South Tarawa Renewable Energy Project (FFP KIR 49450)

SECTOR ASSESSMENT (SUMMARY): ENERGY

A. Sector Road Map

1. Sector Performance, Problems, and Opportunities

1. Kiribati is a micro economy in the central Pacific with a huge Pacific Ocean economic zone. Its gross domestic product (GDP) was $200 million in 2019 and, and prior to the pandemic, this was expected to grow at 3.1% annually, driven mainly by fishing license fees and government expenditure. GDP is projected to grow only 0.6% in 2020 due to the pandemic. Service activities constitute over 60% of the economy, with little input from industry or agriculture. Kiribati’s international trade shows a substantially negative balance, largely because of the need to import essential foodstuffs, manufactured items, and fossil fuels for transport and electricity production. Kiribati’s remoteness from major markets and most resources leads to high import costs, while its low elevation, averaging only 2 meters above sea level, creates severe vulnerability to sea-level rise and other climate change impacts and natural hazards.

2. Overcrowding in the capital, South Tarawa, where more than half the total population of 115,847 in 2018 lives, is stressing the natural environment, housing, land management, sanitation services, and underground water reserves. Kiribati’s poverty rate was estimated at 22% in 2006, with South Tarawa having the highest number of poor people with a poverty rate of 24%.1 Gender inequalities persist in the public and private sectors, and within the home. Unemployment is high overall (31%), and even higher among women (58%). The government’s policy is to move towards substantial reduction of the imbalances by replacing fossil fuel imports, deploying renewable energy and energy efficiency measures, establishing more permanent staffing for civil services based on overseas support and development assistance, and mainstreaming gender in development.

3. Grid-connected electricity in South Tarawa is generated and distributed by the state- owned Public Utilities Board (PUB). Established under the Public Utilities Ordinance (1977, and further amended in 2000), the PUB is granted corporate autonomy in its operations by management, and is chaired by the chief executive officer and supervised by the board of directors appointed by the Ministry of Infrastructure and Sustainable Energy (formerly the Ministry of Public Works and Utilities). The board is chaired by the secretary of the ministry. The ministry plans and provides guidance for the delivery of activities relating to national infrastructure development and provision of public utilities and services. The PUB’s mission is to commercially provide and maintain quality, reliable electricity, water, and sewerage disposal services to Tarawa.

4. Primary energy demand. Kiribati’s energy consumption, which is dominated by imported fossil fuels (52%) and coconut oil (42%), has been steadily increasing over the last few years. The residential sector is the largest consumer of energy, followed by land transport. As of 2016, electricity makes up only 3% of household energy consumption; more than 95% of household energy consumption comes from biomass in the form of coconut oil and palm oil residue (77%) and fuel wood and wood waste (10%), and petroleum products in the form of kerosene (5%) and petroleum (5%). Kiribati people rely on wood and kerosene for cooking and boiling water, which often results in health problems caused by indoor air pollutants. Liquefied petroleum gas use is limited because of its high cost, especially in comparison with kerosene (subsidized, through price

1 Australia Department of Foreign Affairs and Trade. 2013. Kiribati Program Poverty Assessment 2013. Canberra. 2 controls, by up to A$0.60 per liter). More than 70% of South Tarawa households use electricity for minimal lighting (an average of 0.5 kilowatt-hours per day) that is inefficient and expensive.2

5. Heavy reliance on imported diesel fuel for power generation. Like many other small Pacific islands, Kiribati’s electricity generation relies heavily on imported diesel fuel, transported over long distances across the ocean and subject to weather and climate-change-related supply disruptions.3 This dependence exposes Kiribati to fluctuating oil prices and has resulted in among the region’s highest costs of power generation.4 The PUB’s 7.01 megawatts (MW) of installed capacity comprises several diesel generators totaling 5.45 MW and recently completed grid- connected solar photovoltaic systems totaling 1.56 MW-peak (MWp). These supply an annual peak demand close to 6 MW to government, commercial, and residential customers. The photovoltaic systems account for 22% of installed capacity but supply only around 9% of demand on South Tarawa; diesel generation supplies the remaining 91%. The PUB serves more than 57,000 people in South Tarawa, which has the highest demand at 24.7 gigawatt-hours (GWh) in 2019. Kiribati’s outer islands are served largely with solar home systems, and Kiritimati island, the second largest load center (1.65 GWh in 2016), has a separate power system not managed by the PUB.

6. Constrained renewable energy development and lack of private sector participation. While grid-connected solar power is the least-cost renewable energy option for South Tarawa and there is significant resource potential of 554 MW, deployment has been limited. This growth is constrained by the lack of energy storage to manage intermittency and transfer load to supply nighttime demand, grid instability, weak institutional capacity and regulatory framework, affordability concerns, limited financing, and reliance on development partner funding. Also, despite the potential for revenue generation from the high electricity costs, there are no independent power producers in Kiribati. Barriers to private sector investment include (i) lack of an enabling policy and regulatory framework, (ii) credit worthiness of the PUB as an off-taker, (iii) lack of bankable projects, and (iv) small transaction sizes.5

7. High electricity generation costs and tariffs. The PUB’s diesel generation system on South Tarawa has low efficiency and incurs high repair and maintenance costs and large capital replacements on top of the high cost of fuel shipments. Also, because of lack of back-up generation assets, the PUB regularly conducts load shedding to cope when catastrophic events, such as generator failures, occur. 6 The high generation cost results in high tariffs that disproportionately affect the poor, suppress demand, and hinder growth in the commercial and tourism sectors. The PUB forecasts that the demand up to 2030 will continue to grow at a low rate of 2% per annum. Of the 7,877 households in South Tarawa (44% of households in Kiribati), 72.4% are grid connected. Around 20%–25% of households are headed by women.

8. Unsustainable utility performance. Among the PUB’s three operations streams, electricity provides the most revenue (83% on average). The PUB relies on development partners

2 Jensen, T. L. 2017. Kiribati 2016 Urban Household Electrical Appliances, Lights, and End-use Survey Process and Findings. Tarawa. United Nations Development Programme (March). 3 In 2017, the PUB spent A$6.1 million (57% of total expenditure) on diesel and lubricant. Approximately 49% of all imported diesel is used for electricity generation. 4 Pacific Power Association. 2018. Utilities Benchmarking Report, 2017 Fiscal Year. Suva. This report indicates that the average supply costs across Pacific utilities is $0.320 per kilowatt-hour compared to $0.395 per kilowatt-hour for South Tarawa. 5 ADB’s Private Sector Development Initiative supports reforms to expand private sector opportunities in Kiribati. 6 The PUB has requested funding from the Government of New Zealand for installation of a diesel generator and fiber optic cables for the entire South Tarawa grid (Bonriki–Betio), and for other network and institutional capacity development. 3 for capital investments and on government subsidies (community service obligation) of around 10% of total revenues. From 2015-2019, the PUB reported negative operating profits (inclusive of subsidies), except in 2016 when electricity revenues increased by 9% because of improvements in metering and revenue collection. Only small increases in the PUB’s revenue are driven by expanded consumption and new residential consumers. In 2017–2018, PUB introduced (i) an inverted block tariff structure for residential customers, which effectively provided a financial incentive for customers to consume electricity wisely; and (ii) a tariff equivalent to a lifeline or low- income tariff.7 In 2018–2019, the estimated losses from electricity were about A$0.5 million, increasing at about 8% over 2017. The main reasons for losses in electricity revenues are the below-cost recovery tariff and the subsidies provided to the water operations. The cost of fuel for electricity generation, although decreasing steadily from 63% of total expenditure in 2015 to 50% in 2019, continues to expose the PUB to importers’ prices, and this adversely impacts its profitability and sustainability.8

2. Government’s Sector Strategy

9. Sector objectives. The Government of Kiribati has prioritized strengthening fuel security and reducing carbon emissions. In 2008, it published the Kiribati Development Plan (KDP), 2008– 2011, which highlighted renewable energy and efficient technology as key resources for driving sustainable economic growth and improving fuel security.9 In 2009, the government launched its first energy policy—the Kiribati National Energy Plan—which emphasized the need for “available, accessible, reliable, affordable, clean and sustainable energy options”. 10 In 2015, Kiribati submitted its nationally determined contribution under the Paris Climate Agreement, under which Kiribati has committed to reducing emissions by 12.8% against business as usual projections in 2030, or by 49.0% in 2030. With international assistance, Kiribati can reduce its emissions by 61.8% by 2030.11 Recent strategy documents, including the Kiribati 20-Year Vision 2016–2036 (KV20), reaffirm these commitments and call for concrete approaches to achieving them.12

10. Energy road map and investment plans. The International Renewable Energy Agency supported Kiribati to prepare a plan to guide medium-term investments in line with commitments under the Paris Agreement.13 The Kiribati Integrated Energy Roadmap: 2017–2025 recommends deploying solar photovoltaic and BESSs to enable deeper penetration rates of renewable energy, and supporting more efficient diesel generation systems in South Tarawa. The road map identified grid-connected solar photovoltaic as the least-cost generation option.14

7 Kiribati’s per capita gross domestic product of A$2,397 ($1,625) is the lowest in the Pacific region. The limited economic growth, and lately the impact of the coronavirus disease pandemic, make it more difficult for the customers to absorb utility costs and affects their capacity to pay. 8 Despite having the highest tariffs in the region at A$0.10–A$0.55 ($0.08–$0.44)/kWh for residential customers and up to A$0.70 ($0.56)/kWh for industry and government consumers with a weighted average tariff of A$0.51/kWh, the PUB needs heavy subsidies, largely for its water and sewerage operations. Government subsidy through the community service obligation agreement was A$1,135,000 ($821,059) in 2017 (8% of total revenues). This increased to 10% of total revenues to A$1,474,590 in 2018 and A$1,282,258 in 2019. 9 Government of Kiribati, Ministry of Finance and Economic Development. 2008. Kiribati Development Plan 2008– 2011. Tarawa. 10 Government of Kiribati, Ministry of Public Works and Utilities. 2009. Kiribati National Energy Policy. Tarawa. 11 Government of Kiribati, Office of the President. 2015. Republic of Kiribati, Intended Nationally Determined Contribution. Tarawa. 12 Government of Kiribati, Ministry of Finance and Economic Development. 2016. Kiribati 20-Year Vision 2016–2036. Tarawa. 13 Kiribati committed to use renewable energy to reduce fossil fuel consumption by 2025 (23% reduction on South Tarawa, 40% on Kiritimati, and 40% on the outer islands). It has also set the target of using energy efficiency to further reduce diesel consumption by 2025 (22% on South Tarawa, 20% on Kiritimati, and 20% on the outer islands). 14 International Renewable Energy Agency. 2017. Kiribati Integrated Energy Roadmap: 2017–2025. Bonn. 4

11. To complement investment plans set out in the Kiribati Integrated Energy Roadmap, the World Bank and the government commissioned a report, the Kiribati Utility Services Reform Project, to establish long-term financial, legal, regulatory, and contractual plans to improve the PUB’s operations and encourage private investment in the energy sector.15 The report advances (i) a performance improvement plan and reform options for the PUB and (ii) a comprehensive energy act to regulate and promote renewable energy and private sector participation in the electricity subsector. In 2013, the Secretariat of the Pacific Community and Deutsche Gesellschaft für Internationale Zusammenarbeit supported the government to prioritize investments by developing A Least Cost Analysis of Electricity Generation Options for Kiritimati Island.16 The analysis suggests four options of least-cost power generation for Kiritimati Island. In 2018, the government confirmed its target to replace 45% of diesel generation with solar through its investment plan under the Scaling Up Renewable Energy Program of the Strategic Climate Fund.

B. Major Development Partners: Strategic Foci and Key Activities

12. Kiribati relies heavily on donor assistance and external grants (Table 1). Development partners have supported Kiribati to plan energy sector investments and financing solar projects. Key development partners include the Asian Development Bank (ADB); the European Union; the Governments of Australia, Japan, and New Zealand; the United Arab Emirates; the International Monetary Fund; the United Nations; and the World Bank Group.17 Several large grid-connected photovoltaic systems were installed in South Tarawa during 2015–2017. The first project was commissioned in 2015 under Japanese funding through the Pacific Environment Community Fund. The second project was completed in 2015 with funding from the United Arab Emirates. The third project was completed in early 2016 under World Bank funding. In total, these systems will have a generation capacity of 1.42 MW and are expected to contribute about 8%–10% of overall energy consumption on South Tarawa, contributing $800,000 per annum of fuel cost savings for the PUB.

13. In 2015, Kiribati received total development cooperation funds of $64 million, provided by 25 development partners, of which 11 contribute less than $100,000. The main providers are Australia (39% of all development cooperation), New Zealand (19%), and the World Bank (17%). In recent years, Kiribati’s main development partners have been the Government of New Zealand, the European Union, the Republic of Korea, the United Arab Emirates, and Australia. Of the 1.78 MW peak installed solar capacity in South Tarawa, about 1.63 MW was financed by development partners (Table 2). The European Union has invested in rural electrification programs, including connections for homes, businesses, schools, meeting halls, and health clinics.18

14. In March 2017, construction started for the Kiritimati Island Water Project and the Kiritimati Island Energy Sector Programme. The €4.94 million water project is implemented by the Pacific Community and aims to provide safe and sustainable drinking water to communities in targeted areas of Tennessee and London. The $8.87 million energy sector program aims to provide improved access to affordable, reliable, and clean energy on Kiritimati Island through a high- voltage network connecting the population centers, two new power stations, and a new solar facility. The joint initiatives form part of the European Union–New Zealand partnership for sustainable development in the Pacific, established in 2013.

15 World Bank. 2014. Kiribati - Utility Services Reform Project. Washington, DC. 16 Secretariat of the Pacific Community and Deutsche Gesellschaft für Internationale Zusammenarbeit. 2013. A Least Cost Analysis of Electricity Generation Options for Kiritimati Island. Suva. 17 The International Monetary Fund provides support through the Pacific Financial Technical Assistance Centre. 18 Government of Kiribati. Developing Outer Islands Economies. Development Partners’ Forum, May–June 2016. 5

Table 1: Major Projects by Development Partners Amount Development Partner Project Name Duration (million) Energy Sector EU/NZ Kiritimati Island Energy Sector Programme 2014–2019 $8.87 Republic of Korea South Tarawa Ocean Thermal Energy Project 2020 $28.00 EU EDF 11 – European Development Fund 2014–2020 $12.20 GEF/Australia (PRIF) Kiribati Grid Connected Solar PV Project 2013–2018 $3.92 Urban Development, Water Supply, and Sanitation ADB/WB/GCF South Tarawa Water Supply Project 2016–2020 $54.50 New Zealand Aid Urban Development Project 2010–2013 NZ$16.50 Programme Kiribati Adaptation Programme Phase 2 2006–2011 $6.60 World Bank, GEF/ Kiribati Adaptation Programme Phase 3 2011–2015 $10.80 GFDRR/Australia Outer Gilbert Islands Water and Sanitation Phase 1 2010–2015 €3.40 EU Improving Water and Environmental Sanitation 2008–2012 $2.50 UNICEF (regional Kiribati, Solomon Islands and Vanuatu) Transport and Communication Japan Project for Reconstruction of the Nippon Causeway 2017–2019 A$49.00 ADB/Word Bank Outer Island Infrastructure Investment Project 2020–2022 $42.00 ADB = Asian Development Bank, EU = European Union, GCF = Green Climate Fund, GEF = Global Environment Facility, GFDRR = Global Fund for Disaster Risk Reduction, NZ = New Zealand, PRIF = Pacific Regional Infrastructure Facility, UNDP = United Nations Development Programme, UNICEF = United Nations Children’s Fund, WB = World Bank. Source: Asian Development Bank.

Table 2: Installed Solar Photovoltaic Capacity in Kiribati, 2019 Capacity Location (kWp) Funding Agency Year Bikenibeu 400.0 Pacific Environment Community 2015 Bonriki 500.0 United Arab Emirates/Masdar 2015 Betio Sports, Betio KIT, Bikenibeu Hospital, 553.0 World Bank 2016 and Bikenibeu King George V High School KSEC 10.0 Not confirmed 2014 Taeoraereke USP 9.6 Not confirmed 2015 Moroni High School 125.0 Private investor 2019 Outer Islands hybrid PV/diesel 30.0 KSEC 2019 Zone 1, London, Tennessee, and Tabwakae 150 .0 European Union/New Zealand Ongoing (now interconnected with Zone 2) Zone 3, Poland Village 36.5 European Union/New Zealand Ongoing KIT = Kiribati Institute of Technology, KSEC = Kiribati Solar Energy Company, kWp = kilowatt-peak, USP = University of the South Pacific Sources: Asian Development Bank; International Renewable Energy Agency. 2017. Kiribati integrated Energy Roadmap: 2017–2025. Bonn; World Bank. 2019. Kiribati Scaling-Up Renewable Energy Program Investment Plan (P164894). Washington, DC.

15. Australia and Kiribati signed the Kiribati-Australia Partnership for Development at the Special Forum Leaders Meeting in Port Moresby in 2009. The partnership seeks to advance Kiribati's vision as articulated in the KDP (footnote 9), focusing on improving the lives of Kiribati's main assets—its people—through development of the economy and their capabilities.

C. Institutional Arrangements and Processes for Development Coordination

16. External assistance is managed through the National Economic Planning Office of the Ministry of Finance and Economic Development. ADB began cofinancing operations in Kiribati in 1995. Since then, cumulative direct value-added official cofinancing commitments for Kiribati have totaled $72.03 million for five investment projects, and $4.64 million for seven technical assistance projects. Despite the significant number of development partners and the heavy 6 reliance on development assistance, formal coordination mechanisms in Kiribati vary in quality. Prior to 2010, development partners had sought to coordinate their activities through an annual roundtable meeting geared toward the implementation of the country’s national development plan. Although the meetings provided an opportunity to assess progress in implementing the plan and identify potential new areas for cooperation, in practice they consisted largely of the government’s presentation of its development needs.

17. In 2010 the government initiated the start of biennial development partners’ roundtable meetings in Kiribati. The Development Partners’ Forum is a forum for high-level dialogue between the Government of Kiribati and development partners on issues such as progress on the Kiribati Development Plan, development strategies, and priorities for the government and official development assistance. This forum reviews the policies and action plan for development jointly put forward by the government and development partners. The forum also discusses the effectiveness of development cooperation and resource estimation. Development coordination occurs during project review missions (particularly with the World Bank, as well as the high commissions in Tarawa of the Governments of Australia and New Zealand).

18. Both ADB’s Pacific Subregional Office in Suva and ADB missions meet regularly with key government bodies, including the Ministry of Finance and Economic Development. ADB also regularly engages with major donors (including the Governments of Australia and New Zealand, the European Union, the International Monetary Fund, and the World Bank) to examine potential areas for cooperation, particularly in the area of public financial management. ADB also continues to look for opportunities to undertake joint activities and build on existing cooperative relationships and complementary activities. ADB seeks to promote donor coordination by meeting with donors regularly and sharing information and analyses. A development partners’ agreement to improve aid effectiveness in Kiribati, which builds on the Paris Declaration, has been discussed among partners and with the government, and ADB will seek opportunities to promote its development.

D. ADB Experience and Assistance Program

19. ADB has provided support to Kiribati since 1974 and has committed loans and grants totaling $96.97 million and technical assistance of $20.02 million. During 2017–2018, ADB approved grants of $7.5 million to help improve Kiribati’s economic management by sustaining political and bureaucratic momentum for complex and politically sensitive reforms. The 2019– 2021 country operations business plan for Small Pacific Island Countries, including Kiribati,19 focuses on generating economic growth for sustainable development, in line with the broad objectives of the KDP 2016–2019; KV20 2016–2036; and ADB’s Pacific Approach, 2016–2020.

20. The proposed South Tarawa Renewable Energy Project is ADB’s first energy sector project in Kiribati, for approval in 2021. The project will install a solar and battery energy storage system and build institutional capacity including preparation of a draft energy act to increase deployment of renewable energy and related private sector investments. The project will help Kiribati achieve targets in reducing the use of imported diesel and increasing the contribution of renewable energy. The project is prioritized by the government and is in line with national policies, sector strategies, plans, and road map (footnotes 9–14). The project will be financed by ADB under its Pacific Renewable Energy Investment Facility, with cofinancing from the Government of New Zealand and the Strategic Climate Fund.20

19 ADB. 2018. Country Operations Business Plan: 11 Small Pacific Island Countries, 2019–2021. Manila. 20 Under the Scaling Up Renewable Energy Program in Low-Income Countries (www.climateinvestmentfunds.org). 7

Problem Tree for Energy Sector

Reduced options Limited growth High Fuel Poorly maintained, Reliance on for household in tourism and household supply insufficient, and subsidies income commercial expenditure disruptions unreliable power and donor generation sectors on electricity supply funds

EFFECTS

Greenhouse High generation costs and tariffs Vulnerability to oil import and Unsustainable gas emissions and suppressed demand transport costs, climate hazards utility operations

High reliance on imported fuel for power generation CORE PROBLEM

Low penetration of Low-efficiency Frequent load Cross-subsidy from Insufficient renewable energy power generation shedding because electricity to water capital and related clean from old diesel of lack of back-up and sanitation investments technologies generators generating assets services due to because of combined operations below cost- in one utility and recovery tariffs community service and low Limited Limited access to Lack of obligations to water collection technical and financing and lack enabling supply and efficiency institutional of investments by regulatory sanitation operations capacity private sector framework CAUSES