China continues to be the top financier of coal-fired power internationally. Its state-owned enterprises and development banks are constructing and financing many of the world’s new coal projects, including in Europe where up to 3.5 gigawatts of capacity is planned with support from Chinese state entities. This is increasing the risk that countries participating in the Belt and Road Initiative will be locked into high-emissions development pathways. This overview explains the status of China-backed coal projects in Southeast Europe, and the compliance irregularities that surround them.

A deal long in the making

In 2009, the Serbian government included a list of foreign investment projects with state-backed loans in the country’s 2010 fiscal budget1 . Among the proposed projects, the government asked China’s Ministry of Commerce in late 20092 to borrow from China Eximbank for the following projects:

  1. Retrofit/overhaul of Kostolac coal power unit B1 (€100 million)
  2. Retrofit/overhaul of Kostolac coal power unit B2 (€50 million)
  3. Power plant desulfurization of Kostolac units B1 and B2 (€100 million)
  4. Construction of Kostolac coal power unit B3 on a greenfield site and expansion of an open-pit coal mine (€600 million)
  5. Construction of a bridge across the Danube in Belgrade (later to be called the Pupin Bridge) and associated infrastructure (€200 million)
  6. The purchase and installation of a mobile security inspection system (US$30 million)

In November 2013, Serbia’s state-owned electricity company EPS and China Machinery Engineering Corporation (CMEC) agreed on two phases for work at Kostolac B in north-east Serbia: the addition of a desulfurization plant for the existing B1 and B2 units and the construction of the new B3 unit.

Serbia’s binding commitment to align and implement the EU Energy acquis

The process of joining the EU requires Serbia to meet the obligations set by the EU accession process under the Stabilization and Association Agreement and the Energy Community Treaty (ratified in 2009). As a Contracting Party to the Energy Community, Serbia made legally binding commitments to adopt core EU energy legislation in order to align its regulatory framework with that of the EU in areas such as energy, competition and the environment. Image 1: Kostolac B3 coal-fired power station project’s Drmno coal mine. Photo credit: Wang (2014)

Desulphurization of Kostolac B1 and B2

The desulphurization plant was officially opened in July 2017 but is not operational. In response to an enquiry from the Center for Ecology and Sustainable Development (CEKOR), a Serbian NGO, Serbia’s Environmental Inspectorate stated on 1 March 2018 that it was not operating during the winter months. It added that a planned landfill for the gypsum (a by-product of the process) was incomplete although the response did not make clear whether this was to blame for the delay with the desulfurization plant.

Kostolac B2 emissions without pollution control in 2019.
Video: VedvarendeEnergi (2019).

Major concerns over Kostolac B3

In November 2013, China Machinery Engineering Corporation signed an Engineering, Procurement and Construction (EPC) contract with Serbia’s EPS to build Kostolac B3 and expand the Drmno coal mine. In December 2014, the Serbian government and state-owned China Eximbank signed a US$608 million concessional loan contract for the projects. There are several concerns with the project:

  • No tender was conducted for the main contractor.
  • Arbitration for the project would be conducted under rules defined by the lender and subject to Chinese law.
  • No environmental impact assessment was conducted before Drmno coal mine was expanded.3
  • Kostolac B3 is non-compliant with current EU pollution limits, known as the 2017 LCP BREF.4
  • The Serbian government took the loan on behalf of EPS, which may have been in breach of the state aid obligationsSerbia agreed to under the Energy Community Treaty.

No public tender and Chinese arbitration

Instead of a public tender for Kostolac B3, the Chinese and Serbian governments signed an intergovernmental agreement that released joint projects from tender obligations.5 Eximbank is required by government directive to assess the legality of projects it finances and when asked about the omission of a tender the bank referred to the intergovernmental agreement, claiming that all joint projects in Serbia were free from tender obligations. This would not be allowed under EU law and runs contrary to Serbia’s commitment under the EU accession agreement to harmonize its laws with those of the EU. In early 2015, the Serbian parliament ratified the Kostolac financing deal, signed with China Eximbank, in an extraordinary session that was announced to the public with less than 24 hours’ notice. Among several problematic provisions, the contract implies that any project arbitration would be subject to Chinese law.

What is the Energy Community?

The Energy Community is an international organization established between the EU and several third countries to extend the EU internal energy market to Southeast Europe and beyond. Contracting Parties such as Serbia, which is an EU candidate country, commit to transpose and implement the relevant EU energy acquis communautaire, which includes EU laws governing – but not limited to – electricity, gas, energy efficiency and the environment, and to develop an adequate regulatory framework in line with the acquis under the Treaty. Photo credit: National Energy Administration of China6. Opening Ceremony of Kostolac B3 coal plant project (November 20,  2017)

Inadequate environmental impact assessments

The United Nation’s Espoo Convention Implementation Committee criticized Serbia for not assessing the transboundary environmental effects of Kostolac B3. After the first environmental impact assessment expired, the process had to be repeated in 2017 and was quickly approved on 28 September in the same year. Just weeks later, on 20 November, the Serbian and Chinese governments announced that construction would start on Kostolac B3. This was a few days shy of the 16+1 Summit, a meeting between China and 16 Central and Eastern European countries. The Serbian environmental NGO CEKOR requested the construction permit but the only document to be disclosed by the Serbian government so far is a permit for the chimney of the B3 unit, not for the whole plant. The document is dated July 2017. This means that the construction started before the environmental impact assessment was even completed, contrary to Serbia’s Environmental Impact Assessment Law. A construction permit for the main part of the plant was issued in April 2019, a year and a half after work officially began. To add to the legal issues faced by the Serbian government, the expansion of the captive Drmno open pit coal mine from 9 to 12 million tons a year was exempted from undertaking an EIA process in 2013.6 This decision appears to be contrary to Serbian law7 as well as the Environmental Impact Assessment Directive under the Energy Community Treaty. The Energy Community – the EU’s energy watchdog – is still investigating the legality of Serbia’s decision to exclude the expansion of Drmno from the project’s EIA decision. This investigation highlights the failure of China Eximbank and CMEC to conduct rigorous due diligence, the former for failing to address the questionable compliance with Serbian legislation when issuing the loan, and CMEC for neglecting the concerns brought forward by civil society organizations and affected communities.

Investigation by the Arhus Convention Compliance Committee

The Arhus Convention establishes the rights of the public to access to information, participation in decision-making and access to justice in environmental matters. The Arhus Convention Compliance Committee is investigating the alleged failure of the Serbian government to comply with the Convention’s provisions on access to justice and public participation. As described above, there are significant irregularities in the issuance of construction permits for Kostolac B3, which were completed two months before the public consultation ended.

Furthermore, the Environmental Impact Assessment Decision was issued in September 2017, contravening the Serbian Environmental Impact Assessment LawArt. 5, which states: “A developer may not commence the project implementation without having previously completed the impact assessment procedure and obtained the approval of the EIA Study from the competent authority.”

Non-compliance with EU’s industrial emissions rule

In 2017, the EU updated its rules on industrial emissions, which will apply to Kostolac B3 upon Serbia’s entry into the EU, if not before. The Kostolac B3 environmental assessment shows that air pollution from the plant will exceed EU standards. Failure to meet the standards will expose Serbia to the prospect of expensive retrofits when it joins the EU.

Weak oversight by Chinese state actors and enterprise

Decades of state lending to Chinese companies for large-scale infrastructure and resource extraction projects overseas has led to documented environmental and social harms. In response, the Chinese government started putting non-binding requirements in place to ensure that Chinese companies and financial institutions could assess on a case-by-case basis the ex-ante environmental and social assessments. They also developed different sets of criteria for environmental and social due diligence – none of which are legally binding – to identify and mitigate problems early in the project appraisal process.

One such non-binding policy is the 2013 Guidelines on Environmental Protection for Overseas Investment and Cooperation. This requires all Chinese enterprises operating overseas to observe the laws and regulations of the host country and fulfill basic or international environmental obligations, such as environmental impact assessments and pollutant discharge and emission standards, to name a few.  

In 2014, China’s Ministry of Commerce, which is one of two agencies that oversees Chinese foreign investments, issued Measures for Overseas Investment Management. This binding measure  requires Chinese companies to conduct or undertake overseas investments and projects in accordance with the laws and regulations of host countries, and to ensure adequate environmental protection.

However, the plethora of non-binding Chinese state-issued guidelines and binding measures governing companies and financial institutions involved in overseas projects do not have specific provisions for when violations occur. Information disclosure on violations, investigations and corrective measures is still not publicly available. There have been instances where upon being notified of violations by NGOs, experts and communities – both before and during implementation – Chinese agencies have pulled out of projects, although this is rare.

A satellite image shows roughly that between the signing of the loan agreement in early 2015 to today, mining activities have expanded the total area of the Drmno open pit coal mine to more than 1.6 km2, This is an estimate since there is no publicly available data disclosed by either CMEC or China Eximbank. However, these parties have a responsibility to meet both national and international environmental standards according to the Chinese state.

[1]http://obor.nea.gov.cn/pictureDetails.html?id=2422
[2] PRC’s Economic Counselor’s Office at the Chinese Embassy in the Republic of Serbia (December 22, 2009): http://yu.mofcom.gov.cn/aarticle/jmxw/200912/20091206690415.html
[3]Best available techniques reference document for large combustion plants, 2017
[4]https://www.energy-community.org/legal/cases/2018/case0918RS.html
[5] On August 20, 2009, the Serbian government signed a Memorandum of Understanding with the Chinese government on economic and technical co-operation in the field of infrastructure. Annex 2 to the 2009 agreement was signed on August 26, 2013. This annex includes a clause in Article 5 that (our translation): Agreements, contracts, programs and projects carried out in accordance with Article 4 of the Agreement on the territory of the Republic of Serbia do not carry an obligation to publish a public tender for carrying out investment works and delivery of goods and services, except if it is otherwise specified in the commercial contract from paragraph 4 of this Article. 
[6] Serbia’s Ministry of Energy, Development and Environmental Protection, Decision no.353-02-901/2013-05, dated July 26, 2013. 
[7] Serbia’s Ministry of Energy, Development and Environmental Protection, Decision no. 353-02-901/2013-05. (Annex 7)