Report and Recommendation of the President to the Board of Directors

Project Number: 46934 February 2013

Proposed Loan and Administration of Loan Solarco Company Limited Central Thailand Project (Thailand)

In accordance with ADB’s public communications policy (PCP, 2011), this abbreviated version of the RRP excludes confidential information and ADB’s assessment of project or transaction risk as well as other information referred to in paragraph 97 of the PCP.

CURRENCY EQUIVALENTS (as of 1 January 2013)

Currency unit – baht (B) B1.00 = $0.03 $1.00 = B32.00

ABBREVIATIONS

ADB – Asian Development Bank CTF – Clean Technology Fund EGAT – Electricity Generating Authority of Thailand EGCO – Electricity Generating Public Company EPC – engineering, procurement, and construction kWh – kilowatt-hour MW – megawatt (alternating current) PEA – Provincial Electricity Authority PPA – power purchase agreement SPP – small power producer VSPP – very small power producer YEH – Yanhee EGCO Holding

NOTE

In this report, "$" refers to US dollars.

Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Director General P. Erquiaga, Private Sector Operations Department (PSOD) Director C. Thieme, Infrastructure Finance Division 2, PSOD

Team leader D. Wiedmer, Senior Investment Specialist, PSOD Team members S. Durrani-Jamal, Senior Economist, PSOD R. Lockhart, Investment Specialist, PSOD M. Manabat, Senior Investment Officer, PSOD N. Moller, Senior Counsel, Office of the General Counsel K. Paocharoen, Investment Officer, PSOD A. Porras, Safeguards Officer, PSOD D. Purka, Principal Investment Specialist, Regional and Sustainable Development Department L. Rahman, Young Professional, PSOD R. Samiano, Safeguards Officer, PSOD

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. THE PROPOSAL 1 II. THE PROJECT 1 A. Project Identification and Description 1 B. Development Impact, Outcome, and Outputs 2 C. Alignment with ADB Strategy and Operations 3 D. Implementation Arrangements 4 III. THE PROPOSED ADB ASSISTANCE 5 IV. POLICY COMPLIANCE 5 A. Safeguards and Social Dimensions 5 B. Anticorruption Policy and Anti-Money Laundering Policies 6 C. Investment Limitations 6 D. Assurances 6 V. RECOMMENDATION 7 DESIGN AND MONITORING FRAMEWORK 8

PROJECT AT A GLANCE

1. Project Name: Central Thailand Solar Power Project 2. Project Number: 46934 3. Country: Thailand 4. Department/Division: Private Sector Operations Department Private Sector Infrastructure 2 5. Sector Classification: Sectors Primary Subsectors Energy √

6.Thematic Classification: Themes Primary Subthemes Economic growth widening access to markets and economic opportunities Environmental global and regional transboundary sustainability environmental concerns Private Sector √ Private sector investment

development 6a. Climate Change Impact: 6b. Gender Mainstreaming: Adaptation Gender equity theme Mitigation √ Effective gender mainstreaming Some gender elements Not applicable No gender elements √

7. Targeting Classification: 8. Location Impact: Targeted Intervention Rural Geographic Income Urban dimensions Millennium poverty at National High General of inclusive development household

Intervention growth goals level Regional √

9. Nonsovereign Operation Risk Rating : NSO6 10. Safeguard Categorization:

Environment B Involuntary resettlement C

Indigenous peoples C

11. ADB Financing:

Sovereign/Nonsovereign Modality Source Amount (B million) Project Nonsovereign Finance OCR B1,650 million

Loan 12. Cofinancing:

Financier Category Amount ADB Clean Technology Fund Official Loan $35 million Local Thailand Commercial Banks Loan B2,310 million

Total $107 million equivalent

13. Counterpart Financing: Not Applicable 14. Aid Effectiveness: Not Applicable

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed loan of B1,650 million (or its equivalent in US dollars if baht are not available), and (ii) proposed administration of a loan not exceeding $35 million or 15% of project costs (whichever is less), to be provided by the Asian Development Bank (ADB) Clean Technology Fund (CTF),1 both to Solarco Company Limited for the Central Thailand Solar Power Project in Thailand.2

II. THE PROJECT

A. Project Identification and Description

1. Project Identification

2. The 57 megawatt (MW) Central Thailand Solar Power Project is part of the long-term growth strategy of Electricity Generating Public Company (EGCO), which emphasizes expanding investments into renewable energy to strengthen its business in independent power generation in Thailand. With its recent acquisitions and projects currently under development, EGCO plans to increase its installed renewable energy capacity to more than 300 MW by 2015.3 EGCO’s strategy aligns with the Renewable and Alternative Plan, 2012–2021 approved by the Government of Thailand in December 2011, which sets a target of 2,000 MW of solar power capacity by 2021. The plan also sets a target of generating 25% of primary energy from renewable sources by 2021, thereby avoiding 76 million tons of carbon emissions annually.

3. The project is eligible for cofinancing from the ADB CTF.4 The Clean Technology Fund provides concessional financing to support the rapid deployment of low-carbon technologies with significant potential to reduce and avoid greenhouse gas emissions over the long term. It is administered through multilateral development banks, including ADB, and is one of the largest funds helping developing countries fill gaps in financing projects to mitigate climate change. The CTF trust fund committee approved the allocation of $99.5 million for the CTF Thailand Private Sector Renewable Energy Program on 24 May 2012, to be utilized and administered by ADB.5 The proposed project is the third private sector project in Thailand 6 under the ADB CTF 7 (approved and under due diligence), for a total allocation of $54 million to date.

4. As of September 2012, Thailand had 32,000 MW of installed power generation capacity. The country’s electricity production depends heavily on conventional fuels, with 66% produced using natural gas and 20% using coal and lignite. Natural gas has traditionally provided a reliable and low-cost source of energy, but growing demand and dwindling natural gas reserves from the Gulf of Thailand mean the country must diversify and secure alternative fuel sources for power generation. Fortunately, Thailand has abundant renewable energy sources—biomass,

1 Financed by the Clean Technology Fund. 2 The design and monitoring framework is in Appendix 1. 3 EGCO’s current operating installed capacity for renewable energy includes 9.9 MW of biomass and 63 MW of solar. 4 Climate Investment Funds. http://www.climateinvestmentfunds.org. 5 ADB Thailand Private Sector Renewable Energy Program approved by the CTF Trust Fund Committee on 24 May 2012 pursuant to the Financial Procedures Agreement entered into between ADB and the International Bank for Reconstruction and Development as trustee of the Trust Fund for the Clean Technology Fund, 18 March 2010. 6 The first two private sector projects identified under the ADB CTF are the Provincial Solar Power Project and the Theppana Wind Power Project. 7 ADB. 2009. Establishment of the ADB Clean Technology Fund and the ADB Strategic Climate Fund. Manila 2

biogas, mini-hydro, solar, and wind. Using these domestic sources of renewable energy can boost Thailand’s energy security, save foreign exchange, and protect the country from global price fluctuations in energy markets.

5. To complement its renewable energy strategy, the Ministry of Energy advocates decentralized power generation mainly by supporting the country’s small power producer (SPP) and very small power producer (VSPP) programs. The SPP program allows private developers to build, own, and operate 10–90 MW power projects and enter into power purchase agreements (PPAs) with the Electricity Generating Authority of Thailand (EGAT). Under the VSPP program, producers of up to 10 MW may sell power to the Metropolitan Electricity Authority or the Provincial Electricity Authority (PEA). Renewable energy SPPs and VSPPs are eligible for a feed-in tariff (or “adder”) in addition to the wholesale electricity price.

CONFIDENTIAL INFORMATION DELETED

2. The Borrower and Sponsors

6. Solarco, a special-purpose company incorporated in Thailand and 100% owned by Yanhee EGCO Holding (YEH), will develop the project. EGCO owns all the common shares of YEH and has exclusive rights to manage YEH and Solarco. EGCO is Thailand’s first independent power producer and is currently the second largest private power producer in the country. EGAT privatized EGCO in 1992; it was listed on the Stock Exchange of Thailand in 1995. EGCO is 25.4% owned by EGAT and 23.9% by TEPDIA Generating. 8 EGCO has invested in power projects in Lao People’s Democratic Republic, the Philippines, and Thailand with a total installed capacity of 6,194 MW. 9 Yanhee Solar Power owns the YEH preferred shares. The founder of Yanhee International Hospital owns Yanhee Solar Power.10

B. Development Impact, Outcome, and Outputs

1. Impact

7. The project will diversify Thailand's energy mix by adding renewable energy capacity, thus helping the country progress toward its clean energy targets.11 To achieve sustainable long-term economic growth, Thailand is promoting alternative sources of energy such as solar for power generation, and is beginning its transition to a low-carbon economy. is a clean and sustainable source of electricity that diversifies the country’s energy mix, strengthening energy security and reducing reliance on fossil fuel.

8. The project contributes to accelerating and expanding private investment in clean energy infrastructure in Thailand. Successful project implementation and viable returns are expected to attract other private investors to solar energy projects.

8 TEPDIA Generating is jointly owned 50% each by Mitsubishi and Tokyo Electric Power. 9 This figure includes projects under development. 10 Dr. Supot Sumritvanitcha is the founder of Yanhee International Hospital. Yanhee is a multiservice general hospital in Bangkok that specializes in a range of medical and cosmetic services. Yanhee comprises a hospital with a 400- bed capacity, 95 outpatient rooms, 12 major and 30 minor operating rooms, an intensive care department, emergency rooms, delivery rooms, and a nursery. The founder of Yanhee has some experience in renewable energy through a prior solar power project in 2011. 11 The government has established clean energy targets of 2,000 MW of solar power by 2021 and 25% of primary commercial energy from renewable sources by 2021. 3

2. Outcome

9. The outcome will be the demonstrated viability and sustainability of a utility-scale solar project in the private sector. Avoided carbon dioxide emissions are considered an outcome indicator in addition to the usual financial and operating indicators.

3. Output

10. The output will be a 57 MW solar power project constructed and commissioned.

C. Alignment with ADB Strategy and Operations

11. Consistency with Strategy 2020. ADB’s Strategy 2020 supports development that is environmentally sustainable and enlists the private sector to meet growing energy demand in the region, capitalizing on ADB’s operating strengths in infrastructure development, finance, and other areas.12 The strategy supports expanding environment-friendly technologies for clean and efficient energy generation and use, as well as a larger role for private sector financing of infrastructure through public–private partnerships.

12. Consistency with the country strategy. ADB’s country partnership strategy, 2007– 2011 for Thailand has three core strategic areas: infrastructure, environmental sustainability, and capital markets. 13 The government’s Alternative Energy Development Plan, 2012–2021 notes the immense potential for solar power in Thailand and that energy imports can be avoided through its use with private investment. The project supports the government’s long-term objective for the Thailand Clean Technology Fund Investment Plan to use ADB CTF resources to support renewable energy projects in the private sector.14

13. Consistency with the Energy Policy. The project is consistent with ADB’s Energy Policy, which emphasizes investments in energy efficiency, renewable energy projects, and wider access to energy.15 It advances ADB’s target of investing $2 billion per year in clean energy by 2013 to accelerate low-carbon growth and reduce regional greenhouse gas emissions, as well as the target of the Private Sector Operations Department to attain 25% of its annual approvals for clean energy projects. Further, under the Asia Solar Energy Initiative, ADB is committed to identifying, developing, and assisting implementation of 3,000 MW of new solar power projects by 2013, providing up to $2.25 billion in financing and leveraging an additional $6.75 billion.

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12 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila. 13 ADB. 2007. Country Partnership Strategy: Thailand, 2007–2011. Manila. ADB is working with the government to prepare a new country partnership strategy, 2013–2016, which will align with the 11th National Economic and Social Development Plan, 2012–2016. The country operations business plan, 2013-2015 for Thailand bridges the 2007-2011 country partnership strategy and the 2013–2016 country partnership strategy for Thailand. 14 The Clean Technology Fund provides scaled-up financing to demonstrate, deploy, and transfer low-carbon technologies with significant potential to avoid greenhouse gas emissions over the long term. The Clean Technology Fund is part of the Climate Investment Funds implemented by multilateral development banks to bridge the financing and learning gap until the next international climate change agreement. 15 ADB. 2009. Energy Policy. Manila.

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D. Implementation Arrangements

14. Table 3 summarizes the implementation arrangements.16

Table 3: Summary of Implementation Arrangements Aspects Arrangements Regulatory framework The project is being developed as a public–private partnership under Thailand’s very small power producer program, which utilizes renewable energy from private sector power plants with capacity of up to 10 MW to provide clean electricity to the grid.

Management The project will be developed and managed by Solarco, a special-purpose company incorporated in Thailand that is 100% owned by YEH. EGCO owns all the common shares of YEH and has exclusive rights to manage YEH. EGCO is Thailand’s first independent power producer and is currently the second largest private power producer in the country.

Implementation period First quarter 2013–fourth quarter 2013 Construction period of 8–10 months

Construction arrangements The project will be developed under two fixed-price, date-certain, EPC arrangements.

Supplier, contractor Both EPC arrangements will supply multi-crystalline PV modules from REC Modules, a subsidiary of REC, which was established in 1996 and is a leading vertically integrated solar firm. It is based in Norway and listed on the Oslo Stock Exchange. The modules are manufactured in Singapore at an integrated production facility with an annual capacity of 800 MW for 2012. The REC solar module was announced as the best performer in the independent Photon Field Performance Test, which demonstrated a 6% greater electricity yield on average compared with other leading solar PV firm modules.a

The first EPC arrangement (EPC I) includes Phoenix Solar (Singapore), which will be responsible for the design and supply of PV modules and inverters, and PESCO, which will be responsible for the construction and supply of the balance of plant equipment. Phoenix Solar (Singapore) and PESCO are jointly and severally responsible for all liabilities under the EPC I.

Phoenix Solar (Singapore) is a subsidiary of Phoenix Solar, a leading international PV system integrator. Phoenix Solar develops, constructs, and operates large- scale PV plants and is a specialist in turnkey arrangements. The company has sold solar modules with a peak power of more than 1 gigawatt since it was first founded. Phoenix Solar is based in Germany and is listed on the Frankfurt Stock Exchange. PESCO, established in 1986, is a Thai mechanical and electrical contractor. PESCO provides a full scope of services in the design, supply, and installation of turnkey projects. Phoenix Solar (Singapore) and PESCO have experience in Thailand as contractors for a 16 MW solar power project.

The second EPC arrangement (EPC II) includes Italthai, which will be responsible for the design and construction, as well as the supply of inverters and the balance of plant equipment. REC Modules will be responsible for the supply of PV modules. The EPC II arrangement has two points of responsibility and division of obligations under two parallel contracts. REC Modules will guarantee module defects and the 25-year efficiency warranty of the modules. Italthai will provide delay damages and guarantee the plant performance ratio for 2 years.

Italthai is a related company of Italian-Thai Development Public Company, which is one of the largest construction contractors in Thailand and is listed on the Stock Exchange of Thailand. It has more than 50 years of experience in construction and

16 Details of Implementation Arrangements (accessible from the list of linked documents in Appendix 2). 5

Aspects Arrangements a strong track record in construction projects for private clients and government authorities, such as EGAT, MEA, and PEA. Itlalthai has experience as the contractor for the NED solar power project in Lopburi province, which was also financed by ADB. Operations arrangements

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Major cost structure Solar PV has relatively high up-front capital costs and minimal operating costs. The cost structure is highly predictable, with limited expenditure on maintenance and parts replacement, and no ongoing fuel expense. As debt financing is the only material expense, it drives the economics and viability of solar power projects.

Operation and O&M for solar power is relatively simple, comprising panel cleaning, regular maintenance inspections, minor repairs, measurements, data verification, reporting, and site security. EGCO Engineering & Service, a wholly owned subsidiary of EGCO, will undertake the O&M services. The company has O&M experience as the operator for the NED solar power project in Lopburi province.

Relevant parties Revenue off-take is supported by PEA, Thailand’s state-owned distribution utility responsible for all distribution and retail electricity sales outside the Greater Bangkok area.

Performance monitoring Solarco will submit quarterly unaudited financial statements, annual audited financial statements, and semiannual environmental and social monitoring reports to ADB during construction and annually thereafter. The performance indicators are included in the design and monitoring framework (Appendix 1).

ADB = Asian Development Bank; EGAT = Electricity Generating Authority of Thailand; EGCO = Electricity Generating Public Company; EPC = engineering, procurement, and construction; Italthai = Italthai Engineering; ITD = Italian– Thai Development; MEA = Metropolitan Electricity Authority; MW = megawatt; NED = Natural Energy Development; O&M = operation and maintenance; PEA = Provincial Electricity Authority; PESCO = Process Engineering Services; PPA = power purchase agreement; PV = photovoltaic; REC = Renewable Energy Corporation; YEH = Yanhee EGCO Holding. a Renewable Energy Corporation. 2011. Annual Report 2011,Sandvika Source: Asian Development Bank.

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III. THE PROPOSED ADB ASSISTANCE

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IV. POLICY COMPLIANCE

A. Safeguards and Social Dimensions

15. In compliance with ADB’s Safeguard Policy Statement (2009), the project is classified as category B for environment, category C for involuntary resettlement, and category C for indigenous peoples. The potential environmental and social impacts of the project have been identified and effective measures to avoid, minimize, mitigate, and compensate for adverse impacts are incorporated in the initial environmental examination report. Solarco’s institutional capacity and commitment to manage the project’s social and environmental impacts are

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deemed adequate and described in the environmental management plan included in initial environmental examination reports. The sites where the plants will be constructed are already owned by Yanhee Solar Power, acquired on a willing-seller, willing-buyer basis. The project transmission lines are expected to have a short-term impact during construction and insignificant environmental impacts during the remaining life of the project. During construction, a maximum of 160 construction workers will be at each project site at any particular time. ADB will ensure that the investment documentation includes appropriate provisions requiring Solarco to comply with national labor laws and, in addition, to take specific measures (including matters specific to contractors) in relation to the internationally recognized core labor standard for the ADB-financed portion of the project, in compliance with ADB’s Social Protection Strategy. 17 Several public hearings and information dissemination activities involved stakeholders to ensure public participation. These activities were confirmed during a due diligence site visit and found to be in accordance with ADB requirements. For gender classification, the project is categorized as having no gender element.18

B. Anticorruption Policy and Anti-Money Laundering Policies

16. Solarco was advised of ADB’s Anticorruption Policy (1998, as amended to date), and policy relating to the Combating of Money Laundering and the Financing of Terrorism (2003).19 Consistent with its commitment to good governance, accountability, and transparency, ADB requires Solarco to institute, maintain, and comply with internal procedures and controls following international best practice standards for the purpose of preventing corruption and money laundering activities and the financing of terrorism; and to covenant with ADB to refrain from engaging in such activities.

C. Investment Limitations

17. The proposed loan is within the medium-term country, industry, group, and single-project exposure limits for nonsovereign investments.

D. Assurances

18. Consistent with the Agreement Establishing the Asian Development Bank, the Government of Thailand’s no objection to the proposed assistance to Solarco will be obtained. ADB will enter into suitable finance documentation, in form and substance satisfactory to ADB, following approval of the proposed assistance by the Board of Directors.

17 ADB. 2003. Social Protection Strategy. Manila (adopted in 2001). 18 Summary Poverty Reduction and Social Strategy; Safeguards and Social Dimensions Summary (accessible from the list of linked documents in Appendix 2). 19 The Financial Action Task Force classifies Thailand as a strategically deficient jurisdiction in relation to combating money laundering and the financing of terrorism. The project team was mindful of this when conducting its integrity due diligence, which did not disclose any significant integrity risk. 7

V. RECOMMENDATION

19. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan not exceeding B1,650,000,000 or its equivalent in US dollars to Solarco Company Limited for the Central Thailand Solar Power Project in Thailand from ADB’s ordinary capital resources; and (ii) the administration by ADB of the loan not exceeding $35,000,000 or the equivalent of 15% of project costs, whichever is less, to Solarco Company Limited for the Central Thailand Solar Power Project in Thailand to be provided by the ADB Clean Technology Fund; both (i) and (ii) with such terms and conditions as are substantially in accordance with those set forth in this report, and as may be reported to the Board.

Haruhiko Kuroda President

07 February 2013

Appendix 1 8

DESIGN AND MONITORING FRAMEWORK

Performance Targets and/or Indicators with Data Sources and/or Design Summary Baselines Reporting Mechanisms Assumptions and Risks Impact Assumptions Diversified energy mix 2,000 MW of new solar Statistics and information Stable and consistent through the addition of power capacity by disclosed by the Ministry regulatory policies for the renewable energy 2021 to help meet of Energy renewable energy capacity Thailand’s target of subsector 25% of primary commercial energy Viable tariffs for solar power from renewable energy Risk Increased private At least two other new Statistics and information Demand from PEA lower sector participation in utility-scale solar power disclosed by the Ministry than expected solar power generators installed by of Energy production 2021

Outcome Assumptions Demonstrated viability More than 90,000 Solarco annual technical Plant achieves forecast and sustainability of megawatt-hours of reports availability utility-scale private solar power delivered sector solar power to the off-taker per Off-taker complies with its project annum, on average, purchase and payment during the first commitments 10 years of operation (2014–2024) Viable tariff rates for solar power over the operating 66,576 tons of carbon Solarco annual technical life of the project dioxide equivalent reports emissions avoided per Risks annum, on average, Deficient operation and during the first maintenance 10 years of operation (2014–2024) a Lower than estimated solar resources over the Projected financial Solarco financial model; operating life of the project internal rate of return annual audited financial exceeds the weighted statements average cost of capital of 3.3% at project completion

Projected economic Development internal rate of return effectiveness monitoring equal to or exceeding reports 12% at project completion

At least 50 full-time Sex-disaggregated equivalent permanent employment data staff positions filled collected from Solarco from commercial operations date

Performance Targets and/or Indicators with Data Sources and/or Design Summary Baselines Reporting Mechanisms Assumptions and Risks Outputs Assumption 57 MW utility-scale 57 MW solar power Solarco annual technical Project agreements solar power project capacity commissioned reports adhered to as agreed by constructed and by the fourth quarter of counterparties commissioned 2013 Risk At least 150 people Solarco annual Delayed commissioning of (full-time equivalent) operations reports, solar power plant employed during sex-disaggregated construction employment data collected from Solarco

Local purchase of Development goods and services effectiveness monitoring amounting to more reports, Solarco annual than B1,725 million operations reports ($54 million equivalent) during construction

Activities with Milestones Inputs 1.1 Construction work in progress, as scheduled ADB: B1,650 million 1.2 Loan agreement signed by first quarter of 2013 ($52 million) 1.3 Commissioning of project by fourth quarter of 2013 ADB Clean Technology Fund: B990 million ($31 million) CONFIDENTIAL INFORMATION DELETED

ADB = Asian Development Bank, MW = megawatt, PEA = Provincial Electricity Authority. a Based on annual production (megawatt-hours) x emission factor (0.739 tons of carbon dioxide equivalent per megawatt-hour), for renewable energy projects. Source: Asian Development Bank.

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