PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: Project Name

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: Project Name Power Sector Guarantees Project II Region Africa Sector Power (90%); Oil and gas (10%) Project ID P Borrower(s) Federal Republic of Nigeria Implementing Agency Nigeria Bulk Electricity Trading PLC Environment Category [] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared 07/07/2015 Estimated Date of October 10, 2015 Appraisal Authorization Estimated Date of Board April 28, 2016 Approval I. Introduction and Context A. Strategic Context 1. The original Power Sector Guarantees Project (PSGP, P120207) was approved on May 1, 2014, for an amount of US$395 million supporting the first two Independent Power Producer (IPP) transactions - the Azura Edo IPP (Azura) and the Exxon Qua Iboe IPP (QIPP). The Board of Directors of the Bank also endorsed a framework for a series of IBRD guarantees for future transactions (independent power producers, IPPs, generation companies, GENCOs, and distribution companies, DISCOs) estimated in the aggregate at US$700 million, including the first two IPPs (Azura and QIPP). As the second project in the series, PSGP II mobilizes up to US$300 million as IBRD guarantees supporting next batch of private transactions (IPPs only). In addition, PSGP II will also mobilize Clean Technology Fund (CTF) allocation of US$100 million in order to support the development of solar IPPs in Nigeria. B. Country Context 2. The Federal Republic of Nigeria has experienced stable economic growth averaging 8 percent over the past decade. In the context of high economic growth, Nigeria s key challenge is to make its growth more inclusive. Of the millions of Nigerians who enter the labor market each year, only 10 percent are able to find formal jobs. As a result, (formal) unemployment grew from 19.7 percent to 23.9 percent between 2009 and 2011, affecting principally the young (15-24 age group) with a rate rising from 25 percent in 2009 to 37.7 percent in A statistical rebasing of the gross domestic product (GDP) in 2014 reveals that Nigeria s GDP is estimated at close to US$500 billion (2012), making it the world s 26 th largest economy. 3. A large and rapidly expanding population of 170 million represents an opportunity for economic development and increased employment if new markets can be unlocked. As of 2013, service and agriculture sectors comprised the largest share of GDP, followed by trade, and oil and gas sectors. Greater market connectivity toward a unified domestic market is a key precondition for achieving rapid diversified growth that can promote small and medium 98822

2 enterprises, create jobs, and reduce poverty. By making markets more inclusive, Nigeria can extend opportunities to the poor and other excluded groups. 4. Given the ongoing oil price shock, the macroeconomic picture in Nigeria is quite vulnerable due to limited fiscal reserves. In addition, the country is facing conflict and security challenges. Nigeria s population size makes its progress in reducing extreme poverty very important for achieving the global target of 3 percent by Nigeria is the most populous country in Africa and the seventh most populated in the world. Using the official national poverty line and per adult equivalent consumption, the poverty rate declined from 48.5 percent in 2004 to 45.7 percent in C. Sectoral Context 5. Nigeria is one of the world s largest oil exporters and is endowed with abundant domestic energy resources, including the eighth largest reserves of natural gas and significant untapped hydropower potential along the Niger River. Despite these favorable conditions, access to energy services is low: only a third of the demand for power is supplied from the national grid, those connected to the grid face multiple daily power cuts, over 80 million citizens are left entirely without access to electricity the second largest access deficit, globally. This power crisis is an obstacle to economic growth and has a negative impact on the everyday lives of Nigerians. A recent poll indicated that nearly 70 percent of Nigerian consider that electricity should be the primary priority of the new Government. In recognition of this, the incoming administration has committed to continued support to the power sector. Status of the Ongoing Power Sector Reform 6. The Federal Government of Nigeria (FGN) is undertaking a bold power sector reform program encompassing the entire power sector value chain. The 2010 Power Sector Reform Roadmap aims to expand power generation while dramatically improving service delivery, revenue recovery, and efficiency. The unbundling and privatization of the vertically integrated sector utility, Power Holding Corporation of Nigeria (PHCN), was completed in November 2013, with the majority of the successor companies now functioning in the Transitional Electricity Market (TEM). An independent regulator and a bulk power trading company were also established. 7. While sector reforms are starting to result in tangible improvements, many implementation challenges remain. The demand for electricity in Nigeria continues to outpace supply. Over the past decade, Nigeria s publicly owned and operated electricity system has been failing to meet Nigeria s power needs. In early 2015, the total available capacity was around 4,000 MW which was significantly below the suppressed demand estimated to exceed 6,000 MW. The demand in the Nigerian power sector is expected to continue to increase at around 10 percent per annum in the medium term, reaching 10,000 MW by 2020 (Figure 1 below). The supply shortfalls are further marred with generally inefficient technical and commercial management of the grid system, leading to frequent interruptions and poor service quality.

3 Figure 1: Demand and Supply Projections Continued Gas Supply Constraints 8. Power generation is also constrained by the inefficient exploitation of Nigeria s abundant natural gas resources. The power sector in Nigeria relies heavily on natural gas supply (over 70 percent of generation). The lack of policy-level reform in the upstream gas sector, together with overall inefficiency of commercial gas market frameworks and the gas supply infrastructure leaves nearly 1,500MW of installed power general capacity stranded. In the short-term, there is an urgent need to improve the credit-worthiness of the power generation offtakers of the gas supply. In the medium-term, it will be important for the FGN to undertake structural reforms to unleash the potential of the gas resources. The WBG is also providing up to US$600 million IDA guarantees to support gas sales agreements (GSA), for example, of Chevron and Accugas for Egbin and Calabar power plants respectively under Nigeria Electricity and Gas Improvement Project, NEGIP (P106172) as well as targeted IFC investments (e.g. Seven Energy, a parent of Accugas) to improve the commercial viability of gas supply. Diversification of Generation Mix: The Solar Potential 9. Nigeria lies in top quartile for global solar radiation potential, with mean average Daily Normal Irradiance (DNI) of 1,900 kwh/square meter annum 1. Nigeria has tremendous solar power potential, particularly in the Northern parts of the country. Development of utility scale grid-connected solar generation plants will not only reduce the reliance on natural gas, but would also underpin economic growth in the North. However, the solar sector in Nigeria significantly lags the regional benchmarks due to general unfamiliarity with the technology, commercial structures, comparable commissioning performance, and power delivery benchmarks. Moreover, the price-discovery mechanisms have not been fully developed which contributes to inability to attract private capital at optimal rates and generally high overall costs. 1 ECOWAS -

4 Delayed Delivery of Frontrunner Power Generation Investments 10. The private sector has expressed an interest in investing in the power sector, but, there is still a continued need to provide credit enhancement and investment support for the newly established power market. The first IPP transactions supported by IBRD Guarantees under the original PSGP, Azura and QIPP, are expected to reach financial close over the next few months. The commercial negotiations of the contractual documents have been concluded; and are awaiting Nigerian Attorney General s legal opinion on GON s obligations under such documents. These transactions do not have any unresolved fiduciary, environmental, social or other safeguards issues pending. The commercial operation date (COD) is expected to be in Overall, the perceived risk by private investors related to investments in Nigerian power sector remains high. There is a continued need to mitigate the high level of uncertainty risk that frontrunner transactions face. In the longer term, as Nigeria s power sector reforms progress through the transitional phase, it is expected that the need for risk mitigation will decrease, as sector institutions establish successful track records of financial, operational and contractual performance. The proposed PSGP II will continue to use the same preparation framework (commercial, technical, economic, financial, safeguards due diligence) with the original PSGP.

5 D. Relationship to CPS 12. The proposed PSGP II is fully aligned with the FY14-17 Nigeria Country Partnership Strategy (CPS), which focuses on three strategic clusters in support of inclusive economic growth. The proposed PSGP II is also part of the World Bank Group s Joint Energy Business Plan (EBP) for Nigeria that includes IDA/IBRD, IFC, and MIGA. WBG support includes upstream and downstream investments along the energy supply chain as well as a strong sectoral dialogue with the authorities. The WBG support to specific transactions complements ongoing policy support as WBG presence can attract credible investors and secure transparency in selection and contracting processes. II. Proposed objective(s) 13. The project development objective is to increase the supply of electricity received by Nigerian consumers. III. Preliminary description A. Concept 14. The proposed PSGP II will support the implementation of the Roadmap for Power Sector Reforms by providing additional US$300 million IBRD Guarantees to support the next batch of IPP transactions. In addition, the proposed PSGP II provides to support the development of renewable energy IPPs by mobilization of US$100 million CTF financing allocation for gridconnected solar IPPs in Nigeria. B. Description of Project Components 15. Component 1 - Guarantees for Private Transactions (up to US$300 million): IBRD Guarantees will be provided in supporting private transactions at an advanced stage of development, as described under Component 1 of the Board-approved original PSGP PAD. The transactions may also benefit from complementary IFC investments and MIGA insurance, as appropriate. The contractual framework for these IPPs to be considered is expected to be similar to that of the first two IPP projects supported under the original PSGP, including a Power Purchase Agreement (PPA) with NBET. The IBRD Guarantees to be provided under PSPG II are expected to be structured with indicative terms and conditions which are substantially similar to those that have been approved under the original PSGP. Following screening criteria will be applied for transactions that will be supported under PSGP II: (i) FGN s own IPP nomination and prioritization procedures based on the status of readiness (e.g. registration and licensing, land deeds, etc.) of each transaction, (ii) status of compliance (e.g. technical design, environmental and social assessments, economic feasibility, and financial structuring, etc.) with the Nigerian and WBG guidelines, (iii) strategic priority to support economic development of the Northern states, as well as (iv) diversification of generation mix and renewable energy development (e.g. solar IPPs). In addition, continued innovation in accessing different financing markets is also a part of the screening criteria. 16. Component 2 - Support for Solar IPPs ($100 million): Based on regional best practices, the overall strategic approach is to support the development of FGN led solicited solar IPP

6 market in Nigeria. The Bank (under an ongoing IDA project) is carrying out a feasibility study to investigate appropriate sites, sizing, and mechanisms (for example, a hybrid solar-hydro site or a standalone site). The resulting information will be used to develop standard bid-out packages and will be competitively auctioned off for development (tentatively, by mid-2016). During this solicited process, the IPPs winning the auctions will be developed as a public-private partnership with bidders offered CTF financing as government participation (subsidized loans), in addition to IBRD Guarantees (as noted above), as needed, to reduce the high cost of frontrunner solar IPPs and to obtain the lowest possible tariff. 17. Under this Component, support will also be provided to private sector led solar IPPs that are currently in advanced stages of development. Given the nascent state of the solar IPP market in Nigeria, and the higher than usual costs (due to security situation, transportation, and establishment of a new supply chain) of renewable energy generation plants in northern Nigeria, the CTF financing will assist in reducing the risk premium associated with these transactions, support price discovery, and will support development of commercial frameworks and standard documents (e.g. PPAs and put/call option agreements, PCOAs) that will be used for solicited IPPs. 18. While, NERC has made provisions for higher pass-through tariffs for renewable energy IPPs, it expects to follow an open-book approach to negotiate realistic purchase prices of such transactions and for prices to reduce over time with further crowding in of experience and scale. This is aligned with the experience in other developed markets such as South Africa and Chile. IV. Safeguard policies that might apply Performance Standards (please explain why) Yes No TBD PS 1: Assessment and Management of Environmental and Social Risks and Impacts This project will follow the process established in PGSP for investments in new power plants, which is that a full ESIA that meets the requirements of PS 1 and Nigerian law and regulations must be prepared, disclosed, and approved by the Bank for each investment prior to Board presentation. In cases where the investment is in an existing generating plant, the PS 1 requirement will be fulfilled by means of an environmental audit. Developers and operators will prepare an ESMS for construction and operation, with provisions for compliance by contractors and suppliers, as well as a Stakeholder Engagement Plan and grievance mechanism. Since it is possible that the project may also support system improvement investments by DISCOs that have not yet been identified, the ESMF that was prepared for comparable activities under PSGP will be modified to incorporate the Performance Standards and disclosed prior to appraisal. The terms of reference for the Sectoral Environmental and Social Impact Assessment or gas-fired power development planned in conjunction with PSGP have been amended to add solar, wind, and hydroelectric generation, and consultants are being engaged to carry out the assessment. PS 2: Labor and Working Conditions IPP developers and operators will need to conform to labor and working condition requirements of this PS, by means of provisions in their ESMS and procedures to ensure that they are applied as fully as is practicable to contracted workers, workers engaged by third parties, and workers in the supply chain. In parts of northern Nigeria, providing effective security for facilities and personnel will require special attention.

7 Performance Standards (please explain why) Yes No TBD PS 3: Resource Efficiency and Pollution Prevention Development of solar and hydroelectric generation will not affect GHG or air pollutant emissions and may represent avoided emissions if they are considered to be substitutes for generation that would otherwise be gas-fired. Gas-fired IPPs will add to Nigeria s GHG emissions. All investments will be designed and operated according to the more stringent of Nigerian standards or the World Bank Group EHS Guidelines. Waste Management Plans will be prepared as part of ESIAs and incorporated in the ESMS of developers, contractors, and operators. PS 4: Community Health, Safety, and Security ESIAs and Environmental Audits will address community health and safety issues, including: social conflict and exposure to HIV/AIDS and other communicable diseases as a result of influx of workers and employment-seekers, air and noise emissions, exposure to hazardous materials, emergency preparedness and response, and loss of ecosystem services important to the community. Developers, operators, and contractors will be guided by this PS when arranging for security of their facilities. PS 5: Land Acquisition and Involuntary Resettlement Some of the investments under consideration either already exist (e.g., GENCOs and DISCOs) or will be located on sites already owned and used by the developer and therefore will not entail land acquisition. Some sites may be acquired in willing-buyer/willing-seller transaction. However, it is possible that land may be acquired, particularly for transmission lines, in transactions in which expropriation is an option, and for this reason, PS 5 is triggered. RAPs acceptable to the Bank will need to be prepared in those cases. Since it is possible that the project may also support system improvement investments by DISCOs that have not yet been identified, the RPF that was prepared for comparable activities under PSGP will be modified to use PS 5 as its basis and disclosed prior to appraisal. PS 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources Depending on location, investments may affect forest or wetland habitat and related biodiversity. Hydroelectric facilities will affect aquatic ecology and water uses. Impacts on ecosystem services will have to be addressed. Some types of solar generation have adverse impacts on birds. Transmission lines located near areas frequented by large birds or crossing flyways pose risks of collisions and electrocutions. There are 30 important bird areas, two Ramsar wetlands, and seven national parks that will need to be considered in selecting investments for support. PS 7: Indigenous Peoples Groups meeting the definition in PS 7 are not found in Nigeria. PS 8: Cultural Heritage Shrines, graves, and other cultural heritage important to local communities are frequently found on power plant sites transmission line rights of way. Avoidance is preferable, but relocation is also possible if carried out in consultation with the affected communities and in accordance with traditional and administrative procedures. Chance finds procedures will be needed in all construction contracts.

8 V. Tentative Financing Source: ($m.) Borrower 0 IBRD Guarantees 300 Clean Technology Fund 100 Total 400 VI. Contact point. Contact: Mr. Erik Fernstrom Title: Lead Energy Specialist Tel: efernstrom@worldbank.org Contact: Ms. Tomoko Matsukawa Title: Senior Financial Officer Tel: tmatsukawa@worldbank.org. VII. For more information contact:. The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: