Decentralized Electrification Project (DEP)

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Guinea

Decentralized Electrification Project (DEP)

Project Concept Document

Draft - August 1999

Africa Region

AFC16

Date: August 1999 / Task Team Leader: Willem Floor
Task Manager: Robert van der Plas
Country Manager/Director: Mamadou Dia / Sector Manager/Director: Mark Tomlinson
Project ID: TBD
GEF Supplement ID: TBD / Sector: Energy / Program Objective Category: ES
Lending Instrument: SIL / Program of Targeted Intervention: / [ ] / Yes / [ x ] / No
Project Financing Data / [x] / Loan / [] / Credit / [] / Guarantee / [] / Other [Specify]
For Loans/Credits/Others:
Amount (US$m/SDRm): TBD million (including GEF)
Financing plan (US$m): [x] To be defined (TBD)
Source / Local / Foreign / Total
Government / 1.00
Parallel Financing (AFD, FFEM, BAD) / 3.00
Private investors / 1.60
IDA / 3.00
GEF / 2.00
Total / 10.6
Borrower/Beneficiary: The Government of the Republic of Guinea (GoG)
Guarantor: N/A
Responsible agencies: Ministry of Hydraulic and Energy (MHE), Ministry of Economy, Finance and Planning
Project implementation period: 5 years. Expected effectiveness date: ……………..
Expected closing date: …………………

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CONTENTS

A. Project Development Objective

B. Strategic Context

1. Sector-related CAS goals supported by the project

2. Main sector issues, sector policy and Government strategy

3. Sector issues to be addressed by the project

C. Project Description Summary

1. Project components

2. Key policy and institutional reforms supported by the project

3. Benefits and target population

4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection

2. Major related projects financed by the Bank and/or other development agencies

3. Lessons learned and reflected in proposed project design

4. Indications of borrower’s commitment and ownership

5. Value-added for Bank support in this project

E. Issues Requiring Special Attention

F. Sustainability and Risks

1. Sustainability

2. Risks

3. Possible controversial aspects

G. Project Preparation and Processing

Annexes

1. Project Design Summary (Logical framework and detailed project description)

2. Project Preparation Plan

3. Project Processing and Timetable

4. Conclusions of ESMAP Pilot Project

ABBREVIATIONS AND ACRONYMS

BED:Bureau d’Electrification Décentralisée (Decentralized Electrification Office)

CAS:Country Assistance Strategy

DE:Decentralized Electricity/Electrification

DEF:Decentralized Electrification Financing mechanism

DNE:Direction Nationale de l’Energie

DRE:Decentralized Rural Electrification

DSM:Demand Side Management

ENELGUI: Energie Electrique de Guinée (Asset-holding company)

ESMAP:Energy Sector Management Assistance Program

GEF:Global Environment Facility

GoG:Government of Guinea

LRMC:Long Run Marginal Cost

MHE:Ministry of Hydraulic and Energy

NGO:Non Governmental Organization

PDES:Providers of Decentralized Electricity Services

RET:Renewable Energy Technology

SHS:Solar Home System

SOGEL:Société Guinéenne d’Electricité (Private company, responsible for system operation )

PV:Photovoltaic

A: Project Development Objective

The project consists of both development and global environment objectives (GEF) that are integrated in order to be mutually supportive.

1. Project development objective and key performance indicators (see Annex 1):

The proposed project will support the Government strategy of increasing access to electricity in rural areas (district level localities). To achieve this objective, the project will:

(i) Promote a deregulated electrification approach in order to maximize private investments in electricity service delivery.

(ii) Promote community-implemented, decentralized, replicable and affordable grid/off grid/local isolated grid electrification schemes; and

(iii) Set-up a Decentralized Electrification Financing mechanism (DEF) for independent power producers/suppliers.

2. Project global environment objective (GEF) and key performance indicators (see Annex 1):

The global environment objective of the project fully supports GEF’s Operational Program Number 6 and specifically seeks to promote renewable energy technologies (RETs) for rural electricity service delivery, by removing barriers to their use and reducing implementation coststhat result from a lack of practical experience, initial low volume markets, and from the dispersed nature of applications, GEF support will effectively help to facilitate effective implementation arrangements through private sector participation and reduce CO2 emissions.

B: Strategic Context

1.1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1):

Date of latest CAS discussion: October 21, 1997

The proposed project supports the following four CAS objectives:

a) To foster rapid, broad based and private sector-led growth and increase the access to electricity in rural areas in an economically and environmentally sound manner with GEF financing.

b) To promote community-based self-help in the areas of social and economic infrastructure.

c) To promote micro-credits for the development of local private sector and rural credits.

d) To foster a more adapted contractual system of greater decentralization of service delivery.

The project will also support the broad goal of poverty reduction by improving the living standards, mainly through improvements in the quality of household lighting. By improving lighting, children will have more time at night and better study conditions and adults will have time to read or extend the length of their productive day.

The CAS objective of promoting community-based self-help is supported by the capacity building effort in developing self managed rural electricity schemes, as well as the Demand Side Management (DSM) component.

1.2. GEF operational Strategy/Program Objective addressed by the project

The project supports GEFs OP 6; Climate changes: promoting the adoption of renewable energy by removing barriers and reducing implementation costs. The project will make it attractive for the private sector to start investing in decentralized rural electrification schemes, and operate these on a fully commercial basis by; (i) reducing the high investment costs of RET by offering a subsidized financing mechanism (for a limited period of time only); (ii) raising public awareness on the advantages of using RETs, and (iii) reducing initial high transaction costs that result from lack of market knowledge, reduced market size, and dispersion of customers. At project end it is expected that RETs will have demonstrated to provide viable business opportunities in rural Guinea.

2.1 Main sector issues:

Electric power facilities in Guinea consist of a number of separate systems that are not interconnected. The power company SOGEL supplies the Capital, Conakry, and a number of smaller towns or prefectures. Mining companies and some other large consumers generate their own electricity. In addition there are 24 small diesel and run-of-the-river hydro stations in several towns whose operation is sporadic, inefficient and unreliable.

ENELGUI owns all public power sector assets on behalf of the Government. System operations have been contracted out for 10 years to a foreign private operator SOGEL under an “Affermage” contract. Recent discussions indicate the Government’s willingness to void this contract due to the poor performance, and issue a concession to a private company under more favorable conditions. A workshop in November 1999 will be held to discuss this in detail, at which time the Government will propose an action plan that should lead to the identification of a private operator in a relatively short time.

The quality of electricity service is poor and consumption has been constrained by a lack of supply rather than lack of demand. Tariffs are fairly high and are considered to be satisfactory for financial cost recovery. In addition, the Government is committed to a tariff policy that allows the operator to realize a reasonable return on net revalued fixed assets. Tariffs are automatically adjusted when objective parameters show significant changes in the cost of operation. However, collection is poor and fraud is rampant, and this is not reflected in the tariffs. As a result, despite several attempts to restore the financial viability and sustainability of the power sector (addenda 1 and 2 to the leasing agreement), the situation remains precarious. SOGEL continues to experience difficulties in balancing its accounts and ENELGUI does not have adequate resources to properly carry out the maintenance and expansion of the sector facilities.

Guinea had a population estimated at 6.8 millions in 1996, of which 70 percent (or about 435,000 households-equivalent) live in rural areas. The majority of the population in Guinea does not have access to electricity. Guinea has an overall electrification rate of about 5%; only 35% of urban households are connected (the Capital and large prefectures). In rural areas (district or “sous-prefectures” level localities), the majority of the population has no prospects of receiving electricity services based on conventional solutions in the medium to long term, i.e., extension of the distribution grid within their lifetime. In peri-urban areas, there are still thousands potential consumers that are not connected to the grid for technical and/or financial reasons, who use batteries to run their TVs and lights. As usual, the reason for SOGEL not serving these potential clients is their small energy demand aggravated sometimes by their location far away from existing grids. The investment required to expand power supply to the remote areas under current stringent norms is very costly. Moreover, several factors, including the institutional environment, have so far heightened the reluctance of private sector to serve this potential market. There is no data about the number of health facilities and schools without electricity, and no specific incentives are given to private entrepreneurs to provide electricity service to those establishments.

2.2. [Note: Summarize assessments of key policy, institutional and other issues, and the Government’s strategy to address them, referencing the economic and sector work of the Bank and other development agencies.]Sectorial Policies and Government Strategy

In 1992, the Government defined a sector policy for electricity, which was approved by the World Bank. The Ministry of Hydraulic and Energy aims to:

a) Develop appropriate electricity services for people willing to pay;

b) Adopt tariff policies that are self-financing;

c) Promote private sector in production, transmission, and distribution of electricity;

d) Develop the use of new technologies for decentralized electricity supply;

e) Develop hydro power potential; and

f) Limit ministry's activities to only policy making and regulation of the energy sector.

With the assistance of the World Bank-UNDP ESMAP program, (see Annex 4), the GoG has conducted several surveys and organized two workshops in 1997-1998 to develop the concept of a national Decentralized Electrification Program. These activities clearly showed that:

a)Rural consumers and institutions only use small quantities of electricity for lighting, communication, water pumping, and refrigeration. Typically, a rural family uses the equivalent of 20-40 kWh/month, a load that is too small to justify grid extension over a long distance, but can easily be supplied by solar home systems (SHS). Currently, when it is impossible for them to be connected to the national grid, they have no other choice than kerosene lamps and dry cell batteries for radios, flash lights, etc. and,

b)SHS, solar lanterns as well as pico-hydro systems [1]and diesel-generator sets could provide an intermediate solution that would be affordable for the majority of peri-urban and rural households.

In February 1998, the Government demonstrated a strong commitment to developing a de-regulated Decentralized Rural Electricity (DRE) sector by issuing a sub-sector policy letter that addressed:

a) The reform of the regulatory framework for the DRE (applying to power plants with up to 250 kW installed capacity), including the liberalization of tariffs/taxes on DRE delivery and services, and the reduction of import tax on specific DRE equipment,

b) The creation of a “Bureau d’ERD”, financially autonomous and technically independent from the administrative institutions (a small, independent DRE Office),

c) The creation of an autonomous DRE Fund, to be managed by an existing financial organization,

d) The launching of a National Decentralized Rural Electrification Program, with the assistance of the World Bank.

In June 1998, the Government promulgated the law 97/012/AN, which allows the financing, the construction, the management, the maintenance and the transfer to the public sector of development infrastructures by the private sector. The BOO formula (Build, Own, and Operate) seems to be very well adapted to the needs of private DRE suppliers. This law opens up, for the first time, the possibility to develop small, privately run, power utilities in rural areas.

3. Sector issues to be addressed by the project and strategic choices:

Since 1998, a second far-reaching reform of the electricity sector took place with the objective to establish a full private concession in the production, transmission and distribution of electricity. As a consequence, the electricity law/code will be revised to define an appropriate institutional framework for broader private sector participation and large scale grid extension. This reform is likely to have an impact on non-connected households in close vicinity of the electricity grid in the concession area. For isolated households however, it will almost certainly have no effect. Indeed, in the current context, neither rural nor peri-urban electrification activities will be undertaken, because their financial profitability is low compared to urban project opportunities. As a result and because of the population growth, the number of non-electrified households in Guinea will increase each year if nothing changes in the national electrification strategy.

Therefore, a decentralized electrification program should be an integral part of the electricity sector reform, right from the beginning. The Government of Guinea is willing to promote access to electricity to all households, instead of only improving the electricity service delivery to those households who already have access to electricity in urban areas. But, pragmatically, it agrees with potential private stakeholders to start with rural households and businesses that can afford such electricity services. It is therefore important to separate the long term objective from the tactical/strategic approach: the long term social objective is bringing electricity to all at the best possible price; the operational and short term objective is quickly bringing electricity to the most solvent at the highest admissible price (willing buyer, willing seller; this has to be fully understood by potential customers). This short-term objective applies to the activities proposed under the project.

In terms of strategy, the two fundamental principles of GoG’s Decentralized Electrification Program (DEP) are:

• The first priority is to promote private participation in decentralized electrification. The primary aim of the DEP is not to bring electricity to the off-grid people, but to promote capitalization in the decentralized power sector. The primary target is not the household to be connected, but the stakeholder that will enter the rural power business. Once households are integrated into a DE scheme, the interest focuses on other households that are not yet connected. On the other hand, a Provider of Decentralized Electricity Services (PDES) remains a partner of the program, because he may (and must, through adapted support contracting) continue developing and expanding electrification services. Moreover, over time he becomes of greater interest to the program, because he becomes technically more professional and more reliable for credit. This results in a systematic preference of the DEP for private professional stakeholders over local community associations (Comités Ruraux de Développement, users associations). The private provider will normally try to maximize its profits, which perfectly fits the aim of the program, as long as specific procedures insure that parts of this profit are reinvested in the rural power sector.

• The three principles of independence. The DEP relies on three principles of non-intervention by the State, which have been reconfirmed by the Direction Nationale de l’Energie:

No State intervention on priorities of electrification: specific projects in such or such locality will be developed on a purely commercial basis, according to business opportunities as seen by the PDES

No State intervention on electricity tariffs; this will be left to the PDES, on cost-effectiveness and capitalization criteria (sufficiently high tariffs will be an important element of project validity for commercial bank decision) as well as willingness to pay for clients. However, initially the tariff proposal will have to be accepted by the BED, at the time of business plan analysis, in order for the PDES to benefit from the financing mechanism advantages.

No State intervention on PDES selection, that will be left to the appreciation of the commercial bank in charge of the DEF mechanism.

State responsibilities consist of (and are limited to): (i) defining the area where DE concessions will be promoted (geographical, level of installed power), (ii) defining the rules applicable to the DEP, in terms of regulations and contracting; (iii) developing fiscal incentives, as well as technical and financial support, and (iv) attributing the local concessions automatically to the PDES retained by BED and DEF, after only ascertaining the absence of potential conflicts with public development programs. The State will delegate responsibility of DEP decision making to the “Bureau d’Electrification Décentralisée” (BED), the independence of which must be officially recognized.

In order to carry out the program, two support structures will be created:

• A small Office “Bureau d’Electrification Décentralisée” (BED), with a not-for-profit status will act as the Project Implementation Unit for the duration of the DEP. Its staff (General Director only) will be contracted by the MHE on an international competitive basis. BED will be autonomous from government structures and will be remuneratedbased on results (base funding will initially come out of Project funds, to be progressively replaced by a small kWh surcharge at the end of the project). BED has a fundamental role to play in the promotion of DE, but it should refrain from attaching priorities to certain zones within concessions, among regions, zones, villages or technologies. Such pressure will certainly come from State or local Authorities, but should not be entertained. The leading factor for project development is not programming but market opportunity.

• A Decentralized Electrification Financing mechanism (DEF), initially managed by BED and progressively by a local financial institution. Such financial institution will be in charge of the specific financial products, combining subsidies and loans under specific DEP procedures. The DEF mechanism will be operated in total independence, selecting borrowers and projects according to its own established criteria.

C: Project Description Summary