Document ofThe World Bank

Report No:

GEF PROJECT BRIEF

ON A

PROPOSED GRANT FROM THEGLOBAL ENVIRONMENT FACILITY TRUST FUND

IN THE AMOUNT OF USD 15.2 MILLION

TO THE

REPUBLIC OF ARGENTINA

FOR AN

ENERGY EFFICIENCY PROJECT

January 20, 2005

CURRENCY EQUIVALENTSExchange Rate Effective {Date})

Currency Unit = Argentine Peso= US$1

FISCAL YEARJanuary 1 – December 31

ABBREVIATIONS AND ACRONYMSAC Air ConditioningAEEF Argentina Energy Efficiency FundCAMMESA Compañía Administradora del Mercado Mayorista EléctricoCAS Country Assistance StrategyCFL Compact Fluorescent LampCGF Contingent Grant FacilityDSM Demand Side ManagementEDENOR Empresa Distribuidora y Comercializadora Norte (Buenos Aires)EDESUR Empresa Distribuidora y Comercializadora Norte (Buenos Aires)EE Energy EfficiencyENARGAS Ente Nacional Regulador del GasENRE Ente Nacional Regulador de la ElectricidadEPEC Empresa Provincial Energía de CórdobaESCO Energy Services CompanyFA Fiduciary AgentFM Fund ManagerGEF Global Environment FacilityGHG Greenhouse GasGoA Government of ArgentinaGTZ Gesellschaft für Technische Zusammenarbeit (German Technical Cooperation)IFC International Finance CorporationIPCC Intergovernmental Panel on Climate ChangeIRAM Instituto Argentina de Normalización y CertificaciónM&E Monitoring and EvaluationPAEE Programa de Ahorro y Eficiencia EnergéticaPCG Partial Credit GuaranteePIEEP Programa de Incremento de la Eficiencia Energética y Productiva en las PYMEsPURE Programa de Uso Racional de EnergíaPYMEs/SMEs Pequeñas y Medianas Empresas/Small and Medium-Sized Enterprises RFP Request for ProposalsS&L Standard & LabelingSE Secretariat of EnergyTOE Tons of oil-equivalentUNDP United Nations Development ProgrammeUNFCCC United Nations Framework Convention on Climate ChangeUTN Universidad Tecnológica NacionalWB World Bank

Vice President: Pamela CoxCountry Manager/Director: Axel van Trotsenburg

Sector Manager: Susan G. GoldmarkTask Team Leader: Philippe J. Durand

ARGENTINAEnergy Efficiency Project

CONTENTS

Page

A. STRATEGIC CONTEXT AND RATIONALE....................................................................51

1. Country and sector issues..................................................................................................51

2. Rationale for Bank and GEF involvement.........................................................................94

3. Higher level objectives to which the project contributes...................................................95

B. PROJECT DESCRIPTION..............................................................................................117

1. Project development objective and key indicators..........................................................117

2. Project components..........................................................................................................127

3. Lessons learned and reflected in the project design......................................................1713

4. Alternatives considered and reasons for rejection.........................................................1814

C. IMPLEMENTATION.....................................................................................................1915

1. Partnership arrangements (if applicable).......................................................................1915

2. Institutional and implementation arrangements.............................................................1915

3. Monitoring and evaluation of outcomes/results............................................................2419

4. Sustainability and Replicability.....................................................................................2419

5. Critical risks and possible controversial aspects...........................................................2621

6. Loan/credit conditions and covenants...........................................................................2923

D. APPRAISAL SUMMARY..............................................................................................2923

1. Economic and financial analyses...................................................................................2923

2. Technical........................................................................................................................3024

3. Fiduciary........................................................................................................................3024

4. Social.............................................................................................................................3024

5. Environment..................................................................................................................3125

6. Safeguard policies..........................................................................................................3125

7. Policy Exceptions and Readiness..................................................................................3226

Annex 1: Country and Sector or Program Background......................................................3327

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies..............4335

Annex 3: Results Framework and Monitoring.....................................................................5143

Annex 4: Detailed Project Description..................................................................................5547

Annex 5: Project Costs............................................................................................................6254

Annex 6: Implementation Arrangements..............................................................................6355

Annex 7: Financial Management and Disbursement Arrangements..................................6759

Annex 8: Procurement Arrangements...................................................................................6860

Annex 9: Economic and Financial Analysis..........................................................................7163

Annex 10: Safeguard Policy Issues.........................................................................................8173

Annex 11: Project Preparation and Supervision..................................................................8375

Annex 12: Documents in the Project File..............................................................................8476

Annex 13: Statement of Loans and Credits...........................................................................8577

Annex 14: Energy Efficiency Fund........................................................................................8880

Annex 15: Incremental Cost Analysis..................................................................................10294

Annex 16: STAP Review.....................................................................................................109101

Annex 17. Country at a Glance..........................................................................................113105

Annex 18: Maps.....................................................................................................................115107

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Sector reform and impact of the economic crisis:

There exists at the moment an opportunity to significantly influence the efficiency of energy use in Argentina by supporting government plans for regulatory and policy changes to promote energy efficiency and to strengthen the market by building private sector and financial sector capacity.

Energy sector reforms in Argentina in the 1990s made the power and gas sectors among the most competitive in South America. Overall, the results of the energy sector reform were positive for supply side efficiency. In the power sector, there was significant new investment in generation, wholesale price and distribution losses were halved, and retail tariffs and service interruption decreased. In the gas industry, important bottlenecks were eliminated, service provision was expanded, and direct access by final consumers was developed.

However, for both the electricity and gas sectors, the major reforms on the production, transmission, and distribution levels were not accompanied by similar actions to improve efficiency on the demand side. This situation has resulted in higher energy use for the Argentine economy, higher energy costs and lower competitiveness for productive sectors, greater energy consumption for consumers with increasingly higher costs as retail prices are raised, and greater local and global pollution associated with the consumption of fossil fuels.

While the country was poised to address the demand side energy efficiency issues by the late 1990s, as evidenced by the passage of energy efficiency legislation by the upper house, this momentum was stalled by the economic crisis in 2002. The crisis created a loss of confidence in the financial sector and a contraction of bank credit for investments in new equipment, which was especially serious for small and medium enterprises which could not self-finance the investments. The devaluation of the peso increased the cost of imported parts and equipment, and also put pressure on the government to control electricity tariffs, especially among residential consumers.

The Argentine economy has made significant progress over the past two years in emerging from the crisis. For the energy sector, adequate price incentives exist in Argentina today to make energy efficiency investments for both electricity and natural gas profitable among nearly all consumer categories. Electricity wholesale prices have been adjusted to reflect variations in seasonal costs and passed through to industrial and commercial users, whose tariffs have increased by over 50 percent since 2002; further increases that would raise electricity wholesale prices up to market rates are scheduled for 2006 as part of an agreement signed between the Government and most power generators. Wellhead gas prices have increased by about 135 percent since 2001, up to US$1/MMBtu, and are expected to be completed freed in 2006; these increases have been

passed through to industrial, commercial, and compressed natural gas (CNG) consumers, resulting in retail price increases of 30-90 percent since 2001. Retail electricity and gas prices for residential users are expected to be revised as part of the integral tariff review scheduled for most distribution concessionaires in 2006, including the ones participating in the project.

Despite sufficient energy price incentives, there remain information and regulatory barriers to energy efficiency improvements, and the lack of experienced companies and banks inhibits the development of the energy efficiency market. The IFC/GEF Efficient Lighting Initiative (ELI) project has helped advance the penetration of compact fluorescent lights in Argentina, through the involvement of a committed utility (EDESUR), that will also be involved in this project. The government is committed to introducing new regulations for minimum energy efficiency standards and labeling for lamps, appliances and equipment, but needs both technical assistance and political support that would be provided by Bank/GEF involvement. The PIEEP project has demonstrated a large potential for energy efficiency and productivity improvements in small and medium enterprises, but the inadequate development of an ESCO industry, and a financial sector averse to investment lending, have left many potential energy efficiency projects, both in the industrial and commercial sector, idle. To tap the potential for energy efficiency among a growing industrial and commercial sector, a concerted effort is needed to raise awareness of the market for energy efficiency within the financial sector through capacity building and by lowering the risks through a guarantee fund. The economy has recovered sufficiently in the last two years so that there is now considerable liquidity in financial markets, but most lending is currently going for consumer lending and other short-term (60-90 days) financing. New laws restricting the amount of government securities that commercial banks can hold will increase their demand for longer-term investment financing. As a further incentive to the Government to launch a major program on energy efficiency, Argentina is facing an impending energy supply shortage. Potential for improving energy efficiency:

The energy intensity of Argentina’s economy has been increasing in recent years. The country’s energy intensity was 25% higher in 2000 compared to 1994. Energy costs represent an important share of total costs for several types of industries, such as cement, paper, textiles, ceramics, etc. The use of efficient equipment in the industry could reduce electricity consumption by 20% and fuel use by 15%, in average. In the commercial and residential sectors, as well for public lighting, average savings of 30% could be achieved. The energy sector accounts for a large share (47% in 2000) of greenhouse gas (GHG) emissions in Argentina that amounted to an estimated 282 million tons in 2000 (excluding GHG emissions from changes in land use).

The ELI project has helped advance the penetration of CFLs in the market, through the involvement of a committed utility (EDENOR), that will also be involved in this project. The government is committed to introducing new regulations for minimum energy efficiency standards and labeling for lamps, appliances and equipment, but needs both

technical assistance and political support that would be provided by Bank/GEF involvement. The PIEEP project has demonstrated a large potential for energy efficiency and productivity improvements in small and medium enterprises (see Annex 1), but the inadequate development of an ESCO industry, and a financial sector averse to investment lending, have left many potential energy efficiency projects, both in the industrial and commercial sector, idle. To tap the potential for energy efficiency among a growing industrial and commercial sector, a concerted effort is needed to raise awareness of the market for energy efficiency within the financial sector through capacity building and by lowering the risks through a guarantee fund. The economy has recovered sufficiently in the last two years so that there is now considerable liquidity in financial markets, but most lending is currently going for consumer lending and other short-term (60-90 days) financing.

Barriers to energy efficiency:

There are a number of barriers to increased investment in energy efficiency in Argentina. Some of these barriers are similar to those in other countries, while others are specific to the financial situation and regulatory framework in Argentina.

Lack of regulatory incentives to promote energy efficiency. Even with energy prices sufficient to justify investments and process and managerial changes, the regulatory framework for electricity and natural gas often inhibits utilities and many classes of consumers to undertake energy efficiency investments. A prime example is the inability for utilities to finance energy efficiency investments by allowing customers to repay through their utility bills.

Lack of adequate price signals to energy consumers, especially among residential consumers. Partly as a result of the financial crisis, energy prices for some classes of consumers have been controlled and not allowed to reflect increases in the costs of energy supply. Some residential tariffs specifically discourage energy efficiency, for example, by effectively providing lower tariffs for increased usage. Electricity and natural gas tariffs are still below 2002 levels, although they are being increased for many classes of consumers, especially industrial and commercial consumers.

Lack of information among residential consumers on the efficiency of energy equipment. Salesmen of energy equipment fail to inform buyers of operation costs, as related to its purchase cost, or to the relative efficiency of appliances, so that consumers tend to consider their purchase decision only in terms of the initial price, disregarding the total cost throughout the life of the product. A lack of reliable information on equipment efficiency also prevents the use of its low operational cost as a marketing instrument. There is no standardization, testing, certification and labeling program in place to orient vendors or consumers.

Inadequate information and high transaction costs for enterprises to implement energy efficiency investments. The lack of information among industrial consumers about EE technologies and experiences, and the high cost of the initial design and implementation of EE projects has compounded the difficulties for obtaining access to financing for energy efficiency.

Perceived high risk among banks to finance energy efficiency projects. Access to financing has been difficult due to the 2002 crisis, and energy efficiency projects are still perceived as high-risk initiatives, while there are doubts related to their actual profitability. In general, commercial banks ignore how to evaluate EE projects and their guarantee requirements, and several small and medium projects become unfeasible due to transaction costs.

Infant ESCO industry. There are only a few energy services consulting companies that yet do not function as real ESCOs. However, with adequate support and information, these companies are expected to pursue cost-effective energy efficiency investments.

Government strategy includes EE as an important element:

In light of an impending energy supply imbalance in Argentina, the Government is strongly committed to undertaking a major program on energy efficiency at this time. Energy efficiency is an important component of Argentina’s energy program. While the country made significant progress on improving supply side efficiency through major energy sector reforms introduced in the 1990s, demand side efficiency improvements have been more difficult to achieve and were further hampered by the economic crisis of 2001.

In 2003, the GoA, through the Secretariat of Energy, designed the Energy Saving and Efficiency Program (PAEE), in line with the Secretary of Energy’s policy objective of promoting energy efficiency and the use of renewable energy sources. The PAEE’s key strategic policy areas for promoting energy efficiency in Argentina include the following aspects: (i) developing a regulatory framework that promotes energy efficiency measures, (ii) designing the appropriate institutional structure to involve the different actors interested in developing a market for energy efficiency, (iii) implementing a program for Energy Savings and Efficiency in Public Buildings, (iv) awareness raising, education, and dissemination of information on energy efficiency and energy savings to consumers, decision-makers, professionals, and the public in general. Two instruments in that sense are the PIEPP to promote energy efficiency within SMEs and the Program for Energy Equipment Quality (PROCAE) to develop energy equipment standards and labeling, (v) stimulating the energy efficiency market through economic incentives, (vi) Establishing financial mechanisms to ensure that the cost of investments approximates the opportunity cost of capital, (vii) increasing research and development (R&D) in the area of energy efficiency, (viii) designing and implementing an information system about the availability, costs, and benefits of energy efficiency technologies.

In the 2004 the GoA launched the PURE (Program for the Rational Use of Energy) an incentive-based program similar to the initiative developed by Brazil in 2001 during its energy crisis. In Argentina, electricity and natural gas users were required to save in 2004 at least 5% compared with their energy use in the same period of 2003 or pay penalties; actual savings were rewarded. The program was extended in 2005 and incentives were stiffened. However, the impact of the program is uncertain, in particular in the case of residential users.

The current project has been requested by the Government of Argentina and the Secretariat of Energy. It will support the Government strategy and EE experiences in Argentina and worldwide, by focusing on providing assistance on the regulatory and policy framework, tapping the growing liquidity in the financial sector, and building on the positive work that has been done in the industrial sector (PIEEP) and through the electric utilities.

2. Rationale for Bank and GEF involvement

Argentina is one of the most important countries in Latin America, and prior to the 2001 crisis, had the third largest economy in the region. Argentina is the fourth largest consumer of energy in Latin America and is second only to Venezuela in per capita energy consumption. On the positive side, a significant share of the country’s energy is provided by hydro (35%), resulting in CO2 intensity that is moderate by developing country standards. However, all incremental consumption over the coming years is expected to be supplied from fossil fuels.

Argentina is in a critical period with respect to energy policy and, as a result, energy efficiency. The Government is conscious of the importance of energy prices in order to attract investments for needed supplies and to induce energy efficient behavior by users. This project, by helping establish regulatory and policy measures, information, and financial risk reduction instruments needed to promote energy efficiency, is critical in Argentina through this energy transition. A true market for energy efficiency in Argentina requires both a financial sector that will support business plans and investments, and the development of companies such as ESCOs, leasing companies, and others that can subsume both the technical and financial risk for energy efficiency investments. Based on the experience of GEF-supported projects in other countries, GEF participation and WB expertise will be critical for the establishment of the proposed energy efficiency fund and to allow leveraging of additional resources and reaching a critical mass for sustainability.

The project is fully consistent with the objectives of the 2003-5 Country Assistance Strategy (CAS) for Argentina, in particular the objectives of sustained economic growth, and environmental sustainability. The new CAS that is being prepared (2006-8) is expected to reiterate the objectives of economic growth and environmental sustainability, including climate change mitigation.

3. Higher level objectives to which the project contributes

Advances in the science of climate change have moved rapidly over the last decade and it is now clear that climate change impacts pose a threat to economic development. While the world is already committed to some level of global climate change, given that atmospheric CO2 and other warming gases will continue to increase based on past emissions. Countries are therefore advised to take adaptive measures to reduce the potential negative impacts of climate change. However, the degree of future climate

change will also depend on future GHG emissions, which can be reduced through energy efficiency, the promotion of low carbon technologies, and other measures. In the short-term, energy efficiency is one of the most cost-effective ways to reduce GHG emissions, while also bringing other economic and environmental benefits.

For Argentina, which has played a major role in international climate change discussions and negotiations, energy efficiency also represents an important near-term measure for reducing GHG emissions. More importantly, promoting energy efficiency has been shown to have positive economic and development benefits to an economy by lowering production costs and placing energy efficiency within the broader context of efficient production. As Argentina emerges from the recent crisis, EE benefits include not only improving productivity and lowering the costs of energy supply, but to the extent that fossil fuel use is reduced, it will help improve local air quality.

Argentina and UNFCCC. The United Nations Framework Convention on Climate Change (UNFCCC) was ratified by Argentina on November 3, 1994, as a non-Annex 1 party. In 1997, Argentina presented its First National Communication followed by a review presented in 1999. In order to update the knowledge of the structure and evolution of GHG emissions, the 1997 Greenhouse Gas Inventory has been formulated, and the 1990 and 1994 inventories have been reviewed in accordance with the Revised 1996 IPCC Guidelines. In June 2002, Argentina ratified the Kyoto Protocol. The Second National Communication was prepared with GEF support (MSP). The Tenth Session of the Conference of the Parties (COP 10) was held in Buenos Aires from 6 to 17 December 2004 together with the twenty-first sessions of the Subsidiary Body for Scientific and Technological Advice (SBSTA 21) and the Subsidiary Body for Implementation (SBI 21). During the preparation of this project, the Focal Point has confirmed that Argentina remains strongly committed to reduce the energy intensity of the economy.

B. PROJECT DESCRIPTION

1. Project development objective and key indicators

The development objective of the project is to achieve a sustained increase in the efficiency of energy use in most sectors, which would reduce energy costs for consumers and contribute to the long-term sustainability of the energy sector.

The intermediate objective of the project is to develop a sustainable and growing market for energy efficiency services and equipment in Argentina by removing key institutional, financial, and information barriers that are currently limiting the development of an energy efficiency market. The project will seek to reduce the perceived risks for energy efficiency investments among commercial banks, improve the capacity and incentives for key electricity utilities to promote energy efficiency among their customers, and develop new energy efficiency regulations (including standards and equipment labeling), and strengthen the ESCO industry. This is the first major and broad based project on energy efficiency by the World Bank and the GEF in Argentina. It is expected that the program will be linked to existing and new energy efficiency activities in the country by the Bank, other donors, and domestic actors.

The global objective of the project is to reduce the gas emissions and the climate change risk, by systematically removing the barriers that prevent activities and investments in energy efficiency and energy conservation. (GEF Operational Program No. 5).

Key performance indicators with respect to the project objective would include: Savings of electricity, natural gas and fuels Number of EE projects and associated investment volume with commercial banks

participating in financing with AEEF. Number of financial institutions engaged in EE project financing. Number of ESCOs engaged in EE project development and implementation. Establishment of adequate regulatory incentives and institutional framework for

EE Number of EE standards and labels Number of additional energy efficient equipment (CFLs, fridges, water heaters,

AC units) sold to residential customers by participating electric utilities EE knowledge, investment and behavior change by energy users

Performance indicators with respect to the global objective would include: Measurable reduction of GHG emissions from participating sectors and sub-

borrowers, and associated energy savings

See annex 3 for detailed indicators and targets.

2. Project components

To achieve its development objective, the project consists of three main components, each described below: Component 1: Establishment of the Argentina Energy efficiency Fund (implemented by the Fund Manager); Component 2: Development of EE programs by electric utilities (implemented by EDENOR, EDESUR, EPEC and possibly others); and Component 3: Capacity Building and Project Management (implemented by the SE).

Component 1: Establishment of the Argentina Energy Efficiency Fund (AEEF) (Total estimated cost US$38.9 million. Proposed GEF support of US$7.8 million)

This component aims to create and operate the Argentina Energy Efficiency Fund (AEEF), to facilitate energy efficiency investments by users, ESCOs and other actors, primarily in the industrial and commercial sectors. The central objective of the AEEF is to demonstrate the commercial viability of investment in energy efficiency by reducing the risk perception that currently impedes such investments. The operational principles of the fund are to: (i) maximize the financing of energy efficiency investments, leveraging capital resources as much as possible; (ii) preserve its capital base, through commercially-oriented operation, in order to maintain resources for revolving use; and (iii) publicize its operating results so that businesses are increasingly willing to invest in energy efficiency and commercial banks become increasingly willing to undertake lending transactions.

The two key activities of this component are:

a. Contingent Grant Facility. (US$1.8 million from GEF). The lack of support to identify and prepare energy efficiency projects is viewed as a significant constraint to energy efficiency investments in Argentina. Through this facility, the AEEF would share the cost of preparing feasibility studies for bankable EE projects. This facility would recover the funds from projects that are ultimately financed by a commercial bank. The costs of feasibility studies self-financed by firms that would then apply to the project guarantee facility through commercial banks, are expected to represent an additional US$2.5 million.

b. Guarantee Facility. (US$10 million, of which US$5.5 million from GEF) Through this facility, the AEEF would co-share with the commercial banks the risks of lending to EE projects by providing partial credit guarantees up to an agreed percentage of the banks’ loans. A proactive fund manager would be hired to promote energy efficiency investments by commercial banks through the use of the Fund. Leveraged funds (commercial banks’ lending not covered by guarantees and SMEs’ equity contributions would amount to about an additional US$26.1 million.

Because commercial banks in Argentina are currently highly liquid, it is proposed that the AEEF would initially provide only partial credit guarantees to support bank financing of EE projects, and would not co-finance these projects. The financial situation in Argentina would be reviewed at mid-term, and a decision made on the need to use part of the AEEF funds to co-finance EE project with participating banks. The intention of the fund is to demonstrate the financial viability of energy efficiency investments, and that thereafter the financial sector would expand and strengthen its lending in this area without the need for a guarantee.

The AEEF management total cost would be US$1 million, of which US$0.5 million from GEF).

Component 2: Development of a Utility Program. (US$53.3 million, of which US$3.7 million from GEF)

This component will support energy efficiency investments by electricity utilities in order to achieve energy savings in the residential, commercial and public sectors, which are major consumers of electricity in Argentina. This component will be executed by leading electric distribution companies (accounting for around 60 percent of the entire electricity market in Argentina). Three electric power distribution companies (EDENOR and EDESUR from Buenos Aires and EPEC from Córdoba) have expressed in writing their desire to participate in the project and co-finance project costs. The utilities will finance investments in energy efficiency, with GEF support provided primarily for technical assistance for program design and execution .These utilities have designed their respective energy efficiency programs as summarized in Table 1 below. Other utilities can join the project during implementation. Table 1 : Utility Program (2007-2012)

Components Electric UtilityEDENOR EDESUR EPEC

Installation of efficient lamps

and other equipment

640.000 lamps for commercial and residential users

33.000 energy efficient equipment (fridges, washers and AC) for

residential consumers / 100.000 lamps for street lighting and

buildings

Lamps for residential users (300,000), public buildings (1,000) and street lighting (150,000)

Demonstration Projects

EE in low income neighborhoods: energy efficient equipment & houses + pre-payment

metering; project design and support.

Street lighting project: 1,500 lamps; project design &

support, including institutional & financing arrangements

Program support activities

Program design, training, M&E, consultation and dissemination activities

Program design, training, M&E, consultation and

dissemination activities

Program design, training, M&E, consultation and dissemination activities

Component 3: Capacity Building and Project Management (Total estimated cost US$5.5 million. Proposed GEF support of US$3.7 million). This component will build capacity within the private and public sectors and strengthen the incentives for investment in energy efficiency.

a. Preparation of energy sector, tax and financial policies and regulations for the promotion of EE activities . The project aims to support GOA in creating the regulatory and institutional framework in which to create a market for energy efficiency in Argentina. Work would include the development of new regulatory and tariff structures, including peak-load pricing for residential customers, the extension of EE financing through customer billing by utilities, and the reform of tax and import duties for EE investments and equipment. It is expected that the corresponding regulatory changes would be promulgated before the end of the project

b. Standardization, testing, certification and labeling program. This component will support the establishment of a comprehensive program for energy efficiency standards and labeling of key energy consuming equipment, including home appliances, industrial equipment and building materials. This activity will include the modernization of the certification laboratories that will take part in the program, the institutional strengthening of the standardization bureaus, and regulatory and enforcement activities. This program will complement and strengthen the utility program by raising awareness among end-users and expanding the range of energy efficiency equipment financed by the utilities.

c. ESCO capacity building. A strong ESCO industry in Argentina would help to strengthen the market for energy efficiency services in the commercial and industrial sectors and be a key implementer of EE investments financed through the EE Fund. Emerging Argentine ESCOs have strong technical capabilities, but do not have sufficient experience with contractual and financial issues that are vital to securing financing and implementing performance contracts. Project resources will be used for training and to support dissemination and use of standardized or reference contractual instruments (performance contracts and independent verification protocols) with the support of qualified consultants and experts.

d. Information, training and dissemination programs . Creation and dissemination of case studies can overcome a critical barrier to energy efficiency investments within the residential, commercial and industrial markets (including a program for small and medium enterprises) and the public sector (with programs for public buildings and public lighting).

This component will provide information on the benefits of energy efficiency, and support the AEEF through the dissemination of EE best practices, carrying out energy efficiency diagnostics, and disseminating information on financing options to financial institutions and other actors involved in the AEEF.

e. Project coordination, monitoring and evaluation. This would include institutional support and technical assistance for project promotion and management, including support to the Steering Committee, the Secretary of Energy, and other stakeholders. In addition, it will support regular monitoring of the project components, reporting, and evaluation of the project in meeting its global and developmental goals.

Figure 1 below summarizes the project’s main components and activities, while Table 2 summarizes project costs by financing source..

Figure 1: Argentina Energy Efficiency Project

Global objective :reduce the gas emissions and the climate change risk, by systematically removing the barriers that prevent activities and investments in energy efficiency and energy conservation

Development objective :increase the energy efficiency in end uses, which would reduce energy costs for consumers and contribute to the long-term sustainability of the energy sector

Intermediate objective : Developing the market for EE services and products

3.Capacity building and Project

Management

3.a - Incentive Framework

3.c - Support for ESCO development

3.e Project Coordination, Monitoring & Evaluation

3.b - Standards and labeling

3.d - Dissemination Activities

1. Establishment of the Argentina

Energy Efficiency Fund (AEEF)

1. a - Contingent Grant Facility

1. b - Guarantee Facility

1.c - Fund Administration

2. Development of a Utility Program

2.a Efficient lamps and equipments -

for residential and public sector users

2.b Pilot projects

2.c Training, information, research

and dissemination activities

Table 2: Project costs by components and source of financing (US$ million)

3. Lessons learned and reflected in the project design

Lessons learned evidence that market mechanisms to promote certain technologies or EE products have sustainable prospects as they allow market actors to make decisions based on products’ commercial merits. One of the requirements for making decisions is that sufficient and accurate information about the energy consumption of products be available and know to consumers. Therefore, the project includes a certification and labeling program to assess the energy costs of major energy-consuming equipment, and the dissemination of this information to consumers. Aside from technical information, it is important for financial information to be available, such as through case studies of firms who have successfully invested in energy efficiency equipment or processes. One other barrier that has been demonstrated in other countries is the high transaction costs for identifying and preparing energy efficiency investments, especially for the purposes of securing financing. The project addresses this barrier in two ways: (i) by helping to develop standard contracts for ESCOs and host enterprises that will reduce the risks of default by both parties, and (ii) providing contingent grants to project sponsors to help identify and prepare energy efficiency investments.

Experience from GEF’s overall EE portfolio suggests that even in countries where the local financial market has sufficient size and liquidity, consumers and investors may have limited access to local funds for energy efficiency projects due to perceptions of high risk, high transaction cost, lack of institutional infrastructure and project development capacity or lack of awareness regarding technologies and their technical and financial performance characteristics. Providing risk-sharing instruments (ie., credit risk guarantees and other contingent finance instruments) can be a cost-effective way of addressing these barriers. Commercial loan guarantees have been successfully demonstrated in completed GEF projects. With the focus on local financial markets and institutions, such projects have a high likelihood of sustainability and replicability

Apart from the GEF, lessons learned from EE Fund experience worldwide highlight the importance of transparency of Fund management procedures, avoidance of political interference and subsidized interest rates, the need to rely on existing market participants,

portfolio diversification, emphasis on projects with high rates of return, bundling of small projects, proactivity of the Fund Manager, and integration of financial and technical expertise for the development of a sound project portfolio.

As regards utility energy efficiency programs, according to GEF experience sustainability is an important concern. Three key issues must be taken in consideration: (i) the incentives for the utility, (ii) the know-how and the human resources of the utilities and the regulatory agencies to evaluate EE projects, and (iii) the provisions to make the program sustainable. Other important lessons for utility EE programs are: (a) a supportive policy environment is essential for success; (b) programs should be complemented with financing instruments; (c) public campaigns are critical; and (d) program implementation units must have managerial and financial autonomy.

4. Alternatives considered and reasons for rejection

The project team considered a number of alternative project models before settling on the current proposed structure.

Direct Investments in Energy Efficiency. Direct investments in energy efficiency have been used by the World Bank in other countries, usually for projects where the potential energy savings were a significant share of total energy use. This approach was not judged as appropriate for Argentina given the absence of a dominant energy-consuming sector where investments in EE could be profitably made and due to the availability of capital in the domestic market. While investment by the Bank in energy efficiency in Argentina may be possible, in general the problem is the perception of credit risk rather than a lack of capital liquidity.

Loan-only Fund. The initial concept for the project was to overcome the lack of financing for energy efficiency by financial institutions through the creation of a dedicated loan fund capitalized by the GEF and other sources of funding. During preparation, discussions with numerous banks and financial experts revealed that there is considerably liquidity in Argentina, but that banks are not investing in investment projects, but rather are concentrating on short-term consumer loans. It was decided that what was needed were mechanisms to lower the perceived risk on the part of lenders for energy efficiency investments, and that GEF and other sources of funding could be better used, and go much farther, if focused on guarantees and contingent grants rather than loans. The question of liquidity in domestic banks and the need for a loan fund will be further evaluated during appraisal, and will also be examined at mid-term review.

Exclusive Reliance on ESCO market development. At present, the ESCO market in Argentina is insufficiently developed for ESCOs to be the sole driving force for the project. Nonetheless, the development of for-profit ESCOs, including energy performance contracts, will be developed under the project (component 1) and ESCOs are expected to be one of the key players in undertaking energy efficiency investments in small and medium enterprises.

Focus only on industrial and commercial users. While the project expects to promote commercial investments in the industrial and commercial sectors through the technical assistance and contingent loan financing components, these components would only indirectly affect the residential and commercial market for electricity without the involvement of key electricity distribution companies. Therefore, it was decided to include electricity utilities in the project and to leverage investments in energy efficient appliances and equipment through the utility program component. It is also expected that the involvement of major electric utilities will have an important political and social benefit given their size and influence, and given the large share of residential and commercial electricity usage in total energy use in Argentina.

Inclusion of gas utilities. Although gas usage and the efficient use of natural gas will be addressed through components 1 and 2, natural gas utilities are not a focus of component 3. For technical and financial reasons, there are lower incentives for saving natural gas compared to electricity. The decision was therefore made to focus the utility program on electricity.

C. IMPLEMENTATION

1. Partnership arrangements

Cofinancing will be pursued for the AEEF prior to approval of the project by the WB Board (Options include: IBRD loan; grant from the Netherlands; other to be defined). The Secretary of Energy has expressed its interest in an IBRD loan of US$5-10 million to increase the size of AEEF’s guarantee facility, so as to leverage more funds and increase the impact of the Fund.

Continued support of GTZ to the Secretariat of Energy regarding energy efficiency policies and strategies and program implementation: financing of two EE experts between 2006-2009 will contribute to strengthen SE’s capacity for implementation of this program. This would represent project cofinancing in the amount of US$430,000.

Coordination will be maintained with UNDP regarding its proposed regional program for energy efficiency standards and labeling program. The SE is the counterpart for both programs and will ensure that there is no overlap or duplication of activities.

2. Institutional and implementation arrangements

Overall organization.

The recipient of the grant will be the Ministry of Economy. Component 1 (energy efficiency fund) will be administered by a Trustee under a Trust Fund Agreement with the SE; disbursements from the EE Fund would be made by an Asset Manager, following instructions from the Fund Executive Director; see below for more details on

the functions of the EE Fund Executive Director and Asset Manager. The electric utilities (EDENOR, EDESUR and EPEC) will be the implementing agencies for component 2 (utility program), under a subsidiary agreement with the SE. The Secretariat of Energy will be the implementing agency for component 3 (capacity building and project management) under a subsidiary grant agreement with the Ministry of Economy and Production.

A steering committee composed of the SE, the Secretary of Environment and the Secretary of Industry will provide overall guidance and supervision for project implementation, as well as ensuring coordination of EE and clean development initiatives between the three Secretariats. The steering committee will be chaired by the SE. A Technical Committee composed of representatives from the implementing agencies and other key project stakeholders will support project implementation and M&E.

Implementation Arrangements for the AEEF

Governance of the AEEF. The AEEF would have an autonomous structure, management and organizational capabilities, under the principles of healthy and prudential management. The control of the use of the AEEF funds would be exercised by a Fund Executive Director (FED), supported by an Executive Committee composed of two representatives from the public sector and one from the private sector. The FED and the members of the Executive Committee would be selected by the Energy Secretariat under the following conditions:

a. The selection of the FED and the officers of the Executive Committee for the administration of the AEEF should be satisfactory to the Bank;

b. The Bank should be consulted before any changes regarding the selection of the FED and/or the composition of the Executive Committee throughout the duration of the Bank’s supervision of the GEF-financed Project, with the understanding that the Bank should have a right to exercise remedies if such changes negatively impact Project execution in the reasonable opinion of the Bank.

c. The FED should exercise control over the use of the AEEF funds,

The Energy Secretariat would have an oversight role over the AEEF through periodic audits, but would not interfere in the day-to-day administration of the AEEF. The Bank would have the right to request audits of the AEEF throughout the duration of the Bank supervision of the GF-financed Project, in accordance with standard Bank practice. The AEEF would be subject to the Bank’s procurement and financial management guidelines throughout the duration of the Bank’s supervision of the GEF-financed Project.

GEF-financed trust funds are exempt from the requirement that Bank-administered funds be disbursed only to finance eligible expenditures as they are actually incurred, subject to the conditions specified in the previous two paragraphs (see GEF Exception Memo of March 15, 2002).

The FED is expected to follow a Management Manual agreed with the Energy Secretariat. The FED would have to make appropriate choices about the use of the fund’s two facilities according to specific project circumstances, the evolution of the financial markets, and early implementation experience, and prepare periodic reports for the Energy Secretariat and the Bank on the operations of the AEEF. Most importantly, the FED would have a pro-active role in persuading banks to participate in this project through direct contacts, and the dissemination of information about the AEEF facilities and of case studies of EE projects financed by other banks using the AEEF facilities. The FED and the officers of the Executive Committee would be compensated out of the GEF funds allocated to this component. The FED will also:

a. approve proposals for contingent grants to finance preparation of feasibility studies of EE projects, sign grant contracts with EE project sponsors, and assign and sign contracts for the elaboration of the feasibility studies, following Bank procurement rules; and

b. sign Guarantee Framework Agreements with financing banks, and approve partial credit guarantee proposals presented by these banks.

Administration of the AEEF Funds. The AEEF funds would be administered for the purposes of this component directly by the Trustee or by an independent Asset Manager (AM), operating under an Asset Management Agreement between the AEEF and said manager. The Asset Management Agreement would provide, inter alia, for the flow of funds to beneficiaries and other requirements to implement the Contingent Grant Facility and the Credit Guarantee Facility. The Asset Management Agreement would also specify the circumstances and conditions for the removal of the AM.

If the AM is a commercial bank, it would be selected using a competitive process based on both cost and quality criteria, under Bank guidelines. The main functions of the AM are to: (i) maintain the accounts of the AEEF: a Contingent Grant Account and a Guarantee Reserve Account, (ii) issue the guarantees, (iii) make payments; and (iv) generate reports for the Energy Secretariat, the FED and the Bank. :

The AM would be compensated for expenses, including cost for setting up and an incentive for successfully concluding transactions. The setting up cost and the initial operation of the AM would be paid with GEF funds, but later on, compensation of the AM could be covered from interest payments and could be additional.

It is expected that the AEEF would administer GEF funds for about 6 years. According to the financial model developed for the project, this implementation time is sufficient to demonstrate successful operation. Thereafter, the private financial sector can fully take over funding for EE projects on a sustainable basis. The project implementation period would last 6 years, during which GEF funds would have been fully disbursed. After World Bank project closure, the Secretariat of Energy would conduct appropriate monitoring and oversight of AEEF performance.

Institutional and implementation arrangements for the project can be summarized in the following chart.

Figure 2: Institutional arrangements

Argentina - Energy Efficiency Project

Capacity Building & Project

Management

Establishment of the Argentina Energy

Efficiency Fund (AEEF)

Project Coordination, Monitoring &

Evaluation

Incentive Framework

Support for ESCO development Contingent

Grant Facility Guarantee

Facility

Standards and labeling

Dissemination Activities

Development of a Utility Program

Efficient lamps and equipments -

for residential and public sector users

Pilot projects

Training, education, research and dissemination

activities

Executive Committee

Secretariat of Energy

Secretariat of Industry & SME

Secretariat of Environment

Technical Committee

Participant Entities

Fund Executive Director

Asset Manager

EE Promoters

Trust Fund Agreement

Academic Center - EE project Validation / Ex-

post auditsEDENOR

EDESUR

EPEC

OTHERIRAM, Laboratories,

Consumers Protection Agency,

Other

ENRE, ENARGAS, Provincial Regulatory

Agencies, Other

Commercial Banks

Industry Chambers, Consumers Associations

Subsidiary Agreement

Environmental Verification

3. Monitoring and evaluation of outcomes/results

A comprehensive monitoring and evaluation system will be established for all three project components – as a key instrument for evaluation of project results and outcome. The project baseline and performance targets (some of which could only be estimated or presented as ranges at this stage of project preparation), as well as tentative arrangements for monitoring and evaluation, are summarized in Annex B. These will be fleshed out in detail during project appraisal, through a consultancy financed with support from the PDF-B Grant, and agreed upon with the Secretariat of Energy as part of the project Operational Manual.

The project management team within the Secretariat of Energy will be responsible for developing and implementing - with the support of the AEEF Manager, electricity distribution utilities and Technical Committee members - the monitoring and evaluation of the entire project, including collecting project performance information and reporting on the impact and results of the project.

An independent consultant will perform a yearly audit of performance indicators compiled and reported by the project management team. There will also be two surveys to assess improvements in EE practices by types of users, at project mid-term and end.

The cost of the above three consultancies (detailed design of M&E, annual audit by independent consultant, and surveys of users’ EE practices) is estimated at a total US$200,000.

4. Sustainability and Replicability

Sustainability

The project will achieve sustainability in its outcomes by simultaneously:

(i) Reducing the credit risk barriers to energy efficiency financing through partial credit risk guarantees and contingent grants for project identification and preparation. Once banks and project sponsors (including ESCOs) establish profitable lines of energy efficiency financing, the risk reduction instruments will no longer be needed, and the financial sector will sustain the investments. The financing program will include small and medium enterprises where the PIEEP program has successfully identified profitable energy efficiency investments but where mainstream financing by commercial banks is still lacking.

(ii) Identifying high-return energy efficiency investments for electricity consumers that can be financed by electric utilities, and through permanent regulatory changes, allowed to be recovered through customers’ electricity bills. The reform of distorted electricity tariffs, especially in the residential market, will help expand and sustain this avenue for achieving energy

efficiency savings, both institutional and financially. The project will build on previous utility pilots (ELI-GEF) that demonstrated the profitability of investments in energy efficient lighting.

(iii) Establishing minimum energy efficiency standards for key energy-consuming equipment and appliances and disseminating information on life-cycle operating costs through a certification and labeling program. Once established, the standards and labeling program will be financed through equipment manufacturers who realize a premium in their products through certification and “green” labeling.

(iv) Assisting in the establishment of a vibrant ESCO industry in Argentina, where ESCOs will reduce the risk of investing in energy efficiency by enterprises and commercial banks, and the ESCOs themselves will be driven by the profits that can be made on energy efficiency investments.

Project sustainability will be enhanced through the commitment of the government, major utilities, participating banks, and industry. Ultimately, the importance and least-cost nature of energy efficiency to augment energy supply, improve energy security, and improve environmental quality in Argentina will sustain the program.

For the Argentina Energy Efficiency Fund (AEEF), sustainability would be achieved through: (i) demonstration effects, and (ii) mobilization of capital market resources. The EE projects financed with AEEF support would show project sponsors and financing banks that organizational and technical changes can generate important energy savings, and that these savings can translate into lower costs and higher returns on their investments. Financing banks would realize that EE projects can be less risky than other projects. In addition, through the activities of the AEEF, banks, project sponsors (including ESCOs) and consulting firms would develop project evaluation skills that can be applied to future EE projects. These demonstration effects would ensure that the market for EE project financing would continue expanding even after the AEEF has ceased to operate.

Banks that have portfolios of loans supported by the partial guarantee facility could decide to securitize these, fairly homogeneous and well performing loans, to mobilize more resources for financing of EE projects. Once the number of EE loans reaches a critical mass, the AEEF and the SE would assess the feasibility of working with the participating financing banks in the establishment of a Financial Trust for the securitization of the banks’ portfolios of EE loans. In this way, the banks would be able to mobilize capital market resources to continue expanding their EE project lending.

Replication

The project is being designed to demonstrate the financial viability of investments in energy efficiency that can be replicated in other parts of the country by both the private sector (banks, ESCOs, enterprises) and by electric utilities. There are already sufficient

price incentives to make investments in natural gas and electricity energy efficiency profitable for most economic sectors, including industry and commercial consumers. By overcoming the risk perceptions of commercial banks, additional follow-on investments without the use of guarantees or technical assistance will be undertaken by the private sector. For the residential sector, while additional tariff reforms would provide additional incentives, there are already sufficient returns on some energy efficiency investments (such as lighting) that they can replicated once adequate information is provided to consumers. Regulations allowing utilities to recover energy efficiency investments on consumer bills – which will be a grant condition for the project – will provide an additional incentive for utilities to undertake energy efficiency investments for their customers, and this can be extended to other utilities in the country once demonstrated and the legislation made permanent.

5. Critical risks and possible controversial aspects

The main risks factors and the proposed mitigation measures are outlined in Table 3 below:

Table 3 : Risk Matrix Risk Risk

RatingRisk Mitigation Measures

Non-Project RisksMacroeconomic – financial sector crisis affecting bank liquidity; economic slow-down affecting industry capability/interest for energy efficiency investments; crisis affecting household affordability for EE products.

M

Option to add a loan facility to the Fund to complement the guarantee facility.Refocus project investments on EE equipment and subprojects with shorter pay-back

Political – lack of broad support by government agencies at national and local levels

MUpfront commitment.Involvement of multiple government agencies.Involvement of provincial authorities.

Regulatory – energy price signals do not encourage end user interest in implementing energy efficiency measures.

M

The Government has adjusted energy prices and this is expected to continue.Demonstration of financial viability of EE investments for residential customers at current energy prices.

Project RisksFinancial – Lack of interest by local financial institutions in EE financing; Fund clients do not repay loans; guarantee facility is not sufficient; Fund size will hinder sustainability and replicability of EE financing.

S

Financial market assessment.Ongoing consultations with commercial banks to guge interest.Flexible design of Fund, evolving to loan co-financing if necessary.Co-financing to be pursued, initially and after showing results.

Regulatory – EE regulatory incentives under the project are not implemented by GoA and/or regulators.

M

Upfront commitment of regulatory agencies. Regulatory incentives specific to project components will be designed early in project implementation. Regulatory changes and tariff increases will be linked to the tightening energy supply/demand .

Environmental – projects supported by the fund have serious environmental impacts

N Fund will screen projects for environmental impacts.

Technical – energy savings do not materialize or equipment does not perform as planned

N

Focus on proven technologies and sub sectors.Labeling and M&E programs to overcome technology risks.Encourage shared energy-savings contracts.

Implementation – project execution is not done in timely and efficient fashion.

M Steering and Technical CommitteesEE Fund Manager will have performance incentives and operational autonomyExperience by SE in WB-financed project implementation.

Involvement of experienced, efficient electric utilities.

Overall risk rating S

Loan/credit conditions and covenants

Conditions for negotiations:

Draft Trust Fund Agreement between Secretariat of Energy and Trustee Draft Subsidiary Agreements between Secretariat of Energy and EDENOR,

EDESUR and EPEC. Project Procurement Plan Project Financial Management Plan ENRE has allowed the recovery of investment in EE equipment for the residential

and commercial sectors, made by the electric utilities it regulates, through electricity billing to customers of these utilities

Condition for Effectiveness:

The AEEF’s Fund Executive Director has been appointed under terms and conditions satisfactory to the World Bank.

During Project Implementation:

To be finalized during negotiation.

D. APPRAISAL SUMMARY

Appraisal scheduled for 2006.

1. Economic and financial analyses

Economic analysis shows that energy efficiency is the least-cost way of augmenting energy supply in Argentina in the short- and medium-term (see Annex 9), through the delay in construction of new generating plants and associated investments in transmission and distribution. Financial viability is built upon the current levels of energy tariffs and investment costs that make the selected EE activities financially workable for the consumers and the participant entities implementing the project components. Current and future tariffs, including ongoing surcharges for additional consumption, are expected to provide a solid foundation for the sustainability of the EE activities supported under the project.

The incremental cost of the GEF alternative has been estimated to be US$89 million, and the global environmental cost for which GEF resources are requested is US$15.2 million. The substantial domestic incremental costs would be covered through increased lending for energy efficiency investments under the EE Fund, and through increased investment by electricity customers through the utility program. Global environmental costs include those measures needed to stimulate investments in industry, commerce, public, and residential sectors, through improvements in the regulatory framework, capacity building, information (including risk perceptions and pilot programs), and financing. No GEF

funds are being requested to cover the investment in energy efficiency equipment or measures.

Accumulated CO2 emissions reductions directly resulting from the project are expected to reach 5.9 million tons by 2012, associated to savings of 8,990 GWh of electricity and 804 kTOE of fuels, and deferral of 745 MW.

2. Technical

The main energy efficiency technologies that are cost-effective include lighting, fridges, gas and electrical water heaters, washers, heating and cooling equipment, burners and boilers, variable speed drives, capacitors, compressors, controls, steam traps, etc. All of these are mature technologies. The Argentine markets for these technologies are generally well served by a large range of local producers, importers and dealers.

A detailed market assessment is being undertaken with PDF-B resources as part of project preparation. Preliminary results confirm that there is a substantial market for energy efficient equipment and investments, especially in the industrial and commercial sectors. Some of this information on the most promising sectors and investments is presented in Annexes 1, 9, and 15. The most detailed information has been prepared for the small and medium enterprise sector as part of the PIEEP project, with the results summarized in their most recent workshop and project documents. More detailed market assessments of the technical and financial potential is being undertaken as part of the PDF-B work, and the results will be forthcoming prior to appraisal.

3. Fiduciary

Fiduciary and procurement matters will be finalized prior to appraisal.

4. Social

No negative social impact is anticipated to result from the project. The project is expected to facilitate the emergence and growth of a robust national EE industry. By investing in energy saving measures private sector SMEs will be able to reduce their operating costs and improve competitiveness in domestic and external markets. Thus, the population will benefit through increase in employment. EE projects in the municipal and commercial sectors are expected to make basic public services more affordable and better quality, improving the comfort of the general population. Demand-side EE investments in the residential sector may bring significant social benefits by mitigating the impact of possible increases in residential energy prices while improving the comfort level. The 1997 household expenditure survey showed that expenditure on electricity, fuels (excluding transport) and water represent close to 5.5% of total expenditure. The general population will benefit from the positive environmental impacts of the project. Overall, higher end-use efficiency creates a positive link between environmental and social outcomes.

Key project stakeholder groups are as follows: (i) SMEs mostly in the industrial and the service sector, municipalities and housing cooperatives/associations - as potential subproject clients (project sponsors); (ii) equipment/materials manufacturers, importers and dealers; building design and retrofit contractors; ESCOs and EE consultancies - as business partners; (iii) companies in the financial sector, particularly banks, mortgage and leasing companies - as co-financiers; (iv) electric utilities and their customers; (v) academic entities and laboratories, and (iv) local environmental and EE advocacy groups and NGOs.

The project components have been discussed with a broad cross section of stakeholders. In August 2005, the project concept and logical framework were discussed at a stakeholder workshop. Further outreach actions, including an investors’ workshop, will be carried out. Broad-based participation and public involvement are incorporated in the project design. Organized outreach and public information campaigns are included in the TA component. An EE market assessment will also be conducted during project appraisal. For Component 1, surveys and meetings with more than 10 commercial banks have been carried out to assess the requirements for investment financing of energy efficiency in Argentina. Discussions have also been held with numerous electric utilities as potential participants in the project. One of the major energy efficiency programs upon which this project builds is the PIEEP project for improving energy efficiency and productivity in small and medium enterprises. The project has been discussed with the key stakeholders involved in the PIEEP project, including at a project workshop in November 2005.

5. Environment

No major environmental issues are foreseen in the project. All projects with potential negative impacts to be financed through the EE Fund will be screened by the Fund Manager. The project will result in substantial improvements in both local and global environmental conditions. By the end of the project, 804 kTOE plus 8,990 GWh are expected to be saved. Emissions of CO2 would be reduced by an accumulated 5.9 million tons by 2012 compared with the baseline without project.

Estimates of the energy efficiency and global environmental benefits are provided in Annexes 9 and 15.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes NoEnvironmental Assessment (OP/BP/GP 4.01) [X] [ ]Natural Habitats (OP/BP 4.04) [ ] [X]Pest Management (OP 4.09) [ ] [X]Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [X]Involuntary Resettlement (OP/BP 4.12) [ ] [X]Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [X]Forests (OP/BP 4.36) [ ] [X]

Safety of Dams (OP/BP 4.37) [ ] [X]Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [X]Projects on International Waterways (OP/BP/GP 7.50) [ ] [X]

7. Policy Exceptions and Readiness

(The project will comply with all applicable Bank policies, requires no policy exception, and will be ready for implementation at the time of appraisal.)

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

Annex 1: Country and Sector Background

ARGENTINA: Energy Efficiency Project

A. Energy Sector Reforms of the 90’s

Broad energy sector reforms were implemented in Argentina during the 1990s to introduce competition, market unbundling and private sector participation in the electricity and gas sectors. Sector reform was based on: (i) establishing a legal and regulatory framework, and two regulatory entities, ENRE and ENARGAS, for regulated activities (distribution and transmission, under a price cap regime); (ii) introduction of market forces for the competitive part of the sector (power generation and gas E&P), with pass through of the corresponding costs to final customers; (iii) divesting most government assets in the sector; (iv) liberalizing the sectors with direct access of large users to power generators of gas producers.

Overall, the results of the energy sector reform were positive. In the power sector, there was significant new investment in generation, wholesale price and distribution losses were halved, and retail tariffs and service interruption decreased. The introduction of competition among electricity generators and the increase in transmission efficiency were also important achievements. In the gas industry, important bottlenecks were eliminated, service provision was expanded, and direct access by final consumers was developed. In both sectors, independent regulatory agencies were created and were well staffed and funded. However, the reform had several weak points, including: insufficient social tariff mechanism, lack of incentives for transmission investment, insufficient coordination between gas and electricity regulation, lack of regulatory accounting, insufficient attention to customers’ interests, and importantly for this project, insufficient incentives for increased efficiency on the energy demand side.

B. The economic crisis and the new strategy

Following the social and economic crisis and currency devaluation of 2002, Argentina’s economy has shown a strong recovery in 2003-04. Together with low energy prices, this has led to a surge in electricity and gas demand that grew by 8% and 10% respectively in 2003-2004. Every year about 500 MW of additional power generation capacity would be required. Gas supply has tightened and led to major reduction of gas exports to Chile, imports of expensive fuel oil for power generation and gas imports from Bolivia. Gas transport and electricity transmission are close to maximum capacity.

The Government moved towards the normalization of energy markets. Since the disruption caused by energy price pesification and freeze in 2002, the GoA took action on price adjustment, addressing the demand/supply balance and promoting investment to relieve bottlenecks in the energy sector.

Through an agreement with gas producers, gas price at the wellhead have been allowed to increase by about 135% since 2002 to US$1/MMBtu in average and should be

completely freed in 2006, which will allow moving closer to gas opportunity costs (fuel oil). Wellhead price increases were passed through to industrial, commercial consumers and compressed natural gas (CNG) users, which have resulted in price increases of between 30-90% since 2001, depending on the company and user category. (see figure 1 with example of variable tariff evolution for a gas distribution company in Buenos Aires.)

Figure 3: Metrogas variable tariff

Electricity wholesale prices were adjusted to reflect variations in seasonal costs and passed through to industrial and commercial users, whose tariff increased by over 50% since 2002 (see Figure 4 with example for Edesur). Figure 4: EDESUR – Average electricity tariff

E D E S U R - A v e r a g e E l e c t r i c i t y T a r i f f

0 . 0 4 0

0 . 0 6 0

0 . 0 8 0

0 . 1 0 0

0 . 1 2 0

0 . 1 4 0

0 . 1 6 0

$ /

KW

h

R e s i d e n t i a lC o m m e r c i a lC o m m e r c i a l ( T 2 )I n d u s t r i a l

Progress was made towards the renegotiation of the 22 electricity and gas transport and distribution concessions, with agreements reached by UNIREN with 8 concessionaires mostly in the electricity sector, including tariff increases in 2005 (excluding residential users) and an integral tariff review to be conducted by the regulatory entities in 2006.

Overall the sound legal and regulatory framework that exists in the energy sector since 1992 was maintained, though with some limitations related to price setting.

Several measures were taken to address the electricity and gas demand/supply balance:

a. imports of gas from Bolivia were reinitiated in 2003; b. exports of gas and electricity to Chile, Brazil and Uruguay were reduced

when weather conditions became unfavorable (for significant amounts in the case of Chile.

c. a reward/penalty-based program (PURE) was established in 2004 and stiffened in 2005 to promote the rational and efficient use of electricity and gas, with participation of distribution companies regulated by ENRE and ENARGAS;.

d. an agreement (FONINVEMEM) was achieved with major power generators to increase power generation capacity by 1600 MW (i.e. about 10% of current peak demand), together with the adjustment of electricity wholesale prices back to market rates;

e. the government reactivated efforts towards the capacity increase of Yacyreta hydropower plant (additional 1200 MW) and Atucha nuclear power plant (additional 800 MW);

f. a draft hydrocarbon law with fiscal incentives for increased exploration was introduced to Congress. If current trends of oil production and consumption continued, Argentina would become a net oil importer by 2010.

g. Argentina joined a regional initiative to develop gas transport infrastructure through public private partnerships (the so-called working group for southern gas pipelines) that would improve the supply of gas from Peru and Bolivia to Chile, Argentina, Paraguay, Uruguay and Brazil.

As a combined result of the above initiatives and favorable weather conditions (good hydrology and mild temperatures), there were no significant energy supply restrictions in Argentina in 2004/05. Private concessionaires also ensured good levels of service quality. In other words, the energy sector continued to function adequately.

However important issues remain in the energy sector that might hinder service quality and sector development in the near future, with some impact on country growth. Overall prices are still below costs in the sector, and there are significant price distortions between energy sources. Further private investment in the sector will require reestablishing incentives and trust building with private investors. Insufficient investment in all segments of the sector exacerbates supply constraints and would have impacts on service quality in the short to medium term. The risk of electricity supply interruptions in 2006/07 has increased. There are still considerable inefficiencies in end-use of energy and there are important prospects for reducing the economy’s carbon intensity. Finally, necessary increases in residential tariff are still to be agreed upon and might be difficult to effect in 2006/07 in a pre-election context.

C. Energy intensity and possible savings

In Argentina, residential, commercial and industrial users represent 87% of electricity consumption, while these three sectors account for 48% of total consumption of natural gas. Due to their high share of energy consumption, residential, commercial and industrial users are natural targets for energy efficiency activities.

Figure 5: Electricity Consumption by sector, 2003

Electricity Consumption by Sector, 2003

29%

17%41%

1%

4%

1%

3%

4%Residential

Commercial

Industrial

Water andSanitationPublic lighting

Irrigation

Public buildings

Other

Figure 6: Gas consumption by sector – January – April 2005

Gas Consumption by Sector January - April 2005

11%3%

1%

34%41%

1%9%

Residential

Commercial

Public Buildings

Industry

Power Generation

Sub - Distributors

CNG

The energy intensity of Argentina’s economy has been increasing in recent years. The country’s energy intensity was 25% higher in 2000 compared to 1994, though still relatively low compared to other countries such as Chile, Brazil and Mexico (due to the importance of non-energy intensive commodities production on Argentina’s economy). Argentina’s energy intensity in 2001 (7,000 Btu/US$1995) was about two thirds of the United States’ energy intensity. Carbon intensity (0.1 kg/US$1995) was about half of the US’s carbon intensity. .

As shown in Table 4, energy costs represent an important share of total costs for several types of industries, providing a strong incentive to reduce energy costs.

Table 4: Energy consumption in main industrial sectors

Activity Energy / costs (%)Energy /

Total Industrial Energy

Basic chemical 18.4 6.9Ceramics (structural) 21.7 3.2Cement 21.7 3.2Iron and Steel 6.8 6.7Plastic and rubber 13.4 5.3Non ferrous metals 12.5 2.6Ceramics (non-structural) 14.0 1.4Glass 13.8 1.4Paper and Fiber 11.7 2.4Metal foundries 10.8 2.1Wood and wood products 8.1 2.3Fertilizers 9.1 2.9

Timber mills 9.0 1.4Sugar 8.9 1.3Petroleum refining 3.5 5.5Plastic products 3.8 3.7Slaughterhouses and meat processing 1.5 3.8

Source: Secretary of Energy, PIEEP, 2001

It is estimated that the use of already-available efficient technology in industry alone could reduce electricity consumption by 20% and fuel use by 15%. Cogeneration opportunities would amount to 400MW. In the commercial sector, improved lighting and air conditioning technologies could lead to estimated potential savings of 30% in electricity and 15% in fuels. In addition if mercury vapor lamps were replaced by sodium lamps for public lighting, 30% reduction in electricity could be achieved. Households too could reduce their consumptions by up to 30%, by replacing inefficient lamps and appliances. Efficient technologies in water and sanitation could also save up to 50% in electricity costs.

Greenhouse gas (GHG) emissions in Argentina amounted to an estimated 282 million tons in 2000 (excluding GHG emissions from changes in land use). In 2000, 46% of these emissions corresponded to CO2, 30% to CH4 and 24% to N2O. As shown in Figure 1 below, the energy sector was the main contributor to GHG emissions, with 47% of total emissions. In this context, an energy efficiency project becomes very relevant for GHG emissions reduction.

Figure 7: GHG emissions in Argentina by sector.

47%

4%

44%

5%

Energy Industrial process Agriculture and Livestock Solid waste

Based on reasonable rates of market penetration of EE technologies and practices (reaching 30% of total potential savings after ten years), the reduction of CO2 emissions could reach 14 million tons in 2015, equivalent to 5% of baseline emissions. Local benefits would include significant cost reduction for customers and deferred investments in power generation and gas transport.

D. Barriers to Energy Efficiency

There are a number of barriers to increased investment in energy efficiency in Argentina. Some of these barriers are similar to those in other countries, while others are specific to the financial situation and regulatory framework in Argentina.

Lack of regulatory incentives to promote energy efficiency. The regulatory framework for electricity and natural gas provides inadequate incentives for utilities and many classes of consumers to undertake energy efficiency investments, even where the marginal cost of energy supply is significantly above the marginal cost of investing in energy efficiency. Consumers associations still have to focus on EE as an instrument to improve consumer well being. As a positive example, pilot programs have shown the benefit of allowing electric distribution companies to recover the cost of compact fluorescent lamps through electricity bills for residential customers, and extending this authorization in time and scope would provide added incentive for residential electricity savings and investment in residential energy efficient equipment by utilities.

Lack of adequate price signals to energy consumers, especially among residential consumers. Partly as a result of the financial crisis, energy prices for some consumers have been frozen and not allowed to reflect increases in the costs of energy supply. Some residential tariffs specifically discourage energy efficiency, for example, by effectively providing lower tariffs for increased usage. Nor are tariff systems conducive to energy efficiency - such as tariff rates that effectively provide lower rates for increased usage, or the absence of time-of-day tariffs to reflect variable costs of supply. Electricity and natural gas tariffs are still below 2002 levels, although they are being increased for many classes of consumers, especially industrial and commercial consumers.

Inadequate information among industrial consumers about EE technologies and experiences. The PIEEP was a first step towards providing industrial consumers with information on EE potential and specific measures. However the PIEEP was limited in scale as well as in scope - geographically and sector-wise. Dissemination of best practices is not sufficiently used as a replication tool for EE investments. At provincial level there is also insufficient knowledge and informative actions about EE.

Lack of information among residential consumers on the efficiency of energy equipment. Salesmen of energy equipment fail to inform buyers of operation costs, as related to its purchase cost, or to the relative efficiency of appliances, so that consumers tend to consider their purchase decision only in terms of the initial price, disregarding the total cost throughout the life of the product. A lack of reliable information on equipment efficiency also prevents the use of its low operational cost as a marketing instrument. There is no standardization, testing, certification and labeling program in place to orient vendors or consumers.

High transaction costs for enterprises to implement energy efficiency investments. The high cost of the initial design and implementation of EE projects is added to the lack of access to financing for introducing EE measures.

Perceived high risk among banks to finance energy efficiency projects. Access to financing has been difficult due to the 2002 crisis, and energy efficiency projects are still perceived as high-risk initiatives, while there are doubts related to their actual profitability In general, commercial banks ignore how to evaluate EE projects and their guarantee requirements, and several small and medium projects become unfeasible due to transaction costs.

Infant ESCO industry. There are only a few energy services consulting companies that yet do not function as real ESCOs. However, with adequate support and information, these companies are expected to pursue cost-effective energy efficiency investments.

Multiplicity of stakeholders and fragmented institutional framework. The multiplicity of stakeholders involved or concerned with EE increases the information barrier and makes difficult the coordination of EE actions. At government level, EE overlaps the mandates of several entities (including the SE, Secretariat of Environment, Secretariat of Industry, Ministry of Foreign Affairs, and Secretariat of Competition and Consumer Protection) which also makes coordination difficult and can lead to duplication of efforts in that field.

E. Government Strategy for EE

Facing a serious energy supply/demand imbalance, the Government of Argentina launched the PURE program (programa utilizacion rational de energia) in April 2004 to reduce electricity and natural gas demand. PURE is an incentive-based program for the rational energy use, and is similar to an initiative developed by Brazil in 2001 during its energy crisis. The first version of the PURE program was applied during the winter of 2004 (June-September), and a similar one in the winter of 2005. Some provinces implemented additional efforts, such as Cordoba that approved a comprehensive energy conservation law or Mendoza that implemented a seasonal change of time.

However, the Government is aware of the necessity to go beyond an emergency-response type of program, so as to promote comprehensive energy efficiency actions with sustainable impacts, as part of its strategy for the energy sector. The energy efficiency actions would be implemented at a time when Argentina is easing out of the economic crisis, tariff adjustments are being implemented and appropriate regulatory arrangements are being re-established.

An ‘Energy Efficiency Bill’ was proposed by the GoA and approved by the upper chamber of Congress in October 2003. The law establishes the SE’s mandate and responsibilities for promoting EE.

In 2003, the GoA, through the Secretariat of Energy, designed the Energy Saving and Efficiency Program (PAEE), in line with the SE’s policy objective of promoting energy efficiency and the use of renewable energy sources. The PAEE’s key strategic policy areas for promoting energy efficiency in Argentina include the following aspects:

Developing a regulatory framework that promotes energy efficiency measures.

Designing the appropriate institutional structure to involve the different actors interested in developing a market for energy efficiency.

Implementing a program for Energy Savings and Efficiency in Public Buildings.

Awareness raising, education, and dissemination of information on energy efficiency and energy savings to consumers, decision-makers, professionals, and the public in general. Two instruments in that sense are the PIEPP to promote energy efficiency within SMEs and the Program for Energy Equipment Quality (PROCAE) to develop energy equipment standards and labeling.

Stimulating the energy efficiency market through economic incentives. Establishing financial mechanisms to ensure that the cost of investments

approximates the opportunity cost of capital. Increasing research and development (R&D) in the area of energy

efficiency. Designing and implementing an information system about the

availability, costs, and benefits of energy efficiency technologies.

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

ARGENTINA: Energy Efficiency Project

1. General experience from GEF-financed Energy Efficiency projects worldwide1

One of the key components of several GEF-financed EE projects is the market transformation program that deals with improving the efficiency of available products. The key issues associated with this type of program have included technology credibility, limited capacity to enforce standards/codes, lack of consumer education, weak laboratories and lack of credibility of products labels. Lessons learned evidence that market mechanisms to promote certain technologies or EE products have sustainable prospects as they allow market actors to make decisions based on products’ commercial merits. This type of programs should: i) improve local manufacturing capabilities as well as enhance competition, ii) develop public education campaigns involving government and NGOs, iii) be flexible to allow changing market conditions, iv) support activities for replication and dissemination of results, and v) begin monitoring and evaluation early.

Experience from GEF’s overall EE portfolio suggests that even in countries where the local financial market has sufficient size and liquidity, consumers and investors may have limited access to local funds for energy efficiency projects due to perceptions of high risk, high transaction cost, lack of institutional infrastructure and project development capacity or lack of awareness regarding technologies and their technical and financial performance characteristics. Providing risk-sharing instruments (ie., credit risk guarantees and other contingent finance instruments) can be a cost-effective way of addressing these barriers. Commercial loan guarantees have been successfully demonstrated in completed GEF projects. With the focus on local financial markets and institutions, such projects have a high likelihood of sustainability and replicability

Apart from the GEF, lessons learned from EE Fund experience worldwide highlight the importance of transparency of Fund management procedures, avoidance of political interference and subsidized interest rates, the need to rely on existing market participants, portfolio diversification, emphasis on projects with high rates of return, bundling of small projects, proactivity of the Fund Manager, and integration of financial and technical expertise for the development of a sound project portfolio.

As regards utility DSM programs, according to GEF experience sustainability is an important concern. Three key issues must be taken in consideration: i) the incentives for the utility, ii) the know-how and the human resources of the utilities and the regulatory agencies to evaluate EE projects, iii) the provisions to make the program sustainable. Other important lessons for DSM programs are: (a) a supportive policy environment is essential for success; (b) programs should be complemented with financing instruments;

1 Based on “World Bank Energy Efficiency Portfolio Review and Practitioners Handbook” , World Bank Environment Department, Climate Change Team. January 2004.

(c) public campaigns are critical; (d) program implementation units must have managerial and financial autonomy.

2. Specific experience in EE projects worldwide

Hungary EE Co-Financing Program (HEECP). The IFC/GEF-supported HEECP is designed to overcome barriers to EE project finance and development via a PCG program to share in the credit risk of EE operations undertaken by domestic financial institutions and a TA program to help prepare projects and aid general EE market development. HEECP has now a strong pipeline of projects with an average size of US$250,000. HEECP has been instrumental in establishing active competition between Hungarian banks to develop and market project financing products. The TA program is designed to be flexible and results-oriented responding to and directly supporting the specific needs of the individual ESCOs and financial institutions executing the transactions supported by the facility. Because of the wide range of end-user sectors, niche financial products have been developed. Another important lesson learnt under HEECP is the streamlined credit approval process which minimizes transaction costs. Building on the model successfully demonstrated under HEECP, IFC is implementing a new PCG project with co-financing from GEF called Commercializing EE Finance (CEEF) for five EU accession countries (Czech Republic, Slovakia, Estonia, Latvia and Lithuania).

Romania EE Project (GEF). This project involves an energy efficiency revolving fund (REEF), which addresses inadequate bank liquidity by including a loan component. However, experience under the Municipal EE Program in Bulgaria and HEECP confirms the need for a guarantee instrument in the current stage of development of EE portfolio by the commercial banking sector, which is often characterized by highly risk-averse behavior. During the initial market sounding, commercial banks often indicate a strong preference for credit risk coverage prior to shifting to non-guaranteed debt financing of EE projects.

Bulgaria Energy Efficiency Fund (BEEF). The project, approved by the Bank Board in early 2005, will support the commercially oriented operation of the Bulgaria Energy Efficiency Fund (BEEF). The primary goal of BEEF is to develop and finance bankable energy efficiency projects that can reduce greenhouse gas emissions in a sustainable manner. The project, which is focused on the creation of the specialized fund, combines both technical project and financial structuring capacity into one entity, thereby addressing the current weak capacity to develop and finance energy efficiency projects. The Project provides (i) partial credit guarantees to share in the credit risk of energy efficiency projects; (ii) loans to co-finance energy efficiency projects on a commercial basis; and (iii) technical assistance to initially finance on a grant basis a portion of project development and operating costs of BEEF in the early years. The fund makes use of both guarantees and loans, with fungibility of funds between the two instruments depending on market conditions. The use of both instruments is predicated on the basis that there are both liquidity and credit risk barriers to energy efficiency investments in Bulgaria, but that through time, and the growing integration into the EU, liquidity problems will dissipate.

3. World Bank Group-supported experience in Argentina

The Word Bank Group has been involved in the energy sector in Argentina through several activities, and the design of this project has benefited from the broad knowledge gained through these activities. The main programs include:

The ELI Program

The ELI program promoted the growth of markets for energy-efficient lighting in seven countries and was implemented in Argentina by one of the three large utilities in the Buenos Aires metropolitan area (EDESUR - owned by Spain's Ends). The program worked to address three main barriers to penetration of efficient lighting in the main consumption sectors: information, product availability and quality, and financing. The program involved information and training activities, certification of efficient lamps (CFLs), market aggregation to reduce equipment cost, and equipment financing for EDESUR consumers. The program achieved a penetration of about 15% in the residential market of EDESUR and lesser penetration in the rest of the country. However, the program impact and sustainability was hampered by several factors:

First, the 2002 economic crisis reduced consumer affordability and the financial viability of CFLs;

Second, because of the ongoing electricity distribution concession renegotiation, the program could not achieve implementing regulatory changes and tariff incentives for efficient lighting - a situation compounded by the temporary shadowing of the regulatory entity (ENRE);

Third, the program focused mostly on EDESUR customers; and

Fourth, the program was limited to lighting - admittedly a significant contributor to electricity consumption and peak demand.

Three utilities in total participated in the ELI program. Additional barriers for expanding the program to involve more utilities are the lack of financing to sell CFLs in installments, perceived high transaction costs by small utilities and electric cooperatives, lack of a well recognized certification and labeling system for CFLs, and lack of information for customers who are not buying CFLs or are buying lamps of very low quality.

The Efficient Street lighting Program

The Argentina Efficient Streetlighting Program was a technical assistance program funded by the GEF with a grant of $736,250. The International Finance Corporation (IFC) was the GEF Implementing Agency and the Program was implemented in 1999-2001 by the International Institute for Energy Conservation (IIEC).

The Program collaborated with municipal and provincial governments, electric distribution utilities, banks, and engineering and contracting firms in Argentina. Through a range of technical assistance activities conducted with all parties, the Program supported development, structuring and financing of municipal street-lighting (SL) projects which use efficient lighting technologies in order to improve public SL services, save energy and money, and reduce the emission of greenhouse gases.

The Program’s legacy of innovative models and tools for developing SL projects is summarized in a guidebook, which has been distributed to interested parties and available on key websites. Thus, Argentine municipalities, distribution utilities, ESCOs, professional associations, government agencies, and university departments can continue to apply the Program’s methods to develop and implement efficient SL projects.

PERMER

Since 1999, the PERMER - Renewable Energy in Rural Electric Markets project - has been promoting the use of renewable energy for rural electrification through market instruments and actors (private concessionaires mostly). The project, funded by an IBRD loan and a GEF grant, is based in the Secretariat of Energy.

As a result of PERMER implementation, the Secretariat of Energy gained experience in terms of project implementation, including provincial and utility involvement through specific participation agreements, as well as regarding Bank’s procurement and disbursement guidelines and arrangements.

4. Non Bank-financed experiences in Argentina

PIEEP - Project for Increasing Productive and Energy Efficiency in Small and Medium Enterprises

The ‘Project for Increasing Productive and Energy Efficiency in Small and Medium Enterprises’(PIEEP) has seen cooperation between the governments of Argentina and Germany through ‘The German Agency for Technical Cooperation’ (GTZ). Housed in the Secretariat of Energy, PIEEP started in December 1999 with the support of the Ministry of Trade and Industry, the Ministry of Environment The National Institute of Industrial Technology (INTI) and the National Technological University (UTN).

The PIEPP aimed to improve energy efficiency in SMEs, mostly agro-industries, through pilot cases, training and best practice dissemination, and has achieved good results, which however would require scaling up and application to other key sectors.

Several activities under the PIEEP have been successfully implemented: in the provinces of Buenos Aires (dairy sector and industrial parks), Córdoba (dairy sector), Tucumán (citric fruits and sugar), Río Negro (cold chambers), Santa Fe (grain drying), Mendoza (agricultural irrigation and SMEs electro intensive metal mechanics) and in Buenos Aires City (sausages). This program is to end on December 2005, but the Secretariat of Energy expects GTZ to continue supporting the EE Project as co-financier. So far good results have been achieved in improving the efficiency in small and medium-sized enterprises, but the project would benefit from scaling up its activities.

URE

The Rational Use of Energy (URE) Program was initiated in 1993, and was financed by the European Union (EU). The program focused on the institutional and technological development of small and medium size enterprises (SMEs) to help them make efficient use of energy; labeling of electric appliances; improvement of public lighting; and promotion of efficient urban transport. In 1999, the URE program entered into an agreement with the participants of the electrical equipment market for labeling home appliances, but was abruptly interrupted in 1999 following a change in Government policy and priorities regarding energy efficiency.

JICA

The Japanese International Cooperation Agency (JICA) granted technical assistance to the ‘Investigation Center for the Rational Use of Energy’ (CIPURE). As part of the project, a ‘Conservation and Efficient Energy Use in Argentine Industry’ program was carried out between 1996-2000; the program created a ‘Training Center for Energy Efficiency’. The Argentine Technological Fund (FONTAR) also financed the project.

Table 5: Features of Energy Efficiency Programs in Argentina

Program/Financier/

Cost/Year

Participants Objectives Methodology Achievements Difficulties/shortcomings Learnings

Efficient Lighting Initiative (ELI)GEF-IFC

EDESUR, EPEC Reduce barriers to penetration of efficient lighting in the residential sector.

Certification of efficient lamps (CFLs)

Reduction of equipment costs

Equipment financing for EDESUR customers

Xxxx CFLs installed (15% of Edesur customers)

Financial recovery mechanism authorized by ENRE on pilot basis

2002 crisis reduced consumer affordabilityProgram limited to lightingLack of national certification and labelling system

Customer information is very important

PIEEPGerman Government-GTZ

Secretariat of energySecretariat of Industry and TradeSecretariat of Environment and sustainable DevelopmentINTI (National Institute of Industrial Technology).UTN (National Technological University).

Help SMEs to efficiently use their productive resources, from an energy and environmental standpoint

Address EE barriers: deficient information of industries on EE potential and options; limited supply of energy efficiency services; incomplete policy framework for energy efficiency.Establish a working group with key stakeholders and GTZ support, in selected provinces

…… industries participated in program

Actual savings by participating industries

Best practice dissemination for several industrial sub-sectors in selected provinces

EE potential identified for selected industrial sub-sectors

Financial barriers Insufficient

dissemination with SMEs

Limited development of ESCOs and industry reluctance to ESCO concept

Energy utilities and equipment suppliers did not participate in program

Weak policy framework

Need to address institutional fragility regarding EE policies and strategies

Importance of stakeholder consultation and participation, in particular SMEs.

Pilot projects help demonstrate EE potential and establish best practices

Need of financing instruments for investments with payback of more than 1 year

It is efficient to focus on specific sub-sectors and regions

Efficient Street LightingGEF-IFC

Municipal and provincial governments; Electric distribution utilities; International Institute for Energy Conservation; Engineering firms; Contractors

Improve efficiency of municipal street lighting, save energy and reduce GHG emissions

Provide TA to government agencies, utilities and contractors

Technical definition of projects

Review of financial obstacles and instruments

Guidebook and internet-based information

Lack of political commitment

Financing did not materialize

Insufficient communication & trust between parties

Investment priorities and debt situation of municipalities

Ensure participation of local counterpart and expertise

Define financing and institutional options as part of program

Take into account

Program/Financier/

Cost/Year

Participants Objectives Methodology Achievements Difficulties/shortcomings Learnings

different expectations and incentives of program stakeholders and consult & involve them in program implementation

Involve regulatory entities in EE programs

UREEuropean Union

Secretariat of Energy (SE)

Induce energy saving behaviours, designing an energy efficiency agency and drafting and energy savings law

Assessment of EE potential and identification of key industrial sectors for EE investments

Energy Quality System (currently used by SE)Assessments and energy efficiency audits in several provincesPilot

EE agency was never implementedSE commitment vanished in 1999No assessment of program impact

Pilot programs should accompanied with actions to address replicability issues and overall incentive framework.

Importance of promoting market mechanism for EE instead of relying exclusively on government actions

Importance of M&E actions

ARGURELECEU (ALURE Program)

EDENORICAEN (Cataluña Energy Institute)

Promote the rational use of energy in regulated markets

Learn from successful EU programs and regulations

Pilot experience in Moreno (BA province)

No dissemination or replication of results of pilot project

……….

…..JICA

CIPURE (Research Center for the Rational Use of Energy).INTI.Energy Efficiency Training Center.Technological Fund.

Improve industry competitiveness through reduction of energy costs; strengthening of CIPURE

Technology transfer, equipment and staff training for CIPURE Information and dissemination activities

CIPURE institutional weaknessLimited relations between industry and CIPURE.

Regional labelling program (under preparation)GEF-UNDP

Brazil; Argentina; Uruguay; Chile; ParaguayIn Argentina: Secretariat of Energy

Improve regional EE labelling

Not started yet n/a n/a

Second Government of Assess Consultant Report under n/a n/a

Program/Financier/

Cost/Year

Participants Objectives Methodology Achievements Difficulties/shortcomings Learnings

National Communication to UNFCCCGEFUS$1 million

ArgentinaFundación Bariloche (Implementing agency)

energy efficiency options and quantify associated emission reductions

studies preparation

Annex 3: Results Framework and Monitoring

ARGENTINA: Energy Efficiency Project

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information

Reduce energy intensity through increased and sustained improvements in energy efficiency.

At least 8992 GWH saved by EOP

At least 745 MW deferred by EOP

Amount of natural gas and other fuels saved increased to 804,000 of TOE by EOP

Lower-than-expected energy savings and emission reductions may signal deficiencies in design of AEEF, insufficient incentives for utilities or industries and deficiencies in the implementation of the dissemination and capacity strengthening program, which would require adjustments in project design – in particular at the time of project mid-term review.

Global Environment Objective:Reduction of greenhouse gas emissions through addressing of barriers to energy efficiency markets.

Accumulated project-related reduction in tons of CO2 emissions is 0.4 mill by PY2 and 5.9 mill by EOP

Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring

Component 1:Investors and financial institutions provide funds for energy efficiency through establishment of the Argentina Energy Efficiency Fund (AEEF)

Component 2:Electricity utilities increase their investment in energy efficiency among residential and commercial consumers

Component 3:Regulations, norms and standards for energy efficiency are developed

Energy equipment

Amount of AEEF-supported lending for energy efficiency projects increased to US$3.6m by PY2 and $9.6m by EOP

At least 6 banks involved in EE project financing by EOP

At least 60 energy efficiency projects supported the AEEF by PY2 and 160 by EOP

Accumulated investments by electric utilities in energy efficiency reach at least US$53.3 million by EOP (from a baseline of US$1.4m).

At least 310,000 EE lamps and 8 other types of new EE equipment installed by participating utilities by EOP

Issuance of regulations, norms and standards as necessary (at least 4 by EOP)

Total number of energy equipment

Might reveal insufficient incentives in the guarantee mechanism, requiring at mid-term review to shift towards a co-lending facility. Limited number of banks involved would require increased information.

Lower-than-expected EE investments and equipment installed by utilities would require strengthening customer information and revisiting the financial viability of EE investments.

Non issuance would require to strengthen political commitment for project

Delays in S&L implementation and

standards and labeling processes have been strengthened

ESCOs capacity and supply of EE services have increased

Users are better informed on potential & options for EE investments, and implement EE investments or behavior change

labels reach 15 by EOP

Accumulated number of labeled equipment sold reaches between 8.3 and 12.5 million by EOP

Number of project-supported ESCOs that promote EE projects is at least 4 by EOP

At least 30% of residential and 40% of industrial users surveyed at EOP agree that their behavior has changed as a result of increased EE knowledge and investment opportunities

lower-than-expected penetration of labeled equipment might require stronger commitment from energy equipment, manufacturers, importers and dealers, as well as increased efforts in customer information.

Limited number of firms functioning as ESCOs would require revisiting design of support and incentives for ESCOS or relying more on other instruments supported by the project (utilities, financial institutions).

Poor information or EE behavior by certain type of users would require redesigning the information and dissemination strategy for these users. The induced, indirect effect of the project will also be estimated through this indicator

Arrangements for results monitoring (These indicators will be finalized and agreed upon during project appraisal.)Target Values Data Collection and Reporting

Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 YR6 YR11 YR16 Frequency and Reports

Data Collection Instruments

Responsibility for Data Collection

Accumulated amount of GWH savedAmount of MW deferred

Accumulated amount of natural gas and other fuels saved (thousand of TOE)

Accumulated project-related avoided emissions (million tons of CO2)

00

0

0

00

0

0

955250

24

0.4

2246358

95

1,1

3973475

236

2.2

6175600

462

3.8

8992745

804

5.9

336001534

4500

27

794002464

13200

72

Annual Sub-projects completion reports; annual and quarterly progress reports

SE compiling data provided by electric distribution companies, AEEF Fund Manager, and other participants in the Technical Committee.

Intermediate Outcome IndicatorsIssuance of regulations, norms and standards 1/

1-2 1-2 1-2 1-2 Annual Annual and quarterly progress reports.Data on sales and imports of energy equipment

SE compiling data provided by electric distribution companies, AEEF Fund Manager, and other participants in the Technical Committee.

Number of energy equipment labels 2/ 1 1 2 2 3 3 4

Accumulated number of labeled equipment sold (thousand)

0 0 1300-2000

2600-4000

4100-6200

5700-8600

8300-12500

Number of project-supported ESCOs promoting EE projects

0 0 0 1-2 2-3 3-5 4-6

EE knowledge, investment and behavior change by users (%)

ResidentialIndustrial

00

1020

3040

Mid-term review and end of project

Survey of representative sample of different types of users

SE through consulting firm

Amount of AEEF-supported lending (US$ million)

0 0 3.6 4.8 7.2 8.4 9.6 Annual Sub-projects completion reports; annual and quarterly progress reports

SE compiling data provided by electric distribution companies, AEEF Fund Manager, and other participants in the Technical Committee.

Number of banks involved in EE project financing

0 0 2 2 4 4 6

Number of AEEF-supported EE projects 0 0 60 80 120 140 160Accumulated investments by electric utilities in energy efficiency (US$M)

1.4 3 8 18 28 40 53.3 Annual and quarterly progress reports.Annual reports by utilities.

Number of new EE equipment installed by utilities (thousands)

LampsOther

tbd0

tbd0

505

906

1307

2107

3108

53

1/ Potential regulations and norms identified at this stage include: (a) extension of authorization for electric utilities to recover EE investments (for residential users or public lighting) through customer billing; (b) real-time electricity tariffs for large residential users; (c) modifying concession contracts of distribution utilities to include energy services as a business; (d) tax incentives for investments in EE by end users; and (e) differentiated importation tariffs for EE equipment. These will be revised and complemented through studies during project implementation.

2/ The products that have been selected to start the Standards and Labeling program include: compact and longitudinal fluorescent lamps; lamps for public lighting; electronic and electromagnetic ballasts; refrigerators and freezers; air conditioners; cloth washers; electric motors; and standby equipment. This list will be revised and complemented during project implementation

54

Annex 4: Detailed Project Description

ARGENTINA: Energy Efficiency Project

To achieve its development objective, the project consists of three main components, each described below: Component 1: Establishment of the Argentina Energy efficiency Fund (implemented by the Fund Manager); Component 2: Development of EE programs by electric utilities (implemented by EDENOR, EDESUR, EPEC and possibly others); and Component 3: Capacity Building and Program M&E (implemented by the SE).

Component 1: Establishment of the Argentina Energy Efficiency Fund (AEEF) (Total estimated cost US$38.9 million. Proposed GEF support of US$7.8 million)

This component aims to create and operate the Argentina Energy Efficiency Fund (AEEF), to facilitate energy efficiency investments by users, ESCOs and other actors, primarily in the industrial and commercial sectors. The central objective of the AEEF is to demonstrate the commercial viability of investment in energy efficiency by reducing the risk perception that currently impedes such investments. The operational principles of the fund are to: (i) maximize the financing of energy efficiency investments, leveraging capital resources as much as possible; (ii) preserve its capital base, through commercially-oriented operation, in order to maintain resources for revolving use; and (iii) publicize its operating results so that businesses are increasingly willing to invest in energy efficiency and commercial banks become increasingly willing to undertake lending transactions.

The two key activities of this component are:

a. Contingent Grant Facility. (US$1.8 million from GEF). The lack of support to identify and prepare energy efficiency projects is viewed as a significant constraint to energy efficiency investments in Argentina. Through this facility, the AEEF would share the cost of preparing feasibility studies for bankable EE projects. This facility would recover the funds from projects that are ultimately financed by a commercial bank. The costs of feasibility studies self-financed by firms that would then apply to the project guarantee facility through commercial banks, are expected to represent an additional US$2.5 million.

b. Guarantee Facility. (US$10 million, of which US$5.5 million from GEF) Through this facility, the AEEF would co-share with the commercial banks the risks of lending to EE projects by providing partial credit guarantees up to an agreed percentage of the banks’ loans. A proactive fund manager would be hired to promote energy efficiency investments by commercial banks through the use of the Fund. Leveraged funds

55

(commercial banks’ lending not covered by guarantees and SMEs’ equity contributions would amount to about an additional US$26.1 million.

Because commercial banks in Argentina are currently highly liquid, it is proposed that the AEEF would initially provide only partial credit guarantees to support bank financing of EE projects, and would not co-finance these projects. The financial situation in Argentina would be reviewed at mid-term, and a decision made on the need to use part of the AEEF funds to co-finance EE project with participating banks. The intention of the fund is to demonstrate the financial viability of energy efficiency investments, and that thereafter the financial sector would expand and strengthen its lending in this area without the need for a guarantee.

The AEEF management total cost would be US$1 million, of which US$0.5 million from GEF).

Component 2: Development of a Utility Program. (US$53.3 million, of which US$3.7 million from GEF)

This component will support energy efficiency investments by electricity utilities in order to achieve energy savings in the residential, commercial and public sectors, which are major consumers of electricity in Argentina. This component will be executed by leading electric distribution companies (accounting for around 60 percent of the entire electricity market in Argentina). Three electric power distribution companies (EDENOR and EDESUR from Buenos Aires and EPEC from Córdoba) have expressed in writing their desire to participate in the project and co-finance project costs. The utilities will finance investments in energy efficiency, with GEF support provided primarily for technical assistance for program design and execution .These utilities have designed their respective energy efficiency programs as summarized in Table 1 below. Other utilities can join the project during implementation. Table 6 : Utility Program (2007-2012)

Components Electric UtilityEDENOR EDESUR EPEC

Installation of efficient lamps

and other equipment

640.000 lamps for commercial and residential users

33.000 energy efficient equipment (fridges, washers and AC) for

residential consumers / 100.000 lamps for street lighting and

buildings

Lamps for residential users (300,000), public buildings (1,000) and street lighting (150,000)

Demonstration Projects

EE in low income neighborhoods: energy efficient equipment & houses + pre-payment

metering; project design and support.

Street lighting project: 1,500 lamps; project design &

support, including institutional & financing arrangements

56

Program support activities

Program design, training, M&E, consultation and dissemination activities

Program design, training, M&E, consultation and

dissemination activities

Program design, training, M&E, consultation and dissemination activities

Component 3: Capacity Building and Project Management (Total estimated cost US$5.5 million. Proposed GEF support of US$3.7 million). This component will build capacity within the private and public sectors and strengthen the incentives for investment in energy efficiency.

a. Preparation of energy sector, tax and financial policies and regulations for the promotion of EE activities . The project aims to support GOA in creating the regulatory and institutional framework in which to create a market for energy efficiency in Argentina. Work would include the development of new regulatory and tariff structures, including peak-load pricing for residential customers, the extension of EE financing through customer billing by utilities, and the reform of tax and import duties for EE investments and equipment. It is expected that the corresponding regulatory changes would be promulgated before the end of the project

f. Standardization, testing, certification and labeling program. This component will support the establishment of a comprehensive program for energy efficiency standards and labeling of key energy consuming equipment, including home appliances, industrial equipment and building materials. This activity will include the modernization of the certification laboratories that will take part in the program, the institutional strengthening of the standardization bureaus, and regulatory and enforcement activities. This program will complement and strengthen the utility program by raising awareness among end-users and expanding the range of energy efficiency equipment financed by the utilities.

g. ESCO capacity building. A strong ESCO industry in Argentina would help to strengthen the market for energy efficiency services in the commercial and industrial sectors and be a key implementer of EE investments financed through the EE Fund. Emerging Argentine ESCOs have strong technical capabilities, but do not have sufficient experience with contractual and financial issues that are vital to securing financing and implementing performance contracts. Project resources will be used for training and to support dissemination and use of standardized or reference contractual instruments (performance contracts and independent verification protocols) with the support of qualified consultants and experts.

h. Information, training and dissemination programs . Creation and dissemination of case studies can overcome a critical barrier to energy

57

efficiency investments within the residential, commercial and industrial markets (including a program for small and medium enterprises) and the public sector (with programs for public buildings and public lighting). This component will provide information on the benefits of energy efficiency, and support the AEEF through the dissemination of EE best practices, carrying out energy efficiency diagnostics, and disseminating information on financing options to financial institutions and other actors involved in the AEEF.

i. Project coordination, monitoring and evaluation. This would include institutional support and technical assistance for project promotion and management, including support to the Steering Committee, the Secretary of Energy, and other stakeholders. In addition, it will support regular monitoring of the project components, reporting, and evaluation of the project in meeting its global and developmental goals.

Figure 1 below summarizes the project’s main components and activities, while Table 7 shows how the project components will address energy efficiency in the residential, commercial, industrial and public sectors.

58

Figure 8: Argentina Energy Efficiency Project

59

2. Development of a Utility Program

2.a Efficient lamps and equipments -

for residential and public sector users

i) Investmentsii) Project support

2.b Pilot projects

i) Low income neighborhoodsii) Public lighting

2.c Training, information, research

and dissemination activities

Argentina - Energy Efficiency Project

iv) Project monitoring and evaluation

3. Capacity Building & Project Management

3.a - Incentive Framework

3.c - Support for ESCO development

3.b - Standards and labeling

i) Expansion & strenghtening of de EE labeling processii) Development of minimum standard system

3.e Project Coordination, Monitoring &

Evaluation

ii) Support for financial administration and procurement tasks

i) Support for the Steering Committee

iii) EE technical support

v) EE project Validation

vi) EE project - Ex post Audits vii) EE environmental project validation

3.d - Dissemination

Activities

i) Public dissemination programsii) Dissemination of the labeling programiii) Energy auditsiv) Best practice dissemination

v) Dissemination activities for financial institutions

i) multiple studies on regulatory and tariffs issuesii) Workshops

i) Training activities

ii) Development of contractual instruments

1. Establishment of the Argentina

Energy Efficiency Fund (AEEF)

1. a - Contingent Grant Facility

1. b - Guarantee Facility

1.c - Fund Administration

60

Table 7: Project components and sectors involved

Sectors

Components

Capacity Building AEEF Utility Program

ResidentialElectricity X X

Natural Gas XCommercial

Electricity X X XNatural Gas X X

IndustrialElectricity X X

Natural Gas & LPG X XFuel oil, gasoil, etc. X X

Public SectorElectricity X X

Natural Gas X

61

Annex 5: Project Costs

ARGENTINA: Energy Efficiency Project

Establishment of the Argentine Energy Efficiency Fund (AEEF) 26.20 12.70 38.90

Development of a Utility Program 49.64 3.68 53.32

Capacity Building and Project Management 1.87 3.68 5.54

Total Baseline Cost 77.71 20.05 97.77

Physical contingencies - - -

Price Contingencies - - -

Total Project Cost 77.71 20.05 97.77

Total Financing Required 77.71 20.05 97.77

Local (US$M) Foreign (US$M)*

Total Cost (U$SM)Components

* GEF + GTZ + Other (tbc)

Identifiable taxes and duties are US$m ___, and the total project cost, net of taxes, is US$m___. Therefore, the share of project cost net of taxes is ___%.

62

Annex 6: Implementation Arrangements

ARGENTINA: Energy Efficiency Project

Overall organization. The recipient of the grant will be the Ministry of Economy. The Secretariat of Energy will be the implementing agency for component 1 (incentives for market development) and component 4 (project coordination and M&E), under a subsidiary grant agreement with the Ministry of Economy and Production. Component 2 (energy efficiency fund) will be administered by a Trustee under a Trust Fund Agreement with the SE; disbursements from the EE Fund would be made by an Asset Manager, following instructions from the Fund Executive Director; see below for more details on the functions of the EE Fund Executive Director and Asset Manager. The electric utilities (EDENOR, EDESUR and EPEC) will be the implementing agencies for component 3 (utility program), under a subsidiary agreement with the SE. .

A steering committee composed of the SE, the Secretary of Environment and the Secretary of Industry will provide overall guidance and supervision for project implementation, as well as ensuring coordination of EE and clean development initiatives between the three Secretariats. The steering committee will be chaired by the SE. A Technical Committee composed of representatives from the implementing agencies and other key project stakeholders will support project implementation and M&E.

Implementation Arrangements for the AEEF

The AEEF would be established through the signing of a Trust Fund Agreement (Contrato de Fideicomiso) between the Energy Secretariat as Trustor (Fideicomitente) and a Trustee. The Trustee could be one of Argentina’s public banks, which customarily act as fiduciary agents for trust funds in which the government is the Trustor. The Trust Fund Agreement would specify the conditions and circumstances that would require the change of Trustee. The AEEF funds would be utilized for the purposes of this component of the Project directly by the Trustee or through an independent asset manager.

Governance of the AEEF. The AEEF would have an autonomous structure, management and organizational capabilities, under the principles of healthy and prudential management. The control of the use of the AEEF funds would be exercised by a Fund Executive Director (FED), supported by an Executive Committee composed of two representatives from the public sector and one from the private sector. The FED and the members of the Executive Committee would be selected by the Energy Secretariat under the following conditions:

63

a. The selection of the FED and the officers of the Executive Committee for the administration of the AEEF should be satisfactory to the Bank;

b. The Bank should be consulted before any changes regarding the selection of the FED and/or the composition of the Executive Committee throughout the duration of the Bank’s supervision of the GEF-financed Project, with the understanding that the Bank should have a right to exercise remedies if such changes negatively impact Project execution in the reasonable opinion of the Bank.

c. The FED should exercise control over the use of the AEEF funds.

The Energy Secretariat would have an oversight role over the AEEF through periodic audits, but would not interfere in the day-to-day administration of the AEEF. The Bank would have the right to request audits of the AEEF throughout the duration of the Bank supervision of the GF-financed Project, in accordance with standard Bank practice. The AEEF would be subject to the Bank’s procurement and financial management guidelines throughout the duration of the Bank’s supervision of the GEF-financed Project.

GEF-financed trust funds are exempt from the requirement that Bank-administered funds be disbursed only to finance eligible expenditures as they are actually incurred, subject to the conditions specified in the previous two paragraphs (see GEF Exception Memo of March 15, 2002).

The FED is expected to follow a Management Manual agreed with the Energy Secretariat. The FED would have to make appropriate choices about the use of the fund’s two facilities according to specific project circumstances, the evolution of the financial markets, and early implementation experience, and prepare periodic reports for the Energy Secretariat and the Bank on the operations of the AEEF. Most importantly, the FED would have a pro-active role in persuading banks to participate in this project through direct contacts, and the dissemination of information about the AEEF facilities and of case studies of EE projects financed by other banks using the AEEF facilities. The FED and the officers of the Executive Committee would be compensated out of the GEF funds allocated to this component. The FED will also:

c. approve proposals for contingent grants to finance preparation of feasibility studies of EE projects, sign grant contracts with EE project sponsors, and assign and sign contracts for the elaboration of the feasibility studies, following Bank procurement rules; and

d. sign Guarantee Framework Agreements with financing banks, and approve partial credit guarantee proposals presented by these banks.

Administration of the AEEF Funds. The AEEF funds would be administered for the purposes of this component directly by the Trustee or by an independent Asset Manager (AM), operating under an Asset Management Agreement between the AEEF and said manager. The Asset Management Agreement would provide, inter alia, for the flow of funds to beneficiaries and other requirements to implement the Contingent Grant Facility

64

and the Credit Guarantee Facility. The Asset Management Agreement would also specify the circumstances and conditions for the removal of the AM.

If the AM is a commercial bank, it would be selected using a competitive process based on both cost and quality criteria, under Bank guidelines. The main functions of the AM are to: (i) maintain the accounts of the AEEF: a Contingent Grant Account and a Guarantee Reserve Account, (ii) issue the guarantees, (iii) make payments; and (iv) generate reports for the Energy Secretariat, the FED and the Bank. :

The AM would be compensated for expenses, including cost for setting up and an incentive for successfully concluding transactions. The setting up cost and the initial operation of the AM would be paid with GEF funds, but later on, compensation of the AM could be covered from interest payments and could be additional.

It is expected that the AEEF would administer GEF funds for about 6 years. According to the financial model developed for the project, this implementation time is sufficient to demonstrate successful operation. Thereafter, the private financial sector can fully take over funding for EE projects on a sustainable basis. The project implementation period would last 6 years, during which GEF funds would have been fully disbursed. After World Bank project closure, the Secretariat of Energy would conduct appropriate monitoring and oversight of AEEF performance.

See Figure 9 on next page that summarizes implementation responsibilities and relationships for the main participating entities

65

Figure 9: Implementation arrangements

Argentina - Energy Efficiency Project

Incentive framework for

development of an EE market

Argentina Energy Efficiency Fund (AEEF)

Project Coordination, Monitoring & Evaluation

Incentive Framework

Support for ESCO development

Contingent Grant Facility

Guarantee Facility

Standards and labeling

Dissemination Activities

Development of a Utility Program

Efficient lamps and equipments -

for residential and public sector users

Pilot projects

Training, education, research and dissemination

activities

Executive Committee

Secretariat of Energy

Secretariat of Industry & SME

Secretariat of Environment

Technical Committee

Participant Entities

Fund Management

Fiduciary Agent

EE Promoters

Management contract

Academic Center - EE project Validation / Ex-

post auditsEDENOR

EDESUR

EPEC

OTHERIRAM, Laboratories,

Consumers Protection Agency,

Other

ENRE, ENARGAS, Provincial Regulatory

Agencies, Other

Commercial Banks

Industry Chambers, Consumers Associations

Project Agreement

Environmental Verification

66

Annex 7: Financial Management and Disbursement Arrangements

ARGENTINA: Energy Efficiency Project

To be finalized during appraisal.

1. Financial management: country aspects

A CFAA for Argentina was carried out in …… The CFAA report concludes that: ………………

2. Project financial management arrangements

Implementing entities: organization, staffing, procedures and information systems for financial management. Arrangements for audits, reporting, and supervision.

3. Disbursement arrangements GEF funds flows.Special accounts.

Table A: Allocation of GEF Grant Proceeds

Expenditure Category Amount in US$ million Financing Percentage1. Partial Credit Guarantee 100%2. Subloans 100%3. Consultant Services 90%4. Goods 80%5. Incremental Operating Costs

90%

67

Annex 8: Procurement Arrangements

ARGENTINA: Energy Efficiency Project

To be finalized during appraisal.

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the [IBRD Loan] and GEF Grant , the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement of Works: Works procured under this project would include: [Describe the types of works]. The procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank. [Indicate any special requirements specific to the project.] [If the project involves procurement carried out by communities, indicate where details can be found in the Project Implementation Manual or similar documents.]

Procurement of Goods: Goods procured under this project would include :[ Describe the types of goods]. The procurement will be done using the Bank’s SBD for all ICB and National SBD agreed with or satisfactory to the Bank. [Indicate any special requirements specific to the project.]

Procurement of non-consulting services: [ Provide a general description of non-consulting services to be procured under the project and information on the bidding documents to be used for the procurement.]

Selection of Consultants : [Provide a general description of the consulting services from firms and individuals required for the project.] Short lists of consultants for services estimated to cost less than $_______equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. [If applicable, provide any information regarding engaging universities, government research institutions, public training institutions, NGOs, or any special organizations.]

68

Operating Costs: [Describe the operating costs which would be financed by the project and procured using the implementing agency’s administrative procedures which were reviewed and found acceptable to the Bank.]

Others: [Describe if any special arrangements for scholarships, grants etc. ]

The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the [name the Project Implementation Manual or the equivalent document.].

B. Assessment of the agency’s capacity to implement procurement

Procurement activities will be carried out by [name of the Implementing Agency]. The agency is staffed by [describe the key staff positions], and the procurement function is staffed by [describe the staff who will handle procurement].

An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by [name of the procurement staff] on [date]. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement Officer and the Ministry’s relevant central unit for administration and finance.

The key issues and risks concerning procurement for implementation of the project have been identified and include [describe the risks/issues]. The corrective measures which have been agreed are [Describe the corrective measures].

The overall project risk for procurement is [give the risk rating].

C. Procurement Plan

The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on [date] and is available at [provide the office name and location]. It will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended [frequency] supervision missions to visit the field to carry out post review of procurement actions.

E. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

69

(a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 8 9

Ref. No.

Contract (Description)

EstimatedCost

ProcurementMethod

P-Q Domestic Preference(yes/no)

Reviewby Bank(Prior / Post)

ExpectedBid-OpeningDate

Comments

(b) ICB contracts estimated to cost above [fill in threshold amount] per contract and all direct contracting will be subject to prior review by the Bank.

2. Consulting Services

(a) List of consulting assignments with short-list of international firms.

1 2 3 4 5 6 7

Ref. No. Description of Assignment

EstimatedCost

SelectionMethod

Reviewby Bank(Prior / Post)

ExpectedProposals SubmissionDate

Comments

(b) Consultancy services estimated to cost above [fill in threshold amount] per contract and single source selection of consultants (firms) for assignments estimated to cost above [fill in threshold amount] will be subject to prior review by the Bank.

(c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than [fill in threshold amount] equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

70

Annex 9: Economic and Financial Analysis

ARGENTINA: Energy Efficiency Project

Main criteria for the selection and design of the project components

An early decision was made in terms of selecting only affordable and financially viable EE activities to eliminate the need for subsidies, rebates or similar price incentives that could be costly and that would not be sustainable at the project end. As a consequence, the activities to be undertaken by the EE project are financially viable and economically attractive allowing the project to concentrate in the facilitation of these activities in the marketplace by providing technical and financial assistance.

Financial viability is built upon the current levels of energy tariffs and investment costs that make the selected EE activities financially workable for the consumers and the participant entities implementing the project components. In addition, electricity tariffs –which will be renegotiated in 2006, are currently subject to the PURE surcharges . In consequence, current and future tariffs, including ongoing surcharges for additional consumption, are expected to provide a solid foundation for the sustainability of the EE activities and avoiding the need for subsidies or rebates.

The second evaluation involved the level of project intervention in the marketplace, e.g., leaving the task of advancing the EE cause to the market forces alone or supporting their participation by funding barrier removal activities. Minimum interventions could be less costly but more time consuming, while a proactive stance has proven more effective based on international experience.

Barriers affecting the market penetration of EE appliances, equipment and materials (AE&M), will be addressed through information and capacity building activities that will support a standards and labeling (S&L) program. Such an approach has been shown to be one of the most cost effective EE improvement tools available. For the first phase of this program, AE&M will be selected on the basis of volume of market presence, potential efficiency gains, and acceptance of main stakeholders, to ensure fast implementation and maximum local and global benefits. For the chosen appliances and equipment, mandatory labels and minimum standards will be developed and implemented. In the case of the EE services, the most active agents in the marketplace were approached during project design, including ESCOs2 and utilities, and main barriers were identified to be the lack of financial support and technical assistance to help prepare bankable EE projects, provide EE services, and implement DSM programs. To design the financial supporting instruments several options were evaluated, with the participation of commercial banks, local financial specialists and interested ESCOs. The main conclusions of this exercise were: (a) the need for a dedicated EE fund to provide critical support for EE investments, (b) the financial instruments offered by this facility should be

2 In the Argentinean context, ESCOs include engineering firms that provides EE technical advice and/or implement projects with limited financing from manufacturers of EE equipment.

71

flexible in order to adapt to changing conditions of the financial system in Argentine, (c) contingent grants should be made available to facilitate preparation of EE projects; (d) market knowledge and the proximity to clients necessitates the involvement of commercial banks for channeling support to EE investments, and (e) the EE fund should focus on high-return and relatively small projects, including the commercial sector, public buildings, and small and medium enterprises (SME), the latter following the PIEEP approach explained elsewhere in this project brief. Annex 14 details the design of the EE Fund. The technical assistance instruments are designed to facilitate implementation of EE and DSM programs in order to help eliminate the other main barriers that hinder the delivery capacity of ESCOs and utilities. The main activities in this area will aim to support ESCOs development, DSM development, and dissemination activities.

Selected components based on cost effectiveness

As a consequence of the above analysis, the project will support investments in energy efficient goods and services by (i) setting up the Argentine Energy Efficiency Fund (AEEF), to facilitate financing of activities aimed to increase the efficiency of energy use in the industrial, commercial, and public sectors, including proactive support to ESCOs; and (ii) supporting utility-based EE and Demand Side Management (DSM) activities, and (iii) supporting market transformation activities by building regulatory and institutional capacity, including the implementation of a Standards and Labeling (S&L) program, to improve availability of energy efficient appliances, equipments and services in the marketplace. Total project investments are estimated at US$ 98 million, including a GEF grant of US$15.2 million estimated on the basis on the incremental cost analysis.

Global and local benefits

By the end of the project, 0.8 million tons of oil equivalent (TOE) plus 8,990 GWh are expected to be saved. Accumulated emissions of CO2 would be reduced by 5.9 million tons compared with the baseline without project.

The project market transformation activities are expected to continue beyond the Project’s end, as part of the broader Argentina Program for Energy Saving and Efficiency (PAyEE) set up in 2003 by the Government of Argentina (GOA). Also as a consequence of the operation of the EE equipment to be installed during project implementation, accumulated energy savings of 4.5 million TOE and 33,600 GWh are expected by 2017. By 2022, savings would reach 13.2 million TOE and 79,340 GWh. Emissions of CO2 would be reduced 27.1 million tons by 2017 and 71.9 million tons by 2022, compared with the baseline. The ratio between the dollar amount of the GEF grant and the CO2 removed would amount to US$ 9.3 per ton of carbon in 2012 and will be reduced to about US$ 2.0 per ton of carbon by 2017.

Annual electricity savings in year 2012 would be equivalent to 2% of total generation.

72

The power sector should be able to postpone investments to supply demand as the result of the reduction of total demand at peak time, equivalent to 745 MW in 2012, 1,534 MW by 2017, and 2,464 MW by 2022. Estimated postponement in investment would amount to US$969 million in 2012, US$1,944 million in 2017, and US$3,203 million in 2022.

Financial Viability

The project will help to make available efficient equipment in the marketplace, allow ESCOs and other market players to deliver EE services, support final users in obtaining financing, supported by the Argentina Energy Efficiency Fund (AEEF), and help electricity utilities to implement EE and DSM programs.

The following sections describe the results of the financial and economic analysis of: (a) the investments in equipment that will be part of the standards and labeling program, (b) investments by SME and other sectors that will be supported by the AEEF, and (c) the investments by participating utilities in DSM and EE programs. Finally, a cost effective evaluation was performed for the whole project.

In order to estimate CO2 emissions, the dispatching of the generation system was simulated, taking into consideration the incorporation of the new plants planned to be built during the period under analysis. The dispatching criteria were the same used by CAMMESA, the operator of the wholesale power market, to dispatch the interconnected generation system. The main results are: priority is always given to the dispatch of thermal plants, which defines the marginal costs and the marginal emissions of CO2 per kWh generated and, with small variations, emissions are about 600 grams of CO2 per kWh produced. This value was used to estimate the reduction in emissions.

A. Standards and Labeling Program

The S&L program includes in a first stage the standardization and labeling of the following AE&M: compact fluorescent lamps, incandescent lamps, refrigerators, freezers, residential air conditioners, electric industrial motors, electric water heaters, and natural gas heaters, water heaters and stoves.

The GOA has decided to implement a mandatory labeling program to inform the public on the efficiency of the equipment in the market and establish minimum standards to eliminate from the market the most inefficient equipment. The energy savings and the reduction of emissions as a consequence of the labeling and standards program were estimated simulating a gradual market penetration of the more efficient equipment as project implementation proceeds. A more detailed evaluation of the combined effect of labels and standards will be performed during appraisal.

Compact fluorescent lamps (CFL) and incandescent lamps are included in the S&L program because they can be used for the same applications, but CFLs could save about 75% of the energy used by the comparable incandescent lamp (Table A).

73

. Table A. Comparative Demand of lamps (*)

Efficiency Type of lamps Lifetime Lamp Efficiency

Average Wattage

Estimated Total Demand

    Hours Lm/W W TWh1A Incandescent 940 8-12 68 13.081B CFL 4500 40-70 17 0.242B Fluorescent T12 6500 60-70 50 4.212A Fluorescent T8 6500 70-80 40 1.823A Mercury Vapor 12000 35-60 300 2.353B Sodium HP 12000 45-110 220 1.37  Others       0.4  Total       23.5

(*) Total consumption is estimated for 2005.

Lamps A in Table A are more efficient than the lamps B in the same category. They use less energy to yield the same output. On average, each CFL could save 164kWh per year, compared with the equivalent incandescent lamp.

Replacing two CFL for two incandescent lamps –as planned by the project- produce most of the savings at peak time (Chart B), allowing utilities to postpone investments in supply facilities. The amount of energy consumed by the incandescent lamps in Argentina makes them the first candidates for replacement.

Chart B. Replacing CFL for Incandescent LampsEnergy Savings and Peak Reduction

Energy Savings and Demand ReductionWith and Without Project

0%

20%

40%

60%

80%

100%

120%

1 5 9 13 17 21Hours

Others Refrigerator T V Illumination With Project

74

From the point a view of the residential customers, the estimated payback period for purchase of energy efficient equipment is indicated in Table C.

Table C. Payback Period for Purchase of Energy Efficient Products

Replacing Energy Efficient ProductsIncremental

Cost for Efficiency

Annual Energy Savings

Payback Period

% US$ YearsCompact fluorescent lamp (15W) for incandescent lamp (60W)(Residential clients R1 and R2 have different tariff)

R1 87%R2 87%

6.394.35

0.71.5

Refrigerator 9 7.65 3.3Freezer 9 8.88 3.0Air conditioner 4 19.90 2.6Electric water heater 12 6.29 1.0

The payback period is significantly lower than the lifetime of the lamps and appliances, facilititating the uptake of more efficient equipment by residential users, therefore strengthening the viability of the S&L program.

The S&L program is expected to accumulate savings for about 4,007 GWh and 169 kTOE by the year 2012 and 17,600 GWh and 860 kTOE by 2017. Emissions saved would amount to 2,395 million tons of CO2 by 2012 and 12,120 million tons of CO2 by 2017.

B. Energy Efficiency Fund

The Argentine Argentina Energy Efficiency Fund (AEEF) will facilitate energy efficiency investments, primarily in the industrial, commercial, and public building sectors, and will build on the successful groundwork that has been laid in SMEs. The central objective of the AEEF is to demonstrate the commercial viability of investments in energy efficiency by reducing the risk perception that currently impedes such investment lending by financial institutions.

Past and ongoing work performed by the Secretariat of Energy as part of the national Program to Increase the Energy Efficiency and Productivity of SME (PIEEP - Programa de Incremento de la Eficiencia Energética y Productiva en las PYMEs) shows a large potential of savings of energy and other resources that could be capitalized if the barriers that hinder the financing of these opportunities are overcome.

PIEEP has interacted with industry associations in the in the provinces of Buenos Aires (dairy sector and industrial parks), Córdoba (dairy sector), Tucumán (citric fruits and sugar), Río Negro (cold chambers), Santa Fe (grain drying), Mendoza (agricultural irrigation and SMEs electro intensive metal mechanics) and in the city of Buenos Aires (sausages).

75

An evaluation of two industrial plans in the food sector (that manufacture sausages) produced the following results:

Table D. Evaluation of energy use in two typical plants. Buenos Aires City.

    PLANT A PLANT B Difference    Use/unit  Cost per

year Use/unit  Cost per

year 

Production ton/year 1555   2850   55%Water liters/ton of

product6616 $6,700 1849 $3,700 358%

Electricity kWh/ton of product

243 $29,500 400 $59,200 61%

Gas m3/ton of product

40 $8,000 55 $20,000 73%

TOTAL     $44,200   $32,900  

A detailed evaluation was performed to assess the causes of differences in the use of resources between the two plants.

Table E. Evaluation of energy use per unit. Buenos Aires City.

Processes kWh per unit PLANT A PLANT B      %   %Refrigeration kWh/kg product 0.11 44 0.2 49Meat processing

kWh/kg product 0.12 48 0.1 16

Illumination kWh/m2 8.73 5 37 10Others kWh/kg product 0.01 3 5.24 25Total kWh/kg product 0.24 100 0.4 100

To improve the operation of the two plants and reduce the use of electricity, natural gas and water, the plants were audited and the following measures were recommended.

76

Table F. Recommendations for Plant A. Buenos Aires City.

Resources Area Recommendation Cost Annual Savings

Payback

           

Electricity  Refrigeration systems Refrigerators:   utilization factor and operation.  

No cost $2,000  Immediate

   Demand management Automatic demand control.  $4,500.00  $3,800  14 months

Water  Water for cleaning  installation   of   new pressurized   water   system and training 

$2,000  $3,300  8 months

Defrosting Defrosting by vapor injection $1,000.00  $1,000  12 months

TOTAL     $7,500  $10,100  9 months

Table G. Recommendations for Plant B. Buenos Aires City.

Resources Area Recommendation Cost Annual Savings

Payback

           Electricity Refrigeration systems Thawing products,

operation, cleaning$1,000 $4,000 3 months

  Demand management Automatic demand control.

$4,500 $3,800 14 months

Natural Gas

Boiler installation of new pressurized water system and training

$3,000 $4,500 8 months

TOTAL     $7,500 $12,300 7 months

Based on all SMEs evaluated by PIEPP across all sectors and in different parts of the country, electricity savings were found to be about 10 to 15%, and fuel savings about 15 to 20% through operational and management changes without capital investments. Another 30 to 35% of the savings had a payback of less than one year and were usually financed by the SME itself. Obtaining the remaining savings, with a payback of more than one year, was very difficult due to lack of financing and only a few SME were able to make the required investments.

Lessons learned from PIEPP indicate the need to create a financing facility such as the AEEF, and such lessons guided the design of the instruments to be offered under the project.

Conclusions from the PIEEP program to date are:

First, there is a need to adopt a proactive approach when dealing with SMEs and to identify the energy savings opportunities. Proactive audits can produce energy savings without investments.

77

Second, support is needed, such as through the Contingent Grants in the project, to identify and prepare energy efficiency projects. Through this facility, the AEEF would share the cost of preparing feasibility studies for bankable EE projects.

Third, as there is liquidity in the banking system of Argentina now, Partial Risk Guarantees would co-share with the banks the risks of commercial lending to EE projects. However, it is recommended to keep open the option of cofinancing projects if the liquidity of the banking system declines in the future.

The AEEF is expected to finance about 1,920 projects, 560 during the first 6 years, that could save about 1,170 GWh and 634 kTOE by the year 2012 and 6,790 GWh and 3,670 kTOE by 2017. Emissions saved will amount to 2.0 million tons of CO2 by 2012 and 11.8 million tons of CO2 by 2017.

C. Utility-based DSM and EE Programs

The participant utilities will take advantage of the existence of EE equipment in the marketplace to implement DSM programs aimed to reduce demand at peak, in order to improve the load factor and postpone investments in supply facilities. These programs consist primarily in: (a) promoting the acquisition of EE equipment by facilitating their financing and informing the customers about the potential savings, (b) facilitating the refurbishing of municipal street lighting systems by upgrading luminaries and/or lamps and improving controls, (c) improving the use of energy in public buildings, and (d) demonstrating the concept of efficient dwellings for low-income customers to transform the construction market for this segment of the population.

Financial viability of the DSM programs (a) to (c) requires that the savings to the final users, which represent the loss of income of the utilities, be compensated by the reduced purchase of energy in the wholesale market and the postponement of investments in supply facilities. Therefore, programs that can contribute to substantially reduce peak demand, e.g., street lighting and CFL programs, have the higher rate of return and shorter payback. The utilities participating in the street lighting programs will have an average TIR of 12% and a payback of 2 to 4 years years, depending on the characteristics and cost of the street lighting upgrading. Programs to replace CFL have an average TIR of 12% to 35% and repayment periods for the customers are 7 to 47 months. Programs to sell appliances through the electricity bills have TIRs of about 17% to 23%.

Example of Utility Program. Replacement of Compact Fluorescent Lamps for Incandescent Lamps

This activity consist in installing 2 Compact Fluorescent Lamps (CFL) of 15 and 19 watts to replace 2 incandescent lamps of 60 and 75 watts in the premises of residential clients Category R1, those that consume less than 300 kWh bimonthly and represent 46% of the total residential customers. The replacement will also be offered to Category R2 clients, those that consume more than 300 kWh bimonthly.

78

As almost 50% of all residential users use less than 300 kWh every two months, the savings from the use of EE lamps represent a high percentage of current electricity bills. The distribution of the clients of one of the participant utilities is indicated in Chart H.

Chart H. Distribution of Residential Clients

For a high percentage of small users the energy used by lamps and refrigerators represent almost 70% of their monthly bill and could benefit by the use of EE equipment.

The average use of electricity by residential customers is estimated as follows

Table I. Use of Electricity

Final Use ParticipationLamps 39%Refrigerator 29%TV and video 12%Others 20%

The reduction of energy use during the day by the utilization of more efficient lamps and refrigerators represents important savings for the customers. The associated reduction of demand at peak time is beneficial for the utility because it allows it to postpone investments in network expansion.

The DSM programs implemented by the utilities are expected to save about 3,812 GWh by the year 2012 and reduce CO2 emissions by about 1.4 million tons of CO2 by the same year. Future replication would increase these amounts.

Distribution of Residential Clients of EDESUR

0102030405060708090

20 80 140

200

260

320

380

440

500

560

620

680

740

800

860

920

980

1040

1100

1160

1220

1280

1340

1400

Bimonthly Consumption in kWh

Use

rs

x 10

00

79

D. Conclusions

The proposed EE project aims to transform the energy market by contributing to the strategy of the GOA to promote energy efficiency as a core component of its energy sector strategy which will help to avert the risks of an energy crisis as well as obtaining local and global benefits. To this end, the project will support activities that are financially attractive and viable for all participants, and will help to remove the barriers that hinder their implementation.

Compared with the baseline, expected annual savings by 2012 are equivalent to 2.2% of the electricity to be produced. The GEF grant is equivalent to about US$2.53 per ton of CO2, i.e., US$9.29 per ton of carbon. By 2017, due to the additional savings generated by the Project, the GEF contribution would be equivalent to about US$2.0 per ton of carbon.

80

Annex 10: Safeguard Policy Issues

ARGENTINA: Energy Efficiency Project

[To be finalized during appraisal]

The only WB Safeguard Policy that is triggered by the project is Environmental Assessment (OP/BP/GP 4.01). The WB’s environmental category assigned to the project is B.

The environmental impacts of the project will be related to the specific EE investments supported under the subcomponents of the project (implemented by the distribution utilities or by project promoters under the Energy Efficiency Fund). No significant negative environmental impacts will be caused by the project,

Among the environmental benefits of reducing energy consumption through energy efficiency projects are: the reduction in local air pollutants (particulates, SOX, NOX, HC), and the reduction of greenhouse gas emissions, specifically CO2. Investments to be supported through the project must meet minimum energy efficiency savings for eligibility and such savings will be specifically monitored and reported under the project.

Likely subproject candidates are: commercial, industrial and public lighting improvements; improvement and replacement of electric engines; reconstruction of boilers; public and industrial water pump improvement and replacements, installation of small co-generation units, steam traps, power factor improvement, fuel switching, (DEVELOP). The subprojects are expected to be relatively small, with investment costs generally not higher than US$100,000, thus limiting the environmental impacts. Investments made by the utilities would include: efficient lamps, fridges, water heaters (gas and electrical), and AC units; public lighting improvements; efficient industrial chillers.

As will be described in the environmental chapter of the FI’s Operations Manual (OM) and in the Subsidiary Agreements with the participating electric distribution utilities, compliance with Argentinian environmental law, policies and procedures will be, in most cases, a necessary and sufficient condition for the Bank’s endorsement of financing of subprojects under the project. Argentina has made significant progress in adapting its Environmental Impact Assessment (EIA) system to international norms. (TO BE CONFIRMED). Also, the three participating utilities have a good track record regarding environmental assessments and definition and implementation of environmental management plans. (TO BE CONFIRMED DURING APPRAISAL)

Environmental Assessment Process. Technical support to the Energy Efficiency Fund will include at least one staff in the Secretary of Environment to deal with the environmental assessment and environmental management aspects of the subprojects supported by the project. Under the Environmental Chapter of the OM, every subproject proposal should contain a questionnaire completed by the developer/sponsor that will

81

allow the Secretary of Environment to determine the applicable course of action in accordance with the table below:

World BankEnvironmental Category(under OP/BP/GP 4.01)

Action Required from EE Fund Manager or participating electric distribution utilities

Category A – substantialadverse environmentalimpact/risk

Notify the developer/sponsor that the project is not eligible for financing under the Fund.Participating electric distribution utility should nt implement the project.

Category B - moderate andmanageable adverseenvironmental impact/risk.

Prepare an Environmental Summary Sheet (ESS) describing the steps taken to comply with the Argentinian environmental assessment and environmental management requirements. Present ESS to the Bank upon request.

Category C – negligibleadverse environmentalimpact/risk.

Obtain, and present to the Bank upon request, a letter from the competent environmental authority that an environmental assessment for the subproject is notrequired.

82

Annex 11: Project Preparation and Supervision

ARGENTINA: Energy Efficiency Project

Planned Revised ActualPCN review Oct. 14, 2004 Oct. 14, 2004 Oct. 14, 2004Initial PID to PICInitial ISDS to PICAppraisal Sept. 2005 July 2006Negotiations Oct. 2005 Sept. 2006Board/RVP approval Nov. 2005 Oct. 2006Planned date of effectiveness Jan. 2006 June 30, 2007Planned date of mid-term review

Jan. 2009 June 2010

Planned closing date Dec. 31, 2011 June 30, 2013

Key institutions responsible for preparation of the project: Secretariat of Energy, EDENOR, EDESUR, EPEC.

Bank staff and consultants who worked on the project included:

Name Title UnitPhilippe Durand Task manager LCSFETodd Johnson Senior environment specialist LCSFELuis Vaca-Soto Consultant LCSFEMariluz Cortes Consultant LCSFFLucia Spinelli Consultant LCSFEMariano Lanfranconi Consultant LCSFFAlejandro Solanot Financial management specialistAna María Grofmacht Procurement specialist Juan David Quintero Lead environment specialist LCSESReynaldo Pastor Counsel LEGLAAna Kuschnir Team assistant

Bank funds expended to date on project preparation:2. Bank resources: US$03. Trust funds: BBGEF: US$ …………. GEF Block B: ……4. Total: …………..

Estimated Approval and Supervision costs:1. Remaining costs to approval: ……………..2. Estimated annual supervision cost: US$70,000

83

Annex 12: Documents in the Project File

ARGENTINA: Argentina Energy Efficiency Project

“Argentina Energy Efficiency Project” prepared by Fundación Bariloche and Lestard/Franke consultants. November, 2005.

Estimates of energy savings and CO2 emission reductions by project component (Excel spereadsheet)

“World Bank GEF Energy Efficiency Portfolio Review and Practitioners’ Handbook”, World Bank Environment Department, January 2004.

Private Sector Participation in Market-Based Energy-Efficiency Financing Schemes: Lessons learned from Romania and International Experiences, ESMAP, November 2003

“STAP Review of the Argentina Energy Efficiency Project” by Howard Geller, December 2, 2005.

ELI – Argentina – Final Report, Febraury 2004

“IFC/GEF Argentina Efficient Street Lighting Program. Final Report”, by IIEC, Shir Ashar, and Denise Knight. April 2002.

“Energy consumption in the industrial sector”, Fundación Bariloche / GTZ, march 2004.

Encuesta Nacional de Costos de los Hogares, 1996/97, INDEC

Inventario de GHG, Fundación Bariloche, Septiembre 2005

Several Progress and Final Reports prepared by GTZ-PIEEP project.

Several Reports prepared by Secretariat of Energy, Argentina.

84

Annex 13: Statement of Loans and Credits

ARGENTINA: Energy Efficiency Project

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P088220 2005 AR (APL1)Urban Flood Preven&Drainage

130.00 0.00 0.00 0.00 0.00 127.02 0.08 0.00

P088032 2005 AR(CRL1)Buenos Aires Infrastr SIDP(1APL)

200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00

P071025 2004 AR-Provincial Maternal-Child Hlth Inv Ln

135.80 0.00 0.00 0.00 0.00 132.08 3.61 0.00

P072637 2004 AR-Prov. Maternal-Child Hlth Adj PMCHSAL

750.00 0.00 0.00 0.00 0.00 150.00 150.00 0.00

P078143 2004 GEF AR Enabling Act. Conv. Climate Cha

0.00 0.00 0.00 1.14 0.00 0.82 0.43 0.00

P083982 2004 AR ECONOMIC RECOVERY SUPPORT SAL

500.00 0.00 0.00 0.00 0.00 500.00 333.33 0.00

P088153 2004 AR National Highway Asset Management 200.00 0.00 0.00 0.00 0.00 199.00 52.27 0.00

P073578 2003 Social Protect VI (AR-Jefes de Hogar) 600.00 0.00 0.00 0.00 0.00 5.23 5.23 0.00

P070374 2002 AR PROFAM LIL 5.00 0.00 0.00 0.00 0.00 2.71 2.71 2.71

P069913 2002 AR Santa Fe Provincial Reform 330.00 0.00 0.00 0.00 0.00 126.70 126.70 126.70

P068344 2001 AR Cordoba PRL5 303.00 0.00 0.00 0.00 0.00 75.00 75.00 0.00

P044447 2001 AR Catamarca Provincial Reform 70.70 0.00 0.00 0.00 0.00 24.30 25.00 25.00

P064614 2001 AR- Second Secondary Education Project 56.99 0.00 0.00 0.00 0.00 18.00 -38.99 0.00

P049012 2001 GEF AR-Marn.Poll.Prevention 0.00 0.00 0.00 8.35 0.00 8.08 4.72 4.38

P057473 2001 AR INDIGENOUS COMMUNITY DEVELOPMENT LIL

5.00 0.00 0.00 0.00 0.00 3.22 3.22 0.00

P055482 2000 AR-Pub. Hlth. Surv. & Disease Control 52.50 0.00 0.00 0.00 0.00 8.57 8.57 -1.17

P057449 1999 AR State Modernization 30.30 0.00 0.00 0.00 0.00 18.17 18.17 -11.67

P045048 1999 GEF AR-RENEWABLE ENERGY IN RURAL MARKETS

0.00 0.00 0.00 10.00 0.00 9.48 8.89 3.89

P006043 1999 AR RENEW.ENERGY R.MKTS 30.00 0.00 0.00 0.00 0.00 25.56 25.56 8.72

P006046 1999 AR WATER SCTR RFRM 30.00 0.00 0.00 0.00 0.00 18.34 18.34 18.34

P006058 1999 AR-Social Protection 4 90.80 0.00 0.00 0.00 0.00 8.54 8.54 4.10

P052590 1998 AR NAT HWY REHAB&MAINT 450.00 0.00 0.00 0.00 0.00 48.29 48.29 48.29

P050713 1998 AR MODEL COURT DEV. 5.00 0.00 0.00 0.00 0.80 0.72 1.52 1.52

P039787 1998 GEF AR-BIODIVERSITY CONSERVATION

0.00 0.00 0.00 10.10 0.00 6.63 5.46 2.46

P006041 1998 AR SMALL FARMER DV. 75.00 0.00 0.00 0.00 0.00 19.84 19.84 2.84

P005980 1997 AR PROV ROADS 300.00 0.00 0.00 0.00 0.00 46.53 46.53 46.53

P006010 1997 AR PROV AG DEVT I 125.00 0.00 0.00 0.00 0.00 53.20 53.20 8.31

P006052 1997 AR FLOOD PROTECTION 200.00 0.00 0.00 0.00 0.00 24.57 24.57 -15.59

P006059 1997 AR-Maternal & Child Hlth & Nutrition 2 100.00 0.00 0.00 0.00 0.00 11.36 11.36 0.00

P040808 1997 AR N.FOREST/PROTC 19.50 0.00 0.00 0.00 0.00 8.73 8.60 0.00

P039584 1997 AR B.A.URB.TSP 200.00 0.00 0.00 0.00 0.00 45.43 45.43 36.43

P037049 1996 AR PUB.INV.STRENGTHG 16.00 0.00 0.00 0.00 5.70 0.82 6.52 1.02

P006040 1996 AR FORESTRY/DV 16.00 0.00 0.00 0.00 0.00 3.08 3.08 3.08

P006060 1995 AR MUNIC DEVT II 210.00 0.00 0.00 0.00 4.08 10.04 14.12 10.04

P006018 1995 AR PROV DEVT II 225.00 0.00 0.00 0.00 0.00 1.91 1.91 1.91

85

Total: 5,461.59

0.00 0.00 29.59 10.58 1,941.97

1,121.81

327.84

ARGENTINASTATEMENT OF IFC’s

Held and Disbursed PortfolioIn Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2000 ASF 4.00 0.00 0.00 4.10 4.00 0.00 0.00 4.10

1998 AUTCL 3.64 0.00 0.00 0.00 3.64 0.00 0.00 0.00

2002/04 Aceitera General 50.00 0.00 20.00 30.00 50.00 0.00 20.00 30.00

1995/97/99 Acindar 9.60 0.00 0.00 0.00 9.60 0.00 0.00 0.00

1994/95 Aguas 18.82 0.00 0.00 44.63 18.82 0.00 0.00 44.63

1999 American Plast 0.00 0.00 1.83 0.00 0.00 0.00 1.83 0.00

2000 BACS 4.96 6.25 0.00 0.00 4.96 6.25 0.00 0.00

1999/04 Banco Galicia 7.50 0.00 0.00 0.00 3.75 0.00 0.00 0.00

2000 Bco Hipotecario 1.00 0.00 14.54 26.10 1.00 0.00 14.54 26.10

1997 Bunge-Ceval 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.00

1996 CAPSA 2.57 0.00 2.36 6.10 2.57 0.00 2.36 6.10

1995 CEPA 3.00 0.00 0.00 1.20 3.00 0.00 0.00 1.20

1994 EDENOR 3.75 0.00 15.00 0.00 3.75 0.00 15.00 0.00

1998 F.V. S.A. 3.75 0.00 4.00 0.00 3.75 0.00 4.00 0.00

2000 FAPLAC 8.98 0.00 5.00 0.00 8.98 0.00 5.00 0.00

1996 Grunbaum 2.50 0.00 0.00 3.33 2.50 0.00 0.00 3.33

Grupo Galicia 0.00 3.06 0.00 0.00 0.00 3.06 0.00 0.00

1998 Hospital Privado 8.48 0.00 0.00 0.00 8.48 0.00 0.00 0.00

1992 Huantraico 0.00 27.00 0.00 0.00 0.00 0.00 0.00 0.00

2004 Jumbo Argentina 0.00 40.00 0.00 0.00 0.00 7.50 0.00 0.00

1992 Malteria Pampa 0.00 0.00 2.00 0.00 0.00 0.00 2.00 0.00

1997 Milkaut 0.00 1.61 0.00 0.00 0.00 0.38 0.00 0.00

1993/94/03 Molinos 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1995 Nahuelsat 2.05 0.00 0.00 0.00 2.05 0.00 0.00 0.00

1996/99 Neuquen Basin 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00

1993 Nuevo Central 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00

PCR 6.11 0.00 0.00 0.00 6.11 0.00 0.00 0.00

1998 Patagonia 1.76 0.00 1.00 0.00 1.76 0.00 1.00 0.00

1998 Patagonia Fund 0.00 9.37 0.00 0.00 0.00 2.40 0.00 0.00

1999 S.A. San Miguel 5.60 0.00 0.00 0.00 5.60 0.00 0.00 0.00

1995 SanCor 9.10 0.00 20.79 0.00 9.10 0.00 20.79 0.00

1995 Socma 6.26 0.00 0.00 15.00 6.26 0.00 0.00 15.00

1998 Suquia 0.00 0.00 10.50 0.00 0.00 0.00 10.50 0.00

1997 T6I 4.44 0.00 5.00 7.50 4.44 0.00 5.00 7.50

1997 Terminal 6 4.44 0.00 0.00 3.25 4.44 0.00 0.00 3.25

1995 Terminales Port. 1.50 0.00 0.00 0.00 1.50 0.00 0.00 0.00

86

1995/00 Tower Fund 0.00 1.68 0.00 0.00 0.00 0.83 0.00 0.00

1995 Tower Fund Mgr 0.00 0.05 0.00 0.00 0.00 0.05 0.00 0.00

1996 Transconor 20.29 0.00 17.87 157.58 20.29 0.00 17.87 157.58

2001 USAL 9.27 0.00 0.00 0.00 7.27 0.00 0.00 0.00

1997/03 Vicentin 30.00 0.00 0.00 30.00 0.00 0.00 0.00 0.00

1993 Yacylec 0.00 2.52 0.00 0.00 0.00 2.52 0.00 0.00

Total portfilio: 263.37 99.54 124.89 328.79 197.62 25.99 124.89 298.79

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

1999 American Plast 0.00 0.00 0.00 0.00

2004 Banco Rio TFF 0.02 0.00 0.00 0.05

2004 FIDEX 0.03 0.00 0.00 0.00

2001 Gasnor 0.02 0.00 0.00 0.02

2005 Grupo Galicia 0.04 0.00 0.00 0.00

2001 ITBA 0.01 0.00 0.00 0.00

Total pending committment: 0.12 0.00 0.00 0.07

87

Annex 14: Energy Efficiency Fund

ARGENTINA – Energy Efficiency Project

This annex describes the rationale, instruments, organization and expected impacts of the Argentina Energy Efficiency Fund, which would provide partial credit guarantees and contingent grants for the financing and development of energy efficiency investments in the industrial and commercial sectors, to be proposed by project promoters such as enterprises, energy service companies, equipment providers, etc.

Introduction.

Commercial bank financing of energy efficiency projects (EE projects) is negligible in Argentina. The absence of a market for energy efficiency financing has several causes, including lack of awareness among enterprises of the potential returns of energy efficiency investments, and the slow recovery of bank credit after the recent financial crisis in Argentina.

During 2001 and 2002, Argentina suffered a severe financial crisis which led to a drastic fall of lending to the private sector (see Chart [ ]). The stock of private sector credit declined about 40 percent in real terms in 2002, and a further 12 percent in the first half of 2003. Although credit to the private sector started to recover in the first quarter of 2004, it still represents only 9 percent of GDP, a relatively low level compared to pre-crisis one (i.e. 23 percent) and to the levels exhibit by other countries of the region. The recovery has been led by consumer lending (personal and credit cards loans), which increased almost 140 percent in the last two years, but lending to the corporate sector has remained at approximately 48 percent of its 1997 level.

Chart XXX. Private Sector Loans

17.9 19.622.6 22.8 22.2 20.5

10.77.8 8.3 8.9

0

10

20

30

40

50

60

70

80

1996 1997 1998 1999 2000 2001 2002 2003 2004 Oct-05

in A

R$

billi

on

0

5

10

15

20

25

30

35

40

% o

f GD

P

as a % of GDP (right axis) in AR$ billion

Source: Staff calculation on BCRA data.

Bank deposits have recovered, and banks in Argentina are, at the moment, highly liquid. However, deposits are very short term: almost 70 percent of deposits in the banking system are for less than 60 days and foreign lines, which were prior to the crisis one of

88

the main sources of long-term funding, have considerably diminished since the crisis. This situation limits the ability of banks to finance investment projects, which are by nature long term. Also, banks perceive long term lending as highly risky, due to the damage made during the crisis to the contractual integrity of credit guarantees and the credibility and reliability of the processes of execution of guarantees and repossession of collateral. Access to banking credit is particularly difficult for SMEs, since most of them lack the types of guarantees demanded by the banks. As a consequence, most SMEs finance their investments through own resources and, to a lesser extent, trough suppliers’ credit.

In this context, bank financing for energy efficiency projects is almost non-existent, despite the potentially high returns that this type of projects could generate. Since most of the banks’ lending is for short-term consumer loans and credit cards, banks have little incentives to develop their project evaluation capabilities, let alone to develop the expertise needed to evaluate the potential returns of energy efficiency investments. Moreover, EE projects tend not to be attractive to banks because of the relatively high transaction costs associated with EE project development and financing, the small amounts of capital needed per project, and the low collateral value of EE project equipment. Enterprises, on the other hand, have little understanding of the potential returns of energy efficiency investments and, even when they have some technical understanding of the needed changes, they are unable to formulate investment plans that can be considered bankable by the banks.

Using GEF funds to develop the market for EE project financing

The proposed EE Project would allocate US$8.0 million of GEF funds to help develop the market for energy efficiency financing, addressing the problems of lack of finance for EE projects at two levels:

a. building up the project development side of the market through brief energy assessment studies free of cost to potential project sponsors; (Brief EE Grant Assessment Facility); and

b. reducing the risks of project financing by providing contingent grants for EE project assessments, and partial credit guarantees to bank financed EE projects (Argentina Energy Efficiency Fund).

The Brief EE Grant Assessment Facility (US$2000,000 of GEF funds).

The GEF would assign US$200,000 to finance a number of brief energy assessment studies of selected SMEs to develop awareness for EE projects among potential project sponsors through the identification of organizational and/or technical changes that could improve energy efficiency. This facility would follow the experience of the PIEEP project in Argentina, funded by the GTZ. The brief EE assessments would be carried out by selected ESCOs (Energy Services Enterprises) or consultants that would compete for GEF funds on the basis of cost and technical expertise. The grants would cover an agreed limited number of ESCOs’ staff hours dedicated to the assessments. The funds

89

would be provided to the ESCOs on a grant basis, and would, therefore, gradually be depleted. The GEF funds would be disbursed from a special account, on the basis of expected disbursements, following Bank rules and procedures. This facility is expected to operate in local currency.

The funds would be administered by the Secretariat of Energy (SE) in close collaboration with the Secretariat of Industry (SI). Both Secretariats would determine the sectors, geographical zones where the assessments would be conducted. Prior to appraisal, the project team will ascertain if the public procurement laws for public entities would make the contract for brief energy assessments with ESCOs overly complicated. If this is the case, an option would be to give the administration of this facility to the Trust Fund described below.

In the illustrative simulations, the facility is estimated to finance 100 brief EE assessments over 2 years, at an average cost of US$2,000. The brief EE assessments would follow an agreed format and provide preliminary estimates of potential energy efficiency gains that the SME could achieve with organizational and/or technical reforms. The assessments would be presented to the SMEs’ managers free of charge, together with information on sources of finance. The Secretariat of Energy would keep a copy of the brief EE assessments to create a data base on potential EE projects and for dissemination purposes. This is expected to boost the demand for EE project from SMEs and ESCOs, not only from those where the brief EE assessments are carried out but also from other SMEs and ESCOs that, through the dissemination of these assessments, learn about the potential benefits EE projects may generate and the possibility of financing them. In addition to this, the facility would help to develop the ESCOs’ business and technical expertise.

The Argentina Energy Efficiency Fund (AEEF) (US$7.8 million of GEF funds)

The Project would assign US$7.8 million of the GEF funds to help develop the market for energy efficiency financing. These funds would be placed in a Management Trust: The Argentina Energy Efficiency Fund (AEEF), a financial facility that would operate on commercial principles and use the GEF funds to help address two of the main weaknesses in the market for energy efficiency project financing: (i) the limited project development capacity, particularly among SMEs and banks; and (ii) the perception among banks that projects sponsored by SMEs are highly risky, including EE projects. Out of the US$7.8 million, US$0.5 million would be assigned to cover the AEEF costs.

The AEEF would act as a market facilitator for EE project financing, through two facilities:

Contingent Grant Facility (US$1.8 million). Through this facility, the AEEF would cost-share the cost of preparing feasibility studies for bankable EE projects. This facility would recover the funds given only if the project has found financing from a bank. This facility would be gradually depleted.

90

Guarantee Facility. (US$10 million, of which US$5.5 million are GEF funds). Through this facility, the AEEF would co-share with the banks the risks of lending to EE projects. It would provide partial credit guarantees (PCG) to cover up to an agreed percentage of the bank credit to EE projects.

Since banks are currently highly liquid, the AEEF would initially provide only partial credit guarantees to bank financing of EE projects, and would not co-finance these projects. However, during the mid-term review of the project, the Bank and the authorities would review the need to use part of the AEEF funds to co-finance EE project with participating banks. This decision would be based on an assessment of the liquidity of the financial sector. If the decision is made in favor of using AEEF funds for project co-financing, a detailed proposal for the implementation of this new program would be elaborated and approved by both parties.

The two facilities operated by the AEEF are expected to mobilize substantial resources for EE project financing. Based on PIEEP experience, the project team has estimated that at the end of 5 years the Contingent Grant Facility could generate more than 700 feasibility studies for EE projects of which, almost 300 would obtain bank financing (40 percent). The Guarantee Facility, it is estimated would provide PCGs to 560 EE projects, and help mobilize more than US$30 million from the financing banks and the project sponsors. Both facilities together would generate projects for almost US$40 million, an amount that would generate a demonstration effect needed to jumpstart the market for EE project financing. The AEEF could, in a second stage, receive additional funds from other donors, including the World Bank. For simulation purposes, it is assumed an additional contribution of US$4.5 million to the Guarantee Facility (see Table [ ] and [ ]).

Table XXX. AEEF Project cost

Total GEF Other Banks leverage SMEs GOA

Contingent Grant Facility 4.3 1.8 2.5

Partial Credit Guarantee Facility 33.6 5.5 4.5 20.2 3.4

Fund management, startup and administrative costs 1.0 0.5 0.4 0.10

Total 38.9 7.8 4.9 20.2 5.9 0.10

(in US$ million)

91

Table XXX. Main Assumptions and Results foran illustrative AEEF case

Assumptions

Feasibility studiesCost (in US$) 6,000% financed by AEEF 60%% becoming financed EE projects 40%

EE projectCost (in US$) 60,000Commercial bank loan(in US$) 54,000% guaranteed 30%Non-performing loans 8%

Results (at the end of 5 years)

Feasibility studies financed by the AEEF 720Feasibility studies becoming financed EE projects 288EE projects financed by the AEEF 560

Organizational Arrangements for the AEEF

The design of the AEEF has taken into account three basic principles:

Avoid possible conflict of interest among the different stakeholders Minimize the administration and transaction costs Ensure sustainability and replicability of the AEEF

Establishment of the AEEF. The AEEF would be established as a Management Trust Fund (Fideicomiso de Administración), which under the Argentine law enjoys the same safeguards with respect to the separation of the trust from the equity of the trustee as in countries with common law legislation3.

The AEEF would be established through the signing of a Trust Fund Agreement (Contrato de Fideicomiso) between the Energy Secretariat as Trustor (Fideicomitente) and a Trustee. The Trustee could be one of Argentina’s public banks, which customarily act as fiduciary agents for trust funds in which the government is the Trustor. The Trust Fund Agreement would specify the conditions and circumstances that would require the change of Trustee. The AEEF funds would be utilized for the purposes of this component of the Project directly by the Trustee or through an independent asset 3 Trust Funds (Fideicomisoso) are judicial instruments for transferring the property of some assets from a Trustor to a Trustee, to exercise the property of these assets according to the instructions of the Trustor, for the benefit of a designated Beneficiary. The assets in trust remain separate from the patrimony of the Trustee,the Trustor or the Beneficiary. and cannot be affected by the creditors of any of these parties. An ordinary Trust is a Management Trust, but if the rights of the beneficiaries are represented in financial securities, they are Financial Trust, and are administered by banks. Institutional investors are the main investors in the growing number of financial trust funds that are being created in Argentina to securitize streams of income to finance a wide variety of public and private investments (they account now for over 5 percent of private sector loans).

92

manager. The AEEF is expected to operate at least for the Project implementation period of five years, but it could continue to operate after the Project closes, utilizing remaining funds, or through its participation in a possible securitization of EE projects (described below).

Governance of the AEEF. The AEEF would have an autonomous structure, management and organizational capabilities, under the principles of healthy and prudential management. The control of the use of the AEEF funds would be exercised by a Fund Executive Director (FED), supported by an Executive Committee composed of two representatives from the public sector and one from the private sector. The FED and the members of the Executive Committee would be selected by the Energy Secretariat under the following conditions:

a. The selection of the FED and the officers of the Executive Committee for the administration of the AEEF should be satisfactory to the Bank;

b. The Bank should be consulted before any changes regarding the selection of the FED and/or the composition of the Executive Committee throughout the duration of the Bank’s supervision of the GEF-financed Project, with the understanding that the Bank should have a right to exercise remedies if such changes negatively impact Project execution in the reasonable opinion of the Bank.

c. The FED should exercise control over the use of the AEEF funds,

The Energy Secretariat would have an oversight role over the AEEF through periodic audits, but would not interfere in the day-to-day administration of the AEEF. The Bank would have the right to request audits of the AEEF throughout the duration of the Bank supervision of the GF-financed Project, in accordance with standard Bank practice. The AEEF would be subject to the Bank’s procurement and financial management guidelines throughout the duration of the Bank’s supervision of the GEF-financed Project.

GEF-financed trust funds are exempt from the requirement that Bank-administered funds be disbursed only to finance eligible expenditures as they are actually incurred, subject to the conditions specified in the previous two paragraphs (see GEF Exception Memo of March 15, 2002).

Role of the Fund Executive Director. The FED is expected to follow a Management Manual agreed with the Energy Secretariat. The FED would have to make appropriate choices about the use of the fund’s two facilities according to specific project circumstances, the evolution of the financial markets, and early implementation experience, and prepare periodic reports for the Energy Secretariat and the Bank on the operations of the AEEF. Most importantly, the FED would have a pro-active role in persuading banks to participate in this project through direct contacts, and the dissemination of information about the AEEF facilities and of case studies of EE projects financed by other banks using the AEEF facilities. The FED and the officers of the Executive Committee would be compensated out of the GEF funds allocated to this component. Since the AEEF requires excellent performance on the part of the FED,

93

compensation should be adequate to attract an experienced professional manager for this position.

Specifically, the FED would have the following functions:

Establish and maintain contacts with potential participating banks, and disseminate information on the use of the AEEF facilities,

Decide which feasibility studies would be financed under the CGF, Instruct the Asset Manager to make the disbursements related to the feasibility

studies financed under the CGF, Sign Guarantee Framework Agreements with financing banks, that comply with

Bank eligibility criteria (OP 8.30), Contract the external technical certification agents to certify if projects meet EE

criteria, Receive the technical report and the economic-financial report of the EE

project(s) submitted by financing banks, Approve the credits submitted by the financing banks (based on the above

information) and instruct the Asset Manager to issue the corresponding PCGs, Hire external teams to administer loans that had required the execution of the

PCGs, Evaluate the operations of the AEEF, prepare reports for the Secretariat of Energy

and the Bank, and propose adjustments.

Management of the AEEF Funds. The AEEF funds would be administered for the purposes of this component directly by the Trustee or by an independent Asset Manager (AM), operating under an Asset Management Agreement between the AEEF and said manager. The Asset Management Agreement would provide, inter alia, for the flow of funds to beneficiaries and other requirements to implement the Contingent Grant Facility and the Credit Guarantee Facility. The Asset Management Agreement would also specify the circumstances and conditions for the removal of the AM.

If the AM is a commercial bank, it would be selected using a competitive process based on both cost and quality criteria, under Bank guidelines. Quality criteria would include overall reputation, national coverage, quality of management team, and experience with similar trust fund management.

The main functions of the AM are the following:

Protect the resources of the AEEF, according to the instructions of the Asset Management Agreement signed with AEEF and the Operational Manual,

Issue, sign and register the guarantee contracts on the approved EE credits, and follow up on the issued guarantees,

Invest the AEEF liquid resources according to pre-determined risk criteria, Receive and keep the documentation presented by the financing banks, Pay the PCGs of the non-performing loans after the execution of the guarantees,

94

Pay for the feasibility studies supported under the CGF, and receive the recuperation of the studies that get bank financing,

Pay for the expenses of the FED and for the dissemination of the AEEF facilities, Carry out the accounting of the AEEF and pay for the external audits, Prepare periodic reports for the FED, the Secretariat of Energy and the Bank.

Compensation of the Asset Manager. The AM would be compensated for expenses, including cost for setting up and an incentive for successfully concluding transactions. The AM requires sufficient compensation so that the AEEF will be operated by motivated, experienced, and skilled staff. The basis for calculating the compensation of the AM would be established in the Asset Management Agreement. Operating costs are critical in determining the financial performance of the AEEF. The compensation of the AM would be determined based on the amount of funds under management, the amounts disbursed, the structure and tenor of the guarantees provided. The minimum cost of administering a fiduciary fund in Argentina is about US$1,500 monthly. Total setting up cost for the AEEF are estimated at about US$50,000. The setting up cost and the initial operation of the AM would be paid with GEF funds, but later on, compensation of the AM could be covered from interest payments and could be additional.

Financing Facilities of the AEEF

I. Contingent Grant Facility (CGF): (indicative amount US$1.8 million from GEF)

This facility would cost-share the cost of preparing feasibility studies for projects to be financed by participating commercial banks with support from the AEEF. The facility would cost-share (up to 60 percent) with project sponsors the risk of preparing feasibility studies for investments in EE projects. If the project succeeds to obtain bank financing, the grant would be repaid to the CGF plus agreed interests. If the feasibility study does not result in a project that obtains bank financing, the contingent grant would not be repaid. Based on this mode of operation, the facility would gradually be depleted. This facility is expected to operate in local currency.

Feasibility studies seeking funding under this facility would be submitted by financing banks or project sponsors. In all cases, the project should have been pre-approved or be under consideration by a financing bank, to avoid using the GEF funds for projects that have no financial merit. In all cases, the financing bank should have confirmed that the proposed project meet the preliminary technical criteria for EE projects, established in a “EE Scoring Manual” agreed with the SE. This confirmation is necessary to avoid using the GEF for projects that have no merit from the point of view of energy efficiency.

Contracts for the elaboration of feasibility studies financed under this facility would have to be assigned following Bank procurement rules.

On the basis of case illustrative simulations, the facility is estimated to finance more than 700 feasibility studies over 5 years, at an average cost of US$6,000, resulting in almost 300 projects (40 percent) obtaining bank financing (see Table [ ]). Key factors impacting

95

in the success of this facility include operating costs and percentage of grants resulting in successful financing of projects.

II. Guarantee Facility (GF): (indicative amount US$10 million, of which US$5.5 million from GEF)

During project preparation, the project team interviewed a number of commercial banks to assess their interest in financing EE projects. Most of them confirmed that they are reluctant to finance EE projects due to their unfamiliarity with such projects and perceived weak client/project credit profiles. This facility would promote bank lending to EE projects by sharing in the credit risk of EE finance transactions.

The AEEF would issue PCGs through the AM for credits issued to finance EE projects by participating banks (banks that have signed Guarantee Framework Agreements). A competitive priced guarantee fee would be charged based on the risk level determined by the FED (based on the Management Manual), with higher risk projects being charged higher fees. Minimum percentage of the total project cost would be borne by the project sponsors. The PCGs would be issued based on pre-defined criteria and appraisal methods included in the Management Manual. The individual guarantee commitments would not exceed the amount of US$100,000 (the guarantee liability limit). The Guarantee Reserve Account (GRA) would be held in a competitively selected commercial bank. The GRA would earn income through interest payments and guarantee fees, which would help offset administration costs and some defaults.

On the basis of case illustrative simulations, the facility is estimated to guarantee 560 EE projects over 5 years, at an average cost per project of US$60,000 and assuming a 30 percent guarantee of banks’ EE portfolio (see Table [ ]). The projections estimate that after 5 years the facility’s capital would be almost the same as at the beginning of the project. Key factors impacting in the success of this facility include operating costs and percentage of non performing loans.

Characteristics of the PCGs issued by the AEEF. The PCGs could be issued to guarantee a percentage of each commercial loan to EE certified projects (see below for certification criteria), in which case it would cover up to 50 percent of the outstanding loan principal; or it could be issued to guarantee a percentage of a package of credits (global partial guarantee) issued by participating banks, in which case it would cover up to 30 percent of the entire EE portfolio. A guarantee fee of 1 to 3 percent of the guaranteed gross funds could be charged.

Global partial guarantees would function as a first-loss for the total amount of credit given by each bank for EE projects. The mechanism has two advantages: (i) reduces the moral hazard because the banks assume part of the loss for non-performing loans; and (ii) by providing first-loss protection over the whole portfolio of EE credits, the bank has an incentive to generate a higher volume of EE credits to diversify and reduce their probability of credit losses. At a later stage in project implementation, the Bank and the

96

authorities could evaluate if the percentage of first-loss could be assigned according to the volume and performance of EE credits generated by the financing banks.

Characteristics of the EE loans eligible for PCGs. Loans presented by financing banks would qualify for PCGs if they meet the following characteristics:

Only banks with eligible EE loans would apply for PCGs to the AEEF, Eligible loans would finance projects that meet, inter alia the following criteria:

o are financially viable, with expected rates of return that will enable them to repay the bank loans,

o qualify technically as EE projects. Simple projects that meet basic eligibility criteria defined in a “EE Scoring Manual” would not require further certification. More complex projects would have to be certified as EE by an external technical certification agent designated by the AEEF. This agent could be the EE Center of the National Institute of Technology (INTI), the National Technical University (UTN), or the Technological Institute of Buenos Aires (ITBA).

o meet the environmental requirements of appropriate national and local authorities and is consistent with applicable environmental policies of the Bank.

The guaranteed loans would have a clause for the transfer of the guarantees to the AEEF in case of default of the project executor and execution of the PCG. In such cases, the AEEF would designate an external administrator to recover the loans.

The EE loans would be denominated in pesos, for a maximum of 5 years, at market interest rates.

Each financing bank would be responsible for the administration of their loans. The loans would be subscribed with homogenous documents, approved by the AEEF,

to facilitate review by the FM and the possibility of future securitization of the banks portfolios of EE loans.

Potential borrowers of EE loans. Potential sponsors of EE projects could be the following agents:

(i) Industrial and service SMEs with projects that involve the purchase of equipment or execution of works that would result in a more efficient use of energy;

(ii) ESCOS that participate in the financing of EE equipment by their clients; and(iii) Producers of EE equipment that provide financing to their clients.

In Argentina, ESCOs tend to be small enterprises or groups of engineers with few assets to provide as collateral for bank credit. Equipment producers are more likely to have assets that could serve as collateral, but they would get only to short-term credit. It is likely that most project sponsors would be SMEs interested in modernizing their production facilities. Prior to project appraisal, the project team will develop more

97

accurate deal-flow estimates of EE projects, both from the perspective of project sponsors and that of the financing banks.

Financing Banks. Commercial banks would learn about the facilities provided by the AEEF for financing of EE projects through several sources: the dissemination efforts of the Energy Secretariat, the pro-active marketing of its products by the FED, interested ESCOs, and their industrial clients. Prior to appraisal, the project team will discuss with the main commercial banks the proposed Guarantee Facility and try to ascertain their potential demand for PCGs.

Commercial banks interested in applying for PCGs under the AEEF would have to meet Bank eligibility criteria (OP 8.30 – Financial Intermediary Lending) which include minimum solvency and liquidity levels, portfolio quality, corporate governance and project evaluation capacity. The AEEF would request the interested banks to submit an application providing the relevant information and submit it to the Bank for its no-objection. Participating banks would sign a Guarantee Framework Agreement with the AEEF that would specify the conditions of the PCG, the actions that would be taken against the debtor in case of execution of the guarantees, and the arbitration arrangements in case of disagreement between the participating bank and the AEEF concerning the execution a the guarantees.

Since banks do not have the expertise to decide which projects would qualify as EE projects, the SE would develop an “EE Scoring Manual” to help the banks identify if a project would qualify as EE project, before submitting it to the AEEF. The EE Scoring Manual would have a check list of eligibility criteria that would be filled up by both the project sponsor and the bank. Simple EE projects that meet the manual’s eligibility criteria may not need to be certified by the external technical certification agent. More complex projects would have to be certified by an external technical certification agent.

Participating banks would also have to assess (through their own staff or outside experts) if their EE projects meet the environmental requirements of appropriate national and local authorities and are consistent with applicable environmental policies of the Bank.

Sustainability of the AEEF

Sustainability of the proposed AEEF would be achieved through several mechanisms: (i) significant impact on the universe of energy consuming SMEs; (ii) demonstration effects among potential project sponsors and banks, and (iii) potential mobilization of capital market resources.

Impact and demonstration effects of the AEEF. The EE projects financed with AEEF support would involve a relatively large number of SMEs. In Argentina, there are about 180,000 enterprises that are clients of the energy generating utilities, of which about 60,000 are SMEs. If, in five years, the AEEF provides guarantee credits to almost 600 EE projects, most of which are sponsored by SMEs, it would have reached nearly one percent of the universe of energy using SMEs. This would have a significant impact in

98

absolute terms, as well as in terms of demonstration effects not only on the rest of the enterprises but also on other commercial banks that would eventually decide to finance EE projects without the incentive of a partial guarantee.

The EE projects financed with AEEF support would have a strong demonstration effect on potential project sponsors and financing banks. Project sponsors would see that organizational and technical changes can generate important energy savings, and that these savings could translate into lower costs and higher returns on their investments. Financing banks would realize that EE projects can be less risky than other projects. In addition, through the activities of the AEEF, banks, project sponsors (including ESCOs) and consulting firms would develop project evaluation skills that can be applied to future EE projects.

Dissemination of the achievements of the AEEF. To enhance the demonstration effects of the AEEF, during the second or third year of operation of the AEEF, the FED would collaborate with the SE in implementing a dissemination campaign to publicize the achievements of the AEEF among potential EE project sponsors and banks. This campaign would have as an objective to ensure that the market for EE project financing would continue to expand even after the AEEF has ceased to operate. The dissemination campaign would also aim at recruiting additional sponsors for the AEEF, to extend its reach and years of operation.

Potential Securitization of EE loans to mobilize capital market resources. Banks that have portfolios of loans supported by PCGs could decide to securitize these, fairly homogeneous and well performing loans, to mobilize more resources for financing of EE projects. Once the number of EE loans reaches a critical mass, the AEEF and the SE would assess the feasibility of working with the participating financing banks in the establishment of a Financial Trust for the securitization of the banks’ portfolios of EE loans. The Financial Trust would issue two types of debt: (i) senior debt (the most secure debt) that can be purchased by pension funds (AFJPs), and (ii) junior debt (less secured debt) that can be purchased by the AEEF. In this way, the banks would be able to mobilize capital market resources to continue expanding their EE project lending. The AFJPs would find the securities issued by the financial trust very attractive because they can be rated and would be backed by good performing assets.

Lessons Learned from other Energy Efficiency Financing Programs

The design of the AEEF was adopted after contemplating different options and incorporates lessons learned from other energy efficiency financing programs. There are few projects involving EE financing and only a handful of them are in operation. The design of the AEEF, incorporates the experience of EE financing mechanisms in China, India, Thailand, Romania, Croatia, and Bulgaria, and the proposed designs for Philippines, Poland, Uruguay, Tunisia, Serbia and Montenegro, Macedonia, Russia and Hungary (both supported by the IFC). Some of the lessons learned are the following:

99

Partial Credit Guarantees are the most appropriate financial instruments in well developed banking sectors, where banks are liquid and willing to accept some risks, and when there is sufficient baseline market activity to justify and support the program. As indicated before, the Argentine financial sector meets these characteristic and, for that reason, the main activity of the proposed AEEF would be to provide PCGs.

Even when the financial market conditions are appropriate for using PCGs to stimulate the financing of EE projects, in some cases, there may be a need to build the project development side of the market through ESCOs and other business models. This proposed operation includes two subcomponents to build the project development side of the market. One is the brief energy assessment studies free of cost to potential project sponsors, to be carried out by ESCOs, and the other is the contingent grants for EE project assessments.

In the absence of good deal-flow estimates, it is always prudent to undersize the EE fund, in the near term. Successful funds can always find ways to increase their leverage ratios or be expanded with other donor/government funds. This proposed project is very conservative in the amount allocated to the AEEF, and contemplates the possibility of expanding it with other donor contributions.

There is a need for flexibility in project design to allow for different business models and financing. The design of proposed financing mechanism takes into account the need for flexibility, establishing that during project implementation, the authorities and the Bank will ascertain the convenience of using the AEEF to co-finance EE projects with participating banks.

EE Funds should have minimum government interference in financial decisions. The governance structure proposed for the AEEF would minimize government interference in the day-to-day operations of the fund. The government through the Secretariat of Energy would have an oversight function through periodic audits.

Fund Managers should be pro-active in marketing the EE funds among financial institutions and beneficiaries. The FED would have a pro-active role in persuading banks to participate in this project through direct contacts, and the dissemination of information about the AEEF facilities and of case studies of EE projects financed by other banks using the AEEF facilities.

100

Argentina Energy Efficiency Fund (AEEF) Structure

EE ProjectIndustrial and Service SMEs

ESCOs

Producers of EE equipment

Technical Certification

Agent

Commercial bank

GEF

OtherAEEF

Contingent Grant Facility

Guarantee Facility

FED

Asset Manager

Audits

Secretariat of Energy

Environment category

certification

101

Annex 15: Incremental Cost Analysis

ARGENTINA: Energy Efficiency Project

Overall Context for Energy Efficiency in Argentina

There is an opportunity and urgent need to address the barriers to energy efficiency in Argentina at this time. The major reforms introduced in the 1990s on the production, transmission, and distribution of electricity and natural gas were not accompanied by similar actions to improve efficiency on the demand side. This situation has resulted in higher energy use for the Argentine economy, and consequently higher energy costs and lower competitiveness for productive sectors, greater energy consumption for consumers with increasingly higher costs as retail prices are raised, and greater local and global pollution associated with the consumption of fossil fuels.

While the country was poised to address the demand side energy efficiency issues by the late 1990s, as evidenced by the passage of energy efficiency legislation by the upper house, this momentum was stalled by the economic crisis in 2001-2002. The crisis created a loss of confidence in the financial sector and a contraction of bank credit for investments in new equipment, especially among small and medium enterprises. The contraction in government revenues at all levels also resulted in the delay of investments in such areas as public lighting and public buildings. The devaluation of the peso increased the cost of imported parts and equipment, and also put pressure on the government to control electricity tariffs, especially among residential consumers.

The rationale for the current project is to make a concerted effort to address energy efficiency on the demand side in Argentina. The PIEEP project has demonstrated a large potential for energy efficiency and productivity improvements in small and medium enterprises, but the inadequate development of an ESCO industry, and a financial sector averse to investment lending, have left many potential energy efficiency projects idle. The economy has recovered sufficiently in the last two years so that there is now considerable liquidity in financial markets, but most lending is currently going for consumer lending and other short-term (60-90 days) financing. Given rising energy imports, concerns about the security of energy supply, and growing environmental awareness, the Government is strongly committed to undertaking a major program on energy efficiency at this time. The current project will address regulatory, financial, and information barriers to improvements in energy efficiency, and GEF support for the program will provide the added push that the Government needs to promote needed reforms through the political system.

Baseline Scenario

There are a number of disparate activities going on in Argentina in the area of energy efficiency and this is likely to continue under the baseline situation. The Secretariat of Energy has a small program for the promotion of energy efficiency and the use of

102

renewable energy, the Energy Saving and Efficiency Program (PAEE), which is limited in scope and scale (total budget is less than US$200,000/year). In addition, since 2004 a program for rational use of energy (PURE) has been implemented. As Argentina’s economy recovers, there will be increasing incentives for new investment in plant and equipment, as well as the energy-consuming capital stock among residential consumers. Without a comprehensive program for standards and labeling, as well as implementation of minimum efficiency standards, it is likely that the efficiency of major energy consuming equipment – lamps, refrigerators, motors, pumps, air conditioners – will improve only gradually. Currently labeling for refrigerators has been designed but is not being implemented. The utilities that are involved in the project are undertaking some investments and studies in energy efficiency, especially in lamps for residential consumers and public lighting. The ESCO market in Argentina is currently minuscule and this is not expected to change in the near term without: (i) impetus from the regulatory framework, (ii) adequate incentives and knowledge among the financial sector, and (iii) training and capacity building among market participants. The PIEEP program has been very valuable for identifying some high-value investments within small and medium enterprises but has not been able to overcome the lack of financing for investment projects and for entities like ESCOs to begin working on a large scale to promote energy efficiency investments. As for the financial sector, investment financing will only gradually become available to enterprises, rates of interest will be very high for those investments that do get funded, and energy efficiency will not be pursued by the financial sector due to perceived risks and inadequate knowledge of the opportunities. Utilities that have adequate regulatory incentives will continue to promote efficiency investments among their larger clients, but only for those clients that can self-finance the investments. For all other categories of consumers, while there currently exists sufficient financial incentives to justify energy efficiency investments, the lack of financing and inadequate regulatory incentives for some utilities will limit EE investments.

An estimate of the baseline scenario costs is given in the following table:

103

1 Argentine Fund for Energy Efficiency (AFEE) - 38,900,000 38,900,000 7,800,000

1.a Contingent Grant Facility - 4,300,000 4,300,000 1,800,000

1.b Guarantee Facility - 33,600,000 33,600,000 5,500,000

1.c Fund Management - 1,000,000 1,000,000 500,000

2 Utility Program 6,024,948 59,347,810 53,322,862 3,677,961

2.a Efficient lamps and equipment (*) 2,985,757 52,016,037 49,030,280 1,544,601

2.b Pilot projects - 2,439,360 2,439,360 779,560

2.b.i Public lighting - 261,000 261,000 150,000 2.b.ii EE for low income neibourhoods - 2,178,360 2,178,360 629,560

2.c Training, information and dissemination activities 3,039,191 4,892,413 1,853,222 1,353,800

3 Capacity Building and Project Management 1,582,300 7,126,856 5,544,556 3,676,300

3.a Incentive Framework 140,000 584,000 444,000 270,000

3.b Standards and Labeling 439,900 2,029,900 1,590,000 1,171,800

3.b.i Expansion and strenghtening of the energy efficiency labeling process - 1,380,000 1,380,000 1,080,000

3.b.ii Minimum Efficiency Performance Standards System Development - 210,000 210,000 91,800

3.c Support for ESCO development - 369,333 369,333 300,000

3.d Dissemination activities 1,002,400 2,462,178 1,459,778 1,087,000

3.e Project Coordination, Monitoring and Evaluation - 1,681,444 1,681,444 847,500

TOTAL 7,607,248 105,374,666 97,767,418 15,154,261

(*) Includes : 940.000 lamps for commercial and residential users, 260.000 lamps for street ligthing and public buildings and 33.000 equipments.

# GEF IncrementalComponents Baseline Alternative

104

GEF Alternative

Under the GEF Alternative, Argentina will implement a systematic and wide-ranging program for energy efficiency, addressing regulatory, institutional, and financial reforms and mechanisms needed to create a sustainable market for energy efficiency products and services. It will build on existing, and somewhat dispersed, efforts in the country for addressing energy efficiency, including the programs mentioned above. The project has been created to address the major end-use energy consuming sectors in Argentina, including industrial and commercial energy consumption (including electricity, gas, and other sources), as well as residential and commercial electricity consumption. Investments in energy efficiency measures under the project will be financed by commercial banks, electric distribution utilities, and consumers, with GEF support limited to technical assistance and various risk reduction instruments (see Component 2 below).

The proposed GEF project has three major components that, in combination, will overcome the main barriers outlined above to developing a market for energy efficiency in Argentina.

Component 1. Establishment of the Argentina Energy Efficiency Fund (AEEF). (Total estimated cost US$38.9 million. Proposed GEF support of US$7.8 million)

This component aims to create and operate the Argentine Argentina Energy Efficiency Fund (AEEF), to facilitate energy efficiency investments, primarily in the industrial and commercial sectors. The two key activities of this component are: (i) a Contingent Grant Facility to help identify and prepare energy efficiency projects, and (ii) a Partial Risk Guarantee Facility to help reduce the risk of financing energy efficiency investments.

Component 2. Development of a Utility Program. (US$53.3 million, of which US$3.7 million from GEF)

This component will support energy efficiency investments within several leading electric distribution companies in order to achieve energy savings in the residential and commercial sectors, which are major consumers of electricity in Argentina. Three electric power distribution companies (EDENOR and EDESUR from Buenos Aires, and EPEC from Córdoba) plan to participate in the Project.

Component 3. Capacity Building and Project Management. (Total estimated cost US$5.54 million. Proposed GEF support of US$3.68 million)

This component will build capacity within the private and public sectors and strengthen the incentives for investment in energy efficiency (i) Preparation of energy sector, tax and financial policies and regulations for the promotion of EE activities. (ii) Standardization, testing, certification and labeling program. (iii) ESCO capacity building. (iv) Education, training and dissemination programs.

105

Domestic and Global Benefits Expected

106

Table 2 Incremental Benefits and CostsBenefits/Costs Baseline GEF Alternative Incremental Domestic

and Global Benefits and Costs GEF Alternative 1/

Domestic BenefitsArgentina will continue to reap the domestic economic, financial, and environmental benefits of supply side efficiency improvements.

Additional energy efficiency improvements will be made on the demand side, which represent the largest share of energy consumption.

Significant additional domestic benefits will be gained including lower net energy imports, energy security, and local air quality associated with lower fossil fuel emissions.

Global Benefits. Energy efficiency investments continue to be ad hoc by individual companies with adequate credit and awareness of energy efficiency potential.

New laboratories for testing the energy efficiency of some equipment and appliances are established, but only for electricity, not for natural gas.

New regional energy efficiency standards for the Southern Cone are established through the UNDP/GEF project.

Most commercial banks remain passive to proposals for energy efficiency and continue to focus on consumer loans and avoid investment project lending.

Small and medium enterprises continue to benefit from TA under the PIEEP program but lack a regular market for project financing.

Utilities undertake only the most profitable energy efficiency investments, primarily among commercial and industrial customers who can self-finance, but investments in residential programs remain limited.

Under the auspices of the project, the government adopts new national regulations for energy efficiency (such as utility bill payback programs).

Energy tariff deregulation is given an added boost through the project with the objective of energy efficiency.

New minimum energy efficiency standards established for a broad range of appliances and industrial equipment.

New domestic standards and certification of equipment and appliances are integrated with the regional standards work undertaken through the UNDP/GEF project.

Residential and commercial consumers more aware of the operating cost savings of more efficient appliances through the labeling program and increase purchases of such equipment on their own and through utility financing programs.

Industrial consumers, especially small and medium enterprises, increase their investments in energy efficiency through increased ESCO activity (through TA for

Energy efficiency investments by utilities spurred by new national EE regulations.

Energy savings spurred by standards and labeling for the adoption and replication of energy efficient equipment and appliances.

Local private sector and financial sector expertise built for identifying and designing energy efficiency projects.

Residential and commercial electricity savings allow the delay in building new generation capacity and improve energy security.

Number of lamps and refrigerators installed….

GWH of electricity savings are estimated to be 8990 by 2012.

Gas and other non-electrical energy savings are estimated to be 804 kTOE.

Direct reduction in CO2 emissions of 5.9 million tons from energy efficiency by 2012, 28.1 million by 2017, and 71.9 million by 2022.

107

contracts, for example, and through contingent grants for project identification and preparation), and the availability of loans from commercial banks.

Commercial banks become more active in energy efficiency investments and as the number of loans increase, there are opportunities for securitizing the loans for sale to pension funds and others.

Cost by Component (million US$)

1. Argentina Energy Efficiency Fund

2. Utility Program

3. Capacity Building and Project Management

Total

0

6,025,000

1,582,000

7,607,000

38,900,000

59,348,000

7,127,000

105,374,000

38,900,000Of which GEF: 7,800,000

53,323,,000Of which GEF: 3,680,000

5,545,,000Of which GEF: 3,680,000

97,770,000

Incremental Cost GEF

Total Direct Carbon Avoided (CO2)

Total Cost/Direct Carbon-CO2 Avoided

US$15.2 million

5.9 million tons

US$2.53/ton CO2

1/ Details on calculation of energy savings and CO2 emission reductions are presented in Annex 9.

108

Annex 16: STAP ReviewARGENTINA: Energy Efficiency Project

Comments to the World Bank/GEF on the Argentina Energy Efficiency ProjectHoward GellerDec. 1, 2005

STAP ReviewerHoward GellerExecutive DirectorSouthwest Energy Efficiency Project (SWEEP)December 1, 2005

Thank you for the opportunity to review this interesting and important project. In general I think the project employs appropriate approaches to remove the barriers to greater energy efficiency in Argentina, and I recommend it go forward. But I have a number of comments and suggestions for modifying or supplementing the proposed activities. I believe these changes and additions would increase the chances for project success.

1. Component (3), strengthening the regulatory and policy framework for energy efficiency (EE) in Argentina, seems to be very important. I strongly recommend that part (a) include consideration of and if possible advocacy for reforming utility sector tariffs and regulations so that utilities are not penalized financially for implementing effective energy efficiency programs. This issue has been at the forefront of efforts to encourage well-funded and effective utility energy efficiency and demand-side management (DSM) programs and the U.S. and elsewhere. In short, it is difficult to get investor-owned, private utilities to implement effective DSM programs if they lose revenues and profits for doing so. There are various options such as decoupling of electricity sales and revenues that can be adopted to address this problem, and I suggest they be explored and pursued in Argentina for both gas and electric utilities, as part of this project. Doing so would increase the likelihood that a major component of the project (component 2) is successful, and that it leads utilities to vigorously support DSM and customer-based energy efficiency over the long run.

1. Project team response. We agree that providing utilities with adequate incentives is essential to promoting utility energy efficiency and demand-side management programs. Although tariff levels for commercial and industrial customers have already risen to levels to make many energy efficiency investments profitable, there remain institutional and regulatory disincentives for utilities to promote such programs. In the residential sector, where electricity tariffs have been controlled below those of industrial and commercial customers, and where there are also structural disincentives in the tariff system, there are already some energy efficiency investments that make financial sense for both the users and the utilities but are hindered by information barriers on the users’ side and by regulatory obstacles on the utilities’ side. As a condition of GEF Grant negotiation, the Bank would seek a permanent regulatory mechanism to allow utilities to finance qualifying energy efficiency investments through customer billing – a

109

temporary exemption of this nature was allowed for EDESUR under the IFC/GEF efficient lighting initiative (ELI). Another option to be reviewed would be that the concession contracts of the distribution utilities are modified to establish the sale of energy efficient equipment as an authorized business for these utilities - in addition to electricity sales. This is already the case for EPEC, which is under provincial regulation, unlike EDESUR and EPEC that are under federal regulation by ENRE. Under Component (3), there will also be studies of the electricity and natural gas tariff system, with the goal of identifying the disincentives to energy efficiency and seeking to rectify the situation though utility regulatory reform.

2. I am pleased to see the sub-component on appliance testing, labeling, and standards. There is large potential for cost-effective energy savings from such activities. As part of this effort, it might be useful to develop a list of priority products for which testing, labeling, and standards will be implemented, as well as a timetable for doing so. Also, I suggest developing a labeling program to recognize the most energy-efficient products in the different categories where energy efficiency testing is carried out, along with a promotion and education effort to inform consumers about the labels. This type of labeling effort has been implemented with considerable success in Brazil (the so-called selo PROCEL program) as well as in the U.S. (ENERGY STAR appliances and products).

2. Project team response. A list of priority products for labeling and standards, and associated promotion and dissemination among consumers is a good idea. At the moment the project scope includes such promotion & dissemination efforts under Component (3), and, on the basis of expected savings impacts and acceptability by stakeholders, the proposed S&L program includes the standardization and labeling of the following equipment: compact fluorescent lamps, incandescent lamps, refrigerators, freezers, residential air conditioners, electric industrial motors, electric water heaters, and natural gas heaters, water heaters and stoves. These concepts will be further developed under the PDF-B financed preparatory work and incorporated into the project prior to appraisal.

3. The notion of supporting ESCOs and providing financing and/or financial guarantees for ESCO projects is worth pursuing. But I believe the experience with building up the ESCO industry in developing countries has been somewhat mixed. ESCO development has proceeded slowly and with limited success in Brazil, for example. In order to increase the likelihood that ESCO development and the AEEF will be a success in Argentina, I suggest devoting some funds to developing the demand for ESCO services in a few key sectors such as in large office buildings and in the public sector. These sectors are typical markets for ESCO services in other countries. Some funds could be used to promote use of ESCOs in these sectors, publicize the results of demonstration projects, and if necessary reform government procurement rules to enable performance contracting and use of ESCOs by the federal, state, and local governments. The public sector often lacks the capital to make energy efficiency investments on its own, and thus is an excellent market for ESCOs if third party financing is available.

3. Project team response. We are familiar with the record of ESCO development in Brazil and other developing countries and agree that their development takes time and effort. We agree that it is best to focus on a few sectors where the energy savings are proven (low risk) and where

110

there are adequate mechanisms for financing and repayment. In addition to the commercial and public buildings sectors, that have been a focus of ESCO activity in the US and other industrial countries, the project will also focus on small and medium enterprises. Building on the work of the PIEEP project, that has identified a number of low-risk and high-return energy efficiency investments, we believe that ESCOs can play an important role among small and medium enterprises by bundling small projects, bringing finance, and reducing the overall technical and commercial risks that are currently hindering the adoption of EE investments. At the moment, the project includes capacity strengthening of ESCOs and development of contractual mechanisms under Component (3) [During appraisal, we will review the justification for financing some demonstration projects in the public sector wih ESCOs involvement.]

4. Components (2) and (3) of the project appear to be reasonable, given the limited detail provided. The success of component (2) will depend on a number of factors including the willingness of the utilities to implement effective DSM programs, the capability of utility staff and contractors running the programs, the design of the programs, and the level of cooperation and support from the private sector. I don’t have reason to believe there will be problems in these areas, I simply note their importance (as does the PAD at the bottom of p. 9 and in Annex 2). I also note that very little detail is provided about the design and scope of the utility DSM programs. If the utilities lack expertise in DSM programs, it may be useful to involve an international expert in utility DSM programs to assist the utilities with program design and implementation, using GEF or other bilateral aid monies to fund such support.

4. Project team response. The team and Secretary of Energy are currently in the process of developing the utility program with several Argentine utilities and regrets that more detail was not available in the previous version on the project document. In addition to addressing the regulatory incentives for utility energy efficiency programs, as noted in comment 1 above, GEF support for Component (2) will be primarily concerned with technical assistance to ensure the effective design and scope of the utility programs and in this regard, the need for assistance from both international and domestic expertise will be assessed and provided where necessary. We believe that the current version of the document provides additional information on the design of Component (2)

5. Regarding the topic of replication, utilities are more likely to want to continue DSM programs if they benefit financially from doing so, thus my comment about this in item 1 above. Also, utilities could potentially benefit from avoided investment in generation and transmission facilities, not just the distribution grid.

5. Project team response. We agree that the financial, as well as regulatory, incentives for utilities are critical for their interest in DSM and other energy efficiency programs, and that current regulation and tariff policies affect this interest. The situation is made more complex, and the incentives are different for different utilities, due to different electricity regulatory frameworks for Edenor/Edesur on one hand and EPEC on the other hand, and this will also be addressed both during further project preparation and during implementation. Edesur and Edenor is not involved in generation or transmission, the costs of which they pass through to ciustomers, while EE investments allow them to reduce demand and thus distribution

111

investments, in addition to helping customers’ affordability and contributing to the companies’ image. EPEC on the hand is an integrated utility, that is authorized to recover EE investments through billing and has the additional incentive of reducing investments in subtransmission and generation through EE investments. See also responses 1 and 4 above.

6. Regarding the analysis of risks, I think another set of risks is that the GOA might not follow through in adopting key policy and regulatory reforms such as appliance efficiency standards or reforms of utility tariffs so that utilities are not financially penalized if they operate effective DSM programs. I’m not sure about the magnitude of these risks, but I think they should be included. Also, the overall risk rating for the project as a whole is medium in my judgment.

6. Project team response. We agree that there are risks of the government not adopting key policy and regulatory reforms and this is included in the critical risks section 5 of the PAD under “political risks.” We have rated the overall risk of the project as substantial (S) because of the cumulative effect of several moderate and some substantial ratings. See also comment 1 above regarding condition for Grant negotiations.

7. Regarding the Results Framework and Outcome Indicators (Annex 3), I suggest considering adding satisfaction of private sector partners such as ESCOs and vendors of energy-efficient lighting products (and other products), which can be ascertained through conducting surveys at various stages of the project. These entities could be asked if there sales and revenues are growing, if the project is having a positive impact on their sales and revenues, and if they have suggestions for improving the project, for example.

7. Project team response. We agree and will include surveys of ESCOs and vendors of energy efficient products, as well as other project beneficiaries (such as SMEs, utilities, etc), in the monitoring and evaluation plan for the project. Measurement of beneficiary satisfaction with the project through periodic surveys would be useful as one of the project performance indicator. Cost-effectiveness of the surveys in terms of scope, targets, sample and periodicity will be assessed during project appraisal It is expected to have such surveys at the end of the project and probably also at the time of the project’s mid-term review.

112

Annex 17. Country at a Glance

ARGENTINA: Energy Efficiency Project

113

114

Annex 18: Maps

ARGENTINA: Energy Efficiency Project

115