Concept Paper

Project Number: 43576 June 2011

Democratic Socialist Republic of Sri Lanka: Clean Energy and Network Efficiency Improvement Project

I. THE PROJECT A. Rationale

1. The Clean Energy and Network Efficiency Improvement Project (formerly Power Sector Strengthening Project)1 will include the following components: (i) wind power development; (ii) energy efficiency improvement; and (iii) solar power development. The wind power development component will create an enabling environment and infrastructure for wind power development through use of a public-private partnership (PPP) approach and construction of a grid substation and a transmission line to enable evacuation of power from a 100 megawatt (MW) wind park to be developed in the area of Mannar island in the Northern province.2 The energy efficiency improvement component will include construction of grid substations in locations critical for technical loss reduction and associated transmission lines where necessary, reinforcement and reconductoring of 33 kV medium voltage (MV) lines, reactive power management through MV capacitor installation in order to address overloading of conductors, voltage drop in MV lines and poor power factor that are main contributors to technical losses in the Eastern, Central, Sabaragamuwa, and Western provinces. The solar power component will include support in developing a solar power park3 on a PPP basis and strengthening a relevant transmission infrastructure, as necessary, for solar power evacuation to the grid. The latter component may also include a 0.5 MW rooftop solar power generation pilot to be developed on a PPP basis with the aim to encourage a private sector market for solar rooftop generation development. 2. Sri Lanka’s power sector struggles to meet the growing demand for electricity at sufficiently low cost and acceptable reliability. The share of thermal power in the generation mix has increased from 6% in 1995 to 61% in 2009 as the entire demand growth has been served by oil-fired thermal generation. Although estimated 53.0% of the total generated power provided to the grid in 2010 was from renewable (essentially from hydropower) sources because of better weather conditions and abundant rains in this year, the high share of oil-fired thermal generation still makes electricity expensive due to high fuel prices and poses a serious threat to the country’s energy security and the environment. The transmission and distribution system is currently too weak to meet the growing demand in the regions. Substantial investments are required to strengthen the transmission and distribution networks and improve their reliability. There is an urgent need to develop other clean energy sources additional to hydropower, undertake loss reduction efforts, and address energy efficiency issues. Since Sri Lanka’s hydropower potential is almost exhausted, diversification to renewable energy sources, such as wind and solar energy, will improve the country’s energy security and the environment. In

1 The project’s former title (i.e., Power Sector Strengthening Project) is indicated in the Sri Lanka Country Operations

Business Plan (COBP) 2011-2013. A project preparatory technical assistance (PPTA) is included in Appendix 4. 2 As one of possible options, construction of a 220/33 kV grid substation and about 110 kilometers (km) of a 220

kilovolt (kV) transmission line from the Mannar island area to New-Anuradhapura grid substation is currently being explored.

3 One of the potential sites that may be explored for the solar power component is the proposed Hambantota solar power park in the Southern province. It is expected that about 600 acres of land may be allocated to the solar park by the government that may be sufficient to develop about 50-100 MW solar power generation depending on whether solar power generation facilities include power storage. According to the Sustainable Energy Authority (SEA) of Sri Lanka, out of these, about 50 acres are already available for a total potential capacity of about 4-8 MW. Construction of a total 1.33 MW of solar photovoltaic (PV) generation capacity financed by the Government of Japan and Korea International Cooperation Agency on a grant basis is ongoing. The proposed component may support developing about 6-10 MW capacity by the private sector on a PPP basis.

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particular, the private sector is very much interested in developing wind power generation because of the current high wind power feed-in-tariff in Sri Lanka.4 3. The proposed project is consistent with Sri Lanka's national and sector priorities stated in the country's 10-year development framework prepared in 20065 that focuses on infrastructure development to accelerate economic growth and narrow regional disparities and envisions sustainable development of energy resources, conversion facilities and delivery systems to enable access to and use of energy services by the entire population, and the safe, reliable delivery of such energy services at a competitive price. The framework is based on the government’s National Energy Policy and Strategies (NEPS), a ten year plan for the energy sector. The project is consistent with the government’s development strategies, as updated in 2010,6 that aim to (i) increase supply capacity of the system to 3470 MW by 2012 and 6367 MW by 2020; (ii) increase share in grid energy supply from nonconventional renewable energy sources7 from 4.1% in 2007 to 8.5% by 2012, 10% by 2016, and 20% by 2020; (iii) increase the percentage of households connected to the grid from 88% in 2010 to 100% by 2012; (iv) reduce the total technical and commercial losses of the transmission and distribution network from 14.6% in 2009 to 14.0% by 2012, 13% by 2016 and 12.0% by 2020; and (v) achieve energy savings of 4.3% in 2012, 6.4% in 2016, and 8.7% in 2020 from a potential consumption level through energy conservation. 4. The project is also consistent with the Sri Lanka Country Partnership Strategy (CPS)8 of the Asian Development Bank (ADB) that focuses on (i) funding transmission projects to remove grid constraints on absorbing additional capacity from renewable energy sources and to achieve energy-efficiency improvements through strengthening of the transmission network, (ii) improving connectivity for the poor, (iii) mitigating climate change through financing individual clean energy projects, and (iv) promoting private sector development and expanding the role of PPP in the energy sector. The project is included in the Sri Lanka Country Operations Business Plan (COBP) 2011-2013. It will further support sustainable development of the power sector of Sri Lanka in line with the national and sector priorities, ADB's CPS and complement activities of other major development partners. B. Impact, Outcome, and Outputs 5. The Project will contribute to a reliable, adequate, and affordable power supply for sustainable economic growth and poverty reduction in Sri Lanka. The outcome of the project will be increased clean power supply and improved efficiency and reliability in the delivery of electricity. The physical outputs of the project will be: (i) transmission infrastructure for wind power evacuation from Mannar island area including construction of a 220/33 kV grid substation and about 110 km of 220 kV transmission line; (ii) improvement of energy efficiency of transmission and medium voltage networks including construction of four 132/33 kV grid substations and about 58 km of 220 kV and 11 km of 132 kV double circuit transmission lines, construction of about 716 km of new and reconductoring of about 149 km of old 33 kV lines, and reactive power management through installation of 309 of 33 kV/11 kV capacitor banks; and (iii)

4 There is a total of 33 MW of wind power capacity in operation in Sri Lanka at present, of which 30 MW were

constructed by the private sector. The current feed-in-tariff for wind power of about 19.8 Sri Lanka rupees per kilowatt-hour that is applicable to wind power plants with capacity of up to 10 MW is considered high.

5 Government of Sri Lanka. 2006. Mahinda Chintana: Vision for a New Sri Lanka. Colombo. 6 Government of Sri Lanka. 2010. Mahinda Chintana: Vision for the Future. Colombo. 7 Nonconventional renewable energy includes mini-hydro, wind, solar, biomass, tide and geothermal power

generation sources. 8 ADB. 2008. Country Partnership Strategy: Sri Lanka, 2009–2011. Manila.

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strengthening transmission infrastructure for solar power evacuation from Hambantota solar power park where a pilot 6-10 MW solar power plant for financing by the private sector on a PPP basis will be developed. The project will also include support for preparation of documentation (bidding documents for a reverse auction,9 a draft power purchasing agreement [PPA], etc.), PPA negotiation and deal structuring for the proposed wind10 and solar parks, and developing 0.5 MW rooftop solar power pilot through a piggy-backed TA.11 C. Investment and Financing Plans

6. The total cost of the proposed project is estimated at US$156.3 million, including physical and price contingencies. Based on the cost estimates, Table 1 shows the proposed financing arrangements.

Table 1: Tentative Financing Plan

Source Amount ($ million)

Share of Total (%)

Asian Development Bank (OCR allocation) 100.00 63.98

CEFPFa 2.00 1.28

Cofinanciersb 20.00 12.80

Government 34.30 21.94

Total 156.30 100.00 a Grant financing will be sought from the Asia Accelerated Solar Energy

Development Fund to be established under the Clean Energy Financing Partnership Facility in 2011 and administered by ADB.

b Co-financing will be further explored during project processing. Source: Asian Development Bank estimates OCR = ordinary capital resources

7. The proposed loan amount to be provided from ADB's Ordinary Capital resources is currently US$80 million in line with the latest COBP 2011-2013 for Sri Lanka. During ADB's mission to Sri Lanka in February 2011, the Ministry of Power and Energy (MOPE) requested to consider increasing ADB financing for the proposed project to cover urgent needs of transmission and distribution systems strengthening to reduce technical losses and to address the high priority of the government in developing nonconventional renewable energy sources. The government and ADB are currently finalizing their discussion on the proposed country program for 2012-2014. It is expected that a loan of US$100 million may be provided for the proposed project, subject to agreement between the government and ADB. MOPE has requested the ADB’s mission to consider exploring cofinancing opportunities to make US$120 million financing available for the proposed project in case the loan size is less than this requested amount. Also, grant financing from the Asia Accelerated Solar Energy Development

9 A reverse auction is a type of auction in which the roles of buyers and sellers are reversed. In a reverse

auction, sellers compete to obtain business, and prices typically decrease over time. 10 Currently the government is considering to have technically and economically feasible blocks for

tendering to the private sector. One option is to have blocks of about 25 MW each. According to the Electricity Act of 2009, the government should have a certain number of shares in any power plant exceeding capacity of 25 MW.

11 A capacity building TA originally titled Capacity Development of Power Sector for an amount of US$900,000 is included in the Sri Lanka COBP 2011-2013 for processing in 2012. The title of this TA was subsequently changed to Capacity Building for Clean Power Development for incorporation in the new COBP to better reflect its scope.

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Fund to be established under the Clean Energy Financing Partnership Facility in 2011 and to be administered by ADB will be explored for the solar energy component. D. Indicative Implementation Arrangements 8. MOPE will be the executing agency for the project. Ceylon Electricity Board (CEB) will be the implementing agency (IA) for the project. Dedicated project implementation units (PIUs), which will include experienced staff and be headed by senior officers, will be set up in CEB to undertake day-to-day activities. PIUs will be established in CEB for each project component. Full-time project managers with qualified staff will be appointed to supervise subprojects under each component. The PIUs will be responsible for overall project implementation, including procurement, accounting, quality assurance, social and environmental issues, and coordination with government agencies. The PIUs will also coordinate closely with the procurement committee, which will be appointed by the cabinet or MOPE depending on the size of the contracts. 9. The project will be implemented over approximately 4-year period from effectiveness date expected in December 2012. All procurement to be financed under the loan will be carried out in accordance with ADB’s Procurement Guidelines (2010, as amended from time to time). Advance contracting and retroactive financing will be considered during due diligence missions for the project.

II. TECHNICAL ASSISTANCE

10. A capacity building Technical Assistance (TA) grant for an amount of US$0.9 million from ADB’s Technical Assistance Special Fund (TASF-IV) is envisaged for Capacity Building for Clean Power Development12 in the current Sri Lanka COBP. This TA is proposed to be processed as piggy-backed to the project. The TA will include support for the preparation of documentation (bidding documents for a reverse auction, a draft PPA, etc.), for deal structuring for the proposed wind park, negotiation of PPA(s), and for development of a pilot 0.5 MW rooftop solar power on the PPP basis. Activities under the TA will include transfer of know-how, hands-on training and workshops on deal preparation, structuring and financial closure for renewable energy development projects to agencies to be involved in this process, namely CEB, Public Utilities Commission of Sri Lanka, and Sustainable Energy Authority.

III. DUE DILIGENCE REQUIRED

11. A project preparatory TA (PPTA) grant for US$1 million from ADB’s TASF is proposed to prepare the project. The PPTA is included in the current Sri Lanka COBP. A consulting firm will be recruited to conduct technical, economic, financial, poverty and social, and safeguard assessments of the project. The consultants will confirm the project scope and cost estimates, propose procurement packaging and implementation schedule. A separate consulting firm specialized in conducting actual wind and solar measurements, data gathering, measurement and satellite data modeling to properly assess wind and solar resource, and technical analysis will be recruited from September 2011 to September 2012 to ensure that necessary data and analysis are available to attract interest of private investors for the wind park and solar power generation.13 Experienced legal and technical individual consultants (one international and two national) will be recruited for analysis of the current wind and solar power legal and regulatory

12 Footnote 11. 13 Full one-year cycle actual measurements are required according to sound business practices.

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framework and initial bidding documentation drafting. Outline terms of reference are attached in Appendix 5.

12. The PPTA consultants will undertake the following due diligence:

(i) Wind and solar data. Actual wind and solar measurements at proposed locations, data gathering, measurement and satellite data modeling to properly assess wind and solar resource, and technical analysis will be conducted.

(ii) Technical. Technical justification and feasibility examination of each component will be carried out. The proposed transmission and distribution lines routes will be identified, reviewed and optimized. Energy efficiency measures will be explored. The issue of and measures required for grid system stability as a result of connection of wind and solar power will be examined. The detailed scope for each component will be formulated, reviewed and further developed. Interfacing of all project components will be undertaken.

(iii) Economic and financial. Economic and financial analyses will be conducted. Economic and financial viability of the project, including each component, will be examined.

(iv) Governance. The financial management assessment of CEB, project risk assessment and risk mitigation plan will be prepared.

(v) Poverty and social. The required poverty and social assessments, including gender analysis, will be undertaken. The initial gender categorization of the project is Category III, i.e. some gender benefits.

(vi) Safeguards. The necessary safeguard assessments will be carried out following the requirements of ADB’s Safeguard Policy Statement (2009). The anticipated environmental impacts of the proposed project are not significant. Therefore, initial categorization for environmental impacts of the project is “B”. The key components of the proposed project will be located at three separate physical locations and for each of the component, an Initial Environmental Examination (IEE) will be formulated. If during PPTA, significant environmental impacts are identified at a project component, an Environmental Impact Assessment (EIA) will be formulated for the component. The proposed project is unlikely to have significant involuntary resettlement impacts. Therefore, the initial categorization for involuntary resettlement impacts is “B”. A resettlement plan will be formulated for each project component, if involuntary resettlement impacts are identified. The proposed project is unlikely to trigger indigenous peoples safeguards issues. Therefore, the initial categorization for indigenous peoples impacts is “C”.

(vii) Renewable energy legal and regulatory framework. Analysis of the current wind and solar power legal and regulatory framework, including potential, viability and suitability of PPP options, and initial bidding documentation drafting will be undertaken.

13. The main assumptions are that the Government will (i) remain committed to power sector reforms, development of renewable energy sources and improved power sector performance, and (ii) implement the long-term generation expansion plan. The potential risks to the implementation of the investment sub-projects include (i) delays in associated generation investments, and (ii) delays in project implementation and resulting project cost escalation. These risks appear to be low, and the latter may be mitigated through proactive project implementation and advance contracting.

14. Extensive consultation with the government and close coordination with stakeholders concerned will be undertaken to ensure participatory approach and required quality in preparation of the project in line with ADB's requirements.

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IV. PROCESSING PLAN

A. Risk Categorization 15. The project is categorized as low risk due to its following features:

(i) The proposed loan modality is a Project Loan, and the estimated loan amount does not exceed $200 million.

(ii) ADB has implemented 11 investment and 19 TA projects in the energy sector of Sri Lanka in the past, and currently has two ongoing investment project (the Clean Energy and Access Improvement Project approved by ADB in 2009 and the Sustainable Power Sector Support Project approved in 2011) and six TA projects.

(iii) CEB, the proposed IA for the project, has substantial experience and necessary capacity in implementing externally funded projects, including those financed by ADB, the World Bank, Japan International Cooperation Agency and other bilateral donors. CEB is the IA for the ADB's two ongoing projects and one TA, and is the EA for two ongoing TAs.

(iv) The initial safeguard categorizations of the project are as follows: • Environment - Category "B"; • Involuntary resettlement - Category "B"; and • Indigenous people - Category "C".

B. Resource Requirements 16. For project processing, a total of eight person-months will be required, of which two person-months for a team leader and total six person-months for the economic, financial, legal, private sector, social, and environmental specialists (one person-month for each specialist).

17. A total of 47 person-months (pm) of consulting services input (19 pm of international and 28 pm of national) is required for the PPTA (details in Appendix 4).

C. Processing Schedule 18. The following processing schedule is proposed:

Table 2: Proposed Processing Schedule Milestones Expected Completion Date PPTA fact finding CompletedPeer review of the concept paper and its finalization CompletedApproval of the concept paper/PPTA IV June 2011Recruitment of PPTA consultants July-September 2011Loan fact finding mission April 2012Interdepartmental and sector-focused review May 2012Management/Staff Review Meeting June 2012Loan Negotiations July 2012Board circulation August 2012Board Consideration September 2012Expected loan effectiveness December 2012

PPTA = project preparatory technical assistance

Source: Asian Development Bank estimates.

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V. KEY ISSUES

19. The PPTA consultants will carry out the required technical, economic, financial and safeguards due diligence, as well as actual wind and solar data gathering and analysis. Since wind and solar power are intermittent sources, consultants will be required to specifically examine the issue of and measures required for grid system stability as a result of connection of wind and solar power to the grid. No major issues related to the project are expected at this stage. The project is not expected to have any critical social and environmental issues that cannot be mitigated. 20. The project team will consult Central Operations Services Office, Economics and Research Department, Independent Evaluation Department, Office of Cofinancing Operations, Office of the General Counsel, Regional and Sustainable Development Department during project processing as required.

Appendix 1 8

BASIC PROJECT INFORMATION Aspects Arrangements Modality Project Loan Financing ADB (OCR allocation) - US$ 100.00 million

Co-financing - US$ 20.00 million Grant (CEFPF) - US$ 2.00 million Government - US$ 34.30 million

COBP/RCOBP The project is included in the Sri Lanka COBP 2011 – 2013 (ADB. 2010. Country Operations Business Plan 2011-2013: Sri Lanka. Manila). The project is consistent with ADB's Sri Lanka Country Partnership Strategy that focuses on (i) funding transmission projects to remove grid constraints on absorbing additional capacity from renewable energy sources and to achieve energy-efficiency improvements through strengthening of the transmission network, (ii) improving connectivity for the poor, and (iii) mitigating climate change through financing individual clean energy projects.

Classification Sector (subsectors): Energy (renewable energy, electricity transmission and distribution) Themes (subthemes): Economic growth (promoting macroeconomic stability; widening access to markets and economic opportunities; developing rural areas) Environmental sustainability (Natural resources conservation) Gender mainstreaming: Some gender benefits Targeting classification: General intervention Location impact: National - high Rural - low Urban - low Safeguards: Environment - Category B Involuntary resettlement - Category B Indigenous peoples - Category C

Risk categorization

Low risk

Partnership(s) The processing team will explore opportunity for grant financing from the Asia Accelerated Solar Energy Development Fund to be established under CEFPF in 2011 and to be administered by ADB. Other co-financing will be explored as well. The Government will finance taxes and duties, PIU counterpart staff and some local costs.

Use of a PBA No PBA will be used. Parallel PIU No parallel PIU will be established and used.

MOPE will be the executing agency of the project. CEB will be the implementing agency of the project. Dedicated PIUs including experienced staff and headed by senior officers will be set up in CEB to undertake day-to-day activities. PIUs will be established in CEB for each project component. Full-time project managers with qualified staff will be appointed to supervise subprojects under each component. The PIUs will be responsible for overall project implementation, including procurement, accounting, quality assurance, social and environmental issues, and coordination with government agencies. The PIUs will coordinate with a procurement committee to be appointed by the Cabinet or MOPE depending on a contract size.

Department and division

South Asia Department/Energy Division

Mission leader and members

Mukhtor Khamudkhanov (team leader/technical) Priyantha Wijayatunga (economics), Srinivasan Janardanam (finance), Paola van Houten-Castillo (social), Shotaro Sasaki (environment), Grant Hauber (public- private partnership), Ramit Nagpal (counsel)

ADB = Asian Development Bank, CEB = Ceylon Electricity Board, CEFPF = Clean Energy Financing Partnership Facility, COBP = country operations business plan, MOPE = Ministry of Power and Energy, OCR = ordinary capital resources, PBA = programmatic based approach, PIU = project implementation unit, RCOBP = regional cooperation operations business plan.

Appendix 2

PROBLEM TREE

High distribution network equipment failures in provinces

Inadequate low-cost generation capacity

Transmission constraints prevent development and

connection of private mini-hydro resources

Required network augmentation not completed

Network losses not optimized

Delays in developing renewables

Inadequate funding

available

Reactive power

management not optimized

Electricity system cannot meet demand at sufficiently low cost

and acceptable reliability

Energy efficiency

measures not fully

implemented

Inadequate maintenance and asset replacement

activities performed

Transmission network constraints

Logistical problems prevent repair and

maintenance

Uncertainty over long-

term generation

plan

Poor financial

position of CEB

Technical constraints limit ability of the grid to absorb large quantity of wind

energy

Technical and commercial

frameworks do not encourage development of

micro-hydro resources

IPPs do not respond to

optimal VARs requirements

High generation

costs

Insufficient tools, equipment, and

replacement parts

Inadequate facilities

Increasing demand for electricity

No commercial incentives to

produce VARs

Reactive compensation

devices unavailable

Equipment failure

SEA programs not

completed

Adequate funding for all

energy efficiency

initiatives not available

Delays in developing low-cost thermal

fired power

CEB = Ceylon Electricity Board, IPP = independent power producer, SEA = Sustainable Energy Authority, VAR = volt-ampere reactive

Slow and unsustainable economic growth

Pervasive poverty Legend

Problem or constraint

Problem or constraint to be addressed by project intervention

CoreDevelopment Problem

Appendix 3 10

PRELIMINARY DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting

Mechanisms Assumptions

and Risks Impact Reliable, adequate, and affordable power supply for sustainable economic growth and poverty reduction

System supply capacity increased to 3470 MW by 2012 and 6367 MW by 2020 (2010 baseline: 2891 MW) Electrification ratio increased from 88% in 2010 to 100% in 2012 Average cost of power reduced by 25% by 2016 (2009 baseline: SLRs18.69/kWh) In grid energy supply from nonconventional renewable energy sources increased from 4.1% (2007) to 8.5% by 2012, 10% by 2016, and 20% by 2020 500 MW of renewable energy added by 2016 (2007 baseline: 123 MW) CEB generating sufficient cash to cover operating costs by 2015

CEB annual report (power sector statistics) Progress reports on 10-Year Development Framework

Assumptions Macroeconomic growth remains stable.

Government remains committed to power sector reforms and development of renewable energy sources

Risks Insufficient cash generation by CEB to fund its operations because of (i) an increase in fuel oil costs and reliance on expensive thermal electricity generation, (ii) delays in commissioning of less costly generating capacity, and (iii) tariffs set below supply cost

Outcome Improved clean power supply, efficiency and reliability in the delivery of electricity

Technical and commercial losses of the CEB network reduced from 14.6% of net generation in 2009 to 13% by 2016 and 12.0% by 2020 100 MW of wind power connected to the grid by2016 About 6-10 MW of solar power connected to the grid by 2016

CEB annual report (power sector statistics) Progress reports on 10-Year Development Framework CEB monthly system reports SEA reports

Assumptions Least-cost generation expansion plan implemented as scheduled The government to continue to fund grid extension and strengthening

Appendix 3 11

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting

Mechanisms Assumptions

and Risks Outputs 1. Transmission infrastructure for evacuation of wind power constructed in Mannar island area 2. Energy efficiency of transmission and medium voltage networks improved 3. Transmission infrastructure for solar power evacuation constructed in Hambantota area 4. Advisory and capacity building support provided for wind and solar power development on PPP basis

XXX MVA 220/33 kV grid substation capacity for wind power evacuation added to the transmission network by June 2016

About 110 km of 220 kV transmission line added to the transmission network by June 2016

500 MVA 220/132 kV and XXX MVA 132/33 kV grid substation capacity added to the grid in critical locations for technical loss reduction by June 2016

58 km 220 kV and 11 km of 132 kV double circuit transmission lines added to the transmission network by June 2016

309 capacitor banks of total XX MVAr installed on 33 kV and 11 kV for technical loss reduction by December 2015

716 km of new 33 kV lines added and 149 km of old 33 kV lines reinforced/reconductered to improve power quality to poor rural households including those headed by women by December 2015

XX MVA 132/33 kV grid substation capacity and about XX km of 132 kV transmission line for solar power evacuation added to the transmission network by June 2016 PUCSL, CEB and SEA capacity build, including training of XX staff (30% of which women), and required support provided for deal structuring and financial closure for 100 MW wind park in Mannar island area, 6-10 MW solar power generation in Hambantota solar park, and 0.5 MW pilot solar rooftop development on PPP basis

CEB annual report (power sector statistics) Government budget Government gazette Project progress reports by CEB CEB annual report (power sector statistics) CEB monthly reporting SEA reports CEB monthly reporting Project progress reports by CEB PUCSL, SEA and CEB reports Project progress reports by CEB

Assumptions Sufficient project implementation capacity of CEB Risks Unexpected increase in prices of commodities and raw materials, and construction delays Delayed government approvals for procurement and recruitment of consultants

Appendix 3 12

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting

Mechanisms Assumptions

and Risks Activities with Milestones Inputs

ADB loan (OCR): $100 million Item Amount ($ million)

Civil works Equipment Consulting services Contingencies Interest and commitment charges during construction

Government: $34.30 million Item Amount ($ million) Civil works Equipment Incremental (land, environmental and social mitigation, project supervision)

Contingencies Taxes and duties Interest during construction

Co-financing: $20 million Item Amount ($ million) Civil works Equipment Consulting services Contingencies Co-financing (AASEDF under CEFPF): $2.0 million Technical assistance TASF 0.90

1.1. Construction of 220/33 kV grid substation in Mannar area by June 2016

1.2. Construction of Mannar–New Anuradhapura 220 kV transmission line by June 2016

2.1. Construction of new 132/33 kV grid substations in critical locations and associated transmission lines by June 2016

2.2. Construction of new and reinforcement/ reconductoring of old 33 kV line lines by December 2015

2.3. Installation of reactive power devices by December 2015

3.1. Construction of 132/33 kV grid substation in Hambantota solar park area by June 2016

3.2. Construction of 132 kV transmission line for power evacuation from Hambantota solar park by June 2016

4.1 Support to PUCSL, CEB, and SEA in preparation and conducting bidding, negotiation and concluding PPAs for 100 MW wind park, 6-10 MW solar power and 0.5 MW PV solar rooftop generation by December 2013

4.2. Capacity building of PUCSL, CEB, and SEA in developing renewable energy projects, including deal structuring and financial closure, on PPP basis by December 2013

Government 0.25 AASEDF = Asia Accelerated Solar Energy Development Fund, ADB = Asian Development Bank, CEB = Ceylon Electricity Board, CEFPF = Clean Energy Financing Partnership Facility, km = kilometer, kV = kilovolt, kW = kilowatt, kWh = kilowatt-hour, MVA = megavolt-ampere, MVAr = megavolt-ampere of reactive power, MW = megawatt, OCR = ordinary capital resources, PPA = power purchasing agreement, PPP = public-private partnership, PUCSL = Public Utilities Commission of Sri Lanka, SEA = Sustainable Energy Authority, TASF = technical assistance special fund. Source: Asian Development Bank estimates.

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PROJECT PREPARATORY TECHNICAL ASSISTANCE A. Justification

1 The Sri Lanka government’s development framework envisions sustainable development of energy resources, enabling access to and use of energy services by the entire population, and reliable delivery of such services at a competitive price. To achieve the goal of meeting the growing demand for electricity at sufficiently low cost and acceptable reliability for sustainable economic growth and poverty reduction, the government plans to increase supply capacity of the system including through raising share of nonconventional renewable energy sources (wind, solar, etc.), reducing total technical and commercial losses of the transmission and distribution networks, and undertaking energy conservation. To address investment needs in support of these plans, a project preparatory technical assistance (TA) is needed to prepare a relevant project for consideration by the Asian Development Bank (ADB) and other financiers. B. Major Outputs and Activities

2 The major outputs and activities are summarized in Table A4.1.

Table A4.1: Summary of Major Outputs and Activities

Major Activities Expected

Completion Date Major Outputs Expected

Completion Date Conducting actual wind and solar data measurement, modeling and analysis

September 2012 Measurement data and analysis Wind and solar resource report

September 2012 October 2012

Conducting project technical, economic, financial, resettlement and environmental due diligence

April 2012 Inception Report Interim Report Draft Final Report Final Report

October 2011 January 2012 April 2012 May 2012

Analyzing the current wind and solar power legal and regulatory framework and initial bidding documentation drafting

April 2012 Report on legal and regulatory framework Draft bidding documents

January 2012 April 2012

Source: Asian Development Bank estimates C. Cost Estimate and Proposed Financing Arrangement

3 The TA is estimated to cost $1,300,000 equivalent, of which $1,000,000 equivalent will be financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF-IV). The government of Sri Lanka will finance the remaining $300,000 equivalent. The detailed cost estimate is presented in Table A4.2.

Appendix 4 14

Table A4.2: Cost Estimates and Financing Plan

($'000)

Item Total Cost

A. ADB Financinga 1. Consultants a. Remuneration and per diem i. International consultants (19 person-months) 480.0 ii. National consultants (28 person-months) 93.0 b. International and local travel 93.0 c. Reports and communications 12.0 2. Equipment (computer, printer, etc.)b 50.0 3. Workshops, training, seminars, and conferencesc 10.0 4. Surveysd 175.0 5. Miscellaneous administration and support costs 2.0 6. Representative for contract negotiations 5.0 7. Contingencies 80.0 Subtotal (A) 1,000.0 B. Government Financing 1. Office accommodation and transport 100.0 2. Remuneration and per diem of counterpart staff 120.0 3. Contingencies 80.0 Subtotal (B) 300.0 Total 1,300.0

a Financed by the Asian Development Bank's Technical Assistance Special Fund (TASF-IV) b Equipment

Type Quantity Cost Wind and solar radiation measurement equipment 7 $42,000 Computers 2 $4,000 Printer/copier/scanner 1 $4,000

c Workshops, training, seminars, and conferences Purpose Venue Wind and solar power development Colombo, SRI Bidding and negotiation of PPA Colombo, SRI

d Surveys may include (i) environmental and social surveys, (ii) measurement-related survey works at wind and solar measurement locations, (iii) measurement and satellite data modeling expenses to identify wind and solar resource, and (iv) other necessary surveys.

Source: Asian Development Bank estimates ADB = Asian Development Bank, PPA = power purchasing agreement D. Consulting Services

4 Two consulting firms will be recruited for the project with total positions and person-months as indicated in Table A4.3. Both firms will be recruited using quality and cost based selection methodology with an 80:20 technical-cost weighting based on simplified technical proposal. One consulting firm will conduct technical, economic, financial, poverty and social, and safeguard due diligence, prepare project cost estimates, procurement plan and implementation schedule. In addition, renewable energy specialists (international and national) engaged through this firm will prepare/review wind park master plan, will explore potential of the proposed solar power park and of a possible market for rooftop solar power generation through a public-private partnership (PPP) approach. A separate specialized consulting firm will conduct

Appendix 4 15

actual wind and solar measurements, data gathering, measurement and satellite data modeling to properly assess wind and solar resource, and technical analysis for the wind and solar power plants at identified locations. Experienced legal and technical individual consultants (one international and two national) as indicated in Table A4.3 will be recruited for analysis of the current wind and solar power legal and regulatory framework and initial bidding documentation drafting. 5 A summary of consulting services requirements is presented in Table A4.3.

Table A4.3: Summary of Consulting Services Requirement International National Name of Positions Person-

months Name of Positions Person-

months Specialized Firm: Wind Resource Assessment Specialist 2 Wind Resource Assessment Specialist 3 Solar Resource Assessment Specialist 1 Solar Resource Assessment Specialist 2 Due Diligence Consulting Firm: Transmission Specialist/Team Leader 4 Transmission Specialist 4 Distribution Specialist 2 Distribution Specialist 3 Renewable Energy Specialist 2 Renewable Energy Specialist 2 Power Economist 2 Power Economist 2 Financial Analyst 1 Financial Analyst 2 Environmental Specialist 2 Environmental Specialist 3 Social Development Specialist 2 Social Development Specialist 3 Individual Consultants: Legal Specialist 1 Legal Specialist 2 Technical/Procurement Specialist 2 Source: Asian Development Bank Estimates 6 The outline terms of references for the project preparatory TA consultants are described below: Position Summary Tasks Qualification Wind Resource Assessment Specialist/Team Leader of a specialized firm (international)

• Manage consulting team and ensure quality output

• Conduct actual wind measurements, data gathering, measurement and satellite data modeling to properly identify wind resource, and relevant technical analysis

Engineer qualified to at least a university bachelor degree with 10 years or more of experience and preferably having professional certification in wind power, renewable energy, and/or electrical/chemical/material engineering.

Solar Resource Assessment Specialist (international)

• Conduct actual solar measurements, data gathering, measurement and satellite data modeling to properly identify solar resource, and relevant technical analysis

Engineer qualified to at least a university bachelor degree with 10 years or more of experience and preferably having professional certification in solar power, renewable energy, and/or electrical/chemical/material engineering.

Transmission Specialist/Team Leader of a due diligence consulting

• Manage consulting team and ensure quality output

• Conduct due diligence on transmission lines and grid substations, examine alternative

Power engineer qualified to at least a university bachelor degree with 15 year of experience in transmission

Appendix 4 16

firm (international) solutions • Analyze system stability issue due to

connection of wind and solar power to the grid • Prepare composite cost estimates, procurement

plan and implementation schedule • Estimate Green House Gas Reduction • Conduct/review route surveys

design

Distribution Specialist (international)

• Conduct/review route surveys • Finalize the least-cost design for line routes and

the cost estimates for a relevant component of ensuing project

• Conduct load flow studies to optimally sizing the wire and develop an investment plan for upgrading/reinforcement

• Prepare a procurement plan and implementation schedule for the component

Power engineer qualified to at least a university bachelor degree with 15 year of experience in distribution design

Renewable Energy Specialist (international)

• Formulate a proposal for financing, including technology option and design, and finalize cost estimates

• Prepare/review wind park master plan • Explore potential of the proposed solar power

park and of a possible market for rooftop solar power generation through PPP

• Prepare relevant implementation schedule and investment plan for the component

•

Power engineer qualified to at least a university bachelor degree with 15 year of experience in renewable (wind, solar) power development/design

Power Economist (international)

• Undertake project economic analysis • Assess social and gender impacts jointly with

social development specialist

At least a bachelor degree in economics and 15 years of relevant experience in economic analysis of projects

Financial Analyst (international)

• Undertake project financial analysis including calculation of a financial internal rate of return

• Conduct sensitivity analysis and financial forecasting

• Undertake a financial management assessment of the proposed implementing agency

At least a bachelor degree in economics/ finance and 15 years of relevant experience in financial analysis of projects

Environmental Specialist (international)

• Prepare Initial Environmental Examination (IEE) reports or, if necessary, Environmental Impact Assessment (EIA), for project components including analysis of potential impacts of associated wind and solar facilities

• Prepare Environmental Management Plans (EMPs)

• Ensure public consultation

At least a bachelor degree in environmental engineering/science and at least 15 years of experience in carrying environmental studies including IEE and EIA preparation

Social Development Specialist (international)

• Conduct social and gender analyses, including potential impacts of associated wind and solar facilities, and prepare relevant design recommendations as appropriate

• Prepare resettlement plans for project components

• Identify appropriate compensation methodologies where required

At least a bachelor degree in social development or related fields and at least 10 years of relevant experience

Appendix 4 17

• Ensure public consultation Legal Specialist (international)

• Analyze the current wind and solar power legal and regulatory framework including prospects, viability and suitability of PPP options

• Draft initial bidding documentation for reverse auction for wind and solar power generation

At least a bachelor degree in law, admission as a lawyer in one or more of ADB’s member countries and 15 years of experience in deal structuring on private sector renewable energy (mainly wind) projects.

Technical/Procurement Specialist (national)

• Technical support to legal specialist in drafting initial bidding documentation for reverse auction for wind and solar power generation

At least a bachelor degree in power engineering and 5 years of experience in dealing with renewable energy projects and procurement

7 International consultants will be assisted by national consultants. All national consultants will have at least a bachelor’s degree from an established university and five years of experience in their respective area of expertise. E. Implementation Arrangements

8 The Ministry of Power and Energy (MOPE) will be the executing agency. The Sustainable Energy Authority (SEA) will be the implementing agency for the wind and solar power measurement component of the TA. Ceylon Electricity Board (CEB) will be the implementing agency for the remaining TA components. A dedicated project implementation unit (PIU), which will include experienced staff and be headed by a senior officer, will be set up in CEB and SEA to undertake day-to-day TA activities. CEB and SEA will provide in-kind contribution in the form of counterpart staff, project related data, office accommodation for consultants, and local transportation outside Colombo to visit project sites as feasible. 9 The proposed TA processing and implementation schedule is listed in Table 4.4.

Table 4.4: Proposed Technical Assistance Processing and Implementation Schedule

Major Milestones Expected

Completion Date Approval of concept paper June 2011Selection of consulting firms July-Sept. 2011

Selection of individual consultants October 2011

Inception Report October 2011

Interim Report January 2012

Report on legal and regulatory framework January 2012

Draft bidding documents for wind and solar power April 2012

Draft Final Report April 2012

Final Report May 2012

Wind and solar data and technical analysis report October 2012

Physical completion October 2012

Technical assistance financial closure December 2012Source: Asian Development Bank estimates

Appendix 5 18

INITIAL POVERTY AND SOCIAL ANALYSIS

Country: Sri Lanka Project Title: Clean Energy and Network Efficiency Improvement Project (formerly Power Sector Strengthening Project)

Lending/Financing Modality:

Project Loan Department/ Division:

South Asia Department/Energy Division

I. POVERTY ISSUES

A. Links to the National Poverty Reduction Strategy and Country Partnership Strategy The goal of the government‘s 10-year development framework is to achieve rapid economic growth that will benefit the entire population and spur the social development of the country. To achieve this goal, the government plans to invest in and develop large infrastructure projects that will help link remote rural villages to Sri Lanka’s urban centers and these to global markets, combined with measures to increase Sri Lanka’s international competitiveness. In line with Sri Lanka’s national strategy to reduce poverty, the country partnership strategy (CPS), 2009–201114 focuses on (i) strengthening the investment climate, and (ii) achieving socially inclusive development by, among other things, expanding access to high-quality services including power. The country operations business plan (COBP), 2011–2013 is consistent with the strategies and operational priorities of the CPS for Sri Lanka, and is linked to the poverty reduction objectives for the region. The proposed Clean Energy and Network Efficiency Improvement Project (formerly Power Sector Strengthening Project) is consistent with ADB's Sri Lanka CPS that envisages (i) funding transmission projects to remove grid constraints on absorbing additional capacity from renewable energy sources and to achieve energy-efficiency improvements through strengthening of the transmission network, (ii) improving connectivity for the poor, (iii) mitigating climate change through financing individual clean energy projects, and (iv) promoting private sector development and expanding the role of PPP in the energy sector. The project is included in the Sri Lanka COBP 2011-2013. The project will: (i) assist to develop wind and solar power through creation of an enabling environment and a relevant infrastructure for evacuation of wind and solar power; and (ii) energy efficiency improvement of the transmission grid and medium voltage network to reduce technical losses and ensure reliable power supply to the population including to rural poor households. B. Targeting Classification Select the targeting classification of the project:

General Intervention Individual or Household (TI-H) Geographic (TI-G) Non-Income MDGs (TI-M1, M2,

etc.) Explain the basis for the targeting classification: Although electrification makes social intervention to the poor, there has been no direct linkage with the poverty reduction. C. Poverty Analysis

1. If the project is classified as TI-H, or if it is policy-based, what type of poverty impact analysis is needed? Not applicable 2. What resources are allocated in the PPTA/due diligence?

A social and poverty specialist will be recruited under the PPTA to conduct the poverty analysis. 3. If GI, is there any opportunity for pro-poor design (e.g., social inclusion subcomponents, cross subsidy, pro-poor

governance, and pro-poor growth)? Please explain. The project includes improvement of 33 kV medium voltage network to enable better quality and reliability of

electricity supply in poor rural areas for enabling pro-poor growth.

14 ADB.2008. Country Partnership Strategy: Sri Lanka, 2009–2011. Manila.

Appendix 5 19

II. SOCIAL DEVELOPMENT ISSUES A. Initial Social Analysis

Based on existing information: 1. Who are the potential primary beneficiaries of the project? How do the poor and the socially excluded benefit

from the project? Rural households are potential primary beneficiaries. They include the poor, women and children. Women are severely affected by lack of electricity in housework, which is typically served by them in the rural areas. Children may not be able to avail of sufficient study and learning opportunities, which may result in a lower literacy rate in rural areas. 2. What are the potential needs of beneficiaries in relation to the proposed project? Alternative energy sources such as kerosene and wood sometimes cause health problems because of air pollution inside houses. Electricity is environment friendly and better for the health. Also, better access to electricity enables productive economic activities and creates opportunities that improve well being of the population. 3. What are the potential constraints in accessing the proposed benefits and services, and how will the project

address them? Lack of and unreliable access to electricity seriously disrupts social access to health and diagnostic services, communications and media information, and any economic activities. Electricity will be the basis to improve accessibility to these services and achieve relevant benefits.

B. Consultation and Participation

1. Indicate the potential initial stakeholders. Affected people and local communities, local authorities, focal groups, civil society groups, and local associations. All relevant stakeholders will be identified and consulted throughout the implementations of the PPTA and the ensuing project. 2. What type of consultation and participation (C&P) is required during the PPTA or project processing (e.g.,

workshops, community mobilization, involvement of nongovernment organizations and community-based organizations, etc.)?

Affected persons and communities will be fully consulted during the project design and implementation through stakeholder consultations and workshops. 3. What level of participation is envisaged for project design?

Information sharing Consultation Collaborative decision making Empowerment

4. Will a C&P plan be prepared during the project design for project implementation? Yes No Please explain.

The consultations will be carried out during implementation as per Sri-Lankan regulations. No plan is therefore prepared for further consultations and related activities are embedded into the implementation of the Project.

C. Gender and Development Proposed Gender Mainstreaming Category: Some gender benefits

1. What are the key gender issues in the sector/subsector that are likely to be relevant to this project/program? The project will have minor and temporary resettlement related impacts. During project implementation, women affected by the project will be given preference for suitable work. The implementing agencies will ensure that women are consulted and invited to participate in group-based activities and, where possible, women will be given the opportunity to learn new skills that may provide alternative forms of income generation and livelihood. 2. Does the proposed project/program have the potential to promote gender equality and/or women’s

empowerment by improving women’s access to and use of opportunities, services, resources, assets, and participation in decision making?

Yes No Please explain. The proposed project components are gender neutral, no specific measures are required at this moment for differential gender requirements as women are not specifically disadvantaged because of economic, political, or socio-legal discrimination and they do not face specific barriers to access and benefits of electrification. 3. Could the proposed project have an adverse impact on women and/or girls or to widen gender inequality? Yes No Please explain The proposed project will make positive effects on women.

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS

Appendix 5 20

Issue Nature of Social

Issue Significant/Limited/ No Impact/Not Known

Plan or Other Action Required

{Delete boxes not required}

Involuntary Resettlement

The magnitude of impacts will be assessed once the project components have been made more specific. A Resettlement Plan will be prepared.

Limited impacts are expected.

Resettlement Plan Resettlement Framework Environmental and Social Management System Arrangement

None Uncertain

Indigenous Peoples

No indigenous people are expected in the project areas.

No impact. Indigenous Peoples Plan Indigenous Peoples Planning Framework

Environmental and Social Management System Arrangement

None Uncertain

Labor

Employment Opportunities

Labor Retrenchment Core Labor Standards

A limited and temporary number of skilled and unskilled jobs will be available to the local population during construction. Specific assurances will ensure enforcement of core labor standards by contractors.

Positive Plan Other Action No Action Uncertain

Affordability

It is not expected that affordability will be an issue as electricity is subsidized, in particular for poor customers, by the Government. PPTA will look at this in more detail.

No impact Action No Action Uncertain

Other Risks and/or Vulnerabilities

HIV/AIDS Human Trafficking Others (conflict, political instability, etc.), please specify

Appropriate assurances will be incorporated in the ensuing project.

Migrant and local workers will need to be educated about the risks of HIV and other preventable transmissible illnesses. The implementing agency will ensure that contractors implement necessary preventative and mitigating measures to ensure the health and safety of workers and the local population.

Plan Other Action No Action Uncertain

IV. PPTA/DUE DILIGENCE RESOURCE REQUIREMENT 1. Do the TOR for the PPTA (or other due diligence) include poverty, social and gender analysis and the relevant

specialist/s? Yes No

2. Are resources (consultants, survey budget, and workshop) allocated for conducting poverty, social and/or gender analysis, and C&P during the PPTA/due diligence? Yes No