Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: 55701 Project Name Additional Financing - Energy Development and Access Expansion Project (TEDAP) Region AFRICA Sector Renewable energy (60%); Power (20%); General energy sector (20%) Project ID P117260 Original Project Name: TZ-Energy Development & Access Expansion Original Project ID: P101645 Borrower(s) Government of Tanzania Implementing Agency Ministry of Energy and Minerals Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared July 14, 2010 Date of Appraisal Authorization January 21, 2010 Estimated Date of Board Approval March 30, 2010 1. Key development issues and rationale for Bank involvement 1. The Government of Tanzania has requested IDA Additional Financing of US$25 million to establish a credit line for small rural/renewable energy projects to enhance access to electricity and help addressing the country’s significant power generation shortfall. 2. Tanzania faces significant power shortages. The power system’s security and supply reliability are inadequate due to high reliance on hydro power, which is susceptible to droughts. Previous droughts illustrate the uneconomical consequences of emergency use of thermal power generation. 3. In addition, Tanzania has one of the lowest electrification rates in Sub-Saharan Africa (SSA) – 11% compared to a 20% SSA average. The access rates are particularly low in rural areas (below 2%), where most of the Tanzanian population lives and where poverty rates are highest. 4. Tanzania has abundant, but largely untapped renewable energy resources , including small hydro, wind, solar and various forms of biomass, which could be harnessed for power generation and access expansion. The Tanzania Energy Development and Access Expansion Project (TEDAP)’s activities have created a favorable environment for the development of small renewable energy projects. As a result, a number of rural renewable energy projects have been initiated by the local private sector. Eighty potential projects have been identified, of which 22 are considered priority (with confirmed sponsors and detailed design studies completed or underway) with a cumulative total size of 78 MW. The total renewable energy potential substantially exceeds TEDAP’s original expectations of 17 MW at appraisal. Page 2 5. Tanzania has adopted a comprehensive regulatory framework supporting small renewable energy projects , which is considered one of the best practices in the region. The framework includes standardized power purchase agreements and tariffs for small power projects (for both the main grid and isolated grids), simplified regulatory rules for small power projects and comprehensive guidelines for the project developers. 6. A recent assessment of the Tanzanian financial sector indicates that liquidity is becoming constrained, and long-term lending is extremely rare due to the absence of long-term funds. Several local commercial banks have shown interest in financing local renewable energy projects, but their already constrained ability to lend long-term has been exacerbated by the global financial crisis. At the same time, renewable energy projects typically require longer-term funding (e.g. 10-15 years) due to their relatively high initial costs. 7. In the absence of adequate financing, the identified small renewable projects will not be able to move forward. Failure to mobilize medium/long-term funding would therefore negatively affect TEDAP’s ability to meet its development objectives. 8. Tanzania has a stable macroeconomic environment and a sound, competitive financial sector, capable of absorbing the proposed credit line and conducting reliable due diligence. Several of the large national banks have confirmed a strong interest in supporting small renewable energy projects if they could access a credit facility. 9. Since its effectiveness in March 2008, TEDAP’s development objectives and implementation progress have been consistently rated satisfactory. TEDAP ’s off-grid component, in particular, has yielded significant positive results in terms of developing institutional capacity, creating an enabling regulatory framework for scaling-up electricity access and promoting private sector participation in renewable energy projects, with numerous small power projects (SPPs) now under development. 10. The proposed Additional Financing would address the financing gap by providing local banks with long-term funds for financing of small renewable energy projects, and would scale-up TEDAP’s outcomes and targets for renewable energy generation. 11. The Additional Financing is consistent with the latest Country Assistance Strategy (JAST: Tanzania Joint Assistance Strategy) and the Government’s National Strategy for Growth and Reduction of Poverty – MKUKUTA (Goal 6 – Provision of reliable and affordable energy to consumers). 2. Proposed objective(s) 12. The objective of the TEDAP is to improve the quality and efficiency of the electricity service provision in the main three growth centers of Dar es Salaam, Arusha, and Kilimanjaro and to establish a sustainable basis for energy access expansion. The project’s global environmental objective is to abate greenhouse gas emissions through the use of renewable energy in rural areas to provide electricity. Page 3 13. The Project Development Objective would be sl ightly reformulated to highlight project’s enhanced focus on renewable energy development. The new Project Development Objective will read: The Project Development Objective is to improve the quality and efficiency of the electricity service provision in the main three growth centers of Dar es Salaam, Arusha, and Kilimanjaro and to establish a sustainable basis for energy access expansion and renewable energy development in Tanzania. The global environmental objective will not change. 3. Preliminary description 14. TEDAP consists of three components: (A) a grid component of US$85.8 million focusing on urgent investments in TANESCO’s transmission and distribution network; (B) an off-grid component of US$22.5 million (including US$6.5 million from GEF) to support an institutional set-up for the newly established Rural Energy Agency (REA) and to develop and test new off- grid electrification approaches for future scale up; and (C) a technical assistance component of US$3.2 million. 15. TEDAP’s off-grid component has three subcomponents: (i) Small Power Projects (SPPs), including renewable power generation and mini-grids; (ii) Sustainable Solar Market Development, supplying solar photovoltaic (PV) systems for public institutions and for individual households and businesses in rural areas; and (iii) Technical Assistance to the Rural Energy Agency (REA) and other stakeholders. These activities are implemented through: (a) provision of grants to the private sector (including NGOs and cooperatives) to partially off-set investment costs of new service connections (through performance grants), and for pre- investment studies, business and market development (through matching grants); and (b) supply, installation and provision of maintenance and other associated services for the Sustainable Solar Market Packages, as well as the provision of goods, consultant services and training for the technical assistance subcomponent, and related operating expenses. 16. The proposed Additional Financing will require addition of one sub-component and adjusting implementation arrangements of the Component B. The Additional Financing will not affect the Components A and C. 17. The Component B – “Off-grid Component” - will be renamed to “Small Power Project Component”. This name reflects better the compo nent’s support to both grid-connected and off- grid small power projects. 18. The sub-component B1 will be modified to introduce a new beneficiary and a new activity (US$ 2 million of the Additional Financing). First, the Additional Financing will expand the existing matching grant window under the sub-component B.1, which is currently providing technical assistance to the project developers. The Additional Financing will open this grant window to participating financial institutions (PFIs) for the development, appraisal and supervision of their renewable energy portfolios. Second, the Additional Financing will add a low-cost distribution pilot, as a new activity under the sub-component B.1. This activity, implemented by REA, will demonstrate new techniques and implementation approaches aimed at reducing the costs of distribution networks. Reducing costs of distribution networks (currently Page 4 among the highest in Sub-Saharan Africa) would enhance commercial viability of SPP mini- grids and reduce subsidy needs. 19. A sub-component B.4 Rural / Renewable Energy Credit Line would be added (US$23 million of the Additional Financing) . The credit line would provide long-term funding (up to 15 years) to eligible participating financial institutions in local currency to on-lend to eligible small power projects (SPPs). The project developers would request loans to PFIs of their choice. The PFIs will perform a full appraisal of the projects and if satisfied, will request corresponding credit line funding. The credit line is open to all Tanzanian financial intermediaries, as long as they meet eligibility criteria. The detailed implementation arrangements and the eligibility criteria will be established in the Operating Guidelines. 20. Implementation arrangements for component B will be adjusted to reflect the inclusion of the new sub-component B.4. REA will act as the program manager and facilitator. The Tanzania Investment Bank will administer the credit line financially on behalf of the Government of Tanzania. The project’s closing date is proposed to be extended to March 31, 2015. 21. Several grant resources have been made available to Tanzania for rural and renewable energy development, including the Lighting Rural Tanzania grant in the amount of US$1.1 million financed under the Africa Renewable Energy and Access Grant (AFREA). The Lighting Rural Tanzania grant ensures additional parallel financing to TEDAP’s matching grant window, providing grants of up to $100,000 each to the private sector for technical assistance to develop business models that deliver a wide array of innovative and appropriate modern lighting products to off-grid households and businesses in rural Tanzania, with the quality, applications, costs, or configurations needed by this low-income market segment. Energy for these lights could be from renewable energy, mechanical, or other non fossil fuel sources. The grant is not expected to have any negative environmental and social impacts, as it provides only technical assistance related to the dissemination of low-cost lighting systems. 4. Safeguard policies that might apply 22. TEDAP triggers the following safeguards policies: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Physical Cultural Resources (OP/BP 4.11) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) 23. TEDAP’s compliance with safeguards policies has been satisfactory. 24. The Additional Financing is not expected to trigger any additional safeguards policies. As the type and size of projects supported by the credit line are the same as those already included in TEDAP’s off-grid component, the Additional Financing will apply the same instruments and Page 5 procedures already in place for TEDAP’s off-grid component, including the Environmental and Social Management Framework (ESMF), the Resettlement Policy Framework (RPF). 25. The Lighting Rural Tanzania grant is intended to contribute to the social and environmental development of rural areas in Tanzania. Given that the activity is providing technical assistance grants for market development for dissemination of solar lanterns and similar individual lighting devices only, no negative environmental and social impacts are foreseen. However, REA will screen all subprojects, and if any negative impacts are identified, the subprojects will be required to follow TEDAP’s Environmental and Social Management Framework (ESMF) and the Resettlement Policy Framework (RPF), which were publicly disclosed on July 1, 2007. 26. In line with the provisions of TEDAP Financing Agreement, the responsibility for safeguards compliance for the component B will pass from MEM to REA based on REA’s satisfactory capacity assessment. According to the assessment of REA’s capacity for the implementation of safeguards, Environmental and Social Impact Assessment (ESIA) training will be provided to REA in order to enhance the expertise in screening and practical operational exposure. REA will also be responsible for reviewing and monitoring project developers’ compliance with the safeguards requirements for the new sub-component B.4. 5. Proposed Financing Plan Source: ($m.) BORROWER/RECIPIENT 0 International Development Association (IDA) 25 Total 25 6. Contact point Contact: Dana Rysankova Title: Sr. Energy Specialist Tel: (202) 458-9514 Fax: (202) 473-5123 Email: Drysankova@worldbank.org