Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 42001 January 2009

Proposed Loan and Administration of Grant Republic of the Philippines: Philippine Energy Efficiency Project

CURRENCY EQUIVALENTS (as of 9 December 2008)

Currency Unit – peso (P)

P1.00 = $0.0206 $1.00 = P48.607

ABBREVIATIONS

ADB – Asian Development Bank CDM – Clean Development Mechanism CER – certified emissions reduction CFL – compact fluorescent lamp CO2 – carbon dioxide DOE – Department of Energy EIRR – economic internal rate of return ERC – Energy Regulatory Commission ESCO – energy service company FIRR – financial internal rate of return FTL – fluorescent tube lamp ICB – international competitive bidding IPP – independent power producer LED – light-emitting diode LIBOR – London interbank offered rate Meralco – Manila Electric Company NCB – national competitive bidding NEA – National Electrification Administration NPC – National Power Corporation PMU – project management unit PNOC – Philippine National Oil Company QCBS – quality- and cost-based selection TransCo – National Transmission Corporation WESM – wholesale electricity spot market

WEIGHTS AND MEASURES

GWh (gigawatt-hour) – 1,000 megawatt-hours kg (kilogram) – 1,000 grams kWh (kilowatt-hour) – 1,000 watt-hours m3 (cubic meter) – 1,000 liters mg (milligram) – 0.001 gram mm (millimeter) – 0.001 meter MW (megawatt) – 1,000 kilowatts MWh (megawatt-hour) – 1,000 kilowatt-hours

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General A. Thapan, Southeast Asia Department (SERD) Director A. Jude, Infrastructure Division, SERD Team leader S. Hasnie, Senior Energy Specialist, SERD Team members G. Atay, Assistant General Counsel, Office of the General Counsel

S. Phanachet, Principal Treasury Specialist, Treasury Department M. Sultana, Social Development Specialist, SERD D. T. Bui, Energy Economist, SERD Y. Tsujiki, Financial Analysis Specialist, SERD S. Tumiwa, Senior Energy Specialist, Regional and Sustainable

Development Department Y. Zhai, Lead Professional (Energy), SERD

CONTENTS Page

LOAN AND PROJECT SUMMARY i

MAP

I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3

III. THE PROPOSED PROJECT 9 A. Impact and Outcome 9 B. Outputs 9 C. Special Features 13 D. Project Investment Plan 13 E. Financing Plan 13 F. Implementation Arrangements 14

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 17 A. Financial Analysis 17 B. Economic Analysis 17 C. Potential Carbon Credits 18 D. Environmental Benefits and Social Safeguards 18 E. Sustainability 18 F. Risks 19

V. ASSURANCES AND CONDITIONS 20 A. Specific Assurances 20 B. Conditions for Disbursement 21

VI. RECOMMENDATION 21 APPENDIXES 1. Design and Monitoring Framework 22 2. The Philippines Power Subsector 25 3. Summary of Major External Assistance to the Energy Sector 31 4. Compact Fluorescent Lamp Distribution Plan 33 5. Super Energy Service Company 36 6. Communication and Social Mobilization Strategy 40 7. Detailed Cost Estimates 42 8. Detailed Implementation Schedule 44 9. Procurement Plan 46 10. Outline Terms of Reference for Consultants 49 11. Financial Analysis 51 12. Economic Analysis 53 13. Summary Poverty Reduction and Social Strategy 56 14. Summary Initial Environmental Examination 59

SUPPLEMENTARY APPENDIX (available on request) A. Philippine Energy Efficiency Road Map B. Super ESCO Business Plan C. Communication Plan D. Financial Management Assessment Questionnaire

LOAN AND PROJECT SUMMARY Borrower Republic of the Philippines Classification Targeting classification: General intervention

Sector: Energy Subsector: Energy sector development Themes: Sustainable economic growth, regional cooperation, capacity development Subthemes: Promoting economic efficiency and enabling markets, trade and investments, institutional development

Environment Assessment

Category B. The environmental implications were reviewed and no significant adverse impacts were identified.

Project Description The Project will (i) retrofit about 40 government-owned office

buildings with efficient lighting; (ii) procure 13 million compact fluorescent lamps (CFLs) for distribution to residential and other customers to reduce peak power demand; (iii) introduce energy-efficient lamps for public lighting; (iv) set up a laboratory for testing energy-efficient appliances and a lamp waste management facility; (v) establish a super energy service company (ESCO) to support ESCO development; (vi) promote an efficient-building initiative; and (vii) develop and implement a communication and social mobilization program.

Rationale Philippine consumers spend a large part of their household

income on energy; the country’s electricity tariffs are among the highest in the region. This situation has become even worse with recent oil price increases and is likely to continue in the short to medium term as the Government cannot influence high oil prices. The introduction of competition through open access and targeting existing subsidies can only reduce electricity tariffs in the medium to long term. The Government is focusing on increasing the use of indigenous renewable energy generation (such as geothermal, biomass, wind, and hydropower) and promoting energy efficiency to meet these challenges. The Government recognizes that it alone cannot identify and finance the various energy-efficiency initiatives. Studies carried out by the Department of Energy (DOE) with assistance from the Asian Development Bank (ADB) demonstrate that by investing $46.5 million in energy efficiency, the Government could defer $450 million of investments in new power plants, and save about $100 million annually in fuel cost.

ii

The Project’s purpose is to reduce the peak load power demand by implementing an energy-efficiency program, with particular focus on efficient lighting that will contribute to greenhouse gas reduction. Carbon credits will be sought following the methodology approved by the executive board of the Clean Development Mechanism. The Project is economically and financially sound with an economic internal rate of return of 99% and a financial internal rate of return of 206% compared with the weighted average cost of capital of 2.4%. For the CFL distribution component, the payback period is less than 1 year, making the investment cash flow positive in the first year. The economic and financial internal rates of return calculations do not include the value of Clean Development Mechanism credits generated by the Project.

Impact and Outcome The final impact of the Project will be reduced cost of energy

production. As electricity cannot be stored, its supply and demand has to be met instantaneously. During peak times, the marginal cost of generation is usually about 5–10 times more than the average cost of generation. Therefore when the peak demand is reduced by using efficient lighting, the average cost of generation is reduced. Consumers’ energy costs will be reduced with the use of efficient lighting. With reduced electricity demand, the overall need for supply (generation) will be reduced. Also, a large amount of greenhouse gas emissions—and the associated cost of importing fuel—will be avoided, creating carbon credits for the Project under the CDM. The Project will establish sustainable business models for large-scale implementation of energy-efficiency programs. It will reduce public sector and local government energy expenditure, reduce health risks associated with residual mercury and kerosene (in off-grid areas), enhance livelihoods of rural communities, facilitate a viable ESCO industry, and establish a certification process for energy and environmentally efficient commercial buildings.

Project Investment Plan The estimated cost of the Project is $46.5 million, including

physical and price contingencies, interest and other charges during implementation, and taxes and duties of $2.4 million.

iii

Financing Plan A loan of $31,100,000 from the ordinary capital resources of ADB will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The Asian Clean Energy Fund (established by the Government of Japan) will provide a grant of $1.5 million equivalent under the Clean Energy Financing Partnership Facility. ADB will administer the grant. The Government will provide financing of $13.9 million.

Allocation and Relending Terms

Under a subsidiary loan agreement that will be on terms and conditions satisfactory to ADB, the Government will relend $7.5 million equivalent to the super ESCO that will be established as a subsidiary corporation of the Philippine National Oil Company. The super ESCO will bear the foreign exchange risk for this subsidiary loan agreement.

Retroactive Financing Retroactive financing is proposed for an initial supply of CFLs that will be ordered between 1 August 2008 and loan effectiveness, with a ceiling of up to $3.1 million (10% of the loan amount), in accordance with Innovation and Efficiency Initiative: Cost Sharing and Eligibility of Expenditures for Asian Development Bank Financing—A New Approach (2005). The Government and the Implementing Agency were advised that approval of advance action or retroactive financing does not commit ADB to financing the Project.

Period of Utilization Until October 2011 Estimated Project Completion Date

April 2011

Executing Agency Department of Energy

iv

Implementation Arrangements

DOE will be responsible for overall technical supervision and execution of the Project. DOE will also be the Implementing Agency for the following subcomponents: (i) retrofit of government office buildings, (ii) testing laboratory and lamp waste recovery plant, (iii) efficient-building initiative, and (iv) public lighting retrofits. The other implanting agencies are (i) the super ESCO for the ESCO component; and (ii) the National Electrification Administration for the components involving electric cooperatives—national residential lighting initiative except in the franchise areas of the private utilities. As the Executing Agency, DOE will establish a project management unit, headed by a director and appropriately staffed for day-to-day coordination. The unit director will have overall responsibility for supporting implementation and providing guidance, administrative and technical support, counterpart staff, documentation, and other services that may be required.

Procurement All procurement to be financed under the ADB loan and the Asian Clean Energy Fund grant under the Clean Energy Financing Partnership Facility will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time), and the procurement plan prepared and agreed between the Government and ADB. All procurement contracts will contain anticorruption provisions as specified by ADB. Advance action will allow DOE to initiate its communication plan and the first stage of CFL distribution. The Government was advised that approval of advance action does not commit ADB to financing the Project.

Consulting Services Consultants will be recruited in accordance with ADB’s Guidelines

on the Use of Consultants (2007, as amended from time to time). They will provide support for project implementation. Advance contracting will be applied for consulting services.

Project Benefits and Beneficiaries

The direct economic benefits of the Project include reduced peak demand and overall reduction of imported oil for power generation by use of energy-efficient lighting devices. This will result in savings of about $100 million per annum from avoided fuel cost and deferral of an investment of $450 million in power generation and associated network capacity of 450 megawatts, which is about 3% of the Philippines’ total generation capacity. Poor customers will particularly benefit, as lighting is a significant component of their electricity consumption. These households will benefit from improved quality lighting.

v

Risks and Assumptions The CFL distribution component has some risks: (i) the efficient and timely procurement of CFLs and their distribution without any leakage to the commercial market; and (ii) the Government’s ability to implement and enforce strict controls on energy-efficiency labeling and testing of CFLs. These risks are mitigated by ensuring that (i) distribution of CFLs to customers is done at the payment points of the electric cooperatives and private distribution utilities, (ii) each CFL is marked “not for sale,” and (iii) suppliers deliver the CFLs directly to the distribution points. Each customer will receive a coupon with their electricity bill and be made aware of the free distribution via mass media communication. Appropriate monitoring mechanisms for effective distribution and reporting of the CFL component will be developed. All electric cooperatives participated in developing the proposed distribution mechanism. The mechanism will be optimized during implementation of the first phase. Lessons from the distribution of the first lot will be incorporated in the distribution of subsequent lots.

The Project’s ability to create enough competition among the major lighting manufacturers is not considered a significant risk. About 3 to 5 million units will be procured in each of the three lots to ensure strong competition and to discourage market dominance by any single brand. Establishment of a super ESCO has some risks. The risks associated in opening up the public sectors—hospitals, schools, and office buildings—to private suppliers may (i) take longer than planned during design; (ii) meet unforeseen legal barriers; (iii) need much more incentives and encouragement for public sector managers to participate in the process; and (iv) be dominated by several existing suppliers, thus inhibiting the growth of the market. DOE will address all these risks in the detailed business plan. The super ESCO will face some risks in developing the ESCO market for industry and commercials sectors, for example: (i) an insufficient number of ESCOs are interested in the super ESCO’s offers (financing and capacity building), (ii) end consumers do not trust a government-supported ESCO on grounds of perceived bureaucracy, (iii) not enough competent staff are available to implement the super ESCO business plan, (iv) legal and procedural complications slow needed quick disbursement, and (v) the ESCOs are not able to design benefit-sharing contracts that will encourage all parties—the super ESCO, private ESCOs, and end users—to continue energy-efficiency related activities and make it a sustainable program.

P A C I F I C O C E A N

S o u t h C h i n a S e a

S u l u S e a

Panay Gulf

LeyteGulf

C e l e b e s S e a

M o r o G u l f

Babuyan Channel

P h i l i p p i n e S e a

VisayanSea

Sibuyan Sea

Bohol Sea

Oroquieta

Malaybalay

Cagayan de Oro

MarawiTubod

Siquijor

Mambajao

Dipolog

Dumaguete

Zamboanga

Isabela

IpilPagadian

Jolo

Panglima Sugala

San Jose

IloiloBacolod

Jordan

KaliboRoxas

Romblon

Boac

MamburaoCalapan

Lucena

Puerto Princesa

Cebu

Tagbilaran

Catarman

Tacloban

Catbalogan

Naval

Daet

PiliVirac

Sorsogon

Legaspi

Trece Martires

MANILABalanga

Binangonan

Sta. Cruz

Batangas

Palayan

Baler

Tarlac

San Fernando

Malolos

Iba

Lingayen

San Fernando

Baguio

La Trinidad

Lagawe

Cabarroguis

IlaganBontoc

Bayombong

Laoag

Vigan

BanguedTuguegarao

Tabuk

Kabugao

Masbate

Borongan

Maasin

Surigao

Butuan

Prosperidad

Tandag

Koronadal

Alabel

Isulan

Shariff AguakKidapawan

Digos

Mati

Tagum

Nabunturan

Davao City

Basco

Itbayat

Sabtang

AKLAN

CAPIZ

ILOILO

ANTIQUE

GUIMARASCEBU

PALAWAN

BOHOL

SIQUIJORCAMIGUIN

MASBATE

MARINDUQUE

ROMBLON

ALBAY

SORSOGON

CATANDUANES

SURIGAODEL NORTE

SURIGAO DEL SUR

BUKIDNON DAVAODEL

NORTE

COMPOSTELA VALLEY

DAVAO ORIENTAL

DAVAO DEL SUR

SARANGANI

SOUTHCOTABATO

SULTAN KUDARAT

MAGUINDANAO

BASILAN

SULU

TAWI-TAWI

ZAMBOANGADEL NORTE

ZAMBOANGASIBUGAY

ZAMBOANGADEL SUR

NORTH COTABATO

KALINGA

APAYAO

CAGAYAN

ISABELA

MT. PROVINCE

ABRA

ILOCOS SUR

ILOCOS NORTE

BENGUET

QUIRINO

AURORAPANGASINAN

ZAMBALES

TARLAC

BATAAN

BULACANPAMPANGA

NUEVAECIJA

NUEVAVIZCAYA

QUEZON

CAVITE LAGUNA

BATANGAS

RIZAL

Polillo

LA UNION

IFUGAO

CAMARINESNORTE

CAMARINESSUR

AGUSANDEL SUR

AGUSANDEL NORTE

MISAMISOCC.

MISAMISORIENTAL

LANAODEL SUR

LANAODEL NORTE

LEYTE

BILIRAN

SOURTHERNLEYTE

WESTERNSAMAR

EASTERNSAMAR

NORTHERN SAMAR

NEGROS OCCIDENTAL

OCCIDENTALMINDORO ORIENTAL

MINDORO

NEGROSORIENTAL

Burias

Ticao

BATANES

REGION IV-ACALABARZON

REGION IV-BMIMAROPA

CAR

REGION IIlocos REGION II

Cagayan Valley

REGION IIICentral Luzon

REGION VBicol

REGION VIIIEastern Visayas

REGION VIWestern Visayas

REGION VIICentral Visayas

NCR

REGION IXZamboanga Peninsula

A R M M

REGION XIIICARAGA

REGION XIDavao Region

REGION XIISOCCSKSARGEN

REGION XNorthern Mindanao

NCRARMM

CALABARZONCAR

CARAGA

MIMAROPASOCCSKSARGEN

- National Capital Region- Autonomous Region in Muslim Mindanao- Cavite, Laguna, Batangas, Rizal, Quezon- Cordillera Administrative Region- Agusan del Norte, Agusan del Sur, Surigao del Norte, Surigao del Sur- Mindoro, Marinduque, Romblon, Palawan- South Cotabato, North Cotabato, Sultan Kudarat, Sarangani, General Santos

National Capital

City/Town

Private Distribution Utilities

Provincial Boundary

Regional Boundary

Boundaries are not necessarily authoritative.

The project covers 108 electric cooperatives and3 private distribution utilities and the franchise areaof Manila Electric Company.

PHILIPPINES

PHILIPPINE ENERGYEFFICIENCY PROJECT

Kilometers

0 50 100 150

N

08-1514 HR

125 00'Eo

125 00'Eo

119 00'Eo

119 00'Eo

8 00'No 8 00'No

16 00'No16 00'No

122 00'Eo

122 00'Eo

21 00'No

21 00'No

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed loan to the Republic of the Philippines; and (ii) proposed administration of a grant to be provided by the Asian Clean Energy Fund under the Clean Energy Financing Partnership Facility for the Philippine Energy Efficiency Project. The design and monitoring framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

1. Macroeconomic Performance

2. Gross domestic product growth improved gradually from 4.4% in 2002 to 7.2% in 2007—the highest growth in 3 decades. This growth was fueled largely by consumer spending (about 70%) and partly by public sector expenditures on current and capital outlays. Implementation of fiscal reforms in 2004–2006 coupled with receipts from privatization permitted the Government to increase expenditures, estimated at 17% of gross domestic product in 2007. However, growth slowed to 4.6% during the first quarter of 2008. This is largely due to rising commodity prices; increase in international oil prices; and a slowdown in global growth, which will impact exports. Overall economic growth for 2008 is likely to be around 4.5%. In March 2008, the Philippine Development Forum emphasized the importance of physical infrastructure in increasing regional competitiveness and market access, attracting investments needed to sustain economic growth, and reducing poverty. In this regard, the Government’s 2009 budget proposal calls for continued fiscal consolidation and priority for key physical infrastructure projects. The 2005–2007 country strategy and program of the Asian Development Bank (ADB) emphasizes support for removing infrastructure bottlenecks in power, transport, and agriculture to increase the competitiveness of private sector-led manufacturing and service sectors.1

2. Energy Sector Performance

3. The National Power Corporation (NPC), a vertically integrated utility, had primary responsibility for power generation and transmission in the Philippines until the power subsector was restructured in February 2002. Prior to the restructuring, NPC and several independent power producers shared electricity-generating functions in the country. Privately owned Manila Electric Company (Meralco), 16 privately owned utilities, 7 municipal systems, and 119 rural electric cooperatives distributed electricity across the country. The power supply system in the Philippines is divided into three grids—Luzon, Mindanao and Visayas. The Luzon grid covers Metro Manila and accounts for about 70% of total power demand in the country; the Mindanao grid is the second largest. The National Electrification Administration (NEA) is responsible for rural electrification. It manages electrification targets and maintains the operation of rural networks through the electric cooperatives. 4. Burdened with excessive debt, lack of competition, and stranded generation capacity with expensive take-or-pay contracts, the Government decided to restructure and privatize the power industry. In 1998, ADB supported the Government’s initiative through the Power Sector Restructuring Program2 with financing of $300 million. The program’s principal objective was to create competitive electricity markets by unbundling generation and transmission, and providing 1 ADB. 2005. Country Strategy and Program (2005–2007): Philippines. Manila (extended to 2010). 2 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of the Philippines for the Power Sector Restructuring Program. Manila.

2

open and equal access to transmission and distribution. By March 2003, NPC’s assets were organized into two state-holding companies: (i) National Transmission Corporation, which took on much of the company’s transmission assets; and (ii) Power Sector Assets and Liabilities Management Corporation, which assumed control of the power-generating assets. 5. The Electric Power Industry Reform Act, passed by Congress in 2001, was the blueprint for the 2002 restructuring. The act required the breakup of NPC’s integrated assets into separate units for electricity generation and transmission. By March 2008, the Government had finalized a 25-year concession to operate the national power grid, and the Power Sector Assets and Liabilities Management Corporation had formally approved the sale of more than 1,855 megawatts (MW) or 44% of NPC’s generation assets in support of the Government's revised target of 70% privatization before the end of 2008. In 2001, the Government established an independent regulator, the Energy Regulatory Commission to oversee competition and monopoly regulation of the sector. Detailed analysis of the power subsector is in Appendix 2. 6. Total energy demand is projected to double by 2030 (from 2007), growing at about 4% per annum. Electricity demand growth3 will be similar. Growth will be strongest in the residential sector (at 6.5% annually), as compared to the commercial (5.7%) and industry sectors (4.7%). If the status quo continues, most of this demand growth will have to be met by imported oil and coal. Both coal and oil consumption grew by 10% between 2006 and 2007. Coal will continue to be the dominant4 fuel for electricity generation and will account for 54% of electricity generation by 2030. The transport sector’s demand is currently exclusively met by oil and will account for about 44% of total final energy demand by 2030. 7. The total installed power-generating capacity in the Philippines was 15,937 MW in 2007, generating about 59,600 gigawatt-hours, a 20% increase since 2001. Natural gas (32%), geothermal energy (17%), and hydropower (14%) are the main domestic primary energy sources used for generation. Oil-based and coal-fired generation contribute the remaining 37%. The electricity tariffs in the Philippines are among the highest in the region5 and, as a result, consumers spend a large part of their household income on energy. Recent oil price increases have exacerbated the situation, especially for poor consumers in rural areas. Global energy prices will continue to be high in the short to medium term. 8. In response to these challenges, the Government organized the Philippine Energy Summit in February 2008 to discuss options for mitigating the impact of high energy prices on the general public. The summit concluded that while the introduction of competition through open access6 and better targeting of existing subsidies could reduce electricity tariffs in the medium term, a more effective solution would be a combination of increased use of indigenous renewable energy generation (such as geothermal, biomass, wind, and hydropower) and promotion of energy efficiency because of its quick implementation ability. The summit participants agreed to pursue energy efficiency as the short-term strategy to combat the impact 3 Projections of energy demand and electricity consumption are taken from various reports published by the

Philippine Department of Energy and International Energy Agency, including International Energy Agency. 2007. World Energy Outlook 2007. Paris.

4 National coal-based generation was about 28% in 2007 (35% in Luzon, 10% in the Visayas, and 20% in the Mindanao grids).

5 Philippines $0.22 per kilowatt-hour (kWh), Cambodia $0.20 per kWh, Viet Nam $0.06 per kWh, and Indonesia $0.065 per kWh.

6 Open access means that the utility’s wires are “open” and can be used by a customer to receive electricity from an alternative source. Open access gives a customer the choice to shop around for a “cheaper” source of electricity, switch directly to the cheaper alternative, and pay the incumbent utility only for regulated transmission and distribution charges.

3

of high energy prices. The Government recognizes that it alone cannot identify and finance the various energy-efficiency initiatives, and therefore, developed a two-pronged implementation plan. Under this plan, the Government will make residential customers aware of the economic benefits of energy efficiency; and for commercial and industrial customers, the Government will create an enabling policy and lending environment to encourage private sector investments in energy efficiency. These measures will ensure efficient use of electricity by all consumers, thus lowering consumer cost and costs of the government and private corporations for electricity; and ultimately reduce the import of fossil fuels. 9. To implement this plan, the Government requested ADB support. The plan will reduce the impact of high energy prices and the overall carbon footprint of the energy sector. B. Analysis of Key Problems and Opportunities

1. Key Problems and Constraints

10. Power Shortage. Electricity demand is projected to increase by about 6% during 2008–2014. This will require adding 4,000 MW of new generation capacity.7 By 2012, power shortages are expected in the Luzon and Visayas grids as demand growth will catch up with current excess generation capacity. In January 2008, the Government, in its updated energy sector development plan, identified 14 power projects with a total capacity of 2,534 MW. The Government expects the private sector to invest in these generation projects and to trade power in the power pool or sell directly to distribution utilities. 11. Benefits of Competition Delayed. Unbundling power ensures appropriate investments and efficient operation through (i) competition in generation and retail; and (ii) effective regulation, as a surrogate for competition, for monopoly transmission and distribution. Despite the facts that (i) power restructuring is well advanced, (ii) the Philippines is a role model for the region, and (iii) the Government has been successful in attracting private investors to purchase old NPC generation plants at higher than expected prices,8 consumers have not yet benefited from the reforms in terms of lower electricity prices. The main competitive element—open access—has not yet been implemented. 12. System Peak. The system peak in most rural electric cooperatives is driven by the evening lighting load; unlike Meralco, where the late afternoon system peak is driven by commercial air-conditioning load. A large part of the rural system peak is contributed by incandescent bulbs in households, inefficient linear fluorescents in commercial buildings and small factories, and inefficient public lighting. Widespread use of inefficient lighting (residential and commercial) has created capacity constraints within the rural electric cooperatives (particularly in remote rural areas) by increasing system peak demand, and eroding transmission reserve capacity and generation capacity. This inefficient lighting has not only burdened end consumers with excess electricity bills, it also contributes to additional greenhouse gas emissions caused by the excess generation needed (from diesel or fuel oil) for the extra electricity to supply the inefficient lighting. 13. Lack of ESCO Development. An energy service company (ESCO) is a private business that engages in a performance-based contract with a client to identify and implement energy-efficiency measures to reduce the client’s energy consumption at the client’s premises. A super

7 Department of Energy. 2008. Power Development Plan 2006 Update. Philippines. 8 Prices ranged from $1.55 million to $2.03 million per megawatt.

4

ESCO aggregates activities of other ESCOs and brings financing for projects. It can take the form of a leasing or financing company to provide ESCOs and/or customer’s energy equipment on lease or benefit-sharing terms. It will also lead efforts to develop the ESCO industry with capacity building, knowledge management, and market development. 14. With one of the region’s highest electricity tariffs (after Japan), the Philippines should be the one of the most attractive places for investments by ESCOs. The high electricity prices provide excellent incentives for establishing ESCOs to undertake energy-efficiency projects; unfortunately, this is not the case and only a few ESCOs are operating in the country. To date, very few energy-efficiency projects have been implemented. The main barriers to ESCOs are (i) limited or no access to funds (without collateral or guarantees), (ii) lack of technical evaluation capacity in commercial banks, (iii) lack of flagship projects and general awareness of energy efficiency by end users, and (iv) inadequate policy support. 15. ESCOs need to promote energy-efficiency ideas and concepts to commercial and industrial customers where electricity represents only about 10%–15% of their operating cost. Business managers are either not aware or do not consider energy efficiency as a priority despite high returns on energy-efficiency investments. 16. Mercury Pollution. The compact fluorescent lamp (CFL) contains 2–5 milligrams of mercury. A typical linear fluorescent lamp, used commonly in offices and houses, contains about 12 milligrams of mercury. These lamps have been in use for the last 40 years, and only recently have governments begun addressing issues of their safe disposal. Mercury poses a hazard to pregnant women, infants, and children. People in the Philippines, as in many developing countries, dispose of fluorescent lamps in landfills, ultimately polluting groundwater. The Government plans to institute measures that will address mercury content in CFLs sold in the Philippines, and to collect mercury from old fluorescent lamps before disposal.

2. Opportunities

17. Efficient lighting reduces electricity demand for lighting by around 40%. In the Philippines, where the domestic and commercial lighting base is large, lighting is the main driver of the peak load. About 1,300 MW of the peak demand can be saved by switching to the use of energy-efficient lights. More than 40 million incandescent lights are in operation, according to the Philippines Lighting Industry Association. Only 20% of the electricity used by an incandescent bulb produces light; the remaining 80% is wasted as heat. A CFL uses all of its electricity input to produce light, saving about 80% of power consumption. Because of their design, CFLs last about 10 times longer than incandescent lamps. 18. Governments, worldwide, are encouraging customers to use more CFLs, as the savings are much more than the avoided cost of adding new generation capacity. The additional benefits are environmental, including avoided greenhouse gas emissions. Perusahaan Listrik Negara, the national electricity utility in Indonesia, started distributing CFLs to its residential customers in 2007. Australia, Canada, People’s Republic of China, Thailand, Viet Nam, and many other countries have used a CFL distribution program as an effective alternative to building new power stations to meet growing demand. Put simply, if 1 million incandescent bulbs are replaced with CFLs at a cost of about $1.5 million, the electricity demand will be reduced by 50 MW. The impact on the power system will be the same as building a new 50 MW power station, which may cost at least $50 million, another $2 million–$3 million each year to operate, and 3–4 years for construction.

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19. Efficient Lighting Choices for Off-Grid Customers. Off-grid customers, with their high cost of generation, are looking for choices beyond CFLs. Light-emitting diodes (LED)9 can produce the same amount of light as a 40-watt incandescent bulb or a 13-watt CFL, with only about 8–9 watts and have an effective life of more than 50,000 hours (replacement of a light bulb every 30 years).10 Projects are being undertaken in Africa to replace inefficient kerosene lanterns with LEDs in off-grid areas.11 LED lighting, coupled with a small solar panel, is an environment-friendly alternative for remote populations with no access to grid-connected electricity. This technology can bring large benefits for off-grid communities in the Philippines who are dependent on kerosene lamps. 20. Efficient Public Lighting. In the Philippines, public lighting (street lighting and lighting of public areas) is subsidized and local government units are responsible for managing it.12 In the provinces, most street lighting uses inefficient lighting technologies, such as fluorescent lights, incandescent bulbs, and low-pressure mercury vapor lamps. India, Thailand and Viet Nam have developed national efficient public lighting programs. The Philippines could use efficient lights for public lighting to reduce the need for energy generation and avoid the associated carbon dioxide (CO2) emissions. 21. Efficient Buildings. Commercial buildings consume large amounts of energy estimated at about 25%–40% of energy used globally, generating 30%–40% of greenhouse gases and 30%–40% of solid waste. According to a recent publication, improving energy efficiency in buildings by implementing (i) lighting retrofits; (ii) improved heating, ventilation, and air-conditioning systems; and (iii) building control systems can reduce more than 700 million tons of greenhouse gases, mostly at net negative marginal costs. 13 22. In many countries, this priority area is addressed through efficient-building initiatives14 by encouraging adoption of efficient-building practices through (i) incorporating better designs such as building orientation and construction; (ii) implementing improved operation systems (maintenance, control systems, monitoring, communication, and waste disposal); and (iii) improving overall building management, including ventilation and air-conditioning. In the Philippines, four major professional groups are involved in developing efficient-building initiatives. These groups share common long-term goals and plan to align their short-term activities. Together, they plan to develop a building rating system for the country. This has the potential to avoid emissions of about 2.2 million tons of CO2 over the next 10 years. Development of an acceptable rating system for the Philippines—both for new and retrofitted buildings—is a priority for the Government. The proposed efficient-building system will be implemented as a national voluntary rating scheme.

3. Government Strategy for Energy Efficiency and Tackling Climate Change

23. In 2004, the Government launched its National Energy Efficiency and Conservation Program, which includes activities supporting energy-efficiency standards and labeling, demand-side management, energy management, recognition programs, advisory services, and monitoring. The Department of Energy (DOE) implemented the Philippine Efficient Lighting and

9 Light-emitting diode is commonly seen as a tiny orange or red display light in electronic products. 10 Usually, the life of light bulbs is shorter—incandescent bulbs last for 800 hours, while CFLs last for 8,000 hours. 11 “Lighting Africa” is an initiative of the World Bank Group and the International Finance Corporation. 12 Consumption is not metered and charges are based on P6 per kWh tariff fixed charge per light. 13 McKinsey & Company. 2007. Reducing US Greenhouse Gas Emissions: How Much at What Cost? Available:

http://www.mckinsey.com/clientservice/ccsi/pdf/US_ghg_final_report.pdf 14 For example, the Green Building Council of Australia. http://www.gbca.org.au/

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Market Transformation Project in 2005 to address barriers to widespread use of energy-efficient lighting systems.15 The Global Environment Facility through the United Nations Development Programme funded the 5-year project, which (i) studied overall market dynamics for CFLs in the Philippines, (ii) developed rating systems, (iii) developed national standards for CFLs, (iv) identified the need for mercury waste management, and (v) recommended a large-scale CFL program targeting residential and other customers. In the context of the later this proposed project was formulated at the request of the Government. 24. At about 1.0 ton per capita, the Philippines’ emissions of CO2 are among the lowest in Southeast Asia.16 The country’s greenhouse gas emissions totaled 100 million tons equivalent of CO2 in 1994. The Philippines, being a nonannex I17 country in the United Nations Framework Convention on Climate Change, does not have any immediate restrictions and is not expected to implement its climate change commitments unless developed countries provide funding and technology. However, the Philippines was among the first countries to create a dedicated organization to tackle climate change. In May 1991, the Government created the Inter-agency Committee on Climate Change comprising 15 government agencies and nongovernment organization representatives, and in August 2007 the Government established the Presidential Task Force on Climate Change, with the DOE secretary as chair. 25. The task force’s mandate includes (i) undertaking strategic approaches and measures to prevent or reduce greenhouse gas emissions, including fuel efficiency, energy conservation, use of renewable energy, and waste management; and (ii) conducting a comprehensive public information and awareness campaign nationwide to educate the public on the climate change situation and its adverse effects. The task force organized the Energy Summit in January 2008 with ADB as its technical advisor, and led the development of a road map for energy efficiency (Appendix 2 and Supplementary Appendix A). 26. Private Sector Investment in Energy Efficiency. Since the oil crisis of the 1970s, ESCOs have flourished 18 worldwide, and despite low oil prices in the last 5–10 years, investments in energy efficiency have continued with newer technology. Recently, Thailand’s Energy Efficiency Revolving Fund Program implemented 200 projects without any credit defaulters over 5 years. In the United States, the Federal Energy Management Program invested about $20 billion in energy-efficiency projects between 1990 and 2000. ESCO revenues from these investments were estimated at about $2 billion for 2000. 27. The Federal Building Initiative (launched in 1991 by the Government of Canada) supported federal departments to contract with ESCOs to develop and implement energy-efficiency retrofits through performance contracts. By 2006, it delivered 7,500 retrofitted federal buildings and other facilities attracting about $240 million of private sector investment and annual savings of $33 million. Many other similar programs are supporting ESCO development, for example, the Australian Government Energy Efficiency Investment Program, the Hungary Energy Efficiency Guarantee Fund, Bulgarian Energy Efficiency Fund, and Energy Efficiency 15 The project seeks to encourage consumers in the Philippines to switch from the use of incandescent bulbs to more

energy-efficient lighting systems. 16 Indonesia (1.4 tons per capita), Lao People’s Democratic Republic (0.2), Malaysia (6.4), Philippines (1.0),

Singapore (11.3), Thailand (3.9) and Viet Nam (0.9). 17 Annex I countries include the industrialized countries that were members of the Organisation for Economic

Co-operation and Development in 1992, plus countries with economies in transition, including the Russian Federation, the Baltic States, and several central and eastern European states (http://unfccc.int).

18 An international survey of the ESCO industry, published by the Lawrence Berkeley National Laboratory in Berkeley, California, in November 2003, collected ESCO activities in 38 countries outside of the United States and calculated the total amount of ESCO activity to be between $560 million and $620 million.

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Loan Fund in India.19 The strategy of the Government of the Philippines is to attract private investments in implementing energy efficiency by creating a conducive policy environment for such investments. 28. Clean Development Mechanism (CDM) Credits.20 The increase in concentration of greenhouse gases (mainly carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) in the atmosphere has increased heat retention and caused changes in the climate. In the Kyoto Protocol, the common but differentiated responsibilities are recognized and emission reduction targets set for developed countries, which creates a market in emissions reductions. The CDM was defined in the Kyoto Protocol to promote lower emissions from projects in developing countries. 29. The CDM is a market-based financial instrument that assists developing countries to achieve sustainable development and industrialized countries to meet their emission reduction targets. It encourages investments in “clean” projects in developing countries that reduce emissions below the baseline scenario. These emission reductions, once verified and certified (called certified emission reductions [CERs]), can be acquired by developed countries to comply with their commitments under the Kyoto Protocol. CERs are measured in terms of carbon credits. The advantages of the CDM are (i) a reduction in global emissions of greenhouse gases; (ii) assistance to developing countries to meet their sustainable development objectives and promote cleaner projects; (iii) help for industrialized countries to meet their emission reduction targets; and (iv) use of a market-based approach to ensure efficient reduction of greenhouse gases. The actual emission reductions have to be monitored, verified by independent parties, and then certified by the CDM executive board to capture a project’s benefit as CERs, which can be traded in the carbon market. Each CDM project requires a baseline and monitoring methodology. All energy-efficiency projects qualify for the CDM mechanism.

4. ADB’s Sector Strategy

30. ADB has been a partner in developing power in the Philippines, and contributed to increasing the country’s electrification rate of barangays (villages) from 55% in 1986 to 94% in 2006, and of households from less than 50% in 1986 to 75% in 2006. ADB assistance has effectively brought about sector reform; an independent energy regulator was established, substantial progress was made in privatization, and the wholesale electricity spot market is operating. 31. However, in an environment where global concerns for the threat of climate change are well established, a strategy based solely on conventional energy is no longer sustainable on its own. Making electricity rates more affordable, averting power shortages beyond 2012, and promoting clean energy and energy efficiency are today’s challenges. ADB’s new strategy for the Philippine energy sector will supplement its efforts in conventional energy with energy-efficiency and climate change mitigation initiatives. ADB has been working closely with DOE and the Presidential Task Force on Climate Change to formulate a road map for implementing

19 International Bank for Reconstruction and Development/The World Bank. 2008. Financing Energy Efficiency:

Lessons from Brazil, China, India, and Beyond. Available: http://www.esmap.org/filez/pubs/ 211200830655_financing_energy_efficiency.pdf

20 Clean Development Mechanism credit is a credit balance for a quantity of carbon dioxide (CO2) equivalents, issued pursuant to Article 12 of the Kyoto Protocol and decisions adopted with respect to the United Nation's Climate Convention or the Kyoto Protocol; referred to in the Amendment Directive as certified emission reduction.

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this strategy. The road map is being developed with other stakeholders. For energy efficiency, in 2008, ADB proposes to finance a range of pilot initiatives that will be scaled up as a larger intervention in subsequent years. The pilot initiatives cover proven energy-efficiency activities that generate high return on investments, and are included in the Government’s draft road map.

5. Policy Dialogue

32. ADB acted as technical advisor for the 2008 energy summit and developed an energy-efficiency road map for the sector, which encourages all consumers to switch to more efficient forms of lighting. Based on ADB’s technical analysis and advice, the Government has decided, as a policy, to be the first country in Asia to phase out incandescent bulbs from January 2010.21 If implemented, this will generate considerable savings: $1.3 billion in deferred new generation investments22 and a reduction of about 900,000 tons of CO2 emissions per year. Despite these high savings by society, some consumers may see this policy as a burden as the initial cost of a quality CFL—that actually lasts about 10,000 hours—is more than five times the cost of an incandescent bulb. Since customers are not fully aware of the energy savings potential, they consider CFLs an expensive choice compared with the cheap incandescent bulb. 33. The Government’s initiatives to (i) phase out incandescent bulbs, (ii) implement efficiency improvements in government buildings, and (iii) support the development of ESCOs to help implement energy-efficiency projects need immediate direct investments.

6. External Assistance

34. ADB is the lead development partner in the Philippine energy sector, with a focus on the electricity subsector. Over the last 30 years, ADB provided about $2.9 billion in loans and around $15 million in technical assistance to the sector, mostly focused on conventional energy. ADB’s assistance to power includes (i) 20 loans to NPC ($1.6 billion) for power generation and transmission projects, (ii) program loans for power subsector restructuring and debt liabilities management ($1.3 billion), and (iii) 34 technical assistance grants for institutional strengthening and various studies (about $15 million). 35. ADB takes the lead in providing policy advice to the Government on power subsector restructuring, while continuing support to NPC. The World Bank has a more prominent role in rural electrification programs. Other major multilateral and bilateral agencies involved in the sector include the Japan Finance Corporation, Japan International Cooperation Agency, United States Overseas Private Investment Corporation, and United States Agency for International Development. ADB has been coordinating its assistance to the sector with other agencies, particularly the World Bank and Japan Finance Corporation. In recent years the Swedish International Development Cooperation Agency, United Nations Environment Programme, and United Nations Industrial Development Organization have provided assistance to the industry sector. A summary of major external assistance to the sector is in Appendix 3.

21 In her closing remarks at the 2008 Philippine Energy Summit, President Gloria Macapagal-Arroyo announced the

country’s plans to phase out incandescent bulbs by January 2010. 22 Conservatively, 40 million incandescent bulbs (average 60 watts), replaced by 13-watt CFL, with 70% coincidence

factor, or 1,300 MW of deferred investment; 3 hours per day, 1,600 gigawatt-hours; 0.54 kilograms CO2/kilowatt-hour, 900,000 tons of CO2.

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7. Lessons

36. ADB’s recent involvement in the Philippine power subsector has been in the form of program support related to subsector restructuring. With ADB support, the Philippines is among the first of ADB’s developing member countries to implement fundamental power restructuring, with substantive privatization of generation assets, and concession agreements with private parties to operate transmission assets and achieve a competitive market for electricity. This is an ambitious and complex task involving coordinated actions on legislative, regulatory, and policy measures spread over a reasonably long period. The process started around 1998 and is continuing. 37. ADB’s interaction with the Government during its Energy Summit and other policy work clearly demonstrates the Government’s willingness to support investments in projects to mitigate the impact of climate change. With volatile oil prices and strong Government commitment, a broad-based, energy-efficiency project will set the foundation for future ADB investment, and if implemented effectively, will generate an opportunity for large-scale investment in the medium term.

III. THE PROPOSED PROJECT

A. Impact and Outcome

38. The final impact of the Project will be reduced cost of power generation. As electricity cannot be stored, its supply and demand has to be met instantaneously. During peak times, the marginal cost of generation is usually about 5–10 times more than the average cost of generation. Therefore when the peak demand is reduced by using efficient lighting, the average cost of generation is reduced. 39. Consumers’ energy costs will be reduced with the use of efficient lighting. With reduced electricity demand, the overall need for supply (generation) will be reduced. Also, a large amount of greenhouse gas emissions—and the associated cost of importing fuel—will be avoided, creating carbon credits for the Project under the CDM. The Project will establish sustainable business models for large-scale implementation of energy-efficiency programs. It will reduce public sector and local government energy expenditure, reduce health risks associated with residual mercury and kerosene (in off-grid areas), enhance livelihoods of rural communities, facilitate a viable ESCO industry, and establish a certification process for energy and environmentally efficient commercial buildings. B. Outputs

40. The Project will have the following outputs: (i) implementation of lighting retrofits in selected government buildings, (ii) provision of 13 million CFLs to consumers, (iii) implementation of energy-efficient public lighting programs, (iv) expansion of testing laboratory capacity and establishment of a mercury waste management plant for fluorescent lighting, (v) establishment of a super ESCO, (vi) implementation of a certification scheme for energy-efficient buildings, and (vii) development and implementation of a communication and social mobilization program. 41. The Project has four components, some of which are pilot programs that could be subsequently scaled up as components of a future project.

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1. Component 1: Efficient Lighting Initiative

42. Lighting accounts for more than 50% of the evening peak power load in the rural Philippines, where unlike in Metro Manila, use of air-conditioning (residential or commercial) is relatively modest. The use of proven technology in efficient lighting can reduce this demand by 40%–80%. The efficient lighting initiative will pilot the use of various efficient lighting options—fluorescent lamps, CFLs, LEDs, sodium lamps, and electronic ballasts—to reduce peak demand.

a. Subcomponent 1.1: Retrofit of Government Office Buildings

43. The goal of this component is to reduce wasted energy in government office buildings because of inefficient lighting equipment. Older-style fluorescent lamps, incandescent bulbs, and inefficient magnetic ballasts will be replaced by energy-efficient alternatives—new T8 fluorescent lamps, CFLs, and electronic ballasts, respectively. This will supplement DOE’s current initiative under the Philippine Efficient Lighting and Market Transformation Project, and target about 40 (of an estimated 300 nationwide) selected government office buildings for the retrofit. Within the limited budget of $3 million, this pilot will save about 7,000 megawatt-hours annually, equivalent to about $1.7 million; and avoid 5,000 tons per annum of greenhouse emissions.

b. Subcomponent 1.2: National Residential Lighting Program

44. Many residential customers use at least two 40-watt incandescent bulbs. The objective of this component is to replace these two incandescent bulbs with CFLs: collect the working incandescent bulbs, gather them as evidence of a government-led program, and claim CDM credits for the program. The electricity consumption for lighting will be reduced by 80% for these customers when they switch to energy-efficient CFLs. Overall, this initiative will distribute about 13 million CFLs, free of charge, to residential and other customers of four private utilities23 and about 108 electric cooperatives nationwide. This initiative will help customers to more easily adjust to the Government’s proposal to phase out incandescent bulbs by 2010. 45. Customers in some off-grid areas will be provided with LED lights under a pilot program to evaluate the use of LED lights in place of kerosene, candles, and other nonelectric alternatives. 46. A budget of $18 million, including $250,000 for the LED program, is allocated for this component. Under this component, for example, by replacing two incandescent bulbs with two CFLs at no cost, each customer will save about P800 each year. This savings can continue for about 7 years (life of a 10,000-hour lamp for 3–4 hours a day average use), and overall save each customer about P6,000 over the next 7 years. The Project will defer investment of about $450 million in new power plants in addition to the savings in fuel cost, and avoid about 300,000 tons of CO2 emission annually from reduced power generation, the market value of which is about $3.0 million per year. Households switching to LEDs will save about P600 net per month from avoided use of kerosene lamps. A detailed plan for distribution of CFLs and LEDs is in Appendix 4.

23 Manila Electric Company, Cagayan Electric Power and Light Company, Visayan Electric Company, and Davao

Electric Company.

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c. Subcomponent 1.3: Public Lighting Retrofit Program

47. Incandescent bulbs and mercury vapor lamps are used for public lighting in most parts of the country outside the large cities. Under this subcomponent, efficient CFLs will replace incandescent bulbs, while high-pressure sodium lamps will replace mercury vapor lamps, thus saving about 60% of the electricity presently used. This component will demonstrate the use of LEDs as a replacement for incandescent lamps currently used in traffic lights. Within the limited budget of $1.5 million, this pilot can save about 9,000 megawatt-hours annually, or about P54 million in electricity costs, and avoid greenhouse gas emissions of 5,000 tons per annum.

d. Subcomponent 1.4: Energy Efficiency Testing and Lamp Waste Management

48. Minimum performance efficiency standards are commonly used to control efficiency standards of everyday use appliances. This requires a country to be able to test for compliance against a set of technical standards. The Government introduced minimum performance efficiency standards for a range of appliances beginning in 1993 and has facilities to test room air-conditioners, small refrigerators, and CFLs. It plans to expand the capability of the existing testing laboratory to enable it to test televisions, washing machines, large refrigerators, freezers, and a range of other consumer products. The budget for upgrading the appliance-testing laboratory is $2.5 million. The Government estimates that the energy-labeling initiative could avoid generation of about 8 million tons of CO2 over 10years. 49. In addition, $1.5 million is allocated to establishing a new mercury waste management plant for recovery of mercury from used fluorescent lamps, and for preventing the residual mercury from entering the food chain through landfill dumps leeching into groundwater. The Government plans to use a form of extended producer responsibility, which requires the manufacturer or importer to be responsible for waste, obliging them to internalize waste management costs in their product prices, as an option for making the recovery of mercury a viable commercial business model that will attract private investors. 24 DOE has signed a commercial lease agreement with a private waste management company, which has all necessary permits and clearances to deal with mercury and other hazardous wastes, to locate the facility on its site.

2. Component 2: Efficiency Initiatives in Buildings and Industries

a. Subcomponent 2.1: Super ESCO

50. Despite the high prices of energy, and well-established private banking system, the ESCO industry is not well developed in the Philippines compared with other countries in the region. Lack of access to financing and lack of technical understanding by potential clients are two of the main reasons. Through this project component, the Government will introduce incentives and technical expertise to the industry. 51. Various models of ESCO operations have been tried globally. The most appropriate model needs to take account of local conditions and participants’ capacity (footnote 20). As a

24 Extended producer responsibility is a strategy designed to promote the integration of environmental costs

associated with products throughout their life cycles into the market price of the products. Organisation for Economic Co-operation and Development. 1999. Fact Sheet: Extended Producer Responsibility. Available: http://www.oecd.org

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pilot under this subcomponent, the Government’s strategy is to develop a working model of a super ESCO as a subsidiary of the Philippine National Oil Company (PNOC)—a government-owned corporation under DOE.25 This newly established super ESCO will develop projects for its own implementation (for the public sector) and support development of other ESCOs (for the private sector) by providing financial and technical advisory support. The range of services offered by a typical ESCO includes (i) preliminary feasibility analysis including detailed audits of facilities and design of energy-efficiency options and financing; (ii) installation services and management; (iii) operation, maintenance, and performance monitoring; and (iv) promotion of energy-efficiency technologies and services. A single organization leading all ESCO-related activities will minimize transaction costs often necessary for successful implementation of a benefit-sharing mechanism between a range of participants through financial, technical, and performance guarantees. 52. Privately owned ESCOs and end users may be able to utilize both finance and technical expertise of the super ESCO. This component has funding of $8.0 million. The proposed design of the super ESCO is presented in Appendix 5.

b. Subcomponent 2.2: Efficient-Building Initiative

53. This component will accelerate implementation of the building rating system by streamlining existing initiatives into a single nascent building rating system. The system will include sustainable site development, indoor air quality improvement, efficient energy and water use and management, solid waste management, preference for green materials, and preservation of cultural contexts. This will be enforced through voluntary agreements and supported by developing awareness of the rating system. 54. The Government plans to extend the industry-rating system to (i) rate new and retrofitted buildings, and (ii) expand it in harmony with other initiatives within the Association of Southeast Asian Nations region. New buildings certified by the rating system could save up to 20% and retrofitted buildings will save up to 6% in energy costs annually. At least 200 new and 200 retrofitted buildings in each of the commercial and industry sectors, 10 upper-middle-class green residential projects of 200 units each, and 10 low-cost green residential projects of 1,500 units each are expected to be certified under the new efficient-building rating system over the next 5 years. In addition, all government buildings that have completed energy savings retrofits can apply for certification under the rating system.

3. Component 3: Communication and Social Mobilization

55. Communication and social mobilization activities will be grouped into two streams: (i) communication for efficient lighting, and (ii) promotion of efficiency in everyday life. An integrated campaign will be launched based on the detailed marketing plan developed with the Government during project preparation. The communication plan themes are (i) widespread awareness, (ii) widespread understanding, (iii) cooperation and participation, (iv) development of a sense of urgency, and (v) community ownership. A list of communication and social mobilization requirements for each project component is in Appendix 6.

25 A super ESCO aggregates activities of other ESCOs and brings financing for projects. It can take the form of a

leasing or financing company to provide ESCOs and/or customers with energy-efficiency equipment on lease or benefit-sharing terms.

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4. Component 4: Project Implementation Support

56. DOE, the Executing Agency, will recruit consultants under this component to support project implementation, preparation of bidding documents (including technical specifications), bid evaluation, and program implementation coordination; and supervision. C. Special Features

57. Linkage with the Philippines’ Climate Change Initiatives. The Government’s planned phase out of incandescent lamps by 2010 has a direct impact on some of the efficient lighting initiatives proposed in this Project. Beyond the lighting initiatives, the ESCOs and potential scaled-up projects are the core DOE medium-term programs. 58. Linkage with Global Environmental Initiatives. Most of the energy-efficiency programs are inherently linked to global environmental initiatives, including the Kyoto Protocol, which the Government ratified in 2002. The national residential lighting program (paras. 44-46) qualifies for the CDM. The cash payment made in return for the CERs created by the program, once it is registered as a CDM project, will enhance the commercial viability of the program and others like it, and encourage private sector participation in energy-efficiency investment. D. Project Investment Plan

59. The project cost is estimated at $46.5 million, including physical and price contingencies, interest and other charges during implementation, and taxes and duties of $2.40 million (Table 1 and Appendix 7). E. Financing Plan

60. The Government has requested a loan of $31,100,000 from ADB’s ordinary capital resources to help finance the Project. Consideration has been given to the amount of taxes and duties, and these do not constitute an excessively high share of project costs. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The Asian Clean Energy Fund26 under the Clean Energy Financing Partnership Facility will provide grant cofinancing equivalent to $1.5 million. The Government will finance $13.9 million (Table 2). 61. Under a subsidiary loan agreement, the Government will make $8 million equivalent of the ADB loan proceeds available through relending arrangements to the super ESCO. The super ESCO will bear the foreign exchange risk for this subsidiary loan agreement. The Borrower will be the Republic of the Philippines.

26 Established by the Government of Japan and administered by ADB.

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Table 1: Project Investment Plan ($ million)

Item Amount A. Base Costa 1. Efficient Lighting Initiative 1.1 Retrofit Government Office Buildings 2.66 1.2 National Residential Lighting Program 16.16 1.3 Public Lighting Retrofit Program 1.33 1.4 Energy Efficiency Testing and Lamp Waste Management 3.51 2. Efficiency Initiatives in Buildings and Industries 2.1 Super ESCO 8.00 2.2 Efficient Building Initiative 0.50 3. Communication and Social Mobilization 3.1 Communication for Efficient Lighting 1.50 3.2 Promoting Efficiency in Everyday Life 1.00 4. Project Implementation Support 1.50 5. Taxes and Duties 2.40 B. Contingenciesb 1. Physical 3.32 2. Price 1.28 C. Financing Charges during Implementationc 3.34 Total (A+B+C) 46.50 ESCO = energy service company. . a In mid-2008 prices. b Physical contingencies computed at 9% for base cost. Price contingencies computed at 0.8%

for foreign exchange costs, and 5.0% in 2008 and 4.5% in 2009 onward for local currency costs; includes provision for potential exchange rate fluctuation.

c Includes interest and commitment charges. Interest during the grace period is computed at the 5-year forward London interbank offered rate plus a spread of 0.2%. Commitment charge is calculated at 0.15% on the undisbursed balance.

Source: Asian Development Bank estimates.

Table 2: Financing Plan ($ million)

Source Amount % of Total Asian Development Bank 31.1 66.9 The Asian Clean Energy Fund under the Clean Energy Financing Partnership Facilitya

1.5

3.2

Government of the Philippines 13.9 29.9 Total 46.5 100.0

a Established by the Government of Japan and administered by ADB. Source: Asian Development Bank estimates.

F. Implementation Arrangements

1. Project Management

62. As the Executing Agency, DOE will be responsible for the overall technical supervision and execution of the Project. DOE will establish a project steering committee (PSC) to be chaired by the Secretary of DOE or a designated DOE representative, which shall be responsible for the overall policy guidance. The PSC shall meet at least on a quarterly basis to ensure that the objectives of the Project are being achieved. In addition, DOE will be the Implementing Agency for the following subcomponents: (i) retrofit of government office

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buildings, (ii) testing laboratory and mercury waste recovery plant, (iii) efficient-building initiative, and (iv) public lighting retrofits. Once incorporated as a subsidiary of PNOC, the super ESCO will be the Implementing Agency for the ESCO component. NEA will be the Implementing Agency for the components involving the electric cooperatives—national residential lighting initiative except in the franchise areas of the private utilities. DOE will establish a project management unit (PMU), headed by a director and appropriately staffed for day-to-day coordination. The PMU director will have overall responsibility for supporting implementation and providing guidance, administrative and technical support, counterpart staff, documentation, and other required services.

2. Implementation Period

63. The Project will be implemented over 2 years from April 2009. The detailed implementation schedule is in Appendix 8.

3. Procurement

64. All procurement to be financed under the ADB loan and the Asian Clean Energy Fund grant under the Clean Energy Financing Partnership Facility will be carried out in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time), and the procurement plan prepared and agreed between the Government and ADB. All procurement contracts will contain anticorruption provisions as specified by ADB. The procurement plan is attached as Appendix 9.

4. Advance Procurement Action and Retroactive Financing

65. The Government asked ADB to approve advance action to expedite the recruitment of consultants and procurement of equipment. Management approved advance action for procurement of goods and services, and retroactive financing for an initial supply of CFLs that will be ordered between 1 August 2008 and loan effectiveness, for up to $3.1 million (10% of the loan amount). This will cover tendering and bid evaluation for the equipment packages, but not include signing of contracts, except for the initial supply of CFLs under retroactive financing. Advance action will allow DOE to initiate its communication plan and the first stage of CFL distribution. The Government and the implementing agencies were advised that approval of advance action or retroactive financing does not commit ADB to financing the Project.

5. Consulting Services

66. Consultants will be selected and engaged under the Project in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). An international consulting firm will be engaged to manage implementation of the Project. The firm will deliver 127 person-months of consulting services (40 person-months of international and 87 person-months of national consulting) following ADB’s quality- and cost-based selection method. Two to three individual consultants will be hired under the advance action to develop bidding documents for CFL and the waste management facility. They will assist the PMU in managing the Project, preparing the detailed implementation plan (where necessary), developing bidding documents, supporting procurement-related activities, and preparing progress reports. 67. The consulting team will closely work with the professional media firm that will be separately hired to deliver the communication and social mobilization component. Appendix 10 provides the outline terms of reference for the consultants.

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6. Anticorruption Policy

68. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Government and DOE. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the Executing Agency and all contractors, suppliers, consultants, and other service providers as they relate to the Project. 69. To ensure transparency and good governance, DOE will publicly disclose on its website and the Philippine Government Electronic Procurement System information on how loan proceeds are being used. For each procurement contract, DOE will disclose (i) the list of participating bidders, (ii) name of the winning bidder, (iii) basic details on bidding procedures adopted, (iv) amount of the contract awarded, (v) list of goods and services purchased, and (vi) intended and actual utilization of loan proceeds under each contract being awarded. DOE will ensure that all project staff are fully aware of ADB procedures, including procedures for (i) implementation, (ii) procurement, (iii) use of consultants, (iv) disbursement, (v) reporting, (vi) monitoring, and (vii) prevention of fraud and corruption. To strengthen field monitoring of the distribution of CFLs to customers under the national residential lighting program, where possible, the electric cooperatives will enter into memorandum of agreements with qualified non-governmental organizations that are acceptable to ADB to ensure their participation in the inspection and monitoring of CFL deliveries.

7. Disbursement Arrangements

70. For activities to be implemented by NEA and DOE, the ADB loan will be disbursed as direct payments to contractors and equipment suppliers. The Government will establish two imprest accounts—the first managed by DOE to cover Project expenditures other than those expenditures related to subcomponent 2.1 (Super ESCO), and the second managed by the super ESCO to cover Project expenditures related to subcomponent 2.1 (Super ESCO). The account will facilitate timely release of funds for making payments, particularly for expenditures under small contracts. Both DOE and the super ESCO will operate and maintain the imprest account in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). The advance to the imprest accounts, in aggregate, will be limited to 10% of its allocation financed by the ADB loan or 6 months projected expenditure of the component, whichever is less. ADB’s statement-of-expenditure procedure will be followed to liquidate and/or replenish funds advanced to the imprest accounts, and will apply to individual payments less than $100,000. Larger amounts will be disbursed as direct payments.

8. Accounting, Auditing, and Reporting

71. All agencies involved in project implementation will maintain separate accounts exclusively for project-related disbursements. The PMU will review and consolidate these accounts and have them audited annually in accordance with sound auditing practices by the sovereign audit agency of the Government or other auditors acceptable to ADB. The audit report will include a statement verifying whether or not the funds disbursed by ADB were used for the purpose for which they were provided. The report will include the auditor's opinion on the

17

use of the imprest account and statement of expenditure procedure. Copies of the audited accounts and auditor’s report will be submitted to ADB within 6 months after the end of each fiscal year.

9. Project Performance Monitoring and Evaluation

72. The PMU will prepare quarterly progress reports and submit them to ADB within 20 days of the end of the applicable period. The reports will be prepared in a format acceptable to ADB and include the following: (i) project progress in each project area, (ii) status of institutional development activities, (iii) delays and problems encountered and actions taken to resolve them, (iv) compliance with loan covenants, and (v) expected progress during the next 6 months. A project performance management system will be developed on the basis of the project design and monitoring framework to examine the Project’s technical performance, evaluate delivery of Project facilities, assess achievement of Project objectives and measure the Project’s social, economic, financial and institutional impacts. Baseline and periodic surveys will be carried out to collect data disaggregated by income group, gender, types of vulnerability and other characteristics as appropriate. Within 12 months of the Project’s physical completion, DOE will prepare and submit to ADB a project completion report in ADB’s standard format, including costs and status of compliance with loan covenants.

10. Project Review

73. In addition to regular monitoring, ADB and the Government will jointly review project performance at least twice a year. The review will assess implementation performance and achievement of project outcomes and objectives, review financial progress, identify issues and constraints affecting the Project, and work out a time-bound action plan for their resolution. 74. In 2010, ADB and the Government will undertake a midterm review to assess implementation status; review project parameters; and take appropriate measures including modifying the scope and implementation arrangements, and reallocating loan and grant proceeds, as appropriate given implementation experience, to achieve the project objectives.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Financial Analysis

75. The financial viability of the Project was assessed by conducting a financial internal rate of return (FIRR) analysis. The FIRR analysis compared the project financial return to the weighted average cost of capital. The analysis was carried out in real terms using 2008 prices and the costs include capital investment and physical contingency. The financial analysis examined the aggregate costs and benefits from the efficient lighting initiatives. The financial benefits are measured from the volume of energy savings of each efficient lighting component multiplied by energy costs. For the whole Project, the financial analysis shows an FIRR of 206%, which exceeds the weighted average cost of capital of 2.4%, indicating that the Project is financially viable (Appendix 11). B. Economic Analysis

76. The value of reduced electricity consumption—or savings—due to the use of more efficient lighting systems (CFL, efficient ballast) is evaluated as equivalent to the economic value of the avoided supply generation costs. Electricity consumption in the with-project

18

scenario is 534 gigawatt-hours per year lower than in the without-project scenario. Apart from the benefits accrued to society by way of avoided generation costs, the Project is credited with environmental benefits. 77. The economic internal rate of return of the Project is 99%, implying that the investment would be recovered once the Project is implemented. The Project’s net present value is $106 million after 5 years of operation (Appendix 12). C. Potential Carbon Credits

78. The national residential lighting program component has the potential to generate about 300,000 tons of CERs each year (paras. 44–46). ADB’s carbon market initiative will help the Government register the Project as a CDM project; this is anticipated by March 2009. D. Environmental Benefits and Social Safeguards

1. Environment Aspects

79. Environmental benefits include less air pollution through the reduction of local emissions of sulfur dioxides; nitrogen oxides; particulate matters; and most importantly, CO2. The component addressing lamp waste management will include the collection of spent fluorescent lamps from households, institutions, and business establishments. The facility will enable consumers to dispose of fluorescent lamps without damaging the environment. Disposal of spent CFLs and fluorescent tube lamps in landfills is among the primary sources of mercury pollution that could migrate to groundwater and also become airborne. Recovery of glass tubes, aluminum, mercury, and other lamp components by the recycling facility would reduce the need for production of raw materials. Mercury emission during recycling is negligible. The recycling facility has air emission control equipment to ensure that mercury levels comply with applicable standards. Regular monitoring of indoor air quality will be undertaken during operation. Transport, storage, handling, and packaging of recycled materials—mercury in particular—will be in accordance with the requirements of the Republic Act 6969 (an act to control toxic substances and hazardous and nuclear wastes).

2. Social Aspects

80. The project impacts were assessed in terms of quality and reliability of access to electricity. The Project’s social impact relates to household and social service organizations. The replacement of incandescent lamps (25–60 watts) with 13- to 15-watt CFLs is expected to help poor customers improve the lighting in their houses. This is especially important for children, since reading and doing homework with low lighting can cause eye strain and lead to poor eyesight. Better lighting will improve the household environment for social and economic activities. In addition, CFLs will benefit poor customers directly by electricity cost savings. The social marketing and awareness, and motivational campaign on promotion of CFLs will be targeted at both men and women. The grassroots campaigns will use local social and nongovernment organizations to provide effective adoption and monitoring of CFLs. Appendix 13 provides a summary poverty reduction and social strategy. E. Sustainability

81. The project design involved participation of a wide range of stakeholders, including the electric cooperatives that will be implementing the Project under the leadership of NEA. The

19

wide range of consultation has helped develop a sense of ownership by all. The Department of Finance has allocated the necessary amount of counterpart funding for the Project. The distribution of CFLs will accelerate the switching from incandescent bulbs to CFLs by all customers. F. Risks

82. Risks that may affect project implementation, constrain attainment of objectives, and ultimately impact project success include (i) lack of political will to support ongoing project activities, (ii) institutional weaknesses, and (iii) significant reduction of the price of carbon credits, although the Project is viable without these. 83. The CFL distribution component has some risks. Risk relates to the efficient and timely procurement of CFLs and their distribution without any being sold by the commercial market. Risk also relates to the Government’s ability to implement and enforce strict controls on energy-efficiency labeling and testing of CFLs. These risks are mitigated by ensuring that (i) the electric cooperatives distribute the CFLs to customers at their payment points, (ii) each CFL will be marked “not for sale”, and (iii) suppliers directly deliver the CFLs to the electric cooperatives. 84. Each customer will use their electricity bill as a coupon and be made aware of the free distribution via mass media communication. Appropriate monitoring mechanisms for effective distribution and reporting of the CFL component will be developed. All electric cooperatives participated in developing the proposed distribution mechanism. The mechanism will be optimized during implementation of the first phase. Lessons from the distribution of the first lot will be incorporated in subsequent distributions. 85. The Project’s ability to create enough competition among the major lighting manufacturers is not considered a significant risk. About 3 to 5 million units will be procured in each of the three lots to ensure strong competition and to discourage market dominance by any single brand. 86. Establishment of a super ESCO has some risks. The risks associated in opening up the public sectors—hospitals, schools and office buildings—to private suppliers may (i) take longer than planned during design, (ii) face unforeseen legal barriers, (iii) need many more incentives and encouragement for public sector managers to participate in the process, and (iv) be dominated by several existing suppliers, inhibiting the growth of the market. DOE will address all these risks in its detailed business plan. 87. The super ESCO will face several risks in developing the ESCO market for the industry and commercial sectors, for example: (i) not enough ESCOs will be interested in the super ESCO’s offers (financing and capacity building), (ii) end consumers may not trust a government-supported ESCO because of perceived bureaucracy, (iii) competent staff may not be available to implement the super ESCO business plan, (iv) legal and procedural complications may slow the needed quick disbursement, and (v) the ESCOs may not be able to design a benefit-sharing contract that will encourage all parties—super ESCO, private ESCOs, and end users—to continue energy efficiency-related activities to make it a sustainable sector despite the high tariffs. Appropriate measures are being developed to address these risks in the ESCO business plan. 88. Institutional Weaknesses. DOE does not have an adequate number of qualified staff familiar with ADB procedures; this may affect project implementation. DOE plans to address this

20

issue by restructuring to improve its effectiveness in meeting growing needs by redeploying staff, enhancing their skills through in-house training, and hiring contractual staff.

V. ASSURANCES AND CONDITIONS

A. Specific Assurances

89. In addition to the standard assurances, the Government has given the following assurances, which are incorporated in the legal documents:

(i) The Government will make available adequate funds to the Project, and such funds will be released when required and in the amounts called for throughout the project period, to enable the project Executing Agency and the Implementing Agencies to discharge their responsibilities under the Project effectively, and to cover any shortfall of funds to ensure timely completion of the Project.

(ii) The Government will make available the facilities, services and other resources which are required for the carrying out of the Project and for the operation and maintenance of the project facilities throughout the project implementation period.

(iii) The Government will cause the Project Executing Agency and the NEA to closely monitor distribution of CFLs to the residential and other customers under the National Residential Lighting Program.

(iv) In order to ensure effective implementation and monitoring of the CFL distribution, the Government will cause (a) NEA to enter into implementation agreements with the electric cooperatives, (b) DOE to enter into implementation agreements with the private utilities, with terms and conditions satisfactory to ADB, and (c) where possible, the Government will cause the electric cooperatives to enter into memorandum of agreements with qualified non-government organizations that are acceptable to ADB, with terms and conditions satisfactory to ADB.

(v) Within twelve (12) months from loan effectiveness, the super ESCO will (a) appoint a chief executive officer under a performance-based contract, key technical staff, and seven board members, at least two of which will come from the energy industry, and (b) undergo a financial management system assessment in a manner satisfactory to ADB and obtain a “satisfactory” rating.

(vi) The Government will cause DOE to ensure that (a) the Project facilities, especially those pertaining to subcomponent 1.4 (Energy Efficiency Testing and Lamp Waste Management) of the Project, are designed, constructed, operated and maintained in compliance with applicable environmental laws and regulations of the Government and ADB’s Environment Policy (2002), and (b) all required environmental permits and clearances are obtained for the lamp waste management facility under subcomponent 1.4 (Energy Efficiency Testing and Lamp Waste Management) of the Project, prior to its operation.

21

B. Conditions for Disbursement

90. No disbursement will be made from the loan account for subcomponent 2.1 (Super ESCO) until:

(i) the super ESCO is established as a subsidiary corporation of PNOC with an independent legal corporate personality under the Government’s relevant laws and regulations, including the Corporation Code of the Philippines (1980);

(ii) a management team is appointed for the super ESCO; (iii) the super ESCO has entered into a project agreement with ADB in terms and

conditions proposed by ADB; and (iv) the Government has entered into a subsidiary loan agreement with the super

ESCO in terms and conditions satisfactory to ADB.

VI. RECOMMENDATION

91. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $31,100,000 to the Republic of the Philippines for the Philippine

Energy Efficiency Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board; and

(ii) the administration of a grant not exceeding the equivalent of $1,500,000 to the Government of the Philippines for the Philippine Energy Efficiency Project to be financed by the Asian Clean Energy Fund under the Clean Energy Financing Partnership Facility.

Haruhiko Kuroda President

8 January 2009

22 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

Impact Cost of power generation reduced

By April 2015, • Average cost of

production by electric cooperatives reduced by 10% from 2008

• Electric utility and electric cooperative load factor increased by 10% from 2008

• Annual report of

NEA and electric utilities

• Load factor data from the electric cooperatives and utilities

• Project monitoring data from consultants

Assumptions • Consumer acceptance of

energy efficiency during and beyond the project period

• ESCO market potential in the public and private sectors

Risks • Government not enforcing

efficiency standards in future • Failure of super ESCO because

of poor policy support

Outcome • Consumers’ energy

cost reduced by use of efficient lighting

By April 2011, • Overall peak

demand reduced by about 300 MW from 2008

• Energy consumption for lighting in selected public buildings reduced by 20% from 2008

• 30% reduction of electricity use in selected hospitals (from 800,000 kWh per year) and schools (from 6,000 kWh per year) by Super ESCO projects from 2005

• Progress reports

from implementation consultants

• Program surveys, and monitoring and evaluation reports

• NEA and electric utility annual reports

• Super ESCO annual reports

Assumptions • Continued commitment by

electric utilities and rural electric cooperatives to energy efficiency

• Super ESCO staff ability to identify, design, and efficiently implement public sector project and lend to viable private projects

Risks • Distributed CFLs may not

replace working incandescent bulbs

• Poor selection of public lighting projects

• Market acceptance of the super ESCO business model

• Consensus among four fragmented efficient-building groups will continue

Outputs 1. Lighting retrofits in

selected government buildings

2. 13 million CFLs

distributed to consumers

• Overall energy

savings of 7,000 MWh in government buildings by 2010

• Overall system

peak in the evening reduced and consumption reduced by 534,000 MWh by April 2011

Program monitoring and evaluation reports from each retrofitted building NEA and utility annual reports, Energy Regulatory Commission publications

Assumptions • DOE will be able to monitor

and evaluate benefits • CFLs will be distributed to end

customers effectively Risks • Inappropriate collection of

incandescent bulbs • Delay in procurement and

leakage in CFL distribution • Delay in developing the

regulatory framework for lamp waste and energy labeling

Appendix 1 23

Design Summary

Performance Targets/Indicators

Data Sources/Reporting

Mechanisms

Assumptions and Risks

3. Implementation of

energy-efficient public lighting programs

4. Expansion of

testing laboratory capacity and establishment of a waste management facility

5. Establishment of

the super ESCO

• Peak demand reduction of 0.5 MW in the Cagayan Electric Power and Light Company system and annual saving of P13 million to the city of Cagayan de Oro (local government unit)

• Recycling plant

and testing lab operating by 2010

• At least 6 public

sector projects ($3 million) and 15 private sector projects ($1 million) completed by April 2011

Monitoring reports from LGUs Procurement documentation; progress reports from operator Financial and accounting information from super ESCO

• Delay in project registration by United Nations Framework Convention on Climate Change by March 2009

• Insufficient number of ESCOs interested in the super ESCO offers (financing and capacity building)

• End consumers lack trust in a government-supported ESCO on grounds of perceived bureaucracy

• Lack of competent people to implement the super ESCO business plan

• Legal and procedural complications slow the needed quick disbursement

6. Certification system for energy-efficient buildings operating

7. Implementation of a

communication and social mobilization program

• Complete system installed and 10 certificates issued by April 2011

• Population made

aware of energy-efficiency program by 2010

Progress report Program progress reports; outreach survey results

• Program uses effective

media and material, and forgets the appropriate sections of the population (for example, poor and rural communities for the efficient lighting program)

24 Appendix 1

Activities with Milestones Component 1: Efficient Lighting Initiative

Subcomponent 1.1: Retrofit Government Office Buildings 1.1 Procure and install equipment by Q3 2009 1.2 Monitor and verify savings by Q4 2010 1.3 Prepare and disseminate case studies by Q1 2011 Subcomponent 1.2: National Residential Lighting Program 2.1 Complete procurement of CFLs by Q3 2010 2.2 Complete distribution of CFLs by Q1 2011 2.3 Conduct consumer surveys, monitoring and evaluation by Q1 2011 2.4 Prepare and disseminate case studies by Q1 2011 Subcomponent 1.3: Public Lighting Retrofit Program

3.1 Complete detailed design, procurement, and installation by Q3 2010 3.2 Complete monitoring and verification of savings by Q4 2010 3.3 Prepare and disseminate case studies by Q4 2011 Subcomponent 1.4: Energy Efficiency Testing and Lamp Waste 4.1 Complete procurement and installation by Q3 2010 4.2 Finalize laboratory accreditation by Q3 2010 4.3 Procure waste management facility by Q3 2009 4.4 Transfer facility to private operator by Q1 2011

Component 2: Efficiency Initiatives in Buildings and Industries

Subcomponent 2.1: Super ESCO 5.1 Establish ESCO as a subsidiary of PNOC by Q2 2009 5.2 Develop a detailed business plan for the super ESCO—targets, logo,

management, board, and technical panel—by Q2 2009 5.3 Initiate marketing of ESCO services by Q3 2009 5.4 Develop standard documentation by Q3 2009 5.5 Conduct ESCO workshops in monitoring and verification, draft

engineering procurement and construction contracts by Q4 2009 5.6 Conduct monitoring and verification of savings, and evaluate project

performance by Q1 2010 Subcomponent 2.2: Efficient-Building Initiative 6.1 Establish a technical committee chaired by DOE by Q2 2009 6.2 Identify and select demonstration projects by Q3 2009 6.3 Establish the accreditation requirement by Q3 2009 6.4 Prepare case studies by Q1 2010 6.5 Launch the efficient-building initiative by Q2 2010 Component 3: Communication and Social Mobilization 7.1 Finalize the communication plan through consultation by Q3 2009 7.2 Recruit communication firm and implement plan by Q3 2010

Inputs • ADB: $31.1 million loan • Asian Clean Energy Fund:

$1.5 million grant • Government of the

Philippines: $13.9 million Government Buildings: $2.66 million CFLs and Light-Emitting Diodes: $16.16 million Public Lighting: $1.33 million Energy Efficiency Testing and Lamp Waste Management: $3.51 million Super ESCO: $8.0 million Efficient Buildings: $0.5 million Communication: $2.5 million Implementation support: $1.5 million Taxes and Duties: $2.4 million Contingencies and Financing Charges: $7.94 million

ADB = Asian Development Bank, CFL = compact fluorescent lamp, DOE = Department of Energy, ESCO = energy service company, MW, = megawatt, MWh = megawatt-hour, NEA = National Electrification Administration, PNOC = Philippine National Oil Company, Q = quarter. Source: Asian Development Bank estimates.

Appendix 2 25

THE PHILIPPINES POWER SUBSECTOR

A. Overview

1. Power Generation. The National Power Corporation (NPC), a vertically integrated utility, was set up with the generation and transmission of electricity as its primary responsibility Prior to the restructuring of the power subsector in February 2002, NPC and several independent power producers (IPP) shared electricity-generating functions in the country. Privately owned Manila Electric Company (Meralco), 16 privately owned utilities, 7 municipal systems, and 119 rural electric cooperatives distributed electricity. Thirty-five IPPs (about 8,000 megawatts [MW]) have contracts with NPC for the sale of electricity, while three others (about 2,000 MW) have contracts with Meralco. 2. Power Transmission. The National Transmission Company (TransCo) manages the country’s power transmission network. It manages approximately 21,319 circuit-kilometers of transmission lines including a submarine cable system, 93 substations, about 24,310 million volt amperes substation capacity—a total of about $2.5 billion in assets. As of June 2008, TransCo’s gross reserve capacity in the Visayas is low: about 50 MW (peak load 1,135 MW), while sufficient margin exists in the other two national grids—Luzon reserve 2,751 MW (peak load 8,763 MW) and Mindanao reserve 504 MW (peak load 1,126 MW). Transco plans to double its transmission infrastructure by 2014 with an estimated cost of $3.70 billion. According to TransCo—as committed by the 2005–2014 Power Development Program—the required transmission infrastructure expansion and upgrading needed to support new generation capacity is nearly 10,475 circuit kilometers of transmission lines and 22,785 megavolt-amperes of substation capacity. Long-term plans for a 500-kilovolt system include a meshed grid network for Luzon. Meshed grid networks at 138 kilovolts are also planned for the Visayas and Mindanao islands. 3. Rural Electrification. In 1969, the Republic Act 6038 created the National Electrification Administration (NEA) as the primary agency responsible for implementing the rural electrification policy. Within this framework, the rural electricity cooperatives are responsible for implementing electrification targets, and for operating and maintaining the rural networks. In 1999, NEA launched the Accelerated Barangay Electrification Program,1 aimed at providing electricity to 90% of barangays (villages) by 2004 (and 100% by 2008). Subsequent programs gave momentum to renewable electrification, particularly for providing basic lighting services to barangays in remote areas by using solar photovoltaic battery charging systems and home lighting systems. In 2004, NEA went through its own restructuring initiative, and reduced its staff from 730 to 313. It also moved from a loss of P5.6 billion in 2003 to breakeven in 2004. 4. By 2006, the rural electrification program had achieved the following electrification rates: an increase from 55% in 1986 to 94% in 2006 in the barangays; and from less than 50% in 1986 to 75% in 2006 for households. The Government plans to continue the rural electrification program as a priority. 5. Power Shortage and High Electricity Prices. In the early 1990s, customers in the Luzon grid experienced severe power shortages, leading to prolonged blackouts and adverse impacts on the economy. At the peak of the shortage, the blackouts averaged 12–14 hours per

1 The initiative was initially a partnership of the Department of Energy, National Electrification Administration,

National Power Corporation through its Small Power Utilities Group, and Philippine National Oil Company–Energy Development Corporation.

26 Appendix 2

day. NPC and Meralco contracted IPPs to invest in new power generation. The IPP contracts included high-cost premiums to compensate for the high risk perceived by these investors. Most had a take-or-pay feature requiring the power purchasers (NPC or Meralco) to pay even when the IPPs were unable to generate electricity because of transmission and other constraints. Accordingly, NPC had to pay 25%–80% of the agreed-on prices irrespective of the power generated, which made IPP power 25% more expensive than NPC’s own generation at the time. In 2001, the actual electricity demand was 55% below the forecast for 2001 provided by the precrisis Philippines Development Plan of 1993 (and revised high scenario of 1996). This might be part of the reason for the huge surplus of stranded generation capacity of a very high take-or-pay contract. This contingent liability for the Government and a combination of other problems resulted in Philippine power rates being among the highest in the region. 6. Restructuring to Reduce Debt. Burdened with excessive debt, lack of competition in the power subsector, and stranded generation capacity with high take-or-pay contracts, the Government decided to restructure and privatize the power industry. In 1998, the Asian Development Bank (ADB) supported the Government’s initiative with the Power Sector Restructuring Program2 for $300 million, which was supplemented by a partial credit guarantee in December 2002. The principal objective of the program was to create competitive electricity markets by unbundling generation and transmission, and providing open access to transmission and distribution. 7. Unbundling and Privatization. The Electric Power Industry Reform Act, passed by Congress in 2001, was the blueprint for the 2002 restructuring. The act required the breakup of NPC’s integrated assets into separate units for electricity generation and transmission. It also mandated the sale of the Government’s equity holding in Meralco, the publicly listed company that owns and operates the country’s largest electricity distribution network. In 2001, the Government established an independent regulator, the Energy Regulatory Commission (ERC) to oversee competition and monopoly regulation. 8. By March 2003, NPC’s assets were organized into two state holding companies: (i) TransCo, which took on much of NPC’s transmission assets, and (ii) the Power Sector Assets and Liabilities Management Corporation, which assumed control of the power-generating assets. The restructuring initiative reached an important juncture by 2006 as the legal, regulatory, and institutional framework for privatization and competition were largely in place. However, for the restructuring to succeed, financial viability had to be restored, regulatory performance improved, and the confidence of private sector investors increased. In November 2006, ADB support 3 consolidated the restructuring process by (i) correcting the long-term financial problems of the subsector, (ii) strengthening regulatory performance, (iii) enhancing conditions for privatization, and (iv) improving public confidence in the reforms. 9. By early 2008, the Government awarded a 25-year concession to operate the national power grid to a consortium for $3.95 billion, and the Power Sector Assets and Liabilities Management Corporation formally approved the sale of more than 1,855 MW or 44% of NPC’s generation assets in support of the Government's revised target of 70% privatization before the end of 2008.

2 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of the Philippines for the Power Sector Restructuring Program. Manila. 3 ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Program

Cluster and Program Loan Republic of the Philippines for the Power Sector Development Program. Manila.

Appendix 2 27

10. Wholesale Electricity Spot Market (WESM). As part of its sector restructuring policy package, the Government established a competitive electricity spot market to facilitate electricity trading among market participants. The Luzon WESM began commercially operations in mid-2006. During 6 months from June to December 2006, the volume of electricity traded in the Luzon WESM reached approximately 21 gigawatt-hours (GWh), with 20 generators and 15 customers participating in the market. 11. In April 2008, the Department of Energy (DOE) deferred the proposed launching of the Visayas WESM on the grounds that although the market operator and its technical systems are in place, DOE needed to review the situation given the Visayas inadequate capacity in transmission and generation. DOE’s decision was based on a study highlighting the tight demand and supply balance situation in Cebu, Negros, and Panay; and indicating that some of the Visayas participants are not ready to effectively operate in an extended WESM.4 12. Cross-Subsidies Removed. Beginning in 2002, the energy regulator, ERC, removed the intergrid cross-subsidies to make prices more reflective of the underlying cost and to improve pricing signals to end consumers. This was followed by ERC’s approval of the removal of interclass cross-subsidies for Meralco customers. With the removal of the cross-subsidies, Meralco’s rates for each kilowatt-hour (kWh) were reduced for commercial customers (P0.70) and across a range of industrial customers (P0.27–P0.89). These decreases were accompanied by rate increases to residential and other customers: residential and general service customers (P0.71), small industrial customers (P1.01) and government hospitals (P1.08). Cagayan Electric Power and Light Company (Cepalco) and Bukidnon II Electric Cooperative (Buseco) were also directed to remove interclass cross-subsidies. As of 2004, ERC had approved unbundled rates for 133 utilities (including Meralco) to bring transparency in electricity pricing; showing generation, transmission, distribution, and supply costs separately on customers’ bills. The lifeline subsidy—a subsidy paid to consumers using less than 100 kWh per month—was exempted from the phaseout for 10 years, as mandated by the Electric Power Industry Reform Act. As of October 2007, Meralco had 1.7 million lifeline customers, about 43% of all its residential customers. The lifeline rate is supported by a contribution of P0.1132 per kWh by all other Meralco customers.

Table A2.1: System Peak Demand

( in megawatts)

Year Luzon Visayas Mindanao Total Noncoincident Peak 1985 2,311 256 470 3,037 1990 2,973 380 621 3,983 1995 3,920 628 780 5,351 2000 5,450 749 939 7,150 2005 6,443 1,037 1,149 8,632 2006 6,466 1,066 1,228 8,763 2007 6,643 1,102 1,241 8,993

Source: Department of Energy.

4 Intelligent Energy Systems. 2008. Technical Asisstance on WESM Policy Development. Available:

http://www.wesm.ph/files/study_on_the_extension_of_wesm_commercial_operation_in_vis..pdf

28 Appendix 2

Table A2.2: Power Generation by Grid and Source, 2007 and 2006

2007 2006 Change Plant Type MWh % Share MWh % Share MWh % Luzon Coal 14,417,796 33.00 14,099,158 34.00 318,638 2.26 Oil-Based 2,192,048 5.00 1,711,415 4.00 480,633 28.08 Combined Cycle 652,834 1.00 238,870 1.00 413,964 173.30 Diesel 1,348,033 3.00 1,315,067 3.00 32,965 2.51 Gas Turbine 0 0.00 0 0.00 0 0.00 Oil Thermal 191,182 0.00 157,478 0.00 33,704 21.40 Natural Gas 18,789,414 43.00 16,365,960 40.00 2,423,454 14.81 Geothermal 3,600,503 8.00 3,519,417 9.00 81,086 2.30 Hydro 4,562,309 10.00 5,492,271 13.00 (929,963) (16.93) Wind 57,842 0.00 53,235 0.00 4,606 8.65 Total Generation 43,619,911 100.00 41,241,457 100.00 2,378,454 5.77 Visayas Coal 848,428 10.00 718,663 9.00 129,766 18.06 Oil-Based 1,477,089 18.00 1,281,766 16.00 195,324 15.24 Diesel 1,334,868 16.00 1,165,700 14.00 169,168 14.51 Gas Turbine 9,045 0.00 193 0.00 8,853 4,592.80 Oil Thermal 133,176 2.00 115,873 1.00 17,304 14.93

Geothermal 5,746,878 71.00 6,100,202 75.00 (353,325) (5.79) Hydro 29,197 0.00 28,093 0.00 1,105 3.93 Total Generation 8,101,593 100.00 8,128,723 100.00 (27,130) (0.33) Mindanao Coal 1,570,872 20.00 476,245 6.00 1,094,627 229.85 Oil-Based 1,478,868 19.00 1,671,619 23.00 (192,751) (11.53) Diesel 1,478,775 19.00 1,671,376 23.00 (192,602) (11.52) Oil 93 0.00 242 0.00 (149) (61.52)

Geothermal 867,308 11.00 845,660 11.00 21,648 2.56 Hydro 3,971,927 50.00 4,419,049 60.00 (447,122) (10.12) Solar 1309 0.00 1,376 0.00 (67) (4.86) Total Generation 7,890,283 100.00 7,413,949 100.00 476,334 6.42 Philippines Coal 16,837,096 28.24 15,294,066 27.00 1,543,030 10.09 Oil-Based 5,148,006 9.00 4,664,799 8.00 483,206 10.36 Combined Cycle 652,834 1.00 238,870 0.00 413,964 173.30 Diesel 4,161,675 7.00 4,152,144 7.00 9,531 0.23 Gas Turbine 9,045 0.00 193 0.00 8,853 4,592.80 Oil 324,452 1.00 273,593 0.00 50,859 18.59

Natural Gas 18,789,414 32.00 16,365,960 29.00 2,423,454 14.81 Geothermal 10,214,688 17.00 10,465,279 18.00 (250,591) (2.39) Hydro 8,563,433 14.00 9,939,413 18.00 (1,375,980) (13.84) Wind and Solar 59,151 0.00 54,612 0.00 4,539 8.31 Total Generation 59,611,788 100.00 56,784,130 100.00 2,827,658 4.98 ( ) = negative, MWh = megawatt-hour. Source: Department of Energy.

Appendix 2 29

Table A2.3: Electricity Sales by Sector, 2007 and 2006

2007 2006 Difference Item GWh % Share GWh % Share GWh % Change Luzon Residential 12,129 27.00 11,802 28.00 328 3.00 Commercial 11,503 26.00 10,865 26.00 638 6.00 Industrial 11,034 25.00 10,563 25.00 471 4.00 Others 768 2.00 712 2.00 57 8.00

Total Sales 35,435 80.00 33,941 80.00 1,493 4.00 Own Use 3,141 7.00 3,444 8.00 (303) (9.00) System Loss 5,764 13.00 5,039 12.00 725 14.00 Total Consumption 44,340 100.00 42,424 100.00 1,915 5.00 Visayas Residential 2,157 29.00 2,036 29.00 121 6.00 Commercial 1,003 14.00 910 13.00 93 10.00 Industrial 2,402 33.00 2,340 34.00 62 3.00 Others 455 6.00 265 4.00 190 72.00

Total Sales 6,017 82.00 5,551 80.00 466 8.00 Own Use 574 8.00 606 9.00 (32) (5.00) System Loss 790 11.00 788 11.00 2 0.00 Total Consumption 7,382 100.00 6,946 100.00 436 6.00 Mindanao Residential 2,089 26.00 1,992 27.00 97 5.00 Commercial 964 12.00 904 12.00 61 7.00 Industrial 3,086 39.00 2,985 40.00 100 3.00 Others 418 5.00 298 4.00 120 40.00

Total Sales 6,557 83.00 6,179 83.00 378 6.00 Own Use 279 4.00 178 2.00 102 57.00 System Loss 1,054 13.00 1,057 14.00 (3) (0.00) Total Consumption 7,890 100.00 7,414 100.00 476 6.00 Philippines Residential 16,376 27.00 15,830 27.88 545 3.00 Commercial 13,470 23.00 12,679 22.33 791 6.00 Industrial 16,522 28.00 15,888 27.98 634 4.00 Others 1,641 3.00 1,275 2.00 367 29.00

Total Sales 48,009 81.00 45,672 80.00 2,337 5.12 Own Use 3,994 7.00 4,227 7.00 (233) (6.00) System Loss 7,608 13.00 6,885 12.00 724 11.00 Total Consumption 59,612 100.00 56,784 100.00 2,828 4.98 ( ) = negative, GWh = gigawatt-hour. Source: Department of Energy. B. Road Map

1. Philippines Energy Summit

13. The recent Philippines Energy Summit provided a forum in which all stakeholders could discuss and develop a consensus on the options for mitigating the impact of high-energy prices on the general public, and how some of the options could assist in addressing climate change. Stakeholders acknowledged that while the introduction of competition and open access in the wholesale electricity market and better targeting of existing subsidies can reduce electricity tariffs in the short term, a more effective solution for the longer term would focus on increasing the use of indigenous renewable energy sources (such as geothermal energy, biomass, wind, and hydropower) and promoting energy efficiency.

30 Appendix 2

14. The summit topics included (i) attaining energy security and sustainable development, (ii) accelerating oil and gas exploration and development, (iii) promoting renewable energy development and utilization, and (iv) easing the burden of increasing prices on energy and power users.

15. The summit workshop identified three strategies: introducing innovative market interventions, strengthening energy-efficiency and conservation efforts already under way, and establishing an institutional framework to mainstream energy efficiency and conservation within the operation of the energy market. 16. The road map (Supplementary Appendix A) draws heavily on the thoughts and recommendations of the summit’s energy-efficiency workshop. The main recommended initiatives are to

(i) reinstate demand-side management practice by distribution utilities; (ii) undertake large-scale replacement of incandescent bulbs by CFLs; (iii) establish a legal framework for demand-side energy efficiency through policy; (iv) establish a retrofit program and guidelines for commercial and industry sectors; (v) create comprehensive and innovative financial facilities, e.g., loan guarantees,

and fund for energy efficiency and renewable energy; (vi) implement lighting retrofit in government office buildings; (vii) encourage public lighting retrofit programs; (viii) scale-up information, education, and communication efforts on energy efficiency;

including promotion of energy efficiency in everyday life; (ix) introduce higher taxes for inefficient technologies; (x) support implementation of Administrative Order 183; (xi) develop a lamp waste management policy; (xii) develop a policy study on the calibrated phaseout of inefficient technologies

(initially incandescent lamps); (xiii) introduce a fleet management program for public transport operators; (xiv) establish baseline data and benchmarks; (xv) develop curriculum integration and instructional material; (xvi) include social mobilization program for market monitoring; (xvii) mandate designation of energy manager in all energy-intensive consumers

(consuming at least 1 million liters of oil equivalent per year); and (xviii) study and, where appropriate, promote nonmotorized transport.

Appendix 3 31

SUMMARY OF MAJOR EXTERNAL ASSISTANCE TO THE ENERGY SECTOR

1. The Asian Development Bank (ADB) is the lead official development partner in the energy sector, with a focus on the power subsector. Since 1971, ADB has provided 28 loans for a total of $2.9 billion to the energy sector. This includes 20 loans to the National Power Corporation (NPC), guaranteed by the Government, with a combined value of $1.6 billion. In addition, ADB provided two program loans for power sector restructuring and debt liabilities management totaling $750 million and a partial credit guarantee of $500 million. ADB also provided 35 technical assistance grants, with a combined value of $15.5 million, covering areas such as (i) coal industry development, (ii) rural electrification, (iii) energy conservation, (iv) tariff and pricing studies, (v) regulation, (vi) consumer impact assessment, (vii) geothermal steam and natural gas pricing studies, (viii) power development planning, (ix) feasibility studies, and (x) environmental assessments. 2. The World Bank also has been active in the power subsector. To improve coordination of their operations, ADB and the World Bank reached an understanding in 1998 on the division of responsibility for power. ADB would take the lead in providing policy advice to the Government on power restructuring, while continuing support to NPC before its privatization. The World Bank would assume a more prominent role in rural electrification programs. ADB has been coordinating its assistance with other agencies, including the Japan Bank for International Cooperation. Other major multilateral and bilateral agencies involved include the Japan International Cooperation Agency, United States Overseas Private Investment Corporation, and United States Agency for International Development (Table A3). 3. In the field of energy efficiency, ADB is scaling up energy-efficiency market transformation efforts by building on the legacy outputs of previous and ongoing capacity building, technology demonstration, and barrier removal projects funded by the Global Environment Facility (through its implementing agencies, the International Finance Corporation of the World Bank Group and the United Nations Development Programme), Japan International Cooperation Agency and United States Agency for International Development. The Swedish International Development Cooperation Agency, United Nations Environment Programme, and United Nations Industrial Development Organization have provided smaller grant assistance to the industry sector in recent years. While these programs were useful in clearing the market barriers to commercializing energy-efficiency technologies and mainstreaming demand-side management measures, none was able to scale-up and sustain the desired transformation of the local energy-efficiency market.

Table A3: Summary of External Assistance

Multilateral and Bilateral Agencies

Activities

The World Bank Group In 2003, the World Bank approved the Rural Power Project with a credit line of $20 million to support rural electrification projects. The International Finance Corporation, as the Government-appointed transaction advisor, assists the Government in implementing private sector participation in areas currently served by the National Power Corporation’s Small Power Utilities Group.

Global Environment Facility During 2000–2005, the Global Environment Facility provided $2 million for the Efficient Lighting Initiative: Philippines country program, $10 million for the Philippine Electric Cooperative System Loss Reduction Project, $3 million for the Philippine Efficient Lighting

32 Appendix 3

Multilateral and Bilateral Agencies

Activities

Market Transformation Project, and $3 million for the Capacity Building to Remove Barriers to Renewable Energy Project.

Japan Finance Corporation The bank is providing financing for transmission systems particularly in the Visayas and Mindanao; and is involved in supporting private investors for power generation plants.

Japan International Cooperation Agency

The agency is providing institutional support to the Department of Energy for the preparation of the power sector development program (including demand forecast methodology), transmission development plan, and missionary electrification development plan.

United States Overseas Private Investment Corporation

The corporation’s substantial exposure to the power subsector is well diversified and all of its National Power Corporation related risk is counterguaranteed by the Government of the Philippines. In 2003, the corporation insured a $250 million 15-year National Power Corporation and Power Sector Assets and Liabilities Management Corporation bond with non-honoring of sovereign guarantee coverage.

US Agency for International Development

The agency, through the United States Department of Energy, provides technical assistance to the Energy Regulatory Commission (and its predecessor Energy Regulatory Board) in utility demand-side management, tariff setting, rate unbundling, and removal of cross-subsidies; guidelines on open access; and relevant institutional strengthening, including training.

Other Bilateral Assistance Bilateral aid agencies from Australia, Denmark, France, Germany, and United Kingdom have been providing support to strengthen the Energy Regulatory Commission, and to develop new and renewable energy and rural electrification. The Swedish International Development Cooperation Agency provided assistance to accelerate energy-efficiency retrofits in the industry sector.

Sources: Asian Development Bank, Department of Energy, and World Bank.

Appendix 4 33

COMPACT FLUORESCENT LAMP DISTRIBUTION PLAN

1. The Philippine Energy Efficiency Project provides for the purchase of 13 million energy-efficient compact fluorescent lamps (CFL) for free distribution to the customers in metropolitan areas of Manila; the cities of Cebu, Cagayan de Oro, and Davao; and approximately 108 electric cooperatives covering all regions. The program will be implemented under programmatic Clean Development Mechanism (CDM) guidelines, and involve the adoption of independent monitoring and verification of savings consistent with the methodology of the United Nations Framework Convention on Climate Change. This includes the collection of the replaced incandescent bulbs, preparation of inventories, certification, and safe disposal. 2. The free distribution will be on the basis of two CFLs of 13, 14, or 15-watt capacity (equivalent to 60–75 watt incandescent lamps) to residential and other customers in the electric cooperatives. A. CFL Market Impact 3. The Government intends to phase out incandescent bulbs by 2010. It estimates that about 40 million incandescent bulbs are currently in the Philippines market.1 Although the use of CFLs has significantly increased over the past few years, the availability of low-quality lamps has distorted customer perceptions of CFLs. The distribution of free CFLs (international quality, 10,000 hours life) to residential consumers predominantly in rural areaswill provide an opportunity to influence their adoption of CFLs. The current retail cost of CFLs is expected to decrease because of economies of scale from increasing popularity, which would assist in addressing the current price gap between CFLs and incandescent bulbs. The quality of CFLs in the market will increase as the market will look for CFLs with long lives—similar to the 10,000-hour bulbs to be distributed under the Project. B. Procurement Procedures 4. Procurement of the 13 million CFLs will be undertaken in accordance with the Procurement Guidelines (2007, as amended from time to time) of the Asian Development Bank (ADB). In view of the multiple packages to be procured and the profusion of CFL manufacturers in the world (many of whom are inexperienced, have limited capacity, and offer inferior products), ADB’s single-stage, two-envelope procurement procedure, wherein bids with separate envelopes for technical and financial proposals are submitted simultaneously, will be used. The project management unit (PMU) will open the technical proposal first and review the responsiveness of the bidding documents. Only financial proposals of bidders with responsive technical proposals will be opened for evaluation and comparison. The financial proposals of bidders whose technical proposals are not responsive will be returned unopened. CFLs procured will meet relevant international standards. 5. Certain manufacturers adopt their own individual standards within the 13- to 15-watt range for “watts per lumen” output criteria, with other manufacturers producing 13-, 14-, or 15-watt CFLs as standard with slight variance in lumen output. A consultant expert in efficient lighting and its procurement will help the PMU prepare specifications and tender documents. The bidding documents will incorporate the following special provisions:

1 The Philippines Lighting Industry Association estimates 68 million, but other industry experts have lower

estimations. The report and recommendation of the President assumes 40 million for all calculations.

34 Appendix 4

(i) CFLs must meet the highest international technical and environmental standards. (ii) Bidding will be undertaken in specified batches to provide phased CFL regional

deliveries to accommodate implementation and coordination abilities, not to exceed 1 year.

(iii) Only screw fixings will be specified. (iv) Delivery time frames for individual batches and explicit delivery locations will be

provided. (v) Criteria will be included for evaluating 13- to 15-watt CFLs (watts versus lumen

output) for bid equalization.

6. The CFLs will be procured in three lots with about 3 million–5 million in each lot. The CFLs will be delivered by the winning bidder to each electric cooperative and distribution utility in the quantities specified in each package. The Department of Energy (DOE) will finalize the allocation during preparation of specifications and bidding documents. C. Preparatory Works 7. In preparation for the procurement and distribution of the CFLs, the PMU (with the assistance of its energy-efficiency lighting expert) will undertake the following preparatory actions: (i) prepare a detailed list of all eligible consumers in each of the participating utilities; (ii) design vouchers for distribution to eligible consumers for collection of CFLs in exchange for working incandescent bulbs; (iii) prepare monitoring sheets and reporting formats for sales monitoring, inventories of incandescent lamps, breakages, and lamp failures (and warranty replacements); (iv) design and specify appropriate labeling for each CFL (to be indelibly attached in the factory) and that the CFL is “not for sale”; 2 and (v) prepare draft bidding documents for CFL procurement under advance action.

D. Distribution and Installation 8. To determine the most secure and efficient method of CFL distribution in the Philippines, a consultative workshop was undertaken with representatives from participating distribution utilities and electric cooperatives. They recommended the following distribution methodology as being the most efficient and secure in the Philippine context:

(i) The appointed suppliers will deliver the CFLs in prearranged quantities (batches) to all the distribution utilities.

(ii) The distribution utilities are responsible for internal distribution to their suboffices. (iii) Vouchers in the form of electricity bill inserts or “tear-off” slips with the customer

account number will be issued to all eligible customers in one billing cycle. The vouchers can be exchanged for the CFLs on a first-come first-served basis. New connections will not be eligible for the program.

(iv) Each distribution utility will distribute the CFLs by having eligible consumers collect the CFLs at the utility’s payment points (or other designated secure distribution points) in exchange for appropriate CFL vouchers.

(v) Each consumer account will be eligible to exchange two working incandescent bulbs (of any wattage) for two CFLs (of single wattage).

2 CFLs distributed will be certified accredited laboratory protocol, and branded with a program logo and the product

brand name. The CFL should have a hologram (or similar) with a unique serial number that can be used during program monitoring and guarantee follow-up.

Appendix 4 35

(vi) Any excess CFLs will be returned to the National Electrification Administration for redistribution and not sold to the market.

(vii) The incandescent bulbs collected will be made inoperable without damaging the glass and stored in specially designed colored containers for each wattage (e.g., green for 25 watts, red for 40 watts, orange for 50 watts, blue for 60 watts, yellow for 75 watts, and brown for 100 watts). Using this simple method for collecting incandescent bulbs will help distribution utilities and the National Electrification Administration calculate the loads taken off the system. The distribution utility will keep an inventory of the incandescent bulbs.

(viii) The incandescent bulbs will be audited independently under CDM-approved arrangements to enable carbon credits to be obtained.

(ix) A contractor will be appointed to crush the incandescent lamps so that they cannot find their way back into the market.

9. DOE will finalize the mode of distribution of light-emitting diodes in off-grid areas and CFLs in the metropolitan areas of Manila and the Cities of Cebu, Cagayan de Oro, and Davao during implementation of the project.

E. Preparation of Baseline 10. During the preparatory works and the distribution process, a baseline will be prepared to assist in determining the peak reduction resulting from the CFL initiative and for submission to the CDM authorities to justify appropriate CDM credits. The consultant with DOE will carefully research all the CDM requirements and prepare all checklists, questionnaires, and databases for preparation of the baseline. F. Post Installation Monitoring 10. DOE, with the assistance of the energy-efficiency expert, will establish a scheme for monitoring and evaluation after program implementation begins. An independent entity is proposed for this work, which would reinforce the CDM procedural requirements, particularly auditing.

36 Appendix 5

SUPER ENERGY SERVICE COMPANY

A. Financing Facility in the Form of a Super Energy Service Company

1. An energy service company (ESCO) promotes energy efficiency for end users. A super ESCO supports capacity development and activities of others ESCOs, and brings financing for projects. It can also take the form of a leasing or financing company to provide ESCOs and/or customers with energy-efficiency equipment on lease or on benefit-sharing terms. ESCOs can be an important institutional mechanism for the delivery of energy-efficient investment.1 The Government plans to promote the ESCO industry by setting up a super ESCO, which will act as an ESCO for the public sector (hospitals, schools, and other public facilities) and as a super ESCO for the private sector (industrial and commercial customers). For the private sector clients, it will work through the smaller ESCOs. It will support independent ESCOs working with customers to design and install energy-efficiency projects on a fee-for-service basis. They may either use their own equity or borrow funds to finance energy-efficiency projects using a shared savings or equipment rental contracting arrangement. B. Justification for Creating a Super ESCO

2. The Philippines ESCO industry is a case of market failure. Despite high power tariffs, the ESCO industry is limited to a few utility-owned (3), independent (consultants) (4), and vendor-owned (6) businesses. Lack of access to financing, and lack of understanding of energy efficiency are the main reasons for this. Of 13 participants, only 6 are capable of organizing financing. A super ESCO can remove these barriers by bringing new risk capital for project financing. In the Philippines, a super ESCO can easily operate with a quasi-banking license2 issued by the Bangko Sentral ng Pilipinas, the central bank, allowing it to borrow for onlending. This is not allowed in many countries, for example Brazil. The Brazilian constitution limits the ability of a “service” company to invest in project finance. Leasing is a financial function and is limited to financial corporations, which are regulated by the Brazilian Central Bank. This is one reason why Brazil had to take the relatively expensive financial guarantee route for promoting energy efficiency. International experience suggests that the presence of a large number of ESCO-like companies is a prerequisite for the success of any guarantee fund for energy efficiency. If ESCOs are not present, then the market will not likely be able to produce quality deal flow for the funds to survive. This is one other reason why the Government has decided to set up a super ESCO, rather than a simple financing facility. 3. Super ESCO models are common is the United States. The state of California was one of the pioneers of the super ESCO concept in the world. Countries like Australia, Canada and the People’s Republic of China also use public-owned ESCOs to promote this sector. Since in the energy-efficiency business, the ESCOs’ clients usually have stronger balance sheets than the ESCOs, the loan to the client is often used as an option, a common practice in North America. This creates two types of projects: shared savings projects, and guaranteed savings projects when the loan is to the client. In the long term, the super ESCO would build its balance sheet for evaluation by lending institutions by raising equity capital. The investor in the super ESCO will receive a risk-adjusted rate of return. When access to other forms of financing becomes easily available, and the ESCO market expands, the Government may transfer the super ESCO to the private sector.

1 World Bank. 2008. Financing Energy Efficiency: Lessons from Brazil, China, India, and Beyond. Washington DC. 2 Business World. 2008. Toyota Financial Obtains Quasi Banking License. 12 June.

Appendix 5 37

1. The Super ESCO—EC2 Corporation

4. The Government plans to establish the super ESCO as a corporation and subsidiary of the Philippine National Oil Company. To ensure its management has incentive to perform, the Government plans to compensate the chief operating officer and the board of directors based on performance. The Government will name the super ESCO the EC2 corporation3 (Figures A5.1, A5.2, and A5.3).

Figure A5.1: Proposed EC2 Corporation Model

EC2

Hospital, Schools and Other Public Facilities

Investments underGovernment directions

GovernmentLoan

Repayment

ADB

CEO and Board hired on a performance

based contract

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

IndustriesEnergy Efficiency Equipment & Services

Shared savings CommercialBuildings

SmallBusinesses

EC2

Hospital, Schools and Other Public Facilities

Investments underGovernment directions

GovernmentLoan

Repayment

ADB

CEO and Board hired on a performance

based contract

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

IndustriesEnergy Efficiency Equipment & Services

Shared savings CommercialBuildings

SmallBusinesses

ADB = Asian Development Bank, EC2 = E for energy efficiency, environment, and entrepreneurship, and C2 for climate change, ESCO = energy service company. Sources: Asian Development Bank and Department of Energy staff analyses.

Figure A5.2: Proposed EC2 Corporation Model – Public Sector

EC2Hospital, Schools and Other Public Facilities

Investments underGovernment directions

Eg., RA 183

Payment

Design, Procurement, Installation Service

Contract to sharesavings

Vendors Vendors Vendors

Competitive Tendering

EC2Hospital, Schools and Other Public Facilities

Investments underGovernment directions

Eg., RA 183

Payment

Design, Procurement, Installation Service

Contract to sharesavings

Vendors Vendors Vendors

Competitive Tendering

EC2 = E for energy efficiency, environment, and entrepreneurship, and C2 for climate change, RA = Republic Act. Sources: Asian Development Bank and Department of Energy staff analyses. 3 EC2: E for energy efficiency, environment, and entrepreneurship, and C2 for climate change.

38 Appendix 5

5. The EC2 Corporation will act as a normal ESCO for public sector facilities and directly demonstrate the benefits of energy-efficient projects for facilities like schools, hospitals, and other public facilities. Activities will include (i) preliminary feasibility analysis including detailed audits of facilities and design of energy-efficiency options and financing; (ii) installation services and management; and (iii) operation, maintenance, and performance monitoring. 6. On the public sector front, the EC2 corporation will follow the model of an energy savings performance contract4 that allows government-owned facilities to purchase energy-efficiency technologies and services from private vendors using a shared savings approach. Under the model, the EC2 corporation will bear the costs of implementing energy-saving measures, including the cost of energy audits; project design; acquiring, installing, operating, and maintaining equipment; and training operation and maintenance personnel. It will receive a share of the energy savings resulting directly from implementing such measures during the multiyear term of the contract. After paying the EC2 Corporation, the remaining savings will be shared between the government facility and the Government (Department of Finance through reduced budgetary allocation).

Figure A5.3: Proposed EC2 Corporation Model – Private Sector

EC2PrivateESCO

ESCO accreditationworkshops - training

IndustriesEnergy Efficiency Equipment & Services

Shared savings

CommercialBuildings

SmallBusinesses

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

CustomersPrivate ESCO IndustrySUPER ESCO

Financing

Repayments

• Training Material• Template Contracts• Business Development Kits• Research and Development• Product Development• Best Practices• Code of Conduct• Accreditation• Performance Benchmarking

EC2PrivateESCO

ESCO accreditationworkshops - training

IndustriesEnergy Efficiency Equipment & Services

Shared savings

CommercialBuildings

SmallBusinesses

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

PrivateESCO

CustomersPrivate ESCO IndustrySUPER ESCO

Financing

Repayments

• Training Material• Template Contracts• Business Development Kits• Research and Development• Product Development• Best Practices• Code of Conduct• Accreditation• Performance Benchmarking

EC2 = E for energy efficiency, environment, and entrepreneurship, and C2 for climate change, ESCO = energy service company. Sources: Asian Development Bank and Department of Energy staff analyses. 7. Under this arrangement, if the typical power bill for a customer is reduced from 100 units a month to 65 units through investments in appropriate technology, the public sector customer will approach the EC2 Corporation and enter into an energy savings performance contract 4 An energy performance contract is broadly defined as a contract between the energy service company (ESCO)

and its client, involving an energy-efficiency investment in the client’s facilities, the performance of which is to some degree guaranteed by the ESCO, with financial consequences for the ESCO.

Appendix 5 39

whereby the savings will repay the investments made by the EC2 corporation until the time the investment is fully repaid. Then the Department of Finance will automatically capture the benefits of this investment as lower electricity cost by this government facility (school, hospital, or other public facilities) as the budget allocation will be lower. 8. The EC2 Corporation will strengthen the ESCO industry by providing financial and technical support to the smaller private sector ESCOs. The financial support will be in the form of loans to facilitate timely funding of projects. Qualified ESCO projects will include projects proposed by companies using energy performance contracting as part of energy-efficiency investment transactions. The EC2 Corporation will receive loans from the Government and onlend to ESCOs or end users to finance ESCO projects. The interest rate charged to the projects may be subsidized in some cases to establish awareness of the energy-efficiency market and gradually increased to the market rate. As a revolving fund, the loan payments from ESCO projects will be relent to support other projects. An outline of the super ESCO’s business plan is in Supplementary Appendix B.

40 Appendix 6

COMMUNICATION AND SOCIAL MOBILIZATION STRATEGY A. Project Communication Requirements

1. Retrofit of Selected Government Office Buildings

1. Existing lighting equipment will be replaced: T12 with T8 fluorescent tubes, standard ballasts with electronic ballasts, and incandescent bulbs with compact fluorescent lamps (CFL). Promotional materials to be used include

(i) mini billboards or banners in front of retrofitted buildings describing the savings by government buildings using T8 fluorescent tube lights with electronic ballasts and CFLs;

(ii) brochures or flyers explaining the benefits of changing current lighting equipment to energy-efficient products and materials; and

(iii) newspaper advertisements announcing the Government’s initiative to lead climate change programs by retrofitting its own buildings and offices with high-performance energy-efficient lighting equipment and products.

2. Nationwide Compact Fluorescent Lamp Distribution

2. Free CFL distribution will encourage people to use CFLs earlier than the proposed 2010 ban on incandescent bulbs. Promotional materials to be used include the following (Supplementary Appendix C):

(i) Promotional boxes to package the free CFLs will describe the savings to the consumer of using CFLs and their contribution to the environment. Details of power cost savings will be thoroughly explained. The energy label and the savings benefit will be printed on the box.

(ii) Newspaper announcements will discuss the program, which could be implemented in waves to allow media announcements to gather momentum and create awareness and interest in consumer markets so that people anticipate the arrival of the free CFL program in their area. The announcements will be published in regional and provincial newspapers, vernacular magazines, and comics.

(iii) Streamers, banners, and flyers will announce the free CFL program and the location of exchange centers in the various geographic locations.

(iv) Radio announcements for the free CFL program will create awareness and interest and be provided in English, Pilipino, Taglish, and major provincial dialects.

3. Public Lighting Retrofit Program

3. High-pressure sodium lamps will replace mercury vapor lamps in street lighting, and light-emitting diodes will replace current incandescent bulbs used in traffic signal lights. Signs and banners in strategic areas where retrofitting is occurring will identify benefits of the retrofit program.

Appendix 6 41

4. Energy-Efficiency Testing

4. The capacity of the lighting and appliance-testing laboratory will be extended from testing current products based on current capacity to a wider range of products. Promotional materials to be used include the following:

(i) Brochures will be made available in all appliance and hardware stores, supermarkets, and any store selling light bulbs and appliances to explain options to consumers and help them make informed purchases.

(ii) Newspaper announcements will inform the public of the testing capabilities and labeling efforts, and create wider awareness.

5. Lamp Waste Management

5. A fluorescent lamp recycling facility will be procured for the recovery of mercury. Newspaper announcements will inform the public about the recycling facility and encourage them to recycle fluorescent lamps for mercury recovery. B. Social Mobilization Requirements

6. Promotional materials to be used include

(i) information kit on efficient lighting and energy efficiency to be used in workshops and capacity-building activities;

(ii) information (brochures, flyers, pamphlets) designed for cooperation and participation in energy-efficiency programs;

(iii) letters and information to stakeholders, users, legislators, potential financial partners, policymakers, and similar groups to lead to policy changes, build ownership, increase project participation, and facilitate legislation; and

(iv) information to industry groups, e.g., interior designers, architects, engineers, building contractors and construction companies, real estate companies, and others with work related to lighting.

7. Consultative workshops and other consensus-building activities may be planned on an as-needed basis. These components will be procured using national competitive bidding as this will require extensive travel in the country and understanding of local culture, mindset, and customs by the program designers. C. Procurement

8. Procurement of consulting and attendant services under this component (procured as “related services”) for communication for efficient lighting ($1.5 million) and promoting efficiency in everyday life ($1.0 million) will be carried out using the national competitive bidding method.

42 Appendix 7

DETAILED COST ESTIMATES

Table A7.1: Detailed Cost Estimates by Expenditure Category

Item % Foreign % BaseForeign Local Total Foreign Local Total Exchange Costs

A. Base Cost1. Efficient Lighting Initiative

1.1 Retrofit Government Office Buildings 106.8 22.5 129.3 2.2 0.5 2.7 83 6 1.2 National Residential Lighting Program 781.5 4.0 785.5 16.1 0.1 16.2 99 35 1.3 Public Lighting Retrofits 54.5 10.2 64.6 1.1 0.2 1.3 84 3 1.4 Energy Efficiency Testing and Lamp Waste Management 155.5 15.2 170.6 3.2 0.3 3.5 91 8

2. Efficiency Initiatives in Buildings and Industries2.1 Super ESCO 388.9 0.0 388.9 8.0 0.0 8.0 100 17 2.2 Efficient Building Ititiative 7.8 16.5 24.3 0.2 0.3 0.5 32 1

3. Communication and Social Mobilization3.1 Communication for Efficient Lighting 72.9 0.0 72.9 1.5 0.0 1.5 100 3 3.2 Promoting Efficiency in Everyday Life 48.6 0.0 48.6 1.0 0.0 1.0 100 2

4. Project Implementation Support 48.6 24.3 72.9 1.0 0.5 1.5 67 3 5. Taxes and Duties 0.0 116.7 116.7 0.0 2.4 2.4 0 5

Subtotal (A) 1,665.0 209.3 1,874.3 34.3 4.3 38.6 89 83 B. Contingencies

1. Physical 137.7 23.7 161.4 2.8 0.5 3.3 85 7 2. Price 16.7 45.6 62.2 0.3 0.9 1.3 27 3

C. Financing Charges During Implementation 162.3 0.0 162.3 3.3 0.0 3.3 100 7

Total (A+B+C) 1,981.7 278.5 2,260.2 40.8 5.7 46.5 88 100

P million $ million

ESCO = energy service company. Source: Asian Development Bank estimates.

Appendix 7 43

Table A7.2: Detailed Cost Estimates by Financier

($ million)

ItemTotal

Amount % Amount % Amount % AmountA. Base Cost

1. Efficient Lighting Initiative1.1 Retrofit Government Office Buildings 2.66 100.0 - - - - 2.66 1.2 National Residential Lighting Program 5.16 31.9 - - 11.00 68.1 16.16 1.3 Public Lighting Retrofits 1.33 100.0 - - - - 1.33 1.4 Energy Efficiency Testing and Lamp Waste Management 3.51 100.0 - - - - 3.51

2. Efficiency Initiatives in Buildings and Industries2.1 Super ESCO 7.50 93.8 - - 0.50 6.3 8.00 2.2 Efficient Building Ititiative 0.50 100.0 - - - - 0.50

3. Communication and Social Mobilization3.1 Communication for Efficient Lighting - - 1.50 100.0 - - 1.50 3.2 Promoting Efficiency in Everyday Life 1.00 100.0 - - - - 1.00

4. Project Implementation Support 1.50 100.0 - - - - 1.50 5. Taxes and Duties - - - - 2.40 100.0 2.40

Subtotal (A) 23.16 60.1 1.50 3.9 13.90 36.0 38.56 B. Contingencies

1. Physical 3.32 100.0 - - - - 3.32 2. Price 1.28 100.0 - - - - 1.28

C. Financing Charges During Implementation 3.34 100.0 - - - - 3.34

Total (A+B+C) 31.10 66.9 1.50 3.2 13.90 29.9 46.50

a: Established by the Government of Japan and administered by ADB.

under CEFPF of the PhilippinesADB ACEFa Government

ADB = Asian Development Bank, ESCO = energy service company, ACEF=Asian Clean Energy Fund, CEFPF=Clean Energy Financing Partnership Facility. Source: Asian Development Bank estimates.

44 Appendix 8

DETAILED IMPLEMENTATION SCHEDULE

Component 1: Efficient Lighting Initiative1.1 Retrofit of Government Office BuildingsFinalize Equipment Inventory and ScopeProcurement of Equipment and ServicesPre-Installation MonitoringBuilding RetrofitsPost-installation MonitoringCase studies and Disemination1.2 National Residential Lighting ProgramFinalize ECs and Scope of supplyProcurement of CFLsCFL DistributionConsumer surveys and Monitoring & Verification of savingsCase studies and Disemination1.3 Public Lighting Retrofit ProgramFinalize ECs and LGUs and ScopeProcurement of Equipment and Services Pre Installation MonitoringPublic Lighting RetrofitPost-installation MonitoringCase studies and Disemination1.4 Energy Efficiency Testing and Lamp Waste ManagementProcurement of LWM facilityOperation of LWM facilityProcurement of Product testing Equipment and ServicesStandards Development and Laboratory AccreditationTransfer of LWM facility to Private OperatorComponent 2: Efficiency Initiatives in Buildings and Industries2.1 Super ESCOEstablish ESCO as a subsidiary of PNOC Business plan for the super ESCO and managementInitiate marketing of ESCO servicesDevelop standard documentationConduct workshops in monitoring and initial contractsConduct monitoring and verification 2.2 Efficient Building InitiativeEstablish a technical committee chaired by DOEIdentify and select demonstration projectsEstablish the accreditation requirementPrepare case studiesLaunch the efficient-building initiative

20104th Quarter2nd Quarter 3rd Quarter3rd Quarter 4th Quarter 1st Quarter 1st Quarter 2nd Quarter

20112nd Quarter 3rd Quarter 4th Quarter 1st Quarter

2008 2009

Appendix 8 45

Component 3: Communication and Social Mobilization3.1 Communication for Efficient LightingConsultancy for Development of Comminication PlanDevelop materialsLaunch Program and implement3.2 Promoting Efficiency in Everyday LifeConsultancy for Development of Comminication PlanDevelop materialsLaunch Program and implementComponent 4: Program Implementation Support4.1 Consultant for Implementation and Scale UpExpression of Interest (EOI)Request for Proposals and SelectionConsulting Services PeriodAccreditation of CDM CreditsCDM MethodologyPreparation of PDD and Baseline SurveysHost Country ApprovalValidation & RegistrationMonitoring & VerificationApplication for CERs Approval and Carbon Trading

ongoing activities funded by SEID's staff consultancy budget

1st Quarter 2nd Quarter2011

2nd Quarter 3rd Quarter 4th Quarter 1st Quarter2008 2009 2010

4th Quarter

CFL = compact fluorescent lamp, EC = electric cooperative, LED = light emitting diode, LGU = local government unit, LWM = lamp waste management.

2nd Quarter 3rd Quarter3rd Quarter 4th Quarter 1st Quarter

46 Appendix 9

PROCUREMENT PLAN

Project Name: Philippine Energy Efficiency Project

Loan (grant) Number: 42001

Loan Amount: $31.1 million Executing Agency: Department of Energy Date of first Procurement Plan: 29 January 2009

Date of this Procurement Plan: 5 January 2009

Section 1: Process Thresholds, Review, and 18-Month Procurement Plan

A. Project Procurement Thresholds

1. Except as the Asian Development Bank (ADB) may otherwise agree, the following process thresholds will apply to the procurement of goods and works.

Procurement of Goods and Works Method Threshold International Competitive Bidding for Works Above $5,000,000 International Competitive Bidding for Goods Above $1,000,000 National Competitive Bidding for Works1 Between $500,000 and $5,000,000 National Competitive Bidding for Goods1 Between $500,000 and $1,000,000 Shopping for Works Under $100,000 Shopping for Goods Under $100,000

B. ADB Prior or Postreview

2. Except as ADB may otherwise agree, the following prior or postreview requirements apply to the various procurement and consultant recruitment methods used for the Project.

Procurement of Goods and Works Procurement Method Prior or Post Comments ICB Works Prior ICB Goods Prior NCB Goods Prior

Recruitment of Consulting Firms

Quality- and Cost-Based Selection (QCBS) Prior

Recruitment of Individual Consultants

Individual Consultants Prior

ICB = international competitive bidding, NCB = national competitive bidding.

Appendix 9 47

C. Goods and Works Contracts Estimated to Cost More Than $1 Million

3. The following table lists goods and works contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

General Description

Contract Value

($ million)

Procurement

Method

Pre-qualification of Bidders

Advertisement Date

(quarter/year)

CommentsRetrofit 40 government buildings with T8 36-watt fluorescent tube lights, electronic ballasts, and luminaires, scope includes supply, installation, and disposal of old fittings

3.0 ICB No 1st quarter 2009

Supply and deliver 13 million compact fluorescent lamps

17.75 (in 3 lots of 5- 3-5 million

CFLs)

ICB No 4th quarter 2008

Supply and install street and traffic lights in selected electric cooperatives, including disposal of redundant fittings and posts

1.5 ICB No 1st quarter 2009

Supply, install, commission, and operate lamp waste management facility

1.48 ICB No 1st quarter 2009

Supply and install laboratory test facilities and equipment, accredit laboratories, develop standards and program management, and build capacity

2.52 ICB No 1st quarter 2009

Implement communication and social mobilization—communication for efficient lighting

1.500 NCB with attendant services procured as “related services”

No 1st quarter 2009

Implement communication and social mobilization—promoting efficiency in everyday life

1.000 NCB with attendant services procured as “related services”

3rd quarter 2009

CFL = compact fluorescent lamp, ICB = international competitive bidding, NCB = national competitive bidding.

48 Appendix 9

D. Consulting Services Contracts Estimated to Cost More Than $100,000

4. The following table lists consulting services contracts for which procurement activity is either ongoing or expected to commence within the next 18 months.

General Description

Contract Value

($ million)

Recruitment Method

Advertisement Date

(quarter/year)

International or National Assignment

Comments

Project implementation support

1.5 QCBS, FTP ADB business opportunities

(19 June 2008)

International and national assignments

80:20 cost–quality

ratio ADB = Asian Development Bank, FTP = full technical proposal, QCBS = quality- and cost-based selection.

E. Goods and Works Contracts Estimated to Cost Less than $1 Million and Consulting Services Contracts Less than $100,000

5. The following table groups smaller-value goods, works, and consulting services contracts for which procurement activity is ongoing or expected to commence within the next 18 months.

General Description

Value of Contracts

(cumulative )

Number of Contracts

Procurement and Recruitment

Method

Comments Supply of light-emitting diode lamps

$0.250 million 1 NCB

NCB = national competitive bidding.

Appendix 10 49

OUTLINE TERMS OF REFERENCE FOR CONSULTANTS

1. The implementation consulting team will require the services of a multidisciplinary team of international (40 person-months) and national (87 person-months) consultants. The consultancy firm will be responsible for the timely delivery of the output requirements. 2. The international consultants will have experience in (i) implementation of large-scale efficient lighting projects including commercial, residential, and public lighting; (ii) energy-efficiency testing of appliances and capacity building; (iii) lamp waste management technologies and operation; (iv) design and management of energy-efficiency funds; and (v) design and facilitation of efficient-building projects. 3. The national consultants are expected to have (i) a good understanding of the energy sector in the Philippines, and (ii) expertise in the conduct of monitoring and verification of energy-efficiency projects including the conduct of consumer surveys. A. Component 1.1: Retrofit of Government Buildings 4. Under this component, the consultant will perform pre- and post installation monitoring, verify energy savings, and prepare case study reports. This is expected to require 12 person-months of consulting services (4 international and 8 national) over 2 years. The consultant will (i) conduct validation audits of the buildings with the assistance of government energy officers to finalize the scope of supply and services; (ii) prepare technical specification and bidding documents; (iii) help with bid evaluations, contract negotiations, and contract award; (iv) coordinate retrofits and issuance of acceptance certificates; and (v) prepare case study reports and facilitate dissemination.

B. Component 1.2: National Residential Lighting Program 5. This component includes the preparation of bidding documents (including technical specifications), program implementation coordination, management, and monitoring of compact fluorescent lamp (CFL) and light-emitting diode (LED) distribution and collection of incandescent bulbs. 6. To streamline the CFL procurement and distribution program, an energy-efficiency expert (specializing in energy-efficient lighting) will be appointed under the advance procurement action. This component will need 25 person-months of consulting services (6 international and 19 national) over 2 years. At least one individual consultant will be fielded in the fourth quarter of 2008. The consultant will (i) finalize project design including flow charts, logistical preparation, and indelible labeling requirements; (ii) establish appropriate international and national certification specifications for CFLs; (iii) determine the number of bid packages for CFLs, quantity to be included in each bid package, and selection of regional delivery points; (iv) prepare technical specifications for CFLs and bidding documents; and (v) discuss the scope of LEDs for use as general lighting in nonelectrified barangays (villages) with the executing and implementing agencies, and finalize distribution channels. 7. This component will also include (i) coordination of CFL distribution and collection of incandescent lamps, including the preparation of inventories of the collected incandescent lamps and progress reporting on CFL distribution; (ii) conduct of monitoring and verification of the energy and demand impacts using approved methodology; (iii) provision of relevant documentation to facilitate the determination of CERs (carbon emission reductions) under programmatic CDM (Clean Development Mechanism); and (iv) preparation of case study reports and facilitate dissemination.

50 Appendix 10

C. Component 1.3: Public Lighting Retrofit Program 8. This component will retrofit street lighting in three selected electric cooperatives and traffic lights in a local government unit. It will require 9 person-months of consulting services (3 international and 6 national) over 2 years. The consultants will (i) conduct validation audits of the sites to finalize the scope of supply and services; (ii) prepare technical specifications and bid documents; (iii) assist in bid evaluations, contract negotiations, and contract award; (iv) coordination of retrofits and issuance of acceptance certificates; (v) conduct of pre and post installation monitoring and verification of energy and demand savings; and (vi) prepare case study reports and facilitate dissemination.

D. Component 1.4: Energy Efficiency Testing and Lamp Waste Management 9. This component will expand the capacity of the appliance-testing laboratory to test energy-efficiency performance of a wider range of appliances, and require 9 person-months of consulting services (3 international and 6 national) over 2 years as implementation support. The consultants will (i) review the current operations of the lighting and appliance-testing laboratory, and finalize the scope of the additional testing facilities and the requirements in terms of product standards and laboratory certification; (ii) prepare technical specifications for testing equipment and bidding documents; and (iii) prepare documentation for the laboratory accreditation to ISO 17025 and coordinate the accreditation application process. The team will prepare technical specifications and bid documents for the lamp waste management facility; and help with bid evaluations, contract negotiations, and contract award for this component.

E. Component 2.1: Super Energy Service Company 10. The consulting firm will provide 32 person-months (8 international and 24 national) of consulting over 2 years. The consultants will be hired on a performance-based contract, with incentives to develop new business for the super energy service company (ESCO). 11. The consultant will (i) confirm identified projects for demonstration; (ii) assist proponents of demonstration projects in preparing technical and financial details; (iii) develop standard documentation; (iv) develop equipment specification and tender documents; and (v) help evaluate bids. F. Component 2.2: Efficient-Building Initiative 12. For the implementation of this component, one international (5 person-months) and one national (6 person-months) consultant will be appointed intermittently over 2 years. The consultants will (i) assess the proposed rating system for new and retrofitted buildings; (ii) streamline existing initiatives into a single-building rating system for the Philippines; (iii) draft specifications and conduct industry-wide consultation; (iv) finalize specification for the rating system; (v) develop specifications for the scoring mechanism and software; (vi) support procurement; (vii) develop and design the accreditation requirement and procedures for implementation of the rating system; (viii) develop the training curriculum for accrediting assessors; (ix) review and upgrade the design of the buildings selected for demonstration to meet the system requirements; and (x) certify buildings using the system.

Appendix 11 51

FINANCIAL ANALYSIS

1. The financial viability of the Project is assessed by considering the aggregate costs of the investment components and benefits based on energy savings from the efficient lighting initiatives. 2. Weighted Average of Cost of Capital. The Project’s financial internal rate of return (FIRR) is compared with the weighted average cost of capital of 2.4%, which is based on the following assumptions (Table A11.1):

(i) Asian Development Bank (ADB) loan: $31.1 million, interest rate of 2.6% per annum;1

(ii) Government of the Philippines: $13.9 million, nominal cost of 8.3% per annum;2 (iii) funds from the Asian Clean Energy Fund provided as a grant; (iv) inflation rate: 0.7% per annum for international cost and 4.5% for local cost;3 (v) real cost: ADB loan—1.9%, Government of the Philippines—3.6%; and (vi) weighted average cost of capital: 2.4%.

Table A11.1: Weighted Average Cost of Capital Calculation

Financing Component

Item ADB ACEF Government of the Philippines Total

A. Amount ($ million) 31.1 1.5 13.9 46.5 B. Weighting (%) 66.9 3.2 29.9 100.0 C. Nominal cost of funds (%) 2.6 0.0 8.3 D. Tax rate (%) 0.0 0.0 0.0 E. Tax-adjusted nominal cost (%) 2.6 0.0 8.3 F. Inflation rate (%) 0.7 0.7 4.5 G. Real cost (%) 1.9 0.0 3.6 H. Weighted component of WACC (%) 1.3 0.0 1.1 2.4 WACC (%) 2.4

ADB = Asian Development Bank, WACC = weighted average cost of capital, ACEF=Asian Clean Energy Fund. Source: Asian Development Bank estimates. 3. Capital Costs and Financial Benefits. The project costs include all the capital investments for efficient lighting (component 1), efficiency initiatives in buildings and industries (component 2), and communication and social mobilization (component 3). The investments for the efficient lighting initiative include 36-watt fluorescent tube lightings for government buildings; 13, 14, or 15-watt compact fluorescent lamps (CFL) for residential users; and 70-watt, 150-watt, and 250-watt high-pressure sodium vapor lamps with poles for public lighting. All capital costs are expressed in real terms using mid-2008 prices. The FIRR is calculated on the basis of the base costs, excluding price contingency and financial charges during implementation. 4. The project component of efficient lighting initiatives is to distribute energy-efficient lights for government buildings, residential use, and public lighting retrofit. Financial benefits are measured by energy cost savings from replacing old lighting with new fixtures. The energy savings is 1 Calculation of ADB’s cost of funds is conducted as follows: (i) 5-year swap rate as of December 2008 = 2.4%; (ii) ADB

loan spread = 0.20%; (iii) nominal cost of ADB funds = 2.4 + 0.2 = 2.6% 2 Referring to the market rate of the Government’s 5-year local currency bonds. 3 Source: ADB estimates on domestic cost escalation factor for the Philippines and World Bank manufacturers unit value

index.

52 Appendix 11

computed from the volume of electricity savings from the use of efficient lighting multiplied by the Government’s energy costs. Energy costs for government buildings and CFL distribution were P8 per kilowatt-hour (kWh) ($0.16 per kWh) and public lighting of P6 per kWh ($0.12 per kWh), which were used during the periods of analysis. 5. The payback period and FIRR of each efficient lighting fixture were calculated. The financial benefits of using efficient lighting are very high with short payback periods (capital cost divided by cost savings) of 2.0 years for government buildings, 2.1 months for CFL distribution, and 4.1 years for public lighting (Table A11.2).4

Table A11.2: Financial Benefit by Efficient Lighting

Components

A1.1: Government Buildings

A1.2: CFL Distribution

A1.3: Public Lighting

Investment amount ($ million) 3.0 13.0 1.5 Cost per fixture (P) 1,020.0 57.0 4,274.0 Annual savings/fixture (kWh/year) 63.0 40.0 176.0 Annual savings per fixture (P/year) 507.0 321.0 1,054.0 Payback period (year) 2.0 0.2 4.1 FIRR (%) 41.0 Positivea 16.0 CFL = compact fluorescent lamp, FIRR = financial internal rate of return, kWh = kilowatt-hour. a The FIRR of CFL distribution was not calculated because it produces positive net benefit from the initial year. Cost of

public lighting includes cost of lamps, poles, and installation fees. Source: Asian Development Bank estimates. 6. The FIRR of the Project is 206%, calculated by including the capital costs of the Project and the consolidated benefits from efficient lighting initiatives (Table A11.3). This high FIRR is due to the strong financial benefits of CFL distribution, and reflects the short payback period of 2.1 months. The FIRR exceeds the weighted average cost of capital, and therefore, the Project is financially viable.

Table A11.3: Financial Analysis of the Project

Item 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Investment cost ($ million) (5.4) (33.6) (3.6) Energy savings from the

Project (gigawatt-hour) 53.4 534.0 534.0 534.0 534.0 534.0 480.9 3.0 2.7

Energy cost (P/kilowatt-hour) 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 Energy cost saving ($ mil) 8.8 87.8 87.8 87.8 87.8 87.8 79.0 0.4 0.3 Net benefit ($ million) (5.4) (24.8) 84.2 87.8 87.8 87.8 87.8 79.0 0.4 0.3

Financial internal rate of return = 206% ( ) = negative. Notes: (i) Life of CFL and lighting fixture is 6–8 years. (ii) Energy cost of P6/kilowatt-hour is used for public lighting component. Sources: Asian Development Bank and consultants estimates.

4 Assumption of the benefit calculation (case of compact fluorescent lamp (CFL) distribution A1.2): A 14-watt CFL will

replace 50.7-watt incandescent lamps, saving 36 watts. Cost of one CFL = $1.17, 3 hours/day, 1,095 hours/year, with energy cost of $0.16 per kWh, the annual savings: (50.7 watts–14 watts) x 1,095 (hours/year) = 40.2 kWh/year. Annual savings in $ = 40.2 kWh x $0.16 per kWh = $6.4 per year. Therefore, the payback period will be $1.17/$6.4 = 0.18 year or 2.1 months.

Appendix 12 53

ECONOMIC ANALYSIS A. Project Cost–Benefit Analysis 1. The project components complement each other to reduce electricity consumption for lighting in the country. Three components—retrofitting of government buildings, distribution of compact fluorescent lamps (CFL), and efficient lamps for public lighting—directly result in reduction of electricity consumption. The other components facilitate this reduction. In this analysis, the physical benefit of the Project is the amount of electricity saved by introducing more efficient lighting systems in households, government buildings, and public lighting. B. Evaluation of Project Costs and Benefits 1. Project Costs 2. The costs of the Project (to society) are the costs of equipment (lamps), labor, and implementation. They include physical contingencies but exclude interest during construction and price contingencies. The total project cost is estimated at $42.6 million expressed in 2008 prices. 2. National Residential Lighting Program 3. The program will distribute 13 million CFLs throughout the country. By procuring these at wholesale price, the price per lamp will be reduced by almost 50% of the retail price. A survey conducted during the implementation of a Philippines’ demand-side management project determined the average wattage of incandescent bulbs to be around 50 watts. Based on this, single wattage CFLs will be procured (13, 14, or 15 watts), equivalent to at least 60-watt incandescent bulbs. Each replacement results in a saving of 39 watts. With 3 hours of use per day, each replacement saves about 42.7 kilowatt-hours (kWh) annually contributing to total annual energy savings amount to 534 gigawatt-hours (GWh)/year and capacity savings to 450 megawatts (MW). 3. Retrofitting of Lighting Systems in Government Buildings 4. This program will replace the standard T12 fluorescent tube lamps with standard magnetic ballasts with efficient 36-watt T8 fluorescent tube lamps and electronic ballasts. Any incandescent lamps will be replaced with CFLs. The savings result from lower consumption of electricity of the electronic ballasts (1 watt) as compared to the magnetic ballasts (40 watts). This program results in savings of 9 GWh. 4. Retrofitting of Public Lighting Systems 5. This program will use high-pressure sodium lamps as a replacement for mercury vapor lamps; and the use of light-emitting diodes for traffic signals. The program is based on an implementation model established between the Department of Energy (DOE), City of Cagayan De Oro (local government unit), and Cagayan Electric Power and Light Company (electric utility) under the Philippine Efficient Lighting Market Transformation Project. The program will yield annual energy savings of 1.5 GWh. 6. Among the three components, the CFL program yields the greatest savings and thus plays a predominant role in the viability of the whole Project. To evaluate the project benefits, the societal value of electricity savings resulting from the Project must be estimated.

54 Appendix 12

7. Economic assessment of a demand-side management program can look at different perspectives of the parties involved, e.g., utility, customers, regulator, and society. For society, the total resource cost (also known as economic efficiency) approach is used. This measures net costs of a demand-side management program based on the total cost of the program including both participant and utility costs, and compares these costs with the total benefits, such as avoided supply costs, avoided participant costs, and societal benefits such as environmental externalities.1 8. According to the stated approach, the value of reduced electricity consumption (or savings) due to the use of more efficient lighting systems (CFL, efficient ballast) is equivalent to the avoided supply costs. Since savings occur at the end user level, the avoided supply should be evaluated by looking at the mix of generation source in the Philippines. A data collection of generation charge for 14 power companies in three regions—Luzon, Visayas, and Mindanao—reveals that the generation charge ranges between P2.37 per kWh and P7.06 per kWh, with an average of P3.7 per kWh. The economic internal rate of return and net present value calculations are based on the average nationwide cost. 9. As savings are made by existing consumers, they will not affect the transmission and distribution systems. The avoided supply costs therefore consist of avoided generation costs and avoided system losses. The resulting value of kWh electricity saved for the Manila Electric Company (Meralco) is P5.68.2 10. Apart from the benefits accrued by society by way of avoided generation costs, the Project is credited with environmental benefits. As electricity consumption in the with-project scenario compared with the without-project scenario would be lower by 534 GWh every year, emissions from power generation would also be reduced. The environmental benefits include less air pollution causing local impacts such as sulfur dioxides, nitrogen oxides, and particulate matters. But most important is the reduction of carbon dioxide (CO2) emissions. With the average CO2 emission factor of the Philippines power system estimated at 0.54 kilogram CO2 per kWh,3 the annual electricity savings of 534 GWh is accompanied with reduction of about 300,000 tons of CO2 per year. 11. The internal rate of return and net present value of this investment are obtained by comparing the economic benefits of the Project against its costs (Table A12). The average economic internal rate of return of the Project is high at 99 %, with investment recovered early during project implementation. This is due to the very high electricity savings from a relatively inexpensive CFL program. The Project earns a net present value of $106 million after 5 years of operation.

1 See for example: US Congress, Office of Technology Assessment. 1993. Energy Efficiency – Challenges and

Opportunities for Electric Utilities Box 6D, Chapter 6. 2 Note that this is different from the actual residential tariff. 3 Source: Project design documents prepared by consultants

Appendix 12 55

Table A12: Internal Rate of Return and Net Present Value Computation

Item 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Investment costs ($million) (5.4) (33.6) (3.6) Energy savings from the Project (GWh) 53.4 534.0 534.0 534.0 534.0 534.0 480.9 3.0 2.7

Energy costs (P/kWh) min 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 Minimum energy cost savings 2.6 26.1 26.1 26.1 26.1 26.1 23.5 0.1 0.1 Minimum net benefit (5.4) (31.0) 22.4 26.1 26.1 26.1 26.1 23.5 0.1 0.1 Energy costs (P/kWh) average 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 Average energy cost savings 4.2 42.3 42.3 42.3 42.3 42.3 38.1 0.2 0.2 Average net benefit (5.4) (29.3) 38.7 42.3 42.3 42.3 42.3 38.1 0.2 0.2 Energy costs (P/kWh) max 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 7.1 Maximum energy cost savings 7.8 77.6 77.6 77.6 77.6 77.6 69.8 0.4 0.4 Maximum net benefit ($million) (5.4) (25.8) 74.0 77.6 77.6 77.6 77.6 69.8 0.4 0.4

(%) ($ million) Min EIRR 58 NPV 52.37 Average 99 106.26 Max 183 223.40

( ) = negative, EIRR = economic internal rate of return, max = maximum, min = minimum, NPV = net present value. Notes: (i) Life of compact fluorescent lamps and lighting fixtures is 6–8 years. (ii) Energy cost of P6 per kWh is used for public lighting component. Source: Asian Development Bank estimates.

56 Appendix 13

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: Philippines: Philippine Energy Efficiency Project Lending/Financing Modality: Project Department/

Division: Southeast Asia Department Infrastructure Division

I. POVERTY ANALYSIS AND STRATEGY

a. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy The Family Income and Expenditure Survey of 1997 showed that poverty incidence declined from 49.3% of the total population in 1985 to 40.6% in 1994 and 36.8% in 1997. Between 1994 and 1997, urban poverty incidence in the total population declined from 28% to 21.5%, while rural poverty incidence fell only from 53.1% to 50.7%; thus, more than half of the rural population is still poverty stricken. The lowest incidence of poverty is in the National Capital Region and surrounding areas; while the highest, exceeding 50%, is in the Autonomous Region for Muslim Mindanao, the central and northern regions of Mindanao, and the Bicol region. The poor tend to be self-employed in agriculture and related activities in rural areas, and casual laborers of all types in urban and rural areas. The link between rural and urban poverty is strong as the urban poor are mainly rural migrants. The Government’s Medium-Term Philippine Development Plan 1999–2004 emphasizes poverty reduction through measures such as promotion of equitable growth, rural development, and increased social sector investments. In 1998, the Government established the National Anti-Poverty Commission and the Presidential Commission for the Urban Poor. A poverty reduction target envisaging a reduction in the incidence of poor families from 32% in 1997 to 25%–28% by 2004 was projected in the Medium-Term Philippine Development Plan. According to the 2003 Family Income and Expenditure Survey, the country had 16 million families, with an average of five members, and an average annual income of P148,757 (increase of only 2.5% in nominal terms from 2000 or income declined in real terms by 10%), 84% of family income went to expenditures, and average annual saving of families was about P20,615. The Philippines is suffering from a deteriorating infrastructure sector. Although electrification rates are higher than in many countries in the region, a large proportion of the population still does not have access to electricity. For those who have access, the high price of electricity discourages its use. Poor consumers using electricity for lighting use one of the most inefficient forms of lighting—the incandescent bulb that uses 80% of its energy input to produce heat and 20% for lighting. Recently, with the increase of international oil prices, poor consumers are increasingly burdened with the growing expense of meeting their energy needs. In this context, the Government organized the Philippine Energy Summit in February 2008 to discuss options for mitigating the impact of high energy prices on the general public and decided to promote energy efficiency to help residential customers with their growing energy cost. B. Poverty Analysis Targeting Classification: General intervention 1. Key Issues In the Philippines, a typical lifeline customer uses about 100 kilowatt-hours (kWh) of electricity per month. Many of the customers use at least two 40-watt incandescent bulbs. One of the objectives of the Project is to replace these two incandescent bulbs with compact fluorescent lamps (CFL), collect the working incandescent bulbs, gather them as evidence of a government-led program, and claim Clean Development Mechanism credits. The electricity consumption for lighting will be reduced by 80% for these customers when they switch to energy-efficient CFLs. Overall, this initiative will distribute about 13 million CFLs, free of charge, to residential and other customers of four private utilities and 108 electric cooperatives nationwide. This will prepare these customers to more easily adjust to the Government’s proposal to phase out incandescent bulbs by 2010. Customers in some off-grid areas will be provided with light-emitting diode (LED) lights under a pilot program to evaluate the use of LED lights in place of kerosene, candles, and other nonelectric alternatives. LED is a third-generation lighting system; a typical 9-watt LED light can produce as much light as a 13-watt CFL or a 60-watt incandescent bulb. Good quality LEDs can operate between 10,000 and 50,000 hours compared with 8,000 hours for a typical CFL or 800 hours for an ordinary incandescent bulb. This initiative will increase the environment's carrying capacity to support the country's sustained economic growth, reducing poverty in the process. The Philippine Energy Efficiency Project will distribute good quality and reliable power to existing consumers with lower losses. An objective of the Project is to promote energy-efficient bulbs.

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The Project’s objective in terms of contribution to the sector to reduce poverty was assessed. The Project will not have significant direct impacts on economic growth and poverty reduction as it will not support new connections. The Project’s contribution in the energy sector will be mainly on energy saving during peak hours. The loss reduction and energy savings will reduce the cost of power generation. Under the demand-side management program, the promotion of CFL lamps through bulk purchase and free distribution will help to expand the CFL market and increase revenue for small distributors and small retailers in the long term. Most of the users of CFL lamps are from higher- and middle-income groups as the cost of a good quality CFL bulb is high. However, in recent years, more poor households have been using CFL lamps, although they are limited by the cost. Poor households use both CFLs and incandescent lamps, and balance spending on light bulbs with energy consumption. The incandescent lamp is much cheaper but consumes more energy. The longevity of incandescent lamp is very low in comparison to a CFL. The CFL lamp lasts 5 times longer than an incandescent lamp. Although the incandescent bulb needs to be replaced quite often, poor people prefer to buy them because of their low price. Since no form of certification exists for efficiency claims, rural households often become victims of fraud. Most poor people use 5-watt incandescent bulbs, which in reality are 20 watts with poor efficiency. Low-quality CFL lamps are also prevalent in the market and targeted to low-income and poor households that would be reluctant to buy high-quality and higher priced lamps. The main beneficiary of the Project will be rural households, specifically households on lifeline tariffs, consuming less than 100 kWh a month. The same households will also learn about other affordable energy-efficient choices for reducing household expenditures on energy from the communication and social mobilization component. Remote rural households that depend on kerosene-based lighting will have the opportunity to test LED-based lighting. The public lighting component will increase mobility of these households by increasing net light output in rural areas using less energy overall. 2. Design Features. Households will save up to 80% of their electricity cost on lighting. In addition, the Project will allow about 3.7 million households to switch to CFLs without incurring any additional cost—about P200 by 2010 when the Government’s proposed phaseout of incandescent bulbs will be implemented.

II. SOCIAL ANALYSIS AND STRATEGY

A. Findings of Social Analysis CFLs will be distributed to more than 5 million households by 108 electric cooperatives and 4 private distribution utilities. The average consumption of many of these households is below the 100 kWh per month threshold for lifeline customers. For example, a lifeline customer qualifying for a lifeline tariff receives a bill of P360 for consumption of 40 kWh in a month; with the average discount of about 40% for a lifeline customer, the customer will be required to pay about P220. If the electricity consumed by lighting in that household is P200, use of two CFLs will reduce the consumption by more than P100 each month. Distribution of high-quality CFL lamps to poor households to replace incandescent lamps would benefit poor customers in lower electricity bill, and improved lighting in their houses. This is especially important for children since reading and doing homework with low lighting can cause eyestrain and lead to poor eyesight. Reliable and improved household lighting would have a positive impact on the household’s economic and social activities in the evening. The savings in energy bills might have an impact on the households’ expenditure or savings. The social marketing and community awareness of the energy-efficiency program will be used to develop customer’s confidence in using CFLs through nongovernment organizations, social organizations, television, and radio. The impact of promotion of CFLs depends on affordability and effective distribution channels.

B. Consultation and Participation

The 108 electric cooperatives were consulted on the distribution model for CFLs. Management of the cooperatives gave their assurance that they will work closely with local social organizations and the National Electrification Administration to make distribution as effective as possible. 2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring?

Information sharing Consultation Collaborative decision making Empowerment 3. Was a C&P plan prepared? Yes No C&P will be prepared during implementation.

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C. Gender and Development 1. Key Issues. Social mobilization, consultation, and participation will specifically target women and children. In many cases, purchase decisions at the household are made by women. Children will be made aware of energy-efficient lighting through brochures and other promotional materials distributed at schools. 2. Key Actions. Measures included in the design to promote gender equality and women’s empowerment—access to and use of relevant services, resources, assets, or opportunities and participation in decision-making process:

Gender plan Other actions/measures No action/measure Summarize key design features of the gender plan or other gender-related actions/measures, including performance targets, monitorable indicators, resource allocation, and implementation arrangements. The C&P plan will specifically target social mobilization and women and children.

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS

Issue Significant/Limited/ No Impact

Strategy to Address Issue

Plan or Other Measures Included in Design

Involuntary Resettlement

Full Plan Short Plan Resettlement Framework No Action

Indigenous Peoples

The Project will cover the entire country. The project beneficiaries are customers from all ethnic groups. The Project will have no negative impact on ethnic minority groups. The social mobilization program for procurement of CFLs will prepare brochures, which will be in the local language and extensive graphics will be used for easy understanding by all.

Specific measures in social mobilization will be included so that lifeline and ethnic groups understand the benefits of CFLs.

Plan Other Action Indigenous Peoples

Framework No Action

Labor Employment opportunities Labor retrenchment Core labor standards

Plan Other Action No Action

Affordability Action No Action

Other Risks and/or Vulnerabilities

HIV/AIDS Human trafficking Others(conflict, political

instability, etc), please specify

Plan Other Action No Action

IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? □ Yes ⌧ No During the implementation, the socioeconomic indicators will be developed for the following: (i) social marketing component, (ii) benefit of using CFLs for children’s education and social life, (iii) utilization of savings from electric bills, and (iv) acceptance of CFLs by different socioeconomic groups.

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SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

1. To promote energy efficiency in the country, the Department of Energy (DOE) with assistance from the Asian Development Bank (ADB) proposes to implement a range of programs that would reduce peak power demand. This will contribute to greenhouse gas reduction. Carbon credits will be sought following the methodology approved by the executive board of the Clean Development Mechanism. The Department of Energy (DOE) will be the Executing Agency. The proposed Project will be implemented over 2 years from April 2009. 2. The Project will (i) retrofit about 40 government-owned office buildings with efficient lighting; (ii) procure 13 million compact fluorescent lamps (CFLs) for distribution to residential and other customers to reduce peak power demand; (iii) introduce energy-efficient lamps for public lighting; (iv) set up a laboratory for testing energy-efficient appliances and a lamp waste management facility; (v) establish a super energy service company (ESCO) to support ESCO development; (vi) promote an efficient-building initiative; and (vii) develop and implement a communication and social mobilization program. 3. ADB classifies the Project as environmental category B. An initial environmental examination was prepared consistent with ADB’s Environment Policy (2002) and Environmental Assessment Guidelines (2003). This summary IEE examination focuses on the proposed pilot lamp waste management facility and includes descriptions of existing environmental conditions, the Project, assessment of environmental impacts, recommended mitigation measures, environmental monitoring, and public consultation. A. Project Description

4. Use of energy-efficient fluorescent lamps will increase significantly, especially in the Philippines. Since a CFL contains 2–5 milligrams (mg) of mercury and a typical linear fluorescent tube lamp (FTL) used commonly in offices and houses contains about 12 mg of mercury, safe disposal of spent lamps is a critical issue from a public health and environmental perspective. Mercury is known for its high toxicity and its significant adverse impacts on human health are well documented. As in many developing countries, locals dispose of FTLs in landfills, ultimately polluting groundwater. The implementation of the pilot lamp waste management facility will address the health and environmental issues through proper awareness, and collection. This will give customers a choice for recycling of mercury in lamps. 5. The lamp waste management facility subcomponent will include the collection of spent lamps from households, institutions, and business establishments. The pilot facility will have a capacity of processing 6 million lamps per year. For every 1 million lamps, approximately 900,000 intact glass tubes, 2.2 tons of aluminum, 120 kilograms (kg) of tin, 944 kg of copper, 360 kg of chloride salts, and 10 kg of mercury will be recovered. Practically all of the components of the spent lamps will be recycled into reusable raw materials. 6. It will consist of a compact crush and separation plant built into a 20-foot container and a maximum capacity of about 300 kg of tube material per hour, equal to approximately 2,000 tubes per hour. The compact crush and separation plant is designed for processing fluorescent tubes of various length and shapes. The machine crushes and separates the material into a glass fraction, a metal end (end cap) fraction, and a fluorescent powder fraction. 7. The facility will be located in one of the existing warehouses of DoloMatrix Philippines within the Angeles Industrial Park in Calibutbut, Bacolor, Pampanga. The warehouse has a total

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area of 2,520 square meters. The room will be ventilated by fresh air—at least three exchanges per hour. The compact crush and separation plant generates negligible amounts of mercury concentration in the room during operation. The maximum concentration of mercury emission in the atmosphere (inside the room) during processing is 0.025 milligrams/cubic meter (mg/m3). The permissible limit set by the Occupational Safety and Health Administration1 is 0.05 mg/m3. The process air will be discharged through two series of connected carbon filters. 8. Recycled materials will be sold as raw materials to various establishments. Transport, storage, handling, and packaging of recycled materials, mercury in particular, will be in accordance with the requirements of the Republic Act 6969 (an act to control toxic substances and hazardous and nuclear wastes) and the requirements of the occupational safety and health center of the Department of Labor and Employment. B. Description of the Environment

9. The facility will be installed in an existing warehouse surrounded by other warehouses within the industrial park. The project area and its immediate vicinity are devoid of vegetation and wildlife. The nearest residential area is about 500 meters away from the project site. The industrial park is being serviced by the Angeles Electric Power and Theresa Water Works. C. Screening of Potential Environmental Impacts and Mitigation Measures

5. No environmental impact is anticipated during construction since as equipment will be installed within an existing warehouse. During operation, mercury concentration in the work area will dependent on the manner in which materials for recycling are handled and how maintenance work on the equipment is executed. Most equipment generates negligible amounts of mercury concentration in the room during operation. The process air will be discharged through two series of carbon filters. Filters will be subjected to retorting2 or treated using dolocrete technology.3 The materials to be processed should be dry, clean, and stored indoors prior to the process. The equipment instructions for plant operation must always be followed. 6. No significant volume of wastewater will be generated since the retorting process is somewhat similar to distillation processes where water is only used for cooling. Cooling water will be recycled back into the process. 7. Applicable provisions of the Republic Act 6969 and requirements of the occupational health and safety center will be implemented. Appropriate protective equipment will be provided for personnel and good housekeeping will be observed through implementation of the 5S methodology.4 Only trained staff will be allowed to operate the equipment. The operator will ensure annual medical checkups of staff as well as testing for blood mercury levels. D. Institutional Requirements and Environmental Monitoring Plan

8. For the lamp waste management component, a working group will be established comprising DOE (chair) and a representative from key stakeholders such as the Environmental

1 The Occupational Safety and Health Administration is an agency of the United States Department of Labor. 2 Retorting is a process which makes use of an airtight vessel in which substances are heated for a chemical

reaction to produce gaseous products that can be collected for other uses or for further processing. 3 Dolocrete technology is an innovative waste treatment technology that binds toxic and hazardous wastes into a

pseudomineral matrix, which stabilizes the contaminant species and prevents its release into the environment. 4 5S is a methodology for efficiently organizing and managing the work space and work flow.

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Management Board, Department of Environment and Natural Resources, local government units, nongovernment organizations, private sector, and waste management operators. DOE, as the interim owner of the lamp waste management facility, will obtain the necessary environmental permits and clearances from the Department of Environment and Natural Resources and the Environmental Management Board prior to project implementation. The PMU will conduct semiannual monitoring of the operator’s implementation of mitigation measures. 9. A consultant expert in lamp waste management, energy-efficiency standards, and labeling will assist DOE in preparing specifications, and prequalification and tender documents. The bidding documents will specify, among others, that the lamp waste management facility will meet the highest international technical and environmental standards. 10. The pilot facility will be implemented under a turnkey arrangement including supply, shipping, installation, commissioning, operator training, and regular maintenance. The supplier of the facility will operate the lamp waste management facility for 2 years under DOE direction. The operator, under the supervision of DOE, will conduct indoor air quality monitoring and analytical testing of the glass and aluminum end caps to ensure that mercury levels are within applicable standards. The cost for environmental monitoring during operation is included in the project budget. E. Public Consultation and Information Disclosure

11. A public consultation, involving 20 representatives of the local government unit, nongovernment organization, DoloMatrix Philippines, Philippine Economic Zone Authority, and DOE, was conducted on 3 July 2008 at the Angeles Industrial Park. Details of the pilot lamp waste management facility, its potential impacts and mitigation measures were presented by DOE. The participants raised issues related to the safety and health of the community, and the environmental compliance and safety aspects of the equipment. DOE and DoloMatrix Philippines addressed these issues and elaborated on equipment specifications and procedures or systems to be implemented during its operation. F. Conclusions

17. The Project will result in reduced costs for energy production. With reduced electricity demand, the overall need for supply (generation) will be reduced and a large amount of greenhouse gas emissions—and the associated cost of importing fuel—will be avoided, creating carbon credits for the Project under the Clean Development Mechanism. 18. The lamp waste management facility subcomponent, in particular, will enable consumers to dispose of FTLs without damaging the environment. The disposal of spent CFLs and FTLs in landfills is among the primary sources of mercury pollution that could migrate to groundwater and could become airborne. Recovered materials through the recycling facility will also reduce the need for the production of raw materials. 19. The predicted environmental impacts of the lamp waste management facility have been identified and appropriate mitigation measures are included in this initial environmental examination. Responsibilities for implementation and monitoring of mitigation measures and the monitoring plan are defined clearly. The need for further environmental study is deemed not necessary.