FOR OFFICIAL USE ONLY Report No: PAD00147 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$250 MILLION TO THE LEBANESE REPUBLIC FOR A LEBANON RENEWABLE ENERGY AND SYSTEM REINFORCEMENT PROJECT (P180501) SEPTEMBER 11, 2024 Energy & Extractives Middle East And North Africa This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective {September 10, 2024}) LEBANESE POUND Currency Unit = (LBP) LBP 89,5001 = US$1 US$1.345 = SDR 1 FISCAL YEAR January 1 - December 31 Regional Vice President: Ousmane Dione Regional Director: Paul Noumba Um Country Director: Jean-Christophe Carret Practice Manager: Husam Mohamed Beides Task Team Leader(s): Alexis Madelain, Yanchao Li, Mohamed Zakaria Kamh 1The official exchange rate was adjusted to 15,000 LBP/US$ in February 2023 from a former 1,507.5 LBP/US$. The exchange rate of 89,500 LBP/US$ reflects the BDL pla orm exchange rate that was aligned with the US$ banknote exchange rate as of December 2023. ABBREVIATIONS AND ACRONYMS AFS Audited Financial Statement AM Accountability Mechanism AMI Advanced Metering Infrastructure BDL Banque du Liban CAPEX Capital Expenditure CCDR Country Climate and Development Report CERC Contingent Emergency Response Component CIS Customer Information System COM Council of Ministers CRP Cost Recovery Plan CSO Civil Society Organization CWM Cash Waterfall Mechanism DA Designated Account DFIL Disbursement and Financial Information Letter DRE Distributed Renewable Energy DSP Distribution Service Provider DSPOE Dam Safety Panel of Experts E&S Environmental and Social EDL Electricité du Liban EDGE Excellence in Design for Greater Efficiencies EHS Environmental, Health and Safety EIRR Economic Internal Rate of Return EMS Energy Management System EPC Engineering, Procurement, and Construction EPP Emergency Preparedness Plan ERA Electricity Regulatory Authority ERP Enterprise Resource Planning ESCP Environmental and Social Commitment Plan ESF Environmental and Social Framework ESHS Environmental, Social, Health and Safety ESIA Environmental and Social Impact Assessment ESMAP Energy Sector Management Assistance Program ESMP Environmental and Social Management Plan ESRS Environmental and Social Review Summary ESS Environmental and Social Standards FCV Fragile, Conflict, and Violence FIRR Financial Internal Rate of Return FM Financial Management FSRU Floating Storage Regasification Unit GDP Gross Domestic Product GHG Greenhouse Gas GIS Gas-insulated Switchgear GoL Government of Lebanon GRS Grievance Redress Service GRM Grievance Redress Mechanism GWh Gigawatt-hour HPP Hydro Power Plant IBRD International Bank for Reconstruction and Development IFR Interim Financial Report IFRS International Financial Reporting Standards IMPACT Inter-Ministerial and Municipal Platform for Assessment, Coordination and Tracking IPF Investment Project Financing IPP Independent Power Producer IT Information Technology kWh Kilowatt-hour LBP Lebanese pound LNG Liquefied Natural Gas LRA Litani River Authority M&E Monitoring and Evaluation MDM Meter Data Management MEDREG Association of Mediterranean Energy Regulators MENA Middle East and North Africa MOEW Ministry of Energy and Water MOF Ministry of Finance MW Megawatt NCC National Control Center NDC Nationally Determined Contributions NPV Net Present Value O&M Operation and Maintenance OE Owner’s Engineer OHL Over-Head Transmission Line OHS Occupational Health and Safety OPEX Operating Expenditure OT Operation Technology PASA Programmatic Advisory Services and Analytics PCBs Polychlorinated Biphenyls PDO Project Development Objective PMT Project Management Team POM Project Operations Manual PPSD Project Procurement Strategy for Development PSC Project Steering Committee PV Photovoltaic RE Renewable Energy ROW Right-of-Way RTU Remote Terminal Unit SCADA Supervisory Control and Data Acquisition SCD Systematic Country Diagnostic SEA/SH Sexual Exploitation and Abuse/Sexual Harassment SEP Stakeholder Engagement Plan SOP Series of Projects SPDs Standard Procurement Documents STEM Science, Technology, Engineering, and Mathematics STEP Systematic Tracking of Exchanges in Procurement TA Technical Assistance TOR Terms of Reference US$ United States dollar WA Withdrawal Application The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) TABLE OF CONTENTS DATASHEET ........................................................................................................................... i I. STRATEGIC CONTEXT ..................................................................................................... 1 A. Country Context ...............................................................................................................................1 B. Sectoral and Institutional Context ...................................................................................................2 C. Relevance to Higher Level Objectives ..............................................................................................6 II. PROJECT DESCRIPTION .................................................................................................. 7 A. Project Development Objective .......................................................................................................7 B. Project Components ........................................................................................................................7 C. Project Beneficiaries ......................................................................................................................11 D. Results Chain..................................................................................................................................12 E. Rationale for Bank Involvement and Role of Partners ...................................................................13 F. Lessons Learned and Reflected in the Project Design....................................................................13 III. IMPLEMENTATION ARRANGEMENTS ........................................................................... 14 A. Institutional and Implementation Arrangements ..........................................................................14 B. Results Monitoring and Evaluation Arrangements ........................................................................15 C. Sustainability ..................................................................................................................................15 IV. PROJECT APPRAISAL SUMMARY .................................................................................. 16 A. Technical, Economic and Financial Analysis ..................................................................................16 B. Fiduciary .........................................................................................................................................20 C. Legal Operational Policies ..............................................................................................................21 D. Environmental and Social ..............................................................................................................22 E. Gender ............................................................................................................................................23 F. Citizen Engagement ........................................................................................................................24 V. GRIEVANCE REDRESS SERVICES .................................................................................... 25 VI. KEY RISKS .................................................................................................................... 25 VII. RESULTS FRAMEWORK AND MONITORING .................................................................. 28 ANNEX 1: Implementation Arrangements and Support Plan ................................................ 35 ANNEX 2: Detailed Description of the Project...................................................................... 45 ANNEX 3: Letter of Electricity Sector Policy ......................................................................... 53 ANNEX 4: Summary of EDL’s Cost Recovery Plan (CRP) ........................................................ 57 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) ANNEX 5: Series of Projects (SOP) ....................................................................................... 60 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) @#&OPS~Doctype~OPS^dynamics@padbasicinformation#doctemplate DATASHEET BASIC INFORMATION Project Operation Name Beneficiary(ies) Lebanon Lebanon Renewable Energy and System Reinforcement Project Environmental and Social Risk Operation ID Financing Instrument Classification Investment Project P180501 Substantial Financing (IPF) @#&OPS~Doctype~OPS^dynamics@padprocessing#doctemplate Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [✓] Contingent Emergency Response Component (CERC) [✓] Series of Projects (SOP) [✓] Fragile State(s) [ ] Performance-Based Conditions (PBCs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternative Procurement Arrangements (APA) [✓] Hands-on Expanded Implementation Support (HEIS) Expected Approval Date Expected Closing Date 30-Sep-2024 31-Dec-2030 Bank/IFC Collaboration No Proposed Development Objective(s) The project development objective (PDO) is to enable cleaner, more reliable and efficient grid electricity services in Lebanon. Components Component Name Cost (US$) i The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Component 1: Strengthening of EDL Systems 65,000,000.00 Component 2: Increase of Grid-Connected Renewable Energy Supply 170,000,000.00 Component 3: Technical Assistance 15,000,000.00 Component 4: Contingent Emergency Response Component (CERC) 0.00 @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate Organizations Borrower: Lebanese Republic Implementing Agency: Electricité du Liban (EDL), Litani River Authority (LRA) @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? Yes SUMMARY Total Operation Cost 250.00 Total Financing 250.00 of which IBRD/IDA 250.00 Financing Gap 0.00 DETAILS World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 250.00 @#&OPS~Doctype~OPS^dynamics@paddisbursementprojection#doctemplate Expected Disbursements (US$, Millions) WB Fiscal Year 2025 2026 2027 2028 2029 2030 2031 Annual 15.00 70.00 60.00 50.00 40.00 10.00 5.00 Cumulative 15.00 85.00 145.00 195.00 235.00 245.00 250.00 ii The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Energy & Extractives CLIMATE Climate Change and Disaster Screening Yes, it has been screened and the results are discussed in the Operation Document @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate SYSTEMATIC OPERATIONS RISK- RATING TOOL (SORT) Risk Category Rating 1. Political and Governance  High 2. Macroeconomic  High 3. Sector Strategies and Policies  Substantial 4. Technical Design of Project or Program  Moderate 5. Institutional Capacity for Implementation and Sustainability  High 6. Fiduciary  High 7. Environment and Social  Substantial 8. Stakeholders  Substantial 9. Overall  High @#&OPS~Doctype~OPS^dynamics@padcompliance#doctemplate POLICY COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? iii The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) [ ] Yes [✓] No ENVIRONMENTAL AND SOCIAL Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance ESS 1: Assessment and Management of Environmental and Social Risks and Relevant Impacts ESS 10: Stakeholder Engagement and Information Disclosure Relevant ESS 2: Labor and Working Conditions Relevant ESS 3: Resource Efficiency and Pollution Prevention and Management Relevant ESS 4: Community Health and Safety Relevant ESS 5: Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant ESS 6: Biodiversity Conservation and Sustainable Management of Living Natural Relevant Resources ESS 7: Indigenous Peoples/Sub-Saharan African Historically Underserved Not Currently Relevant Traditional Local Communities ESS 8: Cultural Heritage Relevant ESS 9: Financial Intermediaries Not Currently Relevant NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). @#&OPS~Doctype~OPS^dynamics@padlegalcovenants#doctemplate LEGAL Legal Covenants Sections and Description Article IV Remedies of the Bank, 4.01. The Additional Event of Suspension consists of the following: (a) The Regulatory Framework has been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely, in the opinion of the Bank, the ability of the Borrower, EDL and/or LRA to perform any of their respective obligations under this Agreement, the EDL Subsidiary Agreement and/or LRA Subsidiary Agreement (as the case may be). Article IV Remedies of the Bank, 4.01. The Additional Event of Suspension consists of the following: (b) any of the actions set forth in the Letter of Electricity Sector Policy has been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely, in the opinion of the Bank, the ability of the Borrower, EDL and/or LRA to perform any of their respective obligations under this Agreement, the EDL Subsidiary Agreement and/or LRA Subsidiary Agreement (as the case may be). iv The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Schedule 2, Section I.A.2: The Borrower shall, no later than three (3) months after the Effective Date, or such later date as agreed by the Bank, establish and maintain throughout Project implementation, a steering committee, chaired by the Minister of Energy and Water, with terms of reference, composition, roles and responsibilities acceptable to the Bank and defined in the Project Operations Manual (“Project Steering Committee”), to provide, inter alia, overall strategic guidance and Project oversight, approve the Annual Work Plan and Budget, and review implementation and evaluation reports, as applicable. Schedule 2, Section I.C.1(b): The obligation [of EDL] to appoint, not later than six (6) months after the Effective Date, or such later date as agreed by the Bank, and thereafter maintain throughout Project implementation, an external auditor responsible for auditing EDL Project financial statements and for consolidating the audit report of the Project; all with terms of reference, qualifications and experience satisfactory to the Bank. @#&OPS~Doctype~OPS^dynamics@padconditions#doctemplate Conditions Type Citation Description Financing Source No withdrawal shall be made for Eligible Expenditures under Category (2) unless and Schedule 2, Section until the Borrower has Disbursement IBRD/IDA III.B.1(b) appointed commissioners for the Electricity Regulatory Authority, in compliance with the Regulatory Framework No withdrawal shall be made for Eligible Expenditures under Category (3) unless and until the Borrower has caused LRA to establish the Schedule 2, Section Dam Safety Panel of Disbursement IBRD/IDA III.B.1(c) Experts (DSPOE), with composition, terms of reference, and qualifications satisfactory to the Bank, as further detailed in the Project Operations Manual The Borrower, through the MoEW, has prepared and adopted, and caused the Effectiveness Article V, Section 5.01(a) IBRD/IDA Project Implementing Entities to prepare and adopt, the Project v The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Operations Manual, in form and substance satisfactory to the Bank The Borrower, through the MoEW, has caused the Project Implementing Entities to establish their respective Project Management Teams, with composition, mandate and resources satisfactory to the Bank, as further detailed in the Project Effectiveness Article V, Section 5.01(b) IBRD/IDA Operations Manual, and appoint each a Project manager, a procurement specialist, a financial management specialist, and an environmental & social specialist, with terms of reference, qualifications and experience satisfactory to the Bank The EDL Subsidiary Agreement has been executed and delivered, and all conditions precedent to its Effectiveness Article V, Section 5.01(c) effectiveness or to the right IBRD/IDA of EDL to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled The LRA Subsidiary Agreement has been executed and delivered, and all conditions Effectiveness Article V, Section 5.01(d) precedent to its IBRD/IDA effectiveness or to the right of LRA to make withdrawals under it (other than the effectiveness of vi The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) this Agreement) have been fulfilled vii The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) I. STRATEGIC CONTEXT 1. In the context of Lebanon’s ongoing economic, financial and energy sector crises, the Project supports essential investments to enable the recovery of grid electricity services to the population. The collapse of electricity services from the grid is a major barrier to economic recovery and exacerbates social inequalities. The Government of Lebanon (GoL) has recently taken important initial reform steps to establish the foundation for improved services and financial viability in the sector, building on substantial World Bank policy dialogue and advisory engagement. The Project supports critical ‘no-regret’ physical investments that are now needed to restore basic functionality of the electricity network infrastructure. It will result in increased supply of low-cost renewable energy (RE); improved electricity service delivery; reduced average cost of electricity generation; and streamlined billing and collection processes. The operation will also pave the way for private capital mobilization, notably in the renewable energy space, by reducing technical and commercial risks while reforms are pursued to improve investment climate. The Project is the first of a series of projects that are needed to support sector turnaround and development. A. Country Context 2. Lebanon’s economy has been facing multiple crises for years, beginning with an economic and financial meltdown in late 2019, followed by the impacts of the COVID-19 pandemic and the Port of Beirut explosion in 2020. The country’s economic and financial crisis – brought about by strong interlinkages among the fiscal, monetary and financial sectors, leading to systemic failure – has been considered among the worst crises globally since the mid-nineteenth century 2. Real gross domestic product (GDP) has cumulatively contracted by close to 34 percent between 2018 and 2022, wiping out more than 15 years of economic growth3. Following a dramatic drop in GDP per capita between 2019 and 2022, the World Bank reclassified Lebanon in July 2022 to lower-middle income status, down from upper-middle income status 4. Rapid currency depreciation, with the Lebanese pound losing more than 98 percent of its value, has driven triple digit inflation pushing many households below the poverty line. Approximately 44 percent of the population in five governorates was identified as poor in 2022, based on a new unofficial consumption-based poverty line 5. About 30 percent of the population is estimated to be unemployed, with youth unemployment reaching almost 50 percent. 3. Five years into the crisis, little progress has been made towards a comprehensive resolution plan. Lebanon is mired by an institutional and political crisis, and entrenched in a complex macroeconomic, financial and social crisis. A highly polarized political landscape and a caretaker government since May 22, 2022 have stalled the country’s prospects for economic recovery. Concerns about efficient use of resources coupled with a lack of accountability and transparency have hindered sustainable fiscal policies, while exacerbating existing inequality and level of poverty. Public discontent, fuelled by the crises, has further aggravated social tensions and polarization. Furthermore, geopolitical tensions and foreign interventions in the country’s political system also contributed to Lebanon’s overall fragile status and added an underlying layer to development challenges in the country. More recently, Lebanon has been hit by the ongoing Conflict in the Middle East. Military operations along Lebanon’s southern border have escalated from low to high intensity fighting since October 2023. The spillover effects of the Conflict in the Middle East pose yet another shock to Lebanon’s economic recovery and growth prospects. 4. The collapse of the currency, coupled with the systemic failure of the banking system, has resulted in a pervasive dollarized cash-based economy, including in the energy sector. Transactions are predominantly settled in cash, leading to a sizeable US dollar cash economy and lines of credit offered by the banking sector are fully cash collateralized. Salaries are increasingly dollarized in the private sector, and the sub-components of the Consumer Price Inflation basket are nearly 2 World Bank (2021). Lebanon Economic Monitor, Spring 2021: Lebanon Sinking (To the Top 3). 3 World Bank (2023). Lebanon Macro Poverty Outlook, Spring Meetings 2023. 4 World Bank (2022). Lebanon Economic Monitor, Fall 2022: Time for an Equitable Banking Resolution. 5 World Bank (2024). Lebanon Poverty and Equity Assessment: Weathering a Protracted Crisis. Page 1 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) completely dollarized. The World Bank (2022)6 estimates that the cash economy has increased in size from 26.2 percent in 2021 to 45.7 percent of GDP in 2022. Some government fees have also been dollarized. The electricity utility, Electricité du Liban (EDL), accepts, but does not require, the payment of electricity bills in US$. 5. Severe shortage of electricity services from the grid is a major barrier to economic recovery. Infrastructural decay pervades all sectors in Lebanon. The inadequate provision of public services forces households to substitute toward more expensive, and often less sustainable, private sector alternatives, further entrenching inequalities in socioeconomic standing. As the economic and financial crisis unfolded, electricity blackouts have extended from eight hours up to 22 hours per day. Even prior to 2019, shortage of electricity supply was cited as a major obstacle by 32 percent of firms. The collapse of grid services had significant negative spillover on other critical infrastructure, notably the telecommunications networks, also perceived as a major impediment to business, and put at risk already fragile water service delivery. B. Sectoral and Institutional Context 6. The installed grid-connected electricity generation capacity in Lebanon is about 2,300 Megawatt (MW) primarily comprised of fuel oil and diesel-based thermal power plants . There are seven thermal power plants with installed capacity of 2,000 MW7, with the two largest, Zahrani and Deir Ammar power plants, totalizing 975 MW. Hydropower plants (HPPs) have an installed capacity of 280 MW, with the largest being 192 MW power plants on the Litani river. In 2021, the total electricity demand was about 24,000 GWh while the total grid-connected generation was about 14,000 GWh. Prior to the crisis, consumers were getting about ten hours of electricity supply per day with supply deficit equal to 40 percent of demand. During the year 2022, grid supply to consumers dwindled down to one to two hours, before recovering to about four to five hours per day since early 2023. The grid-supply inadequacy increased reliance on diesel generators and led to the very rapid expansion of off-grid/distributed solar Photovoltaic (PV) in 2021/22. The deployment of standalone small-scale solar PV systems by the private sector, including battery energy storage systems, has accelerated, albeit in the absence of a legal framework. Total installed capacity of stand-alone solar PV systems has reached 1,000 MW by end of 2023, mostly by users who can afford the upfront capital expenditure (capex) in the absence of a functional banking sector and access to credit. This surge in distributed RE systems followed the removal by the GoL of fuel subsidies on diesel and other petroleum products, which aligned economic incentives towards energy efficiency and low-cost energy resources. 7. EDL, the vertically integrated national utility, is responsible for electricity generation, transmission, and distribution, except for a few localized hydropower and distribution concessions. EDL operates under the administrative oversight of the Ministry of Energy and Water (MOEW) and the financial oversight of the Ministry of Finance (MOF). The Lebanese Oil Installations Directorate and the Lebanese Petroleum Administration are also involved in the electricity sector, but the absence of coherent planning and insufficient collaboration often delay important action. The management of the distribution segment is outsourced to private distribution service providers (DSPs) although complex division of responsibilities between EDL and the DSPs have created challenges. The sector does not have a regulatory authority to undertake independent oversight and regulation. With electricity tariff structurally below cost-recovery level for more than two decades until the November 2022 tariff increase, EDL is highly financially distressed and has relied on budget transfer to ensure service delivery. 8. The electricity sector has been facing the following challenges: Challenge #1: Significant deterioration in reliability of electricity supply. The main reason has been the financial distress of EDL, which resulted in: (a) lack of cash and limited access to hard currency, since 2019, to purchase fuel oil and diesel for thermal power plants , leading to a backlog of asset maintenance in the entire electricity sector; (b) lack of adequate grid-connected electricity generation due to lack of fuel 6 World Bank (2022). Lebanon Economic Monitor (Spring 2023): Normaliza on of Crisis is No Road for Stabiliza on. 7 Of which a significant share is fully depreciated assets that would be decommissioned as soon as new and more efficient capacity could be added, in line with the Electricity Sector least cost genera on masterplan completed in 2021. Page 2 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) and dilapidation of generation assets; and (c) absence of transmission network investments, which is a critical precondition for reliable electricity supply and integration of RE. The Port of Beirut explosion also destroyed the National Control Center (NCC), which is a critical asset for monitoring and management functions of the transmission network and its absence substantially complicates the operation of the entire electricity system given EDL’s inability to control the generation and dispatch of power plants to meet the demand in real time and integrate new renewable energy resources. 9. Challenge #2: Operational inefficiencies in the electricity sector . In 2023, electricity losses in EDL’s network were about 40 percent. The transmission network losses were estimated at about 4) percent while the largest share of losses is in electricity distribution with about nine percent of technical losses and 25 percent of commercial losses (electricity theft). The strengthening of the transmission network and introduction of Advanced Metering Infrastructure (AMI) in distribution should help reduce losses. 10. Challenge #3: Expensive electricity supply mix. The current generation mix, mainly based on liquid fuel, is expensive (average generation cost was an estimated US$0.16/kWh in 2021), polluting and unsustainable from a balance of payment perspective. Increasing the share of RE would reduce the average cost of generation to about US$0.08/kWh by displacing costly fuel imports denominated in hard currency (according to estimates in the 2021 Least Cost Generation Plan). Yet, mobilizing private capital at scale for grid-connected renewable energy projects is contingent upon a functional grid and adequate financial standing of EDL. 11. Challenge #4: Lack of reliable operational and financial data. EDL has not been able to produce reliable data on operational indicators (such as losses) due to lack of proper wholesale and retail metering. There is no system in place for collection of outage and customer impact data to evaluate network-wide reliability of supply. The lack of outage data has been complicating the projection of electricity demand and absence of electricity loss data has been complicating the computation of economically efficient costs. EDL has not undergone financial audit for the years 2010-2019 and therefore there is no reliable data on its assets, liabilities, revenues, and costs. This has also been hindering the estimation of economically justified level of tariffs and evaluation of cost recovery trajectory. 12. Challenge #5: Private sector participation impeded by dysfunctional network infrastructure, EDL non- creditworthiness, and the legal and regulatory vacuum. Given the magnitude of investments needed into least-cost generation in Lebanon8, enabling private sector participation will be critical for electricity sector turnaround. The GoL launched in 2017 a selection process for the award of 11 licenses for small-scale solar Independent Power Producers (IPPs) (15 MW). None have reached financial close to date, due to technical and off-taker risks. EDL’s network lacks basic functionality to manage variable supply, and its revenues do not cover the full cost of electricity services. The absence of an effective legal and regulatory framework9 for the sector overall delays decision-making and weakens transparency and predictability. Foreign direct investment is also affected by the macroeconomic context, sovereign credit rating, transfer and convertibility risks. As a result, the private sector currently operates only in the standalone off-grid electricity market segment. 13. With no fiscal space left, the GoL has been compelled to start reforming a decades-long status quo . Over the past decade, the electricity sector had a sizable impact on Lebanon's fiscal and current account positions. Annual transfers to EDL, including treasury advances, have averaged 3.8 percent of GDP over 2010-20. The economic and financial crisis precipitated the collapse of grid services. Facing unsustainable subsidy requirements, the GoL took initial steps to restore services and improve the sector’s viability. As part of a “National Emergency Plan” for the sector, the first increase in tariff since 1994 was implemented in February 2023 (at US$c.10 per kWh for the first 100kWh of consumption, and US$c.27 8World Bank (2024). Lebanon Country Climate and Development Report. Washington DC. 9Law 462, with provision to establish an independent and autonomous Energy Regulatory Authority (ERA), was ra fied in 2002 but has not been opera onalized to date. Page 3 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) per kWh above). The Lebanese Parliament ratified a Law on Distributed Renewable Energy (DRE) in December 2023, aimed to promote grid-connected RE systems with net metering and wheeling arrangements for households and businesses. 14. A set of initial reform measures implemented by the GoL has established the foundation for improved services and financial viability and is the basis for the proposed Bank financing operation. The preparation of the most-urgent measures has gained some momentum, as the Government embarks on the consolidation of initial results from measures implemented under the National Emergency Plan and builds on these initial steps to improve service delivery in a financially and fiscally sustainable manner. The Bank is supporting the GoL to prepare sector reform measures through ongoing programmatic energy technical assistance.10 The recently approved measures presented below will enable adequate operation and maintenance of proposed investments, needed to sustain the development objective of the Project, and thus form the basis for Bank’s proposed investment project financing. 15. Reform Measure #1: EDL’s Cost Recovery Plan has been prepared and approved11. It presents a five-year roadmap (2024-2028) to rapidly improve electricity service delivery to a minimum of 10 hours per day, with revenues covering the total cost of service by 2026. It is based on several actions that will together: (i) increase low-cost RE supply in the generation mix; (ii) reduce losses (from 40 percent to 21 percent) and streamline billing and collection cycles (from 12 to 3 months); and (iii) increase coverage of fuel costs in a manner that bridges EDL notional shortfall until EDL reaches break- even by 2026. EDL’s cost recovery plan is further detailed in Annex 4. 16. Reform Measure #2: EDL has prepared and disclosed audited financial statement (AFS) for 2020 12. This is the first time since 2011 that AFSs are disclosed. EDL has recruited an auditor to support with: (i) the preparation of AFS for 2020, 2021 and 2022; (ii) the establishment of opening balance in compliance with international standards on auditing; and (iii) an action plan to put in place a credible financial management system. The disclosure of AFS for 2020 is the first step in this process. The audit report for the year 2020 has a disclaimer opinion by the auditor due to the challenging circumstances related to the nonavailability of supporting documents after the Port of Beirut Explosion, and the limitations in the accuracy of the balance sheets items' opening balances. However, the progress in addressing the qualifications raised on the EDL audit report and their resolutions is key to measure progress of EDL's commitment towards the establishment of sound transparency and accountability mechanisms. 17. Reform Measure #3: EDL, MOEW, and Banque du Liban (BDL) have agreed on a cash waterfall mechanism (CWM) 13. The CWM prioritizes the most critical payment categories to ensure service continuity through a disciplined and predictable financial management system. It will move the sector away from discretionary decisions and convoluted payment processes, towards a structured and disciplined approach for payment execution agreed upon ex ante. Given BDL’s de facto cap to foreign exchange (forex) made available to sustain service, EDL has started to accept, but does not require, the settlement of electricity bills in US$. Yet, the hard currency collected falls short of its payment obligations in US$. The CWM ensures that priority payments are made first, with a mechanism for exchanges from LBP to US$ required to implement EDL’s cost recovery plan. The implementation of the CWM will improve payment predictability and transparency and thus reduce perceived risks for prospective market entrants. 18. Full sector turnaround would require Government’s steadfast commitment on a comprehensive reform program over the long term. These initial reform measures would need to be continued and expended over time to sustainably restore reliable electricity services and enable subsequent Bank financing for the sector (see Table 1). As per the GoLs plan14, needed reforms would also subsequently encompass: (i) efficiency and transparency of revenue management 10 Lebanon Energy Transi on and Development Program, P179937. 11 Approved by EDL Board of Directors on July 4, 2024, and by MOEW on July 21, 2024, and sent to the Bank by the Prime Minister and the Minister of Energy and Water, on behalf of the Government of Lebanon, on August 19, 2024 (see Annex 3). 12 Disclosed on EDL’s website on August 8, 2024. 13 The concept design of the CWM was prepared by EDL with the support of MOEW and endorsed by BDL on August 18, 2024. 14 Policy Statement “Se ng Lebanon’s Electricity Sector on a Sustainable Growth Path ”, approved by the Council of Ministers on March 2022. Page 4 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) within a financially viable energy sector, (ii) EDL corporatization and evolution towards an efficient transmission system operator (TSO) in a largely unbundled sector, and (iii) a legal and regulatory framework, aligned with the Government’s vision for the electricity sector market structure and conducive to operational performance, service quality and least cost system expansion. 19. A functional Electricity Regulatory Authority (ERA) would promote efficiency and service quality, and impartially balance the interests of the Government, customers, investors, and suppliers . As per global experience, it will require significant time and resources to set up and should thus be initiated rapidly. The GOL is committed to ERA establishment, working with the support from the Association of Mediterranean Energy Regulators (MEDREG) on an action plan. The appointment of ERA’s board members, the first step in ERA’s establishment process, will be completed by December 2025 (see Annex 3). Accordingly, their appointment by the COM is a disbursement condition for the financing for the first phase of a grid-connected solar park (Sub-component 2.1), which could subsequently contribute to mobilization of private capital for further solar investments. 20. The Letter of Electricity Sector Policy, addressed to the Bank on August 19, 2024, reiterates the GoL’s commitment to pursue priority reform actions. Building on most recent achievements in the sector, it presents specific undertaking and timebound reform measures which will be delivered during project implementation, notably to (i) operationalize the cash waterfall mechanism, (ii) improve financial transparency in the sector, and (iii) establish a functional ERA (see Annex 3). GOL’s adherence to the selected actions expressed in the Letter of Electricity Sector Policy will be supported by an additional legal remedy clause in the loan agreement. Table 1. Status of Reform Measures and Next Steps Reform Initial Status First Reform Steps Next Steps Expected Results Areas (completed) (by SOP2)  National Emergency Plan Approval of the Cost  EDL implements the Cost EDL’s revenues cover Cost approved in Oct. 2022 Recovery Plan Recovery Plan for economically Recovery  Tariff adjustment (2024-2028) justified cost of implemented in Feb. 2023 services  EDL restricted access to Adoption of a Cash  EDL and BDL operationalize EDL executes US$ ($5m/week) Waterfall CWM payments according Revenue  EDL payments to Mechanism (CWM), to structured, Management suppliers subject to with BDL acting as transparent, and delays and discretionary Bank agent* predictable cash decision management process  Outstanding overdue Disclosure of EDL’s  EDL establishes opening EDL discloses audited Financial external audit reports Audited Financial balance. financial statements Transparency since 2010 Statements (AFS)  EDL addresses shortcomings on yearly basis for 2020 in internal control system  Legal vacuum, with Law  COM appoints ERA 462 governing the sector commissioners, based on never implemented competitive and merit- A fully functional ERA Regulatory  Law on Distributed based selection process**. delivers license and Framework Renewable Energy (DRE)  ERA’s budget funded, authorization for IPPs ratified on Dec. 14, 2023 internal organization and status approved, internal procedure established*** *to ensure disbursements from the Collection Account would be made in accordance with the agreed waterfall structure, including EDL’s ability to convert LBP- based revenues to US$ at prevailing market rate; **Disbursement Condition for Sub-component 2.1; ***on key regulatory issues, incl. tariff methodology, license, authorization, and public consultations. Page 5 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) C. Relevance to Higher Level Objectives 21. The Project builds on the Systematic Country Diagnostic, SCD (FY25) and is fully aligned with the Guiding Principles for World Bank Engagement in Lebanon Under the Status Quo (2024-2026). Poor delivery of electricity supply is identified in the SCD as a key binding constraint to Lebanon’s economic development with ripple effects on the lives of Lebanon’s residents. Poor electricity services not only increase the cost of living as people cope with energy deficiencies, but also have deleterious impacts on key sectors, including, education, water, and healthcare services, while also undermining the quality of life, economic productivity, and job creation. The Project’s objectives of increasing low-cost renewable energy supply to the grid, notably solar, and improving EDL operational and commercial performance, are part of the interventions identified as priority engagements in Lebanon even under the status quo of the absence of larger and more comprehensive reforms. Such high value-added priority interventions do not replace the dire need for a comprehensive and adequate crisis resolution plan, encompassing deeper reforms across critical sectors. Instead, such priority interventions are meant to preserve crucial public services and serve as a foundation for a comprehensive overhaul and large-scale investments in the electricity sector once an adequate recovery plan is in place. 22. The Project is in line with the World Bank’s Fragile, Conflict, and Violence (FCV) strategy and the Middle East & North Africa (MENA) Regional Update 2021. Preventing and mitigating FCV challenges are key to progress on the Sustainable Development Goals and promoting peace and prosperity. The electricity crisis (and related critical water services) coupled with economic and social marginalization of the most vulnerable groups (those who cannot afford to pay the private generator price), and perceptions of grievances and injustice are drivers of fragility. Failure to solve the electricity crisis in a socially fair manner will increase the risk of increased social unrest, violence, and conflict. The Project will support green growth in a resilient and inclusive manner with a focus on restoring basic services. 23. The operation is aligned with and contributes to the Lebanon Country Climate and Development Report, CCDR (FY24), specifically on the cost-effective decarbonization of the power sector pillar. As per the Lebanon CCDR, decarbonizing Lebanon’s power sector would generate a triple dividend, reducing economic costs by 41 percent and emissions by 43 percent and improving macro-fiscal outcomes. The Project, financing most urgent investments in EDL systems, network reinforcement and piloting utility-scale solar PV plants and hydropower rehabilitation would contribute to create the conditions enabling this transition over the medium term. Lebanon’s updated Nationally Determined Contributions (NDC) of 2020 commits to unconditionally generate 18 percent of the electricity demand and 11 percent of heat demand (in the buildings sector) from renewable energy sources in 2030. Conditionally, Lebanon commits to generate 30 percent of its electricity demand and 16.5 percent of heat demand (in the buildings sector) from renewable energy sources in 2030. The operation is consistent with and contributes to these targets. It also contributes to NDC’s objectives to increase energy sector’s robustness, security, reliability, sustainability, and independence which will reduce the burden on the government budget and alleviate the fiscal deficit. Activities under this operation are in line with the SDG7 Energy Compact of the Republic of Lebanon. Strengthening institutional performance of EDL contributes to the climate enablers laid out in Lebanon’s NDC to support uptake and integration of renewable energy. These climate enablers are crucial to achieve the targets laid out in the NDC as well as the Lebanon National Adaptation Plan. 24. The proposed operation is aligned with the World Bank's Maximizing Finance for Development (MFD) approach. The financial difficulties faced by EDL, coupled with Lebanon's broader macroeconomic challenges, have hindered private sector involvement in the electricity sector. This Project, particularly through Sub-components 2.1 and 2.3, aims to address these barriers to utility-scale solar PV plants through constructing the first utility-scale solar PV plant and strengthening of transmission network, which would pave the way for subsequent privately owned and operated solar PV projects. This would be achieved through demonstrating EDL’s ability to operate and successfully integrate intermittent RE into its network. In the short term, the Project would also enhance EDL’s financial viability by supporting various critical measures aimed at improving metering and billing. By mitigating technical, financial, and commercial risks, the Project is expected to attract private investments within three years of its closure, especially in the renewable energy sector. Driven by the Page 6 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) investments under Sub-components 2.1 and 2.3, the expansion of solar PV capacity in Lebanon is expected to reach approximately 300 MW which will enable around US$200 million in private capital (PCE) within project timeframe. Additionally, the existing small-scale solar PV systems, which currently generate around 1,000 MW collectively, could be partly connected to the grid in the future, facilitated by the NCC, the AMI and information systems developed under Component 1. This integration is anticipated to stimulate the market and attract additional private investment, as businesses and individuals will have the opportunity to install solar systems and sell excess energy. In parallel to this Project, the establishment of ERA and operationalization of DRE Law will improve the legal and operating environment and enhance the efforts to increase private sector participation. II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement 25. The project development objective (PDO) is to enable cleaner, more reliable and efficient grid electricity services in Lebanon. PDO Level Indicators 26. The achievement of the PDO will be measured using the following indicators, which will contribute to one corporate scorecard indicator as presented below: a. Outcome 1: Cleaner electricity services enabled i. PDO Indicator 1: Renewable energy capacity enabled (MW) (Corporate Scorecard Indicator), under Subcomponents 2.1 and 2.2. ii. PDO Indicator 2: Increased supply of grid-connected solar energy to consumers (GWh), enabled by automation of dispatching supported with NCC (Subcomponent 1.1), grid-connected renewable energy supply and network reinforcement (Component 2). b. Outcome 2: Improved reliability of grid electricity services iii. PDO Indicator 3: Reduction in frequency of equipment failures at substations rehabilitated under the Project (percentage), enabled by selected network reinforcements (Subcomponent 2.3). c. Outcome 3: Improved efficiency of grid electricity services iv. PDO Indicator 4: Improvement of billing for electricity services (percentage of electricity consumed), enabled by EDL efficient commercial systems (Subcomponent 1.2). B. Project Components 27. The Project would be the first of a Series of Projects (SOP) to support broader electricity sector recovery and development. The Project, the first operation of the series (SOP1), will contribute to restoring basic functionality of the electricity network, by necessary rehabilitations and reinforcement to its electricity transmission network, improving EDL operating systems, rehabilitating LRA hydropower plants, and increasing the share of utility-scale solar PV. A subsequent project (SOP2) would further reinforce the transmission network to strengthen service reliability and integrate a higher share of renewable energy. Through its activities, the SOP will also strengthen the resilience of the network, and, given the risks identified in the detailed disaster and climate risk screening, the Project will also integrate in its design and implementation specific mitigation measures to ensure the resilience of the investments. Annex 5 presents the proposed approach for the SOP. The Project will have the following main components. 28. Component 1: Strengthening of EDL Operational and Commercial Systems (US$65 million to be fully financed with IBRD loan). The activities of this component will directly strengthen the ability of EDL to better anticipate, identify, and Page 7 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) address network disruptions and strengthen the resilience of EDL’s system. This component will have the following sub- components: 29. Sub-component 1.1: Strengthening of EDL Operational Systems (estimated cost of US$25 million) . This sub- component is a top-priority investment to enable EDL to manage its grid more reliably and efficiently, especially with anticipated increase in renewable energy shares in the electricity supply mix (including private sector developed renewable energy projects). This sub-component will finance the following: (a) construction of a new NCC building within the perimeter of EDL headquarters’ territory in Beirut; (b) supply and installation of Supervisory Control and Data Acquisition (SCADA) system, Energy Management System (EMS), telecommunication equipment with the rest of EDL’s substations and feeders, and reserve power supply equipment for NCC in the case of emergencies (including disruptions due to extreme weather events), and dispatch control; (c) necessary upgrades to remote terminal units (RTUs) and rehabilitation for communication links between EDL’s substations and the new NCC, and (d) five-year software maintenance contract (in addition to warrantee) for all relevant operational software required for NCC and training of EDL staff to ensure EDL acquires the required experience and knowledge, including through on- the-job training on the NCC systems. The NCC building will be established within EDL headquarters, which is already an area with no flooding risk. Moreover, the NCC building design will imbed necessary climate resilient considerations such as thermal insulation to avoid impact of excess heat. The NCC building will meet international energy efficiency standards and respective certifications equivalent to at least EDGE Level 1. The EMS and SCADA will collect real time weather information such as temperature and sunlight that will inform forecasting to deploy renewable energy supply. This is to improve the system control and dispatch with increased intermittent generation, as well as increase the reliable grid operation of the transmission system under normal and extreme weather conditions, which will increase the resilience of the power system in Lebanon. 30. Sub-component 1.2: Strengthening of EDL Commercial Systems (estimated cost of US$40 million) . This sub- component will finance the following: (a) the EDL’s Center for Advanced Metering Infrastructure (AMI), and (b) supply and installation of Enterprise Resource Planning (ERP) platform. The AMI center will be comprised of Meter Data Management (MDM), Customer Information System (CIS), billing system, consumer portal, fiber optic and 4G gateways, etc. The billing system within the AMI center will comprise the invoicing, collection and reporting functionalities. The ERP will include the main components of company asset management, financial management, supply chain management, human resources, customer service, and other aspects. This sub-component will finance the ERP system design, customization, license, data migration, training, and system deployment, as well as needed information technology (IT) infrastructure and hardware. The design of the AMI center will ensure needed interoperability with the smart meters installed by the DSPs. This sub- component will not finance the procurement and installation of the smart meters. The supply and installation of smart meters falls under the scope of ongoing contracts EDL has signed with the Distribution Service Providers (DSP). Establishing an AMI center will contribute significantly to identifying areas of losses, which would be a necessary step to reduce such losses and improve EDL’s operational performance. 31. Component 2: Increase of Grid-Connected Renewable Energy Supply and Network Reinforcement (US$170 million to be fully financed by IBRD loan). This component will have the following sub-components. 32. Sub-component 2.1: Development of Grid-connected Solar PV Plant (estimated cost of US$91 million) . In Lebanon’s macrofiscal context and given EDL off-taker’s risk, the private sector is not ready to finance the development of utility- scale solar PV project. Using public financing to pilot low-cost utility-scale solar PV plant would improve, in the short term, EDL financial stance and technical readiness to integrate intermittent supply. Going forward and conditions permitting, it will also contribute to reducing technical, financial, and commercial risks and pave the way for future private investments in the sector, notably in the RE space. This sub-component will finance the following: (a) construction of about 150 MW of utility-scale solar PV power plant, which includes: design, supply, and installation of the solar PV modules, inverters, and the balance of the plant comprised of structural components, electrical components, control and monitoring systems, auxiliary systems, and civil works; and (b) two-year operations and maintenance (O&M) contract for the solar PV project Page 8 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) to be constructed to ensure EDL acquires the required experience and knowledge, including through on-the -job training. Climate resilient measures will be incorporated, e.g., installation of heat-resistant solar PV models, and module materials designed to better withstand operating conditions in extreme heat (note the solar site is not subject to risk of flooding). The site will be located in the Hermel, Ras Baalbek and Qaa area (with a full potential of up to 1,200 MW), identified based on a geospatial analysis and environmental and social screening. The exact siting of the first phase, consisting of a 150 MW solar PV plant, will be identified through the detailed feasibility study to be financed under a complementary US$1.5 million Recipient-executed Energy Sector Management Assistance Program (ESMAP) Grant for Support for Lebanon Utility- Scale Solar Park. As described above, the appointment of ERA board members by the COM is a disbursement condition for the financing for this sub-component, to ensure that progress is made with the enabling environment for future private investment in grid-connected solar PV plants. 33. Sub-component 2.2: Rehabilitation of LRA HPPs and Strengthening of Dam Safety (estimated cost of US$25 million). This sub-component will finance the rehabilitation and replacement of key electricity generation equipment as well as monitoring and control systems at Joun, Awali, Markabi HPP as well as measures to strengthen the safety of Qaraoun dam. The works will specifically include the following: a. Joun HPP: (a) replacement of turbine inlet value for Unit No. 2 and rehabilitation of the inlet valve for Unit No. 1; (b) replacement of the main seal of safety valve; (c) replacement of the speed governors for both units, including supply of spare parts; (d) anticorrosion protection of the spiral cases of turbines of both units; and (e) replacement of three voltage transformers in the switchyard. b. Awali HPP: (a) renewal of the electric cabinets for the safety valve and the intake valve; (b) replacement of the actuators; (c) overhaul of injectors; (d) replacement of the speed governors for all three units , as well as supply of spare parts; (e) rehabilitation of excitation system and voltage regulators for all three units; and (f) complete replacement of control, protection, and SCADA systems for the entire plant. c. Markabi HPP: (a) rehabilitation of speed governors; (b) replacement of SCADA system of the whole powerplant; (c) replacement of protection systems for three transmission lines; and (d) supply and installation of triphase disconnectors. d. Dam safety improvement: (a) supply and installation of monitoring instrumentation for the Qaraoun dam; (b) crack injection in the plinth gallery of the Qaraoun dam; (c) maintenance of valves. The installed system will monitor changes in levels of water (during drought or floods) to inform functioning of the dam. 34. Sub-component 2.3: Rehabilitation and Reinforcement of EDL Transmission Network (estimated cost of US$54 million). The specifications and design of the following subcomponents (overhead line design, transformer and switchgear foundations and erections, etc.) will adopt international climate resilient standards (foundations and tower design that take into account necessary safety factors against extreme wind, flooding, seismic, etc.). Moreover, and in line with international best practices from original equipment manufacturers, transformers will be equipped with necessary cooling systems to ensure climate resilient performance against extreme heat conditions. All substations will be equipped with necessary firefighting and fire alarm systems, in line with international standards, to protect against fire risk. Proper vegetation management will be part of the facilities management to eliminate hazards and risks of fires. This sub- component will finance the following: a. Rehabilitation of Achrafia 220 kV substation. This will include rehabilitation or replacement of high voltage and auxiliary transformers, replacement of switchgear, busbars, disconnecting switches, capacitor banks and the secondary equipment. This substation is critical to improve the reliability of supply to Beirut busy districts, improve the evacuation of cheap clean energy from the grid to the key demand centers, hence reduce the critical load reliance on standalone diesel generation. Page 9 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) b. Rehabilitation of 220 kV Deir Nbouh – Baalbek overhead transmission line (OHL) . This will include supply and installation of damaged towers, partial replacement of conductors, insulators, optical ground wire, and other required equipment. This line is critical for the evacuation of the solar PV energy generated from the solar plant financed under Sub-component 2.1. This line is also critical for grid reliability in Northern Lebanon. c. Upgrade of Baalbek substation. This will include (a) supply and installation of two 220 kV air-insulated line bays including all necessary equipment and upgrades to the secondary systems, and (b) connecting the circuits Deir Nbouh-Ksara as in-out into Baalbek substation to increase the grid reliability of the 220 kV northern transmission loop. Similar to the upgrades of Achrafia substation, the upgrades of Baalbek substation will contribute to evacuate clean and cheap energy to the demand centers in the area. d. Connection of solar PV plant to the grid. This will finance construction of new 220 kV Point of Connection (PoC) substation, complete with all primary and secondary equipment to connect the solar PV plant financed under component 2.1 and connect the PoC to EDL grid via in-out connection to the existing Deir Nbouh-Baalek double circuit 220 kV line. The selection of PV site under component 2.1 was carried out taking into account, among other factors, proximity to existing EDL high voltage network to minimize the length of new power lines to be constructed. 35. Component 3: Technical Assistance (US$15 million IBRD loan to be fully financed by IBRD loan) . This component will have the following sub-components. 36. Sub-component 3.1: Project Implementation Support and Technical Studies for EDL (estimated cost of US$10 million). This sub-component will finance: (a) the Owner’s Engineer (OE)15, hired by EDL. EDL’s OE will be responsible to prepare all designs, detailed feasibility studies, and tender documents for main contracts under the Project, tendering process, technical supervision of contracts, monitoring of contractors’ compliance with the requirements of environment and social (E&S) instruments, site supervision and quality control, addressing climate resilience and adaptation requirements in all designs, financial management and reporting, and review and approval of payment certificates, and other aspects of contracts related to improvement of EDL operating and commercial systems (Sub-components 1.1 and 1.2), construction of grid-connected solar PV plant (Sub-component 2.1), and strengthening of EDL network (Sub- component 2.3). Given its criticality for investment readiness, EDL is using advance procurement for the OE contract, expected to be launched in September 2024. The preparation of the bidding documents for the construction of solar PV plants will be financed by a US$1.5m RETF ESMAP Grant, that complements this proposed loan and is being processed on standalone basis. This sub-component will also finance: (b) consultancy services for the review of EDL business processes to fully leverage the value of the ERP system, built upon recommendations proposed under the completed assessment during project preparation stage; (c) individual consultants within EDL’s Project Management Team (PMT) as detailed in paragraph 51, as well as individual consultants supporting the Project’s Steering Committee (PSC) for strategic guidance 15 The term “Owner’s Engineer” refers to interna onal consul ng firms specialized in engineering, procurement and construc on management of projects, hired by the Owner (EDL/LRA) through interna onal compe ve tender, to provide the Owner with full support through the project life cycle. The Project Management Teams of EDL and LRA will each be individually supported by an Owner’s Engineer in two key func ons: (a) General design review and procurement support up to award of contracts in line with the approved procurement strategy, and (b) Owner’s engineering services for the construc on phase and subsequent warranty period. Given the scale of works, the Owner’s Engineer, and contractors will each be required to have a qualified Environmental Specialist, a Social Development Specialist, and a Health and Safety Specialist. These Environmental, Social, and Health and Safety (ESHS) Specialists will be responsible for implemen ng all the ac ons and management plans proposed and for ensuring compliance with requirements of the World Bank’s relevant environmental and social standards and EHS Guidelines, as well as with the requirements of the na onal environmental legisla on and regula on. The PMT will manage the Owner’s Engineer. Also, with support from the Owner’s Engineer, the PMT will manage the procurement process and coordinate the approval of contracts during the implementa on of the project. The PMT will also be responsible for approving disbursements, monitoring overall project progress, preparing reports for EDL/LRA/MOEW and the World Bank, u lizing data from Owner’s Engineer deliverables, and ensuring that financial and repor ng requirements are met and World Bank procurement procedures are followed. Page 10 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) and overall supervision of the Project; (d) various technical, economic, financial and other studies that may be required during implementation of the Project; (e) capacity building for EDL, such as strengthening of in-house capacity for power system planning and modeling, distribution and transmission system maintenance, procurement, and E&S; and (f) external audit and support for strengthening financial management and reporting at EDL. Capacity building support for power sector planning will incorporate training on considering how climate change impacts the system and designing measures for mitigation. 37. Sub-component 3.2: Project Implementation Support, Technical Studies for LRA, and Dam Safety Panel of Experts (estimated cost of US$5 million). This sub-component will finance: (a) OE, which will support the LRA with preparation of procurement documents for main contracts under the Project, tendering process, technical supervision of contracts, monitoring of contractors’ compliance with the requirements of E&S instruments, site supervision and quality control, and review and approval of payment certificates, and other aspects of contracts related to rehabilitation of HPPs and improvement of dam safety; (b) Tier 2 dam safety assessment (as per requirements of Bank policy framework) for Qaraoun, Anan Lake, and Joun Lake dams; bathymetric study of the reservoir to estimate sedimentation and actual reservoir capacity; dam break and flood propagation study; and other technical, economic, financial and other studies that may be required during implementation of the Project; (c) preparation of the instrumentation plan, update of O&M plan, update of Emergency Preparedness Plan (EPP); (d) the dam safety panel of experts (DSPOE) to be comprised by qualified experts in specific technical fields related to hydropower-DSPOE will provide guidance and advice to LRA during implementation of the Project on various technical matters; and (e) Capacity building for LRA on technical, contract management, and dam safety aspects of hydropower. 38. Component 4: Contingent Emergency Response Component (CERC). This component will have zero funding allocation at the onset and will only be triggered in emergency circumstances. Project Financing 39. The total Project cost is US$250 million, financed with US$250 million IBRD loan. A parallel US$1.5 million ESMAP grant will complement the proposed loan to support feasibility study for solar park and E&S instruments preparation. A detailed breakdown is presented in Annex 2. Table 2. Project Financing Project Components Total Costs IBRD IBRD ($m) ($m) % 1. Strengthening of EDL Operational and Commercial Systems 65.0 65.0 100 Sub-component 1.1: Strengthening of EDL Operational Systems 25.0 25.0 100 Sub-component 1.2: Strengthening of EDL Commercial Systems 40.0 40.0 100 2. Increase of Grid-Connected Renewable Energy Supply and Network Reinforcement 170.0 170.0 100 Sub-component 2.1: Development of Grid-connected Solar PV Plant 91.0 91.0 100 Sub-component 2.2: Rehabilitation of LRA Hydropower Plants 25.0 25.0 100 Sub-component 2.3: Strengthening of EDL Transmission Network 54.0 54.0 100 3. Technical Assistance 15.0 15.0 100 Sub-component 3.1: Project Implementation Support for EDL 10.0 10.0 100 Sub-component 3.2: Project Implementation Support for LRA 5.0 5.0 100 4. CERC 0.0 0.0 100 TOTAL COSTS 250.0 250.0 100 C. Project Beneficiaries Page 11 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 40. The immediate beneficiaries are the two implementing entities, namely EDL and LRA. EDL will benefit from the project through financing of the NCC, AMI systems, solar parks, transmission network investments, as well as TA for project implementation, capacity building and analytical studies. The financing part will enable EDL and LRA to strengthen technical and operational performance and embark on a more financially sustainable path. The TA part will equip EDL to better perform its mandates to deliver quality electricity services to the Lebanese people, with significant renewable energy resources in its system. 41. The ultimate beneficiaries are the consumers of improved electricity services enabled by the investments under this Project. The World Bank carried out between Nov 2022 and Jan 2023 a survey covering 1,660 households across all of Lebanon’s eight governorates. Although the electricity infrastructure from EDL is almost universally accessible (97 percent are connected and subscribed to EDL) and Lebanese households have modern and energy-consuming appliances, the survey revealed alarming levels of energy poverty: at the time of the survey between 2022 and 2023, 50.1 percent of households were receiving four hours or less of electricity per day from the network. Therefore, Lebanese households had resorted to a combination of grid and off-grid energy sources - mainly a mix of subscription-based diesel generators (59.7 percent) and privately-owned generators (4.58 percent), home solar systems (36 percent), torches (6 percent), and batteries (10 percent). A fraction under 10 percent were running a home-based business powered by this energy mix. The use of the combined alternative sources allowed Lebanese households to reach 19 hours of electricity provision per day on average. However, this came at substantial additional costs. Nearly half of the households (45 percent) experienced increased spending because of accessing energy from multiple sources. The Project will finance a series of critical investments to strengthen EDL’s operational and commercial systems, increase EDL’s renewable energy generation, and improve the efficiency of LRA’s hydro power plants and systems, which will lead to increase in lower-cost and cleaner electricity supply. The investments will also help enhance the reliability of grid electricity services and increase service hours, which will support the improvement of productivity and quality of life for households, public institutions (schools, health facilities) and businesses. Benefits will extend to the population at large in Lebanon through induced jobs creation and economic growth, ease of doing business, and better prospects for poverty alleviation and shared prosperity. D. Results Chain 42. Figure 1 outlines the Theory of Change of this Project, indicating the outputs, outcomes and impacts anticipated. Figure 1. Theory of Change Activity Output Outcome Impact • Improved EDL • Operationalized Component 1: Strengthen EDL infrastructure, systems and modern systems for Systems operational processes to EDL (NCC, SCADA, AMI; • Reduced costs of • Infrastructure reinforcements accommodate VRE accounting, reporting, energy for • Software/operations • Increased hours of reliable etc.) beneficiaries electricity supply • Increased solar PV • Improved financial Component 2: Increase RE supply performance of EDL generation capacity • Solar PV with associated grid • Improved supply mix at • Rehabilitated HPP with • Reduced GHG connection lower costs with lower higher efficiency emissions and • Hydro rehab emissions • Grid enhancements if pollution • Grid enhancements if required required • Enhanced EDL • Training sessions systems and capacity • Hands-on support • Enhanced capacity of EDL sustainable beyond Component 3: TA • Recruitment of to reliably manage a grid the project cycle • Capacity building personnel and with higher penetration of • Implementation support consultants per project RE needs Page 12 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) E. Rationale for Bank Involvement and Role of Partners 43. Given current macrofiscal context, the sector has currently no access to financing for investments critically needed to restore electricity services. The GoL defaulted on its foreign debt (Eurobond) payment in March 2020, effectively marking the country’s first ever sovereign default. The Project focuses on “no regret” investments, required to restore minimal services, even under a protracted “Status Quo” scenario characterized by the absence of larger reforms (see Lebanon SCD - P500099 and Guiding Principles for World Engagement in Lebanon Under Status Quo). Given the sector’s structural currency mismatch (with revenues in LBP and costs largely denominated in US$) and despite initial policy measures to increase revenues (including the possibility for EDL’s clients to pay electricity bills in US$ as of March 2024), the electricity sector has limited access to hard currency to cover for only part of its operating costs, let alone investment. As a lender of last resort with long lasting engagement in the sector through technical assistance and advisory services, the World Bank is uniquely positioned to support the project aiming to contribute to restore grid functionality and improve EDL operation and commercial performance. 44. World Bank involvement is expected to build on initial sector reform actions by the GoL to leverage further reforms and financing from other donors in subsequent operations in order to support sector recovery and reform programs as international confidence builds with the implementation of the Project and associated reforms, combined with broader macro fiscal reforms. 45. Energy sector recovery could subsequently gain speed and scale by using the private capital mobilization (PCM) that macro fiscal stabilization would unlock. Macro fiscal stabilization, coupled with EDL’s improved financial stance and an effective regulatory framework, would ultimately allow PCM for utility-scale RE IPPs identified through least-cost planning, and procured through a structured and standardized competitive process. Switching EDL’s generation assets from liquid fuel to cheaper and cleaner natural gas, through pipeline gas or Liquified Natural Gas (LNG) imports, would support the grid to supply 24-7 electricity with maximized contribution from renewable energy. Operationalization of DRE law, combined with additional dispatchable power and system flexibility, would allow households and businesses to gradually connect distributed solar PV systems to the grid. The World Bank is engaged in a programmatic advisory service and analytics (PASA) to inform the sector reform agenda (P179937). In parallel with the successful implementation of the Project, the Bank, IFC and MIGA could scale up support through: (i) new investments in network reinforcement; and, assuming some progress on macro fiscal stabilization and reforms: (ii) credit enhancement support to catalyze private investments in RE and diversify the mix away from liquid fuel, and (iii) and policy-based conditions financing to support the implementation of sector reforms (see Annex 5). F. Lessons Learned and Reflected in the Project Design 46. Lessons learned from previous World Bank involvement indicate that Lebanon’s implementing environment is very challenging. All previous lending operations prepared by the World Bank in the electricity sector in the last decade were dropped due to various reasons16, including the Government’s slow progress on reforms and lack of implementing capacity as well as external factors such as political and social crises. The last lending operation was the Reform Implementation Development Policy Loan (DPL) (P094288), approved and fully disbursed in 2007, where energy reform was the main component. Progress in energy reform supported by this DPL was monitored through a parallel TA grant (P104774). While some limited initial energy reform measures were completed, others – and most substantial – planned under the DPL 16These include Energy Sector Reforms Program (P170506), Electricity Transmission Project (P170769), Gas to Power Genera on Project (P166423), Energy Sector Reforms Workshop (P162678), Par al Risk Guarantee: Floa ng Storage and Regasifica on Unit Project (P146202), MEW Electricity Sector Capacity Building (P122081), GAS Pipeline Guarantee (P094305) and Electricity Services Emergency Support and Reform Project (P177846). Page 13 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) were not17. Despite the TA grant provided to support sector reform, the lack of any political agreement on the reform agenda was the main obstacle for moving forward to implement the reform program. Since then, there have only been TAs to support sector and policy dialogues, including TAs on the option of importing liquified natural gas (LNG) through a Floating Storage Regasification Unit (FSRU)18. The lessons learned from these operations are summarized below. 47. Choice of instrument. The proposed operation is an IPF, designed as the first operation of an SOP. The IPF instrument will ensure that the loan will primarily be used for capital expenditures, that have been structurally underfinanced over the past decade in a model whereby subsidies were mostly channeled through recurrent fuel supply. The SOP approach allows to sequence investments along with progress on the enabling environment and built-in incentives for the government to advance the reform agenda to unlock subsequent lending. Annex 5 presents the proposed approach for the SOP. 48. Reforms and frontloaded policy measures. The project, as the first operation of the SOP, focuses on most urgent “no regret” investments that require only limited policy actions to achieve and sustain the PDO. The three necessary policy measures are fully frontloaded (see Paragraph 14). These have been prepared with Bank’s support over the past 18 months and have been completed prior to completion of loan appraisal. The project will also incentivize the establishment of the overdue ERA, a longer-term reform action which, if not required to achieve the PDO of SOP1, would contribute to create the enabling environment for subsequent operations of the SOP, notably for private capital mobilization in the generation segment. As additional support will be needed to prepare longer term reform actions, the Bank can mobilize technical assistance from the ongoing programmatic ASA (P179937) to inform the policy reform agenda. The Bank’s additional remedy in the loan agreement will help ensure continuous leverage on pursued reform actions as outlined in the Government’s Letter of Electricity Sector Policy (see Annex 3). The specific milestones to achieve the reform actions, including the operationalization of ERA, will be further detailed in the POM. 49. Implementation capacity. Since there have not been lending operations in the sector in the last decade, EDL and LRA lack experience implementing Bank projects. Previous engagements also show that while technical capacity is adequate, fiduciary and E&S capacity is limited. The recent economic crisis has further accelerated the depletion of most qualified human resources from public and para-public entities, including EDL and LRA. The Project therefore supports PMTs within EDL and LRA under Component 3.1 (see Implementation Arrangements) that would include hiring consultants to carry out the necessary activities. Given EDL’s limited human resources and risks associated with managing multiple complex contracts and sub-projects, a single OE whose scope of work will encompass services for all sub-components under EDL’s responsibility will be recruited by EDL. A similar arrangement is planned for LRA, which will recruit a single OE for sub- components 2.2. and 3.2. This would facilitate the management of interfaces and reduce associated risks. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 50. EDL and LRA will be the implementing entities for their corresponding investments, supported by their respective OEs19, and reporting to a PSC chaired by MOEW. The PSC will comprise of representatives from EDL and LRA as well as MOF. MOEW will be responsible for strategic guidance and overall supervision of the Project. EDL and LRA will establish PMTs to manage the Project with required skills mix. 17 including(a) EDL restructuring, (b) establishment of ERA, (c) finalizing of a master plan for power genera on expansion, (d) fuel cost reduc on in Deir Ammar and Zahrani power plants by using natural gas, and (e) development implementa on of a program to reduce network losses and improving billing and collec on. 18 These include Lebanon Gas Import and FRSU Ac on Plan (P164657), Support to Gas Unit for LNG at MOEW (P147618), and Support to Implementa on of Electricity Sector (P113858). 19 See footnote 15. Page 14 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 51. The core of the PMTs will comprise the following positions : (1) a project manager, who will coordinate all project activities and will be the World Bank’s main counterpart during project implementation, (2) a procurement specialist, (3) an FM specialist, and (4) E&S specialists. Key positions of the PMTs, including fiduciary teams, will be in place before loan effectiveness. On that basis, Component 3 will address capacity building needs at EDL and LRA to take on E&S, procurement, and FM responsibilities under the Project. This proposed implementation arrangement is illustrated in Figure 2. LRA has already established its core PMT team. Moreover, both entities are committed to Advanced Procurement method to hire international OEs, one for each entity, to be mobilized by the end of 2024. Project Operations Manual (POM) will be finalized before loan effectiveness. The POM will elaborate on the coordination between PMT and OE. For the procurements of EPC works, the OEs role will be to fully support the Owners (EDL/LRA) during the entire process. It covers preparing the tender documents, tendering process (answering clarifications from bidders, prepare evaluation criteria, evaluating bids, etc.), till contract award. The PMTs’ role is to guide, supervise, review, and endorse the draft deliverables prepared by the OE team, at each step of the tendering process and ultimately build Owners’ capacity throughout. Figure 2. Proposed Implementation Arrangement for the Project B. Results Monitoring and Evaluation Arrangements 52. The monitoring and evaluation (M&E) of the project will be carried out by the project implementation entities EDL and LRA, consistent with the M&E requirements to be stipulated in the POM. The PMTs, to be established within EDL and LRA, will prepare M&E reports, to be submitted to the PSC and the World Bank. M&E practices will be undertaken by qualified M&E specialist and aligned closely with the Results Framework of the Project, and will cover key project activities including procurement, construction progress, contractual payments, and other aspects of project management and quality control. The reports will also include implementation of environmental and social aspects of the project (including full reporting of incidents), as well as issues related to citizen engagement and grievance redress. The PMTs will also prepare financial monitoring reports. Project financial statements will be audited by an independent financial auditor. The Project will be subject to periodic Implementation Status & Results Reports, a Mid-term Review and at the end of the Project, the PMTs will jointly prepare a project Implementation Completion and Results Report. C. Sustainability 53. Proposed investments, supported by selected policy measures, will contribute to sustained improvement of operations and electricity services. In the current context, the status quo that prevailed over the past decades is no longer Page 15 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) an option and GOL has been compelled to engage reform actions. Under this proposed operation, , proposed investments will directly contribute to reduce cost of services and increase revenues, creating headroom for EDL to ensure adequate operation and maintenance to sustain direct results expected from project activities in term of network reliability, operational and commercial efficiency, and improved electricity generation mix. Second, proposed investments are embedded within EDL’s broader Cost Recovery Plan, aimed to improve electricity service delivery and bridge sector’s cost- revenue gap by 2026. Proposed investments are the most urgent ones identified to restore basic electricity network functionality, increase low-cost RE supply, reduce losses and streamline billing and collection cycles. Third, Project will contribute to sector technical and financial readiness for future private investments in new generation capacity, notably in renewables. Selected policy measures will increase financial transparency (the disclosure of EDL AFS) and payment predictability (CWM) to reduce perceived risk for prospective market intrants. Looking forward, the establishment of a functional regulator (ERA) will also facilitate, over the medium term, private capital mobilization at scale in the sector. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis (i) Technical Analysis 54. The investments under the proposed Project were identified following comprehensive technical assessment studies. The following summarizes the key studies that were done to inform the design of the Project’s components. Additional information is presented in Annex 2. 55. Technical study to identify location of new NCC. Selection of the NCC site was based on industry criteria of security, safety, reliability, expandability, redundancy of power supply, accessibility, and operability of EDL systems. Three sites were screened, and recommendation was made to construct the NCC at the best-suited location on EDL headquarter site. Cost estimate was prepared for main items: demolition of existing damaged building (after Port of Beirut explosion) and construction of new building, new SCADA/EMS system, new telecommunication equipment, substation automation equipment, spare parts, training for EDL staff, and 3-year maintenance service, and contingency. 56. Detailed diagnostic to identify requirements for strengthening of commercial systems of EDL. EDL carried out a study to assess existing internal business applications and systems for commercial processes, financial control, inventory management, project management, maintenance, human resource management, and enterprise resource planning. This assessment identified gaps and opportunities for short- and medium-term improvements. This assessment and opportunities for improvement were based on international benchmarks and best practices to identify a fit-for-purpose approach for improvement, taking into account the Lebanese context (laws, regulations, etc.), and also included estimation of implementation costs. 57. Geospatial analysis to identify location of solar PV sites. The following key factors and exclusions (which are consistent with accepted practices for geospatial analysis) were used to identify the most suitable potential solar PV site areas for the purposes of the Bank project: solar resource quality, ecological non-protected areas, slope of the terrain, land use and land cover, land ownership (only areas with state-owned lands were selected), distance to the roads, population density, distance to load centers, and distance to substations. The following sites were identified: (i) Site 1: Hermel, Ras Baalbek and Qaa, with estimated potential for 1,200 MW; (ii) Site 2: Taraiya, with estimated potential of 30 MW; (iii) Site 3: Harbata, with estimated potential of 25 MW; and (iv) Site 4: Maqne, with estimated potential of 25 MW (see Figure 4 in Annex 2). Site 1 is the only one suitable to accommodate a 150MW solar PV plant, with potential for subsequent development(s) by IPPs. The most recent data (May 2024) was used to identify the construction costs, including development costs, prices of solar PV modules, balance of the plant, as well as commissioning and decommissioning, and contingencies. The grid interconnection costs were evaluated considering the approximate distances to the nearest substations and the interconnection points to be built at each substation drawing up on the power flow analysis carried for the purposes of prioritization of EDL network investments. Page 16 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 58. Detailed due diligence to identify LRA HPP rehabilitation needs. The scope of rehabilitation and the costs were determined based on technical assessment of operating records and inspection of critical equipment at HPPs. The assessment and inspection focused on the condition of generation equipment, SCADA, operation and maintenance procedures and arrangements, and electrical auxiliary systems. 59. Dam safety assessment. Tier 1 independent dam safety inspection and assessment (as per requirements World Bank’s ESF) was carried out to identify the scope of dam safety related activities under the Project. It included review of dam safety inspection and period safety review report; review of available design reports; review of recent O&M records and instrumentation monitoring; review of criteria and methodology for estimation of the design flood, flood routing, etc. to determine spillway sizing, field inspection, and other. Given the findings from Tier 1 review, the Project would finance detailed dam safety examination. Tier 2 assessment will be completed by LRA by March 2025 and would also finalize the detailed cost estimate for improvement of dam safety measures. Dam safety improvement plan will be climate informed, and improvements will address any identified climate risks. 60. Power flow analysis to identify EDL network investment needs. The transmission investments under this Project were identified based on an engineering study that estimated 10-year transmission investment needs. The study considered different demand forecast scenarios and covered a wide range of engineering solutions to come up with the least cost transmission investments to expand the capacity of the transmission network, including for the purposes of connection of new solar PV capacity, and improve the grid reliability amid contingency events. (ii) Paris Alignment 61. The proposed operation is aligned with the goals of Paris Agreement on both mitigation and adaptation. Lebanon is exposed to several risks, including wildfire, droughts, floods and extreme heat, which climate change is expected to exacerbate. In most locations, extreme heat, particularly severe in July and August, will become even worse with climate change. Climate projections show that the increase in maximum temperatures over a 7-day average across each decade is up to 2°C for the 2030 decade, while the higher end model shows significant increases of 4°C by 2040 in the entirety of the country. Water scarcity caused by droughts is another concern in most of the country, and historical data from the last century show that the situation has already gotten worse more recently. Frequency of extreme heat spells have been increasing due to climate change, inducing an increase in energy demand. Deployment of renewable energy presents an opportunity to meet this increased demand in a cost-effective way. Moreover, to ensure reliability of energy supply, it is essential to consider climate risks when designing energy infrastructure and planning electricity demand management, such as extreme temperature at that may impact performance and operational efficiency of energy infrastructure like the solar PV plant, and flooding that risks damages to physical infrastructure. The Project faces risks from climate change- exacerbated hazards, including wildfires, droughts, extreme heat, and possibly floods (for Subcomponent 2.2). Given the geographical distribution of the grid infrastructure, certain locations could be impacted by hazards such as extreme heat and storm. To address this, the Project design, as elaborated in the technical sections, has incorporated climate mitigation and adaptation measures, and risks will be continuously monitored and managed to ensure they remain low/acceptable. 62. The mitigation risks associated with each activity can be considered low. Specifically, for Sub-component 1.1, construction of the NCC will achieve at least Level 1 EDGE Certification or other global certification with equivalent energy performance requirements. Activities under Sub-component 1.2, in particular financing roll out of AMI, is universally aligned as they are geared towards demand-side management. Activities under Component 2 can be considered universally aligned as they support grid-connected solar parks, rehabilitation of hydropower plants, and reinforcements of grid infrastructure to evacuate renewable energy. Component 3 is also aligned as it supports technical assistance for the project activities. 63. Key adaptation benefits of the Project are increased capability and resilience of the power system to overcome climate risks as a result of various interventions financed. Specifically, the Project contributes to (i) increased capability of the power system to withstand and recover from adverse operation conditions with the use of advanced monitoring Page 17 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) and control capability of SCADA/EMS (Component 1); (ii) enhanced resilience of power generation assets with considerations to address climate risks, including installation of heat-resistant solar PV models, and module materials designed to better withstand operating conditions in extreme heat (Subcomponent 2.1; note the solar site is not subject to risk of flooding); (iii) increased capability of existing hydropower dams owned and operated by LRA to safely discharge the floods, which may potentially increase due to climate change impacts (Subcomponent 2.2), and (iv) enhanced resistance and resilience of the transmission network to abnormal natural events with the use of new transmission equipment and modern software tools that can better model and simulate natural events (Subcomponent 2.3). (iii) Economic Analysis 64. Project economic viability assessment was conducted by comparing the streams of economic costs and benefits under “With Project” and “Without Project” scenarios for 25-year period, which is the estimated useful economic life of solar PV projects. This is a conservative approach because other assets – substation equipment, transmission lines, and rehabilitated hydro equipment – have useful life of more than 25 years. The economic discount rate was assumed at 10 percent and the analyses drew upon outputs from the technical assessment studies. 65. Main economic costs of the Project. The main economic costs of the Project include: (a) capital costs of NCC, roll- out of AMI, strengthening of targeted electricity transmission assets, and rehabilitation of three LRA HPPs; (b) decommissioning costs of solar PV projects; (c) cost of consulting services to inform the design of the relevant components of the Project; (d) costs of OE; and (e) incremental O&M costs to maintain the rehabilitated or constructed assets. The cost of dam safety improvements and related consulting services was not included in the total Project costs because those are not incremental in nature, and those costs would need to be incurred under both “with Project” and “without Project” scenarios. 66. Main economic benefits of the Project. The main economic benefits of the Project would include: (a) reduction of unserved energy due to improvement of reliability of electricity transmission network and increase in the supply of electricity to consumers, and (b) avoided CO2 emissions. a. Reduction of unserved energy. The Project would lead to reduction in unserved energy and copying costs for residential and non-residential consumers. This reduction would be driven by increase in the supply of solar PV based electricity, rehabilitation of LRA HPPs, and reduction of commercial losses due to roll-out of AMI. b. Avoided CO2 emissions. Construction of solar PV plants would also help to displace diesel-based generation that residential and non-residential consumers rely on as a copying mechanism due to shortages of grid-connected electricity supply. 67. Result. The economic analysis of the project yielded the following results: (a) under the Base Case scenario, the economic rate of return (EIRR) is 26 percent, higher than the hurdle rate or social discount rate of 10 percent, and the economic net present value (NPV) is US$77 million; (b) under low carbon shadow price scenario, the EIRR rises to 29 percent and economic NPV to US$84 million; (c) under high carbon shadow price, the EIRR is 32 percent and economic NPV is US$95 million. The economic analysis would use the low carbon price values as a conservative approach. For the GHG accounting, the main methodology that was used to calculate the GHG emissions was reduction of carbon intensity per kWh with the added renewable energy generation. The result showed that the Project will contribute to avoiding carbon emissions approximately 0.53 MtCO2 over the lifetime of the asset (25 years), including both the avoided emissions from RE generation and reduced technical losses. The economic analysis showed that the Project is economically viable and generated positive GHG mitigation benefits. 68. Sensitivity analysis. Sensitivity analysis was conducted to assess the robustness of the estimated project economic returns to changes in the main evaluation variables. Sensitivity analysis covers the following cases that in turn stress test the economic returns to the project. The results of the sensitivity analyses suggest that the Project remains economic viable even in case of significant variation of key inputs and variables. Page 18 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Table 3. Sensitivity Analysis for Economic Evaluation of Entire Project Exclusive of avoided CO2 emissions NPV (million US$) EIRR (%) Base-case 77.31 25.53 a. 20 percent higher construction cost 64.43 21.02 b. 20 percent lower electricity tariff 55.17 20.28 c. Combination of (a) and (b) 42.29 16.76 (iv) Financial Analysis 69. The financial analysis of the Project was carried to evaluate the financial viability of the respective Project activities for two implementing entities, EDL and LRA. The financial analysis was done based on the financial costs and prices, and using the actual cost of capital for the Project. The financial analysis evaluated the incremental cash revenues and costs under “With Project” and “Without Project” scenarios. The discount rate was assumed at 10 percent reflecting Lebanon’s difficult macro and sectoral context. 70. The Technical Assistance component (US$15 million), including consulting contracts, is not included in the analysis since the benefits mainly related to institutional and organizational improvement at the level of both EDL and LRA. 71. Project financial costs for EDL. The financial costs of the Project include: (a) capital costs of NCC, roll-out of AMI, and strengthening of targeted electricity transmission assets; (b) Commissioning costs of solar PV projects; (c) PMC; (d) cost of consulting services to inform the design of the relevant components of the Project; and (e) incremental O&M costs to maintain the rehabilitated or constructed assets. 72. Project financial benefits for EDL. The financial benefits of the Project include i) the incremental cash revenues from sale of additional electricity from solar PV power plants (150MW); and ii) reduction of unserved energy from decrease of substation failure incidence. 73. Project financial costs for LRA. The main financial costs of the Project include: (a) capital costs for rehabilitation of three power plants; (b) dam safety related investments and expenditures; (c) PMC; (d) cost of consulting services to inform the design of the relevant components of the Project; and (e) incremental O&M costs to maintain the rehabilitated or constructed assets. Capital Costs are assumed to be inclusive of taxes, duties, and inflation escalation. 74. Project financial benefits for LRA. The main financial benefit of the Project is the avoided reduction in cash revenues from sale of electricity. Specifically, under “Without Project” scenario, the electricity generation of LRA HPPs is expected to reduce due to dilapidation of critical equipment, which would therefore lead to reduction of sales. 75. Results: The financial analysis of the project yielded the following results: (a) financial NPV of US$254 million and Financial Internal Rate of Return (FIRR) of 22.8 percent for EDL, and (b) financial NPV of US$44 million and FIRR of 24.3 percent for LRA. This result suggest that the Project will have significant impact on improvement of financial viability of EDL as well as to LRA. 76. Sensitivity Analysis. Sensitivity analysis was conducted to assess the robustness of the estimated Project financial returns to changes in the main evaluation variables. The results of the sensitivity analysis suggest that the Project remains financially viable even in case of significant variation of key inputs and variables. Table 4. Sensitivity Analysis for Financial Analysis of the Project Project Financial Analysis of EDL NPV (million US$) FIRR (%) Base-case 254 22.8 Page 19 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) a. 20 percent higher construction cost 217 19.8 b. 20 percent lower electricity tariff 232 22.0 c. Combination of a and b 195 19.0 Project Financial Analysis of LRA 44 24.3 a. 20 percent higher construction cost 39 21.6 b. 20 percent lower electricity tariff 31 21.0 c. Combination of a and b 26 18.5 B. Fiduciary (i) Financial Management 77. The Bank financial management team assessed the two implementing agencies and the FM risk, part of the fiduciary risk, is rated as high. Specific risks identified are presented in Annex 3. Proposed FM arrangements are presented below. 78. Staffing. the PMTs of EDL and LRA will include a finance officer respectively. The Bank will provide the needed training and guidance for the financial officer and the PMT, in addition to hands-on support to ensure that the PMTs are familiarized with Bank procedures. 79. Budgeting. A yearly project budget and disbursement plan will be developed by each agency to include their part of the project. LRA will send the budget to EDL, and the latter will consolidate the budget plan and will submit it to the Bank by no later than December 20 of each year. The consolidated budget plan will be in line with the procurement plan and implementation schedule. Any significant variation in the budget will be justified. 80. Accounting and Reporting. EDL will utilize a ring-fenced system based on excel spreadsheet to record the daily transactions and produce the financial report. This arrangement will be temporary until an integrated system is acquired, installed, and customized. In addition, EDL and LRA will prepare periodical progress reports which will include detail analysis about the physical and financial progress. 81. Internal Controls. A POM will be prepared by EDL with inputs from LRA. The POM will include detailed FM rules and regulations. The POM will be a condition for effectiveness. Two OEs will be recruited, one for each agency, the OE will be a specialized international firm to support EDL and LRA in the design and supervision of all the work under the project. 82. Flow of Funds. Upon confirmation by the Bank that the advance method is reinstated for Lebanon, for EDL’s part of the project, the funds will be channeled from the World Bank to the Ministry of Finance (MoF) treasury account and then transferred to a segregated project Designated Account (DA-A) in US$ opened under EDL’s name at the Central Bank of Lebanon and dedicated to the project. EDL will use the funds in the DA-A to pay for eligible expenditures under the project. For LRA, the funds will be channeled from the World Bank to the Ministry of Finance (MoF) treasury account and then transferred to a segregated project Designated Account (DA-B) in US$ opened under LRA’s name at the Central Bank of Lebanon and dedicated to the project. LRA will use the funds in the DA-B to pay for eligible expenditures under the project. 83. External Audit. Each agency will recruit an external auditor with TORs acceptable to the Bank to audit the respective project financial statements. EDL external auditor will consolidate the audit report before sharing with the Bank. The audit will cover each fiscal year of the project and will be carried out in accordance with International Standards on Auditing. Details of the legal and practical arrangements between EDL and LRA for ensuring this coordination will be documented in the POM. 84. Disbursements Arrangements. The proceeds of the Loan will be disbursed in accordance with the Bank's disbursements guidelines for projects and as outlined in the Disbursement and Financial Information Letter (DFIL). (ii) Procurement Page 20 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 85. Procurement will be carried out in accordance with the World Bank Procurement Regulations for Investment Project Financing Borrowers dated September 2023 or the newest version (Procurement Regulations). The provisions of the Borrower’s Procurement Plan for the project (Procurement Plan) provided for under Section IV of the Procurement Regulations will apply, as the same may be updated from time to time in agreement with the World Bank. The borrower will also ensure that the project is carried out in accordance with the provisions of the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by International Bank for Reconstruction and Development (IBRD) Loans and International Development Association (IDA) Credits and Grants”, dated July 1, 2016 (Anti-Corruption Guidelines). In addition, the Project will require bidders/primary suppliers of solar PV panels (and other material, as applicable) to provide two declarations: a Forced Labor Performance Declaration (which covers past performance), and a Forced Labor Declaration (which covers future commitments to prevent, monitor and report on any forced labor, cascading the requirements to their own sub-contractors and suppliers). The Borrower will include enhanced language on forced labor in the procurement contracts as per Bank’s Standard Procurement Documents. 86. The procurement risk is rated as high due to several contributing factors . The overall situation combined with broader macroeconomic risks, creates a challenging environment. Key issues include market instability, price fluctuations, and exchange rate volatility. Additionally, the complex nature of the activities planned for financing by the project and the limited capacity of the implementing agencies- both of which are new to World Bank operations- further elevate the risk. The project will be subject to a high-risk prior review threshold. A preliminary procurement capacity assessment was conducted (see Annex 3). 87. Key Procurement under the Project. The main contracts planned for financing by the Project are mostly large Design, Supply & Installation contracts for civil works and hardware/software operation technology (OT) to enhance EDL’s operation and commercial business systems, transmission network requirements, construction of solar PV power plants, and rehabilitation of HPPs, in addition to supply and installation of large equipment, and large consultancy services, mainly the OE. International competitive bidding will mostly be used targeting mid-size or lager international contractors specializing in relevant fields. Considering that both implementing agencies were not previously exposed to World Bank operations, capacity building support will be provided to both agencies to strengthen their capacity in different fields. The Borrower is in the process of developing the Project Procurement Strategy for Development (PPSD) to be reviewed and cleared by the Bank by negotiations. The PPSD will be updated as needed during project implementation. 88. Capacity Assessment. Based on the findings of the assessment, the following measures will be in place: (1) the project will follow the World Bank procurement regulations including complaints mechanism and settlement of disputes, and will use the World Bank Standard Procurement Documents (SPDs); (2) Two PMTs will be established in each implementing entity composed of experienced staff and hired consultants, including at least a project manager, procurement specialist, financial management specialist, environmental, social, health and safety specialists and focal points, as well as techncal experts to ensure coordination of project activities; (3) The advertisement and contracting conditions must ensure regional and international market outreach; (4) OE will be hired to support both agencies in developing technical designs and specifications, environmental and social requirements, and bidding packages, as well as supervising works. Additionally, the Hands-on Expanded Implementation Support (HEIS) might be extended to the implementation entities upon request, pursuant to the Procurement Policy and Procurement Directive. The Bank will extend its support to assist the implementation entities to deliver effective procurement processes going beyong the regular implementation support, in situations of capacity constraints. C. Legal Operational Policies @#&OPS~Doctype~OPS^dynamics@padlegalpolicy#doctemplate Page 21 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No D. Environmental and Social 89. The Environmental Risk Classification is Substantial. The planned interventions will have overall net positive environmental and public health impacts due to (i) increased supply of clean, renewable, grid electricity, and (ii) reducing the reliance on individual diesel generators. These interventions will reduce air and noise pollution as well as greenhouse gas emissions. However, the planned interventions under components 1 and 2 specifically: (i) demolition and reconstruction of the NCC building, (ii) strengthening the 220 KV grid, (iii) rehabilitation of three HPPs, and (iv) installing 150 MW PV plant will be accompanied by civil and electromechanical works. Civil works are typically associated with temporary, reversible, and geographically confined negative impacts on the surrounding environment such as air and noise emissions, hazardous and non-hazardous solid and liquid waste generation, use of chemicals, hazardous materials, pollution of surface water bodies and impacts on terrestrial and aquatic ecosystems. The nature of the physical works will also be associated with workers health and safety risks include falling in excavations, materials handling, electrocution, falling from heights, drowning in river waters or reservoirs, hitting by moving objects, etc. The strengthening of existing substations may include replacement of old transformers with new ones as part of strengthening EDL grid. Some old transformers - unlikely to be changed under this project - may contain oils that are contaminated with polychlorinated biphenyls (PCBs), which are toxic chemicals which require proper handling, storage and end disposal. The installation of the PV plant will require the occupation of large areas of desert land which have moderate ecological importance as per the E&S screening which was conducted by independent consulting firm hired by EDL. The E&S screening also confirmed that the proposed wider area20 for development of PV plants is not designated as protected area and does have significant risks on biodiversity or sensitive ecosystems. However, some mitigation measures were recommended to be considered in the planning and design phases to eliminate and minimize any residual impacts on biodiversity to minimize any potential impacts on endemic flora and fauna species as well as migratory and resident birds. During operation, the grid-connected solar PV systems combined with battery storage systems, will result in (i) generation of electric and electronic wastes (e.g., storage batteries at their end-of-life), and (ii) consumption of fresh water for cleaning the PV panels. The risks and impacts associated with the construction and operation of the PV plant will be addressed in a full environmental and social impact assessment which will be part of the bidding documents. The operation of the hydropower plants on Litani river relies on the water flows regulated by Qaraoun Dam. In case of Dam failure, severe social, environmental and economic impacts may occur such as: loss of agricultural lands, power outage, loss of livelihoods, flow of contaminated water, disruption of lifeline facilities, and can result in possible loss of lives. A dam safety initial assessment was conducted and assured the integrity of the dam structure. The assessment also recommended some dam maintenance activities which will be undertaken as part of the project interventions. The operation of HPPs, after project intervention, will not result in any new or additional negative impacts on water resources, natural migration patterns of fish and other aquatic organisms. Most of the adverse impacts associated with the construction and rehabilitation activities are expected to be short/medium-lived, limited geographically limited to the construction phase and can be managed, avoided, or mitigated by implementing technically and financially viable measures within the capacity of the local contractors in the country. Based on the conducted E&S screening, audits and assessment, it is determined that the environmental risk rating is Substantial. 20 The exact coordinates for the planned u lity-scale PV of 150 MW capacity are not determined but will be within the studied area for biodiversity. Page 22 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 90. The social risk is substantial as potential risks are temporary, predictable and reversible, medium in magnitude and in spatial extent and size of the population likely to be affected being medium to large scale and with a medium to low probability of serious adverse effects to human health and environment. The project has positive social impacts as it will increase the reliability of the electricity supply to grid-connected consumers. Under Component 1 construction of a new NCC building and installation of SCADA software will serve citizens and communities sustainably. Advanced metering which will be rolled out nationwide will improve and strengthen customer account management and services. Under Component 2, LRA HPPs will be rehabilitated and associated with minor civil works. Also under Component 2, new grid- connected solar PV projects will be developed to improve grid electricity supply to consumers and may even promote some employment opportunities to surrounding nearby communities both during construction and operation. Manufacturing of solar PV panels may include child labor and forced labor associated with primary supply workers of solar panels. For solar PV construction and HPP rehabilitation there may be OHS and community health risks, child labor and forced labor and SEA/SH risks. There is also the risk of perception of exclusion from project benefits of affected communities especially those living in close proximity to the project locations. Lands that will be selected for PV plants will ensure that they are public lands with no encroachment based on agreed criteria. As for the reconstruction of the NCC building, this will be taking place on EDL publicly owned lands and will not involve any involuntary resettlement. Furthermore, the POM will include the criteria to exclude any sites that may cause resettlement for Project activities. Populations residing downstream of the three HPPs, which have been in operation since the 1960s, are not expected to be negatively impacted by the rehabilitation works as any existing pollution levels at the upper watershed or downstream of the river basin will not be affected by the project interventions. 91. The implementing agencies EDL and LRA, in close coordination with MoEW and with the support of a competent E&S consultancy firm, are preparing, and have disclosed the following studies and documents by the appraisal stage : (i) Stakeholder Engagement Plan (SEP), (ii) Dam Safety Report, (iii) Draft Audit and Draft ESMP for the three HPPs owned and operated by LRA and, (iv) an E&S screening report for the proposed solar PV plant potential locations. The Environmental and Social Commitment Plan (ESCP) has been disclosed. These instruments will ensure the mitigation of any potential environmental and social negative impacts associated with the project interventions, and will ensure regular safety inspections are conducted and existing emergency procedures are in place and implemented. Feedback from consultations was overall positive for all project proposed interventions and as detailed in the SEP, three HPPs Audit and ESMP and the Solar PV plant E&S screening report. 92. The following instruments will be prepared before commencement of the relevant activities : (i) Environmental and Social Impact Assessment (ESIA) for the utility scale PV plant (150 MW), (ii) ESMP for the rehabilitation of the power lines necessary to evacuate the generated power of the PV plant and the associated interconnection substations (including hazardous waste management plan for replacement of old oil-based transformers – if needed) while ensuring feedback from inclusive stakeholder consultations, (iii) simple ESMP for NCC construction and demolition of Chiyah Building, (iv) Dam Safety report in accordance with ESS4 requirements, (v) ESMP for civil works necessary for Qaroun Dam maintenance), and (vi) Labour Management Procedures (LMP). All these provisions and timelines are clearly stipulated in the ESCP. To ensure proper implementation of the E&S requirements, a qualified E&S focal point will be recruited as a member of the LRA PMT to perform overall E&S oversight and report on the overall E&S performance and compliance with the ESCP while dedicated E&S specialist(s) will be hired as part of the EDL PMT. Preparation of the E&S instruments will be mandated to a specialized E&S firm whereas supervison of works under component 1 and 2 will fall within the scope of the OE. E. Gender 93. A key contribution of the Project is to increase clean and affordable electricity supply across the grid, which would offer more benefits to female citizens, who are disproportionally more vulnerable to energy poverty in Lebanon. A Page 23 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) recently conducted Bank study21 based on focus group interviews and survey data concluded that energy poverty has dire adverse impacts on women across Lebanon. Women respondents identify that they have been forced to develop time- consuming and labor-intensive coping mechanisms, including conducting household chores at highly unsociable hours when the national grid becomes available. The lack of electricity for residents’ daily needs has affected women’s mental health and intra-household dynamics. Moreover, the study observed that Lebanese women lack decision-making on energy expenditure and the type of energy sources households can use (notably choosing a combination of EDL supply, distributed solar PV systems and/or diesel generator subscription). EDL supply is considerably cheaper than diesel generators. This Project, by boosting EDL supply, would increase access to affordable electricity services to women citizens who are disproportionally affected by grid disruption. 94. This Project will also support EDL efforts to promote an enabling environment for women to get practical experience through internships or apprenticeships and improve their employability prospects in the sector . In Lebanon, 61 percent of students in public universities enrolled in Science, Technology, Engineering, and Mathematics (STEM) related fields are women. However, only 20 percent of workers in STEM jobs are women and unemployment among women in Lebanon is higher than men with few women applying and working in the energy field. 22 Key reasons are that women face underlying cultural bias in addition to constraints around networking, accessing information about job opportunities or apprenticeships where they can get practical experience. For example, according to a survey carried out across Egypt, Saudi Arabia, and the United Arab Emirates, the second-most reported reason why women do not join or stay in the workforce is a lack of mentorship and role models (World Bank 2022). There are also issues related to mobility and norms, particularly in contexts marked by fragility and conflict, which may make it difficult for young women to get their foot in the door in male dominated fields, such as engineering. In this context, this Project will promote a program that provides young female engineers with practical experience in the energy field, access to mentorship and receipt of a certification of completion. Given institutional capacity constraints, the targeted program will be developed over the course of different phases. SOP1 will focus on building the capacity of EDL through technical assistance, gender gap assessment and knowledge sharing of gender diversity case studies with successful examples of what has worked and then SOP2 will focus on the development of a program to increase female participation in the workplace through collaboration with regional/global women in energy networks.23 Specific measures such as outreach to universities and targeted messaging in recruitment advertisements to encourage the number of female applicants will be considered. As part of the SOP, the project will track female representation in internships or apprenticeships with an expected target of 30 percent to be achieved by SOP2 (See Monitoring and Evaluation Plan). F. Citizen Engagement 95. The project is compliant with the corporate requirements for citizen engagement, based on the mechanisms that it has in place to engage with citizen beneficiaries during the project’s implementation. In addition to other channels such as the Grievance Redress Mechanism (GRM), the project will utilize Lebanon’s Inter-Ministerial and Municipal Platform for Assessment, Coordination and Tracking (IMPACT) platform to i) share project information, making public the key approaches and expected/updated results and impacts (electricity supply increase, improved reliability, etc.), and ii) solicit, address and respond to feedback from citizen beneficiaries about the project, including complaints, suggestions, queries and compliments. The IMPACT platform is a Central Inspection initiative to give access to the public with 21 Lebanon CCDR Background Note "Towards an inclusive and Just Transi on in Lebanon's Energy Sector" (forthcoming). 22 Based on available data, the total share of women at EDL is 15 percent, and in technical departments it is 6 percent (World Bank, 2022 “Towards More and Be er Jobs for Women in Energy”). This is in line with na onal es mates: Based on the 2018/2019 Labor Force Survey, the share of women in electricity, gas, steam and air condi oning in Lebanon is es mated at 5 percent (World Bank 2022 “Towards More and Be er Jobs for Women in Energy”). While data is limited, anecdotal evidence collected from across the region suggests female internship representa on is likely to be as low. 23 For example, the regional internship program carried out by the Regional Network in Energy for Women in MENA can provide strategies and lessons learned for Lebanon. Page 24 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) comprehensive information regarding government initiatives. https://impact.cib.gov.lb/. Regular consultations with key sector stakeholders including CSOs and academics will be carried out to seek their views on project implementation as well as any suggestions on course correction. The feedback loop will be closed by reflecting their feedback in project implementation where possible. An Intermediate Indicator under Component 3 has been included to measure citizen engagement, i.e. percentage of registered feedback cases (complaints, suggestions, compliments) that have been addressed and responded to in a stipulated amount of time. 96. Besides project-level mechanisms, the Project will also enhance EDL’s capacity to manage citizen engagement in the long term by financing the ERP activity and TA component. The ERP will enable more efficient and transparent customer service with the provision of key information systems, while Sub-component 3.1 can support the capacity building of EDL to manage and address feedback and complaints from customers. V. GRIEVANCE REDRESS SERVICES 97. Grievance Redress. Communities and individuals who believe that they are adversely affected by a project supported by the World Bank may submit complaints to existing project-level grievance mechanisms or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted to the AM at any time after concerns have been brought directly to the attention of Bank Management and after Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s Grievance Redress Service (GRS), visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, visit https://accountability.worldbank.org. VI. KEY RISKS 98. The overall risk rating of the Project is High due to the ratings for the following risks. 99. Political and Governance Risk is High. Since October 30, 2022, Lebanon’s Parliament has not selected a new President The current Government continues to serve in caretaker capacity. Moreover, the exacerbation of the country’s security situation in relation to the spillover effect of the ongoing Conflict in the Middle East may impede the implementation process and worsen the FCV situation. Such risks are beyond the control of the Bank and thus would be difficult to mitigate. 100. Macroeconomic Risk is High. The sector is facing a structural currency mismatch between revenues denominated in LBP, while about ninety percent of its cost are in US$. In the absence of a unified exchange rate, it raises the question of the ability of the Central Bank to make available the hard currency needed to sustain services (about US$1 billion per year for 8 hours of services); this risk is compounded further by low levels of international reserves due to the protracted crisis. Lack of access to US$ may impact the ability of EDL an LRA to properly maintain the assets to be constructed under the Project. A mitigation measure includes recent Government decision to allow EDL to collect payments for electricity bills in US$ and LBP (at client’s discretion). An additional mitigation measure put in place with the support of the Bank include the establishment of a CWM, agreed upon with MOF and BDL, to ensure EDL’s access to forex needed to ensure continuity of EDL operations. The CWM design has been approved by the Government, and the operationalization of the CWM will be completed by June 2025, per the Letter of Electricity Sector Policy (Annex 3). Page 25 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 101. Sector Strategies and Policies Risk is Substantial. The Government does not have a track record of consistent implementation of policies and reforms in the electricity sector. Some of them will be important for long-term sustainability of investments under the Project. Specifically, consistent implementation of tariff policy to ensure electricity tariffs are regularly adjusted to reflect changes in economically justified costs is critical for EDL and LRA to adequately maintain the newly constructed or rehabilitated assets. Furthermore, it will be important to ensure adequate implementation of requirements for transmission and distribution network grid codes to ensure that all new connections are done with due consideration of network requirements of EDL. This would also ensure that the required costs are properly covered for EDL (through tariff) and the new customers cover the required portion. On sector reforms, the political crisis in Lebanon may affect the Government’s ability to take timely decision to advance the reform agenda, notably for the establishment of ERA. The mitigation measures include the combination in the Loan Agreement of: (i) a disbursement condition on the first step to establish ERA and (ii) an additional remedy related to the implementation of selected actions outlined in the Government’s Letter of Electricity Sector Policy to maintain leverage on reform actions during implementation. 102. Technical Design Risk is Moderate. Proposed activities use well-established technologies and do not present construction or operational challenges. Detailed assessments and due diligence are being carried out as part of Project preparation. OEs will be hired by EDL and LRA to help prepare the technical specifications to be used for procurement of works and goods under their respective scope of activities. O&M contracts for solar PV plants will also be financed under Component 2, including significant capacity building, to facilitate the hand-over of the assets to EDL. 103. Institutional Capacity for Implementation and Sustainability Risk is High . Given capacity gaps at EDL and LRA, the adequacy of staffing with adequate skills within dedicated teams is critical. To mitigate the capacity risk, technical assistance will include assignment of qualified staff from within EDL and LRA to carry out implementation activities, hire consultants where needed including, importantly, the OE. The comprehensive and integrated OE support is a key mitigation measure for limited capacity and lack of experience with the Bank. The OE mandate will also include formal and on the job capacity building, to gradually strengthen EDL and LRA. 104. Stakeholder Risk is Substantial. There are diverse groups of stakeholders in the electricity sector both in public and private domains. This has often led to conflicting directions and resistance to change. During the last project preparation mission, the team has already reached out to several of the key stakeholders, which expressed their overall support given the relevant of the design and components to addressing urgent sector needs. The reform actions, which were required prior to Project Appraisal, have entailed certain alignment between stakeholders, especially regarding the CWM (up to agreement between BDL, MOF, MOEW and EDL). Mitigation measures include leveraging donor community to facilitate stakeholders’ cooperation in advancing reforms agenda, frequent coordination meetings, and regular dialogues underpinned by sector working groups led by the World Bank. Representatives from different sectors (including private sector, civil society and academia) will be consulted on regular basis. 105. Environmental and Social Risk is Substantial, with Environmental Risk rated as Substantial, and Social Risk being as Substantial. See Section IV-D. Environmental and Social above. 106. Fiduciary risk is High due to high procurement and financial management (FM) risks. The procurement risk is High. The overall situation combined with broader macroeconomic risks, creates a challenging environment. Key issues include market instability, price fluctuations, and exchange rate volatility. Additionally, the complex nature of the activities planned for financing by the project and the limited capacity of the implementing agencies- both of which are new to World Bank operations- further elevate the risk. To mitigate the risk and non-payment or delayed payment risks under the Project, the direct payment method will largely be used. In addition, the main contracts under the Project, mostly large engineering, procurement, and construction (EPC) contracts for transmission network requirements, construction of solar PV power plants, and rehabilitation of HPPs, as well as consultancy contracts, i.e. OE contract, will be procured through international competitive bidding process. Additionally, the Bank may extend its support to assist the Page 26 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) implementing entities to deliver effective procurement processes going beyong the regular implementation support, through the HEIS upon the Borrower’s request. HEIS does not substitute for the Borrower’s decision-making authority. The procurement key decisionsat key stages remain the responsibility of the Borrower. 107. The FM risk is High. The risk rating is based on an FM assessment undertaken by the Bank FM team. The risk rating is due to the following: (i) the overall situation in the country and the elevated corruption and perception thereof; (ii) limited availability of civil servants, deterioration of the local currency, informal capital control and delays in transfers and payments due to the depletion of hard currency; (iii) no previous experience at EDL and LRA in executing Bank financed projects; (iv) limited capacity of public oversight institutions namely the Court of Accounts to undertake comprehensive audit of public agencies. The Bank conducted an FM assessment of the project and the two implementing agencies and confirmed the risk rating and the initial risks identified in addition to the specific risks based on the activities. The Bank also proposed appropriate mitigating measures for all the risks identified and agreed with the executing agencies on the acceptable implementation arrangements to ensure compliance with acceptable fiduciary requirements as per Bank rules and regulations (see Annex 1 for detailed risks and proposed mitigating measures). Page 27 The World Bank Lebanon Renewable Energy and System Reinforcement Project(P180501) VII. RESULTS FRAMEWORK AND MONITORING @#&OPS~Doctype~OPS^dynamics@padannexresultframework#doctemplate PDO Indicators by PDO Outcomes Baseline Closing Period Cleaner electricity services enabled Increased supply of grid-connected solar energy to consumers enabled by automation of dispatching supported with NCC and network reinforcements (Gigawatt-hour (GWh)) Jun/2024 Jun/2030 0 250 Renewable energy capacity enabled with direct support (Megawatt) CRI Jun/2024 Jun/2030 0 343 Improved reliability of grid electricity services Reduction in frequency of equipment failures at substations rehabilitated under the Project (Percentage) Jun/2024 Jun/2030 0 30 Improved efficiency of grid electricity services Improvement of billing for electricity services (% of electricity consumed) (Percentage) Jun/2024 Jun/2030 73 90 Intermediate Indicators by Components Baseline Closing Period Component 1: Strengthening of EDL Systems NCC installed and operational (Yes/No) Jun/2024 Jun/2029 NO YES Completion of the Advanced Metering Infrastructure (AMI) Center (Yes/No) Jun/2024 Jun/2029 NO YES Page 28 The World Bank Lebanon Renewable Energy and System Reinforcement Project(P180501) Component 2: Increase of Grid-Connected Renewable Energy Supply Generation capacity of grid-connected solar energy enabled (Megawatt) Jun/2024 Jun/2029 0 150 Total number of Hydro Power Plants rehabilitated (Number) Jun/2024 Jun/2029 0 3 Dam Safety Enhancements Implemented (Yes/No) Jun/2024 Jun/2029 NO YES Completion and connection of 220 kV Point of Connection (PoC) Solar substation to the grid (Yes/No) Jun/2024 Jun/2029 NO YES Total number of substations rehabilitated under the project (Number) Jun/2024 Jun/2029 0 3 Hydropower generation capacity rehabilitated (Megawatt) Jun/2024 Jun/2029 0 193 Private capital enabled for solar PV projects due to Project’s interventions (million) (Amount(USD)) Jun/2024 Jun/2029 0 200 Component 3: Technical Assistance Percentage of registered citizen feedback cases that have been addressed and responded to in a stipulated amount of time (Percentage) Jun/2029 100 EDL Owner's Engineer (OE) is mobilized (Yes/No) Jun/2024 Jun/2025 NO YES LRA Owner's Engineer (OE) is mobilized (Yes/No) Jun/2024 Jun/2025 NO YES Preparation of Required Dam Safety Plans is Completed (Yes/No) Jun/2024 May/2026 Page 29 The World Bank Lebanon Renewable Energy and System Reinforcement Project(P180501) NO YES Component 4: Contingent Emergency Response Component (CERC) Page 30 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Monitoring & Evaluation Plan: PDO Indicators by PDO Outcomes Cleaner electricity services enabled Increased supply of grid-connected solar energy to consumers enabled by automation of dispatching supported with NCC and network reinforcements (Gigawatt-hour (GWh)) This indicator monitors progress toward cleaner electricity services enabled by tracking the Increased supply of Description grid-connected solar energy to consumers enabled by automation of dispatching supported with NCC and network reinforcements (Gigawatt-hour (GWh)) Frequency Semi-annual Data source EDL based on metering data. Methodology for Project implementation progress reports by EDL. Data Collection Responsibility for EDL Data Collection Renewable energy capacity enabled with direct support (Megawatt) CRI Description This indicator measures renewable energy capacity enabled with direct support of the project. Frequency Annual Data source EDL Methodology for EDL performance data Data Collection Responsibility for EDL Data Collection Improved reliability of grid electricity services Reduction in frequency of equipment failures at substations rehabilitated under the Project (Percentage) This indicator will monitor improvement in the reliability of grid electricity services by tracking frequency Description reduction (%) in equipment failures at substations rehabilitated under the project. Frequency Annual Data source EDL Reports Methodology for EDL reports on equipment failures Data Collection Responsibility for EDL Data Collection Improved efficiency of grid electricity services Improvement of billing for electricity services (% of electricity consumed) (Percentage) This indicator will monitor the improvement in the efficiency of grid electricity services by tracking the Description improvement in electricity service billing (% of electricity consumed). Frequency Semi-annual Data source EDL energy accounting and financial data Methodology for Project implementation progress reports by EDL. Data Collection Responsibility for EDL Data Collection Monitoring & Evaluation Plan: Intermediate Results Indicators by Components Component 1: Strengthening of EDL Systems NCC installed and operational (Yes/No) Description This indicator measures the progress with construction and operationalization of NCC Frequency Annual Data source EDL Page 31 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) EDL project progress reports including data on the functioning of NCC and its interoperability with essential Methodology for equipment such as SCADA and EMS will be assessed through means such as the Certificate of Construction Data Collection Completion (CCC) and the Certificate of Operational Acceptance (COA). Responsibility for EDL Data Collection Completion of the Advanced Metering Infrastructure (AMI) Center (Yes/No) Description This indicator would measure the progress with the implementation of the metering infrastructure. Frequency Annual Data source EDL Methodology for Assessment of deliverables, including Certificate of Construction Completion (CCC) and the Certificate of Data Collection Operational Acceptance (COA). Responsibility for EDL Data Collection Component 2: Increase of Grid-Connected Renewable Energy Supply Generation capacity of grid-connected solar energy enabled (Megawatt) Description This indicator measures generation capacity of grid-connected solar energy enabled by the project Frequency Annual Data source EDL performance data, Methodology for Regular reporting from EDL (Utility performance data) will be provided once PV solar capacity is enabled and Data Collection connected to grid. Responsibility for EDL Data Collection Total number of Hydro Power Plants rehabilitated (Number) This indicator measures the progress of rehabilitating Hydropower Plants (HPP) by capturing Project Description implementation progress reports for the respective HPP rehabilitation. Frequency Semi-annual Data source LRA Methodology for Project implementation progress reports for the respective HPP rehabilitation. Three (3) HPP plants are under Data Collection consideration. This indicator will measure the count. The baseline is 0, and the target is 3. Responsibility for LRA Data Collection Dam Safety Enhancements Implemented (Yes/No) This indicator measures the progress with implementation of remedial measures to improve the safety of Description Qaraoun dam. Frequency Semi-annual Data source LRA Methodology for Project implementation progress reports by LRA. Data Collection Responsibility for LRA Data Collection Completion and connection of 220 kV Point of Connection (PoC) Solar substation to the grid (Yes/No) Description This indicator measures the implementation progress with connection of the solar power plant to the network. Frequency Annual Data source EDL Methodology for Project implementation progress reports of EDL Data Collection Responsibility for EDL Data Collection Total number of substations rehabilitated under the project (Number) Description This indicator measures the implementation progress of substation rehabilitation by capturing Project Page 32 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) implementation progress reports for the respective substations. Three (3) 220kV substations require rehabilitation. This indicator will measure the count. The baseline is 0, and the target is 3. Frequency Annual Data source EDL Methodology for Project implementation progress reports for the respective substations. Data Collection Responsibility for EDL Data Collection Hydropower generation capacity rehabilitated (Megawatt) Description This indicator measures hydropower generation capacity rehabilitated with direct support of the project Frequency Annual Data source LRA asset data The Litani River Authority (LRA) in Lebanon typically publishes reports and data on the condition of its assets, Methodology for such as dams, reservoirs, and hydroelectric plants, annually. These reports may include inspection information, Data Collection maintenance activities, and overall asset condition. www.litani.gov.lb Responsibility for LRA Data Collection Private capital enabled for solar PV projects due to Project’s interventions (million) (Amount(USD)) This indicator measures the amount of private capital enabled (PCE) for solar PV projects due to the project's Description interventions. Frequency Annual Data source MOEW Methodology for MOEW Data Collection Responsibility for MOEW Data Collection Component 3: Technical Assistance Percentage of registered citizen feedback cases that have been addressed and responded to in a stipulated amount of time (Percentage) Percentage of registered feedback cases (complaints, suggestions, compliments) that have been addressed and Description responded to in a stipulated amount of time Frequency Semi-annual Data source GRM, citizen feedback processes Methodology for GRM, citizen feedback processes Data Collection Responsibility for EDL Data Collection EDL Owner’s Engineer (OE) is mobilized (Yes/No) Description This indicator measures the progress with the selection of OE for EDL Frequency Quarterly Data source EDL Methodology for STEP data and information Data Collection Responsibility for EDL Data Collection LRA Owner’s Engineer (OE) is mobilized (Yes/No) Description This indicator measures the progress with selection of OE for LRA Frequency Quarterly Data source LRA Methodology for STEP information and data. Page 33 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Data Collection Responsibility for LRA Data Collection Preparation of Required Dam Safety Plans is Completed (Yes/No) This indicator measures progress toward Dam Safety Enhancements by tracking completion in preparing Description required dam safety plans. Frequency Semi-annual Data source LRA Methodology for Project implementation progress reports by LRA. Data Collection Responsibility for LRA Data Collection Share of female engineers participating at EDL as interns or in apprenticeships (%) Percentage of internships or apprenticeships completed by women seeking to enhance their employability in Description technical posiitons in the sector. Frequency Results expected to be met in SOP2 Data source EDL with technical assistance Methodology for EDL Human Resources corprorate reporting with technical assistance Data Collection Responsibility for EDL Data Collection Component 4: Contingent Emergency Response Component (CERC) Page 34 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) ANNEX 1: Implementation Arrangements and Support Plan COUNTRY: Lebanese Republic Lebanon Renewable Energy and System Reinforcement Project (i) Project institutional and implementation arrangements 108. EDL and LRA will serve as the implementing entities for their respective investments in the Project. They will be supported by their respective OEs and will report to a PSC chaired by MOEW. The PSC will include representatives from EDL, LRA, and MOF. MOEW will oversee strategic guidance and the overall supervision of the project. This detailed implementation arrangement is depicted in Figure 2, illustrating the roles and responsibilities of the various entities involved, the support structures in place, and the timeline for key activities leading to the project’s effectiveness. 109. Project Management and Support will including the following aspects: a. Strategic Oversight and Coordination: MOEW will be responsible for providing strategic direction and ensuring the overall supervision of the Project’s progress. The PSC, which includes representatives from MOEW, MOF, EDL, and LRA, will facilitate high-level decision-making and coordination among the different stakeholders. b. Capacity Building and Training. Component 3, along with the PASA (P179937) will address the capacity- building needs of EDL and LRA, focusing on enhancing their capabilities to manage environmental and social risks, procurement, and FM responsibilities. Training sessions and continuous support will be provided to ensure that these entities are well-equipped to handle their roles effectively. 110. Formation of PMTs: EDL and LRA will each establish their own PMTs to manage the project. These teams will be composed of professionals with a diverse set of skills required for effective project management. The core team will include: a. Project Manager: Responsible for coordinating all project activities and acting as the main point of contact with the WB throughout the project implementation. b. Procurement Specialist: Ensuring that all procurement processes are carried out efficiently and in accordance with World Bank guidelines. c. FM Specialist: Overseeing FM, budgeting, and ensuring compliance with financial regulations and standards. d. E&S Specialists and Focal Points: Managing and monitoring the project's compliance with environmental and social commitmemt plan and instruments, and ensuring adherence to ESS requirements. (ii) Financial Management 111. The project will be implemented following the World Bank rules on fiduciary including financial management and procurement regulations (dated September 2023). The implementing agencies will be EDL and the LRA. EDL is a public establishment with an industrial and commercial vocation. It was founded by Decree No. 16878 dated July 10, 1964, to take charge of the production, transmission, and distribution of electric energy throughout all Lebanese territory. EDL is an autonomous State-Owned Enterprise (SOE) with legal and financial independence and operates under the administrative tutelage of the Ministry of Energy and Water (MEW) and under the financial tutelage of the Ministry of Finance (MOF). EDL has no prior experience in implementing Bank financed project. 112. The LRA is a state-owned enterprise with an industrial and commercial mandate and was established according to the Law No. 14/08/1954. It is responsible for implementation of the Litani River Master Plan for irrigation and domestic water supply, monitoring of water resources (surface water and ground water) in Lebanon, as well as construction and operation of the Qaraoun Dam, Awali, Markabi, and Joun HPPs, and electric networks between these power plants and Page 35 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) the EDL network. It is also responsible for operation of three irrigation projects in the Bekaa area and the south Lebanon. LRA operates under the administrative oversight of MOEW, and under the financial oversight of the Ministry of Finance (MOF). LRA has no prior experience in implementing Bank financed project. 113. EDL and LRA will be the implementing entities for their corresponding parts of the project, supported by their respective Owner’s Engineers (OEs). EDL and LRA will each establish a dedicated PMT to manage the Project. Financial Management Assessment 114. The Bank financial management team assessed the two-implementing agencies and the FM risk, part of the fiduciary risk, is rated as high. The following are the identified risks: a. Overall high perception of corruption in the country due to the deteriorating economic and social situation. b. Devaluation of the local currency in addition to lack of trust. c. High turnover of employees in the public sector due to the economic situation resulting in a general decline in public service delivery. d. Project implemented by two agencies, EDL and LRA who have no previous experience in implementing Bank financed projects. This will require enhanced coordination, on-hands support, close guidance, and monitoring. e. EDL has an outdated organization structure, weak governance model and restricted accountability, with limited human, and financial resources capacities. f. LRA is governed by its internal bylaws, these by laws details their internal control systems which include segregations of duties and monitoring and controls. These systems are specific to LRA but are limited and faces significant constraints in terms of financial and human resources capacities. g. EDL and LRA have no integrated systems to record financial transactions, in addition to no capacity for the preparation and production of reliable financial reports as per Bank requirements. h. Potential delays in the flow of funds due to the lengthy process of transferring funds from the Ministry of Finance treasury account to the project designated account for EDL and LRA (upon confirmation by the Bank that the advance method is reinstated for Lebanon). i. Project includes a significant amount of works, which necessitate special skills and enhanced monitoring and controls to ensure that the physical progress is aligned with the financial progress and that that the work is delivered with the highest quality and the funds are used for their intended purposes. j. EDL is audited by an external private auditor; the last audit covered the year 2010 and had a disclaimer of opinion, revealed significant deficiencies in internal controls, lack of an integrated system, proper reconciliation, and substantiations of many accounts. An audit was conducted for year 2020 based on the request of the Bank, and the draft audit was submitted in April 2024, the audit also had a disclaimer of opinion with significant deficiencies in internal controls, lack of an integrated system, proper reconciliation and substantiations of many accounts and lack of fixed assets registration and valuation. k. EDL and LRA are both subject to the audit of the Court of Accounts (CoA) based on the provisions of the applicable laws, CoA audits all public funds, however with the constraints that the CoA is facing in terms of financial and human resources, the audit is not conducted on a regular basis which would give limited assurance on the use of the project funds. 115. The following are the agreed upon mitigating measures to be applied. The FM residual risk will remain high awaiting the implementation of the mitigating measures. Once the Bank is satisfied with the implementation of the mitigating measures, the residual risk will be revisited and reduced to Substantial. The following are the proposed mitigating measures: Page 36 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) a. EDL and LRA will each establish a full dedicated PMT to handle their part of project implementation. The PMT will include a project manager, financial officer, and procurement officer. The establishment of the PMT will be a condition of effectiveness. b. The project implementation will be separated from other activities at EDL and LRA, through a ring-fenced system, including specific project rules and regulations on financial management including accounting and financial reporting. c. Upon confirmation by the Bank that the advance method is reinstated for Lebanon, EDL and LRA will each open a segregated Designated Account (DA) in US$ at the Central Bank of Lebanon to receive the funds. Payments made from the DAs will be in US$ to preserve the value of the funds. d. EDL and LRA will use excel spreadsheets to record the daily transactions and produce the required interim financial reports. This will be temporary for EDL as the reform process moves forward, and the acquisition of an integrated system is finalized. e. Interim Un-audited Financial Reports (IFRs) will be prepared by EDL and LRA. The IFR of each agency related part will be submitted to the Bank by no later than 45 days after the end of each quarter. As part of the financial management capacity reforms and operational enhancement of the EDL, an audit firm has been recruited to conduct the audit of the establishment, starting year 2020. In addition, the audit firm will conduct a complete and comprehensive inventory and valuation of all assets owned by EDL. EDL will also recruit a consultancy firm to support in the deployment of the ERP system which will include shifting to international accounting standards and set up an internal audit function. f. A POM will be prepared for the project with input from EDL and LRA. The POM will include a detailed FM chapter. The POM will be prepared and submitted prior to effectiveness. g. Two OEs will be recruited, one by EDL and one by LRA to support in the design, planning, execution and supervision of the work done under components 1 and 2. The OEs will prepare quarterly reports to be submitted simultaneously to EDL, LRA and the World Bank. h. EDL and LRA will submit periodical progress reports which will include detailed analysis about the physical and financial progress. The Bank task team will have access to all work sites, conduct supervision missions to verify the progress and quality of work done. i. Each agency will recruit an external auditor with terms of references acceptable to the Bank to audit the respective project annual financial statement. LRA will send to EDL the audit report issued by its auditor and EDL’s auditor will consolidate the audit report. The audit reports and management letter related to each agency will cover each fiscal year and will be submitted to the Bank no later than six months after the end of said year. Financial Management Arrangements 116. Staffing: EDL and LRA will each establish a PMT to handle project implementation. Each PMT will include a fully dedicated team comprising a project manager, finance officer, procurement officer and M&E officer. The Bank will provide the needed training and guidance for the financial officer and the PMT, in addition to hands-on support to ensure that the PMTs are familiarized with Bank procedures. The establishment of the PMT will be a condition for effectiveness. 117. Budgeting: A yearly project budget and disbursement plan will be developed by each agency to include their part of the project. LRA will send the budget to EDL, and the latter will consolidate the budget plan and will submit it to the Bank by no later than December 20 of each year. The consolidated budget plan will be in line with the procurement plan and implementation schedule. Any significant variation in the budget will be justified. Page 37 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 118. Accounting and Reporting: EDL will utilize a ring-fenced system based on excel spreadsheet to record the daily transactions and produce the financial report. This arrangement will be temporary until an integrated system is acquired, installed, and customized. The integrated system will include, among others, modules for accounting, reporting and fixed assets registry. LRA will utilize excel spread sheet to record their part of the project. Each agency will produce quarterly interim unaudited financial reports (IFRs) and annual project financial statements in compliance with International Public Sector Accounting Standards (IPSAS) cash basis of accounting. The quarterly consolidated IFRs will include: a. Statement of Cash Receipts and Payments by category and component/sub-component for the quarter, year ending and cumulative. b. Accounting policies and explanatory notes including a footnote with disclosure on schedules; (i) Statement of DA reconciling period-opening and end balances; (ii) Statement of project commitments, showing contract amounts committed, paid, and unpaid under each of the project’s signed contracts; (iii) Statement of physical progress for infrastructure works against financial progress (payments); and (iv) a comprehensive list of fixed assets. 119. The IFR produced by each agency will be submitted to the Bank within 45 days after the end of the concerned quarter. 120. Internal Controls: EDL and LRA will be responsible for implementing appropriate internal controls and monitoring arrangements to mitigate the risks and ensure that project funds are used efficiently for their intended purposes. EDL with inputs from LRA will prepare a POM detailing the roles and responsibilities of all stakeholders involved in project implementation and submit it for Bank clearance. The POM will include specific detailed procedures about the roles and responsibilities for each agency, clear segregations of duties, and accountability in addition to monitoring nd controls for both agencies. The POM will be approved by the Bank as a condition of effectiveness. The POM will include a detailed FM chapter. 121. The project will include a significant amount of work under components 1 and 2 including construction of a national control center, development of a grid-connected solar PV plants, and rehabilitation of LRA hydropower plants. To ensure that the work is delivered with the highest quality as per the envisaged design, and to align physical progress with the financial progress, OEs will be recruited by EDL and LRA to support in the design, planning, execution and supervision of the work under components 1 and 2. The OEs will be international firms with extensive technical expertise in such assignments. The OEs will ensure proper contract management for all the work done including close supervision and monitoring of the physical progress and payments to contractors. To ensure transparency, the OEs will submit quarterly reports to EDL, LRA and the World Bank simultaneously. The reports will include a detailed status of the progress done, the quality of work delivered against the financial progress and payments made. The OEs will be recruited within 3 months from effectiveness. 122. In addition, EDL and LRA will prepare periodical progress reports which will include detail analysis about the physical and financial progress. Any significant variances between the physical and financial progress will need to be justified. 123. As part of the financial management reforms and operational enhancement of the EDL, the project will support/finance the following activities: a. Audit of EDL: given that EDL has not been audited since 2010, the Bank agreed with EDL to conduct an audit of the institution as per international auditing standards to be done by a private external auditor with terms of references acceptable to the Bank. The audit would start with covering fiscal year 2020 and then subsequent years. As per the audit of 2010, EDL has been suffering from poor record keeping, lack of an Page 38 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) integrated system, inability to substantiate and accurately valuate opening and closing balance of many accounts including credits and bank accounts, and lack of fixed assets inventory and valuation. These same issues were also raised in the audit of 2020 which has already started, and the first draft was submitted in April 2024. The auditor also noted the impediment of hyperinflation and the need to re-state the financial statements accordingly as mentioned by the auditor. The final version of the financial audit report of 2020 has been issued and disclosed on EDL’s website on August 8, 2024. b. A consultancy firm will be recruited to support EDL address the issues raised from the external audit. The firm will support in establishing an integrated system which will include all essential modules on accounting and financial reporting as per international accounting standards in addition to inventory management, procurement, human resources, payroll, billing etc. The integrated system – part of the ERP – is essential for preparing reliable and timely financial information to inform management decision. The deployment of the ERP system will be preceded by a comprehensive assessment of EDL’s system, internal controls and corporate governance. In addition, the assessment will include the establishment of an internal audit function. The firm will also conduct a complete and comprehensive inventory and valuation of all assets owned by EDL, in addition to a complete review, adjustment and verification of all relevant opening and closing balances along with their substantiation. The system will allow the generation of timely and reliable financial data and financial reports and detailed fixed assets reports which will help EDL make informed decisions about its activities and planning. The firm will also work with EDL on addressing the deficiencies in internal controls and will support it in establishing a robust system of internal controls as per acceptable international standards. 124. The entity audit report and management letter for years 2021 till 2024 will be required from EDL. These will be essential to monitor the progress made by EDL in terms of financial management and operational enhancement in addition to the required improvement of internal controls. The audit of year 2021 will be required by June 30, 2025 and the audits for subsequent fiscal years (2022 till 2024) will be required by June 30 of each year starting year 2026. The audit report for each fiscal year will be disclosed and made public by EDL. 125. Flow of Funds: Upon confirmation by the Bank that the advance method is reinstated for Lebanon, for EDL’s part of the project, the funds will be channeled from the World Bank to the Ministry of Finance (MoF) treasury account and then transferred to a segregated project Designated Account (DA-A) in US$ opened under EDL’s name at the Central Bank of Lebanon and dedicated to the project. EDL will use the funds in the DA-A to pay for eligible expenditures under the project. For LRA, the funds will be channeled from the World Bank to the Ministry of Finance (MoF) treasury account and then transferred to a segregated project Designated Account (DA-B) in US$ opened under LRA’s name at the Central Bank of Lebanon and dedicated to the project. LRA will use the funds in the DA-B to pay for eligible expenditures under the project. 126. External Audit. Each agency will recruit an external auditor acceptable to the Bank to audit the respective part of the project financial statements. The audit will be carried out in accordance with International Standards on Auditing. The audit report and project financial statements, along with the management letter, will be submitted to the Bank no later than six months after the end of each fiscal year. LRA will share its audit report with EDL and EDL auditor will consolidate the project audited financial statements. The external auditor for each agency is expected to be recruited within six months of project effectiveness. The consolidated project audit report and management letter will be submitted by EDL to the Bank within 6 months after the end of the audit period. (iii) Disbursements Arrangements 127. The proceeds of the Loan will be disbursed in accordance with the Bank's disbursements guidelines for projects and as outlined in the Disbursement and Financial Information Letter (DFIL). Transaction based disbursement will be used Page 39 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) under this project. Advances will be made to two DAs in US$ opened at the Central Bank in the name of the project, DA- A under EDL and DA-B under LRA. Requests for payments from the Loan will be initiated using Withdrawal Applications (WAs) either for Advances, Reimbursements, direct payments, and Replenishments to the DA. The advance ceiling for the DAs will be as follows: DA-A US$ 12.3 million and DA-B US$ 1.6 million. Replenishment and documentation of the DA will be based on Statements of Expenditures (SOEs). Format and content of SOEs will be added to the DFIL. Interim Financial Reports will be used for financial management purposes. All documentation showing expenditures shall be retained by the relevant implementing agency and shall be made available to the Bank and its representatives for audit, if requested. Table 5. Categories of Expenditures Category Amount of the Loan Percentage of Expenditures to be Allocated (expressed Financed (inclusive of taxes) in US$) 1) Goods, works, non-consulting services, consulting services and operating costs under 128,678,000 100% parts 1, 2.3, and 3.1 of the Project (implemented by EDL) 2) Goods, works, non-consulting services, consulting services and operating costs under 90,772,000 100% parts 2.1 of the Project (implemented by EDL) 3) Goods, works, non-consulting services, and consulting services, Operating Costs and 24,937,000 100% Training for Parts 2.2 of the Project (implemented by LRA) 4) Goods, works, non-consulting services, and consulting services, Operating Costs and 4,988,000 100% Training for Part 3.2 of the Project (implemented by LRA) 5) Emergency Expenditures under Part 4.1 of the 0.00 NA Project 6) Emergency Expenditures under Part 4.2 of the 0.00 NA Project 7) Front End Fee (for Parts 1, 2.1, 2.3 and 3.1 of Amount payable pursuant to Section 2.03 the Project implemented by EDL) 550,000 of this Agreement in accordance with Section 2.07 (b) of the General Conditions 8) Front End Fee (for Parts 2.2 and 3.2 of the Amount payable pursuant to Section 2.03 Project implemented by LRA) 75,000 of this Agreement in accordance with Section 2.07 (b) of the General Conditions 9) Interest Rate Cap or Interest Rate Collar Amount due pursuant to Section 4.05 (c) premium (for EDL) of the General Conditions 10) Interest Rate Cap or Interest Rate Collar Amount due pursuant to Section 4.05 (c) premium (for LRA) of the General Conditions Total 250,000,000 Page 40 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 128. The Bank will honor eligible expenditures completed, services rendered, and goods delivered by the project closing date. A four-month grace period will be granted to allow for the payment of any eligible expenditure incurred (that is, services, goods or works, received, and accepted) before the Loan Closing Date. 129. Disbursement Conditions. Retroactive financing will cover payments made prior to the Signature Date of the loan agreement but on or after September 1, 2024, for an amount not to exceed $ 25,735,000 for Category (1) and $ 997,500 for Category (4). For Eligible Expenditures under Category (2) unless and until the Borrower has appointed commissioners for the Electricity Regulatory Authority in compliance with the Regulatory Framework; or for Eligible Expenditures under Category (3) unless and until the Borrower has caused LRA to establish the DSPOE, with composition, terms of reference, and qualifications satisfactory to the Bank, as further detailed in the Project Operations Manual. 130. Authorized Signatories. Authorized signatories will be nominated by the EDL and LRA to sign the WA. Names and corresponding specimen of their signatures will be submitted to the Bank prior to the receipt of the first WA (advance to DA). Each WA will be approved and signed by the authorized signatories. 131. Fraud and Corruption. Fraud and corruption may affect the project resources, and thus impact negatively the project outcomes. The above proposed fiduciary arrangements, including the POM with a detailed FM chapter, reporting, recruitment of OEs under EDL and LRA, in addition to the external audit for each agency, will help address the risk of fraud and corruption that are likely to have a material impact on the project outcomes and will ensure that funds will be sued for their intended purposes. Table 6. Financial Management Action Plan Action Responsible Due Date Establish a Project Management Team EDL and LRA By effectiveness Prepare a POM with detailed FM chapter EDL and LRA By Effectiveness Recruit an external auditor for each implementation entity respectively EDL and LRA 6 months after effectiveness 132. Supervision Plan. A supervision mission will be conducted four times during the first year to ensure hands-on support and continuous follow up and guidance on FM procedures. The supervision mission objective is to ensure that strong financial management systems are maintained throughout the life of the Project. The IFRs will be reviewed on a regular basis by World Bank and the results and issues will be followed up during supervision missions. OEs reports will be reviewed, and issues will be identified and followed up by the project. External audit report and management letter will also be reviewed, and any significant issues discussed and addressed through actions plans. Additionally, during supervision missions, the project’s financial management and disbursement arrangements (including a review of sample payments and financial movements of the DA) will be reviewed to ensure compliance with the Bank’s minimum requirements. (iv) Procurement 133. Procurement will be carried out in accordance with the World Bank Procurement Regulations for Investment Project Financing Borrowers dated September 2023 or the newest version (Procurement Regulations). The provisions of the Borrower’s Procurement Plan for the project (Procurement Plan) provided for under Section IV of the Procurement Regulations will apply, as the same may be updated from time to time in agreement with the World Bank. The borrower will also ensure that the project is carried out in accordance with the provisions of the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by International Bank for Reconstruction and Development (IBRD) Loans and International Development Association (IDA) Credits and Grants”, dated July 1, 2016 (Anti-Corruption Guidelines). The procurement risk is rated as high due to several contributing factors. The overall situation combined with broader macroeconomic risks, creates a challenging environment. Key issues include market instability, price fluctuations, Page 41 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) and exchange rate volatility. Additionally, the complex nature of the activities planned for financing by the project and the limited capacity of the implementing agencies- both of which are new to World Bank operations- further elevate the risk. The project will be subject to a high-risk prior review threshold. 134. Applicable Procurement Regulations. Procurement will be carried out in accordance with (1) the World Bank Procurement Regulations for Investment Project Financing for Borrowers dated September 2023 or the newest version (Procurement Regulations); (2) the provisions of the Borrower’s Procurement Plan for the project provided for under Section IV of the Procurement Regulations; (3) the provisions of the ‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants’, dated October 15, 2006, and revised in January 2011 and as of July 1, 2016 (Anti-Corruption Guidelines). In addition, the Project will require bidders/primary suppliers of solar-PV panels (and other material, as applicable) to provide two declarations: a Forced Labor Performance Declaration (which covers past performance), and a Forced Labor Declaration (which covers future commitments to prevent, monitor and report on any forced labor, cascading the requirements to their own sub-contractors and suppliers). The Borrower will include enhanced language on forced labor in the procurement contracts as per Bank’s Standard Procurement Documents. 135. Implementing Agencies and Staffing. The project will be implemented by two independent entities, EDL and LRA, neither of which have previous experience with World Bank operations. Each implementing entity will establish its own PMT. Each PMT will include, at least, a project manager, a procurement specialist, a financial management specialist, and an environment and social specialist. Additional consultants may be engaged as necessary to support the implementation of the project. To ensure effective oversight and strategic direction, a Project Steering Committee chaired by MOEW will be established. 136. Project Procurement Strategy for Development (PPSD) . The procurement strategy is aimed at broadening the social and employment benefits of the project, while also ensuring the quality of project execution. The Borrower has developed the PPSD. It will be updated as needed during project implementation. 137. Systematic Tracking of Exchanges in Procurement (STEP). STEP is the World Bank’s online procurement planning and tracking tool to prepare, clear and update procurement plans and conduct procurement transactions as referred to in the Procurement Regulations Section V, article 5.9. The procurement plans for the life of the project will progressively be developed by the CMU and uploaded through STEP. It defines the market approach options, the selection methods and contractual arrangements, and determines the World Bank’s reviews. Any contract not uploaded in STEP, with award notification not being uploaded prior to signing of contracts, may not be eligible for financing. 138. Procurement Plan. An initial Procurement Plan is developed by each of the implementing entities as part of the PPSD. The procurement plan will be uploaded in STEP and updated throughout the implementation as needed. 139. Procurement Risk Rating and Prior Review Threshold. The procurement risk is rated as high due to several contributing factors. The overall situation combined with broader macroeconomic risks, creates a challenging environment. Key issues include market instability, price fluctuations, and exchange rate volatility. Additionally, the complex nature of the activities planned for financing by the project and the limited capacity of the implementing agencies- both of which are new to World Bank operations- further elevate the risk. For sustainability, contractors are increasingly looking beyond local markets to regional and international options. Competition is narrow due to the survival of large firms and the collapse of small enterprises. The lengthy procurement processes exacerbate the public sector’s lack of confidence, and the dysfunctional banking sector poses significant challenges. Contractors face difficulties in accessing guarantees or loans necessary for maintaining liquidity, when needed. The project will be subject to the high prior review threshold. 140. Key Procurement under the Project. The main contracts planned for financing by the Project are mostly large engineering contracts for transmission network requirements, construction of solar PV power plants, and rehabilitation Page 42 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) of HPPs, in addition to supply and installation of large equipment, and large consultancy services, mainly the OEs. International competitive bidding will mostly be used targeting mid-size or lager international contractors specializing in relevant fields. Considering that both implementing agencies were not previously exposed to World Bank operations, capacity building support will be provided to both agencies to strengthen their capacity in different fields. 141. Procurement Capacity Assessment. EDL and LRA follow the national public procurement law (PPL-244/2021) that was made effective on July 29, 2022. The implementing entities have a clear system of accountability with clearly defined responsibilities and delegation of authority. Procurement planning is exercised however implementation depend largely on availability of budget considering the country’s dire financial situation. Procurement is usually delayed or diverted as there is no predictability of funds availability. The entities used to be well staffed, however, following the deterioration of the financial and economic situation in the country, the agencies are now suffering from significant lack of staff and non- availability of resources. Both entities do not have a formal system known to the bidding community to review and resolve complaints from bidders at different stages of the procurement cycle, hence there is no system in place that allows the complaint to be reviewed administratively besides judicial review. In addition, there is no system effective which ensures timely and fair decision-making protecting against retaliation. Although the new public procurement law provides clear mechanism for complaints, the complaint body is nevertheless not yet established. The external audits are exercised by the Court of Accounts. (i) The external audits are not carried out by an independent body; (ii) the scope and quality of the procurement audit does not include physical inspections and compliance checks; (iii) audit reports are not issued in a timely manner, hence recommendations related to procurement are not implemented promptly. There is no other form of oversight of procurement exercised by other external independent organization like civil society groups, anticorruption agency or similar, except the informal one through the media. Shortcomings are observed at the contract management level, including delays in payments. Based on the findings of the assessment, the following measures will be in place: (1) the project will follow the World Bank procurement regulations including complaints mechanism and settlement of disputes, and will use the World Bank SPDs; (2) Two PMTs will be established in each implementing entity composed of experienced staff and hired consultants, including at least a project manager, procurement specialist, and financial management specialist, and environmental, social and occupational health and safety specialists and focal points; (3) The advertisement and contracting conditions must ensure regional and international market outreach; (4) OEs will be hired to support both agencies in developing technical designs, requirements, and bidding packages, as well as supervising works. Additionally, the Bank may extend its support to assist the implementing entities to deliver effective procurement processes going beyong the regular implementation support, through the HEIS upon the Borrower’s request. HEIS does not substitute for the Borrower’s decision-making authority. The procurement key decisions at key stages remain the responsibility of the Borrower. (v) Implementation Support Plan 142. Implementation support to the PMTs will concentrate on essential functions and activities around technical tasks, management roles, and adherence to the ESF. Considering the limited capacity of the PMTs especially that of EDL, key aspects of the Implementation Support Plan could include the following: a. Just-in-Time Assistance: The WB's support has been already in place during project preparation, and will continue into implementation right after project approval to assist the Borrower in achieving swift project effectiveness. b. Capacity Building: While some capabilities are present in the implementing agencies, additional support is crucial, particularly for fiduciary and ESS aspects. The WB will provide early training for PMT staff in operations, fiduciary responsibilities, and ESS. Fiduciary and safeguards staff based in Lebanon will participate in regular missions and be on hand for timely support. The Bank may extend the HEIS upon the Borrower’s request building the capacity of PMT staff throughout the process. Page 43 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) c. Support Missions and Reporting: The WB will conduct regulatory missions to evaluate implementation progress and support the PMTs and relevant counterparts. Given the PMTs’ inexperience with Bank-financed operations, additional support missions will be conducted in the first year. The PMTs will provide bi-annual progress reports on physical and financial project status, highlight any obstacles encountered, and propose solutions. Regular monitoring of ESS compliance as outlined in the project’s ESCP will also be carried out. An MTR of the project will be performed jointly with the WB at the midpoint of the Project. Page 44 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) ANNEX 2: Detailed Description of the Project 143. Component 1: Strengthening of EDL Operational and Commercial Systems (US$65 million to be fully financed with IBRD loan). This component will have the following sub-components. Sub-component 1.1: Strengthening of EDL Operational Systems (estimated cost of US$25 million) . 144. The construction of a new NCC for EDL is a prerequisite to increase the reliable RE integration in EDL’s grid . Following the Port of Beirut explosion in 2020, EDL lost critical assets including its headquarters, which housed its NCC. As a result, the explosion caused a total failure of NCC operational capabilities. All functions managed or controlled by the NCC have been disrupted, and there is no capability for remote monitoring, operation, or control, making the NCC fully unfunctional, and its current location to be unsafe due to the severe civil damages (walls, ceilings, foundations). Due to the absence of a functional control center, and limited hosting capacity for the transmission network in Lebanon, managing the power grid in real-time is extremely challenging, and would be exacerbated with significant intermittent renewable energy (RE) supply. Increasing the share of RE in the electricity supply mix is cost efficient and would enable utilization of domestic solar resource to displace expensive imported fuel. 145. This sub-component will finance the construction of the new NCC including supply and installation of SCADA, EMS, Telecommunication equipment with the rest of EDL’s substations and feeders, Uninterruptible Power Supply equipment for critical loads in the NCC, and a dispatch control. A detailed engineering study has been conducted to recommend an optimal location, functional requirements, and conceptual design for the NCC, based on certain set of industry best practice criteria including security, safety, reliability, expandability, and operability of EDL systems. Considerations have also been taken to ensure future plans towards functional separation of EDL’s accounts, that is separate ethe System Operation function from Transmission function and electricity wholesale purchase function. 146. The conceptual design study recommended establishing EDL’s NCC within the perimeter of EDL headquarter . Based on several locations analyzed, the study recommended a new location to ensure full alignment with international best practices for NCC requirements, such as independence and security, redundancy of power supply, and accessibility. The design of the new NCC will ensure a modern, secure, and functional layout, and meet the operational needs of the control center while providing necessary amenities and maintaining aesthetic standards. It is expected that the new NCC will have a total built up area of 4000 square meter including basement and three floors, which can accommodate up to 160 staff (almost double the current EDL NCC and supporting functions’ staff to accommodate for future expansion). 147. EDL will hire an OEto prepare the detailed design of the NCC, together with the necessary tender packages to build the NCC with specifications according to the international best practices and based on the recommendations made in the World Bank engineering study. This will be financed under sub-component 3.1. Table 7. Cost Breakdown for EDL’s National Control Center (NCC) Item Estimated Cost (Million US$) SCADA/EMS/Telecom Systems (including three-year warranty and perpetual licenses as per 11.5 standard practices and necessary training for personnel) Civil/Structural/Architectural and Electromechanical systems 9 Contingency Budget (20%) given the brownfield nature of the project (this is to cover RTU 4 and communication networks rehabilitation, as needed) Total 24.5 Sub-component 1.2: Strengthening of EDL Commercial Systems (estimated cost of US$40 million) . 148. A detailed study has assessed EDL current business processes , including commercial applications for commercial processes, financial control, inventory management, project management, maintenance, human resource management, Page 45 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) and enterprise resource planning. This assessment identified gaps and opportunities for improvement in the short medium terms. This assessment and opportunities for improvement were based on international benchmarks and best practices to identify a fit-for-purpose approach for improvement, considering the Lebanese context (laws, regulations, etc.). Critical business areas for improvement are presented in the Figure 3 below. Figure 3. EDL Business Areas for Improvement Improving Digital Payment Enhancing Data Strengthening Financial Investing in Smart Metering Channels and Customer Management and Controls, Procurement and and AMI Deployment Service: Automation Inventory Management 1.Phased roll-out of smart 1.Expanding digital payment 1.Upgrading existing 1.Segregation of duties, clear meters and the associated options and incentivizing systems, implementing approval workflows, and AMI infrastructure to their use. data validation checks, and regular audits. enable real-time data 2.Developing a systematic automating manual 2.Optimizing procurement insights, proactive loss approach to handle non- processes are crucial for processes through reduction measures, and payment instances. improving data accuracy, digitalization and vendor improved energy 3.Enhancing Customer reducing errors, and performance evaluation. management. Relationship Management accelerating process cycles. 3.Enhancing financial 2.Implementing a centralized (CRM) functionalities and 2.Integrating workflow reporting and analysis will AMI data center structure establishing unified call management systems. provide detailed insights with redundant systems to center services. 3.Developing Robust into financial performance ensure data security and Reporting and Monitoring and operational efficiency. system reliability. Systems. 4.Digitization of inventory 3.Encouraging the 4.Using data to conduct management processes. integration of advanced regular audits to enable technologies, facilitating EDL to track progress, seamless data sharing, identify bottlenecks, and automating processes, and make informed decisions enhancing customer for continuous support capabilities among improvement. all DSPs under EDL supervision. 149. One of EDL’s key operational inefficiencies is the protracted billing and collection cycle , which takes in most cases more than 10 months to collect the issued bills. This has detrimental impact on EDL’s cash flow. Moreover, the excessive network losses, attributable mainly to non-technical losses due to network tampering, is draining around 40 percent of EDL’s revenues. Historically, EDL has grappled with a myriad of issues, from outdated commercial management systems to inefficiencies in billing, invoicing, and energy metering. The lack of modern IT infrastructure and smart metering solutions further exacerbates the utility's inability to manage and reduce losses, directly impacting its service quality and financial health. 150. This sub-component will finance the EDL’s AMI center and the deployment of an ERP system , and relevant operational technology (OT) platforms and systems needed for integration. The overall AMI solution aims to provide the necessary tools to collect and process data in an automatic way to enhance the commercial operations of EDL, namely: billing and collection, commercial field works, energy losses reduction and customers relationship. Given the new Renewable Energy law, it is important to also facilitate net metering schemes for Renewable system owners through AMI concept. The AMI center will comprise MDM, CIS, billing system, consumer portal, fiber optic and 4G gateways. The billing system within the AMI center will comprise the invoicing, collection, and reporting functionalities. This covers automatic bill calculation, error handling, payment processing, account status tracking, operational reporting. The AMI center will also be designed in a way to facilitate future integration with EDL’s Enterprise Resource Planning (ERP) platforms. 151. The deployment of an Enterprise Resource Planning (ERP) system will enable timely informed business decisions and provide robust compliance and reporting capabilities that ensure adherence to local and international regulations. Page 46 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) The deployment of the ERP system will be preceded by: i) Assessment and update of the accounting standards and methodologies to shift to full IFRS (ii) Assessment of the internal controls and recommendations on strengthening the Utility’s Corporate governance, (iii) Acquisition and deployment of an ERP system including accounting and reporting, and the delivery of needed training to users (iv) Set up of an Internal audit function, development of IA charter, manuals, delivery of training to appointed staff, and creation of an audit committee (v) Enterprise asset management (EAM) development with increased controls and automation as part of the ERP. By automating compliance processes, the company can avoid costly penalties and maintain a good standing with regulatory bodies. Additionally, ERP systems offer comprehensive reporting tools that enable detailed analysis of operational performance, helping the company to identify and mitigate risks proactively. As a first step, EDL will recruit a Business Operation consultant to review business processes and prepare the detailed design and bidding docs for ERP platform and transition plan (under sub-component 3.1), to fully leverage the benefits of ERP. Once EDL’s business processes updated and streamlined to fully leverage the benefits of ERP, this sub-component will finance the ERP system design, customization, license, data migration, training, and system deployment, as well as needed IT infrastructure and hardware (see table below for cost breakdown). This component will not finance the supply and installation of the smart meters themselves as this is the responsibility of the private sector DSPs. Table 8. Cost Breakdown for EDL AMI center and ERP System Item Est. Cost (MUS$) AMI Center Main and backup systems, including system integration and necessary warranties according to industry best 25 practices Civil/Structural/Architectural and Electromechanical systems 1 Contingency Budget (20%) given the brownfield nature of the project 5 Subtotal AMI Center 31.0 ERP System ERP Software Licenses, Customization and Integration, Internet Connectivity Upgrades, Cybersecurity 4.0 Enhancement Infrastructure and hardware 1.5 Change Management, Data Migration, Training, Implementation and Testing 2.8 Ongoing Support and Maintenance 0.7 Subtotal ERP System 9.0 TOTAL 40.0 152. Component 2: Increase of Grid-Connected Renewable Energy Supply and Network Reinforcement (US$171 million to be fully financed by IBRD loan). This component will have the following sub-components. Sub-component 2.1 Development of Grid-connected Solar PV Plant (estimated cost of US$91 million) 153. A geospatial analysis was carried out to selected suitable areas with high potential for the deployment of large- scale grid-connected ground mounted solar PV assets. The four highly attractive areas for solar development have been further analyzed using higher resolution data (from 250mx250m to 10mx10m) and assess more precisely the capacity potential for solar PV ground-mounted system in each one. An E&S screening of potential areas was also carried out. On this basis, the Hermel, Ras Baalbek and Qaa area (1) potential is estimated at 1200 MW, the Taraiya area (2) at 30MW, the Harbata area (3) at 25MW and the Maqne area (4) at 25MW (see Figure 4 and Table 9). This remains high-level assessment on relatively large areas with the highest potential, that would have to be confirmed through subsequent Page 47 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) technical feasibility studies. Site 1 is the only one suitable to accommodate a 150MW solar PV plant, with potential for subsequent development(s) by IPPs. Table 9. Criteria for solar PV assessment Exclusion criteria Scoring of non-excluded sites (total score of 67) - Elevation (>1,500m), - Solar resource quality (20), - Protected areas (UNESCO WH and IUCN I-VI) and - Distance to load centers (10), exclusions for biodiversity based on local data. - Distance to substations (20), - High population density (>200 people/km²), - Distance to roads (5), - Urban areas, water bodies and airports, - Land use / land cover (5), - Slopes (any south facing sites with > 20%, southeast or - Population density (5) southwest facing sites with > 10% and any other - Slopes (2) slopes >5%) 154. As next steps, EDL’s OE will carry out site-specific feasibility study and detailed design for the solar PV plant , including exact siting on the Hermel, Ras Baalbek and Qaa area, for an estimated total of 150MW, be financed by the Project. With the support of the OE, hired under component 3.1, EDL will also prepare associated E&S documents and the necessary tender packages to select EPC contractor(s) with technical specifications according to international best practices. Figure 4. Four Areas Identified for Large-scale Solar PV Development Page 48 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Table 10. High-level characteristics of the four potential areas Item Hermel, Ras Ballbek and Qaa Taraiya Harbata Maqne Project size potential (MWp) 1,200 30 25 25 Project AC capacity (MVA) 1,159 29 24 24 Nearest substation Hermel Bednayel Laboué Baalbek Distance to substation (km) 7 8 3 5 PV field active area (m²) 5,256,180 131,400 109,504 109,504 Total plant potential area (m²) 11,564,000 289,000 219,008 219,008 Annual GHI (kWh/m²) 2,066.1 2,092.5 2,087.6 2,083.1 P50 energy (GWh) 2,783.9 72.2 58.7 58.6 P50 specific yield (kWh/kWp) 2,319.9 2,410.9 2,352.4 2,349.6 P90 energy (MWh) 2,589.0 67.1 54.6 54.5 P90 specific yield (kWh/kWp) 2,157.5 2,242.1 2,187.7 2,185.1 Sub-component 2.2 Rehabilitation of LRA HPPs (estimated cost of US$25 million) 155. LRA owns, manages and operates Qaraoun Dam and a cascade of three downstream hydropower plants : Markabi (36 MW, established in 1961), Awali (108 MW, established in 1964) and Joun (48 MW, established in 1968) HPPs, with an aggregate installed capacity of 192 MW. With a production of 520 GWh, the Litani cascade provided 13% of the total generation. The three HPPs provide EDL with cheap and clean baseload energy. LRA and EDL have a contractual arrangement to sell the power from the three HPPs at a tariff set by the Ministry of Energy. 156. A technical due diligence report was prepared to assess the need for rehabilitation of LRA HPPs to improve operational efficiency and extend lifespan, to enhance and prolong the provision of low-cost hydro power to the grid. The rehabilitation works will not cause increase in installed capacity or change in the volume or water flow rate.This sub- component will finance rehabilitation and replacement of key electricity generation equipment as well as monitoring and control systems at Joun, Awali, Markabi HPP as well as measures to strengthen the safety of Qaraoun dam. The works will specifically include the following: a. Joun HPP: (a) replacement of turbine inlet value for Unit No. 2 and rehabilitation of the inlet valve for Unit No. 1; (b) replacement of the main seal of safety valve; (c) replacement of the speed governors for both units, including supply of spare parts; (d) anticorrosion protection of the spiral cases of turbines of both units; and (e) replacement of three voltage transformers in the switchyard. b. Awali HPP: (a) renewal of the electric cabinets for the safety valve and the intake valve; (b) replacement of the actuators; (c) overhaul of injectors; (d) rehabilitation of speed governors, as well as supply of spare parts; (e) rehabilitation of excitation system and voltage regulators for all three units; and (f) complete replacement of control, protection, and SCADA systems for the entire plant. c. Markabi HPP: (a) rehabilitation of speed governors; (b) replacement of SCADA system of the whole powerplant; (c) replacement of protection systems for three transmission lines; and (d) supply and installation of triphase disconnectors. d. Dam safety improvement: (a) supply and installation of monitoring instrumentation for the Qaraoun dam; (b) crack injection in the plinth gallery of the Qaraoun dam; (c) maintenance of valves. Sub-component 2.3: Strengthening of EDL Transmission Network (estimated cost of US$54 million) 157. Ensuring reliable and congestion-free transmission network and seamless power flow from 220 kV to 66 kV grids will be critical to integrate the increasing supply from intermittent solar PV , as well as accommodate the expected Page 49 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) increase in demand and future private sector led generation. EDL network currently has high transmission losses and reliability issues due to aged infrastructure. Annex 5 depicts the current EDL 220, 150, and 66 kV transmission network. 158. A power system study that looks at the five- and ten-year transmission investment needs was carried out . The study considered different demand forecast scenarios and covered a wide range of engineering solutions to come up with the least cost transmission investments to upscale the hosting capacity of the transmission network and improve the grid reliability amid contingency events. Based on the load flow study, severe overloads on 66 kV network appears during contingency events on the 220/66 kV transformers. This is expected as the new proposed generation is planned to be connected to the 220 kV network, hence requiring the upgrade/reinforcement of the coupling transformers (220/66 kV) to allow the flow to seamlessly transit from generation to demand. 159. This sub-component would finance priority investments needed to reinforce EDL transmission network and allow energy supply to meet demand, including but not limited to RE projects financed under sub-component 2.1. EDL will hire an OE (under sub-component 3.1) to prepare the detailed design of the below listed transmission upgrades, together with the necessary tender packages with specifications according to international best practices. Table 11. Priority Investments for EDL network reinforcements Investment Equipment Est. Rationale Cost* (MUS$) Interconnection - 220/15 kV point of connection substation and 35 Connect the new solar PV site to the EDL substation for necessary works of cutting in-out of the Deir Nbouh- grid to evacuate the PV power into the solar PV Baalbek double circuit 220 kV existing line that transmission network. identified in passes through the solar park proposed in Hermel component 2.1 area under component 2.1. Rehabilitation Necessary rehabilitation to the (a) primary (high 6 Rehabilitating the Achrafieh substation is of the voltage and auxiliary transformers, Gas Insulated crucial for (a) ensuring a stable and reliable Achrafieh 220 Switchgear and Busbars (GIS, GIB), disconnecting power supply to key major neighborhoods in kV substation switches, capacitor banks, panels, cables, CTs, PTs, Beirut between downtown Beirut and Nahr etc. (b) secondary equipment (earthing network, Beirut areas (Achrafieh, Gemayzieh, and substation Automation, Protection and Control, Mar Mikhael districts), (b) improving EDL's Communications, low voltage cables, etc.) and revenue generation from paying customers through reducing hours of service balance of plant (panels, electromechanical system, interruption due to grid failure, and (c) including any necessary civil works. enhancing the overall resilience of the Capital’s power infrastructure. Rehabilitation Supply and Installation of 11 damaged 220 kV 2 This OHL has been out of operation since of the 220 kV overhead Towers, complete with overhead 2021. This two-circuit line is a major path for overhead conductor (50 km, 570 sqmm ACSR, and 10 km of energy evacuation to EDL grid. Its double circuit OPGW 12 fibers) and related civil works and restoration is important to enable EDL to line Deir Nbouh accessories. evacuate cheap renewable electricity into - Baalbek the network and enhance its revenues. Construction will happen on the existing Right of Way . Upgrading Supply and installation of two 220 kV Air insulated 2 Baalbek substation is currently connected to Baalbek line bays, necessary equipment and upgrades to the EDL 220 kV grid via one of the two circuits Substation secondary systems protection and control, Deir Nbouh-Baalbek-Ksara. It is important to telecommunication, panels, etc); Necessary civil improve reliability in the 220 kV northern works for equipment installation (No substation loop by ensuring full double circuit Page 50 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) fence expansion is needed); in-out connection to connection from Deir Nbou-Baalbek-Ksara the Deir Nbouh Ksara 220 kV circuit substations. Hence, it is important to add two new line bays at Baalbek substation to connect this double circuit line into Baalbek substation. This reinforcementwill ensure a greater reliability to evacuate solar PV plant at Hermel Qaa area into EDL grid towards Beirut area. 20 percent 9 Contingency Total 54 * Association for the Advancement of Cost Engineering (AACE) Class 5 cost estimation 160. Component 3: Technical Assistance (US$15 million to be fully financed by IBRD loan) . This component will have the following sub-components. 161. Sub-component 3.1: Project Implementation Support and Technical Studies for EDL (estimated cost of US$10 million). This sub-component will finance: (a) the OE which will support EDL with preparation of procurement documents for main contracts under the Project, tendering process, technical supervision of contracts, monitoring of contractors’ compliance with the requirements of environment and social (E&S) instruments, site supervision and quality control, financial management and reporting, and review and approval of payment certificates, and other aspects of contracts related to improvement of EDL operating and commercial systems (Sub-components 1.1 and 1.2), construction of grid- connected solar PV plant (Sub-component 2.1), and strengthening of EDL network (Sub-component 2.3). Given its criticality for investment readiness, EDL is using advance procurement for the OE contract, expected to be launched in September 2024. The preparation of the bidding documents for the construction of solar PV plants will be financed by a US$1.5m RETF ESMAP Grant, that complements the proposed loan and is being processed on standalone basis to accelerate implementation readiness. This sub-component will also finance: (b) consultancy services for the review of EDL business processes to fully leverage the value of the ERP system, built upon recommendations proposed under the completed assessment during project preparation stage; (c) individual consultants to support EDL’s PMT and the Project’s Steering Committee; (d) various technical, economic, financial and other studies that may be required during implementation of the Project; (e) capacity building for EDL, such as strengthening of in-house capacity for power system planning and modeling, distribution and transmission system maintenance, procurement, and E&S; and (f) external audit and support for strengthening financial management and reporting at EDL. 162. Sub-component 3.2: Project Implementation Support, Technical Studies for LRA, and Dam Safety Panel of Experts (estimated cost of US$5 million to be financed by IBRD loan proceeds) . This sub-component will finance: (a) OE, which will support the LRA with preparation of procurement documents for main contracts under the Project, tendering process, technical supervision of contracts, monitoring of contractors’ compliance with the requirements of E&S instruments, site supervision and quality control, and review and approval of payment certificates, and other aspects of contracts related to rehabilitation of HPPs and improvement of dam safety;; (b) Tier 2 dam safety assessment (as per requirements of ESF/ESS4) for Qaraoun, Anan Lake, and Joun Lake dams; bathymetric study of the reservoir to estimate sedimentation and actual reservoir capacity; dam break and flood propagation study; and other technical, economic, financial and other studies that may be required during implementation of the Project; (c) preparation of the instrumentation plan, update of O&M plan, update of Emergency Preparedness Plan (EPP); (d) the dam safety panel of experts (DSPOE) to be comprised by qualified experts in specific technical fields related to hydropower. DSPOE will provide guidance and advice to LRA during implementation of the Project on various technical matters; and (e) Capacity building for LRA on technical, contract management, and dam safety aspects of hydropower. 163. Project Financing. The total Project cost is US$250 million, fully financed by IBRD loan. Page 51 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Table 12. Project Cost Estimates Total Costs IBRD IBRD Project Components ($m) ($m) % 1. Strengthening of EDL Systems 65.0 65.0 100 1.1. Strengthening of EDL Operational Systems 25.0 25.0 100 - NCC: Civil works, electromechanical, SCADA/EMS/Telecom systems and 21.4 21.4 RTU/communication network rehabilitation (as needed) 3.6 3.6 - Training and two-year maintenance contract 1.2. Strengthening of EDL Commercial Systems 40.0 40.0 100 - AMI center: Main and backup systems including two-year O&M contract 31.0 31.0 - Enterprise Resource Planning (ERP) 9.0 9.0 2. Increase of Grid-Connected Renewable Energy Supply and Network Reinforcement 170.0 170.0 100 2.1. Development of Grid-connected Solar PV Plant (150MW) 91.0 91.0 100 - Modules, Civil works, and electromechanical systems 88.0 88.0 - O&M for 2 years 3.0 3.0 2.2. Rehabilitation of LRA Hydropower Plants 25.0 25.0 100 - Joun Hydropower Plant 5.4 5.4 - Awali Hydropower Plant 10.2 10.2 - Markabi Hydropower Plant 5.4 5.4 - Qaraoun dam safety improvement 4.0 4.0 2.3. Strengthening of EDL Transmission Network 54.0 54.0 100 - Interconnection substation for solar PV plant 35 35 - Rehabilitation of the Achrafieh 220kV substation 5 5 - Rehabilitation of the 220 kV overhead line Deir Nbouh – Baalbeck 2 2 - Upgrading Baalbek Substation 3 3 - Contingency (20 percent) 9 9 3. Technical Assistance 15.0 15.0 100 3.1. Project Implementation Support for EDL 10.0 10.0 100 - Owner’s Engineer (OE) for EDL 7.5 7.5 - Capacity building and studies 2.5 2.5 3.2. Project Implementation Support for LRA 5.0 5.0 100 - OE for LRA 1.5 1.5 - Dam Safety Panel of Experts 1.5 1.5 - Capacity building and studies 2.0 2.0 4. CERC 0 0 100 TOTAL COSTS 250.0 250.0 100 Page 52 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) ANNEX 3: Letter of Electricity Sector Policy Page 53 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Page 54 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Page 55 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Page 56 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) ANNEX 4: Summary of EDL’s Cost Recovery Plan (CRP) Objectives 164. Delivering reliable and affordable electricity services. The Cost Recovery Plan (CRP) outlines a five-year roadmap (2024-2028) to rapidly improve electricity service delivery to EDL’s consumers to a minimum of 10 hours per day. It is fully consistent with the objectives outlined in the Policy Statement “Setting Lebanon’s Electricity Sector on a Sustainable Growth Path” approved by the Council of Ministers in March 2022, presenting a comprehensive reform pathway for the sector, conducive for private capital mobilization at the scale required to deliver continuous, reliable, and affordable electricity services in the medium term. The CRP capitalizes on the most recent development in the sector, including the rapid deployment of standalone off-grid solar photovoltaic (PV) systems by households and businesses. 165. Achieving financial sustainability and operational efficiency. Rapidly achieving financial sustainability is paramount to improve service delivery in a fiscally sustainable manner. The CRP includes several scenarios to reach a financially sustainable situation, where EDL’s revenues will cover the total cost of service by 2025-26. This objective will be achieved through: (i) an optimized cost structure, with the rapid ramp-up of EDL’s most-efficient generation assets combined with critical investments to enable renewable energy supply into the grid, (ii) improved operational and commercial efficiency, to ensure energy control, accounting, billing and collection in line with industry best practices, (iii) strengthened EDL’s financial management and reporting needed to inform corporate decision in real time, reduce perceived risks for prospective market entrants and reinforce financial transparency and predictability, and (iv) temporary financial support to bridge the cost-revenue gap during the transition phase, through the Government’s fuel supply agreement with Iraq. 166. Consolidating initial results from emergency measures. The CRP builds on the emergency measures to restore disrupted grid services, implemented since mid-2022 under the National Emergency Plan for the Electricity Sector. It notably includes: (i) the first revision of EDL’s electricity tariff since 1994, to reflect current cost structure, (ii) secured fuel imports on preferred terms through Government’s agreement with Iraq, to restore a minimum of four hours of daily service from the grid, (iii) emergency actions to reduce losses, notably billing mechanism for connection with circuit- breaker, strengthened regulation for infringement, theft prevention, and illegal connection removal campaigns, and (iv) support to produce reliable and timely financial information, establish EDL’s opening balance and prepare yearly audited financial statements as per international standards on auditing. The CPR aims to consolidate and build on these initial steps, to leverage the impact on service delivery in a financially and fiscally sustainable manner. Action Plan to Achieve Full Cost Recovery 167. The CRP is based on several actions that will together lead to better services, improved operational efficiency, and reduce the cost of service by 25 percent by 2028, compared to 2023: 168. Increase the share of low-cost supply in EDL’s generation mix. The increase in electricity supply to the grid, from 5,700 to 11,200 GWh per year over the period described in the CRP, will result from the commissioning of 315 MW utility- scale solar PV plants with enabling network and system reinforcements, combined with increased supply from EDL’s most efficient dispatchable power plants (Deir Ammar and Zahrani combined cycle gas turbine, and Zouk and Jieh reciprocating engine). With a focus on short-term and given current macrofiscal environment as well as regional context, the CRP assumes only limited greenfield investments and no electricity or gas cross-border trade in the foreseeable future. If prevailing conditions allow, electricity and gas imports would further add supply to the grid and reduce average cost of generation by displacing costlier liquid fuel. 169. Reduce losses to increase revenues. To achieve the objectives of CRP, EDL will scale-up loss reduction campaigns (initiated early 2023) to reduce total network losses from 40.2 percent to 20.7 percent by 2028, with the support of all Page 57 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) concerned stakeholders (ministries of interior, of defense, of justice, security forces). EDL will invest in needed operational and commercial systems (smart meters, billing and invoicing systems, etc.) that will allow EDL to streamline protracted billing and collection cycle from 12 to 3 months, using advanced metering infrastructure. This will also contribute to improve client’s experience and reduce EDL’s working capital requirements. 170. Government’s transition support. The governments of Iraq and Lebanon have signed in 2021 a fuel supply agreement, to swap Iraqi High Sulphur Fuel Oil, for Gas Oil used to run EDL’s power plants. Over the period of the CRP, the share of fuel cost covered by EDL revenues will gradually increase, in a manner that bridges EDL notional shortfall and until EDL reaches break-even. Public administration and public establishments are expected to diligently settle electricity bills, or otherwise be subject to EDL standard procedures for delinquent clients. Accordingly, the Ministry of Finance will make necessary provisions in the budget or bear responsibility for the payments of public client receivables, if/for which EDL would be explicitly instructed to continue servicing despite overdues. The implementation of the CRP also requires BDL, as EDL’s sole authorized financial service provider, to make available the US dollars needed for due payments denominated in hard currency, from EDL’s revenues collected in LBP (and/or in US$). Expected Results Figure 5. CRP projected income statements – “Ambitious” scenario with full fuel cost coverage INCREASING COVERAGE OF FUEL COSTS EFFICIENCY GAINS PASS-THROUGH TARIFF BREAK-EVEN 2023 2024 2025 2026 2027 2028 3,000 2,274 2,327 2,500 1,988 2,124 2,000 1,500 1,102 842 1,000 291 338 [MUSD] 500 25 152 - (500) (181) (170) (1,000) (1,500) (1,023) (2,000) (1,272) (2,500) (1,962) (1,973) (1,983) (1,990) Revenues Expenses Profit/(Loss) 171. Increased revenues covering the full cost of services. With the implementation of the CRP actions, EDL revenues will increase to cover for economically justified cost of service by 2025. Until then, the shortfall will be bridged by Government’s support to cover the cost of fuel obtained from Government’s agreement with Iraq. EDL will only pay for a fraction of the fuel cost until break-even (30 percent and 65 percent in 2024 and 2025). Thereafter, notional profit would be pass-through tariff to benefit EDL’s customers. Given EDL’s cost structure, current electricity tariff is denominated in US dollar (payable in US$ and LBP) and indexed to international oil price. In the medium term, the tariff structure would evolve with EDL’s efficiency gains, the diversification of the energy mix and, ultimately, the tariff methodology to be developed by the regulatory authority foreseen under Law 462. 172. Strengthened EDL financial stance to improve service delivery. CRP’s pathway towards strengthened financial stance, decoupled from fiscal support (through declining in-kind fuel transfers), would enable EDL to secure capital needed to modernize the network, reduce risks for suppliers and mobilize independent power producers in the renewable energy space through transparent and structured competitive processes, to meet electricity demand in a least-cost manner. Page 58 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) Large-scale solar parks will be developed into phases, with CRP focusing on EDL’s technical and commercial readiness and initial phase, to de-risk private investments that macrofiscal stabilization would subsequently unlock. 173. Risks. CRP’s accelerated recovery (the “Ambitious” scenario) is subject to developments beyond EDL’s direct control, as well as support from other Government’s stakeholders. If this support does not materialize or faces delay, achievable targets would be impacted as described in the “Baseline” scenario under status quo, with slower improvements in services quality (reaching a minimum of 8 hours per day) and in losses reduction (reaching 32 percent) by 2028. Reforms and Vision 174. EDL as a financially viable, transparent, and creditworthy utility. EDL reforms engaged under the CRP include the review of business processes to improve operational and commercial efficiency, as well as financial reporting, with the preparation and the disclosure of EDL’s audited financial statements on yearly basis. With the support of MOEW, MOF and BDL, a CWM will be implemented for a more disciplined, transparent, predictable, and effective financial management system, ensuring the prioritized allocation of funds for critical operating expenses and investments, and ultimately, supporting the broader goals of sectoral reform and sustainability. With the stabilization of EDL’s financial position, these reform actions will strengthen EDL’s creditworthiness, laying the ground for sustainable infrastructure upgrades, private capital mobilization into low-cost clean energy solutions and improved services delivery. 175. EDL at the forefront of the energy transition. The CRP covers most urgent investments required to operate the grid with large share of intermittent renewable generation, in line with the target of 30 percent of the mix over the next decade. EDL’s state-of-the-art national control center and critical reinforcements of the transmission network would pave the way for a significant increase in renewable energy supply into the grid. In addition, the upgrade of EDL operational, commercial, and financial systems will support the implementation of the recently approved Distributed Renewable Energy law, notably for net-metering. In the medium term, diversifying the mix towards low cost and cleaner renewable sources to fully meet the electricity demand is predicated on a resilient, technically sound, and financially viable power sector unlocked through sustained reform actions. Page 59 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) ANNEX 5: Series of Projects (SOP) to Support Electricity Sector Recovery and Development 176. Electricity sector recovery would gain speed and scale incrementally, along with progress achieved at sector, policy reforms and macrofiscal levels. EDL’s Cost Recovery Plan (see Annex 4) outlines a pathway to electricity sector recovery and development. With minimum grid supply secured, reactive power and adequate dispatching, cost effective renewable energy supply would feed in a functional grid, gradually displacing diesel generators. Switching EDL’s generation assets from liquid fuel to cheaper and cleaner natural gas, through pipeline gas or LNG imports, would support the grid to supply 24-7 electricity with maximized contribution from renewable energy. The operationalization of an appropriate legal and regulatory framework would create the conditions to mobilize private sector in generation and distribution segments as outlined in Government’s policy statement for the sector24. Macrofiscal stabilization would also allow private capital mobilization (PCM) at scale for utility-scale IPPs, notably in the RE space, identified through least cost planning and procured through a structured and standardized competitive process. Figure 6 presents the Lebanon’s pathway for energy sector recovery and development. Figure 6. Lebanon’s pathway for energy sector recovery and development 177. The overarching development objective of the program is to support the development of reliable electricity services to cost effectively meet the demand in Lebanon. SOP1 will enable the restoration of basic grid functionality, allow renewable supply to connect to the grid and improve EDL’s financial stance. SPO2 will create the conditions to materially increase electricity supply to bridge the capacity deficit in a least cost manner. Given the magnitude of required investments, this would require mobilizing private capital at scale in generation, while prioritization scarce public financing on transmission network reinforcements needed for the additional supply to seamlessly meet the demand. The program would result in significant direct economic, financial and environmental benefits, by displacing very costly and polluting distributed diesel fuel generators, and indirect benefits by alleviating a major constraint on economic growth in Lebanon. The major risk outside sector’s control is a protracted economic and financial crisis that would largely deter needed investment. 24 Policy Statement “Se ng Lebanon’s Electricity Sector on a Sustainable Growth Path ”, approved by the Council of Ministers on March 2022. Page 60 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) 178. The second operation of the series, SOP2, will further reinforce and upgrade the transmission network to strengthen service reliability and integrate a higher share of renewables into EDL grid . SOP1 supports most critical network rehabilitations needed to accommodate the ramp-up of electricity supply from existing generation assets, coupled with the integration of utility-scale solar PV plants. Additional transmission network upgrades and reinforcements would subsequently be required to ensure reliability of grid services with increased generation capacity and higher penetration of variable renewable electricity sources. These investments have been identified and prioritized based on an engineering study for 10-year transmission investment needs. SPO2 could support least cost transmission investments needed to expand the capacity of the transmission network, including for the purposes of reliable evacuation and connection of new future private-sector financed solar PV plants, and improve the grid reliability amid contingency events by 2030 time-horizon, as presented in the below table. Table 13. Priority reinforcements in the Transmission System by 2030 Investments est. US$m Upgrade of the existing Marjayoun substation to 220 kV voltage level 12 Upgrade of the existing Nabateih substation to 220 kV voltage level 12 Upgrade of the existing Halba substation to 220 kV voltage level 12 Reinforcement of 66 kV line Zahrani - Mosalyeh 2 with conductor 630 mm2 1 New 66 kV line Joun - Awali (288 mm2) 2 Construction of 220 kV ring Basta - Ain Mreisseh - Unesco - Basta 38 New line 220 kV Bsalim - Marina 4 New line 220 kV Bsalim - Chabbak 7 Upgrade of the existing Damour substation to 220 kV voltage level 12 Total (including 20 percent contingency) 100 Source: Power Flow Analysis for Lebanon Electricity Transmission Network, Phase 1 179. In parallel, and as EDL financial standing continues to stabilize, the World Bank Group guarantee platform could also provide credit enhancements to catalyze private investments in grid-connected RE and diversify the mix away from liquid fossil fuel. Along with progress achieved on technical, commercial, and financial performance, guarantee instruments could be mobilized to backstop selected government’s payment obligations and de-risk private investments in least cost generation options. Specifically, two potential applications for guarantees have been identified: (i) Floating Storage and Regasification Unit (FSRU), or possibly imports of pipeline gas and/or electricity if condition allows, to displace costlier and more polluting diesel-based generation; and (ii) RE IPPs, identified as a key lever to reduce cost of generation over the next decade. Immediate application would be the next phase(s) of development for the large-scale solar PV park in the Hermel, Ras Baalbek, Qaa area, supported under Component 2.1 of SOP1. Under such approach, the Bank, IFC and MIGA would work closely together to mobilize private capital in a least cost manner. In the medium term, avenues to strengthen private sector participation in distribution segment could also be explored. 180. Advancing SOP2 and the preparation of credit enhancement support would require continued progress on the technical, financial and regulatory fronts. The Pproject (SOP1) would contribute restore basic functionality of the electricity network infrastructure, at a critical time when the Government has initiated first reform measures to establish the foundation for improved services and financial viability. Advancing additional support would require tangible progress in the following areas: - Improved service delivery to customers, with increased hours of daily services and improved reliability, resulting from additional supply from existing generation assets, and the integration of the low-cost RE supply enabled by network reinforcements and EDL’s operational and commercial systems. SOP1 is supporting this objective, in the framework of EDL’s Cost Recovery Plan. Subsequent operations would facilitate the commissioning of new generation capacity. Page 61 The World Bank Lebanon Renewable Energy and System Reinforcement Project (P180501) - EDL’s improved financial stance, as a result of the recently revised tariff structure, reduced losses, increased supply and improved billing and collection cycle. Accordingly, increased revenues would gradually cover for the full cost of services and allow EDL to timely meet payment obligations. EDL’s new commercial systems supports this objective. - Functional legal and regulatory framework, conducive to operational performance, private sector participation and least cost system expansion. Bank ongoing programmatic energy technical assistance (P179937) is supporting this objective. Page 62