Technical Assistance Consultant’s Report Project Number: 38183 November 2006 Samoa: Preparing the Power Sector Expansion Program Prepared by John Grimston and Study Team Tonkin and Taylor International Ltd Auckland, New Zealand For Ministry of Finance, Samoa This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. All the views expressed herein may not be incorporated into the proposed project’s design. Abbreviations and Acronyms ADB Asian Development Bank CSO Community Service Obligation EPC Electric Power Corporation of Samoa GoS Government of Samoa MoF Ministry of Finance MNREM Ministry of Natural Resources, Environment and Meteorology PIC Pacific Island Country PUMA Planning and Urban Management Agency SOEMD State Owned Enterprise Monitoring Division SOPAC South Pacific Applied Geoscience Commission SWA Samoa Water Authority TA Technical Assistance TOR Terms of Reference USGIC US Geothermal Industries Corporation Table of Contents I. Introduction 1 A. Background – The Power Sector in Samoa 1 B. Goals and Objectives 2 C. Purpose and Contents of the Inception Report 2 D. Establishment 3 E. Work Undertaken to Date 3 II. Outcomes and Issues 5 A Outcomes to be Provided from the TA 5 B Regulatory Issues 7 C EPC Capacity for a New Regulatory Environment 9 D Corporate Governance and Institutional Development 10 E Power System Planning 13 F Renewable Energy 15 G Environmental Issues 17 H The Proposed Vaita’i Hydropower Project 18 III. Methodology 22 A. Regulatory, Governance and Institutional Development Aspects 22 B. Power System Planning 22 C. Renewable Energy 23 D. Financial Management Aspects 24 E. Economic Aspects 25 F. Hydropower (including engineering, environmental, etc) 25 IV. Organisation and Staffing 29 V. Work program 33 Appendix 1: Terms of Reference Appendix 2: List of Persons Met Appendix 3: Reference List Appendix 4: Format and Scope of a Resettlement Framework Appendix 5: Format and Scope of a Short Resettlement Plan Appendix 6: Figures F1 and F2 and Flow Duration Curves Appendix 7: Economic Background and Identification of New Major Electricity Loads Appendix 8: EPC Electricity Demand Forecasts Background Data Appendix 9: EPC Electricity System 1 I. Introduction A. Background – The Power Sector in Samoa 1. Energy is a critical element underpinning the Government’s strategy for economic growth and social development. Throughout the 1990’s, Samoa went through a rapid transformation in its energy consumption pattern from heavy use of traditional indigenous biomass toward a more commercial energy supply. No hydrocarbon deposits have been found in Samoa. Solar energy usage is currently limited to water heating and some photovoltaic systems on the smaller islands. Biomass accounts for about 48% of the total primary energy supply in Samoa, with petroleum products at 39%. Electricity consumption from diesel and hydro accounts for about 13% of usage. Biomass, primarily from fuel wood and coconut residues, is the dominant cooking fuel. An undetermined amount (estimated 12 MW) of on-site unaccounted for standby diesel electricity generation is used by hotels, commerce and industry in the event of supply outages or to avoid high electricity costs. 2. Electric Power Corporation (EPC) is responsible for electricity generation and transmission in Samoa. Whereas Savai’i is exclusively served by diesel generation from some 4.5 MW of effective capacity, Upolu has 8 hydropower plants at 5 sites with a total installed capacity of 12.2 MW (including Afulilo) and 18.3 MW of diesel capacity. In the 2003/04 year, 44% of EPC’s generation was from hydro and 56% from diesel. Fuel accounted for 69% of the total generation cost and 43% of EPC’s overall costs. By 2005-06 the cost of fuel had increased to 77% of the total generation cost and 53% of EPC’s overall costs. This leaves EPC and its customers exposed to fluctuations in world oil prices. EPC, as a corporate entity, has autonomy of its daily operations (except for tariff setting and staff employment conditions) and is governed by the Electric Power Corporation Act (1980). In 2005, an ADB consultant’s assessment of EPC’s financial management performance found that it has struggled, primarily due to an inability to set tariffs appropriately, inadequate cost recovery and poor revenue collections. Consequently, EPC’s ability to operate as an autonomous company with full accountability for its actions need strengthening to enhance transparency and cost-efficiency. The financial situation has deteriorated further in 2006/07 with further increases in diesel prices but no increase in tariffs. 3. Despite an automatic tariff adjustment mechanism being agreed for EPC in 2001, it has not been applied. The 15% tariff increase in May 2005 was the first explicit increase since November 2001, although modest effective increases were implemented by phasing out the previous prompt payment discount. By contrast, over the period, the cost of fuel, expressed in local currency, increased by a factor of about two. This problem is exacerbated by the fact that EPC does not systematically forecast demand or prepare power system plans. Any power planning undertaken does not take into account the availability of a substantial amount of private diesel generation. EPC proposed a further 15% tariff increase in May 2006 and the introduction of an Automatic Fuel Adjustment Clause (AFAC) The Board decided to introduce an AFAC rather than seek a further tariff increase in 2006. However, the AFAC has yet to be introduced. 4. Because of its structure EPC has little capacity to focus on customers, manage demand or increase revenue from sales. The Board and management have little ability to manage for financial viability when they do not have the appropriate staff, tools and information necessary to ensure that revenue is appropriate for the financial needs of the company. 5. EPC undertakes significant Community Service Obligations for Government but these are generally not explicit and often not financed. 6. Reforming and strengthening institutional and regulatory changes to be instigated under the TA, in conjunction with development of a professional electricity demand/supply forecasting and subsequent investment planning and tariff setting regime will set an underpinning base on which investment in new generation will be able to be made. Provision needs also to be made for increased private sector involvement in the electricity supply sector. 7. While it has done so occasionally in the past, EPC currently does not have the capability to purchase electricity generated by existing private owned generators, nor to control multi-source generation. This capability including purchase of equipment which will allow remote monitoring and control of the system needs to be instituted before the full value of private generation in Samoa can be utilised. 8. The current flat tariff structure provides no incentive for peak electricity avoidance by electricity users by load shifting (freezers) or use of on-site diesel generation. The result is that new peak generation capacity will soon be avoidably required and existing private sector investment in on-site generation is poorly utilized. Improvements in these areas are constrained by current tariff structure and the need for legislative changes. 2 9. As part of power planning there is a need to confirm the viability of new hydro generation in Savai’i and for renewable energy projects in general. These opportunities along with the use of existing private owned generation need to be integrated into a 10 year generation investment plan for EPC. 10. With the provision of full autonomy for EPC there will need to be set in place a regulatory environment for the components of the business that are a natural monopoly (distribution and retail) that ensures that reliable electricity supply is occurring at the least cost. The Ministry of Finance has established an SOE Monitoring Division with which the Bank is separately working to enhance its capabilities - this unit could take on a slightly widened role with regard to monitoring of EPC. Alternatively the Ministry has also proposed in its draft energy policy establishment of an Energy Board, while a regulator has been established for the telecommunications sector that could be enhanced to also cover electricity. 11. The reforms of EPC and the SOE sector that have been taking place over the last decade have established a sound base but further legislative changes are needed before EPC can involve the private sector, take over full autonomy for its operations and be held accountable. Savai’i 12. Savai’i is mountainous, with the population totalling 45,000 concentrated in the coastal strip. Electricity is generated by EPC’s diesel powerstation at Saleloga, the main town. The island is served by a 22 kV transmission system running around the coast, with allied sections of 6.6 kV line. The total installed capacity at Saleloga is of the order of 5.5 MW (the actual figure depends on the degree of engine de-rating applied), comprising 3 Cummins engines and 3 larger Caterpillar engines. The daily load curve is characterized by a steady load for most of the day (at about 40 - 50% of the peak), with the peak reaching 4 MW occurring over the period 6 – 10 pm when lighting is the main use. Annual demand growth is estimated to be about 6% (Source: Nippon Koei report, 2003), putting added pressure on the generation system. However, more recent information on past load growth 2001 to 2006 has shown only a 1.5% per annum load growth. Therefore in the absence of any major new loads, plus rising tariffs, load growth is only likely to be of the order of 2.0% per annum at most from the existing customer base. Notwithstanding this there is an urgent need to develop a new diesel power station.