Document of The World Bank Report No: ICR00002296 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-36731 IDA-36730 TF-51248) ON A CREDIT IN THE AMOUNT OF SDR 85.6 MILLION (US$ 115 MILLION EQUIVALENT) AND A GLOBAL ENVIRONMENTAL FACILITY GRANT IN THE AMOUNT OF US$ 8 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR THE RENEWABLE ENERGY FOR RURAL ECONOMIC DEVELOPMENT PROJECT June 20, 2012 Sustainable Development Department Sri Lanka Country Management Unit South Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective May 30, 2012) Currency Unit = Sri Lankan Rupee LKR 1.00 = US$ 0.01 US$ 1.00 = LKR 132.40 FISCAL YEAR July 1 – June 30 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank kW Kilowatt AF Additional Financing kWh Kilowatt-Hour AU Administrative Unit kWp Kilowatt-Peak AWDR Average Weighted Deposit Rate LKR Sri Lanka Rupee AWFDR Average Weighted Fixed Deposit Rate LOLC Lanka Orix Leasing Company CAR Consumer Acceptance Receipt M&E Monitoring and Evaluation CAPEX Capital Expenditure MFI Micro Financing Institution CAS Country Assistance Strategy MTR Mid Term Review CEA Central Environmental Authority MW Megawatt CEB Ceylon Electricity Board MWh Megawatt-Hour CER Certified Emissions Reduction MWp Megawatt-Peak CO2 Carbon Dioxide NCRE Non-Conventional Renewable Energy CPS Country Partnership Strategy NGO Non-governmental Organization DFCC Development Finance Corporation of Ceylon O&M Operations and Maintenance DSM Demand Side Management PADGO Portfolio Approach to Distributed Generation Opportunities EIRR Economic Internal Rate of Return PCI Participating Credit Institution EnPoGen Energy, Poverty and Gender PDO Project Development Objective ESCO Energy Services Company PUCSL Public Utilities Commission of Sri Lanka ESD Energy Services Delivery PV Photovoltaic FIRR Financial Internal Rate of Return QAG Quality Assurance Group FM Financial Management QEA Quality At Entry GEF Global Environmental Facility QAS Quality At Supervision GEO Global Environment Objective RERED Renewable Energy for Rural Economic Development GoSL Government of Sri Lanka SEA Sustainable Energy Authority GW Gigawatt SFC Specific Fuel Consumption GWh Gigawatt-Hour SHS Solar Home System ICB International Competitive Bidding SME Small and Medium Enterprise ICR Implementation Completion and Results Report SPPA Standardized Power Purchase Agreement IDA International Development Association SRMC Short Run Marginal Cost IEG Independent Evaluation Group TA Technical Assistance IFC International Finance Corporation USD United States Dollar IPP Independent Power Producer VECS Village Electricity Consumer Society ISR Implementation Status Report VHP Village Hydro Project IVR Installation Verification Report Wp Watt-Peak JICA Japan International Cooperation Agency ii Vice President: Isabel M. Guerrero Country Director: Diarietou Gaye Sector Manager: Jyoti Shukla Project Team Leader: Abdulaziz Faghi ICR Team Leader: Abdulaziz Faghi iii Democratic Socialist Republic of Sri Lanka Renewable Energy for Rural Economic Development Table of Contents A. Basic Information iii B. Key Dates iii C. Ratings Summary iv D. Sector and Theme Codes v E. Bank Staff v F. Results Framework Analysis vi G. Ratings of Project Performance in ISRs viii H. Restructuring (if any) ix I. Disbursement Profile x 1. Project Context, Development and Global Environment Objectives Design 1 1.1 Context at Appraisal 1 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 2 1.3 Original Global Environment Objectives (GEO) and Key Indicators (as approved) 2 1.4 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 2 1.5 Revised GEO (as approved by original approving authority) and Key Indicators, and reasons/justification 3 1.6 Main Beneficiaries 3 1.7 Original Components (as approved) 3 1.8 Revised Components 6 1.9 Other significant changes 6 2. Key Factors Affecting Implementation and Outcomes 6 2.1 Project Preparation, Design and Quality at Entry 6 2.2 Implementation 10 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 16 2.4 Safeguards and Fiduciary Compliance 17 2.5 Post-completion Operation/Next Phase 17 3. Assessment of Outcomes 19 3.1 Relevance of Objectives, Design and Implementation 19 3.2 Achievement of Project Development Objectives and Global Environment Objectives 20 3.3 Results Framework 24 3.4 Efficiency 25 3.5 Justification of Overall Outcome and Global Environment Outcome Rating 26 3.6 Overarching Themes, Other Outcomes and Impacts 27 3.7 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 28 4. Assessment of Risk to Development Outcome and Global Environment Outcome 28 5. Assessment of Bank and Borrower Performance 29 5.1 Bank Performance 29 5.2 Borrower Performance 31 6. Lessons Learned 31 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 34 7.1 Borrower/implementing agencies 34 7.2 Co-financiers 35 Annex 1. Project Costs and Financing 36 Annex 2. Outputs by Component 37 Annex 3. Economic and Financial Analysis 41 Annex 4. Bank Lending and Implementation Support/Supervision Processes 52 Annex 5. Results of Beneficiary Surveys 54 Annex 6. Stakeholder Workshop Report and Results 56 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR 58 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders 68 Annex 9. List of Supporting Documents 69 MAP 70 IBRD 39369 List of Tables Table 1 Component-wise breakdown of financing (all values in US$) ............................................. 5 Table 2 Share of envisaged and actual expenditure by component .................................................. 37 Table 3 Grid connected renewable electricity sub-projects refinanced under RERED ................... 37 Table 4 Mini-hydro Project Assumptions and Results ..................................................................... 42 Table 5 Economic Analysis of Mini Hydro Sub-Project.................................................................. 43 Table 6 Mini Hydro Financial Analysis ........................................................................................... 44 Table 7 Assumptions and Results for 40 Wp SHS ........................................................................... 45 Table 8 Costs Avoided with SHS ..................................................................................................... 46 Table 9 SHS Economic Analysis ..................................................................................................... 46 Table 10 SHS Financial Analysis ..................................................................................................... 47 Table 11 Economic and Financial Analysis of VHP ........................................................................ 48 Table 12 VHP Avoided Cost ............................................................................................................ 48 Table 13 VHP Economic Analysis ................................................................................................... 49 Table 14 VHP Financial Analysis .................................................................................................... 49 Table 15 Assumptions Used in Economic and Financial Analysis .................................................. 50 Table 16 SHS and VHP Consumer Surplus Calculation and Results .............................................. 51 List of Figures Figure 1 Rate of electrification in Sri Lanka (1976-2012) ................................................................. 7 Figure 2 Grid-tied Sub-Project Locations ........................................................................................ 41 Figure 3 Distribution of Off-grid Systems ....................................................................................... 44 Figure 4 SHS Problem Analysis ....................................................................................................... 56 ii A. Basic Information Renewable Energy for Country: Sri Lanka Project Name: Rural Economic Development IDA-36730,IDA- Project ID: P076702, P077761 L/C/TF Number(s): 36731,TF-51248 ICR Date: 06/19/2012 ICR Type: Core ICR GOVERNMENT OF SRI Lending Instrument: SIL, SIL Borrower: LANKA Original Total XDR 59.30M,USD 8.00M Disbursed Amount: XDR 85.59M,USD 7.94M Commitment: Environmental Category: B Focal Area: C Implementing Agencies: DFCC Bank Cofinanciers and Other External Partners: None. B. Key Dates Renewable Energy for Rural Economic Development - P076702 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 01/22/2002 Effectiveness: 10/07/2002 10/07/2002 10/18/2010 Appraisal: 01/22/2002 Restructuring(s): - 06/16/2011 Approval: 06/20/2002 Mid-term Review: - 09/05/2005 Closing: 06/30/2008 12/31/2011 Renewable Energy for Rural Economic Development - P077761 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 01/22/2002 Effectiveness: 10/07/2002 10/07/2002 10/18/2010 Appraisal: 01/22/2002 Restructuring(s): - 06/16/2011 Approval: 06/20/2002 Mid-term Review: - 09/05/2005 Closing: 06/30/2008 12/31/2011 iii C. Ratings Summary C.1 Performance Rating by ICR Outcomes Satisfactory GEO Outcomes Satisfactory Risk to Development Outcome Low or Negligible Risk to GEO Outcome Low or Negligible Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Highly Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance Performance C.3 Quality at Entry and Implementation Performance Indicators Renewable Energy for Rural Economic Development - P076702 Implementation QAG Assessments (if Indicators Rating: Performance any) Potential Problem Project at Yes Quality at Entry (QEA) None any time (Yes/No): Problem Project at any time Quality of Supervision No None (Yes/No): (QSA) DO rating before Satisfactory Closing/Inactive status Renewable Energy for Rural Economic Development - P077761 Implementation QAG Assessments (if Indicators Rating: Performance any) Potential Problem Project at No Quality at Entry (QEA) None any time (Yes/No): Problem Project at any time Quality of Supervision No None (Yes/No): (QSA) GEO rating before Satisfactory Closing/Inactive Status iv D. Sector and Theme Codes Renewable Energy for Rural Economic Development - P076702 Original Actual Sector Code (as % of total Bank financing) Energy efficiency in power sector 1 1 Renewable energy 99 99 Theme Code (as % of total Bank financing) Climate change 22 22 Infrastructure services for private sector development 23 23 Other financial and private sector development 11 11 Participation and civic engagement 22 22 Rural services and infrastructure 22 22 Renewable Energy for Rural Economic Development - P077761 Original Actual Sector Code (as % of total Bank financing) Renewable energy 100 100 Theme Code (as % of total Bank financing) Climate change 25 25 Infrastructure services for private sector development 25 25 Participation and civic engagement 25 25 Rural services and infrastructure 25 25 E. Bank Staff Renewable Energy for Rural Economic Development - P076702 Positions At ICR At Approval Vice President: Isabel M. Guerrero Mieko Nishimizu Country Director: Diarietou Gaye Mariana Todorova Sector Manager: Jyoti Shukla Penelope J. Brook Project Team Leader: Abdulaziz Faghi Subramaniam V. Iyer ICR Team Leader: Abdulaziz Faghi - ICR Primary Author: Enno Heijndermans - v Renewable Energy for Rural Economic Development - P077761 Positions At ICR At Approval Vice President: Isabel M. Guerrero Mieko Nishimizu Country Director: Diarietou Gaye Mariana Todorova Sector Manager: Jyoti Shukla Penelope J. Brook Project Team Leader: Abdulaziz Faghi Subramaniam V. Iyer ICR Team Leader: Abdulaziz Faghi - ICR Primary Author: Enno Heijndermans - F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) (1) Improve the quality of rural life by utilizing off-grid renewable energy technologies to provide energy services to remote communities. (2) Promote private sector power generation from renewable energy resources for the main grid. Revised Project Development Objectives (as approved by original approving authority) Not Applicable. Global Environment Objectives (from Project Appraisal Document) To reduce atmospheric carbon emission by removing barriers and reducing implementation costs for renewable energy and removing barriers to energy efficiency. Revised Global Environment Objectives (as approved by original approving authority) Not Applicable. (a) PDO Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Additional 85 MW of small scale renewable grid connected power generation capacity Indicator 1 : installed. The additional financing would support another 50 MW of grid-connected power generation capacity Value (quantitative or 31.00 116.00 166.00 178.8 Qualitative) Date achieved 10/07/2002 10/07/2002 04/30/2008 12/31/2011 The Original Target is the sum of the baseline value of 31 MW and the target of 85 MW Comments from the original credit. Formally revised target includes another 50 MW added by the (incl. % Additional Financing. Percent achievement is 107%. A further 36.5 MW of capacity are achievement) under construction. vi Increase in income generating activities in communities that gain access to electricity Indicator 2 : (measured in number of households, small/medium enterprises and public institutions) 742 (excludes income increase due to Value improved education (quantitative or 0.00 1,500.00 - and avoided loss of Qualitative) income due to reduced morbidity)1 Date achieved 10/07/2002 10/07/2002 - 12/31/2011 There was no formal numerical target according to the PAD; however, the Bank team attempted to capture this data during implementation by assuming that the 1,500 households, small/medium enterprises and public institutions targeted for electrification Comments from the original IDA Credit (1,000) and the Additional Financing (500), would (incl. % experience an increase in income generating activities as a result of access to electricity. achievement) As this was reported in several implementation status reports, the decision to keep it in the ICR was to maintain consistency in past reporting. Please refer to the footnote which elaborates on the target value. (b) GEO Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Indicator 1 : Reduction in Greenhouse Gas Emissions Value (quantitative or 0.00 1.25 - 2.15 Qualitative) Date achieved 10/07/2002 10/07/2002 - 12/31/2011 Comments Target values measured in million tons of avoided carbon emissions as a result of Project (incl. % interventions. Percent achievement is 172% achievement) Promote adoption of renewable energy by removing market barriers and reducing Indicator 2 : implementation costs Value See PDO Indicators 1 and 2 See PDO Indicators See PDO Indicators 1 (quantitative or - above 1 and 2 above and 2 above Qualitative) Date achieved 10/07/2002 10/07/2002 - 12/31/2011 Comments This indicator was linked to PDO Indicators in so much as the achievement of those was (incl. % due to GEF support to the promote adoption of renewable energy by removing market achievement) barriers and reducing implementation costs. 1 World Bank studies in Bangladesh and Philippines found statistically highly significant benefits to electrified households vis-à-vis un-electrified households due to higher educational achievements of children in electrified households and in reduced morbidity due to avoided illnesses by switching from kerosene lamps to electric lamps. vii (c) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Electricity access to households, rural small/medium enterprises and public institutions Indicator 1 : through off-grid systems Value (quantitative or 22,685 183,685 136,185 138,480 Qualitative) Date achieved 10/07/2002 10/07/2002 10/18/2010 12/31/2011 Original target values include the baseline plus values approved in the PAD and Comments additional targets set by the Additional Finance. The formally revised target represents (incl. % the values agreed at restructuring (113,500) plus the Baseline Value. Percent achievement) Achievement is 103%. G. Ratings of Project Performance in ISRs Actual Disbursements Date ISR (USD millions) No. DO GEO IP Archived Project 1 Project 2 1 10/23/2002 S S S 0.00 0.00 2 05/12/2003 S S S 15.00 1.60 3 06/30/2003 S S S 15.00 1.60 4 12/29/2003 S S S 16.62 2.57 5 06/22/2004 S S S 23.55 3.46 6 12/21/2004 S S S 30.74 4.38 7 06/14/2005 S S S 40.61 5.16 8 12/12/2005 S S S 53.25 5.78 9 06/27/2006 S S S 63.65 6.16 10 12/22/2006 S S S 72.63 6.38 11 06/26/2007 S S S 81.81 6.96 12 12/20/2007 S S S 82.43 7.15 13 06/19/2008 S S S 82.45 7.25 14 12/17/2008 S S S 92.02 7.40 15 05/28/2009 S S MS 95.22 7.40 16 10/27/2009 S S MS 97.81 7.51 17 05/27/2010 S S S 103.36 7.72 18 12/01/2010 S S S 106.78 7.86 19 06/07/2011 S S S 119.38 8.00 20 01/01/2012 S S S 127.06 8.00 viii H. Restructuring (if any) Amount Disbursed at ISR Ratings at Board Approved Restructuring in USD Reason for Restructuring Restructuring millions Restructuring & Key Date(s) PDO GEO Changes Made DO GEO IP Project1 Project 2 Change Change The restructuring was required to revise the end-of-project target for the ‘off-grid renewables’ component from 161,000 households, small and medium enterprises and public institutions being connected to 113,500 as 10/18/2010 N N S S S 106.78 - recommended by the Ministry of Power and Energy. The reduced target is appropriate in light of faster than anticipated grid-based rural electrification which reduces demand for off-grid renewable solutions. The restructuring was required to extend the closing date by 6- months. This was necessary to enable ongoing investments to be completed and ensure satisfactory close-out of 06/16/2011 N N S S S 122.25 - the project. The extension is also being considered to make up for the delay in effectiveness of the Additional Financing credit which was beyond the control of the implementing agency. ix I. Disbursement Profile P076702 P077761 x 1. Project Context, Development and Global Environment Objectives Design 1.1 Context at Appraisal At appraisal in 2002, nearly 60 percent of the population of Sri Lanka (about 19 million at that time) had access to electricity; however, the levels of access varied significantly among regions of the country. On one hand, areas such as the Western Province had about 80 percent access to electricity while other Provinces (e.g. Uva) had less than 30 percent. Recognizing the importance of electrification to the expansion of the economy and for the country’s overall development agenda, the Government of Sri Lanka (GoSL) set a target to achieve 75 percent electrification island-wide by the year 2007. The supply of electricity to meet this goal required substantive investment in additional electricity generation capacity. Sri Lanka’s largest source of electricity came from hydropower and the task of increasing the supply with limited resources was challenging given that most of the major hydro sites had already been fully developed. The Government would have had to rely purely on conventional thermal power generation as an alternative to hydro in order to serve the unmet demand and achieve its electrification targets. As a result, expansion of the grid through thermal power was the principal vehicle for electrification in the country along with expanding the national grid network. Meanwhile, the ongoing Energy Services Delivery (ESD) project financed by the World Bank and Global Environment Facility (GEF) had demonstrated that off-grid systems – such as solar home systems (SHS) and community-level independent grids – were a viable option to serve a significant population living in remote rural communities where the grid had not reached. It also demonstrated that mini-hydro and other renewable energy technologies such as wind and biomass had potential to contribute to the energy mix in the grid and could add diversity to electricity generation. As renewable energy technologies use indigenous resources, its use would lead to a reduction in the import of fossil fuels for power generation. The ESD project had also proven to be a catalyst for engaging the private sector to invest in renewable energy development. As a result of successes achieved under the ESD project, the GoSL sought the Bank’s assistance to support a scale-up of its rural ‘off-grid’ electrification program complemented by a diversification of the energy mix through the development of ‘grid- connected’ renewable energy investments. Moreover, GoSL was also keen on a continuity of private sector participation in the energy sector and on designing a mechanism, which would enable private developers, commercial banks/financers and entrepreneurs to be key stakeholders in this endeavor. This would improve overall sector development and contribute to a more robust economy. The development of such schemes would have been made possible given the existence of appropriate institutional structures and mechanisms pioneered under ESD. The request from the Government of Sri Lanka for the development of the Renewable Energy for Rural Economic Development (RERED) project was consistent with the World Bank Country Assistance Strategy (CAS) (May 1996), which included: promotion of sustainable private-sector led growth; increasing efficiency in delivery of infrastructure, especially in rural areas; preserving the environment; and working closely with communities and non-Governmental 1 Organizations (NGOs) to generate development solutions. This was also aligned with the GEF Operational Program 6: Promoting Renewable Energy by Removing Barriers and Reducing Implementation Costs. It is also consistent with the subsequent CAS dated July 2008. The latest Country Partnership Strategy (CPS) dated April 2012 came into effect after Project closing; however, in spite of this, the Project remains relevant in the context of this CPS, specifically on Focus Areas 1.A: Facilitating sustained private and public investment - Improving the investment climate, and 3.A: Improving living standards and social inclusion – Increasing quality of services. Relevant to the first objective, the Project addresses the constraints of access to finance (for renewable energy investments) and electricity rates by moderating the increase of the electricity price through the utilization of indigenous renewable resources of energy. Relevant to Focus Area 3.A, the Project improves rural electricity services which directly improves the quality of life, social inclusion and indirectly enabling the provision or improvement of social services such as health, education and water supply. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) This project aimed to: (i) improve the quality of rural life by utilizing off-grid renewable energy technologies to bring electricity to remote communities; and (ii) promote private sector power generation from renewable energy resources for the main grid. The key indicators were: 1. Installation of 135 megawatts (MW) of grid-connected electric power generation capacity from small-scale renewables (original target was 85 MW with an additional 50 MW proposed under RERED Additional Financing). 2. Increase in income generating activities in communities that gain access to electricity. 3. Electricity access to 161,000 households, rural small/medium enterprises (SMEs) and public institutions through off-grid systems (original target was 101,000 with an additional 60,000 proposed under RERED Additional Financing) 1.3 Original Global Environment Objectives (GEO) and Key Indicators (as approved) The Project’s Global Environmental Objective was to reduce atmospheric carbon emissions by removing barriers and reducing implementation costs for renewable energy, and removing barriers to energy efficiency. The key indicators were: 1. Reduction of atmospheric carbon emissions / Greenhouse Gas Emissions (1.25 million tons of carbon avoided); 2. Promote adoption of renewable energy by removing market barriers and reducing implementation cost. 1.4 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification A restructuring of the project was approved on October 16, 2010 in order to reduce the target for the off-grid renewables component from 161,000 to 113,500 households, enterprises and institutions. The primary reason was that grid expansion had proceeded more rapidly than 2 originally expected as the GoSL had made a policy and very significant financial commitment to accelerate grid-based electricity coverage. Therefore, more households, enterprises and institutions were being served by the grid and others anticipating grid electricity to extend to their villages decided not to invest in off-grid electricity sources. This reduced the demand for off-grid schemes. At Appraisal, the Governments’ rural electrification policy envisaged that 20 percent of the population would remain reliant on off-grid electricity supply2. At present, the Government expects to achieve 100 percent electrification by end 2012 of which a mere 40,000 households would have to be served by off-grid means (Note: average growth rate in grid-based electricity connections since 2005 was about 6 percent per year and helped household electrification rate to reach 92 percent by March 2012). 1.5 Revised GEO (as approved by original approving authority) and Key Indicators, and reasons/justification Not applicable. 1.6 Main Beneficiaries Both the country (as a whole) as well as rural households and enterprises were the principal beneficiaries of this Project. The country benefitted from grid-tied renewables that reduced fuel imports, diversified the power generation mix, reduced generation costs, and built a world-class renewable energy (mainly mini-hydro) industry that is now expanding its services and investments to Africa and other Asian countries. Building on this success, the GoSL has increased its goal of renewable energy generation (excluding large hydro), from 15% of total generation by 2015 to 20% by 2020 (730 Gigawatt-hour (GWh) in 2010 to over 4000 GWh in 2020). The rural households and enterprises benefitted from increased access to reliable supply of electricity which could expand income generating activities from productive use of electricity; improve their quality of life through the use of (small) appliances; and improving indoor air quality from reduced kerosene smoke. An indirect benefit to the rural households and enterprises, though limited and difficult to quantify, would be improved services for the electrified public institutions such as health clinics, schools and other education buildings and water supply institutions. Other beneficiaries include: (i) rural services institutions which can improve their service delivery to the villages and communities; (ii) financial institutions which will be expanding their services with access to long term financing; (iii) entrepreneurs/investors who are able to secure financing for their renewable energy projects; (iv) GoSL leveraging its financial resources for rural electrification; and (v) the global community which is benefitting from reductions of greenhouse gas emissions. 1.7 Original Components (as approved) 2 Renewable Energy for Rural Economic Development; Project Appraisal Document (PAD) 3 Component 1: Grid-connected Renewable Energy Power Generation (US$ 77.2 million) Component 1 is by far the largest component of the project with an allocation of 63% of total Bank financing including from both the original IDA Credit and Additional Financing. Table 1 below provides a breakdown of financing for each component, by source and as a percentage of total financing. This component would dramatically expand the renewable electricity generating capacity and production in Sri Lanka. This would be achieved by supporting private commercial developers to realize grid connected renewable electricity projects. Support would be provided, by facilitating access to sufficiently long-term financing from participating credit institutions (PCIs). Under this component, up to 80% of renewable energy project loans extended by PCI’s to private developers can be refinanced by the project. The investments were expected to be mainly in mini-hydro projects; however, it was also available for wind power and biomass generation. Component 1 is directly linked to the PDO promoting private sector power generation from renewable energy resources for the main grid and the GEO reduction in atmospheric carbon emissions. It also contributes the increased proportion of electricity capacity being derived from renewables. Component 2: Solar Photovoltaic (PV) Investments (US$ 33.7 million) Component 2 is the other major component of the project with an allocation of 27% of total Bank financing most of which came from the original IDA Credit supplemented by funds from the Additional Financing. This component would provide electricity to remote rural households that would not be connected to the grid in the foreseeable future. Under this component, output-based credit and grant support would be provided for the supply and installation of solar home systems. The subsidy would depend on system size (smaller systems receive bigger subsidies) and decline over time. The project would also refinance loans given by PCIs to households. Component 2 is directly linked to the PDO improving the quality of rural life by utilizing off-grid renewable electricity technologies to bring electricity to remote communities as well the GEO. It also contributes to both the increased proportion of electricity capacity being derived from renewables and number of rural consumers served by renewable energy systems. Component 3: Independent Grid Systems (US$ 4.1 million) Component 3 is a relative small component, with an allocation of only about 3% of total Bank financing almost all of which was from original IDA Credit. It supports the development of renewable energy based community mini grid systems which brings electricity services to remote rural communities. Mini grid systems are in particular of interest for villages with good micro hydro resources. The support provided would include: (i) project preparation grants to developers for identifying projects and working with communities to help them realize the projects; (ii) refinancing of loans by PCI’s to communities for eligible projects; (ii) investment subsidies to communities to reduce the cost for the communities; and (iv) supervision grants to PCI’s to cover the incremental supervision cost. The refinancing would be limited to 80 percent of the loan provided to communities and the subsidy to US$ 400 per kW installed capacity (later increased to US$600) up to US$ 20,000 per system. Component 3 is directly linked to the PDO improve the quality of rural life by utilizing off-grid renewable electricity technologies to bring electricity to remote communities and the GEO reduction in atmospheric carbon emissions. It also contributes to both the increased proportion of electricity capacity being derived from renewables and number of rural consumers served by renewable energy systems. 4 Component 4: Energy Efficiency and Demand Side Management (DSM) (US$ 1.1 million) Component 4 is the smallest component with an allocation of less than 1% of total IDA financing. This component intended to support the development of energy service companies (ESCOs) through awareness creation and training. Support would also be provided for the development of an ESCO business plan and development of legal agreements. Component 4 is directly linked to the GEO and contributes to removal of barriers in energy efficiency. Component 5: Cross-sectoral Energy Applications (US$ 3.1 million) Component 5 is also a small component, with an allocation of about 2% of total Bank financing. It was envisaged to promote renewable energy applications in non-energy sectors such as health, education and water supply. This would be achieved through technical assistance (awareness creation, assessment of impact and benefits and specification of standard energy packages) and co-financing of various initiatives. The co-financing would leverage additional funds from ongoing and planned Government and donor-supported projects. Component 5 is linked to the GEO and contributes to the number of electricity use strategies developed and implemented by government and nongovernmental institutions in non-energy sectors for using electricity to improve the delivery of their products and services in rural areas. Component 6: Technical Assistance (US$ 3.8 million) The allocation for component 6 was about 3% of total IDA and GEF financing. It was intended to largely support the implementation of the RERED investment components and would comprise a number of technical assistance activities, including: 1. Project administration and promotion 2. Support to the development of sub-projects 3. Market assessment and technology promotion related to renewable energy and energy efficiency capacity building 4. Cross-sectoral energy applications 5. Post-completion sustainability of project 6. Monitoring and evaluation / surveys Table 1 Component-wise breakdown of financing (all values in US$) % of S/N Component IDA-13 IDA-2 GEF Total total 1 Grid-connected RE Power Generation 49.2 28 0 77.2 63% 2 Solar PV Investments 18.8 11 3.9 33.7 27% 3 Independent Grid Systems 3.6 0.5 0 4.1 3% 4 Energy Efficiency and DSM) 0.6 0.5 0 1.1 1% 5 Cross-sectoral Energy Applications 2.3 0 0.8 3.1 3% 6 Technical Assistance 0.5 0 3.3 3.8 3% Total 75 40 8 123 100% 3 IDA-1 means the original IDA Credit and GEF Grant approved in 2002 for an amount of US$ 75 million equivalent and $8 million, respectively. IDA-2 means the Additional Financing approved in 2007 for an amount of US$ 40 million equivalent. 5 1.8 Revised Components Not applicable. 1.9 Other significant changes None. There were a few notable changes namely in the revision of thresholds for using established commercial procurement practices by the private sector; increasing IDA Credit and GEF Grant percentage of expenditure under all TA categories and revising the benchmark of the refinancing rate of interest. Those are discussed in detail in section 2.2. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 2.1.1 Background The RERED project is a direct follow-up to the ESD Project and was designed to reap the fruits of the groundwork established by that project. ESD was a breakthrough initiative, which created an enabling environment for renewable energy development and energy efficiency. One of the flagship achievements of ESD was the development and adaptation of a Standardized Power Purchase Agreement (SPPA) and piloting the use of relatively large-scale, long-term credit through licensed commercial banks as such credit lines were previously reserved for development banks while commercial banks mainly had access to small-scale SME credit lines. As a result, the capacity of small hydro in Sri Lanka increased from 1 MW in 1997 to 32 MW at the end of 2002. ESD also demonstrated the viability of private sector participation in providing off-grid electricity services with financing coursed through Micro Finance Institutions (MFIs). MFIs extended credit facilities to rural households and by the end of 2002, a total of 20,953 SHS were installed, with sales averaging 850 systems per month. Off-grid electrification was also provisioned through village hydro systems, whereby 35 village hydro schemes had been built with a total capacity of 350 kW, benefitting 1,732 households. An additional 49 village hydro projects were at various stages of development and would immediately benefit from a follow-on financing facility. Due to these and other factors, the design of RERED was in line with the environment at that time which had become more conducive for growth and scale-up. The number of mini-hydro developers was increasing (11 at the time); 4 major solar companies were in operation and about 12-15 village hydro developers were active. Also at the village level nearly 80 active electricity consumer societies were established. Wind power development had also been piloted for the first time in Sri Lanka under ESD with the establishment of a 3 MW wind project. There was considerable interest from the private sector to develop additional wind projects on several sites in Sri Lanka. In 2002, the Government had invited expressions of interest from developers for 40 MW of wind capacity. At appraisal, it was envisaged that RERED would be an important facilitator of financing for about 20-25 MW of that targeted capacity. 6 Tackling energy efficiency was also a key area of engagement as the environment for the implementation of demand side management activities had improved after ESD, including the formation of multiple ESCOs – the first of which came into being during the course of ESD. While clearly the foundations had been laid for sustainable growth of the renewable energy industry in Sri Lanka, critical barriers still needed to be addressed to maintain momentum; those were:  The size of the market which was still relatively small;  Ensuring a level-playing field for private sector participants;  Access to long term financing was still limited as domestic fund mobilization was mainly short term;  Integrating renewable energy in the country’s overall electrification strategy; and  Establishing a sustainable and transparent basis for subsidies for rural electrification. 2.1.2 Soundness of the background analysis During the preparation of RERED it was assumed that technical and financial concerns would limit grid extension and that even with widespread and rapid expansion of the system there would still be nearly 20 percent of the island’s population reliant on off-grid systems (nearly 1 million households.) This assumption was based on information from and discussions with the Ceylon Electricity Board (CEB) – the country’s largest power utility. CEB had also stated that the existing electricity generating capacity was facing shortages of about 35 percent coupled with an annual electricity demand growth of 8 to 10 percent. 100 90 Households electrified (%) 80 70 60 50 40 30 20 10 0 1976 1978 1980 1982 1984 1990 1992 1994 1996 1998 2000 2002 2004 2010 2012 1986 1988 2006 2008 Year Figure 1 below shows that, in effect, electrification moved faster than anticipated due to GoSL’s decision to aggressively invest in grid network expansion, and reached a greater number of households than had been assumed at Appraisal. The current plans by GoSL indicate 100% village electrification by the end of 2012 recognizing that about 40,000 households will need to be electrified through off-grid options. 7 100 90 Households electrified (%) 80 70 60 50 40 30 20 10 0 1976 1978 1980 1982 1984 1990 1992 1994 1996 1998 2000 2002 2004 2010 2012 1986 1988 2006 2008 Year Figure 1 Rate of electrification in Sri Lanka (1976-2012) One of the sharpest rates of increase in electrification was in the period from 2003-2011 when the generation capacity grew from 2,483 MW to 3,139 MW4, an increase of 658 MW (or about 26.5% of total installed capacity). As development of major hydro has remained stagnant at 1,207 MW since 2003, the growth came from an increase in thermal power (51%) as well as renewable energy (48%), the latter comprising small hydro, wind and biomass. This was consistent with the analysis at Appraisal. 2.1.3 Lessons taken into consideration during preparation The preparation of RERED benefitted from a build-up of considerable experience in the implementation of rural and renewable energy projects in the country; however, from the Bank’s perspective, this was not only limited to the Sri Lanka experience. RERED also benefitted from experiences in other countries where a number of similar initiatives had been undertaken, including countries in South and East Asia and Sub-Saharan Africa. The guiding principles for success emerging from the various Bank interventions included: (i) necessity of providing consumer choice; (ii) ensuring pricing which is cost-reflective; (iii) overcoming high start-up cost; (iv) encouraging local participation and tapping into private sector and civil society capabilities and potential; and (v) implementing sound sector policies. The implementation of ESD offered useful lessons, which were built into the design of RERED. Those included: (i) Flexibility in the implementation and in the effective implementation review missions as an opportunity to address emerging problems and implementation challenges amongst all project stakeholders while considering adjustments to project design, as needed, to help resolve bottlenecks; 4 Sri Lanka Central Bank Annual Report 2012 8 (ii) The effectiveness of third-party administration of the credit and grant facility and overall project management; (iii) Involvement of industry associations and advocacy groups plays an important role in guiding industry growth and directions; (iv) The adoption of an SPPA, ensuring tariff certainty, a bankable legal framework that assured availability of long term financing was vital to the success in grid connected renewable investments; and (v) The importance of participation and commitment of the entire community on off-grid village electrification schemes for ensuring long term sustainability of these schemes, as well as a adequate after sales services (especially for SHS) are crucial. 2.1.4 Rationale for Bank involvement The Bank has been recognized and accepted in Sri Lanka as a key catalyst for grid-connected and off-grid renewable energy and energy efficiency interventions. The key value-added stems from the Bank’s experience in supporting countries in Africa and Asia to develop and implement large renewable energy and energy efficiency projects. This knowledge and experience is unique among development institutions. The ESD project validated the adopted approach and laid the foundation for scale-up under RERED. The Bank was best placed to help Sri Lanka achieve that potential, both in terms of knowledge and financing needs. The Bank’s involvement increased the confidence of the PCIs to continue to provide long-term loans to private developers of renewable energy projects. This was of particular importance because increasing the access to energy services from renewable energy was at the heart of the RERED design. 2.1.5 Assessment of project design The Project has two distinctively different but complementary objectives, one of a social/poverty alleviation nature and another which is geared towards the power sector with an environmental dimension. The element that binds the two objectives is that both will be achieved through renewable energy technologies that are low-carbon and fueled by indigenous resources. The social and economic benefits of rural access to electricity services are well documented (IEG. The Welfare Impact of Rural Electrification, 2008 and Marge: Energy Poverty and Gender (EnPoGen) Sri Lanka Report, 2002). Rural households prefer grid electricity as it provides them with the highest and most reliable level of services and significantly subsidized tariffs, especially for those consuming less than 60 kWh/month. On the other hand, they would be more inclined to opt for off-grid electricity if the prospects for grid connectivity appeared to be out of reach or would take many years before they are connected. The Project aimed at providing off-grid electricity services to those households. The assumptions made by the Project (i.e. about 20% of households would not be connected to the grid by 2010) meant that the utilities would need to support extending connectivity to 650,000 households between 2004 and 2010. Therefore, the target of electrifying about 160,000 rural households, using off-grid schemes would be approximately 25% of the total forecast of un-electrified households by 2010. This was a 9 reasonable target and would make a significant impact. In reality, over 1.3 million new grid connections were made between 2004 and 2010, which was double the original target. The grid-connected renewable energy component would add 135 MW of renewable energy generating capacity to the existing capacity of 32 MW – an increase of over 400%. This would constitute 5.4% of the total installed generation capacity at the time. The grid connected renewable energy component was therefore significant to the power sector in Sri Lanka. The design of the project also included an engagement on energy efficiency through a small component; however, the limited resources allocated for energy efficiency and DSM (US$ 2 million equivalent or 0.9% of the total financing) made a significant impact unlikely. Moreover, a low interest credit line for energy efficiency extended by Japan International Cooperation Agency (JICA) made demand for RERED funds far less attractive. To reduce complexity and remain focused, it would have been better to limit the project to renewable energy and address energy efficiency in a more significant manner in a different project supported by the Bank or other development institution. Overall, the project was designed to build on the success of the ESD and it included a number of the same components using proven approaches. In general, the project design was sound and was designed to make a significant contribution to off-grid electrification, increasing the renewable energy generation capacity to diversify the fuel mix relying on indigenous resources, and contribute to an increase in total installed power generation capacity in the country to meet the growing demand for electricity. 2.1.6 Adequacy of Government’s commitment The Government’s commitment to the project was unwavering while recognizing the value of implementing such a Project through a commercial entity (i.e. DFCC Bank was the RERED Project Administrative Unit, continuing the role they played in ESD). Due to the nature of the project being driven by commercial lenders and private developers, DFCC was better placed with its experience in commercial banking transactions to work with the PCIs and private developers and administer the refinancing mechanism. The Government facilitated the implementation of the Project by providing the required policy and regulatory support, approving investments by the utility in substation upgrades, as well as considerable grant support for off-grid electrification schemes. 2.1.7 Participatory process Stakeholder participation during preparation was achieved through a consultative process established under ESD. This included consultation with PCIs, industry associations and individual companies, village electricity consumer societies, CEB and other Government organizations. 2.1.8 Assessment of risk The overall risk rating at Appraisal was substantial. This is considered appropriate for the type and scale of interventions proposed under the Project. The demand for refinancing of loans for grid-connected renewable energy projects depends on a number of macroeconomic factors that are beyond the control of the Project. For example, when interest rates were substantially higher 10 at certain periods during the implementation period - most notably at the height of the military conflict - the demand for refinancing loans reduced significantly. Demand grew once more when interest rates dropped again. On the other hand, the risk of an insufficient market for SHS was identified and considered moderate. The impact of a saturated market for SHS or accelerated grid expansion was not analyzed in sufficient detail, which could have addressed some of the challenges faced during implementation. This is an important lesson for other countries that are undertaking or planning aggressive off-grid electrification schemes. 2.1.9 Quality at entry rating by QAG (if any) Not applicable. 2.2 Implementation 2.2.1 Progress of Implementation Implementation progress was generally rated ‘satisfactory’ with a few exceptions in 2009 when the rating was ‘marginally satisfactory’ mainly attributed to slow disbursements. This eventually picked up and the Credit was fully disbursed5. The major implementation issues by component are discussed below: Component 1: Grid-connected Renewable Energy Generation There were no major issues during the implementation of Component 1. Minor issues were the benchmarking of refinance interest rate and limitation of refinancing approvals to the available budget. The AU approved refinancing until the total budget was committed. This led to non- disbursing commitments and did not provide an incentive to submit refinancing applications quickly. This approach would have caused a significant amount of undisbursed refinancing approvals at the end of the project. Both issues were resolved (refer to the section below on Actions Taken in Response to Problems). As component 1 was by far the largest component of the project the AU rightfully devoted most attention to this component. Component 2: Solar PV Investments Sales of SHS fell from 2,000 per month in 2005 to 800 per month in 2008. The shrinking of the market was caused by rapid expansion of the grid and by a reduction or cessation of SHS loans from financial institutions as the rate of defaults on loans began to rise sharply. This in turn, was caused by, among others, SHS vendors not honoring their after sales services and warrantee obligations. Due to some of these unanticipated market conditions, actual number of households to be electrified fell short of the original target. However, overall, the component was successful in providing opportunities for rural households to gain access to much-needed electricity services far sooner than they would have, had they waited for a grid electricity connection. As component 2 was a major component the AU made significant efforts to get this component back on track. When the AU realized that this was not possible, a proposal was made to restructure the project to revise the realistic target expected to be achieved under this component. Component 3: Independent Grid Systems 5 Fully disbursed does not mean zero balance. At the end of the Disbursement Grace Period, US$ 12,052 of IDA funds were refunded by GoSL as unutilized. 11 There were no major issues implementing this component. One minor issue was in the quality and technical capacity of some of the village hydro developers and equipment suppliers. That issue was addressed through the introduction of a pre-qualification process for all village hydro developers and suppliers, mandatory testing of equipment and stricter supervision. Component 4: Energy Efficiency and DSM There was little demand for support from the Project under this small component. The main reason for this was that the Environmental Friendly Solutions Fund (E-Friends), supported by JICA, offered similar support at better terms (70-100% refinancing, 10 year loan with 2 year grace period and a fixed Rupee interest rate of 8.5% per annum.)6 The initiatives that were supported under this component included refinancing of loans for energy efficiency sub-projects and awareness campaigns. Because there was no demand on these funds (and component was very small) the AU correctly decided to focus its attention on the more significant components with larger impacts on the achievement of the PDO and GEO. Component 5: Cross-sectoral Energy Applications This component also had limited demand. The grid was expanding rapidly and most rural public institutions such as schools and hospital were gaining access to grid electricity and, as such, a long term renewable energy-based solution was not a priority. AU also did not push this component and devoted its attention to the main (larger) components, namely 1 and 2. Component 6: Technical Assistance There were no issues with the implementation of component 6. 2.2.2 Success Factors RERED is a successful project in a number of dimensions. It supported the development of 185.3 MW of renewable energy capacity (or about 65% of total renewable electricity generating capacity in Sri Lanka as of March 2012. It also provided off-grid electricity to over 116,000 remote rural households (or about 0.5 million people.) Key factors that contributed to the successful implementation of RERED are given below: (i) Building on the success and lessons learned from ESD and use of proven concepts. Many of the activities designed for RERED were previously piloted under ESD. All of the support mechanisms were developed and required minimal fine-tuning. The adoption of an SPPA developed under ESD coupled with an established tariff regime and securing long- term financing was critical to the continued success of renewable energy investments in the sector. Consultation with major stakeholder groups had been institutionalized and the implementation agency had acquired the necessary skills, knowledge and experience to handle these transactions. Stakeholders were familiar with the requirements and support provided, resulting in a seamless transition from ESD to RERED. (ii) Private sector leadership. The project development and global environmental targets could only be achieved through the implementation of a significant number (ultimately 71) grid-connected renewable energy sub-projects. This required substantial implementation 6 An external evaluation of the E-Friends Fund can be obtained from the following link: http://www.jica.go.jp/english/operations/evaluation/oda_loan/post/2006/pdf/project27_full.pdf 12 and financial capacity that could only be provided by the private sector. The project was set to achieve those targets by creating an enabling environment for private sector participation. Entrepreneurs would identify economic and financially viable projects, investing time, effort and equity in the preparation of those projects, and seeking financing from PCIs. Having a line of credit facility through RERED incentivized the PCIs to extend sub-loans as they were able to refinance these loans through the IDA Credit at favorable terms. (iii) Implementation arrangements. One of the key success factors lay in the project management by the DFCC Bank which functioned as the RERED Administrative Unit (AU). The AU was, by design, a separate entity from DFCC Bank’s main lending function to avoid a possible conflict of interest and provide transparency to PCIs whom were competing with DFCC Bank on the refinancing of sub-loans. The AU was staffed with professionals (including engineers), many of whom had gained considerable experience from the implementation of ESD. As the implementation progressed, the AU retained much of this knowledge and became well in tune with energy sector issues. The AU was also taking up an important role as facilitator and intermediary between the direct beneficiaries (PCIs, developers, SHS vendors, village hydro developers and end-users), the various Government branches (Ministry of Finance, Ministry of Power and Energy, etc.) and the World Bank. The AU maintained a good consultation process with all stakeholders throughout the implementation of RERED and convened regular workshops and meetings to help resolve impediments and address emerging problems. This established good faith and a great deal of trust in the AU among the various stakeholders. (iv) Enabling macro-economic environment. Re-financing of loans for renewable energy sub-project only works in a suitable macro-economic environment which is usually outside of the control of the Project. In this case, GoSL supported an excellent market enabling environment and its commitment to getting the private sector engaged in developing the sector was crucially important to RERED’s success. Significant duty and tax concessions were also available for most sub-projects. During the implementation of RERED the macro- economic environment was generally conducive. Interest rates were reasonable (other than for a period during heightened military conflict in the country), the exchange rate fluctuated relatively modestly and there were no restrictions on lending for renewable energy investments. With the tariffs offered by the CEB, projects were financially viable and encouraged developers to actively develop and implement renewable energy projects. Under different macro-economic conditions, and without government cooperation, the Project might not have been successful. 2.2.3 Actions Taken in Response to Problems During implementation several actions were taken in response to emerging problems. The most important actions are discussed below. (i) Change of Interest Rate of Refinancing Loans. The original RERED IDA Credit and GEF grant agreement stipulated that interest rates to PCIs are calculated based on a six- month average of the Average Weighted Deposit Rate (AWDR). At the time the Additional Finance was approved, the rate was to a blend of AWDR and Average Weighted Fixed Deposit Rate (AWFDR). This was done to improve financial sustainability by bringing the 13 interest rates closer to market terms. Subsequently, interest rates had begun to rise sharply and that led to a significant increase in the financing terms for renewable energy project loans and resulted in a considerable decline in loan applications. While lending rates began to decline rapidly in the second half of 2009, the cost of RERED remained high as it was influenced by fixed deposit rates set every 6-months. The interest rates for RERED funds remained high for a longer period of time, causing its sub-loans to be out-priced by other loans available in the market. Therefore, in response to these issues, the Bank agreed with GoSL to use the AWDR - revised every 3 months. As a result, more sub-projects were picked-up and the pace of loan applications and financing of sub-projects increased. (ii) Change of disbursement condition to first-come first-serve basis. For the most part during the life of the project, the AU did not approve new refinancing requests when the RERED un-committed balance was insufficient. As per the participation agreements with the PCIs, the AU could cancel a refinance commitment only if no disbursements had taken place in 12 months. This resulted in non-disbursing commitments with a risk of large undisbursed balance towards the latter stage of the project. In 2008, the AU in consultation with the Bank and PCIs, changed their approach and overcommitted the available funds by approving refinancing requests with the clear understanding that disbursements would take place on a first-come first-serve basis until the available funds are exhausted. This provided an incentive for project developers and PCIs to submit disbursement requests as soon as possible or otherwise run the risk of not being able to draw on the full amount of approved refinancing. This modified approach resulted in an increase in disbursements and ensured that the IDA Credit would be fully disbursed by the closing date of the project or during the grace period. (iii) Prequalification of village hydro developers and suppliers. Developers received a project preparation grant to develop village hydro projects. This grant was paid in installments after a set of milestones were reached. The support was considered attractive and resulted in an increase in the number of village hydro developers during the latter stages of ESD, not all of whom had the required knowledge and skills. To avoid this issue, including potential misuse of resources, the AU introduced a prequalification process for village hydro developers and equipment suppliers whereby only those with a minimum level of knowledge and experience were pre-qualified under the Project. This led to fewer number of incomplete projects and potentially unsatisfied end-users, and overall, a more efficient implementation of the village hydro component. The introduction of mandatory testing of turbines prior to installation led to better quality equipment and less conflicts with suppliers. (iv) Modification of SHS vendors’ business model. In late 2006, problems with the solar PV component began to surface. By 2009, it became clear that sales targets might not be achieved. To address this problem, the AU organized a participatory problem analysis workshop in December 2009 to analyze the issues in detail and identify remedial actions (details on problems encountered are provided in section 6 on lessons learned). The workshop provided recommendations for possible actions, including the modification of the SHS vendor business model. This included import of cheaper but good quality systems, shift to cash sales and modification of the sales services networks. SHS vendors started to 14 implement the recommendations, but it was not sufficient to increase SHS sales. In October 2010, the project was restructured to reduce the target for the off-grid renewables component from 161,000 households, enterprises and institutions to 113,500. With a saturated market, the number of solar vendors active at the peak of SHS sales fell from 14 to 2. The current vendors are supplying SHS systems on a cash basis or on credit provided by the vendors themselves. (v) Increasing the thresholds for using established commercial procurement practices by the private sector. The established thresholds were set in 1997 under the ESD project and were carried over into the RERED project without revision. Data from RERED-financed sub-projects showed that costs had gone up substantially over the period (2004-2010). This meant that more sub-projects would need to follow International Competitive Bidding (ICB) procedures since the costs would go beyond the established thresholds under ESD. This was also more critical for smaller projects where the cost of going through an ICB procedure outweighed the benefit of using commercially accepted procurement practices. As such, an increase in the thresholds for investment projects was agreed with GoSL. For the procurement of Goods, the threshold increased from US$ 2 million to US$ 6 million, while the Works category increased from US$ 3 million to US$ 9 million and Turnkey contracts from US$ 5 million to US$ 15 million. These increases were in line with the percentage increase in Prior Review in the Bank’s South Asia Region for the Borrower’s Procurement Transactions approved in May 2009. (vi) Increasing IDA Credit and GEF Grant percentage of expenditure under all TA categories. The Government requested to increase the percentage of expenditures financed for the technical assistance categories of the IDA Credit and GEF Grant to 100%. Due to the difficult fiscal situation further aggravated by the global economic crisis, GoSL had not been able to allocate co-financing for technical assistance funded by IDA or GEF in a timely manner. At the height of the military conflict, the solar subsidy payments were also delayed by GoSL, resulting in severe cash flow problems to SHS vendors. This has often resulted in payment delays to suppliers and reputational risks for the Bank. The increase facilitated the implementation of a critical technical assessment of the power grid absorption capacity as well as capacity building activities and other TA geared towards scaling-up investments in new renewable energy technologies such as wind and biomass. The increase in expenditures was covered by a reallocation of non-utilized funds from other categories. 2.2.4 Mid Term Review The Mid Term Review (MTR) was carried out in September 2005. At that time it was concluded that the original targets for off-grid electrification could be achieved (101,000). The grid connected renewable energy project component was behind schedule. Delays were caused by problems with connections that needed to be made by CEB as result of sub-stations reaching their maximum capacities, delays in obtaining required approvals from the Central Environmental Authority (CEA) and other agencies, and from delays in obtaining land. The MTR provided the following recommendations: (i) streamlining approval procedures; (ii) address with CEB problems related to connection of renewable energy projects to the grid (grid failure and absorption capacity of sub-stations); (iii) pre-qualification and training of village hydro 15 developers and equipment suppliers; (iv) closer monitoring of performance of village hydro projects; and (v) require village hydro developers to involve village mobilization experts. The AU implemented the recommendations to the extent possible. To address sub-station capacity, CEB took on a number of grid strengthening projects financed by the Asian Development Bank (ADB) and others. Approximately two years following the MTR, an Additional Financing was approved by IDA in 2007. This was largely in response to the increased demand for RERED refinancing. Since the majority of the funds would be geared towards new sub-projects, and with an average gestation period of about 2 years from inception to commissioning, a 3-year extension to the closing date was approved to allow sufficient time for the additional financing credit to be committed and disbursed. By that time, most of the funds available under the IDA Credit and GEF Grant were disbursed; however, since there were some amounts that still remained uncommitted (mainly allocated for TA), the parent project was also extended to allow GoSL to utilize all remaining sources of funds. Ultimately, all but a few thousand dollars from the entire allocation of IDA and GEF was exhausted by the end of the disbursement grace period. 2.2.5 Performance ratings by the Quality Assurance Group (QAG) for Supervision or Projects at Risk Not applicable. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 2.3.1 M&E Design The first objective of the Project is to improve the quality of rural life by utilizing off-grid renewable energy technologies to bring electricity to remote communities. The M&E framework includes two indicators for the first objective: (i) increase in income generating activities in communities that gain access to electricity; and (ii) electricity access to 161,000 households, rural small/medium enterprises and public institutions through off-grid systems. Studies show that quality of life improves when access to electricity is provided. This does not necessarily require an increase in income. Non-financial benefits include reduction of “time poverty,� the feeling of social inclusion, improved cleanliness of the home and a greater improvement in studying opportunities for children. Increased income generating activities would be an additional benefit and further improve the quality of life. The number of households, small and medium enterprises and public institutions electrified can simply be obtained from project statistics. The increase in income generating activities would be accessed through surveys. Where increased income generation activities are found, attribution may be difficult. The second objective is to promote private sector power generation from renewable energy resources for the main grid. This will increase the electricity generation capacity of Sri Lanka using environmentally friendly indigenous renewable resources, avoiding carbon emissions and conserving foreign currency which is otherwise spent on the import of fossil fuels. The indicators for the second objective are: (i) additional 135 MW of small-scale renewable grid-connected power generation capacity installed (85 MW under RERED and 50 MW under the Additional Finance); (ii) reduction of greenhouse gas emissions (1.25 million tons of CO2 avoided); and (iii) promote adoption of renewable energy by removing market barriers and reducing implementation 16 cost. The indicators are adequate to assess achievement of this objective. The installed capacity is obtained from project statistics, as this information must be provided for all re-financed projects, whereas the avoided green house gas emissions can be calculated from total electricity generated, which can be obtained from CEB. The removal of market barriers will be evident from achieving the first indicator. In the discussion of this indicator additional details on barrier removal can be provided. 2.3.2 M&E Implementation and Utilization The AU contracted a consultant to monitor progress towards achieving objectives and meeting indicators. M&E reports were submitted initially every quarter and bi-annually from 2006 onwards. Where the information had to come from project statistics, very accurate and reliable information was obtained. The AU collected the required information as part of its routine administration work and progress was monitored throughout the sub-project lifecycle. Based on this process, corrective action was taken where needed. 2.4 Safeguards and Fiduciary Compliance 2.4.1 Safeguards There were no major issues on either social or environmental safeguards and overall safeguards compliance is rated satisfactory. The project relied on GoSL environmental clearance processes. In addition, the AU contracted consultants to conduct environmental and social assessments of every grid connected sub-project before approval, and on a sample basis after commissioning, which also included site visits. Based on these assessments, two projects were denied its application for refinancing because of non-compliance with environmental safeguards. After commissioning, no significant problems were found. According to the RERED Operating Guidelines which were strictly adhered to, IDA had required prior review of: (i) all biomass projects; (ii) mini-hydro projects with a capacity of more than 5 MW; (iii) wind projects with a capacity of more than 10 MW; (iv) all projects involving land acquisition and/or resettlement; and (v) the first two environmental assessments of each PCI for mini hydro, biomass and wind power projects. The AU followed these procedures diligently. 2.4.2 Fiduciary Fiduciary compliance was satisfactory. The AU had well-established procedures for approval of disbursements of loan and grant resources and adequate financial management (FM) staff with sufficient capacity to undertake those responsibilities. PCIs were required to submit refinancing application packages comprising a complete set of documents. Refinance disbursements were made only after providing proof that PCIs had already disbursed their loans to developers and such funds were utilized for the stated purpose. Co-financing grants were disbursed on submission of proof of installation. Other grant payments were generally based on reaching specified verifiable milestones. Verification of installation of SHS was carried out on a sample basis. These verifications did not find any indication of unjustified payment requests. The AU kept detailed records on all payments made. Financial audits carried out during implementation did not find any issues. To ensure adequate fiduciary controls, IDA reviewed: (i) the first two refinancing requests, irrespective of size, submitted by each PCI; (ii) refinancing applications 17 above the free limit (US$ 3.5 million); (iii) each PCIs’ first solar home system refinancing request; (iv) each PCIs’ first grid-connected hydro, wind and biomass refinancing request; and (v) each PCIs’ first village based hydro, wind and biomass refinancing request. 2.5 Post-completion Operation/Next Phase Until 2007 there was no single Government organization in Sri Lanka responsible for the promotion of renewable energy. To implement ESD and later RERED, an implementing unit had to be established and GoSL decided to facilitate this through an independent unit within a private development bank, namely DFCC Bank. On October 1, 2007 the Sri Lanka Sustainable Energy Authority (SEA) was established through the enactment of the Sri Lanka Sustainable Energy Authority Act No. 35 of 2007. SEA was established as an apex institution responsible for reaching a new level of sustainability in energy generation and use through increasing the use of indigenous renewable energy resources and improving energy efficiency. The RERED AU is expected to be handing over Project files to the SEA who will continue to take on some of these roles of facilitating investments in the sector. They will also likely continue to maintain the documentation, data, and studies undertaken under RERED which was disclosed on the Project website. This includes a wealth of analysis, data and information on the subject of renewable energy and related initiatives in the developing country context. Throughout the project, this had been very valuable resource for many researchers, practitioners and those who are keen on replicating some of Sri Lanka’s experiences. Although the transfer arrangements are clear it could have been benefitted from better coordination with SEA and more pro-activity. Sub-projects refinanced by RERED shall continue to comply with GoSL environmental requirements, including the required monitoring. This is expected to continue after Project closure. ESD and RERED addressed one of the most important barriers to renewable energy development, namely the availability and access to sufficient long-term credit. This barrier was addressed by encouraging commercial banks to lend to renewable energy projects in order to demonstrate that the risks are manageable and that lending would also be profitable. Once commercial banks recognized this, they were expected to continue lending for these projects, even without support from RERED. The true criterion of success of RERED is in the continued lending for renewable energy projects by commercial banks and the initial findings post Project completion are very encouraging. SPPAs have been signed for an additional 95 renewable energy projects with a total capacity of 281 MW, commercial banks are willing to continue lending in the sector, and some banks have even taken their financing abroad on other renewable energy projects outside of Sri Lanka. In addition, the credibility created by RERED and ESD have led to other investors financing grid-tied renewable projects. These include, fund mobilization through Initial Public Offerings (IPOs) by several local firms, entry of foreign funds, and a risk sharing facility from the International Finance Corporation (IFC) namely, Portfolio Approach to Distributed Generation Opportunities (PADGO) Project. It would be of interest for the SEA to continue monitoring these trends and other relevant ones. The SHS component of the Project (Component 2) was largely of similar design to the one financed under ESD given the success achieved under the latter. The outcome of the SHS sub- 18 component of ESD was rated satisfactory, and while the design did not vary much between the two projects, the SHS component of RERED faced substantial difficulties. This illustrated that sometimes the most important lessons can be learned years after project completion and not always immediately following completion of a project. It is worth noting that the difficulties were not necessarily due to component design or product failures, but rather because the market reached saturation leading to fewer business opportunities for vendors. As a result, the cost of doing business went up and led to a higher transaction cost and smaller volumes. A number of solar companies closed down and their customers were left without support prompting many to stop repaying their loans. These issues led to a somewhat negative reputation for solar PV. It is therefore important for SEA to continue monitoring the impact of the activities implemented under RERED as it will help also in supporting the Government’s continued effort of off-grid electrification of remaining households to achieve island-wide electrification. A possible follow-up to the RERED Project could be support for the development of wind energy as well as power generation from biomass and grid-connected solar PV (where installed cost is dropping rapidly). The distribution utilities and the regulator (PUCSL) introduced net metering regulations that allow individual customers to install solar PV systems where the electricity generated from PV offsets their electricity payments at the retail tariffs. Few investments of these schemes (limited to 42 kWp per facility) are happening as residential tariffs were recently increased to as much as Rs 50.4/kWh (currently about US$0.38/kWh). Small hydro development is now considered a commercial practice with sufficient expertise in the country which may not require additional support. Biomass generation, and to a lesser extent wind power and solar PV, are still facing a number of barriers and support to overcome these barriers would be useful. These barriers include some of a technical nature, as well as regulatory and financing barriers. There are at present no renewable energy projects in the World Bank lending pipeline for Sri Lanka. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation RERED is still highly relevant to Sri Lanka, the Bank and global energy and climate initiatives. Grid-connected renewables supplies electricity to consumers from indigenous resources. At the national level, this contributes to reduced expenditures on imported fossil fuels as well as greenhouse gas emissions from fossil fuel based electricity generation. The grid-connected renewable energy sub-project development under RERED is in line with the October 2006 GoSL National Energy Policy and Strategies of Sri Lanka as it addressed 3 of the 9 main elements of that policy, namely: (i) provide basic energy needs; (ii) improve energy security; and (iii) use indigenous resources. This is also consistent with President Mahinda Rajapaksa’s ‘Mahinda Chinthanaya – Vision for the Future’ which commits to increasing generation from renewable energy (excluding large hydro) to 20% of total generation by 2020 corresponding to about 4,000 GWh/year (or ~1300 MW in installed capacity). The development of grid-connected renewables responds to the 2009 CAS outcome 2.1 Improving Infrastructure Provision. As a result of these sub-projects, a vibrant sustainable world-class SME-based 19 renewable energy industrial sector has developed with good domestic and foreign business prospects. This also contributes to achieving CAS outcome 2.2 Improving the Business Environment for Stronger Entrepreneurship and Knowledge-based Economy. As the Project ended prior to the completion of the latest CPS dated April 2012, there are no direct indicators to which the Project contributes to in this CPS; however, it is believed that as a result of RERED interventions, outcomes such as ‘Improved access to finance’ (under 1.1 Improving investment climate) as well as Improved quality and sustainability of infrastructure (under 3.1 Increasing the quality of service delivery). This attribution is mainly due to the emergence of a sustainable industry which is engaged in developing, financing and operations and maintenance of energy delivery systems. Moreover, commercial banks are continuing to lend to private developers whereas in the past the latter faced significant challenges securing financing (or obtaining it at much higher costs) due to perceived risks of small-scale privately- developed infrastructure projects in the county and/or the usually high capital cost of these investments. To date, climate change is still one of most important global priorities. Its’ impact not only on the environment, but on food security, water resources, etc. is critical, and the grid-connected renewable energy sub-projects reduce the carbon intensity of the power supply in Sri Lanka. In addition, lessons learned and experience gained from the implementation of the RERED project has been shared with a number of countries many of whom have adopted similar models in the development of their renewable energy initiatives. Electrification has been a high priority for GoSL. The 2006 Energy Policy calls for 85% electrification by 2015. In 2010, GoSL announced its intention to have island-wide electrification by the end of 20127. To achieve the 100 percent electrification goal, GoSL is investing significantly in network expansion, using off-grid means to electrify roughly 40,000 customers who are “beyond the last mile,� and adding new generation capacity. If the subsidy required for grid connection exceeds LKR 200,000 per household (approximately US$ 2,000), those households will be provided with an alternative subsidy to obtain a robust renewable energy- based off-grid solution. Therefore, the off-grid schemes developed under RERED remain highly relevant to GoSL’s priorities. From the Bank’s perspective, these are also relevant to the 2009 CAS outcome 1.1 Supporting Integrated Rural Development and outcome 2.1 Improving Infrastructure Provision by providing electricity services which in turn improves market connectivity. The village hydro sub-projects also contribute to village organization through the establishment of electricity consumer societies. The off-grid activities contribute to CAS outcome 1.2 Improve Economic Opportunities in North and East as 15% of the SHS supported by RERED were sold to households in those areas. This is also relevant to the 2012 CPS as off-grid electricity significantly improves households’ quality of life and social inclusion. 3.2 Achievement of Project Development Objectives and Global Environment Objectives Achievement of the following objectives is discussed: 7 Electrification data shows that at the end of the first quarter of 2012 the electrification ratio had reached about 92 percent. 20 1. Improve the quality of rural life by utilizing off-grid renewable energy technologies to bring electricity to remote communities; 2. Promote private sector power generation from renewable energy resources for the main grid; 3. Reduce atmospheric carbon emissions by removing barriers and reducing implementation costs for renewable energy, and removing barriers to energy efficiency. The first objective corresponds in particular with component 2 (Solar PV Investments) and component 3 (Independent Grid System). The two components cover about 18% of the actual total expenditures for the Project. The second and third objectives relate in particular to component 1 (Grid-Connected Renewable Energy Power Generation), which incurred about 80% of actual total expenditures of Project funds. Objective 1: Improve the quality of rural life by utilizing off-grid renewable energy technologies to bring electricity to remote communities. RERED aimed to provide 161,000 households, rural small and medium enterprises and public institutions access to electricity services through off-grid renewable energy schemes. In 2010, the target was reduced to 113,500 based on the forecast demand for off-grid electrification. The final accounting for off-grid electrification showed that RERED had provided access to electricity to 110,575 households through the sales of SHS while 6,220 households were electrified through independent grid systems, mainly village hydro. In total RERED provided 116,795 households access to electricity, which exceeded the revised target by a small margin. It is also important to realize that for many families, first time access to electricity was a life- changing event. Electricity from SHS and off-grid community-based hydro sub-projects has made a lasting impact on the lives of the beneficiaries. Although there has been only a limited improvement in their income, they have gained significant benefits in quality of life through better lighting, enabling children to study longer in the evening hours, facilitating the work of women and improving family and community relationships. Of these benefits, improved domestic lighting has played the most significant role in improving the quality of life. Many villagers described the improved lighting as “a reawakening of their lives,� believing that they would have never realized this dream in their lifetime. Electric lighting when compared to alternatives such as kerosene lanterns – which had long been used by the village communities – offers distinct advantages: (a) it is far safer as it dramatically reduces kerosene-related accidents including fire and burns; (b) it is cleaner as soot build up from burning kerosene oil in homes is avoided; (c) it improves safety by allowing more light points, especially for outdoor use; and (d) provides overall greater quality of lighting. Off-grid electricity is also extensively used for watching television, leading to more awareness of the outside world, in addition to the entertainment aspect. Surveys8 carried out during Project 8 Resources Development Consultants (Pvt) Ltd.: Monitoring and Evaluation of the Renewable Energy for Rural Development Project. September 2004 - September 2008. Completion Report submitted to RERED AU. 21 implementation showed that husbands devoted more time to the family (80% of the respondents in surveys) and reduced time spent outside of the house including alcohol consumption in the evening (20% of respondents). Villagers feel safer (60 – 87 % of the respondents of different surveys) and reported that there is more unity among villagers and an increase in socio-cultural activities resulting from electricity at religious places in the villages (80% of the respondents). The use of computers was also observed in a few houses electrified by village hydro schemes. Contrary to expectation, the availability of electricity did not stimulate the development of enterprises. It did, however, improve operation of existing enterprises. According to reports from PCIs and consultants, access to electricity improved economic activities of 742 (household) enterprises or 0.6% of total number of electrified households. Economic activities that benefited from access to electricity include grocery shops, bakeries, battery-charging stations, communication centers, computer training centers, grinding/rice milling and cinnamon processing. Although there was no formal target according to the PAD, the Bank team tried to capture this data during implementation by assuming that the 1,500 households, small/medium enterprises and public institutions targeted for electrification from the original IDA Credit (1,000) and the Additional Financing (500), would experience an increase in income generating activities as a result of the provision of electricity. However, as indicated above, that implicit target was not achieved. Although the revised targets have been achieved, and the impact on those receiving access to electricity is evident from surveys, there are a few issues to be noted. Of the 110,575 SHS sold to rural households an estimated 20,000 had to be repossessed because households defaulted on their loans. In general, the PCIs only repossessed the modules which were deemed as their only collateral. The value of the repossessed modules was insufficient to recover the outstanding balance. Further, a small number of SHS and village hydro systems are no longer used because the households have since been connected to the electricity grid. On the other hand, many rural households – in spite of being connected to the grid - continue to use their SHS as a back-up system and some villagers continue to use their village hydro system. By doing so, they are able to reduce their electricity bills. On the other hand, while several village systems have now been connected to the grid, another important development occurred. Under a scheme similar to an SPPA but for smaller systems, the off-grid village systems connected to the grid can now sell power to the utility at an agreed tariff. This is a win-win situation for the villages communities who have invested money and sweat equity into their off-grid systems as they can now benefit from the reliability of the national grid, while continuing to earn revenues from the sale of electricity generated by their village hydro schemes back to the utility at an agreed tariff (see Annex 2 for more details.) It should be noted that not all rural households using off-grid schemes have benefitted from the expansion of the national, grid approximately 40,000 households are expected to still remain without access to the national grid (including some who are on small islands.) This is in addition to thousands who are still using off-grid schemes or other means such as kerosene for lighting today. However, for those who have benefitted from faster than anticipated grid expansion this was a positive development as it provides a higher level of services and is more affordable for households. Off-grid electricity supply provided years of access to electricity before the arrival 22 of the grid to their communities, and for those households who have yet to receive grid power, the off-grid schemes are still very much valued. The number of grid connected domestic customers were 2.82 million in 2004. By 2010, that number had increased to 3.96 million - an increase of 1.14 million. Grid electrification now serves 92 percent of households making off-grid less relevant than originally anticipated at Project Appraisal. However, off-grid schemes have demonstrated that SHS and/or independent mini grids are a viable option for rural areas where the cost of grid extension would be prohibitive for the utility. Overall, achieving this objective is rated satisfactory as benefits to electrified households outweigh the difficulties and challenges encountered. Objective 2: Promote private sector power generation from renewable energy resources for the main grid The indicator for achieving objective 2 was the installation of an additional 135 MW of small- scale renewable grid-connected power generation capacity installed (85 MW under RERED and 50 MW under the Additional Financing). In reality, RERED supported the installation of about 185.3 MW grid-connected renewable energy sub-projects. This included 2 wind projects (19.8 MW total capacity), 1 biomass project (1 MW capacity) and 68 mini hydro projects (164.5 MW total capacity.) Only the biomass project stopped operating9. Private sector developers developed all projects, using loans provided by commercial banks participating in RERED. The PCIs extended loans totaling US$ 122 million (LKR 12.84 billion), which is on average 59.5% of total project cost. The total investment was about US$ 205 million (LKR 21.55 billion). As of March 2012, there were 102 NCRE projects connected to the grid. The total installed capacity from those was 243.1 MW of which almost 65% was a result of RERED support. The total energy generated during 2011 from NCRE was 722 GWh10 of which RERED-funded sub- projects contributed 422.5 GWh (58%). There are good indications that development of grid-connected renewables will continue after the close of the RERED project. About 26 other plants commissioned to date have not been financed by RERED or ESD, most of which were commissioned during the last few years of RERED implementation. In addition, there is a pipeline of about 95 projects for which an SPPA has been signed between private developers and CEB. Developers have shown a continued desire to undertake private investment in renewable energy generation even without support from RERED, and commercial banks continue to finance these investments. Sources of funds include private equity, funds raised through stock markets, foreign equity investors and support from a small IFC loan guarantee facility. This demonstrates that the expected outputs and outcomes have been achieved. 9 The 1 MW Walapane biomass power plant at Nuwara Eliya was Sri Lanka’s first grid-connected biomass plant commissioned in November 2004. It stopped operation due to a variety of reasons, including fuel supply issues, frequent grid failure and remoteness of the plant site. The failure of this project made PCIs more reluctant to lend for biomass power projects. 10 Source: CEB Statistical Digest 2011. Small IPPs (604) + IPP NCRE (118) =722 GWh 23 Whilst the above discussion highlights the significant achievements associated with this objective, they do not capture the full picture. In achieving this objective, the Project contributed to the creation of a world-class renewable energy industry in Sri Lanka (in particular for small hydropower) comprising investors, private developers, financiers, engineers/designers, planners, operators, equipment manufacturers, etc. In addition, rural communities benefitted from both temporary and long-term employment opportunities from construction and operations of the sub- projects and overall improved infrastructure as GoSL had undertaken construction of new roads and/or repair of existing ones to facilitate the construction activities for some of these sub- projects. A number of villages benefitted from piped water supply, construction of houses, school facilities, community centers and improved facilities at places of worship. Developers carried out these improvements mainly to create goodwill among the villagers, while some were done as compensation payments to the villagers. Overall achieving this objective is rated highly satisfactory. Objective 3: reduce atmospheric carbon emissions by removing barriers and reducing implementation costs for renewable energy, and removing barriers to energy efficiency The indicators for achieving the global environmental objective were: (i) avoiding emissions of 1.25 million tons of CO2); and (ii) promotion of the adoption of renewable energy by removing market barriers and reducing implementation cost. The quantifiable indicator was not increased with the additional financing. The avoided emissions are calculated from the actual renewable electricity production. As given above, total electricity generation from RERED-financed sub-projects in 2011 was 422.5 GWh. Total generation supplied will fluctuate, mainly depending on rainfall (for the hydro plants.) When considering that not all plants commissioned in 2011 are operating at full capacity or were in operation for a full year, and those commissioned in 2012 or yet to be commissioned did not generate any electricity as of yet, the electricity generation figure used is considered a conservative estimate for the total annual electricity generation over the lifetime of the sub- projects. Assuming an average carbon emission coefficient for Sri Lanka of 0.8 kgCO2/kWh, the resulting avoided emissions of sub-projects commissioned to date is 1.84 million tons CO2) surpassing the target by 47%. By estimating the total expected generation from all plants commissioned in 2012 or those expected to be commissioned by year’s end, the volume of avoided CO2 emissions would be 2.15 million. The removal of market barriers is evident from the additional installed capacity of grid-connected renewable energy from all investments in the sector. The main market barriers first addressed by the ESD project at a smaller scale were more substantially addressed through RERED. Those were: (i) commercial banks not willing to lend for grid-connected renewable energy projects because they are not familiar with these until then untried projects and consider lending in this sector too risky; (ii) developers cannot obtain lending (or lending with longer tenures) for these projects; (iii) un-electrified households had little access to clean electricity services on affordable 24 terms; (iv) investors considered renewable energy investments to be risky; and (v) CEB is reluctant to purchase electricity from grid-connected renewable energy plants. The resulting reduction in carbon emissions can also be attributed to the off-grid schemes as well, though these are far smaller in volume than emissions avoided from the grid-connected sub- projects. Achieving this objective is rated highly satisfactory. 3.3 Results Framework The objectives of RERED were all within the direct control of the Project. Higher-level objectives could have been: (i) create strong support and commitment among Government agencies and CEB for the development of grid-connected renewable energy sub-projects; and (ii) create recognition that renewable energy-based off-grid electrification schemes are a viable and preferred option for areas where the cost of grid extension is prohibitive. These higher-level objectives also have been achieved with RERED playing a crucial role. The CEB has changed from a reluctant acceptor of grid-connected renewable energy to a strong supporter of those. CEB stated that power purchased from small renewable energy plants, had saved the utility LKR 2 billion in electricity generation cost in 2010, resulting from reduced expenditure on imported heavy fuel oil and other fossil fuels based power generation. The Mahinda Chinthanaya calls for generation from renewable energy to reach 20% of total electricity generation or about 4,000 GWh/year by 2020 and the 2012 National Energy Policy currently under preparation calls for increasing the renewable energy generation capacity from 234 MW at the end of 2012 to 928 MW by 2020. Mahinda Chinthanaya also commits to 100 percent access to grid electricity for all households. 3.4 Efficiency 3.4.1 Economic Grid-connected mini hydros were the dominant investment in the “grid-tied� component. A mini hydro sub-project was used as a representative project for the economic and financial analyses. Post completion, the Economic Internal Rate of Return (EIRR) was 46 percent for a representative 2.5 MW mini hydro plant with an investment cost of US$1,445/kW, a plant factor of 38 percent and an avoided cost of US$0.252/kWh based on Short-Run Marginal Cost (SRMC) of highest cost thermal plants offset by the mini hydro generation. The economic analysis at Appraisal for a 1,500 kW mini hydro plant showed an EIRR of 24 percent. The higher EIRR is attributed to the higher avoided cost even though plant factor was lower and investment cost higher than at Appraisal. Solar Home Systems. Households using a SHS will save on kerosene for lighting and batteries as well as receiving far superior and safer lighting services from electric lighting compared to kerosene lighting. A 40 Wp SHS is used for the representative analysis. The EIRR is 88 percent 25 when consumer surplus (attributed to the far superior electric lighting) is considered. If consumer surplus is disregarded, the EIRR is 13 percent. There was no EIRR calculated at Appraisal for this component. Village hydro. The village hydro plant saves kerosene for lighting and batteries as well as providing far superior and safer electric lighting services compared to kerosene lighting. Beyond meeting households’ basic electricity needs, they have the potential to meet other electricity needs in the community such as ironing, water pumping, and power for small enterprises. The EIRR of a representative sub-project was calculated taking into account only savings due to avoided kerosene and battery use as well as consumer surplus gained from using superior electric lighting. The EIRR for a representative sub-project with a capacity of 8 kW and serving 30 households is 54 percent when consumer surplus was considered and 9 percent if consumer surplus was not considered. The EIRR of a typical village hydro sub-project was reported as 12 percent at Appraisal. 3.4.2 Financial Grid connected mini hydro. The financial analysis of the representative 2.5 MW mini hydro plant shows a Financial Internal Rate of Return (FIRR) of 17 percent against an FIRR of 21 percent calculated at Appraisal. The FIRR varies substantially from sub-project to sub-project depending on site characteristics, which determine investment cost and plant factor. The financial analysis used the flat rate 20-year tariff approved by the regulator, PUCSL, which was applicable in 2010. Solar Home Systems. The FIRR for the representative 40 Wp SHS was 12 percent compared to 7 percent estimated at Appraisal. While the 12 percent is comparable to interest that is paid on a fixed deposit savings account, it would be considered a low return on an investment that a poor household with few savings would expect. However given the poorer quality of services from kerosene lighting, the expenses and difficulties of transporting batteries for recharging, a household would expect to give the SHS services a higher value than merely its financial returns. Village hydro. The FIRR for the 7.5 kW representative sub-project is 50 percent. The high FIRR is due to the significant reduction in investment costs due to grants provided, which reduce the investment cost to US$704/kW (compared to a SHS of over US$9,000/kW after grant). Without investment subsidies, the FIRR would drop to 13 percent. Even more so than in the case of an SHS, the level of services provided by the village hydro plant is much greater than that of the alternative (kerosene lighting, dry cell batteries, battery charging, etc.) For example, in the representative sub-project evaluated, a household could potentially use nearly 60 kWh per month given the generation potential of the village hydro scheme (compared to 5.5 kWh per month from a 40 Wp SHS.) 3.5 Justification of Overall Outcome and Global Environment Outcome Rating Rating: Satisfactory The RERED PDOs and GEOs have been achieved. The indicator for grid-connected renewable energy capacity and avoided emissions has been exceeded by a substantial margin, while the indicator for rural households connected through off-grid renewable electricity options was less 26 than planned, bearing in mind that the number of households electrified by the grid far exceeded expectations at Appraisal. The objectives of project are still highly relevant to the Government of Sri Lanka and within the World Bank CAS. The sub-projects supported by RERED are economically and financially sound. Based on actual expenditure, it can be argued that the grid-connected component was the most dominant component of the Project (nearly 80% of expenditures against 18% for off-grid component). Therefore, the shortcomings in the smaller element of the project must be weighed against achievements above expectation by the larger component and the one contributing to the major development of the PDOs and GEOs. Giving an overall rating for this Project only as ‘satisfactory’ would not do the project justice in conveying the truly transformational and breakthrough achievements of this Project and the significant benefits it has brought to Sri Lanka. On the other hand, rating this project as ‘highly satisfactory’ would downplay some of the shortcomings, especially on the smaller components. In order to maintain a high standard and remain critical it is considered appropriate to maintain an overall rating of ‘satisfactory.’ 3.6 Overarching Themes, Other Outcomes and Impacts 3.6.1 Poverty Impacts, Gender Aspects, and Social Development The off-grid electrification elements of the project (i.e. components 2 and 3) had achieved the intended rural development impact envisioned at Appraisal. In both off-grid electrification options, household lighting has improved considerably. Electrification offers the possibility of increased lighting points in homes and for outdoor lights. Village communities have felt the difference and clearly expressed preference in the cleanliness aspect of electric lighting compared to kerosene lanterns. This has also prompted some to invest in home improvements. Village hydro also offers the opportunity of using equipment with a higher power rating such as television sets, grinders, power tools, heaters and irons. The World Bank IEG 2008 impact evaluation of rural electrification (which includes off-grid electrification) concluded that the economic case for investment in rural electrification is proven, provided that technical problems in service provision are adequately addressed. It further concludes: (i) electricity represents cost savings compared with kerosene; (ii) electricity can spur growth of home businesses; (iii) electricity extends waking hours; and (iv) electrification benefits the quality of health services. The positive effect of electrification on woman has been extensively described in the EnPoGen series of reports (2002). The study found that even in minimal quantities, electricity brings about profound lifestyle changes in families, mainly by making home life more convenient and housework easier. Electricity results in time savings in the daily lives of both men and women. Men use these mainly for recreation and leisure, whereas women redirect it to other household chores. On the whole, time savings from electricity do not reduce the overall work load of women, although they make work easier. The social development impact comes from Alleviation of isolation, through television and radio. This is considered the next highest benefit of electricity as it serves to bring remote rural communities closer to the outside world. Further, the level of social interaction within households and communities increase with electricity, which contributes in numerous ways to social capital development. The above is confirmed in the project surveys summarized in 27 the “Completion Report� which reports on achievements in the period September 2004 to September 200811. 3.6.2 Institutional Change/Strengthening RERED was instrumental in developing a vibrant renewable energy industry in Sri Lanka. A large number of renewable energy sub-projects and schemes were initiated as a result of availability of RERED financing. Consequently, a demand for supporting services developed, including project development, technical/advisory, construction, equipment manufacturing, financing, etc. Given the long-term support extended by the Bank in the sector over a period of 15 years (including ESD), these services were able to thrive. Moreover, the Project contributed to the formation of several associations, including solar, village hydro developers and small power. These continue to be active today and play an important role in representing their industry in government, regulatory and other consultations. As a result, Sri Lanka now has a world-class renewable energy industry with developers, manufacturers, and financiers venturing abroad to undertake investments in renewable energy projects in other countries in Asia and Africa. A few examples include:  Five Sri Lankan mini hydro developers are now active in East Asia;  Lanka Ventures, an equity financier, is investing in mini hydro projects in East Africa;  VS Hydro is an established consultancy in the hydropower industry, and undertakes its own contracting and manufacturing of turbines in Sri Lanka and has investments in Uganda, Tanzania and Kenya.  An 18 MW plant in Uganda uses three 6 MW turbines manufactured in Sri Lanka. 3.6.3 Other Unintended Outcomes and Impacts (positive or negative) To enlarge the SHS market and speed up sales, MFIs were brought in under ESD and continued to have a role under RERED. The MFIs were providing loans to households for the purchase of SHSs. The MFIs were frequently under pressure from vendors to process loans faster in order to maintain the sales levels of SHSs. At the same time, extending loans for SHSs was profitable and, thus, the MFIs also had an incentive to increase the number of loans. The process was moving well until about 2006 when defaults began to increase and some PV modules had to be repossessed (with MFIs unable to resell those at prices high enough to cover the unpaid balance of the loans.) This led to substantial losses for the MFIs who eventually ceased to provide loans for SHS altogether. This was an unintended negative impact. At the same time, Lanka Orix Leasing Company (LOLC) entered the micro financing business only in 2003 to provide SHS loans under RERED. LOLC provided about 12,000 loans for SHS, of which about 4,000 defaulted. The repossessed modules could not be sold and were finally combined into a grid-connected PV array at LOLCs headquarters in Colombo. LOLC incurred substantial losses from providing SHS loans, yet still considers its’ participation in RERED of great value. As a consequence of its participation in the Project, an LOLC subsidiary is now the largest MFI in Sri Lanka. It also ventured overseas (Cambodia) providing micro credits, interestingly for SHS. This is an unintended positive impact. 11 Resources Development Consultants (Pvt) Ltd.: Monitoring and Evaluation of the Renewable Energy for Rural Development Project. September 2004 - September 2008. Completion Report submitted to RERED AU. 28 3.7 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops The AU carried out a beneficiary survey among the participating PCIs, which was administered and analyzed by an independent third party. The most interesting results of the survey were that PCIs had entered the business of lending for grid-connected renewable energy because of ESD and RERED, but they are now confident enough to continue lending for those projects provided they are viable at commercial interest rates. The work of the AU was also highly praised. Details are provided in Annex 5. 4. Assessment of Risk to Development Outcome and Global Environment Outcome Rating: Negligible to Low The risks to the following outcomes are assessed: 1. Improved quality of rural life by utilizing off-grid renewable energy technologies to bring electricity to remote communities 2. Promoted private sector power generation from renewable energy resources for the main grid 3. Reduced atmospheric carbon emissions by removing barriers and reducing implementation costs for renewable energy, and removing barriers to energy efficiency The risk to the improved quality of life by utilizing off-grid renewable energy technologies to bring electricity to remote communities is considered low. The risk of communities no longer using the off-grid renewable energy technologies for another reason than the arrival of the grid is low. Once they have experienced the benefits of electrification they will make considerable efforts to maintain this service. If communities are connected to the grid, the level of services improves and therewith the quality of life. In many cases, the off-grid options may be maintained as back-up or to reduce the grid electricity bill. RERED contributed to the development of an off-grid renewable energy industry. A substantial part of the capacity built and infrastructure established has not been sustained. Of the 14 SHS vendors at the peak of sales, only 2 vendors are still active in the off-grid sector. Those two vendors are, however, expected to continue the SHS business because there still is a market with little or no competition. Several of the 14 SHS vendors are now offering grid-connected solar PV systems (typically 1-2 kWp each), under net metering rules. Some of the technicians trained under ESD/RERED are providing independent after sales services in their area and SHS vendors depend on their services to fulfill their obligations. Development of village hydro without RERED support is unlikely while the need is also declining due to rapid grid expansion. Developers active in village hydro have moved to other areas and some are now providing consultancy services in India and Africa. While there is a risk that some of the grid-connected renewable energy sub-projects would stop operating (mainly for projects where PPAs will be expiring and the tariff offered for those would be too low to sustain operations), it is highly unlikely that this would occur in any considerable numbers as these projects are very profitable, especially after debt is paid off (between 5 to 10 years.) The risk that the private sector ceases to develop and seek new projects is considered low unless tariffs decline substantially to the point where the economics become unviable. The Government has indicated its commitment to the participation of the private sector in electricity 29 generation, especially from renewable resources. These projects are financially viable and commercial banks are continuing to lend, even without RERED refinancing. In addition, RERED contributed to the establishment of a sustainable renewable energy industry which is now catering to more than just the local demand. Project developers and the CEB both have a shared interest in maximizing renewable energy production. As the alternative will remain imported fossil fuel based electricity generation, the risk to the conservation in greenhouse gas emissions is considered low. The overall risks to achieving the PDO and GEO are considered Negligible to Low. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance 5.1.1 Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The quality at entry was satisfactory. RERED was for the most part a continuation of the successful ESD project. Successful approaches piloted under ESD were incorporated in RERED and the proven management structure was maintained. Lessons learned from the implementation of ESD were applied in the design of RERED. Conversely, and in retrospect, the benchmarking of loans to AWFDR in the Additional Financing (from AWDR in the first RERED IDA Credit) should have been carefully studied as this shift constrained the Projects’ ability to commit and disburse funds until the decision was made to revert back to AWDR. Also, in retrospect, the removal of the GEF grant for larger systems was probably done pre-maturely. The only shortcoming was the inclusion of two relative small components (energy efficiency/DSM and cross-sectoral energy applications) which did not yield the anticipated results and diverted the focus from the main components. Overall the Bank performance in ensuring quality at entry is rated satisfactory. 5.1.2 Quality of Supervision Rating: Satisfactory Bank supervision was made easy by the high quality of the implementing agency. This enabled the Bank supervision team to maintain a more strategic management role rather than day to day handholding of all activities. This also tremendously improved the sense of ownership by the implementing agency and GoSL, and facilitated the AU to propose solutions to arising problems. The Bank responded adequately and timely on requests for clearances and No Objections and participated regularly in meetings with all Project stakeholders. The role of the Bank was highly valued in the feedback survey conducted at the end of RERED. The quality of supervision could have been improved through deeper involvement by the Bank in areas where the AU was weak. The AU was not as proactive in administering the technical assistance component, and less TA had taken place than envisaged. Many TA activities were intended to be demand driven, and the AU on its own did initiate many capacity building programs unless requests were made by the industry, Project stakeholders or beneficiaries. The proper analysis of the problems faced by the SHS which took place could have been done sooner. 30 When the analysis was finally completed it was too late for recommendations to be implemented. Finally, the Bank should have insisted on better transition arrangements including digitalizing the archives and transfer of files. The benefits of creating ownership (highly satisfactory) balance the disadvantage of a hands-off approach (moderately satisfactory). Overall, the quality of supervision is rated satisfactory. 5.1.3 Justification of Rating for Overall Bank Performance Rating: Satisfactory Given the satisfactory rating for both ‘ensuring quality at entry’ and ‘quality of supervision,’ the overall rating of the Bank performance is satisfactory. 5.2 Borrower Performance 5.2.1 Government Performance Rating: Satisfactory The Government took a hands-off approach on day-to-day implementation while playing an essential market enabling role. The Project was designed to support the private sector in developing grid-connected and off-grid renewable energy projects, and implemented by a commercial entity, namely the RERED AU of DFCC Bank. The Government limited its role to creating an enabling environment and providing counterpart funding for these sub-projects to flourish. The AU was being funded by the Government based on the level of disbursements of the refinanced loans. In turn, the Government was very responsive to requests for assistance from the AU and helped address problems arising during implementation. The Government also provided considerable grant support for SHS (directly) and village hydro schemes (through provincial councils) and, through CEB, established attractive tariffs for selling renewable electricity to the national grid and ensured that the SPPA terms and conditions were adhered to by all parties. Based on the above, the Government performance is rated as satisfactory. 5.2.2 Implementing Agency or Agencies Performance Rating: Highly Satisfactory The performance of the AU is rated highly satisfactory. The AU was highly committed to achieving the objectives of the Project. They established very good relationships with all major stakeholder groups, including PCIs, MFIs, developers, SHS vendors, village hydro developers, industry associations, and village electricity societies. The AU avoided a possible conflict of interest by separating itself from the lending arm of DFCC Bank. This aspect was highly appreciated by the other PCIs who were competing against DFCC on refinancing loans. The AU had full ownership of the Project and proactively coming up with solutions to arising problems, with input and support from the World Bank and the Government, where needed. The AU established well-documented procedures, kept good and complete files on all sub-projects and maintained detailed records. The areas where the AU could have done better include: (i) being more creative in identifying opportunities for TA activities to support the various components; (ii) devoting adequate attention to all components; and (iii) planning for a smoother transition at Project close. 31 Although there were minor shortcomings, the performance of the implementation agency was exceptional and is rated highly satisfactory. 5.2.3 Justification of Rating for Overall Borrower Performance Rating: Satisfactory As Government performance was rated satisfactory and implementing agency performance rated highly satisfactory, the overall Borrowers’ performance is rated satisfactory. 6. Lessons Learned A number of valuable lessons can be taken away from the implementation of RERED. These lessons are in particular important for the design and implementation of possible follow-up initiatives to RERED, and for the Sri Lanka Sustainable Energy Authority to take into account in future sustainability of the sector. These lessons are also relevant for future renewable energy projects in other countries. The most important lessons include:  Lesson 1: Long term involvement is very important;  Lesson 2: A quality implementation body is vital;  Lesson 3: Private sector market growth should be carefully managed where possible;  Lesson 4: Stakeholder consultation throughout the project cycle is necessary;  Lesson 5: Risk analysis should be carried out also during implementation;  Lesson 6: Performance-based incentives to selected developers is key in enabling communities to get expert support;  Lesson 7: Prepare well for project closure;  Lesson 8: World Bank involvement added credibility. Lesson 1. Long-term involvement is very important As mentioned elsewhere in the document, RERED (and the Additional Finance) were a follow-up to the ESD project and this string of continuity in engagement with the country covers a period of more than 14 years. Implementation of ESD started slowly largely because different stakeholders had to grow into their respective roles and start-up problems had to be resolved. These start-up problems did not happen in RERED. The procedures and systems set-up during ESD were, with minor modifications, also used for RERED. The long project period enabled building trust and good relationships between the AU and the various stakeholders. It also provided sufficient time to convince PCIs that the risk of lending for grid- connected renewable energy sub-projects was manageable. Policies established under ESD could be monitored under RERED and emerging problems could be addressed. A much shorter duration of the project would have substantially increased the risk to the sustainability of the results. Long-term involvement also enables the identification of problems that usually occur much later, sometimes after several years. The off-grid PV component was considered a success at the end of ESD, and so with minor modifications, this component was continued under RERED. It took almost four years after the start of RERED for problems to surface. A number of factors 32 contributed to the problems encountered, these were: (a) there was no mechanism to address vendors not honoring after sales and warrantee obligations as they stopped providing after sales and warrantee services because of bankruptcy or because business was becoming non-profitable in a small and dispersed market; (b) dissatisfied end-users stopped repayment of SHS loans to PCIs who in turn began repossessing the PV modules, and the re-sales of these would not cover the outstanding balance because the price of new modules was reducing significantly over time; (d) a shrinking market due to expansion of the grid at a faster pace than assumed; (e) PCIs were providing fewer loans with, as a consequence, further shrinking of the market. These developments show that design issues may become apparent years after project closure and it was because of RERED that these could at the least be monitored and salvage efforts be made. In projects with shorter durations, such problems would only be identified after an evaluation is carried out several years from completion. More importantly, in a rapidly saturating market, businesses must be agile to adopt and be responsive to new market conditions – what worked where electrification rate is low will not be viable in areas where electricity coverage is high. Lesson 2: A quality implementing body is vital The quality of the implementing agency is vital to the success of any project. The implementing body needs to have ownership, authority and the responsibility to be flexible in addressing arising problems. The implementing agency should be able to function independently and solve issues on its own, while knowing when to involve the Government and the World Bank where appropriate. Another key aspect was in building trust among key beneficiaries and stakeholders. The implementing body must have adequate staffing and the right skill mix to carry out the various tasks. It must also be able to devote sufficient time to the project. Lesson 3: Private sector market growth should be carefully managed where possible The provision of off-grid electricity using SHS depended on private vendors, and the village hydro component depended on private village hydro developers. These private sector parties enter into this business only when profit is to be made. In some isolated cases, this has led to participation of unqualified and/or undesirable private entities, which were drawn by the grants on offer. However, many of the unqualified/undesirable entities were not strictly private sector, but small non-governmental organizations (NGOs) or community-based organizations (CBOs). The private sector 'businesses' that engaged in village hydro to expressly earn a profit were, on the whole, fine. The real problems arose towards the end of ESD when a large number of new developers were trained (in hindsight inadequately) in order to scale up village hydro development. Some village hydro developers lacked the required technical and community development skills, causing frustration among Village Electricity Consumer Societies (VECS), PCIs and the AU. The AU addressed this problem by introducing a pre-qualification process for all village hydro developers and also equipment suppliers. This may have reduced the number of developers but it substantially improved the quality and reduce conflicts otherwise. When SHS sales grew steeply (2003 to 2005) a large number of SHS vendors entered the market as entry barriers were low, which later became overcrowded and resulted in declining margins for each vendor. As the growth rate slowed down, the market was less profitable, causing vendors to go bankrupt or cease operations. In both cases, after sales services and warrantee obligations were often not honored. In hindsight, it would have been better to manage the growth phase more 33 carefully to assure sustainability of after sales and warrantee services. On the other hand, there are factors beyond the control of Project as managing such growth can often be complex and difficult to control. Where possible, the implementation would have been easier with a smaller number of pre-qualified SHS vendors. One disadvantage is that prices and services would need to be regulated by an appropriate body in the country as having fewer vendors might lead to monopolizing power in some areas. Introducing more stringent entry requirements such as the provision of guarantees and/or performance bonds may have also helped address this problem. Lesson 4: Stakeholder consultation throughout the project cycle Implementation of RERED confirmed the importance of maintaining an ongoing dialogue with the main stakeholders and beneficiaries. The AU maintained this dialogue through regular meetings and visits and actively supported the strengthening of stakeholder groups such as the Federation of Electricity Consumer Societies and other technology associations. Consultations strengthened trust and understanding of problems and constraints amongst the various stakeholder groups. Lesson 5: Risk analysis should be carried out also during implementation An analysis of the risk to achieving the PDO and GEO should be carried out also during implementation and not only during preparation. External experts, not involved in the implementation of the Project, should preferable carry out this assessment. That way, it is possible to identify new risks, assess the risks of emerging problems, and take appropriate action. Lesson 6: Performance based incentives works well The project provided performance-based incentives to selected village hydro developers. This provided an incentive to developers to help communities develop village hydro schemes. The developers would identify the village, mobilize the community and establish contacts with appropriate financing institutions, many of whom were not participating in RERED. Payment of developers by the Project was based on achieving clearly defined milestones. This minimized the risk to the Project and reduced the workload of the implementing agency. The Development of grid-connected renewable energy sub-projects was based on a similar principle where the Project did not need to identify the opportunities but rather only evaluate those proposed by the developers. Subsidies to SHS vendors were also performance-based depending on proven sales of SHS. On the other hand, no grants were given to grid-connected project developers. Lesson 7: Prepare well for project closure A project like RERED generates valuable information for similar projects, not only in Sri Lanka, but also in other countries. However, the wealth of information is only of limited accessibility. The paper files are currently stored in boxes. It is unlikely that any of the information in these boxes can be accessed in one or two years. A project like RERED should digitalize its files for easy reference. The way this was done for the China Renewable Energy Scale-up Program is a best-practice example. Digitizing the files should be planned well before project closure and financial resources must be reserved for this. It is further important to discuss project closure with key stakeholders and beneficiaries to make sure they understand that the project will close and that there will be no direct follow-up. This will help them to prepare for project closure. Lesson 8: World Bank involvement added credibility 34 The World Bank not only brings financial resources, knowledge and staff expertise, but through its’ participation in the Project, it also boosts the credibility of the project and builds confidence among stakeholders and beneficiaries. This was of particular importance for the participating commercial banks involved in RERED as it made them more willing to consider lending for renewable energy initiatives. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 7.1 Borrower/implementing agencies Comments received from the Borrower were mainly editorial and were incorporated in the ICR where appropriate. In addition, the Borrower’s Completion Report is attached as Annex 7. 7.2 Co-financiers Not applicable. (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) Not applicable. 35 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Renewable Energy for Rural Economic Development – Fully Blended Project P076702 and P077761 Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) Grid Connected Hydro, Wind and 150.3 204.92 136.34 Biomass Solar PV Investments 63.7 43.70 68.60 Community Based Hydro and 5.3 2.62 49.43 Biomass Energy Energy Efficiency and Conservation 2.0 0.33 16.50 Cross Sectoral Links 4.9 0.04 0.82 Technical Assistance 5.7 2.30 40.35 Total Baseline Cost 231.9 253.91 109.49 Physical Contingencies 0.00 0.00 - Price Contingencies 0.00 0.00 - Total Project Costs PPF 0.00 0.00 - Front-end fee IBRD 0.00 0.00 - Total Financing Required 231.9 253.91 109.49 (b) Financing Renewable Energy for Rural Economic Development – Fully Blended Project P076702 and P077761 Appraisal Actual/Latest Type of Percentage of Source of Funds Estimate Estimate Financing Appraisal (USD millions) (USD millions) International Development Association Lending 115.00 120.73(12) 104.98 (IDA) GEF Grant 8.00 7.94 99.25 Borrower (GoSL) Grant 6.30 7.81 123.97 Sub-borrower Equity 61.50 87.28 141.92 PCI Lending 41.10 30.15 73.36 Total 231.9 253.91 109.49 12 Note: US$ 7 million was re-allocated to the tsunami emergency relief. 36 Annex 2. Outputs by Component An indication of the relative importance of the RERED components is what was envisaged in the PAD and the actual as per the ICR, in terms of share of the total expenditure (see Table 2.) Table 2 Share of envisaged and actual expenditure by component S/N Component PAD ICR 1 Grid-Connected Renewable Energy Power Generation 64.8% 80.7% 2 Solar PV Investments 27.5% 17.2% 3 Independent Grid Systems 2.3% 1.0% 4 Energy Efficiency and Demand Side Management 0.9% 0.1% 5 Cross-sectoral Energy Applications 2.1% 0.0% 6 Technical Assistance 2.5% 0.9% The outputs and outcomes of each component are discussed below: Component 1. Grid-Connected Renewable Energy Power Generation This component is by far the largest in the Project amounting to about 80% of total expenditures. Refinancing was made to 63 grid-connected renewable energy sub-projects by private sector developers and investors. This included 68 mini hydro projects, 2 wind projects and 1 biomass project. Details on these projects are provided in Table 3. The main barrier was the reluctance of commercial banks to offer long-term lending to the sector. This was primarily true for technologies other than hydro (such as biomass and wind) as the hydro has been tested under ESD. Lending to wind sub-projects commenced once tariffs were revised and RERED provided additional TA to support the PCIs and developers. RERED extended a line of credit through IDA to a group of commercial banks, development banks and leasing companies (collectively known as PCIs) to re-finance a portion (up to 80%) of the loans that they would extend for renewable energy sub-projects. The terms of the refinancing loan were an interest rate of AWDR with repayment over 10 years starting from 5.5 years after the first withdrawal. The terms of the loan to developers was negotiated between the developer and the PCI with a maximum duration of 10 years, including a two-year grace period. Table 3 Grid connected renewable electricity sub-projects refinanced under RERED Technology Sub- Total Electricity Number Status Projects Capacity Production of PCIs (Nos.) (MW) (GWh) Mini-hydro 68 164.5 401.3 6 62 plants commissioned as of March 2012; the remaining by end-2012. Wind 2 19.8 27.3 4 One project was commissioned in 2010, the second is expected in 2012. Biomass 1 1.0 0.0 1 Stopped operation because of fuel supply problems Total 71 185.3 428.6 6 - 37 The total volume of investments for all sub-projects was about US$ 205 million (LKR 21.55 billion). The PCIs had extended loans totaling US$ 122 million (LKR 12.84 billion), which on average represents 59.5% of total sub-project cost. The amount of re-financing provided by RERED for these investments was US$ 88.38 million (LKR 9.35 billion). The expected outputs for this component have been surpassed, as measured by the key performance indicators. The overarching outcomes were also achieved as PCIs have all indicated a continued interest and actual lending to the sector, specifically for grid-connected renewable energy projects beyond the close of RERED. Similarly, developers were confident of securing finances for their projects as enough capacity has been built that developers are now able to attract financing by listing projects on the Colombo Stock Exchange. To date, five companies have become publically traded in Sri Lanka. The first company to do so was Vallibel Power Erathna PLC, which was listed on May 17, 2006. The company has 3 mini hydro projects with a total capacity of 21.9 MW, all of which have been refinanced by RERED. This component also made the largest contribution to positive environmental impact through the avoidance of about 2.15 million tons of CO2. Component 2. Solar PV Investments This component was the second largest to be supported by the Project with 17.2% of actual expenditures. It facilitated the sale of 110,575 SHS to rural households by private vendors as well as support to investment subsidies (or co-financing grant) from RERED13 and refinancing of loans provided by PCIs for SHS. The total refinancing provided by RERED for this component was US$ 21.78 million. The Project provided an investment subsidy of US$ 40 per SHS which was paid to the developer for systems with module sizes ranging between 10-30 Wp. About 76,000 systems received a Government subsidy with the majority receiving LKR 10,000 (approximately US$ 95 per system. A total of 77,408 systems bought through loans were refinanced by RERED (including re-flows of refinancing funds). The balance (33,167) were sold on cash basis, through vendor credits or financed by institutions not participating in RERED (“Non-PCIs�). The average SHS loan from PCIs to households was about US$ 400 with a 3-year repayment period at an interest rate above 15 percent per annum. Requests for payment of the SHS investment subsidies submitted by the vendors were reviewed by Project auditors checking for all appropriate documents, invoices, consumer acceptance receipts (CAR) and packing lists. The project auditors then prepared an assessment report for the AU, upon which the AU would disburse against eligible payments. Field verification was carried out on a sample basis. The total investment subsidies paid to 14 SHS vendors was US$ 11.9 million (US$ 4.5 million from GEF, US$ 0.2 million from IDA and US$7.2 million from GoSL). With an average capacity of 25 Wp per the system, the total capacity of RERED-financed SHS is 2.8 MWp. 13 Depending on the locality, many systems received supplemental subsidies directly from the local government. 38 The revised target for number of households to be served by off-grid means was achieved; however, of the 110,575 SHS sold, an estimated 20,000 were repossessed by the PCIs due to defaults by households on their loans. The implicit expected outcomes were: (i) SHS demonstrated as a viable option for areas not being served by the grid; (ii) micro credits for SHS are routine business for PCIs; and (iii) ensuring a sustainable SHS industry. These outcomes have been partially achieved. The Government, CEB and SEA consider SHS a viable option for areas that are unlikely to receive grid in the near future. However, PCIs have ceased lending for SHS and only two SHS vendors are still active in Sri Lanka. On the other hand, those vendors still see SHS as a profitable market in Sri Lanka. One vendor offers households the option to pay for the system in installments, which in itself is a form of micro credit to households. Component 3. Independent Grid Systems With 1.0% of actual total expenditure, this was also considered a small component in volume, though its impacts outweighed the volume of financing. Under this component, RERED supported the installation of 173 community-based micro hydro systems and 2 community-based biomass electricity systems. The average capacity of the village systems was 10 kW. While, the project refinanced 53 systems, the balance 120 (69%) were re-financed by ‘non-PCIs.’ The Project provided development and co-financing grants for basically all systems and supervision grants for 73 PCIs and non-PCIs. The independent mini-grid systems component provided access to electricity for 6,181 households. A survey conducted among VECS in 2011 showed that 66% of the villages have now access to the grid. This does, however, not mean that all households in a given village are connected to the grid. Villages, in general, continue operating the mini grids independent from the CEB connection. Villages not only benefitted from the electricity provided, they also benefitted from the establishment of VECS. Another important development related to village schemes that have been connected to the grid is the availability of an option to sell electricity to the utility at the mini-hydro tariff (similar to an SPPA but for much smaller systems.) This means that a village which is purchasing electricity from the national grid can also sell back to that grid the energy which has been produced by its village hydro scheme. The first pilot scheme to adopt this was the Athuraliya village hydro at in Ratnapura with a capacity of 21 kW. The grid connection and upgrade costs were borne by donors (including a consultancy cost borne by the RERED Project) and village residents were issued shares to the value of their investment in the assets of a new power company, allowing them to benefit from dividend income once payments are received from CEB from the power bought by the utility. Component 4. Energy Efficiency and Demand Side Management This component was intended to be complementary to the renewable energy investments but was too small to make any significant impact. In the original design, 0.9% of the total financing was allocated to this component. In reality, only 0.1% of total actual expenditure was incurred. Under component 4, six energy efficiency projects were refinanced for a total of US$ 154,000 which leveraged a total investment of US$ 330,000. The number of sub-projects was small because 39 there was very limited demand for the support provided under this component. The availability of similar support with better financial terms from the Environmental Friendly Solutions Fund (E-Friends) supported by JICA made it difficult for the component to take off. Component 5. Cross-sectoral Energy Applications This component was designed to be a small but significant activity using 2.1% of the total financing envelope. Final accounting shows that less than 0.05% of funds were used to finance activities under this component. Two consultancy services were contracted and carried out to assess electricity needs of public institutions in the North and East of Sri Lanka. In addition, two other pilot projects to electrify a government school and a hospital in the Eastern and Northern provinces did not proceed due to the escalation of the military conflict at the time. Component 6. Technical Assistance The TA component funded a number of important activities such as environmental audits, physical verification of assets, and overall support to the RERED AU. Several studies were also carried out under this component, including:  Technical assessment of Sri Lanka’s renewable energy resource based energy generation for the connection and management of embedded generation;  Wind integration study to assess the absorption capacity of the grid to an increase in wind power;  Support for due diligence of two proposed wind farms to be refinanced by RERED;  Evaluation of capital market constraints to finance renewable power projects;  Feasibility and mechanism for connecting off-grid hydro schemes to the grid;  Solar industry growth analysis. TA activities were of tremendous value to many Project stakeholders and contributed to a greater understanding of sector and project-related issues for developers/investors, commercial banks/MFIs, industry associations, the CEB, other government agencies and stakeholders. These knowledge products focused on the important elements of successful sector development (e.g. techno-economic appraisal of projects, environmental and social considerations, and financial aspects of the energy sector.) The provision of TA activities including both studies as well as human resource capacity building through hands-on training and workshops that has lead to the creation of a more robust and mature sector. 40 Annex 3. Economic and Financial Analysis This annex summarizes ex-post economic and financial analysis of three of the dominant areas financed under this project and compares them to expectations at Project Appraisal. These are: (i) grid connected renewable energy projects using a 2.5 MW mini-hydro project as a representative project, (ii) solar home systems using a 40 Wp SHS as a representative project, and (iii) community-based village hydro projects using an 7.5 kW project serving 30 households as a representative project. The analysis is conducted for a typical project in 2010. The analysis is undertaken for a representative investment in each investment category. The LKR to US$ exchange rate at Appraisal was 92 LKR per US$ and in 2010 it was 112 LKR per US$. Mini-Hydro Sub-projects Mini hydro, biomass power and wind power projects feed power to the national grid at a substation with adequate capacity that is nearest to the power plant. All mini-hydro projects are on streams/rivers in the hill country except for two projects in Polonnaruwa District where one mini-hydro project is at the dam toe on Maduru Oya Reservoir and another at a canal drop. The wind projects are in Puttalum district in the North Central Province (See Figure 2). The one (1) MW biomass power plant is no longer operating. An economic and financial analysis was conducted for one representative mini hydro project as mini hydro projects were the dominant class of grid tied projects financed by RERED. The economic analysis shows that the project economics is robust and the economic returns are better than estimated during Appraisal. The EIRR for the representative project is 45.8 percent compared to 24 percent at appraisal. The higher EIRR is principally due to higher economic SRMC of generation of thermal plants offset by operating the mini hydro plants. The FIRR for the project is 17.3 percent compared to 21 percent at Appraisal. The lower FIRR is due to higher investment cost and lower plant capacity factor. The 2010 analysis values economic benefits from avoiding CO2 emissions. The increase in Figure 2 Grid-tied Sub-Project Locations EIRR due to emissions avoided is 1.8 percent. Economic avoided cost is based on the SRMC of generation of the most expensive generators. The sources of data and assumptions used to estimate the avoided cost is given in Box 1. Key data and results and comparison with estimates at Project Appraisal are given in Table 4. 41 Table 4 Mini-hydro Project Assumptions and Results At At Project Representative Mini hydro Project Units Appraisal Close Representative Project Capacity MW 1.5 2.5 Unit Economic Cost 2010 USD/kW 1,177 1,445 Unit Financial Cost 2010 USD/kW 1,766 1,786 Capacity Factor Percent 46% 38% O&M Cost Percent of Capex 5% 2.5% Project construction time Months 10 to 15 Up to 24 Economic avoided cost (See text box) 2010 USD/kWh 0.077 0.252 Tariff 2010 USD/kWh 0.077 0.116 Carbon Emissions Factor tons/MWh - 0.80 Economic Value of Carbon Avoided USD/ton CO2 - 15.00 Financial CER Credit USD/ton CO2 - 4.68 Results Economic Internal rate of return Percent 24.0% 45.8% Financial Internal Rate of Return Percent 21.0% 17.3% Box 1 Assumptions in Calculating Avoided Cost Economic short run marginal cost at 33 kV 0.252 US$/kWh Financial short run marginal cost at 33 kV 0.118 US$/kWh Flat rate tariff for mini hydro 0.116 US$/kWh  Calculations are based on mini hydro power offsetting CEB and Independent Power Producer (IPP) diesel-fired plants (CAES and GT16) and Naphtha combined cycle plant (CCKP), the highest cost generators in CEB system according to CEB 2011 tariff application.  The SRMCs are based on diesel at 0.63 US$/liter and Naphtha at 0.75 US$/kg.  Variable Operations and Maintenance (O&M) cost is 4.5 US$/MWh for diesels and 3.5 US$/MWh for combined cycle plant.  Transmission loss is 1.89% as per CEB tariff application.  Diesel Specific Fuel Consumption (SFC) is 0.25 liters/kWh and Naphtha SFC is 0.34 kg/kWh. Flat rate tariff for mini-hydro from PUCSL. Data on CEB marginal plant operation used for SRMC calculation Capacity Financial GWh for 6 Factor with Thermal Gen Fuel Cost months 270 GWh of Owner Unit Fuel (LKR/kWh) (Jan-Jun ‘11) NCRE CEB GT16 Auto diesel 36.89 1.71 0.5% IPP CAES Auto diesel 18.98 24.76 3.5% CEB CCKP Naphtha 12.63 249.52 34.8% 42 Source: CEB Tariff Application (2011) The economic and financial analyses are given in Table 5 and Table 6. Table 5 Economic Analysis of Mini Hydro Sub-Project Mini-Hydro Project Economic Analysis (In 2010 US$) kWh Economic CO2 Year Capex O&M Total Cost supplied Output Avoided Total Value Net Value 1 2,168,036 2,168,036 - - - - (2,168,036) 2 1,445,357 1,445,357 - - - - (1,445,357) 3 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 4 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 5 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 6 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 7 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 8 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 9 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 10 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 11 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 12 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 13 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 14 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 15 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 16 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 17 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 18 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 19 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 20 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 21 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 22 90,335 90,335 8,322,000 2,099,699 99,864 2,199,563 2,109,228 EIRR 45.8% 43 Table 6 Mini Hydro Financial Analysis Mini-Hydro Project Financial Analysis (In 2010 US$) Elec. Sales CER Total Year Capex O&M Total Cost kWh Revenue Revenue Revenue Net Value 1 2,678,571 2,678,571 - - - - (2,678,571) 2 1,785,714 1,785,714 - - - - (1,785,714) 3 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 4 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 5 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 6 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 7 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 8 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 9 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 10 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 11 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 12 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 13 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 14 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 15 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 16 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 17 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 18 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 19 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 20 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 21 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 22 111,607 111,607 8,322,000 968,919 31,158 1,000,076 888,469 FIRR 17.3% Off Grid Systems Off grid systems supported by RERED were principally SHS and village hydro schemes and two biomass powered mini-grids. The distribution of installations is shown in Figure 3. As expected the off-grid systems are predominantly in districts that have lower electrification coverage. Presently, GoSL considers consumers where a grid connection cost is more than LKR 200,000 (approximately US$1,785 in 2010 US$) to be candidates for off- grid solutions and they estimate there are about 40,000 such consumers. In contrast, in 2002 when grid coverage was much less, the marginal cost of grid connection was US$300 (about US$450 per connection in 2010 US$). Solar Home Systems SHS are purchased by households and enterprises that either do not want to wait a long time to receive Figure 3 Distribution of Off-grid Systems 44 grid connection or by those in located in areas where grid connection is not cost effective or is impossible. The SHS offers basic electricity services to those switching from kerosene for lighting and using rechargeable batteries to operate small appliances such as television or radio. A 40 Wp SHS14 will provide about 5.5 kWh a month and for the purpose of analysis, 2.3 kWh/month is assumed to be used for lighting and the balance for other purposes such as operating a TV and other appliances. At this scale of electricity use it is not a substitute for grid electricity that has the potential to offer “unlimited� electricity at low cost (households consuming small amounts of electricity, for example 30 kWh/month or less, the tariff is highly subsidized). The economic and financial analysis considers the benefits to derive from (a) kerosene fuel and kerosene lanterns displaced, and (b) rechargeable batteries and battery charging costs avoided. The economic analysis additionally considers the economic value of carbon emissions avoided and the consumer surplus due to superior lighting provided by electric lamps compared to kerosene lamps15. Consumer surplus assumptions and results are shown later in Table 16. The EIRR for the 40 Wp SHS providing electric lighting and electricity for television, radio or other small appliance was 95 percent when Consumer Surplus was taken into account. If Consumer Surplus was not considered, then EIRR was 16 percent. EIRR was not reported at appraisal. The FIRR was 12 percent. At appraisal FIRR was estimated at 7 percent. Comparative data for 40 Wp SHS at Appraisal, ICR and summary of results is given in Table 7. Table 7 Assumptions and Results for 40 Wp SHS At At Project Representative 40 Wp SHS Units Appraisal Close Size Wp 40 40 Economic SHS Cost 2010 USD N/A 447 Financial SHS Cost 2010 USD 518 500 RERED Grant 2010 USD 103 40 Other Grants 2010 USD - 91 Total Grant 2010 USD 103 131 Financial Cost after grant 2010 USD 415 369 Module Life Years 15 15 Battery Life Years 3 3 Financial Battery Cost 2010 USD 72 71 Controller Life Years 7 7 Financial Controller Cost 2010 USD 47 32 Economic Cost of Kerosene LKR/Liter N/A 83 Financial Cost of Kerosene LKR/Liter N/A 51 Results EIRR w/ consumer surplus N/A 95% EIRR w/o consumer surplus N/A 16% FIRR 7% 12% 14 The average size of a SHS supported by RERED was 43 Wp and 97 percent of SHS were in 20-60 Wp range. See http://www.energyservices.lk. It should be noted that the GEF grant was being phased out and from Jan 1, 2007, a 40Wp system was no longer entitled to a GEF grant. A US$40 grant was available only for SHS below 20Wp while the GoSL subsidy continued. From January 2010, the US$40 GEF grant was made available for systems up to 30Wp. 15 Consumer Surplus is calculated using the approach detailed in Meier, Peter, “An Economic Analysis of Solar Home Systems: A Case Study for the Philippines�, February 3, 2003, The World Bank and available at http://www.worldbank.org/retoolkit. 45 The cost, usage patterns and output from kerosene lighting and rechargeable batteries used in the economic and financial analyses are given in Table 8. Table 8 Costs Avoided with SHS Displaced when using SHS Financial Economic Kerosene savings Liter/month 5.7 5.7 Cost of kerosene LKR/Liter 51 83 Cost Savings Kerosene USD/month 2.60 4.22 Number of lamps 2 Lamp Life (Years) Year 5 Lamps Cost USD/month 3 2.4 Recharged Batteries/HH 1 1 TV use hours/day 3 3 TV wattage watts 14 14 Energy/day Wh 42 42 Recharge interval days 14 14 Battery capacity Ah 61 61 Usable capacity Ah 70 70 Charging cost LKR/charge 100 88 Annual Charging Cost USD 23 20 Battery cost LKR 71 47 Battery Life years 5 5 The EIRR and FIRR calculations are given in Table 9 and Table 10. Table 9 SHS Economic Analysis SHS Economic Analysis (In 2010 US$) for 40 Wp SHS Lamp Battery Controller Economic Replace- Replace- Replace- Total Avoided Batteries CO2 Consumer Total Useful Year Capex ments ment ment Cost kerosene Displaced Avoided Surplus Value Net Value kWh/Year 1 447 0 446.89 48.18 67.27 2.77 124.53 242.76 -204.13 65.7 2 5.50 5.50 43.47 20.48 2.77 124.53 191.26 185.76 65.7 3 5.50 5.50 43.47 20.48 2.77 124.53 191.26 185.76 65.7 4 5.50 46.51 52.00 43.47 20.48 2.77 124.53 191.26 139.25 65.7 5 5.50 5.50 43.47 20.48 2.77 124.53 191.26 185.76 65.7 6 5.50 5.50 48.18 67.27 2.77 124.53 242.76 237.26 65.7 7 5.50 46.51 52.00 43.47 20.48 2.77 124.53 191.26 139.25 65.7 8 5.50 28.93 34.43 43.47 20.48 2.77 124.53 191.26 156.83 65.7 9 5.50 5.50 43.47 20.48 2.77 124.53 191.26 185.76 65.7 10 5.50 46.51 52.00 43.47 20.48 2.77 124.53 191.26 139.25 65.7 11 5.50 5.50 48.18 67.27 2.77 124.53 242.76 237.26 65.7 12 5.50 5.50 43.47 20.48 2.77 124.53 191.26 185.76 65.7 13 5.50 46.51 52.00 43.47 20.48 2.77 124.53 191.26 139.25 65.7 14 5.50 5.50 43.47 20.48 2.77 124.53 191.26 185.76 65.7 15 5.50 28.93 34.43 43.47 20.48 2.77 124.53 191.26 156.83 65.7 NPV @ Discount Rate 10% 551 339 241 21 947 1,549 998 500 Levelized Economic Electricity Cost 1.10 USD/kWh EIRR 88% with Consumer Surplus 13% w/o Consumer Surplus 46 Table 10 SHS Financial Analysis SHS Financial Analysis (In 2010 US$) for 40 Wp SHS Lamp Battery Controller Kerosene Battery Capex net Replace- Replace- Replace- Total Cost Use Total Net Useful Year of grants ments ment ment Cost Avoided Displaced "Revenue" Revenue kWh/Year 1 369.00 - 369.00 36.50 94.71 131.21 (237.79) 65.7 2 6.00 6.00 31.15 23.28 54.42 48.42 65.7 3 6.00 6.00 31.15 23.28 54.42 48.42 65.7 4 6.00 71.00 77.00 31.15 23.28 54.42 (22.58) 65.7 5 6.00 6.00 31.15 23.28 54.42 48.42 65.7 6 6.00 6.00 36.50 94.71 131.21 125.21 65.7 7 6.00 71.00 77.00 31.15 23.28 54.42 (22.58) 65.7 8 6.00 32.00 38.00 31.15 23.28 54.42 16.42 65.7 9 6.00 6.00 31.15 23.28 54.42 48.42 65.7 10 6.00 71.00 77.00 31.15 23.28 54.42 (22.58) 65.7 11 6.00 6.00 36.50 94.71 131.21 125.21 65.7 12 6.00 6.00 31.15 23.28 54.42 48.42 65.7 13 6.00 71.00 77.00 31.15 23.28 54.42 (22.58) 65.7 14 6.00 6.00 31.15 23.28 54.42 48.42 65.7 15 6.00 32.00 38.00 31.15 23.28 54.42 16.42 65.7 NPV @ Discount Rate: 10% 531.09 246.67 307.34 554.02 22.93 500 Levelized Cost 1.06 USD/kWh FIRR 12% Village Hydro Under RERED, 174 Village Hydro Projects (VHP) were refinanced and have all been commissioned; 14 VHPs remain to be completed as of December 31, 2011. The median VHP project had 7.5 kW serving 27 customers. The largest project had a capacity of 48 kW serving 102 customers and the smallest, 3 kW serving 2 customers. The economic and financial analysis was done for a representative project, Andawala in Udagama with 7.5 kW serving 30 customers. The project potentially could supply 22 MWh/year at a load factor of 33 percent (~8 hours/day at peak capacity). However, only a small portion may be needed for household lighting and appliances (5 MWh/year), thus leaving 17 MWh/year for other purposes, including productive uses. The economic and financial analysis results and the characteristics of the project and comparison to the VHP scheme analyzed at Appraisal are given in Table 11. The EIRR with Consumer Surplus was 54 percent and without it was 10 percent. The EIRR at appraisal was 12 percent. The FIRR was 50 percent compared to the estimate of 10 percent at appraisal. The higher FIRR is due to lower cost of the project to the community (after RERED and government grants) of US$700/kW compared to US$940/kW at appraisal. The VHP project analysis at appraisal assumed revenues from electricity sales to community of US$2600, compared to US$3,000 for the representative project analyzed. 47 Table 11 Economic and Financial Analysis of VHP At Project Representative VHP Project Units At Appraisal Close VHP Capacity kW 11.0 7.5 Customers Number 50-60 30 Investment Financial Cost 2010 USD 21,630 14,005 Project Dev. Financial Cost 2010 USD 10,300 7,000 Total Project Financial Cost 2010 USD 31,930 21,005 Total Project Economic Cost 2010 USD N/A 17,854 Unit Cost 2010 USD/kW 2,903 2,801 Grant 2010 USD 16,774 15,728 Net Financial Cost 2010 USD 15,156 5,277 Net Unit Financial Cost 2010 USD/kW 1,378 704 O&M Cost % of investment 8% 7% Project Life Years 20 15 Results EIRR with consumer surplus N/A 55% EIRR without consumer surplus N/A 10% EIRR (unknown method or assumptions) 12% - FIRR 10% 50% The savings to village from avoided kerosene and battery use is summarized in Table 12. Table 12 VHP Avoided Cost Kerosene savings per household liter/month 5.7 5.7 Cost of kerosene LKR/liter 51.0 83.0 Kerosene Savings per household LKR/month 291 473 CO2 emissions factor kg/liter 2.7 2.7 CER Credit Value USD/ton CO2 0 15 Lights per Household 4 4 Cost per lamp USD 3 2.7 Other electricity uses after hydro kWh/month/HH 10 10 Recharged Batteries/HH 1 1 TV use hours/day 6 6 TV wattage watts 20 20 Energy/day Wh 120 120 Recharge interval days 7 7 Battery capacity Ah 88 88 Use capacity Ah 100 100 Charging cost LKR/charge 100 88 Annual Charging Cost Million LKR 0.156 0.138 Battery cost Rs 11,500 7533 Battery Life years 5 5 Total cost of batteries Million LKR 0.345 0.226 48 The economic and financial analyses are given in Table 13 and Table 14. Table 13 VHP Economic Analysis Village Hydro Project Economic Analysis (In 2010 US$) Economic Total Avoided Batteries CO2 Consumer Total Useful Year Capex O&M Cost kerosene Displaced Avoided Surplus Value Net Value kWh/Year 1 17,854 17,854 - - - - (17,854) 0 2 980 980 1,545 3,247 83 7,118 11,993 11,013 5,133 3 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 4 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 5 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 6 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 7 980 980 1,545 3,247 83 7,118 11,993 11,013 5,133 8 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 9 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 10 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 11 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 12 980 980 1,545 3,247 83 7,118 11,993 11,013 5,133 13 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 14 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 15 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 16 980 980 1,304 1,229 83 7,118 9,734 8,754 5,133 NPV 23,010 9,417 11,844 575 54,140 71,054 48,044 35,493 Levelized Cost 0.648 USD/kWh EIRR 54% w/ Consumer Surplus and 8.6% w/o Consumer Surplus Table 14 VHP Financial Analysis Village Hydro Project Financial Analysis (In 2010 US$) Kerosene Capex net Total Cost Batteries Year of grants O&M Cost Avoided Displaced Total Value Net Value kWh/Year 1 5,277 5,277 - - - (5,277) - 2 980 980 1,175 4,477 5,653 4,672 5,133 3 980 980 934 1,397 2,331 1,351 5,133 4 980 980 934 1,397 2,331 1,351 5,133 5 980 980 934 1,397 2,331 1,351 5,133 6 980 980 934 1,397 2,331 1,351 5,133 7 980 980 1,175 4,477 5,653 4,672 5,133 8 980 980 934 1,397 2,331 1,351 5,133 9 980 980 934 1,397 2,331 1,351 5,133 10 980 980 934 1,397 2,331 1,351 5,133 11 980 980 934 4,477 5,411 4,431 5,133 12 980 980 1,175 1,397 2,572 1,592 5,133 13 980 980 934 1,397 2,331 1,351 5,133 14 980 980 934 1,397 2,331 1,351 5,133 15 980 980 934 1,397 2,331 1,351 5,133 16 980 980 934 1,397 2,331 1,351 5,133 NPV 11,576 6,861 14,864 21,724 10,148 35,493 Levelized Cost 0.326 USD/kWh FIRR 50% 49 Other Assumptions and Consumer Surplus Calculation The other assumptions used in the economic and financial analyses are given in Table 15. Table 15 Assumptions Used in Economic and Financial Analysis Conversion from 2002 to Constant 2010 USD (mid-year) 1.47 multiplier Exchange Rate 2010 112 LKR/USD Discount rate 10% CER Credit Value 4.68 $/ton CO2 Economic Value of CO2 avoided 15 $/ton CO2 Kerosene emissions factor 2.7 kg/liter Kerosene Economic Price 83.00 Rs/Liter Kerosene Subsidy 32.00 Rs/Liter Source: Ceylon Petroleum Corporation Duties & Taxes Percent Assumes most imports from India Mini hydro E&M equipment (assumes BOI project - duty & VAT free imports, but pays PAL, NBT) 8.5% Civil Works (Steel, Concrete etc.) 34.9% Weighted average duties and taxes 19.1% Solar Home Systems Solar Module 9.6% Battery 34.5% Controller 9.6% Lights 8.4% BOS 12.0% Installation 12.0% Dealer margins 0.0% Weighted average 10.6% Village Hydro SHP & Distribution Network (VAT, NBT, PAL) 22.5% 50 Consumer surplus is calculated for SHS and VHP using the methodology described in Peter Meier, “An Economic Analysis of Solar Home Systems: A Case Study for the Philippines�, February 3, 2003, The World Bank16. The calculation and results are given in Table 16. Table 16 SHS and VHP Consumer Surplus Calculation and Results Consumer Surplus for SHS and Village Hydro 40 Wp SHS Village Hydro Kerosene Fin. Cost (LKR/Liter) 51.0 51.0 Kerosene (Liters/month) 5.7 5.7 Number of lamps 2 3 Lamp Life (Years) 5 5 Lamps Cost LKR 300 300 Kerosene (Liters/Year) 68.4 68.4 Battery Cost (LKR) 11,500 11,500 Battery Life (years) 5 5 Recharging Cost/Year (LKR) 4,589 4,589 Kerosene Lumens/lamp 20 20 Liters/hour 0.025 0.025 Lumen hours/liter 800 800 Kerosene light output (lumen- hours/year) 54,720 54,720 Lighting Cost (USD/lumen-hour) 0.0006 0.0006 Kerosene lighting annual cost (LKR) 32 33 Solar lamp rating (W) 5 7 Solar Lamps (lumens/watt) 30 30 Hours/day of Lighting 4 4 No. of lamps 3 4 Lumen Hours/Year 657,000 1,226,400 Watt hours/Year (20% losses) 27,375 51,100 USD/kWh 1.0628 0.3262 Annual Lighting Cost (USD) 29.09 16.67 Lighting Cost USD/lumen-hour 0.000044 0.0000136 Economic Lighting Consumer Surplus USD/HH/Year 125 237 Note Consumer Surplus uses 2/3 of rectangular area under demand curve to reflect its concave shape 16 http://siteresources.worldbank.org/EXTRENENERGYTK/Resources/5138246- 1237906527727/Economic_Analysis_of_Solar_Home_Systems.pdf 51 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Supervision/ICR Abdulaziz Faghi Energy Specialist SASDE - Amali Rajapaksa Senior Infrastructure Specialist SASDT - Boonsri Prasertwaree Kim Program Assistant SASDO - Darshani De Silva Environmental Specialist SASDI - Deepal Fernando Senior Procurement Specialist ECSO2 - Donna Thompson Sr Financial Management Specialist OPCFM - Gevorg Sargsyan Program Coordinator SEGEN - Hiran Heart Consultant SASDI - Jiwanka B. Wickramasinghe Sr Financial Management Specialist SARFM - Lashantha Handapangoda Consultant SASDI - Jayawardhana Luis Alejandro Lara Lopez Program Assistant SASDO - Md. Iqbal Senior Energy Specialist SASDE - Mikul Bhatia Senior Energy Specialist SEGEN - Miriam Witana Procurement Specialist EAPPR - Peter Johansen Senior Energy Specialist ECSS2 - Raihan Elahi Senior Energy Specialist AFTEG - Ravindra Anil Cabraal Consultant AFTEG - Seenithamby Manoharan Senior Rural Development Specialist SASDA - Shane Andrew Ferdinandus Program Assistant SASDO - Shaukat Javed Program Assistant SASDO - Sriyani De Alwis Team Assistant SACSL - Sriyani M. Hulugalle Senior Economist SASFP - Sumith Pilapitiya Lead Environmental Specialist SASDI - Supul Chamikara Wijesinghe Financial Management Specialist SARFM - 52 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY02 22.63 70,966 FY03 0.00 0 Total: 22.63 70,966 Supervision/ICR FY03 25.37 80,118 FY04 22.77 64,358 FY05 18.98 47,457 FY06 19.63 67,250 FY07 16.03 43,334 FY08 26.47 85,307 FY09 27.65 113,345 FY10 19.16 85,112 FY11 20.28 88,388 FY12 16.01 100,271 Total: 212.35 845,906 53 Annex 5. Results of Beneficiary Surveys To obtain feedback from beneficiaries, a survey of PCIs lending to grid-connected sub-projects and SHS was undertaken. The AU undertook a number of surveys. Different questionnaires were prepared for each of the two sectors. PCIs lending to grid-connected sub-projects The questionnaire was sent to four PCIs actively involved in lending to grid-connected sub- projects and responses were received from three (3) of them. The questionnaire was not sent to DFCC Bank. The most salient points were: 1. All respondents stated that they have started financing grid-connected renewable energy investments because of ESD/RERED, as it offered long-term financing, the PCIs could extend the tenures of their loans to developers. Overall, RERED was critical for the development of the portfolio of sub-projects financed by the PCIs. 2. The refinancing credit line improved the liquidity position of the PCIs and accelerated credit growth. Further, the conditions of refinancing were attractive with a long repayment period, concessionary interest rates and low volatility because the interest rate was linked to the AWDR which was an acceptable benchmark to the banks, which in turn allowed the banks to offer lower interest rates to the developers. The rates typically charged by commercial banks in the absence of RERED refinancing would have been too costly and some of sub-project may have become unfeasible. 3. In addition to the refinancing, the PCIs valued the technical assistance provided. In particular, the training extended to their staff in order to build in-house capacity, and on financing of low head hydro and wind projects. Also the hydro and wind related overseas study tours, workshops and seminars were appreciated. 4. When asked what the PCIs did not like about the support given by RERED, one PCI mentioned the lengthy procurement procedures and another would have preferred if 100% refinancing was extended for the sub-loan instead of the ceiling of 80%. 5. The PCIs were also asked to rate the support provided by RERED on a 10-point scale with 10 being perfect. The average rating was 8.3. One PCI remarked that: “in an interest rate falling scenario in the country the refinancing scheme proved to be more expensive than the commercial lending possible by the banks. During this time, some projects were financed by commercial loans. However, subsequently this rate was amended.� 6. The performance of the AU was rated very highly. On all aspects (guidance and help provided, responsiveness and timeliness of actions and quality of work) the average score was 9.3. The PCIs expressed their great appreciation for the AU who had worked diligently to provide direct and valuable assistance to them. This was done independent from GoSL and the World Bank and the PCIs did not need to resort to them to resolve most of their issues. 54 7. All PCIs indicated that they will continue lending for grid-connected renewable energy projects after RERED closure; however, the interest rate will be based on commercial rates and thus projects which are marginally viable, will likely not be able to obtain financing. 8. One of the PCIs, Hatton National Bank, received a runner-up award in the Development Project Financing category at the Asian Banking Award 2004 for their involvement in financing off-grid village hydro schemes. PCIs financing SHS The questionnaire was sent to three (3) PCIs involved in SHS financing. The following is a summary of the main issues emerging from their responses: 1. The reasons for households not repaying their SHS loans were: (i) poor after sales service by suppliers; (ii) grid connection; (iii) financial problems; (iv) willful defaulters; and (v) problems with quality of the product. 2. About 40% of the SHS loans were non-performing (small loans in particular) and of the total loan value, 19% was non-performing. PCIs repossessed 23% of the modules for systems they financed and only 41% of the repossessed modules could be sold. 3. The PCIs were asked to rate different aspects of the vendors on a 10-point scale. The results were: system quality: 5, user manual/operation training: 1, honoring warrantee: 1 and provision of after sales services: 0. The low scores reflected the dissatisfaction of the PCIs with the industry. 4. In terms of their support to the Project, the AU received an average score of 6.7. 55 Annex 6. Stakeholder Workshop Report and Results The off-grid electrification target of RERED was 101,000 households, rural small and medium enterprises and public institutions. The Additional Finance increased this target to 161,000. Sales of SHS, was the main vehicle to reach this target. In 2009 the RERED Solar PV Investment component was facing serious challenges. While the component reached 66 percent of its target, it was witnessing a steady year-to-year decline in annual installations. If the decline could not be stopped, it would be difficult to reach the target. To analyze the problems and to identify solutions, the AU organized a participatory PV Component Trouble Shooting Workshop. The two-day workshop was held in Colombo on November 17-18, 2009. Seventeen participants attended the workshop, representing PV companies, MFIs, leasing companies, the AU and the World Bank. The participants conducted a problem analysis and proposed possible solutions. From the problem analysis it was clear that the RERED solar PV investments component was in a downward cyclical trend and represented in Figure 4 below: PV companies go out of business Faltering after sales Fewer SHS sales services (warrantees, repairs, sales of system components) Fewer SHS loans Customers (households) dissatisfied with system and performance Increased SHS loan Households stop defaults repaying SHS loans Remaining un-electrified Households connected to households are poorer, the national grid, or less credit worthy promised grid-connection Figure 4 SHS Problem Analysis The following actions were proposed by the workshop: 1. PV companies should diversify their business and not only rely on SHS sales; 56 2. RERED will commission a study to come-up with a solution for warrantee problems; 3. PV companies will prepare a plan for Coordinated System Service by PV Companies to reduce both risks and costs; 4. The AU will prepare a PV Component Wind-Down Plan in case the PV component stops; 5. PV companies will specify products they will offer for cash sales which meet RERED specs; 6. RERED will extend the same GEF subsidy from 20 Wp systems to < 40 Wp systems; 7. AU and PV companies agreed on an awareness creation plan; 8. PV companies, in consultation with MFI’s will prepare information for end-users (i.e. households) on their rights and obligations for their PV system should they be connected to the grid. This will also include information on what is included in the lease including what is covered in the lease agreement (i.e. commissioning and repairs during the warrantee period) and what needs to be paid by households beyond the warrantee period; 9. RERED will commission a study to improve the PV loan payment collection. Although all stakeholders supported the recommendations, it was concluded that it was too late to implement these and revive the solar PV investments component. In 2010, the Project was restructured to reduce the target from 161,000 households, small and medium enterprises and public institutions to 113,500. 57 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR 58 59 60 61 62 63 64 65 66 67 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable. 68 Annex 9. List of Supporting Documents 1. Project Appraisal Document. Democratic Socialist Republic of Sri Lanka Renewable Energy for Rural Economic Development Project. May 24, 2002. 2. Project Paper. Additional Financing. Socialist Republic of Sri Lanka Renewable Energy for Rural Economic Development Project. May 15, 2007. 3. Restructuring Paper. Renewable Energy for Rural Economic Development Project. October 18, 2010. 4. Restructuring Paper. Renewable Energy for Rural Economic Development Project. June 16, 2011. 5. Mid-Term Review Report. Renewable Energy for Rural Economic Development Project. Resources Development Consultants Ltd. 2006. 6. World Bank. IEG. The Welfare Impact of Rural Electrification: A Reassessment of the Cost and Benefits. An IEG Impact Evaluation. 2008. 7. Marge. Energy Poverty and Gender (EnPoGen) Sri Lanka Report, June 2002. 8. Energy Forum. Connecting Off-grid Village Micro-hydro Power Schemes to the National Electricity Grid. December 2011. 9. Enno Heijndermans. Renewable Energy for Rural Economic Development. PV Component Trouble Shooting Workshop Report. December 2009. 10. Completion Report. Renewable Energy for Rural Economic Development Project. Resources Development Consultants Ltd. 2008. 11. A New World. LOLC Micro Credit. LOLC Micro Credit Ltd. Annual report 2010/2011. 12. Vallibel Power Erathna PLC. Annual Report 2010/2011. 13. Mackwoods Energy. Prospectus for Initial Public Offering. NDB. 2012. 14. SEEDS Annual Report 2010/2011. 15. Renewable Energy Sector Development: A Decade of Promoting Renewable Energy Technologies in Sri Lanka. UNDP. Case Study 11. Environment and Energy. January 2012. 16. VSHydro. Profile. 2012. 69 IBRD 39369 t SRI LANKA ai St r RENEWABLE ENERGY FOR RURAL ECONOMIC DEVELOPMENT PROJECT lk Pa 379 OG Jaffna Bay of GRID-CONNECTED RENEWABLE ENERGY SUB-PROJECTS FINANCED BY THE PROJECT, IN MEGAWATTS: Bengal GC HYDRO GC BIO-MASS 7,634 OG GC WIND Palk Bay OG 3,805 OFF-GRID RENEWABLE ENERGY SCHEMES FINANCED BY THE PROJECT AND NUMBER OF BENEFITING HOUSEHOLDS: NORTHERN OG HYDRO OG BIO-MASS OG 402 OG SOLAR PV 1,413 OG Aruvi Ar NATIONAL CAPITAL u Gulf of PROVINCE CAPITALS Mannar PROVINCE BOUNDARIES DISTRICT BOUNDARIES 8,925 OG a OG 2,588 Yan Oy Anuradhapura Ka la O ya NORTH CENTRAL 6,224 OG GC 10.8 OG 4,326 SRI LANKA NORTH WESTERN GC 7.0 Madura Oya OG 2,449 13,185 OG OG 4,130 Batticaloa De OG 215 du Mahaweli Ganga ru EASTERN Oy a GC 2.5 Kurunegala CENTRAL ha Oya GC 41.3 Kandy Ma 1,783 OG GC 19.9 Senanayake Gal Oya Samudra 334 OG OG 5,374 OG 7,659 OG 4,149 510 OG GC 10.9 66 OG a OG 1,698 Kelan a ng 35.6 GC Badulla 938 G OG COLOMBO U V A i 90 OG 1.0 GC OG 144 SAB WESTERN ARA alu Ganga GAM K Ratnapura UWA OG 13,016 Kirin 1,758 OG 50.6 GC OG 15,599 OG 119 di Oya 207 OG OG 3,800 Walawe OG 51 Ga Laccadive ng INDIAN OCEAN a Sea 1,361 OG 1,905 OG 310 OG 1,337 OG SOUTHERN 52 OG GC 0.6 Galle 0 20 40 60 Kilometers This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any 0 10 20 30 40 Miles endorsement or acceptance of such boundaries. JUNE 2012