Page 1 PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1746 Project Name Renewable Energy Market Transformation Region AFRICA Sector Renewable energy (100%) Project ID P073322 GEF Focal Area Climate change Borrower(s) GOVERNMENT OF SOUTH AFRICA Implementing Agency Development Bank of South Africa (DBSA) Environment Category [ ] A [ ] B [X ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared May 27, 2004 Estimated Date of Appraisal Authorization August 1, 2005 Estimated Date of Board Approval December 6, 2005 1. Key development issues and rationale for Bank involvement South Africa has very high greenhouse gas (GHG) emissions - At present, South Africa ranks among the top ten producers of greenhouse gas - carbon dioxide, methane, etc. - emissions on a per capita basis. The primary reason is that South Africa relies heavily on coal to meet its energy needs; in particular, South Africa has a large-scale coal-based power generation system. — but wants to reduce GHG emissions by promoting renewable energy - While coal is likely to remain a financially attractive energy source for South Africa, the Government is committed to reducing the country’s GHG emissions. The Government’s White Paper on Renewable Energy (2003) includes the following target for renewable energy: 10,000 GWh renewable energy contribution to final energy consumption by2013, to be produced mainly from biomass, wind, solar and small-scale hydro. The renewable energy is to be utilized for power generation and non-electric technologies such as solar water heating and bio-fuels. This is approximately 4% of the estimated electricity demand by 2013. — with external ‘carbon’ funds playing a key role. South Africa’s fiscal resources are limited, and there are competing high priority programs, such as providing services and opportunities to those who suffered under the apartheid regime. The Government is looking to international funds – such as from Global Environmental Facility (GEF) and the Prototype Carbon Fund (PCF) 1 – to co-finance GHG emissions reductions activities. In keeping with this, 1 The PCF provides funds that are neither loans nor grants ; instead it buys “carbon emission reductions credits.” This is a tradable commodity to be created under the Clean Development Mechanism (CDM) of the Kyoto Protocol; the Bank’s PCF has been set up in advance of the final approval of the Kyoto Protocol to gain some early experience of the trading in this new commodity. The South African Designated National Authority for CDM is the Department of Minerals and Energy (DME). Page 2 the Government has signed a ‘Host Country Agreement’ which authorizes the PCF to operate in South Africa. CAS links . The project is linked to the 1999 Country Assistance Strategy strategic priority of “fostering social and environmental sustainability.” In particular, the CAS states: South Africa is the largest contributor in Africa (on a per capita basis) to greenhouse-gas emissions and global climate change, due to its large coal-based energy sector. Energy sector reforms aimed at reducing these emissions are urgently needed, and South Africa is a key country targeted through the ongoing Global Carbon Initiative [ sic – the reference here is to GEF and PCF]. A new CAS is being drafted, and is expected to include environmental sustainability as an objective. Project support to the Government . The project will support the Government in setting up the policy and institutional framework required to transform the market for renewable energy. Using GEF funds, the project will provide technical assistance and capacity building; in addition, catalytic and declining GEF grants will be provided removing the barriers to the utilization of solar water heaters by commercial customers such as hotels. Lessons learnt. A key lesson from developing countries as well as industrialized countries (UK, Germany, USA, etc.) is that renewable energy development requires a policy and institutional framework that facilitates private sector involvement and investments. Further, the nature of this framework varies from country to country, and should be designed to suit the local conditions. This lesson forms the basis of the project concept. Activities of other partners . The project team is working closely with Danida, which is supporting the Department of Minerals and Energy (DME) on renewable energy. Rationale for Bank involvement. (i) South Africa wants to take advantage of the Bank’s knowledge of renewable energy; (ii) providing and facilitating ‘carbon finance’ funds. 2. Proposed objective(s) The project development objective is to enhance environmental sustainability in South Africa’s energy sector by facilitating significant reduction in South Africa’s GHG emissions. The project’s global objective, in line with GEF Operational Program 6 (OP6), is to remove the barriers to, and reduce the implementation costs of, renewable energy technologies to help mitigate greenhouse gas emissions. Page 3 3. Preliminary description The project will provide technical assistance (TA) and capacity building for Renewables-based Power Generation and Commercial Solar Water Heating (CSWH). The Dept. of Minerals and Energy will contract DBSA to be the implementing agent for the project. . Component Preliminary Cost Estimates (US$M) Preliminary Financing Plan (US$M) GEF grants Government Private TA and capacity Building 6.5 5.0 1.5 0.0 Commercial Solar Water Heating (CSWH) 10.0 1.0 0 9.0 Total 16.5 6.0 1.5 9.0 TA and Capacity Building. The overall objective is the creation and/or strengthening of the organizations and institutions that would help the Government meets its renewable energy target. The capacity areas covered would be the policy setting, promotion, regulation, service provision, and monitoring/evaluation of renewable energy power generation. The agencies covered would include DME, National Energy Regulator (NER), and potential project sponsors and financiers. Commercial Solar Water Heating (CSWH) . The project will support expansion of South Africa’s nascent solar water heating industry by promoting installation of systems for solar water heating for commercial, institutional, and industrial applications; this will be coordinated with an UNDP/GEF program aimed at the residential market 2 . There are already a few companies serving the CSWH market in South Africa, without any subsidies or other incentives; however, they face some barriers which makes it difficult for them to scale-up. The near-commercial nature of the CSWH presents good prospects for rapid take-off during the project with GEF support. Renewable energy power generation. This project is expected to trigger significant private sector investments in renewable energy power generation; these investments will be financed outside this by project by a combination of private equity and debt, with debt financing 2 A typical CSWH system, suitable for a hospital, has a storage capacity of 30,000 liters, whereas the capacity of residential systems is 200-30 liters. Some of the main end-users of CSWH systems are hotels, hostels, hospitals, flats/apartment blocks, and industry/food processing. Page 4 facilitated by an output- based revenue stream provided by external ‘carbon funds’ such as the PCF. Preliminary analysis indicates that over 2005-2008 there will be about 5-6 projects: · With a renewable generation capacity of 75 MW that would displace about 900 GWh per year of Eskom’s generation, and capital cost of about $ 150 million, with ‘carbon funds’ providing about $ 50 million; · Which would utilize resources such as landfill-gas-to-electricity, bagasse cogeneration in sugar industry, waste-based generation in the paper industry, small hydro and wind. Alternative development interventions/approaches The conventional approach of the Bank, including GEF, financing renewable energy power generation investments was rejected – this reflects the emergence of non-Bank funds 3 as well as the well-developed nature of South Africa’s private and financial sectors. Lending instrument . The project provides only GEF grants, as there is no need for South Africa to borrow IBRD funds for this project. 4. Safeguard policies that might apply The technical assistance and solar water heating investments in the project are not expected to present any environmental or social risk. Solar water heating is not a ‘listed activity’ with respect to South African environmental requirements, and therefore would not be subject to the environmental screening or environmental assessment process. Since the project does not involve any land taking, and the only construction will be within the perimeter of existing institutional, commercial, or industrial establishments, (and in fact, mostly on rooftops) no social safeguards are expected to be triggered. 5. Tentative financing Source: ($m.) BORROWER 1.5 GEF 6.0 PRIVATE COMMERCIAL SOURCES 9.0 Total 16.5 6. Contact point Contact: Arun P. Sanghvi Title: Lead Energy Specialist Tel: (202) 458-2504 Fax: (202) 473-5123 Email: Asanghvi@worldbank.org 3 PCF funds come from sources outside the Bank, and are not considered as part of WBG funds. Page 5