Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1091 Project Name SUSTAINABLE ENERGY (GEF) Region EUROPE AND CENTRAL ASIA Sector District heating and energy efficiency services (40%);Renewable energy (40%);Micro- and SME finance (20%) Project ID P089656 GEF Focal Area Borrower(s) MINISTRY OF ECONOMY Implementing Agency Ministry of Economy 15, Ul. Jurij Gagarin Macedonia, former Yugoslav Republic of 1000 Tel: +389-2-393 531 Fax: +389-2-394 902 violeta.keckoarovska@economy.gov.mk Environment Category [ ] A [ ] B [ ] C [ x] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [X] S 2 [ ] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared September 2, 2004 Estimated Date of Appraisal Authorization March 16, 2005 Estimated Date of Board Approval October, 2005 1. Key development issues and rationale for Bank involvement Macedonia is one the countries in the South East Europe (SEE) with fewest energy resources. It has no oil, gas or coal and the main fossil fuel resource consists of limited deposits of lignite. The short-term alternative for increasing electricity supplies is to expand imports, which already are about 10% of Macedonian demand. However, by relying on imports Macedonia’s security of supply decreases sharply as well as its negotiating position with respect to regional electricity exporters. In order to decrease future dependence on imported fuels, the government is interested in parallel development of indigenous (renewable) energy sources and through demand side measures to improve energy efficiency. A number of barriers are hampering the investment in energy efficiency (EE) and renewable energy (RE) projects, most notably: (i) Lack of an enabling framework; (ii) Lack of awareness, information, and confidence in the efficacy of investments and technology; (iii) Lack of capacity in project development; (iv) Perceived risks and lack of understanding of EE/RE investments in FIs; (v) Lack of development capital and project finance; and (vi) Lack of longer- term affordable debt finance. Rationale for Bank Involvement Page 2 The World Bank Country Assistance Strategy (dated August 14, 2003; Report No: 26513- MK) mentions that “opportunity exists to improve the efficiency of energy usage in FYR Macedonia, which has high energy consumption relative to GDP, and to develop the country’s significant renewable energy resources”. The main interventions in the energy sector foreseen in the CAS relate to Macedonia’s inclusion in the South Eastern Europe Regional Energy Market (SEEREM) and support to improve the performance of the national power utility, ESM. This project will complement these activities assisting the GoM and ESM in addressing demand side issues that will help address the growing imbalance between energy supply and demand. 2. Proposed objective(s) The objectives of the project are to: · Change the current unfavorable investment and incentive conditions and create an enabling environment in Macedonia that fosters the development of sustainable energy utilization (in this context defined as efficient use of energy and use of renewable energy sources) through providing financial, methodological, informational, and institutional support; · Support a large increase in energy efficiency (EE) investment in Macedonia through development of a self-sustaining, market-based financing mechanism based on a principle of commercial co-financing. The project’s goal is focused on the development and implementation of financially profitable EE projects, which can provide sustainable and increasing reductions in GHG emissions without relying on public subsidy; and · Increase the availability of financing for renewable energy (RE) investments, enterprises and intermediaries through the establishment of a financial facility with a long-term time horizon, which will provide seed capital for equity or debt co- financing of RE development projects. 3. Preliminary description A Macedonia Sustainable Energy Program (MSEP) will be established. The MSEP would seek to promote investments in energy efficiency and renewable energy by removing institutional and financial barriers. The program will financed via a GEF grant with contributions from the Government of Macedonia (GoM), other donors (e.g. the European Commission and the USAID), debt financing from local banks and equity investments from local project developers. At present the following components are foreseen: 1. Technical assistance to capacity building, policy and strategy advice and administration of a financial facility. The TA will focus on project identification, training, study tours, information campaigns, dissemination of best practice Page 3 guidelines, and other efforts to facilitate the emergence of a market place for EE/RE investments. It will also include support to the establishment of a utility based ESCO; 2. Investments in EE/RE project facilitated by capitalization of a Sustainable Energy Financial Facility (SEFF). The SEFF will provide support to: (a) EE projects through co-financing on commercial terms and provision of guarantees; (b) RE projects through providing equity finance and debt co-financing. Component 1 - Technical Assistance (US$ 2.0 million of which US$1.5 million from GEF grant and the remainder from GoM’s own sources and other donors) . This component covers the following areas: · Capacity Building Strategic/Legislative/Institutional: Support to a the MoE’s Department of Energy (or a new Energy Agency). Technical asssistance will include policy and strategy advice regarding promotion of EE/RE through training and consultancy support to the MoE. · Capacity Building, Technical/Advisory : Funding activities in initial project development and evaluation through a Project Development Assistance Facility (PDAF). The PDAF will provide financial and technical support for project preparation; organize workhsops and seminars for potential co-financiers and clients; market and disseminate information; and train the staff of consultants, ESCOs, etc. in project development and financing techniques. · Fund Administration : Financing of incremental set-up and running costs of the SEFF. · Support to utility based ESCO: E.g. an ESCO owned by ESM Transmission, ESM Distribution and the Skopje Heating Company – Toplifikajie. The GEF support will mainly finance the SEFF administration, the PDAF and the support to a utility based ESCO. It is envisaged that the GoM would finance staff time, rent and operating costs of an expanded Department of Energy (or a new Energy Agency) while the European Commission/EAR and the USAID are expected to provide most of the capacity building on the strategic/legislative/institutional level. Component 2a – Investment in Energy Efficiency Projects (US$ 11 million facilitated by loan financing or guarantees through SEFF initially capitalized by US$2.0 million from GEF grant and the remainder from local banks and private investors) . Loans for EE investments would be made on a commercial basis to creditworthy customers that will revolve with interest and principal payments into it for additional loans. As alternative to lending, SEFF could offer a partial guarantee facility. The initial GEF capitalization is proposed to be US$2.0 million, the USAID and the GoM is expected to contribute US$0.5 million, commercial co- finance and equity is expected to amount to US$6.5 million and re-investment of returned capital is expected to amount to US$2.0 million. Component 2b – Investment in Renewable Energy Project (US$7.5 million Financial Support through the SEFF initially capitalized by US$1.5 million from GEF grant and the Page 4 remainder from local banks and private investors) . RE investments would either be made as equity stakes in well researched, financially viable projects or as commercial loans and guarantees where appropriate. As alternative to lending, SEFF could offer a partial guarantee facility. The initial GEF capitalization is proposed to be US$1.5 million, the Austrian Development Corporation and the GoM is expected to contribute US$0.5 million, commercial co-finance and equity is expected to amount to US$4.0 million and re-investment of returned capital is expected to amount to US$1.5 million. 4. Safeguard policies that might apply [Guideline: Refer to section 5 of the PCN. Which safeguard policies might apply to the project and in what ways? What actions might be needed during project preparation to assess safeguard issues and prepare to mitigate them?] 5. Tentative financing Source: ($m.) BORROWER/RECIPIENT 0 GLOBAL ENVIRONMENT FACILITY 5 FOREIGN PRIVATE COMMERCIAL SOURCES (UNIDENTIFIED) 15 Total 20 6. Contact point Contact: Peter Johansen Title: Sr Energy Spec. Tel: (202) 458-5578 Fax: Email: pjohansen@worldbank.org