PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No 59140 Project Name Russia Energy Efficiency Financing Project Region EUROPE AND CENTRAL ASIA Sector District heating and energy efficiency services (100%) Project ID P122492 Global Supplemental ID P123692 GEF Focal Area C-Climate change Borrower(s) Gazprombank Implementing Agency Gazprombank Environment Category [ ] ABC X FI [ ] TBD (to be determined) Date PID Prepared December 8, 2010 Estimated Date of Appraisal Authorization June 13, 2011 Estimated Date of Board Approval December 15, 2011 1. Key development issues and rationale for Bank involvement 1. Country Context The Russian economy needs modernization and diversification. It is over-reliant on the energy extraction industries and the export revenues that they generate, and there has long been under- investment in alternative means of generating growth. This leaves the economy and the government finances exposed to the inherent volatility in prices for natural resources. At the same time, technological and innovation advancement in the real sector is less dynamic than it could be, which badly reflects on the competitiveness of the Russian economy. The government understands this issue and has recently been vigorously pursuing a modernization agenda. Energy efficiency is recognized as one of the key elements of modernization. 2. Sectoral and Institutional Context Russia possesses a huge untapped energy resource energy efficiency (EE). Little attention has been paid to EE in Russia during decades of extensive development, especially during the Soviet era. This, coupled with abundant energy resources, has made Russia one of the largest but least efficient energy consumers in the world. According to recent WB/IFC estimates, Russia can cut its energy consumption by about 45% or some 300 mtoe, an amount which exceeds the annual energy consumption of France. This would translate into a CO emissions reduction of about 800 million tons per year. The largest technical EE potential can be found in residential and public buildings (53.4 mtoe and 15.2 mtoe correspondingly, electricity generation (44.4 mtoe), industry (41.5 mtoe), transport (38.8 mtoe), and heat supply systems (31.2 mtoe). However, if Russia’s EE potential and related economic and environmental benefits are to be realized, the country will need to mobilize about $300 billion for EE investments. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
The Russian authorities have recognized the importance of EE for sustained economic growth. The Russian President, Dmitry Medvedev, signed in 2008 a decree calling for an action plan to cut the energy intensity of Russia’s economy by 40% by 2020. It was followed by the preparation of a law “On Energy Efficiency Improvement and Energy Saving thatwas passed by the Duma in November 2009. Furthermore, the government adopted an Action Plan on EE and Energy Saving in December 2009. At present, the concerned Ministries are developing about 70 EE bylaws aimed at facilitating the implementation of the law. In support of the implementation of the EE law, which pays a lot of attention to the public sector, the government is now implementing several pilot projects in the main public sub-sectors (public buildings, housing, lighting, utilities. This should allow the government to a) develop a substantial understanding of the various issues facing EE investments in these sub-sectors and develop policies to address them, and b) develop typical technological, institutional and financing solutions for their subsequent replication across Russia. In addition, in December 2009 the government established the Russian Energy Agency (REA), which is now taking the lead in coordinating and implementing the government’s EE agenda. The EE legal and institutional developments are being complemented by economic incentives, namely energy price adjustments. Specifically, gas tariff increases in recent years have been in the range of 20% - 30% per year depending on the customer group and are expected to keep growing at about 10% - 15% in the next two years. The current level of gas tariffs for both households and industry is about m. Electricity tariffs grew by more than 10% on average in recent years and are set to go up further in 2011 and 2012. For illustration, the average household electricity tariff reached about kWh in 2010. However, implementation of Russia’s EE agenda, especially at this initial stage, is likely to face barriers. As evidenced by other countries, the development and implementation of an EE legal and regulatory framework and effective mechanisms to deliver financing require concerted and persistent efforts. It usually takes years before complex and multifaceted EE related issues are addressed to enable commercial financing of EE, which is a key success factor in realizing a country’s EE potential. The World Bank has been helping a number of countries to overcome issues facing EE investments and has accumulated a rich body of experience. Therefore, it is well placed to help Russia. The country will greatly benefit from having access to the best international practice, lessons learned, transfer of knowledge and seed financing that could be provided by the World Bank. It will enable the country to speedup the implementation of its EE agenda and hence improve the chances of it meeting its ambitious goal of energy intensity reduction. 3. Relationship to CAS The project will support the first pillar of the Country Partnership Strategy (CPS, which is to Diversify the economy for sustainable development and growth. In particular, it will support the specific CPS objective of helping Russia to employ its energy wealth more efficiently and
open space for innovative entrepreneurs.” 1 The links between energy efficiency and modernization are crucial to Russia’s future growth. By helping to spread knowledge of how to develop energy efficiency projects and use innovative methods for their financing, the project will help Russian banks to diversify into new areas and thus assist their clients in increasing their efficient use of resources. This, in turn, will help the greater goal of modernization. 2. Proposed objectives) A. Proposed PDO The Project Development Objective is to improve the efficiency of energy use in private and public entities by scaling-up commercial bank lending for energy efficiency. The global environmental objective is to reduce greenhouse gases (GHGs) through the removal of barriers related to EE investments. Proposed key project monitoring indicators include total energy savings and associated GHG emission reductions, and the total number of projects and related investment amounts. B. Key Results 1) Energy savings stemming from the project. 2) Associated GHG reduction. 3) EE investments leveraged by the project. 3. Preliminary description The project will comprise a WB financial intermediary loan (FIL) to participating financial institutions (PFIs) and a GEF grant to address institutional, regulatory and market barriers facing commercial financing of EE projects. Gazprombank (GPB) has been identified as a PFI. Participation of an additional bank in the FIL will be explored during the early stages of project preparation, as well as during implementation, in the form of additional financing. A request fora US million grant in support of the project (PIF) was submitted to GEF at the end of November. The GEF grant will aim to help GPB and other Russian banks develop EE lending business. Also, the grant will support REA in performing its EE mandate in relation to creating an environment which enables commercial financing for EE projects. The project is expected to have two main components 1. EE investment lending 2. TA in support of investment lending Each component is elaborated below. World Bank (2009) Country Partnership Strategy Progress Report for the Russian Federation for the Period FY07-FY09, World Bank, p 10
Component 1: Energy Efficiency Investment Lending (Estimated cost US million proposed financing WB Loan US million, GPB US million, project owners/energy service companies (ESCOs) and regions/municipalities US million, other banks US million, GEF US million). The component includes a US million IBRD loan to GPB in support of GPB lending for EE investment projects. GPB will leverage these funds with its own on at least a 1:1 ratio, so it will manage an EE credit line to the amount of US million. GPB’s borrowers under the credit line - project owners/ESCOs, regions, and municipalities are expected to co-finance the GPB credit line at about 25% or US million. It was tentatively agreed to direct about 70% of the GPB credit line to EE investments in industry, with the balance of 30% going to support EE investments at the regional and municipal level. However, the allocation of funds among sectors within the credit line will be fine-tuned, based on the outcomes of the EE market study that GPB is to complete by the end of February 2011, and a subsequent investment plan. Sub-project selection criteria, including a list of eligible sectors, project type and size, energy savings requirements, as well as monitoring and reporting requirements will be fully defined in a Project Operational Manual. To motivate regions and municipalities to implement their respective EE action plans and make PFI lending more attractive, the GPB lending will be blended with GEF grant funds. Specifically, it is proposed that US in grant funds will be allocated to each of the initial regions or cities that agree to undertake measures within their pilot EE action plans, successfully complete them, and mobilize financing for implementation. If an additional PFI for participating in the FIL is identified at the early stages for project preparation and thus joins the project, the WB FIL and the co-financing amounts will be increased correspondingly. However, if another bank is to join the project it will need to demonstrate a high level commitment to the project and dedicate sufficient resources to perform on time its project preparation duties, including conducting an EE market study and preparing a Project Operational Manual. Also, it is expected that the project will involve other banks in EE lending. As the dissemination of best practice and lessons learned by the PFIs proceeds, REA will begin recruiting new banking partners to the project. To ensure leverage and assess commitment, banks will be required to provide a specific investment plan of at least US million in order to be eligible fora customized TA on EE lending from the GEF grant. Component 2: Technical Assistance in Support of Investment Lending (Estimated cost US million proposed financing GEF grant US million, GPB US million, REA US million, regions/municipalities US million. The main objective of this component is to ensure the successful implementation of component 1 and to disseminate its results in order to scale-up commercial financing of EE projects across Russia. This component will also finance project management.
It consists of the following three sub-components. a) Project development, project appraisal and monitoring for the industrial sector. Under this component, efforts will betaken to help ensure successful implementation of the credit line and GPB’s EE business development. Activities to be undertaken include (i) pipeline development (ii) development of modified project appraisal assessments to take into account EE project risks and cash flows (iii) technical due diligence for early EE projects (iv) development of special EE project financing products or schemes and (v) developing enhanced systems for monitoring energy savings after the projects have been financed and implemented. b) Development of EE Action Plan framework, pilot plans and financing schemes at the regional and municipal level. REA will help selected pilot regions and cities to further develop their EE Action Plans. Financing of these pilot Action Plans will be considered under component 1 and then disseminated for replication. c) Market development, policy dialogue, and information dissemination. This component seeks to help prime the market for EE financing through various market development efforts, ongoing policy dialogue to remove barriers to EE financing, share experiences from GPB’s EE credit line, and recruit new banks into the EE lending market. GPB will be expected to establish a Project Coordinating Unit to ensure effective implementation of the EE credit line. REA will setup a Project Implementation Unit to manage the activities funded from the GEF grant. 4. Safeguard policies that might apply