The World Bank Gas Utilization (P133531)

REPORT NO.: RES41698 Public Disclosure Authorized

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF SHANXI GAS UTILIZATION APPROVED ON MARCH 28, 2014 TO Public Disclosure Authorized PEOPLE’S REPUBLIC OF

ENERGY & EXTRACTIVES

EAST ASIA AND PACIFIC Public Disclosure Authorized

Regional Vice President: Victoria Kwakwa Country Director: Martin Raiser Regional Director: Ranjit J. Lamech Practice Manager/Manager: Jie Tang Task Team Leader(s): Ximing Peng Public Disclosure Authorized The World Bank Shanxi Gas Utilization (P133531)

ABBREVIATIONS AND ACRONYMS

CHP Combined Heat and Power Covid-19 Corona Virus Disease -2019 CPS Country Partnership Strategy EA Environmental Assessment FYP Five Year Plan GoC Government of China IBRD International Bank for Reconstruction and Development ICR Implementation Completion Review ISR Implementation Status and Results Report MOF Ministry of Finance PDO Project Development Objective PMO Project Management Office RE Renewable Energy RF Results Framework TA Technical Assistance The World Bank Shanxi Gas Utilization (P133531)

Note to Task Teams: The following sections are system generated and can only be edited online in the Portal.

BASIC DATA

Product Information

Project ID Financing Instrument P133531 Investment Project Financing

Original EA Category Current EA Category Full Assessment (A) Full Assessment (A)

Approval Date Current Closing Date 28-Mar-2014 30-Jun-2020

Organizations

Borrower Responsible Agency International Department, Ministry of Finance Shanxi Guoxin Energy Development Group Corporation

Project Development Objective (PDO) Original PDO The proposed Project Development Objective (PDO) is to increase gas utilization to reduce greenhouse gases emission in selected counties in Shanxi province. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed

IBRD-83480 28-Mar-2014 04-May-2014 30-Jul-2014 30-Jun-2020 100.00 95.65 4.35

Policy Waiver(s)

Does this restructuring trigger the need for any policy waiver(s)? No

The World Bank Shanxi Gas Utilization (P133531)

Note to Task Teams: End of system generated content, document is editable from here.

I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING

A. PROJECT STATUS

1. Background. The US$100 million loan for the Shanxi Gas Utilization Project was approved by the Board on March 28, 2014. The loan became effective on July 30, 2014 and has a closing date of June 30, 2020. The Project Development Objective (PDO) is to increase gas utilization to reduce greenhouse gases emissions in selected counties in Shanxi province. This project comprises three components: (a) Distributed Gas-fired Combined Heat and Power (CHP) Plants; (b) Expansion of Gas Distribution Network; and (c) Technical Assistance (TA). The project aimed to achieve its objective by: (a) serving residential, commercial, and industrial consumers through two newly built gas-fired CHP plants and affiliated facilities in Baode and Xiyang with capacity of 126 MW each, and (b) expanding gas distribution network in four county cities (Xiangyuan, , Tunliu, and Qingxu County). It was planned to start serving customers from 2016. The total project cost was estimated at US$295.39 million and the total financing of the International Bank for Reconstruction and Development (IBRD) is US$100 million.

2. A project restructuring was completed in December 2017 to expand the service area of Component (b) to the 5th county (Yangcheng) and postpone the project implementation schedule: both gas-fired CHP plants under Component (a) were planned to start serving customers from 2018 while gas supply under Component (b) would commence in 2017.

3. Implementation Status and Achievement to Date. The construction of both gas-fired CHP plants was completed in late 2018, the trial operation test was completed in late 2019, so both plants will be ready for commercial operation in 2020 when the final acceptance will be approved by local authorities in about October 2020, and start to supply heat and electricity in the 2020/21 heating season. The construction of gas distribution networks in all five counties has been completed in stages and has started to supply gas to customers since 2017, while the remaining project activities (installation of gas meters in ) will be completed in mid-2020. Several important activities were delayed due to the Covid-19, including the final acceptance test of gas turbines in both CHP plants, completion of some gas distribution network, and procurement of additional proposed TA activities. The project continues contributing to the provincial gasification program, which has been merged into a more aggressive provincial energy strategy (as stated below) to promote energy transition in Shanxi province. The PDO remains achievable and relevant to current conditions and the priorities reflected in government strategies, as well as the World Bank Group’s China Country Partnership Strategy (CPS) for 2013-2016 (Report No. 67566-CN) dated October 11, 2012, and is in line with the Strategic Theme One of the CPS “Supporting Greener Growth”.

4. Progress towards achieving the PDO is currently rated Moderately Satisfactory and the Implementation Progress including project management is rated Moderately Satisfactory too. Total loan disbursement amounted to US$95.65 million, 96 percent of the IBRD loan. Throughout implementation the project was in compliance with all fiduciary and safeguards requirements and most of legal covenants except for one legal covenant—approval of on-grid electricity tariff by the Provincial Government—which was fulfilled in February 2020 with delay. The Project does not have outstanding audit reports or significant outstanding financial management issues. The performance of the implementing agency is considered satisfactory.

5. Evolving of the Provincial Energy Strategy. The project implementation started in 2014 when Shanxi province was preparing its 13th Five-Year-Plan (FYP, 2016-2020), and the provincial gasification program was considered as one major action to promote energy transition in Shanxi, in order to shift from coal-dominated economy and energy mix to greener economy

6 The World Bank Shanxi Gas Utilization (P133531)

and cleaner energy. This energy strategy was evolving in line with the country’s ambition on “energy revolution” and Nationally Determined Contributions to mitigation of climate change.

6. In 2014 the Government of China (GoC), at the highest decision-making level, launched an “energy revolution” to ensure a transition to a sustainable energy system without disruption. The “energy revolution” encompasses radical changes in energy consumption and supply, institutional reform, and technological innovation and stresses the need to strengthen international cooperation to achieve these objectives. In September 2017, Shanxi province proposed, and the State Council endorsed them as a pioneer province to implement the “energy revolution”. The central government approved the “Piloting Comprehensive Reform for Energy Revolution in Shanxi” policy on May 29, 2019 to empower Shanxi with special authority to overcome some policy hurdles to enforce its new energy strategy – both renewable energy (RE) and gas are considered as its main energy resources to replace coal, and coal industry is required to be upgraded and restructured to demonstrate its role as “pioneer" of energy revolution in China 1.

7. The new energy strategy in Shanxi promotes a cleaner energy development in comparison with its previous gasification program, as REs will play a more important role and its share will increase in Shanxi’s overall energy mix. The Shanxi Gas Utilization Project, which was designed to support the provincial gasification program, is still in line with the new energy strategy, but the operation of both gas-fired CHP plants will be influenced – an optimal operation mode in Shanxi power system will be to run the high-fuel-cost gas power as peaking capacity but priority dispatch will be considered for zero-fuel-cost REs when they can generate. In practice that means that the annual operation hours of the gas-fired power plants will be reduced substantially, which directly affects achievement of the project outcome targets. However, the combination of both gas power and REs (and also storage) can support more aggressive RE development in Shanxi and reduce the total fossil fuel combustion and carbon emission in Shanxi province. As a result, the project indicators targets related to Component (a) gas-fired CHP plants can no longer be achieved, while indicators’ targets related to Component (b) gas distribution network expansion will be achieved.

8. Impact to the Project Operation. To support the new energy strategy in Shanxi province to facilitate RE development and reduce fossil fuel consumption and carbon emissions, the results framework (RF) of the Project needs to be adjusted as this will reduce the annual operation hours of both gas-fired CHP plants. While formulation of indicators remains relevant, the target values/actual outputs of the Project need to be re-estimated to quantify the impact of the new energy strategy to the operation and outcomes of the Project. Specifically: (a) annual operation hours of both gas-fired CHP plants would be reduced from the originally planned 4,000 to 2,400 hours, so annual gas consumption of both plants would be reduced from 250 to 165 3 3 million m ; and (b) total gas consumption of the whole project is now estimated as 255 million m , so annual CO2 reduction would be 535,320 tons. With the updated implementation schedule, the above-mentioned outcome level and related intermediary targets are expected to be achieved fully at the end of the 2020/21 heating season (November 1, 2020 – March 31, 2021).

9. Risk Assessment. At the time of project appraisal and throughout most of the implementation, the overall risk to achieving the PDO was rated Substantial in view of the risks related to technical design and concern on financial losses. The risk rating was upgraded to High in September 2019 because of both the depressed economy globally and implementation of new energy strategy in Shanxi province, which have affected the operation of both gas-fired CHP plants so their generation will be reduced. The evolving power sector reform to encourage the competition among power plants could put the gas-fired plants

1 A new operation has been requested by the central government to support Shanxi for this new energy transition - Shanxi Economic and Energy Transition Development Policy Operations (DPO) has been included in the FY21-22 pipeline, with a targeted two tranches of total US$600 million to accelerate Shanxi’s transition to a lower coal consumption and more diversified economy, and provide alternative employment opportunities, thereby mitigating global climate change while mitigating social impacts and improving air quality.

6 The World Bank Shanxi Gas Utilization (P133531)

in an adverse situation in short-term when the pricing mechanism is still not ready to cover both the capacity value and environmental benefits of gas-fired power plants, so the financial revenue of both gas-fired CHP plants will be reduced substantially. And current risk rating of the project implementation is kept as High in the latest implementation status and results report (ISR).

B. RATIONALE FOR RESTRUCTURING

10. The PDO remains achievable, the performance of both the project mamagemetn office (PMO) and implementing agencies are satisfactory, and an action plan to implement the restructured project was prepared by the PMO to the satisfactory of the Bank, so we can consider the proposed restructuring. Specific impacts to bring this restructuring are described below.

11. Impact of the Provincial Energy Strategy to Project Outcomes. As mentioned above, the new energy strategy focusing on energy transition in the province, which was not anticipated at appraisal or early implementation, directly affects operation of gas-fired power plants supported under the project. Accordingly, related project outcome targets need to be adjusted to the new operating environment and to support the energy transition in Shanxi. That substantiates a need for re-estimating outcome targets and time of their achievement.

12. Impact of Covid-19 to the Project Implementation. The spreading of Covid-19 in early 2020 has affected the implementation of the remaining project activities, mainly: (a) the final acceptance test of the gas turbines in both gas-fired CHP plants; (b) acceptance test of the completed gas pipelines and installation of remaining gas meters in a project city (Yangcheng); and (c) completing the procurement of a new proposed TA activity and planned trainings. Per discussion in the latest April 2020 mission (a virtual mission), completion of above project activities would require additional time beyond the current project closing date. The new proposed closing date is April 30, 2021. This will be the first extension of the project closing date.

13. Cost Saving of the IBRD loan. With the completion of the two gas-fired CHP plants, there is a total cost saving of about US$ 2.3 million IBRD loan. In order to better use of the available IBRD resources, the PMO proposes to use the cost saving in: (a) building the capacity of the implementing agencies to improve the operation management of the Project, and (b) financing the investment of gas distribution network component.

II. DESCRIPTION OF PROPOSED CHANGES

14. Requests from the Ministry of Finance (MOF). We Bank has received two request letters and one clarification from MOF about the proposed changes: (a) a letter on April 2, 2020 to request for an extension of six months; (b) an email on June 12, 2020 to agree on extension of additional four months; and (c) a letter on June 17, 2020 to request for fund reallocation of the disbursement categories.

15. Proposed Change to the Closing date. An extension of the project closing date by ten months, from June 30, 2020 to April 30, 2021, is proposed in order to complete the mentioned remaining activities and cover the first full heating season and operation year of the Project.

16. Proposed Fund Reallocation of the Disbursement Categories. Cost saving of IBRD loan (US$2.30 million) from Disbursement Category 1 (Goods and civil works under Part 1 of the Project – both CHP plants) is proposed to be reallocated to Disbursement Category 2 (Goods and civil works under Part 2 of the Project – gas distribution network) and Disbursement Category 3 (Consultant’s services, Training and Workshop under Part 3 of the Project – technical assistance). So the reallocated

6 The World Bank Shanxi Gas Utilization (P133531)

amounts of IBRD loan will be US$76.70 million, US$18.70 million and US$4.35 million under Disbursement Categories 1, 2 and 3 respectively. With the reallocation, funds can be made available to support the new proposed TA activity, focusing on capacity building of the implementing agency and improvement of the project operation.

17. Results Framework (RF). To keep consistency with the new energy strategy in Shanxi province, the results framework of the Project is proposed to be modified as it reduces the annual operation hours of both gas-fired CHP plants, then the annual gas consumption and avoided carbon emissions will be reduced as well. The modification is made to revise the final targets of both PDO level indicators (gas consumption and avoided carbon emissions) and intermediary indicators (generation and heating supply of both CHP gas-fired power plants). The indicators related to the expansion of gas distribution network component are kept unchanged while it includes an earlier agreement, dated December 21, 2017, to include a fifth county (Yangcheng) under Component (b) of the Project. The details of the revised project indicators are provided in Section IV.

18. Implementation Plan and Disbursement Estimates. The project implementation schedule is proposed to be updated to reflect the influence of Covid-19 and the proposed revised loan closing date. As the majority of the IBRD loan has been disbursed, the disbursement estimate is kept unchanged.

Note to Task Teams: The following sections are system generated and can only be edited online in the Portal.

III. SUMMARY OF CHANGES

Changed Not Changed Results Framework ✔ Loan Closing Date(s) ✔ Reallocation between Disbursement Categories ✔ Overall Risk Rating ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Components and Cost ✔ Cancellations Proposed ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Safeguard Policies Triggered ✔

6 The World Bank Shanxi Gas Utilization (P133531)

EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔

IV. DETAILED CHANGE(S)

OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S)

Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-83480 Effective 30-Jun-2020 30-Apr-2021 30-Aug-2021

OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES

Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed

IBRD-83480-001 | Currency: USD

iLap Category Sequence No: 1 Current Expenditure Category: GDs &CWs Pt.I

79,000,000.00 73,891,331.54 76,700,000.00 100.00 100.00

iLap Category Sequence No: 2 Current Expenditure Category: GDs & CWs Pt.2

18,000,000.00 13,207,620.99 18,700,000.00 100.00 100.00

6 The World Bank Shanxi Gas Utilization (P133531)

iLap Category Sequence No: 3 Current Expenditure Category: CS, Training & Workshops Pt.3

2,750,000.00 1,305,947.57 4,350,000.00 100.00 100.00

Total 99,750,000.00 88,404,900.10 99,750,000.00

OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)

Risk Category Rating at Approval Current Rating

Political and Governance  Substantial Macroeconomic  High Sector Strategies and Policies  High Technical Design of Project or Program  Moderate

Institutional Capacity for Implementation and  Substantial Sustainability Fiduciary  Moderate Environment and Social  Moderate Stakeholders  Substantial Other Overall  High .

6 The World Bank Shanxi Gas Utilization (P133531)

.

Results framework COUNTRY: China Shanxi Gas Utilization

Project Development Objectives(s) The proposed Project Development Objective (PDO) is to increase gas utilization to reduce greenhouse gases emission in selected counties in Shanxi province.

Project Development Objective Indicators by Objectives/ Outcomes

RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target

1 2 3 4 Annual Avoided CO2 Emission Annual avoided CO2 emission 0.00 9,681.00 48,405.00 96,810.00 288,810.00 535,320.00 (Metric ton) Action: This indicator has been Revised Annual Gas Utilization Annual Gas Utilization (Cubic 0.00 7,000,000.00 35,000,000.00 70,000,000.00 156,000,000.00 255,000,000.00 Meter(m3)) Action: This indicator has been Revised PDO Table SPACE

6 The World Bank Shanxi Gas Utilization (P133531)

Intermediate Results Indicators by Components

RESULT_FRAME_TBL_IO Indicator Name PBC Baseline End Target

Expansion of Gas Distribution Network Component

Number of household and other gas users (Number) 0.00 43,000.00 Distributed Gas-fired CHP Component

Annual electricity supply (Gigawatt-hour (GWh)) 0.00 700.00

Installed capacity of the CHPs (Megawatt) 0.00 252.00

Annual heating supply (Mega Joules (MJ)) 0.00 150,000,000.00 IO Table SPACE

.

6 The World Bank Shanxi Gas Utilization (P133531)