ICRR 14359 Report Number : ICRR14359 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 07/29/2014 Country : China Project ID : P067828 Appraisal Actual Project Name : Renewable Energy US$M ): Project Costs (US$M): 361.24 440.59 Scale-up Program (CRESP) L/C Number : L4792 Loan/ US$M): Loan /Credit (US$M): 213.55 201.59 Sector Board : Energy and Mining Cofinancing (US$M): US$M ): Cofinanciers : Board Approval Date : 06/16/2005 Closing Date : 09/30/2010 12/31/2011 Sector (s): Renewable energy (100%) Theme (s): Environmental policies and institutions (29% - P); Climate change (29% - P); Infrastructure services for private sector development (28% - P); Rural services and infrastructure (14% - S) Prepared by : Reviewed by : ICR Review Group : Coordinator : Surajit Goswami Robert Mark Lacey Christopher David IEGPS1 Nelson 2. Project Objectives and Components: a. Objectives: Program Objective and Phases: The projects under review supported the first phase of a three-phase Renewable Energy Scale Up Program, partly financed by a proposed Adaptable Program Loan (APL) series. The program objective was to enable commercial renewable electricity suppliers to provide energy to the electricity market efficiently, cost-effectively, and on a large scale. Phase 1 was to contribute to the program’s global objective through development and implementation of the legal and regulatory framework to create and gradually increase the share of renewable energy-based electricity generation. Phase 2 was to continue supporting the program’s global objectives through institutional development and capacity building to further decrease cost, and to improve the financing framework and provide assistance for implementation in about 10 provinces. Phase 3 was to contribute to the full achievement of the program’s global objective through support to the remaining less developed provinces. Project Objective: Two projects were prepared: (a) the First Phase of the Renewable Energy Scale-Up Program (termed as Project 1 in this Review); and (b) the Follow Up to the First Phase of the Renewable Energy Scale-Up Program (termed as Project 2 in this Review). The ICR does not distinguish between the two projects. According to the Project Appraisal Documents of Project 1 (page 5) and Project 2 (page 5): The objectives of the Projects were to: (i) create a legal, regulatory, and institutional environment conducive to large-scale, renewable based electricity generation; and (ii) demonstrate early success in large-scale, renewable energy development with participating local developers in two provinces, in one pilot autonomous region and one pilot province. According to the Loan Agreements of Project 1 (page 18) and Project 2 (page 15): The objectives were to assist the Borrower to initiate actions to achieve the Program’s objectives countrywide through: (i) developing a legal and regulatory framework for the Mandated Market Policy (MMP); and (ii) providing support for the implementation of said legal and regulatory framework in the Pilot Provinces, with participation of private sector developers. The Loan Agreement of Project 1 (page 4) defined MMP to mean a policy aimed at building demand by mandating electricity suppliers to meet some of their electricity needs from renewable sources. In addition, studies were expected to include (page 18): distribution of national renewable energy targets between provinces; setting the tariff level for renewable energy; sharing the MMP costs between provinces; developing trading schemes to minimize the MMP costs; linking the MMP to carbon trading mechanisms; and preparing a medium to long term plan for renewable energy development. The statements of Project objectives in the Loan Agreements are used as the basis for this Review. b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components: The projects had two components: (a) an institutional development and capacity building component (Project 1); and (b) an investment component (Project 1 and Project 2). Component A: Institutional development and capacity building component (Project Cost: US$ 88.82 million estimated; US$100.22 million actual). The Institutional Development and Capacity Building component was designed to meet national priorities and the needs of the pilot provinces and was to include the following: (a) MMP research and implementation support. This included studies on further development of the MMP and its implementation, particularly on targets, tariff levels, policy development, sharing of incremental cost, trading and carbon trading, and long-term planning and preparation of implementing regulations. The main counterparts for these activities included government bodies, and the main anticipated outcomes included legislation and regulations leading to sustained scaling-up of renewable energy; (b) Technology improvement for wind and biomass. This included technology development based on important local investments leveraged by small grants, cost-shared grants or both, for wind and biomass. In addition, it covered preparation of standards, development of certification and establishment of a testing center. Beneficiaries included Chinese wind and biomass equipment and related service suppliers, government bodies dealing with standards, and testing and accreditation agencies; (c) Long-term capacity building. This included support to selected universities for twinning arrangements with leading international universities to develop postgraduate-level or specialist renewable energy engineering and other related courses and to offer fellowship programs to support senior specialists studying abroad. At the provincial level, the project was to provide TA for effective implementation of the Renewable Energy Law (REL), that included: (a) Implementation of the MMP by focusing on the tasks to make the REL effective in the pilot provinces, aimed principally at provincial government bodies and other stakeholders; (b) Support to ensure the success of the investment projects by providing assistance in design, procurement, construction, and operations and maintenance, as needed by each project Sponsor; (c) Pilot or demonstration projects to be carried out in the pilot provinces supporting technologies other than wind, biomass, and small hydro with potential for replication in the pilot provinces component; (d) Renewable resource assessments for each of the pilot provinces; (e) Capacity building for market participants; (f) Support for investment scale-up with the sponsors of the investment subprojects financed under the Support for Wind and Biomass in Pilot Provinces Component; and (g) Costs of the Project Management Office (PMO), Government of China, and donor coordination activities, monitoring and evaluation, and administration, including fiduciary duties. Component B: Investment component, financed by the (Project Cost: US$253.06 million estimated; US$338.37 million actual). This had four sub-components at four locations: In Fujian, Project 1 was to construct a 100 MW wind farm at Changjiang’ao, Pingtan Island. The investment consisted of wind turbines, associated civil and electrical works, an extension to an existing control room, a switchyard, and a 15 km, 110 kV transmission line from the wind farm to the Beicuo substation, which was to be upgraded to meet the evacuation needs of the wind farm. In Jiangsu, Project 1 was to construct a 25 MW straw-fired biomass power plant at Rudong with an 110 ton per hour, high-temperature, high-pressure straw-fired boiler; one 25 MW steam turbine; and associated mechanical, electrical, and civil works. In Inner Mongolia, Project 2 was to develop a wind farm at Huitengxile. It was to install wind turbines with an aggregate capacity of about 100 MW and associated civil and electrical works; expand an existing switchyard and a control room; extend 110kV transmission line from the wind farm to the Desheng Substation; and upgrade the Desheng Sub-station. In Zhejiang, Project 2 was to carry out Small Hydropower Sub-projects (SHP). It was to rehabilitate about eleven (11) small hydropower plants to increase the aggregate capacity from about 40MW to about 52MW; and construct about seven (7) hydropower plants with an aggregate capacity of about 16MW. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Project Cost: Actual project costs were US$440.59 million (about 22 percent more than the appraisal estimate). There were no revisions of the project components. However, reallocations were made within the component financed by the GEF grant, on 08/28/07 and 09/24/10. These reallocations were to meet changing priorities, and requests from the Borrower/Local Authorities. For example, at the request of the Government, the project supported a component (of turbine) manufactures in addition to the support provided to the turbine manufacturers. Similarly, at the request of pilot provinces, part of the provincial budget was transferred to the demonstration projects for offshore wind projects. External Financing: The World Bank Group provided US$161.68 million in the form of an IBRD loan (about 6.7 percent less than envisaged at appraisal), and the GEF provided US$40.22 million of grant financing (in line with the appraisal estimate). There were no other external sources of financing. Borrower Contribution and Local Sources of Borrowing Country: The Borrower contributed US$69.34 million (about 11 percent more than envisaged at appraisal); and Local Sources of Borrowing Country (including Local Financial Intermediaries) provided US$101.26 million (about 57 percent more than envisaged at appraisal). Dates: The closing date of the projects was extended twice: (a) from September 20, 2010, to September 30, 2011,, to reallocate the grant proceeds to high-priority activities indicated above; and (b) from September 30, 2011, to December 31, 2011, to enable the Project Management Office (PMO) to disseminate lessons through, among other things, a project closing workshop. 3. Relevance of Objectives & Design: a. Relevance of Objectives: High Project objectives are highly relevant at appraisal and currently. China's emissions from coal fired power plants have risen sharply in recent years due to rapid industrialization, and analysis had indicated that the greatest potential for displacing coal by renewable energy (RE) was in the power sector. Recognizing the potential, the Government passed the Renewable Energy Law, which became effective January1, 2006, almost immediately after this project was approved by the Board. As indicated by the ICR, China is currently committed to increase the share of non-fossil fuel in its primary consumption to 15 percent by 2020, with RE accounting 80 percent of that amount. Lastly, project objectives also contributed towards the CPS (FY13-16) Strategic Theme 1: Supporting Greener Growth (Outcome 1.1 Shifting to a sustainable energy path. b. Relevance of Design: Substantial For the first objective, that of developing a legal and regulatory framework, the design was conceptually adequate to deliver on the various aspects of the Mandated Market Policy (MMP). For example, in terms of developing (through studies) trading schemes to minimize the MMP costs, a single national quantity target was set and it was required that every province meet a corresponding percentage of its total consumption from new renewable energy resources. Trade in green certificates was to then enable the provinces to attain their quantity targets at least cost. In the early years of development, the system was expected to work without a centralized market. Bilateral deals between producers and power companies who need to meet their renewable energy targets was expected to lead to attainment of quantity targets at least cost. For the second objective, that of providing support for the implementation of the said framework in the Pilot Provinces, for generation the design was adequate. In addition, the project did plan studies on connection of wind farms to the grid and their impacts on grid stability to raise awareness of power grid operators and wind developers of interconnection requirements and transfer international best practice and knowledge. However, there was no plan to ascertain in depth the incentives of the grid companies. Specifically, the project did not have pilots for transmission pricing at grid companies for them to make adequate investments in additional transmission facilities and to cover costs of dispatch activities required to accommodate more intermittent renewable resources (such as wind). The organization of the projects (see PAD page 47) had a distinct generation focus at least for piloting in the provinces. 4. Achievement of Objectives (Efficacy): (a) Develop a legal and regulatory framework for the Mandated Market Policy (MMP): Substantial. Outputs • Reviewed and updated national renewable energy (RE) objective and target with recommendations for management regulation for quota system of RE power generation • Study on pricing mechanism for RE and proposed management regulations on renewable electricity tariffs • Analysis and recommendations on cost sharing mechanism for RE and proposed management regulation on sharing RE generation cost • A one-week study tour on pricing mechanism and cost sharing system for RE electricity in Italy and Denmark along with a summary report for the study tour • Various studies, such as the RE industry development report and the analysis, evaluation of energy sources development status in rural China, as well as proposed sector development of specific technologies (such as biomass, ethanol, and solar) that could contribute to the country’s long-term plan for RE development were prepared but no specific medium to long-term plan for RE development was prepared (to be checked w/ TTL). Some of the studies crucial to the development of MMP (as envisaged in the PAD), such as those for developing trading schemes to minimize MMP costs and linking MMP to carbon trading mechanisms, were not reported in the ICR. Outcomes The RE Law, the main legal framework for MMP, became effective on January 1, 2006, just after Project 1 became effective on 11/30/05. China committed to 15% non-fossil fuel in primary energy mix by 2020, and targets were allocated to all provinces with national and provincial incentives for RE development established. Key amendments to the RE Law and regulations that were adopted can be partly attributed to the Project 1. These include: On targets, and subsidies: • Notice on Measures for Renewable Electricity Surcharge Subsidies and Quota Trade System from October 2007 to June 2008 – Ordinance Code NDRC Price No. 3052 (2008) • Interim Management Regulation on Subsidy for Energized Biomass, MOF Economic Construction No. 735 (2008) and the follow-up, Notice on Management Regulation of Agricultural and Forestry Biomass Combustion Power generation • Interim Management Regulations on Financial Subsidy for Solar PV on Buildings, MOF Build No. 129 (2009) • Notice on Implementation Plan of Promoting Renewable Energy in Infrastructure, MOF Economic Construction No. 306 (2009) On setting tariff levels: • Notice on Improved Price Policy for Grid-Connected Wind Power, NDRC Price No. 1906 (2009) • Notice on Improved Price Policy for Agricultural and Forestry Biomass Generation, NDRC Price No. (2010) 1579 : • Because of the studies undertaken by the project, the prices of biomass fuels (straw from agriculture residues) turned out to be much higher than originally anticipated for many biomass-fired power plants. As a result, the feed-in tariffs for biomass have been adjusted upward to factor in the fluctuations in biomass fuel prices. In terms of technology strategies and roadmaps for key RE technologies, the small hydro-power (SHP) policy studies and Zhejiang SHP investments put SHP back on the national agenda. Some regulations, also partly attributable to the Project 1, supported MMP indirectly. These, for example, included demand management initiatives such as the Notice on Recommendation of Green Energy County NEA New Energy No. 343 (2009), and management of supply chain, such as the Notice for Collection and Management of Livestock and Landfill Biogas for Power generation. However, no notices to support MMP cost-minimization or to link it to carbon trading appear to have been developed using project support. (b) Provide support for the implementation of said legal and regulatory framework in the Pilot Provinces, with participation of private sector developers: Substantial The projects provided support at the National level as well as in Pilot Provinces through: • National Level Institutional Development and Capacity Building: (a) Technology Improvement Wind; and (b) Technology Improvement Biomass • Provincial Level Institutional Development and Capacity Building: (a) Support Implementation of the RE Law; and (b) Pilot Demonstration Projects; • Building a pipeline of RE projects at the Pilot Provinces through Investors Scale-up Support Facility (ISSF); and • RE investment projects at four locations. Outputs National Level Institutional Development and Capacity Building Technology improvements for wind: • Wind turbines design and type certified according to international standards • Standards developed for wind turbines based on and in compliance with international standards • Accredited wind turbine testing centers and certification bodies according to ISO/IEC Guide 65 requirements • Short-term wind forecasting capabilities internationally benchmarked • Developed academic and post-academic wind training courses. Technology improvements for biomass: • Supported ten biomass equipment manufacturers through cost-shared sub-grants to improve biomass gasification technologies and address biomass fuel management issues. In nine of these projects, new or improved equipment were developed. These included biomass briquetting and gasifier equipment, and equipment to collect crop residues. Provincial Level Institutional Development and Capacity Building Support Implementation of the RE Law: • Five policy related tasks were carried out in Fujian, ten in Jiangsu, ten in Zhejiang, and eight in Inner Mongolia. These were related to targets, quota, financial incentives, and cost sharing mechanism of incremental costs, specific to that location. Pilot Demonstration Projects: • Under the Competitive Grant Facility—Pilot Demonstration Project (CGF-PDP), the projects supported the identification and preparation of renewable energy demonstration projects in the pilot provinces. Eight projects were selected on a competitive basis. They included biomass gasification, biogas, biomass-fueled CHP, PV, ecological buildings and heat pumps. One project (heat pump in Inner Mongolia) had to be cancelled, since required approvals could not be obtained. • In addition to the above projects, five additional demonstration projects were supported using the reallocated funds from the provincial policy support. These included tidal power in Zhejiang, biogas in Inner Mongolia, and offshore wind in Jiangsu, Zhejiang, and Fujian. Building a pipeline of RE projects at the Pilot Provinces through Investors Scale-up Support Facility (ISSF) • Under the facility, 14 projects were approved: three for Jiangsu Guoxin, 9 for Zhejiang, 1 for China Long Yuan Power Group, and 1 for Inner Mongolia North Longyuan Wind Power Corporation. RE investment projects at four locations The following RE investment projects were undertaken under CRESP: (a) Fujian Wind, (b) Jiangsu Biomass, (c) Zhejiang SHP, and (d) Inner Mongolia Wind. • Fujian Wind: The China Long Yuan Power Group Corp. installed 50x2.0 MW Vestas wind turbines on Pingtan Island in Fujian (total capacity 100 MW). All 50 units were operational by December 31, 2007. • Jiangsu Biomass: Jiangsu Guoxin installed a 25 MW straw-fired biomass power plant at Yinxing Village, Rudong County, Jiangsu. It was operational by July 1, 2008. • Zhejiang SHP: Zhejiang Hydropower Management Center (ZHMC) oversaw the implementation of the 16 SHP projects. The total capacity of the 6 newly constructed SHP projects was 13.6 MW and the incremental capacity of the 10 rehabilitated SHP plants was 9.91 MW (the total capacity of the rehabilitated SHP plants increased from 26.38 MW to 36.29 MW). The total incremental capacity was 23.51 MW, which was 4.49 MW below the target (28 MW) and was due to cancellation of one new and one rehabilitated plants. They (new and rehabilitated plants) were operational by December 31, 2010. • Inner Mongolia Wind: The Inner Mongolia North Longyuan Wind Power Company installed 80x1.5MW Suzlon wind turbines at Huitengxile, Desheng County, Inner Mongolia. All turbines were operational in September 2011. Outcomes National Level Institutional Development and Capacity Building Technology improvements for wind: • Fully achieved as (a) all the eight Chinese wind standards developed under the project were approved by the Standardization Administration of China (SAC); (b) two wind turbine testing centers were accredited and carried out 15 and 21 wind turbine tests respectively; (c) two certification bodies were accredited for wind turbine certification. The Standards Committee, testing centers, and certification bodies are expected to continue their work in the future. The Standards Committee will operate with support from the government (Ministry of Science and Technology, MOST) and the private sector (wind turbine manufacturers), and the testing centers and certification bodies will operate on a commercial basis. • Chinese RE equipment, especially wind turbines, has improved greatly, with exports, even to developed countries, increasing significantly. Four out of the top 10 global wind manufacturers are now Chinese wind manufacturers. The increased demand for wind power related equipment in China has led to all internationally recognized international manufacturers establishing manufacturing capacity in China, which in turn has led to quality improvements by the domestic manufacturers. • Technology improvements for biomass: • The country has become the world’s number 3 in installed capacity for production of electricity from biomass, although the role of the projects was limited compared to that for the technology improvements for wind. Provincial Level Institutional Development and Capacity Building Support Implementation of the RE Law: • The pilot provinces used the outputs to prepare wind, PV, and biomass development plans and to support the preparation of the 12th Five Year Plan for renewable energy. Pilot Demonstration Projects: • The total renewable electricity capacity of the seven projects is 7.5 MW. Particular noteworthy is the 5 MW fixed bed biomass gasification plant in Jiangsu. This is the largest gasifier in China. The total capacity of the five demonstration projects is 370 MW (to be checked w/ TTL), although it is not yet known how much will actually be built. Building a pipeline of RE projects at the Pilot Provinces through Investors Scale-up Support Facility (ISSF) • The 14 projects resulted in an additional renewable electricity capacity of 149 MW (actually built) and may lead to an additional 918 MW renewable electricity generation capacity (envisaged). The ICR also indicates that, by the end of 2008, 1,329 MW of RE projects were planned and developed in pilot provinces, which was more than double the target. RE investment projects at four locations • Fujian Wind: The installed 100 MW units sold 280 GWh to the grid in 2008, 301 GWh in 2009 and 2010. The capacity factor increased from 33.0 to 35.5% (one of the highest in China). The annual electricity generation at 294.1 GWh/year (average over the last 3 years) is 113% of target. • Jiangsu Biomass: The installed 25 MW straw-fired biomass power plant sold 141.2 GWh of renewable electricity into the grid in 2010 (87% of target). • Zhejiang SHP: The incremental (to be checked w/ TTL) installed capacity of 23.51 MW sold 103.78 GWh of additional electricity into the grid in 2010 (109% of target). • Inner Mongolia Wind: The installed 100 MW units sold 79.71 GWh to the grid in 2011 (33% of target). 5. Efficiency: Modest The ICR calculated traditional measures of efficiency (economic and financial internal rates of return - EIRR and FIRR) for the RE investment projects, which cost 77 percent of total project cost. These measures were then compared with those in the PAD. The PAD had also attempted to calculate the regional development impacts (a distributional measure) of the RE policies but neither the PAD nor the ICR calculated the efficiency of anything other than the investment projects. The table comparing the EIRRs and FIRRs of the four investment projects, as presented in the ICR, is shown below for easy reference. Economic benefits include both direct benefits from the sales of electricity as well as emission reduction benefits based on a model. No weighted EIRR or FIRR for the projects combined was calculated in the ICR or in the PAD. EIRRs and FIRRs at ICR and Appraisal Project EIRR (%) FIRR (%) Brief Explanation: ICR Appraisa ICR Appraisa l l Fujian Wind 16.1 13.6 10.9 6.5 - Higher annual generation Power - Higher power purchase tariff Jiangsu 11.6 20.8 5.0 10.6 - Operational problems 2008–10 Biomass - Higher fuel price Power Inner 9.3 12.5 5.1 7.0 - Overrun of investment cost Mongolia - Delayed project commissioning Wind Power - Less power generation Zhejiang 10-195 10-33 6-102 7-16 - Increase of investment costs Small - Rehabilitation not affected Hydropower The PAD assumed an “Opportunity cost of capital� of 12% (page 79), and the various investment project returns were expected to be above this hurdle rate. Ex-post, except for wind power and some of the small hydro power projects, the investment project returns were below this rate. For wind power and small hydro power investment projects, if a capacity penalty (the penalty for not having continuous power available for dispatch to the grid) is included, the EIRR would decrease and could be below the hurdle rate. On the other hand, if the opportunity cost of capital (which in turn is a weighted average of equity and debt costs) is lower (say 8%, currently used by China’s National Development and Reform Commission according to the ICR), returns from all investment projects would be above the hurdle rate. There were also some operational and administrative inefficiencies from organization of the project (see section 9), which contributed to postponement of various activities particularly those related to policies. The implementation period was increased by roughly 25 percent and the project closing date was postponed by a little more than a year. Based on the above figures and analysis, the efficiency of the project is rated Modest . ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re -estimated value at evaluation : re- Rate Available? Point Value Coverage/Scope* Appraisal No ICR estimate No * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The relevance of the project objectives was high, while the relevance of project design was substantial, with some shortcoming from not having the incentives of the grid companies taken into consideration. Achievements of the two objectives are substantial. Lastly, Efficiency of the project based on the efficiencies of the investment projects (77 percent of the total cost) was modest, which was a moderate shortcoming. A Moderately Satisfactory outcome rating is assigned. a. Outcome Rating : Moderately Satisfactory 7. Rationale for Risk to Development Outcome Rating: • Technical: Significant. The technical problems of continued development of various RE technologies remain challenging. While considering the risks, the ICR mentions only wind power, and even that faces obstacles from not being able to supply continuously. For other REs, such as biomass, the situation is even more challenging technically. While the cost-shared sub-grants for improvements in biomass technology did bring success, the Renewable Energy Scale Up Program did not support any university program for biomass and post-academic training for biomass was not available. Consequently, over the medium-term, development of solutions in biomass can be expected to be less forthcoming than for wind power. • Financial: Moderate. The Government’s strong commitment to the ambitious targets can be expected to wane as consumers complain more and more about the higher prices that would have to be paid for RE. When the amount of electricity generated from RE units is small, the burden on consumers is relatively small and consumers do not complain. However, as the electricity from RE units reaches a certain level, the blend price that the consumer has to pay may start to be perceived as onerous. In some European countries, such as Germany and Spain, because of costs, there has been already a backlash against electricity from wind power. • Other stakeholder ownership: Significant. The whole system of development of a pipeline of projects could come to a halt as a result of relatively small changes in investment incentives. As the ICR points out, the phase 2 project will continue to support initiatives started under this one, including the cost-shared grant scheme for pipeline development. Beyond the phase 2 project, however, sustainability of these schemes is questionable. Should an economic downturn occur, China would likely reevaluate these subsidies. In addition, there are competing incentives to develop clean coal, and private sector interest may easily switch out of developing RE technologies to these other technologies where government support may lead to higher profits. Should the support for RE falter because of technological or, financial reasons, or because of waning private sector interest, the goals for RE output would likely be lowered, probably implying rule changes for the MMP. Over the assumed 20-year lifetime of investments supported by this project, such a risk is significant. a. Risk to Development Outcome Rating : Significant 8. Assessment of Bank Performance: a. Quality at entry: The ICR stressed the parts of the project where the Quality-at-entry (QAE) was indeed satisfactory but it did not point out where there were shortcomings. Regarding strategic relevance and approach, QAE was highly satisfactory particularly with the passage of the RE Law. On Technical Aspects, because of the project that preceded this one, QAE was satisfactory on wind power related items including manufacturing, testing, and certification, and the investment project Fujian Wind. However, QAE had significant shortcomings with regard to biomass technology. There were, for example, issues related to moisture content of the feed and the feeder system. In terms of institutions, there were some unresolved issues at entry such as the location of the biomass plant which was resolved later. In terms of M&E design, separating unproven Biomass from Wind technology for the PDO Indicator 3 (Improved quality and reduced cost among manufacturers and service providers), and similarly for Intermediate Outcome Indicators, could have permitted better management of risks. at -Entry Rating : Quality -at- Moderately Satisfactory b. Quality of supervision: The Bank supervision team focused on Development Impact satisfactorily as indicated by its reallocating of project resources as and when the Government allocated resources (outside the project) to original project priorities, for example, wind resource assessment. The supervision team also reallocated resources effectively when progress at the provincial level was insufficient. The team also addressed satisfactorily project shortcomings due to divergences among public agencies, and inexperience of the Project Management Office (PMO). For example, when it was observed that the follow-up of consultant contracts by the PMO was insufficient, the number of expert consultants was increased while reducing the number of inexperienced PMO staff. Continuity could have been undermined by the fact that there were six Task Team Leaders (TTLs) in five years. However, this turnover of TTLs was mitigated by having as a consultant the first TTL and a core project team, which with the changing TTLs, developed detailed aide-memoires and mission reports and kept the focus on implementation issues as they arose. The Bank was less diligent in adjusting M&E indicators when project funds were reallocated. For example, although pilot demonstration projects received additional funds, the target for the Intermediate Outcome Indicator 5 (Pipeline of renewable energy projects under development in the provinces) was not adjusted upward. Quality of Supervision Rating : Satisfactory Overall Bank Performance Rating : Moderately Satisfactory 9. Assessment of Borrower Performance: a. Government Performance: Government ownership and commitment to development objectives were Highly Satisfactory. The supportive institutional policies were achieved. Not only was the RE Law approved faster than anticipated, but important actions on setting the tariff and subsidy levels were achieved rapidly as well. However, as the ICR on page 11 indicate, unwarranted delays were experienced during the first year after effectiveness, from institutional divergence among government agencies. Government Performance Rating Satisfactory b. Implementing Agency Performance: The main implementing agencies were: National Development and Reform Commission (NDRC); Long Yuan Pingtan Wind Power Company Ltd.; Jiangsu Guo Xin New Energy Development Company Ltd.; Inner Mongolia North Long Yuan Wind Power Company; and Zhejiang Small Hydropower Development and Management Center. The PMO was within the Energy Bureau of NDRC. The ICR indicates that unwarranted delays arose in the first year from (a) inexperienced PMO staff and inadequate alignment of PMO staff skills with the project focus areas; and (b) coordination difficulties between PMO (national level) and provincial Development and Reform Commissions (DRCs). After the first year, further delays were encountered because of (a) the long time required to put contracts in place; (b) large number of small contracts; (c) consultants not meeting agreed deadlines and insufficient follow-up from the PMO; (d) implementation of the sub-grant projects much more difficult than anticipated and requiring more time; and (e) insufficient initiatives at the provincial levels, They were addressed after the mid-term review. Implementing Agency Performance Rating : Satisfactory Overall Borrower Performance Rating : Satisfactory 10. M&E Design, Implementation, & Utilization: a. M&E Design: • Detailed M&E indicators were developed for both institutional aspects and investment projects. A results framework was prepared (see PADs: Annex 3 on pages 27-33 and pages 28-29). In the framework, objectives were specified clearly (but not exactly as in the loan-agreements), with the outcome indicators, including intermediate ones, that reflected the objectives in the loan-agreements. The indicators were measurable for project end in terms of numbers and location, with some targets set for the mid-term review as well. • Because this is a Phase 1 project, most of the baselines, such as those for institutional development or emissions reduction were set to zero. There were three sets of indicators where the project had non-zero baselines. For one of these non-zero baseline indicators, on costing of various renewable technologies, the baseline data was not collected. For another set, on standards for wind turbines and availability of testing facilities, the baseline was just indicated as “partial�. Only for one set of indicators, the one on renewable electricity generation and capacity, the project had numerical baselines. • For evidence on the “environment� for development of renewables at the pilot provinces, technical and social surveys were to be used. Similar surveys were proposed for data collection on improvements in quality and reduced cost among manufacturers and service providers. • Data collection was proposed on increased renewable electricity in TWh/year, renewable capacity in GW, and reduced emissions (for carbon, oxides of nitrogen, oxides of sulphur, and particulates). However, no measures were proposed relative to the overall electricity generation or emissions. Consequently, the amount of renewable electricity generated could be going up with renewable electricity generation as a percentage of total electricity generation going down. Similarly the project could be reducing emissions through this project but total emissions due to electricity generation in China could be going up. b. M&E Implementation: • Development of capacity to enable the Government to monitor and evaluate the impact of the project was an integral part of the Institutional Development and Capacity Building Component and was to be undertaken by the PMO. • Based on the PAD, the project measured five project development objective indicators and nine intermediate outcome indicators. However, the project did not carry out the technical and social surveys indicated in the PAD, neither gathering evidence on “environment� for development of renewables or of improved quality and reduced cost,. For the evidence on the provincial environment for renewables, the project sidestepped the lack of surveys with targets set for each province of substantial increases in renewable electricity generation along with approval of supporting regulations, which were being measured also for another indicator. For evidence of improved quality and reduced costs, the project chose qualitative and softer measures, for example, diminishing operational problems with biomass units and increase in certifications of wind turbines. While these may indicate to some extent quality improvements, they were inadequate to measure reduction in costs of renewable technologies. • The M&E was owned fully at the national level. However, when it came to getting data that required participation at the provincial level or the industry in general (for example, to get costs), the ownership was weak. c. M&E Utilization: • The project carefully measured RE generation and capacity along with the implied reduction of emissions. When the generation was not forthcoming, the project took corrective actions such as changing the closing date by one year. • Because certain crucial feedbacks at the provincial level and from the manufacturers were dropped, the program’s direction possibly did not benefit enough from M&E. Instead, the project relied on the cost-shared grant mechanism to find out what interests the private sector. Without detailed cost data, the project had no reliable way to find out if a certain process promoted by the private sector could actually work (and be replicated) without the subsidies. At the end, much of the work related to sustainability was transferred to the next phase. M&E Quality Rating : Modest 11. Other Issues a. Safeguards: Three Safeguard Policies -- Environmental (OP 4.01), Involuntary Resettlement (OP 4.12), and Safety of Dams (OP 4.37) -- were triggered by the Project. The project was classified as safeguard screening category S2, and environmental screening category B. No major safeguards issues were identified at appraisal and no exceptions to Bank policies were requested. For each of the four investment projects, the Borrower and implementing agencies agreed to implement environment management plans (EMPs), acceptable to the Bank. The ICR found overall Environmental performance of all four investment projects satisfactory. In three locations, Fujian, Jiangsu, and Zhejiang, there were no significant issues with implementation of the environmental aspects of the project or environmental management activities. There was no reporting specifically that the project completed the planned mitigation activities In the Inner Mongolia wind farm, the ICR reports that “one significant environmental issue was experienced. Early on during construction, poor access to roads had led to trucks driving through grassland, which caused unacceptable impacts. Corrective efforts were made at the request of the Bank’s supervision teams. In addition, the external environmental supervisor was engaged by Inner Mongolia North Long Yuan Wind Power Company only in 2010 to strengthen the Environmental Management Plan (EMP) implementation�. On Resettlement, the ICR reports that land acquisition and resettlement for all investment projects were satisfactorily implemented. Compensation was paid to the affected people based on the Resettlement Action Plan (RAP), replacement houses were constructed for all relocated households, and all proposed rehabilitation measures indicated in the RAP were implemented for the affected villages. The income and livelihood of the affected people were restored and even increased compared with that before resettlement.. On Safety of Dams, the ICR reported that in Zhejiang SHP one of the subprojects identified at appraisal was dropped because of dam safety issues and no mitigation was required for the 16 sub-projects financed under the project. b. Fiduciary Compliance: Financial Management The Project Management Office (PMO) produced financial reports in line with World Bank reporting requirements and summary reports for internal use and use by the World Bank supervision team. Over the years, the projects were audited regularly and no problems were found. In the most recent financial audit results, they received the highest ranking by the National Audit Office. This highest ranking was received by 11 of the 49 World Bank projects/programs in China. The National Audit Office also praised the verification mechanism for the financial sub-grants which had been introduced. Based on the above, it is assumed that the financial covenants were complied with and there were no audit recommendations Procurement At Appraisal, the procurement capacity of the PMO was assessed as adequate. For the investment subcomponent, the implementing company at Fujian was found to have previous experience with Bank procurement. At Jiangsu and Inner Mongolia, the implementing companies were found to have extensive experience with power sector projects, but not with Bank procurement. At Zhejiang, implementing company was found to have extensive experience of small hydro projects. All companies were to use procurement agents familiar with Bank procedures. Even with the above capacity, because of diverging opinions between the PMO and the Bank/GEF team, some major procurement issues delayed implementation until they were resolved following the midterm review of the project. These issues included procurement procedures and fragmentation of contracts, cost-sharing bidding procedures and their alignment with Chinese decision making, and the choice of provincial pilot projects. Disbursement The project had no issues with eligibility of expenditures and once the procurement issues (see above) were resolved, disbursement followed, particularly during the last 18 months of the project. c. Unintended Impacts (positive or negative): None d. Other: None 12. 12. Ratings : ICR IEG Review Reason for Disagreement /Comments Outcome : Highly Satisfactory Moderately The shortcoming in design in not Satisfactory having considered the incentives of grid companies was not acknowledged in the ICR. The relevance of the project objectives was high, while the relevance of project design was substantial, with some shortcoming from not having the incentives of the grid companies taken into consideration. Achievements of the two objectives are substantial. Lastly, Efficiency of the project based on the efficiencies of the investment projects (77 percent of the total cost) was modest, which was a moderate shortcoming. Risk to Development Negligible to Low Significant The technical challenges of various Outcome : RE technologies are significant, particularly because cost aspects have become important. Bank Performance : Satisfactory Moderately QAE has moderate shortcomings Satisfactory with biomass technology. Unlike wind technology development, there was no preceding Bank project that had developed this technology, which undermined performance in this area. Borrower Performance : Satisfactory Satisfactory Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons: • Long-term engagement with the government at the national level is important to the success of an initiative such as the Chinese Renewable Energy Scale Up Program (CRESP). The CRESP program is the only window in the Bank’s China energy portfolio that engages long-term RE policy dialogues and partnership with the National Energy Authority(NEA). The long-term engagement has built trust between the Bank team and NEA, which often turns to the Bank team and the CRESP program for support and inputs to key policy decisions. However, at the provincial or industry level, trust building has been slow. • Combining policy support and technical assistance through a GEF grant with large-scale long-term financing for RE investments through IBRD loans in one package may be the most cost-effective tool to enable transformational changes to scale up renewable energy. Conceivably, such a combined GEF grant and IBRD loan approach could be substituted by projects that blend bilateral grants or concessional loans (from Clean Technology Fund for example) with IBRD or even IFC lending. • A core project management team, with contributions from world-class international and local experts, is a cost effective method for carrying out the studies under a project such as this one. Relying on the recruitment of a large number short-term staff is less conducive to high-quality work. • The project showed strong agenda setting role of the Government for renewable energy. However, it also showed inability of the industry to respond when technological solutions are unavailable at the cost supported by the Government/customers. While generation from wind energy progressed well under the MMP, that from biomass was limited. The lesson is it takes more than strong agenda setting and subsidies by the Government to generate solutions from the domestic industry. 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: The ICR demonstrated a good understanding of a complex project, particularly on the required organization to address both policy issues and investments in a large country. Analysis and presentation were generally satisfactory. However, the ICR could have presented the project in a more a systematic and balanced way. For example, it could have provided more details on activities envisaged in the PAD but not undertaken, such as the technical and social surveys that were to provide the data on environment for development of renewable and on quality and cost among manufacturers and service providers. Because certain shortcomings did not receive the attention they warranted, some ratings were over-positive. a.Quality of ICR Rating : Satisfactory