Sri Lanka - Energy Services Delivery (ESD) Project

Report No. PIC1335 Project Name Sri Lanka-Energy Services Delivery (ESD) Project Region South Asia Sector Energy Project ID LKPA10498 Implementing Agencies Ministry of Finance Galle Face Secretariat Colombo 1, Sri Lanka Telephone: 94-1-549-823 Fax: 94-1-449-823 Ceylon Electricity Board 50 Sir Chittampalam A. Gardiner Mawatha Colombo 2, Sri Lanka Telephone: 94-1-329-904 Fax: 94-1-449-572 Private investors (to be identified) Date Prepared June 17, 1996 Projected Board Date February 18, 1997 1. Background. GOSL development policy places high priority on energy and electricity development. Hydropower is the only indigenous energy resource used for power generation on a large-scale. About half of Sri Lanka's available hydropower potential has been developed. The growing need to import petroleum products contributes to a significant trade deficit. The GOSL energy strategy, endorsed by the June 1994 National Environmental Action Plan (NEAP), is to support socio-economic development and meet basic human needs by (a) optimally developing energy resources in a least economic cost and environmentally sound manner; (b) developing and managing forest and non-forest wood fuel resources; (c) improving institutional capacity to develop and manage the energy sector; (d) promoting efficiency pricing of energy; (e) advocating energy conservation; and (f) diversifying energy sources and reducing dependence on imported energy sources. This strategy has led the GOSL to explore the use of a wider range of energy technologies and systems including renewable energy and demand side management (DSM). 2. Presently, about 70t of Sri Lanka's households outside Colombo and the Western Province are not connected to grid electricity. A large unmet demand for electricity is indicated by the 300,000 off- grid households who use power from car batteries that are recharged from grid supplies. The use of traditional grid-based approaches to meet the rural electricity demand has become increasingly expensive as lines are extended to more dispersed populations. The high grid extension costs have spurred an interest in cost-effective alternatives, such as solar photovoltaics and off-grid micro-hydro plants. 3. The Ministry of Power and Energy and the CEB have initiated DSM  efforts to counter the rapid growth in electricity demand. While the largest electricity demand growth is in the residential sector, the low tariffs and large number of customers impede DSM initiatives in this sector. The commercial building sector is more easily reached, faced with higher electricity tariffs, and more promising for DSM. 4. Project Objectives. The objectives of the proposed ESD Project are to: (a) encourage the use of environmentally sound renewable energy technologies by the private sector, NGOs, and cooperatives for grid and off-grid energy services; (b) reduce long-term demand for electricity through DSM; and (c) strengthen the public and private institutional capacity to deliver energy services through renewable energy and DSM. In addition, the ESD Project has the global environmental objective of mitigating carbon emissions in Sri Lanka. 5. Project Description. The project would include three components: (a) the ESD Credit Line Component, (b) the Pilot Grid-Connected Wind Farm Component, and (c) the Capacity Building Component. The Credit Line Component would offer medium- and long-term financing through Participating Credit Institutions (PCIs) to private sector firms, NGOs, and cooperatives for solar PV and village-hydro pre-grid electrification, rehabilitation of grid-connected tea estate mini- hydro sites, and other renewable energy investments. The Pilot Grid- Connected Wind Farm Component will finance a CEB-executed grid- connected pilot windfarm project of approximately 3 MW. The Capacity Building Component would provide training and technical support for renewable energy and energy efficiency initiatives by both the public and private sector, including CEB's DSM and Pre-Electrification Units, PCIs, and project developers. 6. Project Implementation. The GOSL would onlend the proceeds of the ESD Credit Line Component to eligible PCIs, which would, in turn, onlend these proceeds, along with complementary financing out of their own resources, to eligible sub-borrowers. The Credit Line would support subprojects up to 5 MW in capacity (larger projects could seek financing through the FY96 Private Sector Infrastructure Development Credit). An Administrative Unit (AU) located within the Development Finance Corporation of Ceylon (DFCC) would be responsible for record keeping, reporting functions, and processing disbursement requests for subloans and GEF grant funds approved by PCIs. In addition to administering the Credit Line Component, the AU would also provide technical support and training to subproject developers and PCIs for ESD credit operations, and would maintain a consumer protection facility for off-grid solar home systems and village-hydro schemes. Private sector developers and tea estate management companies are the likely beneficiaries for mini-hydro power plant rehabilitation projects, which would sell power to the grid based on an avoided-cost tariff. Private investors, NGOs, and village cooperatives would be the beneficiaries for the solar photovoltaic and village hydro subprojects. Beneficiaries will be responsible for sub-project preparation, loan application, sub-project implementation, and subloan repayments. The role of the CEB would be primarily to create the enabling environment for facilitating the implementation of the sub- projects, including the execution of non-negotiable power purchase agreements for small power producers with accompanying tariff and - 2-  grid-interconnection specifications. 7. The Pilot Wind Farm of about 3 MW would be executed by the CEB on an Engineering, Procurement, and Construction (EPC) contract basis, subject to standard IDA procurement procedures. The CEB would be responsible for facility monitoring, operation, and maintenance, including all potential operation and/or service contracts. 8. The Capacity Building Component would be implemented by the CEB's DSM and Pre-Electrification Units (PEU) as well as by the ESD AU in the DFCC. Capacity building to the CEB's DSM Unit would consist of consulting services for DSM initiatives (including development of an Energy Efficiency Building Code), technical training, and related equipment and systems. Capacity building to the CEB's PEU would broaden the Unit's expertise and abilities. Capacity building to support the ESD Credit Line would consist of assistance to PCIs for training in appraisal of subprojects and project preparation assistance to off-grid project developers. 9. Project Sustainability. Sustainability of the proposed Project would be assured through an enabling regulatory environment, strengthened institutions, and appropriate incentives and returns for stakeholders. The Project would help create a favorable regulatory environment through implementation of the standardized Small Power Purchase Agreement (SPPA) for small private power producers and Published Power Purchase Tariff (for facilities with capacities no greater than 5 MW). The Project would also strengthen CEB's DSM and renewable energy planning, advisory and coordination capacity, enhance the capabilities of the banking sector to support alternative energy project implementation, support the growth of a commercial infrastructure and utilize locally-based institutions to deliver off- grid energy services. Project sustainability will be supported through agreed monitoring and implementation actions, including an AU-operated consumer protection facility for off-grid systems. Due to the innovative nature of the Project, the Mid-Term Review will be scheduled early (about eighteen months after effectiveness) to allow the opportunity for mid-course corrections if necessary. IDA will also monitor Project implementation on the basis of periodic reports from the AU and the CEB, annual independent audits of AU-operated special accounts, and through IDA supervision missions. 10. Project Cost and Financing. On a preliminary basis, it is estimated that the total financing requirement for the Project will be approximately US$ 58.0 million of which about US$ 26.0 million is proposed for the IDA Credit, US$ 7.3 million from a GEF Grant, and the balance from the private sector, PCIs and the GOSL. 11. Environmental Aspects. The proposed Project would have net positive effects on the environment. Off-grid electrification subprojects would reduce use of kerosene and lead-acid automotive batteries, thus benefiting the environment and reducing health hazards. Because of their small size and the fact that civil works are already in place in most cases, the grid-connected tea estate mini-hydro subprojects are unlikely to cause significant environmental damage or require resettlement. The run-of-river village hydro projects are even -3 -  less likely to have negative environmental impacts. Power generated by grid-connected renewables or saved through DSM would result in corresponding reductions in emissions from the burning of fossil fuels. The PCIs would ensure that GOSL and IDA-mandated environmental and resettlement clearances are obtained, as necessary. The Project has been assigned a "B" environmental classification. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending July 19, 1996. - 4 -