Project Information Document (Pid) s55

PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB3685 Project Name Energy Efficiency Region EUROPE AND CENTRAL ASIA Sector Power (60%); District heating and energy efficiency services (30%); Renewable energy (10%); Project ID P108023 Borrower(s) REPUBLIC OF BELARUS Implementing Agency Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared February 22, 2008 Estimated Date of August 25, 2008 Appraisal Authorization Estimated Date of Board January 27, 2009 Approval

1. Key development issues and rationale for Bank involvement

The economy of Belarus declined after the dissolution of the Soviet Union (near 30% decline in GDP) followed by consistent economic growth since 1996. In 2002 Belarus surpassed its 1990 output level. Nonetheless, Belarus remains one of the least transformed economies in ECA with significant state control and regulation of almost every sector of the economy. Belarus is also one of the most energy-intensive economies in the world; on average energy the intensity of GDP of Belarus is twice as much as that of the developed countries of the EU.

During recent years, Belarus has made significant efforts to reduce energy intensity and improve efficiency in energy sector. The archived results are encouraging; the energy intensity was about 0.76 (toe per GDP) in the mid-1990s and was reduced to 0.45 in 2004. The government’s energy efficiency program aims to further reduce the energy intensity of the economy by over 30 percent by 2010. The aim is to strengthen energy security through capital investments in asset renovation, efficient utilization of fuel and energy resources, and more extensive use of domestic, alternative and renewable sources of energy, such as biomass. The government has approved the large energy programs in 2006 and 2007 which aim to reduce the energy intensity, increase the share of the domestic sources in energy generation, and increase the energy security. The programs are: (i) program to modernize major energy generating plants; (ii) program to convert existing heating plants to combined heat and power generation; (iii) energy efficiency program; and (iv) renewable energy program. The new Country Assistance Strategy (CAS) was approved in December 2007 and it includes a new energy project underlining energy efficiency and use of local energy sources.

In 2006, the Bank prepared the energy sector report “Addressing Challenges Facing the Energy Sector” which puts emphasis on the same issues as the Government’s new programs mentioned above. In addition, the above-mentioned report recommends the gradual introduction of structural and institutional reforms in the sector in order to move from vertically integrated state owned utilities towards more liberalized energy markets. After the report was issued, there have been positive developments in Belarus related to plans for the unbundling of the state owned energy companies and changes in the regulatory and institutional framework.

The European Commission (EC) and the Government of Belarus opened their energy dialogue in 2007 and continued with a new set of meetings in Minsk in January 2008. At the end of 2007, the EC allocated Euro 5 million for technical assistance in the Belarus energy sector. Part of the EC funds could be used during the Bank’s energy efficiency project preparation and implementation for technical assistance on the energy market rules and regulatory issues.

The project may also seek financing from GEF for Climate Change related components. The Ministry of Environment has requested the Bank’s participation in GEF funding in Belarus. GEF funding may be linked to investments and technical assistance to renewable energy sources, use of bio-fuels under the EED component.

Belarus has additionally shown strong commitment to greenhouse gas mitigation as demonstrated through ratification of the Kyoto Protocol and negotiation of an amendment to Annex B of the Protocol to include an assigned amount for the country. The amendment requires ratification by 75% of Parties to become effective. In the interim the Government is exploring options to integrate carbon finance opportunities into its investment portfolio.

The government of Belarus has expressed its interest to borrow from the Bank for energy efficiency projects during the preparation of the CAS and also during the identification of the new project. The Ministry of Energy, Belenergo, and the Energy Efficiency Department have committed to work with the Bank during project preparation and prepare and finance from their own sources the required feasibility studies and environmental management plans.

2. Proposed objective(s)

The development objective of the project is to improve energy security and reduce environmental emissions through energy efficiency in energy sector in Belarus.

3. Preliminary description

The project is planned to have two investment components and two implementing agencies, Belenergo and the Energy Efficiency Department. The components are as follows:

Belenergo's component (cost estimate US$ 120 million):

Belenergo is the state owned power utility currently responsible for power generation, transmission and distribution through its subsidiaries. The project aims to finance two subcomponents under Belenergo, which preliminarily are:

a) The conversion of large heat-only-boilers (HOBs) operated by Belenergo to combined heat and power (CHP) plants, in the towns of Borisov, Mogilev and Grodno for which the feasibility studies have been completed. These CHPs will be located at the existing boiler plant sites and will partly utilize existing buildings and other infrastructure. The existing feasibility studies have considered several alternatives for the proposed investments, including (i) continuation of heat generation without power generation, and (ii) different configurations for power generation.

In Borisov the plan is to convert the existing HOB to a combined cycle CHP plant based on natural gas. The preliminary power capacity is about 65 MW. In Mogilev a smaller HOB would be converted to a CHP plant based on gas engine technology. In Grodno the preliminary plan is to convert an exiting steam boiler to use wood waste and add a small steam turbine.

The preliminary cost estimate of about US$ 90 million will be verified during the project preparation. The economic justification of the above mentioned investments will be also reviewed.

b) Reconstruction of a high voltage power line in Brest Oblast will include upgrading of an existing power transmission line from 220 kV to 330 kV. The upgrade will improve efficiency, remove a power transmission bottleneck and is also a part of a program to improve the regional power trade between Belarus, Poland, Lithuania, Ukraine, and Russia. Cost estimate of this subcomponent is about US$ 30 million.

Energy Efficiency Department Component (cost estimate US$30 - 40 million):

Conversion of HOBs to mini-CHPs in medium size towns of Belarus. This component may include the conversion of a number of existing HOBs to gas-fired CHPs and possibly could also include conversion of HOBs for bio-fuel (wood waste, wood chips, etc.), if the feasibility studies demonstrate economic viability.

For interventions with Belenergo and the Energy Efficiency Department the project will support the Government to design a GHG emission reductions program for development as a new Kyoto Protocol initiative under the JI mechanism.

4. Safeguard policies that might apply [Guideline: Refer to section 5 of the PCN. Which safeguard policies might apply to the project and in what ways? What actions might be needed during project preparation to assess safeguard issues and prepare to mitigate them?]

Safeguard Policies Triggered Yes No TBD Environmental Assessment (OP/BP 4.01) x Project is expected to be rated category B. The implementation of the energy efficiency improvements, conversion of existing heating plants to combined heat and power plants will take place at existing sites. The Belarusian side, Belenergo and Energy Efficiency Department, will prepare the required environmental management plans and public consultations in Belarus. The implementing agencies will ensure that rehabilitation contracts will include clauses that will require contractors to comply with safety rules in Belarus and safeguards standards of Belarus as Safeguard Policies Triggered Yes No TBD well as of the Bank. Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Physical Cultural Resources (OP/BP 4.11) X Indigenous Peoples (OP/BP 4.10) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X

5. Tentative financing Source: ($m.) Borrower 50 International Bank for Reconstruction and Development 150 Total 200

6. Contact point Contact: Pekka Kalevi Salminen Title: Sr Energy Spec. Tel: (202) 473-0816 Fax: (202) 614-1569 Email: [email protected]