Development of the System for Promotion of the Renewable Energies Small Scale Projects in El Salvador

(SIFER)

Group Members a) Organization leader data: Organization: Ministry of Economy/

Directorate of Electric Energy

Address:

Contact: Dr.-Ing. Salvador Rivas Ing. Jorge Rovira

Position: Subdirector Director

Alameda Juan Pablo II y Calle Guadalupe, Edif. C-2 Plan Maestro, Centro de Gobierno, San Salvador, El Salvador, C.A.

Telephone: +503 – 231 56 13

Fax: +503 – 281 11 57

E-mail: srivas9@minec.gob.svjrovira@minec.gob.sv

b) Others Group member data: Organization: Ministry of

Environment/ Unit for Clean Development

Address:

Contact: Lic. Mauricio Ayala Position: Jefe de Unidad

Km. 5 ½, Carretera a Santa Tecla, Colonia las Mercedes, Edificio SNET, San Salvador, El Salvador, C.A.

Telephone: +503 – 283 2269

Fax: +503 – 283 2269

E-mail: ayalam@marn.gob.sv

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Index 1. Specific Context of the Project 2. General Objectives 3. Results

Conditions for the Operation of the Commercializing Company System to Guarantee the Purchase Price of the Commercializing Company

4. Activities per Component 4.1 Design of the Revolving Fund for Renewable Energy (FOGES) 4.2 Procedures for the Use of Financial Mechanisms 4.3 Negotiations to Obtain Monetary Resources 4.4 Steps for the Fund Creation

5. Time Table 6. Budget ANNEXES

A. Direction of Electric Energy of the Ministry of Economy B. Unit of Clean Development of the Ministry of Environment and Natural Resources C. Introduction to the method of Leveled Costs of Energy for the Assessment

of Generation Alternatives

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Project Summary The objective of this proposal is to develop a System for the Promotion of Renewable Energies (SIFER) that operates under the conditions of the prevailing deregulated electric markets in El Salvador. This model looks for the increasing of the competitive advantage of the renewable energy projects, through financial mechanisms that mitigate the high recovery cost of the initial capital investment required by this kind of projects. The central elements for the operational activity of the SIFER, as a result of the final project development, are the following:

1. Design of a Revolving Fund of Guarantee and Stabilization for Renewable Energy (FOGES) (€ 30,000). This fund will be use to cover part of the guarantees required by the developers of renewable energies small projects, and to guarantee the purchase price of the electric energy generated.

2. Obtaining of funds and negotiation: development of a Procedures Guideline

indicating how to use the mechanism for debt exchange, clean development, and other financial mechanisms, support in the negotiations processes, trips expenses, etc. (€ 40,000 + approximately € 10,000 counterpart).

3. Development of Assessment Methods / Tools to compare the costs of

several renewable energy options (€ 35,000 counterpart).

4. Development of a Commercializing Company, capable of the implementation of mechanisms to structure long-term energy purchase contracts and to provide a fund to manage the risks of the prices fluctuations in the market (€ 35,000 as counterpart).

The development of these elements for the SIFER requires supervision, and supporting services on the technical, financial, and administrative areas from the local counterparts (€ 20,000 counterpart). Additionally, the SIFER will be able to be supported by other mechanisms, as the Guarantee Fund, that is currently being developed by the Central American Bank of Economic Integration (CABEI / BCIE).

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Renewable Energy in El Salvador

Generator 2Renewable Energy

Generator 3Renewable Energy

Commercializing Company

Generator 1Renewable Energy

Revolving Fundof Guarantee

And Stabilization

Distributor

Long-TermEnergy Purchase

ContractsFix Price

Long- TermEnergy Purchase

ContractsVariable Price

CountryDonor AGeneration Project 1

Renewable Energy

Usuario

CountryDonor B

Government

Carbon Purchase

Generation Project 2Renewable energy

Project Assessment

Risk Assessment

Debt exchange,Additional Resources

CostIncome

Contract

Promotion System for Renewable Energies

The activities include the formulation of studies in order to design:

The Revolving Fund for Renewable Energy. The Procedures Guideline to use the financial mechanisms. The operational concept of a Commercializing Company. The Computer methods and instruments.

Besides, other required activities are the following:

Negotiations to obtain the monetary resources for the fund. Steps for the creation of the fund. Steps for the creation of the Commercializing Company.

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1. Specific Context of the Project The Government of El Salvador (“GOES”) decided to restructure the electricity sector, establishing an attenuated vertical decentralization model (accounting separated by activity and neutrality of the transmission system), free access of third parties to the transmission and distribution network to guarantee the free entrance on non discriminatory and objective bases. Here we describe the package of Government Reforms to promote the competence and development of the electricity sector:

- On 1996, entered a new Electricity Law, that liberalizes the sector, establishing the necessary elements to guarantee the competence and the consumers protection. (1996)

- A restructuring Plan was established to: o Created several generation companies without affecting the efficiency of

the system, this companies were derived from the state monopolistic entity CEL. (1998)

o Separated the coordination of the generation from the maintenance and expansion of the transmission system. (1996)

o Created the Unit of Transactions or UT, in order to facilitate the exchange and the energy sale/purchase. (1998)

o Four electricity distribution companies by region were created, they belonged to CEL before, without exclusive concession, and the rules were given for new companies who wanted to join the generation, distribution or transmission markets.

o On January 1998, the four distribution companies were offered to international investors and private sector. It was sold approximately 75% of the shares of this companies to international strategic associates. 20% was sold to the employees of the companies and CEL, and 5% in the stock exchange.

o A plan was established to balance the fees, to place the monopolistic company CEL (Governmental – autonomous) in adequate conditions of competence after the reform of the sector. (1998)

o The General Superintendencia (Supervisory) of Electricity and Telecommunications (SIGET) was created, as an agency with regulatory tasks, procedures well defined and a minimum level of discretion.

In El Salvador the participation of the renewable energy sources (RER) in the generation of electric energy, has been reduced from more than 90% in the 80’s to near the 55% currently. The country depends therefore in a higher measure from petroleum derived resources, and all of them have to be imported, generating vulnerability to their price variations. The current situation of the electricity market in El Salvador supports the development and establishment of electric energy generation projects, which have

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a quick return over the investments. These projects generally utilize fossil generation. Although the basic objectives of the regulatory framework promote the markets competitive development in the segments of generation and commercialization, there are some barriers that the small producers of electric energy have been facing since the beginning of their activities: fundamentally, they do not count on with the financial instruments for the development of new projects, and for the adequate maintenance and expansion of their current projects. In spite of the environmental advantages to utilize renewable energies for the electric generation of energy, there are in El Salvador barriers that inhibit the renewable energy small scale projects development:

- Non-existence of adequate instruments for the financial structure of the renewable energy projects.

- Lack of long-term purchase agreements: Because they don’t have long-term contracts of sale with specific prices (PPA’s: power purchase agreement), as can be found in the energy PPA’s of neighboring countries as Honduras and Guatemala 1, the banks have difficulties to propose long-term financing loans with favorable conditions for the RER projects.

- Limited guarantees capacity: As the assets for the generation are specialized and immovable, especially in the hydraulic projects, the banks consider that a high level of guarantee is needed (125% of the loans in general) to limit the credit risk. The small independent investors have difficulties to offer these guarantee levels to the banks2.

A possible solution to this situation would be the creation of a Commercializing Company, which agglutinates this kind of producers and could assign a special guarantee fund, managed by an independent institution, enabling the access to financial instruments that serve as a base for the development of new investments in small renewable energy projects. The sustainable development, which takes into account environmental, social, and economic aspects, is very important in the energy sector. In this sector, the renewable energies offer the better conditions to guarantee the covering of the energy demand in a friendly way with the environment, because it reduces the increment of the emissions of the greenhouse effect gases. The utilization of our

1 1 In Honduras, 18 contracts of PPA were signed in 2001 with 14 hydroelectric projects and 4 of biomass. The contracts of sale had a duration of 15 years, with a negotiated average price approx 0.065 US$/kWh, and the projects obtained benefits of tax exoneration. In Guatemala, the company ORMAT (Geothermic) has a PPA for 15 years with a sale price of 0.065 US$/kWh. The preliminary costs of investment, as the costs of wells drilling, were done with public funds.

2 It is considered that the co-generation projects associated with the Sugar Companies, could offer corporate guarantees and have a lower risk level than the independent projects, that are handled by companies created for the exclusive purpose of operate a generation project. Nevertheless, the present difficulties of the sugar sector in El Salvador, represents an additional structural problem for the banks in their analysis of the grid project’s risk. In a general way, the “corporate risk” is a deal more accepted by the local banks than the “project risk” for the financing of RER.

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own renewable energy resources in El Salvador improves the strength of the electric system. 2. General Objectives The Government of El Salvador, through the Ministry of Economy (MINEC) and the Ministry of Environment and Natural Resources (MARN), desires to promote the renewable energy utilization, because the long-term advantages of the electric generation based on renewable resources. The renewable resources contribute to reduce the public costs of health and environmental deterioration, due to the contamination caused by the extraction, transportation and combustion of fossils combustibles. Another advantages are: a) The diversification of the electric energy generation sources in our country, through the incorporation of our own renewable resources to isolate the country from the fuels price changes, that affects negatively the country’s Balance of Payments; b) The renewable energy projects generally create new specialized jobs, which contribute to increase the incomes of the local economies. 3. Expected Results The expected results are the following:

1. The design of the Revolving Fund of Guarantee and Stabilization for Renewable Energy (FOGES).

2. Guideline of Procedures to use the debt exchange mechanisms, clean development and other financial mechanisms to get funds had been elaborated.

3. Negotiations for the obtaining of monetary resources for the fund have been carried out (initial proposal developed with UNDP would be considered as a counterpart, approximately €10,000).

4. Carried out actions to create the fund, which will support the development of financial mechanisms to mitigate the high recovery cost of the initial capital required by the projects, as well as to manage the prices changes risks in the electric energy market.

5. The operative concept for a Commercializing Company for small scale renewable energy projects had been developed (counterpart).

6. Carried out actions for the creation of the Commercializing Company (counterpart).

7. Methods for the assessment and costs compare of several renewable energy options had been implemented in computer systems (counterpart).

The results 5, 6, and 7 will be achieved through activities that represent our counterpart compensation of this financing petition for the results 1, 2, 3 and 4. Since the SIFER operates in an integral way, it’s convenient to have a knowledge

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of how these activities are interrelated. For such reason, an introduction of SIFER’s two fields of operation is presented:

Commercializing Company operation conditions System to Guarantee the Purchase Price of a Commercializing

In the following chapter there will be presented each one of the results that are intended to achieve with this proposal, describing the necessary activities to achieve each one of them and grouping these by components. With regard to the result 7, which refers to the methods to assessment and costs compare of several renewable energy options, we are presenting an introduction to the Method of Leveled Costs of Energy for the Evaluation of Generation Alternatives in Annex C.

Commercializing Company Operation Conditions

As part of the development of the SIFER, a Commercializing Company will be created, to agglutinate the different electric energy generators interested, with the purpose to trade the energy produced by them. The Commercializing Company would be able to sell directly to final users in low and medium networks, as through transactions in the Wholesale Market, whether in the System Regulating Market or well in the Contracts Market. Likewise, the Commercializing Company would establish energy purchase agreements in the medium and long term with the generating units grouped. According to the current regulatory and legal framework, an Electric Energy Commercializing Company has the conditions to buy electric energy originated from generators located in distribution networks, and therefore not connected directly to the broadcasting system, and to sell then this energy, under the following conditions:

1) Inscription. It should be register as commercializing on the Electricity Operators Record of SIGET. Besides, to operate in the Wholesale Market it should be registered in the Unit of Transactions (UT), with an anticipation of at least one month, prior to the beginning of transactions.

2) Agreement with the intermediary Market Participant (MP). Every Commercializing that desire to do transactions in the Wholesale Market utilizing distribution networks, should have agreements with the owners in order to use their installations, in which it should be established the procedures for the energy exchange coordination, conciliatory and resolution of disputes.

3) Distribution Contracts. To trade electric energy in low and medium networks, the company should have distribution contracts with the distributors of the area where the consumers are going to be supplied. In the case that the consumers are located in the same distribution network of the generator whose energy is being trade, the Agreement with the intermediary MP and the Distribution Contract will integrate the same contractual instrument. On the other side, in the case of consumers

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located in the another distributor network, it’s a matter of two different contracts.

4) Broadcast Contract. In case to need the broadcast networks to inject energy, the Commercializing should count on with an agreement with the Transmitter for this use.

5) Payment Guarantee. To get the authorization to operate in the Market, a Commercializing should present a payment guarantee to the UT, that serves to support all its monetary obligations with the UT. Also, the Distributor has the right to require guarantees, that are hold to the maximum value established in the Regulation of Commercializing.

System to Guarantee the Purchase Price Commercializing.

The Commercializing Company would have the support of the Revolving Fund of Guarantee and Stabilization (FOGES), and for such reason would be in the condition to offer a MWh purchase price to the small generators, with the objective to provide them with the required incomes to accomplish with their financial commitments. This purchase price could be even over the market prices, during the first years of the project, when the following conditions may occur:

• the KWh generation costs are higher than the sale price, • the impact of the financial costs, through the debt reimbursement, is

higher and it’s damaging the project.

The benefits of this compensation system would only be available during a limited time period. Once the time for the initial support is over, the free market negotiation system would apply again. The compensation would not be a subsidy, it’s like a soft loan with reimbursement concession conditions and a long grace period.

We intend that the Commercializing Company buys the energy to the small generators at a Long Term Fixed Price (PFL) by technology. A system of differentiated prices will be studied for hydroelectric projects, biomass projects, etc. The PFL allows to guarantee the long-term purchase prices. This price will be determined with a model program for the generation costs based on international standard costs and local data when available. The Commercializing will buy the energy from several Generators at the PFL price, and will sell it to clients (mainly Distribution Companies) for a Negotiated Market Price (NMP), that would be the average price of all the energy sales: This transaction could cause a Deficit3 (D): D = PFL – NMP

3 This lost is momentary in the project time. It will become a gain in the long term.

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This deficit D will be financed to the Commercializing by the FOGES. The Generator of electricity who is receiving the PFL will reimburse it, at the end of the support period. We think that the Commercializing Company would have a better capacity to negotiate the sales price with the Distributors than an individual generator, for the following reasons:

• to sell higher quantities of energy, originating from multiple generators,

• to be able to regulate its energy offering having several suppliers.

Besides, this would allow to reduce the transaction costs (sales costs of energy).

4. Activities per Component

4.1 Design of the Revolving Fund for Renewable Energy (FOGES) The proposal is the creation of a Revolving Fund of Guarantee and Stabilization for Renewable Energy (FOGES). This Fund could be created under a financial trustee fund figure, ruled by the Articles 1233 and following of the Commerce Code of El Salvador. The fiduciary company that manages this Fund would be an established financial institution, being the Commercializing Company the trustee, under the purposes and instructions established in the act of the Fund constitution.

This Fund would be destined to:

- Cover the differences between the prices paid by the Commercializing Company to the Generators beneficiaries under limited time contracts, and the result of the sales by contracts or in the MRS.

- Serve as a payment guarantee for the obligations that the Commercializing Company could assume with the Unit of Transactions (UT), and with the Distributors and Intermediaries that have distribution contracts and agreements in the Wholesale Market.

- Pay the established compensation to the fiduciary company. - Finance the operational costs of the Commercializing Company,

established by the authorities. - Cover expenses of constitution and/or start of activities on behalf the

Commercializing. - Optionally, finance feasibility studies and/or technical assistance for

future Generation projects beneficiaries of the program.

Activities

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The activities for the achievement of the results of this component are the following. 1) Calculation of the Long-term future price This activity will consist of the following thing:

- At the beginning, we will proceed to analyze different studies, previously carried out in El Salvador, about the calculation of the marginal price.

- After that, we will describe in a report the different calculation methods for the long-term future prices. Subsequently, the suitable methods and tools, for the conditions of the electric system in El Salvador will be selected.

- Based on the analyses carried out and considering the operations with the regional market of electricity, we will proceed to establish a long-term future price for the electric system of El Salvador.

- Due to the existing concentration in the generation and to the probability of abuse on the market, it will be necessary to consider the possible actions (maneuvers) of the market’s actors, in order to obtain a price of the wholesale market and thus to consider possible adjustments of the long-term future price.

2) Decision of the Fund’s Size In function of the electric energy bought from the small scale Generators and the sale prices, it will be necessary to estimate the dimensions of the Revolving Fund. As a base for the sale price, we will have the long-term future price, established in the previous activity. The size of the fund that allows to stabilize the incomes of the small Generators will depend on the hydroelectric plants (HP) and others, since:

- If it’s a matter of stabilizing the incomes of a HP, there is a compensation between the price and the energy generated: i) in the hydrological good years, the price will descend, but the quantity of energy will increase, so the total income would increase; ii) in the poor years, the price will increase, but the lower quantity produced will not increase, normally, in the same proportion. In this case, we would try to stabilize the incomes in a certain proportion of the price of the MRS multiplied by the average production expected of the plant.

- For a thermal plant that burns sugar cane chaff, as well as, for a wind

and geothermic plant, the problem will be in the hydrological good years, therefore their production can be thought independent of the conditions of the rainwater.

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The Fund has a dynamic behavior in time, whose size depends on the type of the generation plants entering in operation, their installed power and the energy generated by them; as well as, the gap between the purchase and sales prices, which are a reflection of the behavior of the electric market. These financial analysis and other considerations will have to be described in the study. To the calculation of the estimated size of the Fund, its necessary to elaborate a sensibility analysis on the critical variables. 3) Design of the Revolving Fund For the design of the Revolving Fund, we require the following steps:

- Design of the fund profile (for example a trustee fund) based on the guidelines provided by the creators of the fund.

- Elaboration of the operating bases of the fund in order to

define its functionality.

- Elaboration of the legally constitutive deed draft, under the laws of El Salvador, containing the obligations and rights of the involved parts.

4) Model for Electric Energy Sale Contracts to Distributors The General Law for Electricity of El Salvador, in its Art. 79, establishes that the prices of the energy included in the rates sheets, should be based on: “a) The prices of energy and contained capacity in long-term contracts approved by the SIGET, according to the methodology that will be defined in the rules. These contracts will be public and will be adjudicated by free offer processes, that accomplish with the parameters and procedures established by the SIGET;

b) The average price of the energy in the MRS in the respective node, during the previous year to the presentation of the Sheet;”.

The objective of this activity is to define a model for the electric energy sale contracts for the Distribution companies, in a way that due to their characteristics, these contracts would be able to be transfer to the rates, and could be acceptable for the future regulation.

4.2 Procedures for the Financial Mechanisms Use Based on bibliographical references and in the experience on the use of debt exchange mechanisms, clean development and other financial

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mechanisms for fund obtaining, there will be an evaluation to recommend which ones are better for the renewable energies promotion in El Salvador.

Activities 1) Document for Procedures Guideline The elaboration of the procedures guideline will include recommendations on financial mechanisms, additional to the debt exchange, that could be used in the SIFER’s operation framework.

4.3 Negotiations to Obtain Monetary Resources

This component consists in the development of a consultation process that facilitates the negotiations for debt exchange. Especially, it would have to consider the politics and interests of the candidate creditors countries, related to the promotion of the renewable energies; as well as, with the cooperation for the sustainable development. The objective would be that from both parts, there will be interest to develop the SIFER, and the utilization of the funds as a joint project.

Activities

1) Debt Conversion of the Candidate Countries

Based on a bibliographical investigation, there will be described the record of the debt exchange process for the candidate countries: Germany, Spain.

2) Specific Characteristic of the Candidate Countries

Specifically related to the project, the politics of development and cooperation will be investigated, the politics for promotion of the renewable energy resources, etc. From this investigation it will be defined in which ways El Salvador would be able to be benefited from the politics of these countries. Based on the activities 1 and 2 of this component and in a document for proposal of debt exchange (elaborated as a counterpart), it will be developed a proposal, including coherently the approaches of the counterparts for debt exchange.

3) Recommendable Procedures for the Debt Exchange Management

This activity consists in the elaboration of the recommendable route to be followed in order to get our goal: debt exchange. This will described in which way is recommended to complete each one of the route steps, including institutions and contact persons, required for the debt exchange

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management. Besides, we require a time table of the activities and meetings with the counterparts, designed in a way that the presentation and negotiation of the debt exchange proposal would have a high success probability.

4) Preparation Meetings with the Institutions of the Candidate Countries

So much to define, but especially to proceed with the debt exchange management described in the preceding activity is necessary to maintain, in the right moments, consultations with Officials of the target institutions in the candidate countries. Likewise, there is the possibility that a mission from the candidate country wants to visit El Salvador, with the purpose to evaluate directly the political will and the seriousness of the proposal.

There are two kind of preparation meetings:

- Technical character, to define the terms and conditions of the debt exchange; as well as, the conditions for the assignment of the funds and its utilization rules;

- Political – diplomatic character, to develop the political will for the decision and to acquire the commitments that this management demands.

On behalf of El Salvador, it’s foreseen that Governmental Officials will carry out visits to the competent institutions of the candidate countries. Additionally, it would have to be organized an attention program for a possible mission of Officials from the candidate country to El Salvador. 5) Preparation of Documents and Presentations When the debt exchange process is discussed and finalized, it will be necessary to carry out the final adjustments between the Officials of the respective Ministries involved, and organize a meeting to undersign the Agreement. We required that this documents are prepared, as well as, the corresponding presentations.

4.4 Steps for the Fund Creation

Activities

1) Formal Creation of the Revolving Fund (FOGES)

The following operational tasks are required for the Fund creation and formal beginning of operations:

- Incorporation of possible modifications required by the Fund’s Investors.

- Conditions negotiation with the Funds Manager Bank.

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- Elaboration and undersign of the Fund’s legally constitutive deed.

- Inscription in the Register of Commerce in El Salvador.

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5 Time Table

Month 1 2 3 4 5 6 7 8 9

Component 1 Design of the Revolvent Fund for Renewable Energy (FOGES)

1) Estimation of the long term price

2) Determination of the Fund's size

3) Design of the Revolvent Fund

4) Model for Agreements of electric energy sale to the Distributors.

Component 2 Procedures for the Use of the Financial Mechanism

1) Document of the Procedures Guidelines.

Component 3 Negotiations to Obtain Monetary Resources

1) Debt exchange with the candidate countries

2) Specific characteristics of the candidates countries

3) Procedures recommended for the negotiation of the debt exchange

4) Preparatory meeting with the competent institutions of the creditor country

5) Preparation of documents and presentations

Component 4 Negotiation for the Fund Creation

1) Formal creation of the Revolving Fund

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6 Budget - Draft Budget –

Days-

ExpertHonorary per day

Partnership Counterpart Total

Component 1: Design of the Revolving Fund for Renewable Energy (FOGES)

€ 29,200 € 0 € 29,200

International Expert 40 500 € 20,000 € 20,000Local Expert 20 250 € 5,000 € 5,000Total trips (2 tickets @ €1,200; 12 days @ €150) € 4,200 € 4,200 Component 2: Procedures for the Use of Financial Mechanisms

€ 4,250 € 0 € 4,250

Regional Expert 10 300 € 3,000 € 3,000Total trips (1 ticket @ €800; 3 days @ €150) € 1,250 € 1,250 Component 3: Negotiations to Obtain Monetary Resources

€ 29,900 € 10,000 € 39,900

International Expert 30 500 € 15,000 € 15,000Total regional trips UE (4 tickets @ €500; 8 days @ €150)

€ 3,200 € 3,200

Total international trips (6 tickets @ €1,200; 30 days @ €150)

€ 11,700 € 11,700

Component 4: Negotiation for the Fund Creation € 3,750 € 0 € 3,750Local Expert 15 250 € 3,750 € 3,750 Other Direct Costs (supervision; administrative, technical and financial assistance, telecommunications)

€ 0 € 19,000 € 19,000

Contingencies € 3,000 € 1,000 € 4,000 Design and operation of the SIFER for the Partnership

€ 70,100 € 30,000 € 100,100

Component 5: Operation of the Commercializing Company (Counterpart)

€ 0 € 30,000 € 30,000

Component 6: Negotiation for the creation of the Commercializing Company (Counterpart)

€ 0 € 5,000 € 5,000

Component 7: Methods for Costs Assessment and Compare (Counterpart)

€ 0 € 35,000 € 35,000

Total for the Design and Operation of the SIFER

€ 70,100 € 100,000 € 170,100

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ANNEXES A Direction of Electric Energy of the Ministry of Economy

The Direction of Electric Energy (DEE) is a special administrative unit with a technical character of the Ministry of Economy, created with the purpose to attend the Ministry in the fulfillment of its role as principal entity for the electric sector politics of the electric sector in El Salvador.

MISION. According to the strategic plan designed by the Ministry of Economy, the mission of the Direction is to elaborate, propose, coordinate and execute the politics, programs, projects and actions for the efficient operation of the activities for generation, transportation distribution and commercialization of the electric energy; with benefit for the consumers and users through a premium quality supply, at reasonable rates not discriminatory, through conditions and operation rules based on the competence and efficiency in the assignment of resources.

VISION. The vision is that the Electric Direction of Energy elaborates, proposes and executes the politics, plans and energy programs, coordinating the governmental actions and enabling that officials, investors, market agents and users count on with information, objectives and precise and clear rules that allows to complete, guarantee and perfect the process for transformation and modernization of the electric sector. It will be characterized for a high technical level and qualified human resources, compromised with the country development.

OBJECTIVE. The general objective set in the Operating Wrk Plan 2002-2003 is to complete, guarantee and perfect the process for transformation and modernization of the electric sector in El Salvador; in order to achieve higher competitiveness and efficiency in the sector that assure reasonable rates, as well as, territorial and social equity in the expansion of the energy provision, in a framework of adequate environmental protection and industrial development.

To reach this, the Plan mention the following specific objectives:

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o Complete, adapt and perfect the current regulatory framework, through the identification of problems and the formulation of recommendations and propose of normative adjustments, in order to achieve a greater transparency and efficiency in the operation of the industry, that allows better prices and services for the users.

o Try that the management of the public sector companies be consistent with the objective to develop a competitive electric market, through the restructuring and modernization of such companies and the monitoring of their operation, with the purpose of reaching a higher transparency and efficiency in the operation of the sector.

o Expand and increase the access of the smaller incomes sectors and the most disadvantaged geographical zones in the country to the electric energy supply, through the formulation of a rural electrification strategy and a subsidies policies to the investment and to the consumption of the electric sector, in order to reach adequate conditions of territorial and social equity in the expansion of the provision

o Prompt the regional electric integration, favoring the not discriminatory, transparent, and objective sanction of rules destined to regulate the regional exchanges of electric energy, in order to improve the competence conditions in the market and the supply quality and guarantee in the national electric sector.

o Promote the rational use of energy, the energy efficiency and the renewable and new development of sources; through the elaboration of strategies, policies instruments and specific programs, in coordination with the related units of the Ministry of Environment and Natural Resources, in order to reach a sustainable development of the industry with the environmental objectives of protection and the initiatives linked with the implementation of the Kyoto Protocol on Global Climate Change.

GOALS. To obtain the specific objectives defined, the Work Plan establishes the following goals:

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o Adaptation and perfectionist of the Wholesale Market operation, through the execution of a diagnosis and the formulation of recommendations and normative adjustment proposals.

o Restructuring and modernization of the state companies and public entities decentralized or autonomous of the sector, as well as the financial, accounting, and legal separation of this entities, adequate to the objective of disintegration of the industry ordered by the General Law of Electricity.

o Optimum operation of the state generation of property, through the daily monitoring of the electric energy opportunity offerings that they carry out the public companies, autonomous institutions of the State or the companies that result of their restructuring in the Wholesale Market, the ones that should be adjusted to efficient and optimum norms of operation.

o Formulation of the rural electrification strategy and the investment subsidies politics, executed through the National Fund of Investment in Electricity and Telecommunications (FINET).

o Formulation of the subsidies policies for the consumption, executed through the Ministry of Estate, the National Fund of Investment in Electricity and Telecommunications (FINET) or any another institution of the Government applied to such end.

o Promotion of the rules sanction to set in motion the integration on the regional electricity sector, through the competent regional and national agencies, with the support and the aid to the representatives of the Government in the agencies and regional projects linked to the electric sector and the participation in initiatives oriented to prompt the integration process.

o Formulation of a strategy for the development of the renewable and new sources and the efficient energy, with solid policies instruments for the development of the renewable and new sources and the efficient use of the energy in the context of a competitive electric market.

ORGANIZING STRUCTURE

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The Unit will be structured in the following areas: 1. Wholesale Market and Regulation Area 2. Public Companies and Restructuring Area 3. Rural Electrification and Subsidies Area 4. Renewable Resources and Energy Efficiency

The organization counts on with: a Director, three Advisors and a Technician; also we have with Legal and Administrative personnel support. Additionally, a considerable part of the work that is directed and implemented by the DEE is bases on studies elaborated by consultants and international aid.

The Wholesale Market and Regulation Area will carry out a complete research of all the information related to the operation of the wholesale market and the operation of the electric system, that understand the reports and statistical originating from the Unit of Transactions (UT), the evolution of the prices of the fuels, the demand growth rates and its relations with other prominent variables, the plans provided by the sector. It will analyze the electric market operation, detecting problems, imperfections and not desire practices, and proposing its modification. Besides, it will carry out a daily monitoring of the electric energy opportunity offerings that carry out the public companies, autonomous institutions of the State or the companies that result of its restructuring, in the wholesale market, trying its adjust to efficient and optimum norms of operation. It will represent the Government with the regional agencies linked to the regional electric process of integration in the elaboration and proposal of rules for the impulse and it set in motion of the regional electricity integration.

The Public Companies and Restructuring Area will participate in a study of consultancy that carry out a complete analysis of the organizing, legal, and financial situation of the Executive Commission of the Lempa River (CEL) and recommend alternatives oriented to the restructuring and modernization, as well as, the financial, accounting, and legal separation of the companies linked to this. It will devise a detailed work plan in order to achieve the restructuring, modernization and financial, accounting, and legal separation of the CEL and its businesses linked, to comply the objective of disintegration of the industry ordered by the General Law of Electricity. It will coordinate and will supervise the execution

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of the work plan approved by the Minister. It will coordinate the actions of the electric sector state companies with the Ministry.

The Rural Electrification Area will perform the function of counterpart of an external program of consultancy destined to the elaboration of a rural electrification strategy and the definition of goals, guidelines and criteria to apply in the subsidies policies to the investment executed through the National Fund of Investment in Electricity and Telecommunications (FINET). It will formulate the strategy of rural electrification and will propose a detailed work plan that contains the goals, guidelines and criteria to apply in the subsidies policies for the investments in the electric sector, executed through the National Fund of Investment in Electricity and Telecommunications (FINET); as well as, the regulations and procedures manual for its efficient execution. It will formulate the subsidies policies for the consumption executed through the Ministry of Estate, the FINET or any another State agency.

The Renewable Resources and Energy Efficiency Area, will elaborate a development strategy for the renewable and new sources, and for the efficient use of the energy. It will act in coordination with the related units of the Ministry of Environment and Natural Resources.

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B Unit for Clean Development of the Ministry of Environment and Natural Resources.

The Unit for Clean Development of the Ministry of Environment and Natural Resources (MARN) was created in the year 2000, which depends directly from the Direction of Environmental Management; its basic responsibility is to facilitate and promote the execution of projects that reduce or avoid greenhouse effect gases emissions, in the framework of the Climate Change Convention and the Kyoto Protocol.

In this sense, it promotes the renewable energies projects execution, with the fundamental purpose of contributing in the greenhouse effect gases emissions reduction, responsible of the global warming-up; taking into consideration that this type of projects, upon utilizing renewable resources (water, vapor of the subsoil, sun, wind, biomass) for the production of energy, avoid flammable fossils burn and contribute to the Development.

On the other hand, the Unit for Clean Development, as National Focal Point for the theme of the Clean Development Mechanism (CDM), is facilitating the commercialization of the certificates of emissions reduction (CERs) originating mainly of renewable energy projects which will represent an additional source of incomes for this kind of projects

The CDM will permit to the projects that avoid the use of flammable fossils (like the renewable energy projects), to trade certificates for emissions reduction (CERs) with the developed countries (that have emissions reduction commitments in the framework of the Kyoto Protocol), which will represent additional incomes for the renewable energy projects developers.

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C Introduction to the Method of Leveled Costs of Energy for the Evaluation of Generation Alternatives

Since the energy supply point of view, the economic evaluations of alternatives, use the leveled costs like initial tool for the selection of a short list of viable options that subsequently are evaluated in detail.

For a first analysis, is convenient to use data of entrance, estimated by consultants or dependable bibliographical sources; if there are not available information, it should require new investigations and studies to assure the better possible results. In many cases, the data of entrance can have a variance of approximately +/- 30%. Therefore, it should not be expected that studies of this nature have absolute results, but ranks.

The energy costs in cents for kilowatt-hour and capacity in dollars by kilowatt, will compare different base alternatives with different capital costs, economic duration, costs of maintenance, fuel cost and other variable costs. The procedure will include the sensibility analysis of the leveled cost of energy on different variables (discount rate for example).

Once an option, or short list of options is ready, based on the initial calculations of leveled costs, a total costs study is undertaken, esteeming in detail the costs of suppliers, manufacturers and/or consultants. This phase (total costs study) also provides a time table for the project including the study phase, construction phase and operation phase. The decision to proceed always is taken on the base of a total costs study.

LEVELED COSTS OF ENERGY is used as a comparative measure of several generation alternatives whit various life cycles. The Leveled Costs of Energy are derived upon calculating the present value of the net cost (including capital costs, operation and any another fixed and variable costs) of an alternative of generation and to divide for the present value of the average energy produced by this alternative (during their economic life). These costs are expressed in cents by kilowatt hour or dollars by megawatt hour.

The Leveled Costs offers a quantitative method for comparison of generation alternatives, that vary in energy productions, load factors, capital costs, O&M fixed and variables costs, and economic life. In a comparative projects analysis is important to identify all the possible alternatives. A selection process with more detailed analytic methods, rules out alternatives and avoids loss of time. The calculation of leveled costs of an alternative is an appropriate indicator of the long-term electricity production cost.

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CALCULATION OF THE LEVELED COSTS.

The Leveled Costs are calculated with the following information:

• Define the economic life of the project.

• Define the appropriate discount rate (cost of the money) for the project.

• Define the incremental costs of the project and when will they take place. These they will include fixed costs and appropriate variables.

• Projection of the energy production for the life of the project (kWh).

• Calculation of a Present Value of each series of numbers, dividing the dollars to Present Value ($) among the energy to Present Value (kWh) and the quotient is the Leveled Cost of Energy in $/kWh (to become cents by kilowatt).

This methodology is consistent with the methodologies used by many service companies, the Department of Energy of the United States (DOE) and the Electric Power Research Institute (EPRI). In other words, this method is internationally recognized and used.

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