Preliminary Design Document SCF Program for Scaling-Up Renewable Energy in Low Income Countries (SREP)

Transcription

1 CIF/SREPWG/2 March 12, 2009 Working Group on Designing Program for Scaling-Up Renewable Energy Paris, France March 25-26, 2009 Preliminary Design Document SCF Program for Scaling-Up Renewable Energy in Low Income Countries (SREP)

2 Table of Contents PREAMBLE... 3 I. BACKGROUND... 5 II. OBJECTIVES AND PURPOSE OF SREP... 7 III. SREP DESIGN PRINCIPLES... 7 IV. COUNTRY ELIGIBILITY... 8 V. SELECTION OF PILOT PROGRAMS... 8 VI. SCOPE PILOT PROGRAMS... 9 VII. FINANCING MODALITIES VIII. PROGRAMMING PROCESSES IX. GOVEMANCE X MONITIORING AND EVALUATION...12 ANNEX : EXAMPLE[S] OF POTENTIAL TYPES OF INVESTMENTS OF THE SREP... 13

3 PREAMBLE (i) The Governance Framework of the Strategic Climate Fund (SCF) provides that within the framework of the SCF, targeted programs with dedicated funding (SCF Programs) can be established to provide financing to pilot new development approaches or scaled-up activities aimed at a specific climate change challenge or sectoral response. Resources will be mobilized and pledged to specific SCF Programs to be financed within the SCF. Arrangements to guide the SCF Programs, ensure effective partnerships, and provide accountability will be defined for each SCF Program to ensure the effective operations of the programs. (ii) After approval of the SCF, informal consultations on the design of a new targeted program to promote renewable energy in low income countries were undertaken: first, to gauge interest in contributing to such a program (held in conjunction with the CIF Pledging Meeting in September 2008), and second, to gather preliminary views on the scope of such a program (held in conjunction with the Partnership Forum in October 2008). (iii) On the basis of these consultations and further bilateral discussions, a preliminary concept note was submitted to the SCF Trust Fund Committee in January 2009 for discussion. The SCF Trust Fund Committee (TFC) reviewed the concept note and provided the following observations and guidance to assist the further development of the concept: (a) (b) (c) (d) (e) (f) it is important to attract private sector participation in the program; as a targeted program under the SCF, the SREP should be focused on transformation and climate impacts. The transformative goal of the SREP might be to shift low income pilot countries to a different model of energy use by providing an incentive to leapfrog to the use of renewable technologies. By changing the technological path in countries that do not yet have significant greenhouse gas emissions, the program could make an important development and climate impact; in selecting pilot programs, it is suggested that consideration be given to low income countries that could become globally significant contributors of greenhouse gases if their current path of technological development is not changed; the program should be complementary and additional to, and work in synergy with, other programs of the multilateral development banks and should seek to leverage bilateral co-financing; it will be important to clarify what is the appropriate balance between the climate focus of the program (generation and distribution of renewable energy) and the issue of access to energy in low income countries; and recognizing that this program is to focus on renewable energy, further consideration should be given by the Trust Fund Committee as to how will energy efficiency can be addressed under the SCF.

4 (iv) The Trust Fund Committee agreed to the following steps to elaborate the design of the program: (a) a working group should be convened to prepare an initial design document; (b) the design document prepared by the working group should be circulated for review and written comments. The design document should then be revised, on the basis of the comments received, and disseminated in advance of a design meeting to be convened in April. A second design meeting should be convened, if necessary, to reach consensus on a design document, in early May in advance of the next SCF Trust Fund Committee Meeting; and (c) the final design document should be submitted to the SCF Trust Fund Committee for its review and approval at its meeting to be held in May. (v) This document constitutes a preliminary draft design document for further consideration by the Working Group.

5 I. BACKGROUND 1. Low income countries face a dual challenge of increasing the availability of electricity and other commercial fuels needed for economic development and increasing access to the 1.5 billion people who have no access to electricity and are dependent almost wholly on traditional biomass fuels for energy services. The Figure 1 Sectoral Sectoral Fossil Use Energy of Fossil Use Energy (US in EIA, ) majority of the low income countries and Transport populations are in Sub- Industrial Saharan Africa and Residential/Commercial Asia, and electricity access is about percent in Africa and 52 percent in Asia. In a vast majority of these countries fossil energy use is highest in the residential and commercial sectors 50.0 followed by transport sector (Figure 1). 0.0 Millions of tons of oil equivalent Non-OECD ECA Non OECD Asia Middle East Africa LCR 2. Presently most low income countries have low emissions of greenhouse gases due to energy use. Economic development will require these low income countries to increase commercial energy use substantially. The International Energy Agency (IEA) expects that Africa will require an additional 250 million tons of oil equivalent (Mtoe) between 2006 and 2030 and Asia (other than China and India) will require an additional 400 Mtoe to achieve their economic development goals Renewable energy comprises approximately 18 percent of total global final energy consumption (Figure 2), of which, 72 percent is traditional, unsustainable use of biomass. The next largest renewable energy segment is large hydropower constituting 17 percent of total share of renewable energy. The balance 11 percent comprises other forms of renewable energy. Region 1 IEA, World Energy Outlook, 2008

6 Figure 2 Renewable Energy Share of Global Final Energy Consumption, 2006 ( 4. Low income countries are well endowed with renewable energy resources, though they use a tiny fraction of their potential. In Africa, less than 10 percent of their hydro potential is used. In Asia (excluding China), less than 25 percent is used. Africa is well endowed with geothermal resources, but excluding Kenya, little is used. Similarly, there is strong potential to develop wind, biomass and solar resources in most low income countries. While the opportunities are large in low income countries, if business-as-usual practices prevail, much of this large potential will remain unused, as it is today. 5. The need to ramp up modern energy use in low income countries coupled with the availability of exceptional renewable energy resources provide a fertile opportunity to help countries develop a renewable energy base that will allow them to leap-frog into a new pattern of energy generation and use. Increased financing is vital to catalyze such a transformative use of renewable energy. Such resources are needed to overcome the challenges to achieving this potential: a) lack of access to capital: there is a funding gap for renewable energy as commercial lenders are often unwilling to finance such investments. The capital intensity of renewable energy investments further exacerbates the problem. When there are capital constraints, the tendency is to favor conventional energy projects that typically have low capital intensities; b) weak enabling environments: Few low income countries have in place an enabling environment necessary to promote renewable energy. It is necessary, therefore, to create an enabling environment by establishing the necessary policy, legal and regulatory frameworks, improving access to knowledge, and strengthening institutional capacities is essential to reduce risks and transactions costs, and thereby encourage renewable energy investment. c) need to engage public and private sector. the private sector and civil society can be effective in scaling up renewable energy investments if an enabling environment exists. This underscores the important role of the public sector in setting the policy and regulatory framework for private sector and civil society interventions and contributing to investments in the early stages of a transformative program.

7 d) lack of affordability: even with increased access to investment resources many potential customers may have limited financial resources to make energy purchases at a scale needed to make renewable energy businesses financially viable. II. OBJECTIVES AND PURPOSE OF SREP 5. The SCF Program for Scaling-up Renewable Energy in Low Income Countries (SREP) is proposed to be established to assist low income countries make a transformational change to low carbon energy pathways by optimally exploiting their renewable energy potential in place of fossil-based energy supply. 6. Transformational change would occur through greater public and private sector recognition of renewable energy, increased investor confidence, and improved market and financial conditions necessary for large scale replication of such applications. 7. The SREP could also help countries benefit from a number of co-benefits. Using renewable energy in place of conventional fuels could simultaneously address local air pollution reductions while reducing greenhouse gas emissions, contribute to climate resilience, and enhance energy security. 8. The SREP would co-finance multilateral development bank (MDB) lending programs and other available funds to invest in renewable energy technologies for electricity use [and thermal energy generation] in low income countries. III. SREP DESIGN PRINCIPLES 9. The SREP would be a pilot program aimed at demonstrating the economic, social and environmental viability of low carbon development pathways in the energy sector by creating new economic opportunities and increasing energy access through the use of renewable energy. Building on this aim and the principles of the SCF, SREP should: a) be country-led so that it is fully integrated into national energy plans and builds on, and draws benefit from, national policies; b) take a programmatic and outcome-focused approach for investing in renewable energy as an alternative to conventional energy sources such as coal or oil. A pilot program would consist of both renewable energy investments and technical assistance, together with support for policy changes to greatly increase the use of renewable energy; c) give priority to renewable energy investments that create value added in local economies, by targeting renewable energy technologies that allow for the generation and productive use2 of energy as well as community services such as health education and communication; 2 The working should develop an appropriate definition of productive use.

8 d) commit sufficient SREP funding and leverage significant additional financing from MDBs and from other public and private sources to achieve large scale renewable energy impacts; e) work in a small number of low income countries, selected on the basis of objective criteria, to maximize its impact and the demonstrative effect; f) utilize the transformational potential of the private sector and civil society groups to achieve economic development and support long-term social and environmental sustainability; and g) seek wider co-benefits, such as reduced local pollution and increased energy security. IV. COUNTRY ELIGIBILITY 11. A country eligible for participating in SREP pilots would be: a) a low income country eligible for MDB concessional financing (i.e., IDA or a regional development bank s equivalent); b) engaged in an active MDB country program. For this purpose, an active program means where an MDB has a lending program and/or on-going policy dialogue with the country. V. SELECTION OF PILOT PROGRAMS 12. SREP would support country or regional pilot programs 3. A minimum target funding level of US$250 million is proposed. The SREP Sub-Committee should determine the number of pilot programs and the level of funding for each pilot, taking into account, among other things, the resources available for the SREP and the objective of providing scaled-up resources in the pilot countries. Final selection of pilot countries will be made by the SREP Sub-Committee. 13. Selection of the pilot countries would be made by the SREP Sub-Committee on the basis of advice of an Expert Group to be established by the Sub-Committee. 14. The Expert Group should provide advice on selection of the pilot programs based on objective selection criteria, to be approved by the SREP Sub-Committee, such as: a) assessment of need, as determined by high dependence on conventional fuels for electricity generation, low electricity access, and/or high dependence on traditional use of biomass for thermal applications; 3 A regional or sub-regional program will be considered as one pilot under the SREP.

9 b) renewable energy resource potential in the country; willingness to take a programmatic approach to renewable energy development that could eventually move the country towards a low carbon development path in the energy sector; 4 c) distribution of pilots across regions, [recognizing that a majority of low income countries and their population are in Africa and Asia]. 15. Taking into account the recommendations of the Expert Group and in accordance with the country eligibility set out above, the SREP Sub-Committee will approve a list of pilot programs to be considered for financing under the SREP. The proposed countries would be invited to confirm their willingness to participate in the SREP. VI. SCOPE OF PILOT PROGRAMS 16. Investments in renewable energy programs for generation and use of energy could include the following: a) Grid and off-grid electricity services from new renewable energy technologies. For purposes of SREP, new renewable energy technologies should include solar, wind, biomass, geothermal, and hydropower with capacities up to 10 MW per facility (as defined in the WBG Strategic Framework on Development and Climate Change.) b) [Thermal applications in industry, agriculture or residential/commercial sectors, including increased and sustainable supply of biomass such as through sustainable community forests, solar and geothermal heating, biogas or other renewable-based fuels, and related efficient end-use technology.] 17. SREP would support complementary technical assistance as these are essential for transformative and enduring change. This could include support for planning and pre-investment studies, policy development, regulatory reform, and business development and capacity building as an integral and complementary part of renewable energy investment operations. SREP support would be available for co-funding the preparation of SREP programs and technical assistance during project implementation. 18. The following operational criteria would be used to prioritize and select activities to be funded by SREP under the pilot programs: a) Transformative impact. Country programs proposed for SREP financing would need to demonstrate how they will have a transformative effect in achieving national-scale outcomes. A key criterion would be how the project would lead to replication, particularly how it would remove barriers in the enabling environment beyond the immediate project boundary. b) Economic and social development impact. Proposals for SREP financing 4 Conditions needed for such transformation may include a willingness to adopt, or the existence of supportive regulatory structures and institutions (including agencies to promote/utilize renewable energy); an enabling business environment; sector-wide energy development strategies that are open to integrating renewable energy into energy access and supply enhancement programs; and good governance.

10 should demonstrate the generation of co-benefits. Economic development, poverty reduction and/or social development as well as environmental co-benefits would add to the value of a proposed SREP program. c) Economic and financial viability. Proposals should demonstrate the current and medium-term economic viability of the investments. d) Leveraging of additional resources. Preference should be given to public and private sector proposals that maximize the leverage of SREP funds. e) Implementation capacity. Programs may be executed through government agencies, financial intermediaries, private sector or civil society organizations. Preference should be given to proposals that build the implementation capacity and work with permanent institutions that could continue desired scale-up beyond SREP support. VII. FINANCING MODALITIES 19. SREP would offer a mixture of grants and highly concessional loan financing which would be blended with concessional financing available from the MDBs and which would leverage other public and private sector resources. 20. SREP would fund the additional cost necessary to make the project financially viable together with the cost of related technical assistance. It would use of a range of financial instruments. See Box 1 below for examples of potential financial instruments. Box 1: Examples of Financial Instruments SREP would utilize a range of financial instruments that are already available in MDBs. They include: a. Output-based aid to increase the affordability of provision of renewable energy services. The buydown will be available for renewable energy investments that are unaffordable for low income consumers. Such assistance should be tied to investments that meet economic and social sustainability criteria. Good principles of subsidies would be adhered to (e.g., time-bound or if justified over a longer period (such as in the case of lifeline tariffs) commitment by government to contribute), and transparently sourced and targeted). b. Investment financing using quasi-equity financing, debt, capital cost buy-down, production incentives or other financial instruments to make renewable energy investments and related transmission and distribution investments financially viable. c. Credit enhancement or risk mitigation that will leverage trade finance and short term working capital finance to renewable energy suppliers, provide partial risk coverage to investors that lack adequate credit history, limited collateral for securitizing the renewable energy loans or other risks. d. Financial intermediation grants that can be on-lent as loans through domestic financial institutions, including micro-finance institutions for renewable energy investments. VIII. PROGRAMMING PROCESSES 21. Once a country has confirmed its willingness to participate in a pilot program, the relevant MDBs would conduct a joint programming mission to consult the government on the design of the pilot program. During these consultations, the government and the MDBs should

11 engage appropriate UN agencies and other development partners, private sector, national civil society and other stakeholders on how the pilot program may assist the government to enhance the climate resilience of their national development plans, strategies and financing. A primary goal of the joint mission(s) is for the government and the MDBs to prepare jointly a succinct plan for SREP funding. 22. The plan would include the following: a) country context of the program (fit with national energy plans) and strategic goals, b) concept notes on the priority projects to be proposed to SREP for funding, and information on status of project preparation, c) proposed sequencing of investments, d) financing required for each project, and resources requested from the SREP. 23. The plan will be submitted to the SREP Sub-Committee for review and endorsement. 24. The further processing of activities identified in the programming plan will follow the MDBs policies and procedures for appraisal, MDB Board approval and supervision. A proposed program or projects, developed pursuant to the programming plan, will be circulated by the Administrative Unit, prior to its appraisal by the relevant MDB, to the SREP Sub-Committee for information. IX. GOVERNANCE 25. In accordance with the SCF Governance Framework, the SCF Trust Fund Committee should establish a SREP Sub-Committee consisting of: a) up to six representatives from contributor countries to the SREP, identified through a consultation among such countries (or potential contributors in respect of the first year of the SREP operations), but at least one of which should be a Member of the SCF Trust Fund Committee; b) a matching number of representatives from eligible recipient countries to the SREP, but at least one of which should be a Member of the SCF Trust Fund Committee. For the purpose of this paragraph, an eligible recipient country means any country which meets the eligibility criteria for funding under paragraph X above; and c) any other representatives designated by the SCF Trust Fund Committee. 26. In addition to other observers identified in the Rules of Procedure for the SCF Trust Fund Committee, which will apply mutatis mutandis to the SREP Sub-Committee meetings, a representative of the Energy for the Poor Initiative (EFPI) should be invited as an observer to the SREP Subcommittee in order to ensure optimization of resources and coordination with the EFPI. 27. The functions of the SREP Sub-Committee should include:

12 a) appointing the expert group and approving criteria and guidance to be followed by the group; b) approving financing modalities for the SREP; c) endorsing further development of activities in country plans for trust fund financing, and approving SREP financing for country plans; d) approving periodic reports to the SCF Trust Fund Committee on the operations of SREP; e) ensuring complementary between activities foreseen for SREP and activities of other development partners active in the field of climate change, including the GEF, UNDP and UNEP, and ensuring effective cooperation between the SCF Program and GEF, UNDP and UNEP country activities to maximize synergies and avoid overlap; and f) exercising such other functions as they may deem appropriate to fulfil the purposes of SREP. X. MONITORING AND EVALUATION 28. Results measurement of SREP should demonstrate the transformative impact of the funded programs at three levels of impact: project, program and global environment. In order to measure the impacts of the SREP program, baseline surveys would be conducted as well as project closing surveys. 29. Key performance indicators for SREP could include: a) Project level: Renewable energy use increase and renewable energy co-benefits achieved through the SREP interventions; b) Program level: adoption of a national plan for promoting renewable energy, creation of an enabling policy/legal framework needed to achieve transformation shift to a low carbon energy development pathway using renewable energy; and c) Global environment level: CO 2 emissions avoided measured in terms such as total emissions avoided or intensity reduced.

13 ANNEX : EXAMPLE OF POTENTIAL INVESTMENTS UNDER SREP SREP Programmatic Approach Illustrative Example Renewable Energy for Power Supply Augmentation and Electricity Access Expansion Background 1. A low income country in Africa with 30 million people is endowed with diverse energy sources including biomass, natural gas, hydropower, coal, geothermal, solar and wind power, much of which is untapped. Wood-fuel accounts for up to 92% of total energy supply with about 2% from hydro-electricity and 7% from oil-derived products. The power sector is dominated by a single vertically integrated national utility. Total installed generation capacity is 1000 MW including IPPs and imports, of which 60% is hydro based. National electricity coverage is about 10%. The country is recovering from an energy crisis that can be attributed largely to loss of hydro generation, which together with the delays in sector investments, and the recent run-up in oil prices and inability to optimize use of hydro, fossil and other resources have caused an energy crisis with significant load shedding. 2. The energy crisis has highlighted the importance of reliable energy for economic growth and poverty alleviation. It has revealed the underlying vulnerability of hydro-dominated generation system and impacts of its dependence on oil. Though the country has some gas resources, gas supply is highly subsidized to the power sector (less than 1/10 the border price), even though export opportunities for gas exist. The country recognizes the importance of adequate diversified generation planning and timely investments. It is estimated that capacity increases of about 50 MW per year will be needed to meet demand growth and to enhance system reliability and diversity. 3. The Government is preparing a new long-term Power Sector Master Plan. A Rural Energy Act was passed that established a Rural Electrification Agency to lead rural electricity access initiatives and a Rural Energy Fund (REF) to finance such initiatives. The government s rural electrification goals envisage increasing electricity access in a regionally equitable manner to reach 40 percent coverage in 10 years. Of particular importance in rural areas is ensuring that energy needs are met for economic development as well as for critical education and health services. 4. The country has reasonably dynamic corporate sector, including operations in rural areas in sectors such as agriculture, wood industry, and mining. A number of national and international banks are operating. However, financing terms are not suitable for long term investments (e.g., interest rates are high at about 20 percent per annum, equity requirements of 40 percent, access to long term capital is scarce, grace periods are 0.5 to 1 year). The current financial crisis and decline of commodity prices has affected the financial capability to invest in renewable energy power generation/supply. 5. Objectives of SREP Pilot Program a) To augment electric power supplies and increase electricity access in urban and rural areas for productive enterprises, service delivery facilities (in health and education), and households; b) To strengthen institutional and financial sector capacities to scale up the use of renewable energy to supply electric power in a commercially oriented and sustainable manner; and

14 c) To optimally exploit the country s renewable energy potential to offset fossilbased electricity supply. Proposed SREP Program 6. The proposed SREP Program comprises three main components as outlined below. 7. Pre-investment Support for SREP Program Development. (a) Development of renewable energy supply curves and policy options for accelerating the implementation of economically viable renewables. This will include assistance to rationalize energy pricing and taxes and duty structures. (b) (c) (d) (e) Prepare Pilot Program to assist the country to adopt a low carbon energy development pathway. Prepare regulatory framework, standard purchase agreement and tariff formulation, and interconnection standards for renewable energy private power projects. Support private sector in renewable energy project pipeline development for grid, mini-grid and off-grid applications. Capacity building support for key institutions, including Rural Electrification Agency, financiers, power utility and regulator. Estimated cost: $1 million 8. Investment Components Renewable Energy Supply for Grid Augmentation. SREP to offer co-financing to domestic financial intermediaries to enable them to provide quasi-equity financing, long term debt or partial guarantees to increase access to financing to private sector developers. By working through domestic financial intermediaries, local investor experience and confidence is built. It will support investments of the order of 40 MW of renewables generation. Estimated financing requirement: $30 million. [question: is this SREP financing or Total financing: If total, what is proportion for SREP?] 9. SREP Co-financing to the Rural Electrification Fund to offer: a) Output-based assistance for large scale use of renewable energy for rural electrification to cover a portion of the cost of capital investments. Both mini-grid and off-grid renewable energy applications would be supported, such as solar photovoltaics, biomass-fired generators, micro/minihydro, wind-solar hybrid systems, etc. b) Grant co-financing for Sustainable Solar Market Package (SSMP). SSMP is a contracting mechanism for the supply and installation of PV or hybrid systems in key public facilities (schools, clinics etc), with an extended maintenance-and-repair contract and with incentives to offer individual systems for private consumers and enterprises in a defined rural area. Grant co-financing would be provided for the public facilities. Output-based grant would be available for private consumers and enterprises. As necessary microfinance institutions could obtain financing to finance consumer sales of small renewable energy systems. It will support investments to assist about 300,000 people gain access to clean modern energy using renewable energy sources. Estimated financing requirement: $10 million for public facilities.[same Question as above] 10. Technical Assistance Component. (a) Strengthen/operationalize the regulatory frameworks; implement policies; build

15 (b) (c) (d) (e) (f) capacity among lenders and investors, utility and regulator. Renewable energy resources characterization and database development (wind, biomass and small hydro). Support pre-investment work for grid connected and off-grid renewables. Business and market development support to entrepreneurs and developers Project management, monitoring and evaluation Estimated cost: $2 million [Same question as above]