SUPPLEMENT #1TO THE INITIAL ENVIRONMENTAL EXAMINATION (IEE)

Title of Activity:1. ScalingUp Renewable EnergyCentral Asia InteragencyAgreement with the Department of Energy’s National Renewable Energy Lab

2. Power the Future Indefinite Delivery Indefinite Quantity Contract

Program Area:EG.7 Modern Energy Services

EG.10 Environment

EG.12Climate Change-Clean Energy

Program Elements:EG 7.1 Expanded access to Modern Energy Services

EG 10.1 Clean ProductiveEnvironment

EG.12.2 Clean Energy Investment, Implementation, and Use

Country/Region:Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan

Funding Period: FY2017– FY2022

Resource Levels/Amount(s): USD 25 million

Statement Prepared by: Sergey Yelkin, Energy Projects Specialist, Economic

Development Office

Date:February 3, 2017

Supplemental IEE? Yes X DCN of Original IEE:

-Asia 14-69 -Regional Energy and Water Cooperation in Central Asia), FY 2014-2020 (Programmatic)

Environmental Media and/or Human Health Potentially Impacted (check all that apply):

None Air WaterLand BiodiversityHuman healthOther

Climate Change Vulnerability Risk LowMediumHigh

ENVIRONMENTAL ACTION RECOMMENDED: (Place X where applicable)

Categorical Exclusion: [ X ] Negative Determination with Conditions: [ X ]

Positive Determination:[ ] Deferral: [ ]

SUMMARY OF FINDINGS

The purpose of this Supplement to theInitial Environmental Examination (IEE), in accordance with Title 22, Code of Federal Regulations, Part 216(22CFR216), is to provide a preliminary review of the reasonably foreseeable effects on theenvironment, as well as recommended threshold decisions, for the activities detailed below. Thedocument provides a brief statement of the factual basis for the threshold decisions.

Recommended Action: The activities under review are recommended for the Threshold Decisionsindicated above in the Environmental Action Recommended Sectionand Section 5 of the IEE (Categorical Exclusion and Negative Determination with Conditions).

1.PURPOSE, BACKGOUND AND ACTIVITY DESCRIPTION

1.1Purpose

This Supplement #1 to the Programmatic Regional Energy and Water Cooperation IEE(DCN: Asia 14-69), further referred to as “P-IEE”, is for two new activitiesthat will take place underProgram Areas EG.7: Modern Energy Services, EG.10: Environment and EG.12:Climate Change-Clean Energy and Development Objective 2of the Mission’s Regional Development Coordination Strategy (RDCS): Enhanced Cooperation on Shared Energy and Water Resources. The Amendment covers Clean Energy, including renewable energy and energy efficiencyactivities. The Amendment is a critical element of a mandatory environmental review and compliance process meant to achieve sound activity design and implementation.ThepurposeofthisIEESupplement #1isto:

  • Timelyanddulyaccountfor: 1) Interagency Agreement (IAA) with US Department of Energy’s National Renewable Energy Laboratory (NREL):Scaling Up Renewable Energy-Central Asia (FY 2017-FY 2018); and2)Power the Future (PTF): Scaling Up Clean Energy (FY 2018-FY 2022) with an estimated combined value of $25 million to be implemented in five countries of Central Asia. This Supplement does not change the budget ceiling of the P-IEE.
  • Confirmthatthescope,natureandtypeofproposedactivitiesareconsistentwiththoseregionalandcountry-specificactivitiesdescribedintheoriginalIEE.
  • StipulatethatallpreviouslyapprovedThresholdDecisionsandrelatedconditions, limitations and stipulation for revisionshallfullyapplytoproposedactivities.
  • Establish additional types of activities Qualifying for a NegativeDetermination with Conditions (ND), and
  • Stipulate for screening, mitigating, monitoring and reportingmeasures as presented in Section 4.

1.2 Background

The goal of these activities is to accelerate the regional transition to high performing and market-based approaches to low emissioneconomic growth. This will be achieved by mitigating climate change by increasing the deployment of cost-competitive renewable energy in all five Central Asian countries and improving their ability to meet national emissions commitments. While other donors are operating in this overall space, USAID/Central Asia(USAID/CA) has been and will continue to be diligent in coordinating to ensure no duplication of efforts.

USAID/CA seeks to enter into a one-year interagency agreement with the NREL to assist the five Central Asian countries with the initial assessments and technical assistance needed to reduce greenhouse gases and scale up renewable energy. This activity will provide an analytical base for any additional work the Mission or another donor plans to do on the adoption and scaling up of renewable energy in Central Asia. Determination was made that the requirements of Foreign Assistance Act, section 621(b) have been met and that the Department of Energy’s National Renewable Energy Laboratory is particularly suitable to perform the required technical assistance. Action memorandum of determination was prepared for USAID/CA Mission Director approval.

An IAA between USAID and NREL will enable USAID to utilize the expertise residing at the NREL. Under the IAA, NREL is particularly suitable to provide the technical assistance towards supporting the Central Asian countries to begin implementing their efforts to reduce greenhouse gases, enhance transparency of progress toward those reductions, and scale up renewable energy.

1.2.1 GHG Emissions and NDCs in Central Asia

The NREL Agreement and PTF activity aim to strengthen the global response to the threat of climate change by keeping the global temperature rise this century to well below two degrees Celsius above pre-industrial levels. Achieving this goal will require significant reductions in emissions of GHGs over the coming decades. In advance of Paris December 2015 Climate Change conference, many countries, including four of the five Central Asian nations, outlined the post-2020 climate actions they intend to take to reduce their own GHG emissions, known as their Intended Nationally Determined Contributions (INDCs).

Central Asia is a significant source of GHG emissions. In 2012, emissions from the five countries in the region totaled 660 million tons CO2-equivalent. GHG emissions from Kazakhstan accounted for some 45% of the regional total, with Uzbekistan and Turkmenistan accounting for more than one-third and one-sixth, respectively. Emissions from energy production and consumption accounted for more than 85% of the region’s emissions[1].

Kazakhstan: As a result of energy-intensive mining and industry, Kazakhstan is one of the world’s biggest emitters per unit of Gross Domestic Product (GDP). In the past few years, the government of Kazakhstan has shown leadership in addressing global climate change.

The government of Kazakhstan, through its INDC, has committed to an unconditional targetof 15% reduction of GHG emissions by 2030 compared to a 1990 baseline, and 20% conditional target if external assistance is available. To achieve these targets, the government committed to 3% renewable generation by 2020, 30% renewable generation by 2030, and 50% alternative (renewables and nuclear) by 2050. The government seeks to reduce energy intensity of the economy by 10% by 2015, and 20% by 2025.

Kyrgyz Republic: Although it has one of the lowest GHG emissions per capita in the world, the Kyrgyz Republic is one of the most climate vulnerable countries in Central Asia. Freshwater reserves in the Kyrgyz Republic are estimated to decrease 40% by the end of the century if the effects of climate change continue unabated. In its INDC, Kyrgyz Republic committed to reducing GHG emissions 11.49 - 13.75% below a BAU scenario by 2030. With international support, Kyrgyz Republic could reduce emissions 29.00-30.89% below BAU in 2030.

Tajikistan: This is a small developing country without significant reserves of oil, gas, or coal, and a low per capita GDP, as such it is a low emitter of GHG, but is extremely vulnerable to climate change, including frequent natural disasters. Tajikistan’s NDC has a target of 65- 75% of the 1990 level of GHG emissions by 2030. About 98% of Tajikistan’s electric power is from hydropower facilities. Tajikistan plans to achieve its contributions through systematic reforestation and through new international funding and technology transfer for energy efficiency improvements in power, transport, and agricultural sectors.

Turkmenistan: notes that intends to reduce the emissions intensity of its economy,reducing the amount of GHG emissions per unit of GDP, although it anticipates that the overall level of emissions will double by 2030 over 2012 levels.

Uzbekistan:Although it did not submit an INDC, Uzbekistan is taking steps towards transitioning to a lower emissions economic development model. Uzbekistan reported that for the last 15 years (2000-2015) its energy intensity per GDP was reduced by 55%. By 2030, Uzbekistan further plans to reduce its energy intensity per GDP two fold.

1.2.2 Regional Challenges and Opportunities in Developing Renewable Energy

In Central Asia, countries have taken some steps to add renewable energy (RE) to their national energy mix. There is enormous potential for power generation from cost competitive solar, wind, small hydro, and biomass resources in the Central Asian countries. Through development of their domestic RE resources, these countries canaccess many development benefits, including increased energy security using market-based approaches, renewable energy exports, economic development and job creation, and reduced GHG emissions.

Developing a RE industry in Central Asia also provides an economic opportunity for rural and agricultural areas.As of 2016, Kazakhstan has 48 operational RE facilities with a combined capacity of approximately 252 MW (including hydro and biomass); these facilities currently account for about one percent of all electricity produced in Kazakhstan. In order to reach its three percent target, Kazakhstan seeks to bring approximately 1800MW of new solar and wind generation capacity online over the next four years.

In addition to developing Kazakhstan’s RE supply, parallel efforts to improve energy efficiency (EE) in existing energy systems can both contribute to INDC emission reduction targets, and enable grid flexibility that is essential for balancing the natural variation of solar and wind power generation. One of the larger energy sub-sectors where improvements in efficiency can have a significant impact is combined heat and power (CHP) facilities. In addition to generating power, CHP units also supply heat for buildings and industrial processes. CHP units are primarily powered by coal, and currently generate about half of the nation’s electricity. CHP offers a unique opportunity to access flexibility in the power system, and will play an important part in grid integration of VRE in Kazakhstan.

Kazakhstan is viewed as a regional leader, and through C5+1 countries [2]in the region will benefit from lessons learned in Kazakhstan through the implementation of replicable pilot projects, improved knowledge management practices, and broad information sharing among regional stakeholders.

Central Asia’s power sector offers important opportunities for development of renewable energy and energy efficiency. Realizing this potential will however require determined national and regional action to:

●Create an effective enabling environment for RE that accounts for the low wholesale and retail electricity prices that are common throughout the region; Establish the policy and regulatory preconditions for investment in RE;and

●Addressing institutional and technical barriers to high penetration grid-connected RE

Developing large scale RE poses challenges related to high costs and electrical system operational stability throughout Central Asia. While the regional challenges to scaling up RE in Central Asia are considerable, opportunities for encouraging RE development through regional cooperation exist that can complement national actions.

1.2.3Other Donors’ and IFI’s Activities

United Nations Development Program (UNDP). Initiated in the early 2000s by the UNDP and the government of Kazakhstan, and financed by the Global Environment Facility (GEF), the Wind Power Market Development Initiative was one of the first projects in Kazakhstan that aimed to reduce the country’s greenhouse gas emissions by facilitating the sustainable development of the wind market. It made the first attempt to address the development of regulations and policy instruments to reduce the risk of renewable investments and support the adoption of a national target for wind power in Kazakhstan. The Wind Atlas of Kazakhstan, which served as a basis of later investments, was a direct outcome of this initiative, as was an initial assessment of the development potential by region. The combination of a broad range of market barriers prevented the investment fell into three categories: 1) awareness, information and capacity; 2) financial and low electricity prices; 3) policy and institutional. In 2016-2017, UNDP plans to develop proposals for improvement of RE regulatory basis under the project “upport to the Government of Kazakhstan in implementation of ’Green Economy’” concept and institutionalizing of the Partnership Program “Green Bridge”.

European Bank for Reconstruction andDevelopment(EBRD). The EBRD’s involvement in Kazakhstan’s renewable energy market began in 2008 by signing a Sustainable Energy Action Plan (SEAP). This document outlined a range of joint actions, comprising both investments and technical assistance. Among the proposed investments, renewable energy projects were identified as priority investments. The proposed technical assistance activities focused on regulatory support in the area of renewable energy. The government of Kazakhstan passed the renewable energy law in 2009. In June 2009 the EBRD helped the government develop its Clean Technology Fund (CTF) Investment Plan. The CTF provided support and approved the government’s request to nominate renewable energy as a priority investment area in Kazakhstan. The CTF allocated USD116 million to support the creation of a renewable energy market, by funding investments and technical assistance on the introduction of a cost allocation system; draft provisions for feed-in tariff; procedures on the award of concessions; and developing standards for power-purchase agreements and national standards regarding the technical conditions of connecting renewable energy projects to the grid. The majority of the recommendations were incorporated into the new primary law.

Between 2010 and 2015, the CTF provided a total of Euro 1 million to support the EBRD’s and the Kazakh government’s work on creating a favorable environment for renewable energy by analyzing existing barriers, identifying incentive mechanisms and drafting primary and secondary legislation. A new renewable energy law with significant improvements was passed in 2013. It introduced a feed-in tariff mechanism, designed the Power Purchasing Agreement (PPA) and helped create of the Cost Clearing and Settlement Centre in 2013 to serve as the single buyer for renewable power. The Centre’s main function is to purchase renewable generation from eligible generators, calculate the average cost per MWh of generation purchased and sell the energy to suppliers and other load-serving entities.

During the period of 2010-2015 EBRD signed several investments in renewable energy in Kazakhstan[3].In April 2016, a number of further improvements in the regulations related to the creation of a reserve fund for payments of the feed-in tariffs, the development of a standard agreement for the connection to the grid and the possible indexation of the feed-in tariffs to hard currency were proposed. The EBRD plans to continue to work closely with the government on improving the existing renewable energy framework.

1.2.4On-going USAID Energy Activities

The following energy and climate change activities have been implemented in 2014-2017:

Central Asia Energy-Water Development Program (CAEWDP, 2014-2018). The purpose is to enhance regional cooperation in Central Asia around shared energy and water resources. The program combines various interventions in power sector reforms, energy trade, efficiency improvements, emissions reductions, and climate change adaptation with regional and local water dialogue, water governance improvements, sustainable management, and water resiliency. By joining WB's multi-donortrust fund with USD1million. in 2014, USAID is able to coordinate with other donors, expanding its impact to improve water resources managementfrom local to international levels across the regionmaximizing USG limited resources in Central Asia region.Currently, USAID and WB have one year no cost extension agreement through December 2017 allowing the mission to be a part of the donor coordination in energy and water sector.

Energy Links Project (2014-2019).The objective of Energy Links is to increase national energy security for countries in Central Asia via four supporting outcomes: Outcome 1: Increased transparent intra- and inter-regional energy trade; Outcome 2: Improved legal and regulatory framework and investment climate for the countries’ energy sectors; Outcome 3: Improved corporate governance, operations, and commercialization of the energy companies; Outcome 4: Improved energy efficiency (EE) and demand-side management (DSM). Energy Links project conducted assessments for Tajikistan and Kyrgyzstan Republic power sectors, providing policy context, system characteristics, and high-level energy supply and consumption data to help frame DSM and energy efficiency analysis. Energy sector in both countries is in a continuous crisis state, especially in winter, driven primarily by the mismatch between high winter electric loads from building heating systems, and the low winter availability of the hydropower resource that comprises almost all of the country’s generation capacity. The problem is typically described as a capacity-constrained electric grid, specifically during the winter months due to excessive and inefficient use of electricity to heat homes with electric resistance heaters. While capacity expansion is a major priority, demand side management and energy efficiency can also make major contributions to resolving the energy crisis and supporting clean development. Energy Links also works on USAID supported Central Asia – South Asia 1000(CASA-1000) by funding the CASA-1000 Secretariat’s executive director and support staff, and helping the participating countries work through the project’s various contracts and agreements.

Climate ChangeMitigation Program(KCCMP, 2013-2017).ThepurposeofUSAID’sKCCMPistohelp Kazakhstanachieve long term and sustained reduction in greenhouse gas(GHG) emissionsintensitybysupporting the governmentand businesscommunityofKazakhstan inimplementationofclimate changemitigation policiesandmeasuresatthe project, corporate,andnational levels. Theprogram approachincludesassistance in developing,implementing,andenforcingpolicies, regulationsand/orproceduresthatprovide real andmeasurable reductions in GHG emissions while strengthening thetechnical and institutional capacitiesof Government of Kazakhstan agencies;building the capacity of the business community to measure and manage their emissions and energy consumption andtakemitigation actions;andimproving graduate-leveleducationandtrainingfor thenextgeneration.KCCMPsupportedtheGovernment of Kazakhstan for an initial draftoftheINDC, andsigningand ratification ofParisAgreement in November 2016. Additionally, KCCMP is working with UNDP and local investors on improvement efficiency of heat supply to autonomously heated municipal buildings. Preliminary results show this improvement can reduce air pollution and GHG emissions from the heating systems by more than 50 per cent. Kazakhstan being committed to its climate change goals, faces substantial pressures to improve its economy, which is deeply reliant on heavy industries that are energy-intensive and produce significant GHGs. Given quite high government staff turnover and the significance of the financial and economic constraints on businesses, it will be difficult to achieve goals of GHG reduction.