Agency’s Project ID: P090117

GEFSEC Project ID:

Country:Mexico

Project Title: Integrated Energy Services for Small Localities Rural Mexico

GEF Agency: World Bank

Other Executing Agency(ies): Ministry of Energy (SENER) / Indigenous People Development Commission (CDI)

Duration: 5 years

GEF Focal Area:Climate Change

GEF Operational Program: OP6

GEF Strategic Priority: CC1, CC3, CC4

Pipeline Entry Date:March, 17, 2005

Estimated Starting Date: July 2006

IA Fee:

Project Executive Summary

GEF Council Submission

Contribution to Key Indicators of the Business Plan:(i) 4.98 Million Tones of Avoided Carbon Emissions; (ii) At least 200 new productive and/or economic development activities (e.g., micro businesses) that promote more intensive use of electricity.

Record of endorsement on behalf of the Government(s):

Ricardo Sanchez Baker / Date: November 4, 2004
Director General, Ministry of Finance
Financing Plan (US$)
GEF Project/Component
Project / 15,000,000
PDF A
PDF B / 350,000
PDF C

Sub-Total GEF

/ 15,350,000

Co-financing*

IBRD / 15,000,000
Government / 59,000,000
Private / 7,500,000
Sub-Total Co-financing: / 81,500,000
Total Project Financing: / 96,500,000
Financing for Associated Activities If Any:
Leveraged Resources If Any:

*Details provided under the Financial Modality and Cost Effectiveness section

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 / Jocelyne Albert
Sr. GEF Regional Coordinator
Latin America and the Caribbean, World Bank
Date: December 5, 2005 / Tel. and email: 202 473 3458

Project Summary

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

Mexico has already achieved an electrification coverage of almost 95 percent. However, there remain an estimated 5.96 million people without electricity living predominantly in rural indigenous areas of the Southern States (Oaxaca, Chiapas, Guerrero, Veracruz) where the average electrification coverage is 88 percent. Electrifying the remaining households is challenging, since the majority of them are found in small, remote, isolated communities. Further, the unelectrified population is expected to increase by 20 percent through population growth over the next decade.Seventy percent of the population in extreme poverty in Mexicois concentrated in the Southern States.

In 2000, the Government of Mexico (GoM) expressed its commitment to increase the national electrification coverage to 97 percent by 2006 (Energy Sector Program, PROSENER 2001-2006). In particular PROSENER has established the challenge to implement a national rural electrification program based on renewable energy incluiding photovoltaics, aeolic, mini-hydro and biomass. As of 2005 however, there is no national rural electrification program in place and the target of increasing the electrification coverage to 97 percent by 2006 has not been reached due to a number of institutional, programmatic and fiscal constraints.

One of the main constraints to the implementation of a national rural electrification program is the nature and performance of decentralization policies introduced in 1996. These policies effectively transferred the administration of federal resources for social infrastructure development from the central government to the States and Municipalities. Unfortunately, the decentralization and devolution of the financial and programmatic control to the States and Municipalities has not been accompanied by a parallel build-up of local capacity to identify electrification needs/uses and plan cost-effective solutions accordingly. A recent national municipal survey demonstrates that the expenditure efficiency at the Municipality level is extremely low and that investments in rural electrification are marginal.

The other important constraint is the lack of understanding regarding the performance of renewable energy in rural distributed applications which results in a generalized resistance to the use of these types of solutions.

Other key barriers include i) the lack of a legal framework addressing specific provisions for the development of renewable energy, ii) the existence of high and inefficient consumer subsidies (not targeted to the poor) that affect the competitiveness of renewable energy, iii) the complexity of inducing service provision –especially private- in rural areas, and iv) the lack of a strategic framework streamlining the expertise and efforts of key government agencies while continuing to sthrengthen Municipal and local capacities.

To bridge the electrification gap, achieve a more efficient use of available public resources and promote the use of renewable energy in rural distributed applications, the GoM has requested assistance from the Bank to prepare and implement a rural electrification Project.

The proposed Project is a fully blended operation that includes a US$ 15 million GEF grant and a US$ 15 million IBRD loan. The total project costs are estimated in US$ 96.5 million.

The objective of the Project is to increase access to efficient and sustainable integrated energy services inrural areas of the Southern States of Mexico. To achieve this, the Project will i) contribute to the financing of subprojects to supply electricity services to about 50,000 currently un-served rural households, businesses, schools and health centers, using renewable source-based integrated energy services, ii) promote a more intensive use of electricity while contributing to increase the number of subsistence, productive and economic activities, iii) develop a sustainable market for the provision of least costs integrated energy solutions, and iv) demonstrate the key elements of a strategy for service provision in rural areas that attracts investment from private and public sector electricity providers, as well as national, regional and local governments. The Project will be implemented over a five year period (July 2006-2011).

The global environmental objective of the Project is to achieve reduction of greenhouse gas emissions through use of renewable energy in rural areas for the provision of electricity. The key global performance indicator is avoided carbon emissions (CO2e). Total estimated carbon emissions reductions from facilities installed during Project implementation are estimated at 4.98 million metric tones of CO2e, over the lifetime of the systems. The long-term national impact of this Project is expected to be much lager than this number as replication progresses.

The proposed Project will be developed primarily in the Southern States: Oaxaca, Guerrero, Veracruz, Puebla and Chiapas and will focus on communities or aggregates of communities in the range of 50 to 500 households. The initiative will target 50,000 households in the period July 2006-2011. The proposed Project has five main components: 1) Strengthening of strategy, policy, and regulatory frameworks, 2) Investment in rural electrification sub-projects, 3) Technical assistance and capacity building activities necessary to ensure the success and sustainability of the Project at different stages of implementation, 4) Technical assistance to increase productive uses of electricity and improve quality of life and, 5) Project management. Each of these components is described below (and in more detail in GEF Project Brief Annex 4):

Component 1. Strengthening of strategy, policy, and regulatory frameworks. This component includes a) the review and design of strategy, policy and/or regulatory measures for electricity tariff and subsidy schemes as well as ownership and property rights associated with off-grid rural electrification projects, b) the design of incentives to foster the development of renewable source based off-grid electricity services, c) the development of regulatory measures, standards and manuals to ensure minimum quality levels in technical installations and service delivery practices, d) the development of methodological guidelines and tools for public consultation activities and, e) the design of a conflict resolution mechanism to ensure transparency and reduce risks.

Component 2. Investment in Rural Electrification Sub-Projects. This component will provide capital cost subsidies for a fraction of the investment cost of rural electrification sub-projects, and targeted output-based subsidies focused on service quality and market development. The sub-projects will be implemented by qualified electricity service providers. Two different service delivery models will apply depending on the type of sub-project as described in Annex 4.The following off grid technologies are being primarily considered: a) photovoltaic systems serving a single customer, b) isolated grids powered by a hydroelectric plant, c) isolated grids powered by a diesel plant, d) wind generators serving a single customer or customer clusters, e) isolated grids powered by biomass generators, f) battery charging stations energized by any of these technological options, and g) combinations of a. through f. The Project will also support the installation of a limited number of efficient wood stoves in rural households.

Component 3. Capacity Building to State, Municipal and Community Stakeholders. This component aims to assist the various stakeholders that will have to work together under the proposed Project design. This component will strengthen the capacity of Federal, State, Municipal and Community stakeholders to identify, plan, prioritize, and implement sound off-grid rural electrification sub-projects in cooperation with electricity service providers, the private sector, decentralized government institutions such as the CFE and when appropriate, NGOs and academia. The component is focused on all those stakeholders that will be ultimately responsible for the planning, identification, selection, implementation and monitoring of sub-projects. The component will include the activities and actions necessary to strengthen the different stages of the project cycle as described in Annex 4.

Component 4. Technical Assistance to Increase Productive Uses of Electricity. The objective of this component is mainly to promote a more intensive use of electricity while contributing to increase the number of social and productive activities.. The component includes technical assistance and capacity building activities associated with: a) access to micro-financing and development of business plans, b) development of social or community projects with high impact on health and education, and c) development and financing of productive and economic activities.

Component 5. Project Management. This component will support the overall management of the proposed Project including the Federal Implementation Unit (FIU) and the State level implementation units (SIUs) as well as their technical and social and environmental oversight teams. It is expected that the actual administration of the GEF and IBRD resources will be carried out by Nacional Financiera NAFIN.

TABLE 5.1 ESTIMATED PROJECT COSTS BY COMPONENT
COMPONENT / US$ Million
GOM / IBRD / GEF / Private / Total
1 / Policy, Regulation and Strategy
Tariff and Subsidy Schemes / 0.5 / 0.4 / 0.4 / 1.3
Ownership Rights and Schemes / 0.5 / 0.4 / 0.4 / 1.3
Conflict Resolution Mechanism / 0.05 / 0.1 / 0.15
Incentives to Promote RETs / 0.2 / 0.05 / 0.25
Technical Specifications, Manuals and Standards / 1 / 0.5 / 1.5
Methodological Guidelines, Tools Social Consultation / 0.4 / 0.1 / 0.5
2 / Rural Electrification Sub-Projects (Investment/ OBA Subsidies) / 51.05 / 5.06 / 5.64 / 6.54 / 68.29
See Annex 5 for Details
3 / Technical Assistance
Computer hardware and software/modeling tools planning stage / 0.01 / 0.01
Measurement, data collection on renewable energy resources / 0.2 / 0.4 / 1 / 1.6
Capacity building to FIU and SIUs / 0.8 / 0.5 / 0.2 / 1.5
Communication strategy / information campaign / 0.5 / 0.5 / 0.5 / 1.5
Pre-feasibility, Feasibility, Engineering of Selected Subprojects / 0.25 / 0.5 / 0.5 / 1.25
Bidding packages, service delivery models / 0.1 / 0.2 / 0.3 / 0.6
Permanent training to community extension agents / 0.3 / 0.5 / 0.5 / 0.2 / 1.5
Impact Evaluation (surveys / analysis) / 0.25 / 0.5 / 0.25 / 1
Monitoring Activities (technical / social / environmental) / 1 / 0.5 / 0.5 / 2
4 / Technical Assistance Social/productive Uses of Electricity
Component Management / 0.25 / 0.25 / 0.5
Capacity building social activities (subsistence / quality of life) / 0.5 / 0.5 / 1
Capacity building local entrepreneurs: micro-businesses - productive / 1.25 / 0.5 / 1.75
5 / Project Management 4 States 5 year Period
One FIU: Management, Procurement, Financial, Technical / 0.325 / 0.3 / 1 / 1.625
One SIUs: Management, Procurement,Financial, Technical / 1.54 / 1.25 / 1.25 / 4.04
Social and Environmental Oversight (Five SIUs) / 0.91 / 1.705 / 0.385 / 3
Procurement/Legal Executing and Implementing Agencies / 1 / 1
Administration Fee Trust Funds / 0.375 / 0.375 / 0.75
TOTAL / 59 / 15 / 15 / 7.5 / 96.5

The GEF resources will, specifically, co-finance the following activities, all of them focused on the introduction of off-grid rural electrification projects based on renewable energy:

i.Review and design of strategy, policy and/or regulatory measures for electricity tariff and subsidy schemes as well as ownership and property rights,

ii.Design of incentives to foster the development of renewable source based off-grid electricity services,

iii.Development of regulatory measures, standards and manuals to ensure minimum quality levels in technical installations and service delivery practices,

iv.Investment in rural electrification sub-projects. This component will provide capital cost subsidies for a fraction of the investment cost and targeted output-based subsidies focused on service quality and market development.

v.Capacity building to State, Municipal and community stakeholders

vi.Technical assistance to promote a more intensive use of electricity while contributing to increase the number of social, productive and economic activities

vii.Project management.

The above components are designed to remove the barriers to the introduction of rural electrification projects based on renewable energy not connected to the grid (described above).

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

The key performance indicators will be: i) number of new electricity connections using renewable energy, ii) capacity additions with renewable energy (MW/year), iii) number of productive uses of electricity in rural areas, and iv) avoided tones of carbon emissions (tCO2e/year).

The Project will provide capital cost subsidies for a fraction of the investment cost of rural electrification sub-projects, and targeted output-based subsidies focused on service quality and market development.

The sub-projects will be implemented by qualified electricity service providers. The service delivery model will be based on medium term service contracts for equipment provision, operation, maintenance, training and transfer to community individuals or organizations (BOTT). The design of the contracts –and type and size of subsidies- will vary depending on the type of technology and the scale of the project. Payments to suppliers will be made contingent upon successful operations of the system over time.

The main risk of the Project is associated with the complexity of inducing service provision –especially private- in rural areas. To mitigate this risk, SENER has entered into agreements with three government institutions that are considered key to the successful development of the IESRM Project: a) the Indigenous People Development Commission (CDI), b) the Federal Commission of Electricity (CFE), and c) the FIRCO agency (Ministry of Agriculture). These three institutions have strong networks of social and technical specialists. The IESRM Project will take off and evolve with support of these three agencies, taking advantage of their edge and experience. In particular, the Project will rely on the FIRCO experience, building upon its platform of equipment suppliers, promoting the transition to service provision and the participation of energy service providers.

GEF financing will target the components designed to address this challenge and lower the barriers to the introduction of renewable source based integrated energy solutions not connected to the grid.

  1. Country Ownership

a)Country Eligibility

Mexico is eligible for GEF funding. Mexico has ratified the UNFCC and is eligible to borrow from the International Bank for Reconstruction and Development (IBRD). Mexico has also ratified the most important multilateral environmental agreements (Vienna Convention 1985; Montreal Protocol 1987; United Nations Climate Change Convention 1993).

Mexico ratified the Kyoto Protocol on September 7, 2000 and established the Ministry of Environment (SEMARNAT) (Secretaria de Medio Ambiente y Recursos Naturales) as the designated national authority (DNA) responsible for the implementation of the Clean Development Mechanism (CDM). SEMARNAT is a sophisticated agency, with an agenda that includes all relevant environmental topics and strategies directly linked to all relevant sectors.

b)Country Drivenness

Mexico has closely followed the international requirements associated with the Kyoto Protocol and United Nations Framework for Climate Change (UNFCC). Mexico has issued its first and second national communications (1997, 2001) as well as several updates of the national GHG emissions inventory. The country is fully engaged with the climate change agenda at national and international levels.

  1. Program and Policy Conformity

a)Fit To GEF Operational Program and strategic priority

The Project is consistent with GEF Operational Program Number 6, “Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs”. In the Project, IBRD and GoM funds will provide minimum capital cost and output-based subsidies to catalyze investments in rural electrification. GEF support will target only those components that specifically support the introduction of renewable source based off-grid electrification projects: i) development of policy and regulatory incentives (CC3), ii) development of regulatory measures, standards and manuals to ensure minimum quality levels in technical installations and service delivery (CC3), iii) market transformation through the provision of minimum targeted capital cost and output based subsidies (CC1), iv) technical assistance and capacity building activities (CC1, CC3), and v) technical assistance to increase productive uses of electricity and economic development in rural communities (CC4). The GEF will equally co-finance the administration costs of the Project with resources from the GoM and the IBRD loan.

b)Sustainability (including financial sustainability)

Project sustainability will be ensured through: a) the continuous strengthening of an institutional network integrated with government and non-government agents, focused on the planning, prioritization and implementation of rural electrification projects in coordination with other key government programs, and b) the implementation of service delivery models and market mechanisms designed to promote synergies between “external” (e.g. ESCOs, equipment suppliers, public utility, NGOs) and “internal” service providers (e.g. community organizations, local cooperatives, individuals, private companies) consistent with their real capabilities and nature.

The sustainability of sub-projects, on the other hand, will be ensured through: a) the implementation of service delivery models based on medium-term build, operate, train and transfer (BOTT) service contracts with output based subsidies, and b) strong emphasis on community participation, consumer education and training. Members of successful, early sage communities would be offered contracts to provide training in later communities (to build ‘local empowerment’).