The World Bank Public and Municipal Renewable Energy Project (P179867) Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 27-Mar-2023 | Report No: PIDA35388 Mar 15, 2023 Page 1 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Project Data Country Project ID Project Name Parent Project ID (if any) Turkiye P179867 Public and Municipal Renewable Energy Project Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EUROPE AND CENTRAL ASIA 27-Mar-2023 12-Jun-2023 Energy & Extractives Financing Instrument Borrower(s) Implementing Agency Investment Project Financing ILLER BANKASI ANONIM ILBANK, MINISTRY OF SIRKETI (ILBANK), REPUBLIC ENVIRONMENT, OF TURKIYE URBANIZATION AND CLIMATE CHANGE Proposed Development Objective(s) The development objective is to increase the use of renewable energy through self-generation in public facilities. Components 1. Renewable Energy Investment in Central Government Buildings 2. Renewable Energy Investments in Municipalities 3. Technical Assistance and Project Implementation Support 4. Contingent Emergency Response Component PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 503.00 Total Financing 503.00 of which IBRD/IDA 500.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 500.00 Mar 15, 2023 Page 2 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) Non-World Bank Group Financing Trust Funds 3.00 Energy Sector Management Assistance Program 3.00 Environmental and Social Risk Classification Moderate Decision The review did authorize the team to appraise and negotiate Other Decision (as needed) B. Introduction and Context Country Context 1. Türkiye enjoyed high economic growth rates between 2002-2017 that supported poverty reduction but experienced a significant downturn in 2018-2019. Türkiye achieved rapid economic and social development in the 2000s, with poverty incidence more than halving and real Gross Domestic Product (GDP) increasing by 50 percent by 2008. Since the Global Financial Crisis, rapid growth continued but was increasingly associated with stagnant productivity, a rising current account deficit and growing foreign exchange-denominated debt stock. Policies to stimulate the economy led to economic overheating in 2017, double-digit inflation, and a large current account deficit. The cumulative effects of these and other economic vulnerabilities came to a head in mid-2018, with the tightening of global economic conditions combined with challenges in international relations. These events triggered a significant depreciation of the Turkish lira and turmoil in the Turkish economy. Spending fell, inflation accelerated, and the corporate sector’s debt increased. Türkiye experienced three-quarters of negative growth from late 2018 to mid- 2019, coupled with sizable job losses. Poverty reduction progress stalled in 2018. 2. An emergent economic recovery starting late 2019 was undermined by the COVID-19 pandemic, but the swift government policy led to a sharp rebound in the economy. Over the course of late 2018 and 2019, the economy went through significant adjustments. Current account imbalances declined significantly, banks and corporates reduced their exposure to foreign currency debt, private sector credit growth resumed, and demand had started to recover. Its economic activity was rebounding with strong growth in 2019 Q4 but was disrupted by the onset of the COVID-19 pandemic in early 2020. Like in many other countries, the COVID-19 health crisis turned into a deep economic turmoil in Türkiye, leading to a sharp contraction in GDP (10.4 percent, year-on-year) in 2020 Q2. The Government’s economic policy response to Covid-19 was swift but focused on loosening monetary policy and rapid credit expansion, resulting in a significant increase in economic activity in late 2020 that more than offset the decline recorded earlier in the year and double-digit GDP growth in 2021 (11 percent) with the economy and employment surpassing pre-pandemic levels. However, the policy frameworks to ensure a strong economic rebound during the Mar 15, 2023 Page 3 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) pandemic also heightened macroeconomic risks, including rising inflation, currency depreciation, increasing corporate and banking sector vulnerabilities, and a decline in reserve buffers. 3. Türkiye’s economic growth slowed in 2022 amidst a deteriorating external environment. Türkiye’s economic growth remained among the best G20 growth performers in 2022 despite growth slowing to 5.6 percent as exports, investment and manufacturing activity lost momentum in the second half of the year. Russia’s invasion of Ukraine slowed Türkiye’s exports to the EU and raised energy import prices. However, exports to Russia jumped, and Türkiye experienced increased financial inflows from unknown origins recorded as net error and omissions. The country’s vulnerability has been exacerbated by the two devastating earthquakes that struck the southern provinces of Türkiye on February 6, 2023. 4. The February 6, 2023 earthquakes of 7.8 and 7.5 magnitude, followed by more than 7,500 aftershocks and two additional earthquakes, have resulted in the largest such disaster to hit the country in over 80 years, and have inflicted the heaviest damage in 11 provinces in southern Türkiye. These regions have some of the highest poverty rates in Türkiye and also host more than 1.7 million Syrian refugees, which is almost 50% of the total Syrian refugee population in Türkiye. The earthquakes caused an estimated $34.2 billion in direct physical damages, the equivalent of 4% of the country’s 2021 GDP, according to a World Bank rapid damage assessment report which also acknowledges that recovery and reconstruction costs will be much larger, potentially twice as large, and that GDP losses associated to economic disruptions will also add to the cost of the earthquakes. 5. The Global Rapid Post-Disaster Damage Estimation (GRADE) Report, which focuses on the direct physical damages in Türkiye, also estimates that 1.25 million people have been rendered temporarily homeless due to moderate to severe damage or complete building collapse. Direct damages to residential buildings account for 53% ($18 billion) of the total damage, with 28% of damage ($9.7 billion) in non-residential buildings (e.g., health facilities, schools, government buildings, and private sector buildings), and 19% of damage ($6.4 billion) related to infrastructure (e.g., roads, power, water supply). The damage estimates in the report do not include the broader economic impacts and losses for the Turkish economy, or the cost of recovery and reconstruction which could be significantly more than the direct damages and requires a more in-depth assessment. 6. Türkiye is at a crossroads regarding climate change mitigation, while the country is vulnerable to climate impacts. Greenhouse gas (GHG) emission increases in Türkiye have been slower than economic growth and its per capita emissions are lower than European Union (EU) countries (4.8 vs 6.1 tons of CO2 in 2019, for Türkiye and EU average, respectively). However, its coal dependency is high, currently representing about one third of total electricity generation. Meanwhile, Türkiye has a “high vulnerability� in 9 out of 10 climate vulnerability dimensions, compared with a median of 2 out of 10 in other OECD countries1. Climate- related disasters have been striking with greater frequency and intensity over the last two decades. In 2019 alone, 935 extreme events occurred, caused mainly by heavy rains and floods, windstorms, snow, and hail. Climate models predict this trend to continue with increasing abnormalities in precipitation patterns with more frequent extreme rain and floodings, as well as protracted drought and wildfires, and sea-level rise. 1 World Bank (2022) Country Climate and Development Report - Türkiye Mar 15, 2023 Page 4 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) 7. Türkiye’s ratification of the Paris Agreement in October 2021 and its pledge to achieve net zero emissions by 2053 was a strong signal of the country’s commitment to join the global community in tackling the climate global emergency. As part of the Paris Agreement process, Türkiye has recently submitted the first iteration of its nationally determined contribution (NDC) to the United National Framework Convention on Climate Change (UNFCC), outlining its climate actions and targets. The government of Türkiye (GoT) is also currently working on its Long-Term Decarbonization Strategy and National Development Plan, which will further define measures and actions to address climate change. Sectoral and Institutional Context There is strong government support for renewable energy development and distributed generation 8. Scaling up renewable energy (RE) has been at the core of Türkiye’s development policies and will continue to play a critical role in meeting its net zero emission targets. Türkiye is endowed with considerable renewable energy resources, including solar, wind and geothermal. Utilizing these RE resources and achieving energy security has long been at the core of the government strategy, as reflected in the Electricity Sector Security of Supply Strategy (2009), National Renewable Energy Action Plan (2014), Energy Strategic Plan (2019-2023) and Eleventh Development Plan (2019-2023). These policies together have acted as key drivers for the impressive growth of RE in the past decade. At the end of 2022, RE (including hydroelectric, wind, solar, and geothermal power plants) constituted about 54 percent of total installed capacity and 45 percent of Türkiye’s power generation2. This achievement has well exceeded the RE target of 38.8 percent in the power generation mix by 2023 set in the government’s strategic documents mentioned above, placing Türkiye as the 5th largest RE generator in Europe and the 12th largest in the world3. While acknowledging this progress, the World Bank Türkiye’s Climate Change Development Report (CCDR, 2022) calls for further decarbonization of the power sector as one of the key pillars to achieve the country’s net zero emissions target. In this same line, Türkiye’s recently released National Energy Plan (2022) includes a target to achieve a share of RE of almost 65 percent in installed capacity and 55 percent in total power generation by RE in 2035 to meet the economy-wide net zero emission target by 2053. More specifically, the plan indicates that over 74 percent of the expansion in generation capacity (72GW out of 96.9 GW) in the period should come from RE resources, the majority of it solar (52.9 GW total installed capacity by 2035) and wind (29.6 GW total installed capacity by 2035) energy. 9. As part of the Ministry of Energy and Natural Resources (MENR) Strategic Plan 2019-2023, the Government of Türkiye (GoT) has also strengthened the regulatory framework for distributed RE. A new legislative package for unlicensed projects was issued in May 2019, with its subsequent amendments, to strengthen the regulatory framework for unlicensed generation4. The package provided a well-defined list of electricity generation options, including distributed solar photovoltaic (PV), both rooftop and ground- mounted, for which a license to operate would not be required if used mainly for self-consumption and if produced at a specific consumption point. The new framework also abolished the feed-in-tariff (FiT) support for unlicensed projects as it introduced a net-billing scheme that capped project capacity to the 2 Ministry of Energy and Natural Resource of Türkiye, https://enerji.gov.tr/infobank-energy-electricity 3 https://www.trade.gov/country-commercial-guides/turkey-electric-power-renewables-smart-grid-energy-storage-civil- nuclear#:~:text=Turkey%20currently%20has%20approximately%2031%2C500,biomass%20power%20plant%20installed%20cap acity. 4 Presidential Decree (CK) dated 9 May 2019 and numbered 1044 Mar 15, 2023 Page 5 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) customer’s contracted capacity with the utility, thus making unlicensed projects mainly dedicated to self- consumption (with the possibility for certain categories of consumers to receive remuneration for any excess generation injected into the grid as per the net-billing policy). More recently, the requirement for the generation facilities to be located at the same consumption point or in the same distribution zone as the consumption point(s) has been lifted and some consumer categories (i.e., municipalities, industrial and irrigation facilities) may install up to 2 times their contracted capacity. In parallel, the Government has also developed a program to support the utility connected RE market through auctions (the YEKA program), which have had several rounds for solar and wind since it was launched in 2017. 10. Further development of the distributed RE market, especially solar, can play a key role in achieving the 2035 RE generation targets set by the government while alleviating transmission and distribution constraints. Despite impressive growth in the renewable energy market in recent years, Türkiye currently uses only an estimated 3 percent of its solar and 15 percent of its onshore wind potential5. Wind capacity has increased from 2,312 MW in 2014 to 11.4 GW by the end of 2022. In the same period, solar PV capacity has increased from 40 MW to about 9,446 MW. While a large portion (7,967 MW or 84 percent) of this capacity is unlicensed (also referred to as distributed) generation, mostly built under the previous FiT scheme of 13.3 USD cents/kWh6, most of it is considered centralized7 rather than true distributed systems. The 2019 legislative amendments mentioned above ensure that new unlicensed generation installations are primarily aimed at self-consumption and thus consistent with distributed generation characteristics. Interviews with sector stakeholders in late 20208 revealed that about 410 MW out of total 6,667 MW installed solar capacity in 2020 was distributed solar PV built under the unlicensed generation regulation, while the figure at the end of 2022 is estimated to have increased to about 2,000 MW9. Although this is remarkable progress, the pace of installations will need to significantly increase as the large solar (and wind) potential and the benefits of distributed generation (e.g., limited strain on the transmission and distribution system in most cases) coupled with the conducive regulatory scheme for unlicensed generation support the role of distributed RE in meeting Türkiye’s RE generation targets. Distributed generation contributes to the decarbonization of the building sector and reduction of public energy expenditures 11. The building sector is one of the largest energy consuming and GHG emitting sectors in Türkiye. The building sector including residential, commercial, and public service consumed 1.48 million TJ in 2019 10, about one-third of the country’s total final energy consumption (and more than the industry sector). Given the high rate of urbanization and the fast growth of the building stock at 4 percent per year, the building 5 IEA (2021) “Türkiye’s success in renewables is helping diversify its energy mix and increase its energy security� 6 Effective for the projects commissioned before June 30, 2021 7 Under the previous FiT scheme, many solar projects with less than 1MW were built together to avoid administrative procedures required for licensed generation but collectively work as power plants. 8 This market sounding was part of preparation of the Scaling-up Distributed Solar PVs in Türkiye Program (P176375), whose objective is to scale up the market and improve the enabling policy environment for distributed solar PV in the following sectors: residential, industrial & commercial, and micro, small and medium-sized enterprises. 9 As of December 2022, solar PV represented over 92 percent of the total unlicensed generation in Türkiye. 10 IEA, https://www.iea.org/countries/turkiye Mar 15, 2023 Page 6 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) sector will continue to drive the country’s energy consumption as its energy use is expected to double by 2050. In addition, the building sector is a direct consumer of coal, oil and natural gas to meet its heating needs. Despite a slightly decreasing trend, almost 40 percent of final coal consumption in 2019 in Türkiye was used to meet the heating demand in buildings (27.4 percent for commercial and public services and 12 percent for residential). As a result, this sector emitted about 57 Mt of CO2 in 2019, about one-quarter of the direct GHG emissions11 from the final consumption sector of the country. Both National Energy Efficiency Action Plan (NEEAP, 2017-2023) and National Climate Change Action Plan (2010-2023) highlight the building sector as an indispensable component to meet the country’s energy efficiency (EE) and climate mitigation goals. 12. Distributed RE for public facilities can help offset their energy consumption and mitigate the impact of rising energy prices on public budgets and municipal energy bills, while helping Türkiye deliver on its climate commitments. Based on a study12 commissioned by the MENR in 2016, there were about 175,280 public buildings (including central and municipal buildings) in operation across the country, which were responsible for energy consumption of over 25,000 GWh/year (or about 2.2 percent of the country’s final energy consumption) and thus a significant share in public expenditures. Energy expenditures can represent as much as 15 percent of the budget in some municipalities in Türkiye13 and the share has significantly raised in the last year due to increasing electricity tariffs14. Meanwhile, several municipalities already have their own climate change mitigation targets15 and forthcoming legislation will require all municipalities to prepare comprehensive climate change action plans for both mitigation and adaptation, which would necessitate consideration of low-carbon technologies in their facilities. A study conducted in 2018 estimated the technical potential of rooftop solar PV in Türkiye’s public buildings at 2.1GW16, and recent examples from central government buildings have shown that distributed RE such as ground- and rooftop solar PV can offset up to 100 percent of the building’s energy consumption. Moreover, RE as distributed resources are a cost-effective solution for electricity generation. Specifically, distributed PV currently supplies more affordable energy than the grid does in many countries, as the levelized cost of electricity (LCOE) of distributed PV has fallen 40-70 percent since 2010, depending on the region, and reductions are expected to continue17. The public sector can play a demonstration role for distributed energy generation 13. Considerable efforts have already been made in Türkiye to reduce energy demand through energy 11 Without accounting emission associated electricity 12 Econoler (2016) Market Assessment Report for Public Buildings, prepared for the Ministry of Energy and Mineral Resources, Türkiye 13 The ratio of electricity costs to the total budget is in the range of 2-5 percent in metropolitan municipalities, 5-8 percent in provincial municipalities, and 10-15 percent in district municipalities. For water and sewerage administrations, this value varies between 12-19 percent. 14 ILBANK (2021) Renewable Energy and Adaptation Projects Conceptual Framework Documentation, iZ POWER (2021) Gerze Municipality: Solar Power Plant Feasibility Report, and visits to municipalities during project preparation. 15 Twenty-seven municipalities are already members of the Global Covenant of Mayors on for climate and Energy (GCoM) – the largest global alliance for city climate leadership – 16 have committed to a climate change mitigation target through the GCoM process, but much remains to be done—currently, 10 of the 27 cities are working on emissions inventories and mitigation plans, while only 2 have performed an adaptation assessment and none have adaptation plans 16 Tetra Tech ES (2018) Turkey: Rooftop Solar PV Market Assessment, prepared for the World Bank 17 IEA (2022) Unlocking the Potential of Distributed Energy Resources Mar 15, 2023 Page 7 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) efficiency measures, but additional efforts are required to further decarbonize the building sector through distributed RE. The GoT has launched and implemented various EE improvement programs or combined EE and RE programs in the building sector, some of them supported by International Financial Institutions (IFIs), including investment financing from the World Bank. While EE should be the first step to avoid unsustainable energy consumption, as it is typically much cheaper to save a unit of energy through EE than generating it, the remaining energy needs of an efficient building can be fully or partially met using distributed RE located at or close to the building site, contributing to deeper decarbonization. Consistent with this principle, the Bank is supporting two investment projects, the (i) Energy Efficiency in Public Buildings Project (EEPBP, P162762), which supports EE and distributed RE measures in public buildings that are seismically safe, and the (ii) Seismic Resilience and Energy Efficiency in Public Buildings Project (SREEPBP, P175894), which supports EE and distributed RE measures in central government buildings that require structural measures for seismic safety. However, there is significant remaining investment potential for distributed RE in newer government buildings that are already sufficiently energy-efficient and seismically safe, as well as in municipalities. 14. Expanding RE in central government buildings and municipalities faces several inherent barriers, some of which also affect private development of distributed RE for self-consumption. Key barriers for the public sector include: i) a lack of budgetary resources to finance capital investments, including limited ability to borrow for many municipalities; and ii) limited technical and implementation capacity to execute RE projects across central and municipal government agencies. In addition, a lack of uniform grid- interconnection standards and guidelines for minimum performance standards contributes to lengthy and uncertain permitting and inspection processes for approval, both for public and private installations. These barriers have collectively contributed to the underdevelopment of RE investments in central and municipal government facilities in Türkiye, despite the potential to reduce energy costs and generate environmental benefits. 15. Global experiences have demonstrated that adopting RE in the public sector can help stimulate market development, decrease operational costs, and show leadership in sustainable energy use. Many countries in Europe, North America, and Asia have legislative mandates for renewable energy use in public buildings or national programs to invest in on-site RE projects in government agencies. Global experiences show that these initiatives in the public sector help build the capacity of market actors such as project developers, installation companies, component manufacturers, etc., as well as contribute to address regulatory and administrative barriers, thus spurring market development by demonstrating positive results. In Türkiye, for example, the Government’s recent investment in EE in public buildings has helped to build the capacity of local energy auditors and design companies to introduce new business models such as performance-based contracts for EE building retrofits as well as to demonstrate that significant energy savings can be achieved through EE retrofits in buildings. 16. The proposed Project will support the Government of Türkiye to scale-up renewable energy use in the public sector by focusing on central government and municipal facilities and deliver its commitment in line with the Paris Agreement. The Project will contribute to expanding the distributed RE market in public facilities by directly addressing the lack of budgetary resources to finance capital investments and by putting in place implementation modalities to tackle the limited technical and implementation capacity to execute RE projects. This will help demonstrate leadership in the public sector to use sustainable energy Mar 15, 2023 Page 8 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) solutions to deliver on the country’s climate mitigation commitments and to enhance energy security.18 In addition to RE, the Project will also support pilots to demonstrate the combination of distributed RE with electrification of heating through heat pumps, which is critical for the decarbonization of the building sector. While each of these technologies are well proven and internationally adopted, recent experience has shown reluctance among some designers and engineers in Türkiye to recommend heat pumps in public building retrofits and there has been limited application of combining heat pump retrofits with RE installations. C. Proposed Development Objective(s) Development Objective(s) (From PAD) 17. The project development objective (PDO) is to increase the use of renewable energy through self- generation in public facilities. Key Results 18. Progress made under the Project would be monitored through the following two PDO indicators: (a) Renewable Energy generation capacity (other than hydropower) constructed under the Project (Megawatt, Corporate Result Indicator (CRI)) (b) Net greenhouse gas (GHG) emission reductions (as a result of RE power generation) (Metric tons/year, CRI) D. Project Description 19. The proposed Public and Municipal Renewable Energy Project aims to support the government in decarbonizing the public building sector and scaling up the development of distributed RE sources. The Project will be financed by a US$500 million IBRD loan and a US$3 million grant from the Energy Sector Management Assistance Program (ESMAP). The Project will include three components: (i) RE investments in central government facilities; (ii) RE investments in municipalities; and (iii) technical assistance (TA) and implementation support. As mentioned previously, the Bank is already supporting two projects (EEPBP and SREEPBP) that finance investments in EE and distributed RE measures as well as seismic safety in central government buildings. The proposed Project is complementary to the two existing projects, as it targets the remaining potential for distributed RE in newer central government buildings that are already sufficiently energy-efficient and seismically safe, as well as ground-mounted distributed RE (Component 1) and distributed RE in municipalities (Component 2). For rooftop solar PV installations on buildings, the Project’s eligibility criteria will ensure that buildings are adequately energy efficient (“EE first� principle) and seismically safe. 18The Scaling-up Distributed Solar PVs in Türkiye Program (P176375), currently under preparation, is expected to contribute to addressing additional barriers that also affect private sector investments in distributed RE (e.g., lack of uniform standards and guidelines and lengthy permitting processes). Mar 15, 2023 Page 9 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) Component 1. Renewable energy investments in central government facilities (US$246 million IBRD loan) 20. This component will support investments in central government and central-government-affiliated facilities (e.g., public buildings under central ministries, universities, and hospitals) and will be implemented by the General Directorate of Construction Affairs (GDCA) under the Ministry of Environment, Urban and Climate Change (MoEUCC). Component 1 is divided into Subcomponent 1a, which focuses on RE investments, and Subcomponent 1b, which is a pilot to combine RE investments with heat pumps and efficient lighting installation in buildings. 21. Subcomponent 1a. Renewable energy investments in central government facilities (~US$240 million IBRD loan). This subcomponent will finance investments in RE installations that will be used to offset the facilities’ electricity consumption as per the Turkish unlicensed RE regulation scheme. This scheme supports distributed RE installations that are primarily dedicated to self-consumption (i.e., the maximum size of the RE system is linked to the customers connection capacity) and allows the customer to sell excess generation to the grid at the retail price. Estimates at Project appraisal indicate that RE installations in central government facilities financed under the Project would result in total annual energy cost saving of over 470 million TRY. An initial pipeline of about 80 subprojects in central government facilities (e.g., state universities, sports buildings and hospitals) distributed across most provinces in the country and amounting to a total generation capacity of nearly 60 MW has already been identified and will be reconfirmed during appraisal. This pipeline includes rooftop, car park canopies and ground mounted solar PV installations, ranging from a few kW to several MW. Additional subprojects will be financed in subsequent implementation rounds, including potential support to distributed RE installations for central government facilities during reconstruction in the areas affected by the February 2023 earthquake. RE technologies other than solar PV are also eligible under this subcomponent, as per the eligibility criteria presented in paragraph 26. 22. Subcomponent 1b. Pilot to combine renewable energy investments with heat pump and efficient lighting installation in central government facilities (~US$6 million IBRD loan). This subcomponent will support investments in pilots for a small subset of the subproject portfolio (3 to 5 subprojects) to combine solar PV investments with investments in light-emitting diode (LED) to replace inefficient lighting technologies and electrification of heating (i.e., substituting fossil-fuel boiler capacity with heat pumps to support both heating and cooling), which would allow additional RE capacity to be deployed and ultimately reduce the buildings’ emissions. While the Project targets buildings that already have an adequate energy performance and building envelope, the combination of solar PV and heat pumps increases the self- sufficiency of buildings and reduces the strain on the electricity grid, as well as further contributing to the decarbonization of the building stock. The candidate subprojects for the pilots will be selected during Year 1 of the Project. Preparation and design of the subprojects are planned for Year 2 so that the installation and works can be completed in Year 3 and 4. Component 2. Renewable energy investments in municipalities (US$244 million IBRD loan) 23. This component will support introducing RE technologies in municipalities and will be implemented by the International Relationship Department of Iller Bankası A.S. (ILBANK). As in Component 1, the RE installations will be used to offset the overall energy consumption from public facilities (e.g., administrative Mar 15, 2023 Page 10 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) buildings, community sport and cultural centers, water supply and water treatment, public lighting, etc.) as per the unlicensed RE regulation and thus contribute to a reduction in the municipalities’ or municipal enterprises’ (e.g., municipal water utilities) electricity bills. The unlicensed RE scheme provides a high degree of flexibility, from which municipalities will benefit, namely: (a) a municipality can invest into larger distributed RE systems that offset the aggregated electricity consumption from any given number of facilities that the municipality owns and (b) the distributed RE generation facilities do not have to be located at the consumption point(s) or in the same distribution zone as the consumption point(s). An initial pipeline of about 50 subprojects in municipalities has already been identified, amounting to a total capacity of 68MW and an estimated investment cost of about US$100 million. Subprojects are located in provincial, district and metropolitan municipalities across the country. ILBANK is currently assessing additional sub- projects as well as revising the estimated investment costs and will present an updated pipeline by appraisal. It is expected that the first batch of sub-projects to be supported during the first two years of project implementation will represent at least 50 percent of the total financing for this component. Subprojects in the pipeline include solar PV (both rooftop and ground-mounted), wind, and in-pipe micro- hydropower (hydro-turbines to harvest energy from water flowing through existing pipelines in water utility or treatment facilities), ranging from a few kW to several MW. Additional subprojects will be financed in subsequent implementation rounds, based on eligibility and depending on funding availability. The detailed eligibility criteria for subprojects under Component 2 are also presented in paragraph 28. 24. To respond to the impact of the recent earthquake in February 2023, Component 2 can also finance RE installations in affected municipalities. While the major recovery and reconstruction activities19 will be supported through Türkiye Earthquake Recovery and Reconstruction Project (P180849) and other emergency recovery funding for the country, this Project can support introducing RE in the affected communities as part of reconstruction to supplementing other recovery efforts. Such support will however be expected in the later phase of the reconstruction, once earthquake damage restoration and rebuilding activities are undertaken. The possibility of giving priority to municipalities affected by the earthquake in subsequent implementation rounds will be discussed during project implementation. 25. While central government entities benefitting from RE investments under Component 1 will not be required to pay for such investments, ILBANK will provide sub-loans to municipalities to finance the RE sub-projects. Since the RE investments are financially attractive (i.e., simple payback periods between about 6 and 7.5 years), municipalities can use the electricity cost savings to cover loan repayments as well as O&M costs, and still benefit from the remaining cost savings. Estimates at Project appraisal indicate that RE installations in municipal facilities financed under the Project would result in total annual energy cost saving of 565 million TRY. These kind of savings will help to support financial sustainability of autonomous municipal entities throughout the country. Eligibility criteria for renewable energy investments under Component 1 and 2. 26. Eligibility criteria for all RE investments include: a. For Component 1: (i) ownership of the facility is by or assigned to the central government; (ii) there are no plans for move, closure, demolition, or privatization of the facility; (iii) facility is not exposed 19 ILBANK will be one of the main implementing agencies in the recovery and reconstruction for the earthquake damage Mar 15, 2023 Page 11 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) to high flood risk; (iv) the proposed RE investment qualifies for “unlicensed� electricity production pursuant to the “Unlicensed Electricity in the Electricity Market Production Regulation� No. 30772 published in the official gazette on May 12, 2019, and its subsequent amendments20; (v) the RE technology is solar PV, solar water heating21, wind, or battery storage in combination with RE; (vi) the feasibility study confirms the financial viability with a maximum simple payback period of 15 years22. For rooftop solar PV subprojects, the following additional eligibility criteria apply: (i) building must be structurally and seismically safe - a building is considered structurally and seismically safe if it is officially assessed by a civil engineer (registered with the Turkish Chamber of Civil Engineers) as structurally and seismically safe, and such assessment has been accepted by MoEUCC; and (ii) building must have adequate energy performance. For sub-projects under Component 1, the responsibility to obtain the connection permits for each sub-project will fall under the responsibility of the MoEUCC’s Design, Supply and Installation contractor. Having a connection agreement in place will thus not be a requirement for a sub-project to be included in the pipeline. b. For Component 2: (i) ownership of the facility is by or assigned to the municipality; (ii) there are no plans for move, closure, demolition, or privatization of the facility; (iii) facility is not exposed to high flood risk; (iv) the proposed RE investment qualifies for “unlicensed� electricity production pursuant to the “Unlicensed Electricity in the Electricity Market Production Regulation� No. 30772 published in the official gazette on May 12, 2019, and its subsequent amendments; (v) the RE technology is solar PV, in-pipe micro-hydropower (hydro-turbines to harvest energy from water flowing through pipes in, e.g., water utilities), wind, or battery storage in combination with RE; (vi) the feasibility study confirms the financial viability with a maximum simple payback period of 15 years23; (vii) the connection agreement must be in place prior to ILBANK’s approval of the sub- loan; (viii) the municipality’s creditworthiness must also be proven by the standard credit risk assessment carried out by ILBANK24. For rooftop solar PV sub-projects, the following additional eligibility criteria apply: (i) building must be structurally and seismically safe - a building is considered structurally and seismically safe if it is officially assessed by a civil engineer (registered with the Turkish Chamber of Civil Engineers) as structurally and seismically safe, and such assessment has been accepted by ILBANK; and (ii) building must have adequate energy performance. 27. These criteria will be further defined in the Project Operation Manuals (POMs). Specific works and goods would be considered part of the “RE investment� as long as they are directly related to the RE installation and/or deemed necessary for the generation of RE, and the entire RE investment, including related works 20 Except for solar water heating 21 Renewal of a limited number of solar water heating systems in public facilities such as hospitals and universities are expected under Component 1 22 Although the expected lifetime and warranties for solar PV are typically 20 years are more, a maximum payback period of 15 years allows for contingency 23 Although the expected lifetime and warranties for solar PV are typically 20 years are more, a maximum payback period of 15 years allows for contingency 24 Assessed factors include: current credit risk exposure and past loan performance of the borrower with ILBANK, any outstanding credit exposure and loan payment performance of the borrower with other domestic and foreign lenders, and any overdue liabilities of the borrower to National Treasury or any other public entities arising from due social security payments, unpaid energy bills, etc. The client’s borrowing capacity is measured by comparing the 40 percent of the annual allotment with the current debt service obligations. Mar 15, 2023 Page 12 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) and goods, needs to meet the criteria for financial viability described above. RE subprojects for military or security-related facilities (e.g., prisons, police stations) will not be eligible for financing under the Project Component 3. Technical assistance and project implementation support (US$10 million IBRD loan, US$3 million ESMAP grant) 28. This component will finance project management and implementation support activities, with both implementing agencies also providing in-kind contributions. Component 3 is divided in two subcomponents. 29. Subcomponent 3a. Technical assistance and project implementation support for MoEUCC (US$4 million IBRD loan, US$1.5 million ESMAP grant). It will include, inter alia, early subproject development costs, such as marketing and outreach; preparation and/or technical review of feasibility studies; day-to-day project management such as bidding document preparation, tendering process management, contract management, supervision of installation and works; implementing financing requirements in compliance with Bank’s fiduciary policies and guidelines; ensuring satisfactory implementation of environmental and social framework (ESF); project monitoring and evaluation; training, capacity building, and knowledge sharing for the Project Implementation Unit (PIU) staff and for contractors, building administrators, women in the RE field and any other relevant project stakeholders; project communications; and incremental operational costs. The ESMAP grant under this subcomponent is expected to finance the following activities during the first 24 months of project implementation, to be confirmed during appraisal: (i) preparation of feasibility studies for the first batch of RE sub-projects; (ii) preparation of technical inputs for procurement packages, also for the first batch of subprojects; (iii) energy audits and feasibility studies for demonstration pilots; and (iv) capacity building on O&M for Project beneficiaries. The CIF grant would finance similar activities for additional batches of sub-projects in years 3-5 of implementation. 30. Subcomponent 3b. Technical assistance and project implementation support for ILBANK (US$6 million IBRD loan, US$1.5 million ESMAP grant) It will include, inter alia, early subproject development costs, such as marketing and outreach; technical review of feasibility studies; day-to-day project management, including management of procurement agent consultant(s) hired to support municipalities in the bidding process for contractors and supervision consultants; implementing financing requirements in compliance with Bank’s fiduciary policies and guidelines; ensuring satisfactory implementation of Environmental and Social Management System (ESMS); project monitoring and evaluation; training, capacity building, and knowledge sharing for the Project Management Unit (PMU) staff and for contractors, municipal administrators, women in the RE field and any other relevant project stakeholders; project communications; and incremental operational costs. The ESMAP grant under this subcomponent is expected to finance the following activities during the first 24 months of project implementation, to be confirmed during appraisal: (i) support to new implementation modality for municipal on-lending, including hiring of procurement agent consultant(s) and of capacity building for the first batch of sub- projects; (ii) installation of online SCADA database for sub-project monitoring; and (iii) capacity building on O&M for municipalities. The CIF grant would finance similar activities for additional batches of sub-projects in years 3-5 of implementation. 31. Under their respective subcomponents, MoEUCC and ILBANK will also consider support for pursuing Mar 15, 2023 Page 13 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) certification of emission reductions (ERs) generated under the Project. The Project, under the ESMAP grant, could support both IAs in the development of the documentation required to register the project, the development of a Measurement, Reporting, and Verification (MRV) framework for the project data required, and the engagement with relevant government bodies on the use of the certified ERs as Mitigation Outcomes under the NDC or for compliance market transactions. Before deciding on the relevant activities to be financed under the Project, further discussions are however needed with the Climate Change Directorate on issues such as (i) party(s) responsible for ER certification, (ii) ownership of the ERs, and (iii) coverage for ER certification. It will also need to be confirmed whether the Project can participate in international crediting schemes or whether the credits to be generated should be kept for the national system, which is to be set up in the coming years. . . Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No Summary of Assessment of Environmental and Social Risks and Impacts . 32. The environmental risk rating of the project is Moderate. The Project has a national-wide scope and will be available to all central government agencies and municipalities in Türkiye that comply with the specific eligibility criteria agreed during project preparation. Exact locations of the sub-projects are not known at the appraisal stage. This risk will be re-evaluated when additional information becomes available, particularly those related to the scale, size and location. In general, the environmental impacts from the Project are expected to be positive given that the energy will be provided by RE sources. However, the implementation activities may entail potential adverse environmental impacts due to dust and noise generation, vehicle and machines emissions, generation of construction waste, including hazardous waste such as oil, grease, hydrocarbons, old electrical appliances, lead-based paints, etc., as well as OHS issues such working at height, rotating and moving equipment, vibration, welding / hot works, industrial vehicle driving and site traffic, ergonomics, repetitive motion, manual handling, fire, etc. The sub-projects are expected to be implemented in the existing public/municipal lands in the urban and peri-urban areas. In the case where culturally important buildings will be selected, those will need special permits from the respective authorities where the protection measures will be identified, and the construction activities will need to be implemented accordingly. The impacts related to the project are expected to be temporary, reversible and manageable through the application of the national laws as well as the use of the Environmental, Health and Safety Guidelines (EHSGs) of the World Bank Group and Good International Industrial Practices (GIIP). Overall, as the proposed types of civil works are well known and will be relatively of small scale, these risks and impacts are not expected to produce significant or irreversible adverse effects on human health and/or the environment - they will be minor to moderate, site specific and temporary. 33. The social risk rating of the project is Moderate. The Project activities will have standard, temporary, and site-specific construction impacts. Social risks and impacts are associated with labor and working Mar 15, 2023 Page 14 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) conditions, OHS, community health and safety, and land acquisition (although expected to be limited). Whilst the activities under Component 1 will exclude any subprojects that require new land acquisition, the likelihood of significant land acquisition or physical resettlement impacts is assessed as low for Component 2. ILBANK’s Environmental and Social Management System (ESMS) will include mechanisms to mitigate potential economic and physical displacement risks of sub-projects where the installation of RE technologies may require some land acquisition or the usage of lands that are previously acquired for the sub-project purposes. The Project is not expected to have significant impacts on vulnerable groups but there may be some risks related to the potential presence of informal users on public lands that will be utilized for Project activities. Regarding the risks related to labor and working conditions, Turkish labor law is comprehensive and consistent with the requirements of ESS 2. However, since the project will be focusing mostly on solar PV installations and there are allegations of forced labor risks associated with the supply chain, appropriate mitigation measures will need to be integrated into the project design. Türkiye also has a comprehensive OHS legal framework; however, there is a risk that potential issues may arise during project implementation due to weak enforcement of the law. The sexual exploitation and abuse (SEA) and sexual harassment (SH) risks are low at this stage considering the small scale of construction works, limited labor influx, and the sub-project locations being the urban and semi-urban areas which are easily accessed and easy to supervise. 34. Specific locations and final designs of the investments are not known at this stage and will be finalized during project implementation. The final selection of sub-projects to be financed is subject to a decision to be made by national authorizing entities. The Project will not finance any sub-projects categorized as having high and substantial environmental and social risk, such as those that may required significant involuntary land acquisition and physical displacement or which may have significant impacts on sensitive environments, such as natural and critical habitats. Also, any sub-project on International Waterways (OP/BP 7.50) will not be eligible for financing. 35. The Environmental and Social impacts are expected to be mostly temporary and predictable, and can be managed with adequate management plans, human and financial resources. Specific E&S management plans have been prepared for the project during preparation, including Environmental and Social Management Framework (ESMF), Stakeholder Engagement Plan (SEP), Labor Management Procedures (LMP) by MoEUCC and Stakeholder Engagement Plan by ILBANK. 36. ILBANK’s ESMS will specify the rules and procedures for the Environmental and Social Assessment of the proposed investments, including guidelines for environmental and social screening (the content and structure of Environmental and Social Management Plan (ESMP) and the analysis/assessment needed for its development, ESMP Checklist or Resettlement Screening Checklist where relevant), requirements for specific sub-management plans, and requirements for the monitoring plan and implementing responsibilities. Site-specific risks/impacts will be determined by ILBANK during the screening process and then due diligence will be carried out by the E&S specialists of ILBANK including an assessment of the municipalities and their capacity-building needs. All site-specific environmental and social assessment documents will be finalized, approved and disclosed before the completion of the respective bidding processes of each sub-project – with responsibility for approval being shared by ILBANK and World Bank, in line with ESS9 provisions, depending on their risk classification. Mar 15, 2023 Page 15 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) E. Implementation Institutional and Implementation Arrangements 37. The proposed Project will be implemented by two implementing agencies: MoEUCC (Component 1 and Component 3) and ILBANK (Component 2 and Component 3). Below is a summary of the implementation arrangements, while a detailed description is presented in Annex 1. Implementation arrangements for Component 1 38. This component will be implemented by the existing PIU under MoEUCC’s GDCA. MoEUCC is responsible for the environment, public works, and urban planning in Türkiye and its GDCA has the mandate for construction and renovation of central government buildings and strong experience and technical capacities in the construction sector. As mentioned above, the existing PIU under GDCA has been implementing two ongoing World Bank-financed projects. The EEPBP includes distributed RE installations such as rooftop solar PV and ground-mounted PV, its implementation progress in the latest ISR was rated satisfactory, and the PIU has gained significant experience during its implementation. A new team will be established under this existing PIU to administer all aspects of the proposed Project, while benefitting from cross-fertilization from the staff and consultants already working on the implementing of the EEPBP. The team for the proposed Project will be composed of a combination of 16 shared staff and 11 dedicated consultants, the latter to be hired shortly after effectiveness. These consultants include procurement specialist, financial management (FM) specialist, electrical engineer, environmental engineer, Operational Health and Safety (OHS) specialist, social specialist, two civil engineers, project assistant, and two junior engineers. Needs for additional expert support will be reevaluated throughout Project implementation. 39. Under Component 1, the PIU will be responsible for (i) raising awareness about the Project and developing the subproject pipeline; (ii) collecting information about the subprojects and screening to ensure eligibility criteria are met; (iii) procurement of the consultant firm(s) to prepare feasibility studies for the subprojects (feasibility study consultant); (iv) procurement of the consultant firms to support procurement of the Design-Supply-Installation (DSI) for the RE installations and supervision of installation and works (implementation support consultant or ISC) with support from the ISC; (v) review and acceptance of the feasibility studies; (vi) procurement of the DSI for the RE installations; (vii) supervision of the installation and works including acceptance; (viii) coordinating the ISC, DSI contractors, and beneficiaries during subproject preparation and implementation; (ix) financial management; (x) compliance with environmental and social requirements; and (xi) Project monitoring and reporting. Implementation arrangements for Component 2 40. Component 2 will be implemented by the existing Project Management Unit (PMU) under International Relations Department at ILBANK. ILBANK is an incorporated, non-deposit-taking development and investment bank, established in June 1933. It is a municipalities’ bank that provides financial resources and technical assistance to municipalities. Given its mission, business model and organization, ILBANK is uniquely suited to perform the required tasks under the Project. In addition, (i) the lack of access to commercial finance by municipal borrowers due to their financial limitations (low creditworthiness) and Mar 15, 2023 Page 16 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) administrative capacity constraints; (ii) the shortage of long-term funds in local currency offered by domestic banking sector; and (iii) the insufficiency of alternative funding mechanisms, including capital markets, project financing and impact finance mechanisms, underpin the viability of the role ILBANK plays as the lender of choice in municipal finance (see Annex 5 for additional information on ILBANK) 41. ILBANK’s International Relations Department is currently implementing the World Bank-financed SCP I and II as well as the MSIP and has gained extensive experience in managing implementation of municipal infrastructure investments as a financial intermediary (FI). The existing PMU is organized into four units: Business Development Unit, Technical Management Unit, Contract Management Unit, and Financial Management Unit. A total of 80 staff and consultants are working across the four units, and an additional 22 new staff will have been hired by Project approval to enhance ILBANK’s institutional capacity in line with its growing portfolio. Considering the expertise of the new and existing staff, ILBANK will hire additional individual consultants as needed upon Project effectiveness to successfully implement the proposed project. 42. Under Component 2, the PMU will be responsible for (i) raising awareness about the Project and developing the subproject pipeline; (ii) collecting information about the subprojects and screening them to ensure eligibility criteria are met; (iii) reviewing and accepting the feasibility studies prepared by municipalities; (iv) procurement for the project management activities under Component 3b; (v) implementing gender and citizen engagement activities; (v) financial management; (vi) compliance with environmental and social requirements; and (vii) Project monitoring and reporting. . CONTACT POINT World Bank Almudena Mateos Merino Senior Energy Specialist Manuel Jose Millan Sanchez Senior Energy Specialist Borrower/Client/Recipient ILLER BANKASI ANONIM SIRKETI (ILBANK) REPUBLIC OF TURKIYE Mar 15, 2023 Page 17 of 18 The World Bank Public and Municipal Renewable Energy Project (P179867) Implementing Agencies ILBANK Gönül Ejderoğlu Manager Zejderoglu@ilbank.gov.tr MINISTRY OF ENVIRONMENT, URBANIZATION AND CLIMATE CHANGE Esra Tombak Head of Foreign Investments Department General Directorate esra.tombak@csb.gov.tr FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Almudena Mateos Merino Task Team Leader(s): Manuel Jose Millan Sanchez Approved By Practice Manager/Manager: Country Director: Eavan O'Halloran 28-Mar-2023 Mar 15, 2023 Page 18 of 18