PROJECT BRIEF - Biomass Energy Belarus

UNITED NATIONS DEVELOPMENT PROGRAMME GLOBAL ENVIRONMENT FACILITY PROJECT DOCUMENT 1. IDENTIFIERS: PROJECT NAME Biomass Energy for Heating and Hot Financing Water Supply in Belarus PROJECT NUMBER BYE/02/G31 GEF: USD 3 129 000 UNDP/GEF PIMS NUMBER 1893 PDF B: USD 245 000 DURATION 48 months Parallel Financing: GEF IMPLEMENTING AGENCY United Nations Development Programme Committee on EE: USD 2 130 000 (UNDP) USD 62 000 (in-kind) EXECUTING AGENCY Committee on Energy Efficiency Local organisations: USD 1 780 000 IMPLEMENTING AGENCY Committee on Energy Efficiency USD 1 590 000 (in-kind) REQUESTING COUNTRY Belarus ELIGIBILITY Belarus ratified the UNFCCC on 9 May 2000 Total excluding PDF: USD 8 691 000 GEF FOCAL AREA Climate Change Total : USD 8 936 000 GEF PROGRAMME FRAMEWORK OP#6: Promoting the adoption of renewable energy by removing barriers and reducing implementation costs LPAC MEETING: 4 December 2002 ACC/UNDP SECTOR: 0500 Energy ACC/UNDP SUBSECTOR: 0504 New and Renewable Sources of Energy 2. SUMMARY The proposed project will address the reduction of greenhouse gas (GHG) emissions in Belarus by increasing the capacity of the government to support biomass energy projects and the capacity of customers to finance and implement them. This project will focus on the following objectives: 1) strengthening institutional capacity to support biomass energy projects; 2) establishing a track record for investments in sustainable biomass energy projects, including both fuel supply and demand; 3) developing straightforward financial “starter” mechanisms in a challenging investment climate that will allow continued financing for biomass energy projects; and 4) overcoming negative perceptions of biomass energy and provide public and private investors with much-needed market information. First, the project will address lack of biomass project experience by facilitating the investment of USD 2.1 million by the Committee on Energy Efficiency and USD 3.4 million by the private and public sectors by 2006 in biomass energy projects. The project will also address financial barriers by establishing a revolving fund with initial capitalization of USD 1.54 million that will be based in part on the GEF contribution and dedicated to the support of biomass energy. Direct fossil fuel savings as a result of this programme represent approximately 1.08 million tonnes of CO2 reduction over a 15-year period. Thus, for a GEF contribution of USD 3.129 million, the cost per tonne of CO2 reduced is USD 2.9. Estimates of the potential impact on wood-fuel use resulting from this project total an additional annual amount of 895,000 tonnes of CO2 by 2015.

On behalf of: Signature Date Name/title

Nikolai Zaichenko, The Government: First Deputy Minister of Economy ______

Committee on Energy Lev Dubovik, Chairman Efficiency of the ______Republic of Belarus

Niel Buhne, UNDP Resident Representative UNDP: and UN Resident Coordinator ______

Co-financing commitments for all demonstration projects are provided, though two sub-project owners are not specifying the co-financing amount. UNDP/GEF will not proceed with designing and implementing these demonstration projects, unless co-financing is specified and committed. Biomass Energy for Heating and Hot Water Supply in Belarus

TABLE OF CONTENTS

1 PROJECT OVERVIEW...... 3

2 BACKGROUND AND CONTEXT...... 3

3 BARRIERS...... 10

4 OBJECTIVES...... 12 4.1 Overall objective...... 12 4.2 Specific objectives...... 13 4.3 GEF rationale...... 13 5 PROJECT COMPONENTS/ACTIVITIES AND EXPECTED RESULTS...... 14 5.1 Component 1: Institutional Capacity Development...... 14 5.2 Component 2: Technical Capacity Development...... 18 5.3 Component 3: Financial Capacity Development...... 22 5.4 Component 4: Information and Outreach to Increase Awareness...... 24 6 RISKS AND SUSTAINABILITY...... 26 6.1 External Risks...... 26 6.2 Internal risks...... 27 6.3 Sustainability...... 28 7 STAKEHOLDER PARTICIPATION AND IMPLEMENTATION ARRANGEMENTS...... 28 7.1 Stakeholder participation...... 28 7.2 Implementation arrangements...... 29 8 INCREMENTAL COSTS AND PROJECT FINANCING...... 30 8.1 Incremental Costs...... 30 8.2 Project Financing...... 31 9 MONITORING AND EVALUATION...... 32

10 LEGAL CONTEXT...... 34

11 BUDGET...... 35

ANNEX A: Incremental cost...... 37

ANNEX B: Project planning matrix...... 40

ANNEX C1: STAP review...... 50

ANNEX C2: Response to STAP review...... 52

ANNEX D: Operational focal point endorsement...... 54

ANNEX E: Overview of boiler houses between 0.5 and 10 MW...... 56

ANNEX F: Wood waste availability in Belarus...... 58

1 Biomass Energy for Heating and Hot Water Supply in Belarus

ANNEX G: Overview of relevant regulations...... 60

ANNEX H: Selection of project sites and evaluation criteria...... 61

ANNEX H bis: Sample calculation for demonstration project (#1, Option 2)...... 61

ANNEX I: Investment project site fact sheets...... 64

ANNEX J: CO2 emission calculation...... 91

ANNEX K: Signed letters of intent...... 93

ANNEX L: Equipment requirements...... 97

ANNEX M: Terms of reference for international and national experts and subcontractors...... 106

ANNEX N: Outline of Coordination efforts with the World Bank...... 120

ANNEX O. Revolving Fund Definition...... 121

ANNEX P. Replication Plan Specifics...... 128

ANNEX Q. Commitments of Project Beneficiaries...... 131

1 PROJECT OVERVIEW

There are over 10,000 boiler houses with capacities below 10MW th that provide district heating and process heat in the Republic of Belarus, where the majority of these (65%) burn heavy oil (mazut), diesel and coal, and the remainder burn natural gas. The combustion of these fossil fuels leads to high levels of greenhouse gas (GHG) emissions since boilers are frequently inefficient because of age (commonly 20 to 30 years old), and operate far below their design capacities (as a result of reduced industrial demand). Belarus depends heavily on imported fuels (over 85% of total energy consumption comes from foreign sources), so the energy sector also places a considerable financial burden on both the public and private sectors and slows economic growth. A comprehensive market and resource study, which was carried out within the framework of the PDF B project (BYE/00/G42), indicates that about 2,000 boilers sized between 0.5 and 10 MWth burning coal or heavy oil are suitable for conversion to wood fuel. On the fuel supply side, approximately 6 million cubic meters of wood-waste, which are currently unused, could be used as fuel, increasing to 6.7 and 8.3 million cubic meters in 2005 and 2015 respectively. The principal barriers to be addressed in achieving this potential, which are described in this project brief, were identified in the course of the PDF B project, and they will be tackled through the proposed project activities. In particular, the proposed activities will remove barriers related to perception and awareness, organisation, technical capacity, and financing.

The expected direct results of the successful implementation of the current proposal will facilitate the investment of USD 2.1 million by the Committee on Energy Efficiency and USD 3.4 million by the private and public sectors by 2006. A revolving fund (with initial capitalization of USD 1.54 million) dedicated to the support of biomass energy will be established, based on part of the GEF contribution. It is expected that by the end of 2006, the key elements will be in place for the sustained development of wood-fuel supply and the implementation of biomass-fuelled boilers in Belarus, able to respond to an increasing demand for biomass heating. Direct fossil fuel savings as a result of this programme represent approximately 1.08 million tonnes of CO2 reduction over a 15-year period. Thus for a GEF contribution of USD 3.129 million, the cost per tonne reduced CO2 is USD 2.9. Based on realistic estimates of the potential impact on wood-fuel use resulting from this project (beyond existing plans of the Belarussian government) reductions could amount to an additional annual amount of 895,000 tonnes of CO 2 by 2015 (from reductions representing a coal equivalent of 400,000 tonnes, with an estimated 330,000 coming from mazut, 20,000 from gas, and 50,000 from coal-fired boilers).

The GEF support is requested to cover the incremental costs of activities that facilitate the development of the biomass heating market through a barrier removal process whereby, by means of selected investment projects, biomass boilers of 38,000 tce/year would be installed during a 4-year period, and initiatives undertaken to overcome barriers in fuel supply through both project implementation and planning. Without the proposed GEF support the increase in uptake of wood energy is unlikely to be efficient, sustainable and cost effective, and it is unlikely to occur in the near future, resulting in an energy-intensive and costly pattern that will hinder ongoing economic reforms.

2 BACKGROUND AND CONTEXT

Belarus, which borders Poland to the west, Russia to the east, Ukraine to the south, and Latvia and Lithuania to the north, has few traditional energy resources and is therefore highly dependent on imports. Natural resources are limited, and, apart from small deposits of natural gas, oil and peat, the most important natural resource are the forests, which cover 36% of the country. Winters are cold and summers are cool and moist, and there is a great need for heating during the winter months. The country is divided into 6 oblasts (districts), and one municipality (consisting of the capital Minsk).

Belarus was one of the Soviet Union's major industrial republics, specialised in the production of machinery and equipment and, although industry has declined significantly since independence from the USSR in 1991, heavy industry and manufacturing continue to make an important contribution to the economy. Belarus has retained close political and economic ties with Russia, and has signed a treaty on a two-state union that envisions greater political and economic integration. Belarus suffered greatly from the 1998 financial crisis in Russia but is recovering with a GDP

3 Biomass Energy for Heating and Hot Water Supply in Belarus growth of 6% in 2000. The industrial sector continued to be the source of this growth, at 10.3 in 1999 and 8 percent in 2000.

Investment climate Inflation, although still the highest in Eastern Europe at approximately 100% in 2000, has decreased significantly from the 1999 level of 251%, and this trend appears to be continuing in 2001 and 2002. In spite of this there have been a number of very positive developments since the unification of official and market exchange rates in September 2000. On 9 October, 2001, a new Investment Code of the Republic of Belarus, a comprehensive document that substituted the existing multiple regulations on foreign investment, came into force. The Code states that investors’ rights are guaranteed by the state. It guarantees property rights and the right to remit profits abroad. Investments cannot be nationalized without complete and timely compensation, which should include interest payment calculated on the basis of LIBOR rate starting from the date of nationalization to the date of actual compensation payment. The Investment Code introduces concessions, a new form of investment in Belarus. The government has also worked out the National Program for Attracting Investment, which is aimed at improving the general investment climate.

Belarus offers a number of considerable advantages to potential investors – its central location, well-educated and relatively inexpensive work force, low crime rate and easy access to the Russian market. The Government of Belarus officially welcomes foreign investment, which is seen as a source of much-needed currency. Nevertheless investments in all sectors, including the energy sector, have been hindered by low levels of privatisation. Also foreign investors usually connect risk with the fact that the banking system in Belarus is still incipient. Among the issues that raise the concern of the government are problematic repayment of credits, high interest rates and low capitalization of banks. The Bank System Development Concept is expected to pave the way for the necessary changes.

Energy sector Energy resources such as oil and gas are limited in Belarus, and the country is highly dependent on imports. In 1999, 88% of total energy consumption in Belarus came from foreign sources, most of this in the form of natural gas from Russia. These imports are purchased in part for hard currency, which gives the current government very strong economic and political incentives to reduce energy consumption.

Belarus’ oil consumption is more than four times its oil production, despite a 50% reduction in the country's oil consumption in the past eight years: since 1992, Belarus’ oil consumption has dropped dramatically, from 375,000 bbl/day to just 188,000 bbl/day in 2000. In spite of this, Belarus must import 75% of its oil, almost all of which comes from Russia. Belarus has two refineries (the Naftan and Mazyr refineries), but despite high oil prices that have increased Russian oil exports, Belarussian refineries received reduced supplies from Russia during much of 2000 because the Belarussian government lacked the funds to pay Russia for oil deliveries. There are plans to upgrade the two refineries significantly to improve oil-processing effectiveness, the quality of oil products, and export potential. This will mean a significant change in the fractions of heavy and light oils, which could have serious consequences for the availability of heavy (mazut) oil, frequently used in boilers.

Belarus is also heavily reliant on natural gas imports from Russia, and it produces less than one fiftieth of the natural gas that it consumes each year. Due in part to an inadequate payment recovery from consumers, the country has built up large arrears to Russian gas supplier Gazprom in spite of a favourable purchase price of approximately USD 30 per 1,000 cubic metres (in comparison, Russia charges Ukraine approximately USD 50 per 1,000 cubic meters and Lithuania USD 76 per 1,000 cubic meters of gas). Payment recovery has been changing for the better and Belarus has paid for 100% of gas purchased in 2001, partially in cash and partially with supplies of material resources (farm produce is exported to Russia under barter deals) to settle current payments and to cover existing arrears. The gas debt to Russia has been reduced from USD 244 million in early 2000 to approximately USD 200 million by the end of 2001.

One of the reasons that Russia charges Belarus lower prices for gas is that Russia receives reduced tariff rates for its gas that transits Belarus to customers in Western Europe. Belarus is also gaining importance as a major transit point for other Russian energy exports. Approximately 50% of Russia's net oil exports go through Belarus, and this fuel is not subject to export duties due to the Russian-Belarussian Union agreement. In addition, Belarus is hoping to benefit as a transit country for Russian electricity being exported to Europe.

Belarus has a power-generating capacity of 7,700 MW. Fossil fuels account for 99.9% of the total generation of 25.7 TWh (2000) of electricity, with natural gas-fired power plants accounting for 90%, oil-fired plants accounting for 10%, and hydropower plants just 0.1%. Approximately 25% of the electricity demand is met through the import of electricity from Lithuania and Russia, another source of hard-currency expenses for the government.

Heat and Hot Water Supply Heating and hot water is predominantly supplied through two types of district heating systems: 1) large combined heat and power (CHP) systems and heat-only boilers operated by the state energy company “Belenergo”, which has 23 CHP plants, and 35 regional boiler houses with capacities from 80MW to 700MW; and 2) smaller, heat-only boilers operated by the Ministry of Communal Services or other Ministries, state industrial enterprises, and private companies. The Belenergo CHP plants and boilers are predominantly fuelled by natural gas (90%). The Ministry of Communal Services owns about 1,700 heat-only boiler-houses with an average installed capacity of 5MW. Of these, 50% are gas- fired, 40% run on heavy oil, 6% on coal, and the remainder on peat and wood. Individual municipalities operate the boilers of the Ministry (with the Ministry of Communal Services providing political and administrative services), and financial resources come via municipal budgets. In addition to the boilers of the Ministry of Communal Services, there are about 10,000 boiler houses below 10MW heat capacity under the ownership of other Ministries, state and private industrial enterprises, as well as schools, hospitals and sanatoriums, and include approximately:

 5,300 boiler houses with an installed capacity less than 0.5 MW,  3,350 boiler houses with an installed capacity from 0.5 to 3 MW,  740 boiler houses with an installed capacity from 3 MW to 5 MW, and  580 boiler houses with an installed capacity from 5 to 10 MW.

These boiler houses operate on natural gas (35%), heavy oil and diesel oil (30%), and coal, peat and wood (35%), are typically 20 to 30 years old, are operated below their design capacity (meaning low efficiencies), and rely on boilers made from cast iron, which are prone to starting problems. Boilers operated by both state and private industrial enterprises, in addition to providing heat for their own needs, usually provided heat and hot water to surrounding apartment buildings or the ministry of communal services in cities and villages.

Heat tariffs vary considerably from one city to another, as does the degree of cross-subsidy from industry and budget entities (those that receive money from state budgets) to residential consumers. With a few exceptions, industry and government customers subsidise residential consumers to meet the production cost of the respective regional/district utility or boiler to which they are all connected. Heat tariffs declined in Belarus following the decline of the purchase price for Russian natural gas during the last few years. At present, the average cross-subsidy for heat consumption is 2.4 USD/GJ (10 USD/Gcal). Non-payment for electricity and heat from end-consumers amounted to USD 110 million in 2000. This reduces the incentive for new investments in heat and hot water production since there is, in some areas, little hope of recovering the costs.

Outside the larger cities it is not uncommon that during summer months hot water is provided only on weekends. The reasons for this include fuel shortages (meaning that fuel, when available, needs to be stored for the winter months when supplies are scarce), and high fuel costs. Because of the high and unsustainable level of cross subsidies there is a strong incentive at the government level to find lower cost fuels, and consequently fuel for a number of manually stoked coal and peat-fired boilers have been substituted by wood fuel. Unfortunately, this practice has led most often to low combustion efficiencies because of incorrect air-fuel ratios. The Ministry of Communal Services has converted

120 boiler houses in this way, and is using an increasing amount of wood for fuel (2.7% of their energy mix was from wood in 1999, 3.5% in 2000, and 4.0% in 2001, according to official statistics). It should be stressed that, although no detailed analysis has been made, this fuel substitution approach can in no way be considered sustainable from a climate change perspective since low efficiency wood combustion releases high levels of products of incomplete combustion (more complex hydrocarbons such as methane) with high global warming factors. Local experts claim typical efficiencies in the range of 55 to 60% (as opposed to modern biomass boilers which typically operate in the 80 to 85 % efficiency range).

With respect to future fuel availability, there is growing pressure in the supply of heavy oil for mazut boilers (mazut being the heavy fraction resulting from the refining of crude oil) and this is likely to worsen if the proposed upgrade of the oil refineries goes ahead since the proportion of heavy fraction produced by the refineries is then expected to decrease from the current level of 40% to a level of 20%. The supply of natural gas and coal depends on the ability to pay, since both fuels are imported.

A comprehensive market study carried out within the framework of the PDF B project resulted in a database of 5,000 boiler houses in the 0.5 to 10 MW range. An analysis of the database shows that the Ministry of Communal Services owns approximately 27% of boiler houses in this size range, with 20% in the agricultural sector, 21% in the social sector (education and health), and 32% in industry (see Annex E for additional details).

Biomass Resources In the Soviet period, Belarus was an important centre for the processing of wood, most of which came from Russia. Following independence, Belarus has become more self-sufficient, and now makes use of its own forests for the wood- processing sector. Forests cover approximately 36% of Belarus, and there is an estimated annual increase in biomass resources of 25 million compressed cubic meters per year. As a result of the Chernobyl catastrophe in 1986, economic activity on 36,000 hectares of forests is banned due to the high degree of contamination, but this represents less than 1% of the total forest cover1. The planned volume of uncontaminated wood cut is 10.8 million cubic meters for 2001 made up of 5.8 million cubic metres as timber for export or processing, and 5 million cubic meters as firewood in logs. A detailed resource analysis of wood-waste availability, carried out under the PDF B, shows the technical potential as 6.1 million cubic meters in 2001 (see Annex F for details). This wood-waste comes predominantly from harvesting, forest management, and, to a much lesser degree, from wood processing.

A number of mechanisms already exist in Belarus for the supply of fuel wood. The Oblast Fuel Enterprises situated in each oblast (“Obltop”) are operated by the oblast administration. Every “Obltop” manages approximately 20 “Raitop” or “Gortop” which are located in regional centres. These regional fuel enterprises are operated both by the regional administration and by the corresponding “Obltop”. Regional fuel enterprises have 1 – 2 teams of workers which carry out logging and transport units to supply fuel wood for population, commercial and budget (state) institutions. Taken together the approx. 120 regional enterprises supply about 450 thousand m3 of compressed wood (in the form of logs), what is about 10% of total firewood consumption (about 4,200 thousand m3 of compressed wood in year 2000.). “Obltop” and “Raitop” are also responsible for supplying peat and coal. The Obltop, on a tender basis, purchases coal and the supplier then delivers coal to each Raitop. The Raitop is responsible for selling this coal to end users in their region.

1 The use of wood from contaminated areas is explicitly excluded from this GEF project. It is however worthy of note that a study by US, Danish and Belarusian experts carried out between 1994 and 1998 with the objective of reducing ‘the health, economic and lifestyle impacts to the general population residing in or near the contaminated areas’ through biomass power production using contaminated biomass and forest litter emphasised that ‘Commercial-scale demonstrations of the [combustion] process using fuels doped with stable isotopes of the radionuclides of greatest concern have been completed in the US and demonstrate that a relatively small fraction of the material escapes out of the stack even with modest particle capture systems’. Biomass energy combustion was seen in that study as an efficient way of capturing radionuclides in the ash thus reducing volumes 200 times, and providing economic incentives for operation of decontamination facilities. Source: Chernobyl Bioenergy Project: Power Production from Radioactively Contaminated Biomass and Forest Litter in Belarus, Final Report, Phase 1, September 1998.

There are also 88 Forest Enterprises (“Leshoz”) operated by the Ministry of Forestry. The Leshozes are involved both into harvesting and thinning of forests; harvesting occupies only about 10% of their business and the rest is from thinning, and they supply fuel wood, usually in the form of logs. As a rule every “Leshoz” has a sawmill with processing capacity of around 1000 m3 per month.

Harvesting of wood is mainly made by “Lespromhozes” which belong to the “Bellesbumprom” forestry concern. Almost all wood residues produced during harvesting are left in the forest, and are frequently burned directly in the forest. This is also the case for waste wood from thinning. Waste wood is also made available through the Belarussian Wood and Paper Industry (“Bellesbumprom”), which covers about 80% of all wood processed in Belarus. The main wood processing and logging is carried out in 20 enterprises spread over the entire Republic, but concentrated in the Minsk and Gomel oblasts. In 2000, of 780 thousand cubic metres of waste resulting from their logging and wood processing activities, 540 thousand cubic metres were used (340 thousand m3 used for production of wood chipboards, fibre boards, etc., and 210 thousand m3 as fuel for boilers) leaving 240 thousand m3 unused. Sawdust is only used as fuel at 6 enterprises, and at others it is landfilled, where it generates GHG emissions, or given to farmers for use as floor covering in animal enclosures or supplied for alcohol production.

Belarus as a whole currently uses 0.77 million tonnes of oil equivalent (Mtoe) of wood and wood waste (or 1.1 Mt coal equivalent) for fuel. The majority of this is for heating in individual rural households (0.56 Mtoe), a lesser amount is used in small boiler houses (0.17 Mtoe as pieces) and the remainder is used within the wood processing industries (in the form of offcuts and sawdust).

Environment and Energy Policies The Government of Belarus ratified the United Nations Framework Convention on Climate Change (UNFCCC) on 9 May 2000, and the UNFCCC entered into force on 9 August 2000. In addition to the law ratifying the UNFCCC, the basic documents relating to climate in Belarus are the Law of the Republic of Belarus “On the Protection of Atmospheric Air” adopted in May 1997, and the National Climatic Programme. A significant part of the National Climatic Programme is devoted to national policy, technologies and organisational measures for prevention of climatic changes. The programme contributes to the development of a strategy and of measures aimed at the reduction of anthropogenic influence on the climate, and it also deals with the necessary organisational measures to implement the programme.

At the end of 2001, the government created the Ministry of Fuel and Energy on the basis of the Committee for Fuel and Energy Complex and Chemical Industry, which had been housed in the Ministry of Economy. Government programs on energy efficiency and renewable energy predate the Ministry; a reduction in the use of traditional fuel sources in power stations and district heating systems through these areas has been part of the energy policy of the Government of Belarus since 1996. It has been reiterated in the recently published energy policy for the period 2001 to 2015. Simultaneously, the government has developed a series of regulatory documents in the field of energy saving to create a legislative, economic, financial, organisational and technical framework in the effective use of fuel and energy resources, and the use of local fuels, waste products, and renewable energy. An overview of the relevant regulations is provided in Annex G, and includes the following:  The Law of the Republic of Belarus “On energy saving”;  National Programme of energy saving and renewable energy utilisation for the period 2001 to 2005 (building on the successful National Programme for the period until 2000);  National policy on the development of small and non-conventional power engineering;  Documents establishing the “Energy Saving ” national extra-budgetary fund;  Policies introducing instrumental metering;  Policies providing preferential credits for energy saving activities; and  Policies designed to provide incentives for economic entities to save energy, through which enterprises can create “Energy saving funds”. Savings obtained due to energy efficiency measures are accumulated in this fund and can be used for further activities in savings as well as for bonuses (up to 50% of this fund).

 New regulations related to provide incentives for budget institutions to save energy are under design in the Committee for Energy Efficiency.

In addition, the government has recently approved the new “National programme on energy saving and renewable energy utilisation for the years 2001-2005” and “Main directions of national energy policy.” The programme is designed to encourage an economic transition towards energy saving and wide utilisation of renewable energy, and it includes state financial support for energy saving and renewable energy projects, the creation of budgetary fund for financing projects, and programmes related to utilisation of renewable energy sources. Within this programme are serious plans to increase the use of wood waste as fuel in Belarus with a target of 1.6 million tonnes of coal equivalent for 2005, and 2 million tonnes coal equivalent for 2015.

Relevant Planned and Ongoing Activities In order to implement policies related to energy efficiency and renewable energy, the government established a State Committee on Energy Efficiency and Control in 1993. This body, which was renamed the Committee on Energy Efficiency in 2001, oversees a multi-level system to manage energy saving in national agencies, regions, districts, cities, towns, municipalities and enterprises. The committee has established economic, financial and legal measures to support energy saving; introduced renewable energy sources; provided information support for energy saving; and instituted a system of training and continuing staff education. The Committee also has two subsidiary enterprises: an engineering centre and a consulting company.

A special inter-agency Steering Committee was created in 1998 by a Decree of the Council of Ministers in order to promote and co-ordinate efficient use of local energy sources, including wood and wood waste. This committee is headed by the chairman of the Committee on Energy Efficiency and includes members of all key sectoral ministries, regional departments, scientific institutions and state enterprises. Special interdisciplinary committees are also working in the regions and in Minsk municipality.

In July 1997, the Government of Belarus created the national extra-budgetary fund “Energy Saving”. It is funded to a small extent (2-3%) by fines levied from firms for irrational consumption of fuel and energy resources. The Committee on Energy Efficiency which administers this fund (in addition to the extra-budgetary Innovation Fund) invests about USD 2 million every year for the conversion of boiler houses to local fuels and can provide grants (100% for state- owned and operated enterprises, and 50% for some private enterprises) or favourable loans (reduction of the local bank interest rates by 50 % from the existing (and decreasing) level). The Committee has also provided money from the Innovation Fund through favourable loans at rates of 20% of the National Bank refinancing rate to finance energy efficiency projects. These loans should increase as money invested by the Committee returns to a special account and could be used again for energy efficiency activities, and loan portfolio has increased over the past two years. In addition, local banks actually invested a total of USD 2.85 million in 2000 and 2001 for energy projects in conjunction with these loans and grants.

Between 1996 and 2000, USD 370 million was invested in energy saving activities under the National Programme on Energy Saving. The bulk of this investment was on the installation of metering devices, design of new energy saving materials and technologies, boiler rehabilitation, and replacement of old heat boilers with more efficient ones. The government has also issued an order to banks authorised to service state programmes to issue soft loans to economic entities, irrespective of the form of ownership, when these loans would support the implementation of energy saving measures with priority value for the country.

In addition to financial support the Committee on Energy Efficiency is carrying out educational and research projects related to the promotion of energy efficiency and energy saving. A programme on education and promotion of energy efficiency in Belarus includes the production of information booklets and training through relevant courses. Research is being carried out on the potential for the use of fast growing wood as fuel for heating. The aim is to produce about

200 thousand tonnes of coal equivalent (tce) of fast growing willow by 2005, although less ambitious estimates are that approximately 250 thousand tce/year of fast-growing wood will be in use by 2015.

The United Nations Economic Commission for Europe (UNECE) has been a strong and long-term supporter of energy efficiency and renewable energy (including wood energy) in Belarus, and played an important part in encouraging Belarus’ ratification of the UNFCCC in 2000. The UNECE has also been instrumental in, and has strongly supported the development of the current UNDP/GEF wood-waste activities.

Other UNECE activities in Belarus include the Energy Efficiency 21 Project, which aims to assist Belarus in meeting international environmental treaty obligations under the UNFCCC through the development of energy efficiency investment projects. In this project energy saving measures are to be implemented within “Demonstration Zones” in Baranovichy, Borovljany, Kedyshko, and Vitebsk, and include measures such as automatic control systems for heat consumers, reconstruction of district heating system, reconstruction of street lighting, and conversion of heat only boilers to co-generation plants. At present all these energy-saving measures are subject of business planning and financial engineering activities within the framework of UNECE training courses. The UNECE and UNDP are also in discussion with the Government on the developing a project to overcome barriers to energy efficiency investments, and there are good possibilities for close co-operation with the financing arrangements developed during the course of the project.

A World Bank loan “Social Infrastructure Retrofitting Project” (BY-7056) which has recently started, in addition to investments in energy efficiency improvements, will invest approximately USD 7 million for boiler replacement or conversion from oil and coal to gas and wood fuel (about 90 small size units) as well as make investments into the partial reconstruction of District Heating Networks (29 networks in all, covering piping and temperature regulation). The state enterprises “Belenergosberezhenie” and “Belinvestenergosberezhenie” were created in order to implement investment projects and other activities in the area of energy efficiency and the latter was created to serve as the Project Management Unit (PMU) for the World Bank project. The World Bank is interested to develop a project to the GEF on energy efficiency that will include elements of wood-waste use and the upgrading of a district-heating network closely related to their “Social Infrastructure Retrofitting Project” (BY-7056). Discussions have taken place to ensure complimentarily of activities with this UNDP initiative. One element of the World Bank “Social Infrastructure Retrofitting Project” (BY-7056) will provide assistance to the government to analyse the current tariff and subsidy situation and to develop recommendations for change, which would directly complement the UNDP-GEF proposed activities.

Strategic considerations for the GEF (justification of GEF involvement) The government of Belarus is clearly committed to improving energy efficiency and increasing the use of wood and wood waste as boiler fuel, and there is evidence that the use of wood fuel in boilers is increasing – at least within the Ministry of Communal Services and wood processing industries. In addition, the government’s dominant role in the energy market (as a consumer, service-provider, and supplier) ensures that its support for biomass energy will have a large-scale impact.

However, the ad-hoc approach of wood substitution in coal-fired boilers followed by the Ministry for reasons of fuel security is not sustainable from a global environmental perspective. There is also doubt about whether the current approach is financially sustainable in the long term. While there is solid groundwork for sustainable financial support for biomass energy, there is little experience in the field beyond government grants. In addition, progress outside the Ministry of Communal Services’ majority of boilers in increasing biomass as an energy source has been slow despite the obvious local benefits and the availability of state support to promote it.

It is clearly necessary to address the underlying causes of these problems (e.g., wood substitution in gas boilers on one hand and slow uptake on the other) through a barrier removal process. This project addresses that need and offers the opportunity to build on the positive national policies in Belarus by ensuring an environmentally sustainable approach that results in global environmental benefits. The project will finance actions that provide lessons beyond their

9 Biomass Energy for Heating and Hot Water Supply in Belarus immediate impact and provide long-term and sustainable global benefits, including the introduction of alternative, environmentally-sound, and viable approaches for using wood resources. By using GEF funds to enhance local efforts in a way that will secure global environmental benefits, the approach will thus have a multiplier effect.

3 BARRIERS

The barriers given below are divided into four categories: perception and awareness barriers, financial barriers, technical barriers, and organisational barriers. Within each category the barriers are given roughly in order of priority (importance and urgency), although this ordering is to some extent subjective.

A) Institutional barriers i. Lack of programmatic and co-ordinated national planning, matching wood resources with energy needs, which would allow decision-making to follow the most efficient approach (integrated resource management). ii. The need for individual boiler houses to arrange the fuel supply for wood energy (on a case by case basis and, in the case of state entities using their own resources) when supply of fossil fuels is frequently organised for them, meaning additional time burdens, risks, and uncertainties, and the comparative certainty and ease of use of coal, oil and gas. iii. Lack of infrastructure for the storage and supply of wood fuel. iv. Lack of a concerted, co-ordinated effort to support and promote wood-energy based activities. v. Lack of legislative and supportive policy context, in particular one that gives incentives to decision makers to choose wood fuel.

B) Technical barriers i. Lack of a management and planning system addressing the fuel supply chain/market on a large scale, impeding the efficient harvest, processing, storage and delivery of fuel. ii. Lack of tools to guide decision-makers in selecting the most cost effective heating and hot water alternatives on a national, regional and local level. iii. Lack of wood fuel standards. iv. Lack of technical experience of automated fuel feeding systems for medium sized biomass boilers. v. Lack of modern technology for fuel combustion at a medium scale.

C) Financial barriers i. Lack of funds for the establishment of efficient fuel supply systems and conversion of boiler houses to wood fuel, which leads to the use of simplified, low efficiency, and environmentally unsustainable equipment and technologies. ii. State entities such as municipalities, hospitals, schools and state enterprises, need to purchase wood fuel themselves (using their own budgets), whereas coal, oil or gas is frequently purchased by oblasts (district administrations) and paid for using regional budgets. This provides a strong disincentive since fossil fuels appear to cost virtually nothing from the state entity point of view. iii. Current cross subsidises of the population (by industry) in the energy sector. iv. High prices for wood fuel in some areas, caused by inefficient supply systems, leading to wood-fuel prices comparable to brown coal, and competitive natural gas supplies. v. Uncertainties on the long term market price of fuel wood and the level of heat and power tariffs. vi. Lack of interest from the banking sector because of lack of experience with biomass energy, uncertain investment climate. vii. High project preparation costs without the assurance of obtaining financing.

D) Perception and awareness barriers i. Lack of knowledge among decision-makers of the benefits (social, employment, environmental, economic), opportunities and versatility of biomass energy.

ii. Perception of biomass boilers as a small scale, dirty, and inefficient technology (due to inefficient and polluting old biomass boilers or ‘converted’ coal boilers). iii. Lack of information about modern technologies of harvesting, processing, storage and combustion of wood waste. Wood fuel is usually associated with obsolete manual technologies. iv. Lack of local “success stories” of modern biomass based district heating projects in Belarus. v. Lack of information to determine accurately the specific investment and operational costs of biomass based district heating plants in Belarus.

In the absence of GEF support to overcome the barriers defined above, the progress in increasing the use of biomass as an energy source will remain slow or stop entirely, and the Government target to increase the share of biomass by approximately 50% in the primary energy consumption by the year 2010 is not likely to be achieved, and growth beyond these targets will not take place. The proposed project will tackle all barriers identified above in order to increase effectiveness and introduce sustainability to ongoing efforts in the biomass sector. The link between project activities and the barriers identified is summarised in Table 1 below:

Table 1: Barriers and the Activities Addressing Them

Barrier description Key outputs addressing this barrier A: Institutional barriers i Lack of programmatic and co-ordinated national Output 1.4: Training conducted to strengthen capacity of in- planning matching wood resources with energy needs country experts which would allow decision-making to follow the most efficient approach (integrated resource management) ii The need for individual boiler houses to arrange the Output 1.3: Findings from the investment projects, study fuel supply for wood energy tours and developed planning tools are internalised and the implications for policy assessed Output 2.2: Wood Supply Investment Project Organized and Implemented iii Lack of infrastructure for the storage and supply of Output 2.2: Wood Supply Investment Project Organized and wood fuel Implemented iv Lack of concerted effort to support and promote Output 1.5: Plan for Sustaining/Replicating Project Results wood-energy based activities Developed and Launched Output 3.1: Pipeline of biomass investment projects developed Output 4.1: Relevant decision-makers at ministerial, oblast, and regional level are fully informed of the potential for wood energy as part of a modern fuel system v Lack of legislative and supportive policy context, in Output 1.3: Findings from the investment projects, study particular one that gives incentives to decision tours and developed planning tools are internalised and the makers to choose wood fuel implications for policy assessed B: Technical Barriers i Lack of technical framework addressing the fuel Output 2.2: Wood Supply Investment Project Organized and supply chain/market on a large scale, impeding Implemented efficient fuel harvest, processing, storage, delivery. ii Lack of tools to guide decision-makers in selecting Output 1.2: National wood energy plan the most cost effective heating and hot water developed based on least-cost planning alternatives on a national, regional and local level principles are developed. Output 4.1: Relevant decision-makers at ministerial, oblast, and regional level are fully informed of the potential for wood energy as part of a modern fuel system iii Lack of wood fuel standards Output 1.3: Findings from the investment projects, study tours and developed planning tools are internalised and the

Barrier description Key outputs addressing this barrier implications for policy assessed iv Lack of technical experience of automated fuel Output 1.4: Training conducted to strengthen capacity of in- feeding systems for medium sized biomass boilers country experts Output 2.1: Boiler Conversion Investment Projects Implemented Output 2.2: Wood Supply Investment Project Organized and Implemented v Lack of modern technology for fuel combustion at a Output 2.1: Boiler Conversion Investment Projects medium scale Implemented Output 2.2: Wood Supply Investment Project Organized and Implemented C: Financial Barriers i Lack of funds for the establishment of efficient fuel Output 3.2 Revolving fund for biomass energy established supply systems and conversion of boiler houses to wood fuel ii For state enterprises the need to purchase wood fuel Output 1.3: Findings from the investment projects, study by organisation when coal, oil and gas is frequently tours and developed planning tools are internalised and the purchased from oblast budgets implications for policy assessed iii Lack of interest from the banking sector because of Output 2.1: Boiler Conversion Investment Projects lack of experience Implemented Output 3.2: Revolving fund for biomass energy established D: Information/Awareness and Perception Barriers i Lack of knowledge among decision-makers of Output 4.1: Relevant decision-makers at ministerial, oblast, benefits opportunities and versatility of biomass and regional level are fully informed of the potential for energy wood energy as part of a modern fuel system ii Perception of biomass boilers as a small scale, dirty, Output 2.1: Boiler Conversion Investment Projects and inefficient technology Implemented Output 2.2: Wood Supply Investment Project Organized and Implemented iii Lack of information about modern technologies of Output 1.1: Project Management Unit Established and harvesting, processing, storage and combustion of Capacity Development Provided to the Government and wood waste Other Potential Investors on an Ongoing Basis Output 2.1: Boiler Conversion Investment Projects Implemented Output 2.2: Wood Supply Investment Project Organized and Implemented iv Lack of examples from "success stories" of modern Output 1.3: Findings from the investment projects, study biomass projects in Belarus tours and developed planning tools are internalised and the implications for policy assessed Output 2.1: Boiler Conversion Investment Projects Implemented Output 2.2: Wood Supply Investment Project Organized and Implemented v Lack of information to determine the specific Output 3.1 Pipeline of biomass investment projects investment and operational costs developed

4 OBJECTIVES

4.1 Overall objective The objective of this project is to reduce the GHG emissions of Belarus by removing the barriers to economically feasible wood and wood waste utilisation for heat, hot water and power supply. Target areas include district heating for residential, industrial and public buildings such as schools, hospitals and sanatoriums.

4.2 Specific objectives This project will address the principal barriers to the implementation of wood and wood-waste boilers through a process of barrier removal involving boiler conversion and fuel supply side projects, planning for replication through awareness raising, development of decision-making tools, policy assessment, the establishment of a revolving fund for sustainability and the development of an investment pipeline. An exit strategy will be developed ensuring that activities continue after the close of the project.

Objective 1: Strengthen institutional capacity to support biomass energy projects Objective 2: Establish a track record for investments in sustainable biomass energy projects, including both fuel supply and demand. Objective 3: Develop straightforward financial “starter” mechanisms in a challenging investment climate that will allow continued financing for biomass energy projects. Objective 4: Overcome negative perceptions of biomass energy and provide public and private investors with much-needed market information.

4.3 GEF rationale While there are compelling economic and environmental incentives for biomass energy use, there is a clear need for assistance in addressing barriers to a market in this sector. The project ultimately aims to support market mechanisms since this is most likely to lead to the development of an efficient (least-cost) development strategy in both financial and economic terms.

On one hand, the Government of Belarus has demonstrated proven support for energy efficiency and renewable energy that is unusually strong compared with other CIS countries, including strategy documents, government programs, fines for inefficient energy use, and direct investments in clean energy projects. For example, the State Committee invested USD 2.0 million in 2001 for the conversion of boiler houses to local fuels. On the other hand, the government directly controls approximately 80% of the economy, which limits the market-based approaches that are compatible with current conditions. The financing mechanisms proposed in the activities of the project reflect this mixed situation and realistically assess the potential for market growth in difficult conditions. For example, the project does not consider loan guarantees in the context of its activities. The lack of institutional capital, unavailability of political risk insurance, and insufficiently mature capital markets would not make this a viable option. Instead, the project will build upon the strong institutional foundation for project development and precedent grant financing by supporting the government in the development of a loan mechanism through which it can leverage existing funds channelled into biomass energy projects. It will address existing risks through the design of the activities; such as indexing the loan fund for inflation.

It is also clear that the federal government has two compelling reasons to invest in biomass energy for reasons other than environmental sustainability: economic savings and security issues. Biomass is a less expensive fuel than coal, mazut, or natural gas in Belarus, and increased investment in biomass would allow the government to save twice – first when paying for fuel for budgetary organizations, such as hospitals; and again when reducing subsidies currently expended in the residential sector.

However, an equally compelling motivation exists in the form of energy security. Belarus receives all of its natural gas from a single supplier – the Russian Federation. Two years ago, this supply was actually cut off due to disagreements. Clearly, high levels of natural gas dependency in a country with a long winter would be politically unwise. Unfortunately, Belarus does not have many sources of indigenous energy. The primary source used currently is peat, which has led to land degradation and air pollution through its use. Indigenously grown biomass, in this case, is a very attractive choice.

In short, this project is envisioned as a market development project that will serve as a bridge between the current situation of low awareness and lack of capital to an eventual situation where the government and private investors can introduce additional means of developing the market. These measures will complement ongoing government efforts to

13 Biomass Energy for Heating and Hot Water Supply in Belarus address barriers in the overall energy market, such as the planned programme of price liberalisation to reduce subsidies and cross subsidies in energy.

The proposed project has the potential to make a significant contribution to the reduction of GHG emissions in Belarus, because it will replace carbon-intensive fuels with clean energy from the sustainable harvesting of biomass, which does not contribute to the net increase of the GHG. Direct fossil fuel savings as a result of this programme represent approximately 1.08 million tonnes of CO2 reduction over a 15-year period. The CO2 emission reductions as a result of this project are expected to reach 895,000 tonnes per year in 2015.

5 PROJECT COMPONENTS/ACTIVITIES AND EXPECTED RESULTS

The proposed full-scale project will consist of 4 key components designed to overcome the 4 categories of barriers identified during the implementation of the PDF B project. Each component consists of a number of activities contributing directly to overcoming specific barriers (but clearly contributing to the reduction of other related barriers). The investment projects, for example, while primarily contributing to the reduction of technical barriers also have the potential to play an important role in overcoming awareness, capacity and information related barriers.

The components and activities have been designed in such a way as to ensure sustainability and benefit long after the end of the full-scale GEF project. In all activities the programme will make use of international and national expertise as appropriate.

The project focuses on the following four types of barrier removal:  Institutional Capacity Development;  Technical Capacity Development;  Financial Capacity Development; and,  Information and Outreach to Increase Awareness.

5.1 Component 1: Institutional Capacity Development

Output 1.1 Project Management Unit Established and Capacity Development Provided to the Government and Other Potential Investors on an Ongoing Basis Output 1.2 National wood energy plan developed based on least-cost planning principles are developed Output 1.3 Findings from the investment projects, study tours and developed planning tools are internalised and the implications for policy assessed Output 1.4 Training conducted to strengthen capacity of in-country experts Output 1.5 Plan for Sustaining/Replicating Project Results Developed and Launched

Output 1.1 Project Management Unit Established and Capacity Development Provided to the Government and Other Potential Investors on an Ongoing Basis

Approach: The purpose of the start-up and management arrangements is to strengthen the institutional capacity of organisations in Belarus in the facilitation and promotion of viable biomass energy projects to key stakeholders. This will take the form of twinning between the Project Management Unit (PMU) and a ‘Twinned Institute’ in another country. The foreign institute will act as the foreign hub, facilitating twinning activities between Belarus and the twinned country. The twin institute in the foreign country will benefit from research partnerships with its Belarussian colleagues. The PMU will play a similar role as the co-ordinator in Belarus. The activities will focus on addressing awareness-raising needs, as well as technical and organisational needs to support the project activities. Under the proposed activities in institutional

14 Biomass Energy for Heating and Hot Water Supply in Belarus capacity development, including study tours, training workshops and secondments, the foreign institute will be the foreign facilitator and will work closely with the PMU to identify suitable content.

The twinned institute has concrete tasks to be carried out for capacity development, as well as a more strategic long- term role, both of which are to be described in detail in the terms of reference to be included in the project document. The rationale behind this approach is two-fold: 1) to provide a coherent foundation linking and integrating institutional and financial capacity development, and 2) to establish a basis for long-term international co-operation well after the GEF project finishes. Without the proposed twinning, the capacity development activities risk becoming merely steps to completion of the project rather than foundations for long-term replication. The proposed twinning encourages strategic planning for the future long after the end of the UNDP/GEF project, and a strategy for continuing the partnership between the two institutions will form a part of the activities under Output 1.5.

Activities: 1.1.0 Establish Project Steering Committee. 1.1.1 Hire project manager, technical assistant (junior) and administrative staff. 1.1.2 Establish the Project Management Unit and open office. 1.1.3 Finalize work plan and review institutional and management arrangements for project implementation (inception report), including a draft version of a plan to support replicability of project activities. 1.1.4 Draw up shortlist of local and foreign experts for key project activities. 1.1.5 Call for expression of interest and draw up shortlist of potential contractors for initial projects. 1.1.6 Identify potential twinning institutes, and call for tenders. Establish twinning arrangement and hold yearly planning/management meetings between the Project Management Unit, and the twinned institute. 1.1.7 On an ongoing basis, prepare and implement Monitoring and Evaluation reviews including the Annual Project Workplan, the Annual Project Report, the tripartite review meetings, the annual Project Implementation Review, the Mid-term and final independent evaluation, the project Terminal Review, the terminal tripartite review, and the yearly project audits (see the section on Monitoring and Evaluation for details and proposed Workplan).

Indicators:  By the end of month 2 after the project starts the project manager and administrative staff is contracted.  By the end of month 3 a call for expression of interest for the investment projects have been issued, and a shortlist of potential contractors identified.  By the end of month 3 a shortlist of long- and short- term consultants / companies for key project activities is developed.  By the end of month 6 a twinning arrangement has been established and is functioning.  By the end of the project monitoring and evaluation has been carried out according to plan and results have been used to provide for continual refinement of project activities.

Output 1.2: National wood energy plan developed based on least-cost planning principles are developed

Approach: The development of a national plan will be critical to the development of a wood energy market, as it will simultaneously enhance the ability of the government to plan where investments might be most strategic and the ability of potential investors to assess the market for biomass energy projects.

A Geographical Information Systems (GIS) will be developed for Belarus, which includes geographical data on existing boilers, heating needs, wood-waste resources, wood enterprises, existing government wood supply organisation, and transport systems (rail, road, water). This will allow for the development of integrated and co- ordinated approaches for the planning of replication, and providing tools for financial decision-making. This activity is seen to be especially relevant for Belarus with its strongly centrally planned approach. The approach will emphasise

15 Biomass Energy for Heating and Hot Water Supply in Belarus the training of local experts in the development of relevant GIS resources. In addition to GIS, improving local capacity for the monitoring of wood-fuel characteristics and quality, and the measurement of boiler emissions will further strengthen decision-making capabilities.

Note: Attention will be given to environmental issues, such as particulate control and “clean” operating practices for wood-fired boilers, during the development of policy and during training and outreach.

Activities: 1.2.1 Conduct review of the current GIS and Resource Management capabilities in Belarus and identify possibilities to build on this capability. Consult with stakeholders on possible synergies with other planning activities in the energy sector. 1.2.2 Review of international experiences in information-based decision-making tools for national wood energy planning and the potential for this to be used in Belarus. 1.2.3 Develop detailed implementation schedule. 1.2.4 Select and hire a consultant to assist in development of GIS on wood fuel. 1.2.5 Arrange training for 2 Belarussians abroad in a tailor-made MSc programme (or similar) in the use of a GIS and with their thesis/fieldwork focusing on designing and implementing a GIS as per the project requirements. 1.2.6 Update and develop the database on wood waste resources and existing boiler houses developed during the PDF B, and get it into a format suitable for the GIS. 1.2.7 Carry out training in wood resource planning and in the implementation of a system for monitoring emissions and wood fuel quality. 1.2.8 Purchase necessary hardware and software for GIS system and for the implementation of the quality control system (for measurements of boiler emissions and wood fuel quality). 1.2.9 Develop planning scenarios (proposals) based on the developed system for the use of the Committee on Energy Efficiency.

Indicators:  By the end of the project 2-3 people have been trained in the use of Geographical Information Systems (GIS) for biomass resource planning.  By the end of year 3 a GIS system with relevant biomass planning data is functioning.  By the end of the project the Committee on Energy Efficiency have made use of the GIS system to develop least cost activities for replication.  The national capacity to monitor boiler emissions and measure wood fuel quality will be increased by the end of year 3.

Output 1.3: Findings from the investment projects, study tours and developed planning tools are internalised and the implications for policy assessed

Approach: In year 4, the lessons learnt from the investment projects, awareness campaign, and resource planning activities will be assessed. In addition, targeted recommendations on the legislative and policy framework needed to facilitate future replication of the investment projects and wider use of modern wood energy will be developed. A dialogue with decision-makers focused on policy will be initiated, and a seminar attended by relevant stakeholders will be held.

Activities: 1.3.1 Using the results of outputs 1.1 to 1.5, identify findings and implications for Belarussian planning and policy and assess the impact on potential replication of the project. 1.3.2 Prepare a document with suggestions for policy and disseminate to key stakeholders for comment.

1.3.3 Hold a seminar / dialogue with selected (government) stakeholders to debate and review the suggestions.

Indicators:  Positive feedback from stakeholders attending the policy seminar.  Positive feedback from the Council of Ministers is received on the policy recommendations.  Growth of funding for conversion of biomass fuel for the next period of planning (after completion of the project), including, arrangements for financial resources to be set aside for the project development phases of wood energy projects.  Changes in policy or, at minimum, progress in the adaptation of policy initiated by, for example, the Committee on Energy Efficiency.

Output 1.4 Training Conducted to Strengthen Capacity of In-Country Experts

Approach: The development of local capacity through targeted training forms an important element of the project and this is reflected throughout the project design, as it will address other barriers in addition to institutional barriers (financial barriers in particular). Training takes various forms such as ‘on-the-job’ training, study tours and exchange visits, focused study, and seminars and workshops. In particular, the following training is envisioned:

Activities: 1.4.1 Develop training plan within project management unit for both project staff and other stakeholders with a view to replicability and sustainability of the project. 1.4.2 On-the-job training: Hire a junior technical assistant in the project management unit to receive training from the project manager. 1.4.3 Local experts and trainees will also be hired in the investment projects, and secondments in project engineering and implementation will be a contractual obligation of project developers and equipment suppliers. 1.4.4 The suppliers will also be required to provide training to operators and maintenance staff for the investment sites. 1.4.5 On the job training will also take place in biomass resource planning within the information and awareness component. 1.4.6 Study tours and exchange visits: Study tours and exchange visits will take place in the biomass fuel supply demonstration and under awareness raising, as well as in secondments under the proposed twinning arrangement (described below). 1.4.7 Dedicated study: As a part of the wood fuel plan (information-based decision making tools) resources are allocated to facilitate training for two Belarussians abroad in a tailor-made MSc programme (or similar) in the use of a GIS and with their thesis/fieldwork focusing on designing and implementing a GIS as per the project requirements. There are a number of institutes worldwide that can provide such training if it cannot take place entirely under the twinning arrangement. A stipulation in the training program will require students to spend a minimum number of months or years with the project office (the exact amount will be determined during the project initiation phase).

Output 1.5: Plan for Sustaining/Replicating Project Results Developed and Launched

Approach: A plan for the “scaling-up” of wood energy implementation after the end of the project will be developed. The plan will review the status of the barrier removal process, initiated within the GEF project and identify remaining information, training, capacity, financing, and hardware requirements. A concrete set of future activities will be identified based on the policies that have been put into place over the course of the project. In this way information, training, capacity, financing and hardware requirements will be scaled-up based on previous outputs. Through these

17 Biomass Energy for Heating and Hot Water Supply in Belarus activities barriers remaining at the end of the project will be assessed and planning made for continued and wide-scale implementation of wood-energy. While these activities are grouped under institutional capacity, they address all the identified barriers by putting into place mechanisms that will continue to overcome barriers after the end of the GEF project.

During the exit strategy, the twinned institute will act as advisor, providing international expertise to those implementing each output, and access to additional resources (information / contacts) where required. The facilitative role of the twinning arrangement is shown under the sub-section “Supplementary Information on Project Activities.”

Activities: 1.5.1 Prepare 'best practice' guidebooks for potential future project developers and decision makers. These guidebooks will include a substantial section on project identification and development. 1.5.2 Develop scale-up plan based on the project outputs, reviewing, for example financial mechanisms for replication of projects that are appropriate for Belarus. 1.5.3 Carry out conclusion workshop for the promotion of the project results and discussion of the scale-up plan.

Indicators:  During the project lifetime a "best practice" guidebook is published.  By the end of the project a concrete and realistic plan for continuation and scaling up results is developed and disseminated, and next steps identified.

5.2 Component 2: Technical Capacity Development

Output 2.1 Biomass Boiler Conversion Investment Projects Implemented Output 2.2 Wood Supply Investment Project Organized and Implemented

Output 2.1 Biomass Boiler Conversion Investment Projects Implemented

Approach: Five boiler conversion projects will be implemented to jump-start the market for clean-burning biomass and to ensure that potential public and private sector customers understand that wood fuel is a viable, cost effective and modern alternative to fossil fuels, challenging negative perceptions of wood energy. The introductory projects will feature a range of wood energy conversion techniques (various boiler sizes and types including combined heat and power (CHP)) so that they will be able to serve as project development templates for subsequent project. In addition, the project will support the creation of a regional fuel supply system in order to ensure future supply of wood fuel in a growing market.

The investment sites were selected based on a careful screening and evaluation process as part of the PDF B. Potential sites were initially screened from the database of over 4500 sites compiled by local specialists (see Annex E). The screening criteria included the capacity of the boiler house, year-round heat demand, availability of wood waste resources, and the existence of institutional consumers, in addition to industrial heat demand. Following the initial screening of the database, approximately 30 boiler houses were visited and additional data collected. The evaluation of the 30 boiler houses, carried out by a team of local experts and international consultants, included the assessment of the long-term viability of the enterprise or organisation (sustainability), the potential of the project to “jump-start” the market (visibility and accessibility), replication potential, availability of co-funding, and the technical and economic feasibility of the proposed project. The list of 30 boiler houses identified during the screening phase was reduced to 5 key sites during this evaluation process. A summary of the selection criteria used to select the investment sites is given in Annex H and fact sheets giving a detailed description of the selected sites according to the evaluation criteria is given in Annex I (a summary of which is given in Table 2 below). 5 possible alternative investment sites in a reserve list located between Minsk and Brest are also given in Annex I. The physical locations of the key sites are shown in the accompanying Figure 1.

While CHP is not the primary focus of the proposed project, favourable power purchase tariffs make CHP an attractive option. On one hand, high up-front costs mean that the majority of wood waste boiler installations in the future will be heat-only systems (thus justifying the focus on heat-only boilers). On the other hand, the value of successful biomass- fired CHP investments in overcoming negative perceptions should not be underestimated, thus justifying the inclusion two CHP systems in the group of five projects.

Note: In spite the GEF funding to the Project is fully provided as a grant to the Republic of Belarus, each of the investors in the introductory projects will be required to return the GEF portion of the funding (totalling USD 1,310,000 for the 5 boiler conversion investment projects) to a revolving fund managed by the Committee for Energy Efficiency of Belarus following a grace period and repayment period. Project site owners have agreed with the Committee on a 2-year grace and 7-year repayment period, but this arrangement is preliminary and will be finalized by the project team during implementation. A revolving fund will be established with the returned funds that will be used for replication activities consistent with the investment activities conducted under the project (see Component 3: Financial Capacity Development).

Table 2: Overview of Initial Investment Project Sites SITE NUMBER 1 2 3 4 5 Project name Poultry Farm Furniture Factory Uzda VOLAT-1 Farinovo District ‘Radon’ ‘Molodechno’ ‘Stroidetali’ company Heating Plant sanatorium Location Olekhnovichi, Vileika, Uzda, Farino City, Dyatlovo, Minsk Oblast Minsk Oblast Minsk Oblast Polosk Oblast Grodno oblast Ownership To be privatised Joint Stock Co. Private company Municipality Public company status Existing system Mazut oil Mazut oil Electrical Mazut oil Natural gas Biomass biomass fuel Sufficient wood Sufficient wood Adjacent To be supplied resources supply project waste to meet waste to meet furniture factory from Dyatlovo own needs own needs forest company Proposed CHP CHP Heat only Heat only Heat only measures 7.5 MWth 7.5 MWth 1 x 1 MWth 12 MWth 3.5 MWth 0.5 MWel 0.75 MWel 1 x 0.7 MWth gasification unit 14 bar steam 23 or 39 bar and existing (low pressure) steam boiler (high pressure) Estimated cost and sources (all figures in USD) Owners 860 000 800 000 320 000 50 000 320 000 Others IKEA 700 000 Committee 510 000 550 000 190 000 450 000 190 000 GEF loan 350 000 400 000 130 000 300 000 130 000 TOTAL 1 720 000 1 750 000 640 000 1 500 000 640 000

CO2 reduction 21 000 22 000 2 000 24 000 3 000 (tonnes / yr) Mitigation costs for GEF funds 1.1 1.2 4.3 0.8 2.9 over 15 years (USD/Mg CO2)

SO2 reduction 159 158 - 197 - (tonnes / yr)

Involvement of local experts will be an integral part of the process. The installation supplier(s) will be expected to provide on-the-job training in all phases of the project engineering and implementation and capacity building to local experts (in the form of a secondment or some similar training) is to be part of the terms of reference of the supplier(s). A promotional campaign including workshops and study tours of decision-makers and technical experts to the projects will be designed and implemented to support the awareness raising elements of the project as part of this component.

Barriers addressed: While these investments will strengthen technical capacity, they will also raise awareness among decision makers of wood energy as a modern, clean, cost-effective and efficient fuel for medium scale (5-10MW) applications, eliminate negative perceptions of wood energy, demonstrate the applicability of various system arrangements for wide scale use in Belarus, and provide opportunities for training in all aspects of project development and management. Financial barriers will be addressed indirectly through the impact on government budget policies as a result of increased awareness and the establishment of a dedicated revolving fund.

Activities: 2.1.1 Hire local experts (and trainees) for overall management and support activities of the investment projects. Hire international advisor to assist with planning, assessment of tenders, and implementation of projects. 2.1.2 Review technical, physical and timing requirements for the project sites prepared in the PDF B and revise if necessary. Prepare detailed procurement and implementation plan. 2.1.3 Develop detailed terms of reference for the project sites, prepare public call for tenders, short-listing, evaluation and selection. 2.1.4 Prepare and sign contracts with experts and companies. 2.1.5 Implement and commission the investment projects. 2.1.6 Conduct on-site monitoring, and document findings for inclusion into policy review (feeding into Output 1.3).

Indicators:  By the end of year 3 the investment projects are operating as designed.  Monitoring is in operation at all sites throughout the project.  Total fuel savings, from all 5 projects of approximately 35,000 tonnes coal equivalent per year and emission reductions of 72,000 tonnes per year is achieved from year 4.

Output 2.2: Wood Supply Investment Project Organized and Implemented

Approach: A regional fuel supply system will be established at the wood harvesting Joint Stock Company “Molodechnoles” in Molodechno close to Vileika (site number 2 in the map above). The fuel supply system, covering harvesting, processing, storage, and delivery of wood chips, will primarily aim to supply fuel to the boiler site at the poultry farm in Olekhnovichi (site number 1 above), but will additionally be established with a view to supplying fuel to smaller, regional, wood-fired boilers to be established as a result of the GEF project activities. Involvement of local experts and the training of both experts and users will be an integral part of the project implementation process. A promotional campaign including workshops and study tours to the projects of decision-makers and technical experts will be implemented in output 1.4. The GEF contribution Figure 1: Demonstration project sites (USD$230,000), which is a grant for Belarus will be made for the site in the form of a loan to be returned to the revolving fund under the scheme described in Component 3.2.

Barriers addressed:

This project component will tackle barriers of awareness and perception, technical barriers on the fuel supply side, and institutional barriers. In particular the project will raise awareness among decision makers of modern methods for the planning and operation of a wood-chip supply organisation, and showcase an efficient fuel supply chain under Belarussian conditions. In addition the project will demonstrate how costs of fuel supply can be reduced using appropriate fuel supply systems, illustrate how the risks and uncertainties of fuel supply may be reduced with a regional supply organisation, and provide lessons for replication and training. As for the proceeding outputs, financial barriers will be addressed indirectly through the impact on government budget policies as a result of increased awareness.

Activities: 2.2.1 Hire local technical expert (and trainee) for the management of the overall project on fuel supply. Hire international advisor. 2.2.2 Conduct review of approaches (technologies) for fuel supply (including study tour, workshop etc.) involving the key stakeholders in the proposed project in the identification of best practice and relevance to the Belarus situation 2.2.3 Prepare detailed plan for all the activities, including selection of technologies, design, procurement, and supply of equipment for wood fuel enterprise. 2.2.4 Call for expression of interest and draw up short list of suppliers and producers of equipment and machines for a wood fuel supply company. Conduct necessary procurement procedures (tender, contracts, etc.) to produce and supply machines and equipment for wood fuel production and transportation. 2.2.5 Ensure successful implementation of the project, including set up of the new wood fuel supply organisation. 2.2.6 Provide support to the Committee on Energy Efficiency addressing elaboration of wood fuel standards. 2.2.7 Conduct on-site monitoring and document experiences for inclusion into policy review (output 1.3)

Indicators:  By the end of year 3 the 'biomass fuel supply’ project is operating efficiently and cost effectively according to design parameters  Reduction in long-term fuel preparation and delivery costs in wood harvesting as compared to existing organizations that currently operate in forests. for the wood harvesting company of over 20% as a result of the techniques implemented in the project  More boilers in a 70 km radius supplied by – and operated on – wood fuel/chips

Operating Assumptions: An overview of assumptions used for the investment projects is provided in Annex H bis., a series of sample calculations for Olekhnovichi. The prices for wood fuel used in the calculations were taken on the basis of calculations done by the project team jointly with accountants at each site. For example, the Olekhnovichi boiler house will use wood residues after harvesting as fuel. This wood waste will be supplied from the Joint Stock Company (JSC) "Molodechnoles" (the market supply demonstration site). The distance to the site is about 40 km. The wood fuel sale price there is 5 USD/m3 loose wood. This price was calculated by the financial accountant of the "Molodechnoles" JSC. In this case cost of wood waste for "Olekhnovichi" is 5 USD, too. The "Radon" sanatorium will purchase wood fuel from a local forestry enterprise. This wood fuel is actually wood that is collected after thinning the forests located around the sanatorium. Distance to the collection point is maximum 5-10 km. The sanatorium has already received a letter of confirmation from the forestry enterprise that it is ready to supply the necessary amount of wood fuel at 2 USD/m3 loose wood.

The other three sites have sufficient wood waste on site at each enterprise after wood processing. In principle, this wood waste is free of charge. Nevertheless, the project team asked financial accountants at these sites to make assessments of wood waste prices inside each enterprise. This price includes mainly transportation costs and the cost of storage at each enterprise. Figures given to the team were used in its calculations. A wood waste price of 0.5 USD/m 3 loose wood was given by the "Vileika" and "Uzda" wood processing enterprises and the "Farinovo" furniture factory.

From the reserve sites, there is a price of 0.3 USD/m3 from the Ivatsevvichi wood processing enterprise. Boiler house in "Telekhany" will be supplied with wood waste from the forest by means similar to the "Molodechnoles" company. Because of this, the team used a price of 5 USD/m3 -- similar to Olekhnovichi – in its calculations.

If the pre-contractual prices for wood waste supply as indicated above and in Annex Q ‘Commitments of Project Beneficiaries’ are not met (i.e., equal to or less than) then these project sites will not be permitted to participate in the UNDP/GEF project.

The sales price of heat in Belarus is very different from region to region and from boiler house to boiler house. In the calculations for the investment projects, the project team used the actual heat sale price for each site. The sales price of electricity is common all over the Republic. For all the sites, it is 0,035 USD/kWh.

In our calculations, we used a standard 10% discount rate for an option without GEF contribution and 9% discount rate with GEF grant. The reasoning behind a 9% discount rate was as follows: GEF provides 20% contribution for hardware to be paid back by the site owner at theoretical 5% interest rate to a revolving fund. (5% was assumed, but perhaps the decision will be even 0%. It depends on the revolving fund conditions). Therefore, 20% of the necessary investment in a site given by GEF can reduce standard 10% discount rate to 9%. If it were 0%, the discount rate would be 8%.

A project lifetime of 15 years was assumed across the board except for a figure of 10 years for the market supply demonstration site and 25 years for the communal service boiler house in Telekhany. 15 years is a minimal lifetime for boiler house equipment. Usually, it lasts between 15-25 years. For the market supply demonstration, the lifetime will be shorter because lorries, tractors, and other equipment working in the forest have shorter service lifetimes.

5.3 Component 3: Financial Capacity Development

Output 3.1 Pipeline of biomass investment projects developed Output 3.2 Revolving fund for biomass energy established

Output 3.1 Pipeline of biomass investment projects developed

Approach: Making use of the decision-making tools developed in preceding outputs, a pipeline of 5 to 10 potential projects will be developed (at least 1 or 2 of which will be on fuel supply). An ‘investment brief’ covering financial and technical analysis of each project will be prepared, and presented to potential funders (private, government, local and foreign).

Activities: 3.1.1 Using the results of output 1.2, identify 5 to 10 projects meeting the principles of demand and least cost. 3.1.2 Carry out energy audits, and economic analysis of proposal (business plan). 3.1.3 Prepare a portfolio of projects for presentation to potential funders. 3.1.4 Hold meetings with selected funders to present the project portfolio and seek letters of interest.

Indicators:  Investment briefs on 5 to 10 replication projects (covering the technical and business case for each) are available in the second half of year 3 of the project allowing time for finding and allocating financial resources for a) further development of the concept papers and b) implementation of the second generation projects.  Funding sources for the replication projects identified and expressions of interest received from the relevant organisations.

Output 3.2 Revolving fund for biomass energy established

A revolving fund will be established within the project out of the GEF grant. This fund will be used for biomass energy replication activities consistent with the activities. The government will be able to develop this loan fund through into a perpetual revolving fund for biomass energy projects and would be in a position to contribute funds from the ‘Energy Saving Innovation’ fund, thus ensuring sustainability.

The revolving fund is created on the basis of the GEF contribution to the Project. All GEF funding is a grant to the Republic of Belarus totalling 3,129,000 USD. A part of this to the amount of 1,540,000 USD is the funding for the investment projects. The boiler conversion hardware funding is 1,310,000 USD and the biomass fuel supply hardware funding is 230,000 USD. The hardware funding will be given to the sites owners in the form of a low interest (5%) loan to be returned to a revolving fund that is established within the Project. The revolving fund will be managed by Belinvestenergosberezhenie (or a branch of this institution), which is one of the two subsidiary companies affiliated with the State Committee. These funds will be used to make additional investments after the end of the project. The loans will be indexed to inflation in order to prevent the risk that current annual inflation levels (approximately 40%) deplete the value of funds paid back into the fund. A financial feasibility study of the most appropriate loan package and recipient will be conducted during the activities to establish the fund.

The government will be able to ensure sustainability of the fund by seeking additional contributions into the revolving fund; for example, contributions from the Energy Saving Funds administered by the Committee on Energy Efficiency. Belinvestenergosberezhenie (or a branch of this organisation), under the Committee’s supervision, will administer the biomass energy revolving fund. The specific terms and conditions of the fund, as well as legal agreements and administrative criteria will be determined at this time so as to ensure that it meet the needs and operating environment in Belarus. In this way, the project will work with the government to broaden its focus on loan schemes as opposed to grant schemes for promising investment projects, allowing its limited funding to be leveraged.

The Government of Belarus has the advantage of already having a legal mechanism in place by which it can offer loans for energy-saving projects. In case of favourable loans provided by local banks, the State Committee can compensate 50% of the refinancing rate of the National Bank. In 2000 and 2001, the State Committee spent USD 470,000 and USD 360,000, respectively, to cover this half of refinancing rate for favourable loans. All this money was then accumulated in commercial banks. The government is also providing money from the innovation fund as favourable loans at 20% of the National Bank refinancing rate to finance energy efficiency projects. The money invested by the Committee will return to a special account and could be used again for energy efficiency activities.

The activities supporting this output will address financial barriers, in particular the identification of funding for long- term replication.

Activities: 3.2.1 Establish conditions of the revolving fund most conducive to operation in current conditions. 3.2.2 Finalise legal agreements and administrative criteria. 3.2.3 Ensure adequate, trained, staffing for the fund by drafting appropriate terms of reference and recommending training as necessary. 3.2.4 Establish the revolving fund on the basis of an existing or new lending mechanism (with preference given to a viable existing mechanism). 3.2.5 Seek additional contributors to the fund for longer-term sustainability.

Indicators:  The revolving fund will be established using the appropriate charter documents.  The revolving fund will be operating effectively with appropriate staffing.

 The government will leverage a certain percentage of its current funding for energy projects through the fund’s mechanism.

5.4 Component 4: Information and Outreach to Increase Awareness

Output 4.1 Relevant decision-makers at ministerial, oblast, and regional level are fully informed of the potential for wood energy as part of a modern fuel system

Approach: A dissemination strategy comprising preparation and targeted distribution of promotional material (brochures, videos etc.), regular study tours (both in-country and international), magazine articles and press releases, seminars and workshops, will be developed and implemented. These activities principally tackle awareness barriers. In particular these activities will get decision makers interested in the potential for wood energy, and facilitating informed decision- making, raise awareness at a ministerial, oblast and regional level of the potential for wood energy, and how wood energy can be part of a modern fuel system, and provide training and capacity building. Financial barriers will be addressed through an exchange visit to a relevant revolving fund successfully established in a foreign country in preparation for the establishment of the Belarusian revolving fund.

Activities: 4.1.1 Review project dissemination and awareness activities. 4.1.2 Identify key decision-makers at ministerial, oblast, and regional levels (including, for example, deputy ministers, managers of forest enterprises, directors of joint stock companies, and technical managers) and the most appropriate awareness raising approaches for each target group. 4.1.3 Conduct local study tours (to the sites), workshops, and seminars to raise the awareness. 4.1.4 Establish exchange visits and secondments (including one in preparation for establishment revolving fund). 4.1.5 Conduct a survey at the end of year 2 and 4 on the impact of the awareness campaign.

Indicators:  Surveys at the end of year 2 and 4 on participants in the study tours (internally to the sites, and externally to countries where biomass is in common use) shows growing interest in the use of biomass in Belarus.  There is a growing interest, indicated by increased requests to the PMU for information, from decision-makers targeted by the dissemination activities.  Information leaflets, brochures and videos are published and distributed to target audiences each year.  The project is mentioned at the council of ministers (or in other interdepartmental government meetings) at least 3 times a year, and regularly in the press.  By the end of the project, demand for biomass boiler installations has increased.

Supplementary Information on Project Activities

‘Twinning’ to Address Existing Barriers All components of the project will feature a twinning arrangement to a certain extent. The rationale is to provide a coherent foundation linking and integrating the different components based on current, cutting-edge experience and to establish a basis for long-term international co-operation well after the GEF project finishes.

The facilitative role of the twinning arrangement is shown diagrammatically in Figure 2 below.

Figure 2: Proposed twinning arrangement illustrating facilitative role of the proposed co-operation

BELARUS TWINNED COUNTRY Government Government Committee on Energy Efficiency Committee on Forestry Municipalities Ministry of Communal Services Twinned GEF PMU Enterprises, Manufacturers Regional Government Institute Institutes and Universities Private and State Enterprises Biomass Energy Institutes and Universities Association

Co-operation in the form of: exchange visits, study tours, secondments, joint workshops, seminars, joint participation in relevant trade fair, and identification of future joint activities

Phasing of Activities  Project management, awareness raising throughout  Investments in the first 3 years  Revolving fund, project pipeline towards the end  Exit strategy and lessons learned more intensively at the conclusion.

It should be noted that replication will not be limited to the exit strategy in the final year of the project. In fact, replicability has already been taken into account in identifying the potential market for biomass boilers and in developing a short list of promising projects – both activities undertaken during the project design phase.

During project implementation, replication will be handled in two ways. Direct activities will include training and the development of a pipeline of investment projects. Indirect activities will include the support of the financial mechanism, awareness-raising, the focus on policy development, cooperation with the World Bank SIRP project, and the use of the Steering Committee to spur interest in the project and to disseminate its results.

Expected Results and Outputs At its conclusion, the project team will have leveraged substantial progress in the elimination of barriers to the widespread use of wood-waste for fuel in Belarus. Six investment projects will have been implemented. Replication will have been ensured through awareness-raising activities, as well as the design of decision-making tools, an assessment of policy, the establishment of a revolving fund for biomass energy investments and the development of a portfolio of investment projects (investment pipeline). An exit strategy will have been developed and put in place, and a close, working relationship with a counterpart institute will have developed over the course of the project. These activities will have made a significant impact on the reduction of all the barriers identified in Section 2 above.

As a result of the 4-year project, biomass boilers burning wood-waste equivalent to 35,000 tonnes of coal will be installed through the conversion of 3 mazut oil-fired boilers and 2 gas-fired boilers. The annual CO 2 emission reduction due to the installation of the boilers will be about 72,000 tonnes (67,000 from the oil boilers and 5,000 from the gas-fired boilers). Assuming a boiler system lifetime of 15 years (many boilers in Belarus are currently well over

25 years), then the life cycle CO2 emission reduction is 1.08 million tonnes. This reduction is a direct result of the proposed intervention. For a GEF contribution of USD 3.129 million, the cost per tonne of reduced CO2 is USD 2.9 per tonne.

Based on recent feasibility studies conducted in Belarus, the total realistic medium-term potential for biomass energy as a result of the proposed GEF project represents a coal equivalent of 400,000 tonnes, 330,000 coming from mazut boilers, 20,000 from gas, and 50,000 from coal. This represents an annual CO2 saving of approximately 900,000 tonnes.

The above results and outputs expected from successful implementation of the proposed project will ensure that the overall objective (development of waste wood hot water and heating systems) of the project is achieved.

6 RISKS AND SUSTAINABILITY

The proposed project involves the participation and coordination of several main committees and ministries (including the Committee on Energy Efficiency, the Committee of Forestry, the Ministry of Communal Services, the Ministry of Natural Resources and Environmental Protection, and the Ministry of Economy), municipalities, regional and oblast authorities, entrepreneurs, manufacturers, NGOs, and R& D institutions at various levels. A project of this nature is likely to face risks, ranging from changes in world fuel prices to lack of commitment of various stakeholders, some of which lie outside the control of the project stakeholders (external risks), and some within the control of the project participants (internal risks).

6.1 External Risks External risks by definition lie outside the control of the project and represent the external logic or assumptions in a project. The project has been designed so as to minimise the impact of external risks. During the project, the project team is responsible for monitoring changes in assumptions, and where possible works to influence the probability that the project assumptions hold true. The project’s external risks are:

The risk of a lack of ongoing, long-term government support for biomass energy: The success of the project to meet its objectives depends on the continued strong support from the Committee on Energy Efficiency and other government organisations, ensuring that biomass energy activities continue after the end of the project. The current level of enthusiastic support from the Committee and its sustained commitment over the past several years to putting supportive policies into place for renewable energy indicate that this risk is small. The risk is further mitigated by project activities that raise awareness of government organisations and decision-makers, create tools for long-term planning, and assist in the establishment of institutional arrangements that will continue to be effective after the period of GEF support (through the twinning arrangement). It should also be noted that the UNECE, UNDP and World Bank are active in the promotion of renewable energy, and the government has indicated a clear commitment (enacted in laws and regulations) to the support of biomass energy.

The risk of low fossil fuel prices: The achievement of the immediate and global environmental objectives of the project depends on a gradual increase in the end user prices for competing fuels, and a reduction in the existing price distortions (at the border – the special tariffs agreed to with Russia – and the cross subsidies for energy end-users). Current trends, and future indications are positive, and the assumption that prices will continue to increase appears to be good; as a result, this risk appears to be low. Even with relatively low world fuel prices, Belarus will face strong incentives to use domestic fuel, as it will free up hard currency for other projects.

The risk of a poor investment climate: Large-scale investment by government or the private sector in infrastructure such as the upgrading of district heating networks to biomass fuels requires a positive investment climate. This depends in part on political stability with continuity of investment-enabling policies, and continuing economic growth and inflation reduction. The prospects for these conditions to be met are good – reforms, although gradual, are continuing. In the medium-term the possible two-state union with Russia will necessitate economic liberalisation, and a reduction of government controls on investment.

6.2 Internal risks The risk of poor co-operation between project stakeholders: To be successful, the project needs input and co-operation from several main ministries and other institutions in Belarus as well as their serious commitment to continue the promotion of the biomass and other renewable energy technologies. The project will mitigate this risk by establishing a Project Steering Committee (PSC) as a main body to co-ordinate the project activities with other ongoing activities in Belarus, as well as to discuss and introduce the eventual legal and regulatory changes needed to promote the use of biomass as an energy source.

The risk of withdrawal of baseline funding (sponsor risk): Despite the technical and financial support to project recipients there is a risk that the required “baseline” funding for the projects is withdrawn. During the preparation of the project, this risk has been minimised by broad consultations with the key stakeholders. The project will minimize the risk of withdrawal by ensuring that participants in the projects continue to be kept fully informed of, involved in, and committed to the project. In addition, local participants will be involved in all phases of project implementation (including planning, implementation and training). Letters of intent, signed both by relevant mayors/officials and directors of organisations involved, have been received for all proposed projects. The project preparation team has also held repeated meetings with the stakeholders to assess their commitment and provide them with support. Particular attention is drawn to two sub - project owners where amounts of their contributions have not been specified. To further reduce the risk that baseline financing is not forthcoming, UNDP/GEF will not proceed with designing and implementing these demonstration projects, unless co- financing is specified and committed.

The risk of inadequate project implementation: In a project of this complexity a top quality project management is absolutely essential for the success of it. Besides the experience and good knowledge of biomass energy activities in general, the qualifications of the project management should include a proven track record and experience on promoting and managing projects of a similar size and complexity. These risks will be minimised by taking them into account while defining the Terms of Reference for the project managers and the other project personnel (this will be done at the Project Document stage). Inadequate financial and administrative implementation capacities of the Government for the overall programme management as well as local institutions and authorities for executing their respective subcontracts could also impede the project implementation and reduce the efficient utilisation of project funds. This risk will be minimised by close monitoring of the implementation of project activities by the UNDP and the UNECE. The UNDP country office is also prepared to provide support services to the Government upon their request.

The risk of cost overrun and time delays (completion risk): This risk relates to possible cost-overrun and time-delay risks of project completion. This risk will be minimized by the negotiation of fixed-price "turnkey" contracts with suppliers and experts and careful selection of contractors.

The risk of use of inappropriate technologies (technology risk): Any technology, which is at the “leading edge” of current practice, may be considered to present a technology risk. In this project this risk is minimised by only making use of technologies with a satisfactory track record, and ensuring that only experienced contractors are used. The project implementers (international and local experts) should be highly experienced and bring together expertise to overcome this risk. In addition hardware will be required to be supplied with favourable guarantees and maintenance contracts with the recipients

The risk of a lack of available biomass fuel (input and supply risk): This is the risk relating to the provision of biomass fuel of sufficient quality and quantity. During the PDF B phase of the project, the large availability of suitable wastewood was confirmed. The biomass boiler conversion projects have been selected based on detailed fuel supply analysis thus minimising this risk, and systems have been sized conservatively based on available fuel resources. The fuel supply project addresses this risk directly. In addition, hardware will be carefully selected to ensure that the widest possible range of feedstock may be used. Regarding the cost of the biomass fuel, if the pre-contractual prices for wood

27 Biomass Energy for Heating and Hot Water Supply in Belarus waste supply as indicated in Annex Q “Commitments of Project Beneficiaries” are not met then these project sites will not be permitted to participate in the UNDP/GEF project.

The potential for deforestation could be considered a risk associated with the availability of biomass fuel. However, in the case of Belarus, deforestation will not be a significant threat from either a legislative or a resource point of view. The Belarusian forests are managed forests, and logging takes place under licence, so there is little chance of unplanned, uncontrolled logging on a large scale. The harvesting and thinning of forests is controlled by special institutions under the Committee on Forestry (formerly Ministry of Forestry). As there are already safeguards to prevent this, from a project point of view there is low risk that the increased demand for biomass might lead to deforestation. In addition, from a resource point of view, there is an annual increase of forest biomass in Belarus of 25 million compressed cubic meters per year, so the projected impact of the GEF project of 2.1 million cubic meters in 2015, even if it were to come entirely from new logging and not from residues (unlikely) is well below the annual increase (bearing in mind that for 2015 the planned cut is 19 million cubic metres resulting in unused wood waste of 8.3 million cubic metres – see Annex F). Under that scenario, the Belarusian forests will still be increasing by about 4 million cubic meters per year - and still a long way from the possibility of deforestation.

The risk of failure of investment projects (operation risk): Operation risk is the risk to sustained operation arising from the failure of operations of the technical capacity component of the project. The project has mitigated this risk in the way that the financing for the projects is structured. Since the recipients are all making significant investment in the systems (overall more than 50% of the costs) they thus carry a reasonable equity and their commitment to successful operation will be great. In addition the hardware suppliers will give detailed training in the operation of the system, ensuring that the systems are operated as intended.

6.3 Sustainability The issue of sustainability is addressed both directly and indirectly through the throughout the design of the project. Activities that indirectly support the sustainability of the project include training, information dissemination and the development a national strategy. Financial sustainability is directly addressed through the establishment of the revolving fund, whereas institutional sustainability is supported through training of key individuals and development of an ongoing partnership with a foreign institution (twinning arrangement). Explicit attention is also given to the development of the post-project strategy that is part of the project activities (specific information is included under Output 1.5: “Plan for Sustaining/Replicating Project Results Developed and Launched”).

7 STAKEHOLDER PARTICIPATION AND IMPLEMENTATION ARRANGEMENTS

7.1 Stakeholder participation All project stakeholders have been consulted during project preparation and participated in the preparation of this project through the PDF B project. During the PDF B, two seminars were held in which participants were able to give comments and input into the project design, and numerous meetings were held with a wide range of stakeholders. These include:  Council of Ministers;  Committee on Energy Efficiency and oblast branches;  Committee on Forestry;  Ministry of Natural Resources and Environment;  Ministry of Economy;  Ministry of Housing and Communal Services;  Committee on State Control;  Energy concern “Belenergo”;  Pulp and Paper concern “Bellesbumprom”;  Scientific and educational institutes (Polytechnical Academy, Thermal Engineering, Heat and Mass Transfer Institute, “Belnipienergoprom”, Sakharov’s);

 Representatives of Municipalities from the cities of Uzda and Polotsk;  Non government institutions and private companies (EcoMir fund, Pragma-plus, Lotius, “Belkotloprom”, Sakharov’s institute, “Energotekhno”);  Representatives of all potential investment sites;  Representatives of the mass media (TV, Radio-1, “Energy Efficiency” magazine, “Respublika” newspaper)  UNECE; and, UNDP, World Bank, IFC, and EBRD. Consultation with, and engagement of, these same stakeholders will be an important part of the proposed full-scale GEF project, particularly participating in awareness raising. Their involvement will be facilitated through information dissemination and consultation within each project component.

7.2 Implementation arrangements Based on the extensive discussions with project stakeholders, a robust project implementation structure has been developed as given in Figure 3 below.

Figure 3: Implementation Arrangements Committee on Energy Efficiency executing agency PROJECT OVERSIGHT Project Steering Committee (incl. UNDP, UNECE, WB)

Belinvestenergosberezhenie (Existing state energy investment enterprise) PROJECT ACTIVITY Revolving Fund Project Management Twinned Institute established Unit (PMU)

Local Experts International experts / advisors

P R O J E C T T A R G E T S T A K E H O L D E R S7 / B E N E F I C E R I E S

Government decision- Technical institutes, Demonstration project makers, and other public universities, private sector stakeholders (enterprises and sector stakeholders NGOs, media state organisations)

The executing agency for this project will be the Committee on Energy Efficiency of the Republic of Belarus, which was created in 1993. The committee heads a multi-level management system to ensure the efficient control of energy saving that encompasses national agencies, regions, districts, cities, towns, municipalities and enterprises. The committee has established a developing and adaptive system of economical, financial and legal support of energy saving and introduction of renewable energy sources; information support for energy saving; and a system of training and continuing staff education.

A special inter-sectoral steering committee was created within the Committee on Energy Efficiency in 1998 by a Decree of the Council of Ministers in order to promote and coordinate efficient use of local energy sources, including

29 Biomass Energy for Heating and Hot Water Supply in Belarus wood and wood waste. This steering committee is headed by the chairman of the Committee on Energy Efficiency and includes members of all key sectoral ministries, regional departments, scientific institutions and state enterprises. A special working group set up under this steering committee, is envisaged as the basis for the Project Steering Committee. Other key participants of the Project Steering Committee will be representatives of the UNDP, the UNECE and the World Bank. The World Bank, which is considering submitting a project to the GEF on energy efficiency including elements of wood-waste use and closely related to their “Social Infrastructure Retrofitting Project” (BY- 7056) will be invited to have a representative on the Project Steering Committee, in a reciprocal arrangement designed to ensure co-operation and complimentarily of activities between the two projects.

The UNECE secretariat, which worked in support of the PDF phases of this project, will play an important role in the implementation of the full-scale project, providing, where necessary:

1. Technical backstopping for the project execution consisting of assistance to the Executing Agencies in Minsk and local implementation units including development of terms of reference, consultant contract oversight, monitoring and reporting, dissemination of information and experience to energy efficiency demonstration zones in the Russian Federation and abroad, and reporting to UNDP on project implementation.

2. Additional resources on an 'in-kind' contribution basis to the project by the Energy Efficiency 21 Project such as international fora for the consideration of policy reforms in relation to western and eastern European best practice. Within the same framework, support could include the presentation of project opportunities to foreign business and financial community, provision of training materials for business planning and financial engineering, and the preparation of proposals for leveraging additional support for investments or technical assistance (especially for the national and international dissemination of results as they emerge).

The Project Management Unit, will be established within the state enterprise “Belinvestenergosberezhenie” which also serves as the Project Management Unit for the World Bank “social infrastructure retrofitting project”. A possible sharing of Project Management Unit functions and facilities with any eventual World Bank GEF project will be explored.

As part of Component 3, a revolving fund that will be used for replication activities consistent with the investment project activities conducted in this project will be established within Belinvestenergosberezhenie (or a branch of this organisation), under the Committee’s supervision. The operation of this fund, and the opportunity to ensure sustainability by securing additional local and international capital, will also be determined during the implementation of activities under Component 3.

The executing agency will work closely with the Ministry of Natural Resources and Environmental Protection, which is designated as the government implementing agency under the UNFCCC and is also responsible for monitoring air quality.

8 INCREMENTAL COSTS AND PROJECT FINANCING

8.1 Incremental Costs The detailed Incremental Cost analysis is given in Annex A.

The support from GEF is USD 3.129 million. This will result in direct CO2 reductions of about 72,000 tonnes per year and CO2 reductions of about 1.08 million tonnes based on a 15-year lifetime for the systems. The cost per tonne of CO 2 reduced over the 15-year period is 2.9 USD.

8.2 Project Financing

A breakdown of the project’s financing is provided in Table 3 by project component. The workplan by project component is provided in Figure 4. Signed letters of intent for co-financing and in-kind contributions are listed in Annex K and provided as an attachment to this proposal.

Table 3: Project Financing (in US Dollars) Component Total Baseline Increment Project Cost Total Local Local Committee Govt. GEF Organiza- Organiza- on Energy (in-kind) tions tions Efficiency (in-kind) (cash) Institutional Capacity 1.1 Project Mgmt. 303,000 36,000 267,000 1.2 Nat. Wood Plan 326,000 326,000 1.3 Findings/Policy 76,000 12,000 64,000 1.4 Training* 1.5 Replication Plan 102,000 102,000

Technical Capacity 2.1 Investment Projects 6,511,000 4,940,000 1,380,000 1,670,000 1,890,000 1,571,000 2.2 Wood Supply Project 996,000 560,000 210,000 110,000 240,000 436,000

Financial Capacity 3.1 Pipeline of Projects 19,000 19,000 3.2 Revolving Fund 40,000 40,000

Info/Awareness-Raising 4.1 Outreach 318,000 14,000 304,000

TOTAL (USD) 8,691,000 5,500,000 1,590,000 1,780,000 2,130,000 62,000 3,129,000 % 63% 18% 20% 25% 1% 36%

* While training is listed as a separate line item for activity purposes, it will be funded across the budget lines in which training will be conducted. The project staff will draw up a training plan that includes all of these proposed activities at the inception of the project in order to provide a comprehensive overview of the activities.

Note: While the Financial Capacity component of the project will involve a grant to the Government of Belarus, the funds will be used as loans and not grants within the project. The $40,000 allocated to the revolving fund will cover initial legal and staffing expenses. The capital of the fund itself will come from the repayment of the investment funds for the biomass fuel supply and boiler conversion investment projects outlined in Component 2 of the project. The project team will also undertake negotiations with the Government on providing additional capital for the fund, and it will discuss possible capitalization by other financial institutions.

Figure 4 – Draft Workplan by Project Component Year 1 Year 2 Year 3 Year 4 3 4 4 1 4 1 2 1 2 1 2 3 2 3 3 4

Project Component Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Component 1.1 Project management, capacity development Component 1.2 National Wood Energy Plan Component 1.3 Lessons Learned Component 1.4 Training for decision- makers Component 1.5 Plan for sustainability Component 2.1 Demand-side investment projects Component 2.2 Supply- side Investment Project Component 3.1 Pipeline of projects Component 3.2 Revolving Fund Component 4.1 Information/Outreach

9 MONITORING AND EVALUATION

The project will be monitored and evaluated in line with UNDP rules and procedures, and the GEF guidelines for monitoring and evaluation, and the report formats to be used are those given in the UNDP/GEF Information Kit on Monitoring and Evaluation. The project indicators, as given in the Project Planning Matrix in Annex B, are the benchmark against which Monitoring and Evaluation will take place and a number of specific Monitoring and Evaluation activities are given under sub-section b below. a) The standard Monitoring and Evaluation activities include:  The inception report which constitutes the finalization of project design and presents the overall work plan as well as the first detailed annual work plan. The inception report is due at the beginning of the project implementation (month 3) and is the responsibility of the Project Manager.  The Annual Project Workplan describes in detail the provision of inputs, activities, and expected results for the project in a given year or for the life of the project, indicating schedules and the persons or institutions responsible for providing the inputs and producing results. The workplan will be updated and revised each year by the Project Manager.  The Annual Project Report (APR) aims to obtain the independent views of the main stakeholders of a project on its relevance, performance and the likelihood of its success and will be prepared each year by the Project Management under the leadership of the UNDP office in Minsk, together with key stakeholders including are the target groups, project management, and the Committee on Energy Efficiency, and submitted to the annual tripartite review.

 To minimize paperwork and processing time, the APR will be held in conjunction with the annual Project Implementation Review (PIR). The annual PIR reviews financial status, procurement data, impact achievement and progress in implementation. A Harmonized APR/PIR report will be prepared each year between June and September under the leadership of the UNDP Minsk office together with other project stakeholders and with the support of the UNDP/GEF regional co-ordinator and the GEF Monitoring and Evaluation Team. The Annual PIR prepared by the UNDP CO is intended for submission to the GEF, and is an annual obligation to the GEF Secretariat. The PIR is the main tool used by the GEF for monitoring its portfolio. Additional progress reports and reviews may be requested, as necessary, during the project's implementation.  The tripartite review (TPR) is the highest policy-level meeting of the parties directly involved in the implementation of a project and will include the Belarussian Committee on Energy Efficiency, the Minsk Office of the UNDP, the project management, and the direct beneficiaries and other stakeholders. They consider the progress of a project based on the APR. The TPR meetings will be held once a year (the first within 12 months of the start of the project) under the leadership of the UNDP office in Minsk. The Minsk UNDP office will prepare tripartite review reports immediately following the TPR meeting.  Mid-term and final evaluation are independent evaluations organised mid-way through the project implementation (focuses on the effectiveness, efficiency and timeliness of project implementation; highlights issues requiring decisions and actions), and at the end of the project (in addition identifying impacts and sustainability of results). The project team, the UNDP office in Minsk, and the UNDP/GEF Regional Office in Bratislava are responsible for organizing the evaluations, under the leadership of the Minsk UNDP office.  The terminal report is the overall assessment of the project by its stakeholders and additionally aims to serve as a source of lessons and recommendations for follow-up activities. It will be prepared during the final two months of the project.  The terminal tripartite review considers the implementation of the project as a whole, paying particular attention to whether the project has achieved its immediate objectives and contributed to the broader environmental objective, and decides on future actions. This review will be carried out in the final month of the project.  Audit - the Government will provide UNDP with certified annual financial statements relating to the status of UNDP/GEF funds, including an independent annual audit of these financial statements, according to the procedures of the UNDP. The audit will be conducted by the legally recognised auditor of the Government, or by a commercial auditor engaged by the Government, and at the cost of the executing agency. During the course of the project there are three audits (in the second quarter of years 2, 3, and 4), and a fourth to be conducted after the close of the project b) Specific Monitoring and Evaluation activities: As part of the assessment of the impact of awareness raising activities (output 4.1) a survey of attitudes among key decision-makers will be carried out at the end of year 2 and year 4. Throughout the project data will be collected to allow the verification of achievement on the indicators given in the Project Planning Matrix (Annex B). The Project Planning Matrix gives details of indicators, verification sources, units, frequency and responsibility.

c) Tentative M&E Plan

Year 1 Year 2 Year 3 Year 4 Quarter Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Inception report Workplan Annual Project Report (APR) Tripartite review (TPR) Project Implementation Review (PIR) Mid-term evaluation Audit Final evaluation Terminal report Terminal tripartite review

d) Reporting to the Government of Belarus Besides reporting to the UNDP, the Project Management Unit in accordance with Belarussian regulations will report to the Ministry of Economy about progress of the Project’s implementation following standard forms on a semi-annual basis.

10 LEGAL CONTEXT

This project document shall be the instrument referred to as such in Article I of the Standard Basic Assistance Agreement (SBAA) between the Government of Belarus and the United Nations Development Programme, signed by the parties on 24 September 1992.

Revisions may be made to this project document with the signature of the UNDP Resident Representative, provided that he or she is assured that the other signatories of the project document have no objections to the proposed changes concerning:

a. Revisions in, or addition to, any of the annexes to the project document; b. Revisions which do not involve significant changes in the immediate objectives, outputs or activities of a project, but are caused by the rearrangement of inputs already agreed to or by cost increases due to inflation; and c. Mandatory annual revisions, which rephrase the delivery of agreed project inputs or increased expert or other cost due to inflation or take into account expenditure flexibility.

11 BUDGET

Total Year 1 Year 2 Year 3 Year 4 CMBL Description w/ USD w/m USD w/m USD w/m USD w/m USD m 10 Personnel 11 International consultants including travel and DSA 11_01 Technical advisory.services 6 99000 2 24750 2 24750 2 24750 2 24750 (combustion.) 11_02 Technical advisory services 6 92000 2 23000 2 23000 2 23000 2 23000 (supply) 11_99 Line total 14 191000 4 47750 4 47750 5 47750 5 47750

13 Administrative support 13_01 Administrative assistance 48 19200 12 4800 12 4800 12 4800 12 4800 13-99 Line total 48 19200 12 4800 12 4800 12 4800 12 4800

15 Monitoring & evaluation 15_01 Duty travel (in country) 30000 7500 7500 7500 7500 15_99 Line total 30000 0 7500 0 7500 0 7500 0 7500

16 Mission costs 16_01 Mission costs 24000 12000 12000 16_02 UNECE duty travel and DSA 4 28000 1 7000 1 7000 1 7000 1 7000 16_03 Project evaluation missions 2 39000 0 7000 1 16000 1 16000 16-99 Line total 4 91000 1 7000 1 14000 1 35000 1 35000

17 National professionals 17_01 Project manager 48 38400 12 9600 12 9600 12 9600 12 9600 17_02 PM technical assistant 48 21600 12 5400 12 5400 12 5400 12 5400 17_04 Technical advisor (combustion) 48 26400 12 6600 12 6600 12 6600 12 6600 17_05 Technical advisor (fuel supply) 48 26400 12 6600 12 6600 12 6600 12 6600 17_06 Marketing advisor 36 19800 12 6600 12 6600 12 6600 17_07 GIS elaboration 96 52800 24 13200 24 13200 24 13200 24 13200 17_08 Policy assessment 46 25300 10 5500 18 9900 18 9900 17_51 Short-term national experts 239 125700 47 25600 56 30800 56 30800 70 38500 17_99 Line total 609 336400 119 67000 150 84300 158 88700 172 96400

19 Project personnel total 675 667600 129 134050 157 158350 167 183750 181 191450

20 Contracts 21_01 International subcontractor 12 190700 1,5 22500 1,5 28000 3 50100 6 90100 (twinning)

22_01 National suncontractor 46400 23200 23200 (investm.pipeline) 29 Subcontracts total 12 237100 2 22500 2 28000 3 73300 6 113300

30 Training 31 Fellowships 31_01 GIS training fellowships 52800 26400 26400

31_99 Line total 52800 26400 26400

32 Other training 32_01 Trainee- technic.advisor 36 18000 9 4500 9 4500 9 4500 9 4500 (combustion) 32_02 Trainee- technic.advisor (fuel 36 18000 9 4500 9 4500 9 4500 9 4500 supply) 32_03 Training courses (in country) 64000 10000 18000 18000 18000 32_04 Study tours 110000 20000 30000 30000 30000 32_05 Seminar/workshop costs 23000 5000 5000 5000 8000 32.06 Conferences 29500 6000 8000 8000 7500 32_99 Line total 262500 18 50000 18 70000 18 70000 18 72500

39 Training total 315300 18 50000 18 96400 18 96400 18 72500

40 Equipment 45 Equipment 45_01 Expendable equipment 12000 3000 3000 3000 3000 45_02 Non-expendable equipment 272000 45_021 Office equipment 13000 7000 3000 3000 45_022 Flue gases and fuel quality monitoring 259000 75000 184000 equipment 45_03 GIS information software 20000 10000 10000 45-99 Line total 3044000 95000 200000 6000 3000 49 Equipment total 304000 95000 200000 6000 3000

50 Miscellaneous 52 Reporting and publishing costs 57000 10000 10000 15000 22000 52_99 Line total 57000 10000 10000 15000 22000

53 Sundries 53-01 UNDP Audit 8000 2000 2000 2000 2000 53_99 Line total 8000 2000 2000 2000 2000 59 Miscellaneous total 65000 12000 12000 17000 24000

71 Micro-capital grants - credit 71-01 Biomass energy revolving fund 1540000 530000 710000 300000 79 Micro-capital grants - credit 1540000 530000 710000 300000 total

99 Grand total 3129000 843550 1204750 676450 404250

 Covers trainings for approximately 40 persons, include for example training for decision makers on policy and legislation, training for technical specialists in boilers, wood fuel supply, etc.

ANNEX A: INCREMENTAL COST

Broad Development Goals

The overall development objective of this project is the provision of heat and hot water to communities in Belarus to meet local and national needs at the lowest possible cost. Without GEF intervention, meeting this goal will require increased use of imported fossil fuels, along with the inefficient use of local resources.

Baseline

The Belarus Government is strongly committed to greater use of wood-waste for fuel, and has set ambitious targets, aiming to increase biomass use from the current level of 5.6 million cubic meters (90% of which is firewood in the form of logs) to 6.8 million m3 in 2005 and 8.8 million m3 in 2015 (from a present level of 1.1 million tonnes of coal equivalent (tce) to 1.6 million tce for 2005, and 2 million tce for 2015). While the above may be taken as a baseline it should be noted that, based on the type and scale of barriers to the growth of wood energy identified during the PDF B phase of this project, these targets are themselves unlikely to be met without GEF support. Although far from conclusive, early indications are, for example, that the ‘conversion’ of boilers by the Ministry of Communal Services could be slowing since the most easily converted sites have been converted first (wood energy comprising about 2.7% of their energy mix was from wood in 1999, 3.5% in 2000, and an estimated 4.0% in 2001). The long-term incremental costs may consequently be underestimated.

Global Environmental Objective

The global environmental objective is the reduction of GHG emissions by removing the major barriers to the development of wood-waste heat and hot water generation to replace fossil fuel use in Belarus. The project has been designed to be consistent with the GEF Operational Programme 6 'Promoting the adoption of renewable energy by removing barriers and reducing implementation costs'.

GEF Alternative

The proposed GEF activities tackle the barriers to the widespread use of wood-waste for energy in Belarus. Biomass resource assessments have indicated that Belarus has a current annual potential of 11.7 million m 3, 6.1 million m3 of which is currently unused, representing over 1 million tonnes of coal equivalent. The total potential, the predicted growth as a result of government actions, and the additional impact of the proposed GEF activities is show in Table 4 and Figure 5 below:

Table 4: Wood fuel resource availability and use in million cubic meters (solid)

Factor 2000 2005 2015 Total potential (firewood and wood waste) 11.7 13.5 17.1 Used in households, boilers, and enterprises 5.6 6.8 8.8 Used, including projected GEF impact 5.6 7.0 10.8 Projected impact of GEF project - 0.2 2.1 (difference)

Baseline and Projected GEF impact

) GEF impact t n e l a v i u q

e 1500

l a o c

s e n n o t ( 1000 e s u

d o o W BASELINE 500

0 2000 2005 2010 2015 Year Figure 5: Baseline and projected GEF impact on wood use in Belarus

Incremental Cost Matrix The Incremental Cost Matrix is provided directly below this summary. Under the baseline, the use of biomass energy in Belarus grows according to Government targets and reaches a level of 1,800 tonnes coal equivalent in 2015. Heat needs not met by wood energy will be met by fossil fuels, principally coal and mazut in the size range and location of boilers being considered in this project.

Under the GEF alternative, and during the 4-year project, biomass boilers burning wood-waste equivalent to 35,000 tonnes of coal will be installed through the conversion of 3 mazut oil-fired boilers and 2 gas-fired boilers. The annual

CO2 emission reduction due to the installation of the boilers will be about 72 000 tonnes (67,000 from the oil boilers and 5 000 from the gas-fired boilers). Assuming a boiler system lifetime of 15 years (many boilers in Belarus are currently well over 25 years), then the life cycle CO2 emission reduction is 1.08 million tonnes. This reduction is a direct result of the proposed intervention. For a GEF contribution of USD 3.129 million, the cost per tonne of reduced

CO2 is USD 2.9 per tonne.

Based on recent feasibility studies conducted in Belarus, the total realistic medium-term potential for biomass energy as a result of the proposed GEF project represents a coal equivalent of 400,000 tonnes, 330,000 coming from mazut boilers, 20,000 from gas, and 50,000 from coal. This represents an annual CO 2 saving of approximately 900,000 tonnes.

Additional Benefits This project will bring many additional domestic benefits to Belarus. The Government is particularly interested in increasing fuel security, and this is a very strong incentive for biomass energy. In addition, biomass energy has been shown to help increase industrial capabilities, provide employment for local people in construction and operation, and bring a high level of local satisfaction (see “Evaluation of the socio-economic impacts of renewable energies: global survey to decision-makers”, European Commission 1999). In the medium term, this project is likely to result in conversion of coal fired boilers, which will bring local air quality improvements (estimated for 2015 as 50 000 tonnes coal equivalent, meaning a reduction of 750 tonnes of SO2 per year). In addition, SO2 reductions from displaced mazut are estimated at 5,900 tonnes per year.

Incremental Cost Matrix Component Baseline Alternative Increment Global Barriers limit growth of biomass energy beyond the Perception/awareness, financial, technical and organisational barriers Significant GHG emission reductions are Environ- baseline (taken as the government 2005 and 2015 are substantially reduced, resulting in increased use of wood-waste attained. mental targets). In the baseline wood fuel use increased from for fuel and reduced GHG emissions associated with mazut oil, coal Benefits Annual direct CO2 emission reductions in 1122 tce in 2000 to 1800 tce in 2015. Total CO2 and gas boilers. In the GEF alternative, 62 000 tce of mazut and baseline emissions in the district heating sector are 41 10 000 tce of natural gas is replaced with biomass. 2005 are 72 000 tonnes. The 15-year CO2 241 000 tonnes in 2005 and 40 823 000 tonnes in reductions are approximately 1.08 million 2015. GEF alternative CO2 emissions for the sector are 41 169 000 tonnes tonnes. in 2005 and 39 928 000 in 2015. Indirect CO2 emission reductions in 2015 as a result of this project are projected to be 895 000 tonnes per year. Domestic Under the baseline domestic benefits are likely to In addition to increased employment and added fuel security, the Increased local employment, added fuel Benefits include growth in local employment and increased fuel modern systems introduced through this project will increase security, improved industrial capabilities,

security. industrial capabilities and improve local air quality. better local air quality (including SO2 emissions reduced by 6650 tonnes per year in 2015) Components: Technical and Present level of adoption of biomass energy systems Five boiler conversion investment projects are put in place The perception of wood energy as a viable Financial continues, with simple, inefficient and unsustainable evidencing modern, clean and versatile use of wood energy. A wood alternative to oil and gas is dramatically Capacity conversion techniques. Upgrades of boilers at the supply investment will showcase an efficient fuel supply chain under improved. Decision-makers start to see wood sites, if they occur at all, are to equivalent gas or oil Belarussian conditions and show how costs of fuel supply can be energy as clean, modern, versatile, and cost systems. Fuel supply is planned on a case-by-case reduced using appropriate fuel supply systems. effective. basis. Cost: USD 1 590 000 (site owners, in kind) USD 7 507 000 USD 2 007 000 USD 1 780 000 (site owners, cash) USD 2 130 000 (Government, cash) Institutional Measures are put into place to meet government wood- Government measures are enhanced through replication activities Replication of the fuel supply and fuel use Capacity and energy targets. National co-ordination remains limited. focused on awareness raising, the development of national decision- projects is ensured. The lessons learned in the Awareness A portfolio of ‘bankable proposals’ is not developed, making tools, policy assessment, the establishment of a revolving projects are applied, and biomass energy use Raising and projects are selected in a loosely co-ordinated fund for similar investments, and the development of an investment grows. Benefits continue after project fashion. No specific activities are put in place to scale pipeline after the end of the project. A plan for scaling up concludes and use of biomass energy up activities learnt from boiler conversions under the implementation after the end of the project is developed, and continues to increase in a sustainable way. government programme are not scaled up. continuing information, training, capacity, financing and hardware Barriers have been permanently reduced. requirements are identified. A concrete set of future activities is identified and activities and funding sources for post-project continuation are secured. Cost: - USD 1 122 000 USD 62 000 (Government, in kind) USD 1 060 000 (GEF) TOTAL Cost Total baseline costs: Total project costs: Total Incremental costs: USD 5 500 000 from local sources USD 8 691 000 (including 267 000 (GEF) and 36 000 (Government) USD 3 129 000 requested from GEF (36%) project management costs in included above) USD 62 000 from the Government

ANNEX B: PROJECT PLANNING MATRIX

Project Strategy Indicator Sources of Verification Assumptions Global Environmental Objective

Greenhouse gas emissions are reduced CO2 emissions are reduced by an accumulated total Yearly reports of projects (given in tonnes of 720,000 tonnes at the sites up to the year 2015 CO2, yearly report submitted to UNDP Fossil fuel consumption is reduced (10 years) and 1.08 million tonnes in 15 years office prepared by site energy managers)

Immediate objective Sustainable use of biomass as an energy By the end of the project the biomass used per year Final report of the project (in cubic meters Ongoing support from Government and source is promoted and increased in for district heating is increased by 280,000 m³ of or tce, responsibility of PMU) the Committee on Energy Efficiency Belarus wood chips (loose) or 35 000 tonnes coal equivalent.

By the end of the project 5 sites are operating clean Reports from the project sites, and project Fossil fuel prices continue to increase and efficient biomass district heating units, and a evaluation (reports from project sites, fuel delivery mechanism is being successfully responsibility of PMU) Fuel price distortions are reduced demonstrated

By the end of the project wood waste is promoted by Reports from the Committee on Energy There is an increasing willingness to Government officials at national, oblast, regional Efficiency, and the Committee on Forestry recover energy costs from consumers and municipal levels as a viable fuel for district Feedback from Council of Ministers heating

By the end of the project the Government is in a Reports from Committee on Energy Investment climate continues to position to identify the most cost-effective boiler Efficiency improve conversion sites and biomass fuel delivery mechanisms and has developed a plan for implementation

By the end of the project the Government has Government legislation allocated additional funding to the conversion of boilers to biomass fuels

Outputs Output 1.1: Project management is in By the end of month 2 after the project starts the Contracts signed Project co-ordination body continues to place and functioning project manager and administrative staff is function after the end of the project contracted

By the end of month 3 a call for expression of Documentation of call, expressions of Continued strong support from the interest for the projects have been issued, and a interest from organisations Committee on Energy Efficiency shortlist of potential contractors identified

By the end of month 3 a shortlist of long- and short- Expressions of interest from consultants / Market price of wood for fuel is term consultants / companies for key project companies transparent and reflects costs activities is developed

By the end of month 6 a twinning arrangement has Minutes from meetings of PMU and Prices for competing fuels increase over been established and is functioning twinned institute time and subsidies are reduced

By the end of month 6 the basic operating modalities Reporting as in the M&E plan of the revolving fund will have been determined and legal/institutional arrangements made

By the end of the project monitoring and evaluation has been carried out according to plan and results have been used to provide for continual refinement of project activities

Output 1.2: Information-based decision By the end of the project 2-3 people have been Final project report making tools for a sustainable and co- trained in the use of Geographical Information ordinated national wood energy plan, Systems (GIS) for biomass resource planning based on least-cost planning principles are developed By the end of year 3 a GIS system with relevant Yearly project reports biomass planning data is functioning

By the end of the project the Committee on Energy Policy document Efficiency have made use of the GIS system to Feedback from Council of Ministers develop least cost activities for replication

The national capacity to monitor boiler emissions and measure wood fuel quality will be increased by the end of year 3

42 Biomass Energy for Heating and Hot Water Supply in Belarus Output 1.3: Findings from the projects, Positive feedback from stakeholders attending the Policy document study tours and developed planning tools policy seminar are internalised and the implications for policy assessed Positive feedback from the Council of Ministers is Yearly project reports received on the policy recommendations

Growth of funding for conversion of biomass fuel Government reports and resolutions for the next period of planning (after completion of the project)

Changes in policy or, at minimum, progress in the Government reports and resolutions adaptation of policy initiated by, for example, the Committee on Energy Efficiency

Output 1.4: Training conducted to See notes below in activity description strengthen capacity of in-country experts

Output 1.5: Information, training, During the project lifetime a "best practice" Guidebook capacity, financing and hardware guidebook is published requirements are scaled-up based on all previous outputs (strategy for By the end of the project a concrete and realistic Document containing plan sustainability, replication) plan for continuation and scaling up results is developed and disseminated, and next steps identified Output 2.1 Projects showing that wood By the end of year 3 the 'end use' sites are operating Yearly project status reports from the sites energy is modern, clean, versatile, cost- as designed effective and efficient are implemented (boiler conversion investments) Monitoring is in operation at all sites throughout the Project reports (monitoring data project processed)

Total fuel savings, from all 5 projects of Project status reports approximately 35000 tonnes coal equivalent per year and emission reductions of 72 000 tonnes per year achieved from year 4.

Output 2.2: Investment project showing By the end of year 3 the 'biomass fuel supply' Yearly report from the project site Woodwaste fuel supplied at or below that risks and uncertainties of fuel supply project is operating efficiently and cost effectively the pre-contractual estimated cost. can be reduced with a functional regional according to design parameters supply organisation (biomass fuel supply investment) Reduction in long-term fuel preparation and delivery Yearly report from project site costs for the wood harvesting company of over 20% as a result of the techniques implemented in the project

More boilers in a 70 km radius supplied by – and Yearly report from project site operated on – wood fuel/chips

Output 3.1: Pipeline of investment Investment briefs on 5 to 10 replication projects Printed project portfolios projects developed (covering the technical and business case for each) are available in the second half of year 3 of the project

Funding sources for the replication projects Report identified and expressions of interest received from the relevant organisations

Output 3.2: Revolving Fund for Biomass The revolving fund will be established and will be Regular reporting from fund managers Energy Developed operating effectively by the end of the project. Charter documents/MOU (if necessary) Output 4.1 Relevant decision-makers at Surveys at the end of year 2 and 4 on participants in Results of questionnaire ministerial, oblast, and regional level are the study tours (internally to the sites, and fully informed of the potential for wood externally to countries where biomass is in common energy as part of a modern fuel system use) shows growing interest in the use of biomass in Belarus

There is a growing interest, indicated by increased Yearly project report requests to the PMU for information, from decision- makers targeted by the dissemination activities

Information leaflets, brochures and videos are Leaflets, brochures and videos, records of published and distributed to target audiences each feedback (letters, phone calls, emails) year from users

The project is mentioned at the Council of Ministers Reports from Council of Ministers and the (or in other interdepartmental government meetings) Committee on Energy Efficiency. at least 3 times a year, and regularly in the press. Newspaper clippings, recordings

By the end of the project demand for biomass boiler Number of requests to Committee on EE installations has increased by the municipalities, enterprises. Government reports, yearly project report

Activities Inputs Costs Under Output 1.1 Office room hire Summary: Continued strong support from the Committee on Energy Efficiency 1.1.1 Establish Project Steering Committee Salary of project manager USD 303 000 over the 4 year project, of which 1.1.2 Hire project manager, technical Salary of junior (PMU technical assistant) assistant, and administrative staff USD 36 000, in kind, Committee on EE Administrative assistant 1.1.3 Establishment of Project USD 267 000, GEF Management Unit Allowances for short-term students and interns 1.1.4 Finalize work plan and review Office equipment institutional and management Evaluation missions (2) including DSA, Travel arrangements for project implementation (inception report) Operational budget for PMU travel, accommodation, workshops and training etc. 1.1.5 Draw up shortlist of local and foreign experts for key project activities Project financial audits (4) 1.1.6 Call for expression of interest and UNECE regional advisor travel and DSA draw up shortlist of potential contractors for turn key projects 1.1.7 Establish twinning arrangement and hold yearly planning/management meetings between the Project Management Unit, and the twinned institute 1.1.8 Prepare and implement Monitoring and Evaluation reviews. Under Output 1.2 1.2.1 Conduct review of the current GIS National experts (1 full time for 4 years, 2 full time Summary: and Resource Management capabilities in for 2 years to update and implement database) Belarus and identify possibilities to build USD 326 000, of which International expert or institution on this capability USD 326 000 GEF 1.2.2 Review of international experiences Training budget in information-based decision-making Travel tools for national wood energy planning and the potential for this to be used in Hardware (computers, emissions testing, wood Belarus quality measurement) 1.2.3 Develop detailed implementation Information (existing, relevant GIS datasets) schedule Software 1.2.4 Select and hire a consultant to assist in development of GIS on wood fuel 1.2.5 Arrange training for 2 Belarussians abroad in a tailor-made MSc programme (or similar) in the use of a GIS and with 45 Biomass Energy for Heating and Hot Water Supply in Belarus Activities Inputs Costs their thesis/fieldwork focusing on designing and implementing a GIS as per the project requirements. 1.2.6 Update and develop the database on wood waste resources and existing boiler houses developed during the PDF B, and get it into a format suitable for the GIS 1.2.7 Carry out training in wood resource planning 1.2.8 Purchase necessary hardware and software for GIS system and for the implementation of the quality control system 1.2.9 Develop planning scenarios (proposals) based on the developed system for the use of the Committee on Energy Efficiency Under Output 1.3 1.3.1 Using the results of outputs 1 to 4, Local experts (1 or 2 full time for 1 year) Summary: identify findings and implications for Belarussian planning and policy Seminar costs (2 to 3 seminars) USD 76 000, of which 1.3.2 Prepare a document with suggestions International expert or institution USD 12 000 (in kind), Committee on EE for policy and disseminate to key Travel USD 64 000 GEF stakeholders for comment 1.3.3 Hold a seminar / dialogue with selected (government) stakeholders to debate and review the suggestions Under Output 1.4 1.4.1 Develop a training plan for staff and project stakeholders under the project management component. 1.4.2 On-the-job training: Hire a junior technical assistant in the project management unit to receive training from the project manager. While training is listed as a separate line item for activity purposes, it will be funded across the 1.4.3 Hire and train local experts in budget lines in which training will be conducted. The project staff will draw up a training plan the investment projects, and that includes all of these proposed activities at the inception of the project in order to provide a secondments in project comprehensive overview of the activities. engineering and implementation

46 Biomass Energy for Heating and Hot Water Supply in Belarus Activities Inputs Costs will be a contractual obligation of equipment suppliers. 1.4.4 Provide training to operators and maintenance staff for the investment sites. 1.4.8 On the job training will also take place in biomass resource planning within the information and awareness component. 1.4.9 Study tours and exchange visits: Study tours and exchange visits will take place in the biomass fuel supply demonstration and under awareness raising, as well as in secondments under the proposed twinning arrangement 1.4.10 Dedicated study in GIS for biomass planning Under Output 1.5 1.5.1 Prepare 'best practice' guidebooks for Local expert (5 full time for 1 year, 3 50% time for 1 Summary: potential future project developers and year), decision makers USD 102 000, of which International expert or institution 1.5.2 Develop scale-up plan based on USD 102 000 GEF outputs 2 to 6, reviewing, for example Best practice guidebook development, publishing, financial mechanisms for replication of printing, and distribution projects that are appropriate for Belarus Workshop 1.5.3 Carry out conclusion workshop for the promotion of the project results and discussion of the scale-up plan

Under Output 2.1 2.1.1 Hire local experts (and trainees) for Local experts hired in Activity 1.1 (1 full time for 4 Summary: overall management and support activities years, 1 full time trainee, 3 part time at 50% for 4 of the projects. Hire international advisor years, 4-6 full time for 6 to 8 months) USD 6 511 000, of which to assist with planning, assessment of International advisor (120 days, 6 visits to Belarus) USD 1 380 000 in kind from system tenders, and implementation of projects owners Project equipment engineering, supply and 2.1.2 Review technical, physical and USD 1 670 000 cash from system owners timing requirements for the sites prepared installation in the PDF B and revise if necessary. USD 1 890 000 from Committee on EE Prepare detailed procurement and implementation plan USD 1 571 000 GEF 2.1.3 Develop detailed ToRs for sites, 47 Biomass Energy for Heating and Hot Water Supply in Belarus Activities Inputs Costs prepare public call for tenders, short- listing, evaluation and selection 2.1.4 Prepare and sign contracts with experts and companies 2.1.5 Implement and commission sites 2.1.6 Conduct on-site monitoring, and document findings for inclusion into policy review (component 1.4) Under Output 2.2 Woodwaste fuel supplied at or below the pre-contractual estimated cost. 2.2.1 Hire local technical expert (and Local experts hired in Activity 2.1 (1 full time for 4 Summary: trainee) for management of the overall years, 1 full time trainee for 4 years, 4 to 5 full time project on fuel supply. Hire international for 6 to 8 months) USD 996 000, of which advisor. International advisor (120 days, 4 visits to Belarus - USD 210 000 in kind from system owners 2.2.2 Prepare detailed plan for all the note: this could be the same advisor as in output 1 if USD 110 000 cash from system owners activities, including selection of the necessary skills are available) technologies, design, procurement, and USD 240 000 from Committee on EE project equipment supply of equipment for wood fuel USD 436 000 GEF enterprise. Study tour on fuel supply 2.2.3 Conduct review of approaches (technologies) for fuel supply (including study tour, workshop etc.) involving the key stakeholders in the proposed project in the identification of best practice and relevance to the Belarus situation 2.2.4 Call for expression of interest and draw up short list of suppliers and producers of equipment and machines for a wood fuel supply company. Conduct necessary procurement procedures (tender, contracts, etc.) to produce and supply machines and equipment for wood fuel production and transportation. 2.2.5 Ensure successful implementation of the project, including set up of the new wood fuel supply organisation. 2.2.6 Provide support to the Committee on Energy Efficiency addressing elaboration of wood fuel standards. 2.2.7 Conduct on-site monitoring and document experiences for inclusion into

48 Biomass Energy for Heating and Hot Water Supply in Belarus Activities Inputs Costs policy review (output 5) Under Output 3.1 3.1.1 Using the (ongoing) results of output Local subcontractor Summary: 4, identify 5 to 10 projects meeting the principles of demand and least cost Local travel USD 19 000, of which 3.1.2 Carry out energy audits, and USD 19 000 GEF economic analysis of proposal (business plan) 3.1.3 Prepare a portfolio of projects for presentation to potential funders 3.1.4 Hold meetings with selected funders to present the project portfolio and seek letters of interest

Under Output 3.2 Shared with output 3.1 3.2.1 Establish conditions of the revolving Local experts (3 part-time time over 2 years) Summary: fund Local travel USD 40 000, of which 3.2.2 Finalise legal agreements and administrative criteria International expert or institution USD 40 000 GEF 3.2.3 Develop profile for and hire adequate, trained, staff. 3.2.4 Establish the revolving fund. 3.2.5 Seek additional contributors to the fund for longer-term sustainability. Under Output 4.1 4.1.1 Review project dissemination and Funding for travel (study tours) Summary: awareness activities Local marketing expert USD 318 000, of which 4.1.2 Identify key decision-makers at ministerial, oblast, and regional levels Local biomass expert USD 14 000 (in kind) from Committee on EE (including, for example, deputy ministers, International expert or institution managers of forest enterprises, directors of USD 304 000 GEF joint stock companies, and technical Training materials managers) and the most appropriate Promotion materials awareness raising approaches for each target group Promotional campaign (in-country study tours, videos, brochures, adverts etc.) 4.1.3 Conduct local study tours (to the sites), workshops, and seminars to raise the

49 Biomass Energy for Heating and Hot Water Supply in Belarus Activities Inputs Costs awareness 4.1.4 Establish exchange visits and secondments 4.1.5 Conduct a survey at the end of year 2 and 4 on the impact of the awareness campaign

ANNEX C1: STAP REVIEW

The overall project concept is good. The estimates of expected greenhouse gas emission reductions and associated incremental cost are reasonable. The proposed institutional structure of the project appears to take well into account the peculiarities of the Belarus economy and political framework. The proposed project will build on existing Belarus plans for expanding biomass use. The existence of a prior official plan for expanding biomass use bodes well for the likelihood of success of the GEF project. Similarly, the existence of the GEF project may heighten the likelihood of success of the official government biomass plan. Below are my main comments on the proposal. I have separately provided “track changes” comments directly in the draft proposal:

1. The idea of “twinning” the PMU with a knowledgeable foreign institute is interesting, but it is not entirely clear what the twin would do. To clarify what the project has in mind, it would be helpful to cite two or three examples of foreign institutes that could effectively play the role of twin. It would also be helpful if some clarification could be provided regarding what benefit the foreign twin stands to derive from participation in the project. Also, it is envisioned that the twin institute will continue its involvement beyond the end of the project period. Where is funding expected from to support this involvement?

2. I understand that the 895,000 tCO2 mentioned in the abstract (and elsewhere in the document) is expected savings from replication projects after the GEF project ends. In this context, the barriers to be removed by GEF involvement don’t seem all that significant (since the project itself will result in 1.08 mtCO2 reduction). How likely is it that the government targets for expanded wood fuel use (absent GEF) will be met? Can an argument be made that the GEF project will actually help achieve the government baseline, so that the GHG emissions impact of the GEF project will be greater than 1.08+0.895 mtCO2?

3. Given that Belarus gets “favorable” gas prices from Russia and (presumably) sufficient supplies of gas, will biomass be able to compete with natural gas? Would it make more sense for Belarus to pursue boiler conversions to gas than to wood?

4. Mention is made of 200,000 tce of fuelwood from plantations by 2005 or 250,000 tce by 2015. How do these figure into the GEF project plans?

5. The World Bank loan “Social Infrastructure Retrofitting Project” (BY-7056) will, among other activities, invest approximately USD 7 million for boiler replacement or conversion from oil and coal to gas and wood fuel (about 90 small size units). These investments would appear to be doing some of the exact things the GEF project will do. What is the rationale for not more-direct integration between the GEF project and the World Bank program? There would seem to be substantial economies of scale to be gained.

6. What are typical prices for wood fuels in Belarus? It is difficult to get a sense of the overall economics for biomass projects without a clear indication of prices.

7. Given that the MSc students are expected to return to Belarus to set up the GIS system, will the system be set up soon enough for its use to be demonstrated with the proposed investment projects?

8. Regarding Output 1.3 (“Findings from the investment projects, study tours and developed planning tools are internalised and the implications for policy assessed.”) I would suggest that the dialogue with decision makers be initiated much earlier than in the last year of the project. In fact, I would suggest that it be started in the first Co-financing commitments for all demonstration projects are provided, though two sub-project owners are not specifying the co-financing amount. UNDP/GEF will not proceed with designing and implementing these demonstration projects, unless co- financing is specified and committed. Biomass Energy for Heating and Hot Water Supply in Belarus

year. Regular briefings could be given to apprise decision makers of progress, together with soliciting of advice at several key decision points in the early years of the project. By year 4, the decision makers will then (hopefully) feel some ownership of the program, thereby enhancing the prospects for effective policy development and implementation. The latter are key to insuring replication of the project after the GEF involvement ends.

9. The budget table shows only $40,000 committed to the revolving fund. I presume that the funds for investment will essentially be disbursed by the fund and will provide the basis for repayments into the fund over time. If this is correct, the discussion of the budget could be clarified to reflect this. Also, does the project steering committee make the decisions on which projects will receive the investment financing during the project period? How will the revolving fund make decisions about future projects?

10. The project calls for use of waste wood chips. Wood chips can also be made from whole trees, which may (or may not) be cut sustainably. The draft proposal that I reviewed did not discuss safeguards against unsustainable tree cutting. However, as indicated in some follow-up email communication I received, such safeguards are in place in Belarus, and deforestation arising from the project (or subsequent replication efforts) is not a significant risk. My understanding is that this issue will be discussed in an added paragraph in the final proposal.

Eric D. Larson Princeton Environmental Institute Princeton University

ANNEX C2: RESPONSE TO STAP REVIEW

1. The idea of “twinning” the PMU with a knowledgeable foreign institute was developed as the result of observing the benefits of similar arrangements in other economies in transition. For example, the European Commission Twinergy program provided support for joint research, training, and mentoring for energy-related institutions in the Eastern European region. Federal energy agencies or offices working in renewable energy in countries in the Central Europe or Scandinavia such as Austria or Scandinavia (France) could share their expertise in policy and program development related to biomass energy. Alternatively, research institutions such as ETSU (UK) or the Wuppertal Institute (GER) could provide training and insight from a different perspective. Ultimately, either type of institution would be in a position to develop capacity in Belarus for the functions described in the project. For the participating foreign twin, there would be enhanced opportunities for research and the benefits of working with an expanded team of strong technical experts. As a part of Output 1.5, the PMU will investigate the possibility of funding an ongoing partnership. This funding might come in the form of a grant from a bilateral donor (e.g. from the host country of the twinned institution) or from any research grants received by the joint group of experts from the two institutions.

2. The estimates for CO2 reduction made in the project brief were conservative and designed to reflect direct, quantifiable mitigation. An argument could be made that the GEF project will help to achieve the government baseline. Conversely, it could be very difficult to achieve the government baseline without the strategic assistance provided by the GEF project in resource planning and in establishing a sustainable financial mechanism. In particular, the mechanism will allow the government to leverage the grant funding that it is currently disbursing to projects into greater resources for loans, which would almost certainly increase the indirect impacts of the project on emissions.

3. While Belarus currently receives “favorable” gas prices from Russia, these prices are still quite expensive and divert valuable hard currency from the government’s budget. The price of natural gas is certain to increase over time, and the large-scale installation of gas boilers would lock the country into energy consumption patterns that could have strong, negative financial consequences in outlying years. The fact that the natural gas is obtained from a single, foreign supplier should also be seen from an energy security perspective. There are compelling arguments for increasing the share of domestic energy in Belarus, particularly when this source of energy is as widely available and economically feasible as wood fuel.

4. Fuelwood from plantations is seen as an additional source of supply for wood-fired boilers supported through the replication efforts of the project. The possible role of these plantations will be researched in the development of the national strategy to be developed under Component 1 of the proposed project.

5. The proposed project differs from the World Bank activities under its social infrastructure project in that it will use the loans repaid to the project to fund additional investments. In addition, the recipients of the loans will be the project sites themselves in order to develop familiarity with financing boiler retrofits. UNDP-GEF and UNDP Belarus have maintained regular contact with the World Bank mission in Minsk and with the World Bank-GEF team in Washington, and both agencies will continue to communicate on their work with the Government of Belarus in this area.

6. “Market” prices for biomass can be difficult to determine in the absence of an actual market for wood fuel. For example, some fuel is used internally (i.e. wood waste used for a factory boiler on-site), or may even be bartered. However, it should be noted that the suppliers are domestic, so that the prices do not include the “opportunity cost” of payment in hard currency. A more detailed explanation of costs and prices will be provided under separate cover.

7. The GIS system will be set up soon enough to assist with the preparation of the pipeline of projects described in Component 3 and will be demonstrated during the proposed project replication. The initial projects in Component 2 will inform the design of the system.

8. While Output 1.3 (“Findings from the investment projects, study tours and developed planning tools are internalised and the implications for policy assessed.”) will begin during the latter half of the project, dialogue with decision makers will certainly be initiated at the inception of the project. Both the information/outreach activities in Component 4 and the capacity building described in Component 1 are designed to establish an ongoing relationship with key policy-makers. As the reviewer suggests, the project will provide “regular briefings to apprise decision makers of progress, together with soliciting of advice at several key decision points in the early years of the project.” In fact, the Project Steering Committee and the annual Tripartite Review of the project have these objectives as their mandate.

9. The funding for the revolving fund has been clarified in the text of the brief. The $40,000 allocated to the revolving fund will cover initial legal and staffing expenses. The capital of the fund itself will come from the repayment of the investment funds for the biomass fuel supply and biomass boiler conversion investment projects outlined in Component 2 of the project. The project team will also undertake negotiations with the Government on providing additional capital for the fund, and it will discuss possible capitalization by other financial institutions. Decisions on which proposed projects will receive investment will be made by the staff of the fund and a board of advisors in accordance with screening criteria. However, it should be noted that the precise staffing and approval process will be developed under Output 3.2.

10. Factors that would mitigate the risk of unsustainable tree cutting are discussed under the section on Risks (see section 6.2). In the case of Belarus, deforestation will not be a significant threat because of legislative issues and also from a resource point of view. The Belarusian forests are managed forests, and logging takes place under licence, so there is little chance of unplanned, uncontrolled logging on a large scale. The harvesting and thinning of forests is controlled by special institutions under the Committee on Forestry (formerly Ministry of Forestry). As there are already safeguards to prevent this, from a project point of view there is low risk that the increased demand for biomass might lead to deforestation. In addition, from a resource point of view, there is an annual increase of forest biomass in Belarus of 25 million compressed cubic meters per year, so the projected impact of the GEF project of 2.1 million cubic meters in 2015, even if it were to come entirely from new logging and not from residues (unlikely) is well below the annual increase (bearing in mind that for 2015 the planned cut is 19 million cubic metres resulting in unused wood waste of 8.3 million cubic metres – see Annex F). Under that scenario, the Belarusian forests will still be increasing by about 4 million cubic meters per year - and still a long way from the possibility of deforestation.

ANNEX D: OPERATIONAL FOCAL POINT ENDORSEMENT

Co-financing commitments for all demonstration projects are provided, though two sub-project owners are not specifying the co-financing amount. UNDP/GEF will not proceed with designing and implementing these demonstration projects, unless co- financing is specified and committed. Biomass Energy for Heating and Hot Water Supply in Belarus

ANNEX E: OVERVIEW OF BOILER HOUSES BETWEEN 0.5 AND 10 MW

The database of boiler houses sized between 500 kW and 10 MW developed during the PDF B contains data on almost 5000 boiler houses throughout Belarus. The following data gives an overview of information contained in the database:

Installed capacity of boiler houses: Installed capacity of boiler houses (Gcal/h)

Capacity (Gcal/h) Number 5 to 10 12% 0.5 to 3 3357 3 to 5 743 5 to 10 576 TOTAL 4676 3 to 5 16%

0.5 to 3 72%

Location of boiler houses: Location of boiler houses Region Number Brest Brest 689 Mogilev 15% Vitebsk 785 17% Gomel 985 Grodna 489 Minsk (excl Minsk 919 Vitebsk city) 17% Mogilev 815 Minsk TOTAL 4676 20%

Grodna Gomel 10% 21%

Boiler house ownership: Boiler house ownership Region Number % of total Ministry of communal 1260 27 Ministry of services Industry com m unal Agriculture 935 20 32% s ervices Education 845 18 27% Health 140 3 Industry 1496 32 TOTAL 4676 100

Health 3% Fuels used in boiler houses: Education Agriculture 18% 20% Fuel Number Fuels used in boiler houses Mazut only 739 Gas only 1355 Mazut only Coal only 220 More than 16% Wood only 433 one fuel Peat only 325 26% Diesel only 410 Other (more than 1 1194 fuels ) TOTAL 4676

Diesel only 9% Gas only 28%

Peat only Coal only 7% Wood only 5% 9%

59 Biomass Energy for Heating and Hot Water Supply in Belarus ANNEX F: WOOD WASTE AVAILABILITY IN BELARUS

All units are in million cubic metres of compressed wood.

Year 2000 2005 2015 1 Total wood cut 10.8 13.3 19 Including: 1a Fire wood in logs, 5 5.2 6.4 1b Merchantable and other wood 5.8 8.1 12.6 2 Exported without processing 1 1.5 2 3 Goods made of merchantable wood 2.6 3.5 5.6 4 Wood waste during processing 2.2 3.1 5 Including: 4a Used as raw material for production 1 1.1 2 4b Wood waste for use as fuel 1.2 2 3 5 Forest residues from harvesting 4.3 5.3 7.6 5a Including residues could be used as fuel 3.2 4 5.7 6 Cleaning of littery forests and storage of fire wood left without use before 1.5 1.5 1.5 7 More careful care about (thinning of) young forests 0.8 0.8 0.8 8 Total potential (fire wood and wood waste could be used as fuel) 11.7 13.5 17.1 Including: 8a Used (without GEF impact) 5.6 6.8 8.8 8b Wood waste available for use (currently unused) 6.1 6.7 8.3 8c Projected total usage (with GEF impact) 5.6 7.0 10.9 8d Projected GEF impact on usage (8c - 8a) 0.0 0.2 2.1 9 Ratio of wood waste used as fuel to total wood waste available (without GEF impact) 48% 50,3% 52% 9a Same with GEF impact 52,1% 65% Basic data in the estimates given in lines 1,2 and 3 for 2005 and 2015 are based on government projections.

Projected Wood Waste Availability

16.0 GEF impact ) d o 14.0 o l w e

u d f e r s s 12.0 o f e r d p e m s o u c

10.0 f unused (technically available for modern biomass energy) e o

b ³ m d

o 8.0 i o l l c i m h (

c i e t 6.0 h s a w w

e t d s o o 4.0 a w W used as firewood d o

2.0 o w

0.0 2000 2005 2010 2015 Year

ANNEX G: OVERVIEW OF RELEVANT REGULATIONS

Regulations Objectives Key implementing agents 1. Law “On Energy Saving” The objective of this law is to improve effectiveness of fuel and energy Committee on Energy resources use. Efficiency

This law sets energy saving as a priority of state policy 2. New “National programme on Promotion of state policy to save energy aiming for the reduction of energy Committee on Energy energy saving for the years 2001- intensity per unit of GDP by 25% With preferences given to local energy Efficiency, Ministry of 2005” resources. Economy

This programme builds on the “National Programme on Energy Saving to 2000” which aimed for the growth of GDP between 1995-1999 by 28,3% without growth in the use of energy resources. The target was substantially met with a reduction of energy intensity per unit of GDP of 22,4%. 3. Budget Fund “Energy Funding of measures on energy saving. Funds come from fines for irrational Fund is managed by the Efficiency” (inefficient) use of energy resources. The fund is used in the financing of Committee on Energy energy saving measures. Efficiency 4. National policy on the To give support to non-conventional power plants. Owners of these plants Committee on Energy development of small and non- may sell electricity to the power grid at double the industry tariff (USD 0.07 Efficiency conventional power engineering per kWh). “Belenergo” concern (defined by Decree N 400 of the Council of Ministers)

5. Policies introducing Introduction of obligatory metering of fuel and energy resources. Today Committee on Energy instrumental metering. about 75% of all consumers have heat and flow meters. Efficiency and other Ministries 6. Policies providing preferential Funding of activities on energy efficiency. Commercial banks’ loans for Legal entities, Committee credits for energy saving activities energy saving measures are provided at 50% of refinancing rate of the on Energy Efficiency, National Bank about half of banks’ interest rate through match funding Commercial banks from the Committee on Energy Efficiency 7. Funds «For Energy Saving» Funding of activities on energy efficiency and incentives. Funds are created Legal entities introduced by the Council of within organisations to start and continue activities in energy efficiency Ministers Decree N 504 sphere and provide bonuses for employees saving energy. 8. New regulations related to Creating incentives to save energy in budget sphere organisations. At Committee incentives for budget sphere present this regulation is under design. Ministry of Finances institutions to save energy.

ANNEX H: SELECTION OF PROJECT SITES AND EVALUATION CRITERIA

Screening

Selection of the sites was made in two steps. The initial step involved the screening of the extensive database of over 4500 sites developed as part of the PDF B process. The boilers were screened according to the following criteria:  A boiler house capacity between 5 and 10 MW or more  A stable heat demand all year  The availability of sufficient wood waste resources for the present and future  Sufficient space in the boiler room and around it for the new boiler technology, and the wood waste delivery, processing and storage  Necessity of a stable steam load (where combined heat and power production is proposed)  Existence of social sphere consumers (apartment buildings, hospitals, etc.) connected to a boiler house  The district heating system in a good condition to avoid losses during heat transportation

Following the screening of boilers from the database, approximately 30 boiler houses were visited and additional data collected.

Evaluation Criteria

The boiler houses visited were evaluated according to the following criteria:  Prospects for long-term viability of the enterprise or entity  Visibility and accessibility (value for “jump-starting” the market)  Replication potential  Technical feasibility of proposed project  Economic feasibility of proposed project  Willingness to participate as a initial investment project site  Contribution to addressing analysed barriers  Availability of co-funding

The selected sites scored highly in all the above criteria.

ANNEX H BIS: SAMPLE CALCULATION FOR DEMONSTRATION PROJECT (#1, OPTION 2)

The following assumptions were made in calculations:  “For calculations of fuel consumption the amount of heat production is assumed to be 45,500 Gcal/year (see year 1999). The year 2000 was not typical for this farm and its boiler house).  In 1999, according to heat-meter readings, the heat consumption during winter-time was equal to 28,400 Gcal and during summer time 17,100 Gcal/year. p The heating value of chips is taken as Q H = 2400 kcal/kg. So, the necessary wood-fuel consumption will be

p 9 3 B = Qyear/(Qh *  ) = 45500 * 10 /(2400 * 10 * 0.79) = 24000 tonnes/year

where g.w. g.w.  b - gross-weight efficiency of boiler;  b = 0.79 (as minimum)

Average heat production of the boiler during winter will be as follows:

Pb = Qwt/wt = 28400/4656 = 6.1 Gcal/hour or 7.1 MW.

For this reason, a wood-fired boiler similar to the DKVR 10-14-250 (10 tonnes of stream/hour, 14 bars and 250 oC) can be chosen. Possible winter pick loads can be covered by reserved boiler available in the boiler house. To select a turbine, the following formula was used: the power –

Nturbine = {D(i1 – i2) * oe * g}/3600,

where D – amount of stream, kg/hour;

i1 – inlet stream enthalpy, kJ/kg; i2 – outlet stream enthalpy, kJ/kg;

oe – relative effective efficiency of turbine;

g – efficiency of turbogenerator.

Nturbine = {10000 (2895 – 2625) * 0.72 * 0.92}/3600  500 kW

The appropriate turbine could be a back pressure turbine similar to TG 0.5A/0.4 P13/3.7 of Joint-Stock Company ‘Kaluga Turbine Works” (Russia)

During the summer, the heat production of boiler will be

s Pb = Qst /st = 17100/3624 = 4.72 Gcal/hour or 5.47 MW. This means that steam production will be about 7.4 tonnes/hour and electrical power of turbine at that time can be derived as

Nst = 7400 * (2895 – 2625) * 0.92/3600  370 kW.

The total amount of electricity produced per year will be

E = 500 * 4656 + 370 * 3624 = 3668880 kWh.

The cost of electricity produced during the year will be

Cel = 0.035 * 3 668 880 = 128411 USD.

The profit from substitution of oil by chips can be calculated as following.

The amount of oil to be used to produce the heat and electricity

Boil = 24000 tonnes of chips/year * (2400 kcal/kg / 9600 kcal/kg) = 6000 tonnes/year

The price of the oil -

Coil = 100 USD/tonne * 6000 tonnes/year = 600000 USD.

The price of chips –

Cchips = 10 USD/tonne * 24000 tonnes/year = 240000 USD.

The profit is

C = 600,000 – 240,000 =360,000 USD/year

The current expenses on maintenance and running of the equipment including cost of fuel, depreciation, current maintenance, salary, other expenses will be 299,395 USD per year. The total income is 600,000 – 299,395 +128,411 = 429,016 USD

Economical indices counted on the basis of standard formulas at 10% discount rate are as follows: NPV = 154,000 Payback = 5.38 IRR = 24%

ANNEX I: INVESTMENT PROJECT SITE FACT SHEETS

Project 1: Combined Heat and Power Plant in the City of Olekhnovochi

Owner: Molodechno Poultry Farm, Olekhnovochi, Minsk oblast Alexander Klimashevski, Director Project sponsor: Committee for Energy Efficiency (Minsk department) G.I.Kirilchik, Head of department

Contact: Address: Olekhnovochi Telephone: 8-273-91-237 City: Olekhnovochi Fax: 8-273-91-239, 91-395 Oblast, postal code: Minsk, 222323 Email:

Existing system: Plant capacity: 15 MW Distribution net 2500m within factory, 800m to central heat distributor, and 2000m in the city, 190000 m3 Type of boilers Mazut fired steam boilers Year of Boiler 1: 1974 installed: DKVR10/13 - 2 units construction: Boiler 2: 1974 Main end Technology, apartment buildings, communal services users/customers: Legal status of To be privatised owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil 7448 5845 Tonnes 100/tonne Gas Electricity Yes 5951 4075 MWh 0.035/kWh Heat production Yes 45500 33 000 Gcal/year 25/Gcal

Proposed intervention overview: Description: It is planned to install a 7.5 MW wood-fired steam boiler (14 Bar steam pressure) with combined heat and power production using a 0.5 MW backpressure steam turbine. Heat and electricity production will cover almost all needs of the farm. A portion of the heat will be sold to the Ministry of Communal services and excess electricity produced at night will be sold to the national electric grid. Benefits Oil fuel savings of 6200 tonnes / yr (9 000 tce/yr) Electricity savings of 1000 tce / yr

CO2 emission reduction of 21 000 tonnes / yr SO2 emission reduction by 160 tonnes / yr New jobs Replication potential There are about 580 boiler houses with heat capacity from 5 to 10 MW in Belarus. About 40% of them are natural gas fired, 50% are oil fired and about 10% are coal or peat fired. More than 50% of them are located close to wood processing and forestry enterprises and potentially could be converted to wood fuel.

Proposed measures and financing (including hardware and implementation costs):

OPTION 1 Object Measure Estimated investment in USD 2 Wood fired boilers 4 MW each, 14 Boiler similar to the KE 6,5-14 450 000 x 2 = 900 000 Bar with automatic control system MT, 12 tons of steam/hour

Back pressure turbine 0,5 MW 300 000 (incl. Implementation)

Boiler house building and wood waste 200 000 storage

Design 180 000 Implementation 190 000 Contingencies 160 000

Total investment and savings 1 930 000, saving of 405 400 USD/yr

OPTION 2 Object Measure Estimated investment in USD Wood fired boiler 7.5 MW, 14 Bar Boiler similar to the DKVR 10-14- 720 000 with automatic control system 250, 10 tones of steam/hour, 14 bar, t=250C Back pressure turbine 0.5 MW 300 000 (incl. Implementation)

Boiler house building and wood waste 200 000 storage

Design 160 000 Implementation and adjustment 180 000 Contingencies 160 000

ECONOMIC INDICATORS (over estimated project lifetime of 15 years) OPTION 1 OPTION 2 Indicator Units With GEF loan Without loan With GEF loan Without loan SPBT Years 6.3 6.6 5.19 5.38 NPV USD 1 367 600 1 183 000 1 738 000 1 543 000 IRR % 20 20 24 24

CCC (for GEF) US$/Mg CO2 1.1

Option 2 is preferred

PRELIMINARY FINANCING PLAN Cost USD % of Total Owner's resources: 860 000 50

Sponsor resources: 510 000 30

GEF Loan: 350 000 20

Total: 1 720 000 100

Basic assumptions wood fuel purchase price 5 USD/m3 loose heat sale price 25 USD/Gcal electricity sale price 0.035 USD/kWh project lifetime 15 years

Project 2: Combined Heat and Power Plant in Vileika city

Owner: Joint Stock Company "Stroidetali" Sergei Zhuck, Director Project sponsor: Committee for Energy Efficiency G.I. Kirilchik, Head of Department

Contact: Address: Str Stachanovskaya 134 Telephone: 8-271-52-500 City: Vileika Fax: 8-271-54-259 Oblast, postal code: Minsk, 222410 Email:

Existing system: Plant capacity: 14 MW Distribution net 2 km, with 6 substations, 1 building with 18 apartments. A school N5 is planned to be connected in 2003 Type of boilers Mazut fired steam boilers Year of Boiler 1: 1985 installed: DKVR6,5/13 - 2 units, construction: Boiler 2: 1985 DE10/14 - 1 unit Boiler 3: 1987 Main end Technology, apartment buildings, communal services users/customers: Legal status of Joint stock company owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil 3860 Tonnes 100/tonne Gas Electricity Yes 5031 MWh 0.035/kWh Heat sale Yes 27935 Gcal/year 25/Gcal

Proposed intervention overview: Description: The boiler house will be converted to wood fuel with combined heat and power generation. It is planned to install a new direct burning 7,5 MW steam boiler 23-39 Bar, 370-450°C and a 0,75 MW back pressure turbine. The new boiler will cover almost 100% heat load and about 80% of the electricity load. Benefits Oil fuel savings of 6000 tonnes / yr (9000 tce / yr) Electricity savings equivalent to 2000 tce / yr

CO2 emission reduction of 22 000 tonnes / yr SO2 emission reduction of 160 tonnes / yr New jobs Replication potential There are about 580 boiler houses with heat capacity from 5 to 10 MW in Belarus. About 40% of them are natural gas fired, 50% are oil fired and about 10% are coal or peat fired. More than 50% of them are located close to wood processing and forestry enterprises and potentially could be converted to wood fuel.

OPTION 1 Object Measure Estimated investment in USD 2 Wood fired boilers 2 x 4 MW with 2 boilers KE-6.5-14 or similar 900 000 automatic control system During winter 2 boilers will be operated, and in summer 1 boiler Back pressure 0,75 MW turbine Turbine with generator similar to 320 000 TG 075/04 P13/2. Wood waste storage and 180 000 Boiler house building System of wood waste collection and 150 000 transportation Implementation and 180 000 Adjustment Design 160 000 Contingencies 100 000

Total investment and savings 1 990 000 saving of 619 700 per year

OPTION 2 Object Measure Estimated investment in USD 1 wood fired boiler of 7,5 MW with Similar to DKVR 10/23-370, 10 750 000 automatic control system tons of steam/hour working all Back pressure 0,75 MW turbine and year through. 320 000 generator

Wood waste storage and 120 000 Boiler house building System of wood waste collection and 150 000 transportation Implementation and 160 000 Adjustment Design 150 000 Contingencies 100 000

Total investment and savings 1 750 000 savings of 730 000 per year

ECONOMIC INDICATORS (over estimated project lifetime of 15 years) OPTION 1 OPTION 2 Indicator Units With GEF loan Without loan With GEF loan Without loan SPBT Years 4,0 4.1 2.8 2.9 NPV USD 3 005 000 2 723 300 4 134 000 3 802 000 IRR % 31 31 42 42

GEF Loans: 400 000 23

Total: 1 750 000 100

Basic assumptions wood fuel purchase price 0.5 USD/m3 loose (theoretical cost of own wood waste). heat sale price 25 USD/Gcal or 100 USD per 1 tonne of oil saved electricity sale price 0.035 USD/kWh project lifetime 15 years

Project 3: Heat-only boiler in City of Uzda

Owner: Private enterprise "VOLAT-1" Igor Petkevich, director Project sponsor: Committee for Energy Efficiency Victor Fedoseev

Contact: Main office address 12, Olshevskogo s.str. Telephone: + 375 17 254 78 85 City: Minsk Fax: + 375 17 254 01 60 Oblast, postal code: Minsk Email:

Existing system: Plant capacity: Electrical boiler house Distribution net N/a 800 kW capacity Type of boilers 8 electrical boilers 100 kW Year of 1989. Shops were bought by installed: each construction: “VOLAT-1” in 2001 Main end Technology, office building users/customers: Legal status of Private company owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil Gas Electricity Yes 3 100 MWh 0.035/kWh Heat sale Yes Gcal/year 45/Gcal

Proposed intervention overview: Description: A new wood fired heat only 1.7 MW boiler house will be installed in a separate building instead of existing electrical boilers installed inside production premises. District heating piping (outside laying 150 meters long) to connect boiler house to production shops will be installed. The new wood fired boiler house will have a higher capacity than the old one because of growing demand for production (additional wood processing equipment and shops to be installed in the coming years – currently production growth is limited due to high expenses for heat supply which is produced by electrical boilers). Due to saving reasons temperature comfort in shops and in office is also limited. Benefits Year round heat and hot water for technology and sanitary needs Natural gas savings at power plant due to electricity savings amounting to 1000 tce / yr Improved temperature comfort

CO2 emission reduction of 2 000 tonnes / yr New jobs Replication potential There are about 3350 boiler houses with heat capacity from 0,5 to 3 MW in Belarus. About 35% of them are natural gas fired, 50% are oil fired and about 15% are coal, peat or wood fired.

OPTION 1 Object Measure Estimated investment in USD 2 Wood fired boilers, automatically 1 boiler at 1 MW and 1 boiler at 250 000 operated 0.7 MW. The larger boiler will be in operation during winter and the Wood waste storage smaller one during summer. The 30 000 Boiler house building smaller boiler will also serve as a 70 000 Heat network reserve during winter. 50 000 Design 50 000 Implementation adjustment, training 90 000 Contingencies 100 000 Total investment and savings 640 000 savings of 162 200 per year

ECONOMIC INDICATORS (over estimated project lifetime of 15 years)

Indicator Units With GEF loan Without loan

SPBT Years 5.1 5.3 NPV USD 667 400 583 693 IRR % 24 24

GEF Loans: 130 000 20

Total: 640 000 100

Basic assumptions wood fuel purchase price 0,5 USD/m3 loose (theoretical cost of own wood waste) heat sale price 45 USD/Gcal electricity sale price 0.026 USD/kWh (night tariff), 0,0132 day tariff for heating project lifetime 15 years

Project 4: Heat-only boiler in the town of Farinovo

Owner: Polotsk municipality Andrei Fialka, deputy head of Farinovo division of Vetrino municipality Representative of Polotsk region municipality: Alexei Sedjuk, Deputy Major

Project sponsor: IKEA (Sweden) Stefan Koletich, Dep. Head of Belarus office Committee for Energy Efficiency Victor Fedoseev, Dep. Chairman

Contact: Address: RPO Zh K Ch Telephone: 8-0214 466 536, 445 452 City: Farinovo Fax: 8-0214 461 273 Oblast, postal code: Polotsk, 211412 Email: IKEA(Belarus) +375 17 206 53 91

Existing system: Plant capacity: 50 MW Distribution net 3500 m 100% of net 20 years or older (25-30% heat losses) about 50 substations Type of boilers Steam boiler DKVR 10/13 - Year of Boiler 1: 1973 Boiler 2: 1973 installed: 3 units. Steam boilers DE construction: Boiler 3: 1973 Boiler 4: 1974 25/14 - 2 units. One of them Boiler 5: 1974 is in disabled state Main end Institutions and apartment buildings in Farinovo town users/customers: Legal status of Municipality owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil 3100 100 per tone Gas Electricity Yes MWh 0.035/kWh Heat sale Yes 19 100 Gcal/year 48/Gcal

Proposed intervention overview: Description: There are two possible options: 1.The old boiler house and district heating pipeline for heat transportation from it to Farinovo town will be closed. New wood fired heat only boiler house with separate building will be constructed in Farinovo town instead of central heat substation. The designed capacity of this boiler house is 5-7 MW. 2. Reconstruction of existing boiler house by installation of one 10-12 MW wood-fired automatically controlled steam boiler. The method of conversion is replacement of 2 or 3 of the existing boilers, which are old, inefficient and in a poor condition. The other mazut-fired boilers will be left with no changes and will serve as reserves (or to cover pick loads only). A small wood waste storage facility will be constructed and equipped with necessary devices for wood chips transportation to boiler. Wood waste will be

supplied from the neighbouring wood processing factory. The second option will be implemented if IKEA Co from Sweden goes ahead with its plans to purchase the neighbouring wood-processing factory (which is currently bankrupt). In this case IKEA interested to be a sponsor of the proposed boiler house reconstruction. Benefits Oil fuel savings of 7 500 tonnes / yr (11 000 tce / yr)

CO2 emission reduction of 24 000 tonnes / yr SO2 emission reduction of 200 tonnes / yr New jobs Replication potential There are about 300 boiler houses with heat capacities from 10 to 20 MW in Belarus. About 53% of them are natural gas fired, 40% are oil fired and about 7% are coal or peat fired. Almost all of them are equipped with the same type of boilers (DKVR type) used in this site. More than 50% of them are located not far from wood processing and forestry enterprises and potentially could be converted to wood fuel. This project will provide experience with a replication potential for hundreds of similar boiler houses in Belarus.

OPTION 1 Object Measure Estimated investment in USD Wood fuel automatically operated New boiler house with 2 boilers (4 600 000 boiler 5-7 MW MW main and 3MW reserved) Wood waste storage and boiler house installed in Farinovo town instead 150 000 building of old one outside of the town, which is going to be closed. 150 000 Heat network reconstruction Improvement of district heating 30 000 Design system. Implementation adjustment, training 100 000 Contingencies 150 000 Total investment and savings 1 180 000 yearly savings of 268 200

OPTION 2 Object Measure Estimated investment in USD Wood fuel automatically operated New wood fired boiler will replace 800 000 boiler 10-12 MW 2 old and inefficient mazut fired Wood waste storage and boiler house boilers in existing boiler house 150 000 building with improvements of the existing district heating system. 150 000 Heat network reconstruction 150 000 Design Implementation adjustment, training 100 000 Contingencies 150 000 Total investment and savings 1 500 000 yearly savings of 563 000

ECONOMIC INDICATORS (over estimated project lifetime of 15 years) OPTION 1 OPTION 2 Indicator Units With GEF loan Without loan With GEF loan Without loan SPBT Years 4.5 4.6 3.1 3.2 NPV USD 1 211 800 1 090 360 3 038 000 2 805 000 IRR % 27 27 38 38

Sponsor resources: Committee for Energy Efficiency 450 000 74 IKEA (Sweden) 700 000

GEF Loan: 300 000 20

Total: 1 500 000 100

Basic assumptions wood fuel purchase price 0,5 USD/m3 loose heat sale price 25 USD/Gcal electricity sale price 0.035 USD/kWh project lifetime 15 years

Project 5: Heat only boiler in the Radon Sanatorium

Owner: State own company Unitary sanatoriums enterprise (USE) "Belagrosdravnitsa" Director of Sanatorium Radon Nikolai Mazur Deputy director of USE “Belagrosdravnitsa” Alexander Subatch Project sponsor: Grodno department of the Committee for Energy Efficiency Head of department A.F. Nechai

Contact: Address: Village of Boroviki Telephone: Minsk office +375 17 239 46 48 City: Dyatlovo Fax: + 375 17 288 69 16 Oblast, postal code: Grodno oblast Email:

Existing system: Plant capacity: 8 MW Distribution net 3300 m 100% of net 14 years (25-30% heat losses) Type of boilers DKVR 6,5/13 - 2 units Year of construction: Boiler 1: 1986 installed: converted from steam to Boiler 2: 1987 water cycle. Water boilers Boiler 3 1996 "Fakel" - 2 units Boiler 4 1996 Main end Sanatorium "Radon", Children sanatorium "Borovichok" users/customers: Legal status of Public company owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil Gas 1 717 000 1 630 000 m3 0.07/m3 Electricity Yes MWh 0.035/kWh Heat sale Yes 11 400 Gcal/year /Gcal

Proposed intervention overview:

Description: Boiler house reconstruction by converting one of two DKVR 6,5/13 to wood fuel by means of the installation of a gasification unit (pre-oven). The existing boiler is in good condition and will be used to burn the gas generated in the gasification unit. The other natural gas fired boiler will be left with no changes and will be used to cover pick loads only. Two small size “Fakel” water boilers will be dismantled to make space for the gasification unit. A small wood waste storage facility will be constructed and equipped with necessary devices for wood chips transportation to gasification unit. A larger storage facility for logs delivered from the forest will be established and equipped with a chipper - wood chips will be produced directly on the territory of the boiler house. The “Dyatlovo forestry company” will supply wood fuel to the boiler house. An agreement to supply 14000 m3 of wood in logs a year from forests thinning has been made.

The existing district heating network is in a bad condition. Heat losses due to leakages and poor thermal insulation are estimated on the level of 25-30% of total heat production. According to the recommendations of energy audit the most efficient way of improving the system is the replacement of pipes with pre-insulated ones. Benefits Reduction of natural gas consumption by 1,63 million m3 (2000 tce / yr), Reduction of heat losses in the district heating system by 20-25%,

CO2 emission reduction of 3 000 tonnes / yr New jobs Replication potential There are about 3350 boiler houses with heat capacity from 0,5 to 3 MW in Belarus. About 35% of them are natural gas fired, 50% are oil fired and about 15% are coal, peat or wood fired. Almost all of them are equipped with the same type of boilers (DKVR type) used here. In a 1996 study, the potential in Belarus for the use of gasification units in this size range has been shown to be high and cost effective where space is available in the boiler house for the installation of the unit. More than 50% of them are located not far from wood processing and forestry enterprises and potentially could be converted to wood fuel. This project will give experience with the replication potential for hundreds of similar boiler houses in Belarus.

Object Measure Estimated investment in USD Wood fuel automatically operated HOTAB, WERNER or similar 200 000 gasification unit 3,5 MW gasification unit instead of one of Wood waste storage and boiler house two existing boilers 50 000 building Wood logs storage and chipper 50 000 Heat network reconstruction 200 000 Design 50 000 Implementation adjustment, training 40 000 Contingencies 50 000 Total investment 640 000

ECONOMIC INDICATORS (over estimated project lifetime of 15 years) Indicator Units With GEF loan Without loan SPBT Years 6,2 6,5 NPV USD 329 000 285 384 IRR % 20,3 20,3

GEF Loans: 130 000 20

Total: 640 000 100

Reserve Project 1: Heat-only boiler in the City of Ivatsevichi

Owner: Joint Stock Company "Ivatsevichidrev" Nikolay Poplavski, Chief Engineer Project sponsor: Committee for Energy Efficiency A.N.Kuzminchuk, Head of Department

Contact: Address: Str Zavodskaja, 4 Telephone: 8-01645-214-46 City: Ivatsevichi Fax: 8-01645-214-82 Oblast, postal code: Brest, 225250 Email:

Existing system: Plant capacity: 12 MW Distribution net 2 km, with 6 substations, 1 building with 18 apartments. A school N5 is planned to be connected in 2003 Type of boilers Gas fired steam boilers Year of construction: Boiler 1: 1982Boiler 2: 1985 installed: DKVR610/13 - 2 units Main end Technology, heating of shops users/customers: Legal status of Joint stock company owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 2000 2001 Oil Gas 4150000 M3 70$/1000 m3 Electricity Yes Heat sale Yes

Proposed intervention overview: Description: Boiler house conversion to wood fuel. It is planned to install heat only boiler 3-4 MW capacity. Benefits Gas fuel savings (~2 million cubic metres) New jobs

CO2 reduction (~3000 tonnes per year) Replication potential There are about 300 boiler houses with heat capacity from 10 to 20 MW. About 53% of them are natural gas fired, 40% are oil fired and about 7% are coal or peat fired. Almost all of them are equipped with similar boilers to the proposed project

Object Measure Estimated investment in USD 1 Wood fired boiler 3 MW (2 Gcal/h) One steam boiler similar to KE- 500 000 with automatic control system 6.5-14 One wood fired boiler will cover Boiler house building reconstruction both summer and winter load 20 000 Wood waste transportation system In case of surplus demand there is 50 000 Implementation and one more gas fired reserved Adjustment boiler 60 000 Design 40 000 Contingencies New wood fired boiler will allow 80 000 Total investment and savings to save about 4 mill m3 of Natural 750 000 gas a year saving of 281 500 per year

ECONOMIC INDICATORS (over estimated project lifetime of 15 years) Option 1 Option 2 Indicator Units With GEF loan Without loan With GEF loan Without loan SPBT Years 5.08 5.3 3.1 4.0 NPV USD 1 481 800 1 318 200 2 234 600 1 956 000 IRR % 25 25 39 31

GEF Loan: 150 000 20

Total: 750 000 100

Basic assumptions wood fuel purchase price 0.3 USD/m3 loose (theoretical cost of own wood waste). heat sale price 25 USD/Gcal electricity sale price 0.035 USD/kWh project lifetime 15 years

Reserve Project Site 2: Heat-only boiler in the City of Telekhany

Owner: Ivatsevichi municipality Chief Engineer of Telekhany Communal service company Vladimir Krasnikov

Project sponsor: Committee for Energy Efficiency Andrey Kuzminchuk, Head of Brest oblast Division

Contact: Address: RPO Zh K Ch Telephone: 8-01645 31 278 City: Telekhany Fax: 8-01645 31 278 Oblast, postal code: Brest, 211412 Email:

Existing system: Plant capacity: 1.6 MW Distribution net 1500 m 100% of net 15 years old, air line in relatively good condition Type of boilers Steam boiler E 1/9 - 3 units. Year of Boiler 1: 1975 Boiler No 2: 1975 installed: construction: Boiler N 3 1978 Main end Institutions and apartment buildings in Telekhany town users/customers: Legal status of Municipality owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil 630 100 per tonne Gas Electricity Yes MWh 0.035/kWh Heat sale Yes Gcal/year /Gcal

Proposed intervention overview: Description: Reconstruction of existing boiler house by installation of 2 wood fired automatically controlled water boilers 1MW capacity each. Method of conversion is replacement of 3 existing boilers, which are old, inefficient and in bad condition with 2 wood fired ones. One small size wood waste storage will be constructed and equipped with necessary devices for wood chips transportation to boiler. Wood waste will be supplied from neighbouring forestry enterprise (5 km far). Benefits Oil fuel savings 630 tonnes a year (900 tce) New jobs

CO2 emission reduction of 2 000 tonnes / yr SO2 emission reduction of 16 tonnes / yr Replication potential There are about 3350 boiler houses with heat capacity from 0,5 to 3 MW in Belarus. About 35% of them are natural gas fired, 50% are oil fired and about 15% are coal, peat or wood fired.

OPTION 1 Object Measure Estimated investment in USD Wood fuel automatically operated New boiler house with 2 boilers (1 200 000 boiler house 1,6 MW MW each, main and reserved ones) Wood waste storage and boiler house installed in Telekhany town 30 000 building instead of old ones Heat network reconstruction 20 000 Design 20 000 Implementation adjustment, training Contingencies 30 000 Total investment and savings 50 000 350 000 yearly savings of 59 200

ECONOMIC INDICATORS (over estimated project lifetime of 25 years) Option 1 Option 2 Indicator Units With GEF fund Without GEF With GEF fund Without GEF SPBT Years 8.8 9.4 NPV USD 225 300 187 600 IRR % 17 17

Sponsor resources: Committee for Energy Efficiency 105 000 30

GEF Loan: 70 000 20

Total: 350 000 100

Basic assumptions wood fuel purchase price 5 USD/tonne heat sale price 25 USD/Gcal electricity sale price 0.035 USD/kWh project lifetime 25 years

Reserve Project Site 3: Combined Heat and Power Plant in collective farm “Mayak kommuny”

Owner: Collective Farm “Mayak Kommuny”, v.Kupelka, Vitebsk oblast Grigoriy Falko, Chairman Project sponsor: Committee for Energy Efficiency (Minsk department) V.G.Khron, Head of department

Contact: Address: v. Kupelka Telephone: 8-02161-7-95-077 City: v. Kupelka Fax: 8-02161-7-94-44 Oblast, postal code: Vitebsk Email:

Existing system: Plant capacity: 2 MW Distribution net 7500m from BelGRES; 1500 m to v.Grishany, 2000 m to v.Vysokoe Type of boilers Mazut fired boilers Year of Boiler 1: 1974 installed: “Universal” - 2 units construction: Boiler 2: 1974 Main end Technology, apartment buildings, communal services users/customers: Legal status of To be privatised owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil Tonnes 130/tonne Gas Gas 49/th.m3 Electricity Yes 1890 1980 MWh 0.035/kWh Heat consumption Yes 32750 34000 Gcal/year 25/Gcal

Proposed intervention overview: Description: At present the farm is supplied with heat from big size gas fired CHP, located in Erekhovsk (Belgres) through the district heating system 7,5 km long. In summer period the CHP operates as heat only boiler house. Thermal insulation of DH pipes is extremely poor. Heat losses level is approx. 40% of heat supplied.

The farm owns an old obsolete low efficient non-operating boiler house. This boiler house will be fully reconstructed. Its capacity will be essentially increased in order to supply with heat not only farm itself, but also other consumers supplied from small size low efficient coal fired boiler houses located nearby. In this connection local district heating system will be rehabilitated and long distance poor insulated leaking pipes from Orekhovsk will be disconnected. It is important to mention, that there are no any other consumers connected to this long distance pipe. It is planned to install two 4 MW wood fired steam boilers (14 Bar steam pressure). The boiler house will operate as CHP with 0.75 MW back pressure steam turbine. Heat and electricity production will cover all needs of a farm. A part of the heat will be sold to the local utility of communal services and electricity produced will be sold to the national electric grid. Wood fuel will be supplied from the local forestry enterprise Benefits Gas and coal fuel savings are a little bit more than 4200 toe/yr New jobs

CO2 reduction Replication potential There are about 580 boiler houses with heat capacity from 5 to 10 MW in Belarus. About 40% of them are natural gas fired, 50% are oil fired and about 10% are coal or peat fired. More than 50% of them are located close to wood processing and forestry enterprises and potentially could be converted to wood fuel.

Object Measure Estimated investment in USD 2 Wood fired boilers 4 MW each, 14 Boiler similar to the KE 6,5-14 450 000 x 2 = 900 000 Bar with automatic control system MT, 12-13 tons of steam/hour

Back pressure turbine 0,75 MW 270 000 (incl. Implementation)

Boiler house building and wood waste 250 000 storage District heating system 150 000 Design 180 000 Implementation, adjustment, training 200 000 Contingencies 100 000

ECONOMIC INDICATORS (over estimated project lifetime of 15 years) With GEF fund :Without GEF Indicator Units SPBT Years 3.48 4.56 NPV USD 2 783 000 2 373 000 IRR % 35.0 27,6 CCC (for investor) US$/Mg CO2 CCC (for GEF) US$/Mg CO2

Grants (demonstration project) GEF: 410 000 20

Total: 2 050 000 100

Reserve Project Site 4: Combined Heat and Power Plant in Luninets city

Owner: Concern “Belenergo” Anatoliy Pavlukevich Director Project sponsor: Committee for Energy Efficiency G.I. Kirilchik, Head of Department

Contact: Address: Str Stachanovskaya 134 Telephone: 8-01647 25794 City: Luninets Fax: 8- Oblast, postal code: 225644 Brest oblast Email:

Existing system: Plant capacity: 75 MW Distribution net 1.5 km to city distribution net supplying with heat all the city of 45000 inhabitants, industrial enterprises and social sector Type of boilers Mazut fired steam boilers Year of Boiler 1: 1974, Boiler 4-1976 installed: DKVR 20/13 - 4 units, construction: Boiler 2: 1974, Boiler 5-1975 KVGM-100 - 2 units Boiler 3: 1975, Boiler 6-1976 Main end Technology, apartment buildings, communal services users/customers: Legal status of State company (utility) owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 1999 2000 Oil 13500 Tonnes 130/tonne Gas Electricity Yes MWh 0.035/kWh Heat sale Yes 115000 Gcal/year 25/Gcal

Proposed intervention overview: Description: Existing boiler house is oil fired. It is planned to install one wood fired boiler instead of old obsolete oil fired one. A 0.75 MW back-pressure turbine will be installed too. This measure will permit to decrease mazut consumption. and give a hot running water to Luninets’ citizens all the year round. Now dew to saving reasons domestic hot water system of Luninets city is disconnected for the warm period (April - October). Wood fuel will be supplied from the local forestry enterprise Benefits Oil (gas) fuel savings New jobs

CO2 reduction Replication potential There are about 125 boiler houses with heat capacity from 30 to 50 MW. About 65% of them are natural gas fired, 30% are oil fired and about 5% are fired with more than 2 kinds of fuel, including wood. Almost all of them are equipped with the same type of boilers as demonstration one

Object Measure Estimated investment in USD Wood fired boiler of 10 MW with1 boiler E-16-21-350 or KE-25-14-700 000 automatic control system 225 MTD-GM or similar to them

Wood fuel storage and supply system 150 000 Back pressure 0,75 MW turbine 270 000

Implementation and 200 000 Adjustment Design 150 000 Contingencies 150 000 Total investment and savings 1 620 000 saving of 1 080 000 per year

ECONOMIC INDICATORS (over estimated project lifetime of 15 years) With GEF fund :Without GEF Indicator Units SPBT Years 1.34 1.7 NPV USD 6 920 000 6 594 000 IRR % 83.2 66.8

CCC (for investor) US$/Mg CO2 CCC (for GEF) US$/Mg CO2

Total: 1 620 000 100

Basic assumptions wood fuel purchase price 3.13 USD/m3 loose heat sale price 25 USD/Gcal electricity sale price 0.035 USD/kWh project lifetime 15 years

Reserve Project Site 5: Heat only boiler in Mosty city Grodno oblast

Owner: Joint Stock Co “Mostydrev” Alexander Onischenko Director Project sponsor: Committee for Energy Efficiency, Grodno oblast department A.F. Nechay, Head of Department Contact: Address: 38, Sovetskaya str. Telephone: 8-015 15 33218 City: Mosty Fax: 8-015 15 33676 Oblast, postal code: Grodno Email:

Existing system: Plant capacity: 40 MW Distribution net 3 km to city distribution net within enterprise and for supplying heat to the city (25000 inhabitants, and social sector) Type of boilers Gas fired steam boiler DE/25 – Year of installed: 2units, construction: Year 1980, Gas water boilers Year 1972 DKVR/20/13-2 units PTVM-30 – 1 unit Year 1980 Wood fired boilers Tampella – 2 units Year 1947 Main end Technology, apartment buildings, communal services users/customers: Legal status of Joint Stock Co owner/sponsor

Existing energy consumption: Fuel Energy meters Annual consumption Energy units Energy price in installed USD Yes/No 2000 2001 Oil Tonnes Gas 20 050 17 955 Th. m3 49/th.m3 Electricity Yes MWh 0.035/kWh Heat sale Yes Gcal/year 14/Gcal

Proposed intervention overview: Description: Option 1. It is planned to replace 1 steam gas fired boiler DE 25/14 with new automatically operated wood fired steam low pressure boiler. This measure will permit to reduce natural gas consumption. and give a hot tap water to citizens all the year long. Now from the reason of fuel savings, domestic hot water is switched off for the summer period (since April till October).

This enterprise has sufficient quantity of wood waste to provide all the existing boilers with this kind of fuel. Lack of funding is the main barrier on the way to do it quickly. A peculiarity of this wood waste is high level of water content: 60 – 70% in average. In this case flue gases vapour is to be condensed to improve thermal efficiency of the boiler. A condenser of flue gases vapour (heat recovery unit) will be installed as a part of a boiler.

Option 2 Instead of gas fired low pressure steam boiler DE 25/14 one wood fired water boiler with 10 MW capacity is to be installed. This boiler will directly supply district heating system of Mosty city with hot water all the year round (for heating purposes and for domestic hot water preparation). This boiler is planned to be equipped with the flue gases heat recovery unit too. Benefits Gas fuel savings New jobs

CO2 reduction Replication potential There are about 125 boiler houses with heat capacity from 30 to 50 MW. About 65% of them are natural gas fired, 30% are oil fired and about 5% are fired with more than 2 kinds of fuel, including wood. Almost all of them are equipped with the same type of boilers as demonstration one

Option 1 Object Measure Estimated investment in USD 1 Wood fired steam boiler of 10 MW 1 boiler E-16-14-200 or similar 700 000 with automatic control system with flue gases heat recovery unit will be installed Heat recovery unit 250 000

Building and wood fuel storage 200 000

Implementation and 200 000 Adjustment Design 150 000 Contingencies 100 000 Total investment and savings 1 600 000 saving of per year 712000

Option 2 Object Measure Estimated investment in USD 1 Wood fired water boiler of 10 MW1 boiler or similar with flue gases700 000 with automatic control system heat recovery unit will be installed

Heat recovery unit 250 000

Building and wood fuel storage 200 000

Implementation and 200 000 Adjustment Design 150 000 Contingencies 100 000 Total investment and savings 1 600 000 saving of per year 712 000

Options 1 and 2 are similar on economic indicators. One of the options will be selected during technical design on the basis of concept developed jointly with the Committee on Energy Efficiency and JSC Mostydrev

Total: 1 600 000 100

Basic assumptions wood fuel purchase price 1.1 USD/m3 loose heat sale price 15 USD/Gcal electricity sale price 0.035 USD/kWh project lifetime 15 years

Biomass fuel supply Project: A Wood Processing Department in Molodechno

Owner: Joint Stock Company "Molodechnoles" Leonid Stankevich, Director Project sponsor: Committee for Energy Efficiency Victor Fedoseev

Contact: Address: 24, Vilenskaja str. Telephone: 273 7 10 33 City: Molodechno Fax: 273 7 77 61 Oblast, postal code: Minsk oblast Email:

Proposed intervention overview: Description: The ‘open end’ Joint Stock Company "Molodechnoles" which is specialised in wood harvesting will establish a department or branch responsible for the collecting and processing, storage, and distribution of wood residues left in the forest after harvesting.

The department will operate on a commercial basis selling wood chips to consumers. The main consumers will initially be the boiler house at the Olekhnovochi poultry farm supported by the GEF project loans and, as a backup, the project at the wood processing JSC “Stroidetal” in Vileika. The project will purchase special equipment (mobile chippers and forwarders) and transportation means (tractors, loaders and lorries) to store, produce and deliver wood chips to consumers. The company will produce about 50,000 cubic metres of loose wood chips per year and transporting them to local boiler houses. The nature of the The current market for wood fuel used for heating purposes is very limited. For the time market for the being wood fuel is mainly stored in logs. These logs are predominantly used as fuel for enterprise' products orstoves in private houses and in small size boiler houses that belong mainly to the Ministry services of Communal Services or to local municipalities. Although wood chips, sawdust and offcuts are produced as wood waste at wood processing enterprises most are used in their own boiler houses as fuel. There is currently no demand for wood chips as fuel outside of the wood-processing sector because there are of very few suitable boilers available. Wood chips are only sold to enterprises specialised in alcohol production. In many cases (excess) sawdust and wood chips are lost or disposed of in landfills. Forest residues from wood harvesting, on the other hand, are currently not used for wood chips production because of the lack of any demand and are simply burned in the forest. The proposed company will be the first in the market of wood chips produced for heating purposes in Belarus. Benefits **Forest residues after harvesting which are lost now (burned directly in the forest) will be collected, processed into chips and delivered to boiler houses. The amount of forest residues that are currently lost during harvesting is about 3 million cubic metres (growing to a forecasted 5.7 million cubic metres in 2015). **New jobs

**CO2 reduction through enabling biomass energy activities Replication potential Replication potential will depend on the number of boiler houses converted to wood fuel and demand for wood fuel for these boiler houses as a result of GEF actions. As mentioned above, the amount of wood residues created in the forest during harvesting and fired in the forest is currently about 3 million cubic metres, and this project has a capacity of 50 thousand cubic metres of wood chips loose. After the of modern technologies, the willingness to build similar boiler houses will grow and new companies dealing in production of wood chips will start operating. The replication potential counted from the forest residues potential is around 100 wood

fuel enterprises with a similar capacity as the the proposed project. In reality, fewer wood supply enterprises with larger capacities are expected in the market. Through the creation of new wood fuel enterprises the wood fuel market will be established and competition between enterprises with grow.

OPTION 1 (implementation cost is included) Object Measure Estimated investment in USD Equipment and transportation units for Equipment for collecting, 790 000 wood storage company chipping, storage and transporting of wood fuel Total investments 790 000

ECONOMIC INDICATORS (over estimated project lifetime of 10 years)

Indicator Units With GEF loan Without loan

SPBT Years 5.2 5.5 NPV USD 305 000 280 000 IRR % 19 19

GEF Loan: 230 000 29

Total: 790 000 100

Basic assumptions wood fuel sale price 5 USD/m3 loose project lifetime 10 years

ANNEX J: CO2 EMISSION CALCULATION

CO2 emission calculations are given in Table 5 on the following page, and are based on the following assumptions and information sources:

 Year 2000 fuel usage figures from government reports. Projections for 2005 and 2015 are based on government figures used in the regulations for the government’s “National Programme of Energy Saving and Renewable Energy Utilisation for the period 2001 to 2005”. The figures include all kinds of fuels that are used for energy production (heat and power) in Belarus.

 The CO2 emission factors used have been determined locally by the Belarussian Scientific-Research Centre “Ecologia”, an agency of the Ministry of Natural Resources and Environmental Protection, as part of their preparations for the first official National Communication. These figures relate closely to those used by the IPCC (with small variations due to local conditions), and are as follows:

Fuel Emission factor (kg/MJ): Mazut 73.530 Natural 56.339 gas Coal 103.147 Peat 104.250

 Since all wood fuel in this analysis comes from renewable sources (i.e. it is harvested in sustainable way), and emissions are subsequently reabsorbed, the wood fuel emissions are zero.

 CO2 emissions have been determined by multiplying fuel used by energy content and the emission factor. So, for example, taking total consumption of Mazut in the year 2000 we have: . 2980 thousand tce, or in energy units . 87 339 MJ multiplied by the emission factor of 73530 g/MJ, we get

. 6422 Gg of CO2, as given in the table.

 CO2 equivalent figures are given in the table for comparison, and are not used in descriptions and further calculations given in the project brief.

Table 5: CO2 Emission Calculations 2000 2005 2015 Kind of fuel Th. tonnes of СО2 (th. СО2 SO2 Fuel (th. tce) СО2 (th. CO2 SO2 Fuel (th. tce) СО2 (th. CO2 SO2 coal eq (tce) tonnes/yr) equiv. (tonnes/yr) tonnes/yr) equiv. (tonnes/yr) tonnes/yr) equiv. (tonnes/yr) Planned trends of fuel consumption without GEF impact Gas 18,742 30,957 30,959 - 19,500 32,209 32,211 - 20,000 33,035 33,037 - Mazut +diesel 2,980 6,422 6,424 53,440 2,637 5,683 5,685 47,289 2,200 4,741 4,743 39,452 Coal 396 1,197 1,197 5,940 350 1,058 1,058 5,250 250 756 756 3,750 Wood fuel* 1,122 - - - 1,400 - - - 1,800 - - - Peat 769 2,349 2,350 - 750 2,291 2,292 - 750 2,291 2,292 - Total 24,009 40,925 40,930 59,380 24,637 41,241 41,246 52,539 25,000 40,823 40,827 43,202 Savings from GEF intervention (demonstration (for 2005) and replication (for 2015)) Olekhnovichi > Mazut 9 19 19 159 > Gas (elec.) 1 2 2 - Vileika > Mazut 9 19 19 158 > Gas (elec.) 2 3 3 - Uzda > Gas (elec.) 1 2 2 - Farinovo > Mazut 11 24 24 197 Radon > Gas 2 3 3 - Mazut in total 29 62 62 515 330 711 711 5,918 Gas in total 6 10 10 - 20 33 33 - Coal in total - - - - 50 151 151 750 Total savings 35 72 72 515 400 895 895 6,668 Trends in fuel consumption taking into account GEF impact Gas 18,742 30,957 30,959 - 19,494 32,199 32,201 - 19,980 33,002 33,004 - Mazut + diesel 2,980 6,422 6,424 53,440 2,608 5,621 5,623 46,774 1,870 4,030 4,031 33,534 Coal 396 1,197 1,197 5,940 350 1,058 1,058 5,250 200 605 605 3,000 Wood fuel 1,122 - - - 1,435 - - - 2,200 - - - Peat 769 2,349 2,350 - 750 2,291 2,292 - 750 2,291 2,292 - Total 24,009 40,925 40,930 59,380 24,637 41,169 41,174 52,024 25,000 39,928 39,932 36,534 GEF impact on growth of wood fuel use and reduction of GHG emissions Savings from - - - - 35 72 72 515 400 895 895 6,668 wood fuel use

ANNEX K: SIGNED LETTERS OF INTENT

Letters indicating interest and commitment to the project have been received from all project participants. Signed versions are available in English and Russian.

The list of commitment letters is as follows:

 Committee on Energy Efficiency, dated 29/04/2002

 Molodechno Battery Farm, dated 26/04/2002

 Vileika Joint Stock Co "Stroidetali", dated 25/04/2002

 Volat-1, dated 5/01/2002

 IKEA, dated 11/01/2002

 Farinovo, dated 14/01/2002

 Radon, dated 11/1/2002

 Molodechnoles, dated 28/12/2002

 Mostodrev, dated 22/4/2003

ANNEX L: EQUIPMENT REQUIREMENTS

The executing/implementing agency will maintain inventory records of non-expendable equipment. Non- expendable equipment is capital goods procured once during the project and used through the whole project period.

The project will follow UNDP procurement procedures. UNDP/GEF supported equipment will remain UNDP’s property until formally transferred will be made by the UNDP Resident Representative, in consultation with the Parties concerned. The Executing/Implementing Agency will be responsible for ensuring that the use of equipment and supplies procured with UNDP/GEF funds is strictly for the purpose of the project. It will see for its proper custody, maintenance and care and provide UNDP, upon request, with information regarding the use, storage and maintenance of such equipment.

Equipment requirements are to be finalised at the outset of project operations, based on the actual needs.

ANNEX M: TERMS OF REFERENCE FOR INTERNATIONAL AND NATIONAL EXPERTS AND SUBCONTRACTORS

INTERNATIONAL EXPERTS

Budget Line 11-01 Technical advisory services (combustion)

Position title: Technical expert on advisory services (combustion) Budget line 11-01 Type of contract: Service Contract

Duration of contract: 120 working days over the 36 month period

Objectives of work: To provide international expertise necessary to ensure the successful implementation of output 2.1 (demonstration projects showing that wood energy is modern, clean, versatile, cost-effective and efficient are implemented) Duties:  Together with local experts review and evaluate the feasibility studies and investment proposals prepared during the PDF B  Provide assistance for the preparation of the full technical design of the systems and the tender documents for the equipment and services to be purchased  Evaluate the tenders from suppliers and assist in the selection of suppliers  Monitor the implementation of the demonstration projects ensuring that they meet their intention of showcasing biomass energy potential.  Troubleshoot and work to solve implementation barriers  Elaborate possible long-term mechanisms to support the biomass energy projects in conjunction with the other experts participating in the projects’ implementation. Expected Results: Demonstration projects showing that wood energy is modern, clean, versatile, cost- effective and efficient are implemented

Schedule of work: Start of activities: 2003 End of activities: 2006 Qualifications:  Extensive practical hands-on experience (a minimum of 10 years) in the implementation of state-of-the-art biomass energy technologies  Relevant experiences in Eastern European countries with biomass energy projects  good interpersonal skills and ability to transfer skills to local experts  wide experience in elaboration of projects on wood and wood waste use as fuel, feasibility studies for such projects Special Terms: Experience in former Soviet Union Republics

Duty Station: UNDP Minsk

Supervisor: Project manager, National Project Co- ordinator (Name and Title) Subscriber: (Name)

Budget Line 11-02 Technical advisory services (supply)

Position title: Technical expert on advisory services (fuel supply) Budget line 11-02

Type of contract: Service Contract

Duration of contract: 120 working days over the 36 month period

Objectives of work: To provide international expertise necessary to ensure the successful implementation of component 2.2 (demonstration project showing that risks and uncertainties of fuel supply can be reduced with a functional regional supply organization) Duties:  Together with local experts review the regional supply system proposed during the PDF B, and propose adjustments as necessary  Provide assistance for the preparation of the institutional, contractual and hardware requirements and assist in the preparation of the tender documents for the equipment and services to be purchased  Evaluate the tenders from suppliers and assist in the selection of suppliers  Monitor the implementation of the demonstration projects ensuring that they meet their intention of showcasing biomass energy potential  Troubleshoot and work to solve implementation barriers  Elaborate possible long-term mechanisms to support the biomass energy projects in conjunction with the other experts participating in the projects’ implementation.  To arrange a small study tour (for approx 10 Belarusian experts who will be involved in the fuel supply system to be set up under this activity) to countries in which effective fuel supply systems are being implemented (including at least 1 Eastern European country that is working on tacking biomass fuel supply systems). Expected Results: demonstration project showing that risks and uncertainties of fuel supply can be reduced with a functional regional supply organisation

Schedule of work: Start of activities: 2003 End of activities: 2006 Qualifications:  Academic and practical background in the forestry product sector and/or logistics  Extensive practical hands-on experience (a minimum of 10 years) in the arrangement and implementation of a regional biomass energy supply system  Relevant regional experience in the arrangement of biomass fuel supply systems  Demonstrated ability to adjust and tailor advice to local conditions  Good interpersonal skill and ability to transfer skills to local experts Special Terms:

INTERNATIONAL SUBCONTRACTOR

Budget Line 21 Twinning subcontract

Outputs 3 to 7 of the proposed project, comprised of replication and exit strategy activities will take place within the framework of a twinning arrangement with an international organisation. The rationale is to provide a coherent foundation linking and integrating these outputs and to establish a basis for long-term and strategic international co- operation well after the end of the GEF project.

This will take the form of twinning between the Project Management Unit (PMU) and a ‘Twinned Institute’ in another country. The foreign institute will act as the foreign hub, facilitating twinning activities between Belarus and the twinned country, strengthening the institutional capacity of the PMU and other Belarussian organisations in the facilitation and promotion of viable biomass energy. Activities focus on addressing awareness-raising needs, as well as technical and organisational needs to support the project activities.

For Output 1.4, which includes study tours, training workshops and secondments, the foreign institute will be the foreign facilitator, and will work closely with the PMU to identify the most suitable content. During other outputs, the twinned institute will act as advisor, providing international expertise to those implementing each output, and access to additional resources (information / contacts) where required.

Position title: Consultant services on twinning arrangements Budget line 21 Type of contract: Service Contract

Duration of contract: 12 working months over the 48 month period

Objectives of work: To provide the international expertise necessary to ensure the successful implementation of component B and C of the project Duties:  Assist the local marketing expert in the development of the project dissemination strategy, advising on awareness raising and capacity building activities based on international experience. In particular advise on how the proposed study tours can best be used to raise awareness of and enthusiasm for biomass energy systems.  Arrange a total of 4 to 6 study tours over the four-year project duration for groups of Belarusian stakeholders (policy, funding and operation of revolving fund, equipment supply, end-users) for the purposes of training, capacity building and awareness raising.  Provide and adapt materials which can be used as the basis for the promotional campaign  Facilitate contacts and exchanges between Belarusian organisations and International organisations  Prepare a review/survey of the international experiences and state of the art in information-based decision-making tools for national wood energy planning and the potential for this to be used in Belarus  Assist the project manager / GIS expert in the specification of local hardware, software, institutional, skill and informational requirements for the achievement of the required outputs  Advise local specialists in the development of the GIS system, evaluating progress, and development of models for interpreting results into concrete plans

 Prepare an objective synthesis of experiences in project outputs to be used as a basis for the policy assessment process  Assist the project management unit in the exploration of concrete policy options for removal of barriers to biomass energy  Attend the seminar / dialogue to provide the international perspectives on facilitative policies for biomass energy  Advise on foundation documents / contracts for the revolving fund ensuring that it is established soundly  Facilitate dialogue between the Biomass Fund, the project management unit and international donors for future contributions to the fund  Review the business plans / project portfolios developed by local experts ensuring that they comply with requirements of international donors  Compile the package which will be used in the marketing of the projects and make presentations to / hold negotiations with donors together with Belarusian counterparts  Draft sections of the best practice guidebooks in close co-operation with local specialists  Carry out an independent assessment of the barrier removal process identifying the next barriers to be removed and proposing scale-up activities  Assist local specialists in the development of the scale-up plan

Expected Results: The successful implementation of all components of the Project through twinning arrangements

Schedule of work: Start of activities: 2003 End of activities: 2007

Qualifications:  Excellent international network with access to organisations and expertise worldwide (including donors)  Wide experience in the elaboration of projects on wood and wood waste use as fuel, feasibility studies for such projects, marketing and promotion, business plan development, national programmes, and policy assessment. Good knowledge of international experience in this field  Relevant regional experience working with a governmental, private sector, and non-governmental organisations in Eastern Europe  Demonstrated ability to adjust and tailor advice to local conditions, engage with local stakeholders

Special Terms: Experience in former Soviet Republics

ADMINISTRATIVE ASSISTANCE

Budget line 13-01 Administrative assistant

Position title: Administrative Assistant to the Project Manager Budget line 13-01

Duration of contract: 48 months

Objectives of work: To provide assistance to the Project Manager, the UNDP office in Belarus and the Committee for Energy Efficiency in implementing the project

Duties:  ensures proper functioning of the project office, equipment, office supplies, etc.;  assist the programme manager and local and foreign consultants in conducting different activities within the framework of the project (training, seminars, procurement of tickets, rent of premises, arrangements on study tour, etc.);  during the visits of foreign experts bears the responsibility for their visa support, transportation, hotel accomodation etc;  organises procurement of office consumables;  organises control of budget expenditures by preparing payment documents, and composing financial reports;  keeping files with project documents, expert reports;  controls the usage non expendable equipment (record keeping, drawing up regular inventories);  contacts local and foreign experts and consultants about to inform them about the project details and changes.  Performs other duties under the instruction of the project manager.

Expected Results: Successful project office operation

Qualifications:  Higher education,  not less than 2 years experience in office administration, preferably UN projects  speaking and writing English,  computer skills. Special Terms: Citizen of Belarus

NATIONAL EXPERTS

Budget Line 17-01 National project manager

Position title: Project manager

Objectives of work: Successful management and implementation of the project

Duties: As leader of the Project Management Unit, and in close consultation with the Executing Agency, the Project Steering Committee and the UNDP, the project manager is responsible for day-to-day management, co-ordination and supervision of the implementation of the project activities. Specifically, the project manager is responsible for:  Overall co-ordination, management and supervision of project implementation  Preparation of detailed work plans for the project, and drafting of terms of reference for the subcontracts (in consultation with the Executing Agency and UNDP)  Organize and supervise workshops and training needed during the project  Identify national experts and institutions to work for the project (in close co- operation with the executing agency, project steering committee and the UNDP)  Supervise the work of the national and international experts working for the project  Liaise with relevant ministries, national and international research institutes, NGOs and other relevant institutions in order to involve their staff in project activities, and to gather and disseminate information relevant to the project  Prepare periodic progress reports of the project, measuring project impact against the project indicators given in the project planning matrix  Monitor validity of project assumptions and in dialogue with the project steering committee and the UNDP adapt the activities so as to ensure project success  Control expenditures and ensure an adequate management of the resources provided for the project Conduct negotiations on co-operation with the government and international actors and financing instructions active in Belarus in order to identify and mobilize resources Expected Results: Project implemented, demonstration sites operating, revolving fund established Schedule of work: Start of activities: 2003 End of activities: 2007 Qualifications:  A master degree equivalent in an academic area directly relevant to energy,

environment, and sustainable development  A minimum of 10 years working experience in the area of energy, energy efficiency and biomass energy  Extensive experience with project and corporate management, co-operating with project personnel including government officials, scientific institutions, NGOs, private sector and international organisations, and a demonstrated ability to manage projects of this kind and complexity. Experience in management of international projects.  Excellent interpersonal and training skills  Good computer skills  Fluency in both Russian and English. Special Terms: Citizen of Belarus Duty Station: UNDP, Minsk

Supervisor: National Project co-ordinator, First Deputy Chairman of the Committee on Energy Efficiency of Belarus (Name and Title) Subscriber: (Name)

Budget Line 17-02 Technical assistant to project manager

Position title: Technical Assistant to Project Manager

Objectives of work: Technical assistance in successful project management and implementation

Duties:  Assistance the project manager in day-to-day project implementation activities and project management. This is a technical position and this assistant will be delegated technical activities, and in the process learning from the project manager  Prepare terms of reference for national experts, advisors, trainees and contractors, study tours, training courses  Coordination of foreign and local experts activities  In coordination with UNDP office prepare technical bidding documents for procurement goods and services for demonstration sites  In consultations with local authorities and local subcontractor identification of investment projects portfolio  Management of other technical aspects of the project  Overall technical supervision of project implementation

Expected Results: Demonstration sites are successfully operating, data bases and GIS are completed and functioning

Qualifications:  A master degree equivalent in an academic area directly relevant to energy, environment, and sustainable development  A minimum of 5 years working experience energy, preferably in biomass energy  Experience with project management  Excellent interpersonal and communication skills  Good computer skills  Fluency in both Russian and English.

Special Terms: Citizen of Belarus

Budget Line 17-04 Technical advisor (combustion)

Position title: Technical expert on combustion Budget line 17-04

Objectives of work: Successful management the implementation of the boiler conversion demonstration projects (output 1). Duties:  Review and evaluate the feasibility studies and investment proposals prepared during the PDF B,  Evaluate market of wood fired boilers and steam turbines in Belarus, Russia and foreign countries in terms of price and quality  Participation in the full technical design of the systems and the tender documents for the equipment and services to be purchased  Evaluate the tenders from suppliers and together with the project manager and Executing Agency select preferred suppliers  Monitor the day to day implementation of the demonstration projects  Troubleshoot and work to solve implementation barriers  Other duties relating implementation of boiler conversion demonstration sites  Prepare proposals for combustion technologies and equipment relating the portfolio of new projects Expected Results: Demonstration projects showing that wood energy is modern, clean, versatile, cost- effective and efficient are implemented

Qualifications:  A master degree equivalent in an academic area directly relevant to energy, combustion and environment.  Extensive knowledge of state-of-the-art biomass energy technologies and experiences and lessons learned in Belarus and/or other countries with biomass energy projects;  A minimum 5 years working experience in boiler houses design,  Practical experience with implementing biomass energy projects in Belarus and/or abroad;  Good interpersonal and training skills;  Ability to work in both Russian and English

Special Terms: Citizenship of Belarus

Supervisor: Project manager, National Project Co- ordinator

(Name and Title) Subscriber: (Name)

Budget Line 17-05 Technical advisor (supply)

Position title: Technical expert on fuel supply Budget line 17-05 Type of contract: Service Contract

Objectives of work: Successful management the implementation of the biomass fuel supply demonstration projects (output 1). Duties:  Review and evaluate the feasibility studies and investment proposals prepared during the PDF B,  Evaluate wood waste resources and existing market of wood fuel in Belarus in terms of wood fuel availability, possible suppliers, quantity and quality,  Review the regional supply system proposed during the PDF B, and propose adjustments as necessary  Prepare the institutional, contractual and hardware requirements and preparation of the tender documents for the equipment and services to be purchased for wood fuel processing and supply,  Evaluate the tenders from suppliers and select of suppliers in close co- operation with the project manager and executing agency  Monitor the implementation of the demonstration projects ensuring that they meet their intention of showcasing biomass energy potential  Troubleshoot and solve implementation barriers  Other duties relating implementation of biomass fuel supply demonstration site,  Prepare proposals on technologies of fuel supply for the portfolio of new projects Expected Results: Demonstration project showing that risks and uncertainties of fuel supply were reduced with a functional regional supply organization

Schedule of work: Start of activities: 2003 End of activities: 2007 Qualifications:  Academic and practical background in the forestry product sector and/or logistics  Good knowledge of forest harvesting and wood processing technologies and equipment,  Extensive practical hands-on experience relevant to the project  Practical experience with implementing biomass energy projects in Belarus and/or abroad  Demonstrated ability to develop economically sustainable activities in Belarus (ie. with entrepreneurial experience)  Good interpersonal and training skills;  Ability to work in both Russian and English

Special Terms: Citizenship of Belarus

Budget Line 17-06 Marketing advisor

Position title: Marketing advisor Budget line 17_06 Type of contract: Service Contract

Objectives of work: Supervising and supporting the market analysis, information dissemination, facilitating the public participation in the elaboration and development of the biomass energy projects. Duties:  Review experiences and lessons learned from the realised wood biomass energy projects in Belarus and abroad and their relevance to information dissemination, public participation in and public acceptance of biomass energy projects  Develop information dissemination strategy and marketing campaign to increase awareness and understanding of biomass energy technologies at the local level, including information on their benefits and constraints  Supervise and organise the information dissemination and marketing campaign as designed above, including the development of appropriate materials, the organisation of public hearings etc., and other activities as necessary  Carry out surveys at the end of year 2 and 4 on participants in the study tours to assess the impact of the awareness raising campaign, and make improvements as required  Assess the awareness of biomass energy in key stakeholder groups  In close consultation with the other experts working for the project, elaboration of the existing information and other related barriers to the realisation of biomass energy activities; Expected Results: Dissemination and awareness campaigns are implemented aiming to reduce information and perception barriers Schedule of work: Start of activities: 2004 End of activities: 2007 Qualifications:  Extensive knowledge of the state-of-the-art methodologies, strategies, tools and practices for conducting market surveys, market analysis and information dissemination and marketing campaigns for the introduction of new technologies and commercial products;  Extensive experience and demonstrated ability to conduct market surveys, market analysis and information dissemination and marketing campaigns in

Belarus;  Good interpersonal and training skills;  Good computer skills;  Fluency in Russian, ability to work in English highly desired  Experience in and familiarity with the energy sector, biomass and other renewable energy and energy efficiency technologies is considered a plus. Special Terms: Citizen of Belarus

Budget Line 17-07 Geographic Information System elaboration

Position title: Expert on GIS system Budget line 17_07 Type of contract: Service Contract

Objectives of work: Development the GIS system to facilitate the implementation of integrated and co- ordinated approaches for the planning of replication, and providing tools for financial decision-making.

Duties:  Carry out review of the current GIS and Resource Management capabilities in Belarus and identify possibilities to build on this capability  Supervise the review of international experiences in information-based decision-making tools for national wood energy planning and assist with the assessment of the potential for this to be used in Belarus  Develop detailed implementation schedule for the Information System output  Supervise the provision of training on GIS systems ensuring that it is relevant to Belarusian circumstances and adapted as necessary.  Manage the development of the data model, the data gathering and the input process according to the requirements for the GIS system  Working with other local specialists and the international experts to develop planning scenarios (proposals) based on the developed GIS system for the use of the Committee on Energy Efficiency  Expected Results: GIS system is developed and operating

Schedule of work: Start of activities: 2003 End of activities: 2007 Qualifications:  Extensive knowledge of local Belarusian infrastructure and resource planning approaches and practical implementation;  Extensive experience and demonstrated ability to work in a multi-disciplinary

environment and make use of multi-criteria decision-making tools;  Good interpersonal and training skills;  Good computer skills;  Fluency in Russian, ability to work in English highly desired  Experience in creating digital GIS datasets through digitizing paper source documents, data-entry, editing, scanning and developing datasets within a GIS environment would be a considerable advantage  Experience in and familiarity with the energy sector, biomass and other renewable energy and energy efficiency technologies is considered a plus. Special Terms: Citizenship of Belarus

NATIONAL SUBCONTRACTOR

Budget line 22 Investment projects pipeline

Position title: Consultant services on development of a pipeline of investment projects Budget line 22 Type of contract: Service Contract

Duration of contract: 24 months period

Objectives of work: Develop a portfolio of 7-10 investment projects Duties:  Select using the data base of boiler houses 15-20 potential sites undertake a technical and economic feasibility analysis of the identified boiler energy efficiency measures;  Undertake energy audits of selected sites and identify availability of wood waste necessary for conversion  Estimate the total investment needs to realize the economically feasible potential to reduce the energy production at the demand side;  Estimate the total heat demand and the heat load density of the selected project site/district before and after the realization of the (economically feasible) boiler conversion energy efficiency measures;  With respect to the foreseen heat demand and heat load density analyze the technical, economic and environmental feasibility of the different biomass fuel supply options and the measures to improve the energy efficiency of the fuel supply side in general;  Prioritize the different fuel supply side measures with respect to their technical, economic, financial and environmental feasibility;  Identify the existing barriers to the realization of the identified fuel supply side energy efficiency measures;

 Present and discuss the results of the analysis, with an objective to define the framework and to select the measures and technologies for conversion to wood fuel. Expected Results: 7-10 sites for conversion to wood fuel are identified

Schedule of work: Start of activities: 2004 End of activities: 2006 Qualifications:  wide experience in making energy audits, elaboration of energy efficiency and biomass projects, feasibility studies for such projects, good knowledge of international experience in this field ,  Availability of qualified personnel.

Special Terms:

ANNEX N: OUTLINE OF COORDINATION EFFORTS WITH THE WORLD BANK

The project brief was actively discussed with World Bank staff, and UNDP held discussions both with the GEF Secretariat and World Bank staff following the submission of the brief to the GEF Council to determine the appropriate scope of cooperation under the project. The results of these discussions were as follows:

First, it was determined that direct integration of the proposed UNDP-GEF work into the ongoing World Bank loan would not be possible. The World Bank Social Infrastructure Retrofitting Project (SIRP) focuses only on certain institutional facilities in the social sector, such as schools, nurseries, hospitals, etc. The Loan Agreement between the Government of Belarus and the World Bank does not allow funds to be used for any other sites or purposes. These terms and conditions would limit the impact of the UNDP project to demonstrate the benefits of boiler conversion across the market. A general description of the SIRP has been included in the project document (see page 10).

Second, the World Bank had also specifically proposed using GEF grant funds to purchase and install equipment to retrofit a boiler house at a health care facility in Belarus. The concern of the project team was that a grant for equipment would work at cross-purposes with the concept that biomass boiler conversions could be cost-effective and therefore supported by financial mechanisms such as loans. There was also some concern that it would not be fair to offer a grant to one facility while asking other pilot investors to take loans for the same purpose. The project proponents felt that loans would be more effective in addressing both financial barriers (more capital would be available under a loan scheme) and awareness barriers (a working fund would send a powerful message to potential investors and lenders about the viability of these investments).

The project team and UNDP-GEF have proposed the following solution: the proposed health facility project will be included under consideration for support through the revolving fund. This solution would allow the facility to be a candidate for the capital that will be generated from repayment to the revolving fund. The project might be considered sooner if discussions on attracting additional capital for the fund are successful. Using this approach, the facility would gain access to funding, and the revolving fund would receive a project that has already reached an advanced state of preparation. This proposed solution would seem to be mutually beneficial while also remaining consistent to the principles of market transformation. Furthermore, it would also be possible for other promising projects identified during the course of the SIRP to be considered for funding in this manner.

All project stakeholders agreed that technical cooperation would be an important area for joint work, and that it would be mutually beneficial to exchange technical experience from both projects. For example, a number of the SIRP project sites are equipped with small boiler houses (200 – 500 kW), which will be converted to local fuels that include wood fuel. The UNDP-GEF project will focus on medium and large boiler houses. It is clear that each project will benefit from the experiences of the other, as the range of technologies for conversion will be slightly different. In addition, the emphasis on clean-burning technologies meeting stringent environmental requirements has been noted at the suggestion of the World Bank. Finally, it is anticipated that results from the SIRP project would be included in the training and outreach activities of the UNDP-GEF project, and the UNDP-GEF project activity on the development of a biomass resource atlas for Belarus should also benefit the SIRP in turn.

A World Bank SIRP project representative will be included in the Steering Committee of the UNDP/GEF Project what was indicated in the Prodoc (see page 30 of the Prodoc). A Memorandum of Understanding between the UNDP and the World Bank is, therefore, not seen to be necessary to ensure close coordination between the two agencies.

ANNEX O. REVOLVING FUND DEFINITION

1.1 Definition and Description of the RF Administrator

In addition to the details on financing to set up the revolving fund (RF) and preliminary investment projects conditions, which are presented in Output 3.2 of the Project Document, the following information covers the RF’s political and administrative status.

The State Enterprise Belinvestenergozberezhenie (full name Investment and Consultancy National Unitary Enterprise Belinvestenergosberezhenie) has been identified as the institution to administer the Revolving Fund to be established under the project.

The Belinvestenergozberezhenie enterprise was founded in 1998 by the State Committee on Energy Efficiency following a decree of the Council of Ministers2 demanding its establishment. By its legal charter Belinvestenergozberezhenie is a nation-wide state enterprise under control of a single founding agency (State Committee) established according to the Civil Code and Law on Enterprises of Belarus for coordination of large investment projects in the area of energy efficiency. The Legal Charter of the Belinvestenergozberezhenie allows for establishment of subsidiary bodies and new legal entities (of which the Revolving Fund is going to be a one).

The summary of the mission of Belinvestenergozberezhenie (as per its Legal Charter) is: - economic activity under international and national projects, including those funded by the World Bank and other financial organizations, in the area of energy efficiency; - pooling and re-distribution of national funding for energy efficiency enterprises, including those funds of Belenergo Concern and other stakeholders assigned as co-financing to the World Bank project. - In order to enable implementation of its mission Belinvestenergozberezhenie does: - management and coordination of international projects co-financed by the World Bank and other international financial donors - managerial control over the targeted and correct use of international funds and over the time-tables of international projects, - day-to-day financial and technical control over international projects, - consultancy to national stakeholders on preparation of Terms of References, business plans, bidding competitions, planning and implementation of projects and programs in the area of energy efficiency, and - development of business plans for projects on highly efficiency use of fuel.

In support of the above activities, Belinvestenergozberezhenie is additionally licensed to implement: - various forms of mediation in financial transactions in the area of energy efficiency (activity type # 65239 in the official register), - other activities to support financial mediation (# 67139), - consultancy to managers and staff of private and public enterprises, PR activities, policy advice for planning, organization and support of effective use of information for managers, targeted consultations for managers (#74140-01), - energy audits of enterprises (74140-02).

The operations of the enterprise are financed by the State Committee on Energy Efficiency as well as from support costs and income from various investment projects the enterprise operates. The founder (the State Committee) has the following responsibilities and control functions over Belinvestenergozberezhenie:

2 Annual program funds of the State Committee amount to USD 30 million on average

- approves the Legal Chargter of Belinvestenergozberezhenie, including its amendments and additions, defines and amends the mission and types of activities of Belinvestenergozberezhenie, - assigns and dismisses the Director of the enterprise, - controls the use and safety of non-expandable items belonging to the enterprise, - has final decision-making authority about creation of subsidiary bodies, - approves the annual report of the enteprise, - conducts regular financial and administrative checks of the enterprise, and - approves decision on liquidation and/or reorganization of the enterprise.

Today Belinvestenergozberezhenie has 20 staff, including highly qualified investment equipment procurement officers, national and international contract officers, crediting and investment techniques officers, etc. Regular training is arranged for the specialists of the enterprise. Thus, in May 2003 two experts on procurement will be trained for 3 weeks in Turin (Italy).

One of the key projects which the agency was recently assigned to handle is the World Bank Energy Efficiency for Social Infrastructure Loan (a USD 40 million plus 4-year project, including 22.6 million of the World Bank financing). The WB project covers 350 social infrastructure sites all over Belarus As can be seen, not only the mandate, but the staff qualifications and financial solvency of the enterprise match the objectives of the RF establishment and minimize the financial risks.

1.2 Scenario for establishment and empowerment of the RF

Technically, once the project is cleared (since the GEF component is a key bid for the fund), the supervising agency – the State Committee for Energy Efficiency will issue a decree assigning Belinvestenergosberezhenie to administer the RF. Based on the Legal Charter, a subsidiary body (Revolving Fund) will be established as an separate legal entity assigned to Belinvestenergozberezhenie. The RF will act on the basis of its own Charter (the RF Charter), the draft of which has been developed over the course of PDF B. In preparation for the establishment of the RF during the PDF B stage, the legislation and procedural background was studied in full, the legal and administrative grounds for establishment of the RF under Belinvestenergozberezhenie (once the funds were cleared) were found fully satisfactory.

The draft RF Charter3 covers the following:

Definition of the RF. State Unitary Enterprise will be established by Belinvestenergozberezhenie and will act as a separate legal entity, with its own bank accounts, financial and programmatic responsibility, its own obligations, presentation of its interests in court, etc.

In accordance with the legislation of Belarus the RF will be assigned the mission to implement international and national programs which include pooling and reallocation of investment resources of the state, as well as international organizations.

Objectives and Activities. The key objective of the RF is to ensure financing (on the payback terms) of programs in the area of energy efficiency, replacement of fossil fuel by alternative fuels, including biofuel.

The RF should mediate investment (on the payback terms) to enterprises of any type of ownership with the purpose of increasing energy efficiency, decreasing use of fossil fuel, replacement of such fuels by alternative fuels, including wood and woodwaste. Specifically, in accordance with the official register of activities of Belarus, the RF will:

3 The text of the RF Charter is available in Russian. For the purpose of its presentation here key extracts were translated to English.

- undertake monetary and financial mediation (651, 652, 67), including specifically for securing funding and payback: - Finalization of legal contracts between all stakeholders involved in the use of RF funds, including finalization of pay-back arrangements; - Calculation, discussion and approval with each stakeholder of cashflows and timetable for payback; - Control over the correctness of funds allocation and use; - Control over observance of the payback timetables; - Control over targeted use of finance achieved by recipients; - Defining sanctions and their application when needed. - undertake consultancy and installation of software related to the mandate (7220) - render information services in accordance with legislation of Belarus (741) - render assistance to enterprises on preparation of business plans (7414) - render assistance to clients on check and control of the correct use by subcontactors of investment funds (7420).

The role of Belinvestenergozberezhenie as a founding agency. The founding agency: - approves the Legal Chargter of Belinvestenergozberezhenie, including its amendments and additions, defines and amends the mission and types of activities of Belinvestenergozberezhenie, - assigns and dismisses the Director of the enterprise, - controls the use and safety of non-expandable items belonging to the enterprise, - has final decision-making authority about creation of subsidiary bodies, - approves the annual report of the enterprise, - conducts regular financial and administrative checks of the enterprise - approves decision on liquidation and/or reorganization of the enterprise.

Additionally, the draft plan of launching activities of the RF stipulates: - financial transaction arrangements: opening of a special bank account to enable full transparency of transactions, development of technical procedures for issuance of and payback of grants, - RF human resource management: hiring of personnel to ensure highly qualified and dedicated staffing of the RF, - Development of Operational Manual on the basis of the charter to ensure that each detail of the RF operationsis identified, studied and duly stipulated, - Relationships with other (state and private institutions).

The draft Charter was discussed with Ministry of Economy and Ministry of Finance and it has been decided that once the contribution of the project towards the RF is cleared, a Decree of the President of Belarus will be drafted and enforced to confirm all the administrative and financial arrangements about its operation and enable preferential taxation of its operation.

1.3. Transparency of the RF

In order to prevent misuse and corruption a World Bank system of management of control and reporting will be introduced to ensure transparency of operations of the Revolving Fund. This system is well-known as one of the strictest compared to other systems of anti-corruption protection. It envisages among other things: - full transparency of all operations related to bidding, starting from preparation of the invitation package and ending with procedures for bid selection and assigning contracts; - strict reporting at each stage of cooperation with potential subcontractors, as well as when approving documents at each stage of the bidding competition and subsequent financial transactions through the RF; - annual independent audits of RF.

The staff of Belinvestenergozberezhenie includes specialists with long experience in the use of such control and reporting systems.

Apart from the internal reporting system and external audits, the operations of the RF will be subject to inspections used in the banking sector of Belarus, which includes: - meticulous study of financial viability of the to-be funds recipient, including evaluation of its fixed and liquid assets, presentation of guarantees; - strict analysis of each business plans, selection of the best plans and the most reliable to mitigate financial risks; - production of legal procurement-delivery contracts to fix the price and other terms, as well as contracts on RF loan payback.

Additionally, in terms of transparency and corruption issues, it is important to note that within the former Soviet Union, Belarus is consistently rated as the least corrupt state, which is largely owing to a strict system for state control (in fact bureaucratic barriers resulting from controls are consistently mentioned as a much greater deterrent than corruption to foreign investment and national business development). The operations of the RF will be fully subject to reporting and inspections of the State Committee on Energy Efficiency, National Bank and Committee on State Control. The latter has a mandate to inspect use of RF funds by the state as well as by private enterprises and individuals, very much reducing chances of corruption (furthermore our experience is that Government is especially careful that international funds are managed honestly and transparently).

1.4. Financial viability, cash flow, and projected solvency of the RF

The RF is expected to have life time of at least 21 years as indicated in the cash flow analysis below (for the purpose of cash-flow analysis a 2.5% discount rate was assumed with a grace period of 1 year) The RF will be replenished from Innovation Fund of the State Committee on Energy Efficiency. The participation of the Committee will be a grant to the RF, which will not need to be returned to the Innovation Fund (projections for Committee’s grants to the RF beyond year 9 will be made in course of RF monitoring and evaluation exercises in the future).

The RF cash flow analysis was drawn for 18 years and it assumes that the Committee on Energy Efficiency continues to grant matching funds beyond the project proportional to the income of the RF made up through payments. Thus, the Committee on Energy Efficiency remains firm in its decision to match the USD 1.5 million GEF contribution to the EF by at least the equivalent USD 1.5 million grant from its Innovation Fund.

The cash flow also shows that the management of the fund in the beginning will be covered from the UNDP-GEF project. Further on, its management will be covered partially from interest earned by the RF, but mainly from consultancy services on business planning, etc. (which is one of the businesses the RF will do according to its Charter). The interest will be pooled and reserved mainly for force-major conditions (such as default on specific loans, etc.).

Map of cash Inflows and Outflows in case of 2,5% interest rate and 1 year grace period (USD) Year N Site name and Loan disbursement (green) and Payments back to Revolving Fund (red), including interest (yellow) Amount of GEF loan 0 1 2 3 4 5 6 7 8 9 10 11 12 1 Molodechno poultry farm Interest 5000 8750 8750 7000 5250 3500 1750 Loan 350000 Debt 200000 150000 70000 70000 70000 70000 70000 2 Vileika "Stroidetal" Interest 5000 10000 10000 8000 6000 4000 2000 Loan 400000 Debt 200000 200000 80000 80000 80000 80000 80000 3 Sanatorium "Radon" Interest 3250 3250 2600 1950 1300 650 Loan 130000 Debt 130000 26000 26000 26000 26000 26000 4 Volat - 1 Interest 3250 3250 2600 1950 1300 650 Loan 130000 Debt 130000 26000 26000 26000 26000 26000 5 Farinovo Interest 7500 7500 6000 4500 3000 1500 Loan 300000 Debt 300000 60000 60000 60000 60000 60000 6 "Molodechnoles" Interest 5750 5750 4600 3450 2300 1150 Loan 230000 Debt 230000 46000 46000 46000 46000 46000 Total Repayment to RF from demonstration sites 106000 308000 308000 308000 308000 202000 Committee's Contribution to RF 106000 308000 308000 308000 308000 202000 7 Interest 5300 5300 4240 3180 2120 1060 New RF loan Debt 212000 42400 42400 42400 42400 42400 8 Interest 15400 15400 12320 9240 6160 3080 New RF loan Debt 616000 123200 123200 123200 123200 123200 9 Interest 16460 16460 13168 9876 6584 3292 New RF loan Debt 658400 131680 131680 131680 131680 131680 10 Interest 19540 19540 15632 11724 7816 3908 New RF loan Debt 781600 156320 156320 156320 156320 156320 11 Interest 22832 22832 18266 13700 9132 New RF loan Debt 913280 182656 182656 182656 182656 12 Interest 21450 21450 17160 12870 New RF loan Debt 858000 171600 171600 171600 13 Interest 15908 15908 12726 New RF loan Debt 636256 127251 127251 14 Interest 19138 19138 New RF loan Debt 765456 153090 15 Interest 19240 New RF loan Debt 769507 16 Interest New RF loan Debt 790917 17 Interest New RF loan Debt 18 Interest New RF loan Debt 19 Interest New RF loan Debt 20 Interest New RF loan Debt Interest total Interest 23250 38500 41150 48850 56550 64250 71950 77010 77012 77014 77014 RF management expenses 5000 6000 18000 27600 27600 27600 33600 33600 33600 33600 39600 39600 39600 Source of funding GEF GEF GEF GEF/RF RF RF RF RF RF RF RF RF RF Expected RF incomes due to consultant services 55000 55000 68000 68000 75000 81000 81000 90000 95000

Notes: RF Loan 127 Borrower's payment back to RF Interest payment to RF Biomass Energy for Heating and Hot Water Supply in Belarus Under a normal case scenario, if the Committee on Energy Efficiency matches the RF contribution of the GEF as currently planned, the RF will be sustainable in year 6 of RF’s existence. Under the worst case scenario, sensitivity analyses based on the presumption of no replenishment from the State Committee and a discount rate of 2.5% show that the RF will have to operate for at least 9 years to become financially viable.

1.5 Financial sensitivity analysis for the RF

Influence of the return rate on NPV

The data above indicates, that if the RF operates over 9 years, it will remain solvent and self-sufficient even if the discount rate is higher (2.5%).

Influence of non-payments on the NPV

If, for example, one of the largest recipient (Stroidetali from Vileika) fails to pay back the loan, the fund will suffer some drawback and will spend additional 2 years to gain self-sufficiency and solvency (i.e. its full payback period is increased to 11 years).

In case a smaller recipient fails (e.g. Radon), only one additional year will be required to gain self- sufficiency (10 years).

Analysis also shows that delay in the payback is not extremely sensitive for the financial figures of the RF.

The key to low sensitivity both to the non-payback and delays in payment is the guaranteed financial contribution of the Committee on Energy Efficiency. At present, the intention of the State Committee is to invest about USD 1.5 million to funds operations once the GEF grant is released.

1.6 Dealing with default problems.

Representation of its interest in court is a legal responsibility and right of any legal entity operating in Belarus.

The loan agreements between the Belarusian RF enterprise and the loan-beneficiary will be a legal instrument for the RF to give a loan and for the recipient to take and pay it back to the RF. Specific terms, including non-payment penalties - will be reflected in the loan agreement. The RF enterprise will check the established payback schedule on a quarterly basis. On the default subject the loan agreements will envisage the following:

According to the legislation of Belarus, in case of default the lending enterprises can turn to economic court to legally seek return of the loan and interest. The Law of Belarus protects the rights of lending organizations and investors. The borrower, according to the legislation, is responsible for full repayment of the loan as it was specified in the loan agreement. Appropriation of assets is also envisaged. The final decision as to the type of penalty will be decided on by the economic court. The loan agreements will stipulate guarantees for payback, including asset appropriation and other penalties. In order to draw legally correct loan agreements a lawyer will be one of the personnel of the RF enterprise.

Apart from court action (and before it) the loan agreements will also stipulate the following: - increase of the soft interest to the level of commercial bank currency loan interest rates (currently 15-18%) - having financial and energy audits at the enterprise in order to analyze the efficiency of energy use. In most cases inefficient use of energy results in financial inefficiency. If the audit reveals misuses of energy, the Committee on Energy Efficiency (and this will be delegated to the RF

128 Biomass Energy for Heating and Hot Water Supply in Belarus enterprise) will fine the company following a direct forced bank transfer procedure without court action - putting the company in the “black list” which in the future will be deprived of opportunities for RF funding and other soft funding for energy efficiency measures.

The loan agreements, naturally, can only be drawn with each beneficiary once the funding of the RF is confirmed and the RF is operationalized.

ANNEX P. REPLICATION PLAN SPECIFICS

In addition to the replication potential (market of suitable boilers, woodwaste supply and demand) and the GHG emission reduction figures presented in the main body of the Project Document, which are hoped to be achieved in and beyond the project once its outcomes are widely replicated, the following is a description of how exactly such replication will be realized.

The replication plan will be fully in line with the Strategy for Wide Scale Replication of Wood and Wastewood Use as Fuel in Belarus. The Strategy was a product of the PDF B stage facilitated by the GEF. Specifically, it mentions the following steps:

- Establishment during the GEF project of a separate unit (a RF with its administrative mechanism attached to Belenergozberezhenie of the Committee on Energy Efficiency of Council of Ministers of Belarus) to coordinate large-scale replication of biomass use (primarily wood) in the Republic of Belarus;

Project link: The twinning arrangement, which will be established in the project document, will not only help establish the RF in Belarus, but also guide it all the way through its operations in and beyond the project, replicating the best practices and lessons learned through publications, workshops, seminars in and outside of Belarus.

- To enable wide-scale replication of experience, the GEF project team will facilitate preparation and submission of a draft Council of Ministers’ Decree on Large-scale Utilization of Biomass as Fuel by Various Sectors of Industry, covering the specific conditions of each industry, building on the monitoring data of the GEF project and inventory processes;

Project link: The project team, through its Steering Committee and expertise will facilitate drafting of the decree and arrange for participatory consultations before its adoption. The Decree, once passed, will be the key replication element of the project, paving way for wide use of wood and wood waste as fuel in Belarus.

- To support the Decree a National Program for large-scale utilization of wood as fuel will be produced in coordination and with support from key stakeholders, including the ministries of economy, finance, forestry, natural resources, communal services, State Committee on Energy Efficiency, industries, etc. The Program will include specific targets in terms of woodfuel use in various industries and markets, aimed at collectively achieving increased reductions in the emissions of GHG;

Project link: The Steering Committee of the project supported by the experts, will be assigned by the State Committee on Energy Efficiency the lead group for planning and drafting of the Program and a mechanisms to ensure participatory approach to drafting the Program. Together with national authorities, sectoral stakeholders and international partners – including the World Bank – the justification and long-term plan for Program implementation will be drafted, including planning of new projects for the Revolving Fund. Serving as a lead agency on this state-level task means not only national ownership, but also the power and responsibility for replication of its outcomes beyond project life.

- Contributions will be strengthened towards the RF from special centralized investment funds, innovation funds and other financial sources provided by any party interested, legal entity or person, including credits granted by local or international institutes;

Project link: Long-term planning of RF financing has started in the PDF B phase and will be strengthened in the very early stages of project implementation. The financial solvency and

130 Biomass Energy for Heating and Hot Water Supply in Belarus sensitivity analysis so far indicate that with guaranteed participation of two agents – GEF and the State Committee of Energy Efficiency – the RF becomes fully self-sufficient in 9 years since its launch. Continued support of the State Committee beyond that period – e.g. on a 20-year planning scale – makes the fund not extremely sensitive neither to non-payment, nor to delayed payment of debt4.

- Continued inventory of small and medium-sized boiler houses, primarily those fired by coal and heavy oil and belonging to communal services or state entities, with the feasibility study of their possible upgrading and conversion to woodfuels;

Project link: This will build on the GIS introduction (done in the project) to effectively monitor the development of the replication strategy nation wide. Extensive support of local authorities in this work will be achieved by the project.

- Development and implementation of new projects, building on the process and outcomes of the GEF project with the purpose to show not only the modern technologies of combustion (gasification) of biomass of various moisture content in highly automated state-of-the-art boiler houses, but also the modern technologies and equipment for effective production, storage and transportation of wood waste;

Project link: In order to enable this, local project experts will analyze the available boiler-house data base, conduct additional audits of potential new sites and develop business plans for the Revolving Fund beyond the project.

- Allocation of additional resources for provision of organizational, scientific and technical expertise for woodwaste use projects building on the process and outcomes of the GEF project;

Project link: The project team will work with State Committee on Energy Efficiency to help streamline, priorities and identify additional resources inside and outside the country to improve organization, scientific and awareness raising activities on energy efficiency at the national level, including workshops, seminars, trainings, GIS use, study tours, etc.

Corresponding sections will be introduced into the National Program for Large-Scale Utilization of Wood and Woodwaste.

- Further improvement of legal framework covering all types, prices and tariffs, forms and methods of accountability for woodfuels, emission standards for boiler houses, etc., all building on the outcomes of the GEF project;

Project link: The expertise, equipment and software gained for this purpose in the framework of the GEF project (e.g. procurement for emission measurement equipment) will continue to serve its purpose fully beyond the project when replication is being implemented.

- Further improvement of favorable conditions for the wood fuel supply market in the country;

Project link: The Government is linking the development of wood fuel supply market very much to such companies as Molodechnoles, which is one of the sites in the project. Legal and administrative preferences are being envisaged to remain operational through the Revolving Fund beyond the project. Opportunities for expanding energy forests in Belarus will be seriously analyzed and reported to the State Committee on Energy Efficiency.

- Launch of new and continued implementation of various international project activities addressing the issues of energy efficiency, utilization of biomass including different types of

4 More data on financial solvency and sensitivity analysis is presented in the attachment on Revolving Fund definition. 131 Biomass Energy for Heating and Hot Water Supply in Belarus woodfuels (chips, pellets, briquettes, wood processing waste, etc.) for the purposes of heat supply (projects of the World Bank, UNECE, etc.);

Project link: Already now Belinvestenergozberezhenie has experience of synergetically successful management of UN ECE and World Bank initiatives. The Revolving Fund and strengthened Belinvestenergozberezhenie will become a substantial benefit for obtaining new and additional international assistance beyond the project.

- Awareness-raising campaign in mass media about the benefits of wood compared to fossil fuels;

Project link: Poject-related workshops, trainings, seminars, study tours, publications etc. will be organized in a way so as to streamline and prioritize the PR and awareness raising activities currently conducted by the state in this area, as well as improve use of resources and draw new resources both from inside and outside the country. This project link is also equally relevant for the following elements of the Strategy: - Preparation and implementation of workshops, arrangement of working meetings (for managerial personnel of industries, enterprises and organizations, technicians, etc.); - Training for Belarusian decision-makers and experts (possibly abroad), experience sharing with foreign partners about modern wood fuel utilization technologies and equipment; - Assisting customers who could potentially sponsor construction of biomass-fired boiler houses in conduction of express audits with identification of optimum construction (reconstruction) variants, elaboration of business plans, execution of bank credit agreements, etc.

This is just a summary of the Strategy which in the course of the PDF B was discussed and successfully adopted by the National Intersectoral Committee on Energy Efficiency (including all key ministries and state committees). The adoption means that the Strategy has become a document, which is obligatory for observance by the relevant national stakeholders.

A more detailed plan for replication will be developed in the project and become part of the Bill and National Program (mentioned above) which – if the project is launched – will be produced by the Government in the course of its implementation. This way both the legislation and the national programme will be designed in ways, that address the rapidly changing economic and political circumstances in Belarus (and in other countries in transition), which make inappropriate the traditional detailed 10 – year plans. It is hoped that the GEF project, will contribute to rapid positive changes in the energy efficiency sector of the country, and the replication plan – as expressed not only in the project document but also in the Bill and the National Program (see above) – will largely build on this positive dynamic.

However, already now, in anticipation for the GEF project’s approval, the first step for implementation of the Strategy has been made: a number of proposals to the Government of Belarus were developed by the State Committee on Energy Efficiency. All of them were subsequently adopted by the Council of Minster’s Decree #1820 dated 27 December 2002. This Decree prescribed expansion of the use of wood and woodwaste as fuel over the coming two years. It envisages 600,000 tons of coal equivalent of woodwaste to be used additionally to what was approved earlier in the next two years.

This is a clear indication that the PDF-B of this project has already resulted in policy decisions favoring wide expansion of the woodwaste and wood use as fuel in Belarus. The Government is very hopeful that the GEF assistance for this purpose will continue. In this respect it is worth mentioning that the timing for the Council of Ministers’ Decree was specifically coordinated with the potential launch date of the GEF project, after it was approved by the GEF Council in the fall last year, and the Government at this stage is still hopeful that its anticipation of GEF assistance will proved to be justified.

ANNEX Q. COMMITMENTS OF PROJECT BENEFICIARIES

The contractual details for the investment projects are expressed in Letters of Cooperation presented to the project by the State Committee on Energy Efficiency and the corresponding partners. The summary of their participation is presented in the table below:

# Project stakeholder Type of commitment Subject of the Size of financial made commitment contribution to the project committed, USD 1. State Committee on Letter of Interest Obligation for co- 2 130 000 – in cash Energy Efficiency financing of project 62 000 – in kind activities, including the Revolving Fund 2. Stroidetali Letter of Intent Co-financing commitment 350 000 – in cash 450 000 – in-kind 3. Molodechno Poultry Letter of Intent Co-financing commitment 400 000 – in cash Farm 460 000 – in kind

4. Radon Letter of Intent Co-financing commitment Depending on the contribution of GEF and the State Committee 5. Volat 1 Letter of Intent Co-financing commitment 120 000 – in cash 200 000 – in kind

6. Molodechnoles Letter of Intent Co-financing commitment 110 000 – in cash 210 000 – in kind

7a. IKEA (for Farinovo, Letter of Interest in Intent to cofinance the Polotsk district) Participation project once decision on construction of the IKEA factory in Belarus is finalized5. 7b. Polotsk district Letter of Interest in Co-financing commitment Depending on the authorities (for Participation contribution of GEF Farinovo, in case the and the State IKEA case is Committee withdrawn). 8 Mostodrev (reserve Letter of Interest in Co-financing commitment 350 000 - in cash site) Participation 450 000 - in kind

One of the key criteria for the project was selection of end-user sites which themselves produce huge amounts of woodwaste, excluding in this way the risk of non-compliance of any third-party supplier driven mainly by commercial interest. If the third-party supply modality was chosen as a main one, this would have indeed brought about a high risk of suppliers quitting their project obligations and turning to more lucrative end-users of woodfuel. That is why the three core demonstration sites (Stroidetali from Vileika, Volat from Uzda, and IKEA from Farinovo) plus two reserve sites were selected specifically because they are both suppliers and end-users of woodfuel.

5 A reserve site has been fully prepared for the Farinovo case, which is the Polotsk district. 133 Biomass Energy for Heating and Hot Water Supply in Belarus This does not mean that a third-party supply issue is not going to be considered, but rather, weighing all the risks of currently unstable economic situation and absence of large demonstration projects before, a decision was made to mitigate the supply non-compliance risk through a strategy of maximum involvement of self-sufficient end-users. However to confirm that the work with third-party suppliers will be also considered seriously – the Radon boilerhouse (end-user) was chosen specifically because it is hoped to become a model for third-party supply. The Radon Boilerhouse has made a pre-contract (on the basis of official correspondence exchange as mentioned above) with Diatlovo Forestry on supply of a predetermined amount of woodwaste at a fixed price. It fixes the price and terms of delivery and is subject to observance by both parties. However, before the project is launched and the RF provides a loan for this site, the pre-contract can not be reformatted into a proper contract. Once the GEF project is confirmed and the RF loan is operational, the legally biding contract on the same conditions will be drawn.

One final case of third-party supply is Molodechnoles, which is going to supply woodwaste to Molodechno poultry farm. Molodechnoles will supply woodwaste originating from felling and woodprocessing. The Government has made the enterprise its key partners in arranging a woodsupply market in Belarus. The economic department of the company has done a lengthy calculation of the supply price they are going to charge, and that is $5 per loose m3 of woodwaste. There is a formal agreement between the Energy Efficiency Committee, the Forestry Committee and the company that they will be granted concession rights to collect woodwaste in the vicinity of Molodechno paltry – which is a very lucrative proposal that the company is unlikely to reject because they will have considerable saving in terms of operational and transportation costs. Their commitment to participate in the project is attached.

If the pre-contractual prices for wood waste supply as indicated in the table below are not met (i.e., equal to or less than) then these project sites will not be allowed to participate in, and receive funding through, the UNDP/GEF project.

The table below summarizes pre-contractual obligations for fuel supply:

# Name of project site Who supplies wood Type of contract Type of fuel, its size fuel and price as defined at the pre-contractual stage 1. Stroidetali Stroidetali No contract needed since no external wood supply envisage (full self-supply guaranteed) 2. Molodechno Poultry Molodechnoles Letter of Commitment Loose chips, 60000 Farm from Molodechnoles to m3/year, Molodechno Paultry Farm 5 USD/ m3 3. Radon Diatlovo Forestry Letter of Commitment Woodwaste from from Diatlovo Forestry to sanitary fellings, Radon 10000 m3/year 2,0 USD/ m3 of loose 4. Volat-1 Volat-1 No contract needed since no external wood supply envisage (full self-supply guaranteed) 6. IKEA (for Farinovo) IKEA (for Farinovo) No contract needed since no external wood supply envisage (full self-supply guaranteed) 7. Polotsk district Polotsk forestry Commitment letter from Woodwaste from Polotsk Forestry sanitary fellings, 134 Biomass Energy for Heating and Hot Water Supply in Belarus unlimited amounts at price below 5 USD per m3 8 Mostodrev (reserve Mostodrev (reserve No contract needed since site) site) no external wood supply envisage (full self-supply guaranteed)

The Project Document makes a reference to those letters in the text and the PDF files with all the letters mentioned are on file. It is worth mentioning that the core and “reserve” project partners were carefully selected at the PDF B stage to make sure they are not only financially and administratively stable and market oriented, but are willing to participate on the price and cost-sharing conditions proposed by the project.

The reliability of the partners selected (demonstration site owners) is confirmed by their positive financial results, despite the current difficult national economic environment. They possess their own financial resources which they are willing to grant to the project, which is confirmed by the Letters of Cooperation. The end-user demonstration sites were selected out of a big list of potential sites and are considered to be the best in meeting the project requirements, including their obligation to take in the woodfuel according to project terms – this is also reflected in the Letters of Cooperation.

In accordance with the provisions of the PDF B document the full project was initially prepared to employ a grant mechanisms to allocate funding to potential project stakeholders. However, over the course of the PDF B stage the GEF rules changed whereupon a Revolving Fund idea was discussed and successfully integrated into the project. Now allocation of funds to project stakeholders had to be made on a compensatory and pay-back basis.

Taking into account changed financing rules of the GEF, the State Committee on Energy Efficiency has held several working meetings with heads of all demonstration sites. Over the course of negotiations – and this is a true indication of the commitment – all stakeholders have confirmed their willingness to participate in the project on the new rules. The State Committee has also confirmed that its intention for financial participation in the project remained unchanged. 30% of investment costs of each demonstration site would be covered by the Committee’s in-cash funding. Having analyzed the new financial projections, all stakeholders have confirmed that the project remained lucrative for them financially, and they were willing to stick to the commitment of its participation, including the commitment to payback the loans on the agreed terms.

Thus, the following structure for funding of investment projects was developed and voted for by each participating stakeholder: - 50% of the project investment cost is covered by the owners directly - 30% is covered by the State Committee on Energy Efficiency as a direct grant to the beneficiary - 20% would be a 5-year loan from the Revolving Fund established with GEF support. A 1-2 year delay for repayment of the main debt will be granted. The average return rate will be 2-3%.

At one of the coordination group meetings during the PDF B stage the stakeholders recommended that the project team should finalize the project concept following the approved condition and present it to the GEF for financing.

The price relationship between producer and user of energy

135 Biomass Energy for Heating and Hot Water Supply in Belarus In the project there is no need for legal contracts between producers of energy on the basis of woodwaste and those who will buy it which is attributed to the specific character of laws regulating buying and selling of energy in Belarus, as well as to the specifics of project sites covered.

On the latter argument, the project – in most cases – has no separate buyer of energy, i.e. the sites who produce the energy on the basis of woodwaste are also those that use it for their own purposes (Stroidetali from Vileika is 100% user of its own-produced energy, the same is true for Volat-1 in Uzda, Radon (it gets the woodwaste delivered by Diatlovo, but burns it itself and uses its own energy itself fully). Mostodrev and Olekhnovichi poultry farms are 80% both producers and self-users.

For each of the named sites production and self-use of energy is lucrative because it allows to reduce costs of buying imported fossil fuels and make the products and services cheaper, increasing their competitiveness.

In some cases the excess heat is being sold outside (which is the case in Farinovo and the 20% of energy produced by the above named sites). HOWEVER, in Belarus the price for energy between the energy supplier and the energy end-user is not regulated by the market (i.e. it can not be agreed by a commercial contract). It is established and regulated by local executive authority (regional municipality), which has special departments which do audits of the costs of producing energy at the boiler houses, losses in transportation, subsidies for population, etc. The price per each district is established for each boiler house. It is being revised annually based on the documents submitted by the boiler house owner and with account of the government policies for subsidization, etc. Once the price is fixed the buyer is obligated to buy the energy from the supplier at the fixed price, while the energy supplier is obligation to sell it at that price.

In accordance with the current energy efficiency legislation, when a company invests in alternative energy and energy efficiency and achieves certain reductions in cost, it has a right to retain the old price for the product or service – the price which was enforced before the reduction was achieved due to technological changes. This old price will stand until the enterprise fully pays back any loans taken for the purpose of energy efficiency measures. It means that the local executive committee will not reduce the price of energy for the end user despite the reduction in costs achieved by the producer until it pays back any energy efficiency loans. This way the Government, under generally centrally planned economy, introduced flexible mechanisms to stimulate energy efficiency investment, while at the same time providing additional guarantee for payback of loans, including of the type the RF of the UNDP-GEF project is going to provide for.