PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: 84217 Global Partnership on Output Based Aid (GPOBA) Grid-Based Project Name Electricity Access Project Region EAST ASIA AND PACIFIC Country Vanuatu Sector(s) General energy sector (100%) Urban services and housing for the poor (40%), Rural services and Theme(s) infrastructure (40%), and Social inclusion (20%) Lending Instrument GPOBA Grant - SIL Project ID P133701 Borrower(s) Republic of Vanuatu Department of Energy, Ministry of Climate Change and Natural Implementing Agency Disaster Environmental Category B Date PID January 20, 2014 Prepared/Updated Estimated Date of February 7, 2014 Appraisal Completion Estimated Date of March 7, 2014 Approval Track 1 processing under small grant procedures – The review did Concept Review Decision authorize project preparation to continue I. Project Context Country Context The Republic of Vanuatu is an archipelago of 82 volcanic islands covering a total area of about 12,200 square km, of which land surface area is very limited (approximately 4,700 square kilometers). The country has been a democratic republic since gaining independence from the United Kingdom and France in 1980. Vanuatu’s population is approximately 249,000 people , almost evenly distributed among the six administrative provinces. The national household count stands at an estimated 50,740, of which about 12,470 households (25 percent) are located in urban areas and the remainder 38,270 (75 percent) are dispersed in rural areas.1 The average household monthly income in Vanuatu is VUV 83,800 (US$892.00), with an average household monthly income of VUV 97,500 (US$1,037.00) reported in urban areas.2 1 Vanuatu Household Income and Expenditure Survey 2010. Vanuatu National Statistics Office, Government of Vanuatu. December 2012. 2 Vanuatu Household Income and Expenditure Survey 2010. Vanuatu National Statistics Office, Government of Vanuatu. December 2012. Vanuatu has become one of the fastest growing economies of the Pacific region. The economy has experienced strong and sustained growth mainly driven by tourism, construction, and aid inflows. The per capita Gross Domestic Product (GDP) is estimated at USD3,124 (USD4,916 at Purchasing Power Parity (PPP)).3 Yet, the cost of basic infrastructure services is high and affects the business environment in the country. For instance, although Vanuatu ranks 80th in the “ease of doing business” indicator reported by the World Bank,4 which analyzes a total of 183 economies, it ranks only 124 in the “getting electricity” indicator5 mainly due to the high cost associated with obtaining a new connection to the electricity grids. Sectoral and institutional Context Electricity access in Vanuatu. An estimated 27 percent of the Vanuatu population has access to electricity. Access rates in the main urban centers - Port Vila and Luganville - are about 75 percent, dropping off considerably in rural areas with much smaller loads per customer and a far lower population density. Around 20 percent of the rural population has access to electricity. Peri-urban and rural connections are less common due to the lower population density and large distances between customers, lower electricity loads and high connection costs. Thus, even within the concession areas, around one in five households does not have access to electricity. Electricity services in Vanuatu are delivered through three types of models. The three models are: (a) independent “main grid systems” in the two main urban centres; (b) isolated “mini-grids” in lesser population concentrations but where a grid supply system is still a technically and economically competitive option, and (c) decentralized energy service systems. Grid electricity supply in Vanuatu is largely restricted to Port Vila and Luganville, as well as small parts of the islands of Malekula and Tanna. Role of the private sector in the delivery of electricity services. The private sector is responsible for generating and supplying electricity under concession agreements with the Government of Vanuatu (GoV). There are currently four concession areas in Vanuatu – Port Vila, Tanna and Malekula and Luganville– operated by two existing private sector utilities. Union Electrique du Vanuatu Ltd. (UNELCO), a subsidiary of GDF Suez, has been operating in Vanuatu since 1939 and supplies the Port Vila, Malekula and Tanna concession areas. In Port Vila, the concession is in force until the year 2031 and provides UNELCO exclusive rights to generate and supply electricity within a 15 km radius of the city boundaries. Vanuatu Utilities and Infrastructure Ltd (VUI), a subsidiary of Pernix Group, has supplied the Luganville concession area since January 1, 2011, after signing an Operations and Maintenance (O&M) agreement with the Government of Vanuatu for the Luganville electricity concession. Installed generation capacity and supply to the national grid. The total installed capacity in Vanuatu is 30.7 Megawatts (MW). Of this capacity 26.0MW is in Port Vila (peak demand 11.3MW), 4.1MW in Luganville (peak demand 1.5MW), 0.34MW in Malekula (peak demand 0.12MW) and 0.27MW in Tanna (peak demand 0.12MW). Around 20 percent of electricity is produced using renewable energy (10 percent from the Sarakata hydro plant, which serves Luganville, and the rest from wind and coconut oil on UNELCO’s grid system). Recent indications are that UNELCO is scaling up the use of biodiesel in its power plants including investment in copra plantations to increase security of supply of biodiesel. The remaining 80 percent of electricity is generated from diesel powered plants using imported fuel. 3 IMF World Economic Outlook Database, April 2013 http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx 4 Ease of doing business, The World Bank group as ranked at June 2012.http://www.doingbusiness.org/rankings 5 ‘Getting Electricity’, The World Bank group as ranked at June 2012. http://www.doingbusiness.org/data/exploretopics/getting-electricity There are two key legislative acts pertaining to electricity supply in Vanuatu. The two acts are the Electricity Supply Act (Chapter 65, 1972) and the Utilities Regulatory Authority Act (Act No. 11 of 2007). The Electricity Supply Act provides the GoV authority to enter into concession contracts with private sector partners for the purpose of granting electricity supply and distribution exclusivity to the contracted Concessionaire. The Utilities Regulatory Authority Act establishes the Utilities Regulatory Authority (URA) of Vanuatu. The URA regulates prices, service standards and market behavior in the electricity sector and it is also tasked with protecting the long-term interests of consumers. The URA oversees and applies the provisions established in both the Electricity Supply Act and the concession agreements. The GoV is responsible for energy policy; it establishes the framework (through legislation, regulations and concession contracts) which enables the participants to operate in the sector to service the people of Vanuatu. Currently there are no wiring standards or licensing of electricians in Vanuatu, however, the concession holders work to either the Australian and New Zealand or the French standards. The URA regulates electricity tariffs. The current pricing arrangements involve the determination of a base tariff level which varies with fuel, labor and material prices. Fuel prices are passed through to consumer tariffs. Electricity retail tariff levels are high across the concession areas, in part due to high costs of imported diesel fuel. Electricity base tariff is around VUV 54.20 (US$ 0.59 per kWh).6 Retail tariffs are set across five consumer categories. Low consumption domestic consumers, considered to be ‘low income consumers’ benefit from a lower tariff (34 percent of the base tariff), no fixed charge and a flat rate security deposit.7 The cost of service connections is not regulated, and utilities charge consumers for new connections based on the actual costs of installing a connection. The installation and use of prepayment meter system in the Port Vila Concession area has been approved by the URA. In 2009, UNELCO requested the URA to consider and approve the implementation of a prepayment meter trial within the Port Vila concession area. UNELCO commenced implementation of a trial project at Mele Maat, Port Vila, in January 2010, and in September 2010, UNELCO provided the URA with a report setting out its assessment and findings from the trial. Following various public consultations and draft decisions, the URA approved the use of pre-payment meters for the Port Vila concession on August 16, 2013.8 The GoV has made the development of the electricity sector a priority. The Vanuatu National Energy Roadmap (NERM), which was developed with support from the World Bank, lays the foundation for future energy sector policy and investment in Vanuatu. 9 The NERM was approved by the Council of Ministers (COM) on June 27, 2013. It seeks to address key constraints that have prevented the energy sector from delivering affordable modern energy access in an efficient and sustainable manner to the vast majority of the population. The NERM sets out three strategic directions (three pillars) for the sector: i) Government leadership and commitment – establishing a comprehensive and consistent set of enabling policies, a strengthened legislative and regulatory framework, and targeted financing mechanisms; ii) Empowering and holding accountable key energy institutions – ensuring that the DoE and the URA are effective energy sector institutions, and iii) Implementing a sector-wide approach under the principle of "Many Partners, One Team, One Plan” – implementing a programmatic framework for coordinated implementation and sector development, which involves identifying and financing alternative sources of energy, including renewables, and working with the private sector to improve energy distribution and access. 6Base tariff of 53.99Vatu/kWh (exchange rate $1 USD = 96 Vatu) at August 2013. Utilities Regulatory Authority. August 2013. http://www.ura.gov.vu/index.php?option=com_content&view=article&id=68&Itemid=98&lang=en 7 Small Domestic Consumer tariff is divided into three blocks: 1 st block up to 60 kWh per month at 18,43 VUV/kWh; 2 nd block from 61 to 120 kWh per month at 65,58 VUV/kWh, and 3rd block over 120 kWh per month at 162,60 VUV/kWh. 8 The use of pre-paid was approved for Port Vila by the URA. Final Report: Pre-payment meters – Final Decision. Utilities Regulatory Authority. August 2013 9 Vanuatu National Energy Road Map 2013-2020, published March 2013. The NERM identifies five priority areas and targets for Vanuatu’s energy sector. The NERM focuses on five energy sector priorities: (i) Access – access to secure, reliable and affordable electricity for all citizens by 2030; (ii) Petroleum Supply – reliable, secure and affordable petroleum supply throughout Vanuatu; (iii) Affordability – lower cost energy services in Vanuatu; (iv) Energy Security – an energy secure Vanuatu at all times, and (v) Climate Change – mitigating climate change through renewable energy and energy efficiency. The project will contribute to increased access and affordability of electricity in Vanuatu. II. Project Development Objectives The Project Development Objective (PDO) is to increase sustainable access to formal grid-based electricity services within Vanuatu’s electricity concession service areas for low -income customers through targeted subsidies. Access in the context of this project means a direct consumer connection to the electricity grid, as opposed to a shared connection or no connection due to lack of affordability. The objective will be achieved by subsidizing the cost of grid-based household service connections for approximately 4,375 households that will be eligible to connect as “small domestic consumers”. The project will also contribute to improving eligible households’ safety standards by subsidizing the cost of household wiring, where wiring is not to standard or in place, and will provide energy saving light bulbs. III. Project Description The project has four components. These are: 1) Output Based Aid (OBA) subsidies for new electricity service connections for low-income households; 2) OBA subsidies for household wiring for low-income households accessing electricity services under the project; 3) Implementation support to the Department of Energy (DoE) for project management, communications and outreach, and training, and 4) Independent verification of outputs. The proposed activities under each component are presented below. Component 1: OBA subsidies for new electricity service connections for low-income households. This component provides one-off OBA subsidies to cover up to 80 percent of the cost of connecting low-income households to grid-based electricity services in Vanuatu. The subsidy will be available for both post-paid electricity meters and pre-paid meters (where available). This component will be implemented through existing private sector utilities - Union Electrique du Vanuatu Ltd (UNELCO) and Vanuatu Utilities and Infrastructure Limited (VUI), and will be subject to verification by the DoE. Component 2: OBA subsidies for household wiring for low-income households accessing electricity services under the project. This component provides one-off OBA subsidies to cover the cost (up to a predefined limit) of household wiring for low-income households accessing grid-based electricity services under the project, where wiring is not to standard or not in place. The households will be wired according to a standard design for the project in accordance with Australian and New Zealand standards (AS/NZS 3000). Household wiring will include cabling and backfilling (in a trench prepared by the consumer) from the utility meter box to a Ready Board on the consumer’s premises. The Ready Board will include necessary protection, two light sockets with switch, two power outlets and two energy saving light bulbs. For safety reasons, the wiring will be carried out and/or authorized by qualified (Grade A, Australian Electrical/Mechanical Fitters license or equivalent) electrical contractors contracted or authorized by UNELCO or VUI to carry out the works. The utilities will supervise the electrical contractors and on completion, provide verification that the internal wiring has been completed to standard. Component 3 – Implementation support to DoE for project management, communications and outreach, and training. The DoE will require support throughout the project’s life to oversee implementation and develop longer-term institutional capacity for managing energy- related subsidies. Funding from this component supports the DoE with the following: (a) Development and adoption of technical standards and licensing for household wiring; (b) Monitoring and evaluation and financial management of OBA subsidies; (c) Outreach and education to raise beneficiaries’ awareness of the project and to raise consumer awareness on electrical safety; (d) Technical training and related support for DoE staff, if required; (e) Services from an independent auditor, if required; (f) Outreach and project implementation activities such as hiring training facilities, printing of training and awareness raising material, travel to outer islands for implementation of key project activities; and (g) Goods required for project implementation such as project related office equipment and supplies. Component 4 – Independent verification of outputs. This component will fund a suitably qualified consultant or firm as an Independent Verification Agent (IVA) to undertake the verification of outputs under the project. IV. Financing (in USD Million) Total Project Cost: 4.85 Total Bank Financing: Financing Gap: 0.00 Financing Source Amount BORROWER/RECIPIENT 0.00 GPOBA 4.85 Total 4.85 V. Implementation The DoE will be the implementing agency for the project. The Ministry of Finance and Economic Management (MFEM) will be the Recipient and would enter into a Grant Agreement with the World Bank. The DoE will have overall responsibility for project management and will be the official implementing agency for the Project. The Project Management Unit (PMU) in the Ministry of Climate Change and Natural Disaster will provide fiduciary support to the DoE. The PMU currently supports four other current World Bank projects, including the recently signed Energy Sector Development Project (P145311). The PMU comprises two financial management officers and one procurement officer overseen by a project management advisor. The project will contribute funding for the DoE’s and PMU’s activities (under Component 3) to support this project. The process of making household connections and installing household wiring will be managed by the utilities (UNELCO and VUI). The utilities (UNELCO and VUI) will be responsible for receiving customer requests for services (service connection and household wiring) and for assessing the eligibility of each customer request. The utilities will assess the current standard of wiring prior to connecting an eligible customer. If wiring is not to standard or is not in place, a contractor employed by the utility will install household wiring to compliance standard (Australian and New Zealand standard). When the contractors have “certified” the wiring, the utilities will make the household connection. The utilities will be responsible for submitting subsidy payment requests to the DoE for verification. Role of the Independent Verification Agent. A reputable company or person(s) with relevant expertise will be contracted as the IVA to verify the delivery of outputs against which the OBA subsidy will be disbursed. The IVA will be requested to perform the verification of connections. The service providers (utilities) shall provide detailed information to the DoE once the connections have been carried, which shall be cross-checked by the IVA before payment of the OBA subsidy. VI. Safeguards Policies (Including Public Consultations) Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X Comments: The Environmental and Social Management Framework contains an impact assessment matrix and a Code of Practice for Electrical Connections, which provides straightforward mitigation measures for noise, waste management, worker health and safety, and vegetation clearance. VII. Contact point World Bank Contact: Mr. Kamlesh Khelawan Title: Senior Energy Specialist Telephone: +61 (02) 9223 6573 Email: kkhelawan@worldbank.org Borrower/Client/Recipient Contact: George Maniuri Title: Director General, Ministry of Finance & Economic Development Telephone: 678 23032 Email: gmaniuri@vanuatu.gov.vu Implementing Agencies Contact: Mr. Jesse Benjamin Title: Director, Department of Energy, Ministry Climate Change and Natural Disaster Telephone: 678 25201 Email: jbenjamin@vanuatu.com.au VIII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop