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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: 67035-AM
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED GRANT
FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND
IN THE AMOUNT OF US$1.82 MILLION
TO THE
REPUBLIC OF ARMENIA
FOR AN
ENERGY EFFICIENCY PROJECT
March 1, 2012
Sustainable Development Department
South Caucuses Country Department
Europe and Central Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their
official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective of March 7, 2012)
Currency Unit = AMD
385 AMD = US$1
1.54 US$ = SDR 1
FISCAL YEAR January 1 – December 31
ABBREVIATIONS AND ACRONYMS
BOT
CEEP
CFAA
CPAR
CPS
DPL
DPO
EBRD
EIA
EIRR
EMP
ESCO
ESMAP
FIRR
FMM
GEF
GHG
Board of Trustees
Commercialization of Energy Efficiency Project
Country Financial Accountability Assessment
Country Procurement Assessment Report
Country Partnership Strategy
Development Policy Loan
Development Policy Operation
European Bank for Reconstruction and Development
Environmental Impact Assessment
Economic Internal Rate of Return
Environmental Management Plan
Energy Service Company
Energy Sector Management Assistance Program
Financial Internal Rate of Return
Financial Management Manual
Global Environment Facility
Greenhouse gas
IDA
KWh
MENR
MW
NGO
NPV
ORAF
PEFA
REP
R2E2 Fund
International Development Association
Kilowatt-hour
Ministry of Energy and Natural Resources
Megawatt
Non-Government Organization
Net Present Value
Operational Risk Assessment Framework
Public Expenditure and Financial Accountability
Renewable Energy Project
Renewable Resources and Energy Efficiency Fund
SEFF Sustainable Energy Financing Facility
SIL
SW
TA
UHP
UNDP
Specific Investment Loan
Staff-week
Technical assistance
Urban Heating Project
United Nations Development Program
Regional Vice President: Philippe H. Le Houerou
Country Director: Asad Alam
Sector Director:
Sector Manager:
Laszlo Lovei
Ranjit J. Lamech
Task Team Leader: Ani Balabanyan
REPUBLIC OF ARMENIA
ENERGY EFFICIENCY PROJECT
Table of Contents
I. Strategic Context ..................................................................................................................... 1
A. Country Context .................................................................................................................. 1
B. Sectoral and Institutional Context ....................................................................................... 1
C. Higher Level Objectives to which the Project Contributes ................................................ 4
II. Project Development Objectives ................................................................................................ 4
A. PDO..................................................................................................................................... 4
1. Project Beneficiaries ........................................................................................................... 4
2. PDO Level Results Indicators ............................................................................................. 5
III. Project Description.................................................................................................................... 5
A. Project components....................................................................................................... 5
B. Project Financing .......................................................................................................... 7
1. Lending Instrument....................................................................................................... 7
2. Project Cost and Financing ........................................................................................... 7
C. Lessons Learned and Reflected in the Project Design ................................................. 7
IV. Implementation ......................................................................................................................... 8
A. Institutional and Implementation Arrangements .......................................................... 8
B. Sustainability .............................................................................................................. 10
V. Key Risks and Mitigation Measures ........................................................................................ 10
VI. Appraisal Summary .......................................................................................................... 11
A. Economic and Financial Analysis .............................................................................. 11
B. Technical .................................................................................................................... 12
C. Financial Management ............................................................................................... 12
D. Procurement ................................................................................................................ 13
E. Social .......................................................................................................................... 14
F. Environment (including safeguards) .......................................................................... 14
G. Other Safeguards Policies triggered ........................................................................... 15
Annex 1: Results Framework and Monitoring.............................................................................. 16
Annex 2: Detailed Project Description ........................................................................................ 17
Annex 4 Operational Risk Assessment Framework (ORAF) ....................................................... 28
Annex 5: Implementation Support Plan ........................................................................................ 30
Annex 6: Team Composition ........................................................................................................ 32
Annex 7: Economic and Financial Appraisal ............................................................................... 33
Annex 8: Incremental Cost Analysis ............................................................................................ 37
Annex 9: Procurement Plan .......................................................................................................... 40
Annex 10: STAP Roster Review………………………………………………………………. .45
Annex 11: Map of Armenia .......................................................................................................... 46
DATA SHEET
Armenia
Energy Efficiency Project (P116680)
PROJECT APPRAISAL DOCUMENT
.
EUROPE AND CENTRAL ASIA
ECSS2
.
Basic Information
Date: 22-Feb-2012 Sectors: Energy efficiency in power sector (100%)
Country Director: Asad Alam Themes: Climate change (100%)
Sector
Manager/Director:
Ranjit J. Lamech/Laszlo
Lovei
Project ID: P116680 EA Category: B - Partial Assessment
Lending
Instrument:
GEF Grant Focal Area: Climate change
Team Leader(s): Ani Balabanyan
Joint IFC: No
.
Borrower: Republic of Armenia
Responsible Agency: Renewable Resources and Energy Efficiency Fund
Contact: Ms.Tamara Babayan Title: Director
Telephone: +37410-58-80-11 Email: [email protected]
.
Project Implementation
Period:
Start
Date:
03-Jul-2012 End
Date:
31-Dec-2014
Expected Effectiveness
Date:
03-Jul-2012
Expected Closing Date: 30-Jun-2015
.
Project Financing Data(US$M)
[ ] Loan [ X] Grant [ ]Other
[ ] Credit [ ] Guarantee
For Loans/Credits/Others
Total Project Cost (US$M): 10.66
Total Bank Financing
(US$M):
0.00
.
Financing Source Amount(US$M)
BORROWER/RECIPIENT 8.84
Global Environment Facility (GEF) 1.82
Total 10.66
.
Expected Disbursements (in USD Million)
Fiscal
Year
2012 2013 2014 2015 2016 0000 0000 0000 0000
Annual 0.30 0.40 0.50 0.50 0.12 0.00 0.00 0.00 0.00
Cumulati
ve
0.30 0.70 1.20 1.70 1.82 1.82 1.82 1.82 1.82
.
Global Environmental Objective(s)
The project development objective is to reduce energy consumption of social and other public facilities. The
global environmental objective is to decrease greenhouse gas emissions through the removal of barriers to the
implementation of energy efficiency investments in the public sector.
.
Components
Component Name Cost (USD Millions)
Energy efficiency investments in public facilities 8.70
Technical assistance 1.96
.
Compliance
Policy
Does the project depart from the CAS in content or in other significant
respects?
Yes [ ] No [ X ]
.
Does the project require any waivers of Bank policies? Yes [ ] No [ X ]
Have these been approved by Bank management? Yes [ ] No [ X ]
Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]
Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]
.
Safeguard Policies Triggered by the Project Yes No
Environmental Assessment OP/BP 4.01 X
Natural Habitats OP/BP 4.04 X
Forests OP/BP 4.36 X
Pest Management OP 4.09 X
Physical Cultural Resources OP/BP 4.11 X
Indigenous Peoples OP/BP 4.10 X
Involuntary Resettlement OP/BP 4.12 X
Safety of Dams OP/BP 4.37 X
Projects on International Waterways OP/BP 7.50 X
Projects in Disputed Areas OP/BP 7.60 X
.
Legal Covenants
Name Recurrent Due Date Frequency
Operational Manual X
Description of Covenant
R2E2 Fund shall be required, to implement the Project in accordance with the Operational Manual.
.
Team Composition
Bank Staff
Name Title Specialization Unit
Joseph Paul Formoso Senior Finance Officer Senior Finance Officer CTRLA
Jasneet Singh Senior Energy Specialist Senior Energy Specialist ECSS2
Alexander Astvatsatryan Senior Procurement
Specialist
Senior Procurement
Specialist
ECSO2
Anarkan Akerova Counsel Counsel LEGEM
Ani Balabanyan Operations Officer Team Lead CFPTO
Arman Vatyan Sr Financial
Management Specialist
Sr Financial
Management Specialist
ECSO3
Wolfhart Pohl Senior Environmental
Specialist
Senior Environmental
Specialist
ECSS3
Artur Kochnakyan Energy Economist Energy Economist ECSS2
Non Bank Staff
Name Title Office Phone City
Anke S. Meyer Consultant Consultant WBICC
1
I. Strategic Context
A. Country Context
1. Armenia has sustained economic reforms leading to significant improvements on its
income levels over the past decade and a half. Growth advanced 12 percent on average between
2001 and mid-2008, driven by an increased inflow of remittances and foreign investments, high
commodity prices, the transition rebound and strong reform efforts. This, and improved social
service provision, led to a sharp drop in poverty from over half of the population in 1999 to
about 23.5 percent in 2008. Key among the various reforms undertaken are the land privatization
in early 1990s, establishment of sound regulatory framework for the banking system, and
unbundling and the attraction of private capital into a number of infrastructure sectors, including
water and energy.
2. The global financial crisis hit Armenia severely despite swift government response.
Actual outcomes of 2009 indicate that the economy contracted by 14.2 percent while poverty
rose by nearly 5 percentage points and the fiscal deficit increased to about 8 percent of GDP.
The Government responded swiftly with re-prioritization of government expenditures towards
those that protect or create jobs in the short term and protected its priority social spending
programs such as pensions and the targeted social assistance program, which helped Armenia
avoid even worse poverty outcomes.
3. A gradual economic recovery is underway. The GDP grew by 2.1 percent in 2010 and an
estimated 4.2 percent in 2011. The global conditions will affect significantly the medium-term
prospects via remittances, trade (particularly exports of copper and molybdenum), and tourist
flows. Also, Armenia faces possible contagion effects from the ongoing euro-zone crisis.
4. The energy sector is essential for the sustainable economic development of the country
and investments in the energy sector underpin growth prospects. Utilities (energy, water and gas
supply) account for around 3.5 percent of the country‟s GDP and the energy sector contributes
the largest share of about 3 percent. Energy and infrastructure reforms contributed significantly
to Armenia‟s success through the 2000s, directly via investments, and indirectly through an
increased reliability of energy supply and elimination of large quasi-fiscal deficit.
B. Sectoral and Institutional Context
6. The energy sector of Armenia has achieved significant results through reforms and
restructuring. The sector has strong payment discipline with collections for electricity and gas
nearly at 100 percent of sales. There are no explicit or implicit subsidies to the energy sector and
the sector entities are among the largest tax payers in the country. There is a competent
regulatory agency for the sector. Despite these achievements, the energy sector faces a number of
challenges.
7. The key challenges of the energy sector include: (a) emerging power supply gap; (b)
threatened energy security; and (c) increasingly unaffordable energy tariffs.
2
8. Emerging power supply gap: Armenia currently has sufficient capacity to meet its
demand. However, depending on electricity demand growth scenarios, generation capacity
shortage of 800-1100 MW to meet the peak electricity demand is estimated to emerge after the
planned shut-down of the nuclear power plant (currently scheduled for 2016), and the phasing
out of inefficient and old (>40 years) thermal power plants.
9. Threatened energy security: Heavy reliance on imported fuels and the old and under-
maintained transmission and distribution assets put Armenia at risk of supply interruptions, price
fluctuations, and possible outages. The average age of the transmission lines is around 45 years
and the transmission company did not make any substantial investments in rehabilitation of the
lines. Moreover, fuel for more than 90 percent of the country‟s energy needs is imported.
Armenia is dependent on the imports for all of its transport fuel, all gas used for heating (whether
industrial or residential) and cooking, and gas and nuclear fuel used to generate over two-third of
the country‟s electricity.
10. Unaffordable energy tariffs: Rising fuel prices and the need for new, more expensive
generating units make the energy tariffs less affordable for the poor. In 2009, the poor Armenian
households spent roughly 8 percent of their total household budgets on electricity and gas. The
affordability issue will exacerbate if fuel prices continue to rise and the required significant
investments are made in new generation assets and rehabilitation of existing generation and
transmission assets.
11. The Energy Sector Strategy and the Sustainable Development Program of the
Government recognize these challenges. The increase of the power supply reliability and
improvement of energy security are among the key strategic objectives of the sector. To that end,
the Government prioritizes realization of economically viable energy efficiency potential as
means for achieving the above strategic objectives. Thus, the Government requested the Bank to
support with improvement of energy efficiency of public facilities and creation of an enabling
environment for energy efficiency.
12. Armenia has significant potential for energy efficiency and can recoup sizable economic
benefits through utilization of this potential. While Armenia is one of the less energy intensive
economies in the region, largely due to the structural changes of the economy, large potential
remains for further efficiency improvements. The 2008 World Bank Study found that Armenia
could save 132 billion Armenian Drams (more than US$360 million) annually, equivalent to 4.3
percent of its 2009 GDP, through energy efficiency investments. The World Bank study
estimated the energy efficiency investments in public facilities having the highest returns with
paybacks of two to ten years. The energy efficiency potential is not realized due to several
informational, knowledge, financing and legal obstacles.
13. Improvement of energy efficiency will contribute to addressing the above challenges.
Specifically, higher energy efficiency will contribute to: (a) reduction of investment needs in
new generation due to realization of energy efficiency potential; (b) improvement of the
country‟s energy security due to reduced demand for gas used for heating purposes and as a fuel
for electricity generation; and (c) improvement of affordability of energy for the poor given that
3
improved energy efficiency will require less energy consumption to achieve the needed comfort
level of heating, lighting or other use.
14. The Government has taken important steps to encourage realization of the energy
efficiency potential. In 2005, the National Parliament passed the Law on Energy Savings and
Renewable Energy, creating a legal basis for energy efficiency in Armenia. The Government
also adopted the National Program on Energy Savings and Renewable Energy, which identifies
the sectors with the largest energy efficiency potential and provides an outline of technical
measures/solutions to be taken to realize the identified technically viable potential. Additionally,
under the Development Policy Loan (DPL) of the World Bank, the Government adopted a time-
bound Energy Efficiency Action Plan for 2010-2013 that prioritizes energy efficiency measures
for various sectors.
15. Currently, several donors are supporting the Government to realize the energy efficiency
potential. The Armenia Sustainable Energy Financing Facility of EBRD supports private
enterprises‟ access to energy efficiency investment funds through line of credit to local
commercial banks. The Commercialization of Energy Efficiency Project, financed by USAID,
supports the private sector energy service companies and the banking sector to increase the
availability of bank financing for energy efficiency projects. The UNDP/GEF project on
Improvement of Energy Efficiency in Buildings supports development of building codes with
energy efficiency requirements; control, testing and certification of energy efficiency of
materials; awareness raising and piloting of integrated building design. The IFC Sustainable
Energy Finance Project supports establishment of a sustainable market for energy efficiency and
renewable energy investments. For energy efficiency, IFC project primarily supports financial
institutions to develop energy efficiency lending and awareness raising on sustainable energy
finance.
16. The Bank has knowledge and significant experience with energy efficiency projects
globally; the Bank also has a history of long and successful engagement in the energy sector of
Armenia and has played an important role in reforming the sector. The Bank has a comparative
advantage in analytical and operational work related to energy efficiency, which draws on the
Bank‟s cross-country experience. Moreover, energy efficiency is identified as a strategic target
and direction under the World Bank energy strategy and support program to developing
economies. In addition, the Bank has significant experience and knowledge in implementing
GEF-supported projects. Specifically, the Bank implemented the International Development
Association (IDA)-GEF financed Renewable Energy Project (REP) and is currently
implementing the GeoFund 2: Geothermal Project financed by the GEF. The Bank‟s comparative
advantage also lies in its strong operational capacity, which is built on fiduciary standards,
environmental and social safeguards, and portfolio quality assurance and monitoring system.
17. GEF‟s involvement in the project will help to remove some of the barriers to realizing the
economically and financially viable energy efficiency potential in the country. Without GEF
participation, the Government and the private sector may not be able to make sustainable investments in energy efficiency that will bring benefits to public facilities and the country at
large, due to limited incentives to implement energy efficiency projects, restrictive public
budgetary and procurement rules and limited borrowing capacity of public sector organizations.
4
Also, without the GEF involvement, there would be lack of resources to build knowledge about
energy efficiency among various stakeholders, including policy-makers, financial institutions,
public, residential and private sector energy consumers and other stakeholders.
18. Armenia is eligible for GEF assistance under the Climate Change Focal Area since it is
eligible to borrow from IBRD and ratified the United Nations Climate Change Convention on
May 14, 1993. Moreover, Armenia ratified the Kyoto Protocol on April 25, 2003, and therefore
has a significant incentive to promote energy efficiency, which helps to reduce greenhouse gas
(GHG) emissions.
19. Under this project, the Government will provide investment funds for energy efficiency
investments, channeled through Renewable Resources and Energy Efficiency Fund (R2E2 Fund)
Fund, which is in line with the GEF strategic priority of „„…increasing the availability of
financing for energy efficiency…”
20. The project is consistent with the GEF Climate Change Focal Area, in particular with
GEF Operational Program 5 – Energy Efficiency and the following strategic programs under
GEF-4: SP1 “Promoting Energy Efficiency Technologies and Practices in Appliances and
Buildings.” The GEF incremental financing would not only create national benefits, but also
global environmental benefits in the form of reduced GHG emissions.
C. Higher Level Objectives to which the Project Contributes
21. The project addresses the objectives of ensuring reliable power supply to end-users and
increasing the country‟s energy security, outlined in the Energy Sector Strategy of Armenia. The
project is in line with the Sustainable Development Program of the Government, which
prioritizes increasing energy efficiency in all sectors of the economy. The proposed project is
also consistent with the current Country Partnership Strategy (May 12, 2009) for FY 2009-2013
since it is centered on the second pillar of the CPS to support economic competitiveness and
growth through improvement of energy efficiency.
II. Project Development Objectives
A. PDO
22. The project development objective is to reduce energy consumption of social and other
public facilities. The global environmental objective is to decrease greenhouse gas emissions
through the removal of barriers to the implementation of energy efficiency investments in the
public sector.
1. Project Beneficiaries
23. The project benefits will accrue to a large number of people. The number of key
beneficiaries is not possible to quantify with a sufficient degree of precision given the scope of
the project. The key direct beneficiaries will be employees of administrative buildings, students,
children and hospital patients, depending on the public facilities where energy efficiency
5
investments will be made. The energy efficiency benefits include improved comfort levels,
reduced energy costs, and upgraded facilities. The technical assistance component of the project
will generate indirect benefits for the public sector in general by creating more conducive
environment for energy efficiency. Private construction and equipment suppliers will benefit
from increased demand for their goods and services.
2. PDO Level Results Indicators
24. To measure the progress toward achieving the project development objectives, the
following key outcome indicators were defined:
Energy savings (in kWh) in the retrofitted social and other public facilities; and
CO2 emission reductions (tCO2) in retrofitted social and other public facilities through
energy efficiency investments.
25. The energy savings in the retrofitted social and public facilities are projected to be
around 215 million kWh and the associated direct CO2 emission reductions will reach 50,549
tons.
III. Project Description
A. Project components
26. The project will be supported by US$8.3 million from government funding, US$1.82
million from the GEF grant, and US$0.54 million co-financing1 from the Renewable Resources
and Energy Efficiency Fund (R2E2 Fund). The Government funding will include the taxes and,
during the project life, the repayments of the revolving funds under now-closed Bank projects –
Urban Heating Project and Renewable Energy Project. The R2E2 Fund co-financing will
originate from service fees and interest under the proposed Energy Service Agreements within
framework of the project. The project funds would be channeled from the R2E2 Fund to social
and other public facilities for energy efficiency retrofits. The paragraphs below summarize the
project components. More details on specific activities can be found in Annex 2.
27. Component 1: Energy efficiency investments in public facilities (estimated cost of
US$8.7 million, including US$8.0 government funding and US$0.7 million GEF grant). This
component will support energy efficiency investments in social and other public facilities, e.g.
schools, kindergartens, hospitals, administrative buildings, street lighting. The energy efficiency
investments will reduce the energy consumption of retrofitted public and social facilities and
reduce the CO2 emissions. Additionally, these investments will generate substantial social
benefits, including increased quality of education, improved health.
28. The public sector has substantial energy saving potential with high rates of return on
energy efficiency investments. Specifically, the World Bank‟s Armenian Energy Efficiency
Study estimated that the public sector can save around 130 million kWh of energy equivalent
annually or around 35 percent of estimated total energy consumption. Furthermore, the energy
1 Assessed based on the estimated service fees and interest R2E2 Fun will get under the proposed Energy Service
Agreements.
6
audits conducted for eight public facilities as well as energy efficiency investments in eleven
schools under the World Bank financed Urban Heating Project, confirmed the financial viability
of energy efficiency investments and indicated reduction of energy consumption by 30-40
percent.
29. The target facilities have been selected from over 5,000 public and other social facilities
for which the R2E2 Fund has done extensive stock-taking and collected information on key
technical parameters of buildings, energy consumption and location. Financing of facilities will
be demand-driven but subject to some basic screening criteria and secondary technical and
financial eligibility criteria. The screening criteria include: (a) confirmation of public ownership
of facility; (b) structural soundness of the facility (absence of major structural damages that may
jeopardize integral stability of the building); (c) absence of plans for closure, downsizing or
privatization of the facility; and (d) comfort level of more than 50 percent. A secondary set of
eligibility criteria, which will be based on due diligence by the R2E2 Fund, include: (i) a
minimum of 20 percent energy savings; (ii) less than 10-year simple payback period for energy
efficiency investments; (iii) sub-projects should be at least US$50,000 and not more than
US$500,000, and (iv) the borrowers should be in good financial standing and demonstrate
payment discipline.
30. The R2E2 Fund has developed an overall investment plan for the project. The average
investment cost per sub-project is around US$70,000; schools will have lower investments and
hospital projects will be larger. In total, about 121 sub-projects are planned to be implemented
over the three-year period. The sub-projects will be supported through innovative energy service
agreements, whereby the beneficiaries will repay the investment costs from the energy savings.
For eligible social facilities, the R2E2 Fund will base repayments on realized energy savings, so
in these cases the R2E2 Fund will assume performance risks (see Section IV, Annex 3 for further
details). Therefore, the investment support for piloting initial 7-10 sub-projects under the
performance-based repayment scheme will be provided with the GEF grant to test and refine the
proposed mechanisms for financing of energy efficiency investments. A detailed investment plan
for the first year has also been developed by the R2E2 Fund, which includes 22 sub-projects with
total investment of around US$1.6 million (see Annex 9 for details).
31. The project will primarily finance insulation of walls, basements and attics,
repair/replacement of external doors and windows, window optimization2, reflective surfacing of
walls behind radiators, as well as improvements/ replacement of boilers and heating systems,
replacement of mercury vapor lamps with high-pressure sodium vapor lamps (or light emitting
diodes, LEDs) and of incandescent bulbs with compact fluorescent lamps (CFLs).
32. The project will seek to develop, test and disseminate replicable and sustainable models
for energy efficiency service provision. Energy efficiency investments in social and other public
facilities can also help stimulate the market by creating demand for energy efficient equipment
and services, and send a strong signal to the private sector and the public about the Government
commitment to energy efficiency.
2 Window optimization involves partial replacement of existing windows with walls while complying with day-
lighting requirements.
7
33. Component 2: Technical assistance (estimated cost of US$1.96 million, including
US$1.12 million GEF grant, US$0.54 million R2E2 co-financing and US$0.3 million
Government co-financing). This component will help remove the existing barriers to realizing
the energy efficiency potential and create an enabling environment for energy efficiency in the
public sector. The key areas that this component will finance include: (a) capacity building of the
R2E2 Fund, including training and basic audit and monitoring equipment; (b) pipeline
development and capacity building to participating public agencies, to address knowledge gaps
on energy efficiency, build the demand for program financing, and improve the prospects for the
sustainability of energy savings generated under the project; (c) policy development support,
including efforts to support budgeting, procurement and financing of energy efficiency projects
in the public sector, as well as select policy measures and energy statistics; (d) market
development and capacity building of various market actors, including ESCOs, banks,
construction firms; and (e) project management, including monitoring, reporting and financial
audits.
34. The technical assistance needs are in line with the time-bound Energy Efficiency Action
Plan that the Government adopted in 2010 under the Development Policy Operations (DPO).
B. Project Financing
1. Lending Instrument
35. The project will be supported through US$8.3 million of government financing, GEF
grant of US$1.82 million to cover technical assistance and 7-10 pilot sub-projects and US$0.54
million in R2E2 Fund co-financing.
2. Project Cost and Financing
Project Components Project cost
(million
US$)
GEF
Financing
(million US$)
GEF as %
of Total
Financing
1. Energy efficiency
1.1. Energy efficiency investments
1.2. Technical assistance
Total Baseline Costs
Physical contingencies
Price contingencies
Total Project Costs
Interest During Implementation
Front-End Fees
Total Financing Required
8.70
1.96
10.66
-
-
10.66
-
-
10.66
0.70
1.12
1.82
-
-
1.82
-
-
1.82
8%
57%
17%
-
-
-
-
17%
C. Lessons Learned and Reflected in the Project Design
36. The design of the energy efficiency component draws upon the lessons learned from
various energy efficiency projects in Armenia and similar projects implemented by the Bank
8
elsewhere (Serbia Energy Efficiency Project (2004), the Montenegro Energy Efficiency Project
(2008), Belarus Social Sector Energy Efficiency Project (2001), Croatia Energy Efficiency
Project (2003), Armenia Urban Heating Project (2006)) and the World Bank‟s Energy Sector
Management Assistance Program (ESMAP) work on energy efficiency in the public sector.
Specifically:
Extensive preparatory work, including collection and analysis of technical data on
building envelopes and energy consumption, is crucial for initial assessment of the
energy saving potential in the public facilities, development of sound eligibility criteria
and identification of a pipeline.
An effective monitoring and evaluation is necessary to assess the impact of energy
efficiency improvements in targeted buildings.
Technical assistance is essential for overcoming obstacles to creation of an enabling
environment for energy efficiency and scaling up of energy efficiency investments.
Robust pipeline development mechanisms are needed to ensure strong and high quality
project pipeline is developed and maintained.
The development of simple, replicable models for energy efficiency project packaging
and financing in the public sector is critical along with ongoing policy dialogue to
address emerging budgeting, procurement, legal and other issues.
IV. Implementation
A. Institutional and Implementation Arrangements
37. The R2E2 Fund will implement the project since it has adequate capacity and significant
experience in implementing Bank financed projects. The R2E2 Fund is a non-profit organization
established by the Government in 2005 with the mandate to promote the development of
renewable energy and energy efficiency markets in Armenia and to facilitate investments in
these sectors. The implementation of the project as well as overall R2E2 Fund operations will be
supervised by the Board of Trustees (BOT), consisting of representatives of government
agencies, NGOs, and the private sector, thus, ensuring required professional expertise. The BOT
is chaired by the Minister of Energy and Natural Resources.
38. The funds available under the investment component of the project will be channelled
through the R2E2 Fund. The R2E2 Fund will channel the funds by entering into energy service
agreements with: (i) municipalities and legally independent public facilities, and (ii) eligible
social facilities that are not legally independent.
39. For municipalities and public entities with revenue streams independent of the state
budget (e.g., municipal administrative buildings and street lighting, universities, hospitals) and
with demonstrated financial discipline and adequate administrative and institutional capacity to
be involved in the project, the R2E2 Fund will provide loans for energy efficiency improvements
(in form of financing of energy efficiency improvements). These loans will be provided under a
broader Energy Service Agreement, whereby the R2E2 Fund will also provide additional
services. However, the loans will be treated as municipal debt, with fixed repayment obligations
to be made within their budget provisions in future years. In addition to the loans, the R2E2 Fund
9
will provide the following services: conduct a preliminary screening to identify the general scope
of the energy efficiency sub-projects; develop bidding documents; carry out the procurement of
design and works on behalf of municipalities; oversee construction and commissioning; pay the
contractors for services provided (from the proceeds of the loan); and monitor the sub-projects.
The municipalities and public entities will be responsible for properly maintaining the systems,
repaying the loan, and paying a service fee to the R2E2 Fund in accordance with the Energy
Service Agreement. The amount of the repayments will be designed to allow municipalities and
public entities to repay the investment costs and service fee from the accrued energy cost
savings. Since the R2E2 Fund will disburse the loans directly to the contractors and be
responsible for all procurement, no separate FM or procurement assessments for each
participating municipality would be required.
40. In the case of eligible social and other public facilities, which are not legally independent,
the R2E2 Fund will enter into Energy Service Agreements without loans. Under this scheme, the
R2E2 Fund will first determine the average baseline energy use, identify the general scope of an
efficiency sub-project, develop bidding documents, conduct the procurement, finance the project,
oversee construction and commissioning, and monitor the sub-project. The Energy Service
Agreement will obligate the social and other public facilities to pay the baseline energy costs
over the life of the agreement. These baseline payments will be subject to adjustments, should
the social facility‟s base payments increase (e.g., due to increasing the heated area or comfort
levels, increases in tariffs, colder than usual climate). With these payments, the R2E2 Fund will
pay the energy bills (gas, oil, power) on the facility‟s behalf and reimburse itself for its
investment cost and service fee. The agreement should not be longer than ten years. The
agreement will also be designed so that the duration can be adjusted if the R2E2 Fund recovers
its full investment earlier or later.
41. To promote the development of the local ESCO industry and ensure sustainability of
energy efficiency services within the country, the R2E2 Fund will enter into contracts with
construction/ESCO firms. The contracts will include project design, and supply, installation,
commissioning, and possibly maintenance of equipment. In addition, the contract will include
provisions to allocate some project performance risks to the contractors based on the actual
energy savings generated from the project.
42. The R2E2 Fund will be responsible for implementation of the financial management
(FM) function of the project, including the flow of funds, planning and budgeting, accounting,
financial reporting, internal controls and auditing. The R2E2 Fund has strong experience in
implementing Bank-financed projects and currently implements the GeoFund 2: Armenia
Geothermal Project.3
Results Monitoring and Evaluation
43. The BOT and the management of the R2E2 Fund will bear the overall responsibility for
monitoring of project outcomes. The R2E2 Fund will build upon the information system for
monitoring and evaluation developed under previous operations. It covers financial viability of
3 The R2E2 Fund also implemented several Bank-financed projects in the past including Urban Heating Project, Renewable
Energy Project and the PPA for Electricity Supply Reliability Project.
10
energy efficiency sub-projects, energy savings from implementation of energy efficiency
measures, the project pipeline, disbursed, committed and invested amounts, defaults, and GHG
reduction. The R2E2 Fund will base its reporting on the commissioning and O&M reports
provided by the contractors. Emission reductions will be estimated based on the observed
reduction in heating/energy intensity of retrofitted public and other social facilities after
implementation of energy efficiency measures. The R2E2 Fund will regularly review a sample of
sub-projects to monitor implementation progress.
44. Additionally, a comprehensive evaluation of the project‟s results will be undertaken
during the project mid-term review.
B. Sustainability
45. The selection criteria of the public facilities will ensure sustainability of energy efficiency
investments. Specifically, the selection criteria are such that only public facilities where energy
efficiency investments can be financially viable and can generate cash savings are selected. The
savings from those investments will be used to maintain the retrofits. Additionally, the
Government committed to implement the measures under the Energy Efficiency Action Plan for
2011-2013, which will help to secure greater government commitment as well as additional
donor support to eliminate barriers to energy efficiency.
46. The replicability of energy efficiency investments will be ensured through: (a) removal of
existing legal, regulatory, procurement and information barriers to energy efficiency in public
sector; (b) development and testing of various financing, implementation and repayment schemes
for energy efficiency investment sub-projects in public sector facilities, which will also have a
strong demonstration effect; (c) training for public agencies to support with implementation of
energy efficiency policies and regulations; (d) capacity building for private sector actors to
strengthen their capacity in carrying out energy audits, energy management, financial appraisal
of energy efficiency investments and other key areas related to provision of energy services and
management; and (e) revolving of the investment funds by the R2E2 Fund.
V. Key Risks and Mitigation Measures
Risk Ratings Summary Table
Risk Rating
STAKEHOLDER RISK Low
IMPLEMENTING AGENCY RISK
- Capacity Moderate
- Governance Moderate
PROJECT RISK
- Design Moderate
- Social and Environmental Low
- Program and donor Low
- Delivery, monitoring and sustainability Moderate
11
VI. Appraisal Summary
A. Economic and Financial Analysis
47. The economic costs and benefits of the project were calculated exclusive of taxes and
subsidies and the assessment of the financial costs and benefits was done inclusive of taxes.
48. Economic and financial analysis: The economic and financial appraisal of energy
efficiency sub-projects was done for one typical facility from each major category of social and
other public facilities, based on results of energy audits. Specifically, economic and financial
viability of energy efficiency investment was assessed for a hospital, school, kindergarten,
municipality and street lighting.
49. The main economic benefit from energy efficiency investments is the economic value of
the saved energy. The main economic costs are the capital investments.
50. The main financial benefit of the energy efficiency investments is the reduction in energy
bill of social and public facilities. The financial costs of energy efficiency investments are the
capital investments.
51. A cost-benefit analysis was conducted to assess the economic and financial viability of
energy efficiency investments in each type of social and public facility. The results of economic
and financial appraisal are presented in the Table 1 below.
Table 1: Results of economic and financial analysis of energy efficiency investments Economic NPV
(US$)
EIRR
(%)
Payback
(years)
Financial NPV
(US$)
FIRR
(%)
Payback
(years)
Hospital 170,330 36 3.8 14,479 14 7.7
School 68,860 37 3.7 6,992 14 7.7
Kindergarten 23,969 31 4.3 8,075 17 6.6
Municipality
building
23,666 66 2.5 12,869 32 4.2
Street lighting 76,929 77 2.3 24,048 24 5.0
52. Sensitivity analysis: The key parameters, which may significantly affect the economic
and financial viability of sub-projects are the investment costs, the heating and lighting comfort
levels and the forecasts of the gas and electricity tariffs. The impact of defined variation in those
parameters for each of the above facility is presented in detail in Annex 7 (Tables 6 and 8).
Overall, the energy efficiency investments for some of the facilities may become financially
unviable only in case of 20 percent increase in estimated investment costs and comfort levels, i.e.
the facilities will be using the energy bill savings to increase in-door temperature. The energy
efficiency investments are also sensitive to gas and electricity end-user tariff. However, no
OVERALL PREPARATION RISK Moderate
OVERALL IMPLEMENTATION RISK Moderate
12
decrease of end-user gas and electricity tariffs is likely due to expected further increase of
imported gas prices and related increase in power generation costs. Thus, the estimated financial
viability of energy efficiency investments will only improve given the expected further increase
of tariffs.
B. Technical
53. Energy Efficiency: A survey of different types of social and other public facilities across
all marzes of Armenia was completed in mid-2010, showing a large need for energy-efficient
upgrading of such facilities. Based on this survey, selection criteria were established (see para.
28) to ensure that energy efficiency improvements financed by the project are done in facilities
where they will maximize the benefit-cost ratio and minimize the impacts of rising energy costs
and increases in comfort levels. Energy audits of eight types of public and social facilities found
a large level of cost-effective efficiency improvements, which can be provided by commercially
available technologies. Specifically, energy audits of eight public facilities suggested that energy
efficiency investments will create energy savings of around 42-59 percent, yield FIRRs of 14-32
percent, and require an average investment of about US$85,000. Street lighting had the highest
returns; hospitals had the highest potential for savings and required the largest investment;
schools also had viable projects, but were dependent upon baseline comfort levels. This analysis
was further tested by pilot energy efficiency investments undertaken in eleven urban schools
under the now-completed Urban Heating Project (completed in June 2011) in ten cities. The pilot
projects indicated that the energy bills went down on average by 34 percent while the heated area
increased by 49 percent.
54. Energy service companies will be procured under combined design and construction
contracts; the payments under these contracts will partially be based on project performance (i.e.,
realization of energy savings). As a fallback option, energy audit experts will be procured by the
R2E2 Fund to identify customized energy saving measures ensuring that investments will be
properly assessed, financially viable, and technically feasible.
C. Financial Management
55. The financial management (FM) arrangements of the R2E2 Fund have been reviewed
periodically as part of the on-going project‟s implementation support and supervisions and have
been found satisfactory. The FM assessment for this project, undertaken in January 2012,
established that the R2E2 Fund has acceptable FM arrangements in place. In particular: (i) the
FM staff has extensive experience in the Bank procedures for disbursement and financial
management, (ii) the filing system is well systematized; (iii) internal control system at the R2E2
Fund is overall adequate; and (iv) annual audited financial statements of the R2E2 Fund (entity)
and of the on-going Bank-financed projects implemented by the R2E2 Fund were submitted on
time with unmodified (clean) opinions, with no major issues raised by the auditor in the
management letters.
56. The R2E2 Fund developed Financial Management Manual (FMM) describing the FM
arrangements under the project (including the funds flow and internal controls under Energy
Service Agreements).
13
57. The annual audits of the project and the entity (the R2E2 Fund) financial statements will
be provided to the Bank within six months of the end of each fiscal year and for the project also
at the closing of the project. The Recipient has agreed that it will publish (posting on the R2E2
Fund website) the audit reports of the project and the entity within one month after the receipt of
those from the auditor. Following the Bank's formal receipt of these reports from the Recipient,
the Bank will make them publicly available according to World Bank Policy on Access to
Information. As part of the project implementation support and supervision missions, semiannual
interim un-audited financial reports (IFRs) will be reviewed and regular risk-based FM missions
will be conducted.
58. Analytical assessments conducted (PEFA, CFAA, CPAR) indicate significant progress.
Considering these improvements, the Bank is currently using the Treasury system to maintain the
designated accounts of Bank-financed projects. The Treasury system will also be used for this
project. For all the other FM elements (except for budgeting where also the country system is
used) the R2E2 Fund‟s respective systems are going to be used.
D. Procurement
59. Procurement under the project will be carried out in accordance with the World Bank‟s
Guidelines: Procurement of Goods, Works, and Non-Consulting Services Under IBRD Loans
and IDA Credits & Grants by World Bank Borrowers” (January 2011) and “Guidelines Selection
and Employment of Consultants Under IBRD Loans and IDA Credits & Grants by World Bank
Borrowers” (January 2011), and the provisions stipulated in the Legal Agreement. The World
Bank Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by
IBRD Loans and IDA Credit and Grants dated October 15, 2006 and revised on January 2011,
would also apply. The various items under different expenditure categories are described in
detail below. For each contract to be financed out of the Grant, the procurement methods or
consultant selection methods, estimated costs, prior review requirements, and time frame agreed
with the Bank are specified in the Procurement Plan presented in the Annex 9. The Procurement
Plan will be updated at least annually or as required to reflect the actual project implementation
needs and improvements in institutional capacity. The Procurement Plan will be published in line
with the requirements in the Procurement and Consultants Guidelines. General Procurement
Notice (GPN) will be published in the UN Development Business by negotiations. 60. Procurement under the project will be carried out by the R2E2 Fund. Under Component
1, US$8.7 million equivalent will be invested into sub-projects to increase energy efficiency (i.e.
to reduce energy consumption of the public facilities) in social and other public facilities. Sub-
projects will be in the range of US$50,000 - US$500,000 equivalent. Although most of the
investment financing would come from reflows from previous World Bank supported Urban
Heating Project and Renewable Energy Project, the World Bank Guidelines referred to above
would be followed, to allow for the performance-based, design/build works contracts to be
developed and used.
61. The R2E2 Fund will prepare performance-based bidding documents and will present
those for the Bank‟s review and comments. Under the performance-based contracting, a portion
14
of the contractual payments to ESCOs will be released once the energy savings are verified at
commissioning provided they correspond to the level agreed in the contract. Under Component
2, US$1.96 million equivalent will be spent to remove the existing barriers to realizing energy
efficiency potential and creation of an enabling environment for energy efficiency in the public
sector. The financing will include: (a) capacity building of the R2E2 Fund; (b) pipeline
development and capacity building to participating public agencies; (c) policy development and
regulatory framework improvement support; (d) market development and capacity building of
various market actors, including ESCOs, banks, construction firms; and (e) project management.
62. The R2E2 Fund has implemented several World Bank financed projects since 2005 and
gained experience in World Bank procurement rules and procedures. Because of the staff turn-
over, the current procurement capacity of the R2E2 fund is insufficient to carry out procurement
under the project and will be strengthened by hiring of a competitively selected procurement
specialist experienced in the Bank financed procurement.
63. Given the above, it is proposed that the procurement risk of the project is rated as
Moderate. E. Social
64. This project has no associated social risks, but a substantial positive social impact. By
promoting energy efficiency in public facilities, Component 1 will also benefit socially
vulnerable groups, such as children and hospital patients. This component will also support
important public awareness raising activities to promote the uptake of energy saving technology
in the private sector, thus widening the pool of potential beneficiaries
F. Environment (including safeguards)
65. The environmental impacts from the project are expected to be minor and relate mainly to
small scale construction works. Those minor issues may arise from noise, dust generation,
vehicle emissions, construction waste management and traffic / pedestrian safety. The only
project activity with environmental relevance will be the replacement of mercury vapor lamps
with high-pressure sodium vapor lamps or light emitting diodes and replacement of incandescent
bulbs with compact fluorescent lamps. The mercury vapor lamps contain Mercury (Hg), which is
toxic, volatile and easily ingested and, thus, will pose a specific challenge regarding safe
disposal. If released into the environment, the mercury contained in the lamps would create
health risks for workers and cause negative environmental impacts by potentially poisoning
mammals, birds, reptiles and plants. Therefore, all mercury vapor tubes will be collected
unbroken and disposed in a special way. Several options are available, including packing and
shipping to recycling plants in Armenia or abroad, and those options will be investigated in
detail. If expected quantities are small (e.g. 100-1000 pieces), the project will finance purchase
of mobile disposal systems, in which lamps are crushed in a confined, airtight chamber and
mercury fumes are absorbed with active coal. Several such systems are commercially available
on the market.
66. All impacts are expected to be easily and readily manageable with the “Checklist
Environmental Management Plan (EMP)” template, contained in the Operational Manual. This
15
safeguards instrument will be triggered by all small-scale construction, renovation, retrofitting
and installation works relating to the activities planned under this component. The checklist EMP
is self-explanatory, but does contain an introductory section explaining its scope, use and
application.
G. Other Safeguards Policies triggered
67. The project was assigned Safeguards Category B. The project triggers OP/BP 4.01 on
Environmental Assessment.
Safeguard Policies Triggered Yes No
Environmental Assessment (OP/BP 4.01) X
Natural Habitats (OP/BP 4.04) X
Forests (OP/BP 4.36) X
Pest Management (OP 4.09) X
Physical Cultural Resources (OP/BP 4.11) X
Indigenous Peoples (OP/BP 4.10) X
Involuntary Resettlement (OP/BP 4.12) X
Safety of Dams (OP/BP 4.37) X
Projects on International Waterways (OP/BP 7.50) X
Projects in Disputed Areas (OP/BP 7.60) X
16
Annex 1: Results Framework and Monitoring
ARMENIA: Energy Efficiency Project
Results Framework
Project Development Objective (PDO): Reduce energy consumption in social and other public facilities.
PDO Level Results
Indicators* Co
re
Unit of
Measure Baseline
Cumulative Target Values** Frequency
Data Source/
Methodology
Responsibility
for Data
Collection
Description
(indicator
definition etc.) YR 1 YR 2 YR3
Indicator One: Energy savings
in retrofitted social and other
public facilities4
kWh
equivalent
0 13,205,672 66,028,359 215,692,640 Quarterly R2E2 Fund
implementation
progress reports
R2E2 Fund Energy efficiency
improvements in
social and other
public facilities
Indicator Two: CO2 emission
reductions in retrofitted social
and other public facilities
through energy efficiency
investments5
tCO2 0 3,095 15,474 50,549 Annual R2E2 Fund
implementation
progress reports
R2E2 Fund Environmental
performance of
retrofitted social and
other public
facilities
INTERMEDIATE RESULTS
Intermediate Result indicator
One: Cumulative investments
in social and other public
facilities
US$ 0 1,500,000 4,900,000 8,700,000 Annual R2E2 Fund
implementation
progress reports
R2E2 Fund Progress with
realization of
financially viable
energy efficiency
potential
Intermediate Result indicator
Two: Regulations, legislative
amendments, guidelines to
further promote energy
efficiency
N/A Diagnostic
study
completed
The relevant
package is
prepared
The package is
submitted for
enactment
Quarterly R2E2 Fund
implementation
progress reports
R2E2 Fund Progress with
creation of enabling
environment for
energy efficiency
Intermediate Result indicator
Two: Number of public sector
projects commissioned
Number 0 21 68 121 Annual R2E2 Fund
implementation
progress reports
R2E2 Fund
*Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators)
**Target values should be entered for the years data will be available, not necessarily annually.
4 Cumulative energy savings over 20-year useful life of investments. 5 Cumulative CO2 reductions over 20-year useful life of investments.
17
Annex 2: Detailed Project Description
1. The project development objective is to reduce energy consumption of social and other
public facilities. The global environmental objective is to decrease greenhouse gas (GHG)
emissions through the removal of barriers to the implementation of energy efficiency
investments in the public sector.
2. The project (estimated cost of US$10.66 million) will have two components –
investment and technical assistance, summarized as follows:
3. Component 1: Energy efficiency investments in social and other public facilities
(estimated cost of US$8.7 million, of which US$8.0 million government funding and US$0.7
million GEF grant). This component will support energy efficiency investments in social and
other public facilities, e.g. schools, musical/art schools, kindergartens, hospitals, administrative
buildings, street lighting. The energy efficiency investments will reduce the energy consumption
of social and other public facilities and reduce the CO2 emissions. Additionally, these
investments will generate substantial social benefits, including increased quality of education and
improved health. Moreover, energy efficiency investments in social and other public facilities
will prime the market for energy efficiency improvements, by creating demand for energy
efficient equipment and services and send a strong signal to the private sector and the general
public about the Government commitment to energy efficiency.
4. The component targets public facilities since the 2008 World Bank study estimated that
the public sector has around 130 million kWh of viable annual energy saving potential, with rates
of return on energy efficiency investments that are the highest among all sectors. Additionally,
energy efficiency audits for eight public and other social facilities (two hospitals, two schools,
two kindergartens, a street lighting and a municipal building) confirmed the financial viability of
energy efficiency investments. In particular, the results of the audits suggest that an average
facility could save around 150,000 KWh equivalent of energy per year by investing an average
of US$70,000 with a simple payback of 3-8 years. Moreover, the results of energy efficiency
measures implemented in eleven public schools, which had their heating systems rehabilitated
under the World Bank Urban Heating Project, suggest that energy consumption reduces by more
than 40 percent.
5. The target facilities were selected from a total of over 5,000 social and other public
facilities for which the R2E2 Fund has done extensive stock-taking and collected information on
key technical parameters of buildings, energy consumption and location. In addition, the R2E2
Fund staff visited around 210 facilities to independently assess the energy situation and verify
some of the data provided. Financing of facilities will be demand-driven but subject to some
basic screening criteria and secondary technical and financial eligibility criteria. The screening
criteria include: (a) confirmation of public ownership of facility; (b) structural soundness of the
facility (absence of major structural damages that may jeopardize integral stability of the
building); (c) absence of plans for closure, downsizing or privatization of the facility; and (d)
comfort level of more than 50 percent. A secondary set of eligibility criteria, which will be based
on due diligence by the R2E2 Fund, include: (i) a minimum of 20 percent energy savings; (ii)
less than 10-year simple payback period for energy efficiency investments; (iii) sub-projects
18
should be at least US$50,000 and not more than US$500,000, and (iv) the borrowers should be
in good financial standing and demonstrate payment discipline.
6. This component will primarily finance the following key energy efficiency measures: (a)
attic and basement insulation, (b) repair/replacement of external doors and windows; (c)
windows optimization, i.e. partial replacement of existing windows with walls while complying
with day-lighting requirements, (d) reflective surfacing of walls behind radiators, (e)
improvement/ replacement of boilers and heating systems of social and other public facilities; (f)
replacement of mercury vapor lamps (HGL) with high-pressure sodium vapor lamps or light
emitting diodes (LEDs) for street lighting and/or traffic signals; (g) replacement of incandescent
bulbs with compact fluorescent lamps; and (h) other financially viable energy efficiency
measures.
7. The R2E2 Fund has developed an overall investment plan for the project, which
estimates the financing and implementation of about 121 public sector sub-projects with total
investment cost of US$8.7 million. While the average size is estimate at US$70,000, sub-projects
in schools might be smaller and sub-projects in hospitals might be larger. A detailed investment
plan for the first year has been developed by the R2E2 Fund, which includes 22 sub-projects
with total investment of around US$1.6 million.
8. The projects will be supported through energy service agreements. Eligible social
facilities that are not legally independent will repay the cost of the investment made by the R2E2
Fund from the realized energy savings, so in these cases, the R2E2 Fund will assume
performance risks (see Section IV, Annex 3 for further details). Therefore, investment support
for piloting initial 7-10 sub-projects under the energy service agreement approach will be
provided with the GEF grant to test and refine the proposed mechanisms for financing of energy
efficiency investments.
9. Component 2: Technical assistance (estimated cost of US$ 1.96 million, including
US$1.12 million GEF grant, US$0.54 million R2E2 co-financing and US$0.3 million
government co-financing). This component will help remove the existing barriers to realization
of energy efficiency potential and create an enabling environment for energy efficiency in the
public sector. The main areas that this component will finance include:
Training and technical assistance to build the technical and financial capacity of the R2E2
Fund and its staff, as well as equipment for auditing, M&V and data collections.
Program marketing and capacity building to the target public sector entities to address the
information and knowledge gaps related to energy efficiency, build demand for financing,
and improve the sustainability of energy savings. Activities will include program workshops
and flyers, development of a program website, development of successful case studies for
broader dissemination, training on educational programs for schools and other organizations
can implement to reduce energy waste and collect/analyze energy consumption data, etc.
Support in policy development related to energy efficiency, such as review of existing public
procurement and budgeting rules for energy efficiency services (e.g., blend of goods, works
and services, use of NPV rather than least cost, retention of savings by beneficiaries, use of
M&V protocols as basis for payments to service providers), development of alternate
19
financing models for energy efficiency in the public sector, regulatory support to assess and
develop feasible DSM mechanisms, developing methodologies and functions related to
energy and energy efficiency statistics, updating of the Energy Efficiency Action Plan, etc.
Capacity building for energy service providers and other market actors to screen, design,
evaluate, appraise/finance, implement, and measure energy efficiency investments in the
public sector.
Project management. Financing of incremental costs of the R2E2 Fund related to project
implementation.
10. The scope of technical assistance is based on the Energy Efficiency Action Plan for 2011-
2013, adopted in 2010.
20
Annex 3: Implementation Arrangements
Project Administration Mechanisms
1. The R2E2 Fund will implement the project. It has adequate implementation capacity,
including staff with solid professional qualifications, and significant experience in implementing
Bank financed projects. Specifically, the R2E2 Fund is currently implementing the GeoFund 2:
Armenia Geothermal Project and was the implementing entity for the Bank financed Urban
Heating Project, the associated GPOBA Gas and Heating Project as well as the Renewable
Energy Project. The R2E2 Fund was established as a non-commercial entity by the Government
Decree No 799, dated April 28, 2005, with the mandate to promote the development of
renewable energy and energy efficiency markets in Armenia and to facilitate investments in
these sectors. The R2E2 Fund is governed by a BOT and managed by a qualified management
team under the director. The overall framework for the R2E2 Fund operation is defined in the
Charter, while the details of the principles and implementation rules governing the R2E2 Fund
are spelled out in the Operational Manual.
2. The implementation of the project as well as the overall R2E2 Fund operations will be
overseen by the BOT. The BOT, chaired by the Minister of Energy and Natural Resources,
consists of ten members with eight members representing the public sector and two representing
the private sector and NGOs engaged in the areas of energy efficiency and renewable energy.
The public sector members are represented by the Ministry of Finance, Ministry of Energy,
Ministry of Nature Protection, Ministry of Urban Development, Ministry of Territorial
Administration and the Central Bank of Armenia.
3. The funds under the investment component of the project will be channelled through the
R2E2 Fund. The R2E2 Fund will channel the funds by entering into energy service agreement
with: (1) municipalities and legally independent public entities to finance energy efficiency
investments, and (2) eligible social facilities, which are not legally independent.
4. For the first set of beneficiaries, the R2E2 Fund will enter into energy service agreements
and provide loans (in form of financing of energy efficiency measures) to municipalities and
public entities with revenue streams independent of the state budget (e.g. municipal
administrative buildings and street lighting, universities, hospitals) and with demonstrated
financial discipline and with adequate administrative and institutional capacity to be involved in
the project. These loans will be provided under a broader Energy Service Agreement, whereby
the R2E2 Fund would also provide additional services. The loans will be treated as municipal
debt, with fixed repayment obligations to be made within their budget provisions in future years.
In addition to the loans, the R2E2 Fund will provide the following services: conduct a
preliminary screening to identify the general scope of the energy efficiency sub-projects; develop
bidding documents; carry out the procurement of design and works on behalf of municipalities;
oversee construction and commissioning; pay the contractors for services provided (from the
proceeds of the loan); and monitor the sub-projects. The municipalities and public entities will be
responsible for properly maintaining the systems, repaying the loan, and paying a service fee to
the R2E2 Fund in accordance with the Energy Service Agreement. The repayment instalments
will be designed to allow municipalities and public entities to repay the investment costs and
21
service fee from the accrued energy cost savings. Since the R2E2 Fund will disburse the loans
directly to the contractors and be responsible for all procurement, no separate FM or
procurement assessments for each participating municipality will be required.
5. For the second set of beneficiaries, the R2E2 Fund will enter into Energy Service
Agreements with eligible social and other public facilities, which are not legally independent and
depend on the stage budget for their revenues, without providing any loans. Under this scheme,
the R2E2 Fund will first determine the average baseline energy use, identify the general scope of
energy efficiency sub-project, develop bidding documents, conduct the procurement, finance the
project, oversee construction and commissioning, and monitor the sub-project. The Energy
Service Agreement will obligate the social and other public facilities to pay the baseline energy
costs over the life of the agreement. These baseline payments will be subject to adjustments,
should the social facility‟s base payments increase (e.g., due to increasing the heated area or
comfort levels, increases in tariffs, colder than usual climate). With these payments, the R2E2
Fund will pay the energy bills (gas, oil, power) on the facility‟s behalf and reimburse itself for its
investment cost and service fee. The agreement should not be longer than ten years. The
agreement will be designed in such a way so that the duration can be adjusted if the R2E2 Fund
recovers its full investment earlier or later.
Energy Service Agreement (Public Facilities with Revenue Stream Independent of State
Budget)
22
Energy Service Agreements (Public Facilities with Revenue Streams Dependent on State
Budget)
6. To promote development of the local ESCO industry and ensure sustainability of energy
efficiency services within the country, the R2E2 Fund will enter into contracts with
construction/ESCO firms. The contracts will include sub-project design and supply, installation,
commissioning, and possibly operations and maintenance of equipment. In addition, the contract
will include provisions to allocate some project performance risks to the contractors based on the
actual energy savings generated from the project.
Financial Management, Disbursement and Procurement
7. Financial management: The R2E2 Fund will be responsible for implementation of the
financial management (FM) function of the project, including the flow of funds, planning and
budgeting, accounting, financial reporting, internal controls and auditing. The R2E2 Fund has a
strong experience in implementing Bank-financed projects and currently implements GeoFund 2:
Armenia Geothermal project6.
8. The FM arrangements of R2E2 Fund were reviewed and found satisfactory. The FM
assessment for this project, undertaken in January 2012, established that the R2E2 Fund has
acceptable FM arrangements in place. In particular: (i) the FM staff has extensive experience in
6 The R2E2 Fund also implemented several Bank-financed projects in the past, including Urban Heating Project, Renewable
Energy Project and the PPA for Electricity Supply Reliability Project.
23
the Bank procedures for disbursement and financial management, (ii) the filing system is well
systematized; (iii) internal control system at the R2E2 Fund is overall acceptable; and (iv) annual
audited financial statements of the R2E2 Fund (entity) and the on-going Bank-financed projects
implemented by the R2E2 Fund were conducted on time with unmodified (clean) opinions, with
no major issues raised by the auditor in the management letters.
9. The R2E2 Fund developed FMM describing the FM arrangements under the project
(including the funds flow and internal controls under Energy Service Agreements).
10. The overall financial management risk for the project is Moderate, with Inherent and the
Control Risks of the project before and after mitigation measures also rated as Moderate.
11. The R2E2 Fund is capable of preparing relevant budgets. The annual budget is based on
procurement plan, and is prepared in much detail, which is necessary for monitoring of the
project. It is classified by categories, components and sub-components, sources of funds. The
director, the financial manager, and the procurement specialist are involved in the preparation of
the annual budget. The final plans and budgets are submitted to the Ministry of Finance (MOF)
for approval. When the budget is endorsed by MOF, it is submitted for approval of the project
management board. The R2E2 Fund agrees all variation from the budget with the Bank and the
Government in advance, and then makes changes in the annual budget.
12. The financial department of the R2E2 Fund consists of a Financial Manager, with prior
experience in R2E2 Fund as a Disbursement Specialist, a Financial Specialist/Accountant, who
previously worked as a financial consultant and supported the Financial Manager and currently
deals with bookkeeping, disbursement function, and Economist/Loan Officer, who currently
supports Financial Manager with data entry into accounting system and monitors and manages
loan portfolio. Overall, the current FM staffing arrangements at the R2E2 Fund are considered to
be adequate for project implementation.
13. The R2E2 Fund utilizes 1C accounting software. The software has accounting, fixed
assets, loan servicing and communities modules, and is capable of generating all statutory reports
as well as the projects‟ FMRs. However, some inaccuracies were observed in past with
generating IFRs due to the software malfunction. In order to eliminate the observed
shortcomings, the R2E2 Fund recently upgraded the accounting software, addressing all the
previous deficiencies, which will be used for the new project. The accounting system of the
R2E2 Fund is maintained according to former accrual basis Accounting Standards of Armenia
(ASRA). For the project reporting purposes IFRS will be adopted. The current chart of accounts
at the R2E2 Fund is in accordance with ASRA and will be adapted to the project requirements,
taking into account the R2E2 Fund‟s accounting system features and requirements of the project.
14. Overall, there is an acceptable and well documented internal control system in place at
the R2E2 Fund. The payments under the contacts are made based on acceptance acts/invoices.
Upon receipt of the invoice (or acceptance act), both the director and the financial manager
authorize the payment and the due amount under the contract is transferred to the supplier‟s bank
account. There is no petty cash at the Fund and all the payments are made via treasury transfers.
The operating expenses under the project will be financed partially from the GEF grant and
24
partially from the R2E2 Fund own resources. The fixed assets register is maintained in the
accounting software. All fixed assets of the Fund are allocated to the personnel, who are formally
responsible to safeguard the allocated assets. Sample fixed assets observed during the mission
had inventory tags attached. The accounting data is regularly backed-up on CDs. Considering the
small size of R2E2 Fund, no internal audit function is required neither exists. The R2E2 Fund
developed a Financial Management Manual (FMM) describing the FM arrangements under the
project including the funds flow and internal controls under Energy Service Agreements7. In
addition, the controls at the R2E2 Fund over IFRs preparation will be exercised consistently as
reflected in the FMM. 15. Project management-oriented IFRs will be prepared under the project. The R2E2 Fund
will produce a full set of IFRs every semester throughout the life of the project. The format of
IFRs has been agreed during the assessment and includes: (a) Project Sources and Uses of Funds,
(b) Uses of Funds by Project Activity, (c) Project Balance Sheet, (d) Designated Account
Statement, and (e) SOE Withdrawal Schedule. These financial reports will be submitted to Bank
within 45 days of the end of each calendar semester for the semester. The first semiannual IFRs
will be submitted after the end of the first full semester following the initial disbursement. Those
requirements and IFR formats will be incorporated in the FMM.
16. The audit of the entity and the project financial statements will be conducted (i) by
independent private auditors acceptable to the Bank, on terms of reference (TOR) acceptable to
the Bank and procured by the R2E2 Fund, and (ii) according to the International Standards on
Auditing (ISA) issued by the International Auditing and Assurance Standards Board of the
International Federation of Accountants (IFAC). The R2E2 Fund‟s current auditing
arrangements are satisfactory to the Bank, and it has thus been agreed that those arrangements
will be maintained for the R2E2 Fund and similar audit arrangements will be adopted for the
project. The annual audited project and entity (the R2E2 Fund) financial statements will be
provided to the Bank within six months after the end of each fiscal year, and for the project also
at the closing of the project. The Recipient has agreed that it will publish (posting on the R2E2
Fund website) the audit reports of the project and the entity within one month after the receipt of
those by the entity. Following the Bank's formal receipt of these reports from the Recipient, the
Bank will make them available to the public in accordance with the World Bank Policy on
Access to Information. The contract for the audit awarded during the first year of project
implementation may be extended from year to year with the same auditor, subject to satisfactory
performance. Audit costs will be financed from the proceeds of the project. 17. Disbursement: The R2E2 Fund‟s staff has extensive experience in Bank disbursement
procedures. The R2E2 Fund will open and manage Designated Account (DA) in the Treasury. A
project account (PA) will be opened in the HSBC Bank Armenia for transfer of Government
Counterpart Funding8. The Project funds will flow from:
(a) the Bank, either via DA, which will be replenished on the basis of full documentation or
7 The R2E2 will procure goods and works contributing to the energy efficiency for beneficiary entities under those agreements.
The project funds will be used for these investments. Then the beneficiary entities will make repayments to R2E2 revolving
account as per the schedule established in the Agreement. 8 This represents funding accumulated as a result of repayments from on-lending components under World Bank financed Urban
Heating Project and Renewable Energy Project, which are closed.
25
using SOEs, or by using the direct payment method or the Special Commitment. Further details
on this are provided in the Disbursement Letter; or,
(b) the Government via the PA where, as a part of the implementation arrangements, the
Government shall deposit its contribution to the Project and replenish it on a regular basis. Both
Bank and Government funds will be managed by the R2E2 Fund. Withdrawal applications for
the replenishments of the DA will be sent to the Bank on a quarterly basis. In addition to the
above accounts, the R2E2 will open and manage a separate Revolving Funds account at HSBC
bank Armenia, where the repayments (both principal and interest) from the beneficiaries will be
pooled.
18. Procurement: Procurement under the project will be conducted by R2E2 Fund - a non-
commercial entity established on April 28, 2005 by the Government Decree No 799. The R2E2
Fund is governed by a Board of Trustees (BOT) chaired by the Minister of Energy and Natural
Resources. BOT consists of ten members representing the public and private sectors and NGOs.
The public sector members are represented by the Ministry of Finance, Ministry of Energy and
Natural Resources, Ministry of Nature Protection, Ministry of Urban Development, Ministry of
Territorial Administration and the Central Bank of Armenia. R2E2 Fund has a Procurement Unit
(PU). PU carried out procurement under the several Bank financed projects (i.e. Armenia:
Geothermal Project; Renewable Energy Project; Urban Heating Project; and GPOBA Gas and
Heating Project) and gained certain experience in the Bank financed procurement.
19. Assessment of the R2E2 Fund‟s capacity to implement procurement under the project has
been carried out in January 2012. The R2E2 Fund currently has one procurement specialist with
modest experience. It is recommended to strengthen procurement capacity through competitive
selection of a procurement specialist with an experience in the Bank financed procurement.
20. Procurement of Goods Works and Consultant Services wholly or partially financed by the
Grant will be carried out following World Bank‟s Guidelines: Procurement of Goods, Works,
and Non-Consulting Services Under IBRD Loans and IDA Credits & Grants by World Bank
Borrowers (January 2011) and Guidelines Selection and Employment of Consultants Under
IBRD Loans and IDA Credits & Grants by World Bank Borrowers (January 2011); the
implementation arrangements described in the Operational Manual for the project; and using the
latest version of the Bank‟s Standard Bidding Documents (SBD) for all ICBs, NCBs, Shopping
and RFPs available on the Bank‟s web site.
21. The R2E2 Fund prepared Procurement Plan, where procurement and review methods for
the items to be procured under the project are presented. The Procurement Plan will be posted on
the World Bank‟s web site upon completion of the negotiations.
22. Thresholds for Procurement Methods:
23. Goods: Goods and equipment estimated to cost US$300,000 or more will be procured
through International Competitive Bidding (ICB). Goods estimated to cost less than $300,000
and more than $100,000 will be procured through National Competitive Bidding (NCB). Readily
26
available off-the-shelf goods estimated to cost less than US$100,000 each may be procured
through Shopping on the basis of three written quotations obtained from qualified suppliers.
24. Works: Civil works contracts estimated to cost not more than US$500,000 equivalent for
sub-projects reducing energy consumption of the public facilities to be financed under
Component 1 of the Project, will be procured through NCB method. Civil works contracts
estimated to cost not more than US$100,000 equivalent for sub-projects reducing energy
consumption of the public facilities to be financed under Component 1 of the Project, can be
procured through Shopping. The R2E2 Fund will prepare bidding documents and will present it
for the Bank‟s review and comments
25. Consultant Services: Consultancy services to be provided by consultancy firms and
estimated to cost US$300,000 or more will be procured through Quality and Cost Based
Selection (QCBS), Quality Based Selection (QBS), Fixed Budget Selection (FBS), Least-Cost
Selection and methods. Consultancy services to be provided by consultancy firms and estimated
to cost less than US$300,000 may be procured through Consultants‟ Qualifications (CQ) method.
For assignments estimated to cost less than US$100,000 each, the shortlist may comprise only
national firms according to the paragraph 2.7 of the Consultant Guidelines. Individual
Consultants will be selected in accordance with Section V of the Consultant Guidelines.
26. Latest versions of the Bank‟s Standard RFP and SBD available on the Bank‟s web site
will be used for procurement of Goods and Selection of Consultants.
27. Prior Review thresholds are proposed as follows:
- All ICB and first two NCB contracts for Goods and Works;
- First Shopping contract for Goods and Works;
- All DC contracts;
- All contracts with consulting firms estimated to cost US$100,000 or more and all Single Source
contracts;
- All contracts with individual consultants estimated to US$50,000 or more and all Single Source
contracts.
28. As the project will be implemented in an environment where corruption can be perceived
as an important issue, adequate mitigation measures have been put in place and will be closely
monitored to ensure that the residual project risk is acceptable, including: (a) procurement prior
and post reviews to monitor and assess the corruption risk; (b) monitoring of procurement
progress against the procurement plan; (c) advertising and posting of contracting opportunities
under the project on the official web-site of the Public Procurement of the Ministry of Finance of
the Republic of Armenia www.procurement.am, in addition to the UNDB.
29. Country office based procurement specialist will provide implementation support on
various procurement related issues and guidance on the Bank‟s Procurement Guidelines.
27
30. Environmental and Social Safeguards: The team has not identified any environmental and
social risks which would not be under the coverage of the safeguards policies, and which would
not be addressed by the corresponding safeguards instruments.
Monitoring and Evaluation
31. The R2E2 Fund has sufficient capacity to collect the required data required for
monitoring of the progress towards project outcomes. The R2E2 Fund will collect on a regular
basis the required information and data on energy savings from energy efficiency investments in
social and public facilities. In addition, the R2E2 Fund will further develop its existing
information system to collect the other key data required for monitoring of the intermediate
results indicators, including the pipeline of projects; disbursed, committed and invested amounts;
defaults and the financial viability estimates of the sub-projects. The R2E2 Fund will base its
reporting on the commissioning and O&M reports provided by the contractors. The GHG
emission reductions will be estimated based on the observed reduction in heating/energy
intensity of retrofitted public and other social facilities after implementation of energy efficiency
measures.
32. The cost of data collection, monitoring and evaluation will be covered by the incremental
operating costs of the R2E2 Fund.
28
Annex 4: Operational Risk Assessment Framework (ORAF)
Project Stakeholder Risks
Stakeholder Risk Rating Low
Description: Risk Management:
Some of the stakeholders may not fully understand how the project is
aligned with their needs.
The project implementation will be accompanied by disclosure of relevant information by the R2E2 Fund to
inform the beneficiaries and the general public about the benefits of energy efficiency improvements and the
project activities. The Bank‟s ongoing dialog and continuous cooperation with the Government and other
key stakeholders will ensure smooth implementation of the project.
Resp: Both Stage: Both Due Date: 30-Jun-2015 Status: In Progress
Implementing Agency (IA) Risks (including Fiduciary Risks)
Capacity Rating Moderate
Description: Risk Management:
Procurement of energy efficiency services might be delayed due to large
number of contracts, planned under the project, and limited experience
of the current procurement specialist of the R2E2 Fund in similar
projects.
The R2E2 Fund will hire a procurement specialist with adequate experience in Bank financed projects.
Resp: Client Stage: Implementation Due Date: 04-May-2012 Status: In Progress
Governance Rating Moderate
Description: Risk Management:
Slow and ineffective decision making by the R2E2 Fund. The project team will maintain close dialogue with the key Government counterparts to ensure the Board of
Trustees of the R2E2 Fund makes effective and timely decisions regarding the project matters.
Resp: Bank Stage: Implementation Due Date: 30-Jun-2015 Status: Not Yet Due
Project Risks
Design Rating Moderate
Description:
The social and other public facilities may not be interested in energy
efficiency investments.
The public and private sector do not uptake the energy efficiency
investments.
Risk Management:
Pipeline development and awareness raising activities, as well as packaging of services and use of innovative
repayment schemes, highlighting of co-benefits, will contribute to attractiveness of participation in the
program.
Resp: Client Stage: Implementation Due Date: 30-Jun-2015 Status: In Progress
Risk Management:
Public awareness campaigns, including lessons learned from initial projects, as well as involvement of
Energy Service Companies in improvement of energy efficiency of social and other public facilities will
contribute to replicability.
29
Resp: Client Stage: Implementation Due Date: 30-May-2015 Status: Not Yet Due
Social and Environmental Rating Low
Description:
Minor environmental impacts may result from noise, dust generation,
vehicle emissions, construction waste management and traffic /
pedestrian safety.
Environmental impacts from replacement of mercury vapor lamps with
high-pressure sodium vapor lamps or light emitting diodes and
replacement of incandescent bulbs with compact fluorescent lamps.
Risk Management:
The mentioned impacts are expected to be easily and readily manageable with the “Checklist Environmental
Management Plan (EMP)” template, contained in the Operational Manual. This safeguards instrument will
be triggered by all small-scale construction, renovation, retrofitting and installation works relating to the
activities planned under this component. The checklist EMP is self-explanatory, but does contain an
introductory section explaining its scope, use and application.
Resp: Client Stage: Implementation Due Date: 30-Jun-2015 Status: Not Yet Due
Risk Management:
All mercury vapor tubes will be collected unbroken and disposed in a special way. Several options are
available, including packing and shipping to recycling plants in Armenia or abroad, and those options will be
investigated in detail. If expected quantities are small, the project will finance purchase of mobile disposal
systems, in which lamps are crushed in a confined, airtight chamber and mercury fumes are absorbed with
active coal. Several such systems are commercially available on the market.
Resp: Client Stage: Implementation Due Date: 30-Jun-2015 Status: Not Yet Due
Program and Donor Rating Low
Description: Risk Management:
Energy efficiency projects financed by multiple donors may lack
coordination.
Continue to ensure dialogue among donors through meetings and sharing of information.
Resp: Bank Stage: Both Due Date: 30-Jun-2015 Status: In Progress
Delivery Monitoring and Sustainability Rating Moderate
Description: Risk Management:
Energy savings in retrofitted social and other public facilities are not
sustained.
The selection criteria of the public facilities will ensure sustainability of energy efficiency investments.
Specifically, the selection criteria are such that only public facilities where energy efficiency investments can
be financially viable and can generate cash savings are selected. The savings from those investments will be
used to maintain the retrofits.
Resp: Client Stage: Implementation Due Date: 30-Apr-2015 Status: In Progress
Overall Risk
Preparation Risk Rating: Moderate Implementation Risk Rating: Moderate
Description: Description:
30
Annex 5: Implementation Support Plan
1. Strategy and approach for implementation support: The implementation support strategy was
developed considering the risks and mitigation measures identified in the ORAF and targets provision of
flexible and efficient implementation support to the client.
Procurement. The procurement related implementation support will include: (a) timely advice
from the country office based procurement officer on various procurement related issues and
guidance on the Bank‟s Procurement Guidelines; (b) monitoring of procurement progress against
the procurement plant.
Financial management: The financial management related implementation support will
primarily include timely advice and detailed guidance from the country office based financial
management specialist on various aspects of the project financial management. Additionally, the
financial management supervisions will review the project financial management system,
including but not limited to accounting, reporting and internal controls, and provide further
suggestions on its improvement.
Environmental safeguards: The Bank‟s environmental and social specialists will provide on
demand support in strengthening the capacity of the R2E2 Fund in tackling safeguards related
issues. The Bank‟s safeguards specialists will monitor a sample of the sub-projects regarding the
implementation of the agreed checklist EMPs and – especially during the initial implementation
phase - will provide guidance to the Government to address the issues that may arise.
Various aspects of energy efficiency components: The Bank team will supervise the
implementation of the project on daily basis to provide advice the R2E2 Fund on various issues
related to energy efficiency.
2. Implementation support plan: The project team will provide timely and effective implementation
support through daily supervision since several task team members are based in the local office. The task
team will provide the following detailed inputs to support project implementation:
Technical inputs: The energy efficiency specialist will: (a) review the bidding documents for
procurement of energy efficiency services to ensure appropriate specification of energy efficiency
measures to be implemented by ESCOs; (b) provide requested guidance to the R2E2 Fund on
development of pipeline of energy efficiency sub-projects, awareness raising activities, as well as
packaging of services and use of innovative repayment schemes.
Fiduciary requirements and inputs: The financial management and procurement specialists,
based in the country office, will provide timely support. The Bank will conduct risk-based financial
management implementation support and supervision mission within a year of the project
effectiveness, and then at appropriate intervals. In addition, the regular IFRs and annual project and
entity audit reports will be reviewed by the Bank. As required, a Bank-accredited Financial
Management Specialist will assist in the implementation support and supervision process. The
procurement specialist will provide needed guidance on Bank procurement rules/guidelines, bidding
documents and other procurement issues.
Safeguards: The project‟s environmental specialist will review safeguards compliance,
specifically the application of checklist EMPs during the initial phase of project implementation and
be available on an ad-hoc basis throughout the entire implementation period.
31
Operation: The co-TTL of the project will be based in the country office and will conduct daily
supervision of the project and coordinate with the client and other project team members so as to
provide timely guidance and support to the client.
Time Focus Skills Needed Resource Estimate
First twelve
months
Technical review of the bidding documents Energy efficiency
specialist
5 SWs
Procurement review of the bidding
documents
Procurement specialist 3 SWs
FM supervision Financial management
specialist
3 SWs
Environmental supervision Environmental
specialist
1 SWs
Support with project supervision
coordination
Energy economist 8 SWs
Task management Operations Officer 6 SWs
12-36 months Implementation of project Energy efficiency
specialist
12 SWs
Environmental supervision Environmental specialist 2 SWs
Financial management and disbursements Financial management
specialist
4 SWs
Review of bidding documents for
procurement of energy efficiency services
and TA activities
Procurement specialist 4 SWs
Support with project coordination and
economic/financial analysis inputs
Energy economist 20 SWs
Task management Operations Officer 18 SWs
Skills Mix Required
Skills Needed Number of Staff Weeks Number of Trips Comments
Task team leader 24 Field trips as required
Energy economist 28 Field trips as required Country office based
Energy efficiency specialist 17 Three
Procurement specialist 7 Field trips as required Country office based
Financial management
specialist
7 Field trips as required Country office based
Environmental specialist 3 Two
32
Annex 6: Team Composition
World Bank staff and consultants who worked on the project:
Name Title Unit
Ani Balabanyan Task team leader, Operations
Officer
CFPTO
Arthur Kochnakyan Energy Economist ECSS2
Jas Singh Sr. Energy Efficiency Specialist ECSS2
Anke Meyer Consultant, Energy Efficiency
Specialist
ECSSD
Wolfhart Pohl Sr. Environmental Specialist ECSS3
Arman Vatyan Sr. Financial Management
Specialist
ECSO3
Garik Sergeyan Financial Management Consultant ECSO3
Alexander Astvatsatryan Procurement Officer ECSO2
Armine Aydinyan Procurement consultant ECSO2
Gevorg Sargsyan Program Coordinator ETWEN
Anarkan Akerova Legal Counsel LEGES
Joseph Formoso Sr. Finance Officer CTRLA
Irina Tevosyan Program Assistant ECCAR
Josephine A. Kida Program Assistant ECSSD
33
Annex 7: Economic and Financial Appraisal
1. The economic costs and benefits of the project were calculated exclusive of taxes and subsidies and the
assessment of the financial costs and benefits was done inclusive of taxes.
2. Key assumptions: The economic and financial analysis relies on the following key assumptions:
Table 4: Key assumption of economic and financial appraisal AMD/US$ average annual exchange rate 380
Long-run marginal cost of power supply US$ 111/MWh*
Long-run marginal cost of gas supply AMD 163.4/m3**
Heating value equivalence of gas and
electricity
9.1 kWh/m3
Assessment period 20 years
VAT rate 20%
Discount rate 10% * Energy Sector Issues Note, World Bank, 2010.
** Bank team estimate.
3. Economic analysis: The following eligibility criteria will be applied for social and other public facilities
to be considered for financing under the project: (a) structural soundness of the facility (absence of major
structural damages that may jeopardize integral stability of the building); (b) no plans for closure, downsizing or
privatization of the facility; (c) at least 50 percent comfort level; (d) less than 10-year payback period for energy
efficiency investments. The R2E2 Fund will be responsible for selection of the sub-projects to ensure they meet
the above eligibility criteria.
4. The main quantifiable economic benefit from energy efficiency investments in public facilities is the
economic value of saved energy. Energy savings were valued at the estimated long-run marginal cost of
electricity supply and/ or gas supply, depending on the facility and the heating option used before
implementation of energy efficiency measures. The main economic costs of the project are the capital
investments.
5. The energy efficiency investments will also generate economic benefits that were not quantified in this
analysis, including emission reductions, increased comfort level for occupants of the social and public facilities
and improved quality of services provided by those facilities, e.g. improved in-patient hospital care, better
quality education, improved night-time lighting conditions for pedestrians and vehicles.
6. Cost-benefit analysis was conducted for each type of public facility (a hospital, school, kindergarten,
municipality building and street lighting) that might be financed under the project. The results of the economic
analysis are presented in the table below.
Table 5: Results of economic analysis of energy efficiency investments
NPV (US$) EIRR (%) Payback (years)
Hospital 170,330 36 3.8
School 68,860 37 3.7
Kindergarten 23,969 31 4.3
Municipality building 23,666 66 2.5
Street lighting 76,929 77 2.3
34
7. Sensitivity analysis: The key parameters, which may significantly affect the economic viability of
energy efficiency investments, are the investment costs, the heating and lighting comfort levels and the
estimated long-run marginal costs of electricity and gas supply. The impact of defined variation in those
parameters is presented in the Table 8. The results of the sensitivity analysis suggest that even in case of
significant variation of key input parameters, the energy efficiency investments remain economically viable.
8. Financial analysis: The main financial benefit of the energy efficiency investments is reduction of the
energy bills. The energy bill savings from energy efficiency investments were valued at current effective
electricity and gas tariffs, depending on the type of the facility and the heating option utilized by the facility
before energy efficiency investments. The financial costs of energy efficiency investments are the capital
investments and incremental O&M costs. The results of the financial analysis of energy efficiency investments
are presented in the table below.
Table 7: Results of financial analysis of energy efficiency investments NPV (US$) FIRR (%) Payback (years)
Hospital 14,479 14 7.7
School 6,992 14 7.7
Kindergarten 8,075 17 6.6
Municipality building 12,869 32 4.2
Street lighting 24,048 24 5.0
9. Sensitivity analysis: The key parameters, which may significantly affect the financial viability of the
energy efficiency investments, are the investment costs, the heating and lighting comfort levels as well as the
forecasts of the end-user gas and electricity tariffs. The impact of defined variation in those parameters is
presented in the Table 9. Overall, the energy efficiency investments for some of the facilities may become
financially unviable only in case of 20% increase in estimated investment costs and comfort levels, i.e. the
facilities will be using the energy bill savings to increase indoor temperature. The energy efficiency investments
are also sensitive to gas and electricity end-user tariff. However, no decrease of end-user gas and electricity
tariffs is likely due to expected further increase of imported gas prices and related increase in power generation
costs. Thus, the estimated financial viability of energy efficiency investments will only improve given the
expected further increase of tariffs.
35
Table 8: Sensitivity analysis for economic appraisal of energy efficiency investments
Inv. cost +
20%
Inv. cost -
20%
LRMC of
electricity +
20%
LRMC of
electricity -
20%
Comfort
level + 20%
Comfort
level - 20%
LRMC of
gas + 20%
LRMC of
gas – 20 %
Hospital NPV (US$) 142,548 198,111 246,266 94,393 156,196 18,463 N/A N/A
EIRR (%) 28 250 50 25 34 38 N/A N/A
Payback (years) 4.5 3.0 3.0 4.9 3.1 3.4 N/A N/A
School NPV (US$) 58,028 48,529 N/A N/A 50,083 87,637 93,464 44,256
EIRR (%) 37 51 N/A N/A 30 46 48 27
Payback (years) 3.7 2.9 N/A N/A 4.3 3.2 3.2 4.6
Kindergarten NPV (US$) 19,004 28,934 N/A N/A 13,231 34,707 33,728 14,210
EIRR (%) 24 42 N/A N/A 22 40 39 23
Payback (years) 5.2 3.4 N/A N/A 5.5 3.5 3.6 5.4
Municipality building NPV (US$) 21,634 25,698 29,656 17,676 19,499 27,834 24,431 22,891
EIRR (%) 50 99 88 49 54 81 69 64
Payback (years) 3.0 2.0 2.3 3.0 2.8 2.3 2.4 2.5
Street lighting NPV (US$) 71,105 82,753 98,139 55,719 60,653 93,260 N/A N/A
EIRR (%) 57 119 109 53 59 101 N/A N/A
Payback (years) 2.7 1.2 1.9 2.9 2.7 1.0 N/A N/A
Table 9: Sensitivity analysis for financial appraisal of energy efficiency investments Inv. cost +
20%
Inv. cost -
20%
Effective
electricity
tariff +
20%
Effective
electricity
tariff - 20%
Comfort
level + 20%
Comfort
level - 20%
Effective
gas tariff +
20%
Effective
gas tariff –
20 %
Hospital NPV (US$) (20,248) 49,206 61,940 -32,981 4,611 24,348 4,641 24,317
FIRR (%) 10 19 19 8 12 15 12 15
Payback (years) 9.4 6.2 6.2 10.3 8.2 7.4 8.2 7.3
School NPV (US$) (6,548) 20,533 N/A N/A (4,408) 18,393 21,931 (7,947)
FIRR (%) 10 19 N/A N/A 11 17 18 10
Payback (years) 9.1 6.0 N/A N/A 9 6.5 6.4 9.5
Kindergarten NPV (US$) 1,869 14281 N/A N/A (531) 16,681 15,896 254
FIRR (%) 13 23 N/A N/A 12 22 22 12
Payback (years) 7.0 5.4 N/A N/A 8.5 5.5 5.5 8.5
36
Inv. cost +
20%
Inv. cost -
20%
Effective
electricity
tariff +
20%
Effective
electricity
tariff - 20%
Comfort
level + 20%
Comfort
level - 20%
Effective
gas tariff +
20%
Effective
gas tariff –
20 %
Municipality building NPV (US$) 1,039 15,409 17,362 8,377 9,539 16,209 13,490 12,248
FIRR (%) 25 43 39 24 26 37 33 30
Payback (years) 4.0 3.4 3.5 5.0 4.8 3.7 4.0 4.3
Street lighting NPV (US$) 16,768 30,115 36,138 13,973 14,739 31,805 N/A N/A
FIRR (%) 19 31 31 19 19 29 N/A N/A
Payback (years) 6.0 4.3 4.2 6.0 5.0 4.5 N/A N/A
37
Annex 8: Incremental Cost Analysis
1. Project implementation would require incremental costs to remove barriers to otherwise economically
and financially viable energy efficiency projects with substantial global environmental benefits. The
incremental costs to be supported by the GEF are defined as the difference between the economic cost of the
Baseline Scenario and the GEF Alternative. Presented below is the description of the Baseline Scenario, the
GEF Alternative, and the incremental cost analysis.
Baseline Scenario
2. Armenia has significant energy efficiency potential. The 2008 World Bank Study9 found that Armenia
could save over US$360 million annually, equivalent to around 4.3 percent of its 2009 GDP, through energy
efficiency investments. This is equal to energy savings of approximately 1.21 mtoe annually, or 1 TWh of
electricity and 600 million m3 of natural gas. However, investments in energy efficiency are quite limited due to
various barriers, including: (a) limited public awareness and knowledge gaps about the potential benefits of
energy efficiency; (b) legal and regulatory barriers; (c) lack of incentives to invest in energy efficiency; (d)
limited ability of social and other public facilities to secure financing for energy efficiency investments; (e)
limited capacity of public agencies to adopt and effectively implement energy efficiency policies; and (f) an
under-developed ESCO industry.
3. Under the Baseline Scenario, the realization of the energy efficiency potential in public sector would be
slow in the medium term. Without the GEF grant, the in-country capacity to create an enabling environment for
energy efficiency will develop slowly and significant share of the economically and financially viable energy
efficiency potential in public sector will remain unrealized. Therefore, under the Baseline Scenario, the total
investments in energy efficiency of social and other public facilities during the project implementation were
estimated at US$4.8 million, which included US$2.8 million under the Armenia Sustainable Energy Financing
Facility supported by the EBRD and an estimated US$2.0 by financially sound public facilities (e.g., hospitals
that generate adequate cash flow to finance the energy efficiency measures either from their own funds or
through borrowing).
4. GHG reduction benefits: Under the Baseline Scenario, the energy savings over useful life-time10
of
investments were estimated at 31 million kWh of electricity and 181 million kWh equivalent of gas. The energy
saving estimates were based on the energy audits for a sample of eight social and other public facilities
representing each major category of target facilities as well as the results of actual energy efficiency measures
implemented in a number of public schools financed under the completed World Bank Urban Heating Project.
Specifically, the energy saving estimates were derived by extrapolating the estimates of annual energy savings
per dollar of investments, based on audit results and findings of actual energy efficiency investments in a
number of public schools. The GHG emission reductions in social and other public facilities were estimated at
49,518 tons11
of CO2, calculated based on 2009 Armenia emission factors12
for electricity and gas.
9 “The Other Renewable Resource: The Potential for Improving Energy Efficiency in Armenia”. July, 2008. 10 Useful life-time of retrofits in social and other public facilities is assumed to be 20 years. 11 The GHG emission reductions mentioned in this analysis are the cumulative reductions over the useful life-time of investments. 12 Electricity supply emission factor – 0.262 kg/kWh; gas supply emission factor – 1.9 kg/m3
38
GEF Alternative Scenario
5. The Project Scenario (GEF Alternative) will generate around US$95.7 million incremental energy
efficiency investments. Those will include: (i) US$8.7 million of energy efficiency investments in sub-projects
in social and other public facilities undertaken within the framework of the project and (ii) around US$87
million of induced energy efficiency investments, creating indirect GHG emission reductions. The GEF
Alternative will facilitate additional investments in energy efficiency primarily due to: (a) development of
viable financing schemes for energy efficiency investment and strong demonstration effect of energy efficiency
sub-projects, confirming viability of energy efficiency investments; (b) awareness-raising to address the energy
efficiency related information and knowledge gaps of public sector entities to build their demand for energy
efficiency financing; and (c) capacity building for energy service providers to design, evaluate, appraise and
implement energy efficiency investments in public and other social buildings. Those investments will be
financed through the post-project revolving of US$8.7 million of investment funds available under the project
and around US$87 million of investments financed from other sources, including additional financing attracted
by the R2E2 Fund such as a proposed second phase with an IBRD loan. Those investments will primarily be
made in social and other public facilities as well as other sectors (following strong demonstration effect and
capacity building for energy service providers) and will include financially viable investments with shortest
payback periods (4-8 years) as estimated by National Program of Renewable Energy and Energy Savings.
6. GHG reduction benefits: Under the GEF Alternative, the total direct and indirect energy savings were
estimated at 490 million kWh of electricity and around 2,889 million kWh equivalent of gas with resulting
GHG emission reduction of 1,256,512 tons of CO2.13
Those include direct GHG emission reduction of 89,751
tons of CO2 and direct post-project reduction of 224,377 tons of CO2, and indirect reduction estimated at
942,384 tons of CO2.14
Incremental costs and benefits
7. The total incremental cost of the project is US$1.82 million in GEF funds and would cover creation of
an enabling environment for energy efficiency, support in the preparation of energy efficiency sub-projects in
social and other public facilities as well as piloting of mechanisms for energy efficiency investments as
described in the section of implementation arrangements.
8. Over a 20-year period, the total incremental emission reductions from the project were estimated at
1,206,994 tons of avoided CO2 at a cost to the GEF of US$1.5/ton of CO2.
GEF Incremental Costs and Benefits Matrix
Baseline Alternative Incremental
reductions attributed
to GEF project
Domestic benefit Inefficient use of electricity
and gas in social and other
public facilities.
Limited investments in
energy efficiency measures
Substantial energy savings in retrofitted social and other public facilities.
Barriers to development, implementation and financing of energy efficiency investments reduced
Over 20-years period,
3,168 million kWh of
incremental energy
savings
13 Energy saving estimates are based on normalized comfort levels for heating and lighting. 14 Using bottom-up approach.
39
Baseline Alternative Incremental
reductions attributed
to GEF project
Global
Environmental
Benefit
Base case energy efficiency
investments lead to 49,518 tons
of CO2 emission reduction.
Investments in energy efficiency
yield 1,256,512 tons of direct and
indirect CO2 emission reduction.
Incremental reduction of
1,206,994 tons of CO2 in
20-year period
GEF Incremental
Cost (mln. US$) 0.0 1.82
40
Annex 9: Procurement Plan
REPUBLIC OF ARMENIA
ENERGY EFFICIENCY GEF PROJECT
I. General
1. Project information:
Project Name: Armenia Energy Efficiency GEF Project
Project ID: P116680
Implementing Agency: Armenia Renewable Resources and Energy Efficiency Fund
2. Bank’s approval Date of the procurement Plan: Feb. 9, 2012
3. Date of General Procurement Notice: April 2011
4. Period covered by this procurement plan: May, 2012 – December, 2014
II. Goods and Works and non-consulting services.
1. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in
Appendix 1 to the Guidelines for Procurement:
Procurement Method Prior Review Threshold Comments
1. ICB (Goods) All >US$300,000
2. NCB (Goods) First two ≤ US$300,000
3. ICB (Works) All >US$4,000,000
4. NCB (Works) First two ≤ US$500,000
5. Direct Contract All
6. Shopping (Goods) First ≤US$100,000
7 Shopping (Works) First ≤US$100,000
2. Prequalification. N/A
3. Reference to (if any) Project Operational/Procurement Manual: Operational Manual acceptable to
the Bank prepared by the Borrower
4. Any Other Special Procurement Arrangements: N/A
5. Summary of the Procurement Packages planned during the first 18 months after project
effectiveness (including those that are subject to retroactive financing and advanced procurement)
41
1 2 3 4 5 6 7 8 9
Ref.N
o.
Description
Estimated
Cost
US$
Procurement
method
Number of
Contracts
Domestic
Preference
(yes/no)
Review
by Bank
(Prior / Post)
Expected Bid
opening date
Comments
1 Energy efficiency
investments in public
facilities (Pilot Projects)
700,000 NCB 8
No Prior/Post* May 1, 2012 GEF Grant
1.1
Yerevan kindergarten N15 41,680 NCB No Prior May 1, 2012 GEF Grant
1.2 Masis school N2 90,947 NCB No Prior May 1, 2012 GEF Grant
1.3 Ohanavan village school 49,263 NCB No Post May 1, 2012 GEF Grant
1.4 Masis hospital 280,421 NCB No Post May 1, 2012 GEF Grant
1.5 Martuni hospital 233,368 NCB No Post May 1, 2012 GEF Grant
1.6 Vedi Municipality 17,052 NCB No Post May 1, 2012 GEF Grant
1.7 Dilijan street lighting 48,947 NCB No Post May 1, 2012 GEF Grant
1.8 Noubarashen child care
establishment 48,315 NCB No Post GEF Grant
2 Energy efficiency
investments in public
facilities
8,000,000 NCB multiple No Post June 1, 2012 –
June 1, 2014 GoA co-financing
First-year pipeline
2.1 Aparan school N1 49,547 NCB Post GoA co-financing
2.2 Argina village school 39,315 NCB Post GoA co-financing
2.3 Ashtarak vocational school 11,648 NCB Post GoA co-financing
2.4 Armavir school N10 28,547 NCB Post GoA co-financing
2.5 Gavar school N1 62,273 NCB Post GoA co-financing
2.6 Masis School N3 83,652 NCB Post GoA co-financing
2.7 Tsovazard village school 41,115 NCB Post GoA co-financing
2.8 Vagharshapat School N5 64,168 NCB Post GoA co-financing
2.9 Vagharshapat School N1 62,526 NCB Post GoA co-financing
2.10 Yerevan School N159 26,621 NCB Post GoA co-financing
2.11 Metsamor hospital 126,189 NCB Post GoA co-financing
2.12 Hrazdan school N9 69,473 NCB Post GoA co-financing
2.13 Syunik village school 23,684 NCB Post GoA co-financing
2.14 Gavar school N5 54,000 NCB Post GoA co-financing
3 Procurement of Tools and
Software for R2E2 Fund
(M&V, Energy Audit)
150,000 S 2 No
Prior/Post* June 15, 2012
GEF Grant/GoA
co-financing
42
* Prior Review for the first two contracts for NCB and first contract for shopping.
NCB - National Competitive Bidding (in accordance with paragraph 3.3 – 3.4 of the Guidelines)
S - Shopping (in accordance with paragraph 3.5 of the Guidelines);
III. Selection of Consultants
1. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1
to the Guidelines Selection and Employment of Consultants:
Selection Method Prior Review Threshold Comments
1. Selection of consulting firm All above US$100,000
2. IC All above US$ 50,000
3. Single Source(both firms and ICs) All
2. Short list comprising entirely of national consultants: Short list of consultants for services, estimated to
cost less than US$ 100,000 equivalent per contract, may comprise entirely of national consultants in
accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.
3. Consultancy Assignments with Selection Methods and Time Schedule 1 2 3 4 5 6 7 8
Ref.
No.
Description of Assignment
Estimate
d
Cost
(US$ )
Procurement
Method
Number of
Contracts
Review
by Bank
(Prior /
Post)
Expected
Proposals
submission
date
Comments
1 Project pipeline development
and technical supervision 180,000 CQ/IC Multiple Post May 15, 2012
GEF
Grant/GoA co-
financing
2 Removal of information and
knowledge gaps to energy
efficiency and awareness raising
80,000 CQ/IC Multiple Post May 30, 2012
GEF
Grant/GoA co-
financing
3 Capacity building for energy
service providers and other
market actors
140,000 CQ/IC Multiple Post July 16, 2012
GEF
Grant/GoA co-
financing
4 Improvement of legal and
regulatory framework for energy
efficiency
250,000 CQ Multiple Post August 15,
2012
GEF
Grant/GoA co-
financing
5 Policy development support,
including development of
National Energy Efficiency
Action Plan for 2013-2016
300,000 QCBS 1 Prior August 15,
2012
GEF
Grant/GoA co-
financing
6
Financial Audit 90,000 CQ 1 Post September
30, 2012
GEF
Grant/GoA co-
financing
7
Project management 706,000
GEF
Grant/GoA co-
financing
IV. Implementing Agency Capacity Building Activities with Time Schedule
43
1. In this section the agreed Capacity Building Activities (some items could be from CPAR
recommendation) are listed with time schedule
No.
Expected outcome / Activity Description
Estimated
Cost Estimated Duration Start Date
Comments
1 Training of R2E2 staff on
EE issues* 60,000
July 16, 2012-
December 31, 2014 July 16, 2012 Post
* Trainings, seminars, other events proposed by specialized organizations
QCBS = Quality and Cost-based Selection (in accordance with paragraphs 2.1 - 2.35 of the Consultant‟s Guidelines)
CQ = Consultants Qualifications (in accordance with paragraph 3.7 of the Consultant‟s Guidelines)
IC = Individual Consultant (in accordance with section V of the Consultant‟s Guidelines)
44
Annex 10: STAP Roster Review
Reviewed by: Lev Neretin
February 8, 2010
The STAP review raised the following key issues:
Focus on barrier removal: The main focus of the project is to reduce energy intensity through removal of
barriers. STAP recommends conducting a systematic assessment of the barriers to identify, rank and prioritize
interventions to overcome those barriers. The barriers may vary for different sectors (public and private
sectors), and from the perspective of different stakeholders.
Team response: The systematic assessment of barriers to energy efficiency was done under the National
Program on Renewable Energy and Energy Efficiency (2007) and Energy Efficiency Study for Armenia
(2008), which identified key cross-sectoral and sectoral barriers to energy efficiency and outlined potential
measures to remove them. Based on the above, the Government developed and adopted a time-bound Energy
Efficiency Action Plan (the Decree N43, dated November 4, 2010), which identified the priority energy
efficiency measures to be implemented in 2011-2013. The Action Plan contains both horizontal and sector-
specific measures, including: (a) implementation of broad information and public awareness campaigns; (b)
revision of government procurement rules to ensure purchase of energy efficient machinery, devices and other
equipment; (c) development of detailed energy balance; etc. Please see Section II (B) of the PAD. But the
project will focus exclusively on public entities, so the barriers targeted are now narrower in scope.
Selection of sectors for interventions: Component 1, 2, and 3 seem to target both public institutions
(buildings) as well as commercial and residential sectors in Armenia. There is a lack of clarity in whether
industrial, transportation, power generation, and urban waste sectors are included for components 1, 2, and 3.
There is a need for analysis of potential for improving EE in different sectors along with potential for
reduction in GHG emissions in different sectors and sub-sectors covering both public and private institutions.
There is some confusion in the use of terms - public institutions and public utilities.
Team response: The Armenia Energy Efficiency Study estimated the energy saving and associated GHG
reduction potential of various sectors of economy. The results of the above study, a number of reviews within
the Bank and consultations with the Government counterparts and other stakeholders suggested energy
efficiency of public and other social facilities should be targeted given high rates of return on energy
efficiency investments, demonstration effects and stimulation of ESCO and related industries. Therefore, the
GEF funded TA will primarily support creation of an enabling environment for energy efficiency by removing
obstacles to energy efficiency investments in public and other social facilities. Public and other social
facilities include schools, kindergartens, hospitals, municipal buildings and street lighting.
Please see Section III (A) of the PAD.
Investment in public institutions: Component 4 aims at energy efficiency investments in public buildings.
Will the investment in public buildings be on a commercial basis or as an investment subsidy? It may be
desirable to make it as a commercial investment, generating revenue for further expansion.
Team response: We agree. The targeted public and other social facilities under the project will be required to
use some of the savings to repay the funds received for financing of energy efficiency investments on a
commercial basis. The funds available under the investment subcomponent of the energy efficiency component
will be channelled through the Renewable Resources and Energy Efficiency Fund (R2E2 Fund) - a non-profit
organization established by the Government with the mandate to promote development of renewable energy
and energy efficiency markets and the implementing agency for the project. The R2E2 Fund will channel the
45
funds by entering into energy service agreements with: (1) municipalities and legally independent public
entities to finance energy efficiency investments, and (2) eligible social facilities, which are not legally
independent. Repayments of the investment costs may subsequently be used by the R2E2 Fund to finance
energy efficiency investments in other social and public facilities thus creating a revolving fund. The project
will help to develop, test and disseminate replicable and sustainable models for energy efficiency service
provision. Energy efficiency investments in social and other public facilities can also help stimulate the
market by creating demand for energy efficient equipment and services, and send a strong signal to the
private sector and public about the Government commitment to energy efficiency. Please see Section IV (A)
and Annex 3 of the PAD.
Components 1, 2, and 3: The project includes a detailed set of activities to raise awareness, generate
information, improve regulatory frameworks, capacity building, labeling, procurement procedures,
benchmarking etc. These activities are indeed useful and necessary. However, these activities need to be
further strengthened by measures supporting access to technology and investment capital. One of the proposed
activities in this direction should be to generate information on the profitability of the investment in EE in
different sectors.
Team response: We agree. The investment component (estimated at US$8.3 million) of the project will
provide investment capital for implementation of energy efficiency measures in public and other social
facilities. Additionally, the investment component of the project will facilitate access of targeted facilities to
energy efficiency technologies, which the public and other social facilities would not be able to access without
the project except for very basic technical solutions and technologies. The energy efficiency measures will be
implemented by ESCOs with contracts structured in a way to ensure that only technically viable and cost-
effective solutions are implemented. The awareness raising activities under the project, including
development of case studies, will help to demonstrate and disseminate the information on financial viability of
energy efficiency investments in public and other social activities. Please see Section III (A) of the PAD.
Risk Assessment: The assumption that investment in EE in public sector will have “demonstration effect” on
investment in EE in other sectors particularly in the private sector, may not hold true. The potential barrier
could be the lack of access to technology and investment capital, even if investment on EE in the public sector
demonstrates profitability.
Team response: Investments in energy efficiency of public and other social facilities will create demand for
energy efficiency services and promote local manufacturing and imports of energy efficient equipment,
technologies and construction materials, thus, facilitating access to energy efficiency technologies. Further,
demonstration of the sub-project returns, viable financial mechanisms, creation of simple ESCO contracts
and fostering of ESCOs and other energy service providers, etc. will also help build the commercial market
and access to financing. The other donor-funded projects will contribute to scaling-up of energy efficiency
investments by providing financing and other technical assistance. Specifically, the ongoing EBRD financed
project on Sustainable Energy Financing Facility supports private enterprises’ access to energy efficiency
investment funds through line of credit to local commercial banks. The Commercialization of Energy
Efficiency Project, financed by USAID, supports the private sector energy service companies and the banking
sector to increase the availability of bank financing for energy efficiency projects. Please see Section II (B) of
the PAD.
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ARMENIA
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
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IBRD 33364
SEPTEMBER 2004
ARMENIASELECTED CITIES AND TOWNS
PROVINCE (MARZ) CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE (MARZ) BOUNDARIES
INTERNATIONAL BOUNDARIES