Document of The World Bank FOR OFFICIAL USE ONLY Report No: RES13247 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF WIND POWER DEVLOPMENT PROJECT IBRD LOAN No. 79270-EG/ CTF LOAN TF096930-EG/ GRANT No. TF096929-EG June 25, 2010 FOR THE ARAB REPUBLIC OF EGYPT June 20, 2014 MNSEE Middle East and North Africa 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. ABBREVIATIONS AND ACRONYMS AFD Agence Française de Développement AfDB African Development Bank BOO Build, Own, and Operate CBG Central Bank Guarantee CTF Clean Technology Fund EA Environmental Assessment EETC Egyptian Electricity Transmission Company EIB European Investment Bank EIRR Economic internal rate of return ESIA Environmental and Social Impact Assessment ESMP Environmental and Social Management Plan FIRR Financial rate of return GHG Greenhouse gas emissions GOE Government of Egypt GRM Grievance Redress Mechanism IBRD International Bank of Reconstruction and Development ICB International competitive bidding IPP Independent Power Producer ISO International Organization for Standardization ISR Implementation Status Report KfW Kreditanstalt für Wiederaufbau Kv Kilo volts MERE Ministry of Electricity and Renewable Energy MoEE Ministry of Electricity and Energy MoIC Ministry of International Cooperation NCB National Competitive Bidding NIF Neighborhood Investment Funds NPV Net present value NREA New and Renewable Energy Agency NSS National Strategy Studies OHTL Overhead Head Transmission Line OP Operational Policy PDO Project Development Objective PIU Project Implementation Unit PPA Project Preparation Advance RAP Resettlement Action Plan REF Renewable Energy Fund RPF Resettlement Policy Framework SBD Standard Bidding Document TFC Trust Fund Committee WACC Weighted Average Cost of Capital WBG The World Bank Group Regional Vice President: Inger Andersen Country Director: Hartwig Schafer Sector Director: Junaid Ahmad Sector Manager: Charles Cormier Task Team Leader: Waleed Saleh I. Alsuraih ARAB REPUBLIC OF EGYPT WIND POWER DEVELOPMENT PROJECT CONTENTS DATA SHEET ........................................................................................................................................i A. Summary of Proposed Changes ........................................................................................................ ii B. Project Status .................................................................................................................................... iii C. Proposed Changes .............................................................................................................................. v Development Objectives/Results ............................................................................................................ v Compliance ............................................................................................................................................. v Financing ...............................................................................................................................................vi Components ........................................................................................................................................ viii Other Change(s) .....................................................................................................................................ix Change(s) in Appraisal Summary ........................................................................................................... x Annex 1: Description of additional transmission infrastructure to be funded from sub- component A1 loan Savings ................................................................................................................. 1 Annex 2: Revised Project Results Framework and Monitoring Indicators .................................... 4 Annex 3: Operational Risk Assessment Framework (ORAF) ........................................................ 10 Annex 4: Project Costs and Financing Plan ..................................................................................... 15 Annex 5: Updated operational dates for planned wind farms in the Suez Gulf region ................ 16 Annex 6: Updated Procurement Plan and Procurement Strategy ................................................. 17 Annex-7: Clean Technology Fund (CTF) ......................................................................................... 21 DATA SHEET Egypt, Arab Republic of Egypt - Wind Power Development Project (P113416) MIDDLE EAST AND NORTH AFRICA MNSEE . Report No: RES13247 . Basic Information Project ID: P113416 Lending Instrument: Specific Investment Loan Regional Vice President: Inger Andersen Original EA Category: Partial Assessment (B) Country Director: Hartwig Schafer Current EA Category: Partial Assessment (B) Sector Director: Junaid Kamal Ahmad Original Approval Date: 15-Jun-2010 Sector Manager: Charles Joseph Cormier Current Closing Date: 31-Dec-2015 Team Leader: Waleed Saleh I. Alsuraih . Borrower: Arab Republic of Egypt – Ministry of International Cooperation Responsible Agency: Egyptian Electricity Transmission Company (EETC) . Restructuring Type Form Type: Full Restructuring Paper Decision Authority: Board Approval Restructuring Level: Level 1 Explanation of Level one Approval Authority: . Financing ( as of 25-Mar-2014 ) Key Dates Approval Effectiveness Original Revised Project Ln/Cr/TF Status Signing Date Date Date Closing Date Closing Date P113416 IBRD-79270 Effective 15-Jun-2010 04-Nov-2010 14-Aug-2011 31-Dec-2015 31-Dec-2017 P113416 TF-95224 Closed 03-Jan-2010 04-Jan-2010 04-Jan-2010 30-Jun-2011 30-Jun-2012 P113416 TF-96929 Effective 04-Nov-2010 04-Nov-2010 14-Aug-2011 31-Dec-2015 31-Dec-2017 P113416 TF-96930 Effective 15-Jun-2010 04-Nov-2010 14-Aug-2011 31-Dec-2015 31-Dec-2017 Disbursements (in Millions) % Undisbur Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed Disbur sed sed P113416 IBRD-79270 Effective USD 70.00 70.00 0.00 3.21 66.79 4.6 P113416 TF-95224 Closed USD 0.49 0.49 0.00 0.49 0.00 100 P113416 TF-96929 Effective USD 0.25 0.25 0.00 0.00 0.25 P113416 TF-96930 Effective USD 149.75 149.75 0.00 6.81 142.94 4.6 . Policy Waivers i Does the project depart from the CAS in content or in other significant Yes [ ] No [ X ] respects? Does the project require any policy waiver(s)? Yes [ ] No [ X ] . A. Summary of Proposed Changes The Wind Power Development Project (the Project) consists of three main components to support the expansion of transmission networks needed to evacuate wind power generation from Gulf of Suez region to the national grid. The main 500kV transmission line (sub-component A1) is financed by the International Bank of Reconstruction and Development (IBRD) (US$70 million) and the Clean Technology Fund (CTF) (US$148.25 million). Overall purpose of the Project restructuring: the main purpose of the proposed restructuring is to respond to the request received from the Borrower for using the loan savings (US$106.4 million of which $34.2 million of IBRD, and US$72.2 million of CTF) from sub-component A1. Accordingly, this paper introduces changes to the Project to utilize the savings to finance additional transmission infrastructure. Since these changes will lead to modifications of the Project Development Objective (PDO), the proposed restructuring is Level I. Annex 1 provides a description of the proposed additional transmission to be supported by the Project. Proposed Changes to the Project: 1. Two new sub-components under Component A ('Transmission Infrastructure’) would be financed from the loan savings under Sub-component A1; 2. The Project Development Objective (PDO) would be amended and the results framework revised to improve measurability; and 3. The project closing date would be extended by 24 months to ensure the full achievement of the revised PDO. The two new Sub-components are designed to: (1) further support the transmission networks needed to evacuate existing and planned wind generation along the western coast of the Suez Gulf; and (2) upgrade existing and old transmission lines. The envisaged benefits of these sub-components include: 1. Connecting an isolated load center at the Gulf of Suez region with the national transmission networks and thereby contribute to improved reliability of electricity supply; 2. Displacing expensive diesel generators on the coastal load center; and 3. Reducing bottlenecks by upgrading the conductors of existing 220kV transmission networks to utilize more efficient and cleaner power generation. Change in Implementing Agency Yes [ ] No [ X ] Change in Project's Development Objectives Yes [ X ] No [ ] Change in Results Framework Yes [ X ] No [ ] Change in Safeguard Policies Triggered Yes [ ] No [X] Change of EA category Yes [ ] No [X ] Other Changes to Safeguards Yes [ X] No [ ] Change in Legal Covenants Yes [ ] No [X] Change in Loan Closing Date(s) Yes [ X ] No [ ] Cancellations Proposed Yes [ ] No [ X] Change to Financing Plan Yes [ X] No [ ] Change in Disbursement Arrangements Yes [ ] No [X] Reallocation between Disbursement Categories Yes [ X ] No [ ] Change in Disbursement Estimates Yes [ X ] No [ ] ii Change to Components and Cost Yes [ X ] No [ ] Change in Institutional Arrangements Yes [ ] No [ X ] Change in Financial Management Yes [ ] No [ X ] Change in Procurement Yes [ X ] No [ ] Change in Implementation Schedule Yes [ X ] No [ ] Other Change(s) Yes [ ] No [ X ] Appraisal Summary Change in Economic and Financial Analysis Yes [ X ] No [ ] Appraisal Summary Change in Technical Analysis Yes [ X ] No [ ] Appraisal Summary Change in Social Analysis Yes [ X ] No [ ] Appraisal Summary Change in Environmental Analysis Yes [ X ] No [ ] Appraisal Summary Change in Risk Assessment Yes [X] No [ ] . B. Project Status The Project was approved by the Board on June 15, 2010. The financing plan included: an IBRD loan of US$70 million; a CTF loan of US$149.75 million; a CTF grant of US$250,000 (declared effective on August 14, 2011); US$70 million from European donors led by the European Investment Bank (EIB), including financing from Kreditanstalt für Wiederaufbau (KfW), Neighborhood Investment Fund (NIF), and Agence Française de Développement (AfD); Government financing of about US$54 million for the transmission infrastructure; and about US$450 million in private sector financing for the first 250 MW Build, Own, and Operate (BOO) project. >Project components: the Project consists of the following three main Components and associated Sub- components: Components Sub-components  Al - 500kV double-circuit Overhead Head Transmission Line (OHTL)  A2 - Construction of 500kV/220kV GIS Substation in Ras Gharib (A) Transmission  A3 - Extension of Samallout 500kV/220kV Conventional substation Infrastructure  A4 - Construction of double circuit 220 kV line from Ras Gharib to Gabel El-Zait (B) Technical assistance to  B1 - Consultancy services for the development of the wind BOO support the expansion of program Egypt’s wind generation  B2 - Consultancy services to support Management of Wind Power program Integration in Egyptian Power Market  B3 - Technical Assistance to perform Environmental Assessment  B4 - Knowledge Management (C) Gulf of Suez 250 MW Wind Build, Own, Operate (BOO) Project >Update on wind development in the Gulf of Suez: One of the key models supported by the Wind Development Project is the competitive bidding approach where the Egyptian Electricity Transmission Company (EETC) will issue tenders requesting supply of power from large scale renewable energy resources for specific pre-determined sites on a BOO basis. It is expected that the competitive bidding approach will result in additional wind generation capacity of about 2,530 MW by private sector of the envisaged 3,000 MW from resources in the Gulf of Suez. The 2006 original plan of the New and Renewable Energy Agency (NREA) included a 5-year pipeline of 2,500 MW of commercial wind farms to be tendered as BOO/ Independent Power Producer (IPP) projects with technical assistance from the World Bank. It consists of tendering a 250 MW wind BOO farm (as Phase I) on a predetermined site in Ras Gharib (at Gulf of Suez) area in 2010 (this represents Component C); followed by Phase II, 2 x 250 MW to iii be tendered in each of the subsequent three years; and a final Phase for 3 x 250 MW in the year thereafter. The plan of these projects was revised in 2013 to include only Phase I and II as BOO projects, while Phase III tendering will be done on IPP basis. The implementation of all (public and private) wind projects in the Gulf of Suez area has incurred delays due to the 2011 revolution and unstable country transition thereafter. However, these delays and changes to the plan will only defer the commissioning date of wind farms. In other words, the GoE is still committed to work with development institutions and private sector to address the obstacles of implementing the wind projects in the Gulf of Suez region. Annex-5 provides the latest update of the commissioning dates for all wind farms projects in the Gulf of Suez region. >Implementation Status Review: The latest ISR (December 2013) rated progress towards achieving the PDO as Moderately Satisfactory (MS) and the Implementation Progress as Moderately Unsatisfactory (MU). The IP rating was downgraded to MU, due to delays with regards to the procurement of (i) the 280 km 500 kV transmission line (sub-component A1) and (ii) the first 250MW Wind BOO project (Component C). >Implementation progress: Since the supervision mission in December, 2013, the Implementing Agency has proactively taken a number of corrective measures that led to signing the contracts for sub-component A1 and Component B2 (consultancy services to support wind integration). All funds (except for savings) are fully committed and contracts under components A and B are now at the implementation stage. For Component C, delays incurred due to the unstable country transition since the revolution early 2011 that led to heightened risk perception among the private investors. With incurred delays in implementing the first 250MW wind BOO project, its planned commercial operation in December, 2015 will be deferred by 18 to 24 months. However, the Government of Egypt (GoE) has shown strong commitment to support Component C through issuing a Central Bank Guarantee (CBG) in December 2012 with a value of US$660 million. However, the CBG had a limited impact on the achieving a financial closure for the first 250MW wind BOO and it proved insufficient to address the different risks associated with the project as well as providing sufficient comfort to the private sector to smoothly proceed with the bidding process that was launched in 2009. >World Bank support to expedite Component C implementation: The Bank has been discussing the benefits of improving the overall risk profile of the 250MW Wind BOO project through the use of World Bank Group (WBG) credit enhancement instruments (World Bank Guarantees and MIGA Insurance). These discussions are now at an advanced stage with the implementing agency (Egyptian Electricity Transmission Company, EETC), Ministry of Electricity and Renewable Energy (MERE), and Ministry of International Cooperation (MoIC). On March 6, 2014, MERE requested the Bank to conduct a market sounding assessment to determine the value added of using a World Bank Guarantee and MIGA insurance. The Bank agreed to conduct the assessment to support EETC in identifying areas of strengthening the project design and bankability, and expedite its implementation. The assessment was completed on April 17, 2014. The assessment findings, conclusions, and next steps were submitted to MERE and MoIC. The Bank Group will further follow up with these entities to advance the GoE decision on the use of WBG credit enhancement instruments needed to improve private investors’ risk perception, project bankability, and facilitate the competitive tendering process for Component C. >Contract value for Sub-component A1 (500kV double-circuit Overhead Head Transmission Line): The contracted amount is US$ 58,346,692.5, EURO 20,914,861.16 and EGP 108,600,483.39 which in addition to the 10 percent Provisional Sum make the total contract value equivalent to US$111,865,672.97 of which US$35,797,015.35 is to be financed by IBRD and US$76,068,657.62 by CTF. The amount of funding between IBRD and CTF was decided by EETC as 32% and 68% of the contract value, respectively. > Disbursement for Sub-component A1: In Q3 FY14, advance payments were triggered for both the CTF loan TF096930-EG and IBRD loan no.7972-EG, with cumulative disbursement reaching US$10 million, representing approximately 10 percent of the contract amount. iv >Source of savings for restructuring: The savings to finance the additional two transmission Sub- components are from the difference between the approved loans of IBRD (Loan 79720, US$70 million) and CTF (Loan TF096930, US$148.25 million) for Sub-component A1 and the total equivalent value of its contract in US$. These savings are mainly due to a drop in world prices of key materials (particularly, aluminum and steel) during the procurement for Sub-component A1 compared to the estimated costs at the time of project appraisal in 2010. The total Project savings are US$106,384,327.03 broken down as follows:  IBRD Loan (no.79720): US$ 34,202,984.64  CTF Loan (TF096930): US$72,181,342.38 . C. Proposed Changes . Development Objectives/Results Project Development Objectives Original PDO The project development objective is to develop transmission infrastructure and business models for scaling-up wind power in Egypt. Change in Project’s Development Objectives Explanation The PDO needs to reflect the revised scope added in this restructuring under Component A. Proposed New PDO The project development objective is to develop business models and required transmission facilities for scaling-up wind power in Egypt, and increase transmission capacity in targeted areas. Change in Results Framework The restructuring proposes revisions to the Project’s results framework and indicators to: (i) revise the indicators based on progress and what can be realistically achieved within the extended time frame of the project; (ii) amend some indicators to ensure alignment and consistency with the revised scope of the project; (iii) introduce applicable core sector indicators; and (iv) remove indicators that are no longer relevant. Annex 2 shows the details of the revised results framework. . Compliance Change in Safeguard Policies Triggered Explanation: >Current status: The Environmental and Social Impact Assessment (ESIA) and the Resettlement Policy Framework (RPF) were disclosed on March 28, 2010 in country and April 23, 2010 on InfoShop, respectively. Land acquisition along the expected 280 km Suez Gulf-Samallaut 500kV transmission line (Sub-component A1) will be limited to compensation for tower footings, along a distance of about 30-35 km of line from the crossing of the Nile River and Samallaut substation where most of the land agricultural. The number of towers in this area will be 26, avoiding en-route cultivated land as much as possible. The Resettlement Action Plan (RAP) –including a Grievance Redress Mechanism (GRM) - was cleared by the Bank on November 6, 2013 and disclosed in country on April 10, 2014 and in Infoshop on May 8, 2014. The transmission contract was signed in December 2013 but the actual construction in the affected areas has not commenced. Thus the RAP implementation has not started yet. >Changes: The first additional sub-component (A5) consists of two substations and sites along with their two transmission lines to connect them with the grid. These transmission lines are located in predominantly desert areas at the Gulf of Suez. The second sub-component (A6) consists of rehabilitating five existing v overhead transmission lines (OHTLs) which are mostly located within the Nile Delta Governorates where there is now a significant amount of agricultural lands. All the routes of these OHTLs when constructed were on barren desert, but now, four of them have been reclaimed and became agricultural lands, and the fifth is still desert owned by the Government (see Annex-1 for more details). The safeguards of two new Sub-component required an update of the existing ESIA and RPF to address the following:  Determine whether there are any outstanding land disputes on existing transmission lines and ensure no litigation related to the land for rehabilitation of the existing transmission line.  Update the existing RPF to ensure inclusion of a crop compensation mechanism and grievance redress mechanism (GRM) for both the rehabilitation of transmission lines and construction of sub-stations.  To update the existing ESMP to ensure the rehabilitation of transmission lines and construction of sub-stations are covered.  Document the ownership and/or ownership process for the new sub-stations (it was understood that only one of the sub-stations was located own land owned by EETC).  Conduct a round of consultation to include rehabilitation of transmission lines and construction of sub-stations. The participation details and all issues raised should be thoroughly documented and presented in the revised ESIA/ESMP report.  Ensure that the main features of the current safeguards status/performance and those of the new components are well articulated in the restructuring paper and summarized in the RVP memo. The ISDS has been updated to reflect the two new sub-components and the fact the existing ESIA and RPF are being revised and updated to reflect the potential new civil works, their impacts, mitigation measures, and the revised ESMP. The supplementary ESIA and RPF were disclosed in country and on Infoshop on June 11, 2014. Current and Proposed Safeguards Policies Triggered: Current Proposed Environmental Assessment (OP) (BP 4.01) Yes Yes Natural Habitats (OP) (BP 4.04) No No Forests (OP) (BP 4.36) No No Pest Management (OP 4.09) No No Physical Cultural Resources (OP) (BP 4.11) No No Indigenous Peoples (OP) (BP 4.10) No No Involuntary Resettlement (OP) (BP 4.12) Yes Yes Safety of Dams (OP) (BP 4.37) No No Projects on International Waterways (OP) (BP 7.50) No No Projects in Disputed Areas (OP) (BP 7.60) No No . Financing Change in Loan Closing Date(s) Explanation: The Closing Date of the Project will be extended from December 31, 2015 to December 31, 2017, to reflect additional activities to be financed from IBRD and CTF savings of Sub-component A1 and allow enough time for satisfactory achievement of the Project Development Objective. Furthermore, project extension will allow sufficient time to complete the competitive bidding process for the first 250MW Wind BOO project (Component C) that has incurred in about a two-year delay due to the heightened risk perception by investors since the revolution in 2011. In this context, the Bank has proposed the use of a series of IBRD guarantees and MIGA insurance as credit enhancement and risk mitigation tools for the three projects under wind BOO program (3x250MW). As mentioned above, the Bank team will continue its close coordination with EETC on the decision of using WBG guarantees to ensure a successful of vi completion of Component C by the extended closing date which will mark a cornerstone for engaging the private sector in the financing of renewable energy projects in Egypt. Ln/Cr/T Original Closing Current Closing Proposed Closing Previous Closing Status F Date Date Date Date(s) IBRD- Effective 31-Dec-2015 31-Dec-2015 31-Dec-2017 31-Dec-2015 79270 TF- Closed 30-Jun-2011 30-Jun-2012 30-Jun-2011 95224 TF- Effective 31-Dec-2015 31-Dec-2015 31-Dec-2017 31-Dec-2015 96929 TF- Effective 31-Dec-2015 31-Dec-2015 31-Dec-2017 31-Dec-2015 96930 Reallocations Explanation: Unallocated proceeds totaling US$3.5 million of IBRD-79270 loan will be reallocated to the expenditure category “Works and goods under Part A.1”. This category under the same IBRD-79270 loan will include Parts A.5 and A.6 as part of this restructuring. Works and goods category for TF-96930 of the CTF will be revised to include Parts A.1 and A.5. Current Category of Disbursement % Ln/Cr/TF Currency Allocation Expenditure (Type Total) Current Proposed Current Proposed WKS & GDS UNDER IBRD-79270 USD 66,500,000.00 70,000,000.00 100.00 100.00 PART A.1 PREMIUM FOR 0.00 0.00 0.00 0.00 CAPS/COLLARS UNALLOCATED 3,500,000.00 0.00 0.00 0.00 Designated Account 0.00 0.00 0.00 0.00 Total: 70,000,000.00 70,000,000.00 CONSULTING TF-95224 USD SERVICES, TRNG, 489,980.00 489,980.00 100.00 100.00 WKSHPS Designated Account 0.00 0.00 0.00 0.00 Total: 489,980.00 489,980.00 CS & Training under TF-96929 USD 250,000.00 250,000.00 100.00 100.00 Part B. 4 Total: 250,000.00 250,000.00 TF-96930 USD GDS & WKS 148,250,000.00 148,250,000.00 100.00 100.00 TECH. SUPP.&STUDIES - 1,500,000.00 1,500,000.00 100.00 100.00 PARTS B.1&B.2 Designated Account 0.00 0.00 0.00 0.00 Total: 149,750,000.00 149,750,000.00 vii Disbursement Estimates Change in Disbursement Estimates Explanation: Disbursement estimates are being modified to reflect the actual disbursement schedule for signed contract and estimates for the new components until project closure. The disbursement amounts for FY14 will be updated and new estimates for FY15, FY16, FY17 and FY18 will be added once the restructuring is approved. Fiscal Year Current (USD) Proposed (USD) 2010 0.00 2011 0.00 2012 0.00 2013 39,000,000.00 2014 14,000,000.00 3,206,257.0 2015 17,000,000.00 23,305,793.9 2016 39,281,466.1 2017 3,857,509.3 2018 348,973.8 Total 70,000,000.00 70,000,000.00 . Components Change to Components and Cost Explanation: >Change to Components: The proposed restructuring introduces two additional transmission subcomponents to Component (A) as follows: (A5) Extensions of the 220 kV network along Suez Gulf Coastal area; and (A6) Rehabilitation of 220kV overhead transmission lines (OHTLs) Thermal Conductors. Below is a description of each sub-component. -Sub-component A5- extension of the 220 kV network along Suez Gulf Coastal area: This sub-component proposes reinforcement of the national 220kV network by extending it along the Gulf of Suez. This is part of EETC’s longer term plan to complete the 600km 220kV loop from Hurghada to Shalatin and eventually to the main grid at Nakra Substation near Aswan in 2018. The initial phase of the planned 220kV ring will reinforce the existing substation capacity in Hurghada and extend the 220kV network northwards about 90km along the coast of Suez to connect the isolated system of El-Qusair which has a growing demand. Sub-component A5 consists of: (i) 2x125MVA, 220/66kV, 2×40 MVA 66/22 kV, North Hurghada GIS Substation (ii) Connection of North Hurghada Substation with the national grid through 2km 220kV and 7km 66kV Double Circuit OHTLs both as In/Out connections to North Hurghada (iii) 2x75MVA, 220/66kV, 2×25 MVA 66/22 kV, El-Qusair GIS Substation (iv) Connection of El-Qusair GIS Substation with the national grid through 90km 220kV Double circuit OHTL Sub-component A6- rehabilitation of 220kV overhead transmission lines (OHTLs) Conductors: this sub- component entails upgrading the conductors (ACSR type) of 232km of five existing and old 220kV OHTLs with high temperature INVAR thermal conductors. This upgrade will enable these existing lines to viii double their peak capacity and reduce bottlenecks in the regions of Alexandria, Delta, West Delta, and Canal. >Sub-component Costs: Detailed estimated costs and the financing plan are included in Annex 4. The total estimated cost for the new sub-components is US$103.8 million. >The financing plan indicates US$62.1 million from CTF savings to finance Sub-component A5 and US$34.2 million from IBRD savings and US$7.5 million form the Borrower’s contribution to finance Sub- components A5 and A6. >Utilization of the CTF loan: The uncommitted US$72.2 million (savings) from the CTF Loan of which US$62.1 million will finance sub-component A5 under this restructuring, and the remaining balance of US$10 million is proposed to be utilized to support the establishment of a Renewable Energy Fund (REF) as an innovative financing mechanism to incentivize the scale-up of renewable energy projects - on commercial and sustainable basis - in support of Egypt’s objective to achieve 20 percent of generation supply from renewables by 2020. The Bank has been discussing several options with EETC to utilize these funds, including the needed support for starting-up the operations of REF. REF is expected to address the financing barrier of RE projects through providing different financing products and incentives for RE projects as well as technical assistance to expedite the deployment of different renewable technologies. It is expected to establish a clear investment pipeline that would serve as a platform for effective use of public and private finance. As the institutional framework is unclear yet for the REF’s implementing agency, further discussions - following this Project’s restructuring- will be pursued with EETC, MERE, and MoIC to agree on the use of the US$10 million balance to support the establishment of the REF and/or other eligible activities for CTF financing by June 30, 2015. An approval will be sought from the CTF Committee, once a decision on these activities is made by the Borrower. Current Component Proposed Component Current Cost Proposed Action Name Name (US$M) Cost (US$M) Transmission 218.25 218.25 Infrastructure Technical Assistance to Technical Assistance to support the expansion of support the expansion of Egypt's wind generation Egypt's wind generation 1.75 1.75 program; and knowledge program; and knowledge management management Gulf of Suez 250 MW Gulf of Suez 250 MW 0.00 0.00 BOO Proiect BOO Proiect Total: 220 220 . Other Change(s) Change in Procurement Explanation: 1. Procurement of Goods and Plant Design, Supply and Installation for contracts funded by Loan proceeds will be carried out using the Bank’s Standard Bidding Document (SBD) for Goods dated March 2013 and the Bank’s Standard Bidding Document (SBD) for Plant Design, Supply and Installation dated April 2008 and revised August 2010 respectively, as modified and successfully used under the Ain Sokhna, Giza North, Helwan South and Wind Power projects. The Bank has approved the use of the one stage two envelope procedures for this project. Therefore, the SBDs will be adapted to include the agreed modifications to accommodate the sequential opening of the technical and commercial envelopes. ix 2. Procurement of Goods and Plant Design, Supply and Installation will be carried out in accordance with the World Bank’s “Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers" dated January 2011, and the provisions stipulated in the Legal Agreement. 3. Prior-Review Thresholds. Prior-review and procurement method thresholds for the project are indicated in the following table. Procurement Thresholds Category Prior Review Procurement Method Thresholds Thresholds (USD (USD millions) millions) ICB NCB Plant Design, ≥ 15 ≥ 10 < 10 Supply and Installation Goods ≥3 ≥1 <1 Updated Procurement Plan and Procurement Strategy are described in annex-6. Change in Implementation Schedule The restructuring will extend the closing date by an additional 24 months to complete sub-components A5 and A6, thus the implementation schedule will be revised accordingly. . Change(s) in Appraisal Summary Appraisal Summary Change in Economic and Financial Analysis Explanation: The economic internal rate of return (EIRR) and the financial internal rate of return (FIRR) for the project associated with the proposed restructuring are stronger, in light of the significant cost savings. The results reported below are conservative, as additional economic benefits expected from the proposed two new Sub-components are not easily quantifiable in the economic analysis including: (a) improved power system reliability; (b) reducing bottlenecks by doubling the capacity of rehabilitated 220kV transmission lines; and (c) reduction in greenhouse gas emissions (GHG) by 73kT/year due to displacement of existing 20MW diesel generation unit. Additional financial benefits can be expected from reduced operation and maintenance costs of these diesel units. Compared to the original analysis conducted at appraisal, there are no additional costs associated with the proposed sub-components (A5) and (A6), since they will be financed from Sub-component A1 cost savings. Economic analysis: If the economic analysis of the project only compares the energy benefits with the incremental capital and operating costs, the EIRR of the project is just above the 10% opportunity cost of capital generally applied to government investments in Egypt. This represents a substantial improvement upon the economic analysis presented at the project appraisal where the EIRR was exceeding the 10% threshold value only when the value of carbon benefits approaches US$13 per ton. Increasing price elasticity from the base case assumption of -0.30 to -0.40 reduced the EIRR of the project (excluding GHG benefits) by almost 7 percentage points from 10.5% to 3.1%. In this scenario, the project only became viable when the assumed value of avoided CO2 emission is above US$30 per ton, a notable increase compared to the US$50 per ton required to become viable at the project appraisal. The CTF concessional loan plays a critical role in mitigating risks of reduced carbon prices and increased price elasticity of demand, by lowering the opportunity cost of capital and thereby improving prospects of attaining economic viability of the investment. x Carbon Price 0 $5 $13 $20 $30 Elasticity -0.3 -0.4 -0.3 -0.4 -0.3 -0.4 -0.3 -0.4 -0.3 -0.4 EIRR (%) 10.5 3.1 11.3 3.9 12.7 5.1 14.2 6.3 16.7 7.81 NPV at 10% (without CTF ) 149 (1,811) 386 (1585) 764 (1,206) 1095 (875) 1,568 (102) NPV at OCC ( CTF case) 3,378 (1,496) 3,824 (1,051) 4,537 (338) 5,161 286 6,052 1178 BC at 10% (without CTF) 1.02 0.75 1.05 0.79 1.10 0.84 1.15 0.88 1.21 0.95 BC at OCC (CTF case) 1.26 0.89 1.29 0.92 1.34 0.97 1.39 1.02 1.46 1.09 Financial analysis: The financial analysis used the same assumptions as the EIRR analysis with respect to incremental power and the system average costs of transmission and distribution. The financial NPV of the project was calculated at two discount rates – one representing the real Weighted Average Cost of Capital (WACC) associated with the proposed project financing plan, and a second which assumed that the CTF financing was replaced with additional funds from IBRD. The table shows that with CTF funding at the proposed level of US$150 million (WACC-1), the project is financially viable from the GOE perspective as long as the value of carbon credits approaches or exceeds US$5/t (compared to US$13/t at the project appraisal). Without the CTF funding (WACC-2), the project only becomes financially viable when the carbon price exceeds US$13/t (compared to US$20/t at the project appraisal). Hence, the proposed restructuring has improved the financial viability of the project. If there are no carbon credits, or if their value falls below US$5/t (compared to US$13/t at the project appraisal), the proposed level of CTF financing is insufficient to make the project financially viable from the perspective of the GOE. Carbon Price $0 $5 $13 $20 $30 FIRR -0.2% 0.8% 2.5% 4.1% 6.7% NPV@WACC-1 (with CTF) ($962) $248 $2184 $3,878 $6,297 NPV@WACC-2 (without CTF) ($2,075) ($1,275) $4 $1,124 $2,724 Appraisal Summary Change in Technical Analysis Explanation: For Sub-component A5: EETC has identified isolated load centers at El-Qusair city that is close to the wind farms in the Gulf of Suez which can absorb wind generation by displacing its existing diesel generation supplies to reduce CO2 emissions and facilitate growth of the tourism market along the Red Sea. In 2014, the estimated GHG emissions from the existing 20MW diesel units at El-Qusair are about 73 kT/year. This amount should be reduced by at least 50% (and more in the future) after the substation is connected to the main grid - with a significant supply contribution from the nearby wind generation sources. For Sub-component A6: the only to the technical appraisal relates to EETC concerns about reducing bottlenecks in the 220kV grid particularly during peak wind production periods. In this respect EETC has carried out a number of load flow and stability studies to identify key parts of the transmission system where high temperature conductor replacement is the best option to relieve overloading in existing 220kV networks. Appraisal Summary Change in Social Analysis Explanation: The existing Resettlement Policy Framework (RPF) was cleared by the Bank in March, 2010. A resettlement action plan was prepared and cleared by the Bank on November 6, 2013 for the Samallout / Suez Gulf / Jabal El-Zayt 500 kV OHTL by following the principles and procedures set forth in the RPF. The Resettlement Action Plan (RAP) was disclosed on April 10, 2014 in the country and on May 8, 2014 in Infoshop. For two substations and sites along with their two transmission lines to connect them with the grid described in sub-component A5, the lands for the substations were allocated and the transmission lines are located in predominantly desert areas at the Gulf of Suez. For the rehabilitation of the five existing OHTLs under sub-component (A6) of this restructuring, four of them are mostly located within the Nile Delta Governorates where there is a significant amount of agricultural land that was developed after the construction of these lines and the fifth in the desert. Although efforts will be made to avoid and minimize the impacts, it might be impossible to avoid any damages to the crops. Therefore the existing RPF was updated, through supplementary assessment, to cover the potential impacts of temporary land acquisition and damages of crops. The supplementary RPF covers both sub-components A5 and A6 of this xi restructuring. The institutional arrangements and funding mechanism will remain the same. Appraisal Summary Change in Environmental Analysis Explanation: The Project remains classified as category B, and the new activities did not trigger any new safeguards policies. The existing Environmental and Social Impact Assessment (ESIA) was updated to reflect the additional scope of the environmental and social impacts of the construction and operation of the transmission lines and substations. The transmission lines and the substations are located primarily on desert uninhabited state-owned land which does not encompass any sensitive habitats or environmental receptors. The anticipated impacts associated with the construction and operations of the new activities have been carefully studied and mitigation measures were adequately proposed. Further, the revised Environmental and Social Management Plan (ESMP) covered the institutional arrangements needed to proper environmental management at both construction and operation phases. Appraisal Summary Change in Procurement Assessment of the agency’s capacity to implement procurement: There was no need to carry out a new procurement capacity assessment because EETC’s capacity to implement procurement was assessed as part of the project preparation for the Wind Power Development Project and updated during the preparation of the Giza North Additional Financing and Ain Sokhna Restructuring. The same arrangement, which remains satisfactory to the Bank, will be applied to conduct procurement activities under this component. EETC through the engineering consultant EPS will carry out procurement. It is considered that EETC/EPS has the capacity to implement procurement and that no additional mitigation measures are needed. Under the Wind Power Development Project and the Giza North Additional Financing, EETC/EPS gained considerable experience in World Bank procurement procedures and their performance is considered satisfactory. During supervision, the Bank will conduct due diligence at critical stages of the procurement process and during contract management. The procurement plan are revised to incorporate the two sub-components (A5 and A6); and the procurement strategy are presented in Annex-6. Appraisal Summary Change in Risk Assessment Explanation: Project implementation risks from the technical and project management aspects are judged to be Moderate. However, the overall implementation risk is rated Substantial due mainly to the macroeconomic and financial risks that are coupled with unstable political and economic transition which may have an adverse impact on project implementation and sustainability as well as the development of the wind generation in the Gulf of Suez. The latter could significantly impact meeting the 20% target of the generation mix from renewable sources. xii Annex 1: Description of additional transmission infrastructure to be funded from sub- component A1 loan Savings Background The two additional sub-components (A5 and A6) are designed to support further development of the planned 220kV ring network in the Gulf of Suez and strengthen the existing 220kV. They will enable existing and planned wind generation to: (i) displace diesel fuel that is currently used to generate power to supply growing coastal tourist load centres; and (ii) provide the means to facilitate interconnection of future wind resources en route. The subprojects also include upgrading of the older 220kV lines in the network by replacing existing 232km ACSR 380/50mm2 conductors with high temperature INVAR 238/97mm2 thermal conductors. This will enable the five re-conductored lines in the Alexandria, Delta and Canal areas to carry approximately 100% higher peak currents particularly during high wind production periods. The upgrading will help reduce bottlenecks in the transmission networks that were identified in the 2009 EETC Master Plan study making the best use of existing structures to maintain existing Rights-of-Way within highly populated areas of the city. Sub-components (A5): Extension of the 220 kV network along Suez Gulf Coastal area: it is recognized that the planned investment by BOO contractors in wind resources along the Red Sea has not progressed as fast as expected when the loan was approved. There are a number of reasons for the disappointing progress but most of the largely administrative concerns are now being addressed. As a consequence the NREA still expects a significant take-up, particularly as the political situation in Egypt returns to normal. Good progress with transmission evacuation infrastructure is therefore essential to demonstrate to the IPP investors that their wind power can be evacuated whenever it is available. In this respect the expansion of the 220kV ring network along the Red Sea is a vital part of the power system infrastructure that will absorb the wind power as much as possible en-route. The proposed 220kV extensions shown in Figure 1 will form part of EETC’s longer term plan to complete the about 600km 220kV loop from Hurghada to Shalatin and eventually back to the main grid at Nakra Substation near Aswan as shown in dashed lines below: Figure 1: Existing and Proposed Grid Transmission Extensions at the Suez Gulf 1 The initial phase of EETC planned 220kV ring along the Red Sea will reinforce the existing substation capacity in the town of Hurghada (a rapidly growing tourist center, (where there is already about 5MW wind capacity installed) and extend the 220kV network northwards about 120km along the coast of Suez to meet the increasing demand in Al-Qusair. By 2020 it is proposed to then extend the 220kV line another 300 km to supply the towns of Marsa Alam and from thence to Shalatin, that like the town of Al-Qusair, are currently supplied by diesel engines which can be used as backup supplies in case there is insufficient wind capacity available. The schematic diagram in figure 2 indicates how the wind generation along the Red Sea will be interconnected with the main grid and show in red (i) the ongoing 500kV project funded under the loan and (ii) the proposed 220kV extensions along the Red Sea: Figure 2: Sub-component A5 schematic diagram Sub-component A6- rehabilitation of 220kV overhead transmission lines (OHTLs) Thermal Conductors: Upgrading existing 220kV transmission lines with high temperature thermal conductors to increase the OHTLs capacity and reduce the bottlenecks in the existing transmission network without having to establish new right-of-ways, thereby enhancing the reliability and enabling the utilization of more efficient and cleaner power generation. Table 1 below outlines the main characteristics of the targeted lines for rehabilitation. When constructed, the rights of ways of all these OHTLs were on barren desert, but now, four of them have been reclaimed and become agricultural land. The fifth is still on desert land owned by the government. No compensation was paid during construction of the OHTLs. (see table 2). 2 Table 1: Characteristics of the OHTLs to be rehabilitated Conductor Type Length Transmission Line Existing New (km) Concerned Zone ACSR 220kV, OHTL, Menouf/ Tahrir Badr 35 380/88mm2 INVAR 238/97mm2 ACSR Alex & West Delta 220kV, OHTL, Sadat/El-Bostan 380/50mm 32 ACSR 220kV, OHTL, Menouf/ Basous 380/88mm 45 Delta ACSR 220kV, OHTL, El-Manayef/ Abu-Soltan 40 380/88mm ACSR Canal 220kV, OHTL, Suez2/ Badr 380/88mm 80 Total Length 232 Table 2: Land type for OHTLs Transmission Line Route Nature During Route Nature Construction Now 220kV, OHTL, Menouf/ Tahrir Badr Plain Desert Reclaiming Land 220kV, OHTL, Sadat/El-Bostan Plain Desert Reclaiming Land 220kV, OHTL, Menouf/ Basous Plain Desert Reclaiming Land 220kV, OHTL, El-Manayef/ Abu-Soltan Plain Desert Reclaiming Land 220kV, OHTL, Suez2/ Badr Plain Desert Plain Desert Implementation Timetable Based on EETC experience with the nearly complete 220kV lines (being built under component A4 of the project), the proposed new project sub-component is expected to be implemented within four years. EETC has already completed much of the design and will also make use of its standard technical specifications as used on the existing project but adapted to conform to international competitive bidding (ICB) requirements. This should reduce the up-front design and procurement time, leaving about 36-40 months for the contractors to complete the work. The key implementation millstones are as follows: Implementation Timetable - Key Completion Dates Component Design Tender & Contact Contact Material Install & Warrenty Complete Evaluation Signing Effective Delivery Commiss Period A5(i) Hurghuda GIS Oct-14 Apr-15 Jun-15 Sep-15 Mar-17 Sep-17 Sep-18 A5(ii) 220kV & 66kV loops Jul-14 Dec-14 Mar-15 Jun-15 Dec-16 Jun-17 A5 (iii) El-Qusair GIS Oct-14 Apr-15 Jun-15 Sep-15 Mar-17 Sep-17 Sep-18 A5 (iv) 90km 220kV line Jul-14 Dec-14 Mar-15 Jun-15 Jun-16 Dec-17 Dec-18 A6 Rehabilitation (INVAR reconductoring) Jul-14 Dec-14 Mar-15 Jun-15 Jun-16 Mar-17 3 Annex 2: Revised PDO, Project Results Framework, and Monitoring Indicators Revisions to the Results Framework Comments/ Rationale for Change PDO Current (PAD) Proposed The PDO is to develop PDO is to develop business models infrastructure and business and required transmission facilities for models for scaling up wind scaling-up wind power in Egypt, and power in Egypt increase transmission capacity in targeted areas. PDO indicators Current (PAD) Proposed change* Transmission infrastructure No change to evacuate 3,000 MW of wind power (completion rate) New Transmission capacity for rehabilitated transmission lines doubled (Yes/No) Financial close of first No change private sector investment in wind power (250 MW) (Yes/No) Progress in implementing Progress in implementing remaining Due to the revision of remaining wind competitive 750 MW wind competitive bidding procurement approach by the bidding program (2250 program (percentage) Ministry of Electricity and MW) (percentage) Renewable Energy, the target value is now 750MW instead of 2250MW taking only into account the 3 projects, each of which will add 250MW planned under the ongoing Wind BOO Program. Projected GHG emission Projected GHG emission reductions At appraisal, 1,600MW (60% reductions from 2,500 MW from 790 MW of new wind capacity of remaining 2,250MW) and of new wind capacity (Metric Ton) the first 250MW wind BOO (Metric Ton) were expected to be operational by the closing date of the project. However, the GHG emission reductions from 1,600MW will be deferred by two years as shown in the schedule of Annex 5. The estimated GHG emission reductions will now be for the revised wind power capacity (790MW) to be installed by the 4 Revisions to the Results Framework Comments/ Rationale for Change new closing date of this project, which represents one-third the envisaged 2,500MW in the Gulf of Suez area. Public and private Dropped Covered in indicators above investments leveraged for transmission and first BOO wind project Total Job creation in the Dropped Progress on job creation during wind industry (number) construction will be measured outside the project results framework. Wind power supply chain Dropped This will be measured outside development (MUSD) the project results framework. Household’s benefitting Direct Project Beneficiaries (number), Revised to be aligned with core from wind energy (number) of which female (%) indicator Intermediate Results indicators Current (PAD) Proposed change* 500 kV transmission line No change from Suez Gulf to Samallout 500 kV/220 kV substation No change in Ras Gharib New 500 kV/220 kV No change transformer at Samallout 220 kV transmission line No change from Ras Gharib to Gabel El-Zait New 220 kV transmission line from North Hurghada to El-Qusair New 220kV transmission lines rehabilitation New Transmission lines constructed or rehabilitated under the project (km) Legal and financial Revised: advisory services to EETC Bid document for first BOO developed for first 250 MW BOO (Yes/No) wind project Procedures for wind power No change integration by system operator (Yes/No) Development and Dropped Dropped to avoid repetition construction of 250 MW BOO project at Gulf of Suez Competitive tendering of Dropped Dropped due to the change in 5 Revisions to the Results Framework Comments/ Rationale for Change 2x250 MW 2011, 2012 and the wind development 2013 and 3X250 MW in procurement approach as 2014 described under the above PDO indicators. Displacement of Diesel Generation Added to reflect the results of (GWh) the new Sub-component A6 6 Original Project Development Objective (PDO) was to develop infrastructure and business models for scaling up wind power in Egypt Revised Project Development Objective (PDO) is to develop business models and required transmission facilities for scaling-up wind power in Egypt, and increase transmission capacity in targeted areas. Cumulative Target Values Data Responsib PDO Level Results Core Progress Source/ ility for UOM Baseline Frequency Comments Indicators to date Methodolo Data YR14 YR15 YR16 YR17 gy Collection Completion rate of transmission infrastructure Progress capable of ☐ % 0 10% 25% 55% 75% 100% Quarterly EETC Reports evacuating 3,000 MW of wind power Transmission capacity of YES/ Progress rehabilitated ☐ NO NO NO NO YES YES Quarterly EETC NO Reports transmission lines doubled Financial close of first private sector YES/ Progress ☐ NO NO NO YES YES YES Quarterly EETC investment in wind NO Reports power (250 MW) Progress in implementing remaining 750 Progress ☐ % 0 10% 15% 30% 40% 50% Quarterly EETC MW wind Reports competitive bidding program Projected GHG The target value was Metric Progress emissions (MT ☐ Ton 1.2 1.2 1.5 1.9 2.3 2.6 Quarterly EETC revised to take into Reports annually) account the size of 7 reductions from wind generation 2,500MW of new capacity (790 MW) of new wind to be added by YR17 capacity based on the updated schedule in Annex 5. Direct project 861,4 1,067,55 1,466,4 ☒ # 0 0 402,136 Quarterly EETC EETC beneficiaries* 41 5 22 Female ☒ % 0 0 49% 49% 49% 49% Quarterly EETC EETC beneficiaries Cumulative Target Values Data Responsib Core Intermediate Progress Source/ ility for UOM Baseline Frequency Comments Results Indicators to date Methodolo Data YR14 YR15 YR16 YR17 gy Collection 500 kV transmission line Yes/ Progress ☐ No No No No YES YES Quarterly EETC from Suez Gulf to No Reports Samallout 500 kV/220 kV substation in Ras Yes/ Progress ☐ No No No No YES YES Quarterly EETC Gharib No Reports New 500 kV/220 kV transformer at Yes/ Progress ☐ No No No No YES YES Quarterly EETC Samallout No Reports 220 kV transmission line Yes/ Progress ☐ No No No YES YES YES Quarterly EETC from Ras Gharib No Reports to Gabel El-Zait 220 kV transmission line Yes/ Progress from North ☐ No No No No No YES Quarterly EETC No Reports Hurghada to El- Qusair 8 220kV transmission lines Yes/ ☐ No No No No No YES rehabilitation No Transmission lines constructed or 429 Progress ☒ km 0 40 40 50 330 Quarterly EETC (rehabilitated) (232) Reports under the project Cumulative Target Values Data Responsib Core Intermediate Progress Source/ ility for UOM Baseline Frequency Comments Results Indicators to date Methodolo Data YR14 YR15 YR16 YR17 gy Collection Bid document for first BOO Yes/ Progress ☐ No No No YES YES YES Quarterly EETC developed No Reports Procedures for wind power Yes/ Progress ☐ No No No No YES YES Quarterly EETC integration by No Reports system operator Displacement of Diesel Generation ☐ 0 0 0 0 0 87.6 Yearly EETC EETC GWh  The calculation of beneficiaries’ number assumes that the output of wind generation will spread across grid-connected consumers in all sectors, existing and new, in cities and rural. The per capita consumption 1,549kWh/capita of the year 2012 is used as a baseline with a growth of 2.7% per year to estimate its value for the calculation of number of beneficiaries when the project is operational. Capacity factor is estimated at 37.5% 9 Annex 3: Operational Risk Assessment Framework (ORAF) Egypt, Arab Rep: Egypt - Wind Power Development Project (P113416) . . Project Stakeholder Risks Stakeholder Risk Rating Substantial Risk Description: Risk Management: (i) Private sector lack of interest and confidence to (i) In addition to the Government’s Central Bank Guarantee (CBG) issued participate in the bidding of the Wind BOO Project December 2012 with a value of US$660 million for the first BOO project, The World (ii) A few farmers could potentially be affected by the Bank is proposing the adoption of credit enhancement and risk mitigation instruments construction of transmission lines on agricultural lands (IBRD and MIGA guarantees) to encourage private sector participation in the tendering (iii) Government ownership and commitment to the process during a period of heightened political risk. project may be compromised due to competing (ii) Most of the project area is on desert land. An RPF – a Resettlement Action Plan government priorities during the challenging country including a Grievance Redress Mechanism was completed and disclosed-- has been transition. prepared to avoid or minimize involuntary resettlement and land acquisition through design efforts. (iii) Strong ownership demonstrated by the government was demonstrated during project preparation due to the importance of this project for the sector and country at large. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Implementation Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Moderate Risk Description: Risk Management: (i) Weak capacity of EETC to adequately implement the (i) The World Bank carried out a market sounding exercise, in which bidders highlighted Wind BOO Project; to EETC a number of issues which are hindering the bidding process and the market (ii) Weak capacity in project monitoring and procurement sounding report proposed a number of recommendations. EETC took good note and will work on resolving these issues promptly, while the World Bank will closely coordinate 10 and monitor progress made; Furthermore, the designated BOO team at EETC is supported by a consulting firm to build capacity and complete the tendering process of the first BOO project. This is supported by sub-component B1. (ii) The World Bank committed to provide hands-on training for capacity building of the implementing agency on World Bank projects’ procedures and standards to follow with regards to procurement, financial management and safeguards. To date both the procurement and safeguards training were provided, and the financial/disbursement training will be scheduled shortly. A project implementation manual will be produced based on these training for each area. The manual can be provided to the PIU (of this project and could be others) as a learning document on how to implement Bank projects. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Implementation Governance Rating Moderate Risk Description: Risk Management: Lack of coordination between EETC, NREA and relevant Upon a request from the Bank to strengthen coordination effectiveness, a technical partners in project implementation group has been established which meets regularly to ensure frequent updates on project status and coordination among different entities. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Implementation Risk Management: Assessments of fiduciary risks (procurement, financial management) have been carried out and adequate arrangements are in place for proper management and transparent use of project funds. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Implementation Project Risks Design Rating Substantial Risk Description: Risk Management: High risk profile of the first 250 MW BOO project has The World Bank has suggested to the GoE and particularly to EETC and the Ministry of 11 resulted in significant delays in the tendering process due Electricity and Renewable Energy (MERE) that they consider the use of a World Bank to low private sector confidence in the sector. The success Guarantee (the WB Guarantee) to support the payment obligations of EETC under the of the first 250MW project and overall wind BOO projects PPA as a means to improve the risk profile of the Project and enable its bankability. is essential for the success of the current Wind Resp: Status: Stage: Recurrent: Due Date: Frequency: Development Project and for achieving MOEE’s ambitious renewable energy target that is to be mostly Client In Progress Implementation financed by the private sector. Social and Environmental Rating Moderate Risk Description: Risk Management: The project and additional activities to be funded under Environmental and Social Impact Assessment (ESIA) and the Resettlement Policy the savings will finance investments with potential Framework (RPF) were disclosed on March 28, 2010 in country and April 23, 2010 at environmental and social concerns in the project areas InfoShop respectively. Moreover, the Resettlement Action Plan (RAP) –including a Grievance Redress Mechanism (GRM) - was cleared by the Bank on November 6, 2013. The RAP was disclosed in country on April 10, 2014 and in Infoshop on May 8, 2014. These safeguards instruments assessed environmental and social impacts of the project providing clear guidance on the requirements of the site-specific safeguard instruments and mitigation measures. Public and direct consultations with project stakeholders, as required by the Bank, were completed. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Implementation Program and Donor Rating Low Risk Description: Risk Management: Slow progress in the implementation of Wind programs to Considering that all programs have been deferred due to the political and economic be implemented by other donors, and transmission instability in Egypt, this risk is expected to occur for a short period of time. If required, capacity will not be utilized fully. however, EETC will install suitable reactive power compensation to manage optimal operation of the transmission lines in case the wind power development is slower than expected. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Implementation Delivery Monitoring and Sustainability Rating Moderate 12 Risk Description: Risk Management: (i) Suboptimal technical performance and need for (i) Based on the experience in developing over 600 MW of capacity, there is maintenance of built infrastructure substantial local capacity in wind power (Government and private sector) ranging from (ii) Limited financial sustainability of EETC and the resource assessment to wind farm operation and maintenance. renewable energy sector (ii) The government has demonstrated readiness to assist through the adoption of Government Guarantee to support the financial sustainability of the project. Furthermore, the project is designed to contribute to the achievement of the 20 percent renewable energy target set by the supreme energy council through the scaling-up of wind and solar energy. The counci1 also recently approved key policy steps related to wind power scale-up in the country. These include: (a) Approval by the supreme energy council of the need to cover additional costs for renewable energy projects; (b) Finalization of the land use policy for wind power developers; (c) Approval of zero customs duty on wind equipment; (d) Acceptance of foreign currency denominated PPAs and confirmation of central bank guarantees for all BOO projects; and (e) Permitting support for developers with respect to environmental, social and defense clearances. These measures are already being implemented pending their adoption as part of the new electricity law. In addition, the use of a series of World Bank Guarantees for the wind BOO program is at an advanced stage of discussion with the Government, and if approved will boost the financial sustainability of the first project as well as the renewable energy program at large. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Implementation Other (Optional) Rating Risk Description: Risk Management: Resp: Status: Stage: Recurrent: Due Date: Frequency: Other (Optional) Rating Risk Description: Risk Management: 13 Resp: Status: Stage: Recurrent: Due Date: Frequency: Overall Risk Overall Implementation Risk: Rating Substantial Risk Description: Description: Project implementation risks from the technical and project management aspects are considered to be Moderate. However, the overall implementation risk is rated substantial due mainly to the macroeconomic and financial risks that are coupled with unstable political and economic transition which may have an adverse impact on project implementation and sustainability as well as the development of the wind generation in the Gulf of Suez. The latter could significantly impact meeting the 20% target of the generation mix from renewable sources. 14 Annex 4: Project Costs and Financing Plan Project Costs All in US$million 6.97 EGP/US$ Loan Savings Project Costs 106.4 Sub-component Local Forex Total A5 Extension of the 220 kV network along Suez Gulf Coastal area: 2x125MVA, 220/66kV, 2×40 MVA 66/22 kV, North Hurghada GIS Substation 1.9 13.4 15.3 220kV Connection of North Hurghada Substation (2km) and 66kV loop in/out 0.0 2.2 2.2 2x75MVA, 220/66kV, 2×25 MVA 66/22 kV , El-Qusair GIS Substation 1.8 11.4 13.1 220kV Connection of El-Qusair Substation (90km) 11.7 18.3 30.0 A6 Rehabilitation of 232km OHTL Conductors by INVAR Thermal conductors 3.2 25.6 28.9 Project Base Costs 18.6 70.8 89.4 Physical Contingencies @ 10% 1.9 7.1 8.9 Financial Contingencies (FC 5%, LC @ 10%) 10% 1.9 3.5 5.4 Total Project Costs 22.3 81.4 103.8 Project Financing Plan All in US$million Share of Source Sub-component Estimated Savings total Local Forex Total % Clean Technology Funds A5 72.2 11.4 50.7 62.1 60% World Bank A5 and A6 34.2 3.4 30.8 34.2 33% EETC - Own Resources A5 and A6 - 7.5 - 7.5 7% Total A5 and A6 106.4 22.3 81.4 103.8 100% Financing Plan Breakdown by Sub-component Sub-component A5 18.5 52 70.4 CTF 11.4 50.7 62.1 IBRD 1.1 1.2 2.3 EETC - Own Resources 6 - 6 Sub-component A6 3.9 29.5 33.4 IBRD 2.4 29.5 31.9 EETC - Own Resources 1.5 - 1.5 15 Annex 5: Updated operational dates for planned wind farms in the Suez Gulf region Financier/Sponsor Government entity Revised operation Wind Farm date Size (MW) European Development Partners NREA February, 2014 200 (EDPs) Japan International Cooperation NREA July, 2016 220 Agency (JICA) Spanish Government NREA July, 2016 120 Wind BOO, Gulf of Suez EETC December, 2016 250 Cooperation with Masdar (UAE) NREA January, 2018 200 European Development Partners NREA 2018 200 (EDPs) Financing options under review NREA 2018 200 IPP NREA 2018 6x100 Wind BOO, Gulf of Suez EETC 2019 2x250 Total 2,490 Source: EETC, November, 2013 16 Annex 6: Updated Procurement Plan and Procurement Strategy Package/ Estimat ed cost Sub- Procurement Pre- Expected Bid Lot Domestic ICB Description Financed By USD component Method Qualification Preference Bank Review Opening date Million Rehabilitation of 232km 220kV, Existing OHTLs Conductors by Thermal conductors INVAR Type: - [A] Menouf/ Tahrir Badr – 35km Lot 1 - [B] Sadat/El-Bostan – 32km IBRD/EETC 33.4 A6 - [C] Menouf/ Basous – 45km - [D] El-Manayef/ Abu-Soltan – 40km - [E] Suez2/ Badr – 80km 2×2km,220kV Double Circuit OHTL In/Out July October ICB-1 connection for North Hurghada to the OHTL Gabal ICB No No 2014 2014 El-Zait/ South Hurghada and ×7km, Lot 2 CTF/IBRD/EETC 2.5 A5 66kV, Double Circuit OHTL In/Out connection to the UGC Hurghada Center/ Tourist Center. 220kV, Double Circuit OHTL Safaga/El-Qusair Lot 3 with 90km Length CTF/IBRD/EETC 35.1 A5 A 2x125MVA, 220/66kV North Hurghada GIS CTF/IBRD/EETC A5 Substation (Switchgear). Lot 1 17.6 Two 125MVA, 220/66kV Power Transformers for CTF/IBRD/EETC A5 North Hurghada 2 October January ICB 2 ICB No No 2014 2015 A 2x75MVA, 220/66kV El-Qusair GIS Substation CTF/IBRD/EETC A5 (Switchgear). Lot 2 15.2 Two 75MVA, 220/66kV Power Transformers for CTF/IBRD/EETC A5 El-Qusair. 17 1. Procurement Strategy The Bank discussed with EETC the procurement strategy to be followed in view of the lessons learned from previous projects. Three issues were discussed:  The two envelope system. - It has been agreed that the borrower will use the two envelope system as approved by the Bank for the El Tebbin, Ain Sokhna, Wind Power, Giza North and Helwan South projects with successful results in terms of competition and prices. The borrower has gained experience in tendering for these types of projects under the Wind Power project. The two envelope system has proven to be efficient, economic and transparent and has attracted good competition.  Prequalification vs post qualification. - The advantages and disadvantages of prequalification vs post qualification were discussed with the borrower. These included the risk that the high costs of preparing detailed bids could discourage competition, the assurance to the employer that invitations to bid are extended only to those who have adequate capabilities and resources thus simplifying the bids evaluation process and the risk of unnecessary delays with prequalification. However, the borrower’s position is to follow the procedures as approved by the Bank for the El Tebbin, Ain Sokhna, Wind Power, Giza North and Helwan South projects.  The use of fixed prices versus adjustable prices – Although in the previous project financed by the Bank, EETC required bidders to offer fixed prices, it is well known that this practice results in bidders including a premium in their prices to have an insurance against price increases during the execution of their contracts. For those reasons, the Bank has advised against the use of fixed prices. However, EETC argued that on the other hand the use of adjustable prices creates additional burdens such as (a) the need to find additional funding for price increases; (b) the need for contract amendments to adjust the final contract price; and (c) the need (in the case of public entities like EETC) to have additional budget authorizations for contract price increases. In addition, the use of price adjustment contracts, although resulting in initial lower contract prices, are not a guarantee of lower final contract value (since the owner assumes the price increase risks). For all those considerations, despite Bank arguments in favor of the use of price adjustments, it is EETC decision to continue using fix price contracts. 2. The bidding processes will be advertised in the Development Business of United Nations and in dg- Market as required by the Bank’s Guidelines as well as in the National Gazette of Egypt (El Ahram) as required by local procedures. 3. Two envelope system: The following special provisions for procurement will apply: a. Bidding shall be open to all potential and qualified bidders and not exclusively to manufacturers. However, a bid from a non-manufacturer would require a commitment letter from the manufacturer. b. In addition to clear technical specifications, the bidding documents shall include detailed and clear technical evaluation criteria. c. During the technical evaluation, no meeting with the bidders shall take place; clarifications with bidders shall take place in writing only and can neither result in modifications of the bids (i.e., withdrawal of deviations) nor in changes to the bid price. 18 d. The bidding documents shall include a list of deviations which are considered as major. The list may not be comprehensive but in any event, bids with major deviations will be considered substantially non-responsive and will be eliminated. Minor deviations and omissions may be accepted and may be quantified in monetary terms only for the purpose of evaluation and as per detailed method spelled out in the bidding documents. This will neither affect the bid price, nor the contract price. e. For contracts where technical deviations may, with due justification, bring additional competition to the bidding process, the bidding documents may allow bids to include a list of deviations from terms and conditions or technical specifications, and, in such event, the bidders shall provide additional price of withdrawal of deviations (pricing of the withdrawal of the deviations would be part of the commercial bids). Minor deviations or omissions will be quantified for evaluation purposes only, by using the quotation given by the bidder, or, if not quoted, the deviation may be quantified for evaluation purposes based on pricing information available to the owner according to the specifications in the bidding documents in other similar and recent bidding. f. If bidders are allowed to offer deviations, and in accordance with Bank guidelines, when the owner awards the contract to the successful bidder, the owner may request the bidder to withdraw any of the deviations listed in the winning bid, at the price shown by the bidder for the deviation in attachments to the bid. g. The bid validity period shall be sufficiently long (180 days) to cover the entire evaluation process to avoid having to request bid validity period extensions given that prices are fixed. h. After opening the technical envelopes, the commercial envelopes shall be kept unopened and in a safe place. i. The review process of the technical evaluation shall be as follows: (i) preparation of the Technical Evaluation report and recommendations by the Borrower, to be sent to the Bank; (ii) review by the Bank and, if needed, clarifications to be sought by the Bank from the Borrower; and (iii) Borrower to then receive no-objection from the Bank. Borrower will then inform the bidders of the outcome of the technical evaluation. For those bidders rejected due to being substantially non -responsive, the Borrower shall provide clear reasons for the rejection to these bidders who request. j. Prior to the opening of the commercial envelopes for bidders deemed responsive, adequate time (a minimum of 5 business days) has to be provided to allow opportunity for bidders deemed non-responsive to complain, if they wish. The agreed bidding documents will establish clearly this period of five business days for bidders to complain. Any complaint letter or communications and responses provided by the Borrower need to be sent to the Bank for information. The Bank, in consultation with the Borrower, will examine these complaints. If additional data is required to complete this process, they will be obtained from the Borrower. If additional information or k. clarification is required from the bidder, the Bank will ask the Borrower to obtain it and comment or incorporate it, as appropriate, in a revised version of the Technical Bid Evaluation report. The Bank’s review will not be completed until any complaint submitted is fully examined and considered. l. Commercial bids of substantially responsive technical bids shall be opened in public and bid prices read out. Bids of non-responsive bidders should be kept until contract signing. m. When the full evaluation is completed, the Bid Evaluation Report and contract award recommendation are prepared by the Borrower and sent to the Bank for review. 19 n. The Bank shall, if it determines that the intended award would be inconsistent with the Loan Agreement and/or the Procurement Plan, promptly inform the Borrower and state the reasons for such determination. Otherwise, the Bank shall provide its no objection to the recommendation for contract award. The Borrower shall award the contract only after receiving the “no objection” from the Bank. o. If after publication of the results of evaluation, the Borrower receives protests or complaints from bidders, a copy of the complaint and a copy of the Borrower’s response shall be sent to the Bank for information. p. If as result of analysis of a protest the borrower changes its contract award recommendation, the reasons for such decision and a revised evaluation report shall be submitted to the Bank for no objection. The Borrower shall provide a republication of the contract award in the format of paragraph 2.60 of these Guidelines. q. The terms and conditions of a contract shall not, without the Bank’s prior approval, materially differ from those on which bids were asked or prequalification of Contractors, if any, was invited. 4. Procurement Plan. The draft Procurement Plan (PP) for the project, prepared by borrower, has been received by the Bank and found to be acceptable. The PP will be updated annually to reflect the latest circumstances. The Procurement Plan packages are as indicated above. 5. Risks and Mitigation Measures. The Procurement risk for the project is assessed as “MODERATE”. Because of the value and complexity, all packages will be subject to the Bank’s prior review. The only risk that has been identified is that of potential delays due to the long procurement process. The following measures were agreed and are now in place to mitigate the remaining risks: Prepare the specifications and the Bidding Documents as soon as possible and carry out advance procurement. 20 Annex-7: Clean Technology Fund (CTF) EGYPT, ARAB REPUBLIC OF: Wind Power Development Project By the completion scale- By the completion of the up Phase Indicator CTF/IBRD-funded Project 2,500MW wind power capacity by 2019 Transmission infrastructure to evacuate wind power generation capacity 3,000MW 3,000MW [equivalent MW] Tons of GHG emissions reduced or avoided by commercial operation of  1.4 million  4.5 million the scaled-up 1  Tons per year [tCO2eq/yr]  28.5 million  90.3 million  Tons over lifetime of the project [tCO2eq] Financing leveraged through CTF US$1,625.5 million, of which: US$4.5 billion funding [US$ million]  Private [US$450 million]  IBRD [US$70 million]  EIB/kfW/AfD [US$ 70]  PPIAF [US$0.5 million]  kfW [US$0.7 million]  Borrower [US$62.3 million]  Others [US$972 million] CTF leverage ratio [1:X] 1:10.82 1:30 Cost effectiveness  CTF cost effectiveness  5.3  1.7 [US$CTF/tCO2eq avoided over lifetime of the project]  Total project cost effectiveness [US$Total Project/tCO2eq  12.43  N/A avoided over lifetime of the project] Other co-benefits - Advancing the deployment of renewable energy sources to the planned targets - Supporting the sector in reducing fuel consumption and emissions - Strengthening local manufacturing capacity - Improving the reliability of electricity supply 1 Based on wind power capacity (790MW) to be installed by the new closing date of the project, which represents one-third of the envisaged 2,500MW in the Gulf of Suez area. 2 Based on wind power capacity (790MW) of which 250MW from the BOO and 540MW from other projects. If there is no public information available on the actual cost of financing for the 540MW of that capacity, a proxy will be used based on the latest financial closure for wind projects in Egypt or MNA region 3 Calculation of Total project cost effectiveness only includes costs associated with transmission infrastructure (CTF-funded component). Therefore, it excludes US$450 million private financing for the development of 250MW BOO wind power project. 21 Introduction 1. Egypt ranks among the 11 countries in the world showing the fastest-growing GHG emission. The analysis undertaken as part of the National Strategy Studies (NSS) in 2002 indicates that by 2017 emissions could reach more than three times the 1990 levels. The overall energy sector (including transport) is expected to remain by far the largest source, with the growth rate of 4.9%. The actual growth of emissions, based on IEA/OECD database, has been slower compared to the NSS projections (in large part due to a lower GDP growth) but still shows well over 30% increase from the 1990 levels. 2. The growth of the GHG emissions in Egypt is primarily linked to the strong economic growth and associated increases in energy demand, especially through higher demand for electricity and transport services. Electricity demand is growing at 7-8% per year, which implies adding about 1,500-2000 MW per year over the next several years (installed capacity was 29.1 GW in 2013). The increase in energy demand has been met primarily by increased use of fossil fuels (Figure 1), leading to the high carbon intensity of the economy. Figure 1: Share of Fossil Fuels in Total Primary Energy Consumption in Egypt, 1995-2010 3.5 3 2.5 (Quadrillion Btu) 2 1.5 1 0.5 0 Total Fossil Fuel Consumption Total Primary Energy Consumption 22 Figure 2: Energy Related CO2 Emissions in Egypt, 1980-2011 Egypt Total Carbon Dioxide Emissions from the Consumption of Energy 220 200 180 Million Metric Tons 160 140 120 100 80 60 40 20 3. As a result, the CO2 emissions from energy uses have increased by over 7 % per year since 2000, reaching about 168 Mt in 2007 (see figure above). In view of the characteristics of GHG emissions, the main priorities for achieving GHG reductions lie in the electricity and transport sectors which, combined, contribute to over 70 percent of the GHG emission in Egypt. Assessments of a range of 31 mitigation options were considered as part of the National Strategy Study in 2002 and the following priority areas were identified a. Co-generation in textile, chemicals, food and beverage, metals, buildings, and hotel sectors; b. Energy efficiency in textile, chemicals, food and beverage, metals, buildings, and hotel sectors; c. Fuel switching to natural gas in industry and transportation; d. Wind energy development; e. Organic waste management and municipal solid waste methane utilization; f. Afforestation projects; g. Concentrating Solar Power (CSP) options such as integrated solar-fossil fuel combined cycle power station and solar pumps; h. Extension and electrification of railways and underground lines; and 23 i. Support mass transit system for transport modal shift and extension of waterways transportation infrastructure. 4. In the electricity sector, the Government recognizes that the power system in Egypt needs to grow in tandem with the economy with the early lower cost transmission investments providing an important enabling function for competitive investments in generation. Even with somewhat lower electricity consumption growth rate in comparison with the GDP growth -- to allow for energy efficiency improvement -- the needs for new investments in the power generation, transmission, and distribution are very significant. The MoEE, with endorsement of the Cabinet, adopted the following strategy: (i) increased use of efficient fossil-fuel generation technologies (CCGT and supercritical steam boilers); (ii) large scale development of Egypt’s renewable resources with the goal of having 20% of its installed generation capacity in the form of renewable by 2020 (including the existing hydropower); and (iii) stepping up efforts for more efficient consumption of electricity. Of the 20% of generation targeted for renewable resources, approximately 12% or 7,200 MW is intended to be provided by wind resources. Egypt’s Investment Plan for CTF 5. The CTF Plan for Egypt was originally endorsed by the CTF Trust Fund Committee (TFC) in January 2009. An update of the CTF Plan for Egypt was approved in November 2012. Under this plan, the Government of Egypt would use US$300 million from the CTF to catalyze investments in renewable energy and sustainable transport. Specifically, the CTF would finance the following investments: (i) transmission system upgrade, (ii) Renewable Energy Fund, (iii) 200 MW Wind Farm project implemented through PPP, and (iv) Urban Transport Infrastructure Development project. 6. The indicative financing of these interventions is summarized in table 1 below: Table 1: Indicative Financing under CTF Plan for Egypt (US$ million) Wind Power Urban Transport Development 200MW Wind Financing Source Total (World Bank) Project (World Farm (AfDB) Bank) CTF 100 150 50 300 GoE 320 62.3 - 1,035 Private Sector 450 210 MDB/Others 310 70.0 (IBRD) 140 591 71.2 (Others) Total 730 803.5 400 1,926 24 Project Description 7. The Wind Power Development Project (the Project) was approved by the CTF Trust Fund Committee on May 7, 2010 and by World Bank Board on June 15, 2010 with an IBRD loan of US$70 million, a CTF loan of US$149.75 million and a CTF grant of US$250,000, and was declared effective on August 14, 2011. The Project approved by the CTF Trust Fund Committee consists of three main components to support the expansion of transmission networks needed to evacuate wind power generation from Gulf of Suez region to the national grid. The components are (A) Transmission Infrastructure, (B) technical assistance to support the expansion of Egypt’s wind generation program, and (C) Gulf of Suez 250 MW wind BOO Project. The main 500kV transmission line (sub-component A1) is co-financed by IBRD (US$70 million) and the CTF (US$148.25 million). 8. The main purpose of the proposed restructuring for this Project is to respond to the request received from the Borrower for using the loan savings (US$106.4 million of which $34.2 million of IBRD, and US$72.2 million of CTF) from sub-component A1. Accordingly, this paper introduces changes to the Project to utilize the savings to finance additional transmission infrastructure4. The additional transmission infrastructure consists of two new sub-components under Component A ('Transmission Infrastructure’) would be financed from the loan savings of Sub-component A1. The two sub-components are designed to (1) further support the transmission networks needed to evacuate existing and planned wind generation along the western coast of the Suez Gulf through sub-component A5; and (2) upgrade existing and old transmission lines through sub-component A6. The envisaged benefits of these sub-components include:  Connecting an isolated load center at the Gulf of Suez region with the national transmission networks and thereby contribute to improved reliability of electricity supply;  Displacing expensive diesel generators on the coastal load center; and  Reducing bottlenecks by upgrading the conductors of existing 220kV transmission networks to utilize more efficient and cleaner power generation 9. Proposed Transformation. The project will help scale-up wind energy generation from the existing approximately 647 MW to over 3,000 MW as part of achieving Egypt’s 7,200 MW target for wind energy (12% of installed generation capacity) by 2020. 10. In particular, this project enables the deployment of wind power at transformational scale in the Gulf of Suez and Gab El-Zait by providing critical transmission infrastructure necessary for private sector investments in generation. Without this project, wind power development in this region will be dependent largely on donor financed public sector projects and sub-optimal 4 As CTF is only financing A5 Sub-component, US$62.2 million will be utilized to finance A5 projects and a balance of US$10 million will remain. It is proposed to use this balance to support the establishment of a Renewable Energy Fund (REF). As the institutional framework is unclear yet for the REF’s implementing agency, further discussions - following this Project’s restructuring- will be pursued with EETC, MERE, and MoIC to agree on the use of the US$10 million balance to support the establishment of the REF and/or other eligible activities for CTF financing by June 30, 2015. 25 transmission infrastructure – lack of transmission infrastructure has constrained wind power development all over the world, including in large markets like the U.S. 11. Upfront transmission investments of about US$ 353.5 million, including US$ 150 million from the CTF, comprise a small percentage (~ 7.9%) of total investments of about US$ 4.5 billion in new wind power infrastructure with an installed capacity of 2,500 MW commissioned in the area. 12. In order to accelerate the wind program to be able to achieve the ambitious target, the Government is pursuing a wind commercialization program that will focus on engaging the private sector. The different public and private business models include private Build, Own, Operate, (BOO)5 projects, feed-in-tariffs for small projects, public projects, autogeneration and joint ventures. One of the key models is the competitive bidding approach where the EETC will issue tenders requesting supply of power from large scale renewable energy resources for specific pre-determined sites on a Build, Own, Operate (BOO) basis. It is expected that the competitive bidding approach will result in additional capacity of about 2,500 MW of private sector capacity. The programme targets to achieve competitive electricity tariffs through an international tender and stimulate private investment from international and local investors into Egypt’s power sector. Transmission infrastructure to evacuate the additional capacity is an essential prerequisite to private sector participation in the wind commercialization program. Potential for GHG Emissions Reductions 13. Emission reduction potential of investment: The current approach for developing wind resources relies largely on donor financed public projects implemented by the New and Renewable Energy Agency (NREA). Absent of any further development of wind resources, GHG emissions from power generation are expected to increase from an estimated 63 million tons/yr in 2007 to an estimated 282 million tons by 2020 – an increase of 219 million tons. Based on a grid emission factor of 0.55 that was utilized for the registered CDM project in Zafarana and an estimated capacity factor of 0.375, the annual emission reductions for the 2,500 MW of new wind capacity additions would be approximately 4.5 million tons of CO2. An equivalent of 1.4 million tons of CO2 will be saved annually based on the wind power capacity (790MW) to be installed by the new closing date of the project. 14. Technology development: Currently the majority of wind turbines in Egypt at Zafarana are Gamesa 850 kW turbines in addition to Vestas 660 kW and Nordex 600 kW turbines. All these turbines are very reliable and proven designs. It is expected that the current state of the art wind turbine technology of the 2 to 2.5 MW class will become a standard also for Egypt with this program. These turbines have a track record of several thousands of turbines and a number of manufacturers have already gained experience with high temperature versions which are able to operate at conditions up to 45°C ambient temperature. These turbines have a rotor diameter of 80 to 93 m for the high wind versions which are approved for IEC Class 1. As the wind conditions exceed IEC Class 1 for the average wind speeds but without gusts, the manufacturers have to apply for a special type certification for these projects. Currently most of the suppliers 5 Includes transmission and generation costs 26 also offer low wind versions with rotor diameters extended by up to 10 m in the range of 90 to 100 m. The hub height may be 80 m or 100 m for the Nile region. New developments in the 3 – 3.6 MW class, which will be ready for serial production by 2010 have rotor diameters of 107 – 116 m with respective hub heights up to 100 – 140 m. Cost-effectiveness 15. The projected emissions savings of 28.5 million tons of CO2 would translate to a cost estimate of about US$5.3 of CTF investment per ton of CO2. The total project cost effectiveness is US$12.4 per ton of CO2 avoided. 16. As wind power development gains momentum in Egypt, it is expected that there will be more local manufacturing of components that will help bring down costs. Starting from the first wind projects, Egypt has already had a history of encouraging local production of wind turbine components. Electrical components (cables, transformers) and wind turbine towers have been mostly produced by local companies, at significant cost savings relative to imported materials. As local markets for turbines and components grow, it is expected that local manufacture will increase to take advantage of lower labour and transportation costs. As early adopters of wind technology in the region, Egyptian manufacturers are likely to enjoy a competitive advantage in regional markets, which will allow them to further reduce costs through economies of scale. Demonstration Potential at Scale 17. Scope for avoided annual GHG emissions through replication. The above discussion on the impact of the project on GHG emissions and also the impact of the government’s current program for wind energy development are only for a fraction of the envisaged wind potential within Egypt and within the region as a whole. The wind atlas for Egypt, which was completed in 2005, shows that most of the land area adjacent to the Suez Gulf as well as large areas east and west of the Upper Nile, an area near Kharga in South-Eastern Egypt and parts of the Sinai have average annual wind speeds in excess of 7 m/s. The wind potential of the Suez Gulf region alone has been estimated at 20,000 MW. All of these areas are lightly populated, which increases their attractiveness as sites for further development of wind generation. If the costs of wind generation fall, and the private sector proves willing to play a significant role in supplying power to Egypt, wind energy could become an economically as well as an environmentally attractive alternative to gas generation, and could ultimately exceed the 12% share of total generation targeted for 2020. 18. The CTF-funded project supports development of the first large scale private sector competitively bid project for renewable energy in Egypt. With 2,500 MW of planned installed capacity, and an estimated investment cost of $4.5 billion, the wind commercialization program has already attracted the attention of international developers and fostered an interest in the development of local capacity in manufacturing and support services. It is also of a sufficient scale to justify necessary adaptation of equipment designs in order to achieve optimum performance under Egyptian conditions. 27 19. The CTF supported investments would under-pin development of a further 2,500 MW of new wind capacity in the Egyptian power system which would result in additional annual emission reductions of about 4.5 million tons of CO2. Assuming that the government’s target of 12% of total generation being supplied by wind resources is realized by 2020, it is expected that over 7,200 MW of wind capacity will be installed and over 17 million tons of CO2 emissions will be avoided annually. Figure 2 below shows the cumulative increase in carbon emissions associated with the growth in electricity generation from 2009 to 2025 under three scenarios – business as usual which is limited to minimal wind generation, project-related wind generation (2,500 MW by 2015) and wind generation at the government target level (7,200 MW by 2020). Figure 2: Impact of Large Scale Wind Development on Emissions Cumulative Increase in Emissions from Power Generation - 2009 - 2025 120 Million tons 100 80 60 40 20 - 2020 Target BAU Project Only 20. Through implementation of the project, the government will gain experience in negotiating and contracting with private sector generation companies, while private companies will have an opportunity to observe the relative ease or difficulty of doing business with the Egyptian government. This learning experience will help both parties to adjust their negotiating positions and facilitate the completion of future contracts. The Egyptian experience, being the most extensive in the region, will also be applicable for many of the other MENA countries and several countries such as Jordan, Syria and Yemen are already beginning to look closely at the BOO approach to wind development. In all these respects, the project has the potential to be transformational to the development of wind resources in the region and the consequent reduction in GHG emissions associated with power generation. 21. The project has several elements that will support replication as well as further development of other renewable resources: (a) The experience in preparation of bid documents, development of grid code, and legal agreements will all be helpful for future renewable energy projects, including solar projects: (b) The joint wind resource measurement program will provide valuable experience for future wind projects, and, (c) The policies being introduced by the GoE 28 in the course of development of the first BOO project such as land use, customs duties, bank guarantees, foreign exchange denominated PPAs, and permitting are likely to help future development, including development of solar projects. Development Impact 22. The development of wind energy brings significant benefits in terms of the enhanced quality and reliability of power supply to consumers, which is a high development priority for the Government of Egypt. Tapping into the wind resources helps the country to reduce the carbon intensity of power generation (wind investments related to the project itself would reduce CO2 emissions by almost 4.5 million tons per year). In terms of reliability, further diversification of generation sources would reduce vulnerabilities associated with any power system which has a large hydro component and is hence subject to the short and long term variations in hydrology. Diversification of the generation mix is also expected to strengthen the resilience of the power sector to future shocks such as peaks in fuel costs, interruptions in fuel supply, or impacts of climate variability on hydro power. 23. While the project itself is intended primarily to evacuate wind power from the Suez Gulf region, over the longer term it is expected to be an integral component of a least-cost transmission expansion plan for Egypt. At present, the HV transmission network, as well as most of the power generation plants, is concentrated in a north-south corridor parallel to the Nile River. While this is a suitable arrangement for the existing combination of generation facilities and load centers, it limits the flexibility of the network in terms of serving future export markets such as Saudi Arabia and Jordan. It also increases the risk that a single major incident could interrupt power supply to a large part of the country. The new line between the Nile and the Suez Gulf which is being funded by the current project could easily be looped along the Suez coast and linked to an east-west line from Cairo and/or routed under the Suez Gulf to provide a direct link to export markets and an alternate link between upstream hydro resources and the major load centers around Cairo. 24. With respect to environmental co-benefits, the wind generation supported by the project is expected to displace gas fired single-cycle and CCGT plants which have typically been located close to load centers, as well as also diesel units located in proximity of Red Sea coastal cities as those in the isolated system of El-Qusair city that will be addressed by of sub-component A5. While gas fired plants are typically free of toxic and particulate emissions, the presence of large scale gas combustion plants and the routing of major gas pipelines close to urban centers presents an undesirable risk to local population. Diesel units that are not connected to the grid and represent the most expensive and highly polluting source of power generation. 25. Large scale wind power development would support Egypt in building up industrial infrastructure for future development. The government also wishes to ensure local manufacturing capacity to be strengthened as part of the wind commercialization program. The development of the wind sub-sector in Egypt would further strengthen Egypt’s role as a leader in renewable energy development in the region and could help it become regional supplier for the wind industry. Due to the current international market situation manufacturers have other even better and more attractive markets which require local content. They can only be encouraged to 29 establish local production facilities in Egypt if they can expect a continuous market share in the medium to long-term. The much needed customization of the equipment for achieving optimum performance under Egyptian conditions would also be possible only through a scaled up program. Any decision by manufacturers to establish local production facilities is made in relation to the size of the local market which means Egypt has to compete with other regional markets which have already proven their stability and attractiveness. 26. Beneficiaries and gender. In Egypt, more than 99 percent of households are connected to the national integrated electricity grid. The connection of additional generated electricity from wind power at the Gulf of Suez will be spread across grid-connected consumers in all sectors. The estimated number of beneficiaries (of which 49 percent are female) will also be an important indicator to measure the benefits to all grid-connected consumer sectors from the wind power generation. Hence, the M&E framework is being adjusted under the restructuring of this project to include an indicator that measures the estimated number of direct beneficiaries of which the percentage of female was included. Implementation Potential Public policies and institutions: 27. The GoE is strongly committed to the wind energy development program, both to reduce dependence on natural gas as a source of power generation and to provide a cleaner and healthier environment for the population. Since 1986, the New and Renewable Energy Agency (NREA), which was established under the Ministry of Electricity and Energy, has worked with lenders and donors to introduce and develop renewable energy technologies in Egypt on a commercial scale and to deepen the local capabilities to use, produce and develop its equipment in different applied fields. To date NREA has been responsible for the development of approximately 460 MW of wind power plants, and are continuing to actively pursue opportunities for additional projects to be developed with a combination of public and donor funding. The GoE also established a “Petroleum Fund” that provides economic incentives to producers of non-fossil fuel based energy although the incentive of 2 Pt/kWh is insufficient to mobilize significant investment. 28. The Supreme Energy Council in 2008 established the 20% renewable energy target for 2020 which was expected to be met largely by scaling-up of wind and solar energy as the hydro potential is largely utilized. Financial crisis, revolution, country instability, weakened enabling environment and lack of commercial framework to re-engage the private sector. Hence all the original planned targets including those of adding 2,530MW in the Gulf of Suez area have been now delayed. The council has also approved key policy steps related to wind power scale-up in the country. These include: (a) Approval of the need to cover additional costs for renewable energy projects through tariffs; (b) Finalization of the land use policy for wind power developers; (c) Approval of zero customs duty on wind equipment (d) Acceptance of foreign currency denominated PPAs and confirmation of central bank guarantees for all BOO projects and (e) Permitting support for developers with respect to environmental, social and defense clearances. These provisions are also included in the draft Electricity Law; however, pending adoption of the 30 Law by Parliament, they are being implemented through regulations issued by the Supreme Energy Council. 29. The project provides a substantive contribution to the transmission infrastructure development and support for the construction of the first 250 MW BOO wind project along with technical assistance for (i) facilitating the competitive bidding and (ii) to establish procedures to enable the system operator to manage the integration of large blocks of intermittent wind generation within the power system. The transmission infrastructure for wind power development in the Gulf of Suez and Gabel El-Zait area requires 66kV, 220kV, and 500kV transmission lines and associated substations to evacuate about 3,000 MW of wind energy. 30. With respect to implementation arrangements, the construction of the transmission line will be implemented by the state-owned grid operating company, EETC. As the single buyer of power in the Egyptian system, it will also contract with private developers for the purchase of power from new wind generation plants. The program for development of a pipeline of wind generation projects is being led by a cross-departmental Steering Committee under the Ministry of Electricity which is comprised of top officials and experts from the EEHC, EETC, NREA, the Energy Regulator, and the Ministry of Electricity. A Wind Tender Steering Committee oversees the work of the Gulf of Suez Wind Project task force of the EETC with technical assistance from NREA. Staff and consultants with extensive experience from the previous three thermal BOO projects are also working on this task force. 31. Policies and institutional arrangements ensure that development of renewable energy resources and the associated reduction in GHG emissions is a central focus of all power sector institutions and is supported by extensive technical and administrative expertise. This will facilitate technology transfer within the country, while Egypt’s growing reputation as a center for renewable energy development will facilitate transfers within the broader region. Sustainability, however, will require continued focus on sector finances. In the short term, it is extremely unlikely that wind energy will be financially viable when compared with the cost of gas-fired generation. The marginal electricity production cost in Egypt is about US cents 3.75/kWh (based on a gas price of $3/mmBtu), whereas the cost of wind power cost is estimated to be in the range of 7-11 US cents/kWh, depending on site conditions. However, it should be noted that wind compare favorably with the cost of import of natural gas. Over time it is likely that the gap between gas fired and wind generation will narrow as tariffs increase. In view of the fact that wind resources in Egypt are of unusually high quality, long-term costs are likely to be highly competitive. In the interim, support from concessionary financing sources to develop the transmission infrastructure and thereby offset some of the cost and risk premiums associated with private development of wind generation, is critical to support the scale-up effort. 32. A large share (two-thirds) of the new wind generation to be added by 2010 is envisaged to be privately financed and operated which removes it from one level of dependence on the budget. A second level of budget dependence, government subsidies to cover the differential between the cost of wind power and the retail power tariff, is being addressed as part of the ongoing tariff reform in the medium term whereby the government has committed itself to an average annual increase in electricity tariffs of about 7.5%. Electricity pricing reforms resumed in late 2012 and 2013. The first phase of reform in November 2012 entailed a weighted average 31 increase of the household tariff just below 8 per cent. The first tariff block (up to 50kWh) remained unchanged, while the price for the second block (50-200 kWh per month) increased by 5 percent. The highest block (over 1000 kWh) saw a price increase of 19 percent. The second phase implemented in January 2013 entailed a further just below 8 per cent increases, still keeping the first block unchanged. Prices for commercial users were also increased by more than 15 percent. An adjustment in electricity tariffs was implemented in January 2012 with a substantial increase for a group of energy intensive industries covering about 15 percent of electricity sales. Tariffs increased by up to about 25 percent for fertilizers, cement, petrochemicals and metal industries and up to about 50 per cent for glass, ceramic, and porcelain industries. These increases will ultimately cover the increased share of (relatively) higher cost wind energy in the generation mix.6 In the interim, the Supreme Council on Energy has announced that additional costs linked to renewable energy will be covered either by direct Government transfers to the EETC or through a Renewable Energy Fund (REF), to be created under the new Electricity law. As discussed in a previous section, the GoE is also undertaking efforts in the area of energy efficiency that will help the transition to cost-reflective pricing (by keeping consumer electricity expenditures close to existing levels). 33. In addition, the World Bank is engaged with the government to enhance the overall sector policy framework and advance reforms aimed at improving sector commercial environment and financial sustainability. The government recognizes that EEHC operates under tight financial constraints and has demonstrated its willingness to gradually increase tariffs toward cost covering levels and provide budget and other support in the meantime. 34. Leverage: In this project alone CTF financing of US$ 150 million is leveraging in addition to financing of (a)US$ 70 million from IBRD loan, US$ 70 million from EIB, kfW, NIF, AfD loan an Government financing of about US$ 54 million for the transmission infrastructure.; (b) approximately US$ 450 million in private sector financing for the first 250 MW BOO project; and (c) over the project life, a total of US$4.5 billion in wind investments for another about 2250 MW (public and private). CTF Additionality 35. The project provides upfront financing for transmission infrastructure and mitigates the power evacuation risk faced by project developers. Although transmission infrastructure comprises a small percentage of the overall financing needs of a transformative wind program, it allows project developers to make considered long-term decisions as this critical infrastructure is often not available for wind projects. 36. The development of the wind resource in Egypt carries both a cost premium and a risk premium in terms of the delivered price of electricity, especially when compared to the cost of public-sector fossil fuel plants located closer to load centers. The wind resource is remote from the main grid, necessitating substantial investments in transmission infrastructure, while the lack 6 However, until the wind energy scale-up is completed, wind power will represent only a small part of generation and hence will have little impact on the weighted average cost of supply. 32 of a successful track record in terms of tendering for privately developed wind generation raises the likelihood that tariffs for wind power will contain a significant risk premium. 37. This risk premium will have an adverse impact on the project economic returns, making it difficult for the GOE to achieve an EIRR that matches or exceeds its opportunity cost of capital (generally 10% for government investments). Table 2 below summarizes the highlights of the economic analysis. The first column shows the EIRR and net present value (NPV) of the project including only the WTP benefits of increased power supply. The subsequent columns show the project returns at different assumed levels of carbon prices. Net Present Value is shown at the standard discount rates of 10% and also at a reduced opportunity cost of capital of 5.7% which reflects the inclusion of $150 million of CTF funding. Table 2 also shows the project's benefit-cost (BC) ratios based on discount rates of 10% and the CTF weighted OCC. BC ratios are not generally used as a criterion for economic viability in Egypt; however, they are often applied for public and public/private sector projects elsewhere (e.g., the Mid-west International Organization for Standardization (ISO) in the US uses a 1.25 BC ratio for transmission projects) Table 2: Highlights of Economic Analysis Carbon Price 0 $5 $13 $20 $30 E -0.3 -0.4 -0.3 -0.4 -0.3 -0.4 -0.3 -0.4 -0.3 -0.4 EIRR (%) 10.5 3.1 11.3 3.9 12.7 5.1 14.2 6.3 16.7 7.81 NPV at 10% (without CTF ) 149 (1,811) 386 (1585) 764 (1,206) 1095 (875) 1,568 (102) NPV at OCC ( CTF case) 3,378 (1,496) 3,824 (1,051) 4,537 (338) 5,161 286 6,052 1178 BC at 10% (without CTF) 1.02 0.75 1.05 0.79 1.10 0.84 1.15 0.88 1.21 0.95 BC at OCC (CTF case) 1.26 0.89 1.29 0.92 1.34 0.97 1.39 1.02 1.46 1.09 38. If the economic analysis of the project only compares the energy benefits with the incremental capital and operating costs, the EIRR of the project is just above the 10% opportunity cost of capital generally applied to government investments in Egypt. The sensitivity analysis finds that, while the EIRR findings were robust under a range of assumptions regarding lower demand growth and higher capital cost, they are quite sensitive to the assumed price elasticity of electricity demand. Increasing price elasticity from the base case assumption of - 0.30 to -0.40 reduced the EIRR of the project (excluding GHG benefits) by almost 7 percentage points from 10.5% to 3.1%. In this scenario, the project only became viable when the assumed value of avoided CO2 emission is above US$30 per ton. 39. The analysis demonstrates that the investment faces risks to its viability as a result of potential changes in the price of carbon and price elasticity of demand. The break-even NPV, without CTF financing, will require a carbon price between $0 and 5 per ton, if price elasticity is -0.30; however, the carbon price would have to be above $30 per ton for the NPV to be positive if price elasticity is -0.40. Therefore, the CTF concessional loan plays a critical role in mitigating risks of reduced carbon prices and increased price elasticity of demand, by lowering the opportunity cost of capital and thereby improving prospects of attaining economic viability of the investment (i.e. where EIRR met or exceeded this rate and NPV breaks even). 40. The project financial rate of return (FIRR) assessment is complicated, however, by the fact that the finances of the implementing agency, EETC, reflect only part of the true cost of the services provided. The GoE, through a system of non-cash subsidies, actually bears a large part 33 of the cost of supply, including a significant proportion of the costs of power generation. EETC is assured a positive margin on the purchase-resale of electricity, and is insulated from increases in the average cost of generation. To assess the financial impacts of the project solely from the perspective of EETC would fail to capture the effect that the relatively high purchase price of wind energy will have on the weighted average cost of supply. In order to capture all of the financial impacts of the project, it was decided to examine the project’s financial returns from the perspective of the GOE which is not only the primary borrower and ultimate owner of the consolidated sector but also the entity which will, either directly or indirectly, receive the incremental revenues and bear the full burden of incremental costs. 41. The financial analysis used the same assumptions as the EIRR analysis with respect incremental power and the system average costs of transmission and distribution. Rather than using customer willingness to pay to measure benefits, the financial analysis used the incremental revenue from retail sales of the power. Since Egypt is in the process of adjusting its retail selling tariffs, average tariffs are assumed to increase at an annual rate of 2.5 percent in real terms (i.e. in addition to inflation), a rate which is consistent with the recent proposed tariff adjustments. 42. The financial NPV of the project was calculated at two discount rates – one representing the real Weighted Average Cost of Capital (WACC) associated with the proposed project financing plan, and a second which assumed that the CTF financing was replaced with additional funds from IBRD7. In both cases, nominal borrowing rates were converted to real rates assuming a long term international inflation rate of 1.5 percent. As with the EIRR, the financial analysis also looked at different values for carbon credits associated with the project. The table below summarizes the results. CTF funding is included in WACC-1, but excluded in WACC-2 (table 3). Table 3: Highlights of Financial Analysis Carbon Price $0 $5 $13 $20 $30 FIRR -0.2% 0.8% 2.5% 4.1% 6.7% NPV@WACC-1 (with CTF) ($962) $248 $2184 $3,878 $6,297 NPV@WACC-2 (without CTF) ($2,075) ($1,275) $4 $1,124 $2,724 43. The table shows that with CTF funding at the proposed level of US$150 million (WACC- 1), the project is financially viable from the GOE perspective as long as the value of carbon credits approaches or exceeds $5/t. Without the CTF funding (WACC-2), the project only becomes financially viable when the carbon price exceeds $13/t. If there are no carbon credits, or if their value falls below $5/t, the proposed level of CTF financing is insufficient to make the project financially viable from the perspective of the GOE. The above analysis is subject to a number of uncertainties. It does, however, indicate that under a reasonable set of assumptions, the proposed CTF financing increases the likelihood that the project will yield a positive financial return to the GOE. 7 The financial cost of GoE financing was assumed to be 6.95 percent, which is the yield on a recent issue of GoE 30 year dollar bonds. 34 Implementation Readiness 44. Procurement plan and packages are in place, and all contracts of are already signed and under implementation. All implementation arrangement related to safeguards remain the same and all documents have been developed and disclosed. Similarly, fiduciary arrangements are agreed, and in place. Moreover, the Bank has been providing significant hands-on capacity building to the Project Implementation Unit (PIU) at EETC. The proposed new projects were selected based on firm readiness for implementation. For the additional two sub-components, the arrangement for implementation will remain the same for all these areas except procurement which included an updated strategy to ensure following the new procurement guidelines of which EETC is already acquainted with from the other transmission projects financed by the Bank. 35