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PROJECT BRIEF

1. IDENTIFIERS PROJECT NUMBER: 502486 PROJECT NAME: Philippines - CEPALCO Distributed Generation

PV Power Plant DURATION: 2 years IMPLEMENTING AGENCY: World Bank EXECUTING AGENCY: International Finance Corporation (IFC) REQUESTING COUNTRY: Philippines ELIGIBILITY: Ratified the UNFCCC on August 2, 1994 GEF FOCAL AREA: Climate Change GEF PROGRAMMING FRAMEWORK: Operational Program #7 2. SUMMARY: Solar Photovoltaic (PV) technology is a cost-effective generating source of electricity that is in the process of establishing itself in off-grid markets around the world. However, on-grid applications so far have been limited to a few installations in developed countries, even though PV offers various advantages as distributed generating sources. The two reasons for this lag are the high costs of PV compared to thermal alternatives and the need for additional energy storage because of the interruptible and variable nature of solar energy. To demonstrate PV’s effectiveness in addressing distribution system capacity issues, a 1 MW distributed generation PV power plant is proposed to be built and integrated into the 80 MW distribution network of the Cagayan de Oro Power & Light Company (CEPALCO), a private utility operation on the island of Mindanao in the Philippines. The PV system will be operated in conjunction with an existing 7 MW hydroelectric plant with dynamic load control, thereby enabling the joint PV/hydro resource to reduce both distribution level and system level demand, effectively providing “firm” generating capacity. The PV plant will also assist in postponing the need for additional substation installations in the CEPALCO distribution system for a period of up to three years. The project will thus reduce the need of CEPALCO to purchase additional quantities of thermal plant-based power, thereby reducing its emissions of greenhouse gases. However, more importantly, it is expected that this plant will provide the first, full-scale demonstration of the environmental and, ultimately, also economic benefits of the conjunctive use of hydro and PV-based power, as well as the first significant use of grid-connected PV in a developing country. If, as is expected, the large-scale introduction of this technology helps in substantially reducing PV systems’ costs, widespread applications worldwide are likely to result. There exist some 360,000 MW of potentially suitable hydro plants in high-solar insolation regions of developing countries that could benefit from such conjunctive operations with additional PV power plants. 3. COSTS AND F INANCING (MILLION US$):

GEF: $4.025 million (includes PDF Block A grant)

Co-financing: $3.0-4.0 million Total Project Costs: $7.0 - $8.0 million

4. ASSOCIATED F INANCING (MILLION US$) : $21 million IFC capital financing

facility for CEPALCO 5. OPERATIONAL FOCAL POINT ENDORSEMENT: Ramon Paje, Undersecretary, DENR

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6. IA CONTACT: Dana R. Younger, IFC/GEF Coordinator, Tel.(202) 473-4779; Fax (202) 974-4349, e-mail: dyounger@ifc.org

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BACKGROUND AND CONTEXT

1. Photovoltaic (PV) technologies, based on the direct conversion of sunlight into electrical energy, provide a potentially unlimited source of electrical energy, because the earth’s yearly energy input from the sun amounts to more than 10,000 times current world consumption of primary energy. Solar insolation in most of the developing countries of the world varies from 2,000 to over 2,500 kWh/m2 per year. Today’s PV systems are capable of converting between 7 to 15 percent of this amount into electricity and, with further development, are expected to convert between 15 to 25 percent. This means that less than one tenth percent of the available land area in these regions would be needed to supply all of their current primary energy needs. 2. So far, however, the supply of energy from PV, compared to total energy consumption is minuscule. Counting total shipments between 1982 and 1997, the total installed world PV capacity, at the end of 1997, has been estimated to amount to about 744 MWp, producing, perhaps, around 1.4 TWh of electricity per year. By comparison, in 1996 the total world production of electricity amounted to 13,720 TWh (4,942 TWh in non-OECD countries), or almost 10,000 times more. 3. So far, PV has been shown to be the least-cost option for supplying electricity for high value uses in off-grid locations. In on-grid applications, a number of niche markets have been identified in industrialized countries. Most of them are related to the firming up of peak-load power demands on extended feeder lines that have reached the limit of their transmission capacity. In these cases, PV facilities located next to the load can reduce the need for distribution network reinforcement. A number of these so-called “distributed generation” applications have been made in the US, Europe and Japan. Other applications of distributed generation have been the various “thousand” or “million” roof programs, most of which are ongoing (particularly in Japan and Germany). However, all of them are heavily subsidized, or depend in part on “green power” tariff surcharges levied against consumers (as in a program being undertaken in Sacramento, California). Few, if any projects of these types of PV installations have been undertaken in the developing world. 4. The two major reasons for the low penetration of PV in network applications are costs and the need for additional back-up systems because of the interruptible nature of solar energy supplies. The current average cost of a mid-sized PV installation per installed kWp is $6,900, exclusive of storage or back-up costs1. This compares to between $400 to $2,000 for alternative, conventional generation sources (thermal or hydro). In terms of average lifetime costs, delivered per kWh costs from conventional sources amount to between $0.05 and $0.14, while those from PV range between $0.30 to $0.38 in high insolation areas (2000 to 2500 kWh/m2/year). In addition, solar energy is available only during (sunny) daylight periods, and in variable amounts. If short-term storage has to be added to the PV system to meet system peakload demand, the cost for PV increases to between $0.42 to $0.55 per kWh2. 5. Recent projections indicate that PV systems costs may fall within the next few years to around $3,000/kWp or less. This would reduce per kWh costs in high insolation areas to between

1 It must be noted that the average costs per kWh for PV generating plants are far more sensitive to the rate of discount chosen than are those of thermal plants. This is because of the long life expectancy of PV plants and their very low operating and maintenance costs. 2 Data based on Dennis Anderson, “The Economics of Photo-Voltaic Technologies,” draft, Oct. 1998.

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$0.15 to $0.18, excluding3 supplemental storage. This would bring PV within striking distance of the $0.14 to $0.25 costs for delivered, flat to spiky peak power supplies, as cited by Anderson (1998). Throughout the developing world, there are a significant number of countries or regions, which face peakload power costs at that level. Many of them also have substantial, already developed hydroelectric resources with substantial storage capabilities, but insufficient water inflows to operate at maximum capacity at all times. For these systems, conjunctive operations with added PV generating facilities could firm up the energy supplies from both sources, thereby effectively converting low-value, interruptible PV generation into firm, high-value peakload power, without the need for additional backup facilities (see figure 1). The potential market is very large, consisting of several hundreds of thousands of megawatts of already installed hydro capacity. 6. For the Philippines, the development of indigenous and, in particular, renewable energy resources has the highest priority for the Government of the Philippines. In 1996, some 56% of the country’s power production depended on imported oil or coal. At the end of 1997, total installed capacity was about 14,000 MW. According to the National Power Corporation (NAPOCOR), the country’s state-owned generating company, by 2005 an additional 12,978 MW will be required, with another 79,160 MW to be added between then and 2025. Of this generation mix, some 3,947 MW are expected to be supplied from renewable energy sources, plus 5,115 MW from geothermal and 4,732 MW from hydro. Currently, somewhat over 3,000 MW of hydroelectric plants are in operation. On Mindanao alone, the installed hydro capacity is 984.7 MW. Almost all of the existing hydro plants are water constrained, which makes them suitable candidates for conjunctive operations with PV generating plants.

7. To promote the development of renewable energy resources, the Government has established the New and Renewable Energy Program (NREP) which is being implemented by the Department of Energy (DOE) through its Non-Conventional Energy Division. It aims to accelerate the promotion and commercialization of new and renewable energy systems. As part of these efforts, a major objective is: “to develop economically viable new and renewable energy systems to levels of technical maturity at which these can be commercially competitive with conventional energy.” The promotion and development of integrated network PV generating facilities would be part of this mandate.

RATIONALE AND OBJECTIVES

8. The International Finance Corporation (IFC), the private sector affiliate of the World Bank Group, proposes to utilize GEF funds to partially finance the installation of a 1 MWp PV-based power plant, to be integrated with the power distribution network of the investor-owned Cagayan Electric Power and Light Company Inc. (CEPALCO) on the island of Mindanao. The objective of the proposed project is to demonstrate the technical, operational and, ultimately, economic feasibility of utilizing PV based solar energy for supplementing and firming up the productive capacity of existing hydro projects, initially in the Philippines, but also as a model which can be replicated elsewhere in the developing world. In the Philippines alone there exist several thousand MW of hydro capacity that likely could be utilized in such conjunctive operations. This would eliminate the

3 According to the US DOE’s PVMaT program, PV module manufacturing costs are expected to fall from a current level of between $2 to $2.50 per Wp at current world-wide industry production capacity levels of some 120 MWp/year to 1 to $1.50/Wp when production capacity increases to 350 MWp/year. This capacity level is expected to be reached by the year 2000, based on already announced industry expansion plans.

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need for the additional installation of thermal power generation facilities (mainly diesel and oil-fired gas turbines) with their attendant emissions of greenhouse gases (GHGs) and various local pollutants (sulphur dioxides, nitrogen oxides, particulates and noise). 9. The project would fall under the GEF’s Operational Program No.7, which, in paragraph 7.7. (a) places particular emphasis on the development of “Photovoltaics for grid-connected bulk power and distributed power (grid reinforcement and loss reduction) applications.”

10. The project would be the first sizable distributed PV network installation in a developing country. It would demonstrate the technical and operational feasibility of integrating operations utilizing the installed PV capacity, which is a non-firm, interruptible energy resource, with the limited stream flow of an existing hydroelectric project in such a way that the combined output of both facilities would be converted into high value, firm peakload power, to displace GHG-emitting thermal generation facilities. In addition, the project would reduce transmission and distribution losses by being installed within the low-voltage power distribution network. This would also delay expansion investments by CEPALCO in distribution plant and equipment. 11. A second major objective of the project would be to demonstrate the potential for bringing about large-scale utilization of PV generation in network applications throughout the developing world through replication of this project’s approach (see Annex IV). Assuming the availability of a suitably designed GEF-funded program, it is expected that an increase in the overall market for PV systems by several magnitudes could be achieved, which when compared to the present, would provide the necessary base for reducing the currently still high costs of PV systems to levels that would make grid-connected PV increasingly competitive with other power generating sources. PROJECT ACTIVITIES, COMPONENTS AND EXPECTED RESULTS 12. The project would consist of the installation of approximately 1 MWp of PV generating plant in the power distribution network of CEPALCO in the central business district of Cagayan de Oro in Mindanao. The system would be operated in conjunction with an existing 7 MW hydroelectric plant4 with dynamic load control, thereby enabling the joint PV/hydro resource to reduce both distribution-level and system-level demand, effectively providing “firm” generating capacity (see Figure 1). In the absence of the PV plant, the hydroplant would operate at between 3 MW to 7 MW capacity depending on available water flow.

Hydro Solar

Reduction inCEPALCO

Peak Demand

Figure 1. Conjunctive use of the PV and hydroelectric resources 4 This is the Bubunawan hydroplant, which will be commissioned in April 1999. This plant is connected via a 48 km dedicated transmission line directly to the Central business district of Cagayan de Oro, where the PV plant would be located. While this plant is essentially a “run-of-the-river” design, it does include a limited pondage, with storage equivalent to about 14 MWh of energy (or 2 hours of plant operation at full capacity).

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13. Privatization of the government-owned NAPOCOR and restructuring of the transmission system provides opportunities for distributed generation, such as the PV/hydro plant concept. CEPALCO and other distribution utilities will be forced to purchase their own power from private power producers, and power generated from the distributed PV/hydro plant would displace high-cost marginal power supplied by small (50 MW to 100 MW) diesel power plants. 14. Transmission constraints will force developers to build smaller, more expensive power plants near load centers, which will make various alternatives more attractive in the foreseeable future. Furthermore, the PV plant would be connected directly to the distribution system, enabling CEPALCO to avoid additional capital charges for transmission capacity and ancillary services. 15. Non-economic benefits of distributed PV include: (i) increased independence from foreign oil supplies; (ii) protection against volatile fuel price swings; (iii) mitigation of risk in distribution capacity planning in an uncertain economic climate; (iv) firming up of voltage levels and frequency stabilization; (v) enhanced air quality from reduced NOx, SOx, and particulate emissions; and (vi) reduction in GHG emissions. Only the last of these is of direct interest to the GEF. Distributed Generation 16. A screening exercise identified the most promising location within CEPALCO’s service territory to develop a PV plant. The Central (13.8 kV) distribution planning area, in and around the central commercial district of Cagayan de Oro city, was selected due to: • Marginal Distribution Capacity Costs. The area had the highest cost outlook to provide for local

distribution capacity upgrades, including three new substations planned between 2000 and 2010. • Load Growth Rates. The area had the slowest load growth, such that the incremental capacity

addition offered by the PV plant would be able to support load growth (and defer substation construction) for at least three years.

• Load Shapes. The area had a good match between daily load profiles and the pattern of solar radiation intensity (see figure 2).

17. As in the case of power distribution, the PV plant output does not directly coincide with system-level load. Unlike the case of power distribution, however, it is not possible to optimize the load/solar matching through judicious site selection. The peakloading for the total CEPALCO system, aggregated in Figure 2 for the period October 19-23, 1998, is shown to last for a period of about 10 hours (about 10:00 AM to about 8:00 PM).

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Figure 2. CEPALCO Aggregate System-Level Load PV/Hydro Conjunctive Use 18. A PV plant constructed in the CEPALCO service territory will reduce the daytime peak, but will be unable to carry load in the evening hours. However, by coordinating the output of the PV plant with hydroelectric power, it is possible to extend the available local peak generation availability into the evening hours and avoid capacity charges. \ 19. The Bubunawan Hydropower Plant, currently under construction, is a 7 MW run-of-the-river facility with limited storage in Baungon, Bukidnon. Once the project is operational, Bubunawan Power Co. (BPC) will sell power to CEPALCO. The plant has a total storage capacity to deliver 7 MW for about 2 hours. The benefits of a joint operation with the PV generating plant include: • Enhanced Hydro Capacity. The PV plant would carry load during the daylight hours that would

have been carried by the hydro plant. The PV plant would allow the hydro plant to retain its charge until late afternoon and early evening, effectively increasing the storage capacity of the hydro plant.

• “Dispatchable” Solar Power. The hydro plant overcomes a shortcoming of the PV plant by

effectively enabling it to follow the load. By dispatching the hydro plant on a real-time basis – in coordination with the PV plant and the CEPALCO system – loads would be supported beyond the daylight operating time of the PV plant alone.

• Sunk Storage Cost. The Bubunawan project is currently under construction and is considered a

sunk cost. The economic valuation of the PV plant, therefore, presumes the existence of the hydro plant. Only small incremental costs for additional communication and control systems would be required to achieve PV/hydro conjunctive use.

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• Seasonal Effects. Both PV and hydro are limited by resource availability. However, the two

plants would be complementary. Additional water flow during the rainy season would offset the poor solar availability. Likewise, enhanced PV output during the dry season would offset the poor hydro availability.

RISKS AND SUSTAINABILITY 20. Specific risks include: (i) macroeconomic risks such as devaluations of the currency and/or substantial increases in import duties or taxes, which would affect the financial viability of the project; (ii) potentially high land costs in areas most suitable for the installation of the PV module arrays or field(s); (iii) substantially lower solar insolation than estimated on the basis of presently available information; (iv) inability or unwillingness of the system’s dispatchers to continually optimize the conjunctive use of the solar and hydro plants; (v) future bulk power tariffs that would value purchased peaking power at substantially lower prices than those assumed in this analysis; and (vi) new regulatory rules that would prohibit electric distribution companies from owning any generating facilities regardless of their technology or size. 21. Sustainability risks are deemed to be low, at least in terms of technological and operational characteristics. Today solar PV cell and module manufacturers are willing to guarantee their products for periods of up to twenty years, or for a period as long as the total assumed lifetime for the demonstration project. Operating and maintenance expenses of an operational solar PV module power plant are very low, because it contains no moving parts. STAKEHOLDER PARTICIPATION AND IMPLEMENTATION ARRANGEMENTS 22. The implementing entity will be CEPALCO, a private, investor-owned utility with a peakload of about 80 MW. It serves about 69,000 customers. It is the third largest electric distribution utility in the country. CEPALCO holds the power distribution license on the island of Mindanao for a coastal region reaching from the city of Cagayan de Oro in the west to the town of Jasaan in the northeast. CEPALCO obtains the bulk of its power supplies from NAPOCOR, which is expected to be privatized in the near future. NAPOCOR supplies power to CEPALCO through several substations at 138 kV or 69 kV respectively. While the company is mainly a distribution utility, it also holds part ownership in a 18 MW diesel power plant owned by MINERGY and in BPC, which is currently constructing a 7 MW hydro power plant. CEPALCO has recently concluded a corporate financing package of some $21 million with IFC, consisting of both loans and an equity investment. Another, recently added minority shareholder of the company is the Hawaiian Electric Company, which, incidentally, also operates a PV rooftop power generating installation as part of its system in Hawaii. 23. CEPALCO has been consistently in the forefront of Philippine utilities with respect to the use of renewable energy resources and energy demand side management (DSM) programs. In 1998, the company filed a substantive demand side management plan with the Philippines Energy Regulatory Board. The program contains specific time schedules for the various program components that the company has itself committed to undertake. As part of this program, CEPALCO is expected to collaborate actively with the IFC/GEF Efficient Lighting Initiative (ELI), which is still under appraisal in the Philippines. CEPALCO also has developed an active program for investments in renewable energy resources, including small hydro plants ranging from a few hundred kW to as much as 12 MW, wind power installations, energy forest plantations in conjunction with wood-and

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waste biomass power plants, remote and on-grid PV generation facilities, wind power plants, as well as a domestic solar hot water heating program. However, it is constrained at this time from undertaking more than a handful of the most economic of these programs by capital constraints and return on investment criteria. CEPALCO maintains an active collaboration program with the Sacramento Municipal Utility District (SMUD) in California, the owner and operator of the path-breaking “PV Pioneer” program, which owns and operates PV generating facilities (in individual grid-connected plants of up to 2 MW and dispersed rooftop installations) totaling several megawatts. 24. CEPALCO also collaborates closely with a number of non-governmental organizations, including Preferred Energy Incorporated (PEI), a non-profit organization, which promotes renewable energy, energy efficiency and DSM in the Philippines. PEI is a minority shareholder in the Bubunawan hydro power plant. 25. CEPALCO has undertaken appropriate consultations with locally affected parties in Cagayan de Oro and will conduct a suitable environmental analysis of the proposed PV power plant during the appraisal phase. A detailed environmental assessment of CEPALCO’s operations including the Bubunawan hydroplant and its transmission line has just been completed as part of the US$21 million IFC financing facility for CEPALCO. The PV plant itself will be subject to a similar environmental review consistent with IFC environmental and social guidelines and does not entail any involuntary resettlement. 26. CEPALCO will be the co-investor for the balance of the non-GEF funding for the proposed PV generating plant. On the basis of the current, preliminary cost estimates, CEPALCO’s total cost share will amount to between US$3 million and US$4 million including an appropriate share of capital costs and engineering design expenses. Its upfront investment in the project is equivalent to the estimated project net benefits over its 20-year lifetime, discounted at a rate of 10%. The company will manage project design, contracting and construction supervision. It has a well-qualified technical staff, with considerable knowledge in the operation of PV power generating facilities through its previous and ongoing collaboration with SMUD. CEPALCO also has long experience as a utility construction contractor and has, through subsidiaries, undertaken a number of substantial utility construction contracts throughout the Philippines. INCREMENTAL COSTS AND PROJECT FINANCING Preliminary Economic Analysis 27. The evaluation of distributed PV considers two economic alternatives for supporting growing loads in CEPALCO’s Central (13.8 kV) planning area. These alternatives span a common study period from 2000 through 2020, and are defined as follows:

Baseline – Conventional Distribution Planning

The baseline assumption is to execute the existing expansion plan for the planning area, delayed by two years. The basis for the delay is based upon: (i) the economic downturn in 1998 which resulted in lower load growth than expected; and (ii) the additional capacity offered by forced air cooling at Camaman-an Substation. Three substation additions are included within the study period through 2008, although additional capacity increases would be expected beyond this period.

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Alternative – Distributed PV/Hydro

The GEF-funded alternative is to install a 1,000 kVA (peak) PV plant within the planning area. This plant may be a single installation or it may comprise a number of separate systems distributed throughout the planning area. CEPALCO would coordinate control of the plant with the 7 MW Bubunawan Hydropower Plant to optimize peakload reduction. The analysis assumes that conjunctive use of the PV and hydro results in firm generation capacity, which is provided for the life of the system and valued at the cost of diesel generation. The distributed PV/hydro resource will delay the need for CEPALCO to invest in the planned distribution capacity upgrades, effectively shifting all substation capital investments into the future. The availability of the PV generating plant’s electricity will reduce CEPALCO payments for generation capacity, energy, transmission, and ancillary services, and these benefits are enhanced by reduced line losses through the transmission and distribution systems. A small benefit is attributed to the reduced substation maintenance associated with the delay in the planned capital investments. Costs include the capital cost of the PV system, installation and interconnection, and ongoing maintenance. Costs for the hydro system are not included since they are considered as sunk costs for purposes of his evaluation as they would be incurred in any event.

Assumptions: 28. The key assumptions of the analysis are included in Table 1. The assumed marginal generation cost of P/ 4.00/kWh combines the estimated costs of generation capacity and energy at P/ 0.76/kWh and P/ 3.24/kWh, respectively, based upon a load factor of 71%.

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Table 1. Key Assumptions

POWER SYSTEM Generation Marginal generation cost P/ 4.00/kWh ($0.10/kWh) Generation capacity value P/ 40,000/kW ($1,000/kW) Transmission Transmission capacity P/ 155.4/kW-mo ($3.885/kW-mo) Transmission losses 4.5 % Ancillary Services Load following & frequency regulation P/ 5.60/kW-mo ($0.14/kW-mo) Spinning Reserve P/ 20.8/kW-mo ($0.52/kW-mo) Back-up power P/ 200/kW-mo ($5.00/kW-mo) DISTRIBUTION Planning area load growth 300 kVA/yr Substation O &M P/ 34000/MVA-yr ($850/MVA/yr) Distribution losses (technical) 7% Power factor 0.9

FINANCIALS Base year 2000 Discount rate (real) 10% per year Currency exchange rate P/ 40 = $1US

PV PLANT Costs PV Modules $3.40/Wp Power conditioning unit (PCU) $0.50/Wp Balance of system (BOS) $1.40/Wp Installation (turnkey basis) $1.30/Wp O&M $15.00/MWh Performance Rating 1000 kVA Firm capacity (effective, with hydro) 600 kW PV Capacity factor 25% Lifetime (and study period) 20 years

29. Transmission capacity and ancillary services are based upon estimated service charges by the regional transmission company for power generated by the 18 MW MINERGY diesel plant. The load growth of 300 kW/year is based upon the assumed 2% growth rate for the central Cagayan de Oro commercial district. The Central (13.8 kV) planning area currently has an installed capacity of 15 MVA. Distribution losses at CEPALCO are known to be about 10%, of which 7% are technical (3% is attributed to energy theft). Capital loans are assumed to be 20% per year with inflation at 10% per year. Consequently, the real discount rate is taken as 10% per year. The exchange rate of P/ 40 to the dollar is current as of the end of 1998. 30. PV system costs include modules, power electronics, installation, and balance of system costs. Module costs assume that the plant is run at a leading power factor of 0.9 to support the

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distribution voltage, however no economic benefit is assumed for voltage support. The plant is rated at 1000 kVA and 900 kW, but is assumed to provide 600 kW of effective firm capacity when operated in conjunction with the hydro plant (approximately 1 MW at peak capacity). The total cost of the modules is based upon the DC field rating after accounting for a 5% power conversion loss (947 kW DC). The PV power plant is expected to generate approximately 1.9 GWh per year over its estimated 20-year lifespan.

31. The results of the analysis are provided in Table 2. Total estimated lifetime benefits are calculated to be P/ 120 million (US$3 million) which fall short of the estimated costs by P/ 158 million (approximately US$4 million). This shortfall represents the approximate amount, which would require support by the GEF for the project to be viable.

Table 2. Results of Economic Analysis

Benefits P/ $ Reduced Generation Capacity 14,280,000 357,000 Avoided Energy Purchases 61,320,000 1,533,000 Reduced Transmission Capacity 10,720,000 268,000 Avoided Ancillary Services 15,640,000 391,000 Deferred Substation Capital Investment 16,160,000 404,000 Deferred Substation Maintenance 2,440,000 61,000

Total Benefits 120,560,000 3,014,000 Costs

Engineering and Construction Supervision 4,000,000 100,000 PV Capital Cost 265,280,000 6,632,000 Hydro Capital Cost 0 0 PV plant maintenance 10,080,000 252,000 Total Costs 279,360,000 6,984,000

Shortfall 158,800,000 3,970,000 Detailed Appraisal Needs 32. The economic analysis presented above is intended to be the best current estimate based upon preliminary information collected during a pre-appraisal mission conducted in December 1998. A detailed appraisal and project plan will be required following the initial GEF Council endorsement to reduce key uncertainties prior to project commitment by CEPALCO and financial closure. The detailed appraisal will have to address the following key uncertainties: • Solar/Hydro Resource Matching. The economic benefits of the distributed PV system are based

upon the concept for conjunctive use with the 7 MW hydroelectric facility. This concept was the basis for crediting the plant with “firm” capacity, and resulted in savings in the form of avoided generation capacity, transmission capacity and ancillary services. A more detailed investigation is required to validate the concept, however, including a review of diurnal and seasonal hydrologic data and solar performance modeling. The analysis would also have to consider electric load variations over the year.

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• Solar Monitoring. Instrumentation should be installed to begin collecting historical solar resource data in and around the city of Cagayan de Oro. This data would be used to estimate PV plant performance, and to document differences in microclimates for siting purposes.

• Preliminary Design and Cost Estimate. A basic plan needs to be developed including a

preliminary plant design specification. This exercise would include evaluating various plant configuration options and committing to one concept, (e.g., choice between a single large plant or many small rooftop systems to make up the desired capacity). A preliminary design should be developed in sufficient detail to allow realistic cost estimates to be prepared and turnkey bid estimates solicited.

• Detailed Feasibility Study. A feasibility study should be conducted with detailed technical and

financial calculations based upon the information developed above prior to proceeding to project implementation.

33. As this will be the first plant of its kind to be installed in a developing country setting, there are a number of cost uncertainties at this stage. IFC believes that its independent engineer’s estimates and CEPALCO’s experience with power plant engineering and construction cost control combined with a competitive procurement process should yield a final project cost in line with the estimates contained in this PCD. However, IFC wishes to note that due to the uncertainties noted above, there is some risk that at the time the project is presented to the GEF Council for its final endorsement, there will need to be a modest upward adjustment in the total project cost that would require additional GEF funds.

Incremental Costs 34. As can be seen from the initial economic analysis presented previously, the specific, incremental costs of the project itself are estimated to be approximately US$4 million, out of total project costs of US$7 to US$8 million. This ratio of incremental to total costs would appear to be very high, if the analysis were to be limited to this individual project only and were to consider no more than the project-specific carbon dioxide savings of some 30,000 tons over the project’s expected lifetime of 20 years. However, the CEPALCO 1 MW PV power plant is assumed to be only the first commercial demonstration, although a singularly important one, to justify systematic development of a GEF-funded distributed generation PV program for selected GEF-eligible countries. At this time, it is too early to develop firm forecasts of the components, time requirements and incremental costs of such a program. The following, therefore, represents no more than a possible, even though quite reasonable scenario for such an overall development program. 35. Table 3 lists the assumed project and program components, incremental costs (to the GEF) and lifetime carbon savings of such a program. The scenario covers a period of 10 years. It is assumed that costs of the GEF supported PV network projects would initially decline at 10% p.a. in line with current industry projections. After five years, the scale-up in GEF-induced project volumes would result in PV system prices falling to $3,300/kWp and to $3,100/kWp after six years. Thereafter, prices are assumed to fall to $3,000/kWp or less, making PV generation cost competitive with alternative peakload power plants. The program would imply a total GEF investment of about US$57 million. To this may have to be added some US$2-5 million for PV network program development and promotion costs. The net lifetime carbon savings, for this 10-year program, would amount to about 22 million tons of carbon, at a cost of about $2.65/ton. The ultimate program effects

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and resulting carbon savings would be very much larger, given the huge potential market for such installations worldwide in developing countries as cited earlier.

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Table 3. Scenario of Distributed Generation PV Investment Program

Start-Up

Year Peak

Capacity Cumulative

Capacity Projected

PV Costs/MW

GEF Incremental

Costs*

Cumulative Incremental

Costs

Lifetime Carbon Savings

MW MW $ million $ million $ million tons 2000 1 1 7 4 4 8,223 2001 2 3 6.3 6.6 11.2 16,446 2002 2 5 5.7 5.34 17.7 16,446 2003 5 10 5.1 10.5 32.3 41,115 2004 50 60 3.3 15.0 47.3 411,150 2005 100 160 3.1 16.0 63.3 822,300 2006 200 360 less than 3 0.0 1,644,600 2007 400 760 0.0 3,289,200 2008 800 1560 0.0 6,578,400 2009 1200 2760 0.0 9,867,600

Totals 2760 57.4 63.3 22,695,480 *Assumes that PV prices will fall by 10% p.a. between 2000 and 2003; in 2004 the net subsidy would be reduced to $300/kW, in 2005 to $100/kW, with competitive market prices reached by 2006.

Monitoring, Evaluation and Dissemination 36. IFC’s Environmental Projects Unit will undertake, in conjunction with CEPALCO, a detailed appraisal of the project prior to its implementation. This appraisal will determine the specific parameters for the project’s design, capacity, the optimum site location(s) of the solar field(s), site specific solar insolation, the seasonal and daily availability of water resources for the optimum conjunctive PV-hydro operation, as well as the design of the optimal control equipment and instrumentation for it. Project components for the project’s actual implementation will be procured by CEPALCO following its standard procurement guidelines and in conformance with IFC procedures. IFC will closely supervise the appraisal, implementation and operation of the project through regular supervision missions and appropriate financial controls. In order to ensure that CEPALCO’s engineering designs are appropriate and that turnkey cost estimates are sound, IFC will retain independent engineers to review all relevant engineering designs and cost estimates on behalf of the GEF. Standard GEF project monitoring and evaluation will be performed by IFC on an ex-post basis for a minimum period of two to three years, to record plant performance operating characteristics. These will be recorded and made available to the GEF and other interested parties, particularly utilities and/or power plant developers who are interested in utilizing this technology elsewhere. The project is expected to play an important role throughout the developing world to demonstrate the validity as well as technical and economic efficacy of the conjunctive PV-hydro operational concept. 37. Special efforts will be made to develop appropriate dissemination materials and performance records for presentations to interested parties such as development and financing agencies, private and public utilities and private power plant developers. It is expected that CEPALCO will also make site tours available to interested parties.

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38. The project proposal was subject to an independent review by a qualified expert from the STAP Roster. His summary comments are attached as Annex III. The reviewer comments that this is a “very interesting and promising proposal.” He states further that “the proposal has been clearly thought through and presented.” He finally concludes: “Because this project has the potential to be widely replicated, it has high relevance to the objective of the GEF of reducing CO2 emissions through the application of renewable energy and warrants high priority.” 39. The reviewer also made a number of minor suggestions for clarification of the presentation. These comments have been incorporated in the text of this final Project Concept Document.

ANNEX 1 PAGE 1 OF 2

PROJECT PLANNING MATRIX

SUMMARY VERIFIABLE INDICATORS

MEANS OF VERIFICATION

CRITICAL ASSUMPTIONS AND RISKS

The project falls within the scope of GEF OP7, which specifically identifies “photovoltaics for grid-connected bulk power and distributed power (grid reinforcement and loss reduction) applications” as one of its priorities. The project also fulfills national policy objectives, which aim to achieve “energy self-sufficiency by indigenous energy development”. According to the Philippines New and Renewable Energy Program, a major objective is “to develop economically viable new and renewable energy systems to levels of technical maturity at which these can be commercially competitive with conventional energy”.

GEF objectives as stated under GEF OP 7. Objectives as stated in the Philippines National Energy Plan and the Philippines New and Renewable Energy Program. .

Published GEF Operational Guidelines. Government policy documents detailing the objectives of the National Energy Plan and the New and Renewable Energy Program.

Effective solar insolation at the proposed site will be approximately equal to or better than that calculated on the basis of currently available preliminary information. Plant equipment and installation costs will be within the estimated parameters or be less than currently estimated. CEPALCO will be able to optimally manage the conjunctive operation of the PV and hydroplant components of the system. Projected electric peak load prices from outside suppliers will be as high or higher than those projected in this analysis.

Determination of solar insolation as measured by a micro-site insolation study forming part of the appraisal. Careful selection of most suitable project site(s) that optimize solar energy production on the one hand and minimize land, construction and electric interconnection costs on the other. Installation of control system that optimized conjunctive PV – hydro operation. 2 to 3 years of careful monitoring of plant performance after project completion. Detailed documentation of technological approach and of operational results for dissemination worldwide.

Careful review of appraisal report and detailed engineering and cost studies. Project supervision during construction and subsequent, systematic monitoring of performance.

The operational performance of the PV-hydroplant system will be as projected in this analysis so that it can serve as a practical demonstration of the soundness of this technological approach for larger installations in the Philippines and throughout the world. Based in part on the performance of this plant, the world PV industry will be able and willing to plan production increases to such a level that scale economies will reduce PV prices to competitive levels with other types of peak load power plants. GEF, in collaboration with other multi and bilateral development agencies will support a systematic development program to achieve the above PV cost reduction objectives.

ANNEX 1 Page 2 OF 2

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The project will demonstrate the viability of conjunctive PV-hydro operations, which will substantially increase the value of existing hydroplants. It will eliminate the need for backup energy storage facilities for the PV generation plant, making PV far more cost effective than it is otherwise. This will open up a huge, potential market for PV leading to scale economies that will make PV generating plants competitive with alternative, greenhouse gas producing thermal power plants.

Measurement of actual production of the PV generating plant in kWh of peak and residual non-peak output. Calculation of avoided thermal power plant-produced generation and resulting GHG emissions. Comparison of these results with simulated power generation that would take place in the absence of the PV power plant.

Establishment of a continuous recording system measuring solar insolation, PV and conjunctive hydroplant energy production during peak and non-peak demand periods.

Public and private utilities and power developers will be prepared to systematically utilize cost competitive PV generating plants for conjunctive use with existing hydro power plants throughout the world. International financial agencies and private financing sources will be prepared to finance the high up-front, low operating cost, long-life PV plants in preference to shorter life, low capital cost, high operating cost thermal alternatives.

The main project component will consist of a 1 MW PV collector array that will be integrated at sub-transmission voltages into the CEPALCO distribution network, thereby reducing transmission losses. For operational purposes, the plant controls will be fully integrated with the controls of a small hydro power plant to permit their conjunctive operation for optimized utilization of the PV and hydro energy outputs.

Total project costs have been estimated at about US $7 million. US$4 million would be contributed by the GEF on a grant basis. The other $3 million, consisting of $2.73 of capital costs and about $0.25 million in PV plant maintenance costs would be contributed by CEPALCO.

Actual construction costs of the plant and control equipment will not be substantially higher than estimated in this preliminary analysis. Suitable and affordable sites for the PV plant can be found that optimize solar insolation, and minimize sub-transmission costs.

ANNEX 2 PAGE 1 OF 3

INCREMENTAL COST ANALYSIS Broad Development Goals 1. The development goal of the distributed generation PV power plant is to prove the technical, operational and, ultimately, economic soundness of using PV generating plant conjunctively with existing, water-constrained hydroelectric power facilities. This will increase the total firm (i.e., dependable) energy capacity of both the solar and the hydro components. In addition, the plant will help to postpone the need for adding subtransmission and distribution facilities in an expanding power distribution system. 2. By adding PV generating facilities to already existing, but capacity constrained hydro plants, the capacity utilization of the latter can be optimized, while the energy produced by the PV plant is being converted from low-value, secondary (i.e., non-dependable) energy to primary energy, thereby replacing high-cost thermal, environmentally polluting peak load power supplies. Global Environmental Objectives 3. The global environmental objective of this first, conjunctive use distributed generation PV power plant is to prove the soundness of the technological approach so as to induce the widespread adoption of this technology in appropriate GEF-eligible countries on a worldwide basis. With appropriate financial support from the GEF, this will lead to substantial cost reductions for PV technology, which, in turn, will make the technology cost competitive with other alternatives. The results will be substantial reductions in the emissions of GHGs associated with electricity generation from alternative thermal power plants. A plausible scenario developed in Table 3 of the main text indicates carbon savings in excess over 22 million tons over a ten-year development horizon. Baseline 4. In the absence of the project, the sponsoring company, CEPALCO, would proceed with its presently planned investment and development program. The investment program would mainly consist of the timely installation of needed additional distribution facilities such as substations, reinforced transmission and distribution lines, and additional feeder cables. In addition, CEPALCO would purchase diesel power plant produced electricity to meet its peak load requirements from outside suppliers. The total costs of these components, both for the needed investments and energy purchases over the project’s planning horizon of 20 years, would amount to an estimated total of US$3,014,000 expressed in discounted present values at 10% and January 1999 prices.

ANNEX 2 PAGE 2 OF 3

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The Alternative and Its Global Environmental Benefits 5. The alternative would consist of the installation of a 1 MW PV power generating plant, strategically located within a selected one hectare area or areas of the CEPALCO distribution network. By locating the PV plant close to appropriate load centers, the need for additional distribution facilities would be delayed, leading to cost reductions of the planned baseline investment program. Appropriate load controls would be incorporated so that the PV plant could be optimally operated in conjunction with a new hydroelectric power plant to which CEPALCO has access but which has limited storage capacity. This storage capacity would be utilized to replace the PV generating capacity at times in which sunshine is not available (i.e., evening peak load periods). This conjunctive operation would convert the PV generated energy into firm, peak load energy. 6. Conjunctive use of hydro and PV will reduce the need for purchased energy from outside diesel power plant operations. The total output of the PV plant over its projected 20-year life expectancy is estimated to be about 39 million KWh. This will reduce GHG emissions from these thermal generating facilities. The total avoided GHG emissions over the 20-year planning horizon for operation of the PV plant would be about 30,000 tons of CO2. 7. The incremental costs of installing and operating the PV power plant instead of using the baseline alternative are estimated to be about US$4 million, based on current PV equipment market prices. The total costs of the PV alternative would amount to some US$7 million (expressed in present value terms), while the savings from reduced outside energy purchases and savings in capital costs resulting from the delay in distribution facility expansion would amount to about US$3 million, also expressed in present value terms. These costs are, by necessity, preliminary estimates. Exact costs will be established during project appraisal with GEF funding to be restricted to eligible incremental costs only. (a) Incremental Cost Table: Baseline Alternative Increment Global Environmental Benefits

0 30,000 tons of CO2 emissions avoided

30,000 tons of CO2 avoided

Domestic Benefits 39 million KWh of diesel generated peakload energy

Reduced air, water & noise pollution, along with 39 million kWh of PV generated peakload energy

Reduced air, water & noise pollution

Costs US$3,014,000 US$6,984,000 US$3,970,000 (b) Component Financing (in US$):

Component GEF CEPALCO Total Independent Engineering Review* 100,000 100,000 PV Capital Costs** 3,900,000 2,732,000 6,632,000 Hydro Capital Costs 0 0 0 PV Plant Maintenance 0 252,000 252,000 Total 4,000,000 2,984,000 6,984,000 * Independent engineers retained by IFC as “lender’s representatives” for validation of proposed uses of the GEF

funds. ** This capital cost item includes reasonable engineering design expenses which will be capitalized into the project

cost.

ANNEX 2 PAGE 3 OF 3

(c) Disbursement Projections

Will be supplied after appraisal. (d) Project Financing per Expenditure Category:

Will be supplied after appraisal.

ANNEX 3 PAGE 1 OF 3

STAP ROSTER TECHNICAL REVIEW

Philippines: CEPALCO Distributed Generation PV Power Plant

1. Overall impression

This is a very interesting and promising proposal. It addresses two key issues relating to the wide spread introduction of photovoltaics (PV) in grid systems in developing countries, firstly the avoidance of investment in electricity storage and secondly, if the follow-on project to replicate in sufficient other locations is implemented, it would contribute to the cost convergence of PV systems with fossil alternatives as a result of a faster rate of market growth and consequent economy of scale in PV system manufacture.

The proposal has been clearly thought through and presented.

2. Relevance and Priority

PV has the potential to become the largest global non-CO2 producing energy technology and requires a number of market stimulation initiatives on different applications to accelerate the technology down the learning curve to convergence with energy from fossil fuels.

Successful demonstration of the concept of linking PV and hydro in a developing country situation should encourage private sector investment in other projects as the incremental costs for PV reduce, particularly if a follow-on project to buy down the costs until convergence was achieved, was approved.

Because this project has the potential to be widely replicated, it has a high relevance to the objective of the GEF of reducing CO2 emissions through the application of renewable energy and warrants a high priority.

3. Background and Context

The project document covers the potential scope for PV and the current problems of high cost in sufficient detail.

Under point 3 of the Background and Context I would suggest some minor modification to the text. Although I am aware that the Kerman substation project in California was justified on the grounds of distribution network reinforcement, I am not aware that such projects ‘have become relatively numerous in the US, Europe and Japan’. The reference to ‘ various ‘million solar roofs’ initiatives’ is a bit misleading, as they are not directly relevant to this proposal. As far as I am aware none of the developed country roof programs (USA, Netherlands, Germany, Japan) were introduced for distribution network reinforcement reasons, but as market enabling schemes to stimulate increased PV manufacturing capacity (hence reduce the costs) and as part of commitments to increase the application of renewable energy. Each individual PV roof system is usually only a few kW and rather than ‘usually subsidized’, I believe all are heavily subsidized, due to the high initial PV system costs and also the relatively low value of the electricity displaced in the, primarily, domestic markets.

Under point 4 I would also add that the cost of PV electricity is highly dependent on the discount factor applied.

ANNEX 3 PAGE 2 OF 3

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4. Scientific and Technical Soundness

The project is scientifically and technically sound, if well designed and implemented it should have a low technical risk.

5. Rationale and objectives

The objective of proving the technical practicality of combining PV and hydro in a developing country situation in a way which means the output of the PV and hydro systems are complementary is very attractive. The output of the PV systems is likely to be at their highest when the hydro systems are limited by water availability and consequently there is spare capacity in the already installed power distribution systems. Additionally, the output of the hydro systems can be reduced in periods of high insolation and then increased in periods of inclement weather or darkness.

The project appears fully consistent with GEF strategy and plans. The GEF grant would buy down the cost of a renewable energy project with high potential for replication. The possibility of follow-on financing to fund further projects would help to increase the market for PV and accelerate the technology down the cost learning curve. Such a program would be complementary to the IFC/GEF PVMTI initiative for off-grid PV systems.

6. Project Activities

The basic activity of installing approximately 1 MWp of PV generating capacity with dynamic load control with a hydro facility is sound, particularly when the “Detailed Appraisal Needs,” which includes collection of insolation data and solar/hydro resource matching, have been met at a later stage of project definition.

The proposal does state (p4) that the PV facilities will be in the central business district of Cagayan de Oro city and on page 12 states that a decision on whether to build one large plant or many small rooftop systems will be done at the preliminary design stage. I would have found it useful if the proposal had included a map showing the distances from the central commercial district of Cagayan de Oro city and the 7 MW Bubunawan Hydro power plant.

I do have some reservations about installing the PV capacity at a large distance from the hydro facility and would be particularly concerned if it was decided to go for many small PV installations. The prime reason is that a large number of small rooftop facilities may not be viewed by other utilities as a convincing and conclusive demonstration of the concept of integrating PV and hydro. This option would be little different from other rooftop projects and the developed country rooftop program should provide adequate experience on what is required to integrate successfully a large number of small rooftop PV systems in to an existing grid system. A further reason is the increased complexity of the control system needed to integrate a large number of small PV systems and the hydro facility.

However, I appreciate that the financial benefits associated with the proposal include the deferment of expenditure on substation expansion in the central business district of Cagayan de Oro city plus reduction in transmission losses. Therefore, I would recommend that the feasibility study investigate the possibility of a single PV system in the business area. If this is not feasible, because of land availability or cost, then a very limited number of quite large systems close to existing substations should be considered. Maintenance costs would probably be lower for a single 1 MW or a limited number of large PV systems than for the option of using a large number of small rooftop systems.

The proposal states that the hydro plant will have the capacity to deliver 7 MW for 2 hours, it might be useful to quote what the anticipated output is expected to be during the peak daytime hours, which would then be reduced by about 600kW with the PV facility.

ANNEX 3 PAGE 3 OF 3

7. Risk and Sustainability

Adequately covered in the proposal.

8. Participatory Aspects

Appear fully satisfactory. CEPALCO, as the implementing agency, has appropriate PV experience through their collaborative programs and has experience of project development and implementation. As the distributor of the power and because of their share holding in the Bubunawan Hydropower Plant, they will have a vested interest in the continued success of the project.

9. Incremental Costs and Project Financing

Appears adequate from the data provided.

10. Detailed Appraisal Notes

The proposed work program, including collection of data and detailed feasibility study fully covers the required work.

In isolation the project has very limited global benefits and has a high cost for CO2 avoided. The real global benefits from this project would occur by widespread replication of the concept as PV system costs fall over the coming years.

The impact that a follow-on GEF program to support the linking of PV and hydro in candidate countries would have on PV cost reduction is extremely difficult to assess, as it would depend on the incremental annual PV system sales generated by the program and the underlying volume of the industry in each year of the program. I believe the main contribution would be the difficult to quantify benefit of increased supplier confidence, hence willingness to invest in PV module manufacturing facilities of larger scale, if a clear and significant program was approved.

11. Replicability

I cannot confirm the quoted figure of 360,000 MW of potentially suitable hydro plants in high insolation areas in developing countries, but such a high capacity would offer a high potential for replication and a significant saving in CO2 emissions by reducing the demand for fossil based power generation.

12. Time Frame

Duration is quoted as two years, which should be adequate, but the papers do not appear to mention the commissioning date for the Bubunawan Hydropower plant, which is a key date.

As this would be a demonstration project with wide replicability, the sooner it is commissioned the earlier other replication projects could be developed.

ANNEX 4 Page 1 of 1

COMPONENTS OF LONG-TERM GEF DEVELOPMENT STRATEGY While ultimately it is expected that technological progress, growing market demand for PV from non-grid applications and gradually increasing scale economies in production will result in the projected reductions in PV cost, a well-focused market intervention strategy involving a known amount of GEF funds to be dedicated to this purpose could bring about a drastic acceleration of this process. Such a strategy should consist of: (i) The construction of a few, strategically placed, full-scale demonstration plants to prove the

technological soundness of the conjunctive hydro/PV generation concept in strategically selected developing countries;

(ii) Technical and market studies to identify the utilities with the most suitable hydro projects

throughout the developing world that would benefit from conjunctive hydro-PV operations; (iii) Systematic promotion of detailed discussions among the PV industry, utilities and financing

organizations such as IFC, the World Bank, Regional Development Banks and private investment sources about ways and means to identify financing sources, develop the potential market and create, in parallel, a more efficient, lower-cost PV systems production industry that will be some 10 to more than 100 times larger than the current one.

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