Document of The World Bank Report No: 40083 PROJECT BRIEF ON A PROPOSED GLOBAL ENVIRONMENT FACILITY GRANT IN THE AMOUNT OF US$10 MILLION TO THE RUSSIAN FEDERATION FOR A RENEWABLE ENERGY PROJECT May 7, 2007 CURRENCY EQUIVALENTS (Exchange Rate Effective March 21, 2007) Currency Units = Russian Ruble (RUB) 26.03 RUB = US$1 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy MW Megawatt CFAA Country Financial Accountability Assessment MWe Megawatt electric CLW Contingent Loan Window MWh Megawatt per hour CMM Coal Mine Methane MWt Megawatt thermal CO2 Carbon Dioxide NEFCO Nordic Environment Finance Corporation CPS Country Partnership Strategy NGO Nongovernmental Organization DO Development Objective NOx Nitrous Oxides DH District Heating NPAF National Pollution Abatement Facility EBRD European Bank for Reconstruction and NPAF ED NPAF Executive Directorate Development ECA Europe and Central Asia Region NPAF OM NPAF Operational Manual EE Energy Efficiency NPAF SB NPAF Supervisory Board EIA Environmental Impact Assessment NPV Net Present Value EMP Environmental Management Plan OECD Organization for Economic Cooperation and Development ESCO Energy Service Company OJSC Open Joint Stock Company EU European Union PCF Prototype Carbon Fund FI Financial Intermediary PM10 Particle Matter less than 10 microns in diameter FM Financial Management PMU Project Management Unit FMR Financial Management Report PPW Project Preparation Window FMS Financial Management System PSR Project Status Report FSU Former Soviet Union PV Photovoltaic FTP Federal Target Programs (of Russia) RAO "UESR" Unified Energy System of Russia GEF Global Environment Facility RE Renewable Energy GHG Greenhouse gas RER Renewable Energy Resource IBRD International Bank for Reconstruction REEEP Renewable Energy & Energy Efficiency Partnership IEA International Energy Agency REFF Renewable Energy Financial Facility IFC International Finance Corporation RF The Russian Federation IP Implementation Progress RREP Russia ­ Renewable Energy Program IRR Internal Rate of Return RSLW Revolving Soft Loans Window ISDS Integrated Safeguards Data Sheet SA Special Account ISO International Standard Organization SO2 Sulfur Dioxide JSC Joint Stock Company SOE Statement of Expenses MEDT Ministry of Economic Development and Trade TA Technical Assistance MEST Ministry of Education, Science & Technologies TOR Terms of Reference MIE Ministry of Industry and Energy UNDP United Nations Development Program MNR Ministry of Natural Resources VAT Value Added Tax MOF Ministry of Finance WWF World Wild Fund MoU Memorandum of Understanding Vice President: Shigeo Katsu Country Director: Kristalina Georgieva /Klaus Rohland Sector Manager: Charles Feinstein Task Team Leader: Helmut Schreiber RUSSIAN FEDERATION RENEWABLE ENERGY PROGRAM (RREP) Contents A. Strategic Context and Rationale 1 1. Country and Sector Issues 1 2. Rationale for Bank Involvement 2 3. Higher level objectives to which the project contributes 3 B. PROJECT DESCRIPTION 3 1. Financing instrument 3 2. Project development objective and key indicators 3 3. Project components 4 4. Lessons learned and reflected in the project design 6 5. Alternatives considered and reasons for rejection 7 C. IMPLEMENTATION 7 1. Partnership arrangements 7 2. Institutional and implementation arrangements 8 3. Financing Partners 8 4. Monitoring and evaluation of outcomes/results 9 5. Sustainability 9 6. Critical risks and possible controversial aspects 10 7. Grant conditions and covenants 11 D. APPRAISAL SUMMARY 12 1. Economic and financial analyses 12 2. Technical 13 3. Fiduciary 13 4. Social (Stakeholder involvement) 15 5. Environment 15 6. Safeguard policies 15 7. Policy Exceptions and Readiness 16 ANNEX 1: Country and sector background 17 ANNEX 2: Major related projects financed by the Bank and/or other agencies 21 ANNEX 3: Results Framework and Monitoring 23 ANNEX 4: Detailed project description 27 ANNEX 5: Project costs 36 ANNEX 6: Implementation arrangements 37 ANNEX 7: Financial Management and Disbursement Arrangements 41 ANNEX 8: Procurement Arrangements 42 ANNEX 9: Economic and financial analyses 43 ANNEX 10: Safeguard Policy Issues 48 ANNEX 11: Project Preparation and Supervision 49 ANNEX 12: Documents in the Project File 50 ANNEX 13: Statements of Loans and Credits 51 ANNEX 14: Country at a Glance 54 ANNEX 15: Incremental Cost Analysis 58 ANNEX 16: STAP Roster Review 63 ANNEX 17: Letter of Support: Ministry for Economic Development and Trade 70 ANNEX 18: Letter of /Request for Support: State Duma 72 ANNEX 19: Letter of /Request for Support: Altaisky Kraj 74 ANNEX 20: Letter of /Request for Support: Republic of Buryatia 75 ANNEX 21: Letter of /Request for Support: Republic of Karelia 76 ANNEX 22: Letter of /Request for Support: Komi Republic 78 ANNEX 23: Letter of /Request for Support: Krasnodar Kraj 79 ANNEX 24: Letter of /Request for Support: Stavropol Kraj 81 ANNEX 25: Map 82 RUSSIAN FEDERATION RUSSIA ­ RENEWABLE ENERGY PROGRAM (RREP) PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSSD Date: May 7, 2007 Team Leader: Helmut Schreiber Country Director: Kristalina Georgieva/ Klaus Sectors: Renewable energy (75%); District Rohland heating and energy efficiency services (25%) Sector Manager/Director: Charles Feinstein Themes: Climate change; Environment; Energy Project ID: P079033 Environmental screening category: FI Lending instrument: GEF grant Project Financing Data: [ ] Loan [ ] Credit [x] Grant [ ] Guarantee [] Other For Loans/Credits/Others: Total GEF financing: US$ 10.0 million Proposed terms: as per Grant Agreement Financing Plan (US$m.) Source Local Foreign Total Recipient 66.5 66.5 Global Environment Facility 10.0 10.0 Others (REEEP) 0.3 0.3 Total 66.8 10.0 76.8 Recipient: Russian Federation Responsible Agency: Ministry of Economic Development and Trade Estimated disbursements (Bank FY/US$m) FY 2008 2009 2010 2011 2012 Annual 0.5 2.0 3.0 3.0 1.5 Cumulative 0.5 2.5 5.5 8.5 10 Project implementation period: FY08 ­ FY12 Expected effectiveness date: December 2007 Expected closing date: December 2012 Does the project depart from the CAS in content or other significant respects? Yes No Does the project require any exceptions from Bank policies? Yes No Have these been approved by Bank management? Yes No Is approval for any policy exception sought from the Board? Yes No Does the project include any critical risks rated "substantial" or "high"? Yes No Does the project meet the Regional criteria for readiness for implementation? Yes No Project development objective: The development objective of the project is to facilitate a sustainable market for renewable energy in the Russian Federation by supporting the development of enabling policies and institutional capacity, and market oriented financing mechanisms. Project description: The project design will include two components: Component A: Technical Assistance for Policy Development, Institutional Strengthening and Capacity Building. This component has the following subcomponents: o Development of Renewable Energy Policies; o Market Infrastructure Development; o Renewable Energy Program in Natural reserves and National parks; and in Special Tourist-Recreational Economic Zones; o Partnership on Innovative Financing Mechanisms and Regulations; o Knowledge and Information Collection and Dissemination; o Program Management, Monitoring, and Evaluation. Component B: Renewable Energy Financial Facility. This component will be a financing facility consisting of three instruments: o Project Preparation Window for on-grid electricity generation subprojects o Revolving Soft Loans Window o Revolving RER Facilities in pilot regions Which safeguard policies are triggered, if any? All subprojects are expected to trigger at least the Environmental Assessment (OP/BP/GP 4.01) safeguard policy. Significant, non-standard conditions, if any, for: Board presentation: October 2007 Loan/credit effectiveness: December 2007 Covenants applicable to project implementation: TBD A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues The priorities of the state energy policy of the Russian Federation were formulated in the "Energy Strategy of Russia until 2020". Since approval of the document by the Government on 28 August 2003, significant changes have taken place both in the external macroeconomic environment and in the Russian domestic market. First, today's level of oil prices exceeding US$70/barrel has not been envisaged in any of the scenarios discussed in the Strategy. Indeed, a price of only US$30/barrel was considered as part of the optimistic scenario.1 Given the high international energy prices, the state of the Russian energy sector has become a prominent issue for a number of energy-importing states, including many members of the EU. The benefits to Russia from exporting energy resources such as oil and gas have increased dramatically over the recent years. At the same time, domestic energy demand in Russia is increasing at a much higher rate than previously forecasted. In accordance with the extensive scenario of energy sector development the demand for investments in the sector will be about US$250-300 billion during the period of 2006-2020. The recently developed investment program of RAO UESR has defined an investment demand of US$118.3 billion during 2007-2011. This market environment raises the importance of energy efficient and environmentally friendly technologies. There is a growing realization in Russia that energy saved by increasing deployment of energy efficient and renewable energy technologies can substantially contribute to the benefits from international trade in energy resources. In addition, given the uneven distribution of energy resources across Russia's vast territory, there are many regions in Russia where energy is just as expensive as in its European neighbor-states. In its efforts to increase the market penetration of renewable energy technologies, Russia faces many of the same challenges as other eastern European countries, including inefficient energy tariff structures inherited from the past. Not more than 3.5% of the total primary energy supply is based on renewable energy, of which two-thirds are hydro and one-third all other forms. Renewable energy (without large hydro) accounts for 0.5% of total electricity generation. Experts estimate that heat use based on renewables amounts to about 4% of the total generated heat in Russia. At the same time, Russia's potential for renewable energy development is quite large. In accordance with the OECD/IEA study (2003) the volume of renewable energy with economic potential corresponds to about 30% of the country's actual total primary energy supply, while the technical potential is estimated to be more than five times greater than the energy supply. It includes biomass energy from the nation's rich forest resources, wind, solar, hydro, and geothermal energy resources found in many regions. Additional triggers for Russia's efforts to develop its renewable energy potential include the necessity to modernize the provision of housing and communal services in most Russian cities ­ a process in which energy saving and renewable energy technologies can play a prominent role. The importance of developing Russia's renewable energy resources (RER) has been recognized by its authorities based on the need to diversify fuel utilization and the need to protect the environment. The Russian Energy Strategy stipulates the development of new capacities for RER utilization, and at the same time the gradually reduction of subsidies. This will increase the incentives for investments in energy efficiency and the use of renewable energy resources. In particular, areas remote from fossil fuel resources and being served only by very high-priced energy are prime candidates for an enhanced development of local RER. 1 The optimistic scenario was marked by a 3.3 times GDP growth by 2020, as compared to 2000, seven-fold increase of investments, and continued high prices for oil ($30 per barrel for Urals grade in 2020) and for gas ($138 per thousand m3 in 2020). The moderate scenario envisaged a GDP growth of 2.3 times by 2020, investment growth of 3.6 times, and stable oil and gas prices ($18.5 per barrel of oil and US$118 per thousand m3 of gas). 1 While a federal law on renewable energy development has not yet been adopted, there are several regions that have adopted laws and regulations on renewable energy. Additionally, at the sub-national level exists a well developed institutional framework for energy efficiency improvements that can serve as well as umbrella for RER. 43 regional laws on energy saving, 24 energy saving funds and 75 energy efficiency centers have been established at the regional level. Regional and municipal authorities are the main driving force for renewable energy development in Russia. More than 650 energy efficiency programs are under implementation, including 45 programs at the sub-national level, and more than 537 municipal programs. During the period 2002-2006, several programs2 with components related to RER have been implemented with only little impact on their development. The main reasons for the slow development of renewable energy projects are systemic barriers, the removal of which requires special efforts from the government. The following barriers impede the development of RER in Russia: · Financial Barriers: lack of domestic and foreign investment capital; lack of longer-term affordable debt financing; high project preparation and transaction costs; high cost of special equipment; absence of federal financing mechanisms (such as environmental funds, etc.); un-competitiveness due to low fossil fuel energy prices. · Institutional and Ownership Barriers: lack of legislative support; insufficient enforcement of environmental regulations; inflexibility of municipalities, lack of implementation capacity for renewable energy (RE) projects; mismatch between municipal ownership of district-heating systems and regulation of tariffs by federal/regional authorities; insufficient private sector presence in the power and heat generation sector. · Information Barriers associated with a lack of information about RE technologies and opportunities and their potential. For more details on barriers identified see Annex 1. 2. Rationale for Bank Involvement The concept and objectives of the Russia - Renewable Energy Program (RREP) support the Bank's strategy to assist the Russian Federation in the sustainable development of its energy resources. One of the priorities of the Country Partnership Strategy (CPS), approved by the Board of Executive Directors on November 20, 2006, is to support Russia's increasing global role, and to assist the country in fulfilling its global commitments. The CPS refers to TA operations on the introduction of low-carbon technologies and climate change mitigation. Another priority area of cooperation between the Government and the Bank are diverse activities at the sub-national level. The design of the RREP, with a focus on proactive participation of regions, is fully consistent with this strategic priority. Furthermore during an ongoing policy dialog between the Bank and Russia on energy security issues the importance of diversifying energy supplies are emphasized by accelerating the development of renewable energy and distributed energy. At the joint statement of Minister Kudrin and President Wolfowitz at the G8 Meeting in St. Petersburg on June 9, 2006 both agreed on the obligation to scale up access to affordable and clean energy to meet the Millennium Development Goals. Currently, there are two World Bank Group/GEF projects under implementation, which are directly related to the development of renewable energy in Russia: The Geothermal Energy Development Program 2"Energy-efficient Economy", "South Russia", "Ecology and Natural Resources of Russia", "Studies and Research under the Priority Directions of Science and Engineering", and "Economic and Social Development of the Far East and Transbaikalian Region" 2 for the ECA region (GeoFund), and the Russia ­ Sustainable Energy Finance Program, implemented by IFC. RREP is to be effectively coordinated with these projects to achieve the maximum combined impact. Further is the pilot project under preparation by IFC - Sri Lanka "Portfolio Approach to Distributed Generation Opportunities (PADGO) ". The RREP project would be interested in a possible replication in RREP some positive outputs of the PADGO, when they become evident. 3. Higher level objectives to which the project contributes The Project's global environment objective is to reduce greenhouse gas (GHG) emissions on a continuous basis by overcoming barriers to the development of renewable energy. The project directly supports the GEF Operational Program #6: Promoting the adoption of renewable energy by removing barriers and reducing implementation costs. RREP supports the creation of a comprehensive framework for the development of renewable energy and addresses the following GEF 4 Replenishment priorities of the Climate Change focal area: · Promotion of the supply and demand for grid electricity from renewable resources, · Promotion of the use of renewable energy for the provision of rural energy services B. PROJECT DESCRIPTION 1. Financing instrument The proposed GEF Grant will be used to support: · Technical Assistance (TA) for policy development, institutional strengthening and capacity building - US$5.0 million, and · The development of a long-term Renewable Energy Financial Facility (REFF) - US$5.0 million, in particularly for capitalizing of: 1. A Project Preparation Window for on-grid electricity generation subprojects (PPW) - US$1.0 million; 2. Revolving Soft Loans Window (RSLW) in the National Pollution Abatement Facility (NPAF) ­ US$1.0 million. NPAF will allocate up to US$20.0 million from its own lending resources to provide sub-loans for RER projects; 3. Revolving RER Facilities in pilot regions - US$3.0 million. The grant will be allocated on the basis of a Grant Agreement between the World Bank and the Government of the Russian Federation. NPAF will implement the project in accordance with the provisions of the above mentioned agreement and will sign sub-grant/sub-loan agreements with final beneficiaries. 2. Project development objective and key indicators The development objective of the project is to facilitate a sustainable market for RER in the Russian Federation by supporting the development of enabling policies, institutional capacity, and self-sustaining, market-oriented financing mechanisms. Specifically, the project's aim is to change the current unfavorable investment and incentive conditions and create an enabling environment in Russia that fosters the development of biomass, solar, wind and other renewable energy utilization for heating and electricity generation applications by providing 3 financial, methodological, informational, and institutional support. It will help alleviate rural poverty caused in large part by an underdeveloped local economy and unaffordable energy costs in certain regions of Russia due to high fossil fuel prices which result from long distance distribution networks. Improving the market framework for renewable energy based power and heat production and the implementation of a number of viable renewable energy projects by the NPAF will help accelerate the use of renewable energy and build competence in the private sector to invest into this resource. Key indicators are the change of the regulatory and incentive framework for RER leading to the implementation of viable RE projects and the installed capacity (MW) and the amount of electricity and heat generated (MWh) as a result of REFF support. The global objective of the project is to reduce the emissions of GHG by removing barriers to the development of RER. Key indicators are GHG emission reductions (CO2e). Detailed information are avialble in Annex 3. 3. Project components The project design will include two major components and several subcomponents: Component A. Technical Assistance for Policy Development, Institutional Strengthening, and Capacity Building: US$19.2 million, of which US$5.0 million from GEF, and US$14.2 million counterpart funds. This component covers the following areas: A.1 The Development of Renewable Energy Policies subcomponent will comprise technical assistance focused on supporting the Government in designing and implementing policies on renewable energy development, improving the legislation and regulatory and incentive framework, and preparing national and regional strategies, action plans and programs on the use of renewable energy resources. A.2 The Development of a Market Infrastructure subcomponent will include: (i) support to the Government in designing feed-in tariffs, and a "green certificates" system, technical regulations and standards for RE installations; (ii) support to various governmental entities in establishing streamlined permitting procedures, and (iii) support to and strengthening of private sector companies that invest in RER development. A.3. The Renewable Energy Program in Natural Reserves and National Parks and in Special Tourist-Recreational Economic Zones subcomponent will demonstrate innovative approaches to productive uses of renewable energy for biodiversity conservation and other essential services in natural reserves, national parks and other protected areas. The subcomponent will support the implementation of the following activities: (i) energy-environmental reviews of selected natural reserves and national parks; (ii) feasibility studies and technical design for the utilization of RER in selected national reserves and natural parks; (iii) development of a model design packages for the construction of renewable energy installations in natural reserves, and national parks (iv) preparation of a long-term strategy on RER development in natural reserves, national parks and other protected areas, and (v) preparation of feasibility studies on RER development in seven Special Tourist-Recreational Economic Zones, established by the Government. A.4. The Partnership on Innovative Financing Mechanisms and Regulations subcomponent will provide additional financial resources to extend the Renewable Energy and Energy Efficiency Partnership (REEEP) program in Russia, and in particular, to implement additional 5-6 projects selected in accordance with its procedures and criteria. A.5. The Knowledge and Information Collection and Dissemination subcomponent will support the following activities: 4 Creation and maintenance of an interactive web-portal on renewable energy; Establishment of a Network of National Biomass Centers, and Long-term educational and training capacity building. A.6. The Program Management, Monitoring, and Evaluation sub-component will provide financial support for project monitoring and administration. Component B. Renewable Energy Financial Facility (REFF) (US$5.0 million GEF and US$52.6 million counterpart funds). This component will be a financing facility consisting of three instruments: Project Preparation Window, Revolving Soft Loans Window, and Revolving RER Facilities in pilot regions. B.1. The Project Preparation Window for on-grid electricity generation subprojects (PPW) (US$1.0 million GEF, US$ 4.6 million investment project sponsors) will focus on the development of a strong pipeline of mini-hydro and wind project that can provide deal flow for commercial banks and investors. Grant support will be provided in form of straight and contingent grants to project developers and sponsors to defray the costs of feasibility studies and other project preparatory activities. As a general rule, support will be provided on a cost-sharing basis with a 50% maximum coverage from GEF funds. Contingent grants could be provided for the preparation of bankable projects in cases where high technical and other project risks are expected. Thresholds for the use of contingent grants will be detailed in an Operational Manual of the REFF. In the event that projects supported by PPW reach financial closure, the contingent grant must be repaid out of their proceeds. In the event that the feasibility studies and related work conducted with PPW funding demonstrate that the project is not economically feasible, and all efforts to seek financing for the project are to be terminated, the contingent grant can be forgiven. JSC "Hydro OGK", which is a daughter company of RAO UESR, indicated an interest to cooperate with the GEF in implementing this task. B.2. Revolving Soft Loan Window (US$ 1. 0 million GEF, US$ 33.0 million are NPAF lending resources and funds of investment projects sponsors ) based on the institutional framework and financial resources of the NPAF will constitute a financial mechanism for provision of selective financial support to companies implementing renewable energy development projects. NPAF indicated a readiness to allocate up to US$ 20 million of its resources (repayments from initial sub-borrowers and unutilized portion of the Bank's loan and Swiss grant) for cofinancing of RREP investment sub-projects. NPAF will provide long-term low-cost loans for project developers of renewable energy utilization in accordance to the following conditions: maximum amount of a sub-loan is US$ 7 million for a period to 8 years with a grace period of 2-3 years for principal payment under sub-loans/final loans, which should make no more than 70 % from the sub-project total cost. GEF support (US$ 1.0 million) will allow NPAF to create a pipeline of RER subprojects. The same approach as in PPW will be applied for supporting of subproject developers and sponsors in the form of straight grants through cost sharing of feasibility studies and other project preparation activities. NPAF will also allocate up to US$ 1.0 million for the RER pipeline creation. B.3. The Revolving RER Facilities (US$3.0 million GEF, US$15.0 million counterpart funds) will be created in several pilot regions for the development of regional structures and testing of similar financial instruments (cost-sharing of project preparation and contingent grants and soft loans) at the sub-national level. Several regions were identified at the preparatory stage. Apparently, Krasnodar krai, the Republic of Karelia and the Komi Republic are the best prepared and committed to host Revolving RER Facilities. The final selection of pilot regions and design of the facilities will be done before the RREP start up. 5 Total project costs and the financing plan are shown below. Table 1: Financing Plan Component (according to Category Indicative Costs Financing Plan financing mechanism) Amount % of GEF GoR, Project Total Total NPAF sponsors Policy Development, TA 19.2 25.0% 5.0 12.6 1.6 19.2 Institutional Strengthening and Capacity Building REFF Investment 57.6 75.0% 5.0 21.0 31.6 57.6 Total 76.8 100.0% 10.0 33.6 33.2 76.8 4. Lessons learned and reflected in the project design There are numerous renewable energy projects and programs implemented in the Europe and Central Asia region and worldwide with the financial support of the World Bank, GEF and others. Examples of such projects include: Armenia Renewable Energy Project, China Renewable Energy Scale-up Program, Croatia ­ Renewable Energy Resources Project; Sustainable Energy Project, Macedonia; Turkey Renewable Energy Project; Zakopane Geothermal Project, Poland; Geothermal Energy Development Program for the ECA region (GeoFund). Experience shows that relatively high transaction costs associated with RE project development and financing, the unfamiliar risk for banks and other financial institutions, and the lack of collateral value of RE equipment result in very cautious bank lending practices toward RE projects developers which are, in most cases, small or medium size companies. In addition, domestic financial institutions often lack relevant experience, expertise, and capacity with regard to project finance as well as an understanding of RE business potential and associated project risk assessment experience. These financial barriers will be addressed through the creation of a revolving contingent grant and soft loan mechanisms based on the experiences of the Croatia and Macedonia RE projects. An important lesson is that the development of RER should be part of an integrated energy strategy that reflects the priority given to RER, e.g. by allowing different tariffs for RER reflecting their environmental benefits and contribution to energy security. The institutional structures should be in place and the policy framework should be clear and supportive of sustainable RER development. Government commitment is crucial, and should be reflected in consistent sectoral objectives at the regional and national level. Renewable energy development involves a lot of "learning by doing". That highlights the importance of good project monitoring systems and sufficient flexibility to learn and adjust financing and project implementation mechanisms. Important lessons have been learned by the NPAF while implementing the Environmental Management Project. NPAF gained tremendous experience in project preparation, appraisal and supervision in accordance with international standards. The relatively low performance of the Environmental Management Project/NPAF was due to controversies within the Russian government with respect to the environmental policy in 1995-2006. Therefore, government commitment to renewable energy development is one of the main conditions for successful project preparation and implementation. 6 5. Alternatives considered and reasons for rejection The following alternatives were considered: · Stand-alone GEF grants for specific regional projects, namely Karelia ­ Biomass Project and a project on Promotion of Renewable Energy Development in South Russia. The Russian GEF Focal Point endorsed both projects. However, after consultations with the GEF Secretariat the project team suggested to the Government to place these activities in a more comprehensive country-wide RREP framework to better meet the key GEF objectives of removing barriers to the utilization of environmentally friendly fuels and to the improvement of energy efficiency. · The following two alternative options for housing the REFF were identified and eventually rejected: o Creation of a new institution dedicated to provide financial support to the implementation of RE projects. This option was rejected because of organizational uncertainties and risks of delay in project implementation. Moreover, new institutions created on the basis of grant contributions often fail to sustain themselves after the grant support is discontinued. o Private Bank: Under this option the REFF would be placed at a local bank that would be selected through a competitive tender. The bank would enter into agreement with the World Bank and the Governmental ministries to access the REFF on an exclusive basis to provide loans to borrowers for eligible projects. This option was rejected because it would limit access to the REFF to the branch offices of just one bank. This can create a potential conflict of interest since a commercial bank may want to nurture own business objectives when considering applications of support. The Ministry of Economic Development and Trade (MEDT) suggested locating the REFF at the NPAF, which would create a program unit for managing not only the REFF, but the RREP as a whole. C. IMPLEMENTATION 1. Partnership arrangements The main partners of the Bank in the RREP implementation are: · The Ministry of Economic Development and Trade (MEDT); · The Ministry of Finance (MOF); · The Ministry of Industry and Energy (MIE); · The Ministry of Natural Resources (MNR); · The Ministry of Education, Science & Technologies (MEST), and · The NPAF Executive Directorate (NPAF ED). Financial management, disbursement and procurement functions for the REFF will be carried out by the NPAF ED in accordance with the Grant Agreement and the Agency Agreement to be signed between MEDT, MOF and the NPAF ED. MEDT and the World Bank's Project Team have obtained written confirmation of interest from the Administrations of Krasnodar and Stavropol krais, from the Governments of the Republics Karelia, Buryatia, and Komi and RAO "UESR" to participate in the preparation and implementation of the RREP. The Secretariat of REEEP- Russia and the Former Soviet Union (FSU) will be the executing agency of the subcomponent A.4. "Partnership on Innovative Financing Mechanisms and Regulations". REEEP 7 International Secretariat, the Russian Environmental Center, the World Bank and MEDT will sign a Memorandum of Understanding (MoU) on the partnership in the RREP implementation. Consultations with EBRD, IFC, NEFCO, the Deutsche Energie Agentur and the European Center for Renewable Energy on their participation in the RREP are also under way. 2. Institutional and implementation arrangements The project design and implementation arrangements have been developed in close consultation with the key stakeholders, namely MEDT, NPAF, regional administrations, existing and potential project developers and NGOs dealing with renewable energy, environmental and energy efficiency issues. The project will be implemented by the NPAF which was established by the Government of the Russian Federation in 1995 to fund financially viable, high priority resource recovery/pollution abatement projects. The NPAF ED is the project implementation unit for the Bank's Environmental Management Project and some other international projects; therefore, its staff possesses the needed experience and skills. The NPAF ED will assume overall fiduciary responsibilities for the use of the GEF grant funds. To manage the project, the NPAF ED will establish a Project Management Unit (PMU). NPAF is functioning in accordance with the Operating Instructions (NPAF OI) developed in 1996 and updated in 2002. In addition to maintenance of NPAF ED operating activities, the NPAF OI formalize the process of IP selection, preparation and implementation on the basis of requirements of the Russian legislation and the World Bank rules. The NPAF OI contain formats of documents used in all operations of the investment cycle. MEDT, jointly with the Ministry of Finance will supervise activities of NPAF, including budget approvals, setting up of special accounts, authorizing payments and disbursements of GEF funds. MEDT is the Ministry responsible for overall coordination of RREP. A project Steering Committee under the chairmanship of MEDT was established to provide overall policy guidance and to coordinate the implementation of the RREP with national and international programs on renewable energy development. The Steering Committee will also oversee operations of bilateral donors such as the EU, Austria, Denmark and other Nordic countries and programs of multilateral development agencies related to renewable energy development in Russia. MIE, MNR, and MEST are the agencies responsible for supervision of the following technical assistance subcomponents (i) renewable energy policy, (ii) market infrastructure development, (iii) renewable energy program in natural reserves and national parks, and (iv) and knowledge and information collection and dissemination. In their function they will ensure consistency of RREP operations with the Government strategy on energy, environmental and technological issues in the Russian Federation. The exact amount of counterpart financing will be determined during project appraisal. At this stage the project team anticipates that substantial co-financing of the TA component will be available. In accordance with the program "Studies and Research under the Priority Directions of Science and Engineering for 2007-2010 " financing of RER activities will be around US$8-10 million per year, which is more than three times higher than envisaged government input in the TA component. 3. Financing Partners The, MEDT, the Ministry of Finance and NPAF will be the main partners of the Bank. MIE, MNR, and MEST will provide co-financing for relevant project tasks under the technical assistance component. NPAF and its clients (project investors) will be the main partners in financing RE projects under the Renewable Energy Financial Facility. The administrations of pilot regions will provide co-financing for the creation of regional Revolving RER Facilities. 8 REEEP indicated to allocate at least US$300,000 in support of renewable energy development in Russia during 2007-2011. Upcoming TACIS project "Renewable energy policy and the rehabilitation of small scale hydropower plants in the Russian Federation", with the budget 2.0 million EUR, will provide an important input in achieving of RREP objectives. The World Bank and TACIS intends to sign a document stipulating the relations between two operations on REP development in Russia. It is envisaged that bilateral donors such as the EU, Austria, Denmark and other Nordic countries will also contribute to renewable energy development in Russia. The World Bank intends to deepen its cooperation with donors prior to effectiveness and in particular during the implementation phase. 4. Monitoring and evaluation of outcomes/results A monitoring and evaluation system will be put in place to assess the project's effectiveness during implementation and after the project is completed. A results monitoring framework will be set up focusing on the global development objective to be achieved and the intermediate and/or final results expected from implementing each project component. The framework will include specific and monitorable performance indicators such as the number of subprojects supported by the REFF, the RE investments leveraged by REFF and the associated GHG emission reductions. Project monitoring and evaluation activities will be carried out under the responsibility of the NPAF ED, which will submit semi-annual progress reports to the Bank. The NPAF OI should be updated with the aim to contain more detailed indicators, including those tailored to some specific types of investment subprojects supported by RREP. A mid-term review will be carried out to assess overall project progress. This review will include an in- depth assessment of the institutional and financial sustainability of REFF, its initial impact on the broader RE landscape and the lessons learnt. Based on the outcome of the mid-term review, the Bank will advise the Government of the Russian Federation to take measures to ensure that the project is successfully completed. On the subproject level, all beneficiaries of financial assistance (grants/loans) will establish an incremental cost analysis that includes a baseline scenario and a project scenario for energy performance and emissions, including CO2. 5. Sustainability (a) Sustainability (including financial sustainability) The project is expected to be financially and institutionally sustainable. Project activities are linked to long-term national programs on energy efficiency and renewable energy utilization and to the intention of the Government of the Russian Federation to diversify fuel utilization and to protect the environment. To ensure sustainability beyond the implementation period, the project would: · Assist with the development and implementation of long-term strategies and detailed operational action plans for nationwide activities on RE development; · Influence the regulatory framework to ensure adequate federal/regional support in the form of effective funding mechanisms, electricity buyback policy, preferential taxation, etc. as well as enforcement of environmental regulations; · Build capacity of federal/regional authorities and local communities through adequate training, technical advice, and critical infrastructure and equipment support; 9 · Strengthen the awareness and understanding of the benefits of indigenous renewable energy utilization by the local population, general public and key stakeholders, and their involvement in the above mentioned activities, and · Create a long-term Renewable Energy Financial Facility to help overcome financial and institutional barriers for renewable energy development. (b) Replicability The Program's replicability is ensured by its robust focus on removing barriers to the development of RER in Russia, which will finally lead to a change in the current unfavorable investment and incentive structure and create an enabling environment. Once the financial, information, institutional, ownership and implementation capacity barriers are removed, renewable energy development will become competitive and attract private financing to suitable resource bases throughout the country. (c) Stakeholder Involvement To ensure adequate development impact, the implementation of the Program will be based on broad stakeholder involvement, including actors in the relevant sectors, such as the electricity sector, DH sector, and the forestry sector in the case of biomass projects in Northwestern Russia. On the federal level, MEDT, MIE, MNR, and MEST as well as institutions and organizations under their administration will be project counterparts. On the local/regional levels the administrations of the oblasts will play a leading role. Strong interest and willingness to participate in project preparation and implementation was expressed by NGOs (WWF, several professional associations and other organizations) and the private sector (commercial banks, engineering and consulting companies, equipment producers, etc.). (d) Exit Strategy The final exit strategy for GEF funds will depend on the success of the project. The Government of the Russian Federation, the World Bank and GEF will finalize the exit strategy in year 4 of project implementation or when 75% of the combined REFF funds have been committed, whichever comes earlier. If monitoring and evaluation reports indicate that program objectives are being met, remaining funds could be used to continue support for successful elements of the Program. If monitoring and evaluation reports indicate that program objectives are not being met, remaining funds could be (i) granted to the most successful REFF, (ii) granted to the GOR for the use of other GHG mitigation activities or (iii) returned to GEF. analysis of performance will determine which of the GEF modalities may still serve a useful function and which should be converted for better use in Russia. 6. Critical risks and possible controversial aspects There are a number of risks which are highlighted in the table below, together with proposed or envisaged mitigation measures: Risks Risk Mitigation Measures Risk Rating with Mitigation REFF's size and leverage my not be large enough Obtain GOR, bilateral and multilateral donor Modest to create a sustained market impact. contributions during project preparation and implementation. Use early successes and associated rise in the Fund's credibility to mobilize additional donor contributions. Catalyze substantial commercial co-financing 10 through both demonstration effects of successful projects and business partnerships. Government's commitment to national policy for Build capacity in MEDT, MIE and other Modest RE and to streamline state/local decision-making ministries, and develop procedures to fails over time streamline decisions affecting RE implementation within Government structures. Maintain policy dialog with all stakeholders to ensure commitment to reform. The power sector restructuring will be slow and Build capacity with the new power sector Substantial inadequate leaving investors without proper entities in the RAO UESR, the tariff system enabling framework regulators, and the MIE The private sector will not be willing to invest in Support legislation to ensure adequate feed-in Modest RE projects tariffs or similar price incentive. Technical assistance to NPAF and local FIs to enable optimal financial intermediation through appropriate financial support instruments Lack of financial support for project preparation Obtain firm commitment from partners to co- Low finance preparation of feasibility studies. Market REFF to local FIs early on. Conduct periodic workshops and disseminate early successes to encourage competitive co- financing. Negative outcome of feasibility studies Well prepared RER assessments. Modest Share risks among all project participants Lack of funding for full project scope developed Active soliciting of project finance. Substantial under the feasibility studies REFF does not operate effectively, does not Technical assistance support to the NPAF ED, Modest disburse funds especially with regard to providing additional internal capacity for RE investments. Lessons learned from numerous relevant projects (many in ECA) will be taken into account. Ensure adequate deal flow through project preparation activities. Overall Risk Rating Modest Risk ratings: High Risk (H) Greater than 75% probability that the outcome/result will not be achieved Substantial Risk (S) Probability of 50 ­ 75% that the outcome/result will not be achieved Modest Risk (M) Probability of 25 - 50 % that the outcome/result will not be achieved Low or Negligible Risk (N) Probability of less than 25% that the outcome/result will not be achieved 7. Grant conditions and covenants Conditions for effectiveness: Signing of the Agency Agreement between MEDT, the Ministry of Finance and NPAF ED, satisfactory to the Bank, has been duly executed. Conditions for disbursement through REFF: · NPAF will maintain a financial management system acceptable to the Bank. 11 · Approval by the NPAF Supervisory Board of the Operational Manual, adapted to the implementation of the RREP. NPAF will maintain a financial management system acceptable to the Bank. Project financial statements, SOEs and Special Account will be audited by independent auditors acceptable to the Bank and on terms of reference acceptable to the Bank. The annual audited statements and audit report will be provided to the Bank within six months of the end of each fiscal year. D. APPRAISAL SUMMARY 1. Economic and financial analyses Economic Analysis. Economic analysis of each subproject will provide the primary basis for selection of projects. Primary renewable energy project outputs will typically include heat supply for DH systems and/or electricity. Economic benefits will include the avoided cost of baseline supplies of the same outputs as well as quantified values for reductions of CO2, SO2, NOx, and PM10 emissions compared to baseline supplies. Baselines will be identified through determination of least-cost supplies with appropriate consideration of both operating margins and build margins. Subprojects selected for RREP support will be limited to those that demonstrate positive net economic benefits on this basis. Proper quantification of environmental benefits can be difficult and subject to controversy. To provide a consistent basis for subproject selection and to expedite project evaluations, the RREP will establish standard estimates and methods for evaluation of these benefits that reasonably reflect established values that are currently being used. The RREP will not have a detailed economic analysis ex ante. However, a pro-forma economic model of a renewable energy project will be developed to illustrate the interplay of local and global environmental benefits with traditional economic benefits. This model will also provide the justification for GEF support in terms of barrier removal and global benefits from reduced CO2 emissions at a specified incremental cost. All subprojects will be screened according to the criteria set out by the NPAF Supervisory Board and acceptable to the World Bank. Details of the economic justification for individual subprojects according to GEF criteria are contained in Annex 9 and the NPAF Operational Manual. Consistent with GEF operational policy, the requested GEF funds would only be used to finance the incremental costs on barrier removal, financial support and technical assistance in project preparation and implementation to project developers. For GEF purpose, the preparation of the project has included an incremental cost analysis. This analysis (Annex 15) provides a baseline and the incremental cost of achieving global benefits by using renewable energy sources. Financial Analysis. In order to gauge the market potential for renewable projects that can be supported by the REFF in the early years, a preliminary assessment was carried out and an indicative project portfolio was developed based on technical and financial feasibility evaluation. The key factor determining profitability prospects are the parameters of the underlying heat/power purchase agreements and level of tariff agreed with a consumer or the regulator. The actual purchase price for renewable energy will normally be linked to the market index for the fossil fuels that are being replaced, i.e., the higher the cost for the conventional energy sources that serve as a market reference, the more profitable the renewable energy investment will become. Other tariff schemes where preferential purchase is obligatory and that have a premium attached to them also influence the financial viability of the project. 12 All projects will be financed with private or municipal equity, GEF funds, commercial loans and donor contributions from international, bilateral and/or local sources. Financial due diligence of subprojects will include, among other requirements, creditworthiness of the developer (including track record); business plan (technical and financial pro forma); permitting and licensing, including status of privileged producer; heat- and/or power sales contract, rules of operation in the market. Fiscal Impact. The project has no fiscal impact for the Government as there is no borrowing by the Government and the investment subprojects are financed mainly on a commercial basis. Taxation will be applied as a share of the gross income, or as a tax on the net profit. 2. Technical The project will employ proven, commercially viable RE equipment and technologies. To ensure that renewable energy projects are technically sound and commercially viable, a technical and economic due diligence review will be conducted according to the NPAF Operational Manual. 3. Fiduciary (a) Country Issues The last Country Financial Accountability Assessment (CFAA) of the Russian Federation was conducted in January 2001. Pending the graduation of the Government's financial management and procurement capacity and infrastructure to a level of performance that would allow the World Bank to rely on those systems, the CFAA recommended that fiduciary functions (disbursement, procurement, accounting and reporting, and operational reviews) continue to be outsourced to specialized agencies. Such agencies present the advantage of using skilled consultants and reliable, suitable, and stand-alone computerized information systems. Based on the Bank's current audit policy, the CFAA recommends maintaining current arrangements for the annual audit of Bank-assisted projects, which involve audit by private sector audit firms competitively appointed among those pre-selected by the Bank, in consultation with the MOF. (b) Funds Flow IBRD funds will be transferred by direct payment and Special Account (SA) replenishments. Letters of credit will also be used. There will be no FMR-based disbursements. The SA will be opened in a commercial bank acceptable to the Bank and to the Ministry of Finance. (c) Staffing NPAF ED financial department staffing is described in the NPAF Operating Manual. At present, key financial positions are occupied (all people with experience in Bank-financed projects), and additional financial staff for the Project (if required) will be hired upon signing of the Agency Agreement. (d) Accounting Policies and Procedures NPAF ED maintains its accounting books and records for the Bank-financed Projects using a computerized accounting system. It allows to prepare the records in accordance with Russian statutory reporting rules (for NPAF) and on cash basis (for Bank-financed projects). NPAF ED has a clear formal set of appropriate accounting procedures and internal controls including authorization and segregation of duties, described in the accounting manual, which has been reviewed by the Bank and found acceptable. 13 The NPAF had established criteria and procedures for the selection, design, appraisal, and supervision of investment projects, outlined in its Operating Instructions. NPAF is not subject to Russian taxation, including VAT and income and/or profit tax on interest income, nor is it subject to banking regulations. (e) Internal Audit No internal audit function. (f) External Audit The audit of the project will be conducted by independent private auditors acceptable to the Bank, on standard terms of reference acceptable to the Bank, and procured by NPAF ED in accordance with the Bank procurement guidelines, utilizing the right of prior review by the Bank. The audited financial statements will be sent to the Bank within six months of the end of the Government's fiscal year. The cost of the audit will be financed from the proceeds of the grant. The first and final audits can cover up to 18 months. The contract for the audit awarded during the first year of project implementation and thereafter extended from year-to-year with the same auditor, subject to satisfactory performance. (g) Reporting and Monitoring NPAF ED will be responsible for producing all financial reports for the Bank. NPAF ED has demonstrated in other projects that it is able to report on project expenditures accurately and on time. (h) Disbursement Arrangements NPAF ED will be solely responsible for all disbursement aspects, including operation of the Special Account, preparation and submission to the World Bank of claims for Special Account replenishment, and claims for disbursements of loan proceeds directly from the World Bank. Supporting documentation for SOEs, including completion reports and certificates, will be retained by NPAF ED and made available to the Bank during project supervision. NPAF ED will also be solely responsible for operation of the Project Account in Rubles. (i) Special Account A Special Account will be opened in a commercial bank acceptable to the Bank, and managed by NPAF ED. Payments made from the Special Account are to cover eligible expenditures under the Project. Applications for replenishment will be supported by the necessary documentation, the Special Account bank statement, and a reconciliation of the bank statement. (j) Supervision Plan Bank-accredited Moscow-based Financial Management Specialist will carry out an FM supervision of the project at least once a year. (k) Procurement The NPAF ED will, with agreement from the Bank, use its own staff with significant experience in procurement and disbursement to supervise utilization of the Bank's funds by final recipients under the EMP. 14 This approach will significantly reduce both the costs to NPAF ED and the risks associated with problems with Bank procurement and disbursement procedures. 4. Social (Stakeholder involvement) The primary impact of the project on the population of participating regions shall be the availability and use of a long term, competitive, local energy source which will help to keep heat prices in line or below the prices resulting from fossil fuel based conventional technology. Secondary social impacts in the form of improved local environment are also expected. Appropriate stakeholder participation in project preparation, implementation, monitoring and evaluation is ensured through the application of World Bank guidelines for consultation and disclosure. 5. Environment The project will facilitate improved and transparent management of natural resources through increased use of clean renewable energy (and the decreased use of the polluting and depleting fossil fuels). It directly reduces vulnerability of the poor to environmental change through the reduction of CO2, which mitigates climate change. Furthermore, the subprojects contribute towards protecting the health of the city population from pollution by reducing the emissions of such local pollutants as NOx, SO2 and PM10. Monitoring of the above environmental benefits will be achieved through the monitoring of the associated parameters: reductions in the emissions of CO2, NOx, SO2 and PM10. 6. Safeguard policies The environmental screening category will be FI (Financial Intermediary). In an FI project, specific subprojects are identified during implementation and the responsibility for environmental due diligence lies with the FI, in this case the NPAF. Subprojects will have to follow the environmental safeguards adopted by the NPAF and agreed on by the World Bank. The NPAF OI include an Environmental Chapter describing the process for environmental assessment of the subprojects. All subprojects are expected to trigger at least the Environmental Assessment (OP/BP/GP 4.01) safeguard policy. The NPAF will finance only subprojects that have completed a comprehensive feasibility study prepared by the sponsors according to the NPAF guidelines. The studies would indicate, inter alia: (i) project design; (ii) equipment specifications; (iii) engineering cost estimates; (iv) implementation arrangements; (v) the proposed financing plan; (vi) detailed financial projections with appropriate sensitivity analyses; (vii) the proposed legal structure of the borrowing entity, and (viii) an environmental impact assessment. Safeguard policy compliance assessment of subprojects will involve a social and environmental assessment with all its implications. This assessment will review the project sponsors' capacity to implement the safeguard policy recommendations and, if the capacity is insufficient, propose measures to bring this capacity to the required level. Thus, for all projects Integrated Safeguards Data Sheets (ISDSs) as well as Environmental Management Plans (EMPs) will be prepared by the project sponsors and will be reviewed in the Bank. 15 Safeguard Policies Triggered Yes No TBD Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Cultural Property (OPN 11.03) X Indigenous Peoples (OD 4.20) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X Responsibility for the proper execution of subprojects will be with the NPAF ED. The Bank requires that each subproject is screened and that recipients carry out an appropriate Environmental Impact Assessment (EIA). After completion of the feasibility studies, the NPAF ED will verify that the projects meet the environmental requirements of relevant national and local legislation and are consistent with the environmental policies of the Bank. 7. Policy Exceptions and Readiness The renewable energy projects identified in the Russian Federation require no Bank policy exceptions. ISSUES STATUS Fiduciary An Agency Agreement will stipulate FMS and Procurement capabilities of the NPAF with regard to investment funds administration and procurement. Disclosure Requirements All Environmental and Social Assessments will be done during project preparation. Monitoring & Evaluation M&E indicators will be incorporated into subprojects design and implementation arrangements. Technical NPAF OI will be adapted to the implementation of the RREP, and the changes will be agreed with the World Bank and approved by the NPAF Supervisory Board. 16 ANNEX 1: Country and sector background RUSSIA - RENEWABLE ENERGY PROGRAM Energy Sector Russia is the fourth largest generator of electricity in the world, after the US, China, and Japan. During the 1990's the consumption and generation of electricity fell dramatically. In fact, total generation is not expected to reach 1990 levels until 2010. The decrease in production can be attributed to a number of factors, including decreased demand due to the economic downturn, plants being retired and customers being disconnected from the system for non-payment. Despite ongoing restructuring efforts to privatize the industry, the energy sector faces many of the same challenges as other Eastern European countries, including uneconomic tariff structures and aging electric systems. Revision of the subsidy system of municipal services in ways that increase incentives for service providers to make investments in increased efficiency and in the use of local energy resources is also underway. Renewable Energy Potential There is a large potential for renewable energy development in Russia, in particular, due to countrywide biomass, wind, solar, hydro and geothermal resources explored and assessed in many regions. The following are important positive factors for utilizing Russia's renewable energy potential: · Availability of qualified specialists, including those that have practical experience in project preparation, construction and operation of heat and electricity supply systems; · Necessity of modernization and reconstruction of housing and communal services facilities in most cities of Russia and the possibility of increasing economic effectiveness of heat and electricity supply in many of them by increased utilization of renewable energy; · Rise of world and domestic prices of traditional fuel types increases economic efficiency of local energy sources. The potential for a RE project portfolio was confirmed at the preparatory stage of RREP. About 50 investment projects with total investment costs of more than US$270 million were identified (see table 1). Table 1. Investment projects identified in priority regions at the preparatory stage Region and types of projects Number of projects identified Project costs (US$ million) 1. North-West region ( Karelia Republic, Komi Republic, Arkhangelsk oblast): 22 72.0 Biomass utilization for heat generation 2. Southern region (Adygeya, Dagestan, Total 23 184.1 Ingushetia, Kabardino-Balkaria, Of which Karachaevo-Cherkessia, North Osetia, -Mini hydro 7 Astrakhan, Krasnodar, Rostov, Stavropol): -Solar 4 RER utilization for heat and power generation -Wind 3 -Biomass 2 -Biogas 1 17 -Hybrid systems 6 3. Baikal territory (Republic Buryatia): RER utilization for heat and power 5 22.0 generation Total for three priority regions 50 278.1 Despite the large potential of RER in Russia, currently not more than 3.5% of the total primary energy supply is based on renewable energy, of which two-thirds are large hydro and one-third all other forms. Renewable energy (without large hydro) accounts for only 0.5% of total electricity generation. Heat based on renewables amounts to about 4% of the total heat generation in Russia. This relatively low level of RER utilization is caused, among other reasons, by such factors as: · The country's rich fossil fuel reserves, which give access to cheap energy in large areas around the sources of fossil fuel; · An economy dominated by heavy industry that is best served by centralized power systems, and · A distorting subsidy system that not only conceals the external costs of fossil fuel utilization associated with environmental damages but, especially in the residential heating sector, breaks the link between consumer prices and production costs. Barriers for RE development The development of RE in Russia is impeded by the following barriers: Financial Barriers: Lack of domestic and foreign investment capital: Domestic companies have limited own resources and insufficient access to project financing resources. Foreign sources of capital are discouraged partly by the perceived risky business climate and unstable political and economic conditions and partly by the lack of strong legal institutions and contract enforcement; Lack of longer-term affordable debt financing: Domestic commercial banks are unwilling to lend because investment returns in the longer-term are risky (fuel price volatility, etc.). Financial institutions are unfamiliar with analyzing the financial aspects of RE investments; High project preparation and transaction costs: Project preparation costs accrue prior to ­ and without the assurance of ­ obtaining financing for the actual implementation of the project. Lack of demonstration projects increase transaction costs associated with project preparation; High cost of special equipment: The equipment needed for renewable energy utilization, often determined by small scale production, is costly even when commercially available; Absence of federal financing mechanisms (such as environmental funds, etc.): If there are such mechanisms, their use is limited by unaffordable co-financing requirements; Uncompetitiveness due to low fossil fuel energy prices: The currently existing, distorting subsidy system does not reflect the external costs of fossil fuel utilization associated with environmental damages and, especially in the residential heating sector, breaks the link between consumer prices and production costs. Information Barriers: Lack of information about technologies and opportunities: Lack of information on available technologies, such as conversion of existing large fossil fuel fired boilers to biomass use, knowledge of large-scale biomass co-generation systems, the establishment and operation of modern double-circuit geothermal heat supply systems and binary low-boiling geothermal power plants; 18 Lack of information about benefits: Lack of awareness about the potential benefits (financial, social and environmental) of renewable utilization, profitability of investments, lack of credible case studies; Lack of information for cost/benefit analysis: Lack of heat meters in residential and service buildings and lack of historical heat consumption data for the preparation of baselines increase the costs of preparing credible projections about energy savings and investment and operational costs of RE investments; Lack of reliable information about Russia's companies: Information about financial situation (earnings, profits, and debts) is often difficult to obtain. This increases transaction costs (outside independent auditor) and risks (again, costs) for banks considering loans, or potential joint-venture partners considering investments, and Lack of high quality information about renewable potential: Only rough estimates exist on the potentially exploitable renewable resources. Institutional Barriers Lack of legislative support: Insufficient federal/regional support in the forms of funding mechanisms, electricity buyback policy, preferential taxation, etc.; this is compounded by the fact that fossil fuels are heavily subsidized directly as well as indirectly; Insufficient enforcement of environmental regulations: Environmental regulations (emission standards) have become stricter over the past decade, enforcement (pollution fees, penalties) is still week though, and Inflexibility of municipalities: Local administrations are unwilling to make funding decisions for multi- year projects (long-term benefits are hard to monetize for shorter prospective lifetime of local administrations). Ownership Barriers Mismatch between municipal ownership of district-heating systems and regulation of tariffs by federal/regional authorities. No price signals for residential sector and, therefore, lack of economic interest and capability of municipalities to participate in investment projects on development of renewable energy. Insufficient private sector presence in the power and heat generation sector. Implementation Capacity Barriers Undeveloped local project planning and implementing capacity; human resources only for routine operation, no high level human/technical resources, no energy managers; lack of capacity and guidelines for preparing feasibility studies, business plans and "bankable" project proposals. Policy on climate change mitigation In the Russian Federation issues related to emission reduction of five out of the six GHGs controlled by the Kyoto Protocol are regulated by environmental legislations. Russian legislation does not provide for direct regulation of CO2 emissions. Instruments that primarily declare that GHG emissions should be reduced and their removal increased are indirectly present in different laws. These laws include the federal laws on environmental protection and energy conservation. GHG emission estimates for 1999-2004 presented in the Fourth National Communication of the Russian Federation demonstrate that GHG emissions in 2004 reached 70.1% of the base year's level. An assessment of the possibility to meet Russia's quantified commitments during 2008-2012 based on development forecasts for the economy in general and for its specific industries demonstrates that the actual GHG emission level in the Russian Federation will be significantly less during the commitment period than the assigned amount (i.e. the 1990 emission level). 19 Bank involvement In 1998, the World Bank started an Energy-Environment Review of Russia, which was completed in 2000. In this work, a number of Russian institutions participated. Key results of the study showed considerable renewable energy resources in the Northwestern part, the Southern part, the Far East, and the Baikal area. From the Review it also became clear that the level of utilization does not meet the requirements of the country and the regions mentioned above. Renewable utilization in Russia on a national level is less than 1%, compared to the 8% level of utilization in the European Union. Among the immediate follow up work of this review were two project proposals for a Karelia ­ Biomass Project and Promotion of Renewable Energy Development in South Russia. Both projects were envisaged to be supported by the Global Environment Facility (GEF). The Russian GEF Focal Point also endorsed both projects. The GEF evaluated the proposals and advised the project team to place them in a more comprehensive framework to better meet the key GEF objectives of removing barriers to the utilization of environmentally friendly fuels and to the improvement of energy efficiency. Based on the recommendations of GEF after the evaluation of the previous proposals, the concept of a program called Russia ­ Renewable Energy Program (RREP) has been laid out. The concept and objectives of the RREP support the Bank's strategy to assist the Russian Federation in the sustainable development of its energy resources. The Russia FY03-05 CAS intended, inter alia, to assist Russia to develop the capacity to make effective use of, and benefit from global financing mechanisms related to climate change, such as GEF and the Prototype Carbon Fund. The CAS explicitly mentions RREP: "A possible GEF/PCF renewable energy facility is also under discussion." One of the priorities of recently developed the Country Partnership Strategy ( CPS) is to support Russia's increasing global role, and to assist the country in fulfilling its global commitments. CPS refferes to TA operations on the introduction of low-carbon technologies and climate change mitigation. Another priority area of cooperation between the Government and the Bank are diverse activities at the sub- national level. RREP design, with a focus on proactive participation of regions, is fully consistent with this strategic priority. 20 ANNEX 2: Major related projects financed by the Bank and/or other agencies RUSSIA - RENEWABLE ENERGY PROGRAM Latest Supervision (PSR) Ratings Sector Issue Project (Bank-financed projects only) Bank-financed Implementation Development Progress (IP) Objective (DO) Improve business environment and enterprise support Russia Environmental Moderately Moderately through creation and strengthening of a financial Management Project Satisfactory Satisfactory mechanism (NPAF); incorporation of environmental and natural resources management concerns into the economic, social and political adjustment process. Alleviation of the financial burden on municipal Municipal Heating Satisfactory Satisfactory governments associated with the supply of district Project heating to the local population by (i) improving the operating efficiency of district heating systems through investments; (ii) promoting sound cost recovery policies and commercial practices; and (iii) supporting government efforts to improve the cost- effectiveness of subsidy programs. Need for the electricity sector reform aimed to Electricity Sector Reform Satisfactory Satisfactory introduction of market relations and unbundling of Support Project potentially competitive parts of the generation and distribution systems from RAO UES. Development of a sustainable financing capacity for IFC/GEF Russia: Active Active EE and RE projects in the Russian private sector Sustainable Energy through the integration of credit lines, partial Finance Program guarantees, and technical assistance to financial institutions at different stages of market development. Lack of the necessary institutional procedures and Geothermal Energy Pipeline Pipeline capacity, supporting regulations, and a financing Development Project for mechanism to provide commercial long-term the ECA region financing for renewable energy projects. (GeoFund) Lack of legislative and normative regulation on wind IFC/GEF medium-sized Completed Completed power generation and supply project on Developing the Legal and Regulatory Framework for Wind Power in Russia. Financed by other development agencies 21 Low demand, awareness and capacity for energy UNDP/GEF project on Completed efficiency services in the municipal sector; Risk Capacity Building to barriers in the financial markets inhibiting Reduce Key Barriers to commercial bank participation in energy efficiency Energy Efficiency in project financing. Russian Residential Buildings and Heating Systems Institutional and financial barriers to the UNDP/GEF project on n/a implementation and financing of coal mine methane Removing Barriers to recovery and utilization projects in Russia. As one of Coal Mine Methane the key mechanisms in that regard, the project will Recovery and Utilization support the establishment of a specialized ESCO-type "Coal Mine Methane Recovery and Utilization Company" Need for modernization of current system of Reliable, Energy n/a relationships in covering municipal utility costs. The Efficient Municipal project creates new system of billing and paying for Utility Services municipal utility services. The project drew lessons learned from numerous projects and programs on renewables and energy efficiency, which have been implemented by the World Bank, GEF and others. Examples of such projects include: · Armenia ­ Renewable Energy Project; · China ­ Renewable Energy Scale-up Program; · Croatia ­ Renewable Energy Resources Project; · Macedonia ­ Sustainable Energy Project; · Turkey ­ Renewable Energy Project; · Poland ­ Zakopane Geothermal Project. The proposed project and the GeoFund Program offer complementary support for Russia's renewable energy program. Both projects will use similar approaches to barrier removal and creation of financing mechanisms. The team preparing both projects is in close consultations and will look for opportunities for cooperation during the implementation of the projects. 22 ANNEX 3: Results Framework and Monitoring RUSSIA - RENEWABLE ENERGY PROGRAM Results Framework Project Development Program Outcome Indicators Use of Outcome Information Objectives The project development Introduction of an enabling regulatory Outcome Indicators will provide objective is to facilitate a and incentive framework for RE based the Recipient, the World Bank, sustainable market for renewable power and heat production and the GEF with basic energy in the Russian Federation Total number of renewable energy information on: 1) the by supporting the development of projects reaching financial closure as a achievement of an enabling enabling policies and institutional result of REFF framework for RE investments, capacity, and market oriented and 2) whether the level of financing mechanisms. New RE power generation capacity financing for RE projects is installed (MWe) increasing. New RE heat generation capacity Unsatisfactory progress on installed (MWt) outcome indicators may signal Total amount of electricity and heat shortcomings in TA for removing additionally generated (MWh) from new barriers and reducing investment RE installations costs and capacity building activities, or indicate change in market conditions leading to the need for a revision of existing regulations and tariffs. Global Environment Objective Reduce GHG emissions on a Reduction of CO2 emissions at national Demonstrate that CO2 reductions continuous basis and subproject levels. can be achieved by creating an enabling environment for RER Intermediate Results Results Indicators for each component Use of Results Monitoring One per component Component One: Improved laws, regulations, strategies and Slow enactment of laws, Increased in-country knowledge action plans on RER introduced. regulations and strategies may and improved framework and Feed-in tariffs for RE and of a "Green indicate lack of support from market for RE development Certificate" established stakeholders and require Streamlined permitting procedures additional consultations with established policy-makers and regulators. Private Sector companies are Determine whether the strengthened. component is making progress towards establishing an enabling Number of energy-environmental reviews framework for RER of natural reserves and national parks, development. feasibility studies and technical design Progress in implementation of Implementation of replicable innovative reviews and feasibility studies models of policy , regulatory, or financial will indicate a feasibility of RE frameworks introduction in natural reserves Creation of an interactive web portal on and national parks. RER Progress in implementing of Establishment of a Network of National innovative models will indicate 23 Biomass Centers which approach needs further improvements to legislation and regulations. Component Two: Number of feasibility studies supported by Determine whether the REFF is the REFF operating effectively and meeting Increased investment in RE expectations for financing deals Volume of additional co-financing to projects including the attraction of PPW and REFF in pilot regions leveraged finance. Total financing of RE by REFF in pilot Slow disbursement of funds may regions indicate either weak capacity of REFF to identify viable projects and leverage additional funds for project preparation purposes. 24 Arrangements for results monitoring Data Collection and Reporting Outcome Indicators Baseline Frequency Data Collection Responsibility (annual) YR1 YR2 YR3 YR4 YR5 and Reports Instrum. for Collection Introduction of an Some Substantia PMU reports, enabling regulatory and evidence l evidence midterm review, incentive framework for n/a that that Annual completion report, PMU RE framework framewor technical and social in place k in place surveys RER projects reaching PMU reports, financial closure as a n/a 1 3 6 8 10 Annual midterm review, PMU result of REEP (number) completion report Power generation capacity PMU reports, installed from new RE n/a - 4 12 25 42.1 Annual midterm review, PMU (MWe) (cumulative) completion report Electricity generated from PMU reports, new RE installations n/a _ 10800 32400 67500 113670 Annual midterm review, PMU MWh(e)/year completion report Heat generation capacity PMU reports, installed from new RE n/a - 6 20 35.0 66.0 Annual midterm review, PMU (MWt) (cumulative) completion report Heat generated from new PMU reports, RE installations MWh(t) n/a _ 23820 79400 138950 262000 Annual midterm review, PMU completion report Reduction of CO2 PMU reports, emissions (th t/y) n/a - 22.7 72.1 137 248 Annual midterm review, PMU cumulative completion report Results Indicators for Baseline Frequency Data Collection Responsibility Each Component (annual) YR1 YR2 YR3 YR4 YR5 and Reports Instrum. for Collection Component One - Market Framework Study of Laws, regulations, economic Strategies The relevant The strategies and action plans feasibility and action packages on packages are prepared and n/a of plans are laws and are - Annual PMU reports PMU introduced different prepared regulations introduced RER are prepared 25 Conferences and workshops for politicians and decision-makers 2 4 5 6 8 Annual PMU reports PMU (cumulative) 43 Energy-environmental Energy- 5 10 reviews, feasibility studies environme feasibility feasibility in natural reserves and n/a ntal studies studies Annual Consultant reports MNR national parks reviews prepared prepared completed Implementation of replicable innovative models of policy, n/a 1 2 2 2 - Annual REEP Secretariat PMU regulatory or financial reports frameworks Component Two ­ Investment PPW support to development of feasibility - 500,000 1,500,000 1,500,000 500,000 - Annual PMU reports PMU studies pipeline (US$) Volume of Additional Co- financing (US$) to PPW - 350,000 1,700,000 3,000,000 4,400,000 4,000,000 Annual PMU reports PMU and REFF in pilot regions Total financing of RE projects supported by Administrations of REFF in pilot regions - 2,500,000 4,000,000 6,000,000 7,000,000 8,000,000 Annual pilot regions PMU (US$) reports 26 ANNEX 4: Detailed project description RUSSIA - RENEWABLE ENERGY PROGRAM The project consists of two main components: (A) TA for Policy Development, Institutional Strengthening and Capacity Building, (B) Support to the Establishment of a Renewable Energy Financial Facility. A. Technical Assistance for Policy Development and Institutional Strengthening and Capacity Building: US$5.0 million GEF, US$14.2 million counterpart funds. This component will provide technical assistance in policy development, institutional strengthening and capacity building. It consists of six subcomponents: A1. Development of Renewable Energy Policy subcomponent (US$0.5 million GEF, US$0.9 million counterpart funds): i) Economic studies on different RER in different regions of Russia based on a comparison of RER with tradition fuels, taking into account the full costs for traditional fuel use; ii) preparation of national and regional strategies and action plans on the use of biomass, wind, solar and other renewable energy resources; iii) provision of policy advice to federal ministries and regional administrations in the fields of energy policy and institutional support of renewable energy development, improvement of legislation and regulatory and incentive framework; iv) coordination of preparation and implementation of renewable energy development projects and tasks of federal and regional programs, and v) Conferences and workshops for politicians and decision-makers. Government co-financing from federal and regional budget will cover at least US$1.5 million of component costs. These tasks and figures are included in the Draft Federal Target Program "Increase of Efficiency in Energy-Supply in the Russian Federation for the period 2008-2010 ", which is currently under preparation. The subcomponent will be supported by upcoming TACIS project "Renewable energy policy and the rehabilitation of small scale hydropower plants in the Russian Federation", with the budget 2.0 million EUR. The World Bank and TACIS intends to sign a document stipulating the relations between two operations on REP development in Russia. A2. Market Infrastructure Development subcomponent (US$0.5 million GEF, US$2.0 million counterpart funds) will include: i) support to the Government in designing and introducing feed-in tariffs and a "green certificates" system. Introduction of feed-in tariffs for electricity generators and creation of a "green certificates" system are required for the development of the renewable energy market in Russia. The proposed technical assistance would provide additional resources to MIE to design tariffs for different renewable energy resources. ii) support to regional authorities in regulation of heat prices as they related to renewable energy projects. The current practice of heat price regulation does not provide needed incentives for investments in biomass and other RER in municipal district heating systems. This task will support the development of regulations and procedures stimulating the switch from fossil fuels to biomass resources in district heating systems. iii) support to development and adopting of technical regulations and standards for RE installations. The absence of technical regulations and standards for RE installations in Russia is one of the most important barriers for a RE market development. The activity will support the development, adoption and harmonization of Russia's technical regulations and standards with ISO standards. The work on standards and certification will be applied to hybrid systems involving PV, wind, hydro, geothermal and/or diesel generators. iv) Support the development of a biomass fuel market. There is no functioning market for collection, distribution and sale of biomass for fuel. This task will support market participants in developing 27 pricing guidelines, standard contracts and other necessary elements of a functioning biomass market. Supporting studies on the comparison of different biomass technology will be undertaken. v) support to various governmental entities on establishing streamlined permitting procedures, including providing fair and competitive grid access to renewable energy producers. Sub-laws and detailed instructions for interconnection with grids, licensing criteria and procedures for obtaining land use rights and permits for projects are still to be developed. TA funds will be used to hire experienced consultants in these matters. vi) support to and strengthening of private sector companies with regard to RER development. These activities would consist of support to the introduction of ESCO-models and to the development of business planning on RER development by private companies. Training courses on the mechanisms of public-private partnerships in RER development will be arranged for governmental officials and entrepreneurs. A3. Renewable Energy Program in Natural Reserves, National Parks, and in Special Tourist- Recreational Economic Zones (US$1.9 million GEF, US$5.8 million counterpart funds). This subcomponent will demonstrate an innovative approach to the utilization of renewable energy for biodiversity conservation and other essential services in natural reserves, national parks and other specially protected areas. The Russian Federation possesses a unique system of state natural reserves and national parks, which cover 1.98 % of the territory of Russia. Alternative, environmentally sound energy sources at these sites which are located in remote regions will allow the reserves to: i) reduce GHG emissions generated by traditionally consumed thermal and electric power (diesel fuel, gas and petroleum based), ii) ensure uninterrupted operation of computers and communication equipment which is an important condition for effective protection of reserved territories, and iii) essentially improve the living conditions of employees in settlements and on guard posts and on scientific bases during field works and inspection. Governmental co-financing from the federal budget will cover at least US$6.1 million. These figures are included in the sector program implemented by the MNR. The subcomponent will support the implementation of the following activities: · Energy-environmental reviews of selected natural reserves and national parks, including renewable resources assessment and data base creation; · Feasibility studies and technical design documentation for renewable energy introduction in at least10 reserves, · Development of model design documentation packages for construction of renewable energy installations in reserves. The list of 34 natural reserves and 9 national parks preliminarily selected at the preparatory stage is presented in Attachment 1 of this Annex. The subcomponent will also support the preparation of feasibility studies on RER development in seven Special Economic Zones, established by a Governmental resolution of February 3, 2007. These special economic zones are created in the following regions: Republic of Buryatia, Republic Gornyi Altai, Altai krai, Krasnodar krai, Stavropol krai, Irkutsk oblast, and Kaliningrad oblast. The Federal Agency on Special Economic Zones and MEDT will be responsible for commissioning this study and initiating RE project development in these zones. 28 A4. Partnership on Innovative Financing Mechanisms and Regulations (US$0.5 million GEF, US$0.3 million donor contribution from REEEP, US$1.3 million counterpart funds). This subcomponent will provide additional financial resources to extend the REEEP program in Russia, and in particular, to implement projects competitively selected in accordance with its procedures and criteria. REEEP is a Public-Private partnership and was launched by the United Kingdom along with other partners at the Johannesburg World Summit on Sustainable Development in August 2002. Its activities are focused on capturing the experiences, needs, ideas and action of REEEP partners that are working to increase investment through innovative approaches to financing and project development. REEEP indicated its intention to allocate at least US$300,000 for the support of renewable energy development in Russia in 2007-2011. The partnership of the WB/GEF with REEEP will allow supporting the implementation of RREP through the financing of additional 5-6 projects selected by REEEP. The Russian Environmental Center, as a host of the REEEP Secretariat in Russia and FSU, will administer the execution of this subcomponent of RREP. A5. Knowledge and information collection and dissemination (US$0.8 million GEF, US$3.1 million counterpart funds). The subcomponent will support the implementation of the following activities: · Creation and maintenance of an interactive web-portal on renewable energy, which , will support: i) collection, assessment and updating of information about renewable energy resources in Russia, ii) generation of an up-to-date database containing current technologies and engineering knowledge on renewable energy utilization, iii) collection and dissemination of international and domestic project experience in the field of renewable energies. Federal State Enterprise "Rosinformresource" suggested hosting the web-portal. Rosinformresource could use its network of 69 regional offices for the implementation of this task; · Establishment of a Network of biomass centers to provide advisory services to governmental authorities (on federal and regional level) on different aspects of renewable project development: resource assessment, technology selection and economic comparison, environmental assessment, business planning and training. It will also facilitate knowledge and best practice transfer on biomass energy projects. A focal point for the National Biomass Network will be identified during project start up; · Support the implementation of information-educational projects selected by the Federal Agency on Science and Innovations for inclusion in the Federal Targeted Program "Studies and Research under the Priority Directions of Science and Engineering for the period 2007-2009". These projects will facilitate long-term capacity building in Russia through supporting the set-up of renewable energy educational and training courses, primarily focused on biomass, wind and solar energy utilization. Universities will be selected based on their track record and reputation for quality, on the relevance of the courses they propose, and on cost sharing arrangements. Support will also be provided to selected publications on renewable energy. Governmental co-financing of this component from several Federal Target Programs will be granted in an amount of US$3.1 million or more. A6. Program Management, Monitoring, and Evaluation (US$0.8 million GEF, US$0.5 million counterpart fund). Program management will include day-to-day procurement, financial and contract administration for all tasks carried out under the RREP. This subcomponent will ensure that all activities contribute to the Program's objectives and where necessary corrections and adjustments are made. This would require careful monitoring and evaluation of results by experienced staff. 29 B. The long-term Renewable Energy Financial Facility (REFF) (US$5.0 million GEF, US$52.6 million counterpart funds) The long-term Renewable Energy Financial Facility (REFF) will be established to help overcome financial and institutional barriers for renewable energy development. The facility will consist of three instruments: Project Preparation Window for on-grid electricity generation subprojects, Revolving Soft Loans Window, and Revolving RER Facilities in pilot regions. A long list of projects to be co-funded by REFF has been identified during the preparatory stage. B1. Project Preparation Window for on-grid electricity generation subprojects (US$1.0 million GEF, US$ 4.6 million investment project sponsors) will focus on the development of a strong pipeline of mini-hydro and wind subprojects that can provide deal flow for commercial banks and investors. . JSC "HydroOGK", which is a daughter company of RAO UESR, indicated an interest to cooperate with the GEF on creating and operating of such mechanism. Grant support will be provided to subproject developers and sponsors in the form of straight grants through cost sharing of feasibility studies and other project preparation activities. As a general rule, support will be provided on a cost-sharing basis, with a 50% maximum coverage from GEF funds. GEF funds could also be used for capitalizing a special fund to support the preparation of on-grid renewable projects Contingent grants could also be provided under the PPW to support the preparation of bankable subprojects in cases where significant technical and other project risks are envisioned. In the event that the subproject supported by PPW reaches financial closure, the contingent grant must be repaid out of the proceeds of the subproject. The grant then becomes an unsecured interest-free loan. In the event that the feasibility studies and related work conducted with PPW funding demonstrate that the subproject is not economically feasible and all efforts to seek financing for the subproject are to be terminated, the contingent grant can be forgiven. The PPW is not intended to support basic research and/or technological or product development for which there is no clearly identified market or buyer. Rather, it will support the sponsor to pay for consultant services and cover laboratory analysis and data collection that are vital to securing investor participation and debt financing for a subproject. B2. Revolving Soft Loan Window (US$ 1. 0 million GEF, US$ 21.0 million is NPAF lending resources, and US$ 11.0 million are funds of investment projects sponsors ) will constitute a financial mechanism for provision of selective financial support to companies implementing renewable energy development projects. The Revolving Soft Loan Window (RSLW) will be based on the institutional framework and financial resources of the National Pollution Abatement Facility (NPAF), which was established as a revolving fund by the Government of the Russian Federation with support of the World Bank and the Government of the Switzerland in 1995 . The NPAF's mission is funding of financially viable, high priority resource recovery/pollution abatement projects. NPAF Executive Directorate experienced in project preparation, appraisal and supervision in accordance with international standards. It has a good record of quality of its services in project appraisal and preparation, which was confirmed by the World Bank's supervision missions. The demand for environmental investments continues to be very high. Many enterprises expressed their willingness to undertake energy efficiency and pollution abatement projects assuming that financial conditions will be more favorable. Government representatives stressed that implementation of NPAF projects, besides important environmental improvements, leads to the modernization of core industrial sectors which is one of the government strategic priorities. In light of the above the MOEDT and MOF suggested to the World Bank to extend Environmental Management Project and to include renewable 30 energy development as one of three main project objectives of NPAF. With substantial governmental support NPAF is going to become a long-term financial mechanism even after completion of the Bank's project. GEF support (US$ 1.0 million) will allow NPAF to create a pipeline of RER subprojects. The same approach as in PPW will be applied for supporting of subproject developers and sponsors in the form of straight grants through cost sharing of feasibility studies and other project preparation activities. NPAF will also allocate up to US$ 1.0 million for the RER pipeline creation. NPAF is also committed to allocate up to US$ 20 million of its resources (repayments from initial sub- borrowers and unutilized portion of the Bank's loan and Swiss grant) for cofinancing of RREP investment subprojects. NPAF will provide long-term low-cost loans for project developers of renewable energy utilization in accordance to the following conditions: maximum amount of a sub-loan is US$ 7 million for a period to 8 years with a grace period of 2-3 years for principal payment under sub-loans/final loans, which should make no more than 70 % from the sub-project total cost. NPAF applies two on-lending schemes: (1) direct on-lending by the Ministry of Finance to a project company (Sub-borrower) ; (2) on-lending through a financial intermediary (Sub-borrower) to a project company (Final Borrower). The NPAF's support to a selected subproject could be provided only on a basis of detailed project appraisal, which includes evaluation of: i) technical feasibility of offered technical and technological solutions, procurement plan and project implementation schedule; ii) environmental effects of an investment project; iii) economic efficiency and risks of losses; and iv) financial sustainability of the enterprise-applicant. The list of priority subprojects for the NPAF financial support has been identified during the preparatory stage (Attachement 2 to this Annex). B3. Revolving RER Facilities in three pilot regions (US$3.0 million GEF, US$15.0 million counterpart funds) will be created for the development of regional structures and the testing of similar financial instruments (cost-sharing of project preparation and contingent grants and loans) at the sub- national level. These funds will allow adjusting the flow of potential RER development investment projects in regions. The general conditions of granting funds under this subcomponent may include: i) conformity of financed investment subprojects to RREP eligibility criteria; ii) competitive selection process for the procurement of goods, works, and services; iii) ability of an applicant to provide co- financing of subprojects from their funds; iv) financing is carried out on fixed-term, irrevocable and gratuitous basis, and v) GEF's share in subproject financing shall not be more than 20 percent of the investment cost. Several regions were identified at the preparatory stage. Apparently, Krasnodar krai, the Republic of Karelia and Komi Republic are the best prepared and committed to host the Revolving RER Facilities. The final selection of pilot regions and design of the facilities will be done before the RREP start up as one of the conditions for grant effectiveness. It is expected that NEFCO will be involved in supporting the creation and operations of Revolving RER Facilities in North-West Russia. 31 Attachment 1 to Annex 4. List of Natural Reserves and National Parks, selected for participation in RREP State nature reserves 1. Altaisky 2. Astrakhansky 3. Baikalo-Lensky 4. Baikalsky 5. Barguzinsky 6. Bogdinsko-Baskunchaksky 7. Bolonsky 8. Bryansky Les 9. Bureynsky 10. Daursky 11. Zhigulevsky 12. Kavkazsky 13. Kandalakshsky 14. Katunsky 15. Kerzhensky 16. Kologrivsky les 17. Komandorsky 18. Kronotsky 19. Lazovsky 20. Laplandsky 21. Magadansky 22. Olekminsky 23. Orenburgsky 24. Ostrov Vrangelya 25. Pasvik 26. Pechoro-Ilychsky 27. Sayano-Shushensky 28. Sikhote-Alinsky 29. Sokhondinsky 30. Taimyrsky 31. Teberdinsky 32. Tigireksky 33. Ubsunurskaya Kotlovina 34. Chernyie Zemli National parks 1. Zabaikalsky 2. Kenozersky 3. Kurshskaya Kosa 4. Pribaikalsky 5. Sochinsky 6. Tunkinsky 7. Shorsky 8. Shushensky Bor 9. Yugyd Va 32 List of state nature reserves and national parks, recommended as a priority objects of the RREP State nature reserves 1. Astrakhansky 2. Baikalsky 3. Daursky 4. Kavkazsky 5. Kologrivsky les 6. Kronotsky 7. Laplandsky 8. Ostrov Vrangelya 9. Sayano-Shushensky 10. Sikhote-Alinsky 11. Sokhondinsky National parks 1. Zabaikalsky 2. Kenozersky 3. Sochinsky 33 Attachment 2 to Annex 4: List of priority project candidates for RSLW financial support APPLICANT PROJECT NAME AND PLACE PROJECT PROJECT REQUESTED PROJECT OF DOCUMENTS COSTS RREP SUPPORT SPONSOR IMPLEMENTATION AVAILABLE ($mln) ($mln) ($mln) 1 2 3 4 6 7 1. Government of Kabardin- Small Hydro Electric Station Investment Proposal 4.4 3.6 0.8 Balkar Republic, Nalchik ADYRSU-2, power ­ 7.1 MW, city (South of Russia) capacity ­ 29.0 mln KWh/year. Terms of erection - 2008-2009. 2. OJSC "Zelenchugskie Ust-Djegutinskay small HES, power Feasibility Study 3.0 2.4 0.6 HESs" ­ 3.36 MW, capacity ­ 23.0 mln. kWh. Terms of erection 2008. 3. "Teplonasosnye systems" Energy complex in Novoshakhtinsk Feasibility Study 14.8 7.0 7.8 Ltd. Moscow city city (Rostov oblast, South of Russia). Power - 26 MW with using of waste- heat of mining waters of closed and flooded mine and hydro energy of small flows. Heat power ­ 88.200 GKal, electric power ­ 6.2 mln KWh. Terms of erection - 2008- 2009. 4. Administration of Reconstruction of boiler for wood Investment Proposal 10.0 7.0 3.0 Arkhangelsk Oblast fuel use in Octyabrskiy city of Ulianovskiy District (Arkhangelsk Oblast) 5. Administration of Modernization of electric power Feasibility Study 7.5 3.0 4.5 Arkhangelsk Oblast supply system in Solovetskiy habitation (Arkhangelsk Oblast) 6. OJSC "Komi Heat Multiple purpose Project of creating Investment Proposal 12.4 3.5 8.9 Company" of bioenergy infrastructure in Komi 34 Komi Republic Republic. (North-West of Russia) 7 subprojects: 1 ­ biomass fuel production, 6 ­ switch of 6 boilers of different capacity to biomass fuel. 7. Government of Buraytia Construction of autonomous electric Investment Proposal 5.3 3.6 1.7 Republic supply systems of tourist complexes using solar, hydro and wind power resources in National Parks of PriBaikaliay (Republic of Buraytia) 8. Government of Buraytia Construction of autonomic electric Investment Proposal 5.0 3.3 1.7 Republic supply systems of environmental sound farm enterprises in PriBaikaliay (Republic of Buraytia). 9. Stavropol Kray, Ministry Construction of solar heat supply Investment Proposal 4.5 2.0 2.0 of Industry, Transport an systems of sanatorium-resort and Communications municipal facilities in Stavropol Kray. Heat power (50 MWt) with solar collectors (surface ­ 70.000 m2). Terms of erection ­ 2007-2009. Total: 66.9 35.4 31.5 35 ANNEX 5: Project costs RUSSIA - RENEWABLE ENERGY PROGRAM Local Foreign Total Project Cost By Component and/or Activity US$ million US$ million US$ million 1. Policy Development, Institutional 14.2 5.0 19.2 Strengthening and Capacity Building Component 1.1. Renewable Energy Policy 0.9 0.5 1.4 1.2. Market Infrastructure 2.0 0.5 2.5 1.3. Renewable Energy Program in Natural 5.8 1.9 7.7 Reserves, National Parks, and in Special Tourist- recreational Economic Zones 1.4. Partnership on Innovative Financing 1.6 0.5 2.1 Mechanisms and Regulations 1.5. Knowledge and Information Collection and 3.1 0.8 3.9 Dissemination 1.6. Program Management, Monitoring, and 0.8 0.8 1.6 Evaluation 2. Renewable Energy Financial Facility 52.6 5.0 57.6 2.1. Project Preparation Window for on-grid 4.6 1.0 5.6 electricity generation subprojects 2.2. Revolving Soft Loan Window in the NPAF 33.0 1.0 34.0 2.3. Revolving RER Facilities in pilot regions 15.0 3.0 18.0 Total Project Costs 66.8 10.0 76.8 Total Financing Required 66.8 10.0 76.8 36 ANNEX 6: Implementation arrangements RUSSIA - RENEWABLE ENERGY PROGRAM Overview The National Pollution Abatement Facility will be the implementing agency of the Russian Renewable Energy Program (RREP). The NPAF ED will assume overall fiduciary responsibilities for the use of the GEF grant funds. To manage the project, the NPAF Executive Directorate will establish a Project Management Unit (PMU). The relatively low performance of the Environmental Management Project/NPAF was due to controversies within the Russian government with respect to the environmental policy in 1995-2006. Therefore, government commitment to renewable energy development is one of the main conditions for successful project preparation and implementation. The demand for environmental investments continues to be very high. Many enterprises expressed their willingness to undertake energy efficiency and pollution abatement projects assuming that the financial conditions will be more favorable. Government representatives stressed that the implementation of NPAF projects leads, besides important environmental improvements, to the modernization of core industrial sectors which is one of the government's strategic priorities. Therefore, the MOEDT and the MOF suggested to the World Bank to extend the Environmental Management Project and to include renewable energy development as one of three main project objectives of NPAF. With substantial government support NPAF is going to become a long-term financial mechanism even after completion of the Bank's project. The Ministry of Economic Development and Trade (MEDT) is the government agency responsible for overall RREP coordination. A project Steering Committee has been established to provide overall policy guidance and to coordinate implementation of RREP and its connection to national and international programs on renewable energy development. The Steering Committee is chaired by MEDT and includes representatives of the Ministry of Finance (MoF), the Ministry of Industry and Energy (MIE), the Ministry of Natural Resources (MNR) and the Ministry of Education, Science and Technologies (MEST). The primary goals of the Steering Committee of the Project are: · Coordination of actions of interested ministries on RREP implementation; · Definition of priority directions of project implementation; · Formation of eligibility criteria for RER development projects; · Selection and formation of the list of priority investment projects on RER development; · Decision-making on financing of priority investments on RER development projects under the RREP; · Approval of the RREP Operating Instructions and other guidance/regulatory documents regulating the functioning of RREP and of Project Management Unit (PMU). The Steering Committee will also oversee operations of bilateral donors such as the EU, Austria, Denmark and other Nordic countries and programs of multilateral development agencies related to renewable energy development in Russia. The Policy Development, Institutional Strengthening, and Capacity Building Component MEDT will provide coordination of actions and general leadership in the subcomponent implementation, conformity of actions planned in the frame of the GEF project with directions and provisions of social and economic policy of the Government of the Russian Federation, and in particularly with the tasks of Federal Targeted Programs. 37 MIE is the main executing agency on the Renewable Energy Policy and on Market Infrastructure Development subcomponents. It will assure conformity of the RREP with directions and provisions of the Energy Strategy of the Russian Federation, and with the tasks of the Federal Target Program "Energy Efficient Economy". RAO UESR, JSC Hydro OGK, and other daughter companies will support activities on improvement of legislation and the regulatory and incentive framework including design and introduction of feed-in tariff and work on standards setting. The EBRD is commissioning a study on the rules and regulations of wind power development in Russia. The results of that study will make an important input to the further design of the subcomponent . It is expected that Wood Industries Confederation in North West Russia and other NGOs and business associations will actively participate in the execution of tasks related to the development of a biomass fuel market. MNR and MEDT are the executing agencies for the subcomponent on renewable energy program in natural reserves and national parks, and in special tourist-recreational economic zones. MNR will provide linkage of RREP with the state policy on environmental protection and with the tasks of the Federal Target Program "Environment and Natural Sources". MNR is now preparing a sectoral program on improving the federal system of natural reserves and other environmental protection territories for 2007- 2009, which should provide an institutional and financial basis for the implementation of this subcomponent. The World Wild Fund (WWF) and other environmental NGOs have indicated their interest to participate in supporting activities of the Program. The REEEP Secretariat in Russia and the FSU will be the executing agency of the subcomponent on Partnership on Innovative Financing Mechanisms and Regulations. The REEEP International Secretariat, the Russian Environmental Center, the World Bank and MEDT will sign a Memorandum of Understanding (MoU) or a similar legal agreement on the partnership in the RREP implementation. MEST is the executing agency for the subcomponent on knowledge and information collection and dissemination. It will provide linkage of RREP activities with tasks of the Federal Targeted Programme "Studies and Researches under the Priority Directions of Science and Technology". MEST will be also responsible for the selection and cofinancing of activities related to the creation of a renewable energy resources informational database and for the selection of priority pilot and demonstration technologies and installations on RER. The PMU in the NPAF ED is responsible for overall project administration and implementation of monitoring, evaluation and reporting activities. Annual work programs on the implementation of the components will be prepared by the PMU and approved by the Steering Committee. In implementing work programs the PMU will be responsible for the selection of consultants, including the preparation of terms of reference (TORs), advertising, shortlisting, issuing requests for proposals, evaluation of proposals, negotiating with selected consultants and contracting with those who have been selected. The PMU will also be responsible for maintaining an accounting and management information system, for audits and progress reporting to both the Government of Russia and the World Bank. The PMU will carry out donor coordination through active collection and dissemination of information about renewable energy activities in Russia and organizing regular meetings among donors and investors supporting renewable energy as well as federal and regional authorities and non-governmental organizations. The Renewable Energy Financial Facility The NPAF Supervisory Board (NPAF SB) carries out general management of NPAF activities, and will manage operations of the Renewable Energy Financial Facility (REFF). 38 NPAF SB is operating on the basis of the Regulations approved by the Ministry of Finance of the Russian Federation and MEDT. NPAF SB includes representatives of MEDT, MOF and other interested agencies and organizations. The NPAF SB will be responsible for the following actions in relation to the REFF: i) it defines priority directions for REFF and reviews progress in its implementation; ii) it considers and approves revisions of the NPAF Operating Instructions and other regulatory documents providing REFF functioning; iii) it considers and approves lists of investment projects for further processing under the REFF; iv) it defines terms and conditions for IP funding and repayment, including guarantees; v) it approves IPs to be supported and drafts of sub-grant and sub-loan agreements, and vi) it approves the NPAF ED operating budget. MEDT is responsible for the implementation of the Project Preparation Window and of the Revolving RER Facilities in pilot regions. Implementing this function the MEDT: i) participates in NPAF management through the NPAF SB; ii) together with MoF approves the NPAF Operating Instructions; iii) signs Sub-Grant Agreements with regional authorities and with project beneficiaries; iii) monitors compliance with the terms of sub-grant agreements, and iv) signs an Agency Agreement with NPAF ED. The MOF is responsible for issuing all Sub-loans/Budgetary Credits under the NPAF. Implementing this function the MOF: i) participates in NPAF management through the NPAF SB; ii) together with MEDT approves the NPAF Operating Instructions; iii) signs Sub-loan/Budgetary Credit Agreements for financing investment projects; iii) monitors compliance with the terms of Sub-loan/Budgetary Credit Agreements, and iv) signs an Agency Agreement with NPAF ED. Administrations of regions selected for the hosting of Revolving RER Facilities will be responsible for the creation and functioning of these facilities in accordance with procedures and criteria acceptable to the MEDT and the World Bank. Financial management, disbursement and procurement functions for the REFF will be carried out by the NPAF ED in accordance with the Grant Agreement and the Agency Agreement to be signed among MEDT, the Ministry of Finance and the NPAF ED. Implementing REFF, the NPAF ED manages the project investment cycle and carries out: i) selection and evaluation of project developers' applications, collection and analysis of information necessary for the appraisal of investment projects; ii) screening, selection and preparation of investment projects, their submission to NPAF SB, IBRD, MOEDT and MOF for consideration; iii) drafting of Sub-Grant, Sub-loan, Final Loan/Budgetary Credit, Project Implementation Agreements and other related legal documents and their submission to NPAF SB, MOEDT and MOF; iv) supervision of project implementation and compliance with the terms of Sub-grant/Sub- loan/Budgetary Credit, Final Loan and Project Implementation Agreements; v) assistance to Grant Beneficiaries/Sub-borrowers/Final Borrowers in handling procurements under the procedures stipulated by the Grant Agreement; vi) drafting of all necessary documents and preparation of applications for withdrawal of funds for financing under Sub-grants/Sub-loans/Budgetary Credits and their submission; vii) opening and maintenance of the special account for the accumulation and utilization of REFF repayment proceeds; viii) calculation of due payments of Sub-borrowers to the REFF under Contingent sub-grant/Sub- loan/Budgetary Credit Agreements, notification of Sub-grants beneficiaries/Sub-borrowers on 39 due payments and control of correctness and timeliness of entry of indicated payments to the REFF, and ix) regular submission of reports on REEF financial activities to NPAF SB, MOF, and MOEDT. Regional energy efficiency centers will participate in creating of Revolving RER facilities. For example, the Energy Saving Center of Krasnodar krai empowered by the regional government, to operate regional program on energy saving and RER development. The Energy Saving Center, under the supervision of the Coordination council, which is comprised of representative of the Krai government, selects projects and allocates financing for them both on repayable and on gratuitous basis. As a rule, funds are allocated as interest-free sub-loans. 40 ANNEX 7: Financial Management and Disbursement Arrangements RUSSIA - RENEWABLE ENERGY PROGRAM [This Annex is under preparation and will be finalized during the appraisal as per Bank's requirements] 41 ANNEX 8: Procurement Arrangements RUSSIA - RENEWABLE ENERGY PROGRAM [This Annex is under preparation and will be finalized during the appraisal as per Bank's requirements] 42 ANNEX 9: Economic and financial analyses RUSSIA - RENEWABLE ENERGY PROGRAM Economic and Financial Analyses of subprojects The REFF support to a selected subproject could be provided only on a basis of detailed project appraisal, which includes, inter alia, an evaluation of: technical feasibility of offered technical and technological solutions and project implementation schedule; ii) environmental effects of the project; iii) economic efficiency and risks of losses, and iv) financial sustainability of the enterprise-applicant. This appraisal will be implemented by the NPAF ED in accordance with established practice and Operational Instructions. Financial due diligence requires in the context of the individual subprojects that two distinct objectives are fulfilled: to ensure that the project owner is a financially sound and sustainable entity which will not go broke during the implementation of the project thereby putting the project at risk; and to ensure that the project itself is financially sound and feasible, given its financing plan and operational projections. This will mitigate the risk that the project may fail and/or add a major financial burden to the project owner entity. The project owner analysis will normally be based on the last three to five years' financial results and evolving financial position to date, as well as three to five years of financial projections for the project owner. Thus, the owner will provide financial statements, including income statements, balance sheets and fund flow statements for the past three to five years. Further, it will provide a commentary about the financial performance and explanations as to unusual events in the financial performance. An audit report for each of the years under review will also be provided, if available. The economic and financial analysis of subprojects will be based on estimated project investment costs, the envisaged financing plan as well as projections for project implementation, learning curve of project operations, costs of inputs and revenues from the sale of the outputs, debt schedules and depreciation plans. The time horizon for financial projections of the subproject will cover the life cycle of the envisaged project, including needed re-investments and possible scrap values at the end of the projection period. The projections should be in real terms. The analysis will provide for calculations of net present values (NPVs), internal rates of return (IRRs) on the overall investment and on equity, before and after tax. The risk profile of the subproject will be discussed and documented by providing appropriate sensitivity and risk analyses. The impact of provision of grants on the projected ratios will also be documented by using appropriate sensitivity analyses. Financial Summary of REFF Project Preparation Window for on-grid electricity generation subprojects PPW will provide grant support to subproject developers and sponsors through cost sharing of feasibility studies and other project preparatory activities. As a general rule, support will be provided on a 50% cost- sharing basis to qualified projects. The initial amount of PPW will be US$2.0 million, including US$1.0 from Hydro OGK.. The assumed average grant size is US$100,000 based on estimated feasibility study or business plan costs of US$200,000 per project. It is assumed that 20% of PPW contingent grants will be repaid and then will be used for financing of additional project preparation. A total of 28 grants would be made resulting in about US$ 5.6 million financing for feasibility studies and other project documentation. 43 Revolving Soft Loan Window RSFW will be based on the institutional framework and financial resources of the NPAF and will provide long-term low-cost loans for project developers of renewable energy utilization. NPAF is committed to allocate up to US$20 million of its resources (repayments from initial sub-borrowers and unutilized portion of the Bank's loan and Swiss grant) for co-financing of RREP investment subprojects. The average share of NPAF sub-loans is assumed to be 66% of a project's costs and an average subproject size would be US$5.0 million. Total investments for the initial six subprojects will be US$30 million. The initial capital of RSLW (US$20.0 million) will allow to generate a sustainable reflow of principal and interest payments. For 20 years RSLW would provide sub-loans of more than US$110.0 million, which will result in project investments at the amount of US$166.7 million. Table 9.1: Revolving Soft Loan Facility (REFF) Financial Structures Share of PPW in project Financing (US$) financing (%) Project Preparation Window (PPW) Initial capitalization of PPW 2,000,000 Costs of a feasibility study (in average) 200,000 Average PPW grant 50% 100,000 Contingent grants repaid and reinvested 800,000 Total number of deals 28 Total costs of projects preparatory 50% 5,600,000 activities Total GEF's share in PPW activites 13,8% 1,000,000 RSLW/NPAF Grant support to RER subprojects 2,000,000 preparation Total number of feasibility studies supported 20 Total costs of projects preparatory activities 50% 4,000,000 Average Project Size of an investment 5,000,000 subproject NPAF Sub loan 66% 3,300,000 Equity 34% 1,700,000 Number of deals (initial project portfolio) 6 Total RSLW Financing 34,000,000 Total GEF 1,000,000 Total NPAF 20,800,000 Total Equity 12,200,000 44 Revolving RER Facilities in pilot regions Average Project Size 1,500,000 Average contingent grant/soft loan share in 50% 750,000 project cost GEF share in contingent grant/soft loan 33% 250,000 Equity and other sources 40% 750,000 Number of deals 12 Total Revolving RER Facilities Financing 18,000,000 Total GEF in Revolving RER Facilities 3,000,000 Total Equity and other sources 18,000,000 Revolving RER Facilities in pilot regions An average project size for financing is assumed as US$1.5 million, with a 50% average share of contingent grant/soft loan in project cost. GEF share in contingent grant/soft loan should be not more than 33%. Based on the above assumptions, the GEF contribution of US$ 3.0 million will allow to support investments for initially 12 subprojects in pilot regions at a total amount of US$18 million. This initial capitalization of RER facilities in regions will generate a sustainable reflow of principal payments. Because of the long-term nature of the financial mechanisms and proposed instruments (loans and contingent grants), financial projections have been developed showing income and expenses for the debt fund for 20 years. Cash flow statements for the RSLW are shown below in the table 9.2. 45 Table 9.2: Renewable Energy Financial Facility Cash Model (US$) 1 year 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 year Revolving Soft Loans Window (NPAF funds) Capital balance 20.00 19.51 17.13 12.95 7.65 0.81 0.71 0.87 0.69 0.59 0.74 0.57 0.48 0.09 0.56 0.71 0.17 0.14 0.39 0.16 0.63 Initial projects portfolio Disbursements from RSLW/NPAF for sub loans (0.50) (2.50) (4.50) (6.50) (6.00) (20.00) Principal repayments 0.60 1.20 1.80 3.00 4.00 3.40 2.80 2.20 1.00 20.00 Interest earnings (5% per year) 0.01 0.12 0.32 0.60 0.85 0.84 0.71 0.52 0.34 0.20 0.08 0.01 4.59 Refinancing Disbursements from RSLW for sub loans (3.00) (3.00) (4.00) (6.00) (6.00) (6.00) (7.00) (7.00) (7.00) (7.00) (8.00) (9.00) (8.80) (9.00) (10.00) (10.00) (110.80) Principal repayments 0.60 1.20 2.00 3.20 4.40 5.00 5.80 6.40 6.60 6.80 7.20 7.60 7.96 64.76 Interest earnings (5% per year) 0.11 0.26 0.45 0.70 0.95 1.16 1.35 1.50 1.61 1.68 1.75 1.86 1.97 2.06 2.17 2.28 21.85 Project Preparation Window (PPW) and RSLW (GEF funds) 4.0 3,5 2,0 0,5 0.0 - - - - - - - - - - - - - - - - Balance Disbursements from GEF for grants (0.5) (1.5) (1.5) (0.5) (0.0) (4.0) Principal repayments 0.1 0.3 0.3 0.1 0.8 Refinancing Disbursements from repayments for grants 0.1 (0.3) (0.4) (0.8) 46 Financial Summary for 20 years (US$ million) Total amount of RSLW/NPAF sub-loans made (130.80) Total amount of RSLW/NPAF principal repayments 84.76 Interest earnings 26,44 Total amount of PPW grants given (4.80) Total amount of grant repayments 0.80 47 ANNEX 10: Safeguard Policy Issues [This Annex is under preparation and will be finalized during the appraisal as per Bank's requirements] 48 ANNEX 11: Project Preparation and Supervision [This Annex is under preparation and will be finalized during the appraisal as per Bank's requirements] 49 ANNEX 12: Documents in the Project File [This Annex is under preparation and will be finalized during the appraisal as per Bank's requirements] 50 ANNEX 13: Statements of Loans and Credits RUSSIA ­ Renewable Energy Program As of 04/26/2006 (In Millions of US Dollars) Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P078420 2006 CADASTRE DEVT 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 P082239 2005 HYDROMETEO SYST MOD 80.00 0.00 0.00 0.00 0.00 80.00 1.26 0.00 P082018 2005 KAZAN MUNICIPAL DEVT 125.00 0.00 0.00 0.00 0.00 75.00 -50.00 0.00 P075387 2004 E-LRN SUPRT (APL #1) 100.00 0.00 0.00 0.00 0.00 71.18 -2.42 0.33 P046497 2003 HEALTH REF IMP 30.00 0.00 0.00 0.00 0.00 28.29 14.14 7.17 P072960 2003 CUSTOMS DEVT 140.00 0.00 0.00 0.00 0.00 118.39 43.29 33.67 P069063 2003 ST. PETERSBURG ECON DEVT 161.10 0.00 0.00 0.00 0.00 154.42 94.56 0.00 P066155 2003 TAX ADM 2 100.00 0.00 0.00 0.00 0.38 48.16 10.54 -4.46 P064237 2003 TB/AIDS CONTROL 150.00 0.00 0.00 0.00 0.00 142.34 70.24 25.14 P064508 2002 TREASURY DEVT 231.00 0.00 0.00 0.00 0.00 221.39 41.39 0.00 P064238 2001 N RESTRUCT 80.00 0.00 0.00 0.00 0.00 56.05 56.05 -3.95 P038551 2001 MUN HEATING 85.00 0.00 0.00 0.00 0.00 41.39 41.39 41.39 P050474 2001 EDUC REFORM 50.00 0.00 0.00 0.00 3.00 17.19 19.04 1.52 P046061 2001 MOSC URB TRANS 60.00 0.00 0.00 0.00 0.00 27.81 27.81 0.00 P008832 2001 MUN WATER & WW 122.50 0.00 0.00 0.00 0.00 101.11 98.66 55.81 P058587 2000 REG FISC TA 30.00 0.00 0.00 0.00 0.00 8.08 8.08 0.04 P053830 2000 SUST FORESTRY PILOT 60.00 0.00 0.00 0.00 0.00 44.24 44.24 -1.74 P050487 1999 STATE STATS SYST 30.00 0.00 0.00 0.00 0.00 3.26 3.26 0.97 P050891 1997 ELEC SECTR REF 40.00 0.00 0.00 0.00 1.86 6.60 8.45 8.45 P042622 1996 CAP MRKT DEV 89.00 0.00 0.00 0.00 34.09 13.77 47.86 14.11 P008821 1995 ENV MGMT 110.00 0.00 0.00 0.00 0.00 31.78 31.78 4.50 Total: 1,973.60 0.00 0.00 0.00 39.33 1,390.45 609.62 182.95 RUSSIAN FEDERATION STATEMENT OF IFC's Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 ABOLmed 8.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 Absolut Bank 15.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 AgroIndFinC 5.00 0.30 0.00 10.00 3.83 0.30 0.00 7.67 2003 BCEN Eurobank 75.00 0.00 0.00 0.00 75.00 0.00 0.00 0.00 2004 BSGV 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 BSGV Leasing 69.27 0.00 0.00 0.00 25.85 0.00 0.00 0.00 51 2001 BVF 0.00 3.31 0.00 0.00 0.00 0.00 0.00 0.00 2005 BVPEF III 0.00 12.50 0.00 0.00 0.00 2.14 0.00 0.00 2004 Bauxite Timana 45.00 0.00 0.00 30.00 0.00 0.00 0.00 0.00 2005 Center-Invest 4.84 0.00 5.00 0.00 4.84 0.00 5.00 0.00 2006 Cinema Park 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Delta Credit 16.47 0.00 0.00 0.00 16.47 0.00 0.00 0.00 2003 Delta Credit 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2004 Delta Leasing 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 2002 Egar Technology 0.00 0.81 0.00 0.00 0.00 0.31 0.00 0.00 2005 Esanna 15.00 0.00 0.00 50.00 13.28 0.00 0.00 44.23 2005 Eurosibtrans 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2002 IBS 0.00 0.00 8.00 0.00 0.00 0.00 8.00 0.00 2002 ICB 5.71 0.00 0.00 0.00 5.71 0.00 0.00 0.00 2004 INTH 0.00 3.50 7.00 0.00 0.00 0.00 7.00 0.00 2002 KMB Bank 4.86 0.00 0.00 0.00 4.86 0.00 0.00 0.00 2004 Krono Swiss 50.00 0.00 0.00 45.32 50.00 0.00 0.00 45.32 2005 Krono Swiss 45.00 0.00 0.00 0.00 45.00 0.00 0.00 0.00 2005 Kronospan Russia 81.98 0.00 0.00 0.00 51.53 0.00 0.00 0.00 2005 KuAz 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Lebedyansky 35.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 Moscow Credit Bk 15.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 2003 Moscow Narodn... 57.14 0.00 0.00 0.00 57.14 0.00 0.00 0.00 1998 Mosenergo 8.99 0.00 0.00 0.00 8.99 0.00 0.00 0.00 2002 NBD 0.83 0.00 0.00 0.00 0.83 0.00 0.00 0.00 2003 NBD 4.17 0.00 2.00 0.00 4.17 0.00 2.00 0.00 2001 NMC 1.89 0.00 0.00 0.00 1.89 0.00 0.00 0.00 2004 NWSC 23.00 0.00 0.00 23.48 0.00 0.00 0.00 0.00 2005 Novatek 0.00 22.07 0.00 0.00 0.00 22.07 0.00 0.00 2005 Peter Hambro 0.00 15.00 0.00 0.00 0.00 14.99 0.00 0.00 2004 Pilkington Rus 49.77 0.00 0.00 0.00 49.77 0.00 0.00 0.00 2001 Probusiness Bank 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.00 Promek 83.79 0.00 0.00 0.00 19.79 0.00 0.00 0.00 2003 Quadriga Capital 0.00 17.70 0.00 0.00 0.00 6.86 0.00 0.00 2005 RWMN 0.99 0.00 0.00 0.00 0.99 0.00 0.00 0.00 2004 RZB Leasing Russ 20.00 0.00 0.00 0.00 9.50 0.00 0.00 0.00 RZB Russia 130.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2003 RZB Russia 24.44 0.00 0.00 44.44 24.44 0.00 0.00 44.44 2004 RZB Russia 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1998 Ramstore 8.50 0.00 0.00 0.00 8.50 0.00 0.00 0.00 2001 Ramstore 14.99 0.00 0.00 0.00 14.99 0.00 0.00 0.00 2002 Ramstore 23.57 0.00 10.00 18.75 23.57 0.00 10.00 18.75 2003 Ru-Net 0.00 3.00 3.00 0.00 0.00 3.00 2.00 0.00 2001 Ruscam 4.50 0.00 4.50 0.00 4.50 0.00 4.50 0.00 2003 Ruscam 9.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00 2004 Ruscam 17.50 0.00 0.00 0.00 17.50 0.00 0.00 0.00 2002 Russ Stndard Bnk 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2004 Russ Stndard Bnk 58.48 0.00 0.00 0.00 58.48 0.00 0.00 0.00 1995 Russ Tech Fnd 0.00 0.23 0.00 0.00 0.00 0.23 0.00 0.00 2005 RussiaPartnersII 0.00 10.00 0.00 0.00 0.00 0.80 0.00 0.00 52 Russkiy Mir 24.52 0.00 0.00 29.97 2.47 0.00 0.00 3.02 2004 Russkiy Mir 12.86 0.00 0.00 0.00 12.86 0.00 0.00 0.00 2005 Russkiy Mir 20.48 0.00 0.00 25.03 2.03 0.00 0.00 2.48 SCF Restructured 0.00 0.60 0.00 0.00 0.00 0.60 0.00 0.00 2004 Severstaltrans 23.21 0.00 13.93 0.00 23.21 0.00 13.93 0.00 2004 Sibakadembank 3.00 0.00 6.00 0.00 3.00 0.00 6.00 0.00 2002 Sonic Duo 0.00 0.00 6.00 0.00 0.00 0.00 6.00 0.00 2003 Stav. Broiler 14.25 0.00 0.00 0.00 11.75 0.00 0.00 0.00 2004 Sveza 40.50 0.00 0.00 0.00 28.10 0.00 0.00 0.00 2002 Swedwood Tichvin 5.07 0.00 0.00 0.00 5.07 0.00 0.00 0.00 2005 ToAz 30.00 0.00 0.00 45.00 0.00 0.00 0.00 0.00 2006 UralSib Bank 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2003 UralTransBank 9.17 0.00 0.00 0.00 6.67 0.00 0.00 0.00 2004 Volga Shipping 25.18 0.00 0.00 17.25 15.05 0.00 0.00 0.00 2001 Volga-Dnepr 10.60 0.00 6.09 12.84 10.60 0.00 6.09 12.84 2002 ZAO Europlan 4.29 0.00 0.00 0.00 4.29 0.00 0.00 0.00 1998 ZAO Storaenso 0.60 0.00 0.00 0.00 0.60 0.00 0.00 0.00 2002 ZAO Storaenso 4.20 0.00 0.00 0.00 4.20 0.00 0.00 0.00 Total portfilio: 1,424.11 109.02 76.52 352.08 881.82 61.30 75.52 178.75 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 1999 DLV 0.00 0.00 0.00 0.00 2002 RSB II 0.00 0.00 0.00 0.00 2006 RSB IV 0.00 0.00 0.03 0.00 2006 Forus Bank 0.01 0.00 0.00 0.00 2005 KMB Bank II 0.03 0.00 0.01 0.00 2005 Novatek Gas 0.05 0.00 0.00 0.07 2005 Ramstore IV 0.04 0.00 0.00 0.00 2006 CityMortgage 0.03 0.00 0.00 0.00 2003 DeltaCredit Bank 0.03 0.00 0.00 0.00 Total pending committment: 0.19 0.00 0.04 0.07 53 ANNEX 14: Country at a Glance Europe & Upper- POVERTY and SOCIAL Russian Central middle- Federation Asia income Development diamond* 2004 Population, mid-y ear (millions) 142.8 472 576 GNI per capita (Atlas method, US$) 3,420 3,290 4,770 Lif e GNI (Atlas method, US$ billions) 488.5 1,553 2,748 Average annual growth, 1998-04 Population (%) -0.5 -0.1 0.8 Labor f orce (%) 0.2 -0.5 -0.9 GNI Gross per primary Most recent estimate (latest year available, 1998-04) capita enrollment Pov erty (% of population below national poverty line) /a 21 .. .. Urban population (% of total population) 73 64 72 Lif e expectancy at birth (years) 66 68 69 Inf ant mortality (per 1,000 live births) 16 29 24 Child malnutrition (% of children under 5) 6 .. .. Access to improv ed water source Access to an improv ed water source (% of population) 96 91 93 Literacy (% of population age 15+) 99 97 91 Gross primary enrollment (% of school-age population) 118 101 106 Russian Federation Male 118 103 108 Upper-middle-income group Female 118 101 106 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994 2003 2004 Economic ratios* GDP (US$ billions) .. 395.1 431.5 581.4 Gross capital f ormation/GDP .. 25.5 20.4 21.1 Exports of goods and serv ices/GDP .. 27.8 35.2 35.0 Trade Gross domestic sav ings/GDP .. 30.1 31.8 33.7 Gross national sav ings/GDP .. 29.6 28.6 31.4 Current account balance/GDP .. 2.0 8.3 10.3 Domestic Capital Interest pay ments/GDP .. 0.4 2.4 2.3 sav ings f ormation Total debt/GDP .. 30.9 38.9 26.3 Total debt serv ice/exports .. 6.1 18.2 22.2 Present v alue of debt/GDP .. 22.0 41.8 .. Present v alue of debt/exports .. 109.5 110.5 .. Indebtedness 1984-94 1994-04 2003 2004 2004-08 (average annual growth) Russian Federation GDP -9.2 3.2 7.3 7.1 6.9 GDP per capita -9.3 3.6 7.8 7.6 7.5 Upper-middle-income group E t f d d i 7 0 12 5 12 3 2 5 STRUCTURE of the ECONOMY 1984 1994 2003 2004 Growth of capital and GDP (%) (% of GDP) Agriculture .. 6.6 5.4 5.0 100 Industry .. 44.7 34.0 35.2 50 Manuf acturing .. .. .. .. 0 Serv ices .. 48.6 60.7 59.8 -50 99 00 01 02 03 04 Household f inal consumption expenditure .. 50.8 50.6 49.8 -100 General gov 't f inal consumption expenditure .. 19.1 17.6 16.5 Imports of goods and serv ices .. 23.2 23.8 22.3 GCF GDP 1984-94 1994-04 2003 2004 Growth of exports and imports (%) (average annual growth) Agriculture .. 2.9 5.7 2.9 40 Industry .. 3.7 8.7 6.9 Manuf acturing .. .. .. .. 20 Serv ices .. 3.0 6.9 7.8 0 Household f inal consumption expenditure .. 3.5 7.4 10.5 99 00 01 02 03 04 General gov 't f inal consumption expenditure .. 1.2 2.2 2.3 -20 Gross capital f ormation .. 0.1 13.2 13.6 Exports Imports Imports of goods and serv ices .. 6.0 17.7 23.5 54 Russian Federation PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Inflation (%) Domestic prices (% change) 100 Consumer prices .. 307.6 13.7 10.9 75 Implicit GDP def lator .. 307.3 14.0 18.1 50 Government finance 25 (% of GDP, includes current grants) 0 Current rev enue .. 36.7 37.4 32.5 99 00 01 02 03 04 Current budget balance .. -1.9 4.6 7.0 Ov erall surplus/def icit .. -9.2 2.1 4.7 GDP deflator CPI TRADE 1984 1994 2003 2004 Export and import levels (US$ mill.) (US$ millions) Total exports (f ob) .. 67,379 135,929 183,452 200,000 Crude oil .. 11,355 38,843 58,256 Natural gas .. 10,355 19,981 21,853 150,000 Manuf actures .. 6,900 12,800 15,100 Total imports (cif ) .. 53,480 78,539 100,193 100,000 Food .. 10,700 12,100 13,800 Fuel and energy .. .. 1,300 1,700 50,000 Capital goods .. 13,600 21,400 31,100 0 Export price index (2000=100) .. 70 113 140 98 99 00 01 02 03 04 Import price index (2000=100) .. 94 103 97 Exports Imports Terms of trade (2000=100) .. 75 110 145 BALANCE of PAYMENTS 1984 1994 2003 2004 Current account balance to GDP (%) (US$ millions) Exports of goods and serv ices .. 75,803 151,959 203,742 20 Imports of goods and serv ices .. 65,887 102,558 130,007 Resource balance .. 9,916 49,401 73,735 15 Net income .. -1,840 -13,171 -12,827 Net current transf ers .. -233 -364 -799 10 Current account balance .. 7,843 35,866 60,109 5 Financing items (net) .. -11,788 -4,823 -10,850 0 Changes in net reserv es .. 3,945 -31,043 -49,259 98 99 00 01 02 03 04 Memo: Reserv es including gold (US$ millions) .. 6,501 76,936 124,540 Conv ersion rate (DEC, local/US$) .. 1.5 30.7 28.8 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 Composition of 2004 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed .. 121,922 167,746 152,710 IBRD .. 684 6,289 5,743 A: 5,743 C: 3,554 IDA .. 0 0 0 G: 25,316 D: 400 Total debt serv ice .. 4,802 29,791 47,530 IBRD .. 23 894 917 IDA .. 0 0 0 Composition of net resource f lows E: 53,600 Of f icial grants .. 1,306 .. .. Of f icial creditors .. -1,297 -3,807 -3,539 Priv ate creditors .. 1,218 20,500 5,224 Foreign direct inv estment (net inf lows) .. 408 -2,408 -910 F: 64,097 Portf olio equity (net inf lows) .. 21 -5,045 -26 World Bank program Commitments .. 1,590 320 320 A - IBRD E - Bilateral Disbursements .. 283 233 170 B - IDA D - Other multilateral F - Private Principal repay ments .. 0 719 780 C - IMF G - Short-term 55 Millennium Development Goals 1990 1994 1997 2000 2003 Goal 1: Eradicate extreme poverty and hunger Percentage share of income or consumption held by poorest 20% .. .. .. .. 8.2 Population below US$1 a day (%) .. 6.1 12.7 6.1 2 Population below minimum level of dietary energy consumption (%) .. 4 .. .. 4 Poverty gap ratio at US$1 a day (incidence x depth of poverty) .. 1.2 3.5 1.2 0.5 Poverty headcount, national (% of population) .. 30.9 .. .. .. Prevalence of underweight in children (under five years of age) .. 3 .. 5.5 .. Goal 2: Achieve universal primary education Net primary enrollment ratio (% of relevant age group) 98.6 .. .. .. 89.7 Primary completion rate, total (% of relevant age group) .. 93 95 96 93 Proportion of pupils starting grade 1 who reach grade 5 .. .. .. .. .. Youth literacy rate (% ages 15-24) .. .. .. .. 99.7 Goal 3: Promote gender equality and empower women Proportion of seats held by women in national parliament (%) .. .. 10 8 8 Ratio of girls to boys in primary and secondary education (%) 103.9 .. .. .. .. Ratio of young literate females to males (% ages 15-24) .. .. .. .. 100.1 Share of women employed in the nonagricultural sector (%) 49.6 49.7 49.7 49.6 50.1 Goal 4: Reduce child mortality Immunization, measles (% of children ages 12-23 months) .. 81 91 97 96 Infant mortality rate (per 1,000 live births) 21 18 .. 18 16 Under 5 mortality rate (per 1,000) 21 22 .. 21 21 Goal 5: Improve maternal health Births attended by skilled health staff (% of total) .. .. 99.1 99.3 .. Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 67 .. Goal 6: Combat HIV/AIDS, malaria, and other diseases Contraceptive prevalence rate (% of women ages 15-49) .. 34 .. .. .. Incidence of tuberculosis (per 100,000 people) 48.2 64.4 100.9 122 112.2 Number of children orphaned by HIV/AIDS .. .. .. .. .. 56 Prevalence of HIV, total (% of population aged 15-49) .. .. .. 0.7 1.1 Tuberculosis cases detected under DOTS (%) .. .. 1 4.6 8.8 Goal 7: Ensure environmental sustainability Access to an improved water source (% of population) 94 .. .. .. 96 Access to improved sanitation (% of population) 87 .. .. .. 87 Access to secure tenure (% of population) .. .. .. .. .. CO2 emissions (metric tons per capita) .. 10.6 9.6 9.9 .. Forest area (% of total land area) .. .. .. 50.4 .. GDP per unit of energy use (2000 PPP US$ per kg oil equivalent) .. 1.5 1.6 1.7 1.8 Nationally protected areas (% of total land area) .. .. .. .. 7.8 Goal 8: Develop a global partnership for development Aid per capita (current US$) 1.7 12.5 5.4 10.8 8.7 Debt service (% of exports) .. .. .. .. .. Fixed line and mobile phone subscribers (per 1,000 people) 139.9 163 194.9 240.5 362.3 Internet users (per 1,000 people) .. 0.5 4.7 19.7 .. Personal computers (per 1,000 people) 3.4 11.5 29.9 63.3 88.7 Unemployment, youth female (% of female labor force ages 15-24) .. 21.6 21.8 25.9 .. Unemployment, youth male (% of male labor force ages 15- 24) .. 19.3 20 23.9 .. Unemployment, youth total (% of total labor force ages 15- 24) .. 20.4 26.8 24.7 .. Other Fertility rate, total (births per woman) 1.9 1.4 1.2 1.2 1.3 GNI per capita, Atlas method (current US$) 3420 2650 2660 1720 2610 GNI, Atlas method (current US$) (billions) 508 393.2 391.6 250.3 373.9 Gross capital formation (% of GDP) 30.1 25.5 22 18.7 20.7 Life expectancy at birth, total (years) 68.9 64.5 67 65.3 65.7 Literacy rate, adult total (% of people ages 15 and above) .. .. .. .. 99.4 Population, total (millions) 148.3 148.3 147.3 145.6 143.4 Trade (% of GDP) 36.1 51 47.3 68.1 52.6 Source: World Development Indicators database, April 2005 57 ANNEX 15: Incremental Cost Analysis RUSSIA - RENEWABLE ENERGY PROGRAM Introduction The Russian Federation has significant renewable energy resources, but they play limited role in the country's energy balance. Not more than 3.5% of total primary energy supply is based on renewable energy. Although the Energy Strategy until 2020 foresees that large new capacities for utilization of RER can be constructed, this will happen only if the energy policy, legislative base and the institutional framework are significantly improved and create the incentives for investments in increased energy efficiency and the use of renewable energy resources. There was no serious progress in renewable energy resources development in 2000-2005. Annual electricity production from RER increased by 50% during this period, but its share in total electricity supply only reached 0.7%. Annual heat production from RER is about 4% of total supply, with 23% increase for five years. As discussed in Annex 1, the main reasons for slow development of renewable energy projects are systemic barriers, most of which require special efforts from the government: · Legal and regulatory barriers with gaps in regulations; long and often non-transparent process for obtaining the necessary permits, licenses and other required approvals; and tariffs for existing and newly constructed power and heat generating facilities; · High capital outlay and preparation costs for small renewable projects; · Limited access to long-term finance and unfamiliar risk for banks and other financial institutions, and related perception of high risk for renewable energy projects; · Lack of experience of project sponsors, local FIs and engineering and consulting industry with renewable technologies and the appropriate project structures; management capacity constraints; · Lack of reliable information about potential sites for renewable energy projects. Rationale for GEF involvement The justification of this project for GEF participation is based on the removal of barriers and enabling the mobilization of domestic financing from commercial and public sources. GEF funding ($10 million) is directed to the removal of barriers to create a sustainable renewable energy market in Russia. Without GEF participation, private and municipal developers may not be able to develop and finance projects that benefit project partners and the country at large. Also, without GEF, there would be a lack of resources to build knowledge about renewable energy among private investors, FIs, policy makers, and other stakeholders. GEF support will lead to the creation of sustainable financial mechanisms for the support of renewables at the federal and regional levels resulting in long-term reductions of greenhouse gas emissions. As a result of GEF participation, total funding of US$76.8 million will be mobilized, including US$57.6 million of investments. These investments will allow to create additional renewable energy capacity during five years of project implementation: 66,0 MW(t) and 42,13 MW(e). 58 The baseline scenario The baseline scenario is describes the project without GEF support. As elaborated in Annex 1 of the PAD, presently Russia's energy sector relies on its rich fossil fuel reserves and on the use of thermal power. While there are significant renewable energy resources available, most of them are not expected to be implemented due to the barriers stated above. Also, even if some of the renewable projects materialize without GEF support, they are expected to take longer to be implemented (relative to the alternative scenario below, with GEF intervention). In the absence of state statistics on renewable energy and of real, verifiable data from the market, the project team has accepted the conservative expert forecast of renewable energy development in Russia to 2010 recently prepared by the Institute on Energy Researches (ENIN). This forecast assumes an additional 1 million MWh(t) production of heat from biomass, and 0.8 million MWh electricity from mini hydro, wind, solar and biomass resources by 2010. Greenhouse gas reduction benefits: The greenhouse gas reductions resulting from the electricity and heat production under the baseline scenario (0.5 million tCO2 from new RER heat generation and 0.8 million tCO2 from electricity generation) would result in 20.8 million tons of CO2 emission reductions over 20 years, including 19.5 million tons of CO2 over 15 years after the project completion. GEF Alternative Scenario Under the alternative scenario, GEF support (along with co-financing from the government and other sources) is expected to remove most of the existing barriers and reduce the impact of others; thereby making some of renewable projects viable and enhancing the sustainability of renewable energy development in the country. The Project will include the following components: Component A. Policy Developemtn, Institutional Strengthening and Capacity Building Component: US$5.0 million GEF, US$ 14.2 million counterpart funds. This component covers the following areas: A.1 Development of Renewable Energy Policy subcomponent will comprise technical assistance focused on supporting the Government in designing and implementing policy on renewable energy development, improvement of legislation and normative - regulatory framework, preparation of national and regional strategies, action plans and programs on the use of renewable energy resources. A.2 Market Infrastructure Development subcomponent will include: support to the Government on the feed-in tariff design, support to regional authorities in regulation of heat prices applicable to renewable energy projects, support to development and adoption of renewable energy system and component standards, support to development of a biomass fuel industry, support to various governmental entities in establishing streamlined permitting procedures. A.3. Renewable Energy Program in natural reserves, national parks, and in special tourist-recreational zones subcomponent will demonstrate innovative approaches to productive uses of renewable energy for biodiversity conservation and other essential services in natural reserves, national parks and other protected areas. The subcomponent will support the implementation of the following activities: i) energy-environmental reviews of selected natural reserves and national parks, ii) feasibility studies and technical design documentation for renewable energy introduction in 14 reserves and national parks, iii) development of model design documentation packages for construction of renewable energy installations in reserves, and iv) preparation of a strategy on RER development in natural reserves, national parks and other protected areas for 2011-2015, v) preparation of the feasibility study on RER development in seven Special Tourist-Recreational Economic Zones, established by the Government of the RF. . 59 A.4. Partnership on Innovative Financing Mechanisms and Regulations subcomponent will provide additional financial resources to extend the Renewable Energy and Energy Efficiency Partnership (REEEP) program in Russia, and in particularly, implementation of additional 5-6 projects competitively selected in accordance with its procedures and criteria. A.5. Knowledge and information collection and dissemination subcomponent will support implementation of the following activities: i) creation and maintenance of interactive web-portal on renewable energy, ii) establishment of a Network of National Biomass Centers; iii) support to implementation of the information-educational projects, selected by the Federal Agency on Science and Innovations. A.6. Program Management, Monitoring, and Evaluation sub-component is included, along with financial support for project administration. Component B. Renewable Energy Financial Facility (REFF): US$5.0 million GEF, US$ 52.6 million counterpart funds. This component will be a financing facility consisting of three instruments: Project Preparation Window for on-grid electricity generation subprojects, and Revolving RER Facilities in pilot regions as describe in the Annex 4. As a result of GEF participation during the initial five years, approximately 66.0 MW(t) and 42.13 MW(e) renewable capacity will be built , accounting subprojects supported by PPW but financed from other than REEF sources. Direct REFF investment will be at least US$ 57.6 million (US US$ 39.6 million in projects supported by the PPW and RSLW loans ; US US$18.0 million in projects supported by the Revolving RER Facilities in pilot regions) in addition to what is projected for the baseline. These investments are not expected to be made without the GEF involvement. Greenhouse gas reduction benefits: Under the Alternative (with the GEF project) scenario, greenhouse gas emissions will be reduced (below the baseline level) by more than 4.89 million tons of CO2 over a period of 20 years (247.7 tons CO2/yr) from the 66.0 MW(t) and 42.13 MW(e) built in the initial five years of the REFF operation. Emission reductions due to new energy and heat generation were calculated in the following way: assumed investments / assumed capital unit cost of 1 MW(e) capacity= assumed capacity assumed capacity x assumed number of working hours per year = annual MWh production annual MWh production x emissions factor = annual emissions reductions annual emissions reductions x 20 years (project life) = project life emissions reductions Capital unit costs were assumed as follows: Wind power generation US$1,475 /kW(e); Mini hydro US$1,285/kW(e); Biomass power generation US$1,500/kW(e); Biomass heat production US$500/kW(t); Solar heat production US$ 300/kW(t). Number of working hours per year: Wind installations 2,700 hrs ; Mini hydro 2,700 hrs; Biomass installation 4,500 hrs; Solar heat collectors 1,000 hrs (South region); 60 1,500 hrs (Baikal region). Average emission factors for replaced coal and mazut power plants and boilers: · 1.0 tCO2 for 1MWt(e) x hrs; · 0.5 tCO2 for 1MWt(t) x hrs. Local Benefits: include: (i) reduction in local pollution; (ii) building of the institutional capacity and know-how in planning, assessing, and financing renewable projects, and (iii) contribution to the governmental policy to diversify energy sources, in particular, in remote regions. Also, the project will have a positive impact on Russia's consulting and manufacturing industry. Finally, new financial instruments will become available, such as contingent grants and soft loans. Incremental Costs and Benefits A summary of the costs and benefits is presented also in the following table. Since GEF will contribute US$ 10.0 million, the unit incremental cost for GEF is US$2.04 per ton of CO2 removed. Table: GEF Incremental Cost Matrix Baseline Alternative Increment Domestic Energy demand would be Local pollution with Reliability of the Benefits satisfied with conventional particulates, sulfur and energy supply will be energy sources and nitrogen oxides and other improved and economic pollution would remain residues resulting from the risks associated with high. burning of fossil fuels will be volatile pricing for reduced significantly by the fossil fuels reduced. use of clean renewable energy. Private sector and local FIs Investments in renewables by Increased investments are reluctant to finance the private sector and local FIs in renewables by the renewable energy projects private sector and local due to the high risk and FIs unfamiliar profile of the business Weak capacity of local Competent and strong Increased capacity to organizations (e.g. consulting and engineering develop renewable consulting and engineering industry results in lower cost projects industry) to develop and of projects' preparation and finance renewable projects. implementation and utilization of more efficient technology Global Benefits Renewable energy sources Total emission reductions are 4.89 million tons CO2 would remain underutilized; 25,69 million tons of CO2 reductions as a direct their use would increase result of RREP very slowly. About 20.8 implementation million tCO2 reduction over life cycle. Policy and Regulatory, institutional, By systematically addressing Institutional and technical knowledge these constraints the Strengthening barriers that currently component will facilitate and Capacity inhibit renewable Renewable Energy Policy and Building investments would remain Market Infrastructure 61 Component un-addressed Development. $19.2 million, including $5.0 million ­ GEF share $5.0 million Renewable None of the identified $57.6 million investments: Energy Financial renewable investment $39.6 million in projects Facility opportunities would be implemented. Existing supported by the PPW and conventional energy RSLW loans and contingent supplies would be used grants; instead. $18.0 million in projects supported by the Revolving RER Facilities in pilot regions, Including US$5 million from GEF $5.0 million Total Cost $486. 0 million $562.8 million $76.8 million Including the - $10 million $10 million GEF's share 62 ANNEX 16: STAP Roster Review 1. Review Russia-Renewable Energy Program (RREP) (Appraisal of GEF proposal) The document reviewed is the draft version of Project Brief for the "Russia-Renewable Energy Program (RREP)" dated 12 September 2006. The document in total consists of 78 pages: a cover page and a proposal of 21 pages with 24 Technical Annexes and a map. Annexes 7 (Financial Management and Disbursement Arrangements), 8 (Procurement Arrangements), 10 (Safeguard Policy Issues), 11 (Project Preparation and Supervision), 12 (Documents in the Project File) will be developed, in line with World Bank procedures, at a later stage. The main objective of the proposal is to contribute to the Global Climate Change mitigation process through facilitation of sustainable development of Russia's energy sector and abatement of GHGs. Two key sectors of energy service: renewable energy (75%) and district heating and energy efficiency improvement (25%) are targeted in proposal through implementation of two main project components: component A (US$ 8.0 million, GEF)-institutional and policy measures facilitating the sustainable marketing of RER and component B (US$ 12.0 million, GEF) ­investment mechanisms for support of renewable energy projects from the pilot regions and reducing the incremental costs of environmentally friendly projects. Final conclusion: The proposal (at this stage) and the program as a final product for implementation is very important and timely activity for such country as Russia having unutilized renewable resources; serious institutional, market and other barriers typical for the countries in transition; being Annex I country to the UNFCCC and Annex B country to the Kyoto Protocol with the target stabilization of GHG emission at the 1990 level but oriented on rapid development of its industry including the energy sector and development of market economy. The program could significantly contribute to the facilitation of private sector involvement in sustainable marketing of RER which is vitally important for the increase of RER share in energy industry and the ensuring of the sustainability of whole process thus contributing in Global processes. Some very important elements of the proposal should be highlighted which would facilitate the success of the Program: The standards setting element planned in the program which is really urgent and should be one of the priorities of the component A. Reduction of transaction costs of projects implementation. Certainly providing the assistance to project owners in assessment of technical and economical potential of renewable resources to be used 63 and in preparation of tender documentation for bankable project which is the most costly part of a project development process. Facilitation of increase participation of private entities which is quite weak in RER sector. Demonstration projects in pilot regions are vitally important for improvement the weak statistics existing in transition countries and thus reducing the project risk. Coordination of all programs and projects related to the utilization of RER and currently ongoing or planned in Russia. Russia has large territory with considerable renewable energy resources distributed over the country's administrative and territorial units and with inherited from Soviet time low efficiency. Therefore it is not surprising that several programs on promotion of renewable energy sources utilization and improvement of energy efficiency are listed in proposal. Strong cooperation among these programs is important element for successful implementation of program. Involvement of regions Below are listed some issues for improvement which could strengthen the environmental orientation of project and make clearer overall project idea for outside people not being involved at project preparation stage: a) Barriers analysis As far as the proposal directly supports the GEF OP#06 "Promoting the adoption of renewable energy by removing barriers and reducing implementation costs" the proper identification of barriers to the increase of the renewable energy share in Russia's energy supply system, ensuring of sustainable marketing of RER and improvement of energy efficiency on the basis of cost-benefit analysis are the key points for the reaching of final target. Four types of barriers: financial, institutional and ownership, information and implementation capacity are correctly identified in proposal. Insufficient private sector presence in the sectors considered and weakness of their managerial skills are mentioned among others. Main focus of the study should be done on this latest one and strengthening of the local private sector acting in renewable and energy efficiency fields could be priority target of the project aiming at the facilitation of sustainable market for RER. b) Assessment of resources The proposal mentions feasibility studies conducted in the framework of different programs but nothing is said whether economically and technically feasible potential have been assessed in these studies or it will be the element of the current program. c) Innovative financing mechanisms Along with the mechanisms (Renewable Energy Financial Facility-REFF, Revolving Soft Loan Window- RSLW, Contingent Loan-CL, etc) already considered by the proposal as innovative financial mechanism 64 the Kyoto Mechanisms (Joint Implementation and Emission Trading) could be considered from the point of view of capacity building, preparation of project pipeline and drawing of additional investments. d) Selection of projects for financing Making judgment only on the basis of the project titles the preliminary selected projects (listed in attachments 3 and 4 to the Annex 4) should be very interesting however 2/3 of them are submitted (and probably will be implemented) by Governmental and scientific structures. Focusing on the private sector participation as priority requirement in project selection process could improve the marketing elements of the program. e) Environmental benefit of the program It is clear that project will seriously contribute to the Global Climate Change problem and that's why it will be submitted to the GEF OP#06 serving the UNFCCC. However the environmental benefit of the project and particularly its contribution in reducing of GHGs is not appropriately reflected in the proposal though some preliminary estimations of reduced GHGs are presented in the matrix for incremental costs.. It would be more impressive if the amount of reduced GHGs will be added to the list of indicators (Technical Annex 3-in column for "outcome indicators" as well as in column "Use of Outcome Information") and accordingly to the appropriate sections and chapters of document. The proposal briefly reviews most of ongoing in Russia programs and National strategies related with RER. However the National Policy to the Climate Change and the role of this project in achievement of its targets is in lack. Nothing is said in Annex 14 (Country at a Glance) about country's GHGs emission, its share in global emission or share of energy sector in Russia's GHGs emissions trends. f) Local experience got from similar programs. It is plausible that the experience (particularly related to the barriers) got from the similar projects from neighboring countries has been overviewed and will be seriously taken into consideration during the project implementation stage. To make the critical analysis of the similar projects and programs ongoing in Russia and how the results will be incorporated in this program would be also very helpful. g) Project selection criteria Project selection criteria considered in Annex 9 are oriented only to the economical and financial parameters of a project. Environmental parameters along with others (technology transfer, lifetime of technology, etc) should be also considered at the project selection stage. h) Incremental costs I think that consideration of baseline scenario as "nothing will happen or be implemented in renewable sector without this program" is not correct. My understanding is that these other programs (National or International) against which the incrementality is considered are/will implementing something and the current GEF program will increase their efficiency. The matrix of incremental costs should be accordingly revised. i) Clarification Request 65 Cover page of document, the first right box under the sectors is identifying: Renewable energy (75%); District heating and energy efficiency services (25%). My reading of the proposal is that program doesn't cover energy efficiency issues (may be only at the level of general strategy or legislation). Some clarifications would be helpful PDO abbreviation from Technical Annex 3 is not in the list of abbreviations and acronyms. FSU ­some information on the activity of this unit gives more clearness. Marina Shvangiradze Coordinator/manager of Georgia's SNC to the UNFCCC GEF STAP Roster expert 2. Responses to the STAP Review Below are listed some issues for improvement which could strengthen the environmental orientation of project and make clearer overall project idea for outside people not being involved at project preparation stage: a) Barriers analysis As far as the proposal directly supports the GEF OP#06 "Promoting the adoption of renewable energy by removing barriers and reducing implementation costs" the proper identification of barriers to the increase of the renewable energy share in Russia's energy supply system, ensuring of sustainable marketing of RER and improvement of energy efficiency on the basis of cost-benefit analysis are the key points for the reaching of final target. Four types of barriers: financial, institutional and ownership, information and implementation capacity are correctly identified in proposal. Insufficient private sector presence in the sectors considered and weakness of their managerial skills are mentioned among others. Main focus of the study should be done on this latest one and strengthening of the local private sector acting in renewable and energy efficiency fields could be priority target of the project aiming at the facilitation of sustainable market for RER. Project Team response: The team agrees that this barrier is one of the most important for RER development in Russia as well as in many other countries of FSU. So fare, we put insufficient private sector presence in the power and heat generation sector in the group of "ownership barriers". Therefore, the team has added in the project design (para B3. and Annex 4) a new task to support and to strengthen the private sector with regard to RER development The activities would consist of support to an introduction of ESCO-models and to the development of business planning on RER development by private companies. Training courses on the mechanisms of public-private partnerships in RER development will be arranged for governmental officials and entrepreneurs. b) Assessment of resources The proposal mentions feasibility studies conducted in the framework of different programs but nothing is said whether economically and technically feasible potential have been assessed in these studies or it will be the element of the current program. Project Team response: 66 The OECD/IEA study on renewable energy potential in Russia, published in 2003, is the most comprehensive and professional work so far. In accordance with this study, the volume of renewable energy ( economic potential) corresponds to about 30% of the country's current total primary energy supply. Several other studies on the same topic came to similar conclusions. One of the priority tasks of the TA component will be the execution of a "study of economic feasibility of different renewable energy resources in different Russia's regions based on a comparison of RER with tradition fuels, taking into account of full cost for traditional fuels development". c) Innovative financing mechanisms Along with the mechanisms (Renewable Energy Financial Facility-REFF, Revolving Soft Loan Window- RSLW, Contingent Loan-CL, etc) already considered by the proposal as innovative financial mechanism the Kyoto Mechanisms (Joint Implementation and Emission Trading) could be considered from the point of view of capacity building, preparation of project pipeline and drawing of additional investments. Project Team response: Russia's potential for participation in the Kyoto mechanisms is large, and there are good opportunities for an attraction of additional investment resources in renewable energy projects. However, these resources were not considered by the team as the project co financing due to the absence of governmental procedures on JI project approval and selling of Emission Reductions Units or Assigned Amount Units to Parties of Kyoto Protocol. The issue should be considered in details during the project appraisal, when the above mentioned governmental procedures envision to be in place. Also, we would need guidance from GEF SEC if, and if yes, under which circumstances GEF and JI funds can complement each other. So far, GEF and JI funding of the same project is not possible. d) Selection of projects for financing Making judgment only on the basis of the project titles the preliminary selected projects (listed in attachments 3 and 4 to the Annex 4) should be very interesting however 2/3 of them are submitted (and probably will be implemented) by Governmental and scientific structures. Focusing on the private sector participation as priority requirement in project selection process could improve the marketing elements of the program. Project Team response: The relatively low share of project ideas from private sector developers in the pipeline can be explained by the procedure of project identification. MEDT cooperated closely with regional administration in identifying of investment projects and in assessing the possible demand for investment support. While it is expected that private investors will participate in many of projects formally proposed by governmental entities and/or regional and municipal authorities, the share of projects initiated by private proponents will be increased at the later stage, when open competitive bidding process will be arrange for allocation of GEF support to RER projects. e) Environmental benefit of the program It is clear that project will seriously contribute to the Global Climate Change problem and that's why it will be submitted to the GEF OP#06 serving the UNFCCC. However the environmental benefit of the project and particularly its contribution in reducing of GHGs is not appropriately reflected in the proposal though some preliminary estimations of reduced GHGs are presented in the matrix for incremental costs. It would be more impressive if the amount of reduced GHGs will be added to the list of indicators (Technical Annex 3-in column for "outcome indicators" as well as in column "Use of Outcome Information") and accordingly to the appropriate sections and chapters of document. The proposal briefly 67 review most of ongoing in Russia programs and National strategies related with RER. However the National Policy to the Climate Change and the role of this project in achievement of its targets is in lack. Nothing is said in Annex 14 (Country at a Glance) about country's GHGs emission, its share in global emission or share of energy sector in Russia's GHGs emissions trends. Project Team response: Agreed. Text and relevant data will be added. f) Local experience got from similar programs. It is plausible that the experience (particularly related to the barriers) got from the similar projects from neighboring countries has been overviewed and will be seriously taken into consideration during the project implementation stage. To make the critical analysis of the similar projects and programs ongoing in Russia and how the results will be incorporated in this program would be also very helpful. Project Team response: MEDT and other governmental counterparts are interested in the experience of similar project implementation in other countries. Some approaches and modalities applied in other WB/GEF projects were used by the team in the RREP project design. But, most of the projects in neighboring countries started quite recently (1-2 years ago), therefore, there are not yet many results, which could be directly incorporated in the project. The project team has reached an agreement with the governmental counterparts that certain resources from the GEF grant and from counterpart co-financing will be allocated for lessons learning. g) Project selection criteria Project selection criteria considered in Annex 9 are oriented only to the economical and financial parameters of a project. Environmental parameters along with others (technology transfer, lifetime of technology, etc) should be also considered at the project selection stage. Project Team response: Agreed. We will add relevant information. h) Incremental costs I think that consideration of baseline scenario as "nothing will happen or be implemented in renewable sector without this program" is not correct. My understanding is that these other programs (National or International) against which the incrementality is considered are/will implementing something and the current GEF program will increase their efficiency. The matrix of incremental costs should be accordingly revised. Project Team response: Agreed. The incremental project's GHG reductions took into account only those that were directly generated by investment projects supported. There are no calculations of emission reductions generated by activities of the Technical Assistance component. The team will make an assessment of environmental effects of the technical assistance and will discuss the issue with the counterparts in details during the formal project appraisal. i) Clarification Request Cover page of document, the first right box under the sectors is identifying: Renewable energy (75%); District heating and energy efficiency services (25%). My reading of the proposal is that program doesn't cover energy efficiency issues (may be only at the level of general strategy or legislation). Some clarifications would be helpful 68 Project Team response: The indicated 25% are not related to energy efficiency services, but to "District heating and energy efficiency services". As district heating will play an important role in the project, this is justified in our opinion. PDO abbreviation from Technical Annex 3 is not in the list of abbreviations and acronyms. Project Team response: "PDO" stands for Project Development Objective. It has been spelt out in the text. FSU ­some information on the activity of this unit gives more clearness. Project Team response: FSU stands for "Former Soviet Union". 69 ANNEX 17: Letter of Support: Ministry for Economic Development and Trade Letter from Mr. V. Gavrilov, Deputy Director, Ministry of Economic Development and Trade September 13, 2006 To: Mr. Helmut Schreiber Lead Environmental Economist World Bank RM Dear Mr. Schreiber, With connection to the presentation of a set of documents regarding the project "Russian Program to Develop Renewable Energy Sources" (RREP) to the GEF Board, please find below some information on the project preparation progress. Pursuant to instruction #5P-KA of the Ministry of Economic Development and Trade of the Russian Federation dated March 20, 2006, the Ministry coordinates activities of the Ministry of Industry and Energy of the Russian Federation, Ministry of Natural Resources of the Russian Federation, Ministry of Education and Science of the Russian Federation as well as consulting firms, aimed at implementing all project preparation components that shape up key tasks of the future Program. Over the past period the Ministry of Industry and Energy of the Russian Federation has made several important decisions regarding the development of renewable energy sources (RER) - see minutes #45-/09 (annex 1) of the meeting held by Mr. A.Dementyev, Deputy Minister of Industry and Energy of the Russian Federation, on August 20, 2006. A set of measures of state support to developing RER and increasing their share in the national energy budget is to be put together. Proposals on RER facilities to be included into draft federal program aimed at improving energy efficiency in the Russian Federation that is being designed following assignment by the President of the Russian Federation, and to be considered in the designing of the Long-Term Program for Electric Power Industry Development up to 2020 and General Scheme of Electric Power Industry Facilities Location up to 2020, are under preparation. Key measures include developing draft federal law "On Support of Renewable Energy Sources Use" initiated by the JSC RAO "UES of Russia". The Ministry of Education and Science of the Russian Federation under the framework of the "R&D in Priority Areas of Science and Technology Development (2007 ­ 2009)" federal targeted scientific and technological program selects proposals to finance awareness-raising and capacity-building projects in RER development. The Ministry of Natural Resources of the Russian Federation under the "Improving Efficiency of Operation of Protected Natural Areas of Federal Importance (2007-2009)" sectoral targeted program designs activities to tap RER in state natural preserves and national parks, and determines the amount of funds needed to tap RER in natural preserves and national parks that are to be received from the national budget. Based on preliminary estimates, investment of 164.4 million RUR in energy equipment using various RER that is planned by the Ministry of Natural Resources of the Russian Federation will help to reduce CO2 emission by 60-70 thousand tons annually. 70 In the course of the Project preparation, many Russian regions (Krasnodarsky Krai, Stavropolsky Krai, Rostov oblast, Arkhangelsk oblast, Republic of Buryatia, Republic of Karelia, Republic of Komi, etc.) developed proposals to design and implement investment projects to tap RER (annex 2). Administrations of several regions (Krasnodarsky Krai, Arkhangelsk oblast, Republic of Komi) came up with initiatives to pilot implementation of the RREP. The Ministry of Economic Development and Trade of the Russian Federation confirms the intention to use the National Pollution Abatement Facility (NPAF) and to direct some of available financial resources to the implementation of the investment component of the RPDRSE. Moreover, the Ministry seriously considers to review the Program and to add financial instruments which will help to make borrowed funds more attractive for end users. The total need for financial resources to implement the identified investment projects exceeds the planned amount of US$ 50-60 million substantially; with this in view, the Ministry of Economic Development and Trade of the Russian Federation together with the Ministry of Finance of the Russian Federation look into a possibility to use not only the US$20M of the NPAF borrowed funds, but also to employ a portion of the unused proceeds of the WB loan and Swiss grant for the National Pollution Abatement Facility (NPAF) as well as other resources. Attachment: 18 pages in 1 copy. V.Gavrilov, Chair, Supervisory Board for the Preparation of the RPDRSE, Deputy Director, Department of Property and Land Relations, Environmental Economics Ministry of Economic Development and Trade 71 ANNEX 18: Letter of /Request for Support: State Duma Federal Assembly of the Russian Federation STATE DUMA DEPUTY of the STATE DUMA (4-th Convocation) 2004--2007 _________________________________________________ June 23, 2006 To: I. N. Grechukhin Director Property and Land Relations, Environmental Management Economy Department Ministry of Economic Development and Trade Dear Igor Nikolayevich: Mandated by a consortium of 24 institutions and enterprises representing different regions of the Russian Federation together with the UNESCO Information Learning Network for Europe on renewable energy (EUTUNETRES) a non-profit making partnership "Renewable Energy Innovation Technology Development Center" has prepared a project proposal for establishing, piloting, and developing an information learning network for scaling up renewable energy use in the Russian Federation (RUSNETREPOWHR). The establishing of the above network is a key task to create favorable conditions for sustainable use of renewable energy based on the best practices of Russia and many other countries in this area. I believe that the project on establishing and development of the information learning network for the utilization of renewable energy in the Russian Federation deserves support. In this connection you are kindly requested to explore the possibility of entering the information learning network investment project on renewable energy in the Russian Federation (RUSNETREPOWFR) into the list of projects to be financed by the Global Environmental Facility (grant) under the "Russia - Renewable Energy" Program. 72 Enclosure: 30 pages Deputy Chairman L. N. Kosarikov State Duma Committee on Environment 73 ANNEX 19: Letter of /Request for Support: Altaisky Kraj ALTAISKY KRAI ADMINISTRATION ALTAISKY KRAI DEPARTMENT FOR INDUSTRY AND ENERGY Lenina Street, 59 Barnaul, 656035 Tel/fax 66-74-42 June 23, 2006 # 4b-1-32/990 To: I.N. Grechukhin Director Property and Land Relations, Environmental Management Economy Department Ministry of Economic Development and Trade Dear Igor Nikolayevich: You are kindly requested to enter the investment project on the use of renewable energy in the Altaisky Krai named "Altaisky Krai ­ Solving Energy and Ecological Problems of Large Livestock Husbandry Integrated Farms by Developing Energy Markets Through Biogas Utilization" into the list of demonstration projects to be implemented under the Global Environmental Facility grant in the context of the "Russia - Renewable Energy" Program. Enclosure: one copy of 7 pages Department Chief V.. Ryapolov Executed by Ilya Gennadievich Zotkin 667541 74 ANNEX 20: Letter of /Request for Support: Republic of Buryatia Government of the Republic of Buryatia Lenina Str, 54, Government House To: A.G. Ishkov 670001 ,Ulan-Ude city, Director tel../ fax (301-2) 21-02-51 Environmental Protection URL: http://gov.buryatia.ru Public Policy Department e-mail buryatia@icm.buryatia.ru Ministry of Natural Resources August 3, 2006 # i 097-000285 Russia On the participation in the preparation of projects under component 3 of RREP Dear Alexandr Gavrilovich: In pursuance of your letter # 12-27/4321 (May 31, 2006) please find enclosed a revised list of projects on renewable energy of the Baikal Conservation Area presented at the International scientific and technological seminar "Russia - Renewable Energy" Program in Rybinsk on June 28-30, 2004 including the following information for each project: name, implementation site, amount of funding. Enclosure: 3 pages Sincerely, L.D.urbyanov Deputy Chairman Government Republic of Buryatia Stamp: Ministry of Natural Resources of Russia, August 9, 2006, incoming #017351/27 75 ANNEX 21: Letter of /Request for Support: Republic of Karelia Russian Federation REPUBLICOFKARELIA STATE COMMITTEE OF THE REPUBLIC OF KARELIA FOR HOUSING AND UTILITIES REFORM To: Igor Nikolaevich Grechukhin Director Property and Land Relations, Environmental Management Economy Department Ministry of Economic Development and Trade Meretskova Street, 8 Petrozavodsk 185003 Tel. 571838, fax 560627 (814) e-maill: gkhrk@onego.ru January 26, 2006 #06-22 / 906 In pursuance of letter D 08-42, January 13, 2006 Dear Igor Nikolayevich: In response to your request D08 - 42 (January13, 2006) please find enclosed a list of republican projects on renewable energy sent by the Government of the Republic of Karelia for co-financing with the Global Environmental Facility grant under the project "Russia - Renewable Energy" Program (RREP). Sincerely, V. K. Koryagin Chairman State Committee Executed by A.G. Fyodor tel. 560158 76 Russian Federation To: Igor Nikolayevich Grechukhin REPUBLIC OF KARELIA Director STATE COMMITTEE Property and Land Relations, OF THE REPUBLIC OF KARELIA Environmental Management Economy FOR HOUSING Department AND UTILITIES REFORM Ministry of Economic Development and Trade Russia Meretskova Street, 8 Petrozavodsk, 185003, Yu. M. Maximenko tel. 57-18-38, fax 55-86-36 (814) June 15, 2006, # 06 - 22/1014 RREP: Project Preparation Unit Dear Sirs: In addition to the documents submitted earlier by the Government of the Republic of Karelia please find attached a specific list of projects recommended for entering into the priority list of projects on renewable energy to be co-financed with the Global Environmental Facility grant under the project "Russia- Renewable Energy" Program. Enclosure: 1 page. Sincerely yours, V.K. Koryagin Chairman State Committee Executed by Ye. V. Gruzdeva Tel. 56-01-58 77 ANNEX 22: Letter of /Request for Support: Komi Republic SERVICE ON TARIFFS To: Yu. L. Maximenko KOMI REPUBLIC Director General Executive Directorate National Pollution Abatement Facility Program Lenina Street, 73, Syktyvkar, Komi Republic, 67981 Tel / fax: (8212) 29-15-71 E-mail: komirec@mail.ru http://www.komirec.ru June 9, 2006 #01-01/1379 On entering the project into the list of demonstration projects Dear Yury Leonodovich: An investment project is currently being prepared in the Komi Republic named "Application of Advanced Technologies for the Utilization of Woodland Management Biological Resources for the Decentralized Energy Supply of Social and Housing Facilities in the Areas of Intensive and Moderate Logging Activities of the Komi Republic". You are kindly requested to enter the above investment project (being a priority task for scaling- up the utilization of biological fuel in compliance with the Instruction of the President of the Russian Federation 704 made in Syktyvkar on April 30, 2006) into the list of demonstration projects under the "Russia - Renewable Energy" Program implemented under the Global Environmental Facility grant. Member of the Government K.Yu. Romadanov Komi Republic Head of the Komi Republic Service for Tariffs Chairman of the Board of Directors Open Joint Stock Company "Komi Heating Company" 78 ANNEX 23: Letter of /Request for Support: Krasnodar Kraj HEAD OF THE ADMINISTRATION To: G. O. Gref KRASNODARSKY KRAI Minister Ministry of Economic Development and Trade Krasnaya Street, 35, Krasnodar city, 350014 Tel.: (861) 262-57-16, fax: (861) 268-35.42 November 29, 2005, #1-02/849 On recommending Krasnodarsky Krai for the participation in the "Russia - Renewable Energy" Program Dear German Oskarovich: The Krasnodarky Krai has developed an action plan through 2015 aimed to satisfy 30% of its needs in the energy by using renewable energy sources including geothermal ones. The preparation of the above program was a result of three-year cooperation of the Krasnodarsky Krai Administration with the Russian Association «Geothermal Energy Society» and the World Bank Global Environmental Facility (GEF). Within the context of this cooperation the Krasnodarsky Krai Administration has financed all joint development activities implemented in the above areas. Currently a World Bank GEF project named "Russia - Renewable Energy" Program (RREP) is being prepared in accordance with Resolution #653 of the Government of the Russian Federation issued in November 1, 2005. In this connection you are kindly requested to consider the possibility of covering the Krasnodarsky Krai by the above project as a pilot region for the implementation of the program mentioned. The Administration of the Krasnodarsky Krai would like to confirm its commitment to participate in the following areas under the RREP: a) regional legislation, delineation of powers for different authority levels; b) preparation of the strategy and the renewable energy program for the Krasnodarsky Krai, and introducing program implementation instruments; c) implementation of a number of investment projects for the utilization of different kinds of renewable energy in the Krasnodarsly Krai; d) establishing a demonstration and information center on renewable energy in the Krasnodarski Krai based on the conception used for the European Renewable Energy Center ( Austria). 79 Dear German Oskarovich: You are kindly requested to support our initiative for covering the Krasnodarsky Krai by the World Bank GEF project. Chief of the Administration Krasnodarsky Krai A. N. Tkachyov 80 ANNEX 24: Letter of /Request for Support: Stavropol Kraj MINISTRY OF INDUSTRY, To: Yu. L. Maximenko TRANSAPORT AND COMMUNICATIONS Director General Stavropolsky Krai Executive Directorate National Pollution Abatement Facility ProgramTolstogo Street 39. Stavropol 355003, tel. (8-865-2) 26-83-43 window 00091669 E-mail: minprom@stayropol.net February 7, 2006 # 08 - 182 Dear Yury Leonidovich: The Ministry of Industry, Transport and Communications of the Stavropolsky Krai recommends the project "Integrated Use of Geothermal Resources of Kazminsky Deposit" representing the Stavropolski Krai to be entered into the list of projects for the "Russia - Renewable Energy" Program (RREP). Please find enclosed the investment proposal with the draft technical and economic specifications. Enclosure: 1. Investment Proposal for the project «Integrated Use of Geothermal Resources of the Kazminsky Deposit» - 6 pages Minister of Industry, Transport and Communications Stavropolky Krai S.. Berezin Executed by S.A. Filippov tel. / : 35-63-63. 81 ANNEX 25: Map (see attached file) 82 ANNEX 26: Minutes of the meeting of the Supervisory Board for the preparation of the project "Russian Renewable Energy Program" «APPROVE:» Chairman of the Supervisory Board for the Preparation of the RREP, Deputy Director, Department of Property and Land Relations and Environmental Management of the Ministry of Economic Development and Trade of the Russian Federation V.Gavrilov. March 19, 2007 CHAIR - O.Pluzhnikov ATTENDEES: Members of the Supervisory Board: - O.Krever - E.Meshkova (substituting for D.Levchenko) - Ju.Maksimenko - A.Pavlov - B.Reutov - M.Solovyev - V.Ugrinovich Invitees: - A.Averchenkov (World Bank) - Yu.Kozeikin (MoF) - M.Saparov (RREP preparation coordinator) - I.Gorkina. (ED NPAF) AGENDA: 1. "On Completion of Main Activities to Implement the GEF Grant Agreement for the Preparation of the Project "Russian Renewable Energy Program" 2. On the Draft World Bank Project Document "Russian Renewable Energy Program" 83 3. On Approval of the NPAF ED Report Regarding Operating Costs for the RREP Preparation in 2006 4. On Interaction Between the Russian Renewable Energy Program and the GEF Project "Geothermal Energy Development Program in Europe and Central Asia (GeoFund)". 1. On Completion of Main Activities to Implement the Global Environmental Facility Grant Agreement for the Preparation of the Russian Federation Project "Russian Renewable Energy Program" (O.Pluzhnikov, Ju.Maksimenko, A.Averchenkov, M.Solovyov, B.Reutov, B.Ugrinovich, A.Pavlov, E.Meshkova, M.Saparov) 1.1. Consider information from the NPAF ED on completion of main activities to implement the GEF Grant Agreement for the preparation of the project "Russian Renewable Energy Program". It should be stressed that outcomes of the preparation components were accepted in two stages. At the first stage the outcomes were accepted at the MEDT during working meetings chaired by representatives of beneficiary Ministries under the project components: MEDT, MNR, MIE, MoES. At the second stage revised materials related to the Project components were approved during working meetings held at the NPAF ED office and attended by representatives of beneficiary Ministries, members of the RREP SB. Outcomes of the work done with regard to the Project components were used by the World Bank in the development of the RREP Project Document. During the seminar held on February 9, 2007, amendments to the RREP project caused by a 50% reduction of the grant amount were discussed. 1.2. Approve report of the Project Preparation Unit ­ NPAF ED ­ On Completion of Activities for the Preparation of the Russian Renewable Energy Program, approved by Resolution #5P-KA of the MEDT dated March 20, 2006 (see attachment 1). 2. "On Composition of the Russian Federation Project "Russian Renewable Energy Program" with Participation of the Global Environmental Facility and the World Bank" (Ju.Maksimenko, O.Pluzhnikov, A.Averchenkov, A.Pavlov, M.Solovyov, E.Meshkova, M.Saparov, I.Gorkina) 2.1. Consider the information from the NPAF ED that based on the outcomes of activities under the RREP components, the WB together with Russian specialists drafted the Project Document for the RREP project to be submitted to the GEF. In the course of the Project Document development, following proposal from the GEF Secretariat, the amount of the grant co-financing intended for the RREP implementation was reduced from $US 20 million to $US 10 million. 2.2. Consider information on the decision taken by the NPAF SB at its meeting on December 21, 2007 (Minutes #20) to expand the scope of investment projects that receive soft financing from the Program to include investment projects aimed to promote renewable energy sources. 84 2.3. Approve the revised concept of the RREP project presented in the WB Program Document that has been developed for submission to the GEF (see attachment 2). 2.4. The NPAF ED together with the World Bank after tentative approval of the draft by the GEF Secretariat is to develop necessary documents for the MEDT to submit a request for a full-scale RREP project to the GOR in the 2nd quarter of 2007. 3. On Approval of the Report of the NPAF ED on Expending the Grant Proceeds for the Preparation of the RREP Project. (O.Pluzhnikov, Ju.Maksimenko, A.Averchenkov, M.Solovyov, E.Meshkova, M.Saparov, I.Gorkina, A.Pavlov) 3.1. Agree with the proposal of the NPAF ED supported by the MEDT (letter #08-4093 dated December 11, 2006) to reallocate a portion of the GEF grant proceeds intended to cover operating costs that had been released thanks to lower actual contract costs, to support the project audit for 2006. 3.2. Approve the Report of the NFAP ED on the operating costs incurred by the Project Preparation Unit in the course of the RREP project preparation activities in 2006 in the amount of US$ 39,994 (see attachment 3). 3.3. Approve on the whole the Report of the NFAP ED on expending the grant proceeds for the preparation of the RREP project in the amount of US$ 349,120 (see attachment 4). 4. "On Interaction Between the Russian Renewable Energy Program and the GEF Project "Geothermal Energy Development Program in Europe and Central Asia (GeoFund)". (O.Pluzhnikov, Ju.Maksimenko, A.Averchenkov, E.Meshkova, A.Pavlov) 4.1. Consider information of the WB on establishment of the Geothermal Energy Development Program in Europe and Central Asia (GeoFund) and beginning of the implementation of respective GEF project (see attachment 5). Emphasize significant potential for the geothermal energy development in Russia, presence of identified investment projects portfolio and advisability of active cooperation between Russian agencies and firms with the WB GeoFund. 4.3. Suggest to the World Bank to expedite preparation of the Russian component (tranche) of the GeoFund ensuring its interconnection with, and complementarity to, the RREP project. 4.4. Request the RREP Project Preparation Unit (NFAP ED) to contribute to the preparation of the Project Document for the Russian component of the GeoFund and participate in its formal submission to the MEDT and MNR for approval. 85 The minutes were taken by Ju.Maksimenko 86