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Acknowledgements

This document was prepared for the Asia Alternative Energy Program (ASTAE) of the WorldBank under a contract with International Resources Group (IRG). The principal author of the

report is Mr. Matthew S. Mendis of IRG. Rohitha Ananda of LGA Consultants (Pvt) Ltd of SriLanka carried out the field data collection and survey work. Sriram Iyer, Mac Cosgrove-Davies,Chandra Govindarajalu and Johannes Exel of the World Bank provided guidance and extensivereview comments. Susan Quinn of IRG provided editorial support for the final report.


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Contents

Acknowledgements........................................................................................................................................ i

Acronyms ...................................................................................................................................................... v

Executive Summary ................................................................................................................................ES-1

1. Background for Impacts Assessment and Lessons Learned Document..............................................11.1 Objectives and Scope of Impact Assessment ...........................................................................11.2 Methodology for Conducting Impacts Assessment..................................................................11.3 Structure of the Report .............................................................................................................2

2. Overview of the ESD Project..............................................................................................................52.1 Objectives and Scope ...............................................................................................................52.2 Objectives of GEF Support ...................................................................................................... 52.3 Major Components...................................................................................................................52.4 Project Cost ..............................................................................................................................6

2.5 Expected Outputs ..................................................................................................................... 62.6 Institutional Set-Up and Implementation Arrangements..........................................................72.7 Project Stakeholders.................................................................................................................8

3. Expected Outputs vis--vis Accomplishments .................................................................................113.1 Credit Component ..................................................................................................................113.2 Pilot Grid-Connected Wind Farm Component.......................................................................13

4. Assessment of Technical Performance/Overall Implementation......................................................214.1 Implementation of the Solar Home System Component........................................................214.2 Off-grid Village Hydro Component ....................................................................................... 224.3 Grid-connected Hydro Component ........................................................................................234.4 Pilot Wind Farm Component..................................................................................................244.5 Capacity Building Component ...............................................................................................24

5. Addressing Cost Barriers..................................................................................................................27

6. Assessment of Institutional Effectiveness ........................................................................................296.1 Participating Credit Institutions..............................................................................................296.2 Borrowers of ESD Credit ....................................................................................................... 296.3 Administrative Unit (AU), based at DFCC Bank...................................................................306.4 Ceylon Electricity Board ........................................................................................................ 316.5 GOSL Agencies......................................................................................................................316.6 Effectiveness of Other Relevant GoSL Agencies...................................................................316.7 Effectiveness of Bank Management and Supervision ............................................................32

7. Assessment of Consumer Satisfaction and Socio-Economic Impacts.............................................. 337.1 Methodology Used in Field Surveys ...................................................................................... 337.2 Summary of Survey Results ................................................................................................... 337.3 Socio-Economic Impacts........................................................................................................36

8. Lessons Learned ...............................................................................................................................398.1 Institutional.............................................................................................................................39 8.2 Technical/Implementation......................................................................................................40


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WB Sri Lanka Energy Services Delivery Project Impacts Assessment and Lessons Learned

ES-iv

8.3 Financial/Economic................................................................................................................42

Annex. Statistical Results of Field Surveys.........................................................................................A-1

Tables2-1 ESD Project Financing Plan................................................................................................................6

2-2 ESD Project Stakeholders...................................................................................................................9

3-1 Cumulative No. of Households Served by SHS, per district (as of June 2002)................................12

3-2 Grid-Connected Minihydro Projects Installed.................................................................................. 13

3-3 Summary of ESD Project Accomplishments....................................................................................15

3-4 Interventions Carried Out Following Mid-Term Review to Address Project Weaknesses .............. 17

4-1 Issues Involved in Implementation of SHS Component...................................................................21

4-2 Issues Involved in Implementation of OGVH Component............................................................... 23

Figures

E-1 ESD Project Partnership .................................................................................................. ES-1E-2 Growth in Grid-Connected Minihydro Capacity (19982002) ....................................... ES-2E-3 Growth in SHS Sales (19982002) ................................................................................. ES-3E-4 Growth in No. of Households Served by Off-Grid Village Hydro Systems ................... ES-4

E-5 Social Impacts of ESD Project on SHS End-users .......................................................... ES-7

E-6 Social Impacts of ESD Project on Off-Grid Village Hydro End-users ........................... ES-9

2-1 ESD Project Set-up................................................................................................................ 8

Boxes

E-1 Accomplishments Under the CEB DSM Component ..................................................... ES-4E-2 ESD Administrative Unit................................................................................................. ES-5

E-3 Private Sector Equipment Vendors and Project Developers ........................................... ES-5

E-4 SEEDS Accomplishments............................................................................................... ES-6


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Acronyms

AU Administrative Unit based at DFCC BankBII Bureau of Infrastructure Investment

CAPS Consultancy and Professional Services Pvt. Ltd.CB Capacity BuildingCboC Commercial Bank of CeylonCBSL Central Bank of Sri LankaCEA Central Environmental Authority of Sri LankaCEB Ceylon Electricity BoardDSM Demand-Side Management unit of CEBESD Energy Services Delivery ProjectEVC End-user village cooperativesGCMH Grid-connected mini hydroGCSPDA Grid-connected small power developers association

GCSHDA Grid-connected small hydro developers associationGEF Global Environment FacilityGoSL Government of Sri LankaHNB Hatton National BankIDA International Development AssociationITDG Intermediate Technology Development GroupLSB Licensed Specialized BanksMFI Micro finance institutionsMoFP Ministry of Finance and PlanningNDB National Development BankNGO Non-governmental organization

OGVH Off-grid village hydroOOPP Objective-oriented project planningPCI Participating credit institutionsPEU Pre-electrification unit (Ceylon Electricity Board)PGCWF Pilot grid-connected wind farmSHS Solar Home SystemsSIA Solar Industries AssociationSEEDS Sarvodaya Economic Enterprises Development ServicesSELCO Solar Electric Light Company Inc.SLBDC Sri Lanka Business Development CentreSPPA Small Power Purchase Agreement

SPPT Small Power Purchase TariffTOR Terms of referenceUNDP United Nations Development Programme


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Executive Summary

Introduction

The Sri Lanka Energy Services Delivery (ESD) Project, a uniquely designed and implementedproject, can serve as an excellent model for other rural electrification initiatives with renewableenergy and energy efficiency components. In particular, it applies a multi-stakeholder approachin overcoming the financial, institutional and market barriers traditionally associated with theimplementation of small-scale renewable energy and energy efficiency options. Through theestablishment of strategic and working partnerships between the government of Sri Lanka, theCeylon Electricity Board, commercial banks, a microfinancing institution, private developers,equipment vendors, rural electricity cooperatives, and end-users, significant gains have beenmade to commercialize grid-connected minihydro and wind power, off-grid village ormicrohydro power, and wide scale use of solar home systems. Additionally, the ESD Project hasalso helped strengthen the basis for adopting demand side management (DSM) options to helpreduce consumption of grid-based electricity. By successfully achieving its objectives, the ESDProject has laid the foundations for a wider-scale commercialization program for renewableenergy and energy efficiency in Sri Lanka. Technical, financial, policy, and information barriershave been addressed by the project, and many lessons can be learned from how these barrierswere overcome. Figure E-1 provides an overview of how the different project stakeholdersinteract.


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Figure E-1. ESD Project Partnership

Project Objective and Components

The main objectives of the World Bank and Global Environment Facility (GEF) assisted ESDProject are to:

Promote the provision by the private sector, NGOs and cooperatives of grid-connected and off-gridenergy services using environmentally sustainable renewable energy technologies;

Strengthen the environment for demand side management (DSM) implementation; and

Improve public and private sector performance to deliver energy services through renewable energyand DSM.

The ESD Project has three principal components. They include the following: The ESD Credit Component,which has an estimated cost of $48.9 million, is designed to provide

support for medium- and long-term financing of private sector firms, NGOs, and cooperatives for off-grid SHS and village hydro projects and grid-connected mini-hydro, wind, and other renewable

energy investments.

The Pilot Grid-Connected Wind Farm Component,which has an estimated cost of $3.8 million, isdesigned to demonstrate the commercial viability and long-run economic potential of wind power inSri Lanka and to catalyze future private sector wind farm development.

The Capacity Building Component,which has a total cost of $2.5 million, is designed to providetraining and technical support for renewable energy and energy efficiency initiatives by both the

World Bank/GEF

Sri Lanka ESD Project

Govt of Sri Lanka

Ceylon Electricity Board Ministry of Finance/Central Bank of Sri Lanka

$

$

$ $

$

Participating Credit

Institutions

DSM PEUGrid-

Connected

SPPA Pilot wind project

Grid-connectedhydro

Future commercialwind projects

Comml Banks& LSBs

MFI(SEEDS)

SHS End -UsersOGVH Electricity Coops

- MinihydroDevelopers

-SHS Vendors


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in rural homes throughout SriLanka (Figure E-3). In theprocess, at least four major SHSvendors have invested significantsums to established extensive

sales and distribution networks inSri Lanka and are now installingSHS at the rate of over 1,300systems per month. Additionally,the ESD Project has helped defineand establish a workable micro-finance institution (MFI) modelwith the participation of a keyNGO: Sarvodaya EconomicEnterprise Development Services(SEEDS), which has a rural

networkand a grassrootsorientation that enables it to reacha greater number of ruralconsumers. This MFI, working in close partnership with the SHS vendors have helped overcome

the SHS consumer financing barrier that plagued the start-up of this component of the ESD

Project.1

Without the support and flexibility demonstrated in the ESD Project, it is unlikely thatthe SHS component would have succeeded. However, as the rate of SHS sales is now increasing,

there is a clear need to diversify and increase the number of participating MFIs in the project.

Additionally, the support provided by the GEF grant for this component has also beeninstrumental in supporting the development of the market. It is not immediately clear how a

reduction in the grant will impact the growth in sales of SHS.

Village Hydro Systems

The ESD Project has already supported the installation of 574 kW village hydro systems serving2,897 households. This is far in excess of the original ESD target of developing 250 kW and

serving 2,000 rural households. This success has been due primarily to the active involvement of

the ESD project working in partnership with NGOs and community based organizations (CBOs)to identify, organize and develop the village hydro projects. Additionally, the involvement of

SEEDS as the microfinance institution has recently helped bridge the financing needs of the

small electricity cooperative societies that are formed to build, own and operate the village hydroprojects. However, like the SHS component, there is a need for the involvement of more MFIs if

village hydro and other similar small-scale isolated grid/cooperatives are to evolve. With the

exception of the Hatton National Bank, the approved PCIs did not aggressively pursue financingof these projects.

1 The ESD Project had an initial SHS target of 30,000 rural households. However, at mid-term (February 2000) less than 1,000 SHS wereinstalled. The mid-term evaluation of the ESD identified the unwillingness of the SHS vendors to borrow from the ESDs approved participatingcredit institutions (PCIs) and provide consumer financing and the constraint faced by most of the PCIs in extending micro-finance directly to SHSconsumers as the principal reasons for failure of this component. As a result, the SHS target was revised to 15,000 and alternate approaches to

consumer finance were explored.

0

500

1000

1500

2000

2500

3000

3500

2000 E nd-2001 Mid- 2002

No.ofhouseholdsserved

Figure E-4. Growth in Number of Households Servedby Off-Grid Village Hydro Systems


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Demand-side Management

The ESD Project also had the objective of supporting the CEB to promote and implementdemand-side management (DSM) programs. Specifically, the ESD supported the CEB in: (a)developing of code of practice for energy efficient commercial buildings; (b) developing thetechnical capacity to carry out energy audits and provide advice on energy efficiency measures

for commercial and industrial clients; (c) carrying out a load research study; and (d) institutingan appliance energy labeling program. The CEB continues to work in promoting energyefficiency and DSM. A recent analysis provided by the CEB indicates that its promotionprograms for energy efficiency and DSM should result in savings of approximately 82 GWh/yrof energy and 32.5 MW of demand capacity by the year 2006. While it is not clear if thesetargets will be met, it is evident that the ESD project has assisted the CEB in initiating its energyefficiency and DSM programs.

Project Organization and Management

From an institutional perspective, one of the most

important elements of the ESD Project was theeffective functioning of the Administrative Unit(AU). The AU played a pivotal role in theadministration of the ESD credit, includingprocessing of loan disbursement requests,maintaining of disbursement records and accounts,compiling program-related statistical records, andsubmitting quarterly reports. Establishing the AUwithin one of the PCIs (the DFCC) was a bold yetprudent move. Equally important was the creation ofan effective wall between the AU and it parent

organization so that the AU was able to operateindependently and without prejudice. By having the

AU drawn from one of the PCIs, the AU was familiar

with the prevailing banking rules and procedures and

was administratively adapt in matters relating to

the application and disbursement of the credit and

the GEF grant. However, the AU was initially not

as effective in matters relating to development and

promotion of the ESD components it was

responsible for. To its credit, the AU recognized

this requirement and has actively worked to meet

this objective. The success of the ESD Project is in

part due to the performance of the AU and,

specifically, the skills and dedication of the AU

Manager, Mr. Jayantha Nagendran. The AU has

actively reached out to all ESD Project

stakeholders and regularly meets with key

stakeholders to identify issues and resolve

problems. Equally important was the long-term

Box E-1. Accomplishments UnderCEB DSM Component

Development of a code of practice for energyefficient commercial buildings

Development of technical capacity to carry out

energy audits and provide advice on energyefficiency measures for commercial andindustrial clients

Conduct of a load research study

Institution of an appliance energy labelingprogram

Projected savings of approximately 82GWh/year of energy and 32.5 MW of demandcapacity by the year 2006

Box E-2. ESD Administrative Unit

Established within one of the PCIs (DFCC),making it familiar with prevailing bankingrules and procedures and administrativelyadept in matters relating to credit applicationand disbursement, BUT carried outoperations independently and withoutprejudice

Overcame initial difficulties in developmentof promotion of ESD components it wasresponsible for

Identification and solution of issues throughregular interaction and consultation withproject stakeholders

Broke even financially in 4th year and nowoperating profitably


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view taken by the DFCC in operating the AU. The DFCC demonstrated a willingness to initiallysustain losses from AU operations for the first three years as the ESD Project ramped up. TheAU broke even financially in its fourth year and is now reported to be operating profitably. Thismodel of an effective, efficient and proactive AU with a long-term commitment and ableleadership is an important element in the success of the ESD.

The commercial licensed specialized banks (LSBs) that were approved as PCIs, for their part,proved to be effective partners primarily in the development of grid-connected hydro projects.However, the commercial banks were not well suited to address the financing needs of off-gridSHS and village hydro components and the SHS vendors and village hydro developers wereunwilling or unable to assist their consumers withfinancing. Thus, it became evident at an early stagein the ESD Project that effective rural based micro-finance institutions (MFIs) were needed. Theinvolvement of SEEDS at about the mid-point inthe project and the eventual approval of SEEDS asa PCI/MFI were instrumental in the success of the

off-grid village hydro and SHS components of theproject. SEEDS capability to function as an MFI, itsestablished rural network and its community basedapproach are all critical elements in addressing thefinancing needs of the SHS and village hydrocomponents.The OGVH developers had their initial share ofstruggles in organizing themselves, meeting therequirements of the commercial banks, and dealingwith members, but overall proved to be effectiveborrowers of credit from the microfinanceinstitution. The SHS vendors did not prove to beeffective providers of credit as shown by theirperformance at the start of the project, but this wasaddressed by accrediting a microfinance institutionso they could concentrate on marketing,distributing, installing and servicing the SHS. Todate, 50 service and distribution centers have beenset up by the SHS vendors throughout the targetareas. It is crucial that this is maintained and evenexpanded to ensure continued reliable operation ofthe SHS systems.It also bears mentioning that the local industryassociation was crucial to the success of the minihydro component of the project as it was able toeffectively voice out the concerns of the hydro project developers concerning the small powerpurchase tariff with the Ceylon Electricity Board.

Box E-3. Private Sector EquipmentVendors and Project Developers

OGVH developers had their initial share ofstruggles in organizing themselves, meetingthe requirements of the commercial banks,and dealing with members, but overall proved

to be effective borrowers of credit SHS vendors did NOT prove to be effective

providers of credit as shown by theirperformance during the start of the project, butthis was addressed by the accreditation of amicrofinance institution so that they couldconcentrate on marketing, distribution,installation, and servicing of SHS systems

Hydro industry association effectively voicedout concerns of project developers duringnegotiations with CEB concerning small powerpurchase tariff issue

Box E-4. SEEDS Accomplishments

Enabled SHS and OGVH components to takeoff with its accreditation as a participatingcredit institution in the project

Approved a total of Rs 199 million worth ofSHS loans as of June 2002

Approved a total of Rs 0.7 million worth ofOGVH loans as of June 2002


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Project Impacts

Macro Level

The ESD project was conceived at a time of lagging public sector investments in powergeneration vis--vis growing demand. Investments in core infrastructure had been increasing

only marginally since 1990 to about 4.5% of GDP while demand for power was increasing at arate of 8% or more annually. Daily power cuts in 1996 underscored the urgent need for newgenerating capacity and improved efficiency. In order to address the situation, the government of

Sri Lanka (GOSL) adopted two strategies: (1) creation of a regulatory and policy environment

which encourages private investments to supplement public resources; and (2) improving theefficiency of energy services delivery. The ESD project was aimed at addressing the serious

issues of capacity and efficiency in the sector by fostering private provision of energy services.The ESD project enhanced the enabling environment for (1) private investments inrenewable energy services through the application of a standardized small power purchase

agreement and non-negotiable tariff (the lack of which effectively impeded development of

small grid-connected power projects; and (2) implementation of DSM by building capacitywithin the CEB.

End-Users

A detailed survey of 100 SHS customers and 50 off-grid village hydro (OGVH) consumers was

carried out to determine the social, economic and quality of life impacts of receiving off-gridelectric services. When interviewed about the impact of the ESD project on their lives, SHS and

OGVH customers all acknowledged the improvement in their quality of life as a result of having

a cleaner, more reliable source of electricity (see Figure E-5). All were pleased about theextended entertainment hours and improved family interaction. Women in particular, highlighted

the usefulness of having lights to continue their household work at night. Parents indicated that

their children have also been able to study better at night and perceive improvements in the

educational performance of their children. There is also increased feeling of safety and betterhealth conditions with the elimination of the fumes from their old kerosene lamps. However,

there appears to be little evidence that access to SHS or OGVH has significantly increasedeconomic or income generating activities. Interestingly, SHS consumers surveyed indicated an

expected increase of discretionary income once their SHS payments were completed. However,

OGVH consumers did not appear to have the same perception. In the case of SHS, the amount ofenergy available is barely sufficient to meet basic household lighting and entertainment serviceneeds. There appears to be more potential for income generating activities with OGVH.

An important impact that the project has also had on end-users, but which they did not

specifically identify during the surveys was improvement in local capabilities to organizethemselves and to collectively manage and monitor projects. This was especially true for the

OGVH component wherein residents had to form rural electricity cooperatives/societies and thenassume responsibility for the day-to-day operation of the project.

Local Business

The ESD project has also had a significant impact on local business. For vendors of solar home

systems, the project has made it possible for existing ones to expand their current market, and

new ones to be established to respond to growing demand. The same is true for local hydroconsultants who have grown in number as a result of growing demand for their services. For


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private developers, the project has made hydro project development more attractive, especiallywith the implementation of an SPPA and the resolution of the tariff issue.

Financial Community

The ESD project has given member of the Sri Lanka financial community a better appreciation

of and actual exposure to renewable energy and rural electrification projects. The experienceunder the project has enabled financial institutions to better appreciate the importance ofinnovative financing mechanisms for such projects, and the fact that not all renewable energyprojects fall under the high-risk category.

Figure E-5. Social Impacts of ESD Project on SHS End-users

0 10 20 30 40 50 60 70 80 90 100

Increased Income

Longer Entertainment Hours

More Time for Schoolwork

Other Activities at Night

Increased Safety

Better Informed

Better Quality of Life

Income-Generating Activities

% of Households Surveyed

Lessons Learned

Implementation of the ESD project has brought to light several lessons in the sustainableprovision of rural energy services.

Institutional

On the institutional aspect, it has shown that local or community participation is crucial toproject successas it ensures project ownership on the part of the communities involved and also

promotes improvement of local capabilities, strengthening of community relations and aids incost recovery. The involvement of a wide range of stakeholdersin the implementation of thedifferent components of the project (e.g. both commercial banks and microfinance institutionsaccredited as participating credit institutions in order to reach a broader group of customers) alsoresulted in project targets being attained and even exceeded. On a macro-level, the institutionalstructures should be in place, and the general policy framework should be conducive for thegrowth of the industry. Government commitment is crucial, and this should be reflected inconsistency of national and sectoral objectives. Two elements that facilitated the growth of the

Increased Discretionary Income


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grid-connected hydro market are the standardized power purchase agreement and the tariffceiling, which significantly lessened transaction costs and risk on the part of investors, and gavethem a more defined framework within which to operate. The ESD project has also shown thatthe administration of a project, especially one with a credit component, is best handled by agroup that is highly familiar with the financial sector, has the administrative capabilities, and

possesses sufficient experience dealing with the private sector. This was demonstrated by the AUexperience.

Implementation/Technical

On the implementation/technical aspect, some ofthe key elements of a successful project includea viable distribution and servicing infrastructureand sufficient market development activities.Flexibility on the part of project implementersisalso very important. One of the major reasons forthe current success of the ESD is that project

implementers were flexible enough to makesome significant changes in project design whenit was determined during mid-term that someissues were preventing the attainment of specifictargets. Experience under the project has alsoshown that the most common technical problemsresult from system overuse. This points to theneed to better educate end-users on thelimitations of their systems and on the basics of

proper operation. In terms ofmarketing/information dissemination, the ESD

project has demonstrated that word-of-mouthseems to be the most effective mediuminattracting potential customers.

Financial/Economic

On the financial/economic aspect, theinvolvement of micro-finance institutionsinfinancing solar home systems and village hydroprojects has been crucial in the expansion ofboth markets. Unlike the common perception that rural customers represent high-risk, the projecthas demonstrated that end-users are willing to pay more than they usually do for energy

expenditures, as long as the energy supply is reliable and safe. End-users place a higher premiumon the reliability and safety offered by sources like hydro and solar energy. However, it shouldbe noted that even with the current credit facilities extended by the ESD project, it is still themiddle to upper rural class who are benefiting from the project. How the needs of the lowerincome rural groups thus remains an issue that has to be resolved. The project also demonstratesthat economic development is not guaranteed by providing access to energy alone . For ruraldevelopment to take place the necessary supporting infrastructure needs to be developed andthere should be a focused effort on the development and promotion of specific income-

Key Lessons Learned

Policy and regulatory framework should beestablished and clear;

Institutional framework should be in place;

Involve key stakeholders in project design,development and review;

Include local and community participation to

support project implementation; Ensure viable distribution and servicing

infrastructure;

Encourage flexibility and adaptability ofproject implementers to changing conditions;

Educate end-users on the operation andlimits of their energy systems;

Communal communications is effectivemarketing medium;

Good micro-finance institutions are critical tosuccess of solar home and village hydrosystems;

Rural households in Sri Lanka are willing topay a premium for clean and reliable energyservices;

Economic development is not guaranteed byonly providing access to energy.

Energy services improve the quality of life butnot necessarily income generation.


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generating activities. The ESD project has shown that although the general lifestyle of thebeneficiaries has improved, there are no clear and concrete economic benefits that can be linkedto the project. This is an area being addressed by the follow-on RERED project.

Figure E-6. Social Impacts of ESD Project on Off-Grid Village Hydro End-users

0 0.2 0.4 0.6 0.8 1

Increased Income

Longer Entertainment Hours

More Time for Schoolwork

Other Activities at Night

Increased Safety

Better Informed

Better Quality of Life

Income-Generating Activities

SocialImpacts

% of Households Surveyed

Increased Discretionary Income

20 40 60 80 100


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Background for Impacts Assessmentand Lessons Learned DocumentSri Lanka has a population of 19 million people with a per capita GNP of US$900 per annum.Approximately 75 percent of the population lives in the rural areas. It is estimated that only 54

percent of the population has access to electricity resulting in approximately 2 millionhouseholds that do not have access to electricity from the grid. Power demand in Sri Lanka isgrowing at over 8 percent per annum and the CEB is unlikely to be able to keep up with thisrapid growth. Currently, the CEB has had to institute load shedding to cope with its increasingdemand. Given the relatively high costs associated with the expansion of rural electric services, itis unlikely that the CEB will be able to significantly increase its rural electric service coverage inthe coming decade and beyond. The government of Sri Lanka places high priority on ruralelectrification as a component of its overall economic, social, and regional development strategy.The basic premise is that by providing reliable energy access to rural populations, economicgrowth will increase and general social well-being will improve.The Energy Services Delivery (ESD) project was conceived to support the government of Sri

Lankas energy strategy. The basic objectives of the ESD Project include the development ofenergy sources in an economically least-cost and environmentally sound manner, improving

institutional capacity to manage the energy sector, promoting rational energy pricing, promoting

energy conservation, and diversifying energy sources and reducing dependence on imported

energy sources. As part of its basic approach, the project promotes active involvement by

community organizations and the private sector in rural energy service provision and

management.

Objectives and Scope of Impact Assessment

The ESD Project is scheduled to officially close by 31 December 2002. The project has been

consistently rated satisfactory and has made impressive progress towards the achievement of theproject development objectives. After the last supervision mission the project was upgraded to

highly satisfactory. In view of the innovative project design and limited renewable energy

experience within Sri Lanka at the start of this project, this achievement is commendable. Recent

Bank/GEF renewable energy projects have in fact already begun incorporating elements of the

ESD project design. In order for wider dissemination among the donor community and clients, it

is important that an independent, comprehensive assessment be undertaken to document the

impacts, implementation experience and lessons learned under this project. Also, the independent

review can support the design of the follow on project in minimizing the risk of replication of

sub-optimal features in the ESD project.

The main objective of the impacts assessment is to comprehensively assess the results achieved.

The report also seeks to identify key lessons learned during implementation and map out bestpractices for cost-effective and sustainable delivery of energy services to rural populations.

Methodology for Conducting Impacts Assessment

This report builds on an independent evaluation report of the ESD Projectcompleted in April

2002 and the results of a field study conducted in May 2002. The field study included interviews

with the different stakeholder groups, including equipment vendors and industry associations,


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participating credit institutions, government institutions involved, the ESD Administrative Unit,and the end-users at the village level.Discussions with the equipment vendors and industry associations were carried out to get someinsights on the technical performance of the systems installed, problems encountered in the field,and issues pertaining to the credit component of the project, particularly any problems

encountered with the participating credit institutions as well as matters involving policy, such asthe small power purchase agreement (SPPA) and the tariff ceiling, which was one of the keyissues during the earlier parts of the project.The participating credit institutions were a good source of insights on how the project has faredfrom a financial point of view by discussing issues such as adequacy of IDA credits as well asaffordability of the OGVH and SHS projects on the basis of repayment performance. Theinterviews also provided a look into how financial institutions perceive renewable energyprojects, i.e. which ones were viewed as risky, viable/sustainable, etc.Discussions with the government institutions focused on the effectiveness of the capacitybuilding component and obtaining general insights on how the project has fared. Interviews withthe ESD administrative unit (AU) were likewise a good source of general insights on the

projects performance.A local (Sri Lanka) consultant, LGA Consultants Private Ltd, was hired to assist with the field

study at the village level. Standard questionnaires were provided for the interviews conducted(attached as Annex 1). The data collected included

Background information on each household

Information on purchasing decisions, consumer financing

Economic impact of new energy service on household, e.g. new employment generated by the project

Social impact of new energy service on household, e.g. improvements in lifestyle

This information was obtained mainly from end-users(to get a close look at how the project has

affected individual lives). Key informants from concerned rural electric cooperativeswere alsoa source of information. In the conduct of the interviews, emphasis was given to identifying

specific benefits from the project, such as employment generation, income generation, and anyother factors that directly contribute to the development of the rural economy. The key results of

this survey are discussed in Chapter 7. Annex 2 contains the full text of the field report results.

Structure of the Report

The report is structured to present the results of the stakeholder consultations on the projectsimpacts and then identify lessons learned and best practices that will promote replication on a

larger scale in other projects and countries.

Chapter 2 gives an overview of the ESD project.Chapter 3 outlines the main accomplishments vis--vis expected outputs.

Chapter 4 is an assessment of the projects implementation/technical performance.

Chapter 5 is an assessment of how the project addressed the cost barriers typically associatedwith rural electrification projects.

Chapter 6 is an assessment of the projects institutional effectiveness and impacts on the various

stakeholders.


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Chapter 7 is a more focused assessment of consumer satisfaction and socio-economic impacts,using as a basis the results of the household surveys conducted.Chapter 8 outlines lessons learned and best practices.The main conclusions and recommendations of the evaluation are presented in the ExecutiveSummary of the report.


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5

Overview of the ESD Project

Objectives and Scope

The World Bank and Global Environmental Facility (GEF)-assisted Sri Lanka Energy ServicesDelivery (ESD) Project commenced on 22 July 1997 with the Ministry of Finance and Planning(MOFP) and Ceylon Electricity Board (CEB) named as the executing agencies.The principal objectives of the project include: Promoting the provision by the private sector, NGOs and cooperatives of grid-connected and off-grid

energy services using environmentally sustainable renewable energy technologies;

Strengthening the environment for demand side management (DSM) implementation; and,

Improving public and private sector performance to deliver energy services through renewable energyand demand side management (DSM).

The Project was expected to result in the addition of about 26 MW of environmentallysustainable generating capacity, including a Pilot Wind Farm, grid-connected mini-hydro, andelectricity services to up to 32,000 rural customers through solar home systems and village hydroschemes. Another key objective of the project was to strengthen demand side management andenergy conservation capabilities within the CEB and the Sri Lankan architecture/ engineeringcommunity.

Objectives of GEF Support

Global Environment Facility (GEF) grant funds have been made available to off-grid (i.e. solarhome systems and village hydro) sub-project developers who signed a sub-loan agreement with a

participating credit institution (PCI). The grant funds have been used to co-finance the initial costof equipment installed through the project and are available to sub-loan beneficiaries. They arereleased on a reimbursement basis, after installation of the off-grid system.Part of the GEF grant is also allocated to providing technical assistance for the preparation ofoff-grid subprojects. Specifically, it finances consultant services to help project developersprepare feasibility studies, business plans, and bank loan documentation. The GEF grant is alsoavailable to PCIs to supervise off-grid village hydro and solar home system subprojects.

Major Components

The ESD Project has three principal components, namely:

ESD Credit Component. This provides support for medium and long-term financing of privatesector firms, NGOs and cooperatives for off-grid solar home systems (SHS) and village hydro(OGVH) projects, grid-connected mini-hydro (CGMH), wind and other renewable energyinvestments. It makes funds available for energy subprojects up to 5 megawatts (MW) through PCIs.Support for the ESD credit program and associated technical assistance is available under IDA creditas well as the GEF grant.

Pilot Grid-Connected Wind Farm Component. This component has an estimated cost of $3.8million and is co-financed by $2.23 million of IDA credit and a GEF grant of $0.88 million. The 3-


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MW pilot wind farm project is designed to demonstrate the commercial viability and long-runeconomic potential of wind power in Sri Lanka and to catalyze future private sector wind farmdevelopment.

Capacity Building Component. This component has a total estimated cost of $2.5 million and is co-financed with $1.0 million of IDA credit and $1.05 million of GEF grant. This component is to

provide training and technical support for renewable energy and energy efficiency initiatives by boththe public and private sector.

Project Cost

The total project cost is US$55.3 million. The project financing includes US$24.2 million fromIDA and $5.9 million from the GEF. The remaining project financing includes $13.7 millionfrom private sector Participating Credit Institutions (PCIs), $9.6 million from renewable energyproject developers/entrepreneurs/energy end-users and $1.9 million from the Ceylon ElectricityBoard/Government of Sri Lanka. A summary of the projects financing plan is presented in

Table 2-1.

Table 2-1. ESD Project Financing Plan (in US$MM)

Project Component IDA GEF PCIs Entrepreneurs CEB/GOSL Total

ESD Credit Program

Mini Hydro 14.4 - 10.1 6.3 0.1 30.8

Village Hydro 0.3 0.1 0.1 0.1 0.1 0.7

SHS 5.0 2.9 3.5 3.0 - 14.4

Business Devt - 0.3 - 0.2 - 0.5

Off-grid Support - 0.5 - - 0.7 1.2

Subtotal 19.7 3.8 13.7 9.6 0.9 47.7

Wind Farm 2.1 0.8 - - 0.6 3.5Capacity Building

PE Unit - 0.3 - - 0.2 0.5

DSM Unit 1.0 0.7 - - 0.2 1.9

Subtotal 1.0 1.0 - - 0.4 2.4

PPF* 0.3 0.3

Unallocated 1.1 0.3 1.4

Total Project Cost 24.2 5.9 13.7 9.6 1.9 55.3

*The PPF is US$340,000.

Expected Outputs

The principal performance indicators for the Project include:

Installation of at least 26 MW of grid and off-grid renewable energy capacity including service to upto 32,000 off-grid rural customers through solar home systems (SHS) and village hydro schemes;

Development of a 3 MW pilot grid-connected wind farm project;


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Issuance by the Ceylon Electricity Board (CEB) of a comprehensive Energy Efficient CommercialBuilding Code of Practice (EECB); and

Support by the CEB for the development of small-scale grid connected renewable energy projects by:

Annually updating the Small Power Purchase Tariff (SPPT);

Signing of least 5 SPPA contracts by mid-term evaluation, and 12 by project completion; and

Incorporating intermittent, non-dispatchable renewable energy generating sources in the generationplanning models prepared by the CEB.

Institutional Set-Up and Implementation Arrangements

Credit Program

For the ESD Credit Program Component, the Ministry of Finance and Planning on-lends theproceeds of the credit component to eligible PCIs, which would in turn on-lend these proceeds,

along with complementary financing from their own resources to eligible sub-borrowers. Theseinclude project developers, SHS equipment vendors, electricity cooperatives, and SHS end-users.An Administrative Unit (from the Development Finance Corporation of Ceylon (DFCC))manages the other credit program. Its other responsibilities include: administration of the GEFgrants and technical assistance related to off-grid subprojects. The GEF grants are used to (1)support off-grid subproject preparation activities; (2) co-finance off-grid subprojects; and (3)provide support through promotion activities, provision of grant funding for verification of solarhome systems; and consumer education and protection. The technical assistance is available tohelp project developers prepare feasibility studies, business plans, and bank loan documentationfor off-grid sub-projects.Grid Connected Pilot Wind Farm Component

The Ceylon Electricity Board is responsible for implementing the pilot grid connected wind farmcomponent on an engineering, procurement, and Construction (EPC) basis. The CEB isresponsible for monitoring, operation and maintenance of this facility.Capacity-Building Component

The Ceylon Electricity Board is also responsible for overseeing the capacity-building activitiesof the Pre-Electrification Unit and the DSM unit. In the PEU, this includes procurement ofequipment as well as retaining local consultants to develop and conduct training courses for CEBstaff as well as private sector and NGO personnel, and assist CEB staff in feasibility studypreparation and other services related to off-grid project support. In the DSM Unit, this includesthe issuance of an Energy Efficient Building Code of Practice, development of institutional

capacity in the energy-related public and private sectors to incorporate the Code of Practice intobuilding design and operations and to monitor the energy savings, demonstration of energyefficiency building design through design competition incentives, and implementation of a DSMstrategy and load research program.Figure 2-1 is a diagram of the basic project set-up.


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Table 2-2. ESD Project Stakeholders

Suppliers/Developers/Consultants

Participating CreditInstitutions

IndustryAssociations

Government/Otherinstitutions

SHS Suppliers

Access International Ltd

Alpha Thermal Systems (Pvt) Ltd.SELCO Solar Lanka Ltd.

Shell Renewables Lanka Ltd.

Solar Project Developers/Consultants

Energy Forum

ITDG South Asia

LLGA Consultants Ltd

Natl Engg Research andDevelopment Centre (NERD)

Resource Management AssociatesLtd

Village Hydro Project Developers/

Consultants/ SuppliersAmanda S P R K

Consultancy and ProfessionalServices (Pvt) Ltd

Enexe (Pvt) Ltd

ENCO (Pvt) Ltd

ETC Lanka (Pvt) Ltd

Integrated Development Association(IDEA)

Infotechs-I/D/E/A/S (Pvt) Ltd

ITDG South Asia

Redco Ltd

Sarvodaya Rural Tech Services

Sri Lanka Business Devt CentreUdayaratne Hydro Power Engg

Grid-connected Mini-hydroDevelopers

Ecopower Ltd.

Zyrex

Wind

NEG Micron A/S Denmark

Development FinanceCorporation of Ceylon(DFCC)

Sarvodaya EconomicEnterprisesDevelopmentServices (SEEDS)

National DevelopmentBank

Sampath Bank

Commercial Bank ofCeylon

Hatton National Bank

Grid-Connected SmallPower DevelopersAssociation

Solar IndustriesAssociation (SIA-SL)

Village HydropowerDevelopersAssociation

Sri Lanka BusinessDevelopmentCentre

ESD Administrative Unit

Central Environment

AuthorityCeylon Electricity Board

Dept of ExternalResources

Energy ConservationFund

Energy Forum

Ministry of Power andEnergy

Ministry of Science andTechnology

Pre-electrification Unit,Ministry of Financeand Planning

Board of Investments(BOI) and Bureau ofInfrastructureInvestment

Local governmentinstitutionsprovincialcouncils and divisionalsecretariats


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Expected Outputs vis--vis AccomplishmentsBy December 2001, it was apparent that the ESD project had already achieved success inmeeting its original targets, with the installation of 30 MW grid-connected minihydro capacity,287 kW from off-grid village hydros, and some 13,300 solar home systems (at a monthly rate of

1,300 systems), and that it was going to exceed targets by the time the project was finished. Thiscontrasted greatly with the status at mid-term wherein the project was being bogged down withmany issues concerning off-grid components. With the implementation of key interventions,weak areas in the project design were successfully addressed and appropriate adjustments weremade. This chapter discusses the projects accomplishments vis--vis the targets set out in the

original project design. It includes a discussion of the problems encountered in the different

components and the interventions made mid-term in order to improve project performance.

Credit Component

Solar Home Systems (SHS)

As of mid-term, sub-loans approved by the PCIs were expected to support the installation of a

little more than 6,000 SHSs. However, by February 2000, the total number of approvals totaled

only 723 systems. The poor performance of the SHS sub-component of the project was being

inhibited by a number of technical and implementation issues. From the point of view of the

PCIs, the SHS sub-loans were too small to justify the costs involved in loan processing, and SHS

borrowers were also perceived as being high-risk. From the perspective of the SHS vendors and

MFIs (intermediate borrowers of SHS sub-loans), the costs involved in securing SHS sub-loans

with PCIs and administering micro-loans to SHS end-users were too high, and there was no

dealer network to speak of, which made it difficult to market the product to the rural areas. For

SHS end-users, the difficulty was in accessing affordable loans, given the high initial costs of

SHS installation. They also had limited awareness of the SHS option, and had misguided notionsas to its reliability.

In order to address the above issues, it was recommended that microfinance institutions be

encouraged to participate in the project in order to increase the number of SHS customers. This

resulted in the accreditation of the SEDS as a PCI and the introduction of a private partnership

model for market development financing. The job of financing SHS was left to the MFIs, while

vendors were encouraged to concentrate on selling systems.

As a result of this intervention, sales followed a nearly exponential projection, from less than 30

systems per month in 1998 to about 1,000 systems per month in June 2002, with an accumulated

number of systems installed of more than 18,000. The three main companies in the Sri Lankan

SHS market have reported monthly sales in the range of 400 to 800 systems, while a fourth

company has reported sales of about 100-120 per month. A commercial distribution and servicenetwork including fifty centers is also in place.


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Off-Grid Village Hydro (OGVH)

As of June 2002, a total of 56 off-gridvillage hydro projects have beenapproved. The mini-grids range from 4-45 kW and serve 2,897 households with

a total installed capacity of 574 kW andare under implementation with creditand grant support from ESD project.This blend of financing has led to areduction in grant funds per project ofnearly 50% or serving twice as manyhouseholds with the same amount ofgrant funds. In terms of capacity, thisalready exceeds the project target of 250kW.This contrasts greatly with the situation

during mid-term, wherein there wereonly 7 projects approved, servicing 400households and representing around 58kW capacity. There was very littleincentive for developers to participate,given the very high costs of coordinatingand organizing village cooperatives todevelop, own, and operate OGVHsystems.From the perspective of the PCIs, theOGVH project loans were small and

entailed high costs and thus not veryattractive. There was also some questionas to the reliability of OGVH borrowers.From the point of view of projectconsultants/organizers, the barriersincluded the long lead-time required to

organize OGVH cooperatives and obtain approvals, coupled with the risks involved in projectorganization and development work. The timing of the GEF grant release to compensate forproject development and organization work was also unsatisfactory, and sustainability of theproject organization and development work without the ESD Project remained unclear. For thecooperatives and end-users, the biggest problem was accessing project financing. Other issues

included O& M of the OGVH projects, and finding productive uses for the OGVH power duringthe daytime when demand was not as much.To address the situation, the CEB initiated an open solicitation process where consultants wereasked to submit proposals on how to address the existing technical, financial, and sustainabilityissues pertaining to this particular component. To ensure that the process would lead to concreteachievements, the consulting contracts were tied to actual deliverablesa set-up that workedwell and resulted in increased participation and more funding to OVGH projects by commercial

banks.

Table 3-1. Cumulative No. of HouseholdsServed by SHS, per district (as of June 2002)

District No. of Households

1. Ampara 699

2. Anuradhapura 1,473

3. Badulla 2,284

4. Batticaloa 24

5. Colombo 114

6. Galle 473

7. Gampaha 60

8. Hambantota 421

9. Jaffna 15

10. Kalutara 103

11. Kandy 225

12. Kegalle 236

13. Kurunegala 2,311

14. Mannar 11

15. Matale 633

16. Matara 487

17. Moneragala 4,854

18. Mullaitivu 4

19. N-Eliya 278

20. Polonnaruwa 746

21. Puttlam 693

22. Ratnapura 2,215

23. Trincomalee 203

24. Vavuniya 57

Total 18,619

Source: ESD Project Quarterly Statistical Report (June 2002)


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Grid-Connected Mini-Hydro (GCMH)

Sri Lankas minihydro capacity hasrisen from about 1 MW in 1997 to 31MW in June 2002. At mid-term, theprogress of this component was on-

schedule, but the tariff-setting issuebetween the CEB and projectdevelopers remained unsettled. Themain issue from the perspective of theproject developers was providingadequate compensation for the actualcapacity value of the GCMH systemsin setting the SPPT.To address the situation, thegovernment employed the services ofan independent consultant to review

and report on the tariffs set by the CEBfor the purchase of power from smallpower producers. Based on hisfindings, a tariff ceiling that wasacceptable to both the CEB and privatedevelopers was set, and the issue isnow considered resolved. Table 3-2 isa list of GCMH projects (andcorresponding capacity) as of June2002.

Pilot Grid-Connected Wind Farm Component

The pilot grid-connected wind farm component required that the CEB build a 3-MW pilot windfarm on an Engineer, Procure and Construct (EPC) basis in the Hambantota district by May1998. This component was completed not too far off the original schedule, with commissioningtaking place in February 1999 and certification in May 2000. The plant consists of five 46-metertowers with 600 kW turbines designed to supply a total annual capacity of about 4.5 GWh. Totalproject cost amounted to US$1,200/kW, which is acceptable for a first grid-connected wind farmoperation in a country. Wind speeds have also been found to be as projected during projectdesign. The CEB continues to monitor and record operational data from the wind farm and learnfrom this experience the issues that must be addressed for integrating non-dispatchable and

intermittent renewable power.At mid-term, there was concern that the CEB had not undertaken any measures to attract privatesector development of wind power in Sri Lanka. To address this, regional wind resourcemeasurements supported by UNDP/GEF and specific evaluations of sites were conducted by acommercial company in order to facilitate project identification by private developers.Consequently, there is now a favorable regime in Sri Lanka to develop and implement windprojects. Several private companies, with international backing, are actively pursuing plans forwindpower development and projects as high as a 30 MW wind farm have been proposed. As a

Table 3-2. Grid Connected Minihydro (GCMH)Projects Installed as of June 2002

Name of Project Capacity

1 Bambara Batu Oya-Ratnapura 3200

2 Erapura Ganga-Kolonna 750

3 Carolina Estate-Watawala 2500

4 Panakura Oya-Minuwanella 320

480

5 Ellapita Ella - Maliboda Estate 550

6 Delgoda 2400

7 Glassaugh 2526

8 Mandagal Oya - Maliboda Estate 1271

9 Galaththa Oya-Pussellawa 1200

10 Medapiti Oya Deegalahinna 1500

11 Rat ganga Hapugastenne 1 46502150

12 Nividu 2000

13 Naya Ganga Mini Hydro Power Project cancelled

14 Upper Watawala 1300

15 Niriella 3000

16 Deiyanwala, Gantelgoda Ela 1400

TOTAL 31,197


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result, the CEB has recently issued an open tender for windpower electricity to stimulate thisdevelopment. Additionally, some of the windpower developers are exploring the possibilities ofaccessing the financial support of the Clean Development Mechanism (CDM) to enhance thefinancial viability of their proposed projects.

Capacity-Building Component

The capacity-building component was programmed to be carried out in the Pre-ElectrificationUnit (PEU), and in the Demand-side Management (DSM) unit of the CEB.In the CEB Pre-electrification unit (PEU), the program was aimed at enhancing in-houseexpertise in off-grid project preparation and to facilitate and promote technically andeconomically viable renewable energy subprojects as part of the ESD credit and the pilot windfarm components. It was also targeted at enhancing the ability of PEU staff to train staff fromCEB, the private sector, and NGOs in the areas of renewable energy project design anddevelopment.This broad objective was met by the PEU by actively engaging in:

Improved rural electrification coordination;

Preparation of materials describing off-grid electrification options

Training of CEB area staff in disseminating information and promotion of off-grid electrificationoptions

Coordination between CEB and off-grid project developers on CEB rural electrification plansincluding indication of areas not likely to receive grid service in the near term

Preparation and dissemination of a guide for practical implementation of grid interconnection/integration requirements;

Off-grid renewable energy project development training;

Non-dispatch able power source modeling and planning; and

Mini and village hydro project development assistance.

Meanwhile, capacity building in the CEBDemand-Side Management (DSM)Unit consisted of: Design and implementation of a Code of Practice for Energy Efficient Commercial Buildings;

Development of institutional capacity in the energy related public and private sectors to incorporatethe Code of Practice into building design and operations and to monitor the energy savings;

Demonstration of energy efficiency building design through design competition incentives; and

Support CEB in implementation of a DSM Strategy and Load Research Program.

The concepts of energy efficiency/demand side management and renewables have been acceptedwithin the CEB and the capacity to design and execute DSM programs is firmly in place. Energyefficient building codes have been developed and are in use and several energy servicecompanies (ESCOs) are now operating in Sri Lanka, in part due to efforts by the CEB. Theframework for power purchase from grid-connected small hydropower is likewise in place, and


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training and awareness generation program for renewables has been conducted internally amongutility staff.At mid-term, the observation was that the CEB was carrying out the capacity-building activitiesin isolation of its general activities, i.e. there was little real coordination between the activities ofthe ESD capacity building components and the normal day-to-day activities of the CEB.

Clearly, there is a stark contrast between the current project situation compared to the status atmid-term wherein the project was basically on schedule with the grid-connected activities, butwas bogged down with many issues concerning off-grid components. With the implementationof key interventions aimed at addressing weak areas in the project design, targets for the off-gridcomponents are being accomplished, and even exceededIt has been estimated, in fact, that by project closure in December 2002, the following shall havebeen accomplished: Additional 22 MW from private sector mini-hydro projects

Additional 765 kW through village hydro projects

Additional 10,000 solar home systems (with current monthly sales at 1,300 units per month)

These are expected to translate into a shortfall of US$1.2 million to maintain credit off-take atthe current level, and to maintain the current SHS sales of 1,300 units per month. For the GEFco-financing grants on the other hand, there is an estimated shortfall of US$400,000.Table 3-3 traces the accomplishments of the ESD project both at mid-term and as of June 30,2002. Table 3-4 lists in greater detail the status of the various projects as of mid-term, thedifferent recommendations made after the mid-term review, interventions carried out, andcorresponding results as of June 2002.

Table 3-3. Summary of ESD Project Accomplishments

Objectives Key PerformanceIndicators/Expected

Outputs

Accomplishments/ Statusas of Mid-term (Dec 1999)

Accomplishments as ofJune 30, 2002

1.1 Installation of at least26 MW of grid and off-gridrenewable energy capacityby end of 2002, includingservice to 32,000 off-gridcustomers by end ofproject

Grid-connected: 14.7 MWminihydro capacity

Off-grid: 682 SHS unitsinstalled; seven (7) OGVHprojects amounting to 58 kWcapacity, 2000 households

Grid-connected: 31 MWminihydro capacity

Off-grid: 18,619 SHS unitsand 56 approved OGVHprojects (equivalent to 574kW installed capacity, 2,897households) for village hydrosystems

1. Promote theprovision by theprivate sector, NGOsand cooperatives ofgrid-connected andoff-grid energyservices usingenvironmentallysustainablerenewable energytechnologies

1.2 At least one powerpurchase agreement for aprivate wind power projectsigned by CEB

Pilot wind farm completed;awaiting final certification inMay 2000.

No power purchase

agreement for a commercialproject yet.

As a result of successful 3-MW demonstration projectand wind resourceassessment studies

conducted, a number ofinvestors have entered thepicture, with one alreadyinvesting in on-site windmeasurement and feasibilitystudies, and in seekingfinancing from carbon tradingmechanisms and investors.

2. Strengthen theenvironment for DSM

2.1 CEB issuance ofEner Eff icient

Code already drafted;ex ected to be read b

EECB codes developed andin use althou h still rather


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Objectives Key PerformanceIndicators/Expected

Outputs

Accomplishments/ Statusas of Mid-term (Dec 1999)

Accomplishments as ofJune 30, 2002

implementation Commercial Building(EECB) Code of Practice

March 2000 and implementedby July 2000.

limited; to be expanded underRERED Project

3.1 CEB annual update of

Small Power PurchaseTariff

Annual updates being carried

out. Tariff issue between CEBand small power producersconsidered resolved with thesetting of a tariff ceiling.

3.2 Signing by CEB of atleast 5 SPPA contracts bymid-term evaluation; 12 byproject completion

Ongoing discussions between

private developers and CEBre: small power purchasetariff

16 minihydro refinanceapprovals, and 15 more underconsideration

3. Improve public and

private sectorperformance todeliver energyservices throughrenewable energyand DSM

3.3 Generation planningmodels prepared by CEBwhich incorporateintermittent, non-dispatchable renewableenergy generating sources

Preparation of generationplanning models ongoing.

CEB continues to monitor andrecord data from wind farmand grid-connected minihydroprojects to become morefamiliar with issues that mustbe addressed for integrating

non-dispatchable renewableenergy generating sources.


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Table 3-4. Interventions Carried Out Following Mid-Term Review To Address Project Wea

Mid-Term Status Recommendations Interventions

Off-grid SHS As of end-Dec 99, only 682 SHSapproved for GEF grantdisbursement (vis--vis 30,000

target); only 9% of IDA creditdisbursed; 2.4% for related GEFgrant approvals disbursed

SHS vendors reluctant to serveas consumer financinginstitutions due to the necessaryinstitutional network, high costsand risks associated withadministering micro-loans tolow-income isolated ruralhouseholds.

Interest rates paid by the end-users in excess of 24 percentper annum and in some cases

as high as 33 percent perannum

Participation of more MFIs that canservice potential isolated rural SHScustomers should be increased. This

can be achieved by: assisting potential MFIs in

qualifying as PCIs for the ESDProject;

considering less stringent criteriafor MFIs to qualify as PCIs; and

encouraging existing PCIs towork with and provide loans toMFIs that have proven outreachcapabilities in the targeted ruralareas.

ESD Project also needs toinvestigate the possibility of using theGEF grant to provide loan insurance

coverage to enhance MFI financialsecurity thereby allowing MFI toaccess the available ESD credit.

Microfinance (with theaccreditation of SEEDS as a Pand private partnership mode

market development and finanintroduced and actively promo

The job of financing was left toMFIs, while vendors wereencouraged to concentrate onselling systems.


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Off-gridvillage hydro(OGVH)

Costs of coordinating andorganizing village cooperatives todevelop, own and operate theOGVH systems very high

The option to allow private sectoror NGO developers who build,own and operate OGVH systemsand sell the electricity service toconsumers should be considered

within the ESD Project. GEF grant could be used to

attract the participation of theprivate sector through competitivebidding for specific franchiseareas

Open solicitation process was initto get proposals from consultantshow to address policy, technical, sustainability issues pertaining toOGVH component. To ensure thaprocess would yield actualaccomplishments, consulting conwere tied to deliverables.

GridConnectedMini-hydro(GCMH)

Progress generally good, withapprovals/ disbursements as of mid-term exceeding targets. Specifically,disbursements are at US$6.0MM

(out of the total 14.4 million IDAcredit)

ESD Project should work with theCEB and GCMH developers toensure that tariff-setting issue issettled, i.e. the actual capacity value

of the GCMH systems areadequately compensated for in thesetting of the SPPT

Independent consultant hired toreview and report on the tariffs sethe CEB for purchase of power frsmall power producers. Based on

consultants findings, a ceiling thawas acceptable to both the CEB aprivate developers was set on tarfor minihydro projects


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Pilot windfarmcomponent

3MW pilot wind farmcommissioned in February 1999and certified May 2000.

CEB monitoring and recordingthe operational data from the

wind farm and learning from thisexperience the issues that mustbe addressed for integratingnon-dispatchable andintermittent renewable power.

CEB has not undertaken anymeasures to attract privatesector devt of wind power in SriLanka.

CEB should undertake detailedstudy of energy and capacityvalue of wind electricity for theCEB grid and actively developand disseminate wind resource

data to help attract private sectordevelopers for Sri Lankas windenergy resources.

Regional wind resourceassessment (supported by UNand specific evaluations of sitecarried out.

Potential projects identified to

facilitate increased private secparticipation in this area.

Capacity-BuildingComponent

Implementation of capacity-building activities proceedingwithout any major problems

However, CEB appears to becarrying out these activities in

isolation of its general activities,i.e. there is little realcoordination between theactivities of the ESD capacitybuilding components and thenormal day-to-day activities ofthe CEB

CEB should more activelyintegrate the results of the DSMand PEU activities into itsmainstream activities, i.e.

clearly define an implementation

program for the results of theDSM studies and building energyefficiency standards; and

have the PEU actively identifyand promote off-grid ruralelectrification options in areasthat are clearly not going toreceive grid electricity in the nextfive years

CEB drafted implementation pfor energy efficient building co

CEB actively pushed for andassisted in the actual developof ESCOs


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Assessment of Technical Performance/Overall Implementation

Implementation of the Solar Home System Component

As of the end of June 2002, a total of 18,619 solar home systems had been installed, with anaverage of 1000 systems being installed per month. This contrasted greatly with the situation atmid-term when only 682 applications had been approved for GEF grant disbursement (vis--vis30,000 target). The main issues that cropped up in the implementation of this component

(categorized according to stakeholder) were as follows:

Table 4-1. Issues Involved in Implementation of SHS Component


Limited rural network

High transactions costs

High risks associated with low-income, isolated households

SHS Vendors High costs of securing SHS sub-loans with PCIs High cost of administering micro-loans to SHS end-users

High risks posed by SHS end-users

Lack of developed dealer network

Distraction from principal functions (i.e. selling systems)

End-Users Limited access to affordable loans

Initial high costs of SHS installation

Lack of awareness of SHS option

Perceived lack of credibility of SHS vendors

Participating Credit Institutions

A number of the commercial banks reiterated a long-standing and commonly shared view among

traditional lending institutions that lending to solar home systems was high-risk and unprofitable.

They expressed preference for the grid-connected hydro projects, which they perceived to be

significantly less risky. SEEDS, for its part, recognized the need for it to expand its operations to

keep up with the growing demand. It also acknowledged the need to streamline the process so

that the release of funds could be carried out faster.SHS Vendors

Since the start of the project, SHS vendors had been reluctant to serve as consumer financing

institutions due to the required institutional network, high costs and risks associated with

administering micro-loans to low-income isolated rural households. High interest rates were also

an issue as end-users had to pay in excess of 24 percent per annum and in some cases as high as33 percent per annum.

In order to address these issues, microfinance and private partnership model for market

development and financing were introduced and actively promoted. The job of financing was left

to the MFIs and vendors were encouraged to concentrate on selling systems. As a result of these

interventions, sales increased at an exponential rate.

During consultations in May 2002, most of the equipment vendors acknowledged that the entry

of SEEDS, the lone microfinance institution accredited as a PCI, was highly instrumental in


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increasing access of consumers to financing, and as a result, expanding the SHS market. Asidefrom relieving the vendors of the role of financier, SEEDS also has a rural network, whichenabled it to reach a greater number of end-users in remote areas. Most vendors expressed theneed for more MFIs to be accredited as PCIs in the future as SEEDS has been unable to keep upwith the growth in demand for SHS loans, resulting in a growing backlog and delays in the

release of funds to vendors.End-users

During the surveys conducted among end-users, majority expressed satisfaction with the energyservice they were receiving under the SHS component (more details in Chapter 7). The mostcommon technical problem cited involved battery failure stemming from over-use of the system.Defective lamps have also been identified as an issue. Other problems stem from wiring defects,loose connections, and incorrect placing of the PV module. Some expressed strong concernabout the future when the warranty period ends and field offices of the vendors are closed.Others also mentioned incidents of parts supply shortages and the lack of enough knowledgeablefield personnel. In terms of overall level of service for repair/maintenance, however, eighty (80)percent of those surveyed indicated satisfaction.

The success of the SHS component was clearly facilitated by the entry of a microfinanceinstitution that had a rural network and had a grassroots orientation that enabled it to reach andbe more responsive to a greater number of rural customers. In order to sustain the gains madeunder this component, it is essential that more MFIs participate in the program, especially as theexperience under ESD showed that commercial banks are not inclined to go into micro-lending.

Off-grid Village Hydro Component

The off-grid village hydro installations are built, owned, and operated by the communitiesthrough electricity cooperative societies that were set up specifically for that purpose. Assistanceis provided by the ESD project in retaining consultants to prepare these installations. Project

preparation assistance usually includes social mobilization, society formation, preparation offeasibility studies that cover both technical and socio-economic aspects, submission of businessplans, and other documentation for bank loan negotiations and some amount of projectimplementation support (Gamata Light Electricity for Villages, 2002).The main issues that cropped up in the implementation of this component (categorized accordingto stakeholder) were as follows:

Table 4-2. Issues Involved in Implementation of OGVH Component


Small size of OGVH project loans

High transactions costs

High risks associated with OGVH borrowers

OGVH ProjectConsultants/Organizers

Long lead times required to organize cooperatives and obtain approvals

Risks associated with project organization and development work

Timing of GEF grant release to compensate for project developers work

Sustainability of project organization and development work without the ESDproject

OGVH Cooperatives/

Societies/End-users

Limited access to affordable loans

Timing of release of GEF grant

Operation and maintenance of OGVH project


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Productive use of OGVH power

Participating Credit Institutions

The commercial banksparticipating in the project generally view off-grid village hydro projectsas high-risk, and prefer the grid-connected hydro projects. The principal borrowers for theOGVH projects are village societies or cooperatives specifically formed to undertake the project.As such, they do not have an established banking record. The commercial banks also admitted tonot having the rural network to serve small end-users who make up the electricity cooperatives.As in the case of the SHS component, it was the entry of a microfinance institution that enabledthe OGVH component to take off. SEEDS had a better understanding of the rural situation, awider rural network, and was able to respond more effectively to the needs of rural electricitycooperatives.OGVH Project Consultants/Organizers

The most important catalysts for the development of the OGVH projects have been the OGVHconsultants/organizers. Their main responsibility is to identify and develop potential village

hydro sites, a role they have been performing long in various rural areas in Sri Lanka before theESD project. The project, therefore, only served to assist them in their development efforts andexpand the applications of village hydro in the country. The main concern of this group has beenthe long lead time and tremendous effort required to organize target households to a functioningvillage society that is capable of qualifying for a loan.OGVH Cooperatives/Societies/End-users

Most of the end-users expressed satisfaction over the energy service provided under this scheme(see Sec 7 for more details) and expressed desire to expand their current usage and acquire moreappliances. This contrasted greatly to the situation at the start of the project when there was apervasive lack of awareness about the potential of the proposed OGV projects (as well as theirlimitations). The most common technical problems faced by customers were power failurescaused by over usage. Normally this occurs between 6pm to 10pm. Those consumers who are atthe end of the distribution line also face the problem of low voltage on occasion.

Grid-connected Hydro Component

The implementation of the grid-connected minihydro component has been progressing well sincethe start of the project. As of June 30, 2002, 16 loans representing a total of 31 MW installedcapacity had been approved. An additional 15 loans are currently under appraisal, representingan additional 53 MW. The original target at project inception was 26 MW of both grid and off-grid renewable energy capacity.

A meeting with the ESD Administrative Unit and representatives of the Grid Connected SmallPower Developers Association in May 2002 revealed that private developers are generallysatisfied with the way the grid-connected hydro component of the project has been implemented.The small power purchase agreement and the resolution of the tariff issue were both identified asbeing crucial in attracting more developers to enter the market. The SPPA, in particular, meantreduced transaction costs, risks, and a clearer framework for investors to operate in.Prior to this, there had been long-running debates/discussions between the CEB and the grid-connected small hydro developers association (GCSHDA) regarding the level of the tariff, the


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provision of a capacity credit to small power producers, etc. The eventual resolution of theseissues made it possible for turning the situation around.ECOPOWER, one of the private companies that have played a major role in setting up gridconnected hydro projects, cited the resolution of the SPPT and the long-term money madeavailable under the ESD project, as crucial factors in their decision to pursue several projects.

Prior to ESD, terms offered by financial institutions were for considerably shorter periods.Commercial banks participating under the project perceive this component to be the least risky,largely because of the small power purchase agreement (SPPA).Clearly the success of this component was due largely to the resolution of the SPPA and tariffceiling issues. This serves as an example of how crucial it is to have a conducive institutional andpolicy framework in place to attract private sector participation.

Pilot Wind Farm Component

The implementation of the 3-MW pilot wind farm component has proceeded with no majorbarriers to implementation. The pilot project was commissioned in February 1999 and certified

in May 2000. The plant consists of five 46-meter towers with 600 kW turbines designed tosupply a total annual capacity of about 4.5 GWh. Total project cost amounted to US$1,200/kW,which is acceptable for a first grid-connected wind farm operation in a country. Wind speedshave also been found to be as projected during project design.The success of any pilot project is determined by its ability to stimulate a commercial market. Asof mid-term, there were no prospects for commercial wind farm projects, largely because of theexpected high costs of electricity to be generated from. The prevailing sentiment was that thelevel of the SPPT was not sufficient to support the commercial wind developmen

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