Moldova - Second Energy Project

Report No. PID8697 Project Name Moldova-Second Energy (@+) Region ECA Sector Energy Project ID MDPE40558 Borrower Republic of Moldova Implementing Agencies Moldtranselectro {electricity component} 78, V. Alecssandri str. Chisinau, Moldova 2012 Tel: +(373 2) 253-309 Fax: +(373-2) 253-142 National Agency for Housing and Real Estate Services (NAHRES) {heating/energy efficiency component} 3 Gh Tudor Chisinau 2028 Moldova Tel: (373-2) 727-350 Fax: (373-2) 728-798 Environment Category B Date This PID Prepared October 1, 1999 Date Initial PID Prepared October 1, 1999 Projected Appraisal Date October 16, 2000 Projected Board Date February 27, 2001 Country and Sector Background. Moldova is a small, landlocked country between Romania and Ukraine, with land area of 33,700 square kilometers and population of 4.3 million. With rich soil and temperate climate, it relies mainly on agriculture and food processing industry. The country is poorly endowed with energy resources and imports almost all of its primary energy. It has gone through a tumultuous economic and political period during this decade, which left the country divided along the Nistru river, with the Transnistria region on the left bank breaking away from the rest of the country. Moldova relies heavily on gas and electricity imports. Gas is imported from Russia, and is the main fuel for local electricity generation and district heating. Power plants on the right bank of the Nistru river include only three combined heat-and-power plants and cover about 20t of electricity consumption of that part of the country, as Moldova's largest power plant is located in Transnistria. The rest of electricity is imported from Ukraine and Transnistria, and to a smaller extent from Romania. Heating in cities is based on district heating. The energy sector is undergoing privatization and structural reforms. The majority of shares in the gas industry has been sold to Gasprom. The Government intends to sell the remaining 35t of shares to strategic  investors. The power sector is organized into five distribution, three generation, and a dispatch and transmission company. Distribution and generation companies are being offered for privatization, and a wholesale, competitive electricity market is being established. The district heating sector, now organized into two state-owned companies, is being reorganized into smaller, municipally-based companies. Moldova established an independent energy regulator agency and adopted new gas and electricity laws, creating a modern, market oriented legal and regulatory framework for the energy sector. Objectives. The objectives of the project are: to reduce the cost and improve the quality and reliability of electricity supply through the development of a wholesale electricity market; and to improve the efficiency of heat supply and consumption in selected public and residential buildings. Description. The project includes the following components: A. Rehabilitation of power system infrastructure: upgrade of metering of electricity in the transmission network; rehabilitation and upgrade of power system dispatch and communications; priority rehabilitation of electricity transmission network bottlenecks; technical assistance for: - financial restructuring and corporate management of Moldtranselectro; - operation, institutional development and regulation of the electricity market; B. Improvements in heat supply and consumption: improvements in heat supply and consumption in selected public and residential buildings; development of least cost options for improving heat supply and consumption; technical assistance for institutional and regulatory reform of heat production and delivery; C. Technical assistance for project preparation and implementation. Financing. The project will be financed by an IDA credit in the amount of US$15 million, a USAID grant of US$3 million, and a local contribution of about US$2 million. Sweden will provide a technical assistance grant for the strategic heating study and a for a feasibility study for rehabilitation of an initial group of public buildings. Implementation. The electricity component of the project will be implemented by Moldtranselectro, the company which operates electricity transmission and dispatch, under the supervision of the Department of Energy. The heating/energy efficiency component will be implemented by the National Agency for Housing and Real Estate Services (NAHRES), under the supervision of the Ministry of the Environment and Land Development. Sustainability. Privatization of power distribution and generation companies would create the necessary conditions for a reversal in financial and physical decline of the sector. It would also enable establishment of a competitive electricity market based on transparent rules and independent regulation, thereby creating conditions for sustaining the benefits of the project. The Government has launched a program to restructure the district heating industry in an effort to create better conditions for sustained development -2 -  of the sector. The Government has also taken initiatives to promote energy efficiency rehabilitation of public and private multi-family residential buildings. The heating component of the project would parallel this effort and demonstrate viable measures to reduce heat consumption and make it more affordable, which could be continued and replicated through future investment operations. Lessons learned from past operations in the country/sector. The lessons include taking [Note: Lessons learned from completed and ongoing projects financed by the Bank and other development agencies.]up-front actions on policy and institutional issues; resolving important project implementation issues early on, including project implementation organization, staffing and local financing; and leveraging funds with other donors. Environmental Aspects. The project is expected to have no adverse environmental impact and should, in fact, lead to some environmental improvements. Since the project deals with the existing facilities, no incremental adverse impact is expected and no major environmental issues are expected to arise. The use of PCB in power transformers should have been discontinued in Moldova. The project will examine whether it indeed has been so, and to what extent there is a need to deal with consequences of its use in the past. The project should reduce possible oil leaks from transformers subject to rehabilitation, if any. The project will ensure that adequate measures are taken for identification and handling of any possible use of asbestos in insulation of pipes during rehabilitation of buildings. An Environmental Management Plan will be prepared prior to project appraisal, as required for projects financed by IDA Credits. Program Objective Categories. The project belongs to the category of environmentally sustainable development. Project Benefits. The main benefits of the project are: reduced cost and improved reliability and quality of power supply, and reduced cost of heat supply in rehabilitated buildings. Project Risks. The main risks include: (i) poor financial performance of electricity companies; (ii) poor enforcement of market rules and Government's interference with sector regulation and enforcement of payments; (iii) poor financial discipline in the heating sector and unreliable heat supply; and (iv) project implementation delays due to lack of local financing and poor project management. Contact Point: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Vladislav Vucetic, ECSEG The World Bank 1818 H Street N.W. Washington, DC 20433 Telephone No.: (202) 473 3977 Fax No.: (202) 477 8518 Note: This is information on an evolving project. Certain components may -3 -  not necessarily be included in the final project. Processed by the InfoShop week ending February 18, 2000. - 4 -  Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID) . If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID.