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Project acceleration and risk report

The June CTF trust fund committee meeting reviewed the CTF semi-annual operational report and noted the recent acceleration of project preparation and approvals: Fiscal year 2014 “has seen an accelerated development of CTF projects and programmes. The total amount of CTF funding approval during FY14 will reach close to $1.4 billion, exceeding the level of funding approval during any of the previous fiscal years.” Libya was added as a new country in the Middle East and North Africa region revised investment plan (see below).

The October CTF semi-annual operational report indicates that a further $1 billion is expected to be approved in FY15. By September $3.8 billion in CTF funding had been approved for 70 projects and programmes (including four from the dedicated private sector programme). As of June 2014 a total of 2,255 MW of renewable energy had been installed under CTF projects. This comprises wind (38 per cent), geothermal (28 per cent), hydro (26 per cent) and solar (8 per cent).

The June meeting also discussed a risk report on CTF income levels, potential funding shortage and ways to increase investment income. It requested the trustees to work with the MDBs to share an updated cash flow model by August. The sub-committee also requested the CIF administrative unit and MDBs to outline a specific target for net income and projected loan losses for consideration at the November meetings. Germany requested the trustees to explore ways to increase investment income and to inform the sub-committee of possible options to that end at its next meeting.

Private sector programme

Two geothermal projects were approved in June worth $20 million in Mexico and $20 million in Chile as part of the first phase of the dedicated private sector programme. In October a further $25 million was approved for a project to develop geothermal energy in Turkey. Funding proposals for projects worth $10 million in Colombia and $65 million in Turkey are expected by October 2014.

The June trust fund committee meeting reviewed progress in phase two of the dedicated private sector programme (see CIF Monitor 9). It approved several programme concepts, while also requesting that MDBs develop sub-programmes and projects under each programme within CTF countries:

• Scaling up of the two utility-scale renewable energy programmes ($120 million for utility-scale geothermal energy and $53.5 million for renewable energy mini grids and distributed power generation). Phase 1 and 2 countries include Chile, Colombia, India, Indonesia, Kenya, Mexico, Philippines and Turkey. All MDBs are interested in participating.
• The addition of two new sub-programmes under the utility scale renewable energy programme with a focus on private and early stage renewable energy power for an indicative amount of no more than $35 million and solar photovoltaic power for an indicative amount of no more than $95 million. These programmes could take place in: Burkina Faso, Ghana, Kenya, Mali, Niger, Nigeria, Chad, Senegal, Brazil and Mexico. To date the AfDB, IDB and IFC have expressed interest in participating.
• $35 million for the mezzanine finance for a climate change programme which could operate in India, Indonesia, Philippines, Thailand, Vietnam, Bangladesh, Cambodia, Lao PDR, Maldives, Mongolia, Nepal, Pacific Region and Tajikistan. To date the ADB has expressed interest in participating.
• The addition of one new programme, the energy efficiency and self-supply renewable energy programme, for an indicative amount of no more than $20 million. This could take place in Brazil, Bolivia, Chile, Peru, Mexico and Colombia. The IDB has expressed interest in participating.

The CIF administrative unit and the MDBs have prepared an outline of how the additional $330 million of UK-provided funding received in December 2013 will be used, which will be reviewed at the November trust fund committee meeting.

The climate finance equity investments programme presented to the trust fund committee in October 2013 was not endorsed (see CIFs Monitor 9). The trust fund committee requested “further information regarding how risks would be managed under an equity programme, and how different funding instruments (grants, capital and loans) would be considered”. A revised proposal was presented for a $30 million mezzanine co-investment facility for the ADB’s climate public-private partnership fund. These funds would be used to “catalyse investments in climate change projects which otherwise would not be viable with traditional senior debt and equity financing”.

Updates on investment plans

Nigeria revised investment plan

The June trust fund committee meeting endorsed revisions to Nigeria’s investment plan. Two projects have been removed: the bus rapid transit Lagos project ($50 million) and the bus-based mass transport support project ($50 million). $100 million in funds will be re-allocated to the utility-scale solar PV project supervised by the World Bank. Funding for the financial intermediation for clean energy/energy efficiency programme has been reduced from $50 million to $25 million. The remaining $25 million has been re-allocated to the utility-scale solar PV project supervised by the AfDB.

Prior to approval the UK asked for clarification on financing, costs and tonnes of carbon dioxide reduction calculations. It also asked whether “these projects address the regulatory bias towards fossil fuels in any way?” and whether “there is any reason why components of the solar plants could not be manufactured in Nigeria? This would create jobs and improve the developmental impact.” The IBRD responded: “The proposed World Bank and AfDB projects will not address the regulatory bias towards fossil fuels” and the “projects will be led by the private sector and procurement of equipment will be done based on the internationally accepted commercial principles of highest economy and efficiency.”

Middle East and North Africa Region (MENA) revised investment plan

The June trust fund committee meeting endorsed revisions to the investment plan for the MENA region, covering Algeria, Egypt, Jordan, Libya, Morocco and Tunisia. The indicative allocation of CTF funding will increase from $660 million to $750 million. Libya has been added to the investment plan.

The revised investment plan explains that Libya is “highly dependent on the hydrocarbon sector, which represents four-fifths of GDP, with gas used for the majority of its electricity generating installations. As part of its policy to meet a mix of 10 per cent renewables by 2020, Libya has expressed its interest in participating in the CTF MENA CSP programme … an indicative envelope of US$20million has been added to the investment plan …. The next steps will be the preparation of technical and environmental/social feasibility studies and preparation of adequate legal and institutional framework.”

Several donors, including the US and Canada, queried whether Libya had been included as a new pilot country, and raised concerns about political stability. The MDBs replied that Libya was added to the plan since it expressed interest, and as it belongs to the MENA region it should be covered by a regional investment plan. The MDBs said this is not the same as adding Libya as a new pilot country.

Selected project updates

Vietnam: CTF funding rejected

The $950,000 project, Core environment program and biodiversity conservation corridors initiative in the greater Mekong sub-region, was not approved. The project aimed to support the implementation and development of climate-resilient and low-carbon strategies by assisting the government of Vietnam to build its capacity to implement mitigation response measures and support increased regional exchange on mitigation actions. The concept was submitted in May with expected approval in June. According to the CTF schedule of project approvals the “project concept is being reviewed and prepared for resubmission.”

The UK raised concerns on the project: “Given that a number of the CTF investment criteria in the proposal are provided as ‘not applicable’ (particularly cost-effectiveness) can the ADB please explain further on the rationale behind the decision to use CTF funds to contribute to this existing technical assistance (TA) programme?” Furthermore, the US added: “We would like to see a robust response from ADB as to why CTF is the best vehicle for the activities”.

The ADB responded: “We would like to clarify that the CTF funds are not contributing to an existing TA programme. Rather, in the interest of efficient implementation and reducing transaction costs, the TA for monitoring and evaluation endorsed in the CIF update of 2013 is being clubbed together with an existing TA programme.” However, the UK and US remained concerned: “we are unable to approve this project as it does not appear to relate directly to the priority sectors (energy efficiency and urban transport) and objectives contained in Vietnam’s Investment Plan, nor does it meet the CTF investment criteria.”

Middle East and North Africa Region: CTF funding questioned

Project details

The Noor II & III concentrated solar power project will contribute to the Moroccan solar energy agency plan to develop 2,000 MW of solar power by 2020.

Key donor questions and concerns prior to approval

Canada: “Morocco appears to be currently subsidising fossil fuels. We note that there is a complementary technical assistance component to the investment package; it could be beneficial to explore if TA could include a policy dialogue component on complementary (to feed in tariff) carbon pricing mechanisms, worldwide experiences etc.”

The US said it objected “to the decision to allocate funding but does not wish to block such a decision. We are unable to support this project due to longstanding concerns about the inclusion of local content requirements in the project procurement.”

AfDB and IBRD responded that the government “announced in May 2014 a revision to its fossil fuel policy that phases out subsidies to fuel oil that is currently the only subsidised fuel used in the power sector”.

They clarified that some content would be locally sourced and constructed but currently “there are no specific estimates for possible local expenditures on good, materials, or labour.” Furthermore, the case of Noor I “would suggest that the local content clause had no impact on the pricing of the plant, since it was 30 per cent lower than the cost estimate.”

Project details

“The proposed MENA technical assistance (TA) programme is part of the revised CTF MENA investment plan, which was endorsed by the trust fund committee in May 2013. The programme supports large-scale deployment of technology by enhancing the developmental and economic impacts through increased local manufacturing and service provision, and informed policies and programmes in participating countries”.

Key donor questions and concerns prior to approval

The US: “The objective to the CTF is to focus on deployment of low-emission technology. While such deployment could and should spur local investment in the sector to support the technology, CTF does not have an explicit objective of supporting local manufacturing capacity, particularly when such support is separated from project investments.” The US also commented: “The Global Environment Facility has funded hybrid concentrated solar power/gas plants in Morocco and we believe that it may have also supported similar plants elsewhere in the region. There is no clear justification for why further hybrid plants are needed at a scale that justifies CTF support rather than other funding sources.”

IBRD responded: “The revised TA proposal does not encourage the use of local content requirements in any country, which would be contrary to World Bank procurement rules”. On the hybrid concentrated solar power/gas plant the IBRD said: “retrofitting existing power plants with a solar field can be a highly cost effective way of building CSP power plants, as it could mean that no new power block is needed. This would then in turn reduce the incremental costs that the countries would have to bear themselves.”

Project details

“This proposal is a sub programme under the endorsed dedicated private sector programme: utility scale renewable energy programme with a focus on private and early stage renewable energy power.” The goal is to “break down barriers preventing the development of the private renewable energy markets in south east Mediterranean and the exploitation of the region’s outstanding renewable resources.”

Key donor questions and concerns prior to approval

The UK approved the project but noted, “it would be helpful for us in endorsing future proposals if activities that will help reduce poverty could be made more apparent”.

Canada queried the financing instruments to be used and asked for the project to be funded via grants “until such time that the risk sharing amendment is finalised, given this project proposal requests CTF financing in the form of one of the financial products CTF contributors have defined to be a ‘higher risk’ financial product.”

Germany: “We would like to seek confirmation that if and when EBRD would like to apply equity or quasi equity instruments that such financing would be as per the new risk sharing mechanism coming from grant funds.”

The EBRD responded: “This is not for us to decide, but we can prior to each investment being made revert to the trustee for such a decision, with a suggestion from us based on the criteria to be developed.”

Egypt: questions on poverty impacts

Project details

The objective of the project is “to develop infrastructure and business models for scaling-up wind power in Egypt” and to “connect the future wind parks at the Gulf of Suez and Gabel El-Zait to the national network.” The outcomes expected include “implementation of the first private sector investments in wind power generation” and “reducing greenhouse gas emissions through facilitating the development of clean energy resources (wind power) which result in displacing thermal (fossil fuel-based) generation.”

Key donor questions and concerns prior to approval

The UK asked why the development impact section did not mention poverty and “how the project/savings from the original project will benefit the poorest”. It also asked for more information on gender: “the reference to 49 per cent of recipients being women is not the strongest case for an approach of targeted measures that would specifically focus on gender benefits for women and girls.”

IBRD responded: “For existing consumers, the connection of additional power generation could mean increasing their consumption for better quality of life, expanding business activity (e.g. SMEs), modernising industry, improving school buildings, or installing healthcare equipment”, and “for rural consumers, such source of electricity supply could alleviate poverty by increasing electrification of villages, illuminating roads to support economic and social activities, the development of education and health care and meeting the basic needs for low-income families.” On gender, “the percentage of female beneficiaries is used as an indicator but not targeted”.

Turkey: funding approved for private sector geothermal

Project details

“The project will provide loans to private sector investors aimed at bridging the funding gap existing at early stage of development of Geothermal Power Plants (GPPs). The facility will also provide technical assistance to promote best practices in the development of geothermal resources for power and heat generation, particularly at early stage. This will include supporting developers during their exploration and production drilling campaigns to minimise technical and financial risks.”

Key donor questions and concerns prior to approval

The UK: “We are concerned that the special dividend proposed on the CTF loan could act as a disincentive on project developers to seek out commercial loan resources from other lenders” and “if you expect a continuing role for public finance to address the high risks associated with drilling, then please be clear about this”.

Germany asked about the interest rate and length of senior loans, noting that “the interest rate should reflect the high risk of the investment”.

Canada: “due to the high risk level associated with this proposed investment, we do not see it as being consistent with the CTF matched funding principle. Accordingly, we cannot support the proposed project in its current form, unless it is sourced from grant and/or capital contributions.”

EBRD responded that loans would be up for to 10 years and in response to UK questions said: “The special dividend will be charged in order to reimburse CTF for the risk taken if CTF does not participate further” and “the operation has to be seen in the context of the overall dedicated private sector programme, where substantially larger funds will be made available by IBRD in a separate transaction”.

India: gender and energy efficiency

Project details

“The project development objective is to assist India in achieving energy savings by: (a) mobilising commercial financing using risk sharing mechanisms; and (b) catalysing an energy efficiency project.” This is sought to be accomplished by, “(1) leveraging project funds to encourage private sector investment in energy efficiency projects and (2) providing complementary technical assistance and capacity building to stakeholders in India’s energy efficiency market.”

Key donor questions and concerns prior to approval

The UK suggested that the number of gender disaggregated jobs be included in the results framework.

The IBRD responded: “we will not be able to collect the requested information on an annual basis as part of the results framework but we will include this in the operational manual for the project for reporting on these in annual business and implementation plan. The numbers will be collected as they become available and will be included in the implementation completion report of the project.”

Ukraine: CTF rationale questioned

Project details

“Funds made available to participating financial institutions in Ukraine for on-lending to eligible private sector sub-borrowers for sustainable energy investments in the residential sector. The project aims to demonstrate the benefits of rational energy utilisation in the light of the rising energy costs and unreliability of the energy supply in Ukraine.”

Project details

“Improve the reliability of the power transmission system and support implementation of the wholesale electricity market in Ukraine, as well as strengthen system capacity for integrating renewable energy power into the grid. The proposed project will support rehabilitation of transmission substations, installation of reactive power compensation devices, and deployment of new smart grid technologies.”

Key donor questions and concerns prior to approval

The UK asked: “Why would this entire project not happen without CTF funds?”

IBRD responded: “The use of CTF funding will be crucial for introducing smart grid technologies in Ukraine, which would not have happened in the absence of CTF support”.