heat production capacity Attention must be given to the process of consumption and capacity estimates Many smaller demonstration projects reduce the risk of failure Phased approach to support the learning process Follow-up Further pellet boiler grid connection from the BIOMASA association members

Lessons learnt 2 Associative and publicly led management of pellet and heat production The project implementation profited from having a local association, which Covered different roles: awareness raising, decision-making, management and financial perspective, Associated the key local stakeholders.

Lessons learnt 2 Set-up The coupling of pellet production and development of a local/national base market for pellet distribution and consumption to kick start the market transformation process is a strategy that can clearly facilitate the market transformation process and its continued development. When designing an initiative aimed at market transformation, plans must ensure that adequate resources and appropriate institutional structures are set up to promote cooperation and high level dialogue on enabling policies to complement actions on the ground Associations of municipalities have easier access to EU structural funding for infrastructure projects (oriented to large investments)

Lessons learnt 3 In order to provide reliable data on CO2 emission reductions for GEF projects, adequate baseline and monitoring and reporting systems must be systematized. Consider different factors taht are likely to change with time: Raw material (when biomass residues become a commodity, prices rapidly increase) heat prices, fossil fuel prices that the project has to compete with, demand, labor costs. Energy efficiency measures should be implemented before (or together with) the specification and installation of heating systems.

Successful project ? Conclusion of the independent Final Evaluation: (Project)...can be considered a success story by UNDP and GEF in bringing about market change in favor of biomass energy production and use in Slovakia.

Thank you! For more information see: or contact: Klara Tothova, CST Environmental Officer UNDP, Europe and the CIS Bratislava Regional Centre Grosslingova 35, Bratislava, Slovak Republic Tel: Fax: