Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 35075-MX PROJECT APPRAISAL DOCUMENT ON A Public Disclosure Authorized PROPOSED GRANT FROM THE GLOBAL ENVIRONMENT TRUST FUND IN THE AMOUNT OF US$25.0 MILLION TO THE UNITED MEXICAN STATES FOR A Public Disclosure Authorized LARGE-SCALE RENEWABLE ENERGY DEVELOPMENT PROJECT May 19,2006 Finance, Private Sector and Infrastructure Department Colombia and Mexico Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the Public Disclosure Authorized performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective as ofJune 1,2006) CurrencyUnit = MXP MX$11.2475 = US$1 US$ = SDR1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BMZ German Ministry for Economic Cooperation and Development BOT Build-Operate-Trans fer CCGT Combined Cycle Gas Turbine CDI Indigenous Peoples Development Commission (Comisidn de Desarrollo de Pueblos Indigenas) CDM Clean Development Mechanism CEC California Energy Commission CENACE National Dispatch Center (Centro Nacional de Control de Energia) CFE National Electric Commission (Comisidn Federal de Electricidad) CO2 Carbon Dioxide C02e Carbon Dioxide Equivalent CPS Country Program Strategy CRE Energy Regulatory Commission (Comisidn Reguladora de Energia) DGIDTMA The Directorate General for Research, Technological Development, and the Environment of SENER (Direccidn General de Investigacidn, Desarrollo Tecnoldgico y Medio Ambiente) EMP Environmental Management Plan ER Emissions Reduction ERPA Emissions Reduction Purchase Agreement GEF Global Environment Facility GHG Greenhouse Gas GoM Government ofMexico GPG The Geothermal-electric Project Management Division ofCFE (Gerencia de Proyectos Geotermoelktricos - Morelia) GW Gigawatt GWh Gigawatt-hour IEA International Energy Agency (Paris) IIE Mexico Electric Power Research Institute (Instit~tode Investigaciones Electricas) INEGI National Institute of Statistics, Geography and Computer Science (Instituto Nacional de Estadistica, Geografia e Informdtica) IPP Independent Power Producers IRR Internal Rate ofReturn kWh Kilowatt-hours LNG Liquid Natural Gas MEC Marginal Energy Cost MW Megawatt NAFIN Mexico state development bank (Nacional Financiera) NFFO UK Non-Fossil Fuel Obligation NPV Net Present Value NREL U.S. National Renewable Energy Laboratory O&M Operation and Maintenance OPEC Organization of Petroleum Exporting Countries OPF Publicly Financed Works (Obra Pziblica Financiada) PEF Federal Budget (Presupuesto de Egresos de la Federacidn) PEMEX Mexican Petroleum Corporation (Petrdleos Mexicanos) PERGE Spanish acronym for Large-Scale Renewable Energy Development Project (Proyecto de Energias Renovables a Gran Escala) POISE Least Cost Plan (Programa de Obras e Inversiones del Sector Elkctrico) PPA Power Purchase Agreement PROFEPA Federal Ministry for Environmental Protection (Procuraduria Federal de Proteccidn a1 Ambiente) RPS Renewable Portfolio Standard SBC System Benefit Charge SEDESOL Ministry of Social Development (Secretaria de Desarrollo Social) SEMARNAT Ministry ofthe Environment and Natural Resources (Secretaria de Medio Ambiente y Recursos Naturales) SEN National Electric System (Sistema Elkctrico Nacional) SENER Ministry ofEnergy (Secretaria de Energia) SHCP Minstry ofFinance and Public Credit (Secretaria de Hacienda y Crkdito Pzi blico) SP The Planning Department of CFE (Subdireccidn de Programacidn) SRMC Short Run Marginal Cost SSA The Health Ministry (Secretaria de Salud) Tcf Trillion cubic feet TW Terawatt TWh Terawatt-hours UNDP United Nations Development Programme UNFCCC United Nationsal Framework Convention on Climate Change UP1 Unit for Promotion ofInvestment within SENER (Unidad de Promocidn de Inversiones) USAID United States Agency for International Development Vice President: Pamela Cox Country ManageriDirector: Isabel Guerrero Sector Manager: Susan G. Goldmark Task Team Leader: Charles Feinstein MEXICO Large-Scale Renewable Energy Development Project CONTENTS Page 1. Country and sector issues.................................................................................................... 1 2 . Rationale for Bank involvement ......................................................................................... 2 3 . Higher level objectives to which the project contributes .................................................... 3 B. PROJECT DESCRIPTION................................................................................................. 3 1. Lending instrument: Free standing GEF project ................................................................ 3 2 . Program Objectives ............................................................................................................. 3 3 . Project Phases and Key Indicators ...................................................................................... 4 4. Project components ............................................................................................................. 5 C. IMPLEMENTATION .......................................................................................................... 8 1. Institutional and implementation arrangements .................................................................. 8 2 . Monitoring and evaluation of outcorneslresults................................................................ 10 3 . Sustainability and Replicability ........................................................................................ 10 4 . Critical risks and possible controversial aspects ............................................................... 11 D. APPRAISAL SUMMARY ................................................................................................. 13 1. Economic and financial analyses ...................................................................................... 13 2 . Technical ........................................................................................................................... 14 3 . Fiduciary ........................................................................................................................... 14 4 . Social................................................................................................................................. 15 5. Environment.. .................................................................................................................... 17 6 . Safeguard policies ............................................................................................................. 18 7. Policy Exceptions and Readiness...................................................................................... 18 Annex 1: Country and Sector or Program Background ......................................................... 19 Annex 2: Major Related Projects Financed by the Bank andlor other Agencies ................. 27 Annex 3: Results Framework and Monitoring ........................................................................ 29 Annex 4: Detailed Project Description...................................................................................... 43 Annex 5: Project Costs ............................................................................................................... 64 Annex 6: Implementation Arrangements ................................................................................. 65 Annex 7: Financial Management and Disbursement Arrangements ..................................... 72 Annex 8: Procurement Arrangements ...................................................................................... 79 Annex 9: Economic and Financial Analysis ............................................................................ 83 Annex 10: Safeguard Policy Issues............................................................................................ 98 Annex 11: Project Preparation and Supervision ................................................................... 114 Annex 12: Documents in the Project File ............................................................................... 115 Annex 13: Statement of Loans and Credits ............................................................................ 116 Annex 14: Country at a Glance ............................................................................................... 119 Annex 15: Incremental Cost Analysis ..................................................................................... 122 Annex 16: Policies to Stimulate the Market for Renewable Electricity: International Experience and Lessons Learned............................................................................................ 144 Annex 17: Information about Some Key Issues Related to Wind Energy Project Development in Mexico: Land Leasing. and the Potential for Job Creation ...................... 153 Annex 18: STAP Roster Review .............................................................................................. 162 Annex 19: Map IBRD34480 ..................................................................................................... 170 MEXICO LARGE-SCALE RENEWABLE ENERGY DEVELOPMENT PROJECT PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSFE Date: 511 9/06 Team Leader: Charles M. Feinstein Country Director: Isabel Guerrero Sectors: Renewable energy (55%); General Sector ManagerlDirector: