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Best practice model in Central Asia Sustainable energy model for rural communities

Contents Executive Summary...... 2 World Bank assistance to Energy Sector: a quick overview of the past decade...... 4 Case studies...... 6 Success factors...... 9 Lessons from the World Bank’s Village Improvement Project...... 12 Energy Project Model...... 13 Conceptual model...... 17 Relevance of the model to Central Asia...... 18 Limitations of the model and risk factors...... 21 Conclusion...... 24

Acronyms

CAR Central Asia Region GEF Global Ecological Facilities

GHG Green Household Gases (CO 2 - Carbon Dioxide) KR Kyrgyz Republic LIBOR London Exchange MA Ministry of Agriculture RK Republic of Kazakhstan RT Republic of Tajikistan SGP / GEF Small Grants Program of the Global Ecological Facilities sHPS Small hydroelectric power station UNDP United Nation Development Program WBG World Bank Group WPU Wind Power Unit Executive Summary

The document reviews the World Bank’s assistance to the energy sector of Tajikistan, Kyrgyzstan and Kazakhstan and finds that most of the financial and technical assistance has been concentrated in improving sustainability of state run utilities and rehabilitating the existing energy infrastructure. Little additional generating capacity has been installed in Tajikistan and Kyrgyzstan since their independence and in Kazakhstan the World Bank’s effort has centered on transmission lines. At the same time, such interventions largely addressed the energy needs of urban citizens, while large sections of the rural poor remained without adequate access to electricity.

The model proposes a new approach where public and donor spending will be allocated to address the energy needs of rural and remote communities through a decentralized approach and is based on renewable energy projects. The model demonstrates possible approaches by analyzing five renewable energy case studies in Kazakhstan, Kyrgyzstan and Tajikistan. The five case studies describe community based renewable energy projects that benefited the rural poor in Central Asia. In many cases, the projects recouped their startup costs within ten years, and provided for more reliable electricity for small businesses, rural communities, and migrant animal caretakers. This paper explores the factors that contributed to the success of these case studies and provides recommendations for how the World Bank’s energy portfolio in Central Asia can be reshaped to meet the needs of the most disadvantaged citizens.

The paper identifies several factors that contributed to the successful implementation of renewable energy projects. These factors include donor financing which enables projects financially. It also identifies that co- investment in projects results in ownership of those projects in communities. Know-how that has emerged over the years for successfully implementing renewable projects under local conditions, is prominent. Financial sustainability, or the degree of ‘usefulness’ of projects that were designed around revenue generating activities, is also a critical element that makes successful projects possible. Finally, the case studies show that support from local-level governments in convening and allocating in-kind donations of services is also important.

Such a community-driven, small scale energy approach shares key elements with other successful rural projects, namely World Bank’s Village Investment Project (VIP). This project seeks to empower villages to created critical infrastructure and employment generating activities by using small grants and loans. A comparison between the case studies and VIP demonstrates that decentralization, joint implementation with beneficiaries and a decentralized, need-driven approach can be contributing factors to the success of projects.

Based on case studies and elements of the VIP project, a best practice model for decentralized renewable energy projects is proposed. The model describes key elements of project identification, ownership, financing and achievement of sustainability. The model best practices for community based renewable energy projects are identified as follows:

a) Clear identification of energy project and its potential benefits with the community;

b) Despite the simplicity of some small RE projects, a thorough feasibility study is required and should be conducted by experts, experienced in such projects and familiar with the local culture and environment;

c) Joint-financing of the project where donor and stakeholders share the costs of the project. Importantly, best practice calls for the design of RE projects around revenue generating activities and the extension of energy (mostly electricity in cases observed) for local consumption.

d) Establishment of ownership of the project in the community. Successful case studies had either a care-taker with specific responsibilities assigned (by the donor or community) or the main consumer of energy services as the owner of the project. Also, responsibilities to share the benefits from the project with the community were clearly agreed. Local government plays a critical role in convening and arbitrating of such agreements.

2 e) Financial sustainability is most critical and must be addressed together with the community during the project design phase. As mentioned above, best practice calls for designing RE projects for productive purposes primarily and social benefits secondarily.

f) Local governments’ role in helping to replicate successful projects in other locations by raising awareness of practical application of RE, mobilizing communities and helping fellow administrators reduce barriers for community led energy projects.

If the decentralized approach is feasible, and technically and financially small scale energy projects were possible with donor assistance, how might these success factors and good practices be encompassed in an energy model and scaled up? For the proposed model to find more acceptance, conditions and gaps will need to be addressed.

A certain enabling environment is required to allow wide-scale replication of the model. The enabling environment starts with supporting a legal and regulatory base which gives sufficient freedom to communities to implement decentralized projects. This also empowers local government to make local decisions and creates a favorable fiduciary regime.

Financial barriers need to be resolved by devising financial products that would be exclusively available to promote pro-poor, decentralized renewable energy projects. Loans should be made available at low cost and for a long period of time (which is currently not available). Expansion of small scale renewable projects requires technical capacity to build and service such projects based on local resources and expertise. Local manufacturing capacity will need to be revived in order to reduce maintenance costs and raise the serviceability of small renewable energy technology.

Based on the needs, this best practice model develops a set of recommendations where donors, and in particular, the World Bank could provide assistance. Core aspects of the recommendations are based on the three above needs: to help governments put in place a supporting environment and incentives; to expand access to finance; and, together with the government, to invest in local technical maintenance capacity.

3 World Bank assistance to Energy Sector: a quick overview of the past decade

Kazakhstan, Tajikistan and Kyrgyzstan

In the last 10 years, the World Bank has financed between five and ten energy sector projects in each of these three countries. The Bank and governments’ energy projects could be characterized by two broad phases – the restructuring of energy sector in late 1998 to 2005, and the emergency energy support projects beginning in 2008.

Energy sector reform projects such as the Structural Adjustment Credit in Kyrgyzstan and Energy Loss Reduction project in Tajikistan tried to increase efficiency, accountability and financial viability of energy systems to address serious performance shortcomings in heat and power provision. However, the projects concentrated on privatization of utilities, tariff increases and fee collection improvements. Review of World Bank documents suggests that emphasis was on reducing energy losses on the consumer side. Following the 2007 and 2008 energy crises in both countries, the World Bank approved several emergency grants and loans to address severe energy shortages. These emergency funds were used to rehabilitate electricity and heat networks, towards fuel procurement, to rehabilitate urban combined heat and power plants, and for capacity building for government and utilities.

Table 1 - World Bank Energy Investments 1998-20091: Tajikistan

Year Project $US million Project components (energy component)

2010 Power and heat transmission rehabilitation Emergency Energy Assistance Project - 15 Heat supply system rehab additional financing (not approved Fuel purchase yet) Cost of energy import

2008 Pamir Additional Financing 2.5 Flood damage rehabilitation

2008 Energy Emergency 6.5 Heat & electricity rehab, fuel procurement, electricity grid rehabilitation. Dushanbe and Khujand cities primarily.

2006 Development Policy Grant 1 Governance, public sector management

2005 Energy Loss Reduction Project 18 Power and gas meters, TA for government.

2002 Pamir Private Power Project 18 Privatization, asset rehabilitation, additional 14 MW.

1999 Emergency Flood Assistance Project - 0.1 Electricity line restoration Supplemental Credit

1998 Emergency Flood Assistance Project 0.4 Electricity line restoration

Kazakhstan

Year Project $US Project components million

2009 Moynak Electricity Transmission Project 48 2 branches of transmission lines, modernization of 3 substation

2007 EITI Support Grant 0.07 Implementation of Extractive Industry Transparency Initiat.

2005 North-South Electricity Transmission Project 100 Portion of North South transmission line ($93 m). Extension of 11 Information was collected from the World Bank project web resources. Amounts represent the energy components of projects only, not total costs. Projects’ components are drawn from appropriate project documentation. 4 2 Substations

1999 Electricity Transmission & Rehab Project 140 Substation rehabilitation, institutional development, electricity trade

Kyrgyzstan

Year Project $US million Project components (energy component)

2009 Emergency Energy Assistance Project - 4 Scale up of EEAP Additional Financing

2009 Additional Financing for the VIP 2 0.6 Scale-up to national level

2008 Emergency Energy Assistance 11 Bishkek and Osh heat generation system rehab, fuel procurement, piping, capacity building

2006 Second Village Investment Project 1.2 Decentralized community-led projects (1.2 m as marked for energy projects)

2000 Consolidation Structural Adjustment Credit 12.2 Energy sector unbundling, privatization and financial sustainability

2000 Consolidated Technical Assistance Project 1 Technical and policy support for CSAC above

1998 Power and District Heating Supplemental 14.7

1996 Power & District Heating Rehabilitation 20 Financial loss reduction /collection, 90 MW unit, infrastructure Project rehab, TA for sector, gov.

The project data indicates that little new energy capacity for any of the countries was added as part of Bank- supported projects. In Bishkek, some 90 MW of heat and power were added as the result of rehabilitation and completion of Bishkek CHP plant2. In Tajikistan, 14 MW new generating capacity has been added to Pamir 1 HPS in 2002-2005 as part of a privatization and rehabilitation project bringing the station’s capacity to a full 28 MW3. In Kazakhstan, the World Bank-supported projects enabled greater access to generation, but did not add capacity as such. The additional capacity added was completion/rehabilitation of existing designs. While more energy has been freed by efficiency and rehabilitation of existing equipment and assets, very few MW of new capacity were installed with the support of the World Bank. In addition, the component breakdown of the Bank’s projects shows that most of the financing helped address heat and electricity needs of urban locations – in Kyrgyzstan (Bishkek and Osh) and Tajikistan (Dushanbe and Khujand), while loans to Kazakhstan addressed HV transmission capability. Pamir energy, the only project that added new capacity in Tajikistan, benefited the remote, impoverished Pamir province. Findings The table also shows that achieving financial sustainability of utilities by means of privatization, upward energy price adjustments and improving bill collections (metering for population major components for Kyrgyzstan and Tajikistan countries) were dominant components of projects. Projects approved early in the decade, in other words, relied largely on the reduction of financial losses at the consumer end. These sector restructuring efforts delivered little direct benefit to consumers (albeit strengthening long-term sustainability on the supply side, which was achieved in Kazakhstan and to a lesser extent in Tajikistan), and in the case of Kyrgyzstan’s structural adjustment credit, the Bank’s project evaluation found that major components of the project were unsatisfactory4.

22Power and District Rehabilitation Project, Implementation Completion and Results Report, the World Bank, June 2008 p. 3 33 Pamir Private Power Project: Additional Financing, Project paper, the World Bank, June 23, 2008 44 Kyrgyz Republic - Consolidation Structural Adjustment Credit Project, Implementation Completion and Results Report, the World Bank, pp. 6 -13, 21. Components assessed by the Evaluation by the Quality Assurance Group 5 We see that the World Bank and Central Asian governments attempted ambitious reforms of the energy sector in an effort to make them sustainable in the long-term and increase efficiency and reliability. Later, the Bank’s assistance was crucial in supporting the people of Tajikistan and Kyrgyzstan during severe energy outages. However, intervention to address energy security for the rural poor was limited and very few new energy generation projects were added. Most projects focused on the financial sustainability of energy providers and the restoration of energy for cities. Rural populations received limited assistance and continue to suffer from severe energy shortages. The World Bank has provided funds to rehabilitate rural energy infrastructure, and the ADB has funded community based micro-hydropower technical assistance to support energy access for in the rural areas. These interventions were limited and often organized on an ad hoc basis; for instance in response to natural disasters. The World Bank should do considerably more to restore energy access for rural areas and empower communities to take full advantage of energy services.

Case studies The World Bank Group should adopt visionary goals in its energy strategy and expand options available to decision makers and societies to meet energy needs. In addition to supporting traditional energy projects as prioritized by governments, the Bank should help to create space for decentralized, small scale energy solutions, which are more appropriate for rural and remote communities. Therefore, the Bank’s upcoming energy strategy should pay special attention to the energy needs of the rural poor.

To explore good practices, several successful renewable energy projects were observed to help inform alternatives in securing energy needs, particularly those of marginalized rural communities. The five case studies and energy model presented below are meant to revisit the debate about renewable energy solutions and the role of the public financing in meeting the needs of rural communities by implementing a more sustainable energy model in Central Asia. The following cases of successful micro renewable energy projects are described below; two of the cases are in Kazakhstan, two are in Tajikistan, and the fifth is from Kyrgyzstan. More information about each project is available in the attached annexes. The author’s review of these successful cases does not represent a comparative study, but reveals key factors attributable to the successful project implementation. The authors of this report were involved in the design, implementation and subsequent monitoring of the first two case studies5. The third and fourth case studies were part of a regional study of renewable energy implementation and a project visit in late January, 20106.

55 The author of case studies 1 and 2, Valeriy Zhiltsov, national renewable energy consultant with GEF was also implementing these projects. 66 Qurbondjo Kabutov, Academy of Sciences and Abdulhamid Kayumov, Agency For Hydrometeorology, Tajikistan. Conducted a series of field studies on renewable energy potential and current development in Tajikistan, 2002. Akbari hydroelectric power station case study is a project in Rasht Valley of Tajikistan. 6 Case 1 - Solar Drier Units

The first case study (“Sun on a service for the agriculture”) has allowed people to use solar energy for a better and ten times accelerated drying process of fruits and vegetables, without loss of quality in summer and autumnal periods. This solar drying process has improved the safety and marketability of goods in the market, and has reduced the use of organic fuel and electricity for these purposes. At the time of project commencement in 2004, the project benefited 22 seasonal agricultural workers from ten families (primarily women), two small businesses, and dried fruit distributors and retail vendors. This project was jointly implemented by the ‘Women of the East’ non-profit organization with support from GEF Small Grantы Program and the local government. In addition, several local stakeholders co-invested in the project 7. The $32,000 project became self sustainable within two summer-fall seasons – one of the fastest cost recoveries achieved in renewable projects. This project is still operational in a financially sustainable manner and enjoys the support of the local communities and the Enbekchi-Kazakh regional government of the Republic of Kazakhstan.

Case 2 – Small Wind Power for Shepherds

The second case involves the installation of kilowatt-class wind turbines to support and sustain nomadic animal husbandry in the Karaganda oblast of Kazakhstan. The objective was to demonstrate the use of small- scale renewable projects by providing an autonomous electricity supply to mobile animal herders and farmers’ small businesses. This project was initiated by the Farmers Association in the Shetsk region of Kazakhstan in 2005, jointly implemented by the Shetsk regional government and Research & Production Center “mechanization of agricultural industry” initiative in 2006, and co-financed by the GEF Small Grants Program, the farmers’ association of agriculture workers “Azat”, the private rural enterprise “Izhe” and the local population8. The Shetsk regional and Karaganda provincial governments actively supported the project by mobilizing support from local businesses. At the time of the assessment, the project benefited 28 people in the summer and around 20 people in the winter. In addition, the project benefits two farmer’s entrepreneurs by electrifying the production and storage of dairy and meat products. Power generated from the windmills helps make wool as well. These goods are then sold in domestic markets. Greater productivity from increased daily production, an increased number of animals and longer stay-over periods in the fields is expected to achieve payback in 7 to 8 years. The turbines have increased revenue by 2000 US dollars and have allowed this design to become sustainable. This project started in 2006 and is still active. The project cost $49,000 to implement9.

Case 3 – “Akbari” Micro-Hydro Power Station

The third case documents the experience of a micro-hydro power station (HPS) installed in a rural community in Tajikistan with the support of United Nations Development Program in 2004. This hydropower station provides electricity to its owner (and the primary energy consumer) “Akbar” enterprise, which owns a power transformer manufacturing and repair shop near the regional town center, and another private vulcanization enterprise located nearby. In addition, the Akbari HPS supplies electricity to 21 families during the late fall and winter months. The micro HPS keeps two businesses operating year-round and supplies 21 families with electricity for basic needs when no electricity is available through the main grid. Opportunities exist to install an additional generator to cover a greater number of households. This project was implemented and co-financed by the Akbar business and the UNDP’s financing of $29,000 with the support of the local government. Cost recovery is expected in 4 to 5 years.

77 Co-financing distribution: NGO “Women of the East” (2,510 $), local population ($1,500), JSV "Asphalt concrete" ($2,500), brick factory "Tau - Turgen" ($2,000) and manufacturer «Erkin&K» (3,000 $) 88 Co-financing break down for the second case: Azat $1,500, Izhe $2000 and population $2,500, GEF 99 Equipment costs amounted to $23,300 out of the total $49,000. 7 Case 4 – “Chasmasor” Micro-Hydro Power Station

This case study describes another micro HPS in the Bunkagien village in Southern Tajikistan, which was jointly financed by three parties and implemented by Binokor, a local non-profit organization. The 25kw run-of-the-river micro hydro station powers: lighting and low-load appliances (non-heating) for 85 families; a local school with around 700 students; 2 mosques; and several small retail shops. Electricity is available only during the fall and winter months. The $17,200 project is jointly financed by International Fund for Aral Sea ($6,500), Barki Tojik or countries main electricity utility ($6,000), and the community ($4,300). The main donor (International Fund for Aral Sea) capped the price per family to $2.3 a month flat (the government recommended higher rates). Some $1,600 is expected to be collected during the first year (6 winter and fall months), which means cost recovery can be achieved in 9-10 years. The government waived taxes for this project for the first 5 years of operation. Households are expected to pay around a $3 per month flat fee, and it appears the actual consumption of power is not individually metered.

Case 5 - Kizil-Charba Hybrid Biogas Micro Hydro Power Station

A combined 4-unit biogas reactor linked to a 5 kW micro hydropower station was installed in the village of izil-Charba in Talas region of Kyrgyzstan. The biogas reactor can produce between 8 and 25 m 3 of methane per day, and during warm months the micro-hydro power station also produces electricity10.The system benefits 22 families and produces some 100 liters of fertilizer per day as a by-product. The project has helped reduce local deforestation, supplanted wood as source of energy for cooking and heating and reduced energy costs for families. Women and children involved in cooking benefit most from this indoor-friendly fuel source. The GEF-supported project also improved space insulation with the 22 houses and organized a community-wide tree replanting. The project was co-implemented with local stakeholders, with GEF providing a grant in sum of $7,463 and a non-governmental organization, “Dan”, designing and building the system using second-hand parts. The local government donated cisterns for the biogas reactor, helped organize the community and raise awareness about renewable energy opportunities through media. At the time that this case study was prepared, Dan was running a shop where bio-gas systems were produced and supplied 5 biogas reactors for local consumption.

10 During the winter months the micro-HPS supplies electricity to heat the four biogas units to maintain operational temperature. 8 Table 2: Capacity, Costs and Beneficiaries

kW OF COST PER PROJECT PROJECTS BENEFICIARIES CAPACITY kWh COSTS

Energy efficiency / heat

Solar fruit and 65 kW producing Total cost Two businessmen and 22 vegetable drying. 342*10 9 кJ $32,000 additional seasonal Case per year. *equipment employees 1 -Enbekshi-Kazakh costs: wide impact on distributors, region, Kazakhstan $8276 sale, labor etc.

Generation of electricity

4.5 kW wind power Peak Total cost units for a herdsman, capacity 6 $49 000, Two families/shepherd with Shetsk region, кW with ~$0.11 *equipment Case 15 peoples and 5 workers in Kazakhstan accumulator costs: 2 winter seasons and 13 battery $22,500 workers in the summer capacity 2 * 190 A*h

“ Akbari” Micro HPS, 45 kW Total cost Tajikistan $36 000, Case 2 businesses and 21 ~$0.01 - 0.02 *equipment 3 households cost: $29,000

Case “ Chasmansor” micro 25 kW $17,200 School, 2 public offices, 4 HPS, Tajikistan shop, mill and 85 households

“ Kizil-Charba” hybrid 5 kW + 8- $7,463 Case Biogas-micro HPS 20m3/day (grant 22 households 5 component )

Table 2 shows energy generated and costs for the five small scale renewable projects. The five cases demonstrate small, but nevertheless important, renewable solutions for the benefit of energy-poor communities. Another table listing recent micro-HPS projects in Tajikistan is attached and will also be referred to in this document.

Success factors Based on the case studies and expert experience with these projects, this section will identify noteworthy factors that made the projects successful. We will also identify how these factors inform a renewable energy best practice model.

Initial capital financing – donor grants

All five renewable energy projects explored in the previous section were made possible by grants from either GEF or UNDP and matched with smaller state or community contributions. The donor funding financed the biggest part of the project costs, even though the local population, select entrepreneurs and governments all mobilized considerable financial resources as well. The case studies suggest that donor financing catalyzed government and community co-investments and other in-kind support. These projects also indicate that expenditure for hardware and transportation constitutes the bulk of project costs11. These expenditures require lump-sum cash investments that would be difficult to source from governments or communities over time. Because of high investment needs, lack of financing opportunities and prevailing poverty in the region, we can assume that without donor assistance these projects probably would not have taken place. Therefore, availability of cheap or free finance was one of the key factors that allowed successful implementation of the

11 See table 3 total cost and equipment expenses. 9 projects. Donor financing is not the only success criterion, however, as cases exist of donor- funded and supervised projects that have still proven unsuccessful.

Co-financing and joint implementation with beneficiaries

Another important element observed was cost-sharing and community ownership. Having a stake in the project ensured that projects functioned effectively. The project implementers note that beneficiaries were gentle towards the procured equipment, and ensured proper and timely maintenance of unit components. Beneficiaries regarded the projects as investments because they involved their own funds and effort. Cost- sharing on joint implementation was a part of the project design specifically to foster ownership. For example, in Case 1 the NGO contributed $3,000 out of the $32,000 total cost. In addition, members of families also contributed labor by leveling the site of the future driers, preparation of sand-concrete mixtures and the laying of the concrete foundation where the driers were to be installed. Beneficiary families also contributed non-skilled labor for activities such as painting and waterproofing of the driers. In Case 2, each herdsman co-invested $2,000 against every $12,500 of grant funds for equipment made available by the SGP / GEF. The herdsmen and their hired-labor also agreed to contribute in-kind by laying the foundation for each of the two wind turbines, digging 75m trenches for underground cables, and installing internal wiring and hook-ups from herdsman camps to the generating units. In the third case, the Akbar enterprise spent at least $7,000 to prepare the housing structure and for hydro-technical works to divert river water in addition to $29,000 grant funds allocated for the project. The workers from the electro-transformer enterprise possessed considerable experience working with high-voltage equipment and were able to perform all electrical work associated with the installation and transfer of electricity from the mini HPS to the two businesses and households.

Financial sustainability and proven usefulness

Each of these case studies has a relatively fast payback timeframe (Case 1 - two years, Case 2-eight to ten years, Case 3 – four to five years). It is not clear whether donors required or expected a repayment of their funding, but those investing in the project were clearly interested in recouping their investments given that the amounts invested by communities are quite significant by local measures. Some cases produced obvious financial benefits, while other resulted in social benefits. These projects have proven their financial sustainability, even though it is early to judge whether they will result in profits for communities. Profitability in this case better serves as an indicator of sufficient buy-in from the beneficiaries and that the projects generated tangible ‘value’ for which people were prepared to pay and invest. So, in Case 1, large scale fruit drying and processing amounted to a profit nearly of $47,000, which allowed project owners to purchase their own truck for delivery of raw materials to drying units and final dry-fruit and vegetable products from village to Alma-Ata City. The second case demonstrated how better labor and life conditions for herders and their hired workers allowed for prolonged stays in remote pastures rather than overgrazed locations. This contributed to an increase in herd size over a one year period. Two local farmers benefited from deliveries of drinking water for cattle, mechanized processing of milk separation, meat and wool products and refrigeration for product storage; thus increasing their incomes to up to $2,000 per year per each herdsman household. The micro HPS in the third case allowed uninterrupted operation for two businesses, which would have otherwise been impossible during the fall and winter months. The profits from the transformer production and repair enterprise, vulcanizing enterprise and additional income from the 21 households who pay for electricity during winter allows for sustainable operation of the mini HPS. Out of some 150 similar micro and mini HPS projects in the country, this mini HPS is significant because the initial investment and groundwork allowed a $645/kW cost per unit, instead of the average $1200/kW for micro and mini HPS under similar conditions 12.

1212 The cheaper initial cost per unit of capacity here is useful from the perspective of external donors or investors, such as the communities and UNDP. 10 The Chasmasor project is a recent project so cost recovery measurement is not possible, but before the project, local families spent between $35 -45 for gasoline powered power generation during winter, and with the HPS, each family now pays $2.5 - 3 monthly.

Active support from local government

Local authorities in rural areas of CAR countries are usually highly interested in the implementation of renewable projects to support local industries and agriculture. In the cases observed above, they agreed to allocate land plots for renewable objectives, and facilitated the projects in accordance with local legislation. They also mobilized financial and in-kind contributions from local businesses. For example, in Case 1, Akimat of the Enbekshi-Kazakh district (Alma-Ata region) has allocated a plot of land near the Enbek village for a fruit drying facility and negotiated the in-kind contribution of bricks and construction materials from the Tau-Turgen brick company. In Kyrgyzstan’s case, the local government provided cistern containers for biogas units, which were a costly component, and provided land for the reforestation component of the project. Local governments are also helpful in disseminating success stories through media and by organizing workshops for communities. Case 2 illustrates how the government’s subsequent promotion of wind power led to requests for 900 and 623 wind-turbines (4 to 6 - 10 kW per unit) from the Shetsk and Karkaralinks regions of one Karaganda Oblast respectively13. Later TV broadcast coverage of the trend may have also caused purchase orders for 400 small class turbines, 1 000 wind power units, and several batches of even smaller solar-wind units to supply telecommunication towers for neighboring regions.

Local expertise in renewable project implementation

There is a growing realization that for small scale projects, extra-effort is required during feasibility assessments and local expertise in RE projects is needed for success. The projects, mostly UNDP/GEF designed and funded, relied on NGOs with specific experience in designing and installing village renewable energy systems. NGOs such as Dan and Binokor, and private enterprises such as Akbar14 have implemented similar projects previous to the case studies – indicating that specialized skill and experience in service/delivery NGOs are emerging. Project sponsors hired consultant services during the pre-installation design phase, construction phase and for monitoring after installation. Particularly in the first two projects, special budget line items of $600 allowed external experts to conduct application quality assessments and to ensure proper design and post- installation monitoring. Financing enabled experts to provide meteorological information, conduct market research, connect with producers of equipment and receive technical and economical information. These experts performed a series of estimations for scientific grounding of their choice of equipment types, ensuring each was most suitable for the specific site. The importance of local expertise is highlighted by recent failure projects. For instance, a newly installed 16 kW wind power unit in Aralsk was destroyed, and a hybrid solar - underground water desalination system was damaged in Kzylorda, because of insufficient expertise and experience implementing renewable projects. The recent ADB Technical Assistance pilot micro HPS also failed partly because insufficient resources were allocated for hydrological assessments and partly because of severe weather changes affecting water flows.15 In the above projects a level of experience in implementing renewable projects seems to contribute to success. In the first two cases GEF involved an external consultant to help design and oversee project implementation, whereas the project described in Case 3 relied on a local company’s specialized experience.

1313 It is not clear though whether these request from populations meant that they were willing to cover part or all of the costs, or such enthusiasm came from assumption that grant funding will extend to them as well. 14 Akbari mHPS was not built by Akbar owner, but an organization with several years of experience in building micro- HPS was hired. Akbar specialist have helped with electric work. 1515 Development of Community Based Micr-Hydropower Supply in Remote Rural Areas. ADB Technical Assistance Completion Report. http://www.adb.org/Documents/TACRs/TAJ/38179-01-taj-tcr.pdf 11 Emerging favorable fiscal and regulatory environment

The Tajik and Kyrgyz governments have introduced favorable laws and regulations to support renewable projects of micro-, mini- and small scale. These laws help foster favorable conditions for utilizing a network of rivers and other water streams with a minimum winter discharge of 0.5 cubic meters per second. Case 4 describes how the government is able to wave taxes on micro projects to make them more feasible and attractive. By contrast in Kazakhstan, tax and regulatory support is available to competent energy producers only for projects with capacities of 500 kW and more. As a result, small scale solar - powered facilities, wind turbines and wind farms of lower kilowatt classes cannot benefit from existing tax policies.

Lessons from the World Bank’s Village Improvement Project To compare success factors and to expand the pool of case studies, the World Bank’s Village Improvement (VIP) Projects were selected. We select the VIP projects because they have a small energy component (including Case Study 5), were highly rated for effectiveness by the Bank and because they targeted the needs of rural communities. The two Village Improvement Projects (VIP, VIP2 and VIP2 Supplemental financing) carried out in Kyrgyzstan are among the more successful energy projects of the World Bank in Central Asia. Although only 8% of project components were energy related, the project’s approach and lessons can help guide future energy sector projects. The World Bank VIP projects represent a grant/loan program in support of aiyl okmotus (village self-government units), which are community development projects that provide essential infrastructure service and generate employment opportunities for communities. Projects are locally- managed, demand-driven and carried out by villages with the support of “grassroots institutions”, such as the NGOs, local governments and service organizations. The Projects’ main components are: a) Social mobilization, micro-project implementation, local governance; b) Village investments; and c) Project management16.

The project has received high ratings at the appraisal stage: “Implementation performance and progress towards meeting the development objectives have been excellent from the beginning…… reaching about 70% (2.15 million) of all rural residents of the Kyrgyz Republic17” An analysis of publicly available documentation on VIP and VIP2 project helps us identify key elements of the project and draw comparisons with the individual energy projects described in the case studies. When comparing what approach was taken to support infrastructure and energy projects at the village and sub- village (e.g. several households) levels, one observes the following similarities in the project features:

WB VIP features: Energy Cases project features:  Grant and loan mixed financing  Grant financing  Minicipality & community driven  NGO entrepreneur & community driven  Promotes entrepreneurship  Involves entrepreneurship  20% community co-investment required  Some community cost sharing & in-kind  Rural focused  Rural feasible only

1616 Second Village Investment Project, additional financing, Program Information Document, the World Bank, October 13, 2009. 1717 Second village Investment Project, Program Appraisal Document, the World Bank, July 2006, p. 83. Table on Project intermediate development outcomes indicates that original targets/objectives have been surpassed three years early. Page 84 12 Also, differences were identified: + Not specific to particular kind of projects + Capacity building & governance component We observe that the following elements are present in the separate case studies assessed as well as by the Bank’s VIP and VIP2 projects: a decentralized approach; donor assisted investment; community ownership; demand driven project identification; cost-sharing; and possible the support of at lowest government level. Hence, we hypothesize that these elements of project design contribute to success.

Energy Project Model The combination of factors observed from the case studies and lessons from projects such as the World Bank’s Village Improvement Projects help draw a picture of an emerging model for decentralized, pro-poor energy projects based on renewable energy.

The model describes good practices in designing and sustaining renewable energy projects. The model is based on five steps:  Project identification (by local government, organization or individuals);  Assisted18 start-up financing;  Joint implementation with government, donor and community;  Ownership transfer;  Ensuring financial sustainability; and  Support for replications in other regions.

Project identification

Individuals, communities and local government authorities are the main stakeholders and initiators of the decentralized energy model. They identify needs and opportunities and mobilize their own resources to meet their energy needs in a manner most applicable to their current and future circumstances. Depending on local needs and feasibility of project designs, the energy projects (including bio-, hydro, solar and wind and hybrid systems) from 50 -100 kW are jointly implemented. During the early project stages, development agencies will guide project implementation with the community and governments drawing from successful projects already implemented. Donors also ensure that projects benefit the community members and are inclusive of marginalized and poorer members. At later stages, local entrepreneurship and local governments help identify opportunities, set standards and implement projects directly with communities. In this model, the identification of opportunities and initiatives comes from communities, local business/organizations or the local government. The project initiators consult with local beneficiaries regarding their participation in the project and willingness to invest and pay for energy service. Roles of the government, NGO/entrepreneur and community beneficiaries are defined and agreed upon. Local businesses or public energy institutions identify a need for an energy project and put forth resources with the assistance of donors/the public/community assistance. This business or public body becomes the ‘primary consumer’ of energy and shares the benefits (e.g. heat, electricity or financial gain) with the community. Such projects are successful when a primary energy consumer with a long-term stake in project success is present. The primary energy consumer can be local government, local business or another entity. In best

1818 Here assisted means access to loans, grants or a combination will be need in addition to any indigenous investments. 13 cases, the primary consumer is able to derive earnings from the project. Essentially, donor or other public assistance to such projects is possible only when broader members of the community benefit from the project. The Akbari HPS project in Tajikistan and the solar-drier-based business described in Case 1 can be examples of such an approach. Projects are designed to be simple, locally replicable and maintenance-friendly. As much as possible, renewable projects should rely on local capacity, both technological and human, to implement projects in order to help foster indigenous initiative and build technical and entrepreneurial experience.

Assisted Financing

Upon project identification and community agreement on implementation, donors help to finance the project. Without supportive financing, projects are unlikely to start due to the low incomes of beneficiaries, restricted or absent access to financing and expensive and short financing options even when they are available. Project sponsors can be donors only (as in Cases 1 and 2), or joint private-donor-government investments (Cases 3 and 4) that fund capital investments, labor and equipment costs. As we see from Table 2, above, between $32,000 and $49,000 was invested by developmental agencies, governments and the population. Initial capital costs can be significant and donor or public funding assistance is required. However, renewable projects enjoy free ‘fuels’ and consumers’ payments adjust to increasing fuel costs or supply challenges, as they would with traditional energy projects. With the exception of maintenance and repair costs, the prices can be set by care-takers/governments and donors.

Joint Implementation with community involvement

The second step provides for community participation in the form of labor and investment in construction and equipment. Involvement of beneficiaries is done mostly through local authorities on a regional and village level by establishing a ‘contract’ with the benefiting population that a certain percentage of financing and labor input will be provided by the people. Local populations are poor and able to contribute capital at a rate of between 5 – 8 % of the total investment needed. Local governments also invest in projects from their budgets and recruit local businesses that can contribute materials or skills (venue and bricks in Case 1, electrical skills and financing in Case 3, unskilled labor in all cases, and 30% of financing of the Micro HPS in Case 4). Experience shows that small and micro-scale renewable projects are not successful when fully funded and implemented on a grant basis19. Where partial co-financing from local beneficiaries is involved and projects showed the potential to generate tangible benefits, projects proved more lasting because they were sustained by small revenue generated from consumers. Mixed investments and beneficiary involvement ensure community motivation to keep the project operational and to pay fees. The projects, nevertheless, should have a clearly defined owner to ensure sustainability. While the projects are community driven and implemented, the actual technical assessment and implementation is delegated to a certified implementing agent. An experienced, certified specialist or organization is hired to advise the communities and local authorities on energy opportunities. This specialist individual or organization then implements the project to the satisfaction of the beneficiaries, overseen by the local authority. Investors, community members, local authorities and implementing agent collectively discuss options, identify risks and opportunities and agree on benefit sharing, resource use rules and repayment and contributions from communities – financially or in-kind.

Establishment of ownership

After completing the project with beneficiaries, the donors help the community and project care-taker to take control of the project and ensure that it is operational. The new care-taker (often main consumer) is based in the community, is a beneficiary of the project and usually has invested in the project or has a financial stake

1919 A. N. Kabutov, based on field trips and analysis of existing renewable projects in southern Tajikistan . 14 in project continuation. In fostering ownership, it is important to select a project owner that will have a significant stake in project continuation. The local government authorities play a critical role at this stage. They need to possess the credibility, motivation and community trust to oversee the transfer of ownership to the entrepreneur who invested in the project. The authorities not only ensure that the process is fair and transparent, but that there is space for the community to have a voice in the projects’ use. When there is no specific care-taker to assume ownership of the project or the community decides that collective ownership is a preferred approach, the donors and local government should ensure that beneficiaries select or hire a reliable project operator to ensure its sustainability. The emerging practice described in the case studies is to hire an individual or a group of specialists (for larger projects) to maintain the project. Village government or a community member is appointed to collected fees from energy consumers. The local government or village heads also have the responsibility to ensure that the terms of the agreement between the care-taker and the community members are honored, and create space for village residents to discuss and resolve any issues.

Ensuring Sustainability

When the ownership is transferred, the model envisions a move towards self-sustainability (meaning the project can continue producing energy for the community when the donor leaves) and recovery of initial installation costs/enough profits to replace productive units. The financial model used in these projects relies on the principle of communities’ investment in project construction, ensuring that people will be interested in recovering their investment. The model works for smaller projects described in the case studies because it allows flexibility in terms of type of renewable project selected, number of beneficiaries involved and cost and benefit sharing among participants. For large projects where significantly greater costs, skills, and risks are involved, sustainability can be achieved by designing projects around revenue generating facilities as the main beneficiary or future owner (e.g. stable businesses, bazaars, small manufacturing shops and other ‘revenue sources’). Main beneficiaries in our case studies were core and reliable consumers of energy for which they paid, and allowed flexible addition of households on individual agreements. The core energy consumers can also be project care-takers, who benefit financially from the project (because their business depends on electricity or energy generated).This approach also motivates continued operation of the renewable units. For example, in the first case described, the approach assumes that the income [fees] receivable for energy use will allow the local community to acquire a new complex of more modern equipment to continue fruit and vegetable commodity drying by the time that the equipment’s life-cycle is reached. Repair of the solar drying equipment is carried out at the expense of depreciation charges. Collective participation in decision making and formalized agreements (when large numbers of beneficiaries are involved) should be ensured. Local governments should bear reputational, and when possible political and financial stake, in the successful operation of such projects in the long run to ensure sustainability of the approach.

Replication and popularization

Finally, as the project demonstrates successful operation and socio-economic benefits to the population, donors and local governments should actively ‘popularize’ their experiences in other locations. Local governments benefit from job and business creation and an improved reputation. A vivid case for effective popularization is Case 2 where local Akimats, through active promotion and facilitation of technical solutions, created more requests for kilowatt-class WPUs. Entrepreneurs specializing in renewable energy projects also popularize renewable solutions and make their services available for greater numbers of people. Popularization of wind power use by shepherds and for water pumping in Kazakhstan was successful, but replication will be difficult because currently imported WPUs remain expensive. Case 1 better illustrates how projects can be increased in numbers. It illustrates how solar heaters/driers were locally produced and installed. The drier is locally designed and patented by Anatoly Sudarev (Сударев Анатолий Васильевич) who also took part in the project, which cost only around $400 per single 8-section drier unit. Solar drying 15 equipment is very simple to construct and has an efficiency rate of about 60 %, and production does not require welding or composite technological-casing hardware. The simple design can be serially produced in any of the countries of the region at an even cheaper cost. Cases 3 and 4 demonstrate that locally designed micro-HPS production by small enterprises is possible when funding is available. The projects were implemented by licensed organizations (a private entrepreneur and Akbar in Case 3) and the non- governmental organization “Binokor”, which already had experience installing HPS using donor money.

16 Conceptual model In order to disseminate the above good practices, decision makers and the donor community need to promulgate strategies and assume supportive roles to support a decentralized pro-poor energy sector model. Development agencies in particular should promote an innovative approach to energy security for the poor in a manner that is sustainable, empowering and locally relevant.

Under this approach, governments and donors gradually shift emphasis from large scale commercial projects and energy trade, and apply resources toward promoting access to renewable energy solutions tailored to meet the needs of the rural poor. The main and distinct barriers that exist for achieving this goal are: inadequate legal frameworks and regulatory burdens; low access to finance; low technical capacity; the low purchasing power of the population; and, lack of essential infrastructure. Annex D describes key obstacles and risks in more detail. To overcome an environment unfriendly to decentralized renewable solutions, efforts should center on: 1. Creating favorable legal and institutional capacity for a decentralized energy model; 2. Making renewable energy solutions economically and socially feasible; 3. Building indigenous technical capacity for the long term transition for a sustainable energy model. 1) Governments adopt forward-looking legislation that promotes adoption and growth of renewable energy and the energy-efficiency market. The legal framework defines renewable projects, streamlines regulation of renewable projects, creates standards, and adopts favorable regulatory and tax conditions to support renewable sector growth. The laws establish clarity and predictability on how regulators treat small projects, outline rights for private generation and distribution of power, and standards. The laws also outline tax-breaks and other government support for decentralized power generation. Tajikistan and Kyrgyzstan have recently adopted such laws20 to strengthen the institutional capacity of local governments. These law streamline the permitting and regulatory process for small scale energy projects. Kazakhstan must extend favorable conditions to micro and small renewable projects in its existing legislation. An enabling environment for small rural projects generally requires the greater autonomy of local governments21. The role of the government is to decentralize decision making, regulatory and permitting responsibilities. Regional and village-level government will ensure that institutional barriers to plan, initiate, invest and manage energy projects at the community level are safely reduced 22 and decision-making and permitting will be delegated closer to energy consumers. As the cases indicate, after financial barriers, regulatory and permitting obstacles are key culprits that discourage development of decentralized rural energy. We note that in the World Bank’s rural energy investment project, a separate component addresses the capacity development needs of local governments. 2) To make renewable solutions more feasible, decision makers will concentrate on reducing financial barriers23 by establishing a financial mechanism capable of pooling private capital at market rates, but making them available to consumers at concessionary conditions. The objective of this mechanism will be to provide subsidized long term capital above typical micro-finance and SME credit rates but below typical public infrastructure loans. The capital will be pooled from private capital, government matching and donor

20 2010 laws on renewable energy in Tajikistan and Kyrgyzstan, included in annex. 21 Khennas, Smail and Barnett Andrew. Best Practices in Sustainable for Sustainable Development of Micro Hydropower in Developing Countries. http://www.docstoc.com/docs/23166695/Report-of-micro-hydro-power- plants/button168 . See summary of findings, p. x-xi 2222 Kabutov & Zhiltsov. See the Annex D Barriers to Renewable Energy. Excessive number of approval instances for small scale energy projects is a major barrier for growth of renewable sector in Central Asia, see attachments “Technical and Design Risks, and Barriers for Renewable Energy”. 2323 As described in cases 1-4, access to low interest capital is limited. Currently prevalent loan terms, cost of capital, risk factors are prohibiting for weak financial service development. Both case studies and VIP1/2 projects identify: “There is an acute shortage of basic financial services overall and they are almost totally unavailable in rural areas. Most [current] donor-supported credit lines are serving only clients at the upper end o f medium enterprises.” VIP2, Project Appraisal Document, July 2006. p.18 17 contributions and managed by existing financial institutions. Communities, entrepreneurs, (initially) donors and municipal governments would prove to financial institutions that loans will be used toward renewable energy projects in order to qualify for long-term yet cheap financing24. While micro-renewable projects will require financial assistance for years to come, government and financial institutions should aid replacing donor grants with concessionary bulk-financing channeled at existing banks. As awareness and the market matures, this line of dedicated funding becomes available for communities and entrepreneurs to diversify energy projects. By the end of the next decade, leasing becomes available for renewable energy units. 3) The third long term requirement for the proposed energy model is an increased domestic technical capacity and knowledge base. This would help achieve quality projects and reduce initial costs as experience and cheaper feasibility assessments became possible. Maturing technical and theoretical capabilities would foster competition between services providers, which is currently missing from pilot or stand alone projects. Towards this objective, governments and financial institutions will seek ways to carry out investments in relevant businesses.

Relevance of the model to Central Asia

More efficient solutions for the rural poor

The poor in Central Asia region live predominantly in rural areas. Energy poverty for the rural population is exacerbated when already limited resources are dedicated primarily to urban areas. Table 1, showing the World Bank’s investments in Tajikistan and Kyrgyzstan above, illustrates that Bank and government investment decisions favor large cities. Rural energy needs are likely to be de-prioritized, with governments often cutting supply to populations outside major urban centers even in times when total energy supply in the country is sufficient. For example, in Tajikistan the aluminum smelter belonging to TALCO consumes up to 40% of total national power generated, and is kept operational while power supply to a large part of the population is curtailed to only a few hours a day or cut off completely. New investments in large centralized projects also come with the need to ensure that industry-scale energy consumption will exist to justify those investments. For instance, in Tajikistan Russian RusAL, one of the world’s leading aluminum producers, promoted additional aluminum smelting plants along with the planned investment in large HPS. As the result, projects may not be designed to provide power for the poor through investments into infrastructure, financing (project designed to be feasible at bulk-sale) or form (e.g. investments in electricity and oil infrastructure). Because large scale projects are expensive, require assured energy purchases and involve considerable political risk, investments in such projects are slow to materialize or are lacking altogether. For Kyrgyzstan and Tajikistan, which import fossil fuels and incur high-transportation costs due their land- locked position and mountainous terrain, scaling up centralized heating systems based on fossil fuels or reliance on grid power is costly. Kazakhstan’s vast size and low rural population density, at around 800 people per average rural settlement25, also invites a decentralized energy model. Despite vast hydrocarbon resources, distribution of energy in such dispersed conditions (5.9 persons per sq. km) is also inefficient. Supporting rural decentralized renewable energy represents a pro-poor approach to energy security in the region. Communities have a greater say in energy investments, and greater control over energy use and distribution. Local governments, entrepreneurs and community members can pool resources to implement locally-relevant projects without having to depend on support from central governments. In addition, as observed in the cases studies, co-investment and joint implementation in close cooperation with local governments empowers communities to manage energy use in an accountable manner. The decentralized and participatory nature of access provision has a positive impact on the local government’s accountability and

2424 Potential of corruption, misappropriation of funds is high in such model where regulatory functions of government are weak. In community driven project implementation it will be difficult to assure that funding has been used towards renewable projects. Donor driven approach can ensure compliance with requirements, but is not sustainable. 25 Ministry of Agriculture of the Republic of Kazakhstan, http://www.minagri.kz/en/agr.php. 18 capacity to plan and implement economic infrastructure projects with the community and private sector, as demonstrated in the case studies and also in World Bank’s Village Investment projects.

Pro-poor costs effectiveness

The following table compares recent World Bank investment in the rehabilitation and capacity upgrade of the Pamir Energy project and a similar hypothetical investment in smaller projects. Prevailing costs of micro HPS in Central Asia indicates that energy can be cheaper than electricity produced by large scale projects under certain conditions. Project Project cost Added capacity Cost per kW Pamir Energy/Pamir 1 $27 m* 14 MW $1,900/kW Potential investment ($27 m.) (22.5MW) $1,200 /kW** micro and small HPS

Note: *The Pamir 1 projected added 14 MW capacity to existing power plant and rehabilitated the infrastructure and improved water flow regulation. Additional, 2.5 million were allocated to the Pamir 1 power plant for emergency repairs in 2008. **$1,200 per kW of installed capacity for micro HPS is an accepted cost in Central Asian conditions. Actual cost from donor-funded micro-HPS projects observed was around only $300 per kW installed26. Assuming micro-HPS project average investments provided in the Annex A from $4,323 (15 kW) to $23,100 for large micro-HPS (25-45 kW), a 27 million investment could support between 6,245 and 1,168 projects targeting rural areas using micro-HPS in Tajikistan or Kyrgyzstan. However the above projects would supply power only intermittently and suffice for illumination only. To ensure a level of electricity consumption of rural households to that of urban residents (ensuring enough energy for cooking/heating and home appliances), 0.3 -1 kW of capacity will need to be installed per person. The Annex on energy potential presents calculations under this scenario.

The Need for Energy Diversification

The populations of Central Asia have increasingly relied on electricity to meet their heating needs, and when impossible, on biomass and coal. Over the years, the practice has led to frequent overloads of generating capacities and put pressure on grid infrastructure27, and in rural areas has led to rapid deforestation. Moreover, overreliance on a few HPS has become a matter of national security in Tajikistan. According to the recent World Bank assessment “A cessation of Nurek operations [which nearly stopped during winter 2008] would put the entire country (with the exception of GBAO, where Pamir Energy Company owns and operates the energy system) into a black-out situation, with consequent impacts in water supply systems which are dependent on electricity.”28 Scaling up investment in independent renewable solutions would reduce dependence on imported fuels and simultaneously reduce the vulnerability of rural areas to energy crises.

26 See Annex A: Micro-HPS projects table. 27 e.g. in Tajikistan. Development of Options for Social Protection under Energy Sector Reforms in Tajikistan, ESMAP proposal, May 2003. Available at http://www.esmap.org/filez/activity/227200714251_ECATajikistanenergysector.pdf 2828 Tajikistan - Energy Emergency Recovery Assistance Project, Project Paper vol. 1, the World Bank, 18 April 2008/ page 3. http://www- wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/04/25/000334955_20080425050355/Rendered /PDF/433330PJPR0P1117362B01off0use0only1.pdf . The paper further elaborates that Nurek station has been operational for 35 years and is in need of overhaul, while the other major power generator, a coal fired power plant in the capital Dushanbe, is also in a dilapidated condition. 19 Significant environmental benefits

Central Asia enjoys 7 to 8 months a year of sunlight, and from 3 to 4.5 average low peak sun hours a day 29. Solar-assisted space heating and electricity for lightning and basic cooking offers considerable environmental benefits for remote rural communities, primarily by replacing the need for organic fuel such as wood. Reliance on wood as a source of fuel by rural households continues the dangerously unsustainable rate of deforestation in the region30. Replacing wood as an energy source will reduce mudslides that are particularly damaging for Kyrgyzstan and Tajikistan’s rural poor. According to OSCE, in Tajikistan some 50,000 ha of arable is lost a year to floods, mudslides and erosion. As a mountainous country with 7 % arable land (of which almost half is already lost) Tajikistan will experience grave economic and social problems within 15 years if patterns are not changed31. Small scale renewable energy systems are environmentally-friendly on a regional scale as well. Unlike large scale hydropower stations, small HPS do not dam rivers, and have limited impact on eco-systems and water flow downstream. For pre-dominantly rural and agricultural communities dependent on irrigation, free flow energy options are critical.

Benefits to small businesses

Once scaled up, the proposed energy model would enhance employment opportunities and foster small businesses (in technical services, basic manufacturing, retail services and transportation, seasonal labor and in the financial sector). Compared to investments in large traditional energy projects, smaller renewable energy projects are labor-intensive and rely on local technical and labor to reduce costs. The model contributes to the development of a local skills base and technological capacity and creates employment and business opportunities closer to benefiting communities.

Renewable Energy Potential for Rural Areas, 2011 – 2021:

Over the course of the next decade and assuming that financing is available; some 600 – 800 MW of additional capacity could be added with the addition of micro to small HPS units in Central Asia. These HPS units would benefit up to 1.5 – 1.8 million citizens. Wind energy has the potential to produce 250 – 300 MW of energy which would benefit 600 to 700 communities in rural, peri-urban locations and nomadic communities. Solar driers and heaters could be employed in up to 10, 000-12,000 households providing a potential 1,100 to 1,300 mln kWh from solar, 750 to 900 mln. kWh from wind and between 3 600 and 4 800 mln. kWh from small hydro power stations (in total between 5 450 and 7 000 mln. kWh) per year. This translates to a total of 4 – 5 mln. tons of GHG gas emissions reduction. For this scale of renewable energy to be achieved an investment of around 2.3 – 2.8 USD billion will be required over the next ten years for the region. A detailed breakdown of renewable energy potential for the region is attached in the Annex B.

solar Wind Power Micro to Type of renewable driers Units small HPS /heaters

2929 Global Solar Power Map, Middle East (contains southern Central Asia), Advanced Energy Group http://www.solar4power.com/map13-global-solar-power.html 30 Bringing Power to the Poor in the Pamirs, World Bank, press release. Available here: http://lnweb90.worldbank.org/eca/eca.nsf/0/66201C6DC20F591785256C32006D471A?OpenDocument Tajikistan’s mountains regions lost up to 70 of wood covered areas since late 90s as extreme energy shortages led to use of wood for fuel. Kyrgyzstan, has lost 70 percent of its forest trees since 1930s and its world’s largest and rare walnut forest is in danger from cultivation and cutting for fuel. 3131Central/South Asia: Deforestation Makes Mark On Region, Its People, Radio Free Europe/Radio Liberty citing OSCE environmental officer Saulius Smalys, August 29, 2006. 20 Min Max Min Max Min Max

Average number of 3 people per 2.5 people per 2.5 people 2.5 people per people per one kW kW kW per kW kW

Investments, thousand $ $ $ $ $ $ US 1,100,000 1,300,000 360,000 600,000 720,000 960,000

People with energy 120, 600,0 700,00 1,500 2,000, access 100,000 000 00 0 ,000 000

Limitations of the model and risk factors The model is based on successful experiences with small scale renewable energy projects. Many other factors exist that make this model unsuitable in certain conditions, and many limitations were not addressed in the case studies. The model suffers from a contradiction where energy access for the poor is met by an even more expensive solution than that which is currently available. The model describes successful cases based on projects that were funded primarily by grants. Successful adoption and scale up in current conditions with only grant- based funding is unrealistic. In all three cases, the UNDP and GEF grants covered most of the project costs. High initial installation costs and the high cost of imported equipment remain the main impediments to widespread use of small scale renewable energy. For example, wind power units of the kilowatt’s class – considering their full cost, including delivery to Central Asia through the intermediaries, is comparable to the cost of modern automobiles. High costs come from transportation, which adds up to 30 % 32 of the factory price of equipment. Cross-border custom duties add an additional 12 % to the original manufacturing prices. The low incomes of rural populations prevent reasonable cost recovery if fees are collected from household consumers alone. Thus, this model relies on a combination of donor (external grant financing), public contributions and private investments. The model is based on the assumption that public and, importantly, private financing will be adequate to scale-up the model. Self-sustained replication of the presented renewable energy model is slow due to low tariffs and difficulty ensuring collections, both of which prevent investments. Further disincentives to wide-scale adoption exist due to lower tariffs potentially obtainable from the grid. Today, prevailing power generation based on large HPS and coal-fired CHP is more cost competitive than the renewable projects described. Thus, the model also suffers from the assumption that enough communities will choose to participate in a decentralized renewable solution over that of the current system because the model may be more sustainable in the future. Unlike other countries where decentralized renewable projects are taking root in remote communities because they are the only option, Central Asian rural areas are connected to the power grid. To achieve true sustainability and replication of the model, prevailing energy costs will need to increase substantially, making renewable solutions more attractive33. Another potential risk of the model is reliance on the owner / care-taker to serve as a core consumer of energy and investor. This approach may limit the number of renewable energy projects implemented, skew investments toward relatively wealthy neighborhoods and delay wide-scale replication of the model. Many very remote and poor communities may not have a single revenue-generating facility to invest in the renewable energy project and take ownership. Local governments similarly may not have budget to adopt a project and ensure its sustainability. In cases 2 and 3, household consumption of electricity was more of a positive by-product of powering entrepreneurship activities, which were the primary co-investors and main

32 Based on expert experience. High costs are due to inefficient, uncompetitive procurement and corruption. Additional costs involved for piecemeal distribution to remote locations within countries. 33 According to the World Bank, recent increases in loan servicing for extensive rehabilitation of infrastructure, increasing costs of importing energy (coal, oil and electricity) and higher fees imposed by private power producers (Sanktuda 1 HPS is Russian-Tajik joint venture, and Pamir 1 is jointly AKFED and IFC) and general increase in demand would increase the true cost of electricity generation to $0.04 per KW/h and beyond if financial (non payments) and technical losses (inefficiencies) are taken into account. At this range, renewable energy projects become more competitive with the grid supplied power.

21 consumers of electricity. Communities and entrepreneurs may not risk investing their resources in projects if there is no assurance that project will be sustainable. Finally, a model in which a primary consumer and care- taker is a business may reinforce selection of electricity generating projects (which are more likely to be useful for business purposes) over other solutions that may be more applicable. As mentioned, this model is biased on its consideration of case studies of projects that mostly aimed to generate electricity. It is not clear whether such a model would be applicable for providing heating in the same decentralized manner. A decentralized model based on small scale renewable electricity generation is poorly suited for meeting heating demands in winter months. Feasibility of other types of energy solutions need to be assessed to identify the true potential and limitations of a decentralized renewable approach in meeting energy needs of CAR. Yet, non-traditional energy sources such as wind, biomass and solar will have to compete with more established hydro or fossil based electricity solutions due to the abundance of hydro resources in upstream countries and hydrocarbon resources in Kazakhstan. This competition can adversely affect diversification and large scale adoption of renewable projects. Risks due to the changing physical environment are high for this model. For lower upstream countries of Tajikistan and Kyrgyzstan, the most practical approach to scale-up renewable energy is to harness the power of small rivers. However, small scale run-of-the river projects are particularly vulnerable to the effects of melting glaciers and the increased draughts frequently observed today. Tajikistan and Kyrgyzstan, and to a lesser extent Uzbekistan and Turkmenistan, are among the countries most vulnerable and least prepared for the effects of climate change34. Changing hydrology may further exacerbate the plight of the poor and this model does not adequately assess reliability of small scale energy projects if scaled-up. A more thorough country-by-country assessment is required and other types of renewable energy should be considered.

3434 Marienne Fay, Rachel Block, Adapting to Climate Change in Eastern Europe and Central Asia, edited by Fay, Block and Ebinger, the World Bank, 2008. pp.17-18 22 Recommendations for World Bank The recommendations outlined below are meant to help create conditions where the model outlined above would be possible. The Bank’s leadership, access to finance, and technical expertise could help overcome barriers for a successful transition toward a more sustainable energy model in the region.

Create a dedicated financing source

The World Bank Group is uniquely positioned to scale up access to low cost financing both for the public sector and in support of the private sector in Central Asia. The experience of the WBG in the region, particularly in the financial sector, should allow it to create a dedicated fund in each country to offer low- interest (LIBOR + 1 %), long-term financial service to allow investments in renewable and energy efficiency projects only. This dedicated fund should be able to provide financing for eligible projects at a minimum of 5 to 10 year terms. Currently, commercially available 2 - 5 year loans with 14 – 24 % interest rates do not allow investment in small-scale renewable and energy efficiency solutions. The World Bank group also has the capacity to pool investments and enter untested sectors in developing countries. Finally, the World Bank’s mission to reduce poverty allows it to dedicate more resources into initiatives where long-term social and economic returns outweigh short-term financial considerations.

Foster a conducive environment for RE growth

The World Bank can continue supporting regulatory and fiscal reforms in Central Asian countries to lower barriers35 for the development of the small-scale renewable energy and energy efficiency sector. This will help governments further extend existing tax breaks, simplify permitting, and access to finance for micro-, mini and small scale renewable projects. World Bank intervention will also lower the transaction costs and risks for governments and private sector to enter the renewable sector. This will in turn strengthen hydro-meteorological services; and fund modern, systematic environmental feasibility studies to explore opportunities for renewable solutions on a decentralized small scale.36. With more dedicated financing in this sector, countries can update / create renewable resource maps, and evaluate seismic conditions, as has been recently done in Kazakhstan’s Wind Atlas. The development of wind atlases of the CAR states for altitudes from 10 up to 20 m also will promote more effective utilization of resources and determination of the most eligible zones and terrains for consequent financing of the wind designs. These operations should be executed at the state level with the specialists appropriately certified specialists. In the long term, the World Bank can help governments and the private sector develop National Carbon Funds. The proceeds from the sale of emission reductions quotas and penalties for the overflow of marginal concentrations of harmful emissions can be used to invest in decentralized, renewable solutions to benefit energy-poor communities.

Help Governments develop domestic technical and manufacturing capacity

Investments in renewable energy projects will help develop local manufacturing capacity and hasten technology and skills transfer. This will lower installation costs and build a local skills base for the effective adoption of renewable practices. In the best case scenario, professional maintenance and service centers could be founded in each country. Transferring information to government regulators and officials about the source of licenses, franchising and investment in specialized small and medium enterprises would help to develop this sector. Recent ADB technical assistance for community based micro-hydro power stations also

35 Currently, Kazakhstan’s tax breaks, and permitting regulation favor medium and large energy projects, and large consumers and suppliers dominate policy attention. 36 RETScreen International. Software&Data, Training Material. Engineering Textbook. Case Studies. 23 recommended scaling up local servicing capacity37.The creation of domestic productions of WPU and enterprises for its maintenance would reduce costs by 15 - 25 %, largely by saving on transportation (current supply line is 7 000 - 20 000 km for WPU of western production), saving on customs duties (about 12,5 - 15 %) and guarantee and post, and warranty costs. All of these factors call for regionally-based production of modern WPUs of the kilowatt’s class with fiber glasses blades and generators on permanent magnets, which necessitate the training of local technicians and engineers, and the critical transfer of "know-how”. The World Bank should also offer sustained support to research institutions and professional exchange programs to help bring Central Asian expertise up to date with contemporary technologies, modern equipment, software and best practices. In the near-term, World Bank financing for renewable solutions can be jointly implemented by local and renowned experts to nurture local expertise. A side project might be to develop a complex building to demonstrate renewable energy mechanisms in operation as an exhibition for visitors.

Help revive local R&D

The World Bank is well-positioned to promote technology and skills transfer, and help research institutes and universities shift from pure theoretical teaching towards applied R&D. This can be implemented by offering grants to universities and NGOs conducting of scientific studies on the efficient and practical development of renewable energy mechanisms in Central Asia. Central Asia had once had considerable renewable expertise that has deteriorated over the last 20 years. Reviving this potential will contribute to the technological and cultural shift towards sustainable energy strategies.

Raise awareness of renewable opportunities

The World Bank can use its public information mechanism to popularize the opportunities and benefits of renewable energy generation among the population with the assistance of local authorities. This will aid the cultural shift toward greater acceptance of clean, decentralized energy solutions. If successful widespread buy-in is achieved, costs will diminish as new players, solutions and markets will emerge.

Conclusion The proposed energy model is relevant and feasible in the Central Asian context because it is based on existing practice and successful project implementation by development agencies during last five years. A similar decentralized approach adopted for the World Bank’s VIP project has also been popular. The model essentially is reinforcing the existing renewable energy initiatives, is currently implemented in small numbers, and describes initial steps for scaling up similar projects. The case studies included in this paper identify the importance of decentralization and community engagement and they place these principles in the center of the proposed energy model. Equally, the cases demonstrate the essential role of donor development organizations as funders of renewable energy projects. The model notes current good practices in attaining financial sustainability to make replication and scale-up feasible, and recommends a dedicated fund to help develop the nascent renewable sector. The model also acknowledges the regulatory and technical hurdles that must be overcome. The current model demonstrates why small scale renewable solutions are pro-poor, arguing that such an approach is able to satisfy the energy needs of the poor, efficiently target rural areas and place decision making and accountability in the hands of beneficiaries. The micro-to-small scale solutions may appear to have limited impact individually, but have considerable promise in large numbers as the financing, regulatory framework, and technical capabilities of CAR countries improve. Small-to-medium scale renewable projects are environmentally friendly and have the potential to generate local employment and

3737 Development of Community Based Micro-Hydropower Supply in Remote Rural Areas. Technical Assistance Completion Report, Asian Development Bank, May 2010 http://www.adb.org/Documents/TACRs/TAJ/38179-01-taj- tcr.pdf

24 improve quality of life. Finally, a network of smaller renewable solutions can satisfy different energy needs and does not have to be based on electricity generation. For the model to succeed, national-level reforms and significant resources will have to become available. In this context, the World Bank can play an important role in fostering a transition towards a sustainable energy model. The proposed model is consistent with the principles and priority directions outlined in the World Bank’s Energy Strategy approach paper and regional needs of Central Asian Republics as identified in the same energy approach38.

3838 Energy Strategy Concept Paper- need for additional ECA generating capacity, transition and scale-up of the current efforts to use renewable solutions. 25

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