of the Commission Decision on the Annual Action Programme 2013 in favour of Tanzania to be financed from the 10 th European Development Fund

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1 ANNEX 3 of the Commission Decision on the Annual Action Programme 2013 in favour of Tanzania to be financed from the 10 th European Development Fund Action Fiche for Zanzibar Renewable Energies and Energy Efficiency 1. IDENTIFICATION Title/Number Zanzibar Renewable Energies and Energy Efficiency CRIS number: TZ/FED/ Total cost Total estimated cost: EUR Aid method / Method of implementation DAC-code Total amount of EDF contribution: EUR (Envelope A) Project Approach Partially decentralised management with United Republic of Tanzania Sector Energy policy and administrative management Power generation/ renewable sources 2. RATIONALE AND CONTEXT 2.1. Summary of the action and its objectives The objective of this Action is to promote energy efficiency programmes and adequate regulatory and institutional development by supporting Zanzibar authorities in the implementation of renewable energies technology. The main actions will entail the following activities: - Supply of measurement equipment to be used for data collection and modelling (wind and solar); - Technical Assistance (TA) assignment with two components: 1) investigate further options for renewable energy development and energy efficiency projects and 2) regulatory framework revision and capacity building activities. At the end of the implementation period it is expected that the capacity development plans are approved and adopted, that qualitative and quantitative data (wind maps, solar and biogas) on renewable energies and energy efficiency is available for strategic sector decisions and projects on renewable energies and energy efficiency are identified and approved for implementation. 1

2 2.2. Context Country context Economic and social situation and poverty analysis Zanzibar consists of two main islands of Unguja and Pemba and a number of other small islets. The islands are located in the Indian Ocean about 40 kms off the mainland coast of Tanzania. Unguja has an area of 1,464 square kilometers while Pemba has a land area of 868 square kilometers. Zanzibar has a small but rapidly growing population. According to the HBS survey, the total population of Zanzibar is million. The population growth rate is estimated at 3.1 % annually, which exerts an increasing pressure on the island s energy supply. The gross domestic product (GDP) estimates at current prices reached TZS 1,198.0 billion in 2011 compared to TZS billion in The constant GDP growth rate is 6.8 per cent in 2011 compared to 6.4 per cent in The per capita GDP rose to TZS 960 thousand (EUR 480) in the year 2011, compared to 215 Euro in the mainland, illustrating the higher standard of living of Zanzibar and higher capacity to pay for energy services. 47% of the population still lives below the poverty line and households presently spend 17.9% of their revenue on average on energy, water and housing. Both Unguja and Pemba islands have a well-developed road network that spans practically the entire islands. There are no parts that would be further than 15 km from a main road. The remotest parts of both islands are their Northern tips which are only reachable by unsealed roads. However, roads are narrow at some points and harbours are not well equipped to handle large and heavy cargo National development policy The strategic priorities for the energy sector in Zanzibar are detailed in the following: The Zanzibar Strategy for Growth and Reduction of Poverty (MKUZA II) document of the Revolutionary Government of Zanzibar - the document deals only marginally with electricity and identifies security of supply and environment as the main concerns. The Revisited Zanzibar 2020 Vision which proposes more diversified priorities and objectives than the MKUZA II; The Business Plan of the Zanzibar Electricity Corporation (ZECO) from 2010/2011 to 2013/2014 (Zanzibar Electricity Company), which prioritizes reliability of supply and access (it envisages new grid-based connections annually). The analysis of the above was complemented by discussions with the members of the Planning Commission of Zanzibar as well as the analysis of the policy and strategy documentation for the entire Tanzania economy, in particular its energy sector. The more detailed overview of energy priorities in Zanzibar is presented in Table 1. Energy Sector Priorities in Zanzibar Economic and Energy Policy Documents MKUZA II 2020 VISION ENERGY POLICY STRATEGIC PLAN ZECO BUSINESS PLAN Energy High priority Medium priority High priority 2

3 Independence Energy Security High priority High priority High priority Medium priority (increase capacity) Cost of production Medium priority Low priority High priority Low priority Medium GHG emissions High priority High priority (production of RE) Access High priority Low priority) High priority Preliminary indications suggest that the main priorities of the Zanzibar Government in the energy sector are: (i) reliability of supply, particularly in light of the dramatic consequences of the power cut and present occasional power shedding; (ii) energy independence, due to projected price escalation of electricity supplied by TANESCO (Tanzania Mainland Electricity Company); (iii) cost of energy production with regard to affordability and competitiveness concerns; and (iv) environmental considerations. The proposed project is thus in line with main priorities identified in the Zanzibar policy documents and the EU energy policy. Energy is not a Union matter (not part of the competences of the United Republic of Tanzania, but of the Revolutionary Government of Zanzibar) and despite the development and adoption of an Energy Policy in 2003 in Tanzania mainland, there is no specific energy legislation in Zanzibar. The only legislation that is enacted is the Petroleum Levy Act. The Ministry responsible for energy has specific legislation (acts), which enforces energy issues (petroleum and renewable energy) Sector context: policies and challenges Tanzania is seeking to reduce its dependence from electricity imports and its exposure to oil price volatility. In this framework, and in recognition of the vulnerability of Zanzibar s electricity supply sector to interruptions, the EU has been requested to support the assessment of the feasibility of using local, renewable energy sources available in Zanzibar. This is now a pressing issue as the Zanzibari population growth rate is estimated at 3.1 % annually which exerts an increasing pressure on the island s energy supply (total population: million). The GDP estimates at Current prices reached TZS 1,198.0 billion in 2011 and the growth rate was 6.8 per cent; the major activities contributing to this growth are Agriculture, Fishing, Trade, Tourism and Restaurants. The strategic priorities for the sector are presented in the MKUZA I and II; 1 Revisited Zanzibar Vision , The Energy Sector Policy 3, Strategic Plan and ZECO Business Plan 5. The Energy sector in Zanzibar is under the responsibility of the Ministry of Lands, Housing, Water, and Energy (MLHWE) and involves the following departments and agencies: The Department of Energy and Minerals (DoEM), which is in charge of Energy policy implementation and monitoring, sector regulation including tariff, studies and supervision of energy sector public enterprises, including ZECO. The DoEM has 2 1 The Zanzibar Strategy for Growth and Reduction of Poverty: (ZSGRP) MKUZA II, RGoZ, October The Revisited Zanzibar Vision 2020, RGoZ, October Zanzibar Energy Policy, Ministry of Water, Construction, Energy and Land, 8 th December The Strategic Plan , Ministry of Land, Hosing, Water and Energy, July ZECO Business Plan 2010/2011 to 2013/14, ZECO, March

4 new divisions, one in charge of Renewable Energy, another one in charge of Energy demand including Energy Efficiency; The Directorate of Policy and Planning in charge of policies and planning for all the sectors covered by the MLHWE, including Energy; The Zanzibar Electricity Corporation (ZECO), manager of the power system. ZECO was established in 2006 and is operating under the Zanzibar Electricity Corporation Act No.3 of 5th of May Today ZECO supplies power on both islands, Unguja and Pemba, and receives the bulk of its supply under a power purchase agreement with TANESCO via two undersea cables. In addition, the Ministry responsible for Finance also has a large regulatory role and influence (eg. on the fossil fuel trading) exerted through the Public Investment Commissioner, acting under the regulations of the Public Investment Act of At present, however, there is limited capacity to regulate energy supply and demand, and more efforts are needed to reinforce the DoEM which is under reorganisation. The energy demand is projected to increase by 11% per year in the base case of the Planning Commission, and 13% in the Vision 2020 scenario. The total demand will reach 735 GWh by 2020 and 2,719 GWh by 2032, starting from an un-constrained demand of 287 GWh in These projections indicate that Zanzibar s power sector needs major investments in order to ensure that a rapidly growing demand is met. In addition there is concern about the present 100% dependence of Zanzibar on imported electricity creating the risk of unstable electricity bulk supply price, which is driven by the widely fluctuating international price of energy and by the prospects for rising electricity production cost in the Tanzania mainland. A full range of renewable energy opportunities has been assessed in the preliminary EU funded study (Feb 2012) in order to determine interventions with the best cost benefit ratio. The study identified potential for the development of wind, solar and landfill gas energy. Concerning energy efficiency, the study identified the following areas of intervention: high efficiency lighting for households, energy saving in hotels (solar water heaters, improved air conditioners), improved stoves (firewood, charcoal and agriculture residues represent more than 80% of energy consumed in Zanzibar). The study also concluded that, in terms of implementation, the main challenges are the lack of capacity of DoEM and ZECO in renewable energies and energy efficiency projects and the low electricity tariffs Lessons learnt The EU has not been previously engaged in Zanzibar in this sector (except for the 2012 assessment study) and the support from other development partners is rather recent. Nevertheless, the experience in the Tanzania mainland provides some guidance on how to catalyze the support and overcome the main challenges. From the EU perspective, the energy issues can only be addressed through an integrated approach, combining better legislation and regulation, promotion of renewable energy sources and energy efficiency projects, decentralised solutions in rural areas, better management of forests resources and integration of climate change issues in all response strategies. The priorities identified in the assessment have been recognized by the main stakeholders and Zanzibar authorities have expressed a clear interest to develop a long lasting partnership with 4

5 the EU to create a conducive regulatory and institutional framework for innovative solutions based on renewable energy Complementary actions At present, capacities and knowledge in the Renewable Energy & Energy Efficiency (RE & EE) fields are very limited in Zanzibar and several Development Partners are more focused on improving the capacities of ZECO rather than on promoting RE/EE concepts. The main external funded programs in the Zanzibar energy sector are: - The Millenium Challenge Cooperation (MCC) has funded a second 100MW capacity cable between the mainland and Unguja to be connected early 2013, + technical support to ZECO for losses reduction. - The Norwegian Agency for Development Cooperation (NORAD) is involved in cooperation with ZECO for several years: installation of a 25MW capacity cable between Tanga (mainland) and Pemba (2010), rural electrification especially in Pemba and ongoing actions such as: capacity building for maintenance and development of monitoring system for power transmission, rural electrification and grid extension, development of an electrification master plan including emergency generation project for Unguja.. - The Swedish International Development Cooperation Agency (SIDA) has funded several studies for ZECO (financial turn-round, pay your bill campaign, business plan) and for MLHWE: Zanzibar Diagnostic Energy Supply (2005), Energy Policy (2011) + Energy Master Plan and Energy Efficiency Master Plan which are ongoing. - The Japan International Cooperation Agency (JICA) has funded Zanzibar Water Authority (ZAWA) which had in the past the same problems as ZECO (non-technical losses and low tariffs) and ZECO transmission upgrade and reinforcement program covering the main North-South system backbone. - UNDAP is now preparing a technical assistance to DoEM for an Energy Efficiency awareness campaign combined with review of legislation, review of tax for importations and promotion of gas rather than firewood Donor coordination In 2006 the Government of Tanzania has adopted a road map for sector transformation geared at addressing the various bottlenecks in broad terms, and to improve the coordination of the many government and donor funded programmes within the sector. The Development Partners Group on Energy (DPG Energy) in Tanzania is now coordinated by SIDA and includes basically all donors active in Zanzibar: MCC, NORAD, JICA and EU. The main objective of the DPG is to improve dialogue through sector monitoring, identification of bottlenecks, support to jointly undertaken challenges and catalyze strategic approach. A Joint Energy Sector Review Report is prepared every year and a project matrix is periodically updated for DPG purposes. There is no specific matrix for Zanzibar s projects as they are included in the all Tanzania matrix. The coordination of sector issues relating specifically to Zanzibar is addressed within DPG on a case by case basis. 5

6 3. DETAILED DESCRIPTION 3.1. Objectives The global objective is to support Tanzania in developing interventions promoting socioeconomic development based on renewable energy and efficient energy management. The specific objective is to support the development of renewable energies technology in Zanzibar, promote implementation of energy efficiency programmes and adequate regulatory and institutional developments. This specific objective is exclusively linked to module as described under Expected results and main activities The main results to be achieved are as follows: R.1 - Wind farm potential assessed together with analysis of possible combinations with other sources of renewable energies, notably solar and landfill biogas; R.2 - Regulatory and institutional reforms to promote renewable energy projects and energy efficiency enhanced. Activities that will contribute to the achievement of these results are: A1.R1: Data collection, renewable energies resources analysis A2.R1: Logistics study for wind and solar farms A3.R1: Wind flow modelling for Selected Sites, output prediction for wind parks and solar PV farms A4.R1: Market assessment and economic analysis for renewable energy projects in Zanzibar A5.R1: Preliminary design for wind, solar farms, solar home systems and landfill gas project A6.R1: Evaluation of regulatory requirements for identified renewable energy projects A7.R1: Environmental and social impact assessment study A1.R2: Analysis of previous, existing and under preparation initiatives on small islands, A2.R2: Analysis of existing and under preparation regulations, institutional arrangements and financial instruments A3.R2: Analysis of barriers to the development of renewable energy & energy efficiency in Zanzibar A4.R2: Identification of application areas and specific regulations and incentives proposals for renewable energy & energy efficiency development A5.R2: Capacity building for renewable energy & energy efficiency development including funds (CDM, etc.) and financing mobilization A6.R2: Analysis of the need for a specific renewable energy & energy efficiency Agency, defining its role and responsibility 3.3. Risks and assumptions The main assumptions, which may have an impact on the successful implementation of the project, are: Specifications for wind measurement tender are timely prepared, agreed, and tender launched before approval of the project; Sites for installation of wind masts are confirmed and agreed by Zanzibar s stakeholders in the early stage of project implementation; Sustained political support for the development of renewable energy to substitute imported energy is maintained; 6

7 Appropriate sites are selected and agreed for renewable energy & energy efficiency projects; Sustained Revolutionary Government of Zanzibar support to the development of specific regulations and institutions for renewable energy and energy efficiency; Suitable electricity tariffs to develop renewable energy and energy efficiency projects, and attract investors and development banks have been identified; Sufficient institutional/ management capacity within ZECO and DoEM exists to host and oversee project implementation. Project risks are tied to the non-fulfillment of the assumptions outlined above. Of these, the continued political support risk is the most serious in the sense that it would undermine the project purpose. Another serious real risk is that of reluctance to change existing practices of reliance on lowcost imported energy. In this event, project outputs could be of little practical value since political will and commitment to address the obstacles to renewable energy & energy efficiency development is a precondition for the project to be successful. In order to minimize the resource risk for all potential stakeholders, it is envisaged to establish high quality data for the wind, landfill gas and solar resource as well as for the operational characteristics of the current power grids (load curves at critical system nods, losses, fuel consumptions, power quality etc). These data series are critical inputs for adequate design and they will mainly be generated by the project. The overall strategy to mitigate the risks is based on the close coordination with other Development Partners and on the agreed framework for implementation to be confirmed by the Financing Agreement Cross-cutting issues Cross-cutting issues, mainly the environmental impacts, climate change adaptation and mitigation measures, social and gender impacts, will be taken into account during the execution of the feasibility study and incorporated in the preparatory activities for the detailed design Stakeholders The key stakeholders involved in implementation of the project are the Ministry of Land, Housing, Water and Energy (MLHWE) and its Department of Energy and Minerals (DoEM) as entities managing the national energy issues in Zanzibar and ZECO as energy supplier. In addition, the Deputy NAO in Zanzibar, based in the Ministry of Finance will be the Contracting Authority responsible for the overall coordination of intervention. There is no specific Agency in charge of all dimensions to be covered in the Renewable Energy and Energy Efficiency sub-sectors. It is assumed that the DoEM will be the main counterpart for sector policies and ZECO for implementation. 7

8 4. IMPLEMENTATION ISSUES 4.1. Financing agreement In order to implement this action, it is foreseen to conclude a Financing Agreement with the United Republic of Tanzania, referred to in Article 184(2)(b) of the Financial Regulation or in Article 17 of Annex IV to the Cotonou Agreement Indicative operational implementation period The indicative operational implementation period of this action, during which the activities described in sections 3.2. and 4.3. will be carried out, is 60 months, subject to modifications to be agreed by the responsible authorising officer in the relevant agreements Implementation components and modules Partially decentralised management with the partner country This action with the objective of supporting the development of renewable energies technology in Zanzibar, promote implementation of energy efficiency programmes and adequate regulatory and institutional developments will be implemented through partially decentralised management with the United Republic of Tanzania in accordance with Articles 21 to 23 of the 10 th EDF Financial Regulation 215/2008 according to the following modalities: The partner country will act as the contracting authority for the procurement and grant procedures. The Commission will control ex ante all the procurement and grant procedures. Payments are executed by the Commission. The change of method of implementation constitutes a substantial change except where the Commission "re-centralises" or reduces the level of budget-implementation tasks previously entrusted to the beneficiary partner country. In accordance with Article 262(3) of the Rules of Application, the partner third country shall apply for procurement rules of Chapter 3 of Title IV of Part Two of the Financial Regulation. These rules as well as rules on grant procedures in accordance with Article 193 of the Financial Regulation will be laid down in the financing agreement concluded with the partner country. The contracting authority for the project shall be the National Authorising Officer (NAO) of the United Republic of Tanzania The National Authorising Officer will delegate this power to the Deputy National Authorising Officer in Zanzibar. The project supervisor shall be Ministry of Lands, Housing, Water, and Energy (MLHWE). A steering committee shall be set up to oversee and validate the overall direction and policy of the project (or other responsibilities to be specified). The project steering committee shall meet twice a year. 8

9 The two main public stakeholders are the Ministry Department of Energy and Minerals (DoEM) and the Zanzibar Electricity Company (ZECO). It is proposed to provide the necessary support through procurement of related supplies (one tender for measurement equipment) and services (one tender with two lots, lot 1 assessment of further options for renewable energies and lot 2 Institutional development and regulatory framework revision) 4.4. Scope of geographical eligibility for procurement in direct centralised and decentralised management The geographical eligibility in terms of place of establishment for participating in procurement procedures and in terms of origin of supplies and materials purchased as established in the basic act shall apply Indicative budget Module Amount in EUR Third party contribution Supplies contract (Supply and installation of wind and solar measurement equipment) Service Contract (Feasibility study + Regulatory framework and capacity development) Evaluation and audit Communication and visibility Contingencies Totals The above project will follow and build on a long term technical support to be provided during the preparatory phase until the start of the project. It is expected that during the preparatory phase the supplies and services tenders are prepared to allow a timely launch. The supplies (masts and measurement equipment) should be available at the time of starting the implementation of the services contract. For that purpose, the supply tender will be launched with a suspensive clause Performance monitoring All actions undertaken as a result of this programme will have only medium and long term impacts, in terms of energy saved or energy produced from renewable energy. No energy performance indicator will be available to measure the results of the programme at the end of the two-year period. The overall energy intensity of the economy would be meaningless for this programme. The indicators of progress to measure the achievements are mentioned below and further developed in the Logical Framework: 9

10 R.1 - Wind farm potential assessed together with analysis of possible combinations with other sources of renewable energies, notably solar and landfill biogas; - Wind monitoring masts and solar radiation meters installed on sites agreed by the beneficiary; - Data collection reports available every 6 months; - Logistic plan submitted and sites selected and agreed for wind park(s); - Feasibility of grid integration demonstrated (load flow simulation report accepted); - Market assessment report available; - Preliminary design of wind park(s); solar farm(s), solar home systems and landfill biogas projects done and feasibility studies available including economic analysis; - EIA/ SIA available and accepted by beneficiary and EU Delegation. R.2 - Regulatory and institutional reforms for renewable energy and energy efficiency projects enhanced. - Study about previous, existing and under preparation initiatives available; - Study of existing and under preparation regulations, institutions and financial instruments available; - Analysis of barriers to the development of renewable energy & energy efficiency in Zanzibar available, discussed and agreed by beneficiary; - Areas of application and specific regulations and incentives proposed to the RGoZ, and discussed during a workshop; - DoEM and ZECO staff trained, capacities improved, available for identification of new renewable energy & energy efficiency projects, 5 to 10 new projects identified; - Need for a specific renewable energy & energy efficiency Agency analysed and 'Yes or No' decision confirmed by beneficiary, business plan available for the entity in charge of renewable energy & energy efficiency development. As far as the project modality is concerned: (a) Day-to-day technical and financial monitoring will be a continuous process as part of the Beneficiary responsibilities. To this aim, the Deputy National Authorising Officer as key stakeholder shall establish a permanent internal, technical and financial, monitoring system to the project, which will be used to elaborate the progress reports. (b) Independent consultants recruited directly by the EU on specifically established terms of reference will carry out external monitoring (technical audits), which in principle will start from the second year of project Evaluation and audit Independent technical audit and evaluation will be undertaken at the end of project implementation and will be resourced from the Financing Agreement respective budget lines. The EU reserves the right to undertake additional audits and evaluations as it deems appropriate on behalf of and for the benefit of the NAO. In such cases the EU acts as Contracting Authority 4.8. Communication and visibility The proposed project will be summarised on the Delegation s website. Visibility of the European Commission will be promoted through a signing ceremony for the Financing 10

11 Agreement and press related events for important milestones of the implementation of the project. The Consultants responsible for implementation of Result 2 will at the inception of project prepare a communication and visibility plan for this and subsequent phases. This will be prepared according to EU guidelines. In addition, dissemination of information on the project outcome will be ensured through relevant data on the websites of MLHWE ( and ZECO ( accessible to the public 11