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PROJECT EXECUTIVE SUMMARY GEF COUNCIL INTERSESSIONAL WORK PROGRAM SUBMISSION

AGENCY’S PROJECT ID: 3186 Financing Plan (in US$) GEFSEC PROJECT ID:2499 COUNTRY: GUATEMALA GEF Project/Component PROJECT TITLE: PRODUCTIVE USES OF RENEWABLE ENERGY IN Project 2,650,000 GUATEMALA (PURE) GEF AGENCY: UNDP Sub-Total GEF 2,650,000 OTHER EXECUTING AGENCY(IES): FUNDACIÓN SOLAR Co-Financing* DURATION: 4 YEARS Government (cash) 9,000,000 GEF FOCAL AREA: CLIMATE CHANGE Government (in-kind) 325,000 GEF OPERATIONAL PROGRAMME: OP-6 Municipalities 1,000,000 GEF STRATEGIC PRIORITY: CC-4 (PRODUCTIVE USES OF Private sector 1,000,000 RENEWABLE ENERGY) Fundación Solar 350,000 PIPELINE ENTRY DATE: 24-MAY-2004 Sub-Total Co-financing 11,675,000 ESTIMATED STARTING DATE: MID-2005 Total Project Financing 14,325,000 IA FEE: US$ 382,000 * An additional US$ 16,000,000 of private investment will be leveraged by the project CONTRIBUTION TO KEY INDICATORS OF THE BUSINESS PLAN:

As a direct impact of this project, CO2 emissions in Guatemala will be reduced by approximately 630,000 tons over 20 years. The indirect emission reduction impact of this project is estimated at 3.15 million tons of

CO2 over a 20-year period.

RECORD OF ENDORSEMENT ON BEHALF OF THE GOVERNMENT

Juan Mario Dary Fuentes Minister of Environment and GEF Focal Point Ministry of Environment and Natural Resources Date: 11-29-2004

This proposal has been prepared in accordance with GEF policies and procedures and meets the standards of the GEF Project Review Criteria for approval.

1. Oliver Page Frank Pinto Climate Change Portfolio Manager RCU LAC Executive Coordinator Tel. and email: (52 55) 5263 9844 [email protected] 2. Melissa Edwards Programme Officer UNDP Guatemala Tel. and email: (502) 2384 31 00 [email protected] Frank Pinto 3. Fundación Solar: Iván Azurdia (502) 2360 11 72 Executive Coordinator [email protected] Date: 17 February 2005 1 1. PROJECT SUMMARY A. PROJECT RATIONALE, OBJECTIVES, OUTCOMES , OUTPUTS AND ACTIVITIES

Background and project rationale

1. Guatemala is one of the poorest and most inequitable countries in Latin America. Poverty reduction and implementation of the post-guerilla peace accords are two main priorities of national policy and action. The Ministries of Energy, Environment and Agriculture, together with the National Association of Generators are seeking to rationalize the use of natural resources in the context of the above priorities. Water and watershed related management activities and rural development efforts are currently receiving wide support from the international donor community as well as lending from international financial institutions for a total of US$120 million. Linking these efforts with renewable energy (RE) development for productive uses will reinforce the link between global environment and poverty reduction in a project area that presents both poverty and conflict concerns.

2. This initiative results from high interest, consultation and commitment reached in particular within the framework of GVEP (Global Village Energy Partnership). With the primary objective of poverty reduction through the use of modern energy services, the GVEP program in Guatemala has an integral approach, where the need for energy is identified in all sectors, and energy is provided to satisfy the identified demand. The full-sized Productive Uses of Renewable Energy project (PURE-Guatemala) continues this line of action. This project follows on the results and recommendations of a UNDP/GEF supported MSP entitled “Renewable Energy Based Small Enterprise Development in the Quiche Region of Guatemala”, executed by Fundacion Solar. Box 2 of the Project Brief summarizes how the lessons learnt from this experience have been incorporated into this proposal.

3. The sectors of agriculture and agro-industry play a central role in Guatemala's economy. They are characterized by inefficient and inadequate energy use, mainly of oil-based fuels, traditional biomass, animal and human energies. This reduces productivity, increases production costs and leads to environmental and human health problems that add stress to agriculture, to the natural resource base and to society. Despite the availability of natural resources and the existence of technologies to tap their energy potential, as in most of the developing world, the widespread adoption of renewable energy for productive uses has not been achieved in rural Guatemala. This is due to the poverty trap, which does not enable low-income people to invest capital upfront, and the failure of GoG assistance to incorporate new communities into a market economy. While RE has the potential to fulfill the energy needs of each of the steps in the agricultural production systems, the widespread application of these technologies is currently hampered by a number of social-institutional, cultural, policy-regulatory, information, market-financial and cultural barriers. These barriers maintain a business-as-usual situation in which rural communities do not have the financial capability to access new technologies, while lack of energy and other infrastructure severely limits the development of new income- generating productive activities.

4. A market niche for private sector energy development of grid-connected RETs in rural areas has not been developed yet. One reason is that the legislation leveling the playing field for RE to enter into competition with conventional energy production for the national grid has only recently been approved and a regulatory framework is yet to emerge. Another issue that has hampered the development of grid connected RE is the lack of adequate multi stakeholder arrangements to develop projects that benefit both private investors and the communities that own or use natural resources. To date, private investors have developed small hydro projects by purchasing land and providing energy directly to the grid, without taking into consideration the needs of the surrounding communities. In many cases, communities receive no electricity service despite their proximity to the energy source, since there are no incentives for project developers to extend the grid to these areas. Therefore, local stakeholders have a negative perception of private investors, since the use of their resource provides no local benefits and they have no say over how their resource is managed. As a result, many communities have blocked new projects or hindered existing operations.

Project objectives 2 This project aims at removing barriers for the dissemination of productive uses of energy generated by RE technologies (RETs) in one of Guatemala’s poorest areas: the departments of Alta Verapaz, Baja Verapaz, Quiché, Huehuetenango, and San Marcos.

The global environment objective is to reduce greenhouse gas emissions generated by thermal power generation in the national grid system and by avoiding the use of diesel-based generators and village min- grids in isolated areas. The strategic goal of the PURE initiative is to remove barriers for the development of 9 MW of grid-connected RET (small hydropower) and 1 MW of off-grid RET applications (mini/micro hydropower, solar/biomass thermal and solar PV). At least an additional 45 MW of on grid and 5 MW of off grid RE are expected to materialize as a result of the project over the next 10 years.

The development objective is exploitation of indigenously available RE resources integrated with environmentally sustainable development and poverty reduction in rural areas. Under the GEF-supported alternative scenario, the value added resulting from a ‘productive use of renewable energy’ program will contribute to sustainable development in rural areas, seeking to bring employment and other economic as well as social benefits to the rural population. PURE-Guatemala will seek increased local benefits through two separate energy-related approaches:  Shared benefits of locally produced and nationally sold (grid connected) RE. For the private sector, first estimates indicate an internal rate of return close to 12% for grid-connected small hydro projects;  Extension of the local production chain of processed export products/commodities, including organic coffee, cardamom and timber products, which are processed locally through drying, dehydrating, sawing and packing, using RE as process input, with consequential added value to the local economy. The sustainable use of locally available water and energy resources for processing creates value added to local products and has the potential to provide communities with better income sources and living standards.

Project strategy and approach 5. PURE's strategy revolves around the extension of agricultural and forestry productive chains in rural Guatemala, using renewable energy technologies (RETs) as a primary input to the productive process. Energy and freshwater uses for processing local products creates value added to the local economy, by locally processing agricultural and forestry products. Likewise, access to energy offers a spill-over potential to provide informal sector micro-enterprises (restaurants, workshops) with higher sources of income and community households with higher living standards (improved lighting and water supply). Rather than focusing on providing access to energy as the project objective, PURE Guatemala envisions RE as a fundamental input of an operational framework that catalyzes an added value productive chain. Under the PURE Guatemala project, local producers will be linked with national and global markets, securing additional income, thus alleviating poverty in these areas and providing resources to ensure the sustainability of the RE initiatives.

6. The project will focus on 4 productive chains that have been identified by the GoG as priorities for their rural development strategies and require energy as a fundamental input for processing. These are:

a. Coffee – Guatemala has made substantial advances towards certification of its coffee as a high value “premium organic” crop. Integration of solar or biomass coffee dryers to the productive chain has the potential to increase local incomes and produce a high quality crop. b. Cardamom – While Guatemala currently produces cardamom, it is a low quality variety due to inappropriate drying processes. Introduction of appropriate RE technologies for drying will result in “green dried” cardamom which is sold at a premium price in international markets. c. Timber – As with coffee, Guatemala is making advances in green certification of much of its timber. RET technology will be used for pre-drying of high quality woods, so that it can be exported in optimal conditions. Furthermore, introduction of RETs will allow the development of sawmills and carpentry shops to further process the timber, thus increasing the value added retained at the local level.

3 d. Dairy products – Introduction of RETs will allow for further processing and storage of dairy products. This will allow the rural dairy industry to progress from providing local communities with basic dairy goods to supplying larger regional and national markets.

7. Small-scale RE technologies, such as mini/micro-hydro plants, solar photovoltaic (PV) home systems, solar water pumping and solar or biomass dryers are the most cost-effective option for energy supply in the target region, suited to the size and scale of investments that can be promoted for supplying energy services to these isolated areas. Approximately 4 to 5 mini/micro-hydro installations will be installed in river basin communities: each provides power to a nearby community in a mini-grid system, supplemented with solar PV and micro-hydro for selected isolated applications and thermal applications for drying of products on farms. Typically, off grid facilities involve institutional and capacity development support by NGOs and locally based organizations. Financing of off-grid RET investment will come mainly from the national or local government, in coordination with existing GoG programs. Additional income generated at the local level will allow end users to pay for energy services, thus ensuring sufficient funds for adequate operation and maintenance and future expansion of the energy services.

8. In the case where the RET system will be grid-connected, typically a small hydropower installation, financing will be mostly private. Here, it is PURE–Guatemala’s role to create the most appropriate institutional mechanisms to facilitate investment in RE that allows for the benefits to be shared between communities and private investors. Agreements will be established between the local government, the private developer and the local groups to manage the watershed so water springs are protected, natural resources of the watershed are properly managed and land tenure conflicts are settled. PURE will also be developed in local communities to promote benefit sharing of RE investments between local stakeholders and the private sector.

9. In order to develop micro and mini-hydro resource, there is a need for integrated water resource management at a watershed level. PURE will provide the necessary assistance to legally establish stakeholder committees for the integrated management of land and water at the watershed level and for the development of river basin management and operational plans. These actions will be linked with local environmental and land-use planning and prioritization. Therefore, integrated management of watersheds will result in securing water and electricity supplies, but also will help reduce the risk to climate related events like runoffs, drought periods, deforestation, and soil erosion. Sustainable agricultural and forestry business is directly linked to appropriate management of watersheds, because it protects the water resource and ensures the necessary energy potential.

10. PURE will develop regulatory and policy instruments to promote both the use of renewable natural resources for RET use, and for productive uses of electricity. It aims to propose new regulatory and financial instruments under the recently approved Law for Incentives for the Development of Generation from RE Sources, which promotes independent grid connected RE generation. Secondly, the project will lobby for the enhancement of the 2d phase of the Rural Electrification Fund to include off-grid electrification support, by making an assessment of policy instruments related to increased off-grid energy service, such as linking subsidy with productive uses of energy. Thirdly, PURE will promote a policy dialogue on the linkages between energy supply, rural development, natural resources management and adaptation to climate change.

Project outcomes and outputs 11. The project has 4 main outcomes that will contribute to the removal of the identified barriers within a full-size project, over a period of 4 years. These outcomes, and their associated outputs, are listed below:

Outcome 1: 1 MW of Off-Grid RETs (mini hydro, solar) for Productive Uses 1.1 Development of local ‘value added’ productive chains through the introduction of RETs and national/international market development 1.2 Development of 1MW of off-grid mini hydro, biomass, and solar energy 1.3 Increased capital mobilization for PUE lending 1.4 Local capacity building and small business development 1.5 Review of technology support system for hydro and other RETs

4 Outcome 2: 9 MW of Grid-connected Private Sector RET (small hydro) with energy benefits for local population 2.1 Development of grid-connected small hydro by private developers 2.2 PUE catalyze rural development in communities associated with RE investment 2.3 Stakeholder engagement and environmental good practices in small hydro development Outcome 3: Sustainable Natural and Energy Resources Management in River Basins 3.1 Local enabling environments for participatory watershed management integrated with natural resources management for RE generation and vulnerability aspects, including adaptation to climate change 3.2 Better management practices in agriculture, forestry and animal husbandry Outcome 4: Conditions for project replication are established, including policy and regulatory proposals, and monitoring and feedback mechanisms. 4.1 Monitoring tool for PUE in RET-based rural development and local resources management and information dissemination 4.2 Enabling environment proposed of regulatory instruments for independent small hydropower producers 4.3 Proposed policy directives on off-grid rural energy provision with mini hydropower and solar energy 4.4 Improved policy dialogue on the linkages between energy supply, rural development, natural resources management and climate-change adaptation

B. KEY INDICATORS, ASSUMPTIONS AND RISKS 12. Key indicators of success for the Project include: Energy and climate change:  Multi-sectoral investment in RE technology with increased private sector involvement in on-grid and off- grid projects. 1 MW of off grid RE and 9MW of on grid RE are installed by the end of the project.  Farmers and agro-processing units' adoption of the project’s area, of RET applications for productive uses  Enhanced efficiency of energy use on farms and agro-industries benefiting from the project  Adaptation of RE to the local context through the demonstration of potential agricultural/agro-industrial uses of the technology;  Increased capacity to assess and manage risks associated with long-term climate change through an integrated watershed management approach. Institutional:  An enabling legal, regulatory and policy environment, adopted by the GoG, with consolidated policies and regulation for promoting grid-connected RET as well as off-grid RET in rural areas;  Adoption of "rules of the game" by the private sector and the Government in the promotion and development of RE (price policies, regulations, norms, green certification; fair trade; forestry and agro- processing);  Strengthened river basin committees and strengthened institutional cooperation between agricultural/agro- processing and energy sectors;  Strengthened capacities of stakeholders in identifying, designing, promoting, marketing, investing, installing, operating and maintaining RE in agricultural/agro forestry production systems;  Strengthened markets of RE applications in Guatemala Environmental: 1. Avoided GHG emissions from the agricultural and agro-industrial sector in the project area and reduced dependence in the national power grid on fossil fuel based technologies. Direct reduction in

GHG emissions of 630,000 tons of CO2 over 20 years, and indirect CO2 reductions amount to 3.15 million tons. 2.Watershed management plans implemented at local level 3.Improved agricultural practices by local communities Economic and social: 4.A considerably increased financial flow towards productive use RE projects in the selected municipalities 5.Enhanced income generation and employment in rural communities, due to enhanced markets for goods produced by RETs and increase in small and medium business development 6.Enhanced food security in the poor rural areas of the project sites; 5 7.Social and spill-over benefits resulting from increased availability of energy for domestic and micro- enterprise productive uses; 8.Contribution to sustainable rural livelihoods and poverty alleviation. Awareness, knowledge and dissemination: 9.Increased awareness of and information about RE for productive uses in the agricultural/agro industrial sector in Guatemala; 10. Dissemination of project results in other municipalities of Guatemala.

13. Important project assumptions are:  Baseline is not superseded because of larger volumes of energy imported from the interconnected neighboring countries or due to a decrease in fossil fuel price.  Long-term financial support and pro-active participation of the GoG and its institutions, in particular MEM, MARN, MAGA as well as of local governments  National economic conditions and regional integration (CAFTA) favor income-generating investments for RETs for PUE in rural areas  Political stability allows cooperation between ministries and with non-government stakeholders as well as local democratic governance structures  Active interest of local communities to participate in managing water and land resources, enabling energy development for productive uses  Potential conflicts between municipalities, communities and private developers regarding shared watersheds and land tenure can be minimized.

14. During the project design stage, project risks have been closely analyzed and mitigation strategies have been incorporated. However, while the project is designed to minimize these risks, some issues are not entirely within the project’s control but may affect project implementation. These risks are listed below.

Social, participatory:  Political unrest due to unmet social demands affects community participatory processes.  Divided leadership, social fragmentation and weakened business climate that has prevailed beyond the civil war period in the highlands area continues to pose a barrier for investment and lending in this area. While PURE is designed to operate in this scenario, the fragility of social structures in this area introduces a level of risk that cannot be completely eliminated.

Policy-regulatory, institutional:  Political changes shift GoG priorities to other areas than PURE – Guatemala’s objectives. The execution of the project by Fundación Solar minimizes this risk; however, active engagement by GoG counterparts is essential to achieve project objectives.  In the long run, MEM/INDE contributions for off grid RE are not guaranteed. While financing for the direct interventions in the PURE project is secured, the sustained contribution of GoG financial resources for off grid electrification is essential.  MAGA remains committed to reduction of vulnerability in selected watersheds. Given the current level of support channeled through MAGA to address this issue, this risk is considered minimal.

Market and financial:  Due to remote location of some potential project sites, sustainable products sources and resources may be difficult to supply and access to financing for remote communities difficult. PURE will take these issues into account as its criteria for site selection. Furthermore, the close alignment with the GoG’s rural development strategy mitigates this risk.  The Association of RE Generators (AGER) and private developer’s interests to develop RET in the project’s area may shift or diminish due to unclear regulatory frameworks with lack of incentives for RET development and/or a drastic reduction in global oil prices. Recent policy initiatives (such as the RE Incentive Law) suggest that a policy reversal is unlikely, and AGER’s commitment to the initiative under present conditions is firm.

6  Variations in market prices for targeted goods do not allow their financially sustainable production, impeding repayment of loans of RET for PUE investments. To minimize this risk, PURE focuses on products that form the basis of the GoG’s rural development strategy, thus ensuring broad support (from sources other than project funds) for such activities.

PURE´s M&E strategy will ensure that particular attention be devoted to measuring the above risks and “red flags” are raised in a timely manner. Should any of these risks (or any unpredicted events) jeopardize project implementation, the project management team will be responsible for taking the appropriate measures to adapt the project strategy as necessary, with UNDP and UNDP/GEF support.

2. COUNTRY OWNERSHIP AND DRIVENNESS A. COUNTRY ELIGIBILITY 15. Guatemala is eligible for GEF financing and has ratified UNFCCC on March 28th, 1995

B. COUNTRY DRIVENNESS 16. In Guatemala, MARN coordinates the formulation, implementation, and follow up of the national environmental policies and programs. MARN is both the UNFCCC focal point and the GEF Operational Focal Point and provides follow-up to all regional and international agreement regarding the UN environmental conventions. The proposed project is relevant to the MARN climate change policy, in particular to its efforts to develop a national mitigation plan and support the development of technologies that reduce GHG emissions, including RE technologies (RETs).

17. MEM formulates the energy policies and promotes the laws and bylaws that are required to promote sustainable energy approaches. The recently approved Law for the Development of Generation from RE Resources1 provides an incentive of a 10-year tax holiday for developers, and allows the import of material and equipment for power plant construction exempt of import taxes and value added tax (VAT). The new law will contribute to leveling the playing field RE by enhancing the opportunities of independent, small-scale, producers and operators to enter the energy market. However, the law has only recently been approved and a sound regulatory framework is yet to emerge in Guatemala.

18. The GoG developed a poverty reduction strategy that identified a geographical poverty belt corresponding to the departments where the proposed project will be implemented. In this strategy, the GoG established a new rural development policy in response to the weakening situation of small farmers, faced with increased international competition. Poverty alleviation, improved management of land and water resources and control of pollution from agricultural sources are stated as immediate rural priorities. It recognizes that, instead of large-scale commodity production, Guatemala’s highland agriculture should focus on quality products. A system of certification of origin of agricultural and food products is under development, and the GoG is pursuing full compliance with pesticide legislation and starting to promote organic agriculture. Land and water management issues are to be addressed through decentralized water management at the watershed level. MAGA is taking the lead in implementing the rural development strategy.

19. PURE responds to the GoG’s rural development priorities by promoting environment-friendly agricultural and agro forestry practices, rational use of natural resources and poverty alleviation. The project will build on a concerted effort among public, private as well as NGOs and local partners to reach the above goals. Furthermore, the combined cash and in-kind contribution of the GoG (MEM, MAGA), local government (municipalities) and the private sector (ANG) is a very clear expression of interest for a project that is a combination of public-private investments.

3. PROGRAM AND POLICY CONFORMITY A. FIT TO GEF OPERATIONAL PROGRAMME AND STRATEGIC PRIORITY

1 Ley de Incentivos para la Promoción de las Energías Renovables, Decreto 52-2003 del Congreso de la República (October 30, 2003) 7 20. The activities proposed under PURE will remove important barriers to the adoption of RE technologies for off-grid and on-grid application in Guatemala, including technological, social-institutional, cultural, policy- regulatory and market-financial barriers. PURE is fully consistent with GEF OP#6: Promoting the adoption of RE removing barriers and reducing implementation costs.

21. The Project will contribute in meeting the following strategic GEF priorities:  CC-2: Productive Uses of RE: implementation of RE technologies (RET), especially mini/micro hydropower, that is linked with productivity enhancement of value added agricultural and forestry products and income generation of micro-enterprises, being made sustainable through stakeholder engagement in local river basin management  SPA: Strategic Priority on Adaptation: By promoting an integrated watershed management approach PURE is minimizing the risk of damage to small hydro investments due to climate variations, as well as supporting appropriate agricultural practices that reduce watersheds and local communities' vulnerability.

22. The total CO2 reduction attributable to the proposed GEF initiative is 630,000 tonnes of CO2 over 20 years. Total GEF investment is US$2.65 million, hence the unit abatement cost of the GEF intervention will

therefore be 4.2 US$ per tonne of CO2.

23. PURE will contribute to the implementation of UNFCCC-COP7 decision of the framework for development and transfer of technologies. This framework emphasizes the need to remove barriers and provide positive incentives for technology transfer projects, and to integrate technology transfer objectives in national policies. It also identifies the enhancement of skills in the adoption, adaptation, installation, operation and maintenance of environmentally sound technologies as a key issue (UNFCCC COP-7, 2001). PURE is further supported by the analysis of the Consultative Group of Experts on National Communications of Non-Annex I countries, which emphasizes the need to develop mitigation measures for the agricultural sector which constitutes the largest source of GHG emissions in many developing countries and the 2d largest source in most of them (UNFCCC, 2001).

B. SUSTAINABILITY (INCLUDING FINANCIAL SUSTAINABILITY)

24. Income-generating productive uses of RE are PURE´s sustainability foundation. RE sources will be developed in regions where a value added productive chain has been identified and corresponding income generation has been quantified. Additional income generated at the local level will allow end users to pay for energy services, thus ensuring sufficient funds for adequate operation and maintenance services, instead of the traditional malpractice of setting tariffs in off-grid systems that do not cover O&M cost, often with detrimental effects for the system’s reliability in the long run. The true success of this endeavor will imply that energy will be treated as a means responding to a productive and social demand, where energy is one of several key inputs such as credit accessibility, technical assistance, market development and administrative processes.

25. Regarding grid-connected RE production by private developers, sustainability of essentially lies in simulating market mechanisms that allow the development of RET as an effective and least cost alternative for power production. PURE will demonstrate the clear ownership and community participation from project’s onset, in the application of conflict prevention and resolution methodologies, strong local government concurrence and support, as well as the importance of strong partnerships between funding agencies and implementing agencies.

26. Sustainability must be addressed for in two different scenarios; off grid and on grid renewable energy. - On grid: Once connected to the grid, users will receive no additional subsidy for consumption and will pay the same “social tariff” (currently at US$ 0.082 per kWh) as any other grid-connected consumer that consumes less than 300kWh/month. The only element of subsidy that is present in this case is the financing of low-tension distribution grids for the communities, which will be financed with government funds. The

8 project will focus on harnessing the productive potential of the electricity to ensure an adequate payment capacity in the recipient community. - Off Grid: In this scenario, the project acknowledges that an element of subsidy is required to make the investment feasible to the end user. The premise of this project is that the subsidy will only be provided for initial investment on equipment, and no subsidy will be provided for consumption. Hence, any user fee must cover, at least, life cycle O&M costs of the equipment. For mini grids, energy consumption will be metered and billed at the standard grid connected tariff. Fundacion Solar has determined that billing at this rate is sufficient to cover O&M costs. For stand-alone systems, such as PV panels, a fixed monthly fee will be paid by the user. Fundacion Solar has determined that to cover life cycle O&M costs (including battery replacement), this monthly fee stands at around Q30.00 (US$ 3.5), which is less than the estimated Q50.00 (US$6) used for candles, kerosene lamps, and other low quality lighting sources). It is important to note that no GEF funds will be used to subsidize equipment – government co-funding is earmarked for this purpose.

27. Integrated watershed management at a local level is a key component of project sustainability. Rivers and streams are basic in all aspects of rural community livelihoods. Therefore, the use of water as an energy source must be an integral component of watershed management practices: it is also important to enhance local capacities to reduce vulnerability to extreme climate events. PURE, in association with MAGA, will explore methodologies for adequate local watershed management and risk reduction to ensure the sustainable use of the watershed. It is expected that at least 10 river basin management committees will be legally established by the end of the project.

28. Institutionally, sustainability will be understood in PURE as the ability to incorporate and institutionalize the concept of RE as a means to integrate rural development into an inter-ministerial coordination unit that carries economic or social programs, incorporating energy from the beginning of the planning process. The GVEP concept will be carried over to ensure continuity and fresh ideas integration into the future.

C. REPLICABILITY

29. The replicability of the project hinges on PURE’s ability to clearly demonstrate the financial and social benefits of RE productive uses. The project strategy is to develop a win-win model where the income stream, generated through productive uses, provides benefits to both end users and electricity producers through the increased payment capacity, in which the end-users have clear commitments and willingness to pay tariffs needed for a long-term maintenance, operation and expansion of the RET installations. Thus, PURE will focus on developing and facilitating new mechanisms that allow other stakeholders to invest in RE, rather than rely entirely on financing with GoG or donor grants.

30. PURE will work to convince the GoG that a financial deliverable mechanism should be set in place in the 2d phase of the GoG’s Rural Electrification Fund for subsidizing access to rural energy services and for providing loans and credits for PUE. Rural off-grid electrification is generally not financially feasible, so subsidies should be used to allow universal access to a modern energy supply. However, the system can be made economically viable, if the subsidies are used in a ‘smart’ way that does not create distortions between users of isolated systems and grid-connected users, by re-directing tariff subsidies (for electricity consumption) to credits for off-grid and RET-based technologies for productive uses in a way that generates income, creates jobs and steers economic development.

31. Regarding grid-connected RE production, replicability will be ensured by establishing adequate mechanisms of benefit sharing among project stakeholders, thus fostering investment in financially viable RE based generation. PURE will also support the establishment of a regulatory framework within the Law of Incentives for RE, which is expected to catalyze further interest and investment in RE by independent private developers.

32. These mechanisms will be applicable to Guatemala as a whole, therefore establishing a national framework for project replicability. The relevant ministries, MEN, MAGA and MARN, have shown a strong commitment to the promoting RET and PUE, recognizing their great value to foster local employment and 9 development as well as sustainable natural resources management. The local capacity built in projects partners will allow the continuation of an integral rural development approach, where energy will not be seeing as an end, but as a means to foster economic growth and social services. The participation of grass root groups, GoG agencies, municipal government, and private sector will create a critical mass of constituency to support RE and its productive uses. This will enable the continuation of financial and assistance programs based on demand and experience gain during project implementation.

33. Finally, the replication of project's results will be promoted through its active dissemination and lessons learned. PURE will work on information dissemination and public awareness enhancement activities, such as public exhibitions, multi-media presentations, training courses, seminars and workshops.

D. STAKEHOLDER INVOLVEMENT

34. Broad-based national-level public consultations and local stakeholder engagement have been implemented as part of three past and ongoing previous projects in the area of energy and natural resources management:  Renewable Energy Based Small Enterprise Development in the Quiché Region, UNDP/GEF Medium Size Project (1999-2002), implemented by Fundación  Development of Policy and Legal Frameworks for Rural Energy Services for the Promotion of Renewable Energy technologies (RETs) and Access to Energy for the Poor, UNDP project (2003-2004), implemented by Fundación Solar  GVEP Guatemala: Energy for Poverty Reduction, Phase I, UNDP project (2004-2005, ongoing), implemented by Fundación Solar and MEM  Strengthening National Capacities for Stage II of Adaptation to Climate Change, Ongoing Regional UNDP/GEF project, channeled through MARN in Guatemala  Natural Resource Management Program in Upper Watershed Areas, currently implemented by MAGA with IDB funds  Integrated Natural Resource Management In Guatemala’s Western Highlands, implemented by MARN with World Bank/GEF funding, implemented by MAGA with IFAD funding.

35. As Fundación Solar enjoys wide respect of different energy sector stakeholders, private sector, academia, community groups and other NGOs, it has been able to facilitate processes that would have otherwise been very difficult to carry out. The implementation of the proposed full-sized PURE project will build upon the know-how and experience that Fundación Solar has obtained during the implementation of the above- mentioned projects. Promoting their continued participation in project activities is one of the first challenges of PURE, and this needs to be continued throughout project implementation. Relevant stakeholders include:  GoG institutions: MEM, MARN, MAGA, INAB, CONAP, Ministry of Health (MOH) and Ministry of Education (MOE), SEGEPLAN, Social Investment Fund -FIS- and FONAPAZ;  Local governmental institutions: municipalities, COCODES, COMODES;  Private sector: RE system developers, producers and vendors and their associations, such as AGER;  NGOs in that work in the area of rural development, energy or environment, such as Fundación Solar;  Current and potential RE users in the agricultural sectors, in particular farmers and farmers’ unions;  Domestic financing institutions such as BANRURAL and rural credit cooperatives;  Universities and research institutions such as Universidad Rafael Landívar (URL);  Regional institutions and networks that can act as cooperation platforms, such as Economic Commission for Latin America and the Caribbean (ECLAC), Inter-American Development Bank (IADB), Latin American Energy Organization (OLADE), Latin American Rural Electrification Council (CLER);  Other international financing institutions active in the project area, such as the European Union.  Bilateral development cooperation agencies active in the RE field.

E. MONITORING AND EVALUATION (M&E)

10 36. PURE will be monitored and evaluated according to standard UNDP rules for nationally executed projects. The Project Management Unit (PMU), under direct responsibility of the Project Coordinator (PC), will elaborate and provide key M&E documentation. The PMU is responsible for continuous up-dating and reporting of financial and progress information. Specifically, a quarterly review and reporting cycle will be established with the delivery of financial and progress reports, as well as proposals for updated work plans. The documentation will be subject to approval, potential adjustments and subsequent implementation in the regular meetings held between Fundación Solar and UNDP. In those meetings, any bottlenecks occurring in implementation will be addressed and resolved. One of the initial activities in the work plan will specify appropriate performance benchmarks, which will be established prior to PURE´s implementation to enable effective M&E of project progress, and to create a sound basis for informed crucial management decisions.

37. PURE's Logical Framework attached summarizes the indicators of project progress and impact considered appropriate at the present time. It will be further detailed during project initiation. During the 1st quarter of project implementation, the PC will review these indicators with an eye toward fine-tuning them. He/she will then undertake an assessment of the baseline values for these indicators. These baseline values will then be considered as comparison points for progress being made under the project. Where appropriate, the meaningful indicators will be re-estimated each year, or in a shorter period of time, in preparation for the APR-PIR. In addition, the performance of the remainder of the RE market will be monitored so that the contribution of PURE can be evaluated in its appropriate context. Adaptive management that responds to changing circumstances in the context of the project will be encouraged, subject to approval by UNDP.

2. FINANCIAL MODALITY AND COST EFFECTIVENESS A. FINANCIAL MODALITY

38. PURE is expected to cost US$14,325,000 of which US$2,650,000 will be requested from GEF. No PDF A nor B funds were requested as the formulation cost were covered by Guatemala's UNDP Country Office (CO) program. The GEF contribution will be used to address the various barriers that hamper the development of off-grid and on-grid RE technologies, mini/micro hydro and solar.

39. For PURE, a total of US$11,675,000 will be available for direct co-financing of the project activities, as indicated in the table below: Name of Co-financier (source) Classification Type Amount (US$) Status MAGA Government Cash 8,000,000 Letter available MEM Government Cash 1,000,000 Letter available AGER Private Sector Cash 1,000,000 Letter available Fundacion Solar NGO Cash 350,000 Letter available Municipalities in project sites Government Cash 1,000,000 After final selection of sites MAGA, MARN, MEM Government In-kind 325,000 Agreements established Total PURE co-financing 11,675,000 Private RET project developers Private Sector Equity investment 16,000,000 After final selection of sites Total parallel financing 16,000000 Total available financing 27,675,000

40. In addition, an amount of US$16 million will be leveraged from private small hydropower developers, combined equity and debt capital, to invest in up to 9 MW grid-connected hydropower capacity.

B. COST EFFECTIVENESS

41. The GEF contribution represents a leverage of 1 to 9 approximately. The fact that the GoG as well as private sector (AGER) has pledged significant resources towards the incremental cost of the project demonstrates full ownership of the project, commitment to support small hydropower development and to trigger the application of off-grid technologies (mini/micro hydropower and solar energy) for productive uses.

3. INSTITUTIONAL COORDINATION AND SUPPORT A. CORE COMMITMENTS AND LINKAGES

11 42. Guatemala's UNDP-CO is fully committed to assist Guatemala in facilitating access to sustainable energy services to rural poor. The frameworks for UNDP-CO activities in sustainable energy are the GVEP (action plan under preparation) and the UNDP-CO Energy Strategy, recently formulated supported by Fundación Solar. The proposed full-sized project is an essential component in the operationalization of these strategies. Moreover, the energy program is part of a larger strategy of Guatemala's UNDP-CO, focusing on a more equal economic growth aimed at diminishing existing income disparities. Some of the instruments of this strategy are the economic growth clusters identified in the 2003 National Human Development Report. These clusters -forestry, textile industry, tourism and agro-industry- cannot be implemented as 'motors' of economic and social development if energy sources are not available in rural areas. Finally, the proposed project is fully compatible with UNDP’s mandate in assisting developing countries in reaching the Millennium Development Goals, particularly MDG-1 (poverty reduction), MDG-7 (environmental sustainability), and MDG-8 (partnerships for development).

B. CONSULTATION, COORDINATION AND COLLABORATION BETWEEN IAS, AND IAS, AND EXAS, IF APPROPRIATE

43. In the framework of GVEP, the GoG formed in 2003 a Working Group consisting of SEGEPLAN, MAGA, MINECO, MEM, MOH and MOE. PURE will use this mechanism of multi-stakeholder coordination’s as the Project Steering Committee (PSC) providing guidance and supervision on the project implementation. Essentially, all participating entities in project co-financing and implementation will be invited to participate in the regular monthly meetings, or PURE-specific ad-hoc meetings, to oversee the smooth running and effective execution of programmatic activities and budgets and to allow for strategic planning, adaptive management and logistical coordination to take place.

44. In addition to serving as the project steering committee, the GVEP Working Group will serve as the coordination mechanism between the present UNDP/GEF project and other GEF and non-GEF funded initiatives in the region. Since the GVEP working group includes MAGA, MARN, and MEM, the three main institutions involved in these initiatives, this will allow national stakeholders to develop and update coordination plans according to the advances made by each of these projects. Complementarities and synergies among the initiatives will be discussed periodically in this forum. Since there is continuous change in the scope, duration, and specific achievements of each initiative, the present project is designed with sufficient flexibility to adapt to these varying circumstances. This is of most relevance in the Outcome 3, regarding watershed management, where the primary project responsibility will be to ensure that energy issues are incorporated into broader integrated resource management efforts.

C. PROJECT IMPLEMENTATION ARRANGEMENT

45. The project will be implemented by UNDP and executed by Fundación Solar (NGO execution), which has successfully worked with UNDP CO and the MEM in previous sustainable energy projects. Fundación Solar is a Private Development Organization, formally registered in Guatemala through Ministerial Decree No. 302 in 1994. Its main areas of work are sustainable energy and environmental services, such as watershed management.

46. In addition to the PSC, a Multi-stakeholder Advisory Committee (MAC) will provide a forum for programming, review and measures on operational issues, as well as to discuss broader policy issues, by seeking inputs from other organizations, besides the project partners directly involved in the project. MAC will bring together other key GoG agencies, such as INAB and CONAP, as well as representatives from the academia, selected NGO’s, community level beneficiaries (representatives from the COCODES and COMUDES) and key financial institutions (such as BANRURAL).

47. A Project Management Unit, headed by a PC, will be responsible for formulating and submission of work and financial plans top the PSC, monitoring of work progress, coordination with the various GoG ministries and gencies, ensuring the timely provision of GoG inputs providing guidance to the project team of national and 12 international consultants, coordination with UNDP, reviewing reports and to look after administrative arrangements required under UNDP procedures.

13 INS IN ANNEX A. INCREMENTAL COST ANALYSIS

1. INCREMENTAL COST ANALYSIS TITUTIONA BROAD DEVELOPMENT GOALS

The development objective is exploitation of indigenously available renewable energy resources integrated with environmentally sustainable development and poverty reduction in rural areas. Under the GEF-supported alternative scenario, the value added resulting from a ‘productive use of energy (PUE)’ program will contribute to sustainable development in rural areas, seeking to bring employment and other economic as well as social benefits to the rural population. The project will seek increased local benefits through two separate energy-related approaches:  Shared benefits of locally produced and nationally sold (grid connected) renewable energy. For the private sector, first estimates indicate an internal rate of return close to 12% of implemented grid-connected small hydro projects;  Extension of the local production chain of processed export products/commodities, including organic coffee, cardamom and timber products, which are processed locally through drying, dehydrating, sawing and packing, using renewable energy as process input, with consequential added value to the local economy. The sustainable use of locally available water and energy resources for processing creates value added to local products and has the potential to provide communities with better sources of income and higher living standards.

GLOBAL ENVIRONMENTAL OBJECTIVE

The global environment objective is to reduce greenhouse gas emissions generated by thermal power generation in the national grid system and by diesel-based generators and village min-grids in isolated areas. The goal of the PURE initiative is to install and operate up to 9 MW of grid-connected RET (small hydropower) and 1 MW of off-grid RET applications (mini/micro hydropower, solar thermal and solar

PV) during the project lifetime, thus reducing 630,000 tons of CO2. This is expected to stimulate the development of at least MW of grid connected and 5 MW of off grid RETs over the next 10 years, thus reducing an additional 3.15 million tons of CO2.

BASELINE

In the baseline scenario, the renewable energy potential in rural Guatemala will continue to be underdeveloped, with substantial implications for local communities, the national government, and the global environment. Grid extension will continue to be the standard electrification approach of the government, at a large taxpayer cost and low coverage at the rural level. Development in off-grid and renewable energy in rural areas will remain very limited. Therefore, in the baseline scenario, the energy situation in rural Guatemala will continue to be characterized by:  Rural development programs and rural electrification programmes will continue to be developed and implemented independently. This will prevent the integration of energy issues into productive development activities, thus passing up on a substantial market niche for renewable energy.  Local communities will have no access to financial resources to develop their locally available renewable energy (RE) sources. Potential added-value activities stemming from access to energy will not be examined or fully understood, thus limiting the return on investment in renewable energy. In this way, the inadequate access to affordable modern energy supply will continue to constrain productivity and hinder the improvement of living conditions.  Families will remain dependent on the use of inefficient technology (such as candles and batteries for lighting) as energy sources in rural communities or adopt fossil fuel based technologies (such as diesel generators).  Few government resources will be directed to RE investment, and the majority of available resources will be dedicated to grid extension. Private investment in renewable energy will not occur because (a) isolated RE systems are not perceived as an attractive investment, and (b) the regulatory and institutional arrangements allowing grid connected RE to be distributed are not in place.  The focus on grid coverage extension and diesel generators for off-grid electrification will delay investment in other forms of energy production, thus contribute to increasing greenhouse gas emissions from the energy sector.

GEF PROJECT ALTERNATIVE

The fundamental concept is to promote renewable energy in communities where the value of local goods will be enhanced through productive uses. The project will link local producers with national and global markets. This will secure additional income, thus alleviating poverty in these areas and providing financial resources to ensure the sustainability of the renewable energy initiatives. This is an innovative approach compared to the more traditional one where the main focus was on meeting basic energy needs. Energy becomes a fundamental input of an operational framework that catalyzes an added-value productive chain.

Existing barriers for the dissemination of productive uses (PUE) of energy generated by renewable energy technologies (RET) will be addressed by fostering a multi-stakeholder dialogue that steers inter- institutional cooperation to respond to demand-driven community needs for PUE. The executing agency will catalyze and coordinate agreements to materialize commitments to income generation activities that mitigate GHG emissions through renewable energy technologies. Also, the project will provide a set of tools for decision making, planning, implementation, and monitoring, to promote the sustainability of innovative options for natural resources management through targeted capacity building and stakeholder strengthening.

The project’s strategy therefore integrates various dimensions: (i) mitigation of GHG emissions through promotion of renewable energy technologies (RET) that are linked to (ii) income generation and productivity enhancement through productive uses of energy, being made sustainable through the incorporation of (iii) adaptation to climate change considerations that consider vulnerability and natural resource management practices that are relevant to sustainable livelihoods at the community level, and (iv) by providing the necessary support to relevant policy making and regulations and to a national and local multi-stakeholder dialogue and long-term collaboration, that are required for successful replication of the project in the national context.

The alternative scenario to be achieved through the implementation of this project is characterized by:  Increased use of and knowledge about RE for productive uses in rural areas with a sufficient level of technical services and financial support to warrant a sustainable operation;  Rural development programmes that integrate the energy dimension, thus developing the country’s vast RE potential to stimulate rural productivity;  Well-functioning markets that generate increased local income for productive uses of RE, including adequate market information and access as well as accessible financing mechanisms both for RE users, vendors and other market actors.  An enabling environment for RE for isolated and grid connected generation projects, with mechanisms that guarantee the evolution of policies to respond to new developments.

SYSTEM BOUNDARY

15 The geographical boundary of the proposed full-sized project is the national territory of Guatemala. Project activities will focus on the “poverty belt” in the western highlands of Guatemala (departments of Alta Verapaz, Baja Verapaz, Quiché, Huehuetenango, and San Marcos), where an anticipated 9 MW of small hydropower capacity will be installed over the period 2005-2009 as well as about 1 MW of off-grid RET applications for productive uses.

As designed, scope of the project has two main components. On one hand, productive uses of renewable energy are proposed as a mechanism to ensure the feasibility and sustainability of both on grid and off grid RE investments. Therefore, the objective of the productive use component is to generate sufficient local levels of income to cover, at least, the O&M costs of off grid RE investments, and to create local benefits for communities to support private investment in RE (in particular, for the on grid investments).

On the other hand, the watershed management component of the project also targets system sustainability. All activities conducted under this component aim to generate a sustainable use of watersheds that values the use of water as an energy resource. This effort focuses on two components; a) reducing the vulnerability of the actual hydroelectric facilities to climate variation through adequate design, and b) ensuring that social and institutional arrangements are in place for sustainable watershed management.

ADDITIONAL BENEFITS

Small-scale RET projects contribute to increased foreign investment, mobilize commercial bank participation in the renewable energy arena, reduce dependence on imported fossil fuels (oil); improve the country’s energy balance/mix and contribute to economic development activities in often remote areas and lastly they generate employment benefits at the local level (productive uses of energy) and the national level (local assembly and partial manufacturing of hydropower equipment).

COSTS

The total cost of the proposed initiative is US$30,325,000, which can be divided in two categories:  Cost of implementing PURE project activities (technical assistance to remove barriers hampering the development of on-grid and off-grid RETs, at USD 14,325,000  Private sector funding for investment in small-scale hydropower, leveraged by PURE, and estimated at US$16,000,000.

The total incremental cost of the GEF alternative is US$2.65 million. The co-financing consists of cash contributions of US$11,350 million, coming from two Government entities (MAGA and MEM), municipalities, the private sector association AGER, and Fundacion Solar as well as in-kind contributions valued at US$325,000, coming from the Government entities and private sector players.

GLOBAL BENEFITS

The installation of 10 MW of renewable energy (hydro and solar) will results in a reduction of approximately 630,000 tons of CO2-equivalent over the lifetime of the RET installations (20 years) as a direct impact of the proposed PURE initiative. A conservative estimate of the indirect impact of this project, from expanded RET on-grid and off-grid developments that are triggered by the proposed barrier removal activities, results in at least 3.15 million tons of CO2 reductions.

16 INCREMENTAL COST MATRIX

BASELINE ALTERNATIVE GEF INCREMENT OUTCOME 1 Development of 1 MW Off-Grid RETs (mini hydro, solar) for Productive Uses 1.1 Integration of Commercial chains in Integration of ‘value Renewable energy can ‘high-value’ rural Guatemala continue added’ products is improve rural products into to develop excluding achieved, enabled by productivity when commercial chain rural isolated PUE (based on RETs), implemented jointly communities and not thus demonstrating the with rural integrating RETs an a benefits to local development programs productive input. development. The and included as part of demonstration of the a productive chain that energy/productivity includes business link catalyzes project improvement and sustainability and marketing of new replication. products. 1.2 Development of Communities with an The use of targeted Increased offer of RET off-grid mini endowment of natural support provides based energy services, hydro and solar and agricultural access to energy based and auxiliary services energy resources for productive on RET and PUE for project use development are development will implementation in likely to pursue contribute to reducing rural context. installation of diesel GHG emissions and isolated generator sets increasing for energy provision. development The GoG and other opportunities at the donors will divert funds local level. to this end. 1.3 Increased capital Rural off grid areas Start of capital flows in Capacity mobilized as mobilization for continue to be seen as rural off grid areas of seed lending capital in PUE lending risky on the perception Guatemala will create rural Guatemala for of local financial momentum for lending RET and PUE institutions; therefore no for PUE enabled by development of rural off-grid instruments takes place development due to lack of finance for RET-based PUE 1.4 Local capacity Capacity to set up and The concept of RET Capacity established building and small manage (energy) and PUE cross- in key areas of micro- business enterprises continues to fertilization enterprise development be non-existent demonstrates the development (PUE) as feasibility of this well as technical and development path for managerial aspects of isolated communities. RET-based energy enterprises and activities 1.5 Review of Diesel Gensets continue Integrated support Identification of technology to provide low quality systems for RET support gaps and support system for service with high O&M address end user needs. targeted capacity hydro and other cost. building programmes RETs Support systems for RET continue to be fragmented and provide inadequate service. COST USD 6,825,000 USD 8,020,000 USD 1,195,000 BASELINE ALTERNATIVE GEF INCREMENT OUTCOME 2 Development of 9 MW of Grid-connected Private Sector RET (small hydro) 2.1 Development Extension in the grid is Use of commercially Auxiliary services and of grid-connected likely to be based on viable small assessment for small hydro by fossil-fuelled thermal hydropower development of small private developers power production by private hydropower in the The enormous RE developers will project area potential in Guatemala contribute to reducing will not benefit the greenhouse gas country, local emissions communities or contribute to mitigation of GHG emissions

2.2 Productive uses of Private investment in Benefit sharing Establishment of RE catalyze rural energy fails to consider arrangements allow an appropriate development in local energy and increase in investment mechanisms for communities development needs. in RE development. benefit sharing. Local communities Local communities Capacity development remain in poverty and obtain direct benefits for extension of value have a negative image of form private added productive private investment. RE investment. chains. projects, although financially viable, do not materialize. 2.3 Stakeholder Conflicts between Dialogue improves, Local capacity created engagement and community stakeholders and resolution for environmental environmental and project developers of strategies linked to awareness creation good practices in small hydro power in implementing local and conflict resolution small hydro Guatemala will continue development benefits, between developers of development to escalate, due to benefit both levels of small hydro and perceived institutional stakeholders community ineffectiveness of (communities stakeholders conflict resolution, thus benefiting at the local continuing the delay in level, and developers grid-connected RET available to reduce development lead times for integration and dispatch in the grid) COST USD 3,110,000 USD 3,745,000 USD 635,000 (USD 16 million of (USD 16 million of indirect private indirect private investment) investment) OUTCOME 3 Sustainable Natural and Energy Resources Management in River Basins 1.1 Local enabling Baseline continues to see Local communities and Empowerment and environments for natural resources municipalities engage local participation in participatory management, energy in a common goal to river basin committees watershed development and develop integral river will increase success management climate-linked basin management of energy and rural integrated with vulnerability mitigation plans to develop the development in the natural resources as isolated activities in natural and energy project sites. management for local rural development resources in a RE generation and and that are conducted in sustainable way and to vulnerability a top- down approach, respond to climate- aspects without the involvement linked vulnerability of stakeholders and emergencies

- 18 - BASELINE ALTERNATIVE GEF INCREMENT 1.2 Better Capacity to implement Communities become Subproject areas management better management engaged in better operating in the PURE practices in practices will continue to management practices project implement agriculture, depend on ad-hoc extra- in a consistent better practices in forestry and community interventions approach with natural agriculture and animal husbandry and energy resource forestry, enabling management and RET-based PUE in income-generating these areas and activities become examples to other communities in Guatemala. COST USD 1,470,000 USD 1,690,000 USD 220,000 OUTCOME 4 Conditions for project replication are established, including policy and regulatory proposals, and monitoring and feedback mechanisms. 4.1 Monitoring tool There is no available A tool is available and Increased use of for PUE in RET- project monitoring tool disseminated through methodological tools based rural linking global benefits of appropriate linking mitigation and development and mitigation and mechanisms, detailing adaptation issues with local resources adaptation with the local methodological issues. poverty reduction management and benefits of reduced Stakeholders are objectives of RET information poverty through sensitized and aware of (small and mini dissemination improved income and existing linkages and hydropower, solar sustainable livelihood. responses. Capacity energy) projects in Common practice of building is in place for rural off grid small hydro power replication of this communities. Lessons development, project into a wider learned from the disconnected with national program implementation of natural resources proposed activities are management and income disseminated generation, will continue 4.2 Enabling Continuation of lack of Small scale RET based Guatemala to environment regulatory mechanisms on grid connected implement adequate proposed of for independent RET- projects find market mechanisms to regulatory based production for the mechanisms to be improve market instruments for national grid limits the dispatched, assisting conditions in support independent small development and market Guatemala to continue of RET under hydropower dispatch of RET, a path of de- reformed market producers contributing de facto to carbonization of the conditions. increase of GHG energy sector and emissions in the assisting sustainable operation and capacity development. addition of the Guatemala electricity grid. 4.3 Proposed Government continues Policy directive in Policy directive policy directives without a rural off grid place, linking global mobilizes the on off-grid rural policy framework, objectives and local commitment of energy provision excluding rural development needs by Government to secure with mini populations from the supporting access to the necessary hydropower and local benefits of modern energy monetary installments solar energy improved energy access, services with a required for thus limiting balanced consideration maintaining a development to RET and PUE interagency program opportunities and linking rural off grid limiting its commitments energy provision using to reach the millennium RET and PUE. development goals

- 19 - BASELINE ALTERNATIVE GEF INCREMENT 4.4 Improved Government agencies Government agencies Increased number of policy dialogue on and ministries continue improve in discussion Government the linkages to deal with development and design and stakeholders and between energy issues and links to global implementation of programs improve supply, rural issues in a non-integrated relevant programs coordination and development, fashion, maintaining related to sustainable implementation by natural resources implementation in- development in the considering both management and inefficiencies in program country. Improved mitigation and climate-change development, especially participation and adaptation issues in adaptation in issue relating the policy dialogues will the context of local contribution to global assist Guatemala and sustainable benefits and local its society to enhance development benefits sustainable development discussion of climate paths. change issues. COST USD 270,000 USD 870,000 USD 600,000 Total project Without the project, the Directly resulting With a clear mandate energy sector from the PURE to promote initiative development will project a path for local including positive continue to be based on sustainable global impact, GEF is fossil fuel. Marginalized development will supporting a valuable communities will lack emerge. effort to integrate access to modern energy 630 000 tons of CO2 global, national, sources hampering local will be avoided as climate change and economic development direct impact of the land degradation and the development of project over 20 years. aspects. the country as a whole. 2,000,000 tons of CO2 will result from project replication. Total cost USD 11,675,000 USD 14,325,000 USD 2,650,000 (plus USD 16 million (plus USD 16 million leveraged) leveraged)

- 20 - NAA:

ANNEX B. PROJECT LOGICAL FRAMEWORK STITUTIINSTITUTIONON

2. LOGICAL FRAMEWORK ANALYSIS

PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) GLOBAL . . 0.5 MW of isolated . Identified . Project monitoring . Political stability. ENVIRONMENTAL . The country will be systems are barriers to renewable and evaluation . Stable energy OBJECTIVE unable to take installed. The at energy for productive reports markets. To reduce advantage of its RE least two off grid uses are removed . Project publications Guatemala’s potential. projects are . Implementation . Press releases greenhouse gas . 3.15 million tons of providing energy for cost for RET are . Official government emissions by CO2 emissions over PU. reduced by 15% documents promoting productive the next 20 years. . PPAs and benefit overall. Transaction . Updated uses of renewable sharing agreement costs for grid Guatemala National energy with strong in place for 5MW of connected RET are Communication rural development on grid investment. reduced to a third of benefits 1MW of on grid RE the current value. in operation. . At least 630,000 . At least two “value tons of carbon will be added” productive avoided by the chains using development of at Renewable Energy least 10 MW of RE are fully developed generation, basically and local products hydropower linked with access productive applications PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) national/internation . With the project al markets replication strategy implemented at 3,150,000 tons of CO2 will be avoided

DEVELOPMENT . The GoG continues to . Local development . Integrating . Energy balance . Social and political OBJECTIVE provide financial and and cost and benefit modern reliable RE as . Local business stability. Development of TA support to sharing agreement part of the local balance sheet and . Absence of conflicts indigenously available marginalized adapted to each sustainable economic financial reports. Iin project area.. renewable energy communities on an ad case is emerging. development is . Human resources integrated hoc basis without . Decision makers in recognized as a key development with environmentally integration. the GoG are factor for success. report. sustainable . The poverty belt will increasingly . Increased local . No mayor climate development and remain under attention showing interest in value added allows or environmental poverty reduction in but no integrated the integrated 50% of the concerned catastrophes (e.g. rural areas approach including option and new population to get out of earthquake, access to modern form funds are dedicated the poverty circle. hurricane) of energy to support to the project. . The local local economic diversity and development will vegetation cover is at reach isolated least conserved. communities. Improvement is seen in 25% of the concerned communities. . Communities become an example in conservation agriculture and

- 22 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) entrepreneurship. OUTCOME 1 . Pre feasibility . Conditions in . At least 1 MW of . Project and official . Political stability Development of 1 studies by GVEP and place to develop off-grid RET will be documentation allows for MW Off-Grid RETs MSP portfolio do not 0.5 MW of operational by year 4 (feasibility studies, investment in rural (mini hydro, PV) for result in projects. isolated systems. . At least 5,000 business plans, areas Productive Uses . Communities stay The first off grid people have direct MoUs, contracts) . There is strong poor. Monetary project is access to energy . Opening of bank municipal support earning less than providing energy services from RETs accounts for each the RET projects as 1USD per head. for PU. . At least 40-100 off-grid facility to well as strong . PUE identified and businesses profit from allow for project involvement of the increased Value RET energy services for development and community as a Added estimated. PUE fee collection. sense of ownership . Commercializatio . Local value . Local entrepreneur and income n channels added reaches 2USD considered credit generation identified and per person. worthy and opportunity negotiations in . 30% of local individual credit . National economic progress. families are out of contracts with Fis. conditions and . First isolated extreme poverty regional integration plant in operation. . MAGA’s Cuencas (CAFTA) support . First micro credit Altas project rural enterprise granted and PU cooperating with PURE development and starting. by providing of up to $ ‘value added’ 4.7 million for the use products for of RETs in forestry and regional and agriculture activities foreign markets . Upfront subsidy required for off grid RE electrification decreases by 25% 1.1 Integration of . Unsustainable . 7 marketing plans . At least 3 fair . Marketing strategy . Participation and ‘high-value’ use of valuable local for integrating trade/green market documents interest from products into wood resources. ‘value added’ organizations in . MoUs between organizations, such

- 23 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) commercial chain . Sale price of products (coffee, Central America, EU, communities as AGER, cardamom and coffee cardamom, certified US or Japan sign AGEXPRONT and AGEXPRONT, stay at the lower end wood and milk business contracts AGER or Mayacert, Mayacert of the scale $50 / products) in 7 sites . At least 50,000 stating product confirmed. bushel for coffee and into commercial USD per year are allocations $25 / bushel of chain operating in representing turnover . Business contracts cardamom the region. for the communities with . Country, linked concerned and wholesalers/distrib with market niches secured. utors in US, Europe in industrialized . Cardamom and Japan countries (fair trade, processing with RE green markets) increases value of crop . Cooperative by 50% agreements with . 3GWh of AGEXPRONT and renewable energy are AGER or certification produced each year at entities such as least and sold in locals Mayacert to market communities at a cost local community that covers equipment production O&M at a minimum.

1.2 Development . No feasibility . 5 feasibility . Business plans . Feasibility study . Interest, of off-grid mini studies. studies for mini hydro documents, participation and hydro and solar . MAGA completed. development at the engineering layout commitment of energy concentrates on . Financing sources selected sites as well and blueprints, local groups agriculture without in place. as for solar energy for business plans and . Involvement of emphasizing energy as . MAGA integrates selected applications general project municipal a key process input. RE within its own (crop drying, PV documents government . No modern project planning. lighting) . Signed contracts . Local governance energy available. . 2 M US$ from . MoUs with co- for construction of and democracy is MAGA are financing partners and plants functional dedicated to the financial closure of . Communities and . Land tenure

- 24 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) present initiative project implementation enterprises that secures . Construction of . At least 45 have access to development sites mini hydro in 4 -5 installation of other energy sites RETs (solar PV . Project and legal . Local tariff and systems, solar water documentation fee system is agreed pumps and solar available upon and (should at dryers) . MoUs between least cover O&M cost private developers, and possibly river municipalities and basin environmental local communities cost) to allow project development on their land 1.3 Increased capital . Micro credit . Financial . MoU signed with . Document on micro . Effective local mobilization for institutions continue to assessment of MAGA (and CONAP, finance guidelines organizations PUE lending focus their activities lending INAB) for co-financing and instruments for . Support from on relatively less organizations, through FIDA/IDB PUE MAGA, PPP to co- marginalized areas in lending opportunities projects, focusing on . Attendance lists of financing Guatemala. and financial delivery agroforestry, forestry workshop and confirmed . The poverty belt models production linked with public . Willingness of remains as such. . Micro-finance watershed dissemination for a international . No micro credit guidelines for PUE management, soil and . MoU signed cooperation institution attracted to produced and water conservation and between project agencies to provide area due to lack of risk distributed RETs for PUE and MAGA co-financing guarantee . At least two . Two international . MoUs signed . Effective EoIs signed with donors provide co- between project participation of micro-finance financing through local and financial institutions organizations for PUE NGO(s)/financial institutions (FCG, . Commitment activities Minimum 350 institutions that BANRURAL, between FIs and 10- 000 US$. . Financial institution FUNCAFE, CDRO, 15 local communities . GEF financing of lending for FUNDAP) by year 1 (including $ 250,000 leverages at productive uses in

- 25 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) the 5 off-grid project least $ 1 million for communities that sites and PUE by yr 3 have gained access communities near . Other spin-off to electricity the 5 on-grid sites) activities develop in . Extension of informal sector. At grant to NGO(s) with least 10 shops are fully micro finance functioning in each experience (such as community. Local CDRO, FCG and social events every FUNDAP). month. Guaranteeing that . Local credit credit lines are extended for PUE extended reaches 2,000,000 . Agreement US$. extending $200,000 . At least 4 FI in micro credits for officer operate in the PUE are signed. region

1.4 Local capacity . RE development . ‘Good practices’ . Capacity building . URL university staff . Leadership of URL building and remains divided and manual adapted program for trainers in working on R&D . Interest, small business independent from to target group place at URL and elaboration of participation and development other MAGA activities distributed. University. 30 new capacity building commitment of . No local capacity . Training for students every year. program local groups to build, operate, and trainers: at least On site training . Manuals and other . Active participation maintain RE. 50 staff trained integrated. capacity building of local from government . Training and materials governments (MAGA, CONAP workshops (capacity . Maya field workers and INAB) as well building) for technical receive a diploma as staff from project as PUE trainer NGOs and local implementation, O&M extended by URL government and and energy enterprise . Number of male . 75 ‘businesses’ management and and female

- 26 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) are trained in RE finance. Local community with application organizations involved members and for ‘value added’ and legalized to municipality products of goods operate and maintain officers trained and services RETs in 5-10 sites organizations (including the 5 off-grid project sites). . 30 entrepreneurs had of local organization producing high VA goods with RE in project site are able to develop BPs.

1.5 Review of . No information on . Technology gap . Report . Project Report . technology providers, quality of assessment containing assessment support system technology prices or available, shared of the RET support for hydro and O&M requirement. and validated by system and other RETs all professionals. commercialization of . Gap closure RETs strategy . Technology Gap designed. does not exist as a barrier to RE development. Reliability factor: 90%. Availability of spare parts in less than 1 week at project site. Availability of qualified staff.

OUTCOME 2 . No private RE . 3MW operating. . At least 9 MW of on- . Project and official . Political stability

- 27 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) Development of 9 development in project . Co financing grid RET operational documentation allows for MW of Grid- area. secured for a total . At least USD 16 (feasibility studies, investment in rural connected Private of 6 MW. million is committed for business plans, areas Sector RET (small . Benefit sharing investment from private MoUs, contracts) . There is strong hydro) agreement in and public sources. . Opening of bank municipal support place. Use of 1M . At least 3 locally accounts for each the RET projects as private co based energy firms off-grid facility to well as strong financing agreed operating. allow for project involvement of the upon. . At least 10% of development and community as a . Local institutional energy produced used fee collection sense of ownership set up in place. by local communities for and income private, social and PU. generation . MAGA’s Cuencas opportunity Altas project . EIAs identify all cooperating with PURE activities that can by providing of up to $ be implemented by 1.6 million for the use of river basin RETs in forestry and committees agriculture activities

2.1 Development . No development . Feasibility studies . 9 MW produces at . Feasibility study . Insecure land of grid-connected of small grid for the generation of least 40 GWh. documents tenure might small hydro by connected hydro 9 MW at 3 sites added . Local energy . Business plan threaten best private developers projects to the project business operating in a documents development sites baseline by end sustainable manner. . Financial . Municipal project Year 2. . Local sales and agreements and governments and . Business and benefit sharing contract reports. communities have financial plans for 4 and national PPAs . MoU between a sense of small hydro ensure financial developers, ‘ownership’ development sustainability. financiers and . Involvement of activities . 5,000 persons have operator (provider) ANG . Construction of access to electricity in . Price of fossil fuels

- 28 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) grid-connected small project area. remains high hydro at 4 sites by yr 3 2.2 Development of . Value for base . 8 marketing plans . Turnover for PU . Project reports . Productive Uses products is US$50/b for integrating other than energy . Financial coffee and US$25/b in ‘value added’ equals at least 100 000 statements. cardamom products (coffee, USD per year and . Local statistics. cardomon, certified secured for 5 years.. wood and milk . Value added products) in 10 sites equals 60% of product into commercial value.. chain operating in the region. . Country, linked with market niches in industrialized countries (fair trade, green markets)

2.3 Stakeholder . No engagement . Consultations . 12 Capacity . MoU between . Participation and engagement and and environmental with communities, building sessions stakeholders, ANG interest of environmental good practices in municipality and where private and the project on population at the practices in small watershed. watershed developers, local technical selected project hydro development . Tons of wood management governments and assistance and sites used per yearn committee) Local grassroots capacity building . Interest of private increases without institutions and organizations have activities investors and of reforestation schemes. stakeholders agree acquired necessary (documentation financing agencies upon parameters of skills and progress insertion of projects . Basis of the reports) and agree on agreement provides . MoU between monitoring and co- each party with project partners management satisfactory benefits. If and stakeholders

- 29 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) parameters not, agreements have . Survey for mid . 4 Agreements been changed.. project and project signed between . Private end. private developer developers are actively and municipalities looking for additional and local locations organizations . Watershed . MoU between maintained at least in a stakeholders, ANG state suitable for hydro and the project on plant sustainability and technical assistance PU development. . and capacity building activities

OUTCOME 3 . Continuing . Long-term . Strengthened river . Project . Environmental Sustainable Natural unsustainable use of watershed basin social documentation and groups, NGOs and and Energy local resources. management plans organizations (at least manuals municipalities at Resources . Vegetation cover implemented in at 10-15 river basin . Local workshop local and national Management in ratio is 50% and least 5-10 areas by management proceedings level are fully River Basins degrading by 5.% each year 3 committees) . MAGA reporting. informed thus year. . Stable vegetation . Improved soil and . Local agricultural reducing . 0 hectares cover situation water quality in and forestry unnecessary red sustainably managed attained in at least ecologically sensitive statistics tape . No link between RE 50% of project areas of at least 15 . Potential conflicts based PUE and location. micro-river basins. regarding shared sustainable . 50% of land Stabilization in all sites watersheds management and no managed in a and improvement in at between integration of sustainable manner least 25% of sites. In municipalities are adaptation measure in in project area Hectares project minimized investment.. equivalent to 32,000 impact equals 32,000 . Watershed hectares stabilized and 8,000 management . Specific CC related improved. concepts can be

- 30 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) provisions in . MAGA’s Cuencas fused with local investment plans and Altas project knowledge and best practice cooperating with PURE customs development.. by providing of up to $ . Impact of extreme 1.3 million for the use climate event is of RETs in forestry and limited in project agriculture activities area.

3.1 Local enabling . Watershed . Assessments . At least 3 specialized . . Active interest and environments for management does not performed of natural organizations are . Documents, participation of participatory exist under poverty resources active on project site. showing number of local communities, watershed constraints. management, . At least 10-15 river villages and land including women management . CC translates into practices in basin committees are area under . Level of education integrated with external events agriculture and legally incorporated integrated river is sufficient to natural resources resulting in local forestry and (including the on-grid basin plans, introduce management for RE disasters. vulnerability and off-grid project covering watershed integrated generation and (including threats sites conservation, watershed vulnerability analysis of soil . At least 40% of the natural resource management aspects erosion, high- people involved in the management and concepts conservation forest, design and disaster response . Leadership of freshwater implementation of the plans subcontracted ecosystems) in at watershed plans . Signed organizations, least 15 micro-river . 15 watershed plans subcontracts for municipal basins (including the for management of technical assistance government on-grid and off-grid natural resources (land activities project sites and use, agriculture, possible impacts of forestry, animal climate change. husbandry, fresh . Framework for water), RE generation watershed and/or disaster management, prevention are

- 31 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) vulnerability implemented. prevention and stakeholder involvement is formulated . Documented implementation of framework in at least 5 sites. . When adequate, monetary exchanges taking place . 5 river basin committee legally incorporated.. . Five to 10 watershed plans for management of natural resources (land use, agriculture, forestry, animal husbandry, fresh water), RE generation and/or disaster prevention are developed by the end of year 2 . At least 25% of the people involved in the design and implementation of the watershed plans

- 32 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs)

3.2 Better . MAGA is supporting . Management . Management . MAGA project . Leadership of management sustainable practice are visibly practice are visibly monitoring and MAGA practices in management without integrating the integrating the benefits evaluation reports . Participation of agriculture, forestry integrating energy benefits of RE in at of RE in at least 10 . Radio clips, local communities and animal aspects. least 5 locations. locations brochures, posters, . Effective husbandry . 0 local management . Communication . 40% increased local fairs communication plan integrate energy campaign in Mayan production and . Workshop and coordination aspects. languages designed productivity due to materials and with INAB, CONAP by year 1 and better management attendance lists and URL disseminated until practices and energy . Local agricultural year 4 use and forestry . Information . Energy use replaces statistics exchange and at biomass uses for 60% least 10-15 culturally of related activities in appropriate all project sites workshops that . Wood resource identify traditional conserved equals at knowledge with least 100 tons per year production schemes and is replaced by RE using high-tech processing.. options training between MAGA and project staff and local communities

- 33 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) OUTCOME 4 . Within policies, PU is . Outreach efforts, . Coordination . Project publications . Relevant ministries Conditions for not associated to RE. workshops, between various . Legal (MEM, MARN, project replication publications that ministries established. documentation MAGA) are are established, disseminate project- . Identification of (MEM, MARN, committed to off- including policy and relevant information future sites to MAGA) grid regulatory and lessons learned implement project . Laws, by-laws and . Political scenario proposals, and . Official ministry approach: Minimum: 60 regulations allows cooperation monitoring and statements on policy isolated sites for the published in the between the feedback and regulation next 5 year after official gazette various ministries mechanisms. promoting off-grid, project closure. RET and PUE . Partnership with . Demonstrated other donors adaptive established. Funds management based leveraged for on monitoring. replication: 20 million USD at project end. 4.1 Monitoring . Indicators are not site . Specific and . Project impacts are . Documents . MARN leadership tool for the specific and not even simple indicators monitored and . Workshop and evaluation tool of region specific. relevant for PU based disseminated. seminar proceedings PUE in RET-based . Their complexity on RE are developed . Official publications rural energy prevents optimum use shared and agreed at regional level at development and at reasonable cost. upon. least use project local resources . Data is difficult to . Indicators monitoring tools. management obtain for trust issues. developed in other . At least 3 case initiatives for studies reporting on adaptation are poverty alleviation, applied to the PURE sustainable energy and project. vulnerability reduction from experiences in 3 RET projects of PURE . At least 3 national Workshops and

- 34 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) seminars with at least 60 participants have allowed informed exchanges and dissemination of information. 4.2 Enabling . Although the law . Clear and fair . The 4 new grid . Laws and by-laws . Fossil fuel market environment on distributed rules of the game connected plants are that allow the price continue to proposed of electricity has been are established under this clear policy framework to rise, making RE regulatory approved, regulations and agreed upon framework. be implemented more competitive instruments for and instruments to by all parties . Transaction . Workshop and . MEM and MARN independent small apply the new law are concerned. costs reach 10% of seminar leadership hydropower not in place. . Transaction reach investment costs. proceedings . Active participation producers . Transaction costs 20% of . The GoG is by ANG and CNEE represent 30% of investment costs. permanently improving . Political stability investment cost. the legal and regulatory framework to share benefits of the existing RE potential. 4.3 Proposed . Rural . A plan to . A framework for . Laws and by-laws . Fossil fuel market policy directives on electrification and PU integrate RE and off-grid RET and PUE is that allow the price continue to off-grid rural energy are disconnected. PUE is presented proposed to be policy framework to rise, making RE provision with mini and discussed incorporated into the be implemented more competitive hydropower and with GoG. national energy policy . Workshop and . MEM, MAGA and solar energy by year 4 seminar MARN leadership proceedings . Political stability 4.4 Improved . GVEP is the only . GVEP is continuing . At least 2 policy . Official . Participation of policy dialogue on forum for an inter to identify potential statements at the communications CONRED the linkages sectoral dialogue. sites for energy for national level, linking . Workshop and . Political stability between energy . Sustainability of development climate change seminar supply, rural GVEP is not secured. purposes. mitigation, adaptation proceedings development, . GVEP becomes the and rural development

- 35 - PROJECT STRATEGY Mid-term Indicator Final Indicator (End of Sources of (Objectives, Baseline Indicator Assumptions/risks (end of year 2) project) verification outcomes, outputs) adaptation and forum for decision . Various natural resources making. Advice from ministries are project steering continuing to join their committee and efforts to alleviate advisory body is poverty mitigate sought every 6 climate change and its months. impacts within GVEP or not.

- 36 - ANNEX C. ENDORSEMENT AND CO FINANCING COMMITMENTS

- 37 - - 38 - - 39 - - 40 - ANNEX D. RESPONSE TO PROJECT REVIEWS

1 – STAP REVIEW

F A Technical Review of GEF proposal “Productive Uses of Renewable Energy in Guatemala”

Dr. Ashok Gadgil Senior Staff Scientist and Group Leader Environmental Energy Technologies Division Lawrence Berkeley National Laboratory Overall Impression:

The authors are well aware of the social and institutional complexities in implementing new technologies. The overall project proposes to develop (1) 1 MW off-grid renewable technologies, (2) 9 MW of grid connected electrical renewable generation, (3) sustainable natural and energy resource management in river basins, and (4) supporting social conditions for project replication. However, most of the funds will be raised from outside the GEF, and the proposal is cast in a manner such that its outputs attributable to GEF-funding are not easily demonstrable, quantifiable or measurable. Thus, measures of its success are undefined, and are difficult to define.

Response: We agree that the project leverages substantial amounts of co-financing for direct energy investments, activities associated to productive uses, and watershed management arrangements. The interaction between this project and other Government and private initiatives in the region has, in fact, made the task of defining the project boundaries rather difficult. However, the direct objective of the project is clear and measurable: the reduction of GHG emissions through the installation of 10 MW of Renewable Energy. Likewise, the productive uses aspect of this project will be measured through a) the capacity of RE users to pay a fee for electricity that covers, at a minimum, O&M costs, and b) an increase in energy demand in beneficiary communities. Admittedly, measuring success in the watershed management aspects of the project (Outcome 3) is more challenging; this is specifically addressed in the response to the final paragraphs of Section 1 of the current review. Likewise, several of the identified barriers are social and cultural, and the proposed processes to address these issued are difficult to quantify. It is important to note that the significance of such social/cultural issues was highlighted in the Guatemala GEF Country Dialogue initiative held in Guatemala in December 2004.

In response to this review, the project log frame has been revised to refine indicators and ensure that they are measurable and quantifiable.

Furthermore, while it makes the point, correctly, that uses of renewable energy must be economically productive, it leaves the important numbers (how expensive will the electricity be? How much will it be subsidized? How sustainable will be the subsidy?) out altogether, and only hints at some of the numbers late in the proposal – in the appendix.

Response: This issue must be addressed for two different scenarios; off grid and on grid renewable energy.

On grid: Once connected to the grid, users will receive no additional subsidy for consumption and will pay the same “social tariff” (currently at US$ 0.082 per kWh) as any other grid-connected consumer that consumes less than 300kWh/month. The only element of subsidy that is present in this case is the financing of low tension distribution grids for the communities, which will be financed with government funds. The project will focus on harnessing the productive potential of the electricity to ensure an adequate payment capacity in the recipient community. - 41 - Off Grid: In this scenario, the project acknowledges that an element of subsidy is required to make the investment feasible to the end user. The premise of this project is that the subsidy will only be provided for initial investment on equipment, and no subsidy will be provided for consumption. Hence, any user fee must cover, at least, life cycle O&M costs of the equipment. For mini grids, energy consumption will be metered and billed at the standard grid connected tariff. Fundacion Solar has determined that billing at this rate is sufficient to cover O&M costs. For stand-alone systems, such as PV panels, a fixed monthly fee will be paid by the user. Fundacion Solar has determined that to cover life cycle O&M costs (including battery replacement), this monthly fee stands at around Q30.00 (US$ 3.5), which is less than the estimated Q50.00 (US$6) used for candles, kerosene lamps, and other low quality lighting sources). It is important to note that no GEF funds will be used to subsidize equipment – government counterpart funding is earmarked for this purpose.

The proposal also does not state directly (or at least, in an easy to find way) how many tons of CO2 will be avoided directly and indirectly for the project investment.

Response: The proposal has been modified to explicitly state the expected GHG emission reductions (630,000 tons of CO2 equivalent as a direct result and 3.15 million tons as an indirect result, over 20 years) in the project summary and global objective.

In the style of presentation, the proposal will benefit from being more quantitative, more direct, and less wordy.

Response: The proposal has been edited as a response to this comment.

Key Issues

1. Scientific and Technical Soundness

In the paragraph just before the start of section 1.2, illumination services are measured in kWh. This is obviously irrelevant. The correct measure is lumen-hours of lighting.

Response: We agree that lumens are a better measure of illumination than kWh consumed, and therefore the reference to kWh has been removed. The paragraph has been modified to emphasize the fact that actual expenditures on lighting by people with no electricity service (approximately US$ 6 per month) is much higher than the fee that a grid connected user, or an off grid RE user, would pay for the bare minimum lighting needs.

In the first of the four part proposal, the authors appear to mix and add electricity and thermal renewable energy without regard to their different entropy. The correct approach is to convert thermal energy to equivalent electric.

Response: The majority of the renewable energy investments in this project will be for generation of electricity to meet energy or power needs (lighting, refrigeration, pumping, etc…). Some direct thermal energy uses from biomass and solar sources will also be developed, mainly for the drying of agricultural products. The proposal has been modified to make a clear distinction between these two types of energy. The measure of 1 MW of off grid energy is, in fact a combination of electricity services and thermal energy. This is an approximation based on the amount of electricity to be generated and a small fraction of thermal energy converted to equivalent electric.

- 42 - In the first paragraph of section 1.5, the authors express regret that “widespread adoption of renewable energy for productive uses has not been achieved in rural Guatemala.” One would ask where in the world has it been so achieved? Except in places where there are industrialization and centralized planning directives to do so irrespective of costs.

Response: Acknowledging that the adoption of renewable energy for productive uses requires government support, the project approach mainstreams renewable energy investments into a broader rural development context. Therefore, rather than isolated RE investments, the project inserts renewable energy as a key input in broader efforts to increase rural productivity. This collaboration (with substantial cash financing) between the Ministry of Energy and the Ministry of Agriculture, with participation of the Ministry of Environment, is the key driving force of this initiative.

The phrase has been reworded to reflect that Guatemala is not an exception to what occurs in most of the developing world, and that substantial government intervention is being sought to stimulate productive uses of RE.

In section 1.5 right at the beginning, the authors correctly note the tensions between local communities and outside developers of mini- and micro-hydro power. The authors note that these tensions arise because the local community does not get electricity when the hydropower projects are developed. However the authors propose a solution whose economics they leave in the dark. The solution of “stakeholder arrangements” appears to require some giving on part of the energy developers to the local community. How much will this be in $$ terms? Who will bear the extra cost? Will it dissuade the private investors from committing funds to the projects? These important questions are skirted in the proposal. In fact the text appears as an exercise in recognizing but not directly addressing the highly uneven political and economic power positions of the hydropower developers and the local community.

Response: The level of tension between hydro developers and local communities has risen to such a level that, in several cases, private investment is no longer feasible due to community dissatisfaction (expressed through road blockages, disruption of water supply, etc). Furthermore, working in rural areas were land and access to water are a priority to local dwellers, the establishment of clear property rights and resource sharing arrangements are essential for any investment. Therefore, private investors have realized that, in order for their investment to be protected in the medium and long term, these conflicts must be addressed. While, on a strict financial basis, provision of electricity to these communities is not a priority, the private sector acknowledges that corporate social responsibility must be factored into the investment costs, and is therefore willing to contribute to the rural electrification effort.

In terms of the financial contribution, the private sector has committed US$ 1 million that will accompany the investment in 9 MW of grid connected RE. These funds will be targeted specifically to the development of productive uses in newly connected communities, (which will ultimately raise the energy demand by end users). Since the rate per kWh will be equal to that of any other grid connected user, the only remaining input to connect users to the grid is the local distribution grid and metering devices. The Ministry of Energy will finance these inputs with funds from their grid extension budget.

For example, see Table 1 discussing barriers. See the barrier for grid connected RET, where under “market and financial” category, the authors write “private investor do not perceive economic benefits in providing electricity access to rural communities”. Why do they not perceive such economic benefit? Not because they are ignorant! It is probably because either there is no market demand (or the demand is too small to pay for the cost of connection), or because there is not subsidy to cover the low demand at high prices. (Note the micro and mini hydro power is several times more expensive than main grid power). The proposal beats around the bush about such issues throughout. It would have been useful to generously cite numbers, show estimated prices, subsidy levels, market demand size, etc. - 43 - Response: Clearly, demand is currently too low to justify investment for electrification of these communities. However, the proximity of these communities to the source of generation allows them to be connected at a relatively low cost (to be financed by the Ministry of Energy, as described above). Likewise, the development of productive uses is expected to boost demand. Previous Fundación Solar efforts have demonstrated that in a five-year span, electricity demand that is linked to productive uses increases from 7-11 kWh/month (when initially connected) to 30-50 kWh/month (once productive uses are developed). We emphasize, however, that the driving force for private investors to invest in such communities is not strictly financial, but is associated with the corporate social responsibility efforts that are needed to ensure the sustainability of the investment.

On the page following Table 2, in the description of output 1.2, solar thermal drying is mixed up in capacity with PV power, and 4 to 5 mini/micro hydroelectric installations. There are missing pieces of information here. What is the capacity of each of these projects? How important is solar PV in the mix? Why is solar- thermal drying being added to 1 MW of electric power?

Response: Due to the nature of the region where the project will intervene, the main off grid energy sources are expected to be mini/micro hydro installations. While PV systems will also be included, they are expected to provide a marginal contribution to the overall energy mix. Final intervention sites will be determined during the first months of project execution, so the exact capacity of each installation, and the precise technology mix, is yet to be determined. The figure of 1MW is an estimation of the total capacity to be installed to demonstrate the feasibility of the project approach.

Further down, on the page following Outcome 2, at the bottom of the page, we read that “the on-grid RE investments will occur in the same region as the off-grid projects.” However, this does not make economic sense. Why is this being done?

Response: The region where the project is intervening is comprised of 5 departments and 32,000 km2, which is over 25% of the country’s total land area. Within this region, there are sites that have already been identified as economically feasible grid connected hydro projects. Likewise, there are several remote areas where the grid is not expected to reach users in at least 10 years. Therefore, the selected regions offer opportunities for both on grid and off grid investment.

The following page, Outcome 3, discusses sustainable energy and natural resources management in the river basins. This is laudable objective, but it does not fit under what GEF is trying to do in this category (saving CO2 emissions). I wonder if the GEF mandate has become broader than in the past, or we are seeing a good Samaritan measure being injected into a project that is not charged with this responsibility.

The inclusion of a watershed management related outcome in this project stems from two reasons:

a) The sustainability of the hydroelectric investment directly depends on adequate upstream watershed management practices. Unsustainable practices lead to problems (such as excessive sedimentation, lack of regular water flow, etc) that will have a direct effect on the capacity to generate electricity and must therefore be mitigated.

b) The Strategic Priority on Adaptation allows GEF funding for adaptation-related activities as long as projects demonstrate global environmental benefits. The activities proposed in Outcome 3 are designed to reduce vulnerability to climate variations through adequate watershed management arrangements.

- 44 - We acknowledge that the primary focus of the project is the reduction of C02 emissions and hence, less than 10% of the total GEF resources are allocated to Outcome 3. Most of the activities carried out under this Outcome are financed by Government initiatives focused on watershed management issues, and the role of the GEF project, as outlined in the “system boundary” section is limited to a) reducing the vulnerability of the actual hydroelectric facilities to climate variation through adequate design, and b) ensuring that social and institutional arrangements are in place for sustainable watershed management.

It is important to note that this is not the first GEF initiative that incorporates this dimension, since the UNDP/GEF hydro initiative in Nicaragua includes a similar watershed management component. Furthermore, a preliminary description of this outcome was included in the Guatemala project concept paper that was supported and approved by the GEF Secretariat.

The main problems with outcomes 3 and 4 are that many of them are non-demonstrable, non-quantifiable, or non-measurable. For example, activities under output 3.1 include raising awareness, development of local stakeholder dialogue, etc. These are surely important, just that it is going to be hard to show what was done for the money, and if it was good enough or money wasted.

Response: As a response to this review, the project log frame has been revised to sharpen the indicators associated to these outcomes.

Developing adequate indicators for Outcome 3 has been challenging, both because of the innovative nature of this component and the interaction with other government initiative. After extensive discussion with the project proponents, we believe that the key indicators in the log frame (for example, 10 – 15 river basin committees legally incorporated, 25 % increased productivity per hectare as a result of better agricultural management practice, stabilization of soil and water quality in all sites and improvement in water quality in at least 25% of the sites), will provide a good measure on whether results are being achieved in this area.

Outcome 4 focuses on establishing a solid monitoring tool throughout the project and proposing policy and regulatory instruments that will facilitate project replication. A strong monitoring component has been included as an acknowledgment that the project needs this continuous support in order to truly determine the project’s level of success. Regarding policy proposals, the fact that the project is executed by an NGO limits the direct policy results that can be attributed to this project. It is important to note that Fundación Solar is highly regarded both within and outside Guatemala, and that it has been commissioned by the Government to draft energy policy proposals in the past. Therefore, we believe that the policy recommendations issued by this project will be well received and will be incorporated into the country’s legislation. However, the project can propose, lobby, and raise awareness, but the ultimate policy decisions lie beyond the scope of Fundación Solar´s mandate.

2. Identification of global environmental benefits and/or drawbacks of the project

The project aims to accelerate adoption of productive use of renewable energy in rural Guatemala. The global environmental benefits of such acceleration are clear.

There are no global environmental drawbacks of the proposal.

3. How the project fits within the context of goals of GEF, its operational strategies, programme priorities, GEF Council guidance and relevant conventions.

The project fits within the broad goals of GEF and its operational strategies and priorities. It aims to reduce barriers to mainly on-grid and off-grid hydroelectric development in rural Guatemala.

- 45 - 4. Regional Context

Introducing the renewable energy technologies in Guatemala, and making social conditions ripe for replication within Guatemala, will assist in the introduction of these skills and similar institutional support in the region.

5. Replicability of the project

Section 2.4 of the document addresses sustainability and replicability. The section on replicability is unclear. The section refers to intent to convince the Government of Guatemala to provide subsidy for access to electricity. Is this replicability? If so, is it sustainable financially? How? Further on, we read that “rural off- grid electrification is generally not financially feasible” Right. Then we read a really opaque sentence: “..System can be made economically viable if the subsidies are used in a “smart” way that does not create distortions between users of isolated systems and grid-connected users, by redirecting tariff subsidies to credits for off-grid and RET-based technologies for productive users in a way that generates income, creates jobs and steers economic development.” The last phrase is one to which all will say “amen,” but the preceding sentence seems to say that somehow we will provide much larger subsidies to off-grid electrification so that to the consumer it costs about the same as grid-electrification. That does not look like either sustainability or replicability to this reviewer.

Response: The replicability scenario differs in the on grid and off grid cases:

On grid – Studies by Fundación Solar and the National Association of Renewable Energy Generators have determined that there is a substantial potential for small and mini hydro development that is economically feasible. The project will develop an initial 9 MW of grid connected hydro resources in association with the private sector. This will ensure that previous negative experiences between local communities and private developers are not repeated, and that the country’s nascent efforts in developing small scale RE generation projects are supported by the project. By the end of the project, it is expected that mechanisms for collaboration between local communities and private sectors will be developed, and that the legal framework regulating independent generation will be consolidated. This will allow the private sector to invest further in economically attractive projects in the near future. A conservative estimate is that a total of 50 MW of small- scale hydro will be developed over the next 10 years.

Off-Grid – Given the circumstances in rural Guatemala (and much of the developing world) it is unreasonable to assume that off grid RE can be developed without an element of subsidy. The question then becomes, what is the most efficient way to disburse this subsidy? The project premise is that the subsidy must be disbursed up front – for the purchase of generation and distribution equipment – and that users must pay a fee for electricity that, at the very least, covers O&M costs. As productive uses of energy boost the beneficiaries’ income, and micro credit operations are developed in the project region, the project contemplates the possibility of having communities participate in the actual RE investment, thus becoming shareholders of the local generation company. However, it is unlikely that the need for an upfront subsidy will completely disappear in the project lifecycle. The project will therefore demonstrate a way to channel funds (such as those in the Rural Electrification Fund, which is to be replenished over the next two years) in an efficient and sustainable way. Likewise, further penetration of RE in rural areas will create markets and local expertise in the RE supply chain, thus driving down costs. Ultimately, the level of replication will depend on the projects ability to demonstrate that the level of upfront subsidy that is required has been significantly decreased over the project lifetime, and the governments’ (or other funding sources) willingness to provide additional capital to finance the necessary gap. An indicator to this effect – (Reduction in 25% of upfront subsidy government subsidy required per kW of off grid RE installed) has been included in the log frame.

6. Sustainability of the project - 46 - This section is weak. It contains non-measurable targets such as “the project will … explore methodologies for adequate local watershed management and risk reduction to ensure the sustainable use of the watershed.” Exploration of methodologies is hard to quantify as adequately achieved or not. Besides, just exploration can be a paper exercise. What change does it force in the real conduct of society?

Response: The section has been revised to make targets more measurable. Specifically, with regards to watershed management, the proposal now states that at least 10 river basin management committees will be established. While admittedly, this is a first step in ensuring sustainable integrated watershed management, is a measure that is expected to set an example of the integration of watershed management issues in energy projects.

Secondary Issues

The proposal has no significant linkages to other focal areas (e.g., biodiversity protection or coastal waters).

Other (non-stated) beneficial or damaging environmental effects are negligible.

The degree of involvement of stakeholders in the project is planned to be adequate.

The project will build significant capacity in Guatemala in the private and government sectors for Renewable (hydro electricity) installations and their integration in rural development.

The project is innovative in terms of comprehensively addressing the removal of some of the barriers at the technical, institutional and financial level, and also in terms of private sector and government institutions, for long term capacity building for grid-connected hydroelectric power on mini and micro scales.

Additional Comments

1. Section 2.2, Outcome 1, bullet on processed agricultural commodities. Puzzling to see “sawing” as an activity under milk products. What is being sawed??.

2. Section 2.2, Outcome 1, bullet on “Improved energy for cottage and small enterprises”.. Use “sewing” in place of “sowing” machines.

3. Section 2.2, Outcome 1, same bullet as above. Bottom of the page has a sentence that does not make sense – needs clarification. “Loans will be based on the repayment of the specific productive uses of electricity machinery…” How does one repay the productive use of machinery??

Response: The proposal has been edited to fix and/or clarify the above misleading phrases.

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After reviewing this response and discussing the project with the UNDP/GEF Regional Coordination Unit, Dr. Gadgil expressed his support for the project and sent the following message:

Dear Oliver,

Thanks for the written response as well as the subsequent discussion on the phone. I believe that you have adequately answered my questions and concerns. with best wishes for the success of the proposal!

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