Document of The World Bank

Report No: ICR00001516

IMPLEMENTATION COMPLETION AND RESULTS REPORT(TF-57268 TF-57269)

 

ON A

GLOBAL ENVIRONMENT FACILITY GRANT

IN THE AMOUNT OF US$810,000

TO THE INTERNATIONAL GEOTHERMAL ASSOCIATION

AND US$3.72 MILLION

TO THE HUNGARIAN OIL AND GAS COMPANY, PLC

IN SUPPORT OF THE FIRST PHASE OF THE US$25.0 MILLION

GEOTHERMAL ENERGY DEVELOPMENT PROGRAM (GEOFUND)

IN EUROPE AND CENTRAL ASIA

June 30, 2010

Sustainable Development Department Central Europe and the Baltic Countries Country UnitEurope and Central Asia Region

 

CURRENCY EQUIVALENTS

(Exchange Rate Effective November 21, 2006)(HUF rate fixed in GEF Trust Fund Agreement)

Currency Unit = Hungarian Forint (HUF)US$ 1.00 = 213.89 HUF

FISCAL YEARJanuary 1- December 31

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program LoanARGEO African Rift Geothermal Development ProgramBB Bank budgetCEGE Central European Geothermal Energy ProductionCO2 Carbon dioxideCIS Commonwealth of Independent StatesDH District HeatingDIF Direct Investment FacilityECA Europe and Central AsiaEE Energy efficiencyEU European UnionGAF GeoFund Advisory GroupGCT GeoFund Coordination TeamGEF Global Environment FacilityGEO Global Environment ObjectiveGeoE Geothermal EnergyGHG Greenhouse gasGRI Geological Risk InsuranceIBRD International Bank for Reconstruction and DevelopmentICR Implementation Completion and Results ReportIFC International Finance CorporationIFR Interim Financial ReportIGA International Geothermal AssociationMOL MOL Hungarian Oil and Gas Public Limited CompanyNGO Nongovernmental OrganizationPAD Project Appraisal DocumentRE Renewable EnergyRER Renewable Energy ResourcesSTE GeoFund Group of Scientific and Technical ExpertsTA Technical AssistanceUNFCC United Nations Framework Convention on Climate Change

Vice President:    Philippe H. Le HouerouCountry Director: Peter C. Harrold

 

Sector Manager:    Ranjit LamechProject Team Leader:    Kyoichi Shimazaki

ICR Team Leader Kyoichi Shimazaki

 

EUROPE AND CENTRAL ASIAGEOTHERMAL ENERGY DEVELOPMENT PROGRAM (GEOFUND)

CONTENTS

Data SheetA. Basic InformationB. Key DatesC. Ratings SummaryD. Sector and Theme CodesE. Bank StaffF. Results Framework AnalysisG. Ratings of Project Performance in ISRsH. Restructuring I. Disbursement Graph

1. Project Context, Global Environment Objectives and Design....................................12. Key Factors Affecting Implementation and Outcomes...............................................63. Assessment of Outcomes...........................................................................................114. Assessment of Risk to Development Outcome.........................................................145. Assessment of Bank and Borrower Performance......................................................156. Lessons Learned........................................................................................................167. Comments on Issues Raised by Borrower/Implementing Agencies/Partners...........17Annex 1. Project Costs and Financing...........................................................................18Annex 2. Outputs by Component..................................................................................19Annex 3. Economic and Financial Analysis..................................................................22Annex 4. Bank Lending and Implementation Support/Supervision Processes.............23Annex 5. Beneficiary Survey Results............................................................................25Annex 6. Stakeholder Workshop Report and Results...................................................26Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR......................27Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders........................37Annex 9. List of Supporting Documents.......................................................................38

 

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1. Project Context, Global Environment Objectives and Design

1.1 Context at AppraisalThe first phase (APL1) of the Geothermal Energy Development Program (GeoFund) in the Europe and Central Asia Region included two GEF subprojects: (a) a grant of US$810,000 to the International Geothermal Association (IGA) for Regional Technical Assistance (TA) activities and (b) a Geological Risk Insurance (GRI) Grant of US$3.72 million to MOL, Hungary.

Regional Context. Many countries of the Europe and Central Asia Region (ECA) lag behind the original European Union 15 (EU15) countries in the use and development of renewable energy resources (RER). Significant barriers impede the increased utilization of renewable energy and, more specifically, geothermal energy (GeoE) in these countries, including expertise, know-how, energy market issues and high transaction cost because of the typically small size of RER projects. In addition to these, two technology barriers in particular are specific to developing geothermal deposits, namely the high up-front costs to identify the geothermal deposits and drill the high cost wells, and the associated geological risks of not finding sufficient resources during exploration or premature resource depletion during operation. Geological risks appear to be among the most difficult to tackle. Special knowledge pertaining to the assessment and handling of geological risks is often beyond the experience and capacity of both potential energy investors and lenders, which reduces their willingness to undertake or participate in geothermal projects. Most potential client countries of the ECA GeoFund program do not yet have a policy and legislative framework in place to support geothermal energy.

Hungary. Hungary is well known as a country of favorable conditions in terms of geothermal resources since most measured geothermal gradients are higher than the worldwide average. According to the results of numerous published geothermal assessments, Hungary has the largest underground thermal water reserves and geothermal energy potential of low and medium enthalpy in Europe. The measured geothermal resource temperatures in Hungary range from 10 C to 254 C. While the utilization of geothermal energy in Hungary is significant, on a worldwide average it remains relatively low compared to the resource base. This is largely due to the typical barriers as learned from numerous lessons through Bank involvement in geothermal projects: high upfront investment requirements and geological risks associated with drilling.

The value added of the Bank’s assistance for the Hungary MOL Geothermal Power Pilot Project is the covering of the geological risk associated with drilling. Without this guarantee, which is unique on the market, the profitability of the project was not attractive enough for the project developer to undertake the project. Neither conventional type lending, nor straight grants suit the needs of this kind of operation. While loans were available from various commercial sources and were part of the financing package, they did not improve the risk-adjusted IRR. Straight grants on a scale that would push the project above the hurdle rate were not justifiable for private investors.

Hungary targets to increase the share of renewable energy to 5-6 percent from the present level of 3.4 percent by 2010, in addition to pursuing European Union priorities such as security of supply, energy efficiency, economic efficiency, serving national interests, and environmental protection. The project directly contributed to these objectives as it aimed to increase the share of renewable electricity in the country’s grid mix.   1

1.2 Original Global Environment Objectives (GEO) and Key Indicators The program development objective of the overall GeoFund Program is to systematically promote the use of geothermal energy in the Europe and Central Asia region by removing barriers to the development of renewable energy. The most important barriers include: (i) knowledge and information barriers; (ii) institutional, policy, legal and regulatory barriers, and (iii) financial barriers.

The GeoFund Program’s global environment objective is to reduce emissions of greenhouse gases (GHGs) in the interest of climate change mitigation by systematic and streamlined implementation of geothermal projects.

During implementation of the first phase (APL1) the program development objective was monitored as the global environment objective, as it was more applicable to APL1.

This ICR reviews the two GEF subprojects financed as the first phase (APL1) (total US$4.0 million disbursed for two subprojects) of the GeoFund Program and not the entire GeoFund Program, which has not yet closed. The second phase of the GeoFund Program is still ongoing (APL2 for Armenia, US$1.5 million TA), and the overall GeoFund Program will be evaluated at the conclusion of APL2. US$10 million was allocated from the US$25 million GeoFund Program to IFC for geothermal development projects involving the private sector in Turkey. The remaining US$9.5 million will be returned to GEF, as no additional GEF subprojects are envisaged under the GeoFund Program implemented by the Bank because the GEF administrative budget has been exhausted.

The objective of the GEF subproject with the International Geothermal Association (IGA) was derived from the Program’s overall goal: to promote the use of geothermal energy in the ECA region through assistance in the removal of its barriers. This was to be achieved through the implementation of a capacity building component and a policy development component. Key indicators were:

Competitiveness of geothermal energy in client countries increases on a country by country basis;

Better understanding of the technical and economic potential of geothermal energy in a number of participating ECA countries through case studies and training;

Geothermal data bases and international summer school in a number of countries; and

Roster of international Geothermal Experts.

The project development objective of the subproject with the Hungarian Oil and Gas Public Limited Company (MOL) was to increase the share of electricity from renewable energy sources in the Republic of Hungary’s grid mix.

1.3 Revised GEO Not Applicable

1.4 Main Beneficiaries

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In the Regional Technical Assistance subproject, the beneficiaries were the International Geothermal Association (IGA) and the decision makers, market participants and project developers in participating ECA countries, who attended workshops and received information and dissemination materials on geothermal energy development.

For the MOL Geothermal Power Pilot Project Contingent Geological Risk Insurance subproject, the beneficiary was MOL, Hungarian Oil and Gas Company, PLc, the project developer.

1.5 Original Components The overall GeoFund Program was designed as an umbrella facility for geothermal subprojects in participating ECA countries and involved the provision of: (i) technical assistance to address knowledge gaps and capacity barriers that retarded the use of RER and geothermal energy, and to support project preparation and implementation (US$7 million); (ii), direct investment funding to support developers through low-cost loans, grants or contingent grants (US$8 million); and (iii) a Geological Risk Insurance (GRI) window to help mitigate the geological risks associated with geothermal exploration and operation (US$10 million). The GeoFund program was to be implemented in a series of individual subprojects processed as horizontal APLs over a period of eight years. To assure high quality and achievement of the defined project goals as well as to provide support in a flexible manner, the Program was to be implemented on a project by project basis.

APL Triggers. Two sets of triggers applied under the horizontal APL: policy triggers, which determined the eligibility of an individual country to receive Bank assistance under the APL program, and project triggers which determined when an individual investment was eligible to receive Bank funds.

Policy triggers were: Proven country commitment by GEF focal point endorsement of the GeoFund

Program; Established country program on RE development (or program was in the process

of being established).Project triggers were:

Proven commitment of the project sponsor by co-financing in a ratio of approximately of 1:5.

Proven project readiness by a sound screening package as described in “Subproject processing overview” on page 49 of the PAD.

Project eligibility criteria were met as described in Annex 4.G of the PAD. Individual project triggers as established at the respective Quality Enhancement

Review meeting (e.g. regulatory framework and procedures in the country).

The first phase of the GeoFund Program included two GEF subprojects: (a) a grant of US$810,000 to IGA for Regional Technical Assistance (TA) activities and (b) a Geological Risk Insurance (GRI) Grant of US$3.72 million to MOL, Hungary.

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A. Regional Technical Assistance Subproject Implemented by IGA was based on a work program prepared jointly by IGA and the Bank’s GeoFund Coordination Team (GCT).

Capacity Building Component: The capacity building component included:

Review and assessment of geothermal resources, modes of occurrence, and methods of utilization;

Training of local experts in the preparation and implementation of geothermal energy projects;

Transfer of know-how through the establishment of a roster of international geothermal experts and implementation of targeted international studies;

Support to the organization and execution of conferences and workshops; Dissemination of information through support to knowledge resource centers

creation and publications.

Policy Development Component: The policy development component consisted of three subcomponents:

(a) Country policy support activities including review of energy sector policies and legal, regulatory and institutional frameworks as well as energy tariff systems in ECA countries to identify key barriers towards the use of renewable energy resources;

Support of Governments’ policy reforms and framework improvements, including taxation in favor of geothermal energy development;

Development of national geothermal programs and action plans; Creation of domestic financial mechanisms for support of geothermal

energy projects; Creation of and secretariat support to the GeoFund Advisory Forum

(GAF) consisting of experts from the ECA countries; Creation of, and secretariat support to the GeoFund Group Scientific and

Technical Experts (STE).(b) Demonstration projects (of which only component (a) was to be implemented by

IGA).(c) Management and administration component to support the contracting of an

implementation specialist to manage the funds of the subproject.

B. Geological Risk Insurance for the Hungary MOL Geothermal Power Pilot Project.The financing instrument was a grant which would be disbursed if the risks insured under the Geological Risk Insurance (GRI) window of the GeoFund Program occurred. Disbursement of the grant was contingent on geological parameters not reaching the expected values as stipulated in the Grant Agreement. The GeoFund Program subproject consisted of the provision of Geological Risk Insurance (GRI) to cover the short-term geological risk associated with the drilling and testing activities to support the development of a geothermal power

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pilot project to be undertaken by the consortium led by MOL. The project site was north of the village of Iklodbordoce, in the county of Zala, in southwest Hungary, with three existing hydrocarbon exploration wells. A fourth production well was to be drilled there. The planned power plant was to have been connected to the regional system of North Transdanubian Electric Service Company. Total estimated project costs were HUF 3.9 billion (US$18.6 million), which were to be financed by MOL. The geothermal power pilot project supported by GRI included well completion or reconstruction into geothermal production and injection wells, new well drilling, pipelines between the wells and the power plant, injection pumps, the power plant and connection to the grid. All of the geothermal fluids were to be injected into the reservoir to guarantee the renewable nature of the energy source.

The GeoFund subproject provided Geological Risk Insurance (GRI) for a test operation for about nine months on a doublet converted from two existing hydrocarbon wells. The test operation consisted of production and re-injection to establish long-term hydrological conditions. The project developer was to proceed to the implementation phase on the basis of the evaluation of the results of the test operation phase.

1.6 Revised ComponentsThe components were not formally revised. Under the Geological Risk Insurance subproject, the results of the exploration and testing activities indicated that the two wells would not produce adequate geothermal flow rates for any geothermal-based operation. This was verified in the technical report produced by MOL, and further verified by a team of independent experts hired by the Bank, and the expenses for the payment claim were verified by an international auditing firm.

1.7 Other significant changesAbout twenty-three potential subprojects (expected to result in about 7-8 actual subprojects by the end of the overall GeoFund Program in 2014) were initially identified for financing, and two of these were approved for funding under the first phase APL: (a) a grant of US$810,000 to IGA for the regional TA activities and (b) a GRI Grant of US$3.72 million to MOL, Hungary. Development of a pipeline of subprojects took longer than initially expected.

Prior to design of the GeoFund Program, the Bank team prepared a strategy note to identify the potential for geothermal development in ECA. During preparation there were long negotiations and revisions to the GeoFund technical and administrative design due to the GEF secreatariat preference to use financial instruments such as guarantees and loans, which would have tilted the GeoFund towards the high-income graduating countries. There were also high transaction costs associated with using the GeoFund as a pilot for a regional geothermal program and having the Bank team identify, market, solicit, prepare and review proposals for possible GeoFund subprojects. All of the above resulted in administrative budget costs that were higher than for the typical GEF project (total lending costs of about US$549,970 and supervision costs of about US$412,140). The GEF administrative budget for the overall GeoFund program was depleted after three

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years of implementation, and no additional subprojects could be financed due to the lack of administrative funds to identify, prepare and supervise new subprojects.

Implementation arrangements for the subprojects worked as planned during appraisal, with the two Recipients implementing the subprojects, and the GeoFund Coordination team providing oversight. The GeoFund Advisory Forum (GAF) did not materialize, as there were only two subprojects in APL1. The GeoFund Group of Scientific and Technical Experts (STE) was an expert community based on a roster of geological, technical environmental, financial, economic and legal experts and was responsible for carrying out technical, environmental and financial due diligence related activities. It provided geological risk assessment of the GRI subproject. It was not a permanent body, but was on call on an as needed basis.

The ECA wide study on assessment of barriers to Geothermal Energy Use was eliminated, as it could not be completed within the project period. The demonstration projects did not materialize.

Under the Geological Risk Insurance Subproject, the results of the drilling and testing activities indicated that the two wells would not produce adequate geothermal flow rates for any geothermal-based operation. This was verified in the technical report produced by MOL, and further verified by independent experts hired by the Bank. Eligible financial expenses were verified by an international auditing firm. After verification in accordance with the Grant Agreement, a payment of US$3,305,577.63 was made to MOL on December 17, 2007. The remaining unwithdrawn amount of US$414,422.37 was cancelled, and the MOL Grant Account was closed in 2007.

The closing date for the regional technical assistance subproject was extended from December 30, 2008 to December 30, 2009, to allow for completion of two of the regional technical assistance activities. The undisbursed balance of US$110,608.07 was cancelled on April 30, 2010.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at EntryProject Preparation. An extremely long period of project preparation (58 months from concept to Board) reflects the difficulties within the Bank and GEF to process innovative projects such as this one. The GeoFund Program was the first GEF region-wide program for geothermal development, and as such carried high transaction costs. The project team faced many internal constraints to develop a regional program and eventually settled on a horizontal APL format, to be directly implemented by the Bank and through IFC due to the absence of a suitable agency to administer a region-wide program. The Bank did not have experience with regional geothermal projects, but to the extent possible, lessons from previous geothermal projects for district heating (Poland Podhale and Stargard and Lithuania Klaipeda) and from other regional projects such as the Africa Stockpile Programme were incorporated into the project design. General lessons learned from other renewable energy projects and energy efficiency projects such as the Romania Energy

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Efficiency Project, the Bulgaria Energy Efficiency Project, the Turkey Renewable Energy Project and the Caribbean Renewable Energy Development Programme were taken into account in designing the GeoFund Program. Financial barriers were addressed through the creation of a revolving risk insurance scheme based on the experiences of the Romania and Bulgaria EE projects. The GeoFund was to provide a strategic mix of risk insurance, investment and TA instruments to move beyond individual projects to a more systematic approach towards geothermal energy within the ECA Region.

Design. The GeoFund Program aimed to facilitate the creation of an enabling business and regulatory environment in ECA countries so that the development of geothermal energy would become attractive to investors. The GeoFund program was set up as a region-wide and a multi-country facility financed by a GEF grant, using an approach similar to horizontal APLs. The first two subprojects comprised the first phase of the APL. Under the Program, the Bank took on the identification/preparation/supervision of subprojects through the Geothermal Coordination Team (GCT), and IFC was the executing agency for the program of subprojects that were more appropriate for private sector investments. The program’s design focused on:

(i) TA to address knowledge gaps and capacity barriers that retard the use of RER and geothermal energy, and to support project preparation and implementation;

(ii) direct investment funding (DIF) to support developers through low-cost loans, grants or contingent grants, and

(iii) a Geological Risk Insurance (GRI) window to help mitigate the geological risks associated with geothermal exploration and operation, which is the most difficult barrier to tackle. The two subprojects in the first phase APL involved TA and GRI. The design of the GRI component was innovative.

During preparation, three alternatives were considered and rejected: a commercial administrative agent as grant recipient; creation of a dedicated new trust fund at the Bank for GeoFund; and creation of a GEF sub-account, which would not have worked for GRI

insurance or DIF loans.The option finally chosen was to work on a country by country GEF grant scheme.

Quality at Entry. The Quality at Entry Assessment (QEA8) rated quality at entry of the overall GeoFund Program as moderately unsatisfactory citing (i) the complex structure of the program, (ii) long preparation period, (iii) possible resource constraint on the risk insurance component and (iv) limited progress in bringing subprojects to closure. At the time, it was the view of the task team that the GeoFund was not particularly complex and had only one executing agency, IFC; that the long preparation period was not due to the Geological Risk Insurance component but rather to the difficulty to find a suitable project/program design acceptable to both GEF and Bank policies; and that the Geological Risk Insurance component was a pilot program designed to play a catalytic role to remove barriers, and that the criteria could be tightened or funds could be reallocated from one of the other windows if it appeared to be in danger of depletion.

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The ICR rates the quality at entry as moderately satisfactory since the rating is based on an evaluation of the quality at entry of APL1, not of the entire GeoFund program.

The two subprojects in the first APL were well prepared and ready for implementation. Retroactive financing was used to finance some early consultancies under the region-wide Technical Assistance subproject. Priority activities for IGA’s work program were agreed well in advance and included in its Letter of Agreement. The Grant Agreement with MOL Hungarian Oil and Gas Company, Plc, the subproject developer, was extremely detailed and specified the key parameters for payment of all or part of the GRI, and the parameters in the Grant Agreement were used as the basis for calculating the GRI compensation.

Risk Assessment.

Region-wide TA Subproject. The PAD indicated that the critical risks that applied to the overall GeoFund applied to the ECA Regional TA Subproject implemented by IGA, although these risks (legislative risks, subproject development risks and GeoFund risks) did not seem applicable to this subproject. The overall risk rating with mitigation was moderate. In hindsight, the risk of delays in implementation of TA contracts should have been identified and assessed due to IGA’s initial inexperience with Bank procurement and financial management procedures.

GRI for MOL Hungarian Oil and Gas PLc. A separate risk assessment was done for the MOL Geothermal Power Plant Pilot Subproject. The overall risk rating with mitigation was negligible. Risks identified were: policy risk (renewable electricity price volatility, traditional (non-geological) investment risk, and geological risk (rated moderate). The geological risk was to be mitigated by careful pre-investment activities such as geological, hydrogeological, geochemical and geophysical surveys and studies. As evidenced by its completion report, MOL exercised due diligence in implementing the mitigation measures. In retrospect, this risk was underestimated, as it materialized despite the mitigation measures.

2.2 ImplementationThere was no restructuring, and the project was never at risk. As designed, the subprojects were implemented by the Recipients, while the Bank as implementing agency for the GeoFund Program was responsible for identifying, marketing, soliciting, preparing, reviewing and approving additional subprojects as well as the standard supervision oversight. The GeoFund Coordination Team (GCT) met quarterly and as needed to provide overall strategy, direction and processing. In the early stage of the APL, a considerable amount of time and resources was spent to develop additional subprojects, which, due to circumstances beyond the control of the GCT (graduation of new EU countries, rapid escalation of the cost of geothermal drilling and equipment, and the financial crisis, which made investors even more risk adverse) failed to materialize. After 19 promising potential subprojects were proposed during the Istanbul Geothermal Workshop in February 2009, there were no remaining resources in

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the administrative budget for identification, preparation and supervision of additional subprojects.

Through third party financing, IGA obtained about US$1,180,000 in cofinancing for the GeoFund technical assistance activities.

The GRI insured up to 85 percent of the eligible drilling expenses incurred by MOL, and MOL financed the remaining 15 percent of eligible drilling expenses. In addition, MOL also financed all of the pre-drilling expenses (geological surveys, prefeasibility studies, etc, staff salaries, as well as the post drilling expenses to return the land to its pre-drilling state), which are estimated at about US$2-3 million. It also paid up-front to the GeoFund a processing fee of US$10,000 and a 3 percent fee on the insured amount (US$131,254).

2.3 Monitoring and Evaluation (M&E) Design, Implementation and UtilizationThe results framework in Annex 3 of the PAD referred to the overall GeoFund Program, which is still under implementation. Eight geothermal energy subprojects in participating ECA countries were envisaged over the lifetime of the GeoFund Program, and two subprojects were approved under APL1. The arrangements for results monitoring table gave target values for the first phase of the GeoFund APL (2006-2008) and for the subsequent phase (s).

Each of the two GEF subprojects in APL1 had its own M&E design and the respective Recipients (IGA and MOL) were responsible for monitoring and reporting on progress. IGA used the following key indicators: number of training events completed, number of case studies completed, and completion of TA assignments relating to enabling framework and information dissemination. MOL’s Technical Department monitored the exploration and testing activities and reported to the Bank through quarterly progress reports on the testing and drilling exploration activities and the estimated costs and expenses for each itemized activity to determine the expenses to be covered by the GRI, as specified in the Grant Agreement. After MOL indicated that the two wells would not produce adequate geothermal flow rates for any geothermal-based operation, it prepared its own completion report which reported on all the parameters required in the Grant Agreement. Independent experts hired by the Bank performed a final verification of the exploration and testing activities. An independent auditor audited MOL’s eligible financial expenses. Based on a review of MOL’s completion report, the verification report and auditor’s report and a supervision mission, the amount of compensation under the Geological Risk Insurance component was determined and paid in accordance with the Grant Agreement.

2.4 Safeguard and Fiduciary ComplianceSafeguard Compliance: In accordance with the overall GeoFund Program, each subproject had its own environmental rating. The ECA regional TA subproject was classified as environmental category “C” as there were no investment operations in this subproject. The MOL Geothermal Power Pilot Project received an environmental screening category of “B”. Given the small scale nature of the project, potential adverse environmental impacts were limited, site specific and reversible. MOL completed the EA

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disclosure process in accordance with national/EU requirements and obtained the environmental license. MOL also financed the costs related to surface restoration on the drilling field after the closure of the wells, in accordance with local regulations for post well closure actions; these expenses could not be covered by the GRI, because they were not specified in the original budget table in the Grant Agreement.

Fiduciary Compliance: IGA, as the Recipient of the Regional TA subproject, was responsible for financial management arrangements and procurement in accordance with Bank guidelines for the region-wide technical assistance subproject. A financial improvement action plan was agreed with IGA prior to effectiveness. The May 2009 FM supervision mission rated financial management as moderately unsatisfactory due to internal control deficiencies and recommended improvements, which IGA implemented. An off-site review of the FM arrangements was conducted in November 2009 to follow-up on implementation of the action plan required to bring the FM to satisfactory levels. The required actions included: proper application of the invoice acceptance procedures which were stipulated in the manual but not followed by IGA, preparation of proper reconciliation of the received advance to the Designated Account, sending out the withdrawal applications to document payments for expenditures from the Designated Account and agreeing with the auditor the audit period which should include all final transactions. The off-site review demonstrated that the action plan had been completed satisfactorily. A review of sample transactions found that IGA was now following the required procedures with regard to the acceptance of deliverables and invoices and had performed final reconciliation of the project records with the World Bank disbursement records and provided applications documenting all expenditures. The audit contract was amended to cover all project expenditures until the end of the project, and the audit report was to be issued by January 31, 2010 at the latest. The FMS review concluded that the financial management arrangements for the project had improved and the rating was upgraded to moderately satisfactory after the completion of the action plan. The FMS indicated that the FM rating could be further upgraded to satisfactory after the review of the final audit report. The final audit for the IGA Technical Assistance was received in January 2010 and gave an unqualified opinion, and the auditor’s Management Letter indicated that it did not find any internal control issues. The final audit was reviewed by the FMS and found to be acceptable. Fiduciary compliance was not a factor in the MOL GRI Subproject (see Section 1.5 B).

2.5 Post-completion Operation/Next PhaseIGA. The International Geothermal Association is a scientific, educational and cultural organization established to operate worldwide, with more than 3000 members in 65 countries. Its objective is to encourage research, development and utilization of geothermal resources worldwide through the compilation, publication and dissemination of scientific and technical data and information, both within the community of geothermal specialists and between geothermal specialists and the general public. Although GEF funding for the ECA regional geothermal program has ceased, the studies developed under the subproject and the roster of geothermal experts will continue to be maintained and shared with members from ECA countries and from other countries. Based on the experience gained in working with the Bank under the ECA GeoFund

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regional technical assistance component, IGA has been selected as a Recipient Agency of the African Rift Geothermal Development Program (ARGEO), currently under preparation. IGA has created a new company in Germany and opened a branch in East Africa to facilitate implementation of the proposed program.

MOL The MOL Hungarian Oil and Gas Company will continue to operate and remains committed to geothermal energy development in Hungary and abroad despite the unsuccessful outcome of its first exploration. In 2008 it formed a joint venture, Central European Geothermal Energy Production (CEGE), with other sponsors to develop geothermal power in Hungary and in the region.

IFC. IFC received seven potential proposals for geothermal subprojects in Turkey as a result of the Geothermal Workshop held in Istanbul in February 2009. IFC submitted a subproject proposal for GEF Chief Executive Officer (CEO) endorsement in early CY2010, which was subsequently approved in April 2010. This subproject is expected to support GRI requests from Turkey’s private sector and from one municipality over the next few years.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and ImplementationThe GeoFund program and the two subprojects under APL1 were highly relevant to global priorities and were part of the ECA region’s strategy (“Fire without Smoke”) to increase the use of geothermal energy in ECA through facilitating the creation of an enabling business and regulatory environment in ECA countries so that the development of geothermal energy would become attractive to investors. The removal of barriers to renewable energy development continues to be part of the current ECA Energy Strategy to reduce the impact of energy consumption on the environment by increasing reliance on clean/renewable fuel sources and improving energy efficiency (“Lights Out”). The objectives and design were closely aligned with GEF objectives as well. The APL1 Project Development Objective was clear.

The subprojects in APL1 were implemented as originally designed and contributed to meeting the PDO to systematically promote the use of geothermal energy in the Europe and Central Asia region by removing barriers to the development of renewable energy.

Regional TA subproject, implemented by IGA. The capacity building subcomponent was successfully completed, with all major tasks accomplished, including: development of materials for a course on geothermal feasibility studies, international workshops on mineral co-production in geothermal development, two international summer schools on geothermal development and case studies of 7 European geothermal projects. A workshop on Geological Risk Insurance was held. Under the policy development subcomponent, a “Study on Country Assessment of Barriers to Geothermal Energy Use for Power Production in Hungary” was completed as a precondition to design appropriate instruments to remove barriers toward geothermal energy development in Hungary. Road mapping of best ways to remove barriers to geothermal development was

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completed and disseminated at a successful workshop. IGA also established a GeoFund website, a data base of publications and conferences on geothermal development and a roster of international geothermal experts.

GeoFund Subproject for Hungary MOL Geothermal Power Pilot. After unsuccessful drilling and testing, the GeoFund paid US$3.3 million to MOL to cover the eligible drilling and testing expenses. The Geological Risk Insurance worked as designed when the drilling was unsuccessful and played a key role in reducing the risk of drilling for the first geothermal pilot power plant in Hungary.

3.2 Achievement of Global Environmental ObjectivesThe GeoFund Program global environment objective was to reduce greenhouse gas (carbon dioxide) emissions in the interest of climate change mitigation through the systematic and streamlined implementation of geothermal projects. Throughout project implementation the PDO was monitored as the GEO, as evidenced by the ISRs. Neither of the two subprojects (region-wide technical assistance and provision of Geological Risk Insurance) directly contributed to a reduction of greenhouse gas emissions. The PDO of the Hungary MOL Geothermal Power Pilot Project was to increase the share of renewable electricity in Hungary’s grid mix. Had the MOL drilling and exploration resulted in a new geothermal power plant, greenhouse gas emissions would have been reduced, and the share of renewable energy in Hungary’s grid mix would have been increased.. Nonetheless, the geological risk insurance component worked as envisaged in the case of unsuccessful drilling, so the subproject performed as intended. Because of the high upfront costs and risks in geothermal project development, the provision of Geological Risk Insurance played a key role in reducing the risk of the pilot power project. MOL has assured the Bank of its continued commitment to geothermal development, and is exploring two additional geothermal projects, which, if successful, may result in future reductions of greenhouse gas emissions. The technical assistance component provided training, workshops, publications, a roster of experts, roadmaps to remove barriers to geothermal development, and 7 case studies of European geothermal projects. The Geothermal Workshop in Istanbul resulted in 19 prospective subprojects for geothermal development. The regional TA subproject achieved its project development objective, to systematically promote the use of geothermal energy in the Europe and Central Asia region by removing barriers to the development of renewable energy, although it had no direct impact on reducing greenhouse gas emissions.

3.3 EfficiencyThe IGA subproject provided TA and therefore does not lend itself to typical economic and financial analysis. Through third party financing, IGA obtained about US$1.1 million to leverage the funds provided by GEF. Because of its worldwide expertise in geothermal development, it was able to hire consultants with the appropriate expertise. It is a non-profit organization and operated with a very small staff to manage the regional technical assistance activities; its administrative and management expenses over the three year project were only US$67,604. The MOL subproject resulted in a payment of Geological Risk Insurance as a result of unsuccessful drilling, so no economic analysis was done at the ICR stage. The financial and economic analysis done at appraisal was based on the successful development of a geothermal power plant, which did not occur.

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The GRI provided to MOL met the incremental cost criteria, as it was used to finance the development of the first geothermal power plant pilot project in Hungary, which would not have occurred without the GEF funding. Experience gained by MOL in this initial exploration is expected to be replicated in other explorations. MOL brought its own funds to the table, and had the drilling resulted in a favorable result, had obtained financing for the construction of the geothermal power plant.

The APL1 completed the planned activities and met or exceeded the expected outcome in terms of achievement of the Project Development Objective, according to schedule and as cost-effective as initially planned.

3.4 Justification of Overall Outcome RatingRating: SatisfactoryBoth the overall GeoFund Program and the two subprojects in APL1 continue to be extremely relevant to the current ECA Energy Strategy and the focus on reducing the impact of energy consumption on the environment; however, the GEOs were set at the GeoFund Program level and as such, their attainment is overly ambitious for the first phase of the APL. The two subprojects met the PDO to promote the use of geothermal energy in the ECA region through assistance in the removal of barriers. It is important to note that during the implementation of these two subprojects, the achievement of objectives (including GEOs) was measured solely against the attainment of the project’s PDO.

3.5 Overarching Themes, Other Outcomes and Impacts(if any, where not previously covered or to amplify discussion above)(a) Poverty Impacts, Gender Aspects, and Social DevelopmentNot applicable

(b)Institutional Change/StrengtheningThe IGA subproject was instrumental in building the capacity of local experts in the preparation and implementation of geothermal energy projects, in the transfer of know-how through the establishment of a roster of international geothermal experts, and in the dissemination of information about geothermal development. Experts from ECA countries were trained in IGA workshops. As a result of the workshop in Istanbul, Turkey, about 19 potential proposals for geothermal development were submitted to the Bank for review. Of these 7 were referred to IFC as they involved the private sector in Turkey. IGA received initial training in Washington in Bank procurement, disbursement and financial management procedures and gradually gained expertise in Bank procurement and fiduciary management procedures, as evidenced by the request from ARGEO for IGA to be a Recipient for its geothermal development program.

(c) Other Unintended Outcomes and Impacts

Positive:Close coordination between the ECA GeoFund Coordination Team and the ARGEO team resulted in beneficial synergies between the two regional geothermal development programs (coordination of project application requirements and evaluation criteria, joint

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supervision missions, set-up of a joint group of Scientific and Technical Experts, and joint efforts to raise co-financing for both geothermal programs). Experience with the ECA GeoFund Program has been replicated in the ARGEO Program preparation, saving time and resources and eliminating the need to reinvent the wheel. The lessons learned during the negotiations of the payment of the GRI with MOL have improved the clarity of the technical parameters in the Grant Agreement and this experience has been transferred to the ARGEO Program.

Negative: The depletion of the GEF administrative budget forced the GCT to decline to finance any of the 19 subproject proposals received from the Istanbul workshop, except for the 7 candidate subprojects in Turkey, which have been transferred to IFC execution. It is unfortunate to drop the new proposals despite their high quality and the strong interest from prospective developers.

Due to the prolonged global financial crisis, the private sector risk insurance market for geothermal development has not expanded as expected at the time of the launching of the GeoFund Program, which limited the opportunity for leveraging GEF resources with the private risk insurance market.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder WorkshopsNot Applicable

4. Assessment of Risk to Development Outcome Rating: Negligible to Low

Prospects are good for sustainable project development outcomes for the two subprojects financed under APL1. Region-wide technical assistance activities under the IGA subproject have largely been implemented and the 2009 Geothermal Workshop organized by IGA in Istanbul, Turkey resulted in 19 subproject applications for support from the GeoFund. IGA indicated in its completion report that it recognizes the importance of maintaining the data bases and information resources developed under the project. The GeoFund mitigated the geological risk of a geothermal drilling for the first pilot project to produce electricity from geothermal development in Hungary, which MOL, the Hungarian Oil and Gas Company, would not have undertaken without the GRI. MOL has stated to the Bank that it remains committed to geothermal energy development in Hungary and elsewhere in the region, despite the unsuccessful outcome of the first exploration. It has already identified two new geothermal fields to be developed as the second round of exploration. In 2008, it formed a specialized company for geothermal development (Central European Geothermal Energy Production); thus; it is expected that the objective of increasing the share of renewable electricity in Hungary’s electric grid will eventually be achieved.

5. Assessment of Bank and Borrower Performance

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5.1 Bank(a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory

The Bank’s performance in the identification, preparation and appraisal of APL1 was satisfactory. Prior to designing the project, the Bank team prepared a strategy note to identify the potential for geothermal development in the ECA region. The Bank team designed an innovative regional program to systematically promote the use of geothermal energy by removing barriers to the development of renewable energy. Staffing (which included senior technical specialists) and funding were more than adequate during the lending phase. The contingent financing mechanism devised for the Geological Risk Insurance was innovative. The team proposed a horizontal APL for the region-wide GEF program, due to the absence of any other suitable instrument in the Bank’s toolkit. The team displayed adequate knowledge of variations in country conditions. The Bank team actively marketed the concept and solicited proposals for future subprojects. In several cases, considerable preparation work up to the PAD stage was done only to have the host government or project developer suddenly withdraw. The Bank team developed processing steps for future subprojects and criteria for assessing the eligibility and soundness of future subprojects. The team developed very clear guidance for the evaluation and review of the GRI payments, which worked well when the GRI was called.

(b) Quality of Supervision (including of fiduciary and safeguards policies)Rating: Moderately Satisfactory

The GeoFund Coordination Team (GCT) was responsible for overall strategy, direction and processing, and met on a regular basis to discuss overall management, promotion and marketing of the GeoFund program, identification, preparation and development of new subproject applications, internal processing and appraisal of subprojects, instructions of administrative actions for project implementation, and supervision of subprojects. At the beginning of the project, the GCT provided IGA with training in Washington on Bank procurement, disbursement and financial management procedures, since IGA was initially unfamiliar with Bank procurement and financial management procedures. There was continuity in the members of the GCT throughout the project. Fiduciary aspects were supervised regularly and action plans developed and monitored when needed. During the negotiations with MOL on payment of the GRI, the GCT hired external experts to review the outcome of MOL’s exploration and verify their payment claim.Perhaps the GCT should have held a workshop, similar to the one held in Istanbul in early 2009 at the beginning of the project, so that promising subproject proposals were available from project start-up. When it became apparent that the GEF administrative budget resources were insufficient to support new subprojects, the GCT was unable to obtain management support for BB funds or for additional GEF resources. ISRs were produced once a year, which was the Bank minimum requirement at the time. Sector management commented on the three ISRs, and in the final ISR requested the team to prepare a suitable aide memoire and ISR and an approach plan for responding to the project proposals from the Istanbul workshop; these comments do not seem to have been followed up.

(c) Justification of Rating for Overall Bank Performance

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Rating: Moderately Satisfactory

Based on the above explanations, the overall rating is moderately satisfactory, as per the ICR guidelines that the overall rating will be equal to the lower of the two ratings.

5.2 Recipient(a) Government PerformanceRating: Not applicable

(b) Recipient Agency PerformanceRating: Satisfactory

The rating for both Recipient agencies is Satisfactory. IGA, the recipient responsible for the ECA Region-wide Technical Assistance subproject implemented the subproject successfully, albeit with some initial delays due to unfamiliarity with Bank procurement and financial management procedures. Although the FMS review in May 2009 (see Section 2.4) rated financial management as moderately unsatisfactory due to internal control deficiencies, a subsequent off-site FMS review found that IGA had completed the actions required in the action plan, and that the rating should be upgraded to moderately satisfactory, with an upgrade to satisfactory after receipt of an acceptable final audit report. The final audit (received in January 2010) gave an unqualified opinion and the Management Letter indicated that there were no internal control issues. There were no procurement issues during the project. IGA submitted a completion report which detailed the technical assistance activities under the project.

MOL completed its exploration and drilling with sound technical and financial due diligence and provided the periodic reporting required by the Grant Agreement. Its completion report on the exploration and drilling was extensive and satisfied the requirements of the Grant Agreement. The report was reviewed by a reputable international expert hired by the Bank, MOL’s eligible financial expenses were reviewed by an international auditor, and the Bank agreed to pay the geological risk insurance in accordance with the parameters set out in the Grant Agreement. (c) Justification of Rating for Overall Recipient PerformanceRating: Based on the above, the rating for overall Recipient performance is Satisfactory.

6. Lessons Learned Geothermal development is a risky business, with only about a 30 percent success

rate. Given the risk adverse nature of investors and of Bank management, a renewable energy project with a certain portion of the grant designated for geothermal development might have resulted in a more robust pipeline of subprojects and have been more successful in meeting the GEO.

Given that pipeline development is critical to the success of a regional program, it should be pursued as early as possible during project preparation.

Close cooperation between regions on similar innovative geothermal development programs resulted in synergy and efficiencies in terms of knowledge and product innovation.

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Sector specific region-wide programs like the GeoFund Program, solely supported by GEF resources, tend to lack country unit ownership and linkages to country-based programs.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agenciesThe ICR team agrees with the completion reports provided by the two Recipients.

(b) CofinanciersNot applicable

(c)Other partners and stakeholders (e.g. NGOs/private sector/civil society)Not applicable

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

Provision of a Geological Risk Insurance (GRI) to cover the short-term geological risk associated with the drilling and testing activities /1

18.60(3.72) 6.30 34

ECA region wide technical assistance /2 0.81 1.70 210

Total Baseline Cost   19.41 8.00 41Physical Contingencies 0.00 0.00Price Contingencies 0.00 0.00

Total Project Costs  19.41 8.00 41Project Preparation Facility (PPF) 0.00 0.00Front-end fee IBRD 0.00 0.00

Total Financing Required   4.53 8.00 177

/1 US$18.6 envisaged at appraisal was intended for construction of the geothermal pilot power plant, in the event of successful drilling. The risk insurance of US3.72 million is shown in parentheses as it was contingent on the drilling results./2 Actual includes US$1 million in third party cofinancing obtained by IGA.

(b) Financing

Source of Funds Type of Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Recipient (MOL) 18.60 3.00 .00Recipient (IGA) 0.00 1.00 Global Environment Facility (GEF) 4.53 4.00 881/ US$18.6 million from the Recipient MOL included financing for the construction of the power plant, if the drilling were successful.

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Annex 2. Outputs by Component

Both subprojects of the APL 1 were instrumental in reaching the PDO to systematically promote the use of geothermal energy in the Europe and Central Asia Region by removing barriers to the development of renewable energy.

I. Regional Technical Assistance Implemented by IGA (US$0.70 million disbursed)

A. Capacity Building Component Dissemination material for course on geothermal feasibility studies and

project implementation (presentations, papers, CD, and a financial computer model) were made available to the public. Dissemination of information about geothermal energy is a precondition for speeding up the development of geothermal resources.

Targeted international studies and workshops on mineral co-production in geothermal development. The consultant conducted an extensive review of literature related to state of the art research on the extraction of minerals from geothermal brines. The final product was a CD with a collection of papers presented at the geothermal brines conferences in Kamchatka in 2005 and Arizona in 2006, in English and in Russian. The papers have been made available through the IGA Geothermal Conference Database on the web. Information about the technical benefits of mineral extraction or co-production of minerals from geothermal brines had not previously been readily available. The CDs provide a comprehensive summary of the state of the art as well as the available literature on the subject.

Roster of international geothermal experts. The consultant developed a comprehensive roster of internationally recognized geothermal experts that may be drawn upon by the GeoFund eligible countries and others. The expert roster is a good start for seeking geothermal experts.

International Geothermal Workshop. The consultant organized a successful workshop in Istanbul, Turkey (February 16-20, 2009) in cooperation with the International Summer School. Energy officials and business developers discussed different aspects of geothermal development in the GeoFund region. Comprehensive proceedings including all presentations were filed. Proposal for 19 future geothermal subprojects were received.

Publications on geothermal energy, including maintenance of the GeoFund web site. A website was developed for dissemination of information about the GeoFund program. It can be accessed by the GeoFund countries to receive information on the GeoFund and available financial help to companies or municipalities to develop geothermal resources.

Series of case studies for seven European geothermal projects, covering power generation, combined heat and power, district heating, geothermal heat pumps, and agricultural applications. This is an important contribution to the dissemination of information about geothermal applications.

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B. Policy Development Component Identify barriers for geothermal development and provide advisory services to

ministries in priority countries. (This activity was eliminated as it could not be completed within the project period.)

Country assessment of barriers to geothermal energy use for power production in Hungary. The consultant reviewed the geothermal deposits in Hungary, analyzed existing data and established a data base of geothermal resources in the country.

Road mapping session of the best ways to remove barriers to geothermal development. The consultant organized a successful workshop in Moscow September 22-23, 2008. Among the topics discussed were risk mitigation, barrier removal, financing and provision of technical assistance. The report includes the main conclusions and recommendations and is useful for planning future steps in geothermal development in the region.

Assistance in evaluation of project proposals for the second phase of GeoFund. This activity involved the preparation of a Project Proposal Document to be used as a template for private and public project applicants to apply for funding to the GeoFund, taking into account the various assistance windows of the GeoFund and the different application options. Three geothermal experts were hired to evaluate proposals received by the Bank for the new GeoFund subprojects. The output was a scoring sheet for each proposal and a write up of the strengths and weaknesses (see Attachment).

Workshop on Geological Risk Insurance. The consultant organized a workshop on geological risk insurance in November 2008 in Germany in conjunction with the German Geothermal Conference. Comprehensive proceedings with all papers presented at the workshop were published.

II. Geological Risk Insurance for the Hungary MOL Geothermal Power Pilot Project

The subproject consisted of the provision of a Geological Risk Insurance (GRI) to cover the short-term geological risk associated with the drilling and testing activities to support the development of a geothermal power pilot project to be undertaken by the consortium led by MOL. The results of the drilling and testing activities indicated that the two wells would not produce adequate geothermal flow rates for any geothermal-based operation. This was verified in the technical report produced by MOL and confirmed by an independent geothermal expert hired by the Bank. The GRI of US$3.3 million was paid to MOL.

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Annex 2 AttachmentPotential Geothermal Subprojects Proposed Following Workshop in Istanbul

(July 1, 2009)

Funding Type Country Project Name Developer

Type

Total budget

USD

Requested funding

USD

Average Score Comments

RMI Turkey Hateks Geothermal Investment in Manisa/Salihli Region Private 1,958,400 1,370,880 72.0 1 ** Recommended for funding after completion of exploration

RMI Turkey Geothermal Power Project Kula - phase 1 Private 5,125,194 4,356,415 68.7 2 ** Recommended for fundingRMI Turkey Kızıldere Geothermal Power Plant Project Private 3,373,293 2,867,299 79.2 3 * Interesting project, might be considered for fundingRMI Turkey BT-1 WELL in Balcova-Narlidere Geothermal Field Private 1,153,729 980,669 72.7 4 * Conditional funding might be recommendedRMI Turkey Sindirgi Geothermal Project Private 7,120,000 5,696,000 45.1 5 Not recommended

TA Turkey Alasehir Geothermal Survey and Drilling Private 2,029,717 250,000 75.5 1 ** Strongly recommended for funding

TA Turkey Hateks Geothermal Exploration Salihli Region Private 2,500,000 1,000,000 70.7 2 ** Strongly recommended for funding: exploration completion mandatory prior to RMI see above

RMI Tajikistan Panax Kentor Tajikistan Geothermal Project Private 5,473,500 4,652,475 63.6 1 ** Strongly recommended for funding/post exploration

RMI Kyrgyz Republic

Panax Kentor Inylcheck Geothermal Project Private 5,279,000 4,487,150 61.9 2 * Highly recommended for funding/post exploration

TA Serbia Development of a new field in Vojvodina Province Provincial 1,720,000 1,290,000 63.5 1 ** Strongly recommended for funded

TA Croatia Geocroatia Private 6,900,000 5,520,000 54.2 2 *Strongly recommended, TA request must be completed only for one site containing detailed plan and budget

TA Serbia Geoserbia Private 11,500,000 9,200,000 52.8 3 * Recommended, TA request must be completed only for one site containing detailed plan and budget

TA Romania Georomania Private 6,900,000 5,520,000 NA 4 * Recommended, revised detailed proposal requested only for one site containing detailed plan and budget

TA Russia Pauzhetsky GeoPP: Binary Unit State Company 150,000-200,000 1 #1TA Russia Pauzhetska-Kambalno-Koshelevsky Private 2,500,000 2 #2TA Russia Mutnovsky GeoPP: Secondary Steam Unit State Company 1,000,000-3,200,000 3 #3TA Russia Paratunsky Private 2,300,000 4 #4TA Russia Mutnovsky GeoPP-II State Company 2,500,000-4,000,000 5 #5TA Russia Roadmap Private 320,000 6 Project to be considered under a broader IGA TA

** first order priority project* second order priority project

Recommend request for proposals in the listed order of ranking

Ranking

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Annex 3. Economic and Financial Analysis (including assumptions in the analysis) Not Applicable

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/Specialty

LendingCharles Feinstein Sector Manager ECSSD

Helmut Schreiber Task Team Leader ECSSD

Emilia Battaglini GEF Regional Coordinator ECSSDKyoichi Shimazaki Lead Financial Officer IEFClaudia Pardinas-Ocana Sr. Counsel LEGECRon Hoffer Lead Environmental Specialist ECSSDHeike Lingertat Consultant ECSSDGyorgy Lazi Consultant ECSSDLarisa Marquez Program Assistant ECSSDKarina Mostipan Sr. Procurement Specialist ECSPSSiew Chai Ting Lead Financial Management Specialist ECSPSAndrina Ambrose-Gardiner Finance Officer LOAG1Supervision/ICR Helmut Schreiber Task Team Leader COCPOHeike Lingertat Consultant Karina Mostipan Senior Procurement Specialist ECSC2

Kyoichi Shimazaki Task Team Leader ECSS5 Lead Financial Officer

Iwona Warzecha Sr Financial Management Specia ECSC3

(b) Staff Time and Cost

Stage of Project CycleStaff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY02 7.31 64.43 FY03 0.00 21.17 FY04 0.00 10.13 FY05 1.27 16.18 FY06 33.64 313.35 FY07 14.26 124.71 FY08 0.00

Total: 56.48 549.97Supervision/ICR

FY02 0.00 0.00 FY03 0.00 0.00 FY04 0.00 0.00 FY05 0.00 0.00

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FY06 0.00 0.00 FY07 13.88 123.52 FY08 11.10 98.11Fy09 19.96 109.68FY10 14.34 80.83

Total: 59.28 412.14

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Annex 5. Beneficiary Survey Results (if any)Not applicable

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Annex 6. Stakeholder Workshop Report and Results (if any)Not applicable

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Annex 7. Recipient’s ICR

I. International Geothermal Association

Implementation Completion Report on ECA Regional Technical Assistance

INTERNATIONAL GEOTHERMAL ASSOCIATION

Reykjavík 28 June 2010

Mr. Kyoichi ShimazakiLead Financial OfficerSustainable Development DepartmentEurope and Central Asia RegionThe World Bank

IGA – WB Contract. GEF Grant MSP Trust Fund No. TF057268

A grant agreement between IGA and the World Bank about implementation of a TA program under GeoFund was signed on 28 November 2006 (GEF MSP Trust Fund No. TF057268, Regional Technical Assistance as part of the Geothermal Energy Development Program ). The next two months were used to prepare the implementation of the program in accordance with the Bank´s requirements. Having fulfilled the requirements the agreement became effective on 7 February 2007. The end of the grant agreement period was 31 December 2008, but two of the projects (1.4 and 2.4) were extended by one year. One project (2.1) was cancelled from the work program.

The work program includes two main components, (A) Capacity Building and (B) Policy development. The Secretariat established a separate US$ bank account in Iceland to handle the GeoFund money. It was originally within the bank SPRON, which was taken over by the bank Kaupthing during the grant period. Samorka (the company hosting the IGA Secretariat) provided the services of an accountant that made the payments based on invoices approved by the Manager of the IGA-GeoFund.

The accounting firm completed auditing of the IGA-GeoFund funds in January 2010. They concluded that the Financial Statements give a true and fair view of their financial position of the IGA-GeoFund program in accordance with generally accepted accounting

 

NGO in special consultative status with the Economic and Social Council of the United Nations and Partner of the European Union for the Renewable Energies

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principles in Iceland applied on a consistent basis. The audit report has been accepted by the World Bank.

Iwona Warzecha from the World Bank office in Poland visited Samorka/IGA twice during the contract period for a regular financial management review. The first visit was made on 13 June 2007 and the second one on 12 May 2009. The supervision reports from both visits have been cleared by the World Bank.

IGA is very satisfied with the cooperation with the World Bank on implementing the projects in the GeoFund region. All projects included in the work program have been completed successfully except one project that was cancelled.

Discussions between IGA and the World Bank about a new contract within the ARGeo program in Africa are ongoing. In January 2010 the partners came to an agreement about a draft work program within the TA (Technical Assistance) part of the program as well as a draft budget. The agreement will formally be between the World Bank and the newly established company IGA Service GmbH, which is 100% owned by IGA. Due to delays in preparations for the planned exploration drilling in Djibuti the IGA-WB contract is still pending. Based on the experience from the IGA-GeoFund program the IGA is very interested in taking on the responsibility of implementing the planned TA ARGeo program. The resources within the organization and the management structure within the IGA Service company should secure a successful completion of this important task in Africa.

Below is a short description of the main activities within the IGA-GeoFund program as well as evaluation of the outcome of the individual projects implemented.

1.1 Dissemination material for course on geothermal feasibility studies and project implementation TU

Budget: US$ 50,900.

A large part of the budget was used to pay five consultants for preparing short course material in form of presentations and papers. Additional papers from the WGC2010 in Turkey were collected and the material put on a CD for distribution. The topics cover reservoir engineering requirements, economic factors, tools for the analysis of geothermal project economics etc. In addition an open version of the RELCOST financial computer model was delivered and made available for the public.

Dissemination of information about geothermal energy is a precondition for speeding up the development of geothermal resources. Therefore, it is of great importance to have the education material developed under this project available in the future.

1.2 Targeted international studies and workshops on mineral co-production in geothermal development

Budget: US$ 100,000.

The consultant conducted an extensive review of literature related to state of art research on the extraction of minerals from geothermal brines. The final product was delivered to

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IGA in form of a CD. It contains mainly a collection of papers presented at the geothermal brines conferences in Kamchatka in 2005 and Arizona in 2006, both in the English and Russian languages. The papers have been made available through the IGA Geothermal Conference Database on the web. A presentation of the results was given at the GRC meeting in October 2008.

Until now, information about technical benefits of mineral extraction or co-production of minerals from geothermal brines has not been not been readily available. The consultants have provided a comprehensive summary of the state of the art as well as the available literature on the subject.

1.3 Roster of International Geothermal Experts

Budget: US$ 30,000.

The consultant developed a comprehensive roster of internationally recognized geothermal experts that may be drawn upon by the GeoFund eligible countries as well as the World Bank. The roster contains individuals with expertise and extensive experience in all aspects of geothermal exploration, drilling, engineering, construction, operation and maintenance, environmental analyses, contracting and financing.

A great deal of expertise and experience needs to be established in order to facilitate the development of geothermal resources in the GeoFund eligible countries. The expert roster, including geothermal experts from all over the world, is a good start for seeking such expertise. It´s important to keep it up to date in the future.

1.4 International Geothermal Workshop 2008

Budget: US$ 120,000.

The consultant organized a workshop in Istanbul, Turkey, 16-20 February 2009 in collaboration with Equity International and the International Summer School (ISS). The workshop was very successful and well attended. Energy officials and business people discussed different aspects of geothermal development in the GeoFund region. The potential for future development and financing opportunities were described by experts in the field. The organizers submitted comprehensive proceedings including all presentations from the workshop.

1.5 Publications on GeoE, including maintenance of the GeoFund web site

Budget: US$ 40,000.

The aim was to support the GeoFund Project by developing a website for dissemination of information about the GeoFund program. The website can be accessed by the GeoFund countries to receive information on the GeoFund and available financial help to companies or municipalities to develop geothermal resources. The design of the website is based on a similar website that had been developed earlier for the ARGeo program. It is made by professional web designers and is user friendly with all the main

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functionalities that are required of such systems. However, the material available on the website could be more extensive.

1.6 Series of case studies of projects that have been developed

Budget: US$ 50,000.

The consultant prepared case studies for seven European geothermal projects. They cover power generation, combined heat and power, district heating, geothermal heat pumps and agricultural applications. The product fulfils the requirements described in the TOR and gives a comprehensive summary of the selected projects. It´s an important contribution to the dissemination of information about present applications in the area.

2.1 Identify barriers for geothermal development and provide advisory services to ministries in priority countries

Budget: US$ 100,000; project cancelled from the work program.

This project was cancelled from the work program. To complete the project it would have been necessary to extend it by one year, which was not in accordance with procedures acceptable to the World Bank.

2.2 Road mapping session for best ways to remove barriers to geothermal development

Budget: US$ 50,000.

The consultant organized a successful workshop in Moscow 22-23 September 2008. About 15 people attended, thereof 3 IGA Board members. Fruitful discussions about the cooperation between IGA and the World Bank took place and the results were presented to the IGA BoD. Among the topics discussed were risk mitigation, barrier removal, financing and provision of technical assistance. The report from the workshop organizers includes the main conclusions and recommendations from the participants and is useful for planning future steps in the geothermal development in the region.

2.3 Country assessment of barriers to GeoE use for power production in Hungary

Budget: US$ 110,000.

The consultant reviewed the geothermal deposits in Hungary, analyzed existing data and established a data base of geothermal energy resources in the country. The work was finished already before the IGA-GeoFund grant was made effective. Therefore, IGA´s role was mainly to receive and accept a final report from the consultant and make the grant payment to him.

2.4 Assistance in evaluation of project proposals for second phase of GeoFund

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Budget: US$ 30,000.

This project was divided in two parts:

(1) Preparation of a Project Proposal Document (PPD) to be used as a template for private and public project applicants to apply for funding to the GeoFund, taking into account the various assistance windows of the GeoFund and the different applications options.

This document was used in connection with the GeoFund project proposals under item (2) below.

(2) A group of three geothermal experts were hired as consultants to evaluate proposals that the WB received for new GeoFund projects. The output was a scoring sheet for each proposal and a write up of the strengths and weakness of those proposals assigned.

Both project components were completed successfully. The evaluation team submitted detailed evaluation sheets with recommendations for support to selected projects.

2.5 Workshop on Geological Risk Insurance (GRI)

Budget: US$ 50,000.

The consultant organized a workshop on geological risk insurance on 11-12 November 2008 in Karlsruhe, Germany, in conjunction with the German Geothermal Conference 11-13 November. The workshop was a great success and the organizers submitted comprehensive proceedings with all papers presented at the workshop.

As mentioned earlier IGA believes that the projects within the IGA-GeoFund work program have been implemented successfully. The deliverables submitted by the consultants have in general been in accordance with the TOR that was the basis for each individual project.

I would like to thank the World Bank for a successful cooperation with IGA on this important part of the GeoFund program. We look forward to continued cooperation between the partners and hope that the planned activities within the ARGeo program will be realized soon.

Sincerely,

Árni RagnarssonExecutive DirectorInternational Geothermal AssociationIGA-GeoFund Manager

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II. MOL Hungarian Oil and Gas Company, PLc

Thermal water production and re-injection test in OrtaházaImplementation Completion Report (ICR)

ICR completed for reviewing the experience and learning lessons from the GeoFund supported MOL geothermal project, Ortaháza Hungary Europe, 2007.

(+) Abstract

Ortaháza Pilot project aimed to utilize abandoned HC wells in complete geothermal system (production and re-injection). MOL geologist selected Or-Ny-3 and Or-Ny-5 wells from more than 60 potential ones. However temperature reached satisfactory level (146 oC), the reliable flow rate (678 m3/d) was significantly lower than expected (app. 2000-2500 m3/d). Due to low flow rate, the generally low permeability and the limited extension of the reservoir project had to be unsuccessfully closed.

(i) Assessment of the test’s objective, design, and implementation experience

Or-Ny-5 well is located in the vicinity of Ortaháza in the Zala County, SW-Hungary. This exploratory well was drilled in August 1991, with total depth 2930 m (MD). 8 ½” hole drilled to 2930 m, and cased with 7” casing shoe at 2892 m. A total of 38 m interval was open. The upper part of the Miocene consists of limestone and mainly volcanic. The lower part 13 meters is Triassic homogeneous limestone. The target formation was Triassic limestone. Based on logs caves were observed throughout limestone between 2917-2918.5 m, and 2923-2932 m. High mud losses were encountered through both section, ~1036 m3 (upper section was closed by cement plug). The openhole depth interval of 2892 to 2932 m was tested.The hydrodynamic tests of geothermal energy-producing wells provide qualified basic data for planning. Oil industry experience has shown that „heat mining” by production and injection wells may economically be performed from fractured – karstified carbonates. The decisive part of the realization costs of the whole system is related with the production and re-injection wells, the costs of which – on return – depend on the reservoir parameters and, especially, on the well-reservoir contact.Achieving reliable base data hydrodynamic tests have to do with the wells and the tested intervals of the formation.At first short term hydrodynamic well tests (Isochronal production, injectivity and fall-off test) have to be executed individually. The short hydrodynamic test has been designed to accomplish the well test objectives in an operationally safe, low cost effectively, and environmentally responsible.Depending on the results of the short tests, generally long term test and measurements could be performed in a second phase by pipe-line connection between the two wells. The long test is able to answer the existence of the hydraulic connection and the possibility of the thermal breakthrough effect. It can also clear and make more precise the values obtained from the short tests.

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The main objectives of the short testing program were• To measure initial reservoir pressure and temperature.• To determine productivity and flow capacity.• To determine the physical characteristics of the produced water (quality,

chemical composition, gas content, solids/dissolved, salt content, etc.).• To determine well completion parameters.• To make a decision on performing the formation treatment.• To determine the presence and nature of any heterogeneity with in the test

radius.• To collect representative fluid samples for PVT analysis.• Finally, based on the successful evaluation a decision whether to continue the

concept of the project or need some rethinking.

Isochronal production test program• Static bottomhole pressure/temperature measurement, for 4 hours.• First drawdown period (choke size 4 mm, depth 1004 m), for 8 hours. Opened

well, N2 injection at rate 10 m3/minute.• First Build-up period, for 8 hours.• During shut-in, wireline team done the necessary operation according the

given plane, plugged 1004 m, and inserted choke of 4 mm at depth 1503 m.• Second drawdown period, for 8 hours. Opened well, N2 injection at rate

10m3/minute.• Second shut-in period, for: 8 hours. During this time, wireline operation.

Increased choke size to 6 mm at depth 1503 m.• Third drawdown period, for 8 hours Open well, N2 injection at rate

20 m3/minute.• Third build-up period, for 8 hours. Wireline operation. Increased choke size to

8 mm at depth 1503 m.• Final drawdown period, for 8 hours. N2 injection at rate 30 m3/min.• Final build-up period, for 12 hours.

Injectivity and Falloff test program After the isochronal test, the cooled down produced water was injected back from pit into well in the following sequence.

• First rate: 600 liter/minute. Period: 4 hours.• Second rate: 1000 liter/minute. Period: 4 hours.• Third rate: 1300 liter/minute. Period: 4 hours.• Fourth rate: 1600 liter/minute. Period: 7 hours.• Stopped injection falloff test. Period: 15 hours.• Or-Ny-5 well test analysis

For the reason of unsatisfactory results of short term hydraulic tests, the long term test with connected wells was not executed.

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(ii) Assessment of the outcome of the test against the agreed objectivesThe next table illustrates the summary of outcome data recorded during the isochronal test.

The interpretation results are summarized in the next table.

Following is the summary of data recorded during the water injection test.

The following can be concluding. Comparing the results of production test and of injectivity test both provide almost the same results. The results show that the Δp are very similar (Δp= 5.0, 7.0, 8.7, 10.4 MPa respectively) to what we got from production test. The productivity/injectivity indexes can be determined with 110-148 m3/day/MPa values which are under the limit of the demands of geothermal wells.

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It is evident from these results that the tested formation has low permeability. Due to this fact reservoir stimulation was executed by acidizing manner.

[Stimulation jobBelow is a brief overview of sequence of operations carried out during stimulation job.• Cleaner acidizing with coiled tubing 3100-3050 m:• 5 m3 15% HCl sweet water, A261 inhibitor, A201 inhibitor efficiency increaser• 32% HCl, L062 NTA complex affix, J507 friction adjuster, F103 tenzid• Pumped to formation, 3 m3 15% HCl with 200 liter/minute 19.0 MPa• Matrix acidizing, 10 m3 15% HCl with 1600 liter/minute 7.2-6.3 MPa• 20 m3 7.5% SDA with 1600 liter/minute 4.4-2.3 MPa• 30 m3 15% HCl with 1600 liter/minute 2.4-1.0-2.7 MPa• 25 m3 7.5% SDA with 1600 liter/minute 2.7-0.8 MPa• 40 m3 15% HCl with 1700 liter/minute 2.2-4.3 MPa]

Post acid draw-down well test conclusionsFrom the results of the models so far used, it can be conclude that, a model representing a radial composite has shown a close match with the actual data. The interpretation results for this case are summarized in the next table.

The results show that the effective permeability surrounding the well highly increased and the total skin reduced due to the stimulation job. Therefore, the enhanced well productivity is due to permeability rather than skin.

Injectivity and Falloff test Evaluation

Following is the summary of data recorded during the water injection test.

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All periods were not long enough (not stabilized) to get any reservoir estimation but there were good only for checking the pressure losses, and injectivity indexes (PI).Pre stimulation job the maximum PI was only 148 m3/d/MPa. Owing to very successful stimulation PI increased up to 2623 m3/d/MPa in the vicinity of the well. Unfortunately the extension of the reservoir was seemed to be limited.The well was then abandoned due to the unsatisfactory thermal water flow rate the generally low permeability and the limited extension of the reservoir.

Since the results of the short hydraulic test of Or-Ny-5 well were unfavourable the whole pilot project was stopped.

(iii) Evaluation of recipient's own performance during the preparation and implementation of the operation, with special emphasis on lessons learned that may be helpful in the future

Lessons learned: HC wells were drilled with an aim to avoid water thus probability to found a well pair with satisfactory geothermal production potential for power generation purposes is low. MOL and CEGE (see below) are continuing investigation to utilize abandoned individual HC wells. According to company experts, in fissured reservoirs old wells may be valuable part of geothermal system as re-injection wells if positioning of new production well is smart. In addition provided geological information of old wells can significantly reduces exploration costs and development risks. District heating requires lower flow rates compared to requirement of power generation. Old HC wells may supply surrounding area if heat market exist, however due to high pipeline costs area applicable for supply is limited.

(iv) Evaluation of the performance of the Bank, any co-financiers, or of other partners during the preparation and implementation of the operation, including the effectiveness of their relationships, with special emphasis on lessons learned

Geothermal project development is facing with high upfront costs and risks basically run oil industry costs and risks with significantly lower returns. Innovative financing structure, especially risk reduction is inevitable to take off the industry. GeoFund played key role to reduce risk of Ortaháza Pilot.

(v) Description of the arrangements for successful geothermal project executionFounding CEGE and current structure.

Based on work experience of Ortaháza Pilot project ENEX (Iceland), Green Rock Energy (Australia) and MOL (Hungary) founded CEGE – Central European Geothermal Energy – in 2008 with geothermal power generation purposes. Due to financial crisis ENEX sold its stake to GRE and MOL. CEGE is currently a 50-50 percent owned joint venture company. Its mission is to become a market leader in Central Eastern Europe in utilizing geothermal energy in electric power plants and for direct heat supply.

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable

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Annex 9. List of Supporting Documents

Project Appraisal Document on a Global Environment Facility Grant in the Amount of US$810,000 to the International Geothermal Association and US$3.72 million to the Hungarian Oil and Gas Company, PLc in Support of the First Phase of the US$25.0 Million Geothermal Energy Development Program (GeoFund) in Europe and Central Asia, October 24, 2006, Report No. 37317-ECA.

Global Environment Facility Trust Fund Grant Agreement between International Bank for Reconstruction and Development Acting as an Implementing Agency of the Global Environment Facility and MOL Hungarian Oil and Gas Public Limited Company, dated November 21, 2006.

Letter of Agreement for GEF MSP Trust Fund No. TF057268 (Regional Technical Assistance as part of the Geothermal Energy Development Program) between IBRD, acting as Implementing Agency of the Global Environment Facility (GEF) and the International Geothermal Association (IGA), dated November 14, 2008.

Memorandum of Agreement between IBRD as Implementing Agency of the GEF and IFC as Executing Agency for the GeoFund Aide-Memoires and Implementation Status Reports.

Audit Report and Management Letter for Regional Technical Assistance within Geothermal Energy Development Program to International Geothermal Association, January 28, 2010.

Eighth Quality at Entry Assessment (QEA8), Fiscal Year 2006-2007 as amended by the Stage II Panel, dated 12/11/2007, Review of ECA Geothermal Energy Development Program (GeoFund).

Europe and Central Asia GeoFund 1 (P075046) Learning Review of Regional Projects, Draft Report, October 5, 2009.

Final Report 2008-2009, Geothermal Energy Development Program (GeoFund) International Geothermal Workshop,dated March 7, 2009.

Implementation Completion Report by MOL Hungarian Oil and Gas Company PLc, on Thermal Production and Re-Injection Test in Ortahaza.

Implementation Completion Report by the International Geothermal Association (IGA) on ECA Regional Technical Assistance , June 28, 2010.

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