Public Disclosure Authorized 

 

 

 

NTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT

IN THE AMOUNT OF SDR 102.8 MILLION (US$155 MILLION EQUIVALENT)

TO THE PEOPLE'S REPUBLIC OF BANGLADESH FOR A RURAL ELECTRIFICATION AND RENEWABLE ENERGY DEVELOPMENT II (RERED II) PROJECT

 

August 16, 2012

Sustainable Development Department Energy Unit South Asia Region

 

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.

 

OFFICIAL USE ONLY

Report No: 71700-BD 

 

 

 

 

 

CURRENCY EQUIVALENTS (Exchange Rate Effective July 31, 2012) Currency Unit = Bangladeshi taka (BDT) BDT 81.92 = US$ 1 US$ 1.50833 = SDR

 

1 FISCAL YEAR July 1 -June 30

 

 

ABBREVIATIONS AND ACRONYMS 

ADB Asian Development Bank  

BCCRF Bangladesh Climate Change Resilient Fund

BDT Bangladesh Taka 

BERC Bangladesh Energy Regulatory Commission 

CAS Country Assistance Strategy NGO M CPalli 

CDM Clean Development Mechanism

CFL Compact Fluorescent Lamp

ESMF Environment and Social Management Framework 

ELIB Efficient Lighting Initiatives of Bangladesh

FMR Financial Monitoring Report Y FRural 

FY Fiscal Year 

GIZ Gesellschaft für Internationale Zusammenarbeit

GDP Gross Domestic Product

GOB Government of Bangladesh 

ICS Improved Cook Stoves 

IDA International Development Association

IDB Islamic Development Bank

IDCOL Infrastructure Development Company Limited 

KfW Kreditanstalt fir Wiederaufbau 

PBS Public Biddyut Samities (rural electricity cooperatives)

PO Participating Organizations

PSDTA Power Sector Development Technical Assac

RAPSS Remote Area Power Supply Systems 

RERED Rural Electrification and Renewable Energy Development

SGA Subsidiary Grant Agreement 

SHS Solar Home Systems

SREDA Sustainable and Renewable Energy Development Authority 

TA Technical Assistance 

WHO World Health Organization 

 

 

TABLE OF CONTENTS 

Page 

I. STRATEGIC CONTEXT ................................................................................................. 1 

A. Country Context......................1.......................... 

B. Sector and Institutional Context.............1......................... 

C. Higher Level Objectives to which the Project Contributes ........... ........ 5 

II. PROJECT DEVELOPMENT OBJECTIVES ........................................................... 6 

A. PDO........................................................ 6 

B. Project Beneficiaries ................................................. 6 

C. PDO Level Results Indicators......................6.... ............ 6 

III. PROJECT DESCRIPTION ......................................................................................... 7 

A. Project Components ..................................... ........ 7 

B. Project Financing ......................................... ..... 10 

1. Lending Instrument .................................... ......... 10 

2. Project Cost and Financing ............................... ......... 10 

C. Lessons Learned and Reflected in the Project Design..................... 11 

IV. IMPLEMENTATION .................................................................................................. 14 

A. Institutional and Implementation Arrangements .................... ..... 14 

B. Results Monitoring and Evaluation .................................... 15 

C. Sustainability................... ............................. 16 

V. KEY RISKS AND MITIGATION MEASURES......................................................17 

A. Risk Ratings Summary Table .................................... 17 

B. Overall Risk Rating Explanation .............................. ...... 17 

VI. APPRAISAL SUMMARY ......................................................................................... 17 

A. Economic and Financial Analyses .......................... ......... 17 

B. Operational Policy 8.30 Compliance .................................. 21 

C. Technical .................................................... 21 

D. Financial Management........................................... 22 

E. Procurement .................................................. 22 

F. Social (including Safeguards) ...................................... 23 

G. Environment (including Safeguards) .................................. 24

Annex 1: Results Framework and Monitoring .................................................................... 26

Annex 2: Detailed Project Description..................................................................................31

Annex 3: Implementation Arrangements ............................................................................. 49

Annex 4: Operational Risk Assessment Framework (ORAF).............................................66

Annex 5: Implementation Support Plan ................................................................................ 71

Annex 6: Governance and Accountability Action Plan (GAAP).........................................75

Annex 7: Impact Evaluation Methodology............................................................................83

Annex 8: Operations Policy 8.30 Compliance Review.........................................................85

Annex 9: Economic and Financial Analysis ......................................................................... 90

Annex 10: Social A ssessm ent .................................................................................................... 103

Annex 11: M ap of Bangladesh .................................................................................................. 106 

 

A. Country Context 

 

1. Bangladesh, with a population of about 150 million and a land area of 147,570 square kilometers, is amongst the most densely-populated countries in the world. The country is vulnerable to natural disasters and extremely sensitive to climate change impacts. Despite the challenges, Bangladesh has managed to graduate to a higher growth trajectory and maintain an average GDP growth rate above 6 percent in recent years. Poverty has also decreased in recent years, keeping Bangladesh on track to meet the Millennium Development Goal of halving extreme poverty by 2015. Total export of the country increased at a rate of about 14 percent since 2005. However, the infrastructure deficits in a number of areas but especially in energy are emerging as the main threats to maintain its growth in exports and GDP. In the latest Investment Climate Assessment (ICA), the highest number of firms (78%) expressed their concern about the lack of adequate power. 

 

2. A large segment of the population of Bangladesh has little or no access to electricity or to clean energy sources. Access to electricity in Bangladesh is about 55% and in the rural areas, the access rate is only 43% with about 13 million rural households yet to be electrified.' The per capita electricity consumption of about 236 kWh per year is one of the lowest in the world. 

 

3. Out of the total 30 million households in Bangladesh, about 90% use traditional biomass fuels such as fuelwood, dung, and agricultural residues for cooking in low-efficiency stoves (5 to 15 percent fuel efficiency). The incomplete combustions of these fuels in inefficient stoves produce smoke composed of large amount of particulate matter and gaseous pollutants. Indoor air pollution resulting from this smoke is linked with many illnesses including childhood pneumonia and chronic obstructive pulmonary disease representing a significant health hazard. Daily exposure to particulate matter for most Bangladeshis exceeds 200gg/m 3, well above the daily standard of 25j[g/m 3 established by the World Health Organization (WHO). The health impact is particularly acute for women and children who are the most exposed groups to indoor air pollution. According to WHO estimates, about 32,000 children below the age of 5 years and 14,000 adults die every year from pulmonary diseases caused by indoor air pollution in Bangladesh. 

 

B. Sector and Institutional Context 

 

4. The energy sector of Bangladesh is facing many challenges, which include, among others: acute shortage of electricity supply to meet demand; heavy reliance on natural gas for power generation, which itself is in short supply; inadequate investments in power generation and natural gas exploration and production; inadequate tariff to cover costs; weak governance and inadequate autonomy of the corporatized public sector entities; limited human resources capability; and inadequate capacity of the regulator. The peak electricity demand in the country is about 7,000 MW and the available generation capacity is about 5,300 to 6,400 MW, resulting in supply disruptions to those having access to electricity. The rural areas connected to the grid face a disproportionate share of load-shedding. The average system losses of the distribution utilities are below 13%. Natural gas is the primary fuel for more than 80% of power generation, which itself is in short supply. Renewable energy currently constitutes less than 1% of total power generation in the country. 

 

Source: Household Income Expenditure Survey 2010. 

 

 

5. Recognizing the challenges, the Government of Bangladesh (GOB) has adopted a multi¬pronged strategy in the power sector that includes energy conservation, load management, adopting grid and off-grid electrification approaches to extend electricity services, promoting private sector investment in short and longer-term power supply measures, exploiting alternative energy resources to diversify the fuel mix, looking actively for power import from neighboring countries, and improving sector governance and efficiency. The GOB articulated a Vision 2021, 

 

which includes the objectives of: i) universal access by the year 2021 with improved reliability and quality; ii) stabilizing the sector's financial status and increasing its efficiency; and iii) operating the sector on commercial principles and increasing private sector participation. 

 

6. The Renewable Energy Policy (2008) of GOB laid out the target of meeting 5% of total power demand from renewable energy sources by 2015 and 10% by 2020. The Remote Area Power Supply Systems (RAPSS) guideline of 2007 allows for private sector participation in development, operation, and maintenance of electricity generation system and distribution networks in remote rural areas including isolated islands to supplement GOB efforts at achieving universal access by 2020. However, there has not been much progress in implementing the RAPSS schemes. GOB has prepared the legislation to establish a Sustainable and Renewable Energy Development Authority (SREDA) as an autonomous body to lead its efforts in promoting renewable energy and energy efficiency in the country. The Cabinet has approved the legislation and this will be placed in the Parliament for approval. 

 

7. To address the generation shortages, GOB has embarked upon an ambitious generation expansion plan that envisages adding more than 11,500 MW to the national grid by the year 2015. As part of that plan, a number of large power plants have recently been awarded to the private sector. As an interim measure, GOB has contracted about 2,300 MW of plants run on liquid fuel for 3-5 year terms. These short-term plants running on expensive liquid fuel, however, are aggravating the deteriorating financial position of the power sector. To cope with the increased costs of the short-term plants, the Bangladesh Energy Regulatory Commission (BERC) increased the bulk supply tariff by 70% and the retail tariff by about 35% in phases since February 2011 in response to the tariff adjustment requests by the utilities. Even with these adjustments, tariff remains below full cost-recovery. GOB subsidy to the sector stood at BDT63 billion (US$800 million) in FY12 up from BDT40 billion (US$550 million) in FY11. This was in addition to the subsidy to the petroleum sector to the tune of BDT90 billion (US$1.15 billion) in FY12, up from BDT40 billion (US$550 Million) in FY11.² These are clearly unsustainable. 3 In the long run, GOB expects the cost of power generation to come down gradually once the large power plants start to come into operation replacing the costly liquid fuel plants. GOB plans to reduce the budget support requirements to a more sustainable level by FY15 with gradual adjustments in tariff. 

 

_________

²GOB subsidy in petroleum increased by more than double due to a combination of high fuel prices in the international market as well as a sharp increase in petroleum imports due to increased demand from short-term power plants. In its efforts to reduce the need for subsidy, during the last quarter of FY12, GOB had to resort to restricting generation from the short term plants to the evening hours only when demand is at its peak. 

 

8. Despite all the short and long-term efforts at increasing power generation and demand side management, it will take years to fully close the demand-supply gap. Consequently, it will not be possible to achieve the government vision of universal access by 2021 relying only on the grid. Furthermore, the dispersed nature of rural settlements and the numerous rivers that crisscross the country make grid electrification in many areas difficult and expensive. Off-grid renewable energy is the only near-to-medium-term option left for millions of people in the remote areas of the country. 

 

9. The Solar Home Systems (SHS) program of Bangladesh, supported principally by the Bank with other development partners, has emerged as a viable electrification option for lighting and other basic services in areas without grid access. The SHS program started in 2003 with a target to install 50,000 SHS over the 5-year project period under the on-going Rural Electrification and Renewable Energy Development (RERED) project. The program has far exceeded its goals. It is currently installing over 50,000 systems per month making it one of the fastest growing SHS programs in the world. The SHS program is implemented by the Infrastructure Development Company Limited (IDCOL), a government owned infrastructure finance company. The program is a successful public-private partnership model where the Partner Organizations (POs) (mostly Non-government Organizations) procure and install the systems as per technical standards set by IDCOL. Consumers sign SHS purchase contracts under a micro-finance scheme with the POs. After the systems are installed, the POs apply for re-financing from IDCOL for a portion of the microfinance they extended to the households. After technical and other verifications, IDCOL releases the credit and a fixed subsidy (currently $28 per system) to the POs. This refinancing provides the POs with funds to install more systems and reach even more remote areas. 

 

10. Together with support from the Bank and other development partners, the program is expected to reach about 2 million SHS by end 2012 in rural off-grid areas, contributing to increasing access to electricity by 6%. Thanks to the SHS, women are spending productive time after dark (sewing, knitting etc) and students including girls are spending more time studying. The TVs run by SHS contribute to women education and empowerment . Grameen Shakti and a number of other POs are providing training to village women for assembling some SHS components who are then becoming entrepreneurs running their own technology centers, assembling and providing maintenance services. Continuing with the successful installation of the SHS, IDCOL has set a target to reach another 4 million SHS by the year 2016, requiring support from the Bank and other development partners 

 

A 2009 survey by the German International Cooperation (GIZ) that included 260 SHS related interviews in northwest Bangladesh found improved lighting and study conditions, improved access to information and communications, increased savings, and improved safety as the main benefits of SHS. It also noted a high degree of satisfaction among the SHS consumers (more than two-third ofthe respondents were satisfied with the services) while 80% of non-users stated they would like to buy an SHS. A more rigorous impact evaluation study is currently on-going under the RERED project. 

The target of 4 million households is based on SHS being affordable to top 40% of income earning households. With smaller lower cost SHS available, the program is reaching poorer households, which was not possible earlier. 

12. Cooking by rural households is predominantly done in traditional stoves using traditional biomass fuels, the smoke of which is particularly harmful to women and children. The transition to modem, clean cooking fuels like natural gas, liquefied petroleum gas (LPG), and to some extent electricity, will take a long time, as access to these fuels are limited, and the appliances to use them are not affordable to the poor. Transitory clean cooking options for households include improved cook stoves (ICS), advanced combustion stoves, and biogas. An ICS with a well maintained chimney could (i) help save up to 50 percent of the traditional biomass fuels used by improving fuel combustion, and (ii) provide moderate reduction in health damaging pollutants by directing smoke through the chimney out of the kitchen. An advanced combustion stove can provide significantly higher fuel efficiency and reduce emissions. Similarly, biogas can provide clean cooking benefits in addition to household lighting and produce a valuable byproduct in the form of biogas-slurry for fertilizer. For both advanced combustion stoves and biogas, affordability is an important issue preventing a large scale introduction. The large scale dissemination of clean cooking solutions has the potential to yield co-benefits in terms of reduced fuel collection time, improved household health, local environmental quality, and regional climate. 

 

13. Despite efforts by various organizations to introduce clean cooking solutions since the 1980s, in terms of coverage, only about 2 percent of households relying on traditional biomass fuels have access to ICS today. The main barriers for a scaling up of clean cooking solutions in the country are: (i) absence of wide-spread awareness campaigns ; (ii) limited funding to support scale-up activities; (iii) absence of a sustainable funding mechanism; and (iv) cost-revenue shortfall preventing the development of commercial enterprises to promote clean cooking solutions. There is an overall lack of leadership, oversight, coordination, and monitoring of household energy access activities in the country. This is preventing cross-fertilization of best practices. A recent USAID report identified the following seven areas for potential interventions on clean cooking solutions in Bangladesh: (i) market intelligence to remove market barriers; (ii) consumer education; (iii) technical standards, testing and certification; (iv) product development;  (v) policy and regulation; (vi) business development support; and (vii) access to finance. The recent mobilization on clean stoves and fuels through the Global Alliance for Clean Cookstoves 

(GACC) and the United Nations Sustainable Energy for All Initiative offers a unique opportunity that Bangladesh should explore to scale up the provision of clean cooking solutions to households. 

 

14. As part of its efforts to reduce the existing demand-supply gap, GOB has embarked upon the Efficient Lighting Initiatives of Bangladesh (ELIB) program with Bank support to replace incandescent lamps with energy-efficient Compact Fluorescent Lamps (CFLs). The first-phase distribution of 10 million CFLs has been completed, though there have been quality issues with high levels of early lamp failure rates. The Rural Electrification Board (REB)⁶ procured the CFLs while the distribution utilities and the rural cooperatives (Palli Biddyut Samities or PBSs) 7 distributed the CFLs to the households in exchange for incandescent lamps. The second-phase distribution of about 7 million CFLs is being planned, including actions to overcome the quality issues. The ELIB program is registered under the Clean Development Mechanism (CDM) for claiming carbon credits with IDCOL as the Coordination and Managing Entity (CME). 

 

15. To implement the power sector reform activities, Power Cell was established in 1996 as a technical arm of the Power Division of the Ministry of Power, Energy and Mineral Resources (MPEMR). It provides technical assistance for policy formulation, design and implementation of power sector reform activities, implementation support to sector agencies, and capacity building activities of the sector. In support of this service, the Power Cell has been receiving technical assistance funding through the ongoing Bank-supported Power Sector Development Technical Assistance (PSDTA) project, which is scheduled to close in December 2012. Implementation of the power sector reform activities need continued financial support beyond PSDTA closing. 

 

 

16. The RERED II project is an important contributor to the GOB's vision of universal access to electricity by the year 2021. Recognizing that the vision cannot be achieved relying on grid electricity alone, GOB has been putting emphasis on renewable energy based off-grid options for providing access to electricity. The Project would also support the Renewable Energy Policy of the GOB by increasing the share of renewable energy in power generation. 

 

17. The Project builds on the achievements of the RERED project, which has delivered gender responsive results by supporting the provision of energy services to facilitate social and productive activities undertaken by men and women in rural areas of Bangladesh. The RERED II Project would support the provision of renewable energy based electricity services and clean cooking solutions using social mobilization approaches of the NGOs and marketing techniques of the private sector. By leveraging the capacities of NGOs and the private sector, the Project would contribute to strengthening the on-going development of a commercial market for SHS, other renewable energy technologies, and clean cooking solutions, thus contributing to job creation in green technologies. 

 

⁶ REB is the apex body responsible for planning, financing, and installation of the rural grid electrification network of the country. 7 After constructing the rural distribution lines, REB transfers them to the rural cooperatives (PBSs), which are then responsible for retail service provision as well as the operation and maintenance of the rural grid network. 

 _________

18. The Project is consistent with the Country Assistance Strategy (CAS) for FYI 1-14; it would make a positive contribution to human services through increased access to electricity in hard-to-reach areas and to Bangladesh's climate change agenda through the expanded use of renewable energy. Specifically, the proposed Project would contribute to achievement of outcome 1.3 under CAS Pillar 1 (increased infrastructure provision, access and efficiency) and outcome 2.3 under CAS Pillar 2 (reduced environmental degradation and strengthened natural resources management). In keeping with increased vigilance against fraud and corruption risks, the Project incorporates social accountability tools including third party monitoring, and aims at increased transparency through access-to-information and information technology based solutions. 

 

 

 

 

A. PDO 

 

19. The project development objectives are to increase access to clean energy in rural areas through renewable energy and promote more efficient energy consumption. 

 

B. Project Beneficiaries 

 

20. The Project is expected to reach electricity to 2.5 million people (half of which is women) living in the rural areas of Bangladesh where grid electricity has not reached or is not expected in years to come. Access to electricity has numerous economic and welfare benefits especially to women and children who spend greater proportion of time at home. The Project is expected to provide clean cooking solutions for over 1 million households. Access to clean cooking options especially benefits women and children by improving conditions under which meals are prepared, reducing respiratory diseases, reducing time spent on cooking, and saving money. Finally, by supporting a more effective energy-efficient CFL dissemination, the Project would, to some extent, help to make more electricity available for people in the rural areas who bear a disproportionate share of load-shedding. 

 

C. PDO Level Results Indicators 

 

21. The following outcome indicators are proposed. The indicators marked (*) are core sector indicators. The results framework is in Annex 1. 

Number of households, farmers, and businesses having access to clean energy services 

Generation capacity of renewable energy (other than hydropower) constructed (MW) (*) 

Efficient energy consumption through introduction of energy efficient lighting (MW saved per year) 

Number of direct beneficiaries including female beneficiaries. (*) 

 

 

A. Project Components 

 

22. In support of GOB's vision of providing universal access to electricity by the year 2021, the Project would support the provision of renewable energy based electricity services using the capabilities of NGOs and the private sector. The Project would also provide support for increasing access to clean fuels and modem cooking methods. It will help reduce peak 

electricity demand by supporting an energy-efficient lighting program through dissemination of CFLs. Finally, the Project would provide technical assistance support for policy development and capacity building in the power sector in general, and renewable energy in particular. The components to be supported under the Project are described below. A more detailed description is in Annex 2. 

Component A: Access to Electricity (total US$309.2 million, IDA US$116 million) 

 

23. The component would support the Solar Home Systems (SHS) and other renewable energy options for increasing access to electricity. The component would also include technical assistance support to IDCOL for capacity building, inspection and monitoring, impact evaluation, training, and other related activities for ensuring effective implementation. 

 

24. Sub-Component A.1 Solar Home Systems (SHS) (total US$199.8 million, IDA US$99.45 million): The Project would further scale up support to the successful SHS program of Bangladesh for providing access to electricity to households and shops in rural areas where grid electricity will not reach in the short to medium term. The target is to support 550,000 systems following the same implementation arrangement of the RERED project. Customers are expected to provide 10%-15% of the SHS prices as down payment. IDA funds (and IDCOL own funds) will refinance 60%-70% of the micro-finance extended by the POs to the households. 

 

25. The funding requirement is based on the current market prices and a grant support of US$20 for each of the smaller systems installed. The prices for solar panels and batteries (the two major cost components of SHS) are quite dynamic. While the prices for solar panels have fallen significantly in the international market in recent times, battery prices have risen sharply. Consequently, prices of SHS in the local market have remained relatively stable since 2006 (in current BDT per Watt peak). In the event that prices of batteries go down, resulting in a reduction in the end-user price for the SHS, this would allow IDCOL to support more systems with the available funding. The estimated costs are also based on the demand patterns of 2010¬11 where about a quarter of the systems sold were of small size of 20Wp and less, about half of the systems in 40-5OWp range and the rest above 50 Wp. The funding requirements will change depending on the demand pattern -smaller systems will require less credit draw-down while larger systems will require more funds. 

 

26. A grant of US$20 per SHS is available only for 30 Wp and smaller SHS to increase their affordability as these are purchased by the poorest households.8 USAID has expressed interest 

 

8 The program started in 2003 with US$90 per system of grant support, which was the difference in life-cycle costs of SHS and the kerosene lanterns that the SHS replaced. The grant support has since been gradually declined to US$ 28 per system in 2012 

to contribute US$2.5 million for meeting the grant and technical assistance needs for the SHS program. The SHS program is at final stage of registration as a CDM project, and once registered, an existing Bank carbon fund (and a proposed new fund) is expected to purchase emission reductions from the program. 

 

27. Sub-Component A.2 Remote Area Power Supply Systems (RAPSS) (total US$109.4 million, IDA US$16.55 million): The Project would support mini-grid schemes under the RAPSS guidelines to meet the electricity needs of rural household, enterprises, and businesses that could not otherwise be met with SHS. The implementation activities, including selecting the sponsors for establishing, operating, and maintaining the mini-grids, would be undertaken by IDCOL. Sponsor equity will be a minimum of 20% with IDCOL providing the balance (including credit and a capital buy-down grant to keep the end-user tariff affordable) for the mini-grid schemes. The least cost technology options (solar PV, biomass gasification etc.) will be used depending on the resource availability in the specific locations of the mini-grids, building on the lessons learned from the pilots under the on-going RERED project. The component would also support biogas based captive plants to supply electricity in rural areas. Depending on the demand and viability of the sub-projects, the component can support financing other applications such as solar cooling and drying or advanced hybrid brick kilns. 

 

28. The component will also support solar irrigation pumps that would replace diesel¬operated pumps thus contributing to increased access to clean energy by farmers. Similar to the mini-grid schemes, private sponsors would identify locations and reach agreements with groups of farmers on the selling rate for water and on the duration and quantity of water supply. Sponsors will be putting in equity of at least 20%, while the rest of the project cost will be financed through a combination of credit and grant to keep the tariff affordable to farmers. IDCOL will do site specific due diligence before approving the sub-projects. Carbon finance opportunities will be designed to overcome existing barriers, scale up support, and sustainability of these activities. 

 

29. IDCOL market assessments and sponsor inquiries indicate that IDCOL could finance 42 solar mini-grids, 1,500 solar irrigation pumps, 450 biogas-based captive plants, and 28 biomass¬based captive plants during the Project period9 . This would require an estimated US$45 million in credit support, US$41 million in capital buy-down grant, and US$1.9 million in technical assistance, in addition to sponsors' equity of US$21.5 million. The credit finance requirements will be met from IDA and IDCOL own funds. The capital buy-down grant and technical assistance requirements will be met from USAID (US$5 million) and the Bangladesh Climate Change Resilience Fund (BCCRF) (US$24.5 million)¹⁰ -both channeled through the Bank -and from KfW (US$12.9 million). (average USD 0.60/Wp compared to USD 2-5/Wp in other countries). From 2013, grant support will drop to USD 20 per system for smaller systems (30 Wp and less) with no grant for larger systems. An impact evaluation study is currently on-going that would assess, among others, the level of grant support necessary to make the systems affordable to poorer households. 9 IDCOL is currently doing due diligence on a number of mini-grid proposals, and the outcome of these will make clearer the final composition of renewable technologies to be supported under the Project. 

¹⁰Funding commitment of US$24.5 million has been received from the BCCRF. US$23 million is expected for capital buy-down 

grant for the irrigation schemes, while US$1.5 million is expected for technical assistance including feasibility studies, site¬specific due diligence, inspection and monitoring, and impact assessment etc for the irrigation schemes. 

Component B. Household Energy (total US$46.3 million, IDA US$12 million) 

 

30. The proposed household energy component supports the efforts of various NGOs in providing rural households with clean cooking solutions. The activities supported would include: (i) awareness raising through social mobilization to ensure potential users are aware of the fuel saving and health benefits associated with clean cooking; (ii) research and development to enhance product quality, performance, safety and durability; (iii) setting up of performance standards, labeling system and testing facilities; (iv) support to selected POs to generate demand and to facilitate enterprise creation so that households are motivated to buy ICS or advanced combustion stoves; and (v) and capital buy-down grants for biogas plants for cooking. The target is to support commercial dissemination of about 1 million ICS and 20,000 biogas units within the implementation period of the Project. Implemented by IDCOL, the component will build on the success of Bangladeshi NGOs in the areas of community outreach in total sanitation programs. It will also build on the earlier work undertaken by local institutions in the areas of stove design and reduction of emission of toxic pollutants from incomplete combustion of wood fuels. To avoid duplication of efforts, the implementation of this component will be in close collaboration with on-going activities in the sector by NGOs, GIZ, USAID and upcoming activities that will be undertaken through the Global Alliance of Clean Cookstoves. With IDA supported activities creating demand and facilitating supply chain development, households are expected to buy the ICS from the market for cash. The biogas plants are expected to be installed by the POs on cash payments by households (net of capital buy-down grants). 

 

 

31. This component will support the distribution of 7.25 million CFLs in predominantly rural areas where these energy efficient CFLs are not yet widely used. Under the ELIB program supported by the RERED project, about 10 million CFLs were distributed by various utilities to households in exchange for incandescent lamps in 2010. However, post-installation surveys within a few months of installations have indicated alarming levels (33%) of lamp failures. REB, the implementing agency, has claimed replacement of the poor quality bulbs from the supplier. The second-phase procurement of 17.5 million CFLs was initiated in late 2010 under the RERED project (before the post-installation survey results of the first phase was available), but due to various issues (including issues related to submission of fraudulent performance guarantees by the winning bidder) the procurement could not be completed. 

 

32. GOB has expressed its strong commitment to continue with the second phase and intends to initiate a re-bidding, taking into account lessons learned from the poor quality in the first phase and the aborted second-phase procurement. REB will revise the bidding documents with the help of an international technical consultant to strengthen the clauses for quality assurances. Recognizing that many in the urban households have already switched to CFLs, the second phase distribution will be restricted mostly to rural areas where people cannot afford to pay for the high costs of CFLs. IDA funding of US$17 million would cover the costs of CFL procurement including pre-award inspections, pre-shipment inspections and testing, post-shipment testing; costs of distribution including training for proper distribution and documentation to comply with 

 

CDM requirements; customer awareness; impact evaluation etc. Funds from GOB and the utilities are expected to cover the costs of sockets" as well as the costs of PMU within REB. 

 

 

33. The Project would provide continued technical assistance support to Power Cell beyond December 2012 when the on-going PSDTA project will close. This would include, among others, support for implementation of power sector reform, feasibility studies and environment and social impact assessments for various power sector projects in the pipeline, and capacity building of sector institutions. This would also include support for establishment and operationalizing SREDA through the provision of office equipment and furniture, consultant services, and training; and capacity building support for BERC. Finally, this would support developing national guidelines for safe disposal/recycling of CFLs and capacity building for ensuring safe disposal of CFLs financed under the Project. 

 

B. Project Financing 

 

1. Lending Instrument 

 

2. Project Cost and Financing 

35. The total estimated cost of the project is US$386 million out of which IDA financing proposed is US$155 million (40%). For the SHS sub-component, IDA financing would leverage household down payments (US$19 million), POs' share of the micro-credit (US69 million), and IDCOL own financing (US$10 million). For the RAPSS sub-component, sponsors are expected to provide US$22 million as equity while the rest would be provided by IDA and other donors (USAID, BCCRF, and KfW) in addition to IDCOL's own funds. For the household energy component, IDA financing of US$12 million will support demand creation, supply chain development through the POs, and capital buy-down grants for the biogas plants, while households are expected to purchase the ICS and biogas for cash (net of grants) (US$34 million). The estimated cost of the energy efficient lighting component is US$19 million, of which IDA financing proposed is US$17 million. The TA to Power Cell is estimated to cost US$6.5 million, out of which IDA financing proposed is US$5 million. A detailed cost table is in Annex 2. 

 

¹ The CFLs are planned to be screw-types that are better option than the pin-types that households typically use, requiring replacement of the sockets along with the incandescent lamps. 

 

C. Lessons Learned and Reflected in the Project Design 

 

36. The single largest activity of the Project is the SHS sub-component. It builds on the success of the SHS component of the RERED project, which is considered the best practice. Success of the SHS program could be attributed to a number of factors: (i) a sense of ownership by consumers resulting in proper system care; (ii) access to financing and availability of grant assistance to increase affordability and to ensure that POs have adequate capital for investing in and operating the service infrastructure; (iii) customer training imparted by the POs enabling the customers to carry out regular, simple maintenance work themselves; (iv) social acceptability of the POs at the community level and the existence of a micro-credit culture in rural Bangladesh resulting in customer readiness to try the systems; (v) institutional set-up of the POs enabling them to reach remote customers in a cost-effective and efficient manner; (vi) setting technical standards and enforcing the standards through strong supervision and monitoring by IDCOL; 

(vii) risk sharing between IDCOL and the POs, proper customer selection, and attention by both IDCOL and the POs to collection efficiencies (the POs achieved an average collection efficiency of 94% and are servicing their debts owed to IDCOL on a timely basis); (viii) ability to achieve low costs -SHS costs including a five year warranty for batteries and three years of maintenance is US$6-7/Wp (net of subsidy of US$28 per system); and (ix) large customer base in relatively densely populated areas. 

37. The Project also builds on the following key lessons from other Bank-financed SHS projects¹² 

 

* Product quality at entry must be complemented with quality assurance and enforcement. Technical standards established under the RERED project must be upgraded to reflect latest technological developments, including use of efficient light¬emitting diode (LED) lamps. A testing lab is being established with support from the ongoing RERED project that will be used to monitor quality at entry and to undertake random testing to assure quality is maintained. 

 

12 With Bank-financed SHS projects in about 30 countries, the Bank is the largest financier of SHS among the multilaterals and has considerable experience in this sector. 

 

* Keeping the end-goal of fully commercial SHS sales; retain flexibility by how much and how fast grant support is reduced and when reduction takes place. Too quick and too deep a cut in grant assistance could compromise the ability of the POs to provide effective services and may reduce quality. It can also lead to consumer dissatisfaction as they may purchase smaller systems than desired, and the consumers may become unhappy with the level of service provided. 

 

* Presently, the principal SHS customers are the less poor with only about a fifth below the poverty line 3. As the market in a particular area becomes saturated, more dispersed and poorer consumers would need to be reached. While making lower cost SHS affordable to poorer households is inherently valuable, it also makes business sense. Deepening markets enables service centers to have sufficient critical mass of business. Market deepening to reach poorer consumers requires offering smaller and lower-cost systems, including solar LED lamps that poorer consumers can purchase without compromising quality. The proposed project will make such products eligible to receive assistance. 

 

* An alternate approach to increasing affordability is to use a fee-for-service approach. In Peru, the distribution utilities receive a full cost-recovery tariff, comprised of a retail tariff paid by the customer and a subsidy from the national cross-subsidy fund. Prior experience in Bangladesh in a fee-for-service approach was not successful. REB was tasked with the fee-for-service approach under the RERED project, which was later discontinued. The fee-for-service approach will be used in the RAPSS component but not in the SHS. 

 

* As customers become more dispersed, more efficient installation methods, such as using plug-and-play units, and lower cost fees/loan collection methods, such as using mobile phone payments, should be adopted. Otherwise, higher overhead costs will make products too expensive for consumers. The options for introducing IT-based solutions for increasing cost effectiveness in service delivery will be explored in the Project. 

 

* Monitoring and evaluation and obtaining user feedback is essential. Currently, minimal monitoring and evaluation (M&E) is undertaken, only to confirm that product and installation meet standards and that the customers are trained. A third¬party monitoring is being introduced under the RERED project that would be continued under the proposed project. The on-going impact evaluation study will provide recommendations for baseline M&E indicators, which will be incorporated in the Project. 

 

* Donor funds for either grants or credit is insufficient to meet the government goals for off-grid electrification. Commercial sources of financing must be mobilized. A study is being initiated under the RERED project to find ways to leverage additional financing from commercial sources. 

 

¹³The 2009 survey of GTZ found that while there were considerable number of poorer people who purchased an SHS, only 23% 

could be classified as "poor" when applying the regional poverty line. SHS-owning households had a higher per capita incomes (BDT 2,400 per month) than the national average of BDT 1,485. In the northwest Rajashahi division, 48% live below the upper poverty line and 31% below the lower poverty line, compared to 23% of the SHS users in the sample who are living below the upper poverty line and 16% below the lower poverty line. 

 

38. Lessons from RAPSS program. Some of the above lessons, in principle, also apply to the RAPSS investments with respect to meeting customers' expectations in quality and reliability of service, providing affordable service, responding to customer concerns, judicious and targeted use of grants to increase affordability, and working with credible partners who have effective management and financial discipline. Several additional lessons apply. As a mini-grid has constrained electricity supply (limited by renewable energy generator capacity, if expensive diesel back up is not used), ensuring fair allocation of electricity among users and using electricity efficiently are essential. Careful assessment of willingness to pay is important for the project to be financially viable. Irrespective of what customers were paying for electricity in the past, they will compare their service and cost of service to that available in the nearby grid customers. There must be reasonable certainty that in the near to medium term the grid will not reach the community or that the sponsor will be compensated for the stranded assets. If the grid does arrive, many customers will opt for grid service as the tariff would be much lower (even if reliability would be low), with a drastic reduction in revenue for the mini-grid sponsors. 

 

39. Lessons learned in the household energy program: Bank experience of implementing household energy programs worldwide provides for the following lessons learned: i) a holistic approach to household energy issues is necessary; ii) public awareness campaigns are prerequisites for successful interventions; iii) local participation is fundamental; iv) consumer fuel subsidies often times do not to reach those who deserve it most; v) both a market-based approach and public support are essential for commercialization of ICS; vi) the needs and preferences of stove users should be given priority; vii) durability of ICS is important to successfully expand their distribution; and viii) the poorest segment of the population might need microfinance to afford an ICS. 

 

40. In the particular case of Bangladesh, lessons learned include: (i) engaging the local government, community leaders and health volunteers is beneficial for effective awareness raising, increased coordination and successful implementation; (ii) locally appropriate awareness-raising approaches for programs are crucial for uptake of household energy products; (iii) user training on maintenance and use of cookstoves should be extended to women, who are the main users; (iv) performance monitoring of cookstoves should be an important element of program design to ensure adequate feedback for enhancing stove designs; (v) reliable after-sales support and services produce great confidence among users and facilitate the adoption and use of technology; and (vi) the cookstove business must be sufficiently profitable to encourage credible firms and entrepreneurs to enter the business. These have been incorporated in the design of the Household Energy component of the Project. 

 

41. Lessons learned in the ELIB program: The critical elements for the success of large scale CFL deployment programs include: i) strong ownership and commitment of the Government; ii) simple program design that makes free distribution of CFLs the preferred option to cost recovery; iii) strong planning and record keeping; iv) effective coordination amongst the key stakeholders; v) advance consumer awareness; and vi) high quality technical specifications and qualify enforcement. Besides, for long-term continued use of CFLs, availability of high¬quality CFLs at affordable costs must be ensured. This may require providing support for domestic sources of production, with adequate testing laboratories for quality assurance. Parallel 

regulatory and policy efforts of removal of duties and taxes, phasing out of incandescent lamps, and effective recycling or end-of-life management programs, would be needed. The ELIB program has been designed to incorporate all these elements. The first-phase CFLs under the ELIB program were distributed in two single days across hundreds of distribution centers, which proved to be cumbersome in complying with the stringent CDM documentation requirements across the centers. Considering this, a door-to-door distribution is planned for the second phase of the program that would ensure better control over distribution and documentation. To ensure quality of CFLs procured, several modifications to the bidding procedure are envisaged that include, among others, stricter qualifications criteria to attract only genuine bidders and enhanced product testing before shipment. 

 

 

A. Institutional and Implementation Arrangements 

 

42. The main components of the Project (access to electricity and household energy) would be implemented by IDCOL, a government owned infrastructure finance company. IDCOL is run by professional management under effective oversight by a competent Board. As a company, IDCOL is able to offer market based incentive package to its management and staff. IDCOL has proven its capacity in managing the growing renewable energy program of GOB under the on¬going RERED project. The growing renewable energy portfolio however is going to put a strain on the capacity of IDCOL. Recognizing this, an institutional development consultant has been engaged by IDCOL to review the current organization structure and to proposed modifications for enhancing its capacity. It is expected that during the implementation of the Project, capacity of IDCOL will be enhanced with separate unit established to manage the renewable energy program. In addition, for the household energy component, a separate Project Management Unit (PMU) will be established for day-to-day management of the component. 

 

43. IDCOL will implement the components with the help of POs who are mostly NGOs (for SHS and household energy) and NGOs/private sponsors (for RAPSS). The PO selection committee of IDCOL would select the POs as per the eligibility criteria outlined in the Operations Manual of the Project. Starting with 5 POs, the SHS program now has 29 POs, and IDCOL expects to engage more POs as part of its goal of achieving a commercially sustainable competitive market for SHS in Bangladesh. IDCOL has an independent Technical Standards Committee, which approves the standards for the SHS and RAPSS. For the household energy component, a separate technical committee comprising stove experts, technologists and relevant government officials will be set up to advise on design and certification standards and other relevant technological issues. IDCOL has a team of inspectors who would inspect and verify that the systems are installed as per approved technical standards before financing is released from the Project fund. For the RAPSS sub-component, the sub-project specific due diligence would be done by IDCOL based on project proposals from the POs. The Bank will review the appraisal reports of the firstfive sub-projects in each technology. 

 

44. The energy-efficient lighting component will be implemented by REB suing the same implementation arrangement of the RERED project. REB will procure the CFLs and distribute them to the relevant PBSs and other distribution utilities. PBSs and the distribution utilities will 

be responsible for distributing the CFLs in exchange for incandescent lamps in the respective service territories, and destruction of the collected incandescent lamps. REB will be responsible for overall management of the component. IDCOL will be responsible for maintaining database and conducting post-installation surveys as part of CDM requirements. 

 

45. Power Cell will be implementing the technical assistance to the sector following the same implementation arrangement of the PSDTA project. 

 

46. A coordination committee has been set up at Power Division of the Ministry of Power, Energy and Mineral Resources (MPEMR) with representation of the relevant agencies and other ministries (Ministry of Environment, Ministry of Agriculture etc) for effective coordination during implementation of the Project. 

 

B. Results Monitoring and Evaluation 

 

47. Monitoring and evaluation are fundamental to assess implementation progress and to provide necessary corrective measures during implementation. IDCOL has a well-established monitoring system in place for its SHS program that will be further strengthened for the growing SHS program and replicated for use in the other activities (RAPSS and household energy). Data for measuring the outcome and results indicators outlined in Annex 1 will be collected by the POs and reported in the refinancing applications to IDCOL. 

 

48. A robust impact evaluation (IE) on the SHS program is currently on-going that will measure the impact of SHS on household income and socio-economic welfare. This evaluation will suggest M&E indicators that will be incorporated in the PO reporting under the Project. A similar impact evaluation study will be conducted for the access to electricity and household energy components of the Project during implementation. The study will be designed to attribute causality to project interventions. The proposed impact evaluation aims to determine whether the project has had a significant impact on income, employment, access to social services and socio¬economic welfare of the beneficiaries. Results will be disaggregated by gender to measure the impact on female beneficiaries. A baseline survey for the IE will be carried out at project start and the follow-up survey at the project completion. The study will implement a difference-in¬difference approach for comparison between treatment (beneficiaries of the project) and control (non-beneficiaries) groups. Annex 7 details out the methodology to be used. 

 

49. To better assess customer feedback from electricity connections (through SHS and RAPSS) and from clean cooking solutions (ICS and biogas plants under the household energy component), several IT based options for enhanced reporting and feedback are being explored. Some of the POs in the SHS program already have a mobile text messaging system in place to track daily installation data of various field offices of the POs. The option of introducing this system for the whole SHS program and the other activities (RAPSS and household energy) would be explored which would allow for automatic update of the installation data in the database maintained at IDCOL. Customer satisfaction feedback via text messaging would be introduced that would allow for an easy and cost-effective method for collecting customer feedback, thus ensuring enhanced accountability of the POs for proper service delivery. As part of CDM validation, independent third party audits will be carried out annually for the SHS program. 

50. For the energy-efficient lighting component, REB will collect data on the number of CFLs distributed by the PBSs/utilities and report through a progress report on a quarterly basis. Data on loads before and after the distribution in selected feeders will be collated to measure the impact of distribution of CFLs in terms of MW saved. Funding for this impact assessment is provisioned for in the sector technical assistance component implemented by Power Cell. As part of CDM validation, independent third party audits will be carried out annually to verify that the CFLs are working at households. 

 

51. Power Cell will report on a semi-annual basis on the activities undertaken and track progress in creating an enabling policy for renewable energy development. 

 

C. Sustainability 

 

52. The Project is aimed at making the SHS fully commercial with the POs eventually borrowing funds at market terms from commercial sources by the end of the implementation of the Project. With this goal in mind, IDCOL has been gradually reducing the refinancing rate from 80% initially to 70% currently. During the implementation of the Project, IDCOL will extend refinancing of only 60% of the micro-finance of the larger POs having a credit outstanding amount of more than BDT 250 million. A commercialization study is currently on¬going exploring options for full commercialization of the program while ensuring that poorer households are not left out of the program due to increased costs of commercialization. 

 

53. The RAPSS sub-component will require investors to have equity contribution in the sub¬projects and the tariff will be set to ensure a reasonable return to the investors to compensate for the commercial risks that the investors would take. Financial analyses of RAPSS sub-projects have identified that grants of 20 to 50 percent of capital costs would be needed today to make these projects viable at a tariff that is within the customers' ability to pay. IDCOL will closely monitor performance of ongoing and proposed sub-projects and adjust grant levels of future projects to the minimum required. IDCOL is also considering competitive award of grant funds to RAPSS projects based on minimum subsidy requirements. 

 

54. By opting to support micro-enterprise development through training and capacity building through well established POs, the household energy component will pave the way for commercial dissemination of clean cooking solutions. By supporting large-scale dissemination of CFLs in exchange for incandescent lamps, the Project would have demonstrated the benefits of CFLs (savings in customer bills), which would motivate households to continue to use CFLs after expiration of the program CFLs. The Project would also provide support for relevant policy and regulations (e.g. gradual phase-out of incandescent lamps and reduction of taxes and duties on CFLs), which would help promote CFLs in the long-run. 

 

 

A. Risk Ratings Summary Table 

 

Stakeholder Risk Rating Implementing Agency Risk 

-Capacity Substantial 

-Governance Moderate 

 

Project Risk 

-Design Moderate 

-Social and Environmental Moderate 

-Program and Donor Low 

-Delivery Monitoring and Sustainability Moderate Overall Implementation Risk Moderate 

 

B. Overall Risk Rating Explanation 

55. The Project is a repeater operation prepared by implementing agencies which are familiar with Bank procedures, and the main agency (IDCOL) has a proven track record. Therefore, the preparation risk has been rated as Moderate. With respect to implementation, key risks are related to capacity issues for IDCOL (due to scaling up of activities), project complexity (number of components), and sustainability of min-grids under RAPSS sub-component (related to willingness to pay). To address IDCOL's capacity constraints, an institutional assessment is underway to recommend capacity enhancements to meet the needs of the growing renewable energy portfolio. A separate PMU with adequate staff will be established for implementing the household energy component. With respect to project complexity, the components proposed under the Project are independent of each other, such that delays in one component will not impact on the implementation of the other components. With respect to tariff affordability and sustainability of the RAPSS mini-grids, a gradual approach will be undertaken with market testing with a few mini-grids first. In an event the anticipated demand for the mini-grids do not materialize as planned, the funding available will be utilized in the irrigation schemes or in the SHS program in support of achieving the objective of providing access to electricity. 

 

A. Economic and Financial Analyses 

56. Economic and financial analyses were conducted for representative system configurations: 

 

* SHS of varying sizes, displacing kerosene lighting and use of rechargeable batteries for operating small appliances such as TV. Weighted average size was 50 Wp supplying 6 kWh/month. SHS are used to provide electricity to dispersed customers 

where a grid extension and establishment of the distribution network is either not feasible or not cost effective due to dispersed nature of customers, difficult terrain, or low load densities. 

* RAPSS: 

 

-Solar mini-grid comprises of a solar photovoltaic array, batteries, inverter, back¬up diesel (to increase reliability), and a distribution network. The representative system is 103 kWp supplying 23 kWh/month per customer to 500 customers. The alternative is a diesel mini-grid providing the identical level of service to the same set of customers. The tariff charged is based on the willingness to pay of the consumers as obtained from survey data. 14 A mini-grid is used where load density is high (larger number of customers densely located and/or meeting higher electricity demand beyond basic lighting and other services that could be met by a SHS). 

-Solar irrigation water pump with 6.5 kWp solar array, variable frequency inverter, submersible pump, and water distribution network irrigating about 30 acres for three seasons. It would displace a diesel pump and with the same water distribution network. 

- 200 kW biomass gasifier/generator comprising of a fuel handling system, biomass gasifier, gas cleaning equipment and a gas-powered generator will supply power to the sponsor's own facilities in place of a diesel generator of similar capacity supplying the same quantity of electricity. 

 

CFLs of 13 and 23W replacing incandescent lamps of 40/60W and 100W respectively. The national benefits are due to the avoided electricity consumption, reduction of peak load as well as the global benefits of avoided C02 emissions. The benefit to the consumer will be the reduction of electricity expenses and also avoiding more frequent replacement of incandescent lamps, had the consumer continued to use incandescent lamps. 

Household Energy comprises Improved Cookstoves (ICS) and biogas units replacing traditional biomass stoves. A biogas unit produces 2.8 m3 of gas per day for cooking. The quantity of gas is sufficient to prepare three meals a day. 

 

57. The results of the economic and financial analyses are summarized below and detailed in Annex 9.15 All evaluated representative sub-projects are economically and financially viable. The exact number and combination of technologies to be supported under the Project is not known with certainty as it depends on market demand. Consequently the fund allocations across various investment categories may be different from that envisaged at appraisal. IDCOL will 

_________

14 Survey conducted at the 100 kWp solar mini-grid in Sandwip Island, the first project financed by IDCOL. The project is operating and customers are paying 32 BDT/kWh.15 Key assumptions used in the analyses were: solar PV module price of US$ 1/Wp for large modules with positive tolerances; domestic installed cost of SHS of US$7.25 on average including five year system-wide warranty and three years maintenance; other hardware costs are from IDCOL records; domestic retail price of diesel and kerosene of 61 BDT/liter; economic cost of diesel and kerosene (including domestic storage and distribution) of 82.5 and 69 BDT/liter respectively; real fuel cost escalation of 2 percent; marginal duty and tax rate on equipment of 24.4 percent, with PV modules duty and tax exempt; an exchange rate of 82 BDT/US$; and a discount rate of 10 percent. Assumptions and details are in the economic and financial analysis report in the Project Files. In CFL analysis the standard tariff of 4.97 BDT/kWh was used in the financial analysis and an avoided cost of 3.6 BDT/kWh was used in the economic analysis. CFL failure rates were taken into account, using values recommended in UNFCCC CFL CDM Methodology. 

 

58. SHS. Economic Internal Rate of Return (EIRR) and Financial Internal Rate of Return (FIRR) were used to assess the viability of SHS where it displaced kerosene lighting and rechargeable batteries. Sensitivity analyses were conducted to assess the robustness of the results. The SHS economic analysis took into account the economic value of avoided kerosene use as well as the avoided battery charging that a SHS customer would have been incurring prior to getting a SHS. C02 emissions reduction value was taken into account, but it is low compared to economic cost savings. 

 

59. RAPPS. Economic cost effectiveness analysis was conducted for RAPSS applications ¬solar mini-grid, solar irrigation pumping and for biomass gasification captive power supply ¬against diesel generation as the alternative providing the same levels of service. Grid extension was not considered as an alternative as these RAPSS applications will be installed in areas unlikely to be served by the REB grid in the near to medium term. Cost effectiveness analysis, rather than EIRR computation, was undertaken as the type of service (electricity or water delivery), and the service levels (kWh or cubic meters of water supplied) from the renewable energy options and the diesel alternative are identical -thus the benefits are identical. 

 

60. Electricity from a solar mini-grid is economically and financially lower cost than from diesels. The FIRR is 13.7 percent for the solar mini-grid when the retail tariff is 32 BDT/kWh. The equity IRR is satisfactory at about 18 percent as 50 percent of the project cost is grant funded. The results are robust -diesel fuel price must drop 30 percent or PV cost increase 33 percent for diesel to be a lower cost alternative. Both are highly unlikely. 

 

61. A key risk to these mini-grid projects is that customers may not want to pay such a high tariff, especially if the national grid gets near to the mini-grid site. This risk would be mitigated if the mini-grid sites are carefully screened to select sites where there is a high willingness to pay and where the national grid will take a long time to reach. Areas where the grid would take over 8 years to reach would be suitable as the FIRR is about 12 percent or more after 8 years. The risk to the developer is also low as the financial cash flow is positive and FIRR is 12 percent by the sixth year. A key decision point is the sixth year where a significant investment has to be made in replacing batteries. If the grid is anticipated in the near future, the battery investment should not be made, rather interconnecting the solar array to the grid to supplement grid power and to offer voltage support can be considered. Early battery failure would hurt the project finances seriously and therefore enforceable battery warranties are required (SHS systems require 5 year warranties and they have been honored by all participating battery suppliers). 

 

62. Solar irrigation is financially and economically viable. As the sponsors charge less for water from a solar irrigation scheme than from a diesel water supply scheme, water demand from farmers is expected to be strong. The financial results are robust -diesel fuel cost must drop to about 30 BDT/liter (or half its current subsidized financial cost) for diesel pumping to be less costly. It is unlikely that diesel fuel cost will drop so much. 

 

63. The biomass gasifier power project has positive economic and financial returns. Economic cost of electricity from a gasifier is one third that from a diesel generator. Financial cost of electricity from the gasifier is about half that of diesel generation as diesel fuel is subsidized. To achieve attractive returns, the plant must operate reliably over the long term. Internationally, small biomass gasifier power plants have had a spotty performance record. Therefore this technical performance risk must be mitigated through careful design, well trained operators, and properly managed fuel supply. For diesel generation to be lower cost, biomass fuel cost would have to quadruple (in India, for example, biomass fuel price increased six-fold over a ten year period in areas with significant biomass power generation). 

 

64. CFL. EIRR and FIRR were computed for CFLs and both are highly positive. Economic and financial cash flows are positive from the second year. Since the quality of lighting between a CFL and the incandescent light is not very different, consumer surplus from improved lighting was not calculated for the CFL component. Economic benefits of C02 emissions reductions were taken into account. 

 

65. Household Energy. The Household Energy sub-components -Improved Cookstoves and Biogas Units -have attractive returns, both financially and economically. They have significant co-benefits in terms of improved health, socio-economic status, and reduced workload for women. 16 The benefits accrue principally to women and children who spent time in the home and in the kitchen and have responsibility of collecting fuelwood.17 These co-benefits, though not explicitly valued in the EIRR will increase the EIRR of the ICS and biogas sub-components. 

 

16 IDS, "Biogas User Survey", Report to IDCOL, November 2011.

17 Improved cookstoves and biogas stoves result in significant reduction of indoor air pollutants such as small particulates, and toxic pollutants. The WHO estimates that as much as 3.6 percent of the total burden of disease in Bangladesh is attributable to exposure to indoor air pollution; 32,000 children below 5 years of age die annually due to acute lower respiratory infections, and 14,000 adults die due to chronic obstructive pulmonary disease. ESMAP, "Improved Cookstoves and Better Health in Bangladesh: Lessons from Household Energy and Sanitation Programs, The World Bank, Final Report June 2010. 

 

Even without considering the health and other benefits, the economic results are robust ¬biomass fuel prices have to drop to 60-80 percent of current prices before EIRR reduces to 10 percent. In households where fuel is gathered but not explicitly priced financially, there would be less incentive to adopt an ICS or biogas unit. Therefore consumer awareness and education proposed in the project is exceedingly important for adoption of these improved cooking devices. 

B. Operational Policy 8.30 Compliance 

 

66. IDCOL, being a financial intermediary, is required to comply with World Bank's Operational Policy 8.30 for Financial Intermediary Lending (OP 8.30). An OP8.30 compliance review was carried out in June 2012 that found IDCOL to be in compliance with the requirements. IDCOL is in good financial position with adequate capitalization, has good loan recovery rate (collection performance of the POs has been over 96%), makes adequate loan loss provisions as per Bangladesh Bank's regulations, keeps its books of accounts in compliance with rules and regulations, and has a satisfactory profit margin and management capacity ensuring its sustainability as a financial intermediary. The cost of funds for the POs under the project is comparable with their other sources of financing -such as PKSF (Pally Karma Shahayak Foundation), the apex institution financing micro-finance organizations in Bangladesh -ensuring that there is no significant market distortion arising from implementation of the Project. The detailed OP 8.30 compliance review for the RERED II Project is provided in Annex 8. 

 

 

67. The project uses well established renewable energy technologies. The SHS sub¬component use internationally sourced photovoltaic panels and locally sourced batteries, charge controllers and lights, all of which will be compliant with the standards set by the Technical Standards Committee of IDCOL. Before approving the sub-projects under the RAPSS sub¬component, IDCOL due diligence will ensure that the technology used is the least cost option. For the household energy component, a separate Technical Standards Committee will be formed to advise on design and certification standards and other relevant technological issues. 

 

68. Given the size and growth of the SHS program, it has now become imperative to build 

 

domestic capacity for testing of key components and systems to verify continued compliance, and to undertake performance testing of PV systems in the laboratory and in the field. The on¬going RERED project is supporting establishment of a testing facility in Bangladesh. Once established, the POs and manufacturers can avail the testing services for a fee. IDCOL would use the testing services to monitor quality and performance. 

 

69. Regular inspections will be held by IDCOL to ensure the systems are installed as per the approved technical standards. In addition to the inspections, IDCOL will conduct annual technical audits by independent third parties to verify that approved products are used, and are installed as per the technical standards. 

 

70. For the CFLs to be procured under the energy-efficient lighting component of the Project, the technical specifications will be strengthened with support from an international consultant to ensure that the procured CFLs are technically robust to withstand the wide voltage fluctuations typically experienced in the Bangladesh system and can last the required life-time stipulated in the technical specifications. 

 

 

71. A financial management assessment was carried out to evaluate the overall financial management environment prevailing in the country and within the implementing agencies of the Project in accordance with OP/BP 10.02. IDCOL, the implementing agency for the main investment components (access to electricity and household energy), has been implementing the SHS and other renewable energy programs with support of the eligible POs under the RERED project since 2003. IDCOL has acquired significant experience in IDA financial management procedures and requirements. IDCOL's FM organization and system are found to be adequate to manage its operation and to undertake project financial management activities. IDCOL is in the process of full-computerization of its accounting system that will allow for automatic generation of interim project reports without any scope for manipulation and errors. The Participation Agreement between IDCOL and the POs would include provisions requiring the POs/sponsors to maintain appropriate accounting and financial control as outlined in the Operating Guidelines of the Project. 

 

72. The financial management organization of REB, the implementing agency for the energy¬efficient lighting component, is a robust one and its entity financial management systems are also acceptable to IDA. However, there are some outstanding audit issues on the project accounts of REB under the RERED project. An action plan has been developed by REB and substantial progress made in settling the outstanding audit observations. Taking appropriate measures to remedy the outstanding observations has been made a disbursement condition for the efficient lighting component. 

 

73. Power Cell has gained experience in Bank project implementation from their participation in the PSDTA project. There have however been issues with lack of FM staff at the Power Cell. A Deputy Director for Finance and HR has been appointed recently. Appointment of an Assistant Director (Accounts) is made a disbursement condition for the sector TA component implemented by Power Cell. Power Cell resolved all the outstanding audit observations under the PSDTA project that were identified as material to IDA and agreed to follow-up on a priority basis in the case of any audit observations that may arise in the future during implementation of the RERED II Project. A Project Audit Committee with composition and charter of duties acceptable to IDA will be established to monitor the follow-up on audit issues of REB and Power Cell. 

 

 

74. Procurement for the Project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011 (Consultant Guidelines) and the provisions stipulated in the Financing Agreement. The overall responsibility for implementation of the Project would be with IDCOL, REB and Power Cell. The sub-loans under the access to electricity component implemented by IDCOL would be under financial intermediary loan and the procurement for 

these components will be the responsibility of the concerned POs. The POs are expected to follow established commercial practices ensuring economy and efficiency. A procurement audit by independent third parties will be conducted every alternate year to review the procurement practices of the POs to ensure they conform to commercial practices. 

75. A procurement capacity assessment was carried out in all the three implementing agencies with the web-based Procurement Risk Assessment Management System (P-RAMS). REB has adequate staff with procurement knowledge in its Procurement Directorate. However, delays in awarding contracts and maintaining confidentiality during the bidding process are the key issues in REB. Power Cell has shortage of staff with procurement knowledge causing delays in procurement process. Being a financial intermediary, IDCOL is not involved in major procurement except for small value procurement of goods and consultant services. REB and Power Cell are not immune to systemic issues affecting procurement efficiency and performance. The Project is rated as "Substantial-Risk" from procurement operation and contract administration viewpoint. 

 

76. As part of the procurement risk mitigation measures, all the three implementing agencies have agreed to identify a Procurement Focal Point to help the respective agencies in day-to-day procurement follow-up and preparation of periodic procurement reporting. For CFL procurement, an individual international consultant having technical knowledge on CFLs will be appointed to help strengthen the technical specifications and testing requirements. In addition, an individual international procurement consultant will support REB during bid invitation and evaluation as a member of the bid evaluation committee. A national procurement consultant will be appointed by Power Cell who can also assist IDCOL as and when needed basis. REB and Power Cell will prepare thorough terms of reference and a time bound action plan for the bid evaluation committee to ensure strict confidentially of the bidding process and timely completion of the evaluation. Procurement Plans for the first eighteen months for all the three implementing agencies, acceptable to IDA, have been prepared. 

 

 

77. No public land will be used for the Project, and no land acquisition will be financed under the Project. Land required for the RAPSS sub-projects will be private lands made available by the sub-project sponsors via direct purchase or by leasing. IDCOL requires that the land for the sub-projects is free of disputes and encumbrances. All land for Project use, whether made available via direct purchase or leasing, will be screened to ensure that no physical or economic displacement of communities/persons will take place, and lands which are disputed or have encroachments on them (informal settlers, non-titled entities) will not be used for the Project. It may be mentioned that such encumbrances are rare in rural areas. 

 

78. The project may extend facilities in areas where indigenous people (IPs) live. However, availing the facilities/services/products under the access to electricity and household energy components of the Project is purely on a voluntary basis for all paying customers (including IPs). No negative impacts are anticipated towards IPs. In cases of project activities in the IP areas like Chittagong Hill Tracts, the POs are well-versed in IP languages to offer adequate consultation on maintenance of products. awareness raising, and training. 

 

79. A gender responsive social assessment for the Project was carried out to identify opportunities for gender responsive activities in the access to electricity and household energy components. The assessment involved focus group discussions, key informant interviews, and household observations in five different sites. The assessment identified that the SHSs supported under the on-going RERED project has increased women's safety, mobility and entrepreneurial ambitions. It has enabled children to study properly at night and do better in school. Several gender focused activities that would be further explored for implementation under the RERED II Project include consultation with women during installation of the SHS to ensure the locations of the light fixtures are at places that are more beneficial for women in their household chores. Women-centered training and consultations will be adopted to maximize the benefits of SHS for women. To expand the use of biogas plants, POs would explore options for employing both male and female employees who will have access to rural men and women to motivate and advice them for installing and using biogas plants. Consultation with women would be ensured before installation of ICS regarding location and height of the stove placement. More detailed recommendations are in Annex 10. 

 

80. IDCOL will be responsible for monitoring of environmental and social safeguard compliance with support of the POs. An environmental management and social management framework (ESMF) was adopted under the original RERED project, which was updated during the two additional financing of RERED. The ESMF has been further reviewed and revised for the RERED II Project. The updated ESMF includes an assessment of the progress on the compliance of the activities undertaken in the ESMF of the RERED project. The updated ESMF along with its Bangla version has been disclosed in IDCOL website on July 18, 2012 and in World Bank Infoshop on July 20, 2012. 

 

 

81. The Project will promote and scale-up the use of renewable energy technologies and energy efficient bulbs. These interventions yield net positive environmental impacts. The project is designated as environmental Category B (partial assessment) according to OP/BP of the Bank and only one environmental safeguard policy OP/BP 4.01 has been triggered. No significant and/or irreversible adverse environmental and social issues are expected in the sub¬projects financed under the project. 

82. IDCOL has gained experience in implementing the ESMF under the Bank financed RERED project. It has made progress in establishing the Environment and Social Safeguards Management Unit (ESMMU) to institutionalize the environmental and social management in its operation. IDCOL now has a full-time environment staff member who is working with POs and battery manufacturers/suppliers to raise awareness about the importance of environmental and social safeguards. Visits are made by the staff to all battery recycling plants on half-yearly basis for ensuring environment compliance. To further strengthen the ESMMU, IDCOL is in the process of appointing an additional environmental consultant to guide the client in preparing and reviewing the environmental assessment/screening for subprojects. 

 

83. The major environmental concerns of this project are: (i) risk of lead contamination from improper disposal/ recycling of lead-acid storage battery used in SHS; and (ii) risk of mercury contamination from improper disposal of CFL bulbs. Several measures have been undertaken by IDCOL to strengthen SHS battery recycling including refinancing for battery replacement and enhanced incentives for POs and manufacturers for collection of expired batteries. IDCOL has required the compliance of ISO 14001:2004 and OHSAS 18001:2007 by all battery recyclers and battery suppliers. 12 out of the 13 battery suppliers have become ISO 14001 and OHSAS 18001:2007 compliant, and the remaining one is expected to be compliant soon. Also, out of the three battery recyclers of the country, one is already compliant and the other two are in the process of becoming compliant. It is expected that the remaining battery recyclers will be ISO 14001:2004 and OHSAS 18001:2007 compliant before the implementation of the Project begins. An annual environment audit by independent third parties will be undertaken to assess the adequacy of the current mechanism for ensuring proper recycling of batteries and to monitor implementation of the ESMF. 

 

84. For the energy-efficient lighting component, national guidelines will be developed by a team of international and local consultants for the proper disposal of CFLs. These guidelines are required to be in place before the distribution of the CFLs financed under the Project can commence. The sector TA component of the Project will provide technical assistance support for capacity building for ensuring safe disposal of expired CFLs financed under the Project.