Document of The World Bank Report No: 69589-CN INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$120 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A BEIJING ROOFTOP SOLAR PHOTOVOLTAIC SCALE-UP (SUNSHINE SCHOOLS) PROJECT February 7, 2013 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective September 1, 2012) Currency Unit = RMB (Chinese Yuan Renminbi) US$ 1 = RMB 6.30 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BDRC Beijing Development and Reform FIT Feed-in Tariff Commission BFB Beijing Finance Bureau FM Financial Management BGC Beijing Grid Company FMM Financial Management Manual BMAO Beijing Municipal Audit Office FSR Feasibility Study Report BMG Beijing Municipal Government FYP Five-Year Plan BP Bank Procedures GDP Gross Domestic Product CDM Clean Development Mechanism GEF Global Environment Facility CO2 Carbon Dioxide GOC Government of China CPS Country Partnership Strategy GW Gigawatt CQS Selection Based on Consultants' IBRD International Bank for Reconstruction Qualification and Development CRR Cost Recovery Rate ICB International Competitive Bidding DA Designated Account IEA International Energy Agency DSCR Debt Service Coverage Ratio IFC International Finance Corporation (WB Group) DRC Development and Reform IFRs Interim Financial Reports Commission EA Environmental Assessment KPIs Key Performance Indicators EBITDA Earnings before interest, taxes, kWh Kilowatt hour depreciation and amortization ECOP Environmental Codes of Practice M&E Monitoring and Evaluation EE Energy efficiency MOF Ministry of Finance EHS Environmental Health and Safety MOST Ministry of Science and Technology EIA Environmental Impact MW Megawatt Assessment EIRR Economic Internal Rate of Return MWh Megawatt hour EMP Environmental Management Plan NA Not Applicable FDI Foreign Direct Investment NCB National Competitive Bidding FIRR Financial Internal Rate of Return NEA National Energy Administration NPV Net Present Value RMB Renminbi (Chinese Yuan) O&M Operation and Maintenance SBD Standard Bidding Documents OECD Organisation for Economic Co- SCADA Supervisory Control and Data operation and Development Acquisition ORAF Operational Risk Assessment SCC Social Cost of Carbon Framework PAD Project Appraisal Document SGC State Grid Company PDO Project Development Objective SIL Specific Investment Loan PLG Project Leading Group SLA Subsidiary Loan Agreement PMO Project Management Office SSS Single-source selection PP Procurement Plan TA Technical Assistance PV Photovoltaic TOR Terms of Reference QBS Quality-Based Selection TPEC Total Primary Energy Consumption RE Renewable Energy WACC Weighted Average Cost of Capital RESCO Renewable Energy Service WB World Bank Company REDP Renewable Energy Development Wp Watt Peak Proj ect RES Renewable Energy Sources WTP Willingness-to-Pay Regional Vice President: Axel van Trotsenburg, EAPVP Country Director: Klaus Rohland, EACCF Sector Director: John Roome, EASSD Sector Managers: Mark R. Lundell, EASCS Charles Feinstein, EASWE Task Team Leader: Chongwu Sun, EASCS CHINA Beijing Rooftop Solar Photovoltaic Scale-Up (Sunshine Schools) Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT ........................................................... 1 A. Country Context .......... ....... ................................. 1 B. Sectoral and Institutional Context........................................ 2 C. Higher Level Objectives to Which the Project Contributes.................... 3 II. PROJECT DEVELOPMENT OBJECTIVES ..........................3 A. PDO........................................................ 3 B. Project Beneficiaries ................................................. 4 C. PDO Level Results Indicators.........................4... ..........4 III. PROJECT DESCRIPTION ......................................... 4 A. Project Components ..................................... ........ 4 B. Project Financing .................................................. 5 C. Lessons Learned and Reflected in the Project Design.............. ......... 6 IV. IMPLEMENTATION .............................................8 A. Institutional and Implementation Arrangements .................. ........ 8 B. Results Monitoring and Evaluation ....................................... 8 C. Sustainability.................................8.... ............8 V. KEY RISKS AND MITIGATION MEASURES ......................... 9 A. Risk Ratings Summary Table ................................... 9 B. Overall Risk Rating Explanation ......................9... ..........9 VI. APPRAISAL SUMMARY .........................................10 A. Economic and Financial Analyses ................................... 10 B. Technical ........................................... ............... 11 C. Financial Management................................... ............ 11 D. Procurement ......................................... ............... 11 E. Social (including Safeguards) ...................................... 12 F. Environment (including Safeguards) ................................... 12 Annex 1: Results Framework and Monitoring .................................................................... 14 Annex 2: Detailed Project Description.................................................................................. 16 Annex 3: Implementation Arrangements ............................................................................. 21 Annex 4: Operational Risk Assessment Framework (ORAF)..............................................29 Annex 5: Implementation Support Plan ................................................................................32 Annex 6: Economic and Financial Analysis ......................................................................... 34 PAD DATA SHEET China Beijing Rooftop Solar Photovoltaic Scale-Up (Sunshine Schools) Project PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC REGION (EAP) China and Mongolia Sustainable Development Unit (EASCS) Report No.: PAD259 Basic Information Project ID Lending Instrument EA Category Team Leader P125022 Specific Investment B - Partial Assessment Chongwu Sun Loan Project Implementation Start Date Project Implementation End Date 19-Mar-2013 31-Dec-2018 Expected Effectiveness Date Expected Closing Date 3 1-Jul-2013 31-Dec-2019 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Mark R. Lundell John A. Roome Klaus Rohland Axel van Trotsenburg Borrower: International Department, Ministry of Finance Responsible Agency: Beijing Project Management Office Contact: Mr. Zhiqing Shao Title: Director Telephone 86-10-82289551 Email: bjpmoshaozq@bjpc.gov.cn No.: Responsible Agency: Beijing Yuanshen Energy Saving Technology Company Limited Contact: Jibo Nie Title: President Telephone 86-10-88131055 Email: yuanshen@powerbeijing.com No.: Project Financing Data(US$M) [X] Loan [ ] Grant [ ] Other ] Credit [ ] Guarantee For Loans/Credits/Others Total Project Cost (US$M): 239.70 Total Bank Financing 120.00 (US$M): Financing Source Amount (US$M) Borrower 115.4 International Bank for Reconstruction and 120.0 Development Local Sources of Borrowing Country 4.3 Financing Gap 0.0 Total 239.7 Expected Disbursements (in US$ Million) Fiscal Year 2014 2015 2016 2017 2018 2019 Annual 10.0 20.0 35.0 40.0 10.0 5.0 Cumulative 10.0 30.0 65.0 105.0 115.0 120.0 Project Development Objective(s) The project Development Objectives of the proposed project are to increase the share of clean energy in electricity consumption and to demonstrate the viability of the renewable energy service company model for scaling up the deployment of rooftop solar photovoltaic systems in schools and other educational institutions in Beijing Municipality. Components Component Name Cost (US$ Million) Component one: Sunshine Schools Program Support - 226.0 installation of 100 MW rooftop solar PV systems in Beijing Component two: Technical assistance for developing local 4.0 capacity for scaling up solar energy deployment, project implementation, and other priority energy policy initiatives of the BMG Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [X] respects? Does the project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [X] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ] Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X Legal Covenants Name Recurrent Due Date Frequency Debt Service Coverage Ratio X Yearly Description of Covenant Except as the Bank shall otherwise agree, the Beijing Yuanshen Energy Saving Technology Company Limited, shall not incur any debt for its PV business unless a reasonable forecast of the revenues and expenditures of Yuanshen's PV business shows that the estimated net revenues of Yuanshen for each fiscal year during the term of the debt to be incurred shall be at least 1.1 times the estimated debt service requirements of Yuanshen in such year on all debt of Yuanshen including the debt to be incurred. Name Recurrent Due Date Frequency Subsidiary Loan Agreement Description of Covenant The conclusion of a subsidiary loan agreement between Beijing Municipality and Yuanshen prior to implementation of Component 1 of the Project. Team Composition Bank Staff Name Title Specialization Unit Chongwu Sun Senior Environmental Task Team Leader EASCS Specialist Feng Liu Senior Energy Specialist Energy Sector Policy SEGES Gailius J. Draugelis Lead Energy Specialist Operations Advisor EASCS Jian Xie Senior Environmental Economic Analysis ECSEN Specialist Xiaowei Guo Senior Procurement Procurement EASR2 Specialist Wenyan Dong Operations Analyst Implementation EASCS Arrangements and Risk Analysis Yi Dong Senior Financial Financial Management EASFM Management Specialist Mei Wang Senior Counsel Legal LEGAM Sameena Dost Senior Counsel Senior Counsel LEGES Emmanuel Py Infrastructure Specialist Operations Officer and EASWE Energy Jun Zeng Social Development Social Safeguards and EASCS Specialist Development Hua Zhu Program Assistant Program Assistant EACCF Yanqin Song Energy Specialist Renewable Energy EASCS Marcelino Madrigal Senior Energy Specialist Senior Energy Specialist SEGEN Kun Cao Team Assistant Team Assistant EACCF Dan Xie Team Assistant Team Assistant EACCF Non Bank Staff Name Title Office Phone City Ning Wu Finance Analyst 86-13701143534 Beijing Peishen Wang Environment Consultant Winnipeg Noureddine Berrah Energy Consultant, 1-2024731132 Washington Advisor to the team Yibo Wang Solar PV Energy 86-13671355662 Beijing Consultant Sicheng Wang Solar PV Energy 86-13901388270 Beijing Consultant Locations Country First Location Planned Actual Comments Administrative Division China Beijing Beijing X Municipality Institutional Data Sector Board Energy and Mining Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits Co-benefits Energy and mining Other Renewable Energy 100 Total 100 Z I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Environment and natural resources Climate change 34 management Environment and natural resources Other environment and natural resources 33 management management Urban development Other urban development 33 Total 100  I. STRATEGIC CONTEXT A. Country Context 1. China has achieved rapid economic growth in recent decades although many imbalances remain. In the past decade, GDP grew by about 10 percent per annum with effective macroeconomic management. Inflation has been kept largely under control. While China's economy was affected by the global financial crisis through its trade and foreign direct investment (FDI), a forceful fiscal and monetary stimulus helped keep China's growth rate at a high level. 2. China's double-digit economic development has spurred massive consumption of total primary energy and electricity. Total Primary Energy Consumption (TPEC) increased annually by 8.8 percent during 2000-2011, more than triple the global TPEC increase. Electricity consumption grew by 12 percent over the same period and such rapid growth is expected to continue in the coming years. According to the latest International Energy Agency (IEA) New Policies Scenario forecast, China's primary energy demand is expected to grow by 2 percent annually up to 2035, a growth rate that is 0.7 percent higher than the world growth rate and 1.7 percent above the OECD growth rate. The China Electricity Council predicts that China's power generation capacity will reach 1950 GW by 2020. Currently, coal dominates China's energy mix, contributing 68.5 percent of primary energy consumption, and fueling about 53 percent of power generation in 2011. According to the IEA forecast, coal will remain the dominant fuel and would account for more than 50 percent of primary energy up to 2035. 3. The Government of China (GOC) has come to recognize that such tremendous primary energy and power growth cannot be met by fossil fuels. Coal combustion has already caused a certain amount of damage to the eco-environment. Past growth trends are unsustainable and the GOC is increasing its efforts to reduce the energy and carbon intensity of the economy. Shifting to a greener energy supply will benefit both China and the world. 4. Energy efficiency (EE) and renewable energy (RE) are two critical elements of sustainable urban development strategy and are central in China's push to reduce the carbon footprint of its economy. The GOC has pledged to reduce the economy's 2005 carbon intensity by 40-45 percent by 2020. Binding targets were set in the 12th Five-Year Plan (FYP) period to cut GDP energy intensity by 16 percent and GDP carbon intensity by 17 percent. Targets were also set for increasing the share of non-fossil energy, that is, nuclear and RE energy sources, in primary energy use from 8 percent in 2010 to 11.4 percent by 2015 and to 15 percent by 2020. The GOC also plans to increase the installation of rooftop solar PV systems from under 1 GW in 2010 to 3 GW by 2015. 5. Cities have led and will continue to drive China's rapid economic transformation. Urbanization in China exceeded 50 percent in 2011 and is projected to reach almost 70 percent in 2030. In 2010, cities with prefectural or higher level administrative status (287 out of a total of over 657 officially recognized cities) contributed to 61 percent of national GDP, while accounting for 29 percent of the national population. This dominance in economic activities and the decentralized urban management in China give cities great power to shape their own development outcome and that of the nation. A key measure of cities' development success will be its environmental sustainability in terms of local and global impacts. 1 6. Cities account for about 75 percent of China's energy consumption and are key to meeting China's energy intensity and carbon emission reduction targets. Per capita carbon emissions in some major Chinese cities are among the highest of major cities in the world (in part due to large contributions from industries and power generation)'. At the onset of the 12th FYP (2011-2015), many Chinese cities have made continuous and active efforts to change the growth pattern and implement low-carbon development strategies. By 2030 China's cities are projected to add about 45 percent more residents (about 300 million) and about 60 percent more buildings compared to 2010. Accompanied by high economic growth, this rapid urbanization puts tremendous pressure on all forms of urban services: energy, water, transport, and waste management. It also, however, affords Chinese cities the opportunity to reshape their development pathways. 7. Implementing programs and policies to reign in carbon emissions in urban areas will be a central feature of China's emission reduction strategy. The National Development and Reform Commission (NDRC) announced in 2012 that areas in 29 provinces and cities (including Beijing) are to pilot low-carbon growth while specific plans are also being developed to pilot carbon-emissions trading schemes. Such initiatives are expected to intensify as the implementation of the 12th FYP unfolds. In response to the emerging focus on environmentally sustainable growth, many other Chinese cities are also trying to develop eco-city and low-carbon city initiatives. These cities will look to national demonstration pilots for ideas and successful programs to replicate. B. Sectoral and Institutional Context 8. As the nation's capital and a pilot city for low-carbon growth, Beijing (with a metropolitan population of about 20 million) is striving to become a model for other Chinese cities in promoting resource-efficient and environmentally-friendly urban economic growth. Following a successful effort during the 11h FYP period, the Beijing Municipal Government (BMG) has set more stringent targets for the 12th FYP than those of the GOC: reducing GDP energy intensity by 17 percent (vs. 16 percent nationwide) and reducing GDP CO2 intensity by 18 percent (vs. 17 percent nationwide) by 2015. To achieve these targets, the BMG has developed a plan to increase the share of renewable energy in the total final energy consumption from the 2010 level of 3.2 percent to 6 percent in 2015. Beijing already achieved a 26.5 percent reduction in GDP energy intensity during the 11th FYP period (from 2006 to 2010), the highest reduction among all Chinese cities, in large part due to economic and industrial structural adjustment. 9. The Golden Sun Program for solar photovoltaic (PV) generation. To stimulate the domestic PV installation market, the Ministry of Finance (MOF), the National Energy Administration (NEA), and the Ministry of Science and Technology (MOST) jointly initiated the Golden Sun Program in 2009. The purpose of this program is to support the installation of PV generation-mainly rooftop PV systems in urban areas. Under the program, the central government subsidizes about half of the initial capital investment in PV systems. In addition, the Program also encourages and recommends user-side grid connection for PV systems as well as energy service company business model. The program is designed to promote distributed PV generation, but it faces several barriers. World Bank. 2012. Sustainable Low-Carbon City Development in China. 2 10. Barriers to the deployment of rooftop PV systems in China. Despite the availability of significant public capital subsidies to help scale up commercial investments in rooftop PV systems, the sector is facing the following operational, institutional, and policy barriers: * Large-scale deployment is hindered by a lack of tested business models for developing projects and operating and maintaining installed systems; * The Renewable Energy Service Company (RESCO2) operational model faces regulatory challenges in the distributed power generation business segment; * Local capacity to provide sustained institutional and technical support for continued scale-up efforts is lacking; and * There is still no clear policy allowing rooftop solar PV systems to send the excess electricity to the grid. 11. The Beijing "Sunshine Schools" Program. Under the umbrella of the Golden Sun Program, which supports nation-wide installation of PV generation, Beijing will install 100 MW of rooftop PV systems in schools and other educational institutions in Beijing Municipality. It is the largest of such initiatives in China so far. Most projects under the Golden Sun Program involve large PV capacity installed at one place. The proposed "Sunshine Schools" program, however, will involve distributed PV capacity (100 MW in aggregate) in about 800 schools and other educational institutions. The capacities of most systems are expected to range from 50 to 200 kW. The program will test the RESCO business model for distributed rooftop solar PV systems, with enhanced after-sale service. It is also expected to pilot two-way metering for rooftop PV systems. If proven commercially successful, the project would provide valuable experience, and demonstrative and educational effects and benefits (technical feasibility, economic viability, safeguards, and project management) for developing similar schemes in other Chinese cities with promising solar resources. C. Higher Level Objectives to Which the Project Contributes 12. The project's objectives are fully consistent with the Country Partnership Strategy (CPS) for FY2013-FY2016, which was discussed by the Board on November 6, 2012. It directly supports one of the two strategic themes of the new CPS: supporting greener growth, in particular, shifting to a sustainable energy path. The project also contributes to China's efforts to expand use of renewable energy (RE) and to address climate change. It also supports the World Bank Group's corporate commitment to increase RE investments. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 13. The PDO of the proposed project are to increase the share of clean energy in electricity consumption and to demonstrate the viability of the renewable energy service company model for scaling up the deployment of rooftop solar photovoltaic systems in schools and other educational institutions in Beijing Municipality. 2 Renewable Energy Service Company (RESCO): When using the ESCO (Energy Service Company) model in renewable energy sector, the ESCO is usually called RESCO, which is a business model that develops, installs, and arranges financing for projects designed to increase renewable energy and to improve the energy efficiency and maintenance costs for facilities over a range of time period, approximately seven to twenty years. 3 14. The PDO will be achieved by: 1. Supporting a large scale rooftop PV program (Sunshine School Program) for installation of 100 MW PV systems in about 800 schools and other educational institutions in Beijing Municipality; 2. Demonstrating the RESCO model for scaling up the deployment of rooftop solar PV systems; and the development and strengthening of institutional capacity, enabling policies and educational programs for renewable energy deployment in the city; and 3. Supporting institutional capacity building, educational programs for renewable energy deployment in the city, and piloting two-way metering in selected institutions and schools. B. Project Beneficiaries 15. The main direct stakeholders of this project are the Beijing Municipal Government (BMG), and Beijing Yuanshen Energy Saving Technology Company Limited (Yuanshen Company, a municipal energy service company that will serve as a project implementation company). Citizens of Beijing municipality will benefit from the reduction of emissions, participating schools and other educational institutions, their staff and students will benefit, in particular, from the educational program supported by the TA component. C. PDO Level Results Indicators 16. Achievement of the Project Development Objective would be measured by the following indicators (see Annex 1): * Materialized share of renewable energy from rooftop solar PV systems in electricity consumption in selected schools; * Number of RESCO contracts signed; and * CO2 emission reduction (metric tons/year) as a result of the project. III. PROJECT DESCRIPTION A. Project Components 17. The proposed project will be implemented over six years and consists of two main components: (a) the Sunshine Schools Program--installation of 100 MW rooftop solar PV systems in about 800 schools and other educational institutions; and (b) technical assistance (TA) to develop local capacity for scaling up solar energy deployment, project implementation, and other priority energy policy initiatives of the BMG. 18. Component 1: Sunshine Schools Program Support - Installation of 100 MW Rooftop Solar PV Systems in Beijing (estimated cost: $226.0 million; $110.3 million IBRD financing). The proposed component will install 100 MW of distributed rooftop PV systems in about 800 schools and other educational institutions in Beijing under the RESCO model for large-scale 4 rooftop solar PV deployment. Similar to the ESCO business model adopted by the central government as a key market mechanism to scale up energy efficiency investments, the RESCO will take the performance and financial risk of the investment by signing an energy service performance contract (ESPC) with each school/university, which will pay the RESCO only for the solar PV electricity it consumes. The RESCO will install, maintain, and operate the rooftop solar PV installations during the period of the ESPC, and thereafter hand over the installation to the school/university, which themselves pay no up-front capital for the investment. Capital subsidies will be provided by the Golden Sun Program on a graduated scale (RMB8.0/Wp for the first 5 MW and RMB5.5/Wp for the remaining 95 MW). It is expected that the BMG would provide an additional RMBl.0/Wp per year as subsidy limited to the first three years. The Bank loan will be on-lent to the RESCO by the Beijing Municipality. 19. Given that there will be about 800 schools and other educational institutions under this component, a programmatic approach will be adopted for project implementation. Yuanshen Company, the project company for component 1, has developed a Project Implementation and Operations Manual (see Annex 3 for details) acceptable to BMG and the Bank, that outlines school selection criteria, school survey information, technical design and evaluation requirements, environmental management and safety requirements, and procurement and financial management frameworks that are consistent with the World Bank and GOC rules and procedures. During project implementation, relevant Beijing government agencies, including the Beijing Development and Reform Commission (BDRC), Beijing Education Commission (BEC), Beijing Finance Bureau (BFB) and the Project Management Office (PMO), will assist Yuanshen with school selection, if there are any issues and difficulties experienced, and supervise project implementation. 20. Component 2: Technical assistance for developing local capacity for scaling up solar energy deployment, project implementation, and other priority energy policy initiatives of the BMG (estimated cost: US$4.0 million). The proposed TA activities include development of local capacity for scaling up commercially viable solar energy deployment; and engineering and technical support to Yuanshen for the design, procurement, construction supervision and project management of the PV systems. Part of this TA may be financed from Component 3 (for scaling- up commercially viable rooftop solar PV deployment) under a proposed GEF grant supported Urban-Scale Building Energy Efficiency and Renewable Energy Project, which would then replace part of the Borrower's counterpart funding under this project. 21. The proposed TA activities include: (i) Demonstration of the RESCO model for large-scale grid-connected rooftop solar PV deployment in Beijing Municipality, provision of engineering and technical support in relation to PV systems to Yuanshen Company, and independent monitoring and evaluation of implementation and results of such model; (ii) demonstration of two-way metering in Beijing Municipality; (iii) establishment of an online monitoring system for rooftop PV systems and a solar energy information portal in Beijing Municipality; and (iv) improvement of renewable energy education in schools and other educational institutions in Beijing Municipality. B. Project Financing Lending Instrument 5 22. The lending instrument is a Specific Investment Loan (SIL). The loan will be a single currency of US Dollar, variable spread loan of US$120 million, with a maturity of 25 years, including a 5-year grace period, and a front-end fee of 0.25 percent. Project Cost and Financing 23. The table below indicates the project cost and the Bank's financing by component. IBRD Project Components Prjc cost Financing % Financing (US$ million)million) 1. Sunshine Schools Program 198.6 96.9 48.8% 2. Technical Assistance 4.03 0.0 0.0% Total Baseline Costs 202.6 96.9 47.8% Physical contingencies 17.9 8.7 48.8% Price contingencies 9.5 4.7 49.0% Total Project Costs 230.0 110.3 47.9% Interest During Construction 9.4 9.4 100% Front-End Fees 0.3 0.3 100% Total Financing Required 239.7 120.0 50.1% C. Lessons Learned and Reflected in the Project Design 24. China's solar PV industry emerged in the early 1970s and before 2008 PV generation was used mainly for rural electrification. China's solar PV module manufacturing industry started booming over the past decade, but most solar PV modules were exported to the international market, which relies heavily on the existence of incentive policies in developed countries. In 2010, Chinese solar PV manufacturers sold 13 GW, accounting for 45 percent of the global solar PV market. At the same time, in large part because of the Golden Sun Program and the Solar Building Demonstration Project (sponsored by the Ministry of Housing and Urban-Rural Development), the domestic market also entered a fast-track development period. By the end of 2010, the total accumulated installation of solar PV systems reached 900 MW, nine times that of 2008. Current installations are mostly rural generation systems, desert power stations, and some big size rooftop systems. But there is no example yet of a large scale distributed generation system like the proposed project. 3 Beijing Municipality will provide the funding for the technical assistance component, potentially including $2 million of support from a proposed GEF grant supported Urban-Scale Building Energy Efficiency and Renewable Energy Project, for which Beijing Municipality is one of the proposed recipient municipalities. 6 25. From 2001 to 2008, the Bank supported the implementation of the China Renewable Energy Development Project (REDP). Lessons learned from REDP were fully taken into account in the design of the proposed project, as follows: * Taking into account specific country circumstances when designing grid-connected electrification; * Fostering synergies between market and technology development (with TA assistance); * Providing adequate support and adapting the procurement process based on the implementing agency's capacity and the technologies involved; and * Designing flexible TA programs, which are responsive to changing circumstances. 26. In the mid 1990s, China established three pilot ESCO companies with the support of the World Bank to promote the ESCO business model. With two decades development, the ESCO business model has widely been adopted in China's energy conservation sector and the member companies of the Chinese Energy Management Contract Association have reached 787 (up to October 17, 2012). In a circular issued by the State Council in mid 2011, the ESCO business model was recommended as the main tool to be used for realizing the government's energy conservation target in its 12th FYP. Yuanshen Company is one of the three ESCO companies established with the Bank's support. When using the ESCO model in the renewable energy sector, the implementing company is usually called RESCO instead of ESCO. Some user-side connection projects are under operation in China now, but few of them use the RESCO business model. The proposed project will therefore use user-side connection and consumption as base case with the RESCO business model and a few schools will be selected to pilot two-way metering for policy innovation. 27. Experiences from developed countries, such as Germany and the US, as well as from developing countries, such as Mexico, indicate that allowing free-flowing between the distributed solar PV systems and local grid poses no essential technical problems for grid operation when the connected capacity is a small share of the overall local capacity (20 percent is usually considered a threshold). It also opens up opportunities for energy service companies to aggregate distributed projects to achieve economies of scale. Beijing will be the first case where a large number of grid-connected rooftop solar PV systems will come online in a short period of time. The local utility needs to be aware of the potential operational issues arising from grid- connected rooftop solar PV systems and have the solutions. There are also significant potential benefits of having these distributed systems. Local distribution companies in China have not been exposed to these issues until now. 28. Several incentive policies to support PV projects are in use in various countries. For distributed PV projects that are normally connected to the distribution grid, countries use either a Feed-In Tariff (FIT) policy or net-metering rules. In Germany and in most European countries, PV electricity is purchased by utilities with a special FIT that is higher than the price of electricity generated from conventional energy to promote PV application. The difference between the PV FIT and the conventional price is subsidized by governments. In the United States, a mix of incentives, including net-metering rules, tax-credit, Renewable Energy Portfolio Standards, and FIT is applied. 7 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 29. The management structure of the proposed project has already been set up at various levels. The Project Leading Group (PLG) has been established to provide overall policy and strategic guidance during project implementation and to facilitate inter-agency coordination. Under the leadership of the PLG, a Project Management Office (PMO) has been set up to carry out day-to- day project management and monitoring and evaluation activities. It will be supported by an independent monitoring and evaluation mechanism with inputs from the Beijing Energy Conservation and Environmental Protection Center and Yuanshen Company. 30. Yuanshen Company, one of the three ESCO companies established with support from the World Bank, was selected prior to the Bank's involvement by the Beijing municipal government to implement the "Sunshine Schools Program", the first component of the proposed project through the RESCO model, prior to the Bank's involvement in this project. The company will take full responsibility for project implementation as well as all operational service obligations after the rooftop PV systems have been put into utilization. 31. The PMO, together with four other agencies, namely the Beijing Education Commission, the Beijing Energy Conservation and Environmental Protection Center, Beijing Grid Company, and Yuanshen Company, will be responsible for the implementation of the TA components under the project. The PMO will perform a role mainly of guidance and supervision to make sure all activities implemented by the various agencies comply with rules and procedures. 32. A detailed description of the project management structure is presented in Annex 3. B. Results Monitoring and Evaluation 33. Annex 1 lists the performance indicators to be tracked during the project implementation and specifies the source and schedule for data collection. The PMO (with relevant inputs from Yuanshen Company and the Beijing Energy Conservation and Environmental Protection Center) will be responsible for the overall M&E system, including regular data collection to assess progress towards achieving results. It will furnish to the Bank semi-annual progress reports on project implementation by February 15 and August 15 of each year, starting with August 15, 2013. In addition, it will prepare a mid-term review report by February 15, 2016. Based on the recommendations of these reports and the Bank's reviews and comments on them, the PMO will take actions, satisfactory to the Bank, to address any emerging issues in order to meet the targets set in the results framework. C. Sustainability 34. Development of renewable energy to improve the energy structure, and reduce GHG emissions is a long term development strategy of both the GOC and the BMG and both will support the project financially. MOF will provide an investment subsidy through the Golden Sun Program to support the installation and sustainable operation of the project. These subsidies will be provided to Yuanshen Company. With support from its parent company (Jingneng Group, fully owned by the BMG) and the designed TA activities, Yuanshen Company will have required financial, technical, and managerial capacity to operate the project in a sustainable way. 8 Established as one of the three energy service companies (ESCO) established under the WB/GEF China Energy Conservation Project ten to fifteen years ago, its management team and key staff are familiar with World Bank procedures and rules. Financial sustainability is also supported by the BMG providing a RMB1.O/Wp subsidy for the first three years. KEY RISKS AND MITIGATION MEASURES D. Risk Ratings Summary Table Stakeholder Risk Moderate Implementing Agency Risk - Capacity Substantial - Governance Low Project Risk - Design Substantial - Social and Environmental Low - Program and Donor Moderate - Delivery Monitoring and Sustainability Substantial - Other (Optional) N/A - Other (Optional) N/A Overall Implementation Risk Substantial E. Overall Risk Rating Explanation 35. The overall implementation risk rating for the project is Substantial. Risks and associated mitigation measures are presented in the Operational Risk Assessment Framework (Annex 4). The main risks to the achievement of the PDO are: a) cross-sectoral coordination may cause project delays; b) since the large number of schools involved in the project, the capacity of the project company may be weak to coordinate and manage the project; c) participating schools may lack commitment to the project if proper incentives are not included in the project design; and d) rooftop PV systems may not be properly maintained if roles and responsibilities are not clearly defined. 36. Mitigation measures were included in the project design to: a) involve representatives from all relevant agencies in the Project Leading Group and in the PMO to allow smooth cross- sectoral coordination at various levels during project implementation; b) prepare a Project Implementation and Operations Manual and Project Management Manual to apply standard technical requirements for the construction work at the various sites; c) include incentives under the TA component, for example to help schools develop renewable energies laboratories and educational training programs, to enhance their proactive participation in project implementation and ensure their long-term commitment; and d) define clearly the roles and responsibilities of each party in the RESCO contracts that will be signed between Yuanshen Company and participating schools to ensure that the installed solar PV systems will be well maintained and operated. 9 V. APPRAISAL SUMMARY A. Economic and Financial Analyses 37. Economic Analysis. The project aims to promote the use of renewable energy by installing 100 megawatt (MW) of distributed rooftop Photovoltaic (PV) systems in about 800 schools and other educational institutions in Beijing Municipality. The economic costs and benefits of the project have been identified. Economic benefits include consumer satisfaction (via consumption of the electricity generated), avoided environmental and health costs (both global and local) owing to providing electricity by clean solar power instead of thermal power, and the benefits of demonstrative and educational effects provided by the project. Economic costs include the capital investment for the installation of the rooftop PV systems and operation and maintenance (O&M) costs. 38. A cost-benefit analysis was used to evaluate the economic viability of the project. The economic benefit of electricity consumption was valued based on the concept of the consumers' willingness-to-pay for the electricity generated by the rooftop PV systems. In the environmental and health benefits, the global environmental benefit of avoided CO2 emissions and local environmental benefits of SO2, NOx, and TSP reduction were taken into account in the analysis. The analysis also quantified the benefits of demonstrative and educational effects. In particular, the demonstrative benefits include cost reduction and environmental externalities owing to the replication of the roof-top solar PV system in more schools beyond the project. They were estimated under the assumptions of 300 more schools each year from 2015 to 2024 and the unit cost decreased by 15 percent in the same period because of increased production and economies of scale. 39. The cost-benefit analysis concluded that the project is economically viable, with an economic internal rate of return (EIRR) of 8.78 percent. A sensitivity analysis shows that the EIRR will drop to 7.32 percent if the estimated benefit decreases by 10 percent. But if there would be 400 more schools each year and a 20 percent cost reduction in the estimation of the demonstrative benefit, the EIRR would go up to 10.33 percent. Considering that the project aims to increase the share of renewable energy in Beijing's schools, the EIRR is of an acceptable level. 40. Financial Analysis. A financial analysis was conducted at the municipal level, project level, and entity level respectively to assess the certainty of counterpart funds, the profitability of the project, and the financial viability of the project company. Detailed analysis is available in Annex 6. 41. In addition to the Bank loan, the Ministry of Finance (MOF) and the Beijing Municipal Government (BMG) will provide subsidies to the project. The total MOF subsidy for the project will amount to RMB 562.5 million (39 percent of the total project investment cost). The BMG would also provide a RMBl.0/Wp subsidy to rooftop PV systems for 3 consecutive years. The total subsidy from the BMG is expected to be RMB 300 million, of which 42 percent or RMB 125.2 million will be used to subsidize the investment cost of the project, accounting for 9 percent of the total project investment cost. The remaining 58 percent or RMB174.8 million will be used to support the operation and maintenance (O&M) of the project. 10 42. The revenues of the project include tariff revenues paid by project schools and the subsidy provided by the BMG. The operation and maintenance (O&M) costs include expenses for cleaning the PV system, data transfer, bank services, and project management expenses. The financial analysis shows that the project is not financially profitable, and the financial rate of return is negative. It will only break even if the investment costs are lowered by 10 percent and revenues from tariffs are increased by 10 percent. 43. However, the Yuanshen (Project Company) will generate positive cash flows from the project. With the effort to reduce the investment cost and O&M expenses, the cost recovery rate of Yuanshen's PV business could be 1 and its debt service coverage ratio could be 1.1. B. Technical 44. The proposed project will meet Chinese technical standards for design, equipment specifications, project size, layout, structure, construction, and safety, including the regulations from the Golden Sun Program and the State Grid Company. These standards also generally meet international good practice. C. Financial Management 45. A Project Management Office (PMO), established under the Beijing Development and Reform Commission, will be responsible for handling overall management and coordination during project implementation, as well as providing guidance and supervision during the implementation of the technical assistance component. The Bank loan proceeds, including overseeing the Designated Account, will be managed by the Beijing Finance Bureau (BFB). A financial management capacity assessment has been conducted by the Bank and actions to strengthen the project's financial management capacity have been agreed with the relevant implementing units. The Financial Management (FM) assessment concluded that with the implementation of these proposed actions, the financial management arrangements would satisfy the Bank's minimum requirements under OP/BP 10.02. Annex 3 of the PAD provides additional information on financial management. D. Procurement 46. A procurement assessment was conducted. Procurement risks were identified and mitigation measures were devised. The PMO will provide guidance and supervise the procurement activities carried out by Yuanshen Company to procure PV systems through International Competitive Bidding (ICB) or National Competitive Bidding (NCB), according to the thresholds indicated for this project (in Annex 3). The main procurement risk is that Yuanshen Company lacks experience with Bank procurement procedures for supply and installation of equipment through ICB or NCB. This risk will be mitigated by hiring a qualified procurement agent and technical consultants to assist the company in its procurement work. Procurement training was provided by the Bank and Tsinghua University during preparation which has further strengthened the PMO's and Yuanshen's procurement capacities. An initial 18-month procurement plan, acceptable to the Bank, has been developed. It will be updated annually (or as required) to reflect project implementation needs. 11 E. Social (including Safeguards) 47. OP4.12 on Involuntary Resettlement. The project will not trigger the Bank's Involuntary Resettlement (OP/BP4.12) Safeguards Policy, as all civil works related to the project will be conducted within the selected existing schools and other educational institutions; therefore no land acquisition will be needed. 48. OP4.10 on Indigenous People. According to Beijing census data, more than 95 percent of Beijing's residents belong to the Han Chinese majority. Ethnic minority populations include Manchu, Hui, Mongols, and Koreans. Most of these ethnic minority populations live scattered within the territory of Beijing municipality. Some Manchu and Hui populations live collectively within ethnic minority townships/villages. However, these Manchu and Hui groups share similar economic, social, and political institutions as those of the Han majority. They are not collectively attached to geographically distinct habitats, or to ancestral territories, or to natural resources in their land. Moreover, they do not use an indigenous language in their daily lives. Therefore, it is agreed that Manchu and Hui groups in Beijing are not indigenous people as defined in the Bank's OP4.10, and therefore this policy is not triggered. 49. Other Social Concerns - Public Participation and Gender Issue. In order to encourage active participation of project schools in the project design and implementation, and to balance the different interests between Yuanshen Company and schools, a "project school participation outline", as part of the Project Implementation and Operations Manual, was developed by the client. Yuanshen Company used the outline to carry out a school survey covering the following key topics: a) project content; b) potential environmental impacts; c) proposed commercial model and energy service contract; d) energy saving education component; e) construction/installation plan; f) maintenance and emergency plan; and g) other suggestions schools might raise. Yuanshen Company collected the concerns and suggestions through the survey, analyzed them, and incorporated the suggestions in the project design. The outline will also be used for additional school surveys. 50. The gender dimension of the project was also analyzed. Some of major beneficiaries of the project are school teachers, staff, and students, many of which are female, especially in the primary and middle schools. The project is therefore expected to have an overall positive impact on women. F. Environment (including Safeguards) 51. The project is a Category B project as per Bank OP4.01. The proposed rooftop PV system installation and operation will have limited environmental, safety and health impacts. PV systems will be installed on the roofs of existing buildings, without any land acquisition or resettlement. The main potential environmental impacts are health and safety concerns during the operation of the PV systems, as well as potential impacts related to the installation of rooftop PV systems, e.g., potential construction nuisance (noise/dust/waste), disturbance of school activities and construction safety, etc. These impacts are site-specific and minor, and can be avoided, minimized and mitigated with a good design and sound construction management. 52. An Environmental Management Plan (EMP), acceptable to the Bank, has been prepared by Beijing Energy and Environmental Development Engineering Ltd. It includes thorough 12 screening of possible environmental impacts, and a management plan to avoid, minimize and mitigate potential impacts, including environmental health and safety guidelines. It also includes a set of standard environmental codes of practice (ECOPs) for common environmental and safety issues that are likely to be met during the installation and operation. The ECOPs will be included in the Project Implementation and Operations Manual as a guiding tool for project implementation. 53. Extensive consultations were conducted with project schools during the preparation of the EMP. The EMP was publicly disclosed on the websites of the Beijing Energy Conservation and Environmental Protection Center, the project company, and through the World Bank InfoShop (disclosed on September 6, 2012). 13 Annex 1: Results Framework and Monitoring Project Development Objective (PDO): The PDO of the proposed project are to increase the share of clean energy in electricity consumption and to demonstrate the viability of the renewable energy service company model for scaling up the deployment of rooftop solar photovoltaic systems in schools and other educational institutions in Beijing Municipality. S UiofCumulative Target Values Responsibility Description PDO Level Unit of Data Source/ (indicator Results Indicators Measure Baseline FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 Frequency ooy for Data definiton Collection et. Indicator One: Upon Progress PMO Materialized share of project report renewable energy from El NO YES completion rooftop solar PV systems in electricity consumption in selected schools. Indicator Two: Number of Annual Progress PMO RESCO contracts. D Number 0 200 435 700 765 800 report Indicator Three: CO2 tnc Annual Progress PMO emission reduction as a E 0 31360 62720 80640 85120 89590 report result of the project4. tons/year 4 The carbon intensity of the North China Grid is 925 g CO2e/kWh; average electricity transmission &distribution loss is about 6.5 percent. 14 INTERMEDIATE RESULTS Cumulative Target Values Responsibility Description Intermediate E Unit of Data Source/ (indicator Results Indicators I Measure Baseline FY2014 FY 2015 FY 2016 FY 2017 FY 2018 requency Methodology for Data definition ___________________ _______ ____________________________________________ ________ Colecton tc. etc.) Intermediate Result (Component One): Sunshine Schools Program - 100 MW of distributed rooftop PV systems in about 800 schools and other educational institutions in Beijing Municipality Generation capacity of Annual Progress PMO renewable energy report constructed under the project. Number of people provided Annual Progress PMO with access to electricity H Number 0 100,000 250,000 400,000 550,000 650,000 report generated under the project. Intermediate Result (Component Two): Technical Assistance Component Successful demonstration of Upon Progress Beijing Grid two-way metering pilot. NO YES project report Company completion Number of renewable Upon mid- Progress PMO energy demonstration term report laboratories established. E Number 0 15 20 review and project completion Operationalization of an Upon Progress PMO online monitoring system project report for rooftop PV systems and E NO YES completion a solar energy information portal. Organization of training and Upon Progress PMO capacity building workshops NO YES project report on RESCO business model completion for Yuanshen Company. 15 Annex 2: Detailed Project Description 1. The proposed project consists of two main components: (1) Sunshine Schools Program - installation of 100 MW rooftop solar PV systems in about 800 schools and other educational institutions; and (2) technical assistance (TA) in the development of local capacity for scaling up solar energy deployment, project implementation, and other priority energy policy initiatives of the BMG. 2. Component 1: Sunshine Schools Program Support - Installation of 100 MW Rooftop Solar PV Systems in Beijing (estimated cost: $226.0 million; $110.3 million IBRD financing). The proposed component will install 100 MW of distributed rooftop PV systems in about 800 schools and other educational institutions in Beijing. The rooftop PV systems for each primary and middle school are expected to range from 50 to 200 kW, while systems in colleges can be larger. Central and municipal government subsidies will finance about half of the estimated investment, while the Bank loan will cover the remainder. The Sunshine Schools Program will also include pilots on two-way metering in a few selected schools. The duration of the project is estimated to be six years, from 2013 to 2018. The installation of the system will be carried out in two stages and in several batches. The first stage-5 MW to be installed before the signing of the Bank loan agreement-will use retroactive financing and receive a RMB8.0/Wp subsidy from the central government. The second stage-95 MW to be installed after the signing of the Bank loan agreement-will receive a RMB5.5/Wp subsidy from the central government. 3. Installation will be carried out by contractors selected through competitive bidding. The selected contractors will be responsible for the detailed design, construction, and operation and maintenance of the system for a period agreed with Yuanshen. Yuanshen will own the rooftop systems and also be responsible for signing Energy Service Performance Contracts with the schools and collect RESCO service fees from the schools based on actual PV electricity consumption. Yuanshen will take full responsibility for the operation and maintenance of the systems according to the contract with the schools during the life of the contract. 4. Once the installation of the rooftop PV systems is completed, Yuanshen will report to the China General Certification Center (CGC), who is designated in the Golden Sun Program, to carry out the acceptance procedure according to the regulations issued by the National Energy Administration (NEA) [2011-109]. The system will be put into operation after this acceptance procedure is passed. The estimated electricity generated by the installed rooftop systems will be around 100 GWh when the entire project is under operation. Electricity from PV rooftop system is estimated to be equivalent to about 10 to 15 percent of the schools' annual electricity consumption. 5. Five main constraints exist for the design of rooftop PV systems. They are: * Available building rooftop area; * Rooftop strength for holding the PV system; * Requirements of the Golden Sun Program that installed capacity should not exceed 25 percent of the upper level transformer's capacity; * Capacity of the electrical devices in the corridor of PV power output; and * The load of schools on non-school days. 16 6. In most cases, with the constraints of the rooftop area, rooftop strength, the capacity of the upper level transformer, and the capacity of the existing cable line, the installed capacity of the system will be less than the load on non-school days. This is verified in the first batch of the project with retroactive financing. Nonetheless, since the load is always changing, surplus will occur whenever the generation is bigger than the load, in which case the surplus will flow to the grid if no anti flow back device is installed. 7. According to the design and practice in the first batch for retroactive financing, in each school, "N+M" meters should be installed (N stands for the number of PV rooftop systems at the school, each of which should have a meter to measure the electricity generated from the system. Meanwhile "M" stands for the number of feeders, and those M meters will measure the total surplus electricity flow to the grid from the N PV rooftop systems). Currently, there is no clear regulation on two-way metering and pricing mechanisms on the surplus electricity flow to the grid from PV rooftop systems. Table A2-1 gives an overview of the design criteria. Table A2-1: Design Criteria of the Rooftop PV Systems In Terms of Scale and Capacity Items Criteria Available building rooftop area Rooftop areas should be without shading Rooftop strength to hold the PV system The strength of the rooftop should meet the requirements in the safety standards Requirements of the Golden Sun System capacity should not exceed 25 percent Program for installed capacity of the capacity of the upper level transformer Capacity of electrical devices in the System should meet the requirements for corridor of PV power output electrical safety in the whole corridor of the PV power output Load on non-school days System capacity should not exceed the load on non-school days during the early stage of the project. When two-way metering policy is clear, this criteria may be removed 8. An example of the relationship between the daily load curve and the PV daily output in the month of April for a typical school is given below (Figure A2-1) 5: Since the survey was done with one hour intervals between measuring points, the curves are very smooth and don't show the actual fluctuation of the load. Whenever the load is smaller than the generation from the PV rooftop system, surplus electricity will flow to the grid. 17 180 -. 160. -- PVoutpit power 100 a60 C --.oschoo days. o 40 20, . 20 Schjng time Figure A2-1: Daily load curve and PV output in April for a typical school 9. In the case of a larger rootop area and a smaller load, there will be more surplus electricity flow to the grid on weekends and holidays. The amount of surplus electricity will depend on the size of the roofop PV system. Around 10-15 schools of this kind will be selected for two-way metering demonstration during the early stage of the implementation. 10. The information presented above is based on the survey in selected schools in April 2012. Public data on solar radiation shows that the month of April on average has the third highest solar radiation within a year (see table A2-2). April radiation at the time of the survey was even above average. This means rooftop PV systems will generate more electricity in April than in most other months. Since the outside ambient temperature in April is mild, creating no need for heating or cooling, the load is smaller than it is in other months. As a result, most surplus will happen at this time of year, with less surplus expected in other months. Table A2-2: Monthly Average Solar Radiation for 2012 (KWh/mi per day) Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Daily average 2.15 3 394 4.9 548 5.19 4 59 4.38 3.93 3.1 223 183 solar radiation II Figure A2-2 shows the design of the PV rooftop system. The electricity generated by the rooftop PV systems will be converted from DC into AC by an inverter. It will then be directly consumed by the load in the low voltage side, which is encouraged by the Golden Sun Program in its grid connection guidelines. The surplus will flow back to the grid. It is estimated that the total surplus from the proposed project will be around 0.25 percent of the total generation. 18 Metering PV Metering generation SurplusfromPVsystem Wirebox ., Metering down PV array loadfmgrid Grid Loada Figure A2-2: Layout of the rooftop system 12. Component 2: Technical Assistance Component (estimated cost: US$4.0 million). The proposed TA activities include development of local capacity for scaling up commercially viable solar energy deployment; and engineering and technical support to Yuanshen Company for the design, procurement, construction supervision and project management of the PV systems. Part of this TA may be financed from Component 3 (for scaling-up commercially viable rooftop solar PV deployment) under a proposed GEE grant supported Urban-Scale Building Energy Efficiency and Renewable Energy Project, which would then replace part of the Borrower's counterpart funding under this project. The proposed TA activities are summarized below. (i) Supporting the demonstration of the RESCO business model for large-scale grid connected rooftop solar PV deployment. This will include provision of engineering and technical support in relation to PV systems to Yuanshen Company, as well as support for independent monitoring and evaluation of the implementation and results of the RESCO approach, along with related outreach and dissemination efforts; (ii) Supporting the demonstration of two-way metering, including providing support for Beijing Grid Company to analyze the impact of two-way metering for grid- connected rooftop PV systems on the operation and management of the local grid and developing technical and business solutions for incorporating rooftop solar PV systems into the local grid; (iii) Establishing a solar energy information portal, including an online monitoring system for rooftop PV systems, information on rooftop solar PV installations, relevant policies and procedures, local project developers and equipment suppliers, and other relevant information; and 19 (iv) Supporting improvement of renewable energy education in Beijing's schools by improving student access to hands-on activities, supporting student leadership and innovation activities, and improving the content and delivery of the renewable energy education. 20 Annex 3: Implementation Arrangements Project Institutional and Implementation Arrangements 1. The management structure of the proposed project has already been set up at various levels. A Project Leading Group (PLG) has been established and is chaired by the Deputy Director- General of the Beijing Development and Reform Commission (BDRC). The PLG comprises senior leadership from relevant departments of BDRC, Beijing Finance Bureau, Beijing Education Commission, Beijing Grid Company, and Yuanshen Company. The PLG will provide overall policy and strategic guidance, and review the work program. It will also be responsible for facilitating inter-agency coordination and for solving any major issues during project implementation. 2. Under the leadership of the PLG, a Project Management Office (PMO) has been set up in BDRC. The project team includes staff from BDRC, Beijing Finance Bureau, Beijing Education Commission, and Yuanshen Company. The PMO is staffed with competent and committed staff in the field of procurement, financial management, and safeguards, and has about 20 years of experience with World Bank financed projects. It will have overall responsibility for daily inter- agency coordination during project implementation and project management, and will prepare the annual project implementation plan, monitor the project progress, and compile project progress reports for review by the PLG and the World Bank. An independent monitoring and evaluation mechanism will be established by the PMO for overall monitoring and evaluation of all project activities. This includes monitoring the quality for project outputs and results, data consolidation for outcome and impact analysis, and making sure project results indicators are available to measure the achievement of the project development objectives. The detailed TOR, acceptable to the Bank, has been finalized. An on-line tracking and monitoring system is available at the Beijing Energy Conservation and Environmental Protection Center and will be further improved under a project TA activity. 3. Yuanshen Company is the Project Company for the first component. It is one of the three energy service companies (ESCO) established under the WB/GEF China Energy Conservation Project ten to fifteen years ago, and its management team and key staff are relatively familiar with World Bank procedures and requirements for project implementation. Its main responsibilities under the proposed project are to organize implementation activities, select qualified contractors for the installation of the rooftop PV systems in participating schools, coordinate with schools and organize construction in an efficient and safe manner, handle procurement and contract management in compliance with World Bank guidelines and procedures, prepare the detailed work program, select a qualified construction supervision team, carry out daily supervision and quality control of the installation work, and prepare and submit project reports (project progress reports and financial reports) to the PMO on a timely basis. 4. Prior to the Bank's involvement, Yuanshen Company was selected by the BMG to implement the "Sunshine Schools Program" (the first component of the proposed project) using the RESCO model. Yuanshen Company will take full responsibility for project implementation as well as all operational service obligations. After the rooftop PV systems are installed and put into operation, the company will collect fees for the electricity generated by the systems and consumed by the schools. The due diligence and responsibilities of both Yuanshen and the schools are clearly stated in a Renewable Energy Service Company (RESCO) contract signed by 21 both parties. Yuanshen Company will be responsible for the maintenance of the rooftop PV systems during the life of the contract. 5. For the TA component, the PMO will mainly perform a guidance and supervision role to ensure activities implemented by the various agencies all comply with rules and procedures. 6. Figure A3-1 presents an overview of the project's institutional structure. Project Leading Group Project Management Office For Component One: Yuanshen Company For Component Two: * PMO * Beijing Education Commission Contractors (RESCO) * Beijing Energy Conservation and Environmental Protection Schools Center * Beijing Grid Company * Yuanshen Company Figure A3-1: Institutional structure for project management Financial Management, Disbursements and Procurement Financial Management 7. The financial management (FM) capacity assessment identified the large number of parties involved in the project-the PMO, finance bureau, DRC, education bureau, Yuanshen, and participating schools, among others-as the main risk. Cooperation and coordination among these parties will be a challenge for project implementation. Mitigation measures to address this risk, which have been agreed, include: a) preparation of a project management manual that will clearly state the responsibilities of each party (the manual has been developed and approved) and b) World Bank supervision and guidance on these requirements during project implementation. The residual financial management risk, after these mitigation measures, is assessed as Moderate. 22 8. Budgeting. The annual project implementation plan, including the budget and resources, will be prepared by Yuanshen Company and consolidated by the PMO. Budget variance analysis will be conducted on a semi-annual basis by Yuanshen and by the PMO for the respective components they implement, with necessary actions taken to make sure that the project can be implemented as planned. The Bank will work with the PMO and Yuanshen on supervising project budgeting systems to enhance their budget preparation and execution during project implementation. 9. Funds flow. The Bank loan proceeds will flow from the Bank into the project Designated Account (DA) to be set up at and managed by the Beijing Finance Bureau (BFB). The BFB will be directly responsible for the management, maintenance, and reconciliation of DA activities. Supporting documents required for Bank disbursements will be prepared and submitted by Yuanshen to the PMO for review, and then to the BFB for further disbursement processing. Funds will be disbursed to Yuanshen based on their withdrawal applications. 10. The Bank loan will be signed between the Bank and the People's Republic of China through the Ministry of Finance (MOF). On-lending arrangements for the Bank loan will be signed between the PRC through MOF and the Beijing Municipal Government through BFB, then between BFB and Yuanshen Company, a wholly-owned subsidiary of the Beijing Energy Investment Holding Company Limited (Jingneng Group). 11. Accounting and financial reporting. The administration, accounting, and reporting of the project will be set up in accordance with Circular #13: "Accounting Regulations for World Bank-financed Projects" issued in January 2000 by MOF. 12. The Yuanshen Company will manage, monitor, and maintain project accounting records for the activities they execute, retaining all original supporting documents. The PMO will be responsible for preparing the project consolidated financial statements. The unaudited semi- annual project interim financial reports (IFRs) (with format and content in accordance with the aforementioned Circular #13 agreed with MOF) will be prepared and furnished to the Bank by the PMO no later than 60 days following each semester (February 15 and August 15). 13. Internal control. The related accounting policy, procedures, and regulations have been issued by MOF to uniformly align the financial management and disbursement requirements for Bank financed projects. The internal control system, which is consistent with those issued by MOF, has been established in Yuanshen and the same system will be used to oversee project funds. 14. Audit. The Beijing Municipal Audit Office (BMAO) has been identified as auditor for the project. An annual audit report will be issued by BMAO and will be due to the Bank within 6 months after the end of each fiscal year. Following the World Bank's formal receipt of the audited financial statements from the borrower, the World Bank will make them available to the public in accordance with the World Bank Policy on Access to Information. 23 Disbursements 15. Four disbursement methods are available for the project, which are: advance payment, reimbursement, direct payment, and special commitment. Supporting documents required for Bank disbursement using these various methods are documented in the Disbursement Letter issued by the Bank. 16. One DA in U.S. dollar will be opened at a commercial bank acceptable to the Bank and will be managed by BFB. The ceiling of the DA is documented in the Disbursement Letter. 17. The Bank loan would be disbursed against eligible expenditures (inclusive of tax) as shown in the following table: IBRD Loan Allocated percentage of Disbursement Categories Amount Expenditures (US$) to be financed (percentage) (1) Goods (including supply 110,260,000 and installation) and non- 100% consulting services (2) Front-end fee 300,000 100% (3) Interest Rate Cap or 0 Interest Rate Collar premium (4) Interest during construction 9,440,000 100% Total 120,000,000 18. Overhead costs incurred by Yuanshen for preparing, implementing, and managing project activities will be financed by the MOF subsidy and follow the government's fiduciary requirements. The total MOF subsidy is set currently at RMB5.5/Wp to cover both the overhead costs incurred by Yuanshen as well as the installed capacity wattage per each contract. Yuanshen and the government are currently working on determining an appropriate rate/amount per watt for the reimbursed overhead costs. Once agreed, this amount (expressed in RMB/Wp) will be deducted from the MOF subsidy to cover these overheads. Thus, any remaining contract amount not covered by the MOF subsidy will be financed by the Bank loan. 19. Yuanshen will sign the equipment and installation contract with the supplier/contractor, following the acceptable procurement procedures. The contract amount will be expressed in the unit price multiplies the installed capacity. Once the supplier/contractor completes the agreed minimum amount installed capacity, Yuanshen will carry out the acceptance check (Yanshou). If the capacity is acceptable, Yuanshen will request the disbursement of the Bank loan based on the completed capacity. There could be multiple disbursement requests for each contract. The amount financed by the Bank is calculated as: installed capacity * (unit price - (RMB5.5/Wp - 24 RMBO.93/Wp))6. In order to better reflect this arrangement, the following table will be used when Yuanshen submits the withdrawal applications. Supplier Contract Contract The unit Installed Amount Cumulative number unit price price after capacity in financed disbursed RMB/(Wp) subsidy for this by the amount disbursement application WB after this (Wp) application 20. While the contracts between Yuanshen and the schools will continue for 15-20 years after the installation of the PV systems, the Bank can only finance expenditures incurred during project implementation. As such, it was agreed that maintenance costs would be financed from counterpart funds. Since maintenance has already been included in two previously signed contracts, Yuanshen and the PMO will deduct the maintenance amount when submitting withdrawal applications to the Bank for these two contracts. 21. Retroactive Financing. Retroactive financing of up to $24 million would be available for eligible expenditures incurred on and after June 30, 2012. Retroactive financing will be processed according to the requirements specified in the Loan Agreement and Project Agreement. Procurement 22. Capacity Assessment. The principal risk identified in the procurement capacity and risk assessment was the inadequate experience of Yuanshen Company staff with procurement under Bank financed projects (the PMO already has some experience with Bank procurement). Mitigation measures include the following four actions: (a) training has been provided to procurement staff of Yuanshen Company and the PMO during project preparation; (b) procurement training will be provided to all project procurement staff periodically during project implementation in accordance with the procurement training plan prepared by the PMO; (c) Procurement management arrangements acceptable to the Bank has been prepared by Yuanshen as a chapter of the Project Implementation and Operations Manual to standardize project procurement procedures and provide guidance to project staff with responsibility for procurement; and (d) a procurement agent with experience in World Bank procurement procedures has been recruited by Yuanshen Company and the PMO to assist with the planning and implementation of procurement activities. The overall procurement risk is considered 'moderate'. 23. Applicable Guidelines. Procurement will be carried out in accordance with the "Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans 6 The formula is calculated based on the current subsidy level, which is subject to regular review of government subsidies and disbursement status during project implementation. 25 and IDA Credits & Grants by World Bank Borrowers" dated January 2011; the "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011; and the provisions stipulated in the Loan Agreement. National Competitive Bidding (NCB) shall be carried out in accordance with the Law on Tendering and Bidding of the People's Republic of China promulgated by Order of the President of the People's Republic of China on August 30, 1999 subject to the modifications stipulated in the Loan Agreement in order to ensure consistency with World Bank Procurement Guidelines. 24. PV System Supply & Installation and Goods Procurement. PV system supply and installation (100 MW) would be procured under the project. Individual PV systems would range from 50 kW to 200 kW and procurement would be conducted through International Competitive Bidding (ICB) and NCB as well as Shopping. Non-consulting services contracts (outreach and dissemination activities) would be procured for the purpose of raising public awareness on energy efficiency. 25. Procurement Plan. A Procurement Plan (PP) for the first 18 months of project implementation, acceptable to the Bank, has been prepared and consolidated by the PMO for World Bank review. It will be available in the project files and on the World Bank's external website. The PP will be updated annually or as required to reflect implementation needs and improvements in institutional capacity. 26. Frequency of Procurement Supervision. Procurement supervision would be carried out once a year. Procurement post reviews will be carried out by the World Bank every 12 months. The procurement post review sampling ratio will be 1 out of 10 contracts. 27. Thresholds for Procurement Methods and Prior Review. Procurement methods and prior-review thresholds are indicated in the table below. No works or consultants' services will be financed out of the loan. Table A3-1: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Prior Review Category Threshold Method Threshold (US$) (US$) 1. Goods and Non- >3,000,000 ICB All Consulting Services <3,000,000 NCB >3,000,000 and identified in the Procurement Plan <100,000 Shopping 1st Contract None Direct Contracting All (small value contracts for Public Awareness) 26 Expenditure Contract Value Procurement Prior Review Category Threshold Method Threshold (US$) (US$) 2. Supply and >25,000,000 ICB All Installation of <25,000,000 NCB >15,000,000 and Equipment identified in the Procurement Plan <200,000 Shopping 1st Contract 28. Retroactive Financing. Table A3-2 below lists the contracts for PV system installation that are expected to be procured under retroactive financing. All contracts to be financed through retroactive financing will be subject to prior review. Table A3-2: Contracts to be procured under Retroactive Financing Reference Description Procurement Domestic Review by Bank Number Method Preference (Prior / Post) (Yes/No) SS(RE)- Design, supply, installation G201 1-01 and operation services of . rooftop PV systems (first NCB No Prior batch) SS(RE)- Design, supply, installation G2011-02 and operation services of . rooftop PV systems (second NCB No Prior batch) Environmental and Social (including safeguards) 29. Rooftop PV system installation and operation will have limited environmental, safety and health impacts. The PV systems will only be installed on the roofs of existing buildings, without any land acquisition and resettlement, therefore, only OP 4.01 Environment Assessment is triggered. Main potential environmental impacts are health and safety concerns during PV system operation, as well as potential impacts related to the installation of the systems, such as potential construction nuisances (noise/dust/waste), disturbance of school activities, and construction hazards. These potential impacts are site-specific and are not significant. They can be readily avoided, minimized, and mitigated with good design and sound construction management. The project is a Category B project as per OP4.01. 30. An Environmental Management Plan (EMP), acceptable to the Bank, has been prepared by Beijing Energy and Environmental Development Engineering Ltd. The preparation of the EMP followed national requirements, as well as the World Bank's OP4.01 Environmental Assessment 27 and the International Finance Corporation's Environment, Health and Safety General Guidelines. The EMP includes thorough screening of possible environmental impacts and a management plan to avoid, minimize, and mitigate these potential impacts. It also includes a set of standard environmental codes of practice (ECOPs) for common environmental and safety issues met during the installation and operation stages. The ECOPs will be included in the Project Implementation and Operations Manual as a guiding tool for project implementation. 31. Project schools were consulted extensively during the preparation of the EMP. The main health and safety concerns were fully incorporated in the EMP and the ECOP. The EMP was publicly disclosed on the websites of the Beijing Energy Efficiency Center (on September 5, 2012) and the project company, as well as through the World Bank InfoShop (disclosed on September 6, 2012). 32. During project implementation, the PMO and the implementing company (Yuanshen Company) will be responsible for overall environmental management. A Project Implementation and Operations Manual has been developed. It includes the institutional arrangements for environmental management and the ECOP. The ECOP will also be incorporated in the bidding documents/contracts for implementation. Monitoring & Evaluation (M&E) 33. Annex 1 provides a detailed description of the performance indicators to be tracked under the project and specifies the source and schedule for data collection. The PMO (with relevant inputs from Yuanshen Company and the Beijing Energy Conservation and Environmental Protection Center) will be responsible for the overall M&E system, including regular data collection to assess progress towards achieving results. It will furnish to the Bank semi-annual progress reports on project implementation by February 15 and August 15 of each year, starting with August 15, 2013. In addition, it will prepare a mid-term review report by February 15, 2016. Based on the recommendations of these reports and the Bank's reviews and comments thereon, the PMO will take actions, satisfactory to the Bank, to address any emerging issues in order to meet the targets set in the results framework. 34. The PMO has prepared a Project Management Manual which specifies clearly the roles and responsibilities of each party concerned during project implementation. It also gives a detailed description of the project processing workflow and procedures. The Manual helps to create a smooth and coordinated environment for project management. 35. In addition, Yuanshen has developed a Project Implementation and Operations Manual which provides a standardized set of technical and safety instructions for the implementation of component 1 under the project. All the contractors are required to strictly follow the guidance provided by the Manual. Yuanshen will also monitor the construction work at various sites by various contractors based on the Manual. The Manual also specifies the selection criteria of participating schools and Yuanshen' responsibilities for operation, maintenance and repair of the solar equipment installed at the participating schools throughout he project operation phase. 28 Annex 4: Operational Risk Assessment Framework (ORAF) CHINA: Beijing Rooftop Solar Photovoltaic Scale-Up (Sunshine Schools) project 1. Project Stakeholder Risks Rating Moderate Description : Risk Management: The PDO is aligned both with the GOC and BMG 12th Five- Year Plans and GOC and BMG are strongly committed to the Beijing DRC is working on a Government Policy Guideline which requires each district of Beijing project. to take a quantified responsibility of renewable energy application. After this Guideline is operational, the involvement of the district governments and the schools will be further improved. The Beijing Education Commission is fully involved in the project management structure at various levels. Thus the voices from participating schools are clearly heard and the project is designed in a way that schools and students will be able to enjoy Resp: Client and Bank Stage: Both Due Date: Status: In the benefits of the project to the largest extent possible. progress 2. Implementing Agency Risks (including fiduciary) 2.1 Capacity Rating: Substantial Description : Risk Management: The PMO has about 20 years of experience with World Bank Technical discussions and training will be provided to the PMO and Yuanshen Company by Bank financed projects and has competent and committed staff. specialists and consultants. An independent monitoring and evaluation mechanism will be However, the PMO lacks the specific technical expertise established to provide technical support to the PMO and to oversee project design and required for project design and implementation. implementation. Yuanshen Company, the implementing company for The project will provide capacity building support to municipal agencies, especially to the Beijing Component 1, has already implemented Bank financed projects Education Commission, District Education Committees and schools. in the past 15 years. However, Bank fiduciary and safeguards policies have changed over time. Yuanshen's capacity in Financial management and procurement training programs will be provided by the Bank to the coordinating with different government agencies and schools is PMO and the implementing agency to gain adequate knowledge in these fields. weak. A Project Management Manual and a Project Implementation and Operations Manual have been developed and will guide project implementation. Status: In Counterpart funding for rooftop PV systems relies on progress government subsidies. Endorsement of the provision for the subsidies has been received. 2.2 Governance Rating: Low Description : Risk Management: The project management and decision making structure is already in place. The institutional arrangements and the roles Status: In and responsibilities of the different agencies have now been Resp: Client Stage: Both Due Date: clearly identifiedprogress 29 3. Project Risks 3.1. Design Rating: Substantial Description : Risk Management: It will be the first project of its kind in China for large scale distributed solar PV generation in public facilities, particularly In addition, rooftop PV system of 5MW capacity will be installed in selected schools with in schools. However, technologies for rooftop PV installation retroactive financing in order to gain more experience for future large scale construction. and generation are already mature. WB specialists and consultants will work closely with the PMO and the implementing agency on a Project design is complex: (a) large number of schools is comprehensive and detailed project implementation plan. involved in the project; (b) need to customize the design for each school; and (c) the installation work is permitted on weekends or holidays. A project Implementation and Operations Manual has been Status: In developed by Yuanshen to standardize the technical Resp: Client and Bank Stage: Both Due Date: requirements for construction at various sites. Yuanshen has implemented rooftop PV system installation with one school using their own funds to gain lessons and experience for future operation. 3.2. Social & Environmental Rating: Low Description : Risk Management: Environmental: Sufficient training and guidance will be provided to the PMO and to the EIA Consultant throughout The proposed project will have limited environmental impacts project preparation and implementation. during the installation and operation of rooftop PV facilities, with main concerns for safety issues. The EMP incorporates: A "Target School Participation Outline" will be used for school survey before the design is (a) generic environmental specifications to guide the installation finalized for each school. of rooftop PV systems, and (b) safety management rules for operation. The Project Implementation and Operations Manual provide safety instructions to all contractors for the installation phase.Status: In Resp: Client and Bank Stage: Both Due Date: Social: progress Most of the works related to the project will be conducted within the selected existing schools and other educational institutions. 3.3. Program & Donor Rating: Moderate Description : Risk Management: Part of the technical assistance is financed from the proposed The Bank will ensure close coordination among multi stakeholders on technical assistance GEF supported Urban-Scale Building Energy Efficiency and activities. Renewable Energy Project, which is managed by the Ministry of Housing and Urban-Rural Development. As there are multi Status: In stakeholders involved in this project, efficient coordination progress among all parties concerned will be important. 30 3.4. Delivery Monitoring & Sustainability Rating: Substantial Description : Risk Management: Quality of PV installation and other relevant works may not be Under the guidance of the PLG, the PMO will monitor and mitigate the risks identified in project up to standards. Capacity for construction management may not implementation. be strong enough and capacity for identifying and fixing implementation problems may be weak. Bank supervision will focus on sustainability issues. Inadequate human and financial resources to operate and Schools will negotiate new contracts with Yuanshen or select other service providers to maintain maintain the facilities and equipment after the RESCO contracts the rooftop PV systems after the RESCO contracts end. between Yuanshen and the schools end and the facilities are Status: In handed over to the schools. The capacity building component Resp: Client and Bank Stage: Both Due Date: includes actions to address project sustainability. progress 3.5. Other (Optional) Rating: Description: Risk Management: Resp: Stage: Due Date: Status: 3.6. Other (Optional) Rating: Description: Risk Management: Resp: Stage: Due Date: Status: 4. Overall Risk Rating: Substantial Comments: (1) The involvement of the senior leadership representatives from all relevant agencies in the leading group and in the PMO will facilitate cross-sectoral coordination at various levels; (2) The Project Implementation and Operations Manual and the Project Management Manual list standard technical requirements during construction at various sites and standardize relevant workflow and procedures; (3) Initial design may need significant revision at the time of construction, and bidding documents need to take this into consideration to avoid contract variations. 31 Annex 5: Implementation Support Plan Strategy and Approach for Implementation Support 1. This annex lays out the key activities that the Bank will implement to appropriately mitigate the risks identified during project implementation. It will focus on the key risks defined in the ORAF and will strive to provide the client with the most effective implementation support. Under the proposed project, the key risks revolve around the project design and the implementing agency's lack of adequate capacity in the effective execution of the project's physical construction, procurement, financial management, safeguards management, and monitoring and evaluation activities. 2. Technical Support. The Bank provided technical expertise during project preparation and will continue to provide extensive technical support to the PMO and the implementing agency to effectively monitor and implement the project activities according to the Project Management Manual and the Project Implementation and Operations Manual. The Bank will also provide training and technical assistance activities in implementing the technical designs during project implementation. 3. Procurement. Procurement implementation support would include: * Facilitation of a multi-stage training program targeting procurement staff in the PMO and the implementing agency to help them fully understand Bank procurement guidelines; * Review of procurement documents and timely provision of feedback on the results of prior and post reviews to the parties concerned; * Monitoring procurement progress against the agreed Procurement Plan. 4. Financial Management. Project financial management will be reviewed and evaluated on a regular basis by the Bank's financial management specialist. S/he will join supervision missions and will review the implementation of the Financial Management Manual. The specialist will also provide technical support to the project implementing agency and help with timely resolution of potential financial management issues and any issues identified by the auditors. The review and monitoring will include the evaluation of the adequacy of the financial management arrangements in place, disbursement processes, on-lending arrangements, counterpart fund allocations, and document filing systems. 5. Environmental and Social Safeguards. Bank environmental and social development experts will provide guidance to the project implementing agency on addressing relevant issues that arise during project implementation. Implementation Support Plan 6. Most Bank staff working on the project is based in the World Bank Beijing Office. This would ensure rapid and effective response to the Borrower's needs for implementation support. Washington-based staff and international consultants would bring global experience to the project. Formal supervision and field visits covering all aspects of project implementation will be carried out semi-annually during the early stage of project implementation, complemented by occasional visits by small missions on an as-needed basis. Estimated inputs from different specialists at different stages of project implementation are outlined below. 32 7. Financial Management. The supervision strategy for this project is based on its Financial Management (FM) risk rating, which will be evaluated on a regular basis by the FM specialist in line with the FM Manual, and in consultation with the relevant task team leader. Training will be provided by the Bank before the commencement of project implementation. The Bank team will also help the project identify bottleneck issues and address these issues in a timely manner. Table A5-1: Project Implementation Support Input Requirements Time Focus Skills Needed Resource Estimate Partner Role First twelve * Team and project * Technical 6-7 staff, 2 trips per NA months leadership * FM staff * Project design and * Procurement technical supervision * FM & Procurement * Capacity building 12-48 months * Project * Technical 6-7 staff, 2 trips per NA implementation and * Safeguards staff annually supervision * FM * FM & Procurement * Procurement * M&E Other Table A5-2: Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments Task Team Leader 4 SWs during the first year Two Country office based and 3 SWs annually in the following years Energy specialist 4 SWs during the first year Two Country office based and 3 SWs annually in the following years Energy specialist 4 SWs during the first year Two International staff and 3 SWs annually in the (Washington based) following years Infrastructure 3 SWs during the first year Two International staff specialist and 2 SWs annually in the (Washington based) following years Environmental 2 SWs during the first year Field trips as required Country office based safeguards specialist and 1 SWs annually in the following years Social safeguards 1 SW annually Field trips as required Country office based specialist FM specialist 1 SW annually Field trips as required Country office based Procurement specialist 3 SWs annually Field trips as required Country office based 33 Annex 6: Economic and Financial Analysis A. Economic Analysis 1. Project Objectives and Brief Description of Project Components. The project aims to promote the use of renewable energy by installing 100 MW of distributed rooftop PV systems in about 800 schools and other educational institutions in Beijing Municipality. This will be achieved through supporting a rooftop PV demonstration program in about 800 schools and other educational institutions in Beijing Municipality that uses RESCO business model, pilots two-way metering in selected schools, and supports development of institutional capacity, which enables policies and educational programs for renewable energy deployment in the city. 2. Economic Benefits and Costs Identified. The economic benefits and costs of the project are identified and quantified to the extent possible. Economic benefits include consumer satisfaction (via consumption of the electricity generated), avoided environmental and health costs (both global and local) owing to providing electricity by clean solar power instead of thermal power in Beijing, and the benefits of demonstrative and educational effects provided by the project. Economic costs include the capital investment for the installation of rooftop PV systems and operation and maintenance (O&M) costs. General Assumptions and Methods Used 3. The economic benefits and costs are monetized at the constant price of the base year 2011 and are net of taxes, subsidies, and other transfers. The analysis assumes that the prices of goods and wages are determined in market conditions and close to shadow prices used in the economic analysis. Therefore, there is no adjustment or conversion in market prices for shadow prices. 4. The project duration (the period of analysis) is set at 25 years starting from 2013, which includes 5 years of construction and 20 years of operation. The project is a public investment aiming to promote a new renewable energy solution in schools and provide public goods such as electricity consumption utilities of school students and faculty, global and local pollution emission reduction, and demonstrative and educational effects in a long run. A discount rate of 5 percent is used in estimating present values in the analysis. 5. The cost-benefit analysis approach is used to quantitatively examine the economic viability of the investments. The economic benefit of electricity consumption was valued based on the concept of the consumers' willingness-to-pay for the electricity generated by the rooftop PV systems. Environmental and health benefits are owing to the project's providing electricity by clean solar power instead of thermal power which otherwise will bum coal and emit local air pollutants and CO2. Both global and local environmental benefits from C02, SO2, NOx, and TSP emission reduction were quantified so were the benefits of demonstrative and educational effects provided by the project. 6. A sensitivity analysis was conducted to test the robustness of the results of the cost-benefit analyses. Key parameters and assumptions used in the economic analysis are listed in Table A6- 1. 34 Table A6-1: Parameters and assumptions in the economic analysis Items Parameters/Assumptions Project life 25 years Construction period 5 years Operation period 20 years Discount rate 5% Promotional tariff for electricity generated by solar Electricity tariffs in Beijing power: 1.00 yuan /kWh; regular tariff for commercial entities: 0.80; discounted tariffs for schools: 0.50 National average coal consumption by 333 g/kWh thermal power unit CO2 emission factor in north China 0.9 t C02/MWh SO2 emission factor in north China 0.0077 t S02/MWh NOx emission factor in north China 0.004 t NOx/MWh TSP emission factor in north China 0.4 kg TSP/MWh Global environmental benefit per ton US$15 /t CO2 of CO2 reduced Local environmental benefit per ton of US$379 /t SO2 SO2 reduced* Global environmental benefit per ton US$269 /t NOx of NOx reduced* Global environmental benefit per ton US$5801 /t TSP of TSP reduced* Exchange rate US$1 =6.29 yuan RMB * Source: World Bank, 2007, the Cost of Pollution in China. Project baseline and alternatives 7. The project analysis includes the non-project scenario and alternative technical options. In the non-project scenario, the current electricity distribution system would continue to be used in schools. The electricity consumed by schools would be generated by coal-fired power plants. The technical options considered in the analysis include types of PV panels, school selection, metering, and grid connection. Cost-Benefit Analysis 8. Economic benefits. In Beijing, 99 percent of the electricity of the grid is generated by thermal power plants. Coal production and consumption poses significant costs to the local and global environment and the public. In particular, coal burning for power generation emits local air pollutants such as SO2, NOx, total suspended particulates (TSP) and greenhouse gases such as 35 CO2. To estimate global benefits of CO2 reduction, the information about the "social cost of carbon" (SCC) and the carbon price in CDM projects were considered. SCC is intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services. According to a study done by an Interagency Working Group of the U.S. Government under Executive Order 12866, annual average SCC is measured at $31/tCO2 from 2017 to 2037 at a discount rate of 3 percent and at $9 at a discount rate of 5 percent. For the economic benefit analysis for this project, the global environmental cost of US$15 per ton of CO2 was assumed and a baseline emission factor for northern China of 0.9 tCO2/MWh was used. The World Bank 2007 report "Cost of Pollution in China" presented the emission factor and unit cost of SO2, NOx and TSP which were shown in the table above and applied in estimating local environmental benefits of local pollution emission reduction. The economic benefit analysis indicated a present value of global environmental benefits is RMB 114 million and a present value of local environmental benefits is RMB 54 million. 9. The benefits of electricity consumption by schools were quantified using the concept of the willingness-to-pay (WTP), which can help capture the total electricity consumption utility of consumers. With no willingness-to-pay survey done for the project, literature data on WTP values for the premium that consumers are willing to pay for renewable energy sources (RES) on top of their normal electricity bill (rather than the full value) was reviewed. Because these WTP values are measured as a lump sum for a certain length of time rather than as a value per kWh of electricity, the assumption was made that the WTP value for one kWh of electricity consumed is equal to the regular tariff in Beijing, which is 0.80 yuan/kWh, over years. Since the electricity prices in China are expected to continue to increase, this represents a conservative estimate of the average WTP value that puts the estimated economic benefit of electricity consumption at a lower end of a possible range. Its present value estimated in the analysis is RMB 1.02 billion. 10. In non-project scenario, there would be electricity loss in power transmission from power plant to end-user. The distributed PV systems would avoid the loss. Economic benefits from avoided transmission loss were also estimated approximately at 5 percent of total electricity generated. The present value of the saving is RMB 54 million. 11. The project will also have substantial demonstrative value for renewable energy deployment in more schools and other institutions in other cities outside Beijing and beyond the project construction period. Such benefits include cost reduction owing to increased production of the solar PV for more schools and positive environmental externalities like global and local air pollution reduction through the replication of the roof-top systems in schools beyond Beijing. To capture some of the benefits, it is assumed that, inspired by the demonstration project, there would be 300 schools adopting the roof-top solar PV system (with an annual new generation capacity of 30 MWp) every year from 2015 to 2024 in surrounding cities and the unit cost of the system (currently at 12 yuan/Wp) would gradually decrease by 15 percent from 2018 to 2024 because of increased production and economies of scale. The present value of the demonstrative benefit is about RMB 313 million. 36 12. The other benefit which the analysis tried to capture is the educational benefits. The students (and their parents) have a willingness to pay for a better opportunity for scientific studies. The roof-top solar PV systems installed by the project in schools will be used for students to get the first hand experiences with solar power in their science classes or after-school programs. In Beijing, the government provides RMB 100 Yuan per student (or RMB 200 million in total) each year for the in- and after-school science programs. It was assumed that 10 percent (i.e., 10 yuan per student) would be the students' willingness to pay for using the solar PV systems each year. The present value of the benefit is about RMB 70 million. 13. Economic costs. The total capital investment is 1,423.0 million RMB. O&M cost is RMB 2.08 million per year during operation. 14. Results of the cost-benefit analysis. The aggregated results of the analysis under the scenario including the electricity consumption benefit to consumers are summarized in the table below. It shows that the economic internal rate of return (EIRR) of the project is 8.78 percent in real term, its net present value (NPV) is RMB 419.1 million and the benefit-cost ratio (BCR) is 1.33. Table A6-2: Results of the cost-benefit analysis Unit: million Yuan RMB PV (5%) 2013 2015 2017 2019 2020 2024 2025 2030 2037 Electricity consumption 1078.7 4.8 71.9 89.6 92.6 91.6 87.9 87.0 82.3 75.7 (WTP) Global environmental 114.0 0.5 7.6 9.5 9.8 9.7 9.3 9.2 8. 7 8.0 benefits Local environment benefits 53.6 0.2 3.6 4.4 4.6 4.5 4.4 4. 3 4. 1 3.8 Avoided transmission loss 53.9 0.2 3.6 4.5 4.6 4.6 4.4 4. 3 4. 1 3.8 Demo and replication 313. 1 0.0 4.4 13. 1 39.8 62. 1 97.6 0.0 0.0 0.0 benefits Educational benefits 70.3 0.5 7.5 9.5 10.0 10.0 10.0 0.0 0.0 0.0 Benefit Subtotal 1683.6 6.3 98.5 130.5 161.4 182.6 213.5 104.8 99.2 91.3 Capital investment 1242. 9 480. 1 205. 8 68.6 0&M 21.6 0.4 1.4 1.6 1.7 1.7 1.7 1.7 1.7 1.7 Cost Subtotal 1264.5 480.5 207.1 70.2 1.7 1.7 1.7 1.7 1.7 1.7 Net benefit flow 419. 1 (474.2) (108.6) 60.3 159.6 180.9 211.8 103. 1 97.5 89.6 EIRR 8. 78% ENPV (IC=5%) 419. 1 B/C ratio 1. 33 15. A sensitivity analysis shows that the EIRR will drop to 7.32 percent if the estimated benefit decreases by 10 percent. But if there were 400 more schools each year and a 20 percent cost reduction in the estimation of the demonstrative benefit, the EIRR would go up to 10.33 percent. Considering that the project aims to increase the share of renewable energy in Beijing's schools, the EIRR can be considered economically acceptable. 16. Affordability and impact on the poor. The project will install PV systems in schools and other educational institutions in Beijing Municipality and support institutional capacity building. The level of electricity tariff paid by the schools would not increase after the project (at a minimum). It therefore will not cause any additional burden on the public including the poor. 37 B. Financial Analysis 17. A financial analysis was conducted at the municipal level, project level, and entity level to assess respectively the certainty of counterpart funds, the profitability of the project, and the financial viability of the project company. 18. Financial Analysis at the Municipal Level. The project will be jointly financed by the Ministry of Finance (MOF) and the Beijing Municipal Government (BMG). In 2009, MOF launched the Golden Sun Program to support the installation of distributed PV generation, including rooftop PV systems in urban areas. The total MOF subsidy for the project will amount to RMB 562.5 million (39 percent of the total project investment cost). The BMG would provide a RMBl.0/Wp subsidy to rooftop PV systems for 3 consecutive years. The total subsidy from the BMG would be RMB 300 million, of which 42 percent or RMB 125.2 million will be used to subsidize the investment cost of the project, accounting for 9 percent of the total project investment cost. The remaining 58 percent or RMB174.8 million will be used to support the operation and maintenance (O&M) of the project. 19. Financial Analysis at the Project Level. The revenues of the project include tariff revenues paid by project schools and the subsidy provided by the BMG. After installation of the PV systems, the BMG will provide subsidy to Yuanshen. With 42 percent of BMG's subsidy used to cover project investment cost, the remaining 58 percent of BMG's subsidy will be used to cover O&M costs. Since July 2012, the power tariff for schools is RMB0.5053/kWh currently. The project schools will pay Yuanshen for the solar PV electricity it consumes on a monthly basis. It is assumed that the power tariff will not be adjusted during the life of the project. It is estimated that the power consumed by the schools from PV systems is about 100 GWh. 20. The O&M costs include the expenses for cleaning the PV systems, data transfer, bank services, and Yuanshen's management of the project. The major assumption of O&M costs are as follows: * Cleaning PV systems. Yuanshen will pay each school with RMBl,000 per year for employing workers of project schools to clean dust and make minimum maintenance of PV systems. * Data transfer. It is assumed that 40 percent of project schools are located in the remote area of Beijing Municipality and these project schools will use general packet radio service (GPRS) to transfer the amount of power generated by the PV systems and consumed by the project schools to Beijing Energy Conservation and Environmental Protection Center (BECEPC). Every month, Yuanshen will pay RMB30.00 to the company which provides GPRS service. The remaining 60 percent of the project schools will use their campus networks to transmit data to BECEPC or other places. These data transferred by campus networks are free. * Bank services. Each month, the project schools will remit their power tariff to Yuanshen through local banks. These remittances will be paid by Yuanshen at RMB5.00 every month for each school. 38 * Yuanshen' management. Yuanshen has designated several staff to take care of the construction and implementation of the project. Yuanshen' management cost includes the salary of these staff members and their overhead. 21. A calculation of the financial internal rate of return (FIRR) of the project determined the FIRR to be negative, although the weighted average cost of capital (WACC) of the project is about 1.02 percent. The net present value (NPV) of the project at WACC is also a negative figure and the project is not profitable. Detailed information on the project financial analysis is available in the project files. 22. Sensitivity analyses were carried out. Because the project is not financially profitable, switching values of capital costs, maintenance costs, and revenues that would make the FIRR of the project fall to the cut-off rate were calculated. The FIRR of the project would fall to the cut- off rate, if: * The investment cost is reduced by 13%; * The O&M cost is reduced by 83% over the life of the project; * The tariff revenue is increased by 18% over the life of the project; and * The investment cost is reduced by 10% whilst the tariff revenue is increased by 10% over the life of the project. 23. The sensitivity analysis indicated that the most effective way to make the project profitable would be the synthetic action by reducing 10 percent of the investment cost and increasing 10 percent of the tariff revenues. 24. Financial Analysis at the Entity Level. Yuanshen Company is responsible for the implementation of Component 1 of the project. Before the project, Yuanshen had invested in Bayi Middle School to build 0.139 MW of PV systems. A financial analysis of Yuanshen's PV business, including both Bank financed and non Bank financed PV business, was carried out. The financial resources of the project investment made by Yuanshen include subsidies from the MOF and the BMG, and the Bank loan. Yuanshen has the responsibility to pay the debt service of the project. The revenues of Yuanshen's PV business will come from the tariff paid by the project schools and the subsidy provided by the BMG. The O&M costs include the expenses for cleaning the PV systems, data transfer, bank services, and Yuanshen's management of the project. 25. In addition to the assumptions used for the project financial analysis, the following assumptions were also used for Yuanshen's financial analysis: * MOF's subsidy will be recorded as long term account payable, which will be used to write off the depreciation of the PV systems in order to reduce the operating cost of the PV systems. * BMG's subsidy can be divided into two parts. The first part about RMB125.2 million will be used for project investment, which will be used to write off the depreciation of the PV systems. The second part about RMB174.8 million will be used as subsidy revenue to cover the O&M costs. 39 * The Bank loan is about US$120 million, of which US$9.7 million will be used to finance the interest during the implementation and front-end fee. The interest rate of the Bank loan is 2.23 percent and the repayment period is about 20 years after 5 years of grace period. * The depreciation rate is about 5.94 percent and the amortization rate is about 6.25 percent. * The account receivable is 5 percent of tariff revenue generated by PV system. * Yuanshen will enter into contracts with project schools. According to the contracts, the PV systems of first phase of the project schools will be transferred to the project schools in 15 years after the installation of the PV system. The PV systems of the second phase of the project schools will be transferred to the project schools in 20 years after the installation of the PV system. Along with the transfer of PV system, Yuanshen also transfers its O&M obligation to the project schools. 26. Based on this information, the pro forma financial statements of Yuanshen from 2013 to 2037 were prepared. According to these financial statements, the EBITDAs of Yuanshen's PV business are always positive. Taking into account the large amount of depreciation, the net profits of Yuanshen's PV business become negative from 2023 to 2029. Yuanshen's PV business runs at a deficit. The operating cash flows of Yuanshen's PV business are always positive. This enables Yuanshen to have capacity to cover its cost of PV business. There are 8 years that the cost recovery rates are less than 1. However, the debt service coverage ratios are not so good. From the 3rd year of repayment of the Bank loan, DSCRs are below 1. Table A6-3 summarizes the financial performance of Yuanshen. 27. To help Yunshen reduce its investment cost and O&M costs, and increase its tariff revenues, financial covenants are set up which require that CRR is not less than 1 and DSCR is not less than 1.1. Detailed information of Yuanshen's financial analysis is available in the project files. 40 Table A6-3: Financial performance of Beijing Yuanshen Energy Saving Technology Company Limited RMB thousand 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2020 2029 2030 2031 2032 2033 2034 2035 2036 2037 Income Statement Operating Revenue 3,179 21,223 45,113 53,697 56,166 58,605 58,000 57,396 56,792 56,188 55,584 54,979 54,375 53,771 53,167 49,861 49,288 48,716 48,144 47,571 32,538 12,864 5,483 3,013 44,709 Gouvermment Subsidies 139 139 10,435 85,000 60,000 25,000 10,000 5,000 0 0 0 0 0 0 0 0 8 0 8 8 8 8 8 0 0 Operating Expenses 1,582 6,987 13,707 16,151 16,987 17,767 17,733 17,699 17,666 17,632 17,257 15,267 12,632 11,647 11,294 10,385 10,353 10,321 10,289 102357 9,415 5,996 2,500 1,230 3,185 EBITDA 1,736 14,376 41,841 122,547 99,179 65,838 50,267 44,697 39,126 38,556 38M26 39,712 41,743 42,124 41,873 39,475 38,935 38,395 37,854 37,314 23,122 6,868 2,983 1,783 41,524 Depreciation 0 0 0 0 8 0 0 0 0 1,883 83,978 83,978 83,978 83,978 82,151 78,480 78,480 55,076 21,994 9,441 4,760 0 0 0 0 EBIT 1,736 14,3701 41,841 122,5471 99,1791 65,830 50,2671 44,697 39,1261 36,673 -45,651 -44,265 -42,2351 -41,8541 -40,279 -39,0051 -39,545 -16,6821 15,861 27,8731 I8,631 6,868 2,9831 1,783 41,5241 FinancialExpenses 1,110 1,170 60 0 0 14,982 14,214 13,446 12,677 11,909 11,141 10,372 9,604 8,836 8,067 7,299 6,531 5,762 4,994 4,226 3,457 2,689 1,921 1,152 384 EBT 626 13,208 41,781 122,547 00,179 50,855 36,053 31,251 26,449 24,764 -56,792 -54,638 -51,839 -50,690 -48,346 -46,304 -46,076 -22,444 18,867 23,647 14,905 4,179 1,062 630 41,139 Income Tan 94 1,901 6,267 18,382 14,877 7,628 5,408 4,688 3,967 3,715 0 0 0 0 0 0 0 0 1,630 3,547 2,236 627 159 95 6,171 Net-Profit 532 11,225 35,513 104,165 84,302 43,227 30,645 26,563 22,482 21,049 -56,792 -54,638 -51,839 -50,690 -48,346 -46,304 -46,076 -22,444 9,237 20,100 12,669 3,552 903 536 34,968 Cash FIo Statement Operations 1,483 11,493 34,379 103,735 84,178 58,087 44,889 40,039 35,189 34,872 38357 39,743 41,773 42,154 41,903 44,571 38,964 38,423 36,253 33,795 21,638 7,225 3,193 1,812 33,268 Invesntments -322,707 -304,034 -21,901 -34,000 -51,871 8,250.___ 0. 0 0, 0 0 0 0 0 0. 0. 8 0. 8 0 0 0 0, 0 0. Financing 322,667 293,681 110,558 29,421 21,116 -62,417 -61,649 -60,881 -60,112 -59,344 -57,894 -53,213 -47,242 -44,572 -43,165 -41,754 -40,985 -40,217 -39,449 -38,680 -37,912 -37,144 -36,375 -35,607 -34,839 Cash Change 1,443 340 123,036 99,066 53,423 3,920 -16,760 -20,841 -24,923 -24,472 -19,537 -13,471 -5,469 -2,418 -1,262 2,817 -2,022 -1,794 -3,196 -4,885 -16,274 -29,918 -33,182 -33,795 -1,571 Ending Cash Balance 1,443 1,783 124,819 223,885 277,308 281,228 264,468 243,627 218,704 194,232 174,694 161,224 155,755 153,337 152,075 154,893 152,871 151,077 147,882 142,997 126,724 96,805 63,623 29,828 28,257 Balance Sheet Asset Curent Asset 1,602 2,844 127,075 226,570 280,116 284,158 267,369 240,497 221,544 197,041 177,474 163,973 158,474 156,026 154,733 157,386 155,335 153,213 150,289 145,376 128,50 97,448 63,897 29,978 30,493 Net Fixed Asset 454,036 947,169 1,079,406 1,073,966 1,065,202 988306 911,410 834,514 757,618 680,722 603,826 526,930 450,034 373,138 298,068 214,657 142,949 93,155 74,251 66,642 62,823 44,368 18,356 8,845 5,652 Other Assets 28,470 61,770 77,904 86,897 95,814 88,733 81,651 74,569 67,488 60,406 53,324 46,243 39,161 32,079 24,998 13,296 6,525 1,242 -1,948 -3,679 -4,620 -4,620 -4,620 -4,620 -4,620 Total 484,100 1,011,703 1,294,394 1,387,4321 1,441,132 1,361,197 1,260,4291 1,155,580 1,646,649 938,169 834,6241 737,140 947,669 561,243 477,800 305,339 394,809 247,910 222,6931 208,338 186,5531 137,196 77,633 34,203 31,525 Liabilities and Owner's Equity Current Liabilities 82,261 94,690 101,917 96,602 90,696 77,716 64,735 51,755 38,774 25,794 13,495 5,109 1,925 643 -0 0 0 0 0 0 0 0 0 0 0 Long-TermLiabilities 385,457 889,478 1,119,339 1,123,537 1,098,842 988,660 870,228 751,796 633,364 516,815 482,361 447,907 413,452 378,998 344,543 310,089 275,635 241,180 206,726 172,272 137,817 103,363 68,909 34,454 0 Owners' Equity 16,389 27,614 63,128 167,293 251,594 294,821 325,466 352,030 374,511 395,560 338,768 284,130 232,292 181,602 133,256 75,250 29,174 6,730 15,966 36,067 48,736 33,833 8,724 -251 31,525 Total 484,108 1,011,783 1,294,394 1,387,432 1,441,132 1,361,197 1,260,429 1,155,580. 1,946,649 938,169 834,624 737,146, 647,669, 561,243, 477,860 385,339 394,809 247,918 222,693 208,338 186,553 137,196 77,633. 34,203, 31,2 Ratios Debt Repayment 1,110 38,170 2,060 0 0 49,437 48,668 47,900 47,132 46,363 45,595 44,827 44,058 43,290 42,522 41,754 40,985 40217 39,449 38,680 37,912 37,144 36,375 35,607 34,839 CRR 1.23 2.62 4.03 8.59 6.84 .55 2.13 2.00 1.07 1.79 0.49 0.501 0.511 0.511 0.52 .52 0.521 0.601 1.29f 11.5 148 1.24 1.26 12.52 DSCR 1.56 0.301 20.311 - 1 1.33 1 1.83 1 0.93 0.83 1 0.83 0.941 0.691 0.95 1 0.971 0.981 0.95 1 0.95 1 0.951 0.96 0.9 0.1 0.161 0.081 0.05 1.19 41