Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: January 2009 Proposed Loan and Administration of Grant Republic of the Philippines: Philippine Energy Efficiency Project

2 CURRENCY EQUIVALENTS (as of 9 December 2008) Currency Unit peso (P) P1.00 = $ $1.00 = P ABBREVIATIONS ADB Asian Development Bank CDM Clean Development Mechanism CER certified emissions reduction CFL compact fluorescent lamp CO 2 carbon dioxide DOE Department of Energy EIRR economic internal rate of return ERC Energy Regulatory Commission ESCO energy service company FIRR financial internal rate of return FTL fluorescent tube lamp ICB international competitive bidding IPP independent power producer LED light-emitting diode LIBOR London interbank offered rate Meralco Manila Electric Company NCB national competitive bidding NEA National Electrification Administration NPC National Power Corporation PMU project management unit PNOC Philippine National Oil Company QCBS quality- and cost-based selection TransCo National Transmission Corporation WESM wholesale electricity spot market WEIGHTS AND MEASURES GWh (gigawatt-hour) 1,000 megawatt-hours kg (kilogram) 1,000 grams kwh (kilowatt-hour) 1,000 watt-hours m 3 (cubic meter) 1,000 liters mg (milligram) gram mm (millimeter) meter MW (megawatt) 1,000 kilowatts MWh (megawatt-hour) 1,000 kilowatt-hours NOTES (i) (ii) The fiscal year (FY) of the Government and its agencies ends on 31 December. In this report, "$" refers to US dollars.

3 Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General A. Thapan, Southeast Asia Department (SERD) Director A. Jude, Infrastructure Division, SERD Team leader Team members S. Hasnie, Senior Energy Specialist, SERD G. Atay, Assistant General Counsel, Office of the General Counsel S. Phanachet, Principal Treasury Specialist, Treasury Department M. Sultana, Social Development Specialist, SERD D. T. Bui, Energy Economist, SERD Y. Tsujiki, Financial Analysis Specialist, SERD S. Tumiwa, Senior Energy Specialist, Regional and Sustainable Development Department Y. Zhai, Lead Professional (Energy), SERD

4 CONTENTS Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3 III. THE PROPOSED PROJECT 9 A. Impact and Outcome 9 B. Outputs 9 C. Special Features 13 D. Project Investment Plan 13 E. Financing Plan 13 F. Implementation Arrangements 14 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 17 A. Financial Analysis 17 B. Economic Analysis 17 C. Potential Carbon Credits 18 D. Environmental Benefits and Social Safeguards 18 E. Sustainability 18 F. Risks 19 V. ASSURANCES AND CONDITIONS 20 A. Specific Assurances 20 B. Conditions for Disbursement 21 VI. RECOMMENDATION 21 APPENDIXES 1. Design and Monitoring Framework The Philippines Power Subsector Summary of Major External Assistance to the Energy Sector Compact Fluorescent Lamp Distribution Plan Super Energy Service Company Communication and Social Mobilization Strategy Detailed Cost Estimates Detailed Implementation Schedule Procurement Plan Outline Terms of Reference for Consultants Financial Analysis Economic Analysis Summary Poverty Reduction and Social Strategy Summary Initial Environmental Examination 59

5 SUPPLEMENTARY APPENDIX (available on request) A. Philippine Energy Efficiency Road Map B. Super ESCO Business Plan C. Communication Plan D. Financial Management Assessment Questionnaire

6 LOAN AND PROJECT SUMMARY Borrower Classification Environment Assessment Project Description Rationale Republic of the Philippines Targeting classification: General intervention Sector: Energy Subsector: Energy sector development Themes: Sustainable economic growth, regional cooperation, capacity development Subthemes: Promoting economic efficiency and enabling markets, trade and investments, institutional development Category B. The environmental implications were reviewed and no significant adverse impacts were identified. The Project will (i) retrofit about 40 government-owned office buildings with efficient lighting; (ii) procure 13 million compact fluorescent lamps (CFLs) for distribution to residential and other customers to reduce peak power demand; (iii) introduce energyefficient lamps for public lighting; (iv) set up a laboratory for testing energy-efficient appliances and a lamp waste management facility; (v) establish a super energy service company (ESCO) to support ESCO development; (vi) promote an efficient-building initiative; and (vii) develop and implement a communication and social mobilization program. Philippine consumers spend a large part of their household income on energy; the country s electricity tariffs are among the highest in the region. This situation has become even worse with recent oil price increases and is likely to continue in the short to medium term as the Government cannot influence high oil prices. The introduction of competition through open access and targeting existing subsidies can only reduce electricity tariffs in the medium to long term. The Government is focusing on increasing the use of indigenous renewable energy generation (such as geothermal, biomass, wind, and hydropower) and promoting energy efficiency to meet these challenges. The Government recognizes that it alone cannot identify and finance the various energy-efficiency initiatives. Studies carried out by the Department of Energy (DOE) with assistance from the Asian Development Bank (ADB) demonstrate that by investing $46.5 million in energy efficiency, the Government could defer $450 million of investments in new power plants, and save about $100 million annually in fuel cost.

7 ii The Project s purpose is to reduce the peak load power demand by implementing an energy-efficiency program, with particular focus on efficient lighting that will contribute to greenhouse gas reduction. Carbon credits will be sought following the methodology approved by the executive board of the Clean Development Mechanism. The Project is economically and financially sound with an economic internal rate of return of 99% and a financial internal rate of return of 206% compared with the weighted average cost of capital of 2.4%. For the CFL distribution component, the payback period is less than 1 year, making the investment cash flow positive in the first year. The economic and financial internal rates of return calculations do not include the value of Clean Development Mechanism credits generated by the Project. Impact and Outcome The final impact of the Project will be reduced cost of energy production. As electricity cannot be stored, its supply and demand has to be met instantaneously. During peak times, the marginal cost of generation is usually about 5 10 times more than the average cost of generation. Therefore when the peak demand is reduced by using efficient lighting, the average cost of generation is reduced. Consumers energy costs will be reduced with the use of efficient lighting. With reduced electricity demand, the overall need for supply (generation) will be reduced. Also, a large amount of greenhouse gas emissions and the associated cost of importing fuel will be avoided, creating carbon credits for the Project under the CDM. The Project will establish sustainable business models for large-scale implementation of energy-efficiency programs. It will reduce public sector and local government energy expenditure, reduce health risks associated with residual mercury and kerosene (in off-grid areas), enhance livelihoods of rural communities, facilitate a viable ESCO industry, and establish a certification process for energy and environmentally efficient commercial buildings. Project Investment Plan The estimated cost of the Project is $46.5 million, including physical and price contingencies, interest and other charges during implementation, and taxes and duties of $2.4 million.

8 iii Financing Plan Allocation and Relending Terms Retroactive Financing A loan of $31,100,000 from the ordinary capital resources of ADB will be provided under ADB s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB s LIBOR-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The Asian Clean Energy Fund (established by the Government of Japan) will provide a grant of $1.5 million equivalent under the Clean Energy Financing Partnership Facility. ADB will administer the grant. The Government will provide financing of $13.9 million. Under a subsidiary loan agreement that will be on terms and conditions satisfactory to ADB, the Government will relend $7.5 million equivalent to the super ESCO that will be established as a subsidiary corporation of the Philippine National Oil Company. The super ESCO will bear the foreign exchange risk for this subsidiary loan agreement. Retroactive financing is proposed for an initial supply of CFLs that will be ordered between 1 August 2008 and loan effectiveness, with a ceiling of up to $3.1 million (10% of the loan amount), in accordance with Innovation and Efficiency Initiative: Cost Sharing and Eligibility of Expenditures for Asian Development Bank Financing A New Approach (2005). The Government and the Implementing Agency were advised that approval of advance action or retroactive financing does not commit ADB to financing the Project. Period of Utilization Until October 2011 Estimated Project Completion Date Executing Agency April 2011 Department of Energy

9 iv Implementation Arrangements Procurement DOE will be responsible for overall technical supervision and execution of the Project. DOE will also be the Implementing Agency for the following subcomponents: (i) retrofit of government office buildings, (ii) testing laboratory and lamp waste recovery plant, (iii) efficient-building initiative, and (iv) public lighting retrofits. The other implanting agencies are (i) the super ESCO for the ESCO component; and (ii) the National Electrification Administration for the components involving electric cooperatives national residential lighting initiative except in the franchise areas of the private utilities. As the Executing Agency, DOE will establish a project management unit, headed by a director and appropriately staffed for day-to-day coordination. The unit director will have overall responsibility for supporting implementation and providing guidance, administrative and technical support, counterpart staff, documentation, and other services that may be required. All procurement to be financed under the ADB loan and the Asian Clean Energy Fund grant under the Clean Energy Financing Partnership Facility will be carried out in accordance with ADB s Procurement Guidelines (2007, as amended from time to time), and the procurement plan prepared and agreed between the Government and ADB. All procurement contracts will contain anticorruption provisions as specified by ADB. Advance action will allow DOE to initiate its communication plan and the first stage of CFL distribution. The Government was advised that approval of advance action does not commit ADB to financing the Project. Consulting Services Project Benefits and Beneficiaries Consultants will be recruited in accordance with ADB s Guidelines on the Use of Consultants (2007, as amended from time to time). They will provide support for project implementation. Advance contracting will be applied for consulting services. The direct economic benefits of the Project include reduced peak demand and overall reduction of imported oil for power generation by use of energy-efficient lighting devices. This will result in savings of about $100 million per annum from avoided fuel cost and deferral of an investment of $450 million in power generation and associated network capacity of 450 megawatts, which is about 3% of the Philippines total generation capacity. Poor customers will particularly benefit, as lighting is a significant component of their electricity consumption. These households will benefit from improved quality lighting.

10 v Risks and Assumptions The CFL distribution component has some risks: (i) the efficient and timely procurement of CFLs and their distribution without any leakage to the commercial market; and (ii) the Government s ability to implement and enforce strict controls on energyefficiency labeling and testing of CFLs. These risks are mitigated by ensuring that (i) distribution of CFLs to customers is done at the payment points of the electric cooperatives and private distribution utilities, (ii) each CFL is marked not for sale, and (iii) suppliers deliver the CFLs directly to the distribution points. Each customer will receive a coupon with their electricity bill and be made aware of the free distribution via mass media communication. Appropriate monitoring mechanisms for effective distribution and reporting of the CFL component will be developed. All electric cooperatives participated in developing the proposed distribution mechanism. The mechanism will be optimized during implementation of the first phase. Lessons from the distribution of the first lot will be incorporated in the distribution of subsequent lots. The Project s ability to create enough competition among the major lighting manufacturers is not considered a significant risk. About 3 to 5 million units will be procured in each of the three lots to ensure strong competition and to discourage market dominance by any single brand. Establishment of a super ESCO has some risks. The risks associated in opening up the public sectors hospitals, schools, and office buildings to private suppliers may (i) take longer than planned during design; (ii) meet unforeseen legal barriers; (iii) need much more incentives and encouragement for public sector managers to participate in the process; and (iv) be dominated by several existing suppliers, thus inhibiting the growth of the market. DOE will address all these risks in the detailed business plan. The super ESCO will face some risks in developing the ESCO market for industry and commercials sectors, for example: (i) an insufficient number of ESCOs are interested in the super ESCO s offers (financing and capacity building), (ii) end consumers do not trust a government-supported ESCO on grounds of perceived bureaucracy, (iii) not enough competent staff are available to implement the super ESCO business plan, (iv) legal and procedural complications slow needed quick disbursement, and (v) the ESCOs are not able to design benefit-sharing contracts that will encourage all parties the super ESCO, private ESCOs, and end users to continue energy-efficiency related activities and make it a sustainable program.

11 119 o00'e 125 o00'e 16 o 00'N 8 o 00'N NCR ARMM CALABARZON CAR CARAGA MIMAROPA SOCCSKSARGEN o 21 00'N o 'E Itbayat BATANES Basco Sabtang o 'E S o u t h C h i n a S e a National Capital City/Town o 21 00'N Private Distribution Utilities Provincial Boundary Regional Boundary Boundaries are not necessarily authoritative. The project covers 108 electric cooperatives and 3 private distribution utilities and the franchise area of Manila Electric Company. PALAWAN Puerto Princesa S u l u ILOCOS NORTE Mamburao S e a Jolo Calapan Babuyan Channel Laoag APAYAO Kabugao CAGAYAN REGION I Bangued Ilocos KALINGA Tuguegarao ABRA CAR Tabuk ILOCOS SUR Vigan MT. PROVINCE Bontoc Ilagan IFUGAO ISABELA LA UNION Lagawe BENGUET San Fernando La Trinidad Cabarroguis Bayombong Baguio NUEVA VIZCAYA QUIRINO Lingayen PANGASINAN AURORA Baler NUEVA ZAMBALES ECIJA Tarlac Palayan TARLAC Iba PAMPANGA REGION III San Fernando BULACAN Central Luzon Polillo Malolos RIZAL Balanga MANILA NCR QUEZON BATAAN Binangonan Trece Martires Sta. Cruz REGION IV-A CAVITE LAGUNA CALABARZON BATANGAS Lucena Batangas OCCIDENTAL MINDORO REGION IV-B MIMAROPA - National Capital Region - Autonomous Region in Muslim Mindanao - Cavite, Laguna, Batangas, Rizal, Quezon - Cordillera Administrative Region - Agusan del Norte, Agusan del Sur, Surigao del Norte, Surigao del Sur - Mindoro, Marinduque, Romblon, Palawan - South Cotabato, North Cotabato, Sultan Kudarat, Sarangani, General Santos Boac ORIENTAL MINDORO MARINDUQUE ANTIQUE REGION IX Zamboanga Peninsula Sibuyan Sea Iloilo San Jose Jordan GUIMARAS Panay Gulf REGION VI Western Visayas SULU Zamboanga Isabela BASILAN Romblon ROMBLON REGION II Cagayan Valley AKLAN Kalibo Roxas CAPIZ ILOILO CAMARINES NORTE Daet M o r o Pili CAMARINES SUR ALBAY Bacolod P A C I F I C Visayan Sea Legaspi Cebu Virac O C E A N Burias SORSOGON Sorsogon Catarman Ticao NORTHERN SAMAR Masbate MASBATE REGION V Bicol CEBU REGION VII Central Visayas CATANDUANES P h i l i p p i n e WESTERN SAMAR Catbalogan BILIRAN Borongan Naval EASTERN SAMAR Tacloban LEYTE Leyte Gulf SOURTHERN LEYTE Maasin S e a SURIGAO DEL NORTE NEGROS OCCIDENTAL BOHOL Surigao Tagbilaran Bohol Sea REGION XIII NEGROS Dumaguete Mambajao AGUSAN CARAGA ORIENTAL SIQUIJOR DEL NORTE Siquijor Butuan Tandag CAMIGUIN MISAMIS REGION X SURIGAO DEL SUR ORIENTAL Northern Mindanao Dipolog Oroquieta Prosperidad ZAMBOANGA MISAMIS Cagayan de Oro AGUSAN DEL NORTE OCC. Tubod Malaybalay DEL SUR ZAMBOANGA Marawi DEL SUR LANAO BUKIDNON DAVAO DEL NORTE LANAO Pagadian DEL Ipil DEL SUR NORTE Nabunturan ZAMBOANGA SIBUGAY A R M M PHILIPPINES PHILIPPINE ENERGY EFFICIENCY PROJECT Tagum COMPOSTELA VALLEY NORTH COTABATO DAVAO ORIENTAL Kidapawan Mati Shariff Aguak Davao City G u l f MAGUINDANAO Digos REGION XI Isulan Davao Region SULTAN KUDARAT Koronadal DAVAO DEL SUR SOUTH COTABATO Alabel REGION XII SOCCSKSARGEN N Kilometers SARANGANI REGION VIII Eastern Visayas 16 o 00'N 8 o 00'N 119 o00'e Panglima Sugala TAWI-TAWI C e l e b e s 125 o00'e S e a HR

12 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan to the Republic of the Philippines; and (ii) proposed administration of a grant to be provided by the Asian Clean Energy Fund under the Clean Energy Financing Partnership Facility for the Philippine Energy Efficiency Project. The design and monitoring framework is in Appendix 1. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 1. Macroeconomic Performance 2. Gross domestic product growth improved gradually from 4.4% in 2002 to 7.2% in 2007 the highest growth in 3 decades. This growth was fueled largely by consumer spending (about 70%) and partly by public sector expenditures on current and capital outlays. Implementation of fiscal reforms in coupled with receipts from privatization permitted the Government to increase expenditures, estimated at 17% of gross domestic product in However, growth slowed to 4.6% during the first quarter of This is largely due to rising commodity prices; increase in international oil prices; and a slowdown in global growth, which will impact exports. Overall economic growth for 2008 is likely to be around 4.5%. In March 2008, the Philippine Development Forum emphasized the importance of physical infrastructure in increasing regional competitiveness and market access, attracting investments needed to sustain economic growth, and reducing poverty. In this regard, the Government s 2009 budget proposal calls for continued fiscal consolidation and priority for key physical infrastructure projects. The country strategy and program of the Asian Development Bank (ADB) emphasizes support for removing infrastructure bottlenecks in power, transport, and agriculture to increase the competitiveness of private sector-led manufacturing and service sectors Energy Sector Performance 3. The National Power Corporation (NPC), a vertically integrated utility, had primary responsibility for power generation and transmission in the Philippines until the power subsector was restructured in February Prior to the restructuring, NPC and several independent power producers shared electricity-generating functions in the country. Privately owned Manila Electric Company (Meralco), 16 privately owned utilities, 7 municipal systems, and 119 rural electric cooperatives distributed electricity across the country. The power supply system in the Philippines is divided into three grids Luzon, Mindanao and Visayas. The Luzon grid covers Metro Manila and accounts for about 70% of total power demand in the country; the Mindanao grid is the second largest. The National Electrification Administration (NEA) is responsible for rural electrification. It manages electrification targets and maintains the operation of rural networks through the electric cooperatives. 4. Burdened with excessive debt, lack of competition, and stranded generation capacity with expensive take-or-pay contracts, the Government decided to restructure and privatize the power industry. In 1998, ADB supported the Government s initiative through the Power Sector Restructuring Program 2 with financing of $300 million. The program s principal objective was to create competitive electricity markets by unbundling generation and transmission, and providing 1 ADB Country Strategy and Program ( ): Philippines. Manila (extended to 2010). 2 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Philippines for the Power Sector Restructuring Program. Manila.

13 2 open and equal access to transmission and distribution. By March 2003, NPC s assets were organized into two state-holding companies: (i) National Transmission Corporation, which took on much of the company s transmission assets; and (ii) Power Sector Assets and Liabilities Management Corporation, which assumed control of the power-generating assets. 5. The Electric Power Industry Reform Act, passed by Congress in 2001, was the blueprint for the 2002 restructuring. The act required the breakup of NPC s integrated assets into separate units for electricity generation and transmission. By March 2008, the Government had finalized a 25-year concession to operate the national power grid, and the Power Sector Assets and Liabilities Management Corporation had formally approved the sale of more than 1,855 megawatts (MW) or 44% of NPC s generation assets in support of the Government's revised target of 70% privatization before the end of In 2001, the Government established an independent regulator, the Energy Regulatory Commission to oversee competition and monopoly regulation of the sector. Detailed analysis of the power subsector is in Appendix Total energy demand is projected to double by 2030 (from 2007), growing at about 4% per annum. Electricity demand growth 3 will be similar. Growth will be strongest in the residential sector (at 6.5% annually), as compared to the commercial (5.7%) and industry sectors (4.7%). If the status quo continues, most of this demand growth will have to be met by imported oil and coal. Both coal and oil consumption grew by 10% between 2006 and Coal will continue to be the dominant 4 fuel for electricity generation and will account for 54% of electricity generation by The transport sector s demand is currently exclusively met by oil and will account for about 44% of total final energy demand by The total installed power-generating capacity in the Philippines was 15,937 MW in 2007, generating about 59,600 gigawatt-hours, a 20% increase since Natural gas (32%), geothermal energy (17%), and hydropower (14%) are the main domestic primary energy sources used for generation. Oil-based and coal-fired generation contribute the remaining 37%. The electricity tariffs in the Philippines are among the highest in the region 5 and, as a result, consumers spend a large part of their household income on energy. Recent oil price increases have exacerbated the situation, especially for poor consumers in rural areas. Global energy prices will continue to be high in the short to medium term. 8. In response to these challenges, the Government organized the Philippine Energy Summit in February 2008 to discuss options for mitigating the impact of high energy prices on the general public. The summit concluded that while the introduction of competition through open access 6 and better targeting of existing subsidies could reduce electricity tariffs in the medium term, a more effective solution would be a combination of increased use of indigenous renewable energy generation (such as geothermal, biomass, wind, and hydropower) and promotion of energy efficiency because of its quick implementation ability. The summit participants agreed to pursue energy efficiency as the short-term strategy to combat the impact 3 Projections of energy demand and electricity consumption are taken from various reports published by the Philippine Department of Energy and International Energy Agency, including International Energy Agency World Energy Outlook Paris. 4 National coal-based generation was about 28% in 2007 (35% in Luzon, 10% in the Visayas, and 20% in the Mindanao grids). 5 Philippines $0.22 per kilowatt-hour (kwh), Cambodia $0.20 per kwh, Viet Nam $0.06 per kwh, and Indonesia $0.065 per kwh. 6 Open access means that the utility s wires are open and can be used by a customer to receive electricity from an alternative source. Open access gives a customer the choice to shop around for a cheaper source of electricity, switch directly to the cheaper alternative, and pay the incumbent utility only for regulated transmission and distribution charges.

14 3 of high energy prices. The Government recognizes that it alone cannot identify and finance the various energy-efficiency initiatives, and therefore, developed a two-pronged implementation plan. Under this plan, the Government will make residential customers aware of the economic benefits of energy efficiency; and for commercial and industrial customers, the Government will create an enabling policy and lending environment to encourage private sector investments in energy efficiency. These measures will ensure efficient use of electricity by all consumers, thus lowering consumer cost and costs of the government and private corporations for electricity; and ultimately reduce the import of fossil fuels. 9. To implement this plan, the Government requested ADB support. The plan will reduce the impact of high energy prices and the overall carbon footprint of the energy sector. B. Analysis of Key Problems and Opportunities 1. Key Problems and Constraints 10. Power Shortage. Electricity demand is projected to increase by about 6% during This will require adding 4,000 MW of new generation capacity. 7 By 2012, power shortages are expected in the Luzon and Visayas grids as demand growth will catch up with current excess generation capacity. In January 2008, the Government, in its updated energy sector development plan, identified 14 power projects with a total capacity of 2,534 MW. The Government expects the private sector to invest in these generation projects and to trade power in the power pool or sell directly to distribution utilities. 11. Benefits of Competition Delayed. Unbundling power ensures appropriate investments and efficient operation through (i) competition in generation and retail; and (ii) effective regulation, as a surrogate for competition, for monopoly transmission and distribution. Despite the facts that (i) power restructuring is well advanced, (ii) the Philippines is a role model for the region, and (iii) the Government has been successful in attracting private investors to purchase old NPC generation plants at higher than expected prices, 8 consumers have not yet benefited from the reforms in terms of lower electricity prices. The main competitive element open access has not yet been implemented. 12. System Peak. The system peak in most rural electric cooperatives is driven by the evening lighting load; unlike Meralco, where the late afternoon system peak is driven by commercial air-conditioning load. A large part of the rural system peak is contributed by incandescent bulbs in households, inefficient linear fluorescents in commercial buildings and small factories, and inefficient public lighting. Widespread use of inefficient lighting (residential and commercial) has created capacity constraints within the rural electric cooperatives (particularly in remote rural areas) by increasing system peak demand, and eroding transmission reserve capacity and generation capacity. This inefficient lighting has not only burdened end consumers with excess electricity bills, it also contributes to additional greenhouse gas emissions caused by the excess generation needed (from diesel or fuel oil) for the extra electricity to supply the inefficient lighting. 13. Lack of ESCO Development. An energy service company (ESCO) is a private business that engages in a performance-based contract with a client to identify and implement energyefficiency measures to reduce the client s energy consumption at the client s premises. A super 7 Department of Energy Power Development Plan 2006 Update. Philippines. 8 Prices ranged from $1.55 million to $2.03 million per megawatt.

15 4 ESCO aggregates activities of other ESCOs and brings financing for projects. It can take the form of a leasing or financing company to provide ESCOs and/or customer s energy equipment on lease or benefit-sharing terms. It will also lead efforts to develop the ESCO industry with capacity building, knowledge management, and market development. 14. With one of the region s highest electricity tariffs (after Japan), the Philippines should be the one of the most attractive places for investments by ESCOs. The high electricity prices provide excellent incentives for establishing ESCOs to undertake energy-efficiency projects; unfortunately, this is not the case and only a few ESCOs are operating in the country. To date, very few energy-efficiency projects have been implemented. The main barriers to ESCOs are (i) limited or no access to funds (without collateral or guarantees), (ii) lack of technical evaluation capacity in commercial banks, (iii) lack of flagship projects and general awareness of energy efficiency by end users, and (iv) inadequate policy support. 15. ESCOs need to promote energy-efficiency ideas and concepts to commercial and industrial customers where electricity represents only about 10% 15% of their operating cost. Business managers are either not aware or do not consider energy efficiency as a priority despite high returns on energy-efficiency investments. 16. Mercury Pollution. The compact fluorescent lamp (CFL) contains 2 5 milligrams of mercury. A typical linear fluorescent lamp, used commonly in offices and houses, contains about 12 milligrams of mercury. These lamps have been in use for the last 40 years, and only recently have governments begun addressing issues of their safe disposal. Mercury poses a hazard to pregnant women, infants, and children. People in the Philippines, as in many developing countries, dispose of fluorescent lamps in landfills, ultimately polluting groundwater. The Government plans to institute measures that will address mercury content in CFLs sold in the Philippines, and to collect mercury from old fluorescent lamps before disposal. 2. Opportunities 17. Efficient lighting reduces electricity demand for lighting by around 40%. In the Philippines, where the domestic and commercial lighting base is large, lighting is the main driver of the peak load. About 1,300 MW of the peak demand can be saved by switching to the use of energy-efficient lights. More than 40 million incandescent lights are in operation, according to the Philippines Lighting Industry Association. Only 20% of the electricity used by an incandescent bulb produces light; the remaining 80% is wasted as heat. A CFL uses all of its electricity input to produce light, saving about 80% of power consumption. Because of their design, CFLs last about 10 times longer than incandescent lamps. 18. Governments, worldwide, are encouraging customers to use more CFLs, as the savings are much more than the avoided cost of adding new generation capacity. The additional benefits are environmental, including avoided greenhouse gas emissions. Perusahaan Listrik Negara, the national electricity utility in Indonesia, started distributing CFLs to its residential customers in Australia, Canada, People s Republic of China, Thailand, Viet Nam, and many other countries have used a CFL distribution program as an effective alternative to building new power stations to meet growing demand. Put simply, if 1 million incandescent bulbs are replaced with CFLs at a cost of about $1.5 million, the electricity demand will be reduced by 50 MW. The impact on the power system will be the same as building a new 50 MW power station, which may cost at least $50 million, another $2 million $3 million each year to operate, and 3 4 years for construction.

16 5 19. Efficient Lighting Choices for Off-Grid Customers. Off-grid customers, with their high cost of generation, are looking for choices beyond CFLs. Light-emitting diodes (LED) 9 can produce the same amount of light as a 40-watt incandescent bulb or a 13-watt CFL, with only about 8 9 watts and have an effective life of more than 50,000 hours (replacement of a light bulb every 30 years). 10 Projects are being undertaken in Africa to replace inefficient kerosene lanterns with LEDs in off-grid areas. 11 LED lighting, coupled with a small solar panel, is an environment-friendly alternative for remote populations with no access to grid-connected electricity. This technology can bring large benefits for off-grid communities in the Philippines who are dependent on kerosene lamps. 20. Efficient Public Lighting. In the Philippines, public lighting (street lighting and lighting of public areas) is subsidized and local government units are responsible for managing it. 12 In the provinces, most street lighting uses inefficient lighting technologies, such as fluorescent lights, incandescent bulbs, and low-pressure mercury vapor lamps. India, Thailand and Viet Nam have developed national efficient public lighting programs. The Philippines could use efficient lights for public lighting to reduce the need for energy generation and avoid the associated carbon dioxide (CO 2 ) emissions. 21. Efficient Buildings. Commercial buildings consume large amounts of energy estimated at about 25% 40% of energy used globally, generating 30% 40% of greenhouse gases and 30% 40% of solid waste. According to a recent publication, improving energy efficiency in buildings by implementing (i) lighting retrofits; (ii) improved heating, ventilation, and airconditioning systems; and (iii) building control systems can reduce more than 700 million tons of greenhouse gases, mostly at net negative marginal costs In many countries, this priority area is addressed through efficient-building initiatives 14 by encouraging adoption of efficient-building practices through (i) incorporating better designs such as building orientation and construction; (ii) implementing improved operation systems (maintenance, control systems, monitoring, communication, and waste disposal); and (iii) improving overall building management, including ventilation and air-conditioning. In the Philippines, four major professional groups are involved in developing efficient-building initiatives. These groups share common long-term goals and plan to align their short-term activities. Together, they plan to develop a building rating system for the country. This has the potential to avoid emissions of about 2.2 million tons of CO 2 over the next 10 years. Development of an acceptable rating system for the Philippines both for new and retrofitted buildings is a priority for the Government. The proposed efficient-building system will be implemented as a national voluntary rating scheme. 3. Government Strategy for Energy Efficiency and Tackling Climate Change 23. In 2004, the Government launched its National Energy Efficiency and Conservation Program, which includes activities supporting energy-efficiency standards and labeling, demand-side management, energy management, recognition programs, advisory services, and monitoring. The Department of Energy (DOE) implemented the Philippine Efficient Lighting and 9 Light-emitting diode is commonly seen as a tiny orange or red display light in electronic products. 10 Usually, the life of light bulbs is shorter incandescent bulbs last for 800 hours, while CFLs last for 8,000 hours. 11 Lighting Africa is an initiative of the World Bank Group and the International Finance Corporation. 12 Consumption is not metered and charges are based on P6 per kwh tariff fixed charge per light. 13 McKinsey & Company Reducing US Greenhouse Gas Emissions: How Much at What Cost? Available: 14 For example, the Green Building Council of Australia.

17 6 Market Transformation Project in 2005 to address barriers to widespread use of energy-efficient lighting systems. 15 The Global Environment Facility through the United Nations Development Programme funded the 5-year project, which (i) studied overall market dynamics for CFLs in the Philippines, (ii) developed rating systems, (iii) developed national standards for CFLs, (iv) identified the need for mercury waste management, and (v) recommended a large-scale CFL program targeting residential and other customers. In the context of the later this proposed project was formulated at the request of the Government. 24. At about 1.0 ton per capita, the Philippines emissions of CO 2 are among the lowest in Southeast Asia. 16 The country s greenhouse gas emissions totaled 100 million tons equivalent of CO 2 in The Philippines, being a nonannex I 17 country in the United Nations Framework Convention on Climate Change, does not have any immediate restrictions and is not expected to implement its climate change commitments unless developed countries provide funding and technology. However, the Philippines was among the first countries to create a dedicated organization to tackle climate change. In May 1991, the Government created the Inter-agency Committee on Climate Change comprising 15 government agencies and nongovernment organization representatives, and in August 2007 the Government established the Presidential Task Force on Climate Change, with the DOE secretary as chair. 25. The task force s mandate includes (i) undertaking strategic approaches and measures to prevent or reduce greenhouse gas emissions, including fuel efficiency, energy conservation, use of renewable energy, and waste management; and (ii) conducting a comprehensive public information and awareness campaign nationwide to educate the public on the climate change situation and its adverse effects. The task force organized the Energy Summit in January 2008 with ADB as its technical advisor, and led the development of a road map for energy efficiency (Appendix 2 and Supplementary Appendix A). 26. Private Sector Investment in Energy Efficiency. Since the oil crisis of the 1970s, ESCOs have flourished 18 worldwide, and despite low oil prices in the last 5 10 years, investments in energy efficiency have continued with newer technology. Recently, Thailand s Energy Efficiency Revolving Fund Program implemented 200 projects without any credit defaulters over 5 years. In the United States, the Federal Energy Management Program invested about $20 billion in energy-efficiency projects between 1990 and ESCO revenues from these investments were estimated at about $2 billion for The Federal Building Initiative (launched in 1991 by the Government of Canada) supported federal departments to contract with ESCOs to develop and implement energyefficiency retrofits through performance contracts. By 2006, it delivered 7,500 retrofitted federal buildings and other facilities attracting about $240 million of private sector investment and annual savings of $33 million. Many other similar programs are supporting ESCO development, for example, the Australian Government Energy Efficiency Investment Program, the Hungary Energy Efficiency Guarantee Fund, Bulgarian Energy Efficiency Fund, and Energy Efficiency 15 The project seeks to encourage consumers in the Philippines to switch from the use of incandescent bulbs to more energy-efficient lighting systems. 16 Indonesia (1.4 tons per capita), Lao People s Democratic Republic (0.2), Malaysia (6.4), Philippines (1.0), Singapore (11.3), Thailand (3.9) and Viet Nam (0.9). 17 Annex I countries include the industrialized countries that were members of the Organisation for Economic Co-operation and Development in 1992, plus countries with economies in transition, including the Russian Federation, the Baltic States, and several central and eastern European states ( 18 An international survey of the ESCO industry, published by the Lawrence Berkeley National Laboratory in Berkeley, California, in November 2003, collected ESCO activities in 38 countries outside of the United States and calculated the total amount of ESCO activity to be between $560 million and $620 million.

18 7 Loan Fund in India. 19 The strategy of the Government of the Philippines is to attract private investments in implementing energy efficiency by creating a conducive policy environment for such investments. 28. Clean Development Mechanism (CDM) Credits. 20 The increase in concentration of greenhouse gases (mainly carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) in the atmosphere has increased heat retention and caused changes in the climate. In the Kyoto Protocol, the common but differentiated responsibilities are recognized and emission reduction targets set for developed countries, which creates a market in emissions reductions. The CDM was defined in the Kyoto Protocol to promote lower emissions from projects in developing countries. 29. The CDM is a market-based financial instrument that assists developing countries to achieve sustainable development and industrialized countries to meet their emission reduction targets. It encourages investments in clean projects in developing countries that reduce emissions below the baseline scenario. These emission reductions, once verified and certified (called certified emission reductions [CERs]), can be acquired by developed countries to comply with their commitments under the Kyoto Protocol. CERs are measured in terms of carbon credits. The advantages of the CDM are (i) a reduction in global emissions of greenhouse gases; (ii) assistance to developing countries to meet their sustainable development objectives and promote cleaner projects; (iii) help for industrialized countries to meet their emission reduction targets; and (iv) use of a market-based approach to ensure efficient reduction of greenhouse gases. The actual emission reductions have to be monitored, verified by independent parties, and then certified by the CDM executive board to capture a project s benefit as CERs, which can be traded in the carbon market. Each CDM project requires a baseline and monitoring methodology. All energy-efficiency projects qualify for the CDM mechanism. 4. ADB s Sector Strategy 30. ADB has been a partner in developing power in the Philippines, and contributed to increasing the country s electrification rate of barangays (villages) from 55% in 1986 to 94% in 2006, and of households from less than 50% in 1986 to 75% in ADB assistance has effectively brought about sector reform; an independent energy regulator was established, substantial progress was made in privatization, and the wholesale electricity spot market is operating. 31. However, in an environment where global concerns for the threat of climate change are well established, a strategy based solely on conventional energy is no longer sustainable on its own. Making electricity rates more affordable, averting power shortages beyond 2012, and promoting clean energy and energy efficiency are today s challenges. ADB s new strategy for the Philippine energy sector will supplement its efforts in conventional energy with energyefficiency and climate change mitigation initiatives. ADB has been working closely with DOE and the Presidential Task Force on Climate Change to formulate a road map for implementing 19 International Bank for Reconstruction and Development/The World Bank Financing Energy Efficiency: Lessons from Brazil, China, India, and Beyond. Available: _financing_energy_efficiency.pdf 20 Clean Development Mechanism credit is a credit balance for a quantity of carbon dioxide (CO 2 ) equivalents, issued pursuant to Article 12 of the Kyoto Protocol and decisions adopted with respect to the United Nation's Climate Convention or the Kyoto Protocol; referred to in the Amendment Directive as certified emission reduction.

19 8 this strategy. The road map is being developed with other stakeholders. For energy efficiency, in 2008, ADB proposes to finance a range of pilot initiatives that will be scaled up as a larger intervention in subsequent years. The pilot initiatives cover proven energy-efficiency activities that generate high return on investments, and are included in the Government s draft road map. 5. Policy Dialogue 32. ADB acted as technical advisor for the 2008 energy summit and developed an energyefficiency road map for the sector, which encourages all consumers to switch to more efficient forms of lighting. Based on ADB s technical analysis and advice, the Government has decided, as a policy, to be the first country in Asia to phase out incandescent bulbs from January If implemented, this will generate considerable savings: $1.3 billion in deferred new generation investments 22 and a reduction of about 900,000 tons of CO 2 emissions per year. Despite these high savings by society, some consumers may see this policy as a burden as the initial cost of a quality CFL that actually lasts about 10,000 hours is more than five times the cost of an incandescent bulb. Since customers are not fully aware of the energy savings potential, they consider CFLs an expensive choice compared with the cheap incandescent bulb. 33. The Government s initiatives to (i) phase out incandescent bulbs, (ii) implement efficiency improvements in government buildings, and (iii) support the development of ESCOs to help implement energy-efficiency projects need immediate direct investments. 6. External Assistance 34. ADB is the lead development partner in the Philippine energy sector, with a focus on the electricity subsector. Over the last 30 years, ADB provided about $2.9 billion in loans and around $15 million in technical assistance to the sector, mostly focused on conventional energy. ADB s assistance to power includes (i) 20 loans to NPC ($1.6 billion) for power generation and transmission projects, (ii) program loans for power subsector restructuring and debt liabilities management ($1.3 billion), and (iii) 34 technical assistance grants for institutional strengthening and various studies (about $15 million). 35. ADB takes the lead in providing policy advice to the Government on power subsector restructuring, while continuing support to NPC. The World Bank has a more prominent role in rural electrification programs. Other major multilateral and bilateral agencies involved in the sector include the Japan Finance Corporation, Japan International Cooperation Agency, United States Overseas Private Investment Corporation, and United States Agency for International Development. ADB has been coordinating its assistance to the sector with other agencies, particularly the World Bank and Japan Finance Corporation. In recent years the Swedish International Development Cooperation Agency, United Nations Environment Programme, and United Nations Industrial Development Organization have provided assistance to the industry sector. A summary of major external assistance to the sector is in Appendix In her closing remarks at the 2008 Philippine Energy Summit, President Gloria Macapagal-Arroyo announced the country s plans to phase out incandescent bulbs by January Conservatively, 40 million incandescent bulbs (average 60 watts), replaced by 13-watt CFL, with 70% coincidence factor, or 1,300 MW of deferred investment; 3 hours per day, 1,600 gigawatt-hours; 0.54 kilograms CO 2 /kilowatthour, 900,000 tons of CO 2.

20 9 7. Lessons 36. ADB s recent involvement in the Philippine power subsector has been in the form of program support related to subsector restructuring. With ADB support, the Philippines is among the first of ADB s developing member countries to implement fundamental power restructuring, with substantive privatization of generation assets, and concession agreements with private parties to operate transmission assets and achieve a competitive market for electricity. This is an ambitious and complex task involving coordinated actions on legislative, regulatory, and policy measures spread over a reasonably long period. The process started around 1998 and is continuing. 37. ADB s interaction with the Government during its Energy Summit and other policy work clearly demonstrates the Government s willingness to support investments in projects to mitigate the impact of climate change. With volatile oil prices and strong Government commitment, a broad-based, energy-efficiency project will set the foundation for future ADB investment, and if implemented effectively, will generate an opportunity for large-scale investment in the medium term. III. THE PROPOSED PROJECT A. Impact and Outcome 38. The final impact of the Project will be reduced cost of power generation. As electricity cannot be stored, its supply and demand has to be met instantaneously. During peak times, the marginal cost of generation is usually about 5 10 times more than the average cost of generation. Therefore when the peak demand is reduced by using efficient lighting, the average cost of generation is reduced. 39. Consumers energy costs will be reduced with the use of efficient lighting. With reduced electricity demand, the overall need for supply (generation) will be reduced. Also, a large amount of greenhouse gas emissions and the associated cost of importing fuel will be avoided, creating carbon credits for the Project under the CDM. The Project will establish sustainable business models for large-scale implementation of energy-efficiency programs. It will reduce public sector and local government energy expenditure, reduce health risks associated with residual mercury and kerosene (in off-grid areas), enhance livelihoods of rural communities, facilitate a viable ESCO industry, and establish a certification process for energy and environmentally efficient commercial buildings. B. Outputs 40. The Project will have the following outputs: (i) implementation of lighting retrofits in selected government buildings, (ii) provision of 13 million CFLs to consumers, (iii) implementation of energy-efficient public lighting programs, (iv) expansion of testing laboratory capacity and establishment of a mercury waste management plant for fluorescent lighting, (v) establishment of a super ESCO, (vi) implementation of a certification scheme for energy-efficient buildings, and (vii) development and implementation of a communication and social mobilization program. 41. The Project has four components, some of which are pilot programs that could be subsequently scaled up as components of a future project.