MEDIUM-SIZED PROJECT BRIEF
PROJECT SUMMARY
PROJECT IDENTIFIERS
1. Project name: Mini-hydropower
Project
3. Country or countries in which the
project is being implemented: Former
Yugoslav Republic of Macedonia (FYR
Macedonia)
5. GEF focal area: Climate change
2. GEF Implementing Agency: The
World Bank
4. Country eligibility: FYR Macedonia
signed the UNFCCC on January 28, 1998.
6. Operational program/Short-term
measure: Short-term Response Measure
7. Project linkage to national priorities, action plans, and programs: The proposed
Project is linked to:

the National Environmental Action Plan (NEAP). Completed in 1997 with Bank
support, the NEAP identifies air pollution as the major environmental problem in the
country and industries, power and heat generation plants, and the transport sector as its
primary causes. In particular, heat and power generation are the main sources of
greenhouse gas emissions (GHG), especially carbon dioxide. One of the
recommendations of the NEAP for reducing air pollution is to “encourage the use of
renewable energy resources including geothermal, solar and hydropower”. However,
as the geothermal resource has yet to be assessed and the solar and wind potential is
modest, Government has given priority to developing the country's relatively abundant
hydropower potential.

the long term investment plan for the country - Macedonia Investment Projects,
October 96. The plan calls for the construction of both large and small hydropower
plants to meet as much as possible of the projected growth in demand for electricity.
the Power System Improvement Project (PSIP), financed by World Bank and the Government.
PSIP supports the rehabilitation of the six largest hydropower plants in the country and
creation of an enabling environment to facilitate the development of small hydropower
plants by independent power producers. The proposed Project is fully consistent with the
PSIP in that it support the development of mini-hydro sites by entities other than ESM, the
national utility. Both projects also are aimed at developing hydropower, especially small
hydropower plants, and reducing GHG emissions.
8 GEF national operational focal point and date of country endorsement: Mr.
Mikhail Dimovski, Undersecretary, Ministry of Urban Planning and Environment
Date of endorsement: November 3, 1998. The proposed Project was endorsed again
by Mr. Tony Popovski , the Minister of Environment, March 19, 1999.
2
PROJECT OBJECTIVES AND ACTIVITIES
9. Project rationale and objectives:
(i) Reduce Macedonia’s emissions of
greenhouse gases (primarily carbon
dioxide) by substituting hydropower for
power generated by lignite-fired plants.
Indicators:
(i) reduction in carbon dioxide emissions
relative to the without project scenario.
(ii(a)) power purchase agreement signed.
(ii) Encourage the development of
independent power plants especially minihydropower plants.
10. Project outcomes:
(i) Installed hydro capacity and generation
increased
(ii)b))
additional
proposals
and/or
expression of interests received for
developing new mini-hydro power plants.
Indicators:
(i) installed hydro capacity increased by 1.2
MW
11. Project activities to achieve outcomes
(i) Project Implementation Unit ($160,000).
(ii) total hydro generation increased by
about 8.8 GWh per year.
Indicators:
(i) Staff and consultants appointed.
(ii) Debar
($440,000).
mini-hydro
power
plant (ii) Plant constructed and unit
commissioned.
(iii) Kavadarci mini-hydro power plant (iii) Plant constructed and all 5 units
($2,492,000).
commissioned.
12. Estimated budget (in US$):
GEF:
750,000
Co-financing:
Slovene Export Credits
1,177,000
Stopanska Bank
558,000
Equity ( utilities)
680,000
Bilateral Grant
100,000
Government/ESM
26,000
TOTAL (including IDC):
3,291,000
INFORMATION ON INSTITUTION SUBMITTING PROJECT BRIEF
13. Information on project proposer:
Ministries of Economy and Environment of the FYR of Macedonia.
14. Information on proposed executing agency (if different from above): Ministry of
Economy with PIU operated largely by personnel from national electric company (ESM)
and foreign consultants.
15. Date of initial submission of project concept: 12/16/98
INFORMATION TO BE COMPLETED BY IMPLEMENTING AGENCY:
16. Project identification number: MK-GM-65996 (formerly MK-GE-44283)
17. Implementing Agency contact persons: Karin Shephardson, Regional Coordinator
GEF Operations, Europe and Central Asia Region. Email: Kshepardson@worldbank.org;
Tel: (202) 473-8954
3
James Moose, Principal Energy Economist, Europe and Central Asia Region. Email:
Jmoose@worldbank.org; Tel: (202) 473-3563.
18. Project linkage to Implementing Agency program(s): The proposed Project is an
integral part of the World Bank Group's Country Assistance Strategy (CAS) for FYR
Macedonia and supports two of its three key goals - those of encouraging private sector
growth and increasing the efficiency of the state. Specifically, it supports the former by
promoting the development of independent power plants (IPPs), which are a source of
growth and employment, though a minor one. The IPPs, in turn, would provide
benchmark competition to and serve as a vehicle for improving the efficiency of ESM, the
state owned electric company. Largely because of these linkages, the proposed Project is
specifically mentioned in the CAS.
As noted above, the proposed Project is also linked to the PSIP whose major goals are to
increase the country’s hydropower capacity and generation as well as encourage the
development of IPPs. Experience with this operation would provide the inputs needed to
assess the likely future involvement of IPPs in the development of the country's relatively
abundant large and small hydro potential and, ultimately, their implications for the
structure of the sector.
4
FYR MACEDONIA - MINI-HYDROPOWER PROJECT
I. PROJECT DESCRIPTION
Background
1.
FYR Macedonia emerged in 1991 as an independent nation following the break-up
of the Yugoslav Federation. The country is landlocked with two primary ethnic groups,
Macedonians (Slavs) and Albanians. Located on the Balkan Peninsula, it is a
mountainous country of about 26,000 square kilometers and a population of about 2
million.
2.
The country’s indigenous energy resources, consisting of lignite and hydropower,
meet about 58% of its energy needs. The rest is imported, mainly in the form of crude oil,
petroleum products and coke or coking coal. The bulk of lignite reserves are located in
one large low-cost deposit at the Suvudol Mine. It is used primarily to generate electricity
at the Bitola Power Plant, which supplies the majority of the electricity for the country.
Typically, about 75-80% of the electricity is generated from lignite fired plants (mainly
the Bitola Power Plant), 20% from hydropower plants and the remainder is imported.
3.
Hydropower is the country's principal renewable energy resource, followed by
geothermal, wind, solar and biomass. The geothermal resource has yet to be assessed and
the potential for developing wind and solar is modest. As for biomass, the bulk of it is
already being used, with limited prospects for increasing supplies.
4.
FYR Macedonia's considerable hydropower potential is located at sites suitable for
both large and small-scale plants. The Government’s plan calls for developing the larger
hydropower potential to meet slowly rising electricity demand, but its implementation is
likely to remain constrained by the availability of funds over the foreseeable future. The
smaller hydropower potential is located at about 400 sites, spread throughout the country.
The analysis carried out by the Government for the NEAP shows that these sites have the
potential to produce around 1.1 TWh of electricity per year or about 20% of the country’s
current requirements. However, so far only about 75 GWh per year or about 7% of the
total potential has been developed, largely because of lack of experience with small
hydropower plants, their high costs and, until recently, the relative low price of
electricity. The proposed Project is, in part, designed to remedy this situation by
encouraging the development of independent small-scale hydropower plants.
Objectives
5.
The development objective of the proposed Project is to meet the country’s
demand for electricity, while reducing air pollution. In support of this objective, the
proposed Project provides for initiating the development of the country’s relatively
abundant mini-hydro power potential as a substitute for lignite, in electricity generation
and accelerating the process of sector reform by establishing independent power
producers (IPPs).
5
6.
The global (GEF) objective of the proposed Project is to reduce FYR Macedonia’s
emissions of carbon dioxide by substituting electricity generated by mini-hydropower
plants for electricity generated from lignite-fired power plants. In the GEF context, this is
a short term response measure and fully meets the eligibility criteria established by the
GEF. First, the proposed Project would reduce carbon emissions for less than $10/ton of
carbon. Second, the operation is low risk in that the technology, though not widely used
in FYR Macedonia, is well known. Finally, expanding the use of hydropower, including
mini-hydropower, is a part of FYR Macedonia’s longer term strategy for increasing
electricity production and reducing pollution, including emissions of carbon dioxide. The
strategy is an integral part of the NEAP and is made more concrete in the context of the
country’s investment program, which lists a number of hydropower projects as top
priorities for investment, including 15 small hydropower projects.
7.
In addition to reducing carbon dioxide emissions, the proposed Project will
promote the development of small hydropower plants by independent power producers
(IPPs), the first such initiative in the country. Under the new Energy Law, ESM, the state
owned electric company, is required to purchase electricity produced by IPPs. Also, a
new power purchase system, aimed at providing incentives to IPPs, has been adopted, as
agreed under the PSIP. It requires ESM to buy power from IPPs at only a 10%-15%
discount (depending on voltage) to ESM’s household tariff, the highest tariff paid by any
consumer category. The proposed Project will serve as a basis for demonstrating the
adequacy of the incentive package, including the power purchase arrangements (price and
off-take terms) with ESM, in attracting IPPs. As such it could serve as the basis for
replicating similar projects in the future.
Description
8.
The proposed Project involves installation of mini-hydropower plants on the
municipal water supply pipes of the towns of Kavadarci and Debar. These were selected
from among 400 potential small scale hydro sites in the country through a screening
process carried out by Austrian consultants. First, all small hydro sites that in any way
impeded the flow of water into neighboring countries were eliminated because FYR
Macedonia does not have water sharing agreements with other riparians. This criteria
eliminated most of the potential sites. Second, all sites sponsored by ESM, the national
utility, also were eliminated as these could not be developed by IPPs. Finally, of the
remaining sites only those for which the project design and preparation was fairly
advanced and the costs and benefits could be determined were retained. After this
screening only four possible sites were left. During preparation two of these were
recommended for inclusion in the proposed Project, both with good quality data on water
flows.
9.
By focusing on sites whose water flows are known, the proposed Project avoids the
problems faced by the UNDP project - Optimizing the Development of Small Hydel
Resources in Hilly Areas. Start-up of that project was substantially hindered owing to the
poor quality of data on water flows.
10. Details relating to the three components of the proposed Project are presented
below.
6

Kavadarci, located in South Central Macedonia, has a relatively stable
population of about 35,000, including a small ethnic minority. Economic
activities are fairly diversified with the largest employers being a metals
complex (ferro-nickel) and a winery and its accompanying vineyards. This
component involves installing five hydropower plants on the existing water
supply pipe for the town. The pipe starts on a mountain above the town and
runs 19 km downhill, with a total head of about 600 m, to supply around 360
liters/second to Kavadarci, the immediate area around the town and the
adjoining town of Negotino. The five small hydropower plants would be
installed close to existing water chambers on the pipe. There is an asphalt road
paralleling the pipe so that the necessary access to the site is simple. Also, there
is a new 10-kV distribution line nearby so that the connection to the gird is also
easy. The mini-hydropower plants will have a combined capacity of 1.04 MW
and are expected to generate about 7.6 GWh per year.
JP Komunalec, an administratively autonomous company, owned by the town
of Kavadarci will be responsible for implementing this component. JP
Komunalec has 192 employees and is funded from user fees, with no subsidy.
Fees are set such that it makes a small profit. The proposed GEF grant along
with export credit financing and a bank loan will allow the company to fully
fund the project without Government or city support. The cash flow from the
sale of electricity would pay off the export credit and bank loan in about 7 years
after production begins, based on conservative assumptions. (Details are
presented in Annex 1).

Debar is located in the far west of FYR Macedonia on the Albanian border.
Including the surrounding area, it has a population of around 28,000 and the
great majority of the population are of Albanian background. (Presently there
also are a large number of refugees in Debar.) Unemployment is high and the
main industry is light manufacturing. Water is supplied from the nearby
mountains and the flow of water in to the water supply system is fairly constant
at around 200-230 l/s. The portion of the supply pipe to be used as penstock for
the mini-hydropower plant is 260 meters long, with a head of 76 meters. This
component involves installing a 160 KW generating unit, producing about 1.2
GWh of electricity per year. The turbine and generating unit would be installed
in a small building in a vacant lot close to the city reservoir. An asphalt road is
adjacent to the lot and a 10KV line is close by.
JKP Standard, the city utility, will be responsible for implementing this
component. The company is administratively and financially autonomous and
employs 82 people. It is profitable, funded from fees, and does not receive any
subsidy. The proposed GEF grant along with an export credit financing and a
bank loan will fully fund the installation of the mini-hydropower plant without
any subsidy from the town or central government. However, because of its
lower state of development Debar may be eligible for a central government
interest rate subsidy, though no subsidy is assumed in the analysis. All loans
would be paid off in 6 years from starting production using conservative
assumptions (Details are presented in Annex 1).
7

Project Implementation Unit (PIU). The two city utilities which will
undertake the installation and operation of the mini-hydropower plants are
fairly experienced organizations and have used Macedonian Consultants for
design and engineering work. However, neither the utilities nor the consultants
are familiar with modern procurement methods, especially Bank procurement.
It is proposed that a separate PIU, reporting to the Ministry of Economy (which
oversees the electricity sector), be established to assist the city utilities in
undertaking these projects. It would review the design and engineering work,
but its primary function would be to assist the utilities with procurement. The
PIU, in turn, would be assisted by the state electric utility, ESM, on the
technical/operations side and by outside consultants on design and
procurement. The services of the outside consultants would be financed in part
by a bilateral grant from the Swiss Government.
Activities and Financial Inputs
11. The proposed Project, involving three main activities, would be implemented over
a period of about three years period as follows:

The first activity covers the creation of the PIU. The unit would be under the
purview of the Ministry of Economy which is responsible for energy issues, with
inputs from the Ministry of Environment. ESM would provide technical and
administrative support. In order to assist the PIU with procurement, technical
assistance would be provided by consultants funded by Switzerland. The cost of
this PIU is estimated at about US$160,000. The proposed GEF grant would cover
about US$34,000 of the total cost of consultancy services, Swiss bilateral grant
about US$100,000 and the Macedonians about US$26,000. The PIU is expected to
be fully operational within a few months of the GEF grant being made available.

The second activity is construction of the single mini-hydropower plant in Debar.
This would cost about US$440,000 with GEF contributing US$115,000, which is
the incremental cost. GEF funding would be used primarily for civil works. The
rest of the funding would be provided by an export credit for the equipment, a
bank loan and Standard’s own funds. Construction of this mini-hydropower plant
should be completed in about 2 years after project inauguration.

The third component covers the five mini-hydropower plants in Kavadarci. The
cost of this activity is about US$2.5 million. It is expected that GEF would
contribute the incremental cost of about US$600,000 and that this would be used
primarily to purchase equipment. The rest of the funding would come from an
export credit, a bank loan and the company’s own contribution, which is likely to
be mostly in kind. This component will take somewhat longer to complete since it
is likely that the five units will be built in groups rather than all at once. In this
case it may take up to about three years from project inauguration before all five
units are operating.
8
12. In addition to these activities, the Bank would supervise the operation of the PIU,
procurement under the GEF grant and the general implementation of the project by the
contractors and the water companies of Kavadarci and Debar.
Sustainability and Risk
13. The proposed Project, once built, is totally sustainable. Hydropower plants have
very long lives. For example, FYR Macedonia has hydropower plants which were built in
the 1920s and 1930s and which are still operating. Thus, they have been operating 60 to
70 years, which is much longer than the operating lives of most thermal plants.
Furthermore, there will be every incentive to operate these plants since they have very
low operating costs due to the free fuel (water). The revenues generated by the plants will
be much more than the cost of operating and maintaining them. Table below shows the
most important risks both to the development objectives and the global objectives.
Major Risks
Risk
Risk Rating
Negative repercussions of war in Kosovo
(refugees, economic and political pressures)
M
Lack of cooperation between the Ethnic
Communities
S
Government Commitment to opening up the
Sector
N
Prices for Electricity significantly lower than
anticipated after plants built
N
Weak procurement capacity
S
Risk Minimization Measure
Careful monitoring of all Bank activities
in the region. War is long over before
project starts.
The newly elected government has
initiated measures that are likely to
increase cooperation between ethnic
groups.
The Government has shown commitment
to opening the sector and has agreed on
conditionality under the PSIP which
would assist this.
The Government strongly supports these
mini-hydropower projects and has an
Agreement ((PSIP)with the Bank which
supports higher prices.
The project will include a project
implementation unit and consultants to
sharply reduce this risk
Overall Risk Rating
M
Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or low Risk)
Stakeholders and Social Assessment
14. The primary stakeholders are the Government of FYR Macedonia, the mayors, city
councils, municipal utilities and, above all, the people of Debar and Kavadarci. The
concept for the proposed Project came ultimately from the Government (Ministry of
Economy) which is very concerned about developing the country's hydropower potential.
They are particularly concerned about small hydropower sites which, despite their
considerable potential, are unlikely to be of interest to ESM or other outside utilities. The
Ministry of Environment has also been highly supportive since these mini-hydropower
plants represent a means of reducing air pollution and greenhouse gas emissions. The
details of the components were largely developed by the municipalities and the municipal
9
utilities. The mayors and city councils of the municipalities were heavily involved in the
decision to undertake the proposed Projects.
15. Secondary stakeholders include ESM, environmental NGOs and the Faculty of
Engineering, University of Skopje, which has been acting as advisor to the cities on this
project.
16. While social aspects of the proposed Project will be carefully monitored, no
significant issues are known. The proposed Project will not lead to higher water or
electricity tariffs for the local population. The city utilities own the water rights and
because the flow of water is not effected by the units there are no riparian issues. The
proposed Project will provide some local construction jobs and a very few jobs when the
units are operational, which will benefit both ethnic groups. Because of the small size of
the proposed Project and the lack of social issues, it was decided not to do a social
assessment.
Implications of the War in Kosovo
17. The appropriate timing for launching the proposed Project was considered
extensively in the light of the war in Kosovo, which has just ended. There are two reasons
against further delaying the project processing. First, expediting the processing of the
proposed Project would be consistent with the efforts of the international community
including the Bank in assisting the recovery of FYR Macedonia. The Bank, for example,
has an active program aimed at mobilizing additional financing for the country including,
an emergency loan which has recently been appraised. Second, existing projects are
moving ahead including the ongoing GEF Project on Lake Ohrid.
18. Transborder issues with Albania and Kosovo, in particular the transboundary
refugee movements, and their implications on the project will be carefully monitored. At
present, there are a number of Kosovar (ethnic Albanian) refugees in Debar, though
apparently very few in Kavadarci. While the financial situation of the municipality of
Debar could suffer in the short term, there should be no long-term impact on the proposed
Project. If anything, higher demand for water should, in theory, lead to higher electricity
output. One can assume, however, that most of the refugees would have left Debar by the
time the mini-hydropower plants are commissioned.
Lessons learned and reflected in proposed Project design
19. A key lesson learned from pilot phase projects in the Europe and Central Asia
region is the need for fully integrating such projects in to local development initiatives.
The proposed Project was designed and developed in collaboration with the Government
and municipal stakeholders and builds on considerable work done by the Government in
screening and identifying potential small hydropower sites. It also builds on the
expressed demand of the two municipalities for developing their small hydropower
potential as a source of additional income and employment generation.
20. The design of the proposed Project also takes into account the results of the
"quality at entry" assessment conducted by the Bank's Quality Assurance Group. Of
10
special relevance here are the results relating to the need to avoid unnecessary project
complexity and to prepare an adequate economic analysis. Reflecting this concern the
design has been kept simple and a detailed economic analysis has been undertaken. It
clearly shows that, without the proposed GEF grant, the components are economically
marginal.
21. Finally, the experience with the India mini-hydropower project also has been taken
into account. First, the proposed Project focuses on demonstration, given that it yielded
relatively high benefits in the case of India. Second, as noted above, by focusing on sites
whose water flows are known, the proposed Project minimizes the risk of implementation
delays such as those experienced in India.
II. INCREMENTAL COST ANALYSIS
Broad Development Goals and Baseline
22. Development Agenda: The broad development goals of FYR Macedonia, as
outlined in the Government’s National Development Strategy, focus on the acceleration
of recovery, the reduction in unemployment (the current unemployment rate is about 30%
) and the reversal of the rise in poverty (see the Bank’s Country Assistance Strategy for
FYR Macedonia, report 18162-MK). Other goals include the promotion of private sector
growth and enhancement of the efficiency of the state, both of which the proposed
Project supports. The development goals for the power sector include the encouragement
of independent power plants and the development of Macedonia’s hydropower resources,
to the extent economically feasible, in order to increase supply security and improve local
air quality.
23. Baseline: The baseline is defined as what would happen if the proposed minihydropower plants are not built. There are two aspects to this. First, the electricity that
would be produced annually by the mini-hydropower plants (about 8.8 GWh net of
losses), is primarily, but not entirely, base load. The plants are base load plants having
high capacity factors or utilization rates because they will run whenever water is used in
the towns. The city utilities have every incentive to run the plants since the incremental
cost of so doing is extremely low (no fuel costs) and the incremental revenues are quite
attractive. Therefore, in the baseline case additional electricity would be supplied
primarily by FYR Macedonia’s base load power plants, mainly the Bitola lignite fired
plant which produces around 70% of the country’s electricity, but also the Oslomej
lignite fired power plant which provides another 8-10% of the country’s electricity. This
additional generation would not be a problem for Bitola except at peak when it is already
at capacity.
24. This brings up the second aspect of the baseline. At peak periods the proposed
mini-hydropower plants would provide additional generating capacity of 1.2 MW. If this
capacity were not available Macedonia would have to import it or build additional
generating units. In practice, since most of the surrounding countries have the same or a
very similar peak, it is difficult to meet peak demand in the longer term from imports and
additional construction of generation would be necessary. The cost of providing this
11
additional capacity is usually measured by the long run marginal cost of generation and
transmission (LRMC). This figure has not yet been estimated for Macedonia but a study
of this issue is underway. However, approximate estimates are available and they range
from about 4.5- 5.5 US cents/kWh, including investments to meet local air quality
standards. Therefore, for this analysis the long run incremental cost of adding generating
capacity in FYR Macedonia is estimated at about 5.0 US cents/kWh.
GEF Alternative
25. The alternative to the baseline case is the proposed Mini-hydropower Project. As
mentioned above, it consists of the installation of 5 mini-hydropower plants on the water
supply pipe for the town of Kavadarci and one unit on the water supply pipe for the town
of Debar. Total capacity of these units is about 1.2 MW. The economic life is estimated
at thirty years, which is conservative given that hydropower plants tend to be long-lived.
26. Emission Reduction: Base load electricity generation currently comes, and will
continue to come, overwhelmingly from the Bitola Power Plant which emits about 1344
tons of carbon dioxide per GWh of electricity produced (367tC/GWh) and secondarily
from the Oslomej Power Plant with similar emissions. At the margin, peak load
electricity could come from a number of sources including new gas fired plants, coal
plants or hydropower plants in FYR Macedonia or Serbian lignite fired peaking plants.
Without the study mentioned above this will not be known. However, in any case peak
electricity is a small part of the total. Thus, the baseline case electricity generation
replaced by the proposed Project is overwhelmingly base load lignite fired generation,
mainly from the Bitola Power Plant, but also from Oslomej. Once the proposed minihydro plants are on line, they are expected to produce around 8.8 GWh of electricity per
year, reducing some 3,200 tC per year, or 96,900 tC over the planning horizon of 30
years, as shown in Table 2.1.
Table 2.1
Carbon dioxide emission reductions (tC)
Town
Kavadarci
Debar
Total
Total
83,700
13,200
96,900
99
0
0
0
00
0
0
0
01
0
440
440
02
2790
440
3,230
03
2,790
440
3,230
04-30/31
2,790
440
3,230
Scope of Analysis
27. The system boundary was chosen to include the entire power sector of FYR
Macedonia. However, as the capacity to be added by the proposed Project is relatively
small, it is assumed that the project would not have a direct impact on the overall
development of the sector. Sector effects can thus be measured through the long-run
marginal cost (LRMC) of grid power.
12
Incremental Costs
28. The incremental costs calculated for this analysis consist of the difference in the
present value of two life cycle cost streams. The first stream is the cost of the baseline
case, which is assumed to be the long-run marginal cost of generating the same amount of
electricity in a conventional way – that is 8.8 GWh per year at 5.0 US cents per kWh. The
second stream is the alternative or the proposed Project and consists of the relatively
large front-end investments in hydropower plants, followed by thirty years of quite low
operating costs (insurance, maintenance, expected larger repairs, labor, no fuel). The
investment costs for the mini-hydropower plants are shown in Table.2.2. The difference
in the present value of the two cost streams is shown in Table 2.3 by component. In
addition to electricity production, the proposed Project would yield several additional
benefits to FYR Macedonia that are taken into account as follows:



Local air quality improvements: these are captured in the analysis as the avoided
costs of pollution abatement, which is incorporated in the LRMC estimate;
Job creation: to incorporate job creation benefits, labor costs were ‘shadow priced’ at
70% of actual costs (shown in Table 2.2) over the first 5 years of the project
(assuming that the job market will have recovered at the end of 2003).
Energy security: this benefit was not measured as its importance and methodology for
valuation are unclear.
Table . 2.2
Capital costs of mini-hydro power plants (‘000 US$)
INVESTMENT CATEGORY
KAVADARCI
DEBAR
ELECTROMECHANICAL EQUIPMENT
1500
275
CIVIL WORKS
572
55
GRID CONNECTIONS
200
45
OTHER COSTS AND SERVICES
220
65
TOTAL
2492
440
Table 2.3
Lifetime costs of baseline and alternative (US$ 000)
Total
(PV)
Domestic Benefits
Kavadarci (GWh)
Debar (GWh)
Total (GWh)
Baseline costs
Kavadarci
Debar
Total
1,889
343
2,232
99
00
01
02
03
04
05-30/31
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.2
1.2
7.6
1.2
8.8
7.6
1.2
8.8
7.6
1.2
8.8
7.6
1.2
8.8
0
0
0
0
0
0
0
60
60
380
60
440
380
60
440
380
60
440
380
60
440
570
12
99
12
58
12
60
12
60
12
582
111
70
73
73
Alternative
Kavadarci
2,477
873
733
Debar
456
136
288
PIU
34
25
11
Total
2,967
1,033
1,032
Note: Figures may not add up due to rounding
13
29. Sensitivity Analysis: A sensitivity analysis was carried out to test the robustness of
the above estimates with respect to key parameters. The results are shown in Table 2.4.
Table 2.4
Sensitivity Analysis
Total Incremental Costs
Parameter
Absolute (US$000)
959
513
808
505
967
LRMC at 4.5 cents/kWh
LRMC at 5.5 cents/kWh
No shadow pricing of labor
High output (10.3 GWh/yr)
Low output (8.3 GWh/yr)
Per unit (US$/tC)
9.9
5.3
8.3
5.2
10.0
Summary
30.
The results of the incremental cost analysis are summarized in Table 2.5.
Table 2.5
Incremental cost matrix
Domestic benefits
Global environment
benefit
PV Costs (US$000)
- Kavadarci
- Debar
- Project management
Total
Per unit costs($/tC)
- Kavadarci
- Debar
Total
Baseline
Alternative
Increment
8.8 GWh/yr. Of electricity
from lignite-fired power
plant
96,900 tC
(3,200 tC/yr)
8.8 GWh/yr. of
electricity from minihydro
0 tC
-
1,889
343
0
2,232
2,477
457
34
2,967
96,900 tC
(3,200 tC/yr)
588
116
34
735
7.0
8.8
7.6
III. BUDGET
31. The largest cost items for the project are the equipment (turbines, generators etc.)
and the civil works (largely small buildings to house the generators). There are, however,
also costs of connecting the generators to the grid and various miscellaneous costs such
as land for small buildings, engineering etc. The cost of the PIU includes $100,000 for
foreign consultants who would review the design work and, more importantly, help
prepare the procurement documents.
14
Project Budget
(US$ 000)
Component
GEF
Equipment
Grid Connections
Civil Works
Other Costs and Services
PIU Operations
Project total
601
0
115
0
34
750
Other
sources
1174
245
512
285
126
2342
Project total
1775
245
627
285
160
3092
IV. IMPLEMENTATION PLAN
32. As noted above, a separate PIU, reporting to the Ministry of Economy, will be
established to assist the two city utilities in implementing the proposed Project. Its
primary function would be to assist the utilities with procurement. The PIU, in turn,
would be assisted by ESM on the technical/operations side and by outside consultants on
design and procurement. To keep the project simple, every effort will be made to ensure
that there are no more than two GEF financed procurement packages for each component.
These are likely to be primarily equipment in the case of Kavadarci and civil works in the
case of Debar. The PIU will make available information on the project to other
Macedonian and Balkan Utilities so as to encourage its replication (though this is not the
justification of the project which remains a short term response measure).
COMPONENT
6
12
18
MONTHS
24
30
36
42
PIU
KAVADARCI
DEBAR
V.
PUBLIC INVOLVEMENT PLAN
33. Stakeholders The major stakeholders are the Government of FYR Macedonia; and
the mayors, city councils and municipal utilities and people of Debar and Kavadarci. The
latter group will be the main beneficiaries since these plants they should provide: 1) the
municipal utilities with an alternate source of income, thus perhaps holding down the
increase in water tariffs; 2) a limited number of construction and operation jobs; as well
as 3) increased security of electricity supply. The citizens of the whole country will,
however, benefit from slightly lower emissions and a slight increase in security of supply.
15
34. Secondary stakeholders include the electric utility company, ESM, and the
environmental NGOs. ESM has an interest in seeing that the mini-hydropower plants are
reliable and provide inexpensive electricity since it will be the main customer for these
plants and it is responsible for maintaining the integrity of the Macedonian Power
System. The environmental NGOs are most interested in reducing pollution.
35. Stakeholder Participation The concept for the project came from the
Government (Ministry of Economy) which is very concerned about developing the
country’s hydropower potential. They are particularly concerned about small hydropower
plants since they believe there is considerable potential in that area which is unlikely to
be of interest to ESM or other utilities. The Ministry of Environment strongly endorsed
this concept. The details of the components were largely developed by the municipalities
and the municipal utilities. In each city the mini-hydropower projects were approved by
the major and town council and then turned over the municipal water utilities for
implementation. ESM ,as mentioned above, is interested in having the small hydropower
capacity of the country developed but does not want to undertake this role itself since it
would prefer to concentrate its own efforts on larger projects with higher rates of return.
However, it has agreed to assist with the establishment and operation of the PIU since it
is in its interest that the mini-hydropower plants work well. The Ecologists Movement of
Macedonia, the main environmental NGO, was consulted about this project which it
endorsed.
36. Social and Participation Issues There are no known significant social issues. The
project will not result in higher electricity or water tariffs and in fact in the long run may
result in lower water prices for the towns of Debar and Kavadarci if the utilities use their
small electricity profits to subsidize water. The water rights are already owned by the
public utilities. There are no riparian issues as far as Bank policy is concerned since the
project will in no way impact the existing flow of water, rather it will use some of the
untapped energy involved in that flow to generate electricity. Furthermore, the project is
ethnically balanced serving both ethnic communities. The citizens of both communities
also participated in the selection of the projects through their democratically elected town
councils and mayors.
VI. MONITORING AND EVALUATION PLAN
37. Reports: The PIU will provide quarterly reports on the status of the project. These
reports would concentrate primarily on the status of implementation of the project. In this
context they would focus on the major contracts and the status of physical
implementation.
38. For the purpose of monitoring and verification the quarterly progress reports would
include data on power generation and sales. These data would serve as the basis for
estimating the reductions in carbon emissions.
39. Supervision: The project will be regularly supervised in conjunction with the PSIP,
which also involves hydropower plants. It is expected that supervision would occur at
least twice a year. It would involve not only meetings in Skopje with the Ministry of
16
Economy and the PIU but also site visits to Kavadarci and Debar. (Fortunately these site
visits could cover both the mini-hydropower plants and larger hydropower plants which
are being rehabilitated under the PSIP; since both towns, Debar and Kavadarci, have
major hydropower plants which will be undergoing rehabilitation in close proximity.)
During these site visits, meetings would be held with the mayors of the towns and the
management of the city utilities. Also the physical implementation of the work would be
inspected. During supervision missions the local environmental NGOs will also be
contacted.
40. The main purpose of these supervision missions is to make sure that the project is
being implemented properly and that no unexpected issues are creating problems. Such
issues are, unfortunately, common and most often involve procurement.
41. Mid-term Review: A mid term review would be undertaken along with the midterm review for the PSIP. This is expected to occur no later than December 2000.
Annex 1
Page 1 of 5
FYR Macedonia
Mini-Hydropower Plants Project
Kavadarci
1.
Company JP Komunalec , which will undertake this project, was established in
1968 along the lines of a German City Utility and is owned by the town. It supplies not
only water and sewage services to the town of Kavadarci, but also it collects trash and
repairs the streets. Altogether it employs 192 persons of whom 11 have college degrees,
mostly engineers.
2.
JP Komunalec’s balance sheet at the end of 1997, the last year for which data is
available, was very solid with about $ 100,000 of cash and no significant long term debt
including no bank debt. Equity including social capital and reserves, was about $ 2
Million. There were, however, significant accounts payable, similar in size to the
accounts receivable after write-offs.
3.
The company charges enough for its service to cover all costs and make a small
profit. In 1997, the latest year for which data are available, the company had profits of a
little over 1 million Dn. or about $20,000. In addition there was significant depreciation.
4.
The project The water supply system for the cities of Kavadarci and the town of
Negotino was constructed about 12 years ago.. The water supply pipeline is steel with a
4.5 mm width and 457.2 mm diameter. The pipeline is underground with a total length of
19.135 Km. The system capacity is 360-380 l/s. The total height of the system from water
intake to final water chamber is 600 m. It is divided into six small water chambers for
water energy dissipation and water pressure reduction.
5.
The five mini-hydropower plants would be installed adjacent to the water
chambers. These would be Francis turbines combined with small asynchronous
generators. The first unit would have a capacity of 158 kW, the second 215 kW, the third
240 kW, the fourth 215 kW, and the fifth also 215 kW. Total generation would range
from about 7 to 9 Gwh per year depending on the number of hours when the units would
run and modest variations in water flow. For the purposes of this analysis, however, it
was estimated that the units would produce 7.6 Gwh , which is a relatively conservative
estimate. At this level of production the gross revenue from these mini-hydropower
plants would be about $350,000 and again this is a conservative estimate.
6.
The total cost of the Kavadarci mini-hydropower plants is estimated at about
$2.49 Million dollars consisting primarily of the cost of equipment ($1.5 Million,
primarily turbines and generators) and secondarily the cost of civil works ($570,000).
Annex 1
Page 2 of 5
Other costs include gird connections (to a close by 10 KV line) and various
miscellaneous items.
7.
The company has already invested or is investing $ 490,000 in the project. The
remaining cost of the project is about $2.004 Million. This would be financed by the GEF
Grant ($600,000), the company’s own funds (around $150,000 ), an export credit (up to
$1.0 Million) and borrowing from commercial banks. The export credit financing would
fund the purchase of three of the five units. The company is leaning strongly towards
purchasing Slovene generators and turbines, from TurboInstitut Ljubljana. The Slovene
export credit agency has been contacted though the Slovene Executive Directors Office to
confirm that Slovene export credits are available. The GEF funding is likely also to be
used to buy turbines and generators also though these would have to be purchased using
International Competitive Bidding. The commercial banks would provide bridge
financing to allow the export credit to be paid off more rapidly.( See Table 1-1).
8.
New civil works will be fairly limited since the power houses will be built
adjacent to the water chambers close to the pipeline. An asphalt road running parallel to
the pipeline provides good access. The small power houses, which have been designed,
will be 6X8 meters and located about 6 meters from the pipeline. One of the powerhouses
has been completed by the city utility in an effort to accelerate the project.
9.
The mini-hydropower plants will be remotely controlled. There will, however, be
a need for regular maintenance (initially about once a year), occasional supervision,
repairs in the later years and insurance. However, operating costs are quite low.
10.
The design and specifications for the project were prepared by the city utility of
Kavadarci, JP Komunalec, working with the faculty of engineering at the University of
St. Ciril and Methodius in Skopje, the main University in FYR Macedonia. This design
and the cost numbers were then confirmed by the Austrian Engineering and
Environmental Consulting firm, KWI- which strongly supported the project. The design
documentation is available in Macedonian.
Debar
11.
The company JP Standard, which will undertake this project, is the city utility for
the town of Debar with functions which are similar to those of JP Komunalec in
Kavadarci. It employs 82 persons of whom 3 have college degrees, all engineers.
12.
JP Standard’s balance sheet at the end of 1997, the last year for which data is
available, was also fairly solid, though since it is a small company the orders of
magnitude are modest. There was no bank or bond debt and the total value of equity
including social capital and reserves was about $1 million.
13.
The company charges enough to cover costs and has been profitable every year.
In 1997, however, profits were depressed due to local economic conditions and were only
about $2500 . However, depreciation was relatively more significant at about $30,000.
Moreover, the company is anticipating substantial earnings in 1998 and 1999 from
Annex 1
Page 3 of 5
outside activities- primarily reconstruction work already undertaken for a German
Company which has bought the main factory in the town.
14.
The Project The water supply system for the town of Debar and smaller nearby
settlements was constructed about 10 years ago. The water supply pipeline is steel with
4.5 mm width and 445 mm diameter. The system capacity is 200-250 l/s. The section of
the pipeline on which the mini-hydropower plant would be located is 260 m with a head
of 79 meters. The plant would actually be in a vacant lot in the city of Debar.
15.
The unit is planned to be 160 kW in size. It would consist primarily of a Francis
Turbine and an asynchronous generator. The output of the unit could vary somewhat
depending on the number of hours it is in use and the flow of the water. The range is from
about 1.1 Gwh to about 1.3 Gwh per year. The expected generation is about 1.2 Gwh per
year.
16.
The total cost of the Debar mini-hydropower plant is about $440,000 consisting
primarily of the cost of equipment ($275,000, mostly the turbine and generator), civil
works ($55,000), grid connection ($45,000) and other costs and services ($65,000). This
includes contingencies. The company has invested so far about $75,000 in the project and
anticipates further investments of close to $50,000 which would primarily come from its
construction profits. The remaining funds would be from GEF ($115,000), export credits
(up to $ 200,000) and bank financing. The export credit would be for the turbines and
generators and as in Kavadarci, the city utility is leaning strongly towards using Slovene
equipment, with which they are familiar. Again it has been confirmed that Slovene
Export Credit financing is available. The commercial bank financing, which Stopanska
Bank- the largest Macedonian Bank, has agreed to provide, would serve as a bridge loan
to allow the export credit to be paid off earlier. The company could also make a larger
equity contribution if required. ( See Table 1-2 below)
17.
Civil works will again be somewhat limited consisting of the powerhouse for the
generator, 4mX 5m, located about 3 meters from the pipeline and the connection to the
power grid. The small powerhouse is already designed. The vacant lot on which the
building will sit has a paved road adjacent and also a 10 kV power line with which the
plant will be connected.
18.
The mini-hydropower plant will be remotely controlled. There will, however, be a
need for regular maintenance (initially about once a year), occasional supervision, repairs
in later years and insurance. As a result, operating costs again will be quite low.
19.
Again the design of the plant was prepared by the city utility, JP Standard,
working with the faculty of engineering at the University of St. Ciril and Methodius. The
design and cost numbers were confirmed by the Austrian Engineering and Environmental
Consulting firm KWI, which supports the project.
Annex 1
Page 4 of 5
Table 1-1
FINANCING PLAN KAVADARCI( $000s)
Years
1999
Financing
Required
Investments
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1106.0
756.0
588.0
42.0
Operating Costs
0
0
0
0
58.0
60.0
60.0
60.0
60.0
60.0
60.0
Total Operations
1106.0
756.0
588.0
42.0
58.0
60.0
60.0
60.0
60.0
60.0
60.0
18.3
52.2
80.9
89.4
75.3
56.5
37.6
18.8
4.7
0.0
0.0
0
0
100.1
200.2
200.2
200.2
200.2
100.1
0.0
0
12.7
27.1
50.4
71.1
59.3
61.9
62.7
61.2
57.0
37.4
1.7
32.2
150.6
275.0
12.8
31.1
79.4
131.3
351.4
334.7
318.6
300.5
312.4
312.4
312.4
14.5
1137.1
835.4
719.3
393.4
392.7
378.6
360.5
372.4
372.4
372.4
74.5
0
0
372.4
372.4
372.4
372.4
372.4
372.4
372.4
372.4
372.4
372.4
372.4
Inter. +Guar. ECA
Repayment ECA
Interest Bank
Repayment Bank
Total Debt Service
Total
90.8
Financing
Provided
Operating Revenues
GEF Grant
0.0
300.0
280.0
21.0
ECA Loan
390.4
330.3
280.3
0.0
Bank Loan
208.7
179.0
159.1
0.0
20.3
6.2
-11.9
Utility Funding
538.0
26.0
1137.1
835.4
719.3
393.4
392.7
378.6
360.5
372.4
720.7
1001.0
900.9
700.7
500.5
300.3
100.1
0.0
0
0
387.7
546.8
456.0
476.3
482.5
470.6
438.4
287.8
12.8
0.0
Total
Loan Amounts
ECA Loan Amount
Bank Loan
390.4
208.7
Annex 1
Page 5 of 5
Table 1-2
FINANCING PLAN DEBAR ( $000s)
Years
1999
2000
2001
2002
2003
2004
2005
2006
Financing Required
Investments
140.0
300.0
Operating Costs
0
0
12.3
12.3
12.3
12.3
12.3
12.3
Total Operations
140.0
300.0
12.3
12.3
12.3
12.3
12.3
12.3
2.8
9.3
12.3
10.3
7.7
5.2
2.6
0.0
0
19.6
39.1
39.1
39.1
39.1
19.6
1.4
3.0
1.5
2.1
2.4
2.4
2.1
2.4
16.0
Inter.+Guar. ECA
Repayment ECA
Interest Bank
Repayment Bank
Total Debt Service
Total
2.8
10.7
34.8
50.9
48.9
46.6
46.5
37.7
142.8
310.7
47.1
63.2
61.2
58.9
58.8
50.0
0
58.8
58.8
58.8
58.8
58.8
58.8
4.4
2.4
0.1
Financing Provided
Operating
Revenues
GEF Grant
ECA Loan
115.0
85.0
Bank Loan
Utility Funding
Total
110.5
23.2
58.0
62.0
143.0
310.7
58.8
63.2
61.2
58.9
58.8
58.8
85.0
195.5
176.0
136.9
97.8
58.7
19.6
0.0
23.2
11.5
15.9
18.3
18.5
16.0
0.0
Loan Amounts
ECA Loan Amount
Bank Loan
Annex 2
Page 1 of 6
FYR Macedonia
Mini-Hydropower Plants Project
STAP REVIEW AND
WORLD BANK’S RESPONSE TO STAP1 COMMENTS
STAP Review
6 November 1998
Re: Review of Proposed GEF Project "FYR Macedonia Development of
Mini-Hydropower Plants"
Summary
This is a very interesting proposal. The proposed small scale hydroelectric projects would
provide environmentally benign sources of power in an economically and socially
distressed region, and would in a direct sense achieve an objective of the Global
Environment Facility (GEF) by reducing carbon dioxide emissions. The proposal seeks to
develop independent power production by supporting a government decision to back
independent power projects.
The proposal, however, has one particular problem. It fails, in this reviewer's opinion, to
make a case that the one-time demonstration would promote the diffusion of clean,
independent power sources. The proposal indicates that the mini-hydro projects would
have low internal rates of return (IRR) without a GEF grant. While the low IRRs may be
consistent with GEF rules, they are inconsistent with the assumption that independent
power producers, given a one-time boost, could replicate the GEF's introduction of a lowcarbon power source. That is, there is no explanation for how the demonstration of the
approach would transform the current situation into a sustainable market, at least for
mini-hydro plants. If the GEF grant does not somehow change the underlying economic
or financial context to create sustainable market conditions, including sufficiently high
rates of return, the project will not be replicated.
If the expected benefit of the project is not so much the specific technology-mini-hydro
power-but independent power production, then the proposal needs to make the case that
independent power production will also be low-carbon power production. That case can
sometimes be made, but it requires considerable elaboration.
The following specific comments may be useful to you.
Specific Questions About/Comments On the Proposal
1
Mr. William Chandler was STAP Reviewer of this project
Annex 2
Page 2 of 6
C
In section 1.d. you write, "It is expected that the project would reduce carbon
dioxide emissions by about 670,000 metric tons." Over what period is that amount
expected? Per year? Over the life of the project ?
C
Also in section 1.d. you write, "First, the proposed grants by GEF are such that they
would reduce carbon emissions for less than $lO/ton of carbon. "It is not clear to me that
this is the incremental cost of carbon emissions reduction. It seems to be simply the
project cost-which is not the incremental cost-divided by tons of carbon reduced.
C
In section C:l. you write: "After this screening was carried out by Austrian
Consultants, only four possible project components were left. Based on field visits to the
sites by Bank Staff, it was recommended that three of these potential components be
included in this GEF Project." This reviewer interprets this phrase as meaning that the
potential for mini-hydro is very limited in the country, suggesting that this demonstration
project might not, as claimed by the proposal, demonstrate the potential for expanding
min-hydro power.
C
In section C:l., you also write: "The insertion of the turbines into the water supply
pipes, however, in no way impacts on the quality or the quantity of water supplied to
these towns or other potential users." For this reviewer, this information was a very
important indicator that environmental impact will indeed be minimal. The proposers
may want to emphasize this aspect of the proposed project in the summary information.
C
At various points in the proposal, it is argued that a major benefit of the project will
be the introduction of independent power production. While the reviewer finds that a
worthy economic and political goal, it may not be particularly compelling environmental
goal. Brazil, for example, is moving rapidly away from state-sponsored power projects,
which are mostly large-scale hydro projects, to independent, privately-owned power
plants, which are likely to be coal-fired. Obviously, such a transition may have
drawbacks for carbon emissions.
C
In Section D:5., you write, "The mini-hydropower plants will cost around $2000 +
per kW compared to around $600 or less for a natural gas fired plant. "This information
suggests to this reviewer that the proposed GEF demonstration may be demonstrating a
technology that is not sustainable in the market without GEF grants, and that the expected
benefit of market replication of the project will not materialize.
C
In Section E: 6.c., you write, "The project has minimal environmental impact since
the facilities which will be built are small and attached to water supply systems which are
under construction or existing." This reviewer finds this argument incomplete. While the
proposal makes an adequate environmental case for the specific projects, the point of the
project is presumably to open the way for multiple replication, which implies that tens
even hundreds of mini-hydro facilities would be constructed. It is necessary to know
something, at least in general terms, about the environmental impact of creating such a
business (dam modification or construction, power line development), and to be able to
compare those impacts with the alternative of using lignite.
Annex 2
Page 3 of 6
C
The table "Checklist of Bank Policies" in Section E is not understandable.
C
In Annex I, in the table "Project Design Summary," you write, "Number of
independent power plants should increase". The most serious criticism this reviewer has
for the proposal is that this case has not been made. This reviewer finds evidence in the
proposal that the demonstration will not, in fact, achieve this goal (the high capital costs
and low IRRs cited formini-hydro), but not compelling reasons why it should achieve the
goal. In the right column, "Critical assumptions," you write "The Government is
committed to opening power generation to independent power plants and to the private
sector( risk: 10~)~~. That assumption is fine, but there is another, unstated assumption
that mini-hydro plants can be competitive in the market (or that independent power
producers would develop some other low carbon source), and this assumption needs to be
defended with some evidence. Would the post-grant, market find mini-hydro to be more
profitable than other power investments?
C
In Annex 2, FYR Macedonia Mini-Hydropower Project, Incremental Cost
Analysis, you seem to indicate that no one knows the long run marginal cost of power for
the country. That strikes me as a serious problem with a proposal that would make capital
investments for power capacity....
C
In the third line of "Costs" in Annex 2, there is a typo: "Kwh" should
be kWh.
C
Table A.3.1. "Mini-Hydro Power Plants Project Rates of Return" presents a very
serious difficulty for this proposal. If the IRRs for these projects are only in the range of
11-17 percent, and many investments in the region are available with IRRs of 20+
percent, how will the stated objective of the project to create a sustainable independent
power sector be achieved?
BANK 'S RESPONSE TO STAP REVIEW
1.
Overall, the STAP’s comments are valid but for an OP6 operation rather than the
proposed Project which is being prepared under the short-term response window.
2.
According to the GEF Operational Strategy "The GEF may finance climate change
projects that reduce greenhouse gases in the short-term. even if they are not part of an
operational program. Such projects will be funded if they are country priorities , costeffective in the short-term, and likely to succeed. The rationale for project support is
primarily the expected reduction in greenhouse gases rather than its programmatic
impact. .... Short-term projects may be of various types, including initiatives to seize
unforeseen opportunities and to meet contingencies. Short term response projects may
include, but are not limited to, mitigation in areas for which operational programs have
not yet been developed.”
3.
In the context of the above guidance, it is our view that replication is an ancilliary
benefit and the proposed project can be justified without it. Also, the expected benefit of
the project is not so much the specific technology - mini-hydro power - but independent
power production in general. In other words, IPP demonstration is the domestic and not
Annex 2
Page 4 of 6
the GEF objective. Of course, one needs to show that the development goal does not
contradict the global environmental goal; i.e. that IPPs will not be more carbon intensive
than the public sector power. We believe that this would be the case as the fuels utilized
will the same, independent of ownership. But since low carbon IPPs is not the global
environment benefit there would be no need for an elaborate analysis of this point.
RESPONSE TO SPECIFIC STAP COMMENTS
C
In section 1.d. you write, "It is expected that the project would reduce carbon
dioxide emissions by about 670,000 metric tons." Over what period is that amount
expected? Per year? Over the life of the project ?
 It's the lifetime emissions in tons of CO2.
C
Also in section 1.d. you write, "First, the proposed grants by GEF are such that they
would reduce carbon emissions for less than $10/ton of carbon. "It is not clear to me that
this is the incremental cost of carbon emissions reduction. It seems to be simply the
project cost-which is not the incremental cost-divided by tons of carbon reduced.
 It is GEF contribution divided by carbon benefit: i.e. the agreed incremental
cost. Since we cap at $10/ton in two of the three components the agreed IC are
not quite the same as the analytic IC estimate.
C
In section C:1. you write: "After this screening was carried out by Austrian
Consultants, only four possible project components were left. Based on field visits to the
sites by Bank Staff, it was recommended that three of these potential components be
included in this GEF Project. "This reviewer interprets this phrase as meaning that the
potential for mini-hydro is very limited in the country, suggesting that this demonstration
project might not, as claimed by the proposal, demonstrate the potential for expanding
min-hydro power.
 The screening was for components that can successfully demonstrate IPPs (and
have positive IC). Hence, the criteria (i) no involvement by the state utility, and
(ii) advanced preparation. After a successful demonstration those two criteria
will no longer be as important and one can go back to those project. Presumably,
the issue of riparian rights (the third criteria) may also be sorted out over time.
C
In section C:1., you also write: "The insertion of the turbines into the water supply
pipes, however, in no way impacts on the quality or the quantity of water supplied to
these towns or other potential users." For this reviewer, this information was a very
important indicator that environmental impact will indeed be minimal. The proposers
may want to emphasize this aspect of the proposed project in the summary information.
 The relevant section will be expanded.
C
At various points in the proposal, it is argued that a major benefit of the project will
be the introduction of independent power production. While the reviewer finds that a
Annex 2
Page 5 of 6
worthy economic and political goal, it may not be particularly compelling environmental
goal. Brazil, for example, is moving rapidly away from state-sponsored power projects,
which are mostly large-scale hydro projects, to independent, privately-owned power
plants, which are likely to be coal-fired. Obviously, such a transition may have
drawbacks for carbon emissions.
 See para 3 above
C
In Section D:5., you write, “The mini-hydropower plants will cost around $2000 +
per kW compared to around $600 or less for a natural gas fired plant. ”This information
suggests to this reviewer that the proposed GEF demonstration may be demonstrating a
technology that is not sustainable in the market without GEF grants, and that the expected
benefit of market replication of the project will not materialize.
 This is an STRM not an OP6 project, so replication is not essential . Obviously,
it is desirable and constitutes an ancillary benefit, but the project can be justified
without having to rely on replication.
C
In Section E: 6.c., you write, “The project has minimal environmental impact since
the facilities which will be built are small and attached to water supply systems which are
under construction or existing.” This reviewer finds this argument incomplete. While
the proposal makes an adequate environmental case for the specific projects, the point of
the project is presumably to open the way for multiple replication, which implies that tens
even hundreds of mini-hydro facilities would be constructed. It is necessary to know
something, at least in general terms, about the environmental impact of creating such a
business (dam modification or construction, power line development), and to be able to
compare those impacts with the alternative of using lignite.
If there were to be replication, the follow-up operations will have to go through a
standard environmental impact assessment. But again, replication is only a side
benefit.
C
The table “Checklist of Bank Policies” in Section E is not understandable.
 The format is part of the standard template.
C
In Annex I, in the table “Project Design Summary,” you write, “Number of
independent power plants should increase”. The most serious criticism this reviewer has
for the proposal is that this case has not been made. This reviewer finds evidence in the
proposal that the demonstration will not, in fact, achieve this goal (the high capital costs
and low IRRs cited for mini-hydro), but not compelling reasons why it should achieve the
goal. In the right column, “Critical assumptions,” you write “The Government is
committed to opening power generation to independent power plants and to the private
sector ( risk: low)”. That assumption is fine, but there is another, unstated assumption
that mini-hydro plants can be competitive in the market (or that independent power
producers would develop some other low carbon source), and this assumption needs to be
Annex 2
Page 6 of 6
defended with some evidence. Would the post-grant market find mini-hydro to be more
profitable than other power investments?
 Again, the operation is being processed under the STRM window.
C
In Annex 2, FYR Macedonia Mini-Hydropower Project, Incremental Cost
Analysis, you seem to indicate that no one knows the long run marginal cost of power for
the country. That strikes me as a serious problem with a proposal that would make
capital investments for power capacity….
 What is presented are first approximations. Which are sufficient for moving
ahead at this point. But agree that better information is needed. The Study,
about to be initiated, is expected to provide the data.
C
In the third line of “Costs” in Annex 2, there is a typo: “Kwh” should be kWh.
 Thanks – noted.
C
Table A.3.1. “Mini-Hydro Power Plants Project Rates of Return” presents a very
serious difficulty for this proposal. If the IRRs for these projects are only in the range of
11-17 percent, and many investments in the region are available with IRRs of 20+
percent, how will the stated objective of the project to create a sustainable independent
power sector be achieved?
 The table concerns the financial rate of return, and 20+% is probably also a
financial rate of return. The economic rate of return will be better, especially
once we consider (i) employment effects (shodow price labor); (ii) local
environmental benefits, (iii) global environment benefits, etc. But, obviously even
after all that we don’t meet the hurdle rate (what ever it is) we should not do it.
Annex 3
Page 1 of 2
02/01/99 21:17 GEF SECRETFlRIAT + ENUGC NO.835 P0101012
DECEMBER 1998 INTERSESSIONAL WORK PROGRAM:
COMMENTS FROM COUNCIL MEMBERS (reference to GEF/IS/S - December 16,
1998)
Macedonia, FYR: Development of Mini-Hydropower Plants (World Bank)
GEF: $1.50 million, Total: S 6.4 million
Comments from Switzerland 11/20/99)
It should be noted that the inclusion of STAP technical reviews and IA responses as
required annexes has proven to be very useful. The STAP reviewer should always be
identified. STAP reviews should not be summarized by the IA, as in the case of Samoa,
but included in their original form.
Commentss/rom France /l/20/99)
Only one project is presented in the Climate Change category. It concerns the
establishment of mini-hydropower plants in Macedonia (eight units between 0.1 and 1 .O
MW, connected to the network and located in three zones). The GEF is asked for an
amount of US$1.5 million on a total investment figure of US$6.4 million. The other
sources of financing will be: export credits, USS3.4 million; and the Government, US%
1.4 million. In principle, the project meets GEF eligibility criteria, and is of significant
interest: the introduction of small hydropower plants to replace thermal power plants is
certainly feasible in the East and South regions if innovative methods of executing such
projects are adopted.
This project warrants the following comments: The method used in calculating the GEF
grant creates problems, in the sense that it leads to allocating most GEF grants to those
projects that are least cost-effective. In this case, the calculation will be credible only if
the arguments presented in the project documentation demonstrate that the GEF grant
will help lower the costs of mini-hydropower plants in Macedonia, and that subsequent
projects have a good chance of being financially viable without the GEF. The project
documentation should also indicate the specific arenas in which opportunities for cost
reduction are to be expected.
Details of the financial package should also be provided. The sharing of responsibilities
and resources between public players and private operators needs to be clearer. (Since
over 40% of project financing is to come from public sources-21% from the Government
and 23% from the GEF-requirements in both the institutional and contractual spheres
need to be spelled out.)
BANK'S RESPONSE TO COUNCIL'S COMMENTS
(1)
Incremental Costs:
The project is proposed as a Short-Term Response Measure for which the GEF
eligibility criteria is the reduction of carbon emissions for less than $10/ton of carbon, at
low risk, and in accordance with country priorities. The proposed project is below the
Annex 3
Page 2 of 2
cost effectiveness threshold ($7.6/tC); has a high likelihood of success since it is a well
known technology and is of high priority for the country (it is linked to the NEAP; the
Macedonian Long-term Investment Plan ands the World Bank Power System
Improvement Project). The life cycle costs of the proposed mini-hydros have been
reviewed and found reasonable (high front end capital cost offset by very low operating
costs and long life). Alternative renewable sources of energy have been considered,
however solar and wind are very limited and there is very little information about
geothermal (which in FYR Macedonia is better for heating than power generation).
Budget estimates are provided in the MSP Brief.
(2)
Replicability and Cost Reduction Options:
As a Short Term Response Measure, replicability is not a requirement for GEF eligibility.
However, some degree of replicability is expected as an additional benefit since the
proposed project aim at promoting the development of small hydropower plants by
independent power producers. The project will lead to lower costs for future minihydropower plants. The main arenas for cost reductions would be: 1) making the minihydropower technology in Macedonia better known so that in future certain projects
(mainly municipal water projects) would be designed using this technology; and 2)
establishing the process of obtaining operating licenses, agreeing on power purchase
arrangements etc, which this project will pioneer.
(3)
Other Council Comments:
For the comments on incremental cost calculation and cost reduction options, see first
two items in this table.
STAP Reviewer was Mr. William Chandler. His comments and the Bank’s response are
attached to the MSP Brief.
Information on the financial packages and responsibilities is provided and includes a
detailed forecasts of financial flows. The financing is fairly simple and consists of four
components: 1) equity contributed by the city utilities (21%); 2) GEF and bilateral grants
(26%); 3) borrowing from export credit agencies (36%); and 4) Commercial bank loans
(17%). All debts are paid off in about 6-7 years.
Social aspects of the project will be monitored during implementation, However, no
significant social issues, including transboundary issues with Albania and Kosovo,
particularly related to refugee movements, are expected to affect the project by the time
the plants are commissioned.
World Bank User
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