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Project Number: 49450-023 November 2019 Pacific Renewable Energy Investment Facility Federated States of Micronesia: Renewable Energy Development Project This document is being disclosed to the public in accordance with ADB’s Access to Information Policy. CURRENCY EQUIVALENTS The currency unit of the Federated States of Micronesia is the United States dollar. ABBREVIATIONS ADB – Asian Development Bank BESS – battery energy storage system COFA – Compact of Free Association DOFA – Department of Finance and Administration DORD – Department of Resources and Development EIRR – economic internal rate of return FMR – Financial Management Regulations FSM – Federated States of Micronesia GDP – gross domestic product GHG – greenhouse gas GWh – gigawatt-hour KUA – Kosrae Utilities Authority kW – kilowatt kWh – kilowatt-hour MW – megawatt O&M – operation and maintenance PAM – project administration manual PIC – project implementation consultant PUC – Pohnpei Utilities Corporation TA – technical assistance YSPSC – Yap State Public Service Corporation NOTE In this report, “$” refers to United States dollars unless otherwise stated. Vice-President Ahmed M. Saeed, Operations 2 Director General Ma. Carmela D. Locsin, Pacific Department (PARD) Director Olly Norojono, Energy Division, PARD Team leader J. Michael Trainor, Energy Specialist, PARD Team members Tahmeen Ahmad, Financial Management Specialist, Procurement, Portfolio, and Financial Management Department (PPFD) Taniela Faletau, Safeguards Specialist, PARD Eric Gagnon, Principal Procurement Specialist, PPFD Teresita Leono, Associate Project Officer, PARD Mairi MacRae, Social Development Specialist (Gender and Development), PARD Lyailya Nazarbekova, Principal Counsel, Office of the General Counsel Manisha Pradhananga, Economist, Economic Research and Regional Cooperation Department Peer reviewer Dae Kyeong Kim, Senior Energy Specialist (Smart Grids), Sustainable Development and Climate Change Department 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 MAP I. BACKGROUND 1 II. THE PROJECT 1 A. Rationale 1 B. Project Description 4 C. Value Added by ADB 5 D. Summary Cost Estimates and Financing Plan 5 E. Implementation Arrangements 6 III. DUE DILIGENCE 8 A. Technical 8 B. Economic and Financial Viability 8 C. Sustainability 9 D. Governance 9 E. Poverty, Social, and Gender 10 F. Safeguards 11 G. Summary of Risk Assessment and Risk Management Plan 11 IV. ASSURANCES AND CONDITIONS 12 V. THE PRESIDENT’S DECISION 12 APPENDIXES 1. Design and Monitoring Framework 13 2. List of Linked Documents 16 Project Classification Information Status: Complete PROJECT AT A GLANCE 1. Basic Data Project Number: 49450-023 Project Name Renewable Energy Development Project Department/Division PARD/PAEN Country Micronesia, Federated States of Executing Agency Department of Finance Borrower Government of the Federated States of and Administration Micronesia Country Economic https://www.adb.org/Documents/LinkedDocs/ Indicators ?id=49450-023-CEI Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/ ?id=49450-023-PortAtaGlance 2. Sector Subsector(s) ADB Financing ($ million) Energy Renewable energy generation - solar 15.00 Total 15.00 3. Operational Priorities Climate Change Information Climate Change Information1 Addressing remaining poverty and reducing inequalities CO2 reduction (tons per annum) 2,533 Accelerating progress in gender equality Climate Change impact on the Low Tackling climate change, building climate and disaster resilience, and Project enhancing environmental sustainability Making cities more livable ADB Financing Strengthening governance and institutional capacity Adaptation ($ million) 0.75 Mitigation ($ million) 14.20 Sustainable Development Goals Gender Equity and Mainstreaming SDG 7.2 Some gender elements (SGE) SDG 13.a Poverty Targeting Household Targeting 4. Risk Categorization: Low . 5. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: C . 6. Financing Modality and Sources Amount ($ million) ADB 15.00 Sovereign Project grant: Asian Development Fund 15.00 Cofinancing 0.00 None 0.00 Counterpart 0.51 Government 0.51 Total 15.51 Currency of ADB Financing: US Dollar 1 The project reduces greenhouse gas emissions. However, it does not fall under the eligibility criteria for climate mitigation finance as defined by the joint multilateral development bank methodology on tracking climate finance, which notes that not all activities that reduce greenhouse gases in the short term are eligible to be counted towards climate mitigation finance. Accordingly, greenfield fossil fuel projects are excluded, and climate mitigation finance is considered zero. Source: Asian Development Bank This document must only be generated in eOps. 25102019114026771417 Generated Date: 07-Nov-2019 14:51:02 PM N O R T H P A C I F I C O C E A N FEDERATED STATES OF MICRONESIA RENEWABLE ENERGY DEVELOPMENT PROJECT Ulithi YAP Fais Colonia Gaferut Ulul Murilo Faraulep West Fayu Fayu Pikelot Namonuito Nomwin Ngulu Minto Reef Sorol Olimarao Lamotrek Pulap CHUUK Woleai Weno Oruluk STATE OF Kolonia Puluwat Pakin KOSRAE Ifalik Elato Satawal Kuop Nama POHNPEI Losap Ant Mokil Eauripik Pulusuk PALIKIR Namoluk Pingelap Lukunor KOSRAE Etal Ngatik STATE OF YAP Tofol Satawan STATE OF POHNPEI STATE OF CHUUK Nukuoro YAP SUBPROJECTS Rumung Proposed Solar Installation Sites Kapingamarangi 5 2 around Yap Sports Complex Maap KOSRAE SUBPROJECTS Kilometers km Solar Sites Tafunsak Open Ground Solar Site N Wanyaan Kosrae International Airport National Capital Kanif Lelu State Capital Colonia Tofol International Airport Yap International Airport Reef/Atoll State Boundary Battery Energy Storage System International Boundary Ngoof Malem Boundaries are not necessarily authoritative. 192658 19FSM ABV 192658 19FSM Utwe This map was produced by the cartography unit of the Asian Development Bank. Magachgil The boundaries, colors, denominations, and any other information shown on this Walung Households and Power House map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information. I. BACKGROUND 1. On 22 June 2017, the Board of Directors of the Asian Development Bank (ADB) approved 1 the Pacific Renewable Energy Investment Facility. The facility will finance renewable energy projects in ADB’s 11 smallest Pacific developing member countries. 2 It has an overall estimated cost of $750 million, including ADB financing of up to $200 million. Upon approval, the Board delegated authority to the President to approve loans and/or grants to each targeted country for qualifying projects. 2. The facility will provide a grant to the Federated States of Micronesia (FSM) for the Renewable Energy Development Project. The project will finance investment in renewable energy generation facilities in the FSM states of Kosrae and Yap—bolstering energy security and reducing reliance on fossil fuels for power generation in these states. Project investments will include (i) solar photovoltaic capacity and mini grid and solar home system investments for Kosrae Utilities Authority (KUA) in Kosrae and (ii) the installation and integration of photovoltaic capacity and a battery energy storage system (BESS) for Yap State Public Service Corporation (YSPSC) in Yap. The project will also support institutional strengthening and capacity building in KUA and YSPSC, as well as for Pohnpei Utilities Corporation (PUC) in the FSM state of Pohnpei. II. THE PROJECT A. Rationale 3. Macroeconomic context. The FSM has a population of about 105,000 spread across the western Pacific Ocean, comprising more than 600 islands. It is made up of four island states: Pohnpei, Kosrae, Chuuk, and Yap. The gross domestic product (GDP) is about $334 million. All petroleum products and a very high proportion of foods are imported. The FSM’s heavy dependence on imported petroleum fuels makes the country highly vulnerable to petroleum price volatility and shocks. 4. The FSM is a former United Nations Trust Territory of the Pacific Islands, administered by the United States until 1994. The FSM entered a Compact of Free Association (COFA) with the United States in 1986, ensuring 15 years of development aid during its transition to full sovereignty. The COFA provided large external financial transfers to support the operations of the Government of the FSM and substantial public sector investment at the state level, including in energy infrastructure. However, because of lack of adequate maintenance budgeting and practices, the infrastructure is now in poor condition. In 2003, the United States and the FSM entered into an Amended COFA under which the FSM would receive transfers of $92.7 million per year for 20 years, ending in 2023. 5. The FSM economy grew in 2018 by 0.8%, but this growth was driven largely by the fishing industry, which has attracted substantial increases in domestic revenues from fishing licenses sold to foreign fleets. The FSM’s economy has otherwise been stagnant, and significant development challenges remain. Development partner support has focused on achieving 1 ADB. 2017. Report and Recommendation of the President to the Board
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