GEF Focal Area Climate Change (Operational Program No. 7)

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Country Region Sector Project Report No. India-Solar Thermal Power Project India South Asia Energy INGE43021 PID4359 GEF Focal Area Climate Change (Operational Program No. 7) GEF Implementing Agency IBRD GEF Executing Agency IBRD in partnership with KfW Grant Recipient Project Implementing Entity Environmental Category Government of India Date this PID prepared August 7, 2002 Project Appraisal Start Date November 4, 1999 Projected Board Date January 2003 Country and Sector Background Rajasthan State Power Corporation Ltd. (RSPCL) A 1. India's power sector has a total installed capacity of approximately 102,000 MW of which 60? is coal-based, 25? hydro, and the balance gas and nuclear-based. Power shortages are estimated at about 11 of total energy and 15t of peak capacity requirements and are likely to increase in the coming years. In the next 10 years, another 10,000 MW of capacity is required. The bulk of capacity additions involve coal thermal stations supplemented by hydroelectric plant development. Coal-based power involve environmental concerns relating to emissions of suspended particulate matter (SPM), sulfur dioxide (S02), nitrous oxide, carbon dioxide, methane and other gases. On the other hand, large hydroplants can lead to soil degradation and erosion, loss of forests, wildlife habitat and species diversity and most importantly, the displacement of people. To promote environmentally sound energy investments as well as help mitigate the acute shortfall in power supply, the Government of India (GOI) is promoting the accelerated development of the country's renewable energy resources and has made it a priority thrust area under India's National Environmental Action Plan (NEAP). 2. GOI estimates that a potential of 50,000 MW of power capacity can be harnessed from new and renewable energy sources but due to relatively high development cost experienced in the past these were not tapped as aggressively as conventional sources. Nevertheless, development of alternate energy has been part of GOI's strategy for expanding energy supply and meeting

2 decentralized energy needs of the rural sector. The program, considered one of the largest among developing countries, is administered through the Ministry of Non-Conventional Energy Sources (MNES), energy development agencies in the various States, and the Indian Renewable Energy Development Agency Limited (IREDA). During recent years, private sector interest in the renewable energy sector increased due to several factors: (i) the Government opened the power sector to private sector participation in 1991; (ii) tax incentives are offered to developers of renewable energy systems; (iii) there has been a heightened awareness of the environmental benefits of renewable energy relative to conventional forms and of the short-gestation period for developing alternate energy schemes. Recognizing the opportunities afforded by private sector participation, MNES revised its Eighth Plan priorities in July 1993 by giving greater emphasis on promoting renewable energy technologies for power generation. To date, over 1,500 MW of windfarm capacity has been commissioned and about 1,423 MW capacity of small hydro installed. The sector's contribution to energy supply has grown from 0.4w of India's power capacity in 1995 to 3.4w by Solar Energy. India is located in the equatorial sun belt of the earth, thereby receiving abundant radiant energy from the sun. The India Meteorological Department maintains a nationwide network of radiation stations which measure solar radiation and also the daily duration of sunshine. In most parts of India, clear sunny weather is experienced 250 to 300 days a year. The annual global radiation varies from 1600 to 2200 kwh/sq.m. which is comparable with radiation received in the tropical and sub-tropical regions. The equivalent energy potential is about 6,000 million GWh of energy per year. The highest annual global radiation is received in Rajasthan and northern Gujarat. In Rajasthan, large areas of land are barren and sparsely populated, making these areas suitable as locations for large central power stations based on solar energy. Project Objectives 4. The main objectives of the project are: (i) To demonstrate the operational viability of parabolic trough solar thermal power generation in India; (ii) support solar power technology development to help lead to a reduction in production cost; and (iii) help reduce greenhouse gas (GHG) global emissions in the longer term. Specifically, operational viability will be demonstrated through operation of a solar thermal plant with commercial power sales and delivery arrangements with the grid. Technology development would be supported through technical assistance and training. The project would be pursued under GEF's program objective on climate change and is envisaged as the first step of a long term program for promoting solar thermal power in India that would lead to a phased deployment of similar systems in the country and possibly in other developing nations. Strategy 5. The Government supports development of both solar thermal and solar photovoltaics (PV) power generation. To demonstrate and commercialize solar thermal technology in India, MNES is promoting megawatt scale projects such as the proposed 35MW solar thermal plant in Rajasthan and is encouraging private sector projects by providing financial assistance from the Ministry. 6. One of the prime objectives of the demonstration project is to ensure -2 -

3 capacity build-up through 'hands on' experience in the design, operation and management of such projects under actual field conditions. Involvement in the project of various players in the energy sector, such as local industries, the private construction and operations contractors, Rajasthan State Power Corporation Limited (RSPCL), Rajasthan State Electricity Board (RSEB), Rajasthan Energy Development Agency (REDA), Central Electricity Authority (CEA), MNES and others, will help to increase the capacity and capability of local technical expertise and further sustain the development of solar power in India in the longer term. 7. Project sustainability will depend on to what extent the impact of the initial investment cost is mitigated, operating costs fully recovered, professional management introduced, and infrastructure and equipment support for operation and maintenance made accessible. Accordingly, (a) while the solar thermal station will be state-owned, it will be operated during the initial five years under a management contract with the private sector; (b) subsidy support will be limited to capital costs; (c) fuel input, power supply and other transactions would be on a commercial basis and backed up by acceptable marketable contracts; and (d) staff selection and management would be based on business practices; (e) project site would be situated where basic infrastructure is well developed and engineering industries established. Rationale for GEF Financing 8. The project is consistent with GEF's operational strategy on climate change in support of long-term mitigation measures. In particular, the project will help reduce the costs of proven parabolic trough solar technology so as to enhance its commercial viability. This initiative is part of an anticipated multi-country solar thermal promotion program, the objectives of which will be to accelerate the process of cost reduction and demonstrate the technology in a wider range of climate and market conditions. 9. Demonstrating the solar plant's operational viability under Indian conditions is expected to result in follow-up investments by the private sector both in the manufacture of the solar field components and in larger solar stations within India. Insights into local design and operating factors such as meteorological and grid conditions, and use of available back-up fuels, are expected to lead to its replicability under Indian conditions, opening up avenues for larger deployment of solar power plants in India and other countries with limited access to cheap competing fuels. Creation of demand for large scale production of solar facilities will in turn lead to reductions in costs of equipment supply and operation. It is also expected to revive and sustain the interest of the international business and scientific community in improving systems designs and operations of solar thermal plants. 10. The Project is expected to result in avoided annual emissions of 714,400 tons of C02, or 17.9 million tons over the life of the project, relative to generation from a similar-sized coal-fired power station. The cost of carbon avoidance is estimated at $6.5 per ton. Project Description 11. The project involves: (i) Construction of a solar thermal/fossil-fuel hybrid power plant of about 140MW incorporating a parabolic trough solar thermal field of 35 MW to 40 MW; and (ii) Technical assistance package to -3 -

4 support technology development and commercialization requirements. 12. Investment Component. The solar thermal/hybrid power station will comprise: (i) a solar field with a collection area of 219,000 m2 to support a 35MWe to 4OMWe solar thermal plant; and (ii) a power block based on mature fossil fuel technology (i.e, regasified LNG). The proposed project will be sited at Mathania, near Jodhpur, Rajasthan in an arid region. In addition to high solar insulation levels (5.8 kwh/m2 daily average), the proposed site involves approximately 800,000 m2 of relatively level land with access to water resources and electric transmission facilities. The solar thermal/hybrid station will operate as a base load plant with an expected plant load factor of 80%. The final choice of the fossil-fired power block would be left to the bidders, subject to performance parameters set out in the tender specifications. 13. The design choice is an Integrated Solar Combined Cycle (ISCC) involving the integrated operation of the parabolic trough solar plant with a combined cycle gas turbine using naphtha. Such a plant would consist of (i) the solar field; (ii) a combined cycle power block involving two gas turbines each connected to a heat recovery steam generator (HRSG) and a steam turbine connected to both HRSG; and (iii) ancillary facilities and plant services such as fire protection, regasified liquefied natural gas supply and storage system, grid interconnection system, water supply and treatment systems, etc. A control building will house a central microprocessor control system that monitors and controls plant operations 14. Technical assistance: The success of the solar thermal/hybrid power plant as a demonstration project will determine if this technology is replicable in other parts of India. The project will provide technical assistance to ensure that adequate institutional and logistical support for the technology is available for future expansion of solar thermal power. Specifically, funds will be made available for: (i) promoting commercialization of solar thermal technologies among potential investors; (ii) staff training and development of a local consultancy base; (iii) upgrading of test facilities; (iv) improved collection and measurement of solar insolation data and other solar resource mapping activities; and (v) development of pipeline investments. Project Cost and Financing 15. Project Cost: The total cost of the investment component is estimated at US$ million, including interest during construction, physical and price contingencies as well as duties and taxes. Of these costs, the cost of supplies (excluding contingencies) for the solar component including the steam generator amounts to $41 million, and that for the conventional power plant component is $72 million. The cost of the technical assistance component for promoting replication of the solar power technology is estimated at $4 million. 16. Project Financing: The project financing package is as follows: (a) GEF grant equivalent to $49 million; (b) US$113 million, equivalent assistance, from Kreditanstalt fur Wiederaufbau (KfW) in the form of a mixed credit, and (c) the balance of about $43 million consisting of a grant from the Government of India's Ministry of Non-Conventional Energy Sources and equity contribution and loan from the State Government of Rajasthan (GOR); - 4 -

5 Lessons Learned and Technical Review 17. GEF and IDA are actively supporting MNES's revised Plan on promoting wind, solar PV and small hydro technologies through the India: Alternate Energy Project (GET28633-IN) and associated India: Renewable Resources Development Project (Cr2449-IN) and Second Renewable Energy Project (Ln4571- IN). The projects involve lines of credit to IREDA to promote and finance private sector investments in renewable energy, e.g., small hydro, wind and solar PV. Favorable prospects for commercialization of an emerging technology in India is best reflected in the wind sector which saw a rapid growth in installed capacity in the last decade largely through private sector initiatives. An industrial base for wind equipment supply and engineering has emerged in the country with many joint venture companies some of which are now poised to enter the export markets. Moving both the wind and solar PV program towards the commercial mainstream has involved concerted efforts on the part of the government and the private sector in removing barriers to marketing, delivery and operation of these alternate energy systems. These resulted in establishment of acceptable pricing mechanisms, contractual arrangements, performance specifications involving agreement among policymakers, power utilities, manufacturers, financial entities, investors, contractors and consultants. 18. On solar thermal development, key lessons learned from the California experience are the need for (a) financially credible project developers who can adequately bear the construction risks; and (b) an incentive structure that would enable prospective investors to view the operation of the solar thermal facility as an integral part of their corporate business rather than as a mere tax shield or marginal investment. Social and Environmental Aspects 19. The project has been classified as category "A" under the Bank's Environmental and Social guidelines. The project helps to protect the climate both directly and indirectly, through reduction of emission of greenhouse gases. Further, the project makes an indirect contribution towards alleviating poverty. The improvement of energy supply creates scope for economic growth, which also benefits the poor. At the same time the power sector reforms will relieve the state budget from high subsidy payments to the power sector. This will release funds that potentially can be invested in direct poverty alleviation and social infrastructure. In addition, the improved cost-orientation of the power supply and tariff policy will bring about greater efficiency in the power sector which will have a positive impact on Rajasthan's economic development. 20. The project does not involve any resettlements. Most of the site for the power plant has been the property of the RSPCL for quite some time; it is fenced in and is uninhabited. Additional land for the solar field outside the fenced-in area is likewise uninhabited and is not being used intensively. 21. Risks to the environment can arise from the transport and storage of the alternative fuel (HSD) and from the possible effects of the project on local water resources. The risks posed by fuel handling (LNG and HSD) will be limited by pipeline and plant design and layouts that meet advanced safety standards and by management measures. A waste-water treatment system will remove waste-water effluents from the power plant so that the water can be - 5-

6 used for irrigation. Other possible long-term effects of the project on water resources will have to be carefully monitored. The use of LNG as a fuel combined with appropriate firing technology will keep the emissions of air pollutants below the relevant standards. The ISCC technology is environmentally safe and the relevant environmental standards of the World Bank and India will be met. The environmental impacts are acceptable, with low risk of undesirable side-effects. Nevertheless, for a power generation project of this type, an environmental impact assessment (EIA) and Environmental Management Plan (EMP) have been prepared. Contact Point: The InfoShop The World Bank, 1818 H Street NW. Washington DC Telephone No.: (202) Fax No.: (202) M.V. Manzo Task Manager The World Bank, 1818 H Street NW. Washington DC Telephone No.: (202) Fax No.: (202) Mr. G. L. Somani General Manager Rajasthan State Power Corporation Ltd. E-166, Yudhisthar Marg C-Scheme, Jaipur India Telephone No.: (91-141) Fax No.: (91-141) This PID was processed by the InfoShop during the week ending August 16,