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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED SERIES OF IDA PARTIAL RISK GUARANTEES IN THE AMOUNT OF US$ 160 MILLION EQUIVALENT IN SUPPORT OF PROJECTS UNDER THE RENEWABLE ENERGY DEVELOPMENT PROGRAM IN THE REPUBLIC OF UGANDA February 20, 2014 Africa Energy (AFTG1) Africa Region: Tanzania, Uganda and Burundi Country Unit (AFCE1) Report No: UG This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective January 31, 2014) Currency Unit = Uganda Shilling (UGX) 2,475 UGX = US$ 1 FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS BP BST CAS COD DEG DFI EAPP DRC EPC ERA ESAP ESDP ESIA ESMP ESMS ESRS EU EUR FM FMO FY GDP GENCO GET FiT GIZ GWh GoU HSD IA IBRD ICF IDA IFC IPP Bank Procedure Bulk Supply Tariff Country Assistance Strategy Commercial Operation Date Entrepreneurial Development Cooperation German Development Finance Institution Eastern Africa Power Pool Democratic Republic of Congo Engineering, Procurement and Construction Electricity Regulatory Authority Environment and Social Action Plan Electricity Sector Development Project Environmental and Social Impact Assessment Environmental and Social Management Plan Environmental and Social Management System Environmental and Social Review Summary European Union Euro Financial Management Entrepreneurial Development Bank - Dutch Fiscal Year Gross Domestic Product Generation Companies Global Energy Transfer Feed-in Tariff German Development Corporation (Deutsche Gesellschaft für Internationale Zusammenarbeit) Gigawatt hours (of energy) Government of Uganda High Speed Diesel Implementation Agreement International Bank for Reconstruction and Development United Kingdom International Climate Fund International Development Association International Finance Corporation Independent Power Producers ii

3 JBIC KfW KML KV KWh KYC L/C LCOE LDCs LRAP LRF LSHP MDG MEMD MIGA MOFPED MW NEGIP NEMA NDP NSHP O&M OP PDO PPA PRG PS PV RAP REFiT RFP RSHP SHP SPPP SME UEB UEDCL UEGCL UETCL UGX UK DFID UMEME UN USh US$ WBG Japan Bank for International Cooperation German Bank for Reconstruction and Development (Kreditanstalt für Wiederaufbau) Kilembe Mines Ltd Kilovolt Kilowatt Hour Know Your Customer Letter of Credit Levelized Cost of Electricity Licensed Distribution Companies Livelihood Restoration Action Plan Livelihood Restoration Framework Lubilia Small Hydropower Plant Millennium Development Goal Ministry of Energy and Mineral Development Multilateral Investment guarantee Agency Ministry of Finance, Planning and Economic Development Megawatt Nigeria Electricity Gas Improvement Project National Environment Management Authority National Development Plan Nyamwamba Small Hydropower Plant Operations and Maintenance Operational Policy Project Development Objective Power Purchase Agreement Partial Risk Guarantee Performance Standards Power Voltage Resettlement Action Plan Renewable Energy Feed in Tariff Request for Proposal Rwimi Small Hydropower Plant Small Hydropower Plant Small Private Power Producer Small and Medium Enterprises Uganda Electricity Board Uganda Electricity Distribution Company Limited Uganda Electricity Generation Company Limited Uganda Electricity Transmission Company Limited Ugandan Shilling United Kingdom Department for International Development Private Sector Distribution Concessioner United Nations Uganda Shilling United States Dollar World Bank Group iii

4 Vice President: Country Director: Sector Director: Sector Manager: Guarantee Manager: Task Team Leader: Co-Task Team Leader: Makhtar Diop Philippe Dongier Jamal Saghir Lucio Monari Pankaj Gupta Raihan Elahi Robert Schlotterer iv

5 UGANDA: Series of IDA Partial Risk Guarantees for Renewable Energy Development Program TABLE OF CONTENTS I. STRATEGIC CONTEXT AND RATIONALE... 1 A. Country Context... 1 B. Sector and Institutional Context... 1 C. Government Initiatives to Develop Small Scale Renewable Energy Projects... 5 D. Higher Level Objectives to which the Proposed Operation Contributes... 8 II. PROJECT DEVELOPMENT OBJECTIVES... 9 A. PDO... 9 B. Project Beneficiaries... 9 C. PDO Level Results Indicators... 9 III. PROJECT DESCRIPTION A. Project Components B. Project Financing and World Bank Group Instruments C. Lessons learned and reflected in the project design D. Alternatives Considered IV. IMPLEMENTATION A. Institutional and implementation arrangements B. Results Monitoring and Evaluation C. Sustainability D. Partial Risk Guarantee conditions and covenants V. KEY RISKS AND MITIGATION MEASURES A. Risk Rating Summary B. Overall Risk Rating Explanation VI. APPRAISAL SUMMARY A. Economic and financial analyses B. Technical C. Fiduciary v

6 D. Social E. Environment F. Safeguard policies G. Policy Exceptions and Readiness Annex 1: Results Framework and Monitoring Annex 2: Country Sector and Program Background Annex 3: Detailed Project Description Annex 4: Implementation Arrangements Annex 5: Operational Risk Assessment Framework (ORAF) Annex 6: Economic and Financial Analysis Annex 7: Fiduciary and Safeguards Assessments Annex 8: IDA Partial Risk Guarantee Term Sheet in Support of Letter of Credit Annex 9: IDA Partial Risk Guarantee Term Sheet in Support of Commercial Loans Annex 10: Maps vi

7 ..... UGANDA: SERIES OF IDA PARTIAL RISK GUARANTEES FOR RENEWABLE ENERGY DEVELOPMENT PROGRAM PROJECT APPRAISAL DOCUMENT (PAD) AFRICA AFTG1 Basic Information Date: February 20, 2014 Sectors: Energy and Mining (100%) Country Director: Philippe Dongier Themes: Rural Development (100%) Sector Manager/Director: Lucio Monari /Jamal Saghir EA Category: B (Partial Assessment) Project ID: P Lending Instrument: IDA Guarantee Team Leader: Raihan Elahi Joint IFC: No Borrower: Republic of Uganda Responsible Agency: Ministry of Finance, Planning and Economic Development, Energy Regulatory Authority Contact: Dr. Benon Mutambe Title: Chief Executive Officer Telephone No.: b.mutambi@era.or.ug Project Implementing Agencies: Uganda Transmission Company Ltd. (UETCL), Each of the power plant companies undertaking each of the projects Project Implementation Period: Start Date: March 17, 2014 End Date: December 31, 2019 Expected Effectiveness Date: June 30, 2014 Expected Closing Date: December 31, 2019 [ ] Loan [ ] Grant [ ] Other [ ] Credit [ X ] Guarantee For Loans/Credits/Others Project Financing Data(US$M) Total Project Cost: NA Total Bank Financing : NA Total Co-financing : NA Financing Gap : None Terms of Financing: IDA Guarantees: US$ 160 million Bank Group Participation Final Maturity: Amortization Profile: Grace Period: [ ] IFC [ ] MIGA Up to twenty (20) years from effectiveness of each Guarantee NA NA vii

8 Financing Source Amount (US$M) Total Expected Disbursements (in USD Million) NA Fiscal Year FY14 FY15 FY16 FY17 FY18 FY19 Annual NA NA NA NA NA NA Cumulative NA NA NA NA NA NA Project Development Objective(s) The Program Development Objective is to increase electricity generation capacity of Uganda through renewable energy based small private power producers. Components Component Name Cost (USD Millions) (i) Series of Partial Risk Guarantees Up To 160 Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ] Does the project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ] Performance Standards (PS) PS 1. Assessment and Management of Environmental and Social Risks and Impacts PS 2. Labor and Working Conditions PS 3. Resource Efficiency and Pollution Prevention PS 4. Community Health, Safety and Security PS 5. Land Acquisition and Involuntary Resettlement PS 6. Biodiversity Conservation and Sustainable Management of Living Natural Resources PS 7. Indigenous People PS 8. Cultural Heritage Triggered YES YES YES YES YES YES NO YES Legal Covenants Name Recurrent Due Date Frequency (1) Republic of Uganda (2) Each power plant company undertaking each project Yes N/A Ongoing viii

9 ... Description of Covenant Exact terms of covenants to be negotiated with the relevant parties, but are expected to include, inter alia, the following: (i) Under the Indemnity Agreement, Uganda agrees to (a) reimburse IDA on demand or as IDA may otherwise direct in writing for any amount paid by IDA under the IDA Guarantee Agreement together with interest thereon; and (b) to indemnify IDA on demand for all losses, damages, costs, expenses etc. incurred by IDA in relation to or arising out of the IDA Guarantee Agreement. (ii) Under the Project Agreement, each project company will covenant: (i) to execute the Project so as to comply with all its material obligations under the transaction documents, including the relevant environmental and social requirements consistent with World Bank Safeguard Policies; (b) to provide certain information to IDA, including annual financial statements; and (c) not to engage in corrupt practices, fraudulent practices, coercive practices, collusive practices and obstructive practices in connection with the Project. Team Composition Bank Staff Name Title Specialization Unit Raihan Elahi Sr. Energy Specialist TTL AFTG1 Robert Schlotterer Sr. Infrastructure Specialist (Guarantees) Co-TTL TWIFS Monica Teresa Restrepo Sr. Counsel Legal LEGSO Mustafa Zakir Hussain Sr. Energy Specialist Energy AFTG1 Frederic Louis Sr. Hydropower Specialist Hydropower AFTG2 Yasmin Tayyab Sr. Social Development Specialist Social Safeguards AFTCS Martin Fodor Sr. Environmental Specialist Environment AFTN3 Mbuso Gwafila Sr. Energy Specialist Energy AFTG1 Joon Suk Kil Financial Analyst Finance AFTG1 Howard Bariira Centenary Sr. Procurement Specialist Procurement AFTPE Paul Kato Kamuchwezi Financial Management Specialist Financial Management AFTME Tae Kwak Infrastructure Specialist (Guarantees) Infrastructure TWIFS Agnes Kaye Program Assistant ACS AFMUG Chita Oje Program Assistant ACS AFTG1 Rikard Liden Sr. Hydropower Specialist Peer Reviewer TWIWA Sameer Shukla Sr. Energy Specialist Peer Reviewer SEGES Sudeshna Ghosh Banerjee Sr. Economist Peer Reviewer SEGEN Patrice Claude Charles Caporossi Sr. Infrastructure Specialist Peer Reviewer TWIFS Locations Country Uganda First Administrative Division Location Planned Actual Comments Nation wide ix

10 I. STRATEGIC CONTEXT AND RATIONALE A. Country Context 1. Uganda s recent economic growth has enabled substantial poverty reduction and led to progress toward achieving the Millennium Development Goals (MDGs). Real Gross Domestic Product (GDP) growth has averaged around four percent over the past two decades due to rapid population growth. Uganda has surpassed the 2015 MDG of halving the 56 percent poverty rate recorded in it declined to 24.5 percent by Since FY2009/10, a combination of exogenous shocks and domestic factors reduced economic activity to below historical levels. Subdued export performance, reduction in aid flows, high inflation and subsequent tightening of monetary policy to restore macroeconomic stability, reduced GDP growth to 3.2 percent in FY 2011/12, compared to 6.7 percent in FY 2010/11. In FY13, growth rose to 5.8 percent as a result of fiscal and monetary adjustments. 2. Like any other rapidly growing developing country, Uganda requires an adequate and reliable electricity supply for sustainable growth and development. Access to electricity enhances socioeconomic development through better access to education, health care, improved income opportunities, and security. Electricity can also facilitate the development of small and medium scale enterprises (SME) and provides added incentives for larger-scale industrial and commercial investment. Despite being endowed with substantial resources that can generate electricity, Uganda has not been able to provide reliable, cost effective electricity to meet the demand of its growing economy. 3. Uganda s Vision 2040 lays out the broad policy directives to improve electricity access and transform Uganda to a modern and prosperous country within 30 years. Vision 2040 sets out an electricity access target of 80 percent by Uganda s National Development Plan (NDP) covering the period FY11-15 highlights the urgent need to increase access and usage of electricity through investments in least cost power generation, promotion of renewable energy and energy efficiency, and the development of associated transmission and distribution infrastructure. B. Sector and Institutional Context 4. About a decade ago, Government of Uganda ( GoU ) unbundled its electricity supply sector. The unbundling resulted in three corporate entities responsible for: Generation Uganda Electricity Generation Company Limited (UEGCL); Transmission - Uganda Electricity Transmission Company Limited (UETCL); and Distribution - Uganda Electricity Distribution Company Limited (UEDCL). The GoU has since leased the operation of the main generation and distribution assets to the private sector under long-term concession agreements. The management and operation of UEGCL s Kiira and Nalubaale hydropower stations was leased to Eskom (Uganda) Limited. The management and operation of UEDCL s distribution assets was contracted out to several licensed distribution companies (LDCs) of which the predominant one is Umeme Limited. Successful unbundling of the electricity sector and private sector distribution in Uganda continues to be a success story of the African continent. 5. Within the last ten years, large hydropower generation has been insufficient to meet electricity demand in Uganda leading to reliance on more costly emergency thermal based generation. Prior to 2005, the electricity demand in Uganda was largely met by two large 1

11 hydropower generation stations, Nalubaale and Kiira. A prolonged drought during caused decline in water levels in Lake Victoria and reduced available hydropower output from an average 270 MW in 2002 to 120 MW in To mitigate the negative impacts of the resultant power shortages, GoU resorted to emergency rental thermal plants. A total of 120 MW of emergency high speed diesel (HSD) power plants was connected to the grid by Given the high cost of these rental plants, and the GoU s reluctance to pass through the full cost of electricity services to the consumers, the sector faced a difficult financial situation over the last several years. Only after the commissioning of the 250 MW Bujagali hydropower project during the third quarter of 2012, did Uganda have surplus power generation capacity and was able to eliminate production from the emergency rental power plants. The remaining emergency rental thermal power plants have predominantly been on standby since the commissioning of Bujagali hydropower plant. 7. Over the last ten years, the GoU has sought to address its energy challenges, including strengthening its public institutions and introducing private sector participation with the support of development partners, including the World Bank Group. Through the Privatization and Utility Sector Reform Project (PUSRP Cr.3411), the World Bank in 2000 and 2005 supported the unbundling of the sector and contributed to the regulatory and legal reforms that led to Uganda s current sector framework and institutional set up. In addition the PUSRP has until recently provided critical support to the distribution concession with Umeme Ltd. in the form of an IDA PRG. MIGA and IFC have also provided support to the distribution concessionaire. The World Bank Group (WBG) provided financial support for the implementation of the Bujagali Hydropower Plant, through joint IDA (PRG), IFC and MIGA interventions. World Bank Group support paved the way for longer term system loss reduction in distribution and increased generation capacity through the PURSP and Bujagali projects. 8. The World Bank was also instrumental in supporting the reduction of short term power outages and improvement of the financial performance of the electricity sector through the Power Sector Development Operation (PSDO) in 2007.The primary objective of the PSDO was to reduce short-term power shortages and improve financial performance in the sector. This operation combined a Policy Support Program (US$80 million) to advance sector reforms and a Specific Investment Loan (US$220 million) that supported a 50MW emergency thermal generation. At the PSDO s closure in 2011 most of its outcome indicators had been achieved. While the Policy Support Program component was duly implemented and the proceeds of this budget support component significantly helped the GoU in managing the financial requirements of the sector during the crisis, there were mixed results in terms of performance in handling longer term policy aspects of sector finances and longer term expansion plans for the sector. One of the shortcomings of this component was the roll back on the electricity tariffs, which partly cancelled earlier advances towards achieving cost reflective tariffs (Annex 2 has further details). Through GoU s strong commitment in implementing major sector reforms, which the WBG and other development partners supported, Uganda s electricity sector has recorded major gains in institutional reforms and generating capacity expansion. 9. Despite recent achievements, the GoU continues to take steps to address the challenges related to inadequate electricity sector performance and low levels of investments in generation, transmission and distribution infrastructure. To improve the 2

12 financial situation of the sector, the Electricity Regulatory Authority (ERA) in January 2014, approved a multi-year tariff with automatic adjustments for fluctuations in fuel cost and exchange rates. These initiatives will help Uganda s power sector to become sustainable. In addition, GoU plans to enhance the level of access to electricity in Uganda which is currently estimated at about 14 percent. In this regard, the GoU has recently approved the Rural Electrification Strategy and Plan (RESP) for that sets out a rural electricity access target of 26 percent by The plan is currently under implementation. Finally, to further reduce the level of system losses in the power sector, ERA has agreed with Umeme Ltd. on a loss reduction trajectory. Non-technical distribution losses are to be reduced from about 8.0 percent in 2013 to about 5.2 percent by 2019 and overall distribution losses are to be reduced from 24 percent to 14.7 percent by To help achieve these targets, the ERA has approved Umeme Ltd. s investment plan to introduce tamper-proof prepayment meters, and reinforcement of the distribution network. 10. While an agreement had been reached on new performance indicators, Umeme Ltd., the distribution concessionaire, is currently facing legal disputes with ERA which, if unresolved, could lead to a slowdown of the planned investment program (Section V and Annex 2 has further details). In such a scenario, given a tightened financial situation of UETCL, the IDA PRG availed for any Small Private Power Producer (SPPP) may come closer to a triggering scenario, if the Bank cannot prevent such escalation through its sector dialogue. At the same time the earlier PRG support provided to Umeme Ltd. under the PUSRP is no longer available and cannot be triggered, in such an escalation scenario. 11. To support efficient delivery of power to consumers, the GoU has started rehabilitation and upgrading of the transmission and distribution networks. The World Bank is supporting the network rehabilitation and strengthening activities through financing of the Kawanda-Masaka 220 kv transmission line under the Electricity Sector Development Project (ESDP Cr.49880). The GoU is also discussing regional transmission interconnections with neighboring countries, as part of regional integration initiatives under the East African Power Pool (EAPP). 12. According to projected demand growth, generation supply shortages are expected from 2016 until one of the large hydropower plants is commissioned around While the commissioning of the Bujagali Hydropower Plant in 2012 ended a decade of chronic power supply shortages, the continuing strong growth in electricity demand will soon surpass the available generation capacity in Chart 1 below shows the electricity demand supply balance without any intervention to develop small renewable energy projects and/or emergency thermal power plants. The shortage in generation capacity will continue until one of the planned large hydropower plants; Karuma hydropower plant (600 MW) or Isimba hydropower plant, is commissioned. The GoU expects to have one of these large plants to be commissioned by Given the complexities of constructing large hydropower plants and the experience of neighboring countries, construction of large hydropower plants can take more than eight years. This would only extend the period of supply constraint and may cause Uganda to revert to the use of expensive rental thermal power plants if cheaper, quicker to deploy solutions are not implemented in a timely manner. 3

13 1800 Chart 1: Demand Supply Balance MW Biomass Hydropower High Case Energy Demand Growth Source: UETCL Demand Supply Balance Thermal Base Case Energy Demand Growth Period of Supply Constraint 13. In order to avoid power shortages and reliance on expensive rental thermal power plants, the GoU plans to harness its other renewable energy resources by promoting Small Private Power Producers (SPPPs). The GoU anticipates several benefits from the development of SPPPs. The benefits of implementing SPPPs include: (i) SPPPs can be developed and commissioned much faster than large hydropower plants; (ii) multiple projects could be initiated and developed simultaneously without imposing any financial or managerial burden on the Government; (iii) SPPPs can help fill the forecasted demand-supply gap between 2016 and 2020 and reduce or eliminate the use of expensive rental thermal power plants during that period; and (iv) their geographic distribution and diverse hydrological catchment basins will help increase reliability and efficient operation of the power network, and resilience against drought induced shocks. In addition, Uganda would have access to geographical diversified small plants that will transfer the hydrology/water availability risk within the generation sub-system from the Nile River and Lake Victoria to other river basins and watersheds. The distributed generation plants will also reduce network system losses and help increase rural access to electricity as generation will be closer to existing load centers. 4

14 C. Government Initiatives to Develop Small Scale Renewable Energy Projects The major steps taken by GoU to support SPPPs are described below: Renewable Energy Feed in Tariff (REFiT) 14. To support the development of small renewable energy projects, ERA established a Renewable Energy Feed in Tariff (REFiT) program in 2007 covering a two year period. Due to low uptake by project developers, the REFiT was reviewed in 2010 taking into account new information on levelized costs of electricity generation. A new REFiT structure, for 2011 to 2014, was established and remains in force today. ERA did not indicate any revisions in the REFiT level any time soon as it is closely working with the Bank and the GoU through this Project to provide risk enhancement measures for the benefit of investors, that, in ERA s view, should be an adequate incentive to invest in Uganda renewable energy generation sector. 15. The overall objective of the REFiT is to incentivize and support greater private sector participation in power generation using renewable energy technologies. This is in line with the Uganda Renewable Energy Policy 2007 that outlines the Government s vision: To make modern renewable energy a substantial part of the national energy consumption. The Renewable Energy Policy 2007 defines modern renewable energy as renewable energy resources that are transformed into modern energy services, such as electricity The REFiT program tariffs are determined using a US$/kWh levelized cost approach. This approach aims to provide an after-tax internal rate of return to equity holders that is equal to an assumed cost of equity capital. The REFiT is expected to provide tariffs that are sufficient to recover costs and provide a reasonable return on investment without windfall profits. Further details on the key inputs of this tariff are provided in Annex 3. The current REFiT tariff levels and eligible capacity limits are provided in Table 1. 1 Renewable energy (RE) is defined as electricity which can be generated from energy resources such as water power, wind power, solar energy, geothermal energy, biogas and landfill gas, and biomass cogeneration. The REFiT shall apply to small-scale renewable energy systems of selected technologies between an installed capacity of 0.5 MW and 20 MW, as defined by the Uganda Electricity Act RE also refers to clean fuels derived from renewable energy resources like biogas, ethanol, methanol, hydrogen or solar water heating as well as biomass utilized in efficient biomass technologies, like improved charcoal stoves and improved firewood stoves. 5

15 Technology Table 1: REFiT Tariffs and Plant Capacity Limits ( ) Eligible Total Capacity Capacity Allocation Tariff US$/kWh Payment Period (Years) MW Hydro 9-20 MW MW 20 Hydro 1-8 MW MW 20 Hydro MW MW 20 Bagasse MW 20 Biomass MW 20 Biogas MW 20 Landfill Gas MW 20 Geothermal MW 20 Solar PV* MW 20 Wind MW 20 * ERA recently dropped Solar PV from REFiT due to its volatile cost in the current market 17. The GoU in coordination with several development partners decided to offer the following market enhancement instruments. These market enhancement instruments include: (i) a top-up payment to eligible SPPPs over and above the REFiT (the GET FiT premium);; and (ii) provision of partial risk guarantees to the SPPP project sponsors and lenders to: (a) mitigate against Power Purchase Agreement (PPA) and Implementation Agreement (IA) payment risks through a commercial bank issued letter of credit and; (b) mitigate against debt repayment default risk to commercial lenders. These instruments are described below. The Global Energy Transfer Feed-in Tariff (GET FiT) Program 18. GoU with the support of KfW, has established the Global Energy Transfer Feed-in Tariff (GET FiT) scheme to support the development of the small renewable energy projects in Uganda. The scheme provides for an output based top-up payment to the SPPPs to allow a reasonable return on investment, while minimizing the need to increase REFiT and the electricity retail tariff. Under the GET FiT program, this top-up payment is termed premium payment. The premium would be made available to small renewable energy projects undertaken by private sponsors when they begin commercial operation. To formalize the scheme, GoU had entered into an Agency Agreement with KfW, through which KfW has been authorized by GoU to enter into agreements in GoU s name and account with donors and with SPPP developers to support small renewable energy projects. 19. The GET FiT program has raised funds from different bilateral sources for the GET FiT Fund and has appointed a consulting firm as Secretariat. This GET FiT Secretariat can be considered as the Project Implementation Unit (PIU) of the GET FiT Program, governed by a Steering Committee that includes members from the GET FiT Fund donors and GoU. 20. The total funding requirement for the GET FiT Uganda Program is estimated to be about EUR 71.8 million considering the initial approved REFiT. The GET FiT premiums for the different REFiT technologies are as in Table 2 below. Further details on the funding, cost allocation and premium allocations of the GET FiT Program are provided in Annex 3. 6

16 Table 2: GET FiT Premium Payment Levels Technology GET FiT Premium Payment (US$/kWh) 2 Hydro (20 <= <9 MW) Hydro (8 <= <1 MW) Hydro (1 MW <= <500kW) Not included Bagasse 0.01 Biomass 0.01 Biogas No premium Payment required Landfill gas Not included Geothermal Not included Solar PV 3 Dealt through a competitive process Wind Not included 21. The GET FiT premium payment is designed as a quasi-output based incentive for the SPPPs. It is further designed to increase the cash flow of the SPPPs during their initial operating years, thus increasing the internal rate of return of the projects significantly. The total GET FiT premium payment amount for a specific SPPP is determined by estimating the total energy (GWh) the power plant would generate during its contracted period (20 years). In order to conservatively estimate energy generation of a plant, only 60 percent of the installed capacity would be considered along with the projected average annual plant factor. Half of the GET FiT premium will be paid to the SPPP after UETCL confirms that the SPPP has reached Commercial Operation. The remaining half of the GET FiT premium will be paid over the first 5 years of plant operation. The premium payment would be adjusted during this period for any deviation between the power plant s projected plant factor and actual operation. As the amount of GET FiT premium to be allocated to each SPPP would be determined at the time of eligibility, the total amount of generation capacity (MW) that could be supported by the GET FiT program would be determined by the level of GET FiT funding available. Availability of Series of Partial Risk Guarantees from the World Bank 22. Based on a Government-led assessment, a key priority for attracting private sector participation in small renewable energy projects is to provide risk mitigation instruments. The Government has therefore requested the Bank to consider the provision of Partial Risk Guarantees (PRG) to support the development of renewable energy SPPPs. 23. ERA has developed a standardized PPA and IA for small hydro projects. The PPA and IA were prepared following consultation with UETCL, various interested sponsors, Development Financial Institutions, and Development Partners who are supporting the Uganda power sector. The PPA and IA will be used as the main contracting documents governing the 2 While GET FiT Program has raised funds in different currencies, the premium will be paid in US$ equivalent. 3 Solar PV was recently dropped from REFiT by ERA. The regulator suggested that tariff for solar PV projects would be determined based on affordability of Uganda consumers, GET FiT therefore raised additional funds to bridge the gap between the cost recovery tariff of Solar PV projects and affordability of Uganda consumers. 7

17 relationship between the SPPPs and UETCL and SPPPs and GoU respectively. The PPA establishes the terms and conditions upon which the electricity from the generating plants will be supplied to and paid by UETCL. The IA sets the terms and conditions for project development and GoU support including grid connection and evacuation arrangements; regulatory arrangements; protection from GoU expropriation, nationalization of the SPPP by GoU; and GoU payment obligations on trigger of certain pre-agreed events. 24. The GoU further requested the Bank to consider providing different structures of Partial Risk Guarantees to support UETCL ongoing PPA obligations and GoU obligations under IA. PRG support should be provided to the extent that it makes individual projects bankable, but without exceeding the minimum required level of coverage. The proposed IDA Guarantees will be offered in parallel to the GET FiT premium support. D. Higher Level Objectives to which the Proposed Operation Contributes 25. Support to GoU s Rural Electrification and Access program. The proposed program will support Uganda s rural electricity access program and ensure availability of power to connect new consumers to the grid. 26. The World Bank Group Country Assistance Strategy for the period FY11 to FY15 notes specifically that inadequate infrastructure, especially transport and energy, is Uganda s binding constraint for growth and economic transformation. The CAS includes enhancement of public infrastructure (including hydropower generation), among its strategic objectives. 27. The proposed operation is aligned with the World Bank Africa Strategy. The Africa Strategy focuses on competitiveness and employment; and vulnerability and resilience. The Strategy covers all traded goods and service sectors (e.g., light manufacturing, agribusiness, mining, information and communication technology, and tourism) as well as key domestic sectors that support competitiveness (e.g., agriculture, transportation, utilities, education and skills development, construction, and retail). The Africa Strategy puts priority on reforms and public investments in areas of highest growth potential, a healthy and skilled workforce, women s empowerment, and regional integration programs. These include: strategically targeted interventions to address three main investment climate constraints: infrastructure, business environment, and skills. The proposed operation aims to address the infrastructure constraint Uganda is facing, and would help GoU to strengthen its service sectors by ensuring adequacy of electricity supply for economic growth. The proposed program will help Uganda develop renewable energy projects, which will reduce carbon emissions and thus help in mitigating risks associated with climate change. 28. The proposed program will support the Bank s goals of reducing poverty and promoting shared prosperity. The program will help increase job opportunities in isolated and poorer areas during the construction and operation phases of small renewable energy power plants. The increased electricity supply from the projects will support Uganda s rural electricity access program and ensure availability of power to connect new consumers to the grid. 29. The proposed operation will be the first program in Africa to extend a Series of PRGs to small renewable power plants. If successful, the operation could have an important 8

18 demonstrative impact for other African countries. Under this proposed operation, the Bank has worked with the GoU and other development partners to standardize project agreements. The availability of standardized documents has the potential to reduce transaction costs for project sponsors, the Bank and GoU. The lessons learned from this operation could also help the Bank replicate and streamline similar programs in other countries. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 30. The Program Development Objective is to increase electricity generation capacity of Uganda through renewable energy based small private power producers (SPPPs). B. Project Beneficiaries 31. By increasing electricity generation capacity using renewable energy resources, the program will reduce power generation costs in Uganda. The benefits of the Program include: (i) reduction in costs of electricity consumption in Uganda; (ii) supporting the GoU to meet its projected electricity demand growth; and (iii) increasing rural access to electricity services. 32. This program aims to expand generation capacity by MW. This will increase the availability of energy in the system for the population and businesses, thereby supporting the shared prosperity agenda in three ways. Firstly, by increasing electricity supply to support electricity access expansion into rural areas. Secondly, the SPPPs will create jobs directly during construction and maintenance of their power plants. Thirdly, electricity generated from the SPPPs will create jobs through productive uses and will support the reduction of poverty and expansion of the local economy. 33. The program beneficiaries will be the households, social services providers and businesses with electricity connection. All beneficiaries will directly or indirectly benefit from the incremental electricity produced and from a more reliable electricity supply network, which are the outcome of the proposed guarantee program. C. PDO Level Results Indicators 34. The proposed PDO indicators are: (i) Number of SPPPs supported by the IDA PRGs; (ii) Total Hydropower Generation Capacity constructed under the project (MW); (iii) Total Generation Capacity of other Renewable Energy technologies, such as solar, constructed under the project (MW); and (iv) Private capital mobilized over the implementation period on account of the project. 35. The intermediate outcomes relate to the overall sustainability of the program. These will be measured by the total number of commercial banks which provide debt financing to the SPPPs and the commissioning phases of the projects supported. The following intermediate outcome indicators will be monitored for each project: Physical Implementation progress for each project. Incremental investment of each project (US$, equity and debt). 9

19 Commissioning test completed (Y/N). III. PROJECT DESCRIPTION A. Project Components 36. This World Bank program will support a number of individual SPPP projects under the Renewable Energy Development Program in the Republic of Uganda. The total capacity of SPPP projects that could be supported under this proposed program is capped at 150 MW and the renewable energy technologies that could benefit from World Bank support are all the technologies supported under Uganda s REFiT framework and in addition solar PV generation SPPPs, with maximum capacity of 20 MW per project. The World Bank support to those projects will be availed in the form of a series of PRGs up to a cumulative Guarantee amount of US$160 million. This series of PRGs represents the only component under this project and the details of the proposed PRG instruments are described in the following section. 37. The SPPPs that would be supported under the proposed program are at different stages of preparation. The Bank has reviewed a first batch of twelve hydropower projects that requested IDA PRG support. After initial screening, the Bank visited eight hydropower project sites to assess the readiness of the projects using the Bank s eligibility criteria. Accordingly, three projects have been selected as the first projects to benefit from the IDA PRGs following further appraisal. These projects are: (i) Nyamwamba Small Hydropower Plant (9.2 MW), (ii) Lubilia Small Hydropower Plant (5.4 MW), and (iii) Rwimi I Small Hydropower Plant (5.5 MW). The details of the Bank s appraisal of those three initial projects are summarized in Section IV and in Annexes 3, 6 and For the selection of additional SPPPs (following those initial three projects) a suitable implementation mechanism has been considered to minimize transaction costs for the sponsors, the Bank and GoU. As part of this effort, the Bank and the GET FiT Secretariat have aligned their project selection methodology. Each process is individually described in Annex 4 as is the mechanism for how the processes will work together. The Bank and the legal entities supporting the GET FiT Secretariat have entered into a Memorandum of Understanding (MoU) reflecting the agreements on cooperation and sharing of information. The key parameters of the Bank s proposed future selection process are summarized below. 39. KfW, as GoU representative to govern the GET FiT program, has appointed a consultant to staff and manage the GET FiT Secretariat. The major responsibilities of the GET FiT Secretariat are as follows: (a) Day-to-day management of the GET FiT Secretariat; (b) Preparation and implementation of up to two additional Request for Proposal Rounds under the GET FiT Program, including organization and management of Investment Committee meetings and contract negotiations with selected projects; (c) Detailed technical, financial/economic, environmental/social and legal appraisal of Renewable Energy projects applying for the GET FiT premium payment; (d) Supervision of construction of projects supported by GET FiT Program along with managing the disbursement of GET FiT funds; and (e) Preparation of relevant project reports to GoU, and development partners supporting the GET FiT Program. 40. The eligibility criteria of the GET FiT Program and IDA PRG Program are similar. The GET FiT Program follows a quantitative selection process with a pass/fail judgment on legal 10

20 issues, whereas, the Bank follows a qualitative review process. It is expected that in most cases both processes would select the same projects as the Bank and the GET FiT Secretariat has aligned their evaluation processes. The Bank will use the information collected by the Secretariat to carry out its appraisal of the projects. This approach was tried in the first batch of Request for Proposal (RFP) process and was found efficient. In that connection, it will increase efficiency in managing several players working for the same objective. However, while the Bank will receive relevant appraisal information from the GET FiT Secretariat and will also receive the GET FiT s Semiannual Supervision Reports, the Bank will remain responsible for the appraisal of projects and the determination of eligibility for IDA PRGs. The Bank may also contact the sponsors directly to provide supplementary information for the appraisal, when required. 41. While the above methodology would work well for projects that would apply for both GET FiT premium and IDA PRG, there could be SPPPs which would only apply for one instrument. In case a sponsor only applies for the GET FiT premium, then GET FiT Secretariat shall carry out their evaluation process as usual and will not be required to submit its appraisal information to the Bank. In cases when a sponsor only wants to apply for the IDA PRG support and not the GET FiT premium, then that project will be reviewed by the Bank separately outside the GET FiT appraisal arrangement. 42. The proposed IDA PRG program s eligibility criteria are a part of this proposal for which explicit Board approval is being sought. B. Project Financing and World Bank Group Instruments 43. The proposed World Bank program proposes to support the Renewable Energy Development Program with a series of IDA Partial Risk Guarantees (PRGs) up to a cumulative amount of US$160 million. IDA PRGs will be offered for eligible projects in two main forms: a. IDA PRGs supporting Letters of Credit (L/C) to be issued on behalf of UETCL and the GoU to cover liquidity and/or termination risks. b. IDA PRGs in support of commercial debt covering risk of repayment. 44. These two instruments have been identified based on the Bank s market sounding and discussions with several project stakeholders. In an effort to mitigate the perceived UETCL payment risks, the standardized PPA under the current REFiT framework requires that UETCL provides a payment guarantee in the form of a Letter of Credit (L/C) that could be drawn against by an investor (SPPPs) in case of UETCL s payment default of a monthly invoice. In addition to this payment guarantee mechanism to be offered by UETCL under the PPA, the GoU has assumed certain payment obligations for pre-determined political risks, including termination under a standardized IA, which was developed by the GoU and ERA in parallel to the PPA. The IA will be entered into directly between the GoU, represented by the Ministry of Energy and Mineral Development (MEMD), and the SPPP. Discussions with stakeholders have confirmed that risk mitigation instruments, such as IDA PRGs, could be effective in enhancing the proposed REFiT framework described above. In addition, the IDA Guarantee Program will also reduce commercial bank charges to UETCL for securing the L/C facilities, as described below. 11

21 45. The proposed program of PRG support to SPPPs is being designed as a Series of Guarantees. This PAD presents the PRG design for the complete series and appraises the overall scope of the universe of transactions to be supported. It is expected that the basic terms and conditions of the guarantees provided under this program will not change materially over time. Form of IDA PRGs (i) IDA PRGs Supporting Letters of Credit (L/C) from a Commercial Bank 46. The proposed PRGs under this structure will cover two main risk events. Each risk event will be coverable on an optional basis and depending on GoU's/UETCL's decision taken jointly with the World Bank on a project by project basis. The relationship between the SPPPs and the UETCL/GoU will be governed by the standardized PPA and IA. The Bank team has reviewed the PPA and also the related standardized IA and provided its comments to both Agreements. As a condition to PRG effectiveness, both agreements must be in form and substance satisfactory to IDA. a. UETCL Payment Risk under PPA monthly invoices: UETCL is required, under the standardized PPA, to provide a payment guarantee in the form of a L/C for every project eligible under the REFiT framework. Each payment guarantee will be for a predetermined amount, representing at least three monthly invoices. Currently UETCL only manages to receive L/C payment guarantees from its relationship banks on a 12 months basis, at a high cost, and after collateralizing certain revenue elements from its monthly cash inflow. Since this is not a sustainable model for a long term L/C support framework, GoU has asked the World Bank to avail IDA PRGs to alleviate this cost burden to UETCL for IDA eligible projects. The IDA PRG support to UETCL s payment guarantee will also provide an additional halo for commercial investors under individual projects, as the World Bank indirectly will be part of the proposed security package and can intervene through its wider sector dialogue in situations where payment defaults occur. b. GoU Termination Amount Payment Risk: Under the standardized IA, GoU has assumed payment obligations in certain events of termination. Based on market soundings with potential investors and lenders 4, and discussions with GoU and REFiT stakeholders, it is proposed that GoU s ability to attract certain developers for the REFiT program could substantially increase if GoU's termination payment obligations would be guaranteed through L/Cs backstopped by IDA PRGs. This would be particularly relevant for developers that have not yet been engaged in Uganda s power sector. 47. The previously described risks would be covered under one single L/C to be issued by a commercial bank for the benefit of each SPPP. Under this first structure, IDA will backstop payments made by the commercial bank issuing the payment guarantee L/C, to support 4 It is envisioned that PRG backed L/Cs could be assigned by SPPPs to eligible lenders as part of the security package. 12

22 UETCL s payment obligations to the SPPPs under the standardized PPA and, if selected, GoU s termination payment obligations to the SPPPs under the IA. 48. About 20 PPAs and IAs are expected to be concluded between SPPPs and UETCL, and SPPPs and GoU respectively. To simplify the issuance and implementation process, UETCL will competitively select one commercial L/C bank to put in place an umbrella L/C facility to be in effect during a pre-determined availability period. Upon IDA s confirmation of eligibility of a project for PRG support during the availability period, the selected L/C bank would then issue an individual L/C for the relevant project. Annex 3 provides more details on the mechanics of the L/C facility with an IDA PRG backstop and Annex 8 provides an indicative term sheet for the typical PRG structure based on a L/C. (ii) IDA PRGs supporting commercial debt 49. Preliminary information on the second batch of GET FiT premium eligible projects indicates that commercial banks have shown interest in financing SPPPs, provided IDA PRG support is extended to cover the debt repayment risk. As mentioned under the previous section describing the L/C in support of termination payments, certain commercial lenders and investors may value the enhancement through a PRG of GoU's payment obligations under the IA. 50. On that basis, the Bank and the GoU/UETCL discussed the possibility of whether the World Bank Guarantee support could be extended to also include PRGs for direct coverage of commercial debt. In such a case, IDA would issue individual PRGs for renewable energy projects eligible for World Bank support. The PRGs in support of commercial debt would cover an individual SPPP s commercial lender against the breach of certain obligations of GoU/UETCL SPPP with regard to this project leading to a loan repayment default. 51. Under the proposed structure, commercial lenders would be entitled to demand the portion of any principal and/or interest payment which has fallen due under the IDA guaranteed commercial loans and that has not been paid by the project company as a result of the failure of UETCL or GoU to pay undisputed amounts. In the case of a dispute between the Government and the project company in respect of such payments, the IDA PRG would be callable only if the Government is obligated to pay and has failed to do so as provided under the relevant contractual dispute resolution provisions under the IA and PPA. 52. Under this structure, IDA would potentially cover the risk of debt service default arising from the following categories of events: (a) political force majeure events; (b) changes in law making the project contractual agreements unenforceable or void or making the performance of the project company or its contractor (and related parties, such as subcontractors) unlawful; (c) government imposed restrictions on the ability of the project company to be paid or to receive foreign currency or transfer funds abroad; (d) GoU/UETCL payment default under the IA/PPA. Annexes 3 & 9 provide further details with respect to the contractual relations currently envisaged between the different stakeholders under the IDA PRG covering commercial debt. 13

23 Standardization of Project Documents 53. In the case of the PRGs supporting the L/Cs, an umbrella guarantee agreement is currently proposed. It would be entered into by IDA and the L/C bank covering all payments under all L/Cs to be issued under the L/C facility, a reimbursement agreement between the L/C bank, GoU and UETCL and one Indemnity Agreement between the Republic of Uganda and IDA. The form of the L/C, the Project Agreement between IDA and each SPPP and the PRG Support Agreement to be entered by each SPPP and UETCL/GoU will be developed and set in advance (in the same manner as the PPA and IA). These standardized contracts are expected to reduce transaction costs for each project. Approval Process for Subsequent IDA Partial Risk Guarantees under the Program 54. Projects that are in the pipeline will be appraised subsequently and processed for approval in batches using normal project appraisal procedures and through preparation of a Project Appraisal Document 5 (PAD), as required in Bank operational policies and procedures, as long as guarantee exposure is available from the proposed program. Information on subsequent projects would be shared with GoU promptly. It is proposed that given the small size and moderate risks that the small renewable energy projects are likely to have and to the extent that the terms and conditions of the guarantees are not materially different from those approved by the Board in this package, subsequent projects in the pipeline for which PRGs are being sought would be approved by the Africa Regional Vice President (RVP) and then by the Board, on an Absence of Objection AOB basis. If a future power plant to be supported under the program is an environment category A, then Management would offer a full Board discussion. C. Lessons learned and reflected in the project design 55. The team reviewed several relevant PRG operations from Africa and other regions. Some of these programs are Nigeria Electricity and Gas Improvement Project (NEGIP) (P106172), Uganda Private Power Generation (Bujagali) Project (P089659), Cameroon Kribi Gas Power Project (P110177), Indonesia Infrastructure Guarantee Fund Project (P118916), Peru Guarantee Facility (P088923), WAEMU Capital Market Development Project (P074525) and the Kenya Private Sector Power Generation Support Project (P122671). 56. One common challenge that the team identified from reviewing these projects is that when an umbrella guarantee facility was created without identifying and appraising initial projects, the individual projects subsequently failed to materialize. In contrast, the recent experience of a series of PRGs in Kenya has worked well. The important difference was that Board approval was sought for the creation of the umbrella PRG facility, as well as for the PRG to be provided to one or more fully appraised projects. 5 The pipeline projects would be appraised following the eligibility criteria outlined in this PAD. If there is no material deviation in the sector context and overall project implementation environment, then the subsequent Guarantee series PADs will refer to this PAD for (i) Strategic Context, (ii) Project Development Objectives, (iii) Project Description, (iv) Implementation, and (v) Key Risks. The Appraisal Summary of the projects included in each batch would be provided in the subsequent Guarantee series PADs, along with relevant Technical Annexes. 14

24 57. To confirm adequate interest of sponsors to develop such projects and seek the IDA PRG, the Bank developed the proposed PRG structure and appraised several projects that have advanced their project preparation. The projects were found at different stages of preparation and require marginal upgrade to become eligible for the IDA PRG program. 58. Supporting a large number of smaller projects, can lead to high transaction costs for the Bank in project preparation and supervision. By cooperating closely with the GET FiT Secretariat and sharing information, as planned, the Bank can reduce its transaction cost (and those of the clients) without sacrificing appraisal quality. The Bank will also receive semiannual supervision reports from the GET FiT Secretariat. This aspect of the project design is expected to significantly improve project management efficiency and streamline implementation between GET FiT Program and IDA PRG Program. D. Alternatives Considered Alternatives to meet the increased power demand 59. The Bank reviewed alternative solutions that could reduce the supply shortage risk. One alternative approach that could effectively meet the growing power demand would be establishing regional interconnection and trading electricity with neighboring countries. Uganda at present trades electricity with Kenya and Tanzania. It also plans to establish high voltage transmission interconnection with South Sudan and DRC. However, the major objective of these interconnections is to export electricity to neighboring countries. Based on the Bank s experience on financing the Ethiopia Sudan transmission line and Ethiopia Kenya transmission line, it was concluded that regional projects cannot be constructed quickly. Accordingly, it was decided that the transmission interconnection projects that are now under discussion will be allowed to mature before they can be relied on to meet the looming supply shortage that Uganda may face in the near future. Partnership with Other World Bank Group Institutions 60. The Bank discussed with IFC and MIGA about their intention to support the SPPPs in Uganda either through equity/debt financing or through insurance. Though involvement of IFC could have reduced the scope of the proposed IDA PRGs, forming a partnership within the Bank Group institutions to support this program could have increased overall benefits of this program to Uganda. However, though IFC was initially interested to review the first phase projects, after carrying out initial assessment on several SPPPs, IFC concluded that the small size of these projects will not be adequate to cover their transaction costs. Several of the SPPP sponsors informed the Bank that they also tried to get MIGA support to provide insurance cover to their equity, but the small size of their projects was a barrier to MIGA involvement as well. During implementation of the program, if the situation changes, the Bank team will again try to explore ways in optimizing the use of the World Bank Group balance sheet for this program in Uganda. 15

25 IV. IMPLEMENTATION A. Institutional and implementation arrangements 61. Each project will be implemented by a private project company(s) that has overall responsibility for the design, finance, supply, commissioning, operation and maintenance of the plants for the duration of the PPAs. Each project company will set up an appropriate management structure to undertake its project. 62. The GET FiT Secretariat plans to undertake a roadshow in March 2014, to inform international and regional commercial banks on the arrangements that are being designed to support the REFiT program. The projects in the first batch were only able to raise financing from Development Financial Institutions (DFIs). While participation of commercial banks were absent in the first batch, some DFIs are trying to syndicate their loans with some commercial banks. The GET FiT Secretariat had been promoting its premium payment mechanism offered through the GET FiT program and GoU requested the World Bank to design the proposed PRG program. The planned roadshow in March 2014 is targeted to inform the local, regional and international business community on the GoU s efforts to develop its renewable energy sector through private sector initiatives. The second batch of project submission, dated January 2014, indicated interest from commercial banks to participate in this program. Hence the debt PRG structure offered in the proposed PRG program is expected to play a significant role in creating a vibrant private sector sponsored electricity generation industry in Uganda. 63. Bank has reviewed and found the grievance mechanism proposed by the SPPPs in the ESIA and RAP satisfactory. These grievance mechanisms have been publicly disclosed as part of disclosure of the safeguards documents. Each SPPP sponsor has also conducted consultation with project affected people to ensure that they are aware of the project, compensation mechanism and the set grievance mechanism. During the power plant construction phase, GET FiT Secretariat will conduct semiannual supervision to review whether the SPPPs are maintaining the World Bank Performance Standards on environment, social, health and safety issues. In addition to the scheduled semiannual supervisions, the Bank and the Secretariat agreed to offer a dedicated communication channel to the project stakeholders, through which the Bank and the Secretariat could be contacted and informed immediately of any relevant issues related to the projects. The GET FiT Secretariat has updated its official website in this regard by including Secretariat and Bank relevant contact details so that any aggrieved party may raise issues with the Secretariat and the Bank. When the Bank is informed of any specific issue by an aggrieved party, the Bank will address the situation through the remedies provided to it under the Agreements supporting the proposed guarantee program. B. Results Monitoring and Evaluation 64. The GET FiT Secretariat will carry out semiannual supervision and monitoring, and prepare progress reports on the status of each project, supported under the program. The MoU entered into by the legal entities supporting the GET FiT Secretariat (namely, the GoU represented by KfW and the consultant being hired to staff and run the Secretariat) creates the conditions for sharing the GET FiT Secretariat s semiannual progress report with IDA. The Bank will also receive reports under its Project Agreements with each of the SPPPs. 16

26 65. In addition, UETCL prepares detailed annual reports describing the supply and demand situation of its network, along with information regarding dispatching of individual power plants and their average cost of production. The key project performance indicators on the amount and cost of electricity generated by each project will be therefore provided as part of UETCL s normal reporting procedures. Detailed information can be made available from SPPPs and UETCL on the basis of PPA invoicing and payment records which the parties will be requested to share with IDA. IDA s Indemnity Agreement with the GoU would create the conditions for sharing of UETCL s information with IDA. The Project Agreements to be entered into by IDA with each of the SPPPs will contain separate reporting obligations from each SPPP to IDA. C. Sustainability 66. The GoU has demonstrated its strong commitment to develop the renewable energy potential of the country under arrangements that will enhance project efficiency and costeffectiveness. Aside from its strategy to develop the potential of the Nile River, the GoU has also clearly stated its strategy to develop decentralized supply for accelerated access of rural population of Uganda to electricity. Developing the small power plants under the proposed IDA PRG will take the GoU one step closer towards achieving this goal. This decentralized generation will reduce Uganda s dependence on the Nile River and will increase its power supply reliability. 67. To reduce the revenue risk of these small hydropower projects, GoU has offered to compensate the SPPPs for the deemed energy 6. Through the deemed energy clause, the GoU is not only reducing the sponsors revenue risk but is also incentivizing its offtaker to maintain industry standards on routine maintenance and breakdown management. When the large power plants are commissioned, GoU will also have to manage its surplus capacity either through long term export contracts with neighboring countries or allow the SPPPs to sell directly to large customers or to mini grids. The SPPPs should also include in their project feasibility the risk of curtailments, if any. 68. The ERA introduced a multi-year tariff with automatic adjustment on January 16, This multi-year tariff will remain in effect for three years, and would be automatically adjusted in every quarter based on fluctuations in the cost of fuel, exchange rate, etc. The Tariff Order reduced the average retail tariff by one percent from its previous level. Demonstrating the impact of retiring emergency generators and electricity generation from Bujagali hydropower plant. The renewable energy projects that would be supported under the proposed guarantee operation will also reduce the cost of electricity generation in Uganda and will make the sector creditworthy and sustainable in the long run. 69. By supporting the development of these hydropower projects, the World Bank PRG program will support the GoU strategy and contribute to the sustainability and transparency in the sector. 6 As per the deemed energy clause provided in the Power Purchase Agreement (PPA), if after commissioning, the SPPP is prevented from delivering electricity to UETCL then the SPPP will be compensated for the energy that it could have delivered, after adjusting for certain provisions of the clause. 17

27 D. Partial Risk Guarantee conditions and covenants 70. As in other guarantee operations, IDA PRG arrangements will be set forth in the following principal documents: Guarantee Agreement between IDA and L/C Bank and/or commercial lenders; Project Agreements between IDA and each of the SPPPs; and Indemnity Agreement between IDA and the Republic of Uganda. 71. Guarantee Agreement. In addition to standard guarantee provisions, this agreement will contain the obligation of IDA to make payment following the occurrence of certain guaranteed events (as further described in Annexes 8 and 9). 72. Project Agreement. The Project Agreements will contain standard warranties, representations and covenanted undertakings for guarantees (and relevant remedies), including that each of the SPPPs will: (a) execute the Project so as to comply with all of its material obligations under the transaction documents, including the relevant environmental and social requirements consistent with applicable World Bank Policies; (b) to provide certain information to IDA, including annual financial statements; and (c) not to engage in corrupt practices, fraudulent practices, coercive practices, collusive practices and obstructive practices in connection with the Project. 73. Indemnity Agreement. Under this Agreement, the Republic of Uganda will agree: (a) to reimburse IDA immediately on demand or as IDA may otherwise direct in writing for any amount paid by IDA under the IDA Guarantee Agreement together with interest thereon; and (b) to indemnify IDA on demand for all losses, damages, costs, expenses etc. incurred by IDA in relation to or arising out of the Guarantee Agreement. 74. Fee Structure. There is no Commitment Fee currently applicable to IDA PRGs. GoU is not required to pay Guarantee Fees. Only the SPPPs will pay Guarantee Fees as per the terms of the Project Agreements upon effectiveness. There will also be one-time Initiating Fee and onetime Processing Fee payable only on effective guaranteed amounts by the SPPPs. GoU/UETCL will only pay their share of L/C Fees if the full L/C Fee is not assumed by the SPPP. The level of L/C Fee to be paid by GoU/UETCL will be agreed to in the PRG Support Agreement. 75. The proposed IDA Guarantee structures are set forth in more detail in Annexes 3, 8 and 9. 18

28 V. KEY RISKS AND MITIGATION MEASURES A. Risk Rating Summary Table 3: Risk Rating Summary Risk Stakeholder Risk Implementing Agency Risk - Capacity S - Governance M Project Risk - Design M - Social and Environmental M - Program and Donor L - Delivery Monitoring and Sustainability M Rating L - Financial Viability S Overall Implementation Risk S B. Overall Risk Rating Explanation 76. The overall risk rating of the operation is Substantial. The major risk under this operation is the financial viability of the electricity off-taker. To mitigate this risk to the SPPP sponsors, the proposed IDA PRGs are being designed. Related to this payment risk is also the performance and status of the private distribution concessionaire, Umeme Ltd., who represents the main source of revenue to UETCL. Umeme Ltd. recently filed a dispute resolution with the Electricity Tribunal in Uganda. An unresolved dispute could lead to an international arbitration proceeding, which may have an impact on Umeme s daily operation, leading to negative impact on UETCL s revenue inflows received from Umeme Ltd. The Bank is closely monitoring the situation. A more detailed description of risks can be found in Annex 5. VI. APPRAISAL SUMMARY A. Economic and financial analyses Sector Economic and Financial Situation: 77. Based on the least cost expansion plan, Uganda s cost of generation is estimated at US$ 0.09/kWh in 2013, increases to US$ 0.16/kWh in 2019 and decreases to US$ 0.11/kWh from The REFiT approved by ERA provides US$ 0.085/kWh for hydro projects of 9 20 MW and US$ /kWh for hydro projects of 1 8 MW. Hence, cost of hydropower based SPPPs contracted under the REFiT program will remain below the Levelized Cost of Energy (LCOE) price and will be economically beneficial for Uganda. 78. ERA has adjusted the retail electricity tariff to about US$ 0.20/kWh in January 2012, almost double from 2011 (US$ 0.12/kWh), and slightly reduced the retail tariff by 1 percent with introduction of automatic adjustment mechanism to reflect fuel cost and 19

29 exchange variations in January 2014 (520.6 Ush/kWh by domestic consumer). The Bulk Supply Tariff (BST) was also adjusted to reflect UETCL s power purchase costs. UETCL achieved net profit of about US$ 1.6 million in FY However, UETCL had a margin of US$ 0.004/kWh, which was not high enough to improve its operational and financial performance to be out from capital impairment that UETCL has been experiencing since Given that hydro based SPPPs of 1 20 MW have a feed in tariff lower than UETCL s current average power purchase cost, these projects are expected to improve the financial performance of UETCL. The GET FiT premium will be paid directly to the SPPP sponsors and will not affect UETCL s cost of power purchases. 79. The financial performance projection of UETCL provided in Annex 6 shows that UETCL can reduce its operating cost in by introducing the SPPPs. Assuming the same level of adjusted investment program and same tariff regime over this period, UETCL can improve its financial performance by introducing the low cost small renewable energy projects and avoiding the expensive thermal power plants. IDA Supported Projects Economic and Financial Analysis: Nyamwamba Hydro Power Plant (9.2 MW) 80. The Nyamwamba Hydropower Plant (NSHP) is promoted by Africa EMS Nyamwamba Ltd. and its shareholder SAEMS Capital I B.V (Curacao - Netherland Antilles). SAEMS Capital I B.V. is a Curacao - Netherland Antilles based corporation, which was incorporated in 2008, and is a wholly-owned subsidiary of South Asia Energy Management Systems LLC (SAEMS, Delaware). The shareholders of this company are Asia Energy Management Systems LLC (Asia EMS) and Africa Energy Management Systems LLC (Africa EMS). SAEMS owns and operates 10 small hydropower plants in Sri Lanka, with a total installed capacity of 37.1 MW, and an 18 MW Mpanga small hydropower plant in Uganda. 81. The Consolidated Financial Statements of the shareholder SAEMS Capital I B.V. dated 31st of March 2012 show assets of US$ 87.5 million and liabilities of US$ 61.3 million, resulting in equity of US$ 26.2 million with equity ratio of 29.9 percent. Revenues were US$12.2 million in that fiscal year, which closed with losses of US$9.4 million mainly due to FOREX accounting losses. Although the assets consist mainly of fixed assets and the accounted cash of US$8 million in the consolidated balance sheet may be distributed over quite a number of subsidiaries, the company seems to be in a position to make the equity contribution of US$8.1 million (30 percent of investment cost). 82. Unit investment cost per MW of NSHP would be about US$2.9 million, a figure which can be considered adequate for a plant of this size. With an average load factor of only 45.2 percent, the 9.2 MW plant would generate annually 36,428 MWh annually. This would result in annual electricity revenues of US$2.8 million with the original REFiT tariffs without the GET FiT premium. The operating surplus would be about US$ 1.9 million. The total GET FiT premium payments would be US$7.6 million, of which US$ 3.2 million would be due on start of the operation. Based on the standard REFiT tariff, and including the GET FiT premium, the financial internal rate of return (FIRR) would be 9.8 percent. With a discount rate of 10 percent, this results in a negative NPV (US$297,000). The Nyamwamba project sponsors prepared their 20

30 financial analysis using cost escalation, while other similar projects used stable operation and maintenance costs. Revising the financial analysis assuming a scenario of stable operation and maintenance cost, the FIRR of the project is 10.3 percent. Given that NSHP has been able to secure financing for the project at 6 percent interest, the project will benefit the sponsors. Lubilia Small Hydropower Plant (5.4 MW) 83. The Lubilia Small Hydropower Plant (LSHP) is developed by Lubilia Kawembe Hydro Ltd., with its new major shareholder DI Frontier Market Energy and Carbon Fund (DI Frontier). DI Frontier is a Denmark-based investment fund for renewable energy and carbon credit generating assets in Sub-Sahara Africa (SSA). The application indicates that DI Frontier owns 85 percent of the shares, while 15 percent shares are owned by previously existing shareholders. The latter include CaCl Consulting (owned 100 percent by Cletus Serwanga), which was promoter of the project, and Catherine Serwanga. 84. The required investment cost per MW of US$2.6 million is considered reasonable for a plant this size. With an average load factor of only 47.2 percent the 5.4 MW plant would generate annually GWh annually. This would result in revenues of US$ 1.9 million without the GET FiT premium and an operating surplus of US$1.4 million. The total GET FiT premium payments would be roughly US$4.5 million, of which US$1.9 million would be due on start of operation. The financial internal rate of return (FIRR) would be 12.8 percent. The net present value at a discount rate of 10 percent would be US$2.2 million. As the sponsor is expecting to secure its financing at 7.5 percent interest, the project is considered beneficial to the sponsor. Rwimi Small Hydropower Plant (5.5 MW) 85. The Rwimi Small Hydropower Plan (RSHP) is developed by Eco Power Holdings Limited (EPH-L) from Sri Lanka, which was incorporated in 2004 and opened a branch in Uganda in The majority shareholder, MetroCorp PVT (Ltd.), is an investment company in Sri Lanka, with diversified interests in many sectors such as tea plantations, power, and telecommunications. It should be noted that the company received some mezzanine financing from NORFUND. Together with its fully owned subsidiaries such as Eco Power PVT (Ltd), and Eco Power Global (Ltd), EPH-L owns more than ten small hydropower (SHP) plants with a combined capacity of 35M. These include the 6.6 MW Ishasha SHP in Uganda. 86. The Consolidated Financial Statements dated March 31 st, 2012 show assets of US$59.7 million and equity of US$23.3 million with equity ratio of 39.1 percent. Revenues of the holding were US$13.3 million in that fiscal year, which closed with profits of US$2.2 million (profit margin 20.5 percent). The assets consist mainly of fixed assets and the accounted cash of US$2.7 million in the consolidated balance sheet may be distributed over quite a number of subsidiaries. The balance sheet of 2012 did not indicate enough liquid reserves or financial investment means for the RSHP equity of about US$5.8 million. 87. The investment cost per MW of US$3.8 million is considered high for hydropower plant of this size. With an average load factor of 55.6 percent the 5.5MW plant would generate annually GWh annually. This would result in revenues of US$2.4 million before the GET 21

31 FiT premium. The operating surplus would be about US$1.9 million. The total GET FiT premium payments would be US$5.6 million, of which US$2.4 million would be due at the start of operations. Based on the standard REFiT tariff, the financial internal rate of return (FIRR) would be 11 percent. With a discount rate of 10 percent this results in a rather low NPV of US$ 1.4 million. The sponsor is planning to secure its financing at 6.5 percent interest cost and hence the project seems beneficial to the sponsor. B. Technical Nyamwamba Small Hydropower Plant (9.2 MW) 88. The proposed Nyamwamba Small Hydropower Plant (NSHP) is a run of river hydropower project located on the river Nyamwamba that runs through Kilembe village in south western Uganda. The NSHP has a planned installed capacity of 9.2MW and an expected annual energy output of 36.4 GWh. The intake weir is small (4.5 meter maximum height) and simple. The side Tyrolean intake design is acceptable. The major flood that occurred in May 2013 led to changes in the definition of the dam axis. The proposed revised design appears reasonable. The sponsor has been requested to finalize a construction schedule based on the actual progress of the development and a realistic procurement process. With this adjustment, the Nyamwamba project is ready to move forward. Lubilia Small Hydropower Plant (5.4 MW): 89. The proposed Lubilia Small Hydropower Plant (LSHP), which is a run-of-a-river development includes a power station with an installed capacity of 5.4 MW and an annual output of 21.3 GWh. The weir is small (6 meters) and simple. The side intake design is acceptable. The rock condition at the weir site is well known. The information on the grouting needed to ensure water tightness of the weir foundation will be provided in a later stage. The plant will use two Pelton turbines, which seems appropriate. The construction schedule is ambitious but feasible. The tendering for the EPC contract has been launched and the award of the contract is expected after signing the PPA and IA. 90. The sponsor will carry out the following before starting power plant construction: (i) refine the hydrological analysis; (ii) revisit the calculation of the annual output and on the optimization of the power plant capacity; (iii) review the cost estimate to integrate the EPC project management and engineering costs; (iv) review the construction schedule based on the actual progress of the development and a realistic procurement process; and (v) review the catchment yield before finalizing the project design. With the above provisions satisfied, the Lubilia project will be ready to move forward. Rwimi Small Hydropower Plant (5.5 MW) (RSHP) 91. The Rwimi SHP (RSHP) is a run-of-a-river hydropower project that is located on the river Rwimi is south western Uganda. The RSHP has a planned installed capacity of 5.5MW and an expected annual energy output of 26.8GWh. The Rwimi SHPP will be comprised of a 14.5 meter high weir intake; 1,810 meter headrace pipe; surge tower, 1,237 meter penstock and a surface power house with two Francis turbines. The gross head is estimated at 93 meter and the project is planned with a design discharge of 8.0m 3 /s. 22

32 92. Hydrology has been studied based on the observation of rainfall in the area of the project, with only a single rain gauge available in the watershed. Geological assessment is based on field observations with no detailed site investigations. The project will include a 14.5 meter dam and the sponsor has to investigate the following to finalize the project design: (i) how the dam will be constructed; (ii) river diversion; and (iii) the flood to take into account for the construction, etc. 93. The sponsor has been requested to: (i) perform the minimum number of site investigations to support the design (topography, geology, hydrology); (ii) refine the hydrological analysis; (iii) provide details on the calculation of the annual output and on the optimization of the power plant capacity; (iv) prepare a full feasibility design for the overall scheme; (v) review the operation safety and analyze the opportunity to install a head gate at the upper end of the penstock; (vi) prepare the cost estimate; and (vii) review the construction schedule based on the actual progress of the development and a realistic procurement process to finalize the project design. 94. The Rwimi project still needs significant work before it is ready to move forward. The Bank will review its final project design and construction schedule after it has been revised incorporating the above suggestions. Grid Interconnection 95. All power plants supported under the program will be connected with the grid network. GoU has informed the Bank that projects within 5 km of the transmission network will have to construct the transmission network at their own cost. Projects more than 5 km away from transmission network will have to confirm that the project would be economically viable including cost of interconnection. In case the project is viable, the sponsor will have to construct the interconnection, and GoU will reimburse the cost to the sponsor. In both scenarios, the transmission line will be handed over to UETCL for maintenance and operation. Hence the construction of the grid interconnection will have to follow UETCL technical standard specifications. 96. GoU/UETCL is well experienced on the above grid interconnection model. Several SPPPs currently operating in Uganda followed the same approach to connect to UETCL network. The SPPP sponsors support this approach though it requires them to raise additional investment capital for the construction of the grid interconnector, as it reduces the risk of stranded assets (power plants) due to delay in construction of the transmission line. Detail design of the transmission line and its route will be determined in consultation with UETCL after the SPPPs sign the PPA and IA. C. Fiduciary 97. Procurement Management: For IDA supported guarantee programs, the Bank s procurement guidelines require that goods and services be procured by project sponsors with due regard to economy and efficiency. Procurement under the proposed IDA PRG program will be conducted by the individual project sponsors. The main contracts expected to benefit indirectly from the guarantees are those for construction primarily of dams and associated supervision. The 23

33 procurement will follow private sector commercial practices. The Bank shall therefore review each of the applicants in order to assess whether the procurement will be or has been conducted with due regard to economy and efficiency and specifically that the selected contractor will have adequate resources and qualifications to perform the contract. 98. To minimize transaction costs for the sponsors, the Bank and GoU are cooperating to create an enabling environment for the SPPP investors. As part of this endeavor, the Bank and the GET FiT Secretariat have aligned their project selection methodology. For projects applying to both GET FiT and IDA, the Bank will review the information provided to the Secretariat and has in this regard revised the GET FiT application templates to provide information on the procurement of contractors and service providers. Applicants will be required to demonstrate how they will conduct their procurement in a manner that results in economy and efficiency in procurement. SPPPs that will only apply for IDA support will directly interact with the Bank to provide the necessary due diligence information. 99. The Bank reviewed the procurement arrangements for the initial projects proposed to benefit under the program. These projects are: (i) Nyamwamba Small Hydropower Plant (9.2 MW), (ii) Lubilia Small Hydropower Plant (5.4 MW), and (iii) Rwimi I Small Hydropower Plant (5.5 MW). Appraisals of procurement arrangements for these three projects confirm that the sponsors have followed competitive procedures to select their contractors. Two of the selected sponsors are well experienced in developing small hydropower projects; the third one has selected qualified owner s engineers to support the sponsor in project design and supervision. The approach followed by the three sponsors ensures that efficiency and economy would be ensured under the proposed operation. The procurement management assessment is provided in Annex Financial Management: Since the proposed program is a series of IDA PRGs, there are no disbursements anticipated to the responsible entity UETCL; hence the fiduciary role of ensuring that funds are used for intended purposes as in Investment Lending operations is minimal. However, for the PRGs supporting the payment guarantees/lcs to be issued on behalf of UETCL and GoU, UETCL will be opening a Letter of Credit facility with a commercial bank and IDA PRG will cover the L/C repayment by UETCL/GoU to that commercial bank, in case of a L/C draw. For PRGs in support of debt service, a commercial bank will receive a partial debt repayment guarantee from the SPPP sponsor, based on timely payment by UETCL to the SPPP Assessment of the selected three sponsors shows that two experienced project companies have satisfactory financial track records and experience in similar or bigger hydropower plant businesses in Uganda and other countries. They were assessed with appropriate books of accounts and reports prepared under IFRS, audited financial statements by reputable firms and well established shareholders abroad. The third company still does not have its accounts audited as it is still to complete one full year. This company is being sponsored by a Danish based investment fund which is audited by reputable audit firms. All project companies will enter into a Project Agreement with IDA confirming their obligation to maintain the Bank s required financial management standards in order to make its PRG effective and operational. 24

34 D. Social 102. The Bank reviewed a first batch of twelve small hydropower projects that requested IDA PRG support. After initial screening, the Bank visited eight hydropower project sites to assess the readiness of the projects and accordingly selected three projects to be appraised under this proposed series of IDA PRG The appraisal of a substantial number of small projects may lead to significant transaction costs to the Bank. To help reduce these costs with respect to social and environmental issues, the Bank proposes, in carrying out its appraisals, to draw upon information that the GET FiT Secretariat has gathered for its own appraisal of projects following the World Bank Performance Standards. The Bank has assessed the quality and completeness of the information gathered by GET FiT for the first three projects, and considers it sufficiently accurate and thorough to rely upon for appraisal purposes. In particular, the ESIAs and RAPs for the three projects that have been reviewed by the Bank Regional Safeguards Advisor and the Task Team Safeguards Specialists made it easier to validate the reports of GET FiT Secretariat. The Bank has disclosed the Environmental and Social Review Summaries (ESRSs) for the three SPPPs. The Bank and the GET FiT Secretariat have agreed that the GET FiT Secretariat will provide pertinent information for the appraisal of all future projects, to be supplemented or verified as the Bank considers necessary for the completion of its due diligence. This arrangement, if followed, will ensure coordination and consistency of review of each project to receive the GET FiT premium and to determine eligibility for the IDA PRG program The three selected hydropower projects aim to generate electricity and sell it to UETCL, helping GoU meet its electricity demand. The project sponsors have agreed to ensure that during this development process any environmental and social adverse impacts on the communities living within the project areas will be adequately addressed. The proposed IDA PRG program requires its beneficiaries to comply with the World Bank Performance Standards as set forth in the new Operational Policy (OP) and Bank Procedure (BP) 4.03; as the projects in the pipeline are designed, owned, constructed and/or operated by private entities. The objective is to facilitate Bank support for private sector-led projects by applying environmental and social policy standards that are better suited to the private sector The Environment and Social Impact Assessments (ESIAs), Environmental & Social Action Plans (ESAP), Livelihood Restoration Plans (LRP) and Resettlement Action Plans (RAPs) prepared by the three sponsors do not indicate any major dislocation of communities and/or loss of livelihood and services. There will be minor loss of land and relocation of 2 permanent homes in one project. The other two will only result in loss of partial land and mostly temporary during the construction period. These will be addressed as per the LRPs and RAPs. The major common challenges faced by these three projects are: access road to the weir and power house site, high expectation of project affected villages for access to electricity, additional schools, markets and roads despite the fact that none of the communities will receive power directly from the projects. Performance Standards (PS) 1 & 5 are relevant for all three projects. The ESRS of the three projects were disclosed in Bank s Infoshop on February 6,

35 106. The ESIA, ESAP, LRP and RAP of each SPPP grid interconnection will be prepared by the respective SPPP sponsor after they sign the PPA and IA. Preparation of these safeguards documents will follow the same Performance Standards as was followed for the power plants. These safeguards documents, after reviewed and approved by the Bank, will be publicly disclosed by the sponsors at least one month prior to start construction of the transmission line The beneficiaries of the proposed series of IDA PRGs will be private companies and their institutional capacities have been assessed and found in general to be satisfactory. This due diligence is summarized in the ESRSs of each SPPP. Identified gaps to ensure compliance with the Performance Standards are reflected in the ESRS along with an agreed action plan for the sponsors to undertake to become eligible for the proposed IDA PRG The beneficiary companies will operate under the established Ugandan institutional, legal and regulatory framework for environmental and social management. This framework is broadly considered consistent with generally accepted global practice, although its application varies and is affected by limited institutional capacity. However, the framework has been applied extensively for large and small hydropower development. The summary of the three projects environmental issues and their management in compliance with the PSs is as follows. A detailed description is provided in Annex 7. Nyamwamba Small Hydropower Plant (NSHP): 109. The most critical social impact identified in the ESIA is the land acquisition and the resultant impact on livelihoods of those depending on agriculture. The number of potentially affected families whose lands will be impacted due to the project structures will be around 92 (ninety two). The construction of facilities is estimated to require a total of around 7.5 hectare of land, this is a collective total of very small parcels of cultivable land from the front yards of households, mostly temporary, to lay down the 2 km penstock pipe from the weir to the powerhouse, mostly buried below ground. The relocation of homes will only be required for 2 permanent houses and potentially two semi- permanent along the fore-bay area and the penstock path. Several households will be temporarily affected during the construction period by way of loss of compounds, toilet pits, play area, etc., which can be replaced On the positive side, during the construction phase, the project will contribute to increased money circulation in the local area. This may arise from construction related procurement of local materials, payment of wages and salaries to the employees and spending by expatriate work population which eventually can contribute to the local vendors and thereby the local economy. The construction phase will result in creation of job opportunities to the local unskilled, semi-skilled as well as skilled persons in the community and can result in capacity development through transfer of technology The Environmental and Social Impact Assessment (ESIA) was approved by National Environment Management Authority (NEMA) in September The ESIA is the main source document which outlines strategies to mitigate the likely environmental and social impacts. Since the NEMA clearance of the ESIA, the project area has been hit by a severe flood resulting in the design change in response to the flooding. It should also be noted that the 26

36 proposed NSHP is smaller than the 14 MW facility envisaged in the original ESIA. The sponsor will be updating the environment and social documents to reflect the changes due to flooding. In the meantime, the World Bank has undertaken environmental and social due diligence to check any major changes to the assessed impacts, and confirmed that there have been no major changes NSHP as part of its Environmental and Social Action Plan (ESAP) has agreed to the following: a. Update the existing ESIA and RAP for Nyamwamba prior to the effectiveness date of the PRG Support Agreement, reflecting the revised baseline and any other socio-economic changes, and will include the impacts of workers camps, storage areas, and material source points such as quarries b. Based on the updated ESIA, revise the ESMP to reflect changes that may have occurred in the past three years. c. Prepare an Emergency Preparedness and Response plan and communicate in advance to the project affected and adjacent communities. d. Prepare the updated RAP through a consultative process to provide another opportunity for stakeholder and public comment on the project. e. The updated RAP should seek clarity on the unsettled claim of the PAPs on the land now owned by the Kilembe Mines, which is to be acquired by the project. The RAP consultation identified a potential conflict between the right of ownership between the PAPs and the Kilembe Mines Ltd (KML), a Government parastatal with 99 percent ownership. Kilembe mines subleased this land for 99 years from 1954 to 2050 with a hope of mining copper. However, this came to a halt in late 1970s when the copper mining was stopped. This has been obtained by the developer on a sublease basis. The RAP will clarify this issue with the community and KML. f. Set up an Environmental Management Unit (EMU) with clear roles and responsibilities, relevant expertise including a community relations manager and assign a sufficient budget to manage the E&S tasks and community relations satisfactorily. Lubilia Small Hydropower Plant (LSHP): 113. The assessment of the project does not indicate any major permanent adverse social impacts, though the project will result in temporary dislocation of communities and loss of livelihood. The ESIA and RAP adequately identifies the social and environmental impacts. Permanent land take will result from the construction of the project infrastructure including the weir, headrace, penstock, powerhouse and the access road. Some land will be acquired temporarily for purposes of constructing workers camps. Land take will lead to loss of crops along the headrace, penstock and access roads and around the powerhouse area and workers construction camp. However, the project footprint is relatively small due to the nature and small scale of this project. 27

37 114. It is estimated that 83 households will be affected by the project through land take; in addition, there are 10 graves in the area affected by the project. Seven of these graves are located in the proposed access roads alignment, while the rest are along the canal. The graves in the access roads may be bypassed by slightly changing the access road alignment. The graves that cannot be bypassed will be relocated. The area includes a cultural site on the river where Bakhonzo traditionalists practice their rituals The access roads are expected to improve villagers access to the river, which is difficult due to steep terrain. Based on the public consultations carried out for the ESIA, continued access to the river which serves as a prominent water supply, as well as to water springs like the Busyangwa protected spring near the proposed conveyance canal, is of considerable importance to the affected communities. The access will be provided for in the ESMP proposed by the developer Overall, the project s environmental and social impacts are typical for small hydraulic and civil works in rural setting, and can be adequately managed according to the Environmental and Social Management Plan (ESMP) which has been prepared by the project sponsor as a part of the ESIA drawing on the World Bank Group Environmental, Health and Safety Guidelines. The Sponsor has agreed to undertake the following Action Plan: a. The sponsor will finalize and share its business plan to manage the Environmental and Social Impacts prior to the effectiveness date of the PRG Support Agreement. b. Prepare an Emergency Preparedness and Response plan and communicate in advance to the project affected and adjacent communities. Rwimi Small Hydropower Plant (RSHP): 117. The assessment of the project does not indicate any major permanent adverse environment and social impacts, though the project will result in temporary dislocation of communities and loss of livelihood. The major challenge faced by the project is access road to the weir and power house site, and the high expectation of project affected villagers to receive electricity. The sponsor has acquired 8.75 hectares for the access road and has paid compensation to 94 households (though none of the households had to be resettled) the identified site impacts small sections of the cultivable land resulting in crop loss compensation to about 94 households. The access road identified in the technical design is not the ideal location for the access road and will require a more appropriate site. The three options for access road presented by the sponsor will result in acquisition of additional land, displacement of homes and services requiring an update of the RAP In general, the ESIA and ESMP appropriately identify impacts and provide mitigation strategies. The project documentation largely meets the World Bank Performance Standards and the identified gaps would be closed by guarantee effectiveness. The sponsor has agreed to prepare an Emergency Preparedness and Response Plan and communicate in advance to the project affected and adjacent communities. 28

38 E. Environment 119. Environmental issues of the project relate to development or re-development of three small, run-of-the-river (ROR) hydropower schemes: Nyamwamba, Lubilia and Rwimi, described below. The projects are scattered at promising hydropower sites throughout Uganda; all are located in sparsely populated rural landscape that has been modified by extensive use. Environmental and social due diligence had been guided by the Performance Standards for Private Sector Activities (PS) all of which except PS7 (Indigenous Peoples) are relevant to the project, together with OP 7.50 on International Waterways. In addition, the projects are developed to comply with the Ugandan environmental and other regulations. The existing projects ESIAs, ESMPs, RAPs have been reviewed by the Bank and the sponsors either incorporated Bank s comments in the revised safeguards documents or in their Environment and Social Action Plan (ESAP) Climate change risks to the proposed operation are not considered significant. First, most global circulation models agree that Uganda climate is becoming wetter (and hotter). The models do not show likelihood of drying scenarios that could threaten the viability of the small hydro projects in the foreseeable future during the PPA life time of 20 years each project. Second, risks from climate variability (greater run-off extremes) can be addressed through the design of the small hydropower facilities. Third, diversification of power supply from large hydropower is almost exclusively based on the releases from Lake Victoria through the Nile to a more balanced mix of large and small hydro may actually reduce the vulnerability of Uganda s hydropower generation to Lake Victoria water levels. F. Safeguard policies 121. The proposed IDA PRG program is being prepared for a pipeline of projects to comply with the World Bank Performance Standards as set forth in the new Operational Policy (OP) and Bank Procedure (BP) 4.03 as the projects in the pipeline are designed, owned, constructed and operated by private entities. The aim is to facilitate Bank support for private sector-led projects by applying environmental and social policy standards that are better suited to the private sector. 29

39 Table 4: Performance Standards Relevant to the Program Performance Standards Yes No PS 1: Assessment and Management of Environmental and Social X Risks and Impacts PS 2: Labor and Working Conditions X PS 3: Resource Efficiency and Pollution Prevention X PS 4: Community Health, Safety, and Security X PS 5: Land Acquisition and Involuntary Resettlement X PS 6: Biodiversity Conservation and Sustainable Management of X Living Natural Resources PS 7: Indigenous Peoples X PS 8: Cultural Heritage X 122. The beneficiary companies will operate under the established Ugandan institutional, legal and regulatory framework for environmental and social management. This framework is broadly considered designed consistently with generally accepted global practice, although its application varies and is affected by limited institutional capacity and political commitment. However, the framework has been applied extensively for large and small hydropower development All three projects sponsors will require additional human resources to respond to the environmental and social issues and to manage community and welfare concerns and expectations. This will require sponsors of the three projects to strengthen the roles and positions within their management structure, especially on-site, to manage the environmental and social impacts and community relations, and put in place the appropriate staff before the construction phase begins to mitigate and/or deal with any environmental, health and community issues arising during the project s construction phase In addition to applying OP 4.03 on Performance Standards (PS) for Private Sector Activities, the proposed IDA PRG operation triggers OP 7.50 on International Waterways. While no projects are expected to have significant adverse impacts on quality or flow of water in the international waterways, a riparian notification was issued by the Bank on behalf of the project sponsors and the GoU on January 15, Following the prevalent regulatory practice in Uganda, the projects provide for minimum ecological flow (reserve flow, environmental flow) by allocating 10 percent of low season flow as the minimum flow to be maintained at all times. G. Policy Exceptions and Readiness 126. The project does not require policy exceptions. 30

40 Annex 1: Results Framework and Monitoring UGANDA: IDA Partial Risk Guarantee for Renewable Energy Development Program Project Development Objective (PDO): The Program Development Objective is to increase electricity generation capacity of Uganda through renewable energy based small private power producers (SPPPs). Unit of PDO Level Results Indicators Measure Baseline Cumulative Target Values Responsibility Description Data Source/ Frequency for Data (indicator YR 1 YR 2 YR3 YR 4 YR5 Methodology Collection definition etc.) Core Indicator 1: Power plants supported # Semi Annual Indicator 2: Hydropower generation capacity constructed under the project Indicator 3: Other renewable energy (solar/ other) generation capacity constructed under the project Indicator 4: Private capital mobilized MW Semi Annual MW Semi Annual US$ Million Semi Annual INTERMEDIATE RESULTS GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL Commercial banks involved # Semi Annual Intermediate Result (Sub-Component 1): Measured for each SPPP separately Physical Implementation progress 0 30% 100% 100% 100% 100% Semi Annual Incremental investment % Eq/Dt $M 0% 0/0 30% _/_ 100% _/_ 100% _/_ 100% _/_ 100% _/_ Semi Annual Commissioning test completed (Y/N) 0 N Y Y Y Y Semi Annual GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL 31

41 PDO Level Results Indicators Core Intermediate Result (Sub-Component 2) : Measured for each SPPP separately Unit of Measure Baseline Cumulative Target Values Frequency Data Source/ Methodology Physical Implementation progress 0 0% 40% 100% 100% 100% Semi Annual Incremental investment % Eq/Dt $M 0% 0/0 0% 0/0 40% _/_ 100% _/_ 100% _/_ 100% _/_ Semi Annual Commissioning test completed (Y/N) 0 N N Y Y Y Semi Annual Intermediate Result (Sub Component 3) : Measured for each SPPP separately Physical Implementation progress 0 0% 20% 70% 100% 100% Semi Annual Incremental investment % Eq/Dt $M 0% 0/0 0% 0/0 20% _/_ 70% _/_ 100% _/_ 100% _/_ Semi Annual Commissioning test completed (Y/N) 0 N N N Y Y Semi Annual Intermediate Result (Sub-Component 4): : Measured for each SPPP separately Physical Implementation progress 0 0% 0% 30% 100% 100% Semi Annual Incremental investment % Eq/Dt $M 0% 0/0 0% 0/0 0% 0/0 30% _/_ 100% _/_ 100% _/_ Semi Annual Commissioning test completed (Y/N) 0 N N N Y Y Semi Annual GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL Responsibility for Data Collection GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL Description (indicator definition etc.) 32

42 PDO Level Results Indicators Core Unit of Measure Baseline Cumulative Target Values Frequency Data Source/ Methodology Intermediate Result (Sub-Component 5): : Measured for each SPPP separately Physical Implementation progress 0 0% 0% 0% 30% 100% Semi Annual Incremental investment % Eq/Dt $M 0% 0/0 0% 0/0 0% 0/0 0% 0/0 30% _/_ 100% _/_ Semi Annual Commissioning test completed (Y/N) 0 N N N N Y Semi Annual Intermediate Result (Sub-Component 6): : Measured for each SPPP separately Physical Implementation progress 0 0% 0% 0% 30% 100% Semi Annual Incremental investment % Eq/Dt $M 0% 0/0 0% 0/0 0% 0/0 0% 0/0 30% _/_ 100% _/_ Semi Annual Commissioning test completed (Y/N) 0 N N N N Y Semi Annual Intermediate Result (Sub-Component 7): : Measured for each SPPP separately Physical Implementation progress 0 0% 0% 0% 30% 100% Semi Annual Incremental investment % Eq/Dt $M 0% 0/0 0% 0/0 0% 0/0 0% 0/0 30% _/_ 100% _/_ Semi Annual Commissioning test completed (Y/N) 0 N N N N Y Semi Annual GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL Responsibility for Data Collection GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL GET FiT Secretariat/ UETCL Description (indicator definition etc.) 33

43 Annex 2: Country Sector and Program Background UGANDA: Series of IDA Partial Risk Guarantees for Renewable Energy Development Program Country Context 1. Uganda s recent economic growth has enabled substantial poverty reduction and led to progress toward achieving the Millennium Development Goals (MDGs). Real Gross Domestic Product (GDP) growth has averaged around four percent over the past two decades due to rapid population growth. Uganda has surpassed the 2015 MDG of halving the 56 percent poverty rate recorded in it declined to 24.5 percent by GDP growth accelerated from an average of 6.5 percent per year in the 1990s to over 7 percent during the 2000s. Growth remained well above the Sub-Saharan Africa average in the face of consecutive exogenous shocks, including the secondary effects of the global economic crisis, bad weather and surges in international commodity prices. Since FY2009/10, a combination of exogenous shocks and domestic factors reduced economic activity down to below historical levels. Subdued export performance, reduction in aid flows, high inflation and subsequent tightening of monetary policy to restore macroeconomic stability, reduced GDP growth to 3.2 percent in FY 2011/12, compared to 6.7 percent in FY 2010/11. In FY13, growth rose to 5.8 percent as a result of fiscal and monetary adjustments. 2. Like any other rapidly growing developing country, Uganda requires an adequate and reliable electricity supply for sustainable growth and development. Access to electricity enhances socioeconomic development through better access to education, health care, improved income opportunities, and security. Electricity can also facilitate the development of small and medium scale enterprises (SME) and provides added incentives for larger-scale industrial and commercial investment. Despite being endowed with substantial renewable and non-renewable resources that can generate electricity, Uganda has not been able to provide reliable, cost effective electricity to meet the demand of its growing economy. 3. Uganda s Vision 2040 lays out the broad policy directives to improve electricity access and transform Uganda to a modern and prosperous country within 30 years. Vision 2040 sets out an electricity access target of 80 percent by Uganda s National Development Plan (NDP) covering the period FY11-15 highlights the urgent need to increase access and usage of electricity through investments in least cost power generation, promotion of renewable energy and energy efficiency, and development of associated transmission and distribution infrastructure. 4. The World Bank Group (WBG) Country Assistance Strategy (CAS) for the period FY11 to FY15 notes specifically that inadequate infrastructure, especially transport and energy, is Uganda s binding constraint for growth and economic transformation. The CAS includes enhancement of public infrastructure among its strategic objectives. The CAS Progress Report discussed with the Board of Executive Directors in August 2012 gives high priority to support the GoU to identify and facilitate infrastructure projects that will induce private sector investment in new products to increase exports and new jobs. The CAS Progress Report places emphasis on transformational operations and related investments to support the WBG goals of 34

44 ending extreme poverty and promoting shared prosperity, with more emphasis on infrastructure (including hydro-power generation), agricultural productivity, access to markets, and skills development. Sector Background 5. In the early 2000s, Uganda s electricity sector underwent comprehensive reforms aimed at improving sector performance, increasing investment in the sector and increasing electricity access. The centerpiece of the reform effort was the promulgation of the Electricity Act 1999 that stipulates three key energy policy goals for Uganda: (i) to enhance both the economic and environmental sustainability of the sector; (ii) to foster energy security (in terms of security of supply); and (iii) to open the sector for private investment, especially in generation and distribution. 6. The unbundling of the Uganda Electricity Board (UEB) into generation, transmission and distribution entities was completed in 2001, pursuant to the Electricity Act The unbundling resulted in three corporate entities responsible for electricity generation, transmission and distribution: Generation Uganda Electricity Generation Company Limited (UEGCL); Transmission - Uganda Electricity Transmission Company Limited (UETCL); and Distribution - Uganda Electricity Distribution Company Limited (UEDCL). The GoU has since leased the operation of the main generation and distribution assets to the private sector under long-term concession agreements. The operation and maintenance of the generation assets were leased to Eskom on a 20-year concession in 2003 and the main distribution assets were leased to Umeme on another 20-year concession in The transmission business remained under the responsibility of the Uganda Electricity Transmission Company Limited (UETCL) and is operating as a single-buyer for all electricity generated in Uganda or imported through the national grid. Unbundling of the electricity sector and private sector distribution in Uganda continues to be a success story of the African continent. 7. Through the Electricity Act 1999, the Electricity Regulatory Authority (ERA) was created and became operational in The statutory responsibilities of ERA include licensing, tariff policy and regulation, oversight of sector licensees and advising the GoU on electricity supply sector matters. ERA is also responsible for the oversight and approval of all power purchasing agreements (PPAs) that UETCL enters into. Along with the establishment of the ERA, the Electricity Act 1999 also lead to the creation of the Electricity Disputes Tribunal, where ERA s decisions can be appealed and any disputes arising in the sector adjudicated. The Act confers all powers of the High Court to the Disputes Tribunal in the exercise of its jurisdiction. The Uganda electricity sector structure is as shown in Chart

45 Chart 2.1: Uganda Electricity Sector Structure 8. The state-owned UETCL is responsible for the planning, expansion, operation and maintenance of high voltage electricity network i.e., at voltages of 66kV and above. UETCL also carries out the functions of a system operator, buying power from the generators and selling bulk supplies to the distribution concessionaire (Umeme Ltd.). UETCL charges a Bulk Supply Tariff (BST) to the distribution concessionaire, which however has not been cost reflective. As a result, direct and indirect supports from GoU are provided to UETCL to keep the retail tariff affordable to consumers. 9. Uganda does not have any major backbone transmission interconnections with its neighboring countries. There is however, a 132kV double circuit interconnector between Uganda and Kenya which dates back to This line operates on a non-firm supply agreement which was entered into in 1958 following commissioning of the Nalubaale hydropower station. Currently the cross-border supply agreement is for a 50 MW capacity after midnight. Major interconnection projects are underway to strengthen the existing cross-border transmission line to Kenya, and to implement new interconnections with Rwanda, Tanzania and DRC. Recently Completed and Ongoing IDA-supported Power Sector Projects 10. The World Bank has been involved in the power sector in Uganda for over 30 years, beginning in 1980 with emergency repairs to the Owen Falls Dam, which is now called Nalubaale dam (financed by the United Kingdom). The Nalubaale, along with the Owen Falls Extension (now called Kiira) is located on the Nile River, and was constructed and extended over a period of about 50 years, beginning in Other projects include the Power II Project in 36

46 1985 for the rehabilitation the Owen Falls (Nalubaale) Dam; Power III in 1991 for the construction of the Owen Falls Extension (Kiira); a Supplemental Credit to Power III in 2000; and the Power IV Project in 2001, which assisted in financing Unit 14 and Unit 15 (each of 40MW) at the Kiira powerhouse. 11. Since the early 2000s the World Bank, through a number of important projects and operations, supported the GoU in its power sector reform efforts as well as in the expansion of its power generation capacity. Those past interventions contributed to the current shape of Uganda s power sector structure and its current generation asset base. Some key project interventions, which were recently completed or are about to close are briefly described in the following: Power Sector Development Operation (PSDO) (Credit IDA-42970): Despite the country s commendable progress in sector reforms and in attracting private sector investments, Uganda continued to suffer from chronic power shortages in the mid-2000s which then subsequently also led to a financial crisis of the sector. The chronic power shortages were mainly the consequence of a delayed preparation of Uganda s then next large hydropower generation facility, the 250MW Bujagali Hydropower station as well as a prolonged drought in To mitigate those generation shortfalls, the sector s single buyer, UETCL, by 2008 contracted up to 120MW of emergency thermal generation capacity. While those initial measures helped reducing the generation shortfalls, the expensive thermal generation units also put a significant financial burden on the sector s finances, which ultimately required significant tariff adjustments and non-tariff measures to prevent a total collapse of the power sector. In this sector context the World Bank approved in April 2007 the PSDO with the primary objectives to reduce short-term power shortages and financial imbalances, and facilitate orderly longer-term expansion of electricity service. This operation combined a Policy Support Program (US$80 million) aimed at supporting the Government in consolidating and advancing sector reform while meeting some of the remaining financing gaps and a Specific Investment Loan (US$220 million) to support another 50MW additional emergency thermal capacity addition in order to maintain adequate power supply capacity. This operation was implemented in time and closed in July The subsequently filed Investment Completion Report (ICR) rated the overall project outcomes as Moderately Satisfactory. The PSDO managed to set up the foundation for long term development of the sector along a least cost path and the Government s institutional capacity to manage further development in the sector has been initiated. The PSDO achieved most of the outcome indicators with regard to reduced energy deficits, improved financial performance of the UETCL and the facilitation of an orderly longer-run expansion of the electricity sector. At the PSDO s closure, monthly energy unmet demand was reduced by about 95 percent compared to a target of 40 percent. A total of 196 MW of additional generation capacity was installed against a target of 150 MW (exceeding the project target by about 30 percent); and about 55 GWh per annum is being saved against a target of 10 GWh through a number of energy efficiency initiatives related to energy use efficiency and load management. While the Policy Support Program component was duly implemented and the proceeds of this budget support component significantly helped the GoU in managing the financial sector 37

47 requirements during the crisis, the performance in terms of handling of longer term policy aspects related to sector finances and longer term sector expansion was mixed. One of the most significant shortcomings of this component s outcomes was a roll back on the tariff structure, partly negating the early progress made in the sector and also affecting the sector s further prospects and sustainability. After the electricity tariff increases in 2006, the GoU did not adjust tariffs to maintain and reach cost-recovery levels to reduce / eliminate the need for subsidies; instead, in January 2010, the GoU reduced retail tariffs by an average of 8 percent. Private Power Generation (Bujagali) Project (IDA PRG for Loan B0130): While the PSDO was a short term mitigation measure, the Bank in parallel to the PSDO s preparation was also engaged in the preparation of the Bujagali Project, the next least cost option in the hydropower expansion program of the GoU. The World Bank (IDA) supported the commercial financing of this 250 MW run of the river power plant by providing a US$115 million PRG. The IDA PRG was approved in April 2007 together with an IFC A and C loan as well as a MIGA Guarantee. The project s financial structuring was successfully closed in December 2007 and the power plant started its commercial operation in April 2012, one year behind schedule. While the Project is not yet closed due to the PRG, an initial assessment of the project s outcomes indicates, that the commissioning of the Bujagali power station marked a turning point in Uganda s supply and demand balance since Uganda for the first time since the onset of the sector crisis in the early 2000s had significant surplus power which also allowed a reduced production from the emergency rental power plants. According to latest projections by UETCL, the additional power from Bujagali will meet the demand growth in Uganda till 2016 as per the utility s high case load forecast. The project also represents the first major commercial project financing in Uganda s power generation sub-sector which was implemented by a private investor company, Bujagali Energy Ltd. In addition the project benefitted from a successful collaboration of commercial financiers, equity investors and several multilateral and bilateral financing institutions including the WBG, EIB, AfDB, Proparco, FMO and KFW. Privatization and Utility Sector Reform Project (PUSRP - Credit 3411-UG): The project was approved in August 2000 with the objective to support the GoU in the carrying out of its policy to improve the quality, coverage and economic efficiency of commercial and utility services. The project s main components supported several infrastructure sectors in Uganda, including its power sector. The project in the early 2000s supported the unbundling of the UEB and also significantly contributed to the creation of the sector s current regulatory, organizational and legal framework. While the project s main components were fully implemented in 2006 and a partial ICR was completed, the project to date remains open with regard to its Component E. This Component was introduced to the Project in November 2004 using unused proceeds of the original credit in form of a contingent credit to support an IDA PRG to provide risk mitigation support to Umeme Ltd., Uganda s private distribution concessionaire, which was created in March By contributing to the Project s original PDO of facilitating an increased private sector participation in the energy sector, IDA, until recently, was providing 38

48 limited risk coverage (up to US$5.5 million) to backstop a Letter of Credit Facility that could be drawn upon the occurrence of certain GoU risk events. Those risks covered by the PRG included (i) the event of non-payment by the GoU of its electricity bills and (ii) failure of the ERA to approve tariff adjustments according to the pre-agreed tariff methodology set forth in Umeme s distribution and supply license. Since the onset of this project component, MIGA has also been supporting the private distribution concession, by providing a Political Risk Insurance that covers a substantial part of Umeme s investments. Since 2009 the IFC also started supporting the concession company by availing two IFC Loans to Umeme Ltd. (in 2009 and 2013) and in 2012 IFC also took an equity share in Umeme Ltd., when the company successfully entered the East African and International capital markets through an Initial Public Offering (IPO) of approximately 40 percent of its equity. The IDA PRG support to the concession was originally structured to support the concession s implementation in its initial years only. Given the severe power sector financial crisis in 2006, the IDA PRG support was extended to provide further support to the concession during the crisis. With the commissioning of the Bujagali power plant in 2012 certain legal parameters defined under the IDA PRG Support Agreement were duly fulfilled thereby marking the end of the crisis in the context of the IDA legal documentation. Umeme Ltd. and the GoU have since started to close the IDA supported L/C structure. However the MIGA and IFC support to the concession currently remains in place. The project achieved several outcomes: At the onset of the concession distribution losses in Uganda stood at over 40 percent according to Umeme. In October 2013 losses stood at around 24 percent according to the company, representing a significant reduction over the past 8 years. Similarly average bill collection rates were significantly improved according to Umeme, standing at around 100 percent in October 2013 compared to approximately 80 percent at the onset of the concession in 2005 as reported by the company. The performance increases in Uganda s distribution sector positively contributed to the improvement of the sector s finances as Umeme is the main revenue generating company at the end consumer level and thereby the main source of income to the GoU owned single buyer, UETCL, who wholesales its power purchased from private generation companies to Umeme. Umeme and the regulatory authority ERA further agreed on new performance improvement targets in 2012 as foreseen by the concession agreements. Within its distribution license Umeme Ltd. is committed to reduce overall losses on an annual trajectory basis planned to reach 14.8 percent by 2018, when new performance targets will have to be negotiated. Despite those positive developments to date the concession in the past eight years also faced certain challenges. One challenge was Umeme s inability in certain periods to improve losses and collections at a faster pace than expected by the GoU. Another challenge from Umeme s perspective were certain regulatory issues especially when the ERA approved a decrease of the end consumer tariffs, while Umeme required an increase (see reference under PSDO above regarding the tariff decision in January 2010). Similarly to the reduction in tariffs there is currently one issue pending under Umeme s license agreement, which relates to a change of certain commercial aspects introduced to the license by the ERA in Umeme Ltd. has contested the legality of this introduction and the case is currently being dealt with by the Uganda Electricity Tribunal in accordance with the provisions of Uganda s Electricity Act. 39

49 The outcome of this review is currently uncertain and there remains a risk that either ERA or Umeme Ltd. may escalate the issue through international arbitration. Despite those challenges the IDA supported security mechanism in form of a PRG enhanced L/C was not triggered during its availability period and the IDA PRG remained undisbursed until it became non-triggerable. 12. Through the above projects, the World Bank in the past and to date has supported the GoU in shaping the current outline of Uganda s power sector, which builds the current context of this proposed new project. Electricity Supply-Demand Balance 13. The total installed generation capacity of Uganda in 2012 was about 689 MW. This comprised of hydropower plants, including small hydropower plants, with an aggregate capacity of about 590MW in The remainder of the installed generation capacity consisted of 13 liquid fuel thermal and renewable (bagasse cogeneration) plants with an aggregate capacity of about 99MW. Table 2.1: Installed Generation Capacity in Uganda Installed capacity (MW) Hydro Thermal & Renewable Prior to 2005, the power demand in Uganda was largely met from hydropower (180 MW at Nalubaale and 120MW at Kiira and about 3 MW of mini-hydro). The drought in 2004 caused a sharp fall in hydro output forcing the Government to contract for rental thermal plants. Before the Bujagali Hydropower Plant was commissioned in 2012, thermal power generation was about 37 percent of total power generation in Uganda. This value increased from its 7 percent level in After commissioning of Bujagali in 2012, share of generation from thermal plants dropped to 10 percent. Table 2.2: Energy Consumed in Uganda Total Units Sent Out (GWh) 1,889 1,609 1,895 2,097 2,297 2,457 2,600 2,860 Hydro (%) 91% 74% 68% 67% 56% 54% 59% 86% Thermal (%) 7% 23% 28% 28% 39% 42% 37% 10% Renewable (%) 0% 0% 0% 3% 4% 3% 3% 3% Electricity Generation Expansion Plan 15. While Uganda was able to meet its electricity demand in 2013, it needs to increase its total generation capacity to meet the projected growth in electricity demand. Uganda also needs to reduce or eliminate electricity generation from rental thermal power plants as this will reduce to overall cost of power. Therefore significant capacity additions from hydropower plants are envisaged. Those include the Isimba Hydropower Plant and the Karuma Hydropower Plant (600 40

50 MW). Based on discussions with the GoU, both power plants are expected to be commissioned only in 2020, given that there had been delays in the procurement of contractors and mobilization of financing for those two public investment projects. 16. In parallel, the GoU has taken initiatives to develop small renewable energy projects through the private sector over last several years. Table 2.3 and Table 2.4 show Uganda s electricity generation expansion status to date and its future expansion plans until This overview does not include projected additional capacity to be contracted through the REFiT program. Table 2.3: Hydropower Expansion Program Hydro Owner/ Generation Firm Capacity (MW) (Projected) Operator Nalubaale (Units 1-10) UEGCL /Eskom Kiira (Units 11-15) UEGCL /Eskom Bujagali (Units 1-5) IPP Isimba IPP Karuma (Units 1-5) IPP Kasese Cobolt (KCCL) IPP Kilembe Mines (KML) IPP Bugoye (Tronder) IPP Buseruka (Hydromax) IPP Kikagati (Tronder) IPP Ishasha (Eco Power) IPP Mpanga (East Asian Energy) IPP Maziba IPP Paidha IPP Total

51 Thermal and Cogeneration Bagasse Table 2.4: Thermal and Cogeneration Power Expansion Program Type Capacity (MW) Generation Firm Capacity (MW) (Projected) Kakira Sugar Bagasse Sugar Corp of Uganda (SCOUL) Bagasse 0 Kinyara Sugar Bagasse Kabale Peat Coal 40 Namugoga Solar Solar 50 Geothermal (Kibiro) Geothermal 40 Agg 3 Mutundwe (IDA) 50MW AGO AGO Mputa Kaiso-Tonya 150MW HFO (BOT) Crude Electromaxx Tororo 20MW HFO HFO Jacobsen Namanwe 50MW HFO (BOT) HFO Invespro 50MW HFO HFO 50 Agg 1 Lugogo 50MW AGO AGO Agg 2 Kiira 50MW AGO AGO Albatross 50 MW Crude Crude Total Power Sector Financial Position 17. Increasing power purchase obligations denominated in US Dollars, resulting from continued reliance on thermal power negatively impacted the sector s financial position between 2005 and Two factors that further aggravated the financial position of the sector during this phase were: (i) Continued depreciation of the local currency increased power purchase costs and financing costs in local currency terms, as the thermal generation PPAs are denominated in foreign currency; and (ii) Volatility in oil prices in the international market. The rise in oil prices in the international market caused power purchase costs to go up significantly. 18. High costs of thermal power were initially passed on to consumers when retail tariffs were increased by 37.5 percent in June 2006 and by another 41 percent in November In January 2010, the retail tariff was reduced by an average 6 percent across all customer categories (including a 9.9 percent reduction in the domestic category). After this reduction the weighted average end-user tariff was USh 287/kWh (US$ 0.12/kWh). This was far below the cost of power and caused an increase in the amount of the subsidy the GoU had to pay to the UETCL to keep it afloat. Consequently in January 2012 the ERA increased the retail tariff significantly, making the average retail tariff equivalent to USh535/kWh (US$ 0.20/kWh). In January 16, 42

52 2014, ERA further approved a multi-year tariff proposal with automatic quarterly adjustments due to fuel price and exchange rate fluctuations. 19. Effects of inadequate tariff are compounded by the fact that Uganda still faces relatively high transmission and distribution system losses, though the latter were significantly improved in recent years and currently stand around 24% according to the distribution company, Umeme Ltd.. Transmission Losses (%) Distribution Losses (%) Table 2.5: Transmission and Distribution System Losses % 4.0% 4.4% 5.3% 5.1% 5.0% 4.8% 4.7% N/A 38.3% 34.3% 35.3% 34.2% 34.7% 29.5% 27.0% 26.0% 24.3% 20. The GoU is obligated to meet the contractual costs of power generation and the costs of distribution concessionaire Umeme, if the electricity retail tariff does not cover all those costs. To prevent consumer tariffs from going up, the regulator keeps the bulk supply tariff (BST) that UETCL charges to Umeme below cost recovery level. The resulting shortfall is provided by GoU as subsidy to the sector. The capacity payments for the thermal plants are also provided by GoU as subsidy to the sector. During the period FY06-11, GoU provided direct budgetary support of US$ 767 million to UETCL to cover the cost of power purchase. Continued reliance on the thermal power to meet the growing demand coupled with GoU s strategy of not passing on the full cost of providing electricity to consumers will result in increased requirements for government subsidies to the sector. A similar situation was experienced in 2005/2006, before the World Bank PSDO supported the GoU in mitigating the financial challenges of the sector. Table 2.6: Government subsidy to support lower tariff Exchange Rate (Ush/US$) Average 1,775 1,721 1,828 1,925 2,102 2,395 2,585 Government subsidy & tariff support (in Ush Millions) 150,273 78, , , , ,579 0 Government subsidy & tariff support (in US$ Millions) Uganda is and has been a net exporter of power as seen in Table 2.7 below. The power trading has usually been between the neighboring countries of Kenya, Rwanda and Tanzania. The imports reached their peak in 2007 with 60.4 GWh and have since reduced and remained steady. Uganda imports power from Rwanda and Kenya at the following tariff: Imports from Rwanda (US$/kWh): ; 7 Data on Distribution Losses is based on Umeme information provided by Umeme and Transmission loss figures have been provided by UETCL. Transmission loss figure for 2011 is a WB estimate as UETCL did not provide data for that year and The Distribution Loss figure for 2013 is the loss figure for October 2013 provided by Umeme Ltd. 43

53 Imports from Kenya (US$/kWh): (Includes a fixed charge of US$ /KWh and the rest is indexed to inflation). 22. The amount of power exported to Kenya, Rwanda and Tanzania has been cyclical in growth from , with 2011 being more stable. There are plans to export power to DRC in the future. The tariff at which Uganda exports power is as follows: Exports to Rwanda (US$/kWh): Exports to Kenya (US$/kWh) : (Includes a fixed charge of US$ /KWh and the rest is indexed to inflation) Exports to Tanzania (US$/kWh): Table 2.7: Regional Electricity Trading in GWh Imports Rwanda Kenya Total Imports Year on Year growth (%) 81% 24% -28% -36% 5% 5% Exports Kenya 50MW firm Non-firm Tanzania Rwanda Total Exports Year on Year growth (%) -17% 23% 3% 22% -9% 4% 44

54 Annex 3: Detailed Project Description UGANDA: Series of IDA Partial Risk Guarantees for Renewable Energy Development Program I. Renewable Energy Feed-in-Tariff (REFiT) program 1. The Electricity Regulatory Authority (ERA) established a Renewable Energy Feed-in- Tariff (REFiT) program in 2007 covering a two year period from Due to low uptake by project developers, the REFiT was reviewed in 2010 taking into account new information on levelized costs of electricity generation. A new REFiT covering the period was established and remains in force today. 2. The overall objective of the REFiT is to incentivize and support greater private sector participation in power generation using renewable energy technologies, through the establishment of an appropriate regulatory framework. This is in line with Uganda Renewable Energy Policy 2007 that outlines the Government s vision for renewable energy as: To make modern renewable energy a substantial part of the national energy consumption. The Renewable Energy Policy 2007 defines modern renewable energy as renewable energy resources that are transformed into modern energy services such as electricity, which can be generated from solar energy, wind power, water power, geothermal energy and biomass cogeneration. In addition, it also refers to clean fuels derived from renewable energy resources like biogas, ethanol, methanol, hydrogen or solar water heating as well as biomass utilized in efficient biomass technologies, like improved charcoal stoves and improved firewood stoves. Renewable energy in the context of the REFiT is defined as electricity which can be generated from energy resources such as water power, wind power, solar energy, geothermal energy, biogas and landfill gas, as well as biomass cogeneration. The REFiT shall apply to small-scale renewable energy systems, of prescribed priority technologies, up to a maximum installed plant capacity of 20 MW, and greater than 0.5 MW, as defined by the Uganda Electricity Act Declaration of the feed in tariff generated interest among the private sector sponsors. Over the last several years, small renewable energy based SPPPs had to negotiate the tariff with UETCL and the development of each deal followed their own pace. UETCL had to take the risk of whether the cost of an SPPP would be passed through its Bulk Supply Tariff (BST), in case it was higher than the BST. The sponsors also had to invest funds to carry out feasibility studies of their projects without any assurance whether they can negotiate and agree to a PPA with UETCL. Absence of a standardized PPA and IA resulted in subjective clauses introduced in the agreements at the time of negotiation. 4. Setting up a feed in tariff is challenging as power generation project costs are site specific. Different projects of the same technology could have a different cost structure. But often, the small size of the projects does not attract reputable bidders if competitively tendered. Hence, ERA announced the REFiT tariffs for different types of renewable energy technologies which are determined using a US$/kWh levelized cost approach. This approach is based on the electricity generation costs from the renewable energy technologies and is aimed at providing an after-tax internal rate of return to equity holders that is equal to an assumed cost of equity capital. The key inputs are based on general investment assumptions and specific assumptions for each of the renewable energy technologies that influence the power generation costs. These include: 45

55 (i) investment costs for the plant (include materials and capital costs); (ii) grid connection costs; (iii) operation and maintenance (O&M) costs; (iv) fuel costs (in the case of biogas and biomass); (v) interest rates charged for the invested capital; and (vi) reasonable profit margins for the investors. 5. The objective of the feed in tariff is to offer a reasonable level which will allow the sponsors to accept the market risks and make an acceptable return on their investment. Setting up the tariff level too low would not result in private sector participation in the sector. Setting up the tariff too high could result in sponsors making windfall profits and erosion of potential benefits to consumers and the economy. While in the first scenario, the feed in tariff can always be revised upwards as a corrective measure, it could be difficult if the revision impacts the end user tariff. Under the second scenario, the feed in tariff could be revised downwards; all projects that had already been approved would continue to operate at the higher tariff level. Hence to reduce any impact of the second type of risk, ERA announced its REFiT with a cap on the amount of generation capacity that could be supported for each technology between 2011 and Based on an assessment carried out by the ERA, Uganda has potential to attract private sector investment for MW of small scale renewable generation capacity through its current REFiT. Some of the identified projects are at well advanced stages in terms of site selection, feasibility studies, etc. and if supported properly could generate electricity from as early as This could help avert a return to the use of expensive emergency rental power plants to meet the projected electricity demand growth. 7. The tariff levels under the REFiT and eligible capacity limit for approved renewable energy projects are provided in Table 3.1 below. Table 3.1: REFiT tariffs and eligible project capacity limits ( ) Technology Tariff Capacity Limits Payment US$/kWh MW Period (Years) Hydro (9-20 MW) MW 20 Hydro (1-8 MW) MW 20 Hydro (500 KW - 1 MW) MW 20 Bagasse MW 20 Biomass MW 20 Biogas MW 20 Landfill Gas MW 20 Geothermal MW 20 Solar PV* MW 20 Wind MW 20 * ERA later dropped Solar PV from REFiT due to its volatile cost in the current market 8. The REFiT has not attracted sufficient interest from the market, and so far not a single SPPP project has materialized. Discussions with several sponsors revealed that in addition to an inadequate level of tariff offered by REFiT, the risk perception of commercial financial institutions on the Uganda power sector was preventing the sponsors to raise the required funds to finance these projects. 46

56 9. The GoU would like to support these projects as their timely commission will not only develop its renewable energy resources, but would also help GoU meet the increased electricity demand. These small projects can also be constructed quickly and commissioned well before the large hydropower plants can come online in Furthermore, these power plants could reduce the overall cost of power generation in Uganda. With these renewable energy plants commissioned, the GoU could avoid operating the expensive thermal (rental) plants. But, since no SPPP sponsor has yet confirmed any project under the present REFiT level, the GoU is trying to create an enabling environment for private sector investment in renewable energy through offering several market enhancement instruments. These include; (i) Premium payment to eligible SPPPs on top of REFiT; and (ii) Guarantees to mitigate GoU/UETCL payment risk. The GoU s initiatives to work with several donors and with the World Bank Group to develop these market enhancement instruments are described below. II. The Global Energy Transfer Feed in Tariff (GET FiT) Program 10. The GoU has entered into an Agency Agreement with KfW, through which KfW has received the mandate to act in GoU s name and account with Donors and will do the same with SPPP developers to support development of the small renewable energy projects. Through this initiative, the Global Energy Transfer Feed-in Tariff (GET FiT) scheme has been established. KfW has raised funds from different bilateral sources for the GET FiT Fund and has appointed a consulting firm to staff and manage the GET FiT Secretariat. The total funding requirements for the GET FiT Uganda Program is estimated to be about EUR 71.8 million. The different categories of funding sources and uses are provided in Table 3.2. Table 3.2: GET FiT Funding Requirement and Sources Funding Requirement EUR M Funding Source EUR M GET FiT premium payments 64 EU-Africa Infrastructure Trust Fund Implementation Consultant 4 German Development Cooperation 10 M & E Consultant 0.75 Norway 16 TA Facility for ERA 1 UK DfID / DECC (ICF) 16 KfW Management Fee (3%) 2.1 Total Total Table 3.3 below provides an overview of GET FiT subsidy levels and the scope of the GET FiT premium payments for different renewable energy technologies. These levels were determined by KfW in close cooperation with ERA based on: review of the existing REFiT levelized cost model; review of specific investment cost of small-scale renewable energy projects completed or at planning stage in the East African region; interviews and workshops with renewable energy power plant developers and commercial banks; and review of financial models for selected renewable energy projects in the GET FiT pipeline. 47

57 Table 3.3: GET FiT Premium Payment Levels Technology GET FiT Premium Payment (US$/kWh) Hydro (20 <= <9 MW) Hydro (8 <= <1 MW) Hydro (1 MW <= <500kW) Not included Bagasse 0.01 Biomass 0.01 Biogas No premium required Landfill gas Not included Geothermal Not included Solar PV* Dealt through a competitive process Wind Not included *Solar PV was later dropped from REFiT as its cost remains volatile in current market 12. While different technologies attract different premiums, actual top-up levels will not vary across renewable energy projects of different sizes within the same technology group. The subsidy disbursement period has been fixed to 5 years only in order to reduce the GET FiT fund management cost. To avoid that individual projects benefit disproportionally from the GET FiT premium payment, a cap has been introduced on the plant capacity factor for individual projects (60 percent for small hydro, 40 percent for biomass and bagasse). This automatically limits the total premium payments that individual projects can receive. 13. The GET FiT Secretariat has designed detailed project selection criteria, which are described in detail in Annex 4. III. The IDA Partial Risk Guarantees Program Background 14. The proposed IDA Guarantees for the Renewable Energy Development Program will support UETCL and the GoU in attracting private sector investors to develop renewable energy based power plants in Uganda under the approved Renewable Energy Feed in Tariff (REFiT) structure As mentioned under the previous section, the risk perception of potential SPPP sponsors and of commercial financial institutions required certain risk enhancement measures, before a funding commitment from a large number of interested SPPP sponsors could be secured under the REFiT framework. ERA, UETCL and GoU therefore decided to accommodate the shortcomings of the earlier framework design through two main initiatives: a) GET FiT Premiums working on the revenue side: As described earlier, the GET FiT premium mechanism proposes to limit the required level of REFiT tariffs by providing 8 While the initial projects appraised in this document are all small and medium sized hydropower projects, the IDA Guarantees in the future could also support renewable energy projects that do not have a feed in tariff but are below 20 MW of capacity, for example, grid connected solar projects, provided the sponsors are selected following a process ensuring efficiency and economy and the projects appraisal confirms them as being eligible for World Bank support. 48

58 subsidies on a grant basis, which will help improving the revenue base of SPPPs in a standardized tariff environment. b) UETCL/GoU credit enhancement working on the cost side: In an effort to mitigate the perceived UETCL payment risks, the now finalized standardized Power Purchase Agreement (PPA) under the current REFiT framework now requires that UETCL provides a payment guarantee in the form of a Letter of Credit (L/C) that could be drawn by an SPPP in case of UETCL's payment default of a monthly invoice. The PPA defines that each payment guarantee will be for a predetermined amount, equivalent to at least three monthly invoices. This payment guarantee/l/c is required in order to allow the SPPPs to make timely payments to their lenders providing senior loans to each SPPP, which ultimately will lower the funding costs for those SPPPs. In addition to this payment guarantee mechanism to be offered by UETCL, the GoU in consultation with ERA also decided to further mitigate the perceived credit risk of UETCL, by assuming certain payment obligations for pre-determined political risks, including termination. Such obligations were ultimately defined in the standardized Implementation Agreement (IA), which was developed by the GoU and ERA in parallel to the PPA standard and is to be entered directly between the GoU (represented by the MEMD) and the SPPP. Despite those comprehensive measures a number of potential investors interested in the REFiT program indicated that additional risk mitigation for payment obligations of UETCL and the GoU (especially for its Termination payment obligations) may be required before commercial debt (and possibly equity) can be attracted for certain projects. Objective and Main Principles of Selection for IDA Guarantee support 16. The proposed IDA Guarantees will be offered in parallel with the GET Fit premium support and will support the GoU s sector stakeholders second initiative to improve the REFiT framework (GoU/UETCL credit enhancement measures) thereby allowing the REFiT to be kept at moderate levels. The sponsors will have the option to decide whether they either require the GET FiT premium, IDA Guarantees or both. Based on a stakeholder consultation, all potential SPPP sponsors suggested that they will apply for the GET Fit premium payments. Most of the potential hydropower SPPP sponsors currently eligible for GET FiT premium support, informed the GoU that they are likely to apply for IDA Guarantees. At the same time, the bagasse SPPP sponsors informed the GoU that they will raise their financing on their balance sheet and will not follow a project financing approach, hence they did not show much interest to apply for IDA Guarantees if offered. These bagasse SPPPs are sponsored by Sugar farms and they construct the power plants for their own consumption and will sell the excess power to UETCL. There are already several bagasse SPPPs and hydropower SPPPs that are operating in Uganda for last several years on the basis of negotiated tariffs. 17. The precise risk coverage to be provided by IDA under any particular guarantee for an individual project would be determined on a case-by-case basis and would only be as much as is required to permit the sponsor(s) or developer(s) to obtain financing on reasonable terms which would not be available in the absence of the guarantee and which would be necessary to ensure 49

59 project viability and sustainability. The proposed IDA Guarantee Program is designed to enhance the creditworthiness of UETCL and the perceived GoU credit risk by guaranteeing certain obligations to the SPPPs either directly or indirectly. In addition the IDA Guarantee Program will also have a positive effect on UETCL s costs to be incurred for the PPA required L/C facility, as will be described further below. IDA Guarantee Instruments Offered 18. Based on discussions with the GoU REFiT program stakeholders, private sector sponsors and financial institutions, this program is proposing different forms and designs of GoU/UETCL credit enhancement: (i) the first structure would ensure liquidity to the sponsor by guaranteeing the payment obligation by UETCL and GoU s payment obligations in case of termination; (ii) the second structure would provide guarantees to commercial lenders against debt service default, caused by a GoU/UETCL payment default. 19. Based on the specific nature of each project, an assessment will be undertaken, to determine which support structure will ensure project viability and sustainability. In principle, IDA will try to minimize its intervention to the market. The two proposed guarantee structures stated above are explained in detail below. a) IDA PRGs in support of Payment Guarantees/L/Cs to be issued on behalf of UETCL/ GoU 20. The proposed PRGs under this first structure will cover two main risk events, each one coverable on an optional basis and depending on GoU s/uetcl s decision taken jointly with the World Bank on a project by project basis. The two main optional coverage forms under this PRG structure are as follows: UETCL Payment Risk under monthly invoices: As mentioned above, under the standardized PPA, UETCL is required to provide a payment guarantee in form of an L/C for every project eligible under the REFiT framework. Each such payment guarantee will be for a predetermined amount, representing at least three monthly invoices. Currently UETCL only manages to receive a payment guarantee in the form of a L/C from its relationship banks for a period of 12 months. In addition, L/C banks currently require from UETCL substantial collateral for their L/Cs through pledged revenue streams that UETCL receives from the distribution company Umeme Ltd. for the wholesale of electricity. This means that UETCL will incur relatively high direct costs from such L/C banks (in terms of premiums and fees) and indirectly high opportunity costs by collateralizing certain revenue elements from its monthly cash inflow. It is therefore proposed to alleviate this cost burden to UETCL for those projects that are eligible for World Bank support under the REFiT and GET FiT programs and also contribute to the UETCL s ability in securing a substantial amount of L/Cs over a longer period from a competitively selected commercial bank. The World Bank PRG support to UETCL s payment guarantee will also provide an additional halo for commercial investors under individual projects as the World Bank indirectly will be part of the proposed security package 50

60 and can intervene through its wider sector dialogue in situations where payment defaults occur. The main advantage of this proposed IDA Guarantee risk coverage is that minimal security (equivalent to only few months of PPA payments) is being provided to the SPPPs through the IDA Guarantee, while leveraging IDA resources. GoU Termination Amount Payment Risk: As mentioned above, under the standardized IA GoU has assumed payment obligations in certain events of termination under the PPA and IA. Based on market soundings with potential investors and based on discussions with GoU and REFiT stakeholders, it was agreed that the ability of the GoU to attract certain potential developers for the REFiT program, especially when they have not yet been engaged in Uganda s power sector, could substantially increase, in the event that GoU's termination payment obligations would be guaranteed through L/Cs backstopped by IDA PRGs. This proposed optional risk event coverage would also have the benefit in allowing for coverage of certain portions of equity proceeds in SPPPs, for projects that are substantially financed by equity as could be the case for smaller solar PV projects, which may also be introduced to Uganda s power sector during the lifetime of this program. 21. Contractual Structure and Mechanics of the IDA PRGs for Payment Guarantees/L/Cs: It is proposed that both risk events (when elected by the GoU on a case by case basis), would be covered under one single L/C to be issued by a commercial bank for the benefit of each SPPP. Through its PRG instrument under this first structure, IDA will backstop payments made by the commercial bank issuing the payment guarantee L/C, to support UETCL s payment obligations to the SPPPs under the standardized PPA and, if selected, GoU s termination payment obligations to the SPPPs under the IA. Annex 8 provides an indicative term sheet for the typical PRG structure based on such L/C. 22. The key features of the indicative term sheet are set forth below: a) A commercial bank (L/C bank) will establish a L/C facility from which it will issue separate revolving L/Cs for the benefit of each selected SPPP. The L/C could be drawn by the SPPP in the event UETCL/GoU fails to comply with its contractual payment obligations under the relevant PPA/IA, as the case may be, as detailed under the PRG Support Agreement to be entered into by UETCL, GoU and each SPPP. b) Pursuant to a Reimbursement and Credit Agreement between UETCL, GoU and the L/C bank, UETCL/GoU, as the case may be, would agree to reimburse the L/C bank the amounts drawn under the L/C plus accrued interest within an agreed time period not to exceed 12 months. If reimbursement is made to the L/C bank within the agreed time period, the L/C would be reinstated by the L/C bank. However, if UETCL/GoU fails to reimburse the L/C bank within the agreed 12 months period, the L/C bank would have the right to request reimbursement directly from the World Bank under the IDA Guarantee for the drawn amount plus accrued interest, based on the 51

61 Guarantee Agreement 9 to be entered between the World Bank and the L/C bank. Amounts paid by IDA will be deducted from IDA s total guaranteed amount and if such amounts are depleted, the relevant L/C would not be reinstated. 23. It is expected that under the REFiT program a certain number of PPAs and IAs (representing up to 20 individual small renewable energy projects or more) would be concluded between UETCL, GoU and each SPPP. To simplify the issuance and implementation process, UETCL will competitively select a commercial L/C bank to put in place an umbrella L/C facility to be in effect during a pre-determined availability period. Upon IDA s confirmation of eligibility of a project for PRG support during the availability period, the selected L/C bank would then issue a L/C for the relevant project. 24. On the basis of the Bank s due diligence of the three hydropower SPPPs, appraised within this document and assuming a number of additional IDA eligible projects would follow, a total of US$ 42 million could cover the L/Cs to be issued in support of ongoing payments under the PPA and around 50 percent of the termination amounts due under the IA. If the funds under the umbrella L/C facility are fully committed prior to the end of the availability period (period during which individual L/Cs can be issued) or the availability period of the umbrella facility expires and cannot be renewed, it is proposed that, to the extent there are still available amounts under the proposed PRG series program, UETCL will retain the ability to extend the existing L/C umbrella facility (if the L/C bank agrees to such an extension) or UETCL could launch another competitive process for contracting a second L/C Bank for the creation of an additional PRG backstopped facility to support additional SPPPs. 25. The diagram below explains the contractual relations currently envisaged between the different stakeholders under the IDA PRGs for Payment Guarantees/L/Cs. 9 This will be an umbrella guarantee agreement which will cover all the LCs to be issued under the L/C facility. 52

62 Chart 3.1: Contractual Relations between Stakeholders for IDA PRGs 26. The L/C bank that will establish the L/C facility will be chosen on the basis of a competitive process handled by UETCL. The L/C bank will be selected from a shortlist of banks meeting the following criteria: (i) a strong experience in the field of structured finance and trade finance activities, (ii) creditworthiness acceptable to address the long term drawdown needs over the L/C tenure; and (iii) competitive pricing of the L/C. 27. UETCL s current relationship banks have shown interest to provide the L/C facility to be guaranteed by IDA, as the L/C bank risk will rely not on the project merits but on the World Bank s creditworthiness. IDA expects the L/C bank selection to be made after the decision by the Board on the proposed IDA Guarantees. The financing and IDA PRG documents for the appraised projects will be signed thereafter. b) IDA Partial Risk Guarantees (PRGs) in support of commercial debt 28. As mentioned under the previous section describing the Termination Payment L/C backstop, certain commercial lenders and investors may value the additional backstop through a L/C of the GoU payment obligations. 29. While the GET FiT Secretariat and UETCL have informed the Bank that in the first batch of projects eligible for GET FiT premium, no commercial lenders have been attracted by the 53

63 program, preliminary information on the second batch of GET FiT premium eligible projects indicates that commercial banks have now shown interest. 30. The scope of IDA Guarantee support alternatives availed by this project could be extended to also include IDA PRGs for direct coverage of commercial debt. 31. In such a case IDA would issue individual PRGs for renewable energy projects eligible for World Bank support. The PRGs would cover an individual SPPP s commercial lender against certain GoU and/or UETCL payment obligations with regard to this program. 32. Under this structure, commercial lenders would be entitled to demand the portion of any principal and/or interest debt payment which has fallen due under the IDA guaranteed commercial loans and that has not been paid by the project company as a result of the failure of the GoU to pay undisputed amounts due under the IA. In the case of a dispute between the GoU and the project company in respect of such payments, the IDA Guarantee would be callable only if the GoU is obligated to pay and has failed to do so as provided under the relevant contractual dispute resolution provisions. 33. Under this structure, IDA would potentially cover the risk of debt service default for the covered lenders arising from (Annex 9 provides an indicative term sheet for the typical PRG structure): a. Political force majeure events; b. Changes in law making the project contractual agreements unenforceable or void or making the performance of the project company or its EPC contractor (and related parties, such as subcontractors) unlawful; c. Government imposed restrictions on the ability of the project company to be paid or to receive foreign currency or transfer funds abroad; and d. Failure by the GoU/UETCL to comply with their payment obligations under the IA/PPA. 34. Chart 3.2 illustrates the IDA PRGs to be provided to the commercial lenders under the proposed program. 54

64 Chart 3.2: IDA PRGs to Cover Debt Repayment IDA PRGs Conditionality 35. Standard terms and conditions for guarantees would apply to all PRG structures. If IDA were called upon to make payments under the IDA Guarantee Agreement, IDA would seek reimbursement from the GoU of all payments, claims and other expenses it incurs under the Indemnity Agreement. Consequently, there would be a clear financial incentive for UETCL and the GoU to avoid defaulting under the project and financing agreements so as to avoid a call on the IDA Guarantee and the Indemnity Agreement. 36. IDA will also develop standard templates for the Project Agreement that it will enter with the SPPPs. The Project Agreement will contain standard covenants, representations and warranties, including that the project company has acted and will continue to act in compliance with all applicable World Bank policies and procedures, including anticorruption, and social and environmental policies, and will provide IDA with necessary project information. On safeguard issues the project will have to comply with the World Bank Performance Standards. 37. IDA would be compensated for its exposure at 75 basis points per annum on the deployed guaranteed amount for each project. The guarantee fee would be payable six monthly in advance from the date of effectiveness of the guarantee for each project until its expiration/ termination. No Standby Fee would be applicable as currently there is no Commitment Fee charged by IDA. In addition, there would be a one-time Initiation Fee of 15 basis points per project, and a onetime Processing Fee capped at 50 basis points, of the maximum guaranteed amount in support of the proposed project. The payment of fees by each SPPP will be reflected in the relevant Project Agreement with IDA. According to the current pricing applicable to guarantees, no commitment fee applies. 38. All IDA Guarantee-related fees indicated would be payable by the SPPP and are consistent with the pricing policy of IDA Guarantees. 55

65 IV. Review of First Batch of Projects that would be supported under the IDA PRG Program 39. The proposed program would in general support projects that fall under the REFiT program. However, given the recent changes in the price of solar PV technology, ERA removed the Solar PV from REFiT and plans to select Solar PV projects following a competitive process. The proposed IDA PRG program will be offered to such solar projects which will be selected through a competitive process and meets other REFiT project criteria, i.e. capacity ranges from 1 to 20 MW, grid connected projects, sponsored by the private sector, etc. 40. The SPPPs that would be supported under the proposed program are at different stages of preparation. The Bank reviewed a first batch of 12 hydropower projects that requested for the IDA PRG. Based on the Bank s eligibility criteria, 3 projects were selected as eligible to benefit from the IDA PRG following further appraisal. These projects are: (i) Nyamwamba Small Hydropower Plant (9.2 MW), (ii) Lubilia Small Hydropower Plant (5.4 MW), and (iii) Rwimi I Small Hydropower Plant (5.5 MW). A brief description of these projects is provided below. a) Nyamwamba Small Hydropower Plant (9.2 MW) (NSHP) 41. The proposed Nyamwamba Small Hydropower Plant (NSHP) is a run of river hydropower project located in Kilembe of Kasese District in Western Uganda. It is a small hydropower development with an installed capacity of 9.2 MW and an annual output of 39.6 GWh. 42. The NSHP project is situated just outside the Ruwenzori Mountains National Park in Kasese District. The sponsors lacked hydrological information, and hence the feasibility of the hydropower project was carried out using hydrological information of two parallel rivers next to Nyamwamba. Based on this feasibility report, the sponsors applied for the hydropower generation permit from ERA for a 14 MW power plant. After receiving the permit, the sponsors installed metering gauges on the Nyamwamba River and as per the hydrological information obtained from these metering stations, they revised their feasibility report to a 9.2 MW capacity power plant. The sponsor s application to revise their generation permit from 14 MW to 9.2 MW has received ERA s approval. 43. The intake weir is small (4.5 meter maximum height) and simple. The side Tyrolean intake design is acceptable. There are some concerns regarding the water tightness of the foundation at the dam site, but the project has proposed technical solutions that appear appropriate for this small weir. 44. The major flood that occurred in May 2013 led to changes in the definition of the dam axis. The proposed revised design appears reasonable. There is no indication on the construction method, on the construction phasing, on the construction phase design flood. It is likely that the construction will take advantage of the low flow periods to construct the weir but this is not detailed in the documentation. The updated implementation plan will include the above information. 56

66 45. The environmental flow has been reduced to 0.2m3/s and this has apparently been cleared by the GoU. It is on the low side. The hydrological report is dated June 2012, it is not clear if it has been revised following the May 2013 flood to recalculate the design flood for the project. 46. The way the construction is going to be handled is not clear. In the previous documents it was envisaged to have two contracts (one for civil, one for electromechanical), now according to the transfer license, Africa EMS Nyamwamba will be the turnkey company for the construction of the project. It is not clear how the O&M will be handled. The sponsor has been requested to finalize a construction schedule based on the actual progress of the development and a realistic procurement process. 47. With the above provisions, the Nyamwamba project is ready to move forward. 48. Summary assessment of NSHP Sponsor is provided below: a) Certificate of incorporation - Africa EMS Nyamwamba Limited is duly incorporated in Uganda as a limited liability company. It holds a certificate of incorporation dated 20th May It is registered as company No b) Memorandum and Articles of Association - Africa EMS Nyamwamba Limited registered its Memorandum and Articles of Association on 20th May, It has two shareholders, namely: (i) Africa Energy Management Services: 9,999 Shares and (ii) Charles Mugisha: 1 Share. The nominal share capital of the company is Uganda Shillings Two Million with 10,000. shares of Uganda Shillings Two Hundred each, with power to increase and or reduce the capital. Among the objects of the company is the generation and sale of power. Based on the above information Africa EMS Nyamwamba Limited is duly incorporated in Uganda as a limited liability company in accordance with the laws of Uganda. c) Particulars of Directors and Secretaries. Company Form 7 of Particulars of Directors and Secretaries was filed with the Company Registry on May 20th 2011 and shows the following as the Directors and Secretaries of Africa EMS Nyamwamba Limited: (a) Jody Lenihan (Canadian), (b) Rajiv Wadugodapitiya (Sri Lankan), (c) Charles Mugisha (Ugandan), The Company Secretary is: Gloneid (BD) Consult Limited b) Lubilia Small Hydropower Plant (5.4 MW) (LSHP) 49. The proposed Lubilia Small Hydropower Plant (LSHP) development includes a power station with an installed capacity of 5.4 MW and an annual output of 21.3 GWh. The load factor is 47 percent. The feasibility study has been conducted by AH Consulting, a Uganda based regional consulting firm providing consulting services to the private sector, public sector, nongovernmental organizations and development agencies. 50. The geological assessment is based on field observations, boreholes and test pits. The geology of the site presents no major difficulty. 57

67 51. The Lubilia River originates in the high forests of the Ruwenzori Mountains. There are no data of historical flows on this river, but there is a good correlation with the neighboring Kanyampara River and a considerable database of stream flows for neighboring streams. The catchment area is reported to be 42.5 km2 with an average annual flow of 1.44m3/s. The consultant proposes a design flow of 2.5m3/s which is reached 10 percent of the time only according to the flow duration curve. This seems excessive and should rather be 1.2m3/s on this river. 52. The weir is small (6 meter) and simple. The side intake design is acceptable. The rock condition at the weir site is well known. The information on the grouting needed to ensure water tightness of the weir foundation will be provided in a later stage. 53. For the power plant equipment, the choice has been made by the consultant for two Pelton turbines. This seems appropriate, but should be revised if the design flow is reduced. The details of the turbine requirements will have to be cleared with the manufacturers. Details of the calculation of the power output are not given. There is no information on how much firm power will be generated. 54. The construction schedule is ambitious but feasible. The tendering for the EPC contract has been launched and the contract will be awarded soon after signing the PPA and IA. There is no indication on the construction of the transmission line schedule. 55. The sponsor has been requested to, i) refine the hydrological analysis, ii) revisit the calculation of the annual output and on the optimization of the power plant capacity, iii) review the cost estimate to integrate the EPC project management and engineering costs, iv) review the construction schedule based on the actual progress of the development and a realistic procurement process, and v) review the catchment yield before finalizing the project design. 56. With the above provisions, the Lubilia project is ready to move forward. 57. Summary assessment of LSHP Sponsor is provided below: a) Certificate of incorporation - Lubilia Kawembe Hydro Limited is duly incorporated in Uganda as a private limited liability company. It holds a Certificate of incorporation dated 10th August It is registered as company Number b) Memorandum and Articles of Association - Lubilia Kawembe Hydro Limited registered its Memorandum and Articles of Association on 10th August The share capital of the company is Ush10 million divided into 100 ordinary shares of Ush 100,000 each. Its objects include the development and provision. It has two shareholders with a shareholding as: (i) Serwanga Cletus 80 Shares and (ii) Serwanga Catherine 20 Shares. The two are mentioned as husband and wife and are of a common address of P.O. Box, 3655, Kampala, Uganda. Based on the above information, Lubilia Kawembe Hydro Limited is duly incorporated in Uganda as a private limited liability company in accordance with the laws of Uganda. As of April 11th, 2013, the shareholders have changed: The shareholding structure is Frontier 85 percent and existing shareholders 15 percent. The 58

68 shareholders and the company are in the process of registering the change of ownership. c) Form of Directors and Secretaries - In the deficiency assessment, the applicant has submitted the requested Form of Directors and Secretaries, revealing the following composition of the board: Identification of directors: Daniel Schultz (Chairman, Frontier), Cletus Serwanga (existing shareholders), Gert Skov (Frontier). c) Rwimi Small Hydropower Plant (5.5 MW) (RSHP) 58. The Rwimi Small Hydropower Plant (RSHP) is a run of river project consisting in a 5.5 MW power station operating under a 90 meter head with 8 m3/s flow. The annual output is 27 GWh. The load factor is 56 percent only, which is low for a run of river project. The documentation provided is overly simple and does not allow any conclusion on the feasibility of the project. The study has been made by Eco Power Holdings Limited from Sri Lanka, a company that claims experience and expertise in all of the key areas relating to the development of SHP plants. 59. Hydrology has been studied based on the observation of rainfall in the area of the project, with only a single rain gauge available in the watershed. Furthermore, information has been gathered for a narrow altitude band (700 1,600 meter) and there is no information on rainfall trends at higher altitudes which constitute the largest part of the watershed. 60. Geological assessment is based on field observations with no detailed site investigations. This is critical as a large dam is planned on the site (14.5 meter high). There is no information on the sediment load. The developer selected an arch dam alternative while the geometry of the valley is indeed appropriate for an arch dam. There is a general discussion on the dam but nothing corresponding to a feasibility level. There is no indication on how the dam will be constructed, on river diversion, on the flood to take into account for the construction. 61. The choice of using two Francis turbines is appropriate. The details of the turbine requirements will have to be cleared with the manufacturers. Details of the calculation of the power output are not given. There is no information on how much firm power will be generated by the power station. 62. Unit investment cost per MW would be about US$ 3.8 million, a figure which is on the higher side of a plant of that size. 63. The sponsor has been requested to; (i) perform a minimum of site investigations to support the design (topography, geology, hydrology) (ii) refine the hydrological analysis (iii) provide details on the calculation of the annual output and on the optimization of the power plant capacity; (iv) prepare a full feasibility design for the overall scheme; (v) review the operation safety and analyze the opportunity to install a head gate at the upper end of the penstock; (vi) prepare the cost estimate; and (vii) review the construction schedule based on the actual progress of the development and a realistic procurement process to finalize the project design. 59

69 64. The Rwimi project still needs significant work before it can move forward. The Bank will review its final project design and construction schedule after it has been revised incorporating the above suggestions. 65. Summary assessment of RSHP Sponsor is provided below: a) Certificate of incorporation - Eco Power Holdings Limited (EPH-L) was originally registered in the Democratic Socialist Republic of Sri Lanka on 6th September It was registered as a foreign company in Uganda on 31st March It holds a certificate of Registration No. F b) Memorandum and Articles of Association - Company Form No. 22 shows that the full Address of the Registered or Principal Office of a company incorporated outside Uganda (EPH-L) has been duly filed at the Company Registry in Uganda. The company established Office of Business in Uganda is at Rwenzori Courts, P.O Box 6074, Kampala. A copy of the Memorandum and Articles of Association of the company as registered in Sri Lanka has also been duly filed in Uganda. The Share Capital of the company is as follows: (i) on registration the Share Capital was indicated as one Billion Rupees, (ii) No. of Shares: One Million Shares (may be increased). Based on the above information EPH-L is duly incorporated in Uganda as a foreign company in accordance with the laws of Uganda. c) Particulars of Directors and Secretaries - General Company Form N. A 19 (List of Directors and Secretary of a company incorporated outside Uganda was duly registered in Uganda to show the following as the Directors of the company. The documentation submitted by the applicant notes that all are Sri Lankan citizens. 1. Dinesh Jamnadas Ambani, 2. Ronesh Dias Bandaranaike, 3. Ahangama Vithanage R. De Silva Jaya, 4. Michael Haglind, 5. Jan Henrik Hertzberg, 6. Liyanage Ginawardena, 7. Lalith Jamnadas Ambani V. Potential World Bank Guarantee Support to Solar PV Projects under this Program 66. ERA is investigating the possibility of including Solar PV projects under the GET FiT Premium Payment Mechanism (GFPPM). The main reason for this request is the relatively short implementation time and thus short-term availability of Solar PV. After granting a license, commercial operations date (COD) can be achieved for Solar PV projects within 12 months thereby helping Uganda to address the short term supply issues and directly reducing the need for thermal generation in 2015 and afterwards. Further, ERA acknowledges the potential of the technology to balance a power system heavily dominated by hydropower. If ERA decides to support Solar PV projects then these projects could also benefit from the proposed IDA PRG following finalization of standard security packages. 67. During the first round of Request for Proposals under the GFPPM, Solar PV was not included as an eligible technology as it had been removed from the REFiT. The reason for this was that the REFiT guidelines published by ERA in 2011 set the tariff at US$ 0.36, which was more than sufficient to make projects financially viable. However, it was also considerably above the average generation cost, so that from an economic point of view, Solar PV was not 60

70 viable for Uganda and no generation license was ever awarded. In 2012, when reviewing the REFiT, ERA adapted its policy towards Solar PV, due to the market environment, in which prices for Solar PV are fluctuating and hard to determine ( moving targets ), ERA decided against setting a new REFiT for solar. To ensure that the significant potential of solar power generation will be utilized, ERA intends to follow the South African (REIPPP) example and tender out PV concessions through a reverse auctioning process. Hereby, developers are asked to bid a price per KWh and the concession is awarded to the cheapest bidder(s) after a thorough due diligence process. Through such a competitive tender process, the unit costs are likely to come down considerably. Key advantages of Solar PV for the Ugandan electricity market 68. While the subsidy requirement per kwh would be considerably higher than for small hydro (US$ 0.02/kWh) there are strong reasons to justify such an intervention: a) Short-term solution: Solar PV can be brought on the grid within 12 months after concession and generation license are awarded. Solar PV would help to avoid supply shortages and hence negative impacts on social and economic development. In the Ugandan context, Solar PV is the only short-term alternative to thermal generation. b) Diversification: An introduction of Solar PV would facilitate diversification of generation: Solar PV is only marginally affected by rainfall and mitigates the hydrology risk immanent to the current (and future) hydro-heavy energy mix in Uganda, thus improve security of supply. c) Improved grid stability: Solar PV can be built practically everywhere in the country, and particularly in the drier North-Eastern regions, allowing for more distributed generation. To maximize this benefit the selection criteria for locations as well as size of individual Solar PV project will be closely coordinated with the grid operator UETCL. In addition Solar PV is scalable and can be adjusted to meet local demand, which helps reducing the load on the distribution grid. d) Reducing losses: By placing solar plants close to regional daytime load centers, Solar PV has the potential to make a significant contribution to loss reduction. Especially Northern Uganda is supplied via long transmission and distribution lines from the large HPP on the river Nile The economic benefit of placing Solar PV close to regional load centers like Gulu, Lira etc. would be high. This is particularly advantageous, since this region is blessed with comparatively high solar radiation. e) Developing the market for Solar PV: By introducing grid connected Solar PV to the Ugandan market, the entry barriers are lifted and market actors are likely to develop further projects in the country - which is expected to result in reduced costs due to economies of scale. f) Economic Value: Though relatively more expensive than other small RE, e.g. hydro or bagasse co-generation, Solar PV offers a high economic benefit due to the short lead time to commissioning in particular if compared with the avoided cost for thermal generation. Other economic benefits comprise of improved grid stability and avoided electricity losses. 61

71 Advantages of including Solar PV under GET FiT Program 69. The solar component will be integrated into the GET FiT program concept and approach and does not require any changes to its overall governance structure. 70. Since ERA has never conducted a reverse ( Dutch ) auctioning for a concession, a consultant is currently being procured under the existing GET FiT TA facility to support the regulator in this process ( Solar Tender Agent ). The consultant will support ERA in designing and implementing the tender process (reverse bidding) for Solar PV. In addition to the tariff level, the consultant will propose additional criteria (e.g. benefits in terms of loss reduction, grid stability, grid connection, technical quality standards, size of the project etc.) that will guide the selection of project proposals. It will be assured that the GET FiT evaluation criteria (technical soundness, compliance with World Bank Performance Standards on Environmental and Social Sustainability (2012), financial and economic viability, legal due diligence/ Know Your Customer Check) are reflected in the process. Consequently, projects awarded a concession by ERA through the tender process will also be eligible for support under GET FiT. 71. Standardized contracts developed for small hydro projects can easily be adapted to reflect the needs of solar developers. This will also be the responsibility of the Solar Tender Agent. Since the agreements have been drafted to meet the requirements of the Government, the World Bank and investors/ financiers, the contracts will be an important factor making projects bankable and eligible under the proposed IDA PRG program. Quantified Impact of Solar Component 72. With a grant of EUR 15 million a minimum of 20 MWp of Solar PV could be added to the grid. This equals an annual electricity generation of 30 GWh per annum, further promoting RE, in Uganda and directly reducing the need for thermal generation. 28 MWp Solar PV would reduce CO2 emissions by roughly 420,000 tons over the 20 years lifespan of the project based on an electricity output of 1,500 kwh/ kwp and thermal generation that has an emission factor of 0.7 tons CO2 / MWh. 62

72 Annex 4: Implementation Arrangements UGANDA: Series of IDA Partial Risk Guarantees for Renewable Energy Development Program 1. The World Bank and GoU with an objective to minimize costs are cooperating to create an enabling environment for the SPPP investors. As part of this effort, the Bank and the GET FiT Secretariat have aligned their project selection methodology. Each process is individually described below as is the mechanism for how the processes will work together. (i) Project Selection Process under the GET FiT Program 2. The Uganda Electricity Regulatory Authority (ERA) is the implementing agency of the GET FiT program and GoU has appointed KfW to administer the GET FiT Fund. KfW has appointed a consulting firm, to staff and manage the GET FiT Secretariat. GET FiT Secretariat is responsible to evaluate applications it receives from sponsors and based on certain evaluation criteria the Secretariat selects projects that will be eligible to receive the GET FiT premium. The evaluation criteria followed by GET FiT includes a quantitative and qualitative evaluation. The methodology for the quantitative evaluation process is stated in Table 4.1 below. 63

73 Table 4.1: GET FiT Secretariat s Quantitative Evaluation Methodology Criteria Subcriteria Points Range Financial & Economical Environmental & Social Financial Sustainability Economic Viability Assessment & Management of Environmental Risks up to 15 points: thoroughly presented, robust, feasible and adequate financing and business plan // Assumption of FIRR >10% in real terms including the GET FiT premium less than 5 points: no solid financing and business plan (plan submitted lacks detail and robustness) // FIRR is unlikely to achieve the 10% in real terms including the GET FiT premium payment hurdle rate under normal circumstances // cash flow and liquidity not positive during debt service or highly susceptible to sensitivities. up to 20 points: the project features a competitive LCOE (computed based on full project lifecycle costs, e.g. including grid connection) in line with least-cost expansion plans of GoU // Project has ability to commission quickly (</= 2 years for cogeneration, </= 3 years for small hydro) and thus alleviate anticipated power shortages // Project helps to stabilize regional grids and thus helps to promote rural electrification and productive use in rural regions of Uganda. up to 14 points: the project's LCOE is broadly in line with least-cost expansion plans of GoU // Project has ability to commission within less than 3 / 4 years // Project does make a limited contribution to stabilize regional grids. less than 5 points: the project's LCOE is above average/ beyond least-cost expansion path // Project is unlikely to commission within the next 4/5 years // Project makes limited or no contribution to regional grid stability up to 15 points: excellent assessment of environmental impact based on IFC 2012 Performance Standards // all potential risks are thoroughly and comprehensively identified, addressed and analyzed // project s risk and impact mitigation strategy is reasonable and meets standards set by the IFC 2012 guidelines // compensation schemes, if applicable, have been developed, meet IFC 2012 standards and have been included into business plan development up to 10 points: solid assessment of environmental impact meeting some IFC 2012 standards // most potential risks are comprehensively identified, addressed and analyzed to a certain extent// project s risk and impact mitigation strategy is sound and refers to standards set by the IFC 2012 guidelines // compensation schemes, if applicable, have been developed, yet lack in-depth analysis and inclusion less than 5 points: poor assessment of environmental impact only fairly or not meeting IFC 2012 standards // significant potential risks are lack identification and are not addressed and analyzed in the necessary depth// project s risk and impact mitigation strategy is poor // compensation schemes, if applicable, are missing 64

74 Criteria Subcriteria Points Range Technical Assessment & Management of Social Risks Quality & comprehensive ness of Planning Documentation up to 15 points: excellent assessment of social impact based on IFC 2012 Performance Standards // all potential risks are thoroughly and comprehensively identified, addressed and analyzed // project s risk and impact mitigation strategy is reasonable and meets standards set by the IFC 2012 guidelines // compensation schemes, if applicable, have been developed, meet IFC 2012 standards and have been included into business plan development up to 10 points: solid assessment of social impact meeting some IFC 2012 standards // most potential risks are comprehensively identified, addressed and analyzed to a certain extent// project s risk and impact mitigation strategy is sound and refers to standards set by the IFC 2012 guidelines // compensation schemes, if applicable, have been developed, yet lack in-depth analysis and inclusion less than 5 points: poor assessment of social impact only fairly or not meeting IFC 2012 standards // significant potential risks are lack identification and are not addressed and analyzed in the necessary depth// project s risk and impact mitigation strategy is poor // compensation schemes, if applicable, are missing up to 15 points: plant design and planning documentation is good to excellent // all provided documentation meets or exceeds industry standards// used technology is latest standard and suitable for the plant location // risks resulting from the project region have been addressed and incorporated // hydrological data and studies are sound, reliable and approve optimal project site s and plant s design suitability // alleged electricity output and plant capacity are reliable up to 10 points: plant design and planning documentation is feasible and lacks some detail // all provided documentation meets industry standards// used technology is solid standard and suitable for the plant location // risks resulting from the project region have been addressed and partly incorporated // hydrological data and studies are solid, but do not reveal optimal project site s and plant s design suitability // alleged electricity output and plant capacity are reliable, but lack some detail less than 5 points: plant design and planning documentation is incomplete and lacks significant detail // provided documentation does not meet industry standards// used technology is out of date and/or not suitable for the plant location // planning lacks a thoroughly assessed project timeline // risks resulting from the project region have not been addressed // hydrological data and studies are scant // alleged electricity output and plant capacity is not verifiable 65

75 Criteria Subcriteria Points Range Development Schedule 10 up to 10 points: planning includes a thoroughly assessed and realistic project timeline as well as an alternative contingent project development schedule // Region s risk for the development schedule have been assessed and Incorporated less than 5 points: planning partly / generally lacks a thoroughly assessed project timeline and any data regarding a project development contingency plan // lacks incorporation of regional factors Capacity and Experience of the Sponsor 10 up to 10 points: Applicant has a record of comparable successfully-executed projects in the EA region or other less developed countries // key personnel has at least 5 years of industry experience and is verifiably available for the proposed project // Applicant, its parent company or shareholder allow the assumption that enough financial capacities are available to execute the project within the proposed time frame less than 5 points: Applicant has / provides no or only a small record of comparable successfully-executed projects in the EA region or other less developed countries // key personnel has 5 years of industry experience or less // Applicant, its parent company or shareholder do not allow the assumption that enough financial capacities are available to execute the project within the proposed time frame Applicants receiving above 70% are selected under the quantitative evaluation 66

76 3. At the qualitative selection level, the GET FiT Secretariat carries out a legal due diligence of the project based on the documentations submitted by sponsors. In the legal due diligence, the GET FiT Secretariat examines whether the sponsor; a. has availed all required corporate constitutional documents; b. obtained all required licenses and/or clearances, i.e. license from ERA, clearance from National Environment Management Authority (NEMA), Industrial clearances, etc.; c. meets all standard of KfW Know Your Customer (KYC); d. is in compliance with money laundering and terrorism financing checks, including EU and UN sanctions list checks. 4. The legal evaluation results to either pass or fail and if failed then the sponsor will be disqualified irrespective of its scores obtained in the quantitative selection process. (ii) World Bank Eligibility Criteria for Project Selection: 5. Like the GET Fit selection process, the project selection process for IDA supported SPPPs is considered to take place in two phases; (i) initial screening and (ii) detailed project due diligence. 6. For initial screening the parameters which are reviewed include whether the project is; (a) based on renewable energy based resource; (b) between 1 to 20 MW; (c) sponsored by a private sector; and (d) economically feasible including the cost of grid connection. 7. Once a project meets the initial selection criteria, it is then further evaluated for detailed due diligence. At this level the project parameters which are reviewed include; (a) detailed financial and economic analysis; (b) detailed technical evaluation (c) detailed review of project safeguards documents and management capacity; and (d) compliance with the Bank s sanctionable practices. The critical due diligence parameters are discussed in turn below. a) Financial Analysis: The project Financial Internal Rate of Return (FIRR) will be reviewed. It is assumed that free market principles were at play in the selection of these projects by the private sector, hence, a low level of FIRR will not disqualify a project, but the level of FIRR will be assessed along with other evaluation parameters. b) Economic Analysis: The electricity generation costs of most renewable energy projects are much lower than those of thermal power plants. Hence these renewable energy projects will, in general, offer economic benefit to the GoU. In the case of projects for which the cost of electricity generation is higher than the marginal cost, the Bank will assess whether the project benefits can be enhanced through other market mechanisms (e.g. carbon finance, GET FiT premium, etc.). The quick construction time of the projects will also increase the economic benefit of the projects as the projects will enable the GoU to avoid contracting with rental power plants to meet any demand supply gap. c) Technical Assessment: The project feasibility report, plant design and construction planning document will be reviewed to ensure that these meet industry standards. The 67

77 reliability of the hydrology data, suitability of plant location and the proposed technology will be reviewed. Whether (i) the site specific construction risks have been properly reflected, (ii) design and construction alternatives were considered and (iii) the expected plant energy output is reliable, will be examined. The experience of the sponsor in conducting similar projects elsewhere or use of experienced staff/contractors along with whether the project has obtained all required licenses and clearances will be examined. The technical assessment will take into account that required documents cannot be expected to be prepared at the same level of detail that is required for large power plants. d) Environmental and Social Assessment: As the proposed IDA PRG program is being prepared for a pipeline of projects that are designed, owned, constructed and operated by private entities, they would be required to comply with the Operational Policy (OP) and Bank Procedure (BP) 4.03; Performance Standards for Private Sector Activities. The aim is to facilitate Bank support for private sector-led projects by applying environmental and social policy standards that are better suited to the private sector. The projects will be assessed to determine their compliance with the Bank s Performance Standards. (iii) Harmonized Project Selection Process: 8. The selection criteria adopted by the GET FiT Secretariat and the appraisal methodology used by the Bank to identify projects eligible for the IDA support under this Project are found mostly similar. Hence the sponsors will have to provide similar set of information to be eligible for two market enhancement instruments. 9. The Bank and GET FiT Secretariat have aligned their evaluation process. The Bank will use the information collected by the Secretariat to carry out its appraisal of the projects. This scheme was tried in the first batch of RFP process and was found effective. In that connection, it will increase efficiency in managing several players working for the same objective. 10. During the Bank s appraisal of this Program, the GET FiT Secretariat and the World Bank have entered in to a Memorandum of Understanding (MoU) on February 12, 2014 to share information, coordinate and cooperate in order to streamline the selection process and to increase efficiency by reducing duplication of efforts by two organization supporting development of same projects. A flow chart is provided in Chart 4.1 below explaining how the selection process will work between the Bank and the GET FiT Secretariat. 68

78 Chart 4.1: Coordinated Review Process between the Bank and GET FiT Secretariat 11. However, while the Bank will receive relevant appraisal information from the GET FiT Secretariat and will also receive the GET FiT s Semiannual Supervision Reports, the Bank will remain responsible for the appraisal of projects and the determination of eligibility for IDA PRGs. The Bank may contact the sponsors directly to supplement the appraisal when required. 12. While it is expected that in most cases both processes would select the same projects, it is possible that a project may be eligible for the GET FiT Program but not eligible for an IDA Guarantee. For example, if a sponsor scored high on all aspects except the environmental and social parameters, and in total scores above 70 percent, it would be selected under the GET FiT criteria. But to be eligible under the IDA Guarantee, the project must be in full compliance with the World Bank Performance Standards. 13. Secondly, the GET FiT s selection process includes issuing a RFP and then performing a scheduled evaluation process. Sponsors not abiding by the RFP process will not get selected for the GET FiT program, whereas the IDA Guarantee is not bound by any specific RFP schedule. The process is more open in terms of entry. During project preparation, the Bank streamlined its selection process with the first batch of the GET FiT RFP process, which reduced the sponsors transaction cost as sponsors only had to provide information on new occasion. For projects that would want to only apply for IDA PRG support, and not GET FiT program, will be reviewed by the Bank separately outside of the GET FiT appraisal mechanism. 69

79 14. The Bank and ERA have worked closely to finalize the standard PPA and IA that will be used to contract hydropower based SPPPs. The objective of the standard PPA and IA is to reduce transaction cost of selecting several small scale projects and to be able to replicate the experience obtained from this program elsewhere. As of now, only hydropower based SPPPs have applied for IDA Guarantees and hence the Bank has worked with ERA to finalize the standard agreements for hydropower based SPPPs. As investors of new technologies, such as Solar PV, may request support from IDA Guarantees under this program, and subject to ERA being ready to support those projects, similar standard agreements would be prepared to support such new technology projects. Required Bank Resources 127. The preparation of this Series of Guarantees would require sufficient resources during the supervision stage of the proposed IDA PRG program. It is expected that a total of 20 SPPPs could be supported through this proposed program. Based on the preparation phase of these projects, there could be three more batches of appraisal during the first three years of the proposed program. Therefore, these series of Guarantees would require more resources at supervision phase compared to conventional loan/credit programs. Estimated Bank Budget requirement of this program is stated in Table 4.2 below. Table 4.2: Bank Budget Requirement for Proposed IDA Guarantee Series (in US$ 000) Bank Budget Requirement for FY 2015 FY 2016 FY2017 FY2018 FY2019 Supervision Subsequent PAD preparation Total Budget Requirement

80 Annex 5: Operational Risk Assessment Framework (ORAF) UGANDA: Series of IDA Partial Risk Guarantees for Renewable Energy Development Program (P133318) 1. Project Stakeholder Risks 1.1. Stakeholder Risk Rating Low Description: Risk Management: The SPPP sponsors may find better opportunities in other countries and may not demonstrate the same level of enthusiasm to take the market risks prevailing in Uganda. The GET FiT premium offered and the IDA PRG offered may not be adequate to attract the private sector in Uganda. Detailed market assessment has been carried out to measure the private sector perception on Uganda. The first batch of projects that will be supported by the proposed IDA PRG has been developed over the last several years. This shows the strong level of interest from the sponsors to do business in Uganda. The long gestation period confirms that the market conditions are not right, for these sponsors to arrange financing and invest their equity against these projects. Therefore, it is expected that the market enhancements being carried out through the REFiT, GET FiT and IDA PRG, may help the sector and benefit the sponsors. Resp: Stage: Recurrent: Due Date: Frequency: Status: ERA, UETCL, GoU Ongoing In progress 2. Implementing Agency Risks 2.1. Capacity Rating Substantial Description: ERA s effort to move towards cost reflective pricing may not succeed. UETCL may not be able to make timely payment to the SPPPs Risk Management: 2.2. Governance Rating Moderate Description: The governance challenges in Uganda are high. The power sector may also get affected by the surrounding environment. There is a perceived risk of enforcing the contracts governing the relationship between the SPPP and UETCL. GoU indicated that it wants to reduce subsidy to the sector. This should help ERA to move towards cost reflective pricing. ERA has also considered creating public awareness on importance of cost reflective pricing. UETCL s ability to make timely payment to SPPPs mostly depends on setting the correct tariff by ERA. Resp: Stage: Recurrent: Due Date: Frequency: Status: ERA In progress Risk Management: The program will support private sector investments in renewable energy based power generation. There will be no government procurement or fund transfer under this program. The IDA PRG will be extended to a commercial bank L/C facility and/or for a commercial bank Loan Guarantee. Furthermore, the PPA and IA governing the relationship between the SPPP and the UETCL and GoU are also reviewed by the Bank and is part of the PRG program. Resp: Stage: Recurrent: Due Date: Frequency: Status: ERA In progress 71

81 3. Project Risks 3.1. Design Rating Moderate Description: There could be low level of interest from private sector to get involved in Uganda s power generation projects. In addition the current status of the GET FiT secretariat s market sounding process indicates that it may be challenging to raise commercial debt. The main reluctance by commercial lenders to support individual projects under this program seems to be the perceived high risk within the sector and the relatively high transaction costs commercial lenders would incur on such small scale projects. Risk Management: 3.2. Social and Environmental Rating Moderate Description: Inability of the project sponsors to follow Bank s Social and Environment standards. Market assessment by the Bank showed adequate interest among the private sector to get engaged. At the first round of the selection process, about 15 SPPPs applied. The second round has also generated interest among new players. To mitigate the risk of lack of interest by commercial lenders, the proposed IDA PRG program is designed to address this risk by offering PRGs covering commercial debt. With the proposed IDA PRGs in place, the SPPPs may be better able to attract commercial lenders. Given the current market information and assessing the risk appetite of the commercial lenders, this risk is considered moderate. Resp: Stage: Recurrent: Due Date: Frequency: Status: ERA/ GET FiT Secretariat Ongoing In progress Risk Management: 3.3. Program and Donor Rating Low Description: The GET FiT program is supported by several donor contributions. Donors may stop supporting this program leading to an unsustainable program. This program has adopted the World Bank Performance Standards for Safeguards management. These Performance Standards had been used by IFC for its private sector sponsored projects. So the private sector has good track record of following the Performance Standards. Resp: Stage: Recurrent: Due Date: Frequency: Status: ERA/ GET FiT Secretariat/ World Bank Risk Management: 3.4. Delivery Monitoring and Sustainability Rating Moderate Description: Getting information from several small scale renewable energy projects could be difficult and costly. Ongoing In progress Donor interest to support effective programs is increasing. The involvement of DFIs, financing the first phase projects, shows that commercial banks will have to compete with DFI financing schemes to get involved in this program. Resp: Stage: Recurrent: Due Date: Frequency: Status: GoU Ongoing In progress Risk Management: 3.5. Financial Management Rating Low Description: The GET FiT program allocated funds to finance this activity. International consultants have been selected to monitor and supervise the construction activities of the project. GET FiT Secretariat will provide Semiannual progress reports to GET FiT Investment Committee and Steering Committee. Resp: Stage: Recurrent: Due Date: Frequency: Status: GoU/GET FiT Secretariat By effectiveness Risk Management: In progress 72

82 There are no disbursements anticipated under this IDA PRG program, hence, risks related to week financial management is low. The program is designed as a guarantee operation Resp: Stage: Recurrent: Due Date: Frequency: Status: ERA In progress 3.6. Procurement Rating Low Description: There is no procurement under this proposed program which will be supported by the Bank through PRGs. UETCL will have to select a L/C bank and will follow commercial practices. Selection of projects for IDA PRG will follow an appraisal process managed by the Bank staff. Risk Management: 3.7. Financial Viability Rating Substantial Description: GET FiT Secretariat will provide appraisal information to the Bank. It will also carry out its own selection of sponsors for the GET FiT premium and same information will be shared with the Bank for sponsors applying for IDA PRG support. Resp: Stage: Recurrent: Due Date: Frequency: Status: UETCL/ GET FiT Secretariat/ World Bank Risk Management: In progress UETCL s tariff does not cover its full cost. UETCL has to depend on GoU subsidy to meet its total annual expenditure. This increases UETCL risk of not being able to make timely payments to the SPPPs for electricity supplied. To mitigate this risk to the SPPP sponsors, the proposed IDA PRGs are being designed. Related to this payment risk is also the performance and status of the private distribution concessionaire, Umeme Ltd., who represents the main source of revenue to UETCL (in the absence of GoU subsidies) as Umeme Ltd. is the main power off-taker from UETCL. While the performance of the company has steadily improved in recent years and ERA in most cases honored the regulatory framework including the legal rights of the company under its distribution license, Umeme Ltd. recently filed a dispute resolution with the Electricity Tribunal in Uganda. In the worst case scenario an unresolved dispute could lead to an international arbitration proceeding, which may have an impact on Umeme s daily operation, leading to negative impact on UETCL s revenue inflows received from Umeme Ltd. In such a scenario, given a tightened financial situation of UETCL, the IDA PRG availed for any Small Private Power Producer (SPPP) may come closer to a triggering scenario, if the Bank cannot prevent such escalation through its sector dialogue. ERA has introduced multi-year tariff with automatic quarterly adjustments in January The proposed program will ensure that the SPPPs will get paid on time (for a certain period) even if UETCL is unable to make a timely payment. The PRG support provided to Umeme Ltd. under the PUSRP is no longer available and cannot be triggered. Resp: GoU and ERA Stage: Recurrent: Due Date: Frequency: Status: In progress 3.8. Risks before reaching Commercial Operation Rating Moderate Description: Risk Management: a) The fact that most of the project sites are far from the existing grid, interconnection between the power plants and the grid had been a point of concern. Based on an agreement between ERA, UETCL and private sponsors, if the project is located less than 5 km from the grid network, the sponsors will have to bear the cost of constructing the transmission line as part of the project cost. If the project is located more than 5 km from the grid, the sponsors will have to estimate the cost of connection and ensure a) In both cases, the transmission line will be transferred to UETCL for its operation and maintenance. While this provision has offered a solution to the issue at hand, the sponsors will have to arrange additional financing to cover the cost of transmission line. The evaluation of the cost of transmission line and the process of repaying this investment cost needs to be further agreed to. This remains a risk for the sponsors, but it is considered moderate in view of the fact that there had been several small renewable energy projects that had been constructed following the same principle in Uganda 73

83 that the projects are feasible even after constructing the transmission line. If the project remains feasible then the sponsors would be required to cover the cost of the construction of the transmission line and then recover the investment over a period to be agreed with UETCL. b) It will therefore, be important that UETCL properly plans for the investment works and that appropriate charging of consumers and projects takes place. The Bank will obtain the necessary assurances from GoU during project preparation and any needed covenants will be included in the IDA PRG Indemnity Agreement and if necessary, a direct project agreement with UETCL. This risk is therefore considered moderate. b) It is expected that the connection of the projects to the grid may require additional investment in reinforcement of the transmission network to enable proper evacuation and use of the electricity generated. c) The private sponsors may face construction challenges which may delay the commercial operations date. One of the major objectives of this program is to develop the renewable energy based small power plants quickly so that GoU may meet the growing electricity demand. c) The Power Purchase Agreements will include liquidated damages provision to guard the GoU against such inordinate delays. It is therefore expected that the SPPP sponsors will make every effort to reach the commercial operations date in a timely manner. The risk is therefore considered moderate. Resp: 3.9. Risk of Power Supply Balance Rating Low Description: The main objective of developing these small renewable energy projects is that these can be constructed quickly and will enable the government to bridge the demand supply gap until the larger and more efficient hydropower projects come online. However, once the large power plants are online, and if supply is more than the demand, then GoU will have to incur the costs of these power plants, even if they are not operated, as the PPA includes provision to pay the SPPPs for deemed energy. Not developing these small SPPPs would require the government to again rent costly thermal plants to meet the looming supply shortage. Cost of the rental power plants are several times more than the cost of these small scale renewable energy projects. Furthermore, the construction of large power plants are more complicated and it is also likely that these projects could also face construction delays and may not be commissioned by the planned date. The demand of Uganda is increasing, given that most of its generation is from renewable sources, it would need to have excess capacity to hedge against seasonal fluctuation in renewable power plant generation capability. UETCL, ERA and GENCOs Risk Management: Stage: Recurrent: Due Date: Frequency: Status: In progress GoU plans to export electricity once the large power plants are commissioned. Hence, the deemed energy of these small renewable energy projects will not be at risk. Furthermore, the small power plants are distributed all over the country and hence will diversify the hydrology risk that Uganda is currently facing as all its hydro power plants are on the River Nile. The risk of these small power plants not being used is therefore considered low. Resp: GoU Stage: Recurrent: Due Date: Frequency: Status: In progress 4. Overall Risk (Following Review) Implementation Risk Rating: Substantial Comments: The rating reflects the relatively straightforward project design that will facilitate implementation but also recognizes that the program will be sustainable only if fundamentals in the power sector improve over time. The implementation risks are considered Substantial. These would include: (a) capacity of the sponsors to carryout detail feasibility of the project and (b) following the construction schedule properly. It is common for these SPPPs to get involved in such project for the first time. Though, they will be required to appoint experienced EPC contractors, often their ability to avoid construction delays are limited. 74

84 Annex 6: Economic and Financial Analysis UGANDA: Series of IDA Partial Risk Guarantees for Renewable Energy Development Program 1. In this section, the economic and financial benefits to the GoU, UETCL and each project developers to develop the renewable energy based SPPPs are discussed Government of Uganda 2. Based on the least cost expansion plan, Uganda s cost of generation is increasing gradually from US$0.08/kWh in 2012 up to US$ 0.16/kWh until 2019 and about US$ 0.11/kWh in This estimate is based on the assumption that large hydro power plants such as Karuma hydropower plant (600 MW), Isimba hydropower plant, etc. will be operational by The REFiT approved by ERA provides US$ 0.073/kWh for hydro projects of 9 20 MW and US$ /kWh for hydro projects of 1 8 MW. Hence, hydro based SPPPs larger than 3 MW will always be below the LCOE price of US$ 0.09/kWh and will be economically beneficial for Uganda. Nyamwamba Small Hydropower Plant (9.2 MW) (NSHP) 3. The Nyamwamba Hydropower Plant (NSHP) is promoted by Africa EMS Nyamwamba Ltd. and its shareholder SAEMS Capital I B.V (Curacao - Netherland Antilles). SAEMS Capital I B.V. (the "Company") is a Curacao - Netherland Antilles based corporation (incorporated 2008), a wholly-owned subsidiary of South Asia Energy Management Systems LLC (SAEMS, Delaware). The shareholders of this company are Asia Energy Management Systems LLC (Asia EMS) and Africa Energy Management Systems LLC (Africa EMS). SAEMS owns and operates 10 small hydropower plants in Sri Lanka, with total installed capacity of 37.1MW, and 1 small hydropower plant in Uganda with installed capacity of 18MW (SHP Mpanga). 4. The Consolidated Financial Statements of the shareholder SAEMS Capital I B.V. dated 31st of March 2012 show assets of US$ 87.5 million and liabilities of US$ 61.3 million, resulting in equity of US$ 26.2 million with equity ratio of 29.9 percent. Revenues were US$ 12.2 million in that fiscal year, which closed with losses of US$ 9.4 million mainly due to FOREX accounting losses. Although the assets consist mainly of fixed assets and the accounted cash of US$ 8 million in the consolidated balance sheet may be distributed over quite a number of subsidiaries, the company seems to be in a position to make the equity contribution of US$ 8.1 million (30 percent of investment cost). 5. Debt finance is pre-arranged. SAEMS was restructuring the A/B Term Facility from FMO/DEG with the extension of a US$ 24 million parallel debt financing package in order to construct NSHP with the initially planned 14 MW layout. The amount may have to be adjusted to about US$ 19 million due to the smaller capacity of 9.2 MW. The initial borrowing period from January 2012 through January 2014, and a repayment period from July 2014 through January 2020 may need some adjustments as well for the delay in start of implementation. Financial conditions show a maturity of 10 year including 2 year grace period and an interest rate of 6 percent. Overall, the arrangement and the financial conditions are very adequate for a project of this type. 75

85 6. Unit investment cost per MW of NSHP would be about US$ 2.9 million, a figure which can be considered adequate for a plant of this size. With an average load factor of only 45.2 percent, the 9.2 MW plant would generate annually 36,460 MWh for sale, which would result in annual electricity revenues of US$ 2.8 million with the original REFiT tariffs and without the GET FiT premium. The operating surplus would be about US$ 1.9 million. The total GET FiT premium payments would be US$ 7.6 million, of which US$ 3.2 million would be due on start of operation. Based on the standard REFiT tariff, and including the GET FiT premium, the financial internal rate of return (FIRR) would be 9.8 percent. With a discount rate of 10 percent this results in a negative NPV (US$ 297,000). The Nyamwamba project sponsors prepared their financial analysis using cost escalation, while other similar projects used stable OM costs. Revising the financial analysis assuming a scenario of stable OM cost, the FIRR of the project is 10.3 percent. Given that NSHP has been able to secure financing for the project at a cost much below 10 percent, the project will benefit the sponsors. Lubilia Small Hydropower Plant (5.4 MW) (LSHP) 7. The Lubilia Small Hydropower Plant (LSHP) is developed and shall be implemented by Lubilia Kawembe Hydro Ltd., with its new major shareholder DI Frontier Market Energy and Carbon Fund (DI Frontier). DI Frontier is a Denmark-based investment fund for renewable energy and carbon credit generating assets in Sub-Sahara Africa (SSA). In February 2013, DI Frontier became the new majority shareholder of the project company. The application indicates shares of DI Frontier 85 percent, and 15 percent for previously existing shareholders. The latter include CaCl Consulting (owned 100 percent by Cletus Serwanga), which was promoter of the project, and Catherine Serwanga. 8. DI Frontier claims to have total capital commitments of EUR 60.4 million. These commitments are not accounted as capital to be paid in the available balance sheet of DI Frontier. Despite the lack of formal evidence, the availability of the equity contribution of US$ 4 million (28 percent of revised investment cost) can be assumed secure in case the project is promoted. 9. Debt finance arrangements are in progress. An Expression of Interest for debt financing from FMO is available indicating that they are negotiating the mandate to act as an arranger with DI Frontier and that it may consider project financing together with DEG and Emerging Africa Infrastructure Fund (EAIF). Financial conditions of debt finance of US$ 9.3 million were indicated in the financial template with a maturity of 15 year including 2 year grace period. These financial conditions are adequate for a project of this type. 10. Unit investment cost per MW would be about US$ 2.6 million, a figure that can be considered as adequate for a plant of this size. With an average load factor of only 47.2 percent the 5.4MW plant would generate annually 21.6 MWh for sale, which would result in annual electricity revenues of US$ 1.9 million without the GET FiT premium and an operating surplus of US$ 1.4 million. The total GET FiT premium payments would be roughly US$ 4.5 million, of which US$ 1.9 million would be due on start of operation. The financial internal rate of return (FIRR) would be 12.8 percent. The net present value at a discount rate of 10 percent would be US$ 2.2 million. 76

86 11. The project is rather sensitive to hydrological risk, as in case of lower water availability (- 20 percent) the FIRR would drop by 4.3 percent points to 8.5 percent. The annual electricity supply would drop to 17,300 MWh. Cash flow and debt service coverage ratio (DSCR) would be adequate in the base case and acceptable, albeit a bit tight, in the negative scenarios. Rwimi Small Hydropower Plant (5.5 MW) (RSHP) 12. The Rwimi Small Hydropower Plan (RSHP) is developed and shall be implemented by Eco Power Holdings Limited (EPH-L) from Sri Lanka, which was incorporated in 2004 and opened a branch in Uganda in Majority shareholder is the MetroCorp PVT (Ltd.), which is an investment company in Sri Lanka, having diversified interests in major sectors of the economy such as tea plantations, power, telecommunications, etc. It should be noted that the company received some mezzanine financing from NORFUND. Together with its fully owned subsidiaries such as Eco Power PVT (Ltd) and Eco Power Global (Ltd), EPH-L owns 10+ SHP plants which have a combined capacity of 35MW, including 6.6MW in Uganda (SHP Ishasha). 13. The Consolidated Financial Statements dated 31st of March 2012 show assets of US$ 59.7 million and equity of US$ 23.3 million with equity ratio of 39.1 percent. Revenues of the holding were US$ 13.3 million in that fiscal year, which closed with profits of US$ 2.2 million (profit margin 20.5 percent). The assets consist mainly of fixed assets and the accounted cash of US$ 2.7 million in the consolidated balance sheet may be distributed over quite a number of subsidiaries. The balance sheet of 2012 did not indicate enough liquid reserves or financial investment means for the RSHP equity of about US$ 5.8 million. 14. The intended equity ratio for the project investment is 30 percent. But after making cost estimate adjustments, value for this ratio becomes 28 percent. Debt finance for the remainder is in progress. NDB Bank Sri Lanka is agreeable in principle to consider arranging a syndicate debt facility of up to US$ 15 million and Norfund intends to provide a subordinated debt facility of US$ 5 million. The maturity indicated in the Expression of Interest by NDB Bank is 8 year. There are no further specifications from the financial institutions. The financial model of the applicant used a 10 year maturity with 2 year grace period and an interest rate of 6.5 percent. Overall, such arrangements and the financial conditions generally would be considered adequate for a project of this type. However, due to the low margin of this specific project, the financial package may need optimization of structure and adjustment of conditions. 15. The unit investment cost per MW would be about US$ 3.8 million, a figure which is on the higher side of a plant of that size. With an average load factor of 55.6 percent the 5.5 MW plant would generate annually 26,865 MWh for sale, which would result in annual electricity revenues of US$ 2.4 million with the original REFiT tariffs and without the GET FiT premium. The operating surplus would be about US$ 1.9 million. The total GET FiT premium payments would be US$ 5.6 million, of which US$ 2.4 million would be due on start of operation. Based on the standard REFiT tariff, the financial internal rate of return (FIRR) would be 11.0 percent. With a discount rate of 10 percent this results in a rather low NPV of US$ 1.4 million. 16. The project is sensitive to investment cost increase, hydrological risk and delays. An increase in 10 percent of the investment cost would reduce the FIRR by 1 percent-point (FIRR 10 percent). In case of lower water availability (-20 percent) the FIRR would drop by 3.3 percent 77

87 points to 7.7 percent only. The annual electricity supply would drop to 21,500 MWh. A delay of one year, for whatever reason, would mean a reduction of 1.5 percent in the FIRR (9.5 percent). Uganda Electric Transmission Company Ltd. (UETCL) 17. Uganda Electricity Transmission Company Limited (UETCL) is a Public Limited Liability Company that was incorporated on 26th of March 2001 after unbundling of Uganda Electricity Board in accordance with the provisions of the Companies' Act and Section 28 of the Public Enterprise Reform and Divestiture Act. The company is wholly owned by the Government of Uganda through the Minister of Finance, Planning & Economic Development and the Minister of State for Privatization, Ministry of Finance, Planning and Economic Development. 18. Its principal business is to operate high voltage transmission lines, as a system operator and bulk power purchaser and seller in the local market. It is also licensed to import and export power into and out of Uganda. Past financial performance analysis 19. Although there have been certain achievements by the GoU s sector reform through unbundling the sector and establishing an independent regulatory regime, UETCL s financial performance was far from satisfactory in recent years mainly due to not allowing its bulk supply tariff to cover levelized cost of generation. The delay in commissioning large hydro power plants also resulted in renting costly thermal power plants, whereas the total cost of these power plants were not covered by its tariff. The reasons for UETCL s weak financial performance can be summarized as follows: Inadequate government subsidy and tariff structure to cover UETCL's operating cost and loss from foreign currency fluctuation. The severe decline in hydropower output largely due to drought in East Africa region in leading to high dependency on thermal power generation. Delay in commissioning Bujagali 250 MW hydropower plant requiring the rental power plants to operate for a longer period then initially envisaged. 20. Actual operating and financial performance of UETCL from 2006 to 2011 and provisional performance of 2012 are provided in Table

88 Table 6.1: Operational and Financial Performance of UETCL For the Year Ending Dec Actual Actual Actual Actual Actual Actual Projected Installed Capacity MW Firm Capacity Available MW Total Units Sent Out GWh 1,609 1,895 2,097 2,297 2,457 2,600 2,860 Hydro GWh 1,190 1,295 1,405 1,280 1,315 1,538 2,455 Thermal GWh , Other renewable GWh Import GWh Growth in Energy Sales % -8% 15% 12% 10% 16% 8% 12% Operating Revenue Mil USH 249, , , , , , ,816 Mil USD Growth in Revenue % 117% 28% 31% 24% 34% 30% -29% Revenue from Electricity Sales Mil USH 99, , , , , , ,816 Government Subsidy Mil USH 150,273 78, , , , ,579 0 Mil USD Operating Expenses Mil USH 244, , , , , , ,344 Mil USD Cost of Power Purchase Mil USH 219, , , , , , ,045 Growth % 112% 31% 36% 21% 33% 33% -33% Operating Income Mil USH 4,928 7,244 (48,525) 13,525 25,292 33,435 34,472 EBIT Mil USH (55,922) 2,844 11,257 7,992 29,140 Foreign exchange gains(losses) Mil USH 1,947 1,867 (11,577) 396 (7,075) (52,885) (23,567) Net Income Mil USH (397) 524 (57,022) 1,282 (45,356) (34,172) 4,108 Mil USD (0.2) 0.3 (31.2) 0.7 (21.6) (14.3) 1.6 Total Asset Mil USH 311, , , , , , ,285 Equity Mil USH 88,516 89,040 32,018 33,301 25,176 (8,999) (4,891) Liability Mil USH 222, , , , , , ,176 Unit Price Revenue from Electricity Sales USH/kWh USD/kWh Bulk Supply Tariff(BST) USH/kWh USD/kWh Generation Cost USH/kWh USD/kWh Government subsidy USH/kWh USD/kWh During the period , total sales in GWh increased by more than 10% on annual average. As UETCL was not able to meet this increased demand from its existing power plants, it had to rent expensive thermal plants to meet this demand. GoU didn t want to pass on the increased cost of thermal generation to the consumers and offered to pay the capacity payment of these plants to UETCL as GoU Subsidy. 22. Power purchase costs in FY12 constitute about 93% of total operating costs of UETCL, up from about 80% in Other operating costs (salaries, repairs and maintenance, and administrative overhead) have remained in the range of 6-7 percent of annual average gross fixed assets during Electricity revenues during FY05-11 have increased by an annual average rate of only about 26 percent compared to the growth rate of about 42 percent in power purchase costs (including fuel) during the same period 23. During this period, the average generation cost remained higher than the bulk supply tariff (BST) of UETCL by 18 percent to 67 percent except In 2007, BST was higher than 79

89 the generation cost by 15 percent and thus government reduced its subsidy support, which coverd the capacity cost of the rental power plants and rebate support to Umeme. While the subsidy and revenues from sales were able to cover UETCL s operating costs, those cash inflows were not sufficient to meet its financial expenditure and foreign currency fluctuations. As a result, almost every year, since 2006, UETCL incurred a net loss. Chart 6.1: UETCL Operating Revenue and Expenses in Ush Million 24. The generation cost of UETCL gradually increased from US$ 0.09/kWh in 2006 to US$ 0.14/kWh in GoU subsidy increased from US$ 0.05/kWh in 2006 to US$ 0.09/kWh in However, the average bulk supply tariff, i.e. UETCL s revenue from electricity sales per kwh, has only increased from US$ 0.03/kWh to US$ 0.05/kWh in the same period. As an effect, GoU subsidy had to increase from about US$ 85 million in 2006 to about US$ 247 million in This increase in GoU subsidy made the GoU strategy to subsidize the capacity payment of rental plants unsustainable and in the absence of additional subsidies ERA ordered an increase in the retail tariff to pass on most of the power generation costs. The chart 6.1 shows the increase in operating cost of UETCL and how it had been met by GoU subsidy and revenue from sales. 25. In 2012, ERA approved a considerable tariff increase, which increased the retail tariff from US$ 0.12/kWh in 2011 to an average level of US$ 0.20/kWh. The bulk supply tariff of UETCL was also adjusted and in 2012, the generation cost of US$ 0.08/kWh was met by sales tariff of US$ 0.09/kWh. There is no government subsidy payment in 2012 even though there are some rebates (USH 17 million) to Umeme, the lowest amount since

90 26. The average generation costs in 2012 decreased to US$ 0.08/kWh from the 2011 level of US$ 0.14/kWh as the Bujagali hydropower plant was commissioned in 2012 and GoU was able to reduce production from its expensive thermal plants. In order to reduce generation from the thermal plants, GoU is supporting development of small scale renewable energy projects which can be constructed within 2 to 3 years. It is expected that these plants will reduce the cost of generation in Uganda before large hydropower plants come in. Government is planning to construct large hydropower plants such as Karuma hydropower plant (600 MW), Isimba hydropower plant, etc. But these plants could only be commissioned in 2020 or beyond. All these developments are expected to improve the future financial performance of UETCL. 27. Uganda has been experiencing its own currency devaluation as well as global fuel price increase impact, which has limited its payment capability. In FY12, the lack of government subsidy led UETCL to incur delays in its payments to IPP participants in the market despite an important increase in end user tariff. End user tariff increases in FY 2012 led to a significant reduction in rebates to Umeme. However, the GoU stopped its subsidy for capacity payments and tariff support to UETCL for that rebate at the same time. UETCL is currently anticipating Bulk Supply Tariff (BST) increases to be high enough to cover such expenses for the sustainable growth without GoU subsidy support. Financial Performance Projection of UETCL 28. The future financial performance of UETCL depends on: (a) the average cost of power generation, (b) operating performance of UETCL, (c) the level of cost of generation allowed through the Bulk Supply Tariff (BST) of UETCL, (d) GoU subsidy levels (in the absence of adequate BST increases) and (e) other parameters. The investment plan and growth plan prepared by UETCL is ambitious. However, as many of these investment programs are now behind schedule and several investment projects did not reach financial closure, in the underlying financial simulation, the Bank assumed a longer implementation period for the projects than what had been indicated. Accordingly, the investment plan that the Bank considered for the projection of financial performance is summarized in Table

91 Table 6.2: UETCL Investment Plan Projects Total Projects related to Karuma Hydropower ,000 15,361 46,644 49, ,737 Substations due to Karuma ,920 58, ,182 Bujagali Switchyard upgrade to 220kV 16,001 13,610 6,806 2, ,661 Projects related to 250 MW Kabale ,520 2,430 31,820 18,614 11,141 66,525 Projects related to Hydropower plnat - - 1,000 1,872 4, ,488 Projects related to Oriang Hydropower 54, ,344 RE-Investment Projects Donor 10,356 3, ,691 Nkenda - Kabulasoke - Masaka, 280km, - 1,000 1,705 21,524 41,773 31,091 10, ,570 Mbarara- Nkenda 132kV DCST (160km) 19,447 18,513 10,032 2, ,584 Kawanda-Masaka 220kV DCST (142km) 18,630 17,787 11,097 3, ,863 Mutundwe-Entebbe132kV DCST (50km) - - 9,761 14,942 1, ,817 Opuyo-Moroto 132kVDCST (160km) - - 3,283 30,190 34,862 6, ,775 Masaka-Mbarara 220kV DCST (144km) ,040 42,440 18, ,240 Mirama - Kabale132kVDCST (76km) 7,835 16,267 1, ,744 Nalubaale - Lugazi132kVDCST (38km) ,875 1,800 5,881 8,161 1,360 20,277 Hoima-Kafu 220kV DCST ( 70 km) ,062 33,517 4, ,310 Lira-Gulu 132kV DCST (100km) ,440 11,171 19,728 2,815-38,354 Gulu-Kitgum 132kV DCST (110km) ,400 11,463 21,220 3,031 40,314 Gulu-Nebbi 132kV DCST ( 175 km) 4,725 7,875 18,358 19,010 3, ,770 Nebbi-Arua 132kV DCST ( 74 km) 3,530 11,885 10,694 2, ,248 Kikagati-Mirama 132kV (25km) 4,003 3, ,319 Kinyara-Hoima 132kV (70km) 9,916 8,457 1, ,064 Bujagali-Tororo-Lessos 220kV(127 km) 9,894 4, ,841 Masaka-Mutukula-Mwanza, 220kV (85km) 12,780 8,685 8, ,150 Mbarara-Mirama-Birembo (66km) 9,828 3, ,869 Nkenda-Mpondwe (DRC) 220kV line (70km) 15,176 3, ,845 Karuma-Nimule 400kV line (190km) , ,000 26,750 16,200 46,750 Grand Total 197, , , , , , ,760 81,115 1,197, The projected financial performance is based on the GoU s targeted end user tariff of US$ /kWh in FY and BST of US$ /kWh in FY BST increase is assumed with 6 percent annually to match with the inflation, and such increase would need to be passed on to the retail tariff and any losses between revenue requirement of Umeme and revenue coming from targeted end user tariff to Umeme will be rebated by UETCL with GoU compensation. However, UETCL is assuming GoU subsidy, including rebate to Umeme and capacity payments to IPPs, will be discontinued from FY 2012 with fully increased BST. 30. The key assumptions based on which the financial projection is calculated are shown in the Table Table 6.3: Key Assumptions Used in UETCL Financial Projection Assumption FY Annual Domestic Inflation 5.0% Transmission line loss 3.5% in 2013 Annual Foreign Inflation 3.4% 3.0% in 2020 Exchange Rate in FY 13 2,627 USH/USD Distribution line loss 26.0% in 2013 Exchange Rate in FY 20 2,844 USH/USD 19.0% in 2020 AGO (US$/barrel) 120 Collection rate 97% HFO (US$/barrel) 95 Corporate Income Tax 30% Tariff (UScents/kWh) Export/Import in 2013 End user tariff 18.7 in 2013 Kenya in 2020 Tanzania 13.4 BST(Bulk Supply Tariff) 8.9 in 2013 Rwanda 8.3 BST Growth Rate 6.0% p.a Tariff for Renewable PRG Projects 8 Uscents/kWh 10 AGO refers to automotive gas oil while HFO refers to heavy fuel oil. 82

92 31. UETCL assumes two scenarios for its demand growth, (i) Base Case Demand Growth and (ii) High Case Demand Growth. The Base Case Demand Growth assumes an average annual growth rate of about 8.7 percent while the High Case Demand Growth assumes 9.3 percent. The growth in sales from 2006 to 2012 suggests that the Base Case Demand Growth would provide a conservative estimate. Based on the Base Case Demand Growth rate, electricity demand in each year would be as reflected in Table 6.4. Table 6.4: Annual Electricity Demand as per Base Case Demand Growth Rate Year Energy Demand in GWh 2,152 2,354 2,572 2,813 3,076 3,366 3,612 3,863 Peak Demand in MW As per the Base Case Growth Rate, total electric energy demand increases to 3,863 GWh in 2020 from 2,152GWh and peak demand of power will reach 815 MW in 2020 from 527 MW in 2013 with a 6.4 percent annual growth. 33. In order to assess the impact of the proposed IDA Guarantee supported REFiT Program on UETCL s financial performance, the projections are carried out for two scenarios. Using the same assumptions as stated above, the two scenarios assess UETCL performance for (i) Scenario 1: Business as Usual, and (ii) Scenario 2: Small Renewable Energy Projects Developed. 34. The Scenario 1: Business as Usual; assumes that no small renewable energy projects will be constructed in Uganda, and GoU will have to meet the increased electricity demand from rental power plants. Whereas Scenario 2: Small Renewable Energy Projects Developed; assumes that GoU is able to attract SPPP sponsors successfully and a total of 250 MW of SPPPs are developed. The balance demand will be met through rental power plants. Though the proposed IDA Guarantee will be capped at 150 MW of capacity, GoU is expected to support other power plants, such as biomass based plants, without the IDA Guarantee. For analysis purpose, the tariff of SPPPs is considered at US$ 0.08/kWh similar to the REFiT level. 35. In both scenarios, GoU is assumed to meet the peak demand after 2017 with additional capacity increases while it meets energy demand in whole periods. By meeting peak demand, GoU can avoid blackout and provide more reliable power. Scenario 1: Business as Usual 36. Bujagali has been supplying a significant level (35 percent in FY 2012) of total electricity generation output since However, given the increase in electricity demand, and as the planned larger hydropower plants are not expected to supply electricity before 2020, GoU has to depend on rental thermal power plants. The dependency rate of thermal power plants in energy is expected to increase up to 27 percent in FY 2019 from 1 percent in FY 2013 prior to its acquisition of new hydro power plants in FY Table 6.5 shows the supply of different plants that will be required to meet the demand growth in Uganda. The table shows that thermal plants will continue to supply electricity till

93 Table 6.5: Power Plant Wise Dispatch in Business as Usual Scenario Supply & Demand in MW Actual Projected Hydro Nalubaale/Kiira (380MW) Bujagali (250MW) Isimba Hydropower Plant Karuma (600MW) Thermal Mputa Kaiso-Tonya 150MW Electromaxx Tororo 250MW Jacobsen Namanwe 50MW Other Rental HFOs Other AGOs Cogen/renewables Total Installed Capacity ,000 1,050 1,100 1,151 Total Firm Capacity Available Peak Demand Capacity surplus/(shortfall) (93) (116) (120) (106) (46) (65) (85) (57) Capacity surplus/(shortfall) ratio -30% -36% -35% -27% -10% -13% -17% -10% 0% 1% 2% 2% 37. Assuming the current structure of the thermal power plants capacity cost and fuel cost, the estimated generation cost of UETCL in 2013 is about Ush 237/kWh (US$ 0.09/kWh). This cost will gradually increase up to Ush 449/kWh (US$ 0.16/kWh) in FY The generation cost is expected to decrease to Ush 325/kWh (US$ 0.11/kWh) in FY2020 with the introduction of large hydro power plants. 38. In the Business as Usual scenario, during the period FY , the revenue increases by an annual average of 14.2 percent while operating expense increases by 13.2 percent. UETCL is expected to face net losses after 2015 coming from high dependency on rental power plants. Such losses will increase until FY 2020 before large hydro power plants will be installed. Table 6.6 below provides a summary of UETCL financial performance under the Business as Usual Scenario. 84

94 Table 6.6: Business As Usual Scenario: UETCL Financial Performance For the Year Ending December Energy demand GWh 2,152 2,354 2,572 2,813 3,076 3,366 3,612 3,863 Energy sent out GWh 3,081 3,653 3,902 4,177 4,479 4,806 5,073 5,354 Hydro GWh 2,896 3,219 3,359 3,359 3,359 3,359 3,359 4,971 Thermal GWh ,126 1, Other Renewable GWh Renewable PRGs GWh Import GWh Energy supply to End user GWh 2,152 2,354 2,572 2,813 3,076 3,366 3,612 3,863 Revenue Mil Ush 790,227 1,003,833 1,121,443 1,295,790 1,530,176 1,749,799 1,966,365 1,996,274 Tariff rebate to Umeme (91,043) (54,423) (26,096) Government subsidy 161, ,222 96, , , , , ,869 Operating expense Mil Ush 723, ,868 1,068,323 1,307,890 1,655,012 1,974,271 2,257,916 1,724,180 EBIT Mil Ush 46,723 40,243 17,455 (58,177) (186,618) (301,046) (381,579) 208,876 Net Income Mil Ush 57,925 2,129 (63,058) (172,402) (332,212) (467,840) (544,324) 37,931 Cash Flow from operating activity Mil Ush (231,681) (26,350) (14,520) (130,516) (230,254) (368,200) (428,442) 10,163 Cash Balance at year end Mil Ush 156, , , , , , , ,921 CFADS 11 Mil Ush 31,669 (82,619) (48,346) (195,065) (213,050) (450,632) (395,474) 28,330 DSCR (2.6) (0.7) (1.5) (1.2) (2.2) (1.7) 0.1 Current Ratio 339% 316% 291% 263% 234% 222% 208% 237% Generation cost Ush/kWh In FY , the accumulated amount of GoU s subsidy for tariff rebate to Umeme would be about Ush 172 billion (US$ 66 million) and it will be discontinued after 2016 as GoU s targeted end user tariff will be bigger than required tariff of Umeme. As capacity payment for rental power plants increases, total GoU subsidy will increase up to Ush 283 billion (US$ 101 million) in 2019 although GoU stops the support for rebate to Umeme in Total GoU subsidy in FY will be Ush 1,336 billion (US$ 492 million). DSCR will remain negative in most period of FY and the cash flow from operating activities remains negative until However, the cash balance will remain positive due to financing activities for several capex plans. 40. The following chart 6.2 shows the trend of the DSCR and Operating Margin of UETCL from 2013 to 2020 under the Business as Usual Scenario. 11 CFADS (cash flow available for debt service) is usually analyzed by lenders to determine debt size and its credit worthiness with DSCR. It is the amount of cash remaining for debt service after operating costs and taxes have been paid with considering any movement in working capital, capex and financing activities. 12 DSCR(debt service coverage ratio) is defined as : CFADS / debt service obligation(i.e. principal + interest with any financing fee). 85

95 Chart 6.2: DSCR and Operating Cash Flow under the Business As Usual Scenario Scenario 2: Small Renewable Energy Projects Developed 41. In Scenario 2, the demand growth for electric energy is assumed to be at the same level as Scenario 1 (increase by 8.7 percent annually) in FY Even though power output from thermal power plants will be minimized after renewable energy projects substitute them, GoU needs still to depend on some rental power plants with high fuel cost until FY 2020 if they plan to supply electricity to meet the full demand growth. The first small renewable energy project is assumed to be introduced in 2017 and GoU will meet the peak demand at the same time while meeting the energy demand. The assumed tariff (US$ 0.08/kWh) for small renewable energy projects is lower than typical large hydro power plants tariff (US$ 0.12/kWh of Bujagali Power Plant), therefore the small renewable energy power plants are expected to be dispatched at their full capacity, as UETCL benefits from their low cost. 42. Total installed capacity is assumed to reach 1,251 MW in FY 2020, whereas peak demand is assumed to be about 815 MW and the effective firm capacity available will reach to 930MW, slightly higher than peak demand. Total electric energy demand of end user is expected to increase to 3,863 GWh in FY 2020, same as Scenario 1. Table 6.7 shows the supply of different plants that will be required to meet the demand growth in Uganda under Scenario 2. The table shows that small renewable projects would supply about 250 MW of new demand after 2019, while the remaining demand will be met through lower level of usage from thermal plants and existing hydro power plants. 86