lti - undp

GLOBAL ENVIRONMENT FACILITY INVESTING IN OUR PLANET

March 05, 2014

Dear Council Member:

Naoko Ishii, PhD Chief Executive Officer and Chairperson

1818 H Street, NW Washington, DC 20433 USA Tel: 202.473.3202 Fax: 202.522.3240/3245 E-mail: [email protected]

www.TheGEF.org

UNDP as the Implementing Agency for the project entitled: Nepal: Renewable Energy for Rural Livelihood (RERL) .. has submitted the attached proposed project document for CEO endorsement prior to final approval of the project document in accordance with UNDP procedures.

The Secretariat has reviewed the project document. It is consistent with the proposal approved by Council in June 2012 and the proposed project remains consistent with the Instrument and GEF policies and procedures. The attached explanation prepared by UNDP satisfactorily details how Council's comments and those ofthe STAP have been addressed. I am, therefore, endorsing the project document.

We have today posted the proposed project document on the GEF website at www.TheGEF.org. If you do not have access to the Web, you may request the local field office of UNDP or the World Bank to download the document for you. Alternatively, you may request a copy of the document from the Secretariat. If you make such a request, please confirm for us your current mailing address.

Sincerely,

Lti Chief Executive Officer and Chairperson

Attachment: GEFSEC Project Review Document Copy to: Country Operational Focal Point, GEF Agencies, STAP, Trustee

GEF5 CEO Endorsement Template-February 2013.doc

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For more information about GEF, visit TheGEF.org

PART I: PROJECT INFORMATION

Project Title: Renewable Energy for Rural Livelihoods (RERL) Country(ies): Nepal GEF Project ID:1 4345 GEF Agency(ies): UNDP(select)(select) GEF Agency Project

ID: 4522

Other Executing Partner(s): Alternative Energy Promotion Centre (AEPC), Ministry of Science, Technology and Environment (MOSTE), Nepal

Submission Date: Resubmission Date:

22 Nov 2013 13 Feb 2014

GEF Focal Area (s): Climate Change Project Duration(Months)

60

Name of Parent Program (if applicable): For SFM/REDD+ For SGP For PPP

N/A Project Agency Fee ($):

300,000

A. FOCAL AREA STRATEGY FRAMEWORK2

Focal Area Objectives

Expected FA Outcomes

Expected FA Outputs

Trust Fund

Grant Amount ($) Co-financing ($)

CCM-3 Favorable policy and regulatory environment created for renewable energy investments

Renewable energy investment policy and regulation in place

GEF TF 711,675 1,525,320

CCM-3 Investment in renewable energy technologies increased

Renewable energy capacity installed

GEF TF 2,288,325 30,787,180

Total project costs 3,000,000 32,312,500Leverage financing 24,494,530

1Project ID number will be assigned by GEFSEC. 2 Refer to the Focal Area Results Framework and LDCF/SCCF Framework when completing Table A.

REQUEST FOR CEO ENDORSEMENT PROJECT TYPE: Full-sized Project TYPE OF TRUST FUND:GEF Trust Fund


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B. PROJECT FRAMEWORK

Project Objective: Removal of barriers to increased utilization of renewable energy resources in rural Nepal in order to support economic, environmental, and social development of people in the rural areas and to reduce GHG emissions

Project Component

Grant Type

Expected Outcomes

Expected Outputs Trust Fund

Grant Amount ($)

Confirmed Co-financing ($)

1. Enhancement of RE investment environment

TA Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization

Approved and enforced policy that enables PPP model for mini-hydro and large-scale solar PV development, including fiscal incentives and suitability for possible changes in Nepal government structure (to federal system) Methodology and database developed and made available for incorporating mini-hydro and large scale solar PV systems into district RE plans Completed training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large scale solar PV systems development and productive end uses

GEF TF 212,320 900,000

2. RE Investments

Inv Increased investments in RE

Commissioned mini-hydro demonstration projects totalling 1 MW through PPP Model Commissioned mini-grid demonstration projects totalling 300 kW Commissioned large-scale solar PV demonstration projects totalling 500kW Demonstrated PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles

GEF TF 1,198,325 25,507,780


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(SPV3) in three selected mini-hydro projects (1 MW) Demonstrated financially sustainable and reliable a mini-grid connecting ten(10) micro-hydro systems (300 kW) Demonstratedfinancially sustainable and reliable large scale solar PV systems (500 kW total) Operationalised 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance Completed financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance Completed financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance

3a. RE technology and

Inv Improved availability of

Established a wholesale financing instrument to

GEF TF 950,000 4,200,000

3The standard Special Purpose Vehicle (SPV) in a Nepalese context is a Limited Liability Company (LLC).


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project financing enhancement

financial investment supports for rural RE and other low-carbon technology applications

incentivize Banking and Financial Institutions (BFIs) for financing domestic manufacturers Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) to promote commercial financing for mini-hydro and large-scale solar PV projects

3b. RE technology and project financing enhancement

TA Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications

Designed and provided technical support for financing platforms and services for promoting commercial financing for domestic manufacturers Designed and provided technical support for financing platforms and services for promoting commercial financing for mini-hydro and large-scale solar PV projects Developed training materials on mini-hydro and large-scale solar PV projects for financing institutions Established matchmaking platform for mini-hydro and large-scale solar PVdevelopers, financing institutions, and equity investors, and productive end user Functional enterprises adopting productive use of electricity. Operationalised mechanisms to promote financial products forentrepreneurs/end users Established functional electricity based enterprises that are owned by women and

GEF TF 63,036 392,835


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marginalised/ vulnerable groups

4. Human Capacity Development

TA Enhanced capacities and skills of various stakeholders in the RE sector

Created a Database of technical specifications, challenges and opportunities in the design, manufacture (for micro-hydro(60+ kW) and mini-hydro), installation and after-sales service inmicro-hydro(60+ kW), mini-hydro and large scale solar PV systems. Fully trained skilled and technically capable people available for project identification, feasibility studies and detailed design of mini-hydro projects Fully trained skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services. Fully trained skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system Fully trained skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems

GEF TF 436,319 232,485

Subtotal GEF T 2,860,000 31,233,100


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Project management Cost (PMC)4 GEF T 140,000 1,079,400Total project costs (Confirmed) 3,000,000 32,312,500

Leverage financing 24,494,530 C. SOURCES OF CONFIRMED CO-FINANCING FOR THE PROJECT BY SOURCE AND BY NAME ($) Please include letters confirming co-financing for the project with this form

Sources of Co-financing

Name of Co-financier (source) Type of Co-

financing

Co-financing Amount

($) National Government AEPC/CREF Cash 27,707,780National Government AEPC/CREF In‐kind 2,604,720GEF Agency UNDP Cash 2,000,000Total Co-financing 32,312,500Private Sector/Local Government

Banks & financial institutions/DDC/VDC/Others

Leverage financing

24,494,530

D. TRUST FUND RESOURCES REQUESTED BY AGENCY, FOCAL AREA AND COUNTRY1: N.A. 1In case of a single focal area, single country, single GEF Agency project, and single trust fund project, there is no need to provide information for this table. PMC amount from Table B should be included proportionately to the focal area amount in this table. 2 Indicate fees related to this project.

E. CONSULTANTS WORKING FOR TECHNICAL ASSISTANCE COMPONENTS:

Component Grant Amount

($) Co-financing

($) Project Total

($) International Consultants 17,000 40,000 57,000National/Local Consultants

661,875 512,500 1,174,375

F. DOES THE PROJECT INCLUDE A “NON-GRANT” INSTRUMENT?No

(If non-grant instruments are used, provide in Annex D an indicative calendar of expected reflows to your Agency and to the GEF/LDCF/SCCF/NPIF Trust Fund)5.

4PMC should be charged proportionately to focal areas based on focal area project grant amount in Table D below. 5Part of GEF funds will be provided as a grant to the Government implementing partner, Alternative Energy Promotion Centre (AEPC) under the Ministry of Science, technology and Environment. AEPC, in turn will be channeling the funds through its newly established Central Renewable Energy Fund (CREF) as subsidies and wholesale finance (under an appropriate financing instrument) through selected banking and financial


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PART II: PROJECT JUSTIFICATION A. DESCRIBE ANY CHANGES IN ALIGNMENT WITH THE PROJECT DESIGN OF THE ORIGINAL PIF6

A.1 National strategies and plans or reports and assessments under relevant conventions, if applicablNAPs, NBSAPs, national communications, TNAs, NCSA, NIPs, PRSPs, NPFE, Biennial Updaetc.

The long-term national goal of the Government of Nepal is to supply at least ten per cent of total primary energy consumption in the country from renewable energy within next 20 years. In addition, the 20-year targets call for an additional 30 per cent of the population to be electrified through renewable energy applications by installing at least one renewable energy-based system in every household. There are two key policies, the Rural Energy Policy of 2006 and the Subsidy for Renewable (Rural) Energy, which have been enacted to support achieving these targets. The Rural Energy Policy aims to promote clean and reliable energy for poverty reduction and environmental conservation and the aim of the subsidy policy is to accelerate the adoption of renewable energy technologies in Nepal.

The Alternative Energy Promotion Center (AEPC), under the Ministry of Environment, Science, and Technology is the key government organization for the nation’s off-grid renewable energy efforts. In terms of targets, the Government has both long-term (20-year) targets for renewable energy in general and medium-term (5-year) targets for off-grid renewable energy to be achieved under AEPC’s National Rural Renewable Energy Program (NRREP). AEPC is implementing NRREP since July 2012 and the design of the GEF project is carefully aligned with the components and outputs of the NRREP for effective implementation. NRREP is designed for five years and has targets fixed in terms of installed capacity additions for various renewable energy technologies. Its total budget is USD 170 million and out of this about USD 46.6 million will fund baseline activities that are relevant to the GEF-RERL project. The specific targets of NRREP are mini- and micro-hydro capacity additions of 25 MW, community electrification of 150,000 households and productive uses of renewable energy by supporting establishment of 1,300 new MSME and provision of employment for 19,000 people.

The GEF project will support achievement of NRREP’s targeted 25 MW of off-grid hydropower installation over the next five years. It will provide support to establishment of financing mechanisms, which should enhance the activity of the Central Renewable Energy Fund established under NRREP. The project will play a very important role in achieving specific targeted outputs of NRREP such as: financial viability of community electrification systems, scale-up of community electrification, and viable large

institutions (BFIs). AEPC will establish strict fiduciary management and oversight of these funds and the GEF RERL Project team will monitor and report through the PIRs.

6 For questions A.1 –A.7 in Part II, if there are no changes since PIF and if not specifically requested in the review sheet at PIF stage, then no need to respond, please enter “NA” after the respective question.


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scale community PV systems. The project will also put strong emphasis on productive applications of renewable energy, an aspect that is clearly stated as a priority of NRREP.

A.2. GEF focal area and/or fund(s) strategies, eligibility criteria and priorities: A A.3 The GEF Agency’s comparative advantage: NA

A.4: The baseline project and the problem that it seeks to address:

Background

Nepal has a predominantly rural population, with an overwhelming dependence on biomass for fuel. Almost ninety per cent of the energy is used for household purpose. Despite huge hydropower potential, Nepal has one of the world’s lowest per capita electricity consumption. Two out of every five households still do not have access to electricity. Fifteen per cent of the rural households get electricity through off-grid renewable energy sources. Off-grid renewable energy systems will be essential for reaching the rural population still lacking electricity. In this regard, donor supports have played a very significant role in up-scaling of decentralized electricity supply. However, most of the decentralized electricity supply is limited to smaller systems like micro hydro power (MHP) and solar home systems (SHS). Electricity from micro-hydro and solar home systems are primarily used for lighting and powering some low capacity household gadgets. These systems have not facilitated extensive productive end-uses of electricity leading to enhanced livelihoods and increased income generation. Even though Electricity-based enterprises have come up close to micro-hydro plants, contributing to enhanced livelihoods, they suffer from low load factor, one of the reasons being low installed capacities leading to inadequate productive end-use applications. Moving towards bigger sized systems (mini-hydro and large scale solar PV systems) will bring economies of scale, faster progress, wider coverage, and/or more income generating opportunities for local people. Bigger systems offer greater opportunity for enterprise development and better financial and commercial viability.

Electricity Supply and Consumption

Despite the availability of extensive hydropower potential of the order of 42,000 MW, Nepal has one of the world’s lowest per capita electricity consumption, averaging 146 kWh per capita annually in 2010-11. For comparison, average per capita consumptions in 2009 were 517 kWh in South Asia, 571 kWh in India, 2,631 kWh in China and 2,807 kWh in the world. Electricity accounts for only 2.2 per cent of Nepal’s total energy use. The reported number of grid-connected electricity consumers (points of service) has been growing rapidly, rising from 1.85 million at the end of 2010-11 to 2.05 million by January 2012 (an increase of 10.7 per cent).

The Government of Nepal has cited “energy crisis” or power shortage as one of the greatest obstacles faced in the nation’s economic development. It is widely accepted that the shortage of power and frequent power outages have severely constrained economic growth in the nation. Grid-connected power generation capacity of 706 MW in 2011-12, predominantly hydropower, is insufficient to meet demand. Even with the addition of imported power from India which allowed a peak demand of 1,027 MW to be met during the period, daily load shedding is required. The duration of load shedding can reach over 14 hours per day in Kathmandu in the winter, when river flow volume is low and demand is high.

The status of access to electricity indicates that in 2011, about 67 per cent of households used electricity as their main source of lighting. The proportion was 60 per cent for rural households and 94 per cent for urban households. Thus, we may infer that 40 per cent of rural households lack electricity. The issues of load shedding (for grid-connected users) and limited capacity (off-grid users) may limit both the times of


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day at which they have access as well as the type of electricity consuming activities in which they may take part. The second largest source of household lighting is kerosene (named as main source of lighting by 18 per cent of households), which must be imported. Of the 60 per cent of the rural population that does have access to electricity, roughly a quarter get that power from off-grid sources, while the other three-quarters obtain access from the grid.

Of domestically produced grid connected electricity, 92 per cent is hydropower. The electricity supplied by the domestic grid system in 2009-2010 was about 3,690 GWh. Of this, about 57 per cent was generated by power plants owned by the Nepal Electricity Authority (NEA), 26 per cent by Independent Power Producers (IPPs), and the remaining 17 per cent was imported from the Indian grid. Peak demand met by NEA has been growing steadily from 603 MW in 2006 to 946 MW in 2011. Various issues inhibit more rapid growth of the domestic grid-connected sector, including low tariffs.

Huge differences in elevation, abundant snowmelt, and the monsoon rainfall have given Nepal vast hydropower potential. Estimated technically feasible hydropower potential in Nepal at 42,000 MW exceeds capacity installed till now by far, but progress in exploiting this potential has not kept up with demand. The first hydropower plant (of 500 kW) was built in Nepal in 1911, but development since has been slow. Progress has been seen since the opening up of the market to independent power producers in the 1990s.

Although the nation’s armed conflict ended in 2006, the political situation is still a barrier to development of the large-scale power sector. Political instability stalls progress in large energy infrastructure projects. Some project developers have decided to continue activities, but the construction and commissioning of large plants is still very uncertain and subject to various delays due to the political situation. Many projects are either in their study phase or the developers are in a wait-and-see mode. In contrast, small-scale off-grid hydropower stations (totalling about 37 MW) and other renewable energy power producing technologies currently provide much more potential for progress as they are not stymied by larger political and institutional issues.

Off-grid Renewable Energy in Nepal

In Nepal, off-grid renewable energy accounts for about 24 per cent of the total electricity generatedin2010-11. Further, estimates of the proportion of the rural population with access to electricity that gets that access through off-grid renewable power also highlights the importance of off-grid renewable energy in Nepal. According to estimates, of the 60 per cent of the rural population that does have access to electricity, roughly a quarter gets that power from off-grid sources. Overall, around 15 per cent of the rural population and 12 per cent of the Nepali population has access to electricity through off-grid renewable energy sources, mainly village micro-hydropower stations and solar home systems.

Nepal has focused on installing capacity of various off-grid renewable energy technologies in the key segments of hydropower (14.95 MW of mini-hydro, 18.95 MW of micro-hydro and 3.18 MW of pico-hydro), solar (7.44 MW solar home systems), and wind. The data shows the dominance of the sub-sectors of micro-hydro, mini-hydro and solar home systems (SHSs). In general, a predominant theme conveyed is that smaller-scale systems have been disseminated much more widely than larger scale systems. Even the recent trends suggest the dominance of smaller (e.g. micro versus mini-hydro) and household-scale (e.g. SHS versus institutional solar or solar pumping) technologies. In terms of MWs, micro-hydro over the two recent years had the highest capacity installed (5.56 MW), while solar home systems had the second highest capacity (2.08 MW) additions. This suggests that Nepal’s off-grid renewable power development to date has focused on the small end, raising the question of whether moving towards the next step up in size could bring economies of scale, faster progress, wider coverage, and more income-generating activities for local people.


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Role of Donor Programs in growth of Renewable Energy

Donor support has played a leading role in the development of off-grid renewable energy systems in Nepal over the past 17 years. In 1996, UNDP initiated large-scale donor support in the sector with the launch of its Rural Energy Development Program (REDP). Renewable energy technologies were actually initiated in Nepal in the late seventies through the private sector with government and donor support. Yet, commercial supply of electricity from such initiatives was not very successful. As a result, in the nineties, the concept of the community owned and managed micro-hydro plants was initiated by the government, through the support of donor-funded projects, to achieve community electrification. The first of these donor projects was UNDP’s REDP, implemented between 1996 and 2011 to support rural energy system development, including micro-hydro, through a community mobilization approach. Over a period of 15 years, REDP achieved an installed capacity of 7.5 MW of micro-hydro through its community-based approach.

In 2003, the World Bank joined UNDP as a partner organization providing financial assistance to the Government of Nepal and AEPC for replicating micro-hydro system activities in ten more districts. About three years after UNDP’s project, the Energy Sector Assistance Program (ESAP) was set up by DANIDA in 1999. ESAP also put substantial emphasis on micro-hydro, though did not use the community mobilization model of the UNDP project. About 8.5 MW of micro-hydro was installed through the two phases of ESAP. The government through its own efforts added micro-hydro plants for an overall total of 18 MW (or two additional MW to REDP’s and ESAP’s sub-total of 16 MW). The recent data on capacity additions for micro-hydro and pico-hydro stations illustrate the significant role played by donor programs in overall capacity additions. In this case, two programs, UNDP’s “Transition to RERL” (a project developed to serve as a transition from the very successful REDP to the project proposed in this document) and DANIDA’s Energy Sector Assistance Program (ESAP) supported the majority of stations in each category installed in each of the two years. In the Solar PV area, ESAP has given the most significant support to SHSs; and the EU’s Renewable Energy Project has supported institutional solar for income generation, public services, and water pumping.

The above discussion of electricity in Nepal highlights a number of motivations for promoting renewable energy development in the country’s rural areas and development of renewable power generation, in particular: The large proportion of rural households lacking electricity (40 per cent) highlights the need for alternatives, as does the significant proportion of rural households lacking electricity across all types of ecological zones and in each and every regional development zone. Further, this very substantial population without electricity, when considered along with the nation’s very low per capita incomes, raises the idea of potential income-generating opportunities that may be facilitated by electrification. Indeed, the serious capacity constraints associated with the grid-connected systems suggest off-grid systems may have more potential to benefit rural livelihoods and reduce drudgery than the grid itself. In addition, off-grid renewable power sources do not face the same political and institutional barriers that are currently stalling large grid-connected projects, suggesting off-grid efforts can move forward more quickly. This supports the rationale of an off-grid rural renewable energy project generally and those that facilitate the design decisions to be made. First, off-grid renewable energy in Nepal has proven its ability to play a significant role in the country’s overall power provision. It is making substantial contribution, and has the potential to make more, particularly in remote areas where grid extension does not make sense. Further, unexploited potential inmost renewable energy segments is vast, particularly hydropower and solar PV. The current installed capacity reflects only a very small proportion of country’s potential. Donor supports have proven to have played substantial role behind the development of Nepal’s off-grid renewable energy over the past decade.


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In terms of insights for project design, the predominant theme of the findings is that off-grid renewable power development to date in Nepal has focused on the small size installation. The question is thus, whether moving towards the next step up in size will bring economies of scale, faster progress, wider coverage, and more income generating opportunities for local people. In particular, development of mini-hydro stations has been virtually dormant during past 20 years, while development of new micro-hydro stations has spear-headed. Installation of solar PV home systems (SHSs) has been vibrant, while village PV systems are rare and those cases that do exist tend to be limited to lighting or other very low power consumption activities. Institutional solar PV and solar PV pumping have seen more progress than village PV systems. Yet, experience and support is still much more limited compared to SHSs.

Barriers

In assessing the challenges to increased energy access and achievement of a low-carbon development path in rural areas of Nepal still lacking electricity, key barriers are identified and overarching thematic areas are developed. The thematic areas that emerged from the barrier analysis are: (1) physical access issues, (2) affordability (upfront cost) issues, (3) financial sustainability (cash flow for systems maintenance and repair), (4) lack of technical capacity for less disseminated technologies (such as mini-hydro and larger scale PV), and (5) lack of awareness of the potential benefits of less disseminated technologies. Lack of favourable policy (particularly for less disseminated technologies) was also highlighted in the analysis.

Cost issues: High costs of technology are due to several issues. First, high transport costs are endemic to Nepal’s challenging, mountainous terrain. The predominant focus to date on smaller scale off-grid systems means that economies of scale are not leveraged. Further, both construction materials and renewable energy system technologies have high costs, partly due to the necessity of imports. Efforts to date to localize technology may not have sufficiently assessed Nepal’s potential areas of competitive advantage. Also, domestic manufacturers of components that may potentially be cost-competitive lack the scale needed to achieve their own economies of scale and serve the needs of a strong pipeline of projects. Further, lack of technical skills and knowledge may actually serve to keep costs high and slow the pace of manufacture and installation.

Financing issues: Related both to high costs and to low system income once installed, difficulty in getting systems financed is probably the overriding barrier facing increased energy access through off-grid renewable energy systems. Both financial institutions providing credit and equity investors are averse to the risk presented by off-grid renewable systems. They lack ability to evaluate the risk, but at the same time have reasonable concerns about the commercial viability of systems. Financial tools and policy mechanisms could be ways to address some of these issues, but such financial tools are mostly absent and the policy framework incomplete to address systems of various scales and technologies. Indeed, subsidy policies tend to be biased towards smaller systems, thus inhibiting the cost benefits that might be achieved from the economies of scale of larger systems.

Financial sustainability and utilization: Even highly or fully subsidized systems may face issues of long-term financial sustainability in the absence of regular flow of revenues to pay for system repair, maintenance and parts. Yet, utilization levels (and therefore revenues collected) tend to be low. Low utilization stems both from peoples’ lack of ability to pay and the absence of excess system capacity that could meet needs beyond minimal daily consumption. Productive applications – use of energy for income-generating purposes – could be a way to increase utilization and therefore the income and financial sustainability of systems, but more excess power would be needed than is the norm with most systems being installed in Nepal today.

Technical capacity and lack of awareness: These are important thematic areas in assessing barriers to the adoption of renewable energy technologies in Nepal. Inadequate technical capacity is a contributing factor


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to high costs. Therefore, developing standards, building capacities for cost-competitive domestic manufacturing of appropriate parts, and enhancing capabilities of installers and other service personnel will help in reducing costs.

Baseline Project

The “baseline project” is defined as all activities of relevant initiatives that will be implemented without the GEF assistance. These baseline activities may either serve as a base on which activities of the proposed project will build incrementally, or themselves be closely integrated with the proposed project’s activities to together provide incremental benefits. The “baseline scenario” is defined as the situation that would occur over the time period of the project’s implementation and beyond in the absence of the proposed GEF project.

The Government of Nepal and key donors in off-grid renewable energy have made the decision to adopt a programmatic approach whereby all government and donor efforts in rural renewable energy will operate under a single umbrella programme, the National Rural Renewable Energy Programme (NRREP). Thus, the NRREP represents the collective baseline activities (i.e., baseline project) in the country on renewable energy development and utilisation in the country and the specific RE-related components of that project, particularly on mini/micro hydro and solar PV power generation will be subsumed into the proposed UNDP-GEFRERL project as baseline activities.

NRREP has three components, each with broadly defined outputs and activities. NRREP is designed for five years and has targets fixed in terms of installed capacity additions for various renewable energy technologies. Its total budget is USD 170 million. NRREP’s three components are: (1) Central Renewable Energy Fund, (2) Technical Support, and (3) Business Development for Renewable Energy and Productive Energy Use.

Central Renewable Energy Fund (CREF) Component: The objective of this component is to establish CREF as the core financial institution responsible for the delivery of subsidies and credit support to the renewable energy sector and is targeted to have a size of about USD 113 million. The CREF will partner with a financial institution for delivery of the credit and subsidies to the beneficiaries. The fund hopes to leverage its credit with financial institutions, so that the financial institutions also provide additional credit to loan targets. The fund will support both manufacturers and installers of renewable energy technology. However, the fund has not prepared specific plans and financing mechanisms to stimulate renewable energy financing.

Technical Support Component: The objective of this component, which will have a budget of USD 40.1 million, is to accelerate renewable energy service delivery with better quality, comprising various technologies, to remote rural households, enterprises, and communities. Several renewable energy technologies will be supported; and institutional support will be provided to AEPC. Possible income-generating activities in areas associated with renewable energy electrification schemes will also be promoted. Some of the items that are expected to be the areas to receive the greatest emphasis are (i) Solar energy: Lower cost domestic systems, (ii) Community electrification schemes: Increase in financial viability and electricity available to productive applications, and (iii) RE technology supply sector: Increase in quality and other capabilities. Even though policy formulation support at the central government level has to be provided by NRREP, policy formulation initiatives are not explicit in the listed outputs

Business Development for RE and Productive Energy Use (PEU) Component: The objective of this component, with a budget of USD 8.4 million, is to contribute to income generation and employment potential through promotion of micro, small, and medium sized enterprises (MSME) in rural areas,


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particularly for men and women belonging to socially and economically disadvantaged groups. The enterprises will be facilitated by the availability of off-grid renewable energy.

NRREP Targets and UNDP-GEF-RERL's value addition: NRREP targets for the five years of the program are mini- and micro-hydro capacity additions of 25 MW, community electrification of 150,000 households and productive uses of renewable energy by supporting establishment of 1,300 new MSME and provision of employment for 19,000 people. The UNDP-GEF RERL project will enhance the realization of renewable energy benefits targeted by the NRREP with the removal of the current barriers that hinder private sector financing of, and investments on, larger scale rural-based hydropower projects (relative to the typical micro-hydropower projects) and larger solar PV power generation (relative to the usual solar home systems). Both enhanced systems will also be designed to operate at optimal load factors through the facilitation and enabling of more productive end uses of the electricity that these systems will produce.

UNCDF CleanStart Support: The United Nations Capital Development Fund’s (UNCDF) CleanStart Program will bring financing expertise under the overall framework of NRREP. CleanStart aims to facilitate access to clean energy through micro-financing for a total of 150,000 low-income households and micro-entrepreneurs in Nepal (with an estimated 600,000 beneficiaries). The Program will have funding of USD 1.3 million and a duration of four years (2013- 2016). CleanStart will support, at least, three financial service providers in Nepal, building their capabilities to provide micro-finance for clean energy. The financial institutions that CleanStart will be supporting will also be the focus of renewable energy installations supported by the proposed UNDP-GEF-RERL project. Essentially, CleanStart’s baseline activities on supporting micro-financing for productive use of renewable energy (PURE) projects in remote rural areas of Nepal will be enhanced.

Baseline scenario and need for UNDP-GEF-RERL project interventions

Given AEPC's vast experience in smaller micro-hydro systems, it is likely that most of the off-grid hydro installations by NRREP will be micro-hydro of less than 60 kW capacities. Consequently, it may be difficult for NRREP to meet its five-year target of 25 MW. Furthermore, financial sustainability of these systems will continue to be an issue because of insufficient productive end-use applications due to limited power availability. Given the high initial cost of these systems, there is a huge requirement of commercial financing. However, the private sector as well as banks will continue to be hesitant to invest because commercial viability of these systems will likely remain unattained. Issues regarding domestic manufacturing of components for the mini-hydro sector may not be able to improve its ability to offer a cost advantage, lowering total system costs. Support for manufacturers, while provided, may lack strategic focus to ensure manufacturers that may offer potential cost-savings to mini-hydro installations are targeted. To address these gaps, the GEF-RERL project will implement demonstration of Private-Public Partnership (PPP) models in mini-hydro and also implement demonstration of financially sustainable and reliable mini-grid integrating several existing micro-hydro stations. In addition, the project will support NRREP to implement an additional off-grid large micro-hydro and mini-hydro power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance.

The baseline project, in the absence of UNDP-GEF RERL project, will consider the installation of 10 MW of micro-hydro capacity with an expected output of 22% load factor. In baseline scenario, there will be no larger scale off-grid hydropower (e.g., mini-hydro) projects that will be implemented to support enhanced socio-economic development efforts in rural Nepal. Also, the majority of solar PV efforts are likely to remain focused on solar home systems (SHS), and larger scale applications of PV will continue to remain virtually absent from Nepal. Thus, remote areas without water resources may lack the opportunity of productive applications that such larger systems offer. To address these gaps, the GEF-


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RERL project will implement demonstration projects of financially sustainable and reliable Large-scale solar PV projects and support NRREP to implement additional large-scale solar PV projects, demonstrating cost advantages over smaller PV systems, financial feasibility, potential for productive end-uses, and best practices through technical assistance.

Funds disbursed under NRREP will likely be limited to basic loan and subsidy models. While productive applications of renewable energy will be pursued under NRREP, micro-finance may continue to be unavailable to entrepreneurs due to lack of coverage by micro-finance institutions in their areas. To address this gap, the GEF-RERL project will support establishment of credit facilities for domestic manufacturers and financing instruments for promoting commercial financing for mini-hydro and large-scale solar PV projects and related electricity-based enterprises.

Under NRREP, policies specifically promoting mini-hydro and large-scale solar PV systems will remain absent. The proposed project will support establishment and operationalization of a policy that enables PPP model for Mini-hydro and large scale solar PV systems development. Under NRREP capacity building specific to mini-hydro and large scale solar PV manufacturing/installation, operation and other technical areas may not occur. The proposed project will build up these capacities.

A. 5. Incremental /Additional Cost Reasoning:

While there are large size hydroelectric power generation plants in Nepal, RE-based electricity generation have not yet widely been applied to serve rural areas in Nepal. About 73% of the people living in these areas currently have no access to electricity. Reasons for the low level of utilization of RETs are, amongst other, lack of awareness of renewable energy applications, lack of renewable energy investment policies and incentive schemes, lack of access to finance, incomplete policy frameworks and insufficient capacities to manufacture, install and maintain renewable energy systems. The GoN is initiating various activities to address these issues. However, the barriers to creating RE/low carbon investment environment will be persistent. In order to enhance and expand the GoN efforts and with the GEF’s interventions, this project will facilitate and promote the use of renewable energy and low-carbon technology options in rural Nepal. This support is sought to further enhance the baseline efforts of the GoN in promoting RE-based power generation, improving energy access through the provision of RE-based electricity in rural areas; and in removing the barriers to the widespread use of renewable energy technologies (RETs) for electricity generation. Without the GEF support, the potential significant global environmental benefits from the application of RET systems will not be realized. If left alone to its limited resources and capacity, the GoN would not be able to substantially remove the current barriers that hinder the growth of RETs. The promotion of renewable energies in rural areas as an effective policy and institutional instrument for achieving the country’s energy and poverty objectives would also be of limited success if the current barriers remain in place.

The proposed UNDP-GEF RERL project will complement the NRREP to meet its objectives and targets with respect to hydropower, large scale solar PV systems and productive end uses of renewable energy. The project will focus on power generating off-grid renewable energy technologies. Its core strategy will consist of four interrelated concepts: (1) promotion of larger-scale, less-disseminated systems, (2) achievement of commercial viability and private sector financing of up-front costs, (3) achievement of financial sustainability (cash flow for repairs and maintenance), and (4) establishment of productive use enterprises to raise system revenues and generate livelihood benefits. These concepts are brought together in the project design to strategically address the key barriers for greatest potential impact. The key barriers are related to issues of affordability of up-front costs of systems (due both to high costs and lack of capital), financial sustainability (due partly to low utilization), and technical capacity and awareness for less disseminated, but high potential technologies.


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The UNDP-GEF RERL project objective is the removal of barriers for increased utilization of renewable energy resources in rural Nepal. The project will meet its objective by ensuring 12.5 MW of large-scale off-grid renewable energy projects implementation as well as its commercial viability through investment (INV) and technical assistance (TA) support. Firstly, it will strengthen the legal, institutional and policy environment (Component 1). It will do this by ensuring a private sector investment friendly policy for PPP model, supporting district development process by integrating larger systems in their planning process, and providing orientation and training to government officials, and other relevant stakeholders about the sub-sectors and the relevant policies. Secondly, it will support increased investments in RE through financing and technical assistance to demonstrate attractiveness of larger systems (Component 2). It will do so by implementing 1 MW of mini-hydro demonstration projects and 500 kW of large-scale solar PV systems through the PPP model (using limited liability companies called Special Purpose Vehicles) to demonstrate more extensive productive use and greater system revenues. It will also provide TA for installation of 2 MW of micro-hydro projects above 60 kW, 7 MW of mini-hydro projects based on the above model and 2 MW of large-scale solar PV systems. Thirdly, it will enhance the availability of RE financing through establishing appropriate financing instruments for manufacturers and developers as well as ensuring financial sustainability (Component 3A). It will also partially finance the establishment of a wholesale financing instrument as well as provide technical assistance to design such an instrument (Component 3B). Furthermore, the project recognizes the importance of promoting productive use of electricity to enhance financial sustainability of RE investment which will increase utilization of electricity and thereby revenue. The project will ensure that a number of micro, small and medium enterprises (MSME) are functional in the RE project areas and consume substantial amount of electricity with affirmative intervention to promote women’s organizations and women-led business to have access to finance (Component 3B). Finally, the project will focus on enhancing technical capacities and skills required for installing and operating selected technologies. It will support capacity building in the design and manufacture and after-sales service of both mini-hydro and larger scale PV systems. Skill trainings will follow guidelines specified by the project to ensure women’s and marginalised and vulnerable communities’ participation. The project will implement various activities to achieve the project outcomes and outputs.

In order to realize the GoN’s objective of promoting RE-based power generation, improving energy access through the use of RE resources in rural areas, and to remove the barriers to RET applications, the proposed project will consists of the following components and activities:

Component 1: Enhancement of RE investment environment – This component will aim to strengthened legal, institutional and policy environment to support RE development with a special emphasis on mini-hydro and larger scale PV technologies) and productive use in Nepal, including other low-carbon technologies. At the central government level, this technology-specific focus is particularly important to note, as more general policy work is being supported by other efforts within NRREP. It will support and enhance the GoN’s planned efforts in the baseline NRREP project. The expected outputs will include the operationalization of adequate institutional and legal frameworks for the promotion of RE/low carbon investments that also reflect the ongoing changes in the governing structure of Nepal which is transitioning towards a federal structure. With regards to policy intervention, the project will support formulation and adoption of a policy that will create positive environment for a public-private partnership (PPP) model to flourish and attract investment in mini-hydro and large-scale solar PV systems. The integrated district RE development plans will emphasize PPP models and provide the necessary space for private sector participation. For this, continuous capacity assessment/development of relevant government agencies and stakeholders at central, district and village level will be emphasized in the areas of integrated energy policy development, planning, energy cost comparisons, private sector development, community participation as well as reporting, monitoring and evaluation. The budget allocated for this component needs a GEF contribution of USD 21,230 and co-financing support from government of Nepal (AEPC/NRREP) to the tune of USD 900,000.


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Component 2: RE investments –This component will address barriers that need to overcome so that Mini-hydro and Large-scale solar PV projects are implemented through an appropriate ownership and operation modality. It will focus on increasing investments in RE for productive rural livelihoods, through both investment and technical assistance, to achieve additional total installed capacity of 10 MW off-grid mini-hydro and large micro-hydro power plants and a total installed capacity of 2.5 MW of large scale solar power systems for a 5 year period total of 12.5 MW. The primary aim in this component is to raise private sector investment confidence in developing large scale rural RE projects in Nepal. A major element of this component will be to demonstrate successful models of public-private partnerships in designing, development and managing mini-hydro projects as well as the connectivity of a number of micro-hydro systems to operationalize a mini-grid. The expected outputs will include demonstrations of mini-hydro systems (totaling 1 MW) using PPP models at three sites, the demonstration of a mini-grid connecting various micro-hydro systems (total of 300 kW) from the same stream, and commissioning of large scale solar PV demonstrations totaling 500 kW. In order to achieve the demonstration targets, this component will support PPP enterprise development through: identification and preparation of private sector partners; technical assistance in the preparation of business model, design and construction, O&M as well as reporting of performance for dissemination. The budget allocated for this component needs a GEF contribution of USD 1,198,325 with co-financing support from UNDP of USD 355,280and from government of Nepal (AEPC/NRREP) of USD 25,152,500. Further, leverage financing support of USD 24,322,030 will be sought from banks/financial institutions, local governments and other sources.

Component 3A: RE technology and project financing enhancement (RE Financing and Financial Sustainability – Financing Instruments) – This component is designed to augment RE investments promotion through improved availability of financing for rural RE applications. It will aim to establish and operationalize appropriate financial instruments to provide loans to manufacturers of mini-hydro systems, solar systems and other low carbon technologies; fund will be provided to a central financing institution to enhance accessibility to loans for the development of RE/low-carbon systems; and, tailor-made financial services for RE/low-carbon technology applications. A primary aim of this component will also be to targeting focused subsidies and credits to support and complement investments in renewable energy technologies, ensuring gender and social inclusion, while seeking to reduce subsidy levels over time, through linkages with productive end use of energy. The activities in this component will also include the setting up of a functional RE loan portfolio in local (micro-) finance institutions. This component will also built on CleanStart, a UNDP and UNCDF joint programme. The budget allocated for this component needs a GEF contribution of USD 950,000 and a co-financing support of USD 4,200,000 by the government of Nepal (AEPC/NRREP).

Component 3B: RE technology and project financing enhancement (RE Financing and Financial Sustainability - Financing Instrument Design and Awareness Building) – This component is designed to facilitate Component 3A, through the improved design and packaging of investment support mechanisms for rural RE applications. It will provide technical assistance in the design, including the preparation of guidelines and manuals to operationalize – a wholesale financing instrument to incentivize BFIs to provide loans to manufacturers of mini-hydro systems, large solar systems and other low carbon technologies. It will also provide an analysis of alternative collaterals and provide design options for tailor-made financial services (loan products and alternative collaterals) for RE/low-carbon technology applications, as well as loan repayment mechanisms, adapted based on good practices in the country and elsewhere. Strengthening the capacity of financial institutions to develop products and distribution methods which include innovative mechanisms for repayment will be prioritized. In addition, a network that will connect RE project developers, energy service companies, RE/low-carbon system suppliers and distributors and financing institutions will be established. Capacity development for micro-finance institutions and commercial banks on RE financing will also be a key activity under this component. This will result in the design of an operational framework for public-private partnership models and revenue


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sharing schemes for the implementation of rural RE projects. The budget allocated for this component needs no GEF contribution and needs a co-financing support from UNDP of USD 92,145.

In addition to the above, the Component 3Balso focuses on promoting productive use of electricity. This is intended to enhance financial sustainability of RE investment which will increase utilization of electricity and thereby revenue. This component ensures that there will be a number of micro, small and medium enterprises (MSME) are functional in the RE project areas and consume substantial amount of electricity (resulting in at least 30% additional load factor necessitating additional electricity generation) which contributes to financial sustainability of RE projects. The expected outputs of this component are - a significant number of functional enterprises adopting productive uses of electricity, mechanisms are put in place to promote and deliver financial products for entrepreneurs /end users, and there are functional electricity-based enterprises that are owned by women and marginalised/vulnerable groups. The budget allocated for this aspect of the component needs a GEF contribution of USD 63,036 and a co-financing support from UNDP of USD 300,690 and from other sources an amount of USD 22,500 (to be leveraged).

Component 4: Human Capacity Development – This component is intended to address the barriers related to human capacities to plan, manage, operate, finance RE-based energy systems. Enhanced capacities and skills of various stakeholders involved in the RE sector are the expected outcome from this component. It will support capacity building in the design and manufacture of mini-hydro systems and capacity building in the installation and post-installation of both mini-hydro and larger scale PV systems.The envisioned activities that will be carried out under this component which will deliver outputs that will contribute to the realization of these outcomes are to develop and conduct training courses, including training of trainers: (1) for relevant government agencies at the central, district and village level on emerging (rural) RE policies and in the areas of integrated energy planning, energy cost comparisons, energy surveys and energy reporting and monitoring; (2) for manufacturers and installers to design, manufacture and install mini-hydro systems, and large solar PV systems; (3) for survey and installation teams within companies to improve quality of installed mini-hydro plants; (4) for users on the operation and maintenance of RE based energy systems; (5) for micro-finance institutions and commercial banks on financing RE and low-carbon applications; (6) for RE developers on financing opportunities and incentive schemes for RE projects; and, (7) for energy companies/distributers of RE applications on after sales services. The budget allocated for this component needs a GEF contribution of USD 436,319 and a co-financing support from UNDP of USD 232,485

The complete support system (including fund flow and technical support) and activity flow of the UNDP-GEF RERL project is depicted in the Figure 1. The UNDP-GEF RERL project funds for investment support under Component 3a will be provided to the CREF, which is the institutional mechanism established under the AEPC to administer subsidy and credit funds. The CREF will then provide funds to selected banks and financial institutions to establish and operationalize various financial as may be necessary, which are expected to serve as financial support mechanisms to motivate financing RE projects in Nepal. The above banks and financial institutions will then provide the funds to the SPVs (credit, partial interest support, insurance premium support and maintenance matching fund support) or manufacturers (credit support). Investment support for enterprise development will also be similarly channeled through CREF to banks/financial institutions, which will then provide funds to micro finance institutions to on-lend to entrepreneurs. The project will administer and manage all technical supports under Component 3b to realize outputs for Component 3a. Funds to the SPVs under Component 2 will also be channeled through CREF.


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Figure 1: Project TA supports and fund-flow

Mini-hydro

Large scale Solar PV

Technology Choice Potential for cost reduction due to economics of scale

Possibilities for commercial financing

Possibilities for higher utilization

Technologies less disseminated but with high potential

Barriers to be addressed

Affordability of upfront system cost

Financial sustainability

of system cost

Technical capacity and

awareness

Goal: Support low-carbon path in rural Nepal through accelerated sustainable RE development

Objective: Removal of barriers to increased utilization of renewable energy resources in rural Nepal in order to support economic, environmental, and social development of people in the rural areas and to reduce GHG emissions

Enhancement of RE investment environment

RE Investments RE technology and project financing

Human Capacity Development

PPP Policy PPP model

implementation Instruments to

incentivize investment & lending

Capacity enhancement

Government AEPC

Banks

Private Sector

Local bodies

Community Coops

Mini-hydro & large solar PV projects (Build-Own-Operate)

Designers, manufacturers

& installers

Household End-uses

Productive end-use

applications

GHG Mitigation

Energy Access

Financial sustainability

Equity

CREF

Electc-tricity Sale

Providers of products and services

Entrepreneur

Mini-grid

Subsidy & Credit Funds

Wholesale Loan

CleanStart

MFIs

Local BDS Providers MEDEP

Funds flowTA Supports

Special Purpose Vehicle (SPV)

Products & Service inputsElectricity Sales (output)


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Project Objective, Outcomes and Outputs

The project objective is the removal of barriers for increased utilization of renewable energy resources in rural Nepal. The project will meet its objective by ensuring 12.5 MW of large-scale off-grid renewable energy projects implementation in the next five years.

The project will meet its objective through four targeted components, with the third component sub-divided into three distinctive outcomes linked sub-components as follows:

1. Enhancement of RE investment environment 2. RE Investments 3a. RE technology and project financing enhancement [RE Financing and Financial Sustainability –

Financing Instruments] 3b. RE technology and project financing enhancement [RE Financing and Financial Sustainability -

Financing Instrument Design and Awareness Building] 4. Human Capacity Development

The different components, related outcomes and targeted outputs are briefly discussed in the following paragraphs.

Component 1: Enhancement of RE investment environment

This component is designed to address policy barriers in attracting more private and public sector investment in the RE sub-sectors. Attempt is to strengthen the legal, institutional and policy environment. It will do this by ensuring a private sector investment friendly policy for PPP model, supporting district development process by integrating larger systems in their planning process, and providing orientation and training to government officials, and other relevant stakeholders about the sub-sectors and the relevant policies. The project outcome and expected project outputs are:

Outcome 1: Strengthened legal, institutional and policy environment to support RE and

other low-carbon technology development & utilization. Output 1.1: Approved and enforced policy that enables PPP model for mini-hydro and large-scale

solar PV development, including fiscal incentives and suitability for possible changes in Nepal government structure (to federal system)

Output 1.2: Methodology and database developed and made available for incorporating mini-hydro and large scale solar PV systems into district RE plans

Output 1.3: Completed training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large scale solar PV systems development and productive end uses

With the realization that the RE-based power generation projects can be best developed through a public-private partnership model, the GEF project will support government to put in place a private sector friendly environment to attract private investment. This includes enactment of favorable government tax regime and introduction of other incentives, ensuring protection against future changes in law, and introduction of simple, clear and transparent procedures.

The project will assist the government by providing technical inputs in drafting contents for the kind of policies by drawing on national and international best practices. The project technical experts will work closely with the relevant government technical staff belonging to government agencies like AEPC, NRREP, etc., and thereby enhance their capacity to conduct such exercises in the future (this ensures


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sustainability). This will be done by providing specialized training, regular guidance and helping to implement international best practices. Furthermore, the project also has an activity on conducting training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large-scale solar PV systems development and on productive end uses that builds the capacity of relevant government agencies and stakeholders to understand and implement policies. The specific policy and regulation measures to be set in place are as follows. The approved and enforced policies that will enable mini-hydro, large micro-hydro, mini-grid, and large-scale PV projects to be developed with private sector investment are: (1) Revised subsidy policy that is more favourable to attract private-sector investments in mini-hydro, micro-hydro, mini-grid, and large-scale PV projects; (2) Public-private partnership (PPP) policy for attracting private sector investment in mini-hydro projects7; and, (3) Specifications and policy to ensure grid interconnection of mini-hydro, micro-hydro mini-grid, and large-scale PV projects once the grid arrives to the local area. (1) Revised Subsidy Policy8: The current policy limit its effectiveness in attracting the private sector and promoting livelihood activities of larger scale. The revisions will include: (a) increased subsidy levels per household; (b) subsidy provisions for micro-hydro, mini-grid projects; (c) subsidy provisions for private-sector invested projects; (d) flat-rate subsidy for productive uses, and (e) specific subsidy for village-scale PV. See Section 3.3, sub-section 3.3.1 and Activity 1.1.1 of Pro Doc for description of Activities (Page 89 to 90 of Pro Doc). (2) New PPP Policy: The targeted PPP policy will clearly provide government commitment for attracting and retaining private sector investment in mini-hydro projects. It will include incentives, simplification of government processes, assurance against nationalization, protection against change of law, etc. See Section 3.3, sub-section 3.3.1 and Activity 1.1.1 of Pro Doc for description of Activities (Page 89 to 90 of Pro Doc).

(3) New grid connection specifications and policy: This policy is for future grid connection of mini-hydro, micro-hydro mini-grid, and large-scale solar PV projects to address the potential of grid extension to the local area. Specifications for grid connection are included for new projects to comply with starting from the design stage9. See Section 3.3, sub-section 3.3.1 and Activity 1.1.2 of Pro Doc for description of Activities (Page 90 to 91 of Pro Doc).

The policies described above are necessary to remove the barriers described below:

The revised subsidy policies will remove the following barriers:

Capacity and per household usage limitations of the current subsidy policy

7 Modality and concept on how PPP can lead to success in achieving project objectives is described under Outcome 2b, designed to provide technical assistance for realizing investments into Mini-hydro, Large-scale solar PV, etc. 8 The current government subsidy policy (2013) is pro-poor and at the same time attracts the private sector to “provide quality products and services in rural areas”. It also links subsidies with loans and increase agricultural productivity and promotes more non-farm livelihood activities by increasing the number of micro, small and medium sized enterprises. 9 The project will further ensure that these projects will remain sustainable with the advent of the grid by putting in place a feed-in tariff system for them, which will ensure electricity, is bought by the State from these projects. The project will work with NEA to realize the aforementioned specifications and policy


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Lack of inclusion of micro-hydro mini-grid in the subsidy policy

Lack of eligibility of private-sector invested projects for the subsidies

Flat-rate subsidy for productive uses, that is impeding the accelerated development of productive end-use applications

Lack of specific subsidy for village-scale PV

The PPP policy will remove the following barriers: Unclear government commitment to attracting and retaining private sector investment in mini-

hydro projects

Lack of incentives for private sector investment, simple and transparent government processes

Fear of Nationalization of projects

Lack of protection against change of law

The policy for future grid connection of mini-hydro, micro-hydro mini-grid, and large-scale solar PV projects will remove the following barriers:

Lack of specifications for grid connection

Lack of feed-in tariff

Component 2: RE Investments The component will address barriers that need to overcome so that Mini-hydro and Large-scale solar PV projects are implemented through an appropriate ownership and operation modality. The sizes of the target energy projects are much larger than what has traditionally been implemented (micro-hydro). Under this component, the project is expected to support increased investments in RE through financing and technical assistance to demonstrate attractiveness of larger systems. It will do so by implementing 1 MW of mini-hydro (MH) demonstration projects and 500 kW of large-scale solar PV systems preferably through public-private-partnership (PPP) model by establishing a legal entity, Special Purpose Vehicle (SPV)10, as well as for mini-grids (local-grid connecting micro-hydro projects totalling 300 kW) to demonstrate more extensive productive use and thus greater system revenues. It will also provide technical assistance for installation of 2 MW of micro-hydro projects of size above 60 kW, 7 MW of mini-hydro projects based on the above model and 2 MW of large-scale solar PV systems. This component has two outcomes and several related outputs.

10A Special Purpose vehicle (SPV), in Nepal, is generally understood to be any legal entity that has been established for a sole purpose. The SPV will be formed as a limited liability company (LLC) under Nepal's Company Act, 2006. The transaction costs associated with an SPV is similar to a "normal" company, and there are no investment limitations on SPV. Nepal has had successes with SPV in the hydropower sector from big projects to small projects. The SPV is expected to form a company on the basis of a PPP model [Private sector (51% equity), Local government (25% equity) and community through a registered entity (24% equity)]. Being a limited liability company, the establishment of an SPV is considered to protect the interests of both the lenders and the investors.


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1. Outcome 2: Increased investments in RE

2. 2a. Financing demonstration projects on Mini-hydro, mini-grid and Large-scale solar PV projects

Output 2a.1 Commissioned mini-hydro demonstration projects totalling 1 MW through PPP Model

Output 2a.2 Commissioned mini-grid demonstration projects totalling 300 kW

Output 2a.3 Commissioned large-scale solar PV demonstration projects totalling 500kW

3. 2b. Increased investments in RE through technical assistance to demonstrate attractiveness of larger systems

Output 2b.1: Demonstrated PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW)

Output 2b.2: Demonstrated financially sustainable and reliable mini-grid connecting ten (10) micro-hydro systems (300 kW)

Output 2b.3: Demonstrated financially sustainable and reliable large scale solar PV systems (500 kW total)

Output 2b.4: Operationalized 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance

Output 2b.5: Completed financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance

Output 2b.6: Completed financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance

Component 3a: RE technology and project financing enhancement [RE Financing and Financial Sustainability – Financing Instruments]

One of the major obstacles identified in the barrier analysis for the development and uses of the RE in rural areas of Nepal is the non-availability of the financing. It is mostly due to absence of banks and financial institutions in rural areas where the projects are located. This results into higher transaction costs. The component will focus on enhancing the availability of RE financing through establishing financing instruments for manufacturers and project developers as well as ensuring financial sustainability. Under this component, the project finances the establishment of financing tools (funds) to enhance the availability of RE financing.


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Outcome 3a: Improved availability of financial investment supports for rural RE and other low-carbon technology applications

Output 3a.1: Established a wholesale financing instrument to incentivize Banking and Financial

Institutions (BFIs) for financing domestic manufacturers to meet growing orders and be cost competitive

Output 3a.2: Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) to promote commercial financing for mini-hydro and large-scale solar PV projects

The project financing mechanism is based on Public Private Partnership (PPP) modality, which is implemented through establishing a Special Purpose Vehicle (SPV), a legal entity owning and operating the Mini-hydro and Large-scale solar PV projects. The SPVs are owned jointly by entities within the private and public sectors including communities through local cooperatives.The operational control of the projects will be held by the private sector through majority shareholding. The details of the prescribed financing in terms of Debt-subsidy and equity are given in Annex 2, which includes details of funding mechanisms, risk management as well as benefit sharing. The overall mechanism of fund-flow is depicted in Figure 1.

The size of the financial mechanism (financial tools) will be about USD 11.6 million, out of which USD 2.3 million will be from GEF-RERL grant to CREF/AEPC and the remaining USD 7.4 million will be leveraged from participating financial institutions.

It is estimated that the financial mechanism (tools) will stimulate an investment in mini-hydro and large scale solar PV projects of about USD 59.5 million. This will include about USD 28 million government subsidy, USD 7.3 million equity investment, and USD 17 million loans from financial institutions (Banks).

Component 3b: RE technology and project financing enhancement [RE Financing and Financial Sustainability - Financing Instrument Design and Awareness Building]

In order to improve financial investment climate in rural areas of Nepal for energy infrastructure like Mini-hydro and Large-scale solar PV projects through use of various financial tools, this sub-component will provide necessary technical assistance to Banks and Financial Institutions and to AEPC in motivating them to be active in RE financing. This component ensures outcome in terms of increased availability of investment models and financial relief to investors, financers and project developers.

4. Outcome3b: Improved design and packaging of investment support mechanisms for rural RE and

other low-carbon technology applications

Output 3b.1 Designed and provided technical support for financing platforms and services for

promoting commercial financing for domestic manufacturers

Output 3b.2 Designed and provided technical support for financing platforms and services for promoting commercial financing for mini-hydro and large-scale solar PV projects

Output 3b.3 Developed training materials on mini-hydro and large-scale solar PV projects for financing institutions


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Output 3b.4 Established matchmaking platform for mini-hydro and large-scale solar PV developers, financing institutions, and equity investors, and productive end users

The following three outputs reflect the activities implemented for promoting productive use of electricity to enhance financial sustainability of RE investment which will increase utilization of electricity and thereby revenue. Without enhanced utilisation of electricity, the financial performance is not attractive enough for the private sector to invest in off-grid mini hydro and large scale PV. The proposed activities ensure that there will be a number of micro, small and medium enterprises (MSME) are functional in the RE project areas and consume substantial amount of electricity (resulting in at least 30% additional load factor necessitating additional electricity generation) which contributes to financial sustainability of RE projects with affirmative intervention to promote women’s organizations and women-led business to have access to finance for operating MSME. In order to achieve higher load factor, it is necessary to initiate enterprise development activities along with RE project construction.

Output 3b.5: Functional enterprises adopting productive use of electricity

Output 3b.6 Operationalised mechanisms to promote financial products for entrepreneurs /end users

Output 3b.7: Established functional electricity based enterprises that are owned by women and marginalised/vulnerable groups

Component 4: Human Capacity Development

The capacity building component of the project will focus on enhancing technical capacities and skills for the selected technologies. It will support capacity building in the design and manufacture of mini-hydro systems and capacity building in the installation and post-installation of both mini-hydro and larger scale PV systems. Capacity building for manufacturers will focus on those aspects that require manufacture of components identified by the project that have the potential for lowering costs through domestic manufacturing. Component 4 will focus on raising the capacity of those manufacturers in both production and after-sales service. For mini-hydro and large scale PV stations, which are already or soon to be in operation, the GEF-RERL project will work to raise the capacity of both operators and business managers of the systems. Skill trainings will follow guidelines specified by the project to ensure women’s and marginalised and vulnerable communities’ participation (33%).

Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector Output 4.1: Established a Database of technicalspecifications challenges and opportunities in the

design, manufacture (for micro-hydro(60+ kW) and mini-hydro), installation and after-sales service inmicro-hydro(60+ kW), mini-hydro and large scale solar PV systems.

Output 4.2: Fully trained skilled and technically capable people available for project identification, feasibility studies and detail design of mini-hydro projects

Output 4.3: Fully trained skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services.

Output 4.4: Fully trained skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system

Output 4.5: Fully trained skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems


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Comparison of Project Outcomes and Outputs between the GEF-Approved PIF and Project Document

Change in the baseline situation, mainly, the NRREP project being fully functional which was in preliminary stage when PIF was formulated has necessitated that the project outputs and outcomes are restructured. Although the PIF identified barriers for the project are still relevant, the NRREP has planned and initiated several activities that were originally part of the UNDP-GEF RERL PIF. Taking into account of these initiatives, the project outcomes and outputs have been suitably modified. The modifications are summarised in Table 1.

GEF Incremental Reasoning: Cost Effectiveness

The proposed project targets the realization of a substantial increase in the sustainable and efficient use of off-grid hydropower and solar energy resources for the provision of energy services in the rural areas of Nepal (i.e., for household, community and rural industry uses).The proposed UNDP-GEF-RERL builds on the baseline NRREP project through several interventions as incremental activities as described above. It is estimated that an incremental cost of USD 5,000,000 (a contribution of USD 3 million by GEF and USD 2 million by UNDP) will be invested over and above the co-financing from the government and other partners (to be leveraged) of USD 54.8 Million. Even in the absence of the proposed project, the co-financing would be available for the baseline project as envisaged by the government of Nepal through NRREP. The expected incremental benefits at the end of the project, that would not have occurred but for the project, from the proposed GEF interventions are:

5. Strengthened policy, institutional and legal frameworks as an enabling environment for effective

implementation renewable energy projects for expanding energy access, productive livelihoods and low-carbon development.

6. Mini-hydro and large micro-hydro projects totalling 10 MW of capacity installed or financial closures achieved in place of 10 MW of micro-hydrocapacity demonstrating the benefits of economies of scale and financial sustainability.

7. Large solar PV systems totalling 2.5 MW of capacity installed or financial closures achieved. 8. Improvement in load factor (capacity utilization) from 20% to 52% resulting in an additional

renewable electricity generationof 26,795 GWh per year. The annual electricity generation will increase from 17.4 GWh to 44.195 GWh supporting productive end-uses through MSMEs.

9. Incremental annual GHG mitigation potential of 21,436 tCO2. In other words, the annual GHG abatement potential will increase from 13,939 tCO2 (baseline) to 35,375 tCO2 (alternative).

10. 50,000 households benefiting from electricity-based lighting and other end-uses as well as productive end-use services and employment. This would be a transition from 50,000 households having only lighting access in the baseline.

See Table 5 for a summary of Project Activities and Incremental Reasoning

The project objective is the removal of barriers to increased utilization of renewable energy resources in rural Nepal. To achieve this objective and consequently support economic, environmental, and social development of people in the rural areas and reduce GHG emissions, the approach adopted by the project proponents is to demonstrate other schemes for making more effective and significant use of the country’s two major RE resources (hydro energy and solar energy) for power generation, and facilitating the adoption and widespread use of such schemes. The other alternative is to just focus on the usual and proven hydro- and solar energy schemes that have been implemented in rural areas of the country and try to come up with interventions that will address the current issues/problems in their implementation. Such approach will also achieve the project objective but at a much lower levels of intensity (in terms of RE


26

resource utilization and GHG emission reduction), effectiveness, benefits, and innovation in the context of sustainable electricity provision in rural Nepal. The proposed project will promote the implementation of mini-hydro and large-scale solar PV systems to provide access to electricity in rural Nepal for livelihood and productive end-uses. The cost effectiveness of this approach of increasing the utilization of RE resources in rural Nepal as compared to the usual system is based on: (a) economies of scale with the installation of larger size systems; (b) increased electricity generation through enhanced load factor by increasing consumption levels by promoting livelihood and productive end-uses. Nepal is largely dependent on hydro and solar energy sources for power generation. Given these limited choices, Nepal has mostly relied on small-sized Micro-hydro and Solar Home Systems for meeting the rural energy needs. As an improvement to such baseline approach to rural energy provision in the country, the more cost effective approach of deploying larger size and higher load factor hydro and solar power systems serving social and productive activities in rural areas is the one that is applied in this proposed GEF project.

In the adopted approach, the hydro- and solar power generation schemes are at relatively lower investment cost relative to the business-as-usual (BAU) rural electricity generation schemes. The Mini-hydro pilot projects have unit capital cost in the range of USD 3,800-4,700 per kW. This compares favorably with the usual micro-hydro systems that have average investment cost of USD 8,000 per kW. Similarly, the generation cost for solar home systems of about USD 6,750 per kW is higher than that of large-scale Solar PV systems chosen at USD 5,000 to 6,000 per kW. In this case the adopted approach also demonstrates capital cost-effectiveness as a result of economies of scale.

In addition, the project approach also adds to cost-effectiveness through increased load factor with increased demand for electricity from households and SME sectors. It is expected that the project approach will result in improvement in the load factor of the larger sized hydro- and solar power systems from 20% (BAU approach) to 52% resulting in an additional renewable electricity generation of 26.795 GWh per year. The annual electricity generation will increase from 17.4 GWh to 44.195 GWh supporting productive end-uses through MSMEs. There will be two-fold benefits; decrease in the generation cost and increase in the revenue realization. Further, an annual incremental GHG mitigation potential of 21,436 tCO2 is expected to be realized from the adopted project approach, i.e., 13,939 tCO2 from the BAU scheme as compared to 35,375 tCO2 from the project approach. Considering just the direct CO2 emission reductions from the demonstrations, the unit abatement cost (GEF $/ tCO2) from the BAU schemes would be 2.5 times that of the proposed schemes under this GEF project.

Global Environmental Benefits

The contribution to sustainable development and environmental benefits of renewable energy systems are well established. Off-grid power generated by mini-hydro and solar PV systems provides rural households with electric power for lighting, milling, pumping, and other productive end-uses. The global environmental benefits accrue as a result of:

Reduction in kerosene consumption for household lighting,

Reduction in diesel consumption by switching use of diesel power to electricity in agro-processing mills and other productive uses where exist,

A limited reduction in fuel wood consumption for household cooking, water heating and space heating using efficient technologies like rice cookers and heating kettles (As more power is available from mini-hydro compared to from micro-hydro, this behavioural change is expected)

Reduction in use of dry cells used to operate radio and torchlight (flashlights), leading to reduced chemical pollution of the local environment and also reducing the health hazard resulting from the exposure and contact with these chemicals


27

Both mini-hydro and large solar PV systems have the potential to attract carbon financing as they qualify as proven technologies. Along with global environment benefits, they also contribute to other areas of the Sustainable Development Agenda in the following ways:

Along with the public and private sector co-players, the community also gets empowered through involvement in the projects from planning to construction and operation phase.

The projects create temporary jobs (construction) and long-term employment (operation), with skill enhancing opportunities for the local people not only in the energy project but also in electricity-based enterprises.

Moreover, the market of mini-hydro and large solar PV components will flourish creating conducive business environment for local manufacturers, suppliers and service providers thereby creating jobs for many.

As required by the methodologies specified by UNFCCC for CDM for Type 1 Small Scale Project, it is possible to establish the baselines showing dependence upon imported fossil fuels and unsustainable biomass and its continuation under business as usual scenario. Therefore, considering that mini hydro and large solar PV systems qualify as carbon projects under CDM regime, the potential emission reductions have been estimated (Refer Annex 4 Project Document for detailed estimates).

The RERL Project plans to install 1MW of mini-hydro demonstration project and support an additional 9 MW of regular large micro-hydro (2 MW) and mini-hydro (7 MW) projects. Since the total planned installed capacity is 10MW, which is less than 15MW, small scale CDM methodology AMS I.A. is applicable for this category of technology. A new small scale methodology – AMS I.L -- is applicable for calculating emission reduction from large solar PV systems of up to 500 kWp, such as those to be promoted under the RERL Project (Refer Annex 4 Project Document for detailed estimates).

It is estimated that when all the systems (demo and post-demo) come into operation, a total of about 22,040 tCO2will be abated annually over the period of 15 years attributable to productive applications of the energy. Considering lifetime of the systems to be 15 years for both the mini-hydro and the large scale solar systems, the RERL supported projects will contribute to the reduction of 330,604tCO2. The RERL demonstration projects alone will be responsible for abating 37,585 tCO2 whereas the remaining 293,019 tCO2 reduction will be from the post-demo projects supported.

However, “GHG Benefits of GEF Projects: Carbon Dioxide Calculator” methodology, which is used for developing the GHG tracking tool has different method for emission avoided estimation for post demo and indirect benefits. Based upon this, the lifetime direct post-project emissions avoided, attributable to the investments made outside the project's supervised implementation period, but supported by the technical assistance and financial facilities put in place by the GEF project, totaled over the respective lifetime of the investments, which is taken as 15 years. The emissions avoided have been estimated for three periods (i) CEO Endorsement Target, which includes the total installed capacity of 12.5 MW (1.8 MW of commissioned capacity and 10.7 MW of capacity achieving financial closure by the end of project); (ii) Mid-term results, which include total installed capacity of 0.75 MW (0.5 MW of mini-hydro and 0.25 MW large solar PV); and (iii) Terminal Results, which include total commissioned installed capacity of 1.5 MW (1 MW of mini-hydro and 0.5 MW of large solar PV). The estimates of GHG benefits of CEO Endorsement Target assumes lifetime direct emission reduction from 12.5 MW of installed capacity, and for the lifetime indirect emissions reductions, attributable to the long-term outcomes of the complete GEF activities that remove barriers, such as capacity building, innovation, catalytic action for replication, policy formulation, etc. The life time direct emission avoided


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for this scenario is estimated at 321,540 tCO2 and the lifetime indirect emission reductions are expected to be 2,266,857 tCO2 and 1,538,712 tCO2 using bottom-up and top-down approach respectively. Further, the life time direct post project emissions avoided are estimated at 1,189,698tCO2. The terminal results indicate the status at the end of the project, and the GHG mitigation estimates are made with respect to commissioned installed capacity of 1.5 MW. The estimated emission reductions for this scenario are expected to be 37,585 tCO2 of lifetime direct emissions and 131,548 tCO2 of lifetime direct post project emissions. Likewise, the lifetime indirect emissions reductions are estimated to be 338,265 tCO2 and 293,058 tCO2 using bottom-up and top-down approach respectively. Since the terminal results are expected to be easily verifiable, the cost effectiveness is performed for these estimates. Taking all projects into account (demonstration projects and post demonstration projects including indirect impacts) and as per the indirect bottom-up approach, the total GHG emission avoided is estimated at 507,398 tCO2. This will give rise to an estimated CO2 abatement cost of about USD 5.9 of GEF resources /tonne of CO2 emissions avoided. If the UNDP co-financing of USD 2 million is added then the CO2

abatement cost per tonne comes to around USD 9.85. These estimates prove the cost effectiveness of the proposed project.

The estimate of GHG mitigation benefits for mid-term results is limited to lifetime direct GHG emissions avoided. This is estimated at 18,793 tCO2 for an installed capacity of 0.75 MW.

GEF5 CEO Endorsement Template-February 2013.doc 29

Table 1: Summary of Comparison between the GEF-Approved PIF and Project Document

The Components, Outcomes and Outputs Rationale for Changes

GEF-Approved PIF Project Document Component 1: Enhancement of RE investment environment

Component 1: Enhancement of RE investment environment

No change

Outcome 1: Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization


No change

Outputs for Outcome 1: -Prepared, approved and enforced institutional and legal frameworks for the promotion of investments in RE and other low-carbon technologies, reflecting changes in the governing structure of Nepal (which is going towards a federal structure); -Prepared and approved integrated district RE development plans; -Completed RE resource assessments (serving as inputs to the integrated district renewable energy development plans); -Documented and disseminated technical assessments of available RE systems (including costs and benefit) and best practice examples;

Outputs for Outcome 1: Approved and enforced policy that enables PPP model for mini-hydro and, large-scale solar PV development, including fiscal incentives and suitability for possible changes in Nepal government structure (to federal system) Methodology and database developed and made available for incorporating mini-hydro and large scale solar PV systems into district RE plans Completed training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large scale solar PV systems development and productive end uses

Output has been made specific to reflect the better understanding of proposed project. The proposed PPP model include institutional and legal and financing framework for the selected renewable energy technologies Since NRREP is supporting the overall district RE development plans the output has been revised taking this into consideration (baseline project will take care of this output). The revised output includes the resource and technical assessments for the selected renewable energy technologies Output related to dissemination has been made specific to target key stakeholders’ need of capacity building related to policy and institutions.

Component 1: Budget GEF: USD 400,000 Co-financing: USD900,000

Component 1: Budget GEF: USD212,320 Co-financing: USD900,000

PIF GEF estimate has been reduced following a thorough assessment of all activities and a more realistic estimation of costs for all the Outputs related to Outcome 1. Besides, this policy/institutional intervention will be targeted towards the promotion of mini-hydro and large-scale solar systems.

Component 2: RE investments Component 2: RE Investments No change



GEF-Approved PIF Project Document Outcome 2: Increased investments in RE

Outcome 2: Increased investments in RE (Increased investments in RE will be done through:(a) Financing demonstration projects on Mini-hydro, mini-grid and Large-scale solar PV projects, and (b)Increased investments in RE through technical assistance to demonstrate attractiveness of larger systems)

No Change

Outputs for Outcome 2: -Additional total installed capacity of 2 MW off-grid micro-hydro power plants and a total installed capacity of 0.5 MW solar power systems per year (over 5 year period – total 12.5 MW); -Completed demonstrations of RE systems using PPP models to facilitate cooperation between the private and public sector as well as local organizations (2 selected micro-hydro projects, in total 1 MW); -Completed demonstration to establish a mini-grid connecting various micro-hydro systems from the same stream (total 100 kW)

Outputs for Outcome 2: Outputs for 2a: Commissioned mini-hydro demonstration projects totalling 1 MW through PPP Model Commissioned mini-grid demonstration projects totalling 300 kW Commissioned large-scale solar PV demonstration projects totalling 500kW. Outputs for 2b. Demonstrated PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW) Demonstrated financially sustainable and reliable a mini-grid connecting ten(10) micro-hydro systems (300 kW) Demonstrated financially sustainable and reliable large scale solar PV systems (500 kW total) Operationalised 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance

Outputs have been revised to reflect the focus on investments for demonstration projects and technical assistance. Outputs are actual physical facilities installed and functioning as well as mechanisms. Outputs from post-demonstration projects (remaining 7 MW of Mini-hydro, 2 MW micro hydro of size above 60 kW and 2 MW of large-scale solar PV) receiving technical assistance are shifted to Outcome 2b. Mechanisms created to ensure financial and institutional sustainability of demonstration and post-demonstration projects.



GEF-Approved PIF Project Document Completed financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance Completed financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance

Component 2: Budget GEF: USD960,000 Co-financing: USD7,686,000

Component 2: Budget GEF: USD1,198,325 Co-financing: USD25,507,780

There is an increase in investments as a result of increase in capacities of the demonstration projects and allocations for technical assistance for post-demonstration projects.

Component 3a: RE technology and project financing enhancement


No Change



No Change

Outputs for Outcome 3a: -Established capital fund in one of the financing institutions; -Established RE guarantee fund or seed capital provision; -Developed tailor-made financial services based on CleanStart methodology for financing clean energy access, including loan-products in (micro-) finance institutions for several RE applications (micro-hydro, solar, improved watermills and other low-carbon technologies.); -Established RE loan portfolio in local (micro-) finance institutions;

Outputs for Outcome 3a: Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) for financing domestic manufacturers to meet growing orders and be cost competitive Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) to promote commercial financing for mini-hydro and large-scale solar PV projects

Output has been made specific to reflect the better understanding of proposed project. Financial services based on CleanStart/UNCDF is not relevant for mini-hydro and large-scale solar PV projects but can play significant role in productive end-use financing, therefore, are moved to Outcome 3b.

Component 3a: Budget GEF: USD950,000 Co-financing: USD4,200,000


No Change

Component 3b: RE technology and project financing enhancement


No Change



GEF-Approved PIF Project Document Outcome 3b: Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications

Outcome 3b: Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications

No Change

Outputs for Outcome 3b: -Completed study on the most suitable design of a capital fund to provide soft loans to manufacturers of micro-hydro, solar PV and other low-carbon technology systems; -Completed study on the most suitable design of a guarantee fund/seed capital provision in one of the central financing institutions to enhance accessibility to loans for RE and low-carbon technology systems; -Completed study on alternative collaterals (e.g. micro hydro/solar/ equipment or the project itself); -Established and operationalized new innovative mechanisms for repayments of microfinance loans, e.g. mobile banking, satellite office, etc. (Outreach expansion); -Established network between energy companies/RE system distributors and finance institutions; -Prepared and approved framework and enforced implementation guidelines for PPP models including possible revenues sharing schemes;

Outputs for Outcome 3b: Designed and provided technical support for financing platforms and services for promoting commercial financing for domestic manufacturers Designed and provided technical support for financing platforms and services for promoting commercial financing for mini-hydro and large-scale solar PV projects Developed training materials on mini-hydro and large-scale solar PV projects for financing institutions Established matchmaking platform for mini-hydro and large-scale solar PVdevelopers, financing institutions, and equity investors, and productive end users Functional enterprises adopting productive use of electricity. Operationalised mechanisms to promote financial products forentrepreneurs /end users Established functional electricity based enterprises that are owned by women and marginalised/vulnerable groups

Based on needs articulated during stakeholder interaction the scope of outputs has been expanded to include designing of financing mechanism and instruments leading to the establishment of funds that are to be implemented as outputs of Outcome 3a. Issues related to collateral, seed capital, guarantee fund etc. are addressed in credit fund and financing instruments collectively. Network between energy companies/RE system distributors and finance institutions are included in Matchmaking platform. Output related to micro-finance are dealtwith in Outcome 3b for productive end-use as micro-finance are less relevant for mini-hydro and large-scale solar PV projects The last three outputs have been added to address enhanced utilization of electricity through productive end-uses for financial sustainability. Further, it also includes output related to the specific needs of women and marginalised/vulnerable section of the population.

Component 3b: Budget GEF: USD250,000 Co-financing: USD700,000

Component 3b: Budget GEF:USD 63,036 Co-financing: USD 392,735

The Central Renewable Energy Fund (CREF) is being created as part of NRREP and will be operational when the GEF project starts. However, there is still a need to facilitate the credit funds and facilities for local manufacturers, private sector-led commercial financing of projects and match-making platforms. Hence, the reduction in budget required. In addition, more financing will be leveraged from the private sector/commercial banks during project implementation

Component 4: Human Capacity Development Component 4: Human Capacity Development No change



GEF-Approved PIF Project Document Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector

Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector

No change

Outputs for Outcome 4: -Completed training courses for relevant government agencies and stakeholders at central, district and village level on emerging (rural) RE policies and in the areas of integrated energy planning, energy cost comparisons, energy surveys and energy reporting and monitoring; -Completed trainings for enhancing capacities of manufacturers and installers to design, manufacture and install micro-hydro systems between 100 kW and 1 MW; and, solar PV systems up to 10 kW; -Completed training for survey and installation teams within companies to improve quality of installed micro-hydro plants; -Completed training courses on the operation and maintenance of RE based energy systems to the users; -Completed training courses for micro-finance institutions and commercial banks on financing RE and low-carbon applications; -Completed training courses to RE developers on financing opportunities and incentive schemes for RE projects; -Completed training courses for energy companies/distributers of RE applications on after

Outputs for Outcome 4: Created a Database of technicalspecifications, challenges and opportunities in the design, manufacture (for micro-hydro(60+ kW) and mini-hydro), installation and after-sales service inmicro-hydro(60+ kW), mini-hydro and large scale solar PV systems. Fully trained skilled and technically capable people available for project identification, feasibility studies and detailed design of mini-hydro projects Fully trained skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services. Fully trained skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system Fully trained skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems

This output has been included under Component 1. See 3rd Output Outputs are rephrased to reflect specific outputs to be achieved rather than activities to be undertaken. This is a pre-requisite database facility created for subsequent capacity building of all the stakeholders. The single PIF output has been converted into separate outputs to address the specific requirements of technologies like mini-hydro and large solar PV systems. The output has been rephrased. The output has been rephrased. This output has been integrated with the match making platform of the Outcome 3b. The matchmaking platform involving mini-hydro & large-scale solar PVdevelopers, financing institutions and equity investors is expected facilitate capacity development of RE developers with respect to financing opportunities and incentive schemes. This output has been integrated with earlier outputs (third output)



GEF-Approved PIF Project Document sales services; Component 4: Budget GEF: USD300,000 Co-financing: USD500,000


The increase in GEF budget due to a single PIF output being expanded to several outputs to address the specific requirements of technologies like mini-hydro and large solar PV systems. And, the reduction is co-financing resulted from the shifting of specific outputs to Components 1 and 3b.


35

A.6 Risks, including climate change, potential social and environmental risks that might prevent the project objectives from being achieved, and measures that address these risks:

Discussion with stakeholders implies that, while presenting substantial challenge, the proposed project is feasible. The overall project risk is moderate. Major areas of risk include the external investment scenario and political environment, the response of the private sector and banks to the opportunity to invest in off-grid community renewable energy electrification projects, effectiveness of project management and stakeholder coordination under the NRREP umbrella, and the ability to maintain project targets in spite of possible changes in NRREP targets. Major risks and mitigating actions are listed in Table 2 below.

Key assumptions beyond the control of the project are related to some of the risks mentioned above. They include: (1) The banks and private sector are interested in financing commercially viable off-grid renewable energy power projects; (2) The investment environment and the local and national political environments remain conducive to project implementation; (3) The project will be driven forward towards the objectives by strong leadership from the National Project Manager and strong support of the National Project Director; (4) Local people are interested in productive applications and possess the capacity to benefit from project efforts to support them in enterprise development and achievement of market linkages; and (5) AEPC remains supportive of the project; and CREF funds are available to support capacity targets.

Table 2: Major Project Risks and Mitigating Actions

Risk Level

of Risk

Mitigating Action

1. Deterioration of investment environment in Nepal

L Difficult to mitigate, but off-grid projects may shift their focus to mobilising investors from local area of the particular installation.

2. Political instability at local or national level

M

Involvement of all relevant interest groups, with a bottom up approach including marginalized groups. Demonstration sites carefully selected to ensure strong local governance. National level problems more difficult to mitigate, but off-grid projects are less affected than on-grid projects.

3. Lack of interest on the part of private sector in investing in off-grid projects

M Outreach to private sector. Initial private sector may be triple bottom line funds to assist in demonstrating commercial viability to other private sector parties.

4. Lack of willingness of banks to lend to off-grid projects

M Outreach to banks. Project includes training of banks to make them aware of potential commercial viability of projects.

5. Project management may focus more on its traditional strength, i.e., micro-hydro and solar home systems

M Project management arrangements well defined. Project Executive Board, National Project Director, and National Project Manager well chosen.

6. NRREP priorities change, affecting project strategy and targets

L Strong management arrangements and ongoing liaison with other NRREP donors.

7. Stakeholder coordination: too many stakeholders prevent efficient decision-making


8. Demo sites poorly chosen L Specific selection criteria and short list developed during project formulation stage

9. Change in flow of rivers, L Careful planning and design of MHPs that address worse-


36

influencing load factor of hydropower plants

case scenario for next 20 years

10. Lack of interest by local people in productive applications

L

Provision of strong support to local people in enterprise development. Experience to date has already shown strong interest of local people in support for developing enterprises and achieving market linkages.

11. Project funding to be leveraged will not become available.

L

The risk would be low because two banking institutions have already pledged their support in writing to contribute the leverage financing, though amount is not stated. Outreach to banks and financial institutions and local governments. Providing strong proof of financial and commercial feasibilities.

12. Government not implementing any effective policy to encourage renewable energy investment from the private sector

L

The project and AEPC will work closely together to ensure that measures are brought into practice through policy revisions and legislation where necessary. Close coordination with the pertinent GoN policy makers will be ensured to facilitate the approval and enforcement of the formulated policies. Several advocacy and lobbying activities will also be carried out that are aimed at securing the approval of the proposed policy recommendations that are supportive to the promotion of large size hydro- and solar power generation systems in the rural areas. Considering the current initiatives by the government and development partners in promotion and development of renewable energy projects, the risks of government not initiating policy reforms is at a minimum. NRREP and CREF are being established and these will provide additional safe guards.

A.7. Coordination with other relevant GEF financed initiatives

B. ADDITIONAL INFORMATION NOT ADDRESSED AT PIF STAGE: B.1 Describe how the stakeholders will be engaged in project implementation.

Potential stakeholders for the UNDP-GEF RERL project from the government, non-governmental organizations, private sector groups who will have a role in the successful implementation of the Project have been identified. Inputs from literature review, meetings, workshops and individual interactions used to ascertain their role in the project.

The Alternative Energy Promotion Centre (AEPC), the project executing agency, will be establishing Central Renewable Energy Fund (CREF) for delivery of subsidies and credit support to the renewable energy sector in Nepal. GEF-RERL project’s Component # 3 will support that platform via its activities, as described earlier. CREF will be responsible for the selection of participating banks whereas GEF RERL project will assist CREF in the preparation of terms of reference, bid documents to call for proposals from nationally reputed Banks and FIs to administer funds, evaluation of the proposals to shortlist potential fund operators and negotiation and selection of fund administrators. It may be important to note that the project plans to make use of existing institutional structure to expand the capacity. A separate fiduciary oversight of funds is not found to be necessary as the project is going to use BFIs which are closely regulated and monitored by Central Bank. Experience of CleanStart for selecting banks will be sought during this process. The fund will work as the risk sharing mechanism for the bank


37

/financial institution and will stimulate substantially higher credit availability for the sector. The leverage will start from 100% and is expected to increase gradually. The GEF INV fund for this purpose is USD 950,000.

Roles of various institutions are summarized in the Table 3 below.

Table 3: Roles of Various Institutions

Category Stakeholder Role in Project Remarks

G

over

nmen

t Ins

titu

tion

s

National Planning Commission (NPC)

Ensuring inclusion of project in national plans and programs

NPC, chaired by the Prime Minister, is the advisory body for formulating development plans and policies of the country

Ministry of Finance (MOF)

Endorsement of Subsidy Policy; Representation in NRREP Steering Committee; Coordinate with development partners at macro level

MOF is the central authority of Government of Nepal responsible for maintaining both micro- and macro-economic stability in the country. This includes enhanced mobilization of both internal and external resources.

Ministry of Environment, Science and Technology (MOEST)

Coordination with other Ministries Representation in Project Steering Committee

MOEST is responsible for promoting sustainable development of country through environmental protection. This includes coordinating adaptation and mitigation programs to minimize the negative impacts of climate change. AEPC comes under the purview of MOEST.

Ministry of Energy (MOE)

Coordination to ensure avoidance of duplication Licensing of project, where needed

MOE is responsible for development of policies and plans for conservation, regulation and utilization of energy, especially electricity from the country’s water resources.

Ministry of Federal Affairs and Local Development (MFALD)

Coordination with local governments Support in resource mobilization and local permits etc.

MFALD is responsible for coordination, cooperation, facilitation, monitoring and evaluation of activities undertaken by local bodies (75 District Development Committees, 58 Municipalities and 3915 Village Development Committees)

Department of Cottage and Small Industries (DCSI)

Support for enterprise development and linkages

DCSI, with representation in all 75 districts, promotes the development of cottage and small industries enhancing their industrial productivity. It also works towards creating a congenial environment for investment in such industries.


38

Category Stakeholder Role in Project Remarks S

emi-

gove

rnm

enta

l Ins

titu

tion

s

Alternative Energy Promotion Centre (AEPC)

Project executing agency Mobilize resources Coordinate with other stakeholders Support coordination with development partners

AEPC is a government institution under MOEST responsible for developing and promoting renewable energy technologies in Nepal

Nepal Electricity Authority (NEA)

Coordinate among grid and off-grid electrification Future collaboration for grid connection of Mini Grid and Mini Hydro

NEA is the Government owned national electric utility responsible for most of the electricity generation, transmission and distribution in Nepal

Renewable Energy Test Station (RETS)

RE standardization, testing and monitoring

RETS is an autonomously governed laboratory for testing and measuring the quality of solar PV components. Establishment of test facilities for testing solar thermal, bio-mass/bio-gas, micro-hydro etc., are being considered.

Council for Technical Education and Vocational Training (CTEVT)

Collaboration for skill based training

CTEVT is a national autonomous body committed to the production of technical and skilful human resources in the country.

Non

-Gov

ernm

enta

l O

rgan

izat

ions

Local NGOs

Collaboration and synergy regarding RE and RE based enterprise development at local level

National NGOs Collaboration and synergy regarding RE and RE based enterprise development at national level

International NGOs Collaboration and synergy regarding RE and RE based enterprise development at national and international level

Community Based Organizations

Forest users groups, cooperatives etc.

Financing of RE and RE based productive end uses Raw materials for productive end uses Member mobilization for RE utilization

Pro

gram

mes

National Rural and Renewable Energy Programme (NRREP)

Project complements the efforts of NRREP to enable it to meet its renewable energy targets, thereby helping reduce GHG emissions and contribute to the socio-economic development of rural Nepal

NRREP, implemented by AEPC, is a single programme modality. It aims to improve the living standards of rural women and men, increase employment of women and men as well as productivity, reduce dependency on traditional energy and attain sustainable development through integrating the alternative energy


39


with the socioeconomic activities of women and men in rural communities.

UNDP-Micro Enterprise Development Programme (MEDEP)

Collaboration and synergy regarding electricity based productive end uses

MEDEP helps low-income families become entrepreneurs, promote the development of their enterprises, and then create a strong partnership between consumers of micro-enterprise products and services and local service delivery institutions.

UNCDF-CleanStart Collaboration and synergy regarding financing (micro-) of RE systems, productive use uses etc.

CleanStart is a programme that aims to assist poor households and micro-entrepreneurs to obtain access to sustainable, low-cost clean energy supplies through microfinance loans. This programme will support Financial Service Providers (FSPs) to build capabilities to provide clean energy lending, backed by a policy environment and energy value chain that is focused on reaching the poor.

Scaling-up Renewable Energy Programme (SREP):ADB, WB

Collaboration and synergy regarding financing of RE systems, productive end-uses, etc.

SREP is a targeted program of the Strategic Climate Fund (SCF), which is one of two funds within the Climate Investment Funds (CIF) framework.

UK/UNDP-Nepal Climate Change Support Programme (NCCSP)

Collaboration regarding productive uses of electricity as a potential area for climate mitigation and adaptation

NCCSP works to enhance the capacity of the Government of Nepal to implement effective climate change responses.

UK-Nepal Market Development Programme (NMDP)

Collaboration on enhancing market linkages for products out of electricity based enterprises

NMDP works to improve the incomes and growth for poor and disadvantaged people in key sub-sectors within agriculture and other rural markets

Dev

elop

men

t Par

tner

s

UNDP

Executing Agency Project promoter Facilitation of linkages with other UN agencies

Facilitator of the UNDP-GEF RERL Project

GEF Funding the project World Bank, Asian Development Bank

Collaboration for financing (SREP, CREF)

KfW Synergy in financing of RE systems (institutional solar)

KfW banking group is a German government-owned development bank

GiZ Supports NRREP through TA

GiZ supports German Government in achieving its objectives in the field of international cooperation for sustainable development

Norwegian Government Promoter of NRREP

Danish Government


40


UK Government – DFID

Com

pani

es a

nd th

eir

Ass

ocia

tion

s

Nepal Micro Hydro Development Association (NMHDA) and qualified RET installation companies

Its members will be beneficiaries of manufacturer capacity enhancement efforts of the Project Supply of equipment for the demonstration and other projects

NMHDA is the national association of micro hydropower development companies in Nepal.

Solar Manufacturers Association of Nepal (SEMAN)

SEMAN is the national association of solar PV companies in Nepal

Fin

anci

ng a

nd in

sura

nce

Inst

itut

ions

National commercial and development banks

Financing of RE systems and productive end uses

Micro-financing institutions and Cooperatives

Financing of RE based productive end uses

Insurance companies

Insurance of RE systems and electricity based enterprises

Development focused impact funds

Source of seed funding, equity and credit enhancement products

Loc

al I

nsti

tuti

ons

and

thei

r A

ssoc

iati

ons

District Development Committees (DDCs)

Local coordination and resources mobilization Local permits etc., where needed

DDCs are district level local governments in Nepal

Village Development Committees (VDC)


VDCs are village level local governments in Nepal

Association of District Development Committees Nepal (ADDCN)

Awareness and advocacy for increased utilization of RE and RE based productive end uses in DDCs Policy Advocacy

National Association of VDCs in Nepal (NAVIN)

Awareness and advocacy for increased utilization of RE and RE based productive end uses in VDCs Policy Advocacy


41

B.2 Describe the socioeconomic benefits to be delivered by the Project at the national and local levels, including consideration of gender dimensions, and how these will support the achievement of global environment benefits (GEF Trust Fund/NPIF) or adaptation benefits (LDCF/SCCF):

1. Gender issues

As access to technology is power, it is important that power relationships and ownership be balanced between men and women and between and within different groups of population. The key issue is how to provide equal access to resources and opportunities to women and men in all the population groups as their right to basic needs and livelihood. Nepalese society is characterised by gender and social systems, which are based on gender and caste hierarchy following a patriarchal value system. This determines the roles and relationship between women and men, and between different groups. In the energy distribution, it also influences the share, ownership and benefits accruing to women and men in different ethnic groups and between different disadvantaged groups. UNDP’s REDP programme for past one and a half decade was implemented to overcome such gender and social cultural constraints to ensure equal access in the renewable energy sector through mainstreaming of Gender and Social Inclusion (GESI).

Women’s and men’s access and control over resources: Labour is considered productive in Nepal but marred by migration of productive population, predominantly male, for better employment opportunities abroad resulting in lack of male labour in many villages. Nepal’s rural economy is agricultural based and most tasks related to cultivation are segregated by gender. For instance, women predominately are responsible for rice plantation whereas it is always the men that plough the fields. With regards to labour for the construction of stoves, the labour for carrying out various tasks in constructing a stove is shared by women and men. Community participation in constructing energy projects such as micro hydro, when it comes to construction labour; it is shared among men and women. During the Project operation, the opportunity to act as technicians who will construct and install the power projects is dominated by men. Government is implementing affirmative policy in training of micro hydro operators etc. for female.

The collection of fuel wood from the forests is determined by gender since mostly women take up this task and therefore it is implicit that women would continue to undertake this. Introduction of energized rural industries such as rice mill, flour mill, oil expelling, etc. could on the one hand, reinforce or ease drudgery of women and girl children but on the other hand, could also improve the rural economy benefitting both men and women.

Participation in decision-making process: Women in many communities in Nepal participate in decision making, but in majority of communities decision making domain lies mainly with male member of society. Generally, Nepalese women are in disadvantaged position as far as taking decisions in the household is concerned. In the public sphere too, men dominate in political, bureaucratic, industrial and trading businesses. Women though represented in many committees such as water users committees for drinking water and irrigation are mostly passive and support decisions that men take. Though the rules and procedures in many development activities funded by UNDP and other donors mandatorily require strong women participation, it is necessary to create the environment for wholesome participation of women in decision-making to address the strategic gender needs of women.

Gender inclusion in project interventions: Basically the objective of the RERL project with regards to GESI is to build an equitable and gender inclusive society by ensuring equal rights to women of all castes, creed and regions in the social, political and economic aspects of national development.

In the current context, gender mainstreaming refers to empowering women to engage in the enterprises. Women can own and manage the businesses and involve in various stages in the production and marketing. Encouraging women’s participation is justified from the perspective that they need positive


42

discrimination for overall development. Engaging women in local businesses has become important also because of the fact that large number of male members of households have migrated abroad for earnings. There are numerous cases which show that with proper knowledge and skills, women have successfully managed businesses. Therefore, gender sensitization is essential at every stage of business promotion from awareness creation to capacity building and business establishment and operation.

In promoting energy-based enterprises for the sustainability of Mini-hydro and Large-scale solar PV projects, aspects regarding Gender and Social Inclusion (GESI) should be integrated. Various other affirmative actions would require to be identified to ensure women and marginalised people are able to participate in capacity building opportunities, do their own enterprise or are given priority in employment opportunities (at least 33%). The Government’s Renewable Energy Subsidy Policy also has affirmative provisions for single women and widows as well as marginalised communities. UNDP-GEF RERL has further given thrust to this effort by provisioning working capital support to women and marginalised/vulnerable groups in demonstration projects.

2. Poverty

Regarding poverty, about 25% of Nepal’s populations live below the poverty line most of who reside in rural areas. The Project is expected to contribute to poverty reduction through savings on women’s time, increasing employment opportunities, and access to better health facilities. Consequently, villagers will have less days of sickness thereby enhancing their productivity.

3. Other socio-economic benefits

The RERL project is expected to provide socio-economic benefits to communities through extensive promotion of productive end-uses of energy in rural areas where women will be given preference. The cash incomes from productive uses are expected to increase substantially thereby empowering women financially as a mean to overall social and economic empowerment. People’s time mainly that of women and children spent on many of household chores will be saved. Women could potentially use that time for other productive uses further.

Under the project, promotion of productive end-uses based on locally available raw materials and inputs would require higher level of skills. Project is designed with a component where capacity building and market development is given very high priority. As a result the employment opportunities are expected to increase considerably. B.3.Explain how cost-effectiveness is reflected in the project design:

The proposed project targets the realization of a substantial increase in the sustainable and efficient use of hydropower and solar energy resources for the provision of energy services in the rural areas of Nepal (i.e., for household, community and rural industry uses). The target is planned to be achieved through facilitation to remove the identified barriers focusing on institutional strengthening, regulatory framework, capacity building, incentivizing financing for rural energy projects and market development for the products of rural enterprises using electricity from Mini hydro and large scale solar PV projects. During the project inception phase, targeted consultations will be held with local entrepreneurs and public sector institutions to implement projects under PPP modalities for the demonstration projects and post demonstration projects. Also, Component 1 of the proposed project focuses strongly on specific institutional and policy supports for efficient utilization of rural energy (Mini-hydro and large-scale solar PV projects).

The lifetime direct GHG emissions avoided, attributable to the investments made during the project's supervised implementation period (5 years), totaled over the respective lifetime of the investments on the mini-hydro and large-scale solar PV projects (15 years) is 37,617 tCO2. The lifetime direct post-project


43

emissions avoided, attributable to the investments made outside the project's supervised implementation period, but supported by the technical assistance and financial facilities put in place by the GEF project, totaled over the respective lifetime of the investments (15 years) is 131,659 tCO2. Likewise, the lifetime indirect emissions reductions, attributable to the long-term outcomes of the GEF activities that remove barriers, such as capacity building, innovation, catalytic action for replication is estimated to be 338,553 tCO2 and 282,852 tCO2using bottom-up and top-down approach respectively. Taking all projects into account (demonstration projects and post demonstration projects including indirect impacts) and as per the indirect bottom-up approach it is 507,829 tCO2. This will give rise to an estimated CO2 abatement cost of about USD 5.9 of GEF resources/tonne of CO2 emissions avoided. If the UNDP co-financing of USD 2 million is added then the CO2abatement cost per tonne comes to around USD 9.85. These estimates prove the cost effectiveness of the proposed project.

The project’s cost effectiveness will be tracked using the Tracking Tool for Climate Change Mitigation Projects developed by GEF.

C. DESCRIBE THE BUDGETED M &E PLAN: The project will be monitored through the following M& E activities. 1. Project start

A Project Inception Workshop will be held within the first 2 months after the project start, providing a platform for all project stakeholders to review the project document in line with their envisaged roles and responsibilities. The Inception Workshop is crucial to building ownership for the project results and to plan the first year annual work plan.

A fundamental objective of the Inception Workshop will be to present the modalities of project implementation and execution, document mutual agreement for the proposed executive arrangements amongst stakeholders and assist the project team to understand and take ownership of the project's goals and objectives. Another key objective of the Inception Workshop is to introduce project staff with the UNDP expanded team which will support the project during its implementation, namely the UNDP CO, responsible Regional Technical Advisor and other Asia Pacific Centre staff (APRC) as appropriate.

The Inception Workshop will address a number of key issues including:

Assist all partners to fully understand and take ownership of the project. Detail the roles, support services and complementary responsibilities of UNDP CO and APRC staff vis-à-vis the project team. Discuss the roles, functions, and responsibilities within the project's decision-making structures, including reporting and communication lines, and conflict resolution mechanisms. The Terms of Reference for project staff and other project-related structures will be discussed again as needed in order to clarify for all, each party’s responsibilities during the project’s implementation phase.

Based on the project results framework and the relevant GEF Tracking Tool, finalize the first annual work plan. Review and agree on the indicators, targets and their means of verification, and recheck assumptions and risks.

Provide a detailed overview of reporting, monitoring and evaluation (M&E) requirements including roles and responsibilities for different M&E functions, with particular emphasis on the Annual Project Implementation Reviews (PIRS) and related documentation, the Annual Project


44

Report (APR) as well as midterm and terminal evaluations. The Monitoring and Evaluation work plan and budget should be agreed and scheduled.

Plan and schedule Project Board meetings. Roles and responsibilities of all project organisation structures should be clarified and meetings planned. The first Project Board meeting should be held within the first 3 months following the inception workshop.

Any further or unresolved issues with regards to project integration with National Rural Renewable Energy Programme will required to be resolved during this inception phase.

An Inception Workshop report is a key reference document and must be prepared and shared with participants to formalize various agreements and plans decided during the meeting.

Project audit will follow UNDP Financial Regulations and Rules and applicable Audit policies.

2. First Annual Work Plan

After the Inception Workshop, the Project Management Team (PMT) in line with NRREP team will prepare the project’s first Annual Work Plan (AWP), on the basis of the Project Results Framework (PRF). This will include reviewing the PRF (indicators, means of verification, assumptions and risks), imparting additional detail as needed on the basis of this exercise, finalize the AWP with precise and measurable performance indicators and in a manner consistent with the expected outcomes for the project.

3. Reporting 3.1Quarterly Project progress made will be monitored in the UNDP Enhanced Results Based

Management Platform. Quarterly Progress Reports (QPR) will be prepared by the PMT and submitted to the UNDP CO for sharing with the UNDP Regional Team.

On a quarterly basis, a quality assessment process shall record progress towards the completion of key results, based on quality criteria and methods captured in the Quality Management table as per the UNDP Nepal Project M & E Framework.

Based on the initial risk analysis submitted, the risk log will be regularly updated in ATLAS by reviewing the external environment that may affect the project implementation. Risks become critical when the impact and probability are high. Note that for UNDP GEF projects, all financial risks associated with financial instruments such as revolving funds, microfinance schemes, or capitalization of ESCOs are automatically classified as critical on the basis of their innovative nature (high impact and uncertainty due to no previous experience justifies classification as critical).

An Issue Log shall be activated in Atlas and updated by the Project Manager to facilitate tracking and resolution of potential problems or requests for change.

Based on the above information recorded in Atlas, a Project Progress Reports (PPR) shall be submitted by the Project Manager to the Project Board through Project Assurance, using the standard report format available in the Executive Snapshot.

A project Lesson-learned log shall be activated and regularly updated to ensure on-going learning and adaptation within the organization, and to facilitate the preparation of the Lessons-learned Report at the end of the project.

A Monitoring Schedule Plan shall be activated in Atlas and updated to track key management actions/events. The use of these functions is a key indicator in the UNDP Executive Balanced Scorecard.


45

3.2 Annually

An Annual Review Report (ARR) shall be prepared by the Project Manager and shared with the Project Board and the Steering Committee. As minimum requirement, the ARR shall consist of the Atlas standard format for the QPR covering the whole year with updated information for each above element of the QPR as well as a summary of results achieved against pre-defined annual targets at the output level.

An Annual Project Review/Project Implementation Reports (APR/PIR) shall be prepared to monitor progress made since the start of the project and in particular for the previous reporting period (30 June to 1 July). The APR/PIR combines both UNDP and GEF reporting requirements. Based on the ARR, an annual project review shall be conducted during the fourth quarter of the year or soon after, to assess the performance of the project and appraise the Annual Work Plan (AWP) for the following year. In the last year, this review will be a final assessment. This review is driven by the Project Board and may involve other stakeholders as required. It shall focus on the extent to which progress is being made towards outputs, and that these remain aligned to appropriate outcomes.

The APR/PIR includes, but is not limited to, reporting on the following:

Progress made toward project objective and project outcomes - each with indicators, baseline data and end-of-project targets (cumulative)

Project outputs delivered per project outcome (annual).

Lesson learned/good practice.

AWP and other expenditure reports

Risk and adaptive management

ATLAS QPR

Portfolio level indicators (i.e. GEF focal area tracking tools) are used by most focal areas on an annual basis as well.

4. Periodic monitoring through site visits:

GON, APEC/NRREP, UNDP CO and the UNDP APRC will conduct visits to project sites based on the agreed schedule in the project's Inception Report/Annual Work Plan to assess first hand project progress. Other members of the Project Board may also join these visits. A Field Visit Report/BTOR will be prepared by the CO and UNDP APRC and will be circulated no less than one month after the visit to the project team and Project Board members.

4.1 Mid-term of project cycle The project will undergo an independent Mid-Term Evaluation at the mid-point of project

implementation (July 2016). The Mid-Term Evaluation will determine progress being made toward 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 and timing of the mid-term evaluation will be decided after consultation between the parties to the project document. The Terms of Reference for this Mid-term evaluation will be prepared by the UNDP CO based on guidance from the Regional


46

Coordinating Unit and UNDP-GEF. The management response and the evaluation will be uploaded to UNDP corporate systems, in particular the UNDP Evaluation Office Evaluation Resource Centre (ERC).

The relevant GEF Focal Area Tracking Tool, the AMAT, will also be completed during the mid-term evaluation cycle.

4.2 End of Project An independent Final Evaluation will take place three months prior to the final Project Board

meeting and will be undertaken in accordance with UNDP and GEF guidance. The final evaluation will focus on the delivery of the project’s results as initially planned (and as corrected after the mid-term evaluation, if any such correction took place). The final evaluation will look at impact and sustainability of results, including the contribution to capacity development and the achievement of global environmental benefits/goals. The Terms of Reference for this evaluation will be prepared by the UNDP CO based on guidance from the Regional Coordinating Unit and UNDP-GEF.

The Terminal Evaluation should also provide recommendations for follow-up activities and requires a management response which should be uploaded to PIMS and to the UNDP Evaluation Office Evaluation Resource Center (ERC).

The GEF Focal Area Tracking Tool, the AMAT, will also be completed during the final evaluation.

During the last three months, the project team will prepare the Project Terminal Report. This comprehensive report will summarize the results achieved (objectives, outcomes, outputs), lessons learned, problems met and areas where results may not have been achieved. 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 results.

5. Learning and knowledge sharing Results from the project will be disseminated within and beyond the project intervention period

through existing information sharing networks and forums like national knowledge management institutions, national/regional and international workshops and seminars.

The project will identify and participate, as relevant and appropriate, in scientific, policy-based and/or any other networks, which may be of benefit to project implementation though lessons learned. The project will identify, analyse, and share lessons learned that might be beneficial in the design and implementation of similar future projects.

Finally, there will be a two-way flow of information between this project and other projects of a similar focus nationally, regionally and internationally. Experiences of Rural, Renewable Energy in Nepal will be shared in the region as relevant.

6. Communications and visibility requirements Full compliance is required with UNDP and GEF Branding Guidelines. These can be accessed

at http://intra.undp.org/coa/branding.shtml, and specific guidelines on UNDP logo use can be accessed at: http://intra.undp.org/branding/useOfLogo.html. Among other things, these guidelines


47

describe when and how the UNDP logo is required to be used, as well as how the logos of donors to UNDP projects are required to be used. To avoid any misuse, when logo use is required, the UNDP logo needs to be used alongside the GEF logo. The GEF logo can be accessed at: http://www.thegef.org/gef/GEF_logo. The UNDP logo can be accessed at http://intra.undp.org/coa/branding.shtml.

Full compliance is also required with the GEF’s Communication and Visibility Guidelines (“GEF Guidelines”) which can be accessed at: http://www.thegef.org/gef/sites/thegef.org/files/documents/C.40.08_Branding_the_GEF%20final_0.pdf. Among other things, the GEF Guidelines describe when and how the GEF logo needs to be used in project publications, vehicles, supplies and other project equipment. The GEF Guidelines also describe other GEF promotional requirements regarding press releases, press conferences, press visits, visits by Government officials, productions and other promotional items.

Where other agencies and project partners have provided support through co-financing, their branding policies and requirements should be similarly applied.

The M& E work plan and budget details are provided in the Table 4 below.

Table 4: M&E Work Plan and Budget

Type of M&E activity

Responsible Parties Budget (USD)*

Time frame

Inception Workshop and Report

NPD, NPM and Project Board UNDP CO, UNDP GEF

10,000 Within 2 month of project start up

Measurement of Means of Verification of results/Impacts (Outcomes &Objective Indicators).

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

20,000

To be finalized in Inception Phase and Workshop.

Start, mid and end of project (during evaluation cycle) and annually when required.

Measurement of Means of Verification for Project Progress on output and implementation

Oversight by Project Manager Project team

To be determined as part of the Annual Work Plan's preparation.

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

ARR/PIR NPD, NPM and team UNDP CO, UNDP RTA UNDP EEG

None Annually

Periodic status/ progress reports

Project manager and team - Quarterly


48



Time frame

Project Board Meetings

PEB Members, including NPD/AEPC, CREF & UNDP CO NPM & PMT

5,000

Every quarter (four times in a year, once on completion of the APR/PIR and more frequently if needed

ATLAS QPR PMT, UNDP CO Quarterly

Mid-term Evaluation

Project manager and team UNDP CO, UNDP RCU External Consultants (i.e. evaluation team)

30,000 At the mid-point of project implementation.

Final Evaluation

NPD, Project manager and team, UNDP CO, UNDP APRC External Consultants (evaluation team)

30,000 At least THREE months before the end of project implementation

Project Terminal Report

NPD, Project manager and team UNDP CO

0 At least three months before the end of the project

Audit UNDP CO Project manager and team

15,000 Yearly

Visits to field sites

UNDP CO* UNDP APRC* (as appropriate) Government representatives, partners

10,000 Paid from IA fees and

operational budget

Yearly

TOTAL indicative COST1 Excluding project team staff time and UNDP staff and travel expenses

USD 120,000

*Excluding project team staff time PART III: APPROVAL/ENDORSEMENT BY GEF OPERATIONAL FOCAL POINT(S) AND GEF AGENCY(IES)

RECORD OF ENDORSEMENT OF GEF OPERATIONAL FOCAL POINT(S) ON BEHALF OF THE GOVERNMENT(S)

:): (Please attach theOperational Focal Point endorsement letter(s) with this form. For SGP, use this OFP endorsement letter).

NAME POSITION MINISTRY DATE(MM/dd/yyyy)Mr. Lal S. Ghimire

Joint Secretary and GEF OFP for Nepal

MINISTRY OF FINANCE, GOVERNMENT OF NEPAL

03/23/2011

GEF agency(ies) certification

This request has been prepared in accordance with GEF/LDCF/SCCF/NPIF policies and procedures and meets the GEF/LDCF/SCCF/NPIF criteria for CEO endorsement/approval of project.


49

Agency Coordinator, Agency

Name

Signature

Date (Month,

day, year)

Project Contact Person

Telephone

Email Address

Adriana Dinu

UNDP-GEF Executive

Coordinator and Director

a.i.

2/13/2014

Thiyagarajan Velumail

+66 (0)2304

9100, Ext 2597

[email protected]


Table 5: Project Activities and Incremental Reasoning Component/Outcome Baseline Activities Incremental Activities Alternative Activities

Component 1: Enhancement of RE investment environment Outcome 1: Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization

National Rural Renewable Energy Program (NRREP) plans to work for reforms and improvement in the subsidy administration of the renewable energy program. The program will support off-grid hydro (mostly micro-hydro), solar PV (SHS) and thermal systems, biogas and biomass technologies. It will integrate the District Energy and Environment Units into District Development Committees and will work to establish linkages between the AEPC and the needs of the rural population whilst promoting the interests of women and marginalized groups However, AEPC is expected to focus on legal, institutional and policy environment issues for micro hydro, solar home systems, and domestic biogas in which it has substantial experience and that larger scale development and applications of off-grid mini-hydro and large solar PV will continue to remain virtually absent from Nepal NRREP does not have any specific activities for

Policy will be put in place to operationalize PPP model for mini-hydro, large-scale solar PV development, productive end-use applications including fiscal incentives and adaptability for possible changes in Nepal government structure (to federal system). Adequate information will be made available for incorporating mini-hydro and large scale solar PV systems into district RE plans. Training and awareness programs will be designed and completed for relevant government agencies and stakeholders on mini-hydro and large scale solar PV systems development and productive end uses. The above incremental activities will be funded from GEF contribution as well as from co-finance from AEPC/NRREP.

Activity 1.1.1: Preparation and adoption, i.e., approval and enforcement, of policy that enables PPP model for mini-hydro, micro-hydro mini-grid, and large-scale PV development, thus attracting the private sector to such projects. Activity 1.1.2: Preparation and adoption of policy for future grid connection of off-grid mini-hydro, micro-hydro mini-grid, and large-scale solar PV systems. Activity 1.2.1: Preparation of the methodology for integrating mini-hydro projects and large-scale solar PV systems into district energy plans. Activity 1.2.2: Preparation and publication of reports on mini-hydro resource and large-scale solar PV needs assessment for first five districts based on the above methodology. Activity 1.2.3: Preparation and publication of reports on mini-hydro resource and large scale solar PV needs assessment for next ten districts based on the above methodology. Activity 1.3.1: Identification and preparation of case studies for mini-hydro and large-scale solar PV systems. Activity 1.3.2: Conduct of training needs assessment. Activity 1.3.3: Preparation and conduct of training courses


strengthening policy, information and policy awareness regarding mini-hydro or large scale solar PV and renewable energy systems in general..

Component 2: RE investments Outcome 2: Increased investments in RE

AEPC/NRREP will work to endow CREF with the capacity and authority to successfully carry out its operational mandate, especially with respect to effective disbursement of subsidies. It will establish CREF as the core financial institution responsible for the delivery of subsidies and credit support to the renewable energy sector. It will also work to put into operation micro-hydro systems and has unspecified plans to support viable large community solar PV systems Furthermore, it will enhance the project management capacity for community electrification projects. It will also strengthen the Regional Service Centres to facilitate the delivery of renewable energy services and promote linkages at a local level. NRREP has no plans to implement demonstration

Mini-hydro demonstration projects totaling 1 MW will be commissioned through PPP Model by. Mini-grid demonstration projects totaling 300 kW will be commissioned. Large-scale solar PV demonstration projects totaling 500kW will be commissioned. Funds from GEF and UNDP will be utilized as partial contribution to establish financing instrument to incentivize BFIs to provide financing for mini-hydro and large-scale solar PV projects under SPV/PPP model. The co-financing from CREF will be in the form of subsidy as per government policy and will contribute to the above financing instrument in selected BFIs. PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW) will be demonstrated. Financially sustainable and reliable mini-grid connecting ten (10) micro-hydro systems (300 kW) will be demonstrated. Financially sustainable and reliable

Activity 2a.1.1: Implementation of the Mini-hydro Power Generation Demonstrations Activity 2a.2.1: Implementation of the Mini-Grid Power Distribution Demonstrations Activity 2a.3.1: Implementation of the Large Scale Solar PV Power Generation Demonstrations. Activity 2b.1.1: Updating of the feasibility study of the selected Mini-hydro demonstration projects to make it bankable Activity 2b.1.2: Securing private sector active and substantial involvement in the implementation of the demonstration Mini-hydro projects (SPV) Activity 2b.1.3: Securing of licenses, clearances and permits for implementation of mini-hydro demonstrations Activity 2b.1.4: Preparation of detailed project reports (DPR) and bid documents Activity 2b.1.5: Negotiations on the financial closure of the demonstrations based on PPP model Activity 2b.1.6: Construction of the Demonstration Project Facilities Activity 2b.1.7: Setting-up of the O&M modalities Activity 2b.1.8: Documentation of UNDP-GEF RERL demonstration project learning Activity 2b.2.1: Conduct of feasibility study of potential demonstration project Activity 2b.2.2: Establishment of a Special Purpose Vehicle Activity 2b.2.3: Securing of required licenses, clearances and permits for implementation of mini-grid demonstration


projects on mini-hydro, mini-grid and large scale solar PV preferably adopting PPP models through special purpose vehicle (SPV), created as limited liability companies (LLCs), having equity investments from private sector, local bodies and communities. The focus would be mostly on supporting micro-hydro systems and community electrification.

large scale solar PV systems (500 kW total) will be demonstrated. 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance will be operationalized. Financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance will be completed. Financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance will be completed. The GEF and AEPC (through CREF) will contribute as investment to support the above incremental activities. All the above technical assistance activities will be funded by UNDP funds

Activity 2b.2.4: Preparation of detailed project reports (DPR) and bid documents Activity 2b.2.5: Negotiations on the financial closure of the financing of demonstrations based on PPP model Activity 2b.2.6: Construction of the demo project facilities Activity 2b.2.7: Setting up of the O&M modalities Activity 2b.2.8: Documentation and dissemination of lessons learned from demonstrations Activity 2b.3.1: Preparation of a shortlist of potential project sites selected based on a set of criteria and select sites in consultation with relevant stakeholders Activity 2b.3.2: Conduct of detailed feasibility study of selected demonstration projects Activity 2b.3.3: Establishment of special purpose vehicles for the project Activity 2b.3.4: Securing of land use permits Activity 2b.3.5: Preparation of detailed project reports (DPR) Activity 2b.3.6: Negotiations on the financial closure for the financing of the demonstrations Activity 2b.3.7: Implementation of the demonstration project Activity 2b.3.8: Setting-up of the O&M modalities Activity 2b.3.9: Documentation and dissemination of lessons learned Activity 2b.4.1: Implementation of the selected off-grid micro-hydro demonstration projects Activity 2b.5.1: Implementation of the selected off-grid mini-hydro demonstration projects Activity 2b.6.1: Implementation of the large scale solar PV demonstration projects

Component 3a: RE The CREF will partner with Financing instruments would be Activity 3a1.1: Establishment of the


technology and project financing enhancement Outcome 3a: Improved availability of financial investment supports for rural RE and other low-carbon technology applications

financial institutions for delivery of the credit and subsidies to the beneficiaries. However, the fund has not prepared specific plans and financing mechanisms. In the absence of outside stimulus, it is likely that the majority of funding from the CREF will be channelled to micro-hydro and solar home systems. NRREP has no plans to design, fund and implement credit funds and other investment support facilities to incentivize banks to finance domestic manufacturers to meet growing orders and be cost-effective. Neither does it have specific activities to establish instruments to incentivize banks to promote commercial financing for mini-hydro and large solar PV projects.

established to incentivize BFIs to promote commercial financing for mini-hydro and large-scale solar PV systems by the end of the project, which would support the investments for outputs listed under Component 2. In addition, financing instruments and support facilities would be established to incentivize Banking and Financial Institutions (BFI) for financing domestic manufacturers to meet growing orders and achieve cost competitiveness. The GEF funds for this component would be channeled through APEC (under the CREF) with a chosen financial instrument with the stipulation that there will be a process to procure/select a certain number of private BFIs to directly provide the loans. The CREF will provide wholesale finance (provided by GEF) to those FIs to provide the retail loans to the investees. The above financial instruments will initially be funded by GEF as well as AEPC through CREF.

wholesale financing instrument for financing manufacturers Activity 3a.2.1: Establishment of wholesale financing instrumentto incentivize BFIs for commercial financing of Mini-hydro and large-scale solar PV projects

Component 3b: RE technology and project financing enhancement Outcome 3b: Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications

AEPC/NRREP will work to make available appropriate business development services to MSMEs in RE catchment areas. The aim is to contribute to promote income generation and employment potential through promotion of micro, small, and medium sized enterprises (MSME) in rural areas, particularly for men and women belonging to

Other financing instruments and support facilities mechanisms for domestic manufacturers to meet growing orders and be cost competitive will be designed through GEF TA support. Design of financing instruments for promoting commercial financing for mini-hydro and large-scale solar PV projects will be put in place through TA support. Training materials on mini-hydro and

Activity 3b.1.1: Design of the wholesale financing package for Mini-hydro manufacturer and selection of fund administrator Activity 3b.1.2: Design and finalization of wholesale financing package for supporting manufacturers of Mini-hydro, including obtaining NRB approval Activity 3b.1.3 Establishment of wholesale financing package in at least two financing institutions through CREF Activity 3b.2.1: Design of the commercial financing instruments for Mini-hydro and Large-scale solar PV projects and select


socially and economically disadvantaged groups. The enterprises will be facilitated by the availability of off-grid renewable energy. NRREP has no plans to support focused productive end use promotion and market development to be demonstrated.

large-scale solar PV projects for financing institutions will be developed. Matchmaking platform for mini-hydro and large-scale solar PV developers, financing institutions, and equity investors, and productive end users will be created. The technical assistance for designing the above financial instruments and other activities will funded by TA support from GEF and UNDP. Functional enterprises adopting productive use of electricity will be ensured. Mechanisms to promote financial products for entrepreneurs /end users will be operationalized. Ownership by women and marginalized/vulnerable groups of 33% of the functional electricity based enterprises established will be ensured. The above activities will funded by UNDP and GEF.

fund administrator Activity 3b.3.1: Design of training materials for bankers to understand challenges and opportunities in Mini-hydro and Large-scale solar PV projects Activity 3b.4.1: Organization of appropriate events to bring together Mini-hydro developers and Large-scale solar PV Projects, equity investors, and potential lenders Activity 3b.4.2 Follow up work on business matchmaking events Activity 3b.4.3: Development of a web-based portal that allows developers, lenders and investors to interface and exchange information. Activity 3b.5.1: Preparation of guidelines for identifying and assessing existing enterprises in the electrification area having potential for switching to electricity Activity 3b.5.2: Preparation of business plan by the RE project developers (SPVs) for promoting productive use of electricity Activity 3b.5.3: Development of locally based Enterprise Development Facilitators (EDFs) and Business Development Service Providing Organisations (BDSPOs) Activity 3b.5.4: Promotion of switching to electrical energy to entrepreneurs Activity 3b.5.5 Conduct of exploration study for identifying potential and feasible enterprises in the project areas Activity 3b.5.6: Conduct of business promotion campaigns Activity 3b.5.7: Conduct of capacity building work for prospective entrepreneurs to create new enterprises Activity 3b.5.8: Conduct of capacity building for existing entrepreneurs on the smooth operation of the business, business expansion/growth and productivity improvement Activity 3b.5.9: Documentation of good


practices and lessons learned from successful enterprises for replication Activity 3b.6.1 Assessment of existing financing services and identification of existing institutions (non-formal mechanisms e.g. credit saving group) for potential upgrading into micro-finance institutions or cooperatives Activity 3b.6.2 Establishment of formal micro-finance institutions out of existing non-formal mechanisms (e.g. saving credit group) in Mini-hydro areas lacking FIs (banks and MFIs) or needing more MFIs and support building capacity of the MFIs Activity 3b.6.3:Developmentand dissemination of tools for promoting commercial financing of productive use of electricity linking as far as possible with CleanStart activities in Nepal. Activity 3b.7.1: Facilitation of the switching to electricity use by marginalized/vulnerable groups and the establishment of new enterprises

Component 4: Human Capacity Development Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector

AEPC/NRREP will work to ensure that community electrification projects are better designed with regard to the use of the available potential, and operate at a higher load factor to be more sustainable. It will also endeavor to ensure that community electrification technology is scaled-up (in volume and unit size) and is of a higher standard. To achieve this, the NRREP has proposed contracting and capacity development of Regional Service Centres, project management capacity development for community electrification projects and

A Knowledge base of technical challenges and opportunities in the design, manufacture (for micro-hydro (60+ kW) and mini-hydro), installation and after-sales service in micro-hydro (60+ kW), mini-hydro and large scale solar PV systems will be created. Skilled and technically capable people for project identification, feasibility studies and detail design of mini-hydro projects will be developed through training. Skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services will be developed through training. Skilled and technically capable construction and installation teams

Activity 4.1.1 Conduct of a study on the identification of technical challenges and opportunities in design, manufacture, installation and after-sales service for Mini-hydro and Large-scale solar PV systems Activity 4.2.1: Preparation and adoption of a project development and design manuals for Mini-hydro projects. Activity 4.2.2: Conduct of capacity building trainings for developers, consulting firms, and relevant service providers for Mini-hydro projects Activity 4.2.3 Development of manuals on project development, system design and integration manuals for large-scale solar PV systems Activity 4.2.4 Conduct of capacity building trainings for consulting firms, systems integrators, and relevant service providers for Large-scale solar PV projects


capacity development of existing MSMEs NRREP has no specific activities to provide technology and capacity building support for mini-hydro and large scale solar PV projects, especially from the initial design phase up to the operation and maintenance and end use promotion phase to demonstrate how productive load can be effectively utilized.

within companies to improve quality of installed mini-hydro projects and large solar PV system will be developed through training. Skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems will be developed through training. The above activities will funded by GEF.

Activity 4.3.1: Development of a set of pre-qualification criteria and methodology of certification for Mini-hydro manufacturers and Installers. Activity 4.3.2 Acquisition of new mini-hydro technologies through technology transfer Activity 4.3.3: Development of quality assurance procedures, training curriculum and manuals for Mini-hydro manufacturing Activity 4.3.4 Conduct of quality assurance and standardization training Activity 4.4.1: Development of training curriculum and manuals for quality assurance procedures, pre-qualification criteria and methodology of certification for construction and installation of Mini-hydro projects. Activity 4.4.2: Development of a pre-qualification criteria and methodology of certification for installation of Large-scale solar PV systems Activity 4.5.1: Development of O&M training curriculum and manuals for Mini-hydro and conduct training based on these. Activity 4.5.2: Development of O&M training curriculum and manuals for large-scale solar PV systems and conduct training based on these. Activity 4.5.3: Development of business management training curriculum and manuals for Mini-hydro and large-scale solar PV systems. Activity 4.5.4: Conduct of training on business management for Mini-hydro and large-scale solar PV systems.


ANNEX A: PROJECT RESULTS FRAMEWORK This project will contribute to achieving the following Country Programme Outcome as defined in CPAP or CPD: Vulnerable groups have improved access to economic opportunities and adequate social protection: (Output: Vulnerable groups have increased access to energy services and sustainably managed natural resources.) Country Programme Outcome Indicators: Number of households in remote areas connected to micro-hydro or mini-hydro energy services. Number of new job holders. Primary applicable Key Environment and Sustainable Development Key Result Area (indicated in bold below): 1. Mainstreaming environment and energy OR 2. Catalysing environmental finance OR 3. Promote climate change adaptation OR 4. Expanding access to environmental and energy services for the poor including women and representatives from marginalized communities. Applicable GEF Strategic Objective and Program: CC-SP4: CCM-3: Climate Change Mitigation – Promote investments in renewable energy technologies Applicable GEF Expected Outcomes: Investment in renewable energy technologies increased; favourable policy and regulatory environment created for renewable energy investments Applicable GEF Outcome Indicators : tonnes CO2 equivalent avoided

Objective & Outcomes

Objectively Verifiable Indicators Sources of Verification

Critical Assumption

s Indicator Year 0 Targets

Project Objective: Removal of barriers to increased utilization of renewable energy resources in rural Nepal in order to support

Total installed capacity of renewable energy-based power generation projects implemented by end-of-project (EOP), MW

Electricity generated annually for livelihood and quality of life improvement (GWh/yr) by the EOP.

Annual GHG emission avoided

0

0

0

12.511

26.79512

35,375

Documentation on the installed RE-based power generation projects; AEPC records; RERL project M&E reports

RERL project M&E reports


11 This is comprised of 10 MW off-grid hydro (8 MW mini-hydro & 2 MW large micro-hydro); and 2.5 MW of large-scale solar PV system. 12 This is comprised of 23.76GWh/year from additional mini-hydro, and 3.035GWh/year from large solar PV System.


economic, environmental, and social development of people in the rural areas and to reduce GHG emissions

by EOP, tCO2/year No. of households benefitting

from lighting, productive end-use services and employment due to electricity supply by EOP

0 50,000


Component 1: Enhancement of RE investment environment [Policy, Planning, and Information] Outcome 1: Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization

No. of RE-based power generation projects that were proposed and developed as influenced by the strengthened policy regime on RE and low carbon development by EOP

No. of district energy plans developed that include mini-hydro and large scale solar PV power generation installations by Year 3

No. of policies and legal frameworks that are supportive of RE-based energy production were approved and enforced by Year 3

013

0

0

50

15

2

RERL project M&E reports; AEPC reports

Documentation of the district energy plans from AEPC reports

Revised policies and legislations or regulations published in Government Gazette

Component 2:RE Investments

13 Existing RE policy has no provision for mini-hydro and large scale solar PV development


Outcome 2: Increased investments in RE

No. of local financial institutions that provide loans for feasible RE-based energy projects in the remote areas of Nepal by Year 3

No. of RE-based energy projects developed and proposed for financing from local financial institutions by EOP

Total installed large RE-based power generation capacity funded by local financial institutions by EOP, MW

Total installed capacity of renewable energy-based power generation projects achieving financial closure by end-of-project (EOP), MW

3

0

0

0

10

50

1.814

12.5

Documentation on the approved financial support agreements; RERL project M&E reports

Documentation on the financing proposals from the RE project proponents; RERL project M&E reports

Documentation on the approved project financing agreements; RERL project M&E reports


-Developers are willing to construct the project -CREF funds available -Equity and loan available for project proponents

Component 3:RE technology and project financing enhancement Outcome 3a: Improved availability of financial investment supports for rural RE and other low-carbon

No. of RE financial instruments developed, funded and operationalized by EOP

No. of local financial institutions implementing the new RE financial instruments and have RE loan portfolios by

0

0

2

10

Documentation of the establishment and operation of the funded financial instruments

Documentation of RE projects funded by FIs under the established financial instruments

-CREF will operate and augment funds for the facility -Committed FIs will continuously operationaliz

141 MW mini-hydro; 0.5 MW large-scale solar PV; and, 300 kW mini-grid project


technology applications

EOP

e their lending portfolio in support of the established financing instruments


No. of new and improved RE financial instruments for supporting rural RE and low carbon technology applications designed by EOP

Total amount of funds allocated by the GoN and the local financial sector for the new RE financial instruments by EOP, US$ million

Total load factor including contribution of productive use by EOP

No. of productive use enterprises from RE projects funded through the new RE financing instruments by EOP

0

0

0

0

2

30.25

50

300

Documentation of the approved RE financial instruments

Documentation of the approved business plans for the new RE financial instruments, RERL project M&E reports

Meter reading and log

sheet


-CREF will operate and augment funds for the facility -Committed FIs will continuously earmark funds for implementing the new financial instruments

Component 4: Human Capacity Development Outcome 4. Enhanced capacities and skills of various stakeholders in the RE sector

No. of local engineering consulting firms prequalified (qualified to bid) by AEPC for design of RE-based power generation (e.g., mini-hydro projects by EOP

No. of local engineering companies prequalified

0

0

10

5

AEPC records; Directory of local engineering consulting firms; Documentation of qualifications of pre-qualified local engineering consulting firms

AEPC records; Directory of local


(qualified to bid) by AEPC for the manufacturing of RE-based power generation (e.g., mini-hydro) system components by EOP

No. of local engineering

companies prequalified (qualified to bid) by AEPC for the installation of RE-based power generation (e.g., large scale solar PV)systems by EOP

No. of local engineering companies that are qualified and capable to repair and maintain RE-based power generation system equipment/components by EOP

0

0

5

5

engineering firms; Documentation of qualifications of pre-qualified local engineering firms; Company business plan

AEPC records;

Directory of local engineering firms; Documentation of qualifications of pre-qualified local engineering firms; Company business plan

AEPC records; Directory of local engineering firms; Documentation of qualifications of qualified local engineering firms; Company business plan

user

Highlight


ANNEX B: RESPONSES TO PROJECT REVIEWS (from GEF Secretariat and GEF Agencies, and Responses to Comments from Council at work program inclusion and the Convention Secretariat and STAP at PIF). Response to the Council Member Comments

Comment Response Reference The implementation is highly dependent on donor support, including for the co-financing, and it is not sufficiently clarified in the PIF how investment barriers will be overcome. The final project document should explain why more piloting of mini-hydropower is needed in a country that already has demonstrated such technology. It seems that component 3a/3b offers the incentives to the private sector, more so than Component 2.

Yes. Most of the donor support is already confirmed and it is available for funding the NRREP projects, which form the baseline for the UNDP-GEF project interventions. This donor support is available for renewable energy (RE) projects independent of UNDP-GEF project. The proposed UNDP-GEF project builds on the baseline NRREP project with several interventions to make the whole RE initiative more effective with better economies of scale, productive end-uses, enterprise development, financially sustainable and inclusive. Pro Doc elaborately discusses on the strategies adopted to overcome investment barriers. This has been performed in the Project document. Both components provide support to private sector. Under Component 2, both investment and technical assistance support are provided whereas under component 3a and 3b, only technical assistance support is provided.

Please see sub-section “NRREP Indicative Budget and Donor Funds” and Tables 21 & 22 (Page 38 – 39) under section 1.6 - Baseline Projects Please refer section 2.1.1 (page 48 – 50), section 2.2 (page 53 – 54), section 3.2.2 (page 64 – 73), section 3.2.3 (page 73 – 75) and section 3.2.4 (page 76 – 80) Please see under section 2, sub-sections 2.1 (2.1.1, 2.1.5), 2.2 and 2.3 (page 45 – 56) Please refer section 3.2.2 for description of Component 2 on RE investments as well as descriptions on Outcome 2a and Outcome 2b (page 64 – 73). Also, please refer sections 3.2.3 (page 73-75), 3.2.4 (page 76 – 80) for descriptions of components, outcomes and outputs.

Germany further notes that the cost per reduced ton of CO2 for a USD 17.5 million is quite high at almost USD39/ton and would like

Taking all projects into account and as per indirect bottom-up approach, the incremental GHG mitigation potential is 507,829 tCO2. This will give rise to an estimated CO2 abatement cost of about USD 5.9 of GEF resources/tonne of CO2 emissions. If the UNDP co-financing of USD 2 million is added then the CO2

Please refer Section B.3 of CEO Endorsement Refer Section 3.9 of Pro


to see more details regarding other benefits, including an estimate of number of beneficiaries in the final document.

abatement cost per tonne comes to around USD 9.85. These estimates prove the cost effectiveness of the proposed project. The co-financing from the government of Nepal is a baseline co-finance and it would be spent even in the absence of GEF project.

Doc (pages 154 – 156)

GEF Secretariat review at PIF/Work Program inclusion

GEFSEC Questions GEFSEC Comments Responses to GEFSEC Comments Reference

31. Items to consider at CEO endorsement/ approval.

Sound technical and regulatory guidelines for grid or micro-grid interconnection of small-scale renewable power is a critical success factor. Please describe the timeline for development and implementation of these guidelines. Please describe plans for implementing and enforcing the guidelines at the district and village level. Increased use of RE systems to displace use of fuel wood and fossil fuels presumes availability of cost-effective electrically powered lighting, appliances and equipment. Please describe what types of electrical equipment are in demand and available at the district and village level. Also, the form (grant vs. non-grant) and the amount of GEF funding for investment support should be analytically justified according to the incremental cost principle based on the lessons learned by the existing projects in the country and the relevant market data regarding the cost of the specific technologies.

Necessary technical and regulatory guidelines are planned to be completed during the first year of the project as described in Activities related to Output 1.1 and 1.2 It is discussed in section related to Technology Selection The GEF funding is justified both in terms of incremental cost effectiveness and benefits of GHG mitigation.

Refer section 4.2 of Pro Doc (Page 163) Refer Section 2.1 of Pro Doc (pages 45-52) Section 2.2 of Pro Doc (page 53) Please refer the sections on “GEF Incremental Reasoning: Cost Effectiveness” and “Global Environmental Benefits” in this document (CEO Endorsement;


page 18-19) as well as in Pro Doc (page 147-148 & page 154-156)


3. Responses STAP Review

Comment Response Reference 1. Rational for technology selection: It is not justified why off-grid micro-hydro and solar PV are the two selected RE technology "most feasible solutions". The government's Alternative Energy Strategy also includes 1 MW of wind power and 90,000 biogas plants, though it is realized the 15 MW of micro-hydro and around 8MW (peak) of solar PV are the dominant technologies. Solar water pumping for drinking and irrigation and improved watermills are also included in the proposal but no targets are given so it is not clear if these are to be included or not. The project title is very broad but the focus of the project is "Off-grid micro-hydro and solar energy systems to supply energy services for rural communities". Solar PV application for pumping irrigation water is likely to be a very expensive technology. Economic justification is necessary for the SPV technologies for different applications.

Five key reasons for selecting the technologies are elaborated in the Pro Doc: 1. Potential to have the most meaningful and sustainable impacts. 2. Providing both integration and value-add to NRREP by addressing the UNDP-GEF RERL focused area of larger systems which otherwise will be unmet. 3. Achieving project coherence through adherence to a few key thematic areas to have a greater impact rather than having a collection of disparate initiatives. 4. Leveraging UNDP experience and comparative advantage, 5. Emphasizing technologies have potential to create strong benefits in capacity building, awareness, dissemination and market development Financial analyses have been done, provided in Annex 2, for all selected interventions. Nepal is still struggling to establish technical possibilities for wind energy systems for the lack of data. Project title suits very well with focus on productive use and financial sustainability of energy interventions

Refer Section 2.1 of Pro Doc (pages 45-52) Section 2.2 of Pro Doc (pages 53) Refer Annex 2 of Pro Doc Section 1.2 of Pro Doc (pages 15-16)

2. Demonstration sites: Solar and micro-hydro systems are relatively mature with many installations operating successfully in Nepal and elsewhere. Probably good solar and hydro resources exist in many locations within Nepal, so replication and enhanced deployment is a commendable objective. Whether this needs new demonstration projects when monitoring existing projects and promotion of the findings could achieve a similar purpose is not clear. Also how the information collected from the demonstrations will actually be disseminated has not been discussed other than broadly under item 3B. Whether the sites for the stated 1.1 MW of hydro demonstration plants have been selected is not known, nor who will undertake the maintenance and monitoring of these plants once operating. Ideally they should be typical sites rather than being selected as having exceptionally good resources (those with

Demonstration projects are designed, per se, not to demonstrate technical feasibility but to demonstrate implementation modality i.e., public private partnership (PPP), owning decentralized system formally (traditionally informal) by legally established special purpose vehicle (SPV), commercial financing and financial tools along with demonstration of higher load factor (resulting higher revenue) through focus on promoting productive uses.

Refer Section 3.2 of Pro Doc (pages 64 – 65)


good all year-round flows and high head). The 35% load factor used for hydro- seems low (although acknowledged as "conservative"). Existing schemes should be able to provide a more accurate indicator. The key point, not acknowledged, is how any seasonal variations in water flows might impact on the end-users of the electricity if supplies are unreliable, especially for rural livelihood activities. 3. Solar system options: Clarification is needed between the goal of having 0.5 MW/yr of "solar power installations" and including solar pumps for drinking and irrigation which use direct mechanical power. Solar water heating is not discussed though there must also be good potential for this technology. How the project will enhance the existing 4500 watermills is also not clear.

Clarified in 2 above

4. Barriers: Providing training courses for a wide range of stakeholders is commended to overcome the capacity barrier. Overcoming the financing barrier is also a key part of encouraging RE deployment. The challenge to increase manufacturing capacity has been acknowledged, though the selected technologies may well depend on some imported products. Electric generators, Pelton wheel turbines and solar PV panels (or possibly cells) will possibly be imported. It is not clear what components will be locally made.

The aim is to achieve maximum possible localization of design, manufacturing and installation of off-grid mini- and micro-hydro power plants and to a lesser extent large scale solar PV systems. The main objective is to reduce costs. The project document has detailed discussion on the proposed programmes and activities planned to build local capacities in this regard. Both the demonstration projects and targeted capacity building programmes are expected to deliver these outcomes.

Please refer the discussion on need for localization with respect to Cost issues (page 20) Please refer Section 3.2.2. RE Investments (page 64 – 73) for details of various demonstration projects. Please refer Section 3.2.6 on Component 4: Human Capacity Development [Capacity Building in Systems Design and Technology] (Page 90 – 94) for detailed capacity building activities.

5. Climate change risks: There is a chance that precipitation and cloud cover may change over time affecting the local hydro and solar resources, but this is unlikely to be significant before the

We agree with the observations. Since the likely impacts would be beyond the lifetime of the proposed projects, we consider this has outside the scope of the GEF project.


working life of any technologies installed has past. 6. Incremental reasoning, monitoring and evaluation: Given the baseline scenario and all the other parallel initiatives to increase the deployment of RE projects, it is not clear how the additional uptake resulting from GEF investment of 10 MW micro-hydro and 2.5 MW solar systems after 5 years can ever be measured. However, this should not be a deterrent as there is a good opportunity for this GEF RERL project to evolve in parallel with the Nepal government's SREP and RREP programmes as these are developed, and together expand the deployment of renewables. A breakdown of annual targets for hydro and solar PV (and pumping?) capacity installations, which will probably ramp up from a slow start as the 5 year period progresses, would be useful.

A breakdown of annual targets for mini-/micro-hydro, micro-grid and off-grid solar PV is given in the project document.

Please refer section 2.1 Technology Selection and Installation Targets (page 45 – 47) for details. The Tables 25 and 26 provide the details of total and annual targets.


68

ANNEX C: STATUS OF IMPLEMENTATION OF PROJECT PREPARATION ACTIVITIES AND THE USE OF FUNDS15 A. PROVIDE DETAILED FUNDING AMOUNT OF THE PPG ACTIVITIES FINANCING STATUS IN THE TABLE BELOW:

PPG Grant Approved at PIF: 63,000

Project Preparation Activities ImplementedGEF/LDCF/SCCF/NPIF Amount ($)

Budgeted Amount

Amount Spent To Date

Amount Committed

Cost of human resource - team leader, RE policy and tech expert, RE financial expert, & RE livelihood expert

27,622 24,590 3,032

Conduct coordination meetings and travel 2,000 2,000 0Tender announcement in local newspapers & misc.

383 383

0

Conduct Logical frame analysis 1,500 1,500 0Conduct technology demonstration 1,046 1,046 0Design of project activities 1,477 1,477 0Reviews and final project document and CEO endorsement

23,107 20,542 2,565

International consultant to work on project document

5,865 3,590 2,275

Total 63,000 55,128 7,872 ANNEX D: CALENDAR OF EXPECTED REFLOWS (if non-grant instrument is used) Provide a calendar of expected reflows to the GEF/LDCF/SCCF/NPIF Trust Fund or to your Agency (and/or revolving fund that will be set up) NA

15If at CEO Endorsement, the PPG activities have not been completed and there is a balance of unspent fund, Agencies can continue undertake the activities up to one year of project start. No later than one year from start of project implementation, Agencies should report this table to the GEF Secretariat on the completion of PPG activities and the amount spent for the activities.

National Rural Renewable Energy Program – Government of Nepal

Programme Period: 2013-2017 Atlas Award ID: 76958 Project ID: 88046 PIMS # 4522 Start date: Mar 2014 End Date Mar 2019 Management Arrangements NIM

United Nations Development Programme Country: Nepal

PROJECT DOCUMENT1 Project Title: Renewable Energy for Rural Livelihoods (RERL) Program: National Rural Renewable Energy Program (NRREP) UNDAF Outcome(s): Vulnerable groups have improved access to economic opportunities and adequate social protection. (Outcome 2 ) UNDP Strategic Plan Environment and Sustainable Development Primary Outcome: Expanding access to environmental and energy services for the poor: Strengthened capacity of local institutions to manage the environment and expand environment and energy services, especially to the poor. UNDP Strategic Plan Secondary Outcome: Catalysing environmental finance: Countries develop and use market mechanisms to support environmental management. Expected CP Outcome(s): Same as UNDAF

Expected Country Programme Action Plan (CPAP) Output (s): Output 2.4: Vulnerable groups have increased access to sustainable productive assets and environmental services Output 2.4.1: Alternative Energy Promotion Centre’s capacity enhanced for scaling up energy services in rural areas.

Implementing Partner: Alternative Energy Promotion Centre (AEPC), Ministry of Science, Technology and Environment (MOSTE)

Responsible Partners : UNDP

1 For UNDP supported GEF funded projects as this includes GEF-specific requirements

Brief Description Nepal’s primary energy mix is dominated by traditional biomass (84%), contributing to net GHG emissions. About 40% of the rural population lacks access to electricity. When access is available, low system capacity limits use to lighting and other low power applications. While progress has been made in dissemination of off-grid renewable energy systems, issues of affordability of up-front costs of systems (due both to high costs and lack of capital), financial sustainability (due partly to low utilization), and technical capacity and awareness for less disseminated but high potential technologies constrain progress. RERL project will focus on community-scale power generating off-grid renewable energy technologies to promote income generating opportunities and a low-carbon development path in rural areas. Its core strategy will consist of four interrelated concepts: (1) promotion of larger-scale, less-disseminated systems, (2) achievement of private sector financing of up-front costs, (3) achievement of financial sustainability (cash flow for repairs and maintenance), and (4) establishment of productive use enterprises to raise system revenues and generate livelihood benefits.

Total resources required US$ 59,807,030 Total allocated resources: US$ 35,312,500

UNDP Regular Resources US$ 2,000,000 GEF US$ 3,000,000

Government contributions

o Government (GoN) US$ 30,312,500

Funding to be leveraged o Private Sector US$ 19,601,710 o Local Governments US$ 4,647,890 o Others (Un-Funded): US$ 244,930

National Rural Renewable Energy Program – Government of Nepal

Agreed by (Government):__________________________________ ______________

Date/Month/Year Agreed by (Implementing Partner):___________________________ ______________

Date/Month/Year Agreed by (UNDP):_______________________________________ ______________ Date/Month/Year

i

Contents Contents i

List of Tables iv

List of Figures v

List of Abbreviations and Acronyms vi

1 Situation Analysis 1

1.1 Energy and Electricity Situation in Nepal 1 1.2 Off-grid Renewable Energy in Nepal 8 1.3 Productive-use of off-grid renewable energy 15 1.4 Barriers to Energy Access and to a Low Carbon Development Path 17 1.5 Policy and Institutional Environment for Renewable Energy 23

1.5.1 National institutions relevant to off-grid renewable energy 24 1.5.2 National Policies directly relevant rural off-grid energy 25 1.5.3 Other relevant policies, acts, and ordinances 30 1.5.4 National Plans and Targets Related to Renewable Energy 30 1.5.5 Policy Environment on Productive Use (Energy Based Enterprises) 31

1.6 Baseline Projects 33 1.7 Baseline Scenario 40

2 Project Strategy and Design 44

2.1 Technology Selection and Installation Targets 44 2.1.1 Addressing root barriers and key thematic areas 47 2.1.2 Providing Fit and Value-Add to NRREP 50 2.1.3 Achieving a Coherent Niche within NRREP 50 2.1.4 Leveraging UNDP Experience Base 50 2.1.5 Facilitating Technologies with limited Application to date 51

2.2 Project Strategy and Rationale 52 2.3 Alternative Scenario and Rationale for GEF Financing 53 2.4 Policy Conformity and Country Ownership 55

3 Project Objective, Outcomes and Outputs 56

3.1 Project Objectives 56 3.2 Project Components and Outcomes 56

3.2.1 Component 1: Enhancement of RE investment environment 57 3.2.2 Component 2: RE Investments 62 3.2.3 Component 3a: RE technology and project financing enhancement[RE

Financing and Financial Sustainability – Financing Instruments] 71 3.2.4 Component 3b: RE technology and project financing enhancement[RE

Financing and Financial Sustainability - Financing Instrument Design, Awareness Building and business environment] 73

3.2.5 Component 4: Human Capacity Development [ Capacity Building in Systems Design and Technology] 79

3.2.6 Comparison of Project Outcomes and Outputs between the GEF-Approved PIF and Project Document 83

3.3 Project Activities 90 3.3.1 Component 1 Activities 90 3.3.2 Component 2 Activities 94

ii

3.3.3 Component 2 Activities 98 3.3.4 Component 3a Activities 116 3.3.5 Component 3b Activities 117 3.3.6 Component 4 Activities 126

3.4 Key indicators, risks and assumptions 132 3.5 Financial modality (co-financing) 135 3.6 GEF Incremental Reasoning: Cost Effectiveness 135 3.7 Sustainability and Replicability 137 3.8 Stakeholder Analysis and Coordination 138 3.9 Global Environmental Benefits 143 3.10 Cross-cutting issues 146

3.10.1 Gender issues 146 3.10.2 Poverty 148 3.10.3 Other socio-economic benefits 148

4 Project Results Framework and Detailed Project Planning 149

4.1 RERL Project Results Framework 149 No. of RE-based power generation projects that were proposed and

developed as influenced by the strengthened policy regime on RE and low carbon development by EOP 150

No. of district energy plans developed that include mini-hydro and large scale solar PV power generation installations by Year 3 150

No. of policies and legal frameworks that are supportive of RE-based energy production were approved and enforced by Year 3 150

Documentation of the approved business plans for the new RE financial instruments, RERL project M&E reports 151

4.2 Project Activities Table - RERL 153 4.3 Total Budget and Work Plan 163 4.4 Project Activities and Incremental Reasoning 177

5 Management Arrangements 186

6 Monitoring Framework and Evaluation 192

6.1 Project start: 192 6.2 First Annual Work Plan 193 6.3 Reporting 194

6.3.1 Quarterly 194 6.3.2 Annually 194

6.4 Periodic monitoring through site visits: 195 6.4.1 Mid-term of project cycle 195 6.4.2 End of Project 196

6.5 Learning and knowledge sharing 196 6.6 Communications and visibility requirements 197 6.7 M&E Work Plan and Budget 197

7 Legal Context 199

iii

Annexes Annex 1: Letters of Co-Financing Annex 2: PPP model for Mini-hydro and Large-scale Solar PV projects Annex 3: A list of Candidate Projects along with their salient features for Demonstration and

Post-demonstration projects Annex 4: The GHG Emission Reductions Estimates Annex 5: Productive end-uses: Rational, modalities and options for enterprise development Annex 6: A List of Potential Enterprises and Descriptions. Annex 7: The TOR and Job Description of the National Project Manager and Key Personnel

iv

List of Tables Table1: Nepal’s Sources of Primary Energy 2 Table2: Main Energy Source used in Cooking in Nepal in % 4 Table3: Share in Electricity Consumption in Nepal 5 Table4: Main Source of Lighting in Nepal by Household (2011) 5 Table5: Households in Nepal without Access to Electricity, by Ecological Zone (2011) 6 Table6: Households in Nepal without Access to Electricity by Development Region (2011) 6 Table7: Nepal’s Cumulative Installation of Off-Grid Renewable Energy Technologies as of

July 2011 9 Table8: Nepal’s Recent Installation of Off-Grid Renewable Energy Technologies 10 Table9: Annual Capacity Additions of Smaller-Scale Renewable Energy Systems, FY2000/01

to FY 2009/10 10 Table10: Estimates of Potential Exploitable Renewable Energy Capacities 11 Table11: Role of Two Major Donor Projects in Micro-Hydro and Pico-Hydro Capacity

Installed in Nepal in FY2009/10 and FY 2010/11 11 Table12: Donor Projects in Rural Renewable Energy since the mid-1990s 12 Table13: Estimates of Nepal’s Installed Mini-Hydro Capacity by Ownership and Management

Type 14 Table14: Comparison of Up-front Micro-hydro Cost per kW Installed 19 Table15: Summary of Subsidy Arrangements for Micro/Mini-hydro through various Revisions

of Subsidy Policy 28 Table16: Summary of Subsidy Arrangements for Solar PV systems through various Revisions

of Subsidy Policy 29 Table17: Nepal’s Five-Year Off-Grid Renewable Energy Targets, also the Targets of the Five-

Year NRREP Program (FY2012/13 – FY2017/18) 31 Table 18: Targeted Outputs of NRREP’s CREF Component 34 Table 19: Selected Outputs from NRREP’s Technical Support Component Full List of 17

Outputs -- those that are Relevant to the Proposed GEF Project 35 Table 20: Outputs of NRREP’s Business Development 36 Table 21: NRREP Indicative Budget 36 Table 22: NRREP Funding Sources 37 Table 23: Government of Nepal and NRREP Five-Year Renewable Energy Targets Relevant to

the GEF Project 37 Table 24: CleanStart Nepal’s Targeted Outputs and Associated Incremental Activities to be

carried out jointly with the Proposed GEF Project 40 Table 25: Technologies and Total Capacities to be supported by RERL 46 Table26: Annual Installation Targets, by Technology Type – RERL 46 Table27: Comparison of Off-Grid Electrification Technologies in Addressing Chosen Root

Barrier Areas 48 Table28: Utilization Perspective – Technology Choice 49 Table 29: List of the Mini-hydro Demonstration Projects 66 Table 30: Key Technical and Financial Parameters of Mini-hydro Demonstration Projects 66 Table 31: Large-scale Solar PV projects 68

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Table 32: Hydropower Sector (Isolated) and its Capacity Building Needs 80 Table 33: Summary of Comparison between the GEF-Approved PIF and Project Document 84 Table 34: Wholesale Financial Package Supports to Mini-hydro projects 97 Table 35: Wholesale Financial Package Supports to Mini-grid Demonstration Project (300 kW)98 Table 36: Wholesale Financial Package Support to Large-scale Solar PV Projects (500 kW) 98 Table37: Key Project Indicators and Targets 133 Table38: Major Project Risks and Mitigating Actions 133 Table39: Roles of Various Institutions 139 Table40: Emission Reductions from Demonstration Projects 144 Table41: Emission Reductions from Post-demo Projects 145 Table42: Emission Reductions during first ten years of RERL project (All Projects) 145 Table 43: M&E Work Plan and Budget 197

List of Figures Figure 1: Primary Energy Consumption, 2008 3 Figure 2: Sector-wise Primary Energy Consumption, 2008 3 Figure 3: Project TA supports and fund-flow 58 Figure 4: Support modality for Productive End-use promotion 75 Figure 5: Integrated approach, the implementation arrangement for RERL 188 Figure 6: Integrated RERL/NRREP Structure 191

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List of Abbreviations and Acronyms ADBL Nepal’s Agricultural Development Bank Limited ADDCN Association of District Development Committees Nepal AEPC Alternative Energy Promotion Centre BFI Banks and Financial Institutions BSP Biogas Support Programme CAGR Compounded Annual Growth Rate CDM Clean Development Mechanism CEO Chief Executive Officer CO2 Carbon Dioxide CREF Central Renewable Energy Fund CRT/N Centre for Rural Technology/ Nepal CSIDB Cottage and Small Industry Development Board CTEVT Council for Technical Education and Vocational Training DANIDA Danish International Development Agency DCSI Department of Cottage and Small Industries DDC District Development Committee DEEU/S District Environment and Energy Unit/Section DFID Department for International Development DPR Detailed Project Report EDA Enterprise Development Advisor EDF Enterprise Development Facilitators EDI Energy Development Index EPU Enterprise Promotion Unit ESAP Energy Sector Assistance Program EU European Union FAO Food and Agriculture Organization FI Financial Institutions FM Frequency Modulation FNCCI Federation of Nepalese Chambers of Commerce and Industries FY Fiscal Year GDP Gross Domestic Product GEF Global Environmental Facility GESI Gender and Social Inclusion Gg Giga gram GHG Green House Gas GON Government of Nepal GTZ GesellschaftfürInternationaleZusammenarbeit HH Household IEA International Energy Agency IEC Information Education and Communication IEDI Industrial Enterprise Development Institute

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INPS Integrated Nepal Power System IPP Independent Power Producers IWM Improved water mills KfW KreditanstaltfürWiederaufbau ktCO2 kilo tonne of CO2 kW kilo Watt kWh kilo Watt hour LDC Least Developed Country LPG Liquefied Petroleum Gas M Million MEDEP Micro Enterprise Development Programme MFALD Ministry of Federal Affairs and Local Development MFI Micro Finance Institution MFSC Ministry of Forest and Soil Conservation MH Mini Hydro (Installed capacity between 100 kW and 1000 kW) MHP Micro Hydro Projects (Installed capacity between 5 kW and 100 kW) MGP Mini Grid Projects MOAD Ministry of Agriculture Development MOE Ministry of Energy MoEST Ministry of Environment, Science, and Technology MOEST Ministry of Environment, Science and Technology MOF Ministry of Finance MSME Micro, Small, and Medium sized Enterprises MW Mega Watt NA Not applicable na not available NAVIN National Association of VDCs in Nepal NCCSP UK/UNDP-Nepal Climate Change Support Programme NEA Nepal Electricity Authority NGO Non-Governmental Organisation NMDP UK-Nepal Market Development Programme NMHDA Nepal Micro Hydro Developers Association NPC National Planning Commission NRB Nepal Rashtra Bank (Central bank) NRREP National Rural Renewable Energy Program O&M Operation and Maintenance PEU Productive Energy Use PIF Project Identification Form PPA Power Purchase Agreement PPP Public-private partnership PV Photo voltaic RC Regional Service Centres RE Rural Energy REDP Rural Energy Development Program

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REP Renewable Energy Project RERL Renewable Energy for Rural Livelihoods RETS Renewable Energy Testing Station Rs Nepalese Rupees SEMAN Solar Equipment Manufacturers’ Association of Nepal SHS Solar Home System SNV Netherlands Development Organization SPV Special Purpose Vehicle SREP Scaling-up Renewable Energy Programme ToE Tonne of Oil Equivalent ToR Terms of Reference TR/EC Technical Review/Evaluation Committee UN the United Nations UNCDF UN Capital Development Fund UNDP the United Nations Development Programme UNFCCC United Nations Framework Convention on Climate Change US The United States of America USD US Dollar VAT Value Added Tax VDC Village Development Committee W Watt

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Renewable Energy for Rural Livelihoods (RERL)

Background

Nepal has a predominantly rural population, with an overwhelming dependence on biomass for fuel. Almost 90% of the energy is used for household purpose. Despite huge hydropower potential, Nepal has one of the world’s lowest per capita electricity consumption. Two out of every five households still do not have access to electricity. About 15% of the rural households get electricity through off-grid renewable energy sources. Off-grid renewable energy systems will be essential for reaching the rural population still lacking electricity. In this regard, donor supports have played a very significant role in up-scaling of decentralized electricity supply. However, most of the decentralized electricity supply is limited to smaller systems like micro hydro power (MHP) and solar home systems. Electricity from micro-hydro and solar home systems are primarily used for lighting and powering some low capacity household gadgets. These systems have not facilitated extensive productive end-uses of electricity leading to enhanced livelihoods and increased income generation. Even though Electricity-based enterprises have come up close to micro-hydro plants, contributing to enhanced livelihoods, they suffer from low load factor, one of the reasons being low installed capacities leading to inadequate productive end use applications. Moving towards bigger sized systems (mini-hydro and large scale solar PV systems) will bring economies of scale, faster progress, wider coverage, and/or more income generating opportunities for local people. Bigger systems offer greater opportunity for enterprise development and better financial and commercial viability. Barriers

The key barriers to sustainable expansion of the large-scale systems are high upfront capital cost, lack of sufficient commercial financing to cover these costs, lack of favourable investment environment in the country, lack of financial sustainability of operational systems, insufficient technical capacity and lack of awareness. Baseline project

The UNDP-GEF RERL project will integrate into the Government’s single umbrella programme, the National Rural Renewable Energy Programme (NRREP). It will address some of the gaps and needs in the Programme relevant to identified interventions for promoting Mini-hydro and Large-scale solar PV projects. All activities of NRREP that are relevant to the GEF project will together comprise the baseline project. Out of the total NRREP budget of about USD 170 million, USD 46.6 million will fund baseline activities relevant to the UNDP-GEF RERL project.

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Baseline scenario and UNDP-GEF RERL project interventions

Given AEPC's vast experience in smaller micro-hydro systems, it is likely that most of the off-grid hydro installations by NRREP will be micro-hydro of less than 60 kW capacities. Consequently, it may be difficult for NRREP to meet its five-year target of 25 MW. Furthermore, financial sustainability of these systems will continue to be an issue because of insufficient productive end-use applications due to limited power availability. Given the high initial cost of these systems, there is a huge requirement of commercial financing. However, the private sector as well as banks will continue to be hesitant to invest because commercial viability of these systems will likely remain unattained. Issues regarding domestic manufacturing of components for the mini-hydro sector may not be able to improve its ability to offer a cost advantage, lowering total system costs. Support for manufacturers, while provided, may lack strategic focus to ensure manufacturers that may offer potential cost-savings to mini-hydro installations are targeted. In the baseline scenario, in the absence of the UNDP-GEF RERL project, under the NRREP, a total of 10 MW of micro-hydro capacity is planned to be installed. These collectively are expected to operate on the average at22% load factor. Moreover, The majority of solar PV efforts are likely to remain focused on solar home systems (SHS), and larger scale applications of PV will continue to remain virtually absent from Nepal. Thus, remote areas without water resources may lack the opportunity of productive applications that such larger systems offer. Funds disbursed under the NRREP will likely be limited to basic loan and subsidy models. While productive applications of renewable energy will be pursued under NRREP, micro-finance may continue to be unavailable to entrepreneurs due to lack of coverage by micro-finance institutions in their areas. In the NRREP, policies specifically promoting mini-hydro and large-scale solar PV systems will remain absent. The proposed project will support establishment and operationalization of a policy that enables PPP model for Mini-hydro and large scale solar PV systems development. Furthermore, under the NRREP, capacity building specific to mini-hydro and large scale solar PV manufacturing/installation, operation and other technical areas may not occur. The proposed project will build up these capacities. As an improvement to the current baseline initiatives on renewable energy development and utilization in Nepal, the proposed UNDP-GEF RERL project will address the identified gaps and barriers to further enhance the sustainability of the planned efforts, increase the socio-economic impacts to the rural areas of the country that can benefit from the available renewable energy resources, and to realize global environmental benefits mainly in terms of GHG emission reductions. The barrier removal and gap filling interventions that will be carried out as incremental activities to the baseline activities of the country are meant to facilitate and enable the design, engineering, installation and operation of the following:

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Mini-hydropower generation projects as demonstrations to showcase the effective application of Private-Public Partnership (PPP) schemes;

Mini-power grid system that integrate several existing micro-hydro stations, as demonstrations showcasing the design and implementation of financially sustainable and reliable power distribution systems;

Off-grid large micro-hydro and mini-hydro power generation projects as demonstrations to showcase increased load factors through cost-effective and feasible application of the electricity generated for productive end-uses; and,

Large scale solar PV power generation projects as demonstrations showcasing cost advantages over smaller PV systems, financial feasibility, and potential for productive end-uses.

In addition, and to address the project financing-related barriers, the UNDP-GEF RERL project will facilitate the establishment of credit facilities for domestic manufacturers; as well as financing instruments for promoting commercial financing for mini-hydro and large-scale solar PV projects and related electricity-based enterprises. Project Strategy and Design

The GEF Project is highly aligned with the Government of Nepal’s off-grid renewable energy program. Technology selection and project design has been done to most effectively address root barriers to energy access and low carbon development in Nepal, provide both integration and value-addition to NRREP, leverage UNDP experience and comparative advantages, and emphasize technologies that have had only limited application in Nepal. The project will focus on micro-hydro of over 60 kW, mini-hydro, mini-grid and large-solar PV systems as technological interventions. The proposed project will provide both investment support and technical assistance. The root barriers addressed by the project are (a) lack of capital for up-front investment; (b) high cost of systems; (c) lack of financial sustainability of systems and (d) lack of technical capacity and awareness. Policy, regulatory, and institutional barriers are cross-cutting/overarching across financial support, capacity building, financing and efficient-use of energy. Enhancing productive uses is especially important because investors will be attracted to commercially viable systems which have demonstrated financial sustainability through productive use applications. The project's core strategy will consist of (1) promotion of larger-scale, less-disseminated systems, (2) achievement of commercial viability and private sector financing of up-front costs, (3) achievement of financial sustainability (cash flow for repairs and maintenance), and (4) establishment of productive use enterprises to raise system revenues and generate livelihood benefits.

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Project Objective, Outcomes and Outputs

The project objective is the removal of barriers for increased utilization of renewable energy resources in rural Nepal. The project will meet its objective by ensuring 12.5 MW of large-scale off-grid renewable energy projects implementation. The project will meet its objective as follows: Firstly, it will strengthen the legal, institutional and policy environment. It will do this by ensuring a private sector investment friendly policy for PPP model, supporting district development process by integrating larger systems in their planning process, and providing orientation and training to government officials, and other relevant stakeholders about the sub-sectors and the relevant policies. Secondly, it will support increased investments in RE through financing and technical assistance to demonstrate attractiveness of larger systems. It will do so by implementing 1 MW of mini-hydro2(MH) demonstration projects and 500 kW of large-scale solar PV systems preferably through PPP model by establishing a legal entity, Special Purpose Vehicle (SPV), as well as for mini-grids (local-grid connecting micro-hydro projects totalling 300 kW) to demonstrate more extensive productive use and thus greater system revenues. It will also provide technical assistance for installation of 2 MW of micro-hydro projects above 60 kW, 7 MW of mini-hydro projects based on the above model and 2 MW of large-scale solar PV systems. Thirdly, it will enhance the availability of RE financing through establishing financing instruments for manufacturers and developers as well as ensuring financial sustainability. It will also partially finance the establishment of the financing tools (funds) to enhance the availability of RE financing. Furthermore, the project recognizes the importance of promoting productive use of electricity to enhance financial sustainability of RE investment which will increase utilization of electricity and thereby revenue. The project will ensure that a number of micro, small and medium enterprises (MSME) are functional in the RE project areas and consume substantial amount of electricity which contributes to financial sustainability of RE projects with affirmative intervention to promote women’s organizations and women-led business to have access to finance for operating MSME. Finally, the project will focus on enhancing technical capacities and skills for the selected technologies. It will support capacity building in the design and manufacture of mini-hydro systems and capacity building in the installation and after-sales service of both mini-hydro and larger scale PV systems. Capacity building for manufacturers will focus on those that manufacture components identified by the project to have the potential for lowering costs through domestic manufacturing. Skill trainings will follow guidelines specified by the project to ensure women’s and marginalised and vulnerable communities’ participation (33%).

2 Mini Hydro is defined as hydropower projects of installed capacity between, 100 kW and 1MW

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The project will implement various activities to achieve the project outcomes and outputs. Risks and assumptions

Even though project implementation presents substantial challenge, the proposed project is feasible. The overall project risk is moderate. Major areas of risk include the external investment and political environment, the response of the private sector and banks to the opportunity to invest in off-grid renewable energy electrification projects, effectiveness of project management and stakeholder coordination under the NRREP umbrella, and the ability to maintain project targets in spite of possible changes in NRREP targets. Key assumptions include banks and private sector being interested in financing commercially viable off-grid renewable energy power projects., the investment environment and the local and national political environments remain conducive to project implementation, the project is driven by strong leadership from the National Project Manager and strong support of the National Project Director, local people are interested in productive applications and possess the capacity to benefit from project efforts to support them in enterprise development and achievement of market linkages and CREF funds are available to support capacity targets. Global environmental benefitsand Cost effectiveness

The contribution to sustainable development and environmental benefits of renewable energy systems are well established. Off-grid power generated by mini-hydro and solar PV systems provides rural households with electric power for lighting, milling, and other productive use. The environmental benefits accrue as a result of reduction in kerosene, diesel, un-sustainable fuel wood and dry cell consumption for various applications. Both mini-hydro and large solar PV systems have the potential to attract carbon financing as they qualify as proven technologies. Along with environment benefits, they also contribute to other areas of the Sustainable Development Agenda. It is estimated that when all the systems (demo and post-demo) come into operation, a total of about 22,040 tCO2 will be abated annually over the period of 15 years attributable to productive applications of the energy. Considering lifetime of the systems to be 15 years for both the mini-hydro and the large scale solar systems, the RERL supported projects will contribute to the reduction of 330,604 tCO2. The RERL demonstration projects alone will be responsible for abating 37,585 tCO2 whereas the remaining 293,019 tCO2 reduction will be from the post-demo projects supported. However, “GHG Benefits of GEF Projects: Carbon Dioxide Calculator” methodology, which is used for providing inputs to the GHG tracking tool yields slightly different emission avoided estimation. Based upon this, the lifetime direct post-project emissions avoided, totaled over the respective lifetime of the investments (15 years) is 131,545 tCO2. Likewise, the lifetime indirect emissions reduction is estimated to be 338,265 tCO2 and 293,058 tCO2 using bottom-up and top-down approach respectively. Taking all projects into account (demonstration

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projects and post demonstration projects including indirect impacts) and as per the indirect bottom-up approach, the GHG emissions avoided is 507,397 tCO2. The CO2abatement cost per tonne comes to about USD 9.85 when the contributions of GEF and UNDP alone are considered. Sustainability and Replicability

Focusing on sustainability of the UNDP-GEF RERL project and ensuring that it can be replicated has been a major focus while designing the project. This has been done in a number of ways. The project will be sustainable and replicable because firstly, the Project is completely aligned with the objectives and priorities of the Government of Nepal. Secondly, the project emphasizes the enactment of policies and regulations, establishment of suitable financing mechanisms, capacity building and places particularly strong focus on productive end use promotion. Thirdly, the project has taken special care not to top up any subsidy or facilities being provided by the government. Finally, the progression in the phases of the project from demonstration, to post demonstration projects has been consciously adopted to ensure sustainability and replicability. Stakeholders

Potential stakeholders for the UNDP-GEF RERL project from the government, non-governmental organizations, private sector groups who will have a role in the successful implementation of the project have been identified. A detailed capacity assessment of AEPC, the lead executing agency of the project, has been carried by NRREP and roles of various institutions have been identified. Cross cutting issues

The objective of the UNDP-GEF RERL project with regard to GESI is to build an equitable and gender inclusive society by ensuring equal rights of women of all castes, creed and geographical regions in the social, political and economic aspects of national development. The Project will contribute to poverty reduction and livelihood enhancement through savings on women’s time, increasing employment opportunities, and access to better health facilities. Consequently, villagers will have less days of sickness thereby enhancing their productivity. The UNDP-GEF RERL project will provide socio-economic benefits to communities through extensive promotion of productive end-uses of energy in rural areas where at least 33% participation of women will be ensured. The cash incomes from productive uses will increase substantially thereby empowering women financially as a mean to overall social and economic empowerment. People’s time mainly that of women and children spent on many of household chores will be saved. Women can use that time for other productive uses.

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Management Arrangement

The full-sized project (FSP)UNDP-GEF RERL will be implemented by the Alternative Energy Promotion Centre (AEPC) of Nepal under Ministry of Science, Technology and Environment (MoSTE) guided by the Compact Principles agreed with the government to provide technical assistance to AEPC in implementation of National Rural and Renewable Energy Programme (NRREP). UNDP will serve as the GEF Agency for the Project and be responsible for the provision of project cycle management services. Government Cooperating Agency: The Ministry of Science, Technology and Environment (MoSTE), as a cooperating agency shall do high-level monitoring of the project. Alternative Energy Promotion Centre (AEPC) as a national implementing partner under the guidance of the MOSTE will implement the project under National Implementation Guidelines. APEC shall be overall responsible and accountable for the delivery of the project objectives and results aligned with NRREP objectives. To facilitate smooth and effective implementation of project activities, a Project Executive Board (PEB) will be established. The Executive Director of the AEPC will serve as the NPD of RERL Project. AEPC will depute a full time National Project Manager as per the NIM guidelines to oversee the day-to-day operation and management of the project. Aligning with NRREP structure, a full time Senior National Advisor (SNA) with a reporting line to NPD/NPM will be recruited for RERL. To achieve the broader objectives of NRREP programme; it plans to recruit Mini-Hydro Expert (1), Solar PV Expert (1), Livelihood Expert and Energy Finance Expert (1) and Planning and Monitoring Officer (1) as professional staff to provide the needed technical assistance to AEPC/NRREP for the successful implementation of RERL.

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Renewable Energy for Rural Livelihoods (RERL)

1 Situation Analysis

1.1 Energy and Electricity Situation in Nepal

Geographic and Economic Background: A land-locked country in South Asia, Nepal has an energy situation that reflects challenging terrain (over 75% mountainous) and very low income levels. The nation is among the poorest countries in the world, with per capita annual income of USD 742 in Fiscal Year 2011/2012.3It has a population of 26.5 million people of which about 83% live in rural areas.4About 25%ofNepal’s people live below the poverty line, which varies by region but averaged 19,261 NPR per year in FY 2010/2011, or aboutUSD0.75 per day.5Poverty rates of the nation’s different geographic areas present significant variation. Unemployment has been increasing in recent years, creating a “brawn and brain drain” for employment. Nepal contains some of the most rugged mountain terrain in the world. In many areas, difficulty in transportation can result in substantial and sometimes extreme increases in the ex-factory cost of goods by the time they reach the final destination. This situation is a major contributor to the high cost and slow pace of energy infrastructure development. It also inhibits market linkages needed to develop income-generating opportunities in remote rural areas. Both per capita income and per capita energy use in Nepal, while growing, lag far behind regional averages for Asia; and per capita commercial energy consumption is among the lowest in the world. Per capita income (USD 742 in2011/122) grew at a compound annual growth rate of 3.3% between FY 2002/2003 and 2011/2012. Per capita energy consumption grew with an estimated Compounded Annual Growth Rate (CAGR) of 1.8% between 2006/2007 and 2010/2011.6 Overall Energy Use and Sources of Primary Energy: Nepal’s per capita annual energy consumption, at341 kg oil equivalent per capita in 2010, is one of the lowest in the world. Further, the primary energy consumption in Nepal is mostly derived from traditional biomass,

3Economic Survey: Fiscal Year 2011/2012, Ministry of Finance, Government of Nepal, 2012. Preliminary estimate based on 8 months of data 4 Population figures from Nepal Population and Housing Census 2011, Central Bureau of Statistics, National Planning Commission Secretariat, Government of Nepal. 5Poverty figures from Nepal Living Standards Survey III and Poverty in Nepal (both Fiscal Year 2010/2011), Central Bureau of Statistics, National Planning Commission Secretariat, Government of Nepal. 6Calculated based on data from Economic Survey: Fiscal Year 2011/2012 (op. cit.)

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contributing to deforestation and Green House Gas (GHG) emissions.7Further, excessive dependence on traditional biomass leads to serious indoor air pollution linked health hazards as well as overall inefficiencies in energy use. According to Nepal’s First National Communications to the UNFCCC (July 2004), the majority of the nation’s GHG emissions in 1994/1995 came from land conversion, by a substantial margin over fuel use (1,465Gg net CO2 emissions due to fuel use versus 8,117 Gg net CO2 emissions due to land use change). According to the Government of Nepal, the share of traditional biomass in primary energy consumption is about 84percent (FY 2010/11), of which firewood accounts for a major share (Table1).Petroleum products account for 10.4% of primary energy use, coal 2.9%, and grid-connected power generation (mostly large hydropower) 2.6percent. The share of off-grid renewable energy resources is only 0.7%. Nepal has no proven source of petroleum products and depends completely on imports. Petroleum imports, predominantly from India, account for a large share of total foreign currency expenditures. They have increased sharply over the years, with increases in demand for petrol in the transport sector and for Liquefied Petroleum Gas (LPG) for cooking in the residential sector. Price hikes in petroleum products have been a major contributor to domestic inflation. The four-year compound average annual growth rate of Nepal’s total primary energy consumption between FY2006/7 and FY2010/2011 was 3.2%.

Table1: Nepal’s Sources of Primary Energy ‘000 ToE

Source of Energy FY 2006/07

FY 2007/08

FY 2008/09

FY 2009/10

FY 2010/11

4 year CAGR

2006/07 – 2010/11

Share of Total Energy 2010/11

Traditional Biomass 7,854 8,015 8,185 8,342 8,500 2.00% 83.7%

Firewood 6,999 7,149 7,301 7,467 7,606 2.10% 74.9%

Agricultural residue 337 337 344 324 331 ‐0.45% 3.3%

Livestock residue 518 529 540 551 563 2.10% 5.5%

Commercial 1,031 1,038 1,139 1,464 1,580 11.26% 15.6%

Coal 144 193 182 286 293 19.43% 2.9%

Petroleum products 709 655 775 965 1,058 10.52% 10.4%

Electricity 178 190 182 213 229 6.50% 2.2%

Off‐grid Renewable 59 59 64 70 75 6.18% 0.7%

Total 8,944 9,112 9,388 9,876 10,156 3.23% 100.0%Source: Ministry of Energy, Government of Nepal quoted in Economic Survey: Fiscal Year 2011/2012 (op. cit.); computations by RERL Formulation Team. Figure 1and Figure 2below show the breakdown of primary energy consumption by energy sources and by consuming sectors as reported by the Government of Nepal’s Water and Energy Commission Secretariat in Energy Balance 2010. According to these estimates, biomass accounts for about 88% of the total supply and 90% of it are used by residential

7 Other major contributors to deforestation in Nepal are cutting of trees for timber, clearing land for agriculture, and livestock impacts.

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sector. Sector-wise primary energy consumption data shows that the residential sector accounted for 89.1%of the total in FY 2008/09

Figure 1: Primary Energy Consumption, 2008 Total Consumption 388,382 TJ

Source: Energy Sector Synopsis Report, Water and Energy Commission Secretariat, July 2010

Figure 2: Sector-wise Primary Energy Consumption, 2008 Total Consumption 388,382 TJ

Cooking and heating are the main household uses of energy and thus, given the predominant role of the residential sector in overall energy use, the top energy applications in Nepal. Other significant residential energy uses are for animal feed preparation and lighting. Rural and household enterprises use of energy fall into the household end-use category, though it is believed that these at present make up a very small, but growing proportion of the household energy use as compared to daily use applications. Breakdown of consumption by end-use is given in Table2.

Biomass88.0%

Electricity2.1%

Coal2.1%

Petroleum Product7.2%

Renewable0.6%

Residential90.4%

Industrial3.6% Commercial

1.3%

Transport3.9%

Agricultural0.6%Other

0.2%

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Results show that overall, of the nation’s over five million households, the majority (64%) use firewood for cooking, with LPG (21%) and dung (10%) the second and third most common fuels. Use of electricity for cooking is less than 1%. Yet, given the predominance of cooking in end use energy applications, one strong emissions reduction benefit of certain distributed renewable energy systems could be cooking fuel replacement. Rural households, as expected, show an even greater share of fuel wood use as their main cooking source (73%) than the national average, with dung (13%) and LPG (10%) is being their second and third most common cooking fuels. In contrast, only 26% of urban households use fuel wood as their primary cooking fuel. LPG instead is the main cooking fuel accounting for 68% of households in the urban category. Looking at the data by Ecological Belt, Mountain households, depend more than any other group on fuel wood for cooking (95% of households) and Terai, the least (57%).8

Table2: Main Energy Source used in Cooking in Nepal in % Household Type Firewood LPG Dung Biogas Kerosene Electricity Other

All Households 64.0% 21.0% 10.4% 2.4% 1.0% 0.08% 0.42%

Rural versus Urban

Rural Households 73.1% 9.9% 12.5% 2.6% 0.8% 0.04% 0.42%

Urban Households 25.7% 67.7% 1.5% 1.8% 2.0% 0.12% 0.39%

Ecological Belt (including both Rural and Urban)

Mountains 94.8% 3.1% 0.42% 0.22% 0.54% 0.32% 0.09%

Hills 67.0% 29.4% 0.11% 1.6% 1.1% 0.09% 0.17%

Terai 56.5% 15.2% 22.1% 3.5% 1.0% 0.05% 0.71%Nepal Population and Housing Census 2011(op. cit.); computations by the RERL Formulation Team

The above discussion highlights a number of key motivations for promoting renewable energy development in rural Nepal, both from a global environmental and national socio-economic development perspective. Further, the general lack of access to modern forms of energy in rural areas, along with the greater need for rural development in this predominantly rural nation, implies that there is a need for renewable energy options. Particularly for rural communities lacking access or lacking dependable access to power from the grid, off-grid renewable energy technologies can facilitate income generating opportunities that would otherwise be absent. Electrification and use of Electricity: Despite the availability of extensive hydropower potential of the order of 42,000 MW, Nepal has one of the world’s lowest per capita electricity consumption, averaging 146 kWh/person annually for FY2010/2011. For comparison, averages in 2009 were 517 kWh/person in South Asia, 571 kWh/person in India, 2,631 kWh/person in China, and 2,807 kWh/person in the world.9 Electricity accounts for only 2.2% of Nepal’s total energy use.

8 Note: Mountain and Hill areas make up the 75% of Nepal that is considered mountainous, while the Terai are rural lowland areas along the country’s southern border making up the other 25%. 9Nepal data from Economic Survey: Fiscal Year 2011/2012(op. cit.) and calculation of RERL Formulation Team. Other data from “UN Data,” accessed at http://data.un.org

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Government statistics on sector-wise usage of Nepal’s electrical power are given in Table3. The reported number of grid-connected electricity consumers (points of service) has been growing rapidly, rising from 1.85 million at the end of FY2010/2011to 2.05 million by January 2012 (an increase of 10.7%).10

Table3: Share in Electricity Consumption in Nepal

Residential Industrial Commercial Other

42.5% 37.7% 7.6% 12.1% Source: Economic Survey: Fiscal Year 2011/2012 (op. cit.). Note: Data likely refers to grid-connected power only.

The status of access to electricity may be inferred from census data on main source of households’ lighting, as displayed in Table4. In 2011, about 67% of households used electricity as their main source of lighting. The proportion was 60% for rural households and 94% for urban households. Thus, we may infer that 40% of rural households lack electricity. The issues of load shedding (for grid-connected users) and limited capacity (off-grid users) may limit both the times of day at which they have access as well as the type of electricity consuming activities in which they may take part. The second largest source of household lighting is kerosene (named as main source of lighting by 18% of households), which must be imported.

Table4: Main Source of Lighting in Nepal by Household (2011)

Group Electricity Kerosene Solar Biogas Other

Rural 60.1% 21.7% 9.2% 0.5% 7.4%

Urban 94.1% 4.0% 0.2% 0.4% 0.5%

All 67.3% 18.2% 7.4% 0.28% 6.1%Nepal Population and Housing Census 2011 (op. cit.); computations by the RERL Formulation Team

Of the 60% of the rural population that does have access to electricity, roughly a quarter get that power from off-grid sources, while the other three-quarters obtain access from the grid.11The breakdown in terms of ecological zones of the other 40% of the rural population that still do not have access to electricity is given in the right column of Table5. The left column shows the proportions of households in each type of zone without electricity. While mountain areas have a higher proportion of homes without access to electricity, given the lower total population in such zones, hill and Terai areas still account for a higher proportion of total Nepali households without electricity. On a regional basis (see Table6), the Mid-Western and Far-Western regions have the greatest proportion of households without electricity. Yet, given their larger population, the Eastern and Central regions, lead among

10Economic Survey: Fiscal Year 2011/2012(op. cit.). 11AEPC as referenced in “Off-grid Prosperity,” Shoko Noda, UNDP Country Director, in Kathmandu Post, January 24, 2013, has indicated around 12% of the Nepali population has access to electricity through renewable energy sources, mainly micro-hydro and solar home systems. Assuming these are mostly rural households, the RERL Formulation Team has estimated based on census data that 650,796 rural households in Nepal use off-grid renewable energy.

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regions in total number of households without electricity. In general, these two tables show that lack of access to electricity is an issue spread across the rural areas of each of Nepal’s three types of ecological zones and across all of its development zones. That is, a significant proportion of households in each type of ecological zone and in every regional development zone lack access to electricity.

Table5: Households in Nepal without Access to Electricity, by Ecological Zone (2011)

Ecological Zone Proportion of Households in Ecological Zone without

Electricity

Share of Total Households in Nepal without Electricity

Mountains 50.8% 10.4%

Hills 32.7% 46.7%

Terai 30.2% 42.9% Nepal Population and Housing Census 2011 (op. cit.); computations by the RERL Formulation Team with an assumption that the households that do not indicate electricity as their main source of lighting are the ones that do not have access to electricity. Total households without access estimated at 1,775,551.

Table6: Households in Nepal without Access to Electricity by Development Region (2011)

Development Region Proportion of Households in

Development Region without Electricity

Share of Total Households in Nepal without Electricity

Eastern 36.4% 25.2%

Central 22.9% 25.3%

Western 22.0% 13.2%

Mid‐Western 57.7% 22.6%

Far‐Western 50.0% 13.7% Nepal Population and Housing Census 2011 (op. cit.); computations by the RERL Formulation Team with assumption that households that do not indicate electricity as their main source of lighting are the ones that do not have access to electricity.

The Government of Nepal has cited “energy crisis” or power shortage as one of the greatest obstacles faced in the nation’s economic development.12 It is widely accepted that the shortage of power and frequent power outages have severely constrained economic growth in the nation. Grid-connected power generation capacity of 706 MW (reported for FY2011/2012), predominantly hydropower, is insufficient to meet demand. Even with the addition of imported power from India which allowed a peak demand of 1,027 MW to be met during the period, daily load shedding is required. The duration of load shedding can reach over 14 hours per day in Kathmandu in the winter, when river flow volume is low and demand is high.

12Economic Survey: Fiscal Year 2011/2012(op. cit.).

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Of domestically produced grid connected electricity (as represented by the Nepal Power System (INPS), 92% is hydropower.13The electricity supplied by the domestic grid system in 2009-2010 was about 3,690 GWh. Of this, about 57% was generated by power plants owned by the Nepal Electricity Authority (NEA), 26% by Independent Power Producers (IPPs), and the remaining 17% was imported from the Indian grid. Peak demand met by NEA has been growing steadily from 603 MW in 2006 to 946 MW in 2011 (with excess over installed capacity achieved by purchases from India). Various issues inhibit more rapid growth of the domestic grid-connected sector, including low tariffs. Huge differences in elevation, abundant snowmelt, and the monsoon rainfall have given Nepal vast hydropower potential. Estimated technically feasible hydropower potential in Nepal at 42,000 MW exceeds capacity installed till now by far, but progress in exploiting this potential has not kept up with demand. The first hydropower plant (of 500 kW) was built in Nepal in 1911, but development since has been slow. Progress has been seen since the opening up of the market to independent power producers in the 1990s. Although the nation’s armed conflict ended in 2006, the political situation is still a barrier to development of the large-scale power sector. Political instability stalls progress in large energy infrastructure projects. Some project developers have decided to continue activities, but the construction and commissioning of large plants is still very uncertain and subject to various delays due to the political situation. Many projects are either in their study phase or the developers are in a wait-and-see mode. In contrast, small-scale off-grid hydropower stations (totalling about 37 MW) and other renewable energy power producing technologies currently provide much more potential for progress as they are not stymied by larger political and institutional issues.14 As with the previous sub-section’s general overview of energy use in Nepal, this sub-section’s discussion of electricity in Nepal highlights a number of motivations for promoting renewable energy development in the country’s rural areas and development of renewable power generation, in particular: The large proportion of rural households lacking electricity (40%) highlights the need for alternatives, as does the significant proportion of rural households lacking electricity across all types of ecological zones and in each and every regional development zone. Further, this very substantial population without electricity, when considered along with the nation’s very low per capita incomes, raises the idea of potential income-generating opportunities that may be facilitated by electrification. Indeed, the serious capacity constraints associated with the grid-connected systems suggest off-grid systems may have more potential to benefit rural livelihoods and reduce drudgery than the grid itself. In addition, off-grid renewable power sources do not face the same political and institutional

13Nepal Electricity Authority Annual Report 2011 as quoted in Scaling up Renewable Energy Program (Srs P) Investment Plan, 2011, Government of Nepal. 14Renewable Energy Data Book, 2011, Alternative Energy Promotion Centre (AEPC), Ministry of Environment, Science, and Technology, Government of Nepal, 2012: Provides statistics on types (mini, micro, and pico) of installed hydro capacity less than or equal to 1 MW and the total of these categories as of July 2011 is 37 MW.

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barriers that are currently stalling large grid-connected projects, suggesting off-grid efforts can move forward more quickly.

1.2 Off‐grid Renewable Energy in Nepal

As indicated in Table1, off-grid renewable energy accounts for 0.7% of total primary energy in Nepal (as of FY2010/2011). While this share seems low, it reflects the predominance of traditional biomass in Nepal’s primary energy mix. Comparison to the 2.2% share of grid-connected electricity in overall primary energy during the same time period offers better perspective on the role of off-grid renewable energy. Further, estimates of the proportion of the rural population with access to electricity that gets that access through off-grid renewable power also highlights the importance of off-grid renewable energy in Nepal. According to our estimates, of the 60% of the rural population that does have access to electricity, roughly a quarter gets that power from off-grid sources. Overall, around 15% of the rural population and 12% of the Nepali population has access to electricity through off-grid renewable energy sources, mainly village micro-hydropower stations and solar home systems.15 In this section, we offer data on Nepal’s current installed capacity of various off-grid renewable energy technologies, perspectives on recent growth, and a brief history of donor programs that have played a critical role in the growth of renewable energy technologies in the nation. We then offer information on the current status of the key renewable energy technologies that will be addressed in this project. All of these technologies are power generation technologies. They include: micro-hydropower, mini-hydropower, village-scale PV systems, institutional-scale (e.g. hospitals, schools) PV systems, and PV-based agricultural pumping technologies. The strategic reasons that these technologies were selected as the key areas of focus for this project are explained in Section 2 (Project Strategy and Design). Current Installed Capacity of Rural Off-Grid Renewable Energy Technologies in Nepal: Table7 shows the number of installations and installed capacity for various sub-sectors of the key renewable energy segments of hydropower, solar, and wind. In terms of power generation, the data shows the dominance of the sub-sectors of micro-hydro, mini-hydro and solar home systems (SHSs). In terms of geographical spread, the table shows that most technologies have achieved substantial spread, with installations in a significant portion of Nepal’s 75 districts. In general, a predominant theme conveyed by the Table7is that smaller-scale systems have been disseminated much more widely than larger scale systems. In looking at installed capacity, mini-hydro may appear to be the one exception of a larger scale technology that has achieved substantial capacity. Yet, as will be discussed later, most of the mini-hydro capacity installed to date was installed in 70s and 80s, so that mini-hydro is not really part of the current growth trend of off-grid renewable energy technologies in rural Nepal.

15 Shoko Noda, 2013, op. cit.

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Table7: Nepal’s Cumulative Installation of Off-Grid Renewable Energy Technologies as of July 2011

Renewable Energy Technology Total Installations Districts

Covered* Number Capacity

Hydropower: 36.8 MW (not including IWM)

Mini hydro (100 kW < x ≤ 1MW) 40 14.95 MW 31

Micro hydro (5 kW < x ≥ 100 kW) 999 18.65 MW 59

Pico hydro (x ≤ 5 kW) 1,480 3.18 MW 53

IWM (improved water mill) 7,959 NA 46

Solar:(7.49 MW SHSs only)

Solar home system 284,097 7.44 MW 74

Institutional solar PV** 299 Unknown 42

Solar pumping 81 Unknown 22

Small solar home system (<10 Wp) 11,687 0.05 MW 49

Wind

Wind 21 Unknown 12 Source: Renewable Energy Data Book, 2011, AEPC (op. cit.) *Note: Nepal has a total of 75 districts. **Institutional solar PV consists of solar systems serving institutions such as schools and hospitals or clinics. Applications of power generated include computers, FM radios, and refrigeration of vaccines.

Recent Growth and Potential of Off-Grid Renewable Energy Technologies in Nepal: Table8below contains the aggregate data provided by AEPC on recent installations (between July 2009 and July 2011) of various renewable energy technologies. The table shows the substantial progress made in certain sub-sectors. From the perspective of power generation, in the two years covered, installed capacity has been about 8.5 MW or about 19per cent of Nepal’s cumulative off-grid renewable power installed to date. These numbers reflect the increased pace of installation of certain off-grid renewable energy technologies in recent years. Further, annual data over a recent period of ten years (see Table9) shows that progress over the past decade has been steady, rather than sporadic for the smaller renewable energy systems, which have been the focus over this period. Even more clearly than Table7, Table8 shows the dominance of smaller (e.g. micro versus mini-hydro) and household-scale (e.g. SHS versus institutional solar or solar pumping) technologies in the recent growth of off-grid renewable energy technology installations in Nepal. In terms of MWs, micro-hydro over the two recent years had the highest capacity installed (5.56 MW), while large solar home systems had the second highest capacity (2.08 MW) additions. This data reflects the trend in recent years that installation of micro-hydro capacity is much greater than that for mini-hydro. One of the most important points supported by the figures in Table8 is that, while mini-hydro has fairly significant cumulative capacity (as indicated in Table7); there has not been any activity in recent years. That is, the strong growth in off-grid renewable energy technologies in Nepal in recent years has excluded mini-hydro, with existing mini-hydro plants mainly being those installed many years ago.

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Table8: Nepal’s Recent Installation of Off-Grid Renewable Energy Technologies

Renewable Energy Technology Recent Installations July 2009 – July 2011

No. of Beneficiary Households Number Capacity

Hydropower: 6.32 MW (not including IWM)

Mini hydro (100 kW < x ≤ 1MW) None None None

Micro hydro (5 kW < x ≥ 100 kW) 202 5.56 MW 50,332

Pico hydro (x ≤ 5 kW) 218 0.76 MW 10,567

IWM (improved water mill) 1,350 NA 69,985

Solar:2.18 MW

Household solar PV (large SHS) 91,277 2.08 MW 91,277

Institutional solar PV** 38 0.04 MW Unknown

Solar pumping 2 0.003 MW Unknown

Small solar home system (small SHS) 11,687 0.06 MW 11,687

Wind

Wind 2 Unknown UnknownSource: Renewable Energy Data Book, 2011, AEPC (op. cit.); * for FY 2009/2010 only.

It can be seen from Table9that Nepal’s off-grid renewable power development to date has focused on the small end, raising the question of whether moving towards the next step up in size could bring economies of scale, faster progress, wider coverage, and more income-generating activities for local people.

Table9: Annual Capacity Additions of Smaller-Scale Renewable Energy Systems, FY2000/01 to FY 2009/10

Year of

Installation Number of Systems Installed

Micro Hydro Pico Hydro Improved Water Mills

Solar Home Systems

Household Biogas

2000/01 40 112 107 6,211 17,857 2001/02 50 36 58 13,775 15,527 2002/03 34 61 65 18,482 16,340 2003/04 53 80 538 15,106 11,259 2004/05 35 66 599 17,887 17,803 2005/06 38 48 934 6,688 16,1182006/07 42 46 851 10,806 17,663 2007/08 98 70 1,168 38,375 14,884 2008/09 86 32 1,073 53,662 19,479 2009/10 60 36 986 34,219 21,158

Source: Scaling Up Renewable Energy Program: Investment Plan for Nepal, 2011, based on data gathered from Renewable Energy Data Book 2009 (AEPC), Biogas Year Book 2009 and AEPC Annual Progress Report 2009-10.

Table10 below summarizes estimated potential capacity of off-grid renewable energy technologies, comparing them to current capacity. The Table shows that for almost all key renewable energy segments, current capacity reflects only a very small proportion of potentially exploitable capacity.

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Table10: Estimates of Potential Exploitable Renewable Energy Capacities Technology Potentially Exploitable Current Capacity

Hydropower* (total commercially exploitable) 42,000 MW 707.6MW

Mini‐hydro (practically exploitable) >100 MW 15.0 MW

Micro‐hydro (practically exploitable) >80 MW 18.7 MW

Solar PV power 2,100 MW 7.5 MW

Wind 3,000 MW NA** *May include smaller scale sites if deemed commercially exploitable. **Only 12 installations of wind.

Sources: Economic Survey 2011/2012, op. cit., Renewable Energy Data Book 2011 (op. cit.).Estimate for mini-hydro is based on district-level demand assumptions. Note: Current capacities for mini-hydro, micro-hydro and PV are as of July 2011.

Given limited progress in recent years in extending the grid to un-electrified, yet accessible areas and given substantial population in remote areas not suitable for grid extension, off-grid renewable energy systems are seen as a key means of reaching the 40% of the rural population still lacking access to electricity. As such, both the Government of Nepal and donors have been putting substantial efforts into expanding the deployment of renewable energy technologies. Notable progress has been made. Yet, due to many difficulties, it has been slower than targeted. Historical Role of Donor Programs in Growth of Rural Renewable Energy in Nepal: Donor support has played a leading role in the development of off-grid renewable energy systems in Nepal over the past 17 years. In 1996, UNDP initiated large-scale donor support in the sector with the launch of its Rural Energy Development Program (REDP). The data for FY2009/2010 and 2010/2011 for micro-hydro and pico-hydro stations illustrate the significant role played by donor programs in overall capacity additions (see Table11). In this case, two programs, UNDP’s “Transition RERL” (a project developed to serve as a transition from the very successful REDP to the project proposed in this document) and DANIDA’s Energy Sector Assistance Program (ESAP) supported the majority of stations in each category installed in each of the two years.

Table11: Role of Two Major Donor Projects in Micro-Hydro and Pico-Hydro Capacity Installed in Nepal in FY2009/10 and FY 2010/11

Item FY 2009/2010 FY 2010/2011

Micro‐hydro

Capacity installed 1.545 MW 4.016 MW

Total number of stations installed 62 140

Number supported by ESAP 37 90

Number supported by Transition RERL 11 29

ESAP/Tr. RERL supported sub‐total (number) 48 119

ESAP/Tr. RERL % of total number 77% 85%

Pico‐hydro

Capacity installed 0.39 MW 0.37 MW

Total number of stations installed 115 103

Number supported by ESAP 115 103

ESAP % of total number 100 100 Source: Renewable Energy Data Book 2011 (op. cit.).

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Renewable energy technologies were actually initiated in Nepal in the late seventies through the private sector with government and donor support. Yet, commercial supply of electricity from such initiatives was not very successful. As a result, in the nineties, the concept of the community owned and managed micro-hydro plants was initiated by the government, through the support of donor-funded projects, to achieve community electrification. The first of these donor projects was UNDP’s REDP, implemented between 1996 and 2011 to support rural energy system development, including micro-hydro, through a community mobilization approach. Over a period of 15 years, REDP achieved an installed capacity of 7.5 MW of micro-hydro through its community-based approach. In 2003, the World Bank joined UNDP as a partner organization providing financial assistance to the Government of Nepal and AEPC for replicating micro-hydro system activities in ten more districts. About three years after UNDP’s project, the Energy Sector Assistance Program (ESAP) was set up by DANIDA in 1999. ESAP also put substantial emphasis on micro-hydro, though did not use the community mobilization model of the UNDP project. About 8.5 MW of micro-hydro was installed through the two phases of ESAP. The government through its own efforts added micro-hydro plants for an overall total of 18 MW (or two additional MW to REDP’s and ESAP’s sub-total of 16 MW). Table12 summarizes key donor projects in off-grid renewable energy over the past twenty years. REDP (including “transition RERL”) and ESAP have been the most significant donor projects in the micro-hydro area. In the PV area, ESAP has given the most significant support to SHSs; and the EU’s Renewable Energy Project has supported institutional solar for income generation, public services, and water pumping. In addition to the large donor programs listed in Table12, the Government of Nepal has also had some smaller renewable energy programs, some self-funded and some with other donors.

Table12: Donor Projects in Rural Renewable Energy since the mid-1990s

Project Time Period

Donor Technologies Approach/ Comments

1. Renewable Energy Development Program (REDP)

1996‐2011

‐UNDP ‐World Bank

‐Micro‐hydro ‐Biogas ‐Improved cook stoves ‐Solar water heaters

Local level capacity building; community mobilization models

2. Energy Sector Assistance Program (ESAP)

1999‐2012

‐DANIDA ‐Norwegian Embassy

‐More efficient biomass tech for cooking and heating ‐SHSs ‐Micro‐hydro

Introduction of lending to micro‐hydro sector, support for both micro‐hydro and SHSs

3. Renewable Energy Project (REP)

2003‐2012

EU ‐Institutional solar for public services, water pumping, and income generation

Public services include schools, hospitals, etc. Pumping for both drinking water and irrigation

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Status of specific technologies: In this sub-section, we provide a brief discussion of the current status of the renewable energy technologies that will be addressed in the proposed project. These technologies, all off-grid power generation technologies, include mini-hydropower, micro-hydropower, village-scale solar PV systems, institutional solar PV systems (such as those used in schools and health clinics), and solar PV agricultural pumping technologies. Later in this document (Section 2.1) we explain the rationale for selecting each of these technologies for inclusion. Mini-hydropower status: While AEPC data indicates about 40 mini-hydro installations with a total installed capacity of about 15 MW, mini-hydropower today in Nepal is a sub-sector in which activity associated with new installations has been almost completely absent over the past decade. The only exception is the 400 kW Haluwa Khola Station supported by private sector and UNDP commissioned in 2011. The majority of Nepal’s mini-hydro was built in 70s and 80s by the Nepal Electricity Authority (NEA) to electrify the administrative headquarters of various districts. Most of these plants are operating at losses. NEA has leased some of these plants out to private sector to abate losses and many of them are now grid connected.16 NEA’s experience with mini-hydropower has not been good. It stopped its activities in the sub-sector due to high management costs that resulted in heavy operating losses. NEA is gradually handing over these stations to the private sector, which has resulted in improved performance. Aside from the NEA mini-hydro stations, there are only four others and all of these are off-grid. They range in size from 400 kW and above. Two of these were installed over a decade ago with aid from Switzerland (400 kW) in Salleri and Austria (750 kW) in Namche. Both are located in the Solukhumbu District and are owned and operated by the beneficiaries. When AEPC was established in 1996, its mandate in hydropower only covered stations of up to 100 kW. Now, however, its mandate has been expanded to include stations up to 1 MW. The Haluwa Khola station represents the only station over 100 kW to be implemented by AEPC.17 Table13below presents a rough breakdown of the installed capacity and number of operating mini-hydro plants into the following categories: still operated by NEA, leased by NEA to the private sector, or developed and managed by non-NEA entities.

16Development of Framework and Guidelines for Promotion of Mini-hydro in Nepal, June 2012, Energy Development Services P., Nepal (commissioned by AEPC/RERL) 17Energy Development Services, 2012, op. cit.

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Table13: Estimates of Nepal’s Installed Mini-Hydro Capacity by Ownership and Management Type

Ownership Management Off‐grid or grid connected

No. of Stations

Installed Capacity

NEA NEA Mixture 25 10.66 MW

NEA Private Sector Off‐grid 7 1.43 MW

NEA Private Sector Grid connected 4 0.83 MW

Private Sector/Community Private Sector/Community All off‐grid 4 2.03 MW

Total for all types of owners hip/management ‐‐‐‐ 40 14.95 MWSources: Development of Framework and Guidelines for Promotion of Mini-hydro in Nepal, June 2012, Energy Development Services, Nepal (commissioned by AEPC/RERL). For NEA managed stations, estimate by RERL formulation team based on combination of AEPC data and data from Energy Development Services report.

Micro-hydropower status: Clearly, under AEPC and with donor support, there have been strong increases in the number of installed micro-hydro stations over the past decade. Table9shows the number of stations installed each year between FY2000/01 and 2009/10. During this period, the number of stations installed per year ranged from 34 to 98 and the average was about 54. In FY2010/2011, the number of installations jumped to 140, substantially larger than any year in the previous decade. Village solar PV stations: PV stations that power a full village or a subset of villages through a micro-grid are not common in Nepal. The three such systems were installed in the late 80s through French Government development support: 30 kW at Kodari, 50 kW at Gamghadi, and 50 kW at Simikot for supplying electricity for basic lighting in these very remote areas. The Kodari project has been dismantled and remaining two projects are also not functioning properly. More recently, some efforts have been made to provide PV power to clusters of households (e.g. about 12 households) with a single 75 to 80 watt panel, though applications in these cases are also limited mainly to lighting. APV-wind hybrid village power system of capacity 2 kW solar PV and 1 kW wind has been installed in Nepal recently in Nawalparasi district (HurHure) to supply electricity to a village. The costs were found to be high and PV systems provide most of the power. Institutional solar PV: Institutional PV refers to PV serving institutions, such as a hospital, health clinic, or a school. Common applications are refrigeration of vaccines, FM radio, and computers for schools, with the last application appearing to be by far the most common. According to AEPC data, up through July 2011, there were 299 institutional PV systems operating in Nepal spread across 42 of the nation’s 75 districts. Of these, 210 were installed prior to mid-2006, with the other 59 installed since then. An important supporter of such systems over the past decade has been the EU’s Renewable Energy Project (REP) between 2003 and 2012. The projects implemented under this project were 100% supported by grants. During the two years FY2009/10 to 2010/11, thirty-eight such systems were installed. Of these, 36, the vast majority, were installed in schools to facilitate computer use. The average size of these systems was 871 watts. The other two installations over those two years

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were one for FM radio (1.5 kW) and one for a health clinic’s refrigeration of vaccines (3.33 kW). PV agricultural pumping: According to AEPC data, 81 solar pumping systems are operating in Nepal. Of these, 64 were installed prior to mid-2006, with the other 17 installed since that time. The systems are installed across 22 of Nepal’s 75 districts. During the two years FY2009/10 to 2010/11, only two PV pumping systems were installed. Each was 1.5 kW. Conclusion on status of off-grid renewable energy in Nepal: Findings with regard to off-grid renewable energy in Nepal provide insights that support the rationale of an off-grid rural renewable energy project generally and those that facilitate the design decisions to be made. First, off-grid renewable energy in Nepal has proven its ability to play a significant role in the country’s overall power provision. It is making substantial contribution and has the potential to make more, particularly in remote areas where grid extension does not make sense. Further, unexploited potential inmost renewable energy segments is vast, particularly hydropower and solar PV with potential of wind being still unexplored for the lack of wind data. The current installed capacity reflects only a very small proportion of country’s potential. Donor supports have proven to have played substantial role behind the development of Nepal’s off-grid renewable energy over the past decade. In terms of insights for project design, the predominant theme of the findings in this section is that off-grid renewable power development to date in Nepal has focused on the small size installation. The question is thus, whether moving towards the next step up in size will bring economies of scale, faster progress, wider coverage, and more income generating opportunities for local people. In particular, development of mini-hydro stations has been virtually dormant during past 20 years, while development of new micro-hydro stations has spear-headed. Installation of solar PV home systems (SHSs) has been vibrant, while village PV systems are rare and those cases that do exist tend to be limited to lighting or other very low power consumption activities. Institutional solar PV and solar PV pumping have seen more progress than village PV systems. Yet, experience and support is still much more limited compared to SHSs.

1.3 Productive‐use of off‐grid renewable energy

The frequently found enterprises in rural communities (where there is no grid/off-grid power) are agro-processing mills which generally include hulling, grinding and expelling. In some rural areas, water mills provide the grinding service; such water mills are generally owned and operated by marginal families in the community. In some other places, agro-processing mills are diesel powered. These mills are owned and operated by relatively well-off families. In some areas, hand-made paper enterprises are in operation which uses firewood for processing the raw materials. Income generating activities such as tailoring and rural carpentry are based upon human-power. Other enterprises such as knitting, basketry, etc. are also human-powered.

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With the establishment of micro-hydropower systems in rural areas, the scenario for livelihood opportunities are changing. It is true that the electricity generated from micro-hydropower plants has been primarily used by households for lighting followed by operating few household gadgets like radio, TV and mobile. However, in many micro-hydropower sites, electricity-based enterprises have emerged contributing to the plant load factor as well as to the livelihood opportunities. The most frequent enterprises are the agro-processing mills such as rice mill and oil expelling mill. The existing diesel-powered agro-processing mills quickly switch to electricity. Other enterprises include poultry, dairy and those based on forest resources (e.g. saw mill, juice making). In addition, modern consumer services such as photocopying, communication centres, electric/electronic repair centres are also emerging quickly in many places. The power consumed by these enterprises generally range from 0.5 kW (poultry farm, photocopier) to 7.5 kW (rice mill). The total contribution to plant load factor from productive uses in micro-hydropower schemes could be substantial compared to total power available as could be perceived from the following examples from Baglung district. The first example is the Budhathok micro-hydropower plant (60 kW), which has been providing electricity to run several productive use enterprises in its service area, they include three units of grinder/huller mill (7.5kW each), 20 poultry farms (0.5 kW each), and three telecommunication towers (5kW each). The second example is the Nishi Khola I micro-hydropower plant (48 kW) supporting five grinder/huller mills (7.5kW each), 25 poultry farms (0.5kW each), one furniture (7.5kW), one photo studio (0.5kW), and one computer institute (1kW). Annex 6 shows the type of potential productive uses at micro-hydropower plants promoted by REDP and ESAP. Despite such encouraging and emerging scenario, most of the micro-hydropower systems are observed to have low level of load factors, which is attributed to absence of adequate enterprise development in the vicinity of the these plants. According to one of the estimates, electricity produced from micro hydro is limited to around 19% for lighting purpose and remaining 11% for other activities18. According to Mini Grid Outlook19, out of 261 manager level employees in 247 MHP, 54 are women. Similarly, out of 464 operators, 24 are women. A total of 1605 people have been employed after establishment of micro-hydro schemes (directly and indirectly through end-use of electricity), of which 206 are women. Impact study of 20Mini Grid Electrification (MHPs) was carried-out by AEPC/ESAP in 2011 and found that MHPs result in positive impacts for women in terms of their involvement in household decision making process. The study reported 2% increase in the involvement of women on decisions related to children’s education, general health and female health. Likewise involvement of women on decisions related to household finance is found to be 4% points higher, and participation of women in social gatherings is 3% higher with MHP intervention.Though the compiled data does not

18Source: Final Report Analysis of Potential Enterprises in Area Electrified by Micro-Hydropower, AEPC, August 2012 19 Mini Grid Outlook (1999 to 2012), AEPC/ESAP, 2012 20Impact of Mini Grid Electrification, AEPC/ESAP, 2012

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exist, a REDP document21 claims achieving increased number of women managed enterprises having been witnessed in the program areas.’ Case studies are presented on successful women-managed rural carpentry business in Kabre district and local community comprising of indigenous people, other ethnic communities and Women’s Cooperative owned and operated 100 Watt FM station established in Kharbang Dagatung Danda VDC in Baglung. Compared to micro-hydropower plants, the mini-hydro systems are expected to offer greater opportunity for enterprise development, for instance, due to availability of abundant and more reliable power. In the demonstration mini-hydro projects, a number of potential enterprises are expected to emerge soon as power becomes available. For example, in the proposed Mewa Khola Mini Hydropower Project (500 kW), altogether 48 potential enterprises have been identified. These enterprises include agro-processing mills, rural carpentry, bakery, metal works, computer labs& and photo copying centres, etc. Of the estimated total consumption of 1,864,740 kWh/year, about 32% is expected to be used for productive use load from these potential enterprises. Over the years, this figure could increase substantially if the productive end-use promotional activities are implemented. Similarly, in Giri Khola Mini Hydropower Project (210 kW), demand of electricity for agro-processing mills, hotel and grocery shops, rural carpentry, computer centre and cable network service have been identified contributing to a load factor of around 200 kW. In Upper Junbesi Mini hydro project, the most likely productive use of electricity is by hotels. Out of 20 existing hotels, 10 hotels are expected to use electricity on much regular basis and in substantial quantity for cooking, room heating, electric geysers, air conditioners and other appliances. Two Gumba22s are also expected to use electricity for cooking and water heating. There are several energy-based enterprises owned and operated by women. Many of these have provided employment to a number of women. With the incomes from such involvements, studies have shown that women’s involvement in decision making relating to household finances have improved. The electricity of solar PV systems, particularly, the solar home systems, is also used mainly for lighting and charging mobile. Operation of TV with bigger solar home systems (say 60+ Wp) is also sometimes reported. With a bigger sized solar PV system, the productive use scenario could be improved. For example, the solar mini grid electrification project (10.5 kWp) in Gauda village of Saptari district is planned to provide electricity lighting to 40 households and also provide opportunity for operating low watt fans, TV and other electrical appliances along with a 1 kW hulling machine23.

1.4 Barriers to Energy Access and to a Low Carbon Development Path

Off-grid systems are currently the preferred solution for bringing electricity to the 40% of Nepal’s rural households that lack access to power. They offer a solution that, due to the 21 Achievements of REDP, REDP, 2011 22 Buddhist monastery 23 Source: Feasibility Study Report On Solar Mini grid Electrification Project Gobar Gauda, Saptari, AEPC, May 2012

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prohibitively high cost of grid-extension to remote mountain areas, institutional barriers to grid extension to less remote un-electrified rural areas, and extensive load-shedding, the main grid cannot. Renewable off-grid systems in particular offer the means to achieve energy access on a low-carbon path. Further, having a reliable source of electricity and large enough installed capacity, could present new income-generating opportunities Yet, despite advances with micro-hydro and other forms of off-grid renewable energy, such as solar home systems, progress in reaching the rural population without electricity has been slower than targeted. For example, due to various challenges, micro-hydro plants can take three years to construct. In addition, in the case of the estimated 15per cent of the rural population with access to off-grid renewable power the electricity end-uses are generally limited to domestic lighting and small appliance due to low capacity systems. Consequence is the limited revenue resulting in lack of funds for proper repairs and parts replacement. In assessing the challenges to increased energy access and achievement of a low-carbon development path in rural areas of Nepal still lacking electricity, key barriers are identified and overarching thematic areas are developed. The thematic areas that emerged from the barrier analysis are: (1) physical access issues, (2) affordability (upfront cost) issues, (3) financial sustainability (cash flow for systems maintenance and repair), (4) technical capacity for less disseminated technologies (such as mini-hydro and larger scale PV), and (5) lack of awareness of the potential benefits of less disseminated technologies. Lack of favourable policy (particularly for less disseminated technologies) was also highlighted in the analysis. Further findings from the barrier analysis with regard to these thematic areas are as follows: Due to insurmountable costs of grid-extension to remote inaccessible areas, off-grid systems are seen as the means for addressing the first thematic area, physical access issues. Off-grid renewable systems in particular allow access while enabling a low carbon development path and replacement of emission emitting fuels. As for affordability issues, the second thematic area, these stem chiefly from (a) lack of capital for investment, (b) high costs of systems, and (c) low household disposable income. Sustainability issues of installed systems (particularly community systems), the third thematic area, result from (d) low utilization and the particularly low level of productive uses of electricity. Productive uses, were they exist in abundance, could help sustain systems through tariff revenues, with businesses possibly being charged higher rates than households. Further analysis below focuses on the subthemes of (a), (b), and(c) and (d) combined, as well as addressing the themes of (e) lack of technical capacity and (f) lack of awareness. Cost issues: High costs of technology are due to several issues. First, high transport costs are endemic to Nepal’s challenging, mountainous terrain. The predominant focus to date on smaller scale off-grid systems means that economies of scale are not leveraged. Further, both construction materials and renewable energy system technologies have high costs, partly due to the necessity of imports. When domestic options are available, these are not always cheaper than imports. Efforts to date to localize technology may not have sufficiently assessed Nepal’s potential areas of competitive advantage. Also, domestic manufacturers of

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components that may potentially be cost-competitive lack the scale needed to achieve their own economies of scale and serve the needs of a strong pipeline of projects. Further, lack of technical skills and knowledge may actually serve to keep costs high and slow the pace of manufacture and installation. The foregoing issues apply to both off-grid hydropower and off-grid solar PV technologies (together, the focus of this project as explained in Section 2.1). PV technologies, despite great reduction in cost in recent years are still more expensive than off-grid hydropower. Cost estimates per installed capacity vary by source, but generally show Nepal’s costs are higher than those of nearby countries. Below in Table, the range of costs and estimated average cost per kW for micro-hydro installed capacity are given by country. These estimates are provided in an AEPC-commissioned study. The study concludes that current micro-hydro plants built under AEPC are too small and that cost reduction potential exists. Scale of planned installations is determined by an agreed amount of installed capacity per household multiplied by the number of households. It does not take into account potential increases in consumption over the years and does not allow substantial income-generating applications. Further, the resulting small station capacities are not cost effective for grid connection once the grid does arrive. The study emphasizes the need for modernization, specialization, and standardization in the local manufacturing sector. It recommends that tender procedures undergo serious review and that the industry be transformed from a project-by-project “artisanal” approach to a viable industry. For example, a supplier of parts could be asked to supply standardized parts for ten stations at a time rather than on a one-by-one basis.24

Table14: Comparison of Up-front Micro-hydro Cost per kW Installed

Country Cost range (per installed kW) in USD

Average cost (per installed kW) in USD

Nepal 4,000 – 14,000 8,000

China 1,000 – 6,000 3,000

India 2,000 – 6,000 4,000

Sri Lanka 2,000 – 5,000 3,000

Vietnam 1,000 – 20,000 3,000 Source: Micro-Hydropower in Nepal: Enhancing Prospects for Long-term Sustainability, Alex Arter, November 2011.

.

From Table, it is clear that attention needs to be paid for reducing the cost of off-grid hydropower in Nepal. One of the options to reduce the costs, the report concludes, may be to choose Chinese equipment even if it is usually linked to higher routine Operation and Maintenance (O&M) costs. The study also found that up-front costs of micro-hydro stations had increased 50% in Nepal in recent years, necessitating the increase in level of subsidy provided and thus reducing the total number of villages that can be assisted. Finally, the study suggests that detailed standardization following the Chinese model may provide the best potential for lowering domestic manufacturing costs.25

24Micro-Hydropower in Nepal: Enhancing Prospects for Long-term Sustainability, Alex Arter, November 2011. 25Arter, Ibid.

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Other studies assume the potential for a lower average cost per kW going forward. For example, Clemens et al in a 2010 UNDP-AEPC study project that required investment for reaching the target of an additional 150 MW of off-grid hydropower is a “financially modest” USD 435 million or about USD 70 per beneficiary. This estimate implies an average up-front cost of installed power of USD 2,900 per kW. The USD 8,000 per kW indicated inTable14 seems too high based on the prices quoted for some recent projects. Currently costs appear to vary between USD 4,000 and USD 6,000 per kW. Financing issues: Related both to high costs and to low system income once installed, difficulty in getting systems financed is probably the overriding barrier facing increased energy access through off-grid renewable energy systems. Both financial institutions providing credit and equity investors are averse to the risk presented by off-grid renewable systems. They lack ability to evaluate the risk, but at the same time have reasonable concerns about the commercial viability of systems. Financial tools and policy mechanisms could be ways to address some of these issues, but such financial tools are mostly absent and the policy framework incomplete to address systems of various scales and technologies. Indeed, subsidy policies tend to be biased towards smaller systems, thus inhibiting the cost benefits that might be achieved from the economies of scale of larger systems. Further, there is an absence of precedence – of systems financed in a commercially viable fashion -- so that financial institutions and equity investors are especially hesitant to finance projects. To date, most off-grid renewable power systems in Nepal have been developed with subsidy from the government and/or donors. Currently, the Government of Nepal’s Alternative Energy Promotion Centre (AEPC) with support from various donors provide subsidy to these projects accounting for about 40% of the costs. Yet, even this level of subsidy has so far not been adequate to spur development to the pace AEPC now targets for the sector. The other 60% of the financing is typically provided by the developer (via debt and equity financing) and community/rural electric cooperatives, which generally provide part of their equity contribution in-kind through labour. Details on the subsidy system are provided in the discussion on policy presented in Section 1.4, with the recently revised subsidy scheme (2013) presented in Table 15 (off-grid hydropower) and Table16 (PV). While the new subsidy policy has improved the situation in some ways, it continues to be biased towards smaller systems or those that provide less capacity of output per household. Thus, the preferred systems under the subsidy model are precisely those less suitable for income-generating activities. At the same time, the subsidy policy provides for an additional productive use subsidy, but this is much less on a per kW basis than the maximum subsidy that can be achieved by low per capita capacity systems. Finally, the revised version of the policy (2013) specifically states that subsidies will only be for community financed systems, thus instituting a new policy barrier for private sector financing of such systems.

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Credit-providing financial institutions’ reluctance to get involved in the financing of off-grid renewable energy systems can be divided into economic and non-economic reasons. Some of the economic reasons for their hesitance in the case of community systems include lack of productive end users and low load factor, poor repayment track record, dealing with low income households, credit worthiness of rural households served, problems in tariff collection, and high overheads associated with smaller loan portfolios. In addition, the remote location of sites, difficulty in monitoring project development, lack of technical and administrative human resource in rural areas, and political instability are some of the non-economic considerations that keep financial institutions from participating in the sector. Also, their lack of knowledge on market opportunities in the renewable energy sector and how to set up a framework for future carbon finance activities hinders the development of appropriate loan products for the sector.

Many of the reasons for the hesitance of private sector equity investors to invest in off-grid renewable energy projects are similar to those that make banks hesitant to extend credit to such projects. Equity investors will be most concerned about confirming commercial viability. Therefore, precedents demonstrating such viability will be important to them. Triple-bottom-line funds26, impact-financing, or similar investors may serve as a transition to attracting other equity investors to the sector through their support of initial projects. To date, however, even these players have either yet to be convinced of commercial viability or perhaps even made aware of opportunities.

These headwinds notwithstanding, financial institutions that provide credit have been participating in a limited way in the development of the sector. ADBL (Nepal’s Agricultural Development Bank Limited) was the first commercial institution to provide commercial financing in off-grid hydropower systems in Nepal, starting with credit provision to such projects in the 1980s. The bank as of end of FY2008-09 had invested about USD 2 million in 1,084 projects with a total installed capacity of about 6.3 MW. The establishment of the Clean Energy Development Bank, a bank focused on renewable energy, which has the aim of providing affordable and flexible financing solutions to exploit the potential of off-grid hydropower, is a positive development for the sector.

Financial sustainability and utilization: Even highly or fully subsidized systems may face issues of long-term financial sustainability in the absence of on-going revenues to pay for system repair, maintenance and parts. Yet, utilization levels (and therefore revenues collected) tend to be low. Low utilization stems both from peoples’ lack of ability to pay and the absence of excess system capacity that could meet needs beyond minimal daily consumption. Productive applications – use of energy for income-generating purposes – could be a way to increase utilization and therefore the income and financial sustainability of systems, but more

26Triple-bottom-line is intended to advance the goal of sustainability in business practices. The three measures include: profit (the economic value created by the company, or the economic benefit to the surrounding community and society), people (the fair and favorable business practices regarding labor and the community in which the company conducts its business) and planet (the use of sustainable environmental practices and the reduction of environment impact).

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excess power would be needed than is the norm with most systems being installed in Nepal today. A recent AEPC-commissioned study found that over 50% of 26 micro-hydro sites assessed lacked financial sustainability. In the study, “financial sustainability” is defined as having actual cash flow greater than expenditures on repairs and maintenance. The study concluded that larger systems are more likely to be sustainable. The study also concluded that to increase sustainability, tariffs should be collected based on consumption (rather than collecting a monthly flat fee), productive end-use should be encouraged, and larger schemes should be promoted.27 Improving the cash-flow of mini-hydro projects will require a sustainable increase in system load from productive applications which will further require the development of enterprises and uses that are themselves financially viable. Entrepreneurs will not only need to know how to produce their product or service well, they will also need to have financing to start their businesses and market linkages to ensure these are successful. The decision of what to produce in the first place will, in addition, need to be a wise one. So far, while there has been some effort at promoting productive applications at micro-hydro sites, impact has been limited. The small scale of these systems means that the productive applications cannot have too large an energy requirement. Further, work to date has been mostly ad hoc. To achieve a higher level of productive use, a more systematic approach is needed. Such an approach should ensure: (1) appropriate selection of productive use sector, (2) capacity building or information access in that sector if needed, (3) micro-financing of productive applications, and (4) the development of market linkages. On the financing side, an important issue is that many of the more remote locales (classified as Hilly and Mountainous) are not covered by micro-finance institutions. These locales may have local cooperatives that offer limited credit, but work is needed to enable these organizations to operate more fully as financial institutions or cooperate with micro-finance institutions and banks from less remote areas. By promoting productive end-use of energy, it will not only address the financial sustainability of off-grid renewable energy systems, it will also address two other major issues faced in rural Nepal -- low agricultural productivity and limited off-farm employment opportunities. While agriculture accounts for only about 35% of GDP, an estimated 75% of the population is engaged in the sector.28 Increasing productivity in agriculture is a key challenge. Therefore, a productive applications strategy should consider the basic economic situation of rural communities in Nepal and address related barriers. Experts see a greater need and potential for irrigation and vertical lifting of water, an area that renewable energy systems could well support.

27Micro-Hydropower in Nepal: Enhancing Prospects for Long-term Sustainability, Alex Arter, November 2011 28Nepal Economy Profile 2012, Index Mundi.

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Likewise, productive use enterprises, particularly those of scale, could generate off-farm employment opportunities. Currently, the “brawn and brain drain,” the out-migration of Nepalese, especially youth, for mostly unskilled or semiskilled employment in foreign countries, continues unabated. This trend is attributed to the lack of sufficient job opportunities in Nepal. Remittances from Nepalese working overseas, which account for 22per cent of gross domestic product, generate more foreign exchange than exports.29 There is an urgent need to create domestic employment opportunities, especially for the poor and deprived in rural areas, and to counter declining productivity and production caused by migration. Some case-stories published in media, demonstrates earnings in Nepal can be equally competitive Technical capacity and lack of awareness: Technical capacity and lack of awareness are also important thematic areas in assessing barriers to the adoption of renewable energy technologies in Nepal. Inadequate technical capacity is a contributing factor to high costs. Therefore, developing standards, building capacities for cost-competitive domestic manufacturing of appropriate parts, and enhancing capabilities of installers and other service personnel will help in reducing costs. While analysis implies cost-advantages and greater potential for income-generating opportunities from larger scale systems, such as mini-hydro and village PV, awareness of these advantages is lacking. Thus, emphasis is focused on replicating achievements with smaller scale systems (micro-hydro and SHSs) without recognizing the potential long-term advantages of larger systems. Increasing awareness among policy makers, donors, and local communities will be important to ensure that full consideration is given to the options of various locales in developing off-grid power systems. Further, to address financing barriers discussed above, awareness of financial institutions and equity investments needs to be raised. They need to be educated on the risks and benefits of such systems and need to see demonstration of financial viability and related models before their support can be obtained.

1.5 Policy and Institutional Environment for Renewable Energy

This section discusses the Government of Nepal’s institutions, policy, and targets related to off-grid renewable energy. The Alternative Energy Promotion Centre (AEPC), under the Ministry of Environment, Science, and Technology is the key government organization for the nation’s off-grid renewable energy efforts. There are two key policies, the Rural Energy Policy of 2006 (much of which is still yet to take effect through the promulgation of associated acts) and the Subsidy for Renewable (Rural) Energy. The latter was first issued in 2006, a revised version was issued in 2009, and a second revised version currently (as of February 2013) in draft form with finalization expected soon. In terms of targets, the Government has both long-term (20-year) targets for renewable energy in general and

29Developing countries to receive over USD 400 billion in remittances in 2012, says World Bank report, World Bank press release, Nov. 20, 2012.

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medium-term (5-year) targets for off-grid renewable energy to be achieved under AEPC’s National Rural Renewable Energy Program (NRREP). More details on institutions, policy, and targets are given in the sub-sections below.

1.5.1 Nationalinstitutionsrelevanttooff‐gridrenewableenergy

Compared to on-grid large hydropower projects, smaller off-grid systems face less bureaucratic barriers and benefit from the focus of responsibility in a single organization, AEPC. Yet, inadequate government institutions in rural areas present obstacles to rural communities wanting to adopt renewable energy technologies. For off-grid systems, the Alternative Energy Promotion Centre (AEPC), under the Ministry of Science, Technology and Environment, (MoSTE), is the key government body. MoSTE promotes the sustainable development of the country through environmental protection. The AEPC is an autonomous institution under this Ministry. Established in 1996 for the development and promotion of renewable and alternative energy technologies in Nepal, AEPC’s overall objective is to popularize and promote the use of renewable energy technology to raise living standards of the rural people, to protect the environment, and to develop commercially viable alternative energy industries. AEPC is also hoping to bring livelihood improvements to rural citizens by promoting small industries and enterprises based on alternative energy technology. To achieve the foregoing, AEPC helps the Government formulate national policies, plans, and programs on renewable energy and facilitates their implementation. Since its establishment, AEPC has been implementing sector support activities such as subsidy disbursement, human resources development, monitoring, studies, etc. It is also responsible for quality control, monitoring, and evaluation work.

AEPC strives to serve as a one-stop shop for stakeholders, including the community, entrepreneurs, suppliers, and consultants. It is involved in raising awareness of and promoting renewable energy systems, providing the credibility needed to attract donor funding, administering subsidies, and setting standards and guidelines for quality assurance.

AEPC has been implementing renewable energy projects with support from bilateral and multilateral development partners, including ADB, Danida, DFID, the EU, KfW, Norwegian Ministry of Foreign Affairs, SNV, UNDP and the World Bank. The implementation modality for most of these projects in the past has been that development partners have individually or in groups supported different projects implemented by AEPC. Based on these experiences, the Government and development partners have now agreed to jointly implement a single program modality to support the Nepalese renewable energy sector. The modality is known as the National Rural Renewable Energy Program (NRREP), and specific components of this program will form part of the baseline activities of the proposed UNDP-GEF RERL project.

Other government agencies or authorities related to renewable energy in Nepal include the following:

Ministry of Finance: Responsible, among other things, for allocation of national resources, management of public expenditure, mobilization of both internal and external

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resources, and performance of public investments. All government allocations and donor assistance for the off-grid renewable energy sector are managed by this Ministry.

Ministry of Local Development: Responsible for strengthening the governmental system for local bodies. It works to enhance decentralized institutional arrangements for local development from different aspects.

Nepal Electricity Authority (NEA): As the government utility, plans, constructs, operates and maintains generation, transmission, and distribution facilities in Nepal's power system. It also purchases power from private developers and exchanges power with India to meet the nation’s needs. In the past, NEA has installed some off-grid systems, but these operate at substantial loss. As a result, new ones are no longer being pursued. Some of the systems built are either not operating or have been leased out to private parties. NEA at this point has no interest in pursuing off-grid systems and is generally not considered relevant to off-grid projects unless such projects hope to connect to the grid in the future. Yet, having leased out some of its old mini-grid systems, it may be interested in leasing out more over time.

Ministry of Energy: Oversees the development and management of national grid-connected electricity systems and, as such, is not relevant to off-grid projects. The Ministry, however, is responsible for utilization and management of water resources of the country, especially for electricity production and management.

1.5.2 NationalPoliciesdirectlyrelevantruraloff‐gridenergy

The two key legislative instruments for rural off-grid renewable energy are the Rural Energy Policy (2006) and the Subsidy for Rural (Renewable) Energy (2000), with revisions in2006, 2009, and 2013).In addition to these two key legislative instruments, other potentially relevant policies, acts, and ordinances include: The Hydropower Policy and associated Electricity Act of 1992, the Local Self Governance Act, the Hydropower Policy of 2001, and the Financial Ordinance of 2005. Below we review the two key instruments, as well as briefly introducing the others.

The Rural Energy Policy 2006: The Rural Energy Policy aims to promote clean and reliable energy for poverty reduction and environmental conservation. It seeks to do this by supporting increased access, linking rural energy development with employment creation, and promoting use of rural energy for social and economic activities. It promotes decentralization in the planning, implementation, monitoring, and evaluation of rural energy development. It further promotes more involvement of the community, local bodies, non-governmental organizations, and the private sector. It fosters the establishment of central and local rural energy funds, capacity building at all levels, increased focus on use of energy for socio-economic activities, and strong linkages with other sectors like health, education, irrigation, drinking water, small and medium enterprises, and ropeways. The policy tries to integrate into one policy document various aspects of rural energy development in Nepal like subsidy policy, resource mobilization, human resources development, and institutional mechanisms.

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Yet, the Rural Energy Policy has not yet been fully enforced with a corresponding Act.

Despite the many legislative items in its contents that deal with renewable energy systems, only the Subsidy for Rural (Renewable) Energy (issued to address one of the Policy’s legislative items) and the Financial Ordinance (discussed below) have in practice played a significant role in increasing private sector participation in renewable energy technologies. Formulation of acts to support the Policy are, nevertheless, said to be actively underway.

Subsidy for Renewable (Rural) Energy 2000 (revised 2006, 2009 and 2013): The Subsidy for Renewable Energy is integrated with the subsidy provisions mentioned in the Rural Energy Policy, creating legal obligations to support the subsidy aspects of the Policy. There have been three revisions since the original version was issued. The aim of the Subsidy is to accelerate the adoption of renewable energy technologies in Nepal and it has been doing so over the past several years. The Subsidy policy has also provisions to support wind-solar hybrid stations and small independent wind turbines, though the amounts of subsidies for wind-related projects are not specified. The Subsidy lacks provision for support of village-scale PV systems when these are not part of a wind-PV hybrid village system. Government subsidy levels over the last 12 years for off-grid hydropower are provided in Table and Table16. The current subsidy for equipment and installation is determined on per household basis as well as on per kW basis (capped by households per kW and subsidy per kW). Thus, the preferred systems under this subsidy model are less suitable for income-generating activities due to the above ceilings. There is an additional provision for subsidy for productive uses, but the amounts specified are inadequate for promoting wide range of productive end-use applications.

Subsidies are also available for solar home systems, small solar home systems, institutional PV systems, and PV water pumps. There is currently no subsidy for village-electrification systems, clearly a disincentive for development of such larger systems. Further, for each of SHSs, institutional PV systems, and solar water pumps, the subsidies have a cap related to scale or total price, thus posing a disincentive to larger systems. The subsidy for SHSs is capped at a fixed level for systems over 50 W. Institutional PV systems are subsidized at 75% of cost, but at a maximum of 1,000,000 Nepal Rupees (or about USD 11,500). Solar water pumps have a more generous subsidy for larger systems, but this is still capped at NPR 1,500,000 (about USD 17,250). The subsidy policy has been one of the most important government initiatives providing incentive for attracting companies (mainly mechanical manufacturers and installers) to the renewable energy sector. These subsidies, however, have to date been mostly donor funded and prone to donor funding interruptions. This has had an extremely negative effect on the sector, because uncertainty is created and customers tend to wait for the subsidy even if they

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are capable of installing systems without subsidy. The Government has not been successful in its policy of gradually reducing the subsidy. While donors plan to support continuation of the subsidy over the short to medium term (next five years), their longer term interest is to replace subsidy fund provision with provision of revolving credit funds. In spite of some positive move in favour of larger energy systems in the 2013 revisions, the current subsidy policy still favours smaller systems. This bias is considered necessary to make the policy pro-poor. Yet, the bias works against larger systems that may bring income-generating opportunities and thus revenue for the energy systems, which would be positive in terms of system financial sustainability. Further, the recent revision of the Subsidy Policy (2013) has made the development of renewable energy less favourable for the private sector. For example, the subsidy for development of mini-hydro (larger than 100 kW, but less than 1 MW) is available only if the system is developed or owned by the community or cooperative. This was not the case in the past. Table15 and Table16 show how subsidies for micro and mini-hydropower and solar PV systems, respectively, have evolved over past 13 years through three revisions.

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Table15: Summary of Subsidy Arrangements for Micro/Mini-hydro through various Revisions of Subsidy Policy All amounts in NPR

Capacity 2000 2006 2009 2013

Pico Hydro 55,000/kW (up to 3 kW)

8,000/HH but maximum 65,000/kW (up to 5 kW)

12,000/HH but maximum 97,500/kW (up to 5 kW)

Subsidy/HH: 15,000a, 14,000b, 13,000c Subsidy/kW: 90,000a, 80,000b, 60,000c Not exceeding/kW: 165,000a, 115,000b, 125,000c (up to 10 kW)

Micro/Mini (3 to 100 kW in 2000 and 5 to 500 kW in 2006 & 2009)

70,000/kW (3 to 100 kW)

Up to 10,000/HH but not exceeding 85,000/kW (5 to 100 kW)

15,000/HH not more than 125,000/kW (5 to 100 kW)

Subsidy/HH: 25,000a,b,c Subsidy/kW: 130,000a, 100,000b, 70,000c Not exceeding/kW: 225,000a, 225,000b, 195,000c (/kW subsidy will be based on minimum 5 HH per kW)(10-100 kW)

Community/Cooperative owned Mini hydro

- - -

Subsidy/HH: 20,000a, 18,000b, 16,000c Subsidy/kW: 120,000a, 100,000b, 70,000c Not exceeding/kW: 220,000a, 190,000b, 170,000c (/kW subsidy will be based on minimum 5 HH per kW)(100 to 1000 kW)

Rehabilitation of MHP more than 5 kW

50% of the cost or Maximum 35,000

Up to 10,000 per incremental HH but not exceeding 85,000 /kW

50% of installation cost no more than 62,500 /kW

Minor Damage: Up to 10,000/kW, Maximum 200,000 per plant Major Damage and Rehab of old system: Up to 50,000/kW Maximum 1,000,000

MHP for institutional and community use

97,500/kW Plant up to 5 kW

Subsidy/kW: 130,000a, 100,000b, 70,000c

Additional subsidy for transportation of equipment and material of the MHP project

21,000/kW (distance more than 5 days) 8,750/kW (Distance of 2 to 5 days)

Nearest road head: more than 50 km: 3,000/HH 25-50 km: 1,200/HH

500/km/kW not exceeding 30,000/kW

-

Additional financial support for productive use of energy

10,000/kW but not exceeding 250,000 per project

Maximum of 100,000 per individual enterprise or 30% of investment Maximum of 300,000 per community enterprise or 50% of investment

Note: a, b, c are VDCs categorised by the Government; For all the projects getting transportation subsidy, the subsidy amount will be calculated as 1 kW per 8 households maximum Source: Subsidy Policy for Renewable (Rural) Energy 2000, 2006, 2009, and 2013

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Table16: Summary of Subsidy Arrangements for Solar PV systems through various Revisions of Subsidy Policy All amounts in NPR

Type 2000 2006 2009 2013

1 Solar Home System

10 Wp 20 Wp >30 Wp

10-18 Wp

> 18 Wp

5 Wp WLED Based

10-18 Wp

> 18 Wp

5 Wp WLED Based

< 10 Wp

20-50 Wp

>50 Wp

Category A Additional 50% of category C 7,000 10,000 50% or NPR 1250 whichever is less

7,000 10,000

2,000

5,000 7,000 10,000 Category B Additional 25% of category C 6,000 8,000 6,000 8,000 4,800 6,200 9,000

Category C 50% of the cost not exceeding NPR 8,00030

8,000 5,000 6,000 5,000 6,000 4,500 6,000 8,000

Category Description

Category A VDCs Category A by GON Karnali and adjoining districts31 and VDCs Category A by

the GON VDCs Category A by GON

Category B VDCs categories as Category B by GON

Category C

Remaining Districts Accessible VDCs VDCs Category C by GON

2 Institutional Solar PV System and Solar Water Pump

Subsidy for public institution

75% of the cost 75% of the cost 75% of the cost 75% of the cost not exceeding 1,000,000

Subsidy for lighting of public places

75% of the cost not exceeding NPR 15,000

Same as Solar Home System

Subsidy for solar PV Pumping

75% of the cost up to 500 Wp 75% of the cost up to 1000 Wp

75% of the cost not exceeding NPR 1,000,000 for 1.5 kWp

75% of the cost not exceeding 1,500,000 (Community based only)

Source: Subsidy Policy for Renewable (Rural) Energy 2000, 2006, 2009, and 2013 GON

30 The subsidy amount will be reduced every year by 10% for >30 Wp of category C and it was done till 2005 31Humla, Jumla, Kalikot, Dolpa, Mugu, Rolpa, Rukum, Jajarkot, Bajhang, Bajura, Achham, Dailekh, Darchula

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1.5.3 Otherrelevantpolicies,acts,andordinances

Hydropower Policy of 1992: A pioneering effort of the Government to attract private sector investment in hydropower, the policy delineates specific incentives for promoting hydropower. Yet, the challenge of increasing access of the poor to electricity is not addressed in the policy.

The Electricity Act of 1992: Provides legal teeth to the provisions of the Hydropower Policy of 1992. Yet, it does not address off-grid renewable energy development at all.

The Local Self Governance Act of 1999: Gives local bodies the right to manage micro-hydro and other energy programs. This Act also established the right of a local body over natural resources within its territory. There are still, however, ambiguities related to the authority of the national versus local governments in terms of use of hydropower resources and imposing taxes, royalties, and fees for this.

Hydropower Policy of 2001: Further specifies facilities and incentives to attract private investment and accelerate rural electrification. The policy envisages the establishment of a Rural Electrification Fund. It also specifically stipulates that part of a1% royalty from hydropower plants above 1 MW will be provided for rural electrification to the Village Development Committee (VDC) affected by the hydropower infrastructure. Specifically, 50% of the royalty goes to local governments. 12% out of the 50% goes to the district(s) where the plant is located and 38% to the other districts in the zone where the plant is located. (Nepal is divided into 14 zones and 75 districts.)

Financial Ordinance of 2005: Provides a customs duty exemption facility for renewable energy systems. Yet, there are no tax exemptions for micro-hydro plants or their accessories. This is mainly because components for micro-hydro (such as generators, steel sheets, and ball bearings) can also be used for other applications.

Financial Ordinance (decreed annually): Has been providing customs duty and Value Added Tax exemptions for renewable energy systems. Yet, the micro-hydro has been unable to make use of these provisions. This is mainly because of the complication that parts used in the manufacturing of micro-hydro (such as generators, steel sheets, ball bearings, etc.) can also be used for other applications. Solar PV and solar thermal system imports, in contrast, are benefitting from these provisions.

1.5.4 NationalPlansandTargetsRelatedtoRenewableEnergy

The long-term national goal of the Government of Nepal is to supply at least 10% of total primary energy consumption in the country from renewable energy within 20 years. In addition, the 20-year targets call for an additional 30% of the population to be electrified through renewable energy applications by installing at least one renewable energy-based system in every household. (Given that about 33% of the population today lacks access to electricity, this target implies most of that group would get access to power through renewable sources within the next 20 years). A master plan for renewable energy in Nepal

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over the next 20 years is currently being formulated and is expected to include revised targets.32 The Government of Nepal has endorsed the Millennium Declarations, and thus is committed to meeting the Millennium Development Goals. Under the target to reverse the loss of environment (Target 9), one indicator has been included for Nepal regarding rural energy. The indicator is the proportion of the population using wood as their main fuel. This indicator has dropped from 75% in 1990 to 68.4% in 2009. The Government has also joined the UN Secretary-General’s Sustainable Energy for All initiative in mid-2012. Thus, the Government has committed to achieve universal modern energy access for all Nepalese citizens, double the rate of energy efficiency improvement, and double the share of renewable energy in the total primary energy supply by 2030. Medium-term targets for off-grid renewable energy are included as a part of NRREP and represent targets to be achieved over the program’s five-year lifetime. Targets are given in Table17 below. Targets are ambitious and in most cases far exceed the rates of installation or renewable energy technologies achieved in the past.

Table17: Nepal’s Five-Year Off-Grid Renewable Energy Targets, also the Targets of the Five-Year NRREP Program (FY2012/13 – FY2017/18)

Technology or Application Target

Mini and micro‐hydro power 25 MW

Community electrification 150,000 households benefitting

Solar home systems 600,000 systems

Productive uses of renewable energy 1,300 new MSMEs established, employment increased by 19,000

Source: NRREP Nepal Program Document, June 2012, Government of Nepal and core donors Note: MSMEs are micro, small, and medium sized enterprises, in this case facilitated by the availability of electricity or other energy from off-grid renewable energy systems.

1.5.5 PolicyEnvironmentonProductiveUse(EnergyBasedEnterprises)

Over the last decade, the concern - ‘productive use of renewable energy’ - has gradually gained policy prominence including in the development plans. While the periodic plans have lagged, the Rural Energy Policy (REP) 2006 and renewable energy subsidy policies have given increasing attention to promoting productive use of renewable energy. At par with this, in the Industrial Policy 2011 has also recognized the need to promote productive use of renewable energy, which was lacking in the Industrial Enterprises Act 1992. Most of the productive uses of renewable energy fall under the micro enterprise category as defined by the Industrial Policy 2011.

32Economic Survey: Fiscal Year 2011/2012, Ministry of Finance, Government of Nepal, 2012

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The prevailing Industrial Enterprises Act 1992 defines cottage industries as traditional industries utilizing specific skill or local raw materials and resources that are labour intensive and practiced traditionally and are often linked to art and culture. The cottage industries also cannot employ electric machines beyond five kilowatts. Another category of industry is small-scale industry that is defined as having fixed asset of up to an amount of thirty million rupees. The Act has no separate definition for micro enterprises. On contrary to Industrial Enterprises Act 1992, the Industrial Policy 2011 has introduced the category of micro enterprises. Micro enterprises are defined as enterprises with an investment up to 2 hundred thousand rupees (excluding land and buildings) and employing less than 10 kilowatts of power (electrical/mechanical) and are tax (including custom duty and VAT) exempted. The Tenth Plan (2002-2007), which is also the Poverty Reduction Strategy Paper for Nepal, considered alternative energy as a powerful tool for alleviating poverty, poverty alleviation being the sole target of the Plan. The Plan set a broad strategy to give priority to the alternative energy to be carried out in an integrated manner ensuring the economic, social and environmental sustainability. While the Plan visualized the linkage between alternative energy and socio-economic development, it lacked concrete provision for promoting productive use of alternative energy. The trend continued in the successive Three-Year Plan (2007-2010). A relatively higher prominence of productive use in Three-Year Plan (2010-2013) which has an objective statement for productive use of renewable energy as part of the socioeconomic activities of rural communities. The Subsidy for Renewable (Rural) Energy, 2000 and its revision in 2006 had no provision of subsidy support for productive uses of renewable energy. They were heavily focused on increasing access of rural people to alternative renewable sources of energy. However, as can be seen from the ‘Guidelines for Detailed Feasibility Studies of Micro-Hydro Projects’, AEPC has been encouraging developers since as early as 2004 to consider productive uses as one of the strong feasibility criteria The Rural Energy Policy 2006, emphasized on the efficiency of rural energy technology through increased and diversified productive end-use. Mini and micro hydro projects were recognized to be having potential for integration with irrigation, education, health, drinking water, small-scale industry, ropeways and the operation of various enterprises at community and institutional level. The diversified entrepreneurial use of rural energy for food processing, household equipment, agricultural equipment, irrigation, and drinking water is encouraged in addition to cooking and lighting uses. The policy also envisages subsidy supports to productive uses of the renewable energy which has been realized through successive upward provision of subsidy to productive use of renewable energy in revisions of the Subsidy Policy for Renewable energy in 2009 and 2013. Accordingly, as per the latest Subsidy Policy for Rural (Renewable) Energy, 2013, the enterprises using mini hydro power are eligible to get 30% (but not

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exceeding NPR 100,000) of the total investment cost for energy conversion and processing equipment, and/or hardware part of the enterprise. In case of community owned enterprises, the subsidy rate is 50% but not exceeding NPR 300,000. There is also additional subsidy (10% but not exceeding NRP 10,000) for enterprises owned by single woman, widow, vulnerable community, backward, disaster victim, poor and endangered ethnic group. The supports are targeted to micro enterprises as defined in the Industrial Policy 2011. The National Rural Renewable Energy Program (NRREP) has given sufficient emphasis on productive use of renewable energy under the distinct component of productive energy use (PEU). The PEU Component has additional focus on small and medium businesses around larger plants (though this has not been reflected in the subsidy policy 2013 as indicated above). Strategically, the PEU activities intend to increase income generation as a whole for the community with additional focus on small and medium enterprises which offer the greatest economic impact in the area. In terms of renewable energy options, the PEU activities will have focus on micro and mini hydro schemes because of their power output potential. There is a visualization that economic clusters could emerge around the larger plants and hence priority will be given to larger plants.

1.6 Baseline Projects

The “baseline project” is defined as all activities of relevant initiatives that will be implemented without the GEF assistance. These baseline activities may either serve as a base on which activities of the proposed project will build incrementally, or themselves be closely integrated with the proposed project’s activities to together provide incremental benefits. The “baseline scenario” is defined as the situation that would occur over the time period of the project’s implementation and beyond in the absence of the GEF project. It is a forecast based on those baseline project activities that would still occur without the project as well as the expected actions of other organizations (such as investors and banks) or individuals in the absence of the proposed project. As mentioned, the Government of Nepal and key donors in off-grid renewable energy have made the decision to adopt a programmatic approach whereby all government and donor efforts in rural renewable energy will operate under a single umbrella programme, the National Rural Renewable Energy Programme (NRREP). Thus, the NRREP represents the collective baseline activities (i.e., baseline project) in the country on renewable energy development and utilization in the country and specific components of that project, particularly on mini/micro hydro and solar PV power generation will be subsumed into the proposed UNDP-GEFRERL project as baseline activities. Activities of NRREP that are not related to the UNDP-GEF RERL (e.g. biogas and biomass activities) are not considered as part of the baseline project. Thus, our discussion of the baseline project will include NRREP activities supported by non-earmarked and earmarked donor funds and government funds. UNCDF/CleanStart activities in Nepal supported by and directly relevant to the proposed project will be discussed in a separate subsection.

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NRREP and its Components: NRREP has three components, each with broadly defined outputs and activities. NRREP is designed for five years and has targets fixed in terms of installed capacity additions for various renewable energy technologies. Its total budget is USD 170 million. NRREP will work to improve living standards and increase employment and productivity of rural women and men. It seeks to reduce dependency on traditional energy and support sustainable development through integrating renewable energy with the socio-economic activities of rural women and men.

With the development of a first year work plan, NRREP implementation has begun in earnest. It is important to point out that, for the longer term (years two through five of the program), not all outputs and activities are funded or designed in detail. Thus, as the program evolves and additional activities are defined in detail, core funding may be allocated to these activities or donors may provide specific additional support. As such, the GEF project, with the successful implementation of its activities (baseline and incremental), complement and contribute to the realization of the RE-related targets of the NRREP.

NRREP’s three components are: (1) Central Renewable Energy Fund, (2) Technical Support, and (3) Business Development for Renewable Energy and Productive Energy Use. Each of these components is discussed below:

Central Renewable Energy Fund (CREF) Component: The objective of this component is to establish CREF as the core financial institution responsible for the delivery of subsidies and credit support to the renewable energy sector. Targeted to have a size of about USD 113 million, the exact structure of the fund is still not finalized. The CREF Component has two broadly defined outputs as given in Table 18. The CREF will partner with a financial institution for delivery of the credit and subsidies to the beneficiaries. The fund hopes to leverage its credit with financial institutions, so that the financial institutions also provide additional credit to loan targets. The fund will support both manufacturers and installers of renewable energy technology. However, the fund has not prepared specific plans and financing mechanisms to stimulate renewable energy financing. In the absence of outside stimulus to do otherwise, it is likely that the majority of funding from the CREF will be channelled to micro-hydro and solar home systems because Nepal has the most experience in these renewable energy technologies.

Table 18: Targeted Outputs of NRREP’s CREF Component Central Renewable Energy Fund Component Outputs

Output 1.1: The CREF has been endowed with the capacity and powers to successfully carry out its operational mandate in cooperation with other sector organizations and the Alternative Energy Promotion Centre in particular. Output 1.2: The existing subsidy system is modified to improve its effectiveness and to enhance its focus on women and marginalized groups.

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Technical Support Component: The immediate objective of NRREP’s Technical Support Component, which will have a budget of USD 40.1 million, is to accelerate renewable energy service delivery with better quality, comprising various technologies, to remote rural households, enterprises, and communities. Several renewable energy technologies will be supported; and institutional support will be provided to AEPC. Possible income-generating activities in areas associated with renewable energy electrification schemes will also be promoted, though this aspect of the Technical Support Component appears to overlap with the Productive Energy Use Component (described below). Particular technologies or other aspects to be supported through the Technical Support Component are highlighted in the NRREP Program Document and the ones relevant to the proposed project are given below. These highlighted items are expected to be the areas to receive the greatest emphasis by the Technology Support Component in the baseline scenario.

Solar energy: Lower cost domestic systems

Community electrification schemes: Increase in financial viability and electricity available to productive applications

RE technology supply sector: Increase in quality and other capabilities

The 17 outputs under this Component include a wide range of technologies to be supported. Based on review of the full list of NRREP’s 17 outputs, the list in Table 19 below contains those that are relevant to the proposed GEF project. Even though this list shows that NRREP will have baseline activities in the areas of both community hydropower and larger scale solar, given AEPC’s past experiences micro-hydro and solar home systems will receive the major focus. Although the development partners (donors) have indicated that policy formulation support at the central government level will be provided by NRREP, policy formulation initiatives are not explicit in the above 17 outputs.

Table 19: Selected Outputs from NRREP’s Technical Support Component Full List of 17 Outputs -- those that are Relevant to the Proposed GEF Project

Outputs Relevant to Community Electrification (Emphasis likely on off-grid hydro but may also apply to larger scale PV)

Project management capacity for community electrification projects is in place and performing, and the number of completed projects increases at a faster rate

Community electrification projects are better designed with regard to the use of the available potential, and operate at a higher load factor to be more sustainable

Community electrification technology is scaled‐up (in volume and unit size) and is of a higher standard

Outputs Relevant to Larger scale PV Some viable large community Photo Voltaic systems are operational

Outputs Relevant to Cross-cutting gender, Social Inclusion, Institutional, Financing, and Livelihood Themes

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Income generating activities for households using renewable energy are developed and implemented in catchments areas. (Note: Overlaps with Productive Use Component of NRREP)

District Energy and Environment Units become an integral part of District Development Committees and work to establish linkages between the AEPC and the needs of the rural population whilst promoting the interests of women and marginalized groups

Regional Service Centres are contracted and their capacity enhanced to facilitate the delivery of renewable energy services and promote linkages at a local level as a resource of the AEPC

AEPC is recognized as an effective, efficient and Gender and Social Inclusion proactive institution for the promotion and development of the renewable energy sector

Business Development for RE and Productive Energy Use (PEU) Component: The immediate objective of this component, with a budget of USD 8.4 million, is to contribute to income generation and employment potential through promotion of micro, small, and medium sized enterprises (MSME) in rural areas, particularly for men and women belonging to socially and economically disadvantaged groups. The enterprises will be facilitated by the availability of off-grid renewable energy. The objective of this component will be reached through three outputs, as listed below in Table 20. Initial work on this component will focus on a nation-wide study to identify high-potential sectors for enterprise development at community electrification sites.

Table 20: Outputs of NRREP’s Business Development

Business Development and Productive Energy Use Component

Output 3.1: Capacities of existing MSMEs are enhanced Output 3.2: New and innovative MSMEs are created and made operational Output 3.3: Appropriate business development services are available to MSMEs in renewable energy catchment areas

NRREP Indicative Budget and Donor Funds: Table 21 below shows the distribution of the total indicative funds of USD 170 million for NRREP among the three components:

Table 21: NRREP Indicative Budget Million USD

Component Indicative Budget NRREP Budget relevant to UNDP‐GEF RERL

project

1. Central Renewable Energy Fund 113.1 31.3

2. Technical Support 40.1 10.7

3. Business Development for RE and PEU 8.4 3.6

Management 5.1 1.0

Studies, audits, and reviews 3.4 ‐‐‐

Total 170.1 46.6

Of the total budget, the Government of Nepal is to contribute 40% for subsidy, or USD 22.6 million. This would leave USD 148 million to be contributed by donors.

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Out of the total NRREP budget of USD 170.1 million, about USD 46.6 million will fund baseline activities that are relevant to the UNDP-GEF RERL project. Table 22 shows both committed funding and expected commitments from donors to activities that will fall under the NRREP umbrella. Some funds, such as those from Denmark and Norway are not earmarked, and are to support the overall program, while other donors will earmark their funds for specific purposes. We note that the total expected external funding to date is USD 126.3 million, which exceeds the donor contribution of USD 102 million as indicated by the indicative budget in the NRREP Program Document (June 2012).

Table 22: NRREP Funding Sources Million USD

Bilateral Donors TA Pool in USD

Multilateral Banks (SREP and own

funding) Government of Nepal

Denmark: USD 35 M (205 M DKK)

SNV – amount tbd WB 20 40% of subsidy, Subsidy funds are estimated to be 50% of funds allocated to CREF (USD 113 million), i.e. USD 22.6 M

Norway: USD 30 M (170 M NOK )

GEF: USD 5 M ADB 20

DFID: USD 8 M (GBP 5 M )

GIZ – amount tbd

KfW: USD 7 M (EUR 5 M)

UNCDF compact: USD 1.3 M

Total: 80 Total: 6.3 Total: 40 Total: 22.6

Total: Fully committed USD 100; under consideration USD 47 and Grand Total USD 150 M Note: Most contributions are confirmed, but some are still under discussion, including TA supports from SNV, GIZ, and about USD 20 M each from WB and ADB through SREP programme.

NRREP Targets and UNDP-GEF RERL's value add: NRREP targets for the five years of the program were given in Table17 above in the discussion on policy and institutions. Of the seven targets indicated, four are relevant to the GEF project. The UNDP-GEF RERL project will enhance the realization of renewable energy benefits targeted by the NRREP with the removal of the current barriers that hinder private sector financing of, and investments on, larger scale rural-based hydropower projects (relative to the typical micro-hydropower projects) and larger solar PV power generation (relative to the usual solar home systems). Both enhanced systems will also be designed to operate at optimal load factors through the facilitation and enabling of more productive end uses of the electricity that these systems will produce. The NRREP targets are summarized in Table 23 below. While a mini/micro-hydro target and target for households benefiting from community electrification are given, there is no target set for Large-scale solar PV systems; NRREP target includes only individual solar home systems.

Table 23: Government of Nepal and NRREP Five-Year Renewable Energy Targets Relevant to the GEF Project


Mini and micro‐hydro power 25 MW

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Community electrification 150,000 households benefitting

Productive uses of renewable energy 1,300 new MSMEs established, employment increased by 19,000

AEPC Capacity Target

AEPC is recognized by stakeholders as an effective and efficient service institution for development of the renewable energy sector.

UNCDF CleanStart Support – Earmarked under NRREP for renewable energy financing: The United Nations Capital Development Fund’s (UNCDF) CleanStart Program will bring financing expertise to NRREP. CleanStart aims to facilitate access to clean energy through micro-financing for a total of 150,000 low-income households and micro-entrepreneurs in Nepal (with an estimated 600,000 beneficiaries). The Program will have funding of USD 1.3 million and a duration of four years (from 2013- 2016). CleanStart will support up to three financial service providers in Nepal, building their capabilities to provide micro-finance for clean energy. CleanStart’s intended emphasis for the initial years of NRREP is on urban or near-urban areas depending on the target markets of the financial institutions. The financial institutions that CleanStart will be supporting are likely to have some coverage in Terai rural areas, and some Hilly areas, which will be the focus of renewable energy installations supported by the proposed UNDP-GEF RERL project. Under the UNDP-GEF RERL, the baseline activities of CleanStart on supporting micro-financing for productive use of renewable energy (PURE) projects in remote rural areas of Nepal will be enhanced. The cooperative activities will build awareness among micro-finance institutions regarding opportunities in financing the productive use of renewable energy. The geographic spread needed will be achieved either through expansion of partner service areas or through facilitation of their cooperation with local entities in project areas. The four initially targeted outputs of the CleanStart Nepal’s Business Plan are given in

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Table 24 below. It includes the associated incremental activities that will be carried out under the proposed GEF project. Essentially, CleanStart’s activities with its microfinance partners will be extended to encompass financing support for productive use enterprises in areas newly electrified through the support of the GEF project. Activities may also include the facilitation of partnerships between these microfinance institutions and local cooperatives to extend the former’s scope to more remote areas.

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Table 24: CleanStart Nepal’s Targeted Outputs and Associated Incremental Activities to be carried out jointly with the Proposed GEF Project

CleanStart Targeted Output Incremental Activity to be Carried Out

Jointly with Proposed GEF Project 1. Finance for Clean Energy to strengthen capabilities of up to three (3) financial service providers (FSPs) to provide microfinance for clean energy to low‐income households and micro‐entrepreneurs

a. Technical Support for microfinance partners in providing loans for productive use of energy enterprises in mini‐hydro and large‐scale solar project areas supported by the GEF project. To be achieved after training (see (b) below) and either extension of FSP’s geographic scope or, as in (c), partnerships with local organizations.

2. Technical Assistance for Clean Energy to remove barriers to the sustainable deployment of those technologies and services for which the selected FSPs will provide microfinance

‐‐‐‐‐‐‐‐‐‐‐

3. Knowledge and Learning to promote awareness and understanding of the potential for microfinance33 to stimulate adoption of clean energy, and to develop skills in clean energy microfinance

b. Extend knowledge and learning work to promote opportunities in financing productive use of renewable energy to microfinance institutions. Train microfinance institutions to carry out productive use financing business.

4. Advocacy and Partnership to create an enabling policy and business environment to expand microfinance for clean energy

c. Promote partnership between microfinance institutions and local cooperatives for lending for productive use of renewable energy in more remote areas.

1.7 Baseline Scenario

The following discussions outline the likely scenario by the end of the NRREP project period, which we call the baseline scenario. This would be the scenario in case there is no UNDP-GEF RERL project. The projections are divided topically based on areas of focus relevant to the UNDP-GEF RERL project, so that the baseline scenario may be easily compared to the alternative scenario facilitated by the UNDP-GEF RERL project as presented in Section 2.4 of this document. Micro and mini-hydro installations: In the baseline scenario, significant achievements are expected to be made in the installation of micro-hydro plants, but mini-hydro installations are likely to be very few. AEPC and partners have much experience in micro-hydro, but only experience with a single mini-hydro station. Because mini-hydro will present new challenges, it is likely that most of the off-grid hydro that will be installed will be micro-hydro. Further, micro-hydro installations may contain a substantial proportion of small systems of less than 60 kW capacities even though these tend to be less financially sustainable and present less opportunity for productive end-use and grid connection if and when the grid arrives. There has been limited development of micro hydro projects above 60 kW because of limitations in

33 Micro-finance loan size is usually less than NPR 50,000 and in case of renewable energy it can be up to NPR 100,000.

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manufacturing capabilities, lack of productive end use possibilities in rural areas and also lack of sufficient financing. It may be difficult for the Program to meet its five-year target of 25 MW of micro-hydro and mini-hydro installed. The target is quite ambitious in comparison to achievements in the past years. Indeed, in the 17 years since 1996, AEPC has been able, with support from UNDP and the World Bank’s REDP and the Danida and Norway’s ESAP, to achieve about 18 MW of installed micro-hydro capacity. Thus, achieving 25 MW in five years means the pace will have to be ramped up considerably. Yet, recent data does show that in FY2010/11, about 4 MW of micro-hydro was installed; rising from 1.5 MW installed the previous year. Thus, it is possible that an average installation rate of 5 MW per year will be attainable, provided suitable policy and financial incentives are in place to attract substantial private sector investment and there is widespread development of sustainable productive end-use applications of electricity. For the purpose of UNDP-GEF RERL project’s 10 MW Mini-hydro intervention, base line considered is 10 MW of Micro-hydro. In the baseline with Micro-hydro, only 22% load-factor with limited productive use is assumed to be achieved based on current practice; whereas the project intervention will result into additional 30% load-factor (for a total of 52%) due to intensive and expanded productive-end-use of electricity. Yet, the baseline scenario does raise concerns about sustainability. With the focus remaining on small sized micro-hydro, financial sustainability of systems once installed is likely to continue to be a problem, as system revenues are often not enough to cover maintenance and repairs. Under NRREP, productive use enterprises will be pursued at micro-hydro sites. Yet, given the small capacities of the stations, excess energy will be limited thus limiting the type and scope of applications that may be pursued. The scale of the enterprises will also remain small due to power limitations. It will be hard to achieve financial sustainability of such systems through increased revenues from productive applications, as productive applications may account for too low a share of the total load. Livelihood benefits will also be lower than that might be achieved with larger systems. Up-front costs for 25 MW of Micro/Mini-hydro alone would require over USD 60 million investments on top of subsidy fund allocated in NRREP. As commercial viability of systems will likely remain unattained with the focus remaining on micro-hydro, the private sector as well as Banks will continue to be hesitant to get involved in investing in equity and Loan, respectively. Similar will be the case in terms of other renewable energy interventions. Despite desires to gradually wean the system from subsidies, without private sector involvement and commercial financing, this will be difficult. Domestic manufacturing of components for the mini-hydro sector may not be able to improve its ability to offer a cost advantage, lowering total system costs. Support for manufacturers, while provided, may lack strategic focus to ensure manufacturers that may offer potential cost-savings to mini-hydro installations are targeted.

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To address these gaps, the proposed UNDP-GEF RERL project will implement demonstration of PPP models to facilitate cooperation between private sector, public sector, and local organizations in Mini-hydro projects and also implement demonstration of financially sustainable and reliable mini-grid connecting various micro-hydro systems. In addition, the project will support NRREP to implement an additional installed capacity of 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance. Likewise, it will support NRREP to implement an additional installed capacity of 7 MW of off-grid Mini-hydro projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice of Mini-hydro through technical assistance. Solar PV Efforts: In the business-as-usual scenario, the majority of PV efforts are likely to remain focused on solar home systems, with strong support for these from core and possibly ear-marked NRREP donor funding. Additional earmarked donor funding may result in continued support of institutional PV and solar water pumping installations. Yet, with other priorities for baseline activities, achieving financial sustainability of such systems may not receive much focus. Further, without any outputs for village scale PV systems within NRREP, these larger scale applications of PV will continue to remain virtually absent from Nepal. Thus, remote areas without water resources may lack the opportunity of productive applications that such larger systems present. To address these gaps, the UNDP-GEF RERL project will implement demonstration projects of financially sustainable and reliable Large-scale solar PV projects. In addition, it will support NRREP to implement an additional installed capacity of 2 MW of Large-scale solar PV projects, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance. Financing mechanisms: Funds disbursed under NRREP may likely be limited to basic loan and subsidy models, without more innovative need-specific financing mechanisms established, such as targeted manufacturer funds, etc. Further, in the baseline project, CleanStart will focus its microfinance efforts on small renewable energy technologies (mostly household scale) in urban and peri-urban areas. While productive applications of renewable energy will be pursued under NRREP, micro-finance may continue to be unavailable to entrepreneurs due to lack of coverage by micro-finance institutions in their areas. To address this gap, the UNDP-GEF RERL project will design and support the establishment and operation of credit facilities for domestic manufacturers of Mini-hydro component to meet growing orders and be cost competitive. It will also put in place financing instruments for promoting commercial financing for Mini-hydro and Large-scale solar PV projects. Furthermore it will develop training materials on Mini-hydro and Large-scale solar PV projects financing for Banks and financial institutions and create matchmaking platform among Mini-hydro developers and Large-scale solar PV Projects, financing institutions, and equity investors. Furthermore, the project will support increased profitability of existing and

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new enterprises through use of electricity from Mini-hydro and Large-scale solar PV projects, establish instruments to incentivize FIs to promote financial products to micro entrepreneurs and end users, and provide targeted investment support to electricity-based enterprises. Policy Efforts: Under NRREP, good progress will likely be made in formulating and revising general national-level policy to promote off-grid renewable energy as discussed in Section 1.5. Yet, policy specifically promoting Mini-hydro and Large-scale solar PV systems will remain absent. To address these gaps, the UNDP-GEFRERL project will assist AEPC to develop and adopt policies that enable development of Mini-hydro and large scale solar PV systems using PPP model, including fiscal incentives to attract substantial private sector investment. Furthermore, to enable the inclusion of mini-hydro and large scale solar PV systems into the decentralized planning process, the project will make available adequate information for incorporating such projects into decentralized RE plans. Furthermore, it will provide training and awareness programmes to relevant government agencies and stakeholders on Mini-hydro and large scale solar PV systems development and productive end uses to sensitize them on the benefits, challenges and opportunities of these larger systems. Capacity Building: Under NRREP, significant capacity building in many areas related to renewable energy will occur. Yet, capacity building specific to mini-hydro component manufacturers and other technical areas serving the mini-hydro segment may not occur. Similarly, capacity building specific to installation, operation and other technical areas serving large scale solar PV systems may not occur. Therefore, with respect to Mini-hydro and Large-scale solar PV projects, capacity building in on-going projects can be considered non-existent and UNDP-GEF RERL project is looked upon for the purpose. To address these gaps, the UNDP-GEF RERL project will review and update technical challenges, opportunities for capacity building in design, manufacture (for large micro and Mini-hydro), installation, and after-sales service in large micro- and Mini-hydro and Large-scale solar PV projects completed. Based on the findings of the review, the project will support improvement in capacities of (1) project identification, feasibility study and detail design in Mini-hydro and large-scale PV, (2) Mini-hydro-manufacturers in identified areas of manufacturing and in their after-sales services, (3) construction and installation teams within companies to improve quality of installed Mini-hydro projects and large solar PV system, and (4) operation, maintenance and business management of Mini-hydro projects and large-scale solar PV systems. Productive end-uses: With the establishment of MHP in rural areas, the livelihood scenario is changing with use of electricity. Use of electricity from MHPs in electricity-based enterprises is limited though gradually emerging resulting plant load factors that are higher as well as contributing to the livelihood opportunities. Agro-processing is the most common enterprises. In many cases the

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existing diesel-powered agro-processing mills will quickly switch to electricity. Other potential enterprises include poultry, dairy and those based on forest resources. In addition, modern consumer services such as photocopying, communication centres, electric/electronic repair centres are also emerging in many places. Despite such potential, most of the micro-hydropower systems are observed to have low level of load factor, which is attributed to absence of adequate enterprise development in the vicinity of the hydro-power plants. This situation is expected to continue in the baseline scenario. Compared to micro-hydropower plants, the mini-hydro systems as proposed in the GEF project are expected to offer greater opportunity for enterprise development, for instance, due to availability of abundant and more reliable power. In the demonstration mini-hydro projects, a number of potential enterprises are expected to emerge as soon as power becomes available. The electricity generation from solar PV systems, particularly, the solar home systems, is used mainly for lighting and charging mobile phones. With a bigger sized solar PV system as proposed in the GEF project, the productive use scenario is expected to improve. Numerous possibilities related to modern consumer services such as photocopying, communication centres, electric/electronic repair centres and small scale enterprise using small amount of electricity will be opened with availability of electricity from large-scale solar installations.

2 Project Strategy and Design

2.1 Technology Selection and Installation Targets

The selection of which off-grid renewable energy technologies will be supported by the proposed project is a critical aspect of project strategy and design. Technology selection focused on assessment of options with regard to five main areas:

a) Addressing root barriers to expanding energy access and adopting low carbon development pathways, with barriers and thematic areas chosen based on assessment of where the project could have the most meaningful and sustainable impact.

b) Providing both integration and value-add to NRREP by addressing the UNDP-GEF RERL focused area of larger systems which otherwise will be unmet.

c) Achieving project coherence through adherence to a few key thematic areas so as to have a greater impact rather than having a collection of disparate initiatives.

d) Leveraging UNDP experience and comparative advantage, particularly its achievements and know-how developed over the past 17 years in promoting a community model of off-grid renewable energy in Nepal and its emphasis on increasing productive livelihood opportunities.

e) Emphasizing technologies that have had only limited application to date in Nepal, so that the project has the potential to create strong benefits in capacity building, awareness, dissemination and market development.

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These five areas are also key considerations with regard to overall project design. The project will focus on two main categories of renewable energy technology, off-grid hydropower and solar PV. Within these categories, it will focus on four segments:

a) Micro-hydro with capacity over 60 kW (only in the first two years of the project, as a transition to mini-hydro),

b) Mini-hydro (100-1000 kW),

c) Mini-grid of over 100 kW (interconnection of existing micro-hydro stations),

d) Large-solar PV systems to serve a) institutional requirements (serving, for example, health clinics and schools), b) Village Electrification, and c) Solar PV pumping.

Among all segments, mini-hydro will receive special emphasis as the technology have the greatest potential to address the project’s priority barriers and thematic areas, while micro-hydro with capacity of over 60 kW will be included as a transition to the larger mini-hydro systems. Mini-grid, like mini-hydro, represents an untapped and scaling up from existing current smaller MHPs. Inclusion of Large-scale solar PV represents a concerted effort to provide options to those communities lacking sufficient hydropower resources. It also represents an effort to move Nepal forward technologically into new and future areas of renewable energy development. Table 25 shows the overall targets for each of the segment to be supported by the project. Except for micro-hydro, all segments include demonstration projects. The proposed project will provide both investment support and technical assistance to demonstration projects. To all other post-demonstration capacity targets, it will provide only technical assistance. Table26provides more detailed information on annual capacity targets for each technology segments. Financial closure of all capacity is expected by project close in 2018, which means that some capacity, as indicated in Table26as initiated may be under construction at that time.The UNDP-GEF RERL will collect and compile information on expansion of these technology options that may be attributed to RERL interventions.

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Table 25: Technologies and Total Capacities to be supported by RERL

Type Off-grid hydropower: 10.3 MW total Off-grid PV: 2.5 MW total Micro-hydro > 60kW <100kW

Mini-hydro >100kW <1000 kW

Mini-grid of existing MHPs >100kW

Village Electrification

Institutional PV (schools, health posts etc.)

PV Pumping (drinking water and irrigation)

Demonstration ---- 1 MW 300kW 100 kW 100 kW 300 kW Post-demonstration 2 MW 7 MW 300kW 600 kW 700 kW 700 kW Total 2 MW 8 MW 600 kW 700 kW 800 kW 1 MW

Table26: Annual Installation Targets, by Technology Type – RERL

Year Off-grid hydropower Off-grid PV Micro-hydro >60kW (60kW<x≤100kW)

Mini-hydro (100kW<x≤1MW)

Mini-grid of existing MHPs >100kW

Solar PV village electrification

Institutional solar PV (schools, health posts etc.)

Solar PV Pumping (drinking water and irrigation)

initiated† completed† initiated Completed initiated Completed initiated completed Initiated completed initiated completed 1 1 MW 0 MW 0.0 MW 0.0 MW 0 kW 0 kW 100 kW ---- 100 kW --- 150 kW --- 2 1 MW 0.5 MW 1.0 MW 0.0 MW 150 kW 0 kW 100 kW 100 kW# 150 kW 100 kW# 150 kW 150 kW# 3 0 MW 1.0 MW 2.0 MW 0.0 MW 0 kW 150 kW# 100 kW 100 kW 150 kW 150 kW 200 kW 150 kW# 4 0 MW 0.5 MW 2.0 MW 1.0 MW# 150 kW 0 kW 200 kW 100 kW 200 kW 150 kW 200 kW 200 kW 5 0 MW 0 MW 3.0 MW 2.0 MW 0 kW 150 kW# 200 kW 200 kW 200 kW 200 kW 300 kW 200 kW Total 2 MW 2 MW 8 MW 3 MW* 300 kW 300kW 0.7MW 0.5 MW* 0.8 MW 0.6 MW* 1.0MW 0.7 MW* Total hydropower implemented: 10 MW and 600 kW Mini-grid Total PV implemented: 2.5 MW

*Remaining 5 MW mini-hydro, 200 kW village PV, 200 kW institutional PV, and 300kW solar PV pumping will be in construction phase at close of project. † “Initiated” indicates financial closure reached. “Completed” indicates project commissioned. #This indicates demonstration projects, for which RERL will provide a portion of equity investment. For all other capacity targeted, RERL will support with TA only and leverage co-financing to cover full amount of required investment.

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2.1.1 Addressingrootbarriersandkeythematicareas

The technology selection process considered the following root barriers, after some aggregation, for each of the technologies being reviewed. The list of selected root barriers was reduced to four: (a) lack of capital for up-front investment; (b) high cost of systems; (c) lack of financial sustainability of systems, which may be classified as a utilization issue, as greater utilization through productive uses resulting in increased revenues that could increase financial sustainability; and (d) lack of technical capacity and awareness for less disseminated but high potential technologies. Through the project formulation process, the key thematic areas in which the project is believed to have the greatest potential for impact were determined to be: (1) affordability of up-front costs of systems, (2) financial sustainability (cash flow for maintenance and repair), and (3) technical capacity and awareness for less disseminated, but high potential technologies. The policy, regulatory, and institutional barriers are identified as cross-cutting/overarching across financial support, capacity building, financing and efficient-use of energy throughout. In the process of analysis, productive uses came to be seen not only as important to address root barrier (c), but also to barriers (a) and (b), as investors who see financial sustainability demonstrated through productive applications will be more likely to consider systems commercially viable and support them in the future. Given findings regarding electrification needs, the potential of electrification to enhance livelihoods, and the aim of coherence in project design, it was decided to focus on electricity-generating off-grid renewable energy technology options. Various power-generating technologies were then assessed in terms of how they address each of the selected root barriers, with results summarized in Table27 below. Of the options, mini-hydro performs the best overall in terms of potential to address the selected root barriers. It has the lowest per unit cost and demonstrates economies of scale compared to micro-hydro. Because the systems are larger, it also performs better in terms of higher utilisation potential and financial sustainability through better revenue flows. And, as a result of its performance in these areas, the mini-hydro systems clearly have the best chance of demonstrating commercial viability and attracting commercial financing. Mini-grid (an upgrade in which independent micro-hydro systems are interconnected into one grid) also has higher potential for productive applications as it negates supply-capacity constraint. While PV systems, due to higher costs, do not demonstrate benefits similar to off-grid hydropower in addressing financial types of root barriers, they do provide the best solution in some areas without access to hydropower resources. For these areas, assessment of root barriers shows that larger-scale systems, which achieve economies of scale and offer more productive use potential, are preferred areas of focus. These, like mini-hydro, have also been less disseminated than their smaller scale counterpart of SHSs and are thus in need of awareness raising and technical capacity building. The learning from EU implemented

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Renewable Energy Project and NRREP/KfW’s planned initiatives shows desirability of such large-scale solar PV systems. Utilization and particularly productive use to generate revenues are important to financial sustainability (per root barrier (c)) and to the potential for commercial financing (per root barrier (a)). Thus, it is also instructive to look at how different systems perform in terms of potential applications. The comparison is shown in Table28. Considering cooking (limited to use of rice cookers, hot water-pots and other efficient heating or cooking appliances), lighting, small and large service enterprises, small and large production enterprises, and irrigation, mini-hydro with its larger capacity scored the highest by a significant margin in terms of breadth of application types covered. Since creating a mini-grid increases supply capacity over 100 kW, similar to mini-hydro, does as well as mini-hydro. In general, mini-hydro systems are expected both to cover more households and to provide more power per household. Given that cooking is the number one energy consuming application for rural households, this one aspect of mini-hydro (unmatched by most other technologies) could provide much needed support to reducing conventional biomass use and thus deforestation and net GHG emissions.

Table27: Comparison of Off-Grid Electrification Technologies in Addressing Chosen Root Barrier Areas

Technology/Barrier High Cost of Technology

Lack of Commercial Financing

Low Utilization, resulting in Financial

Sustainability Issues

Low capacity and awareness: less disseminated but high potential

Off‐grid hydro

Pico‐hydro ‐More expensive per kW than larger systems

‐Very unlikely to attract commercial financing

‐Too small for productive use

‐587 systems installed mid‐2000 to mid‐2010

Micro‐hydro ‐More expensive per kW than mini‐hydro

‐Unlikely to attract commercial financing

‐Scale too small for extensive productive use

‐536 systems installed mid‐2000 to mid‐2010

Mini‐grid ‐Upgrade of existing systems, so not comparable

‐Upgrade might attract commercial financing

‐Upgrade from separate micro‐hydro stations to mini‐grid could increase productive use

‐Only a few in existence

Mini‐hydro ‐Economies of scale/transport; less expensive per kW than micro‐hydro

‐Lower transaction costs to build ‐Most potential of all technologies to attract private sector

‐Greatest opportunities among all technologies for productive use

‐Few stations installed in last two decades

Off‐grid PV

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Technology/Barrier High Cost of Technology

Lack of Commercial Financing

Low Utilization, resulting in Financial

Sustainability Issues

Low capacity and awareness: less disseminated but high potential

Solar Home Systems (SHSs)

‐More expensive per watt than larger systems

‐Difficult to attract investment due to lack of system revenues

‐Scale too small – limited use, mainly consumptive

‐215,211 systems installed mid‐2000 to mid‐2010

Institutional PV Systems

‐Economies of scale/transport, though more expensive than MHP options

‐May be able to attract private sector

‐More opportunities for productive use than with SHSs, though less than MHPs

‐Less experience than SHSs; ‐38 installed mid‐2009 to mid‐2011

PV pumping As above ‐May be able to attract private sector

‐Great potential to improve agricultural productivity

‐2 installed mid‐2009 to mid‐2011

Village‐scale PV Stations

As above ‐May be able to attract private sector

‐Most opportunity for productive use among PV options, but less than that of mini‐hydro

‐Rare in Nepal

In the PV category, while institutional PV systems and village PV systems are likely to be smaller and therefore have less excess capacity than mini-hydro systems, it is expected that if they are designed with adequate scale in the case of village PV, some micro enterprises may be possible. Solar home systems (SHSs), with their very small capacity, are the most limited of all the PV options considered. PV pumping, specifically designed for pumping for irrigation and drinking water, clearly is strong in the area of productive use potential. The Table28 shows relative use potential of various technologies.

Table28: Utilization Perspective – Technology Choice

Tech/Utilization Cooking Lighting Services SMEs

Irrigation Total No. of Yes

Small Large Small Large

Pico‐hydro No Yes Yes No No No No 2

Micro‐hydro No Yes Yes No Yes No Yes 4

Mini‐grid Yes Yes Yes Yes Yes Yes Yes 7

Mini‐hydro Yes Yes Yes Yes Yes Yes Yes 7

SHSs No Yes Yes No No No No 2

Institutional PV No Yes Yes No Yes No Yes 4.5

Village PV No Yes Yes Yes Yes No Yes 5.5

PV Pumping No May be Yes Yes Yes No Yes 4

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2.1.2 ProvidingFitandValue‐AddtoNRREP

Among renewable energy power generation technologies, most of the experience in Nepal to date is with pico-hydro, micro-hydro, and SHSs. With few mini-hydro plants installed in the last two decades and earlier plants operating at loss for NEA, mini-hydro presents new technical and operational challenges that, without technical assistance may result in a continued focus on micro-hydro. Yet, mini-hydro development will actually better enable NRREP to achieve its key goals, including commercial financing, system sustainability (through greater revenues for loan repayment, maintenance and repairs), and productive applications, and contribute to poverty reduction. Similarly, for areas without sufficient hydrological resources, larger PV systems will provide much more potential than SHSs to meet the aforementioned goals. In terms of NRREP’s specific areas of technology focus and targets, there is also a fit. While there is no separate target for mini-hydro, NRREP has a five-year target of 25 MW additional capacities of micro-hydro and mini-hydro together. The project’s efforts will facilitate this target being reached through promoting larger systems. While NRREP has not indicated any specific targets for institutional PV, PV pumping, or village PV systems, NRREP’s Technical Support Component does indicate that some viable community-scale PV systems will become operational. Currently, the Government of Nepal (unlike in the past when the PIF was developed and NRREP did not exist) desires to align all new renewable energy programs with NRREP. Hence the targets of UNDP-GEF RERL need to be now aligned with NRREP to work in this sector. The focus for NRREP is achievements of the targets and it is not strongly tied with specific technologies whereasUNDP-GEF RERLproject is tied with technologies like mini-hydro, mini-grid, solar PV and PPP approach.

2.1.3 AchievingaCoherentNichewithinNRREP

While the UNDP-GEF RERL project will aim to fit seamlessly within the NRREP umbrella, an overall coherence to its activities will be important for making sure the initiative as a whole is driven forward and is well understood by both those who implement it and those who cooperate with it. The process of technology selection has revealed an appropriate, high-potential niche for the project: The project will focus on off-grid renewable power generation technologies that have received little attention to date in Nepal and that are larger in scale than those that have been the focus of activity for the past decade-plus as identified during the PIF preparation phase. Further, the project will emphasize commercial financing and financial sustainability of systems, to be achieved both through the economics of scale enabled by larger systems and by productive applications as indicated in the PIF.

2.1.4 LeveragingUNDPExperienceBase

UNDP, as the key donor to provide extensive support to renewable energy development in Nepal, has defined its expertise and value-add through capacity building and community mobilization. The recent successful projects of Mini-grid in the Baglung district and

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establishment of a Mini-hydro project under KiND Project in Khimti river basin in collaboration with Norwegian Embassy are some of the additional milestones achieved by the UNDP in the field of off-grid electricity development in Nepal. The focus on community-sized systems will allow continued leverage of lessons learned in community mobilization. And, the needs of mini-hydro, as a newer technology with which there is not too many success stories in Nepal will call for the leveraging of capacity building expertise. The same will be true in terms of the needs of adopting larger scale PV systems. Finally, as UNDP’s new country framework for Nepal puts high priority on livelihoods both in general and as the number one priority for energy work, the more substantial productive applications enabled by the larger scale of mini-hydro systems and larger PV systems also provides the best fit to these priorities.

2.1.5 FacilitatingTechnologieswithlimitedApplicationtodate

As evidenced in the right-most column of Table28 and also as discussed in Section 1.2, the selected technologies have mostly very limited application to date. They are thus in strong need of dissemination, technical capacity building, and awareness. This is particularly true of mini-hydro. Despite existing capacity of about 15 MW, very few plants have been installed in the past 20 years. Technology is dated and systems tend to lack viable revenue models. It is also particularly true of village PV power stations, with only a few dated systems and a few newer PV-wind hybrid systems having been installed in Nepal. Of the other technologies, micro-hydro may seem to be an exception, as Nepal has developed extensive experience with the technology over the past 15 years, with over 500 stations installed between FY2000/01 and FY 2009/10. Yet, the size of these MHPs has tended to be small. As has been noted, the smaller systems tend to do less well in terms of cash flow and sustainability. Data for the 62 micro-hydro stations installed between mid-July 2009 and mid-July 2010 shows that the average capacity was 25 kW and that the mode (ordering capacities from smallest to highest and taking the value of the middle ones) was 22 kW. Only five of the 62 systems were over 60 kW. Thus, scaling up suddenly to over 100 kW capacities for a large proportion of its installations may be difficult for NRREP. Thus, in close consultation with AEPC, it has been decided that in the first two years of the project some emphasis will be put on the larger end (>60 kW) of the micro-hydro scale. Thus, 2 MW of the total of 10 MW of off-grid hydro targeted under the project will be larger micro-hydro and the rest mini-hydro. As for institutional PV and PV pumping, these technologies have received more attention and garnered more experience than village PV power stations, but much less so than SHSs. As indicated in Table7, from July 2009 to July 2011, about 38 institutional PV systems and 2 PV pumping systems were installed. Cumulative installations to date ( Table8) are 299 for institutional PV and 81 for PV pumps. Yet, more work is needed on improving the commercial viability of these systems. Most of these systems to date have been fully grant-financed and financial sustainability has also been an issue.

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2.2 Project Strategy and Rationale

The project’s strategy and rationale are closely tied to the findings and approach of the technology selection process, as described in detail in Section 2.1. They also build on the barrier analysis of Section 1.4, assessment of the baseline project in Section 1.6, and findings of the situation analysis related to Nepal’s energy and electricity situation, particularly the situation of off-grid renewable energy in Nepal (Sections 1.1 and 1.2). The project will focus on off-grid renewable energy-based power generation technologies. Its core strategy will consist of four interrelated concepts: (1) promotion of larger-scale, less-disseminated systems, (2) achievement of commercial viability and private sector financing of up-front costs, (3) achievement of financial sustainability (cash flow for repairs and maintenance), and (4) establishment of productive use enterprises to raise system revenues and generate livelihood benefits. These concepts are brought together in the project design to strategically address the key thematic areas selected from the barrier analysis for greatest potential impact. The thematic areas are: affordability of up-front costs of systems (due both to high costs and lack of capital), financial sustainability (due partly to low utilization), and technical capacity and awareness for less disseminated, but high potential technologies. The way in which the four interrelated concepts comprising the core of the project strategy will address the root barriers associated with these themes is summarized below: 1. Promotion of larger-scale, less disseminated systems: Larger-scale systems address both the issue of high up-front costs and lack of financial sustainability/low utilization. Larger systems achieve economies of scale and thus lower per kW costs. Larger systems can also achieve more excess capacity that can be used in the promotion of income-generating activities. Such activities could in turn increase system revenues and therefore the system’s financial sustainability. As explained in Section 2.1 (Technology Selection), an emphasis on mini-hydro (with some transition support of larger micro-hydro), mini-grid (connection of existing micro-hydro stations), Village PV stations, institutional PV, and PV pumping reflect this strategy of moving towards larger scale systems with lower per kW costs and higher potential for productive applications and financial sustainability. Most of these technologies have a low level of dissemination (or of sustainable dissemination) in Nepal, so that technical assistance and investment in demonstrations is justified. 2. Achievement of commercial viability and private sector financing of up-front costs: The economies of scale achieved by larger systems will reduce per kW costs and in addition reduce transaction costs and thus making them more attractive to the private sector. With the addition of productive applications to ensure greater revenues over the lifetime of the system, viability may be achieved and private sector participants thus attracted to invest. The technologies selected for this project will all, when combined with standard government subsidies, have greater potential than their smaller-scale counterparts for achieving commercial financing for the remaining equity and debt amounts required.

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3. Achievement of financial sustainability (cash flow for repairs and maintenance): Larger systems will have more excess capacity and therefore facilitate uses beyond daily needs. The project will promote these productive uses through enterprise development work. Greater revenues will provide greater cash flow for system repairs, at the same time as net income generation from the enterprises enhances local livelihoods. 4. Establishment of productive use enterprises to raise system revenues and generate livelihood benefits: As explained above, the larger systems provide more opportunities for productive uses, completing the circle of enhanced financial sustainability and thus greater commercial viability. The project component strategy is given below. Activities are divided into four topical areas believed to be best suited to addresses the interrelated issues of: high cost, low dissemination of larger systems, and lack of commercial financing, lack of financial sustainability, low utilization, and livelihood needs.

2.3 Alternative Scenario and Rationale for GEF Financing

In the alternative scenario, with the UNDP-GEF RERL project, the off-grid hydropower systems installed under NRREP’s five-year 25 MW target will achieve a much higher level of sustainability. In addition, more timely progress is made towards this target. Commercial viability of systems is demonstrated allowing much more substantial replication and additional capacity. In this scenario, private sector equity financing is leveraged and commercial financing is also more available to projects. Demonstration of extensive use of productive applications (accounting for 50% of system load or more) is achieved. This in turn demonstrates financial sustainability of systems through increased tariff revenues, further enhancing commercial viability and attraction of commercial equity and debt financing. In terms of PV, given that there are no specific large-scale PV targets under NRREP, in the alternative scenario a greater capacity of large-scale PV is achieved than would otherwise achieved. As part of the intervention to improve the awareness and confidence of the private sector in the cost-effectiveness of PURE projects, demonstrations showcasing the design, engineering, installation and operation of RE-based power systems (100 kW village PV, 100 kW institutional PV, and 300 kW PV pumping) will be carried out. Part of the demonstration is to show how these improved and relatively larger system capacities have much higher level of efficiency and sustainability. In the following paragraphs, the alternative scenario forecast is described in greater detail, divided topically based on areas of focus relevant to the project. These same areas were addressed in the forecast of the baseline scenario (Section 1.5). The forecast of the alternative scenario applies to the situation at project close (after five years of implementation) and beyond. Implementation is targeted for Jan 2014- Dec 2019, roughly the same time period expected for NRREP implementation.

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Micro and mini-hydro installations: In the alternative scenario, mini-hydro plants make up a significant proportion (at least 8 MW) of the 25 MW of off-grid hydro installed over the life of NRREP, which could include some mini-hydro projects. In the alternative scenario, AEPC and partners gain much experience with mini-hydro and are able to continue to disseminate the technology, whereas in the baseline scenario they remain focused on micro-hydro. Among micro-hydro installations, in the alternative scenario, a greater proportion of those installed have capacities greater than 60 kW and are more sustainable than the smaller systems proposed in the baseline scenario. In the alternative scenario, financial sustainability of mini-hydro systems is demonstrated and a much higher level of commercial viability of overall systems is achieved. In the alternative scenario, productive use activities at off-grid hydropower sites are larger in scale and broader in scope. This creates greater income benefits and generates more revenues for power systems than in the baseline scenario, where the size of MHP limits the potential for productive uses. In terms of up-front costs, with the focus shifting to mini-hydro, commercial viability of systems is demonstrated and disseminated in the alternative scenario. As such, the private sector (beyond triple-bottom line investors) becomes interested and begins to invest in RET projects. Banks also are more likely to provide loans to projects. AEPC is gradually able to reduce hydropower subsidies to better off areas; and funding for systems in such areas can take the form of revolving loan funds. In the alternative scenario, domestic manufacturing of selected mini-hydro components is able to present a real cost advantage thus lowering total mini-hydro systems costs. Manufacturers, benefiting from loans from the fund established by the project, are able to scale up and achieve economies of scale. This also enables installation of systems to occur in a more timely fashion. PV Efforts: In the alternative scenario, large-scale PV systems get much more attention than they would otherwise. Institutional PV and PV pumping systems demonstrate greater financial sustainability, providing a model going forward. Financing mechanisms: In the alternative scenario, innovative need-specific financing mechanisms to promote mini-hydro and large-scale PV are developed. This is in contrast to the baseline scenario, in which funds disbursed under NRREP are likely to remain basic loan and subsidy models targeting micro-hydro plants and SHSs. A fund targeted at mini-hydro component manufacturers in the alternative scenario enables these manufacturers to scale up. An equity or credit fund targeted at mini-hydro projects facilitates the process of demonstrating financial viability and attracting private sector investors. In the alternative scenario, CleanStart efforts will have opportunity to include micro-finance support for productive applications rather than focus on small-scale renewable energy technologies in urban or peri-urban areas. With micro-finance available to entrepreneurs, productive use generates a much greater level of revenues than it would otherwise.

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Policy Efforts: In the alternative scenario, a specific policy to support the PPP model of mini-hydro financing is issued and implemented. Further, local DDCs develop specific plans for mini-hydro and large-scale PV. Finally, awareness of policy makers for mini-hydro and large-scale PV is raised. This contrasts with the baseline scenario, in which general progress is made on renewable energy policy and revision of the subsidy policy, but policy, plans, and awareness specific to mini-hydro and PV are absent. Capacity Building: In the alternative scenario, the capacity of mini-hydro component manufacturers in design and manufacture of electro-mechanical parts is raised. Both mini-hydro and large scale PV installers and after-sales service providers also raise their capacities. Further, capacity of operators and business managers of both types of systems is raised. This contrasts with the baseline scenario in which significant capacity building occurs, but that specific to mini-hydro and large-scale PV is unlikely to occur.

2.4 Policy Conformity and Country Ownership

The institutional and policy environment for renewable energy in Nepal is discussed in Section 1.5. The most relevant government organization to this project is AEPC which is responsible for the promotion of all small-scale renewable energy in the nation. The project formulation team has coordinated closely with AEPC during the project preparation process to ensure that the project is aligned with Government objectives. The UNDP-GEFRERL project supplements the NRREP, which is implemented by the AEPC since July 2012, by addressing the identified barriers to the widespread application of large-scale RETs in Nepal that will support productive end-uses. The design of the RERL project is carefully aligned with the components and outputs of the NRREP for effective implementation. Briefly, the proposed project is aligned with NRREP not only in overall objectives of expanding renewable energy and livelihood opportunities, but also in the following specific ways: The project will facilitate the achievement of NRREP’s targeted 25 MW of off-grid hydropower installation over the next five years. It will facilitate the establishment of financing mechanisms, which will enhance the activity of the Central Renewable Energy Fund established under NRREP. The project will play a very important role in achieving specific, as well as enhancing some of the targeted outputs of NRREP such as: financial viability of community electrification systems, scale-up of community electrification, and viable large scale community PV systems. The project will also put strong emphasis on productive applications of renewable energy, an aspect that is clearly stated as a priority of NRREP, but at a limited level if the GEF intervention is not present. The project also has a high level of conformity to Nepal’s Rural Energy Policy of 2006. While only a few parts of this law have been implemented, the law itself can be taken to reflect government priorities in the sector. In particular, the law gives ample attention to employment creation and use of energy for social and economic activities, as well as community involvement. All of these aspects are stressed in the proposed UNDP-GEF RERL.

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Given the close involvement of AEPC in the project formulation process and the close coordination of the project’s outputs with those of NRREP, the level of country drivenness is strong. This level will remain high throughout implementation. AEPC will be the implementing partner and the project team will be housed in AEPC offices.

3 Project Objective, Outcomes and Outputs

For embarking on a low-carbon path for development in rural Nepal through accelerated sustainable RE development, research has shown that there still exists barriers preventing increased utilization of renewable energy in rural Nepal. The Project Result Framework was drafted predominantly on the basis of GEF approved PIF with necessary changes incorporated with respect to some of the outcomes and outputs. This was necessitated because at the time of PIF, there was no NRREP. The Project Result Framework was extensively discussed with stakeholders including a Stakeholder Workshop held on 7 January 2013 in Kathmandu.

3.1 Project Objectives

The immediate project objective is the removal of barriers for increased utilization of renewable energy resources in rural Nepal. The interventions will add to opportunities for livelihoods, income generation, employment and GHG emission reduction, which will support in economic, environmental, and social development of people in the rural areas; emphasis will be given to women, and marginalized groups. Thereby, the project outcomes will be contributing to the goals of objectives of the millennium development goals. The project will meet its objective by ensuring 12.5 MW of Large-scale renewable energy projects (Mini-hydro and Large-scale solar PV) implementation. Furthermore, it will ensure that more than 50% of available electricity generated is utilised for livelihood and quality of life improvement.

3.2 Project Components and Outcomes

The barrier analysis above has shown that (1) high cost of technology, (2) lack of commercial financing, (3) low utilization of produced electricity, resulting in financial sustainability issues and (4) low capacity and awareness leading to less dissemination of high potential technologies are the major barriers for increased utilization of renewable energy in rural areas. Furthermore, it has been shown that Mini-hydro and Large-scale solar PV projects are the most appropriate technologies to address the above issues. Following four project components are identified to address the barriers with respect to Mini-hydro and Large-scale solar PV projects. Subsequently, outcomes are defined relating to the each project components. The complete support system and activity flow of the UNDP-GEF RERL project is depicted in Figure 3.

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3.2.1 Component1:EnhancementofREinvestmentenvironment

ComponentDescription

This component is designed to address policy barriers in attracting more private and public sector investment in these sub-sectors. The outcome of the Component is enunciated as follows: Outcome 1: “Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization.” Indicators for this outcome are: (i) Number of RE-based power generation projects that were proposed and developed as influenced by the strengthened policy regime on RE and low carbon development by end of project, (ii) Number of district energy plans developed that include mini-hydro and large scale solar PV power generation installations by Year 3, and (iii) Number of policies and legal frameworks that are supportive of RE-based energy production were approved and enforced by Year 3 The project will realise the outcome by: i) ensuring the approval and enforcement ofa private sector investment friendly policy for PPP model, ii) building capacities of the District Development Committees (DDC)to develop local plans for Mini-hydro and Large-scale solar PV, providing comprehensive methodology and information, which is expected to help in their planning process, and iii) providing orientation and training to government officials, and other relevant stakeholders about the sub-sectors and the relevant policies. The formulation of the Mini-hydro PPP policy should be integrated with Nepal’s Rural Energy Policy (2006) which is in the process of revision. The policy formulation should be followed by demonstration of the implementation of the PPP model in actual projects, along with suitable financing mechanisms, capacity building of manufactures, developers and operators of Mini-hydro projects, and promotion of and support to productive end uses of Mini-hydropower. See Section 3.3 for the description of activities. This approach will ensure the sustainable development of Mini-hydro projects in Nepal, which can then be replicated in a Large-scale. The in-depth presentation of PPP model envisaged for Mini-hydro projects is provided as Annex 2.

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Figure 3: Project TA supports and fund-flow

Mini-hydro

Large scale Solar PV

Technology Choice Potential for cost reduction due to economics of scale

Possibilities for commercial financing

Possibilities for higher utilization

Technologies less disseminated but with high potential

Barriers to be addressed

Affordability of upfront system cost

Financial sustainability

of system cost

Technical capacity and

awareness

Goal: Support low-carbon path in rural Nepal through accelerated sustainable RE development

Objective: Removal of barriers to increased utilization of renewable energy resources in rural Nepal in order to support economic, environmental, and social development of people in the rural areas and to reduce GHG emissions

Enhancement of RE investment environment

RE Investments RE technology and project financing

Human Capacity Development

PPP Policy PPP model

implementation Instruments to

incentivize investment & lending

Capacity enhancement

Government AEPC

Banks

Private Sector

Local bodies

Community Coops

Mini-hydro & Large solar PV projects (Build-Own-Operate)

Designers, manufacturers

& installers

Household End-uses

Productive End-use

applications

GHG Mitigation

Energy Access

Financial sustain- Ability

Equity

CREF

Electricity Sale

Providers of products and services

Entrepreneur

Mini-grid

Subsidy & Credit Funds

Wholesale Loan

CleanStart

MFIs

Local BDS Providers MEDEP

Funds flowTA Supports

Special Purpose Vehicle (SPV)

Products & Service inputsElectricity Sales (output)

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Similarly, where communities can be more formally organised, such as through a registered cooperative, and where private sector is absent to invest in Mini-hydro and large-scale solar system to meet rural energy requirements, a community owned model to develop and operate such energy facility can also be supported. ComponentStrategies In this component, the focus is on enhancing the investment environment for mini-hydro and larger scale PV technologies by providing policy supports to the government along with supports for policy planning and enhancing information availability for policy decisions. At the central government level, this technology-specific focus is particularly important to note, as more general policy work is being supported by other efforts within NRREP. With regards to policy intervention, the project will support formulation and adoption of a policy that will create positive environment for a public-private partnership (PPP) model to flourish and attract investment in mini-hydro and large-scale solar PV systems. As for planning, the project will support the local District Development Committees (DDCs) in developing local mini-hydro and large-scale PV plans by making resource information available. The project will also emphasize making this information available to investors. Capacity building of government officials at all levels, as needed, is also included to make them more aware of the benefits and requirements of mini-hydro and large-scale PV systems. Component Outputs

Output 1.1: Approved and enforced policy that enables PPP model for mini-hydro and large-scale solar PV development, including fiscal incentives and suitability for possible changes in Nepal government structure (to federal system) The output is a set of approved and enforced policies that enable mini-hydro, micro-hydro, mini-grid, and large-scale PV projects to be developed with private sector investment. To achieve this, the following will be carried out: (1) Revision of current subsidy policy to be made more favourable to attract private-sector investments in mini-hydro, micro-hydro, mini-grid, and large-scale PV projects; (2) Establishment of private-public partnership (PPP) policy for private sector investment in mini-hydro projects34; and, (3) Establishment of specifications and policy to ensure grid connection of mini-hydro, micro-hydro mini-grid, and large-scale PV projects once the grid arrives to the local area.

(1) Subsidy revision: The current government subsidy policy (2013) is pro-poor and at the same time attracts the private sector to “provide quality products and services in rural areas”. It is also links subsidies with loans and increase agricultural productivity and promotes more non-farm livelihood activities by increasing the number of micro, small and medium sized enterprises. Yet, there are a number of aspects of the policy that limit its

34 Modality and concept on how PPP can lead to success in achieving project objectives is described under Outcome 2b, designed to provide technical assistance for realizing investments into Mini-hydro, Large-scale solar PV, etc.

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effectiveness in attracting the private sector and promoting livelihood activities of larger scale. The activities to deliver this output will address these aspects, which include: (a) capacity and per household usage limitations of the subsidy policy, (b) lack of inclusion of micro-hydro mini-grid in the subsidy policy, (c) lack of eligibility of private-sector invested projects for the subsidies, (d) flat-rate subsidy for productive uses, and (e) lack of specific subsidy for village-scale PV. See Section 3.3 for description of Activities. (2) New PPP policy: The targeted PPP policy will clearly provide government commitment to attracting and retaining private sector investment in mini-hydro projects. It will include incentives, simplification of government processes, assurance against nationalization, protection against change of law, etc. See Section 3.3 for description of Activities. (3) New grid connection specifications and policy: The project will put in place a policy for future grid connection of mini-hydro, micro-hydro mini-grid, and large-scale solar PV projects to address the potential of grid extension to the local area. The project will develop specifications for grid connection, so that new projects can comply with these from the design stage. The project will further ensure that these projects will remain sustainable with the advent of the grid by putting in place a feed-in tariff for them, which will ensure electricity, is bought by the State from these projects. The project will work with NEA to realize the aforementioned specifications and policy. See Section 3.3 for description of Activities. Output 1.2: Methodology and database developed and made available for incorporating mini-hydro and large scale solar PV systems into district RE plans

This output will ensure the availability of resource data for Mini-hydro and Large-scale PV projects at the district level, thus providing attraction to the private sector. The needs assessment or market-demand for energy produced from Mini-hydro and Large-scale PV for 15 districts will be carried out. The assessment will first be carried out in five districts as follows:

One district in each of the five Development Regions of the country

Where possible, these districts should be the same as those in which RERL demonstration projects are being carried out.

The mini-hydro resource assessments will include information on the available resources and also the potential productive use applications of electricity in the district. The Large-scale solar PV systems’ feasibility will include potential sites identification in the district, based on availability of landmass and analysis whether solar PV is one of the least cost renewable energy options. The project will also prepare methodologies for resource and needs assessment so that they can be replicated in more districts. The above two assessments prepared for each district will provide sufficient information for the respective DDC to be able to include mini-hydro and large-scale solar PV systems in its plans.

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Once assessment preparation is complete for the first set of districts, the remaining ten districts will be selected based on interest shown for this activity. The project will call for applications from the districts on a prescribed form to be developed by the project. The applications will be evaluated primarily based on the level of DDC commitment. Replication in the remaining districts will be mainstreamed with AEPC/NRREP’s relevant activities. Output 1.3: Completed training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large scale solar PV systems development and productive end uses

Currently, because of frequent transfers, both central government officials and district level officials are usually unaware of the potential benefits of, sustainability strategies for, and policies regarding larger off-grid hydro and PV systems. In addition, due to the emphasis to date on smaller systems, they are less familiar with mini-hydro and large-scale PV systems. This output will be realized through training and awareness enhancement programs that address the knowledge gap of stakeholders regarding the latest policy and information on mini-hydro and large-scale solar PV systems development and productive end uses. The training will focus on both central and district-level officials on the basics of the various technological options and the benefits of larger systems, including the potential and challenges of integrating productive uses to achieve financial sustainability of larger systems. The training will also educate them about the various financing structures possible, including the benefits of the PPP model. They will be informed about current policy provisions and other incentive mechanisms in place. In addition, awareness of the central as well as district level government officials will be increased from the aspect of energy needs of the women and vulnerable groups for living, livelihood and community services At the central level, trainees will consist of officials from AEPC, Ministry of Science, Technology, and Environment, Ministry of Finance, Department of Electricity Development, etc. At the district level, training will focus on local development officers, DDC planning officers, and district energy and environment office personnel. These training and awareness programs will be carried out in the same fifteen districts for which the project support preparation of the resource and needs assessment described in Output 1.2 above. Among the activities that will deliver this output include the preparation of three case studies of mini-hydro best practices and three case studies of large-scale solar PV systems. Based on these case studies and based on documents prepared as a part of the activities to deliver Outputs 1.1 and 1.2, at least five training/awareness events will be conducted to train and orient relevant government agencies and stakeholders on mini-hydro and large-scale solar PV system development and productive end uses. Such knowledge dissemination will enable the targeted stakeholders to support and actively promote mini-hydro and large-scale solar PV development, which will in turn help the project to achieve its targeted outcome of an enhanced investment environment in these areas.

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3.2.2 Component2:REInvestments

ComponentDescription

This component will address barriers that need to overcome so that Mini-hydro and Large-scale solar PV projects are implemented through an appropriate ownership and operation modality. The sizes of the target energy projects are much larger than what has traditionally been implemented (micro-hydro) and still being planned under the baseline project. The latter still faces difficulties in mobilising funds for equity. The efforts to mobilise community for equity in the form of collective action alone will not solve lack of equity issue. The energy development projects to be funded as demonstrations are on Mini-hydro and Large-scale solar PV projects for village electrification powering household end-use services, enterprises, institutional and community services, water pumping for drinking and irrigation. The total capacity of all Mini-hydro demonstrations is 1000 kW. These are meant to showcase the feasibility of Mini-hydro projects and attract the private sector to invest in such initiatives through, 1) suitable policies to support public-private partnership, 2) suitable levels of financial supports and financing instruments to provide a level playing field for investment in off-grid Mini-hydro as compared to other similar investment opportunities, and 3) ensuring a regular cash flow to the project through development and implementation of productive end use applications of hydroelectricity. Similarly, the solar PV demonstration projects will address barriers to Large-scale rural solar PV systems, viz. institutional, high capital cost and technical capacity barriers. In addition, to making a point that larger system capacity will enhance possibility of higher utilization of energy produced, demonstration mini-grid projects interconnecting existing micro hydro projects of about 300 kW will be implemented. The Component 2outcome is increased investments in RE. The relevant outputs that will contribute to the realization of this outcome are divided into two groups, those that are due to the: (2a) investment support to demonstration projects; and, (2b) technical assistance to demonstration and post demonstration projects. Outcome 2: Increased investments in RE

This outcome will be achieved through the implementation of demonstrations, which will showcase the project development model in terms of organization, formation, financing, construction and operation. The demonstration is all about conception, financing and operation of the renewable energy projects. The first type of outputs that will contribute to the realization of Outcome 2 (i.e., 2a) caters to the needs of enhancing the financing environment for the demonstrations. The selected demonstrations will receive investment supports in terms of making each of them attractive

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for Special Purpose Vehicles (SPVs) to invest in equity and finance from Banking and Financial Institutions (BFIs) as detailed in the description of Outputs (2a). The identified financing tools are Mini-hydro Credit Fund, Insurance Premium Support Fund, seed-money for Maintenance Fund, and Limited Interest Relief Fund. These tools are elaborated in Component 3. Under Component 3, the development of financial instruments to support the implementation of the demonstrations consisting of three Mini-hydro projects with total capacity of about 1 MW; mini-grid connecting various micro hydro system of 300 kW and financially sustainable and Large-scale solar PV projects including village electrification (micro-grid), water pumping for drinking water supply and micro irrigation and institutional installations for health posts, schools, and village enterprises totalling 500 kW in total in installed capacity35. In the future, these mini-grids may also bring incomes to the communities through integration with the national grid -- income that would not have been possible had the smaller micro-hydro stations been maintained independently. Activities to deliver the category 2b outputs will be implemented in a coordinated manner with activities that are designed to produce the category 2a outputs. These activities will involve the provision of technical support to each demonstration from feasibility study to commissioning and setting up of O&M systems (outputs 2b.1 to 2b.3). Post-demonstration technical support will be provided (outputs 2b.4 to 2b.6) along with the financial support from the national programme - Central Renewable Energy Fund (CREF). Building on the experience and expertise gained from the implementation of the demonstrations, support to the post-demonstration projects will be facilitated through normal assistance available from the national programme, i.e., NRREP. It is expected that the success of the demonstrations will provide evidence of the financial viability of larger systems, which will bring about a multiplier effect in terms of additional investments and implementation of post-demonstration projects. The achievement of Outcome 2 will be manifested by financial closures for:

10 MW of Mini-hydro projects by the end of the project period - This includes successfully commissioned 1 MW of Mini-hydro from 3 demonstration projects and 2 MW of Micro hydro of size larger than 60 kW; and,

2.5 MW of Large-scale solar PV system including successfully commissioned demonstration projects of various sizes totalling 500 kW.

Selection of Mini hydro Demonstrations: The selection will focus mainly on commercial viability, social impacts and GHG abatement potential. A list of Candidate Projects along with their salient features for Demonstration and Post-demonstration projects has been prepared and presented in Annex 3.

35 Technical supports will be provided to these demonstration projects and they are described separately under Outcome 2b

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ComponentStrategies

The focus of the activities under Component 2 is on demonstrating the commercial viability and financial sustainability of larger off-grid renewable energy systems and thereby advancing their dissemination. The demonstrations will prove/show the viability of commercial financing of mini-hydro through a PPP modality combined with productive applications for ensuring utilization and revenues are high. Private Public Partnership (PPP) and Special Purpose Vehicle (SPV) modality: In terms of project organization and implementation, Private Public Partnership (PPP) modality is assumed to provide the highest possibility of sustainable implementation and operation of the project. The PPP model is discussed in more depth in the Annex 2. In addition to funds for equity, the private sector also brings in operational efficiency necessary for sustainability. Development actors are often tempted to add another dimension of “P” meaning people or Community. However, for our purpose the word “Private” in Private Public Partnership is assumed to represent not only institutionalised private sector (i.e., a registered private company) but also formal institutions formulated with wider participation of communities like cooperatives as long as the motive includes profit making. However, if there are informal organisations in the project areas they should be encouraged to get formally institutionalised at least as a cooperative prior to engaging in the energy development projects. Detailed description of the equity composition of the proposed SPV is given in Annex 2. As described in the Annex, the proposed equity composition will be: Public sector (25 percent of equity)

District Development Committee (15%) Village Development Committees (10%)

Private Sector (75 percent of equity)

Individuals/Promoters (51%) Local people (Beneficiaries) including co-operatives (24%)

The Special Purpose Vehicle (SPV), a legal entity owning and operating the Mini-hydro and Large-scale solar PV projects, will be established to implement the PPP modality. The SPVs are owned jointly by entities within the private and public sectors including communities through local cooperatives. The composition of ownership of the SPV should be such that it attracts the formal private sector (additional funding source) for the investment, i.e., allowing the formal private sector to own the majority stake so that the SPV can be operated efficiently as a commercial operation. The SPV will rely on substantial commercial financing and productive end-use applications, facilitated by activities in another project component. A SPV, in Nepal, is generally understood to be any legal entity that has been established for a sole purpose. The normal practice in Nepal for an SPV is to form a company under Nepal's

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Company Act, 2006. Forming a Company is a very common and established practice in Nepal in general, and also specifically for the small and mini hydropower sector. The proposed SPVs will be another such company with the special feature that it cannot undertake any business that is not part of the project. There is no additional transaction costs associated with an SPV as opposed to a "normal" company, and there are no investment limitations on SPV. Therefore, the component strategies are:

Implementation of the PPP model through the establishment of a legal Special Purpose Vehicle (SPV). Mini-hydro demonstrations (with combined capacity totalling 1 MW) will be implemented to promote commercial financing and expedited construction through technical assistance to additional 7 MW of mini-hydro projects as post-demonstration projects.

In the first two years of the project, provide technical assistance to facilitate the installation of 2 MW of micro-hydro projects of size above 60 kW, as a transition to larger systems.

Conduct demonstration on how the connection of nearby isolated micro-hydro stations into mini-grids (local-grid connecting micro-hydro projects totalling 300 kW) will enable more extensive productive use and thus greater system revenues.

Support demonstration of financial sustainability of larger PV systems, including village scale PV (700 kW total, including 100 kW demo), institutional PV (700 kW total, including 100 kW demo), and PV pumping (700 kW total, including 300 kW demo).

OutputsforOutcome2 Output 2a.1 Commissioned mini-hydro demonstration projects totalling 1 MW through PPP Model This output will be facilitated by financial support to a SPV that will be created based on a PPP model to enhance cooperation between public sector and private sector in building, owning and operating Mini-hydro projects in rural areas in a financially sustainable manner. Public sector will be represented by the District Development Committee (DDC) and local Village Development Committee (VDC) and private sector by local community organizations like cooperatives and private investors. In Nepal, the proposed PPP model using a private sector controlled SPV is relatively new. As available funding from traditional sources and capacity in the public sector to implement many projects at the district level remain limited, it is natural for the public sector to seek partnership with the private sector as an attractive alternative to improve the supply of electricity. The public-private partnership (PPP) model will be an effective way to supplement limited public sector capabilities (both technical and financial) to meet the growing demand for electricity in rural areas.

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A limited company (Special Purpose Vehicle, SPV) is envisaged to be registered with the office of the company registrar. This company (SPV) will be a corporate body for ownership, implementation and operation of the Mini-hydro projects. With the presence of a separate corporate body, SPV, to own, build and operate Mini-hydro projects, bank / FI will feel comfortable to provide loans to Mini-hydro projects and expected to overcome various barriers relating to risks, financing, loan repayments, and sharing of rewards. The role of local institutions such as the DDC and VDC will be important in building partnership with the private entrepreneur. From among the Candidate Projects, following 3 Mini-hydro projects are selected for Mini-hydro demonstration: The list of the demonstration projects to be supported is given in Table 29.

Table 29: List of the Mini-hydro Demonstration Projects

SN Project District VDC Installed Cap, kW Households 1 Mewa Khola MHP Taplejung Khokling 500 3913 2 Giri Khola Jumla Hanku 200 1840 3 Upper Junbesi SHP Solu Junbesi 250 935

The financial analysis has been updated based on UNDP-GEF RERL demonstration project modalities including financial support as envisaged (Refer component 2a and 3a). The key technical and financial parameters of these three projects are given in Table 30.

Table 30: Key Technical and Financial Parameters of Mini-hydro Demonstration Projects

The Government of Nepal has a provision for making renewable energy sector value added tax (VAT) free. Due to implementation complexities, VATs in case of Micro and Mini-hydro projects are expected to be refunded to project developers on claiming after project completion. Funds received as VAT refund (VAT is usually accounted into project costs) will be transferred to maintenance fund. Within the assumptions of 30:70 equity-loan ratio and prevailing subsidy arrangement (Subsidy Policy, 2013), all three projects have demonstrated very attractive financial result that should help in attracting private sector and financial sector to invest in mini-hydro demonstration projects. Return on equity of Mewa Khola Mini-hydro is found to be 20% and project’s internal rate of return (IRR) is about 9.4%, whereas remaining two of the

Private Public Community

1 Mewa Khola 500 17.5 3,913 218,288 85,000 20,393 9,997 9,597 93,302 20.7% 9.4%

2 Giri Khola 210 61.0 4,274 81,249 46,200 5,362 2,629 2,524 24,534 34.7% 17.3%

3 Upper Junbesi 250 61.0 935 83,969 43,700 6,161 3,020 2,899 28,188 29.9% 14.4%

Return on

Equity%

Loan('000 NPR)

FIRRSNEquity

('000 NPR)Subsidy

Anticipated('000 NPR)

Project Cost

(2013 '000 NPR)

Gross Head(m)

Installed Capacity

(kW)Projects

Number of HH

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demonstration showed more attractive financial returns as depicted in the Table 30 above. Detailed financial analysis of Mini-hydro demonstration projects are given in Annex 2. Output 2a.2 Commissioned mini-grid demonstration projects totalling 300 kW

To deliver this output, financial support will be provided to enhance the feasibility of the demonstration of financially sustainable and reliable Mini-grid connecting various micro-hydro systems totalling 300 kW. For Mini-grid projects to be financially viable it is necessary that micro hydro projects are near the electricity users to reduce the cost of transmission lines. In addition, existence of potential market to utilize total electricity supply capacity is necessary. Major problems that a mini-grid project may face are management of conflicts, complexity in operation and adopting commercial tariff. Kailash Khola Mini-grid project (Local-grid36), in Achham, a district far-western development region with capacity to synchronise 12Micro-hydro projects with total installed capacity of 398kW has been selected from a list of 4 candidate mini-grid projects based on its potential for financial sustainability. The local government’s commitment and other technical, social and market situation the project’s viability is unquestionable. The current UNDP RERL project is collecting information and conducting feasibility study of the project. Output 2a.3 Commissioned large-scale solar PV demonstration projects totalling 500kW This output will be delivered with financial support provided to enhance cooperation between private sector and public sector (PPP Model) for the demonstration of financially sustainable and reliable Large-scale solar PV projects (500 kW total). Large-scale solar PV projects to be considered under the project will include Solar-PV Village Electrification, Institutional Solar PV systems for schools and hospitals and Solar PV pumping systems for drinking water and irrigation. To qualify for the demonstration as Large-scale solar PV project, the project must have been endorsed as a feasible project by the Technical Review/Evaluation Committee (TR/EC) of the AEPC. The selection will focus mainly on commercial viability, social impacts and GHG abatement potential. A list of Candidate Large-Scale Solar PV Projects along with their salient features for Demonstration and Post-demonstration projects has been prepared and presented in Annex 3.

36The term Mini-grid is defined in NRREP as an off-grid electricity distribution system with its own generation system and a local transmission distribution system with more than one generation system is defined as local-grid. However, to continue with what has been defined as mini-grid in UNDP-GEF RERL Project PIF, term Mini-grid is used to represent a local transmission distribution system with more than one generation system.

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From among the Candidate Projects, four Large-Scale Solar PV Projects have been picked up as initial demonstration projects which are listed in the Table 31; more projects amounting to 500 kWp will be identified and supported during the inception phase of the project along with validation of information on these 4 demonstration projects. Any new opportunity available for demonstration project should also be investigated and included in the Candidate Project List during inception phase.

Table 31: Large-scale Solar PV projects

SN Project District VDC Installed Capacity,

kWp

Number of Households

1 Solar Mini grid Electrification Project Saptari Gobar Gauda 10.5 70

2 Community Solar Electrification Sindhupalchok Gumba 1.8 54

3 Ramite Khola Solar PV Electrification Morang Ramite Khola 30 50

4 Awalching Solar PV Electrification Surkhet Awalching 10.5 75

Compared to Mini-hydro projects, level of details and design methodology is not harmonized in the case of Large-scale solar PV projects. The above four demonstration projects were selected on a preliminary feasibility study. However, a detailed feasibility study or revalidation based on prefixed criteria and prevailing subsidy policy during inception period will be carried out by the GEF RERL Project Implementation Team. It is expected that the financial feasibility will be ascertained for proper financial engineering of these projects. The UNDP-GEF RERL project formulation team has prepared a financial simulation model for Large-scale solar PV village project and pumping project for drinking water and the model is presented in Annex 2 (PPP for RE Implementation and PPP Financing). As per the simulation model findings, both village electrification and pumping for drinking water are found to be financially attractive for implementation through the PPP model; creating a SPV may be a strong possibility. Village electrification project demonstrated 25% IRR and Pumping project demonstrated about 30% return from the project. Given the equity-loan ratio of less than 1, the return on equity would be even more, which provides opportunity to further tweak the assumptions to make it more cost effective for end-consumer. Output 2b.1: Demonstrated PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW) This output comprises of installed Mini-hydro demonstrations with collective total capacity of 1 MW and funded through PPP model. These demos will show that Mini-hydro projects developed in areas with possibilities for substantial productive end use opportunities can be developed successfully under the PPP model with substantial private sector equity participation, commercial financing and productive end use applications. This can make the Mini-hydro projects financially sustainable and attractive to private sector participation.

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In coordination with the implementation of the activities to deliver Output 2a.1 above, this output will provide technical support in bringing Mini-hydro demonstration projects to commissioning by supporting all steps from feasibility study to commissioning and setting up of O&M systems. Output 2b.2: Demonstrated financially sustainable and reliable mini-grid connecting ten (10) micro-hydro systems (300 kW)

This output comprises of installed financially feasible mini-grid demos with a minimum collective capacity of 300 kW. The mini-grids will increase the overall load factor of the system (group of micro-hydro projects connected together by the mini-grid) through more extensive productive uses, thereby significantly contributing to the financial viability of the connected micro-hydro plants. These mini-grids may also, in the future through grid connection, bring additional income to communities through sale of excess energy to the grid -- income that would not have been possible had the smaller micro-hydro stations been maintained independently because connecting each plant individually has not been able to attract the interest of the national utility, NEA, in spite of persistent efforts from AEPC. The UNDP-GEF RERL will demonstrate the implementation of the Kailash Khola Mini-grid Project (Local-grid), in Achham, to synchronise 12 Micro-hydro projects with total installed capacity of 398 kW

Output 2b.3: Demonstrated financially sustainable and reliable large scale solar PV systems (500 kW total) This output comprises mainly of the installed new Large-scale solar PV systems with a collective installed capacity of 500 kW as part of the demonstrations under the UNDP-GEF RERL project. These include systems on solar PV village electrification, institutional solar PV systems (in health posts, schools etc.) and solar PV pumping. This output contributes to the removal of the dual barriers faced by Large-scale rural solar PV systems: (1) high capital cost; and, (2) requirement of technical skills. This output will be delivered through provision of subsidy, suitable financing mechanisms (through community-ownership, PPP model or private sector investment), capacity building, effective management and proper operation and maintenance. In this way, the completed demonstrations will show greater sustainability of the installed systems that all make up this output.


This output consists collectively of installed higher capacity (over 60 kW) micro-hydro projects as a transition for the AEPC supporting Mini-hydro projects. The total installed capacity is 2 MW. These completed micro-hydro projects that are considered collectively as Output 2.4 will be delivered through the provision of technical support under the PPP model,

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though community based projects will also be supported. These completed micro-hydro projects are intended to demonstrate their sustainability through commercial operation mainly for supplying electricity for productive end use applications. The successful demonstration of these commercial RE-based electricity generation businesses is intended to spur interest in the private sector to invest in, or finance future similar commercial ventures. The technical support to deliver this collective output will begin from project development, through to project operation and productive end use application development.

Output 2b.5: Completed financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance This output will contribute to the target Mini-hydro systems installed capacity under the NRREP. It consists collectively of installed off-grid mini-hydro systems that are implemented in line with the PPP model. The collective total installed capacity of mini-hydropower systems is 7 MW. The various installed systems that make up this output are meant to attract private and public sector equity participation, substantial commercial financing of future mini-hydro projects in the country. Included in the collective output are the commercially operated productive end use applications that make use of the electricity produced by the installed mini-hydro systems. The technical support to deliver this collective output will begin from project development, through to project operation and productive end use application development. Output 2b.6: Completed financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance This output will contribute to the target Large-scale solar PV systems installed capacity under the NRREP. The collective total installed capacity of large scale solar PV systems is 2 MW. The output will be delivered through the provision of technical support under the PPP model. The various installed that make up this output are meant to attract commercial financing of future large scale solar PV projects in Nepal. This output is inclusive of the commercially operated productive end use applications that make use of the electricity produced by the large-scale solar PV systems.

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3.2.3 Component3a:REtechnologyandprojectfinancingenhancement[REFinancingandFinancialSustainability–FinancingInstruments]

ComponentDescription One of the major obstacles identified in the barrier analysis for the development and uses of the RE in rural areas of Nepal is the non-availability of project financing. It is mostly due to absence of banks and financial institutions in rural areas where the projects are located. This results into higher transaction costs. The experiences in financing renewable energy projects in rural areas have shown that it has been very difficult for financial institutions as well as project promoters. AEPC, through its projects and programmes, are providing motivations and various incentives to increase access to finance for rural energy projects37. Similarly, Nepal Rashtra Bank, Central Bank of Nepal has also been providing additional incentives for Banks to finance rural energy projects38. Projects usually get financed only if they are technically proven, financially attractive and uncertainties or risks are manageable. Smaller sized projects at, say, less than 50-60 kW are mainly financed through subsidy, sweat and cash contribution of community and local institutions including DDC/VDC and local charities. Only the balance, usually 20-30%, finance is sought from the financing institutions, i.e., commercial and development banks. Therefore, this component (Component 3a) focuses on achieving the following outcomes. Outcome 3a: Improved availability of financial investment supports for rural RE and other low-carbon technology applications ComponentStrategies

37Typically, for a micro hydro project of 30 kW costing around 7-8 million NPR, the loan amount will be 2-3 million NPR. With current financing tools established by REF/AEPC soon to be CREF banks have started financing micro hydro projects and number of project so financed have reached over 2 dozens of project vis-à-vis 100s of projects built during the period. The financial tools and assistance to commercial and development banks for financing micro hydro projects by AEPC/REF included financial supports in terms of travel costs incurred during project due diligence and monitoring, insurance premium of first three years of project and establishment of micro hydro credit fund which undertakes 50% risk of project finance and provides low cost funds to the bank. In addition, AEPC/REF also other technical assistances in terms of community coordination and mobilization, capacity building of project developers and financial institutions and technical back-stops including project design due diligence. 38 Under NRB's Directives No. 17/069, Monetary Policy of NRB, it is mandatory for Banks& Financial Institutions to finance specified projects under the “Deprived Sector Lending” at preferential interest rates, currently 4, 3.5, and 3% for A, B and C class of BFI, respectively. NRB is gradually increasing this rate. Under the directive Deprived Sector lending can cover lending to hydro-power projects owned by the community and co-operatives only and up to the maximum ceiling of NPR 10 million in a project. Similarly, loan facility to following Renewable Energy Technology for household (family use) purpose up to NPR 60,000 per family are also covered under “Deprived Sector Lending”: a) Micro Hydro power project up to 50 kW, b) Solar Home system, c) Solar cooker, d) Solar dryer, e) Solar pump, f) Biogas plant, g) Improved water mill, h) Improved cook stove; and, i) Wind energy.

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The component will focus on enhancing the availability of RE financing through establishing financing instruments through CREF for manufacturers and project developers as well as ensuring financial sustainability. Among the major activities in this component is the establishment of financing tools (funds) to enhance the availability of RE financing identified by the TA Component 3b. OutputsforOutcome3a Output 3a.1: Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) for financing domestic manufacturers to meet growing orders and be cost competitive The lack of or the slow growth in manufacturing of micro hydro components including turbine, hydro-mechanical and electro-mechanical component assembly is often attributed to lack of investment financing to manufacturing entities. The main reason for this is identified as commercial banks preference to extend loans against collateral as recourse against failure to service the debt. Financing such investment as project financing is not a preferred option. Enterprises find it very difficult to produce collateral (land) as most of the facilities do not own their land, e.g., they are leased and located within industrial estates where ownership of land remains with the estate, and hence does not qualify as collateral for banks. The CREF (renewable energy investment and financing support mechanism established by AEPC as part of the NRREP) will ensure that that appropriate instruments are established to incentivize banks and financial institutions to promote commercial financing for Mini-hydro projects. These instruments will be established in selected banks and financial institutions by CREF. This output, i.e., provision of funds for financing through CREF mechanism to ensure financing availability to Mini-hydro and Large-scale solar projects manufacturers and system integrators will be delivered through appropriate technical support in the implementation of activities under Output 3b.1. This will help in building the Bank’s confidence for financing. Output 3a.2: Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) to promote commercial financing for mini-hydro and large-scale solar PV projects Under this output funds are allocated for wholesale financing instruments to incentivize Banks and BFIs to ensure availability of commercial financing for mini-hydro and large-scale solar PV projects. The funds will be administered by the CREF as in Output 3a.1. The activities under the Output 3b.2 which is of technical assistance nature will assist CREF to ensure the realisation of this output through devising appropriate financing instruments in the selected banks and financial institutions.

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3.2.4 Component3b:REtechnologyandprojectfinancingenhancement[REFinancingandFinancialSustainability‐FinancingInstrumentDesign,AwarenessBuildingandbusinessenvironment]

ComponentDescription Outcome3b: Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications

The financial investment climate in rural areas of Nepal for energy infrastructure like Mini-hydro and Large-scale solar PV projects will be improved through use of various financial instruments for which GEF RERL project will provide necessary technical assistance to Banks and Financial Institutions through CREF/AEPC. In order to increase Mini-hydro and Large-scale solar PV projects’ attractiveness the project will also focus on promoting productive use of electricity. This is intended to enhance financial sustainability of RE investment which will increase utilization of electricity and thereby revenue. Without enhanced utilisation of electricity, the financial performance is not attractive enough for the private sector to invest in off-grid hydro and large scale PV. The productive-use increase is achieved by ensuring a number of micro, small and medium enterprises (MSME) are functional in the RE project areas. The productive-use increase will result in increase in electricity consumption (resulting in at least 30% additional load factor). Outcome 3b will be realized by making available investment models and financial relief to investors, financers and project developers. It will be realized by addressing the barrier related to lack of financial support from Banks& Financial Institutions through the design and utilization of tools for:(a) financing manufacturers to expand their business;(b) developers to develop the Mini-hydro and Large-scale solar PV projects; and, (c) rural enterprise to increase use of energy produced contributing to financial viability of energy projects39. These new financial instruments will attract/activate the bank and financial institutions to lend in the RE sector. Activities related to supportive tariff systems will be implemented through Component 2 (RE Investments), but will be integrally tied to the productive use work of this component. This additional component provides a very good opportunity to promote gender sensitization and inclusion of marginalised communities at all stages of enabling activities of productive-use of energy through enterprises. The Government’s Renewable Energy Subsidy Policy also has affirmative provisions for single women and widows as well as marginalised communities. ComponentStrategies

39 Financing instruments design and implementation for productive use will be covered separately under the Outcome 3b.

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This component will facilitate the design of a credit fund for domestic manufacturers of mini-hydro components that have the potential to be cost-competitive. With a focus on removing the cost barrier to mini-hydro, the formulation team notes that domestic components have potential to be cost competitive and needs concerted efforts. Thus, this component (and supporting activities in Component 4) will:

Identify domestic manufacturing areas that have the potential to reduce overall project costs.

Support the design of funds for RE financing (either equity or debt) and of other instruments (such as subsidizing insurance product and interest in the initial or construction years of the project).

Prepare and provide training materials on mini-hydro to the banks, which are capable of implementing training on their own, but may need awareness building and content such as that which would be provided by the materials indicated.

Establish a platform for exchange among developers, lenders, and equity investors. In this component, it will be particularly important for the project to connect with potential equity investors in mini-hydro projects. The project team will need to identify the various types of potential equity investors, including social equity or triple-bottom line investment funds as well as purely profit-driven organizations. The liaison with the private sector should not be a one-off affair but an on-going dialogue that occurs frequently throughout the year for each and every year of the project. This will be an on-going effort over five years (and probably beyond), so may be best handled by RERL project staff rather than outside consultants.

Productive use promotion will be achieved through,

a. Choosing the right productive end-use technologies

b. Access to appropriate financing

c. Using existing subsidy support from the government

d. Developing backward and forward market linkages for enterprises

e. Local institutional capital

f. Collaboration with Potential Partners such as UNDP/MEDEP40, UNCDF/CleanStart41

40Micro-Enterprise Development Programme (MEDEP) of UNDP is active in 45 districts. It has an integrated demand-driven approach which entails activities on gender mainstreaming in micro-enterprise development, entrepreneurship development, capacity building, appropriate technology, quality assurance, micro-credit, marketing, and management information systems. 41CleanStart Programme: The UN Capital Development Fund (UNCDF) and UNDP have initiated the CleanStart programme in Nepal recently. CleanStart aims ‘to create clean pathways for low-income households and micro-entrepreneurs to jump-start their permanent access to modern energy through sustainable financial services, supported by energy supply chains that respond to end-user and an enabling policy environment’. Of the four components, the ‘Finance for Clean Energy’ component is designed to strengthen the capabilities of MFIs through pre-investment technical assistance and risk capital grants. CleanStart has recently entered into working relationship with AEPC.

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g. Coordination with Relevant Institutions including the District Micro Entrepreneurs Group Associations (DMEGA), which are active in various districts and their umbrella organisation National Micro Entrepreneurship Federation Nepal and the National Entrepreneurship Development Centre (NEDC), will be useful.

h. Types of Possible Enterprises: Depending upon resource availability, different sets of enterprises are possible in different RE project sites. They may be grouped into: a) agro-processing mills, b) industries producing food products, c) industries producing other consumer products, d) establishments providing secretarial and other services, e) establishments providing entertainment, etc. UNDP-GEF RERL should give priority to enterprises based upon local resources. Annex 5 gives a detailed account on how an enterprise for productive end-use of energy needs to be identified and promoted. Such enterprises offer higher level of livelihood opportunity for women and marginalised people. A list of potential enterprises is given in Annex 6.

i. Proactive and Demand Driven Approach

A schematic of the various support flow and key stakeholders is depicted in the

Figure 4: Support modality for Productive End-use promotion

SPV with Enterprise Promotion Unit and

Enterprise Development Advisor

Financial Institutions (MFIs, etc.)

National Partners (MEDEP, CleanStart,

)

Local Partners (BDSPOs/EDFs, DMEGAs, etc.)

Key Players in Productive Use Promotion and Major Roles

TA

NRREP/PEU with Enterprise Dev. Expert

Regional Service Centre/DEEU

Services hired to conduct specified activities

Capacity building

Loan Awareness and support activities

Entrepreneurs

Capacity building; loan products

Partner FIs

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Sustainability of Productive Use Enterprises: The factors affecting sustainability of productive use enterprises are manifold. The activities of UNDP-GEF RERL are designed to ensure sustainability of enterprises in the following ways:

a. Entrepreneurship development through awareness and capacity building training

b. Support in business planning with clear understanding of value chain of the business (linkages with market players)

c. Access to affordable finance

d. Advisory support on selection of technologies and development of business plans

e. Linkages with national and local partners having long-term vision and existence

Financial supports to potential entrepreneurs from women and marginalised/vulnerable communities

More importantly, UNDP-GEF RERL helps create institutional (social) capital of the community including the SPV through supporting the creation of Enterprise Promotion Units at the SPVs and promoting locally based BDSPOs and EDFs. Annex 5 provides the guidelines for productive use promotion considering the sustainability principles (social, economic, technical and environmental) and financial feasibility of the enterprises. OutputsforOutcome3b Under this component, financing instruments will be made available for developers of Mini-hydro projects and financially sustainable Mini-grid projects, Large-solar PV projects, and manufacturers of Mini-hydro project. The following outputs together are expected to result into this outcome. Output 3b.1 Designed and provided technical support for financing platforms and services for promoting commercial financing for domestic manufacturers This output delivers a suitable design for a credit fund mechanism to address the major financial constraints faced by the domestic manufactures of RE systems and make them cost competitive. The output will consist of: (i) A study on the most suitable design of a capital fund to provide soft loans to manufacturers, (ii) Review and analysis of constraints for bank financing to domestic manufacturers, (iii)A credit products concept designed in partnership with financial institutions and banks, discussed and finalised in a larger forum participated by financing and renewable energy manufacturers and other stakeholders, and (iv)Assistance to the financial institutions and banks in designing products for financing domestic manufacturers.

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Output 3b.2 Designed and provided technical support for financing platforms and services for promoting commercial financing for mini-hydro and large-scale solar PV projects This output comprises of designing a comprehensive financing package to incentivize banks and financial institutions to promote commercial financing of Mini-hydro and Large-scale solar PV projects. The comprehensive financing package will be established in selected banks and financial institutions through CREF. Funds allocated in the NRREP for subsidy and credit amounts to over USD 110 million. CREF is also planning to establish these kinds of financial support mechanisms to motivate financing RE projects in Nepal. An additional incentive for the BFIs will be that the lending for rural RE projects may be eligible as mandatory deprived sector lending. As the banks have to lend in the deprived sector certain percentage of the total loans and advances, if the loan to RE sector is eligible for deprived sector lending, the BFIs will be interested in lending to the RE sector. If the RE project become commercially viable through above financial supports, BFIs will be incentivised to provide loan in the RE sector. Output 3b.3 Developed training materials on mini-hydro and large-scale solar PV projects for financing institutions The banks and financial institutions have inadequate knowledge and information on Mini-hydro and Large-scale solar PV projects. Consequently, they perceive higher risks and cannot appreciate these projects as their portfolio for potential lending. BFIs and all the beneficiaries need to be educated on opportunities in Mini-hydro and Large-scale solar PV projects financing by proving that the risks can be reduced and opportunities can be enhanced with the help of financing instruments created by the GEF project. These training materials are to be used by the banks and financial institutions to develop capabilities of their staff to be engaged in financing Mini-hydro and Large-scale solar PV projects. Output 3b.4 Established matchmaking platform for mini-hydro and large-scale solar PV developers, financing institutions, and equity investors, and productive end users Awareness campaign shall be launched targeting the microfinance institutions, cooperatives, public sector and the stakeholders at local level, putting forward the benefits that can be derived from investments in Mini-hydro and Large-scale solar PV projects. The whole idea and processes will be briefed to the stakeholders. This output facilitates the sharing of knowledge, problems and possible solutions, and help that could be offered by various groups of stakeholders of the Mini-hydro and Large-scale solar PV projects.

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Output 3b.5: Functional enterprises adopting productive use of electricity This output will comprise of existing enterprises that switch to electricity by replacing old technologies with electricity based technologies as the electricity becomes available. The entrepreneurs are encouraged to consider expansion of the enterprise along with the switching. It will also include new enterprises that will be set-up in the project area by local or non-local entrepreneurs. Local entrepreneurs are those residing in the project area. Non-local entrepreneurs can come from nearby areas or even from cities and run enterprises in the project area. These existing and new electricity-based enterprises are expected to run profitably because of well thought business planning and back up support to the entrepreneurs through locally based BDSPOs. The support activities for promotion of productive end-use and enterprises will be based on the value chain analysis and on real demand created by awareness activities. The activities designed to deliver the output will address entrepreneurs’ need for information, capacity building and entrepreneurial competency development, coordination with relevant stakeholders, and facilitation in the value chain of the enterprises. Output 3b.6Operationalised mechanisms to promote financial products for entrepreneurs /end users This output ensures that financing supports are easily available to the enterprises from locally based financial institutions. Entrepreneurs need credit financing for establishing new enterprises as well as expanding the existing enterprises. In many rural areas, credit facilities are not readily available due to lack of or existence of only limited number of financial institutions. Therefore, there is a need for supporting financial institutions, particularly, the micro finance institutions (MFIs), to enhance their managerial capacity and develop loan products to take advantage of new opportunities arising due to electrification. To deliver this output, an assessment of the status of micro-financing facilities in the RE project sites will be carried out. This includes identification of potential institutions having interest to engage in micro-financing of energy-based enterprises. In RE project sites where micro-financing facilities are not sufficiently available, the UNDP-GEF RERL will support upgrading the existing potential institutions into formal financial institutions by facilitating registration, linkages and building managerial capabilities.

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The existing as well as new MFIs will be supported to develop financial tools which include loan products for productive applications, domestic or industrial wirings, or working capital for entrepreneurs. In addition to technical assistance in terms of capacity development and loan products development, MFIs also need support in the fund management for disbursing the loans to local entrepreneurs. In general, they will need to be linked with other bigger financial institutions who could provide them wholesale lending. Output 3b.7: Established functional electricity based enterprises that are owned by women and marginalised/vulnerable groups This output is an affirmative action to bring disadvantaged sections of the communities to own and operate electricity-based enterprises. To deliver this output, financial support (grant) will be provided for the working capital at the early stage of these kinds of business enterprises. This support is important as these groups of people generally find difficulty in meeting working capital necessary for initiating and running the business. The feasible enterprises owned by single woman, widow, and vulnerable-community, backward, disaster victim, poor and endangered ethnic group as identified by the Government of Nepal will be eligible for the financial support. This investment support, available only to enterprises at demonstrations projects, is geared towards speedy establishment of new electricity-based enterprises and switching of existing enterprises to electricity.

3.2.5 Component4:HumanCapacityDevelopment[CapacityBuildinginSystemsDesignandTechnology]

ComponentDescriptions The relevant activities in the Mini-hydro demonstrations include identification of the demo scheme and site, feasibility study, project design, manufacturing and fabrication of electro-mechanical components, civil structure construction, installation and commissioning of the project. Once the necessary equipment and ancillaries of the demonstration project is successfully installed and commissioned, it needs to be managed and operated. Activities relevant to Large-scale Solar PV projects are similar to Mini-hydro except that of key components including solar PV panels, inverters, batteries and other system components are imported. Support structures for installation of panels and other components are locally fabricated. Nepal’s hydropower sector’s capacity, specifically in decentralised or off-grid system, which is also known as isolated operations, can be broadly classified by size and project activities as depicted in Table 32. The table shows the relative level of capacity building needs of each size-function pair in a matrix.

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Table 32: Hydropower Sector (Isolated) and its Capacity Building Needs

Project Activities Size of Hydro Power Projects

Pro

ject

Des

ign:

Id

enti

fica

tion

, F

easi

bili

ty, a

nd D

etai

l-de

sign

Pro

ject

Fin

anci

ng

Manufacturing Project Construction

Pla

nt o

pera

tion

Hyd

ro

Mec

hani

cal

Ele

ctro

M

echa

nica

l

Civ

il

cons

truc

tion

Ele

ctro

-Mac

h in

stal

lati

on

Micro hydro (<60 kW)

E E E EI E EI E

Micro hydro (>60 kW)

EI EI E EI E EI EI

Mini-hydro (>100 kW)

LI SI EI SI EI LI LI

Note: In order of least capacity building needs to greatest needs: E-Exists, EI- Exists but needs improvement, LI- Lacks and needs improvement, SI- Substantial improvement needed

Design and supervision: A very-good Mini-hydro design guide prepared by Small Hydro Promotion Project of GTZ in 2006 is widely used by hydropower project designers. It may require nominal updates. However, there is an urgent need to train more design engineers that are capable of performing various activities related to project design, including site identification and civil, hydro-mechanical, and electrical design. Financing: Project design and financial requirements of Mini-hydro and large scale SPV projects also vary widely because of variations in size and interest on loan taken during construction. Manufacturing and installation of Mini-hydro plants: Nepal Micro Hydro Developers Association (NMHDA) and other actors in the sector have indicated numerous capacity gaps requiring attention. The existing manufacturers are fairly capable in manufacturing smaller hydropower projects (<100 kW). There is a need for capacity building in manufacturing turbines and controller/governors for installations above 100 kW, i.e., Mini-hydro. Generators are usually imported due to lack of economies of scale. Capacity building of manufacturing and installation companies will have to include acquiring technology and adapting it to the local conditions, and training for manufacturing and installation. A turbine and governor manufacturing guideline and a general hydro-mechanical and electrical installation and supervision guideline are identified as necessary interventions for realising RERL goals. Prequalification of turbine and other hydro mechanical component manufacturers is an important step in quality assurance. A guideline for the prequalification of turbine and other hydro mechanical component manufacturers would provide a needed transparency in the system. However, a more in-depth capacity gap analysis study should be conducted to identify the capacity gaps and need for design capacity development activities.

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Civil construction: Construction companies and contractors are assumed to be available in the country. However, a specific construction supervision guideline pertinent to Mini-hydro and awareness training programme are planned to be developed to improve supervision of civil construction. Operation and Maintenance: With the current capacities for operation and maintenance of micro-hydro and small solar PV projects (or solar home systems) as a point of departure, these capacities can be further developed for the operation and maintenance of Mini-hydro and large-scale solar PV systems. The operation and maintenance of Mini-hydro and large-scale solar PV systems will call for more formal organizations compared to current community and household-scale operation in terms of technical as well as management skills. ComponentStrategies The capacity building component of the project will focus on enhancing technical capacities and skills for the selected technologies. It will support capacity building in the design and manufacture of mini-hydro systems and capacity building in the installation and post-installation of both mini-hydro and larger scale PV systems. Capacity building for manufacturers will focus on those aspects that require manufacture of components identified by the project that have the potential for lowering costs through domestic manufacturing. Component 4 will focus on raising the capacity of those manufacturers in both production and after-sales service. For mini-hydro and large scale PV stations, which are already or soon to be in operation, the UNDP-GEF RERL project will work to raise the capacity of both operators and business managers of the systems. The component outcome is: ComponentOutcome Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sectorOutputsforOutcome4 Output 4.1: Established database of technical specifications for the design, manufacture (for micro-hydro(60+ kW) and mini-hydro), installation and after-sales service inmicro-hydro(60+ kW), mini-hydro and large scale solar PV systems. The interactions with manufacturers has helped to identify specific manufacturing segments in large micro- and Mini-hydro that have the most potential for both reducing project costs and achieving improvements through capacity building and debt provision to the manufacturers (Output 3a.1). These manufacturing segments include electromechanical components such as turbines, load controller, governor, gates and valves, quality assurance in manufacturing penstocks and joints. To deliver this output, more detailed study of these segments will be conducted and specific manufacturers targeted for capacity building will be identified. For installation and after-sales service, the focus will be on on-site quality

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assurance by installers and capacity enhancement of installers to attend to after-sales-service for the large micro and Mini-hydro. In case of Large-scale solar PV projects as discussed in the Section 2.5.2, apart from training of systems integrators and systems designers additional capacity building needs will be identified as part of this output. More detailed study of these segments will identify specific installers and after-sales service providers of the Large-scale solar PV for capacity building. Output 4.2: Fully trained skilled and technically capable people available for project identification, feasibility studies and detail design of mini-hydro projects This output will comprise of fully trained and technically capable project developers, consultants, and government organizations responsible for identifying Mini-hydro and Large-scale solar PV projects and those responsible for preparing feasibility studies and detailed design of such projects42. The government organizations will include both central level government staff at AEPC as well as district level staff working in the DEEU/S in DDCs. Output 4.3: Fully trained skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services. This output will comprise of fully trained and technically capable local Mini-hydro system components manufacturers in Nepal. These are the local manufacturers of hydro turbines, load controllers and other critical components identified in the assessment study that will result into lower overall system costs. That is, manufacturers in these segments that are believed to be able to beat the imported component in price through capacity building and other supports (see the Output 3a). Subject to validation of the findings during the UNDP-GEF RERL project inception phase, local manufacturers will be assisted in acquiring new technologies, adapting technologies for Mini-hydro and Large-scale solar PV projects from elsewhere. Developing and implementing quality assurance mechanism are also part of the activities to achieve this output. Activities will be based on findings of Activity 4.1.1 and 4.1.2. Output 4.4: Fully trained skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system This output will comprise of fully trained and technically capable companies identified in Activity 4.1.1 that are involved in the construction of Mini-hydro stations and those identified in Activity 4.1.2 that are involved in the installation of large-scale PV systems. Specific areas in which capacity building will be focused are construction supervision, construction 42The project identification will also give high emphasis on potential for productive applications as a key prerequisite on top of resource assessment and other technical aspects. Potential for adequate productive end-use will be a key for a project to be approved for the next stage of development. Feasibility study and detailed design will further emphasize skills related to larger systems and require that both these steps be integrated with detailed design and feasibility work on productive use enterprises that will be integrated with new off-grid power systems.

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safety, and quality assurance during construction, testing and commissioning for Mini-hydro and Large-scale solar PV projects. The activities to deliver this output will include support to AEPC in developing pre-qualification and certification criteria for both Mini-hydro and large-scale PV construction/installation, training for Mini-hydro construction, and quality assurance for large-scale PV installation. Output 4.5: Fully trained skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems This output will comprise of fully trained and technically capable personnel who will operate, manage and maintain “mini-utilities” that are based on mini-hydro and large scale solar PV power systems. Both aspects of operation and maintenance will be critical to the key thematic area of RERL targeted on financial sustainability of systems through generating higher revenues from productive uses. Revenues will be collected by the “mini-utility” and excess revenues in turn will be put aside for major repairs and parts. Trainings for Mini-hydro SPVs and large-scale solar PV projects will be designed and conducted separately.

3.2.6 ComparisonofProjectOutcomesandOutputsbetweentheGEF‐ApprovedPIFandProjectDocument

Changes in the baseline situation, mainly the NRREP project being fully functional (it was in its preliminary stage when the PIF was formulated) have necessitated the restructuring of the originally proposed project outputs and outcomes. Although the identified barriers that serve as the basis for the PIF design are still relevant, the NRREP has already planned and initiated several activities that were originally part of the UNDP-GEF RERL PIF. Taking into account of these initiatives, the project outcomes and outputs have been suitably modified. The modifications are summarised in Table 33.

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Table 33: Summary of Comparison between the GEF-Approved PIF and Project Document


GEF-Approved PIF Project Document Component 1: Enhancement of RE investment environment

Component 1: Enhancement of RE investment environment No change



No change

Outputs for Outcome 1: -Prepared, approved and enforced institutional and legal frameworks for the promotion of investments in RE and other low-carbon technologies, reflecting changes in the governing structure of Nepal (which is going towards a federal structure); -Prepared and approved integrated district RE development plans; -Completed RE resource assessments (serving as inputs to the integrated district renewable energy development plans); -Documented and disseminated technical assessments of available RE systems (including costs and benefit) and best practice examples;

Outputs for Outcome 1: Approved and enforced policy that enables PPP model for mini-hydro and large-scale solar PV development, including fiscal incentives and suitability for possible changes in Nepal government structure (to federal system) Methodology and database developed and made available for incorporating mini-hydro and large scale solar PV systems into district RE plans Completed training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large scale solar PV systems development and productive end uses

Output has been made specific to reflect the better understanding of proposed project. The proposed PPP model include institutional and legal and financing framework for the selected renewable energy technologies Since NRREP is supporting the district RE development plans the output has been revised taking this into consideration (baseline project will take care of this output). The revised output includes the resource and technical assessments for the selected renewable energy technologies Output related to dissemination has been made specific to target key stakeholders’ need of capacity building related to policy and institutions.

Component 1: Budget GEF: USD 400,000 Co-financing: USD900,000


PIF GEF estimate has been reduced following a thorough assessment of all activities and a more realistic estimation of costs for all the Outputs related to Outcome 1. Besides, this policy/institutional intervention will be targeted towards the promotion of mini-hydro and large-scale solar systems.

Component 2: RE investments Component 2: RE Investments No change

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The Components, Outcomes and OutputsRationale for Changes

GEF-Approved PIF Project Document Outcome 2: Increased investments in RE

Outcome 2: Increased investments in RE (Increased investments in RE will be done through:(a) Financing demonstration projects on Mini-hydro, mini-grid and Large-scale solar PV projects, and (b)Increased investments in RE through technical assistance to demonstrate attractiveness of larger systems)

No Change

Outputs for Outcome 2: -Additional total installed capacity of 2 MW off-grid micro-hydro power plants and a total installed capacity of 0.5 MW solar power systems per year (over 5 year period – total 12.5 MW); -Completed demonstrations of RE systems using PPP models to facilitate cooperation between the private and public sector as well as local organizations (2 selected micro-hydro projects, in total 1 MW); -Completed demonstration to establish a mini-grid connecting various micro-hydro systems from the same stream (total 100 kW)

Outputs for Outcome 2: Outputs for 2a: Commissioned mini-hydro demonstration projects totalling 1 MW through PPP Model Commissioned mini-grid demonstration projects totalling 300 kW Commissioned large-scale solar PV demonstration projects totalling 500kW. Outputs for 2b: Demonstrated PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW) Demonstrated financially sustainable and reliable a mini-grid connecting ten(10) micro-hydro systems (300 kW) Demonstratedfinancially sustainable and reliable large scale solar PV systems (500 kW total) Operationalised 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage,

Outputs have been revised to reflect the focus on investments for demonstration projects and technical assistance. Outputs are actual physical facilities installed and functioning as well as mechanisms. Outputs from post-demonstration projects (remaining 7 MW of Mini-hydro, 2 MW micro hydro of size above 60 kW and 2 MW of large-scale solar PV) receiving technical assistance are shifted to Outcome 2b. Mechanisms created to ensure financial and institutional sustainability of demonstration and post-demonstration projects.

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GEF-Approved PIF Project Document

feasibility, productive end-uses, and best practice through technical assistance Completed financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance Completed financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance

Component 2: Budget GEF: USD960,000 Co-financing: USD7,686,000

Component 2: Budget GEF: USD1,198,325 Co-financing: USD25,507,780

There is an increase in investments as a result of increase in capacities of the demonstration projects and allocations for technical assistance for post-demonstration projects.



No Change



No Change

Outputs for Outcome 3a: -Established capital fund in one of the financing institutions; -Established RE guarantee fund or seed capital provision; -Developed tailor-made financial services based on CleanStart methodology for financing clean energy access, including loan-products in (micro-) finance institutions for several RE applications (micro-hydro, solar, improved watermills and other low-carbon technologies.); -Established RE loan portfolio in local (micro-) finance

Outputs for Outcome 3a: Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) for financing domestic manufacturers to meet growing orders and be cost competitive Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) to promote commercial financing for mini-hydro and large-scale solar PV projects

Outputs have been made specific to reflect the better understanding of proposed project. Financial services based on CleanStart/UNCDF is not relevant for mini-hydro and large-scale solar PV projects but can play significant role in productive end-use financing, therefore, are moved to Outcome 3b.

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GEF-Approved PIF Project Document institutions; Component 3a: Budget GEF: USD950,000 Co-financing: USD4,200,000


No Change



No change



No change

Outputs for Outcome 3b: -Completed study on the most suitable design of a capital fund to provide soft loans to manufacturers of micro-hydro, solar PV and other low-carbon technology systems; -Completed study on the most suitable design of a guarantee fund/seed capital provision in one of the central financing institutions to enhance accessibility to loans for RE and low-carbon technology systems; -Completed study on alternative collaterals (e.g. micro hydro/solar/ equipment or the project itself); -Established and operationalized new innovative mechanisms for repayments of microfinance loans, e.g. mobile banking, satellite office, etc. (Outreach expansion); -Established network between energy companies/RE system distributors and finance institutions; -Prepared and approved framework and enforced implementation guidelines for PPP models including possible revenues sharing schemes;

Outputs for Outcome 3b: Designed and provided technical support for financing platforms and services for promoting commercial financing for domestic manufacturers Designed and provided technical support for financing platforms and services for promoting commercial financing for mini-hydro and large-scale solar PV projects Developed training materials on mini-hydro and large-scale solar PV projects for financing institutions Established matchmaking platform for mini-hydro and large-scale solar PVdevelopers, financing institutions, and equity investors, and productive end users Functional enterprises adopting productive use of electricity. Operationalised mechanisms to promote financial products forentrepreneurs /end users Established functional electricity based enterprises that are owned by women and marginalised/vulnerable groups

Based on needs articulated during stakeholder interaction the scope of outputs has been expanded to include designing of financing mechanism and instruments leading to the establishment of funds that are to be implemented as outputs of Outcome 3a. Issues related to collateral, seed capital, guarantee fund etc. are addressed in credit fund and financing instruments collectively. Network between energy companies/RE system distributors and finance institutions are included in Matchmaking platform. Output related to micro-finance are dealtwith in Outcome 3b for productive end-use as micro-finance are less relevant for mini-hydro and large-scale solar PV projects The last three outputs have been added to address enhanced utilization of electricity through productive end-uses for financial sustainability. Further, it also includes outputs related to the specific needs of women and

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GEF-Approved PIF Project Document marginalised/vulnerable section of the population.

Component 3b: Budget GEF: USD250,000 Co-financing: USD700,000

Component 3b: Budget GEF: USD63,036 Co-financing: USD 392,835

The Central Renewable Energy Fund (CREF) is being created as part of NRREP and will be operational when the GEF project starts. However, there is still a need to facilitate the credit funds and facilities for local manufacturers, private sector-led commercial financing of projects and match-making platforms. Hence, the reduction in budget required. In addition, more financing will be leveraged from the private sector/commercial banks during project implementation

Component 4: Human Capacity Development Component 4: Human Capacity Development No change Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector

Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector

No change

Outputs for Outcome 4: -Completed training courses for relevant government agencies and stakeholders at central, district and village level on emerging (rural) RE policies and in the areas of integrated energy planning, energy cost comparisons, energy surveys and energy reporting and monitoring; -Completed trainings for enhancing capacities of manufacturers and installers to design, manufacture and install micro-hydro systems between 100 kW and 1 MW; and, solar PV systems up to 10 kW; -Completed training for survey and installation teams within companies to improve quality of installed micro-hydro plants;

Outputs for Outcome 4: Established database of technical specifications, challenges and opportunities in the design, manufacture (for micro-hydro(60+ kW) and mini-hydro), installation and after-sales service inmicro-hydro(60+ kW), mini-hydro and large scale solar PV systems. Fully trained skilled and technically capable people available for project identification, feasibility studies and detailed design of mini-hydro projects

This output has been included under Component 1. See 3rd Output Outputs are rephrased to reflect specific outputs to be achieved rather than activities to be undertaken. This is a pre-requisite knowledgebase created for subsequent capacity building of all the stakeholders. The single PIF output has been converted into separate outputs to address the specific requirements of technologies like mini-hydro and large solar PV systems.

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GEF-Approved PIF Project Document -Completed training courses on the operation and maintenance of RE based energy systems to the users; -Completed training courses for micro-finance institutions and commercial banks on financing RE and low-carbon applications; -Completed training courses to RE developers on financing opportunities and incentive schemes for RE projects; -Completed training courses for energy companies/distributers of RE applications on after sales services;

Fully trained skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services. Fully trained skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system Fully trained skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems

The output has been rephrased. The output has been rephrased. This output has been integrated with the match making platform of the Outcome 3b.The matchmaking platform involving mini-hydro & large-scale solar PVdevelopers, financing institutions and equity investors is expected facilitate capacity development of RE developers with respect to financing opportunities and incentive schemes. This output has been integrated with earlier outputs (third output)



The increase in GEF budget due to a single PIF output being expanded to several outputs to address the specific requirements of technologies like mini-hydro and large solar PV systems. And, the reduction in co-financing resulted from the shifting of specific outputs to Components 1 and 3b.

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3.3 Project Activities

Activities are organized by outcome and output. In some cases, listings of main activities are followed by sub-activities or more detailed description of the activity.

3.3.1 Component1Activities

Outcome 1: Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization Output1.1: Approved and enforced policy operationalising PPP model for mini-hydro, large-scale solar PV development, productive end-use applicationsincluding fiscal incentives and adaptability for possible changes in Nepal government structure (to federal system) Activity 1.1.1 Preparation and adoption, i.e., approval and enforcement, of policy that enables PPP model for mini-hydro, micro-hydro mini-grid, and large-scale PV development, thus attracting the private sector to such projects Sub-activity 1.1.1.1: Revision of current subsidy policy (2013 version) to attract more private sector investment in off-grid mini-hydro, micro-hydro mini-grid, and large-scale PV projects - This sub-activity will involve the following revisions of the existing subsidy policy:

Make private sector invest in off-grid mini-hydro, mini-grid, and large-scale PV projects eligible for subsidy

Subsidy that gives more weight to capacity rather than households connected

Subsidy for productive end uses based on type and size of enterprise

Add micro-hydro mini-grid clause to subsidy policy

Add Village PV-Electrification clause to subsidy policy This sub-activity will include: (1) Reviewing international best practices for similar subsidy policies and identifying or formulating suitable subsidy provisions to address the identified gaps; (2) Consulting with AEPC, private sector developers, Small Hydropower Development Association of Nepal, and Independent Power Producers’ association of Nepal officials and members to gather relevant information, insights and ideas; (3) Preparing a draft revised subsidy policy; (4) Carrying out a stakeholder workshop to share the draft document and get feedback; (5) Preparing the final draft policy for submission to AEPC; and, (6) Securing Government approval and enforcement of the revised subsidy policy. Sub-activity 1.1.1.2: Drafting of PPP policy for private sector investment in mini-hydro and micro-hydro mini-grid This sub-activity will include the following steps: (1) Reviewing national and international best practices related to PPP model, especially applicable to mini-hydro development and

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identify specific policy and incentive gaps to be addressed to enable the PPP model. (2) Carrying out stakeholder consultations to gather relevant information, insights, and ideas. (3) Preparing a draft PPP policy document for mini-hydro, including a section identifying policy provisions that may be impacted by the proposed federal structure, and recommend suitable modifications for it. (4) Carrying out a stakeholder workshop to share the draft document and get feedback; and, (5) Preparing the final draft mini-hydro and micro-hydro mini-grid PPP policy. Sub-activity 1.1.1.3: Securing government approval of both the revised subsidy policy and the newly drafted PPP policy. This sub-activity will include: (1) Preparing the two policy documents in government approved prescribed format; (2) Carrying out stakeholder consultations to finalize the two policy documents for submission by AEPC to relevant authority (this will specifically include stakeholders involved in the preparation of the draft policy documents and also government agencies, especially the Ministry of Law and Justice); (3) Revising the two policy documents, as and when required during the approval process; and (4) Publishing the revised policies in the Government Gazette for enforcement. Activity 1.1.2: Preparation and adoption of policy for future grid connection of off-grid mini-hydro, micro-hydro mini-grid, and large-scale solar PV systems This policy will ensure that these projects will remain sustainable if and when the grid is extended to the local area of the project. This will reduce the risk to investors and financiers that projects will lose value with grid extension. The policy will call for putting in place a suitable feed-in tariff, which will ensure electricity, is bought by the State from these projects. Sub-activity 1.1.2.1: Development of specifications, in close collaboration with NEA, for mini-hydro, large solar PV systems, and micro-hydro mini-grid systems that meet the national grid code It should be noted that specifications for distribution lines to connect micro-hydro projects to each other in a mini-grid are already covered by existing national standards and regulations. This sub-activity will involve the preparation of the policy and mechanism for off-grid renewable energy projects to connect to the grid once grid reaches the local area. Once approved by the government and adopted as a policy, this will ensure the sustainability of these systems, even with the advent of the grid, rather than being abandoned or ground to a halt because of losses, as usually happens at present. The sub-activity will also include: (1) Reviewing of national and international best practices and standards related to grid connection of renewable energy systems; (2) Carrying out consultations with NEA to gather relevant information, insights and ideas; (3) Preparing a draft grid-connection policy and mechanism; (4) Carrying out a stakeholder workshop to share

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the draft document and get feedback; and, (5) Preparing the final grid connection policy document. Sub-activity 1.1.2.2: Working with NEA to achieve government approval of policy to ensure grid connection of mini-hydro, mini-grid, and large-scale PV systems once grid is extended to the local area. This sub-activity is intended to help operationalize the policy and mechanism for off-grid renewable energy projects to connect to the grid once grid reaches the local area. This will ensure the sustainability of these systems, even with the advent of the grid, rather than being abandoned or ground to a halt because of losses, as usually happens at present. This sub-activity will include: (1) Preparing policy document in government approved prescribed format; (2) Carrying out consultations with NEA, Ministry of Energy and Ministry of Law and Justice to finalize the policy document for submission to relevant authority; (3) Revising of the policy document, as and when required during the approval process; and (4) Publishing the revised policies in the Government Gazette for enforcement. Output 1.2 Methodology and database developed and made available for incorporating mini-hydro and large scale solar PV systems into district RE plans Activity 1.2.1: Preparation of the methodology for integrating mini-hydro projects and large-scale solar PV systems into district energy plans. DDCs already have in place a decentralised district energy planning process that feeds into the overall district plans. However, the current decentralised district energy planning is mostly focused on micro hydro and other household level renewable energy interventions. No methodology exists for including mini-hydro and large scale solar PV systems into these plans. This activity will involve the preparation of the required methodologies. This activity will include, but will not be limited to the following steps: (1) Collecting and reviewing all available information related to potential mini-hydro and large-scale solar PV projects in Nepal; (2) Drafting a methodology for preparing mini-hydro resource and productive end use assessment and large-scale solar PV needs assessment documents; (3) Carrying out a combined training/feedback stakeholder workshop to get feedback on the draft methodology (During this workshop, the relevant District Energy and Environment Office personnel from five selected districts will be trained to implement the methodology);and, (4) Finalizing the methodology. Activity 1.2.2: Preparation and publication of reports on mini-hydro resource and large-scale solar PV needs assessment for first five districts based on the above methodology.

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This will be done in close collaboration with the District Energy and Environment Office personnel from each of the five districts. In addition to the lack of methodology, as described above, DDCs also do not have the required information for including mini-hydro and large scale solar PV systems in the DDC decentralised district energy plans. This activity will help in this regard.Collection of current energy use data and assessment of impacts on women and girls and their involvement in, as well as gender issues of, Mini-hydro and Large-scale solar PV installations will be done. For each of the five districts, this activity will include, but not be limited to: (1) Carrying out data collection and verification and refinement as per the developed methodology; (2) Preparing draft report based on the data collected; (3) Carrying out a stakeholder workshop to get feedback on the draft report, with one workshop held in each of the five districts; (4) Finalizing the report for submission to AEPC; and, (5) Uploading the report on the AEPC website for public use. Activity 1.2.3: Preparation and publication of reports on mini-hydro resource and large scale solar PV needs assessment for next ten districts based on the above methodology. Once the methodology has been formulated and tested in the initial 2 districts, replication of the activity will be required in other districts. This activity will involve the replication of the results of activity 1.2.2 in the next ten districts. For each of the ten districts, this activity will include, but not be limited to: (1) Training of relevant District Energy and Environment Office personnel in implementing the methodology; (2) Collecting, verifying, and refining of data as per the developed methodology; (3) Preparing draft report based on the processed data; (3) Carrying out of a stakeholder workshop to get feedback on the draft report, with one workshop held in each of the ten districts; (4) Finalizing the report for submission to AEPC; and, (5) Uploading the report on the AEPC website for public use. Output 1.3 Completed training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large-scale solar PV systems development and on productive end uses Activity 1.3.1: Identification and preparation of case studies for mini-hydro and large-scale solar PV systems. These case studies will provide the material for the awareness programme. It will provide real world information on systems that have worked or not worked and their factors of success or failure. Such information will motivate the targeted stakeholders to support development of Mini-hydro and Large-scale solar PV systems in their areas. These case studies will also provide inputs for policy formulation as well as project implementation and operation. The case studies will be focused on private sector participation, commercial financing, project management and productive end-use applications.

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This activity will include: (1) Researching on mini-hydro best practice case studies that may already exist (only case studies done in Nepal or in a country with similarities to Nepal will be accepted); (2) Identifying suitable projects for carrying out best practice case studies (if the identified case studies are less than three in number), and the case studies will be selected on the basis of projects having maximum private sector participation, commercial financing, and productive end-use applications; (3) Carrying out data collection and analysis for the case studies with extensive field visits to the selected sites (the studies should focus on what worked, what did not, and why; and the critical factors that led to the success (or sometimes failure) of the different components of the projects should also be identified); and, (4) Preparing the final case study reports. Activity 1.3.2: Conduct of training needs assessment. This activity will include: (1) Interacting with stakeholders to identify gaps in knowledge (select interviewees such as local development officers, AEPC programme managers, ministry officials, etc. and interview stakeholders about their knowledge and needs with regard to larger systems); (2) Interacting with AEPC to ascertain areas in which related stakeholders need to be given training/orientation; and, (3) Preparing a training needs assessment document. Activity 1.3.3 Preparation and conduct of training courses Each training course will consists of at least 7 modules including: technology basics including differences between larger and smaller systems; benefits and potential of large off-grid renewable energy systems, specially Mini-hydro and Large solar PV systems; current policies and incentives for such systems; productive use potential and challenges for these systems; financing structures for such projects; tariff systems and mini-utilities; future grid connection benefits and issues. This activity will include: (1) Preparing a training plan and detailed lesson plan for each of the identified groups at the central and district levels (each training will consist of at least seven modules including: (i) technology basics including differences between larger and smaller systems; (ii) benefits and potential of large off-grid renewable energy systems, especially mini-hydro and large solar PV systems; (iii) current policies and incentives for such systems; (iv) productive use potential and challenges for these systems; (v) financing structures for such projects; (vi) tariff systems and mini-utilities; and (vii) future grid connection benefits and issues); (2) Preparing course materials and selecting trainers; (3) Preparing necessary logistics for the training/orientation; (4) Conducting of training courses (at least one at the central level and five at district level to cover the fifteen selected districts); and, (5) Carrying out evaluation for future refinement of the training program.


Outcome 2: Increased investments in RE

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Output 2a.1: Commissioned mini-hydro demonstration projects totalling 1 MW through PPP Model Activity 2a.1.1Implementation of the Mini-hydro Power Generation Demonstrations Under this activity three selected Mini-hydro projects with a combined capacity of 1MW will be implemented as UNDP-GEF RERL demonstrations. These demonstrations will be facilitated through financing from financial sector (Banks) under the financing schemes developed by the project that will make demonstration projects financially attractive. Such financial instruments that are identified and designed are among the outputs of Component 2 that will contribute to the realization of Outcome 2. The steps involved in this activity are (i) Facilitating the establishment of special purpose vehicle (SPV) under PPP model involving private sector, local government and community organisation. The SPV will build, operate and manage the mini-hydro demonstration projects; (ii) Awarding the contract to the SPV; (iii) Securing the finances for SPV through the established funding mechanisms; (iv) Monitoring the progress of construction and quality control; and (v) Monitoring the functioning of the demo mini-hydro projects and ensuring the targets are achieved. The SPV, a legal entity owning and operating the Mini-hydro projects, will be established to implement the PPP modality. The SPVs are owned jointly by entities within the private and public sectors including communities through local cooperatives. Mini-hydro demonstration projects will receive capital subsidy as per the subsidy policy of the government. It is estimated that the demonstration Mini-hydro project totalling 1 MW installed capacity will receive NPR 2.058millionsubsidies from the government43. Apart from the subsidy for the Mini-hydro projects from the government, other financial support will be provided from the UNDP-GEF RERL. The funds required for these will form part of the existing Central Renewable Energy Fund (CREF). The estimated funds requirement from financing instruments for these projects is given in

43The estimate is based on the detailed Financial Analysis carried out for assessing financing requirements. Please see ANNEX 2 for details.

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Table 34, which amounts to 818,000 USD (Please refer Annex 2 for details).

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Table 34: Wholesale Financial Package Supports to Mini-hydro projects

Financial Supports Costs(‘000 NPR) Year 1 Year 2 Year 3 Year 4 Year 5 Total

UNDP‐GEF RERL Supports (Total)44 17,205 30,252 12,691 7,102 6,398 73,646

UNDP‐GEF RERL Supports Total ('000 USD) 191 336 141 79 71 818

Government Subsidy ('000 NPR) 174,900 ‐ ‐ ‐ ‐ 174,900

Government Subsidy ('000 USD) 1,943 ‐ ‐ ‐ ‐ 1,943

Output 2a.2: Commissioned mini-grid demonstration projects totalling 300 kW Activity 2a.2.1: Implementation of the Mini-Grid Power Distribution Demonstrations The steps involved in this activity are the following: (i) Facilitating the establishment of special purpose vehicle (SPV) under PPP model involving private sector, local government and community organisation. The SPV will build, operate and manage the mini-grid power distribution demonstration projects; (ii) Awarding the contract to the SPV; (iii) Securing the finances for SPV through the established funding mechanisms; (iv) Monitoring the progress of construction and quality control; and (v) Monitoring the functioning of the demo mini-grid power distribution projects and ensuring the targets are achieved. The Kailash Khola Mini-grid project, which has been chosen for the demonstration, is expected to cost about NPR 20 million of which the local government has allocated NPR 3 million and project will provide various types of financial supports to make it a bankable project which is estimated to cost USD 90 thousand(NPR 8.124 million). Output 2a.3 Commissioned large-scale solar PV demonstration projects totalling 500kW Activity 2a.3.1: Implementation of the Large Scale Solar PV Power Generation Demonstrations. Under this activity financially feasible Large-scale solar PV projects with total capacity of 500kW will be demonstrated with financial support of UNDP-GEF RERL and subsidy from the government (CREF) as per the subsidy policy. The steps involved in this activity are: (i) Facilitating the establishment of special purpose vehicle (SPV) under PPP model involving private sector, local government and community organisation. The SPV will build, operate and manage the large scale solar PV power generation demonstration projects; (ii) Awarding the contract to the SPV; (iii) Securing the

44 The estimate is based on the detailed Financial Analysis carried out for assessing financing requirements. Please see ANNEX 2 for details

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finances for SPV through the established funding mechanisms; (iv) Monitoring the progress of construction and quality control; and (v) Monitoring the functioning of the demo large scale solar PV projects and ensuring the targets are achieved.

Table 35: Wholesale Financial Package Supports to Mini-grid Demonstration Project (300 kW)

Cost of Credit Fund (‘000 NPR) Year 1 Year 2 Year 3 Year 4 Year 5 Total

Supports in '000 NPR 2,344 2,779 1,564 744 693 8,124

Supports in '000 USD 26 31 17 8 8 90

Government Subsidy ‐ ‐ ‐ ‐ ‐ ‐

Estimated total subsidy from the government required for the demonstration Large-scale solar PV System projects is USD 513 thousands (NPR 46.2 million). Similarly, the project will provide various financial supports to make these Large-scale solar PV projects bankable. The estimated amount required is about USD 264 thousands (NPR 23.1 million).The cost breakdown is given in Table 36 (please see Annex 2 for details on financing needs).

Table 36: Wholesale Financial Package Support to Large-scale Solar PV Projects (500 kW)

Cost of Credit Fund (‘000 NPR) Year 1 Year 2 Year 3 Year 4 Year 5 Total

UNDP‐GEF RERL Supports (Total) 11,620 3,815 4,765 1,859 1,675 23,735

UNDP‐GEF RERL Supports Total ('000 USD) 129 42 53 21 19 264

Government Subsidy ('000 NPR) 46,200 ‐ ‐ ‐ ‐ 46,200

Government Subsidy ('000 USD) 513 ‐ ‐ ‐ ‐ 513


Output 2b.1: Demonstrated PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW) Activity 2b.1.1 Updating of the feasibility study of the selected Mini-hydro demonstration projects to make it bankable The selected projects have feasibility studies commissioned by AEPC. However, experience has shown that if the private sector is to be involved, it prefers to carry out a detailed feasibility study “under its own watch”. Furthermore, the existing feasibility studies are more focused on the technical aspects of the project. There has to be a more rigorous treatment of the financial analysis and productive end use components. These are areas that commercial banks will particularly focus on when appraising the project for possible financing.

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In this activity, the feasibility studies will be updated to make it bankable. During the inception phase, the project team may select alternative demonstration projects based on findings of the updated feasibility studies or new information that may become available at the time. The following tasks will be undertaken in this activity: (1) Updating of the feasibility report; (2) Conducting of focused group discussion on the draft update report to provide inputs for ensuring it is bankable (the focused group will include representatives from investors ; representatives from banks that have invested in off-grid hydropower projects, representatives from the government, members from civil society and three representatives from AEPC); and, (3) Finalizing the updated feasibility study. Activity 2b.1.2: Securing private sector active and substantial involvement in the implementation of the demonstration Mini-hydro projects (SPV) The selected demonstration projects already have the commitments of the local communities and the local governments. This has been ensured when these projects are reviewed by AEPC. Therefore, there remains the task of getting private project developers to participate in the implementation of these projects. This activity aims to obtain the private sectors active and substantial involvement in funding, and investing on, the mini-hydro demonstration projects. This will involve the issuance of a call for expressions of interest from potential private sector equity investors and lenders. This call will be made through both national and local media, primarily print media and FM radios. However, the primary focus will be to involve local private investors. Therefore, in addition to the call through the media, direct contact through letters and meetings will be made with prominent local businessmen and members of the district chamber of commerce and industries. For loan investment, direct contact through letters and meetings will be made with national and regional financial institutions. Once the expressions of interests are received, an investor forum will be conducted in the district headquarters of each of the districts where the demonstration projects are to be implemented. The objective of the investors’ forum will be to provide a platform where local communities, local government officials and private sector (equity and loan) investors will come together to learn about the projects and get their commitments to participate in the projects. After establishing the demo projects’ developers and investors/funders, facilitation of the establishment of a limited liability company as a special purpose vehicle to implement the project will be done. The establishment of the SPV will involve the preparation of the required documents like memorandum and article of association, registration for VAT and income tax with the Inland Revenue office, etc. Activity 2b.1.3: Securing of licenses, clearances and permits for implementation of mini-hydro demonstrations

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As a pre-requisite for subsidy application, the project developers will have to obtain certain permits and clearances. These are:

Distance certificate from the DDC (required for subsidy application)

VDC recommendation

Water Rights Certificate from the DDC (District Water Resource Committee)

Forest clearance, where needed, etc.

The tasks to be carried out for this activity are:

GEF‐funded Incremental Tasks Project Developer (SPV) – implemented

Baseline Tasks

Mobilize the relevant RSCs for local support Obtain the necessary permits and clearances

Assist in the preparation of the requireddocuments

Preparation of the required documents

This activity will be carried out concurrently with the updating of the feasibility report, because the clearances and permits will have to be obtained when the SPV applies to AEPC for subsidy. Activity 2b.1.4: Preparation of detailed project reports (DPR) and bid documents The next process in project development will be to carry out detailed design of the project, and the preparation of the detailed project report (DPR). The DPR will provide the detailed design specifications for construction of the project. Along with the DPR, the bid documents (documents that will specify what the project contractors will have to bid for) will be specified. The DPR will include site specifications based on survey and investigation of the location, more rigorous analysis of the hydrology for the project, detailed design for dam, civil structures, electrical and mechanical components, transmission system for evacuating of power from the project, infrastructure facilities, environmental and social aspects, detailed project cost estimates and implementation schedule. The bid document may contain instruction to the bidders, data sheets, evaluation criteria, bidding forms, general and special terms and conditions, bidding schedule and contract forms. The tasks for this activity for the project and the project developers will be as follows:

GEF‐funded Incremental Tasks Project Developer (SPV)‐implemented Baseline

Tasks

Financial assistance for DPR preparation45.

Contract negotiations with the applicant consultants

45This will be based on an amount per kW of the project as per the feasibility study. This will help to defray some of the project development cost for the project developer.

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Tasks

Facilitation for the selection of consultantsEnsuring adherence to AEPC requirement for subsidy Appointment of a project manager to look after the interests of AEPC Advice on quality assurance of the DPR and bid document Capacity building of the SPV, as per need. This may include human resources development, financial management, strategic planning. Partial financial support to SPV for salary of the SPV’s Chief Executive Officer (CEO) for the first two years46.

Contract management for the DPR and bid document preparation assignment Appointment of staff to the SPV Quality assurance of the DPR and bid document

Activity 2b.1.5: Negotiations on the financial closure of the demonstrations based on PPP model Concurrently with the preparation of the DPR, the project will have to achieve financial closure, which is needed before a project can proceed to construction. Financial closure will include firm commitment for all project related financing, resulting in an agreement between the SPV and financiers that confirms the financing. The tasks for this activity will include:

GEF‐funded Incremental Tasks Project Developer (SPV)‐implemented

Baseline Tasks

Provide financial support for field visits of financiers to carry out on site due diligence47. Support the SPV by helping establish contacts, accompanying them to meetings etc.

Prepare a financing model for the project Carry out negotiations with the financiers Organize field due diligence related activities for the financiers Sign the financing agreements with the financiers

46This will be to defray cost of the SPV for project development, and will reinforce the project’s commitment towards ensuring the success of the project. The CEO will be jointly recruited by the GEF project and the project developers. 47This is a practice that is prevalent in AEPC to defray project development cost for the financiers. This is done to instill confidence of the GEF project’s commitment towards the success of the project.

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Activity 2b.1.6: Construction of the Demonstration Project Facilities This activity involves the installation of all the required equipment, structures and ancillaries for each demonstration within agreed duration and on budget maintaining the prescribed quality.

The tasks in this activity will include:


Tasks

Provide advice on all tasks to be completed by the SPV Provide construction supervision training to SPV. This will be dealt with in more detail in output 4.

Call for bid from contractors pre‐qualified by AEPC Evaluate the bid received Award contract to the selected contractors Manage the contracts Carry out construction supervision. This may be done either by SPV staff or by consultants hired by the SPV. Carry out quality assurance of the construction/installations

Activity 2b.1.7: Setting-up of the O&M modalities It is important that while the construction is on-going, the SPV prepares itself for the project operation phase. Therefore, this activity will be carried out concurrently with the project construction. The operation and maintenance modalities prepared in this activity will ensure that the project is operated efficiently, which means that there is maximum production at the least possible cost. The engineering and installation plans and procedures to be prepared are:

Plant as-built drawings

Plant operation procedures (start, stop, synchronization, black start isolated operation etc.)

Plant Preventive Maintenance Procedures (Daily, weekly, monthly, and other periodic checklists, tool requirements, process descriptions etc.)

Plant corrective/emergency maintenance procedures (process descriptions etc.)


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GEF‐funded Incremental Tasks Project Developer (SPV)‐implemented Baseline Tasks

Preparation of O&M protocols Provide training to operation staff Technical support to all other activities

Set up of the O&M team On‐the‐job training to the plant operators

Activity 2b.1.8: Documentation of UNDP-GEF RERL demonstration project learning

Documentation of the demonstration projects through monitoring will ensure that they are meeting the project targets, with respect to quantity, quality and effectiveness. The purpose of the documentation/monitoring is two-fold. Firstly, it will monitor whether the targets are being met. Secondly, it will enable the project to draw lessons that will help refine the implementation of the on-going and future demonstration project by providing knowledge on what works and what does not. In addition to the quantitative monitoring, as described above, this activity will document the project through case studies, surveys, impact studies, process documentation etc. It will document these through various media, viz. print, audio and video. The focus will be to especially document the PPP model and productive end use. The tasks to be carried out will include: (1) Collection of data/information related to the project process, experience and impacts; (2) Documentation of the experience and results of the Mini-hydro demonstration projects; (3) Preparation of reports, documentaries, case study reports, pamphlets etc. covering the key highlights of documentation work; and, (4) Conduct of a workshop to disseminate results of the Mini-hydro demonstration projects and to hold roundtable discussions on how to move forward with Mini-hydro development based on the lessons learnt. Output 2b.2: Demonstrated financially sustainable and reliable a mini-grid connecting ten (10) micro-hydro systems (300 kW)

Activity 2b.2.1 - Conduct of feasibility study of potential demonstration project Each of the selected projects currently only has very brief concept study report. There is a need to carry out a detailed feasibility study for each project. This is needed to further investigate the feasibility of the project, design the technical parameters, and ascertain the financial viability of the project. There also needs to be a rigorous treatment of the financial analysis and productive end use components. These are areas that commercial banks will particularly focus on when appraising the project for possible financing. Since no guidelines exist at present, there is also a need to prepare Guidelines for carrying out feasibility study of a mini-grid project. During the inception phase, the project will select alternative demonstration projects based on findings of the feasibility study or new information that may become available at that time. This activity will involve the preparation of the following: (a) Guidelines for carrying out feasibility study of a mini-grid project; and, (b) Feasibility study.The following tasks will be

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carried out: (1) Preparation of the draft guidelines; (2) Conduct of focused group discussions on the draft guidelines (the focused group will include representatives from potential investors ; representatives from banks that have invested in off-grid hydropower projects; representatives from the government; members from civil society and representatives from AEPC); and (3) Finalization of the detailed feasibility study. Also, the following tasks will be carried out: (1) Preparation of the draft detailed feasibility report; (2) Conduct of focused group discussion on the draft report (the focused group will include representatives from potential investors; representatives from banks that have invested in off-grid hydropower projects; representatives from the government; members from civil society and representatives from AEPC); and (3) Finalization of the detailed feasibility study. Activity 2b.2.2 -Establishment of a Special Purpose Vehicle Past experiences have shown that for sustainability, there needs to be an institution that will take ownership of and manage the projects. For the implementation of the demonstrations, the following institutional structure will be piloted. “IPP” Cooperative: The Cooperative that will manage all micro hydro plants. The members of this Cooperative will be the user groups of each of the micro hydro plants. The Cooperative will ensure that the generation load is distributed among the micro hydro plants on an equitable basis. This basis will be formulated by the Cooperative members. Distribution Cooperative: This Cooperative will manage the interconnecting lines and the distribution systems. This Cooperative will purchase electricity from the IPP Cooperative and sell electricity to the end consumers. This activity will involve the establishment of these Cooperatives. It will include: (1) preparation of the required documentation like memorandum and article of association; and (2) registration for VAT and income tax with the Inland Revenue office. Activity 2b.2.3- Securing of required licenses, clearances and permits for implementation of mini-grid demonstration

The project developer will have to obtain certain permits and clearances. These may be: (1) VDC recommendation; and, (2) Forest clearance, where needed, etc.The tasks to be carried out for this activity are:


Mobilize the relevant RC, through AEPC, for local support Preparation of the prescribed documents

Obtain the necessary permits and clearances

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Activity 2b.2.4 Preparation of detailed project reports (DPR) and bid documents The detailed project report for each of the selected projects will need to be prepared. This is needed to design the technical parameters, and ascertain the financial viability of the project. The report will also have a rigorous treatment of the financial analysis and productive end use components. These are areas that commercial banks (if commercial financing is needed) will particularly focus on when appraising the project for possible financing. Based on the DPR, bid documents will also be prepared to get bids for the different lots (as identified) of the construction works.

Activity 2b.2.5–Negotiations on the financial closure of the financing of demonstrations based on PPP model

The project will have to achieve financial closure, which is needed before the project can proceed to construction.

Financial closure will include firm commitment for all project related financing, resulting in an agreement between the project developer and financiers that confirms the financing.

The tasks for this activity will include:


Provide financial support for field visits of financiers to carry out on site due diligence. This is a practice that is prevalent in AEPC to defray project development cost for the financiers. This is done to instil confidence of the GEF project’s commitment towards the success of the project. Support the project developer by helping establish contacts, accompanying them to meetings etc.


Activity 2b.2.6: Construction of the demo project facilities

The project will assist the developer to construct the project within time and on budget maintaining the prescribed quality of the project construction and installation.



Provide technical expert support for preparing this report. Provide technical expert support for preparing the documents.

Prepare a detailed project report. Prepare bid documents

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Provide advice on all tasks to be completed by the developer Provide construction supervision training to developer. This will be dealt with in more detail in output 4.

Call for bid from contractors pre‐qualified by AEPC Evaluate the bid received Award contract to the selected contractors Manage the contracts Carry out construction supervision. This may be done either by project developer staff or by consultants hired by the developer. Carry out quality assurance of the construction.

Activity 2b.2.7: Setting up of the O&M modalities

It is important that while the construction is on-going, the Distribution Cooperative prepares itself for the project operation phase. Therefore, it is important that this activity be carried out concurrently with the project construction. The operation and maintenance modalities prepared in this activity will ensure that the project is operated efficiently, which means that there is maximum production and the least possible cost. The modalities or protocols to be prepared are:

Line as-built drawings

Line operation protocol (synchronization, black start isolated operation etc.)

Line Preventive Maintenance Protocol (Daily, weekly, monthly, and other periodic checklists, tool requirements, process descriptions etc.)

Line corrective/emergency maintenance protocol (process descriptions etc.)

The tasks in this activity will include: GEF‐funded Incremental Tasks Project Developer (SPV)‐implemented Baseline Tasks



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Activity 2b.2.8: Documentation and dissemination of lessons learned from demonstrations

This activity will involve the documentation of experiences and lessons learnt from the mini-grid demonstration project. In addition to the quantitative monitoring, as described above, this activity will document the project through case studies, surveys, impact studies, process documentation etc. It will document these though various media, viz. print, audio and video. The focus will be to especially document the mini-grid management structure and productive end use development. The tasks to be carried out will include: (1) Collection of data/information related to the project process, experience and impacts; (2) Documentation of the experience and results of the mini-grid demonstration projects;(3) Preparation of reports, documentaries, case study reports, pamphlets etc. covering the key highlights of documentation work; and(4) Holding of a workshop to disseminate results of the mini-grid demonstration projects and to hold roundtable discussions on how to move forward with mini-grid development based on the lessons learnt. Output 2b.3: Demonstrated financially sustainable and reliable large scale solar PV systems (500 kW total) Activity 2b.3.1 Preparation of a shortlist of potential project sites selected based on a set of criteria and select sites in consultation with relevant stakeholders Tasks in this activity will include: (1) Mobilisation of the RCs to collect more demands for solar PV village electrification, institutional and pumping projects;(2) Short listing of the potential projects for demonstration based on the following criteria: Technical feasibility, load demand for possible productive end uses, market, presence of financial institutions, and accessibility; and, (3) Selection of demonstration projects for implementation. Activity 2b.3.2: Conduct of detailed feasibility study of selected demonstration projects A detailed feasibility study will be required for the selected projects to carry out a rigorous technical, financial and socio-economic analysis of the projects to ascertain their viability. The study will also design the system and prepare a bid document, as and where needed. Specifically, this activity will include the following:

Solar PV Village Electrification

Solar PV Institutional Solar PV Pumping

Preparation of guidelines for carrying our detailed feasibility studies for solar PV village electrification projects

Carrying out the detailed feasibility study as per the guidelines prepared

Carrying out the detailed feasibility study as per existing AEPC guidelines

Carrying out the detailed feasibility study as per existing AEPC guidelines

Carrying out of detailed technical design of the system

Carrying out detailed technical design of the system

Carrying out detailed technical design of the system

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Preparation of bid documents for calling bids from suppliers



Activity 2b.3.3: Establishment of special purpose vehicles for the project Past experiences have shown that for sustainability, there needs to be an institution that will take ownership of and manage the projects. The type of institution could be as follows:



Private company The institution that operates the facility, such as a school or health post

Users group

Cooperative Cooperative

This activity will support the establishment of these institutions, as needed. It will include (as needed): (1) Preparation of required documentation like memorandum and article of association;(2) Registration for VAT and income tax with the Inland Revenue office; and (3) Helping with contacts and meetings.

Activity 2b.3.4: Securing of land use permits

Solar PV village electrification and also pumping will require land for installation of the system. The former will require land to site the solar panels, and right of way for the distribution lines. For the latter, land will be required for the pumping station and right of way for the distribution pipeline.

Permission to use public land will have to be acquired from the village development committee. For private land, permission will have to be acquired from the private owner.

However, all these activities will be done by the project developer.

Activity 2b.3.5 Preparation of detailed project reports (DPR)

The detailed project report for each of the selected projects will need to be prepared. This is needed to design the technical parameters, and ascertain the financial viability of the project. The report will also have a rigorous treatment of the financial analysis and productive end use components. These are areas that commercial banks (if commercial financing is needed) will particularly focus on when appraising the project for possible financing.


Provide technical expert support for preparing this report.

Prepare a detailed project report.

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Activity 2b.3.6: Negotiations on the financial closure for the financing of the demonstrations

Concurrently with the preparation of the detailed feasibility study, the project will have to achieve financial closure. Financial closure is needed before a project can proceed to construction.

Financial closure will include firm commitment for all project related financing, resulting in an agreement between the project developer and financiers that confirms the financing.

The tasks for this activity will include:


Provide financial support for field visits of financiers to carry out on site due diligence. This is a practice that is prevalent in AEPC to defray project development cost for the financiers. This is done to instil confidence of the GEF project’s commitment towards the success of the project. Support the project developer by helping establish contacts, accompanying them to meetings etc.


Activity 2b.3.7: Implementation of the demonstration project

The project will assist the project developer to construct/install the project within time and on budget maintaining the prescribed quality of the project installation. Solar PV village electrification and pumping will entail construction and installation, whereas Solar PV institutional systems will entail installation.



Provide advice on all tasks to be completed by the project developer Provide installation supervision training to project developer. This will be dealt with in more detail in output 4.

Call for bid from contractors pre‐qualified by AEPC Evaluate the bid received Award contract to the selected contractors Manage the contracts Carry out installation supervision. This may be done either by project developer or by consultants hired by them. Carry out quality assurance of the installation

Activity 2b.3.8: Setting-up of the O&M modalities

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It is important that while the installation is on-going, the developer prepares itself for the project operation phase. Therefore, it is important that this activity be carried out concurrently with the project installation.

The operation and maintenance modalities prepared in this activity will ensure that the project is operated efficiently, which means that there is maximum production and the least possible cost.

The modalities or protocols to be prepared are:

System as-built drawings

System operation protocol

System Preventive Maintenance Protocol (Daily, weekly, monthly, and other periodic checklists, tool requirements, process descriptions etc.)

System corrective/emergency maintenance protocol (process descriptions etc.)

The tasks in this activity will include: GEF‐funded Incremental Tasks Project Developer (SPV)‐implemented Baseline Tasks


Set up of the O&M team On‐the‐job training to the system operators

Activity 2b.3.9: Documentation and dissemination of lessons learned

This activity will document experiences and lessons learnt from the large solar PV demonstration projects. In addition to the quantitative monitoring, as described above, this activity will document the project through case studies, surveys, impact studies, process documentation etc. It will document these through various media, viz. print, audio and video. The focus will be to especially document the mini-grid management structure and productive end use development. The tasks to be carried out will include: (1) Collection of data/ information related to the project process, experience and impacts;(2) Documentation of the experience and results of the large solar PV demonstration projects;(3) Preparation of reports, documentaries, case study reports, pamphlets etc. covering the key highlights of documentation work; and(2) Conduct of a workshop to disseminate results of the large solar PV demonstration projects and to hold roundtable discussions on how to move forward with solar PV project development based on the lessons learnt.


Activity 2b.4.1Implementation of the selected off-grid micro-hydro demonstration projects

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This will involve the implementation of the various activities at the various stages of each demonstration project. The following summarizes the delineation of the tasks involved:

Project Development

Stage

GEF‐funded Incremental

Tasks

NRREP project‐implemented Baseline

Tasks

Project Developer (Demonstration Host)‐

implemented Baseline Tasks

Feasibility Study

Provide investment and TA support as per AEPC subsidy policy and subsidy delivery mechanism

Selection of consultants to undertake the updating of the feasibility report. Finalization of the updated feasibility study.

Bringing together project developers, financiers and technology providers

Technical assistance and advisory support given to NRREP to carry out the activities at this stage of development

Call for expression of interest from potential private sector equity and loan investors. Hold investor forum to provide a platform where local communities, local government officials and private sector (equity and loan) investors will come together to learn about the projects and express interest to participate in the project. Facilitate the finalization of project developers for the project. Supporting the developers to establish a special purpose vehicle to implement the project

Set up a special purpose vehicle for project development

Obtain clearances and permits

Mobilize the relevant RC for local support. Assist in the preparation of the prescribed documents


Preparation of DPR

Advice and support NRREP to carry out the activities at this stage of development

Financial assistance for DPR preparation. Facilitation for the selection of consultants. Ensuring adherence to AEPC requirement for subsidy. Designation of a project manager to look after the interests of AEPC. Advice on quality assurance of the DPR and bid document. Capacity building of the SPV, as per need.

Contract negotiations with the applicant consultants. Contract management Appointment of staff to the SPV. Quality assurance of the DPR and bid document.

Financial Provide financial support for Prepare a financing model for

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Project Development

Stage

GEF‐funded Incremental

Tasks

NRREP project‐implemented Baseline

Tasks

Project Developer(Demonstration Host)‐

implemented Baseline Tasks

closure field visits of financiers to carry out on site due diligence. Support the SPV by helping establish contacts, accompanying them to meetings etc.

the project. Carry out negotiations with the financiers. Organize field due diligence related activities for the financiers. Sign the financing agreements with the financiers.

Construction Provide advice on all tasks to be completed by the SPV Provide construction supervision training to SPV

Call for bid from contractors pre‐qualified by AEPC. Evaluate the bid received Award contract to the selected contractors. Manage the contracts. Carry out construction supervision. This may be doe either by SPV staff or by consultants hired by the SPV Carry out quality assurance of the construction.

O&M modality Assist the project developer to set up the O&M modalities


Productive end use


Implement productive end use activities based on modalities and experiences from the demonstration projects

Monitoring, evaluation and documentation


Implement monitoring, evaluation and documentation activities based on modalities and experiences from the demonstration projects

Output 2b.5: Completed financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance

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Activity 2b.5.1Implementation of the selected off-grid mini-hydro demonstration projects This will involve the implementation of the various activities at the various stages of each demonstration project. The following summarizes the delineation of the tasks involved:

Project Development

Stage

GEF‐funded Incremental Tasks

NRREP project ‐implemented Baseline

Tasks

Project Developer (Demonstration Host) ‐implemented Baseline

Tasks

Feasibility Study

Provide investment and TA support as per AEPC subsidy policy and subsidy delivery mechanism.

Selection of consultants to undertake the updating of the feasibility report Finalization of the updated feasibility study.



Call for expression of interest from potential private sector equity and loan investors. Hold investor forum to provide a platform where local communities, local government officials and private sector (equity and loan) investors will come together to learn about the projects and express interest to participate in the project. Facilitate the finalization of project developers for the project. Supporting the developers to establish a special purpose vehicle to implement the project.

Set up a special purpose vehicle for project development.


Mobilize the relevant RC for local support Assist in the preparation of the prescribed documents


Preparation of DPR


Financial assistance for DPR preparation. Facilitation for the selection of consultants. Ensuring adherence to AEPC requirement for subsidy Designation of a project manager to look after the interests of AEPC. Advice on quality assurance of the DPR and bid

Contract negotiations with the applicant consultants. Contract management. Appointment of staff to the SPV. Quality assurance of the DPR and bid document.

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Project Development

Stage


NRREP project ‐implemented Baseline

Tasks

Project Developer (Demonstration Host) ‐implemented Baseline

Tasks

document. Capacity building of the SPV, as per need.

Financial closure


Provide financial support for field visits of financiers to carry out on site due diligence. Support the SPV by helping establish contacts, accompanying them to meetings etc.

Prepare a financing model for the project. Carry out negotiations with the financiers. Organize field due diligence related activities for the financiers. Sign the financing agreements with the financiers.

Construction Provide advice on all tasks to be completed by the SPV Provide construction supervision training to SPV

Call for bid from contractors pre‐qualified by AEPC Evaluate the bid received Award contract to the selected contractors Manage the contracts Carry out construction supervision. This may be doe either by SPV staff or by consultants hired by the SPV Carry out quality assurance of the construction

O&M modality Assist the project developer to set up the O&M modalities


Productive end use




Output 2b.6: Completed financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance Activity 2b.6.1Implementation of the large scale solar PV demonstration projects

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This will involve the implementation of the various activities at the various stages of each demonstration project. The following summarizes the delineation of the tasks involved:

Project Development Stage


NRREP project ‐implemented Baseline Tasks

Project Developer (Demonstration Host) ‐implemented Baseline Tasks

Detailed Feasibility Study


A detailed feasibility study will be required for the selected projects



Support the establishment of special purpose vehicles for project development, as needed


Mobilize the relevant RC for local support Assist in the preparation of the prescribed documents


Financial closure


Provide financial support for field visits of financiers for due diligence Support to establish contacts, accompanying to meetings etc.


Construction Advice and support NRREP to carry out the activities at this stage of development

Provide advice on all tasks to be completed by the project developer Provide installation supervision training Support for quality assurance of the installation

Call for bid from contractors pre‐qualified by AEPC Evaluate the bid received Award contract to the selected contractors Manage the contracts Carry out installation supervision. by self or

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Project Development Stage


NRREP project ‐implemented Baseline Tasks

Project Developer (Demonstration Host) ‐implemented Baseline Tasks

consultants

O&M modality Advice and support NRREP to carry out the activities at this stage of development

Support preparation of O&M protocols Provide training to operation staff Technical support to all other activities

Prepare O&M protocols from standardised formats Set up of the O&M team On‐the‐job training to the system operators

Productive end use


Support productive end use development activities



Monitor, evaluate and document as per NRREP guidelines

3.3.4 Component3aActivities

Outcome 3a: Improved availability of financial investment supports for rural RE and other low-carbon technology applications Output 3a.1: Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) for financing domestic manufacturers to meet growing orders and be cost competitive Activity 3a1.1: Establishment of the wholesale financing instrument for financing manufacturers This instrument will work as the risk sharing mechanism for the bank / financial institution. This mechanism will stimulate substantially higher credit availability for the sector. The leverage will start from 100% and is expected to increase gradually. The amount set aside for the fund is USD 450,000 (about NPR 40 million)48. This activity will include: (1) Publication of public notice calling for application from manufacturers to access fund for their use; and, (2) Evaluation and awarding of loans to, and recovering of the loan proceeds, from qualified manufacturers.

48The estimate is based on the detailed Financial Analysis carried out for assessing financing requirements and the details are given in ANNEX 2.

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Output 3a.2: Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) to promote commercial financing for mini-hydro and large-scale solar PV projects Activity 3a.2.1: Establishment of wholesale financing instrumentto incentivize BFIs for commercial financing of Mini-hydro and large-scale solar PV projects This activity will entail the setting-up of wholesale financing instrumentin selected banks and financial institutions. Estimated fund requirement/available for the purpose from RERL-GEF UNDP project is USD 500,000 (GEF contribution)49. This activity will include: 1) Validation of the fund requirement for the wholesale financing instruments; 2) Publication of public notice calling for application from developers to access financing fund for their use; 3) Evaluation and awarding loans to, and recovery of the loan proceeds from developers.

3.3.5 Component3bActivities

Outcome 3b: Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications Output 3b.1: Designed and provided technical support for financing platforms and services for promoting commercial financing for domestic manufacturers Activity 3b.1.1: Design of the wholesale financing package for Mini-hydro manufacturer and selection of fund administrator Constraints for bank financing to domestic Mini-hydro manufacturer will be reviewed and analysed to revalidate the credit fund as the most appropriate financial mechanism to remove the financial constraints. In partnership with financial institutions and Banks, relevant credit products concept will be designed, discussed in a larger forum participated by financing and renewable energy manufacturers and other stakeholders. The credit fund will support manufacturers of Mini-hydro for acquiring plant & machinery, latest technology including design patents, maintaining adequate inventory and tools for the manufacturing of improved and low-cost components for the Mini-hydro plant. Establishment of the fund will be based on experiences of establishing other similar funds in Nepal. Assistance will be provided to the financial institutions and Banks in designing product paper for financing domestic Mini-hydro manufacturers.

49The estimate is based on the detailed Financial Analysis carried out for assessing financing requirements and the details are given in ANNEX 2.

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This activity will include the following: 1) Interaction with manufacturers on the constraints and analyse various possible modalities and the operation of the fund; 2) Focus group discussion with representatives of Banks, manufacturers, and other key stakeholders to seek comments and suggestions; 3) Preparation of ToR and bid document to call proposals from Banks and FIs to administer Mini-hydro manufacturer credit fund; 4) Evaluation of the proposals to shortlist potential fund operators; and, 5) Negotiation and selection of fund administrators. Activity 3b.1.2: Design and finalization of wholesale financing package for supporting manufacturers of Mini-hydro, including obtaining NRB approval. Constraints for bank financing to domestic Mini-hydro and Large-scale Solar PV system will be reviewed and analysed to revalidate the various financing tools envisaged in this project formulation document to remove the financial and financing constraints. In partnership with Banks and Financial Institutions (BFI), relevant financial instruments including credit products will be designed, and discussed in a larger forum participated by financing and renewable energy manufacturers and other stakeholders. The credit fund will support project developers of Mini-hydro and Large-scale Solar PV system for acquiring plant & machinery, latest technology including design project development. Establishment of the fund will be based on experiences of establishing other similar funds in Nepal and abroad. This activity will include the following: 1) Interaction with project developers and other stakeholders of the sector on the constraints and analyse various possible modalities and the operation of the fund; 2) Focus group discussion with representatives of Banks, manufacturers, and other key stakeholders to seek comments and suggestions; 3) Design of the financial instruments; and, 4) Obtain Nepal Rashtra Bank’s approval where needed. Activity 3b.1.3 Establishment of wholesale financing package in at least two financing institutions through CREF The establishment of credit facilities will be carried out with BFIs (at least two) that are selected through the bidding process. Assistance will be provided to the financial institutions and Banks in designing product paper for financing Mini-hydro and Large-scale Solar PV system and other financial assistance instruments. This activity will include the following: 1) Preparation of ToR and bid document to call for proposals from Banks and FIs to administer Mini-hydro manufacturer credit fund; 2) Evaluation of the proposals to shortlist potential fund operators; 3) Negotiation and selection of fund administrators; and (4) Extending of CREF contributions to the credit facilities Output 3b.2 Designed and provided technical support for financing platforms and services for promoting commercial financing for mini-hydro and large-scale solar PV projects

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Activity 3b.2.1: Design of the commercial financing instruments for Mini-hydro and Large-scale solar PV projects and select fund administrator Constraints for bank financing the Mini-hydro and Large-scale solar PV projects will be reviewed and analysed to revalidate the justifications for identified instruments as the most appropriate financial mechanism to remove the financial constraints. In partnership with financial institutions and Banks, identified financing instruments’ concepts will be formulated and discussed in a larger forum participated by financing and renewable energy manufacturers and other stakeholders. Financing instruments will support Mini-hydro and Large-scale solar PV projects for the project development. Establishment of these instruments will also be based on experiences of establishing other similar funds in Nepal. This activity will include the following: 1) Interaction with banks and stakeholders on the constraints and analyse various possible modalities and the operation of the identified instruments; 2) Focus group discussion with representatives of Banks, developers, and other key stakeholders to seek comments and suggestions; 3) Preparation of ToR and bid document to call proposals from Banks and FIs to administer identified instruments; 4) Evaluation of the proposals to shortlist potential fund operators; and, 5) Negotiation and selection of fund administrators. Output 3b.3 Developed training materials on mini-hydro and large-scale solar PV projects for financing institutions Activity 3b.3.1: Design of training materials for bankers to understand challenges and opportunities in Mini-hydro and Large-scale solar PV projects These training materials will help Banks and FIs to facilitate project in the initial phase and later for them to conduct these trainings. This activity is to make available training materials for conducting training to the Bankers on understanding challenges and opportunities in Mini-hydro and Large-scale solar PV financing. Activities under this will include: 1) Interaction with the bankers and evaluate the training requirement of the bankers; 2) Preparation of detailed case studies incorporating how the financing mechanism is being practiced internationally; 3) Design of the training materials; 4) Preparation of the financial analysis tools and techniques for setting up the parameters for decision making purpose;5) Conduct of workshops with Bankers to evaluate and get feedback on the training material; 6) Pre-test of the revised training materials in actual training of Bankers; and 7) Finalization of the training materials. Output 3b.4: Established matchmaking platform for mini-hydro and large-scale solar PV developers, financing institutions, and equity investors, and productive end users Activity 3b.4.1: Organization of appropriate events to bring together Mini-hydro developers and Large-scale solar PV Projects, equity investors, and potential lenders

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Awareness regarding the economic viability and technological sustainability is the main idea that should be arouse between the Mini-hydro developers and Large-scale solar PV Projects, equity investors, and potential lenders. Workshops, seminars, expositions, and deal-making events shall be organised at district level. The whole idea is to create a favourable environment for investments in Mini-hydro and Large-scale solar PV projects. This activity will involve organising appropriate events to bring together Mini-hydro and Large-scale solar PV Project developers, equity investors, and the potential lenders so that the all the problem related to the manufacturers, investors and the lenders could be discussed and resolved. This will be the information sharing event and will lead to the development of potential solutions to the problem and create conducive environment for the development of the Mini-hydro projects. This activity will include the following: 1) Identification of the modality and agenda of interaction programme (Workshops, seminars etc.); 2) Scheduling of different district level programmes; 3) Coordination with the local bodies (DDC, VDC, local unit of FNCCI etc.) to identify the participants from developers, equity investors (promoters and general investors /users) lenders; 4) Holding of events to discuss problems and recommendations; and, 5) Preparation of report to be used in the follow-up action. Activity 3b.4.2Follow up work on business matchmaking events Database of potential investors, lenders, and Mini-hydro developers will be prepared. The investors will be briefed on regular basis about the developments and their feedback shall be sought. Activity 3b.4.3: Development of a web-based portal that allows developers, lenders and investors to interface and exchange information. Frequent interaction and exchange of information between all stakeholders is the most important aspect for the proper development of the sustainable RE. To address this concern a web-based portal will be developed. This web-based portal will allow interaction and exchange of information between the developers of the Mini-hydro project, mini-grid system and solar PV system, lenders, investors and manufacturers. Output 3b.5: Functional enterprises adopting productive use of electricity. Activity 3b.5.1: Preparation of guidelines for identifying and assessing existing enterprises in the electrification area having potential for switching to electricity

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The guidelines for assessing existing enterprises is a reference document to be used during feasibility study of the RE projects. The assessment done in line with the guidelines will provide important information relating to potential load factor due to number of electricity-based enterprises. The guidelines are prepared through market-based BDSPOs during first six months of the UNDP-GEF RERL. This activity will include the following steps: 1) Review of existing documents e.g., Guidelines for Detailed Feasibility Studies of Micro-Hydro Projects (this document contains some guides on collecting information on potential enterprises), few samples of feasibility reports submitted earlier by consultants (available at AEPC), study reports on productive uses, etc.; 2) Conduct of desk study of theories relating to business feasibility; 3) Preparation of guidelines and templates for information collection during feasibility study; 4) Getting feedback from concerned stakeholders through peer review and small workshop; 5) Pre-test of the templates in a selected location; and, 6) Finalization of the guidelines. Activity 3b.5.2: Preparation of business plan by the RE project developers (SPVs) for promoting productive use of electricity The SPV should be encouraged to prepare plan for improving load factor as the project becomes operational. This activity can be initiated after financial closure of the project. The SPV should be encouraged to set up an Enterprise Promotion Unit (EPU) within its management set up. The EPU will be assisted by an Enterprise Development Advisor (EDA) for a period of one year. The EDA is responsible for supporting the EPU to prepare and implement the business plan for promotion of electricity-based enterprises in the project area. The entrepreneurs are supported through the EPU as per the enterprise development business plan jointly prepared by the EPU and NRREP’s PEU. The business plan will ensure the promotion of women entrepreneurs and also look the possibility of supporting women-led home based productions. This activity will be implemented by hiring expert services from the market-based BDSPOs. It includes but not limited to the following steps: 1) Orientation training of relevant staff members of the developers of the Mini-hydro and Large-scale solar PV; and, 2) Preparation and implementation of the business plan for promotion of electricity-based enterprises. Activity 3b.5.3: Development of locally based Enterprise Development Facilitators (EDFs) and Business Development Service Providing Organisations (BDSPOs) The EDFs are individuals who are expected to be involved in enterprise promotion campaigns, supporting enterprise creation as well as facilitating the micro entrepreneurs at various stages of the value chain. Their services may be hired by the project developers or even by the entrepreneurs. New EDFs are developed where there is no existing local BDS Providing Organizations or EDFs. Qualified women and persons belonging to marginalised community should be encouraged to become EDFs. Local BDSPOs which comprise of EDFs are awarded

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various enterprise development assignments (described below) through competitive bidding by the SPV’s EPU in consultation with NRREP’s PEU. This activity will include the following steps: 1) Conduct of EDF training for interested and selected local persons on business planning, counselling skills etc. through market based BDSPOs (e.g. IEDI) and possibly in and in collaboration with MEDEP in geographically overlapping areas50; 2) Organization of newly trained EDFs (stand-alone or in association with another organization); and 3) Preparation of business plan by each EDF. Activity 3b.5.4: Promotion of switching to electrical energy to entrepreneurs Existing enterprises that are already identified during feasibility study of the project should be encouraged to switch to electricity as they could be early consumers to tap the new opportunities arising due to electrification. This could provide positive demonstration effect in the area. Efforts should be made to switch existing enterprises to electricity in the first year of the project operation. This activity is carried out at the project sites and should be part of the SPV’s enterprise development business plan. The UNDP-GEF RERL through SPV’s EPU and local BDSPOs should support the entrepreneurs in the following ways: 1) Conduct of technology selection, financing and management and linking them with relevant service providers such as MFIs, NGOs, traders, etc.;2) Preparation of business plans with value chain analysis for high potential products; 3)Organization and conduct of meetings and counselling sessions with experts and relevant institutions in the market; and,4) Establishment of energy-based enterprises in the project sites. Activity 3b.5.5 Conduct of exploration study for identifying potential and feasible enterprises in the project areas Existing as well as new potential entrepreneurs may need additional information and knowledge regarding range of potential enterprises they could consider in the area. The exploration study provides information on potential enterprises including details on value chain. This information will be very useful for encouraging local people to engage in establishing enterprises. Such information will also be used to develop Information Education and Communication (IEC) materials for business promotion campaigns (Activity 3b.5.6). The study is conducted during the construction period or first year of the project operation. Efforts will be made to avail such information to potential women entrepreneurs and people belonging to marginalised/vulnerable communities. This activity will include the following steps: 1) Conduct of the study by a BDSPO, in collaboration with local BDSPO; 2) Conduct of project site visits for observation and assessment purposes, and conduct of a participatory approach market assessment; and, 3) 50If the EDFs already exist in the project area, this training can be organized as a refresher training contextualizing the Mini-hydro and Large-scale solar PV electrification

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Preparation of report describing availability of raw materials, market demand for the products, list of potential enterprises feasible in the area with details on value chain links, financing options, labour, legal issues as well as technology options (Ref. Annex 6). Activity 3b.5.6: Conduct of business promotion campaigns This activity is targeted at the people who might engage in electricity-based enterprises. Business promotion campaigns are conducted proactively by the project to inform and encourage the people to make investment on enterprises. Business promotion campaigns are generally conducted for 2 to 3 days in a locality in the project sites. BDSPOs will be trained to spend additional efforts to identify potential women entrepreneurs and people belonging to marginalised/vulnerable communities. The SPVs in consultation with NRREP’s PEU hires local BDSPOs to implement this activity51. Activity 3b.5.7: Conduct of capacity building work for prospective entrepreneurs to create new enterprises This activity is targeted at the prospective and new entrepreneurs who are considering initiating enterprises once electricity is available. The basic training and other support services should be provided on demand-driven basis. A basic training is 5-10 days long52. This activity will include the following steps: 1) Conduct of basic entrepreneurial training to the interested and selected potential entrepreneurs through local BDSPOs and possibly in collaboration with MEDEP (these training events can be organised on regular basis in Kathmandu or at suitable regional centres calling applications from needy entrepreneurs residing at various RE project sites);and2) For technology related skills training, link the entrepreneurs to relevant training institutions such as vocational training centres certified by Council for Technical Education and Vocational Training (CTEVT), NGOs and private training institutions. Activity 3b.5.8: Conduct of capacity building for existing entrepreneurs on the smooth operation of the business, business expansion/growth and productivity improvement This activity is targeted to the entrepreneurs who are already engaged in enterprises. They need advanced management training with the following scope: Marketing management;

51The following approaches can be pursued in conducting the awareness activities: 1) Conduct village level awareness campaigns to inform and encourage people to make investment on enterprises; 2) Develop and use various IEC materials such as posters, banners, and brochures. Such materials will include information generated by the business exploration study (Activity 3b.5.5); and, 3) Organize enterprise fair on periodic basis to showcase existing and new business ideas. Other approaches to awareness creation can also be pursued as per local need. The business promotion activities can be conducted in collaboration with other support organizations and programs such as MEDEP. 52The training covers topics such as: Self-assessment of entrepreneurial capacity; Identification of the business; Business plan; Marketing concept. The participants for the basic training should be selected considering following points in mind: The person should be enterprising and possess: 1) Clarity of goal; 2) Capability to at least partly cover investment amount from self-equity; 3) Family support; 4) Educational background. In selecting the participants, priority should be given to women and persons belonging to marginalized community.

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Account keeping; Salesmanship; Financial management; Production management. The advance training is organised on demand basis. This activity will include but not limited to the following steps: 1) Conduct of advance management training to interested and selected entrepreneurs through market based BDSPOs and possibly in collaboration with MEDEP (these training events can be organised on regular basis in Kathmandu or at suitable regional centres calling applications from needy entrepreneurs residing at various RE project sites);and, 2) For technology related advanced skills training, linking the entrepreneurs to relevant training institutions such as vocational training centres certified by CTEVT, NGOs and private training institutions. Activity 3b.5.9: Documentation of good practices and lessons learned from successful enterprises for replication The case studies can be used as motivational materials during business promotion campaigns (Activity 3b.5.6). The English version will be useful for sharing UNDP-GEF RERL experience on productive applications at a wider scale. A case study will be conducted each year starting from second year of the UNDP-GEF RERL. This activity will include but not be limited to the following steps, 1) Hire expert services from the market, 2) Select case study sites, 3) Conduct field study including interaction with relevant stakeholders in the field and the centre, 4) Write up and finalize, 5) Print the case in the form of booklets and video documentaries in both English and local languages. Output 3b.6Operationalised mechanisms to promote financial products for entrepreneurs /end users Activity 3b.6.1 Assessment of existing financing services and identification of existing institutions (non-formal mechanisms e.g. credit saving group) for potential upgrading into micro-finance institutions or cooperatives These assessment studies are conducted to assess availability of loan products and volume of services that could be provided by existing financial institutions located at or in the vicinity of the project sites including local branch offices of banks, finance companies as well as micro finance institutions. The studies will also identify local saving credit groups and cooperatives having interest to upgrade into formal financing institutions. These studies are conducted through BDSPOs in the market during the construction period or first year of the project operation. This includes following activities: 1) Conduct of project site visits, and conduct of stakeholder consultations by market-based experts; 2) Assessment of existing financing facilities in the site; 3) Preparation of a list of potential institutions that could be upgraded to MFIs; and, 4) Preparation of recommendations on how these institutions could be upgraded to MFIs.

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Activity 3b.6.2Establishment of formal micro-finance institutions out of existing non-formal mechanisms (e.g. saving credit group) in Mini-hydro areas lacking FIs (banks and MFIs) or needing more MFIs and support building capacity of the MFIs On the basis of recommendations generated by the assessment studies (Activity 3b.6.1), advisory support will be extended to interested non-formal mechanisms (e.g. saving credit group) to upgrade into micro-financing institutions. Collaboration with CleanStart for advisory support in general and support for certain activities in pilot projects will be carried out. CleanStart may even support certain pilot activities for this. This will activity includes: 1) Facilitation of the registration process: 2) Provision of financial support to improve infrastructure of the newly established MFIs; 3) Conduct of capacity development training on management, account keeping, etc. The training can be organised at suitable regional centres. Activity 3b.6.3:Developmentand dissemination of tools for promoting commercial financing of productive use of electricity linking as far as possible with CleanStart activities in Nepal. The activity will extend support to the existing as well as new FIs to develop financial tools which include loan products for productive applications, wiring service for domestic or industrial establishments, or working capital for entrepreneurs. This will be done linking with CleanStart as far as possible. Market based BDSPOs will be hired to conduct this activity. This will include: 1) Conduct of orientation workshops for the FIs to discuss on the financial products (the orientation workshops can be organised in Kathmandu or at suitable regional centres); 2) Linking-up MFIs with other bigger financial institutions for wholesale lending. Output 3b.7: Established functional electricity based enterprises that are owned by women and marginalised/vulnerable groups Activity 3b.7.1: Facilitation of the switching to electricity use by marginalized/vulnerable groups and the establishment of new enterprises Under this activity, feasible enterprises owned by single women/widow and marginalised community will be financially supported. Only those who have attended capacity building training/events will be eligible to receive this support. This activity will include, 1) Provide NPR 10,000 or 25% of the working capital whichever is less as working capital for enterprises owned by single woman, widow, vulnerable community, backward, disaster victim, poor and endangered ethnic group as identified by the Government of Nepal. This support is in addition to the capital investment subsidy provided by the Government.

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Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector Output 4.1: Established database of technical challenges and opportunities in the design, manufacture for micro-hydro(60+ kW) and mini-hydro, installation and after-sales service inmicro-hydro(60+ kW), mini-hydro and large scale solar PV systems. Activity 4.1.1 Conduct of a study on the identification of technical challenges and opportunities in design, manufacture, installation and after-sales service for Mini-hydro and Large-scale solar PV systems The study will identify potential target stakeholders for capacity building on businesses related to the design, installation, operation and maintenance of mini-hydro and large scale PV systems. The study will also include preparation of database of service providers and comparison of domestic manufacturing versus import of various Mini-hydro components, building on preliminary recommendations (as in Section 3.5) for components that may represent high cost-savings if domestic manufacturing is developed. Strong emphasis will be on identifying areas of domestic production and service with high potential for reducing costs of Mini-hydro. The study should also emphasise strongly on identifying areas of domestic service provision with high potential for reducing costs of Large-scale Solar PV. It should be conducted by a consulting firm, preferably with international experts. As a part of the overall work, the study will be required to assess the outcomes and lessons learned from the EU institutional solar PV project recently closed in Nepal, looking in particular at issues with system sustainability. Findings regarding this institutional solar project have informed design of this aspect of RERL and are summarised in Section 3.5 Steps involved in carrying out this activity include: 1) Conduct of the desk study; 2) Stakeholder consultations; 3) Field work to collect and analyse data/information; 4) Discussion of draft report in a stakeholder workshop to get feedback for finalization; and, 5) Finalization of report. Output 4.2: Fully trained skilled and technically capable people available for project identification, feasibility studies and detailed design of mini-hydro and large-scale solar PV systems Activity 4.2.1: Preparation and adoption of a project development and design manuals for Mini-hydro projects. There exist numerous technical project design manuals from various national and international sources. A lot of learning from Project development and design manuals can be accumulated

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to develop this manual. Stakeholder participation and concurrence of key partners should be the basis for the implementation. Manuals will have technical guide to Mini-hydro project identification and development. Training modules will include site survey for Mini-hydro including geology, hydrology, canal alignment and powerhouse site identification. In addition there will also be modules on financing, financial analysis, construction planning and management, construction supervision. Community harmonization will be a special module to ensure community supports during project construction. Similarly, procurement of parts to achieve best cost/reliability mix and development of productive-use projects along with Mini-hydro project development will constitute some additional module. Manuals will also include guide to developing larger-scale productive use enterprises (likely natural resource based) in conjunction with Mini-hydro site development. Manuals will incorporate successful case studies as well as case studies illustrating challenges. Cases will preferably be based on Nepal-based projects and if possible include some case studies based on RERL Mini-hydro demo sites. Steps involved in implementing this activity shall include: 1) Conduct of desk study; 2) Stakeholder consultations; 3) Field work to collect and analyse data/information; 4) Preparation of the manual; 5) Stakeholder consultation on draft report in a workshop; 6) Peer review and feedback on the draft report; and, 5) Finalization of report. The study should be conducted by a consulting firm, preferably with international inputs. Activity 4.2.2: Conduct of capacity building trainings for developers, consulting firms, and relevant service providers for Mini-hydro projects Trainings target group will include developers, consulting firms, and relevant service providers for Mini-hydro projects and expects trainees to be fluent in using the materials included in the development and design manuals prepared in Activity 4.2.1. Trainings will be outsourced. Steps under the activity shall include 1) Preparation of the bid document and soliciting bids; 2) Analysis of bids and selection of consultants; 3) Follow-up and monitoring of training; 4) Analysis of feed-backs from participants of the training; and, 5) Improvement of the manual and guidelines. The project will rely on national expert inputs specifically in designing manuals. Activity 4.2.3Development of manuals on project development, system design and integration manuals for large-scale solar PV systems The technical project design manuals will draw upon international practices. Learning from the EU funded Renewable Energy Project (REP) experiences can also be assimilated. Manuals will have technical guide to Large-scale Solar PV project development and system design and integration including modules on assessing resources for energy generation and use of energy for productive applications. Manuals will also include guide to developing productive use enterprises (likely high value adding information technology or exquisite natural products like

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herbal essence extraction, etc.). In addition there will also be modules on financing, financial analysis, installation planning and management, and installation supervision. Community harmonization will be a special module to ensure community supports during project construction. Similarly, procurement of parts to achieve best cost/reliability mix and development of productive-use projects along with Large-scale Solar PV project will constitute some additional module. Manuals will incorporate successful case studies as well as case studies illustrating challenges. Cases will preferably be based on Nepal-based projects and if possible include some case studies based on RERL Large-scale Solar PV project demo sites. Steps under the activity shall include, 1) Conduct of Desk study; 2) Stakeholder consultations; 3) Field work to collect and analyse data/information; 4) Preparation of the manual; 5) Stakeholder consultation of draft report in a workshop; 6) Peer review feedback; and 7) Finalization of report. The study shall be conducted through a consulting service, preferably with international inputs. Activity 4.2.4Conduct of capacity building trainings for consulting firms, systems integrators, and relevant service providers for Large-scale solar PV projects Trainings will include making target group (consulting firms, systems integrators, and relevant service providers for Mini-hydro projects) fluent in using the materials included in the development and design manuals prepared in Activity 4.2.3. Trainings will be outsourced. Steps under the activity shall include 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Follow-up and monitoring of training;4) Analysis of feed-backs from participants of the training; and5) Improvement of the manual and guidelines. National expert inputs are specifically needed in the design of the manuals. Output 4.3: Fully trained skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services. Activity 4.3.1: Development of a set of pre-qualification criteria and methodology of certification for Mini-hydro manufacturers and Installers. The activity will be conducted by NRREP with assistance from local consultants. This will enable the AEPC to develop and use a nationally accepted pre-qualification and certification system. The steps to be carried out under this activity include: 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Follow-up and monitoring of consultants on preparation of procedure, stakeholder consultation and its finalisation; and 4)

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Implementation of the procedure. National expert inputs are specifically needed in the design of the manuals. Activity 4.3.2Acquisition of new mini-hydro technologies through technology transfer Acquiring new technologies and adapting them to suit to Nepalese condition will be fully based on inputs from stakeholders and analyses to be carried out. The technologies that will be acquired should contribute to significant reduction in Mini-hydro system costs and should enable the improvement of the pace with which systems are being built. Improved turbine design patent acquisitions, electrical governor design and adoption, synchronizing technologies for Mini-grid are identified as needed interventions. These will however need revalidation during inception phase of the project.

Steps to be carried out under this activity include: 1) Carrying out a stakeholder workshop to prioritize new technologies for support, using input from report from activity 4.1.1;2) Identifying suitable international partner(s) for carrying out the technology transfer; and 3) Developing a technology transfer programme for each identified technology, and implementation of the plan. Project Management Unit will provide support to manufacturers in international liaison regarding technology transfer. Activity 4.3.3: Development of quality assurance procedures, training curriculum and manuals for Mini-hydro manufacturing The quality assurance procedures developed should be in areas determined in Activity 4.1.1 and considered as priorities for Nepal. Consultants will consider international practices including from China and Europe and make recommendations so that the products meet the highest standards possible for Nepal. The development of quality assurance procedures for Mini-hydro and Mini-hydro parts manufacturers in collaboration with stakeholders including civil society, manufacturers and users should be completed at the earliest for efficient and effective project delivery with inputs from international experts. Implementation of the quality assurance system will require development of training curriculum and manuals and providing necessary training tools, which will be based on quality assurance procedures and can be locally sourced out. The activity will be conducted by NRREP with assistance from local consultants. Steps under the activity shall include 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Follow-up and monitoring of consultants on preparation of procedure, stakeholder consultation and its finalisation; and 4) Implementation of the procedure. Both international and national experts will be required in the design of the manuals. Activity 4.3.4 Conduct of quality assurance and standardization training

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The training will assist NRREP in enforcing the standards identified in Activity 4.3.3 for Mini-hydro manufacturing segments. Trainings target group will include consulting firms, manufacturers and installers of Mini-hydro. Trainings will be outsourced. Steps to be carried out under this activity shall include: 1) Preparation of the bid document and soliciting bids; 2) Analysis of bids and selection of consultants; 3) Follow-up and monitoring of training; 4) Analysis of feedbacks from participants of the training; and, 5) Improvement of the manual and guidelines. National expert inputs will be needed in the design of the manuals. Output 4.4: Fully trained skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system Activity 4.4.1: Development of training curriculum and manuals for quality assurance procedures, pre-qualification criteria and methodology of certification for construction and installation of Mini-hydro projects. The development of quality assurance procedures for Mini-hydro in collaboration with stakeholders including civil society, manufacturers and users should be completed for efficient and effective project delivery. Implementing of the quality assurance in installations will require development of training curriculum and manuals based on quality assurance procedures for providing necessary training. A local consulting service will be engaged with a defined terms of reference. Stakeholder participation and concurrence of key partners should be the basis for the implementation. A workshop will be held to achieve this participation and concurrence. The activity will be conducted by NRREP with assistance from local consultants. This will enable AEPC to make use of a nationally accepted pre-qualification and certification system. Steps to be carried out under this activity shall include: 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Follow-up and monitoring of consultants on preparation of procedure, stakeholder consultation and its finalisation; and 4) Implementation of the quality assurance procedures. National expert inputs are necessary for the design of the manuals (Ref Activity 4.2.1). Activity 4.4.2: Development of a pre-qualification criteria and methodology of certification for installation of Large-scale solar PV systems A local consulting service will be engaged with a predefined terms of reference. Stakeholder participation and concurrence of key partners should be the basis for the implementation. A workshop will be held to achieve this participation and concurrence.

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The activity will be conducted by NRREP with assistance from local consultants. This will enable AEPC to make use of a nationally accepted roster of pre-qualified installers of Large-scale solar PV systems. Steps to be taken under this activity shall include: 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Follow-up and monitoring of consultants on preparation of procedure, stakeholder consultation and its finalisation; and 4) Implementation of the procedure through nationally recognised CTEVT testing and certification procedure. National expert inputs and collaboration with CTEVT is required. Output 4.5: Fully trained, skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems Activity 4.5.1: Development of O&M training curriculum and manuals for Mini-hydro and conduct training based on these. The training curriculum shall put special emphasis on enhancing technical knowledge and skills for minor repairs and linkages to operate Mini-hydro with service providers for technical backstopping. The training will include formal and on the job training outsourced to capable institution(s). Trainings target group will include operators employed by Mini-hydro SPVs to operate Mini-hydro project functions. Trainings will be outsourced. Steps under the activity shall include 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Ensure training curriculum and manuals to be of quality resulting in effective training;4) Follow-up and monitoring of training;5) Analysis of feed-backs from participants of the training; and6) Improvement of the manual and guidelines. National expert inputs in designing manuals and conducting training will be required. Activity 4.5.2: Development of O&M training curriculum and manuals for large-scale solar PV systems and conduct training based on these. The training curriculum shall put special emphasis on enhancing technical knowledge and minor repairs skills and linkages to operate Large-scale solar PV project with service providers for technical backstopping. The training will include formal and on the job training outsourced to capable institution(s).Trainings target group will include operators employed by Large-scale solar PV project to operate the installation functions. This activity will be outsourced. Steps under the activity shall include 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Ensure training curriculum and manuals to be of quality resulting in effective training;4) Follow-up

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and monitoring of training;5) Analysis of feed-backs from participants of the training; and6) Improvement of the manual and guidelines. National expert inputs in designing manuals and conducting training. Activity 4.5.3: Development of business management training curriculum and manuals for Mini-hydro and large-scale solar PV systems. Scope of this capacity building effort will focus on enhancing skills for trainees on development of tariff system for households and businesses, billing and collection, and management of funds, importance of maintenance funds for future repairs. Curriculum will also include methodologies to encourage increased productive uses so as to increase mini-utility revenues. The training curriculum shall put special emphasis on financial management, client relations, and human resource management. Study visits of the establishment of a Mini-hydro or large-scale PV based mini-utility will also be conducted for the trainees to gain first hand experiences. Activity will be outsourced. Steps to be taken up under this activity shall include: 1) Preparation of the bid document and soliciting bids;2) Analysis of bids and selection of consultants;3) Ensure training curriculum and manuals to be of quality resulting in effective training; and 4) Analysis of feed-backs from peer reviewers and improvement of manuals. For this activity, national expert inputs in designing manuals and conducting training will be required. Activity 4.5.4: Conduct of training on business management for Mini-hydro and large-scale solar PV systems. This will include formal and on-the-job training outsourced to capable institution(s) to carry out the training and will be based on based on materials prepared in Activity 4.5.3.Trainings target group will include managers employed by Mini-hydro SPVs and Large-scale solar PV project to manage the installation functions. Trainings will be outsourced. Steps that will be carried out under this activity shall include: 1) Preparation of the bid document and soliciting bids; 2) Analysis of bids and selection of consultants; 3) Follow-up and monitoring of training; and 4) Analysis of feed-backs from participants and improvement of manuals.

3.4 Key indicators, risks and assumptions

The detailed indicators of RERL are given by output in the Project Results Framework in Part4of this document. Selected key indicators of the project are given in Table 37.

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Table37: Key Project Indicators and Targets

Indicator End of Project

Target

Electricity generation by end of project (EOP) 26.8GWh/Year

Avoided GHG emissions (ktCO2) by end of project (EOP) 21.4 ktCO2/year

Application for financial (e.g. subsidy, credit) and technical support to develop mini‐hydro submitted to AEPC

More than 10 MW

Outside equity investment in demonstration projects USD 1 million

Commissioning of mini‐hydro projects via the PPP model 1 MW

Total MWs of mini hydro achieving financial closure in project period 8 MW

New micro‐hydro of over 60 kW installed with TA support of project 2 MW

Agreements among communities for mini‐grid cooperation At least one

Financially feasible mini‐grid projects with load factor increased two‐fold Minimum 300 kW

Financial closure for five large scale PV projects financed by PPP model 500kW

Total MWs of large scale PV projects installed 2.5 MW

Status of credit facility for mini‐hydro manufacturers Operational

Status of financing mechanism to support mini‐hydro projects Operational

Additional load factor due to productive uses at demo sites At last 20%

Domestic manufacturing capacities to support mini‐hydro components At least 3 MW

Load factor increase due to productive use promotion 50%

Discussion with stakeholders implies that, while presenting substantial challenge, the proposed project is feasible. The overall project risk is moderate. Major areas of risk include the external investment scenario and political environment, the response of the private sector and banks to the opportunity to invest in off-grid community renewable energy electrification projects, effectiveness of project management and stakeholder coordination under the NRREP umbrella, and the ability to maintain project targets in spite of possible changes in NRREP targets. Major risks and mitigating actions are listed in Table38.

Table38: Major Project Risks and Mitigating Actions

Risk Level of Risk

Mitigating Action

1. Deterioration of investment environment in Nepal L

Difficult to mitigate, but off‐grid projects may shift their focus to mobilising investors from the local area of the particular installation.

2. Political instability at local or national level

M

Involvement of all relevant interest groups, with a bottom up approach including marginalized groups. Demonstration sites carefully selected to ensure strong local governance. National level problems more difficult to mitigate, but off‐grid projects are less affected than on‐grid projects.

3. Lack of interest on the part of private sector in investing in off‐grid projects

M Outreach to private sector. Initial private sector parties may be triple bottom line funds to assist in demonstrating commercial viability to other private sector parties.

4. Lack of willingness of banks to lend to off‐grid projects M

Outreach to banks. Project includes training of banks to make them aware of potential commercial viability of projects.

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5. Project management may focus more on its traditional strength, i.e., micro‐hydro and solar home systems

M

Project management arrangements well defined. Project Executive Board, National Project Director, and National Project Manager well chosen.

6. NRREP priorities change, affecting project strategy and targets

L Strong management arrangements and on‐going liaison with other NRREP donors.

7. Stakeholder coordination: too many stakeholders prevent efficient decision‐making


8. Demo sites poorly chosen L

Specific selection criteria and short list developed during project formulation stage

9. Change in flow of rivers, influencing load factor of hydropower plants

L Careful planning and design of MHPs that address worse‐case scenario for next 20 years

10. Lack of interest by local people in productive applications

L

Provision of strong support to local people in enterprise development. Experience to date has already shown strong interest of local people in support for developing enterprises and achieving market linkages.

11. Project funding to be leveraged will not become available.

L

The risk would be low because two banking institutions have already pledged their support in writing to contribute the leverage financing, though amount is not stated. Outreach to banks and financial institutions and the local governments. Providing strong proof of financial and commercial feasibilities.

12. Government not implementing any effective policy to encourage renewable energy investment from the private sector

L

The project and AEPC will work closely together to ensure that measures are brought into practice through policy revisions and legislation where necessary. Close coordination with the pertinent GoN policy makers will be ensured to facilitate the approval and enforcement of the formulated policies. Several advocacy and lobbying activities will also be carried out that are aimed at securing the approval of the proposed policy recommendations that are supportive to the promotion of large size hydro‐ and solar power generation systems in the rural areas. Considering the current initiatives by the government and development partners in promotion and development of renewable energy projects, the risks of government not initiating policy reforms is at a minimum. NRREP and CREF are being established and these will provide additional safe guards.

Note: L=Low; M=Medium and H=High Key assumptions beyond the control of the project are related to some of the risks mentioned above. They include: (1) The banks and private sector are interested in financing commercially viable off-grid renewable energy power projects; (2) The investment environment and the local and national political environments remain conducive to project implementation; (3) The project will be driven forward towards the objectives by strong leadership from the National Project Manager and strong support of the National Project Director; (4) Local people are interested in productive applications and possess the capacity to benefit from project efforts to

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support them in enterprise development and achievement of market linkages; (5) AEPC remains supportive of the project; and (6) CREF funds are available to support capacity targets.

3.5 Financial modality (co‐financing)

The project assists the projects through easing availability of financing and improving use of energy produced by promoting productive use. The project envisages availability of existing financial supports (subsidy) for its intended projects. By establishing financing instruments it also intends to convince and attract BFIs to invest in the renewable energy projects of NRREP in general and RERL projects in specific. During the course of project formulations, at least two of the major commercial banks have pledged support and willingness to participate in the project through financing. The availability of subsidy supports, other supports from AEPC and collaboration/integration with NRREP is assured by the AEPC through its co-financing letter, which is also provided in Annex 1.

Summary of UNDP-GEF RERL Project Financing (USD)

Source Year 1 Year 2 Year 3 Year 4 Year 5 Total

UNDP (Cash) 358,293 668,702 344,451 308,584 319,968 2,000,000

GEF 686,810 1,781,069 350,667 118,027 63,429 3,000,000

UNDP and GEF Funds 1,045,103 2,449,771 695,118 426,611 383,397 5,000,000

Unfunded (to be leveraged) 47,995 46,513 44,105 39,712 66,605 244,930

Co‐financing – CREF 3,472,150 5,663,600 5,857,050 6,437,400 8,882,300 30,312,500

Co‐financing –Banks (to be

leveraged) 2,033,980 3,879,475 3,842,260 4,060,035 5,785,960 19,601,710

Co‐financing ‐ DDC/VDC/Private

Sector (to be leveraged) 496,422 912,063 896,114 989,447 1,353,844 4,647,890

Other Funds 5,990,747 10,501,651 10,639,629 11,526,600 16,088,809 54,807,030

Grand Total 7,036,306 12,951,666 11,334,997 11,953,462 16,471,859 59,807,030

3.6 GEF Incremental Reasoning: Cost Effectiveness

While there are large size hydroelectric power generation plants in Nepal, RE-based electricity generation have not yet widely been applied to serve rural areas in Nepal. About 73% of the people living in these areas currently have no access to electricity. Reasons for the low level of utilization of RETs are, amongst other, lack of awareness of renewable energy applications, lack of renewable energy investment policies and incentive schemes, lack of access to finance, incomplete policy frameworks and insufficient capacities to manufacture, install and maintain renewable energy systems. The GoN is initiating various activities to address these issues. However, the barriers to creating RE/low carbon investment environment will be persistent. In order to enhance and expand the GoN efforts and with the GEF’s interventions, this project will facilitate and promote the use of renewable energy and low-carbon technology options in rural Nepal. This support is sought to further enhance the baseline efforts of the GoN in promoting RE-based power generation, improving energy access through the provision of RE-based electricity in rural areas; and in removing the barriers to the widespread use of renewable energy technologies (RETs) for electricity generation. Without the GEF support, the potential significant global environmental benefits from the application of RET systems will not be realized. If left alone to its limited resources and capacity, the GoN would not be able to substantially remove the current barriers that hinder the growth of RETs. The

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promotion of renewable energies in rural areas as an effective policy and institutional instrument for achieving the country’s energy and poverty objectives would also be of limited success if the current barriers remain in place. Being aligned and in concordance with the objective of the NRREP, the proposed UNDP-GEF RERL project will complement and supplement the NRREP, and contribute to the achievement of the program’s hydropower, solar PV and PURE targets, as well as to the country’s GHG emission reduction targets. The project will focus on power generating off-grid renewable energy technologies. Its core strategy will consist of four interrelated concepts: (1) promotion of larger-scale, less-disseminated systems, (2) achievement of commercial viability and private sector financing of up-front costs, (3) achievement of financial sustainability (cash flow for repairs and maintenance), and (4) establishment of productive use enterprises to raise system revenues and generate livelihood benefits. These concepts are brought together in the project design to strategically address the key barriers for greatest potential impact. The key barriers are related to issues of affordability of up-front costs of systems (due both to high costs and lack of capital), financial sustainability (due partly to low utilization), and technical capacity and awareness for less disseminated, but high potential technologies. The project objective is the removal of barriers to increased utilization of renewable energy resources in rural Nepal. To achieve this objective and consequently support economic, environmental, and social development of people in the rural areas and reduce GHG emissions, the approach adopted by the project proponents is to demonstrate other schemes for making more effective and significant use of the country’s two major RE resources (hydro energy and solar energy) for power generation, and facilitating the adoption and widespread use of such schemes. The other alternative is to just focus on the usual and proven hydro- and solar energy schemes that have been implemented in rural areas of the country and try to come up with interventions that will address the current issues/problems in their implementation. Such approach will also achieve the project objective but at a much lower levels of intensity (in terms of RE resource utilization and GHG emission reduction), effectiveness, benefits, and innovation in the context of sustainable electricity provision in rural Nepal. The proposed project will promote the implementation of mini-hydro and large-scale solar PV systems to provide access to electricity in rural Nepal for livelihood and productive end-uses. The cost effectiveness of this approach of increasing the utilization of RE resources in rural Nepal as compared to the usual system is based on: (a) economies of scale with the installation of larger size systems; (b) increased electricity generation through enhanced load factor by increasing consumption levels by promoting livelihood and productive end-uses. Nepal is largely dependent on hydro and solar energy sources for power generation. Given these limited choices, Nepal has mostly relied on small-sized Micro-hydro and Solar Home Systems for meeting the rural energy needs. As an improvement to such baseline approach to rural energy provision in the country, the more cost effective approach of deploying larger size and higher load factor hydro and solar power systems serving social and productive activities in rural areas is the one that is applied in this proposed GEF project. In the adopted approach, the hydro- and solar power generation schemes are at relatively lower investment cost relative to the business-as-usual (BAU) rural electricity generation schemes. The Mini-hydro pilot projects have unit capital cost in the range of USD 3,800-4,700 per kW. This compares favorably with the usual micro-hydro systems that have average investment cost of USD 8,000 per kW. Similarly, the generation cost for solar home systems of about USD 6,750 per kW is higher than that of large-scale Solar PV systems chosen at USD

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5,000 to 6,000 per kW. In this case the adopted approach also demonstrates capital cost-effectiveness as a result of economies of scale. In addition, the project approach also adds to cost-effectiveness through increased load factor with increased demand for electricity from households and SME sectors. It is expected that the project approach will result in improvement in the load factor of the larger sized hydro- and solar power systems from 20% (BAU approach) to 52% resulting in an additional renewable electricity generation of 26.795 GWh per year. The annual electricity generation will increase from 17.4 GWh to 44.195 GWh supporting productive end-uses through MSMEs. There will be two-fold benefits; decrease in the generation cost and increase in the revenue realization. Further, an annual incremental GHG mitigation potential of 21,436 tCO2 is expected to be realized from the adopted project approach, i.e., 13,939 tCO2 from the BAU scheme as compared to 35,375 tCO2 from the project approach. Considering just the direct CO2 emission reductions from the demonstrations, the unit abatement cost (GEF $/ tCO2) from the BAU schemes would be 2.5 times that of the proposed schemes under this GEF project. The lifetime direct GHG emissions avoided, attributable to the investments made during the project's supervised implementation period (5 years), totaled over the respective lifetime of the investments on the mini-hydro and large-scale solar PV projects (15 years) is 37,617 tCO2. The lifetime direct post-project emissions avoided, attributable to the investments made outside the project's supervised implementation period, but supported by the technical assistance and financial facilities put in place by the GEF project, totaled over the respective lifetime of the investments (15 years) is 131,659 tCO2. Likewise, the lifetime indirect emissions reductions, attributable to the long-term outcomes of the GEF activities that remove barriers, such as capacity building, innovation, catalytic action for replication is estimated to be 338,553 tCO2 and 282,852 tCO2using bottom-up and top-down approach respectively. Taking all projects into account (demonstration projects and post demonstration projects including indirect impacts) and as per the indirect bottom-up approach it is 507,829 tCO2; CO2avoidance cost per tonne comes to around USD 9.85. The project’s cost effectiveness will be tracked using the Tracking Tool for Climate Change Mitigation Projects developed by GEF.

3.7 Sustainability and Replicability

Focusing on sustainability of the UNDP-GEF RERL project and ensuring that it can be replicated has been a major focus while designing the project. This has been done in a number of ways. Firstly, the Project is completely aligned with the objectives and priorities of the Government of Nepal. It will make a significant contribution to the Government meeting its targets for off-grid hydropower development in the renewable and rural energy sector through the implementation of NRREP. Secondly, the project emphasizes the enactment of policies and regulations, establishment of suitable financing mechanisms, capacity building and places particularly strong focus on

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productive end use promotion. These are the major intervention areas identified in numerous studies and also in the UNDP-GEF RERL situation analysis for sustainability of the mini-hydro projects. Thus, the UNDP-GEF RERL project will help establish off-grid mini-hydropower development as a viable sector for public-private partnership for sustainable development going forward. Thirdly, the project has taken special care not to top up any subsidy or facilities being provided by the government. During the implementation of the project, if it is found that these subsidies or facilities needed to be revised, the project will support AEPC to revise the respective policy or regulation for the sector. Project will convince the policy makers and financing institutions that larger projects are better in delivering sustainable energy access through attracting financing institutions and equity investors rather than providing additional incentives to a limited number of projects. Fourthly, the project relies on private-sector led project construction and operation under PPP modality through formation of a SPV which will rely on increase in revenue from higher load factor resulted from the project interventions leading to expanded and productive electricity end-uses. Since, all financial transactions are done at market rates with very little disturbance to operation of market, the project modality is financially sustainable. Finally, the progression in the phases of the project from demonstration, to post demonstration projects has been consciously adopted to ensure sustainability and replicability. The project will provide full support to the demonstration projects, where the various innovations in policy measures, financing mechanisms, capacity building and productive end use promotion will be thoroughly tested. Based on the lessons learnt, the project will then provide mostly advisory support to the post demonstration projects, with AEPC/NRREP taking on major project management roles. It is expected that when the UNDP-GEF RERL project is completed, the experiences and expertise generated by the UNDP-GEF RERL project will be completely internalized into AEPC. Furthermore, financial institutions will have internalized the innovative financing mechanisms and replicate it in other projects. Similarly, service providers will have internalized the capacity building and business development services for further replication.

3.8 Stakeholder Analysis and Coordination

Potential stakeholders for the UNDP-GEF RERL project from the government, non-governmental organizations, private sector groups who will have a role in the successful implementation of the Project have been identified. Inputs from literature review, meetings, workshops and individual interactions used to ascertain their role in the project. Roles of various institutions are summarized in Table39. The Alternative Energy Promotion Centre (AEPC), the project executing agency, will be establishing Central Renewable Energy Fund (CREF) for delivery of subsidies and credit support to the renewable energy sector in Nepal. GEF-RERL project’s Component # 3 will

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support that platform via its activities, as described earlier. CREF will be responsible for the selection of participating banks whereas GER RERL project will assist CREF in the preparation of terms of reference, bid documents to call for proposals from nationally reputed Banks and FIs to administer funds, evaluation of the proposals to shortlist potential fund operators and negotiation and selection of fund administrators. It may be important to note that the project plans to make use of existing institutional structure to expand the capacity. A separate fiduciary oversight of funds is not found to be necessary as the project is going to use BFIs which are closely regulated and monitored by the Central Bank. In addition, the CREF route for fund flow will be subject to Auditor General’s monitoring. Experience of CleanStart for selecting banks will be sought during this process. The fund will work as the risk sharing mechanism for the bank /financial institution and will stimulate substantially higher credit availability for the sector. The leverage will start from 100% and is expected to increase gradually. The GEF INV fund for this purpose is USD 950,000.

Table39: Roles of Various Institutions Category Stakeholder Role in Project Remarks

Governmen

t Institutions

National Planning Commission (NPC)

Ensuring inclusion of project in national plans and programs

NPC, chaired by the Prime Minister, is the advisory body for formulating development plans and policies of the country

Ministry of Finance (MOF)

Endorsement of Subsidy Policy; Representation in NRREP Steering Committee; Coordinate with development partners at macro level

MOF is the central authority of Government of Nepal responsible for maintaining both micro‐ and macro‐economic stability in the country. This includes enhanced mobilization of both internal and external resources.

Ministry of Environment, Science and Technology (MOEST)

Coordination with other Ministries Representation in Project Steering Committee

MOEST is responsible for promoting sustainable development of country through environmental protection. This includes coordinating adaptation and mitigation programs to minimize the negative impacts of climate change. AEPC comes under the purview of MOEST.

Ministry of Energy (MOE)

Coordination to ensure avoidance of duplication Licensing of project, where needed

MOE is responsible for developmentof policies and plans for conservation, regulation and utilization of energy, especially electricity from the country’s water resources.

Ministry of Federal Affairs and Local Development (MFALD)

Coordination with local governments Support in resource mobilization and local permits etc.

MFALD is responsible for coordination, cooperation, facilitation, monitoring and evaluation of activities undertaken by local bodies (75 District Development Committees, 58

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Category Stakeholder Role in Project Remarks Municipalities and 3915 Village Development Committees)

Department of Cottage and Small Industries (DCSI)

Support for enterprise development and linkages

DCSI, with representation in all 75 districts, promotes the development of cottage and small industries enhancing their industrial productivity. It also works towards creating a congenial environment for investment in such industries.

Semi‐governmen

tal Institutions

Alternative Energy Promotion Centre (AEPC)

Project executing agency Mobilize resources Coordinate with other stakeholders Support coordination with development partners

AEPC is a government institution under MOEST responsible for developing and promoting renewable energy technologies in Nepal

Nepal Electricity Authority (NEA)

Coordinate among grid and off‐grid electrification Future collaboration for grid connection of Mini Grid and Mini Hydro

NEA is the Government owned national electric utility responsible for most of the electricity generation, transmission and distribution in Nepal

Renewable Energy Test Station (RETS)

RE standardization, testing and monitoring

RETS is an autonomously governed laboratory for testing and measuring the quality of solar PV components. Establishment of test facilities for testing solar thermal, bio‐mass/bio‐gas, micro‐hydro etc. is being considered.

Council for Technical Education and Vocational Training (CTEVT)

Collaboration for skill based training

CTEVT is a national autonomous body committed to the production of technical and skilful human resources in the country. 53

Non‐Governmen

tal Organizations Local NGOs

Collaboration and synergy regarding RE and RE based enterprise development at local level

National NGOs Collaboration and synergy regarding RE and RE based enterprise development at national level

International NGOs Collaboration and synergy regarding RE

53It focuses on policy formulation, quality control, preparation of competency based curriculum, development of skill standards of various occupations and skill testing, research and training needs assessment etc.

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Category Stakeholder Role in Project Remarks and RE based enterprise development at national and international level

Community Based Organizations

Forest users groups, cooperatives etc.

Financing of RE and RE based productive end uses Raw materials for productive end uses Member mobilization for RE utilization

Program

mes

National Rural and Renewable Energy Programme (NRREP)

Project complements the efforts of NRREP to enable it to meet its renewable energy targets, thereby helping reduce GHG emissions and contribute to the socio‐economic development of rural Nepal

NRREP, implemented by AEPC, is a single programme modality. It aims to improve the living standards of rural women and men, increase employment of women and men as well as productivity, reduce dependency on traditional energy and attain sustainable development through integrating the alternative energy with the socioeconomic activities of women and men in rural communities.

UNDP‐Micro Enterprise Development Programme (MEDEP)

Collaboration and synergy regarding electricity based productive end uses

MEDEP helps low‐income families become entrepreneurs, promote the development of their enterprises, and then create a strong partnership between consumers of micro‐enterprise products and services and local service delivery institutions.

UNCDF‐CleanStart Collaboration and synergy regarding financing (micro‐) of RE systems, productive use uses etc.

CleanStart54

Scaling‐up Renewable Energy Programme (SREP):ADB, WB

Collaboration and synergy regarding financing of RE systems, productive end‐uses etc.

SREP55 is a targeted program of the Strategic Climate Fund (SCF), which is one of two funds within the Climate Investment Funds (CIF) framework.

54CleanStart, to be implemented by AEPC under the framework of NRREP, supports capability strengthening of financial service providers (FSPs) to provide microfinance for clean energy to low-income households and micro-entrepreneurs, provides technical assistance to remove barriers to the sustainable deployment of the above technologies, creates awareness and of the potential for microfinance to stimulate adoption of clean energy, and advocate for enabling policy and business environment to expand microfinance for clean energy. 55In Nepal, SREP will leverage complementary credit, grant and private sector equity co-financing, for scaling up energy access using renewable energy technologies, for poverty reduction, gender and social inclusiveness and climate change mitigation. It will also work to ensure sustainable operations through technical assistance and capacity building.

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Category Stakeholder Role in Project Remarks UK/UNDP‐Nepal Climate Change Support Programme (NCCSP)

Collaboration regarding productive uses of electricity as a potential area for climate mitigation and adaptation

NCCSP works to enhance the capacity of the Government of Nepal to implement effective climate change responses.

UK‐Nepal Market Development Programme (NMDP)

Collaboration on enhancing market linkages for products out of electricity based enterprises

NMDP works to improve the incomes and growth for poor and disadvantaged people in key sub‐sectors within agriculture and other rural markets

Developmen

t Partners

UNDP

Executing Agency

Project promoter

Facilitation of linkages with other UN agencies etc.

Facilitator of the UNDP‐GEF RERL Project

GEF Funding the project

World Bank, Asian Development Bank

Collaboration for financing (SREP, CREF)

KfW Synergy in financing of RE systems (institutional solar)

KfW banking group is a German government‐owned development bank

GiZ Supports NRREP through TA

GiZ supports the German Government in achieving its objectives in the field of international cooperation for sustainable development

Norwegian Government

Promoter of NRREP Danish Government

UK Government – DFID

Companies an

d their

Associations

Nepal Micro Hydro Development Association (NMHDA) and qualified RET installation companies

Its members will be beneficiaries of manufacturer capacity enhancement efforts of the Project

Supply of equipment for the demonstration and other projects

NMHDA is the national association of micro hydropower development companies in Nepal.

Solar Manufacturers ’ Association of Nepal (SEMAN)

SEMAN is the national association of solar PV companies in Nepal

Financing and

insurance

Institutions

National commercial and development banks

Financing of RE systems and productive end uses

Micro‐financing institutions and Cooperatives

Financing of RE based productive end uses

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Category Stakeholder Role in Project Remarks Insurance companies

Insurance of RE systems and electricity based enterprises

Development focused impact funds

Source of seed funding, equity and credit enhancement products

Local Institutions and their Associations

District Development Committees (DDCs)


DDCs are district level local governments in Nepal

Village Development Committees (VDC)


VDCs are village level local governments in Nepal

Association of District Development Committees Nepal (ADDCN)

Awareness and advocacy for increased utilization of RE and RE based productive end uses in DDCs Policy Advocacy

National Association of VDCs in Nepal (NAVIN)

Awareness and advocacy for increased utilization of RE and RE based productive end uses in VDCs Policy Advocacy

3.9 Global Environmental Benefits

The contribution to sustainable development and environmental benefits of renewable energy systems are well established. Off-grid power generated by mini-hydro and solar PV systems provides rural households with electric power for lighting, milling, pumping, and other productive end-uses. The global environmental benefits accrue as a result of: • Reduction in kerosene consumption for household lighting, • Reduction in diesel consumption by switching use of diesel power to electricity in agro-

processing mills and other productive uses where exist, • A limited reduction in fuel wood consumption for household cooking, water heating and

space heating using efficient technologies like rice cookers and heating kettles (As more power is available from mini-hydro compared to from micro-hydro, this behavioural change is expected at higher level in mini-hydro service areas.)

• Reduction in use of dry cells used to operate radio and torchlight (flashlights), leading to reduced chemical pollution of the local environment and also reducing the health hazard resulting from the exposure and contact with these chemicals

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Both mini-hydro and large solar PV systems have the potential to attract carbon financing as they qualify as proven technologies. Along with global environment benefits, they also contribute to other areas of the Sustainable Development Agenda in the following ways: • Along with the public and private sector co-players, the community also gets empowered

through involvement in the projects from planning to construction and operation phase. • The projects create temporary jobs (construction) and long-term employment (operation),

with skill enhancing opportunities for the local people not only in the energy project but also in electricity-based enterprises.

• Moreover, the market of mini-hydro and large solar PV components will flourish creating conducive business environment for local manufacturers, suppliers and service providers thereby creating jobs for many.

As required by the methodologies specified by UNFCCC for CDM for Type 1 Small Scale Project, it is possible to establish the baselines showing dependence upon imported fossil fuels and unsustainable biomass and its continuation under business as usual scenario. Similarly, methodology also specifies barrier analysis in terms of financial, technological and social barriers. Therefore, considering that mini hydro and large solar PV systems qualify as carbon projects under CDM regime, the potential emission reductions have been estimated and the results have been discussed in Annex 4. The RERL Project plans to install 1MW of mini-hydro demonstration project and support an additional 9 MW of regular large micro-hydro (2 MW) and mini-hydro (7 MW) projects. Since the total planned installed capacity is 10MW, which is less than 15MW, small scale CDM methodology AMS I.A. is applicable for this category of technology. A new small scale methodology – AMS I.L -- is applicable for calculating emission reduction from large solar PV systems of up to 500 kWp, such as those to be promoted under the RERL Project. The potential emission reductions is estimated and presented in Annex 4. It is estimated that when all the systems (demo and post-demo) come into operation, a total of about 22,040tCO2will be abated annually over the period of 15 years attributable to productive applications of the energy. Considering lifetime of the systems to be 15 years for both the mini-hydro and the large scale solar systems, the RERL supported projects will contribute to the reduction of 330,604tCO2. The RERL demonstration projects alone will be responsible for abating 37,585tCO2 (Table 40) whereas the remaining 293,019tCO2reduction will be from the post-demo projects supported (Table41).

Table40: Emission Reductions from Demonstration Projects

SN Projects MW

Total Emission Reduction (tCO2e) during

First 15 years after commencement of

GEF support

15 years life time of

projects

1 Mini hydro demonstration projects 1.00 22,810 28,512

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2 Micro hydro project - - -

3 Solar PV village electrification projects 0.10 1,689 1,809

4 Institutional solar PV projects 0.10 1,689 1,809

5 Solar PV pumping 0.30 4,908 5,454

Total 1.50 31,095 37,585

Table41: Emission Reductions from Post-demo Projects

SN Projects MW

Total Emission Reduction (tCO2e) during

First 15 years after commencement of

GEF support

15 years life time of projects

1 Mini hydro demonstration projects 7 121,651 199,584

2 Micro hydro project 2 49,421 57,024

3 Solar PV village electrification projects 0.6 8,008 10,922

4 Institutional solar PV projects 0.7 9,526 12,744

5 Solar PV pumping 0.7 9,102 12,744

Total 11.00 197,708 293,019

However, it should be noted that as the projects will be constructed/installed and commissioned at different points of time, the actual volume of emission reduction in each calendar year will be different than shown above as total volume. Following Table42presents Emission Reductions from all projects during first ten years of RERL project.

Table42: Emission Reductions during first ten years of RERL project (All Projects)

SN Projects MW

Total Emission Reduction (tCO2e)

during first 10 years of RERL

1 Mini hydro projects 8 68,429

2 Micro hydro project 2 30,413

3 Solar PV village electrification projects 0.7 5,453

4 Institutional solar PV projects 0.8 6,364

5 Solar PV pumping 1 7,944

Total 12.50 118,602

However, “GHG Benefits of GEF Projects: Carbon Dioxide Calculator” methodology, which is used for developing the GHG tracking tool has different method for emission avoided estimation for post demo and indirect benefits. Based upon this, the lifetime direct post-project emissions avoided, attributable to the investments made outside the project's supervised implementation period, but supported by the technical assistance and financial facilities put in

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place by the GEF project, totaled over the respective lifetime of the investments, which is taken as 15 years. The emissions avoided have been estimated for three periods (i) CEO Endorsement Target, which includes the total installed capacity of 12.5 MW (1.8 MW of commissioned capacity and 10.7 MW of capacity achieving financial closure by the end of project); (ii) Mid-term results, which include total installed capacity of 0.75 MW (0.5 MW of mini-hydro and 0.25 MW large solar PV); and (iii) Terminal Results, which include total commissioned installed capacity of 1.5 MW (1 MW of mini-hydro and 0.5 MW of large solar PV). The estimates of GHG benefits of CEO Endorsement Target assumes lifetime direct emission reduction from 12.5 MW of installed capacity, and for the lifetime indirect emissions reductions, attributable to the long-term outcomes of the complete GEF activities that remove barriers, such as capacity building, innovation, catalytic action for replication, policy formulation, etc. The life time direct emission avoided for this scenario is estimated at 321,540 tCO2 and the lifetime indirect emission reductions are expected to be 2,266,857 tCO2 and 1,538,712 tCO2 using bottom-up and top-down approach respectively. Further, the life time direct post project emissions avoided are estimated at 1,189,698tCO2. The terminal results indicate the status at the end of the project, and the GHG mitigation estimates are made with respect to commissioned installed capacity of 1.5 MW. The estimated emission reductions for this scenario are expected to be 37,585 tCO2 of lifetime direct emissions and 131,548 tCO2 of lifetime direct post project emissions. Likewise, the lifetime indirect emissions reductions are estimated to be 338,265 tCO2 and 293,058 tCO2 using bottom-up and top-down approach respectively. Since the terminal results are expected to be easily verifiable, the cost effectiveness is performed for these estimates. Taking all projects into account (demonstration projects and post demonstration projects including indirect impacts) and as per the indirect bottom-up approach, the total GHG emission avoided is estimated at 507,398 tCO2. This will give rise to an estimated CO2 abatement cost of about USD 5.9 of GEF resources /tonne of CO2 emissions avoided. If the UNDP co-financing of USD 2 million is added then the CO2 abatement cost per tonne comes to around USD 9.85. These estimates prove the cost effectiveness of the proposed project. The estimate of GHG mitigation benefits for mid-term results is limited to lifetime direct GHG emissions avoided. This is estimated at 18,793 tCO2 for an installed capacity of 0.75 MW.

3.10 Cross‐cutting issues

3.10.1 Genderissues

As access to technology is power, it is important that power relationships and ownership be balanced between men and women and between and within different groups of population. The key issue is how to provide equal access to resources and opportunities to women and men in all the population groups as their right to basic needs and livelihood. Nepalese society is characterised by gender and social systems, which are based on gender and caste hierarchy

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following a patriarchal value system. This determines the roles and relationship between women and men, and between different groups. In the energy distribution, it also influences the share, ownership and benefits accruing to women and men in different ethnic groups and between different disadvantaged groups. UNDP’s REDP programme for past 1 ½ decade was implemented to overcome such gender and social cultural constraints to ensure equal access in the renewable energy sector through mainstreaming of Gender and Social Inclusion (GESI). Women’s and men’s access and control over resources

Labour is considered productive in Nepal but marred by migration of productive population, predominantly male, for better employment opportunities abroad resulting in lack of male labour in many villages. Nepal’s rural economy is agricultural based and most tasks related to cultivation are segregated by gender. For instance, women predominately are responsible for rice plantation whereas it is always the men that plough the fields. With regards to labour for the construction of stoves, the labour for carrying out various tasks in constructing a stove is shared by women and men. Community participation in constructing energy projects such as micro hydro, when it comes to construction labour; it is shared among men and women. During the Project operation, the opportunity to act as technicians who will construct and install the power projects is dominated by men. Government is implementing affirmative policy in training of micro hydro operators etc. for female. The collection of fuel wood from the forests is determined by gender since mostly women take up this task and therefore it is implicit that women would continue to undertake this. Introduction of energized rural industries such as rice mill, flour mill, oil expelling, etc. could on the one hand, reinforce or ease drudgery of women and girl children but on the other hand, could also improve the rural economy benefitting both men and women.

Participation in decision-making process

Women in many communities in Nepal participate in decision making, but in majority of communities decision making domain lies mainly with male member of society. Generally, Nepalese women are in disadvantaged position as far as taking decisions in the household is concerned. In the public sphere too, men dominate in political, bureaucratic, industrial and trading businesses. Women though represented in many committees such as water users committees for drinking water and irrigation are mostly passive and support decisions that men take. Though the rules and procedures in many development activities funded by UNDP and other donors mandatorily require strong women participation, it is necessary to create the environment for wholesome participation of women in decision-making to address the strategic gender needs of women.

Gender inclusion in project interventions

Basically the objective of the RERL project with regards to GESI is to build an equitable and gender inclusive society by ensuring equal rights to women of all castes, creed and regions in the social, political and economic aspects of national development.

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In the current context, gender mainstreaming refers to empowering women to engage in the enterprises. Women can own and manage the businesses and involve in various stages in the production and marketing. Encouraging women’s participation is justified from the perspective that they need positive discrimination for overall development. Engaging women in local businesses has become important also because of the fact that large number of male members of households have migrated abroad for earnings. There are numerous cases which show that with proper knowledge and skills, women have successfully managed businesses. Therefore, gender sensitization is essential at every stage of business promotion from awareness creation to capacity building and business establishment and operation. In promoting energy-based enterprises for the sustainability of Mini-hydro and Large-scale solar PV projects, aspects regarding Gender and Social Inclusion (GESI) should be integrated. Various other affirmative actions would require to be identified to ensure women and marginalised people are able to participate in capacity building opportunities, do their own enterprise or are given priority in employment opportunities (at least 33%) (Refer to Activities 3b.5.3, 3b.5.6, 3b.5.7, and 3b.5.8). The Government’s Renewable Energy Subsidy Policy also has affirmative provisions for single women and widows as well as marginalised communities. UNDP-GEF RERL has further given thrust to this effort by provisioning working capital support to women and marginalised/vulnerable groups in demonstration projects (Activity 3b.7.1)

3.10.2 Poverty

Regarding poverty, about 25% of Nepal’s populations live below the poverty line most of who reside in rural areas [Living Standard Survey, CBS 2011]. The Project is expected to contribute to poverty reduction through savings on women’s time, increasing employment opportunities, and access to better health facilities. Consequently, villagers will have less days of sickness thereby enhancing their productivity.

3.10.3 Othersocio‐economicbenefits

The RERL project is expected to provide socio-economic benefits to communities through extensive promotion of productive end-uses of energy in rural areas where women will be given preference. The cash incomes from productive uses are expected to increase substantially thereby empowering women financially as a mean to overall social and economic empowerment. People’s time mainly that of women and children spent on many of household chores will be saved. Women could potentially use that time for other productive uses further.

Under the project, promotion of productive end-uses based on locally available raw materials and inputs would require higher level of skills. Project is designed with a component where capacity building and market development is given very high priority. As a result the employment opportunities are expected to increase considerably.

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4 Project Results Framework and Detailed Project Planning

4.1 RERL Project Results Framework

This project will contribute to achieving the following Country Programme Outcome as defined in CPAP or CPD: Vulnerable groups have improved access to economic opportunities and adequate social protection: (Output: Vulnerable groups have increased access to energy services and sustainably managed natural resources.) Country Programme Outcome Indicators: Number of households in remote areas connected to micro-hydro or mini-hydro energy services. Number of new job holders. Primary applicable Key Environment and Sustainable Development Key Result Area (indicated in bold below): 1. Mainstreaming environment and energy OR 2. Catalysing environmental finance OR 3. Promote climate change adaptation OR 4. Expanding access to environmental and energy services for the poor including women and representatives from marginalized communities. Applicable GEF Strategic Objective and Program: CC-SP4: CCM-3: Climate Change Mitigation – Promote investments in renewable energy technologies Applicable GEF Expected Outcomes: Investment in renewable energy technologies increased; favourable policy and regulatory environment created for renewable energy investments Applicable GEF Outcome Indicators : tonnes CO2 equivalent avoided

Objective & Outcomes

Objectively Verifiable Indicators Sources of Verification Critical Assumptions

Indicator Year 0 Targets

Project Objective: Removal of barriers to increased utilization of renewable energy resources in rural Nepal in order to support economic,

Total installed capacity of renewable energy-based power generation projects implemented by end-of-project (EOP), MW

Electricity generated annually for livelihood

and quality of life improvement (GWh/yr) by the EOP.

0

0

12.556

26.79557



56 This is comprised of 10 MW off‐grid hydro (8 MW mini‐hydro & 2 MW large micro‐hydro); and 2.5 MW of large‐scale solar PV system. 57 This is comprised of 23.76GWh/year from additional mini‐hydro, and 3.035GWh/year from large solar PV System.

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environmental, and social development of people in the rural areas and to reduce GHG emissions

Annual GHG emission avoided by EOP, tCO2/year

No. of households benefitting from lighting, productive end-use services and employment due to electricity supply by EOP

0

0

35,375 50,000



Component 1: Enhancement of RE investment environment [Policy, Planning, and Information] Outcome 1: Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization

No. of RE-based power generation projects that were proposed and developed as influenced by the strengthened policy regime on RE and low carbon development by EOP

No. of district energy plans developed that include mini-hydro and large scale solar PV power generation installations by Year 3

No. of policies and legal frameworks that are supportive of RE-based energy production were approved and enforced by Year 3

058

0

0

50

15

2

RERL project M&E reports; AEPC reports

Documentation of the district energy plans from AEPC reports

Revised policies and legislations or regulations published in Government Gazette

Component 2:RE Investments Outcome 2: Increased investments in RE

No. of local financial institutions that provide loans for feasible RE-based energy projects in the remote areas of Nepal by Year 3

No. of RE-based energy projects developed and proposed for financing from local financial institutions by EOP

Total installed large RE-based power

generation capacity funded by local financial

3

0

0

10

50

1.859

Documentation on the approved financial support agreements; RERL project M&E reports

Documentation on the financing proposals from the RE project proponents; RERL project M&E reports

Documentation on the approved project financing agreements;

-Developers are willing to construct the project -CREF funds available -Equity and loan available for project proponents

58 Existing RE policy has no provision for mini‐hydro and large scale solar PV development 591 MW mini‐hydro; 0.5 MW large‐scale solar PV; and, 300 kW mini‐grid project

151

institutions by EOP, MW Total installed capacity of renewable

energy-based power generation projects achieving financial closure by end-of-project (EOP), MW

0

12.5

RERL project M&E reports Documentation on the installed

RE-based power generation projects; AEPC records; RERL project M&E reports

Component 3:RE technology and project financing enhancement Outcome 3a: Improved availability of financial investment supports for rural RE and other low-carbon technology applications

No. of RE financial instruments developed, funded and operationalized by EOP

No. of local financial institutions

implementing the new RE financial instruments and have RE loan portfolios by EOP

0

0

2

10

Documentation of the establishment and operation of the funded financial instruments

Documentation of RE projects funded by FIs under the established financial instruments

-CREF will operate and augment funds for the facility -Committed FIs will continuously operationalize their lending portfolio in support of the established financing instruments


No. of new and improved RE financial instruments for supporting rural RE and low carbon technology applications designed by EOP

Total amount of funds allocated by the GoN and the local financial sector for the new RE financial instruments by EOP, US$ million

Total load factor including contribution of productive use by EOP

No. of productive use enterprises from RE projects funded through the new RE financing instruments by EOP

0

0 0

0

2

30.25

50 300

Documentation of the approved RE financial instruments

Documentation of the approved business plans for the new RE financial instruments, RERL project M&E reports

Meter reading and log sheet RERL project M&E reports

-CREF will operate and augment funds for the facility -Committed FIs will continuously earmark funds for implementing the new financial instruments

Component 4: Human Capacity Development Outcome 4. Enhanced capacities and skills of various stakeholders in

No. of local engineering consulting firms prequalified (qualified to bid) by AEPC for design of RE-based power generation (e.g.,

0

10

AEPC records; Directory of local engineering consulting firms; Documentation of qualifications of

152

the RE sector

mini-hydro projects by EOP No. of local engineering companies

prequalified (qualified to bid) by AEPC for the manufacturing of RE-based power generation (e.g., mini-hydro) system components by EOP

No. of local engineering companies prequalified (qualified to bid) by AEPC for the installation of RE-based power generation (e.g., large scale solar PV)systems by EOP

No. of local engineering companies that are qualified and capable to repair and maintain RE-based power generation system equipment/components by EOP

0

0

0

5

5

5

pre-qualified local engineering consulting firms

AEPC records; Directory of local engineering firms; Documentation of qualifications of pre-qualified local engineering firms; Company business plan

AEPC records; Directory of local engineering firms; Documentation of qualifications of pre-qualified local engineering firms; Company business plan

AEPC records; Directory of local engineering firms; Documentation of qualifications of qualified local engineering firms; Company business plan

153

4.2 Project Activities Table ‐ RERL

Notes: “Each Cell coloured black” in schedule column represents one quarter,

SN Activities Responsibility Work Plan

Year 1 Year 2 Year 3 Year 4 Year 5 Outcome1 Strengthened legal, institutional, policy, planning, and information environment ensures increased RE investment and utilization

Output 1.1 Approved and enforced policy that enables PPP model for mini-hydro and large-scale solar PV development, including fiscal incentives and suitability for possible changes in Nepal government structure (to federal system)

1.1.1

Preparation and adoption, i.e., approval and enforcement, of policy that enables PPP model for mini-hydro, micro-hydro mini-grid, and large-scale PV development, thus attracting the private sector to such projects

Project Team AEPC, NRREP Team

1.1.2 Preparation and adoption of policy for future grid connection of off-grid mini-hydro, micro-hydro mini-grid, and large-scale solar PV systems


Output 1.2 Methodology and database developed and made available for incorporating mini-hydro and large scale solar PV systems into district RE plans

1.2.1 Preparation of the methodology for integrating mini-hydro projects and large-scale solar PV systems into district energy plans.


1.2.2 Preparation and publication of reports on mini-hydro resource and large-scale solar PV needs assessment for first five districts based on the above methodology.


1.2.3 Preparation and publication of reports on mini-hydro resource and large scale solar PV needs assessment for next ten districts based on the above methodology.


Output 1.3 Completed training and awareness programs for relevant government agencies and stakeholders on mini-hydro and large-scale solar PV systems development and on productive end uses

1.3.1 Identification and preparation of case studies for mini-hydro and large-scale solar PV systems.


1.3.2 Conduct of training needs assessment. Project Team AEPC,

154


Year 1 Year 2 Year 3 Year 4 Year 5 NRREP Team

1.3.3 Preparation and conduct of training courses. Project Team AEPC, NRREP Team

Outcome 2 - (2a)

Increased investments in RE

Output 2a.1 Commissioned mini-hydro demonstration projects totalling 1 MW through PPP Model

2a.1.1 Implementation of the Mini-hydro Power Generation Demonstrations


Output 2a.2 Commissioned mini-grid demonstration projects totalling 300 kW

2a.2.1 Implementation of the Mini-Grid Power Distribution Demonstrations


Output 2a.3 Commissioned large-scale solar PV demonstration projects totalling 500kW

2a.3.1 Implementation of the Large Scale Solar PV Power Generation Demonstrations


Outcome 2 - (2b)

Increased investments in RE

Output 2b.1 Demonstrated PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW)

2b.1.1 Updating of the feasibility study of the selected Mini-hydro demonstration projects to make it bankable


2b.1.2 Securing private sector active and substantial involvement in the implementation of the demonstration Mini-hydro projects (SPV)


155


Year 1 Year 2 Year 3 Year 4 Year 5

2b.1.3 Securing of licenses, clearances and permits for implementation of mini-hydro demonstrations


2b.1.4 Preparation of detailed project reports (DPR) and bid document

Project Team AEPC, NRREP Team Y

2b.1.5 Negotiations on the financial closure of the demonstrations based on PPP model


2b.1.6 Construction of the Demonstration Project Facilities Project Team AEPC, NRREP Team

2b.1.7 Setting-up of the O&M modalities Project Team AEPC, NRREP Team

2b.1.8 Documentation of UNDP-GEF RERL demonstration project learning


Output 2b.2 Demonstrated financially sustainable and reliable a mini-grid connecting ten (10) micro-hydro systems (300 kW)

2b.2.1 Conduct of feasibility study of potential demonstration project


2b.2.2 Establishment of a Special Purpose Vehicle Project Team AEPC, NRREP Team

2b.2.3 Securing of required licenses, clearances and permits for implementation of mini-grid demonstration


2b.2.4 Preparation of detailed project reports (DPR) and bid documents


156



2b.2.5 Negotiations on the financial closure of the financing of demonstrations based on PPP model


2b.2.6 Construction of the demo project facilities Project Team AEPC, NRREP Team

2b.2.7 Setting up of the O&M modalities Project Team AEPC, NRREP Team

2.b.2.8 Documentation and dissemination of lessons learned from demonstrations


Output 2b.3 Demonstrated financially sustainable and reliable large scale solar PV systems (500 kW total)

2b.3.1 Preparation of a shortlist of potential project sites selected based on a set of criteria and select sites in consultation with relevant stakeholders


2b.3.2 Conduct of detailed feasibility study of selected demonstration projects


2b.3.3 Establishment of special purpose vehicles for the project Project Team AEPC, NRREP Team

2b.3.4 Securing of land use permits Project Team AEPC, NRREP Team

2b.3.5 Preparation of detailed project reports (DPR) Project Team AEPC, NRREP Team

2b.3.6 Negotiations on the financial closure for the financing of the demonstrations


157



2b.3.7 Implementation of the demonstration project Project Team AEPC, NRREP Team

2b.3.8 Setting-up of the O&M modalities Project Team AEPC, NRREP Team

2b.3.9 Documentation and dissemination of lessons learned Project Team AEPC, NRREP Team

Output 2b.4 Operationalized 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance

2b.4.1 Assist NRREP to implement the projects Project Team AEPC, NRREP Team

Output 2b.5 Completed financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance


Output 2b.6 Completed financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance


Outcome 3a Improved availability of financial investment supports for rural RE and other low-carbon technology applications

Output 3a.1 Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) for financing domestic manufacturers to meet growing orders and be cost competitive

3a.1.1 Establishment of the wholesale financing instrument for financing manufacturers


Output 3a.2 Established a wholesale financing instrument to incentivize Banking and Financial Institutions (BFIs) to promote commercial financing for mini-hydro and large-scale solar PV projects

158



3a.2.1 Establishment of wholesale financing instrument to incentivize BFIs for commercial financing of Mini-hydro and large-scale solar PV projects

Project Team AEPC, CREF Team

Outcome 3b Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications Output 3b.1 Designed and provided technical support for financing platforms and services for promoting commercial financing for domestic manufacturers

3b.1.1 Design of the wholesale financing package for Mini-hydro manufacturer and selection of fund administrator


3b.1.2 Design and finalization of wholesale financing package for supporting manufacturers of Mini-hydro, including obtaining NRB approval

Project Team AEPC, CREF, FIs

3b.1.3 Establishment of wholesale financing package in at least two financing institutions through CREF

Project Team AEPC, CREF, FIs

Output 3b.2 Designed and provided technical support for financing platforms and services for promoting commercial financing for mini-hydro and large-scale solar PV projects

3b.2.1 Design of the commercial financing instruments for Mini-hydro and Large-scale solar PV projects and select fund administrator


Output 3b.3 Developed training materials on mini-hydro and large-scale solar PV projects for financing institutions

3b.3.1

Design of training materials for bankers to understand challenges and opportunities in Mini-hydro and Large-scale solar PV projects


Output 3b.4 Established matchmaking platform for mini-hydro and large-scale solar PV developers, financing institutions, and equity investors, and productive end users

3b.4.1 Organization of appropriate events to bring together Mini-hydro developers and Large-scale solar PV Projects, equity investors, and potential lenders


3b.4.2 Follow up work on business matchmaking events Project Team AEPC, NRREP Team

159



3b.4.3 Development of a web-based portal that allows developers, lenders and investors to interface and exchange information.


Output 3b.5 Functional enterprises adopting productive use of electricity

3b.5.1 Preparation of guidelines for identifying and assessing existing enterprises in the electrification area having potential for switching to electricity


3b.5.2 Preparation of business plan by the RE project developers (SPVs) for promoting productive use of electricity


3b.5.3 Development of locally based Enterprise Development Facilitators (EDFs) and Business Development Service Providing Organisations (BDSPOs)


3b.5.4 Promotion of switching to electrical energy to entre Project Team AEPC, NRREP Team

3b.5.5 Conduct of exploration study for identifying potential and feasible enterprises in the project area


3b.5.6 Conduct of business promotion campaigns Project Team AEPC, NRREP Team

3b.5.7 Conduct of capacity building work for prospective entrepreneurs to create new enterprises


3b.5.8 Conduct of capacity building for existing entrepreneurs on the smooth operation of the business, business expansion/growth and productivity improvement


3b.5.9 Documentation of results and experiences of successful enterprises for replication


Output 3b.6 Operationalized mechanism to promote financial products for entrepreneurs/end users

160



3b.6.1

Assessment of existing financing services and identification of existing institutions (non-formal mechanisms e.g. credit saving group) for potential upgrading into micro-finance institutions or cooperatives


3b.6.2

Establishment of formal micro-finance institutions out of existing non-formal mechanisms (e.g. saving credit group) in Mini-hydro areas lacking FIs (banks and MFIs) or needing more MFIs and support building capacity of the MFIs


3b.6.3 Support FIs to develop and disseminate tools for promoting commercial financing of productive use of electricity


Output 3b.7 Established functional electricity based enterprises that are owned by women and marginalised/vulnerable groups

3b.7.1 Provide financial support to women and marginalised/vulnerable entrepreneurs to switch to electricity and to establish new enterprises


Outcome 4 Enhanced capacities and skills of various stakeholders in the RE sector

Output 4.1 Established database of technical specifications (including challenges and opportunities) for the design, manufacture (for micro-hydro(60+ kW) and mini-hydro), installation and after-sales service in micro-hydro(60+ kW), mini-hydro and large scale solar PV systems

4.1.1

Conduct of a study on Identification of technical specifications(challenges and opportunities) in design, manufacture, installation and after-sales service for Mini-hydro and Large-scale solar PV systems


Output 4. 2 Fully trained skilled and technically capable people available for project identification, feasibility studies and detailed design of mini-hydro and large-scale solar PV systems

4.2.1 Preparation and adoption of a project development and design manuals for Mini-hydro projects


161



4.2.2 Conduct of capacity building trainings for developers, consulting firms, and relevant service providers for Mini-hydro projects


4.2.3 Development of manuals on project development, system design and integration manuals for large-scale solar PV systems


4.2.4 Conduct of capacity building trainings for consulting firms, systems integrators, and relevant service providers for Large-scale solar PV projects


Output 4.3 Fully trained skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services

4.3.1 Development of a set of pre-qualification criteria and methodology of certification for Mini-hydro manufacturers and Installers.


4.3.2 Acquisition of new mini-hydro technologies through technology transfer


4.3.3 Development of quality assurance procedures, training curriculum and manuals for Mini-hydro manufacturing


4.3.4 Conduct of quality assurance and standardization training


Output 4.4 Fully trained skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system

4.4.1

Development of training curriculum and manuals for quality assurance procedures, pre-qualification criteria and methodology of certification for construction and installation of Mini-hydro projects


4.4.2 Development of a pre-qualification criteria and methodology of certification for installation of Large-scale solar PV systems


162



Output 4.5 Fully trained, skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems

4.5.1 Development of O&M training curriculum and manuals for Mini-hydro and conduct training based on these


4.5.2 Development of O&M training curriculum and manuals for large-scale solar PV systems and conduct training based on these


4.5.3 Development of business management training curriculum and manuals for Mini-hydro and large-scale solar PV systems


4.5.4 Conduct of training on business management for Mini-hydro and large-scale solar PV systems


163

4.3 Total Budget and Work Plan

Award ID: 76958 Project ID(s): 88046Award Title: Renewable Energy for Rural Livelihoods (RERL) Business Unit NPL10 Project Title Renewable Energy for Rural Livelihoods (RERL) PIMS No. 4522 Implementing Partner(Executing Agency) AEPC/NRREP

GEF Outcome/Atlas Activity

Responsible Party/

Implementing Agent

Fund ID Donor Name

Atlas Budget Account Code

ATLAS Budget Description Amount Year 1 (USD)

Amount Year 2 (USD)

Amount Year 3 (USD)

Amount Year 4 (USD)

Amount Year 5 (USD)

Total (USD)

See Budget Note:

Outcome 1

AEPC/NRREP 04000 UNDP

71200 International Consultants ‐ ‐ ‐ ‐ ‐ ‐

71300 Local Consultants ‐ ‐ ‐ ‐ ‐ ‐

71600 Travel ‐ ‐ ‐ ‐ ‐ ‐

74500 Miscellaneous ‐ ‐ ‐ ‐ ‐ ‐

75700 Training , Meeting & workshop costs ‐ ‐ ‐ ‐ ‐ ‐

Sub‐Total of UNDP ‐ ‐ ‐ ‐ ‐ ‐

AEPC/NRREP 62000 GEF


71300 Local Consultants 104,375 47,500 ‐ ‐ ‐ 151,875 1

71600 Travel 22,762 10,183 ‐ ‐ ‐ 32,945 2

74500 Miscellaneous 6,000 5,500 ‐ ‐ ‐ 11,500 3

75700 Training , Meeting & workshop costs 11,000 5,000 ‐ ‐ ‐ 16,000 4

Sub‐Total of GEF 144,137 68,183 ‐ ‐ ‐ 212,320

Total Outcome 1 144,137 68,183 ‐ ‐ ‐ 212,320

Outcome 2 ‐ (2a)




71600 Travel ‐ ‐ ‐ ‐ ‐ ‐

74500 Miscellaneous ‐ 272,278 ‐ ‐ ‐ 272,278 5

164


Responsible Party/

Implementing Agent

Fund ID Donor Name



Amount Year 2 (USD)

Amount Year 3 (USD)

Amount Year 4 (USD)

Amount Year 5 (USD)

Total (USD)

See Budget Note:

75700 Training , Meeting & workshop costs ‐ ‐ ‐ ‐ ‐ ‐ Sub‐Total of UNDP ‐ 272,278 ‐ ‐ ‐ 272,278

UNDP 62000 GEF



71600 Travel ‐ ‐ ‐ ‐ ‐ ‐

72100 Contractual Services ‐ Companies ‐ 900,000 ‐ ‐ ‐ 900,000 6

75700 Training , Meeting & workshop costs ‐ ‐ ‐ ‐ ‐ ‐ Sub‐Total GEF ‐ 900,000 ‐ ‐ ‐ 900,000

Total Outcome 2 ‐ (2a) ‐ 1,172,278 ‐ ‐ ‐ 1,172,278

Outcome 2 ‐ (2b)




71600 Travel ‐ ‐ ‐ 2,000 ‐ 2,000 8

74500 Miscellaneous 10,500 11,000 10,500 10,000 10,000 52,000 9

75700 Training, Meeting & workshop costs 5,200 5,200 5,200 8,200 5,200 29,000 10

Sub‐Total of UNDP 15,700 16,200 15,700 20,200 15,200 83,000

UNDP 62000 GEF


71300 Local Consultants 88,750 67,500 11,875 16,875 ‐ 185,000 11

71600 Travel 11,452 11,043 1,910 9,420 ‐ 33,825 12

74500 Miscellaneous 26,850 17,000 6,150 11,000 ‐ 61,000 13

75700 Training, Meeting & workshop costs 11,500 7,000 ‐ ‐ ‐ 18,500 14

Sub‐Total GEF 138,552 102,543 19,935 37,295 ‐ 298,325

TotalOutcome2‐(2b) 154,252 118,743 35,635 57,495 15,200 381,325

165


Responsible Party/

Implementing Agent

Fund ID Donor Name



Amount Year 2 (USD)

Amount Year 3 (USD)

Amount Year 4 (USD)

Amount Year 5 (USD)

Total (USD)

See Budget Note:

Outcome3a




71600 Travel ‐ ‐ ‐ ‐ ‐ ‐

74500 Miscellaneous ‐ ‐ ‐ ‐ ‐ ‐


Sub‐Total of UNDP ‐ ‐ ‐ ‐ ‐ ‐




71600 Travel ‐ ‐ ‐ ‐ ‐ ‐

72100 Contractual Services ‐ Companies 225,000 475,000 250,000 ‐ ‐ 950,000 15


Sub‐Total GEF 225,000 475,000 250,000 ‐ ‐ 950,000

Total Outcome 3a 225,000 475,000 250,000 ‐ ‐ 950,000

Outcome3b



71300 Local Consultants 53,750 65,624 58,125 58,125 35,624 271,248 16

71600 Travel 15,757 10,106 9,158 9,158 9,158 53,337 17

74500 Miscellaneous 10,075 26,075 6,700 6,700 6,700 56,250 18

75700 Training , Meeting & workshop costs 4,500 7,500 ‐ ‐ ‐ 12,000 10

Sub‐Total of UNDP 84,082 109,305 73,983 73,983 51,482 392,835

62000 GEF



71600 Travel ‐ 1,138 3,504 3,504 3,504 11,650 20

74500 Miscellaneous 8,949 9,917 10,840 10,840 10,840 51,386 21


Sub‐Total GEF 8,949 11,055 14,344 14,344 14,344 63,036

TotalOutcome3b 93,031 120,360 88,327 88,327 65,826 455,871

166


Responsible Party/

Implementing Agent

Fund ID Donor Name



Amount Year 2 (USD)

Amount Year 3 (USD)

Amount Year 4 (USD)

Amount Year 5 (USD)

Total (USD)

See Budget Note:

Outcome4



71300 Local Consultants 1,415 1,620 ‐ ‐ ‐ 3,035 24

71600 Travel 45,000 84,063 24,063 24,063 24,063 201,252 25

74500 Miscellaneous 2,000 10,000 4,000 4,000 4,000 24,000 26

75700 Training , Meeting & workshop 600 1,800 600 600 600 4,200 27

Sub‐Total of UNDP 49,015 97,483 28,663 28,663 28,663 232,487


71200 International Consultants 10,000 7,000 ‐ ‐ ‐ 17,000 28

71600 Travel 12,300 15,544 3,750 3,750 ‐ 35,344 29

71300 Local Consultants 98,750 145,000 35,000 35,000 11,250 325,000 30

74500 Miscellaneous 14,500 21,000 5,000 5,000 2,000 47,500 31

75700 Training , Meeting & workshop 3,075 4,200 1,800 1,800 600 11,475 32

Sub‐Total GEF 138,625 192,744 45,550 45,550 13,850 436,319

TotalOutcome4 187,640 290,227 74,213 74,213 42,513 668,806

M&E


75700 Meetings & Workshop 11,000 1,000 1,000 1,000 1,000 15,000 33

71400 Contractual Service(Individual) 9,666 3,000 9,667 3,000 9,667 35,000 34

71300 Local Consultants ‐ ‐ 10,000 ‐ 10,000 20,000 35

71200 International Consultants ‐ ‐ 20,000 ‐ 20,000 40,000 36

71600 Travel 2,000 2,000 2,000 2,000 2,000 10,000 37

Sub‐Total of UNDP 22,666 6,000 42,667 6,000 42,667 120,000

Total for M&E 22,666 6,000 42,667 6,000 42,667 120,000

Project AEPC/NRREP 04000 UNDP 71400 Contractual Services(Individual) 84,298 90,013 96,014 102,314 94,533 467,172 38

167


Responsible Party/

Implementing Agent

Fund ID Donor Name



Amount Year 2 (USD)

Amount Year 3 (USD)

Amount Year 4 (USD)

Amount Year 5 (USD)

Total (USD)

See Budget Note:

Management Unit

71600 Travel 15,744 15,744 15,744 15,744 15,744 78,720 39

72500 Supplies 1,333 1,333 1,333 1,333 1,333 6,665 40

73400 Rental & Maint of Other Equip 13,333 13,333 13,333 13,333 13,333 66,665 41

74500 Miscellaneous 15,823 15,823 15,823 15,823 15,823 79,115 42

74200 Audio Visual & Print Prod Costs 10,000 10,000 10,000 10,000 10,000 50,000 43

74500 Miscellaneous 9,259 9,259 9,259 9,259 9,259 46,295 44

72200 Equipment and Furniture 25,106 ‐ ‐ ‐ ‐ 25,106 45

74599 UNDP Cost Recovery Charges 15,934 15,932 15,932 15,932 15,932 79,662 46

Sub‐Total of UNDP 190,830 171,437 177,438 183,738 175,957 899,400

AEPC/NRREP 62000 GEF 71400 Contractual Services(Individual) 31,545 31,544 20,838 20,838 35,235 140,000 47

Sub‐Total of GEF 31,545 31,544 20,838 20,838 35,235 140,000

Total for Project Management Cost 222,375 202,981 198,276 204,576 211,192 1,039,400

Total UNDP 362,293 672,703 338,451 312,584 313,969 2,000,000

Total GEF 686,808 1,781,069 350,667 118,027 63,429 3,000,000

Total Project Budget 1,049,101 2,453,772 689,118 430,611 377,398 5,000,000

Summary of Budgets

UNDP(Cash) 362,293 672,703 338,451 312,584 313,969 2,000,000

GEF 686,808 1,781,069 350,667 118,027 63,429 3,000,000

Sub‐Total Unfunded(To be leveraged) 47,995 46,513 44,105 39,712 66,605 244,930

GEF AND UNDP TOTAL PROJECT COST 1,097,096 2,500,285 733,223 470,323 444,003 5,244,930

Budget Notes: Upon the request from the Implementing Partner (AEPC/NRREP) UNDP may provide support services. The implementing partner will need to formalize this via a Letter of Agreement with UNDP‐Nepal. Direct project service cost will apply in such an eventuality. Direct project service cost (based on actual or transaction costs) for these kind of activities will be separately mentioned in the budget note.

168

BUDGET NOTES:

1

Local Consultants & Local Associate Consultants

Sub Activity 1.1.1.1.0: Hire local consultants, Renewal Energy planning expert and Renewal Energy expert and to Support revision of current subsidy policy (2013 version) to attract more private sector investment in off‐grid mini‐hydro, micro‐hydro mini‐grid, and large‐scale PV projects. Two consultants are to be hired for 60 days @ 250/ day (USD 15,000) in year 1. In addition to this a Local Energy associate consultant is also hired for 30 days @ 125/day (USD 3,750) in year 1.

Sub‐activity 1.1.1.2: Hire Local Consultant and Local Associate Consultant (Same as above), Renewal Energy Policy Expert to Support drafting of PPP policy for private sector investment in mini‐hydro and micro‐hydro mini‐grid. The local consultant is to be hired for 60 days @250/day (USD15,000) in year 1 and the local Associate consultant is also hired for 30 days @ 125/day (USD3,750) in year 1.

Activity 1.2.1: Hire Local Consultant and Local Associate Consultant, both Planning experts to Prepare methodology for integrating mini‐hydro projects and large‐scale solar PV systems into district energy plans. . The local Planning consultant is to be hired for 30 days @ 250/day (USD 7,500) in year 1. And the local Associate Planning consultant is also hired for 30 days @ 125/day (USD3,750) in year 1

Activity 1.2.2: Hire One Renewal Energy Expert and two Local Associate Consultants to Prepare and publish reports on mini‐hydro resource and large scale solar PV needs assessment for first 5 districts based on the above methodology. The Renewal Energy Expert will be hired for 60 days @ 250/ day (USD 15,000) and two local associate consultants will be hired for 100 days in total @ 125 / day (USD12, 500). All these 3 consultants will be hired in year 1.

Activity 1.3.1: Hire one Renewal Energy Expert and Local Associate Consultant to identify and prepare case studies for mini‐hydro and large‐scale solar PV systems. The RE expert will be hired for 45 days @ 250 per/day (USD 11,250) in year 1 and the local Associate consultant will be hired for 45 days @ 125/ day (USD 5,625) in year 1.

Activity 1.3.2: Hire Renewal Energy Training expert to carry out training needs assessment. The training expert will be hired for 20 days @ 250/day (USD 5,000) in year 1.

Activity 1.3.3 Hire RE Training Expert (as above in 1.3.2) to Prepare and conduct trainings. The consultant will be hired for 20 days @ 250 /day (USD 5, 000) in year 1 and 20 days @ 250 /day (USD 5, 000) in year 2. In addition to this a local Associate consultant will also be hired for 10 days @ 125/ day ( USD 1,250) in year 1 and 10 days @ 125/ day ( USD 1,250) in year 2

Sub‐activity 1.1.2.1 Hire Local consultant (Grid Expert) and Local Associate Consultant to develop specifications, in close collaboration with NEA, for mini‐hydro, large solar PV systems, and micro‐hydro mini‐grid systems that meet the national grid code. The local consultant is to be hired for 40 days @ 250/day (USD 10,000) and the local associate consultant is to be hired for 30 days @ 125/ day (USD 3,750) in year 2.

Activity 1.2.3 Hire One Renewal Energy Expert and two Local Associate Consultants ( Same as Activity 1.2.2) to support preparation and publishing of reports on mini‐hydro resource and large scale solar PV needs assessment for next 10 districts based on the above methodology. The Renewal Energy Expert will be hired for 60 days @ 250/ day (USD 15,000) and two local associate consultants will be hired for 100 days in total @ 125 / day (USD 12,500). All these 3 consultants will be hired in year 2 only.

169

2

This expense includes the filed visit expenses (local travel cost, transportation & accommodation cost) of local consultant and local associate consultant from the implementing agency to monitor, implement, and coordinate and oversight. These cover 30 day travel under Activity 1.2.1, 100 days under Activity 1.2.2, 20 days under Activity 1.3.1, 10 days under Activity 1.3.2, 25 days under Activity 1.3.3, 20 days under sub‐Activity 1.1.2.1 and 100 days under Activity 1.2.3.

3 Sundries & Contingent Costs

4 Meeting & workshops with various stakeholder of the project. Total allocated cost amount is USD 16,000 for outcome 1 only.

Activity 1.2.1 Conduct stakeholder workshop in district venues 2 times in year 1 @ USD1,000 per workshop.( USD 2,000)

Activity 1.2.2conducts 5 workshops/meetings to prepare and publish reports on mini‐hydro resources and large scale solar PV needs assessments for first 5 districts in year 1 @ USD1,000 per workshop. ( USD5,000)

Activities 1.2.3 conduct 5 workshops/meetings in 10 districts in year 2 @ USD 1,000 per workshop (USD 5,000).

Activity 1.3.1 Conduct 1 national level workshop for prepare case studies for mini‐hydro solar scale solar PV system. The allocated cost is USD 3,000. Participation will consist of officials from AEPC, Ministry of Science, Technology, and Environment, Ministry of Finance, Department of Electricity Development, etc.

Activity 1.3.2 Conduct Stakeholder workshop in 2 districts. Total budget is USD 1,000.

5 Interest subsidies, maintenance fund, insurance and Other Costs.Out of total estimated amount of USD 1,172,282, UNDP will provide USD 272,282. Refer to budget note 6.

6 Investment supports on Demonstration projects thru financing tools; mini‐hydro credit funds, insurance support fund, maintenance fund & interest subsidy fund. Demonstration projects include Mini‐Hydro projects (1 MW), Mini grid project (300 KW) and large‐scale Solar PV projects (500 KW).

7 Local Consultants & Local Associate Consultants (UNDP)

8 Travel & DSA (UNDP)

9 Sundries & contingent costs such as stationery, taxi expense, papers, courier, miscellaneous expense, etc.

10 Meeting & workshops with various stakeholders

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11 Local Consultants & Local Associate Consultants (GEF)

Activity 2b.1.1 Hire local consultants, mini hydro expert and local associate consultant to update the feasibility study of the selected Mini‐hydro demonstration projects to make it bankable. A mini hydro expert will be hired for 45 days @ 250/day (USD 11250) in year 1. And the local associate consultant will be hired for 45 days @ 125 / day (USD 5625) in year 1.

Activity 2b.1.2Hire a local legal expert and the associate consultant to ensure the compliance in order to bring together private sector project developers for the demonstration Mini‐hydro projects (SPV). . A legal expert will be hired for 30 days @ 250/day (USD 7,500) in year 1.

Activity 2b.1.6Hire a local consultant to Construction of the project. The consultant will A legal expert will be hired for 30 days @ 250/day (USD 7,500) in year 1

Activity 2b.1.4Hire a local consultant and local Associate consultant to Support preparation of detailed project reports (DPR) and bid documents. The consultant will be hired for 45 days @ 250/day (USD 11,250) in year 2. And the local associate consultant will be hired for 30 days @ 125 / day (USD 3,750) in year 2.

Activity 2b.1.7Hire a mini hydro expert (same as Activity) 2b.1.1to Set up the Operation and Maintenance (O&M) modalities/protocols. The mini hydro expert will be hired for 60 days @ 250/day (USD 15,000) in year 4. And the local associate consultant will be hired for 60 days @ 125 / day (USD 7,500) in year 4.

Activity 2b.3.1 Hire a local consultant, a Solar PV expert to prepare a shortlist of potential project sites selected based on a set of criteria and select sites in consultation with relevant stakeholders. The solar PV expert will be hired for 40 days @ 250/day (USD 10,000) in year 1. And the local associate consultant will be hired for 40 days @ 125 / day (USD 5,000) in year 1.

Activity 2b.3.2, Hire a Solar PV Expert, (Same as 2b.3.1) to conduct detailed feasibility study of selected demonstration projects. The solar PV expert will be hired for 30 days each @ 250/day (USD 7,500) in year. And the local associate consultant will be hired for 30 days @ 125 / day (USD 3,750) in year 1.

Activity 2b.3.3 Hire a legal expert to support establishment of special purpose vehicles for the project. The legal expert will be hired for 15 days @ 250/day (USD 3,750).

Activity 2b.3.2, Hire a Solar PV Expert, (Same as 2b.3.1) to conduct detailed feasibility study of selected demonstration projects. The solar PV expert will be hired for 30 days each @ 250/day (USD 7,500) in year 2. And the local associate consultant will be hired for 30 days @ 125 / day (USD 3,750) in year 2.

Activity 2b.3.7Hire a Solar PV expert to Setup the O&M modalities. The solar PV expert will be hired for 20 days each @ 250/day (USD 5,000) in year 2. And the local associate consultant will be hired for 10 days @ 125 / day (USD 1,250) in year 2.

Activity 2b.3.7Hire a Solar PV expert to Setup the O&M modalities. The solar PV expert will be hired for 20 days each @ 250/day (USD 5,000) in year 3. And the local associate consultant will be hired for 10 days @ 125 / day (USD 1,250) in year 3.

12 This expense includes the filed visit expenses (local travel cost, transportation & accommodation cost) of local consultant and local associate consultant from the implementing agency to monitor, implement, and coordinate and oversight. These cover 40 day travel under Activity 2b.1.1, 30 day under Activity 2b.1.2, 20 days under Activity 2b.1.7 and 100 days under Activity 2b.1.9

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13 Sundries & contingent costs such as stationery, taxi expense, papers, courier, miscellaneous expense, etc.

14 Meeting & workshops with various stakeholder of the project. Total allocated cost amount is USD 18,500. Total allocated cost is for outcome 2b.1 and 2b.3

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Development of financial instruments to support Demonstration projects; 4 mini‐grid manufacturer credit fund & 5 mini‐hydro credit fund for post demonstration project

16


Activity 3b.1.1 Hire local Consultant, Finance expert to design the Mini‐hydro manufacturer credit fund and select fund administrator for 15 days @ 250/ day (USD 3750) in year 1.




Activity 3b.3.1 Hire local Consultant, Finance expert to design training materials for bankers to understand challenges and opportunities in Mini‐hydro and Large‐scale solar PV projects. The consultant is to be hired for 40 days @ 250 / day in year 2 .( USD10,000)


Activity 3b.5.1 Hire Local Consultant and Local Associate Consultant Enterprise Development Expert from BDSPO for Prepare guidelines for assessing existing businesses in the proposed electrification area having potential for switching to electricity The local consultant is to be hired for 60 days @250/day (USD15,000) in year 1 .

Activity 3b.5.3 Hire Local Associate Consultants, (30 EDF) ‐ 30 persons for 7 days training to develop locally based Enterprise Development Facilitators (EDFs) and BDSPO. These EDFs are to be hired for 210 days (30*7) @ 125/ per day (USD 26,250) in year 1.

Activity 3b.5.2 Hire 3 Enterprise Development Advisors to support the RE project developers in preparing business plan for promoting productive use of electricity. Each consultant is to be hired for 37.5 days in each year from year 2 to 5 @ 250 / day. (USD 37,500). USD 9375 each year is planned.

Activity 3b.5.4 Local Consultants, Enterprise Development Expert from BDSPO to Support existing entrepreneurs for switching to electric energy. The consultant is to be hired for 12 days in each year form year 2 to 5 @ 250 / day (USD 12,000). Expenditure plan for each year is USD 3000. And local EDFs are also hired for total 150 days from year 2 to 5 @ 125 / day. (USD 9,000). Expenditure plan for each year is USD 2,250.

Activity 3b.5.5 Local Consultant hire, Enterprise Development Expert from BDSPO to conduct market analysis study for identifying potential and feasible enterprises in the project area. The consultant is to be hired for 10 days in each year form year 2 to 5 @ 250 / day (USD 10,000). Expenditure plan for each year is USD 2500. And local EDFs are also hired for total 80 days from year 2 to 5 @ 125 / day. (USD 10,000). Expenditure plan for each year is USD 2,500.

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Activity 3b.5.6 Hire Local Consultant, Local EDFs will be hired to conduct business promotion campaigns. The consultant will be hired for total 100 days from year 2 to 5 @ 125 / day. (USD 12,500).

Activity 3b.5.7 Hire Local EDFs to provide capacity building support to prospective entrepreneurs to create new enterprises. The consultant will be hired for total 200 days from year 2 to 5 @ 125 / day. (USD 25,000). Expenditure plan for each year is USD 6,250.

Activity 3b.5.8 Hire Enterprise Development Expert from BDSPO. The consultant will be hired for total 200 days from year 2 to 5 @ 250 / day. (USD 37,500). Expenditure plan for each year is USD 9,375.

Activity 3b.5.9 Hire Enterprise Development Expert from BDSPO. The consultant will be hired for total 60 days from year 2 to 5 @ 250 / day. (USD 15,000). Expenditure plan for each year is USD 3,750.

17 Travel & DSA (UNDP)

18 Sundries & contingent costs such as stationery, taxi expense, papers, courier, miscellaneous expense, etc. This also covers development of web‐based portal & organizing events to bring together mini‐hydro developers, investors and potential lenders.

20

Travel & DSA (UNDP& GEF) – This expense includes the filed visit expenses of local consultant and local associate consultant from the implementing agency to monitor, implement, and coordinate and oversight. These cover 10 day travel under Activity 3b.5.1 and 860 days under Activity 3b.5.2 to 3b.5.9.

21 Sundries& contingent expense (UNDP)

22 Financial support for new enterprise development (GEF) – NPR 10,000 each will be provided to 300 enterprises.

23 Local Consultants & Local Associate Consultants ( Unfunded)

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Local Consultants & Local Associate Consultants (UNDP)

Activity 4.5.1: Hire local consultants, (1 Civil, 1 mechanical, 1 electrical Engineer 12 weeks each). Each consultant will be hired for 60 days @ 250 per day in year 2 only. Total amount will be (60*250*3= USD 45000)

Activity 4.5.3 Hire local consultant, (1 Mechanical, 1 Electrical Engineer for 2 weeks each and 1 Business development and 1 financing expert). Total 60 days will be utilized among these consultants as per requirements @ 250/ day in year 2 only. Total (60*250= USD 15,000).

Activity 4.5.2: Hire local consultant (1 Civil, 1 mechanical, 1 electrical Engineer 8 weeks for two trainings every years). The consultant will be utilized for 60 days each year from year 3 to year 5 @ 250 / day. Total will be (USD 15,000 per year )

Activity 4.5.4 Hire local consultant (1 Mechanical, 1 Electrical Engineer for 2 weeks each and 1 Business development and 1 financing expert 3 weeks each for 4 years). The consultant will be utilized for 40 days each year from year 2 to year 5 @ 250 / day. Total will be (USD 10,000 per year )

Activity 4.5.5 Hire local consultant (1 Mechanical, 1 Electrical Engineer for 2 weeks each and 1 Business development and 1 financing expert 3 weeks each for 4 years). The consultant will be utilized for 40 days each year from year 2 to year 5 @ 250 / day. Total will be (USD 10,000 per year )

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25 Travel & DSA (UNDP) – local travels for 2 local consultants ( 2 weeks each)

26 Miscellaneous items such as sundries & contingent expenses (UNDP)

27 Training , Meeting & workshop costs (UNDP) cover local and national level workshops (UNDP) – local and national level workshops and trainings

28 International Consultants

Activity 4.3.2 Hire International Consultant to collaborate and support manufacturer in acquiring new technologies. The international consultant is to be hired for 20 days @ USD500 / day in year 1. (USD 10,000)

Activity 4.3.4 Hire international Consultant to conduct training as identified for mini‐hydro manufacturing areas. The international consultant is to be hired for 14 days @ USD500 / day in year 2. (USD 7,000)

29 Travel & DSA – local travel for local consultants under Activity 4.1.1

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30 Local Consultant & Local Associate Consultant

Activity 4.1.1 Hire local consultant (1 Civil, 1 Mechanical, 1 electrical Engineer, and 1 financing expert 3 weeks each) in year 1. The consultants are to be hired for total 120 days @ 250/ day (USD 30,000). Local Associate consultant will also use in order to support senior consultant. Total days for the local associate consultant will be 120 days @ USD 125 day. Total will be (USD 15,000)

Activity 4.2.1 Hire local consultant, (1 Civil, 1 Mechanical, 1 electrical Engineers and 1 financing expert 4 weeks each). The consultants will be hired for total 120 days @ 250/ day (USD 30,000) in year 1.

Activity 4.2.2 Local Consultant Hiring (1 Civil, 1 Mechanical, 1 electrical Engineer, and 1 financing expert 2 weeks each). The consultant will be hired for 60 days each in year 1 to year 4 @ 250 / day (USD 60,000)

Activity 4.2.3 Local Consultant Hiring (1 Civil, 1 electrical Engineer, and 1 financing expert 3 weeks each). The consultant will be used for 60 days @ 250/ day in year 1. (USD 15,000)

Activity 4.2.4 Local Consultant Hiring (1 Civil, 1 electrical Engineer, and 1 financing expert 3 weeks each). The consultant will be hired for 60 days each in year 1 to year 4 @ 250 / day (USD 60,000)

Activity 4.3.1 Local Consultant Hiring (1 Civil, 1 mechanical, 1 electrical Engineer, and 1 financing expert 2.5 weeks each). The consultants are to be hired for 50 days @ 250/ day in year 1. (USD 12,500)

Activity 4.3.2 Local Consultant Hiring (1 mechanical and 1 electrical Engineers 8 weeks each). The consultants are to be hired for 80 days @ 250/ day in year 1. ( USD 20,000)

Activity 4.3.3 Local Consultant Hiring (1 Civil, 1 mechanical and 1 electrical Engineer 5 weeks each). The consultants are to be hired for 120 days in year 2 @ 250/ day ( USD 30,000

Activity 4.3.4 Local Consultant Hiring (1 Civil, 1 mechanical and 1 electrical Engineer 5 weeks each). The consultant will be hired for 11.25 days each in year 2 to year 5 @ 250 / day (USD 11,250) per year.

Activity 4.4.1 Local Consultant Hiring (1 Civil, 1 electrical Engineer 10 weeks each). The consultants are to be hired for total 100 days @ 250/ day in year 2. (USD 25,000)

Activity 4.4.2 Local Consultant Hiring (1 Civil, 1 mechanical, 1 electrical Engineer 8 weeks each). The consultants are to be hired for total 120 days @ 250/ day in year 2. (USD 30,000)

Activity 4.4.3 Local Consultant Hiring (1 Civil, 1 electrical Engineer 10 weeks each). The consultants are to be hired for total 100 days @ 250/ day in year 2. (USD 25,000)

31 Miscellaneous items such as sundries, terminals, contingent expenses

32 Training , Meetings & workshop costs cover local and national level

33 Conduct Inception workshop and Report writing in year 1

34 Measurement of Means of Verification of Project results

35 Local consultants for conducting the midterm evaluation of the Project at the beginning of the year 3.

36 International consultants for conducting the final evaluation of the Project at the beginning of the year 5

37 Field visit expenditure for the M & E team – recurrent, annually

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38

Contractual Services ‐ Individual/salaries for STA, Mini‐hydro experts, Solar power experts, Energy livelihood and finance expert, project support team

39 Travel & DSA for PMU staff. At least 20% of time will be in the field.

40 Supplies – stationary, printing papers, cartridge, toner etc.

41 Rental & Maintenance of Other Equipment

42 Insurance for office equipment

43 Audio Visual & Print Prod Costs

44 Miscellaneous items such as sundries, terminals, contingent expenses

45 Office Set up Costs – computer, printer, projector, furniture & other set‐up

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46 UNDP Cost Recovery Charges Direct Costs for recruitment and payroll processing for each international consultant will be based on following cost structure

There are two rates for more than USD 100,000 of total contract amount and less than USD 100,000) Consultant Recruitment per post USD 370.96 (2x370.93) = USD 741.92 Procurement not involving CAP(for less than Total USD100,000)per case 197.27 or Procurement not involving ACP (for more than Total USD100,000)per case 1098.41 Payment processing Per transaction USD 19.20 = (2x19.2=USD 38.4) Direct Cost for recruitment and payroll processing for each Local consultant will be based on following cost structure

Local consultants exceeding USD 10,000 Consultant Recruitment per post USD 370.96 , ( 10x370.96= USD 3709.6) Procurement not involving CAP(for less than Total USD100,000)per case 197.27 Payment processing Per transaction USD 19.20 , (10x3=30x19.2= USD 576) Direct Cost for recruitment and payroll processing for each project staffs will be based on following cost structure

Provisioned for 16 posts ‐ 4 professional staffs, 7 support staffs and 5 Project staffs staffs] Service Contract package per post 1766.03, (15x1766.03= USD 26,490.45) Staff selection and recruitment USD 1417.58, (15x 1417.58= USD 21,263.37) Contract Management issue and Separation USD 112.28, (15x112.28= USD 1,684.2) Recurrent cost Payroll Cost 236.17 per year, ( 60x 236.17= USD 14170.2) Direct Cost for procurement and payments of each contractual services – companies will be based on following cost structure

Above 10,000 with CAP 784.83 ( 1 procurement x 784.83= USD 784.83) Less than 10,000 without CAP 197.2 ( 1x 197.2 = USD 197.2) Above 100,000 with ACP USD 1098.41 Payment Processing: USD 19.20 each Payment , (2x19.2= USD 38.4) Direct Cost for travel (ticket request, payment of ticket, payment of DSA for an indicative approx. 10): USD 256.20

Total 3.5% of 71600= USD 9,964

47 Contractual Services ‐ Individual/salaries for STA, Mini‐hydro experts, Solar power experts, Energy livelihood and finance expert, project support team

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4.4 Project Activities and Incremental Reasoning

Component/Outcome Baseline Activities Incremental Activities Alternative ActivitiesComponent 1: Enhancement of RE investment environment Outcome 1: Strengthened legal, institutional and policy environment to support RE and other low-carbon technology development & utilization

National Rural Renewable Energy Program (NRREP) plans to work for reforms and improvement in the subsidy administration of the renewable energy program. The program will support off-grid hydro (mostly micro-hydro), solar PV (SHS) and thermal systems, biogas and biomass technologies. It will integrate the District Energy and Environment Units into District Development Committees and will work to establish linkages between the AEPC and the needs of the rural population whilst promoting the interests of women and marginalized groups However, AEPC is expected to focus on legal, institutional and policy environment issues for micro hydro, solar home

Policy will be put in place to operationalize PPP model for mini-hydro, large-scale solar PV development, productive end-use applications including fiscal incentives and adaptability for possible changes in Nepal government structure (to federal system). Adequate information will be made available for incorporating mini-hydro and large scale solar PV systems into district RE plans. Training and awareness programs will be designed and completed for relevant government agencies and stakeholders on mini-hydro and large scale solar PV systems development and productive end uses. The above incremental activities will be funded from GEF contribution as well as from co-finance from AEPC/NRREP.

Activity 1.1.1: Preparation and adoption, i.e., approval and enforcement, of policy that enables PPP model for mini-hydro, micro-hydro mini-grid, and large-scale PV development, thus attracting the private sector to such projects. Activity 1.1.2: Preparation and adoption of policy for future grid connection of off-grid mini-hydro, micro-hydro mini-grid, and large-scale solar PV systems. Activity 1.2.1: Preparation of the methodology for integrating mini-hydro projects and large-scale solar PV systems into district energy plans. Activity 1.2.2: Preparation and publication of reports on mini-hydro resource and large-scale solar PV needs assessment for first five districts based on the above methodology. Activity 1.2.3: Preparation and publication of reports on mini-hydro resource and large scale solar PV needs assessment for next ten districts based on the above methodology. Activity 1.3.1: Identification and preparation of case studies for mini-hydro and large-scale solar PV systems. Activity 1.3.2: Conduct of training needs assessment. Activity 1.3.3: Preparation and conduct of training courses

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systems, and domestic biogas in which it has substantial experience and that larger scale development and applications of off-grid mini-hydro and large solar PV will continue to remain virtually absent from Nepal NRREP does not have any specific activities for strengthening policy, information and policy awareness regarding mini-hydro or large scale solar PV and renewable energy systems in general.

Component 2: RE investments Outcome 2: Increased investments in RE

AEPC/NRREP will work to endow CREF with the capacity and authority to successfully carry out its operational mandate, especially with respect to effective disbursement of subsidies. It will establish CREF as the core financial institution responsible for the delivery of subsidies and credit support to the renewable

Mini-hydro demonstration projects totaling 1 MW will be commissioned through PPP Model by. Mini-grid demonstration projects totaling 300 kW will be commissioned. Large-scale solar PV demonstration projects totaling 500kW will be commissioned. Funds from GEF and UNDP will be utilized as partial contribution to establish financing instrument to

Activity 2a.1.1: Implementation of the Mini-hydro Power Generation Demonstrations Activity 2a.2.1: Implementation of the Mini-Grid Power Distribution Demonstrations Activity 2a.3.1: Implementation of the Large Scale Solar PV Power Generation Demonstrations. Activity 2b.1.1: Updating of the feasibility study of the selected Mini-hydro demonstration projects to make it bankable Activity 2b.1.2: Securing private sector active and substantial involvement in the implementation of the demonstration Mini-hydro projects (SPV) Activity 2b.1.3: Securing of licenses, clearances and permits for implementation of mini-hydro

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energy sector. It will also work to put into operation micro-hydro systems and has unspecified plans to support viable large community solar PV systems Furthermore, it will enhance the project management capacity for community electrification projects. It will also strengthen the Regional Service Centres to facilitate the delivery of renewable energy services and promote linkages at a local level. NRREP has no plans to implement demonstration projects on mini-hydro, mini-grid and large scale solar PV preferably adopting PPP models through specific purpose vehicle (SPV), created as limited liability companies (LLCs), having equity investments from private sector, local bodies and communities. The focus

incentivize BFIs to provide financing for mini-hydro and large-scale solar PV projects under SPV/PPP model. The co-financing from CREF will be in the form of subsidy as per government policy and will contribute to the above financing instrument in selected BFIs. PPP models facilitating cooperation between private sector, public sector, and local organizations through establishment of Special Purpose Vehicles (SPV) in three selected mini-hydro projects (1 MW) will be demonstrated. Financially sustainable and reliable mini-grid connecting ten (10) micro-hydro systems (300 kW) will be demonstrated. Financially sustainable and reliable large scale solar PV systems (500 kW total) will be demonstrated. 2 MW of off-grid large micro-hydro (over 60 kW) power projects demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance will be operationalized.

demonstrations Activity 2b.1.4: Preparation of detailed project reports (DPR) and bid documents Activity 2b.1.5: Negotiations on the financial closure of the demonstrations based on PPP model Activity 2b.1.6: Construction of the Demonstration Project Facilities Activity 2b.1.7: Setting-up of the O&M modalities Activity 2b.1.8: Documentation of UNDP-GEF RERL demonstration project learning Activity 2b.2.1: Conduct of feasibility study of potential demonstration project Activity 2b.2.2: Establishment of a Special Purpose Vehicle Activity 2b.2.3: Securing of required licenses, clearances and permits for implementation of mini-grid demonstration Activity 2b.2.4: Preparation of detailed project reports (DPR) and bid documents Activity 2b.2.5: Negotiations on the financial closure of the financing of demonstrations based on PPP model Activity 2b.2.6: Construction of the demo project facilities Activity 2b.2.7: Setting up of the O&M modalities Activity 2b.2.8: Documentation and dissemination of lessons learned from demonstrations Activity 2b.3.1: Preparation of a shortlist of potential project sites selected based on a set of criteria and select sites in consultation with relevant stakeholders Activity 2b.3.2: Conduct of detailed feasibility study of selected demonstration projects Activity 2b.3.3: Establishment of special purpose

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would be mostly on supporting micro-hydro systems and community electrification.

Financial closure of 7 MW of off-grid mini-hydro power projects replicating PPP model through establishment of SPVs, demonstrating cost-advantage, feasibility, productive end-uses, and best practice through technical assistance will be completed. Financial closure of 2 MW of large scale solar PV systems, demonstrating cost advantage over smaller PV systems, feasibility, productive end-uses, and best practice through technical assistance will be completed. The GEF and AEPC (through CREF) will contribute as investment to support the above incremental activities. All the above technical assistance activities will be funded by UNDP funds

vehicles for the project Activity 2b.3.4: Securing of land use permits Activity 2b.3.5: Preparation of detailed project reports (DPR) Activity 2b.3.6: Negotiations on the financial closure for the financing of the demonstrations Activity 2b.3.7: Implementation of the demonstration project Activity 2b.3.8: Setting-up of the O&M modalities Activity 2b.3.9: Documentation and dissemination of lessons learned Activity 2b.4.1: Implementation of the selected off-grid micro-hydro demonstration projects Activity 2b.5.1: Implementation of the selected off-grid mini-hydro demonstration projects Activity 2b.6.1: Implementation of the large scale solar PV demonstration projects

Component 3a: RE technology and project financing enhancement Outcome 3a: Improved availability of financial investment supports for rural RE and other low-carbon technology applications

The CREF will partner with financial institutions for delivery of the credit and subsidies to the beneficiaries. However, the fund has not prepared specific plans and financing mechanisms. In the absence of outside stimulus, it is likely that the majority of funding from the CREF will be channelled to micro-

Financing instruments would be established to incentivize BFIs to promote commercial financing for mini-hydro and large-scale solar PV systems by the end of the project, which would support the investments for outputs listed under Component 2. In addition, financing instruments and support facilities would be established to incentivize Banking and Financial Institutions (BFI) for financing domestic

Activity 3a1.1: Establishment of the wholesale financing instrument for financing manufacturers Activity 3a.2.1: Establishment of wholesale financing instrumentto incentivize BFIs for commercial financing of Mini-hydro and large-scale solar PV projects

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hydro and solar home systems. NRREP has no plans to design, fund and implement credit funds and other investment support facilities to incentivize banks to finance domestic manufacturers to meet growing orders and be cost-effective. Neither does it have specific activities to establish instruments to incentivize banks to promote commercial financing for mini-hydro and large solar PV projects.

manufacturers to meet growing orders and achieve cost competitiveness. The GEF funds for this component would be channeled through APEC (under the CREF) with a chosen financial instrument with the stipulation that there will be a process to procure/select a certain number of private BFIs to directly provide the loans. The CREF will provide wholesale finance (provided by GEF) to those FIs to provide the retail loans to the investees. The above financial instruments will initially be funded by GEF as well as AEPC through CREF.

Component 3b: RE technology and project financing enhancement Outcome 3b: Improved design and packaging of investment support mechanisms for rural RE and other low-carbon technology applications

AEPC/NRREP will work to make available appropriate business development services to MSMEs in RE catchment areas. The aim is to contribute to promote income generation and employment potential through promotion of micro, small, and medium sized enterprises (MSME) in rural areas, particularly for men and women belonging to

Other financing instruments and support facilities mechanisms for domestic manufacturers to meet growing orders and be cost competitive will be designed through GEF TA support. Design of financing instruments for promoting commercial financing for mini-hydro and large-scale solar PV projects will be put in place through TA support. Training materials on mini-hydro and large-scale solar PV projects for financing institutions will be developed.

Activity 3b.1.1: Design of the wholesale financing package for Mini-hydro manufacturer and selection of fund administrator Activity 3b.1.2: Design and finalization of wholesale financing package for supporting manufacturers of Mini-hydro, including obtaining NRB approval Activity 3b.1.3 Establishment of wholesale financing package in at least two financing institutions through CREF Activity 3b.2.1: Design of the commercial financing instruments for Mini-hydro and Large-scale solar PV projects and select fund administrator Activity 3b.3.1: Design of training materials for bankers to understand challenges and opportunities in Mini-

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socially and economically disadvantaged groups. The enterprises will be facilitated by the availability of off-grid renewable energy. NRREP has no plans to support focused productive end use promotion and market development to be demonstrated.

Matchmaking platform for mini-hydro and large-scale solar PV developers, financing institutions, and equity investors, and productive end users will be created. The technical assistance for designing the above financial instruments and other activities will funded by TA support from GEF and UNDP. Functional enterprises adopting productive use of electricity will be ensured. Mechanisms to promote financial products for entrepreneurs /end users will be operationalized. Ownership by women and marginalized/vulnerable groups of 33% of the functional electricity based enterprises established will be ensured. The above activities will funded by UNDP and GEF.

hydro and Large-scale solar PV projects Activity 3b.4.1: Organization of appropriate events to bring together Mini-hydro developers and Large-scale solar PV Projects, equity investors, and potential lenders Activity 3b.4.2 Follow up work on business matchmaking events Activity 3b.4.3: Development of a web-based portal that allows developers, lenders and investors to interface and exchange information. Activity 3b.5.1: Preparation of guidelines for identifying and assessing existing enterprises in the electrification area having potential for switching to electricity Activity 3b.5.2: Preparation of business plan by the RE project developers (SPVs) for promoting productive use of electricity Activity 3b.5.3: Development of locally based Enterprise Development Facilitators (EDFs) and Business Development Service Providing Organisations (BDSPOs) Activity 3b.5.4: Promotion of switching to electrical energy to entrepreneurs Activity 3b.5.5 Conduct of exploration study for identifying potential and feasible enterprises in the project areas Activity 3b.5.6: Conduct of business promotion campaigns Activity 3b.5.7: Conduct of capacity building work for prospective entrepreneurs to create new enterprises Activity 3b.5.8: Conduct of capacity building for existing entrepreneurs on the smooth operation of the business, business expansion/growth and productivity

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improvement Activity 3b.5.9: Documentation of good practices and lessons learned from successful enterprises for replication Activity 3b.6.1 Assessment of existing financing services and identification of existing institutions (non-formal mechanisms e.g. credit saving group) for potential upgrading into micro-finance institutions or cooperatives Activity 3b.6.2 Establishment of formal micro-finance institutions out of existing non-formal mechanisms (e.g. saving credit group) in Mini-hydro areas lacking FIs (banks and MFIs) or needing more MFIs and support building capacity of the MFIs Activity 3b.6.3:Developmentand dissemination of tools for promoting commercial financing of productive use of electricity linking as far as possible with CleanStart activities in Nepal. Activity 3b.7.1: Facilitation of the switching to electricity use by marginalized/vulnerable groups and the establishment of new enterprises

Component 4: Human Capacity Development Outcome 4: Enhanced capacities and skills of various stakeholders in the RE sector

AEPC/NRREP will work to ensure that community electrification projects are better designed with regard to the use of the available potential, and operate at a higher load factor to be more sustainable. It will also endeavor to ensure that community electrification technology is scaled-up (in

A Knowledge base of technical challenges and opportunities in the design, manufacture (for micro-hydro (60+ kW) and mini-hydro), installation and after-sales service in micro-hydro (60+ kW), mini-hydro and large scale solar PV systems will be created. Skilled and technically capable people for project identification, feasibility studies and detail design of mini-hydro

Activity 4.1.1 Conduct of a study on the identification of technical challenges and opportunities in design, manufacture, installation and after-sales service for Mini-hydro and Large-scale solar PV systems Activity 4.2.1: Preparation and adoption of a project development and design manuals for Mini-hydro projects. Activity 4.2.2: Conduct of capacity building trainings for developers, consulting firms, and relevant service providers for Mini-hydro projects Activity 4.2.3 Development of manuals on project

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volume and unit size) and is of a higher standard. To achieve this, the NRREP has proposed contracting and capacity development of Regional Service Centres, project management capacity development for community electrification projects and capacity development of existing MSMEs NRREP has no specific activities to provide technology and capacity building support for mini-hydro and large scale solar PV projects, especially from the initial design phase up to the operation and maintenance and end use promotion phase to demonstrate how productive load can be effectively utilized.

projects will be developed through training. Skilled and technically capable mini hydro manufacturers in identified areas and their after-sales services will be developed through training. Skilled and technically capable construction and installation teams within companies to improve quality of installed mini-hydro projects and large solar PV system will be developed through training. Skilled and technically capable people available for operation, maintenance and business management of mini-hydro projects and large-scale solar PV systems will be developed through training. The above activities will funded by GEF.

development, system design and integration manuals for large-scale solar PV systems Activity 4.2.4 Conduct of capacity building trainings for consulting firms, systems integrators, and relevant service providers for Large-scale solar PV projects Activity 4.3.1: Development of a set of pre-qualification criteria and methodology of certification for Mini-hydro manufacturers and Installers. Activity 4.3.2 Acquisition of new mini-hydro technologies through technology transfer Activity 4.3.3: Development of quality assurance procedures, training curriculum and manuals for Mini-hydro manufacturing Activity 4.3.4 Conduct of quality assurance and standardization training Activity 4.4.1: Development of training curriculum and manuals for quality assurance procedures, pre-qualification criteria and methodology of certification for construction and installation of Mini-hydro projects. Activity 4.4.2: Development of a pre-qualification criteria and methodology of certification for installation of Large-scale solar PV systems Activity 4.5.1: Development of O&M training curriculum and manuals for Mini-hydro and conduct training based on these. Activity 4.5.2: Development of O&M training curriculum and manuals for large-scale solar PV systems and conduct training based on these. Activity 4.5.3: Development of business management training curriculum and manuals for Mini-hydro and large-scale solar PV systems. Activity 4.5.4: Conduct of training on business

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management for Mini-hydro and large-scale solar PV systems.

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5 Management Arrangements

The full-fledged RERL will be implemented by the Alternative Energy Promotion Centre (AEPC) of Nepal under Ministry of Science, Technology and Environment (MoSTE) guided by the Compact Principles agreed with the government to provide technical assistance to AEPC in implementation of National Rural and Renewable Energy Programme (NRREP). The project will be implemented over the course of five years aligned with NRREP-programme. The project will be nationally executed under National Implementation Guidelines as agreed between GoN and UNDP. While the management structure of RERL will be guided by the provisions agreed with the government under Compact Principles, and UNDP/GEF procedures as governed by NIM guidelines, the overall management structure will fit into NRREP programme structure to avoid duplications during implementation. UNDP will serve as the GEF Agency for the Project and be responsible for the provision of project cycle management services (i.e. General Management support) via the Country Office and specialized technical and oversight support from the GEF unit. AEPC/MoSTE and UNDP will jointly monitor and evaluate all project activities. The project will be governed in accordance with UNDP’s Results Based Management Guideline (RBM), GEF rules and procedures and the Government of Nepal’s operational principles within the governance structure (also see Terms of Reference for the key positions). Government Cooperating Agency: The Ministry of Science, Technology and Environment (MoSTE), as a cooperating agency shall do high-level monitoring of the project on behalf of the Government of Nepal, promote initiatives undertaken by the project nationally as best practice case, and ensure appropriateness of interventions in meeting national priorities. The MoSTE may co-ordinate with other relevant ministries and agencies in order to provide inputs to the project as and when needed. Role of cooperating agency: Since RERL will be implemented under the larger NRREP framework; hence the cooperating agency, the MoSTE, will continue with the existing NRREP Steering Mechanism (Programme Steering Committee - PSC) to provide overall oversight, and strategic and policy guidance to the Project Executive Board (PEB) of RERL in order to help achieve the project results in a timely and cost-effective manner. The PSC will also be responsible for making decisions as required regards to approval of major revisions in the project strategy and implementation approaches. The Executive Director of AEPC, in his/her capacity as the National Programme Director of RERL will function as the Member Secretary in the PSC which is line with the NRREP PSC structure. The composition of the NRREP PSC is given below:

1. Secretary, Ministry of Science, Technology and Environment, Chairperson 2. Joint Secretary, National Planning Commission, Member

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3. Joint Secretary, Ministry of Finance, Member 4. Joint Secretary, Ministry of Energy, Member 5. Joint Secretary, Ministry of Federal Affairs and Local Development, Member 6. Representative, Embassy of Denmark (on behalf of Lead DP) , Member 7. Executive Director, Alternative Energy Promotion Centre, Member Secretary 8. Representative, UNDP, Observer

Apart from what is decided under NRREP programme, PSC will have additional functions, (i) ensure that GEF resources exclusively utilized to implement the activities that relate to the achievement of the approved project objectives and outcomes (ii) provide guidance to resolve an issue or a problem which PEB cannot settle, and facilitate with external partners to seek support for the project (iii) ensure synergy between NRREP resources and RERL technical and financial inputs provided to AEPC to achieve the annual and periodic targets of both NRREP and RERL complementing to each other’s objectives. Implementing Partner- The project implementing partner will be responsible and accountable for achieving the project objective, outcomes and outputs in an effective and efficient manner. Alternative Energy Promotion Centre (AEPC) as a national implementing partner under the guidance of the MOSTE will implement the project under National Implementation Guidelines. APEC shall be overall responsible and accountable for the delivery of the project objectives and results aligned with NRREP objectives. Under the overall guidance of AEPC, there will be 10 Regional Service Centres (RSCs) covering all 75 districts for implementing NRREP activities at the local level in coordination with DEEUs. RERL team at the centre will work closely and in collaboration with RSCs to implement project level activities. Currently RSCs are being established with the support of transition RERL project in collaboration with NRREP.

Responsible partner: In collaboration with Ministry of Federal Affairs and Local Development (MOFALD) and under the overall guidance of AEPC, District Energy Environment Sections/Units (DEES/U) will be responsible for promotion, networking, local planning, monitoring etc. whereas RSCs will get involved directly in project facilitation and implementation at the at the District and local Level. RERL team at the Centre will coordinate, facilitate and in collaboration with RSCs and DEES/U will implement project level activities in full consultation. Considering an integrated approach, the implementation arrangement for RERL under NRREP framework will remain as follows. The framework is depicted in Figure 5.

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Figure 5: Integrated approach, the implementation arrangement for RERL Project Execution Board: To facilitate smooth and effective implementation of project activities, a Project Executive Board (PEB) will be established. The already established NRREP/PSC will provide high-level strategic guidance to the project, while the PEB will be responsible for taking management decisions with respect to project implementation and management, in line with NRREP framework, project mandates, work plans and guidelines. The PEB will have three roles described as below.

The PEB will have representation of MoSTE, Ministry of Finance, Ministry of Federal Affairs and Local Development, Private Sector (to be determined in the inception phase) and Civil Society (to be determined in the inception phase) as Senior Beneficiaries of the project. The Senior Beneficiaries’ primary function within the Board is to ensure the realization of project results from the perspective of project beneficiaries.

UNDP Nepal will be the Senior Supplier and its function within the Board is to provide guidance regarding the technical feasibility of the project.

The National Project Director (NPD) will be the Chair / Project Executive of the PEB and will be responsible to manage the project and ascertain timely project outputs. The NRREP Steering Committee will also provide necessary guidance and overall supervision to the project board.

The PEB will play a critical role in project monitoring and evaluation, assuring quality and performance improvement. The PEB ensures that required resources are committed and arbitrates on any conflicts within the project or negotiates a solution to any problems with

GEF Agency - UNDP

Cooperating Agency Ministry of Science, Technology and Environment (MoSTE)

Implementing Partner Alternative Energy Promotion Centre (AEPC)

(Regional Centres)

Responsible Party RSCs

(In consultation with DEEUs) /U and

Fund Flow

Implementation Arrangement

AEPC/CREF

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external bodies. In addition, it approves the appointment and responsibilities of the Project Manager and any delegation of its Project Assurance responsibilities. PEB will approve Annual Work-Plan, Quarterly Work-Plans and also approve any essential deviations from the original plans. Once the work plans are approved by the PEB, AEPC will submit the annual work plans to the NRREP PSC for review and approval. The PEB will also review the annual and quarterly work plans of RERL and submit to NRREP PSC for its review. National Project Director (NPD): The Executive Director of the AEPC will serve as the NPD of RERL Project. The NPD will be responsible for overseeing overall project implementation and ensuring that the project objective and outcomes are achieved in a timely and cost effective manner. The NPD will be assisted by a full-time National Project Manager (NPM)and will report to the NRREP PSC on project progress and plan, and seek its guidance to resolve emerging issues. The NPD will be responsible for coordinating with NRREP PSC regards to maintaining synergy in achievement of results, exchange of knowledge and expertise from RERL to NRREP and vice-versa. The NPD will provide guidance to the NPM on both strategic and project implementation issues. Project Assurance: PEB will be supported by UNDP Programme Officer to assure that the project is implemented as per its objectives by providing oversight and monitoring functions independently. National Project Manager (NPM): A full time National Project Manager position with a reporting line to NPD has been envisioned for RERL. AEPC will depute a senior staff from its pool who meets the qualifications of the position to work as the NPM as per the NIM guidelines to oversee the day-to-day operation and management of the project, including intra-project coordination and coordination with various components and sub-components within NRREP. For consistency in the structure they will not be called NPM but RERL Component Manager but will purely have a managerial function/responsibility. RERL is a very ambitious project with a challenge to meet all the GEF requirements hence a dedicated Manager will be necessary. As RERL is supporting to achieve the larger goals of NRREP programme, the NPM is mandated to work closely with the NRREP Component Managers and National Advisors under the overall guidance of the AEPC Executive Director. The NPM is responsible for day-to-day management, administration and coordination for timely project implementation. Main functions of the NPM will be to develop project work plans (annual and quarterly) implement them in line with the project objectives, strategies and result frameworks, and prepare progress reports as required by the GoN and UNDP. Other functions of the NPM are highlighted in the ToR (see Annex 7). The NPM will also be responsible for monitoring work progress and ensure timely delivery of outputs in a cost effective manner as per the Annual Work Plans and the Project Results Framework. S/he will ensure high quality of project planning, management, implementation, technical and financial compliance, progress reporting and monitoring. Senior National Advisor (SNA): Aligning with NRREP structure, a full time Senior National Advisor (SNA) with a reporting line to NPD/NPM will be recruited for RERL. SNA

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needs to have a strong technical background on Renewable Energy and should be committed to deliver the larger NRREP portfolio involving RERL. The SNA should work in collaboration with the NRREP Component Managers and National Advisors. The main responsibility of the SNA will be to provide the expert technical guidance to RERL team and to ensure that the RERL project outcomes are met. The SNA will have to provide support to ensure that the integrated approach between NRREP and RERL is maintained and the outcomes of NRREP and RERL are achieved as planned. The RERL project team will be constituted of additional experts that will be assigned to different NRREP components such as micro-mini hydro, solar, end-use promotion and financing, and will report to RERL-NPM, SNA and AEPC/NRREP Component Managers. A team of support staff will be recruited to support AEPC to achieve RERL objectives and targets, and the support staff will work directly under the supervision of the NPM and SNA. The professional staff and the support staff will be funded from project budget. Technical Experts/Professional staff: As RERL supports to achieve the broader objectives of NRREP programme; it plans to recruit Mini-Hydro Expert (1), Solar PV Expert (1), Livelihood Expert and Energy Finance Expert (1) and Management Information System Associate (1) as professional staff (see ToRs in Annex 7) to provide the needed technical assistance to AEPC/NRREP for the successful implementation of RERL. Based on the technical requirement of the project, RERL will recruit short term staffs to support the implementation of the project. (Large scale Micro Hydro (1 year), Mini-Hydro (per demo based in the field for 2 years each), Solar Power (demo – 2 year), Policy and institutional strengthening (10 months) and HR) Technical Experts (long and short term) recruited by RERL will be supervised and guided by the NPD/NPM and SNA and will work in close coordination with NRREP team. UNDP has been supporting AEPC to mainstream Gender and Social Inclusion initiatives through past and on-going renewable energy projects, as a result, a capacity has been built within AEPC to mainstream gender and social inclusion into overall AEPC programming and implementation. Under the current AEPC/NRREP programme a focused Gender Equality and Social Inclusion (GESI) Unit has been established to address GESI related issues for the entire programme. Under this arrangement, Gender Equality and Social Inclusion focal point for AEPC/NRREP will also be supporting RERL team to mainstream GESI initiatives into the project60. GESI focal point will collaborate closely with UNDP Gender team during the project implementation.

60AEPC/NRREP GESI focal point will be supporting RERL team to mainstream GESI initiatives into the project.

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Project Support Staff: Additionally, RERL plans to recruit project support staff to facilitate the implementation of this programme. The role of the support staff will be to support on financial management and compliance, reporting and administrative/logistics activities that are directly related to RERL project. The support staff team will be constituted of Administration and Finance Officer/Associate (1), Project Assistant (1) and Driver (4). The support staff will be supervised by the NPD/NPM and work in close coordination with NRREP team. The RERL funded project team will be housed in AEPC/NRREP programme team. Asset Transfer from old RERL project: UNDP is currently implementing transition RERL project and from April 2011 until December 2013. All the assets including office equipment and vehicles, currently being utilized by transition RERL project will be transferred to the new full-fledged RERL project. The integrated organizational setup of RERL/NRREP as described above is depicted in the figure below.

Figure 6: Integrated RERL/NRREP Structure

Professional Staff

Project Coordinator (National Project Manager for RERL/UNDP-GEF)

Mini-Hydro Expert (1)

Solar Power Expert (1)

Livelihood& Energy Finance Expert (1)

Management Information System Associate (1)

Project Execution Board (PEB)

Senior Beneficiary MOSTE, MOF, MOFALD,

Private Sector (TBC) & Civil Society (TBC)

Executive AEPC

(Executive Director)

Senior Supplier UNDP Nepal

Project Assurance UNDP

Project Support Staff

Admin/Finance Associate/Officer (1)

Project Assistant (1)

Driver (42)

NRREP Steering Committee

Mini-Hydro Unit within CESC of NRREP

Large-Scale Solar Support Unit within SESC of NRREP

Mini-Hydro Productive Use Unit within PEU of NRREP

Financial Sustainability Support Unit within CREF of NRREP

Short term Staff

Large scale Micro Hydro (1 year)

Mini-Hydro (per demo based in the field for 2 years each)

Solar Power (demo – 2 year)

Policy and institutional strengthening (10 months)

Training and HR

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Audit arrangements: The Government 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 according to UNDP financial regulations, rules and audit policies by the legally recognized auditor of the Government, or by a commercial auditor engaged by the Government.Nonetheless, since the activities funded by GEF/RERL also counts into regular NRREP annual programme and budget, they will also be audited as per NRREP auditing requirements. UNDP Support Services: UNDP Kathmandu will provide all required support in terms of participating in various Board and advisory meetings as required and by promoting the project in national and donor community. Prior obligations and prerequisites (if any): None Intellectual property rights and use of logo on the project’s deliverables: AEPC will be the sole owner of all intellectual property rights arising out of the project whereas AEPC will credit UNDP and GEF through display of their logo appropriately on the project’s deliverables

6 Monitoring Framework and Evaluation

The project will be monitored through the following M& E activities. The M& E budget is provided in the Table 43below.

6.1 Project start:

A Project Inception Workshop will be held within the first2 months after the project start, providing a platform for all project stakeholders to review the project document in line with their envisaged roles and responsibilities. The Inception Workshop is crucial to building ownership for the project results and to plan the first year annual work plan. A fundamental objective of the Inception Workshop will be to present the modalities of project implementation and execution, document mutual agreement for the proposed executive arrangements amongst stakeholders and assist the project team to understand and take ownership of the project's goals and objectives. Another key objective of the Inception Workshop is to introduce project staff with the UNDP expanded team which will support the project during its implementation, namely the UNDP CO, responsible Regional Technical Advisor and other Asia Pacific Centre staff (APRC) as appropriate. The Inception Workshop will address a number of key issues including:

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Assist all partners to fully understand and take ownership of the project. Detail the roles, support services and complementary responsibilities of UNDP CO and APRC staff vis-à-vis the project team. Discuss the roles, functions, and responsibilities within the project's decision-making structures, including reporting and communication lines, and conflict resolution mechanisms. The Terms of Reference for project staff and other project-related structures will be discussed again as needed in order to clarify for all, each party’s responsibilities during the project’s implementation phase.

Based on the project results framework and the relevant GEF Tracking Tool, finalize the first annual work plan. Review and agree on the indicators, targets and their means of verification, and recheck assumptions and risks.

Provide a detailed overview of reporting, monitoring and evaluation (M&E) requirements including roles and responsibilities for different M&E functions, with particular emphasis on the Annual Project Implementation Reviews (PIRS) and related documentation, the Annual Project Report (APR) as well as midterm and terminal evaluations. The Monitoring and Evaluation work plan and budget should be agreed and scheduled.

Plan and schedule Project Board meetings. Roles and responsibilities of all project organisation structures should be clarified and meetings planned. The first Project Board meeting should be held within the first 3 months following the inception workshop.

Any further or unresolved issues with regards to project integration with National Rural Renewable Energy Programme will required to be resolved during this inception phase.

An Inception Workshop report is a key reference document and must be prepared and shared with participants to formalize various agreements and plans decided during the meeting.

Project audit will follow UNDP Financial Regulations and Rules and applicable Audit policies.

6.2 First Annual Work Plan

After the Inception Workshop, the Project Management Team (PMT) in line with NRREP team will prepare the project’s first Annual Work Plan (AWP), on the basis of the Project Results Framework (PRF). This will include reviewing the PRF (indicators, means of verification, assumptions and risks), imparting additional detail as needed on the basis of this exercise, finalize the AWP with precise and measurable performance indicators and in a manner consistent with the expected outcomes for the project.

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6.3 Reporting

6.3.1 Quarterly

Project progress made will be monitored in the UNDP Enhanced Results Based Management Platform. Quarterly Progress Reports (QPR) will be prepared by the PMT and submitted to the UNDP CO for sharing with the UNDP Regional Team.

On a quarterly basis, a quality assessment process shall record progress towards the completion of key results, based on quality criteria and methods captured in the Quality Management table as per the UNDP Nepal Project M & E Framework.

Based on the initial risk analysis submitted, the risk log will be regularly updated in ATLAS by reviewing the external environment that may affect the project implementation. Risks become critical when the impact and probability are high. Note that for UNDP GEF projects, all financial risks associated with financial instruments such as revolving funds, microfinance schemes, or capitalization of ESCOs are automatically classified as critical on the basis of their innovative nature (high impact and uncertainty due to no previous experience justifies classification as critical).

An Issue Log shall be activated in Atlas and updated by the Project Manager to facilitate tracking and resolution of potential problems or requests for change.

Based on the above information recorded in Atlas, a Project Progress Reports (PPR) shall be submitted by the Project Manager to the Project Board through Project Assurance, using the standard report format available in the Executive Snapshot.

A project Lesson-learned log shall be activated and regularly updated to ensure on-going learning and adaptation within the organization, and to facilitate the preparation of the Lessons-learned Report at the end of the project.

A Monitoring Schedule Plan shall be activated in Atlas and updated to track key management actions/events. The use of these functions is a key indicator in the UNDP Executive Balanced Scorecard.

6.3.2 Annually

An Annual Review Report (ARR) shall be prepared by the Project Manager and shared with the Project Board and the Steering Committee. As minimum requirement, the ARR shall consist of the Atlas standard format for the QPR covering the whole year with updated information for each above element of the QPR as well as a summary of results achieved against pre-defined annual targets at the output level. An Annual Project Review/Project Implementation Reports (APR/PIR) shall be prepared to monitor progress made since the start of the project and in particular for the previous reporting period (30 June to 1 July). The APR/PIR combines both UNDP and GEF reporting requirements. Based on the ARR, an annual project review shall be conducted during the

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fourth quarter of the year or soon after, to assess the performance of the project and appraise the Annual Work Plan (AWP) for the following year. In the last year, this review will be a final assessment. This review is driven by the Project Board and may involve other stakeholders as required. It shall focus on the extent to which progress is being made towards outputs, and that these remain aligned to appropriate outcomes. The APR/PIR includes, but is not limited to, reporting on the following:

Progress made toward project objective and project outcomes - each with indicators, baseline data and end-of-project targets (cumulative)

Project outputs delivered per project outcome (annual).

Lesson learned/good practice.

AWP and other expenditure reports

Risk and adaptive management

ATLAS QPR

Portfolio level indicators (i.e. GEF focal area tracking tools) are used by most focal areas on an annual basis as well.

6.4 Periodic monitoring through site visits:

GON, APEC/NRREP, UNDP CO and the UNDP APRC will conduct visits to project sites based on the agreed schedule in the project's Inception Report/Annual Work Plan to assess first hand project progress. Other members of the Project Board may also join these visits. A Field Visit Report/BTOR will be prepared by the CO and UNDP APRC and will be circulated no less than one month after the visit to the project team and Project Board members.

6.4.1 Mid‐termofprojectcycle

The project will undergo an independent Mid-Term Evaluation at the mid-point of project implementation (July 2016). The Mid-Term Evaluation will determine progress being made toward 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 and timing of the mid-term evaluation will be decided after consultation between the parties to the project document. The Terms of Reference for this Mid-term evaluation will be prepared by the UNDP CO based on guidance from the Regional Coordinating Unit and UNDP-GEF. The management response and the

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evaluation will be uploaded to UNDP corporate systems, in particular the UNDP Evaluation Office Evaluation Resource Centre (ERC).

The relevant GEF Focal Area Tracking Tool, the AMAT, will also be completed during the mid-term evaluation cycle.

6.4.2 EndofProject

An independent Final Evaluation will take place three months prior to the final Project Board meeting and will be undertaken in accordance with UNDP and GEF guidance. The final evaluation will focus on the delivery of the project’s results as initially planned (and as corrected after the mid-term evaluation, if any such correction took place). The final evaluation will look at impact and sustainability of results, including the contribution to capacity development and the achievement of global environmental benefits/goals. The Terms of Reference for this evaluation will be prepared by the UNDP CO based on guidance from the Regional Coordinating Unit and UNDP-GEF.

The Terminal Evaluation should also provide recommendations for follow-up activities and requires a management response which should be uploaded to PIMS and to the UNDP Evaluation Office Evaluation Resource Centre (ERC).

The GEF Focal Area Tracking Tool, the AMAT, will also be completed during the final evaluation.

During the last three months, the project team will prepare the Project Terminal Report. This comprehensive report will summarize the results achieved (objectives, outcomes, outputs), lessons learned, problems met and areas where results may not have been achieved. 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 results.

6.5 Learning and knowledge sharing

Results from the project will be disseminated within and beyond the project intervention period through existing information sharing networks and forums like national knowledge management institutions, national/regional and international workshops and seminars.

The project will identify and participate, as relevant and appropriate, in scientific, policy-based and/or any other networks, which may be of benefit to project implementation though lessons learned. The project will identify, analyse, and share lessons learned that might be beneficial in the design and implementation of similar future projects.

Finally, there will be a two-way flow of information between this project and other projects of a similar focus nationally, regionally and internationally. Experiences of Rural, Renewable Energy in Nepal will be shared in the region as relevant.

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6.6 Communications and visibility requirements

Full compliance is required with UNDP and GEF Branding Guidelines. These can be accessed at http://intra.undp.org/coa/branding.shtml, and specific guidelines on UNDP logo use can be accessed at: http://intra.undp.org/branding/useOfLogo.html. Among other things, these guidelines describe when and how the UNDP logo is required to be used, as well as how the logos of donors to UNDP projects are required to be used. To avoid any misuse, when logo use is required, the UNDP logo needs to be used alongside the GEF logo. The GEF logo can be accessed at: http://www.thegef.org/gef/GEF_logo. The UNDP logo can be accessed at http://intra.undp.org/coa/branding.shtml.

Full compliance is also required with the GEF’s Communication and Visibility Guidelines (“GEF Guidelines”) which can be accessed at: http://www.thegef.org/gef/sites/thegef.org/files/documents/C.40.08_Branding_the_GEF%20final_0.pdf. Among other things, the GEF Guidelines describe when and how the GEF logo needs to be used in project publications, vehicles, supplies and other project equipment. The GEF Guidelines also describe other GEF promotional requirements regarding press releases, press conferences, press visits, visits by Government officials, productions and other promotional items.

Where other agencies and project partners have provided support through co-financing, their branding policies and requirements should be similarly applied.

6.7 M&E Work Plan and Budget

Table 43: M&E Work Plan and Budget



Time frame

Inception Workshop and

Report

NPD, NPM and Project Board

UNDP CO, UNDP GEF 10,000

Within 2 month of project start up

Measurement of Means of

Verification of results/Impacts (Outcomes &

Objective Indicators).

Project Manager will oversee the hiring of specific studies and

institutions, and delegate responsibilities

to relevant team members.

20,000

To be finalized in Inception Phase and Workshop.

Start, mid and end of project (during evaluation cycle) and annually when

required.

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Measurement of Means of

Verification for Project Progress

on output and implementation

Oversight by Project Manager

Project team

To be determined

as part of the Annual

Work Plan's preparation.

Annually prior to APR/PIR and to the definition of

annual work plans

ARR/PIR NPD, NPM and team

UNDP CO, UNDP RTA UNDP EEG

None Annually

Periodic status/ progress reports

Project manager and team

- Quarterly

Project Board Meetings

PEB Members, including NPD/AEPC,

CREF & UNDP CO NPM & PMT

5,000

Every quarter (four times in a year, once on

completion of the APR/PIR and more frequently if

needed ATLAS QPR PMT, UNDP CO Quarterly

Mid-term Evaluation


UNDP CO, UNDP RCUExternal Consultants (i.e. evaluation team)

30,000 At the mid-point of project

implementation.

Final Evaluation

NPD, Project manager and team,

UNDP CO, UNDP APRC

External Consultants (evaluation team)

30,000 At least THREE months before the end of project

implementation

Project Terminal Report

NPD, Project manager and team

UNDP CO 0

At least three months before the end of the

project

Audit UNDP CO


15,000 Yearly

Visits to field sites

UNDP CO* UNDP APRC* (as

appropriate) Government

representatives, partners

10,000 Paid from

IA fees and operational

budget

Yearly

TOTAL indicative COST1 Excluding project team staff time and UNDP staff and travel expenses

USD 120,000

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7 Legal Context

This document together with the CPAP signed by the Government and UNDP which is incorporated by reference constitute together a Project Document as referred to in the SBAA [or other appropriate governing agreement] and all CPAP provisions apply to this document. Consistent with the Article III of the Standard Basic Assistance Agreement, the responsibility for the safety and security of the implementing partner and its personnel and property, and of UNDP’s property in the implementing partner’s custody, rests with the implementing partner. The implementing partner shall:

Put in place an appropriate security plan and maintain the security plan, taking into account the security situation in the country where the project is being carried;

Assume all risks and liabilities related to the implementing partner’s security, and the full implementation of the security plan.

UNDP reserves the right to verify whether such a plan is in place, and to suggest modifications to the plan when necessary. Failure to maintain and implement an appropriate security plan as required hereunder shall be deemed a breach of this agreement. The implementing partner agrees to undertake all reasonable efforts to ensure that none of the UNDP funds received pursuant to the Project Document are used to provide support to individuals or entities associated with terrorism and that the recipients of any amounts provided by UNDP hereunder do not appear on the list maintained by the Security Council Committee established pursuant to resolution 1267 (1999). The list can be accessed via http://www.un.org/Docs/sc/committees/1267/1267ListEng.htm. This provision must be included in all sub-contracts or sub-agreements entered into under this Project Document.

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