CONTRIBUTION TO KEY INDICATORS OF THE BUSINESS PLAN: Total GHG emissions reductions in the amount of 4.6 million tons of CO2

Partnering with the private sector (financial leverage of 1 to 10 approximately)

Record of endorsement on behalf of the Government(s):Dr. Dali Najeh, GEF Operational Focal Point Date: September 3, 2003International Cooperation for Environment, Ministry of Agriculture, Environment and Water Resources

FINANCING PLAN (US$)GEF PROJECT/COMPONENT

Project 10,250,000PDF A      PDF B 275,000PDF C      Sub-Total GEF 10,525,000CO-FINANCING* Government 18,250,000Others 77,485,000Sub-Total Co-financing: 95,735,000Total Project Financing: 106,260,000FINANCING FOR ASSOCIATED ACTIVITIES IF ANYLEVERAGED RESOURCES IF ANY:

*Details provided under the Financial Modality and Cost Effectiveness section

Approved on behalf of the UNDP. This proposal has been prepared in accordance with GEF policies and procedures and meets the standards of the GEF Project Review Criteria for work program inclusion

Yannick GlemarecDeputy Executive Coordinator

Mathieu C. KoumoinProject Contact Person

Date: 12 September 2003 Tel. (221) 849 1798/1741 email:Mathieu.koumoin@undp.org

AGENCY’S PROJECT ID: PIMS #2129COUNTRY: TunisiaPROJECT TITLE: Development of On-grid Wind Electricity for the 10th PlanGEF AGENCY: United Nations Development ProgrammeOTHER EXECUTING AGENCY(IES): n/aDURATION: 8 yearsGEF FOCAL AREA: Climate ChangeGEF OPERATIONAL PROGRAM: OP-6 – Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation CostsGEF STRATEGIC PRIORITY: CC-3 – Power Sector Policy Frameworks Supportive of Renewable Energy and Energy EfficiencyESTIMATED STARTING DATE: April 2004IA FEE: US$770,000

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PROJECT EXECUTIVE SUMMARYGEF COUNCIL WORK PROGRAM SUBMISSION

PROJECT SUMMARY

a. PROJECT RATIONALE, OBJECTIVES, OUTPUTS, AND ACTIVITIES.

1.1. By committing itself to the deployment of 100MW on-grid wind capacity in its 10 th plan (2003-2007), the government of Tunisia seeks to cut the country’s emissions of greenhouse gases while taking a strategic position towards the increasing promises of the wind electricity industry worldwide. With only 20 MW on-grid wind capacity currently operating under the ownership and management of the state Power Monopoly, Tunisia has also announced the future installation of an additional 200MW on-grid wind power plant within its 11 th plan (2008-2011), thus adopting a long-term program approach in order to maximize private sector participation on a self-sustaining commercial basis. The benefits of the above capacity increases could be substantial to the country, stimulating to the wind power industry and the global environment (improved energy balance and integration of local manufactures, sizable market opportunities for wind-turbine manufacturers, together with significant CO2 abatement), but only if accompanied with targeted capacity strengthening, deep regulatory reforms that spell out the role of key actors in a transparent environment along with the required foreign direct investments (FDI) to drive-in the expected private sector capital and technical “know-how”. The need to re-aligning the country’s renewable energy sector performance with the competitiveness of the whole economy has prompted Tunisia to remove the existing barriers to wind energy commercialization by: (i) supporting the strengthening of the institutional, regulatory and operational capacities of the key structures involved in wind energy sector development through technical assistance, namely, ANER (National Renewable Energy Agency), IPP Office (the country’s Independent Power Production Office), STEG (the incumbent power Utility in charge of all network/power transmission operations), DGE (National Directorate of Energy), the Ministry of Energy; (ii) contributing to a production-based “smart-subsidy” scheme for the deployment and commercial operation of 100MW capacity; and (iii) implementing a TA component to ensure sizable (minimum target of 40%) integration of the relevant local industry (including electric equipment manufacturing, electronics, mechanical etc.). Project activities will principally focus on providing hands-on training (through day-to-day project execution) to all participating government structures complemented with TA recruitment for the tender/bidding process to construct the plant, and structuring of an optimal financing contract/power purchase agreement (PPA) to minimize the government’s contribution to the proposed PBSS (Production-Based Smart Subsidy) scheme. While all plant construction activities and related technical/production risks will be born by the competitively selected private firm, comprehensive program monitoring/evaluation activities with additional wind measurements covering the rest of the country will be carried out the National Renewable Energy Agency (ANER). Also, the absorption capacity of the interconnected grid will be investigated with assistance from STEG to establish the foundations for the sector targets in the 11th plan, which will be implemented without any support from the GEF.

B. KEY INDICATORS, ASSUMPTIONS, AND RISKS (FROM LOG FRAME)

1.2. Key indicators of success for the project include: (i) wind energy production in MWh as a percentage of total generation on the interconnected grid, i.e. effective penetration rate of wind electricity; (ii) network stability and overall quality of the interface to the conventional power grid as captured by the frequency stability and regularity of voltage levels to reflect local capacity and ownership of the technology at the scale envisaged; (iii) the wind power tariff settlement with STEG as specified in the PPA contract, a relatively low tariff after PBSS and all

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government incentives (fiscal, direct cash to meet the project’s incremental cost) suggesting a good competition towards efficient pricing; and , (iv) the rate of local industrial integration.

1.3. Important project assumptions relate to: (i) the validity of baseline parameters to capture the amount of GHG effectively displaced as endogenous natural gas reserves exhaust over time; (ii) deployment and operation of the plant by industry standards; (iii) agreements/plant ownership/shareholder covenant and contracts accepted and/or enforced throughout project lifetime; e.g. PPA, O&M, performance guarantees, insurances etc.; (iv) overall incentive-based regulatory environment that reduces dispute resolution and promotes compliance; and, (v) the government’s ability to bundle local industrial integration targets with tendering for plant concession in ways that reduce cost rather than increasing it.

1.4. Overall risk for the project is moderate. The principal risks that were identified during project formulation relate to: (i) the sustainability of the government’s support; (ii) the financial/PPA negotiation failure risk; and, (iii) lack of interest of the private sector.

1. COUNTRY OWNERSHIP

A) COUNTRY ELIGIBILITY

2.1. Tunisia ratified the UNFCCC on July 15, 1993. As a non-Annex I country, Tunisia is eligible for financing from the GEF through the mechanisms established by the Convention.

B) COUNTRY DRIVENNESS

2.2. The Tunisia on-grid wind power development project has taken long in the making: 4 years. It emerged out of one of the country’s earlier enabling activity project (TUN95G31) which first identified Renewable Energy Development as an interesting GHG mitigation option and brought the issue to the attention of government decision makers in the late 90s. The above project carried out a comprehensive inventory of GHG which concluded that the energy sector accounted for over 53% of the country’s overall GHG emissions. Building on the above findings and the momentum generated, the country’s national communication to the UNFCCC identified 5 concrete sets of actions to promote renewable energy supply as a viable alternative to conventional electricity production. The specific goal indicated in Tunisia’s INC (Initial National Communication) was to reduce the country’s CO2 emissions by 7.2 million tons through wind electricity production by 2020.

2.3. Despite the relatively favorable energy balance of the country with the recent discoveries of significant natural gas reserves, the government understood that on-grid wind energy development – at the scale-envisaged -- could help reduce the country’s GHG emissions in keeping with the objective of the UNFCCC and increase the competitiveness of its economy mainly through the transfer of “know-how” and FDI. The long-term program and commercial/private sector led approach adopted was not only consistent with the general prescriptions of the 10th plan, but also a targeted effort to accelerate the pace of reform in the electricity sector and boost private investments together with job creation by bundling the deployment of the country’s wind potential with local industrial integration. 19 Presidential instructions were promulgated to operationalize the government’s wind energy sector vision and send a strong signal to the private sector along with the international development community that – with limited assistance from the GEF -- the country was ready to take on the challenge of

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installing 300MW of on-grid wind power capacity within the 10th and 11th plans combined. Since 2001 all subsequent annual celebrations of the National Energy Conservation/Efficiency day (set on April 7th of very calendar year) has show-cased the government’s proposed wind energy program and brought together wind energy experts of the highest caliber to discuss the implementation of the preparatory activities supported with GEF PDF-B funding. An additional indication of local ownership of the proposed activities is the establishment of a government National Wind Energy Development Committee which has been acting as a “Steering Committee” to ensure that the implementation of the Government on-grid wind power program is not pursued in isolation within the confines of the electricity sector but carried out in a multi-sectoral manner with significant input from other relevant Ministries and the civil society. 2.4. Much of the confidence in future success and current determination of the Tunisian government to implement its wind resource concession program has to do with the fact that many private sector expressions of interests were recorded by ANER over the years and various proposals submitted to the government by a number of private ventures. These private actors have recently intensified their data collection activities with the public announcement of the Wind electricity sector Presidential decisions in 2001. In December 1999, the Tunisian government was actually approached by a private firm offering to deploy a wind plant to supply 80 MW (2 * 40 MW) to the interconnected grid together with an additional 300 MW wind power development project to be launched in 2002 based on privately collected wind data. With an average annual electricity demand growth rate in the 7% to 8% range, a stable political regime and outlook which is expected to continue in the foreseeable future combined with a BBB+ country rating, ANER and the government are confident that the anticipated private sector participation is highly likely to materialize with the catalytic support of GEF as the country deepens its ties with the European Union. In September 2003, the EU announced its decision to include on-grid wind electricity development in the selected 10 infrastructure sector project developments to boost the Union’s economic growth. This suggests that the wind electricity market in the Mediterranean basin is prepared to respond favorably to the Tunisian proposal.

2. PROGRAM AND POLICY CONFORMITY

A) FIT TO GEF OPERATIONAL PROGRAM AND STRATEGIC PRIORITY

3.1. Out of the various barriers currently impeding the development of the wind electricity sector in Tunisia, it is sensible to suggest that the inherent lack of competitivity of wind electricity compared with conventional production (for the next 5 or 8 years time horizon as quoted by informed industry analysis) is the ultimate issue to be addressed. Looking at the international best practices and benchmarks reinforces the notion that unless the Tunisian government arrives at a wind power KWh tariff settlement that is appealing enough to commercial interests and simultaneously agreeable to STEG, the successful private bidder and the government electricity tariff setting structures, the deployment and sustainable commercial operation of the intended wind farm will be at risk starting with the PPA negotiations. A long-term concession agreement by the government appears to be key to alleviating much of the demand risks but the supply risks associated with the responsiveness of project incremental cost to load factor (as illustrated by the sensitivity analysis in annex 5 to the Project Brief) cannot, realistically, be shifted onto the foreign investor who bears all construction, technical and operational risks. By offering a sizable WRC (Wind Resource Concession) in a single contract, the government’s intension is to reduce transaction costs and maximize scale economies, which

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are interesting steps to be supplemented with a proper risk allocation scheme that is more commensurate with private sector practice if foreign investors are to venture their own capital. Therefore, the activities proposed under this project will remove important barriers to the adoption of wind electricity in Tunisia in tandem with the reduction of long-term implementation cost of zero GHG emitting power technology through the intended PBSS scheme. The project is fully consistent with GEF OP # 6 mandates.

3.2. Based on the activities intended to improve the electricity sector regulatory framework with an emphasis on the promotion of on-grid renewable energy, this project is consistent with SP# 3 and will help leverage an additional 200MW of commercial wind electricity in the 11 th

plan. It represents a sizable effort towards strengthening policy/regulatory frameworks for renewable energy (SP #3) and stands out to make a unique contribution to the prospects for on-grid wind electricity development in the Maghreb region and beyond by laying the regulatory/policy foundations for large-scale adoption of wind electricity (SP#3).

B) SUSTAINABILITY (INCLUDING FINANCIAL SUSTAINABILITY)

3.3. The approach adopted in this project seeks to reinforce the long-term sustainability of the Tunisian wind electricity market. By addressing systematically and simultaneously each of the barriers currently impeding the development of commercial wind electricity in Tunisia, the project will create a framework that is conducive to a sustainable market once the initial trigger conditions are met. Project activities will strengthen capacities and foster the establishment of a transparent environment within which all-key players and major stakeholders will have every reason to contribute their best efforts. The entire process will be supported by UNDP-GEF providing technical, financial and administrative assistance to the entire process as needed.

3.4. By making arrangements to ascertain that the successful implementation of the proposed 100MW wind power plant overlaps with – and feeds into – the preparation of the forthcoming 200 MW wind electricity concession program the government expects that private sector long-term commitments to the country’s overall 300MW wind power program would materialize, and help improve the quality of the competition for the award of the announced concession contract in the 10th plan.

3.5. With respect to the sustainability of the proposed production-based “smart-subsidy” scheme co-financed by the government and GEF in the context of the current 10 th plan, it is key to note that such a scheme will not be needed within the 11 plans for the following reasons:

(i) Tunisia would have acquired a sizable experience and will have strengthened its institutional and operational capacities tremendously. Through the implementation of the 100MW wind plant, STEG, ANER and the IPP Task team will collect concrete hands-on experience that will significantly establish the credibility of the local players.

(ii) It is now well documented by expert forecasts that the wind energy market is expected to continue to grow and result in a significant decline in wind electricity kwh cost. Wind Energy Industry analyst predict that, over the 2003-2007 period,

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the wind power market will register an annual growth rate above 11% while offering more reliable wind-turbines at more competitive costs.

(iii) While kwh wind electricity cost was approximately 1,500US$ in the 80s, it has dropped to about 1,000 US$/Kwh nowadays; suggesting that an 18 to 25% reduction in wind electricity production cost by the year 2010 could be realistic.

3.6. An investigation carried out with the Northern American wind industry indicated that a 17% cost reduction is expected between the 2001-2006 and 2007-2011 time periods. The implication for the present project being that with: (i) projected wind electricity costs around US$830/MW during the Tunisian government’s 11th plan; (ii) the removal of institutional and regulatory barriers; (iii) the building of significant local capacity under this project combined with the confirmation of wind potential/network absorption capacity, all of the above circumstances are sensibly likely to ensure full implementation of the 11th plan’s wind power targets on a self-sustaining commercial basis without a PBSS scheme.

3.7. The project team will carefully monitor both the performance characteristics of the wind farm and the success of the PBSS in stimulating the investment in order to ascertain whether or not such a feature could usefully be used on a more systematic basis to stimulate a share of renewable energy generation in Tunisia’s electric power system more generally. Such an approach might be made replicable or sustainable through the adoption of a surcharge on conventionally-generated power that is required to be devoted to paying future incremental, production subsidies or premiums. Or a slightly different approach would be to require, through a renewable portfolio standard, that the future generation mix contain a specific amount of renewably-generated power. In either event, the PBSS payment will provide an experiment with these approaches, which can then be used to evaluate future options to make such future support to renewable power a permanent feature. If, as is explained in the project brief, this initial 100MW facility enables future Tunisian installations to be undertaken at a cost that is both sustainable and replicable, then continuation of such a mechanism might not be necessary. However, in such a case, the question then becomes whether it would be useful to continue it in order to stimulate renewable energy from other forms.

C) REPLICABILITY

3.8. Replicability of the proposed project is ensured through the sector targets of the 11 th plan. Clearly the Tunisian experience of long-term programmatic approach to on-grid wind electricity development with an initial GEF seed contribution to a PBSS scheme will be replicable in other countries of the Maghreb region and possibly in Sub-Saharan Africa. However, as noted in paragraph 3.7 above, replication of the project in Tunisia within the context of the 11 th plan without GEF support to any PBSS scheme that may be deemed necessary in view of the prevailing circumstance at the 2011 horizon can expect to be a rather straight forward application of the experience and lessons learned during the 10th plan with the government exercising its options in the use of energy sector fiscal policy on grounds of redistribution.

D) STAKEHOLDER INVOLVEMENT

3.9. Stakeholder consultation was undertaken during PDF-B implementation with quarterly meetings with key institutional partners including ANER, STEG, and the Ministry of Industry

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and Energy. Institutional consultation was also done through the execution of several workshops which provided a forum for discussions on the PDF-B funded strategic study on the prospect for wind energy development in Tunisia. The "Commission Nationale de Development de l' Energie Eolienne" (National Wind Energy Development Committee) acted for 2 years as the project preparation steering committee and its membership included NGOs, Civil society, the Academic community, the private sector and a representative of IEPF. 3.10. In addition to the above, regular publications and announcements appeared in local newspapers since the 2001 wind resource concession Presidential decisions were promulgated. An articled published in March 2003 in the main daily newspaper focused on the President’s working meeting with the country’s Prime Minister on the above wind Resource concession program and made public the President’s request to expedite the deployment of the country’s first 100MW wind farm in the 10th plan.

3.11. In September 2003, following full endorsement of the project brief by a government inter-Ministerial Committee, ANER was requested to launch a wide-ranging downstream consultation with the populations in the targeted project zones and civil society and to make a public statement/announcement to inform the general public of the forthcoming local consultations to be carried out by December 2003. Consistent with Tunisian land tenure laws, the populations in the Cap de Bon area and elsewhere that will be effected by the project will be given an opportunity to negotiate the compensation resources granted by the state.

3.12. It is important to note that the National legislation on expropriations was revised in 2003 and the law now requires that expropriations be effected for public works only when it is clearly established that the government cannot find a project land area of equal value/use elsewhere for the public activity to be implemented. ANER has confirmed that the land area for the intended 100MW wind plant belongs to the State and that these areas are not occupied. A few human settlements have reportedly been identified in 0.5 mile distance away from a potential site to be considered for the bulk of the sites intended for the 200 MW wind plant of the 11 th plan; but it appears that no significant expropriations is expected for the immediate 100MW plant under consideration for GEF co-financing as the land area belongs to the State. In accordance with UNDP procedures, any required expropriations (if any) will follow international standards. ANER has requested GTZ to assist with the preparation of a comprehensive consultation plan in the targeted regions to smooth out project launching.

E) MONITORING AND EVALUATION

3.10. Lessons from wind projects were integrated into the choices made by the government with the technical assistance of International Energy sector consulting firm. Furthermore, ANER has agreed to coordinate with all project partners the design and implementation of a comprehensive Programme M&E framework with a focus on overall project performance monitoring of the PBSS scheme and the accompanying TA activities. Moreover and in keeping with UNDP procedures, this project will be subject to annual financial audits. In addition, the normal UNDP and GEF processes of annual review (APR’s , TPR’s, PIR’s) will be used to comply with all reporting requirement. In addition, an independent mid-term and final evaluation will be undertaken, in accordance with both UNDP and GEF procedures.

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3.11. The log-frame attached summarizes the indicators of project progress and impact that are considered appropriate at the present time. It will be further detailed during project appraisal. During the first quarter of project implementation, the Chief Technical Adviser or National Project Director will review these indicators with an eye toward fine-tuning them. He or she will then undertake an assessment of the baseline values for each of these indicators. These baseline values will then be considered as the points of comparison for progress being made under the project. Where appropriate, the indicators that are meaningful on an annual basis or a shorter period of time will be re-estimated each year in preparation for the APR, TPR, and PIR cycle. In addition, the performance of the remainder of the renewable-energy market will also be monitored so that the contribution of this project can be kept in placed in its appropriate context.

3. FINANCIAL MODALITY AND COST EFFECTIVENESS

4.1. The selected Wind farm IPP will be the largest co-financier of the project with an expected US$75,750,000. The government of Tunisia has pledged up to US$18,250,000 in fiscal incentives and direct subsidy combined to meet the projects remaining incremental cost following GEF contribution to the project’s incremental cost. When translated to a full PBSS scheme over the first 5 years of the project, the government’s total contribution will amount to US$21,750,000. GTZ has confirmed its co-financing of the project’s TA activities in the amount of Є1,000,000. GEF will contribute US$2,000,000 to all required TA activities and make an additional US$8,250,000 commitment to the PBSS which will be withdrawn in the unlikely event of an unsuccessful tender.

4.2. Converting the project’s estimated total incremental cost in a “Production Based Smart Subsidy” (PBSS) through a model developed by the International Consulting firm selected by the government yields a PBSS requirement of 2.0 ¢ US /kWh over the first five years of commercial operation (see figure 2 of annex 5 attached to Project Brief). Given an estimated production of 275,940 MWh for year 1 (equivalent to 306,600 MWh X 90% @ 35% load factor) and an annual production of 306,600 MWh for years 2 to 5, this PBSS represents a total amount of US $30,000,000 over 5 years (see figure 3 and sensitivity analysis in annex 5). Again, it should be emphasized that these numbers are based on assumptions presented in table 6 of annex 5; i.e. with an electricity selling price of 3.7 ¢ US and a 35 % capacity factor.

4.3. The Tunisian government’s requested GEF contribution in a total amount of US $8,250,000 over the first 5 year period of project commercial operation out of a total US$30,000,000 required within the proposed full PBSS scheme, represents a contribution of 27.5% of the required share to cover total incremental cost as the Government of Tunisia will have to cover the balance which is still substantial. The amount of US $8,250,000 from the GEF translates into 0.55 ¢ US /kWh over the first five years of commercial operation within the proposed full PBSS scheme (again these numbers are based on assumptions presented in Table 6 of annex 5 of the project brief, given a 3.7¢ US electricity selling price and a 35 % capacity factor). Therefore, the proposed GEF contribution to the PBSS for US$1 would be matched by US$2.6 from the Tunisian government. However, the government intends to bring its PBSS contribution in the 2 to 1 proportion with respect to GEF contribution by discounting various fiscal incentives during the concession contract and PPA agreement negotiation.

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Co-Financing SourcesName of Co-Financier

(source)Classification Type Amount

(US$)Status

IEPF and Partners cash 503,000ANER cash and kind 232,000Government cash and fiscal

incentives18,250,000

(to be translated in full PBSS equivalent over

5 years)

Agreed and expected written confirmation by December 2003

GTZ cash 1,000,000 Written confirmationUnidentified private IPP cash 75,750,000

Sub-total Co-financing 95,735,000

The GEF contribution represents a leverage of 1 to 10 approximately on the basis of the 10th plan and the leveraging ratio yields 1 to 30 approximately when considering the 10th and 11th plans combined. The fact that the government of Tunisia has pledged US$18,250,000 towards the incremental cost of the project demonstrates full ownership of the project, commitment to the wind electricity sector and the government’s preparedness to engage in a fully competitive and transparent tendering process.

4. INSTITUTIONAL COORDINATION AND SUPPORT

A) CORE COMMITMENTS AND LINKAGES

5.1. The United Nations Development Assistance Framework (UNDAF) for Tunisia supports the government’s announced 10th plan by contributing to local and global environmental protection. GHG reductions through energy conservation, energy efficiency and renewable energy development are identified as areas of support from UNDP.

B) CONSULTATION, COORDINATION AND COLLABORATION BETWEEN IAS, AND IAS, AND EXAS, IF APPROPRIATE, N.A.

n.a.

C) PROJECT IMPLEMENTATION ARRANGEMENT

5.2. The Executing Agency for the Project will be ANER the Renewable Energy Agency which has been acting as Executing for almost all of the UNDP-GEF Climate Change projects in Tunisia. ANER will coordinate all TA/capacity strengthening and regulatory improvement activities. The tender and bidding process for the installation of the wind power plant will be executed by the Ministry of Industry and Energy’s IPP Task team/Bureau assisted by an Internationally recruited Energy Consulting Firm or Commercial Bank with seasoned experience in similar projects. The IPP office will work in collaboration wit ANER and STEG in discharging its duties. The Government’s National Wind Energy Development Committee will act as a Steering Committee for this project. UNDP Country Office in Tunis together with UNDP-GEF Regional Coordination for Climate Change in Francophone Africa will undertake GEF oversight.

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ANNEX A: INCREMENTAL COST ANALYSISProject Activity Baseline GEF Alternative Increment

(i) Strengthening the institutional, regulatory and operational capacities of the various structures involved in wind energy sector development through technical assistance, namely, the Ministry of Industry and Energy (DGE, IPP task team), ANER (National Renewable Energy Agency), STEG (the incumbent Power Utility in charge of all network/power transmission operations), along with the private sector and sensitization of the civil society. Improvement in the electricity regulatory framework seeks to elicit further development of on-grid renewable energy deployments with a focus on commercial wind electricity;

th Expansion of Tunisia’s electricity capacity would involve little or no successful commercial development of wind resources over the coming decade, and the growing demand for electricity would primarily be met by building new combined cycle natural gas-fired plants. Without a concerted national effort to remove fundamental market failures in the Tunisian energy market, the development scenario for on-grid wind power in Tunisia would most likely be limited to the continued operation and maintenance of the two existing wind power stations (10 and 8.6 MW).

TA provided to ANER: Wind Unit within ANER,M&E duties with respect to both 10 th

plan and 11th plan targets, wind-map development; targeted training; sector regulatory strengthening, studies and public sensitization campaigns

TA provided to STEG: training and grid absorption capacity study

TA provided to IPP Bureau within the Ministry of Industry and Energy: tender/bidding evaluation, PPA preparation and contract negotiation

Cost: US$1,850,000 GEF Є 900,000 GTZ

Incremental cost:

US$1,850,000 GEF+ Є 900,000 GTZ

US$ 3,000,000

(ii) Contributing to the establishment of the government’s production-based “smart-subsidy” scheme to support the implementation/deployment and commercial operation of 100MW wind power capacity in the 10th plan through a trust referred to as “suggestion de compensation pour la production d’électricité propre de source éolienne;” and,

No PBSS scheme considered, business as usual scenario Establishment of a PBSS

scheme and follow-up M&E activities.

PBSS-Cost: US$26,000,000

GEF: US$8,250,000Government: US$18,250,000

Incremental cost:

GEF: US$8,250,000+ Gov: US$18,250,000

US$26,500,000

(iii) Implementing a TA component intended to ensure sizable integration of the relevant local industry (including electric equipment manufacturing, electronics, mechanical etc.).

No integration of the local manufactures with the international wind industry

Capacity building provided to local manufactures, information supplied to foreign manufactures, joint venture establishments; study on the local industry’s ability to fully participate in construction contracts for the plant.

Cost: US$ 150,000 GEF Є 1,000,000 GTZ

Incremental cost:

GEF: US$150,000+ Є 100,000 GTZ

US$270,000

Total US$ 29,770,000

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ANNEX B: PROJECT LOGICAL FRAMEWORKUNDP-GEF Project- Development of a 100MW on-grid wind plant in Tunisia

Strategy Objectively verifiable Indicators (OVI)

Means of verification (MoV)

Critical Assumptions and Risks

I. DEVELOPMENT OBJECTIVESectoral Objectives:

To reduce greenhouse gas emissions in the electricity sector through the deployment of a 100 MW wind plant to meet the sectoral objectives of the 10th Plan, and on the other hand, to lay the foundation for the implementation of the 11th Plan by the private sector.

Wind plant generated output and sales at least 275,940 MWh during year 1.

Wind plant generated output and sales at least 306,600 MWh for year 2 to 7.

Project follow-up report, statistical reports and official publications Monitoring and evaluation report on avoided GHG emissions with respect to baseline

Baseline is not superseded or rendered obsolete by early exhaustion of endogenous natural gas reserves

Support from the Tunisian Government throughout project life

II. IMMEDIATE OBJECTIVESProject Objectives:

A. To strengthen the institutional, regulatory and operational structures in charge of the sector, namely ANER, STEG, Bureau IPP, DGE, the Ministry of Industry and Energy.

B. To establish a production-based “smart-subsidy” scheme to support the deployment of 100MW wind plant in the 10th Plan.

C. To support the integration of local Industries into the wind energy sector.

a1. Preparation for installing another 200MW during the 11th plan are advanced (at the stage of financial closure) by the end of the project for 10th plan.

b1. Rate of flaws in the connection of wind plants to the interconnected grid, stability of the grid as measured by the stability of the frequency and regularity of the voltage level ; number of agents/engineers/technicians of STEG trained.b2. Acceptation of a wind KWH tariff by stakeholders, including consumers by year 2 after project start.b3. Number of economic studies conducted, number of tender documents prepared, acceptation by partners of project risk mitigation mechanisms.b4. 100% of wind energy generated, purchased by or sold to STEG

c1. Amount of money spent on international wind companies/ experts reduced by 50% per kW installed capacity after year 4 of project start

a.1.1. Files from the ministry and other partners.

b.1.1. STEG report, Technical performance test report

Supervision mission reports

b.2.1. Contract of purchase of wind KWh (PPA)

b.3.1. STEG Report

c.1.1. Tender and contract files

Legal environment is conducive to enforcing agreements and contracts (PPA, O&M, performance guarantee, insurance etc.).

Overall incentive-based regulatory environment that reduces dispute resolution and promotes compliance

Bundling local industrial integration targets with tendering for plant concession to reduce cost rather than increasing it

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Strategy Objectively verifiable Indicators Means of verification (MoV) Critical Assumptions and RisksIII. OUTPUTS

Project Outputs:A1. Capacities ANER strengthenedA2. Capacities of STEG strengthenedA3. Capacities of Bureau IPP strengthenedA4. Regulatory framework strengthened and participation of the private sector to the wind energy development Programme within the 11th Plan promoted

B1. 100MW-capacity wind energy plant deployed and operating in full commercial terms More outputs needed as discussedB2. PPA for 100MW-capacity wind energy plant contract/Plant shareholder covenant.

C1. Capacities of local industries strengthenedC2. Local Manufactures involved in wind plant deploymentC3. Local industry sector information shared abroad

a.1.1. Number of ANER Staff trained a.1.2. Establishment of Wind Electricity Unit within ANER a.2.1. Number of STEG Staff trained a.3.1. Number of IPP Bureau Staff trained a.4.1. Government tariff policy for on-grid wind electricity clarified

b.1. 100 MW on-grid wind power capacity installed with 67 wind turbines, all fully operational on a commercial basis ; plant generated output and sales at least 275,940 MWh during year 1b.2. Wind plant generated and sales at least 306,600 MWh for year 2 to 3.

c.1.1. Number of local manufactures participating in project construction increased by 50% in year 4 after project start as compared to baseline year 2003

ANER annual Reports

STEG annual Reports

Ministry of Industry and Energy Reports

Supervision report

Plant construction Reports Plant performance test Reports

Tender and contract files

Continued coordination among ANER, STEG, the IPP Task Team

Completion of the country’s Wind-Map/Wind Atlas

Efficient/adequate structuring of the ownership of the 100MW Power plant This is not a risk external to the project as far as I understand

Construction, design according to industry standards (costs, deadlines and performance) This is not external

Foreign and local investors interested

Activities (per category) INPUTS/RESOURCESActivities: (These will be detailed with the government during project appraisal to include all required TA activities, detailed feasibility/IPP tender outlines, financing, construction and commercial; e.g. PPA principles)

Study and development of terms de reference, organizational chart and assessments of skills need of the project unit and effective setting-up.

Development of terms of reference for the various studies required for the wind Atlas, recruitment of consultants, implementation of studies, development and dissemination of the Atlas

Definition of training modules on technical connections of wind turbines to the grid, recruitment of trainers, selection of bidders and training implementation

Resources/Means

Dissemination of studies, the organizational chart, decisions of creation.

Dissemination of the wind Atlas

Contracts with trainers and report on training sessions

Contracts with trainers and report on training sessions

Contracts with trainers and report on training sessions

Costs(Will be specified after appraisal mission)

Confirmation of the country’s wind energy potential following wind-map exercise

Agreement with all key partners on an acceptable ceiling price for the tender documents to be issued.

Proposed ceiling price to be able to sustain commercial operation of the wind plant.

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Objectives Objectively verifiable Indicators Means of verification (MoV) Critical Assumptions and Risks

Activities (per category) INPUTS/RESOURCES

Activities:

To evaluate the actual training needs for IPP in procurement procedures, to design corresponding training modules, to select competent training entities and training abroad.

To jointly evaluate with STEG needs in wind project management, to decide on the most adequate form of assistance: training and/or training abroad and modalities of implementation: recruitment of a training entity or STAGE abroad..

To prepare a detailed feasibility study To develop specification for private investors To issue tenders Funding Construction Commercial exploitation

Resources/Means

Dissemination of studies, the organizational chart, decisions of creation.

Dissemination of the wind Atlas

Contracts with trainers and report on training sessions

Contracts with trainers and report on training sessions Contracts with trainers and report on training sessions

Capacity installed (MW) and number of wind turbines built and operating adequately

Tunisian government institutional actors Consultant experts in wind power. Independent electricity producer (IPP). Investors and financial experts. Turbine and equipment specialists Turn-key manufacturer.

Costs

Completion of the country’s Wind-Map/Wind Atlas

Efficient/adequate structuring of the ownership of the 100MW Power plant

Wind energy in sufficient quantity

Construction, design according to industry standards (costs, deadlines and performance)

Foreign and local investors interested

Pre-requisite: Government commitment to meeting the remaining gap of the project’s incremental cost (after GEF support is accounted for) by a combination of all applicable fiscal incentives and direct government subsidy as needed.

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ANNEX C:

(b) STAP REVIEW

Development of On-grid Wind Electricity in Tunisia for the 10th plan

Herman Snel

September 2003

1. Introduction and framework

The project brief for the UNDP/GEF project proposal: "Development of On-grid Wind Electricity in Tunisia for the 10th plan", is reviewed here. The project is designed to aid the development of large-scale wind energy implementation in Tunisia, by: Strengthening the institutional, regulatory and operational capacities of Tunisian agencies and

organizations that are to have a share in the development Contributing to a production based ‘smart-subsidy’ scheme for the deployment of a 100 MW wind

farm, planned to be operational in the year 2007 Providing a TA component aimed at realizing a minimum of 40% local component in the

development of this (and future) wind farms.The 100 MW wind farm forms and integral part of Tunisia’s 10th plan, which covers the period 2003-2007. The 11th plan (2008-2011) foresees the construction of an additional 200 MW of installed capacity in wind energy, by the year 2011. The total of 320 MW in installed wind capacity (including an already existing 20 MW park) will constitute approximately 7.3% of the total electricity generating capacity, expected to be 4400 MW by 2011 [15]1.

The formulation of the project is the result of a number of preliminary activities, starting in 2001 and culminating in the project brief in August 2003. These are outlined in section B1 [1-4] of the brief. They include the initiation of wind measurements in a number of locations (how many?) to assess the wind energy potential of Tunisia. The importance of wind energy measurements of sufficient duration will be stressed in the following sections.

The total project duration is of 8 years, from 2004 to 2012. Although the 10th plan (to which the 100 MW plant pertains) extends to 1007, the project foresees in the provision of ‘smart subsidy’ for five years into the operational life of the plant, hence until 2012.

Although the project brief makes a clear statement in favor of wind energy in Tunisia and the needs for support, it lacks clarity and consistency in a number of details that will be discussed in the following chapters.

2. Scientific and Technical Soundness of the project.

In general, the project brief is scientifically and technically sound, apart from a number of details, some more important than others. These will be discussed in this chapter. In each case reference will be made to the section or the paragraph number of the project brief.

1 Numerals between square brackets refer to the numbered paragraphs of the project brief.

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Before dealing with these specific issues, it is observed that the wind regime indicated in different places of the brief seems more than adequate for further exploration of wind energy in Tunisia. In fact, Northern European load factors are usually in the order of 0.25 to 0.3, well below the 0.35 to 0.4 indicated for Tunisia.

Moreover, it is seen as very positive that a study of the effect on the grid is included, outlined in the TOR of Annex 4. Such as study was (partially) done for other situations, (e.g. Costa Rica) and is of large importance for creating knowledge about wind energy technology and its effects, and gaining the confidence of the grid operator (STEG). It is observed that the effect on the grid depends very much on the type of turbine technology chosen. For instance, with the so called back-to-back converters based on IGBT technology, not only the frequency of the energy to be delivered is set, also the phase angle between voltage and current can be chosen and hence the reactive power. A good knowledge of the effect of different technologies, and use of this knowledge in the tendering process, is very useful.

The estimated cost level of installing wind energy at US $ 1000/kW installed power is a realistic average for a turn-key project of the size considered here. Nevertheless it must be kept in mind that for European manufactures the machine cost in US $ will to a certain degree depend on the exchange rate of the US $ with the €. On average, 70% - 80% of this cost will be machine cost. The additional costs are: permits, farm engineering (micro siting), terrain cost, terrain preparation cost (access roads, cable trenches), foundations, control building, electrical cabling within the farm and to the grid connection point and the grid connection itself. These additional costs depend very much on the accessibility of the terrain and on the distance to the grid connection point. In relative terms, they will be lower for a larger wind farm, reason for which the 100 MW size is a good choice. Also such a size is attractive both to developers, to turbine manufacturers and to the utility itself, if the local grid capacity permits the addition of 100 MW in power.

In estimating future wind energy installation costs, it should be kept in mind that a lower turbine cost only applies to the 70% - 80% of the total cost, the remaining costs are not affected, see also chapter 5 of this review. Although in relative terms the difference is small, such differences do make an impact on the final economical return of a wind farm.

Finally, the item of capacity building on all levels, which is part of the project, deserves much emphasis. In the European and North American context, with a relatively longer history in wind energy implementation, this is seen as one of the key needs for continued progress in wind energy.

Next, the discussion of the different issues that can be improved, in this reviewer’s opinion:

a) The description of the Tunisian electricity sub-sector in section in section B3 is impressive as far as achievements are concerned. However, it leaves unclear if the 95% rural coverage [9] is by the grid or by stand-alone, off-grid systems. The first phrase of [9] suggests that it is off-grid, while the rest of this paragraph (and [17]) suggest that it is on-grid. If there is a sizeable off-grid sector, it would be educational to see what percentage of the total this represents, and indeed to consider the possible effect of wind energy in the future for increasing the on-grid proportion, and describe the benefits.

b) In the cited values of demand and installed power [10, 11], it would be interesting to add the peak demand value, to estimate the present system limitations.

c) Although just a minor detail, it is observed that [13] and [20] refer to the RADES II contract as a BOO [13] and a BOT [20] contract respectively. Possibly the IPP will own the plant for 20 years and then transfer its property to STEG? If so, the question arises if this type of arrangement is common and will apply to wind energy also?

d) The project brief mentions the existence of wind speed measurements, in the northern region of Tunisia, [28, 30]. The importance of wind measurements of sufficient duration cannot be stressed enough. The wind regime is determining for the wind energy production and hence production cost.

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In order to assess the economic feasibility of a 100 MW wind farm, in terms of costs/kWh, a developer will need a number of years of wind measurements, if possible 5 years or more, and a relation with long term measurements at a nearby meteorological station. An investor for a wind farm of this size will only be persuaded with a solid knowledge of the wind regime. Hence a strong recommendation to continue with the recollection of wind speed data.

e) The data in [28] and [30] are not consistent. According to [28], the site at Djebel Sidi Abderrahmen would give 3500 yearly equivalent full power hours, while in [30] the same site (spelled differently!) is listed at 4000 yearly equivalent full power hours. There is a 14% difference between these two numbers, which is quite considerable. Additionally, the corresponding load factor to 3500 hours is not 0.41 as stated in [28], but 0.40, in fact no significant difference but it looks better if the numbers are consistent.

f) More importantly, it is not clear if this load factor is estimated for a single turbine (with what availability?) or for a 100 MW farm of 67 turbines, where array losses may be of 10% - 20%, depending on micro-siting, turbine type and wind regime. In the financial analysis of Annex 5 2 a load factor of 35% is used. It is not clear if this is done to account for array and grid losses, or that it is meant to create a safety margin. The project brief would gain clarity if this were explained. Also, the numbers would appear as more consistent, in the upcoming negotiations with IPP’s.

g) Not of much importance, but in [32], a 30GWh production of the 10.56 MW farm corresponds to a load factor of 32% and not 33%, see also e).

h) In [34] the kWh cost of the Sidi Daoud project is estimated (by STEG) at 2.65 US $ cents. It is also stated in [37] that the avoided cost is estimated at 2.9 US $ cents /kWh (avoided fuel costs), presenting a ‘profit’of 0.3 US $ cents /kWh, rounded-up in the words of [37]. This contrasts with the statement in [44], second bullet, that ‘…the cost of kWh production of wind energy in the Tunisian context will remain quite higher for the 5 or 8 years to come, than the cost of producing conventional energy’. This is all the more true in view of the fact that, according to table 2 of [30] the wind regime at all other mentioned sites is better than that at Sidi Daoud. This must be explained.

i) Paragraph [35] is rather cryptical. It states that the 10.56 MW project savings amount to 7,000 to 9,000 toe annually, which amount will increase to 13,000 to 16,000 toe per annum with the second tranche in place (8.7 MW). This seems logical. However the next phrase states that the aggregate saving of the project over its lifetime is estimated at 140,000 to 170,000 toe. This is probably meant to be the estimated savings for the first part of 10.56 MW only, but the context suggests different. It is not clear if there is a difference between ‘second tranche’ and ‘current extension’.

j) The translation of energy into avoided equivalent CO2 emission in [35] differs from the method followed in Annex 3. In this Annex a value of 600 tCO2e/GWh is arrived at in a rational way. For a 30 GWh/year production of the 10.56 MW plant, see [32], this would mean 18,000 tCO 2e per annum and not 22,000 TECO2 as stated in [35]. The latter value would imply a value of 733 TECO 2/kWh. It is suggested to bring these values in line which each other, including the notation used for Tons of CO2 Equivalent. Obviously the values is the more important than the notation.

k) A word of caution should be voiced regarding the statement that wind turbine towers can be part of the local contents, as suggested in [41] and [62]. Although it is most likely correct (the authors of the brief certainly can make a better assessment than this reviewer can), it should be realized that wind turbine towers are more than simple tubular structures. Specifically the tower’s natural frequencies must be on the design values, as otherwise the dynamic loading of the entire structure will be different from the design values. It is possible to construct the towers strictly following the indications of the turbine manufacturer, but experience shows that this can result in higher costs than those of the usual tower supplier of the manufacturer. However it will be a learning experience. Foundations for the turbines is an item that can be part of local content; the reviewer assumes that this is already included in the category of ‘civil works’. Additionally it suggested to translate ‘pales’ in [41] to ‘rotor blades’.

2 Note that Annex 5 is indicated as Annex 4 in the Table of Contents (there are two Annex 4’s). Likewise, Annex 5 contains two different tables 5.

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3. Regarding the Barriers and Constraints presently existing.

Barriers and Constraints are dealt with in a clear and consistent way in sections B9, B10 and B11 of the project brief (paragraphs 44 through 52). Still a few words may help to expound some of the issues somewhat more.

a) It is correctly assessed in [44] that (pay back) tariff settlements in the Power Purchase Agreement (PPA) are one of the most important items to IPP’s. It is observed in [44] that countries that have seen a successful wind energy development have used attractive tariff schemes. However, this often involves a financial subsidy, also in view of the statement of the second bullet of [44] about competitiveness. Here the wish and need to diversify the energy mix and to start building towards a sustainable energy society, has a political price that is being paid. However this is not always a realistic possibility in less affluent countries. Fortunately Tunisia is blessed with a very good wind climate, which makes it possible to bring wind energy costs much closer to conventional energy costs. Apart from the level of the tariffs agreed in a PPA, the following two items are of very large importance to IPP’s: the long-term certainty of the tariffs, reducing future risks (see also [45], the case of Morocco and

the observation on guaranteed tariffs in [46]), and the guarantee that all the power produced will be purchased.

b) Local expertise is a must for wind energy development, the third bullet of [44] is a very important one. This should extend to consulting firms and the manufacturing industry.

c) Job opportunities resulting from wind energy implementation (see [49]) have been an important goal for (a.o.) the Spanish wind energy program. As a result, an important wind industry has emerged in Spain. It should be noted that job opportunities in the constructing industry are higher than in operation and maintenance (although the latter are also important). In order to create as many jobs as possible, b) should be satisfied.

d) Regarding Tunisian regulations, if environmental taxes were levied on thermal energy production, it could be considered to not charge these taxes to wind energy production

e) The number of Tunisian agencies that have a role in the renewable energy sector seems quite large. It is suggested to clarify the hierarchy of these agencies in the decision making process, in order to expedite the implementation.

4. Benefits, relations to goals of GEF and regional context and replicability

The most direct environmental benefit of the project is the reduction of emissions through energy generated by the wind power installed as part of the project. The estimation of 600 TCO 2e/GWh as derived in Annex 3 of the brief is quite acceptable. With an assumed capacity factor of 35% (as in Annex 5), the avoided CO2 equivalent emissions will amount to slightly above 180,000 TCO2e/year, as indicated in Annex 3.

Over the 5 years of the production based smart subsidy scheme (PBSS) the total avoided CO2 equivalent emissions will be 900,000 TCO2e. For this an amount of US $ 8,250,000 is reserved, which amounts to approximately US $ 9/TCO2e. This seems an adequate amount. In terms of US$/kWh, this amounts to a subsidy of 0.005, approximately equal to equivalent payments under CDM. Note that the estimated annual energy production is not 306,600 kWh as shown in the third item of [68], but 306,600 MWh.

The project fits very well within the GEF goals of reducing emissions of GHG, and will contribute to the compliance of Tunisia with its Kyoto obligations. Moreover it prepares Tunisia for times to come when fossil fuel deposits, both national and international, become in shorter supply. In fact, Tunisia may have a large offshore wind energy potential also, which could be tapped in a further future.

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Regarding the regional context, the project coincides with activities in Morocco and Egypt (as indicated in [45]) and as such is a very welcome addition to regional activities. It can be safely assumed that the project, together with projects in Morocco and Egypt, may induce other North African states to start wind energy implementation.

Project beneficiaries are described in [58]. It is suggested that part of the TA effort address knowledge transfer for wind engineering to Tunisian engineering consulting firms and manufacturing industry, a necessary condition for future developments.

Replicability of the project within Tunisia is assured by the 200 MW wind energy content of the 11th plan. With regard to the GEF content, the project certainly will form a valuable example for other North African states.

5. Sustainability of the program

Sustainability of the program may depend on a number of issues, most of which are addressed in [69] to [73]. In a positive way it can be pointed out that STEG is already involved in wind energy, and that a detailed grid effect study will be made by STEG (see Annex 4).

Another item of concern is the economics of wind energy, as discussed before. This reviewer feels that the present project is economically viable as described, with the possibility of Tunisian Government investment subsidies as indicated in item 5 of [68]. The 200 MW plan will benefit from lower turbine costs and if it could be developed under a CDM scheme, which by then will have matured, it must be viable also.

Again emphasis is placed on local technology and build-up of local knowledge, as essential to sustain wind energy progress.

(Note that in [71] item iii there is a problem with the units. Costs mentioned in this item are costs per kW installed, and not cost per kWh).

The implication that a 17% cost reduction of wind turbines would lead to a 70% cost reduction of installed capacity (stated in [72]) is not entirely correct, as it affects only the turbine costs and not the balance of plant costs.

5. Linkages programs and plans in the region

The project brief does not describe the existence or planned existence of large-scale grid interconnections between different North African nations. If these were to exist, it would certainly be helpful for grid stabilization.

At the same time, a knowledge sharing action with Morocco and Egypt would be very helpful for the present project.

6. Degree of involvement of stakeholders in the project

In the discussion of stakeholders in [74] to [76] it is suggested to add that many multinational oil companies have entered or are entering the renewable energy sector, with a view to long term continuity of their energy related activities. It is suggested to approach these entities as possible stakeholders also.

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Last but not least, the general public (electricity consumers) should also be seen as an important stakeholder. The actions meant to increase awareness at government level should be translated to inform and discuss the options with the general public, notably those living nearby the wind power plants to be constructed.

7. Capacity building aspects

Capacity building is addressed in [66] to [68]. It is limited to Government Agencies. While this is certainly essential for the project, capacity building in engineering consultant firms and manufacturing industry, and perhaps at the higher technological education level, is equally important. It is not clear if the budget will allow for this, but this reviewer suggests to seriously study the possibilities. This will also impress wind energy possibilities on a wider interest group.

8. Conclusions

The proposed project is seen as sound. Details mentioned in the present review are aimed at increasing the viability of the project even more, and clarifying the project brief where necessary.

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ANNEX C

(b 1): RESPONSE TO STAP REVIEW

Development of On-grid Wind Electricity in Tunisia for the 10th plan

September 2003

The STAP review is quoted in normal font style, the response in italics

Major Comments:

Finally, the item of capacity building on all levels, which is part of the project, deserves much emphasis. In the European and North American context, with a relatively longer history in wind energy implementation, this is seen as one of the key needs for continued progress in wind energy.

Next, the discussion of the different issues that can be improved, in this reviewer’s opinion:

l) The description of the Tunisian electricity sub-sector in section in section B3 is impressive as far as achievements are concerned. However, it leaves unclear if the 95% rural coverage [9] is by the grid or by stand-alone, off-grid systems. The first phrase of [9] suggests that it is off-grid, while the rest of this paragraph (and [17]) suggest that it is on-grid. If there is a sizeable off-grid sector, it would be educational to see what percentage of the total this represents, and indeed to consider the possible effect of wind energy in the future for increasing the on-grid proportion, and describe the benefits.

Response:The rate of 95% refers to both on-grid and off-grid rural coverage though off-grid rural electrification is strikingly small in Tunisia. It is fair to say that we have about 95% on-grid rural coverage in the country.

m) In the cited values of demand and installed power [10, 11], it would be interesting to add the peak demand value, to estimate the present system limitations.

Response:Peak demand 1,890 MW in 2002. The information has been added.

n) Although just a minor detail, it is observed that [13] and [20] refer to the RADES II contract as a BOO [13] and a BOT [20] contract respectively. Possibly the IPP will own the plant for 20 years and then transfer its property to STEG? If so, the question arises if this type of arrangement is common and will apply to wind energy also?

Response:According to the information collected by the brief preparation mission, the RADES II project would have been implemented under BOOT scheme over a period of 20 years. Our opinion on

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the scheme to be retained for the 100 MW Wind Energy Project depends essentially on the legal framework in place in Tunisia. However, a 25-year period would be more suitable for the Power Purchase Agreement. The brief considers a life-cycle of 25 years for the wind farm.

o) The project brief mentions the existence of wind speed measurements, in the northern region of Tunisia, [28, 30]. The importance of wind measurements of sufficient duration cannot be stressed enough. The wind regime is determining for the wind energy production and hence production cost. In order to assess the economic feasibility of a 100 MW wind farm, in terms of costs/kWh, a developer will need a number of years of wind measurements, if possible 5 years or more, and a relation with long term measurements at a nearby meteorological station. An investor for a wind farm of this size will only be persuaded with a solid knowledge of the wind regime. Hence a strong recommendation to continue with the recollection of wind speed data.

Response:On this subject, it is fully agreed that the wind regime is one of the most important parameters in terms of energy output of a wind farm, and hence on the economics of a wind energy project. Also, in order to meet industry standards, a wind measurement program must rely on:

i) Appropriate specification (number and configuration), installation and operation of wind monitoring towers, taking into account specific terrain conditions (topographical and meteorological site conditions, roughness, energy supply, etc.);

ii) Data collection, transmission, and analysis, including quality control, standard analysis (Weibull, wind rose, etc.) for a typical time period of 12 to 24 months (5 years is not a standard in the industry);

iii) Climatological adjustment (in relation to long term measurements at a nearby meteorological station), vertical extrapolation, and mapping of wind energy potential using commercial software recognized in the industry (WAsP, WindMap).

p) The data in [28] and [30] are not consistent. According to [28], the site at Djebel Sidi Abderrahmen would give 3500 yearly equivalent full power hours, while in [30] the same site (spelled differently!) is listed at 4000 yearly equivalent full power hours. There is a 14% difference between these two numbers, which is quite considerable. Additionally, the corresponding load factor to 3500 hours is not 0.41 as stated in [28], but 0.40, in fact no significant difference but it looks better if the numbers are consistent.

Response:It is best not to artificially harmonize the figures, as there is a good explanation for the small gaps. Paragraph 28 refers to STEG data as accepted by STEG, whereas paragraph 30 table 2 present the data recorded by ANER on the basis of comparative analysis of data collected by STEG and a private firm as noted under the remarks column of the table.

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q) More importantly, it is not clear if this load factor is estimated for a single turbine (with what availability?) or for a 100 MW farm of 67 turbines, where array losses may be of 10% - 20%, depending on micro-siting, turbine type and wind regime. In the financial analysis of Annex 53 a load factor of 35% is used. It is not clear if this is done to account for array and grid losses, or that it is meant to create a safety margin. The project brief would gain clarity if this were explained. Also, the numbers would appear as more consistent, in the upcoming negotiations with IPP’s.

3 Note that Annex 5 is indicated as Annex 4 in the Table of Contents (there are two Annex 4’s). Likewise, Annex 5 contains two different tables 5.

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Response:Table numbering was corrected. Project feasibility studies were carried out by an International firm which chose to be conservative and the Tunisian government agreed. Contract negotiations will rightly be effected by expectations created prior to concession award. It was the Tunisian government’s choice to be relatively conservative at this stage with the hope that negotiations will be facilitated.

r) Not of much importance, but in [32], a 30GWh production of the 10.56 MW farm corresponds to a load factor of 32% and not 33%, see also (e).

Response:Agreed and corrected.

s) In [34] the kWh cost of the Sidi Daoud project is estimated (by STEG) at 2.65 US $ cents. It is also stated in [37] that the avoided cost is estimated at 2.9 US $ cents /kWh (avoided fuel costs), presenting a ‘profit’of 0.3 US $ cents /kWh, rounded-up in the words of [37]. This contrasts with the statement in [44], second bullet, that ‘…the cost of kWh production of wind energy in the Tunisian context will remain quite higher for the 5 or 8 years to come, than the cost of producing conventional energy’. This is all the more true in view of the fact that, according to table 2 of [30] the wind regime at all other mentioned sites is better than that at Sidi Daoud. This must be explained.

Response:Based on the exceptionally generous financing made available for the construction of SIDI DAOUD as explained in the brief, the above text was meant to refer to the future Tunisian context. With a 30 year concessional loan with 10-year grace period for 50% of the loan financing for SIDI DAOUD, it should be expected that the KWh cost from SIDI DAOUD could be lower than STEG’s avoided cost. STEG’s total avoided cost is basically avoided fuel as capital/investment cost still has to be repaid with commercial interest rate repayment.

t) Paragraph [35] is rather cryptical. It states that the 10.56 MW project savings amount to 7,000 to 9,000 toe annually, which amount will increase to 13,000 to 16,000 toe per annum with the second tranche in place (8.7 MW). This seems logical. However the next phrase states that the aggregate saving of the project over its lifetime is estimated at 140,000 to 170,000 toe. This is probably meant to be the estimated savings for the first part of 10.56 MW only, but the context suggests different. It is not clear if there is a difference between ‘second tranche’ and ‘current extension’.

Response:All recorded data, projections and information prior to June 2003 relate to the initial tranche as the extension became operational only in June 2003. The relevant text was clarified in the brief by adding the first tranche to the estimate of savings.

u) The translation of energy into avoided equivalent CO2 emission in [35] differs from the method followed in Annex 3. In this Annex a value of 600 tCO2e/GWh is arrived at in a rational way. For a 30 GWh/year production of the 10.56 MW plant, see [32], this would

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mean 18,000 tCO2e per annum and not 22,000 TECO2 as stated in [35]. The latter value would imply a value of 733 TECO2/kWh. It is suggested to bring these values in line which each other, including the notation used for Tons of CO2 Equivalent. Obviously the values is the more important than the notation.

Response:The translation of energy in avoided CO2 emissions in paragraph 35 reflects the reality of power loss assumption stated to be close to 10% in paragraph 32. Annex 3 does not make such an explicit loss assumption. The section on SIDI DAOUD is intended to illustrate the amount of experience that can be gained and the learning curve that STEG has been experiencing. As also explained in paragraph 32, depending on network rehabilitation activities, losses can vary quite significantly and the translation of these losses in actual fuel displacement based on a reference scenario can be rather tricky. It is suggested to keep the description offered by STEG’s Engineers on the basis of the SIDI DAOUD’s circumstances rather than harmonizing with the projections in annex 3. These projections still have merits and were analyzed with the sensitivity runs within the brief.

v) A word of caution should be voiced regarding the statement that wind turbine towers can be part of the local contents, as suggested in [41] and [62]. Although it is most likely correct (the authors of the brief certainly can make a better assessment than this reviewer can), it should be realized that wind turbine towers are more than simple tubular structures. Specifically the tower’s natural frequencies must be on the design values, as otherwise the dynamic loading of the entire structure will be different from the design values. It is possible to construct the towers strictly following the indications of the turbine manufacturer, but experience shows that this can result in higher costs than those of the usual tower supplier of the manufacturer. However it will be a learning experience. Foundations for the turbines is an item that can be part of local content; the reviewer assumes that this is already included in the category of ‘civil works’. Additionally it suggested to translate ‘pales’ in [41] to ‘rotor blades’.

Response:“Rotor blades” has replaced the French word “pales”. 4. Regarding the Barriers and Constraints presently existing.

Barriers and Constraints are dealt with in a clear and consistent way in sections B9, B10 and B11 of the project brief (paragraphs 44 through 52). Still a few words may help to expound some of the issues somewhat more.

f) It is correctly assessed in [44] that (pay back) tariff settlements in the Power Purchase Agreement (PPA) are one of the most important items to IPP’s. It is observed in [44] that countries that have seen a successful wind energy development have used attractive tariff schemes. However, this often involves a financial subsidy, also in view of the statement of the second bullet of [44] about competitiveness. Here the wish and need to diversify the energy mix and to start building towards a sustainable energy society, has a political price that is being paid. However this is not always a realistic possibility in less affluent countries. Fortunately Tunisia is blessed with a very good wind climate, which makes it possible to

24

bring wind energy costs much closer to conventional energy costs. Apart from the level of the tariffs agreed in a PPA, the following two items are of very large importance to IPP’s: the long-term certainty of the tariffs, reducing future risks (see also [45], the case of

Morocco and the observation on guaranteed tariffs in [46]), and the guarantee that all the power produced will be purchased.

Response:The case was made in the brief has observed by the reviewer

g) Local expertise is a must for wind energy development, the third bullet of [44] is a very important one. This should extend to consulting firms and the manufacturing industry.

Response:Agreed. The Industrial integration component of the proposed project precisely includes the above suggestion.

h) Job opportunities resulting from wind energy implementation (see [49]) have been an important goal for (a.o.) the Spanish wind energy program. As a result, an important wind industry has emerged in Spain. It should be noted that job opportunities in the constructing industry are higher than in operation and maintenance (although the latter are also important). In order to create as many jobs as possible, b) should be satisfied.

Response:This is a part of the Tunisian government’s plan with the emphasis placed on high level of integration.

i) Regarding Tunisian regulations, if environmental taxes were levied on thermal energy production, it could be considered to not charge these taxes to wind energy production

Response:The government has pledged to apply all fiscal incentives to support the project.

j) The number of Tunisian agencies that have a role in the renewable energy sector seems quite large. It is suggested to clarify the hierarchy of these agencies in the decision making process, in order to expedite the implementation.

Response:Project implementation will proceed on several parallel fronts allowing each government structure to contribute based on its mandate, assigned activities and comparative advantage. ANER’s specified activities under the project are more of a policy formulation, wind measurement and regulatory improvement focus. The IPP Task team within the Ministry will prepare and execute the tenders/bids evaluation and STEG will absorb the wind electricity produced. These are the key players regrouped under the same minister so the command line is clear. All other ad hoc commissions have been useful in efforts to sensitize the government and build the current level of ownership as explained in the brief.

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6. Benefits, relations to goals of GEF and regional context and replicability

The most direct environmental benefit of the project is the reduction of emissions through energy generated by the wind power installed as part of the project. The estimation of 600 TCO2e/GWh as derived in Annex 3 of the brief is quite acceptable. With an assumed capacity factor of 35% (as in Annex 5), the avoided CO2 equivalent emissions will amount to slightly above 180,000 TCO2e/year, as indicated in Annex 3.

Over the 5 years of the production based smart subsidy scheme (PBSS) the total avoided CO2

equivalent emissions will be 900,000 TCO2e. For this an amount of US $ 8,250,000 is reserved, which amounts to approximately US $ 9/TCO2e. This seems an adequate amount. In terms of US$/kWh, this amounts to a subsidy of 0.005, approximately equal to equivalent payments under CDM. Note that the estimated annual energy production is not 306,600 kWh as shown in the third item of [68], but 306,600 MWh.

The project fits very well within the GEF goals of reducing emissions of GHG, and will contribute to the compliance of Tunisia with its Kyoto obligations. Moreover it prepares Tunisia for times to come when fossil fuel deposits, both national and international, become in shorter supply. In fact, Tunisia may have a large offshore wind energy potential also, which could be tapped in a further future.

Regarding the regional context, the project coincides with activities in Morocco and Egypt (as indicated in [45]) and as such is a very welcome addition to regional activities. It can be safely assumed that the project, together with projects in Morocco and Egypt, may induce other North African states to start wind energy implementation.

Project beneficiaries are described in [58]. It is suggested that part of the TA effort address knowledge transfer for wind engineering to Tunisian engineering consulting firms and manufacturing industry, a necessary condition for future developments.

Replicability of the project within Tunisia is assured by the 200 MW wind energy content of the 11th plan. With regard to the GEF content, the project certainly will form a valuable example for other North African states.

Response:Agreed.

7. Sustainability of the program

Sustainability of the program may depend on a number of issues, most of which are addressed in [69] to [73]. In a positive way it can be pointed out that STEG is already involved in wind energy, and that a detailed grid effect study will be made by STEG (see Annex 4).

Another item of concern is the economics of wind energy, as discussed before. This reviewer feels that the present project is economically viable as described, with the possibility of Tunisian Government investment subsidies as indicated in item 5 of [68]. The 200 MW plan will benefit

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from lower turbine costs and if it could be developed under a CDM scheme, which by then will have matured, it must be viable also.

Again emphasis is placed on local technology and build-up of local knowledge, as essential to sustain wind energy progress.

(Note that in [71] item iii there is a problem with the units. Costs mentioned in this item are costs per kW installed, and not cost per kWh).

Response:The typo has been corrected and the text now reads 1,000 US$/KW.

The implication that a 17% cost reduction of wind turbines would lead to a 70% cost reduction of installed capacity (stated in [72]) is not entirely correct, as it affects only the turbine costs and not the balance of plant costs.

Response: The inference is reasonably accurate for wind plants in the range of 100MW or 200 MW as confirmed by industry specialists.

5. Linkages programs and plans in the region

The project brief does not describe the existence or planned existence of large-scale grid interconnections between different North African nations. If these were to exist, it would certainly be helpful for grid stabilization.

Response:Algeria has a conventional 2000MW power project for exports and Morocco has strengthened it interconnected grid in recent years to prepare for major regional power trades. It is correct that a regional integration of power networks (power pools) adds to grid stability. However, with ONE’s (Moroccan grid operator) own wind power development program and other Moroccan Private developers contemplating major wind power plant developments, it may not be sensible to suggest that the purported stabilization effect, if any, would automatically benefit national wind programs outside the dominant power network. This ought to be investigated on a case by case basis.

At the same time, a knowledge sharing action with Morocco and Egypt would be very helpful for the present project.

Response:Agreed. It might be more fruitful to incorporate such activities in the 11th plans target when a concrete and solid Tunisian experience has been built.

6. Degree of involvement of stakeholders in the project

In the discussion of stakeholders in [74] to [76] it is suggested to add that many multinational oil companies have entered or are entering the renewable energy sector, with a view to long term

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continuity of their energy related activities. It is suggested to approach these entities as possible stakeholders also.

Response:The Tunisian counterparts reviewed an earlier version with text along the lines suggested and stroke out similar references.

Last but not least, the general public (electricity consumers) should also be seen as an important stakeholder. The actions meant to increase awareness at government level should be translated to inform and discuss the options with the general public, notably those living nearby the wind power plants to be constructed.

Response:Agreed. This is where the many ad hoc sector entities referred to earlier have been useful in the course of project preparation and will continue to be involved.

7. Capacity building aspects

Capacity building is addressed in [66] to [68]. It is limited to Government Agencies. While this is certainly essential for the project, capacity building in engineering consultant firms and manufacturing industry, and perhaps at the higher technological education level, is equally important. It is not clear if the budget will allow for this, but this reviewer suggests to seriously study the possibilities. This will also impress wind energy possibilities on a wider interest group.

Response:Agreed. Much of the integration efforts of the local industry will involve building capacity of the local industry as specified in the project log-frame (project outputs for strategic objective related to local industrial integration)

8. Conclusions

The proposed project is seen as sound. Details mentioned in the present review are aimed at increasing the viability of the project even more, and clarifying the project brief where necessary.

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