El Salvador - Ahuachapan Expansion Project

Report No. 1025b-ES FILE COPY Appraisal of Ahuachapan Expansion Project: Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL) El Salvador May 21, 1976 Power and Telecommunications Division Lattn America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization  UNITS AND MEASURES kW = kilowatt MW = megawatt = 1,000 kW kW = kilowatt hour qwh = gigawatt hour = 1,000,000 kVh kV = kilovolt kVA = kilo volt-ampere MVA mega volt-ampere m = meter = 3.28 ft km kilometer = 0.621 miles kcal thousand calories kg = kilogram = 2.2046 pounds at.a. atmospheres absolute = 1.033 kg = 14.69 lb/sq in cm centimeter = 0.01 meter cm2 cm2 = square centimeter = 0.0001 m2 = 0.155 square inch CURRENCY EQUIVALENTS Currency Unit = Colon (0) 0 = 100 centavos 01 = TS$0.O4 01l,000,000 = US$400,000 1 centavo = 0.4 US cents US$1 = 02.50 1 US cent = 2.5 centavos 1 US$ million = 02,500,000 ACRONYMS AND ABBREVIATIONS CEL = Comision Ejecutiva Hidroelectrica del Rio Lempa IDB Inter-American Development Bank UNDP = United Nations Development Programme IGSE = Inspeccion General de Servicios Electricos CAESS Companiia de Alumbrado Electrico de San Salvador PAHO = Pan American Health Organization FIV = Fondo de Inversiones de Venezuela INDE = Instituto Nacional de Electricidad FISCAL YEAR GEL's fiscal year ends December 31 ,.  FOR OMCIAL USE ONLY AFPRAISAL CF AHUACHAPAN EXPANSION PROJECT - EL SALVADOR COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA (CEL) Table of Contents Page No. Summary and Conclusions i 1. Introduction 1 2. The Sector 3 Energy resources 3 Sector organization 3 Regulation and tariffs 3 Electricity consumption and service to rural communities 4 Sector development 4 3. The Project 6 The program 6 Estimated cost and financing 7 Engineering 8 Project execution 8 Procurement and disbursement 8 Environment 9 Project risks 9 4. Justification of the Project 10 Objectives 10 Demand and generation forecast 10 Size and type of the project 10 Least-cost solution 11 Timing 11 Return of investment 12 5. The Borrower 13 Organization and management 13 iMlanagement information systems and audit 13 Performance indicators 13 6. Finance 15 Summary Financial performance, rate base revaluation and tariff levels 15 Financing plan 15 Financial position and debt-service coverage 17 7. Recommendations 18 This report has been prepared by Messrs. John E. Graves, Rafael A. Moscote and Felix Perez Rivera (consultant). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  List of Annexes 1. Previous Bank/IDA Lending to CEL 2. Organization of the Electric Power Sector 3. Electricity Regulation and Tariffs in El Salvador 4. Rural Electrification in El Salvador 5. Performance Indicators 6. Possible Future Hydroelectric Developments 7. Detailed Description of the Project 8. Project Implementation Schedule 9. Loan Disbursement Schedule 10. Historical and Forecast Annual Peak Demand, Energy Production and Sales 11. Least-cost Solution and Timing 12. Rate of Return 13. Organization and Management 14. Financial History and Projections Map No. IBRD 1137R2  APPRAISAL OF AHUACHAPAN EXPANSION PROJECT - EL SALVADOR COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA (CEL) Summary and Conclusions i. This report appraises the Ahuachapan expansion project, for which the Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL) has requested financial assistance. ii. Since 1949 the Bank and IDA have provided major financial assist- ance to Salvadorian power development through five loans and one credit to CEL (as borrower or beneficiary) totalling US$58 million. CEL, a govern- ment-owned autonomous institution responsible for bulk electricity supply throughout the country and for retail distribution in rural areas not served by other utilities, has completed the first five projects success- fully, and the related works are in operation. iii. One component of the sixth project, the first unit at Ahuachapan geothermal station, was ready for commercial service on schedule in early 1975. However, CEL is far behind schedule in construction of a disposal channel needed to convey the contaminated geothermal effluent from Ahuachapan to the sea; the channel's completion is now scheduled for October 1977 instead of early 1975. As an interim measure, CEL is disposing of the effluent in the Paz river, which forms the border with Guatemala. CEL has confirmed. that it will limit its effluent discnarge so that concentrations of arsenic and boron in the river will not exceed levels suggested by the Bank, (based on a Pan American Aealth Organization study) and thereby not endanger the well- being of the population or of the surrounding flora and fauna. iv. Construction of the sixth project's other major component, the 135 MW first stage of the Cerron Grande hydroelectric development, also financed by the Inter-American Development Bank, is proceeding on schedule. The plant is expected to be available for commercial operation in early 1977, as originally scheduled. v. Because of problems with the disposal channel and unexpected world- wide price inflation, the cost overruns of the sixth project are estimated at about US$30 million. These cost overruns would be financed by loans from the Venezuelan Investment Fund (FIy) and commercial sources already arranged and from internal cash generation. vi. The proposed seventh project's principal component is a third generation unit of 30 - 37.5 1'IW at AhuachaPan.Besides meeting El Salvador's electricity needs in the early 1980s, installation of this unit will continue to lessen the country's dependence on imported fuel for electricity generation. The project also includes transmission lines needed to meet increased de- mands for electricity, communications and control equipment to enable CEL to operate its system more efficiently, studies of other geothermal fields' feasibility, and studies of CEL's and the other Salvadorian utilities' tariff  - ii - structures, improvements in which are intended to promote more efficient utilization of electricity. vii. The proposed US$39 million loarswould cover the project's foreign financing requirement. The local currency requirements (US$11.2 million equivalent) would be financed by a local bond issue (US$8 million) and internal cash generation (US$3.2 million). viii. Procurement of goods and services for the project other than con- sultants' would be through international competitive bidding in accordance with the Bank's guidelines. No retroactive financing would be required, assuming loan signing in FY76. The Government has requested and the Bank has accepted the extension of preferences of up to 15% to local or regional manufacturers. ix. The project's generating component represents the lea-st-cost solution for meeting El Salvador's incremental requirements beginning in 1982 (when additional capacity would be needed) for all discount rates lower than 23%. However, scheduling its in-service date for year-end 1981 would necessitate high fuel consumption during 1980-81, so that CEL plans for its completion during the first half of 1980; this is a lesser-cost solution than postponement to year-end 1981 for discount rates of up to about 13%. The return on investment in the project, based on 1975 retail tariff levels, is estimated at 14%. x. CEL is a well-managed utility, fully capable of operating the pro- ject upon its completion. diowever, it needs to expand its planning capability to remain abreast of system growth and to avoid undue reliance on outside consul- t,nts. CEL has confirmed that it will expand its planning functions. xi. Except for 1975, when unexpected adverse operating conditions and resultant reliance on fuel caused its rate of return to decrease to 4%, CEL's financial performance has been strong throughout the 1960s and 1970s. A tariff increase made effective in December 1975 is expected to enable CEL to continue this strong performance; its rate of return on a revalued rate base is expected to exceed 8% throughout the project construction period with no further rate increases. The utility's internal cash generation will provide about 37% of its total requirements during the project construction period. xii. The project would form a suitable basis for conventional and Third Window loans for a total of US$39 million. The conventional loan, for US$30 million with a term of 25 years including 4-1/2 of grace, would be made to- CEL and would be guaranteed by the Republic of El Salvador. The loan from the Third Window facility, for US$9 million with a term of 25 years including 7 of grace, would be made to the Republic of El Salvador, to be onlent to GEL under the same terms and conditions as the conventional Bank loan.  APPRAISAL OF A