Project Brief

1. IDENTIFIERS:

PROJECT NUMBER: P077380 COUNTRY Ethiopia PROJECT NAME: Renewable Energy Project DURATION: 5 years IMPLEMENTING AGENCY: World Bank EXECUTING AGENCY: Ethiopian Electricity Agency, Government of

Ethiopia REQUESTING COUNTRY OR COUNTRIES: Ethiopia ELIGIBILITY: UNFCCC:

Ratified on April 5, 1994.

GEF FOCAL AREA: Climate Change GEF PROGRAMMING FRAMEWORK: OP#6 2. SUMMARY: 3. COSTS AND FINANCING (MILLION $US):

GEF FINANCING: PDF: Project GEF

US$ 0.28 million US$ 4.93 million

CO-FINANCING: IDA US$ 7.40 million

Government & Private US$ 3.0 million

GEF TOTAL SUPPORT: TOTAL PROJECT COST:

US$ 5.21 million US$ 15.61 million

ASSOCIATED FINANCING:

IDA EC: EUROPEAN INVESTMENT BANK GOVERNMENT

US$ 125.30 US$ 15.42 US$ 43.07

TOTAL ASSOCIATED FINANCING: US$ 183.79 million 4. IA CONTACT

CHRISTOPHE CREPIN SENIOR REGIONAL COORDINATOR AFRICA REGION WORLD BANK 1818 H STREET, NW, J6-177 WASHINGTON, DC 20043 (202) 473-9727 CCREPIN@WORLDBANK.ORG

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A. Project Development Objective 1. Project development objective: (see Annex 1)

1.1 The project’s development objectives are to: (i) establish a sustainable program for expanding the population's access to electricity and improving the quality and adequacy of electricity supply, thus supporting broad-based economic development and helping to alleviate poverty; (ii) reduce environmental degradation and improve energy end-use efficiency; (iii) reduce the barriers to the wide spread adoption of renewable energy technologies, in particular solar photovoltalic (PV) and micro-hydro power generation in rural areas, thereby contributing to the reduction in greenhouse gas (GHG) emissions via displacement of kerosene and diesel that would otherwise be used for lighting and electricity generation; and (iv) provide technical support for institutional and capacity building of key sector agencies, including for regulatory, fiscal and institutional reforms in the mining sector. 1.2 The Global Environment Objective: The proposed global environment objective is to initiate the process of eliminating the barriers that impede the development of renewable energy, in particular solar photovoltaic (PV) systems and develop micro hydro capacity. The global objective would contribute to the reduction of GHG as some of the use of diesel for power generation would be displaced by the renewable energy. 2. Key performance indicators: (see Annex 1)

2.1 Increased Access to Electricity: (i) access to reliable, affordable and sustainable electricity service to an additional 850,000 people (and indirectly to another 250,000 people who will benefit from improved public services) as a result of the rural electrification and urban rehabilitation and expansion components; (ii) significantly faster rate of small business development in newly electrified areas than in similar locations not yet electrified; and (iii) establishment of a regulatory and institutional structure for private sector-led rural electrification.

2.2 Improvement in the Quality and Adequacy of Existing Service: (i) adequate distribution network to meet requests

for new customers (backlog reduced by 75%); and (ii) reduction of the incidence of low voltages and voltage fluctuations beyond acceptable ranges.

2.3 Improved Management of Biomass Energy: (i) increase in the supply of woodfuels to rural and urban areas with

about 302,000 ha of natural forest brought under participatory community management, and of at least 384,000 ha of farm/agro-forestry schemes established; (ii) faster rate of growth for income enhancing and economic diversification businesses in areas covered by the project; and (iii) the production and sale of 320,000 efficient injera-baking stoves by the private sector.

2.4 Improved renewable energy business environment: (i) increase in the numbers of viable solar PV distributors and

other renewable energy businesses, such as micro hydro and wind; and (ii) adoption by GoE of a renewable energy action plan acceptable to the Bank.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 17009-ET Date of latest CAS discussion: 9/9/1997

1.1 For the energy sector, the CAS focuses on projects which will improve infrastructure necessary to meet Ethiopia’s expanded growth and distributional objectives. An important component of such projects is creating an environment conducive to private sector development. The Energy Access Project is consistent, not only with the CAS, but also with

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the Interim Poverty Reduction Strategy Paper (SecM2001-0072) which was discussed by the IDA Board on March 20, 2001. The Interim Poverty Reduction Strategy Paper (I-PRSP) was prepared in year 2000 following the cessation of the border conflict and was aimed, among key priorities, at addressing immediate human and infrastructure needs as well as restoring the economy to a growth path. A new CAS being prepared to cover the period FY03-05 is expected support the I-PRSP and the full PRSP which is also under preparation. 2. Main sector issues and Government strategy:

2.1 Like many other Sub-Saharan countries, a marked feature of Ethiopia’s energy sector is the high proportion of biomass relative to modern forms of energy consumption (more than 90%). The limited supply of modern forms of energy and their high costs relative to the low average income per capita (US$100), has reinforced the dependence on biomass energy. This pattern of consumption has led to increasing deforestation, shortages of woodfuel and degradation of rural ecosystems – a problem worsened by inadequate supply-side measures for improving forest stocks. Hence, the Government strategy for development of the sector is aimed at improving the supply of electricity and biomass energy in an efficient and cost effective manner, and promoting rational inter-fuel substitution. 2.2 Electricity Sub-sector. In the electricity sub-sector, the specific main issues are the: (i) low rate of the population’s access to power supply (less than 6% based on the number of people actually connected to electricity supply or 13% when all persons living in electrified areas are counted); (ii) inability to connect large new commercial and industrial customers, due to the overloading of the distribution network; and (iii) high cost of future generation investments. 2.3 The percentage of the population with direct access to electricity is low, currently less than 6%. The majority of the people with access are supplied by the Government-owned Ethiopian Electric Power Corporation (EEPCo). EEPCo has about 600,000 customers, most of them in Addis Ababa and a few other main towns that are connected to the main grid. There are very few rural consumers connected to the grid. Apart from the low per capita incomes, other main constraints to increasing access have been a shortage of investment resources because of low tariffs (until about five years ago) over a long period of time, limitations in management and technical expertise, the absence, in the past, of a clear objective and strategy for increasing access. The low level of access to infrastructure services, including to electricity, is a major barrier to economic development and to the provision of social services in towns and rural areas. EEPCo’s limited capacity to speedily connect large new consumers, upon request, is thus constraining commercial and industrial growth. Further, the poor quality and variability of existing service, characterized by low voltage levels and voltage fluctuations beyond acceptable ranges, frequent breakdowns and delays in restoring supply after a breakdown has occurred, is an ongoing problem. 2.4 Related sub-sector strategy. The Government has embraced increasing electricity access (from about 13% today to about 20% by 2012) as an integral part of its strategy for promoting income-generating activities and social services outside major urban centers to improve living standards and reduce poverty. Promoting access to electricity is also part of its strategy to decentralize the delivery of services throughout the country. A multi-faceted strategy for increasing access, and for improving the quality of services to EEPCo’s existing consumers, comprises the following: (a) development of the country’s substantial hydropower resources through both private and public sector

investment for domestic and export markets (Sudan and Djibouti); (b) liberalization of power generation, transmission, distribution, and supply in the isolated areas in order to

complement EEPCo's efforts in the interconnected system; (c) commercialization and decentralization of EEPCo’s operations in order to improve operating efficiency, and

the quality of services to consumers and to unlock resources for investment in systems expansion; and

(d) strengthening the system of regulation to improve the sector’s commercial and operational efficiency.

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2.5 The generation capacity requirement for the National Interconnected System (NIS) is forecast to increase from the current 473 MW to about 981 MW in 2012. This is based on an annual load growth of about 7% projected using the current existing average tariff of about US$0.056 per kWh, equivalent to about 62% of the long-run marginal cost of supply. These results from the draft report of the least-cost expansion plan are being updated to include, among other factors, the lessening of load growth when long-run marginal cost tariffs and demand side management measures are applied in forecasting demand. In addition the effect of reducing system losses on capacity requirements will also be incorporated into the least-cost expansion study. Nevertheless, even after taking into account the moderating impact of these measures on demand, it is expected that the system expansion requirement, for the next 5 years or so, will be high and related capital expenditure will be similarly large (US$1.2 billion in March 2002 prices). Hence, to help finance the expansion, the government is encouraging private investors to develop and operate hydropower projects and to sell their production to EEPCo, as a single buyer, for transmission, distribution and commercialization. While discussions are already in progress with potential investors in Gojeb Hydropower Plant (102 MW slated for commissioning in 2008), the Government is also exploring measures for creating an attractive investment environment for the private sector, including setting up a one-stop shop through which investors can obtain all licenses, clearances and permits. 2.6 In addition to opening up the hydropower generation segment of the Electric Supply Industry (ESI) to private sector participation within the interconnected generation, transmission and distribution systems, in the isolated systems the Government has allowed (since 1998) the private sector to invest in all segments of the ESI. Only minor restrictions remain with respect to the isolated systems (e.g. the limitation of investment in isolated thermal generation to domestic investors and up to 25MW), but these are being reviewed for possible removal. 2.7 The liberalization of the isolated system is intended to spur expansion of access to rural and peri-urban areas. It has arisen from the Government’s realization that, because of capital, management and human resource constraints, EEPCo alone could not feasibly expand access rapidly enough within a reasonable period of time. The Government has therefore adopted a two-track strategy comprising grid-extension by EEPCo and isolated electrification by the private sector, including communities. For the grid-extension track, the key to progress will be success in implementing the commercialization/ decentralization of EEPCo’s operations. 2.8 An inter-institutional committee has prepared an RE strategy paper. The strategy includes among other things; (i) the government’s long-term vision for increasing the rural population’s access to electricity; (ii) the objective of increasing access to 20% of the population by 2012 from 13% today; (iii) the functions of an independent Rural Electrification Board and Secretariat; (iv) sources of revenues for a Rural Electrification Fund (REF) to be utilized to co-finance initial capital expenditures for rural electrification schemes; and (v) management arrangements for the fund. The strategy paper proposes that detailed work be carried out to design this architecture for rural electrification, including preparation of the legislative instrument (proclamation). 2.9 With regard to the operation of the existing power plants, and the NIS, the Government’s strategy is to decentralize and commercialize operations so as to improve efficiency and expand access. EEPCo was established in 1997 to take over management of the power system from the former Ethiopian Electric Light and Power Authority (EELPA). Regulation No. 118/97, under which it was established, helped to enhance its managerial and financial autonomy to run the NIS. The decentralization of EEPCo’s operations to eight regional offices is in progress. A management information system, including an accounting module, to support the operation of the regions as distinct profit/cost centers is being implemented with NDF support under the Energy II Project. The Government considers strengthening the management and skills base for the NIS to be a central aspect of its strategy to improve operating efficiency. Hence, it has decided to secure a management contract arrangement for EEPCo with an experienced utility for a 3 to 5 year duration. In preparation for the management contract, the Government will prepare a business plan with the help of consultants to be financed by the Austrian Development Cooperation. The business plan will provide baseline performance indicators, projected targets for the next several years and recommend measures for achieving the targets. The decentralization and commercialization strategy, including the contract management plan is one of the short term measures for improving the sector's efficiency and increasing access to power. In the medium to long-term, a sector-wide approach, rather than one

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focused on EEPCo only, is required. Hence, the project will finance a long-term Strategy Study for the power sector. The study will comprehensively review the main challenges faced by the sector and suggest strategies for addressing them. 2.10 To strengthen regulatory capacity for the electricity sub-sector, in 1997 the Government established the EEA, under Proclamation 86/97. EEA was charged with regulating the ESI to ensure safe and efficient operation of the system, to recommend tariffs and license operators, among other duties. The EEA is headed by a General Manager appointed by the Prime Minister on the recommendation of the Minister responsible for energy (currently the Minister of Infrastructure). Among EEA’s current key activities are the licensing of EEPCo’s power plants, regional distribution offices and the transmission function; and participation in the discussion of regulatory and contractual issues for the private sector generation projects in the pipeline. With the launching of the second track of the rural electrification (RE) strategy focusing on the isolated systems, EEA will need to strengthen its regulatory capacity to include light-handed regulation of small systems. 2.11 Biomass Sub-Sector. On the supply side the main issue is the depletion of forest resources, mainly through the unsustainable consumption of woodfuels – fuelwood and charcoal. In most areas of the country, current wood consumption levels exceed annual forestry yields. Thus, even assuming no increase in consumption, depletion of limited wood resource stocks will continue. The management of forest resource use needs to be clearly defined. On the demand side, population pressure is expected to exacerbate an already serious biomass shortage problem. The demand for wood products, especially fuelwood, is expected to increase at about the same rate as the population, at around 3% annually. Without substantial mitigation measures, major fuel deficits are likely to result, eventually leading to “energy poverty”. Already there is a notable fuel deficit in certain areas, and data indicate that agricultural residues and dung are widely used as fuel alternatives. Also, inadequate supplies of fuelwood and inefficient use directly impact on rural women’s health and workload. Improved supply will reduce the drudgery associated with collecting fuel far from home. More efficient stoves reduce woodfuel consumption by up to 50% and emit less particulate matter, which is a significant factor contributing to respiratory diseases. 2.12 Related sub-sector strategy. On the biomass demand-side, the focus on expanding the use of efficient fuelwood stoves is expected to have an immediate and significant impact. On the supply-side, the Government’s key strategy is to involve the rural population directly in forest development, not only as tree growers but also as key players in sustainable management. Experience has shown that conservation of natural resources is possible only if the people perceive direct benefits. Efficient fuelwood stoves were disseminated under a project financed by the Department for International Development of the United Kingdom. Tests have shown that these efficient stoves can reduce fuelwood consumption by half. Furthermore, under the Energy I project, techniques for their effective commercial dissemination were proven. 2.13 Renewable Energy Sub-Sector. Rural electrification is a critical necessity for economic development of and improvement in quality of life for the Ethiopian people. The present level of access to electricity services in the rural areas is extremely low, and what is available is often environmentally unsustainable in the long run. On the other hand, Ethiopia has considerable renewable energy resources that offer a sustainable alternative for rural electrification by expanding the generation base and rendering it environmentally more balanced and friendly. Moreover, the private rural energy entrepreneurs have the ability to act as drivers for rural energy supply and sustainable rural development. However, there are serious barriers at the (i) financial, (ii) policy, (iii) awareness, (iv) organizational, and (v) technical levels that act as impediments to the progress of renewable energy sector development and private sector involvement in Ethiopia. Elimination of these barriers is critical for enhancement of rural access to electricity services and to improve environmental sustainability. 2.14 Related sub-sector strategy. The Government recognizes the potential and environmental promise of decentralized renewable energy based electricity technologies to serve very small, disperse loads for which it is not cost effective to supply from the national grid. It plans to remove the barriers – as described above - for widespread use of renewable energy technologies by a ten-year program. The objective of the program contributes to the overall goals of the Government by providing electricity generated by renewable energy systems for rural development through improved quality of life of households; improved social services in the health, education and water sectors; improved productive

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uses and income generating activities; and, private sector and entrepreneurial development. The means to this objective is to create, in five to ten years, a sustainable market for renewable energy systems. This will be done with the involvement of the private sector, communities, (micro) finance institutions, line ministries, government as market enabler, and international donor agencies. Bearing in mind the challenging agenda as described above, a few strategic directions emerge in which future actions would take place: (i) cross-sectoral systems for health, education and water sector; (ii) commercial solar systems for households; (iii) micro-hydro systems for communities and villages, and (iv) renewable energy systems for augmentation of supply to the grid. The Project would support the first two phases of the program. 3. Sector issues to be addressed by the project and strategic choices:

3.1 IDA’s proposed operational approach consists of three elements: (i) policy dialogue and technical support for capacity building, including support for private sector participation in isolated systems; (ii) partnering with other donors and private sector interested in investing in the NIS and in rural electrification in the isolated system; and (iii) laying the foundations, via technical assistance and investments, for commercially oriented expansion of access to modern energy, in particular electricity, and sustainable management and utilization of biomass resources. 3.2 The project concept outlined here reflects several strategic choices. The alternative choices for access expansion are: (i) “business as usual” through grid extension and use of standard designs and construction and operational practices; (ii) extension of the grid, but with more efficient and sustainable designs and practices; and (iii) private-sector led expansion. The “business as usual” approach is not considered under this project as it has failed to deliver on rapid expansion of services over the past several decades. Hence, the Government’s new two-track strategy described above is based on (ii) and (iii). It has therefore been decided to support this strategy while analytical work and dialogue continues on efficiency improvements for the NIS, and on a longer term strategy for the power sector. A prerequisite for private sector-led RE as recognized in the Governments’ rural electrification paper, is the provision of concessional financing to complement private sector debt and equity so as to achieve affordable tariffs. 3.3 It should be noted that more efficient and sustainable electrification practices--in construction, operation and management will be used for both the grid-extension and isolated systems development. It will also be used for urban electrification within the NIS. This is a departure from the “business-as-usual” approach that relies exclusively on standardized high-cost line extensions and using inappropriate designs and operation and management practices. It has also been decided that the proposed project will support the design and implementation of the institutional and financial architecture for access expansion, the elements of which are elaborated in the Government’s rural electrification strategy document (para. B, 2.8). The first few investments to be implemented in the isolated system, under the project, would provide an opportunity for learning by doing and a basis for subsequent scaling-up in later operations. 3.4 To improve the quality of service, the alternative choices are (i) leaving the improvements to EEPCo alone, for implementation under force account using less than optimal designs and practices, or (ii) updating the designs and using supply and install contracts for the major works, with only the secondary work, requiring close contact with customers, being done by EEPCo staff. The latter is preferable in terms of timely completion, avoiding a build-up of EEPCo staff for this one-time project, and helping to develop private contractors. 3.5 The main choices for the biomass sub-sector are either to do nothing and expect that expansion of access to modern energy will address “energy poverty”, or to address the biomass energy problem and concurrently, the problem of severe environmental degradation. Clearly, with the majority of the population, including those supplied with electricity, highly reliant on biomass for cooking and heating, it is expected that it will take a very long time for modern energy to substitute biomass energy both in peri-urban and rural areas. It is therefore necessary to address both supply and demand in the biomass sub-sector. 3.6 The main choices for the renewable energy sub-sector are to continue on an ad-hoc pilot project basis or to choose for a more programmatic, structured approach in which the Government act as a market enabler with the newly emerging private sector, NGOs and rural development organizations as market drivers. The first steps for the latter have been set by

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the Government in instituting an independent regulator and establishing a Rural Electrification Fund. The Project supports these steps. C. Project Description Summary 1. Project components (see Annex 1 for a detailed description and Annex 3 for a detailed cost breakdown):

1.1 The project’s five components are: (i) Institutional and Capacity Building; (ii) Urban Distribution and Load Dispatch; (iii) Rural Electrification and Renewable Energy Promotion; (iv) Biomass; and (v) Environmental Mitigation. 1.2 Project Component 1-- Institutional and Capacity Building. The project will comprise consultants services and training to support: (i) preparation of a long-term power sector strategy; (ii) preparation of an indicative rural electrification master plan and specific studies to build a pipeline of projects for private sector investment; (iii) preparation of an integrated rural energy strategy comprising both the biomass sector and the modern forms of energy; (iv) capacity building for private sector enterprises interested in investing in small-scale renewable energy investments; and (v) capacity building for the key sector agencies--EEPCo, EEA and the proposed RES; and (vi) regulatory, fiscal and institutional reforms in the mining sector. (a) Long-term Power Sector Strategy. The long-term power sector strategy will examine the main challenges facing the power sector and develop strategies for addressing them. The principal challenges are: (i) the low rate of access to electricity and the poor quality of service to existing consumers; (ii) the need to mobilize substantial financial resources for investment (about US$1.2 billion in the next five years); (iii) the potential for the country's large hydropower resource to be developed for both the domestic and export markets; and (iv) the need to develop technical and management skills, improve efficiency and ensure cost effective power supply for economic growth.

(b) Rural Electrification Master Plan and Project Studies. Consultants services will be provided to assist the RES in carrying out an indicative rural electrification master plan, specific studies to determine the viability of sub-projects for implementation under this project, and other studies to build a pipeline of rural electrification projects to be funded out of the REF. (c) Integrated Rural Energy Strategy Paper. The EREDPC will prepare a Rural Energy Strategy Paper which will synthesize the policies for the rural energy sector in line with the Government’s Rural Development Strategy (RDS). The strategy paper will therefore cover both traditional and modern forms of energy. (d) Capacity Building for Private Enterprises. The project will provide financing for the RES to disseminate information on investment opportunities in rural energy as well as to provide technical know-how to potential private sector investors, NGOs and legally constituted community organizations (e.g. electricity distribution cooperatives). (e) Capacity Building for key sector agencies. The key areas for capacity building have been identified for EEPCo, EEA, and the proposed RES. For EEPCo, about US$400,000 will be provided to support staff training to complement the on-going management and human resource development program under the Energy II Project and other training to be provided to technical staff under components to be implemented by EEPCo in this project. For EEA, the project will support training and study tours to strengthen its regulatory capacity for both the NIS and the small-scale isolated electrification systems. The RES will be supported through consultants services in establishing its accounting and financial management systems, MIS and its staff will receive training in project evaluation, financing of rural electrification and other relevant areas. (f) regulatory reforms in the mining sector. Support will be provided to the Ministry of Mines to carry out the following activities aimed at improving the investment climate in the sector: (i) a comprehensive study of the sector's regulatory, fiscal and institutional framework; (ii) design and installation of cadastre and data management facilities at

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both federal and regional levels; (iii) provision of technical advisory services and training to the Geological Survey of Ethiopia; and (iv) a study to promote new investment in the mining of artisanal, construction and industrial minerals.

1.3 Project Component 2--Urban Distribution and Load Dispatch. This component comprises the following two sub-components: (i) Urban Distribution System Rehabilitation and Expansion; and (ii) a Load Dispatch Center (LDC). The distribution system is in a severe state of disrepair and needs urgent attention. The project will support investments to improve the quality of service to existing customers and to extend service to others, primarily within the 4 largest load centers: Addis Ababa, Nazareth, Dire Dawa, and Bahir Dar. Preparation of the component is based on studies previously carried out by independent consultants and updated by others during project preparation. At present EEPCo has neither a dispatch center nor a Supervisory Control and Data Acquisition (SCADA) system. A feasibility study for a load dispatch center has recommended a major reinforcement of the telecommunications systems and installation of SCADA to include an Energy Management System (EMS) and possibly automatic generation control, in view of the planned interconnection with Sudan and Djibouti. The LDC will be included under the project, but the EMS and Automatic Generation Control (AGC) modules will be deferred until such time as the system requires them. Rehabilitation and expansion of the urban system should enable the connection of about 70,000 new consumers. 1.4 Project Component 3 – Rural Electrification and Renewable Energy Promotion. This component will support the Government strategy for improving the population’s access to electricity through the following two sub-components: (i) grid-based rural electrification to be undertaken by EEPCo (connection of about 135,000 new consumers) which has been prepared on the basis of a feasibility study prepared by independent consultants; and (ii) private sector-led rural electrification including renewable energy systems in isolated areas 1.5a The private sector-led renewable energy sub-component will promote sustainable market development of least cost renewable energy systems for off-grid and augmented grid supply use. For the solar PV systems, a market study as well as a scooping study have been carried out to identify barriers to market penetration and an initial outline for addressing these. With support from GEF, studies on PV commercialization and PV systems for cross-sectoral applications have been embarked upon. In parallel with these efforts, the Government will establish an institutional and financial architecture for rural and renewable energy in isolated systems. For the mini and village hydro systems, several pre-investment studies have been completed over the last decade. With GEF support, a strategy on village and mini-hydro development is planned for completion by the end of June. These activities will allow investments to be provided in the later part of the project implementation period for private sector energy schemes. 1.5b The private sector-led renewable energy sub-component will include: (i) investments in renewable energy activities through the Rural Electrification Fund in two ways: (i) concessional loans to businesses, NGOs and other qualified organizations; and (ii) concessional loans for leveraging financing from other commercial, development bank and micro finance institutions. And, (ii) Technical assistance. The Rural Electrification Fund will manage the GEF grant funds through four windows: (i) project preparation facility; (ii) project performance and monitoring facility; (iii) full cost technical assistance window; and (iv) cost-shared technical assistance window (see also Annex 1 and Annex A of the Executive Summary - Incremental Cost Analysis). IDA/GEF disbursements of this sub-component will be contingent on the establishment of the institutional and financial architecture for rural electrification and renewable energy arrangements under the REF, which will be undertaken in the initial phase of project implementation. 1.6 Project Component 4- Biomass. To help reduce environmental degradation and improve biomass energy end-use efficiency, the following planning, and supply and demand management activities are to be implemented: (i) development of a national strategic plan and policy framework for the biomass energy sector; (ii) planning, establishment and monitoring of participatory sustainable natural forest management systems covering about 302,000 ha in identified woredas in the SNNP, Oromiya, Gambela, Amhara, and Tigray Regions; (iii) establishment and monitoring of farm/agro-forestry schemes, covering about 384,000 ha in the same Regions as in (ii) above, as well as in Dire Dawa and Harari, and in Benishangul-Gumuz, Afar and Somali Regions once the regional strategic plans have been formulated; and (iv) support for energy end-use efficiency improvement in the household sector, through the promotion of commercially-based production and dissemination of approximately 320,000 improved injera baking stoves in peri-urban and rural areas. All

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the schemes under (ii) and (iii) will be planned at the woreda level and implemented by individual farmers and Farmers' Associations, and technical assistance will be provided by woredas, regional bureaus of agriculture, and the Natural Resources Management and Regulatory Department (NRMRD) of the Federal Ministry of Agriculture. However, procurement and financial management will initially be handled centrally at the PMU level, but could be devolved to the regions during later stages of project implementation depending on the results of capacity assessments. The end-use efficiency improvement sub-component will be implemented by regional bureaus of energy, with technical assistance from and supervision by the Ethiopian Rural Energy Development and Promotion Center (EREDPC). 1.7 Project Component 5. Environmental Mitigation (US$1.0 million). The Project includes provision for financing the cost of implementing the Environmental Management Plan prepared under the Environmental and Social Impact Assessment (ESIA). The main activities to be funded under this component are: (i) capacity building (training and advisory services) for the environmental and social management and monitoring unit to be established by EEPCo for the purpose of carrying out environmental and social analysis of the various activities to be undertaken under this and future projects; (ii) implementation of a compensation plan for loss of crops during construction of power lines under EEPCo's urban distribution and grid based rural electrification components; and (iii) technical audits to ensure and support the safe disposal of old transformers containing polychlorinated biphenyls. 1.8 The project’s estimated total costs are US$199.12 million, including contingencies, of which about US$132.70 million is estimated for IDA financing.

Component

Indicative Costs

(US$M)

% of Total

Bank- financing(US$M)

% of Bank-

financing

GEF financin

g (US$M)

% of GEF financing

1. Institutional Support and Capacity Building 10.80 5.4 7.46 5.6 0.0 0.0 2. Urban Distribution and Load Dispatch 88.71 44.6 60.14 45.3 0.0 0.0 3. Rural Electrification (see note) 56.30 28.3 46.25 34.9 4.93 100 4. Biomass 42.30 21.2 18.64 14.0 0.0 0.0 5. Environmental Mitigation 1.01 0.5 0.21 0.2 0.0 0.0

Total Project Costs 199.12 100.0 132.70 100.0 4.93 100.0 Total Financing Required 199.12 100.0 132.70 100.0 4.93 100.0

Note: Renewable energy sub-component as part of Rural Electrification component (US$4.93 million from GEF see also Annex 14)

15.39 7.7 7.40 5.5 4.93

2. Key policy and institutional reforms supported by the project:

Policy and institutional reforms are being sought in the following three principal areas: 2.1 Institutional and financial architecture for expanding access to electricity in peri-urban and rural areas, comprising the RES for providing information and technical know-how to potential investors, and the REF for channeling low-cost debt to investors. The details of the architecture are contained in the RE strategy paper. The submission of the required Proclamation to the Borrower's Parliament will be a condition for effectiveness, while the establishment and functional operation of the institutional and financial architecture for private sector-led RE will be a condition for disbursement of funds for goods and supply and installation contracts for sub-projects under this sub-component; In addition, production of a Project Operational Manual (POM) presenting the eligibility criteria, and the terms and conditions and procedures for accessing REF resources, will be a disbursement condition. The REB and its secretariat, the RES, will have functional autonomy, but will be linked administratively (initially to MOI) to the Ministry of Rural Development. 2.2 A second critical prerequisite for a successful private sector-led RE access policy is the availability of one-time concessional funding for capital expenditures to make the schemes attractive for private investment and to ensure the

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affordability of resulting tariffs to consumers. The concessional financing will be provided through sub-loans to the sub-projects sponsors and the terms and conditions for the sub-loans will be determined during the institutional design of the architecture for private sector led RE and specified in the POM. 2.3 A third important issue for the success of the private sector-led RE program will be the ability of the operators to charge cost recovery tariffs. The legal agreements for the proposed project contain the Government’s commitment to allow operators to charge full cost recovery tariffs, after taking into account any concessional financing support made available from the REF. 3. Benefits and target population:

The project will yield the following benefits to the target population groups: 3.1 Electrification Access (rural electrification and renewable energy). About 850,000 people living in towns, villages and the surrounding rural areas will benefit from access to electricity, which will bring about local economic growth and improved social services. A further 250,000 will also benefit indirectly through the improved provision of public services. Furthermore, the institutional and financial architecture established by the project will ensure that the program for increased electricity access extends beyond the completion of the project, setting in motion a process, which is expected to produce a substantial increase in access. The improvement in quality of electricity service will also promote its use to generate income and increase living standards outside the main urban centers. One of the primary benefits of access to electricity will be the improvement in quality of life and quality of public services. The target population is all the current customers of EEPCo, plus other such customers that will be connected to the main grid or existing/new independent grids, plus those who will benefit directly from acquiring solar PV systems or indirectly by the improvements in service quality of rural public institutions. The Project strengthens the infrastructure of the private sector. Rural enterprises will have the benefits of increased productivity, income arising from access to electricity as well as in some of cases electricity sales. For financial institutions that can expand their services to electricity businesses in rural areas by co-financing REF supported projects. For medium scale local investors that can invest in off-grid and renewable energy business opportunities that are within their reach of operation. Also, greater leveraging of Government financial resources for capacity addition and rural electrification, and direct and indirect reductions in greenhouse gases, resulting in global environmental benefits. 3.2 Urban Distribution and Load Dispatch. The benefits resulting from distribution system improvements will be: connection of about 70,000 customers to power supply; adequate system capacity which will avoid overloading; acceptable levels of voltage (plus or minus 5%); reduced energy losses (3% reduction); lower frequency and duration of outages; better safety conditions and a systematized data base on the distribution network to facilitate planning. These improved operational and planning conditions will result in higher quality of service for consumers and reduced costs for both consumers and EEPCo. It will also facilitate the growth of small businesses needing reliable supply, thus promoting economic development. The key contribution of this project to the poor is to ease the electricity service constraint to economic activity and growth, which is a prerequisite for sustained poverty reduction. Like the Urban Distribution component, automated control and operation of the grid, with use of the LDC will enable more efficient and safer operation of the grid, as well as improved quality of supply. Furthermore, the LDC is a prerequisite for effective operation of a competitive power market and interconnection with other countries, both of which EEPCo plans. 3.3 Biomass: The principal benefits expected to arise in the project intervention areas will be an increase in the supply of woodfuels, reduction in the rate of energy-related deforestation and the associated degradation of rural ecosystems, and a significant increase in the production and sale of efficient injera baking stoves. This should also result in a related increase in the growth of income-enhancing and economic diversification activities. The increase in fuelwood supply will result from about 302,000 ha of natural forests which will be brought under participatory management and another 384,000 ha of farm/agro-forestry schemes in at least seven Regions. Approximately 31,500 farmers will be implementing these activities through their Farmer's Associations. The proposed forest resource management schemes will be implemented following completion of the regional strategic woody biomass management plans that are being

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prepared under the WBISPP. The schemes will equate annual yields to allowable resource extraction rates, thus helping to arrest the depletion of the resource. The beneficiaries of the supply-side measures will be rural households in general and women in particular-- and to some extent children-- through a tangible reduction of the burdens associated with daily collection of scarce woodfuel. Women will have more time, and opportunity to participate in income-generating activities, such as the production of cook-stoves, pottery and related small-scale industries. Approximately 580 stove producers will be trained. 3.4 Monitoring and Evaluation arrangements: The Project envisages detailed evaluation of impacts to establish its effectiveness in meeting its access and related economic development objectives. There will be two parts to the M&E program: (i) M&E of the program’s physical outputs to assess the progress in reaching the renewable energy targets; and (ii) M&E of the program’s impacts to assess the rural economic development attributable to the provision of renewable energy services and the sustainability of the renewable energy industry. The elements to be monitored include: (i) rural electrification physical progress through all methods including grid extension, village grid, and solar; (ii) impact of rural electrification on economic development including quality of life enhancement, rural employment, and change in income; (iii) sustainability of the renewable energy industry including: business profitability, cost declines, sales break-even points, structure of system size distributions over time, institutional and financial viability of small hydro cooperatives, etc. Panel surveys, focus groups, and other relevant techniques will be used to establish rigorous monitoring protocols. Evaluations also will be used to guide revisions of Project design – in particular the private sector led rural electrification component needed. Additional surveys or market analyses which may be needed throughout the Project period to assess specific areas such as assessment of a village based systems market, village grid productive use assessment, are also to be covered. 4. Institutional and implementation arrangements:

A dedicated Project Management Unit (PMU) will manage each component of the project. The arrangements will be as follows: 4.1 EEPCo Components. EEPCo has already established a Project Implementation Unit (PIU) for its grid-based rural electrification and Load dispatch components. It will establish an additional PIU for the urban rehabilitation and expansion component. Both PIUs will operate under the oversight of its existing multi-project PMU. EEPCo has had experience working with the Bank and implementing significantly larger projects, such as the on-going Gilgel Gibe hydropower plant under Energy II. Consultants are currently assisting EEPCo in reviewing its design standards and construction and management practices and in developing more appropriate guidelines to be adopted for the project, and mainstreamed later. One change is expected to be implementation through turnkey contracts awarded to private contractors. 4.2 Isolated Rural Electrification/Renewable Energy. The private sector-led rural electrification component will be managed by the Rural Electrification Secretariat (RES) to be established in the initial stages of project implementation. During the current initial phases of implementation, the EEA is in charge of the rural electrification and renewable energy programs. The RES will prepare an indicative rural electrification plan, provide information on potential project sites to prospective investors, review the proposals for investments, prepare specific projects to solicit private sector interest, and provide technical support to interested investors. The REF will be the primary source of rural electrification debt financing, co-financing and technical assistance, which will be overseen by the Board. A trust agent to administer the payments to investors out of the REF will be competitively selected. The EEA will be responsible for licensing, approving tariffs and monitoring technical, environmental and safety standards. Monitoring and evaluation of this component will be contracted out to an independent party in order to draw timely lessons for improving the design of the program. The chart in Annex 12 depicts the proposed institutional and financial architecture for the isolated rural electrification/renewable energy project components. Initially the REB and the rest of the structure will be linked administratively to the Ministry of Infrastructure. At a later time to be determined, based on growth in capacity of the new Ministry of Rural Development, the whole institutional structure will be transferred to that Ministry. The PMU of the EEA is the transitional body managing the preparation of the private sector led rural electrification and renewable energy activities.

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4.3 Biomass Components. Supervision of the biomass energy component will fall under the Ministry of Agriculture (MoA). The PMU for the supply-side activities will be established in the Ministry of Agriculture. The WBISPP will implement the strategic national plan for the biomass energy sector; the Regional and Woreda Bureaus of Agriculture with supervision by the PMU, will assist Farmers’ Associations in the implementation of the natural forest management and farm/agro-forestry schemes. The EREDPC will implement the end-use energy efficiency improvement activities, which will be implemented by the Regional Bureaus of Energy, with technical assistance from the EREDPC. 4.4 The PMUs will receive training in procurement and financial management, to enhance their capacity to effectively manage the project. The project implementation plans (PIPs) prepared by the PMUs will be improved and revised drafts will be discussed with the Government delegation during negotiations for the IDA Credit. The PIPs will include, among other things, procurement plans for the first 18 months of project implementation. During project implementation the PMUs will issue quarterly reports. Independent auditors acceptable to the Bank will audit project financial statements in accordance with generally accepted auditing standards. Audit reports will be submitted to the Bank not later than 6 months after the close of each fiscal year. D. Project Rationale 1. Project alternatives considered and reasons for rejection:

Electrification Access: 1.1 The conventional approach to rural electrification that has been adopted in many developing countries is to extend the grid to reach as much of the population as possible, outside of the urban areas, given financial limitations. Efforts are sometimes made to reach the more distant areas from the grid, often characterized by dispersed poor populations through stand-alone household power systems which are less expensive than conventional grid extension and distribution when the population is very dispersed. This conventional approach is based on the assumption that the main grid will gradually be extended by the national utility, and that secondary towns and rural population centers will be connected to the main grid in the not-too-distant future without any outside intervention. However, experience in many developing countries shows that very often power utilities are unable to significantly undertake expansion from the main grid due to the extra financial burden from projects that are ordinarily not financially viable. 1.2 Ethiopia has had similar experience with grid extension. In particular, historically low tariffs, until a few years ago, combined with managerial and other human resources constraints, have limited EEPCo's capability to significantly extend the grid to rural areas. Hence, the Government has recently adopted a two-track approach involving expansion of EEPCo’s grid in some areas, while allowing the private sector to supply off-grid areas using different technologies and energy sources. This will allow the private sector to customize resources and technologies to suit specific load requirements. For example stand-alone household level systems, based on solar PV could be used for lighting, radio applications, refrigeration and communication in some areas, whereas mini/micro hydropower, diesel and other technologies could be used in other areas to power small-scale manufacturing operations that have income enhancing impacts. 1.3 Urban Distribution and Load Dispatch. The urban rehabilitation and expansion contracts will be awarded on a turnkey contract basis. The alternative is for EEPCo to purchase the materials and use its staff for the construction. The drawbacks of this alternative are that this large, one-time implementation exercise will cause EEPCo to increase the size of its staff beyond that required for normal operations. Experience has shown that implementation of turnkey contracts will be quicker and less costly overall. Unlike most utilities of its size and even smaller ones, EEPCo does not have a central location from which to control its generation and transmission operations, thus making operation inefficient and unsafe. Its telecommunication system, which is essential for operation of a SCADA system, is also outdated and needs a major revamp. The project alternatives therefore do not concern the appropriateness of the SCADA, but rather how it can

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be phased to reduce the initial cost. It has therefore been agreed to install the basic SCADA and delay the EMS and the AGC until the system reaches the level of development to warrant these. 1.4 Biomass. One alternative for addressing the woodfuel problem directly is to attempt large scale inter-fuel substitution. In Ethiopia, this is not considered feasible both because of the high cost of imported fuels and because the existing infrastructure (road and rail) is insufficient for an extensive delivery system. If large scale inter-fuel substitution is ruled out, there is a clear need to both reduce the demand for biomass, through the dissemination of efficient cookstoves, and to expand the supply. There are three options for expanding supply: (i) large-scale government or private sector plantations, (ii) social/agro-forestry and (iii) sustainable management and use of existing forest resources (which increases the supply in the long term). This project involves both social forestry and sustainable management. The option to develop large scale plantations was rejected because the cost of such projects far exceeds the returns generated through the sale of woodfuel. This happens both because of the low price paid for woodfuel, and the long period between the investment in a plantation and the first returns. In addition, there are valuable social “side-benefits” associated with farm/agro-forestry and improved forest management that large-scale plantations do not offer. The Bank's involvement will also help to complete the preparation of a strategic national plan for the biomass sector which will be based on the strategic plans drawn up for individual regions with the Bank's support under the ongoing Energy II Project. The strategic national is an important component of the integrated rural energy strategy plan to be developed by EREDPC, also under this project. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Sector Issue

Project

Latest Supervision (PSR) Ratings

(Bank-financed projects only)

Bank-financed Implementation

Progress (IP) Development

Objective (DO) Uganda Energy for Rural Transformation

Eritrea Rural Electrification Under preparation Ghana National Electrification Completed S S Vietnam Rural Electrification Under preparation Mozambique Urban Household Energy

S S

Sri Lanka Energy Service Delivery HS HS Laos Southern Province Rural Energy S S India Renewable Energy Develop. I Indonesia Solar Home Systems S S Other development agencies

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design:

The above table shows projects with similar features that have been been completed, are under preparation or implementation in different countries. The satisfactory ratings for almost all of the projects under implementation suggests that projects of this nature can be successfully implemented .

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Lessons learned from completed and on-going projects in Ethiopia Sector & Themes KM 3.1 Importance of giving priority to consultation with government, beneficiaries and other stakeholders to ensure a viable project design. Given the highly participatory nature of the proposed project, extensive consultations have taken place with all parties involved, especially with the beneficiaries and other key stakeholders. This is particularly important for the components designed to increase access to electricity as well as the biomass component, in which community organizations and private enterprises play a major role. The consultations have been conducted under the feasibility and environmental impact studies for the urban and rural electrification, load dispatch center, and biomass components. 3.2 Importance of simplifying design. The Energy I project was overly complex with components covering: electric power development, petroleum supply options, industrial energy efficiency and household energy development. IDA incorporated the above lesson in the Energy II project by: (i) focusing on electricity generation and leaving distribution investments and increased access for the next proposed project; and (ii) confining household energy development to expanding on two areas in the Energy I project that were very successful – woody biomass assessment and the strengthening of the Government’s capability for handling rural energy development. The proposed project will focus primarily on electricity and energy development outside the main urban centers in addition to completing the priority urban distribution network improvements that were not included under the Energy II project. 3.3 Effectiveness of private enterprise in rural energy development. Experience with the Energy I project has shown that private enterprise is crucial for viable management of traditional fuels supply and demand. It can also play an important role in supplying the electricity for community-based electrification ventures. Therefore the proposed project’s design will promote private sector development in both of these areas. 3.4 Attention of Government officials to project management The project will seek agreement with the participating Government agencies that project management staff from the Government will be involved in their project duties on a full time basis. Lessons Learned from Other Countries. 3.5 A recent review of the Bank’s experience with solar home systems projects, World Bank Solar Home Systems Projects: Experiences and Lessons Learned 1993-2000, derives some lessons from the early implementation experience: (i) the initial pace of implementation is likely to be slow, as it takes time to develop and fine tune effective business models for operating a solar pv business in rural areas; (ii) adequate after-sales service, including consumer education in proper maintenance and operating procedures, is important for consumer satisfaction, minimizing maintenance costs and enhancing overall system reliability; (iii) while marketing campaigns are important, in order to enlarge the market, consumer awareness must be combined with other factors such as affordability, demonstrations, opinions of neighbors, and service presence; (iv) consumer credit is key to expanding the market beyond cash sales; dealer-provided credit schemes are unlikely to be effective as few dealers have the ability. Additional solar industry include: (v) broad industry scale-up with a private sector delivery model requires “big players” who think in terms of thousands of system sales per month, rather than the tens or hundreds per month acceptable to small, local firms; (vi) “Big players” are attracted by market stability (i.e. stable ground rules such as the SHS specifications and transparent grant release procedures over a long period) and the prospects for attractive returns on investment; and (vii) multiple micro-credit/consumer finance channels are needed to promote stability in growth. This project aims to build on prior projects by other donors and develop a coherent program of sustained knowledge and financing support for the promotion of these technologies. By doing so, it is expected that the cost of these technologies can be brought closer to those in the world market. 3.6 Importance of Community Ownership and Control Cannot be Over-emphasized. There is significant evidence from attempts to increase access to electricity in other countries that heavy-handed, government-based, technology-push

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concepts are expensive and unsustainable. Where communities have been involved in the process, ownership and control of the provision of electricity, results have been much more positive. 3.7 Dissemination of “Improved” Technologies Requires Strong Customer Focus. Sustainability requires full cost-recovery production and retail. People will use new technologies, such as more efficient cookstoves, if there are real benefits in practice. Quality, performance and cost of the new technology, compared to existing methods, are important. The proposed project component is designed to ensure that the private sector or NGO’s are able to make and sell efficient stoves on a full cost-recovery basis. 4. Indications of borrower commitment and ownership:

4.1 Although the detailed design for an appropriate institution to handle the isolated rural electrification activities is ongoing, the Government has designated the EEA as the transitional agency for preparation of this sub-component. Prior to the designation of the EEA, EEPCo’s staff participated in field trips and assisted in gathering and evaluating background information for the project. EEPCo has also funded a study tour for its engineers and management who visited Ghana to learn about the shield-wire distribution technology, one of the power supply options proposed for use under the project. The Chairman of the Board of EEPCo and Minister of State for Infrastructure has taken a keen interest in promoting the electrification access project.

4.2 The Government of Ethiopia has adopted a rural and renewable energy policy and has recently established a national level Rural Electrification Fund that will support the acceleration of all rural electrification and renewable energy activities. Also, in a recent workshop organized by the EEA more than 15 different organizations were represented ranging from the private sector, micro finance institutions and Government Agencies confirmed that renewable energy development should be an integral part of rural electrification planning and implementation. 5. Value added of Bank support in this project:

The Bank’s value added will be in the following areas: 5.1 Electrification Access. It will help to introduce improved and lower cost technologies to Ethiopia (but proven in other countries) to further reduce the cost structure of providing electricity through renewable energy systems; to support implementation of proper environmental and social safeguards; and, ensure that increased electricity access is integrated with provision of training to gain the maximum benefits from the availability of reliable electricity service as quickly as possible. The Bank support for investments in the isolated system will also help to mobilize financing for investments in rural electrification and renewable energy systems. It will also facilitate in transferring knowledge and technologies on renewable energy from other countries – in particular Asia – to bring down the initial investments for these systems. Through this project, EEPCO will switch to supply and installation contracts instead of separate supply contracts with installation done by EEPCO staff. Supply and install contracts are expected to result in significant cost savings and will avoid an increase in the size of EEPCO’s staff beyond that which is required.

5.2 Urban Distribution. In addition to the introduction of new technology (but proven in other countries), that is critical to reducing the cost of infrastructure, the Bank’s knowledge of the sector will help to facilitate optimal use of investment resources for the sector through donor coordination.

5.3 Biomass. The biomass sub-sector has significant near and long term economic, environmental and poverty impacts, but is frequently neglected for investment by the public sector. Bank assistance provides resources and substantial experience. Through its Regional Program in the Traditional Energy Sector (RPTES), the Bank is assisting governments and communities in more than 15 African countries in the development of practices for the sustainable management and use of biomass fuels and for the development of modern biomass energy options, such as the "Millenium Gelfuel". It can provide experience from, and facilitate contact with, other countries at various stages of the process to address problems in the biomass fuels sub-sector. RPTES can also help to highlight the importance of sustainability

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through a focus on in-service training and capacity building at all levels, especially with respect to women’s roles in the biomass sub-sector. Further, the Bank can assist in coordinating donor, NGO and community activities in the sub-sector. The Bank's experience in other countries and in Ethiopia under Energy I and II has been valuable in the design of this project and will be further used during supervision of the project. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): Cost benefit NPV=US$45.9 million; ERR = 18 % (see Annex 4) 1.1. The justification of the proposed project is carried out in three stages as follows: (a) that there is a reliable identified market for the output of the project, i.e demand exists;

(b) that the proposed project provides the most cost-effective means of improving the reliability of the power transmission and distribution systems, and in serving the market; and

(c) the profitability of the project as measured by the economic rate of return The Power Market 1.2 In view of the Government’s program to expand access to electricity supply throughout the country, the electricity market is expected to grow rapidly. Electricity demand is projected to double between 2001, and 2010, from about 1,784 GWh in 2001 to about 3,600 GWh by 2010, an annual average growth rate of about 7%. The growth will occur in both rural and urban areas, with higher growth rates expected in the rural areas. The Addis Ababa municipality currently accounts for about 50% of the market, but its share is expected to decline because of the existing relatively higher level of electrification. The growth rate of electricity demand in the Addis Ababa municipality is expected to average about 5% per year over the next five years, and to decline to about 3% per year thereafter.

1.3 In the rural areas, new household and industrial consumers in about thirty-three small towns and villages, are expected to be connected to electricity supply through the extension of the national power interconnected network. Electricity demand in these towns and villages is expected to grow from about 17GWh in 2005 to about 43GWh in 2010, and to reach 67GWh in 2015, an average growth rate of nearly 20% per year.

1.4 The market analysis is based on the Ethiopian Power System Expansion Master-Plan study, and surveys conducted as part of the assessment of the feasibility of the project components in urban distribution system rehabilitation and expansion, and rural electrification. This confirms the existence of the market for the project’s output.

Least-cost justification

1.5 The Master-Plan Study confirms the adequacy of existing and committed generation and transmission capacity to meet demand in the foreseeable future. Hence, the additional critical investments required in the medium term are those for improving the technical integrity of the distribution systems to enhance reliability and security of supply, and the extension of supplies to new consumers. 1.6 The feasibility study reports on the various project components demonstrated that: (i) rehabilitation and expansion of the urban distribution network in Addis Ababa municipality provided the least cost means of reducing electricity losses and un-served energy due to outages of the network, and improving the overall reliability of the distribution network to meet the incremental demand in comparison with the alternative of increasing generating capacity; (ii) the Load Dispatch component would provide the least-cost means of management of the sub-transmission, and medium voltage distribution for improved reliability and operating cost savings, which would otherwise require increases in network investments, and advancing generation investments; and (iii) the extension of grid supply to the small towns was found to be more cost-effective compared to the alternative of isolated diesel plant generation.

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Economic Rates of Return

1.7 The economic internal rate of return (ERR) on the investment in the project is estimated at about 18%. The ERR was also calculated for the urban rehabilitation and expansion, LDC and grid-based rural electrification sub-components of the project, by comparing the quantifiable costs and benefits in economic terms. The costs comprise capital, and operating and maintenance costs. Benefits vary by component, as detailed below:

(a) Urban distribution rehabilitation and expansion, the benefits comprise: (i) savings in losses valued at prevailing average US$0.06/kWh; (ii) reduced outages valued at the cost of un-served energy to the economy of US$0.27/kWh; and (iii) generation, and network operating cost savings. (b) Load Dispatch component, the benefits comprise: (i) reduced network outages and savings in un-served energy; (ii) capital investment, operating, and staff cost savings. (c) The grid extension to towns and villages, the benefits comprise incremental electricity sales to mostly new customers. (d) Sensitivity analyses were conducted to test the robustness of the profitability of the project to Ethiopia to changes in key parameters of project costs and benefits. The rates of return were examined for the total project and the grid-based rural electrification component based on the two scenarios: (i) a 10% increase in capital and operating costs; and (ii) the combined effect of (i) and 10% decline in the estimated benefits. In the unlikely occurrence of the changes under these scenarios, the net present values remains positive, and the internal rates of return are about 12%. These results confirm the robustness of the economic viability of the proposed project. 1.8 Table 1 – below provides a summary of results of the cost-benefit analysis. Details are provided in Annex 4.

Table 1: Summary Results of Cost –Benefit Analysis

Net Present Value @ 10% Discount Rate (US$ Million)

Net Present Value @ 12% Discount Rate (US$ Million)

Benefit/ Cost Ratio Economic Internal Rate of Return

Total Project 76 46 1.66 18% Urban Distribution Rehabilitation and Expansion

8 1.5 1.75 13%

Load Dispatch Center 17 11.7 5.45 20% Rural Electrification (Grid Extension)

21 7.7 1.78 14%

Details of assumptions and computations are presented in Annex 4. 1.9 Renewable energy technologies: An initial economic assessment for the different renewable energy technologies was conducted. The analysis over a lifetime of fifteen years, with a discount rate of 12%, shows that on average the Project has a positive Net Present Value1. However, determining the avoided cost for each of the options has been a challenge as this project is the first of its kind in Ethiopia in addressing all electrification options for providing service to the rural areas. Baseline data to determine the avoided cost for each of the options is at best scarcely available and often

1 Assumptions: Mini-grid hydro systems: specific diesel consumption: 0.27 liters/kWh; Diesel price: 0.27US$/liter; incremental staff and transmission asssumed the same; O&M cost of hydro: US$60/year; O&M diesel system: 2% of fixed cost; 5% of variable cost; Capital cost diesel system: US$450/kW; Capital cost hydro system: US$1100/kW; Investment cost include interest during construction; Load growth after yr5: 0.07 Average load-factor: 0.45; Avoided cost tariff: 0.07 US$/kWh.

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not confirmed through an extended time of monitoring and evaluation. Therefore, the economic analysis is an initial one and with the implementation of the project and its Monitoring and Evaluation Program, some of these analyses should be possible in more detail during and at the end of the Project. The initial economic analysis shows an economic rate of return of 13% for the sub-component. 1.10 Independent Grids: In many rural areas, conventional electrification by grid extension and LV distribution, given the extremely small loads, is costly and thus considered not feasible. Many rural households can afford just one light bulb, using less than 30 kWh per month. This level of consumption is sufficient for the power served from solar PV or micro hydro systems. Unlike conventional electrification projects, the proposed EAP tries to increase the indirect benefits arising from the end users, such as institutions on improved services, and SMEs on improved efficiency and productivity from the electrification. The economic analysis on a sample site produces ERR of about 15%. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Past Performance 2.1 EEPCo’s financial performance for the past five years (FY1996/97-FY2000/01) is summarized in the table below and so are the projected financial statements for FY2001/02- FY2006/07. Detailed financial statements for both periods are available in Annex 5.

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Historical Financial Results FY 1996/99 – 2001/01 (All amounts in Birr 000’s unless otherwise stated)

1996/97 1997/98 1998/99 1999/00 2000/01 AUDITED AUDITED AUDITED AUDITED Draft Generation (GWh) 1614 1628 1653 1688Sales (GWH) 1,324 1,358 1,333 1,374 1,411.0System Losses (%) 17.97 16.58 19.36 18.60AVERAGE TARIFF (BIRR/KWH) 0.2523 0.3839 0.4564 0.4574 0.4621AVERAGE TARIFF (US$/kWh) 0.0560 0.0612 0.0559 0.0526REVENUE: SALES OF ELECTRICITY 333,939 521,510 608,436 585,650 608,409 TOTAL REVENUE 432,986 659,296 723,052 737,823 743,359TOTAL OPERATING EXPENSE 245,311 252,641 247,228 284,566 308,519GROSS PROFIT(LOSS) 187,675 406,655 475,824 453,257 434,840

TOTAL NON-OPERATING EXPENSES 113,295 112,881 154,695 59,513 53,538

TOTAL EXPENSES 358,606 365,522 401,923 344,079 362,057PROFIT (LOSS) BEFORE TAX 74,380 293,774 321,129 393,744 381,302 Long-term Assets 4,333,546 4,536,430 4,735,207 5,100,370 5,964,885Net Current Assets 734,656 1,036,315 2,431,228 2,529,380 2,368,326Total Assets 5,068,202 5,572,746 7,166,435 7,629,750 8,333,210 Long-term Debt 1,646,584 1,673,103 2,636,563 2,725,272 2,982,382Capital and Reserves 3,421,618 3,899,642 4,529,871 4,904,478 5,350,827Total Capital and Long-term Debt 5,068,202 5,572,746 7,166,750 7,629,750 8,333,210 Funds from Internal Sources 216,255 170,224 402,471 495,485 487,924Long-term Loans 1,823,198 398,373 424,453 284,990 464,691Total Sources 2,039,453 568,597 826,924 780,475 952,615 Investment Expenditures 1512,310 571,265 686,889 481,074 1,147,691Changes in Cash Position 527,143 (2,668) 140,035 299,401 (195,076)Total Applications 2,039,453 568,597 826,924 780,475 952,615

2.2 Profitability Analysis. EEPCo’s strong sales growth trend was reversed in FY1998/99 because of the break-out in hostilities with Eritrea and drought. In that year sales declined by about 1.8%. In the next two years sales grew at a moderate level of about 3% per annum (substantially much lower than the growth rate of about 7.5% achieved in FY1997/98). Sales revenue increased substantially in FY 1997/98 and FY1998/99 as a result of an average tariff increase of about 10%, but subsequently remained at about the same level due to the impact of the war and drought on the economy. Due to the tariff increase EEPCo’s gross profit margin (sales revenues -cost of production including depreciation as a percentage of sales revenues) peaked at about 66% in FY1998/99, but has been declining ever since due to the pressure of moderate inflation on production costs while the tariff remained fixed. In the same period profits before interest and taxes averaged about 55%. The differential between profit before interest and taxes and operating margins,

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reflecting the impact of interest costs on operating profits has been constant at about 4% in the past four years due to the low financial costs (interests cost and exchange rate losses) as a result of improved self-financing of investment and also the result of a low rate of inflation and a fairly stable currency. 2.3 Liquidity Analysis. Reflecting the reasonably strong profit performance, EEPCo’s liquidity position improved considerably, and so did its cash and bank balances. Its debt service coverage ratios also increased substantially as shown in the table on key performance indicators below. 2.4 Financial Policy. EEPCo’s financing policy, as shown in its capital structure and average collection period for receivables, shows a marked improvement between FY1996/97 and today. In FY1997/98, EEPCo’s debt equity ratio was 79% but has since improved steadily to about 62% as of end of FY2001/02—a result of the build up in its retained earnings. The average number of days in receivables reduced from 120 in FY1996/97 to about 68 at the end of FY2000/01 and 55 as of March 2002. The intensive decentralization of commercial functions, including the designation of payment points has had a significant positive impact in improving EEPCo’s working capital management.

Key Financial Performance Indicators (Past and Projected)

1997/98 1998/99 1999/00 2000/2001 2001/2002 2002/003 2003/004 2004/005 Ethiopian Year 1990 1991 1992 1993 1994 1995 1996 1997 ACTUAL ACTUAL BUDGET PROJ. PROJ. PROJ. PROJ. FINANCIAL STRENGTH Self- Financing Ratio 0.30 0.59 1.03 0.43 0.39 0.47 0.37 0.36 Current Ratio 1.73 6.44 8.36 8.49 7.75 5.39 4.98 4.75 Quick Ratio

1.31

4.70 6.09

7.15 5.44 2.89 2.43 2.09

LT Debt to Equity 0.43 0.58 0.56 0.56 0.61 0.53 0.46 0.41 Total Debt To Equity 0.79 0.68 0.63 0.62 0.65 0.55 0.48 0.43 Interest Coverage 7.10 9.65 14.25 16.56 21.76 27.89 11.86 12.47 Debt Service Coverage

0.64 1.17 2.56 1.89 3.56 3.79 3.35 3.56

PROFITABILITY RATIO Gross Margin 0.62 0.66 0.61 0.58 0.59 0.51 0.44 0.41 EBITD Margin 0.52 0.50 0.57 0.55 0.55 0.47 0.40 0.37 Operating Margin (EBT) 0.45 0.44 0.53 0.51 0.53 0.46 0.37 0.34 Net Profit Margin 0.17 0.13 0.24 0.31 0.53 0.46 0.36 0.33 Total Expenses Margin

0.55 0.56 0.47 0.49 0.47 0.54 0.63 0.66

MANAGEMENT EFFECTIVENESS Return on Total Net Assets 0.04 0.04 0.05 0.05 0.06 0.05 0.04 0.03 Return on Equity

0.08 0.08 0.10 0.10 0.14 0.13 0.11 0.11

EFFICIENCIES Revenue Per Employee 79 86 88 89 103 110 119 128 Net Profit Per Employee 28 29 39 39 55 50 44 44 Receivable Turnover 3.0 3.8 3.6 5.2 5.7 5.7 5.7 5.7 Inventory Turnover 0.9 0.8 0.8 1.4 1.7 1.7 1.7 1.8 Total Assets Turnover 0.09 0.09 0.09 0.09 0.09 0.09 0.08 0.08 Average Collection Period 120 95 95 65 60 60 60 60

Future Prospects

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2.5 Profitability Analysis. EEPCo’s financial projections for the next five years, FY2002/03 is predicated on strong sales and sales revenue growth averaging about 7% per annum. Despite the strong projected sales and revenue growth, operating expenses are forecast to grow even faster as a result of the introduction of new diesel units into the system, increases in depreciation costs as new assets are brought into service (Gilgel Gibe Hydropower plant in 2003), and asset revaluations. Thus, gross margins are forecast to decline from 59% in FY2001/02 to about 41% in FY2004/05; and profit before interest and taxes from about 55% to about 37% in the same period. The impact of higher costs of financing on operating profits will become more significant as the differential between the profit before interest and taxes as a percentage of sales revenue widens from about 2% in 2001/02 to about 4% by 2004/05. The two most critical assumptions determining the financial projections are average retail tariff which is assumed to remain more or less constant at about Birr 4.6/kWh or US$0.04.94/kWh, and the large investment program averaging about Birr 1.7 billion per annum, which is larger than EEPCo’s investment program in the past five years (FY1996/97-FY2000/01) by a factor of 3.0. The bulk of the investment will be in generation, about 42%, with transmission taking 32%, rural electrification 15%, distribution 6% and the balance of 5% being for capacity building and other activities. Within generation, the Tekeze Hydropower plant (300 MW) will account for about 85% of the total expenditures or 46% of the total investment expenditures during the five years. Another large investment (Gojeb Hydropower Plant) is excluded from EEPCo's financial projections on the assumption that it will be implemented by the private sector. The large investment expenditures, together with the declining tariff (in real terms) explain the declining self-financing ratios from about 43% in FY2000/01 to about 36 in FY 2004/05. The declining profitability will also be reflected in decreasing rates of return on total assets and on equity as shown in the key performance indicators above. 2.6 Liquidity Analysis. In line with its projected decreasing profit performance, EEPCo's liquidity will also decline in the next five years to FY2006/07. Thus, while it had large cash reserves of about Birr 1.8 billion at the end of FY2000/01, cash balances are projected to decrease and remain at about Birr 200 million at the end of each fiscal year (an increasingly smaller proportion of its sales revenue). Similarly net current assets which accounted for about 15% of total assets at the end of FY2000/01 will decrease gradually reaching about 5% of total assets by FY2006/07. Despite this trend, EEPCo's liquidity position will remain strong with current ratios of about 4.8 compared to about 8.5 at the end of FY2000/01). It is expected that EEPCo's collection of receivables will at least remain as good as it is now or even improve with implementation of a decentralized accounting system which is proceeding under the Energy II Project, thus further enhancing its working capital management.

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Estimated and Projected Financial Results, FY2001/02-FY2006/07 (Birr 000 unless stated otherwise) 2001/02 2002/2003 2003/04 2004/05 2005/06 2006/07 BUDGETEDPROJECTED PROJECTED PROJECTED PROJECTED PROJECTED Sale (GWh) 1,543.3 1,653.6 1,775.6 1,900.5 2,029.4 2,160.8 Average Tariff (birr/KWh) 0.4634 0.4634 0.4634 0.4634 0.4634 0.4634 Average Tariff (US$/KWh) 0.0504 0.0496 0.0495 0.0494 0.0494 0.0494 Revenue: Sales of Electricity 715,169 766,267 822,802 880,675 940,428 1,001,318 Total Revenue 863,748 923,562 994,799 1,068,639 1,140,477 1,223,639 Total Operating Expense 354,680 452, 816 558,674 632,532 689,594 782,453 Gross Profit(loss) 509,068 474,746 436,124 436,107 450,883 441,186 Total Expenses 407,022 501,566 626,980 700,699 753,466 854,141 Profit (loss) Before Tax 456,725 421,996 367,819 367,939 387,011 368,498 Investment Reserve (20%) 456,725 421,996 367,819 367,939 387,011 368,498 Long-term Assets 8,181,688 9,698,802 11,193,121 12,686,236 14,446,240 14,883,019Net Current Assets 1,264,831 798,675 744,323 707,061 868,837 925,861 9,446,190 10,497,477 11,937,445 13,393,297 15,315,077 15,808,870Long Term Debt 3,590,074 3.615,530 3,737,876 3,907,821 3,870,263 3,964,507Total Capital and Reserves 5,856,441 6,881,947 8,199,570 9,485,475 11,444,816 11,844,362Total Capital and Long-term Debt 9.446,190 10,497,477 11,937,445 13,393,299 15,315,079 15,808,870 Funds from Internal Sources 732,893 1,029,671 710,374 674,087 497,878 1,033,041Long Term Loans 923,872 1,096,301 1,089,351 1,105130 1,559,473Total Sources 1,656,765 2,125,972 1,799,725 1,779,217 2,057,331 1,033,041 Investment Expenditures 2,519,032 2,205,033 1,799,725 1,779,217 2,057,351 774,394Changes in Cash Position (862,267) (79,061) 0 0 0 258,647Total Applications 1,656,765 2,125,972 1,799,725 1,779,217 2,057,331 1,033,041

2.7 Financial Policy. EEPCo’s investment program for the next five years (FY2002/03-FY2006/07) is summarized in the table below, along with the corresponding financing plan. The plan totals Birr 8.6 billion including contingencies and interest during construction. The financing plan comprises of disbursements on committed long-term loans (Birr 0.6 billion); internal cash generation (Birr 3.9 billion); and financing deficit/new loans (Birr 3.6 billion). Thus about 40% of the financing plan represents loans yet to be secured. A key challenge for EEPCo will be to mobilize this large amount of financing for investment in the next five years. The main possibilities are to: (i) generate more resources internally through tariff adjustments, (ii) improve operational efficiency thereby unlocking resources for investment; and (iii) mobilize private sector financing. With respect to private sector financing, the only significant generation project appearing in the investment program is the Tekeze hydropower plant since it is already assumed that the Gojeb (100 MW) scheduled for commissioning in 2008 will be undertaken by private sector investors. Nevertheless, the rural electrification program totaling about Birr 1.2 billion should be a prime candidate for scaling back EEPCo's financing requirements through postponement of the less commercially viable schemes until adequate load growths have been achieved to make them financially commercially viable.

2.8 Tariff adjustments will be needed, not only to maintain EEPCo's current financial strength, but also to finance a larger share of the investment program than currently envisaged, if the projected borrowings do not materialize. A tariff study that the Government agreed to undertake under Energy II was to be completed by 2001, but has been delayed. It is now estimated for completion by mid 2003. During negotiations the Government agreed to ensure that the tariff study

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will be completed by June 2003 and that based on its recommendations, it will implement by December 31, 2003, measures to be agreed with the Association for enabling EEPCo to achieve a 25% self-financing ratio in each year and to maintain debt service coverage and current ratios of 1.5 times and 2:1 respectively at all times. 2.9 With regard to operational efficiency improvements, a key aspect is a need for reducing system losses which were about 18% in FY2000/01. The rehabilitation of the urban distribution system will help to reduce losses by about 3% over the five-year implementation period. Another aspect will be continued sound management of working capital for which EEPCo's ongoing MIS project should make a substantial contribution. Thus, an agreement was reached during negotiations that EEPCo would maintain its receivables at levels not exceeding 60 days sales revenue at all times. Further, it was agreed that EEPCo's ability to meet debt maturities as they fall due will be monitored through adequate debt service coverage ratios of at least 1.5 times and that EEPCo will refrain from further borrowings when the ratio falls below this level, unless tariff increases or equivalent cost reduction measures are implemented to restore the ratio to the target level. 2.10 In view of the uncertainties inherent in the main drivers of financial performance (inflation, timing of investment expenditures; etc), during negotiations it was agreed that annual consultations would be conducted by March 31 of each year between the Government, EEPCo and IDA on EEPCO's projected financial performance for the following year, and on the measures required to achieve the agreed targets.

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EEPCo: Investment and Financing Plan, FY2003-FY2007 All amounts in Birr Million

FY2002/03 FY2003/04 FY2004/05 FY2005/06 FY2006/07 Total Completio

n

Date

Generation Rehab. 121 39 32 22 214 Expansion G. Gibe 180 97 276 2003 Tekeze 407 256 336 943 482 2,423 2008 Others 185 98 15 - 299 Studies 20 20 793 450 351 943 482 3018 Total Generation 914 489 383 965 482 3232 Transmission 421 447 800 720 66 2,454 Distribution 128 138 122 45 - 432 Rural Electrification 457 416 159 84 39 1,154 Other 134 129 129 57 40 488 Grand Total 2,054 1,613 1,593 1,871 627 7,757 Contingencies &IDC 151 187 207 186 147 1,138 2,205 1,800 1,800 2,057 774 8,895 Financing Plan Committed Loans 120 198 237 - - 556 On-lent IDA Credit 38 191 229 191 115 764 Internal Cash Generation 1,030 710 674 499 659 3,946 Deficit/Add. Loans 1,017 701 660 1,367 (--) 3,627 Total Financing 2,205 1,800 1,800 2,057 774 8,895

Renewable energy systems. An initial financial assessment for the different renewable energy technologies was conducted. The analysis over a lifetime of fifteen years, with a discount rate of 17%, shows that on average the Project has a positive Net Present Value . For each of the four technology options an analysis was conducted showing IRRs ranging between the 9% and 12%. However, determining the net financing impact on the beneficiaries for each of the options has been a challenge as this project is the first of its kind in Ethiopia in addressing all electrification options for providing service to the rural areas. Baseline data is at best scarcely available and often not confirmed through an extended time of monitoring and evaluation. Therefore, the financial analysis is an initial one and with the implementation of the project and its Monitoring and Evaluation Program, some of these analyses should be possible in more detail during and at the end of the Project. With the preparation of this Project, the import duty on solar panels has been rationalized and is now in line with other power generating system (5%).

On-lending Terms 2.11 The Government would on-lend US$89.24 million to EEPCo. The interest rate would be 6.0 percent, and the repayment terms would be 20 years including a grace period of 5 years. EEPCo would bear the foreign exchange rate risks on the on-lent amount.

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Fiscal Impact:

2.12 No significant fiscal impacts are expected since there will be no direct subsidies to EEPCo or the private sector investors in rural electrification and the Government contribution to the biomass component. There may nevertheless, be loss of revenue to the Government if EEPCo is allowed to appropriate all profits for re-investment in rural electrification and not required to pay taxes or dividends to the Government. On the other hand the Government budget will benefit from the differential between the concessional terms upon which the IDA credit will be extended to the Government and the near-commercial terms on which part of the credit will be on-lent to EEPCo. 3. Technical: 3.1 The basis for capital cost savings in the distribution grid systems is a change in the technical standards to permit the rate of investment to match the demand growth. The new standards will reduce the per capita capital cost of the distribution system substantially; in some cases a reduction by a factor of 2 would be possible. This cost reduction can be achieved while maintaining or improving the quality of service compared with current standards. 3.2 The present standards specify a three-phase distribution design. The entire system must be built to serve even one customer, so that in areas with low population density the system is prohibitively expensive. This approach results in a high initial investment, with a long delay before the full capacity is utilized. 3.3 The “new” standards proposed are a mixture of three-phase and single-phase distribution. Although relatively new to Africa, this design is used in the United States and in developing countries such as the Philippines and Bangladesh. The system can be built incrementally and is inherently flexible. As demand increases, transformers can be easily upgraded. Capacity can be increased to match new demand without discarding the lines already in place. The closer match between investment and demand results in significant cost reductions, but requires that the system be monitored to respond to load growth promptly and avoid overloads. Also technical work on protection and insulation coordination will be required. 3.4 The present EEPCo practice of construction under force account is inefficient (slow and costly). Under the project efficiency improvements are expected through supply and install contracts for all the EEPCo components. 3.5 The renewable energy technologies supported by the RE project (solar home systems, village and mini-hydro) are technically sound and demonstrated worldwide. While Ethiopia has limited experience in technology development and dissemination, there are a few companies, which have been sourcing solar equipment from reputed suppliers like Siemens, BP Solar, Kyocera and Shell to market in Ethiopia. Hydro technologies (including mini-hydro) and expertise are proven in the country with more than three-quarters of its capacity being hydro. 4. Institutional: The institutional and financial architecture for promoting RE in isolated systems is being developed by an inter-institutional committee established by the Government. Pending the establishment of the Rural Electrification Secretariat, the EEA is serving as an interim agency in the preparation process for the private sector-led rural electrification sub-component. The architecture is designed to allow flexibility to adjust to the specific need of private sector led rural electrification as will be learned during the implementation of the program. 4.1 Executing agencies: Executing agencies are: The Ministry of Infrastructure, Ministry of Rural Development, Ministry of Agriculture, Ministry of Mines and EEPCo. The Ministry of Infrastructure and the Ministry of Mines components will be implemented through a PMU in EEA, which will also be the PMU for the private sector led rural electrifcation sub-component. The MoA components will be managed by a PMU, while another PMU in the EREDPC will execute the MoRD components.

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4.2 Project management: Draft Overall Procurement Plans and procurement plans for all components for the first 18 months' activities have been prepared by all four PMUs. The final plans for the first 18 months' activities have been prepared. The exact mix of procurement will be determined on an annual basis during the annual joint reviews between IDA, and the Borrower, where a draft procurement plan by each PMU for the following financial year will be presented and agreed upon. The plan will include relevant information on goods, works, and consulting services under the project as well as the timing of each milestone in the procurement process. These plans will be reviewed by IDA supervision missions. 4.3 Procurement issues: 4.3.1 For the IDA-financed procurement, the capacity assessment done during pre-appraisal has noted that all project components will be managed by PMUs staffed with persons who are familiar with IDA procedures, in particular, the EEPCo components. However, strengthening the procurement planning process through adequate external guidance will be key to facilitating effective project implementation in all components. 4.3.2 In view of its rural development focus, the proposed project and other follow-on rural energy access projects will benefit from broader reforms in public sector procurement. In this regard, the upcoming CPAR for Ethiopia due to GoE by end FY02 is expected to lead towards increased delegation of authority and adequate monetary thresholds from line Ministries to regional offices of implementing entities. In order to increase GoE’s capacity to manage and monitor the procurement process effectively (with devolution of project implementation to local bodies in the regions) improving the accountability, integrity and transparency of the procurement process consistent with international best practice, is a key development objective. 4.4 Financial management issues: 4.4.1 The Bank’s policy (OP 10.02) requires borrowers and project implementing agencies to maintain financial management systems, including accounting, financial reporting and auditing systems, adequate to ensure that they can provide to the Bank accurate and timely information regarding project resources and expenditures. The assessment of the financial management systems of this project was done in line with the guidelines issued by the Financial Management Sector Board in June 2001. 4.4.2 Recent assessments of the financial management systems of the country and project implementing agencies by the Bank (CPFA) and EU (Diagnosis of control capacities) revealed that: (i) the financial management systems of the country generally need to be strengthened; and (ii) that while there is a lack of trained manpower at all levels, the overall control environment is good and there are no accountability issues. 4.4.3 EEPCO, EEA, EREDPC, and the MoA will implement the project. EEPCO has an existing PMU, which currently implements the World Bank-financed Energy II Project. EEA, EREDPC and MoA will each establish a PMU before the effectiveness of the project. In addition to the above main implementing agencies, Regional Agricultural Bureaus and Woreda Agricultural Offices with the supervision of the PMU at the MoA will assist in the implementation of some part of the Biomass component. Thus, it is very important that the process of establishing the financial management systems of PMUs at EEA, EREDPC and MoA should start as soon as possible so that the tasks will be completed by the effectiveness date. Prior to declaring the credit effective, the Bank will verify that the ability of all PMUs to produce quarterly Financial Monitoring Reports (FMRs), which will be submitted to IDA 45 days after the end of each quarter. 4.4.5 All PMUs will be required to maintain accounting records and prepare project financial statements in line with International Accounting Standards. It is also their responsibility to have the projects accounts audited in accordance with International Standards on Auditing. Considering the late submission of audit reports by most of the PIUs in the country and the project is implemented at all levels, the government promised to enhance the audit capacity of the country in the

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coming years through the civil services reform, which is currently underway. The Bank and the Borrower agreed to the submission of audit reports six months after the end of the fiscal year for all PMUs. 4.4.6 Detailed financial analysis of the EEPCO (past and future financial performance) has been done separately and indicated under section E. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. No significant environmental issues are expected.

Other: There might be: (i) some crop damage during construction, for which the appropriate compensations shall be paid; (ii) Poly Chlorinated Biphenyls (PCB) contamination from old transformers that would be removed from the system under the urban distribution component; (iii) bird/power line interactions resulting in deaths of birds; and (iv) the spread of HIV/AIDS under the distribution expansion and rehabilitation component. 5.2 What are the main features of the EMP and are they adequate? They are adequate and include the preparation of a resettlement policy framework on the basis of which a compensation plan for crop damage, will be prepared and executed, use of concrete or imported wood poles instead of domestically sourced wood poles, establishment of environmental and social management units, safe disposal of transformers with contaminated oil and the use of power lines that minimize electrocution of birds. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: April 2002

Proposed Actions: (See Annex 1 for details) Urban Distribution Impact. There is a possibility that some of the older transformers to be replaced may contain PCB, a persistent organic pollutant. Mitigation. This will be checked through an audit as every transformer is tagged with the manufacturers name, date and serial number. If there is any suspicion of PCB contamination, EEPCo will contact UNDP/UNEP/EPA for the latest recommendations on safe disposal.

Impact. During construction there could be disruption to the flow of vehicular traffic and pedestrians. Open cable trenches could pose a danger to pedestrians and animals. Mitigation. To minimize the likelihood of this impact, EEPCo will observe its safety rules for working in built-up areas, such as putting up “CAUTION”and “DANGER” notices, and fencing out trenches.

Rural Electrification The first step in reducing negative impacts is line routing, which will be confirmed following consultation with EPA, EWNHS, EARO, IBCR and other stakeholders before line erection commences. Any sensitive areas will be avoided by re-routing. Impact. There will be crop damage during line erection.

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Mitigation. Compensation for crop damage during line erection will be agreed with a local committee formed by the woreda authorities and including community elders, before construction starts, and checked after completion. US$800,000 has been budgeted for the compensation payments for crop damage. Impact. The use of wood poles could further deplete the timber resources. Mitigation. EEPCo will specify concrete poles/imported wood poles to reduce the demand for timber resources. Impact. There is concern over possible bird/power line interactions. Mitigation. EEPCo will specify the arm-less compact pole design, which is known to minimize bird electrocutions. EEPCo will install flappers in areas where flight paths are found to cross lines and bird deaths occur. Renewable energy The use of renewable energy technologies will yield net positive environmental impacts. Solar home systems (SHS) and village hydro projects will result in the replacement of kerosene and other fuels that are currently used for lighting resulting in corresponding reductions in indoor air pollution. The expansion of mini-grid hydro schemes and the introduction of possible other systems would likewise reduce the need for fossil fuel based power generation. The use of photovoltaics for electricity generation is fairly benign from an environmental point of view. The only potential environmental issue with regard to SHS is the disposal of lead acid or nickel-cadmium batteries used in SHS. The mini-grid hydro as well as village hydro projects will be run-of-the river as opposed to storage projects, therefore, the long-term environmental impacts are considered to be minor. As specific sub-projects and sites are yet to be identified, project specific environmental issues cannot be identified at this stage. The information given above identifies generic environmental issues associated with typical renewable energy systems, proposed under this project. International consultants are working with the EEA to prepare a detailed environmental and social evaluation framework for rural and renewable energy subprojects. This framework will be an integral part of a project operational manual that is required before disbursements can be made for investments.

Community Based Sustainable Natural Forest Management No major negative impacts are expected; however, species proposed for forest rehabilitation will be evaluated with the Institute for Biodiversity Conservation and Research to ensure that no bio-pollution occurs from invasive or weed species. The project will also draw up a public consultation plan once specific communities have been identified and also a training plan covering participatory techniques and community management. The costs are included under this component and no additional budget is required. Farm/Agro-forestry Schemes No major negative impacts are expected, and the threat from poor selection of species is less than for planting in natural forests. Nevertheless, the project will check the acceptability of proposed species with Institute for Biodiversity Conservation and Research. Improved Stoves No major negative impacts are expected. Environmental Management and Training Establishment of an Environmental and Social Management and Monitoring Work Unit in EEPCo (US$210,000). EEPCo will establish a central Environmental and Social Management and Monitoring work unit. This is in line with the National Environmental Assessment Guidelines and Draft Proclamation on Environmental Impact Assessment, which

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make the proponent responsible for presenting information to the EPA. The unit will be established prior to credit effectiveness. Provision of Community Participation Training. The project will introduce a new approach to the management of forest resources for Bureau of Agriculture staff. Much of the early work includes the socio-economic evaluation of demand and use patterns. This will need to be a participatory exercise. Participation is then ever more critical if the project is to be successful and it has been recommended that the Project Management Unit (PMU) develop a specific consultation plan from the very start of the project. Given this emphasis, it is recommended that the PMU recruit at least one social forester and one community development adviser from the beginning, and ensure that all staff involved in the project receive training through formal courses and workshops in consultation, community participation and community management. The cost of training is provided for under this component, and no additional budget is required.

Status of any other environmental studies: None

Local groups and NGOs consulted (list names)

Resettlement: There will be no resettlement as almost all the lines to be built will be for power distribution whose purpose will be to provide power supply to the settlements they will pass through. In the unlikely event that a line route will cause communities to be resettled, the route will be easily changed or isolated supply will be adopted instead. Sites for the grid substations have already been identified - on idle land belonging to EEPCo. The other components will not require resettlement. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted?

Consultation is implicit in the design of the project. For the Biomass component, Regional and Woreda authorities and respective community representatives were consulted. When the detailed surveys for the power lines commence, government authorities, community representatives and property owners will be consulted as appropriate in addressing potential impacts. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? PMU’s implementing components, with potential environmental and social impacts (EEPCo and MoA) will have an environmental and social coordinator who will be the liaison officer with the outside world and will ensure that all the mitigation measures recommended by the ESA report are observed. Second, the indicators listed in Annex 1 and in the management plan will be reported on, at least, a quarterly basis and corrective action taken as necessary. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. 6.1.1 The project will have no major social issues and the social impact will be mainly positive. 6.1.2 Some uncertainty remains about the willingness of communities to accept private sector-based rural electrification schemes because it is likely that their tariffs will be higher than EEPCo's under the existing regime of uniform national tariffs. This issue will be addressed by discussing the concepts with the community during the process of selecting the sites for the first schemes, and incorporating their suggestions and chosen compromises in project design. 6.1.3 This project provides an excellent opportunity for making contact with communities throughout the country. It is envisaged that the issue will be addressed in three ways: (i) project teams will act, during project preparation as well as

29

implementation, as the “arms/legs, eyes/ears” for the HIV/AIDS message to be delivered to rural areas whenever they travel; (ii) “affinity marketing” of HIV/AIDS materials and supplies through agencies and businesses in the project, to be done at time of consultations, cash purchases, meter reading, bill payments, maintenance visits, etc.; and (iii) a focus on meeting the energy needs of rural health clinics and schools, both of which are vital elements of the HIV/AIDS battle plan, and helping advance HIV/AIDS prevention awareness programs at project sites. During project implementation, the Energy team will work with the Health sector staff in the Bank to design an appropriate program. 6.2 Participatory Approach: How are key stakeholders participating in the project? 6.2.1 Electrification. The communities to be electrified will be involved through direct consultation during sector selection. Community participation is one of the key features of the project for extending access. Communities will influence the project at all stages of project design, implementation and operation. In the case of the community-based schemes, ownership will be with the communities. 6.2.2 Biomass. Rural dwellers will be involved through preparation and implementation of the participatory forest management approach, and through training in use and manufacture of improved cookstoves. Federal and local government (i.e. Regional Energy Bureaus), entrepreneurs and private sector, donor community will be involved through workshops that will help to explain the project concept and solicit feedback on project design and implementation. 6.2.3 Renewable Energy. The program is driven by the private sector and most other stakeholders have been consulted and are part of a participatory process in which regular meetings are held to direct the sub-sector as well as to identify and resolve issues. The EEA is facilitating this process. In addition, regular stakeholders meeting will be conducted with the solar, village and mini hydro related organizations. The EEA and in a later stage the REF will facilitate this process. Also, the Government has embarked on a Solicitation for Innovation process which requests the large group of NGOs, rural development organizations and other organizations working in the rural areas to provide their input and performance based ideas on accelerating the renewable energy sector. The REF has a special monitoring and evaluation unit. Their methodology is such that information collected during the implementation of the project will be feed back to adjust and fine-tune the project if necessary. Furthermore, the design of the technical assistance window is such that it allows all stakeholders to participate if it shows to accelerate sustainable renewable energy market development. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? See 5.4 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? See 5.4 and 5.5 6.5 How will the project monitor performance in terms of social development outcomes? Monitoring and evaluation plans have been outlined for each component and are being detailed in each PMU's PIP. Reports will be submitted to IDA at least quarterly. 7. Safeguard Policies: 7.1 Are any of the following safeguard policies triggered by the project?

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Policy Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Yes Natural Habitats (OP 4.04, BP 4.04, GP 4.04) No Forestry (OP 4.36, GP 4.36) No Pest Management (OP 4.09) No Cultural Property (OPN 11.03) No Indigenous Peoples (OD 4.20) No Involuntary Resettlement (OP/BP 4.12) Yes Safety of Dams (OP 4.37, BP 4.37) No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

A resettlement policy framework has been prepared and will be used to prepare a compensation plan for crop damage during construction. Mitigation plans for the potential impacts have been prepared. Safeguards coordinators will be appointed for the two components that could have negative impacts. F. Sustainability and Risks 1. Sustainability:

1.1 Overall. For the NIS, sustainability will be assured through implementation of effective commercialization/decentralization reforms in EEPCo and other efficiency improvement measures. Strengthening management of the NIS through management contract arrangements could help to enhance project sustainability. It would also be essential for EEPCo's tariffs to be periodically adjusted on a timely basis so as to ensure that the company fully recovers the cost of its operations. 1.2 Electrification Access. The project design aims to significantly lower the cost of providing infrastructure by adopting designs that match demand and by utilizing the private sector to carry out construction through supply and install contracts. The sites to be electrified will be only those where, after explanation of costs, benefits and responsibilities, there is demonstrated commitment to the project and ability to pay the required tariffs. For the non-EEPCo isolated systems schemes, commitment will be partly demonstrated by private sector investment, including possibly communities collecting initial cash contributions. 1.3 Urban Rehabilitation and Extension. The project will be implemented in the context of on-going sector reform and commercialization of EEPCo. EEPCo’s new operating principles include improved service (in part through a better distribution network) in exchange for stricter enforcement of bill payment and tariffs set to cover costs. As for Electrification Access, the project aims at reducing the capital and operation and maintenance costs of electrification. 1.4 Biomass. Sustainability is addressed through a focus on a participatory process, through strengthening links between sectors impacting the traditional fuels sub-sector, and through establishing working relationships with existing programs addressing biomass fuel issues. “1.5 Renewable Energy. Several sustainability issues arise: (i) Availability of funds after Project closes. It is expected that through proper management and project selection, the concessional (IDA) funds will be re-used for further expansion of rural and renewable energy investments. Also, additional financing from other donors is expected to co-finance the facility after a track record has been established. (ii) Out phasing of GEF funds. At least four exit strategies are available and based on the experiences of the first half of the Project, a final exit strategy will be agreed upon at the mid-term evaluation. (iii) Other sustainability issues are addressed by involving all the stakeholders through consultative processes organized by the EEA and the Rural Electrification Fund.”

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2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Low cost designs and construction and operation practices are not mainstreamed.

M EEPCo already interested in low-cost designs and standards. An M&E system will be put in place to measure the benefits.

Limited affordability or resistance to commercial approaches.

M Promoting income-generating uses of electricity would enhance affordability. Also, promoting indirect benefits of electricity access would increase the acceptability of commercial approaches.

The work on Biomass components is not mainstreamed.

N The success of the initial small program would allow for mainstreaming during subsequent operations.

Long-term power sector strategy not proposed by skakeholders.

M Stakeholders to be involved at all stages of the study and their inputs taken into account

Rural electrification strategy does not elicit adequate response from private sector.

M Continual review of the program design including the financial terms under the REF would be undertaken.

From Components to Outputs Limited Government capacity impedes project preparation and implementation.

M EEA is the interim host for the private sector-led rural electrification scheme and is being supported by consultants’ services. The RES to be designated as the technical institution for RE will be supported by consultants.

Low cost designs and construction and operation practices are not adopted.

N Studies on low cost designs and operation practices will be done prior to project appraisal and will form the basis for appraisal.

Preference for grid-based rather than community-based supply due to higher cost of the latter.

S Care will be taken during preparation of the rural electrification master plan to ensure that the two delivery methods are complementary.

Lack of community-based development culture in the communities.

M The sites for the first phase will be carefully selected to ensure success.

Overall Risk Rating M

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Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects:

None. G. Main Loan Conditions 1. Effectiveness Condition

(a) A subsidiary loan agreement shall have been executed between the Borrower and EEPCo;

(b) EEPCo shall have established an Environmental and Social Management Monitoring Work Unit satisfactory to the Association;

(c) The Borrower and EEPCo shall have established their respective PMUs under satisfactory terms of reference;

(d) The Borrower shall have submitted to its Parliament a Proclamation for the establishment of the institutional and financial architecture for its rural electrification program comprising the REB, REF, and RES;

(e) The Borrower and EEPCo shall have established adequate financial management arrangements for the project and adopted a financial management manual in a form acceptable to the Association; and

(f) EEPCo shall have appointed auditors with qualifications and experience acceptable to the Association for EEPCo's project and corporate financial accounts.

2. Other [classify according to covenant types used in the Legal Agreements.]

Agreements Reached The following agreements were reached during negotiations: (a) Commencing in fiscal year 2004/2005, EEPCo shall implement those rural electrification projects that conform to the rural electrification master plan to be agreed with the Association by June 30, 2004 taking into account relevant technical, economic, financial and social criteria; (b) The borrower shall undertake not to transfer or make material amendments to the institutional and financial architecture for rural electrification without prior consultations with IDA; (c) The Borrower shall allow non-EEPCo project sponsors under the private sector-led rural electrification program to charge full cost recovery tariffs after taking into account any concessional financing provided under the REF; (d) Except as IDA shall otherwise agree, EEPCo shall:

(i) produce funds from its internal sources equivalent to no less than 25% from Fiscal year 2002/03 onwards of the average of the annual capital expenditures incurred in the preceding year, and estimated to be incurred in the current and the following fiscal years;

(ii) not incur any debt unless it is able to maintain, in each fiscal year during the terms of debt to be incurred, a ratio of cash generated from operations to debt service requirements of no less than 1.5;

(iii) maintain a ratio of current liabilities equal to or greater than 2;

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(iv) The Borrower shall complete the ongoing tariff study under the Energy II Project by June 2003, and taking into account the conclusions of the study implement, by December 31, 2003, measures required for EEPCo to comply with the financial objectives stated above;

(e) Annual consultations (about three months before the beginning of each fiscal year) to be conducted between the Government, EEPCo and IDA on EEPCo's projected financial performance for the following year and on the measures required to achieve agreed targets; (f) A mid-term review of the project to be carried out by December 31, 2004, to assess the overall progress in implementation of the project including the performance of the RE strategy; (g) EEPCO shall implement its Parts of the Project in accordance with the Environmental Management Plan the Resettlement Policy Framework prepared for the project and the Resettlement Action Plan to be prepared for the purpose of making compensation payments for loss of crops during project implementation; and

(h) Beneficiaries for sub-loans under the private sector-led rural electrification and renewable energy sub-component shall be required to carry out their subprojects with due diligence and efficiency, in accordance with sound technical, financial, environmental, resettlement, international waterway and managerial standards as shall be laid out in the project operational manual.

The following will be conditions for disbursement: (a) Financing of expenditures for subprojects under the private sector-led rural electrification and renewable energy program shall be conditional on preparation of a detailed project operational manual prescribing the eligibility criteria, and the terms and conditions for the financing as well as the procedures for accessing the REF resources, including all applicable sub-project agreements; and (b) Financing of expenditures for goods and supply and installation contracts for subprojects under the private sector-led rural electrification and/or renewable energy systems shall be conditional on the establishment and functional operation of a satisfactory institutional and financial architecture for rural electrification comprising an autonomous Rural Electrification Board, Rural Electrification Secretariat, Rural Electrification Fund, the appointment of a Rural Electrification Fund Administrator, and the operating guidelines.

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ANNES 1: Detailed Project Description

ETHIOPIA: ENERGY ACCESS PROJECT

By Component: Project Component 1 - US$10.80 million Institutional and Capacity Building The project will comprise consultants services and training to support: (i) preparation of a long-term power sector strategy; (ii) preparation of an indicative rural electrification master plan and specific studies to build a pipeline of projects for private sector investment; (iii) preparation of an integrated rural energy strategy comprising both the biomass sector and modern forms of energy; (iv) capacity building for private sector enterprises interested in investing in small-scale renewable energy investments; and (v) capacity building for the key sector agencies--EEPCo, EEA, the proposed RES; and (vi) regulatory reforms for the mining sector. Long-term Power Sector Strategy. The long-term power sector strategy will examine the main challenges facing the power sector and develop strategies for addressing them. The principal challenges are: (i) the low rate of access to electricity and the poor quality of service to existing consumers; (ii) the need to mobilize substantial financial resources for investments (about US$1.2 billion in the next five years); (iii) the potential for the country's large hydropower resources to be developed for both the domestic and export markets; and (iv) the need to develop technical and management skills, improve efficiency and ensure cost effective power supply needed to support economic growth. Preparation of an Indicative Rural Electrification Master Plan. A Key instrument for implementation of the Government’s rural electrification program will be a rural electrification master plan. The rural electrification master plan will not be prescriptive of the investments to undertaken, but instead will provide information to potential investors, regional governments, communities and NGOs on investment opportunities. It will be prepared within the next 12-18 months and will include: (i) overall targets for electrification for the country and individual regions; (ii) information on demand and supply in rural areas; (iii) potential investment sites and related energy resources; (iv) indicative costs of electrification; (v) a prioritization of projects within regions and across regions; (vi) information on communities/settlements which are projected to be connected to the grid; etc. The RES would engage consultants to prepare the rural electrification master plan. The RES will be assisted by an international expert to manage preparation of the plan.

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Rural Energy Strategy. A Rural Energy Strategy Paper will be prepared under the project. The objective of the strategy paper is to review the implications of the Government’s Rural Development Strategy (RDS) on the development of rural energy and to produce an integrated strategy encompassing both electrification and biomass. Thus, the strategy paper will produce an action program for achieving the core energy components of the RDS which are: (i) electrification of rural areas; and (ii) promotion of decentralized electricity supply, particularly renewable energy forms such as solar, wind and mini-hydropower; enhancement of the biomass resource base as well as the efficient and diversified use of biomass energy resources. With respect to the electrification component, the strategy paper will draw upon and elaborate on the rural electrification strategy paper prepared recently, and will be coordinated with the preparation of the rural electrification master plan. With respect to the biomass fuels, the strategy paper will draw upon the strategic national plan for the biomass sector also to be prepared based on work undertaken under Energy II. The key activities will be: preparation of a database on energy resources and their geographic distribution, demand and supply analysis also by geographic entities, analysis of policy, institutional and regulatory constraints and recommendations for relieving them. The rural energy strategy will not be intended to provide a prescriptive program for implementation, but instead to provide indicative information of available resources, technologies, policies, institutions and funding mechanism so as to facilitate investment by the private sector, communities, and NGOs. Capacity Building. The project will support strengthening of EEPCo’s capacity in environmental, procurement, financial management, and initial auditing. Relevant training courses will be selected for EEPCo’s staff in these areas based on the recommendations of the environmental and social impact assessment conducted for the project in the case of environmental staff, and on the outcome of the procurement and financial assessments carried out by the Bank in the case of financial and procurement staff. EEPCo will establish an environmental monitoring unit as a condition for Credit effectiveness. EEA’s training objectives are to strengthen its capacity in the key areas of financial modeling and rate setting, restructuring techniques for utilities, financing of rural electrification, technical regulation, and contractual issues on private sector transactions. The Credit will finance about 25 staff weeks of training and study tours for EEA’s staff, and management over a four year period. The capacity building component for the RES will emphasize on-assignment training by consultants in the course of preparation of the rural electrification master plan and of specific studies aimed at building a pipeline of projects for private sector development. In addition, training will be provided in evaluation and financing of rural electrification projects. In addition about 11 person-months of local expert services and about 12 person-months of international experts to assist the RES, once established, with: (i) rural electrification planning, especially to help the RES in managing the preparation of the indicative rural

electrification master plan and of specific studies required to build a projects pipeline (10 person-months of an international expert to be spread over two years);

(ii) implementation of accounting and budgeting systems (3 person-months of local experts);

(iii) implementation of a database of rural electrification projects (3 person-months of local experts);

(iv) implementation of a management information system and reporting procedures (3 person-months of local experts);

(v) developing a communication strategy for the RES to effectively promote the RE program (2 person-months of

local experts); and

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(vi) assess progress in the implementation of the RE strategy at mid-term stage (2 person-months of international experts).

To facilitate the quick operational establishment of the RES, the Credit will finance about US$200,000 for equipment; comprising motor vehicles (US$167,000) and computing equipment(US$33,000). Project Component 2 - US$88.72 million

Urban Distribution and Load Dispatch

The objective of this component is to improve the quality of supply for existing consumers, thus removing an obstacle to increased growth. It comprises: (i) urban distribution system rehabilitation and expansion; and (ii) a Load Dispatch Center (LDC). Urban Distribution System Rehabilitation and Expansion. The distribution system is in a severe state of disrepair and needs urgent attention in order to improve the quality and continuity of power service. The project will support investments to improve the quality of service to existing customers and to extend service to others. In total, 15 cities/towns need their distribution systems rehabilitated, but 4 will be covered under the project. The most critical is Addis Ababa, which has the oldest system and which has not been properly maintained or expanded to meet growing demand. The next urgent are Nazareth, Dire Dawa and Bahir Dar. Several studies have been conducted on the four cities, including a study by NVE (Finland), that had recommended a detailed masterplan study for the four. In 2001 EEPCo’s Planning department carried out a detailed study of the Addis Ababa system. For preparation of the component for IDA funding, PB Power (UK) has reviewed and updated the previous studies, resulting in the following scope:

Item Description Quantity 1 Rehabilitation of 15 kV overhead lines 475 km 2 Replacement of low voltage lines 1640 km 3 15 kV underground cable laying 53 km 4 15 kV compact substation installation 68 pcs 5 15 kV over head line construction 99 km 6 33 kV overhead line construction 60 km 7 132/33 kV transformer installation 1 8 15/0.4 kV distribution substations 429 9 0.4 kV line construction 263 km

10 33/0.4 kV substations 30 11 CAD office equipment 11 12 Vehicles 15

The work will be done under several supply and installation contracts, and similar sub-components from this and the Rural Electrification component will be packaged together. The design concept of this component takes into account improved reliability and safety, through the use of, for instance, ABC conductors for low voltage distribution and concrete poles for 15kV and low voltage overhead lines. It also takes into account cost reduction through the use of improved planning and design practices such as proper selection of voltage levels, conductor and transformer sizes and better organization of construction, operation and maintenance. EEPCo will employ consultants to assist with design, procurement and supervision of all the contracts and each contract will be implemented by an independent contractor under the supervision of a consultant. Load Dispatch Center (LDC). EEPCo has neither a load dispatch center nor a SCADA system, such that operation and control of the power system is currently manual. Furthermore, the current telecommunication systems (Microwave, PLC, Fiber Optics) are inadequate for the current mode of operation and will not support the proposed LDC. A feasibility study

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for a load dispatch center has recommended a major reinforcement of the telecommunications systems and installation of SCADA, including an Energy Management System (EMS) and Automatic Generation Control (AGC). The latter, mainly in view of the planned regional interconnection, such as with Sudan and Djibouti. However, the benefits resulting from inclusion of an EMS will be minimal on the present all-hydro system and the AGC will become necessary when the EEPCo system is interconnected – with Djibouti or Sudan. These modules will therefore be included later. The proposed LDC will comprise: (i) a basic SCADA system; (ii) telecontrol; and (iii) telecommunication systems. The three sub-components would form one contract package, which will include establishment of the LDC and training of operation and maintenance personnel. Monitoring and Evaluation. Progress of the LDC will be monitored by the LDC PIU and be reported on a quarterly basis; the output indicator will be percentage completion. The impact indicator (a significant reduction in unserved energy) would be reported by the PMU/EEPCo, commencing three months after commissioning of the LDC. Engineering Services (for Project Component 2). This will comprise advisory services and logistical support to EEPCo in the implementation of the above components and will include: (i) design and supervision of Urban Rehabilitation; (ii) design and supervision of the LDC (including establishment of the LDC) (iii) staff training for both components The training will be included in the consultancy and supply and installation contracts. Classroom training will be provided prior to implementation of a contract and hands-on training during implementation. The detailed scope will be included in the respective requests for proposals and bidding documents. The LDC training will include attachment of the proposed operational staff to an operational Load Dispatch Center. Both for the Urban Rehabilitation and the LDC, one consultant will be selected for design and supervision but the supervision contract will be awarded only on satisfactory completion of the design contract. Project Component 3 - US$ 56.30 million Rural Electrification A. Grid-based Electrification.

This component will support the Government’s strategy for improving the population’s access to electricity, through grid-based rural electrification. It will be implemented by EEPCo. The design is based on work carried out by the consultants Acres and Norplan and by EEPCo’s Planning department. The following 85 towns in Amhara, Oromia, SNNP and Somali regions would be connected to the grid: Northern Area The Northern Area of the project is fully found in the Amhara regional state of the country. It comprises twenty eight rural towns: Geregera-Filakit, Arbit, Akat, Agrit, Gashena, Kon Abo, Hamusit, Estayish, Koso Mender, Nefas Mewicha, Debre Zebit, Kokit, Tach Gaint, Agat, Efrata, Betelihem, Gob Gob, Sali, Damot, Wolela Bahir, Adeda, Tekilu Ketema, Kimir Dengay, Gasagn, Welesh, Mekane Iyesus, Jib Asra, and Jaran Gendo.

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Central and Southern Areas The Central Area of the project is found in the Oromia and SNNP regional states of the country. It comprises thirty three rural towns: Tawlla, Ole, Gibe Kella, Abelti, Kumbi, Cambo Shower (Endode), Dobi, Natri, Saja, Walga, Darge, Gibe State Farm, Cheza, Hawryat, Adelle, Bele, Seru, Diksis, Siltana, Ticho, Meraro, Arsi Robe, Gobessa, Kula, Negele Borena, Bitata, Harekelo, Wadera, Tiya, Dalocha, Werabe, Wulbareg, and Arekit. Eastern Area This area is mainly found in the Somali regional state of the country. It comprises of twenty four rural towns: Messela, Karamile, Boreda, Boko (Midega), Fedis, Kurfachelle, Awberkele, Awmer Newe, Sero, Ginle, Kela, Alemitu, Bedeno, Grawa, Dawe, Awbere (Tefri Bere), Kebri Beyah, Harshin, Hartishek, Chinakson, Fafen, Hadow, Bombass, and Togo Challe. The majority of the towns will be connected through the extension of 33 kV lines from existing grid substations; only two new grid substation will be constructed, at Nefas Mewicha and Gashena. The first twelve towns under Oromiya & SNNP will be supplied using the now well-proven Shield-wire system, where the two overrunning shield-wires of the transmission line between Gilgel Gibe and Tawla will be used both for shielding the transmission line and distributing at 20 kV. The component will consist of: (i) 1,500 km of 33 kV overhead power lines; (ii) 36 km of 15 kV overhead power lines; (iii) 572 km of 0.4 kV overhead power lines; (iv) 409 km of street-lighting power lines; (v) 36 km of 15 kV overhead power lines; (vi) 441 pole mounted outdoor type three phase and single phase transformers of various sizes (25 kVA, 50 kVA, 100 kVA, 200 kVA, and 315 kVA); (vii) one 34.5 kV, 1x6.3 MVA interposing transformer; and (viii) 1 km of 230 kV transmission lines. EEPCo will employ consultants to assist with design, procurement and supervision of all the contracts and all the contracts will be implemented by independent contractors, and not by force account. Project Design. To date EEPCo has used standard designs for urban and rural reticulations. For the present project, however, EEPCo’s practices in design and implementation of rural schemes have been reviewed and changes made in order to reduce the costs of rural schemes. These include a gradual build up of capacity of the system by selective adoption of 3-phase, 2-phase and single phase designs. Also, optimization of distribution line and protection systems design, improvement of construction practices, the use of low cost systems for customer installations, and more efficient operation and maintenance practices. Monitoring and Evaluation. Progress of this component will be monitored by the Grid-based PMU and will be reported on a quarterly basis. The output indicator will be percentage completion. The impact indicator (customers connected) will be reported by the PMU and through surveys of productive uses of electricity by an independent consultant at the end of the project. Engineering Services (for Project Component 3). This will comprise advisory services and logistical support to EEPCo in the implementation of the above components and will include: (i) design and supervision of Grid based Rural Electrification (ii) staff training

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The training will be included in the consultancy and supply and installation contracts. Classroom training will be provided prior to implementation of a contract and hands-on training will be provided during implementation. The detailed scope will be included in the respective requests for proposals or bidding documents. One consultant will be selected for design and supervision but the supervision contract will be awarded only on satisfactory completion of the design phase. Contract Packaging (Grid-based Electrification and Urban Rehabilitation). The following are the proposed contract packages for the two components: Package 1 - Distribution lines and substations Package 2 - Underground cables and compact substations Package 3 - 15 kV and low voltage line reconductoring Package 4 - Grid substations and transformer B. Isolated Systems Electrification This component will be implemented by the private sector. The project will provide financial and technical support to selected sub-projects, based on hydro/other renewable energy technologies (RETs) or diesel. Despite the enormous potential of micro hydro and solar PV, and demonstrated technical capacity in the area of micro-hydro, Ethiopia has continued to use EEPCO-led grid and isolated gen-sets as exclusive vehicles for electrification, and there has been little systematic commercial development of RETs. However, there is strong evidence that willingness and ability to pay for electricity is high and that communities and local authorities place a high priority on electrification . Intensive consultations with various community leaders and members, and the private sector have been conducted during the preparation period. Many have shown interest in participating in new electrification schemes. Some communities have already collected contributions to fund equity contributions in electrification projects.

While the proposed EAP will initially lay the institutional foundations for accelerating electricity access via commercially oriented rural electrification, it will support limited number of investments to test the viability of the new arrangements for possible mainstreaming, and scaling up access in the medium to long term. To the maximum extent feasible, these investments will involve private sector participation under conditions of full cost recovery debt financing. A set of Monitoring and Evaluation protocols will be formulated to assess performance of the sub-projects, and impact of electrification provision on rural economic development, including quality of life, job creation, and change in income. The approach will be fine tuned in line with the market/performance experience in the course of implementation.

Investments ($6 million): About 5-8 private sector led isolated grid systems

Example 1: Keto project: The Keto river is situated some 12 km South of the village of Chanka (1,420 households with about 7,000 people) in the Oromiya region. The houses of Chanka are mostly found along both sides of the highway, a rough road connecting Gimbi and Dembidollo. Chanka serves as a truck stop as well as a commercial and service center for the neighboring smaller communities. There are shops, small hotels, bars and restaurants in abundance. The main economic activities are agro-industry (coffee processing and maize milling). There is already some electricity: The municipality operates a diesel generator for 3 hours, 6 days a week and provides for some lighting to residences, hotels, bars etc. A diesel powered water pump below the village pumps water to the 24,000 ltr village water tank. Preliminary evaluation: Estimated investment: $900,000; Demand: 1,100 MWh/year; EIRR: 20% at the estimated economic benefit of Birr 1.4/kWh.

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Example 2: Lemi town: With community contributions, EEPCO placed a diesel gen set and constructed grids to serve a community of about 3000 people. The service connection has not been completed but the community is willing to pay for the additional investment to get electricity. A private company is interested in construction of service connections and operation of the generators on a fee basis. More than sixty sites are identified for micro/mini hydro development possibility. Three potential sites are under investigation by the Austrian Development Cooperation (Hoha, Awetu, and Bonora). An Ethiopian consulting firm has recently conducted a feasibility study at the following seven sites: Ketar, Keto, Senqole-Hora, Weni, Mogor, Dongage, and Wellege. Renewable energy (US$15.3 million) The objective of the sub-component contributes to the overall goals of the Government by providing electricity generated by renewable energy systems for rural transformation through improved quality of life of households; improved social services in the health, education and water sectors; improved productive uses and income generating activities; and, private sector and entrepreneurial development. The means to this objective is to create, in five to ten years, a sustainable market for renewable energy systems. This will be done with the involvement of the private sector, the communities, finance institutions, line ministries, the government as market enabler, and international donor agencies. Areas of intervention. The GEF supported Renewable Energy Project focuses on four main areas for intervention for practitioners: (i) renewable energy systems supplying electricity to the grid; (ii) community and village based hydro grids; (iii) cross-sectoral activities initially in the health, education and water sector; and (iv) commercial solar dealers for household and institutional systems. For a summary of the physical targets of the interventions see table 1.

Table 1 Physical targets of renewable energy project Target Target Target

Systems Households MWs Mini-grid systems 3 – 6 - 3.0 Village hydro systems 24 2,400 0.7 Cross sectoral/institutional 300 - 0.2 Dealers supported SHS 6,000 6,000 0.2 Total 6,330 8,400 4.1

Mini-grid systems. The program will work with EEA and EEPCO to ensure that renewable energy generation is open for supply to the grid, in the same way as other technologies under the new power policy. Procurement of the systems will be done by the project developers making use of normal commercial practices, on a competitive basis on the open market. Project developers will need to be qualified based on: (i) business plan; (ii) approval of debt financing from a commercial bank or the Rural Electrification Fund; (iii) compliance with technical specifications and environmental/social safeguards. It is estimated that 3 MW will be installed during the Project period. Key performance indicators are: (i) number of local developers/investors successfully operating in this area; (ii) number of qualified systems installed and operating; and, (iii) adaptation of a standardized small power purchase agreement and tariff by the EEA.

Village based hydro mini grids. The program will work with rural development organizations, NGOs, and

communities to provide electricity to those willing to invest in hydro grid systems. The communities or NGOs will procure the systems on a system-by-system basis. The community or NGO will have to be qualified based on: (i) business plan; (ii) approval of debt financing from a commercial bank or the Rural Electrification Fund; and (iii) compliance with technical specifications and environmental/social safeguards. The community/NGO will be responsible for operation and maintenance of the systems. Co-financing for these isolated grid projects will be provided on a performance basis. A pipeline of viable micro-hydro projects is being finalized by the EEA. It is estimated that during the Project 24 systems will be installed. The key performance indicators are: (i) number of

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rural developers (NGOs) successfully involved in mobilizing communities and developing projects; (ii) number of qualified systems installed and operating; and, (iii) improved use productive facilities by the villagers.

Line ministries for cross sectoral/institutional systems. The program will work with line ministries to provide

electricity to government service centers like schools, clinics, and agricultural centers, mainly through solar, hydro and biomass systems. The Project will support the ministries of Education, Health and Water Resources with the preparation of energy guidelines for improving their services, after which investments will take place. It is expected that most of the systems will be solar based. The project developer will procure the systems on a batch basis following minimum technical specifications and normal commercial practices. The developer on a (standardized) lease-purchase basis will sell the service to the ministries. The mentioned ministries have appointed contact persons. It is estimated that 300 facilities will receive these improved services. The three key performance indicators are: (i) energy guidelines adopted by ministries; (ii) number of qualified systems installed including O&M package; and, (iii) quality of service improved, for example through cold chain improvements, extended hours of education and improved communications.

Solar dealers for household systems. The program will work with solar dealers to provide electricity to isolated

households that have the capacity to pay for these services either on a cash or credit basis. The latter possible through one of the micro finance organizations. The procurement will take place under normal commercial practices where the qualified dealer will purchase the system – mainly solar - on a competitive basis on the open market. Systems supported by the program need to comply with minimum technical specifications. Dealers will need to be qualified by the program, which will include a business plan as well as an approval from a commercial bank or the Rural Electrification Fund for debt financing. It is estimated that during the first and second phase of the program 6,000 thousand systems will be sold. The three key performance indicators are: (i) number of solar dealers; (ii) number of rural solar outlets; (iii) number of qualified systems installed; and, (iv) improved use productive facilities by households and small businesses.

Investments. The program will provide IDA support for investments in renewable energy activities through the REF in two ways: (i) concessional loans to businesses, NGOs and other qualified organizations; and (ii) concessional loans for leveraging financing from other commercial, development bank and micro finance institutions. The preferred option is the second one.

Concessional loans from REF to businesses/NGOs and other legitimate organizations that are pursuing renewable energy investments. Three main criteria apply: (i) the organizations should have been registered as an independent organization as stipulated under the commercial act; (ii) the projects should have obtained a license from the regulator to provide electricity service in a certain area as well as clearance for an agreed upon tariff regime; and, (iii) the proposed project should be financially justifiable and being an integral part of the approved business plan of the organization.

Partner with other finance organizations like commercial and development banks as well as micro finance

institutions to support the investments. This would be done in two ways: (i) through syndication/co-financing of the loans; and/or, (ii) operating as an APEX-like organization by on-lending to these organizations for renewable energy investments. In general terms, syndication will be done with well-established banks, while APEX-type support will be provided to some of the emerging banks.

Technical assistance. REF will manage the GEF grant funds through four windows: (i) project preparation facility; (ii) project performance and monitoring facility; (iii) full cost technical assistance window; and (iv) a cost-shared technical assistance window.

The project preparation and productive uses facility will support any successful financed business proposal with a

technical assistance award of US$8,000. These funds will be disbursed for 50% after the proposed project has received clearance from the REF for financing. The remain 50% of the financing will be disbursed after

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successful commissioning of the village/mini hydro plant or the successful installation of 10% of the projected solar home systems sales as stated in the business plan. An additional US$4,000 will be provided per successful business proposal if a specific productive uses program is an integrated part of it.

Project performance and monitoring facility will provide financing for every installation that has been installed

successfully as indicated in the monitoring plan. This will be a co-financing grant for every installed solar home system at US$3/Wp for the first 1,500 systems before the mid-term evaluation and US$2/Wp for an additional 4,500 solar home systems after the mid-term evaluation2.” The triggers for release of the co-financing grant are: (i) compliance with the program’s technical specifications, (ii) customer signed acceptance receipt and (iii) proof of after-sales service. For village hydro projects this will be US$0.4/W. At the mid-term evaluation of the project, these numbers will be revisited based on the experience so far with in mind the out-phasing of GEF grants. An integral part of the performance-based assistance is the recording and monitoring of its results. As part of the preparation, a detailed M&E plan has been prepared (see also below).

The full cost technical assistance window. This assistance program will support the overall objective of creating a

sustainable market for renewable energy systems. Any barrier for achieving the objective that is identified by the local key stakeholders or individual participants in the program and for which a resolution is proposed could in principle tap into this window. The full cost coverage window focuses on the "bigger picture issues" that are constraining the rate of growth of the complete industry. For example: resource measurements, general awareness and promotional campaigns, training of technicians etc. The triggers for approval are: (i) REF clearance, (ii) endorsement of an independent panel and (iii) endorsement of a representative of the industry. Greater emphasis will be on cost-shared activities (see below), with full-cost activities only rewarded in exceptional cases. Several assignments have been identified during implementation.

The cost-shared financing window. This assistance program will support the overall objective of creating a

sustainable market for renewable energy systems. Any barrier for achieving the objective that is identified by the local key stakeholders or individual participants in the program and for which a resolution is proposed could in principle tap into this window. The cost-shared window focuses on company specific issues that are constraining the rate of growth of the individual organization. For example: marketing plan preparation, product specific road shows, technical improvements, management and technical training etc. The cost-shared window requires a twenty to eighty percent contribution of the company. The trigger for support will be the clearance of (i) the Rural Electrification Fund (REF) and (ii) endorsement of an independent two persons panel. Several assignments have been identified during implementation.

Implementation arrangements. The implementation of the Project will be done by the newly established Rural Electrification Fund with support from the EEA and the Ministries of Health and Education3. The REF will manage the GEF grant funds out of the Technical Assistance and Support Section however directly overseen by the General Manager of the Fund or as a separate Renewable Energy Promotion unit in the REF. The operating guidelines for the Fund as well as the final set-up of the Fund will be conditions for disbursement of the funds. The renewable energy activities fall within the broader mandate and organizational set up of the fund. This means that rural and renewable energy projects will be managed by the Rural Electrification Secretariat (RES) of the Rural Electrification Fund. During the current initial phases of implementation, the EEA is in charge of the rural electrification and renewable energy programs. The RES will prepare an indicative rural electrification plan, provide information on potential project sites to prospective investors, review the proposals for investments, prepare specific projects to solicit private sector interest, and provide technical support to interested investors. The REF will be the primary source of rural 2 The co-financing strategy for the solar home systems after the mid-term evaluation could be adjusted based on the Exit-strategy that will be agreed upon by the Government and the WB/GEF at the mid-term evaluation. A possible alternative option is to provide US$2.5/Wp for an additional 3,600 systems. 3 The Proclamation of the Fund was approved by parliament on Feb 6, 2003

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electrification debt financing, co-financing and technical assistance, which will be overseen by the Board. A trust agent to administer the payments to investors out of the REF will be competitively selected. The EEA will be responsible for licensing, approving tariffs and monitoring technical, environmental and safety standards. Monitoring and evaluation of this component will be contracted out to an independent party in order to draw timely lessons for improving the design of the program. Initially the REB and the rest of the structure will be linked administratively to the Ministry of Infrastructure. At a later time to be determined, based on growth in capacity of the new Ministry of Rural Development, the whole institutional structure will be transferred to that Ministry. The PMU of the EEA is the transitional body managing the preparation of the private sector led rural electrification and renewable energy activities. Monitoring and Evaluation. The Project envisages detailed evaluation of impacts to establish its effectiveness in meeting its access and related economic development objectives. There will be two parts to the M&E program: (i) M&E of the program’s physical outputs to assess the progress in reaching the renewable energy targets; and (ii) M&E of the program’s impacts to assess the rural economic development attributable to the provision of renewable energy services and the sustainability of the renewable energy industry. The elements to be monitored include: (i) rural electrification physical progress through all methods including grid extension, village grid, and solar; (ii) impact of rural electrification on rural economic development including quality of life enhancement, rural employment, and change in income; (iii) sustainability of the renewable energy industry including: business profitability, cost declines, sales break-even points, structure of system size distributions over time, institutional and financial viability of small hydro cooperatives, etc. Panel surveys, focus groups, and other relevant techniques will be used to establish rigorous monitoring protocols. Evaluations also will be used to guide revisions of Project design – in particular the private sector led rural electrification component needed. Additional surveys or market analyses which may be needed throughout the Project period to assess specific areas such as assessment of a village based systems market, village grid productive use assessment, are also to be covered. Component progress will be monitored by the PMU and included in the quarterly progress report. Project Component 4 - US$42.30 million Biomass This project will address a number of issues related to woody biomass resource management and use in Ethiopia. The component comprises three sub-components, which are described below. Development of a national strategic plan and policy framework for the biomass energy sector A national integrated strategic plan and policy framework for the biomass energy sector will be prepared under supervision of the Woody Biomass Inventory and Strategic Planning Project (WBISPP). This activity will draw substantially from the Regional Strategic Plans most of which have already been prepared by the WBISPP under the Energy I and Energy II credits. The planning process which produced these Strategic Plans was highly participatory and consultative in nature, with substantial input being provided by personnel in the Bureaus of Agriculture and Natural Resources in the Regional States. This sub-component will also involve the transfer of the extensive and detailed woody biomass and rural energy database produced by WBISPP to Regional Bureaus of Agriculture. This will include the provision of the necessary hardware, software and technical assistance to allow the use of this information. The database would be placed on an appropriately-located central server which can be easily accessible via the internet by a wide range of Ethiopian agencies, e.g. those involved in rural energy planning,. Establishment of participatory natural forest management systems One of the major outputs of the Regional Woody Biomass Strategic Plans was the identification of the specific woredas that are already experiencing woody biomass resource stress.

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In most Regions a number of those targeted woredas were identified as still having either significant or partial natural forest cover. In order to manage these tracts in a sustainable manner, and to thereby contribute to the securing of a stable and sustainable supply of woodfuels for rural and urban households, an aggregated total area of 302,000 hectares of natural forest in the SNNP, Oromiya, Gambela, Amhara and Tigray Regions will be brought under a participatory management schemes. Those schemes have already been successfully pilot-tested in Ethiopia, and the practical experience and knowledge accumulated in other parts of Africa in recent years under other World Bank-supported projects (Senegal, Burkina Faso, Mali, Mozambique, etc.) will be brought to bear within the implementation process. This sub-component will finance technical assistance to the Farmer's Associations (FAs) in the affected woredas for the development and implementation of forest management plans. In addition, hand tools and materials for the establishment of small nurseries will be provided to the participating FAs. Motorcycles will be provided for woreda level Development Agents. In addition, about one vehicle per five woredas will be supplied, as well as office and field equipment for the Regional Forestry Services. Farm/Agro-forestry Schemes As a further strategy to secure a stable and sustainable supply of woodfuels in the rural areas, an aggregate area of at least 384,000 hectares of new sustainable farm/agro-forestry tree stocks will be realized in the SNNP, Oromiya, Gambela, Amhara, Tigray, and Harari Regions and in the Dire Dawa Administrative Council area. The woredas to be targeted by this sub-component have once again been identified through the Regional strategic planning processes. In addition provision will be made in the sub-component for the piloting of on-farm agro-forestry in Beni Shangul Gumuz, Afar and Somali Regions, once they have completed their on-going strategic planning. The design of this sub-component is based on successful experiences with farm/agro-forestry schemes in Ethiopia and other parts of Africa, such as Senegal and Mozambique. The project will finance technical assistance, materials and other inputs for the establishment of nurseries by individual farmers and Farmers' Associations, motorcycles for wereda level staff, one vehicle for every five woredas, and office and field equipment for the Regional Forestry Services. The woredas to be targeted by this sub-component do not overlap in any way with those being targeted for participatory natural forest management. End-use energy efficiency improvement This sub-component will be implemented by the Ethiopian Rural Energy Development and Promotion Center (EREDPC) through Regional and woreda Bureaus of Energy, and will aim to improve energy end-use efficiency, mainly in the household sector. The sub-component will support dissemination of about 320,000 injera baking stoves in the SNNP, Oromiya, Amhara, Tigray, Benishangul-Gumuz and Gambela regions. A total of about 580 stove producers will be trained through the project. The sub-component will finance technical assistance, limited woodstove R&D, for the adaptation of existing improved stoves from other regions to local regional requirements, or improvement of indigenous stove technologies, training costs for new stove producers, and materials and inputs for the establishment of new stove production facilities. Vehicles and office and field equipment for the EREDPC will also be financed. The design and implementation of this sub-component is based on the impressive experience accumulated thus far in Ethiopia under previous successful projects (World Bank and non-Bank funded). The two most significant of these were the Cooking Efficiency Improvement and New Fuels Marketing Project (CEINFMP), and the Commercialization of Innovative Woodstoves Project (CIWP). These have demonstrated the commercial viability of improved stove programs in urban areas, and could be regarded as models of best practice. The challenge faced by this sub-component is to achieve the same results in rural areas.

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Project Component 5 - US$1.00 million Environmental and Social Mitigation Plan The Project includes provision for financing the cost of implementing the Environmental Management Plan prepared under the EIA. The main activities to be funded under this component are: (i) capacity building (training and advisory services) for the environmental and social management and monitoring unit to be established by EEPCo for the purpose of carrying out environmental and social analysis of the various activities to be undertaken under this and future projects; (ii) implementation of a compensation plan for loss of crops during construction of power lines under EEPCo's urban distribution and grid based rural electrification components; and (iii) technical audits to ensure the safe disposal of old transformers containing polychlorinated biphenyls. The component has been designed based on the environmental and social impact assessment carried out by the government with the assistance of an independent consultant.

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ANNEX 2 - Project Logical Framework ETHIOPIA: ENERGY ACCESS PROJECT

Hierarchy of Objectives

Key Performance Indicators

Data Collection Strategy

Critical Assumptions

Sector-related CAS Goal:

Sector Indicators: Sector/ country reports:

(from Goal to Bank Mission)

1. Support growth, distributional and sustainability objectives in the energy sector, and encourage the development of small-and-medium size enterprises.

1. - Increased reliability of, and access to, electricity supply. - Reduced use of naturalvegetation for energy. - Broad-based, village and rural growth and small-business development.

1. Strong, sustainable modern and traditional energy sectors are necessary to support broad-based, environmentally sound urban and rural growth which will contribute to poverty alleviation.

Sector related CAS and GEF Objectives 2. Build the foundations for sustainable, environmentally sound development

2. 3% avoided green house gas emissions in electricity sector by project end

2. Progress, supervision and mid-term reports

2. REF and EEA maintain committed to support introduction of renewable energy

Project Development Objective:

Outcome / Impact Indicators:

Project reports: (from Objective to Goal)

1. Institutional and Capacity Building. An effective and financially viable power sector.

1. Letter of Sector Development issued by Government.

2. Electrification Access. A sustainable program for increased electricity access as a necessary component of broad-based development and long-term poverty reduction is established.

2a. Reliable, affordable, sustainable electricity access, and support for development and productive uses of electricity, for tens of thousands of new users during project implementation. 2b. Establishment of an institutional structure to ensure continuation of the program after the end of project implementation.

2. Quarterly reports from PMUs and independent party; on-site supervision by Bank team; on-site supervision of additional locations by trained Ethiopian monitoring team.

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3. Urban Distribution. The quality of supply for existing customers is improved and an obstacle to increased growth is removed.

3. Power outages and voltage fluctuations in four main urban centers are reduced to acceptable levels.

3. Monthly supply and demand statistics from EEPCo.

4. Load Dispatch Center The continuity and efficiency of power supply are improved.

4. A significant reduction in unserved energy and in energy losses.

4. Monthly supply and demand statistics from EEPCo.

5. Biomass Reduction of environmental degradation, and improved quality of life especiallyfor rural women, through improved traditional fuels policies, management and end-use efficiency.

5. A significant rise in demand and supply of improved cook-stoves produced for profit by the private sector; 302,000 ha of natural forests placed under participatory management; and 384,000 ha of farm/agro-forestry schemes established.

5. Quarterly report from PMU; periodic on-site supervision by the Bank..

GEF Project Development Objective 6. To maximize the use of local natural resources and the use of least-cost supply options in the power sector

6a. Installation of at least 4 MW of grid and off-grid renewable energy system by end of project 6b. Renewable electricity service to 8,000 new customers 6c. 150 - 300 Institutional systems installed 6d. 100 stakeholders trained

6a-d. Progress, supervision and mid-term reports

Output from each Component:

Output Indicators: Project reports: (from Outputs to Objective)

1. Institutional and Capacity Building, Long-term power sector adopted Rural Energy Strategy Paper Prepared.

1.sector policy - concerning private sector participation in the sector. Rural Electrification Secretariat established. Rural Electrification

1.Long-term power sector prepared. Indicative Rural Electrification Plan prepared.

1. Long-term Power Sector Strategy Study, and Rural Energy Strategy supported by stakeholders.

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Fund set-up, and Fund Manager designated.

2. Electrification Access. About 100 villages, towns or rural communities electrified in a financially and environmentally sustainable manner.

2. Acceleration in access to electricity (at least 850,000 additional persons connected by end of project).

2. Quarterly reports from PMU and managing consultant(s).

2. There is no affordability problem or resistance to commercial approaches.

3. Urban distribution. Power distribution grid strengthened and extended.

3. Power reliability statistics on main grid improve to acceptable levels.

3. Quarterly reports from project management unit.

3, 4. Low cost designs and construction and operation practices are mainstreamed.

4. Load Dispatch Center. The load dispatch center is installed and functional.

4. Quarterly reports from PMU.

4. Quarterly reports from PMU.

5. Biomass. Management of biomass fuel resources improves and supply and demand for efficient cook-stoves is created.

5a. Implementation of participatory approach to improve management of biomass fuel resources. 5b. Local production and sale of about 320,000 cook-stoves.

5. Quarterly reports from PMU.

5. The work on the biomass components is mainstreamed.

GEF Project Outputs 1. Renewable energy systems installed and sustainable operated

1a. Standard Small Power Purchase Agreement adopted by EEA and EEPCO 1b. 3% of generation capacity by renewable energy systems (4MW) 1c. 3 mini hydro projects supplying to grids on commercial basis 1d. 5 to 10,000 solar home systems installed 1e. 150 to 300 institutional systems installed

1a-e. Progress, supervision and mid-term reports

1a. Effective operation of EEA and transparent calculation of purchase tariff 1b. Continued interest of private sector 1d. Interest international solar companies to enter the market

2. Trained energy staff 2a. 50 to 100 educated 2a+b. Progress,

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and increased general awareness in the field of renewable energy

renewable energy employees 2b. 2 regional promotion campaigns

supervision and mid-term reports

Project Components / Sub-components:

Inputs: (budget for each component)

Project reports: (from Components to Outputs)

1. Institutional and Capacity Building

US$10.80 million 1. Quarterly reports from PMU.

1. All stakeholders actively participate in planned workshops.

2. Electrification Access · Grid-based · Isolated systems

US$56.30 million

2. Quarterly reports from PMU. Independent monitoring and evaluation by a research institute.

2.1 There is no preference for one supply option over the other. 2.2 Limited Government capacity does not impede project preparation and implementation.

3. Urban Distribution & LDC · Urban rehab. & expansion · LDC

US$88.72 million

3. Quarterly reports from PMU.

3.1 Low cost designs and construction and operation practices are not adopted.

3.2 Only basic needs are addressed in the initial dispatch center design.

4. Biomass US$42.30 million 4. Quarterly reports from PMU.

4. There will be interest in community-based development.

GEF Project Components Disbursement of

IDA/IFC and GEF funds according to schedule:

1. Credit Program for renewable energy investments

1. IDA: US$7.4 million 1. Progress reports including supervision reports, and mid-term review reports.

1.1 Private sector interest and ability to prepare subprojects 1.2. Active participation of REF and financing organizations

2. Capacity Building and Technical Assistance through Rural Electrification Fund

2. GEF: US$ 4.93 million

2. Progress reports including supervision reports, and mid-term review reports.

2. Effective procurement and processing of REF

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ANNEX 3 - Incremental Cost Calculation

Ethiopia Energy Access Project

Introduction 1. This Incremental Cost Analysis of the GEF supported Renewable Energy sub-component of the Ethiopia Energy Access Project is heavily based on input received from the core stakeholders over the last year. The input was collected through several rounds of consultative meetings, workshops and preparation studies4. 2. This document covers a combination of GEF standard requirements as well as feedback from stakeholders. As a result, the document is set-up in the following way: A vision for the renewable energy program; the broad development goals towards which the program contributes including the more specific project objective; the barriers to accelerated renewable energy market growth and a strategy to remove these barriers; an incremental cost summary and the global environmental benefits. The document concludes with several more specific issues like productive uses program, the exit strategy for GEF, and social impact monitoring.

Vision – Renewable Energy for Rural Economic Transformation5 3. The core stakeholders of renewable energy in Ethiopia visualize that renewable energy would provide electricity to rural customers and the national grid. It would do this in an environmentally friendly manner, at lowest possible cost and be of satisfactory quality to its clients. Renewable energy would contribute to the rural economic transformation of individuals and businesses, by providing additional income generation opportunities, increased efficiency of business and household operations, and enhanced social services like health, education and water supply. Renewable energy would be an integral part of the energy sector’s strategy and would supply about 10% of electricity demand by 2010. Just as important is that renewable energy would be an integral part of the Government’s rural development agenda. 4. The Government would create and enabling environment in which the private sector has taken the lead in reaching rural clients. This enabling environment would include: (i) clear “rules of the game” as defined and enforced by the Regulator and Ministry of Energy; (ii) financial support from the Government that would be kept to the absolute minimum and would be organized through a transparent financing mechanism; and, (iii) a level playing field for independent operators in particular in relation to the national utility EEPCO. A minimum set of technical specifications enforced by the Regulator would brand renewable energy technologies as safe and reliable. 5. Businesses envision that their services would be delivered through an established rural network of sales and service outlets, would have a well trained human resource base, and would adhere to (inter)national standards of accounting and financial management. Micro finance institutions would provide credit to thousands of rural households to make renewable energy systems more affordable. Longer term debt financing through commercial/development banks would be offered to businesses interested in entering or expanding their renewable energy operations in particular for grid connected power generation. 6. A driving force for the industry would be the rural development agenda from the Government that aims to create improved services from schools, health clinics and water pumps through electricity provided from renewable energy systems. Standardized operations would emerge for at least three health and school energy packages. Economies of scale 4 The latest more structured consultative meeting was conducted in December of 2002. The outcome is described in EEA’s “Ethiopia Renewable Energy Program, initial framework and workshop report, December 17, 2002. Also, for a list of other studies please see this report. 5 The vision statement is based on inputs from representatives of seventeen organizations. Bringing these inputs together resulted in the first vision statement for the country. It will evolve as the renewable energy program further emerges. See also Workshop Report Ethiopia Renewable Energy Program, December 17, 2002.

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through these operations would result in international comparable prices of these energy packages on the Ethiopian market. 7. It is envisioned that most of the people in the country would be aware of the pros and cons of renewable energy systems and that they would be in a position to make informed choices on what type of electricity system to purchase. A curriculum in some of the leading technical schools and rural organizations would be established as well as businesses for assembling products with a comparative advantage.

Broad development goals 8. This project contributes to the overall goals of the Ethiopian Government by providing electricity generated through renewable energy systems to transform rural economies by improving quality of life of households; social services in the health, education and water sectors; productive uses and income generating activities; and, private sector and entrepreneurial development. 9. The means to these goals is to create in five to ten years a sustainable market for renewable energy systems. This will be done with the involvement of the private sector, the communities, finance institutions, line ministries, the government as market enabler, and international donor agencies.

Barriers to accelerated renewable energy market growth 10. Seven clusters of barriers impede an accelerated market uptake of renewable energy systems. These barriers are described below in order of importance: (i) financial; (ii) policy; (iii) awareness and market information; (iv) organizational; (v) technical; (vi) economical; and (vii) resource information. More details about these clusters of barriers are provided in the above-mentioned reports6.

The financial barriers are related to the high initial investment cost of renewable energy systems, the low purchasing power of the rural people, the poor rural financial infrastructure, the absence of long term credits in the market, and the sole focus of finance institutions on collateral rather than proper business plans for loan approval.

The policy barriers are related to the high import duties on solar systems compared to other electricity generating devices, the omission of a clearly communicated and enforced regulation to protect private enterprises from the national utility entering their investment areas, and the absence of an action plan and incentive structure from the Government to implement the renewable energy policy statement that was issued in the mid ninety’s.

The market information and awareness barriers are related to a general lack of knowledge of the advantages and

disadvantages of renewable energy systems, the weak promotion of renewable energy systems by all stakeholders, the very limited knowledge of end user preferences, and the limited knowledge of investors that the energy sector is also a potential profitable business area.

The organizational and business barriers are related to a lack of collaboration by the key stakeholders, the lack of

a Government coordination and financing body, the challenge of minimizing the Government’s indulge in private sector activities, the absence of after sales support, the absence of international business operations, and the limited training capacity in the rural areas.

The technical barriers are related to the lack of locally made and priced technologies and systems, the omission of

minimum safety and technical standards, and the lack of guidelines for operation and maintenance support.

6 The Government and some of the other stakeholders are addressing several of the issues raised, for example through the recently established Rural Electrification Fund (Feb 2003).

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The economic benefit barriers revolve around the lack of focus by Government and the private sector to educate the end users on the productive uses opportunities of electricity, and an effective strategy to implement this.

The resource information barriers relate to the lack of comprehensive wind, biomass, and hydro resource data that is easily accessible, and the absence of a database of all renewable energy options and their resource data broken down by region.

11. An initial prioritization by the stakeholders of this extensive list of challenges facing the sub-sector resulted in the following ranking: (i) high tariffs on PV panels, (ii) high initial cost of renewable energy systems, (iii) lack of knowledge of the (dis)advantages of renewable energy systems, (iv) lack of collaboration by key stakeholders, and (v) lack of locally produced systems. The Government and other stakeholders are addressing several of these issues. Barrier removal strategy 12. The Government’s renewable energy program can be divided in three more or less distinct phases over a ten-year period. The first phase is to complete the preparation of the renewable energy agenda with some initial trials up till June 2003. The second phase will cover the following five years where the industry will grow out of its infant stage through capacity building, business development and increasingly accelerating investments. The third phase will rapidly scale up proven success models (see figure 1). This GEF Project supports the second phase of this ten-year program. 13. Phase 1-

Preparing the agenda for action. To finalize the agenda for action, the following five activities are being embarked upon under the guidance of the EEA: (i) Solicitation for innovative renewable energy solutions in rural areas; (ii) A design of a market strategy for institutional system in health and education, including a capacity building program; (iii) The creation of an implementation strategy for solar PV commercialization; (iv) The formulation of a village and mini hydro development strategy; and, (v) the writing of a baseline assessment, and monitoring and evaluation framework. The agenda for action will be summarized in a comprehensive national Renewable Energy Action Plan, which will be updated on an annual basis.

Figure 1: Projected phases of renewable energy market development Phase 1

Agenda for Action

Phase 2 Capacity building, business development

and initial investment

Phase 3 Up-scaling of proven

business models

2003 2008

14. Phase 2 – capacity building, business development and initial investment. During the second phase, the activities will be supported through a framework of incentives rather than individual assignments. The Government would play a market enabling role, distancing itself from implementation of activities and creating an environment in which private sector activities can develop. The Ethiopian Electricity Agency and the newly established Rural Electrification Fund will play key-facilitating roles during this stage. Two types of support will be provided to the industry: (i) technical assistance, and (ii) debt financing. 15. The technical assistance will be offered under four windows: (i) a project preparation window; (ii) a project performance and monitoring window; (iii) a full cost window for funding of national assignments; and, (iv) a cost shared window for company-specific assignments. The concessional debt financing will be provided by the REF to (i) businesses/NGOs and other legitimate organizations that are pursuing renewable energy investments and (ii) other finance organizations like banks and micro finance institutions through syndication/co-financing of loans and/or APEX-like arrangements.

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16. This second phase of the program is supported by the GEF Project and in more detail described in the GEF Alternative section below. 17. Phase 3 – up scaling of proven business models. Phase three falls outside the EAP time period. Activities at this phase will focus on accelerating the success models that have evolved during the second phase of the program.

The baseline 19. The energy balance of the country is heavily skewed towards traditional fuels. Biomass fuels, mainly used for cooking, meet more than ninety percent of the energy requirements, followed by petroleum products and electricity. A mix of hydro and diesel systems generates the electricity, with the diesel facilities at the margin. The rural areas show a similar energy balance, albeit that modern energy forms are even less likely to be used.

20. For rural areas, modern forms of energy like electricity for lighting and some radio and television are only available to less than five percent of rural households. Even so, this group pays a relatively high price for the service as it is offered through isolated diesel power generators (often paying more than 20 cUS$/kWh) and rechargeable batteries (or about US$3.5 per kWh). Most of the rural households use kerosene for lighting purposes, paying on average, 23 cUS$/liter, or about two to three dollars per month. Kerosene, like all other petroleum products, is imported even though reserves have been found but not yet explored.

21. Regardless of this longstanding low access to electricity, it was only recently that a policy on rural electrification was adopted and that an institutional framework was established through the Rural Electrification Fund and the Regulator. Without the implementation of the proposed project - to devise and implement renewable energy as part of the rural electrification strategy - the situation is likely to remain as it is in the foreseeable future, leading to the following consequences:

Access to electricity services will continue to be low, and demand suppressed; Economic development in rural areas will continue to be hampered due to a lack of electricity; Fossil fuel usage will continue to increase leading to increasing environmental unsustainability (CO2 emissions

will continue to rise); Dependency of rural households on 19th century energy solutions will continue to increase; Capacity for renewable energy preparation and implementation will remain low; and Continued dependence on fossil fuels is likely to put further pressure on foreign exchange reserves.

22. However, several features of this situation create opportunities to promote sustainable renewable energy alternatives for rural Ethiopia. Among them are:

Electricity tariffs being paid by rural consumers are higher on average. This indicates that consumers would be willing to pay relatively high prices if reliable services were provided by solar or hydro sources.

Tens of thousands of rural households are estimated to be using batteries, thus paying about US$ 3.50 per kWh of energy.

Several hundreds of independent rural power producers are operating diesel power stations and others are involved in battery charging, which indicates an initial small entrepreneurial base in rural areas for small power businesses.

Government is committed to promoting private enterprise to increase access to electricity services in rural areas.

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Local micro-financing institutions have already supported isolated grids, and are interested in promoting renewable energy.

Establishment of a Rural Electrification Fund to, as part of its mandate, support renewable energy development.

23. Ethiopia’s renewable energy market is in its infancy. Resource assessments of small-scale hydropower potential are only available in the form of desk studies, and no systematic measurements have been done to establish the market potential. Also, no scientific assessments of wind speeds, solar insolation or PV potential have been undertaken. The Rural Energy Development and Promotion Center is implementing a limited number of renewable energy projects with support of donors. However, no information is available on the functionality and performance of these systems in absence of any monitoring system. Other small-scale initiatives are being supported in the rural areas by several organizations, albeit on an ad-hoc basis. A more structured, longer-term program has yet to be embarked upon.

The Alternative (the Project) 24. Areas of intervention. The GEF supported Renewable Energy Project focuses on four main areas for intervention for practitioners: (i) renewable energy systems supplying electricity to the grid; (ii) community and village based hydro grids; (iii) cross-sectoral activities initially in the health, education and water sector; and (iv) commercial solar dealers for household and institutional systems. For a summary of the physical targets of the interventions see table 1.

Table 1 Physical targets of renewable energy project Target Target Target

Systems Households MWs Mini-grid systems 3 – 6 - 3.0 Village hydro systems 24 2,400 0.7 Cross sectoral/institutional 300 - 0.2 Dealers supported SHS 6,000 6,000 0.2 Total 6,330 8,400 4.1

Mini-grid systems. The program will work with EEA and EEPCO to ensure that renewable energy generation can

be supplied to the grid in the same way as other technologies under the new power policy. Procurement of the systems will be done by the project developers making use of normal commercial practices, on a competitive basis on the open market. Project developers will need to be qualified based on: (i) a business plan; (ii) approval of debt financing from a commercial bank or the Rural Electrification Fund; and (iii) compliance with technical specifications and environmental/social safeguards. It is estimated that 3 MW will be installed during the Project period. Key performance indicators are: (i) number of local developers/investors successfully operating in this area; (ii) number of qualified systems installed and operating; and, (iii) adoption of a standardized small power purchase agreement and tariff by the EEA.

Village based hydro mini grids. The program will work with rural development organizations, NGOs, and

communities to provide electricity to those willing to invest in hydro grid systems. The communities or NGOs will procure the systems on a system-by-system basis. The community or NGO will have to be qualified based on: (i) a business plan; (ii) approval of debt financing from a commercial bank or the Rural Electrification Fund; and (iii) compliance with technical specifications and environmental/social safeguards. The community/NGO will be responsible for operation and maintenance of the systems. Co-financing for these isolated grid projects will be provided on a performance basis. A pipeline of viable micro-hydro projects is being finalized by the EEA. It is estimated that during the Project, 24 systems will be installed. The key performance indicators are: (i) number of rural developers (NGOs) successfully involved in mobilizing communities and developing projects; (ii) number of qualified systems installed and operating; and, (iii) improved productive use of the facilities by the villagers.

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Line ministries for cross sectoral/institutional systems. The program will work with line ministries to provide electricity to government service centers such as schools, clinics, and agricultural centers, mainly through solar, hydro and biomass systems. The Project will support the ministries of Education, Health and Water Resources with the preparation of energy guidelines for improving their services, after which investments will take place. It is expected that most of the systems will be solar based. The project developer will procure the systems on a batch basis following minimum technical specifications and normal commercial practices. The developer on a (standardized) lease-purchase basis will sell the service to the ministries. The mentioned ministries will have appointed contact persons. It is estimated that 300 facilities will receive these improved services. The three key performance indicators are: (i) energy guidelines adopted by ministries; (ii) number of qualified systems installed including O&M package; and, (iii) quality of service improved, for example through cold chain improvements, extended hours of education and improved communications.

Solar dealers for household systems. The program will work with solar dealers to provide electricity to isolated

households that have the capacity to pay for these services either on a cash or credit basis. The latter possible through one of the micro finance organizations. The procurement will take place under normal commercial practices where the qualified dealer will purchase the system – mainly solar - on a competitive basis on the open market. Systems supported by the program need to comply with minimum technical specifications. Dealers will need to be qualified by the program, which will include a business plan as well as an approval from a commercial bank or the Rural Electrification Fund for debt financing. It is estimated that during the first and second phase of the program 6,000 thousand systems will be sold. The three key performance indicators are: (i) number of solar dealers; (ii) number of rural solar outlets; (iii) number of qualified systems installed; and, (iv) improved productive use of the facilities by households and small businesses.

25. Investments. The program will provide IDA support for investments in renewable energy activities through the REF in two ways: (i) concessional loans to businesses, NGOs and other qualified organizations; and (ii) concessional loans for leveraging financing from other commercial, development bank and micro finance institutions. The second option is preferred.

Concessional loans from REF to businesses/NGOs and other legitimate organizations that are pursuing renewable energy investments. Three main criteria apply: (i) the organizations should be registered as independent organizations under the commercial act; (ii) the projects should obtain a license from the regulator to provide electricity services in a certain area and obtain clearance for an agreed upon tariff regime; and, (iii) the proposed project should be financially justifiable and be an integral part of the approved business plan of the organization.

Partner with other finance organizations like commercial and development banks as well as micro finance

institutions to support the investments. This would be done in two ways: (i) through syndication/co-financing of the loans; and/or, (ii) operating as an APEX-like organization by on-lending to these organizations for renewable energy investments. In general terms, syndication will be done with well-established banks, while APEX-type support will be provided to some of the emerging banks.

26. Technical assistance. REF will manage the GEF grant funds through four windows: (i) project preparation facility; (ii) project performance and monitoring facility; (iii) full cost technical assistance window; and (iv) cost-shared technical assistance window.

Project preparation and productive uses facility will support any successful financed business proposal with a

technical assistance award of US$8,000. These funds will be disbursed for 50% after the proposed project has received clearance from the REF for financing. The remain 50% of the financing will be disbursed after successful commissioning of the village/mini hydro plant or the successful installation of 10% of the projected solar home systems sales as stated in the business plan. An additional US$4,000 will be provided per successful business proposal if a specific productive uses program is an integrated part of it.

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Project performance and monitoring facility will provide financing for every installation that has been installed successfully as indicated in the monitoring plan. This will be a co-financing grant for every installed solar home system at US$3/Wp for the first 1,500 systems before the mid-term evaluation and US$2/Wp for an additional 4,500 solar home systems after the mid-term evaluation7.” The triggers for release of the co-financing grant are: (i) compliance with the program’s technical specifications, (ii) customer signed acceptance receipt and (iii) proof of after-sales service. For village hydro projects this will be US$0.4/W. At the mid-term evaluation of the project, these numbers will be revisited based on the experience so far with in mind the out-phasing of GEF grants. An integral part of the performance-based assistance is the recording and monitoring of its results. As part of the preparation, a detailed M&E plan has been prepared (see also below).

The full cost technical assistance window. This assistance program will support the overall objective of creating a

sustainable market for renewable energy systems. Any barrier for achieving the objective that is identified by the local key stakeholders or individual participants in the program and for which a resolution is proposed could in principle utilize this window. The full cost coverage window focuses on the "bigger picture issues" that are constraining the rate of growth of the industry. For example: resource measurements, general awareness and promotional campaigns, training of technicians, and preparation of a GEF exit strategy could be included. The triggers for approval are: (i) REF clearance, (ii) endorsement of an independent panel, and (iii) endorsement of a representative of the industry. Greater emphasis will be on cost-shared activities (see below), with full-cost activities only rewarded in exceptional cases. Several assignments have been identified during implementation.

The cost-shared financing window. This assistance program will support the overall objective of creating a

sustainable market for renewable energy systems. Any barrier for achieving the objective that is identified by the local key stakeholders or individual participants in the program and for which a resolution is proposed could in principle tap into this window. The cost-shared window focuses on company specific issues that are constraining the rate of growth of the individual organization. For example: marketing plan preparation, product specific road shows, technical improvements, management and technical training could be included. The cost-shared window requires a twenty to eighty percent contribution by the company. The trigger for support will be (i) the clearance of the Rural Electrification Fund (REF) and (ii) the endorsement of an independent two person panel. Several assignments have been identified during implementation.

Incremental costs summary 27. The total incremental cost calculated for the Ethiopia Renewable Energy Project is US$4.93 million derived as the difference between the baseline scenario (US$ 10.46 million) and the Alternative (US$ 15.39 million). An Incremental costs analysis was conducted for the four areas of intervention: (i) mini-grid renewable energy systems; (ii) village hydro systems; (iii) cross sectoral/institutional systems; and (iv) solar home systems. The results of the analysis was that the mini-grid hydro systems are least cost hence no incremental cost on the investments, and have a economic rate of return of 21%. The village hydro systems have an incremental cost of US$0.26 million for 720kW or US$0.4/kW. The solar institutional systems have an incremental cost of US$0.52 million for 166kW or US$3.1/Wp. The solar home systems have an incremental cost of US$0.54 million for 240kW or US$2.25/Wp. For further detail on the incremental cost see the incremental cost matrix provided below.

Incremental cost matrix 28. Based on the description of the context, development goals, barriers, objectives, baseline, GEF alternative, and sustainability provided above, a summary of the incremental cost could be found in the following table.

7 The co-financing strategy for the solar home systems after the mid-term evaluation could be adjusted based on the Exit-strategy that will be agreed upon by the Government and the WB/GEF at the mid-term evaluation. A possible alternative option is to provide US$2.5/Wp for an additional 3,600 systems.

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Baseline Alternative Increment Domestic Benefits

1. Access to electricity services will continue to be low and the demand suppressed; 2. Process of economic development in rural areas will continue to hamper due to lack of electricity 3. Power availability remains constrained, with prices high and reliability low. 4. Very limited development of the commercial market of renewable energy technologies.

1. Stimulation of rural businesses to expand operations including renewable energy systems 2. Large scale intervention to support the provision of grid-extension, mini grids andisolated through the private and public sector. 3a. Institutional strengthening in development of regulation, pricing, contracts, financing etc. 3b. Energy costs decline and availability improves, with linkages to productive use applications, improved social services and development of local small power entrepreneurs. 4. Renewable energy as integral part of rural electrification and powersupply development strategies

1. Barriers (informationfirst cost, etc.)to commercial development removed. 2. Successful demonstration of a widerange of alternative technologies and business approaches. 3. Renewable energy businesses provide improved technologies to complement grid extension for rural households/institutions on a competitive basis under an established regulatory framework. 4. Experienced renewable energy businesses ready for up scaling of rural investments

Global Environmental Benefits

5.Power supply development, and rural energy services rely on car batteries, diesel, andkerosene.

5. Significant offset of GHG emissions through range of renewable technology options, displacing 3% what would otherwise be diesel generator sets, 5 to10,000 kerosene households, and 300 institutions.

5a. About 0.37 million tons of avoided CO2 emissions 5b. Opening market for commercial renewable energy business in Ethiopia

Cost by Areas of Intervention

(million US$) (million US$) (million US$)

1. Mini-grid 4.50 4.50 - 2. Village hydro 1.15 1.41 0.26

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systems 3. Cross sectoral 2.50 3.02 0.52 4. Solar home systems

1.86 2.40 0.54

5. Technical assistance

0.39 4.00 3.61

GEF Incremental Costs

10.40 15.33 4.93

Global environmental benefits 29. The global environmental benefits of the Project are 0.37 million tons of CO2 over a period of fifteen years. The largest benefits will come from the mini-grid hydro systems about 0.32 million tons of CO2; followed by the village hydro projects with 24 thousand tons CO2; and the solar components of about18 thousand tons of CO2. The average cost of a ton of CO2 for this Project is US$13/ton CO2.

Sustainability and Replicability 30. The renewable energy project will target areas in Ethiopia where grid extension is not planned in the near future. Thus, the projects will likely compete with diesel generators, batteries, and kerosene lamps, which offer poor services at high costs. Therefore, renewable energy services will be marketed to provide reliable and quality services at comparable costs, which should ensure their long-term sustainability. Care will be taken to select sites with concentrated demand for mini-grid projects, and promote solar systems in remote areas where they are likely to be the most cost-effective clean energy solutions. The project preparation phase will carefully consider the demand-supply aspects to arrive at cost-effective options. 31. Apart from the techno-economic considerations, innovative financial engineering will be adopted to match the payments for energy services with the willingness and ability of the consumers to pay. This would mean some market segments might require co-financing. The challenge will be to design an optimal combination of market size, composition and co-financing so as to attract the private sector. Sales service and maintenance would be a necessary requirement irrespective of the mode of private sector involvement. The project would also strive to ensure that key stakeholders have the requisite capacity to handle pertinent tasks. All these considerations would ensure long-term sustainability of operations. 32. It should also be mentioned here that in designing the activities for GEF support in Ethiopia, lessons learned from the experience of the World Bank and other donors in supporting renewable energy technologies in countries in this region – Mozambique, Uganda, Zimbabwe, etc – as well as countries’ from outside the region - Vietnam, Indonesia, India, Sri Lanka, etc. – have been taken into consideration. Learning from other country experiences should contribute towards the sustainability of this project. 33. Also, the Technical Assistance included in the Project is specifically designed to enhance sustainability of the Project supported activities during and after the project period. In particular, there are several factors, which will contribute to this sustainability goal:

• A regime of declining GEF grants (see also below), with a transition to a more sustainable grant structure such as a Rural Electrification Fund;

• Explicit incorporation of renewable energy into power sector planning in general and in rural electrification in particular;

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• A monitoring and evaluation program, which is aimed at quantitatively assessing the contribution of energy to rural development thus providing a clear indication of its value to decision makers and civil society;

• Specific TA activities aimed at identifying potential barriers to sustainability and developing mitigation strategies

Social impact monitoring and evaluation, and dissemination 34. The Project envisages detailed evaluation of impacts to establish its effectiveness in meeting its access and related economic development objectives. There will be two parts to the M&E program: (i) M&E of the program’s physical outputs to assess progress in reaching the renewable energy targets; and (ii) M&E of the program’s impacts to assess rural economic development attributable to the provision of renewable energy services and to assess the sustainability of the renewable energy industry. 35. The elements to be monitored include: (i) physical progress towards rural electrification through all methods including grid extension, village grid, and solar; (ii) impact of rural electrification on rural economic development including quality of life enhancement, rural employment, change in income, and improved service delivering at schools and health facilities; (iii) sustainability of the renewable energy industry including: business profitability, cost declines, sales break-even points, structure of system size distributions over time, and institutional and financial viability of small hydro cooperatives, among other areas. Also, the M&E program will closely monitor the success of the different models applied, document them properly, and ensure that success models are being identified and further pursued for replication. 36. Panel surveys, focus groups, and other relevant techniques will be used to establish rigorous monitoring protocols. Evaluations also will be used to guide revisions of Project design – in particular the private sector led rural electrification component. Additional surveys or market analyses may be needed throughout the Project period to assess specific areas such as the village based systems market and the village grid productive use assessment. Details of the monitoring and evaluation program will become available before GEF-CEO endorsement of the Project. Productive uses 37. Special attention will be given to educate the users of the benefits of productively using the electricity provided by the renewable energy system. This applies in particular to the village based systems and the stand-alone systems for entrepreneurs and households. A structured awareness creation program will be implemented to improve the general awareness of the benefits of electricity as well as a more specific program for the new users of electricity (through the dealers, developers and NGOs). The awareness program will explain the higher quality end-uses that can be created through the efficient use of electricity. Best practices from other countries (like Indonesia and Sri Lanka) will be incorporated in the design. It is expected that the affordability of the systems will increase with this program and that the general level of income will increase. Stakeholders stressed that this activity is essential to the success of the Project. In addition, as part of the project preparation window, businesses are rewarded if they expand their business plans with a productive uses program (see also paragraph 26). Estimated project cost and financing plan 38. The total estimated project cost is US$ 15.3 million divided over five sub-components: (i) mini-grid renewable energy systems with an estimated cost of US$ 4.5 million; (ii) village based hydro systems with an estimated cost of US$ 1.4 million; (iii) cross sectoral/institutional systems with an estimated cost of US$ 3.0 million; (iv) dealer provided solar home systems with an estimated cost of US$ 2.4 million; and, (v) technical assistance of US$ 4.0 million. Total GEF co-financing is US$ 4.93 million or about 30 percent of the overall Project cost. Additional financing will be provided by IDA accounting for nearly 45% of the cost. The remainder will be covered by the private sector (about 25%). For an overview of the estimated Project cost and the financing plan see table 2.

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Table 2 Estimated project cost and financing plan. Target Projected

Cost IDA GEF Private/

Government

Systems Million $ Million $ Million $ Million $ Mini-grid 3 – 6 (3MW) 4.5 3.4 - 1.1 Village hydro 24 1.4 0.9 0.3 0.2 Cross sectoral 300 3.0 1.9 0.5 0.6 Dealers 6000 2.4 1.2 0.5 0.7 Technical assistance 4.0 - 3.6 0.4 Total 15.3 7.4 4.9 3.0

Declining GEF Grant. 39. The existing small scale of the market, the relatively low population density, limited ability to pay for energy services, and the relative unfamiliarity with renewable energy technologies among both customers and businesses require a relatively high level of GEF support up-front in order to effect a shift in technology choices, gain critical mass, and establish the market for a long enough period to facilitate full deployment of installation, operation, and maintenance facilities. For this reason, the GEF grant is "front-end loaded" with a higher absolute amount as well as a higher relative co-financing and capacity building costs in the first phase of the program. Both the capacity building requirements, and the co-financing will be required for delivery of an increased number of installations in subsequent phases. 40. There are several strategies on how the capital cost support will be sustained after the Project (even though the focus is to reduce them as much as possible): (i) through the REF with input from bilateral donors after a track-record has been established; (ii) through the REF with input from the Government through a levy on the bulk tariff; (iii) shifting debt financing from the REF to commercial/development banks and have performance-based grant support from the Government to the REF; and, (iv) through provincial grant provisions. With no experience with performance based grant support in the sector, an GEF-exit strategy will be prepared by the Government during the first years of implementation and completed before mid-term evaluation. Executing agencies and project management 41. The implementation of the Project will be done by the newly established Rural Electrification Fund with support from the EEA and the Ministries of Health and Education8. The REF will manage the GEF grant funds out of the Technical Assistance and Support Section (TASS) directly overseen by the General Manager of the Fund. The operating guidelines for the Fund as well as the final set-up of the Fund will be conditions for disbursement of the funds. 42. The renewable energy activities fall within the broader mandate and organizational set up of the fund. This means that rural and renewable energy projects will be managed by the Rural Electrification Secretariat (RES) of the Rural Electrification Fund. The RES will prepare an indicative rural electrification plan, provide information on potential project sites to prospective investors, review the proposals for investments, prepare specific projects to solicit private sector interest, and provide technical support to interested investors. 43. The REF will be the primary source of rural electrification debt financing, co-financing and technical assistance, which will be overseen by the Board. A trust agent to administer the payments to investors out of the REF will be competitively selected.

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8 The Proclamation of the Fund was approved by parliament on Feb 6, 2003

44. The EEA will be responsible for licensing, approving tariffs and monitoring technical, environmental and safety standards. Monitoring and evaluation of this component will be contracted out to an independent party in order to draw timely lessons for improving the design of the program. 45. Initially the REB and the rest of the structure will be linked administratively to the Ministry of Infrastructure. At a later time to be determined, based on growth in capacity of the new Ministry of Rural Development, the whole institutional structure will be transferred to that Ministry. The PMU of the EEA is the transitional body managing the preparation of the private sector led rural electrification and renewable energy activities. GEF role/ catalytic involvement 46. The Government of Ethiopia has supported renewable energy activities through various of projects for over a decade. However, it has not yet embarked on a more systematic and longer-term effort in which institutional capacity could develo and the environment for sustained business participation could emerge. GEF over of the last year has supported the Government in preparing for this 10-year program on Renewable Energy. Furthermore, it actively supports the core principles of the program, which are: (i) private sector led, (ii) based on cost-recovery and (iii) Government as market enabler. 47. GEF provides three catalytic elements to the program: (i) performance-based “smart” subsidies to provide the private sector with incentives to grow in the right direction while at the same time covering some of the incremental costs; (ii) technical assistance to remove barriers as defined by the stakeholders; and, (iii) best practice expertise from other countries with similar renewable energy programs.

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ANNEX 4 – STAP Review Response to STAP Review Provided by: Daniel M. Kammen, PhD March 3, 2003 Summary: This project, intended to increase rural and urban access to modern forms of renewable energy is well designed in terms of the attention to education and capacity building, and in the clear support mechanisms for specific, well selected, technologies. The inclusion of load dispatch, system management, and technology specific project components are well integrated and conceived. The incremental cost analysis is sound, as is the overall management scheme and plan for annual, local, progress reviews. In light of the large project budget, it is recommended that the project consider adding local photovoltaic manufacturing capacity to strengthen the local renewable industry, provide competition to external suppliers, and provide a superior training opportunity for local renewable energy entrepreneurs. The project is recommended for approval. Major Comments: Solar Cell Manufacturing. As described at length in the comment on Annex 14, page 7: Solar Cell Manufacturing, consider including support for a solar cell manufacturing facility for Addis Ababa. This would be the best way to support the local industry, take advantage of the exceptional training of the Ethiopian professional sector, drive down system costs, and build invaluable local experience with the entire process of the PV industry. Response: the objective of the renewable energy component is to create a sustainable market for renewable energy systems in five to ten years. Any activity supporting this objective is eligible for support under the program including solar cell manufacturing. If a local or international company comes forward with a sound business plan of a facility to produce cells and marketing them in the region this could receive support under the cost-shared technical assistance window of the program. Similarly, the organization could receive support for business plan development under the project preparation window. The renewable energy component is designed to be demand based and hence supports sound business initiatives that help create a sustainable market. Biomass co-generation and gasification. Page 7, Section 3.5 & Page 9, Section 1.6. In addition to the options discussed for the biomass sector, the potential for gasification may warrant attention. At present several Ethiopian sugar producers combust their bagasse and sell the power. That combustion is traditional solid fuel combustion. Small-scale gasification technologies are now becoming available (such as those of Community Power Corporation of Colorado, USA) and even with the strong demand for biomass in Ethiopia, this is a technology that could augment rural power production in the country. An assessment of the potential for emerging biomass technologies to further the mandate of the Ethiopia Energy Access Project is recommended. This analysis can be included in the bank’s stated support for an ongoing national biomass study plan (page 17). Response: along the same line as the first response. The potential for biomass fueled powered generation is substantial in Ethiopia and the technologies to do so are proven in Ethiopia or in other places in the world. Key barrier to move forward with these products is the business set-up and viable delivery mechanisms in the country. If a local (or international) organization, pursues this important market segment they would be eligible to receive support under the earlier mentioned windows. A scooping and/or pre-investment study of biomass fueled power generation options is on the list of national studies to be conducted most probably starting in the first year of implementation.

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Improved wood stoves. The locally developed improved enjera stoves are an important energy and health-saving technology, and thus support for this program is a very sound investment. This project benefits has not been included as value added of the Bank’s support in this project - page 17: 5. The health benefits from reduced biomass smoke exposure are significant (Ezzati and Kammen, 2001). These benefits, based on those reported in central Kenya, could amount to a major project component, and should be evaluated. Response: agree with this comment and have adjusted the text in the Project Brief accordingly. Minor Comments: Biomass components - page 13, 4.3 - The project faces a standard problem in the biomass sector. As written the biomass component will fall under the auspices of the Department of Agriculture. There is a history of nations – including the U. S – where biomass projects placed under Dept. of Agriculture control have failed to do anything significant in the energy area (the USDA’s ethanol fuel program is one such failure). Without close coordination, if not at least partial ‘ownership’ of this project by the Ministry of Energy/Ministry of Rural Development, it is far from clear that significant energy crop production will result. Response: the Board of the Rural Electrification Fund is represented by the key ministries of the country to minimize stand-alone activities, coordinate best practices and to conduct strategic planning of rural energy activities. Also, during the initial period of implementation when the Rural Electrification Fund is not fully operational these coordinating activities will be conducted by the PMU managed out of the EEA. With biomass supplying more than ninety percent of the rural energy sector, it is an important factor to recon with by all institutions involved. The supported institutional set-up has the intention to address this. Grid connected renewables. Page 18: Section 1.5 states: “The Master-Plan Study confirms the adequacy of existing and committed generation and transmission capacity to meet demand in the foreseeable future. Hence, the additional critical investments required in the medium term are those for improving the technical integrity of the distribution systems to enhance reliability and security of supply, and the extension of supplies to new consumers.” It is difficult to take this statement at face value. Addis Ababa is chronically short of power (calling into question the statement about generation), and in virtually no country with such low GNP/capita is the actual state of the electricity grid well reflected by what is on paper. If the transmission system is not up to the task, then the plan to integrate significant new renewable energy capacity (notably wind and biomass) on to the grid will be jeopardized by the lack of ability to connect in smaller, decentralized sources into the network. Response: agree and is a topic of ongoing dialogue with the Government and EEPCO. Also, the project developer needs as part of its analyses take this issue into consideration. However, for most of the developers this is a standard assessment. Even in countries with very reliable grids, the absorptive capacity of the local grid is an integral part of the assessment. The comment is however fully supported, the more reliable grid is available, the larger the possibility for renewable energy systems to feed into it. Cost-benefit - page 19 - The rural electrification cost-benefit calculation shows an almost 2:1 cost-benefit ratio. This is exceptionally strong for initial rural electrification, and is, in fact, somewhat surprising. The differences between the Ethiopian case and that of other countries in the region should be indicated in Annex 4. Response: it is not uncommon for initial rural electrification programs to have a strong economic viability. With only 5% of the rural households having access to electricity in Ethiopia, there is a large group of potential customers that are willing and able to pay for the service but aren’t offered the option. These customers are willing to pay relatively high tariffs; hence, these projects have a relatively high consumer surplus.

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Farm/Agro-forestry schemes - Page 29 & 31 - The prospect of negative consequences of the introduction of exotic species. Even if the formal program does not involve exotic species, the potential expansion of a market for biomass crops is likely over time to result in some individuals importing and planting exotics. Response: agree that this will happen over time if the market for biomass crops continues to grow aggressively. Comments on: Incremental Cost Analysis Renewable energy targets - Annex 14, page 1: Item 2 - “Renewable energy is an integral part of the energy sector’s strategy and is estimated to provide about 10% of the electricity demand.” Questions: Has this been documented, and is it ~ 10% of consumers served in part of full by renewables, or is it on a percentage of kWh basis? Response: this 10% of the installed capacity by 2010. This figure has been documented in the draft Renewable Energy Action Plan that is under preparation. Renewable energy curricula – Annex 14, page 2: Item 6 – Renewable energy curricula are in place at the national university. Specify at what educational levels this sort of training is available. It is particularly important that training is available at not only university levels, but also at technical training institutes and other more widely accessed – particularly by potential clean energy businesspeople – media of instruction. Response: several NGOs and provincial organizations have indicated to integrate renewable energy in their training programs. Also, the stakeholders stressed the point that awareness creation and capacity building in rural areas is of paramount importance if the program wishes to succeed. Funds for this regional capacity building and training has been included in the Project. Village based hydro grids - Annex 14, page 6 - ‘Qualification’ of the villages or NGOs is specified to be based on approval by a commercial bank. In a number of nations this certification has been used as a tool to block some communities from qualification, or as an avenue for corruption. What procedures ensure that this will not become a problem in Ethiopia, with a regionally diverse population, strong sets of local officials, and some strong regional rivalries? Response: the community is not restricted to work with one bank. If it feels that it is blocked for other than financial reasons it is free to approach other financing institutions. Also, the Rural Electrification Fund provides debt financing and could be approached by the community. For the community to tap into some of the grant windows it should – besides other criteria - comply with either an approved loan from a finance organization or the rural electrification fund. Solar cell Manufacturing - Annex 14, page 7 - I would like the project team to consider an idea that will change the dimensions of the project, to some extent. The solar home system market in Kenya has been studied for some time (Duke, Jacobson, and Kammen, 2002), as has been the expansion to neighboring Uganda, Tanzania, the former Somalia, and Ethiopia. We have concluded that one of the key impediments to sustained lower prices for PV systems in East Africa is the absence of any local solar cell fabrication. Currently the PV panels constitute 55 – 60% of the cost of the systems. A small amount of PV production in the region, locally controlled, would exert a strong downward price pressure on the industry, which is at present primarily an import-driven one from Europe. An added feature of this plan is that it would dramatically improve the opportunities, at low cost, for meaningful training in the industry for Ethiopians. My research group has examined this idea at some length with Mr. Muguleta of the Ethiopian Ministry of Science and Technology. A small, roughly 0.5 MW/year production facility would serve the East African community well, would take advantage of the exceptional training of many Ethiopian professionals, and would serve to diversify the East African PV market away from its current Kenya focus. Further, thin-film PV production can be accomplished with inexpensive reel-to-reel technology that requires no clean room. The estimated cost for such a fabrication facility is only $ 1.4 – 2.2 million.

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Response: see first response. PV system subsidies - Annex 14, page 7 - Please justify the subsidy program selected: flat subsidies of US$120 for >=40 Wp; US$70 for >=20Wp and <$40Wp; US$40 for >=10Wp and <20Wp. An alternate plan would be to scale the subsidies so that poorer families receive a larger subsidy. Response: the program has been designed based on four key criteria: (i) limit the free riders by providing less support for larger systems which will be purchased by the richer families; (ii) simplicity in administration and easiness of dissemination to the practitioners; (iii) more support for smaller systems to provide an incentive to the dealers to supply electricity to the poorer households; (iv) out phasing of the subsidies over time while maintaining the incentive to expand the market to the poorer households. Even though, the support per Wp is equal for all systems, the smaller system – for the poorer households – receive a relatively larger grant amount. Incremental cost - Annex 14, page 9 - The incremental cost of $27/tC is, in fact, quite reasonable given that: a) much of the program is for training and capacity building, which by definition can not cost-out well; and b) the initial entry of renewable energy into such a market is unlikely to offset much more than some kerosene and a bit of diesel use. The true measure of such a program is over the full 5+ years of operation, during which we will see the sustainability goals met, or not. Response: the successful implementation of a few grid connected renewable energy systems is a major contribution to the efficiency of the overall incremental cost of the program. Executing agencies - Annex 14, Section 33 - The Ministry of Science and Technology is apparently not included in the management of this project. There is considerable experience in that department in renewable energy issues. Please justify their exclusion, which may be as simple as the need to limit the number of project managers, but it does require some explanation. Response: it is not that the Ministry of Science and Technology is excluded. They are one of the stakeholders and have an important role to play in particular in training and support to businesses to improve their technologies. For several reasons, it was decided to have the management/facilitation of the program been conducted by the Rural Electrification Fund. One of the most important reasons was the full integration of renewable energy in the energy sector.