Basic Information

Chinese Name: 科斯托拉茨煤电站
Location: Kostolac, Serbia
Type of Project: Energy, Extractive
Project Developer(s): n/a
Main Contractor(s): China Machinery Engineering Corporation (subsidiary of China National Machinery Industry Corporation, Sinomach)
Known Financiers: Export–Import Bank of China
Cost: 1,060 million USD
Project Status: Under construction

Project Outline

The Kostolac B Power Plant package project was originally signed in July 2010, with more detailed commercial agreements following in November 2010 (Phase I) and November 2013 (Phase II). Phase I includes the rehabilitation of two 350MW units, the construction of a desulphurisation unit, and the expansion of the Drmno mine from which the power plant sources its lignite. Phase II encompasses the construction of a new 350MW unit, called Kostolac B3, as well as further expansion of the Drmno opencast mine. The desulphurisation unit was opened in 2017, though at the time of writing (early January 2021) it has still not received an operating license and is not functioning. The new power plant was slated for completion in 58 months (bringing it to 2021) but has been delayed to late 2022. The Serbian government has criticised this delay, calling it ‘unacceptable’ in a meeting with the CMEC representatives. The head of Serbia’s construction industry chamber commented the delay was caused by CMEC’s refusal to hire local workers at standard rates, resulting in a chronic labour shortage on-site. The plant is currently expected to operate until 2052, when it will be the last of the Kostolac units to be taken off-line.

The power plant is situated around 90 kilometres east of Belgrade, near the town of Kostolac. The power plant and mine together form a subsidiary of the national power utility EPS and employ around 3,000 workers. The relative quality of the jobs means Kostolac is one of the municipalities with the highest average pay in Serbia and is the only municipality outside of the capital to average over 1,000 USD per month. While not all employees live in the area, Kostolac does profit economically from the presence of the plant and mine complex. The mining communities that have grown around coal power generation exert a powerful political inertia despite their low productivity and decreasing number of jobs. 

Apart from localised economic benefits, the project is billed by the Serbian government as increasing the energy stability of the country, and the desulphurisation unit was ceremoniously opened by the Serbian prime minister as part of the country’s commitment to reducing harmful pollution. Government rhetoric has avoided praise for coal specifically and mostly highlights necessary improvements while maintaining a vague commitment to a low-emissions future.

Serbia’s state-owned enterprise EPS is the official investor, while the government acts as a guarantor for the loan, and has also provided regulatory cover for the project’s many failings. On the Chinese side, CMEC has always been the main contractor, while the Export–Import Bank of China (China Eximbank) provided financing for 85% of the project’s value at an interest rate of 3% for Phase I and 2.5% for Phase II, maturing in 15 years and with a grace period of five years. Serbian subcontractors can account for up to 49% of the total value, as the Chinese loan requires at least 51% of the total value to be sourced from Chinese subcontractors.

Project Impacts

• Employment: The construction has been handled overwhelmingly by a Chinese workforce, but the new unit comes with a promise of 600 new positions to be filled by the local workforce. These estimates have been contested by environmentalists claiming increased productivity will make around 600 mining jobs redundant, while adding only 300 in the power plant. This notwithstanding, the power plant is an important employer locally, reflecting the power plant-mine-community nexus typical of lignite power generation. 
• Environment: Sixteen coal power plants in the Western Balkans produce as much pollution as the 250-odd plants in the rest of Europe. This astounding fact can be interpreted in two ways. The first is to say desulphurisation projects such as Kostolac Phase I are long-overdue and will lead to immediate air quality improvement. On the other hand, prolonging the region’s coal dependency means decades more of bad air, acid rain, local water degradation, and the destruction of landscapes by open-cast mining. Lastly, the desulphurisation unit at Kostolac was still not fully operational four years after it was opened, casting doubt on the planning and construction process as a whole. 
• Local community: The Drmno village near the open cast mine will be directly affected by the mine’s expansion. Villagers, many already suffering a number of chronic conditions, doubt that the national utility or the government has any plans to offer compensation. CMEC’s contract makes no mention of relocation or land acquisition costs, and no studies were made to ascertain the impact on the local community prior to construction beginning. Lastly, the mine is located near a Roman archeological site, though sporadic finds of ancient objects in the mine provide some sympathetic news coverage. 
• Governance: The contract was awarded to CMEC without a competitive public tender on the basis of a Sino–Serbian treaty from 2009, which shields Chinese-funded projects from having to adhere to basic transparency standards in public procurement. The contract made only cursory mention of environmental impact studies, which were successfully challenged in court after construction had already begun. The Serbian state’s guarantee of the China Eximbank loan was moreover investigated by the Energy Community as illegal state aid, but a settlement was reached before a formal dispute settlement procedure. Lastly, the project was investigated by the Espoo Convention on transboundary effects, disputing Serbia’s interpretation that the project, as an extension, would have no new transboundary effects. The treaty’s implementation committee investigated the matter for two years before reaching a conclusion in 2016. Despite giving its blessing in the end, the letter emphasised Serbia would have been in breach of the convention, were it not spurred into action by the investigation.

Lignite fired power plants like Kostolac make up two thirds of Serbia’s electricity production. Many are nearing the end of their life cycle: the last new coal power plant was built in 1991. This presents the country with a dilemma to either retrofit and expand the current coal fleet, or move to cleaner forms of energy. 

On the face of it, Serbia’s government has committed to a green transition, but the appeal of coal remains. At the Kostolac power plant, two older 350MW units are being retrofitted and a new 350MW one constructed, suggesting the country has chosen to stick to lignite. This would most likely not be possible without Chinese loans and expertise. Western institutional lenders have withdrawn from coal projects, making Chinese banks a key source of coal financing globally. Building new coal power plants will lock Serbia into decades more of carbon dependency, saddling it with power plants that will need expensive retrofits to keep them in line with ever-stricter EU regulation.

Kostolac’s retrofit is crucial because desulphurisation units could extend the life of Serbia’s ageing coal fleet by bringing existing power plants in line with stricter EU regulation. The CMEC-designed unit opened in 2017, yet emissions data shows an increase in sulphur dioxide emissions between 2017 and 2018 even with less coal being burnt in 2018. Despite supposedly benefitting from desulphurisation, Kostolac’s two units still emit three times more SO2 than the national emissions plan allows for the whole country. The desulphurisation unit is clearly inactive, with the official explanation being the lack of a gypsum dump. CMEC has not commented on the technical aspects of the device, but the company was not selected as the contractor for the desulphurisation unit of the Nikola Tesla power plant, Serbia’s largest. 

The construction of a new unit at Kostolac impacts the environment, the local community, and the country’s governance as a whole. The role of CMEC and China Eximbank is not so much of instigators, but rather as enablers of bad practices. The turn-key contract refers to the company’s duty to comply with technical standards and regulations, but no mention is made of environmental or social mitigation, which were left to the employer and were not successfully completed until after construction began. China Eximbank has similarly made no interventions or statements, despite the bank’s own environmental standards stating environmental impact assessments must be completed in the pre-loan phase. Given some parts of the plant still lack operating permits, it is hard to see how China Eximbank could have ensured all national regulation was adhered to. 

Locally, villagers of Drmno have opposed the expansion of the open cast mine, saying their houses are already threatened due to the mining operations. Four out of five households reported having a person with chronic illnesses that could be tied to the mine’s operation, and health concerns were the top reason for wanting to leave the village. The Chinese contractor, operating on a turn-key basis, has no involvement in any resettlement or compensation schemes.

Like many of the country’s lignite power plants, Kostolac lies close to the Danube river that cuts across the country from west to east. Because lignite is heavy and tends to spontaneously combust when piled up, it must be burned close to where it is excavated, meaning power plants were built where lignite was found—often in flood-prone areas. In 2014, massive flooding affected the area, submerging the mine and threatening several power plants and causing an acute shortage of domestic electricity production. 

In-depth Sources

• Bankwatch.2020. ‘Kostolac B3 lignite power plant, Serbia.’ Bankwatch.org website. Link.
• Center for Investigative Journalism of Serbia. 2016. ‘Chinese Loan, Serb Rule-breaking.’ Center for Investigative Journalism of Serbia website, 21 July. Link.
• Rogelja, Igor. 2020. ‘Concrete and Coal: China’s Infrastructural Assemblages in the Balkans.’Political Geography 81: 102220. Link.
• Tsimonis, Konstantinos, Igor Rogelja, Ioana Ciută, Anastasia Frantzeskaki, Elena Nikolovska, and Besjan Pesha. 2019. ‘A Synergy of Failures: Environmental Protection and Chinese Capital in Southeast Europe’, Journal of Current Chinese Affairs 48, no. 2: 171–200. Link.