PROJECT DEVELOPMENT FACILITY
REQUEST FOR PIPELINE ENTRY APPROVAL
AGENCY’S PROJECT ID:
GEFSEC PROJECT ID: 2946
COUNTRY: India
PROJECT TITLE: Optimizing Energy Efficiency
in Rehabilitation of Coal-fired Power Plants in
India
GEF AGENCY: World Bank
OTHER EXECUTING AGENCY(IES):
DURATION: 5 years
GEF FOCAL AREA: Climate Change
GEF OPERATIONAL PROGRAM: OP 5, Removal
of Barriers to Energy Efficiency and Energy
Conservation
GEF STRATEGIC PRIORITY: SP2, Increased
access to local sources of financing for renewable
energy and energy efficiency; and SP3, Power sector
policy frameworks supportive of renewable energy
and energy efficiency
ESTIMATED STARTING DATE: January 2007
ESTIMATED WP ENTRY DATE: March 2006
PIPELINE ENTRY DATE: October 2005
FINANCING PLAN (US$)
GEF PROJECT
Project (estimated)Phase 1
Phase 2
Project Co-financing
(estimated)
30,000,000
30,000,000
250,000,000
PDF A*
PDF B**
PDF C
Sub-Total GEF
60,000,000
PDF CO-FINANCING (details provided in
Part II, Section E – Budget)
IBRD/IDA/IFC
150,000,000
Government Contribution
50,000,000
Others
50,000,000
Sub-Total Co-financing:
250,000,000
Total Project Financing:
310,000,000
* Indicate approval date of PDFA:
** If supplemental, indicate amount and date of
originally approved PDF:
Above figure represent minimum proposed case.
RECORD OF ENDORSEMENT ON BEHALF OF THE GOVERNMENT:
(Enter Name, Position, Ministry)
Date: (Month, day, year)
This proposal has been prepared in accordance with GEF policies and procedures and meets the
standards of the GEF Project Review Criteria for approval.
Steve Gorman
GEF Executive Coordinator, World Bank
Malcolm Jansen
GEF Regional Coordinator, SAR
Date: November 23, 2005
Date: January 13, 2006
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PART I - PROJECT CONCEPT
A - SUMMARY
India has 30,000 MW of installed coal-fired power generation capacity that is now, or soon
will be, in need of major rehabilitation. Despite the urgent need to pursue these least-cost
projects, both for the purposes of meeting the growing demand for power and for upgrading
the environmental performance of the plants, India’s plans for large-scale rehabilitation
activities have not been realized. Even if current plans could be successfully executed, the
program would not be optimized for energy efficiency (and therefore carbon efficiency) – the
main objectives are life extension and increased utilization, and there are insufficient market
incentives for energy-efficient solutions. A GEF intervention is proposed to reduce barriers
affecting overall rehabilitation activities, and optimize the resulting investments for energyefficiency.
The mode of intervention would be to combine a GEF grant with Government of India and
IBRD funds in a risk-sharing arrangement within a dedicated financing facility, to be housed
in India’s Power Finance Corporation (PFC). This financing window would offer long-term,
rupee-denominated loans, offering power plant owners in India a competitive debt financing
option for projects to rehabilitate coal-fired plants. These loans would be contingent on the
plant owners performing an energy audit and baseline performance assessment of the plant,
and optimizing the rehabilitation investment plan for energy efficiency as a first-amongequals priority in the context of the overall plan for environmental upgrading. Consistent
with this programmatic reduction of barriers, individual projects would be expected to
include assessment of carbon finance possibilities at the investment planning stage – an
intervention that would also enhance post-investment monitoring and sustainability. GEF’s
involvement is critical. Without GEF, PFC will not be able to break down barriers to these
kinds of projects – ensuring that, as has been the case in recent years, far less rehabilitation
will take place, compared with the targets in the national plan. The GEF intervention would
demonstrate the viability of environmentally sound approaches towards revitalization of a
huge component of India’s capacity base, and open up the market for up to 30,000 MW to be
renovated and modernized over the next decade.
B - COUNTRY OWNERSHIP
There is solid ownership of this initiative within India. Power sector institutions have
expressed keen interest in mobilizing GEF resources to reduce barriers and spark innovation
in the Coal R&M sector, led by the Ministry of Power. The Ministry of Finance (Department
of Economic Affairs) and the Ministry of Environment and Forests (the coordinator for GEF
activities in India) are also supportive and apparently keen to reverse the decline in GEF
activities in India over the course of GEF’s three financing rounds.
At the time of submission of the revised proposal (Nov. 23, 2005), India’s Ministry of Power
had written a strong endorsement of the project to the Ministry of Finance (DEA) and to the
Ministry of Environment and Forests. MoEF, meanwhile, has put the proposed project on its
agenda for the quarterly meeting (in December) to discuss potential GEF projects, in its role
as the coordinating authority for GEF in India. We therefore expect to receive a formal
request from DEA in December, and will transmit this to GEF once it is received.
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
COUNTRY ELIGIBILITY
India signed the United Nations Framework on Climate Change (UNFCCC) on 10 June 1992
and ratified it on 1 November 1993.

COUNTRY DRIVENNESS
India’s National Electricity Policy, notified on February 12, 2005, has the following
objectives:







Access to Electricity: Available for all households in next five years
Availability of Power: Demand to be fully met by 2012; energy and peaking
shortages to be overcome and adequate spinning reserve to be available
Supply of reliable and quality power of specified standards in an efficient manner and
at reasonable rates
Per capita availability of electricity to be increased to over 1000 units by 2012
Minimum lifeline consumption of 1 unit/household/day as a merit good by year 2012
Financial turnaround and commercial viability of electricity sector
Protection of consumers’ interests
A key objective under the policy is “Mission 2012: Power for All,” which aims to see
development of sufficient power to achieve GDP growth rate of 8%.
Among the strategies to achieve the objectives, the following can be highlighted:




Power generation strategy with focus on low cost generation, optimization of
capacity utilization, controlling the input cost, optimization of fuel mix, technology
upgradation, and utilization of Non Conventional energy sources
Distribution reform with focus on System upgradation, loss reduction, theft control,
consumer service orientation, quality power supply commercialization, Decentralized
distributed generation and supply for rural areas.
Financing approaches to generate resources for required growth of the power sector
Conservation measures to optimize the utilization of electricity with focus on
demand side management, load management and technology upgradation to provide
energy efficient equipment.
Meeting the “power for all” target requires an estimated 100,000 MW of new capacity to be
added in the period 2002-2012, and there is of course a degree of focus in the policy on
seeing that the demand for new capacity is met. But other means of meeting demand,
including renovation and modernization of power plants, energy conservation and efficiency,
environmental issues, and efficient energy technology R&D also figure prominently in this
policy. With regard specifically to Coal R&M, the policy says that “Renovation and
modernization for achieving higher efficiency levels needs to be pursued vigorously and all
existing generation capacity should be brought to minimum acceptable standards.” The
policy provides for closing down plants that are too old, decrepit, and dirty to be turned
around by renovation.
The new electricity policy, in the area of Coal R&M, has its centerpiece in a new program ,
the “Partnership for Excellence.” In its first phase, about 10,000 MW of poorly performing
capacity is included. The program involves: 1) identification of immediate, quick wins that
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can improve power plant performance; 2) development of a more effective operations and
maintenance (O&M) approach that can make medium-term impact; and 3) identification of
an optimal R&M investment plan, followed by its execution. This partnership approach
involves state-owned generators, PFC, NTPC and other entities.1 At this time, the
Partnership has begun and personnel from well-performing plants are just starting to be
deputed to poorly performing plants. Detailed investment plans have not been done under the
program, so there is a great opportunity to work through this program to generate a good
pipeline of projects that incorporate low carbon technologies and are optimized for energy
efficiency. However, the proposed GEF-supported financing window in PFC would not be
limited to Partnership for Excellence projects; other public sector opportunities and private
sector players could also bring projects forward.
C – PROGRAM AND POLICY CONFORMITY
1. PROGRAM DESIGNATION AND CONFORMITY
This program is consistent with GEF OP#5, Removal of Barriers to Energy Efficiency and
Energy Conservation. The envisaged outputs are closely linked with two strategic priorities
for the climate change focal area:

Increased access to local sources of financing for renewable energy and energy
efficiency (CC-2) – this project will design a financing mechanism to help create a
large and ultimately self-sustaining sub-sector. In addition to impact on PFC, the
project team will explore with PFC the potential for co-financing requirements for
the projects to be met from the commercial banking sector. Additionally, the team
explore with IFC the possibility of a parallel financing window (within or without
PFC) for IFC support of coal R&M projects in the private sector.

Power sector policy frameworks supportive of renewable energy and energy
efficiency (CC-3) – the project will help mainstream energy efficiency as a firstamong-equals priority in R&M investment. While current policy encourages EE,
actual results clearly indicate that the potential for EE is far from realized in these
kinds of projects.
The project might also help the Indian market be more responsive to opportunities for clean
coal technology transfer, and in this sense an additional GEF strategic priority may be
addressed (Global market aggregation and national innovation for emerging technologies,
CC-5). There is great potential for innovation in technology, operations, and management of
coal-fired power stations in India. The project will allow an integrated look at how best to
achieve EE objectives. There should be particularly great opportunities for national
innovation, as India has built up certain industrial and service capabilities related to coal-fired
power, but has not yet mainstreamed some of the more advanced clean-coal technologies
(e.g., super-critical boilers, coal washing techniques, etc.). The project should help in
enhancing these capabilities by providing incentives to innovate in the area of energyefficient products and services for rehabilitation projects.
2. PROJECT DESIGN
A) ENERGY SECTOR BACKGROUND
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The other entities are better performing state generation companies, such as Rajasthan’s RVUN.
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India depends on coal-fired power plants for 58% of capacity, or 66,000 MW, but much of
this does not perform well. According to the Ministry of Power “the poor performance of
India's existing generating units has been a principal cause of power storages and unreliable
quality of power supply. The primary culprits are the coal-fired thermal power stations which
have an average plant load factor (PLF) of less than 60%.” Heat rates, the key measure of
efficiency for conversion of fuel into electricity, are also poor. Some plants in need of
renovation have heat rates of around 5,000 kcal/kWh, against an efficient rate of around
2,600 kcal/kWh.
India’s Central Electricity Authority, the lead technical agency in government, estimates that
up to 30,000 MW of the capacity base is in urgent need of rehabilitation now, or will be in
urgent need in the near future. Despite policy intentions to rehabilitate coal-fired power
plants, however, the amount of capacity that has actually been rehabilitated has consistently
fallen well short of planned targets. For Coal R&M that has happened, the results have
sometimes been disappointing. In some cases, plant utilitization has not significantly
improved, and where it has, in some cases declined back to the pre-R&M levels within a few
years. And for the past and planned R&M, energy efficiency has not been optimized. Higher
efficiency can be one outcome of R&M activities, but historically and now the main
objectives are life extension and raising plant load factors (PLF).
India’s current Coal R&M program, as considered in this note, covers two separate economic
plan sub-components – smaller projects (Renovation & Modernization) and major project
(Life Extension Program). For sake of ease and reflecting common usage in the Indian power
sector, we refer to everything in this note as Coal R&M. Collectively, India was able to keep
pace with needed investments through the better part of the 7th, 8th and 9th plans, covering
the fifteen years until 2003. In the current, 10th plan however, the life extension target – the
major rehab work – has increased to about 10,400 MW, and work is currently being
undertaken / has been completed only for about 1,800 MW (less than 20% so far). For the
smaller projects, the target for the 10th plan period is 6,800MW (excluding NTPC plants
accounting for 7,460MW). Progress has been very slow in meeting the non-NTPC target. In
the 11th plan, an additional 13,000 MW is planned for some level of rehabilitation. But with
the 10th plan ending in 2007 and set to fall well short of its targets, it is difficult to see how
India will manage to achieve the combined target of well over 20,000 MW in rehab work by
2012, when the 11th plan will end.
B) BARRIERS TO ENERGY-EFFICIENT REHABILITION OF COAL-FIRED POWER PLANTS
There are a host of barriers to realizing the potential for Coal R&M in India. The GEF
intervention would be designed at a programmatic level to address a wide range of the most
serious of these barriers; inevitably, of course, it may not be able to reduce all barriers facing
the worst performing plants in the more difficult states. Having said that, however, the
proposed scheme should be able to provide a viable financing option for the vast majority of
Coal R&M candidates in India. The following barriers may be highlighted:

Barrier to energy efficiency financing – Indian utilities are extremely conscious of the
tariff impact of anything that they do. There is thus a strong focus on viability and
relatively rapid payback periods for any investments. Utility finance managers are also
very interest rate conscious, for the same reason. The financing challenge is complicated
by the relative dearth of long-dated instruments in the market. While tenors for utility
finance in general are getting longer, commercial lenders will not consider those longer
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tenors (10-12 years) for Coal R&M projects. The proposed program will address this
barrier by offering a competitive financing option to coal-fired generators. Market
research during the course of appraisal will narrow in on the set of terms likely to incite a
good response from the market.

Lack of energy efficiency orientation – Indian generators have been primarily concerned
with extending the life of poorly performing plants; life extension activities are then
expected to translate into higher utilitization (in India, “plant load factor” or PLF). Of
course, many life extension activities also result in higher efficiency, in theory and
sometimes in practice, but government and regulatory authorities focus on PLF as the
primary indicator of plant performance, rather than heat rate. The result is that Indian
generators are not well incentivized to treat energy efficiency as a first-among-equal
priority in their R&M planning. The proposed program will require energy efficiency to
rank as a first-among-equals priority, and provide technical assistance to ensure that the
current performance of individual plants is precisely known, and that the ultimate
technical solution reflects energy efficiency optimization.

Policy barrier to energy efficiency – India has an Energy Conservation Law (2001),
implementation of which is partially incomplete. Under the Act, the Central Government
has the powers to (i) define Energy Intensive Industries – this includes Thermal
Generation (ii) define energy consumption standards (iii) direct the energy intensive
industries specified in the Schedule to get energy audits conducted by an accredited
energy auditor in such manner and intervals of time as may be specified by regulations.
The Act defines Energy Audit as "the verification, monitoring and analysis of use of
energy including submission of technical report containing recommendations for
improving energy efficiency with cost benefit analysis and an action plan to reduce
energy consumption." However, the Government has not notified the requirements for
energy audit for thermal power plants under the Act. This means in turn that there are no
systematic baseline assessments of the current performance of India’s coal-fired power
plants. While the proposed intervention cannot drive full implementation of the law,
even without notification, projects wishing to access financing will have to perform
energy audits. This will address the informational issue about current coal plant
performance on a plant-by-plant basis.

Energy Shortages – one of the key barriers to Coal R&M today is that many of the best
candidates for immediate, major R&M are owned by states that depend on the (typically
low cost) power from these plants for an important chunk of their overall supply. Taking
plants off-line for longer periods of time to do major work is politically risky and
economically damaging. States can buy replacement supplies in the bulk power market –
the problem is that prices in the market are always higher than the price of power for
older plants that are heavily depreciated. While this is not, directly, an area of GEF
concern, the program must ensure that the concerns of states in this regard are addressed.
There are two dimensions – the supply risk, i.e. making up for lost supply during the
period of renovation; and the price risk, i.e. the higher cost of replacement supplies as
they are purchased from the market. Supply risk could be addressed by utilizing the 15%
of total central sector generation which is unallocated. Price risk is harder to address, but
the project team would consider several alternatives in appraisal, including long-term
financing that could enable higher incremental supply costs to be annuitized over a period
of time, rather than all passed through to customers in the form of higher tariffs in the
year during which those costs are incurred.
6
It should be noted that the broader regulatory and market barriers to development of India’s
power sector are not the focus of the proposed GEF intervention. The critical aspect to be
addressed by the project is the regulatory treatment of investments in energy efficiency as a
core objective of the coal R&M program. Up-front, the program will require an
understanding with regulatory agencies that allowable generation tariffs will have to include
the full cost of the improvements, adjusted by the subsidy amounts; and that the subsidy
cannot be appropriated (in a sense) such that tariffs are reduced. In terms of broader reforms,
India is making significant progress on reducing losses, increasing collections, targeting
subsidies, and putting in place effective subsidy transfer schemes to help ensure viability in
the distribution sector. Indian authorities (regulatory and political) have been less successful
to date in taking the bold steps on household and agricultural tariffs that will in time be
needed. But progress on this issue – the biggest political economy issue in India, period – is
far beyond the scope of a coal R&M project to address.
C) PROJECT DESIGN
Component No. 1: Project Preparation Grants for energy audits and baseline, and
development of energy-efficient R&M investment plan
The TA component is intrinsically linked to the financing mechanism (Component No. 2,
below). To access the financing window and therefore avail of the interest rate subsidy,
plants would be required to perform the energy audits (that should be done, but are not today)
and baseline their current performance. A second study would be done to optimize the
technical and operational solution for energy efficiency. The two studies combined would
serve as appraisal inputs for specific projects, and would incorporate assessment of carbon
finance participation. The project team also intends to assess the co-financing (whether cash
or in-kind) requirements that will help ensure buy-in from the generators.
Component No. 2: Coal R&M Energy Efficiency Financing Window
The concept would be, through grant funds for technical assistance and investment, to scale
up India’s R&M program. GEF and IBRD funds would be pooled in a risk-sharing
arrangement that offers coal-fired generators a competitive financing option for R&M
generally, but specifically promotes the selection of energy-efficient solutions. The financial
purpose of the GEF funds is to blend down the IBRD amounts to a lower interest rate,
providing incentive for generators to access the funds but requiring them to increase the
energy efficiency aspects of the resulting R&M projects. There could additionally be an
existing GOI interest rate subsidy to provide co-financing fro Government and to increase the
ratio of IBRD to GEF amounts. It would be ideal if GEF’s programmatic intervention could
then be enhanced further at the project level with carbon finance, which would be fully
additional to the GEF/IBRD intervention, and would bring the additional benefit of a tougher
monitoring regime to ensure that energy efficiency gains were realized to the maximum
extent, and sustained over time. But current limitations on blending GEF and carbon finance
are recognized, and a more likely scenario might be that the GEF intervention jumpstarts a
large market for energy-efficient coal R&M in India, and that this mature market then looks
to carbon finance for future subsidy requirements (the “GEF innovates, CF replicates”
model).
3. SUSTAINABILITY (INCLUDING FINANCIAL SUSTAINABILITY)
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The power generation market in India has surprisingly strong underpinnings is spite of the
strained overall financial performance of the power sector in India. While years of
restructuring and reform in India has not put the sector as a whole into financial balance,
losses have over time been mostly concentrated in the distribution sector. Most generators,
whether public companies at the central or state level, or private companies, are profitable
and get paid by distributors on a timely basis – distributors, for their part, typically are
compensated for at least a portion of their loss by subsidies from the state governments. The
remaining generators are owned at the level of the individual states and are regulated on a noprofit, no-loss basis. This means that at this time, for this set of companies, financing new
investments is an additional challenge because there are no retained earnings to contribute to
the capital program. The picture could change for many companies in this situation if they
were more efficient, thus affording state governments and regulators more elbow room within
current tariff ranges to allow them a return on equity. The GEF program is expected,
therefore, to make a direct contribution to the long-term sustainability of some generators.
India’s increasingly robust bulk power market should be highlighted here. Even if a
generator is not, for some reason, paid by a distribution customer, generators have a viable
spot market option – what India calls the ABT (availability-based tariff) market. The
existence (and effective functioning) of this market provides generators with significant
insulation from the performance woes of the distribution side. Indeed, the ABT market is a
source of discipline on the distributors, who know that they will lose supply to the ABT
market if they do not pay their bulk power bills.
For Coal R&M as a whole, basic project activities as envisaged under current high-level plans
are for the most part, viable in today’s market. The goal of the GEF intervention is to raise
the level of environmental performance, in particular emphasizing carbon efficiency, while
simultaneously spurring growth in the market for energy efficient combustion and related
technologies. Broader institutional barriers will also be reduced or eliminated. This should
allow a mainstreaming of environmentally optimized approaches to Coal R&M in India that
meet current GOI objectives while simultaneously resulting in mitigation of significant
quantities of greenhouse gases.
Sustainability may also be addressed by making a portion of the GEF grant output-based –
perhaps by structuring a portion of the subsidy as an interest payment rebate, contingent on
actual performance of the investment program and post-rehab performance. This issue will
be discussed during project preparation. Such an approach would also require a rigorous
monitoring regime, similar to what is generally expected when projects are financed in part
by the CDM. While in this case, procedures related to state pollution control boards might be
adapted for M&E purposes, monitoring will be a critical challenge to be addressed, primarily
because it has not been a traditional role of PFC. [In this regard, as mentioned elsewhere, the
monitoring aspect was one point of desirability for CF to build in from the beginning, since it
would bring not only an output based, additional revenue stream, but also a monitoring
regime.]
A critical consideration, to be assessed fully in the appraisal process, is the exit strategy for
GEF. One exit strategy issue is that, under the program, there will be significant re-flows to
PFC. The project team believes that these should stay in the financing window and be recirculated, but, unless the window was replenished by additional grant and loan resources,
eventually the project volume that the window could support would decline. Managing this
decline, so that the momentum of the market in coal R&M is sustained (and even accelerated,
as appropriate), is essential. Another issue will be to assess the potential for a built-in
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declining subsidy, so that the amount of subsidization reduced over the course of the project,
until such time as the GEF intervention was finished and the projects relied on GOI subsidy
(such as available) and CF, as appropriate. The project team intends to analyze options here
for a managed exit during the course of appraisal.
Phasing of the program is not per se an exit strategy issue, though it does provide a clear midpoint exit in the event that the first phase of the program is unsuccessful. But phasing
generates a risk of a different sort. Given the size of the coal R&M market (huge) and the
transaction costs of setting up financing facilities in India (high), a funded first phase must be
of significant heft to be attractive to the Indians. The project team believes that a $60-million
first is, in fact, a good amount to commit, but has been informed by GEF staff that this might
exceed the available resources. While a smaller amount might be saleable to the Indian side,
the project team would strongly recommend that a first phase be, at a minimum, funded at at
least $30-million, to ensure full commitment by the Indian side.
4. REPLICABILITY
This program is designed to be replicable inside and outside India. Within India, financing
from GEF is requested for a first significant proportion of the country’s Coal R&M market.
Factoring in re-flows to PFC which can be recycled into this market, up to 20% of the total
market over the period 2006-2020 could be addressed solely through this program. But by
leveraging new and improved technology, reaping scale economies in supply chains and
after-sales services, and progressive reduction or elimination of other barriers, the program
will help lay the foundation for full commercialization of the Coal R&M sector. The model
might also be applied, in much the same form, to the emerging area of rehabilitation of hydro
plants.
The program could also be of great interest to other countries with large quantities of coalfired capacity, such as China, Turkey, and Russia. However, it should be noted that the
financing mechanism that might be employed in other markets may well be very different, as
the particular choices that can be made depend on the configuration of national institutions
and other local factors. The principles that have been employed here – the win-win approach,
the focus on barrier reduction, the integration with carbon finance possibilities – should
generate many lessons that will promote the replicability of many of the conceptual aspects of
the program.
5. STAKEHOLDER INVOLVEMENT/INTENDED BENEFICIARIES
As referenced above, the proposed project meshes with India’s National Electricity Policy,
and would contribute to achievement of outcomes by reducing barriers now inhibiting full
development of Coal R&M potential in the country. The key output will be increased and
more economically and environmentally efficient energy from renovated plants, contributing
greatly to the desired “Power for All” outcome. Stakeholders and intended beneficiaries
include various government agencies, private and public generating companies, financial
institutions, private and public sector equipment suppliers and service companies, distribution
companies, customers of all kinds, and residents in areas hosting renovated power plants.
The project is intended to build capacity in generators for energy auditing, monitoring, costbenefit analysis, technology assessment and implementation, and operations and maintenance
practices to support more efficient technology and activities. It will also help PFC and other
participating financial institutions with appraising the viability of efficient R&M projects,
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with integrating their products with carbon finance, and with project pipeline development.
The project should accelerate the roll-out of state-of-the-art technology to serve this market,
whether the technology is developed in India or abroad. It could help provide an operational
boost to the already favorable policy environment for energy efficiency and conservation,
technology R&D, and generation asset management. It might also bring in more private
players into the coal-fired power sectors, by opening up possibilities for public-private
partnerships in this area – options for PPPs will be assessed in program preparation.
D – FINANCING
1) FINANCING PLAN
Indicative Project Budget
Project Component
Technical assistance for energy
audits, baseline studies, and studies
for optimizing energy efficiency
within project investment plans
Coal R&M Energy Efficiency
Financing Window
Total
GEF Budget
10,000,000
IBRD Budget
50,000,000
150,000,000
60,000,000
150,000,000
The precise ratio of IBRD:GEF is to be worked out but the project team is aiming for
something close to if not exceeding the 3:1 ratio indicated in the above table. Additionally,
the proposal is being advanced on the basis that an existing Government of India interest rate
subsidy, offered through the Power Finance Corporation, would continue to be available, and
would approximately match the GEF contribution. Finally, the amount of co-financing
(equity and debt from commercial sources) will need to be worked out in the course of
project preparation. We have indicated a co-finance amount at least equal to the amount
requested from GEF for the interest rate subsidy.
We understand that, due to availability of GEF funds, phasing may be necessary. In that
case, as mentioned previously in the proposal, GOI perspectives should be taken into account,
and a first phase of critical mass will need to be allocated. The project team believes that at a
minimum a first phase comprising the $10-million in TA and $20-million in interest-rate
subsidy would be sufficient to initiate the project, allowing a first round of sub-projects to
receive financing.
The IBRD tranche has the full support of the GOI and the Bank country management, and
initiation of project preparation awaits only the acceptance of the project into the GEF
pipeline. A draft concept note has already been adapted from this proposal to serve as the
project concept note, and we would anticipate having the PCN review immediately after a
positive signal from GEF.
We have not indicated any contribution from carbon finance, and the project does not depend
on the availability of CF resources. The project team will whether, and how, CF fits into the
coal R&M picture during the course of preparation. While ideally, GEF would be an inputbased, programmatic support and CF would be an output-based, sub-project revenue
component, this arrangement may not yet fit with GEF and CDM policies. A more likely
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scenario, at this time, is that CF provides a form of exit insurance for GEF, in that as the
market is established and unit costs for energy-efficient coal R&M go down, new projects
could avail of CF going forward, once the GEF resources are depleted.
2) CO-FINANCING
GOI will be a critical co-financier of the project, since existing but limited interest rate
subsidies offered through PFC will be one component of the overall financing package on
offer to generators. The project team, in appraisal, will consider the co-financing
requirements of the generators themselves, including the question of requiring them to source
at least some of the overall debt financing requirement from the commercial debt market in
India.
It is likely that this financing window could attract the attention of other donors in the Indian
power sector, raising the possibility that they would want to put money through PFC as well.
Coordination with other donors will be a key program preparation activity. Co-financing
from IBRD, GOI, Carbon Finance (if accepted by GEF) and the sub-project sponsors will be
designed to limit the overall GEF contribution to no more than about 20% of the total
program costs, though precise numbers will need to be developed in the course of preparation
and appraisal.
It is also appropriate that, should this proposal be accepted into the GEF pipeline, there
should be consideration of eligibility of plants in the private sector as well. IFC has
expressed interest in funding a “private” window that could avail of the GEF funds as well, in
the same manner. This possibility will be assessed by IFC during project preparation.
Additionally, IBRD and IFC staff, along with PFC personnel and GOI officials, intend to
assess the possibilities for mobilizing private finance through use of public-private
partnerships. This exercise entails the consideration of ownership changes in existing public
sector power plants, a step which is not the focus of current GOI programs in this area.
While it can be expected that such a review will highlight a number of significant constraints
to development of PPPs in this area, the environment for PPPs in India is improving and there
may well be some opportunities for such partnerships identified.
E - INSTITUTIONAL COORDINATION AND SUPPORT
1) CORE COMMITMENTS AND LINKAGES
The 2004 CAS recognizes "ensuring access to reliable power at reasonable costs by
rationalizing power tariffs and improving the financial and operational performance of SEBs"
as a priority reform area in India. The proposed project would help in improvement of
operational efficiency of generation function of SEBs, thus reducing the cost of power to
consumers, while also helping in improving financial performance of power sector utilities.
The key objectives of Bank engagement in generation sector envisioned in the CAS are interalia "to help increase generation capacity in tandem with other GoI programs", and "to help
the generation sector to move towards international best practice for environment and social
safegaurds". The proposed project would enable addition in generation capacity and
enhanced generation, at a much lower cost than green-field projects. The proposed project
would help scale-up India’s rehabilitation efforts, jumpstarting the process for large numbers
of plants that will otherwise not be renovated in a timely manner; and the rehab works that
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then will be done will be optimized for energy efficiency and open up possibilities for carbon
finance as well, while at the same time delivering an overall environmental performance
upgrade.
On the Global Climate change front, the CAS highlights that despite having a low per capita
emission because of the large population base, India is the second highest in absolute
emissions among developing countries. The CAS proposes that the Bank would seek ways to
further expand its partnership with India on national and global issues through programs
financed by the GEF, Montreal Protocol and Carbon Finance. The proposed project would
utilize GEF grants (in conjunction with IBRD loans, GoI grants, and carbon finance)
particularly towards reduction of emissions from thermal generation plants.
2) CONSULTATION, COORDINATION AND COLLABORATION BETWEEN AND AMONG
IMPLEMENTING AGENCIES, EXECUTING AGENCIES, AND THE GEF SECRETARIAT, IF
APPROPRIATE.
The program has, in its initial concept, been designed to minimize cross-institutional
coordination issues. First and foremost, the proposed program works with existing
institutions – it does not create new institutions at any level. Second, the approach is to
supplement existing financial offerings of PFC, rather than replace or compete with them.
This is critical, because it ensures that GEF and possible CF inputs will be fully additional to
those provided by Government of India. The approach recognizes that, without additional
grant resources, GOI’s current subsidy flow to the sector is not enough to jumpstart the R&M
program, and wholly inadequate to ensure energy-efficient results. Finally, the proposed
program slots into the key institutions which already are charged with coordination in the
sector.
3) IMPLEMENTATION/EXECUTION ARRANGEMENTS
An existing institution, the Power Finance Corporation, is the lead central government agency
for mobilization of public sector investment resources. PFC is an effective and capable
organization and an ideal partner for GEF and IBRD. PFC’s existing contacts, relationships,
mandates, programs, and procedures are a good fit with the proposed financing approaches,
and specifically with the energy audit and baseline assessment, technology options analysis,
and monitoring and evaluation activity.
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PART II – RESPONSE TO REVIEWS
A - CONVENTION SECRETARIAT
B - OTHER IAS AND RELEVANT EXAS
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Preparation Guidelines for Concept/PDF Template: Version 2
March 2004
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