Document of The World Bank Report No: 19644-BR PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$43.4 MILLION AND A GRANT FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND IN THE AMOUNT OF SDRI 1.I MILLION (US$15 MILLION EQUIVALENT) TO CENTRAIS ELtTRICAS BRASILEIRAS S.A. (ELETROBRAS) WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR AN ENERGY EFFICIENCY PROJECT IN SUPPORT OF THE FIRST PHASE OF THE ENERGY EFFICIENCY PROGRAM September 14, 1999 Finance, Private Sector, and Infrastructure Brazil Country Management Unit Latin America and the Caribbean Regional Office CURRENCY EQUIVALENTS (Exchange Rate Effective January 4, 1999) Currency Unit = Brazilian Reais R$1.00 = US$0.83 US$1.00 = R$1.20 FISCAL YEAR January 1-December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ALURE Agency for Economic Cooperation between the European Union and Latin America in the Energy Sector ANEEL National Regulatory Body for the Electricity Sector APL Adaptable Program Loan BNDES National Bank of Economic and Social Development BNDESPAR National Bank of Economic and Social Development - Equity Participations CAS Country Assistance Strategy CBM Capacity Building Module CEMIG Power Utility of the State of Minas Gerais CEPEL Center of Electric Research CESP Power Utility of the State of Sao Paulo CIDA Canadian International Development Agency COELBA Power Utility of the State of Bahia COPPE Center of Engineering Studies - University of Rio de Janeiro COPEL Power Utility of the State of Parana CPFL Power Utility of the State of Sao Paulo CSA Core Support Activities DNAEE National Department of Water and Electric Energy DNDE National Department of Energy Development DP Demonstration Project DSM Demand Side Management EU European Union EE Energy Efficiency ELETROBRAS Federal Electric Utility Holding Company ELETRONORTE ELETROBRAS' subsidiary for the North of Brazil ELETROPAULO Power Utility of the State of Sao Paulo ESCO Energy Service Company ESMAP Energy Sector Management Assistance Program Vice President: David de Ferranti Country Manager/Director: Gobind T. Nankani Sector Manager/Director: Danny Leipziger Team Leader: Luis M. Vaca-Soto FOR OFFICIAL USE ONLY GEF Global Environment Facility GOB Government of Brazil GWh Giga Watt hours IBAM Brazilian Association of Municipalities ICB International Competitive Bidding ICR Implementation Completion Report ICT Institute of Science and Technology IERR Internal Economic Rate of Return IFRR Internal Financial Rate of Return IP Integrated Planning kW kilowatt kWh kilowatt hour LACI Loan Administration Change Initiative MME Ministry of Mines and Energy MC Market Change MW Megawatt NCB National Competitive Bidding NGO Non-Governmental Organization NPV Net Present Value PAD Project Appraisal Document PID Project Information Document PIU Project Implementation Unit PMU Project Management Unit PROCEL National Energy Efficiency Program PRODEEM National Program for Energy Development of States and Municipalities RGR Global Reversion Reserve SEAIN Secretary of International Affairs - Ministry of Budget and Planning SINTREL National Electric Power Transmission System SOE Statement of Expenses TA Technical Assistance TOR Terms of Reference TWh Tera Watt hours UNDP United Nations Development Programme USAID United States Agency for International Development 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. Page iii BRAZIL Energy Efficiency Project TABLE OF CONTENTS A. Program and Project Development and Global Objectives .............................................2 1. Program objective and key performance indicators .........................................................2 2. Project objective and key performance indicators ...........................................................2 B. Strategic Context ................................................................3 1(a): Sector-related Country Assistance Strategy (CAS) goal supported by the project ........3 (b): GEF Operational Strategy/Program Goal Addressed by the Program ......................... . 3 2. Main sector issues and Government strategy ................................................................3 3. Sector issues to be addressed by the project and strategic choices ............... ....................5 C. Project Description Summary (Phase I) and Performance Triggers for Subsequent Loans ...............................................................6 1. Project components ................................................................6 2. Key policy and institutional reforms supported by the project .........................................8 3. Benefits and target population ................................................................8 4. Institutional and implementation arrangements ...............................................................9 D. Project Rationale ............. ,.9 1. Project alternatives considered and reasons for rejection ...............................................9 2. Major related projects financed by the Bank, GEF, and/or other development agencies. 10 3. Lessons learned and reflected in proposed project design .............................................. 10 4. Indications of Government/Borrower commitment and ownership ................................I 11 5. Value added of Bank and GEF support in this project .................................................. 11 E. Summary Project Analysis ................................................... 11 1. Economic .................................................. 11 2. Financial Assessment .................................................. 12 3. Technical Assessment .................................................. 12 4. Institutional Assessment .................................................. 12 5. Social Assessment .................................................. 12 6. Environmental assessment .................................................. 13 7. Participatory approach .................... ,13 F. Sustainability and Risks .................... 13 1. Sustainability ................... 13 2. Critical risks .................... .... .. 14 3. Possible controversial aspects ................... 15 G. Main Loan and Grant Conditions ........ ........... 15 1. Effectiveness conditions ................... 15 2. Other ................... 15 H. Readiness for Implementation ....................... 16 I. Compliance with Bank Policies ...................................,,,.,.,., . 16 Page iv Annexes Annex 1: Project Design Summary ..................................................... 17 Annex 2: Project Description ..................................................... 21 Annex 3: Program Letter ..................................................... 35 Annex 4: Project Justification, Incremental Costs, and Benefit-Cost Analysis ................... 40 Annex 5: Institutional and Financial Assessment ................................................. .... 49 Annex 6: Procurement and Disbursement Arrangements ... . ......................................... 56 Table A: Project Costs by Procurement Arrangements ................................. 56 Table B: Thresholds for Procurement Methods and Prior Review .................................. 57 Table C: Allocation of Grant and Loan Proceeds ..................................................... 59 Annex 7: Processing Budget and Schedule ..................... ................................ 60 Annex 8: Main Documents in Project File ..................................................... 61 Annex 9: Statement of Loans and Credits ................... .................................. 62 Annex 10: Organizational Structure ..................................................... 66 Annex 11: Brazil at a Glance ...................................................... 67 Brazil Energy Efficiency Project Project Appraisal Document Latin America and the Caribbean Regional Office Brazil Date: September 14, 1999 Team Leader: Luis M. Vaca-Soto Country Manager/Director: Gobind T. Nankani Sector Manager/Director: Damy Leipziger ProjectID: BR-PE-39200 Sector: Energy/PY Program Objective Category: EA Project ID Supplement D: BR-GE-47309 Focal area: GEF Program No. 5 Lending Instruments: Adaptable Program Lending/ GEF Grant Poverty Targeted Intervention: [I] Yes [XI No Pr_o Finac a a _ APL r Indicative Financing Plan Estimated Implementation Period I Borrower ___ ~~~~~~~ ~~(Bank FY ___ ____ D. 01 i T GEF 1 Others , Total . Comrnitment I Closing --- _Date A ;Loan 1 43.4 35 i 15.0 L125.5 i 2000 . 2004 ELETROBRAS APL2 Loan 4)40.0 32 1_5°.__ 79.5 1 124.5 .,_ 2004 2007 TBD Total . 183.4 33' 20.0 146.6 250.0 _ I i Project Financing Data Lj Loan Credit Guarantee Lx GEF Grant For LoanslCredits/Others: Amount (US$ m/SDR m): WB Loan US$43.4 m, GEF Grant US$15 m. equivalent Proposed Terms: To be defined Multi-currency i Single currency Grace period (years): 5 Standard Variable Fixed LIBOR-based Years to matarity: 15 Comnitment fee: 3/4 % Front-end fee: 1% Financing plan (US$ million): Source T Local Foreign Total IBRD 24.3 I 19.1 43.4 GEF Grant 8.0 77.0 15.0 ELETROBRAS and other _ nts inpo..ct : 44.0 23.1 67.1 Total ,1 76.3 49.2 1 125.5 Borrower: ELETROBRAS Guarantor: Govermment of Brazil (GOB) Responsible agency: ELETROBRAS Estimated disbursements (FYAJS$ m): I Year 1 2000 ! 2001 2002 2003 1 2004 Bank Loan Anual 3.0 l 8.0 13.0 15.0 4.4 Cumulative 3.0. 2 0 4 0 39.0 43.4 GEF Grant L Annual 1.0_ +_ 2.0 4.0 16.0 2.0 Cumulative 1.0 i 3.0 7.0 1 13.0 i 15.0 Project implementation period: 48 months. Expected effectiveness date: January 2000. Expected closing date: December 2003. 2 A: Program and Project Development and Global Objectives 1. Program Objectives and Key Performance Indicators (see Annex I for key performance indicators): The objective of the Energy Efficiency (EE) Program, the basis of the recommended Adaptable Program Loan (APL) and GEF Grant, is to increase the efficiency of energy production and use in Brazil. Expected project benefits include electricity savings of about 1% per year and postponement of investments in electricity supply of about US$300 million per year. In addition, the project would contribute to reduced CO2 emissions estimated at about 17 million tons in a ten-year period. Phase I: Demonstration and Capacity Building The EE project will demonstrate a first set of selected EE products, services, and delivery arrangements among a select group of Brazilian institutions, and make them ready for replication by third parties. It also will remove barriers to the effective capture of successful energy efficiency opportunities in the country's main markets. Phase H: Dissemination and Mainstreaniing If Phase I is successful, a second APL will extend these efficiency gains to a wider cross-section of the Brazilian energy market in years 2004-2007. It would also set up a market-based delivery system to support EE activities in the long term. 2. Project Objectives and Key Performance Indicators: Phase I: The objective of the Phase I of the EE program is to: (a) demonstrate cost-effective measures in the electricity sub-sector through load management and targeted peak period reductions so as to better utilize existing facilities; (b) demonstrate the same to reduce energy use in public, residential, commercial and industrial facilities; (c) enhance standards and labeling programs; and (d) set up a market-based support structure for energy service companies (ESCOs). The milestones to be met before commitment of Phase 11 include the concrete demonstration of the success of the EE measures, and the generation of a critical mass for their replication. Discrete evidence of their clearly positive impact would have to be greatest in this initial stage in order to convince a larger array of potential participating institutions of their benefits. In addition, there would have to be the creation and initiation of a financial facility (at least, 15 projects financed by it), and the selection of a qualified financial intermediary committed to participate in Phase II. Phase II: If evaluation indicates that these milestones have been successfully attained, they would be followed by: (a) the dissemination and replication of "best practice" cost-effective measures in other Brazilian states and sectors; (b) the implementation of a second set of demonstration projects to illustrate new energy-efficient concepts; (c) the expanded use of ESCOs for delivering energy-efficient products and services; and (d) the enlistment of a qualified financial intermediary to operate the financial facility which would be established in Phase I for supporting user-based EE measures. The objectives of the second phase are to expand the number of participants, achieve greater efficiency in the preparation and execution of EE measures, and develop an even more effective infrastructure for their long term support when the sustainability ofthe program becomes critical. 3 B: Strategic Context l(a). Sector-related CountryAssistance Strategy (CAS) goal supported by the project (see Annex 1): CAS Progress Report discussed on June 2, 1998 The EE program supports the strategic goal of increasing the efficiency of the energy market in order to help the Government attain its development objectives, as well as advance its environmental agenda. The CAS indicated that the GOB's energy sector aims are to enhance competition, encourage private sector participation, diversify fuel sources, protect the environment, and support programs and technologies aimed at the efficient supply and use of energy. The proposed project particularly aims at the last mentioned by demonstrating and making available a broader set of effective and environmentally sound EE measures than those now available to energy suppliers, users, and service providers. It is consequently fully supportive of CAS objectives. l(b). GEF Operational Strategy/Program GoalAddressed by the Program: The strategic goal of the proposed EE program, namely the removal of barriers to EE and energy conservation, is fully consistent with GEF Operational Program No. 5 aims. The objective of Program No. 5 is the dissemination of least-economic cost energy-efficient technologies and the promotion of the efficient use of energy. EE program would reduce the risk of climate change by mitigating greenhouse gas (GHG) emissions, which would help meet the Kyoto Protocol's call for intensified national efforts to improve energy efficiency in various sectors. 2. Main sector issues and Government strategy: Issues The main sector issues are: (i) the potential imbalance between Brazil's financial resources and large investment needed to expand power supply, reduce shortage risks, improve service quality, and service underpopulated rural areas; (ii) future rapid growth of thermal-based generation capacity, with associated environmental issues; and (iii) the inefficient supply and use of energy. Background Hydroelectric power plants provide close to 90% of Brazil's 60,000 MW of installed capacity in the electricity sector. Electricity demand has been growing at about 6-7% per year, while inefficient supply and usage of energy cause much waste. Recent blackouts and brownouts have demonstrated strains in the supply system. In order to meet demand, about 27,000 MW of installed capacity should be added to the system over the next 8-10 years. This would entail investments of close to US$38 billion, including US$20 billion alone for additional generation. Considering that most of the attractive hydropower resources have already been developed, a major effort is necessary to limit the otherwise huge increase in primary fossil energy supply required to sustain the growth of Brazil's economy, as well as to mitigate the serious environmental consequences of expanded energy consumption. Studies have forecast CO2 emissions from electricity generation growing from about 27 million tons in 1999 to an accumulated value of 2,174 million tons by 2018, if unchecked. The sector environment is marked by: * inflation has been brought down to single digit figures; * greater reliance upon markets in shaping the structure of the sector; * competitive sector participation is becoming the norm, with private firms assuming greater operational tasks, while the Government plays more of a regulatory role; * imported natural gas will soon start reaching major metropolitan areas and will play a more important role in the future, thus allowing greater fuel choices for electricity generation and end-users; 4 * the availability of natural gas will permit the creation of a new industry competing for customers and improving quality of service; * increasingly cost-based energy prices are fueling greater customer interest in the more efficient use of energy; * local capital markets are now a possibility to tap for financing sector investments; and * the Government is moving from its past function of being the main investment player for energy conservation programs in favor of a more market-based strategy. Barriers Historically, EE measures in Brazil were long deterred by the instability of the economy and protracted subsidized energy (especially electricity) prices. But the more recent stabilization of the economy - except for the very recent disruption - has provided a foundation for such cost reduction investments, as EE projects would be. Further, energy prices have moved toward cost-based pricing, to which the GOB is committed in order to implement and sustain privatization. It also facilitates the mobilization of capital for possible sector investments. Concession contracts with private utilities include tariff adjustment provisions. On average, electricity tariffs more than doubled since the implementation of the Brazilian economic stabilization plan (US$34 to US$72 per MWh, excluding taxes). Tariffs for most industrial, commercial and residential customers are at, or above, international levels, save for some large industrial customers and low-income customers who receive discounted/baseline tariffs. These fictors have improved the enabling environment for EE activity. However, other barriers still hamper its expansion: a Lack ofpublic awareness ofpotential benefits. Brazilian customers are unaware of energy savings measures, how much they can save, and how profitable an investment in EE could be. Purchasers of home equipment, for example, do not know the annual energy cost of such equipment relative to its purchase cost or the most efficient models available. While some EE testing, certification and labeling of electric equipment exist, in many cases it is encumbered by having to be included in a comprehensive customer-focused dealer-accepted program. Also, tariff structures and/or bill collection by distribution companies have to be improved in order to provide all customers with the proper price signals for making judicious energy investments. b. Lack of credible information on effective EE measures. EE development suffers from both the lack of credible case studies documenting the financial benefits of EE investments and the means to disseminate such information to decision-makers. While many EE investments are being made, the types of measures and systems needed to verify and disseminate their results have to be substantially enhanced. Regarding demand-side management (DSM) measures, utilities have refrained from EE activity for fear of revenue losses resulting from reduced energy consumption. Also, electric equipment customers have lacked data on enhanced testing, certification and labeling programs. c. Lack of supporting mechanisms. EE activities are underdeveloped in Brazil. This is partly because of obstacles in the development of ESCOs, engineering or consultant firms that act as market intermediaries introducing efficiency improvements. Customers have been skeptical about them and uncertain as to how to gauge individual ESCOs' merits. In addition, private participants in EE activities have not had access to the kind of financing available for energy supply projects. Banking requirements for small EE projects have been considered exorbitant (e.g., high collateral) and long-term money unavailable. Financial agencies moreover are unfamiliar with this type of activity, and third party financing (other than what is being done through the Government's PROCEL program) is almost non-existent. New developments. New market-based approach. In recent years, the Government has adopted several measures, among other sector reforms, to increase efficiency in the production and use of energy. There had long been an energy efficiency activity (PROCEL), which the authorities transformed into the national program for implementing EE policies in 1991. It then expanded PROCEL's scope and placed it under the national sector holding company (ELETROBRAS). Its objective is to attain growing electricity savings of 130 TWh by 2015, equivalent to a reduction of 13 % in that year's demand, and the postponement of some 25,000 MW of new generating capacity. The PROCEL program has carried out and overseen hundreds of EE projects that are credited with producing significant savings in electrical energy use and is recognized as one of the leading energy conservation programs throughout LDCs. PROCEL's aims include 5 incorporating a growing number of utilities, ESCOs and consumers in EE activities. It seeks to do this by demonstrating EE projects through market-based delivery mechanisms, showing how to increase the efficiency of electricity supply, distribution and use, evaluating these activities, demonstrating their results and stimulating their replication. Legislation promulgated in 1994 permits open access to all electricity concessionaires (generators and distributors) and auto-producers and assigns priority to projects aimed to increase efficiency of energy use. A February 1995 law established a new regime for awarding concession contracts for public services and public works, and introduced competition in the wholesale market by allowing large consumers to contract supply with any generating company. More recent legislation allocated part of the resources collected by a national fund the Global Reversion Reserve (RGR) to EE investments of utilities, states, and municipalities. These measures have created a better environment for private sector investments and implementation of measures to increase EE and reduce energy waste. Now, the Govermnent will take additional actions to improve the efficiency of the utilization of energy (among other measures) to meet energy needs, while also seeking beneficial environmental effects. It considers this timely in the wake of recent and anticipated sector changes, e.g., widespread privatization. Given the latter, state-owned utilities, in order to better compete with privately owned ones, are now striving to retain their customers and also improve their finances through better capacity utilization. In addition, the Government is now causing all new concession contracts to require that at least one percent of total revenues be used for efficiency improvements, subject to the review of the regulatory agency, the National Agency of Energy and Electricity - ANEEL. However, the Government fears that Brazil's EE efforts might diminish or lose focus as the deregulation of the energy sector advances. To address this problem, it is introducing a new regulatory framework, a new institutional structure, and increased private participation to promote competition and private investments in the sector. It also is moving to implement market-based EE programs in tandem with developing new sustainable energy sources. By so doing, it hopes to broaden consumer choices, improve service quality, postpone supply-side investments, and reduce GHG emissions. It requested IBRD/GEF assistance for these purposes, for which the proposed APL and GEF Grant are recommended. 3. Sector Issues to be addressed by the project and strategic choices: To address the issues discussed in para. 2, the project would strive to: (i) raise public awareness on the advantages of EE measures; (ii) provide credible, verifiable practical information on EE measures to suppliers, consumers, and energy service providers; (iii) implement core support activities such as training of ESCOs and performance contracts concerning their activities; (iv) create a financial facility that would catalyze EE measures by third parties for the future; and (vi) demonstrate selected energy efficiency products, services and delivery arrangements. The principal strategic choice made was, rather than to pursue a "command/control" approach, to focus instead on market-based EE measures and on removing barriers for the efficient use of energy. The key ingredients of this were: (i) addressing the entire electric market--i.e., the whole chain of production, delivery, commercialization, and use--not only energy supply; (ii) choosing EE measures to be demonstrated based on their relevancy and future sustainability prospects in the market; (iii) building on existing EE activities and institutions and gradually expanding them; (iv) establishing a strategy with a structure to enable sustainable replication of EE measures after the end of the program; (v) integrating EE policies and programs into sector restructuring and privatization activity; and (vi) building a flexible and learning organizational structure for implementing these measures in order to facilitate continuous refocusing of EE activities as conditions change and experience indicates. The strategy also calls -instead of an "open ended" approach - for intense supervision and monitoring and evaluating progress by use of objective criteria in order to pennit phasing out the program if the experience is unsuccessful or expand it in Phase II if it is successful. 6 C: Project Description Summary (Phase 1) and Performance Triggers for Subsequent Loans Phase 1 (2000-2004) aims at demonstrating the benefits to be obtained from an initial set of energy efficient products, services and delivery arrangements, in which various Brazilian institutions invest. It also encompasses supporting activities focusing mainly on reducing market barriers to broader application of EE measures, and the preparation of a framework (primarily for on-going promotion and financing) of long term EE activities with an expanded role for ESCOs. Phase II is expected to expand the number and participants such activities on a firmer, more sustainable basis. General preconditions for moving to Phase II are: * Successful attainment of the agreed planned results for the initial phase * Successful installation of enabling conditions for the next phase * Agreed detailed plan of action for the second phase * Preparation of second phase sub-projects completed * Demonstrated implementation capacity to carry out the second phase * Government's approval of major decisions in the first phase and the implementation plan for the next phase. Key Performance Indicators to be met before commitment of APL2 and contingent GEF funding (ref. Annex I) are: * EE measures demonstrated are successful in improving electric service quality, providing service options to customers, and postponing investments in expansion of electric supply capacity for about US$1.2 billion in four years. * Increased public awareness and use of EE products, services, and/or actions by public authorities, utilities, and consumers (30% of PROCEL's brand recognition). - Increased number and type of EE products and services are available (sales of Class A equipment are 10% of total). • Financial Facility is established, operated by a qualified financial entity, and demonstrated ability to assess, appraise, and find necessary funding for qualified EE market-based subprojects (15 projects). • Qualified financial entity that will on-lend the Bank funds in commercial terms, is selected for Phase II and Letter of Intention, operational guidelines, and manual for selection of EE subprojects and participants are received. To further stimulate private participation, lFC's involvement in Phase II will be pursued. 1. Project components (see Annex 2for a detailed description andAnnex 3for a detailed cost breakdown): The project consists of three main interrelated components: (i) Demonstration Projects (DP) involving new EE technologies, proper price signals, and delivery service options; (ii) Core Support Activities (CSA) to facilitate future replication of EE measures; and (iii) a Capacity-Building Module (CBM) to enhance policy, regulatory, and implementation functions. It will be implemented by ELETROBRAS with the participation of power utilities, energy agencies, and ESCOs. 7 The recommended Bank loan and GEF Grant would jointly finance the project in the pattern shown below. Component lCategory Costs (1) Bank/GEF Financing US$M % of US$M % of lTotal W Component A. Demonstration !Physical, institution- 90.2 1 72 ! 43.4 IBRDI 52 Projects______ __ u~~__!bilding__ 3.3 GEF |___ 1 B. Core Support Policy, institution- j 20.2 l 16 7.2 GEF 36 _____ ____ ibuildin g _ C. Capacity-building hInstitution-building, ! 15.1 3 12 1 4.5 GEF i 30 lproiect management I l _ Total 125.5 100 I 43.4 IBRD ! 47 ___________________________________ il _____ .15.0 GEF (2) (1) Including contingencies and loan front-end fee. (2) GEF suppaot will focus on removal of baniers during Phase I. Under the phased approach of the program, an additional US$5.0 million will be available to support activities of Phase II, conditional on satisfactory achievement of the performance milestones for Phase IL A. Demonstration Projects. About 50 DP, which have been evaluated by the Bank, will be implemented by ELETROBRAS and power utilities, in eight states and Brasilia. The DP will demonstrate the use of emerging technologies, proper price signals and service options, and new implementation arrangements to improve the efficiency of electric energy supply and use. One group of these will target selected market segments to demonstrate innovative demand charge and time-of-day tariffs, load demand limiters, and improvements in bill collection through metering, improved service conditions, and other commercial actions. These DP are expected to improve commercial relationships in the reformed electricity market; stimulate the interest of utilities in Integrated Planning (IP) methodologies that include Demand-Side Management (DSM) options; and encourage customer-based EE investments. A second group of these projects would increase the use of more efficient appliances and energy equipment, including: compact fluorescent lamps, solar heaters, refrigerators, irrigation pumps, air conditioners, electric control systems, reflecting roofs, high efficient motors, motor speed drivers, motor optimization programs, street lights, and water pumps. Projects in this group will be implemented in commercial buildings, industries, fanrs, residential customers, and public facilities, including offices, hospitals, and schools. In addition, the DP will stimulate development of ESCOs. GEF grant of US$3.3 million would support: (a) transitory financial incentives to energy users to facilitate demonstration of innovative technologies and delivery arrangements in three DP (US$2.1 million), and (b) monitoring and evaluation studies that will contribute to the preparation of "best practice" case studies (US$1.2 million). B. Core Support Activities. This component is designed to facilitate replication of the DP and other sound EE projects. It includes: (i) information, dissemination, and marketing programs, including a Best Practice Program, i.e., case studies and technical and operational guidelines for cost-effective EE measures with wide applicability, derived from DP; a public awareness campaign; and support to energy agencies in the areas of promotion and marketing. The best practice program will also draw on the results of ESMAP efforts to develop pilot projects concerning improved energy use in Bahia State industries. (ii) implementation and initialization of a financial facility to support EE measures by ESCOs and consumers, including building a portfolio of EE projects and preparing them for commercial financing by third parties. The envisioned facility would develop and disseminate commercial and financial instruments for these purposes, based on a detailed study to be conducted under this component, including partial credit guarantees and other adequate financial instruments that would reduce the mitigate the perceived risk by the banking community. The facility 8 would be capitalized by PROCEL and GEF contingent to the approval of the second APL, and would be operated by a qualified financial institution to be selected during Phase I. (iii) demonstration of the independent verification and performance contract concepts through ESCOs. Independent verification entails a third party evaluating actual savings achieved by EE projects. The savings are shared by the ESCO and the energy user under the provisions of their performance contract; (iv) an assessment of actual market acceptance of energy efficiency equipment and measures; (v) implementation of programs for testing, certification, and labeling of efficient equipment and appliances, including enhancement of testing facilities; and (vi) preparation of policies, incentives and regulations for promoting EE, e.g., investment in DSM measures, innovative electric tariff structures, and EE-minded building codes. GEF grant resources of US$7.2 million would finance the incremental costs of the CSA in the areas detailed in Annex 2. Under this component as well, annual progress evaluations will take place to help redirect project activities as necessary. There will also be an assessment of the position of the PROCEL's place in the future institutional structure of the energy sector. C. Capacity-BuildingModule. This component is designed to reinforce the institutional capacity of public energy agencies, regulators and other relevant stakeholders in the EE market to facilitate the implementation of EE policies and projects. It will finance: (a) institutional enhancement and training programs for the staff of PROCEL, regulators, energy agencies, utilities, industrial and commercial associations, end users, ESCOs, and financial entities; (b) support to PROCEL, regulators, energy agencies, and utilities for the design, management, supervision and monitoring of EE projects; and (c) the evaluation of the environmental, economic, financial and social benefits of the EE project. GEF grant resources of US$4.5 million would finance the incremental costs of these activities, as detailed in Annex 2. 2. Key policy and institutional reforms supported by the project: Complementing current institutional reforms and the privatization of the energy sector, the project will help develop a market-based system for promoting EE products and services. Its policy effects would include improving EE in the energy market, reducing the emission of GHG through increased efficiency in energy consumption, and stimulating greater reliance on non-utility actors to provide EE products and services. Supporting GOB policy actions include: expanded government encouragement of implementation of EE projects by utilities, states and municipalities; requirement for privatized utilities to implement EE measures, including measures to reduce end users' consumption; continuation of PROCEL; and a legislative proposal to give ANEEL the authority to set minimum energy consumption standards for certain equipment and appliances. 3. Benefits and target population: The project's expected benefits are significant additional energy savings-estimated at about 4,600 GWh/year in year seven-and associated reductions in C02 emissions, estimated at about 21 million tons over a ten year period (ref. Annex 4). Electricity savings are projected to be about one percent of expected consumption per year. The project will also produce other environmental benefits associated with energy conservation, such as contributing to a reduction in the diseases caused by air pollution and acid rain's negative impacts on agriculture and ecosystems. This is particularly important as annual CO2 emissions from thermal power generation are expected to grow ten- fold, if unchecked, by year 2014. In addition, the project will have substantial public finance benefits by enabling the Government to help defer large investments in supply facilities. Furthermore, the project will help reduce consumer expenses. The benefits of Phase I activities would accrue to all residents of the areas of DP and the 9 special programs; all parts of the country would benefit from Phase II operations. It is estimated that about 30 million people will benefit, directly or indirectly, from the project. 4. Institutional and implementation arrangementsfor Phase I Policy and Guidance. The Ministry of Mines and Energy (MME) will provide the policy framework and the overall guidance to the program. ANEEL will regulate the concessionaires and other participants, in coordination with regulatory state agencies, to contribute to the energy efficiency objectives through regulation of DSM investments, setting of proper electric tariff structures, and other measures. Project Implementation. ELETROBRAS will be responsible for project implementation using the structure in place for executing PROCEL. A project management unit (PMU) under its direction will either coordinate or carry out the activities in all three components. DP would be implemented by electricity utilities and PROCEL (Annex 2). Many of the projects to be supported would make use of ESCOs, which would assume some or all of the risks related to the efficiency improvements involved. PROCEL, drawing on its experience, will support the expansion and consolidation of ESCOs through technical guidance, information exchange, and financial support to the recently created ESCO industry association. Through the GEF grant, PROCEL will expand training, marketing, and communication, including a Best Practices information program. Procurement of goods and services will be carried out in accordance with Bank's guidelines. For procurement and financial management, PROCEL will draw upon the technical services of ELETROBRAS and the United Nations Development Programme (UNDP). ELETROBRAS will continue to use its Physical-Financial Information System introduced in 1996, which provides adequate monitoring of activities, and meet the requirements for the Loan Administration Change Initiative (LACI). ELETROBRAS will on-lend the Bank loan to the other beneficiaries with the same financial tenns and conditions plus an annual administration fee equivalent to about 1% of the amounts disbursed and outstanding. Each beneficiary will bear the foreign exchange risk for its sub-loans. ELETROBRAS will retain US$16.7 million of the US$20 million GEF grant to fund the CSA and CBM, and will pass on as a grant the remaining US$3.3 million to other participants to support the implementation of the DP. ELETROBRAS will report progress on the implementation of the physical and institutional components of the project through quarterly Project Management Reports. Accounting reporting will follow standard procedures and accounting practices. ELETROBRAS will provide, within six months of the end of each fiscal year an audit report, prepared by external auditors satisfictory to the Bank, on special accounts, project accounts, and SOEs. Annual progress evaluations will help to redirect project activities as necessary. A mid-term review will be carried out to evaluate progress of Phase I, prospects of implementation of Phase II and the schedule for its preparation. A Steering Committee integrated by high level ELETROBRAS managers will provide strategic guidance to the project to increase penetration of EE measures, based on the market assessment and project evaluations activities carried out under the project. An Advisory Group composed of key participants, regulators, EE experts, and NGOs will be invited to periodic workshops to discuss project progress and provide feedback on key activities. (Project Organizational Structure is included in Annex 10). An International Seminar will be organized by PROCEL in the year 2002 to interchange experiences on EE matters. D: Project Rationale 1. Project alternatives considered and reasons for rejection: One alternative rejected was to continue meeting energy needs solely through the expansion of the energy supply system. Investment needs in the power sector for this alternative are estimated at about $6 billion to $7 billion per year, which would be difficult to mobilize. It was considered preferable to seek to postpone a part of these investments through EE measures. A simple credit line to support EE investments was likewise discarded. Similar initiatives in Brazil and elsewhere have failed because they did not address the removal of market barriers. 10 A single long-term investment operation was rejected as well. The EE program will necessitate the participation and support of many organizations to obtain comprehensive benefits. Achieving this will require progressive, flexible mobilization arrangements, which the APL project design would afford more readily than a more traditional investment loan. 2. Major related projects financed by the Bank andlor other development agencies (completed, ongoing and planned): Sector issue Project I Latest PSR Ratings ! (Bank-financed - ____________--_____ ________________--__ --____ -____________ --I projects only) _ _ _ _ _ _ _ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ L~ P i, D O Bank-financed l_l Energy Efficiency Jamaica - Demand Side Management Project (*) S S Mexico - High Efficiency Light Project (*) I HS I HS China - Energy Conservation Project (*) S Tlhailand - Electricity Efficiency Project ! S j S Sustainable Power Brazil - Biomass Power Pilot Project (in Generation. Private preparation)* participation. Brazil - Renewable Energy - Rural Electrification Project (in preparation) (*) Brazil - Power Market Development Project (in preparation) Electrification of Rural Hungary - Second Industrial Energy and S S Areas with Private Conservation (PCR, 1994) Participation. , Industrial Energy I I Conservation I__ Other development Agencies _ i UNDP/GEF 1Brazil - Biomass Power Pilot Project | CIDA - ALURE IBrazil - Cooperative agreements for technology l itransfer __ j (*) Supported by GEF. IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Lessons derived from other recent energy projects in Brazil are: (i) the linkage of the effectiveness of loans and loan disbursements to the adoption of macroeconomic or sectoral measures, e.g., financial rehabilitation was not effective in past operations in Brazil and undermined the credibility of the financial covenants. The current approach is to work in parallel, but separately, on macroeconomic/sectoral and project issues. As an example to this end, the Bank is financing technical assistance activities for power sector restructuring; (ii) electric tariff levels had been the main issue in past power sector projects. The experience under the latter contributed to the developments that nullified this issue. Current tariffs, together with sectoT privatization and restructuring plus the recent creation of a new independent regulatory body for the power sub-sector, provide a suitable environment for the market change programs and DP; and (iii) there is a trade-off between good implementation by the stronger companies in the well-developed regions and the greater needs on the part of the poorer companies in other regions. The proposed project includes the participation of leading utilities, energy agencies, states, and municipalities in various geographical areas, including some of the poorest rural areas of the country. 11 Lessons learned from ongoing DSM projects in Thailand, Mexico, and Jamaica are that pricing and regulatory reforms are necessary, but not sufficient, to maximrize and capture EE potential; and that key market barriers must be addressed in a sustainable way. Lessons learned from the application of EE measures in Brazil and more developed countries have been incorporated in the project design, with the help of experienced specialists collaborating with PROCEL (including experts provided by ESMAP and the Bank). The expansion of EE activities in Brazil, as shown elsewhere, entails a learning process requiring the participation of different actors that receive the correct signals--market and regulatory--over an appropriate period of time to prepare them for mainstreaming energy efficiency measures. This and the need to build collaboration and consensus, has been addressed by a phased approach. In it, the first phase focuses on demonstrating early successes, while simultaneously preparing the groundwork and the machinery for later substantial investments and more permanent EE-measure management in the second phase. This approach also permits an exit strategy, if conditions are not satisfactory. 4. Indications of Government/Borrower commitment and ownership: The GOB has manifested support for EE activities as part of its energy sector strategy, and its past actions charging ELETROBRAS and PROCEL with program operations, plus their steady funding. This is strengthen by its program letter supporting the proposed project (ref. Annex 3). These commitments remain in place, as evidenced by: (a) ANEEL's and new concessionaires' requirements to invest in EE works; (b), the likelihood that ELETROBRAS will remain in charge of PROCEL; (c) the Government's continued allocation of RGR funds for such activities; and (d) the Government's intentions to have a financial facility created for long term support of energy efficiency measures. 5. Value added of Bank and GEF support in this project: The experience of the Bank and GEF in such programs-and the "best practices" techniques-would be helpful in: (a) facilitating the demonstration of a significant number of delivery mechanisms and efficient technologies; (b) building support for replication of EE measures; and (c) developing capacity on implementation and regulation of EE measures on the energy supply and demand sides. The IBRD's broad perspectives would encourage a comprehensive view of the project's concepts and design for their implementation. Its expertise in monitoring and evaluation would help the GOB see that all phases ofthe EE program are properly linked and integrated. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): [X] Cost-Benefit Analysis: NPV=US$49.8 million; ERR= 31.6% [ ] Cost Effectiveness Analysis: [ ] Other The direct economic benefits of the EE program will depend on the initiatives and zeal of the participating agencies in utilizing the information and additional resources they would have access to for the anticipated investments in efficiency measures, products and services. Significant energy savings are projected to accrue from: (a) demonstration projects; (b) energy conservation investments by energy users; (c) industrial and commercial firms' medium-cost EE undertakings stimulated by various ESCO promotional tactics; and (d) the operation of more efficient appliances through the strengthening of testing, certification and labeling activity. The resulting savings have been estimated to total 20.8 TWh in ten years, together with 19.2 million tons of CO2 over the same period. . The proposed DP have economic rates of return (ERR) in the range of 18-50%, with an overall ERR of 31.6%. Gross benefits are US$121.4 million; total costs, US$71.6 million; and net benefits, US$49.8 million. Analyses were performed to assess the economic sensitivity of the project to various changes in parameters: (a) Benefit failure, defined as any situation that reduces the benefits of the DP, such as lower than expected energy 12 savings or lower energy prices. The ERR would fall below a discount rate of 12% only if overall DP benefits fall by more than 40%; (b) Investment cost overrun. Investment costs would have to be 22% higher for the ERR to fall below 12%; (c) Higher operating costs (including labor and material costs, and maintenance) Operation and maintenance costs would have to increase by over 700% for the ERR to fall below the 12% discount rate. 2. Financial Assessment (see Annex 5): NPV=US$12.2 million; FRR= 13.2% All DP have a positive net present value (NPV) and financial rate of return in the range of 10-35%. In the case of utility-based DP, these results are based on investment costs, the benefits derived from electricity sales, and the postponement of supply facility investments. Consumer- based project benefits derive from reduced energy expenses. Overall gross benefits are US$93.4 million; total costs, US$81.2 million; and net benefits S$12.2 million. The financial rate of return (FRR) is 13.2%. Considering replications, FRR would increase to 17.0%. Fiscal impact is positive as a result oftaxes and duties paid for by the participants in the project. 3. Technical Assessment: Installations in the demonstration and scale-up phases will use standard and well-proven technologies and methods. Some of these are already in use in Brazil, with all goods and services available internationally. 4. Institutional Assessment: PROCEL is implemented by a 110-person staff that includes a group of highly qualified experts that have been exposed to EE international practices with the support of ESMAP and the Bank. It has taken many innovative steps to overcome market barriers, e.g., disseminating useful information to manufacturers and consumers, stimulating the former to compete in developing energy efficient products. A recent Bank-supervised sector study recommended that PROCEL continue to focus on its role as technical adviser, catalyst and managing entity for energy conservation activity, and should also monitor targets for such activity set by individual electric companies in collaboration with ANEEL. ELETROBRAS, incorporated in June 1962, is an internationally well recognized company jointly owned by the GOB (58% of its common share capital) and BNDESPAR (15%) that is responsible for implementing Brazilian electric power policies. To support the Government in helping define the future structure of ELETROBRAS and the power sector, the Bank is financing an ongoing technical assistance program under a separate project. ELETROBRAS' future role in the sector is still to be defined but, in the medium term, is likely to keep the management of PROCEL, as well as its responsibilities in administering the funds of the RGR and their partial allocation to the financing of EE activities. ELETROBRAS performed well in past Bank projects, whose problems were mainly caused by inadequate government tariff regulations. ELETROBRAS already has in place a physical and financial control system to track the implementation of its funded projects. ELETROBRAS has agreed to upgrade this system and to implement: (a) a project analysis data base for measuring actual costs and benefits (energy savings, peak load reductions and other); and (b) a market assessment activity system for monitoring market responses (such as demand characteristics, equipment availability and energy use patterns). ANEEL was created in 1996 and started functioning in the last quarter of 1997. ANEEL's responsibilities are to regulate and supervise production, transmission, distribution, and commercialization of electric energy in Brazil, including EE programs implemented by power sector concessionaires and permissionaires. To fulfill this last obligation, ANEEL relies on the technical advice of PROCEL's implementing unit. Even being a relatively new institution, ANEEL is playing a key and positive role in the restructuring and operation of the electric sector. 5. Social Assessment: The project is expected to have a positive net social impact. Street lighting, energy efficient measures in low- income housing, and, to some extent, lighting retrofits in schools and hospitals, will directly benefit low-income families. The proposed project poses no resettlement, land acquisition or social development issues. 13 6. Envwronmental assessment: Environmental Category [ ] A [] B [XI C No adverse environmental effects are expected to result from the project. There would only be modest interventions in the case of the PD, where electric equipment will be enhanced, modified, or installed. To the contrary, savings in power generation would help reduce "global warming" by reducing CO2 production. This will happen because, at the margin, the economic dispatching of the generation system will reduce the production of electricity by thermal units using hydrocarbons. Moreover, one subproject involves replacing inefficient refrigerators with efficient ones, with the old ones to be recycled and the refrigerant recaptured in the process. Others include the replacement of fluorescent lamps, ballasts, and fixtures, whose waste products private companies will be encouraged to recycle in an environmentally acceptable way. The technology to accomplish this is well developed and in use in the US and Europe. The CSA and CBM components should have no significant effect on the environment. 7. Participatory approach [key stakeholders, how involved, and what they have influenced; if participatory approach not used, describe why not applicable]: The collaborative nature of the project makes a participatory approach among the executing agencies inherent in the planning and execution of its activities. The information dissemination provisions will facilitate this participation and extend it to the creation of the long term framework, enhancing ownership and sustainability. Extensive consultations have already been carried out at EE national seminars and workshops. Local groups consulted include the National Institute of Energy Efficiency(INEE), academia (Universities of Sao Paulo, Rio de Janeiro and Campinas), trade associations (FIB, FIBA, FIESP), energy agencies (States of Bahia and Sao Paulo), ESCOs, and banks (BNDES, FINEP, and private banks), as well as NGOs. a. Primary beneficiaries and other affected groups: In the short term, the primary beneficiaries and affected groups are the people living in the areas of demonstration projects and the special programs, including poor urban and rural dwellers. In the long term, all the country will benefit from the replication of EE measures. b. Other key stakeholders: With USAID support, several courses have been presented covering DSM program design, ESCO activities, and reduction of electricity transmission and distribution losses. USAID is proposing to offer advanced courses for ESCOs focused on financial, business and marketing issues. A peer exchange program between U.S. and Brazilian officials involving the use of ESCOs services will be implemented though USAID. An international program sponsored by the European Community, ALURE, is supporting efficiency actions in energy markets in Brazil, including energy policy, institutional reforms, finance, legal and regulatory frameworks, and training of energy staff at federal, state, and municipal levels. A cooperative agreement between PROCEL and the Canadian International Development Agency (CIDA), includes support in the areas of evaluation of EE measures, electric motors, public buildings, water and sewage facilities, and marketing. F: Sustainability and Risks 1. Sustainability: The technical environment is inherently sustainable, being composed of standardized, readily available goods and services. Moreover, the sustainability of the DP to be financed is expected to be high, given the fact that many of them involve upgrading and modernizing existing facilities. The project is designed with heavy emphasis on developing DSM solutions and performance-based opportunities to attract utilities, users, and domestic and foreign ESCOs and capital to support the desired outcome. Methods of support for achieving sustainability include: (i) emphasis on monitoring and evaluating subproject activity with ex-ante and ex-post evaluations using internationally accepted protocols and techniques; and (ii) highly successful approaches demonstrated at the subproject level will become candidates for case studies and incorporation into the Best Practice information packaging technique which forms the cornerstone for information dissemination and 14 marketing of the results of the program, verification and feedback of the dissemination efforts. In addition, the Market Assessment activity included in the CSA component will keep track of market opportunities and market performance on a global way, thus contributing to the adaptation of the program and projects to ensure sustainability. Conceivably, not many ESCOs might develop and some could fail and go out of business, thereby reducing the prospects for sustaining EE investments. The provisions for developing performance contracts (providing ESCOs with some share of the benefits of derived energy savings), together with energy savings verifications, spreading "best practice" cases, and creating a financial facility should help reduce this risk. 2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1): Risk Risk Risk Minimization Measure _ Rating Annex 1, cell l Discontinuity of PROCEL j N GEF/Bank technical and financial support to future "from Outputs to j j reinforcements of EE activities. Supervision/Mid-term Objective" -_ D - Review S En , Discontinued ! N j Continuity of PROCEL, StateEnergy Agencies, and | dissemination of EE ESCOs _ projects and programs !_i i No energy sector reform L M Bank technical and financial support to the MME. Reduced social and N Continued activity of PROCEL, energy agencies and political support to EE ESCOs. Educational programs. measures at national and state level and low I customers' acceptance _ I Unsuccessful I S Marketing of commercial EE instruments (verification development of ESCOs protocols and performance contracts), dissemination of best practice experiences, and creation of a financial !_______ ,____________________ I__ _ _- facility. No critical mass of EE M I Activity of ESCOs in the market _ activities ___ _ Ineffectiveness of M ! Remedial measures in Phase LT financia facility Annex 1, cell Scarce counterpart N Satisfactory financial arrangements among the participants "from funding as part of project preparation and implementation. RGR Components to resources for EE Outputs' i_ _ !_-___ _ Inappropriate institutional ! H Creation of a project management unit Implementation of anrangements and capacity building components, including core support to managerial and technical PROCEL, agencies, and regulators capacity ', Lack of commitment of N I Subsidiary Loan Agreements signed according to agreed other participants and | schedule. partners Stress in the electric system is pressing for EE measures. Current activity of participants, and variety of markets, , technologies and delivery mechanisms to be piloted and i I ! demonstrated. ' Bad design of project M I Participation of experienced national and international components consultants under cooperative agreements with energy Less than expected ~ agencies and bilateral agencies t Legssthan expected ! M Detailed review of financial estimations by international O financial rate of return consultants _____ Overall Risk ! !MS Rating S ,__ Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 15 3. Possible Controversial Aspects: No controversial aspects are foreseen. G: Main Loan and Grant Conditions Agreements reached during negotiations: (a) Program letter; (b) final project implementation timetable, procurement schedule; (c) performance indicators for monitoring project progress; (d) performance indicators for implementation of Phase II (triggers); (e) detailed TOR for reporting system (LACI), including mid-term review; (f) organization, staffing and functions of the Project Management Unit (PMU); (g) choice of loan currency and interest rate; (h) terms and conditions of the subsidiary agreements to be signed between ELETROBRAS and each participant and conditions for participation in the project: X procurement arrangements * arrangements for transferring and disbursing Bank and GEF funds * setting up of a project implementation unit (PIU) with satisfactory structure and functions * securing counterpart funds - establishing procedures for PMU support for DP detailed preparation, monitoring and evaluation * compliance with environmental safeguards. 1. Effectiveness Conditions: (a) the PMU is set up and operating. (b) at least two subsidiary agreements have been signed with DP participants and the respective PIUs are set up and operating. 2. Other [classify according to covenant types used in the Legal Agreements.] (a) ELETROBRAS: (a) take all measures within its power to generate resources sufficient to cover its operational expenses, including depreciation, as well as debt service and other financial obligations; (b) provide the Bank with PROCEL's two-year business plan, by November 30, 1999 and annually thereafter, and implement the plan taking into account the Bank's comments; (c) provide the Bank with quarterly reports and a mid-term review report of the project, based on TOR satisfactory for the Bank, and take necessary measures based on the report's recommendations and the Bank's views; (d) maintain the PMU with functions and resources acceptable to the Bank and competent staff, including external consultants, in adequate numbers to coordinate project implementation. (b) Conditionsfor disbursement of the Bank Loan and the GEF grantfor each participant in the project: (a) a subsidiary agreement has been signed between ELETROBRAS and the participant; and (b) the participant has set up a PIU. 16 E Readiness for Implementation X] The engnerg desig documes for th first year's activities are complete and ready for the start of project implementatio.L [I Not applicablce '. m The proc=ment documents for te fist year's activities are complete and ready for the start of project implementadon. X The Project Implementation Plan has bee appised and found to be realisdc and of satsfactory quality. [XI Fiancial management system has been established and is functioning. r I The following items are lacg and are discussed under loan conditions (Section 0): L. Comp1ionce wvith Bank Policies EXI This project complies with all applicable Bank policies. T ] The following exceptions o Bank policies are recommended for approval: the project complies with all othe. applicable Bank polic;es. Task Team Lead rrask Manager. L is M. Vaca-Soto Sector Man 44tor County aager/Director: GobindNankani 17 Annex 1 PROJECT DESIGN SUMMARY Narrative Summary Key Performance Indicators Monitoring and Critical Assumptions and Supervision Risks GOALS Goal to Mission Sector-related CAS Goal Increase the efficiency of the energy * Market sustainability indicators (regulatory framework, * PROCEL * Macroeconomic stability. market to help balance Brazil's private participation, commercial financing) reports * Social and political support environmental agenda with its economic n Reduction of C02 emissions (21 million tons in a ten year * Independent to EE measures and development goals period) market reduction of GHG * Energy savings (1% per year) performance emissions. * Postponement of investments in electricity supply (US$ evaluations 300 million per year) GEF Operational Program: End-of-Program (APL Phase II) Indicators Purpose to Goal Removal of Barriers to Energy * EE measures are successful in reducing CO2 emissions, * PROCEL 0 Electric power and other Efficiency and Energy Conservation saving energy, and postponing investments in expansion reports energy products and (Program No. 5) of electric supply capacity * Independent services priced at economic * Electric utilities are investing about US$70 million per market costs APL Program Purpose: year in market-based DSM measures performance * Adequate regulatory To eliminate the remaining market * ESCOs are signing contracts with utilities and public, evaluations environment for EE barriers (i.e., lack of financing; lack of commercial, and industrial consumers: about 200 measures credible demonstrations; lack of contracts (accumulated), half of them under performance commercial information) to the contracts accelerated commercial introduction of a a Public buildings are retrofitted: 20% of total, broad range of energy-efficient (EE) accumulated equipment and technologies in Brazil. * Best Practice cases are completed: 15 cases per year in the last year APL Phase I: Demonstrate a first set of * EE products are tested, labeled and certified: 12 types of promising EE measures and preparing products in the last year the enabling environment for increased private participation in Phase II. APL Phase II: Demonstration of a second set of EE measures in other geographic areas and market segments and support increased participation of the private sector 18 Annex 1 Project Development Objective (Phase Outcome/Impact Indicators Objective to Purpose I of the Program) To be met before commitment of APL2: To demonstrate market-based energy- * EE measures demonstrated are successful in improving * PROCEL * Electric power and other efficient (EE) products, services, and electric service quality, providing service options to reports energy products and delivery arrangements. customers, and postponing investments in expansion of * Annual services priced at economic electric supply capacity of about US$1.2 billion in four reviews costs years * Independent * Adequate regulatory * Increased public awareness and use of EE products, market environment for EE services, and/or actions by public authorities, utilities, and performance measures, including tariff consumers 30% of PROCEL's brand recognition evaluation structures * Increased number and type of EE products and services * Increased interest and are available: 10% of equipment sales are class A participation of utilities in * Financial Facility is established, operated by a qualified DSM programs financial entity, and demonstrated ability to assess, * Increased participation of appraise, and find necessary funding for qualified EE manufacturers in testing, market-based subprojects, based on agreed operational labeling, and certification practices and eligibility criteria: 15 projects programs * Qualified financial entity is selected for Phase II and Letter of Intention, operational guidelines, and manual for selection of EE subprojects and participants are received * 80% of funds for Phase I are committed 19 Annex 1 Project and Global Outputs (Phase I) Output indicators Outputs to Objectives 1. A first set of already selected EE 1. 20% (100%) of selected EE activities started by March 2000 * Borrower's a Continuity of PROCEL activities, including EE products, services, (January 2001) and completed and evaluated by December quarterly * Continuity of energy and delivery arrangements, is implemented 2001 (July 2003) progress sector reform and evaluated reports, and * Wide social and political 2. A second set of EE activities, to be 2. Activities are selected and pre-evaluated by July 2002 based final report support to EE measures carried-out during Phase II, is selected on agreed criteria of relevancy, replicability, and sustainability on and reduction of 3. Organization and programs exists to 3.1 Best Practice Program is organized and is operating as investments emissions at national and make credible information available on new designed by February 2001 to disseminate and market EE and state level EE products, services, and delivery information in a form which facilitates their use and is performance * Critical mass of EE mechanisms, while screening out everything understandable to utilities, consumers, ESCOs, energy of projects activities other than best practice agencies, regulators, and other participants in the EE market and 3.2. Public Buildings Light Program launched by December programs 2000, supported by the Best Practice Program * Annual 4. EE regulations, financial and commercial 4.1. Incentive regulations are enacted one year after approval reviews and instruments, and training programs are of the new EE law, currently under discussion in the Congress final report established or strengthened to support 4.2. Financial facility to support ESCOs is designed and by incipient ESCOs and other participants in launched by September 2001 and a portfolio of ESCO-based independent the EE market projects is designed, assessed, and ready for financing by third market parties by September 2003 performance 4.3. A strengthened testing, labeling and certification program evaluators is operating by December 2000 4.4. Standard Perfonnance Contracts and Verification Protocols adapted to the Brazilian market and disseminated by March 2000 4.5 20% (100%) of training programs designed by March 2000 (July 2001) and completed by December 2001 (June 2003) 5. Global market performance information and evaluation 5. The market for EE products and services systems implemented and operating by December 2000 is working better through improved information and market procedures, with a system to evaluate global market performance 6.1 Project management unit fully established and counterpart 6. An enhanced program management unit staff selected and mobilized by the fourth quarter of 1999 exists with capacity to learn by doing and 6.2 Enhanced Program Monitoring and Information systems are adapt the EE program based on evaluation in place by July 2000. of market performance of EE activities and participants 20 Annex 1 Project Components: (see Annex Inputs Components to Outputs 2 for detailed description) Demonstration Projects US$90.2 million (includes US$3.3 million from * Borrower's quarterly * Appropriate counterpart funding GEF) progress report * Appropriate institutional * Procurement records arrangements and managerial * Bank's disbursement and technical capacity of all data participants Core Support Activities * Audit reports * Commitment of other * if ormation Dissemination and * US$20.2 million (includes US$7.2 million from * Borrower's annual participants and partners Marketing GEF) financial statements a Customers' acceptance * Financial Facility and Portfolio Building * Testing, Labeling and Standard * Market Assessment Capacity building module * Project Management, planning * US$15.1 million (includes US$4.5 million from of Phase nI, and Monitoring GEF) and Evaluation program * Support to Energy Agencies * Training of ESCOs and other participants . 21 Annex 2 PROJECT DESCRIPTION L. The Energy Efficiency Program Introduction The proposed EE Project, to be financed with an APL and GEF grant, is the first of the two projects under the EE Program, designed to support PROCEL, the ongoing Brazilian national program aimed to reduce energy waste and mitigate GHG emissions. PROCEL is managed by ELETROBRAS under the guidance of the Ministry of Mines and Energy (MME) and its objective is to reach the long-term electricity savings goals established by the GOB, consisting in annual savings of 130 TWh by the year 2015, equivalent to a reduction of 13% in the demand projected for that year without conservation, and the postponement of about 25,000 MW of new generating capacity. PROCEL estimates that its actions resulted in electric energy savings amounting about 2 TWh per year in 1996. Brazil now faces a new macro-economic and sectoral environment: inflation has been brought down (although recently set back); greater reliance upon markets is shaping the structure of the energy sector; competitive sector participation is becoming the norm while the Government is playing the role of regulator, delegating operational aspects to the private sector; imported natural gas will soon start reaching major metropolitan areas and will play a more important role in the future, thus allowing greater fuel choices for both electricity generation and end-users; natural gas availability will enable the creation of a new industry competing for customers and improving quality of service; cost-based electricity prices resulting from sector reforms is increasing customer interest in the more efficient use of electricity, and local capital markets are now a possibility to tap into to finance EE projects Under the project, PROCEL aims to incorporate a growing number of utilities, ESCOs, industrial, commercial and residential users, and other participants in EE effort. To this end, PROCEL objectives are to: (i) demonstrate how to implement EE projects through market based delivery mechanisms focused on end-use consumers; (ii) demonstrate how to increase the efficiency of electricity supply and distribution in a competitive market through EE measures, including load management; (iii) disseminate the results and achieve replication in other utilities and end-users; and (iv) introduce credible evaluation and monitoring systems. A Phased Approach To achieve PROCEL objectives, the EE Program is structured in two phases: Phase I. demonstration and capacity building, to demonstrate energy efficient products, services, and implement core support and capacity- building activities to reduce barriers for the implementation of EE measures; and Phase II: dissemination and mainstreaming, to increase dissemination of credible information on successful EE stories and increase the number and type of EE activities and their geographic and market coverage. Implementation of the Phase II, to be supported by a second project, would depend on the success of Phase I, based on the achievement of the key performance indicators included in the logical framework of the Project. The implementation of the EE Program in two phases supported by APL and GEF funding is consistent with the griduated response strategy for Bank assistance adopted in the CAS, with lending being responsive to continuing progress of key variables while permitting more flexible risk management through the monitoring of key indicators, including those related to the energy sector enabling environment. This approach would help ensure that Bank assistance achieves its intended development impact. II. Program Phases The nature of the Adaptable Program Framework requires the need to devise a strategic program along a path marked by agreed phases and milestones to move forward, thus allowing to learn from experience and adapting the program as new market opportunities arise. What are constant are the overreaching objectives of 22 Annex 2 the program. The Government has articulated those long-term objectives on the program letter attached in Annex 3. Phase I of the EE Program Phase I is the demonstration and capacity building phase of the proposed program. It consists of three main interrelated components: (i) DP involving new EE technologies, proper price signals, and delivery service options; (ii) CSA to facilitate future replication of EE measures; and (iii) a CBM to enhance policy, regulatory, and implementation functions. This phase will entail strong participation of power utilities and a learning experience for other participants, in particular incipient ESCOs. The output of the first phase will include: (i) completion of demonstration projects among seven electricity utilities and state and federal Governments; (ii) documentation of a first set of best practice cases; (iii) tested new measures, including special programs (i.e., Green Lights, testing, certification, labeling programs), commercial instruments (i.e., perfornance contracting and independent verification), the design of an EE financial facility, and incentive regulations on the energy supply-side and demand-side; (iv) trained EE participants, including utilities, energy agencies, consumers, and ESCOs; and (v) detailed design of the second APL. Phase I demonstration projects will be implemented through seven electricity distribution utilities working in conjunction with household, industrial and commercial customers; state and federal public facilities including buildings, hospitals and schools; and commercial facilities including supermarkets and cornmercial centers. Core support and capacity building activities will be coordinated by the PMU at PROCEL and implemented through the delivery mechanisms described below. Phase 11 of the EE Program Phase II is the dissemination and mainstreaming phase of the proposed program. It will take stock and build upon the preparatory activity of Phase I. Under Phase II the focus will shift to increasing EE activities by disseminating the best practice cases and special programs prepared in Phase I, expanding to market niches in other sectors and states, and attracting private financing sources. While the exact nature of the projects will depend on the results of Phase I, it will include: (i) marketing the best practice cases and support programs developed during the first phase and preparation of new cases; (ii) implementation of new demonstration projects and support programs on promising areas identified during the first phase; and (iii) replication of demonstration projects by existing and new participants to open new EE markets in new geographic areas or reinforce existing ones. This activity will expand ESCO-projects supported by the Financial Facility created in Phase I. III. Project Components A. Demonstration Projects (DP) All participant power utilities and state and federal agencies have developed work plans with different product lines as shown on table 1. These work plans have been reviewed during project preparation but may change as experience is gained and new opportunities develop. The selection of product lines has been made based upon relevancy, replication potential, capacity of implementing participants, and diversity of project mix. The DP include: (i) proper electricity price signals and service options; and (ii) delivery mechanisms for disemination of emerging technologies. Projects in the first group will target selected electricity energy markets to test and demonstrate innovative demand charge and time-of-day-tariffs, load demand limiters, options in service conditions, and other commercial actions, such as improvements in bill collection through global metering in problem geographic areas. These demonstration projects are expected to benchmark commercial practices in a reformed electricity market to increase the efficient use of electric facilities; stimulate the interest of utilities in the use of market-based demand-side management options; and encourage customer-based EE investments. 23 Annex 2 Projects in the second group will test delivery mechanisms to increase the use of more efficient ESCOs: A market-based EE delivery system: appliances, equipment, and operational practices. An ESCO provides customers-which can be The initial efforts will include: compact fluorescent energy suppliers or consumers-a service that lamps, solar heaters, refrigerators, air conditioning, produces energy savings, and is paid through a electric control systems, reflecting roof painting, share of the savings achieved. A perfornance high efficient motors, speed drivers, motor contract and the financing structure of the optimization programs, street lighting, and water investments, e.g., off-balance sheet for the pumping. Demonstration projects in this group will customer or leasing, is what makes an ESCO be implemented in commercial buildings, industries, quite different from other contractors. Further, residential customers, and public facilities, including the possibility of securitizing a string of offices, hospitals, and schools. receivables from low risk investments to This project component will provide information to creditworthy customers opens the possibility for develop the Best Practices Information Program and tapping into domestic capital markets. Public will include implementation arrangements that will lighting and buildings will constitute the bulk of stimulate development of ESCOs (see project demonstration cases to structure performance component B below). contracts. As table I of this annex shows, the demonstration projects will be implemented in eight states-Minas Gerais, Parana, Bahia, Sao Paulo, Amazonas, Rio de Janeiro, Mato Grosso, and Brasilia-through regional electricity companies, energy agencies, and energy authorities of the participant States. Detailed descriptions, implementation arrangements, and evaluations of each demonstration projects are available in the project files. Description of Demonstration Projects 1. State of Minas Gerais CEMIG, the integrated electric utility of the State of Minas Gerais, is one of the leaders in promoting the efficient use of energy among consumers. CEMIG will implement eight demonstration projects: (a) Comprehensive DSM Project in the City of Juiz de Fora (Investment: $3.1 million including $0.32 million GEF). Juiz de Fora is a medium size city with 135,000 electricity consumers. The project includes: (i) installation of about 15,000 compact fluorescent lamps in the residential sector; (ii) installation of about 6,000 demand controls of electric showers; (iii) lighting retrofits (about 5,700 lighting fixtures) in commercial buildings; (iv) replacement of about 10,000 mercury vapor street lights with high pressure sodium vapor (HPS) street lights; (v) demonstration of solar water heaters; and (vi) efficiency improvements in motors systems, including installation of about 600 high efficiency motors. ESCOs will participate in the project. (b) Implementation of Time-of-Use Yellow Tariff (Investment: $5.9 million). Residential customers using more than 200 kWh/month and commercial customers consuming more than 500 kWh/month will have special metering equipment installed in order to allow application of the new tariff. This activity will cover 25,000 consumers and the equipment involved will include: 1,000 microprocessors/data collectors installed on 1,000 transformers, 25,000 sensors installed on participants' meters, 2,000 repeater stations, 100 interface devices, and 200 stationary monitors. (c) Process Optimization in Industrial Consumers (Investment: $1.3 million). The project involves an engineering analysis of the critical equipment inside industrial plants to determine the corrective measures to be taken at the end-use application point to optimize the interface utility-consumer with ESCO's participation. Proposed measures include properly sized and installed uninterrupted power supply systems (UPS) of the type often used in large, critical computer operations. (d) DSM Project in the rural area of the Vale do Jeguitinhonha (Investment: $0.2 million). The project, which comprises 300 farms in an area of about 3,000 hectares, will involve the substitution of 600 24 Annex 2 inefficient incandescent lamps (60W) by Compact Fluorescent Lamps (CFLs) (13W lamp and 5W ballast), and Tariff Instruments-Yellow Tariff installation of about 300 demand limiters. System & Consumer behavior: Residential customers using more than (e) DSM in Critical Areas (Investment: $7.1 million). The 200 kWh per month and commercial project is comprised of three main components: (i) a customers consuming more than 500 residential lighting program including the replacement of kWh per month will have a special about 4,000 inefficient incandescent lamps (60W) by CFLs metering system installed and a special (13W lamp and 5W ballast) in clients with energy tariff ("yellow tariff ') charging consumption lower than 100 kWh/month; (ii) a demand differentially energy consumption limiter program including about 1,500 clients with electric during peak and off-peak periods. showers and energy consumption in the range of 100-200 CEMIG's target is to achieve a peak kWh/month; and (iii) a street lighting component including demand reduction of 250 W/consumer the replacement of 30,000 mercury vapor lamps (400 (a total of 62.5 MW) and a 1% W/unit) by HPS lamps (250 W/unit) and 35,000 mercury reduction in energy consumption during vapor lamps (250 W/unit) byHPS lamnps (150 W/unit). the peak period (2,118 MWh/year). The energy consumption during the peak (f) Monitoring of Commercial Losses (Investment: $1.9 period represents 15% of the total million). The project involves the installation of about 100 energy consumption in the CEMIG area. mobile monitoring sets equipped with three phase meters, 300 current transformers, 7 data acquisition equipment and 7 phase angle meters, to be installed in the secondary side of distribution transformers in areas with high values of commercial losses. (g) Promotion of High Efficiency Motor Systems (Investment: $0.9 million including $0.35 million GEF). This project will develop and test the "Motors Optimization Service" (MOS) concept in the industrial sector of Minas Gerais through two interrelated components to address the barriers of high first cost, lack of public awareness, and lack of technical expertise in the Brazilian market. The main components of the project are: (a) implementation of the MOS program, and (b) a rebate program for about 1,600 high efficiency motors and 50 Adjustable Speed Drivers (ASDs). (h) Promotion of Solar Water Pre-Heaters (Investment: $0.3 million, including 0.12 million GEF). This project is part of a regional program involving three States. Project target in Minas Gerais is to install 300 solar water pre-heaters in Juiz de Fora to replace/complement electric showers and reduce peak demand and energy consumption in overloaded areas; develop a testing, certification, and labeling system; and help commercialization of solar heaters in the marketplace. 2. State of ParanA COPEL, the integrated electric utility in Parana, will implement two demonstration projects: (a) Time-of-Use - Yellow Tariff Project (Investment: US$6.0 million). Residential and commercial customers using more than 300 kWb/month but with a power demand lower than 50 kW in the areas of Curitiba, Paranagua, Cascavel, Foz de Iguacui, Maringa and Apucarana. Special metering equipment will be installed in order to allow application of the new tariff. This activity will cover 25,000 consumers and the equipment involved will include: 1,000 microprocessors/data collectors installed on 1,000 transformers, 25,000 sensors installed on participants' meters, 2,000 repeater stations, 100 interface devices, and 200 stationary monitors (b) New Street Lighting Technologies (Investment: US$0.3 million, including US$0.1 million of GEF). The project consists of installing about 1,000 dimnmable electronic ballasts and 1,000 programnimable controllers along with high pressure sodium vapor lamps. 25 Annex 2 3. State of Bahia The electricity distribution utility, COELBA, and the Secretariat of Energy of the State of Bahia will implement five demonstration projects: (a) Residential Lighting in Vitoria da Conquista (Investment: $2.2 million, including US$0.01 million GEF). This activity will involve the supply and installation of approximately 137,000 compact fluorescent lamps (CFL) in the southwest part of the State of Bahia in homes with monthly consumption of electricity equal to or less than 140 kWh/month. The new lamps will consume approximately 18 watts (13W lamp and 5W ballast) and replace incandescent lamps that consume 60 watts each. (b) Pilot Project for EnerMv-Efficient Hotels (Investment: US$0.5 million, including US$0.06 million GEF). COELBA has selected four hotels in Porto Seguro and one hotel in Vitoria da Conquista to demonstrate EE measures and test a combination of utility financing and rebate program involving "utility buy-down" with ESCO's participation. (c) Promotion of Solar Water Pre-Heaters (Investment: US$0.5 million, including US$0.2 million GEF). This project is part of a regional program involving three States. Project target in Bahia is to install 500 solar water pre-heaters in Vitoria de Conquista to replace/complement electric showers and reduce peak demand and energy consumption in overloaded areas; develop a testing, certification, and labeling system; and help commercialization of solar heaters in the marketplace. (d) Reflective Roof Painting (Investment: US$0.1 million, with US$0.06 million GEF). This project is part of a program that will demonstrate reflective roof painting in four major cities of Brazil. Approximately 10,000 square meters of roof area will be painted in Salvador, targeting supermarkets and factories that are air-conditioned. (e) Conserving Energy in Public Buildings and Hospitals (Investment: US$8.4 million). The project involves retrofitting 28 public buildings and 12 hospitals to improve the efficiency of energy use, and testing mechanisms for financing state and municipal buildings retrofits with ESCO's participation. 4. State of Amazonas ELETRONORTE, an integrated electricity company in north Brazil, will implement one demonstration project (a) and PROCEL will demonstrate another (b): (a) DSM Project in the Suburban Area of the City of Manaus (Investment: $14.0 million). The demonstration project will complement other DSM efforts in the region and consists of providing regular connections and improving service quality to about 34,000 low-income customers in the suburban area of the city of Manaus. (b) Reflective Roof Paintin (Investment: US$0.1 million, with US$0.06 million GEF). This project is part of a program that will demonstrate reflective roof painting in four major cities of Brazil. Approximately 10,000 square meters of roof area will be painted in Manaus, targeting supermarkets and factories that are air-conditioned. 5. State of Sao Paulo The electric utilities of Sao Paulo will implement 13 demonstration projects. (a) Street Lighting Project in Area A (Investment: US$9.1 million). The project includes substitution of about 57,000 mercury vapor lamps (215 and 360 W) by high pressure sodium vapor lamps (150 and 250 W) in the areas of Vale do Paraiba, Baixada Santista, Mogi das Cruzes, Sorocaba and Osasco. 26 Annex 2 (b) Street Lighting Project in Area B (investment: US$11.2 million). The project includes substitution of about 70,000 mercury vapor lamps (424 W) by high pressure sodium vapor lamps (275 W) in the areas Araraquara, Baur4, Campinas, Riberao Preto, and S. Jose do Rio Preto. (c) Street Lighting Project in Area C (Investment: US$7.3 million). The project includes substitution of about 45,000 mercury vapor lamps (271 and 424 W) by high pressure sodium vapor lamps (170 and 275 W) in the areas of Votuporanga, Itahhaem, Rio Claro and Atibaia. (d) Pilot High Efficiency Refrigerator Rebate Project (Investment: US$1.2 million, including US$0.4 million of GEF). The project includes replacing about 12,000 low efficiency refrigerators with higher efficiency models, as a way to reduce peak demand in overloaded distribution facilities; complement the testing, certification and labeling program (see Core Support Activities below); encourage manufacturing and sales of energy efficient appliances; and test CFC recovery and recycling from old refrigerators. (e) Pilot High Efficiency Refrigerator Financing Project (Investment: US$2.6 million, including US$0.4 million of GEF). The project includes providing financial support for replacing about 4,000 low efficiency refrigerators with higher efficiency models in the Itaquera region of metropolitan Sao Paulo. As in the project above, the goals are to reduce peak demand in overloaded distribution facilities; complement the testing, certification and labeling program; encourage manufacturing and sales of energy efficient appliances; and test CFC recovery and recycling from old refrigerators. In addition, the project will test recycling of steel and copper of the old models. (f) Energv-Efficient Popular Housing Pilot Project (Investment US$0.6 million, including US$0.2 million GEF). The project, to be implemented in the city of Rio Claro, will demonstrate EE measures in about 300 housing units, to be built by the municipality, each of 50 square meters in floor area. The EE measures include special architectural design that maximizes thermal comfort by the use of natural ventilation and lighting; hard-wired compact or circular fluorescent lamps; solar water heating; painting roofs with a highly reflective roof coating; tree planting to provide shading; and installation of high efficiency refrigerators. (g) Promotion of Solar Water Pre-Heaters (investment: US$0.5 million, including US$0.2 million GEF). This project is part of a regional program involving three States. Project target in Sao Paulo is to install 500 solar water pre-heaters in Campinas to replace/complement electric showers and reduce peak demand and energy consumption in overloaded areas; develop a testing, certification, and labeling system; and help commercialization of solar heaters in the marketplace. (h) Lighting Retrofits in Public Buildings and Hospitals (Investment: $1.5 million, including US$0.2 million GEF). The project is part of a multistate program and consists of lighting retrofits of 8 prominent public buildings and hospitals in main cities of Sao Paulo, with ESCO's participation, testing the performance contract concept. (i) Increasing EE in Schools (Investment: US$1.3 million, including US$0.2 million GEF). This component consists of lighting retrofits of 80 large public schools in the State of Sao Paulo with ESCO's participation, testing the performance contract concept. 6. Federal District - Brasilia CEB, the local utility of Brasilia, together with the Institute of Science and Technology (ICT), will implement two demonstration projects: (a) Lighting Retrofits in Public Buildings and Hospitals (Investment: $1.1 million, including US$0.2 GEF). The project is part of a multistate program and consists of lighting retrofits of 7 prominent public buildings and hospitals in Brasilia, including the building of IBAM (the national association of municipalities), with ESCO's participation, testing the performance contract concept. 27 Annex 2 (b) Increasing EE in Schools (Investment: US$0.8 million, including US$0.1 million GEF). This component consists of lighting retrofits of 50 large public schools in Brasilia with ESCO's participation, testing the performance contract concept. 7. State of Rio de Janeiro PROCEL will implement one demonstration project in Rio de Janeiro: (a) Reflective Roof Painting (Investment: US$0.1 million, with US$0.06 million GEF). This project is part of a program that will demonstrate reflective roof painting in four major cities of Brazil. Approximately 10,000 square meters of roof area will be painted in Rio de Janeiro, targeting supermarkets and factories that are air-conditioned. 8. State of Mato Grosso PROCEL will implement one demonstration project in Cuiaba: (a) Reflective Roof Painting (Investment: US$0.1 million, with US$0.06 million GEF). This project is part of a program that will demonstrate reflective roof painting in four major cities of Brazil. Approximately 10,000 square meters of roof area will be painted in Cuiaba, targeting supermarkets and factories that are air-conditioned. 28 Annex 2 Table 1: Summary of Demonstration Projects Location/Participant Demonstration Projects Number Investment of Cost* Projects US$ million Minas Gerais: CEMIG DSM in Jequitinhonha Valley, Juiz de Fora, 8 20.7 Triangulo Mineiro, and Industrial Consumers; (0.8) Special Tariffs, Monitoring of Commercial Losses; and Efficient Motors and Adjustable Speed Drivers Parana: COPEL Street Lighting; Special Tariffs 2 6.3 _(0.1) Bahia: COELBA/State of DSM in Vitoria da Conquista and Porto Seguro; 5 11.7 Bahia Reflective Roofs; Retrofitting of Public (0.3) Buildings and Hospitals Amazonas: ELETRONORTE Service Options; Reduction of Commercial 2 14.1 Losses; Roof Painting (0.1) Sao Paulo: Zone A - Street Lighting; Retrofitting of Public 4 13.1 BANDEIRANTES Buildings, Hospitals, and Schools; Efficient (0.5) Refrigerators Sao Paulo: Zone B - CPFL Street Lighting; Retrofitting of Public 4 12.3 Buildings, Hospitals, and Schools; Solar Water (0.3) Heaters Sao Paulo: Zone C - CESP Street Lighting; Retrofitting of Public 5 9.9 Buildings, Hospitals, and Schools; Efficient (0.7) Refrigerators; Popular Housing Brasilia: CEB Retrofitting of Public Buildings, Hospitals, and 2 1.9 Schools (0.3) Rio de Janeiro: PROCEL Reflective Roof Painting 1 0.1 (0.07) Mato Grosso: PROCEL Reflective Roof Painting 1 0.1 (0.07) Total 34 90.2 (3.3) * In parenthesis: GEF participation (rounded). B. Core Support Activities (CSA). CSA are designed to facilitate the replication of financially sound EE projects. To do so it focuses its efforts on overcoming information barriers, thus improving energy management information at customer level; reducing transaction costs to private sources of financing, thus leveraging and minimizing public financing; providing credible market assessments, thus allowing for a realignment of EE programs and measures to reflect market realities; and strengthening the testing, certification and labeling program for electrical equipment, thus providing broader choices to consumers. 29 Annex 2 The components under CSA, to be implemented by PROCEL with the support of universities, national laboratories, international donors, and NGOs, include: (a) Information Dissemination and Marketing. (US$8.9 million, including US$3.4 million GEF). Preparation and initial marketing of Best Practice experiences, i.e., case studies and technical and Information Barriers. A major issue hampering operational guidelines for cost-effective EE measures the replication of win-win EE measures by with wide applicability, derived from DP (project consumers, their development by ESCOs and component A) as well as from existing cases, including their financing by the local capital market has improvement of operational practices without been the lack of credible information from investments. Specifically, the project would support relevant real projects in similar circumstances. dissemination of best practices and technical guides to Brazilian EE development suffers from both the business management, and the financial community. lack of credible case studies documenting the This sub-component also includes the implementation financial benefits of an investment and the means of a "Green Light" Program aimed at improving to disseminate such information to industrial and illumination of commercial and public sector premises. commercial decision makers. The project will A detailed Project Implementation Plan has been address this barrier by disseminating-through prepared by PROCEL and consultants, including criteria Best Practices and Green Lights-credible and for selection of case studies, number of annual cases, financially attractive cases to be targeted to and energy savings targets in the industrial and decision makers in the industrial and commercial commercial sectors. sectors. (b) EE Financial Facility and Portfolio Building. (US$5.2 million, including US$1.6 million GEF). Financing of ESCO-based EE Projects. In Implementation of an EE Financial Facility to (a) general, consumer-based EE projects are small, in develop and disseminate commercial and financial the range of US$100,000 to US$1 million by instruments to implement, finance, and guarantee project. There are at least three key factors ESCO-based EE projects; and (b) prepare a portfolio of needed to make these projects happen: (i) a ESCO-based EE projects for financing by third parties. market with attractive savings potential, and The structure, operation, and facility manager selection hence attractive upstream returns for investors. will be based upon a detailed review of feasible options Market assessments show that this is the case in provided by international consultants. The Facility will Brazil; (ii) capable service providers to supply the be capitalized by existing funds from PROCEL, and technical know-how. This element is in its expanded by funds from public and/or private sources. infancy in Brazil and the project will demonstrate The GEF Grant will support the design of the facility, delivery systems and support ESCO development; its initial operation, the portfolio-building activity and and (iii) a financing system with the market its capitalization, including different financial know-how, availability and basic infrastructure in instruments such as partial credit guarantees. The place to make funds accessible to creditworthy design of the fund will focus on encouraging the projects. This element is barely developed in development of private sector third party financing of Brazil. The project will support the financing of ESCO projects by allocating risks to those parties best EE projects by reducing transaction costs related able to manage them and by improving the availability to lack of market knowledge and credit risk and terms and conditions of private sector financing to assessment experience, and by aggregating EE projects. Use of GEF funds to capitalize the facility projects in portfolio to spread their risk. will be contingent to approval of milestones to move to the second APL. (c) Testing, Certification and Labeling Program. (US$3.4 million, including US$1.3 million GEF). Implementation of programs for testing, certification and labeling of equipment and appliances, including motors, lamps, lighting ballasts, refrigerators, freezers, air conditioners, and solar and -heat pump water heaters. While some EE testing, certification and labeling of electric equipment does exist it is not combined into a comprehensive customer-focused dealer-accepted programn. Specifically, the project would support: (i) establishing and extending testing facilities and certification centers with support of the National Electric Laboratory (CEPEL) and universities; (ii) support of "customer friendly" equipment and appliances labeling 30 Annex 2 programs; (iii) implementation of the labeling programs with participation of manufacturers and dealers; and (iv) adoption of voluntary or mandatory minimum efficiency standards on various categories of products, including refrigerators and freezers, motors, air conditioners, and lighting products. (d) Market Assessment Program. (US$2.7 million, including US$0.9 million GEF). PROCEL will undertake a wide range of research activities to improve the evaluation of its EE programs and evaluate their impact in the energy market. These activities will gauge the response of service providers and customers to EE programs and measures, thus allowing for the programs' realignment, as demanded by the market. TORs have been developed by PROCEL to carry out third party market assessments on a periodic basis. These assessments include: (1) Commercial and Public Buildinas Sector Survey. The survey will determine (i) electricity use, electricity intensity, and electricity intensity trends; (ii) the saturation and use of different types of equipment--different lighting products, air conditioning equipment, motors, pumps, etc.; (iii) the prevalence of energy management practices such as lighting and air conditioning control, careful sizing of equipment, and efficiency consideration in equipment purchases; and (iv) the awareness and attitudes of energy managers or building owners/occupants towards EE measures; (2) Industrial Sector Survev. The survey will examine: (i) electricity use, electricity intensity, and electricity intensity trends; (ii) the saturation of different processes and key process features; (iii) the prevalence of EE measures such as high efficiency motors, variable speed motor drives, cogeneration systems, or high efficiency lighting; and (iv) the prevalence of energy management practices such as peak demand limitation, careful sizing of equipment, consideration of EE in equipment purchases, tracking and monitoring of electricity use, establishing energy savings targets, and training plant staff, (3) Conservation Potential. Researchers from COPPEIUFRJ have developed models for assessing the technical, economic, and market potential for electricity savings in Brazil. These models are disaggregated by industrial sector, region, income group, etc. Research will continue during 1999-2002 to refine these models and modify key assumptions; (4) Global Market Evaluation. A number of market-related research projects will be carried out in the coming years in order to help PROCEL analyze its overall energy savings impacts as well as the impacts of individual subprograms and projects; (5) Social and Environmental Impacts. Researchers from COPPE/UFRJ will continue to assess the social and environmental impacts of PROCEL's overall efforts as well as the particular projects funded by the World Bank and GEF. Table 2: Core Support Activities Core Support Activities Description Investment* (US$ million) Information Dissemination Implementation of Best Practice Program 8.9 and Marketing (3.4) Financial Facility and Implementation of EE Financial Facility and preparation of 5.2 Portfolio Building portfolio of ESCO-based projects for financing by third parties (1.6) Testing, Certification and Enhancement of program for testing, certification, and 3.4 Labeling Program labeling of equipment and appliances, including motors, (1.3) lighting products, refrigerators, freezers, air conditioners, and solar and heat pump water heaters Market Assessment Assessment of market penetration of EE equipment and 2.7 Program measures (0.9) Total 20.2 (7.2) * In parenthesis: GEF participation. 31 Annex 2 C. Capacity Building Module (CBM). This component is designed to reinforce the institutional capacity of public energy agencies, regulators, and other participants in the EE market to implement EE measures. The main sub-components are Training and Educational Programs, Support to Federal and State Energy Agencies and Regulators, and Support to the PMU. First, regulatory-based training with state and federal regulators including preparation of policies and incentive regulations to promote EE among electricity utilities e.g., distributive generation, innovative electricity tariff structures, EE building codes, procurement of ESCO services by state and federal agencies. Second, development and delivering training courses for a wide range of partners. Third, support to the Building Capacity in the Public Sector. PMU at PROCEL to monitor and coordinate the Federal and State Governments account for close project. to 20% of electricity demand, almost equal to the non-ferrous industrial sector. As the electricity Specifically, the project would support: (a) the supply and distribution system is privatized and enhancement of analytical capacity in existing state brought up to market standards, there is also a energy conservation units to properly assess the need to bring up to these standards both public environmental and financial benefits of energy energy consumers and regulators. As part of its conservation projects; (b) assistance to the GOB, and tasks, PROCEL has entered into agreements with to the Federal and State regulators in developing international donors to prepare twining effective policies, regulation and standards for arrangements to help upgrade EE municipalities promoting energy conservation in an expanding public buildings. During the implementation of market system; (c) development of technical and the EE Project these arrangements will be operational guidelines for energy conservation expanded to include regulators at Federal and measures with wide applicability, using the result of State levels. case studies from energy conservation programs; and (d) assistance to the PMU in monitoring the project. Main activities under CBM are: (a) Training and Education (Investment: US$3.8 million, including US$1.3 million GEF). (i) Technical Training: (a) T&D Loss Reduction. Courses on reducing commercial and technical losses for utility staff throughout Brazil; (b) ESCO Support. Training to ESCOs and individuals and companies considering entering the ESCO business; (c) Energy Management Training. PROCEL will sponsor a series of short courses on basic energy management techniques for building and facility managers, architects, and other interested parties; (d) End-Use EE Programs. PROCEL will continue training utility staff as well as consultants and other interested individuals on end-use EE programs; and (e) Regulatory Issues. PROCEL will sponsor courses on regulatory issues, including ANEEL rules, cost recovery and financial incentives for utility EE programs, and tariff design. (ii) Management and Administrative Training. (a) Bidding and Procurement Procedures. This course will cover the procedures for acquiring goods and materials and for contracting services in accordance with World Bank rules as well as RGR rules, for the relevant staff in PROCEL, utilities, and state agencies that are participating in the project; (b) Project Management. This course will be for project managers in PROCEL, participating utilities, and state agencies on physical and financial control systems and the new project analysis data system. (iii) PROCEL in Public and Private Schools. Under this activity, the following actions will be taken: (i) agreements with state and municipal school systems and other relevant organizations to implement this training activity; (ii) "Training for the trainers" to be provided by PROCEL to utility staff who will be responsible for training teachers; (iii) training teachers in participating schools; (iv) preparation and distribution of educational materials, including developing of short "topics" related to EE for insertion in school books sponsored by and widely distributed to public schools in Brazil by the Ministry of Education; and (v) planning, oversight, and evaluation of the activity. 32 Annex 2 (iv) PROCEL in Technical Schools and Universities. PROCEL will develop: (a) courses on efficient electricity use for technical schools (secondary schools that train electricians and other technicians); and (b) university-level courses on electricity conservation and a supporting book for engineering students. (b) Support to Federal and State Energy Agencies and Regulatory Organizations (Investment: $ 5.8 million, including US$2.2 million GEF). (i) Support to Federal Agencies. Activities include financing EE specialists in ANEEL who will develop and advocate federal policies that will support EE efforts as the restructuring of Brazil's electricity sector unfolds. (ii) Support to State Agencies. The main activities that will be carried out by the state energy agencies in Bahia, Sao Paulo, and Rio Grande do Sul under this project include: (i) supervision and evaluation of the projects to be carried out with financing from the World Bank (Phase I of the loan); (ii) preparation of new state projects for Phase II of the World Bank loan; (iii) analysis of energy use, EE potential, and the costs and benefits of EE improvements in each state; (iv) involvement in planning and review of utility EE programs; (v) development of financing mechanisms for EE projects and other support for ESCOs; and (vi) development of tariff designs, building codes, efficiency standards, and other policies that will stimulate greater EE. (c) Support to Project Management. Evaluation and Information Systems (Investment: US$ 5.5 million, including US$1.0 million GEF). (i) Support to Project Management. Activities include consultants to support: (i) Project Implementation Unit to supervise implementation of the World Bank loan and GEF grant at the administrative level; (ii) project monitoring, management, and technical assistance to be provided to partner organizations; and (iii) a "private sector liaison" to mnaximize the involvement of ESCOs, manufacturers, and industry associations in the project, and the dissemination of results and replication. (ii) Information Systems. Support of consultants, acquisition of hardware and software, and training activities to: (i) develop and put in use a comprehensive data base on electricity use, end-use equipment, and consumer behavior; (ii) implement a project analysis data base (PADB); and (iii) upgrade physical- financial control systems. Table 3: Capacity-building Module Capacity-building Activity Description of Components Investment* (US$ million) Training and Education Development and delivery of training courses on EE 3.8 matters, including performance contracting, transmission (1.3) and distribution loss reduction, energy management, demand side management, integrated planning, and regulatory issues. Support to Federal and State Support to regulators and agencies on incentive 5.8 energy agencies regulations for EE projects, EE program design and (2.2) evaluation, etc. Project Management Support to PMU on monitoring and effectiveness of 5.5 project. (1.0) Total 15.1 * In parenthesis: GEF participation. 33 Annex 2 IV. Project Implementation Arrangements ELETROBRAS would be responsible for implementation of the World Bank loan and the GEF grant. ELETROBRAS is administering PROCEL, which now has a staff of 110 full- and part-time staff, and an annual budget that now exceeds $5 million for administration and $60 million in commitments for EE programs. PROCEL has carried out or coordinated hundreds of EE projects in Brazil that over 1993-96 resulted in an estimated 1.4% savings in total consumption of electrical energy per year. It is also recognized as one of the leading energy conservation programs in developing countries. ELETROBRAS, through a PMU within PROCEL, will either coordinate or carry out itself the activities in all three components: DP, CAS, and CBM. DP would be implemented directly by electricity utilities with the participation of states and municipalities, and industrial and commercial users, with guidance from PROCEL. A first group of DP projects and their implementing agencies has been selected, using the criteria of likely project success, replication potential, and diversity of project mix. In each of the DP areas PROCEL is building on experience it has already acquired. Many of the projects to be supported make use of ESCOs, generally small engineering or consulting firms which act as market intermediaries to introduce efficiency improvements, and which assume part or all of the risk of doing so. PROCEL will support the expansion and consolidation of ESCOs through technical guidance, information exchange, and financial support to the recently created ESCO industry association. Through the GEF grant, PROCEL will also significantly expand training, marketing, and communication, including a Best Practices information program, over the 1999-2002 period. For support in procurement and financial management, PROCEL will draw upon the technical services of UNDP and ELETROBRAS, and will continue to use its Physical-Financial Information System, introduced in 1996, which provides adequate monitoring of activities. A Special Account will be operated by UNDP. Annual evaluations of progress will help to redirect project activities as necessary, as well as consider the part of PROCEL in the future institutional structure of the energy sector, as a consequence of the ongoing power sector reform. Phase II The Phase I experience will be critical in determining suitable arrangements for implementing Phase II. The energy sector study financed under the Hydrocarbon Transport and Processing Project (Ln. 3376-BR) has recommended that PROCEL continue to focus on its role as technical adviser, catalyst, and managing entity, and should monitor energy conservation targets set by each energy company in collaboration with ANEEL. Meanwhile the operational guidelines and manual for selection of subprojects and participants by the financial entity to be selected to implement Phase II will be prepared, based on the criteria agreed with PROCEL. V. Summary of Project Costs Phase I Proiect Comiponents Loa Frin I Total .._ US$ thousands __ .__ Demonstration Projects 43,100_ 26,400 69,500- Core Support Activities 9,900 . 5,400 ! 15,300 Capacity Building Module 5,100 6,300 11,400 Total Base Cost 58,100 38,100 96,200 Duties and Taxes 13,600 - 13,600 Physical Contingencies 1 6,300 4,200 1 10,500 Price Contingencies 3,100 2,100 5,200 Total Project Cost 81,100 44,400 125,500 34 Annex 2 VI. Summary of Project Financing Phase I In US$ Thousands Project Components IBRD GEF I Local Total Demonstration Projects 38,400 2,900 1 28,200 69,500 Core Support Activities - 6,300 9,000 15,300 Capacity Building Module - 3,900 7,500 11,400 38,400 13,100 44,700 96,200 TOTAL BASE COST "-'9,0 Duties and Taxes - - 13,600 i 13,600 Physical Contingencies i 3,300 l 1,400 5,800 10,500 Price Contingencies 1 1,700 500 3,000 5,200 Total Project Cost I 43,400 15,000 1 67,100 125,500 35 Annex 3 PROGRAM LETTER Avison' ii006 IMI l1r01,99 Re; Energy Efficiency Policy of Brazil Mr. Director, As part of the discussions with the World Bank related to the promotion of energy efficiency and reduicion of elnergy waste in Brazil, I am pleased to share witb you the Brazilian Government's policy and actions in these matters. Summary Policy Position We consider that.hinproving Brazil's economic efficiency in providing goods and services is of critical importance as we expaind our prodtction and our participationi in the global economy. At the same time, we remaln ever mindful of the effects tbat economic growth can have on the environment. In keeping with this goal, our strategy is to improve the efficiency of the production, delivery, and itihzation of all forms of energy, as well as to find new, diversified souces of energy, to inaet Brazil"s future needs. We, expect that improving energy eiciency and reducing waste will have a desired, beneficial impact on the enviotimeat while achieving economic benefir& t Gobind Nankani Director Brazil Department Latin America and the Caribbearn Region The World Baak IaI&H Street, N.W. Washington, DC 20433 36 Annex 3 Pg. 2 - Aviso nt 006 IMME, t I January 1999 We are able to reaffirm this commitmeat even as major structural changes are occtrring in many sectors of thie Brazilian economy. Tlese chaniges are supported by the Government to encourage pTivate investnent, increase competition, and set prices based cn market value. Some of the significant areas of change in the energy Setor are higlhlighted in the discussion that follows. On-Going Structural Changes Cbanges in the cloctrical sector have come swiftly and the results are already significant. Privatizatioii of the sector has been very successfuil to date, resulting in a growing percentage of ownership by private investors. This trend supports the Government's policy on efficiency in at least two ways: (i) state-owned utilities are striving to improve their financial atractiveness througlh a betr utilization of existing capacity; and (ii) privately-owned utilities have realized the value of promoting efficient production and ise of encrgy to inerease their finaneial benefits and improve service quality To facilitate efficiency investment by utilities there is a provision that has been included in aTl new concession contracts requiring that a 1% minimuim of total revenues be used for efficiency improvements (114% to be applied to end uses). The coinpanies are required to submit their investment programns to the regulatory agency on an annual basis. The availability of imported natural gas and new legislation a"ilowing open access to transrnission lines will inicrease the diversity in the Brazilian en1ergy mix, will enhance opportunities for independenlt power producers and industrial co-generators, and will encourage competition. Moreover, a movement away frorn rate of return- based tariffs toward market-based tariffs is resulting in maore realistic prices for electricity, a basic requirement for creating and maintaining a viable energy efficiency industry. Incipient ESCGO are expected to take advantage of this opportunity. To regulate the restuctured power sector and its energy efficiency aetivities, a new autonomous fed6al regulatory agency, ANEEL, has been mi operation since tile end of 1997. 37 Annex 3 P. 3 - Aviso 11I 06 fMhvEE I I Jaway 1999 Present and Future Role of PROCEL PROCEL is the Government's natiopal progrm for implementins its energy efficiency policies, especially in the pbvwer sub-seetor. Created in 1985 and restructured in 1991, PROCEL is directed by the Ministry of Mines and Enetgy and administered by ELETROBRAS. As a key element of its energy strategy, the Government has suppoited, through PROCEL. the implementation of programs and actions aimed at improving the efficiency of production, delivery comrnmercialization, and use of enrgy in the InaTket place. These activities have souglht to increase awareness of the economic and environmental benefits of energy efficiency measures, disseminate information on "best practiccs' and energy perfonnance of equipment, and implement a core siupport system to encourage public and private investments in energy efficiency. In support of this strategy, PROCEL is continuitng to develop different ways to efeca the desired changes in the energy markeL. Among many, three important examples may be singled out; Load Manageincut Programs As privatizrtion increases, tutilities wi1l be faced with pressure to retain customers and provide them with a higher level of vahle-added service. Load manageiient offers an opportun(ty to add services of better value to oustomers ivhiil at tlhe same time improving financial results through greater ese of existing facilities. Energy Service Companies ESCOs are an efective way to enhance private capital investment in energy effLciency. Often the investments are paid off via performance contracts wtsrecby tbe savings resulting from the investment are dedicated to amortizing the investment. PROCEL has a major effort underway tO SuLpport aaid develop an ESCO inidustry in Brazil PROCEL is also working with individual states and municipalities to help develop the efficiency potential in their facilities that, in tum, would create a natural market for ESCOs to work in. 38 Annex 3 PgA-4Avisonm 006 /NM h1lJ.nuaryI1999 Efficientcy labeJs and best practices Despite the best efforts of utilities and.:SCOs to develop an energy efficiency industry, baiers remain fir its widespread acceptance. PROCEL is taking many innovative measures to overcome these barriers For example, inforination dissemination through efficienoy labels on products and "best practices" derived from successfuil projects7 will allow consumers and inaneafacturers to compare benchmarks and take actions. PROCEL also has an outstandinig progran ia place that involves manufacturers compeitng to develop highly efficient products to achieve a desired annual award, which they cart then use in their marketing efforts. Once these batriers are substantially reduced, it will be easier to move to the uldiamate goal of higher efficiency codes and standards. In frltherance of its mission, PROCEL is now in partnership with agencies of the U-S-A, the European Union and the 'Government of Canada to restructure and focus its efforts, reinfome its evalutation capabilities, anid make it a mnore effective, dynamic organtization. Tkc Energy Efficiency Program We are requesting a loan from the World Bank and a grnt forn the Global Emivironmental Facility (GEF) in order to take advantage of their international experience, and to further our efforts and to ensure the most efficient use of thie local resources available. Bank and GEF support will be used to implement and expand the Energy Efficiency Program. This Program will demonstrate new and different energy products, services, and delivery mechianisms and, on the GEF side, improve their evaliation, facilitaW dissemination of 'best practice'F results) and encourage replication by others. Given the newness of somne of the conccpts and the incipient developmeat of a market-basod cnergy service itdustry in Brazil, we are planning to proceed in two phases duiring the program. The first phase, lasting about four years, will focus On; (a) demnstrating cost-effective measures in the electricity suib-sector throughi load management and targeted peak period reductions, to beter utilize existing facilities. These actions will help ensure system reliability in the near future, (b) demonstrating cost-effective measures to reduce energy use in commercial buildings, indostrial applications and other uises; (c) enhancing standards and lableling programs, (d) setting up a market-based support structure for energy service companies; and (e) inplementing a broad-oeacting monitoring and evaluation systern to measure the 39 Annex 3 Pg. 5 - Aviso ng 006 M1AE, II January 1999 degree of success in attainiing the progran's goals and objectives, as expressed by tfe relevant benchmarks. Thlis evaluation system will provide fiedback for redirecting PROCEL's efforts, as needed, and prepare the second phase of the Einergy Efficienoy program, due to begin in 2002 and continue 'throuigh 2005. On the basis of the enhanced information bse developed in the first phase, the second phase will foous on: (a) dissemination and replicatioai on a larger-seale of 'best practice"lcost-effective measures in other states and swoetrs; (b) implementation of a second set of inmdel projects to demonstrate new/additional energy efflcient eCncepts; (c) expanded use of ESCOs in delivering energy efficient products and servimes; and (d) participation of a qualified financial entity to intermediate the second Bsnk Loan under the program and to operate the financial facility designed during Phase 1, aimed to support ESCO-based energy efficiency measures. Conclusion We remain fully committed to promoting the efricient an ennvironmernaEly sustainable supply and use of energy as a comerstone of our strategy of economnic expansion. In furtherance of its energy policies, the Govenmient appreiates the support of the World Batik and the 0EV to implement the proposed innovative Energy Efficiency Progran Yours truly, Rodolpho Touriaho Neto Minister of Mines and Energy 40 Annex 4 PROJECT JUSTIFICATION, INCREMENTAL COSTS, AND BENEFIT-COST ANALYSIS Introduction This annex summarizes: (i) current conditions of the electricity sector in Brazil and the role of the proposed project to support the GOB's strategy to increase EE; (ii) barriers to EE measures and the strategy to remove them; (iii) expected benefits of the project; (iv) economic analysis; and (v) incremental cost analysis. Section IV includes the economic and risk analysis of the project. Section V focuses on the incremental costs and benefits from the GEF's point of view. I. Overview A Sector in Transition The '90s have witnessed radical structural changes in Brazil's economy and its energy sector. Regional changes have also taken place, leading gradually to the creation of a regional energy market and the diversification of energy sources. Two common denominators to these changes are, first, the increasing role of the private sector as investor and operator, and the new role of the state as regulator while providing targeted interventions on those areas where society will benefit but there are still mnarket barriers hampering private sector participation. Second, environmental concerns for climate warming are becoming a key issue at a time when attention is being focused on cleaner fuels and more efficient use of energy to reduce GHG emissions. In the Brazilian electricity sector, out of 60,000 MW of installed capacity, close to 90% is currently comprised by hydroelectric power plants. Electricity demand has been growing at about 6-7% per year since the reactivation of the economy. In order to meet demand, about 27,000 MW of installed capacity should be added to the system over the next 8-10 years, with associated investments close to US$38 billion, of which US$20 billion alone are for additional generation. Considering that most of the attractive hydropower resources have been developed, a major focused effort is necessary to limit the otherwise huge increase in primary fossil energy supply required to sustain the growth of Brazil's economy and to mitigate the serious environmental consequences of expanded energy consumption. Simulations carried out by PROCEL during project preparation show CO2 emissions from electricity generation growing from about 27 million tons in 1999 to an accumulated value of 2174 million tons by 2018, if left unchecked. In the past, just as in the rest of the sector, the Government has been the main investment source and player behind energy conservation programs with PROCEL playing a central role. However, as in the rest of the economy, the Goverrnent is now moving to a market driven EE strategy. The objective of the proposed project is to support this strategy. The Project: World Bank and GEF Support In order to support the GOB strategy, the project will provide for transitional mechanisms to facilitate implementation of a number of demonstration projects that, on the one hand, will save energy and/or help postpone investments in energy supply facilities and, on the other hand, will affirm the benchmarks or working parameters that will encourage future replications. Second, the project will provide core support to the implementation of EE market-based measures by utilities and consumers, including informnation dissemination of best practice cases, public awareness programs, new financial instruments and contractual arrangements, labels and standards, all sustained by market and customer research activities. 41 Annex 4 Third, the project will support capacity-building activities targeted to state and federal regulators and energy agencies, energy service providers, and trade associations. The proposed EE project will be financed within an AP framework constituted of a Bank loan and a GEF grant. The Bank loan would partially finance the demonstration projects. The GEF grant would support the core support and capacity-building activities that will encourage the sustainable implementation of EE measures, including those demonstrated with Bank support. The GEF grant is required to support the incremental costs of removing market barriers and is justified by the global environmental benefits accruing from the project. HI. Barriers to Overcome The major historical barriers to EE measures in Brazil have been an unstable economy and subsidized energy (especially electricity) prices. The stabilization of the Brazilian economy over the past several years, has provided the essential foundation for cost reduction investments, such as EE projects. The movement of energy prices toward cost-based pricing and electricity tariffs reflecting peak and off-peak costs provides a growing incentive for EE investments. Indeed, electric tariffs have increased from $34 per MWh to $72 per MWh, without taxes, since the application of the stabilization plan. In addition, at a time of increasing risks of supply shortages, the GOB is promoting the efficient use of energy, especially electricity. All these factors provide an enabling environment to overcome remaining barriers to increase EE. The remaining barriers still hampering the development of EE activities in Brazil include the following: Lack of public awareness on the potential benefit of EE measures Brazilian customers in all sectors are unaware of energy savings measures, how much they can save, and how profitable an investment in EE is; for example, purchasers of home equipment do not know the annual energy cost of such equipment relative to its purchase cost or the most efficient models available. While some EE testing, certification and labeling of electric equipment exist, in many cases it has to be included in a comprehensive customer-focused dealer-accepted program. In other cases, tariff structures and/or bill collection by distribution companies do not provide customers with the proper price signal to make energy investments. Lack of credible information on effective EE measures The decision to make an EE investment to reduce costs usually is based upon credible information from relevant real projects in similar circumstances. Brazilian EE development suffers from both the lack of credible case studies documenting the financial benefits of an investment and the means to disseminate such information to decision makers in the public and the private sectors, including utilities, industries, and commercial institutions. While many EE investments are being made in Brazil, the types of measures and the systems to verify and disseminate the results should be substantially enhanced and expanded. For example, in the case of DSM measures, where utilities could lose revenues and profits when consumers reduce their energy consumption, utilities will not tend to support EE programs, even if such programs enhance overall economic efficiency. Demonstration of market-based DSM measures that allow postponement of investments and are economically convenient for utilities will help to reduce this barrier and disseminate information on win-win EE measures. Also, enhanced testing, certification and labeling programs will provide customers with credible information on electric equipment, and foster competition among manufacturers. 42 Annex 4 Lack of supporting mechanisms to allow implementation of EE measures The EE industry is underdeveloped in Brazil. ESCO development has been retarded by skeptical customers, absence of successful performance contracts to use as models for replication, and lack of means to judge the quality of individual ESCOs. In addition, private participants in EE activities have no access to financing in the terms equivalent to those available for supply-side projects. For small EE projects, requirements are exorbitant (e.g., high collateral requirements), and longer term financing is not available. Financial agencies are unfamiliar with this type of projects. Third party financing of EE projects, other than what is being done through ELETROBRAS/PROCEL financing for utility, state, and municipal projects via the RGR, is almost non-existent in Brazil. Strategy to Remove Barriers To remove some of the remaining barriers, the EE Program has been structured as follows: (a) Phase I would focus on the demonstration of projects involving new technologies and delivery systems, while supporting capacity-building to enhance policy, regulatory, and implementation functions. This phase will entail strong participation of power utilities and a learning experience for other participants, in particular incipient ESCOs; and (b) using the outputs of the first phase, a second phase wiU focus on the dissemination and replication--supported by a second project included in the APL. It will focus on increasing EE activities by disseminating best practice cases and special programs, expanding market niches in other sectors and states, and attracting private financing sources. It will consist of: (i) marketing the best practice cases and support programs developed during the first phase and preparation of new cases; (ii) implementation of new demonstration projects and support programs on promising areas identified during the first phase; and (iii) replication of demonstration projects by existing and new participants to open new markets in new geographic areas or reinforce existing ones. This activity will include ESCO-projects supported by the Financial Facility created in Phase I. ][. Benefits The EE program will result in significant energy savings in Brazil and associated reductions in GHG emissions through the demonstration of EE practices and the establishment of core support activities to stimulate the implementation of EE measures by utilities and consumers. These benefits will be further expanded during the dissemination and replication phase of the EE program, in particular due to the creation of a sustainable EE industry, i.e. companies that provide cost-effective energy saving services to energy users, called ESCOs. In addition, the EE program will improve the allocation of resources by helping defer investments in energy supply facilities and by expanding the service and price options available to consumers as a result of the competition among energy suppliers to retain customers in a new market-based energy sector. Energy Savings Direct EE program benefits include energy savings by: (a) the demonstration projects; (b) energy users (industrial, commercial sectors and utilities) undertaking incipient low-cost energy conservation investments as a result of the information dissemination program; (c) industrial and commercial users undertaking medium-cost EE projects through ESCOs as a result of a combination of demonstration performance contracting, availability of new financial instruments, reduced transaction costs, and the dissemination of best practices; and (d) the operation of more efficient appliances as a result of the strengthening of the testing, certification and labeling program. Estimated amount of total energy savings is 20.8 TWh in a ten-year period, as indicated in Table I below. The contribution of the demonstration projects is estimated at 2.4 TWh and 18.4 TWh would be saved by the core support and capacity-building 43 Annex 4 activities. The project will contribute to the Government's goal to achieve annual electricity savings of 130 TWh by year 2015. Global Environmental Benefits Based on the experience of similar best practice, information, testing and labeling programs, reduction of emissions derived from project implementation for a period of ten years is estimated at 19.2 million tons of CO2. The set of demonstration projects is expected to yield accumulated energy savings corresponding to a reduction of 2.2 million tons of CO2 emissions. The core support and capacity-building activities would be responsible for saving 17 million tons of CO2. Table 1: Project Benefits Project Components Energy Savings CO2 Reduction TWh Million tons DP 2.4 2.2 CSA and CBM 18.4 17.0 Total 20.8 19.2 IV. Benefit-Cost and Risk Analysis Benefit-cost analysis has been carried out for all the demonstration projects. Their economic internal rates of return (EIRR) range from 18-50%, with the overall EIRR of the project estimated at 31.6%. Financial internal rates of return (FIRR) for the same investments are in the range of 10-35%, with an overall FIRR of 13.2%. Table 2: Economic and Financial Analysis Present Value of Flows (million US$) Economic Analysis Financial Analysis Gross Benefits 121.4 93.4 Total Costs 71.6 81.2 Net Benefits 49.8 12.2 IRR (%) 31.6 13.2 Risk Analysis. Based on the economic cost-benefit tables that were prepared for the subprojects and for the project as whole, analyses were performed to assess the economic sensitivity of the project to various changes in parameters: (a) Benefit failure. This is defined as any situation that reduces the benefits of the project, such as lower than expected energy savings or lower energy prices. For moderate reductions in overall project benefits (10-25%), the EIRR of the overall project remains above 24%. Only if overall subproject benefits fall by more than 35%, would the EIRR fall below a discount rate of 12%. Carbon dioxide conversion based upon avoided thermal generation's composite factor of 916.4 tons of C02/GWh, reflecting marginal dispatch of thermal generation and 10% T&D losses 44 Annex 4 (b) Cost overrun. Investment costs would have to be higher by about 22% for the EIRR to faWl below 12%. This analysis is also based on the unreasonable assumption that there is no learning lesson by the company (e.g., all planned investments continue to be made in the failed subproject). Relaxing this assumption would allow investment funds to flow to successful components. (c) Higher operating costs. Poor implementation of projects could result in higher labor and materials costs, and more frequent maintenance. For the analysis, poor implementation is assumed to result in higher operation and maintenance costs of the energy conservation equipment. Higher operating costs do not have a large impact on the EIRR of the project, as it is mostly capital-intensive. Operation and maintenance costs must increase by over 700% for the EIRR to fall below the discount rate of 12%. Performance Contracting One of the delivery systems to be introduced in this project will be the design and implementation of projects through performance contracting, where payments to the ESCO will be made on the basis of an agreed share of the energy savings achieved by the projects (see Annex 2). Failure to accomplish the energy savings of the project due to poor implementation will result in reduced payments to the ESCO and reduced benefits to the host enterprise. Contracting problems or bad collection of bills will adversely affect the cash flow of the ESCO, but will not affect the financial benefits to the host enterprise or the economic benefits to the country, since the energy savings could still occur. Indeed, over the longer term, contractual or accounts receivable problems could force ESCOs out of business, which would reduce energy conservation investments and adversely affect the true replication of EE measures. To reduce this risk the CSA and CBM of the project will support development and use of standard performance contracts, independent verification of savings, and best practice cases. V. GEF - Incremental Cost Analysis Implementing the above strategy would require incurring incremental costs defined as the difference between the economic cost of the Baseline Situation and the GEF Altemative that will lead to global environmental benefits. This difference is proposed to be supported by a GEF grant. Below, there is a presentation of the Baseline Scenario, the GEF Alternative, and the Incremental Cost. Baseline Scenario In the absence of an alternative, Brazil's EE efforts will probably remain at its current state or, given the current ongoing reforms in the sector, it may lose focus and its funding may start to decline as the deregulation of the energy sector advances. Under the baseline case, it would probably take longer to advance the demonstration of emerging technologies and market driven EE delivery mechanisms. Investments in EE would most likely remain in Government hands, through the use of subsidized loans to state governments and qualifying enterprises. Emerging technologies and their application would not be part of the mainstream as the industrial sector modernizes its infrastructure to compete in the MERCOSUR area and worldwide. Information dissemination on EE financing and practices would remain hampered if no structured demonstration of best practices and monitoring of savings are achieved. Institutional capacity to implement innovative EE measures would remain fragmented and, most likely, at a central level. Participation of private investors and ESCOs would be retarded if commercial instruments, like performance contracting, were not introduced in the EE market. PROCEL was launched in 1985. Historically, its level of activity has averaged investments in EE of US$4 million per year until 1994. The new focus on the role of EE to reduce energy waste, postpone 45 Annex 4 supply side investments, the risk of energy shortages, and the support from multilateral and bilateral agencies is helping to increase the annual budget for EE activities. This has opened a window of opportunity to substantially enhance and expand current EE activities by reducing or eliminating remaining market barriers. However, this effort could be derailed in the absence of credible demonstration of market driven EE mechanisms that would mirror the market transformation of the economy and the sector. For these reasons, a conservative baseline option would have to consider the level of activity that existed until 1994, before the new EE strategy was designed as an integrated approach expecting future support from the Bank, GEF, and other donors. However, to take into account the current investment for EE activities, including the proposed financial support from the Bank, the amount corresponding to the estimated cost of the proposed project is considered in the Incremental Cost and Benefits Matrix attached to this Annex, even though its sustainability could be questionable in the absence of GEF, Bank and other donors' interventions. This baseline option includes the activity of incipient ESCOs and current investments in high efficiency lamps and appliances by private users, as well as the current level of local technical assistance and institutional support to EE activities, based on the operational budget of PROCEL and EE agencies. The alternative is defined as the baseline plus the participation of GEF and other donors to support the removal of existing barriers. The estimated cost of the Baseline Scenario is $102.5 million. The estimated cost by main activities is as follows: Demonstration Projects. In order to take into account the current budget for EE activities, including the proposed financial support from the Bank, the demonstration projects are considered as part of the Baseline situation. The estimated budget by project is included in Annex 2. Under the baseline scenario, total cost is estimated at about US$86 9 million. Core Support Activities. Under the Baseline Scenario: (a) information dissemination and marketing of best practices would remain fragmented; (b) financial instrunents to fund EE measures would continue limited and underutilized; (c) testing, certification, and labeling of energy equipment would remain at their current limited levels; and (d) credible market assessments and evaluation systems to track market penetration and effectiveness of EE measures would stay underdeveloped. Under the baseline scenario, total cost is estimated at about US$8.5 million. Capacity Building Module. Under the baseline scenario, institutional capacity would not be adequate to design and implement the regulations and programs required to support changes in the EE market. Total expenditures under the Baseline Scenario are estimated to be about US$7. 1 million. GEF Alternative The proposed alternative will demonstrate the viability of delivering EE projects through traditional and alternative service providers, including electricity utilities, ESCOs, appliance retailers, manufacturers, and energy state agencies, using performance contracting, pricing and regulatory instruments, and new financing tools. Further, the project will introduce a countrywide EE information system designed to provide plant and financial managers, and energy consumers with credible best practices for various technologies and contractual arrangements. Finally, th; project will also focus on reinforcing regulatory and normative tools to catalyze EE projects. These activities are aimed at overcoming the major barriers to EE investments in Brazil. Demonstration Projects. This component will demonstrate both the uses of efficient technologies, financed by the Bank and delivery systems to be financed by GEF, including performance contracting, rebates and tariff options. A series of EE investments involving different delivery systems, that is, rebates, tariff options, and performance contracting, wilU be designed, implemented, and evaluated and the results widely disseminated. Three sectors are targeted for initial demonstration projects: commercial 46 Annex 4 customers, large industrial customers; and public facilities including offices, schools, and hospitals. The demonstrations will be competitively chosen using selection criteria based upon likely project success, replication potential, capacity of implementing participant, and diversity of project mix. The incremental costs of demonstrating and marketing the different delivery systems are the costs associated with introducing those concepts in Brazil and showing, in particular, that they are attractive to the private sector. The total cost of the GEF Alternative to demonstrate both pilot projects and their respective market-based delivery systems is US$90.2 million. Core Support Activifies. While the demonstration projects, and respective delivery systems, would introduce new ways to implement efficiency projects, there is a need to develop a platform to facilitate replication in other sectors of the economy while attracting private sector capital. To do so, four core activities are geared to: * facilitate the replication of financially successful best practices through information dissemination to decision makers. The incremental costs associated with this component include the preparation of a core number of Best Practice cases and technical guides, introduction of marketing and dissemination systems, evaluation of program results and training of staff at PROCEL and monitoring contractors to prepare the case studies. reduce high initial transaction costs and perceived risks to the local financing community, so that they can channel funds into the energy service industry. The incremental costs associated to this activity include assessment of factors impeding the flows of private capital and selection of instruments to mitigate these factors, training of banking community on evaluation of EE projects, preparation of pre-investment portfolios for consideration by the banking cormmunity, and developing and implementing verification protocols. - strengthen the labeling and standard program to promote the use of efficient appliances among energy users. The incremental costs associated with this component include: (a) expanding testing facilities, and (b) monitoring of implementation and effectiveness. • develop a marketing approach to EE programs and measures. Incremental costs associated to this activity will include taking periodical market assessments that would gauge the market's response to different programs and allow their realignment as required and evaluation systems to monitor market penetration and effectiveness of EE measures. This activity is critical to the development of credible monitoring mechanisms. Under the GEF Alternative, total cost of support core activities will amount to US$20.2 million. Capacity Building Module. The GEF alternative includes support to enhance the institutional capacity and knowledge at federal and state regulatory agencies to effect EE policies in a reformed energy sector. This is particularly important at a time when federal and state regulators will be responsible for regulating how proceeds of the privatization of the electricity distribution concessions-amounting to about US$50 million/year at its peak-will be allocated among cost-effective end-user EE projects. Further, and to influence future technical staff, a targeted educational program will be launched at the level of the technical schools. The incremental costs associated with this component include: (a) training state regulators on EE related regulations; (b) monitoring its implementation and effectiveness; (c) targeted training material to be developed for technical schools; and (d) project implementation support to the PMO for management and monitoring of the project. Total cost under the GEF alternative is estimated at US$15.1 million. 47 Annex 4 Conclusion Total cost of the project under the GEF alternative is US$125.5 million, as compared to a baseline case of US$102.5 million. Incremental features are estimated at US$23 million, of which the GEF is financing US$20 million, and CIDA and ALURE US$3 million. Benefits of the proposed alternative are the emission savings resulting from project implementation and replication of EE measures expected to be caused by the market transformation and capacity-building activities. Energy savings derived from implementation of the GEF alternative for a period of ten years is estimated to be equivalent to 19.2 million tons of CO2 at a cost of about US$1.2 per ton of CO2. The Incremental Cost and Benefits matrix attached summarizes the costs and benefits of the Alternative compared with the Baseline situation. 48 Annex 4 Attachment Incremental Costs and Benefits Matrix Baseline | Alternative IEncrement GCurrent barriers Barriers reduced or I Reduced or GloBale nvfironmental eliminated eliminated barriers Benefit CO2 emissions increasing Reduced CO2 emissions Reduced C02 as currently forecasted compared with emissions (17.0 I forecasted ,million tons) Current EE measures Increased number of Additional viable EE viable EE measures measures able to be replicated in other I___________ ,________ _ ,countries Domestic Benefit } Use of electricity as Reduction in the use of ,18.4 TWh saved currently forecasted energy compared with forecasted Current level of electric Improved level of Better energy , services , energy services services Costs US$ million US$ million US$ million Ongoing EE investments (*) plus: A. Demonstration projects 86.9 90.2 3.3 B. Core Support activities 1 8.5 20.2 11.7 C. Capacity Building 7.1 15.1 8.0 Module Total Costs 102.5 125.5 23.0 CIDA/ALURE contributions 3.0 3.0 GEF Incremental Costs 20.0 (**) *) Ongoing EE investments in the baseline include counterpart funds of ELETROBRAS and participating utilities and other partners mobilized by PROCEL, as well as current customer contribution to EE investments. **) Including both Phases of the EE Program 49 Annex 5 INSTITUTIONAL AND FINANCIAL ASSESSMENT A. Institutional and Financial Profile of the Brazilian Power Sector ELETROBRAS was established in 1961 as a holding company for electrical utilities owned by the Federal Government, mainly to finance the development of capital-intensive hydropower projects. In 1973, important reforms were introduced in the legislation for the power sector, reinforcing the centralized characteristics of the model, and confirming the role of ELETROBRAS as the national coordinator of the power system planning and operation. In spite of the important achievements reached by this model in the past, an inadequate regulatory system, lack of competition, and political pressures resulted in increasing problems for the sector, in particular, inefficiency in system expansion and electricity pricing, raising operating costs, and difficulties to finance increasing investment requirements. Based on the new Constitution approved in 1988, major reforms have been introduced in the institutional and regulatory framework of the power sector in the last years, aiming the decentralization of the sector, facilitating private participation, and enhancing competition. Under the National Program for Privatization (PND), coordinated by the National Development Bank (BNDES), several power utilities were privatized in the period 1995 to mid-1998, such as: ESCELSA, in the state of Espirito Santo (1995), LIGHT and CERJ in the state of Rio de Janeiro (1996), COELBA in the state of Bahia (1997). In agreement with the government of several states, ELETROBRAS is also participating in the administration and preparing the privatization of CEMAT, ENERSUL, COSERN, ENERGIPE, CEAL, CERON, CEPISA, and CELPA. These utilities, as well as the large regional subsidiaries of ELETROBRAS, (FURNAS, ELETROSUL, CHESF and ELETRONORTE) are also included in the mentioned PND. Additionally, the government of the state of Sao Paulo has initiated the privatization of CESP, CPFL and ELETROPAULO. Until now, ELETROBRAS has been a combination of a holding company of electric power utilities, a bank/leasing company, and a development institution for the power sector of Brazil. New power sector legislation has mandated the restructuring of ELETROBRAS by the spin-off of ELETRONORTE, CHESF, ELETROSUL and FURNAS where new power utilities will be created and their shares distributed to the existing shareholders of ELETROBRAS. Through year 2002, about twenty new entities for power generation and transmission would be operating in the interconnected power system, under the supervision of ANEEL, the regulatory body for the electric power sector. Under the new scenario of increased privatization of the sector, the financial success of ELETROBRAS will depend upon its ability to attract capital to participate with equity and financing in those economically efficient projects where risks for private sector participation need to be reduced. In addition, ELETROBRAS will continue implementing programs of national interest such as PROCEL, and research for technical development and indicative planning. ELETROBRAS profits will comprise both proceeds from the reversion fund created by the Federal Treasury to be used in the service expansion and improvement and an appropriate return on the outstanding balance of the funds used to finance the projects, less the costs of borrowings. B. ELETROBRAS' Financial Situation Financial Model and Assumptions. Financial corporate models developed by ELETROBRAS to analyze the Brazilian power sector are not being used anymore, as the structure of the sector is changing and moving rapidly to private operation. Therefore, a financial model for the future operation of ELETROBRAS was developed during project preparation to provide corporate income statement, cash flow and balance sheet in nominal terms for an 8-year period, with 1995-97 as the historical period. Theoretical procedures used by the model are consistent with International Accounting Standards (LAS) and the requirements of Brazilian 50 Annex 5 authorities. However, due to the difficulty in defining detailed future scenarios for privatization, the model has been utilized only to analyze ELETROBRAS finances in the last years and to visualize the effects of some general trends for sector restructuring and privatization. Detailed financial projections are available in project files. Present Financial Situation. Total assets of the companies operating in the Brazilian power sector in 1996 amounted to about US$170 billion, with 50% being equity. The annual revenue was US$35 billion. ELETROBRAS assets in 1996 were US$79 billion, with equity about US$65 billion. In financial terms, this means that: (a) ELETROBRAS stands for about 50% of the power sector resources; and (b) most of the foreign sector debt does not belong to ELETROBRAS, as it corresponds to its subsidiaries and other utilities. Over the last three years, the financial situation of ELETROBRAS has been sound and it is expected to continue being an efficient company through the restructuring period, in spite of size reduction. ELETROBRAS' revenues increased from US$2.2 billion in 1995 to US$4.7 billion in 1997, with its net income growing from US$0.8 billion to US$3.7 billion. Operation and maintenance expenses account for less than 40% of the revenues, which is a good operating efficiency indicator. Capital expenditures have increased from US$2.3 billion to US$7.7 billion in the same period, being mostly funded by internal fund generation. Consequently, debt service coverage is higher than usually found in power utilities and ELETROBRAS has capacity to absorb new debts. ELETROBRAS' long-tenn liabilities are less than 25% of its equity, showing good performance (as usually up to 70% is accepted). In short, presently ELETROBRAS' financial situation is very sound and creditworthy. Future Financial Scenarios. Considering that by the end of year 2002 the Brazilian power sector restructuring should be finished, two scenarios have been envisaged for ELETROBRAS future operation. The base case considers that the goal was achieved and by the end of year 2002 ELETROBRAS would be reduced to 20% of its present size. The second scenario assumes that the proposed restructuring is not fully accomplished and the reduction was only 50%. The base case postulates that most of current assets of ELETROBRAS were transferred to the new entities, maintaining only its functions related to the global supervision of the operation of the interconnected system (load dispatching and energy accounting will be in charge of and Independent System Operator - ISO), ownership of EHV transmission lines and supervision of international operations. In both cases, it was assumed that current ELETROBRAS liability was also proportionally transferred, under the spin-off strategy explained below. Details of main assumptions are available in project files. Financial Projections under Base Scenario. The Brazilian power sector, as mentioned before, is shifting toward increased private participation. The role of ELETROBRAS could change over the future, as privatization is progressing. Therefore, financial projections under the base-case scenario are indicative and will undergo some change as the restructuring evolves. The projections are considered realistic due to the fact that ELETROBRAS: (i) has been able to operate satisfactorily during periods of high inflation; (ii) has shown skills and experience to coordinate large and sophisticated projects, as well as a large numbers of small projects consistently; and (iii) has maintained financial discipline, strictly controlled working capital, correctly assessed credit risk and plowed back a substantial portion of earnings into financing sector expansion. ELETROBRAS current revenues are about US$3.7 billion. Consequently the management of the proposed US$250 million EE program does not represent any risk and it should not either adversely affect the expected ELETROBRAS finances. The base case projections show that ELETROBRAS, in spite of the reduction of its activities, will be able to establish an acceptable profit trend, meet all debt service commitments, keep a reasonable equity base, earn an adequate return on total funds invested, and improve its financial ratios. Sensitivity studies and Monte Carlo simulations available in project files show that under reasonable confidence limits, ELETROBRAS should be able to maintain a good financial structure and earn an acceptable return on its investments. 51 Annex 5 Income Statement About 80% of ELETROBRAS' operating revenue comes from loans granted to power Figure5.1:IncomeStatement utilities of the sector. The remainder of revenue corresponds mostly to earnings from 4 5000 - ea its participation in equities of electric power : 4000 Revenues 600 I. I exvenses companies. On the other hand, operating 20°00 lOerating expenses consist mainly of financial charges 1 Ioo Expenses paid on loans (almost 50%) and functioning 0 Net Income expenses (personnel, material and other), as 14' 5P depreciation of fixed assets owned by ELETROBRAS is irrelevant. It has been assumed that the spin-off operations will affect its revenues after 1999. By year 2003, revenues will drop to US$1.2 billion, about 31% of the F 5 observed 1997 level. Net income will also Figure 5.2: Source of Funds follow the same trend, going down from US$3.0 billion in 1997 to US$0.7 billion in year 2003. 25000 l A moderate growth of ELETROBRAS has been 20000 U Internal Sources assumed after the restructuring period, I 15000 & Transfer of considering the normal growth of the operating 10000 _o Assets and supervisory activities required by its 0sooo U Borrowings and holdings in Itaipui, nuclear plants, remaining 0 oerExternal transmission assets, and administration of Sources special programs. As can be observed in Figure | & '9 ' 5.1, operating income (revenue less operating |_l expenses) and net income (operating income less taxes and social charges) will be substantially reduced after 1999, but its financial ratios (Fig. 5.6) would remain favorable in spite of its size reduction. The indicated favorable financial performance of ELETROBRAS could be undone if a strategy is adopted by the Government for confining ELETROBRAS' activities to an increasing number of social or political unprofitable projects. This seems unlikely as the Brazilian policy is shifting towards more market-based strategies. Funds Statement Currently about 41% of ELETROBRAS' available funds come from internal sources (net income and dividends received). External Figure 5.3: Use of Funds sources account for the remainder 59%/o, coming from the RGR created by the federal government 25000 _ to finance expenses for the expansion and I 20000 0 Capital improvement of electricity services (52%) and Expenditures borrowings (7%/o). As shown in Figures 5.2 and | 15000 _ Reduction of 5.3, the spin-off operation would reduce long 10000Lablte term and permanent assets (e.g., equity 5000 U Transfer of investments in electric power companies). This | Shares will be compensated by a reduction of liabilities 0 and stockholders equity. Therefore, lt o ELETROBRAS' shareholders will receive | ' ' shares in an amount equivalent to the net value of each spun-off subsidiary. A total amount of 52 Annex 5 about US$56 billion is assumed to be transferred. As a result, ELETROBRAS' assets would be reduced to about US$16 billion by the end of year 2002, i.e., to 18.5% of its current value. It has been assumed that the spin-off process will be carried out over the 1999-2002 period. In terms of the use of funds, in the past years most of ELETROBRAS' resources were used to finance capital expenditures, particularly participation in equity of electric companies, which increased about 14% per year. Debt service has been low, as ELETROBRAS' indebtedness is small because most of the lending flow needed by the sector has being going directly to electric power utilities. Other applications included acquisition of plant and equipment, remuneration of stockholders, and surplus to pay other liabilities. Under the assumed spin-off operation, the funds available from the selling of assets will be received by the ELETROBRAS' shareholders. Balance Sheet Figure 5.4: Liability & Equity As a result of its restructuring, the assets, liability and equity of ELETROBRAS would be drastically reduced 100000 over the period 1999-2003. Equity reduction is due to the 80000 transfer of about US$55 billion of shares from ' 60000 l ablfty ELETROBRAS to new companies to be created. _ 40000 E Equity] Therefore, equity would be reduced from US$67.0 at the E 20000 end of 1997 to US$11.9 billion by the end of year 2002 0 (see Figure 5.4). Long term liabilities would be also reduced from the current value of US$16.2 billion, to NO .o .9P US$4.2 billion, in the same period, as about 25% of the capital of ELETROBRAS comes from borrowings. Therefore, total assets and liability plus equity would be reduced from US$86.9 billion to US$16.0 billion by the end of year 2002 (see Figure 5.4). On the other hand, total net fixed assets, which amounted Figure 5.5: Evolution of Assets to US$78.9 billion by the end of 1997, would be reduced | l to US$13.9 billion by the end of year 2002. This 100000 l reduction in book values is consistent with the total 80000 transfer assumed of ELETROBRAS' subsidiary shares to { 60000 fi uent ELETROBRAS' shareholders, amounting to about US$55 40000 _ Fixed billion. Current assets, which usually are correlated with 2000 the level of commercial activities, would also be reduced. 0 Consequently, total assets would drop from US$86.9 0 billion in 1997 to US$ US$16.0 billion by the end of year 2002. This means a reduction of about 82% in a period of four years (see Figure 5.5). 53 Annex 5 Figure 5.6: Evolution of Financial Ratios 120 - Operatig Income (% of 20 Return on Capital Fso - 1Debt Service Coverage S 60- l | l | | | 100 ~~- Internal Sources(% of 1995 1997 1999 2001 2003 Financial Ratios As shown in Figure 5.6, the forecasted financial ratios of ELETROBRAS are robust, even during the transition years. Past operating income has been acceptable in recent years (higher than 30% of revenue), and it is expected to improve over the projection period because operating expenses would be reduced by a higher percentage than revenues. Net income, as a percentage of revenues, has improved in the last three years, reaching an impressive level of almost 78% in 1997. Future values are expected to range between 60% and 79%, higher than the value of 30% widely accepted for this type of institutions. ELETROBRAS has had a low rate of return on average invested capital, in spite of its increase from 1.6% in 1995 to 4.8% in 1997. With the proposed restructuring and adopted assumptions, it could improve to 8% by year 2002. ELETROBRAS' indebtedness is low (about 20% of total capitalization) and its debt service coverage is high. Intemal resources constitute about 2 times the long-term debt service. Due to asset transfer and reduction of liabilities, this indicator would still improve. Currently, total capital expenditures are almost totally financed by internal resources and this situation is expected to continue over the period. ELETROBRAS currently presents a current ratio between 2 and 3, higher than the accepted range of 1.2% to 1.5% and forecasted values show the same level. C. Financial Management, Control and Technical Assistance Financial Management and Control. State agencies and utilities under the coordination and supervision of PROCEL will implement the demonstration projects included in the proposed operation. Brazil is lacking adequate financial services to fund energy conservation projects. A low risk strategy of pursuing a variety of demonstration projects increases the importance of PROCEL's proper financial management, especially for assessment of default risks, credit extension, cash-flow management, and control of accounts receivable. 54 Annex 5 Considering the current strength of ELETROBRAS in this area, it is expected that PROCEL, with the aid of technical assistance, will be able to: (i) Assess the creditworthiness of implementing agencies; (ii) accurately record and supervise a large number of transactions and manage an extensive and diverse portfolio of lenders and debtors, including physical project implementation, contract pricing and cost recovery; (iii) evaluate the effectiveness of individual energy-efficiency projects to decide if they can be replicated and if dissemination of results could lead to sustainable programs on a national scale; and (iii) fulfill monitoring and reporting requirements of project sponsors, particularly the World Bank and Brazilian authorities. PROCEL has had experience in coordinating these types of projects and working with these institutions implementing many projects over the past decade. PROCEL's primary mechanism for transferring grants and loans to local utilities and other executive agencies is PROCECON, whereby ELETROBRAS and PROCEL sign general agreements with the implementing agencies and fund individual projects by approving specific task orders. In addition, a cooperation agreement enables UNDP to administer some specific funds and contracts on behalf of PROCEL and perform procurement functions. Existing qualification and monitoring procedures from these mechanisms will be strengthened and used to supervise the proposed World Bank loan and GEF grant, particularly in the following three areas: Project Management. ELETROBRAS has agreed to create a special Project Management Unit to supervise the implementation of the proposed EE project, consisting of a senior project manager supported by Monitoring and Evaluation, Marketing and Dissemination, Procurement, Accounting, and Project Coordination units. Information and Monitoring Systems. ELETROBRAS and PROCEL already have in place a physical and financial control system to track the implementation of their funded projects. ELETROBRAS has agreed to upgrade this system and to implement: (a) a project analysis data base for measuring actual costs and benefits (energy savings, peak load reductions and other); and (b) a market assessment activity system for monitoring market responses (demand characteristics, equipment available, energy use pattern and other). Technical Training. PROCEL is preparing a program to support the project implementation by training its own staff and the staff from local utilities and agencies participating in the program. Training will be primarily focused on the operation of the information and monitoring systems and World Bank procurement procedures. Technical Assistance. PROCEL is currently receiving technical assistance in project evaluation from Brazilian universities and international institutions (e.g., Canadian technical assistance funded by CIDA). The proposed GEF grant includes technical assistance to assist PROCEL to enhance the financial systems which are essential to: (a) operate and control project implementation; (b) provide basic training and guidance to the financial personnel; (c) further improve the financial planning function; and (d) further enhance financial policy and appropriate procedures. Further supported under the project management components of the GEF grant, where necessary, the technical assistance will include: (1) improvement of the financial models and refine the forecasts to reflect available resources, corporate capacity, financial constraints and sustainable growth; (2) assessment of the corporate structure of potential fund recipients, business environment, project inventory and resources and determination of: (a) appropriate financial structure; (b) critical success factors (debtors control and collection, contract pricing, cost control, corporate growth, etc.); (c) generic accounting structure (code of accounts and general ledger, payroll, a/c receivable, trade creditors etc.) and management information needed to address these factors; (d) cash management and security; and (e) integrated budgetary and cost control mechanisms; (3) preparation, design, supply, installation and commissioning of enhancements to the financial systems software, computer hardware and 55 Annex 5 training; and (4) review and amend the terms and conditions of the standard business contracts to reflect the ELETROBRAS/PROCEL financial policies. 56 Annex 6 PROCUREMENT AND DISBURSEMENT ASSESSMENT A. Procurement Summaries of project costs by procurement arrangements, thresholds for procurement arrangements and prior review, and allocations of Grant and Loan Proceeds by expenditure category are presented in Tables A, B, and C below. Further explanations of the procurement plans agreed for each project component are provided below and are available in the project files. All procurement of works, goods, and services will be carried out in accordance with the Bank's Guidelines. Bank's standard bidding documents will be used for ICB; model bidding documents agreed between the Bank and SEAIN will be used for all NCB. Procurement plans have been prepared by each participant and are available in the project file. Independent consultants will perform procurement audits under TOR satisfactory to the Bank. The Borrower is being assisted by UNDP in procurement matters under an ongoing contract that is not financed by the Bank nor GEF. Table A: Project Costs by Procurement Arrangements (In US$ million equivalent) Total Cost /a Procurement Method Consulting Expenditure Category ICB NCB Other/b Services NBF /c 1. Works Demonstration Projects 8.2 23.9 0.5 32.6 (6.7) (4.9) (11.6) Core Support Activities 5.8 5.8 (0.0) (0.0) Capacity Building Module 0.1 0.7 0.8 (0.0) (0.0) 2. Goods Demonstration Projects 29.3 8.8 10.6 1.5 50.2 (21.0) (4.1) (8.4) (33.5) Core Support Activities 2.0 1.5 0.1 3.6 (1.5) (0.7) (0. 1) (2.3) Capacity Building Module 1.4 0.2 1.6 (0.4) (0.1) (0.5) 3. Consultant Services Demonstration Projects 1.6 0.5 2.1 (1.2) (1.2) Core Support Activities 8.8 2.0 10.8 (4.9) (4.9) Capacity Building Module 9.7 3.0 12.7 (4.0) (4.0) Total 31.3 20.0 41.3 20.1 7.5 120.2 (22.5) (11.9) (13.5) (10.1) (58.0) Notes: /a Excludes interest during construction and loan front-end fees. Figures in parenthesis are the amounts to be financed by the Bank loan/GEF grant. /b Includes international and national shopping and procurement of small works. /c NBF = Not Bank-Financed (consultancies under trust funds, any reserved procurement, and any other miscellaneous items). 57 Annex 6 Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Prior Review Category (Threshold) Method (US$'000) 1. Works >5,000 ICB All 350-5,000 NCB First two <350 (a) Shopping First two 2. Goods >350 ICB All 100-350 (a) NCB First two <100 Shopping First two 3. Consultant Services - QCBS All <100 LCS First two <100 SFB First two <100 Individuals All (a) Prior review above US$350,000.00 Demonstration Project Component Procurement is for works, goods, and consultant services using both the GEF grant and the IBRD loan, and conducted by project participants. Most of project participants and UNDP have experience with procurement using Bank guidelines. As demonstration projects are, in general, of small size, it is difficult to organize packages large enough for International Competitive Bidding (ICB). Indeed, all works will be contracted by National Competitive Bidding (NCB) and national and international shopping. However, if there are any work contracts costing more than US$5 million, ICB will be used. In the case of goods to be used by several participants, they will be purchased together, when possible, in order to increase the package size and through ICB, e.g., compact fluorescent lamps and public lighting fixtures. In total, US$29.3 million value is planned to be procured through ICB, US$17.0 million through NCB, and US$34.5 million through national and international shopping procedures. Local suppliers of equipment and materials with a local aggregate value of at least 50% of the price of the goods will be given margin of preference of 15% or the applicable import duties, whichever is lower. In the case of works, no margin of preference will be applied. Small consulting service contracts for monitoring and evaluating the demonstration projects, totaling about US$1.6 million, will be awarded through Least Cost Selection (LCS), Selection under a Fixed Budget (SFB), and individual consultant procedures. Core Support Activities Procurement for the Core Support Activities is mainly for consultancy services with some complementary contracts for works and goods. Procurement for consultants will be carried out according to Quality and Cost Based Selection (QCBS) procedures for the main contracts, and LCS, SFB, and individual consultant procedures for small energy audits and similar repetitive works for a total of US$8.8 million. The main contracts include those aimed to support the development and implementation of the following programs and projects: (a) Best Practice program, to prepare and disseminate case studies and technical guides of commercially focused EE applications; (b) Green Lights program, to improve efficiency in illumination of commercial and public buildings; (c) Financial Facility, to support ESCO development, use of performance contracting, and preparation of a portfolio of ESCO-based projects ready for financing by third parties; and 58 Annex 6 (d) Market Assessment, to evaluate degree of success of PROCEL EE efforts and guide future PROCEL initiatives. These contracts will be the main instruments for transfer of international know-how to PROCEL and all participants in the EE project by supporting long-term twinning-type arrangement with advisors and trainers with a wide range of practical experience. In general, these relationships are expected to extend for the duration of the project. In addition, individual consultants will be hired to provide hands-on operational advice and support for project implementation. The Core Support component includes procurement of laboratory equipment to install or upgrade testing facilities for a wide range of EE equipment, including domestic appliances and solar water heaters, to support preparation of standards, and certification and labeling programs. This equipment is planned to be procured through ICB procedures for an amount of about US$2.0 million. Complementary small contracts for supplying of goods and services, such as printed material and dissemination activities, are planned to be procured through NCB and shopping procedures for a total amount of about US$6.4 million. Capacity building Module (CBM) Procurement for the CBM will include consultancy services, with complementary small contracts for works and goods. Services will be provided by international and local EE specialists and trainers for a total amount of about US$9.7 million. Services will include training and education to a broad segment of project participants, and direct support to regulatory agencies, energy agencies, and PROCEL. Procurement will be carried out according to QCBS procedures for the main contracts, and LCS, SFB, and individual consultant procedures for small contracts. Main activities include: (a) development of EE policies by Federal and State regulatory bodies; (b) enhancing of energy saving strategies by energy agencies and utilities; (c) enhancing management and technical expertise of PROCEL and its systems for collecting, storing, and managing EE- related data; (d) upgrading of physical and financial project control systems; (e) improving evaluation of social and environmental impacts; (f) enhancing global market assessment, research and surveys of EE activities; and (g) preparation of Phase II of the EE programn. Related programs performed by international energy agencies and funded by donors will also support these activities. Complementary small contracts for about US$2.6 million are planned to be awarded through NCB and shopping. They include small contracts for provision of a wide range of educational materials and equipment, and preparation and arrangement of courses, seminars, site visits, and workshops over the course of the project B. Disbursement Table C presents the planned allocation of grant and loan proceeds. For expenditures pertaining to goods contracts valued at less than US$350,000, consultancy contracts valued at less than US$100,000 for firms and US$50,000 for individuals and all training, reimbursement will be made on the basis of Statements of Expenditures. To facilitate disbursements, two Special Accounts, one for GEF funds with authorized allocations of US$4.0 million, and other for IBRD funds with authorized allocations of US$6.0 million will be established at ELETROBRAS-PROCEL. Part of the IBRD funds will be allocated in Subsidiary Special Accounts to be established at main participating utilities and agencies. Applications for replenishment will be submitted monthly or when the amounts withdrawn equal 50 % of the initial deposit, whichever comes sooner. 59 Annex 6 Table C: Allocation of Grant and Loan Proceeds Expenditure Categozy Amount in Financing Percentage US$ million GEF Grant 1. Works 1.6 100% of foreign expenditures and 80% of local ____ ___ ___ _ __ ____ _ ep eLn tures_ _ _ _ 2. Goods 3.3 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 80% of local _____________________________ 10.1 dxpenditures for other items procured locall 3. Services 10.1 100% Total GEF Grant 15.0 IBRD Loan _______ 4. Works under Part A 10.0 100% of foreign expenditures and 80% of local _____ ________ _ _ _expenditures 5. Goods under Part A 32.966 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 80% of local expenditures for other items ocured locally 6. Front-end Fee 0.434 Total IBRD Loan 43.4 60 Annex 7 PROCESSING BUDGET AND SCHEDULE A. Project Budget (US$000) Planned Actual (At final PCD stage) Bank 256.3 229.9 GEF 140.2 140.2 Total 396.5 370.1 B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project (months) 14 24 First Bank mission (Identification) 03/11/97 03/11/97 GEF Council Work Program Approval 07/97 07/97 Appraisal Mission Departure 04/13/97 10/15/98 GEF CEO endorsement 04/20/98 05/18/99 Negotiations 08/31/98 08/16/99 Planned Date of Effectiveness 03/31/99 01/31/00 Prepared by: ELETROBRAS and participant utilities and agencies. Assistance before project inception: ESMAP: $90,000 Bank staff who worked on the project included: Bank staff who worked on the project included: Luis M. Vaca-Soto (Task Manager, LCSFE); Jose A. Carvalho (Senior Counsel, LEGLA); Arturo S. Rivera (Senior Energy Specialist, EMTEG); Orville F. Grimes (Projects Adviser, LCOQE); Amarquaye Armar (Senior energy Planner); Winston Hay (Senior Power Engineer); Vladimir Jadrijevic (Senior Procurement Specialist, LCOPR), and Nelson de Franco (Brazil - Energy Team Leader, LCSFE). The following consultants also worked on the project: Earle Taylor (Energy Efficiency and Demand Side Management); Heman L. Campero (Economic and Financial Analysis); Howard Geller (Energy Conservation); Charles R. Guinn (Strategy and Policy Analysis); Walter Scott (Power Distribution); Herman J. Nissenbaum (Operational Support); Julius Wilberg (Financial Analysis); and Eric Martinot (Project Design). Contributors to project preparation were Romelia Schneider (Procurement Analyst, LCSFE), and Jordan Blackman and Sati Achath (Consultants). Peer reviewers were Robert P. Taylor (Senior Energy Economist, EASEG) and Srinivasan Padmanabhan (Energy Specialist, EASEG). The GEF external reviewer was Stephen Wiel (Energy Efficiency Scientist - Berkeley National Laboratory - USA). Katherine K. Scalzulli, Olga Bagci, Elizabeth Walden Tambor, and Maria Antonieta Gonzalez assisted in the production of the report. 61 Annex 8 Brazil: Energy Efficiency Project Main Documents in the Project File (*) Project Concept Notes (PCN). World Bank Project Concept Document (PCD). World Bank The Emerging ESCO Industry in Brazil. Instituto Nacional de Eficiencia Energetica, American Council for an Energy Efficient Economy. Power Sector of Brazil - Ten-Year Expansion Plan: 1998/2007- ELETROBRAS Annual Financial Report 1997- ELETROBRAS Project Assessment of Global Environmental Impacts of PROCEL. PROCEL - ELETROBRAS Legislation for Conservation of Electric Energy in Brazil. PROCEL - ELETROBRAS Energy Conservation and GHG Emissions in Brazil. National Institute of Energy Efficiency - Brazil National Program Against Energy Waste. PROCEL - ELETROBRAS Comments on the PROCEL proposals for DSM in Brazil. Eastern Electricity, U.K Creating Energy Efficiency Markets - Alternative Institutional and Financing Implementation Arrangements. World Bank Restructuring of the Brazilian Power Sector - Energy Efficiency and Research and Development. Coopers and Lybrand Future of PROCEL and DSM Programns in Brazil in the Context of Utility Sector Restructuring. ACEEE/PROCEL Draft Energy Efficiency Law - National Policy on Energy Efficiency Brazil Energy Efficiency Project - Core Support Projects -PROCEL - ELETROBRAS Brazil Energy Efficiency Project - Demand-Side Management Options/Marketing Report - CEMIG Brazil Energy Efficiency Project - TOR for Consultants. PROCEL - ELETROBRAS Brazil Energy Efficiency Project-Best-Practice-Energy Efficiency Infonnation Program. PROCEL - ELETROBRAS Brazil Energy Efficiency Project - Project Proposal. PROCEL - ELETROBRAS Brazil Energy Efficiency Project - Institutional, Financial, and Cost-Benefit Analysis. World Bank (*) Including electronic files. 62 Annex 9 Status of Bank Group Operations in Brazil Operations Portfolio As of 12-Jul-99 Original Amount in US$ Millions Fiscal Project ID Year Borrower Purpose IBRD IDA Cancellat Undisbu ions rsed Number of Closed Projects: 198 Active Projects BR-PE-43874 1999 GOVERNMENT OF BRAZIL DISEASE SURVEILLANCE 100.00 0.00 0.00 96.52 BR-PE-48869 1999 FEDERATIVE REPUBLIC OF BR SALVADOR URBAN TRANS 150.00 0.00 0.00 150.00 BR-PE-50763 1999 GOV. OF BRAZIL FUNDESCOLA 2 202.03 0.00 0.00 202.03 BP.-PE-54120 1999 GOVERNMENT OF BRAZIL AIDS 2 165.00 0.00 0.00 144.73 BR-PE-55388 1999 FEDERAL GOVT OF BRAZIL ANIMALiPLANT DIS. CO 44.00 0.00 0.00 44.00 BR-PE-58129 1999 FEDERAL GOVERNMENT EMER. FIRE PREVENTIO 15.00 0.00 0.00 15.00 BR-PE-35728 1998 STATE OF BAHIA BAHIA WTR RESOURCES 51.00 0.00 0.00 39.36 BR-PE-38895 1998 GOVERNMENT OF BRAZIL FED.WTR MGT 198.00 0.00 0.00 171.58 BR-PE-38947 1998 GOVERNMENT OF BRAZIL SC. & TECH 3 155.00 0.00 0.00 137.67 BR-PE-40033 1998 THE STATE OF MINAS GERAIS MG STATE PRIV. 170.00 0.00 0.00 170.00 BR-PE-42565 1998 STATE OF PARAIBA PARAIBA R.POVERTY 60.00 0.00 0.00 45.26 BR-PE-43420 1998 FED. REPUBLIC OF BRAZIL WATER S.MOD.2 150.00 0.00 0.00 150.00 BR-PE-43421 1998 STATE OF RIO DE JANEIRO RJ M.TRANSIT PRJ. 186.00 0.00 0.00 186.00 BR-PE-48357 1998 REPUBLIC OF BRAZIL CEN.BANK TAL 20.00 0.00 0.00 16.83 BR-PE-50762 1998 GOV. OF BRAZIL FUNDESCOLAI 62.50 0.00 0.00 27.13 BR-PE-51701 1998 STATE OF MARANHAO MARANHAO R.POVERTY 80.00 0.00 0.00 59.52 BR-PE-57910 1998 GOVERNMENT OF BRAZIL PENSION REFORM LIL 5.00 0.00 0.00 5.00 BR-PE-6474 1998 STATE OF SAO PAULO LAND MGT 3(SP) 55.00 0.00 0.00 55.00 BR-PE-6549 1998 TBG GAS SCTR DEV PROJECT 130.00 0.00 0.00 130.00 BR-PE-6559 1998 THE STATE OF SAO PAULO (BF-R)SP.TSP 45.00 0.00 0.00 45.00 BR-PE-34578 1997 RIO GRANDE DO SUL RGS HWY MGT 70.000 0.0 0.00 65.90 BR-PE-38896 1997 STATE OF RGN R.POVERTY(RGN) 24.00 0.00 0.00 14.77 BR-PE-42566 1997 STATE OF PERNAMBUCO R.POVERTY(PE) 39.00 0.00 0.00 13.51 BR-PE-43868 1997 STATE OF RGS RGS LAND MGT/POVERTY 100.00 0.00 0.00 88.48 BR-PE-43871 1997 STATE OF PIAUI (PIAUI)R.POVERTY 30.00 0.00 0.00 8.76 BR-PE-43873 1997 FED.REP.OF BRAZIL AG TECH DEV. 60.00 0.00 0.00 46.96 BR-PE-46052 1997 CEARA WTR PILOT 9.60 0.00 0.00 7.46 BR-PE-48870 1997 THE STATE OF MATO GROSSO MT STATE PRIV. 45.00 0.00 0.00 20.09 BR-PE-6475 1997 FED. REP. OF BRAZIL LAND RFM PILOT 90.00 0.00 0.00 58.34 BR-PE-6532 1997 FEDERAL GOVERNMENT FED HWY DECENTR 300.00 0.00 0.00 252.19 BR-PE-6562 1997 STATE OF BAHIIA BAHIA MUN.DV 100.00 0.00 0.00 92.79 BR-PE-37828 1996 STATE OF PARANA (PR)R.POVERTY 175.00 0.00 0.00 138.07 BR-PE-40028 1996 FEDERATIVE REPUBLIC OF BR RAILWAYS RESTRUCTURG 350.00 0.00 50.00 37.42 BR-PE-6512 1996 CVRD ENV/CONS(CVRD) 50.00 0.00 0.00 20.75 BR-PE-6554 1996 FED. REP. OF BRAZIL HLTH SCTR REFORM 300.00 0.00 0.00 224.52 BR-PE-35717 1995 GOVT OF BRAZIL RURAL POV. (BAHIA) 105.00 0.00 0.00 42.13 BR-PE-38882 1995 FED REPUBLIC OF BRAZIL RECIFE M.TSP 102.00 0.00 0.00 71.95 BR-PE-38864 1995 GOVT OF BRAZIL RURAL POV.- CEARA 70,00 0.00 0.00 19.31 BR-?E-38885 1995 GOVT OF BRAZIL RURAL POV.-SERGIPE 36.00 0.00 0.00 9.57 BR-PE-6436 1995 STATE OF CEARA ZIL CEARA UR.DV/WATER CO 140.00 0.00 0.00 57.34 BR-PE-6564 1995 FED REPUBLIC/BRAZIL BELO H M.TSP 99.00 0.00 0.00 41.15 BR-PE-6522 1994 ST.OF ESPIRITO SANTO ESP.SANTO WATER 154.00 0.00 4.00 72.97 BR-?E-6524 1994 ST.OF MINAS GERAIS MINAS MNC.DEVELOPMT 150.00 0.00 5.00 29.44 BR-PE-6543 1994 GOVERNMENT M. GERAIS BASIC EDUC 150.00 0.00 0.00 20.31 BR-PE-6555 1994 STATE GOVTS STE HWY MGT II 220.00 0.00 36.00 3.74 BR-PE-6558 1994 REPUBLIC OF BRAZIL PARANA BASIC EDUC 96.00 0.00 0.00 17.44 BR-PE-6541 1993 S.PAULO/PARANA STS. WTR Q/PLN(SP/PARANA) 245.00 0.00 9.30 25.61 BR-PE-6547 1993 FED.REP.OF BRAZIL METRO TRANSP. RIO 128.50 0.00 0.00 .29 BR-PE-6368 1992 GOVERNMENT WATER SECTOR MODERNI 250.00 0.00 0.00 1.24 BR-PE-6454 1992 GOB RONDONIA NTRL RES. M 167.00 0.00 0.00 27.60 BR-PE-6505 1992 GOVERNMENT OF BRAZIL MATO GROSSO NAT RES 205.00 0.00 0.00 53.09 BR-P-E-6414 1989 COMGAS, SAO PAULO NTRL GAS DIST 94.00 0.00 0.00 .04 Total 6,197.63 0.00 104.30 3,473.86 63 Annex 9 Active Projects Closed Projects Total Total Disbursed TIBRD and IDA): 2,619.45 18,377.82 20,997.27 of which has been repaid: 216.08 13,689.98 13,906.06 Total now held by IBRD and IDA: 5,877.24 4,747.22 10,624.46 Amount sold : 0.00 45.83 45.83 Of which repaid : 0.00 45.83 45.83 Total Uindisbursed : 3,473.86 59.38 3,533.24 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data is updated at the end of the first week of the month and is currently as of 30-Jun-99. 64 Annex 9 Brazil STATEMENT OF IFC's Committed and Disbuned Portfolio As of3l-Jul-99 (In US Dollar Millions) Commifted Disbursed IFC IFC FY Approval Company Loan Equity Quasl Partic Loan Equity Quasi Partic 1973/78/83 CODEMIN 0.00 4.34 0.00 0.00 0.00 4.34 0.00 0.00 1975/96 ONiteno NE 22.50 0.00 0.00 0.00 22.50 0.00 0.00 0.00 1980187197 Ipiranga 40.00 6.32 0.00 150.00 40.00 6.32 0.00 150.00 1980/88 OPP 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 19g0192 DENPASA 0.00 1.00 .12 0.00 0.00 1.03 .05 0.00 19S1 Brasilpar 0.00 .04 0.00 0.00 0.00 .04 0.00 0.00 1982184/86 PISA 0.00 3.90 0.00 0.00 0.00 3.90 0.00 0.00 1987/92/96 MBR 7.02 0.00 10.00 6.23 7.02 0.00 10.00 6.23 1987/96 Perdigao 26.25 10.00 0.00 12.00 26.25 10.00 0.00 12.00 1987/96/97 Duratex 19.00 0.00 3.00 72.17 19.00 0.00 3.00 72.17 1987/97 SP Alpargatas 25.00 0.00 5.00 0.00 25.00 0.00 5.00 0.00 1989/95 Politeno Ind. 13.15 0.00 0.00 0.00 13.15 0.00 0.00 0.00 1990 ENGEPOL .88 0.00 0.00 0.00 .88 0.00 0.00 0.00 1990 Ripasa 1.43 5.00 0.00 0.00 1.43 5.00 0.00 0.00 1990/91/92 Bahia Sul 7.14 20.97 0.00 0.00 7.14 20.97 0.00 0.00 1991 Bradesco-AL 26.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 Bradesco-Bahia 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 1991 Bradesco-Eucatex 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.00 1991 Bradesco-Petrofl 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.00 1991 Bradesco-Romi 1.19 .40 0.00 0.00 1.19 .40 0.00 0.00 1991 Rhodia-Ster 5.71 5.95 0.00 0.00 5.71 5.95 0.00 0.00 1992 CRP-Caderi 0.00 1.93 0.00 0.00 0.00 .68 0.00 0.00 1992/93 TRIKEM 0.00 12.86 0.00 0.00 0.00 12.86 0.00 0.00 1993 BACELL 6.00 15.70 0.00 16.20 6.00 15.70 0.00 16.20 1993 Macedo Alimentos 14.50 0.00 0.00 0.00 14.50 0.00 0.00 0.00 1993 Votorantim 11.71 0.00 0.00 .86 11.71 0.00 0.00 .86 1993196 CEVAL 0.00 20.00 0.00 0.00 0.00 20.00 0.00 0.00 1994 GAVEA 9.38 0.00 5.50 0.00 9.38 0.00 5.50 0.00 1994 GP Capital 0.00 14.04 0.00 0.00 0.00 14.00 0.00 0.00 1994 ParaPigmentos 30.00 0.00 9.00 31.03 25.50 0.00 9.00 25.78 1994 Portobello 12.14 5.00 0.00 0.00 12.14 5.00 0.00 0.00 1994/95/97 Sadia 44.00 10.00 9.33 178.65 44.00 10.00 9.33 178.65 1994/96 CHAPECO 25.00 0.00 0.00 5.00 25.00 0.00 0.00 5.00 1994/96 S.A.I.C.C. 0.00 7.85 6.87 0.00 0.00 7.70 6.87 0.00 1995 Bradesco-Hering 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.00 1995 Brahma - BRA 25.00 0.00 0.00 49.20 25.00 0.00 0.00 49.20 1995 Cambuhy/MC 16.88 0.00 0.00 0.00 16.88 0.00 0.00 0.00 1995 Lojas Americana 24.00 0.00 5.00 12.00 24.00 0.00 5.00 12.00 1995 LATASA-Brazil 13.00 0.00 0.00 2.00 13.00 0.00 0.00 2.00 1995 Rhodiaco/PTA 20.00 0.00 0.00 18.00 20.00 0.00 0.00 18.00 1995/96/98 Globocabo 32.09 27.97 0.00 103.25 32.09 27.97 0.00 103.25 1996 Banco Bradesco 40.00 0.00 0.00 54.36 15.23 0.00 0.00 22.84 1996 Mallory 7.27 0.00 0.00 0.00 7.27 0.00 0.00 0.00 1996 TIGRE 23.08 0.00 5.00 17.09 23.08 0.00 5.00 17.09 1996/97 Lightel 25.00 18.17 0.00 0.00 25.00 I.17 0.00 0.00 1997 Bompreco 25.00 0.00 5.00 0.00 25.00 0.00 5.00 0.00 1997 Copesul 37.50 0.00 0.00 167.14 37.50 0.00 0.00 167.14 1997 Guilmana-Amorimn 28.92 0.00 0.00 81.42 28.92 0.00 0.00 81.42 1997 Rodovia 35.00 0.00 0.00 79.50 33.07 0.00 0.00 75.13 1997 Samarco 16.20 0.00 0.00 13.33 16.20 0.00 0.00 13.33 1997 Sucorrico 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 1997 Wemnbley 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 1997/93 Cotenuinas 15.00 4.00 0.00 18.18 15.00 4.00 0.00 18.18 1998 Arteb 20.00 7.00 0.00 20.00 20.00 7.00 0.00 20.00 1998 BSC 14.00 0.00 0.00 7.50 14.00 0.00 0.00 7.50 1998 DixieToga 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1998 Empesca 5.00 0.00 10.00 0.00 5.00 0.00 10.00 0.00 1998 Fosfertil 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Fras-le 10.00 10.00 0.00 0.00 10.00 6.70 0.00 0.00 1998 Icatu Equity 0.00 30.00 0.00 0.00 0.00 .28 0.00 0.00 1998 Randon 7.00 0.00 3.00 0.00 7.00 0.00 3.00 0.00 1998 Saraiva 15.00 3.00 0.00 0.00 15.00 3.00 0.00 0.00 65 Annex 9 Comndtted Disbured IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1998 Tecon Rio Grande 7.50 0.00 5.50 18.00 0.00 0.00 0.00 0.00 1999 Eliane 32.00 0.00 13.00 0.00 0.00 0.00 0.00 0.00 1999 Vulcabras 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1999 Wiest 9.00 0.00 8.00 0.00 0.00 0.00 0.00 0.00 Total Portfolio: 931.97 270.44 103.32 1,133.11 806.24 236.01 76.75 1,073.97 Approvals Pending Commitment Loan Euitv Qguas Partic 1996 AGUAS LIMEIRA 17.00 1.00 0.00 23.00 1999 AUTOBAN 35.00 0.00 0.00 46.00 1999 CIBRASEC 0.00 7.50 0.00 0.00 1997 CTBC 35.00 0.00 0.00 150.00 1998 FRAS-LE 0.00 0.00 0.00 15.00 1998 FSA 35.00 0.00 10.00 45.00 1996 GLOBOCABO II 0.00 0.00 0.00 38.00 1999 INNOVA 20.00 5.00 0.00 160.00 1999 INNOVATIVE HS 0.00 0.00 6.25 0.00 1997 IPIRANGA EXPANS. 0.00 0.00 5.00 0.00 1998 IPIRANGA-RI 2 0.00 .09 0.00 0.00 1999 JOSAPAR 13.00 0.00 7.00 0.00 1999 MBRLTDP 20.00 0.00 5.00 115.00 1996 OXITENO/ETHYLO 0.00 5.00 0.00 0.00 2000 PURAS 4.00 0.00 1.00 0.00 1998 RANDON 0.00 0.00 0.00 15.00 1997 SP ALPARGATAS II 0.00 0.00 0.00 30.00 1998 UNIBANCO 40.00 0.00 0.00 250.00 Total Pending Commitment: 219.00 18.59 34.25 887.00 66 Annex 10 Energy Efficiency Project Organizational Structure PROJECT IMPLEMENTATION UNIT |MExecutive Secretariat & Advisory Group ELETROBRAS ~ ~DSsemrinationmUitte Prcu n UMonitoring & n Evaluation Unit I Project Managers .mpemetn AgMarketing &e Dissemination Unit |LP-rocurement Unit |Poject Monitoring and ,'~~~~~~~11 Accounting Unit PNUD) Coordinator I . Technical Suport Project Coordination (Demonstration Projects and_ TehiaSupr l Speoial P rograms) Project Managers (PROCEL) | Project Managers | |(Implementing Agencies)| 67 Annex 11 Brazil at a glance 9/16/98 Latin Upper- POVERTYand SOCIAL America middle- Brazil & Carib. Income Development dlamond* 1997 Population, mid-year (mNlions) 163.5 494 571 Lffe expectancy GNP per capita (Atlas method, US$) 4,720 3,880 4,520 GNP (Atlas method US$ billions) 771.9 1,917 2,584 Average annual growth, 1991-97 Population (%) 1.A 1.7 1.5 GNP Gross Labor force {%) 1.7 2.3 1.9 p \ _ per primary Most recent estimate (latest year available, 1991-97) capita N O enrollment Poverty (% of population below national povesY lne) V 17 Urban population (% of total population) 80 74 73 Life expectancy at birth (yearsJ 67 70 70 Infant mortality (per 1,000 live births) 34 32 30 Child malnutrition (% of chikiren under 5) 7 Access to safe water Access to safe water (% of population) 72 73 79 Ilifteracy (% ofpopuation age 15+) 17 13 15 Gross primary enrollment (% ofschoolage population) 112 111 107 -Brazil Mae .. .. .. - Upper-di e-incomne group Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1986 1996 1997 Economic ratfos' GDP (US$ billons) 152.7 268.1 774.9 820.3 Gross domestic investmentVGDP 23.1 19.1 20.7 22.8 Trade Exports of goods and services/GDP 7.0 8.8 7.1 6.2 Gross domestic savings/GDP 20.7 21.6 18.6 20.6 Gross national savings/GDP 19.2 17.1 17.3 18.6 Current account balance/GDP -4.3 -1.9 -3.1 -4.1 Domestic Inetmn Interest payments/GDP 1.1 2.4 1.1 1.1 Savings Investment Total debVGDP 21.8 40.7 23.1 23.6 Saving Total debt servicelexports 37.9 46.8 41.7 45.2 Present value of debtVGDP .. .. 21.8 Present value of debt/exports .. .. 280.8 Indebtedness 1976-86 1987-97 1996 1997 1998-02 (average annual gowth)- GDP 2.9 1.9 2.8 3.2 3.5 GNP per capita 0.2 0.0 1.8 1.9 2.0 Upper-tkddle-lncorne group Exports of goods and services 10.3 5.4 6.1 1.8 5.0 STRUCTURE of the ECONOMY 1976 1986 1996 1997 Growth rates of output and investment (%) (% of GDP) Agricuture 13.0 11.2 14.4 12.7 15 Industry 39.7 45.2 36.4 37.8 10 - Manufacturing 30A 33.0 22.9 23.4 s . Services 47.3 43.7 49.2 49.5 , Private consumption 68.8 67.8 62.2 61.9 s9 94 95 9s 0 General qovemment consumption 10.5 10.7 19.2 17.5 GD I GDP Imports of goods and services 9.4 6.4 9.2 8.5 1 (average annual growth) 1976-86 1987-97 1996 1997 Growth rates of exports and imports (%) Agriculture 3.7 2.5 2.2 2.4 40 Industrv 2.7 0.1 3.0 3.8 Manufacturing 2.3 -0.2 2.9 3.8 20-- Services 2.9 3.1 3.1 3.5 Private consumption 2.5 3.4 4.6 4.5 093 94 es 9 97 General govemment consumption 2.1 -1.6 9.8 8.0 Gross domestic investment -2.1 1.2 -0.2 6.2 20 Imports of'goods and services -3.3 12.1 5.9 13.9 -Exports "_-trrports Gross national product 2.4 1.5 3.2 3.3 Note: 1997 data are preliminary estimates. 1/ Poverty estimate is from 1990. The diamonds show four kev indicators in the countrv (in bold) comoared with its income-orouD averaae. If data are missino. the diamond will be incomplete. 68 Annex 11 Brazil PRICES and GOVERNMENT FINANCE 1976 1986 1996 1997 Inflation (I Domestic prices 2 500 (% change) 250 Consumer prices 147.1 15.8 6.9 2,5W I Implicit GDP deflator 47.6 145.3 17.2 7.8 15001 Govemment finance 6 - (% of GDP, includes current grants) 0 Current revenue .. 22.3 31.3 32.1 S2 93 94 95 9 s7 Current budget balance .. -5.0 -1.2 -1.6 - GDP deflator C R Overall surplus/deficit .. -13.3 -5.9 -6.1 TRADE (US$ millions) 1976 1986 1996 1997 Export and irriport levels (USS millions) Total exports (fob) 22,394 47,747 52,986 5s,ow Coffee .. 2,360 2,095 3,094 Otherfood .. 1,562 4,458 5,729 soo 00 Manufactures .. 11,839 29,676 32,732 Total imports (cif) .. 14,044 53,301 61,358 Food .. .. 3,279 3,290 25,000 L Fuel and energy .. 3,541 3,459 3,220 Capital goods .. 3,464 20,188 26,232 o 91 92 93 94 95 99 97 Export price index (1995=100) .. 68 100 96 Import price index (1995=100J .. 85 103 95 a Exports * Imports Terms of trade (1995=100) .. 80 97 101 BALANCE of PAYMENTS (US$ millions) i976 1986 1996 1997 Current account balance to GOP ratio (%) Exportsofgoodsandservices 10,848 23,870 51,853 56,827 2 Imports of goods and services 14,687 16,576 64,958 74,158 T Resource balance -3,839 7,294 -13,105 -17,331 0 91 92 9 Net current transfers -3 -26 2,899 2,220 2 Current account balance -6,561 -4,991 -24,347 -33,439 Financing items (net) 9,233 -319 33,364 25,629 Changes in net reserves -2,672 5,310 -9,017 7,810 1 Memo: Reserves including gold (US$ millbns) 6,542 5,907 60,089 51,729 Conversion rate (DEC, locaYUS$) 3.88E-12 4.97E-9 1.0 1.1 EXTERNAL DEBT and RESOURCE FLOWS 1976 1986 1996 1997 (US$ millions) Cormositton of total debt, 1996 (USS nillions) Total debt outstanding and disbursed 33,340 109,026 179,047 193,598 IBRD 1,172 7,546 5,876 5,743 A: 5,876 C:63 IDA 0 0 0 0 G 3,550 Total debt service 4,278 11,616 25,091 30,000 9E 16,803 IBRD 130 1,164 1,638 1,428 IDA 0 0 0 0 Composition of net resource flows Official grants 6 30 80 Official creditors 384 1,152 -514 -1,786 Private creditors 5,215 -444 14,514 17,238 Foreign direct investment 1,555 320 9,889 Portfolio equity 0 0 3,981 F 117,311 World Bank program Commitments 486 1,620 858 1,104 A- tsRO E- eilateral Disbursements 173 1,619 1,500 1,416 |B -DA D-Cthermultilateral F-Private Principal repayments 45 608 1,222 1,049 C - IMF G - Short-term Netflows 128 1,011 278 368 Interest pavments 85 556 416 380 Net transfers 43 455 -138 -12 Development Economics 9/16/98