UNDP Project Document

Government of CUBA

and the

United Nations Development Program (UNDP)Global Environment Facility (GEF)

Co-generation of Electricity and Steam Using Sugarcane Bagasse and Trash

CUB/00/A01

This project aims at reducing Cuba’s energy-related CO2-emissions by removing barriers to the substitution of sugarcane bagasse and trash for fuel oil in power and steam co-generation. This will be achieved by the implementation of a project with an installed generating capacity of 30 MW that will demonstrate the technical, economic and financial viability of establishing companies in the vicinity of sugar mills to co-generate steam and power by using biomass-fired high-pressure condensing-extraction steam turbine technology year round. By demonstrating the technology and reducing the barriers to its large-scale replication, it is expected that a significant fraction of the biomass energy potential in Cuba can be harnessed in an efficient way. In the long term, it is estimated that some 1,500 GWh/yr of additional biomass-based power can be supplied to the grid thus reducing annual carbon emissions by over 1.3 M tCO2. This demonstration project will be located some 70 Km south east of Havana at the site of the existing Hector Molina sugar processing plant.

Table of Contents Pages

List of Acronyms and Abbreviations................................................................................................i

SECTION I: ELABORATION OF THE NARRATIVE.......................................................1

PART I: Situation Analysis...........................................................................................................1Context and global significance...................................................................................................1Barriers analysis...........................................................................................................................7Institutional, sector and policy context........................................................................................8Stakeholder analysis....................................................................................................................9Baseline analysis..........................................................................................................................9

PART II: Strategy........................................................................................................................10Project Rationale and Policy Conformity..................................................................................10Project Description....................................................................................................................11Project Goal, Objective, Outcomes, Outputs and Activities.....................................................12Project Indicators, Risks and Assumptions...............................................................................18Expected global, national and local benefits.............................................................................19Country Ownership: Country Eligibility and Country Drivenness...........................................20Replicability...............................................................................................................................23

PART III: Management Arrangements....................................................................................24Executing and Implementing Agency.......................................................................................24Project Steering Committee (PSC)............................................................................................24Project Management Unit (PMU)..............................................................................................24

PART IV: Monitoring and Evaluation Plan and Budget.........................................................25Monitoring, Evaluation and Dissemination...............................................................................25

PART V: Legal Context..............................................................................................................26

PART VI: Annual Budget...........................................................................................................26

SECTION II: STRATEGIC RESULTS, FRAMEWORK AND GEF INCREMENT..........30

PART I: Incremental Cost Analysis..........................................................................................30Project Background...................................................................................................................30Incremental Cost Assessment....................................................................................................31Methodology..............................................................................................................................31

PART II: Logical Framework Analysis.....................................................................................44Table I: Logical Framework and Objectively Verifiable Impact Indicators............................44Table II: Indicative Outputs, Activities and quarterly work plan..............................................45

SECTION III: TOTAL BUDGET AND WORK PLAN.....................................................49

SECTION IV: ADDITIONAL INFORMATION................................................................50

PART I : Other agreements........................................................................................................50Government Endorsement Letter...............................................................................................50Government Financing Letter....................................................................................................51

PART II: Organigram of Project...............................................................................................52

PART III: TORs for Main Sub-contracts.................................................................................53The EPC Contract......................................................................................................................53The Power Purchase Agreement (PPA).....................................................................................55The Product Exchange Agreement (PEA).................................................................................55

PART IV: Stakeholder Involvement Plan................................................................................55National Level...........................................................................................................................55Local Level................................................................................................................................56

Signature Page.............................................................................................................................58

ANNEX I Government Endorsement Letter of Approved Project Brief...............................59

ANNEX II Outline Specification of Demonstration Plant.......................................................67

ANNEX III Framework for the Application of GEF Funds....................................................68

ANNEX IV Capital Cost Estimate for Demonstration Plant................................................70

ANNEX V Biomass Handling and Storage System Description.............................................71

ANNEX VI Sugar Cane Trash Handling System Description................................................72

ANNEX VII Hector Molina Sugar Cane Production Program...............................................73

ANNEX VIII Monitoring and Evaluation Plan........................................................................74

ANNEX IX PPA Draft................................................................................................................80

ANNEX X MINAZ Activities During the Period 2000 – 2005...................................................93

List of Acronyms and Abbreviations

APR Annual Project ReportAWP Annual Work PlanBIG-GT Biomass Gasification Gas Turbine CARICOM Caribbean Community and Common MarketCDM Clean Development MechanismCEST Condensing Extraction Steam TurbineCITMA Ministry of Science, Technology and EnvironmentCO2 Carbon DioxideCOMARNA National Commission for the Protection of Environment and Natural ResourcesCOMECON Council for Mutual Economic CooperationCREDP Caribbean Renewable Energy Development ProjectEPC Engineering, Procurement and ConstructionFIDIC International Federation of Consultant EngineersFSP Full Size ProjectGEF Global Environment Facility GHG Greenhouse Gas GoC Government of CubaIPP Independent Power ProducerIR Inception ReportLRMC Long-run marginal cost of electricityM&E Monitoring and EvaluationMEP Ministry for Economic and Planning, CubaMFP Ministry of Finance and PriceMINAZ Ministry of Sugar IndustryMINBAS Ministry of Basic IndustryMINVEC Ministry of Foreign Investment and Economic CollaborationMW MegawattNEX National ExecutionNORAD Norwegian Agency for Development CooperationNPC National Project CoordinatorNPV Net Present ValueO & M Operation and MaintenancePAEC Cuban Electricity Saving Program PDA Project Development AgreementPDF B Project Development Facility Block BPDF C Project Development Facility Block C

i

PIR Project Implementation ReviewPMU Project Management UnitPPA Power Purchase AgreementPPER Project Performance Evaluation ReportPRODOC Project DocumentPSC Project Steering CommitteeRCU UNDP / GEF Regional Coordination UnitRRM Fund Risk and Replication Management FundSEN National Electric SystemTOR Terms of ReferenceTPR Tripartite Project ReviewTTR Terminal Tripartite ReviewUAC Unit Abatement CostUNDP United Nations Development ProgramUNDP CO United Nations Development Program Country OfficeUNE National Electricity UtilityUNFCCC United Nations Framework Convention on Climate ChangeZAFRA Sugar cane harvest season (between 100-150 days per year in Cuba

ii

SECTION I: ELABORATION OF THE NARRATIVE

PART I: Situation Analysis

Context and global significance

1. Cuba is an island country with an area of 110,860 sq. km and a long coastline of 3,735 km. It has a population of about 11 million with terrain mostly flat to rolling plains, with rugged hills and mountains in the southeast on the main island.

2. Provision of reliable electricity at affordable prices to all households, services and industries is an integral component of the national development plan of the Government of Cuba (GoC). In 2001, over 90 percent of Cuba’s electricity generation capacity was oil-fired. Currently, Cuba produces 50 percent of oil for its domestic consumption while rest is imported. The national grid has covered about 95% of total population at present while 5% of the population located in far and remote places, mainly in the eastern provinces, is yet to be provided with reliable electricity services. Electricity tariffs for the household and agriculture sectors are highly subsidized by the Government while export earning industries face full cost tariffs.

3. Since 1989, Cuba has been in a critical period of national development caused by the sudden collapse of commercial and financial relations with the former COMECON economies along with the reinforcement of the United States economic, financial and trade blockade that the country is facing. In addition, the Cuban industry and energy sectors are built around imported and national fuel oil. Due to the abrupt fall of its Gross Domestic Product and the lack of hard currency, fuel imports have declined from 13 million tons in 1989 to slightly more than 1,4 million in 2003 (with an additional national production of nearly 3,7 million tons). This situation has provoked an intense energy deficit that has had a strong negative impact on the country’s economic structure and population. The critical importance of fuel oil for Cuba can be appreciated in Table1 which presents 2004 estimates of the country’s installed power capacity and generation.

Table 1: Installed capacity and generation in National Electric System 2004 (UNE)

Source Units Installed Capacity MW

GrossGeneration MWh

Generation

Fuel Oil 24 2,880.0 12,335,615.8 80.94%Hydroelectric 2 29.0 63,565.0 0.42%Mini hydro 20 11.0 19,155.3 0.13%Diesel 3 60.0 121,952.8 0.80%Gas 6 215.0 1,626,700.7 10.67%Biomass 94 723.8 1,073,377.7 7.04%Wind 2 0.5 436.7 0.00%Total 150.00 3,919.3 15,240,804.0 100.00%

1

4. Of the total installed generating capacity in the National Electric System (SEN) in 2004, 76% corresponds to the Electric Power stations of UNE, 18.5% from industrial generating facilities that are interconnected to SEN (mainly cogeneration in sugar mills) and 5.5% from Independent Power Producers (IPP). Of the installed capacity in SEN, 82% is using fossil fuels, mainly domestic crude oil and gas from oil wells. The gross electrical energy generated in SEN in 2004 was of the order of 15,200 GWh, of which 82% came from UNE power stations and 7% from sugar mill cogeneration facilities of the Ministry of Sugar Industry (MINAZ).

5. The National Program of Electric Development up to 2010, prepared in 2004, is under revision on account of recent decisions relating to decentralization of generation and diversification of fuel sources with the objective of improving the quality of electricity supply. The key features of the demand growth projections that have been evaluated are as follows:

Electricity consumption will grow at a rate of 3.5% per annum for all sectors (residential, industrial, commercial and agricultural)

Maximum demand will reach about 2,600 MW in 2010, taking into account energy savings resulting from the “Cuban Electricity Saving Program” (PAEC)

Electricity consumption will grow most rapidly in the western area of the country (Pinar del Río, Havana and Matanzas provinces)

New capacity will comprise mainly combined cycle gas turbines (using domestic natural gas), internal combustion engines (using diesel or fuel oil) and renewable sources such as solar and wind farms and biomass based energy projects (i.e., Hector Molina project).

6. In Cuba, the sugarcane agro-industry has had a long tradition that goes back to the XVI century. Until the early 90s, it has remained as the main source of income for the country. The largest sugar production rates were obtained from the early 80s to 1992. During this period, an average of 70 million tons of sugarcane was milled resulting in an annual production of about 7.6 million tons of sugar. This amount corresponded to approximately 7.3% of the annual world production while sugar exports amounting to 6.8 million tons per year represented 24% of the annual world average exports for the period.

7. The continuous decrease in sugar prices in the international market coupled with price increases of inputs to the sugar production (i.e., fuel, fertilizers and others) has prompted the need to restructure the sugar sector in order to minimize production costs and diversify sugarcane utilization and agriculture production. The key objectives of this restructuring have been: (i) to decrease sugar production capacity to meet national consumption and cover export potential requirements, (ii) to diversify sugarcane utilization (i.e., animal food, alcohol, energy, particle board, etc.) and (iii) to use available agricultural land for food production and forest. However, in spite of the decrease in sugarcane production (e.g., from 4.06 million tons in 1996 to 2.28 million tons in 2003), the sugar sector continues to be the largest renewable energy source for Cuba as presented in Table 2.

2

Table 2Contribution of Renewable Energyin the Primary Energy Production 1)

Source / Year 2002 2003 2004Biomass 32.9 29.9 30.9Hydro energy 0.2 0.2 0.2Others 0.2 0.7 0.8Total 33.3 30.8 31.9

1 Estimated as total equivalent fuel oil consumedSource: National Statistics Office 2005

8. Since approximately 56% of the available agricultural land at MINAZ is to be devoted to sugar cane and 36% to forestry, there is a substantial potential for biomass energy development.

9. In 2005, the Cuban Government (GoC) decided to leave in operation 46 sugar mills, for the production of sugar (for domestic consumption and export), molasses, alcohol, other derivates and electricity cogeneration to satisfy the demand of the sector and for supply to the national grid. The Sugar Sector Energy Development Program was approved in 1993 with the objectives of energy self-sufficiency in the sector and exporting energy to the grid. This project is a key component of the program as a result of its innovative use of biomass and its local and global environmental benefits.

10. Sugarcane bagasse is widely used to co generate electricity and steam in the Cuban sugar industry with very low efficiency with low-pressure boilers and back pressure turbines able to operate only during the crushing season. Today, the average cogeneration rate is 31 kWh/t of crushed cane.

11. Given the general shortage of energy in the country and the fact that about 50% of Cuba’s total fossil fuel consumed for power generation is imported, in addition to the positive implications of using renewable energy for the local and global environment, exploring this alternative source of energy has been given high priority. In 1993, the National Parliament approved the National Energy Sources Development Program that places a high priority on the development of indigenous and environmentally sound renewable resources / options for rural and urban areas. Efficient use of sugarcane biomass to produce energy is given one of the top priorities in terms of development efforts. Other options include biomass, wind, solar, and small hydro to meet growing demand for electricity, reducing oil imports and preserving the environment.

12. While the current restructuring of the sugar sector presents challenges to development of this project and renewable energy, it also represents a tremendous opportunity by introducing a new source of sustainable income to MINAZ while improving the energy efficiency of the sugar industry and preserving rural employment.

13. Introducing high-pressure condensing-extraction steam turbine (CEST) technology using sugarcane biomass would significantly improve the energy efficiency of the sugar industry. Establishing CEST power plants using sugarcane bagasse and trash to generate steam and power (year round) would make it possible to satisfy the total power needs of the sugar production

3

complexes (sugar and alcohol) during the harvest season and off season and also to sell a notable amount of electricity to the national grid. This will replace the use of fossil fuels (mainly fuel-oil) in power generation leading to significant global benefits by reducing greenhouse gas emissions.

14. Of the 46 sugar mills available today, 25 are considered suitable for high pressure CEST technology. These mills have a combined capacity to process about 140,000 tons of sugarcane per day. If the biomass derived from this cane were used for steam and power co-generation, some 1,500 GWh of biomass-based electricity could be supplied to the grid annually, in addition to satisfying the steam and power needs of the sugar mills, representing approximately 15% percent of the current fossil fuel energy delivered by SEN in Cuba.

15. These projects have the potential to reduce the energy sector’s carbon emissions by some 34 million tCO2 over a 25-year lifetime of the power plants. In reality, the potential is much higher: energy efficiency improvements in other sugar mills and the collecting and storage of trash and surplus bagasse would make it possible to use biomass in the CEST plants during the non-harvest season. Once the identified barriers are removed and the demonstration plant is shown to operate as a successful commercial entity year round, Cuba will begin to tap this vast renewable energy potential.

16. In the rest of the world, the sugar industry produces over 100 million tons of cane sugar each year, resulting in some 380 million tons of cane biomass (roughly equivalent in thermal terms to 120 million tons of coal or 76 million tons of fuel-oil). Although CEST technology has been adopted in several countries such as the islands of Reunion, Guadalupe, Martinique and Mauritius, India and others, those plants cogenerate with bagasse only during the harvesting season and the rest of the year use fossil fuels. While these technologies are slowly being adopted in the sugar-cane producing world, they are by no means universally deployed. If all of these bagasse and trash were used to replace fuel oil, it would reduce global carbon emissions by almost 60 million tCO2 per year. Hence, the project has significant replication potential outside of Cuba as well.

17. Within this context, a PDF B was approved by GEF in 1995 in order to undertake feasibility studies related to the generation of electric power for export to the national grid using sugarcane bagasse and trash. As an outcome of the PDF B, a feasibility study to implement a steam and power co-generation plant using sugarcane bagasse and trash as fuel was carried out. This study recommended selecting a plant design that would use high-pressure CEST technology to provide steam for both sugar milling and power generation.

18. In 2000, GEF approved a PDF C to assist in the structuring of the Project’s contractual framework in such a fashion as to render it more attractive to potential participants while maintaining or improving the overall economic, technical, energy and environmental benefits of the original project. The Project Brief was approved by the GEF Council in May 2001.

19. The main objective of the PDF C – which led to the formulation of the present document – was the development of a coherent action plan for the establishing of an IPP pilot plant facility

4

and proposals for subsequent replication to maximize the carbon emissions avoidance benefit of GEF project support.

20. With these objectives, the following issues and activities, inter alia, have been covered by the project advisory team:

Recent developments in the Cuban sugar and energy sectors Project technological configuration, cost estimates and carbon saving benefits Project economic evaluation including the development of a financial model Review of environmental considerations taking into account the Cuban legislation Plant specifications General approach to project procurement and evaluation criteria for bids and

guidance on the preparation of bidding documents Advice on preparation of draft agreements including EPC, PPA, Product Exchange

and Biomass Supply agreements The measures necessary to ensure a secure supply of sugar cane biomass fuel to

sustain year round operation, burning both bagasse and trash

21. The advisory team has presented workshops on the FIDIC “Silver Book” international form of contract for EPC or “turnkey” procurement. In addition, several models have been examined with the GoC to facilitate implementation of the demonstration project, seeking to align international procurement with the prevailing Cuban rules and practices.

22. Recent activities of the advisory team have focussed on working with MINAZ, UNE and the UNDP Havana office on the preparation of this updated Project Document (PRODOC) for review according to UNDP/GEF rules and procedures, including the preparation of a logical framework analysis and incremental cost assessment.

23. The work has included the revision and updating of earlier project documentation relating to the demonstration project to take account of its evolution from a 42MW installed capacity cogeneration plant burning sugar cane biomass and fuel oil to a plant of 30MW capacity fired exclusively by biomass. With the earlier project configuration, the carbon emissions resulting from the use of fuel-oil during the off harvest season were estimated at 44,800 tC annually.

24. It is important to note that the effectiveness of the Project in meeting its Global Environmental Objective has consequently been significantly enhanced. The carbon emissions associated with the Project are now insignificant compared with the baseline case. The current design will result in a direct reduction of approximately 134,000 tons of CO2/year, as opposed to the annual reduction of 25,000tons CO2 estimated in the original design, thus increasing the cost-effectiveness of the GEF intervention substantially.

25. To sustain the proposed level of energy production entirely from biomass, the Project will consume fuel from three sources:

Bagasse arising from sugar production. Sugar cane trash (waste biomass) separated from the cane in processing

stations

5

A portion of the sugar cane trash that is, under current practice, left in the cane fields.

Linkage to Ongoing Projects and Programs

26. Currently, in Cuba as well as in the Caribbean region, the following climate change and renewable energy based projects and activities funded by GEF and other agencies are under implementation. The proposed Project has been designed to complement activities and to build synergies with them. Lessons learned will be taken into account while implementing the Project activities to avoid duplication, making full use of their results maximizing the impact.

27. UNDP/GEF Enabling Activity Project – Initial and Second National Communication to the UNFCCC. UNDP has supported the Government of Cuba in the preparation of the Initial National Communication to UNFCC that was concluded in 2001. Currently, a new enabling activity is under development for the Second National Communication.

28. UNIDO/GEF project –Generation and Delivery of Renewable Energy Based on Modern Energy Services in Cuba; the Case of Isla de la Juventud: This recently approved project aims at reducing the Greenhouse Gas Emissions (GHGs) in Cuba by promoting environmentally sound renewable energy technologies for power generation as well as for providing modern energy services on a commercial basis at the Isla de la Juventud. The project addresses the key barriers that constrain the use of renewable energy technologies (i.e., biomass gasification, solar and wind energy) for power and heat generation, promoting business models for sustainable harnessing of renewable energy resources in Cuba.

29. CREDP: Caribbean Renewable Energy Development Project, UNDP/GEF-CARICOM: This project aims at removing barriers to renewable energy utilization in the Caribbean region. Through specific actions related to policy, finance, capacity and awareness barriers, it is estimated that the contribution of renewable energy sources to the region’s energy balances will be significantly increased.

30. UNDP/NORAD –Cogeneration of electricity and heat based on gasification of biomass and gas turbine power generation (BIG-GT) technology. This program sought to unleash the potential of the BIG-GT technology for the implementation of sugar cane biomass cogeneration plants in Cuba through the preparation of a feasibility study. The GoC is currently seeking investment partners to pursue the implementation of this project.

31. UNEP / GEF – Solar and Wind Energy Resource Assessment (SWERA). This global project aims to reduce barriers to investment in solar and wind technologies in 13 countries around the world. Feasibility studies for several cases in Cuba have already been elaborated including solar and wind maps with GIS tools.

32. The project will also liaise with ongoing and upcoming bagasse generation projects in Brazil, in particular the proposed UNDP/GEF intervention to improve the use of sugarcane trash in energy production.

6

Barriers analysis

33. The barriers to the substitution of sugarcane bagasse and trash for fuel oil in power and steam generation being faced by Cuba are not different those present in many other developing countries. PDF B and PDF C phase studies identified a number of barriers that constrain the increased sugarcane biomass use for power generation in Cuba which are:

Limited experience with PPA’s and independent power generation Lack of experience with project finance investments and collaborative operations

between the sugar and electric power sectors Limited experience in handling sugar cane trash at large scale for use in energy

cogeneration facilities Limited experience with storage of sugar cane biomass (trash and bagasse) Lack of experience with high-pressure, efficient bagasse cogeneration facilities Difficult access to financing for a technology that is new to Cuba due to the

unusually high perceived risks High implementation and capital costs of these relatively new biomass-based

renewable energy technologies.

34. The proposed Project is designed to remove barriers to the sustainable replication of co-generation in Cuba using sugarcane biomass as primary fuel through the operation of an IPP. The GEF will contribute towards its incremental costs to encourage the adoption of this technology and to establish a replicable framework for future projects. Due to the challenging nature of the barriers to be removed, the proposed Project would not take place in the absence of GEF and UNDP support.

System Boundary

35. The Cuban economy forms the boundary for the system under examination. The current amount of bagasse generated as a by-product from sugarcane harvesting is about 4.6 million tons and the amount of sugarcane trash about 1.7 million tons. Together these would have a calorific equivalent to 1.2 million tons of fuel oil.

36. It is estimated that 25 MINAZ sugar mills in Cuba could be suitable as sites for installing CEST co-generation plant. This would both improve energy efficiency and generate substantial amounts of energy for the grid. Sugarcane trash, the use of which is currently very limited, could be collected from the sugarcane cleaning stations and fields to supply additional fuel to the cogeneration facilities whenever economically feasible. The ultimate goal of the program is to make biomass available for power generation year round. To reach this objective, additional investments in bagasse and trash handling and storage are needed.

37. Of the 25 sugar mills identified as potential candidates for CEST technology, the four selected for implementation in the first phase have a combined capacity to process about 30,850 tons of sugarcane per day. With configurations similar to the demonstration plant they could supply over 357 GWh of electricity to the national grid annually in addition to satisfying the energy needs of the sugar mills. This will reduce Cuba’s carbon emissions from fuel-oil use for power generation by approximately 286,000 tCO2 per year.

7

Institutional, sector and policy context

38. The national energy agenda in Cuba is spread over several ministries and institutions. The Ministry for Economic and Planning (MEP) is overall in-charge of evaluating short, medium and long-term energy demand for the country and to allocate the economic resources needed to guarantee energy supply. The MEP also identifies opportunities and potential actions to improve the efficiency of energy use in the country. The MEP heads the energy advisory body at the national level (National Energy Council) that oversees national policy planning for energy sector in Cuba.

39. The Ministry of Basic Industry (MINBAS) is in charge of the power, gas and petroleum companies, and manages the national programs for electricity and fuel saving. MINBAS also oversees the working of UNE, the national utility responsible for the electricity grid that covers 95% of the country. UNE is the main institution in charge of the production, transmission and distribution of electricity in Cuba, and has been entrusted with the responsibility of signing the power purchase agreements with IPPs and supporting innovative schemes that would promote self-sufficiency in energy sector and reduce dependence on oil imports.

40. The Ministry of Sugar (MINAZ) deals with the production of sugar and its derivatives, both in its agricultural and industrial dimensions. This ministry controls the total sugarcane biomass available after the production of sugar and through schemes of co-generation accounts for the 18% of current installed capacity electricity for the generation of electricity in the country. Currently, most of the cogeneration plants at sugar mills are synchronized to the national electricity grid and able to sell electricity during the crushing period when they have surplus. Even though the development of specific renewable energy sources is decentralized to several Agencies and Ministries, MINAZ is directly responsible for using sugar cane biomass for power generation. As a result of recent restructuring of the sector, MINAZ also has included in its objectives agriculture and forestry.

41. The Ministry of Finance and Prices (MFP) is the leading governmental body in pricing policy, deals at the macro level with the establishment of tariffs/prices, in line with the economic and social policy of the Government. In coordination with MEP and MINBAS, MFP establishes the regulatory framework for tariffs/prices of energy services, in particular electricity.

42. The Ministry for Science Technology and Environment (CITMA) is the GEF focal point and also looks after renewable energy development in Cuba. CITMA also manages the national R&D program to support the sustainable energy programs for the country, coordinating research and development efforts in international projects, and working with various multi/bi-lateral agencies to support business models in sustainable development for renewable energy technologies, agriculture and other industries.

43. The Ministry of Foreign Investment and Economic Collaboration (MINVEC) rules all aspects of international technical assistance and cooperation initiatives. MINVEC is the channel for foreign investment in Cuba and is the national counterpart of UNDP.

8

44. Since the approval in 1993 of the National Energy Sources Development Program the efficient use of the country's natural resources (biomass, wind, solar, hydro) for the production of energy has been accorded high priority. In October 2002, the GoC created the Front for Renewable Energy which is an inter-ministerial body coordinated by CITMA. Its main mission is to coordinate national efforts to increase the share of the renewable energy sources in the national energy balance

Stakeholder analysis

45. The development of this Project has been undertaken in a participatory fashion consulting the major stakeholders throughout the process. The most important government institutions in Cuba related to energy and climate change issues and international collaboration have all been consulted in this preparatory activity and unanimously support this proposal. These institutions include MINAZ, CITMA, MEP, MFP, MINBAS, MINVEC.

46. In addition, specific stakeholders consultations have been undertaken with local management of:

Hector Molina sugar mill Workers trade union Sugarcane production cooperatives San Nicolas de Bari municipal government Popular Council in Hector Molina area.

47. In order to keep the stakeholders informed at national and local levels regarding the implementation of the Project and its operation targets, the following activities will be carried out:

ACTIVITY STAKEHOLDER LEVEL

FREQUENCY

Workshop regarding the final design of the project: the work plan, targets, project budget, etc

National and Local At the beginning of the GEF project.

Information regarding construction progress

National Steering committee meeting every 6 months

Local Every two monthsInformation regarding the achievement operating targets during the first three years

National Steering committee meeting every 6 months

Local Meetings at the beginning and end of each sugar cane harvest (zafra)

Baseline analysis

48. Under the baseline scenario, the Hector Molina sugar mill would continue to operate at its current milling capacity of 6,900t/d of sugar cane, using all of the associated bagasse as fuel. Using the current low pressure, low efficiency generating technology located at the mill, but with two additional turbo generators installed, the steam and electricity demands for sugar and alcohol

9

production during the harvest season could be met in full. (Currently, the sugar mill imports some of its energy requirements from the grid).

49. For the remainder of the year, the supply of steam and electricity to operate the alcohol distillery will come from the existing boiler and turbo generator, fuelled by Cuban crude oil.

50. It is estimated that the proposed Project would supply 143.54 GWh/y of electricity to the grid to serve the surrounding area. In the absence of the Project (i.e. in the base case), this amount of energy would be supplied from power plants on the national system (SEN).

51. The carbon emissions associated with the baseline scenario are estimated to be 133,990 tCO2/y, of which 2,991 tCO2/y arise from the sugar factory/distillery and 130,999 tCO2/y from generation in the SEN power stations.

PART II: Strategy

Project Rationale and Policy Conformity

Project Rationale for GEF involvement

52. The GEF support is critical in helping establishing an enabling framework for the installation of biomass-fired cogeneration facilities in the vicinity of sugar mills in Cuba. The GEF support will focus on overcoming barriers to development of IPPs through commercially sustainable activities. Without GEF participation, project developers will be less likely or unable to develop and finance projects; and without GEF participation there will be no significant resources to build knowledge about renewable energy among sugar industry officials and employees, commercial banks, local government, and other stakeholders. Ultimately, GEF financial and UNDP implementation efforts support will lead to sustainable, long-term reductions in greenhouse gas emissions and help Cuba join modern industrialized nations in efforts to reduce global pollutants.

Policy conformity issues

53. The objectives of the proposed project are consistent with the objectives of the GEF Operational Program No. 6 on “Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs”.

54. In addition to bringing about global benefits resulting from the substitution of fossil fuels, the Project is consistent with Cuba’s national development priorities. It will increase the use of renewable fuels and reduce imports of fossil fuel. Likewise, it will have a positive impact on the local environment. The GoC is currently diversifying the sugar sector. By increasing sugarcane-based power production, the Project is in line with the objectives of the MINAZ energy development program.55. The Project is also consistent with UNDP’s priorities to support sustainable energy use and build capacity to achieve global environmental and development goals. The Project proposes to demonstrate best practices and innovative approaches to cover early project development and

10

operating costs and thus mitigate project risks while enhancing access to financing for the Project.

56. Finally, since one of the main features of the Project is to integrate biomass production and energy generation for sale to the grid year round, it will result in capacity building, creation of incremental rural employment and improvement in the quality of life through reliable electricity supply, thus contributing to the promotion of all these goals of UNDP.

Project Description

57. The Project will be located some 70km south east of Havana at the site of the existing Hector Molina sugar processing plant which has for more than 20 years generated electricity and steam for its own process demands using bagasse fired low pressure boilers feeding steam turbines. Today, the Hector Molina sugar mill generates steam using 3 boilers (at 19 bar pressure) and electricity for on-site use with 5 turbo generators with a total capacity of 6.5 MW. In addition, it purchases between 1.0 – 1.5 MW of power from the national grid during the harvest season.

58. Unlike the existing low pressure and inefficient cogeneration plant, which operates only during the zafra period, the new power station will utilize modern CEST technology and will operate throughout the year, exporting some 140Gwh per annum of electrical energy to the national grid (SEN). The essential power generation components of the Project will comprise a boiler fired by bagasse and sugar cane trash, raising 170 t/h of steam at 68 bars and 485 o C, feeding a single turbo generator of capacity 30 MW.

59. The Project will be constructed and operated by an Independent Power Producer (IPP) owned by the Hector Molina sugar mill. The IPP will sell electricity to UNE under a Power Purchase Agreement (PPA) as well as supplying process steam and electricity to the Hector Molina sugar plant and associated alcohol distillery. For the construction of the plant, the IPP will enter into an EPC contract with an international contractor, which will include provision for O&M support during the first 2 years of plant operation.

60. MINAZ and the EPC contractor will cooperate to facilitate the transfer of technology, development of know-how and, potentially, the implementation of replication projects. Their respective roles and responsibilities will be set out in a Joint Venture agreement.

61. In addition to financing specific project activities, GEF will provide support to the financing of the IPP cogeneration plant and its subsequent replication in order to reduce the upfront investment costs and mitigate the risks associated with the application of this technology for the first time in Cuba. This will be achieved through investment and replication facilitation mechanisms as described in Annex III.

62. These formal replication mechanisms comprise an Investment Facilitation Mechanism (IFM), under which an amount corresponding to the GEF support to the demonstration plant financing is subsequently invested by MINAZ in replication projects, and a Replication Facilitation Mechanism (RFM) aimed at financing replication feasibility studies.

11

63. These mechanisms are envisaged as but the “kick-start” components of a sustained replication initiative to be maintained by MINAZ over the long term. Other components of this longer term strategy will include:

(i) Dissemination of operating experience derived from the demonstration plant for the benefit of MINAZ management and operating staff from other sugar factories and for potential investors and foreign joint venture partners with an interest in participation in the replication program.

(ii) Monitoring of developments internationally in the field of sugar biomass cogeneration so that the replication program benefits from the latest operating experience with emerging technologies such as gasification.

(iii) The enhancement of indigenous design and manufacturing capability. Based initially on the joint venture with the demonstration plant EPC contractor, this process will aim to lead over time to a situation in which the replica projects are designed and built with minimal foreign input.

Project Goal, Objective, Outcomes, Outputs and Activities

Project Goal

64. The project goal is to reduce Cuba’s energy-related CO2 emissions by substituting biomass (sugarcane bagasse and trash) for fossil fuels (mainly fuel-oil) in power generation. This will be achieved through the demonstration of the technical, economic, and financial viability of establishing IPP to co-generate steam and electricity by using biomass-fired CEST technology.

Project Objectives

65. The primary Project objective is to remove barriers to wide-spread use of efficient biomass-based steam and power cogeneration technologies in the Cuban sugar industry. A further objective is to increase the efficiency of biomass use for power generation, thus reducing Cuba’s dependency on imported fuel-oil. The Project also aims at improving the economic performance of the sugar industry by providing a reliable and inexpensive source of steam and electricity thereby reducing investment requirements and decreasing power-related operation and maintenance costs.

Project Outcomes

The Project outcomes are the following:

Outcome 1: Demonstration of feasibility of establishing an IPP to produce steam and power by using sugar cane biomass-fired cogeneration technologies;

Outcome 2: Reliable supply of sugar cane trash to the plant in planned quantity;

12

Outcome 3: Increased sugar cane supply to Hector Molina sugar mill (and hence sugar cane bagasse to the cogeneration plant) in planned quantity

Outcome 4: Initiation of a program to replicate the use of sugar cane biomass technologies

Project Outputs and Activities

The project outputs are described below together with the corresponding activities.

66. Outcome 1 - Demonstration of feasibility of establishing an IPP to produce steam and power by using sugar cane biomass-fired cogeneration technologies

Output 1.1 Project agreementsThe closure of the project agreements will be the first key output relating to Outcome 1.Activity 1.1.1 Establish the IPPAn IPP will be established to construct and operate the demonstration plant. The IPP will be owned by the Hector Molina sugar mill.Activity 1.1.2 Contractual agreementsThis activity will entail the final drafting of the various contractual agreements relating to the construction and operation of the demonstration plant. These will comprise:

EPC contract agreement – as described in more detail in Section IV, Part III. PPA – denominated in a freely convertible currency over a 15-year term Product Exchange agreement – between the IPP and the Hector Molina sugar mill

covering the supply of bagasse and water to the IPP, supply of electricity and steam to the sugar mill and distillery and IPP boiler ash disposal. It will include contingent provision for supply of alternative biomass fuels in order to guarantee biomass fuel availability to sustain contractual energy supply obligations

Joint Venture agreement – between MINAZ and the EPC contractor for transfer of technology, development of know-how and, potentially, implementation of replication projects.

Other subsidiary agreements – inter alia; in field residual trash supply, electrical interconnection, water supply, effluent disposal.

Activity 1.1.3 Negotiation of the EPC contractInternational companies or consortia interested in bidding for the EPC contract have been asked to participate in a pre-qualification process, with preliminary tender for supply and financing. An international contractor has been pre-selected to prepare a detailed offer to form a basis for negotiation of the final terms of the EPC contract. At the same time, the financing negotiations have begun with appropriate national and international financial institutions.The scope of the EPC contract will comprise the power island (essentially the boiler, turbo-generator and related equipment). The civil works and plant erection will be subcontracted to a Cuban entity. A summary of the estimated capital cost is presented in Annex IV.There will be important interfaces between the EPC contract works and other project activities (i.e., sugar cane trash handling system, improvement of fuel supply and interfaces with the sugar factory, distillery and UNE). The negotiation of the EPC will need to take full account of all these interdependencies.

13

On conclusion of the EPC contract negotiation and those described above, an integrated “Bankable Document” will be compiled to facilitate the financial negotiations in particular with international financing institutions.Activity 1.1.4 Financing negotiationsThis activity will proceed concurrently with Activity 1.1.3, terminating at the award of the EPC contract and signature of the remaining contracts.The terms of operation of the investment facilitation mechanism have to be agreed in principle before completion of this activity.A suitable security package will be required to facilitate negotiations with international financing institutions.

Output 1.2 IPP Plant ConstructedDesign and construction of the IPP plant is estimated to take 36 months.Activity 1.2.1 Detailed engineeringDevelopment of the outline designs to a level of detail appropriate for constructionActivity 1.2.2 Project licenses and permitsThe permits required according to Cuban regulations will be obtained prior to starting construction (e.g. environment, fire protection, sitting, etc)Activity 1.2.3 Plant manufacture and deliveryFirm orders for the plant will be placed in parallel with activity 1.2.1.It is estimated that all components of the plant will be on site 27 months after date of order.Activity 1.2.4 Civil works and plant erectionThe civil works will also commence following contract negotiations and be ready to receive the plant on delivery to site.Plant erection is planned for completion 3 months after delivery of the final plant items.1.2.5 Plant testing, start up and commissioningPlant commissioning will entail performance verification testing and acceptance by the IPP as specified in the EPC contract.

Output 1.3 Biomass handling and storage system installedThe installation of the biomass (bagasse and trash) handling and storage system at the plant will be done under contract to the IPP and will entail the following activities (see Appendix V)Activity 1.3.1 Finalize designThe design and manufacturing is scheduled to begin 15 months into the Project. The Hector Molina sugar mill has already worked on the basic design of the bagasse storage and system. The final design process will produce a detailed specification for equipment manufacture. Activity 1.3.2 Manufacture and deliveryBagasse storage system will be manufactured and delivered to site within an estimated period of 9 months. Activity 1.3.3 Commissioning and testingCommissioning and initial testing must be completed prior to commissioning of the IPP plant. The operation of the bagasse handling and storage system will be optimized by the IPP in cooperation with the sugar mill to ensure the most cost effective utilization of bagasse is attained.

Output 1.4 IPP Plant in OperationThe IPP will assume responsibility for operating the plant from the date of acceptance

14

Activity 1.4.1Training of operating personnelIt is envisaged that the training of personnel will commence with the assistance of the EPC contractor 9 months before plant commissioning to ensure that properly trained IIP operators are available on hand over.Activity 1.4.2 Determine schedule for full local operation of demonstration plantOver an initial operating period the EPC contractor will maintain support staff on site. This initial period will be determined according to the outcome of Activity 1.3.1. Over an agreed period, EPC contractor support will be progressively withdrawn leaving the operation and maintenance of the plant exclusively in the hands of the IPP.Activity 1.4.3 Plant operation optimizationWhile the EPC contractor support staff remain on site the operation of the plant will be optimized to make best use of the available biomass fuel and maximize electrical energy delivered to the grid.

67. Outcome 2 - Reliable supply of sugar cane trash to the plant in planned quantity

Output 2.1 Sugar cane trash handling system installedCuba’s system of harvesting sugar cane differs from the practice in most other sugar producing countries where the trash or leaves are burned while the cane remains standing. In Cuba, currently the trash is separated from the sugar cane at cleaning stations in the field and the sugar cane is delivered “clean” to the mill. To increment the use trash as a fuel for the IPP, it is intended that sugar cane will be delivered to the mill with a higher amount of trash still attached for separation by a new trash handling system (see Appendix VI)The installation of the trash handling system at the plant will be done under contract to the IPP and will entail the following activities.Activity 2.1.1 Finalize designThe design and manufacturing is scheduled to begin 15 months into the Project. The Hector Molina sugar mill has already worked on the basic design of the system which will separate the trash from the cane and deliver the two products to the fuel store and mill, respectively. The final design process will produce a detailed specification for equipment manufacture. Activity 2.1.2 Manufacture and deliveryTrash handling equipment will be manufactured and delivered to site within an estimated period of 9 months. Activity 2.1.3 Commissioning and testingCommissioning and initial testing must be completed prior to commissioning of the IPP plant. The operation of the trash handling system will be optimized by the IPP in cooperation with the sugar mill to ensure the most cost effective utilization of trash as a supplementary fuel.

Output 2.2 Sugar cane trash collection from fieldTo further augment biomass fuel supply, a portion of the trash left in the field will be collected during the non-zafra period and deliver to the IPP. MINAZ has already worked on basic design for this operation (see Appendix __)Activity 2.2.1 Trash supply plan and contract agreementThe availability of trash to the IPP will be the responsibility of the sugar mill, whereas the IPP will be responsible for the collection and delivery thereof. This will optimize the utilization of

15

IPP personnel resources that will otherwise be underutilized during the non-zafra period. An implementation plan and contract will be required to regulate these operations.Activity 2.2.2 Procurement of equipmentTrash bailing, transportation and handling equipment will be required to collect and deliver the trash from the field to the IPP. Activity 2.2.3 Commence operationsOperations are scheduled to commence well ahead of the commissioning of the IPP plant to ensure that trash collection and delivery are reliable on plant start up.

68. Outcome 3 - Increased sugar cane supply to Hector Molina sugar mill (and hence sugar cane bagasse to the cogeneration plant) in planned quantity.

Output 3.1 Increased sugar cane supply to Hector Molina sugar millIn order to provide sufficient biomass fuel for year round operation of the IPP, the supply of sugar cane will have to be increased to provide 9,000 to 10,000 tons per day to the mill during the zafra season (see Annex VII).Activity 3.1.1 Rehabilitation of irrigation and drainage systemsMINAZ has already assigned an additional 6,400 ha of cane fields of A1/A2 quality that are adjacent to the 15,000 ha of Hector Molina cane fields. These additional fields were previously supplying sugar cane to the G. A. Mañalich sugar mill that is now closed as part of the MINAZ restructuring plan. As a result, the total sugar cane production available to Hector Molina will reach 1.2 million tons in 2013.MINAZ has already begun the rehabilitation of irrigation and drainage systems to increase cane production for the IPP plant. The rehabilitation program is scheduled for completion by 2008.

Activity 3.1.2 Cane Planting and Crop farmingMINAZ has budgeted for Cane Planting and Crop farming to restore the productivity of the cane fields to levels attained in the early 90s. Cane production per ha is expected to increase from an average of 33 in 2006 to 79 tons by 2013. In the past, a yield up to 90 tons per ha has been achieved in the Hector Molina area.Activity 3.1.3 Equipment procurementIn order to harvest the additional cane production it will be necessary to purchase 12 harvesting machines, along with transport and other related equipment.

Output 3.2 Increased milling capacity and improved energy efficiencyMINAZ has budgeted $5 million for the increase of milling capacity at the Hector Molina sugar plant from current production of 6,900 tons per day to 10,000 tons per day as well as for the improvement of energy efficiency. The implementation of this increase in milling capacity will be required for compliance with the project agreements and closely monitored as part of project activities.Activity 3.2.1 Design of plant modificationsThe Hector Molina sugar mill will undertake design of the necessary plant modifications early in 2008.Activity 3.2.2 Procurement and installationEquipment procurement and installation will be undertaken by the Hector Molina sugar mill in accordance to project schedule.

16

Activity 3.3.3 Commissioning and testingCommissioning and testing of the modified milling equipment will take place at the end of 2008 to ensure reliable operation for fuel supply on commissioning of the IPP plant.

69. Outcome 4 - Initiation of a program to replicate the use of sugar cane biomass technologies

Output 4.1 MINAZ replication programSubject to satisfactory performance of the demonstration project, MINAZ will establish a replication program at suitable selected sugar mills in Cuba and may subsequently seek to replicate the demonstration plant technology internationally.Activity 4.1.1 Confirm priority replica projectsMINAZ has already identified four projects for potential replication with CEST technology with the following characteristics:

Table 3CEST Technology Priority Replica Projects

Project Availability of sugar cane biomass (t/zafra)

Gross energy generation (MWh /year)

Electricity supplied to the grid (MWh/year)

Melanio Hernández 169,760 83,108 56,636

Jesús Rabí 124,570 60,896 41,499

Batalla de las Guásimas 249,170 121,540 82,827

Mario Muñoz 275,350 134,988 91,992

Total 818,850 400,532 272,954

Source: MINAZ

With the benefit of the initial operating experience of the demonstration project, it will be necessary to confirm that these will comprise the first batch of target replica projects and to establish an order of priority for their implementation.Activity 4.1.2 Initiate pre- feasibility studies on replica projectsThese studies will focus upon those projects identified by MINAZ as priority projects, with the benefit of operating experience from the demonstration plant. They will be undertaken by the Joint Venture established between MINAZ and EPC contractor. To benefit from the lessons learned from the implementation of the demonstration project, these studies will be undertaken once the IPP plant is in operation.

17

Output 4.2 Enhancement of national capacity related to modern sugar cane biomass energy technologies and IPP, including PPAThe experience gained in the construction and operation of the demonstration project will be applied to enhance national capacity to implement replica projects and hence reduce implementation costs.Activity 4.2.1Collect and collate lessons learned from demonstration project The design and construction process and the early period of operation will be closely monitored by MINAZ and the EPC contractor to record lessons learned of relevance to the replication processActivity 4.2.2 Disseminate lessons learned via workshops and seminarsGiven the importance of the demonstration role of the plant, operational workshops will be held to disseminate the design, construction and operating experience and lessons learned for the benefit of the replication process.

Project Indicators, Risks and Assumptions

70. The implementation of this Project presents different risks that are either general country risks (political, commercial and legal) or specific project risks (development, construction / completion and operating). Those risks relating to the successful implementation of Project are to be mitigated, to the extent possible, through the contracts and agreements governing the Project. Other risks will be imposed by events beyond the control of the project actors.

71. The country risks are considered to be manageable, bearing in mind that the project has been developed in close coordination with various key ministries and it is supported at the highest political level in the country. For Cuba’s development, issues like improved efficiency in sugar production on one hand and increased power generation capacity using indigenous fuels on the other are most important priorities.

72. The project specific risks refer to three phases: development, construction and operation. The development risks are mitigated by the fact that GoC together with UNDP / GEF undertook a substantial part of the development risk: a quite detailed preliminary feasibility study was prepared under the PDF B phase. Further development costs related to the institutional and contractual arrangements have been financed during the PDF C phase. The construction risk is a normal risk borne by the developer in any power-plant project and would be further mitigated through the use of the FIDIC EPC standard form of contract which has been developed specifically to address risks of this kind.

73. As to the operating risks, the technical feasibility of the Project has been demonstrated during the PDF B phase. The technology, although new in Cuban sugar mills, is proven and widely used in other parts of the world, apart from the operation during off-season with sugar cane biomass. The risks related to the power off-take arrangements and feedstock (bagasse, trash) will be dealt through a dollar-denominated power purchase agreement (take or pay) on the one hand and firm agreements on fuel supply on the other.

74. The second category of risks has to do with those entirely beyond the control of the Project. These risks-- such as the level of international oil price -- will be carefully monitored. While a

18

rise in the oil price may improve the economic attractiveness of the use of biomass in this Project and subsequent replications, a dramatic decline (which today is considered very unlikely) may have the opposite effect. A similar risk may be linked to the availability of financing. If global capital markets continue to follow current trends and the Project’s risk mitigation strategies--as detailed above-- are successful, it is reasonable to expect that this plant and future plants should obtain financing.

Expected global, national and local benefits

Global benefits

75. The expected global benefit of the proposed Project is to reduce Cuba’s energy-related CO2

emissions by substituting biomass (sugarcane bagasse and trash) for fossil fuels (mainly fuel-oil) in power generation. This will be achieved by Project activities designed to remove barriers to the nation-wide deployment of steam and power co-generation using sugarcane bagasse and trash as fuel. The initial reduction in emissions attributable directly to the IPP pilot project is estimated at some 134,000 t of CO2 per annum. However, as the Project has as its principal objective the removal of the barriers to large-scale replication, the potential for long-term emission reductions is much greater. The scope for replication in Cuba is such that annual emission reductions totalling some 1,369,000 t of CO2 are considered achievable. International replication based on the Cuban experience could yield substantially higher reductions.

National Benefits

75. At the national level, the project aims to reduce Cuba’s dependency on fuel-oil (imported and national). Again the reduction achievable through implementation of the pilot project is modest, but the long term potential could be a total saving of more than 460,000 tons of fuel oil per annum. The Project also aims at supporting the sugar industry diversification program. Firstly, it will provide an additional revenue stream from the cultivation of sugar cane through the sale of electricity generated using bagasse and trash and secondly it will improve the industry’s economic performance by providing it with a reliable and inexpensive source of steam and electricity, reducing investment requirements and decreasing power-related operation and maintenance costs.

Local Benefits

76. At the local level, the improved economic performance of the sugar industry will help to sustain the rural economy, preserving existing jobs that are currently under threat as a result of low sugar prices as well as creating new employment opportunities in power station operation and trash handling. The production of biomass for energy generation could become an end in itself for the cultivation of sugar cane, with the potential for diversification into other energy crops. A further benefit at the local level will arise from the cleaner atmospheric emissions of modern biomass power plants relative to oil burning plants.

19

Country Ownership: Country Eligibility and Country Drivenness

Country Eligibility

77. Cuba is eligible for UNDP assistance and has ratified the Framework Convention on Climate Change in January 1994. The GEF Focal Point has played an active role in the preparation of the Full Project Brief through CITMA, and closely accompanied the development and negotiation of this Concept and fully supports its submission to the GEF (see GEF Focal Point Endorsement letter in Section IV).

Link to National Strategies

78. Cuba has an extensive institutional and legal framework supporting energy and environmental regulations and guidelines with relevance to the proposed Project. In 1975, the new Constitution of the Republic of Cuba recognized the need to protect the environment and in 1977 the National Commission for the Protection of Environment and Natural Resources (COMARNA) was created. In 1994, as a result of increasing awareness on the importance of the environment, the GoC created CITMA.

79. Climate change issues together with the preparation of mitigation and adaptation measures have been a priority for Cuba since 1991 when a Climate Change National Group was established. The following year, Cuba signed the UNFCCC. Since 1995, the country is implementing a National Scientific and Technical Program called “Global Change and the Evolution of the Cuban Environment”. In addition, and in order to strengthen the national capacity to carry out climate change studies the GOC created, in 1997, the Climate Change Task Force.

80. As part of its UNFCCC commitments, Cuba presented in 2001 its First National Communication on Climate Change that included, as one of the mitigation options, the establishment of 30 MW bagasse-based electricity generation plants. This same option to reduce GHG emissions has continued to be included in recent official documents of the GoC related to the implementation of the Clean Development Mechanism (CDM). This is the case of the Portfolio of CDM Project Opportunities prepared in 2002, with the support of UNDP and the Government of Canada and the one prepared in 2004.

20

National Level Support

81. The government of Cuba, including key actors MINAZ, CITMA and MINBAS, is highly committed to the Project and has always been interested in exploring alternative sources of energy. In 1993, the National Parliament approved the National Energy Sources Development program where the efficient use of sugar cane biomass for the production of energy is given one of the top priorities in terms of development efforts. Further, in 1999 the MINAZ approved a specific plan for the development of co-generation of electricity from sugar cane biomass. Within the scope of this program the sugar industry increased the electricity output per ton of cane milled (during the harvesting season) from 18 to 31 kWh in 2004. Following the IPP demonstration project, other projects are planned for year round cogeneration of electricity.

Sustainability

82. The environmental sustainabilityThe environmental sustainability of the Project will be assured provided that there is sufficient biomass economically available to fuel the IPP pilot plant and the subsequent replica projects operating at their design generating capacities. If there is a shortfall and the generating company is commercially obliged to substitute fuel oil for biomass to satisfy its electricity supply obligations under the applicable PPA, then carbon emissions will increase and environmental sustainability will be undermined. For this reason it will be essential to carry out detailed feasibility studies for each plant on fuel availability, delivery logistics and costs related to haul distance.

83. A further factor that could affect environmental sustainability is the oil price. In the event of a substantial fall, it could become commercially attractive to burn fuel oil in preference to bagasse and trash. This risk is mitigated to some extent by Cuban government policy, which favors renewables relative to fossil fuels. It is understood that a new energy law, currently under preparation, will incorporate this provision.

Social Sustainability

84. Given the social benefits of the Project in terms of employment preservation and the local environment, social sustainability is unlikely to be an issue. The provision of long-term reliable supplies of bagasse and trash will require a large and stable rural workforce. Given the recent contraction of the sugar industry, the necessary employees should be readily available. Furthermore, the ongoing commitment of the Government to the rural economy means that Cuba is less likely than more market driven developing economies to suffer the effects of migration to urban areas. However, the workers in the cane fields and sugar factories are important stakeholders in the Project and it is essential that they are fully involved in the transition from producing sugar to producing both sugar and energy. To preserve the motivation of the workforce they will need to understand fully the benefits of biomass power generation to the Cuban economy and the global environment and also that the transition can secure their livelihoods for the long term. This level of awareness and stakeholder “buy-in” needs to be created through a structured program of participatory workshops in the areas that will supply fuel to the new generation of biomass fired cogeneration plants.

21

Institutional Sustainability

85. The Projects will be implemented within an institutional framework composed of the Project Management Unit, i.e. the sugar mill involved that belong to the MINAZ, which is the Cuban State’s Central Administration’s organ responsible for all agricultural and industrial activities within the sugar cane sector.

86. The institutional framework also includes CITMA and MINVEC, both organs attached to the Cuban State’s central administration and respectively responsible for Environment Protection, and Economic Collaboration, and Foreign Investment. In addition, MEP, which is in charge of energy related activities throughout the country, will be involved.The priority afforded to the Project is evident in the Cuban Government’s policy – stated in the National Energy Source Development Program – that prioritizes renewable energy development, based mainly on the use of sugar cane biomass.

The Project will contribute to the institutional sustainability of renewable energy supply in Cuba by:

providing knowledge and building capacity among decision-makers and market participants for a better understanding and acceptance of renewable energy

building confidence for a pipeline of replica projects for continued development of such projects

87. Sustainability will depend on having an effective and enforceable policy and legal framework that ideally will require a minimum share of renewable energy. The Project will support the Government in developing this framework during the early part of project implementation, through the institutions described above. 88. The sustainability of the Project will also benefit from the participation of independent actors –financial institutions, renewable energy equipment providers, contractors and the utility buyer (UNE) – who are pursuing commercially viable development of the renewable energy market, with each actor retaining the specific project risk within its core business competency.Lending to project developers should grow as financial institutions gain successful experience (and hence confidence) with their loan portfolios and the risks associated with biomass cogeneration technology and operations.

Financial Sustainability

89. The financial sustainability of the Project will depend essentially on two factors, the capacity to finance the IPP plant and its subsequent replica projects and the long-term availability of biomass fuels in sufficient quantity and at a competitive price.

90. The financing of the Project is envisaged as coming from the Cuban government and export credit finance for the imported plant equipment, complemented and facilitated by the GEF support. Provided that the demonstration Project is commercially successful, private sector investors might come forward to participate in the financing of the replication program.

22

91. Turning to the question of fuel availability and competitiveness, this will depend on the efficient collection of cane and trash over a sufficient area to ensure long-term generation at full capacity. The recent rising trend in oil prices has enhanced the economic credentials of the Project. As mentioned previously, any future fall in the oil price would have the opposite effect. Replicability

Replication Strategy

92. The salient features of the Project that would ensure replication are technology design, contractual structure, financing mechanisms, reduction in development time and cost, and information sharing.

93. Specifically, during implementation, the Project will use technologies that: (i) are commercially proven and widely available in the Western World (CEST); (ii) are complemented by Cuban expertise and experience in trash collection and biomass fuel storage and preparation for consumption outside the harvesting season; (iii) have excellent prospects for long-term market penetration once the identified barriers are overcome; (iv) have certain components that could be produced or assembled locally over time to decrease dependency on imported components and ensure wider acceptance and support; and (v) have the capacity to reduce greenhouse gas emissions.

94. The Cuban experience is expected to demonstrate that as barriers to wide-scale use of efficient biomass-based steam and power co-generation technologies are removed these technologies will have high prospects for long-term market penetration throughout the sugar sector and for reducing greenhouse gas emissions. This experience is also expected to demonstrate the long-term economic and environmental benefits of renewable energy investments.

95. To enhance the replicability of the Project, GEF technical assistance will support dissemination of project outcomes through appropriate channels, including regional workshops involving bilateral and multilateral donors, country officials and private investors. To the extent that the replica projects are successful, the Cuban experience can be easily tailored to other countries of the region having sugar cane biomass resource potential. The replication strategy beyond Cuba will be firmed up during project implementation.

96. Concurrently with the creation of the IPP, it is expected that a Joint Venture will be established between MINAZ and the EPC contractor that, subject to the successful implementation of the IPP cogeneration plant, will initiate a replication process on an agreed batch of projects. The underlying principle will be that the international company will contribute technology, know how and seed finance (in kind services) for the execution of projects in this first batch. MINAZ will match its contribution with in kind services. GEF will also contribute to this fund.

23

PART III: Management Arrangements

Executing and Implementing Agency

97. The Ministry for the Foreign Investment and Economic Collaboration (MINVEC), UNDP’s counterpart in Cuba, is the Public Authority in charge of co-ordination of international collaboration and its execution. This Project will be executed by the GoC through NEX modality. Experience has shown that NEX provides the best opportunity for project support to conform to GoC priorities and ensure national ownership. The overall responsibility for the project would fall under MINAZ. MINAZ will be responsible for the overall coordination of all activities, and the quality of outputs. As the GEF Implementing Agency for this project, UNDP will monitor all activities and outputs.

Project Steering Committee (PSC)

98. A PSC will be set up to oversee the project implementation and to provide the necessary guidance to the process, advising on inter-ministerial coordination and cooperation, besides serving as a platform for sharing information on the project's progress. It will meet, at least every 6 months, to review progress of project activities and its main functions will include:

Providing guidelines to the PMU Monitoring project work to ensure that goals and objectives are achieved in a

defined time frame Facilitating inter-Ministerial co-ordination and cooperation with the various

Government departments Reviewing project progress through participatory mechanisms and based on lessons

learned

99. The PSC will be comprised of CITMA, MINVEC, MINAZ and MINBAS. The PSC will be co-chaired by UNDP and MINVEC and it will invite other members and experts for specific meetings, as needed. CITMA will supervise and monitor the project as the GEF national focal point.

Project Management Unit (PMU)

100. A PMU will be set up to ensure adequate project management structure and systems for facilitating implementation of the project activities. The established independent entity will operate the power plant with contractual relationships with:

The Hector Molina sugar mill and its distillery (MINAZ) to sell steam and electricity, in one direction, and biomass and condensed water, in the other direction.

The National Electricity Utility (UNE) to sell the electricity generated which will be transmitted and distributed through the national grid.

24

101. In addition to the above, the Project will encourage the participation of the workers and the local community in the project implementation process. Public forums and workshops will be held regularly to introduce the project concept and explain the project’s planned operations and workings to the concerned communities living in the immediate vicinity of the plant, in order to seek their active involvement and ensure local ownership of the project.

PART IV: Monitoring and Evaluation Plan and Budget

Monitoring, Evaluation and Dissemination

102. A monitoring, evaluation and dissemination plan form an integral part of the Project. The project follows all standard UNDP and GEF procedures for monitoring and reporting, including a mid-term and an end of project assessment. UNDP and the PMU will undertake a close supervision and monitoring of indicators for outputs and outcomes to establish and document global and local benefits accrued from the project.

103. The plan includes specific benchmarks linking Project performance to funds disbursements. It also establishes a monitoring framework for future plant replications.

104. The PSC will be responsible for the general monitoring and supervision of the project implementation. The Project will be subject to tripartite reviews by representatives of the government, UNDP, and MINAZ, at least once every 12 months. The National Project Coordinator (NPC) shall prepare and submit to each tripartite review meeting a Project Performance Evaluation Report (PPER) based on the log frame matrix and monitoring arrangements (see Annex VIII). Additional PPERs will be requested during the project, as necessary.

105. A Project Terminal Report will be prepared for consideration at the final tripartite review meeting. The draft shall be prepared sufficiently in advance (at least 4 months) to allow review and technical clearance by the executing agency prior to the final meeting.

106. The GoC will provide UNDP with certified periodic financial statements relating to the status of UNDP/GEF funds, including an annual audit of these financial statements, according to procedures set out in Chapter 6, section 8, of the new UNDP Programming Manual. The audit will be prepared by an independent contractor.

107. The Project will disseminate lessons learned through a wide range of media to a number of targets to ensure that maximum benefit can be gained. When relevant, training and awareness workshops and meetings will be used. The progress and results of these activities and information on project progress will be regularly available through hard copy and electronic newsletters. A publication addressing the best practices used and lessons to be learned will also be produced. Particular attention will be given to ensure that lessons learned can be shared across the country. This is especially important in terms of making sure that valuable principles established and experience gained on this Project can be applied in other sugar mills in the country.

25

108. In addition, the monitoring budget will pay for the hosting of a workshop to introduce the lessons of the demonstration plant to other potentially interested sugar-sector operators from neighboring countries. It is anticipated that this workshop will occur either in year 4 or 5 of the Project—in any event, after the plant begins operating in full.

109. Once the Project becomes operational, as part of the Project progress reporting, a brief (2-4 pages) semi-annual progress report will be prepared and made available through electronic media and Internet, to other sugar R&D centers and associations in the world.

PART V: Legal Context

110. This Project Document shall be the instrument referred to as such in Article I of the Standard Basic Assistance Agreement between the Government of Cuba and the United Nations Development Program, signed by the parties. The host-country implementing agency shall, for the purpose of the Standard Basic Assistance Agreement, refer to the government co-operating agency described in that Agreement.

111. UNDP acts in this project as Implementing Agency of GEF, and all rights and privileges pertaining to the UNDP as per the terms of Standard Basic Assistance Agreement shall be executed ‘mutatis mutandis’ to GEF.

112. The UNDP Resident Representative in Havana, Cuba is authorized to effect in writing the following types of revision to this Project Document, provided that he/she has verified the agreement thereto by the UNDP-GEF Unit and is assured that the other signatories to the Project Document have no objection to the proposed changes:

Revision of, or addition to, any of the annexes to the Project Document Revisions which do not involve significant changes in the immediate objectives,

outputs or activities of the project, but are caused by the rearrangement of the inputs already agreed to or by cost increases due to inflation

Mandatory annual revisions which re-phase the delivery of agreed project inputs or increased expert or other costs due to inflation or take into account agency expenditure flexibility

Inclusion of additional annexes and attachments only as set out here in this project document

PART VI: Annual Budget

113. An overview of the Annual Budget that will be available for project activities is presented in the next page. The available budget has been divided by source; i.e. from GEF and from the Government of Cuba. In Section III a total budget and a detailed work plan is presented in the ERP (Atlas) format (i.e. the UNDP internal project management and accounting software).During the PDF C stage and in accordance with the note to table IV – Project Financing of the Project Brief, the allocation of the GEF contribution to Outcomes 1 and 2 (e.g., Activities 2 and 3 of the Project Brief) has been analyzed in more detail. Under the original design of the trash

26

handling system, the GEF contribution to this activity amounted to $1.8 million (including 3% of UN agency fees).

114. Based on the experiences achieved during the last years, it has been possible to simplify the design of the sugar cane trash handling system. As a result, the cost of the sugar cane trash handling system has been reduced to $1.3 million of which the contributions of GEF and GoC will correspond to $500,000 and $800,000, respectively. The remaining part of the GEF resources originally allocated to Activity 3 of the Project Brief have now been allocated to Outcome I, which in addition to the cogen facility includes a biomass handling and storage system to be used during the zafra and non zafra periods.

27

Table 4 Annual Budget / Contributions of the GEF and the Government of Cuba by year1

1 Actual contributions by output are subject to the results of pending negotiations with EPC contractor and financial institutions

Project Year 1(US$)

2(US$)

3(US$)

4(US$)

5(US$) Total

Outcome 1GEF 828,920 9735,080 50,500 70,500 10,685,000Goc 284,980 17,472,180 27,923,690 75,000 45,755,850Subtotal 1,113,900 27,207,260 27,974190 145,500 56,440,850

Outcome 2GEF 500,000 500,000Goc 8,000 776,000 16,000 800,000Subtotal 8,000 1,276,000 16,000 0 0 1,300,000

Outcome 3GEFGoc 3,000,000 3,000,000 7,500,000 1,000,000 500,000 15,000.00Subtotal 3,000,000 3,000,000 7,500,000 1,000,000 500,000 15,000,000

Outcome 4GEF 100,000 100,000Goc 100,000 100,000Subtotal 0 0 0 0 200,000 200,000

Monitoring &

Evaluation

GEF 19,400 11,800 60,600 21,800 86,400 200,000Goc 19,400 11,800 60,600 21,800 86,400 200,000Subtotal 38,800 23,600 121,200 43,600 172,800 400,000

TotalGEF 848,320 10,246,880 111,100 92,300 186,440 11,485,000Goc 3,312,380 21,259,980 35,500,290 1,096,800 686,400 61,855,850Total 4,160,700 31,506,860 35,611,390 1,189,100 872,800 73,340,850

28

Table 5 Annual Budget / Contributions of the GEF and the Government of Cuba by Outcome / Output 2

Outcome Output GEF(US$)

MINAZ(US$)

Total(US$)

Outcome 1Demonstration of feasibility of establishing an IPP to produce steam and power by using cane biomass technology

1.1 Project Agreements 620,560 620,5601.2 IPP plant constructed 8,276,000 43,356,000 51,632,0001.3 Biomass handling & storage 1,788,440 2,349,850 4,138,2901.4 IPP plant in operation 50,000 50,000Sub-Total 10,685,000 45,755,850 56,440,850

Outcome 2Reliable supply of sugar cane trash to the plant in planned quantity

2.1 Sugar cane trash handling system installed 400,000 700,000 1100,0002.2 Sugar cane trash collection 100,000 100,000 200,000

Sub-Total 500,000 800,000 1,300,000Outcome 3 Increased sugar cane supply to Hector Molina sugar mill (and hence sugar cane bagasse to the IPP)

3.1 Increased sugar cane supply to Hector Molina sugar mill 10,000,000 10,000,0003.2 Increased milling capacity & improved energy efficiency 5,000,000 5,000,000Sub-Total 15,000,000 15,000,000

Outcome 4Initiation of a program to replicate the use of sugar cane biomass technologies

4.1 MINAZ Replication Program 50,000 50,000 100,0004.2 Enhancement of national capacity related to modern sugar cane biomass energy technologies and IPPs, including PPAs 50,000 50,000 100,000Sub-Total 100,000 100,000 200,000

Monitoring & EvaluationMonitoring & Reporting 164,300 164,300 200,000Independent Evaluation 36,000 36,000 200,000Sub-Total 200,000 200,000 400,00

Grand Total 11,485,000 61,855,850 73,340,850

2 Actual contributions by output are subject to the results of pending negotiations with EPC contractor and financial institutions

29

SECTION II: STRATEGIC RESULTS, FRAMEWORK AND GEF INCREMENT

PART I: Incremental Cost Analysis

Project Background

115. The proposed investment project is designed to remove barriers to the sustainable replication of co-generation in Cuba using sugarcane biomass as fuel. The GEF will contribute towards the incremental costs of the project in order both to encourage the adoption of this technology and to establish a replicable framework for future projects in this sector. The main barriers that have been identified are as follows:

Limited experience with PPAs and independent power generation; Lack of experience with project finance investments and joint venture operations

between the sugar and electric power sectors; Limited experience in handling sugarcane trash at large scale for use in energy

cogeneration facilities; Lack of experience operating high-pressure, efficient bagasse cogeneration facilities; Difficult access to finance for a technology that is new to Cuba due to the unusually

high perceived risks; and High implementation and capital costs of these relatively new biomass-based renewable

energy technologies.

116. To overcome these barriers, a modern and efficient biomass co-generation project of approximately 30MW installed capacity will be constructed for the purposes of demonstration and technology transfer, as well as providing operating experience and a platform for replication.

Global Environmental Objective

117. The global environmental objective of the project is to reduce greenhouse gas emissions from the power generation sector in Cuba by substituting biomass for fuel-oil. The project is consistent with the GEF Operational Program #6, “Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs”.

System Boundary

118. The project aims at reducing barriers for steam and electricity co-generation using sugarcane trash and bagasse in Cuba. Thus, the Cuban economy forms the boundary for the system under examination. The current amounts of bagasse and trash resulting as by-products from sugarcane harvesting are about 5 million tons and 2.1 million tons respectively per annum. These figures are expected to increase to 17 and 4.2 million tons respectively within 5 to 10 years. This amount of biomass has a calorific value of about 170,000 TJ, roughly equivalent to 4 million tons of fuel-oil per annum.

119. Within the framework of the MINAZ energy development program, 42 out of 156 sugar mills in Cuba have been selected for the production of electrical energy for the grid using sugar cane biomass. It is envisaged that CEST co-generation plant would be installed at 34 of these, while energy efficiency

30

would be improved in the eight remaining mills to produce substantial amounts of surplus bagasse and trash to fuel the co-generation plants on an all-year-round basis. The 25 sugar mills identified as potential candidates for CEST technology in the first phase have a combined capacity to process about 140,000 tons of sugarcane per day. With configurations similar to the demonstration plant, they could supply about 1,500 GWh of biomass-based electricity to the national grid annually while satisfying the energy needs of the sugar mills. This would reduce Cuba’s carbon emissions from fuel-oil use for power generation by over 1,700,000tCO2 per year.

Incremental Cost Assessment

120. The incremental cost assessment examines the incremental costs and beneficial outcomes to which the GEF will contribute. These relate not only to the direct outcome, namely the implementation of the IPP cogeneration plant, but also the more important longer- term indirect outcomes related to the objective of replication.

121. Four direct outcomes are examined in the incremental cost assessment. The first three of these relate to the IPP demonstration project. Outcome 1 is the successful implementation of the demonstration project with year round operation, using as fuel the sugar cane bagasse arising from the existing capacity of the Hector Molina sugar mill (6900t/day). Outcomes 2 and 3 relate to the utilization of trash (currently a waste product) as fuel and the augmentation of sugar cane bagasse fuel supply respectively. These three outcomes are complementary in nature and will be achieved simultaneously, so that the demonstration plant (Outcome 1) has the benefit of the fuel supply augmentation delivered under outcomes 2 and 3 as soon as it commences commercial operation.

122. The fourth outcome relates to the initiation of the process under which the demonstration plant experience will be applied to replica projects that will be implemented beyond the time frame of the GEF Project.

Methodology

123. For the three outcomes that relate to the demonstration plant, the assessment is based on the estimates of capital costs and incremental costs presented in Tables 6 and 7 respectively. These relate to a plant of installed generating capacity 30MW, fuelled by the sugar cane bagasse arising from an enhanced milling capacity of 9000t/day and sugar cane trash. Hence these estimates relate to the situation that results from the simultaneous achievement of outcomes 1,2 and 3.

124. The incremental cost assessment breaks down these costs, as well as the respective GEF contributions and carbon avoidance benefits, and allocates them to the four project outcomes.Under Outcome 1, a 30MW demonstration plant is constructed but cannot operate at full output because the current milling capacity of the Hector Molina sugar factory provides insufficient fuel. It is estimated that the plant would achieve about 56% of its design export capacity to the grid under this scenario.

125. Under Outcome 2, the energy output of the plant is enhanced by harnessing as fuel the sugar cane “trash” that under current practice is discarded as a waste product. This has the effect of increasing export of electricity to some 84% of design capacity.

31

126. Under Outcome 3, a further increment in energy output is achieved by increasing the production of sugar cane and the milling capacity at the Hector Molina mill. This enables the demonstration plant to achieve its full design export capacity of 143.5 GWh/y to the grid

127. Each of these outcomes is compared with a baseline case that represents the situation that would prevail in the absence of the outcome. Hence, under the baseline scenario for Outcome 1 the Hector Molina sugar mill would continue to generate steam and electricity for its own use. There would be no demonstration plant to supply electricity to areas around Hector Molina and in its absence electricity would need to be taken from the grid instead.

128. The total amount of energy that would need to be taken each year from the grid to compensate for the absence of the demonstration plant is estimated to be 163 GWh. For the purposes of the incremental analysis, the cost of this energy is apportioned between the baseline cases for Outcomes 1,2 and 3 in proportion to their respective total costs.

129. The analysis assumes an operating lifetime of 25 years for the demonstration plant. All costs used in the analysis are present values and the carbon emissions are expressed as tons of carbon dioxide totaled over 25 years. The input data are summarized in Table 7.

130. The assessment is described in more detail below, the results are summarized in Table 8.

131. Outcome 4, the initiation of the replication process, is regarded as a direct outcome of the GEF Project, but the subsequent construction and operation of the replica projects, which has the potential to deliver major avoidance of CO2 emissions, is regarded as an indirect benefit (and separately identified as such in Table 8).

Outcome 1: IPP Demonstration Project

Baseline

132. Generation of Electricity and Steam for the Sugar Mill and DistilleryUnder the baseline scenario, the Hector Molina sugar mill would continue to operate at its current milling capacity of 6,900t/d of sugar cane, using all of the associated bagasse as fuel.Two additional turbogenerators would be required, providing an installed capacity of 12MW for operation only during the sugar cane harvesting season. Process steam would continue to be produced using the existing plant. The estimated cost of the additional equipment is US$4.8 million and this investment would enable the steam and electricity demands for sugar and alcohol production during the harvest season to be met in full. (Currently, the sugar mill imports some of its energy requirements from the grid).

133. For the remainder of the year, the supply of steam and electricity to operate the distillery will come from the existing boiler and turbo generator, fuelled by Cuban crude oil.

134. Supply of Electricity to the Surrounding AreaIt is estimated that the Hector Molina demonstration plant will have the installed generating capacity to supply 143.54 GWh/y of electricity to the grid to serve the surrounding area. In the absence of the project (i.e. in the base case), this amount of energy would be supplied from power plants on the SEN. In order to deliver this amount of electricity to the grid it will be necessary to achieve all of the three outcomes that relate to the demonstration plant.

32

The average fuel consumption in the plants serving the SEN is about 270 t/GWh using fuel oil FC 900 with 81% carbon content. The specific carbon emissions would thus be approximately 802 tCO2/GWh generated.

135. To supply this energy to the project area, the national system would need to generate an estimated 163.34GWh/y, allowing for internal power station consumption of 7.5% and transmission losses of 5%. The long term marginal cost of energy generated by UNE is estimated to be 0.068US$/kWh. Hence the annual cost of providing this supply would be US$11.1 million. A further cost of US$0.4 million per annum would arise from the use of fuel oil to raise steam for the distillery. The present value of these costs over 25 years is US$51.94 million. This present value is assigned to the three demonstration plant outcomes in proportion to their respective costs (as shown on Table 8.) Hence, under the baseline scenario for Outcome 1, it is assumed that 121.32 GWh/y is imported from the SEN at a cost (present value) of US$ 38.58 million.

136. Carbon EmissionsThe carbon emissions associated with the baseline scenario are estimated to be 133,990 tCO2/y.

137. Net Present ValueThe present value of the base case (over 25 years) is US$43.38 million, comprising 4.8 million investment in the sugar factory and US$38.58 million in supply of electricity from the grid.

GEF Alternative Scenario

Generation of Electricity and Steam by an IPP

138. The proposed alternative has as its main objective the removal of barriers to the increased use of sugarcane biomass by demonstrating the viability of establishing enterprises to co-generate steam and power from sugarcane bagasse and trash.

139. Under the alternative scenario, an Independent Power Producer (IPP) will be created with the capacity to generate 207.82 GWh/y of energy from sugar cane biomass. This will be sufficient not only to satisfy the demands for electricity and steam for the production of sugar and alcohol, but also to supply 143.54 GWh/y of electricity to the national grid.

140. The main outcome of the project (Outcome 1) will be the construction and successful operation by the IPP of a pilot plant of some 30MW installed capacity adjacent to the existing Hector Molina sugar mill. The plant will export renewable energy to the grid, displacing new investment in oil fired generation plant. It will employ high-pressure condensing-extracting steam turbine (CEST) technology. The IPP will provide steam and power to the sugar mill and distillery under binding commercial supply contracts and sell the surplus power to the grid through a power purchase agreement

141. Under Outcome 1, the plant will be fuelled only by sugar cane bagasse arising from the current milling capacity of the Hector Molina sugar mill (6,900t/day). This will enable the plant to generate 115 GWh/y of electricity, of which 80.3GWh/y will be available for export to the grid.

142. The bagasse supplied by the sugar factory to the IPP as fuel for cogeneration will be exchanged for steam and electricity supplied by the IPP to the sugar factory and alcohol distillery under the terms of a product exchange agreement, without financial cost to either party.

33

143. Carbon EmissionsThe carbon emissions associated with the alternative scenario are insignificant compared with the base case and are assumed for present purposes to be zero.

144. Present Value and Incremental CostThe present value of the total costs for the GEF alternative, as described above, is US$ 54.67 million. Compared with the baseline scenario, the incremental cost of the GEF alternative is US$ 11.29 million. The avoided carbon emissions are about 100,000 tCO2 annually or 2,505,000 tCO2 over the 25-year lifetime of the plant. This corresponds to a unit abatement cost of 4.64 US$/tCO2 considering only the incremental costs and emissions reductions from the demonstration plant. The GEF is requested to contribute US$ 10.685 million towards the incremental costs of Outcome 1, implying a cost-effectiveness of some 4.265 US$/tCO2 for the GEF contribution, based on the direct reductions resulting from the demonstration plant only.

Outcome 2: Reliable Supply of Sugar Cane Trash to the Plant in Planned Quantity

145. At present the sugar cane trash that is left in the cane fields or separated from the cane at cleaning stations is a waste product arising from sugar production. Under Outcome 2, trash from both of these sources will become an important component of the biomass fuel supply to the demonstration plant, with an estimated contribution of some 28% to the total energy output of the plant.

Baseline

146. Under the baseline scenario, it is assumed that Outcome 1 has been achieved, the demonstration plant is operational and supplying 80.3GWh/y of electricity to the grid. Under the project alternative, the additional fuel supply enables the plant to generate more energy, which, in the absence of the additional fuel would have to come from the grid.

147. The amount of energy taken from the grid that is apportioned to Outcome 2 is 7.1GWh/y. The present value of the cost of this energy from the SEN over 25 years is US$ 2.26 million and the carbon dioxide emissions associated with its generation are estimated to be 0.14Mt.GEF Project Alternative

148. Unlike bagasse, trash is currently not handled by the sugar mill. Instead, it is separated from the sugar cane at cleaning stations in the fields. Under the GEF alternative, trash ceases to be a waste product and acquires value as a fuel. It is planned to change current practice and transport the cane “dirty” (i.e. with the trash still attached) to the power plant. The relatively small amount of trash that remains in the fields will be collected and transported to the plant by a separate entity. The estimated current cost for sugarcane trash at the plant is about 17 US$/t. In the future, the price will be reduced to 10 US$/t. To achieve this price reduction, an investment of US$1.3 million is to be made in the collection, handling and delivery to the demonstration plant of sugar cane trash. The GEF contribution to this investment is US$0.5 million.

149. The annual cost of trash to the IPP is estimated at US$0.413 million. With the benefit of the sugar cane trash as additional fuel, the energy output of the demonstration plant is increased by 44.61GWh/y and export of energy to the grid by 39.9GWh/y.

34

150. The estimated cost of Outcome 2 is US$3.2million, comprising the present value of the capital cost of the trash handling and collection system and the annual cost to the IPP of purchasing the trash from the sugar mill.

Incremental Cost

151. The present values of the baseline and project alternatives are US$2.26 and 3.20 million, respectively, giving an incremental cost of US$0.94 million. The GEF contribution to the incremental cost is US$0.5 million. Carbon dioxide emissions avoided amount to 142,250t over 25 years. The cost of carbon emissions avoided is US$6.6/t CO2

and the cost per unit of GEF support is US$3.5/t CO2.

Outcome 3: Increased Sugar Cane Supply to Hector Molina Sugar Mill in Planned Quantity

152. Under Outcome 3 the fuel supply to the IPP will be further augmented by increasing the production of sugar cane and increasing correspondingly the milling capacity of the Hector Molina sugar mill from 6,900 to 10,000 t/d (maximum).The resulting increase in sugar cane bagasse fuel supply is based on average mill throughput of 9,000t/d..

Baseline

153. Under the baseline scenario, it is assumed that Outcome 2 has been achieved and that the demonstration plant is operational and supplying 120.2GWh/y of electricity to the grid. Under the project alternative, the additional fuel supply enables the plant to generate more energy, which, in the absence of the additional fuel would have to come from the grid.

154. The amount of energy taken from the grid that is apportioned to Outcome 3 is 34.92GWh/y. The present value of the cost of this energy from the SEN over 25 years is US$ 11.10 million and the carbon dioxide emissions associated with its generation are estimated to be 0.70Mt.

GEF Project Alternative

155. Under the GEF alternative, an investment of US$15 million is made in the augmentation of supply of sugar cane bagasse as fuel for the cogeneration plant. This comprises US$ 10 million for increased sugar cane production and US$5 million for modifications and refurbishment in the sugar factory. These two components will be undertaken by MINAZ as part of the Cuban contribution to the project. Although there is no direct GEF contribution to these activities, this work would not be undertaken without GEF support to the Project as a whole. With the benefit of the increased bagasse fuel supply arising from Outcome 3, the energy output of the demonstration plant is increased by 48.49GWh/y and export of energy to the grid by 23.32GWh/y.

156. Whereas bagasse supplied during the harvest season will be covered under the product exchange agreement and provided at no cost to the IPP, that supplied outside the harvest season will be sold to the IPP at the price determined by MINAZ for bagasse supplied during this period to other production units associated with a sugar industrial complex. The current price is US$7.4/t, giving an annual cost to the IPP of US$0.97 million. Hence, the cost of Outcome 3, totaling US$15.7 million, comprises the present value of the capital costs of increased cane production and factory modifications and the recurrent cost of the additional bagasse supply.

35

Incremental Cost

157. The present values of the baseline and project alternatives are US$11.10 and 15.74 million, respectively, giving an incremental cost of US$4.63 million. As explained above, there is no direct GEF contribution to the incremental cost. 702,782t of carbon dioxide emissions are avoided over 25 years at a unit cost of US$6.59/t CO2.

Outcome 4: Initiation of a Program to Replicate the Use of Sugar Cane Biomass Technologies

158. In order to realize the full potential benefit of the GEF contribution to the demonstration project it is essential, assuming that the demonstration will be successful, that every effort is made to stimulate replication.

159. With the implementation of replica projects, the unit cost of cogeneration and hence the unit cost of reducing carbon emissions will be substantially reduced. This reduction in unit costs will arise in two ways. Firstly a reduction in the perceived risks in applying modern biomass cogeneration technology in Cuba will facilitate access to financing on favorable terms. Secondly, the experience gained and lessons learned from the demonstration project will enable future projects to be developed using predominantly Cuban resources and manufacturing capacity.

160. GEF will support initiation of the replication process through a Replication Facilitation Mechanism (RFM). Its objective will be to facilitate the replication of the demonstration project through the financing of feasibility studies. Hence the subsequent implementation of the replication process will bring indirect benefits from the GEF support to its initiation..

Baseline

161. Unless there is specific support to the initiation of the process, there is a significant risk that replication of demonstration project will not take place, in which case benefit of GEF participation will be insignificant compared to the potential benefit arising from similar projects in Cuba and internationally.

GEF Project Alternative

162. Under the GEF alternative, the financing of the RFM will comprise contributions, each of value US$100,000, from the GEF and MINAZ. The GEF contribution will be in cash, whereas that of MINAZ will be in kind (in the form of technical inputs to the feasibility studies). These studies will focus upon those projects identified by MINAZ as priority projects, with the benefit of operating experience from The IPP demonstration project.

Incremental Cost

163. The total incremental cost of Outcome 3 will be US$200,000, of which the GEF contribution is US$100,000. The benefits related to this investment lie in mitigating the risk that replication will not take place at all, or will be limited to one or two projects. The indirect benefits of replication will accrue after completion of the GEF Project and cannot be realistically quantified in financial terms at this stage. However, based on the estimated total capacity of replication projects in Cuba to supply electricity to the grid the potential for avoidance of CO2 emissions is of the order of 34 million tons.

36

The Entire Project (Comprising Outcomes 1 to 4)

164. The results of the incremental cost assessment for the four individual but complementary outcomes, as described above, may be summed in order to assess the incremental cost and benefit of the project as a whole. The total baseline cost is US$56.74 million and that of the GEF project alternative US$73.80 million, giving an incremental cost of US$17.06 million, to which the GEF contribution is US$11.465 million.Based on the direct benefits of the demonstration project only (i.e. excluding the indirect benefits of replication), total carbon dioxide emission avoidance of 3.35Mt is indicated, at a unit incremental cost of US$5.09/t or, in terms of the GEF investment only, US$3.42/t. The replication process initiated with GEF support under the current project has the potential to deliver indirect benefits amounting to carbon dioxide emission avoidance of some 34 million tons.

37

Table 6: Capital Cost Estimate for Demonstration Plant

ITEM 

Amount(US$ millions)

CEST cogeneration plant-Supply 33.30CEST cogeneration plant-Erection 5.46Plant Spares 0.41Bagasse Bulk Store 4.14Trash handling and collection system 1.30Plant water supply 0.38Effluent treatment 0.15Miscellaneous small equipment 0.62Offices and office equipment 0.10Grid connection  1.11Sub-total  46.97Access roads and landscaping 0.15Working capital 0.67Insurances 0.23Electricity supply during construction 0.09Net Total 48.11Contingencies 10% 4.81Financing costs 4.80Total 57.72

38

Table 7: Incremental Cost Estimates3 2.1: INPUT DATA

Operating Lifetime Years 25Discount rate % 15Cost of Cuban crude oil US$/t 140.99Long term marginal cost of electricity US$/KWh 0.068

2.2: COMPARISON OF PROJECT WITH BASELINE CASE  Baseline ProjectCapital cost per unit installed capacity US$/kW 1603.67Installed capacity MW 30.00Energy supplied from the grid GWh 163.34Energy supplied to the grid GWh 143.54Energy generated in the sugar factory GWh 25.50 0.00Installed generating capacity MW 12.00 30.00Energy consumed in the sugar factory – Harvest season GWh 21.43 33.23Energy consumed for repairs and maintenance (outside harvest season) GWh 0.47 0.34Energy consumed in the distillery – harvest season GWh 3.60 4.40Energy consumed in the distillery – harvest season GWh 1.55 2.05Energy consumed in the distillery – Outside harvest season GWh 2.05 2.35Power plant internal consumption GWh 0.00 21.91Electricity generated from fuel oil GWh 165.40 0.00Electricity generated from biomass GWh 25.50 207.82

2.3: COST COMPARISON (US$ millions): Baseline ProjectCEST cogeneration plant – 30MW installed capacity 57.72Sugar factory modifications/refurbishment 4.80 5.00Cost of increased sugar production 0.00 10.00Sub-total: Capital Costs 4.80 72.72Annual Costs: Sugar cane trash 0.00 0.413 Sugar cane bagasse 0.00 0.971 Electricity from the grid 11.11 0.00 Fuel oil for distillery steam supply 0.40 0.00 Operation and Maintenance 1.93 Sub-total: Annual costs 11.51 3.31Net Present Value: 51.94 15.46Present Values:Electricity from Grid/ IPP 51.94 46.92Sugar factory 4.80 4.06Sugar cane production 0.00 7.14Total present values 56.74 73.58 INCREMENTAL COST: 16.83Carbon emissions – grid electricity/IPP TCO2/y 130,999 0Carbon emissions – steam for distillery tCO2/y 2,887 0Carbon emissions over 25 years tTCO2 3,347,150 0Incremental cost per unit of CO2 avoided US$/tCO2   5.03 

3 These Estimates Relate to a project of 30MW installed capacity and include the costs for augmentation of fuel supply through the use of trash and increased bagasse supply corresponding to milling capacity of 9000t/d. They correspond to the sum of Outcomes 1,2 and 3 in Table 8

39

Table 8: Incremental Cost Matrix

NOTE: The costs presented in this matrix are present values of capital and recurrent costs incurred over the assumed plant operating life of 25 years. Therefore they do not necessarily correspond to cost estimates presented elsewhere in this document.

Cost/Benefit Baseline (B) Alternative (A) Increment (A-B)

Domestic Benefits

The project aims to reduce Cuba’s dependency on imported fuel-oil, support the sugar industry diversification programme, preserve rural employment and reduce atmospheric pollution.

Sugar factories generate electricity and steam for their own consumption using inefficient low-pressure technology augmented by purchases from the grid. Generation of electricity for the grid is predominantly from domestic and imported fuel oil. Rural economy under threat as a result of low sugar price.

The development of IPPs using modern CEST technology and fuelled year-round by sugar cane biomass supplies process steam and electricity to the sugar factories as well as delivering electricity to the grid in the following quantities:

Direct Benefit: 143 GWh/yIndirect Benefit: 1,500 GWh/y

Saving of fuel oil consumption. Preservation of rural employment that is currently insecure as a result of the decline in sugar production. Local environmental benefits arising from reduced emissions of pollutants, such as sulphur dioxide, associated with burning high-sulphur fuel oils.

Direct Benefit: 44,000 t/y fuel oil savedIndirect Benefit: 460,000 t/y saved

Global Benefits

Reduction of Cuba’s energy-related CO2 emissions by substituting biomass (sugarcane bagasse and trash) for fossil fuels (mainly fuel-oil) in power generation.

Electricity generation using fuel oil produces carbon emissions totalling some 1.37 M tCO2/y for an energy output corresponding to that of the alternative

Export to the grid of renewable energy from sugar biomass fired power plants

Reduction of carbon emissions in Cuba and further reductions through international replication based on Cuban experience

Direct Benefit: 3.35Mt CO2 avoided over 25 yearsIndirect Benefit: 34 Mt CO2 avoided (in Cuba only)

Table 8: Incremental Cost Matrix (cont)

40

Cost/Benefit Baseline (B) Alternative (A) Increment (A-B)

Outcome 1Demonstration of feasibility of establishing IPP companies to produce steam and power by using biomass fired cogeneration technologies

Feasibility of establishing IPPs for year-round cogeneration using sugar cane biomass remains unproven and barriers continue to inhibit such projects. Hector Molina serves sugar and distillery demand using existing cogeneration plant.

Energy supplied from grid to the area equals 121.32GWh/y

Total Cost: 43.380M$ GEF Contribution: 0.00

CO2 Emissions: 2,502,118

The IPP pilot plant is constructed and operated successfully fuelled by bagasse from existing level of cane production.

Export of 80.3GWh/y of energy from the IPP to the grid displaces consumption of fuel oil in SEN

Total Cost: 54.648M$ GEF Contribution: 10.685M$

CO2

Emissions: 0

The IPP serves as a demonstration project for biomass cogeneration using bagasse h at suitable plants throughout Cuba and internationally

Total Cost: 11.268M$ GEF Contribution: 10,685M$

Direct Benefit: CO2

Avoided: 2,502,118t

Outcome 2Reliable supply of sugar cane trash to the plant in planned quantity

IPP plant operating, delivering 80.312GWh/y to the grid. Fuel is bagasse only. . Energy supplied from grid 7.095GWh/y

Total Cost: 2.256M$GEF Contribution: 0 M$

CO2 Emissions: 142,250t

Biomass fuel is supplemented by trash..

Extra Energy: 44.612GWh/yExtra to Grid: 39.909GWh/y

Total Cost: 3.197M$GEF Contribution: 0.500M$

CO2 Emissions:0

Demonstration that sugar cane trash, formerly a waste product, can be used successfully as fuel.

Total Cost: 0.941M$ GEF Contribution: 0.500M$

Direct Benefit:CO2

Avoided: 142,250t

41

Table 8: Incremental Cost Matrix (cont)

Cost/Benefit Baseline (B) Alternative (A) Increment (A-B)

Outcome 3Increased sugar cane supply to Hector Molina sugar mill (and hence sugar cane bagasse to the IPP) in planned quantity

IPP plant operating, delivering 120.221GWh/y to the grid. Fuel is bagasse and trash.

Energy supplied from grid equals 34.921GWh/y

Total Cost: 11.104M$ GEF Contribution: 0.000M$

CO2

Emissions: 702,782t

Biomass fuel is supplemented by more bagasse from increased cane

supply/milling capacity increased to 9,000t/d.

Extra Energy: 48.491GWh/yExtra to Grid: 23.319GWh/y

Total Cost: 15.735M$ GEF Contribution: 0.000M$

CO2 Emissions: 0

Demonstration that sufficient biomass fuel can be supplied for all year generation utilizing full installed generating capacity.

Total Cost: 4.631M$ GEF Contribution: 0.000M$

Direct Benefit:CO2

Avoided: 702,782t

Outcome 4Initiation of a program to replicate the use of sugar cane biomass technologies

IPP plant operating, delivering 143.50GWh/y to grid.. No

supplementary supply from grid. Replication of demonstration project

may not take place, in which case benefit of GEF participation will be

limited.Total Cost: 0.0M$

GEF Contribution: 0.0M$Est. CO2

(Replica Projects) 30Mt

High probability of replicationProvided that demonstration plant is successful

Total Cost: 0.200M$ GEF Contribution: 0.100M$

CO2 Emissions: 0

Increment will be future implementation of replica plants (beyond time frame of the GEF Project) with estimated export capacity to grid of 1,500GWh/y.Total Cost: 0.200M$4 GEF

Contribution: 0.100M$ Indirect Benefit:Potential for avoidance of 34Mt CO2

through replication projectsTOTALS US$ 56.74 million

CO2 Emissions:

Direct: 3,347,150tIndirect: 34Mt

US$ 73.78 million

CO2 Emissions: 0

Increment:US$17.040millionGEF:US$11.285 million

CO2 Avoided:

Direct Benefit: 3,347,150tIndirect Benefit: 34Mt

Costs per unit of Carbon Avoided:

Total Incremental Cost:GEF Only:

Based on direct benefits only (without replication) US$ 5.03/t CO2

US$3.339/t CO2

4 Within GEF Project time frame. Replication project costs will be incurred later.

42

PART II: Logical Framework Analysis

Table I: Logical Framework and Objectively Verifiable Impact Indicators

Indicator BaselineTarget

Sources of Verification

Key Risks and Assumptions

Mid Term(Mid year 3)

Final(End year 5)

Outcome 1Demonstration of

feasibility of establishing an IPP for cogeneration of steam and electricity

by using sugar cane biomass fired cogeneration technologies

Institutional: 1. Framework2. Contracts

3. IPPPhysical:4. Construction

5. Energy delivery

No IPP producing steam and power year round from biomass to date.

1. In place2. All executed

3. Established

4. On schedule according to agreed milestones5. n.a.

1. Functioning2. EPC completed on time and budget3. In operation

4. Compliance with performance specification5. Delivery of 143 GWh/y to grid

- Contract monitoring- Site inspections- Plant performance tests- Compliance with terms of steam and power supply agreements

Cost and time overruns on EPC contract

Adequate fuel supply for targeted generation of steam and power

Outcome 2

Reliable supply of sugar cane trash to the plant in

planned quantity

Institutional:1. Trash supply agreements

Physical:2. Delivery of trash to IPP

Sugar cane trash has no economic use

1. Agreements in place for collection from field and cleaning stations2. Equipment procurement on schedule

1. Compliance with trash supply agreements

2. Trash supplied to the plant: 8% of cane milled coming from cleaning stations and 1,8 – 2,5 % of cane milled from field

- Project quarterly reports

- Evaluation missions

Availability of trash guaranteed by sugar mill Collection of trash is responsibility of IPP

Outcome 3Increased sugar cane

supply to Hector Molina sugar mill (and hence

sugar cane bagasse to the IPP) in planned quantity

Institutional:1. Product exchange and fuel supply agreements

Physical:2. Delivery of bagasse to IPP

6900 tons of sugar cane processed daily during zafra period

1. Agreements in place for exchange of bagasse during zafra and purchase of bagasse for remainder of year2. Equipment procurement on schedule

1. Compliance with bagasse agreements

2. Sugar cane processing of 9,000 – 10,000 tons per day during zafra

- Project reports & evaluation missions

The sugar industry diversification and recovery program proceeds as expected

Project Strategy Objectively verifiable indicators

Goal To reduce energy-related CO2 emissions by increasing sugarcane biomass use for power generation in Cuba

Indicator Baseline Target Sources of verification

Risks and Assumptions

Objective of the project

To remove barriers to wide-spread use of efficient biomass-based steam and power co-generation technologies in Cuban sugar industry

Mid Term (Mid Year 3):1. Status of institutional framework and contractual agreements

2. Project financing

3. Construction progress

Final (End of Year 5):

4. Plant commissioning and acceptance

5. Fuel supply

6. Overall efficiency of electricity supplied to grid from biomass fuel (kWh/t milled cane)

No efficient biomass-based steam and power co-generation plants currently exist in the Cuban sugar industry operating 7000 – 8000 h/year

Internal cogeneration efficiency 31kWh/t (2004) with negligible export to grid

1. In place

2. In place

3. Plant procurement and civil works >70% complete

4. Plant commissioned and tested by EPC contractor and accepted for operation by the IPP

5. Fuel supply adequate for 7,000 hours generation at rated plant output

6. 116 kWh/t

Official statisticsEvaluation missions

World market price of fuel oil does not decrease significantly

Availability of financing

Cost benefit of trash collection

Adequate initial training and technology updates

Improved efficiencies arising from operating experience.

43

Outcome 4Initiation of a program to replicate the use of sugar

cane biomass technologies

MINAZ defines Cuban replication program

MINAZ program has been defined in outline

1. Detailed program in place for confirmed priority projects2. Replication mechanism and funding in place

1. Commissioning of pre-feasibility studies for replica projects

- Evaluation missions and reports

Pilot project does not progress as expected

Table II: Indicative Outputs, Activities and quarterly work plan

Output Activity 1 2 3 4 5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1.1 Project Agreements

1.1.1 Establish the IPP1.1.2 Contractual agreements1.1.3 Negotiation of EPC contract1.1.4 Financing negotiations

1.2 IPP plant constructed

1.2.1 Detailed engineering1.2.2 Project licenses and permits1.2.3 Plant manufacture and delivery1.2.4 Civil works and plant erection1.2.5 Plant testing, start up and commissioning

1.3 Bagasse handling and storage

1.3.1 Detailed design

1.3.2 Manufacturing and delivery

44

1.3.3 Commissioning and Testing

Output Activity1 2 3 4 5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1.4 IPP plant in operation

1.4.1 Training of operating personnel

1.4.2Determine schedule for full local operation of demonstration plant

1.4.3Plant operation optimization

2.1 Sugar cane trash handling system installed

2.1.1 Finalize design

2.1.2 Manufacturing and delivering

2.1.3 Commissioning and testing

2.2 Sugar cane trash collection from field

2.2.1 Trash supply plan and contract agreement

2.2.2 Procurement of equipment

2.2.3 Commence operations

45

Output Activity1 2 3 4 5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

3.1 Increased sugar cane supply to Hector Molina sugar mill

3.1.1 Rehabilitation of irrigation and drainage systems3.1.2 Cane planting and crop farming3.1.3 Equipment procurement

3.2 Increased milling capacity and improved energy efficiency

3.2.1 Design of plant modifications3.2.2 Procurement and installation3.2.3 Commissioning and testing

4.1 MINAZ replication program

4.1.1 Confirm priority replica projects4.1.2 Initiate pre-feasibility studies on replica projects

4.2 Enhancement of national capacity related to modern sugar cane biomass energy technologies and IPPs, including PPAs

4.2.1 Collect and collate lessons learned from pilot project

4.2.2 Disseminate lessons learned via workshops and seminars

Monitoring and evaluation

Inception workshop

Project monitoring

Independent evaluations

46

SECTION III: TOTAL BUDGET AND WORK PLANAward: tbdAward Title: PIMS 1324 CC FSP: Cogen. Elect/Steam Sugar Cane BiomassProject ID: tbd Implementing Partner/ExA: NEX: Ministry of Foreign Investment and Economic Cooperation (MINVEC)

Project Outcomes/ ATLAS Activities ResponsibleParty

Sourceof

Funds

PLANNED BUDGET & WORK PLAN

ERP/Atlas Budget Code

ERP/Atlas Budget Description Year 1US$

Year 2US$

Year 3US$

Year 4US$

Year 5US$

TotalAmount

1. Demonstration of feasibility of establishing IPP companies to produce steam and power by using cane biomass technology

MINVEC/MINAZ

GEF 72100 Contractual services Company 234,000 7,922,140 40,000 60,000 8,256,14072600 Grants 570,420 570,42074500 Miscellaneous Expenses 10,500 10,500 10,500 10,500 42,00071600 Travel 14,000 14,000 28,00072200 Equipment & Furniture 1,787,920 1,787,920

TOTAL OUTCOME 1 COST 828,920 9,734,560 50,500 70,500 10,684,4802. Reliable supply of sugar cane trash to the plant in planned quantity

MINVEC/MINAZ

GEF72200 Equipment & Furniture 500,000 500,000

TOTAL OUTCOME 2 COST 500,000 500,0003. Increased sugar cane supply to Hector Molina sugar mill (and hence sugar cane bagasse to the IPP)

MINVEC/MINAZ

GEF

TOTAL OUTCOME 3 COST 0 0 0 0 0 04. Initiation of a program to replicate the use of sugar cane biomass technologies

MINVEC/MINAZ

GEF 72100 Contractual services Company 50,000 50,000

72500 Supplies 50,000 50,000TOTAL OUTCOME 4 COST 0 0 0 0 100,000 100,000

5. Monitoring & Evaluation

MINVEC/MINAZ

GEF 71200 International Consultants 2,400 2,400 38,400 2,400 74,400 120,00072500 Supplies 15,000 7,400 10,160 7,400 10,040 50,00074100 Professional Services 10,000 10,000 20,00072400 Comunic & Audio Visual Equip 2,000 2,000 2,000 2,000 2,000 10,000

TOTAL M & E COST 19,400 11,800 60,560 21,800 86,440 200,000TOTAL by Source of Fund/Donor GEF 848,320 10,246,360 111,060 92,300 186,440 11,484,480

GoC 3,312,380 21,259,980 35,500,290 1,096,800 686,400 61,855,850SUBTOTAL 4,160,700 31,506,340 35,611,350 1,189,100 872,840 73,340,330

GEF-PDF B 350,000GEF- PDF C 680,520

GRAND TOTAL 74,370,850

47

SECTION IV: ADDITIONAL INFORMATION

PART I : Other agreements

Government Endorsement Letter

48

Government Financing Letter

49

PART II: Organigram of Project

PROJECT COORDINATOR

IPPEnergy Generation

Steam & Electricity Generation

Fuel (Biomass) Supply

Maintenance

Accounting & Finance

Biomass Storage

Trash Supply Steam

Generation Auxiliary Services

ElectricGeneration

EMP. HECTOR MOLINA

50

PART III: TORs for Main Sub-contracts

The EPC ContractThe engineering, procurement and construction of the IPP cogeneration plant will be carried out under single EPC (or “turnkey”) contract.The EPC contractor will carry full responsibility for the delivery of the plant on time and at fixed cost and for the plant meeting the specified performance criteria. The EPC contractor’s responsibilities will extend to the works executed and the plant and materials supplied by sub-contractors.The civil works and plant erection will be sub-contracted to Cuban enterprises and financed by MINAZ.The physical scope of the EPC contract will cover essentially the “power island”, that is the boiler and turbogenerator and their ancillary equipment. The physical boundaries of the power island will be clearly defined, as will the interfaces with facilities and services that are connected to the power island and not part of the EPC contract, but supplied by others under the direction of MINAZ.The EPC contract will be implemented under the FIDIC Conditions of Contract for EPC/Turnkey Projects, colloquially known as “the Silver Book”.FIDIC (Federation Internationale des Ingenieurs-Conseils) is an international organization, based in Lausanne, Switzerland, which represents most of the private-practice consulting engineers in the world. It produces a wide range of publications and provides guidance on best practice. One of its most important roles is the production of standard forms of contract for a range of different contract types and applications.Introduced in 1999, the Silver Book was drawn up specifically to address the need for a form of contract suitable for projects where certainty of final price and completion date are of extreme importance. Among such projects can be found many financed by private funds, where the lenders and equity investors typically require greater certainty about the cost of a project to the Employer than is provided by more traditional forms of contract. For such projects it is necessary for the contractor to assume responsibility for a wider range of risks than would be the case under the traditional contract forms. If the contractor is to carry such risks, the Employer must give him time and access to obtain and consider all relevant information before he is asked to sign on a fixed contract price. Furthermore, the Employer must accept that the contract price will be increased as a result of the Contractor factoring in the increased risk he is being called upon to bear. Nevertheless, EPC and turnkey contracts are increasingly common and the initial premium on the contract price is often regarded as justified by the certainty of final cost and completion date that these forms of contract provide. This is considered to be the case for the IPP cogen plant, not only because MINAZ and the GEF will wish to achieve completion on time and within budget, but also the replication process is likely to involve international partners who will share these objectives.The contract documents are likely to comprise the following:

General Conditions Particular Conditions Letter of Tender Contract Agreement Dispute Adjudication Agreement

51

Forms of Securities – These will depend on the status of the Contractor and the structure of the project financing. Typically they might include a Parent Company Guarantee, Form of Tender Security, Form of Performance Security (Bond or Guarantee), Advance Payment Guarantee, Retention Money Guarantee and Form of Payment Guarantee by the Employer.

The General Conditions are organized under the following headings:

General Provisions The Employer The Employer’s Administration The Contractor Design Staff and Labor Plant, Materials and Workmanship Commencement, Delays and Suspension Tests on Completion Employer’s Taking Over Defects Liability Tests after Completion Variations and Adjustments Contract Price and Payment Termination by Employer Suspension and Termination by Contractor Risk and Responsibility Insurance Force Majeure Claims, Disputes and Arbitration

The Contract will normally include a Dispute Adjudication Agreement, the terms of which are set out in an Appendix to the General Conditions.

The Particular Conditions are intended to modify and add to the General Conditions as and where necessary to suit the specific characteristics and requirements of the contract and the project to which it relates, as well as accommodating any specific or unusual requirements or conditions imposed by the Client or the Contractor.The Particular Conditions follow the same numbering as the General Conditions and FIDIC provides guidance as to how the specific conditions should be drafted and applied.As with any form of contract, the success of the project to which it elates will depend to a large extent on the comprehensive and unambiguous definition of the Client’s requirements at the outset. This is particularly important in the case of projects such as this IPP where there are many crucial interfaces between the cogeneration plant, the sugar mill and distillery and other installations and infrastructure already in existence on or near the site.

The Power Purchase Agreement (PPA)

The PPA will define the terms under which electricity is sold by the IPP to the national power utility UNE. The document is at an advanced stage of development and an English translation of the current working draft is presented as Appendix IX.

52

The Product Exchange Agreement (PEA)

The PEA will define the terms under which electricity and steam are supplied by the IPP to the adjacent sugar mill and distillery in exchange for bagasse and water (raw water and condensate) supplied by the Hector Molina sugar enterprise to the cogeneration plant. Again the document has reached advanced draft stage.

PART IV: Stakeholders Involvement PlanThe following institutions and organizations were key stakeholders during the project implementation at national and local level:

National Level

MEP has also the responsibilities to approve the investment projects executed by Cuban enterprises as Hector Molina projects, the preliminary approval of this project have been made and should give the confirmation at the end of the financial and EPC contract negotiation. The participation of this institution in the follow up of the implementation plan contributed to obtain information for future decision regarding the implementation of others projects in the scope of the replication program.

MINBAS oversees the working of UNE. That is the main institution in charge of transmission and distribution of electricity in Cuba, and has been entrusted with the responsibility of signing the power purchase agreements with Hector Molina IPP. The relationships between Hector Molina and UNE, taking in consideration the demonstration characteristic of this cogeneration facilities and the supply of energy all year around to the grid is considering be important for the successful of the IPP and the development of the replication program.

MINAZ is directly responsible for using sugar cane biomass for power generation and will supervise as well as closely monitor the arrangements for the execution of the project and be responsible for ensuring:

Overall project execution, implementation and coordination Coordination with key stakeholders (i.e., concerned line Ministries and other

stakeholders) Mechanisms for smooth funds flow to the Project Management Unit (PMU MFP is the leading governmental body in pricing policy, deals at the macro level with

the establishment of tariffs/prices, in line with the economic and social policy of the Government. In coordination with MEP and MINBAS, MFP establishes the regulatory framework for tariffs/prices of energy services, in particular electricity. The information regarding the economic results of the demonstration project in the implementation phase will be useful for decision making in the scope of the regulatory frameworks of energy services, considering sugar cane biomass cogeneration projects supplying electricity to the grid throughout the year.

Ministry for Science Technology and Environment (CITMA) is the GEF focal point ministry, and also looks after renewable energy development in Cuba. In this project CITMA will supervise the development of Hector Molina project implementation plan and it is also in charge of the approval of environmental licenses and the project investment from the point of view of technology transfer. The follow

53

up to the project during the implementation phase, will feedback useful information for his advise to the government in the framework of the Front for Renewable Energy.

Ministry of Foreign Investment and Economic Collaboration (MINVEC) rules all aspects of international technical assistance and cooperation initiatives. MINVEC is the national counterpart of UNDP. In the scope of the project, beside the supervision of the implementation plant will be the way for the relationship between MINAZ and UNDP.

Local Level “Hector Molina sugar mill”, is in charge of the supply of bagasse and to put available

the trash for its use as fuel in the cogeneration facilities for the supplying of steam and electricity required by sugar and alcohol production. This interdependence between both organizations through an agreement, between then, are an important issue for a successful operation of both, and will offer feedback information for the replication program. A close collaboration between IPP and sugar mill must be achieved in order to fulfill the projects targets.

“Workers Trade Union” is the organization of IPP workers and will follow the project implementation plan in order to get the participation of the workers in the solution of any problems that could arise in the operations and maintain of the cogeneration facilities

“Sugarcane Cooperatives” are in charge of the cane production according to they agreement with Hector Molina Sugar mill, that has the responsibility to put available the trash and supply of bagasse to the cogeneration facility to be used as fuel for the cogeneration of heat and electricity. The biomass required by the IPP to fulfill its production targets will depend on the cane production, therefore it is necessary that the cooperative management and workers will keep well informed of the development of the IPP implementation plan in order to get they participation in the solution of problems dealing mainly with the supply of biomass.

“San Nicolas de Bari Municipal Government”, is the maximum state authority in the territory and take care about the social and economical activities that are carry out in the territory of San Nicolas de Bari. As one of the stakeholders, they will be well informed of the development of the implementation plan and could collaborate in the solutions of problems linkage to the social and production activities of San Nicolas de Bari.

“Popular Council” in Hector Molina area, is the representation of the municipal government in the area where will be located the cogeneration facilities. In their relationship with the community they revise problems dealing with the diary life of the community and how could be arrange solutions with the contribution of the existing enterprises. At the same time the community could offer to the IPP, their participation in solutions of IPP problems, in the scope of their possibilities.

Activities Stakeholders Frequency

-National and Local levels At the beginning of the GEF

54

Workshop regarding the final design of the project: the work plan, targets, project budget, etc

project.

Information regarding the advance of the construction schedule

-National levels One Steering Committee Meeting every 6 months during construction period

-Local level

A meeting every two month during construction period

Information regarding the achievements of operation targets during the first two years

-National levels One Steering Committee Meeting every: 6 months every year during the first two years of operation

-Local levels

One meeting at the beginning of the sugar cane harvest and at the end, every year during the first two year of operation

55

Signature PageCountry: Republic of Cuba

UNDAF Outcome(s)/Indicator(s):(Link to UNDAF outcome, if no UNDAF, leave blank)

Expected Outcome(s)/Indicator (s): (CP outcomes linked to the SRF/MYFF goal and service line) Development strategies for climate change

mitigation. Clean energy technologies

promoted through energy efficiency, renewable energy, and technology demonstration, to reduce emissions and strengthen national capacities, especially for resource mobilization.Number of initiatives implemented, under negotiation and identified to promote clean technology, energy efficiency and renewable energy.

Expected Output(s)/Indicator(s): A 30 MW plant established(CP outcomes linked to the SRF/MYFF goal and service line)

Implementing partner: Ministry for the Foreign Investment and (Designated Institution / Executing agency) Economic Collaboration (MINVEC)

Other Partners: Ministry of Sugar Industry (MINAZ)

Agreed by (Government): _____________________________________________________________

Agreed by (UNDP): ___________________________________________________________________

56

Budget: GEF: $ 11,484,480

Allocated resources: GEF: 11,484,480 Other:GoC: 61,855,850

Program Period: 2003 - 2007Program Component: Goal 3. Energy and Environment for Sustainable DevelopmentProject Title: Cogeneration of Electricity and Steam

using Sugarcane Bagasse and TrashProject ID: _________________Project Duration: 5 yearsManagement Arrangement: NEX

ANNEX I Government Endorsement Letter of Approved Project Brief

57

ANNEX II Outline Specification of Demonstration Plant

A1. BoilerBi-drum type water tube boiler with spreader stoker travelling grate

Maximum Continuous Rating (MCR) 175 t/hPeak Steam Generation (0.5h per 24 h) 10 % of MCRPressure at superheater outlet 68 BarTemperature at superheater outlet 485 o CEfficiency 69 %

A.2 TurbogeneratorExtraction condensing steam turbine with one bleed coupled with three-phase synchronous generator

PERIODZAFRA NO ZAFRA

Power Output kW 30000 25000Live Steam:PressureTemperatureMass flow

baro Ct/h

65480170

65480104.

Extraction:PressureTemperatureMass flow

baro Ct/h

3.46165148,5

3.4616521.2

Exhaust:PressureMass flow

bart/h

0.1122

0.1181

Generator:Voltage (60Hz)Power Factor

kV-

13.80.85

13.80.85

B. Other Plant Items

B.1 Electrostatic precipitatorB.2 Boiler feed water pumpsB.3 Pipework, insulation and reducersB.4 Condensate pumpsB.5 Air compressorsB.6 Deaerator and transfer pumpsB.7 Wet cell cooling tower with forced ventilationB.8 Cooling water circulation pumpsB.9 Cooling water auxiliary pumpsB.10 Demineralization plantB.11 25 ton capacity traveling craneB.12 Fire extinguisher pumps (electric and diesel)B.13Electrical Equipment:13.8kV Generator distribution panels13.8/4.16kV Power plant internal distribution panels13.8/4.16kV Sugar factory distribution panels13.8/4.16kV Sugar mill distribution panelsB.14 Biomass storage system and handlingB.15 Trash collection, preparation and handling systemB.16 Effluents treatment facilities

58

ANNEX III Framework for the Application of GEF Funds

In addition to supporting specific project components and activities, GEF will provide support to the financing of the IPP cogeneration plant and its subsequent replication in order to reduce the upfront investment costs and mitigate the risks associated with the application of this technology for the first time in Cuba. This will be achieved through two investment and replication facilitation mechanisms as described below and illustrated diagrammatically on Figure 1.

Investment Facilitation Mechanism (IFM)

As the first step, GEF will provide the sum of US$ 7,500,000 towards the financing of the demonstration plant. This funding will be applied in such a way as to facilitate the financing of the EPC contract for the IPP demonstration plant.

It is envisaged that this initial GEF contribution will essentially become an interest free loan from MINAZ to the IPP to be repaid to MINAZ as and when the IPP has paid off the demonstration plant borrowing. At that time, the IPP will start to repay to MINAZ according to a schedule to be agreed when the terms of the demonstration plant loan financing are finalized. MINAZ will then be required to contribute these funds to an IFM with the objective of supporting the financing of replication projects.

Since the initial GEF contribution will be an essential component of the demonstration plant financing, it will be necessary to agree the terms of establishment and operation of the IFM as a precondition to signing of the EPC contract. However, the IFM itself need not be established until the IPP is generating sufficient revenue from energy sales to generate an operating surplus that will enable it to contribute to this mechanism.

Replication Facilitation Mechanism (RFM)

The objective of the RFM is to kick-start the replication of the demonstration project through the financing of feasibility studies implemented by the joint venture between MINAZ and the EPC contractor.

The financing of the RFM will comprise contributions, each of value US$ 100,000 from the GEF and MINAZ. A complementary contribution would be sought from the EPC contractor during the negotiation of the Joint Venture agreement. These studies will focus upon those projects identified by MINAZ as priority projects, with the benefit of operating experience from IPP demonstration project.

The RFM is envisaged as but one component of a sustained replication initiative to be maintained by MINAZ over the long term. Other components of this longer-term strategy are outlined below:

(i) The operating experience derived from the demonstration plant will be disseminated via a series of workshops, seminars and site visits for the benefit of MINAZ management and operating staff from other sugar factories where there is potential for replication as

well as for potential investors and foreign joint venture partners with an interest in participation in the replication program.

(ii) In addition to building upon the experience derived from the demonstration project, MINAZ will also monitor developments internationally in the field of sugar biomass cogeneration so that the replication program benefits from the latest operating experience with emerging technologies such as gasification.

(iii) A further important component of the replication initiative will be the enhancement of indigenous design and manufacturing capability. Based initially on the joint-venture with the demonstration plant EPC contractor, this process will aim to lead over time to a situation in which the replica projects are designed and built with minimal foreign input. Not only will this significantly reduce the cost of new generating capacity, but also it will place Cuba in a position to export skills and products to other sugar producing countries.

In working with the demonstration plant EPC contractor and in the subsequent operating phase, MINAZ will liaise with Cuban manufacturing and contracting entities to identify and study those components of the cogeneration plant and related equipment that lend themselves most readily to local manufacture. Where appropriate, local entities will be encouraged to form partnerships or strategic alliances with foreign manufacturers for technology transfer and local manufacture under license.

Figure 1: Structure and Operation of the IFM (1a-5a) and RFM (1b-4b)

Energy Sales 2a Loan POWER PURCHASE AGREEMENT 1a 1b Energy Revenue (US$) 3a Repayment GOC / MINAZ

2b

3b 4a

5a 4b

GEF

Investment Facilitation Mechanism

Replica Projects(Implementation)

UNEIPP

Replication Facilitation Mechanism

Replication Studies

ANNEX IV Capital Cost Estimate for Demonstration Plant

ITEM 

Amount(US$ millions)

EST cogeneration plant-Supply 33.30CEST cogeneration plant-Erection 5.46Plant Spares 0.41Bagasse Bulk Store 4.14Trash handling and collection system 1.30Plant water supply 0.38Effluent treatment 0.15Miscellaneous small equipment 0.62Offices and office equipment 0.10Grid connection  1.11Sub-total  46.97Access roads and landscaping 0.15Working capital 0.67Insurances 0.23Electricity supply during construction 0.09Net Total 48.11Contingencies 10% 4.81Financing costs 4.80Total 57.72

ANNEX V Biomass Handling and Storage System Description

The biomass (bagasse and trash) produced by the sugar mill during the crushing season is transported to the steam boiler by a drag conveyor, where some of it is fed directly to the boiler furnace to be consumed immediately as fuel.

The remainder of the biomass goes to covered temporary bulk storage. This storage has a retention time of 4 -5 hours and from it there is a constant recirculation flow, by belt conveyor through a continuous weigher, to the boiler furnace, where it is added in measured quantity to the biomass coming direct from the sugar mill. The addition of biomass from temporary storage is to ensure adequate and continuous fuel supply to the boiler by compensating for variations in the flow of biomass coming from the sugar mill.

When the temporary covered storage is full, the excess biomass is carried by a belt conveyor to the bulk storage area where it is added to the biomass stockpile by bulldozers and other equipment for consumption outside the crushing season. The bulk storage stockpile is not covered and open to the elements.

ANNEX VI Sugar Cane Trash Handling System Description

The sugar cane trash for use as fuel comes from two sources:

Trash removed at drying stations in the fields Trash left on the ground in the harvested areas

The function of the cane harvesters is to cut the cane in the field, clean it of leaves and soil and load it into lorries. These lorries then transport the cane to the drying stations, where the trash that remains attached to the cane is separated.

The remainder of the trash that is present when the cane is cut remains on the ground in the harvested areas. This forms a covering that protects the soil beneath. However, there are certain areas where the soil characteristics are such that that this trash covering can be removed. These areas will be stripped of trash to supply additional fuel for the cogeneration plant. Cane Drying Stations

The collection and preparation of trash for use as fuel begins at the cane drying stations..

The trash is deposited on the ground surrounding the drying station where it is stacked and hauled by tractors to the solar drying area. The trash remains in this area for two to three days, over which the moisture content is reduced to about 40%. When is has reached the desired moisture content it is transported to the fuel preparation center.

The preparation center comprises a transorter feeding two systems of multiple cutters connected in series. These multiple cutters chop the trash to a particle size similar to that of the bagasse. From here it is transported to the plant to be mixed with the bagasse coming out of the sugar mill. Trash deposited in the harvested areas

The trash left by the cane harvesters on the ground is gathered together in the areas between the furrows by a tractor drawn rake in preparation for the next operation.

A baling machine picks up the trash and forms it into bales. These are left on the ground and allowed to dry for a few days, then collected by lorries and transferred to the preparation center. Here the baled trash is chopped and transported for blending with material coming from the biomass store.

ANNEX VII Hector Molina Sugar Cane Production Program

The sugar cane production program for the Hector Molina sugar mill is summarized below.

Sugar Cane Production Program for Hector Molina

Company2006 2007 2008

Area(ha)

Yield (%)

Production(tons)

Area(ha)

Yield (%)

Production(tons)

Area(ha)

Yield (%)

Production(tons)

H. Molina 11,967 34.0 406,885 10,104 39.0 364,878 10,857 45.0 488,565G.A. Mañalich 4,676 32.0 149,642 4,983 40.3 200,817 4,320 45.0 194,400

Total 16,643 33.4 556,527 15,087 37.5 565,695 15,177 45.0 682,965

Company2009 2010 2011

Area(ha)

Yield (%)

Production(tons)

Area(ha)

Yield (%)

Production(tons)

Area(ha)

Yield (%)

Production(tons)

H. Molina 10,,800 52.0 561,600 10,800 60.0 648,000 10,800 68.0 734,400G.A.

Mañalich4,320 51.0 220,320 4,320 59.0 254,880 4,320 66.0 285,120

Total 15,120 51.7 781,920 15,120 59.7 902,880 15,120 67.4 1019,520

Source:MINAZ

Company2012 2013

Area (ha)

Yield (%)

Production(tons)

Area (ha)

Yield (%)

Production(tons)

H. Molina 10,800 76.0 820,800 10,800 80.0 864,000G.A. Mañalich

4,320 74.0 319,680 4,320 76.0 328,320

Total 12,120 75.4 1,140,480 15,120 78.8 1,192,320

ANNEX VIII Monitoring and Evaluation Plan

Project monitoring and evaluation will be conducted in accordance with established UNDP and GEF procedures. The Logical Framework Matrix in Section II of the Project Document provides impact indicators for Project implementation along with their corresponding means of verification. These will form the basis on which the Project's Monitoring and Evaluation system will be built.

This Annex includes: (i) a detailed explanation of the monitoring and reporting system for the Project; (ii) a presentation of the evaluation system; and (iii) a matrix presenting the workplan and the budget for M&E section.

I. MONITORING AND REPORTING

A. Project Inception Phase

The PSC will conduct an inception workshop with the key stakeholders responsible for Project management and implementation at the commencement of the Project with the aim of assisting the Project team to understand and take ownership of the Project’s goals and objectives, as well as finalize preparation of the Project's first annual work plan on the basis of the Project's log frame matrix.

The key objectives of the Inception Workshop are to: review the logframe (indicators, means of verification, assumptions), imparting

additional detail as needed; finalize the Annual Work Plan (AWP) with precise and measurable performance

indicators, and in a manner consistent with the expected outcomes for the Project; develop specific targets for the first year implementation progress indicators; introduce Project staff with the representatives of the UNDP Country Office (UNDP

CO) and the Regional Coordinating Unit (RCU); detail the roles, support services and complementary responsibilities of UNDP-CO and

RCU staff vis à vis the Project team; provide a detailed overview of UNDP-GEF reporting and Monitoring and Evaluation

(M&E) requirements, with particular emphasis on the annual PIR and related documentation, the Annual Project Report (APR), Tripartite Review Meetings, as well as mid-term and final evaluations;

inform the Project team on UNDP Project related budgetary planning, budget reviews, and mandatory budget rephasings;

present the ToR for Project staff and decision-making structures in order to clarify each party’s roles, functions, and responsibilities, including reporting and communication lines, and conflict resolution mechanisms;

B. Monitoring responsibilities and events

The PSC in consultation with relevant stakeholders will develop a detailed schedule of Project reviews meetings, which will be incorporated in the Project Inception Report. The schedule will include: (i) tentative time frames for Tripartite Reviews, PSC Meetings, (or relevant advisory and/or coordination mechanisms) and (ii) Project related M&E activities.

Day to day monitoring of implementation progress will be the responsibility of the Project Coordinator, based on the Project's AWP and its indicators. The PSC will inform the UNDP-CO of any delays or difficulties faced during implementation so that the appropriate support or corrective measures can be adopted in a timely and remedial fashion. Measurement of impact indicators related to global benefits will occur according to the schedules defined in the Inception Workshop . Measurement of these indicators will be undertaken through subcontracts with relevant institutions or through specific studies that are to form part of the projects activities.

Periodic monitoring of implementation progress will be undertaken by the UNDP-CO through semi annual meetings with the PSC, or more frequently as deemed necessary. This will allow parties to take stock and to troubleshoot any problems pertaining to the Project in a timely fashion to ensure smooth implementation of Project activities. UNDP CO and UNDP-GEF RCU as appropriate, will conduct yearly visits to the Hector Molina sugar processing plant to assess first hand Project progress. Any other member of the PSC can also accompany, as decided by the PSC. A Field Visit Report, prepared by the UNDP CO will be circulated no less than one month after the visit to the Project team, all PSC members, and UNDP-GEF.

Annual Monitoring will occur through the Tripartite Review (TPR). This is the highest policy-level meeting of the parties directly involved in the implementation of a Project. The Project will be subject to a TPR at least once every year. The first such meeting will be held within the first twelve months of the start of full implementation. The PSC will prepare an Annual Project Report (APR) and submit it to UNDP-CO and the UNDP-GEF RCU at least two weeks prior to the TPR for review and comments. The APR will be used as one of the basic documents for discussions in the TPR meeting. The PSC will present the APR to the TPR, highlighting policy issues and recommendations for the decision of the TPR participants and will inform the participants of any agreement reached by stakeholders during the APR preparation on how to resolve operational issues. Separate reviews of each Project component may also be conducted if necessary. The TPR has the authority to suspend disbursement if Project performance benchmarks (developed at the inception workshop) are not met.

Terminal Tripartite Review (TTR) is held in the last month of Project operations. The PSC is responsible for preparing the Terminal Report and submitting it to UNDP-CO and UNDP-GEF RCU. It shall be prepared in draft at least 2 months in advance of the TTR in order to allow review, and will serve as the basis for its discussions. The TTR considers the implementation of the Project as a whole, paying particular attention to whether the Project has achieved its stated objectives and contributed to the broader environmental objective. It decides whether any actions are still necessary, particularly related to sustainability of results, and acts as a vehicle through which lessons learnt can be captured to feed into other projects under implementation or formulation.

C. Project Monitoring Reporting

The Project Coordinator in conjunction with the UNDP-GEF will be responsible for the preparation and submission of the following reports that form part of the monitoring process:

Inception Report (IR) - will be prepared immediately following the Inception Workshop. It will include a detailed First Year AWP divided quarterly detailing the activities and progress indicators that will guide implementation during that year. This Work Plan would include the dates of specific field visits, support missions from the UNDP-CO or the RCU or consultants, as well as the timing of meetings of the Project's decision making structures. The Report will also include the detailed Project budget for the first full year of implementation, prepared on the basis of the AWP, and including any M&E requirements to effectively measure Project performance during each 12 month period. The Inception Report will include a more detailed narrative on the institutional roles, responsibilities, coordinating actions and feedback mechanisms of Project related partners. In addition, a section will be included on progress to date on Project establishment and start-up activities and an update of any changed external conditions that may effect Project implementation. The finalized report will be distributed to the UNDP CO and UNDP-GEF RCU and after that to the Project counterparts who will be given a period of one calendar month in which to respond with comments or queries.

Annual Project Report (APR) - is a UNDP requirement and part of UNDP CO central oversight, monitoring and Project management. It is a self -assessment report by Project management to the CO and provides input to the UNDP CO’s reporting process, as well as forming a key input to the TPR. An APR will be prepared on an annual basis, prior to the TPR, to reflect progress achieved in meeting the Project's AWP and assess performance of the Project in contributing to intended outcomes through outputs and partnership work. The format of the APR should include:

An analysis of Project performance over the reporting period, including outputs produced and, where possible, information on the status of the outcome;

The constraints experienced in the progress towards results and the reasons for these; The three (at most) major constraints to achievement of results; Expenditure reports; Lessons learned; Clear recommendations for future orientation in addressing key problems in lack of

progress.

Project Implementation Review (PIR)- is an annual monitoring process mandated by the GEF. It has become an essential management and monitoring tool for Project managers and offers the main vehicle for extracting lessons from ongoing projects. Once the Project has been under implementation for a year, a PIR must be completed by the CO together with the Project. The PIR can be prepared any time during the year and ideally prior to the TPR. The PIR should then be discussed in the TPR so that the result would be a PIR that has been agreed upon by the Project, the executing agency, UNDP CO and the RCU. The individual PIR are collected, reviewed and analyzed by the RCU prior to sending them to the focal area clusters at the UNDP/GEF HQ. The focal area clusters supported by the UNDP/GEF M&E Unit analyze the PIRs by focal area, theme and region for common issues/results and lessons. The focal area PIRs are then discussed in the GEF Interagency Focal Area Task Forces in or around November each year and, based on its findings, consolidated reports by focal area are collated by the GEF Independent M&E Unit.

Quarterly Progress Reports - Short reports outlining main updates in Project progress will be provided quarterly to the local UNDP CO and the RCU by the PSC. The format will be provided.

Periodic Thematic Reports - As and when called for by UNDP, UNDP-GEF or the Implementing Partner, the PSC will prepare Specific Thematic Reports, focusing on issues or areas of activity. The request for a Thematic Report will be provided to the Project team in written form by UNDP and will clearly state the issue or activities that need to be reported on. These reports can be used as a form of lessons learnt exercise, specific oversight in key areas, or as troubleshooting exercises to evaluate and overcome obstacles and difficulties encountered. UNDP is requested to minimize these requests, and when necessary, will allow reasonable timeframes for their preparation by the team;

Project Terminal Report - During the last three months of the Project, the Project team will prepare the Project Terminal Report. This comprehensive report will summarize all activities, achievements and outputs of the Project, lessons learnt, objectives met, or not achieved structures and systems implemented, etc. and will be the definitive statement of the Project’s activities during its lifetime. It will also lay out recommendations for any further steps that may need to be taken to ensure sustainability and replicability of the Project’s activities.

Technical Reports - Technical Reports are detailed documents covering specific areas of analysis or technical specializations within the overall Project. As part of the Inception Report, the Project team will prepare a draft Reports List, detailing the technical reports that are expected to be prepared on key areas of activity during the course of the Project, and tentative due dates. Where necessary this Reports List will be revised and updated, and included in subsequent APRs. Technical Reports may also be prepared by external consultants and should be comprehensive, specialized analyses of clearly defined areas within the framework of the Project. These technical reports will represent, as appropriate, the Project's substantive contribution to specific areas, and will be used in efforts to disseminate relevant information and best practices at local, national and international levels.

Project Publications - Project Publications will form a key method of crystallizing and disseminating the results and achievements of the Project. These publications may be scientific or informational texts on the activities and achievements of the Project, in the form of journal articles, multimedia publications, etc. These publications can be based on Technical Reports, depending upon the relevance, scientific worth, etc. of these Reports, or may be summaries or compilations of a series of Technical Reports and other research. The Project team will determine if any of the Technical Reports merit formal publication, and will also (in consultation with UNDP, the government and other relevant stakeholder groups) plan and produce these Publications in a consistent and recognizable format. Project resources will need to be defined and allocated for these activities as appropriate and in a manner commensurate with the Project's budget.

II. INDEPENDENT EVALUATION

The Project will be subjected to at least two independent external evaluations as follows:

Mid-term Evaluation - will be undertaken at the end of the third year of implementation. The Mid-Term Evaluation will determine progress being made towards the achievement of outcomes and will identify course correction if needed. It will focus on the effectiveness, efficiency and timeliness of Project implementation; will highlight issues requiring decisions and actions; and will present initial lessons learned about Project design, implementation and management. Findings of this review will be incorporated as recommendations for enhanced implementation during the final half of the Project’s term. The organization, Terms of Reference (TOR) and timing of the mid-term evaluation will be decided after consultation between the parties to the Project document. The TOR for this evaluation will be prepared by the UNDPCO with guidance from the RCU and UNDP-GEF.

Final Evaluation - will take place three months prior to the terminal tripartite review meeting, and will focus on the same issues as the mid-term evaluation. The final evaluation will also look at impact and sustainability of results, including the contribution to capacity development and the achievement of global environmental goals. The Final Evaluation should also provide recommendations for follow-up activities. The TOR for this evaluation will be prepared by the UNDP CO based on guidance from the Regional Coordinating Unit and UNDP-GEF.

Audit Clause

The GOC will provide the UNDP Resident Representative with certified periodic financial statements, and with an annual audit of the financial statements relating to the status of UNDP (including GEF) funds according to the established procedures set out in the Programming and Finance manuals. The Audit will be conducted by the legally recognized auditor of the Government, or by a commercial auditor engaged by the Government.

MONITORING AND EVALUATION WORKPLAN AND BUDGET

Table 9: Indicative Monitoring and Evaluation Work plan and corresponding budget for GEF contribution

Type of M&E activity Responsible Parties Budget (US$)5 Time frame

Inception Workshop (IW) o Project Director o UNDP CO o UNDP GEF

5,000 Within first two months of Project start up

Inception Report o Project Team o UNDP CO

None Immediately following IW

Measurement of Means of Verification for Project Purpose Indicators

o Project Director will oversee the hiring of specific studies and institutions, and delegate responsibilities to relevant team members

8,000 Start, mid and end of Project

Measurement of Means of Verification for Project Progress and Performance (measured on an annual basis) + workshop for dissemination

o Oversight by Project GEF Technical Advisor and Project Director

o Measurements by local partners

12,000 Annually prior to APR/PIR and to the definition of annual work plans

APR and PIR o Project Team o UNDP-CO o UNDP-GEF

None Annually

TPR and TPR report o Government Counterparts o UNDP CO o Project team UNDP-GEF RCU

None Every year, upon receipt of APR

Steering Committee Meetings o Project Directoro UNDP CO

0 Following Project IW and subsequently at least once a year

Periodic status reports o Project team 10,000 To be determined by Project team and UNDP CO

Technical reports o Project team o Hired consultants as needed

12,000 To be determined by Project Team and UNDP-CO

Mid-term External Evaluation o Project team o UNDP- CO o UNDP-GEF RCU o External Consultants (i.e.

evaluation team)

36,000 At the mid-point of Project implementation.

Final External Evaluation o Project team, o UNDP-CO o UNDP-GEF RCU o External Consultants (i.e.

evaluation team)

36,000 At the end of Project implementation

\Terminal Report o Project team o UNDP-CO o External Consultant

36000 At least one month before the end of the Project

Lessons learned o Project team o UNDP-GEF RCU

25,000 At mid and end of project

Audit o UNDP-CO o Project team

20,000 At mid and end of projecr

TOTAL COST Excluding Project team staff time and UNDP staff and travel expenses

200,000

5 Excluding Project team Staff time and GoC contribution of $200,000.

ANNEX IX PPA Draft

UNEMINBASELECTRICAL ENERGY PURCHASE AGREEMENT

UNE – HM

OCTOBER 2005

CONTENTS

SECTION # 1: SUBJECT MATTER SECTION # 2: DEFINITIONSSECTION # 3 TERM AND ENERGY SUPPLY OBLIGATIONSSECTION # 4: PRICE OF ENERGYSECTION # 5: BILLING AND PAYMENTSECTION # 6: COORDINATION WITH THE PURCHASER AND DISPATCHINGSECTION # 7: DESIGNATED REPRESENTATIVESSECTION # 8: INTERCONNECTION FACILITIESSECTION # 9: METERINGSECTION # 10: FORCE MAJEURESECTION # 11: CLAIMSSECTION # 12: ARBITRATIONSECTION # 13: FINAL DISPOSITIONS

ELECTRICAL ENERGY PURCHASE AGREEMENT

The Cuban electricity supply utility Union Electrica (UNE), hereafter and in the context of this Agreement referred to as the “Purchaser”

The Independent Power Producer (IPP) hereinafter referred to as the “Supplier”.

BOTH PARTIES, acknowledging the legal capacity in which they appear, whose competence is established hereby, agree to execute this Agreement under the following terms and conditions:

SECTION ISUBJECT MATTER

1.1 Under this Agreement, the Purchaser agrees to purchase from the Supplier all the electricity generated by the cogeneration facilities of the “Basic Power Cogeneration Area of Hector Molina Sugar Mill” under the terms and conditions stated herein below.

SECTION IIDEFINITIONS

2.1 Wherever the following terms appear in this Agreement, whether in singular or in plural, in the past, present or future tense, they shall have the meanings stated herein below, unless they have other significance in the context in which they are used:

2.2 Laws of the Republic of Cuba: means the laws, decree-laws, executive orders and regulations in force in Cuba.

2.3 SEN: means National Electric System.

2.4 Delivery Point: means the physical point where the 110 kV transformers of the Supplier are connected to the 110 kV transmission line from the location of the cogeneration facilities to the interconnection point in the SEN substation in San Nicolas de Bari.

2.5 Interconnection facilities: means the 110kV transmission line from the location of the

cogeneration facilities of the Supplier to the interconnection point in the SEN substation in San Nicolas de Bari.

2.6 Agreement: means this Agreement executed between the Purchaser (UNE) and the Supplier (HM) for the purchase of electricity generated by the cogeneration facilities of the “Basic Power Generation Area Hector Molina Sugar Mill”.

2.7 Appointed Representatives: means the representatives appointed by the Purchaser and the Supplier, as detailed in Section 6.1.

2.8 Energy: means the electricity delivered by the Supplier to the Purchaser at the Delivery Point.

2.9 Rules and Procedures of the Electrical Industry: means the rules and procedures of the electrical industry applicable in Cuba regarding the exploitation and security conditions, regulations, codes and engineering standards, including the recommendations of the manufacturers of equipment.

2.10 Scheduled interruption: means any period of interruption agreed between the Purchaser and the Supplier, in accordance with Section 5.2, to perform maintenance and inspection operations according to the specifications of the manufacturers of equipment and to the Rules and Procedures of the Electrical Industry.

2.11 Non-scheduled interruption: means an event or condition substantially affecting the possibility of the Purchaser or the Supplier of maintaining a continuous, sufficient and safe electricity supply according to the Rules and Procedures of the Electrical Industry in compliance with the existing customers service rules established by the Purchaser, or threatening the safety of the Supplier’s Facilities, of the SEN or of the Purchaser or Supplier’s respective staff.

2.12 Dispatch: means the National Load Dispatching facility of the SEN.

2.13 Installations: means the cogeneration plant of the Supplier and the interconnection installations of the SEN.

SECTION IIITERM AND ENERGY SUPPLY OBLIGATIONS

3.1 The term of this Agreement shall commence on the date of signature and shall continue in effect for a period of fifteen (15) years from the date of commencement of commercial operation of the Installations, such commencement date being mutually agreed by the Parties in writing, unless it is terminated earlier pursuant to the provisions of this Agreement. The Purchaser shall not object unreasonably to an extension of the term by a further five (5) years should the Supplier offer such an extension.

3.2 This Agreement may be terminated or its term may be extended by mutual Agreement of the Parties.

3.3 The Supplier shall supply electrical energy to the Purchaser for the term of this Agreement in the following amounts measured at the Delivery Point:

Maximum amount: ---------------GWh/y

SECTION IVPRICE OF ENERGY

4.1 The selling price of Energy to the Purchaser by the Supplier shall be:

At the rate of ------------- cents and ----------- tenths of a cent of Convertible Cuban Pesos (CUC) per kWh until such time as this rate may be varied according to Clause 4.2 below.

4.2 The foregoing rate shall be subject to annual review during the full term of the Agreement to reflect changes in operating costs, and may be adjusted based on the following:

(To be determined)

4.3 At any time during the life of this Agreement, the Purchaser may buy from the Supplier any amount of Power available in excess to the amount contracted hereunder, and the price of such purchase shall be equal to the above-mentioned, as applicable.

4.4 During the life of this Agreement, the Supplier may buy electricity from the Purchaser at the Delivery Point at the Supplier’s Facilities under the same terms as appear in this Agreement. If this occurs, the month-end amount of energy supplied shall be the net amount provided by the Supplier to the Purchaser during the month.

SECTION VBILLING AND PAYMENT

5.1 The Purchaser shall make a monthly payment in Convertible Cuban Pesos (CUC) for the Energy contracted to the Supplier and delivered by the latter under this Agreement during the preceding month, within sixty (60) days from the submission and acceptance of the invoice.

5.2 The Supplier shall submit a monthly invoice for the Power contracted and sold under this Agreement for the preceding month, which shall be based on the delivery amounts and the prices agreed. The Purchaser shall have three (3) days to examine the invoice and order its payment.

5.3 In the event of disagreement over the amounts invoiced, the Purchaser shall pay that part of the amount invoiced that is not in dispute. The amount in dispute shall be notify to the Supplier and shall be submitted for the consideration of the Appointed Representatives, who will have a maximum of fifteen (15) days to solve the disagreement.

5.4 If this Agreement is terminated in accordance with the terms and conditions hereof, both Parties shall have ten (10) days as from the termination date to submit a final statement showing the amounts outstanding, which shall be settled within the following thirty (30) days.

SECTION VICOORDINATION WITH THE PURCHASER AND WITH DISPATCH

6.1 Cooperation

a) To coordinate the operation of the Installations with the Purchaser’s Energy needs and the requirements of Dispatch, the Supplier shall communicate daily with the Purchaser and with Dispatch to establish the operating capacity of each of the Installations, the Purchaser’s Energy needs and any other issue affecting the SEN and that may require an increase or decrease in the amount of Energy delivered under this Agreement.

b) The Supplier and the Purchaser shall co-operate to the maximum possible extent at all times in order to regulate the Energy needs of the Purchaser and of Dispatch, with the objective of maximising the delivery of Power to the Purchaser under this Agreement.

c) The operating personnel and the operation itself of the Installations shall be governed by the operating procedures of the National Electric System of the Republic of Cuba (NRIB Standard 590).

6.2 Scheduled Interruptions a) In a period of thirty (30) days from the start-up of the commercial operation of the

Installations, the Supplier shall present to the Purchaser in writing its proposals for Scheduled Interruptions during the first year of operation, as well as for the subsequent years, together with the planned duration for each Scheduled Interruption.

b) Within a period of fourteen (14) days from the reception of the schedule of Interruptions proposed by the Supplier, the Purchaser shall notify the Supplier in writing whether or not it agrees (in the event of disagreement this must be based on justified reasons) with the scheduling and duration of such Scheduled Interruptions. If the Purchaser does not agree with one or more Scheduled Interruptions proposed by the Supplier, the Parties hereto shall meet as soon as possible and, in good faith, shall coordinate the Scheduled Interruptions of the Supplier with the Purchaser’s energy needs. If the timing of any of the Supplier’s Scheduled Interruptions shall be amended, the modified periods correspond as closely as possible to the periods originally requested by the Supplier and shall be of the same duration as originally requested.

c) Once the Scheduled Interruptions are agreed, the Supplier shall use its best endeavours to perform maintenance and inspection operations during the scheduled periods.

6.3 Non-scheduled Interruptions

In the event of a Non-scheduled Interruption, the Supplier or the Purchaser, as applicable, shall notify as soon as possible the other Party of the circumstances that have caused the Non-scheduled Interruption and its estimated duration. The Party that suffers a Non-scheduled Interruption shall use its best endeavours and act with due diligence to eliminate the conditions that caused the Non-scheduled Interruption, and the other Party shall cooperate to the maximum extent possible.

6.4 Emergency

If as a result of an emergency, other generating stations cannot supply the SEN, the Supplier, at the request of the Purchaser or Dispatch, shall supply Energy at the maximum capacity of the Installations of -------------------------. If such an Emergency coincides with a Scheduled Interruption, the Supplier shall make all reasonable efforts to reschedule such Scheduled Interruption or to accelerate the maintenance tasks in order to re-establish the supply of Energy as soon as possible. However, nothing in this Section obliges the Supplier to operate any of the Installations in such a way as to endanger the safety of such Installations and that of its staff.

SECTION VIIAPPOINTED REPRESENTATIVES

7.1 Both the Purchaser and the Supplier shall appoint in writing a person who shall act as representative of each Party in connection with this Agreement. The functions to be performed by the Appointed Representative shall be the following:

ii) coordination of construction of the Interconnection Installations;

iii) coordination in the event of Force Majeure or other Non-scheduled Interruptions;

iii) coordination of Scheduled Interruptions;

iv) examination of annual, weekly and daily forecasts of electricity generation at the Installations;

v) review and development of operating procedures for the maintenance and use of the Interconnection Installations

vi) coordination of emergency plans prepared by the Purchaser for recovery from a local or general interruption of electric generation.

vii) analysis and consideration of safety, metering and control procedures in the Installations;

viii) analysis and resolution of invoices in dispute according to Section IV;

ix) supervision of the recalibration of meters used for the metering of energy sold from the Installations;

x) any other matter of mutual interest in relation to the operation of the Installations, as well as the operation of the SEN.

7.2 The Appointed Representatives shall meet, as necessary, to prepare an annual forecast of electricity production of each of the Installations for the following year. This forecast shall be completed and delivered to the Parties hereto sixty (60) days prior to the beginning of the year under analysis.

7.3 Any matters not solved by the Appointed Representatives by means of amicable negotiation shall be submitted for further consideration to the highest authorities of the Purchaser and the Supplier. If the Purchaser and the Supplier cannot come to an agreement within seven (7) days or such other period as they may agree, either of the Parties hereto may submit the case to Arbitration in compliance with Section 11.2.

SECTION VIIIINTERCONNECTION INSTALLATIONS

8.1 The Supplier shall procure, at its own expense, the Interconnection Installations accord-ing to the Rules and Procedures of the Electrical Industry and in consultation with the Purchaser.

8.2 The Purchaser shall install and erect the Installations, at its own expense, and provide the necessary rights to the land on which the interconnection installations shall be built.

8.3 Upon commencement of commercial operations of the IPP generation plant, the Supplier shall transfer the ownership of the related interconnection installations to the Purchaser, free of charge.

8.4 Subsequent to such transfer, the interconnection installations shall be considered part of the SEN and the Purchaser, at its own expense, shall be responsible for the operation and maintenance of the transferred Interconnection Installations, according to the Rules and Procedures of the Electrical Industry.

SECTION IXMETERING

9.1 Metering system

In the Installations of ---------, the Supplier shall assemble redundant (double) metering systems with a precision of approximately zero point five per cent (+0.5%), which shall be placed in the high-tension side of the 110 kV transformer located at the cogeneration site of the Supplier.

9.2 Calibration

(a) In order to guarantee the precision of the metering system, the Supplier shall test and calibrate at its own expense every system at least once every one hundred and eighty (180) days and at such additional times as may be required using its own calibration equipment. The Supplier shall notify the Purchaser of the date upon which such calibration tests shall be made, giving at least forty-eight (48) hours’ notice. A Representative of the Purchaser shall be entitled to be present during such tests. Furthermore, the Purchaser may request additional calibration tests at any time, subject to prior notification to the Supplier with at least forty-eight (48) hours’ notice.

(b) If a calibration test shows that the metering system under analysis fails to meet the precision limits of plus or minus zero point five per cent (+0.5%) or that the measurement system is working ineffectively, the Supplier shall immediately replace the defective meter by another ( the Supplier shall keep spare meters in stock at all times), and at its own expense, repair or replace those meters or other defective components of the metering system.

If a calibration test requested by the Purchaser shows that the measurement system under analysis is working effectively within the prescribed precision limits, the expenses related to such test shall be borne by the Purchaser.

Once a calibration test shows that the measurement system under analysis is working effectively within the prescribed precision limits, the meters shall be sealed in the presence of the Purchaser’s representative, unless the Purchaser decides not to attend the calibration test. If the meters or other components of the measurement system need to be repaired, a calibration test shall be made at the Supplier’s expense to attest that the measurement system is working within the established precision limits, before sealing the meters.

9.3 Reading of the meters

(a) Procedures

On the last day of every month, the Purchaser and the Supplier shall jointly read the meters located in each of the Installations to determine the amount of Energy delivered to the Purchaser during the preceding month. The result of each reading shall be stated in writing and shall be delivered to each of the Parties. Furthermore, the Supplier shall daily inform the Purchaser and the Dispatch of the reading of the meters for the previous twenty-four (24) hours. A copy of such reading of the meters shall be delivered to each of the Parties.

(b) Assumed precision

It shall be considered that the meters and other components of the measurement system are working within the prescribed precision limits except otherwise evidenced by a calibration test. However, there shall not be retroactive readjustments regarding the amount of Energy delivered to the Purchaser as from the last

calibration test, since the parties hereto acknowledge that it might be impossible to determine the exact time at which the meter or other component started to work ineffectively after the last calibration.

(c) Test of measurement and calibration equipment

The precision of the Supplier’s measurement equipment used in the calibration tests established under this Agreement shall be proved and confirmed at least once a year by a qualified agency acceptable to both Parties. The cost of such tests shall be borne by the Supplier, who shall notify the Purchaser in writing of the date of such tests with at least fifteen (15) days’ notice, and the latter shall enjoy the right, at its own expense, of being present at the carrying out of such tests.

SECTION XFORCE MAJEURE

10.1 The Parties hereto shall be free from responsibility for the breach of their commitments when such breach is due to an unforeseeable or Force Majeure event. This shall mean any and all human or natural events arising after the signing of this Agreement beyond the Parties control, unforeseeable, or if foreseeable, unavoidable, that due to its nature it makes difficult to fulfil such obligations, whether totally or partially, after having been adopted all possible countermeasures. Payment obligations shall not be affected by any Force Majeure event or its consequences.

10.2 The Force Majeure may be totally or partially applicable, according to the circumstances, and in the event of being partially applicable, the responsibility relating to the partial Force Majeure event only shall be exempt, but not the remaining obligations assumed by the Parties to this Agreement.

10.3 The Party that invokes Force Majeure shall prove it, and within thirty (30) days shall inform the other Party, in writing and by certified notification, the nature, commencement and possible consequences of the circumstances that have arisen, and the causal and temporal relationship between them, as well as the delay caused in compliance with the Agreement, and their termination.

10.4 Force Majeure does not modify the terms and conditions of the Agreement, except for the delay that may be incurred as a consequence of the event. Consequently, the Party that invokes Force Majeure shall employ its best efforts to minimise the effects in order to resume the normal execution of the contractual obligations.

10.5 If the duration of the Force Majeure situation exceeds six (6) months, the Parties shall jointly examine the situation and the measures required for a solution, and shall agree any and all necessary measures, terms and conditions necessary to restore the situation to normal. This term could be extended for a further six (6) months; however, if the situation persists, the Parties shall have the power to terminate this Agreement.

SECTION XICLAIMS

11.1 Both Parties hereto enjoy the right to mutually claim for any breach of this Agreement.

11.2 All claims shall be made by letter with acknowledgement of receipt, submitted in the legal domicile of the Party against which the claim is made with documentary evidence attached thereto, within seven (7) days after the breach, and the date of filing of the claim shall be considered that of the acknowledgement of receipt of the letter in the office of the Party against which the claim is made.

11.3 The Party against which the claim has been filed shall examine the claim of the claiming Party and file an answer to such claim within ten (10) days as from the date set forth in Section 10.2.

11.4 The letter, which confirms the claim, shall include the following information:

(a) Section or contractual obligation not fulfilled; (b) Foundation of the claim;

(c) Objects of the claim, including the fulfilment of the obligation, repair of the damage, indemnification for damages and pecuniary sanction; and

(d) Proving documentation supporting such claim.

11.5 In the event of no answer in the above-mentioned term, the claiming Party shall be entitled to adopt the measures it deems necessary to eliminate the causes that originated the claim. The expenses derived from such measures shall be borne by the other Party, without such act of the claiming Party affecting the guarantee or freeing the claimed Party from its responsibilities.

SECTION XII

ARBITRATION

12.1 The Parties hereto shall fulfil this Agreement in good faith. Any dispute arising between the Parties during the execution or construction of this Agreement shall be solved by amicable negotiation.

12.2 If such negotiations fail and it is not possible to come to an agreement, the dispute shall be settled in accordance with the rules of the pertinent Popular Court in economic matters. The governing law shall be the Cuban Substantive Law, the jurisdiction to settle the dispute shall be Cuba, and the process shall be conducted in Spanish. The Parties hereto are bound to comply with the Judicial Decision issued to settle any dispute.

12.3 The request of intervention of the above-mentioned Court shall not be a reason for the non-compliance with the rest of the commitments agreed by the Parties hereunder.

SECTION XIIIFINAL PROVISIONS

13.1 Any addition or amendment to this Agreement shall only be valid if resulting from written document signed by both Parties.

13.2 Documents, mailing, delivery reports, commercial invoices, telex or fax transmissions, and any other communication that both Parties hereto serve in the execution of this Agreement shall be written not only in Spanish but also in English, unless otherwise provided in this Agreement.

13.3 The word “Days” used herein shall mean natural days. If the due date for the fulfilment of an obligation coincides with a non-working day, such fulfilment shall be extended until the subsequent working day.

13.4 All the documentation related to this Agreement served between the Parties prior to the subscription hereof shall be considered null and void as from the effective date of this Agreement, unless otherwise the effectiveness of those documents is specifically established under this Agreement.

13.5 Any and all notification served under this Agreement shall be considered as duly delivered if written and sent to the address mentioned hereinbelow and addressed to the appointed person:

By the Purchaser:UNE(insert details)

By the Supplier:The IPP(insert details)

This Agreement comprises thirteen (13) Sections.

This Agreement is executed in Havana, Cuba, on this ------- day of ---------------, in four (4) original counterparts with the same legal validity, in Spanish, of which two are for the Purchaser and two for the Supplier.

The Supplier ______________________________

The Purchase _______________________________

ANNEX X MINAZ Activities During the Period 2000 – 2005

Activity Cost (US$) Reference Institution

Year 2000Negotiations with the companies ENDESA and SIDEC for the creation of a Joint Venture company. Working group of the Cuban part: Dr. Paulino López, Engineer Jorge Luis Isaac, Dr. Jorge Muds, Atty. Thin Gustavo, Engineer Alicia Bernar, Engineer Humberto González, Ing Aldo Estrada, Atty. Ivan Oquendo, Atty. José Braulio

160,333.00 82 m-h of team work dedicated to the activity in 1999 and 2000

MINAZ, UNE, INEL, IPROYAZ,

E.A.HÉCTOR MOLINA

Design of the system of interconnection of the Plant of Cogeneration Héctor Molina and the electric Sub-station of the National Net at San Nicolás of Bari; Preliminary design of the Administrative Building; Valuation of the constructive cost

45,116.00Contract:105.475.1

INEL

Basic Engineering of Modifications the Cane Preparation and Tandem at E.A Héctor Molina

3,608.00 Invoice5681-00-

IPROYAZ

Design of the sugar mill modifications to diminish energy consumption at Hector Molina

29,865.00 Invoice5679-00

IPROYAZ

Proposal of Modifications to the Central Héctor Molina to diminish their steam consumption to 320 Kg /ton of milled cane; Milling Capacity 6900 t/d

121,830.00 88/00 ICINAZ

Analysis on the affectations of the Electric Power station of 40 MW to the design for increasing the milling capacity of Héctor Molina sugar mill

12,144.00 Invoice 248/00 IPROYAZ

Sub-total 366,032.00The following is a summary of the main activities undertaken by MINAZ during the preparatory phase of the Project in support of the implementation of this GEF - Full Size Project (FSP).

Activity Cost (US$) Reference Institution

Year 2001 Study of the Irrigation System for the Enterprise Hector Molina

31,238.00 Invoice 5740-01 IPROYAZ

Negotiations with CDC and NCC for the creation of a JV company; working Group of the Cuban part: Dr. Paulino López, Engineer Jorge Luis Isaac, Dr. Jorge Muds, Atty. Thin Gustavo, Engineer Alicia Bernar, Engineer Humberto González, Ing Aldo Estrada, Atty. Ivan Oquendo, Atty. José Braulio(Año 2001 and 2002)

60,192,00 29 m-h working by the working

group

MINAZ, UNE, INEL, IPROYAZ,

E.A. HÉCTOR MOLINA

Preliminary analysis for the Construction of the Thermoelectric; elaborated by the Agricultural division of E.A.Hector Molina 25,000.00

E.A HÉCTOR MOLINA

Pre-feasibility and feasibility Study of production of Energy Cane in the E.A. Héctor Molina

56,548.00 Invoice: 5809-01;5899 - 03

IPROYAZ-INICA

Sub-total 172,977.00

Year 2002 Feasibility Study of the annual sustained production 100,000 t of wood chips in the company Victoria of Girón of Cienega of Zapata for to the power production in Héctor Molina sugar mill, using as fuel - 2002 70,000.00

AGRICULTURE GROUP OF MOUNTAIN ENTERPRISES

Elaboration of the" Memorandum of Information of the Project" 2002 Cuban Working group: Dr. Paulino López, Engineer Jorge L. Isaac, Atty. Thin Gustavo, Engineer Humberto González ; Engineer Aldo Estrada, Engineer Francisco N. Polledo 5,917.00

2,75 m-h of the Expert Group

MINAZ,UNE,INEL,IPROYAZ, E.A.

HÉCTOR MOLINA

Bidding for selecting candidates to enter into detailed negotiations. Working group of the Cuban part: Dr. Paulino López, Engineer Jorge L. Isaac, Dr. Jorge Muds 5,307.00

2,25 m-h of the Expert Group

MINAZ, UNE

Sub-total 81,224.00

Activity Cost (US$) Reference Institution

Year 2003Request of tender for the Plant of Cogeneration Cap 30 MW Working group: Dr. Paulino López, Engineer Humberto González, Engineer Otto Rodríguez, Engineer Jorge L. Villafranca, Engineer Aldo Estrada 23,036.00

12 m-h of the Expert Group

MINAZ, IPROYAZ, E.A. HÉCTOR

MOLINA

Study of the Air quality at E.A. H. Molina and its relationship with the production of Energy from Biomass 43,357.53

ContractNo. 1G-CN-43-

03

GANMA

Design of the Sugar Cane Development Program for the milling capacity of 10,000 t/d 88,000.00

Invoice5926 - 03

IPROYAZ - INICA

Basic engineering for the implementation of a processing-plant for the Cane Straw for its use as fuel the Plant of Cogeneration Héctor Molina and Refurnishing of the Cane Cleaning Centers 22,207.00

Invoice VC/8503

ICINAZ

Preparation of request of tenders for the Plant of Cogeneration Héctor Molina Capacity 30 MW. Working group: Dr. Paulino López, Engineer Humberto González ; Engineer Aldo Estrada, Engineer Francisco N. Polledo; Lic Aismel Basabe, Engineer Alejandro Iznaga 23,036.00

12 m-h of the Expert Group

MINAZ, IPROYAZ, E.A. HÉCTOR

MOLINA, AZUIMPORT

Sub-Total 176,600.00

Activity Cost (US$) Reference Institution

Year 2004Compatibility among the Croppers of Cane CAMECO and the Thermoelectric using Biomass at E.A. Héctor Molina 8,460.00

Invoice101/2004

ICINAZ

Study of the Possibilities of the Tandem of the E.A. Héctor Molina and its possible modifications to mill ≤10,000 t/d or more maintaining its energy consumption 18,437.00

Invoice 122/04

ICINAZ

Acquisition of 5 Harvesting Machines for the harvesting of cane 500,000.00

Accounting E.A.Héctor Molina

E.A. Héctor Molina

Conceptual engineering of the Water Supply to the Cogeneration Plant. 6,722.91

Invoice1-053-04

IPROYAZ

Cane planting in areas considered in the cane development Program for the foreseen increase of capacity (10,000 t/d); 2300 ha year 2004 3,360,875.00

Book Accounting

E.A. Héctor Molina

Modifications of the H. Molina tandem as part of the proposals for the increment capacity (10,000 t/d): installation of 6 Donnelly chutes, 5 intermediate conveyors of and a tipper of cars of additional cane to the existent ones 255,600.00

Book Accounting

E.A. HÉCTOR MOLINA

Sub-Total 4,150,094.91

Year 2005 Allocation of fund for electrification of 10 irrigation stations: electricity feeding system from national grid, pumping equipment and piping 209,625.00

Contract with UNE and

equipment and civil works contract

CAI Héctor Molina

Drainage of Cane areas: 8 Km 137,299.00 Drainage Contract E.A. Hector MolinaHarnessing of the RAC left over the land in harvested areas where it is allowed to move away the straw covering the landWorking group Cuban specialists: Engineer Zulima Hernández, Ing Nelson Rodríguez; 3,238.40

Book Accounting

E.A. Hector Molina

Sub-Total 35,0162.40Grand Total 5,297,090.84

Note: Below is the list of institutions that have participated in the execution of these activities

MINAZ: Ministry of the Sugar Industry UNE: Electric National Union INEL: Electric National Institute IPROYAZ: Institute of Sugar Projects INICA: National Institute of Investigation of the Sugar cane ICINAZ: Cuban Institute of Sugar Cane Research E.A. Héctor Molina: Agro-industrial Complex Héctor Molina