Argentina - Renewable Energy in the Rural Market Project

Document of The World Bank Report No: 17495-AR PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN AND GEF GRANT TN THE AMOUNT OF IBRD LOAN US$30 MILLION AND GEF GRANT SDR 7.2 MILLION (US$10 MILLION EQUlIVALENT) TO THE ARGENTINE REPUBLIC FOR A RENEWABLE ENERGY IN THE RURAL MARKET PROJECT March 4, 1999 Finance, Private Sector and Infrastructure Sector Unit Argentina, Chile and Uruguay, Country Management Unit Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective June 1998) Currency Unit = Argentine Peso (A$) US$1 = A$1 FISCAL YEAR (January 1 to December 3 1) ABBREVIATIONS AND ACRONYMS AC Alternate Current AFU Administrative and Financial Unit CFE Federal Electric Power Council (Consejo Federal dce Energia Electrica) DC Direct Current FCT Tariff Compensation Fund (Fondo de Compensaci6n Tarifaria) FEDEI Electricity Investment Development Fund (Fondo Especial de Desarrollo Electrico del Interior) GEF Global Environmental Facility GHG Greenhouse Gas GOA Government of Argentina ICB International Competitive Bidding ICR Implementation Completion Report EIRR Economic Internal Rate of Return IFRR Internal Financial Rate of Return NCB National Competitive Bidding NGO Non-Government Organization NPV Net Present Value OED Operations Evaluation Department PAEPRA Electricity Supply Program for the Dispersed Rural Populations (Programa de Abastecimiento Electrico a la Po1blacion Ruiral Dispersa) PCU Project Coordinating Unit PIU Project Implementation Unit PG(s) Provincial Government(s) PRA(s) Provincial Regulatory Agency (ies) PV Photovoltaic RES Renewable Energy System SE Secretariat of Energy (Secrelaria de Energia) SHS Solar Home System SOE Statement of Expenses TOR Terms of Reference WHS Wind Home System Wp Watt Peak WTP Willingness to Pay Vice President: Shahid Javed Burki Country Manager/Director: Myrna Alexander Sector Manager/Director: Danny Leipziger Task Team Leader: Ricardo Klockner  -i1- Argentina Renewable Energy in the Rural Market Project CONTENTS Paee No. A. Project Development Objectives 1. Project development objectives and key performaince indicators ---------- 2 B. Strategic Context 1. Sector-related CAS goal supported by thie project---------------------------- 2 2. Main sector issues and Governmenit strategy---------------------------------- 2 3. Sector issues to be addressed by the project and strategic choices--------- 3 C. Project Description Summary 1. Project componenits---------------------------------------------------------------- 5 2. Key policv and instittitional reforimis supported by the project-------------- 6 3. Benefits and target populationi --------------------------------------------------- 6 4. Institutional and implemenitation arrangements------------------------------- 7 D. Project Rationale I . Project alternatives considered and reasons for rejection-------------------- 8 2. Major related projects financed by the Bank and/or other developmsent agencies----------------------------------------------------- 10 3. Lessons learned and reflected in proposed project design------------------- 10 4. Indications of borrower commitment and ownership ----------------------- 12 5. Value added of Bank and GEF support in this project ----------------------- 12 E. Summary Project Analysis I. Economic---------------------------------------------------------------------------- 13 2. Finuancial----------------------------------------------------------------------------- 15 3. Techinical---------------------------------------------------------------------------- 17 4. Institutional------------------------------------------------------------------------- 17 5. Social--------------------------------------------------------------------------------- 18 6. Environmental assessment-------------------------------------------------------- 19 7. Participatory approach ------------------------------------------------------------ 19 F. Sustainability and Risks 1. Sustainability----------------------------------------------------------------------- 20 2. Critical risks------------------------ ----- ------------------------------- 20 3. Possible controversial aspects---------------------------------------------------- 20  G. Main Loan and Grant Conditions 1. Agreements reached during negotiations--------------------------------------- 22 2. Effectiveness conditions ---------------------------------------------------------- 22 3. Conditions of disbursements for eaclh participating province---------------- 23 H. Readiness for Implementation----------------------------------------------------------------------- 23 1. Compliance with Bank Policies----------------------------------------------------------------------- 23 Annexes Annex I Project Design Summary Annex Ia Key Performance Indicators Annex 2 Detailed Project Description Annex 3 Estin.ated Project Cost Annex 4 Economic Analysis Annex 4a GEF Approach to Incremental Costs and Benefits Annex 5 Financial Analysis Summiiary Annex 6 Procurement and Disbursement Arrangemenits Table A Project Cost bv Procuremenet Arrangements Table B Prior Review Threslholds Table C I Allocation of Bank Loan Proceeds Table C2 Allocation of GEF Grant Proceeds Table D Consultant Services - Selection Method Annex 7 Project Processing Budget and Schedule Annex 8 Documents in Project File Annex 9 Statement of IFC's: Committed and Disbursed Portfolio Annex 10 Operations Portfolio Annex I I Argentina at a Glance Map IBRD 26342  Project Appraisal Document Page I Argendna - Renewable Energy in the Rural Market Project Argentina Renewable Energy in the Rural Market Project Project Appraisal Document Latin America and the Caribbean Regional Office Finance, Private Sector and Infrastructure Date: March 4, 1999 Task Team Leader: Ricardo Klockner Country Manager/Director: Myrna Alexander Sector Manager/Director: Danny Leipziger Project ID: AR-PE-6043/AR-GE-45048 Program Objective Category: Sector: Energy Private Sector Development Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [X] Yes [1 No Project Financing Data [XI Loan II Credit I I Guarantee [X I Other [GEF Grant]] For LoanslCredits/Others: Amount (US$m/SDRm): IBRD Loan US$30m; GEF Grant SDR 7.2m (US$10m equivalent) Proposed terms: I I Multicurrency lxi Single currency, specify US$ Grace period (years): 5 I] Standard Variable I Fixed [xi LIBOR-based Years to maturity: 15 Commitment fee: 0.75% Front end fee: 1.0% Financing plan: ., . WHX - V5' 'A jX. Lc US$ million Government (National and Provincial) 1.9 24.6 26.5 Customers 10.8 0.0 10.8 IBRD (including front-end fee) 11.8 18.2 30.0 Global Environmental Facility (GEF) 2.5 7.5 10.0 Concessionaires 12.1 31.1 43.2 Total 39.1 81.4 120.5 Borrower and Grant Recipicnt: The Argentine Republic Guarantor: N/A Responsible agency(ics): Secretariat of Energy (SE). Provincial Government (PGs) FY/IS$ _0 MO B Z_E_ E , . Annual 3.4 5.1 7.0 8.6 5.2 0.7 Cumulative 8.5 15.5 24.1 29.3 30.0 E;tinat ibimw{ tsEP YUSf r)': 2000( 2 0. i 1'- Annual 2.4 1.8 1.9 2.2 1.2 0.5 Cumulative 4.2 6.1 8.3 9.5 10.0 Project implementation period: | Expected effectiveness date: Expected closing date: 6Pyears p August 31, 1999 I September 30, 2005  Project Appraisal Document Page 2 Argentina - Renewable Energy in the Rural Market Project A: Project Development Objectives 1. Project development objectives and key performance indicators (see Annex 1): Project development objectives are to: a) Provide rural areas with reliable electric supply in a sustainable manner, using renewable energy technologies, where feasible; b) Support the creation of sustainable business operations for rural energy in Argentina; c) Support the expansion of private sector participation in the provision of electricity in rural areas and the corresponding strengthening of provincial government capacities to regulate that participation; and d) Advance the reform of the energy sector in particular critical areas. Global GEF objectives are to: a) Remove market barriers to application, implementation. and dissemination of renewable energy sources; and b) Reduce greenhouse gas (GHG) emissions by replacing small-diesel electricity generation and the use of candles, kerosene and gas cylinders and in lighting and other domestic uses with renewable energy systems (RES). B: Strategic Context 1. Sector-related Country Assistance Strategy ((CAS) goal supported by the project (see Annex 1): CAS document number: 16505-AR Date of discussion of the CAS: May 15, 1997 Progress Report: CAS update discussed on 1 1/04/98 The proposed project is part of the Bank's country assistance strategy. It supports the objectives of promoting private sector investment in infrastructure (the power sector) and concomitantly supports the evolution of an appropriate regulatory and policy framework for the power sector. At the same time. the project focuses on allocating resources to the rural poor, increasing their welfare. as well as promoting environmentally sustainable management of natural resources by redefining and modernizing the role of the public sector, particularly at the provincial level. GEF Operational Strategy/Program Objective addressed by the Project: The proposed project is fully consistent with the GEF Climate Change Operational Program #6 "Promoting the adoption of renewable energy" because its goal is to remove barriers to the adoption of such technologies and reduce the implementation costs. GEF support would help to reduce information barriers for both investors and customers, address high initial cost barriers inhibiting the adoption of RES, and train the regulatory agencies in the monitoring of renewable energy operations of concessionaires. 2. Main sector issues and Government strategy: The Government of Argentina (GOA) has made great advances in the development of a competitive and efficient electricity market. The sector is experiencing the highest levels of outputs at the lowest tariff levels, thanks to privatization and other measures to liberalize the sector since 1990. The sector has been unbundled at the federal level, and most of its facilities (excepting nuclear plants and the large hydro-plants Yacireta and Salto Grande) have been privatized. Privatization at the provincial level (mainly distribution operations) is underway. A well functioning regulatory system has been set up.  Project Appraisal Document Page 3 Argentina - Renewable Energy in the Rtural Market Project These measures. however, have largely benefited the urban population, which were traditionally served by federal and provincial public enterprises. They have mainly involved conventional electricity generation (a combination of hvdro and fossil fuels). There is much yet to be done to address the needs of the rural population (mostly poor) and to introduce renewable energy systems (RES) into the market. At the same time, the newly privatized svstem has generated additional needs for information and for continued policy refinement. Looking at the rural sector, there are four main issues: * there are 2.5 million people (8 percent of the country's population) living in dispersed rural areas having no access to electricity service. Most of these people live in poverty. * the high investment costs required to provide electricity to dispersed rural populations: * the limited financial capability of the provincial govenmnents (PGs) to provide electricitv services to this population, and * the institutional weakness of the provincial regulatory agencies (PRAs) to effectively exercise their regulatory fuLnctions particularly in RES. The GOA strategy to address these issues comprises: e creating a regulatory and policv environment to encourage private sector participation in providing electricity supply to rural areas: * improving the efficiency of energy services delivery: and * strengthening the institutional technical capacity of PRAs. Thle successful implementation of the reform of the energy sector and the corresponding privatization of power enterprises carried out by the national government anid the majority of the PGs are providing a favorable climate for private sector participation under concession arrangements. The GOA's basic strategy to promote electrification of dispersed areas consists of: