PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE

Transcription

1 Project Name Region Country PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: Mexico Municipal Energy Efficiency Project (PRESEM) LATIN AMERICA AND CARIBBEAN Mexico Sector(s) Energy efficiency in Heat and Power (100%) Theme(s) Project ID Borrower(s) Implementing Agency Environmental Category Date PID Prepared/Updated City-wide Infrastructure and Service Delivery (50%), Climate change (50%) P United Mexican States Secretaría de Energía (SENER, Ministry of Energy) B-Partial Assessment 29-Jul-2016 Estimated Date of Board Approval 31-Sep-2017 Concept Review Decisions a. To move ahead with project preparation and submission to the GEF council for consideration, conditional on RVP granting approval to proceed with preparation (as the project has not been under implementation for 12 months, not meeting the definition of a well-performing project, and thus requiring RVP approval to prepare the AF); b. The GEFSEC endorsed the project and it will be technically cleared by the GEF climate mitigation team for consideration of GEF management for inclusion in future GEF Work Program; c. To continue detailing key features of the facility s structure; d. To utilize the New Procurement framework (following the Transitional Arrangements for additional financing ); e. The overall risk rating of the operation remains substantial (as in the parent project); and f. Confirmation of: (i) the same environmental categorization (B) as the parent project; (ii) that there are no changes to the policies triggered (OP 4.01 Environmental Assessment, OP 4.11 Physical Cultural Resources and OP 7.50 International Waterways); and (iii) transfer of responsibility of review and clearance of safeguards oversight and management to the practice manager. 1

2 I. Introduction and Context Country Context 1. The Mexican economy continues to expand at a moderate annual rate of growth of 2.5 percent. Private consumption became the main driving force of economic activity on the back of stronger job creation, real wage growth, and credit expansion. At the same time, Mexico continues to advance on its ambitious structural reform agenda in the areas of labor, education, competition policy, financial sector, telecommunications and energy sector legislation aimed at raising productivity, competitiveness and potential output growth. According to the national, multidimensional poverty criteria, overall poverty headcount increased to 46.2 percent of the population in 2014 from 45.5 percent in 2012 whereas extreme poverty decreased slightly to 9.5 percent in 2014 from 9.8 percent two years earlier. In contrast, the number of people living below the global extreme poverty line of US$1.90 (2011 PPP) in 2012 in Mexico is now estimated at 5.9 percent of total population. 2. Mitigation and adaptation to climate change actions continue to be a national priority to President Peña Nieto s administration. Mexico s Intended Nationally Determined Contribution submitted to the United Nations Framework Convention on Climate Change (March, 2015) aims to achieve greenhouse gas (GHG) emission reduction target of 25 percent by This target could increase up to 40 percent, subject to availability of climate finance and multilateral support, and may reach 50 percent below 2000 levels by The National Climate Change Strategy (Estrategia Nacional de Cambio Climático, ENCC) is the guiding policy instrument that defines a range of actions to achieve these goals, including a renewed focus on efficient energy use and the transition into the development of sustainable cities, where many of the energy sector emissions take place. Sectoral and Institutional Context 3. There are several key institutions in Mexico s energy efficiency (EE) sector, led by the Ministry of Energy (Secretaría de Energía, SENER), the entity responsible for planning and formulating national energy policies. SENER is supported by regulatory and technical bodies, such as the National Commission for the Efficient Use of Energy (Comisión Nacional para el Uso Eficiente de la Energía, CONUEE). CONUEE drafts the National Program for the Sustainable Use of Energy (Programa Nacional para el Aprovechamiento Sustentable de la Energía, PRONASE) and is tasked with promoting the sustainable use of energy in all sectors and government levels by issuing guidance and providing technical assistance. The Electricity Energy Savings Trust Fund (Fideicomiso para el Ahorro de Energía Eléctrica, FIDE) a private non-profit trust fund (TF) provides technical and financial solutions for the deployment of energy efficient actions. To support the transition to clean and sustainable energy use, SENER has created the Energy Transition and Sustainable Energy Use Fund (Fondo para la Transición Energética y el Aprovechamiento Sustentable de la Energía, FOTEASE) that has become a crucial instrument to finance renewable energy and EE investments. 4. Mexico passed energy reform legislation ( ) aimed at increasing productivity, competition, and overall efficiency in the energy sector. The reform is opening-up domestic energy markets to private sector participation and also seeks to support the reduction of energy consumption through energy savings and efficiency initiatives. The National Energy Strategy (Estrategia Nacional de Energía, ENE ) has included EE as a transformational priority area for reducing the country s vulnerability by decreasing electricity demand, thereby helping lower GHG emissions in all sectors and government levels, including local governments. 5. In an urbanized context such as Mexico, expanding the provision of public sector services will likely increase municipalities energy expenditures. EE is a cost-effective way for municipalities to manage energy consumption and help in achieving GHG emissions reduction goals. Mexican 2

3 municipalities highest expenses after salaries are street lighting, water supply, and wastewater treatment. SL and water tariffs are among the highest of public sector services and tariffs There are various barriers affecting the implementation of municipal EE initiatives. Some of the key difficulties encountered by municipalities when implementing EE initiatives, in particular street lighting and water pumping improvements, include a lack of information and awareness, low technical and implementation capacity, misaligned incentives, restrictive procedures and lack of access to financing. 7. The World Bank and Mexico have had a long and solid engagement in the energy sector, which includes investment operations and advisory support. The Low Carbon Development for Mexico (MEDEC) study contributed to the development of several energy efficiency operations, such as the Low Carbon Development Policy Loan and the Efficient Lighting and Appliances Project. The Bank is collaborating with Mexico s participation on the Partnership for Market Readiness (PMR) through which it is developing Nationally Appropriate Mitigation Action Plans (NAMAs) on urban energy efficiency and appliance efficiency. The Bank also supported SENER in the implementation of the Tool for Rapid Assessment of City Energy (TRACE) in 32 Mexican municipalities that has been of particular relevance to these relationship. 2 Important outcomes after implementing TRACE include the municipality of Leon s packaging of its priority interventions under a local sustainable development program through which it could better articulate its policy and leverage funding, as well as the opportunity to design the PRESEM Project, which has strengthened the Bank s engagement on energy efficiency and the climate change agenda. The Municipal Energy Efficiency Project (PRESEM) 8. The US$156 million IPF (of which US$100 million IBRD, US$7 million GoM and US$49 million from municipal entities) was approved by the World Bank s Executive Board on March 8, 2016, and was effective on September 23, The PRESEM s PDO is to promote the efficient use of energy in the Borrower s municipalities by carrying out energy efficiency investments in selected municipal sectors and contribute to strengthening the enabling environment. The project will be implemented by SENER over a five-year period. The operation s closing date is October 31, No closing date extension is necessary to accommodate the GEF grant. The Project consists of two components: a. Component 1 Policy development and institutional strengthening: Seeks to strengthen the enabling environment for energy efficiency at the municipal level, and contribute to the identification of potential subprojects that can feed into a pipeline beyond the project s life; and b. Component 2 Municipal energy efficiency investments: Supports cost-effective energy efficiency investments in municipal street lighting, water and wastewater, and municipal building sectors. 1 Public sector tariffs exist for three sectors only: (a) water pumping, (b) SL for Mexico City, Guadalajara and Monterrey, and (c) SL for the rest of the country. There is no public sector tariff for public buildings. Even if special tariffs for SL and water supply and treatment exist, some operators have switched to medium voltage tariffs to reduce costs. 2 The diagnostics were prepared from September 2014 to May 2015 with support from the Global Environment Facility (GEF) financing from the Bank s Efficient Lighting and Appliances Project. In municipalities that had a climate action plan (the ICLEI s PACMUN tool or other similar tool), the information was reviewed as part of the data gathering assessment. 3

4 9. Overall project coordination and implementation of the PRESEM Project is the responsibility of SENER. The operation channels the loan and counterpart funds through the Energy Transition and Sustainable Use of Energy Fund (FOTEASE). SENER leads the implementation of activities under Component 1. The Electricity Savings Trust Fund (FIDE) executes as Operator the activities considered under Component 2, for which it has signed an agreement with SENER. FIDE also has an agreement with the Federal Electricity Commission (CFE), through which the utility supports project execution by recognizing energy savings and recovering contributions from municipalities and water and wastewater utilities through electricity bills. Depending on the size and recovery period of each subproject, a direct support is provided, which means that no municipality or water utility will have to pay in full the costs of the subproject being implemented The Project relies in the use of Energy Service Agreements (ESAs), an innovative mechanism to finance energy efficiency projects in the public sector. FIDE and SENER will enter into an ESA with a subnational entity, agreeing to continue paying its energy bills (a reduced amount due to the energy efficiency intervention), plus a contribution to partially repay investment costs. Both payments would equal the old electricity bill the entity was paying. FIDE will then prepare and bid out the subproject 4 on the subnational entities behalf, CFE would continue collecting the energy bill and send the subnational entities contributions to FIDE, which would transfer the funds to the FOTEASE for reinvestment on energy efficiency issues (creating a revolving fund). Through this scheme the subnational entity does not incur in debt and implementation is outsourced to a competent entity (FIDE). 11. The operation is progressing as planned. The Project became effective on September 23, SENER is advancing on preparatory activities to set the Project in motion. These include the hiring of key PIU members and the preparation of energy efficiency audits for the first pipeline of five subprojects (to be financed on street lighting in the municipalities of Veracruz and Leon, municipal buildings in the municipalities of Los Cabos and Puebla, and water pumping in the water utility of Huamantla). Additional Financing to PRESEM for a Municipal Energy Efficiency Contingency Facility 12. Project preparation included support by the proposed GEF grant. The PRESEM Project Appraisal Document mentions the use of GEF System for Transport Allocation Resources (GEF-STAR) resources for a contingency facility for the repayment by the municipalities to help reduce the subnational non-payment risk. 5 However, the GEF-STAR project cycle prevented the preparation of a blended operation. On March 1st, 2016, the Bank received a letter from Mexico s Ministry of Finance and Public Credit (SHCP) endorsing a GEF operation to support the creation of a contingency facility under PRESEM. 13. The processing of the GEF-STAR resources as an Additional Finance will increase the development impact by combining the two operations and has considerable savings in transaction costs 3 All subprojects would receive a minimum 30 percent direct support, regardless of their financial viability and in order to address high transaction costs and perceived high risks for all parties. The non-reimbursable support could exceed 30 percent if needed to bring the payback period to less than 6 years or two municipal terms: (i) up to 40 percent of total investment for subprojects of up to US$2 million; and (ii) up to 70 percent for investments over US$2 million. 4 To be financeable, prepared subprojects would need to demonstrate acceptable levels of economic efficiency and energy savings, as defined here: (i) at least 20 percent energy savings; (ii) economic internal rate of return (EIRR) of at least 7 percent (calculated excluding any direct support); and (iii) minimum subproject cost of US$1 million; and maximum cost of US$15 million for SL, US$4 million for OOs, and US$2 million for MBs. 5 See PRESEM Project Appraisal Document, page 7, paragraph 24. 4

5 while allowing faster preparation. The fast processing would allow the contingency facility to be ready when the first sub-projects are implemented. 14. The Additional Financing would support activities that scale-up the Project by creating a municipal energy efficiency contingency facility that would help to partially cover the non-payment risks associated with Mexican municipalities and municipal water utilities (subnational entities). The US$5.79 million GEF grant would capitalize a contingency facility to be triggered in the event of a subnational entity does not repay its agreed contributions to FIDE (and thereby to FOTEASE). The contingency facility would lower risks taken by FOTEASE, and help establish a mechanism that by reducing the risk can help build confidence on the implementation of municipal energy efficiency measures and energy service agreements. The contingency facility would considerably reduce the risks associated with municipal default, a major barrier for the adoption of energy efficiency investments in Mexico. 15. The GEF support would also help ensure a continuous flow of funds to establish the revolving fund for energy efficiency investments. If a subnational entity would not comply with its payment obligations, the contingency facility would be triggered and FOTEASE could partially recover its investments and place them in the revolving fund. Increasing the size of the revolving fund would help the realization of more energy efficiency investments in subnational entities, and increase the number of municipalities where interventions could be financed by the Project, helping to scale-up its implementation. The contingency facility would provide an assurance of operational stability of the ESA scheme, especially in the early learning phase of the implementation by: (i) smoothing out the potential interruptions of repayment cash flow caused by temporary delays; and (ii) demonstrating a functional risk mitigation mechanism (when needed) which could in the future help attract commercial financing for ESAs. Relationship to CAS 16. The proposed Additional Financing is aligned with the Bank s Country Partnership Strategy for FY In particular, the operation would support Pillar I, Unleashing Productivity, by promoting enhanced public sector services and facilitating access to finance, and Pillar IV, Promoting Green and Inclusive Growth, by supporting efficient use of energy and natural resources. II. Proposed Development Objective(s) Proposed Development Objective(s) (From PCN) 17. The development objective of the Project is to promote the efficient use of energy in the Borrower s municipalities by carrying out energy efficiency investments in selected municipal sectors and contribute to strengthening the enabling environment. 18. The Additional financing operation will require updating the results framework by including the indicator on projected lifetime direct GHG emission reductions as PDO indicator instead of the intermediate level. 19. Regarding GHG emission reductions (tco 2) indicators, for purposes of the AF, indirect benefits would also be accounted as per the GEF methodologies. The operation would now also consider indirect 6 Endorsed by the Board of Executive Directors on December 12,

6 benefits and all emission reductions would be estimated over a 20 years lifetime, 7 which will be an indicator reported to GEF. Key Results (From PCN) 20. The PDO level indicators now would be: (a) Projected lifetime energy savings (MWh) - (Core); (b) Number of Energy Services Agreements (ESAs) signed; (c) Projected lifetime direct GHG emission reductions (tco2) (Tons/year); (d) Framework to scale up municipal EE in the country; III. Preliminary Description Concept Description 21. The GoM has requested the World Bank s assistance and endorsed the preparation of and Additional Finance using GEF grant resources for the Mexico Municipal Energy Efficiency Project, to develop a contingency facility to cover the non-payment risk of the agreed contributions from municipality or municipal water utility. 8 SENER would implement the proposed US$5.79 million GEF investment operation over the lifetime of PRESEM, and would scale-up its Component 2 (municipal EE investments). The project structure of the Additional Finance will be the same as that of the parent project: a. Component 1 Policy development and institutional strengthening. Additional resources for US$0.34 million 9 (from GEF) would be allocated to finance monitoring and management activities related only to the utilization of GEF grant. 10 All activities under this component would continue to be led and executed by SENER; and b. Component 2 Municipal energy efficiency investments. This component would create and capitalize a US$5.45 million (from GEF) 11 contingency facility to partially cover the risk of default from municipalities and water utilities benefiting from the implementation of energy efficiency investments in municipal street lighting, water and wastewater, and municipal building sector. 12 The component would continue to be operated by FIDE, with support from CFE and SENER. 22. The proposed activities would rely on the existing operational and financial mechanisms under PRESEM. Overall coordination and Project implementation would be the responsibility of SENER, 7 Under such assumptions, direct and indirect GHG emissions reductions would amount to 4,713,729 tco2, while PRESEM originally considered only direct GHG emission reductions over an 8 year lifetime (463,405 tco2). 8 SENER worked with the National Federalism and Municipal Development Institute (INAFED for its acronym in Spanish) to select 32 municipalities one in each state of Mexico where the project will operate. Municipal EE diagnostics using TRACE tool have been performed as part of PRESEM preparation. 9 Complemented by US$7 million from PRESEM (of which US$1 million SENER and US$6 million IBRD). 10 Most project management costs would be financed with IBRD and counterpart funding. 11 Complemented by US$ million from PRESEM (of which US$6 million SENER, US$49 million municipalities and water and wastewater utilities through repayment scheme, and US$93.75 million IBRD. 12 The sectoral scope of the investments was decided based on the following criteria: (a) these areas were found to have significant untapped energy efficiency potential that can be undertaken directly by the municipality or the water utility; (b) the SENER s sphere of influence lies directly in the energy sector, which in practical terms means the provision of electricity by the CFE; and (c) the use of energy service agreements (ESAs) which allow municipalities to use electricity savings to partially repay energy efficiency investments (performed by the FIDE) and which rely on the CFE s electricity bill. 6

7 through its General Directorate of Efficiency and Sustainable Energy (Dirección General de Eficiencia y Sustentabilidad Energética), and would be supported by the Responsible Project Implementing Unit (Unidad Responsable Ejecutora del Proyecto, UREP). 13 SENER would rely on UREP s in-depth experience implementing Bank-financed projects to handle all procurement and financial management (FM) issues. UREP would be strengthened to have sufficient capacity in technical issues, safeguards compliance, and monitoring. SENER would ensure that appropriate implementation arrangements are in place and that all activities being developed by FIDE are done in accordance with project design and Bank policies. 23. FIDE would execute and manage as Operator the contingency facility under Component 2, for which it would enter into a new agreement with SENER. 14 FIDE s capacity has been proven through the implementation of: (i) PRESEM, (ii) IBRD and GEF-financed Efficient Lighting and Appliances Project (that included a guarantee facility for US$35 million, of which US$5 million came from GEF); and (iii) its own projects. The entity has more than 10 years of experience implementing energy efficiency projects with municipalities, although it had previously disengaged itself due to the municipalities lack of financing capacity. The Bank has provided capacity building to FIDE on its procurement and financial management guidelines, and will organize capacity building activities during implementation, focusing on the creation and management of the contingency facility. 24. The contingency facility would backstop the default of municipalities or water utilities benefiting from the implementation of energy efficiency investments (under PRESEM) for up to 6 months. GEF resources would be channeled to FIDE through the FOTEASE. 15 FIDE would keep and manage those resources until the end of the Project, after which remaining funds would be transferred to FOTEASE. 25. Overall, the contingency facility would work as follows (see Figure 1): a. CFE would report to FIDE that a beneficiary did not pay in full the amount committed for that month under the ESA. FIDE would contact the beneficiary and insist by different means 16 on its contractual obligation to pay. 17 In case the municipality or water utility does not pay the provision of the electricity to service as well, CFE will also follow-up with that beneficiary. b. If in the next 6 months the beneficiary pays its contribution, FIDE will send the recovered resources back to FOTEASE, following the normal mechanism. c. However, if after 6 months, the beneficiary has still not paid back its contribution FIDE would trigger the contingency facility, 18 which would cover up to 6 months of nonpayment. FOTEASE would receive these resources and could temporarily write-off the subproject. The triggering of the contingency facility would not mean that FIDE would stop with all its efforts to recover the beneficiaries agreed contributions. 13 UREP was created to support Bank-based projects. Past projects managed by this unit include the M Efficient Lighting and Appliances project (Loan LN 7996, and its two related grants trust fund TF and TF98465), M Integrated Energy Services (LN7501 and its related GEF Grant TF91733) and one stand along GEF Grant (TF56781, Large-scale Renewable Energy Development Project). 14 As mentioned before, FIDE is already subscribing other collaboration agreements under PRESEM that will also help operationalize this Project and reduce charging administrative costs to the GEF grant. 15 The FOTEASE has been used in previous Bank financed operations since Including phone calls, s, visits, invoices, etc. 17 The cost of all these actions are being covered and paid for under PRESEM. 18 Based on available resources, it is estimated that the contingency facility could cover up to 6 months of payment obligations for every subproject. 7

8 d. If a beneficiary that had defaulted paid (after the triggering of the contingency facility) the corresponding amount would be kept by FIDE (to replenish the facility) and any additional resources would be sent to FOTEASE. e. By Project closing, any funds remaining in the contingency facility would be transferred to FOTEASE to settle any balances and/or to seek further financing EE projects. Figure 1. Operational and Financial Mechanism Contin gency Facility 26. The contingency facility would be located in FIDE s financial division, which is separate from the operational division dealing with beneficiaries. It would be in FIDE s best interest to ensure that despite the existence of the contingency facility municipalities pay back, as an increased default rate would negatively affect the whole operation of the program, thus reducing FIDE s roles, activities and income. 27. Regarding safeguards, the existing framework has been assessed as fully adequate given that the scope of planned investments is not being modified. As a result, the Additional Finance is proposed to have the same environmental rating (B) and the same safeguards originally triggered, as described in the PAD. PRESEM s ESMF 19 already deals with all envisioned impacts of the operation, including waste disposal (for lighting fixtures such as mercury and buildings including asbestos). All investment safeguard impacts have been addressed through the existing parent project ESMF. Overall safeguards rating is rated satisfactory; the project team has carried out safeguards trainings to SENER and FIDE, and FIDE has appointed an experienced staff member as overall safeguard coordinator for PRESEM s Component 2 activities. 19 Available on-line at: 8

9 IV. Safeguard Policies that Might Apply Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment OP/BP 4.01 Natural Habitats OP/BP 4.04 Forests OP/BP 4.36 Pest Management OP 4.09 Physical Cultural Resources OP/BP 4.11 Indigenous Peoples OP/BP 4.10 Involuntary Resettlement OP/BP 4.12 Safety of Dams OP/BP 4.37 Projects on International Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP 7.60 V. Financing (in USD Million) Total Project Cost: Total Bank Financing: Financing Gap: 0.00 Financing Source Amount Borrower 7.00 International Bank for Reconstruction and Development Local Governments (Provincial, District, City) of Borrowing Country [Subnational Entities] Global Environment Facility 5.79 Total VI. Contact point. World Bank Contact: Janina Franco Title: Sr. Energy Specialist Tel: Borrower/Client/Recipient Name: United Mexican States Contact: Ana Daniela Torres Peláez Title: Directora de Organismos Financieros Internacionales Tel: Including US$100 million IBRD loan and US$5.79 million GEF grant (US$6.34 million minus US$0.55 million agency fee 9.5 percent). 9

10 Implementing Agencies Name: Secretaría de Energía (SENER) Contact: Santiago Creuheras Díaz Title: Director General de Eficiencia Energética e Innovación Tel: screuheras@energia.gob.mx. VII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: 10