Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 69657-TO
PROJECT PAPER
FOR
SMALL RECIPIENT EXECUTED TRUST FUND GRANT
US$2.90 MILLION EQUIVALENT
TO THE
KINGDOM OF TONGA
FOR AN ENERGY ROADMAP INSTITUTIONAL AND REGULATORY FRAMEWORK
STRENGTHENING PROJECT
June 8, 2012
This document is being made publicly available prior to approval. This does not imply a
presumed outcome. This document may be updated following management consideration and
the updated document will be made publicly available in accordance with the Bank’s policy
on Access to Information.
i
CURRENCY EQUIVALENTS
(Exchange Rate Effective May 2012)
Currency Unit = TOP
TOP 1.80 = US$1
US$ = SDR 1
FISCAL YEAR
January 1 – December 31
ABBREVIATIONS AND ACRONYMS
ADB
ADO
ASTAE
BMZ
BP
CA
CBD
CCCPIR
CEO
CO2
CPI
CQS
CS
CSO
DA
DP
DPO
ECC
EIA
EIRR
EMP
ESMF
FAESP
FM
FY
GDP
GHG
GIZ
GoNZ
GOT
GWH
HV
IBRD
Asian Development Bank
Automotive Diesel Oil
Asia Sustainable and Alternative Energy Program
Ministry for Economic Cooperation and Development
Bank Guidelines
Connection Agreements
Central Business District
Coping with Climate Change in the Pacific Island Region
Chief Executive Officer
Carbon Dioxide
Consumer Price Index
Consultant Quality Selection
Competitve Selection
Community Service Obligations
Designated Account
Development Partners
Development Policy Operation
Electricity Concession Contract
Environmental Impact Assessment
Economic Internal Rate of Return
Environmental Management Plan
Environmental and Safeguard Management Framework
Framework for Action on Energy Security
Financial Management
Financial Year
Gross Domestic Product
Green House Gas
Die Deutsche Gesellschaft für Internationale Zusammenarbeit
Government of New Zealand
Government of Tonga
Gigawatt Hour
High Voltage
International Bank of Reconstruction and Development
ii
ICB
IDA
IFR
IPESP
IU
IUCN
JICA
kVA
kWh
LARAP
LCS
LCT
LED
LPG
LV
MoF
MPE
MR
MW
NCS
NOx
NPV
O&M
OP
OPR
PDO
PEC
PIAC
PIC
PPA
PRIF
PV
QCBS
RAV
RE
REEEP
RETF
SAIDI
SCADA
SI
SOE
SPC
SV
TA
TERM
TERM-A
Internation Competitive Bidding
International Development Association
Interim Unaudited Financial Report
Implementation Plan on Energy Security
Implementation Unit
International Unit for the Conservation of Nature
Japan International Cooperation Agency
Kilo Volt Ampere
Kilo Watt Hour
Land Acquisition and Resettlement Action Plans
Least Cost Selection
Local Coast Tankers
Light-Emitting Diode
Liquefied Petroleum Gas
Low voltage
Ministry of Finance
Ministry of Public Enterprise
Medium Range
Megawatt
Non-competitive Selection
Nitrogen Oxides
Net Present Value
Operation and Maitenance
Operational Guidelines
Operational Procurement Review
Project Development Objective
Pacific Environment Community
Pacific Infrastructure Advisory Center
Pacific Island Countries
Power Purchase Agreements
Pacific Region Infrastructure Facility
Photovoltaic
Quality- and Cost-Based Selection
Regulated Asset Value
Renewable Energy
Regional Energy and Energy Efficiency Partnership
Recipient Executed Trust Fund
System Average Interruption Duration Index
Supervisory Control and Data Acquisition
Sensitivity Indicator
State Owned Enterprise
Secretariat of the Pacific Community
Switching Value
Technical Assistance
Tonga Energy Road Map
Tonga Energy Road Map Agency
iii
TERM-C
TERM-IU
TGIF
TOP
TPL
US$
WA
WB
Tonga Energy Road Map Committee
Tonga Energy Road Map Implementation Unit
Tonga Green Investment Fund
Tongan Pa'anga
Tonga Power Limited
United States Dollars
Withdrawal Application
World Bank
Regional Vice President:
Country Director:
Sector Director:
Sector Manager:
Task Team Leader:
Pamela Cox
Ferid Belhaj
John Roome
Charles Feinstein
Roberto G. Aiello
iv
KINGDOM OF TONGA
Tonga Energy Roadmap Institutional and Regulatory Framework Strengthening
Project
TABLE OF CONTENTS
1. STRATEGIC CONTEXT
a. Country Context
b. Sectoral and institutional context
c. Higher Level Objectives to which the Project Contributes
1
1
3
14
II. PROJECT DEVELOPMENT OBJECTIVES
15
a.
b.
c.
PDO
Project Beneficiaries
PDO Level Results Indicators
15
15
15
III. PROJECT DESCRIPTION
a.
b.
c.
16
Project components
Project Financing
Lessons Learned and Reflected in the Project Design
IV. IMPLEMENTATION
a.
b.
c.
V.
17
Institutional and Implementation Arrangements
Results Monitoring and Evaluation
Sustainability
KEY RISKS AND MITIGATION MEASURES
VI. APPRAISAL SUMMARY
a.
b.
c.
d.
e.
f.
16
16
17
17
20
20
20
23
Economic and Fiscal Impacts
Poverty and Social Impacts
Financial Management
Procurement
Social (including Safeguards)
Environment (including Safeguards)
23
30
31
32
32
32
Annex 1: Results Framework and Monitoring
34
Annex 2: Detailed Project Description
37
Annex 3: Implementation Arrangements
41
Annex 4: Role of Partners
54
Annex 5: Map of the Kingdom of Tonga
59
v
KINGDOM OF TONGA
ENERGY ROADMAP INSTITUTIONAL AND REGULATORY FRAMEWORK
STRENGTHENING PROJECT
SMALL RECIPIENT EXECUTED TRUST FUND GRANT PROJECT PAPER
EAST ASIA AND THE PACIFIC
EASNS
Date: June 8, 2012
Country Director: Ferid Belhaj
Sector Director: John Roome
Sector Manager: Charles M. Feinstein
Team Leader:
Roberto G. Aiello
Project ID:
P131250
Instrument:
SIL
Sector(s): Energy
Theme(s): General energy sector (100%)
EA Category: C
Recipient: Kingdom of Tonga
Implementing Agency Component 1: Tonga Energy Roadmap Implementation Unit (TERM-IU)
Contact Person: ‘Akau’ola (TERM-IU Director)
Telephone No.: +676 24794
Fax No.: +676 22700
Email: akauola@gmail.com
Implementing Agency Component 2: Tonga Power Limited (TPL)
Contact Person: John von Brink (Chief Executive)
Telephone No.: +676 27390
Fax No.: +676 23047
Email: jvanbrink@tongapower.to
Start
Date:
Project Implementation
Period:
July 1, 2012
Expected Effectiveness Date:
July 1, 2012
Expected Closing Date:
December 31, 2015
End
Date:
June 30, 2015
.
Project Financing Data(US$M)
[ ] Loan
[X] Grant
[ ] Credit
[ ] Guarantee
[X] Other
For Loans/Credits/Others
Total Project Cost (US$M):
4.00
Total Bank Financing (US$M):
2.90
.
vi
Financing Source
Amount(US$M)
BORROWER/RECIPIENT
1.10
AusAID/PRIF Grant
2.50
ASTAE
0.40
Others
0.00
Total
4.00
.
Expected Disbursements (in US$ Million)
Fiscal Year
2013
2014
2015
Annual
0.70
1.20
1.00
Cumulative
0.70
1.90
2.90
.
Project Development Objective(s)
The Project Development Objective is to support the strengthening of the institutional and regulatory
framework of the Tonga Energy Roadmap.
.
Components
Component Name
Cost (US$
Millions)
Component 1: Strengthening the Energy Sector Framework and Structure
(Implementing Agency: TERM-IU). This component will support the Government of
Tonga to strengthen the functioning of the TERM-IU including through technical
assistance in the areas of: (i) energy sector policy; (ii) environmental and social
safeguard frameworks; (iii) petroleum price risk management strategy; (iv) feasibility
studies for power generation from renewable sources; (v) detailed surveys for electricity
use; and (vi) development of a communication plan (including awareness and
dissemination material in local language) for the Energy Roadmap in order to rally key
stakeholders around long-term goals and activities being implemented, thus mitigating
risks of misinformation.
2.10
Component 2: Preparing TPL for Renewable Energy Supply (Implementing Agency:
TPL). This component will support TPL to strengthen its capacity to: (i) carry out power
system modeling to determine the most cost effective way to diversify energy
generation, with a focus on achieving a high long-term renewable and distributed energy
penetration; (ii) design and specify upgrades to monitor, control, and protect systems to
ensure a reliable and secure supply of energy through the electricity system with high
levels of renewable energy generation; (iii) develop standards and procedures for
connection to the power system by independent power producers; and (iv) develop (in
conjunction with TERM-IU and to be approved by TERM-C) a power system plan for a
period of five years focusing on specific renewable energy technology projects such as
solar, wind, biomass and biofuels, but also covering energy storage options and demand
side management.
1.90
vii
.
Compliance
Policy
Does the project depart from the CAS in content or in other significant respects? Yes
[ ]
No
[x]
Does the project require any waivers of Bank policies?
Yes
[ ]
No
[x]
Have these been approved by Bank management?
Yes
[ ]
No
[x]
Is approval for any policy waiver sought from the Board?
Yes
[ ]
No
[x]
Does the project meet the Regional criteria for readiness for implementation?
Yes [ x ] No
[
.
Safeguard Policies Triggered by the Project
Yes
No
Environmental Assessment OP/BP 4.01
X
Natural Habitats OP/BP 4.04
X
Forests OP/BP 4.36
X
Pest Management OP 4.09
X
Physical Cultural Resources OP/BP 4.11
X
Indigenous Peoples OP/BP 4.10
X
Involuntary Resettlement OP/BP 4.12
X
Safety of Dams OP/BP 4.37
X
Projects on International Waterways OP/BP 7.50
X
Projects in Disputed Areas OP/BP 7.60
X
.
Legal Covenants
Name
Recurrent
Maintain TERM-A, TERM-C and TERM-IU
Due Date
Yes
Frequency
Always
Hire key staff for TERM-IU
3 months after
effectiveness
Adopt Operational Manual
1 month after
effectiveness
Maintain TPL implementing unit
Yes
Always
IFR reporting
Yes
Quarter
Progress reports
Yes
Semester
Signing of legal documents and legal opinions
At effectiveness
.
viii
]
Team Composition
Bank Staff
Name
Title
Unit
Roberto G. Aiello
Senior Energy Specialist, Task Team Lead
EASNS
Tendai Gregan
Energy Specialist, co-Task Team Lead
EASNS
Wendy Hughes
Lead Energy Economist
SEGES
Natsuko Toba
Senior Economist
EASIN
Ashok Sarkar
Senior Energy Specialist
SEGEN
Isabella Micali Drossos
Senior Councel
LEGES
Aleta Moriarty
Communications Officer
EACNF
Stephen Paul Hartung
Financial Management Specialist
EAPFM
Haiyan Wang
Finance Officer
CTRLN
Cristiano Costa e Silva Nunes
Senior Procurement Specialist
EAPPR
Nicole Forrester
Program Assistant
EACNF
Paul Fulton
Energy Consultant
EASNS
Martin Swales
Energy Consultant
EASNS
Penelope Ruth Ferguson
Environmental Consultant
EASIS
Ann McLean
Social Consultant
EASNS
Nicolas Drossos
Consultant
EASNS
Siosaia Tupou Faletau
ADB/ WB Liaison Officer
EACNF
Non Bank Staff
Name
Title
Office Phone
City
Locations
Country
First
Administrative
Division
Location
ix
Planned
Actual
Comments
I.
STRATEGIC CONTEXT
a. Country Context
1.
Tonga is a small, remote country that is highly vulnerable to external economic shocks
and natural disasters. Tonga’s population of 104,000 is dispersed across 36 of the 176 islands
that make up the archipelago. Located in the South Pacific, Tonga is one of the most remote
countries in the world, when measured by indicators of proximity to major markets. Small size
and remoteness combine to push up the cost of economic activity in Tonga, limiting the scope
for Tonga’s exports of goods and services to be competitive in world markets. These same
factors also push up the cost of providing public services in Tonga, due to Tonga’s limited
potential to exploit economies of scale in public and private sector activities. In addition, the
openness of Tonga’s economy and the lack of diversification of its sources of foreign exchange
make Tonga highly vulnerable to external economic shocks, while its geographical
characteristics make it highly vulnerable to natural disasters.
2.
Like other small, remote economies, Tonga depends on a very limited number of sources
for its foreign exchange earnings. About one-third of Tongans live abroad, primarily in the US,
New Zealand, and Australia and the remittances they send home are Tonga’s largest source of
foreign exchange. Over the last decade, remittances have averaged just fewer than 32 percent of
GDP. Tourism is Tonga’s next largest source of foreign exchange earnings, with tourism receipts
having averaged about 6 percent of GDP over the last decade. Over this period, tourism receipts
have been on an increasing trend. In contrast, Tonga’s merchandise export receipts which have
averaged about 5 percent of GDP over the last decade have been on a declining trend. Tonga also
receives significant development assistance, with cash grants averaging 3 percent of GDP over
the last decade but 5.1 percent of GDP over the last five years, reflecting an increasing trend.
Tonga also receives significant in-kind grants, which amounted to some 3 -6 percent of GDP in
each of the last two years1.
3.
Also like other small, remote economies, Tonga has a relatively undiversified economic
base. Agriculture, forestry and fishing contribute approximately 20 percent of Tonga’s GDP2,
and have been gradually declining over the course the last decade. Semi-subsistence agriculture
is, however, critical to the livelihoods of the majority of households in Tonga, particularly in
rural areas and the outer islands. Secondary industries, particularly construction activities, also
contribute approximately 20 percent of Tonga’s GDP. Service industries dominate the economy,
among which government services at about 15.5 percent of GDP are the largest component,
closely followed by commerce, restaurants and hotels at about 14.5 percent of GDP. This
category is dominated by wholesale and retail trading activities, which largely distribute
imported goods.
Energy in the Economy
4.
Energy is a fundamental building block for Tonga in its social and economic
development and in enhancing the livelihoods of all Tongans. It affects all businesses and every
1
2
Tonga, Ministry for Finance and National Planning.
Tonga, Ministry for Finance and National Planning.
1
household. Accessible, affordable and sustainable electricity that is environmentally responsible
and commercially viable is a high priority. Tonga is highly dependent on imported fuels to meet
its overall energy requirements. In 2000, when the last energy balance for Tonga was compiled,
imported petroleum products accounted for about 75% of Tonga's total energy needs. Currently,
all grid-supplied electricity, which accounts for over 98% of electricity used in Tonga, is
generated using imported diesel fuel. Over 95% of Tongans are connected to grid-based supply
of electricity.
5.
Tonga's total fuel imports account for about 25% of all imports and about 10% of GDP.
Hence changes in the price and amount of petroleum imports have a significant impact on
Tonga’s balance of payments situation and inflation. In particular, sudden price shocks can be
difficult to absorb. Automotive diesel oil, (ADO) (i.e. diesel) accounts for about two thirds of
petroleum imports; the rest is petrol and aviation fuel, with minimal liquefied petroleum gas
(LPG). About one third of total fuel imported is used for electricity generation.
6.
Oil prices over the last ten years illustrate the volatility to which the Tongan economy
and electricity consumers are exposed. Between 2001 and 2004, the average price of crude oil
increased from around US$25 per barrel to around US$40 per barrel - a 60% increase. This was
followed by a dramatic and continuous rise in crude oil prices between 2004 and 2008, where the
average annual price of crude rose from US$40 per barrel to a peak of around US$140 per barrel.
In late 2008 through 2009 crude oil prices fell to 2006 levels, with the average price in 2009
being around US$62 per barrel. Diesel prices tracked the price of crude oil. Since the beginning
of 2012 the Tapis benchmark crude oil price (Singapore) has been over US$100 per barrel.3
7.
The oil price spike of 2008 led to the highest electricity tariffs Tonga has ever seen, with
electricity prices peaking at over TOP1.00 per kWh (approximately 55USc/kWh). This had a
significant negative impact on economic activity and on the quality of life for all Tongans. The
experience highlighted the risk to Tongan electricity consumers and the economy as a whole of
the combination of 100% dependency on imported diesel fuel for grid-based electricity
generation together with essentially spot market pricing of all imported fuel. The tariff as of June
2011 was TOP0.98 (almost US$0.54 per kWh at an exchange rate of TOP 1.80 per US$). This
has since reduced to TOP0.93 as at May 2012. The fuel component is TOP0.51 (US$0.28).
8.
Scenarios for future petroleum price trends indicate that on average, the price is expected
to increase. The history of international oil prices demonstrates the high price volatility that
characterizes this commodity. Acknowledging the prospect of increasing and volatile petroleum
prices, the Government recognized that the energy sector as currently structured and operated
represents a major risk to the economy overall, and to the standard of living of individual
Tongans. The Government determined that it must, as a matter of priority, take measures to
mitigate these risks. Reducing this vulnerability is an important factor in securing stable
economic growth in the short, medium and long terms.
3
International Energy Oil and Market report - 11 May 2012 (http://omrpublic.iea.org/Prices/Cr_MA_05.pdf).
2
b. Sectoral and Institutional Context
Petroleum Supply
9.
Petroleum is supplied to Tonga by two international oil companies, TOTAL and Pacific
Energy. Uata Shipping, ‘Otumotuanga’ofa and other small ferry locally owned companies are
still used for fuel distribution in the Ha’apai group of islands. Both TOTAL and Pacific Energy
have onshore storage and distribution facilities on Tongatapu, while Pacific Energy also owns
the storage facilities on Vava'u. TOTAL and Pacific Energy are active in the Tongatapu ground
product market (ADO, kerosene and gasoline), and Pacific Energy is the sole supplier of aviation
fuels across Tonga.
10.
LPG is bulk supplied by Tonga Gas (a subsidiary of Fiji Gas, 51% owned by Origin
Energy, Australia) and marketed and distributed onshore by the Government of Tonga’s (GOT)
Homegas Company.
11.
Like other small Pacific Island countries, Tonga faces a long supply chain from the
refinery source. Products are shipped from refineries in Singapore (or sometimes Australia) to
bulk storage in Fiji via medium range (MR) tankers, based on TOTAL and Pacific Energy's
regional supply schedules, and then trans-shipped to Tongatapu and Vava'u in local coastal
tankers (LCT). Thus, landed costs of product in Tonga have a relatively high freight component.
12.
The outer islands are supplied with products trans-shipped through Nuku’alofa. The
Niua's and 'Eua islands are normally the only areas for which main products (gasoline, ADO, and
kerosene) are supplied by drum. Drum distribution is more expensive than bulk distribution and
costs are compounded by the fuel losses through evaporation, leakage and drum decanting which
contribute up to 15% of total drum content.
Petroleum price regulation
13.
The Competent Authority is empowered to regulate petroleum prices under Section 5 of
the Price and Wage Control Act 1988. The Tonga Competent Authority regulates the retail price
of petroleum products, using a pricing template originally developed by the Pacific Islands
Forum Secretariat. The pricing template builds up the retail prices by taking the Singapore price
for fuel, then adding on shipping and storage fees and wholesale and retail markups. In effect,
the average price for the next month is determined by fuel prices, shipping rates and margins two
months prior.
14.
The pricing philosophy seeks to build petroleum prices for Tonga that reflect the actual
costs of buying fuels on the international market and the various costs of delivering that fuel to
Tonga and then distributing it across the country. This petroleum pricing approach is the same
as the “import parity pricing’, which is used in Australia and New Zealand, and is common
across the petroleum industry.
15.
The pricing methodology is subject to annual, triennial and ad-hoc reviews. Every year
the pricing template is supposed to be reviewed (but until recently has not been the case), using a
3
consultation process with the oil companies and other interested parties. Triennial reviews assess
regional freight rate differentials, and the overall incentives for continued investment in
petroleum supply, storage and distribution. Ad-hoc reviews of the pricing templates may be
required to deal with issues such as changes in duties, taxes, or wharfage costs.
Petroleum Safety regulation
16.
Both TOTAL and Pacific Energy state that they operate under international standards for
petroleum handling and storage and that their insurance companies require annual independent
safety audits of their facilities and safety processes. Both companies claim that international
standards are more stringent and specific than the very general safety requirements set out in
Tonga’s Petroleum Act. The model for ensuring compliance with safety standards appears to be
one of self-enforcement by the oil companies, under the oversight of internationally accredited
and independent auditors.
Key petroleum sector issues
17.
Tonga’s high dependency on imported petroleum products to meet its energy demands
makes Tonga highly vulnerable to two types of risks: 1) oil price shocks; and 2) interruptions in
the delivery of fuel. These risks pose threats to Tonga’s energy security, i.e. Tonga's access to
adequate, affordable and reliable supplies of energy.
18.
An improved understanding of these risks is required by government, together with
greater policy direction on how to mitigate risks arising from supply interruptions (e.g.
increasing the level of storage in Tonga or storing fuel offshore), oil price spikes (e.g. financial
hedging); or catastrophic events (e.g. enforcing stringent safety standards and developing
contingency plans for major fuel leaks or fires).
Electricity supply
19.
The Tonga electric system was operated by the Government prior to 1998. In 1998, it
was bought by Shoreline Electric, an investor-owned company. The Government of Tonga
bought the assets back from Shoreline in July 2008. The current company, Tonga Power
Limited (TPL) is a vertically-integrated state-owned enterprise, wholly owned by the
Government of Tonga and operated at arm’s-length. TPL serves four island group grid systems
in Tonga. The main island of Tongatapu in the southern island cluster is the largest with some
73% of the Tonga population living there4. Other systems are on ‘Eua, also in the southern
cluster, Ha’apai in the central cluster and Vava‘u in the northern cluster. Each of these centres
has a diesel power station and a medium/low voltage distribution system. Tongatapu has a small
11kV network. The four island group grids have a generation capacity of just over 13MW that
supplies around 20,000 customers. Tongatapu has the largest share with generation capacity of
11MW and around 15,000 customers.
20.
4
Table 1 below summarizes the generating capacity, recent peak and energy demands on
Tonga National Population and Housing Census 2011.
4
each grid.
System
Tongatapu
Ha’apai
Vava’u
‘Eua
Total
Table 1: A Summary of the TPL Grid Systems 2011 (source TPL)
Installed Capacity
Peak Demand
Annual Energy
Annual
kW
kW
Supplied kWh
Load Factor
11,280
8,150
47,035,950
67.5%
772
296
1,373,698
60%
1,272
892
4,823,910
61-63%
373
285
1,056,588
50-55%
13,697
9,623
Electricity price regulation
21.
The Electricity Act 2007 provides the governance framework for the grid-connected
electricity sector in Tonga. In accordance with the Act, the Electricity Commission was
established in 2008 as the regulatory agency for grid-based electricity supply. The Act defines
the role of the Electricity Commission in regulating the generation and selling of electricity, and
establishes the role of a concessionaire in producing, delivering, and retailing electricity.
22.
The Electricity Concession Contract (ECC) entered into between the Kingdom of Tonga
and TPL under section 20 of the Electricity Act 2007 (extended under the Electricity
Amendment Act 2010) gives TPL exclusivity for the supply of electricity to the island groups.
The ECC sets out the conditions for the utility’s operations, including specific details as to how
and the frequency at which the tariffs are to be calculated, outlines operational efficiency
benchmarks, consumer service standards and penalties for non-compliance, and regulatory reset
provisions at the end of each regulatory period. The current ECC regulatory period runs until
June 30, 2015 at which point the ECC schedules and conditions are renegotiated for a further
seven years.5
23.
The ECC distinguishes fuel and non-fuel components of the tariff. Changes in fuel prices
are fully passed through into power prices, via a clearly defined pass-through mechanism set out
in the Concession Agreement. Although the ECC allows TPL to treat the four island grids
individually, in May 2009 TPL chose to standardize tariffs across all grids and consumer classes.
Tariffs are allowed to be adjusted every three months, the latest being a 6.6% decrease effective
April 2012. The non-fuel tariff component follows the Consumer Price Index (CPI), while the
fuel tariff component is adjusted so that the Concessionaire recovers only the permitted fuel
costs. The ECC requires that TPL earn a rate of return (currently set at 12.9 %) of its Regulated
Asset Value (RAV). TPL is required to submit capital expenditure plans to the Commission for
approval and the Commission can deny approval of a capital expenditure that is not in line with a
least-cost supply strategy. The overall tariff structure is designed to ensure that TPL operates
using full commercial standards. A fuel component increase was made on June 1, 2011 to bring
the tariff to TOP0.98 but TPL Board deferred the 6.7% annual adjustment to the non-fuel
component, which reduced the tariff impact by some TOP2.7 per kWh. Subsequently, in April
2012, TPL applied the above increase in non-fuel component, in addition to the allowable CPI
5
Section 9.2 of the ECC.
5
movement for the year ending December 2012. The increase in non-fuel component was 8.3%.
The total (combined fuel and non-fuel) tariff currently sits at TOP0.93/kWh.
24.
The role and effectiveness of the electricity commission is currently under a broader
regulatory review by the Asian development bank, as part of a multi-region assessment of
regulation in small island states.6
Tonga Power Ltd. Performance
25.
TPL inherited its database and data management systems from its predecessor. A
significant amount of data was lost during the 2006 civil disturbance. The Supervisory Control
and Data Acquisition (SCADA) system at the power station on Tongatapu that automated data
collection on the generating units had failed. The electricity billing database system was over 15
years old, it had certain limitations and TPL only has consumption data by customer back to
when it acquired the business in 2008. Electricity sector data are quite limited at present.
26.
Overall technical and non-technical losses have been high in recent years. On the
Tongatapu grid, where approximately 85% of all of the grid-supplied energy is consumed, total
losses represented just over 17.5% of the energy generated at the engine-generators in 2009
while on the three smaller grids, recent total losses have been between 12.5% and over 20.0% of
generated energy. Based on the total losses and TPL’s estimate that technical losses are in the
order of 12% on Tongatapu, non-technical losses are running around 3%, with station service
around 2-3%. However, over the past year TPL has taken a number of steps to improve data
gathering and reduce losses; at March 2012 the twelve month rolling average total loss has
reduced to under 15%, the effect of recent revenue protection projects will bring total losses
down to the target of 12% by the end of 2012.
(i)
TPL commissioned two new 600kW diesel electric generators on Vava’u and the
implementation of the data collection functions for the SCADA system supplied with the
new generators.
(ii)
TPL has completed the installation and commissioning of a new, computerized
customer accounts system. Current day’s receivable stands 12 days.
(iii)
TPL has installed more than 18,500 new meters as of mid March 2012 and all of
these units can be read with a portable electronic reader. All meter readers will be using
a handheld reader by 3rd quarter of 2012.
(iv)
TPL has installed Light-Emitting Diode (LED) street lights along the whole of the
waterfront in Nukualofa and along the road from the airport to the central business
district (CBD). The trials were considered successful and the plan is now to extend the
LEDs to all street lights. It is now a requirement that any new street lights be LED.
(v)
TPL replaced all of the low voltage (LV) connections around the Popua village, as
a trial to determine loss reduction. Measures show a loss reduction from 8.23% to 7.1%.
6
ADB RETA 6424 “Effective Regulation of Water and Energy Infrastructure Services: Small Island Countries”.
6
TPL is continuing to change connectors on the LV networks serving Nuku’alofa and
reports that, as at May 2012, the majority had been changed. TPL has completed a similar
program to change the LV connectors on all of ‘Eua and has found that losses may have
been reduced by more than 5%.
(vi)
TPL conducted a trial in two villages on Tongatapu by replacing meters to see if
non-technical losses can be reduced. TPL staff found a loss rate of over 50% in one and
over 20% in a second village. After all meters were replaced, the losses were measured
at about 7.5% and 9.5%.
(vii) TPL has installed new electronic metering on all fuel tanks and upgraded the
station service metering so that a more consistent estimate of parasitic load at each station
can be maintained. A monthly stock take of fuel and reconciliation of fuel used provides
assurances as to loss of fuel from leakage or theft.
(viii) TPL has repaired the SCADA data collection system serving the older Caterpillar
generation units and linked the data collection component of the MAK SCADA to the
plant control room at the Popua power station.
(ix)
Other work has included upgrading insulators on many of the high voltage (HV)
lines, the clearing of vegetation that is encroaching on the HV lines and seeking to
standardize as many of the LV lines as possible.
(x)
Overall loss reductions achieved over the past 18 months as of April 2012 on
Tongatapu: 3.2%, on Vava’u: 4%, on Ha’apai: 2.7%, and on ‘Eua: 1%.
(xi)
A 1 MW solar power plant is under construction near the Popua diesel generating
station and is scheduled to be commissioned before the end of August 2012.
Key electricity sector issues
27.
All grid-connected electricity generation in Tonga is from imported diesel oil. The
Tongan economy and electricity consumers have been exposed to high and volatile electricity
prices over the last ten years due to inter alia fluctuations in the price of oil internationally. The
cost of automotive diesel oil (ADO or “diesel”), the fuel used in all of TPL’s diesel generator
sets, has varied widely during recent years. In Table 2 and Figure 1, the total energy generated,
the fuel used and the total cost of that fuel are shown for calendar years 2005 through 2011.
28.
Although annual electric demand grew by just 2% in the six years, the annual fuel cost in
TOP increased by almost 175% in the same period. From 2010 to 2011, although the demand
was declined, the fuel use increased. This means the energy intensity could be showing some
sign of increase and thus needs to monitor carefully this symptom.
7
Table 2: Recent Fuel Use and Cost for Electricity Generation7
Year
kWh
ADO, litre
Fuel cost, TOP
Fuel cost, UST
2005
51,557,573
13,132,596
13,015,693
6,671,978
2006
2007
2008
2009
2010
55,281,157
56,434,346
56,777,701
52,631,366
52,623,212
13,921,617
14,115,388
14,186,248
13,188,831
13,086,288
17,006,525
19,527,073
28,527,236
28,033,960
30,541,979
8,198,466
9,411,998
13,750,053
13,805,090
15,997,379
2011
52,579,016
13,111,463
35,751,813
20,654,418
Source: TPL generation table, prices from Ministry of Labor, Commerce and Industry and National Reserve Bank.
Figure 1: Recent Fuel Use and Cost for Electricity Generation8
60,000,000
50,000,000
40,000,000
ADO, litre
kWh
30,000,000
Fuel cost, TOP
20,000,000
Fuel cost, USD
10,000,000
2005
2006
2007
2008
2009
2010
2011
Source: TPL generation table, prices from Ministry of Labor, Commerce and Industry and National Reserve Bank
29.
Figure 2 illustrates how the cost per unit of electricity on Tongatapu has varied since
March 2002. The cost of diesel fuel drove the tariffs to record highs during 2007 and 2008. The
tariff for Tongatapu reached 102.67 seniti (US$0.5659) and 104.67 on Vava’u (US$0.576).
Since mid-2008, international oil prices have fallen significantly and the correspondingly lower
diesel fuel costs have been passed on to customers through the tariff changes in February and
May 2009, and more recently in April 2012. Average prices though now are high and sustained
at those levels. In addition, the tariff structure changed in May 2009 to equalise the tariff across
all grids. By late 2009, tariffs once again had to be increased due to increasing fuel oil costs. As
discussed above on electricity price regulation, a fuel component was increased in June 2011 to
The cost of shipping fuel to the grids on Vava’u, Ha’apia and ‘Eua has not been included here.
The cost of shipping fuel to the grids on Vava’u, Ha’apia and ‘Eua has not been included here.
9
The official exchange rate floated prior to April 2006 when the rate was fixed at TOP 2.075/US$ until late July
2009. The average monthly exchange rate of the TOP$ has since appreciated to 1.82/US$.
7
8
8
bring the tariff to TOP0.98 but TPL Board deferred the 6.7% annual adjustment to the non-fuel
component, reducing the tariff impact by some TOP2.7 per kWh. As discussed above, fuel and
non-fuel components of tariff were adjusted in April 2012, with overall net effect that the tariff
as at May 2012 sits at TOP0.932/kWh
Figure 2: Electric Rates History in Tonga
1.200
1.000
0.800
0.600
0.400
0.200
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
-
Pa'anga
US$
Source: National Reserve Bank of Tonga
30.
Table 3 shows the medium term demand forecast for Tongatapu, taking into account both
increases in efficiency of supply and end use, as per the TERM. Figure 3 shows the combined
high, median and low forecasts for the four grids combined. Improvements in efficiency could
reduce demand growth by about 17% overall compared to a “do nothing” approach. Even at the
modest rate of demand growth projected taking into account improved supply and end use
efficiency, demand is expected to increase by nearly 30% over 2010 - 2020. Subsequent reviews
by TPL have shown that demand continues to be flat, with total generation growing at 0.25% per
annum to 2020. Energy generated across all grids for the year ending June 2013 is budgeted at
approximately 53GWh.
31.
Reducing the vulnerability of the country to future oil price shocks is a key issue which
requires actions to improve the petroleum supply chain and price risk management, increase
efficiency of generation, distribution and use of electricity, and diversify away from diesel-only
electric generation. It is important that a programme-planned approach is adopted that will
ensure risk mitigation on the management, distribution and storage of petroleum is undertaken
involving the use of credible external expertise before major changes are implemented. Without
taking action, the Tongan economy and energy consumers will be increasingly exposed to risks
associated with the growing dependency on imported petroleum for electricity generation and
transport.
9
Table 3: Median Forecast, Loss Reduction plus DSM Implemented on Tongatapu
end of
end of
end of
end of
end of
end of
end of
end of
2009
2010
2011
2012
2013
2014
2015
2020
Median Growth Scenario, kW.h
~Actual
Annual Growth Rate, Billed Energy
-7.82%
1.00%
2.00%
3.00%
4.00%
4.00%
5.00%
5.00%
Billed Energy
7,012,005
37,382,125
38,129,768
39,273,661
40,844,607
42,478,391
44,602,311
56,925,107
1.667%
5.00%
8.33%
10.00%
10.00%
10.00%
10.00%
DSM effect ,% of Billed
Impact of DSM on Billed, kW.h
0
623,160
1,906,488
3,272,674
4,084,461
4,247,839
4,460,231
5,692,511
Net Billed Energy
37,012,005
36,758,965
36,223,279
36,000,986
36,760,146
38,230,552
40,142,080
51,232,596
Technical Losses (est.)
5,284,297
4,701,728
4,139,803
3,650,804
3,273,024
3,170,029
3,086,157
3,323,195
Loss as % Sent Out
12.00%
11.00%
10.00%
9.00%
8.00%
7.50%
7.00%
6.00%
Non-Technical Losses (est.)
1,739,510
1,282,289
1,034,951
912,701
879,625
866,475
859,715
830,799
Loss as % Sent Out
3.95%
3.00%
2.50%
2.25%
2.15%
2.05%
1.95%
1.50%
Total Network Losses
7,023,807
5,984,018
5,174,754
4,563,505
4,152,649
4,036,504
3,945,872
4,153,994
Energy Sent Out
15.95%
14.00%
12.50%
11.25%
10.15%
9.55%
8.95%
7.50%
Energy Sent Out from Popua
44,035,812
42,742,983
41,398,033
40,564,492
40,912,795
42,267,056
44,087,951
55,386,591
Add Station Service
898,690
872,306
844,858
827,847
834,955
862,593
899,754
1,130,339
Station Service Rate, % Generated
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
2.00%
Total, Energy Generated
44,934,502
43,615,288
42,242,891
41,392,339
41,747,750
43,129,649
44,987,706
56,516,929
Annual Peak Demand, kW
8,142
7,903
7,654
7,500
7,565
7,815
8,152
10,241
Figure 3: Energy Forecasts, Sum of All Grids
85,000
80,000
MegaWatt.hours
75,000
70,000
65,000
60,000
55,000
50,000
45,000
40,000
2010
2011
2012 2013 2014
Do Nothing Median
Efficient Low
2015 2016 2017
Efficient Median
2018
2019
2020
Efficient High
Source: Report on The Tonga Electric Supply System: A Load Forecast, prepared by Martin Swales for the World
Bank / ASTAE, January 2010
10
Government Strategy in the Energy Sector: The Tonga Energy Roadmap (“TERM”)
32.
In April 2009, the Government and Development Partners with the coordination of the
World Bank (WB), embarked on a process to undertake a sector-wide review and develop an
approach to improving the performance of the energy sector and to mitigating the risks. The
resulting document entitled the “Tonga Energy Road Map 2010-2020: Ten Year Road Map to
Reduce Tonga’s Vulnerability to Oil Price shocks and Achieve an Increase in Quality Access to
Modern Energy Services in an Environmentally Sustainable Manner”, or “Tonga Energy Road
Map (TERM)” addresses improvements in petroleum supply chain and consideration of price
hedging instruments, increased efficiency both in electricity supply and use, development of
grid-connected renewable energy resources, improved access to quality electricity services in
remote areas, reduced environmental impacts both locally and globally, enhanced energy
security, and overall sector financial viability. The scope includes policy, legal, regulatory and
institutional aspects of the sector as well as investment. It covers a ten year time period. As
technologies, costs, demand for electricity and sources of financing change over time, it is
envisioned that the TERM will be periodically updated to take these factors into account. The
next TERM review is expected to be completed before the end of 2012.
33.
The TERM focuses on reducing cost and volatility in the price of petroleum imports and
de-linking electricity production from petroleum in accordance with government policy with
respect to energy security and renewable energy goals. A further set of actions could focus
around use of petroleum for transport applications. This was beyond the scope of the TERM
exercise, but work is already underway in this area and would complement the TERM.
34.
Development of the TERM involved unprecedented information-sharing by Government
Ministries and Tonga Power Limited (TPL), and set a new standard in the Pacific for
Government leadership and coordinated development partner support. The process has benefited
from the active participation of more than fifteen development partners, including multi- and bilateral agencies and regional organizations responsible for energy in the Pacific, over the course
of one year. The TERM is important not only for the expected impact on the energy sector in
Tonga. It is already being cited as an example in other Pacific Island Country (PIC) energy
sector discussions and is expected to serve as a model for Government leadership and
development partner coordination of sector-wide planning applicable to infrastructure more
broadly.
35.
The TERM sets out priority actions in the areas of policy, legal, regulatory and
institutional arrangements, and sets out an investment program based on a least cost approach for
reducing reliance on diesel for power generation, with explicit consideration given to managing
risk through development of a portfolio of options to meet the demand for electricity. The
TERM also recommends a detailed program of actions with indicative funding sources and costs
for each element. The TERM will serve as the guiding document for Government and
development partner support.
36.
GOT formally adopted the TERM in August 2010 and by doing so, committed to key
principles for the energy sector and an indicative implementation plan. The Bank will provide
on-going support to the GOT in implementation of the TERM in the form of this project. Other
11
development partners are also working with GOT preparing support for specific aspects of
TERM implementation (see Annex 4).
Objective of TERM
37.
The objective of TERM is to lay out a least cost approach and implementation plan to
reduce Tonga’s vulnerability to oil price shocks and achieve an increase in quality access to
modern energy services in a financially and environmentally sustainable manner. The TERM
will serve as the guiding document for Government actions and development partner support. It
covers a ten year time period. It is envisioned that the TERM will be periodically updated. The
TERM considers the full range of options to meet the objective, including:

Improvements in petroleum supply chain to reduce the price, and consideration of price
hedging instruments to reduce price volatility of imported petroleum products;

Increased efficiency of conversion of petroleum to electricity supplied to consumers (i.e.
increases in efficiency and reduced losses);

Increased efficiency of conversion of electricity into consumer electricity services (i.e.
end-use efficiency measures);

Replacing a portion of current or future grid-based generation with renewable energy.
38.
In addition, in order to meet the objective of increasing access to good-quality electricity
supply, the TERM includes recommendations for a new approach to meeting the needs of
consumers too remote to be connected to a grid-based supply.
Principles underpinning the TERM
39.
Flexibility to update and adjust the implementation plan is needed to ensure the TERM
remains relevant and responds to evolving circumstances. Recognizing the need for on-going
adjustments, the TERM sets out the key principles that will be adhered to, as the specifics of the
implementation plan are updated.
40.
The key principles of the TERM are set out below:
41.
Least Cost Approach to Meet the Objective of reducing Tonga’s vulnerability to oil
price increases and shocks. To identify the least cost approach, the full range of options must
be considered and evaluated relative to one another rather than being considered in isolation.
These include improvements in the petroleum supply chain efficiency; supply and demand side
efficiency improvements; and options for non-diesel power generation for both grid and off-grid
electricity supply. The selection of each new investment will be based on the principle of the
lowest lifecycle cost among the technically feasible alternatives.
42.
Managing Risk. The introduction and implementation of new technical and institutional
approaches will be designed and managed to avoid inadvertently increasing interruption risks in
12
the effort to address price risk issues. The sequencing and timing of adjustments will allow
sufficient time to undertake the detailed work and get in place the required specialist expertise.
An important element of managing risk is to develop a portfolio of options to meet the demand
for electricity. The value of establishing a portfolio of supply sources will be considered when
evaluating alternatives with comparable cost characteristics.
43.
Financial Sustainability. In this context “financial sustainability” means that the cost of
operating the energy sector, including regulatory, operations, maintenance, fuel and financing
costs are recovered through the tariff. While the provision of a subsidy for a particular
investment is not incompatible with the concept of financial viability, it should be applied in
cases where there are specific objectives outside the normal commercial operation. For example,
to address specific social or equity objectives related to providing electricity services in remote
areas, to address specific negative externalities including funds aimed at supporting a transition
to renewable energy to reduce green house gas (GHG) emissions, or to support gaining
experience with technologies that may be expected to become more cost effective over time.
The essential feature is that the source of any subsidy required to keep the sector financially
viable must be secure. Continued dependence on significant injection of subsidy to meet the cost
of normal operations and expansion would not be considered a financially sustainable situation.
Investment options must be evaluated considering the cost implications over the investment
lifetime, to avoid substituting short term price relief for continuing high prices in the medium to
long term.
44.
Social and Environmental Sustainability. Environmental and social sustainability
encompasses both minimizing local negative social and physical environmental impacts of the
energy sector, as well as aligning with global goals with respect to minimizing impact on climate
change where possible. New energy investments under the TERM would be subject to
Environmental and Social Impact Assessments and Mitigation Plans as necessary, as per
international practice. Special consideration will be given to those groups with specific needs
including youth, women, religious groups and those with special needs. Investments that have
major negative environmental or social impacts or constraints that cannot be mitigated or solved
will be avoided. As one of the group of countries which has contributed least to global climate
change, yet stands to be severely impacted, Tonga is committed to setting an example for larger
countries with respect to responsibly and sustainably reducing GHG emissions. Social
sustainability also incorporates an element of equity. Hence the scope of the TERM includes the
provision of sustainable, affordable electricity supply that meets the needs of people living in
remote areas.
45.
Clear, appropriate and effective definition of roles for Government, TPL, and the
Private Sector. GOT is responsible for strategic direction in the energy sector (policy and legal
framework), sector oversight (regulation), creating an enabling environment and monitoring of
progress to achieve the strategic goals, and facilitating where possible the direction of financial
assistance to the sector in accordance with the principles listed above. This implies a strong role
in supervising the implementation of the TERM and actions to revise policy, legal and regulatory
arrangements. For projects and investments that have as a major goal the testing and gaining
experience with technologies new to Tonga, to the extent that public sector funding is available
ownership should remain with Government, possibly but not necessarily through TPL.
13
46.
TPL will be an important implementing agency for the early TERM activities, including
in improved network and efficiency, and implementation of the off-grid program. TPL will also
have responsibility of maintaining supply of electricity to customers on the four grids. TPL is a
key source of technical expertise in the energy sector and this role will be strengthened through
training as part of the implementation of the TERM.
Phases of TERM
47.
The TERM has three phases of implementation: Phase 0, Phase 1 and Phase 2. Phase 0
required the GOT to undertake major institutional governance reform of the energy sector. In
addition, it requires that the utility, Tonga Power Limited (TPL), be provided with support to
enable it to manage the current infrastructure in a safe and operationally sound manner. The
TERM recommended (and Cabinet approved) the conduct of an independent Electricity Tariff
Review under Phase 0 of the TERM to address the key weaknesses of the existing tariff, by
providing recommendations for a new tariff regime that is consistent with a financially
sustainable and efficient electricity sector, taking into account the planned shift to renewable
energy sources and energy efficiency, while providing protection for the poorest consumers.
This review will be shortly commenced under support from the Pacific Infrastructure Advisory
Center (PIAC).
48.
Phase 1 includes works designed to implement the first set of proof-of-concept renewable
energy projects, including on-grid Solar PV supply and substitution of a portion of the fuel used
in existing diesel engines with coconut oil; and the scaling up of the end-use efficiency activities
and review of initial experience with petroleum financial risk management. By the completion
of Phases 0 and 1, a private sector investment framework within the energy sector will be in
place. In addition, Phase 2 will involve further efficiency and renewable energy investments and
will be initiated when data and experience from the phase 0 and phase 1 activities have been
evaluated.
c. Higher Level Objectives to which the Project Contributes
49.
The Tonga Energy Road Map (TERM) represents the result of a year of intensive dialog
with the Government, and consultation and coordination with energy sector development
partners. The TERM has now been operational for two years. The World Bank played a major
role in development of the TERM, from the initial conception of the scope and approach,
through support for and supervision of the key analytic work, managing the coordination of longterm energy sector development partners as well as helping to bring on board new players, and
synthesis of the inputs into the final TERM document. The proposed project forms an integral
part of the Bank’s overall energy sector engagement in Tonga: beginning with the intensive
technical assistance (TA) and dialog around development of the TERM, an Energy Sector
Development Policy Operation (DPO) that was completed in FY11, and the first in the
programmatic series of two DPOs which include a focus on key actions in the energy sector that
was completed in FY12, with the second proposed for FY13.
50.
The approach set out in the TERM is fully in line with the institutional agenda on Climate
Change. Driven by energy security, the TERM integrates energy efficiency and renewable
14
energy generation into the mainstream sector planning and policy framework, through the focus
on reducing vulnerability to oil price rise and shocks as a key factor in enhancing national energy
security. The GOT also recognizes the importance of seeking for climate finance associated to
clean energy investments given the important contribution to support their sustainability.
II.
PROJECT DEVELOPMENT OBJECTIVES
a. PDO
51.
The Project Development Objective (PDO) is to support the strengthening of the
institutional and regulatory framework of the Tonga Energy Roadmap.
52.
The TERM sets out a ten year road map to reduce Tonga’s vulnerability to oil price
shocks and achieve an increase in quality access to modern energy services in an
environmentally sustainable manner. The proposed project will provide assistance to strengthen
the core institutions and regulatory framework relating to TERM and it is a key precursor for the
ongoing and planned operations under the Energy Roadmap (see Annex 4).
b. Project Beneficiaries
53.
Direct beneficiaries of this project are TERM-IU and TPL, and indirectly energy
consumers (households and businesses). The project’s support to TERM implementation is
expected to lead to more efficient use and targeting of available resources which will in turn lead
to lower, more stable electricity tariffs, improved quality of electricity service and improved
access to affordable electricity. The project’s assistance to a sector structure and institutional
arrangements to coordinate strategic planning and targeting of resources will set in motion
actions to improve the efficiency, cost-effectiveness and transparency of the sector institutions,
investments and operations. Support for the development of robust process and financing
mechanisms and investment in renewable energy will improve the effectiveness and rate of
diversification from diesel-based power generation. Improved petroleum price risk management
will contribute to electricity price stability, including all petroleum end users and facilitate
planning and management of Tonga’s balance of payments situation.
54.
Reducing the vulnerability of the economy to oil price rises and shocks will improve the
macroeconomic stability which will have positive implications for the general public. Benefits
with respect to the energy sector aspects also extend beyond Tonga. The process of developing
and now implementing the TERM is widely seen in the region as a concrete example of a new
paradigm for Government leadership and development partner coordination to undertake sensible
planning followed by coordinated implementation.
c.
55.
PDO Level Results Indicators
Progress will be measured against the following results indicators:
(i)
Sector structure and institutional arrangements operate to coordinate strategic
15
planning and targeting of resources to implement TERM.
(ii)
TPL system is more robust with respect to accepting energy supply from
intermittent sources and delivers quality electric power. Internationally-recognized
network reliability criteria such as the System Average Interruption Duration Index
(SAIDI) is currently monitored by TPL management. TPL will seek to track SAIDI
minutes saved as a measure of the success of the project.
III.
PROJECT DESCRIPTION
a. Project Components
56.
The Project will consist of two components:
57.
Component 1: Strengthening the Energy Sector Framework and Structure
(AusAID/PRIF US$0.70 million; ASTAE US$0.40 million; GOT US$ 1.00 million.
Implementing Agency: TERM-IU). This component will support the GOT to strengthen the
functioning of the TERM-IU including through technical assistance in the areas of: (i) energy
sector policy; (ii) environmental and social safeguard frameworks; (iii) petroleum price risk
management strategy; (iv) feasibility studies for power generation from renewable sources; (v)
detailed surveys for electricity use; and (vi) development of a communication plan (including
awareness and dissemination material in local language) for the Energy Roadmap in order to
rally key stakeholders around long-term goals and activities being implemented, thus mitigating
risks of misinformation.
58.
Component 2: Preparing TPL for Renewable Energy Supply (AusAID/PRIF
US$1.80 million; TPL US$0.10 million. Implementing Agency: TPL). This component will
support TPL to strengthen its capacity to: (i) carry out power system modeling to determine the
most cost effective way to diversify energy generation, with a focus on achieving a high longterm renewable and distributed energy penetration; (ii) design and specify upgrades to monitor,
control, and protect systems to ensure a reliable and secure supply of energy through the
electricity system with high levels of renewable energy generation; (iii) develop standards and
procedures for connection to the power system by independent power producers; and (iv)
develop (in conjunction with TERM-IU and to be approved by TERM-C) a power system plan
for a period of five years focusing on specific renewable energy technology projects such as
solar, wind, biomass and biofuels, but also covering energy storage options and demand side
management.
b. Project Financing
Instrument
59.
Financing will be provided by AusAID through the Pacific Region Infrastructure Facility
(PRIF), the Asia Sustainable and Alternative Energy Program (ASTAE)10, GOT, and TPL.
10
ASTAE Grant agreement will end December 31, 2014 in line with the Parent Trust Fund.
16
Retroactive financing of up to 20% of the grant funding is included.
Project Cost and Financing
Table 4. Project cost per source of finance
Project cost
AusAID/PRIF
ASTAE
Financing
% Financing

Component 1: Strengthening the
Energy Sector Framework and Structure
2.10
1.10
52%

Component 2: Preparing TPL for
Renewable Energy Supply
1.90
1.80
95%
Total Project Costs
4.00
2.90
72%
Project Components
c. Lessons Learned and Reflected in the Project Design
60.
Lessons learned during the development of TERM-A are reflected in the design of this
operation. The TERM has strong government ownership and is the best example of development
partner harmonization in any sector in Tonga. Every aspect of the TERM program is customized
for Tonga. A key lesson learned is the importance of a “whole-of-sector” approach as opposed to
isolated and disconnected interventions. Both technical assistance and investment support are
more effective when there are real plans and opportunities to put it into practice.
61.
Another important lesson is information sharing and coordination with other development
partners from an early stage, as well as the proper identification of the stakeholder groups and
their representatives. Moving forward with a “whole-of-sector” approach requires a strong
development rationale and perceived domestic benefits for which a communicating adequately
with the different stakeholders and constituencies becomes essential.
IV.
IMPLEMENTATION
a. Institutional and Implementation Arrangements
TERM Governance Structure
62.
TERM. In April 2010, the main report of the Tonga Energy Road Map 2010-2020
(TERM) was completed and published. In June 2010, the Tonga Petroleum supply report was
submitted to the GOT. This petroleum report and recommendations are a critical component of
the TERM. The TERM was then approved under Cabinet Decision 739 of 20thAugust 2010.
63.
TERM-Agency (TERM-A). On April 20 2012, Cabinet approved the TERM-Agency
17
(TERM-A) as an inherent body responsible for energy matters under TERM.11 As a Government
Agency, TERM-A will act on behalf of Cabinet, and shall be accountable directly to Cabinet, in
accordance with the mandate given to it by Cabinet. TERM-A is responsible of achieving the
objectives of TERM on behalf of the Government. All energy related projects detailed under the
TERM will be the responsibility of the TERM-A.
64.
TERM-Committee (TERM-C). Within TERM-A there is the Tonga Energy Road Map
Committee (TERM-C) which is the governing entity within TERM-A, and, as approved by
cabinet, have the following mandate:
(1)
Consider the proposed institutional reformation and all energy sector related
projects, taking into consideration the whole of Government institutional rationalization
programme;
(2)
Coordinate on Ministry cross cutting energy sector related issues ensuring an
integrated approach to the energy sector reformation program as outlined in TERM;
(3)
Approve projects for the energy sector as detailed under the TERM, taking into
account the equitable distribution of development benefits and environmentally
sustainable development of the energy sector;
(4)
Monitor the progress of the TERM implementation and meet with the GOT
Development Partners annually to review the TERM;
(5)
Oversee and approve the operation of TERM-IU, in particular to budget, staffing
and TERM-IU program implementation of TERM;
(6)
Determine own operational procedures and TERM-IU operational procedures
(based on Government regulations) as approved by cabinet;
(7)
Convene at least once a month or more if needed; and
(8)
Report at least once a month to Cabinet on the progress of TERM.
65.
TERM-C is a dedicated and collective policy management and oversight organisation
(whilst independent of discreet energy related Ministries) in order to be able to support the
achievement of TERM objectives. TERM-C is acknowledged as crucial to the success of TERM
and continued Development Partner funding.
66.
The members of TERM-C are:
(1)
(2)
(3)
(4)
11
Prime Minister
Minister of Environment & Climate Change
Minister for Finance and National Planning
Chairperson Public Service Commission
Cabinet Decision No. 330.
18
Chair
Alternate Chair
Member
Member
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Secretary for Foreign Affairs
Director of Environment & Climate Change
Secretary for Finance and National Planning
Secretary for Labour, Commerce & Industries
Director for Public Enterprises
Secretary for Transport
Solicitor General
Secretary (to be appointed by TERM-C) Member
Member
Member
Member
Member
Member
Member
Member
67.
The role of Secretary is to be responsible for keeping a regular oversight on the
performance of the Director of TERM-IU, facilitating Sub-Committee work commissioned by
TERM-C, and working with individual TERM-C members on matters directed and required by
TERM-C.
68.
TERM Implementation Unit (TERM-IU). TERM-IU is the operating entity under TERMC directly implementing TERM. The Implementation Unit was given the following mandate by
TERM-C:
(1)
Implement TERM objectives as detailed in the TERM document, endorsed by
TERM-C and approved by Cabinet;
(2)
Source development partner funding for the operation of TERM-IU and TERM
projects for a period of not less than 5 years (3 years remaining from April 2012);
(3)
Recruit appropriate staff for TERM–IU (local and overseas technical expertise);
(4)
Coordinate the projects and different phases of TERM implementation;
(5)
Provide secretariat services to TERM-C;
(6)
Report at least once a month to TERM-C on the operation of TERM-IU (financial
and program management);
(7)
Comply with Government financial management and procurement regulations;
and
(8)
Transition the TERM-IU, upon completion of TERM implementation, to a
Ministry the Government decides upon.
69.
The interim TERM-IU Director was appointed in February 2012 for a period of six
months. The substantive TERM-IU Director will be appointed by July 2012 for a term of two
years, and will be responsible for inter alia; quality, relevance, and coherence of the work of the
Unit as well as recruitment of key personnel for the IU; design and implementation of the Unit’s
work program for the first two years; and monitoring and regular reporting of the Unit’s
activities and outputs to the TERM-C. The Director of TERM-IU is not a Member of TERM-C
but presents and reports on relevant matters to TERM-C during its normal meetings and provides
19
secretariat support services, through the TERM-IU, at TERM-C meeting.
Tonga Power Ltd (TPL)
70.
TPL’s organizational structure is in accordance with the Public Enterprise Act 2003. It
establishes a Board that reports to its shareholder the GOT through the Ministry of Public
Enterprise (MPE). The MPE oversees all of GOT’s shareholdings and monitors the performance
of the State Owned Enterprises (SOEs). Tonga's SOEs and TPL in particular have performed
comparatively better than those of other Pacific countries because this governance structure
generally allows them to operate independently of the political process, with fewer unfunded
Community Service Obligations (CSOs).12
71.
As part of TPL’s recognition of the importance of coordinating the implementation of
donor-funded projects, all donor-funded projects generally fall directly under the responsibility
of the CEO with day-to-day management of projects expected to fall under the proposed
‘Strategic Initiatives’ unit.
b. Results Monitoring and Evaluation
72.
Annex 1 sets out the Results Framework and indicators that will be used to monitor and
evaluate the project.
c. Sustainability
73.
Preceding the preparation of this project, the GOT and TPL have undertaken a number of
actions demonstrating commitment to working with the WB and other Development Partners
(DPs) to begin to address key energy sector issues. The development of the TERM is a clear
example of strategic focus and thinking in this regard. The setting up of the TERM-C and the
TERM-IU, together with the periodic TERM-Coordination meetings and follow up, provide
enough comfort level of the GOT’s commitment towards the sustainability of the program.
V.
KEY RISKS AND MITIGATION MEASURES
74.
The 2010 national elections under the new constitutional arrangements proceeded
smoothly. The new administration has made transparency and good governance a centrepiece of
its platform and has affirmed its commitment to implement the TERM. One major pressure
point for the new government – the budget gap – is being partly addressed by a series of WBfunded budget support operations which include a strong focus on implementing key aspects of
the TERM. The TERM features prominently in the GOT’s dialog with other development
partners, both traditional and new partners that have been attracted to provide support to Tonga
in part because of the GOT’s commitment to the TERM. Both the previous and current
administrations have enthusiastically adopted the TERM and it has gained regional prominence.
12
Finding Balance 2011: Benchmarking the Performance of State-Owned Enterprises in Fiji, Marshall Islands,
Samoa, Solomon Islands, and Tonga. ADB, 2011.
Performance Benchmarking for Pacific Power Utilities” Pacific Power Association 2011, December 2011.
20
The risk of developments at the country level disrupting the GOT’s efforts to implement the
TERM is considered low. The proposed WB project is fully aligned with the TERM and
consequently the risk from events at the country level is considered low.
Implementation risks
75.
Risk associated with stakeholders is considered to be moderate to low. In any project
involving a shift in institutional authority and/or a revision to laws and regulation, some
individual stakeholder interests will inevitably not be fully met. Implementation of the TERM
will involve such changes. Mitigation of stakeholder risk is an early and continued effort at
building broad stakeholder support. Within the GOT this process is underway with respect to the
institutional changes to strengthen the TERM-IU, which are being managed as an integral part of
the overall civil service reform program. The TERM-IU, with assistance from REEEP, will
actively engage in consultation with respect to proposed changes in the policy, legal and
regulatory structure, with inputs from Parliament, business associations, and a broad range of
government stakeholders.
76.
Risk associated with the GOT’s commitment to implementing the project is considered to
be low. The GOT has taken a number of actions, including Cabinet approvals and made high
level commitments with traditional and new development partners associated with the TERM
implementation.
77.
Risk associated with implementing agencies’ capacity is considered to be moderate. The
GOT has taken a number of actions to strengthen implementation capacity, including sourcing
and allocating new bi-lateral funds to the restructuring of the TERM-IU, appointing a high level
TERM-IU interim Director and three core support staff, partnering with REEEP and obtaining
Cabinet approval of TERM-A as a Government Agency responsible of achieving the objectives
of TERM on behalf of the Government. TPL management has demonstrated willingness and
ability to implement technical improvements. More details follow in the section below.
Implementing Agency Assessment
78.
TERM-IU. This is a newly restructured entity, but with resources, experienced leadership
and high level GOT support to quickly access implementation support from across GOT, e.g.
from ministries responsible for environment and land/compensation issues. Procurement
training will be provided to designated technical staff and if necessary the proposed project will
support a short-term consultant to progress procurement activities initially. Financial
Management will be handled through the normal Ministry of Finance channels.
79.
Tonga Power Ltd. TPL is already implementing a new solar PV electricity supply on the
Tongatapu grid planned for August 2012 and preparing for subsequent renewable energy (RE)
projects on the other three grids. Managing the existing grid to accommodate RE supply is
becoming part of their core business. The support under the proposed project is integral to
TPL’s ability to plan and improve the grids to make best use of new RE supply. TPL will assign
a senior staff member to head up the TPL Project Management Unit. Procurement training will
be provided to designated technical staff and if necessary the proposed project will support a
21
short-term consultant to progress procurement activities initially. Staff in the finance and
accounts unit will receive training on WB financial management (FM) and disbursement. If
necessary the proposed project will support a short-term consultant to progress support FM
function while TPL staff becomes familiar with WB processes. TPL already prepares annual
audit reports which will be extended to include audit of funds from the proposed project.
Project Stakeholder Assessment
80.
The TERM generally enjoys broad support across the Government and this extends to the
proposed WB-supported project to assist in TERM implementation. However, as implementation
of the TERM and the proposed WB-supported project will involve a shift in institutional
arrangements and/or revision to laws and regulations, some stakeholder resistance may be
expected. Early and continued broad-based consultation lead by the TERM-IU with the
assistance of REEEP will help to understand any concerns and address these to the extent
possible. TERM has already been widely available in public since its adoption in June 2010.
81.
DPs and Regional entities have been involved through the development of the TERM and
re-confirmed support for TERM implementation at the May 2011 first annual TERM review.
Table 5. Risk Ratings Summary
Risk
Rating
Stakeholder Risk
Low
Implementing Agency Risk
-
Capacity
Moderate
-
Governance
Low
Project Risk
-
Design
Low
-
Social and Environmental
Low
-
Program and Donor
Low
Delivery Monitoring and
Sustainability
Low
Overall Implementation Risk
Moderate
Overall Risk Rating Explanation
82.
There is strong, broad-based GOT ownership of the TERM. Cabinet has recently
approved the creation of TERM-A13 as a Government Agency responsible for the
implementation of the Energy Roadmap. The GOT has appointed an experienced interim
13
Cabinet Decision No. 330 dated April 20, 2012.
22
Director of the TERM-IU and the TERM-IU is partnering with REEEP for early, hands-on
assistance in implementation and strategic guidance. The GOT has obtained donor funding for
start-up of the TERM-IU. The proposed project directly supports the institutional and regulatory
framework strengthening of the Tongan energy sector. This project is an integral part of a strong
WB energy and macroeconomic dialog with the GOT, which also includes a series of budget
support operations with a focus on energy issues.
VI.
APPRAISAL SUMMARY
a. Economic and Fiscal Impacts
83.
The proposed project will provide assistance to strengthen the core institutions and
regulatory framework relating to TERM and it is a key precursor for the ongoing and planned
operations under the Energy Roadmap. As described below, the net economic impacts of
implementation of the TERM will be positive and substantial. This underscores the importance
of the institutional and sector framework assistance that will be provided under the proposed
project, in response to the GOT’s request.
Electricity
84.
Successful implementation of the TERM is expected to yield substantial reductions in
diesel imports for electricity generation purposes, relative to a business-as-usual approach. This,
in turn, is expected to reduce the merchandise import bill and the current account deficit, and
improve overall price stability in the event of oil price spikes, without significant detriment to
government revenue from diesel imports.
85.
For illustrative purposes, estimates have been generated for alternative scenarios in 2020,
based on the extent of the implementation of the TERM. In the event that electricity supply and
demand are made more efficient and reasonably large-scale use of renewable energy sources is
achieved by 2020, diesel imports for electricity generation are estimated to be some 45 percent
below those under a business-as-usual scenario. Other things being equal, that reduction in diesel
imports for electricity generation is estimated to have the following implications for government
revenue from diesel imports, merchandise imports and the current account deficit, and overall
price stability in 2020:

Government revenue from diesel imports is likely to fall by a negligible amount
(estimated to be a fall of just over 0.1 percent of total government annual
revenue). The reason for this negligible impact on government revenue is because
government does not derive significant revenue from diesel imports for electricity
generation under the tax regime as it currently stands: these imports are exempt
from excise tax on fuel; as an intermediate good they do not incur consumption
tax; and the wharfage they do incur is a negligible contributor to government
revenue.14
14
Wharfage to Ports Authority = 3 seniti per litre across 7 million litres (50% of TPL volume) = TOP$210,000 per
annum ( Source TPL).
23

Merchandise imports are likely to fall significantly, given both the estimated size
of the reduction in diesel imports for electricity generation and the significant
share of merchandise imports that diesel imports represent. Given a mid-range
fuel price forecast, the reduction in diesel imports for electricity generation in
2020 is estimated to yield a merchandise import bill that is almost 6 percent less
than the business-as-usual scenario. That, in turn, would reduce the current
account deficit by nearly a quarter, relative to the business-as-usual scenario.

The volatility of the electricity price – and, in turn, of the overall level of prices –
in the event of a spike in oil prices is expected to fall in the event that efficiency
gains and large-scale renewable energy use is achieved by 2020. For example, a
fuel price spike from a low price forecast in 2020 to a high price forecast (nearly a
150 percent price increase), is estimated to increase electricity prices by just under
40 percent – relative to a more than 80 percent increase in electricity prices under
the business-as-usual scenario. Overall, then, this would more than halve the
inflationary impact of the rise in electricity prices caused by such a fuel price
spike.
86.
The above estimates are simply provided for illustrative purposes. They focus on
estimating direct impacts of the reduction in diesel imports for electricity generation, and are not
intended to capture wider implications of reduced energy costs, for example on the general level
of business activity. In making these estimations, it is assumed that the changes that need to be
made under the alternative scenarios have been completed by 2020. This means, for example,
assuming that the equipment required establishing large-scale renewable energy generation has
already been imported by 2020. In each case, the estimates are made using the assumption that
other things remain the same. For example, in estimating revenue impacts, it is assumed that the
current tax regime remains in place in 2020.
Petroleum
87.
Tonga’s high dependency on petroleum for its overall energy needs (i.e. energy for both
its stationary and transport sectors) is likely to continue, even if steps are taken to improve fuel
efficiency in the power sector and diversify some power generation towards renewable energy
sources. For Tonga, there appear few other sources of energy with the security and reliability of
supply, proven performance, energy density and portability of petroleum fuels. Tonga’s energy
policy needs to recognise that oil will continue to play a vital role in meeting the energy
requirements of the country, and appropriately manage the risks and consequences of this energy
dependency. Tonga’s high dependency on imported petroleum products to meet its energy
demands makes Tonga highly vulnerable to two types of risks: 1) Oil price shocks; and 2)
Interruptions in the delivery of fuel. These risks pose threats to Tonga’s energy security.
88.
Recent analysis of Tonga’s downstream petroleum sector identified a number of gaps and
made recommendations aim to: (i) improve the regulation of the petroleum sector; (ii) improve
petroleum supply chain efficiency; and (iii) introduce improved risk management practices.
These recommendations are summarized below. A number of the recommendations are for
further, more detailed assessment in certain areas - making it premature to quantify the economic
24
or fiscal benefits. Other recommendations target actions to bring the sector up to international
standards with respect to safety and environmental considerations. In some cases, this requires
that Tonga’s existing laws and regulations be implemented and enforced. In other instances,
changes to current laws, regulations and their application are recommended. The cost to the
economy and environment of delaying or avoiding improvements in these areas could be very
high, especially given the central location of the fuel storage facilities on Tongatapu.
89.
The recommendations also include the introduction of price risk management. The main
benefits would be greater price stability overall and in particular a much reduced exposure to
price spikes which can have a destabilizing effect in a small economy such as Tonga’s.
Illustrative cost/benefit analysis for a range of price risk mitigation instruments applied to
petroleum prices in Tonga using actual data from 2009 show a break-even to small (~$0.4
million) cost of purchasing a financial cap, on a quarterly basis, to hedge the total annual
petroleum import for Tonga. This indicates that the cost of reducing the petroleum price risk is
likely to be manageable, and in years where the price rises quickly, the benefits could be
substantial. Clearly more detailed analysis of specific options would be required to select the
best strategy for Tonga and to quantify the potential fiscal and economic impacts. The
recommendation is for Tonga to begin to gain experience with simple price risk management
instruments (e.g. caps or swaps) covering only a limited portion of the annual fuel purchase
volumes initially. The gradual introduction of financial hedging on some of the fuel volumes
imported into Tonga (such as those used for power generation) has enabled the understanding of
financial risk management to grow, together with an understanding of the costs, benefits and
risks of various hedging strategies.
90.
The Project will provide technical assistance and capacity strengthening for TERM-IU
and TPL aimed at improving energy security and reducing vulnerability to oil price shocks in
Tonga.
91.
A Petroleum Assessment Report is currently being prepared, for review by TERM-C in
July 2012. This will inform Government policy decisions regarding reforms to the downstream
petroleum sector and national energy security.
92.
Mitigation of Tonga’s energy security risks would involve a portfolio approach that could
include:

Fuel substitution; for example: a) using renewable energy to displace oil fired power
generation when renewable are economically, technically and financially feasible; b)
using LPG instead of electricity for some energy services such as cooking and airconditioning;

Energy efficiency programs in the power generation and transport sectors; on both
the supply side and usage side. For example, on the supply side: improving fuel
efficiency of power generation; reducing electrical losses on the network; implementing
minimum efficiency standards for appliances, motor vehicles, and boat engines. And, on
the usage (or demand) side, implementing programs to encourage: energy conservation;
25
uptake of efficient appliances; and switching to more fuel efficient motor vehicle and
marine engines.

Improving the efficiency of petroleum supply chains to and within Tonga, so that
there can be reductions in the significant costs associated with fuel transportation,
storage and handling. Tonga’s remoteness, combined with its small fuel consumption
means that transport and storage cost are high on a per liter basis and this feeds in directly
to the cost and affordability of energy in Tonga. Improvements in the efficiency of the
fuel supply chain, if passed on to Tonga’s users, will have a direct impact on the price
and affordability of energy in Tonga — in both the transport and electricity sectors.

Developing a national policy on minimum levels of fuel safety stocks, and balance of
these between on-shore and off-shore storage facilities. This would inform any policy
and investment decisions on new storage capacity in Tonga to ensure at least 30 days of
fuel reserves are held, for each type of petroleum fuel;

Emergency fuel rationing. Develop a detailed contingency plan for managing a
liquid fuels shortage in Tonga, including fuel rationing arrangements. Regularly test
and improve the plan by conducting simulated fuel emergencies, as required by Tonga's
existing emergency management laws.

Financial risk management. Increase the use of financial hedging for more of
Tonga's fuel supply, drawing on lessons learned from the experience of TPL in 2011.
This could mitigate the amplitude of energy price fluctuations in Tonga, and the negative
impact this has on the price of goods and services, national inflation, and energy
affordability. Options for an institutional framework for commodity price risk
management were discussed in the World Bank’s 2010 petroleum report and these can be
further elaborated during project implementation.15

Upgrading downstream petroleum safety, licensing and regulation as a means of
ensuring national energy security and reliability of supply. Review and update
Tonga’s outdated Petroleum Act (1959) and Petroleum Regulations (1960), with the
objective of bringing them up to best international practice in terms of licensing, safety
planning, validation and verification of asset integrity and fuel handling processes.

Seeking to improve the fuel efficiency of Tonga’s transport sector, which accounts
for 75% of petroleum imports, versus the 25% used in the power sector. Review
Tonga's current vehicle fleet, its growth and likely future composition to inform: a) the
review of Tonga's fuel standards; and b) fuel consumption projections. This is critical to
understanding fuel demand in Tonga, as around 75% of fuel is used for transportation
(land, sea and air); the vehicle fleet is growing; and the efficiency of fuel consumption in
transport is a key issue for the TERM which has not yet been assessed.
“Tonga Oil and Gas Supply Chain Efficiency and Price Stabilization”, final report, prepared by Portland Group
for World Bank, June 2010.
15
26

Introducing fuel standards that are appropriate for Tonga's conditions and engine
fleet, and efforts to improve its energy efficiency.
o Modern engines combined with modern fuel quality results in high fuel
efficiency. Old vehicles, old and badly tuned engines and lower quality fuels
equals higher fuel consumption and operating costs.
o Moving to reduce the age of Tonga’s vehicle fleet (land & sea) and replacing
engines with more modern and efficient ones will take time, but provide benefits,
especially if better quality fuels are available. At present, most of Tonga’s
vehicle fleet is old, with high mileage and old second hand or third hand imported
motor vehicles. And there are no national fuel standards.
o Importantly, the quality of fuel also affects its price, so greater scrutiny of any
fuel quality premia built into Tonga's fuel pricing template is recommended. At
present, Tongans pay fuel quality premia on each litre of the fuels they consume,
but there is no independent testing by the government of the actual quality of
fuels.
93.
This whole-of-sector approach is something that was absent in Tonga until the TERM.
The lack of such an approach, combined with a lack of adequate resources to implement it
effectively and political will, are some of the key reasons for the “fuel crisis” that struck Tonga
and other Pacific Islands in 2008.
94.
Implementation of the TERM is about mitigating the risks arising from a high
dependency on imported fuels for energy, inefficient use of energy. It is also about addressing
fundamental historical weaknesses in the areas of energy planning, energy policy, and dealing
effectively with national energy security issues — particularly financial risks and supply
interruption risks. By addressing these issues effectively, energy security and energy
affordability in Tonga will be improved.
Illustrative Economic Analysis
95.
Because this Project aims mainly at building capacity and enabling environment to
establish a foundation of sustainable energy sector in the future, direct economic impacts cannot
be measured and its impacts are largely indirect (e.g. scaling up of renewable energy and energy
efficiency investments due to the capacity and enabling environment established by the Project)
and long term. For this reason, the immediate foreseeable impacts represent only illustrations of
small initial portion of the real impacts coming along. However, these attempts to illustrate the
immediate impacts are important because the results can provide a general direction of the
proposed project’s impacts and can indicate which variables are sensitive to the expected
benefits in terms of net present value (NPV). These sensitivity analyses are crucial for the
decision makers as this will indicate which areas that interventions should focus in promoting
energy security, renewable energy and energy efficiency in implementing TERM.
96.
In this preliminary indicative economic analysis, the economic costs of the project
27
include: (i) Project cost (TA), (ii) investment and operation and maintenance (O&M) costs of
generic examples of two 1 MW capacity solar power plants, since this project will provide the
enabling environment. These solar power plant costs are based on indicative analysis from the
TERM report in 2010.
97.
The economic benefits of the base case were valued by (i) the fuel (diesel) and O&M
costs savings from (a) two solar power plant and (b) the reduction of the system loss due to the
results of capacity building of the Project that strengthens necessary institutional environments
and technical capacity; and (ii) reduced fuel import values by keeping fuel import share no more
than 10 percent of GDP though the petroleum price risk management under the project.
Additional associated economic benefits are: (i) reduced NOx impacts on health and social
welfare, and (ii) reduced global economic benefits of CO2 emissions. However, these might not
be relevant under the current situation in Tonga and thus will be presented only for illustrative
purposes in case diesel use remains high and urbanization is intensified.
98.
The base case economic internal rate of return (EIRR) is estimated at 53.0 percent with
an NPV at 10 percent of US$ 280.8 million (Table 6). An illustration of indicative estimates of
distributional impacts are presented in Table 7. Consumers would be the largest gainer due to
the avoided fuels costs passed on to the electricity bills and other fuels costs. Suppliers (TPL and
TERM-IU) would gain from avoided costs of fuel and O&M costs of diesel power plants and
system loss reduction. The government would have used the cost of investments for other
purposes such as other projects in energy, health and/or education sectors. The basic need
poverty incidence rate was 22.5 percent in 2009.16 Thus, 22.5 percent of the benefits to the
government and consumers are assumed to be allocated to the poor. This resulted in the poverty
impact ratio of more than 20 percent on the basis that 20 percent is derived from the existing
poor (22.5 percent) but also there would be an increase of poor due to the increased fuel costs in
the counterfactual scenario.
Table 6. Indicative Key Project Economic Analyses Results
10 percent discount
Base case
rate
NPV
US$ 280.8 million
EIRR
53.0 percent
Table 7. Distribution of Impacts of Indicative Project Economic Analyses Results
Government/Econom Supplier (TPL
Consumers
y
and TERM-IU)
$269.7 million
-$16.0 million
$27.2 million
96%
-6%
10%
Of which poor (based on poverty $64.7 million
-$3.9 million
0
incidence of 24% in FY03/04)
Poverty Impact Ratio
More than 20% (based on the existing poor 20% in FY03/04
+ mitigation of potential increased poor by prevention of
increased fuel imports)
16
Source: Asian Development BankConsultant data for Household Income and Expenditture Survey.
28
99.
Sensitivity analyses at 10 percent discount rate are conducted to evaluate changes in the
effectiveness of fuel price risk management to contain the incremental share of fuel import value
that exceeds more than the current 10 percent of GDP, and in capital costs of the solar power
plants.
100. Table 8 shows that if the Project’s fuel price risk management could contain only 50
percent of the increased share of fuel import over the current 10 percent share of GDP, EIRR
decreases from 53.0 percent to 42.3 percent and NPV decreases from US$280.8 million to
US$134.9 million. Switching value (SV) is 3.7 percent and sensitivity indicator (SI) is 1.04.
This means that in order for the NPV at 10 percent to be breakeven, the fuel price risk
management needs to contain at least 3.7 percent of the increased share of fuel import that
exceeded more than the current 10 percent share of GDP.
Table 8. Changes in Containment of Increased Fuel Import Values
% coverage of an increase over 10% import share of GDP
100%
50%
NPV
280.8 million 134.9million
EIRR
53.0%
42.3%
SI
1.04
SV
96%,
3.7%
101. Table 9 shows that when the capital cost of solar power plant decreases from
US$6,900/kW to US$6,000/kW (i.e., total project cost increases from US$17.7 million to
US$15.9 million), the NPV increases from US$280.8 million to US$282.4 million and the EIRR
increases from 53.0 percent to 56.1 percent. Switching value (SV) is US$161.3 million/kW of
solar power plant cost (i.e., the project cost is US$326.6 million) and sensitivity indicator (SI) is
-0.06. Thus, the changes in the capital cost do not have significant impacts on EIRR because
there are other benefits such as the fuel price risk management.
Project costs
NPV
EIRR
SI
SV
Table 9. Changes in Capital Cost
17,700
15,900
280.8 million 282.4 million
53.0%
56.1%
-0.06
-1,745%
326,576
102. This means that the fuel price risk management is crucial to ensure that the project
outcome benefits to the society of Tonga. Especially without the fuel price risk management, the
incremental fuel prices will be reflected in the electricity tariff and will be passed on to the
consumers. According to TERM (page 18), no correlation was identified between tariffs and
consumption. This means that even when the tariff level may increase, the consumers may have
difficulties in adjusting the level of consumptions accordingly (assuming economic growth and
GDP per capita remain stable). Therefore, without the effective fuel price risk management,
there would be a high risk that a sizable amount of populations could slip into poverty or could
29
be under fluctuations of in- and out- of poverty due to the uncertainty of volatile fuel prices.
103. For illustrative purpose, if the value of reductions of CO2 emission is included, EIRR
becomes 53.1 percent with an NPV at 10 percent of US$ 281.0 million. With NOx impacts
added to CO2, EIRR becomes 62.0 percent and an NPV is US$ 300.5 million.17 This high NPV
and EIRR is because the NOx impacts are health and social welfare impacts including premature
respiratory (70 percent), adult chronic morbidity (10 percent), material soiling (5 percent), acute
morbidity (10 percent), and visibility reduction (5 percent).
b. Poverty and Social Impacts
104. Implementation of the TERM supported by this institutional strengthening project will
have significant, direct positive social impacts including:

reducing household expenditure on electricity services through reduced cost of supply
passed on to consumers and improved end-use efficiency to reduce the amount of
electricity required to achieve a given level of electricity services;

reducing the volatility of electricity prices so that households can budget sensibly for the
cost of electricity.

improving access to affordable, quality electricity services in remote areas. The Off-Grid
Initiative which is part of the TERM will provide remote communities with access to
electricity options from renewable sources that are sustainable and also provide for their
varied power needs. The program aims to provide both enhanced quality of life and offer
the potential to increase economic activity of the outer islands communities through a
novel “Tiered Approach”. The approach takes into account the wide variation of energy
demand and development opportunities as well as the economic abilities throughout the
islands and to match the supply concepts to match energy demands.
105. The TERM includes principles of environmental and social impact assessment as an
integral part of new energy sector investments. Any potentially negative social impacts will be
identified and plans developed to avoid or mitigate possible negative consequences.
106. A key social issue that the implementation of the TERM is seeking to address is
affordability of energy. A large share of household expenditure is on energy: for cooking and
lighting (e.g. electricity, LPG, firewood, kerosene); and for transportation (of people, for
economic activity such as farming or fishing, or to get products to and from markets). High costs
of energy can adversely impact on disposable incomes of households, their buying power, and
the net incomes they receive from economic activity.
107.
People near the poverty lines among about 95 percent of the total population connected to
17
Asian Development Bank. (1996). Economic Evaluation of Environmental Impacts, A Work Book. Parts I and II.
Environment Division, Office of Environment and Social Development, ADB, March 1996. Mimeo. Asian
Development Bank, the Philippines.
30
the grids in Tonga are at risk to slip in to the poverty due to increasingly volatile fuel prices. As
noted above in the economic analyses, the available data on basic need poverty incidence was
22.5 percent in 2009. Applying the July 2011 tariff of TOP0.98/KWh or US$0.57/KWh18 and
GDP per capita19 as a proxy to an average income per capita, a share of expenditure of electricity
within per capita GDP is 9.4 percent. Ten percent share of electricity expenditures within the
household income is often regarded as a measure of affordability. Further fuel price increase
pushing up the electricity tariff, e.g., 20 percent increase of TOP 1.2/KWh, would lead to 11.3
percent share of electricity expenditure within per capita GDP. This means households who are
just above the poverty line are at high risk to slipping into poverty and would need to go through
uncertain livelihoods fluctuating below and above the poverty line in tandem with the fluctuation
of fuel prices.
108. Therefore, improving fuel price and supply risk management and laying the foundations
for Tonga to introduce renewable energy in the electricity system would contribute to reducing
the vulnerability to fuel prices and supply fluctuations, increasing energy security and mitigating
the increase of poverty.
c. Financial Management
109. The financial management assessment was carried out in accordance with the “Financial
Management Practices in World Bank-Financed Investment Operations”, issued by the Financial
Management Sector Board on November 3, 2005 and further rationalized in the “Principles
Based Financial Management Practice Manual” issued by the Board on March 1 2010. Under the
Bank’s OP/BP 10.02 with respect to projects financed by the Bank, the borrower and
implementing agency are required to maintain financial management systems – including
accounting, financial reporting, and auditing systems adequate to ensure they can provide the
Bank with accurate and timely information regarding the project resources and expenditures.
110. Overall, the financial management arrangements satisfy the financial management
requirement as stipulated in OP/BP 10.02, subject to implementation of agreed actions and
mitigating measures. The assessed financial management risk of the project before the mitigating
measures is considered substantial and could be reduced to moderate after the proposed and
existing mitigating measures are implemented and have shown effective impact. The FM
requirements for this project are quite straight forward and hence there are limited mitigating
measures. The main risk is the current lack of structure in the TERM-IU and hence no accurate
FM capacity assessment can be conducted. The mitigating measures to overcome this are: (1)
Not to open a Designated Account (DA), (2) To realize payments only through Direct Payments
by the Bank and receive reimbursements for prefinanced activities, (3) TERM-IU will employ a
person with the appropriate accounting skills to enable the preparation of Withdrawal
Applications (WA)for the Direct Payments, accurate recording of financial transactions,
consolidation of the reports, and preparation of accounts for audit, and (4) TERM-IU will
determine what accounting software (or spreadsheet) will be used to maintain the financial
records for Component 1. All requirements need to be in place within 3 months from
effectiveness.
18
19
Exchange rate of US$1 = TOP 1.71 in April 14, 2012. http://coinmill.com/TOP_US$.html#US$=1
Source World Bank Development Data Platform (DDP): US$3,347.46 per capita in 2010.
31
d. Procurement
111. Procurement Risk Assessment: An assessment of the capacity of the Implementing
Agencies (TPL and TERM-IU) to implement procurement actions for the Project was carried out
in November 2011. The assessment reviewed the organizational structure for implementing the
Project and the interaction between the staff responsible for procurement and other national
agencies. The overall Project risk for procurement is “high”, consistent with the operational
procurement review (OPR). The agencies risks were assessed as “high” for TERM-IU and
“substantial” for TPL. Most of the issues/ risks concerning the procurement component for
implementation of the Project have been identified as: TERM-IU is a recently created entity
composed currently of an Interim Director and three core support staff with no procurement
experience and TPL’s lack of experience with the World Bank procurement policies. An action
plan has been proposed and with the implementation of the mitigation measures the overall risk
is expected to be reduced to “substantial” during implementation (see Annex 3).
e. Social (including Safeguards)
112. This project has been classified as Category C and is likely to have no adverse social
impacts. The project does not trigger any of the social safeguard policies. The project involves
funds for the TERM Implementation Unit, policy, strategic planning and changes to the
electricity network (equipment, systems and procedures). The changes to network equipment
will be small scale, and not require any structures, earthworks or other construction work that
will adversely affect the community or environment.
113. It is recognized that other components of the TERM (not funded by this project) may
have potential adverse social impacts, in particular renewable energy generation projects funded
under TERM, for example through the Tonga Green Investment Fund (TGIF) currently under
design. Part of the scope of work for Component 1 of this project is to assist the TERM-IU to
prepare the Environmental and Social Management Framework (ESMF) in preparation for TGIF
funding at a later stage and any other TERM related investment. The ESMF will provide the
framework for TERM-IU and / or developers to: (i) identify suitable land for development, (ii)
approaches to consultation, (iii) methods for land acquisition and compensation, and (iv) prepare
Land Acquisition and Resettlement Action Plans (LARAP) that meet the safeguards policies of
the World Bank (and other donor agencies) and the Tongan legislation.
f. Environment (including Safeguards)
114. This project has been classified as Category C and is likely to have no adverse
environmental impacts. The project does not trigger any of the environmental safeguard
policies.
115. It is recognized that other components of the TERM (not funded by this project) may
have potential adverse environmental impacts, in particular renewable energy generation projects
in preparation for TGIF funding at a later stage and any other TERM related investment. The
TGIF ESMF (prepared under Component 1 of this project) will provide the framework for
TERM-IU and / developers to prepare Environmental Impact Assessment (EIA) and
32
Environmental Management Plans (EMP) that meet the safeguards policies of the World Bank
(and other donor agencies) and the Tongan environmental legislation.
116. An outline ESMF has been prepared by TERM-IU, but the document needs further work
to detail the process of preparing the EIA, EMP and LARAP, and guidelines for community
consultation. The document will also need to clearly show how these processes fit into the
overall process of TGIF funding approval for renewable energy projects. The approach will be
to develop the ESMF at the same time as the design of the TGIF to ensure that the requirements
of the ESMF are integrated into the functions of the TGIF and vice versa. This approach will
also ensure that the requirements of the ESMF are discussed during the various consultations
about the funding scheme.
33
ANNEX 1: RESULTS FRAMEWORK AND MONITORING
Project Development Objective (PDO):
PDO Level Results
Indicators*
Indicator One:
Petroleum risk
management framework
completed.
Core
The Project Development Objective is to support the strengthening of the institutional and regulatory framework of the Tonga Energy Roadmap.
Unit of
Measure
Framework
completed
and submitted
to TERM-C.
Cumulative Target Values**
Baseline
No risk
framework
currently in
place.
YR 1
Draft risk
management
framework
completed.
YR 2
Active
consultations on
draft framework
across
government
entities and nongov’t partners.
YR3
Risk management
framework
adopted.
Freq.
Data Source/
Methodology
As
needed.
Responsibility for
Data Collection
Description (indicator
definition etc.)
TERM-IU
Status of documents
(drafts for review etc).
Framework
submitted to
TERM-C for
consideration.
Indicator Two:
Environmental and Social
Management Framework
completed.
Framework
completed.
Significant
gaps in
existing
environment
and social
management
framework.
Consultants
in place for
key studies.
Active
consultations on
draft framework
across
government
entities and nongov’t partners.
Framework
submitted to
Cabinet for
approval.
As
needed.
On-going
supervision.
TERM-IU
Status of documents
(drafts for review etc).
Indicator Three:
Development Plan for the
grid completed.
Plan
completed as
basis for
future
investments
in the grid.
Out-dated
studies with
insufficient
detail to
support good
planning.
Study 1.
Study 2.
Plans
incorporated into
the asset
management plan
and disclosed to
TERM-C.
As
needed.
On-going
supervision.
TPL
Deliverables as per the
consultants’ contract.
Indicator Four:
Improvements in network
reliability indexes.
International
indexes.
Modest
indexes
compared to
international
stds.
Assessment
of
improvemen
ts to
network.
Procure and
install.
Goods installed
and operational.
Measured and
reported as
SAIDI minutes
saved.
As
needed.
On-going
supervision.
TPL
Deliverables as per the
consultants’ contract and
installation of goods.
34
Indicator Five:
Ability of TPL to model
and predict the effects of
new generation on the
power systems.
TPL have
power system
modeling
capability inhouse.
No overall
system
modeling
software
utilized.
Power
system
models
developed
and staff
trained in
their use.
Evidence of
power system
models being
used and
maintained.
Outputs form part
of asset
management
planning process.
Indicator Six:
Summary report of
processes and documents
required for investment in
generation systems.
Status of
power
purchase
agreement,
connection
agreement
and
operations &
maintenance
agreement.
No current
processes
defined.
Documents
produced
and
processes
welldefined.
Processes used
as the basis for
the
implementation
of one project.
Processes used as
the basis for the
implementation
of multiple
projects.
Indicator Seven:
A well-developed power
system planning document
for the years 2012-2017
Status of
power system
planning
document.
Power system
planning
documentatio
n, asset
management
plan, and
strategic plan
exist; but
need to be
strengthened.
Power
system plan
developed.
Power system
plan revised by
TPL to reflect
implementation
status, and
disclosed to
TERM-C.
Power system
plan revised by
TPL to reflect
implementation
status, and
disclosed to
TERM-C.
TPL
As
needed.
TPL
TPL
INTERMEDIATE RESULTS
Intermediate Result (Component One):
Indicator One:
Adequate staffing of
TERM-IU
Number of
staff.
TERM-IU
Director.
TERM-IU
CEO and
admin staff
in place.
Sectoral
specialists
hired.
As needed.
35
On-going
supervision.
TERM-IU
Intermediate Result (Component Two):
Indicator One:
Control and protection
equipment installation to
enable the network for
intermittent renewable
energy generation
Status of the
project
required to
design,
specify,
procure and
implement
new control
and
protection
equipment.
Control and
protection
systems
currently
inadequate
for high
penetration
renewable
energy
generation.
Equipment
specified
and
procured.
Equipment
installed,
calibrated and
operational.
As needed
On-going
supervision.
TPL
Status of documents (drafts
for review, etc).
Indicator Two:
Feasibility studies relating
to fuel substitution,
coconut biomass/biofuel,
wind generation, solar pv
generation, energy storage
and demand side
management.
Status of the
suite of
feasibility
studies and
technical
options
reports
completed.
Technical
and
commercial
viability of
large scale
implementati
on of
renewable
generation is
not well
determined.
Project scale
and location
determined.
Consultant
awarded
contract.
Feasibility
studies and
technical
options reports
completed.
As needed
On-going
supervision.
TPL
Status of documents.
*Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators)
**Target values should be entered for the years data will be available, not necessarily annually.
36
ANNEX 2: DETAILED PROJECT DESCRIPTION
TONGA: Energy Roadmap Institutional and Regulatory Strengthening Project
1.
The Project Development Objective is to support the strengthening of the institutional
and regulatory framework of the Tonga Energy Roadmap.
2.
The TERM sets out a ten year road map to reduce Tonga’s vulnerability to oil price
shocks and achieve an increase in quality access to modern energy services in an
environmentally sustainable manner. The proposed project will provide assistance in
implementing aspects related to improving energy security rather than the energy access aspect.
Other development partners are providing support focusing on increasing quality access.
3.
The direct beneficiaries of this project will be TERM-IU and TPL, and indirect
beneficiaries will be energy consumers (households and businesses). TERM implementation
will lead to more efficient use and targeting of available resources which will in turn lead to
lower, more stable energy bills, improved quality of electricity service and improved access to
affordable electricity.
The project’s assistance to a sector structure and institutional
arrangements to coordinate strategic planning and targeting of resources will set in motion
actions to improve the efficiency, cost-effectiveness and transparency of the sector institutions,
investments and operations. Support for the development of robust process and financing
mechanisms and investment in domestic renewable energy will improve the effectiveness and
rate of diversification from diesel-based power generation. Improved petroleum price risk
management will contribute to electricity price stability and facilitate planning and management
of Tonga’s balance of payments situation.
4.
Reducing the vulnerability of the economy to oil price rises and shocks will improve the
macroeconomic stability which will have positive implications for the general public. The
international community will also benefit from reduced GHG emissions.
5.
Benefits with respect to the energy sector aspects also extend beyond Tonga. The
process of developing and now implementing the TERM is widely seen in the region as a
concrete example of a new paradigm for Government leadership and development partner
coordination to undertake sensible planning followed by coordinated implementation.
Phases of the TERM Implementation Plan
6.
The Project will support the implementation of key components of Phase 0 and Phase 1
of the Indicative TERM Implementation Plan. The specific Phase 0 activities to be supported
under the proposed project are:
(i)
Implementation of key recommendations for improving petroleum supply chain
efficiency and price risk management;
(ii)
Implementation of institutional, legal, policy and regulatory updates for petroleum
and electricity;
7.
The specific Phase 1 activities to be supported under the proposed project are:
37
(i)
Implementation of up to 1 MW on-grid solar PV on Tongatapu. This capacity is
expected to be small, distributed installation and will be in addition to the 1MW solar
plant under construction at the Popua diesel power station. (The proposed project would
support strengthening of TPL system to effectively use the energy supplied from this and
future RE power plants.)
(ii)
Review of initial experience with petroleum financial risk management and
implementation of modifications as required.
8.
Other DPs are working with the GOT and TPL at various stages of preparation and
implementation of Phases 0 and 1 (see Annex 4).
9.
There will be two implementing agencies: the TERM Implementation Unit (TERM-IU)
and Tonga Power Ltd (TPL).
Project Components
10.
Component 1: Strengthening the Energy Sector Framework and Structure
(AusAID/PRIF US$0.70 million; ASTAE US$0.40 million; GOT US$ 1.00 million.
Implementing Agency: TERM-IU). This component will support the GOT to strengthen the
functioning of the TERM-IU including through technical assistance inter alia in the areas of:

Review and update of energy (electricity and petroleum) sector policy, legal and
regulatory aspects to be consistent with TERM vision and approach. REEEP and
GOT are finalizing a scope of work for some REEEP assistance in this area.
Activities under the current contracted scope between the GOT and REEEP are to
be finalized by the end of June 2012. Support under the proposed project will be
defined taking into account the final outputs of REEEP’s assistance.

Environmental and social safeguards frameworks harmonized with the existing
legal framework in Tonga and with safeguards policies applicable in international
financing institutions such as the World Bank and other Development Partners.

Development of a petroleum price risk management strategy.

Development of feasibility studies for power generation from renewable sources:
a study to determine the technical and financial feasibility of installing a tidal
power system in Vava’u has been proposed.

Detailed surveys of electricity-use by a statistically relevant number of consumers
in Tonga. The results of such a survey are essential for the planning of an
effective Energy Efficiency program.

Developing and implementing an awareness/communications plan to rally key
stake-holders around the TERM’s long-term goals and activities being
implemented and, thus, mitigate risks of misinformation that may arise. Under the
TERM it is anticipated there may be institutional and/or policy changes within the
sector that will have ramifications for a range of stake-holders, so ongoing
awareness activities will be critical to the success of the implementation of the
38
TERM. This activity will include the preparation of dissemination and awareness
raising packages in local language.
Table 10. Indicative Cost of Component 1
Component Description
AusAID/ ASTAE
GOT
PRIF
(US$)
(US$)
(US$)
Strengthening the institutional, policy,
100,000
90,000
regulatory and legal framework
International technical energy advisors
200,000
Feasibility study of renewable sources for
100,000
power generation
Development of an Environmental and
40,000
Social framework
Petroleum price risk management
100,000
framework
Detailed surveys of electricity use
45,000
Awareness/communication plan, including
110,000
materials in local language
Training and Workshops
10,000
10,000
Local professional staff for TERM-IU
400,000
Administrative staff for TERM-IU20
300,000
IT equipment (computers, printers, etc)
35,000
21
Incremental Operating Costs of TERM-IU
260,000
130,000
Other TERM-IU activities
170,000
Total
700,000 400,000 1,000,000
Total
(US$)
190,000
200,000
100,000
40,000
100,000
45,000
110,000
20,000
400,000
300,000
35,000
390,000
170,000
2,100,000
11.
Component 2: Preparing TPL for Renewable Energy Supply (AusAID/PRIF
US$1.80 million; TPL US$0.10 million. Implementing Agency: TPL). This component will
support TPL to strengthen its capacity to: (i) carry out power system modeling to determine the
most cost effective way to diversify energy generation, with a focus on achieving a high longterm renewable and distributed energy penetration; (ii) design and specify upgrades to monitor,
control, and protect systems to ensure a reliable and secure supply of energy through the
electricity system with high levels of renewable energy generation; (iii) develop standards and
procedures for connection to the power system by independent power producers; and (iv)
develop (in conjunction with TERM-IU and to be approved by TERM-C) a power system plan
for a period of five years focusing on specific renewable energy technology projects such as
solar, wind, biomass and biofuels, but also covering energy storage options and demand side
management. Main activities under this component include:
12.
Development of industry standard software-based power system modeling tools that can
be used on an ongoing basis by TPL to investigate the network effects of different generation
technologies and protection and control systems. These models will be developed for Tongatapu,
Vava’u and Ha’apai in order to:
20
21
Including for procurement and financial management capacities.
Rental of TERM-IU office for 2 years.
39

Facilitate the design, specification and implementation of system control and
protection systems to mitigate the negative impacts of high penetration intermittent
generation sources based on renewable energy;

Enable more renewable energy power plants while minimizing the consumption of
diesel fuel and maintaining system reliability; and

Develop a long term plan for the integration of mix of generation technologies into
the networks.
13.
Produce standard documents that enable third party investment in the generation plant.
The document includes a Power Purchase Agreements (PPA), a Connection Agreements (CA),
and an Operations and Maintenance Agreement. The commercial and technical framework of
these documents will be developed.
14.
Produce a suite of feasibility reports into specific generation projects including rigorous
studies into coconut oil biofuel/biomass, wind energy, solar photovoltaic (PV), and automotive
diesel fuel substitution with heavy fuel oil or liquefied natural gas.
15.
Using the software tool developed, and the feasibility studies into the cost of renewable
energy generation, produce a technical options report investigating the possibility of energy
storage and also of demand side management in order to decrease energy costs and increase
renewable energy penetration.
16.
Develop a least-cost generation and associated network development plan for the period
of five years (2013 through 2018) with renewable energy plants scheduled to achieve the GOT
target of a 50% reduction in imported fuel for electric generation plus an indicative plan for the
system development for an additional 10 years (through 2028). Importantly, TPL staff would
receive training and tools so that they will be able to update the plans at regular intervals.
Table 11. Indicative Cost of Component 2
Component Description
AusAID/PRIF
(US$)
Studies on Generation and Network Analysis
900,000
(Study 1) and Least cost development plan of
renewable energy projects (Study 2)
Procurement and installation of System Upgrade
900,000
Equipment
Total
1,800,000
22
In kind in the form of staff time.
40
TPL
Contribution22
70,000
30,000
100,000
ANNEX 3: IMPLEMENTATION ARRANGEMENTS
TONGA: Energy Roadmap Institutional and Regulatory Strengthening Project
Project Institutional and Implementation Arrangements
TERM Governance Structure
1.
TERM. In April 2010, the Tonga Energy Road Map 2010-2020 (TERM) was completed
and published in June 2010. In June 2010, the Tonga Petroleum supply report was submitted to
the GOT. This petroleum report and recommendations are a critical component of the TERM.
The TERM was then approved under Cabinet Decision 739 of 20thAugust 2010.
2.
TERM-Agency (TERM-A). On 20th April 2012, Cabinet approved the TERM-Agency
(TERM-A) as a Government Agency accountable directly to Cabinet, and responsible for
achieving the objectives of TERM. All energy related projects detailed under the TERM will be
the responsibility of the TERM-A. The mandate for TERM-A is the following:
(1)
Consider the proposed institutional reformation and all energy sector related
projects, taking into consideration the whole of Government institutional
rationalization program;
(2)
Coordinate on Ministry cross cutting energy sector related issues ensuring an
integrated approach to the energy sector reformation program as outlined in
TERM;
(3)
Approve projects for the energy sector as detailed under the TERM, taking into
account the equitable distribution of development benefits and environmentally
sustainable development of the energy sector;
(4)
Monitor the progress of the TERM implementation and meet with the GOT
Development Partners annually to review the TERM;
(5)
Oversee and approve the operation of TERM-IU, in particular to budget, staffing
and TERM-IU program implementation of TERM;
(6)
Determine own operational procedures and TERM-IU operational procedures
(based on Government regulations) as approved by Cabinet;
(7)
Convene at least once a month or more if needed; and
(8)
Report at least once a month to Cabinet on the progress of TERM.
3.
TERM-Committee (TERM-C). Within TERM-A there is the Tonga Energy Road Map
Committee (TERM-C) which is the governing entity within TERM-A. TERM-C is a dedicated
and collective policy management oversight organisation (whilst independent of discreet energy
related Ministries) in order to be able to support the achievement of TERM objectives. TERM-C
is acknowledged as crucial to the success of TERM and continued Development Partner funding.
41
4.
The members of TERM-C are:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Prime Minister
Minister of Environment & Climate Change
Minister for Finance and National Planning
Chairperson Public Service Commission
Secretary for Foreign Affairs
Director of Environment & Climate Change
Secretary for Finance and National Planning
Secretary for Labour, Commerce & Industries
Director for Public Enterprises
Secretary for Transport
Solicitor General
Secretary
Chair
Alternate Chair
Member
Member
Member
Member
Member
Member
Member
Member
Member
Member
5.
The role of Secretary is to be responsible for keeping a regular oversight on the
performance of the Director of TERM-IU, facilitating Sub-Committee work commissioned by
TERM-C, and working with individual TERM-C Members on matters directed and required by
TERM-C.
6.
TERM Implementation Unit (TERM-IU). TERM-IU is the operating entity under TERMC directly implementing TERM. The Implementation Unit was given the following mandate by
TERM-C:
(1)
Implement TERM objectives as detailed in the TERM document, endorsed by
TERM-C and approved by Cabinet;
(2)
Source development partner funding for the operation of TERM-IU and TERM
projects for a period of not less than 5 years (3 years remaining from April 2012);
(3)
Recruit appropriate staff for TERM–IU (local and overseas technical expertise);
(4)
Coordinate the projects and different phases of TERM implementation;
(5)
Provide secretariat services to TERM-C;
(6)
Report at least once a month to TERM-C on the operation of TERM-IU (financial
and program management);
(7)
Comply with Government financial management and procurement regulations;
and
(8)
Transition the TERM-IU, upon completion of TERM implementation, to a
Ministry the Government decides upon.
7.
The interim TERM-IU Director was appointed in February 2012 for a period of six
months. The substantive TERM-IU Director will be appointed by July 2012 for a term of two
years, and will be responsible for inter alia; quality, relevance, and coherence of the work of the
Unit as well as recruitment of key personnel for the IU; design and implementation of the Unit’s
42
work program for the first two years; and monitoring and regular reporting of the Unit’s
activities and outputs to the TERM-C. The Director of TERM-IU is not a Member of TERM-C
but presents and reports on relevant matters to TERM-C during its normal meetings and provides
secretariat support services, through the TERM-IU, at TERM-C meeting.
8.
In addition to the TERM-IU Interim Director, three core TERM-IU staff are currently in
place, including an executive assistant to the Interim Director, an accountant and a statistics
officer. All administrative work relating to the functioning of TERM-IU and secretariat support
for TERM-C is currently being carried by these staff, with technical staff (on clean energy,
institutional, legal, and regulatory matters) envisaged to be recruited as of July 2012 after the
appointment of the permanent TERM-IU Director. Procurement advice will be provided to
TERM-IU by the Ministry of Finance and National Planning.
9.
Funding of US$1million from other donor sources has been provided to support TERMIU as Government counterpart funding support. The cost of most Tongan TERM-IU staff /
consultants will be covered from this source of funds.
10.
It is expected that the TERM-IU will evolve in a few years time into an Energy
Department/Division within a Ministry in the Government’s structure.
Tonga Power Ltd (TPL)
11.
TPL’s organizational structure was born out of the Public Enterprise reforms of 2003 (see
Figure 4 below). It establishes a Board that reports to its shareholder the GOT through the
Ministry of Public Enterprise (MPE). The MPE oversees all of GOT’s shareholdings and
monitors the performance of the State Owned Enterprises (SOEs). Tonga's SOEs and TPL in
particular has performed comparatively better than those of other Pacific countries because this
governance structures generally allows them to operate independently of the political process,
with fewer unfunded CSOs.23
12.
As part of TPL’s recognition of the importance of coordinating the implementation of
donor-funded projects, all donor-funded projects generally fall directly under the responsibility
of the CEO with day-to-day management of projects expected to fall under the proposed
‘Strategic Initiatives’ unit.
23
Finding Balance 2011: Benchmarking the Performance of State-Owned Enterprises in Fiji, Marshall Islands,
Samoa, Solomon Islands, and Tonga. ADB, 2011.
43
Figure 4: Organizational structure of TPL (source TPL)
BOARD OF
DIRECTORS
CEO
OUTER ISLAND
MANAGERS
CHIEF FINANCIAL
OFFICER
ADMINISTRATION
ACCOUNTS
DEPARTMENT
IT DEPARTMENT
POWER
GENERATION
DISTRIBUTION
NETWORK
PLANNING AND
DESIGN
STRATEGIC
INITIATIVES
Financial Management
13.
The field and desk review financial management assessment was carried out in
accordance with the “Financial Management Practices in World Bank-Financed Investment
Operations”, issued by the Financial Management Sector Board on November 3, 2005 and
further rationalized in the “Principles Based Financial Management Practice Manual” issued by
the Board on March 1 2010. Under the Bank’s OP/BP 10.02 with respect to projects financed by
the Bank, the borrower and implementing agency are required to maintain financial management
systems – including accounting, financial reporting, and auditing systems adequate to ensure
they can provide the Bank with accurate and timely information regarding the project resources
and expenditures.
14.
Overall, the financial management arrangements satisfy the financial management
requirement as stipulated in OP/BP 10.02 subject to implementation of agreed actions and
mitigating measures. The assessed financial management risk of the project before the mitigating
measures is considered substantial and could be reduced to moderate after the proposed and
existing mitigating measures are implemented and have shown effective impact. Full
implementation of the Mitigating Measures is expected to be realized within 3 months from
effectiveness The FM requirements for this project are quite straight forward and hence there are
limited mitigating measures. The main risk is the current lack of structure in the TERM-IU and
hence no accurate FM capacity assessment can be conducted. The mitigating measures to
overcome this are: (1) Not to open a Designated Account, (2) To realize payments only through
Direct Payments by the Bank and receive reimbursements for pre-financed activities, (3) TERMIU will employ/designate/delegate a person with the appropriate accounting skills to enable the
preparation of Withdrawal Applications for the Direct Payments, accurate recording of financial
transactions, consolidation of the reports, and preparation of accounts for audit. (4) TERM-IU
will determine what accounting software (or spreadsheet) will be used to maintain the project’s
financial records and reporting. All requirements need to be in place within 3 months from
effectiveness.
15.
Budgeting Arrangements: TERM-IU is currently unstaffed, but the unit will have direct
links with the MoF, so, it is expected there will be adequate budgeting capacity including
44
budgeting for the counterpart contribution. TPL have experience in the preparation of the
corporate budget and have the capacity in management. As all expenditure for this project will be
on procurable items, the budget should be consistent with the procurement plan. Each
implementing agency will be expected to review and update the budget at least annually,
including quarterly budgets. For TERM-IU to be able to send the Bank the consolidated annual
budgets and to prepare the consolidated Interim Unaudited Financial Report (IFRs), TPL will be
sending the annual budgets to the TERM-IU on a timely basis.
16.
Accounting Arrangement: Each implementing agency will maintain financial records for
their respective component. At the time of this assessment TERM-IU did not have an adequate
structure in place to meet the accounting arrangements of the project. Before disbursements
through Direct Payment requests, TERM-IU should have an experienced accountant/finance
officer, with terms of reference satisfactory to the Bank and make sure that the unit has the
capacity and time to prepare the Withdrawal Applications, maintain accurate records of the
financial transactions, to capture/register Counterparts funds contribution, consolidate the
financial information from the two implementing agencies for the preparation of the interim
financial quarterly reports (as required in the legal agreement), and preparation of accounts for
audit. In addition the TERM-IU needs to determine what accounting system they wish to put into
place to maintain the project records.
17.
TPL use QuickBooks with a network of 10 users. QuickBooks has the capacity to record
the financial information required for this project however a contracts register will need to be
maintained on a spreadsheet and reconciled back to the QuickBooks contract transactions. There
are 4 accounting staff at TPL and their skills and capacity are adequate to manage the FM
requirements for Component 2 needing training on the preparation of World Bank Withdrawal
Application processes and procedures by project launching. The direct payments requests will be
prepared by TPL and sent to the TERM-IU for further forwarding to the WB, through the MoF.
18.
Internal Controls: It is expected that TERM-IU will adopt the internal control systems
and processes as the Civil Service of the Government of Tonga, within 3 months from
effectiveness. Based on previous projects in Tonga these systems will be adequate.
19.
The current internal controls for TPL expenditure are robust with adequate segregation of
duties. The process of preparation, review and signing of payments are all done be different
people. It is recommended the same processes are used for the expenditure of project funds and
that a flow chart outlining the process from requisition through to payment is made available to
the WB.
20.
Flow of Funds: Under the current project design all expenditures will be for relatively
large contracts, so, no Designated Account will be opened. Most of the payments will be realized
through direct payments, where the approved supplier invoice is submitted to the Bank with a
Withdrawal Application and funds are paid directly to the supplier. Reimbursement of already
occurred expenses paid out of local funds during the retroactive period and implementation
would be accepted by the World Bank. This will help to making small payments acceptable and
reimbursed by the World Bank. This way the project will have very simple flow of funds and
the risk of delays and misuse of funds would be relatively low.
21.
Financial Reporting: While each implementing agency will maintain its own financial
records for the component it is implementing, the project reporting will be realized through
45
quarterly interim unaudited financial reports (IFR), consolidated into one report by the TERMIU, and in a format agreed to with the Bank. Each report shall be prepared in accordance to the
disbursement categories and the project components for the reporting quarter, year to date and
cumulative expenditure. The 2 sources and uses of funds (AusAID Grant and ASTAE Grant)
should be clearly stated in the IFRs. In addition commitments, contracted amounts not yet
expended, will be included in the reporting requirements. The IFRs will be submitted to the Bank
not later than 45 days after the end of the reporting period.
22.
TPL accounts are maintained on QuickBooks which has adequate reporting capacity
given the relatively straightforward reporting requirements for this implementing agency.
TERM-IU do not at this stage have an accounting system in place and this will need to be put
into place within 3 months from effectiveness. The Bank will need to be satisfied the system can
meet the Bank’s reporting requirements.
23.
External Audit: The Tongan Office of the Auditor General will conduct an annual audit
of the consolidated project accounts. The two components from the implementing agencies will
be consolidated into one set of financial statements, by TERM-IU. Hence only one audit will be
required annually. The audited financial statements will be required to be received by the Bank
within 6 months of the end of each of the reporting periods. The Office of the Auditor General
has extensive experience in auditing government departments and World Bank Funded projects
and is an auditor acceptable to the Bank. As TPL is a public enterprise receiving and using Bank
funds, its own annual financial statements should be sent to the Bank, within the same deadlines.
Disbursement Procedures
24.
The project will use only the Direct Payment and Reimbursement methods of
disbursements. The procedure for paying project expenditure through Direct payment is the
completion of a Withdrawal Application accompanied by an approved for payment invoice from
the supplier. All Direct Payments and reimbursements must be incorporated into the project
financial accounts.
25.
Each implementing agency will prepare Withdrawal Applications – (WAs) for their
respective expenditures and it will send the Withdrawal Applications along with accompanying
documentation (through the IU in the case of TPL) to ACU/MOF for checking, signing and
submission to the World Bank. The project will be financed out of two sources of funds as
outlined in Table 12 below:
Table 12. Disbursement Categories and Amounts
Category
Amount of the
Percentage of
AusAID/ PRIF
Expenditures to be
Grant
Financed
US$ Million
(inclusive of Taxes)
Goods, non-consulting services,
consultants’ services, training and
2,500,000
100%
workshops, and incremental
operating costs
TOTAL AMOUNT
2,500,000
46
100%
Category
Consultants’ services,
and workshops
training
TOTAL AMOUNT
Amount of the
ASTAE Grant
US$ Million
Percentage of
Expenditures to be
Financed
(inclusive of Taxes)
400,000
100%
400,000
100%
27.
There is a provision for retroactive financing of up to 20% of both the AusAID and
ASTAE grant amounts. Any retroactive financing will have been paid less than 12 months prior
to the signing the Grant Agreement.
Procurement
28. Procurement Risk Assessment: An assessment of the capacity of the Implementing
Agencies (TPL and TERM-IU) to implement procurement actions for the Project was carried out
in November 2011. The assessment reviewed the organizational structure for implementing the
Project and the interaction between the staff responsible for procurement and other national
agencies. The overall Project risk for procurement is “high”, consistent with the OPR. The
agencies risks were assessed as “high” for TERM-IU and “substantial” for TPL. Most of the
issues/ risks concerning the procurement component for implementation of the Project have been
identified as: TERM-IU is a recently created entity composed currently of a single permanent
staff (Interim Director) with no procurement experience and TPL’s lack of experience with
International Financing Institutions’ procurement policies. The below action plan has been
proposed and with the implementation of the mitigation measures the overall risk is expected to
be reduced to “substantial” during implementation.
TERM-IU
Factor
Accountability
for
Procurement
Decisions in
the
Implementing
Agency
Internal
Manuals and
Clarity of the
Risk
Lack of clarity on who is
accountable for which
procurement decisions.
Mitigation Measure
TERM-C to issue a directive
defining instructions on
accountability for procurement
decision making covering all
steps of the procurement
process and has timeframes
Delays in processing
for the decision, including the
procurement within the
time allotted to make them.
Borrower's internal
TERM-C may consult with
structure.
MOF in preparing this
directive.
Staff have limited practical TERM-IU’s Interim Director
guidance on the steps of
to meet with representatives of
the Tonga’s internal
MOF to receive instructions
47
Indicative
Target
Timeframe
By
effectiveness
By
effectiveness
Procurement
Process
procurement process,
which could lead to
implementation delays.
on Tonga’s internal
procurement process.
Record
Keeping &
Document
Management
Systems
Improper filing facilitates
abuse.
TERM-IU’ to prepare and
apply filing instructions that
clearly describe what records
should be kept in the contract
file and for how long.
Include auditing of filing
practices in TOR for audits.
Staffing
Procurement
Planning
Evaluation and
Award of
contract
By
effectiveness
During
implementation
Absence of procurement
staff may lead to improper
implementation of
procurement activities
under the project (in terms
of efficiency, competition,
transparency).
Agree and implement a
training program (internal/
external) to be implemented
over the life of the project that
is both relevant and practical.
By
negotiations
TERM-IU to utilize the
service a Procurement Adviser
for a period of time
commensurable with the
project procurement load. For
practical reasons and
consistency for the project,
TERM-IU and TPL could
utilize the same Procurement
Adviser.
By
effectiveness
Possible delays in project
implementation due to
weak procurement
planning and monitoring.
Preparation of a realistic
procurement plan and
quarterly status monitoring
updates.
Lack of
understanding/expertise of
evaluation factors resulting
in improper evaluation and
incorrect awards.
Package contracts to a size and
type manageable by TERM-IU
(mainly Shopping and
Individual Consultants).
As to ensure that all evaluators
are qualified experts, the
agency will reach agreement
with the Bank on the
minimum qualification criteria
for members of the Evaluation
Committee, which is to be
appointed shortly before
submission of CVs.
48
By appraisal
(Plan to be
finalized prior
to negotiations)
and quarterly
status
monitoring
updates
During
implementation
Contract
Management
and
Administration
Lack of control over
contract management could
cause incorrect
disbursements, disputes
and implementation delays.
Procurement
Oversight
Unreliable oversight of
operations.
Adopt as much as possible
Lump-Sum type contracts, as
type of contract is easier for
the agency to administer
because no matching of inputs
to payments is required (to be
included in the procurement
plan).
Include appropriate coverage
of procurement aspects to
meet project requirements in
the audit TOR. Need to
distinguish between
compliance and performance
audits so that auditors know
what to do.
During
implementation
During
implementation
TPL
Factor
Risk
Mitigation Measure
Staffing
Staff without experience
with IFI’s procurement
policies may lead to
improper implementation of
procurement activities under
the project (in terms of
efficiency, competition,
transparency).
Agree and implement a
training program (internal/
external) to be implemented
over the life of the project that
is both relevant and practical.
This plan would focus on
Project Management Unit
Staff.
TPL to employ the services of
a Procurement Adviser for a
period of time commensurable
with the project procurement
load.
Indicative
Target
Timeframe
By negotiations
By
effectiveness
Procurement
Planning
Possible delays in project
implementation due to weak
procurement planning and
monitoring.
Preparation of a realistic
procurement plan and
quarterly status monitoring
updates.
By appraisal
(Plan to be
finalized prior
to negotiations)
and quarterly
status
monitoring
updates.
Bidding
documents
Poorly prepared shortlists
could lead to inefficiencies
As to ensure that all firms on
shortlist are qualified the
During
implementation
49
(pre
(e.g. non responsive
qualification,
proposals) and/or low
short listing,
quality services.
and evaluation
criteria)
agency will treat the firms’
written representations
skeptically, and will take up
references from the proposed
firms’ clients. Also, the
agency will consider in
addition to the information
asked for in the request for
EOIs, key factors as a
consultant’s reputation of
integrity and impartiality
rooted in independence from
third parties.
Technical
specifications/TORs are
vague or restrictive to few
bidders/firms.
Involve technical staff and end During
users in preparation of
implementation
specifications or agree to hire
competent consultants to draft
TS/TORs.
Evaluation
and Award of
contract
Lack of
understanding/expertise of
evaluation factors resulting
in improper evaluation and
incorrect awards.
As to ensure that all evaluators During
are qualified experts, the
implementation
agency will reach agreement
with the Bank on the
minimum qualification criteria
for members of the Evaluation
Committee, which is to be
appointed shortly before
proposals submission.
Review of
Procurement
Decisions and
Resolution of
Complaints
Disincentive to participation Meticulous application of the
due lack of transparency in
Procurement and Consultants
the procurement process.
Guidelines provisions in terms
of transparency (e.g.
publication of the general
procurement notice, request
for expressions of interest or
contract award notices).
During
implementation
Procurement
Oversight
Unreliable oversight of
operations.
During
implementation
Include appropriate coverage
of procurement aspects to
meet project requirements in
the audit TOR. Need to
distinguish between
compliance and performance
audits so that auditors know
what to do.
50
29.
Guidelines: Procurement for the proposed Project would be carried out in accordance
with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated
January 2011, and “Guidelines: Selection and Employment of Consultants by World Bank
Borrowers” dated January 2011; and the provisions stipulated in the Financing Agreement.
30.
Procurement Scope: Funds to TPL are expected to finance consulting services
(individuals) with some minor goods. Funds to TERM-IU are expected to finance larger
consulting services (firms and individuals) and major equipment to ensure continuing stable
operation of the generation and transmission systems. Provision is being made to retroactive
financing and he procurement will be carried out in accordance with Bank’s Procurement and
Consultant Guidelines for these contracts and any other procurement that commenced before
project effectiveness in order for the contracts to be eligible for Bank financing.
31.
Thresholds: Prior-review and procurement method thresholds recommended for the
project are indicated in below. These thresholds may be revised during project implementation,
based on risk assessment updates. All the prior review contracts would be stated in the
Procurement Plan.
Selection
Method
FIRMS
QCBS
CQS
Prior Review Threshold
Applicability
In accordance with the authorizing
circumstances provided in the
Consultant's Guidelines
≥ US$100,000
LCS
Individuals
Competitive
Selection
Prior Review Threshold
Applicability
≥ US$50,000
In accordance with the authorizing
All TORs are subject to prior
circumstances provided in the
review.
Consultant’s Guidelines.
Sole Source
All
Short list comprising entirely of national consultants: The ceiling for short-lists of
consultants composed entirely of national consultants would be $200,000. In the event that
sufficient numbers of qualified national firms are not available for effective competition, then
the short-list would consist of both national and international consultants.
Procurement
Prior Review Threshold
Applicability
Method
Goods
ICB
All
Estimate >= US$100,000
Shopping
First two contracts
Estimate <= US$ 100,000
* Any contract financed under retroactive financing will be prior reviewed by the Bank.
51
32.
Procurement Plan: The implementing agencies developed a Procurement Plan for project
implementation which provides the basis for the procurement methods. This plan will be
finalized prior to negotiations and would be available at agencies’ head office. It would also be
available in the Project’s database and in the Bank’s external website. A summary of the project
procurement plan is provided the below. The plan will be updated every year to reflect project
implementation needs. All retroactive financing would require prior review.
Summarized Procurement Plan (Key Contracts)
Ref.
No.
Description of Assignment
Estimated
Cost (US$)
Selection
Method
Contract
Signature
Date
Prior
/
Post
Comments
TERM-IU
1a
Clean energy policy
30,000.00
Indiv CS
06/15/2012
Prior
1b
1c
TERM-C Advisor
Petroleum Advisor 1
160,000.00
50,000.00
Indiv CS
Indiv/
Firm CS
08/01/2012
09/2012
Prior
Prior
1d
Petroleum Advisor 2
50,000.00
09/2013
Prior
1e
Clean energy technical
advisor
Environmental advisor for
framework
Social advisor for framework
90,000.00
Indiv/
Firm CS
Indiv CS
08/2012
Prior
20,000.00
Indiv CS
09/2012
Prior
20,000.00
Indiv CS
09/2012
Prior
50,000.00
50,000.00
Indiv CS
NCS
Shopping
45,000.00
CQS
35,000.00 Goods/
Shopping
08/2012
08/2012
Prior
Post
1j
1k
Communication specialist
Printing of Communications
materials
Electricity end use survey
IT equipment
09/2012
08/2012
Prior
Prior
1l
Feasibility study tidal power
100,000.00
CQS
09/2012
Prior
Firm
QCBS
09/2012
Prior
1f
1g
1h
1i
TOTAL first 24 months: US$ 700,000.00
TPL
2a
Study 1: Upgrade of grids
and prepare the Utility for
Operations with Renewable
Energy Plants
500,000.00
52
Eligible for
retroactive
financing
Eligible for
retroactive
financing
2b
2c
Study 2: Preparation of
systems to enable renewable
energy projects to be
implemented in Tonga
Power Limited networks
Network control and
Management Hardware
400,000.00
Firm
QCBS
09/2012
Prior
900,000.00
Goods
ICB
03/2014
Prior
Subtotal for first 24 months: US$ 1,800,000.00 (expected disbursements are US$1,500,000.00 as
the three activities would not be completed in 24 months).
33.
Procurement Post Review: Procurement supervision and post-review missions will be
carried out annually. A sample of 20% of contracts not subject to prior review will be post
reviewed.
Environmental and Social (including safeguards)
34.
Because this project is classified as Category C, there are no safeguards issues to
implement or monitor as a result of implementing Components 1 and 2.
35.
Within Component 1, the TERM-IU will be responsible for completing the
Environmental and Social Management Framework(s) for future investments in energy
infrastructure under the TERM (for example through the Tonga Green Incentive Fund
currently under design). The TERM-IU will need to engage an environmental and / or
social specialist (as contractors or consultants) with experience in preparing frameworks,
community consultation, impact assessment and land acquisition.
World Bank
environmental and social specialists can support and assist the TERM-IU where
necessary.
36.
The ESMF will be required to meet World Bank environmental and social safeguards
policies (and the policies of any other contributing funding agency). The ESMF will be
submitted for appraisal by the World Bank.
Monitoring & Evaluation
37.
Annex 1 sets out the Results Framework and indicators that will be used to monitor and
evaluate the project.
53
ANNEX 4: ROLE OF PARTNERS
TONGA: Energy Roadmap Institutional and Regulatory Strengthening Project
1.
The development of the Energy Roadmap was supported by fifteen Development
Partners (DPs), including ASTAE, IRENA, Pacific Region Infrastructure Facility partners
(AusAID, NZAid, Asian Development Bankand World Bank), SPREP, SPC, PIFS, PPA, EIB,
EC, IUCN, JICA and REEEP. Coordination among DPs for TERM is very good. TERM-IU has
been hosting periodic development partner consultations on the energy sector. DPs are working
with the GOT and TPL at various stages of preparation and implementation of phases 0 and 1 of
TERM. All DPs focus on energy security as a driver for energy policy, including renewable
energy and energy efficiency. Table 13 below summarizes the ongoing & planned activities by
each DP.
Table 13. Summary of Ongoing/Planned Activities of TERM Development Partners
World Bank
Ongoing
Petroleum Sector Technical Assistance .
As a further technical assistance to the GOT on implementation of petroleum sector reforms, this
activity will assess a range of issues relating to: improving regulation of the petroleum sector;
Alternative Supply Models and means of ensuring competition and efficiency; and review the
GOT’s work to improve energy security, specifically the construction of new fuel storage
facilities and the use of a Medium Range Tanker to bring fuel to Tonga.
Under preparation
Natural Gas Study funded by ESMAP.
Study of the role for natural gas and storage in electric grid networks that use intermittent
renewable energy inputs.
Tonga Green Incentive Fund Project (TGIF) (IDA US$5 million).
This project will support the design of a financial mechanism to support the development of
sustainable renewable energy to reduce reliance on imported petroleum and diversifying sources
of supply to improve energy security.
Renewable Energy and Energy Efficiency Partnership (REEEP)
Ongoing
Strategic framework for the implementation phases of the TERM-AUD$120,000 AusAID
in June 2008 (contract signed November 2011).
This will strengthen the policy, institutional, legal and regulatory frameworks, including a draft
operational plan for the TERM-IU and a tariff review framework.
54
Pacific Island Countries Energy Efficiency and Appliance Labeling Project.
Project: Situation analysis including a study of the impacts of introducing a programme and the
selected countries to outline the regulatory requirements necessary to be developed and enacted
to ensure the transition.
Asian Development Bank(ADB)
Ongoing
Promoting Energy Efficiency in the Pacific - Phase 1 (PEEP 1).
US$1.2 million regional technical assistance for identification of demand-side energy efficiency
initiatives in Cook Islands, PNG, Samoa, Tonga & Vanuatu. PEEP 1 was completed in 2011.
Project in Tonga trialed installation of LED street lights. Financed through the Clean Energy
Fund.
Under preparation
Outer Island Renewable Energy Project.
The proposed project will assist the government’s efforts to reducing the country’s reliance on
imported fossil fuels for power generation. By providing a secure, sustainable and
environmentally-sound source of electricity for private and commercial consumers, it will
implement 1.2 MWp solar power capacity connected to the existing diesel networks, (i) 0.75
MWp of Tonga’s outer islands of Ha’apai, Vava’u and ‘Eua; and (ii) 0.45 MWp of Ha’pai’s
outer islands ('Uiha, Nomuka, Ha'ano and Ha'afeva); and the not electrified Niua islands
(Niua,Toputapu and Niuafo'ou). Phase 1 of the project preparation technical assistance is grant
funded by the Japan Fund for Poverty Reduction (JFPR).
Promoting Energy Efficiency in The Pacific: Phase 2 (PEEP2)- Tonga Chapter Technical
Assistance.
The objective of the TA is to improve efficiency in the use of electrical power for consumers in
five Pacific developing member countries (PDMCs) — the Cook Islands, Papua New Guinea
(PNG), Samoa, Tonga, and Vanuatu — through demand-side energy efficiency improvements in
the residential, commercial, and government sectors of each country, especially in buildings. The
TA will focus on reducing the energy intensity of the PDMC economies and thereby enhancing
energy security, making energy services more affordable to end-users, and reducing Greenhouse
Gas (GHG) emissions.
Pacific Infrastructure Advisory Center (PIAC)
Ongoing
Technical Assistance activities funded by AusAID.
 US$ 190,000 (estimate) in CY2012 to fund two 6 month positions (an institutional advisor
– international, and an operations officer – local) to help establish and staff the TERM-IU.
 US$140,000 (estimate) in CY2012 to undertake a power sector tariff review.
55
GIZ (German Agency for International Cooperation)
Ongoing
Coping with Climate Change in the Pacific Island Region (CCCPIR) Project, funded by the
Federal Republic of Germany, Ministry for Economic Cooperation and Development
(BMZ).
It is implemented with Secretariat of the Pacific Community (SPC) and started in 2009 focused
on land use resources in Fiji, Tonga and Vanuatu. The project expanded to 12 PICs in 2010 and
new components on education, tourism and energy were added. The energy component started in
January 2012 for two years. Its objective is for public and private service providers in the energy
sector to strengthen and improve their services for sustainable, reliable and cost-effective energy
supply within the region. The project focuses on TA and in Tonga is just beginning. The first
activity in Tonga will be a wind energy pre-feasibility study for Tongatapu based on 18 months
of data collected by the Tonga Energy Division from the Lapaha wind and monitoring mast.
Secretariat of the Pacific Community (SPC) (regional projects including Tonga):
Pacific Appliance Labelling and Standards (PALS) programme, funded by the
Government of Australia (Australian Department of Climate Change and Energy
Efficiency), January 2012.
Ten PICs (Cook Islands, Fiji, FSM, Kiribati, Papua New Guinea, Samoa, Solomon Islands,
Tonga, Tuvalu and Vanuatu) have expressed their interest to participate.
FAESP Energy Security Indicators.
As part of the going work of the Framework for Action on Energy Security (FAESP) and its
Implementation Plan (IPESP), SPC is collecting and publishing over 30 energy security
indicators from data collated from the region. Also through 2011 and 2012, a series of national
workshops in energy planning and policy are being implemented to transfer the knowledge and
information on the energy security indicators for the FAESP and to promote and develop the
same indicators for national and local energy planning. The first compilation of the Energy
Security Indicators, including Country Profiles will be published in May 2012.
Petroleum Advisory services.
A petroleum pricing advisory service is delivered on a monthly basis to the Tonga Competent
Authority. SPC provides the data for the verification of the Tonga petroleum prices.
Australia (AusAID)
Support for TERM is delivered through PRIF, and is led by other development partners:
 Funded a Petroleum Supply Study 2009/10 (WBG-led) to provide options for improved
fuel supply arrangements for Tonga. This work formed part of the TERM.
 Funding support of $1.05M to the WBG-led Energizing the Pacific framework in
2008/09 to assist with development of the TERM.
56
Funding provided to REEEP activities in Tonga.
New Zealand (NZMFAT)
Ongoing
Popua Solar Farm Project, NZD$ 7.9 million November 10, 2011-August 1, 2012.
The project will plan, develop, construct and commission 1MW AC photovoltaic solar facility to
supply solar generated electricity into TPL’s Tongatapu power system and deliver an annual
average of 1,880 MWh of renewable energy offsetting 470,000 liters of diesel per annum.
Tonga Village Network Upgrade Project, NZD$ 5.4 million, June 30, 2012-June 30, 2013.
The project will ensure public safety from the dangers (such as electrocutions and electrical fires)
and inefficiencies of a deteriorated low voltage electricity network; increase training of TPL
linesman to level 4 ESITO standards; increase network efficiency through reduced line losses;
increase quality of access to electricity; and improve resilience of the network.
Japan Agency for International Cooperation (JICA)
Ongoing
Clean Energy by Solar Home System Project, 590 million Japanese yen grant, June 2012
(implementation starts) -June 2013.
512 units of solar home systems (SHS) of more than 170 Wp each will be installed in two outer
islands of Tongatapu group and 11 outer islands of Vava’u group.
Under preparation
Tonga Power Micro grid development Project.
Micro grid controller, storage system, solar PV and wind turbine (500KW each) will be installed
in Tongatapu main land. Feasibility study will be finished by December 2012.
Pacific Islands Forum Secretariat - Pacific Environment Community Fund Project
Ongoing
The Pacific Islands Forum Secretariat currently administers and manages the Pacific
Environment Community (PEC) Fund which is a US$66 milion contribution from the
Government of Japan to be used on projects with a focus on solar power generation or salt water
desalination or a combination of both. There are fourteen Forum Island Countries participating in
the PEC Fund, including Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Nauru,
Niue, Palau, Papua New Guinea, Republic of Marshal Islands, Samoa, Solomon Islands, Tonga,
Tuvalu and Vanuatu. Each FIC has an indicative allocation of US$4,000,000 to use on projects.
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Under preparation
Tonga intends to utilize its US$4,000,000 for solar power generation and the TERM-IU has
recently submitted a new concept note titled “Rural/Remote Community Socio-Economic
Productivity Improvement through Solar Power Generation Projects” for consideration.
International Unit for the Conservation of Nature (IUCN)
Rehabilitation of solar home systems in two outer islands (Moungaone and Mango) in the
Ha'apaii group. In addition, IUCN has secured additional funds to provide solar home systems to
Lofanga (also in the Hapaii group).
United Nations Development Program (UNDP)
As part of SPREP/UNDP/GEF Pacific Islands Greenhouse Gas Abatement through Renewable
Energy Project (PIGGAREP) in 2009 the following activities among others are preliminary
planned to take place: support to REM/FEMM 2009, third party opinion on feasibility of wind
power project proposed for Tungapatu and evaluation of Niuafo'ou SEIS.
Via SIDS DOCK/PIGGAREP support has been requested to replace village based diesel based
water pumps in Haapai with solar PV.
European Union (EU)
Identification of outer islands renewable / hybrid energy.
Renewable energy and energy efficiency project.
Identification of grid connected renewable efficiency through loan / subsidy scheme.
Source: (i) TERM Donor Coordination Meeting (Tonga, April 13, 2012); (ii) comments received for the WB quality
enhancement review meeting of this project (May 15, 2012); and (iii) Pacific Energy Working Group meeting (Fiji,
May 18, 2012).
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ANNEX 5: MAP OF THE KINGDOM OF TONGA
TONGA: Energy Roadmap Institutional and Regulatory Strengthening Project
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