China - Institutional strengthening and technical assistance in the rural power sub-sector

Y Joint UNDP 1 World Bank Energy Sector Management Assistance Programme c/o The World Bank 1818 H Street, N.W. Washington, D.C. 20433 U.SA. Project Proposal CHINA Institutional Strengthening and Technical Assistance in the Rural Power Subsector May 1992 This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without UNDP or World Bank authorization.  PROJECT PROPOSAL CHINA INSTITUTIONAL SllU%NGTHENZNGAND TECHNICAL ASSISTANCE IN THE RURAL POWER SUBSECTOR OVERVZEW 1. This project follows a preparatory phase (the Planning and Management of Decentralized Power Companies activity), which identified the issues and problems confronting rural power systems in China and highlighted their needs for institutional strengthening and technical assistance. The present project consists of five activities that form a comprehensive technical assistance program to improve rural power system planning and management, reduce losses in rural power systems, and strengthen the institutional framework in which decentralized rural power systems operate. Each task has an important training component which will be mostly carried out by ESMAP staff. The estimated donor contribution required to complete the overall activity is about US$2 million. However, the five subactivities can be carried out independently of one another and therefore can be funded separately. I. PROJECT CONTEXT Energy Sector Overview 2. Although China is the world's fourth largest producer of electricity, the country continues to face power shortages equivalent to 20 percent of its total electricity consumption. Installed generating capacity is 135 GW, and annual electricity consumption is about 535 TWh. Power consumption is expected to reach 1,100 TWh by 2000, and power shortages are likely to continue for the rest of the 1990s because of lead times required to bring new capacity on stream and capital constraints to building new capacity. In order to minimize the potential power shortfall, it is important for China not only to mobilize resources to build new capacity but also to make more efficient use of existing capacity by promoting demand management. 3. Power shortages have been especially severe in rural areas because of increased energy demand resulting from rapid development of rural industry and increasing farm incomes and from the fact that rural areas are not given priority when there are constraints on the national power grid. 2 INSTrrUTIONAL STRENGTHENING 4. China's national power grid currently meets all the electricity needs of only 600 of the nation's 2,200 counties. Of the 1,600 counties not fully served by the national grid, 800 rely primarily on bulk purchases from the grid, supplemented by power from local generating units. The remaining 800 counties receive most of their power from local, decentralized rural power plants and secure less than 10 to 30 percent of their power from the national grid. Government Strategy 5. The Chinese government is encouraging the expansion of the decentralized power systems in order to reduce the burden on the national system. In this regard, the government is offering incentives, such as tax reductions or exemptions, and allowing increases in electricity prices to stimulate local investment in power plants. These are very important steps toward helping decentralized power companies take full responsibility for their financial operations and attract potential investors. However, decentralization is perceived by local governments as an exchange of county supervision for state and provincial supervision. During the preparatory phase of this project it was found that local enterprise autonomy decreased because of tighter control by supervisory local bureaus. Decentralized power companies thus face institutional constraints on their autonomy and need to improve their planning and management practices in order to function as efficient utilities. Rationale for ESMAP Involvement 6. This project is part of a wider ESMAP effort to provide technical assistance for integrated rural energy development, training, efficiency improvement, and pollution control in developing countries. ESMAP's efforts in China began in 1987, and the design of this technical assistance project is based on the general findings of ESMAP's Rural Energy Assessments and Rural Power Sector Assessments as well as on discussions with the State Planning Commission (the official counterpart) and the Ministry of Water Resources (the working-level counterpart). The project has major training components to ensure sustained efforts after the completion of the activity. SPC and MWR plan to ensure adequate dissemination of acquired methodologies and know-how throughout China by setting up training courses in two or three provincial institutes.  CHINA 3 II. PROPOSED PROJECT Objectives 7. This technical assistance project is a comprehensive set of activities that address previously identified issues and problems in the rural power subsector. The project aims to strengthen the institutional framework of the power sector at the county level to rely more on market forces than on government intervention. It also aims to ensure autonomy for decentralized power companies and entities and to improve the efficiency of rural power systems by transferring methodologies and know-how from relevant ministries and institutes at the national level and from selected provinces to power sector personnel through on-the-job training, study tours, workshops, seminars, and training materials. The project will focus especially on improving the institutional environment in which decentralized power companies operate; the design of small hydropower plants to reduce investment costs; the planning and management of decentralized power companies; and the efficiency of rural power system by reducing power losses. Scope of Work 8. The project will consist of five distinct but complementary activities, as detailed below. ACTIVITY I . ANALYZING THE ORGANIZATION AND STRUCTURE OF DECENTRALIZED RURAL POWER OPERATIONS 9. This activity will assist the Chinese government in carrying out a comprehensive review of decentralized rural power organizations to identify deficiencies (e.g., nontransparent relations among the different organizations involved in sector development, unclear ownership rights, and improper regulatory practices) that hamper their effective development and operation. It will also help determine the most suitable organizational structure, distribution of responsibilities, and interrelationships for effective operation and development, consistent with overall economic goals and public enterprise reforms. 10. The activity will consist of the following tasks: a Appraisal of the Strengths and Weaknesses of Existing Organizations. This task will include a review of the relationship between the state, provincial, and local governments and the decentralized implementing agencies (e.g., local power companies) and among the implementing agencies and river basin authorities. It also will identify the operating inefficiencies and interorganizational bottlenecks, and the essential functions 4 INSTITUTIONAL STRENGTHENING not covered by the existing setup. Finally, it will review the decisionmaking process. b. Assessment of Legislative and Regulatory Framework. The scope of the review includes the laws, general rules, and regulations governing the operations of decentralized power entities; the purchaselsale contracts and pricing policies; the ownership rights of collective/private power plants and the state power companies; and the project financing mechanisms. c. Recommendations for a Suitable Organizational Structure and Institutional Changes Needed to Achieve the Decentralization Objectives. Focuses of study and preliminary recommendations here are organizational structures and legislative changes needed to eliminate or mitigate the inefficiencies and relationships bottlenecks identified; and options for fostering the development and improving the operations and financial viability of the decentralized rural power sectors. d. Seminar/Workshop on Institutional Issues. Successful experiences will be presented; the draft study will be discussed with designated government officials; a program will be designed to implement agreed recommendations; major objections will be noted; and consultancy needs to address them will be identified. e. Preparation of the Joint Final Report. This report will include final recommendations for institutional and organizational changes and a plan for implementation. 11. Budget. The proposed external funding is approximately US$464,000, as detailed in the accompanying table.  CHINA 5 CHINA Institutional Strengthening and Technical Assistance in the Rural Power Subsector ACTIVITY I . ANALYZING THE ORGANIZATION AND STRUCTURE OF - DECENTRALIZED RURAL POWER OPERATIONS Total Budget Budget category Item M/W US$ Personnel 11.01 ESMAP Staff 11.50 International Consultants' Fees 11.60 International Consultants' Travel 13.01 Administrative Support 15.00 Official Travel 16.00 Mission Costs (Bank Staff) 17.OO Local Consultants Subcontracts 21.00 International 22.00 Local Training 32.00 Workshops/Seminars/rC Equipment 41 .OO Expendable Equipment 42.00 Nonexpendable Equipment 43.OO Premises Miscellaneous 5 1 .OO Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries Subtotal Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank Subtotal for External Funding (bl 99+159) World Bank Contribution TOTAL ACTIVITY COST Note: Estimated Additional Local Participation Required: 170  ACTIVITY 2. DESIGNING IMPROVEMENTS FOR SMALL HYDROPOWER PLANTS (SHPP) 12. This activity will help the small hydropower design institutes to reduce investment requirements for SHPP development and to exploit fully the hydraulic capacities of the sites. The activity will consist of the following tasks: a Critically Assess SHPP Design Standards. The work will include performing a walk-through review of the design of different size and type of SHPPs; critically evaluating the design of two planned SHPP projects (one about 750 kW to 1 MW and another about 3-5 MW); identifying scopes for reducing investment requirements and improving overall efficiency SHPPs by streamlining the design and specifications and by introducing improved and recent technologies, recommending optimum and least-cost design to fully exploit the sites, with the necessary technical explanations and justifications and comparative economic and financial evaluation. b. Identify Needs for Technology and Know-how. This portion of the activity will include performing a walk-through review of some local and provincial electromechanical equipment factories; conducting extensive interviews of parties responsible for small hydropower electromechanical equipment and design institutes, to identify the needs for technological and know-how transfer; recommending short-term action to introduce no- and low-cost improvements, and identifying of required follow-up to design and implement a longer-term program for transfer of technology and know-how. c. Hold a Workshop on Design Improvements. This task will include preparing a report on the two case studies; organizing working sessions with design engineers from the provincial and national institutes and representatives from the MWR to assess the feasibility of the design and technological improvements proposed by the joint ESMAP and Chinese teams; recommending actions to improve small hydropower design to reduce investment requirements; and designing a feasible program for technological improvements. 13. Budget. The proposed budget for external funding is approximately US$204,000, as detailed in the accompanying table.  CHINA 7 CHINA Institutional Strengthening and Technical Assistance in the Rural Power Subsector ACTNXTY 2. DESIGNING IMPROYEMENTS FOR SMALL HYDROPOWER PLANTS (SHPP) Total B u d ~ e t Budget category Item M/R.' US$ 10. Personnel 11.01 ESMAP Staff 15 42,000 11.SO International Consultants' Fees 14 45,000 11-60 International Consultants' Travel 13,600 13.01 Administrative Support 4 2,000 15.00 Official Travel 13,000 16.00 Mission Costs (Bank Staff) 0 17.00 Local Consultants 0 0 20. Subcontracts 21 .OO International 22.00 Local 30. Training 32.00 Workshops/SeminardIC 40. Equipment 41 .OO Expendable Equipment 42.00 Nonexpendable Equipment 43.00 Premises 50. Miscellaneous 5 1.OO Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries 99.00 Subtotal 33 177,600 159.0 Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank 179.0 Subtotal for External Funding (bl 99+159) 33 203,620 199.0 World Bank Contribution 30,540 Note: Estimated Additional Local Participation Required: 60  ACTIVITY 3. POWER EFFICIENCY PILOT STUDY 14. This activity will carry out joint power efficiency studies in two pilot counties to identify ways to reduce electrical losses and improve the overall efficiency and reliability of the power system by improving the administrative systems, operating procedures, and economic investments in distribution system rehabilitation. The activity will consist of the following tasks: a Analyze the Distribution System. The task will include reviewing statistics on system performance; performing diagnostic studies of distribution circuits and microcomputer loss analysis; critically analyzing distribution standards and practices; and reviewing customer service activities, including metering and billing. b. Perform an Economic Evaluation and Preparing Power Loss Reduction Program This task includes carrying out cost-benefit analyses of proposed actions and investments to reduce losses and preparing a power-loss reduction program outlining immediate steps to reduce the most serious losses in the systems and to improve longer-term operation of plants and distribution of power. c. Prepare a Handbook for Distribution System Analysis. The work will include reviewing existing training programs and materials; preparing a case study based on analyses carried out in the pilot counties; and writing the handbook d. Design a Distribution System Analysis Course. The course will illustrate sources of loss reduction and basic technical principles of system loss reduction (2 days); distribution system analysis and calculation of technical losses (2 days); economics of electricity loss reduction (1 day); and case studies and lessons learned from the pilot studies (5 days). 15. Budget. The proposed budget for external funding is approximately US$582,000, as detailed in the accompanying table.  CHINA -9 CHINA Institutional Strengthening and Technical Assistance in the Rural Power Subsector ACTTVITY3 ACTIVITY 3. POWER EFFICIENCY PILOT STUDY Total Budpet Budget category Item W US$ 10. Personnel 11.01 ESMAP Staff 40 112,000 11.50 International Consultants' Fees 60 180,000 11.60 International Consultants' Travel 50,000 13.01 Administrative Support 9 5,000 15.00 Official Travel 35,000 16.00 Mission Costs (Bank Staff) 0 17.00 Local Consultants 20 20,000 20. Subcontracts 2 1.OO International 22.00 Local 30. Training 32.00 Workshops/Seminars/rC 40. Equipment 41.00 Expendable Equipment 42.00 Nonexpendable Equipment 43.00 Remises 50. Miscellaneous 5 1.OO Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries O 99 . O Subtotal 129 508,000 159.0 Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank 179.0 Subtotal for External Funding (bl 99+159) 129 582,440 199.0 World Bank Contribution 87,370 Note: Estimated Additional Local Participation Required: 240 10 INSTITUTIONAL STRENGTHENING ACTIVITY 4. POWER PLANNING PILOT STUDY 16. This activity will assist local authorities in drafting comprehensive plans for developing decentralized power systems. The pilot studies will consist of the following tasks: a Power Market Survey. This will include collecting and analyzing historical data on power sales; collecting historical macroeconomic variables; studying the relationship between these variables and the use of power to determine the effect of the most important variables, particularly electricity prices, on the power market; projecting the future development of the region; preparing a long-term, unconstrained power demand forecast to be translated into annual and seasonal load duration curves, and, if possible, preparing typical daily load curves, taking into account potential tariff restructuring or increases and end-use efficiency improvements. b. Supply Options. This includes assessing all possible supply options and long-term electricity purchase contracts; proposing several technically feasible sequences of development of generating plants to meet the prospective demand with some degree of reliability; performing an economic evaluation of the options; and determining the least-cost expansion plan to meet demand. c. Alternative Programs for Distribution. Preparation of programs will include establishing load zones and tying them to substation services areas. d. Least-cost Expansion Plan. This will be based on the most economic combination of supply options and distribution systems and will assess its sensitivity to market variables. e. Handbook for Decentralized Power System Planning. This tasks will include preparation of a case study based on analysis made in the pilot counties and preparation of a handbook on decentralized power system planning. f. Power Planning Workshop. Subjects covered will be as follows: (a) power generation planning methodology (2 days); (b) local distribution planning methodology (2 days); (c) methods for economic evaluation (2 days); (d) case study and lessons learned from the pilot studies (4 days). 17. Budget. The proposed external funding for this activity is approximately US$43 1,000, as detailed in the accompanying table.  CHINA 11 CHINA Institutional Strengthening and Technical Assistance in the Rural Power Subsector ACTIVITY 4. POWER P W N I N G PILOT STUDY Total Budget Budget category Item Mnv US$ Personnel 11.01 ESMAP Staff 30 11.50 International Consultants' Fees 40 11.60 International Consultants' Travel 13.01 Administrative Support 12 15.00 Official Travel 16.00 Mission Costs (Bank Staff) 17.00 Local Consultants 0 Subcontracts 2 1 .OO International 0 22.00 Local 15 Training 32.00 Workshops/Seminars/TC Equipment 41 .OO Expendable Equipment 42.00 Nonexpendable Equipment 43.00 Premises Miscellaneous 51 .OO Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries Subtotal 97 Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank Subtotal for External Funding (bl 99+159) 97 World Bank Contribution TOTAL ACTIVITY COST 97 Note: Estimated Additional Local Participation Required: 150 12 INSTITUTIoNa STRENGTHENING ACTIVITY 5. FINANCIAL AND BUDGETARY CONTROL PILOT STUDY 18. This activity will review and recommend changes in the financial and accounting systems and procedures, consistent with the corporate objectives of the decentralized power entities. It will consist of the following tasks: a Diagnosis. T his task will include reviewing accounting procedures and assessing the relevance, promptness, and accuracy of accounting reports; identifying deficiencies in the budgetary and financial systems; assessing the adequacy of internal and other controls; and preparing an appraisal report summarizing the status of existing systems. b. Workshop on Financial and Budgetary Control (5 days). The workshop will include presentations and in-depth discussion of the diagnosis report; discussion of possible modifications to the accounting system and financial methods and procedures consistent with Public Enterprise reforms; and identification of training needs in the accounting, budgeting, and financial areas. c. Recommended Courses of Action. This task will include modifying the existing systems or designing alternate systems, depending on the results of the diagnosis and the workshop; designing a detailed plan to implement recommended actions; and identifying training needs and designing of local training courses. 19. Budget. The proposed external funding for this activity is approximately US$387,000,as detailed in the accompanying table.  CHINA Institutional Strengthening and Technical Assistance in the Rural Power Subsector ACTIVITY 5. FINANCIAL AND BUDGETARY CONTROL P I W T STUDY Total Budget Budger category Item M/Ur US$ Personnel 11-01 ESMAP Staff 11.50 International Consultants' Fees 11.60 International Consultants' Travel 13.01 Administrative Support 15.OO Official Travel 16.00 Mission Costs (Bank Staff) 17.00 Local Consultants Subcontracts 21 .OO International 22.00 Local Training 32.00 Workshops/Serninar~ Equipment 41 .OO Expendable Equipment 42.00 Nonexpendable Equipment 43.OO Premises Miscellaneous 51 .OO Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries Subtotal Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank Subtotal for External Funding (bl 99+159) World Bank Contribution TOTAL ACTIVITY COST Note: Estimated Additional Local Participation Required: 115 14 INSTrrUTIONAL STRENGTHENING Institutional Responsibilities 20. ESMAP's formal counterpart for the five-activity project will be the Department of Resources Conservation and Comprehensive Utilization of China's State Planning Commission (SPC). SPC will ensure the involvement of relevant ministries and institutes and coordinate their activities. S~arns 21. SPC has designated MWR as the coordinator of the project at the working level. Responsibility for organizing and implementing the project will rest with MWR. 22. The activity is a cooperative and joint effort. Together with ESMAP, a core group of experts and authorities from SPC, MWR, and relevant line ministries and key research institutes will undertake most of the work of preparing training materials, preparing the training course presentations, reviewing the interim reports, and preparing the final report. 23. The activities will commence during spring and summer 1992 and continue until 1994. The final report on institutional issues will be prepared within four months after the seminar/workshop on institutional issues in Activity 1. Reports from other activities will also be released in a timely fashion. Budget 24. The total external funding requirement for all five tasks is estimated at US$2,100,000 (detailed individual budget tables are presented following the descriptions of each of the five activities). The budget estimate includes ten personal computers and software, three photocopy machines for use during training sessions, and financial and technical calculators for participants in the training course. Local costs for which donor agency funding is required include engaging Chinese experts from research institutes or units outside of government ministries and translation costs.