Report and Recommendation of the President
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Grant Assistance Report Project Number: 53365-001 October 2020 Proposed Administration of Grant Kingdom of Bhutan: Alternative Renewable Energy Pilot Project Financed by the Japan Fund for Poverty Reduction This document is being disclosed to the public in accordance with ADB’s Access to Information Policy 2018. CURRENCY EQUIVALENTS (as of 1 October 2020) Currency unit = ngultrum (Nu) – Nu1.00 = $0.014 = $1.00 = Nu73.80 = ABBREVIATIONS BEA – Bhutan Electricity Authority BPC – Bhutan Power Corporation DRE – Department of Renewable Energy JFPR – Japan Fund for Poverty Reduction JICA – Japan International Cooperation Agency MOF – Ministry of Finance MW – megawatt PMU – project management unit NOTES (i) The fiscal year (FY) of the Royal Government of Bhutan ends on 30 June and of its agencies on 31 December. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g. FY2019 ends on 30 June 2019 for the government and on 31 December 2019 for its agencies. (ii) In this report, "$" refers to United States dollars Vice-President Shixin Chen, Operations 1 Director General Kenichi Yokoyama, South Asia Department (SARD) Director Priyantha Wijayatunga, Energy Division, (SARD) Team leaders Yoojung Jang, Social Development Specialist, SARD Takayuki Sugimoto, Energy Specialist, SARD Team members Angela Francesca O. Bernaldo, Project Officer, SARD Tashi Lhamo, Associate Project Analyst, SARD Grace Macalisang, Operations Assistant, SARD Karen Grace C. Ochavo, Associate Environment Officer, SARD Nidup Tshering, Senior Social Development Officer (Gender), SARD Melinda Tun, Counsel, Office of General Counsel Jongmi Son, Finance Specialist (Energy), SARD Peer reviewers Susumu Yoneoka, Energy Specialist (Smart Grids), SDSC-ENE In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area CONTENTS Page PROJECT AT A GLANCE I. INTRODUCTION 1 II. The Project 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs and Key Activities 3 D. Cost Estimates and Financing Plan 4 E. Implementation Arrangements 5 III. PROJECT FEATURES 6 A. Technical 6 B. Economic and Other Impacts, Financial Viability, and Sustainability 7 C. Governance 7 D. Poverty and Social Impacts 8 E. Participatory Approach 8 F. Development Coordination 8 G. Safeguards 8 H. Risks and Mitigating Measures 9 IV. ASSURANCE 10 V. THE PRESIDENT’S DECISION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14 I. INTRODUCTION 1. The Alternative Renewable Energy Pilot Project aims to demonstrate viability and sustainability of solar power as an alternative energy and income source in Bhutan through: (i) conducting a study on regulatory requirements for alternative renewable energy resources and preparing a tariff structure for residential solar photovoltaic systems; (ii) assessing the adequacy of the national electricity grid and pilot-testing solar photovoltaic systems in rural villages; and (iii) enhancing energy-based livelihood skills through vocational education and energy based livelihood equipment support. The project has strong pro-poor, socially inclusive and gender- sensitive features. The project will directly benefit 300 poor households in rural villages. II. THE PROJECT A. Rationale 2. Bhutan is one of the smallest countries by population and geographical area but has one of the fastest-growing economies in the world. Its average annual economic growth of 6.7% between 2008 and 2018 far exceeds the average global growth rate of 3.4%.1 This high growth has contributed to reducing poverty. Poverty rate in Bhutan declined from 12% in 2012 to 8.2% in 2017.2 Despite this significant decrease in the national poverty rate,3 poverty in rural areas (11.9%) is significantly higher than urban areas (0.8%). To continue the economic growth and reduce poverty, the Royal Government of Bhutan has implemented poverty alleviation programs in the poorest villages. 3. A challenge Bhutan faces is that its power generation relies almost exclusively on hydropower. The total installed capacity of existing hydropower plants is 2,326 megawatts (MW). Since all the existing plants are run-of-the-river type, the total generation capacity drastically drops during the dry winter months (December–March) due to low water flows in the rivers. During winter, Bhutan must import power to meet the domestic demands as the peak load is higher than generation,4 but this is becoming increasingly challenging due to India’s own power shortages during the same period. At the same time, solar radiation is at its peak in the winter in Bhutan. The technical potential of solar photovoltaic power generation is estimated to be about 12,000 MW with 4.0 to 5.5 peak sun hours per day. As the prices for solar photovoltaic modules have fallen drastically by more than 87% during the period from 2010 to 2019 and are expected to drop even further,5 the Royal Government of Bhutan is considering the use of solar energy to enhance the energy security by diversifying energy sources and also as a potential solution for the electricity shortage during winter 4. Sustainable and reliable electricity supply is seen as a major element of poverty reduction efforts, as it is needed for productive activities. In addition, energy poverty has gender dimensions as rural women and girls are the primary energy producers for households and they tend to depend on small-scale agriculture and locally available resources to support their livelihoods. An important program of the government’s rural poverty alleviation strategy is provision of a lifeline electricity supply to households with 100% subsidy (Nu5.81/kilowatt hour [kWh], 2017–2019) up 1 International Monetary Fund. October 2020. World Economic Outlook. Washington D. C. 2 National Statistics Bureau of Bhutan. 2017. Bhutan Poverty Analysis Report. Thimphu. 3 The national poverty line is Nu2,195.95 per person per month in 2017. 4 BPC. Annual Transmission System Performance Report for the year 2019. Thimphu. In February 2019, the peak load was 347.64 megawatts (MW) whereas the generation was 320.57 MW. 5 International Renewable Energy Agency. 2019. The Renewable Power Generation Costs in 2019. 2 to 100 kWh of monthly consumption for each household.6 In 2018 alone, Nu104.93 million was spent by the Ministry of Finance (MOF) as subsidy for the rural electricity supply, which is a significant component of the annual budget allocation for the energy sector.7 Although 100% subsidy for electricity is aligned with poverty reduction efforts, it is not sustainable. 5. In this context, the Royal Government of Bhutan requested ADB’s assistance to pilot test the installation of small-scale solar photovoltaic systems to the marginalized rural households and integrate them to the national grid. This will enable rural households to produce energy for their own consumption and the government to reduce electricity subsidies, while also lessening electricity import during winters when solar radiation is at its peak. The solar photovoltaic system will also create income generation opportunities for the households through sale of excess power to the grid and develop energy-based livelihood skills. Further, solar photovoltaic energy supports strong gender equality and social inclusion (GESI) elements by improving income-generating sources through solar photovoltaic power trading and energy-based livelihoods with a focus on women. 6. For the proposed intervention, ADB applied for $3 million grant financing from Japan Fund for Poverty Reduction (JFPR), and it was approved by the Government of Japan on 20 August 2020. The proposed project is aligned with the ADB country partnership strategy 2019–2023 for Bhutan and included in the country operations business plan (COBP) 2020–2022 for Bhutan. It is in line with 5 of the 7 operational priorities of ADB Strategy 2030 for addressing poverty reduction, accelerating gender equality, tackling climate change, promoting rural development, and strengthening governance and institutional capacity. The project also contributes to achieve sustainable development goal 8 7 of ensuring access to affordable, reliable sustainable and modern energy for all. In addition, the intervention is in line with 12th Five-Year Plan of the Gross National Happiness Commission (GNHC), Royal Government of Bhutan regarding reducing poverty and inequality, promoting gender equality, ensuring renewable energy supply, improving efficiency and effectiveness of public service delivery, and strengthening community vitality. 7. ADB has experience in financing renewable energy and gender equality projects in Bhutan. The proposed project will incorporate lessons learnt from ADB Rural Renewable Energy Development Project (Grant 0228-BHU) and JFPR grant, Improving Gender-Inclusive Access to Clean and Renewable Energy in Bhutan, Nepal, and Sri Lanka (Grant 9158-REG). These include effective community mobilization, logistics for solar photovoltaic procurement and installation, and training of Village Electrical Entrepreneur and Electrical Technicians (VEEETs) for solar photovoltaic operations and maintenance. This proposed project and its potential impact will be distinguished from other donor-funded projects as the project targets grassroot poverty reduction with a strong emphasis on women’s economic empowerment. However, the project will be implemented