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Project Executive Summary Template: Version 2 December 2003

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AGENCY’S PROJECT ID: P089656 GEFSEC PROJECT ID: P089656 COUNTRY: FYR Macedonia PROJECT TITLE: Sustainable Energy Program GEF AGENCY: World Bank OTHER EXECUTING AGENCY(IES): Ministry of Economy of Macedonia DURATION: 5 years GEF FOCAL AREA: Climate Change GEF OPERATIONAL PROGRAM: OP5 and OP6 GEF STRATEGIC PRIORITY: CC-2 Pipeline Entry Date: May 24, 2004 ESTIMATED STARTING DATE: March 15, 2006

CONTRIBUTION TO KEY INDICATORS OF THE BUSINESS PLAN: CO2 emission reduction of approximately 100,000 tons per year

PROJECT EXECUTIVE SUMMARY GEF COUNCIL SUBMISSION

FINANCING PLAN (US$) GEF PROJECT/COMPONENT

Project 5,500,000PDF A PDF B 350,000PDF C

Sub-Total GEF 5,850,000

CO-FINANCING*IBRD/IDA/IFC Government 2,800,000Bilateral 500,000NGOs Others 25,500,000Sub-Total Co-financing: 28,800,000Total Project Financing: 34,650,000FINANCING FOR ASSOCIATED ACTIVITIES IF ANY:

LEVERAGED RESOURCES IF ANY:

*Details provided under the Financial Modality and Cost Effectiveness section

RECORD OF ENDORSEMENT ON BEHALF OF THE GOVERNMENT(S): Ljubomir Janev, Minister of Environment and Physical Planning

Date: 04/02/2004

Approved on behalf of the World Bank. This proposal has been prepared in accordance with GEF policies and procedures and meets the standards of the GEF Project Review Criteria for work program inclusion

Steve Gorman GEF Executive Coordinator, The World Bank

Emilia Battaglini Regional Coordinator

Date: June 17, 2005 Tel. and email: 202 -473-3232 [email protected]

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PROJECT SUMMARY

a) Project rationale, objectives, outputs/outcomes, and activities.

The rationale for the Bank support to the development of RE/EE is the “public good” aspects of longer-term energy security. In addition, the Bank has considerable experience with RE/EE projects in the neigboring countries and can add much value to both the project prepartion and implementation. The Bank's involvement is essential to add credibility to the government’s efforts to implement the required policies. In addition, the there can be a very positive impact from energy savings on public budgets ranging from municipalities to the Ministry of Health.

The project’s global environment objective is to reduce greenhouse gas emissions on a continuous basis by overcoming barriers to implementation of energy efficiency and renewable energy. Performance indicators for the global objective include:

• Reductions in carbon dioxide emissions at the national and project levels; • Availability and price of RE/EE products in Macedonia • Increased share of "new" RE in national energy supply.

The latest World Bank Country Assistance Strategy (dated August 14, 2003; Report No: 26513-MK) mentions that “opportunity exists to improve the efficiency of energy usage in FYR Macedonia, which has high energy consumption relative to GDP, and to develop the country’s significant renewable energy resources”. The main interventions in the energy sector foreseen in the CAS relate to Macedonia’s inclusion in the Energy Community of South Eastern Europe (ECSEE) and support to improve the performance of the national power utility, ESM. This project will complement these activities by assisting the GoM and ESM in addressing demand side issues that will help address the growing imbalance between energy supply and demand.

The development objective of the project is to develop a sustainable market for EE and RE by supporting the development of an enabling framework, institutional capacity, and necessary financing mechanisms. Specifically, the project would:

• Change the current unfavorable investment and incentive conditions and create an enabling environment in Macedonia that fosters the development of sustainable energy utilization (in this context defined as efficient use of energy and use of renewable energy sources) through providing financial, methodological, informational, and institutional support;

• Support a large increase in energy efficiency (EE) investment in Macedonia through development of a self-sustaining, market-based financing mechanism based on a principle of commercial co-financing. The project’s goal is focused on the development and implementation of financially profitable EE projects, which can provide sustainable and increasing reductions in GHG emissions without relying on public subsidy; and

• Increase the availability of financing for renewable energy (RE) investments, enterprises and intermediaries through the establishment of a financial facility with


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a long-term time horizon, which will provide seed capital for debt co-financing of RE projects.

Project components Implementation of the project will include three components: Component 1 - Market Framework (US$1.8 million of which US$1.0 million is a GEF grant). This component covers the following areas:

1.1 Capacity Building Strategic/Legislative/Institutional

This sub-component will comprise technical assistance focused on supporting the Government in designing and implementing policy and secondary legislation on the inclusion of RE in the electricity sector. The sub-component will also include support to the market and transmission system operator (MEPSO), the Energy Regulatory Agency and government departments with regard to streamlining of permitting processes. The technical assistance will also comprise legal and technical support and advice to the institutions and government entities involved in creating the regulatory framework for the sector. Capacity building within the same institutions will be required to implement the new regulations.

1.2 Capacity Building, Technical/Advisory

This sub-component will focus on project development and project investment support. Project development support will focus on development of a sustainable pipeline of potential projects that can provide deal flow for SEEF and the contingent loan facility. This will be facilitated by creation of a Sustainable Energy Advisory Facility that will provide information and know-how to private developers and equipment suppliers. It is the intention to provide national best practice guidelines to minimize the possibility of developers ‘re-inventing the wheel’. This component will also comprise development of a stakeholder management strategy that will allow stakeholder views to be included early on within the development of specific projects. 1.3 Monitoring, Information Dissemination and Administration

A monitoring, evaluation and information dissemination sub-component is included, along with financial support for project administration.

Component 2 – Support to Utility-based ESCO (US$1.0 million, of which US$0.5 million is a GEF grant) This component will support the development and startup of a utility-based Energy Service Company, under the umbrella of the Market and Transmission System Operator (MEPSO). The ESCO will help to stimulate the market for energy services by providing turnkey and performance-based contracting for energy efficiency, and by demonstrating the financial performance of such projects using third-party financing for publicly-owned buildings. Initial funding from the GEF Grant will provide the necessary institutional support to MEPSO for preparation of business and financing plans, early-stage market development, and development of contractual and modeling tools.


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Component 3 – Sustainable Energy Financing Facility (US$31.5 million of which US$4.0 million is a GEF grant).

The third component will be a financing facility consisting of a loan guarantee facility and a debt fund, on a co-financing basis with commercial institutions and the Macedonian Bank for Development Promotion (MBDP). This financing component would provide a guarantee facility for EE loans, and a credit facility for EE and RE, co-financed with the MBDP and commercial banks. The investment facilitation component, called the Sustainable Energy Financing Facility (SEFF), will be managed by the MBDP. The funds available for each financial product and the allocation to the different sectors (EE and RE) are shown in the table below (in US$ millions):

Use and Provenance of funds

Energy Efficiency

Renewable Energy

Total

Guarantee Facility (GEF) $1.5 - $1.5

Debt Fund(GEF) $0.5 $2.0 $2.5

Debt Fund(MBDP) $0.5 $2.0 $2.5

Other international or national FIs may contribute to the SEFF at a later stage.

The component will address EE and RE financing separately because of the different nature of the project financial structures. However, both facilities will be housed within the MBDP.

The guarantee facility will focus exclusively on energy efficiency projects, given the shorter paybacks and the traditional difficulty of collateralizing energy efficiency deals. When the utility-based ESCO begins doing business, it may be possible to set aside a portion of reserves to address problems in collection from public entities. Primarily the guarantees will be partial risk guarantees, covering 50-70 percent of the principal of loans made by commercial banks to energy efficiency projects.

Loans from the debt fund would be applied to both energy efficiency and renewable energy projects. Energy efficiency loans would be focused on the industrial and municipal markets, and would be structured most likely as subordinated debt in order to attract additional commercial credit. Most of the projects reviewed during the preparation phase show relatively good payback periods and thus do not require subsidized loan terms; rather, some comfort to senior lenders may be required in the early stages of the market.

Likewise, RE projects may require a subordinated loan structure, but with different repayment terms than energy efficiency loans. Because of the longer payback times, RE projects will need longer loan tenors and will likely be larger because of project size. Loans with grace periods on principal repayment will help attract senior (commercial) lenders by improving the cash flows of the project.


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b) Key indicators, assumptions, and risks (from Logframe)

The performance indicators used to justify Development Objectives ratings during supervision include:

• Introduction of an enabling regulatory and incentive framework for RE based power and heat production (including tariff design, sub-laws on grid code, licensing and permitting procedures, training of stakeholders); Total number of RE projects reaching financial closure as a result of SEFF including the capacity installed (MW) and amount of electricity and heat generated (MWh); and

• Total number of EE projects reaching financial closure as a result of SEFF including the amount of energy (kWh) saved annually against a baseline.

Risk Risk rating Risk minimization measures

Annex 1: From outputs to objective Government’s commitment to national policy for RE and to streamline state/local decision-making fails over time

S• Build capacity in the Energy Agency and develop procedures to streamline decisions

affecting RE implementation within Government stru • Maintain policy dialog with all stakeholders to ensure commitment to reform

The power sector restructuring will be slow and inadequate leaving investors without proper enabling framework

S • Build capacity with the new power sector entities such as MEPSO, the energy regulator and the Energy Agency

The private sector will not be willing to invest in RE/EE projects

M • Support legislation to ensure adequate feed-in tariffs or similar price incentive. • Technical assistance to MBDP and local FIs to enable optimal financial

intermediation through appropriate financial support instruments Private sector is not willing or able to finance development costs

H • Guarantee market for clean energy entrants through policy measures • Provide financial and technical support through the RE Advisory Facility

Payback periods on financing terms are not acceptable to service providers and consumers

S • Select cost and type of savings measures based on economic attractiveness of savings measures and taking into account prevailing financing terms

• Encourage competitive financing of projects Annex 1: From components to outputs

MEPSO will not stay committed to develop ESCO concept

S• Build capacity in MEPSO • Provide case studies from neighboring countries that have successfully established

utility based ESCOs, e.g. Croatia. The Energy Agency will not be established in time for the project to start or will be under-funded.

S• The project can start in the Department of Energy in the MoE as long as sufficient

staff resources are allocated to this purpose over the budget. A sufficient budget allocation to the Agency or MoE will be a Board condition.

Default rate on direct and guaranteed loans exceeds anticipated level

N

• Ensure that estimates for structuring guarantees and loans are based on real market figures

• Monitor default rates during project implementation, checking against projections and comparable market benchmarks

• Establish oversight and accountability for use of guarantee funds • Maintain conservative rules and guidelines for guarantee management

Overall risk rating SRisk Ratings: H (High Risk), S (Substantial Risk), M (Moderate Risk), N (Negligible or Low Risk).

The overall risk rating for the project is: Substantial


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2. COUNTRY OWNERSHIP a) COUNTRY ELIGIBILITY

Macedonia ratified the Climate Change Convention on January 28, 1998 and is therefore eligible for GEF assistance in the climate change focal area.

b) COUNTRY DRIVENNESS

In March 2004 the Ministry of Economy endorsed an Energy Efficiency Strategy that was prepared by the Macedonian Academy of Science and Arts and a number of national and international consultants and financed by the USAID. The Stategy operates with three phases (ending 3 years, 8 years and 16 years from now respectively) during which the residential, commercial, institutional and industrial energy consumption efficiency is gradully improved by 15-20% and the use of minihydropower, geothermal and solar energy expanded compared with today.

In a letter to the World Bank (dated March 25, 2004), the Ministry of Economy expressed interest in obtaining GEF support for a Sustainable Energy Program. This initiative comes as a direct continuation of the work with the Energy Efficiency Strategy and GEF support is considered crucial for the implementation of the Strategy.

The project will allow to follow up on the results of the GEF Mini-Hydropower Project (Grant TF023447) that has successfully demonstrated the technical and economic feasibility of small-scale hydropower installations. The Ministry of Economy has shown great enthusiasm for the project and is eager to see it replicated on a wider scale.

Formal endorsement of the project concept was received from the GEF Focal Point on April 4, 2004.

3. PROGRAM AND POLICY CONFORMITY a) FIT TO GEF OPERATIONAL PROGRAM AND STRATEGIC PRIORITY

The Project is consistent with the objectives of the GEF Operational Program 5: Removal of Barriers to Energy efficiency and Energy Conservation as well as GEF Operational Program 6: Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs. The Project addresses the objectives in Section 5.7 of OP5 through support for activities that remove barriers to achieve local, national, and global benefits and Section 6.4 of OP6 by: a) removing barriers to use of commercial or near commercial renewable energy technologies; and b) reducing any additional implementation costs that result from a lack of practical experience, low market volumes, or from dispersed nature of applications.


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The project directly supports the following GEF Strategic Priorities in the Climate Change Focal Are:

(1) Market transformation for energy efficient products (OP#5). Market transformation programs would facilitate supply and demand of energy-efficient products and promote know-how transfer, with priority on mass-market products such as refrigerators, lights, and motors. The project will support market transformation through information campaigns promoting energy efficient equipment and solutions, thereby stimulating demand for such equipment and solutions;

(2) Increased financing availability (OP#5/OP#6). An important element would be

increasing the availability of financing for energy efficiency and renewable energy investments, enterprises and intermediaries, with priority on leveraged private finance (e.g., with contingent financing) and mechanisms to aggregate small investments, such as ESCOs and guarantee facilities. The project will increase the availability of financing for EE/RE through co-financing or guaranteeing commercial financing;

b) SUSTAINABILITY (INCLUDING FINANCIAL SUSTAINABILITY)

The project is expected to be financially and institutionally sustainable. Project activities are linked to a national strategy on energy efficiency including renewable energy utilization and to the intention of the Government of Macedonia to diversify fuel utilization and to protect the environment.

To ensure sustainability beyond the implementation period, the project would:

• Assist with the development and implementation of long-term strategy and detailed operational plan for nationwide roll-out of activities;

• Influence the regulatory framework to ensure adequate support in the forms of funding mechanisms, electricity buyback policy, preferential taxation, etc.

• Build capacity of the national authorities and local communities through adequate training, technical advice; and

• Strengthen the awareness and understanding of the benefits of efficient energy use and indigenous renewable energy utilization by the local population, general public and key stakeholders, and their involvement in the above mentioned activities.

The Project is implemented by the Energy Agency where capacity will be developed to carry on with supervision and management of EE/RE after the termination of the GEF project. The sustainable energy advisory facility will slowly build up the basis for commercial operation through increased charging for its services. After the termination of the GEF project it is envisaged that the function will be taken over by fully commercial consulting companies based on the staff that have worked in the advisory facility.


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An important factor for the sustainability of the program is the involvement of the commercial banks. By providing training to the banks and gradually scaling up the required level of co-financing from the banks and by phasing in guarantees, the Banks are expected to take on a more and more central role in financing EE/RE thus making the GEF exit smooth and ensuring sustainability on the financial supply side. The size of the SEFF (US$4.0 million) will be large enough to make a considerable impact and meet the program objectives in a country the size of Macedonia. Many of the projects are relatively small and so the SEFF should be able to service a number of projects. With the expected co-financing/leveraging in of another US$27.5 million a total investment volume of US$ 31.5 million would mean the realization of roughly 20-30% of the total potential for EE/RE investments.

c) REPLICABILITY

The concept of the project is highly replicable. Many client countries of the Bank (particularly in the ECA region) share largely similar conditions, including high energy intensity, limited indigenous resources and a large scope for “win-win” EE/RE investments on the one hand and the lack of commercial financing for such investments on the other. The project contains important elements of replication from other GEF financed EE/RE projects, e.g. the IFC Hungary HEECP project but is specific in that it combines EE and RE and in that it operates with a project development facility that is distinctly separated from the financing facility.

d) STAKEHOLDER INVOLVEMENT

A Stakeholder Plan to inform the public and to engage key stakeholders will be initiated during project preparation with both public consultations and individual discussions with a wide range of stakeholders including environmental NGOs, RE/EE technology providers, local academia, local energy consultants and small energy businesses.

Public participation activities will continue during project implementation and will include: (a) brochures specific to different target groups, (b) a general project website; and (c) selected project specific documentation showing the economic, energy and environmental benefits of selected pilot projects. As information about the successful implementation of sustainable energy projects becomes available, it is expected that more and more stakeholders will come forward and propose their own projects for implementation, thus reinforcing the demand-based project concept.

During mid-term review, the World Bank, the GoM, MEPSO and MBDP will review the achievements so far, particularly regarding choice of sectors to support. Stakeholder consultations will provide important inputs into decision making about the course of action during the second part of project implementation. NGOs are expected to carry out information dissemination activities and provide monitoring and evaluation services. Many project stakeholders, including the local banks, will benefit from the training activities.


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e) MONITORING AND EVALUATION

A monitoring and evaluation system will be put in place to assess the project’s effectiveness during implementation and after the project is completed. A results monitoring framework will be set up focusing on the global development objective to be achieved and the intermediate and/or final results expected from implementing each individual project component. The framework will include specific and monitorable performance indicators such as the number of transactions facilitated by the SEFF, the RE/EE investments leveraged by SEFF and the associated GHG emission reductions. Project monitoring and evaluation activities will be carried out under the responsibility of Energy Agency, which will submit semi-annual progress reports to the Bank. A simple management information system for project monitoring and evaluation will be developed, covering, inter alia, the project pipeline, amount invested, loans, cost-sharing with financing partners, cost-effectiveness of projects, defaults, fund reflows, energy saved and GHG reduction. A mid-term review will be carried out to assess overall project progress. This review will include an in-depth assessment of the institutional and financial sustainability of SEFF, its initial impact on the broader RE/EE landscape and the lessons learnt. Based on the outcome of the mid-term review, the Bank will advise the GOM to take measures to ensure that the project is successfully completed.

4. FINANCIAL MODALITY AND COST EFFECTIVENESS

Co-financing Sources Name of Co-

financier (source) Classification Type Amount (US$)

Status* Government of Macedonia

Government In kind 300,000 Government is passing the law on a new energy Agency that will have staff dedicated to project

Macedonian Bank for Development Promotion

Government Loans 2,500,000 MBDP will commit in writing during negotiations

USAID Bilateral In kind 500,000 USAID will integrate their support in their annual work plans

Local banks Private Sector Loans 18,700,000 n/a


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Project developers

Beneficiaries Equity 6,800,000 n/a

Sub-Total Co-financing 28,800,000

* Reflect the status of discussion with co-financiers. If there are any letters with expressions of interest or commitment, please attach them.


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5. INSTITUTIONAL COORDINATION AND SUPPORT

a) CORE COMMITMENTS AND LINKAGES

Government The Government is committed to the project and will provide financial and other support throughout the project implementation. Other Small and Medium Size Enterprises are important for any EE/RE program since many activities will only be realized if the dynamic potential of private enterprises is unleashed. In this sense the project will need to build on the results achieved by primarily the IFC through their regional programs. In the concrete context of Macedonia important synergy is expected to derive from a co-operation with the Southeast Europe Enterprise Development (SEED) that is established by the IFC to support small and medium-size enterprises with investment services, capacity building and improving the business enabling environment. USAID has been active in the Macedonian energy sector for several years and recently financed an Energy Efficiency Strategy which has been adopted by the GoM and which is completely in line with the intension of the present Sustainable Energy project. USAID has expressed the intension to support the implementation of the Strategy with technical assistance in close coordination with the MoE and the World Bank. USAID also considers launching a Guarantee Facility under its Development Credit Authority targeted at sustainable energy if such a facility can be designed to be complementary to the guarantee facility contemplated as part of the GEF supported sustainable energy project. The European Commission’s European Agency for Reconstruction (EAR) may still chose to support the sustainable energy sector with TA. In doing so they have expressed their willingness to coordinate with the activities of the MoE under the GEF supported sustainable energy project. Among the local implementation partners the most important are the Ministry of Health and the Macedonian Association of Municipalities who will assist in identifying opportunities for projects implemented using the ESCO formula in health institutions and municipal buildings respectively.

b) CONSULTATION, COORDINATION AND COLLABORATION BETWEEN IAS, AND IAS AND

EXAS, IF APPROPRIATE.

C) PROJECT IMPLEMENTATION ARRANGEMENT


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Implementing Agency The Energy Agency1 will act as the overall implementing agency for the MSEP, and will coordinate activities among the Bank and other project participants. The Energy Agency will also manage the Market Framework Component. The Agency will establish a special Sustainable Energy Unit with special assignment to the GEF project. The MBDP will act as implementing agency for the investment component. The SEFF will be a program within the MBDP and its staff will be drawn from MBDP ranks; and MBDP will act as the manager of the guarantee and credit facilities. As a development oriented organization that serves as an intermediary between international donors and FIs, the MBDP holds a unique position in the marketplace that can be leveraged to catalyze local investment in EE and RE projects. MEPSO will act as implementing agency for the ESCO component and will provide staff, infrastructure and governance capacity for the ESCO. In order for the ESCO component to become effective, the ESCO will have to be formed as a legal entity within Macedonia. Institutional Structure, SEFF SEFF should be placed at the MBDP. As a development oriented organization that serves as an intermediary between international donors and FIs, the MBDP holds a unique position in the marketplace that can be leveraged to catalyze local investment in EE and RE projects. Specifically, the selection of the MBDP will best meet the following criteria in evaluating the optimal home for the SEFF: 1) Track record/experience, 2) sustainability and cost effectiveness, 3) co-financing and/or direct financial support, 4) management and organizational requirements, and 5) EE and RE market penetration.

Management and Oversight Under this structure, all documentation and processing for loans made under the facility would be carried out by participating FIs, leaving the SEFF to focus on reviewing technical elements and ensuring that the facility’s resources are well utilized. Further, by establishing relationships with local FIs, the SEFF can tap into a bank’s existing client base and draw on their expertise in marketing financial products. It is also important to note that the SEFF will benefit from the activities of the Project Development Assistance Facility (PDAF). The SEFF should be staffed with professionals who have experience in both the technical and economic aspects of EE and RE projects. Listed below is a summary of recommended full-time staffing positions for the SEFF:

1 The parliament is in the process of passing a law that will establish a new Energy Agency taking over responsibilities from i.a. the Department of Energy in the Ministry of Economy. In the case that the establishment of an Energy Agency is delayed or never happens, the Department of Energy would act as the Implementing Agency.


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Facility Manager who will have the ultimate responsibility for the functioning of the SEFF. The manager will be responsible for risk management, obtaining additional funding from donor agencies/other sources, and ensuring the SEFF’s success in originating projects and minimizing losses due to default. The facility manager will be responsible for key client-side activities of the SEFF and will work with participating banks to ensure that proposed EE and RE projects meet the facility’s standards and eligibility criteria. The facility manager will have the authority to approve EE and RE projects that are under a “to be determined” size range. For projects that exceed this threshold, the facility manager will be responsible for presenting the SEFF’s recommendations to the management board or investment committee for final approval. Financial Specialist who will assume the role of a financial analyst and loan officer and have familiarity with EE and RE projects and/or implementing international on-lending facilities. The financial specialist will be responsible for helping manage the risk of SEFF’s portfolio (responsible for determining SEFF losses and helping prescribe solutions to ensure that potential losses are kept at a minimum). Key functions of this position include: financial feasibility analysis, credit risk assessment, risk profile management, and working with local FIs to monitor repayment and recovery procedures. Technical Specialist who will be responsible for the analysis of projects, including assessing the viability of proposed technologies and the reliability of project suppliers, the technical and managerial capabilities of project sponsors, analysis and evaluation of a proposed project’s energy savings and energy generation in the case of RE, and post project completion or inspection. (half or full-time position)


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ANNEX A: INCREMENTAL COST ANALYSIS

Without the GEF involvement the baseline scenario includes a very limited market penetration into the energy efficiency and renewable energy markets mainly relating to the government’s own very limited resources. Most industries and public sector entities will continue the business as usual approach to energy use with the result that energy intensity will remain high and the country will continue to rely on lignite and imported fossil fuels to cover its future power demand expansion. Some projects involving fuel switching from heavy fuel oil to natural gas may occur, but other projects will likely be stalled for many years until the financial sector fundamentally changes. The proposed GEF assistance will be instrumental in helping the GoM to implement the Energy Efficiency Strategy which was recently endorsed by the Ministry of Economy. The program will bring together individual donor initiatives (e.g. from the European Commission via the EAR and from the USAID) under a coordinated framework by taking a systematic and comprehensive approach toward energy efficiency and renewable energy and explicitly linking it to the institution that will formulate the GoM’s policy in the field, i.e. the Energy Agency or Department of Energy within the Ministry of Economy. The GEF support will not only develop a sustainable energy program but will also mobilize the main stakeholders (project developers, industrialists, public institutions, financial institutions) and through demonstration and capacity building create a sustainable framework for a continued focus on efficiency improvements and environmentally benign energy solutions. In addition to addressing the institutional and information barriers the program will also provide a flexible tool to address the financial barriers and to leverage local financing into EE/RE. Baseline Case. The current market activity includes a small amount of energy efficiency projects, financed internally by industrial companies, and little or no investment in renewable energy projects. With the passage of a new law on concessions, it is anticipated that some mini-hydro projects will be implemented. However, in the absence of a feed-in tariff, investors will not be willing to spend much time and money in development activities. Moreover, without appropriate financial products for both segments, it is unlikely that many projects will be financed by local banks. Discussions with local banks have revealed that they are currently not financing projects in this area. Some proposals have been received, for example for municipal lighting projects implemented by private companies, but the collateral requirements do not allow the deals to go forward. None of the banks are currently reviewing RE deals. Similarly, discussions with other stakeholders (including developers, equipment suppliers) through workshops have indicated a strong reluctance to invest without further development of the market. Finally, until issues related to the privatization and unbundling of ESM are resolved, it is unlikely that ESM will play any role in new investments in RE. In the absence of real, verifiable data from the market, the project team has assumed an investment level of US$1.0 million. This includes private sector, GoM and donor activities


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(not including the GEF small hydro project). The investment would be in RE (2/3) and EE (1/3). This funding would accommodate micro-hydro installations and small, internally funded EE projects. These are most likely to be done in industrial companies, where funds are more readily available. Project Case. The project case will see a greater level of investment based on (i) acceleration of market development through technical assistance, especially regarding the feed-in tariff and structuring of contracts; (ii) development of an ESCO company that can play a role in third-party financing of public buildings; and (iii) creation of financial products (guarantee and subordinated debt) that can stimulate commercial bank activity through co-financing. In the project case, about US$20 million can be invested over 5 years in RE, and another US$10 million in EE. This includes US$2.5 million in GEF-funded project debt. The additional cost of US$1.5 million for GEF guarantee reserves brings the total financing cost to US$31.5 million. Global Benefits. The EE/RE investments facilitated by the program will be estimated over a 5-year GEF project period plus a 10-year non-GEF period (to fully amortize all loans), i.e. a total of 15 years. This will relate to projects which otherwise would be unlikely to be implemented due to institutional and financial barriers and the high risks perceived by the local banks. Annual energy savings and avoided life-cycle GHG emissions of CO2 will be estimated both under the baseline scenario (with US$1.0 million invested) and with the GEF project case (with US$31.5 million invested) resulting in an estimate of net global benefits. Emissions Reductions. Estimates of emissions reductions for the base case and project cases were made in the following manner. First, the emissions factor (tCO2e per MWh) was calculated using National Communication figures from the Macedonian submission to the UNFCCC. This factor, based on the heavy fossil fuel content of grid-connected energy, is approximately 1.0 tCO2e/MWh. Because all MSEP investments are expected to be grid-connected, this is a reasonable proxy for actual emissions reductions. Second, energy generation for RE and energy savings for EE were calaculated in the following way: For RE: assumed capacity x assumed capacity factor x 8760 hrs = annual MWh production annual MWh production x emissions factor = annual emissions reductions annual emissions reductions x 15 years (debt fund life) = life-cycle emissions reductions

For EE: Average project size (investment) / average payback period = annual savings (denar) Annual savings / kWh cost = annual energy savings (kWh) Annual energy savings / average project size = kWh saved per denar investment


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kWh saved per denar investment x total investment – annual energy savings annual energy savings x 15 years = project life cycle savings project life cycle savings x emissions factor = life cycle emissions reductions

Incremental Costs. Funds provided to the end-user on equity or a loan basis are expected to generate financial returns (rather than passed through as a “one-off” pure grant). Furthermore, the Facility is planned to gradually perform less and less lending and more and more guarantee operations which increases leverage. At the end of the life of the Facility, its capital may continue to be earmarked for GHG reduction purposes, thus prolonging the impact of the initial investment even further. The actual losses on bad loans are not expected to be more than 15% of the initial capitalization, i.e. US$600,000 (this estimate is based on experience from other lending and guarantee programs). This will be combined with the cost of the Market Framework and ESCO components of US$1.5 million (which is a direct non-refundable cost to the GEF) meaning that the total incremental cost to the GEF will be no more than US$2.1 million. On the basis of this cost, the unit abatement cost for the GEF can be calculated once the benefits are determined. Local Benefits. The local benefits will be specific to the circumstances of the projects. The major local benefit in most cases will be the value of fuel saved due to increased EE. In those cases where the project consists of switching to renewable energy or a cleaner fuel (e.g., natural gas) from a more polluting fuel (e.g., lignite), significant local environmental benefits are expected. Demand-side EE investments in the residential sector may have significant social benefits due to the mitigating impact of these measures on household energy bills at a time of sharply increasing residential energy prices and low disposable incomes. One of the target markets for energy efficiency is the hospital market, which is badly in need of efficiency upgrades and lacking in capital. Mobilization of capital to this market will result in years of energy savings, thus allowing the Ministry of Health and the hospitals to divert constrained resources to core health services instead of energy. The program’s impact on the Macedonian commercial banking sector is expected to be beneficial. It would actively seek co-financing from the commercial banks with the financial facility operating as a last-resort financier, extending credit on terms not more favorable than those available from commercial banks, however taking more risk in terms of accepting project cash-flows as collateral. Through project development support and partial risk mitigation, the program would help open up a new line of business–energy efficiency finance– for a number of Macedonian banks.


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Baseline Project Alternative Increment

Domestic Benefit

Little activity in current business as usual scenario.

Increased investment in RE and EE, leading to reduced imports of electricity, cleaner air from reduction in oil burning.

Global Environment Benefit

US$1 million invested in EE and RE projects; about 64,473 tCO2 reduction over life cycle

Total reduction of 1,934,198 tCO2 over life cycle

Incremental reduction of 1,869,725 tCO2

Costs (US$ million)

Market Framework $0 $1.0 $1.0

ESCO Assistance $0 $0.5 $0.5

Project Investment $0 $4.0 $4.0

Total $0 $5.5 $5.5


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ANNEX B: PROJECT LOGICAL FRAMEWORK

Results Framework

PDO Outcome Indicators Use of Outcome Information

To develop a sustainable market for EE and RE by supporting the development of an enabling framework, institutional capacity, and necessary financing mechanisms.

• Introduction of an enabling regulatory and incentive framework for RE based power and heat production

• Volume of RE projects reaching financial closure as a result of SEFF, measured as capacity installed (MW) and amount of electricity generated (MWh).

• Volume of EE projects reaching financial closure as a result of SEFF, measured as amount of energy (kWh) saved annually against a baseline.

Outcome Indicators will provide the Recipient, the World Bank, and the GEF with basic information from which can be determined: 1) the achievement of an enabling framework for RE/EE investments, and 2) whether the level of financing for RE/EE projects is increasing.

Global Environment Objective Reduce GHG emissions on a continuous basis

• Increased share of “new” RE in national energy supply

• Reductions in CO2 emissions at national and project levels

Intermediate Results One per Component

Results Indicators for Each Component

Use of Results Monitoring

Component One: Increased in-country knowledge and improved framework and market for EE and RE development

Component One: • Stakeholders trained • Establishment of feed-in tariff for

RE • Development of pipeline of EE and

RE projects

Component One:

Determine whether the market preparation component is making progress towards establishing an enabling framework for EE and RE development.

Component Two: Establishment of an operating utility-based ESCO.

Component Two : • Number of staff and capital

deployed by owners • Number and volume of performance

contracts signed

Component Two:

Determine whether the ESCO is developing its business according to plan and meeting its sales targets

Component Three:

Increased investment in RE and EE projects.

Component Three:

• Volume of loans guaranteed • Volume of loans made from SEFF • Volume of Additional Co-financing • Total financing of RE • Total financing of EE • CO2 emissions reduced (tCO2)

Component Three:

Determine whether the SEFF is operating effectively and meeting expectations for financing deals including the attraction of leveraged finance.


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Arrangements for results monitoring

Data Collection and Reporting

Outcome Indicators Baseline (annual) YR1 YR2 YR3 YR4 YR5

Frequency and

Reports

Data Collection Instrum.

Responsibility for

Collection Introduction of an enabling regulatory and incentive framework for RE n/a

Framework in place Annual PMR

Energy Agency

Capacity installed from new RE (MWe) 0.33 2 2 2 2 2 Annual

M&E consultant

reports M&E

consultant

Electricity generation from new RE (MWhe) 1,460 8,760

17,520 26,280 35,040 43,800 Annual

M&E consultant

reports M&E

consultant

Electricty saved (Mwhe) 2,249

12,146

25,978 41,498 55,331 67,476 Annual

M&E consultant

reports M&E

consultant Increased share of "new" RE in national energy supply. 0.13% 0.26% 0.40% 0.53% 0.66% Annual PMR

Energy Agency

Reductions in CO2 emissions at the national and project levels (t/y) 3,863

21,771

45,298 70,582 94,109 115,880 Annual PMR

Energy Agency

Results Indicators for Each Component

Baseline (annual) YR1 YR2 YR3 YR4 YR5

Frequency and

Reports

Data Collection Instrum.

Responsibility for

Collection Component One - Market Framework

Training of stakeholders n/a

Complete 1st training

Complete 2nd

training

Complete 3rd

training

Complete 4th

training

Complete 5th

training Annual PMR Energy Agency

TA for Establishment of feed-in tariff for RE n/a

Completed and

approved Annual PMR Energy Agency

TA for Development of pipeline of EE and RE projects n/a TBD TBD TBD TBD TBD Annual PMR

Energy Agency

Component Two - ESCO

Number of staff - 3 5 7 10 12 Annual PMR ESCO Capital deployed by owners (US$) - 300,000

560,000 820,000 1,300,000 1,740,000 Annual PMR ESCO

Number of performance contracts signed - 3 5 7 10 12 Annual PMR ESCO Volume of performance contracts signed n/a TBD TBD TBD TBD TBD Annual PMR ESCO Component Three –Investment Volume of loans guaranteed (US$) - 1,000,000

1,250,000 1,500,000 1,250,000 1,000,000 Annual

M&E cons reports

M&E consultant

Volume of loans made from SEFF (US$) - 500,000

500,000 500,000 500,000 500,000 Annual

M&E cons reports

M&E consultant

Volume of Additional Co-financing (US$) - 4,300,000

4,300,000 4,300,000 4,300,000 4,300,000 Annual

M&E cons reports

M&E consultant

Total financing of RE (US$) 666,667

4,000,000

4,000,000 4,000,000 4,000,000 4,000,000 Annual

M&E cons reports

M&E consultant

Total Financing of EE (US$) 333,333

1,800,000

2,050,000 2,300,000 2,050,000 1,800,000 Annual

M&E cons reports

M&E consultant


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ANNEX C: RESPONSE TO PROJECT REVIEWS

a) Convention Secretariat comments and IA/ExA response

b) STAP expert review and IA/ExA response

UNIVERSITY OF CALIFORNIA, BERKELEY

BERKELEY DAVIS IRVINE LOS ANGELES RIVERSIDE SAN DIEGO SAN FRANCISCO• • • • • • SANTA BARBARA SANTA CRUZ•

ENERGY AND RESOURCES GROUP DANIEL M. KAMMEN 310 BARROWS HALL CLASS OF 1935 DISTINGUISHED CHAIR IN ENERGY UNIVERSITY OF CALIFORNIA PROFESSOR IN THE ENERGY AND RESOURCES GROUP BERKELEY, CA 94720-3050 PROFESSOR OF PUBLIC POLICY WWW: http://socrates.berkeley.edu/~rael PROFESSOR OF NUCLEAR ENGINEERING TEL (510) 642-1139 DIRECTOR FAX (510) 642-1085 RENEWABLE AND APPROPRIATE ENERGY LAB (RAEL) CO-DIRECTOR, BERKELEY INSTITUTE OF THE ENVIRONMENT EMAIL: [email protected]

To: Peter Johansen, [email protected] Cc: Rick Renner, [email protected] Re: Review of Macedonia Sustainable Energy Project Date: June 10, 2005 Evaluation: This is a difficult project to evaluate. It appears to be well constructed to finance the specific hydro and geothermal projects, and possibly some biomass project efforts, that have been initially identified. Beyond that, however, faith is required that the government and ESCO structures to be established will both have sufficient experience, and sufficient project options to initiate and then support an overall Macedonian energy efficiency and renewable energy industry. This is a tall order, particularly if the initial experience is largely with capital intensive infrastructure efforts (e.g. geothermal). Much of the Annex material is blank or in boiler plate form, and cannot, as yet, be usefully evaluated. Annex 15, the incremental cost analysis, can not be fully reviewed in detail as it is critically dependent on the mix of projects that are not yet identified.


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Prior to approving this project, it is recommended that a more extensive list of potential EE and RE projects, ideally those that have a good chance to facilitate a new private sector presence, are identified/described in the project document. Specific Comments: Page 1, paragraph 3: Needs to be rewritten. The ‘assignment’ of RE to offset imported power, and only that, while energy efficiency, EE, will also impact imports alone, is strangely stated. True or not the issue has to do with the cost and timing of coal-fired imports relative to the availability of RE sources, and the types of EE measures adopted. What this reviewer believes the authors are trying to say is that even with an expansion of RE and EE due to this project, a strong need still exists for new, domestic fossil-fuel capacity. Page 2: Table 1. The high energy intensity in Macedonia certainly needs to be addressed, although the table provided does not fully address the issue of where this opportunity lies. With the steel and other metal production key components of the Macedonian industry, both the magnitude and cost of savings are best expressed by looking at the energy intensity values of these industries relative to other nations with similar industrial mixes. Page 3, ‘paragraph 4, ‘on the longer term’, change to ‘in the longer term’. Page 7, Component 1, “of which a GEF’, change to ‘of which is a GEF’ Page 8, Item 1.3, In ‘Monitoring, Information Dissemination and Administration’ it is not specified what will be done. Since these can be quite distinct activities, this should be spelled out. Page 8, Component 2. Establishing an ESCO is certainly likely to make sense, but some sense of the projects available for the ESCO to undertake should be included to demonstrate the likely profitability and national value of establishing this company. It may well be that the prime customers for the ESCO, are those projects initiated under Component 3, the $31.5 million financing authority. Page 10 & 11. Section 5. The careful discussion of the investment mechanisms not selected is interesting historically, but also suggest some internal or ongoing debate over how best to implement this project. The argument provided as to why the EE/RE credit line was not utilized, for example, is not particularly convincing given that all these mechanisms, including the models selected, are new and will require similar levels of institutional learning and support. Simply for the sake of argument, developing credit lines along with modest amounts of project training (as this funding package does provide) could be seen as one of the most effective, competitive, and open ways to achieve the project objectives. By contrast, establishing the Energy Agency as the implementing agent and the monitoring unit (page 12) with a unique and secured financial backing may succeed, but is not likely to be the optimal method to develop long-term sustainable private sector operations. Even the ESCO appears to be wholly directed by the system operator, MEPSO.


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Indeed, while the risk rating for the project is Substantial (page 14), the risk that the Energy Agency will develop a few projects, but will do little to foster an active indigenous EE or RE industry seems great, yet this is listed only indirectly in the risk table (‘private sector will not be willing to invest in RE/EE projects’, which is listed as only a Medium risk). Page 16. Specify what is ‘senior project finance debt’. Page 16. Why is the assumption that one project loan will default? Is this simply an average based on other projects, or is this based on specific assessments of a likely project to be funded? Second, how was this project size (averaging $400,000 each) selected? In a number of nations receiving such loans, the criticism has been leveled that the loan sizes were fine for pre-existing government partner companies to access, but did little to spur new, indigenous, businesses as the required self-financing was too large. Page 17. The technical section should be expanded. To say that only ‘proven, commercially viable’, equipment and technologies, may not mean much without context. The initial projects appear to have already been largely determined to be small hydro, biomass (although this one is not specified in the document), and geothermal (page 15). What competing biomass technologies, for example, are to be considered? Page 21, Annex 1. Throughout the project documents reference is made to facilitating RE efforts, yet virtually no specific project areas are listed as promising candidates. No mention is made, for example, of the possibility that decentralized projects – not necessarily ones that a federal Energy Ministry may be most interested to see developed – such as small-scale solar or wind companies, could be developed, partially financed, or otherwise supported. ‘Sufficient liquidity’: overall financial availability may not be that relevant to discussions of novel RE projects, particularly given the stated level of unfamiliarity with these potential businesses. Page 25. Annex 2. No list of recent projects is included. Page 26. Annex 3. No list of components is included. Page 32. Annex 5, project costs. All personnel to be supported appear to be upper management positions. What appears to be lacking in Macedonia, however, is not management/financial expertise, but experience with the nuts and bolts of developing RE projects at the level of incubating small new energy companies and projects. Page 35. Annex 7 is blank. Page 52, Annex 15. No indication is given as to where the CO2 reduction numbers come from. Are these, and the $1 million listed as ‘EE and RE invested’ based on prior projects elsewhere?

Responses to STAP Technical Reviewer’s general specific (major) comments:


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Comment 1: impact of RE and EE on electricity imports.

The paragraph has been re-worded to reflect the basic premise that both RE and EE will have a positive impact on the overall energy balance. It is very likely that gas-fired combined cycle plants will replace some of the thermal capacity. RE and EE provide additional resources and choices for the country’s energy mix.

Comment 2: energy intensity of specific industries.

The project team currently does not have specific industry energy consumption data on hand, though this will be analyzed and provided prior to appraisal. Comment 3: Monitoring, Information Dissemination and Administration.

Details of the technical assistance package are still under design at this time, so specific information on the application of funds is not possible at this time. Generally, only a small amount of TA funds will be used for administrative costs, as Component 3 activities will create program revenues to cover operating costs, and the Government of Macedonia has pledged some funds for administration of the Energy Agency, the project implementing agency. Information dissemination will be focused mainly on energy efficiency activities, because these projects are smaller and more dispersed. The project team believes some possible partners, like the Macedonian Association of Municipal Governments, can help spread information to their members to promote EE project schemes. Comment 4: likely candidate projects for an ESCO.

Some case studies have been prepared under the PDF grant, and some of these will be included in the Annexes. The most recent mission revealed that there is a potentially strong demand among the municipal and health sectors, which are especially well-suited for third-part finance mechanisms like performance contracting, which an ESCO can implement. Discussions with several municipal governments and the Ministry of Health have also revealed a keen interest from the customer side. Further information on these sectors will be collected and collated into an initial project pipeline before appraisal.

Comment 5: discussion of investment mechanisms not chosen, esp. credit lines.

The credit line vehicle must be distinguished from the project concept in the MSEP program, which is a proactive debt fund which co-invests with commercial bank debt. The same fundamental problem of deal origination and motivation/understanding at the commercial bank level will exist in this project, as it has with pure credit lines. The difference is creating a unit (the SEFF) which has a mandate to assist developers, the ESCO and commercial banks in deal origination, analysis and structuring. The SEFF will be distinct from (but coordinated with) the Energy Agency, which will play a supervisory role in the project, corresponding with the World Bank, and administering TA funds. Comment 6: Assumptions on loan default and size of SEFF co-investment.


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The assumption on loan default is a conservative estimate (20%); there is no relevant data for such projects because there have been only new building construction/project financings done in recent years. Default levels are more likely on the order of 10% (which is assumed for energy efficiency). The project loan size for SEFF ($400,000) was determined by analyzing several case studies for mini hydro power projects, and developing a capital structure that allowed for debt service coverage ratios that would be acceptable to commercial banks. This criterion was balanced with the total size of the debt fund ($2.0 million for RE), matching funds from MBDP (at least $2.0 million), and sponsor equity. At least 5 projects should be done to ensure some level of portfolio balancing. Sponsor equity levels of 30% will most likely be required by banks and is good practice. The sample projects modeled for the PAD are probably on the high side ($2.0 million total capital cost per project), and there will likely be smaller deals of between 100 kW and 1 MW that will require sponsor equity of between $50,000 and $300,000. This will allow some small but established companies to participate in the market. Comment 7: what type of technologies will be used?

At this time the project team does not have much information on biomass opportunities, and this needs to be further developed by the PDF consultants prior to appraisal. The vast majority of available information is on mini and micro hydro, which will in fact most likely use well proven technologies, similar to projects done in Austria and Slovenia. Comment 8: facilitating RE projects.

In order to simplify the project concept, the project team has focused mostly on the small hydropower sector, for several reasons: (i) it is well known and has significant potential in Macedonia (150 – 200 MW new capacity): (ii) there is a reasonably strong pipeline of potential projects based on identification efforts done many years ago and abandoned for lack of clarity on water rights; (iii) there is technical expertise existing in the country, and several companies that are trying to overcome existing barriers to implement mini-hydro projects; (iv) some of the key barriers (lack of feed-in tariff, lack of long-term financing) can be addressed by the project through technical assistance and financial mechanisms. Issues related to water rights should be resolved soon, providing a clear window of opportunity for the sector, which, with some additional assistance, could become a market leader. Other technologies such as solar and wind can be eligible, but are either more EE opportunities (solar) or much less developed (wind). Comment 9: sufficient liquidity in the market.

The statement in the PAD is intended more to describe the current conditions in the market, and in the case of liquidity, to specify what is not needed from the GEF. In this regard, we know that banks have the funds to lend but some other conditions do not exist which will


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create a market. In this sense, it is intended as a statement of conditions precedent for a successful market. Comment 10: Project costs.

Direct costs of the project will include hiring of financial professionals and to some degree technical professionals to assist the private sector. Additional technical/project professionals will be provided to the ESCO by participating institutions such as MEPSO. It is intended that technical assistance funds will be used to train and otherwise support private companies developing both EE and RE projects. Comment 11: CO2 reduction estimates.

More explanation will be provided in the Annex to describe the origin of the numbers. Certain assumptions have been made about project investment costs ($/MW) for both EE and RE, energy generation or savings (MWh) produced from these investments, and a corresponding emissions factor (tCO2e/MWh). The investment and generation assumptions are based on technology and experience; the emissions factor is an estimate for the country based on the figures presented by the GoM in its National Communications to the UNFCCC for grid-connected electricity.

c) GEF Secretariat and other Agencies’ comments and IA/ExA response

Comment: DESCRIBE IN SOME DETAIL THE PROJECT’S CONSISTENCY WITH STRATEGIC

PRIORITIES.Response: Addressed above and in PAD Comment: THE CONCEPT STATES THAT THE REASON FOR THE HIGH ENERGY INTENSITY

CAN BE TRACKED TO I) HEAVY USE OF ENERGY IN METAL PROCESSING INDUSTRY, II) LOW-EFFICIENCY POWER GENERATION, SUPPLY AND CONSUMPTION, AND III) THE PREVALENCE OF USING ELECTRIC ENERGY FOR RESIDENTIAL HEATING DURING THE WINTER.

ISSUE: THIS PROGRAM DOES NOT ADDRESS THE KEY REASONS OF LACK OF EFFICIENCY, AS THE FUND IS AIMED AT WORKING WITH BANKS AND SMES, WHICH WILL NOT LIKELY INFLUENCE ANY OF THE SECTORS LISTED ABOVE.

RECOMMENDED ACTION: PLEASE CLARIFY HOW THIS PROJECT WILL ADDRESS THE CAUSES I-II-III FOR LACK OF EE. Response: A thorough analysis of the market for EE is provided in the PAD. The project will address the low-efficiency power consumption in all sectors. Comment: THE CONCEPT DESCRIBES AS PART OF THE NATIONAL CONTEXT THE

CONVERSION OF AN OIL FIRED THERMAL POWER PLANT TO GAS AND THE CONSTRUCTION OF A NEW GAS FIRED CO-GENERATION PLANT.


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ISSUE/RECOMMENDATION: THE RATIONALE FOR THIS COMPONENT OF THE PROJECT IS DIVERSIFICATION OF ENERGY SOURCES, NOT GHG EMISSION REDUCTION. PLEASE MAKE A CLEAR DEMONSTRATION OF GHG REDUCTIONS FROM THIS PROJECT, INCLUDING A COMMITMENT BY THE GOVERNMENT AND/OR THE RELEVANT UTILITY THAT THE CONVERSION FROM OIL TO GAS OF THE POWER PLANT WILL NOT BE DELAYED BECAUSE OF THIS PROJECT (IN THIS CASE THE BASELINE WOULD HAVE MORE GLOBAL BENEFITS THAN THE GEF ALTERNATIVE). Response: The project will only target real savings that will produce GHG reductions. The EE or RE investments will have no influence on the timing of the investment in CHP or oil to gas conversions since Macedonia now imports around 30% of its power needs. Comment: AGAIN WITH RESPECT TO THE BASELINE, IT IS NOT CLEAR FROM WHICH

SOURCES ENERGY IS IMPORTED. PLEASE SPECIFY IF IT IS FROM FOSSIL FUEL, HYDRO OR NUCLEAR SOURCES.

Response: Almost all the imported power is from thermal sources based on lignite. Comment: THERE ARE MANY GEF-FUNDED PROJECTS IN THE REGION THAT ARE

IMPLEMENTING FINANCING SCHEMES FOR EE AND RE. A SYNOPSIS AND EVALUATION OF EXPERIENCE ON FINANCING EE AND RE IN THE REGION MUST BE INCLUDED AT THE BEGINNING OF THE PROJECT DESCRIPTION AND MUST BE TAKEN INTO ACCOUNT IN THE PROJECT DESIGN AND COMPONENTS OF THE SUSTAINABLE ENERGY FINANCIAL FACILITY

Response: Lessons learned from the mentioned GEF projects are provided in the PAD. Comment: THE PROJECT MUST BE DESIGNED TAKING INTO ACCOUNT ITS REGIONAL

CONTEXT, WHERE DIFFERENT FINANCIAL INSTRUMENTS HAVE BEEN TESTED IN DIFFERENT COUNTRIES. IS THIS PROJECT A FORM OF REPLICATION? IF SO, OF WHICH COUNTRY AND FINANCIAL MECHANISM? IF NOT, WHAT IS SO UNIQUE ABOUT THIS PROJECT? IN AREGIONAL CONTEXT, WHAT IS THE JUSTIFICATION FOR $5M GEF CONTRIBUTION TO SUCH A SMALL ECONOMY? ARE MACEDONIA’S ECONOMY AND ENERGY POLICY ALREADY INFLUENCED BY THE EXISTING PROJECTS THAT ARE AIMED AT INFLUENCING MARKETS IN THE REGION?

Response: The project contains important elements of replication from other GEF financed EE/RE projects, e.g. the IFC Hungary HEECP project but is specific in that it combines EE and RE and in that it operates with a project development facility that is distinctly separated from the financing facility. The size of the contribution needs to be of the suggested size in order to be of real interest to the commercial banks. Comment: PLEASE ALSO DEMONSTRATE AND DOCUMENT CONSISTENCY AND NO OVERLAP

WITH: EBPF (ENVIRONMENT BUSINESS FINANCE PROGRAM); SEEF; AND THE GEOFUND FOR THE GEOTHERMAL COMPONENT. IF DUPLICATION OCCURS, THAT GEOTHERMAL COMPONENT MUST BE DROPPED


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Response: The consistency with EBPF and SEEF is covered in the PAD. There will not be overlap with the Geofund because that is a guarantee for drilling of new geothermal wells only. This project will focus on the utilization of the geothermal heat. Comment: THE INCREMENTAL COST SECTION IS UNCLEAR, BASELINE IS NOT CLEARLY

SEPARATED FROM THE GEF INTERVENTION SCENARIO. PLEASE CLARIFY. IN ADDITION,THIS SECTION STATES: ‘THE COSTS INVOLVED IN THE CAPITALIZATION AND OPERATION OF THE LOAN/EQUITY FINANCIAL FACILITY MAY BE APPROACHED DIFFERENTLY DEPENDING ON THE METHODOLOGY AND THE CONDITIONS ATTACHED BY THE GEF TO THE USE OF FUNDS DURING THE PROPOSED 10 YEARS OF LIFE OF THE FACILITY.’ PLEASE CLARIFY HOW THE GEF FUNDS WILL BE USED AND EXPLAIN WHY.

Response: The incremental cost section has been completely rewritten and the above comments taken into account. Comment: PLEASE ALSO PROVIDE MORE INFORMATION ON THE GOVERNING BOARD OF

THE FUND

Response: The SEFF will have a supervisory board with representatives from the public and private sector. Details are given in the PAD. Comment: SUSTAINABILITY IS NOT ADEQUATELY ADDRESSED. EVEN THOUGH $5M IS A

RELATIVELY HIGH GEF CONTRIBUTION FOR THIS COUNTRY’S ECONOMY, THE AMOUNT OF THE FUNDS WILL BE SMALL. HOW MANY TRANSACTIONS ARE SUPPOSED TO HAPPEN? HOW THE PROJECT OBJECTIVE CAN BE ACHIEVED THROUGH A FEW TRANSACTIONS?

Response: This is addressed in the sustainability section of the PAD and in the financial analysis. Comment: THE LEVEL OF PARTICIPATION OF NATIONAL COMMERCIAL BANKS IS NOT

SUFFICIENTLY OUTLINED AND THE CO-FINANCING IS UNCERTAIN. PLEASE STRENGTHEN THIS SECTION.

Response: This has been detailed in the PAD. Comment: DESCRIBE A PUBLIC PARTICIPATION PLAN, INCLUDING AT LEAST ALL THE

STAKEHOLDERS IDENTIFIED AT PIPELINE ENTRY.

Response: A Stakeholder Plan to inform the public and to engage key stakeholders has been initiated with both public consultations and individual discussions with a wide range of stakeholders including environmental NGOs, RE/EE technology providers, local academia, local energy consultants and small energy businesses.

Comment: FINALIZE M&E PLAN, CONSISTENT WITH LOGFRAME.

Response: An M&E plan has been outlined but the finalization with quantification of indicators will be done by appraisal in cooperation with the MoE (or the new Energy Agency which will be under formation at that time).


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