The World Bank Shanxi 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 CHINA 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, Changzhi, 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 Yangcheng county) 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