750 kV Rivne-Kyiv High Voltage Line Construction Project with attraction of loan proceeds from European Bank for Reconstruction and Development and European Investment Bank

Situation in project field Principal objectives, results and products of the project Financing terms Cooperation in the frame of Kyoto Protocol Project investment return

Situation in project field  In 2004 two 1000 MW nuclear plant power units were put into operation on the Rivnenska NPS (increase of installed capacity to 2800 MW) and Khmelnytska NPS (increase of installed capacity to 2000 MW).  The stations are located in Western region of Ukraine which is superfluous in capacity balance. Commissioning of two new power units resulted in concentration of more than 5000 MW of generating capacities in this region. Upon that the surplus capacity of Western region is MW (in winter in-peak conditions) and (in summer operation loads).  In connection with decommissioning of Chornobylska NPS the Central power system became scarce both in power and capacity. Holdback in construction of block #3 of Kyivska HPS-6 and significant annual consumption growth in Central PS precondition larger capacity deficit in the region. Apart from commissioning of generating capacities and with the purpose of coverage of growing deficit in the Central PS the Ukrainian IPS – Kyiv intersection requires significant strengthening.  By the Decree of the President of Ukraine of # 1863/2005 «About decision of National Security and Defense Council of January 9, 2005 «About energy security of Ukraine and principal factors of state policy in the sphere of its provision» the list of measures regarding the provision of energy security of Ukraine were specified and among them is the construction of sub-station Kyivska and 750 kV over-head high-voltage line Rivnenska nuclear power station – sub-station Kyivska.

Principal objectives of the project are:  maximum utilization of installed capacities of Rivnenska and Khmelnytska nuclear power stations of the Integrated Power System of Ukraine;  higher constancy of power supply to the Central part of the IPS of Ukraine, including Kyiv generation center;  relocation of 750 kV network from contaminated zone of Chornobylska NPS. Main results of 750 kV Rivne-Kyiv High Voltage Line Construction Project include:  Increase of carrying capacity of IPS electricity networks in the West – Vinnytsya intersection with corresponding increase of utilization of NPS in the balance of IPS;  Higher power supply reliability in the Central part of Ukrainian IPS;  Reduction of number of electricity networks located in contaminated Chornobyl zone by reconnection of 750 kV OHL Khmelnytska NPS – Chornobylska NPS to newly constructed SS Kyivska. Main products of 750 kV Rivne-Kyiv High Voltage Line Construction Project are:  Higher specific weight of power generated by NPS: project execution will enable significant increase of generation by Khmelnytska and Rivnenska NPS which is positive both for NPC Ukrenergo and Ukraine, since more expensive power generated by HPS (gas and coal) is displaced by nuclear power. Availability of additional 1000 MW will result in appreciable savings in amount of EUR 42 M. in 2010 in prices of Taking into account annual power demand increase in Kyiv region in range of %, the utilization of additional 1000 MW will cover the demand increase up to 2019, i.e. during 10 years. Principal objectives, results and products of the project

 Lower demand of gas and coal. In addition to economic products project execution and higher utilization of NPS capacity reduces the demand of power industry in coal and gas by tones of fuel equivalent annually. This will guarantee the stability of supply on account of lesser volumes of natural gas import and coal utilization which is featured by low energy conversion efficiency and high pollution level.  Pollutant reduction: Generation of additional 1000 MW by NPS in lieu of HPS will drastically reduce the pollution of environment by power sector. Such reduction meets the EU Directives and is positive for Ukraine. Evaluative reduction amount of hazardous gases emission (SOx, NOx, CH4, CO2) constitutes tones a year, which equals to EUR 270 M. savings during 10 years.  Lower costs of energy losses in network: The construction of new high-voltage line will result in redistribution of electric power in the system. Analysis of load division carried out by Ukrenergo’s specialists displays the capability of 23 MW loss saving during on-peak operation in In 2010 the savings will amount EUR 0.27 M. while total savings will total EUR 2.43 M.  System stability and reliability: According to Technical evaluation of the Project, the construction of new high- voltage line will contribute to higher system-wide stability and reliability both in Kyiv region and other regions of Ukrainian IPS, which is the source of power redistribution and higher general carrying capacity of the system.  Long-term demand: The Project provides for the coverage of constantly growing demand in power in Kiyv and Central region.  Shut-down of SS Chornobylska: The execution of project is an important step in the shut-down process of SS Chornobylska which is located in the extra-contaminated region. Supplementary measures must be taken in order to assure the shut-down of sub-station. Principal objectives, results and products of the project(2)

Financing terms The total Project cost which includes the construction of 353 km long 750 kV OHL Rivnenska NPS – Kyivska, construction of 135 km long diversion of 750 kV OHL Khmelnytska NPS – Chornobylska NPS to SS Kyivska, extension of SS Kyivska by installation of AT-2 750/330 kV and construction of two 330 kV 60 km long diversions to SS Kyivska aimed on higher stability of power supply to central regions of Ukraine totals EUR 364 M. EBRD and EIB loan – EUR 300 M; NPC Ukrenergo’s own funds – EUR 64 M. Borrower – Ukraine, Borrower’s agent – Ministry of finance, beneficiary – NPC Ukrenergo. Commencement of loan proceeds extension – 2008р.; Tenor of a loan – 15 years, grace period – 3 years.; Terms of EBRD loan: EBRD interest rate – LIBOR (Euro) + 1%; Front-end Commission – 1 %; Commitment charge – 0,5 %. Interest rate of Government of Ukraine subloan (Ministry of finance) – 2%. Terms of EIB loan : EIB interest rate – LIBOR (Euro) + 0,55%; Front-end Commission – 0,25 %; Commitment fee – 0,1 %. Interest rate of Government of Ukraine subloan (Ministry of finance) – 2%.

Economic calculations demonstrate that OHL pay-off for NPC Ukrenergo can be reached only due to deduction of task-oriented component for the implementation of Project from electric power tariff or due to the purposeful extra charge to NPC Ukrenergo tariff. In calculations the value of such extra charge for the loan return period was not indexed and evened between 0.3 to 0.7 kop/kWh; for the period after the return of loan – calculated upon condition of receiving of balance profit (coverage of spread between growth of expenses and incomes from distribution under principal tariff) with 10% efficiency to prime cost. Project investment return Investments Change (+/-) of annual net profit for NPC Ukrenergo Total income increase in calculation prices with OHL Rivnenska AES – Kyivska Change of net present money flows (accrued method) Key effectiveness indicators of investment in the Project for NPC Ukrenergo

Cooperation in the frame of Kyoto Protocol  Ukraine is the party of Kyoto Protocol of the United Nations Framework Convention on Climate Change in accordance with which has the right for national quota of greenhouse gasses emission.  Nearly 75% of greenhouse gasses emissions in Ukraine are caused by power sector. During 1990-s the emission level has decreased as the result of economic recession and this led to significant surplus of emission quotas. Such surplus can be delivered to other parties of Kyoto Protocol. Such opportunity is a significant investment potential and can become a considerable source of Ukrainian budgetary recharge. Owing to execution of 750 kV Rivne-Kyiv High Voltage Line Construction Project eventuates the capacity of utilization of additional 1000 MW generated by NPS in lieu of HPS. Such capacity gain will result in reduction of pollutant emissions arising from power generation. The reduction of pollutant emissions has notable economic benefits for whole Power sector of Ukraine and meets the EU Directives. The major emission types are SOx, NOx, CH4 та CO2. Each fuel type has its own characteristics and emission level which can be expressed in g/kWh, or in tones of used fuel. The total volume of replaced power makes up MWh and gives opportunity of savings in the amount of tones of fuel equivalent not utilized by HPS. The volume of pollutant emission reduction is tones a year.  Based on the level of international prices of pollutants from above-mentioned fuel types the approximate amount of annual savings from emission reduction is USD M.