The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 25-Oct-2020 | Report No: PIDA28290 Dec 10, 2019 Page 1 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Project Data Country Project ID Project Name Parent Project ID (if any) Maldives P172788 Accelerating Renewable Energy Integration and Sustainable Energy Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) SOUTH ASIA 22-Oct-2020 15-Dec-2020 Energy & Extractives Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Republic of Maldives Ministry of Environment Proposed Development Objective(s) The development objective is to increase renewable energy generation capacity and enhance the financial and environmental sustainability of the power sector in Maldives. Components Component 1. Solar PV Risk Mitigation Component 2. Battery Energy Storage System (BESS) Component 3. Grid Modernization for VRE Integration Component 4. Technical Assistance PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 112.65 Total Financing 107.40 of which IBRD/IDA 12.40 Financing Gap 5.25 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 12.40 Mar 03, 2020 Page 2 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) IDA Grant 12.40 Non-World Bank Group Financing Trust Funds 30.00 Clean Technology Fund 30.00 Commercial Financing 45.00 Unguaranteed Commercial Financing 45.00 Other Sources 20.00 Asian Infrastructure Investment Bank 20.00 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. Maldives is an island state comprising nearly 1,200 coral islands grouped into 26 atolls, spread across roughly 90,000 square kilometer (km2) of the Indian Ocean. The Maldivian population, about 515,696 as of 2018, are widely dispersed across the islands, many of them remote and physically vulnerable to rising sea levels. Nearly 80 percent of the total land area of the country, which is less than 300 km2, is less than one meter (m) above mean sea level. The country’s exposure to natural hazards and climate variability poses a threat to lives and the economy. More than 30 percent of the population live in the capital city, Malé, while the rest are distributed across 200 other inhabited islands. Maldives ranks 101 out of 189 countries in the Human Development Index (HDI) for 2017, the second highest HDI rank in South Asia after Sri Lanka. 2. Maldives is classified as an upper-middle-income country with gross domestic product (GDP) per capita of US$10,331 (2018).1 Real GDP grew by 5.3 percent in 2019. In 1980, Maldives was among the poorest countries in the world with a GDP per capita of US$268; and it is now on track to reach high-income status in the next decade. This sustained economic growth has resulted in significant poverty reduction, and Maldives performs well on poverty outcomes compared to its regional, income, and small island peers. Tourism has been key to the development success of the Maldives. The sector directly and indirectly contributes to two-thirds of the Maldivian economy, including 80 percent 1 World Development Indicators 2018. Mar 03, 2020 Page 3 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) of exports, and at least 40 percent of state revenue collections. The high share of tourism in the economy is both a strength and a limitation. While it has lifted economic standards and living conditions, it has also made the Maldivian economy highly vulnerable to developments that affect the tourism sector and the direct and indirect transmission of these effects to other sectors of the economy. 3. At the time of writing, the Maldives will be one of the hardest-hit economies in the world from the coronavirus disease 2019 (COVID-19) pandemic. Maldives has one of the highest numbers of COVID-19 cases per capita in the world. The Government of Maldives (GoM) has taken proactive steps to limit the spread of the disease to its population, restricting the entry of passengers from affected countries since February 4th, 2020, and ramping up to a full border closure from March 27th, 2020. Although borders have reopened as of July 15th, tourism flows have remained some 96 percent below their normal levels. Half of all resorts remain closed and only a handful of international flights have resumed. 4. GDP is projected to contract by at least 19.5 percent in 2020,2 significantly lower than the pre-COVID-19 baseline. The COVID-19 outbreak has had a debilitated effect on tourism, which directly and indirectly accounts for two- thirds of GDP. In a baseline scenario that assumes borders remain open and tourists gradually return, GDP is projected to shrink by 19.5 percent in 2020. Thereafter, it is expected to rebound to 9.5 percent growth in 2021. Lower remittance outflows and some import compression should help to narrow the current account deficit to 19.5 percent of GDP in 2020. However, the fiscal deficit is projected to more than triple to 22.5 percent of GDP. COVID-19 will likely cancel the gains in poverty reduction from the last five years. The poverty rate is projected to increase to 5.6 percent in 2020 (measured at USD 5.50 a day in PPP terms) and to decline very slowly thereafter. GoM revenues are projected to fall by at least US$1 billion in 2020. The Government has responded to the crisis through social and economic support measures. The Government has formulated an Economic Relief Package for different stakeholders of the economy. The package is composed of various financial support and relief to individuals, households and businesses. The International Monetary Fund (IMF) approved a Rapid Credit Facility in the amount of US$28.9 million (100 percent of the quota) to help close the financing gap. 5. The Accelerating Renewable Energy Integration and Sustainable Energy (ARISE) Project is designed as a key measure to aid in Maldives’ post COVID-19 economic recovery. The COVID-19 crisis illustrates the urgency of strengthening Maldives’ resilience to external shocks. The ARISE Project will provide quasi-fiscal support to the GoM by reducing fossil fuel consumption for the power sector and mobilizing significant local savings. Through its four components, the proposed project will assist the GoM to reduce its import bill, trade deficit, current account deficit, and fiscal deficit. Moreover, as the project is expected to be deployed over a short time horizon, it is expected to be a key measure in the Maldives’ recovery from the crisis and will start having immediate impacts on the Maldives economy as early as 2021 and 2022. Sectoral and Institutional Context 6. Demand for electricity has risen steadily in Maldives over the past decade, reflecting robust economic growth. Between 2007 and 2017, total electricity consumption grew by 6.2 percent annually on average, outpacing average annual 2 World Bank. 2020. Maldives Overview: Outlook. Mar 03, 2020 Page 4 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) GDP growth of 5.4 percent over the same period; and total electricity consumption amounted to 750 GWh in 2018.3 The increase in electricity demand partly reflects the growth of the tourism sector, the mainstay of the Maldivian economy. 7. Electricity is generated and distributed through a patchwork of independent isolated island-based grid systems. Each island has its own powerhouse and distribution facility, effectively operating as single, isolated island power grids.4 There are 186 powerhouses on inhabited islands (excluding industrial islands and islands used exclusively as resorts or where service is provided by Island Councils) collectively generating 319 MW from diesel and 21.52 MW from solar. The highly dispersed nature of these power systems poses system operation and flexibility challenges. Two major state-owned utilities, State Electric Company Ltd (STELCO) and FENAKA Corporation Ltd (FENAKA), are responsible for delivering power supply to the majority of the inhabited islands. 5 8. Maldives relies on imported diesel to meet almost all its power needs. In 2019, the country imported over 700,000 metric tons of fuel, 80 percent of which consisted of diesel fuel. This translated into a costly import bill of US$465 million, equivalent to a fifth of all imports and 8.3 percent of GDP. While diesel imports can range from US$240 million to US$400 million annually. These costs can be even higher when oil prices rise, resulting in budget uncertainty and a large fiscal burden on the GoM. 9. The lack of economies of scale and poor quality of infrastructure have resulted in high generation costs due to inefficiencies and distribution losses. The cost of electricity production by island is estimated to range between US¢0.19 and US¢0.33 per kWh for the most efficient generators. This increases to US¢0.69 per kWh for more remote outer islands.6 To reduce the cost of electricity for end users, the GoM provides two types of subsidies to the sector. First, the GoM indirectly subsidizes the purchase of imported fuel by public utilities through the State Trading Organization (STO), the main fuel importer and supplier. Second, the GoM directly subsidizes the utilities through a usage subsidy. Despite these subsidies, end-user tariffs remain high compared to the region and to upper-middle-income countries. 10. Despite important amounts of subsidies to the sector STELCO and FENAKA continue to experience financial difficulties. According to the latest quarterly report on state-owned enterprises (SOEs),7 STELCO’s debt-to-equity ratio stood at 385 percent.8 While FENAKA is not as highly leveraged, with a debt-to-equity ratio of 70 percent as of end Q3 2019, the company has reported operational losses over the last three years (from 2017). 11. Investing in distribution and renewable generation can assist the Maldives’ in its recovery from the crisis and have immediate benefits for the Maldives economy, environment, and equity. First, investing in renewable energy sources, most prominently solar, can reduce generation costs, generate fiscal and external savings, provide environmental benefits, and generate jobs. Second, the distribution network can be strengthened through investments in grid infrastructure and storage systems to improve operational efficiency and flexibility to integrate renewable energy. The 3 Per capita electricity consumption is about 1.8 MWh in the Maldives, compared to 0.7 MWh per person in the average South Asian country and 3.5 MWh per person in the average upper-middle-income country. Source: World Development Indicators and U.S. Energy Information Administration (EIA). 4 With two exceptions (a) the interconnection between the power grids of Malé, Hulhulé, and Hulhumalé, which is nearing completion under the Fifth Power Project financed by the Exim Bank of China, and (b) the central powerhouse in Addu. 5 Malé Water and Sewerage Company Pvt. Ltd (MWSC) is a third vertically integrated utility under the Ministry of Environment (ME); however, it only operates the powerhouse on V.Rakeedhoo. 6 This is higher than, for instance, in India, where estimates suggest costs amount to US¢0.048 per kWh for fossil fuel generation, and significantly higher than in developed countries without similar geographic challenges. 7 Q3 2019 (Ministry of Finance [MoF] 2019). 8 This is because STELCO has needed to borrow from abroad to invest in electricity generation capacity as demand for electricity grows in Maldives. Mar 03, 2020 Page 5 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) battery energy storage systems (BESS) are also a crucial investment to address the variability of power output from renewable energy sources and allow continuous service despite fluctuations in supply and demand. Storage technologies such as BESS can help smooth the supply of electricity and reduce the need for back up diesel generation.9 12. Maldives has steadily increased its capacity to generate electricity from renewable energy, but there is potential to scale up further. In 2009, the country had only 1.64 MW installed; by 2019, this figure had jumped to 21.52 MW. Despite these advances, renewable energy sources—primarily solar PV—make up only 4 percent of the total energy mix. Recent independent power producer (IPP) bids in the Greater Malé area under the World Bank-funded Accelerating Sustainable Private Investment in Renewable Energy (ASPIRE) Project has demonstrated PV tariffs as low as US¢10.9 per kWh. PV tariffs are also expected to continue falling as the market continues to mature, the scale of projects increase, and investor confidence grows. Lowering the costs of electricity would therefore benefit households—who currently spend a significantly higher share of their household expenditure on electricity compared to other countries. C. Proposed Development Objective(s) Project Development Objective 13. The PDO is to increase renewable energy generation capacity and enhance the financial and environmental sustainability of the power sector in the Maldives. PDO Level Indicators 14. PDO Results Indicators are as follows: (a) Renewable energy generation capacity (other than hydropower) constructed under the project (MW) (b) Cost of renewable energy per unit of electricity (kilowatt-hour) achieved through competitive bidding (Amount (USD)) (c) Avoided annual diesel consumption by power generation from renewable energy (million liters per year) (d) Net annual greenhouse gas (GHG) emissions reduced (metric tons per year) D. Project Description 15. The proposed project would contribute to mobilizing private sector investment in solar PV generation capacity; support deployment of BESS and grid modernization to enable VRE integration; and provide technical assistance (TA) for institutional capacity building, pipeline development, and support for early stage feasibility work. 16. Component 1. Solar PV Risk Mitigation (US$45 million mobilized from the private sector, IDA Grant of US$6.2 million, and Clean Technology Fund (CTF) Grant of US$4 million) This component aims to support the Government in mobilizing private sector investment to deploy solar PV generation capacity by providing a risk mitigation package for Independent Power Producers’ (IPP) sub-projects. Where feasible, particularly in smaller islands, IPPs may be requested to invest in solar PV and battery energy storage systems (BESS). Component 1 will support Tariff Buydown Grants to the 9BESS can also provide multiple grid services to the power system, including enhancing reliability through system frequency regulation, lowering system cost by offsetting peak load with renewables, increasing efficiency of existing generators by replacing their reserve requirements, and serving as backup power in case of a grid outages. Mar 03, 2020 Page 6 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) IPPs to reduce the cost of the sub-projects and Payment Security Mechanism to reduce the risk of payment default by the utilities to the IPPs. 17. Component 2: Battery Energy Storage System (BESS) (US$23 million CTF Loan).10 This component will support deployment of BESS in Addu City and other islands to enable a high penetration of solar PV in the power system while ensuring reliable supply in a cost-efficient manner. The component will support approximately 50 MWh of BESS in the selected grid systems, subject to market price trends. The concessionality of the CTF Loan is essential to introduce such an innovative technical solution in a situation where the price could be prohibitive if BESS were to be procured on a commercial basis. 18. Component 3: Grid Modernization for VRE Integration (US$6.2 million IDA Grant, US$20 million co-financing from an Asian Infrastructure Investment Bank (AIIB) Loan and a US$5 million financing gap). This component will support grid upgrades and reinforcement to accommodate an increasing volume of renewable energy and BESS, in selected grid systems. The Ministry of Environment (ME) will lead implementation of this component, in close coordination with STELCO and FENAKA. 19. Component 4: Technical Assistance (US$3 million CTF Grant and US$0.25 million financing gap). This component will provide TA support to be implemented by the ME. . . 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 . 20. Environmental and social due diligence for the proposed project has been carried out under the Bank’s new Environmental and Social Framework (ESF). 21. The environmental risks and impacts have been assessed as being Moderate. Most sites for project activities will be in areas where anthropogenic activity is already present for land-based sites, while floating solar sites are located away from environmentally sensitive locations. There is a moderate risk of negative impacts associated with the solar energy generation system investments, future decommissioning of the solar energy systems at the end of their lifetime, and the grid upgrading works. However, these are expected to be localized in nature and arise only during construction with impacts such as localized dust and noise pollution and waste generation, as well as issues related to worker health and safety and waste generation. The installation of the proposed BESS units will only have a small installation footprint, with a moderate risk from the potential fire and explosion risks alongside the environmental hazards related to the disposal of used batteries containing hazardous waste. These risks will be mitigated with risk management measures including product specifications and ‘cradle-to-grave’ provisions in the contracts of supplier for batteries used in BESS and solar cells in accordance with international best practice. 10CTF Trust Fund Committee approved the CTF funding package for the project (Maldives: Dedicated Private Sector Program [DPSP] III Accelerating Renewable Energy Integration and Sustainable Energy [ARISE] [XCTFMV786A]) on July 14, 2020. Mar 03, 2020 Page 7 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) 22. The social risks and impacts from the project are assessed to be Moderate. Risks associated with land acquisition and involuntary resettlement are not expected under the proposed project. Installation of rooftop as well as ground- mounted solar PV installations will be limited to government land and property, and a lease agreement will be signed between the government owner and the developer. However, installation of solar panels in port, residential, and commercial areas may disrupt commercial activities and restrict access to land or use of other resources. The following social risks should also be closely monitored and considered during project implementation: (a) exclusion of vulnerable groups from consultations and decision-making processes; (b) insufficient coordination and engagement with different stakeholders; (c) influx of labor, particularly migrant workers; and (d) the concomitant issues of gender-based violence (GBV), social tensions, and burden on community resources and public utilities. 23. An Environmental and Social Management Framework for this project was disclosed by the ME on 11 March 2020. This ESMF provides guidance on the due diligence requirements and procedures to be followed in line with the Bank’s ESF and OP 4.03. Specifically, the ESMF includes site selection procedures, procedures for screening all subprojects for environmental and social risks and impacts, a subproject eligibility criteria and exclusion list, procedures for designing assessment and mitigation measures in accordance with relevant ESS, and a framework for monitoring and reporting on due diligence implementation. Additionally, it includes: review of the existing regulatory framework and their enforcement related to the energy storage sector within Maldives, along with mechanisms proposed to fill any major gaps if identified; a three-tier grievance redress mechanism (GRM); and necessary actions to be taken in the form of technical standards and guidance for adopting sustainable sourcing requirements in the project’s procurement arrangements. Consultations on the ESMF and other ESF instruments were conducted by the ME on February 20, 2020, with project stakeholders and beneficiaries. In addition, an Environmental and Social Commitment Plan, Stakeholder Engagement Plan (SEP) and Labor Management Procedures were prepared and disclosed on March 11, 2020, on the ME’s and World Bank’s external website. 24. The ME has demonstrated its capacity to successfully implement World Bank safeguards and World Bank Group EHS11 Guidelines for over a decade. Sector-specific environmental and social risks have also been successfully managed under the ASPIRE Project. Additional capacity will be required to undertake the environmental and social due diligence required under the ESF and for BESS system management under Component 3. E. Implementation Institutional and Implementation Arrangements 25. The Maldives will be the borrower of the CTF Loan and the recipient of grants from IDA and the CTF. The ME will be the implementing agency for the overall project. The ME has implemented several World Bank-financed projects such as Clean Energy for Climate Mitigation Project (P128268), Maldives Environmental Management Project (P108078), Maldives Ari Atoll Solid Waste Management Project (P130163), and ASPIRE Project (P145482). This previous exposure to World Bank-financed projects will facilitate implementing and coordinating activities under the current project. The existing Project Management Unit (PMU) under the ME for the ASPIRE Project will be reinforced with new staff to reflect its added responsibilities for the ARISE Project. 11 EHS = Environmental, Health, and Safety. Mar 03, 2020 Page 8 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) 26. The IPP sub-projects to be supported under Component 1 will be implemented by the private sector that will be responsible for designing, financing, constructing, and operating solar PV generation facilities for the duration of their respective Power Purchase Agreements (PPAs). The PMU will lead the preparation and implementation of the competitive bidding process to select IPPs for the solar PV sub-projects. Each IPP will be selected through competitive tendering, through which credentials of the bidders would be vetted and approved. PPAs between the private sector IPP and offtakers (STELCO and FENAKA) will lay out the responsibility of each party in detail. 27. Components 2, 3, and 4 will be directly implemented by the PMU. Given the scope of work that is closely related to grid systems, the ME will ensure close coordination with STELCO and FENAKA throughout implementation. The ME will establish a Project Steering Committee (PSC), comprising the ME, STELCO, FENAKA, and other relevant parties for efficient coordination and decision making by the government agencies. . CONTACT POINT World Bank Amit Jain Senior Energy Specialist Joonkyung Seong Senior Energy Specialist Borrower/Client/Recipient Republic of Maldives Ibrahim Ameer Minister of Finance dmd@finance.gov.mv Implementing Agencies Ministry of Environment Hussain Rasheed Hassan Minister of Environment secretariat@environment.gov.mv Mar 03, 2020 Page 9 of 10 The World Bank Accelerating Renewable Energy Integration and Sustainable Energy (P172788) 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 Amit Jain Task Team Leader(s): Joonkyung Seong Approved By Practice Manager/Manager: Country Director: Chiyo Kanda 25-Oct-2020 Mar 03, 2020 Page 10 of 10