The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) Project Information Document (PID) Concept Stage | Date Prepared/Updated: 18-Apr-2023 | Report No: PIDC35795 Mar 28, 2023 Page 1 of 8 The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Caribbean P180831 Caribbean Renewable Energy Infrastructure Investment Facility (P180831) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) LATIN AMERICA AND May 06, 2024 Jul 30, 2024 Energy & Extractives CARIBBEAN Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Office of the Prime Minister Eastern Caribbean Central Bank Proposed Development Objective(s) The Project Development Objective is to increase the share of utility-scale renewable energy generation in the Caribbean countries. PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 95.59 Total Financing 95.59 of which IBRD/IDA 60.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 60.00 IDA Credit 60.00 Non-World Bank Group Financing Trust Funds 35.59 Climate Investment Funds 30.00 Mar 28, 2023 Page 2 of 8 The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) Canada Clean Energy and Forest Climate Facility Trust Fund 5.59 Environmental and Social Risk Classification Concept Review Decision Substantial Track II-The review did authorize the preparation to continue Other Decision (as needed) B. Introduction and Context Country Context The proposed Renewable Energy Infrastructure Investment Facility (REIIF) Project, structured as a Series of Projects (SoP), will address barriers to the planned clean-energy transition shared by countries in the Caribbean region. The initial focus of the SoP will be on six countries in the sub-regional Organization of Eastern Caribbean States (OECS), which is committed to the economic integration of member countries. Four of these six countries --Grenada, St. Lucia, Dominica, and St. Vincent and the Grenadines (SVG)- - are upper-middle-income blend countries, eligible for borrowing from the International Development Association (IDA) under the World Bank’s Small Island Economy Exception, hereafter referred to as “OECS IDA member countries.� The two other countries in the group, Antigua and Barbuda and St. Kitts and Nevis, are eligible for International Bank for Reconstruction and Development (IBRD) financing, hereafter referred to as “OECS IBRD member countries.� The small economies of the countries in the Caribbean region limit options for offsetting the high cost of dependence on imported fossil fuels. Prior to the COVID-19 pandemic, economic growth in the OECS countries was volatile due to: (i) the concentration of economic activities in a few sectors, primarily tourism, which contributes over 40%, on average, to gross domestic product (GDP) and represents approximately 45% of total employment; (ii) heavy reliance on imported commodities with widely fluctuating prices; and (iii) vulnerability to natural disasters as well as the adverse effects of climate change. The rise in commodity prices, particularly petroleum prices due to the war in Ukraine, since 2021, has compounded the severe impacts of the COVID-19 pandemic and has restrained economic recovery. The Covid-19, pandemic, which resulted in the near shutdown of tourism, caused severe contraction of the economies in the Caribbean region and increases in public debt during 2020- 21. The contraction of GDP was around 14.2% and 16.8% in Grenada and Dominica, respectively, and 11% in Jamaica. GDP contraction was highest in St. Lucia, at 20.7%, and least severe in SVG, at 5.6%. The revival of tourism in the region during 2021 spurred economic recovery, with annual GDP growth rates in the range of 4.9% to 6.3%. Some countries in the Caribbean region are highly vulnerable to extreme weather events and climate change, which in recent years have taken a huge toll on their economies. Located in the Atlantic hurricane belt, the region is exposed to recurrent extreme weather events, such as hurricanes and floods, as well as rising sea levels. In addition, most countries in the region are subject to substantial seismic activities, such as earthquakes and volcanic eruptions, and associated risks. Disasters due to severe weather are estimated to have cost the Eastern Caribbean countries a yearly average of 3.6 percent of GDP between 1997 and 2016. Given the significant macroeconomic impacts, it is clear that strengthening resilience to natural disasters and adaptation to climate change are critical elements for sustainable economic growth and development in the Caribbean countries. Sectoral and Institutional Context Overcoming the threat to energy security of high dependence on imported fuels is one of the greatest challenges facing countries in the Caribbean region. Around 87 percent of total energy consumption in the Eastern Caribbean depends on imported petroleum products. Most of the imported petroleum is used for electricity generation. 1 Dependence on volatile global energy markets makes the countries in the region vulnerable to price shocks. Among the OECS countries, Grenada and St. Lucia are the most vulnerable, 1 https://www.imf.org/external/pubs/ft/wp/2016/wp1653.pdf Mar 28, 2023 Page 3 of 8 The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) with less than 1.5% of electricity production from renewable energy (solar), and over 96% of the generation capacity from diesel gensets, despite having significant indigenous RE resources. As a result, electricity tariffs in the two countries have been fluctuating between USD 0.28-0.38 per kWh in recent years, with crude oil prices around USD 66 to USD 100 per barrel. This dependence of Caribbean countries on imported fossil fuels presents a major fiscal vulnerability and has led to high electricity prices for residential consumers and elevated production costs for businesses. In the sub-region of the Eastern Caribbean Currency Union (ECCU), during 2016-2021, the estimated annual average expenditure on fossil-fuel imports totaled EC$1.2 billion (USD 444 million), representing, on average, approximately 15.4 percent of imports and 17.1 percent of the trade balance. The persistently high cost of energy supply, averaging 6.0 percent of regional GDP (between 2006 and 2020), compared to about 2.5 percent in more developed countries, has led to the aforementioned electricity tariffs, which are among the highest in the world. Governments in the OECS countries want to attract private investment in RE development but have faced policy, institutional, and technical barriers to achieving this goal. A recent market diagnostics study conducted by the World Bank and the ECCB for the ECCU sub-region, found that private-sector stakeholders, including major regional banks and international financial institutions, are sufficiently capitalized for financing RE projects in the region and are willing to engage in such projects. Commercial banks, in particular, understand the regional context and its risks, as they have existing loans with governments and utilities in the region. However, few such investments have occurred to date, as neither private-sector developers nor public utilities have been able to develop projects to the bankability stage. Figure 1 below summarizes four major barriers to attracting RE development by the private sector. Figure 1: Summary of Barriers to Attracting Private Capital for Scaling up RE in the Eastern Caribbean Countries Barriers to RE Development Leading to High Risk Perception Electricity Grids Weak Implementation Weak RE Policies and Unprepared for Small Size of RE Projects Accepting Variable Capacity of Governments Uncertain Regulations and Utilities Renewable Energy (VRE) In addition to the aforementioned barriers to RE development, there are critical gaps in the existing initiatives and financing facilities supporting RE development in the wider Caribbean region.2 The vast majority of existing initiatives and facilities target the Caribbean region as a whole. While there are many similarities among countries in the region, there are also unique challenges in sub- regions. For example, in the Eastern Caribbean, the small scale of projects, climate vulnerability, and utility ownership structure need special attention. Additionally, most initiatives are not able to provide support for the full project development cycle -- project conceptualization, feasibility studies, design, and financing plan. Furthermore, utility-scale projects are often not the focus. The range of project financing initiatives lacks support for upstream project development. Also, the pipeline of projects ready to be financed is quite weak. The opportunities for adding value to the process of increasing utility-scale RE development are in the areas of project development, risk mitigation and financing, regional coordination. and partnership. Regional collaboration, coordination, and financing instruments are critical to overcoming the barriers to attracting private investment for RE development at a sufficient scale to meet regional NDC targets. Given the common challenges the Caribbean countries face, most notably their small size and their limited public budgets, a regional approach is needed to enable private-sector investment for RE development. This includes general regional coordination and partnership, shared project planning and preparation, harmonization of processes and standards, as well consolidation of aid and development of partner resources to help improve project design. Building on the ongoing energy-sector initiatives, the Project will leverage the capacity of existing regional organizations for 2In addition to the market diagnostics for barrier analysis, the most active existing financing initiatives and organizations in the region were assessed according to their: scope; key lessons learned; and future plans for RE in the ECCU. Mar 28, 2023 Page 4 of 8 The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) their specialized expertise relevant to the various components and aim to further strengthen capacity at regional and national levels. Examples of regional organizations include the ECCB, the OECS Commission, and the Caribbean Center for Renewable Energy and Energy Efficiency (CCREEE). Relationship to RPF The REIIF Project, part of the Regional Partnership Framework (RPF) during FY22-FY25 for the OECS countries,3 is aligned with and contributes to several sub-objectives under High-Level Outcome 1 (HLO1), “Strengthened Resilience to Climate Change and Other Shocks.� HLO1 has established the promotion of climate-change adaptation, crisis preparedness, and debt management as critical priorities. The sub-objectives include reducing the region’s dependence on fossil fuels (section 50), improving the Caribbean region’s climate and disaster risk-management (section 52), and strengthening the resilience of the region’s infrastructure against the impacts of natural hazards and climate change (section 53). The goal of the RPF is to enhance disaster resilience through the implementation of effective and economic interventions, the mitigation of the fiscal burden of disasters, and the contribution to debt-management frameworks. The latter is a particular concern given the high vulnerability of the region’s small island states to the increa sed frequency and impact of extreme weather events. The REIIF Project will contribute to HLO1 Objective 1, “Enhance Environmental Protection and Climate Change Response� by strengthening the investment climate to attract private -sector finance for RE development. Future RE projects will be designed with the goal of strengthening the resilience of power infrastructure to natural hazards while lowering the region’s energy costs. Finally, the REIIF Project is fully aligned with the NDCs of the implementing countries and supports the implementation of the NDC and national energy-sector goals. C. Proposed Development Objective(s) The Project Development Objective is to increase the share of utility-scale renewable energy generation in the Caribbean countries. Key Results (From PCN) Table 1: Project Results and Indicators Key Results Indicators4 Increase in power generation − Utility-scale renewable energy capacity deployed (in MW). by utility-scale renewable − Annual energy generation by utility-scale renewable energy systems energy (MWh/year). − Lifetime GHG emissions reduced or avoided (in kg. of CO2eq.). − A resilience indicator to be determined, either performance-based or attribute- based (e.g., a reduction in damage to wind/solar power plants from storms and cyclones due to improved design of wind turbines/ solar panels to withstand strong winds). Reduction in energy imports − Reduction in fossil fuel imports (tonnes/year). Mobilization of private capital − Amount of private capital mobilized. − A gender indicator to be determined based on specific activities to be supported Gender equity in energy sector by the project D. Concept Description Series of Projects The REIIF Project is part of a Series of Projects (SoP) with one overarching development objective and operations of a similar nature 3 The principal objective of the RPF is to support Green, Resilient, and Inclusive Development (GRID), as well as competitiveness in the OECS countries as they recover from the COVID-19 crisis, to address their medium-term development priorities, and to build resilience to climate change and other external shocks. 4 These will be tracked for each implementing country. Mar 28, 2023 Page 5 of 8 The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) across countries. The first operation of the series will assist Grenada and St. Lucia in expanding RE development for power generation. Other countries could potentially join subsequent operations. All operations in the SoP will share the same PDO and have a similar scope of work as well as implementation arrangements. Any follow-up operation will benefit from the capacity-building, investment planning, and preparation support at the regional level by a regional RE facility that will establish a common template for project development under the initial operation. Solutions to Clearing Common Barriers This SoP has four components designed to provide regional solutions to common barriers Caribbean countries face in RE development. These four components are tailored to address barriers specific to the region while supporting the implementation of projects across the various jurisdictions and regulatory frameworks. The Project’s components will support remedial actions to clear the major barriers to utility-scale RE development, as described below. Barrier 1: Weak RE policies and uncertain regulations. The barriers analysis conducted as part of the TA supporting the Project has reported a perceived lack of commitment from the public sector in supporting RE transactions, as evidenced by weak RE policies, uncertainty in regulations, long lead times to obtain planning permits, etc. Remedial Action. The Project will include a component aimed at incentivizing public-sector support for the investments that the Project will finance. Such incentives will be provided through results-based disbursements to the relevant countries, based on progress achieved in the delivery of RE investments. Barrier 2: The small size of individual projects. The size of a project can affect the ability to attract experienced and high-quality RE investors as well as qualified and experienced contractors, necessary for the delivery of financially viable projects. Remedial Action. The Project will include a component to develop and aggregate projects for combined tender to address this barrier. Barrier 3: Market risk perception. The investment climate for the private sector is still developing and RE investors continue to face many challenges, including: (i) high risk perception regarding political and off-taker risks; and (ii) insufficient cost recovery in providing electricity services. Remedial Action: The Project will provide a risk-mitigation package to private sector IPPs, which will be selected through competitive tendering, to install and operate RE generation facilities. Barrier 4: Electricity grids unprepared to receive variable RE (VRE). Insufficient capacity of the grid to transmit energy from new power projects, such as VRE plants using solar energy, can constrain the expansion of RE in the grid and is a key concern for private and public developers. Remedial Action. The Project will provide direct financing for grid strengthening and expansion. Barrier 5: Lack of appropriate implementation capacity at the government and utility levels. The barrier analysis has highlighted that stakeholders in the Caribbean region often lack the capacity to effectively implement RE projects, due to the limited experience with VRE systems locally, the lack of specific technical expertise in key aspects of RE development (legal, technical, regulatory, procurement), and the limited number of staff. Recent market diagnostics, conducted as part of the TA supporting ECCB, have highlighted a strong interest in green finance, especially for RE development. However, financial institutions in the Region are not yet ready to adopt the green-finance framework being developed through efforts led by the ECCB. Remedial Action. The proposed component on technical assistance will strengthen capacity for RE development in the Caribbean region and will include support for the development of green-finance framework. Component 1: Regional Technical RE Unit (RREU). This component will finance the RREU, which will be staffed with engineers, environmental specialists, lawyers, and transaction advisors who have proven experience in successful RE development in the power sector. The component will also finance the technical assistance activities including (i) the development of a template for commercial and legal documentation; (ii)training activities and (iii) a framework for sustainable finance. Component 2: Risk Mitigation Facility. This component will finance risk mitigation instruments, which will be deployed to mobilize private investment (equity and debt) for strategic projects, mitigate key government-related risks, and improve the financing terms Mar 28, 2023 Page 6 of 8 The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) for projects and governments. Risk mitigation instruments could include a debt-service reserve account to reduce risk perception by commercial lenders. In addition to these instruments, the Project might have guarantees that will address a wide array of government- related risks Component 3: RE Integration Infrastructure. This component will provide direct financing for utilities or other relevant entities to invest in grid infrastructure necessary for RE integration, including battery storage. The approach will be adapted to the specifics of each country. Component 4: Results-Based Incentive Mechanism for the Public Sector. This component will finance direct incentives for governments to support RE project development. Once a project reaches one of the pre-determined milestones, such as the date of financial closure or the starting date of commercial operation, the host country of that project would receive payment relative to the project’s installed capacity. Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 Yes Projects in Disputed Areas OP 7.60 Yes Summary of Screening of Environmental and Social Risks and Impacts . . CONTACT POINT World Bank Neha Mukhi, Frederic Verdol Senior Energy Specialist Borrower/Client/Recipient Office of the Prime Minister Philip J Pierre Prime Minister and Minister for Finance, Economic Developmen ps.finance@govt.lc Implementing Agencies Eastern Caribbean Central Bank Timothy Antoine Governor governor@eccb-centralbank.org Mar 28, 2023 Page 7 of 8 The World Bank Caribbean Renewable Energy Infrastructure Investment Facility (P180831) 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 Task Team Leader(s): Neha Mukhi, Frederic Verdol Approved By APPROVALTBL Country Director: Lilia Burunciuc 21-Apr-2023 Mar 28, 2023 Page 8 of 8