Project Information Document (Pid) s49

PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB7059 Project Name Tonga Energy Road Map Implementation Project Region EAST ASIA AND PACIFIC Sector Other Renewable Energy (70%); Energy efficiency in power sector (30%) Project ID P131250 Borrower(s) GOVERNMENT OF TONGA Implementing Agency Tonga Power Limited PO Box 1704 Nuku'alofa Tonga Tel: (676) 28-344 Fax: (676) 23-632 Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared April, 2012 Estimated Date of June 1, 2012 Appraisal Authorization Estimated Date of Board N/A Approval

1. Key development issues and rationale for Bank involvement Key electricity sector issues. All grid-connected electricity generation in Tonga is from imported diesel oil. The Tongan economy and electricity consumers have been exposed to high and volatile electricity prices over the last ten years due to fluctuations in the price of oil internationally. Reducing the vulnerability of the country to future oil price shocks is a key issue which requires actions to improve the petroleum supply chain and price risk management, increase efficiency of generation, distribution and use of electricity, and diversify away from diesel-only electric generation.

Key petroleum sector issues. Tonga’s high dependency on imported petroleum products to meet its energy demands makes Tonga highly vulnerable to two types of risks: 1) oil price shocks; and 2) interruptions in the delivery of fuel. These risks pose threats to Tonga’s energy security -- i.e. Tonga's access to adequate, affordable and reliable supplies of energy. An improved understanding of these risks is required by government, together with greater policy direction on how to mitigate risks arising from supply interruptions (e.g. increasing the level of storage in Tonga or storing fuel offshore), oil price spikes (e.g. financial hedging); or catastrophic events (e.g. enforcing stringent safety standards and developing contingency plans for major fuel leaks or fires).

Government Strategy in the Energy Sector: Tonga Energy Roadmap

Tonga Energy Road Map (TERM). In 2010, GoT published its Tonga Energy Road Map (TERM)1. The TERM serves as the guiding document for GoT actions and development partner

1 Tonga Energy Road Map 2010 – 2020, June 2010. support for the energy sector. The objective of the TERM is to lay out a least cost approach and implementation plan to reduce Tonga’s vulnerability to oil price shocks and achieve an increase in quality access to modern energy services in a financially and environmentally sustainable manner. The TERM is underpinned by the following key principles:

• least cost approach to meet the objective of reducing Tonga’s vulnerability to oil price increases and shocks; • technical and institutional approaches to manage interruption and price risks; • financial sustainability by ensuring that efficient costs of operating the energy sector, including regulatory, operations, maintenance, fuel and financing costs are recovered through the tariff; • social and environmental sustainability by minimizing local social and physical environmental impacts and by aligning with global goals on climate change; and • clear, appropriate and effective institutional, legal and regulatory frameworks that defines the roles of GoT, TPL and the private sector.

The GoT’s key priorities in relation to the electricity sector include the following:

• incentives for prudent petroleum supply chain contracting and risk management to reduce the price and price fluctuation of imported petroleum products; • efficient conversion of petroleum to electricity (i.e. increases in generation efficiency and reduced distribution losses at TPL); • efficient conversion of electricity into consumer electricity services (end-use efficiency and demand side management); • diversity in energy supply sources based on generation other than from diesel, mainly renewable energy; and • private sector participation in generation projects.

The TERM sets out an indicative implementation plan over three phases. Phase 0 defines the most urgent steps that should be undertaken without delay, including policy, institutional, legal, data gathering actions as well as some investments. Phase 1, which can proceed in parallel with phase 0, includes works designed to gather sufficient information and experience about each possible option to allow subsequent firm decision making. Phase 2 will be initiated when all policy, legal, regulatory and institutional adjustments have taken place and when data and experience from the phase 0 and phase 1 activities is sufficient to define the full-scale developments of renewable energy and other actions to reduce the use of imported fuel are implemented.

The Tonga Energy Road Map (TERM) represents the result of a year of intensive dialog with the Government, and consultation and coordination with energy sector development partners. The World Bank played a major role in development of the TERM, from the initial conception of the scope and approach, through support for and supervision of the key analytic work, managing the coordination of long-term energy sector development partners as well as helping to bring on board new players, and synthesis of the inputs into the final TERM document. For both the UAE and the International Renewable Energy Association (IRENA), support for the TERM preparation and implementation represents the first engagement in energy in the Pacific for these development partners. The proposed project forms an integral part of the Bank’s overall energy sector engagement in Tonga: beginning with the intensive TA and dialog around development of the TERM, a FY11 Energy Sector Development Policy Operation and a proposed FY12 series of DPOs which include a focus on key actions in the energy sector.

The approach set out in the TERM is fully in line with the institutional agenda on Climate Change. The TERM integrates energy efficiency and renewable energy generation into the mainstream sector planning and policy framework, through the focus on reducing vulnerability to oil price rise and shocks as a key factor in enhancing national energy security.

2. Proposed objective(s) The proposed development objective is to improve energy security and reduce vulnerability to oil price shocks in Tonga, through support for implementation of the Tonga Energy Roadmap. The TERM sets out a ten year road map to reduce Tonga’s vulnerability to oil price shocks and achieve an increase in quality access to modern energy services in an environmentally sustainable manner. The proposed project would provide assistance in implementing aspects related to improving energy security to reduce vulnerability to oil price shocks. Other development partners are providing support focusing on increasing quality access.

3. Preliminary description The Project will consist of two components:

Component 1: Strengthening the Energy Sector Framework and Structure (AusAID/PRIF US$0.70 million; ASTAE US$0.30; GoT US$ US$ 1.00 million). This component will be implemented by TERM IU and will focus on strengthening the functioning of the Unit, and on technical assistance support including in the areas of energy sector policy; environmental and social safeguards frameworks; petroleum price risk management strategy; and developing a Communications Plan for TERM to rally key stake-holders around the TERM’s long-term goals and activities being implemented and, thus, mitigate risks/misinformation that may arise.

Component 2: Preparing TPL for Renewable Energy Supply (AusAID/PRIF US$1.80 million; TPL US$0.10 million). This component will be implemented by TPL and will focus on technical assistance including for: (i) designing upgrades to the networks and systems operations procedures (this will include some equipment –inter alia controls systems- to ensure continuing stable operation of the generation and transmission systems and maximize the benefit of proposed renewable energy plant supply; this does not include new structures or activities requiring earthworks); and (ii) developing a least-cost generation and associated network development plan for the period of five years (2012 through 2017) with renewable energy plants.

It is recognized that other components of the TERM (not funded by this project) may have potential adverse social impacts, in particular renewable energy generation projects funded under TERM, for example through the Tonga Green Investment Fund (TGIF) currently under design. Part of the scope of work for Component 1 of this project is to assist the TERM-IU to prepare the Environmental and Social Management Framework (ESMF) in preparation for TGIF funding at a later stage and any other TERM related investment. The ESMF will provide the framework for TERM-IU and / or developers to: i) identify suitable land for development, ii) approaches to consultation, iii) methods for land acquisition and compensation, and iv) prepare Land Acquisition and Resettlement Action Plans (LARAP) that meet the safeguards policies of the World Bank (and other donor agencies) and the Tongan legislation.

4. Safeguard policies that might apply

The project involves funds for the technical assistance of the TERM IU (for policy and strategic planning) and changes to the operation and efficiency of the TPL electricity network (equipment, systems and procedures). The changes to network equipment will be small scale, and not require any structures, earthworks or other construction work, or use of resources that are likely to impact on the community or environment.

5. Tentative financing Source: ($m.) BORROWER/RECIPIENT 1.1 AusAID/PRIF 2.5 ASTAE (TBC) 0.3 Financing Gap 0.0 Total 3.9

6. Contact point Roberto Aiello Senior Energy Specialist, EASNS Timor-Leste, Papua New Guinea and the Pacific Email: [email protected]