Tonga Renewable Energy Project (TREP), under the Pacific Islands Renewable Energy Investment Program. Kingdom of Tonga Asian Development Bank (ADB)

Transcription

1 Tonga Renewable Energy Project (TREP), under the Pacific Islands Renewable Energy Investment Program Kingdom of Tonga Asian Development Bank (ADB) 17 March 2017

2 Project/Programme Title: Tonga Renewable Energy Project under the Pacific Islands Renewable Energy Investment Program Country/Region: Kingdom of Tonga Accredited Entity: Asian Development Bank National Designated Authority: Ministry for Meteorology, Energy Information, Disaster Management, Environment, Climate Change and Communications (MEIDECC)

3 A. Project / Programme Information A.1. Project / programme title A.2. Project or programme A.3. Country (ies) / region A.4. National designated authority(ies) A.5. Accredited entity A.6. Executing entity / beneficiary PROJECT / PROGRAMME CONCEPT NOTE GREEN CLIMATE FUND PAGE 1 OF 5 Please submit the completed form to fundingproposal@gcfund.org 1 Tonga Renewable Energy Project (TREP), under the Pacific Islands Renewable Energy Investment Program Project Kingdom of Tonga Ministry for Meteorology, Energy Information, Disaster Management, Environment, Climate Change and Communications (MEIDECC) Asian Development Bank (ADB) Executing Entity: Ministry of Finance and National Planning (MFNP) Beneficiary: Ministry for Meteorology, Energy Information, Disaster Management, Environment, Climate Change and Communications (MEIDECC) and Tonga Power Limited (TPL) A.7. Access modality Direct International A.8. Project size category (total investment, million USD) A.9. Mitigation / adaptation focus A.10. Public or private Micro ( 10) Small (10<x 50) Medium (50<x 250) Large (>250) Mitigation Adaptation Cross-cutting public Which of the following targeted results areas does the proposed project/programme address? A.11. Results areas (mark all that apply) A.12. Project / programme life span Reduced emissions from: Energy access and power generation (E.g. on-grid, micro-grid or off-grid solar, wind, geothermal, etc.) Low emission transport (E.g. high-speed rail, rapid bus system, etc.) Buildings, cities, industries and appliances (E.g. new and retrofitted energy-efficient buildings, energy-efficient equipment for companies and supply chain management, etc.) Forestry and land use (E.g. forest conservation and management, agroforestry, agricultural irrigation, water treatment and management, etc.) Increased resilience of: Most vulnerable people and communities: Diversification of power generation sources (E.g. mitigation of operational risk associated with climate change diversification of supply sources and supply chain management, relocation of manufacturing facilities and warehouses, etc.) Health and well-being, and food and water security (E.g. climate-resilient crops, efficient irrigation systems, etc.) Infrastructure and built environment (E.g. sea walls, resilient road networks, etc.) Ecosystems and ecosystem services (E.g. ecosystem conservation and management, ecotourism, etc.) 25 years 1 Please use the following naming convention for the file name: [CN]-[Agency short name]-[date]-[serial number] (e.g. CN-ABC ).

4 GREEN CLIMATE FUND PAGE 2 OF 5 A.13. Estimated implementation start and end date B. Project/Programme Details Start: October 2017 End: December 2020 The Fund requires the following preliminary information in order to promptly assess the eligibility of project/programme investment. These requirements may vary depending on the nature of the project/programme. The Board of the Green Climate Fund (GCF) announced its support for the Pacific Islands Renewable Energy Program (the Program) in December The Program will help seven Pacific island countries transition to a renewable energy future. The Program Objective is to transform the electricity production sectors across the Pacific to low carbon, climate resilient pathways, and the Program Outcome will be expanded access to clean, resilient and affordable energy. Further, the Board approved a $12 million grant for battery energy storage system (BESS) in the Cook Islands and a $5 million grant for regional capacity building and sector reform, under the Program. This proposed Tonga Renewable Energy Project (TREP) take place within the Program, and is the second project submitted after the Cook Islands. Benefits: TREP: will deliver an estimated lifetime reduction of 475,750 tco2e emissions; and it will contribute greatly to increasing the contribution of renewables to Tonga electricity production from under 10% to 50% by Paradigm shift: TREP will play a central role in carrying renewable energy use in Tonga to a tipping point after which renewable energy will become a more default investment for both private and public sectors. B.1. Project / programme description (including objectives) The Kingdom of Tonga (Tonga) is a small island developing state (SIDS) consisting of 177 islands with a total area of 748 km 2 divided into the following four island groups: Tongatapu, Ha'apai, Vava'u and Niuas. 36 of Tonga s islands are inhabited and the total population is estimated at 105,000 (IMF, 2014). The entire country can be considered remote from most markets, lying in the Pacific approximately 1,000km from Fiji and over 4,000 km from New Zealand. Like many other small Pacific islands, until recently Tonga s electricity production relied almost exclusively on diesel generation. All grid-supplied electricity, i.e. over 95% of electricity used in Tonga, was generated using imported diesel fuel. An estimated 13 million litres of diesel were consumed annually to only generate electricity, at a cost equivalent to approximately 10% of total gross domestic product and 15% of national imports. This had the following negative implications: high greenhouse gas emissions, high electricity production costs and tariffs, high input price volatility, high dependency on imports, and localised pollution. As of March 2017, about 11%of electricity demand is met by renewables. To respond, the Government of Tonga issued the Renewable Energy Act in Transition to renewable energy has been a national priority ever since. In 2009, the Tonga Energy Road Map, (TERM) established the target of generating 50% of all electricity from renewables by A pillar of efforts to reach the TERM target is the following three-phase plan:

5 GREEN CLIMATE FUND PAGE 3 OF 5 Phase 1, The Outer Island Renewable Energy Project (OIREP), supported by several international partners. OIREP outcomes are: (i) optimized use of on-grid and off-grid generation systems, and (ii) increased consumer access to electricity generated by solar power. OIREP outputs include: (i) the construction and installation of solar power systems with a total capacity of 1.32 MWp on 9 outer islands, (ii) the transfer of operation and maintenance knowledge, and (iii) rehabilitation of the existing grid network near the solar power generation systems on the islands of 'Eua and Vava u; Phase 2: Initial expansion through the most financially attractive projects, with a total investment of $10 15 million. This includes one solar farm to be funded and built by an independent power producer (IPP), and one wind farm to be funded by the Japan International Cooperation Agency (JICA); Phase 3, This proposed project, TREP is central to Phase 3. Phase 3 is to help Tonga meet renewable energy targets in its largest demand centre (Tongatapu) and on the outer islands not covered through OIREP. In parallel, under Phase 3, ADB support has been requested for a new biomass plant. Hence GCF support to TREP is part of a strategic package of investments supporting implementation of TERM. TREP investments focus on renewable energy generation and BESS. Generation is both on-grid and on mini-grids. TREP invests on Tongatapu and at least seven outer islands. TREP also includes the necessary capacity development and training programs to ensure long-term sustainability of impacts. TREP includes the following sub projects: Sub-project no., location and technology Generation capacity Storage capacity No. of beneficiaries 1. Tongatapu: 3 units of BESS - 6.9MW/18.30MWh Indirectly: 75,000 (all island) 2. Tongatapu: grid connected solar PV 4MW 1.4MW/0.7MWh Indirectly: 75,000 (all island) 3. Eua: solar PV and BESS 0.4MW 0.5kWh Indirectly: 5,000 (all island) 4. Vava u: solar PV BESS 0.5MW 1.1MW/1.5MWh Indirectly: approx. 10,000 (all island) 5. Tongatapu: grid connected wind farm 5.3 MW 1.8MW/0.9MWh Indirectly: 75,000 (all island) 6. 4 outer islands (Nomuka, 0.32MW 1.68MWh 1-2,000 Ha afeva, Uiha and Ha ano): solar mini-grid and BESS 7. Niuafo ou: solar mini-grid and 0.122MW 0.52MWh 650 BESS 8. Capacity building n/a n/a n/a

6 GREEN CLIMATE FUND PAGE 4 OF 5 B.2. Background information on project/programme sponsor B.3. Market overview B.4. Regulation, taxation and insurance In total TREP should lead to approximately MW of installed RE capacity and almost 24MWh of BESS capacity. The ADB is a multilateral development bank that provides loans, grants and technical assistance. ADB is composed of 67 members, 48 of which are from the Asia and Pacific region. ADB s clients are its member governments, who are also its shareholders. Moreover, ADB provides direct assistance to private enterprises of developing member countries through equity investments and loans. In 2016, loan, grant and technical assistance approvals to ADB's developing member countries amounted to $17.8 billion, and total co-financing mobilized, with donor support, amounted to $13.9 billion, bringing total sovereign operations to $31.7 billion in Non-sovereign operations for the same year amounted to $2.5 billion. ADB has the largest energy portfolio amongst development partners in the Pacific, covering electricity generation, transmission and distribution. Currently, the regional energy portfolio consists of 14 projects in 8 countries for a total investment of over $350 million. ADB has been operating in Tonga since 1972 and has provided the country with $168.5 million in loans, grants, and technical assistance. Not applicable The following are to play leading roles in the project: Tonga Power Limited (TPL), a regulated public enterprise. Its core business is the generation and distribution of electricity across four grid system in the country; MEIDECC Department of Energy, responsible for policy formulation as well as implementation of rural electrification and demand management projects; Electricity Commission, responsible for the establishment of the tariffs; Minister for Finance and Planning, supervises the Electricity Commission and reports to the Legislative Assembly The implementing partners - MEIDECC and TPL - have the mandate and authority to implement the activities foreseen under this project. They have significant experience executing and implementing energy sector projects. MEIDECC and TPL will be required to obtain project development permits. In doing so, they will respect all national laws and regulations, including environmental regulations, and regulations guiding the need for consultation and stakeholder consent, and all national procedures for land acquisition. Notably, the Tonga Environmental Impact Act (2003) requires all major projects to undertake an environmental impact assessment, and this will be undertaken, if required. ADB financed projects in Tonga are tax exempt. As per the Electricity Amendment Act (2010), all plant and machinery required for setting up power plants in Tonga is exempt from all taxes and duties. Governance B.5. Implementation arrangements The Government of Tonga has established a high level Taskforce to implement TERM. Under the TERM Taskforce, a GCF sub-committee has been established for this TREP project to support TREP project development and coordination. The sub-committee is chaired by MEIDECC and its members include TPL, the Ministry of Finance and National Planning, an OIREP representative, and a representative from the Tonga ADB extended mission office. It reports directly to the Deputy Prime Minister. After approval, this sub- Committee will become the Project Steering Committee. With support from a Project Management Unit (PMU), the Committee will oversee project implementation, facilitate information flows and support coordination. Implementation TPL will implement all grid-connected renewable energy and BESS sub-projects (#1, 2, 3, 4, and 5 of Table in B1). MEIDECC will implement mini and off-grids renewable subprojects coupled with BESS sub-projects (#6 and 7). The PMU will be established in MEIDECC and be responsible for all sub-projects.

7 GREEN CLIMATE FUND PAGE 5 OF 5 Design and supervision consultants will be mobilized through separate contractual arrangements. These consultants, on behalf of the Government of Tonga and ADB, will oversee all implementation: procurement, contracting, civil works and maintenance. Timetable GCF Board Approval: October 2017 ADB Board Approval: April 2018 Bidding documents and bidding: Q Q4, 2018 Contract award: by Q4, 2018 Construction: Q Q4, 2019 Testing/Commissioning: Q Q Training, O&M: Q onwards Evaluation: Q C. Financing / Cost Information Investment Program The TREP cost is estimated at $84.47 million. The indicative financing plan for TREP is presented in the following table: Source Net Amount ($ million) Share (%) Green Climate Fund Co-financing from donors Tonga Power Limited Government of Tonga (GoT) Total Notes All amounts to be confirmed during full project development stage. Government contribution includes exemptions from taxes and duties C.1. Description of financial elements of the project / programme The estimated cost breakdown by sub-project is presented in the following table: Sub-project Cost ($ million) 1. Tongatapu: battery storage Tongatapu: grid connected solar PV Eua: solar PV and battery storage Vava u: solar PV and battery storage Tongatapu: grid connected wind farm Four outer islands (Nomuka, Ha afeva, Uiha and Ha ano): solar mini-grid and battery storage Niuafo ou: solar mini-grid and battery storage Capacity Building Management support Land acquisitions Taxes and duties 9.00 Total C. 2. Pr oj Total project The estimated cost breakdown by input is presented in the following table (details to be discussed and confirmed during the detailed project design stage): Item GCF GoT TPL Other Total Design, Supply and Install for Plants Consulting services Taxes and duties Land acquisition Total All figures in US$ million Financial Instrument Amount Currency Tenor Pricing $84.47 million

8 GREEN CLIMATE FUND PAGE 6 OF 5 ec t fin an cin g inf or m ati on financin g (a) = (b) + (c) (i) Senior Loans (ii) Subordinated Loans (iii) Equity (iv) Guarantees (v) Reimbursable grants * (vi) Grants * $64.37 million ( ) years ( ) years ( ) % ( ) % ( ) % IRR As described above, TREP is part of Phase 3 of implementing the TERM. Phases 1, 2 and 3 have had significant support from many partners, including ADB. Aside from TREP, the investments in the 3 Phases so far total approximately $45 million, as follows: Phase 1: total investment of $24.72 million, including $11.44 million from ADB ($7.44 million grant and $4 million loan); Phase 2: total investment of $10 15 million; Phase 3: (i) TREP and (ii) $8 million biomass plant, 50% financed by concessional loan (currently under consideration by ADB). Justification for grant financing (b) Request ed GCF amount SIDS status and vulnerability: Tonga is a small island development state and is highly vulnerable to external economic and climatic shocks. Tonga is ranked second among the countries considered most at risk from natural disasters (2016 World Risk Report). Further, although not considered to be in a fragile and conflict-affected situation (FCAS), Tonga and other Pacific island countries do meet some of the criteria for FCAS classification. Foreign exchange risk: As of end-june 2016, over 90 percent of the total public debt stock was denominated in foreign currency, and therefore exposed the country to exchange rate risks. Need for socially equitable Tariffs: Electricity tariffs are already very high in Tonga and government social policy precludes increasing them. Analysis suggests that utilising grant instead of loan for TREP would reduce tariffs to consumers by up to about 18.6%, thereby helping to meet social objectives. Debt ceilings: According to the 2016 International Monetary Fund/World Bank Debt Sustainability Analysis, Tonga is considered at moderate risk of debt distress. As such, the debt levels must be carefully managed and monitored. The GCF ITAP review of the Regional Programme stated the Cook Islands and Tonga have reached national debt ceilings. It is not considered reasonable for the GCF to extend loans to these SIDS (GCF ITAP, December 2016) 2. Finally, in December 2016, GCF approved $12 million grant investment in renewable energy/battery storage on the Cook Islands a nation facing similar conditions to Tonga. 2 GCF/B.15/13/Add.16/Rev.01n (December 2016)

9 GREEN CLIMATE FUND PAGE 7 OF 5 In line with the above, grant financing is requested in order to meet this opportunity to support the adoption of renewable energy technology in Tonga. Total Requested (i+ii+iii+iv+v+vi) $64.37 million Financial Instrument Amount Currency Name of Instituti on Seniority (c) Cofinancin g Grant Grant Grant $5 million $6.1 million $9 million Options Options Options Options Donor (tbc) TPL Govern ment (d) Covena nts (e) Conditio ns precede nt to disburse ment Lead financing institution: Asian Development Bank Not applicable The GCF grant proceeds administered by ADB will be disbursed in accordance with the procedures set out in ADB s Grant Disbursement Handbook (2007, as amended from time to time), and detailed arrangements agreed upon between the Government and ADB. Pursuant to ADB's Safeguard Policy Statement (2009) (SPS), ADB funds may not be applied to the activities described on the ADB Prohibited Investment Activities List set forth at Appendix 5 of the SPS. All financial institutions will ensure that their investments are in compliance with applicable national laws and regulations and will apply the prohibited investment activities list to the components financed by ADB. D. Expected Performance against Investment Criteria Please explain the potential of the Project/Programme to achieve the Fund s six investment criteria as listed below. Mitigation D.1. Climate impact potential [Potential to achieve the GCF's objectives and results] The TREP will contribute to climate change mitigation by reducing emissions of greenhouse gases. The reduction estimates for the sub-projects are presented in the following table: Fuel Saving (Liter/ yr) CO2 Emission Reduction (ton/yr) Battery energy storage system (BESS) 1 3 units of BESS in Tongatapu 1,200,000 3,250 Grid-connected solar PV farms 2 2 grid-connected solar PV plants in Tongatapu 1,500,000 4,100 3 Solar PV Farm with BESS in 'Eua 200, Solar PV Farm with BESS in Vava u 300, Grid-connected wind farms 5 Grid-connected wind farms in Tongatapu 3,600,000 9,800 Solar + BESS mini-grid in outer islands 6 80kWp solar mini-grids with 420 kwh battery storage 141, each in 4 outer islands of Ha'apai 7 122kWp solar mini-grid with 520kWh battery storage in Niuafo ou 86, Capacity Building Project Management Support - - Total 7,027,000 19,030 Source: Based TPL s estimates and OIREP reports The total estimated savings are 19,030 tons of CO2e on an annual basis.

10 GREEN CLIMATE FUND PAGE 8 OF 5 Adaptation Tonga is highly vulnerable to climate change induced sea level rise and the increased frequency/intensity of storms, including tropical cyclones. The infrastructure provided through this project will be designed to be resilient through all realistic climate change scenarios. This represents a material improvement over the baseline situation. The TREP will contribute greatly to energy security on Tonga. There will be less reliance on imported fuels. The grids and mini-grids will be designed to be more reliable and more resilient. There will be greater capacity to manage and maintain grids. The more reliable energy supply will support early warning systems, information systems as well as health care and awareness raising programs. As a result of these changes, Tonga s society and economy will be more resilient to climate change. Paradigm shift As mentioned earlier, TERM represents a paradigm shift, not only for Tonga, but also for the Pacific. However, until now, due to financial constraints, TERM implementation has been limited. Tonga, as for many of the Pacific islands, stands at important cross-roads. It can either continue on the previous path of fossil fuel dependence with consolidated investments or it can achieve a transition to low carbon energy sector through renewable energy. The Government of Tonga, through the TERM, has opted for the latter transition. This will also lead to benefits in terms of energy security, improved balance of payments, increased energy access for marginalized communities and reduced local pollution. Tonga already has some experience with a small scale of solar, biomass energies and limited experience with a large (utility) scale wind power and storage systems. However, to take the sector to tipping point, after which renewables will be in most cases the default investment for both public and private sector, the transition require a sizable push in investments and in technology development, to build momentum on Tongapatu and to demonstrate technical and economic feasibility on the outer islands and in the mini-grids. The 3-Phase journey described in the previous sections should take Tonga to that tipping point. D.2. Paradigm shift potential [Potential to catalyze impact beyond a one-off project or programme investment] This is in line with the findings of the GCF ITAP review of the Regional Program which stated Most Pacific countries lack the budget to support rural electrification programmes. Renewable energy for rural electrification offers a paradigm shift as low cost power generation will allow power utilities to extend grids and improve access at lower power generation costs (GCF ITAP, December 2016). Knowledge management and lesson learning TREP is the second to be proposed to GCF under the Program, following the Cook Islands project in December Further projects are being developed in the Federated States of Micronesia, Nauru, Papua New Guinea, Republic of Marshal Islands and Samoa. Under the Program, a regional coordination and knowledge management mechanism will be established with the support of ADB. Initially, the following knowledge exchange will be supported: Tonga to learn from the Cook Island experience with installing BESS, including the institutional and capacity support mechanisms; All countries to learn from Tonga with regards to BESS, grid-integration of intermittent electricity generated by solar and wind power, and institutional and capacity support mechanisms. Enabling Environment and Regulatory Framework Tonga has already taken steps to strengthen its enabling environment and regulatory framework, starting in 2008 with the Renewable Energy Act and the preparation of TERM in Notably TERM, a ten year action plan covering , included comprehensive measures to update policy, legal, regulatory and institutional arrangements. Much of this has been implemented, including actions under Phases 1 and 2 described above. The Government of Tonga is currently preparing a National Energy Bill. This should set out further institutional, regulatory and policy reforms and lead to streamlined policy and decision making. It should also lead to the formal establishment of a Department of Energy. TREP implementation will be interacting with this process and helping to implement the provisions of the Bill, once approved. This is in line with the findings of the GCF ITAP review of the regional Program which stated the first few projects under the current project/programme intervention will help to establish links with

11 GREEN CLIMATE FUND PAGE 9 OF 5 international investors, lenders, specialized consultants (engineering, legal, etc.) and equipment suppliers, and to further develop the capacities of local partners across the supply of the SIDS region, which will foster the development and implementation of renewable power projects (GCF ITAP, December 2016). Environmental: The anticipated environmental benefits include (i) reduced localized air pollution due to less use of diesel generators and (ii) reduced risk from diesel spills resulting in less land and water contamination. These benefits applies to Tongapatu and to all involved islands, affecting a population of over 70,000. Social: the anticipated benefits include: (i) improved reliability of electricity supplies, especially on the outer islands (ii) reduced tariffs for electricity on Tongapatu and all involved islands. These in turn will lead to many social and cultural benefits such as facilitating educational and health-care activities. D.3. Sustainable development potential [Potential to provide wider development co-benefits] Economic: Increased reliability and reduced tariffs for electricity facilitate local business and economic development. The reduced imports of fossil fuel facilitates the reduction of Tonga s negative balance of payments. A renewable-led electricity sector also makes Tonga more attractive as a tourist destination. Gender: Experience from the region and across the world suggest that, if well designed and planned, renewable energy use can deliver gender benefits. TREP will ensure that there is equal opportunities provided for all females at all stages. TREP impacts will also facilitate income-generating opportunities for women in rural and isolated communities and enhance women s social and political status. An ongoing gender assessment will identify needs and opportunities and set out the required actions through the Gender Action Plan (GAP). This is in line with the findings of the GCF ITAP review of the Program which stated all these cobenefits will enhance the sustainable development potential of the intervention. These metrics and the fact that the revenue generation potential of the renewable energy projects in each of the SIDS countries will enhance the sustainability of the projects (GCF ITAP, December 2016). D.4. Needs of recipient [Vulnerability to climate change and financing needs of the recipients] D.5. Country ownership [Beneficiary country ownership of project or programme and capacity to implement the proposed activities] As for all Pacific island states, Tonga is small in size and has limited natural resources. The economy is not diverse, and Tonga is far from markets, and vulnerable to exogenous shocks. All these factors affect growth and contribute to economic volatility. Tonga faces challenges to address economic and social poverty. For example, an estimated 22.5% of the population lies below the national poverty line, and this percentage has been increasing in recent years. In addition, approximately 0.14% of children die before their first birthday. (Source: ADB website). These figures are worse for rural areas and on outer islands. Sustainable energy can play a key role in overcoming these poverty challenges. Natural climate disasters and climate change pose a threat to the people of Tonga, its society, livelihoods and its national environment. Despite Tonga s minute contributions to greenhouse gas emissions, climate change is already affecting Tonga s development, livelihood of its people and future. Energy policy and interventions in Tonga are partly driven by regional level initiatives and accords. This project in part responds to the regional Framework for Action on Energy Security in the Pacific (FAESP) , as endorsed by all Pacific Island leaders in FAESP assessed the threats to achieving energy security in the Pacific. It found that the threats arise from the interaction of a multitude of factors including: fast growing populations without economies to match; remoteness and distances from main centres and supply chain pathways; vulnerability of energy infrastructure to natural disasters such as cyclones, earthquakes, flooding and tsunamis; inability to take advantage of economies of scale due to small populations and limited industrial activity; old and poorly maintained energy infrastructure, etc. The regional Program was set up as a response to FAESP. This is the second project under the Program and the first for Tonga. However, and as mentioned above, Tonga, through TERM, was a key driver of the above regional developments. Energy security, renewable energy and TREP are all amongst the highest priorities of the Tonga government and stakeholders. This is stated clearly in TERM, in Tonga s Second National Communication to the UNFCCC and in the Tonga (I)NDC to UNFCCC. All of these specify the objective

12 GREEN CLIMATE FUND PAGE 10 OF 5 of having 50% of electricity generated from renewable energy sources by Further, the present Government, on taking office in December 2014, stated that access to affordable and reliable sources of energy is crucial to sustainable livelihoods in Tonga s scattered islands. Finally, the ITAP review of the Program found ample evidence.. of a high level of interaction with relevant stakeholders in all the countries and so ranked the country ownership as high. (GCF ITAP, December 2016). First, TREP Project takes place within a multi-phase program, with ongoing activities financed for approximately $45 million. The costs and mitigation targets for TREP specifically are summarized as follows: D.6. Effectiveness and efficiency [Economic and financial soundness and effectiveness of the proposed activities] a) Total project cost: $84.47 million b) Requested GCF amount: $64.37 million c) Expected annual tco2eq reductions: 19,030 d) Estimated lifetime tco2eq reductions (25 year): 475,750 e) Estimated GCF cost per tco2eq reduction (b)/(d): $135.3/ton TREP will reduce GHG emissions by an estimated 475,750 tco2e for a total GCF investment of $64.37 million at a rate of $135.3 per tco2e. As noted in the ITAP review of the Program (GCF ITAP, December 2016), this compares favorably to recent solar power development project in the Solomon Islands that yielded a cost of USD 724 per t CO2 eq. Hence the mitigation impact can be considered as high. Previous economic assessments suggest that each individual sub-project within TREP is economically feasible. However, a full economic and financial analysis is currently being undertaken. Efficiency in implementing TREP will be optimized by: As part of the Pacific Islands Renewable Energy Investment Program, it is expected to benefit from shared input mobilization and possibly joint procurement; ADB s experience and network of partners in the region; ADB and other partners will continually observe the prices of concerned technologies, to ensure that best available technology is obtained at most affordable prices. E. Brief Rationale for GCF Involvement and Exit Strategy Rational for GCF involvement Tonga has an opportunity to transform to a low carbon, resilient electricity sector and has already made progress, with its own limited funds and support from international partners. However, without continued and significant support, the way ahead is uncertain. Tonga cannot access the financial resources necessary to make the investments, and certainly cannot at the rapid pace required to secure this opportunity. With support from GCF and other partners, it should be possible to take renewable energy electricity generation (and associated storage) to a tipping point beyond which investment in renewables becomes the automatic course of action. In addition, GCF support, through the ADB, and as part of the Pacific Islands Renewable Energy Investment Program, will have the following benefits: access to international networks to ensure best possible technologies and practices are adopted; support to ensure best prices are negotiated for procured equipment and civil works. Sustainability TREP takes place within TERM and is fully supported by the Government of Tonga. MEIDECC and TPL will be the implementing agencies of TREP. They are committed to the project s success and sustainability. In line with TERM, Tonga has already made institutional and financial reforms necessary to support sustainable development of the electricity sector. These ensure that revenue is sufficient to support operations and maintenance, that capacity is sufficient to support technology maintenance, and that the institutional responsibilities are clear. Further, key to sustainability is the Government s commitment to O&M and asset management. Other aspects of TREP contribute to its sustainability, notably: the project will help drive the costs of renewable energy down, and so make electricity more affordable on Tonga; and all project assets will be incorporated into the national power utility asset base, and operated and managed accordingly.

13 GREEN CLIMATE FUND PAGE 11 OF 5 F. Risk Analysis Operational/financial risks A risk assessment is being undertaken as part of the ongoing feasibility study. Currently, two significant risks have been identified: Capacity to operate and manage: Assessment: Previous capacity to operate and maintain energy infrastructure has exhibited some weaknesses on Tonga. Further, the project does introduce some new technologies that require new skills to operate and maintain. Hence the risk is medium. Mitigation: Government has committed to taking all necessary maintenance measures. For instance, on 16 December 2015, the Hon. Cabinet Ministers approved that (i) TPL undertake the maintenance of both the outer island mini grid component and solar home system component, and (ii) the Government will cover the annual maintenance estimated costs and any other associated costs. The project includes a major capacity development component, based on a thorough capacity assessment. As a result, multiple staff will be trained in the operation and maintenance of the generation and battery storage facilities to ensure that there is a broad body of technically qualified people. Price of diesel: Should the price of diesel fall too low, the cost of producing electricity from renewable sources will become non-competitive. Assessment: It is noted that (a) the price of oil has held up at reasonable levels in recent years and there is no reason to expect a significant fall (b) the price of renewable energy technologies continue to fall and independent of petroleum prices. Hence the risk is low. Mitigation: given low level of current risk, the situation will be monitored. Environmental and social risks The project is being developed in accordance with ADB procedures and rules, notably ADB s Safeguard Policy Statement (2009). The project is expected to be categorised as Category B for environment and for involuntary resettlement and Category C for indigenous people. A team of experts has been mobilized to confirm these categories and undertake due diligence assessment. With regards to environment, Category B means few, if any, potential adverse impacts that are site-specific, and, if any, are irreversible, and mitigation measures can be designed readily. To address and mitigate these risks, an Initial Environmental Evaluation (IEE) and Environmental Management Plan will be prepared. This will set out the potential adverse environmental impacts of the activities, and the measures to be taken to manage and to mitigate them. With regards to involuntary resettlement, if Category B, a Land Acquisition and Review Framework (LARF) will be prepared. This will outline social safeguard procedures to follow. Next, a Resettlement plan will be prepared. This will describe the population affected by resettlement, and will describe how they are to be assisted. For indigenous people, Category C means the project is not expected to have impacts on indigenous peoples and no further action is required. G. Multi-Stakeholder Engagement The identification and design of this Project builds on the thorough consultation process that led to the TREM in Subsequently, at the national level, detailed consultation has occurred and is ongoing with concerned government departments (MFNP, MEIDECC and TPL) and with potential partners (JICA and Government of Australia). On the ground consultations with beneficiaries. Significant consultations have already taken place with many beneficiaries and many local stakeholders - see details in the pre-feasibility studies provided in Annex. As mentioned above, a gender assessment is being undertaken and a gender action plan is being prepared. The ongoing process to finalize the feasibility study and to undertake the due diligence will include the preparation of a stakeholder participation plan. H. Status of Project/Programme Pre-Feasibility study: Initial, although in some cases detailed, studies have been completed for all project infrastructure components. These are attached in Annex and include: Sub-project Study title

14 GREEN CLIMATE FUND PAGE 12 OF 5 1. Tongatapu: battery storage Sustainable Utility-Scale Energy Storage on the Four Island Grids (ITP, 2016) 2. Tongatapu: grid connected solar PV Tonga Renewable Energy Master Plan - 6 MW Roadmap (AECOM, 2016) 3. Eua: solar PV and battery storage Kingdom Of Tonga - Outer Islands Renewable Energy Project 4. Vava u: solar PV and battery storage (OIREP) - inception report (STR, 2015) 5. Tongatapu: grid connected wind farm Tongatapu Wind Generation Feasibility Study (Aurecon, 2016) 6. Four outer islands (Nomuka, Ha afeva, Uiha and Ha ano): solar mini-grid and battery storage 7. Niuafo ou: solar mini-grid and battery storage Tonga Outer Island Renewable Energy Project (OIREP) - Phase 2 Site Visit Report (TPL, 2016). However, some gaps exist in the above-mentioned analyses. Further, the rapidly evolving nature of the technology means that some of these studies require updating particularly the cost and economic analyses. The updating and gap-filling is now ongoing, together with the due diligence and gender assessment. 1) Please indicate whether a feasibility study and/or environmental and social impact assessment has been conducted for the proposed project/programme: Yes No (It s currently being conducted) (If Yes, please provide them in section J.) 2) Will the proposed project/programme be developed as an extension of a previous project (e.g. subsequent phase), or based on a previous project/programme (e.g. scale up or replication)? Yes No (If yes, please provide an evaluation report of the previous project in section J, if available.) As described previously, this forms part of Phase 3 of a multi-phase package of activities. As of yet no activities have been completed hence evaluation reports are not available. I. Remarks J. Supporting Documents for Concept Note Map indicating the location of the project/programme (To be included in a final proposal) Financial Model (To be included in a final proposal after completion of the feasibility assessments) Pre-feasibility Study Sustainable Utility-Scale Energy Storage on the Four Island Grids (ITP, 2016); Tonga Renewable Energy Master Plan - 6 Mw Roadmap (Aecom, 2016); Kingdom Of Tonga - Outer Islands Renewable Energy Project (OIREP) - inception report (STR, 2015) Tongatapu Wind Generation Feasibility Study (Aurecon, 2015); Tonga Outer Island Renewable Energy Project (OIREP) - Phase 2 Site Visit Report (TPL, 2016); Upgrade of Grids and Preparing the Utility for Operations with Renewable Energy Plants - Stage 2 - Modelling of Renewable Energy Penetration Scenarios (Aecom, 2016). Feasibility Study (if applicable) (To be included in a final proposal after completion of the feasibility assessments) Environmental and Social Impact Assessment (if applicable) (To be included in a final proposal after completion of the feasibility assessments) Evaluation Report (if applicable) GCF-ITAP Report prepared in December 2016