The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 26-Apr-2021 | Report No: PIDA31120 Apr 13, 2021 Page 1 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Project Data Country Project ID Project Name Parent Project ID (if any) Uzbekistan P171683 Electricity Sector Transformation and Resilient Transmission Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EUROPE AND CENTRAL ASIA 27-Apr-2021 29-Jun-2021 Energy & Extractives Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Ministry of Finance JSC "National Power Networks of Uzbekistan", Ministry of Energy Proposed Development Objective(s) The Project development objective is to strengthen the performance of the National Electricity Grid of Uzbekistan (NES) and improve the capacity and reliability of the power transmission system to integrate large scale renewable energy sources. Components COMPONENT 1: Digitalization of the electricity transmission sector COMPONENT 2: Power grid strengthening and renewable energy integration COMPONENT 3: NES institutional development and project implementation support COMPONENT 4: Electricity market development PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 500.00 Total Financing 500.00 of which IBRD/IDA 380.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing Apr 13, 2021 Page 2 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) International Development Association (IDA) 380.00 IDA Credit 380.00 Non-World Bank Group Financing Counterpart Funding 73.00 Borrower/Recipient 73.00 Trust Funds 47.00 Green Climate Fund 47.00 Environmental and Social Risk Classification Substantial Decision The review did authorize the team to appraise and negotiate B. Introduction and Context Country Context 1. Uzbekistan is a lower-middle-income, mineral-rich, landlocked country. With more than 34.5 million people as of 2021, it is the most populous of the Central Asian countries. It has maintained high and stable economic growth over the past two decades. Between 2000 and 2019, per capita gross domestic product rose at an average pace of 5 percent per year, climbing from US$ 2786 to 6999 (in terms of 2017 USD PPP). Official poverty estimates declined commensurably, from 27.5 percent in 2001 to 11 percent in 2019. This progress was also accompanied by equity gains. Over the period from 2008 to 2019, the incomes of the poorest 40 percent of the population consistently grew faster than those of the upper 60 percent. However, Uzbekistan’s economic achievements have largely relied on a model driven by the state’s dominance in the economy, limited economic freedoms, and a restricted private sector. As a result, for decades the country has struggled to reach its full economic potential and generate full employment. 2. The COVID-19 pandemic dealt a severe blow to economic growth in 2020, causing poverty and unemployment to rise. GDP growth slowed sharply in 2019 to 1.6 percent in 2020, from 5.8 percent in 2019, due to COVID-19–related lockdowns and trading disruptions. Uzbekistan was one of the few countries in the region to record an economic expansion in 2020. Economic conditions have weakened due to restrictions on mobility and economic activity, weaker external demand, and lower remittance inflows. Investment has contracted substantially amid dampened demand prospects at home and abroad. The expansion of private consumption has slowed sharply, as increased government transfers to households—part of the GoU’s COVID-19 response (contributing to a larger budget deficit)—are only partially expected to offset reduced labor incomes and remittances. The share of households with at least one working member fell by more than 40 percentage points following stringent lockdown measures in April 2020. Although a swift employment recovery began in June 2020, World Bank estimates of the Apr 13, 2021 Page 3 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) poverty rate rose to between 8.7 and 9.8 percent in 2020, compared with pre-crisis projections of 7.4 percent. As a result, up to 900,000 people at least temporarily fell into poverty, with many more facing considerable hardship and falling incomes. Social transfers launched under the government’s COVID-19 response only partially offset reduced labor incomes and remittances, and the downturn led to the most significant slowing in the pace private consumption growth since independence. 3. An economic rebound is projected in 2021, backed by gains from structural reforms, COVID-19 response and recovery spending, and a revival in trading partner growth. GDP growth is projected to recover to 4.8 percent in 2021. However, this forecast is subject to uncertainty surrounding the global recovery and the potential pace of the country’s COVID-19 vaccination campaign. A gradual resumption of trade and investment flows, a bountiful agricultural harvest, a recovery of remittances, and vaccine distribution will support the recovery and spur further reductions in poverty and unemployment. Stronger GDP growth of 5.5 percent is projected in 2022 as vaccination efforts accelerate and global disruptions ease further. 4. Removing infrastructure bottlenecks has become even more important for creating jobs and increasing labor productivity during COVID-19 and its recovery period. According to the World Bank’s Growth Diagnostics for Uzbekistan study, ensuring uninterrupted supplies of electricity, natural gas, and fuel remains a key priority for small and medium firms to thrive and grow. A large amount of manufacturing output, estimated at 24 percent among large firms and 38 percent among small firms, was lost in 2016 due to interruptions in physical infrastructure services, including electricity and gas. Moreover, the policy of suppressed input prices for fuel and electricity had promoted capital- and energy- intensive industries at the expense of labor-intensive industries that would create jobs for the rapidly increasing workforce. Provided above, as the reform deepens, it is important for the GoU to address the next step of binding constraints for businesses and people, including an uninterrupted supply of electricity and gas. 5. As a partner of choice, the World Bank Group (WBG) is providing lead support to the GoU on economic and energy reforms. The WBG program hence aims to capture the new opportunities by focusing on (a) sustainable transformation toward a market economy, (b) reform of select state institutions and citizen engagement, and (c) investment in human capital. This proposed Electricity Sector Transformation and Resilient Transmission Project (ESTART or the Project) is part of the WBG’s engagement in the energy sector that places strong emphasis on improving energy service delivery, institutional and market development financial sustainability, clean energy deployment, and private sector participation. Sectoral and Institutional Context 6. Uzbekistan is one of the most energy-intensive countries in the world. While Uzbekistan’s energy intensity declined by about 45 percent during the last 15 years, the country’s energy use per unit of GDP is still 3.1 times higher than the average for the Europe and Central Asia region. Despite efforts to improve efficiency, the electricity demand is expected to continue growing steadily in conjunction with the economic growth (projected at about 6 percent over the next 5–10 years). The demand for electricity is expected to grow annually at approximately 4 percent from 2018 to 2030,1 increasing from 61.2 TWh to 1 According to the World Bank Least Cost Generation Expansion Plan (base-case scenario). Apr 13, 2021 Page 4 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) 101.6 TWh, respectively. In terms of electricity consumption, the industrial sector represents the largest customer segment (41 percent) followed by residential (24 percent), agriculture (21 percent), commercial (11 percent), and others (3 percent). 7. The energy sector is less diversified and highly dependent on natural gas. Natural gas accounts for 86 percent of the total primary energy consumption and 82 percent of the electricity mix2 and is a major source of commodity exports but is getting depleted (at the current pace of consumption, the existing proven gas reserves will be depleted within about 20 years3). The system is therefore vulnerable, and the country is taking actions toward sustainable energy transition pathways. The price of natural gas for domestic consumption is kept at about 50 percent of the prevailing rate for international export, thus entailing significant implicit subsidies across the economy. 8. The financial standing of the power sector has deteriorated over the past few years. Before its unbundling in early 2018, Uzbekenergo (UE), the former state-owned vertically integrated electric utility and by extension the power sector was not financially viable. UE experienced a sustained cash deficit generating around 85 percent of the electricity sector revenues supported mainly by gradual increase of the end-user tariffs and partially by demand growth. The sector cash deficit was mainly caused by (a) high technical and commercial losses in the sector, which are not fully recouped through the normative thresholds of losses established in tariff reviews; (b) relatively low collection rates (ranging between 83 percent and 93 percent of revenue invoiced) until 2017, when the utility bill collection responsibilities were temporarily transferred to the Bureau of Forced Execution with enforcement authority; (c) increasing indebtedness in foreign currencies and foreign exchange risk materializing after the currency devaluation in September 2017; and (d) below-cost recovery tariffs. 9. The COVID-19 outbreak has been adversely affecting Uzbekistan’s economy as well as its energy sector. An early assessment identifies that COVID-19 has been affecting the energy sector due to a drop in demand linked to a slowdown in economic activities; change in demand profile (industrial versus residential) affecting the weighted-average tariff; operational challenges to utilities; weakened collection efficiency due to increasing payment delinquency; supply chain disruptions, mobility restrictions, and delays for maintenance and infrastructure works; and as a result, a worsening financial position of the utilities. The assessment suggests that in 2020, COVID-19 would cause around US$80 million cash deficit in the power sector, including US$26 million at Joint-Stock Company National Power Networks of Uzbekistan (NES). 10. With the obsolete sector infrastructure, electricity losses are high, estimated at 20 percent of net generation and it cannot sustain high penetration of renewable energy. This level is more than twice higher than commercial and technical losses in high-income and some middle-income countries. The electric utilities are also incurring additional operations and maintenance (O&M) expenses to source spare parts that are no longer easily available and to cope with frequent outages of equipment. Furthermore, the condition of the electricity networks puts the sustainability and quality of the energy supply at risk. Both frequency and duration of electricity outages are high by the region’s standards. According to the World Bank’s Growth Diagnostics for Uzbekistan Study, large and small manufacturing firms experienced around 24–29 days of electricity blackouts in 2017/2018. Aged transmission infrastructure is also 2 Hydro and coal account for around 10 percent and 8 percent of generation mix, respectively. 3 BP Statistical Review, 2019. Apr 13, 2021 Page 5 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) considered as a bottleneck to implement the GoU’s large-scale renewable energy development program that aims to develop 8,000 MW of solar- and wind grid-connected power generation by 2030. 11. The GoU has initiated ambitious energy sector reforms that envisage introducing competitive market principles in the sector management and operations. Key recent and ongoing reform measures include the following: (i) adoption of a five-year Development Strategy for 2017–2021 that stipulates a broad market-oriented reform in all key areas of the economy; (ii) sector oversight functions have been consolidated under the Ministry of Energy (MoE) that was established in February 2019; (iii) Presidential Resolutions decided in 2019 on the unbundling of the vertically integrated Uzbekenergo (state owned electricity companies) and Uzbekneftegaz (state-owned oil and gas company); (iv) Cabinet of Ministers adopted a new electricity tariff methodology and established a separate tariff commission; (v) tariff adjustments4 in 2018–2019 collectively brought the weighted-average tariff from 70 percent at the beginning of 2018 to 92 percent of cost recovery level in 2019; (vi) the GoU and NES have also initiated development of transmission expansion and rehabilitation plans to 2030 aimed at improving the grid reliability, facilitating grid integration of large-scale renewable energy planned for development, and strengthening regional connectivity. 12. Clean energy transition. Recognizing the country’s huge renewable energy potential for diversification of the energy mix and emphasizing the need for clean energy transition, the GoU has taken initial measures for the development of renewable energy. In April 2020, the Government approved its 2020–2030 Generation Expansion Plan, which calls for development of about 15 GW of net generation capacity (at an estimated investment cost of US$14.7 billion) by 2030, of which 5,000 MW and 3,000 MW solar and wind power, respectively. Furthermore, a renewable energy law was enacted in May 2019 to enable creating environment for renewable energy development and. A Presidential Decree issued in October 2018 created a PPP Development Agency under the Ministry of Finance (MoF) tasked with structuring PPP projects including in the power sector. The first 100 MW Navoi Solar Independent Power Producer (IPP) project (P170598) has been developed under the WBG Scaling Solar Program and yielded a competitive Power Purchase Agreement (PPA) tariff of US¢2.67 per kWh. 13. Building on this success, the GoU entered into agreements with the WBG to support preparation of additional 900 MW solar and 1,500 MW gas-fired IPPs as well as with ADB and European Bank for Reconstruction and Development (EBRD) on preparation of additional 1,000 MW solar and 1,000 MW wind IPPs, respectively. In the longer run, Uzbekistan has a target to get its power sector carbon-free by 2050. In this regard, the GoU will further prioritize the development of renewable and low-carbon technologies and align its power sector development with its commitments under the Paris Agreement. The GoU, with support from the EBRD, has developed a Carbon Neutrality Action Plan for the Uzbek Electricity Sector. The plan suggests several actions for achieving a carbon-free power sector by 2050. 14. However, rapid expansion of solar and wind energy is being constrained by the limitations of the power grid. The existing grid network has not been able to keep pace with the private sector-led renewable energy deployment and will fall further behind the planned scenario unless urgent investments are carried out. The main challenges related to the integration of renewable energy include the limited power transfer capacity and flexibility of the grid from production to consumption locations, as well as 4First tariff increase occurred in November 2018 and made up 45 percent increase for non-residential consumers and 9 percent for residential consumers. The subsequent tariff increase that became effective in August 2019 raised the electricity tariffs by up to 36 percent and 18 percent for non-residential and residential customers, respectively. Apr 13, 2021 Page 6 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) ability of the grid operators to forecast and balance the intermittent nature of the renewable energy supply with automated tools and ancillary arrangements. Public investment, supported by the proposed Project, in grid capacity augmentation and new technologies are required to support the transition into a more ‘renewable energy-friendly’ grid, necessary for enabling integration of large scale renewable energy. 15. The proposed Project is part of the World Bank’s comprehensive clean energy transition support program. It mobilizes much-needed public financing to address the grid capacity constraints specifically targeted to sustainably increase the penetration of renewable energy. These investments lay a strong foundation for renewable energy-friendly orientation of the transmission investments. The technical assistance support of the World Bank has influenced the reprioritization of planning and reinforcement of the grid toward long-term development focusing on Uzbekistan’s clean energy transition. 16. Under the new sector structure, NES will be maintained as the government-owned central utility responsible for the planning and operation of the power transmission system as well as the single buyer of electricity in Uzbekistan. The company will also be the operational backbone of a new electricity market to be put in place in Uzbekistan. Further, with the rapid expansion of the power system in Uzbekistan, including large-scale renewable energy and efficient gas-fired projects financed by the private sector, investments in modernization, expansion, and digitalization of the aged transmission infrastructure will also need to be accelerated to keep pace with power generation expansion and growing electricity demand and to facilitate cost-effective integration of large renewable energy capacities planned for development by 2030. NES will also need to operate based on commercial principles equipped with modern corporate governance and management structure and tools to ensure its efficient, transparent, and stable operation and effective transition to wholesale electricity market in Uzbekistan. 17. The proposed Project aims to support the GoU’s priorities in improving the reliability of electricity supply and energy sector market and institutional reforms. The GoU has requested the World Bank’s continued support to energy sector market and institutional reforms including modernization of transmission grid and commercialization of the newly established grid company (NES) as the backbone for ensuring the reliability of electricity supply in Uzbekistan. To this end, this proposed Project will provide financing support and technical assistance for strategic areas as follows: (a) implementation of energy reforms and transformation of the new grid company (NES) into a modern company run on a commercial basis; (b) financing priority investments for grid enforcement, expansion, and digitalization to improve the reliability of electricity supply, facilitate grid integration of large-scale renewable energy planned for development by private sector participation, and enhance capability of Uzbekistan regional electricity connectivity and trade with neighboring countries; (c) transitioning to the wholesale electricity market; and (d) financial recovery of NES to enable the company’s access to commercial financing in the long term. C. Proposed Development Objective(s) Development Objective(s) (From PAD) 18. The Project development objective is to strengthen the performance of the National Electricity Grid of Uzbekistan (NES) and improve the capacity and reliability of the power transmission system to integrate large scale renewable energy sources. Apr 13, 2021 Page 7 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) Key Results 19. The following PDO-level indicators are proposed: (a) Indicator 1 (Core): Increased capacity of the national power transmission system (kVA). (b) Indicator 2 (Custom): Average interruption frequency per year in transmission network (SAIFI, number). (c) Indicator 3 (Custom): Grid integration of large-scale renewable energy enabled (MW). (d) Indicator 4 (Custom): Avoided GHG5 emissions (mtCO2) [direct]. D. Project Description 20. The proposed Project has the following four components: (a) Digitalization of the electricity transmission sector, (b) Power grid strengthening and renewable energy integration, (c) NES institutional development and project implementation support, and (d) Electricity market development. 21. Component 1: Digitalization of the electricity transmission sector. The proposed Project will take advantage of the modern digital technologies to support the enhanced monitoring, automation and control of the power system. Digital technologies would comprise Supervisory Control and Data Acquisition (SCADA), Energy Management System (EMS) and substation Remote Terminal Units (RTUs). This component will also support an upgrade of NES’s digital telecommunication network to enable those systems to be fully functional. 22. Component 2: Power grid strengthening and renewable energy integration. The proposed investments under the Component 2 will support: (a) modernization of 22 priority transmission substations that were commissioned in 1940/1950s; and (b) construction of a new greenfield substation Koltsevaya 500 kV as well as associated transmission lines to meet increasing demand and improve the reliability of electricity supply for residential, industrial, commercial and public consumers in the Central part of Uzbekistan, where the transmission networks are currently overloaded. 23. Component 3: NES institutional development and project implementation support. This component will support improving the institutional capacity, financial substantiality and technical capabilities of NES to ensure it can effectively carry out its functions of reliable operation of the transmission system and electricity market in Uzbekistan. The component will include the following sub-components: (i) Modernization of NES business process; (ii) NES financial sustainability and preparatory work to access commercial financing; (iii) NES institutional capacity building and project implementation support; and (iv) Technical supervision consultancy. 24. Component 4: Electricity market development. This component will provide technical assistance for the design and implementation of the sector transition to a wholesale electricity market and will include preparation of secondary legislation, market rules, institutional capacity building, design and implementation of systems required for market operation. Specific activities will include: (i) establishment of an Energy Market Regulatory Authority; (ii) development of a Wholesale Electricity Market; (iii) establishment of a Central Buyer; (iv) establishment of a Balancing Market; and (v) implementation support to Ministry of Energy and its Project Office. . . 5 GHG = Greenhouse Gas. Apr 13, 2021 Page 8 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No Summary of Assessment of Environmental and Social Risks and Impacts . E. Implementation Institutional and Implementation Arrangements 25. The proposed Project will be implemented by NES. NES supervisory board and management board appointed by the GoU provide overall oversight of the company. The company’s management board is an executive body, consisting of the chairman and four other members. For Component 4, the MoE and its Project Office would support NES as the key policy focal point and coordinating body, while the procurement of activities would be conducted by NES and its PMU. 26. NES and its PMU core teams have experience in implementing World Bank projects. Previously, UE has implemented two World Bank-financed projects and a number of projects financed by other international financial institutions (IFIs). The core UE team and PMU, which have been implementing the World Bank-financed projects, have moved to NES and will be preparing and implementing the proposed Project. The same teams have also been implementing the World Bank ongoing Modernization and Upgrade of Transmission Substations Project. The PMU core team comprises a qualified project manager, an economist, a procurement specialist, a financial manager, and a project accountant. NES is in the process of hiring financial management and social specialists to further strengthen the PMU capacity. 27. Day-to-day supervision and management responsibility for the proposed Project will be assigned to the PMU established within NES. The PMU will be responsible for the preparation and implementation of this proposed Project, including preparation of project plans, procurement documents, and progress reports and management of all consulting and investment contracts. NES management board will be responsible for monitoring the proposed Project outcomes. 28. A Tender Commission has been established within NES and will make procurement-related decisions for the contracts financed through the Project, including approval of bidding documents, bid evaluation reports, and contract awards in line with the World Bank procurement Regulations. . CONTACT POINT World Bank Apr 13, 2021 Page 9 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) Ferhat Esen Senior Energy Specialist Husam Mohamed Beides Lead Energy Specialist Maksudjon Safarov Senior Energy Specialist Borrower/Client/Recipient Ministry of Finance Timur Ishmetov First Deputy Minister TIshmetov@mf.uz Implementing Agencies JSC "National Power Networks of Uzbekistan" Dadajon Isakulov Chairman of Board grp_modern@mail.ru Ministry of Energy Sherzod Khodjaev Deputy Minister khodjaev.sh@minenergy.uz FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Ferhat Esen Task Team Leader(s): Husam Mohamed Beides Maksudjon Safarov Apr 13, 2021 Page 10 of 11 The World Bank Electricity Sector Transformation and Resilient Transmission (P171683) Approved By Practice Manager/Manager: Country Director: Marco Mantovanelli 26-Apr-2021 Apr 13, 2021 Page 11 of 11