Annex C: Response to Project Reviews

PROJECT EXECUTIVE SUMMARY

GEF Council Work Program Submission

Sub-Total GEF

Co-financing

Agency’s Project ID: P098423

GEFSEC Project ID:2944

Country:Fiji, Papua New Guinea, Solomon Islands, Republic of Marshall Islandsand Vanuatu

Project Title:Sustainable Energy Financing

GEF Agency: World Bank and IFC

Other Executing Agency(ies):FijiMinistry of Works and Energy (MWE); Fiji Electricity Authority (FEA); PNG Sustainable Energy Ltd. (PNGSEL); Central Bank of the Solomon Islands (CBSI), participating commercial banks.

Duration:84 months

GEF Focal Area:Climate Change

GEF Operational Program: OP5 and 6

GEF Strategic Priority: CC-2: increased access to local sources of financing for renewable energy and energy efficiency investments.

Estimated Starting Date: January 2007

Estimated WP Entry Date: June 2006

Pipeline Entry Date:September, 2005

Record of endorsement on behalf of the Governments:

(see next page)

Contribution to Key Indicators of the Business Plan: US$21.6 million in local co-financing for renewable energy and energy efficiency investments mobilized directly and an additional US$21.2million in local financing for renewable energy and energy efficiency investments leveraged.

AProject Summary

The Pacific island countries that will benefit from this project - Fiji, Papua New Guinea (PNG), Republic of Marshall Islands (RMI), Solomon Islands (SI), and Vanuatu - face similar, complex development challenges, stemming largely from their small, sparsely-distributed populations and remoteness. Resulting weak economic growth, in a context of relatively high birth rates,has caused high unemployment and hardship. Even those countries that have achieved positive growth in average per capita income have been unable to fully translate this into adequate job creation and poverty reduction.

The World Bank’sassistancestrategy for the Pacific island countries (PICs) is to help them establish a businessenvironment conducive to faster and sustainable economic growth and tohigher employment. Access to electricity is one key to growth, but is generally low - ranging from 10 percent in PNG to over 65 percent in Fiji. And power generation is heavily dependent on diesel, both on and off the main grid, particularly in rural areas. In 2002, the islands’ cost of energy was in the range of 4-8% of GDP. In 2005, its cost skyrocketed to 12-25% of GDP– a severe drain on resources and barrier to growth. Increasing access to electricity and reducing its cost are thus vitally necessary to promote economic growth and to improve the quality of life ofPIC households.

Fortunately the islands have good renewable energy endowments (solar, wind and hydro) and considerable energy efficiency potential. Hence (a) renewable energy technologies are often the least cost option for increasing access to modern energy services for rural households and micro and small enterprises (MSEs);and (b) energy efficiency improvement can reduce energy import costs. However, past donor (mainly bilateral) assistance efforts have been technology-focused, fragmented, and have failed to establish efficient and commercially-sustainable energy service delivery systems that can achieve these objectives.

With GEF support, the Pacific island states are now beginning to strategically address the major barriers to renewable energy development and energy efficiency improvement. The first key steps in that process are the UNDP/GEF Pacific Islands Renewable Energy Project (PIREP) and its follow-up project, the Pacific Islands Greenhouse Gas Abatement through Renewable Energy Project[1] (PIGGAREP). These two regional projects are addressing the policy and regulatory, technology standard and some of the awareness barriers to renewable energy development. This proposed project, which has been developed in discussion with UNDP, will complement them by addressing the two major remaining barriers– (i) the lack of a professional, accessible dealer network to supply and help maintain renewable energy equipment, such as solar PV kits and/or pico hydro units and (ii) the reluctance of local financial institutions to finance renewable energy systems and energy efficiency investments on affordable terms.

These two major barriers are interlinked and mutually reinforcing. There is currently not enough demand for renewable energy equipment for an accessible and highly professional RE equipment dealer network to develop, because the equipment’s high initial investment costs prevent most of the population from purchasingit for cash. Because of the low demand, retailers or renewable energy service companies (RESCOs) don’t invest in stocks of SolarPV and/or pico-hydro equipment. Similarly, local banks have not explored the option of financing such equipment, have no experience in financing it, and hence view loans for renewable energy equipment as very risky and are unwilling to grant them.

As local stores don’t carry renewable energy equipment, customers aren’t aware of there existence and benefits. During identification of this project several store owners expressed an interest and had a sense that there would be considerable demand, but lack of market intelligence, prevented them from entering this market. Stores would only respond to mainly donor or government financed bulk purchases and don’t stock up for individual sales.

To keep monthly expenses for renewable energy systems the same or less than for fossil fuel options, renewable energy equipment buyers need loan-term loans of at least five to seven years. But the financial institutions are reluctant to makeloans of the required length. Finally, the interest rates charged by banks on the few renewable energy and energy efficiency loans they do make to individuals and MSEs often render them unaffordable.

On the other hand, many local financial institutions are looking for good projects to finance, even in rural areas. For example, the Australian and New Zealand Banking Group Limited (ANZ) has recently initiated rural banking operations in Fiji and Solomon Islands. And, in response to a request for Expression of Interest published on the dgMarket website, a reputed local bank has shown interest in renewable energy lending by its branches and subsidiaries in fourof the six countries involved in this project. Similarly, a number of other local financial institutions have indicated their strong interest in renewable energy lending, though some, particularly the smaller local institutions, would require significant technical assistance before they would be able to do so.

By (i) helping local renewable energy equipment dealers with well researched market intelligence to expand their businesses and develop their skills and (ii) exploiting the willingness of capable local financial institutions to lend for renewable energy and energy efficiency projects andremoving the barriers to such lending, thisproposed project will significantly increase the adoption and use of renewable energy technologies and energy efficiency measures in the participating Pacific Island states. The project’s proposed mechanisms of risk sharing instruments, backed with GEF funds,plus targetedfinancial and dealer institutional capacity-building,is calculated to give the required stimulus to the financial institutions and renewable energy dealers, without causing them to deviate from their normal business practices or undermining their commercial viability.

Objectives, outputs and outcomes.

Objectives

The project will support the higher-level development objectives of the Pacific Island countries, as expressed in the Bank’s Pacific Regional Strategy for FY2006-2009, by helping to: (i) reduce poverty and improve the quality of life for those persons living in rural households and (ii) generate sustainable economic growth and employment opportunities. It will do so by facilitating increased access to electricity, reducing reliance on costly diesel power generation, enabling new income-earning activities, and promoting the development of micro and small enterprises.

The project’s direct objective is to significantly increase the adoption and use of renewable energy technologies and energy efficiency measures in participating Pacific Island states by providing a package of incentives to encourage local financial institutions to participate in sustainable energy financing of equipment purchases. Itsglobal environment objective is to contribute to mitigating climate change through the reduction of greenhouse gas emissions, in line with the objectives of the United Nations Framework Convention on Climate Change.

Outputs/Outcomes

The main outputs/outcomes of the project will be:(i) Establishment of a sustainable energy risk sharing fund. Itwill be set up with US$5.2 million of GEF resources, and will be utilized by commercial banks to establish affordablefinancial products for renewable energy and energy efficiency investment. The participating finance institutions will on-lend to MSEs and to end users of solar PV systems, pico hydro systems and coconut fueled power generation systems. (ii) Growth of profitable renewable energy lending portfolios in local banks and (iii) viable renewable energy supply businesses. Assistance provided under the project will enable Participating Finance Institutions (PFIs) to establish profitable sustainable energy portfolios and MSEs to profitably make commercial sales of alternative energy systems. The project will alsoenhance renewable energy and energy efficiency service capacity and awareness, through the production of interactive video training modules for each of the technical components, which will be utilized by participating households and MSEs, and through mass media communications in coordination with the PIGGAREP,to the general public on the benefits of renewable energy and energy efficiency improvement.

Activities

Component 1: Risk Sharing Fund (RSF) (GEF USD5.2 million, Financial Institutions USD19.7 million, Households and Enterprises USD0.9 million, NGOs USD1.7 million and Renewable Energy Investments (19.5 million)

The RSF will facilitate loans from local private sector financial institutions for sustainable energy and energy efficiency investments by reducing their risk, primarily through the provision of partial risk guarantees. SEFP financing support will not be allocated between the participating countries, although each country will receive an initial allocation for technical assistance to allow operations to commence. The RSF will be administered by a Fund Manager, based in a first class regional financial institution, chosen through a competitive process, with direct links to banks and other financial institutions in the participating countries. The RSF is targeting two groups of end-users: (i) households already using kerosene for lighting needs; and (ii) MSEs, community groups and schools, using kerosene, diesel or other fossil fuels to provide energy for use in their activities. The support would enable these end-users to finance purchases of sustainable energy and energy efficiency equipment. Since the supply chain for such equipment is not well developed in the region, the RSF will also provide financing support to MSEs to allow start-up or expansion of their supply, design, maintenance and installation businesses in this sector.

NGOs and other agencies have indicated their interest in working with the project by targeting the extremely remote and/or extremely poor beneficiaries. The project will actively participate with these groups.

The Fiji Electricity Authority (FEA) is the public utility responsible for general electrification through the national grid in Fiji. It has an extensive grid on Viti Levu and three other smaller grids on Vanua Levu and Ovalau, supplied by 14 power stations with a total installed capacity of 194 MW, of which 80 MW is hydro. FEA, to meet existing and new demand with sustainable energy solutions, based on least cost analysis, will, with input from this project, make investments in renewable energy capacity with financing from IBRD (Board date January 2007). This new capacity will replace all their diesel generation with renewable energy.

Component 2: Technical assistance, market surveys and communications (GEF USD2.48 million, other sources USD1.7 million)

Technical assistance will be provided through the SEFP to: (i) strengthen the capacity of local financial institutions to service clients that wish to borrow to purchase Solar PVs, pico-hydros or fuel switching equipment;(ii) provide relevant training to the Fund Manager, a first class bank with regional representation that will administer the RSF; (iii) strengthen sales and after sales through detailed market studies and communicating the findings with potential retailers, (iv) strengthen the financial and technical capacity of MSE sustainable energy service providers to make them more bankable from the perspective of private sector lenders; (v) strengthen customer understanding of the operational aspects of the sustainable energy equipment to be purchased;(vi) provide assistance in sustainable energy repair and maintenance training to vocational schools in areas where no such training is currently available; (vii) helpother local training institutions, including internet based learning centers, to develop and administer training in the repair and maintenance of sustainable energy equipment; (viii) provide technical support to produce and frequently update an Approved Product Catalogue; (ix) help local retailers and MSEs to attend international trade fairs and training programs; (x) provide technical assistance and support to hydro basin and biomass resource studies in Fiji for investments in large scale renewable energy generation capacity to be finance under a plannedIBRD loan. (Board date January 2007). While these studies will assist FEA with their general investment strategy, in line with Bank policies, none of these studies are part of the preparatory work for the proposed IBRD loan; and (xi) develop and implement a communications plan [in coordination with the Pacific Islands Greenhouse Gas Abatement through Renewable Energy Project (PIGGAREP)] that addresses all the relevant stakeholders.

Component 3: Participant monitoring (GEF USD0.4 million, no other sources).

For the first three years of the project, household borrowers will be requested to fill out semi-annually a short survey, reporting their technical, economic and social experiences resulting from access to modern energy services. Borrowers participating will be rewarded for an acceptable survey by receiving the equivalent of a fortnightly loan service payment on their loan. The feedback from the surveys will help to fine-tune the project interventions for improved effectiveness and to monitor the environmental, economic and social impact of the project on the beneficiaries.

Component 4: Management and Evaluation (GEF USD1.36 million, USD180,000 from Local Governments)

The Executive Agencies (EAs) in the participating countries do not have the specific technical expertise in house to manage this project in their country. For that reason, EAs will procure the services of Management Consultants (MCs) to assist them with the execution of the program.

Evaluations will be carried out by the end of year 2 and year 5.

Key indicators, assumptions and risks

The key development indicators include: (i) number of additional households and MSEs served by renewable electricity services; (ii) installed new renewable generation capacity by unit and kW; (iii) financial savings realized by switching from non-renewable fossil fuels (such as kerosene, petrol and diesel) and non-reusable batteries (such as alkaline dry cells) to renewable supply options, including Solar PV, pico-hydro and coconut oil-fuelled generators; and (iv) number of kWh saved due to energy efficiency interventions. Executive agencies in each country will provide detailed data on project outcomes through the semi-annual reports extracted from a performance-based monitoring scheme, which is described as a separate competent of this project (Component 3). The key global environment indicator will be metric tons of CO2 emissions reduction resulting directly from the proposed project. This will be assessed at the completion of the project implementation based on solar PV systems and pico hydro systems sold, and contributions of fuel switching projects.

There are two key risks which may affect the results and outcomes of the project: (i) households and MSEs are not prepared to commit to long-term loans and (ii) local retailers are unable to access international markets for sustainable energy equipment, resulting in higher-than-projected prices and slower supply to the project. The first risk will be mitigated through promoting the project as replacing the cost of fuels and dry cell batteries rather than a long-term loan program. Participants will also be offered a range of products of different cost, to reduce repayments. The second risk will be mitigated by providing technical assistance, training and intelligence on international procurement of sustainable energy components. If the supply of one technology is diminished then emphasis can be shifted to the other technologies. Several smaller risks have been identified: (i) participants in remote areas do not participate due to the difficulties of transporting equipment; (ii) financial institutionsor retailers fail to perform in accordance with performance agreements; (iii) macro-economic and political instability; (iv) natural disasters such as drought, cyclone or tsunami cause widespread damage to schemes, leading to defaulting on loans and (v) repayments stop due to theft or vandalism of equipment. Mitigation measures are described under section C5 Critical risks and possible controversial aspects.