Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Project Name Region Sector Project Borrower Implementation Agency(ies) Report No. PID11313 Nicaragua-PCF Umbrella Project... Proposed Purchase of Emission Reductions (PCF) Latin America and the Caribbean Region Energy NIPE76246 Republic of Nicaragua Gemina Generador, S.A. Date PID Prepared May 24, 2002 Projected Appraisal Date July 2002 Projected Board Date November 12, Country and Sector Background Power sector Nicaragua has a rich endowment of renewable energy resources. There exists a potential for geothermic plants which is estimated to be between 1000 and 1500 MW. So far, only the Ormat Momotombo plant (70 MW) uses geothermal resources to produce electricity. The hydropower potential is 3760 MW, while 94t of this potential is located on the Atlantic coast. At the moment, the four hydropower plants in Nicaragua produce MW of electricity. Further, there exists a potential for wind energy estimated in around 90 MW and no plants have been developed in Nicaragua, so far. Regarding bioenergy there are no estimates of its potential available, but CNE assumes a high potential especially in the north of Nicaragua. As part of the project to modernize the energy sector, CNE will conduct a study on this source. So far, only one biomass plant (15.80 MW) is in operation, whose owner is Ingenio San Antonio in Chinandega. Solar radiation for the use of direct solar energy like Photovoltaic Systems is 5,5 kwh/sqm per day in the Pacific region and Central Nicaragua and 4,5 kwh/sqm per day in the Atlantic region. Hence, there exists a huge potential of renewable energy resources, which could be exploited to meet the electricity demand in Nicaragua. Nicaragua still depends heavily on fossil fuel imports to cover their electricity supply and this dependence will increase, unless appropriate measures ware taken to set incentives towards an increased use of RET. Private sector involvement is crucial to develop this potential. The organizational and institutional framework necessary for private sector participation is already available as will be shown in the following paragraphs. Environment MARENA (Ministerio de Ambiente y Recursos Naturales) is the ministry in charge of the principal laws and regulations for environment and has taken an active role in promoting the reduction of local and global pollution. There have been advances in the development of environmental laws and guidelines to promote biodiversity and safeguard the environment. Environmental standards are in force since 1995, and MARENA has developed plans for gradual reduction of pollution with different industries. As a part of these activities, the

2 use of RETs as a cleaner alternative for electricity generation is one of the important measures to achieve sustainable development, as the potential for these technologies is considerable in Nicaragua. 2. Objectives The objective of the project is to support development of the international market mechanism for the new commodity known as "Emission Reduction" (ER), developed in the framework of the Kyoto Protocol. In this particular case, the project will facilitate reduction of C02 emissions in Nicaragua through substituting electricity produced by thermal plants with electricity from a Rice-Husk-to-Power plant and other future Sub-projects to be added to the Umbrella. The project is supported by the Prototype Carbon Fund (PCF). PCF supports projects that produce high quality greenhouse gas ER which could be registered with the United Nations Framework Convention on Climate Change (UNFCCC) for the purposes of the Kyoto Protocol. 3. Rationale for Bank's involvement The PCF was established with the objective to pioneer the ER purchase transactions. The Bank's involvement was seen critical in terms of ensuring quality of the first projects, as well as institutionalizing experiences and ensuring replicability of the projects, while providing necessary project due diligence and other fiduciary responsibilities. The value-added of Bank support also includes the availability of in-house expertise in managing energy and environmental projects, ability to mobilize global experts with long experience in the field, technical support for project preparation and supervision capacity. 4. Description Industrias Gemina (IG), a Nicaraguan private company, and Bronzeoak Corporation, an independent group, which develops, funds and implements commercial, energy and environmental projects are the first sub-project's sponsors. IG operates the Chinandega rice and flourmill complex and is the leading company in that business in Nicaragua. So far, IG has bought electricity from the local power distribution company. The maximum electrical on-site demand in 2000 was 1034 kw which is expected to increase to 1200 kw by In 2000, IG paid an average of US 11 cent/kwh for electricity purchased from the local distribution company. Allowing for a tax refund, the net price of electricity in 2000 was 9.65 cent/kwh. The supply of power is somewhat unreliable and the price is highly dependent on the world price of oil. IG is interested in building a biomass power plant to cover their own electricity demand and to sell the excess electricity. The plant will be located in Chinandega, in the same compound than the rice mill and at less than 1 km from an ENTRESA substation. The Rice Husk Power plant will produce 100t of the electrical power used at the mill and would consume 80t of the expected husk stream. The proposed power plant will have a capacity of MW. The electricity not consumed would be sold to external clients in the wholesale market. The technology proposed is based on the conventional boiler/steam turbine cycle. The husks are fed to the combustor and burned to produce heat. The steam generated is passed to a steam turbine which drives an electrical generator. This basic technology has been in use commercially for more than 100 years. It has been employed with a wide range of biomass -2 -

3 fuels including rice husks. The sub-project's construction time is approximately 12 months and is expected to be completed by summer Financing The project consist in the purchase of ER by the PCF. The payment is only against the delivery of the certified ER. Apart from this PCF support, the project does not include any World Bank or IFC financing. The construction of the Gemina Rice-Husk-to-Power plant is financed by the project sponsors and future private investors. 6. Implementation Prototype Carbon Fund (PCF): The Bank established PCF in July 1999, with the operational objective of mitigating climate change. PCF supports projects expected to generate greenhouse gas ER while complying with requirements of Joint Implementation (Art. 6) and the Clean Development Mechanism (Art. 12) of the Kyoto Protocol. PCF purchases high quality greenhouse gas ER which could be registered with the UNFCCC for the purposes of the Kyoto Protocol. PCF enters into irrevocable ERPA and accompanying MVP with "project sponsors" - in this case HGV, defining the quantity, price and other delivery conditions of ER to be purchased by PCF, as well as accompanying institutional arrangements, including the monitoring and verification systems and methods. Independent experts provide baseline validation and verification/certification procedures for emissions reductions that respond to UNFCCC rules as they develop. Project sponsors: GRHP will be carried out by a new independent corporation created for this effect by Industrias Gemina and Bronzeoak Corporation. This company's single purpose the ownership of the rice husk power plant. The name of the company will be Gemina Generador S.A. (GGSA). Upon formation, shares in GGSA will be issued equally to Industrias Gemina and Bronzeoak who will be joint owners. Thereafter, as other parties invest in the company, additional shares will be issued and the ownership interest of IG and Bronzeoak diluted. Industrias Gemina, is a group of companies that evolved from the company Placio Hoviller S.A., which was formed in The Group operates the Chinandega rice and flourmill complex. It also shares ownership of the Molinos del PacUfico mill, which is located 15 km from the Chinandega mills. In 2000, Industrias Gemina had sales revenue amounting to $50 million with profits of $5 million. The value of its fixed assets was $15 million. The milled rice is predominantly sold at wholesale for consumption in Nicaragua. Future company plans, associated with ongoing mill expansion, include export of milled rice to neighboring countries The other sponsor, Bronzeoak Corporation, was founded in 1981, and based in Caterham near London, is an independent group, which develops, funds and implements commercial, energy and environmental projects. Bronzeoak Group comprises various privately owned companies of which Bronzeoak Corporation is part of. It is receiving support from Bronzeoak Limited in developing GRHP. In , the combined Group turnover was $6,389,465 with profits of $246,455. Projections, for , are for turnover of $6,885,882 and profit of $1,624,376. The Group focuses increasingly on RET projects, based on converting biomass to heat and electricity. This has included development - 3 -

4 of power and cogeneration plants designed to burn a wide range biomass including wood and forestry waste, rice husks, palm oil mill waste, and peanut shells. The Group is also developing projects to produce biogas and energy from organic waste streams using anaerobic digestion. Outside the UK and US, these activities are ongoing in China, South East Asia and Central America The Government: The role of the Government in the implementation of the project will be limited and will concentrate on two areas: (i) Implementation of the Kyoto Protocol and setting the rules and mechanisms allowing both public and private entitiesto produce and sell ER, in accordance with mechanisms established by the Kyoto Protocol and related negotiations; (ii) regulatory and oversight responsibilities of the respective power sector and environmental agencies as described below. 7. Sustainability The sub-project would strengthen the legal/regulatory/institutional framework and the involved agencies, and enhance private sector participation in the electricity sector. Results from this efforts ought to be sustainable, provided the underlying policies are maintained. The stability and continuity of the regulatory and policy environment is highly probable due to the results of the recent elections in Nicaragua. MARENA and CNE are fully committed in supporting this PCF-projects and are very interested in developing a pipeline of similar sub-projects in order to achieve local and global emission reductions. Thus, the eligible sub-projects that generate ERs for sale and transfer to the PCF may continue to produce ERs for sale on the international carbon market beyond the life of the umbrella project. In addition, it is expected that other RET projects in Nicaragua will generate ERs during the life of the PCF Umbrella Project that will benefit from the market access gained from implementation of this sub-project. Further, both sponsors have been in their business for several decades and, therefore, have a solid knowledge of their field. Industrias Gemina as well as Bronzeoak are financially viable. Regarding the technical sustainability the feasibility of the technical design was confirmed. The planned technology has been in use commercially for more than 100 years. It has been employed with a wide range of biomass fuels including rice husks. 8. Lessons learned from past operations in the country/sector The proposed Gemina Sub-project is one of the first projects of the PCF portfolio that is implemented by the private sector. This private sector orientation is essential in the case of Nicaragua where thel power sector activities are now developing. The experience with similar type of project that could be reflected in the project design is therefore very limited. Nevertheless, the project has benefited from the coordination and consultations with parallel PCF projects that are being developed in Latin America (Costa Rica, Colombia, and Chile). 9. Program of targeted intervention (PTI) n or ye? Not applicable -4-

5 10. Environment Aspects (including any public consultation). This category B project complies with the World Bank's environmental and social safeguard policies. The project area is not an existing industrial complex and does not cause any environmental nor social impacts. An environmental assessment was carried out in compliance with World Bank procedures, even thought Nicaraguan law did not require it. The Environmental Assessment Report (EAR) was submitted to the World Bank by project sponsors and was found to conform fully with Bank policy guidelines regarding environmental and social concerns. Proper participation was ensured through the Prototype Carbon Fund consultation procedures. 11. Contact Point: Task Manager Clemencia Torres de Mostle The World Bank 1818 H Street, N.W. Washington, D.C Telephone: For information on project related documents contact: The infoshop The World Bank 1818 H. Street, N.W. Washington, D.C Telephone: (202) Fax: (202) Web: htty:// This PID was processed by the InfoShop during the week ending June 28,