PROJECT BRIEF
1. 	Identifiers
Project Number: 
Project Name:				PERU: Photovoltaic-based Rural Electrification in Peru
Duration:				5 years
Implementing Agency:		UNDP
Executing Agency: 			Ministry of Energy and Mines
Requesting Country:			Peru		
Eligibility:				Under Financial Mechanism of UNFCCC 
					(Ratified 7 June 1993)
GEF Focal Area:			Climate Change
GEF - Programming Framework:	Operational Programme 6

2. 	Summary:  
The objective of the proposed project is to assist the Government of Peru in removing barriers to sustainable rural electrification using photovoltaic (PV) technology in remote rural areas, thereby reducing the long-term growth of the greenhouse gas (GHG) emissions.  The project will demonstrate the viability of establishing micro enterprises to sell, maintain and operate the PV systems, as well as create incentives for increased public and private sector investment in photovoltaic-based rural electrification.

3.  	Costs and Financing (US$): 
	GEF: 		- Project			:	3,930,093
			- PDF A			:	     25,000
				Subtotal GEF			:	3,955,093

	Co-financing	-IA-
			-Private			:	1,376,251
  		 	-Nat. Government		:	3,849,465 (in cash)
						   	:	1,646,981 (in kind)
	Total Project Cost				:	9,180,809 (cash)
							:          +1,646,981 (in-kind)

4. 	Associated Financing	(Million US $)		:	  5,000,000 (PROER)

5.	Operational Focal Point Endorsement:

	Name:		Mr. Gonzalo Galdos	Title: President of the Council of Directors
	Organisation:	CONAM		Date: 26 January 1997

6.  	IA Contact: 		Mr. Tommi  Tynjala
Programme Officer, UNDP, Lima
Tel. (51-1) 422 1758 ;  Fax (51-1) 440 4166
Email : ttynjala@pnudpe.org.pe

List of Acronyms

COFIDE	Corporación Financiera de Desarrollo, (Finance Corporation for Development)
CONAM	Consejo Nacional del Ambiente, (National Council for Environment)
DEP		Dirección Ejecutiva de Proyectos (Executive Project Directorate (MEM))
ESMAP	Energy Sector Management Assistance Programme (World Bank/UNDP)
GEF		Global Environment Facility
GHG		Greenhouse Gases
MEM		Ministerio de Energía y Minas, (Ministry of Energy and Mines)
PAE		Programa de Ahorro de Energía,(Energy Conservation Programme (MEM))
PDF		Project Development Facility (GEF)
PROER		Programa de Energías Renovables, (Renewable Energy Programme (COFIDE))
PV		Photovoltaic
SENAMHI	Servicio Nacional de Meteorología e Hidrología, National Meteorological and Hydrological Services)
UNDP		United Nations Development Programme
UNFCCC	United Nations Framework Convention on Climate Change

1. BACKGROUND AND CONTEXT (Baseline Course of Action)

1.1 Country Background

1.	Peru covers 1,285,215 square kilometres and is the third largest country in South America.  Its population is over 24 million, almost half of which is concentrated in the narrow coastal desert. Lima alone has a population of almost six million while the second and third cities, Arequipa and Trujillo, also in the coastal region, have populations of about 900,000 each.  Only 66% of the total population has access to electricity for domestic use.  Over 8 million inhabitants (or 1.6million households) have no access to electricity.  Of these unelectrified households, about 1 million can be expected to be electrified economically through grid extension or the creation of mini-grids for transmitting electricity generated from small hydro or diesel.  The remaining 600,000 households represent the target market for this project.  Forty-five percent of Peru’s population live in poverty with 19% under the extreme poverty level. The critical linkages between energy, poverty and development include population growth, food security, health impacts, environmental, and land degradation.  It is evident that energy is not a sectoral issue but one that is vitally related to other dimensions of development.

2.	Non-conventional renewable energy sources in Peru are remarkable, but inadequately harnessed. They include solar energy, wind energy, biomass/agricultural residues, geothermal energy and municipal and industrial waste. In the Sierra, the average solar radiation levels reach 5 kWh/m2/day, with small seasonal variations. The Ministry of Energy and Mines (MEM) has installed 313 photovoltaic (PV) systems in the country. The wind velocity measurements in the coastal zone indicate average velocities of 6 m/s at 10 m level. Taking into account the penetration capacity of the grid, it should be possible to develop 200 MW of wind power feeding the North/Central Grid. The geothermal potential in southern Peru is estimated at 600 MW. There are currently no geothermal power plants in the country. 

Legal Framework

3.	The Electrical Concessions Act of 1992 regulates the activities related to generation, transmission, distribution and marketing of electric energy. The law creates a modern framework, permitting the generation, transmission, distribution and sale of electricity as a commercial business, within a market free of any restrictions and with minimum state intervention. The supply of electricity for Public Service—defined as consumers with a maximum demand of less than 1 MW—has a tariff system established by law based on the marginal cost of supply, the efficiency of the electrical system, the level of market prices and a real rate of return of 12% annually. Electricity concessions and authorisations may be given to private persons or public or private companies, both local and foreign. A concession is required for:
•	Generation of electricity  that uses hydraulic and geothermal resources whenever the installed capacity is above 10 MW;
•	Transmission of electricity whenever facilities affect state property and/or require rights of way to be granted by the state; and
•	Distribution of electric energy for public service whenever the demand is above 500 kW.  
4.	An authorisation is required to carry out thermoelectric, hydroelectric and geothermal generation activities that do not require a concession, whenever the installed capacity is above 500 kW.  Generation, transmission and distribution activities that do not require a concession or authorisation may be freely carried out in compliance with technical regulations, environmental laws and laws of the Cultural Heritage of the Nation. Article 9 of The Electrical Concessions Law states: “The State promotes the conservation of the environment and the Cultural Heritage of the Nation, as well as the rational use of natural resources in the undertaking of activities related to the generation, transmission and distribution of electric energy.” Currently, there is no special law for renewable energy, save for geothermal energy.

Growth of  the Electricity Sector

5.	Total electricity production rose by 2.1% in 1996. Ninety-seven concessions and authorisations were awarded to different petitioners, raising the total awarded to more than 500.  Some previously-initiated investments are being realised as in the case of the installation of a 125 MW unit in the Santa Rosa Thermal Plant, surpassing the initial commitment of 100 MW. 

6.	According to the programmed projects it is calculated that the electricity-generating capacity in the country will increase by approximately 1,800 MW over the next five years. The projected growth in the supply is mainly by thermal plants: more than half of the increase is expected to correspond to electricity generated by natural gas. 

National Electrification Plan

7.	The electrification coefficient in Peru was the lowest of South America in 1992: At the national level, 43% of the population and in rural areas only 12%, had access to electricity. Due to government efforts, the coefficient in 1996 reached 66% nationally and 19% in rural areas. It is estimated that 20% of the population currently without electricity, living on the outskirts of large urban areas, could easily be supplied with electricity. The remaining 80% -more than 6 million people- live mainly in small and remote rural settlements.

8.	The National Electrification Plan 1997—2000 is being executed by the Executive Project Directorate (DEP, Dirección Ejecutiva de Proyectos) of the Ministry of Energy and Mines (MEM). Forty-three electrification projects were executed in 1996 bringing power to 510,000 inhabitants through the construction of 1,344 kilometres of power lines and an increase of 5.6 MW of installed power in isolated rural systems.  The goal of the plan is to reach 75% coverage at the national level by the year 2000. To achieve this goal 5,451 rural communities will be connected to the main electricity systems of the country. 

9.	The National Electrification Plan is the framework for the proposed project. The existence of market and non-market barriers, however, prevent the full potential of PV’s as a source of rural electricity from being achieved. By removing the identified barriers, this project will establish the necessary conditions to integrate solar photovoltaic systems into the plan in a sustainable manner.

Photovoltaics and Renewable Energy in Peru

10.	Renewable energy development has a long history in Peru. The first resource evaluation and technology promotion activities date back to the 1960’s when the National Engineering University (Universidad Nacional de Ingeniería, UNI) elaborated a preliminary solar map of the country (now out dated). Since then different institutions, both public and private, have been actively participating in the investigation and development of renewable energy technologies. 

11.	The joint UNDP/World Bank Energy Sector Management Assistance Program ESMAP published the document “Peru - Energy Sector Short and Middle Term Strategy” in December 1990. The chapter on renewable energy recognises the abundant renewable energy resources of Peru and analyses some of the problems that faced by renewable energy projects in the 70’s and 80’s. However, the current macro-economic and political situation, as well as the maturity of the different renewable energy technologies are presently different from those presented in the report.

12.	Since 1994, the Executive Project Directorate (DEP) of MEM has executed a UNDP Project PER/94/028 “Non-Conventional Energy” funded by the Government. This project has a solar photovoltaic and wind energy component. A 250 kW grid-connected wind turbine has been installed in Malabrigo since April 1996, and 313 PV systems have been placed in various rural communities. 

13.	In the community of Huancho Lima in the Puno province, this project has installed PV battery chargers (capacity 9 batteries) and provided 30 systems, each one consisting of one battery and two fluorescent lamps. The community has organised a Solar Service Enterprise for assuring sustainability of the project through appropriate management of the charging plants (users pay a fee of US$ 0.80 for charging a battery) and depositing the fees into a bank account for future spare parts and battery replacements in order to assure the long term sustainability of the project.

14.	A different approach has been taken in the community of San Francisco, Pucallpa. The project provided the community with 32 PV systems, including the installation of the systems and the training of a local technician. The users have established a micro-enterprise to guarantee the sustainability of the project. Each user makes a US$ 35 initial payment and pays US$ 3.50 monthly fee to the enterprise. The funds will be used for spare parts and battery replacements as well as for possible expansion of the individual systems/number of systems.

15.	Apart from the equipment purchased by this project, the DEP has bought 1,250 solar photovoltaic systems and a 450 kW wind generator through a UNDP special procurement project. The photovoltaic systems will be installed in rural and remote areas. The 450 kW wind generator will be installed in Marcona, Ica, and should be operative by December 1997.

16.	The National Electrification Plan includes also the installation of 72 mini hydropower stations during the period 1997–2000. The Japanese Government donated part of the equipment of these power stations.

17.	COFIDE (Corporación Financiera de Desarrollo), a second-floor financing institution, is executing a program called PROER, (Renewable Energy Credit Program) funded with US$5,000,000 by the Government of the Netherlands. This program finances 80% of the costs of a renewable energy project and can lend up to US$100,000 for a community or an equipment provider, or up to $10,000 for a micro enterprise or a natural person. The repayment time would be 5 years (1 grace year) and the interest rate is defined by the intermediate financial institution.

18.	Other renewable energy initiatives and projects include the Taquile Pilot Project on the Taquile Island in Lake Titicaca. This project is financed by the Energy Saving Project (Proyecto de Ahorro de Energía, PAE) of the Ministry of Energy and Mines and executed by the Renewable Energy Centre of the National Engineering University. It has established a US$ 65,000 revolving fund for electrification of the island with PV systems, including not only the equipment and installation but also technical manuals, training of five local technicians in maintenance, after-sales services and a stock of spare parts.

19.	These experiences are considered successful from the technical and organisational points of view and their positive elements should be transferred to future projects. Further analysis is required to define the best possible mechanisms for the operations and management (O&M) of the systems in each particular reality. The key issue is an authentic willingness of each involved family to participate in the project, understand its related responsibilities and demonstrate the capacity to assume them.

20.	Community interviews undertaken as part of field visits funded by a PDF Block “A” show that the communities understand the rationale behind user fees both for purchasing and maintenance of systems.  These consultations have revealed that users and non-users in rural communities favour PV systems because of their simplicity; users are satisfied with their systems and pay their monthly fees on time; and many of the non-users are interested in obtaining service and are willing to pay for it.  In addition, many of those who utilised battery-charging systems are interested in obtaining household-level stand-alone systems.  On the other hand, users did not like the limited choice of PV systems and components; they disliked the high prices for most systems; and wanted better financing options to enable them to pay back the cost of the systems over time.

21.	A Committee of Renewable Energy Development consisting of different public and private institutions and chaired by CENERGIA, was created in 1996. The Committee elaborated a proposal “Integrated Program for the Renewable Energy Development” in June 1996. The program was presented to the Ministry of Energy and Mines for its consideration.

22.	Although there are competent institutions and a solid commitment by the Government of  Peru, a number of barriers prevent the utilization of  the country’s abundant renewable energy potential of the country.  This project proposal concentrates on removing barriers to the sustainable dissemination of PV systems in a way which is consistent with the National Electrification Plan. 

1.2 Climate Change Policies

23.	Peru ratified the United Nations Framework Convention on Climate Change in June 1993. A National Committee for Climate Change was created in November 1993 in order to co-ordinate the implementation of the UNFCCC and the Montreal Protocol.  The Committee is chaired by the National Council for the Environment (CONAM).  A GHG Inventory for the year 1990 has been carried out and mitigation have been identified with the support of the US Country Studies program. The land-use sector accounts for 81% of Peru’s total GHG emissions.  However, baseline scenarios estimate significant growth of energy sector emissions due to increased electrical generation.

24.	With the support of the Danish Government (Risø National Laboratory/UNEP Collaborating Centre on Energy and the Environment), work is already underway for the updating of the GHG Inventory to the year 1994 using the revised IPCC Guidelines. Peru is also participating in the CC:TRAIN project  whose funds will cover the preparation of  the national implementation strategy and limited public awareness building via a workshop on the UNFCCC. The National Climate Change Program and Peru’s initial national communication will be elaborated during 1998 with the support of an enabling activity project financed by GEF through UNDP.

2.  RATIONALE AND OBJECTIVES (ALTERNATIVE)

2.1  Project Objectives

25.	The overall objective of the proposed project is to assist the Government of Peru in reducing the long-term growth of greenhouse gas (GHG) emissions from the burning of fossil fuels used to satisfy the basic energy needs in the rural and remote areas (lighting, etc.). The project will remove barriers to the successful implementation of rural renewable energy projects using photovoltaic technology and will create incentives for increased public and private sector investment in renewable energy sector development.

26.	Of the 1.6million household lacking access to electricity in Peru, it is estimated that approximately 1million can be economically supplied electricity either through grid connection or through the provision of electricity generated by small diesel gensets or small hydro systems.  The remaining 600,000 households represent households for whom PV-based electricity may be the least-cost electrification option.  By the end of the project’s five year activities, it is expected that the PV industry will have grown from its nascent state of 1000-2000 50W systems per year to nearly 7000 systems per year.

2.2  Rationale for GEF Financing

27.	This project identifies and targets the barriers to the use of renewable energy in order to achieve a large-scale utilisation of renewable energy driven by private initiatives. The project aims to create programmatic results that will continue to generate a positive global impact even after its termination and is consistent with the Climate Change Operational Program No. 6 “Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs”. 

28.	GEF support is required to remove the barriers that prevent the installation of renewable energy in rural electrification programs in Peru. The major task is the implementation of a Rural Electrification Program that will install 12,500 PV Systems, and create local markets for these systems.  It is anticipated that the PV market in Peru will grow from its current level of almost 2000 PV systems per year to almost 7000 systems being installed per year.  The Government of Peru through its Executive Projects Directorate has been strongly supporting the implementation of this program and is committed to guarantee its long-term sustainability at the local level.  

29.	Communities in rural areas are increasingly evaluating the benefits of PV Systems and PV Systems users have organised small local companies, with the essential goal of assuring the long-term sustainability of the project. At the end of the project’s lifetime, the cost of PV systems in Peru will fall to the point where households in remote rural areas can utilize electricity from PV systems at a cost roughly equivalent to the cost they pay currently for kerosene, candles, and batteries.  That is, the cost of a PV system is expected to fall to the point where it is the least-cost lighting option in remote rural areas.  The rural electricity service companies will be self-sufficient through the assistance provided in this project and the user fees paid on a monthly basis.  This will guarantee the sustainability of the PV market in Peru.

2.3 Barriers to the Successful Dissemination of Photovoltaic Technology

30.	Based on the experiences of the DEP and the proposal of the Committee of Renewable Energy Development, the Ministry of Energy and Mines organised the workshop  “National Plan of Electrification and the Development of Renewable Energy” financed by a PDF Block “Ä” grant.  The participation of organisations involved in renewable energy development, as well as field visits to the different projects mentioned above, were an invaluable resource in identifying the barriers against the optimal use of renewable energy.  The basis of this proposal is to remove these barriers in order to enable the market to grow beyond its current stage. The identified barriers are :

Institutional

31.	To date, there are few firms operating electricity systems of renewable resources in Peru.  Communities have not set up local utilities to provide the services required and local entrepreneurs lack the skills and the incentives to begin operating in this area.  This has served as a barrier to the widespread dissemination of renewable electricity in remote areas. 

32.	To surmount this barrier, rural communities wishing to electrify with renewable energy have organised small enterprises under MEM guidance.  The goal of these enterprises is to assure sustainability of the project in the long term. The rates users pay will be clearly established and will take into account the costs of the equipment, service and the willingness and ability of the users to pay. Even though a number of ownership and financing models may be deployed (lease-hire; utility ownership; user ownership), the establishment of these organisations must be consistent with the concession law and its application to renewable electricity generation.  The scale of the firms will be determined based upon demand, needs, and appropriate scale economies.

Financial-Institutional 

33.	Even if the lifecycle cost of a PV system were lower than that of traditional energy sources (torches, candles, batteries etc.), the high up-front cost of the system makes it unaffordable to low income households.  This high up-front cost is mainly due to low volumes and high transport and installation costs in remote areas and serves as a barrier to PV dissemination. In general, users lack credit histories, capital and credit warranties. Furthermore, the financing institutions have experience neither in renewable energy technologies nor in micro-finance management.

34.	To overcome the barrier caused by high front-end costs, two steps are necessary.  First, the volume of PV systems installed in the country must be increased to allow the industry to capture economies of scale.  Second, a reasonable financing or credit scheme must be established to help users spread their payments over a longer period of time.  The rural electricity service companies will retain ownership of the PV systems and will be able to obtain financing.  The project will ensure both the availability of finances from the financial sector and the soundness of the rural service companies’ finances.

Technical and Information Barrier

35.	Two types of technical information barriers hinder the growth of the nascent photovoltaic industry in Peru.  First, it lacks reliable and detailed solar radiation data.  The existing data is collected and summarized only to the standards of meteorological data, not engineering data.  Therefore, it is unclear to many where there is sufficient solar insolation to allow successful electrification.  Second, the overall endowment of renewable resources and the availability of renewable energy equipment are not generally known. 

36.	In response to these barriers, two types of activities are required.  The first will involve the development and publication of a data base of solar energy resources and markets in Peru.  The second will involve the development and publication of data-base on photovoltaic equipment.

Lack of Technical Standards and Norms

37.	There are no technical norms and standards for PV equipment and components in Peru.  Neither are there recommended practices for the installation and maintenance of PV Systems.  This leads to a lack of consumer confidence in private installations and also places a limitation on market growth.

38.	In order to overcome this barrier, the photovoltaic industry in Peru needs to compare its practices with best international practice.  As part of this project, a set of standards for panels, components, systems and installation practices will be established and publicized to ensure both the high quality of PV installations and consumer confidence.  These standards will also include recommendations for the fluorescent bulbs to be utilized as part of the system as international experience has shown that the efficacy of the tubes can tremendously influence system cost and performance.

Human resources limitations 

39.	Only a few universities in Peru are involved in renewable energy research and development. The number of professors and instructors is small. As a result, the number of well-trained technicians very limited. In rural areas, there is an almost complete lack of technical capacity to build, install and operate PV systems. Users also lack information about the operation and maintenance of PV systems.

40.	 A wide-ranging training and capacity building program is required to overcome the human resource limitations found in the Peruvian PV and renewable energy sector.  This will include support for technical courses at the polytechnic and university level, technician training for builders and installers of systems, certification training to familiarize the industry with the standards for systems and installation, and user training.

3.  PROJECT ACTIVITIES/COMPONENTS AND EXPECTED RESULTS

41.	The project is designed to remove barriers to remote electrification using photovoltaics in stand-alone and micro-grid installations. The focus on the PV technology arises from the successful experiences with these systems in rural Peru. Market opportunities for renewable energies will be created by improving the access to credit, by facilitating the creation of rural PV service companies, and by creating greater consciousness of the benefits and possibilities of PV electrification.  The goal is the development of a sustainable PV market relying upon rural electricity service companies.  Seven project activities have been designed with the aim of removing the barriers to the successful photovoltaic-based rural electrification. 

Activity 1.  Development of Renewable Energy Data and Databases

42.	The aim of this activity is to remove the barrier of lack of Solar Radiation Resource information and the lack of information about solar resources, technologies, and market opportunities in Peru.  Solar radiation information is essential for the proper sizing of photothermal and photovoltaic devices. Ground data on solar energy and sunshine has been collected by a SENAMHI (Servicio Nacional de Meteorología e Hidrología) with approximately 110 instruments (90 solarimeters, 15 actinographs and 5 black and white piranometers) scattered in Peru. SENAMHI was responsible for providing solar energy information until very recently. Because of its nature, the information gathered has been processed for meteorological purposes instead of energy purposes.  This activity will provide SENAMHI the necessary means of processing the existing information; producing new information on solar energy; and making it freely accessible through Internet. SENAMHI will be responsible for keeping the database updated in the future. In addition to the Internet page, a Solar Radiation Data Manual for solar thermal and PV applications will be produced and updated. The database (to be developed with GIS) will also help characterize the potential market for PV’s in Peru.

Activity 2. Standards for PV Systems and Certification of Installations

43.	The aim of this activity is to remove the barrier of poor quality components--like charge/discharge regulators, ballast, fluorescent tubes and batteries--that have often led to malfunction and poor performance of PV systems. Standards and recommended practices are important issues that could prevent the use of poor quality elements and the operation of poor installations, and are essential to keep maintenance work and the O&M costs as low as possible. Many countries in the region are facing the same problem: costly foreign-made solar modules imbedded in a system often unbalanced, with bad components, and poorly installed. The standards developed  (or adopted) should be fulfilled by the suppliers as a bid condition and be able to verification by local labs (like solar laboratories), and further certification of the product.  All efforts will be made to incorporate international best practice and experience in the PV sector, drawing upon experience from elsewhere in Latin America.

44.	The installation is a service provided by the supplier of the PV systems or the regional PV dealer/operator. No matter if the rural electricity company does the installation itself or if they subcontract for the task, systems should be installed following the installation guidelines. Installation technicians and contract supervisors must be trained in these installation guidelines. Randomly selected installations will be inspected to ensure that they are consistent with the guidelines.

Activity 3. Establishment of Model Rural Electricity Concessions and Local Companies

45.	Based upon the legal and regulatory framework established under the Electrification Law; the experience of other Latin American countries with renewable electrification; and the ongoing Technical Assistance of ESMAP, a model for concessional operators for remote rural electrification will be established.  The model will allow for flexible arrangements and ownership patterns, but should be designed to give a secure basis for future investment for both operators and consumers while maintaining consistency with the electricity laws and providing for the requisite economies of scale to make electricity provision economically attractive. 

46.	Communities in Peru have different degrees of organisational development. A number of options for the provision of renewable electricity will be developed and evaluated based upon the experience in other Latin American countries.  The main issues should be the goal of the company, the associative form, rights and responsibilities of members, management fees, tariffs to be charged and fines, when necessary. Local communities will be helped to establish their own rural electric utilities. 

Activity 4.  Strengthening of Financial Institutions for Renewable Electrification

47.	In the first instance, this activity will select and work with a set of financial institutions (banks, development banks or second story financial institutions) to ensure adequate financing for the companies being established to provide the electricity services to remote rural areas under Activity 3. Initially, the goal will be ensuring that the money paid into the company is well-managed.  Through time, the goal is for these financial institutions to begin on-lending for renewable energy activities with their own resources.

48.	Based upon the experiences with the financing of renewable energy systems elsewhere in Peru, this activity will work with selected financial institutions and second-story financial institutions to establish a framework for the financing of renewable electrification.  This will involve not only work to identify appropriate loan qualification standards but also focus on increasing credit availability and lengthening payback terms for small-scale remote rural electrification.  This activity will also work with the rural electrical companies or concession operators to ensure that their fee structure is sufficient to guarantee their long-term sustainability.

Activity 5. Installation of PV Systems 

49.	For the PV market to become sustainable and cost-effective, it will be important that it develop to a size where it can begin capturing economies of scale.  To achieve this goal, the project will concentrate efforts and systems in the hinterlands surrounding four towns:  Pucallpa (Departmento de Ucayali); Iquitos (Dpto de Loreto);  Puerto Maldonado (Dpto. De Madre de Dios); and Jaen (Dpto. De Cajamarca).  Within these regions, a total of 250 small communities of about 50 households willing to purchase PV systems have been selected for inclusion in the PV electrification program. This will result in the introduction of the equivalent of 3125 PV systems in each region, which is expected to generate sufficient local demand for spare parts, replacements and maintenance services to make each region a worthwhile market for further investment. 

50.	The communities selected for the program have met a set of minimal participation criteria.  First, they are not to be part of the expansion program of the grid during the next 5 years at least.  Second, the number of potential users in the community should be relatively  high, at least 50.  Current users of PV systems are invited to participate in the program and should be able to pay the fees required to ensure the enterprises long-term sustainability.  The contribution of the government to the rural electric service companies can be viewed as an equity investment made on behalf of the communities.

51.	When applicable, the use of PV Battery Chargers can also be considered as an alternative for communities with limited income, but with sufficient willingness to pay to cover the costs. This system is very valuable as a marketing tool to be applied in sceptical communities as a previous stage for single PV Systems. It also applies as an answer to provide basic services to poorer communities.

52.	The electrification of rural community centres may be considered under the project.  However, the challenge will involve working with the local communities to ensure the financial viability and sustainability of these projects. Around such a facility, electricity can be made available for other services provided by other Government institutions, like radio telecommunications and health care.

53.	Operation and Maintenance is to be paid for through the monthly fees paid by the users and collected and administrated by the Local Company with the solely purpose of assuring supervision of the systems, and spare parts like fluorescent lamps and replacements like batteries. Fees need to be structured to cover the cost of the systems (adjusted according to Governmental cost-sharing priorities) plus operation and maintenance costs.  The fees collected by the local companies will be managed to ensure the long-term sustainability of the activity, in conjunction with the assistance of the financial sector.  Furthermore, periodic inspections undertaken by the regional suppliers of PV services will be undertaken to ensure continuing product quality. 

Activity 6.  Training Program Development

54.	In order to strengthen the human resource base, three sets of training activities are envisioned.  The first is training at the polytechnic and university level for the principles of renewable energy and the operation of renewable energy businesses.  While the latter type of course will be instituted for non-traditional students, the former is expected to focus on current engineering and economic students.  This program will ensure that current students and owners of renewable businesses have sufficient technical and business skills to work in the renewable energy field.  

55.	 The second training program will be to train installation technicians so that they understand the new PV standards and how to comply with them.  It will certify their proficiency with a “Qualified PV Installation Technician Certification”. Trained Qualified Official Inspectors should be able to supervise (and inspect, if necessary) the quality of the installation of the contractors.

56.	The third training program will focus on the PV users.  It will inform them of concerns and precautions in the operation and maintenance of PV systems. This is more an informative activity, properly documented with printed/other visual material and understood as a service of the supplier.  It may be undertaken through both written and broadcast media in order to maximize its reach.

Activity 7. Co-ordination and Monitoring 

57.	This activity ensures the adequate co-ordination and management of the project and the monitoring of the project activities.  The monitoring team will report periodically to the Co-ordination Committee in charge of the general supervision of the project. The co-ordination committee will designate a working to be responsible for this task.  They may, in turn, hire external consultants to carry out the monitoring activities.

4. RISKS AND SUSTAINABILITY

58.	The major risk associated to the proposed project emerges from the nature of a barrier removal project. For a barrier removal project, it is essential that all the existing barriers be addressed, either by the project itself or by associated projects. This risk will be minimised by maintaining a close working relationship with other actors and other projects working on similar topics.  During the project preparation mission to elaborate this proposal, a barrier identification workshop with about 40 participants from NGO’s, universities, government agencies, financial community, and entrepreneurs was organised. The results of the workshop as well as those of the various bilateral meetings, field trips, and results of existing studies have been incorporated in this proposal to eliminate this risk.

59.	Another risk relates to the long-term sustainability of the project. The project has been designed to build toward sustainability and cost recovery has been built into the project. GEF subsidies will decrease throughout the project’s duration and the project’s support is expected to grow the PV market in Peru, thereby decreasing costs. Moreover, the training and capacity building components of the project have been designed with special emphasis on sustainability and replication.  Central issues for sustainability are the quality of the PV Systems and components, the proper installation and use of the systems, responsible financial arrangements, and full participation. The establishment of qualified service companies will guarantee that the project lays the foundation for the sustainable development of the PV subsector.

60.	A basic assumption of the project is that there are interesting and commercially viable possibilities to invest in renewable energy in Peru. However, different barriers prevent the realisation of these possibilities. This proposal has analysed the existing barriers for the penetration of PV systems in the rural electrification of Peru and proposed a systematic process to remove then.  In addition, other on-going projects and initiatives related to this project have been analysed in terms of their interactions with this project. Mechanisms for the effective participation of all stakeholders in the project have been provided for in the formulation and implementation of this proposal.

61.	At the end of the project, the situation would have responded to the immediate need of providing electricity services to an isolated population but also have laid the foundation for expanded private investments in remote rural electrification through: 
•	Making renewable energy information widely available;
•	Providing better solar radiation information for proper sizing of the systems;
•	Establishing clear legal and institutional foundations for renewable energy in Peru;
•	Enhancing the quality of PV systems, components and installations;
•	Training technicians, professionals, and users in renewable energy; 
•	Creating the foundation for market-driven regional activities and initiatives; and
•	Strengthening the national financial system for the expansion into renewable energy financing.

62.	This project will strengthen the Peruvian PV market and result in the installation of an additional 1,000 to 2,000 PV systems per year, (doubling to tripling current market size).  These results will have a sustained impact on GHG emissions during and after the lifetime of the project.

5.  PARTICIPATION, SUSTAINABILITY, AND IMPLEMENTATION ARRANGEMENTS

5.1 Government Commitment and Institutional Provisions

63.	This project has political support from the highest levels of the environmental and energy authorities in the country. The workshop organised during the project preparation mission was closed by the Minister of Energy and Mines, and also the President of the Council of Ministers (Prime Minister). He emphasised the importance of this project and called for broad involvement and participation in this common task. 

64.	The project will be executed by the Executive Project Directorate (DEP) of the Ministry of Energy and Mines.  Since its creation in 1983, the DEP has executed various projects in co-operation with different governmental and non-governmental organisations, universities, institutes of investigation and community organisations.  They have the responsibility of providing electricity to isolated, dispersed and very low-income communities in Peru as well as the responsibility to increase the rural electrification index by 9% within the next 4 years..

65.	The UNDP office in Lima will support the program, providing assistance in the design and conduct of international competitive bids for equipment and services; in the procurement of technical assistance; and in the arrangements for in-country collaboration with other national and international organisations.

5.2 Local community participation and Sustainability

66.	Each community will obtain electricity services through a local or region-based company as a key element for the success and sustainability of the project.  One of the issues to be examined through the project will be that of the willingness of villagers to pay for the service provided by the PV systems over time, even though they will not own the systems.  The communities must be involved in identifying the appropriate financing arrangements.

67.	By the end of the project, it is expected that a sustainable PV rural service industry will have been stimulated.  As has been shown earlier, the potential market for PV systems in Peru is currently estimated at 600,000 households.  (The population is growing at a rate of 1.9% per year.)  At present, the PV market in Peru sells between 1000 and 2000 systems per year.   With the help of this project--  which will result in the installation of over 3000 systems per year for 4 years-- it is expected that the market will grow to between 6000 and 7000 PV systems per year.  With this increase in size, it is anticipated that the cost per system will fall to almost US$500 per system (excluding taxes).  This places their cost at a level roughly equivalent to current average expenditure levels on kerosene, candles, and batteries in remote rural communities.  Government will also work to remove import duties on imported PV panels and balance of system components.  With the rural energy service companies and the support provided through this project, it is anticipated that this industry will continue to operate profitably and grow in the future.

5.3 Executing Agency and Implementation

68.	The Executing Agency of the project is the Executive Project Directorate of the Ministry of Energy and Mines.  It will nominate an official as the National Director of the project. The National Director has the right to sign contracts and payment orders for the project and he/she is responsible for the efficient execution of the project according to UNDP standard procedures of UNDP.  The project will contract a Project Co-ordinator to carry out day-to-day management under the direction of the National Director. 

69.	A Project Co-ordination Committee was established in September 1997 in order to support the project execution and guarantee that the project activities are in line with both the National Electrification Plan and the National Climate Change Strategy.  The Co-ordination Committee consists of representatives of MEM, National Council for the Environment, National Climate Change Committee and UNDP. The Project Co-ordinator participates in the meetings without vote. 

70.	An Advisory Board for the project will be established with the representatives of the relevant stakeholders including universities, NGO’s, financial institutions, private enterprises, and community representatives. The purpose of the Advisory Board is twofold. Firstly, it gives technical advice to the project in specific questions of implementation. Secondly, it guarantees the transparency and the dissemination of the project outcomes and lessons-learned to the country. 

6. INCREMENTAL COSTS AND PROJECT FINANCING 

71.	The project is estimated to have an incremental cost of approximately US$3.93m as demonstrated in the Incremental Cost Annex (Annex I, Table 1). The total value of the project is US$10,827,790. The incremental cost by project activity is presented in Annex I.

72.	GEF is being asked to provide US$ 3,955,093 as support for the incremental cost of the project (including the value of the PDF-A). The Government of Peru is going to provide US$ 3,849,465 + 1,646,981(in-kind).  The cash contribution is devoted largely to the initial costs of the PV systems which are considered to be an equity investments being made in the rural electricity service companies.  Over the course of the project, the users will pay an initial association fee of approximately US$1,376,251 and a monthly fee in exchange for the electricity provided.  The additional monthly payments—the value of which will be determined through project activities-- are not accounted for in the budget.

73.	Under present conditions in the demonstration projects carried out by DEP, users pay an initial and unique fee (affiliation fee) of S/. 100 (US$ 37.74). According to the estimates worked out for the preparation of this brief, the value of that affiliation fee will have to rise to over US$100 ($1,376,251 /12,000= 114).  Financing options and alternative tariff structures for meeting this expense will explored during the final stages of project preparation.

74.	Table 1 shows the project expenditure by source.  Note that the user contributions include only the initial connection fees, not the monthly service and O&M payments throughout the project lifetime.

TABLE 1.  PROJECT FINANCING BY SOURCE (US$)
Category	GEF contribution	Government (cash)	Government (in-kind)	User Contributions	
Activity 1 Solar Information	140,000	-0-	144,000	-0-	
Activity 2 PV Standards & Certification	253,000	-0-	-0-	-0-	
Activity 3  Dev’t of Concession & Companies	275,000	-0-	50,000	-0-	
Activity 4  Strengthening Financial Institutions	300,000	-0-	150,000	-0-	
Activity 5  Installation of PV Systems	1,827,625	3,733,981	1,302,768	1,376,251	
Activity 6  Training Program Dev’t	450,000	-0-	-0-	-0-	
Activity 7  Mgnt, Monitoring & Evaluation	570,000	-0-	150,000	-0-	
Subtotal of the Above	3,815,625	3,733,981	1,646,981	1,376,251	
Executing Agency Support Costs (3%)	114,468	115,484	-0-	-0-	
Project Subtotal	3,930,093	3,849,465	1,646,981	1,376,251	
PDF-A	25,000				
Project total—incl. PDF	3,955,093	3,849,465	1,646,981	1,376,251	

75.	The program will be developed over 5 years. During the first year there are a set of interrelated activities to lay the foundation for the activities of the latter years.  Activity 1, the Development of the Solar Information Base will be initiated in year 1 of the project.  The development of the PV Standards (Activity 2) and the formation of PV rural service companies (Activity 3) must be accomplished prior to the installation of systems.  Activity 4, Strengthening of Financial Institutions will begin during the first year, and continue throughout the project. The installation activities (Activity 5) are expected to begin in earnest in year 2 and it is anticipated that 3,125 systems will be installed in each of years 2 though 5.  Training (Activity 6) will begin during the first year and continue through the project’s duration.  

7. MONITORING, EVALUATION AND DISSEMINATION

76.	In many cases, it has been shown that the price of the energy services paid by poor people is higher than would be the case if renewable energy were used. This is true even in the cases where the renewable energy option could not compete with the electricity tariffs of the country - as is the case with PV. This is due to the fact that traditional illumination and cooking methods produce the wanted services with poor quality and efficiency (candles, kerosene torches, traditional stoves, etc.).

77.	The Project will be monitored by the DEP experts selected by UNDP/GEF working with the Co-ordination of the Program or by a contracted supervising firm. UNDP’s extensive experience in monitoring large projects will be drawn upon to ensure that the project activities are monitored and properly documented. In this program the repayment records of the communities etc., is of particular importance. This is essential for sustainability of the PV Systems, and for future expansion of the systems. The project planning matrix with the monitoring indicators is shown in Annex II.

78.	The development of an open information system will guarantee wide dissemination of the lessons learned as they are substantiated.  The project will make every effort to identify successful and unsuccessful experiences so that they can be publicized quickly.  This will help investors make renewable energy investment decisions with the latest available information about successful practice in the Peruvian context.

79.	The design of this project has drawn from previous UNDP-GEF sponsored projects, particularly the Zimbabwe Photovoltaic Project.  The first lesson is the importance of equipment standards and installation certification to ensure a high product quality.  These activities have been accounted for under Activity 2 of the project.  The second lesson has to do with the delivery mechanism.  In Zimbabwe, credits were provided to PV system installers on behalf of individual consumers that qualified for the loan.  The ability of this delivery mechanism to reach a large number of middle and lower income consumers is limited.  As a result, the Zimbabwe project has recently been investigating a lease-hire or utility based approach, whereby the ownership and maintenance of the system would be entrusted to a rural energy service company and households would only have to pay a fee for monthly services.  In fact, this latter delivery approach has been incorporated into the Peruvian proposal from the very beginning.  Rural electricity service companies will install and maintain the systems and will charge consumers only a fee for service.  The third lesson has to do with the need of these rural service companies to obtain not only technical skills, but also business skills.  Both the training and financial activities of this proposal have been designed to incorporate business and financial education and training in addition to technical training.

80.	The STAP Roster Technical Review is included in Annex 3 to this document.  The reviewer is very supportive of the project, and he makes several suggestions for improving the project proposal.  Several changes have been made in response to these comments.  First, the role of the database has been increased from merely solar insolation information to the potential market for PV systems in Peru.  Secondly, fluorescent tubes have been included in the list of equipment for which experiences from elsewhere will be reviewed and standards developed.  Third, the model for rural electricity concessions has been broadened from merely a local company to a more flexible approach that may cover a wider geographic area than merely the local level.  Decisions on the scale of the concession will be based upon experiences elsewhere keeping in mind the need to allow for economies of scale in operation.  Finally, the final two considerations listed in the screening procedures were deleted from the discussion.

ANNEX I

INCREMENTAL COSTS

I.1 Broad Development Goal

The broad development goal of this project is the provision of basic services through renewable based electricity to remote rural population of Peru and the removal of barriers to boost the use of renewable energy for electricity supply. Presently, the electrification index of the country is 66%, meaning that nearly 8 million people have no access to electricity.  The goal of the government in the next 4 years is to increase this index to 75%. Taking into account a population of 24 million, the goal is to supply electricity to near 2.16 million people or approximately 432,000 families in this short period. Such a tremendous governmental effort can only be achieved if the private sector is mobilised to participate in this effort on a sustainable basis. The proposed project would directly contribute 2.8% of this goal (with 12,500 families of 432,000).  With the proceeds from those initial households, it is expected that another 4688 households can also be electrified.  

Another way to view the Peruvian PV market is to consider that of the households without electricity (1.6 m), about 600,000 cannot be economically connected to the grid or mini-grids drawing from small diesel or hydro generating sets. These 600,000 households can be considered to be the potential market for solar home systems, and their number might be increasing as rapidly as 12,000 households per year, if it keeps pace with population growth.

I.2 Baseline

Under the baseline, DEP will invest in rural electrification using three alternatives: grid extension, small diesel gensets and PV systems. For the most, the baseline considers the continuation of use of kerosene, candles and non-rechargeable batteries for lighting and other basic electricity needs. PV systems might be used in isolated and dispersed communities not covered by the grid extension program for the next five years, if the barriers identified in this proposal did not exist, and where the operation of small-grid, interconnected, medium size diesel gensets are cost-prohibitive. 

I.3 Global Environmental Objectives

The global environmental objective is the reduction of present and future greenhouse gas emissions through the use of renewable energy. The proposed Rural Electrification Program is profitable and sustainable in the long term, once barriers are removed.  This program is therefore consistent with GEF Operational Program 6,  “Promoting the Adoption of Renewable Energy through Removing Barriers and Reducing Implementation Costs”.

I.4 GEF Project Activities

GEF activities have been described in the body of the project brief. The activities have been designed to overcome the barriers encountered in Peru in the development of electricity supply based on photovoltaic systems.  In terms of electrification, the final result would be 12,500 rural homes electrified with solar energy from PV’s.  Another 4688 households may be electrified with the repayments from the initial household installations.  In terms of development, the project will lead to the expansion of market niches for PV based rural electrification.  At the end of the project, it is anticipated that the PV market in Peru will have grown from its current immature state of installing between 1000 and 2000 solar home systems per year to installing nearly 7000 solar home systems per year on a sustainable basis.  

I.5 System Boundary

The incremental cost analysis presented below represents the barrier removal costs associated with renewable energy electrification in Peru.

I.6 Additional benefits

The Rural Electrification Program here proposed means a small reduction in CO2 emissions from kerosene burning for lighting. Other emissions reductions, not accounted for this project, arise from the future penetration of PV Systems in the rural areas of Peru. As a consequence of this project, significant quantities of diesel oil used for electricity generation will be saved which will result in the reduction of sulphur and nitrogen oxide emissions.

I.7. Incremental cost matrix

Table 1.2 summarises the incremental costs of the activities of the project.  Activity 1, focusing on the lack of information on solar resources, takes advantage of the information made available by SENAMHI and provides for its transformation to a useful form.  Without the project, the information would remain meteorological information.  This activity will also create a widely-accessible energy resource and technology information base that would not be available in the absence of the project.  Activity 2 will develop the standards for PV Systems and components, and the installation of these systems. It will benefit other projects in the region facing the same barrier.  Activity 3 will provide an institutional basis for remote rural electrification by creating a model for rural, community-based utilities and helping to organize the participating communities into those companies.  Activity 4 focuses attention on enabling financial institutions to evaluate and finance renewable energy investments and on strengthening the local electrification companies to ensure their financial viability and management. 

Activity 5 is the budget item, accounting for nearly 90% of project funds.  The project will install 12,500 PV Systems over 5 years. The baseline for participating families is the continued use of kerosene, candles and batteries. Rural households in the project areas spend approximately S/.20 monthly (US$7.55/month, or US$76.80 /yr., excluding 18% VAT) on 
kerosene, candles and batteries (excluding equipment costs).  This figure of US$76.80 per year is in line with the findings of several World Bank studies.  Over a period of 20 years, the present value (discounted at 12%) of these expenditures amounts to US$580.90. 

At current prices, a 50 W peak PV system (including a 50 W peak module, charge regulator, battery and 3 fluorescent lamps) cost about US$900 (retail) in Peru.  Generally, the PV is module is imported while the BOS (Balance of System) is assembled in Peru (value is split at about 50: 50). Imported goods pay a 18% import duty.  Excluding the VAT and the customs duty, the present value for the module is US$331.60. For the BOS, present value amounts to US$381.40, for a sub-total of US$713, excluding replacements.   However, to evaluate the full cost of the system, replacements must be taken into account. A battery suited for PV Systems costs US$100 (US$84.80 excluding VAT). If replacements occur after year 7 and 14, the present value of battery replacements is US$65.80. The total present value of the PV System including battery replacements comes to approximately  US$778.80 (over 20 years discounted at 12%).  

In summary, the incremental cost estimation for the PV System including battery replacement comes to US$778.80 (-) US$580.90 = US$197.90.  Thus, at the beginning of project implementation, the incremental cost can be considered as US$200 due to the nascent status of the Peruvian PV market.  However, as the market grows toward its annual target rate of 7000 systems/year, the price per PV system is expected to decline to roughly the cost that is currently being paid for the energy services in these remote rural areas.  From an initial high of about US$713 per system, the price is expected to decline in increasing steps to about $513 (ex-duty and VAT) at the end of the project.  In keeping with this expectation, the incremental cost subsidy to be given under the project for a PV system will decrease throughout the project’s five-year duration.  This means that the incremental costs to be paid through the project per PV installation will behave as in the following table.  The incremental costs of the 12,500 PV systems comes to US$1,827,625 over the five year period.  The total incremental cost for the installation of the PV systems, US$1,827,625 is reflected in the matrix.  

Table I.1 Projected Price and GEF Support for PV Units
Year	PV Units Installed under Project	Projected PV Price (ex import duty)	Incremental Cost per Unit  (US$)	Total Incremental Cost Subsidy (US$)	
1	-				
2	3125	713	200	624,500	
3	3125	688	175	546,875	
4	3125	653	140	437,500	
5	3125	583	70	218,750	
6 (post project)	-0-	513	-0-	-0-	
Total	12,500	8,240,625		1,827,625	

The CO2 emission reduction benefits can be estimated as follows.  Assuming a household-level consumption of 6 kg/month of kerosene for lighting, a household will generate 18.6 kg CO2/month (223.2 kg/year, 4464 kg during 20 years). The implementation of the 12500 PV Systems will result in the avoidance of 55,800 metric tons of CO2 emissions over the 20-year period of the project. If it is assumed that another 4688 systems are purchased with the payments of the participants, then another 20,927 metric tons of CO2 would be avoided, for a total of 76,727 metric tons CO2 avoided.  As the local market develops further, this figure would be even greater.

The training targeted under Activity 6 would be unlikely to take place in the absence of the project and is therefore, fully incremental.  Activity 7, Co-ordination, Monitoring and Evaluation is an inherent cost of the project and has been considered fully incremental, excluding the in-kind contribution of the DEP for US$150,000.

ANNEX I 

Table 1.2 INCREMENTAL COST MATRIX
Component	Cost category	Costs	Domestic Benefits	Global Environmental Benefits	
Activity 1
National Solar Energy Data Base	Baseline	$144,000 
(in-kind)	Solar energy info not available–no info on solar resource & systems	Only meteorological info available	
	Alternative	$140,000  
$144,000(in-kind)	Solar information available 	Resource & market info available	
	Increment (Alternative - Baseline)	 $140,000	Better utilization of solar resources	Info on solar energy in Peru widely available 	
Activity 2 Standards for PV Systems 	Baseline	0	Lack of standards increase O&M costs of RE Energy systems		
Installations, and 	Alternative	$253,000	Standard developed	Better product and better installations	
Certification	Increment (Alternative - Baseline)	$253,000	Higher consumer confidence in RE products	Decreasing of O&M costs and increased profit of RE firms	
Activity 3 Dev’t of Model Concessions 	Baseline	50,000 (in-kind)	No institutions able to carry out renewable electrification	None	
& Companies	Alternative	$275,000 + 50,000 (in-kind)	Institutions established	PV dissemination possible	
	Increment (Alternative - Baseline)	$275,000	Sustainable PV companies supply energy to rural areas	Companies can profitably provide PV’s	
Activity 4  Strengthening Financial Inst.	Baseline	$150,000 (in-kind)	Financial Institutions unable to loan for PV’s & renewables	Market limited to cash sales	
For Renewable 	Alternative	$300,000 + $150,000 (in-kind)	Financial institutions process PV loans	Market opened to credit sales	
Electrification	Increment (Alternative - Baseline)	$300,000	Financing for PV’s available	PV Market expands	

ANNEX I (cont.)
Table 1.1 INCREMENTAL COST MATRIX  (cont.)
Component	Cost category	Costs	Domestic Benefits	Global Environmental Benefits	
Activity 5  Installation of 	Baseline	$6,413,000 (composed of Govt $3,733,981cash+$1,302,768 in-kind + Users $1,376,251)	Some electricity provided through grid extension—HH’s use kero, candles, etc.	None	
PV Systems	Alternative	$8,240,625	12,500 PV systems installed	CO2  reduction-- Dev’t of PV market	
	Increment (Alternative - Baseline)	$1,827,625	Households get electricity through PV	Market for PV expanded	
Activity 6  Training 	Baseline	$0	Human resource barrier remains	None	
Program	Alternative	$450,000	Suppliers, technicians and Users trained in PV systems/standards	Technical skills increased	
Development	Increment (Alternative – Baseline)	$450,000	Further expansion of PV market	Potential further expansion of global benefits	
Activity 7. 
Co-ordination, Monitoring and	Baseline	$150,000 
(in-kind)	Limited management skills for renewable energy projects		
Evaluation	Alternative	$570,000
$150,000(in-kind)	Improvement of project management	Monitoring experience gained	
	Increment (Alternative – Baseline)	$570,000
$150,000(in-kind)	Project is carefully conducted and monitored	Comprehensive follow-up of the project	
TOTAL	Baseline	$5,110,232 (Gov’t  & Users) 
$1,796,768(Gov’t in-kind)	Continued use of kerosene, candles & ltd access to conventional electricity	None	
	Alternative	$8,560,232 
$1,796,768(Gov’t in-kind)	12,500 users gain access to PV systems	CO2  emissions reduced by 55,700  tonnes	
	Increment (Alternative – Baseline)	$3,815,625	PV Market expanded, continues to grow 	Potential further expansion	

ANNEX II
	PROJECT PLANNING MATRIX 	
Project Development Goal: Energy needs in remote rural communities are satisfied by PV electrification program with positive reductions on GHG emissions	Objectively Verifiable Indicators	Means of Verification
	Assumptions	

 Project Purpose: Government private sector and rural stakeholders are empowered to engage in PV renewable energy development through the removal of institutional, financial, technical, organizational and information barriers currently impeding renewable energy use and investment.

	-  Institutional and operational delivery systems for PV development are in place along with supportive regulatory frameworks and incentive systems.
-  Financial mechanisms to ensure user access and PV system sustainability are developed and tested.
-  Technical capacity of national and local users in strengthened to assume responsibilities of PV-related operations.
-  PV information is updated and made widely available to planners, users and investors to encourage & facilitate development replication, and future investment.
	-Number of institutions established or participating in PV related operations. Implementation & adoption of legal frameworks and incentive systems.
-  Revolving funds, credit lines and other supportive financing options are available at financing institutions.
-  Institutions, technicians and users have participated in training programmes and are applying received knowledge in PV related operations.
-  PV info/data systems in operation, mechanisms by which this information is disseminated to government, private sector, etc. surveys with relevant stakeholders, PV assessing utility and application of data	•	Government and user commitment is reflected in rapid endorsement and adoption of enabling institutional structures and legislative frameworks and incentive systems.

•	Financial institutions are receptive and proactive in engaging into new financing schemes and options for PV development.

•	Wide variety of national and local stakeholders activity participate and apply PV-related skills 

•	PV information and data systems effectively used and applied by planners, users and potential investors.
	
OUPUT 1 :
Renewable energy data and databases exists	1.1 	Data base available by the end of the first year
1.2 	Manual of Solar Radiation Data available by the end of  the first year	1.1 	Database info is used by government planners, private investors, and resource users 
1.2 	Availability of Manual of Solar Radiation 	•	Government decision –makers, private sector investors, etc. are applying information provided in data bases to advance PV development.	
OUTPUT 2:
Standards for PV systems, installation and certification are developed	2.1  Standards for PV installation, maintenance and; operations is available; and disseminated.
	2.1 Availability  of standards in printed form 
	•	Standards are effectively applied by diverse stakeholders and relevant operators.	
OUTPUT 3:
Legal/regulative framework for Renewable Energy have been established	3.1 Proposal of  a law for Renewable Energy to be discussed by the end of the first semester	3.1 Workshops and public discussions
3.2 Presentation of a proposal  to the Government 	•	Relevant government and private stakeholders actively participate in developing a renewable-based legislation framework.  Government commitment reflected in adoption of framework. 	
OUTPUT 4:
Financial institutions are capacitated to manage financing and sustainability of PV operations.	4.1 	Financing institutions develop and implement financing modalities and credit operations supportive of PV development and operations in rural areas. 	4.1 	Record of participating financing institutions, financing modalities in place, surveys assessing user satisfaction and accessibility to credit lines.
	•	Institutions and selected staff attend training seminars and effectively apply financing options to facilitate PV operations and development.

OUTPUT 5: 
PV systems are installed and operational  in select rural communities.	5.1 	Evaluation of Demonstrative PV Projects by the first semester 
5.2 	Evaluation and negotiation with PROER’s additional funding, by the first semester
5.3 	Development of a Concession model by the first semester
5.4 	Installation of 3125 PV systems by end of 2nd and each additional year
5.5 	Installation of additional  12500 PV systems by end of year 5	5.1 	Evaluation of Demonstrative PV Projects, Concession model made available
5.2 	Negotiation with PROER leads to new funding
5.3 	1000 PV systems installed by the first year
5.4 	Control of the  development of the acquisition and installation of the proposed number or PV systems	•	The systems supplied to the users are not oversold : they supply the services they are able to. Installed PV Systems have been properly installed.
•	There is a positive climate with peasants and communities to value the PV option and to adopt it.
•	Communities accept and adopt the  developed Concession Model 
•	Users are confident with the PV systems
•	Fully understanding in the communities of their commitment to the sustainability of the project
Local regional companies are formed to attend the service needs of the Communities	
OUTPUT 6:
Training programme developed and implemented to develop stakeholder skills in PV renewable energy development, installation, maintenance and operations	Based on needs assessment, government and non-government actors are trained in principles of PV installation, maintenance and overall operations	Record of training programmes developed, list and attendance record of trainees maintained,  frequency of training timeframe.	•	Targeted stakeholders and institutions effectively apply skills related to PV maintenance and overall operations.	
OUTPUT 7:
Coordination and monitoring programme established and implemented.	Programme impact is maximized through monitoring and coordination arrangements.	Review of TORs for monitoring and coordinating groups, including composition, frequency of meetings, minutes of meetings, reports of best practices.	•	Key players related to monitoring and coordination are available to meet on a regular basis and actively participate in project related discussions.	

ANNEX III STAP ROSTER TECHNICAL REVIEW

Renewable Energy Based Rural Electrification in Peru

Technical Review 

1)	Overall impression. This is an excellent project, completely in line with overall GEF operational strategy and entirely consistent with the guidelines and objectives of Operational Program No. 6: Promoting the adoption of renewable energy by removing barriers and reducing implementation costs.

2)	Relevance and priority. Renewable energy technologies, when cost effective, are attractive alternatives for reducing greenhouse gas emissions. Providing electricity to rural areas is an important development objective in permitting the use of high quality electric lighting and possibly other electrical appliances. In dispersed rural populations, grid expansion is a capital-intensive alternative for providing electricity. In many cases where the solar resource is excellent, as in large parts of Peru, solar photovoltaics (PV) is the least-cost alternative. Currently the cost of solar PV systems in Peru is high because the market size is small. The high cost in turn reduces market penetration. The proposed GEF project would cut through this vicious circle by creating a significant market, reducing costs and permitting rural electrification using solar PV to be a sustainable, commercial alternative for rural electrification in the medium term (5 – 10 years). See “Cost analysis of solar PV systems”, below.Thus the project addresses both climate change priorities and development objectives.

3)	Background and justification. The background information and data are clearly presented to justify the proposed project. Besides climate change and development, the Project Document identifies linkages with past and ongoing projects, training and capacity building necessary to make PV systems sustainable.

4)	Scientific and technical soundness. The project approach is sound. See, however, “Delivery mechanisms ...”, below.

5)	Objectives. The objectives are clearly expressed. A minor observation follows:
Para. 38 mentions growth of “GHG” emissions caused by electricity generation from 2.69 million tonnes (1990) to 19.18 million tonnes (2010). Since GHG emissions can be expressed in different ways — Carbon equivalent, carbon dioxide equivalent, etc.— the document should specify the units used. The increase represents a growth rate of 8% per year, equivalent to population growth of 2% a year and per capacity electricity consumption growing at 6% a year, which are reasonable baseline assumptions.

6)	Activities. The reviewer believes that a couple of activities could be added. This can be accomplished by modifying some of the proposed activities without increasing financial resources. The suggestions are listed in order below:
Activity 1. Development of renewable energy data and databases. Solar energy has far less geographical variation than wind, hydro, and geothermal resources. Consequently, a solar atlas for Peru may be prepared from existing data with relatively little effort. A more relevant Geographic Information System (GIS) would characterize the potential market for PV and other renewable alternatives. This database could incorporate census and other demographic and socioeconomic data, the location of existing transmission and distribution lines, which define future access to grid-based electricity. The GIS would include solar radiation and other renewable energy resource data relevant to this and other renewable energy projects in rural Peru. Argentina has such a GIS developed and operating for those provinces where PV is most attractive for decentralized electrification. This know-how could be transferred to Peru through appropriate training programs.
Activity 2. Standards for PV systems and its installation and certification. Product standards should include not only the PV components —as proposed— but lighting equipment as well. Relatively small changes ( 20%) in the efficacy of fluorescent lamp systems mean significant differences in the cost of the PV system (costing around $900 in Peru) to meet the demand. Also, fluorescent tube lamps, ballasts, and starters have large differences in quality, affecting both performance and lifetime. While these are problems in urban settings as well, equipment failure may be highly counterproductive in the proposed project whose aim includes demonstrating that solar PV systems (and associated equipment) are an excellent alternative for dispersed rural areas.
Activity 3. Establishment of model rural electricity concessions and local companies. Paras. 47 and 63 suggest that PV electric service would be provided by companies at the community level. This is not the only option. See “Delivery mechanisms ...”, below.
Activity 5. Installation of PV systems. Para. 67 sets forth criteria for the pre-selection of communities. These may not be the best criteria. For instance, solar PV is most cost effective compared to other alternatives for dispersed rural populations far from existing or proposed grids (“far” in distance or because of natural barriers, such as streams, mountains, forests, etc.). The market survey mentioned in Activity 1 would help identify potential locations. The distance between houses is not relevant if the solar systems are at the individual house level (as is most common). The criterion that the number of potential users be “relatively high, at least 50” is reasonable to achieve scale economics if the service is provided by a community-level company, but less relevant if service is provided by a company covering a larger area. Indeed, a community of 50 houses relatively close to each other, represents a potential electricity demand that could be met at lower cost using other renewable technologies (such as wind, hydro or biomass) where unit investment requirements ($/kW) have strong economies of scale compared to PV systems which are modular in nature.

7)	Participatory aspects. While community participation and support are important for the adaptation and correct use of solar PV systems, this does not necessarily require “community cohesion” (para.67) or that each community establish a local company to provide the service (para. 84 and elsewhere).

8)	Global benefits. Estimates of global benefits in terms of CO2 emissions reduction (Sec. A.1.7) from the 12,500 PV systems to be installed during the project are correct. Indeed, successful completion of the project will result in the creation of a sustainable market for solar PV systems of around 50,000 units per year (much higher than the 1000 to 2000 systems per year identified in para. 80). The GEF participation to catalyze such a market is an excellent investment towards the global environment (approx. $1.07 per tonne of CO2 avoided).
9)	GEF strategies and plan. See Item 1 of review.

10)	Replicability. The approach of this project is applicable to electrification in any developing country with a large rural population and good solar resource where a solar PV infrastructure has not yet been developed.

11)	Capacity building. This element is an essential component in reducing the barriers to successful adoption of solar PV technologies.

12)	Project funding. Proposed funding levels is appropriate, and the estimates are adequately justified.

13)	Time frame. The proposed rime frame is appropriate to the objectives and activities.

14)	Secondary issues.
 
a)	This project has no significant links to other GEF focal areas (biodiversity and international waters).
b)	The proposed project is related to other efforts at rural electrification using solar PV systems in Bolivia, Chile, Argentina, etc., and would benefit from sharing information and experience with programs in these and other countries.
c)	Insofar as the project tests and compares alternative delivery mechanisms for providing rural electrification using solar PV systems, it would be innovative.

15)	Additional comments.
See Sections that follow: “Cost analysis of solar PV systems” and “Delivery mechanisms for rural electrification”.

Cost analysis of solar PV systems
According to the project document (Annex 1), the cost of PV lighting systems in Peru is currently around $900. With a mature market, and not including cost reductions in manufacturing, the prices (excluding VAT and customs duty) might be as follows:

Solar panel 50Wp module with charge regulator 	$ 300	
Battery	85	
3 compact fluorescent lamps	45	
Total	$ 430	

Considering a lifetime of 20 years for the solar panel, and 7 years for the battery and lamps, and a discount rate of 12% (the same assumptions as in the project document), we estimate the annualized life-cycle cost of buying and operating the system to be $69 per year. The users are currently paying $77 per year for fuels and batteries, not including the cost of lighting equipment. 

Lighting levels with the solar PV system would be considerably higher. Considering a kerosene consumption of 6 kg/month, and an efficacy of 0.2 lumen/W for kerosene wick lamps, the light output is equivalent to 15,000 lumen-hours per month. With three 16-watt compact fluorescent lamps (efficacy 56 lm/W) operating 4 hours a day, the light output would be 323,000 lumen-hours per month.  

Thus a switch from kerosene wick lamps to the solar PV system would increase light output 20-fold while costing no more (in a mature market). If the project can bring about the cost reductions assumed here, and remove other barriers, it is clear that it would be commercially sustainable in the long run, with significant global environmental and development benefits.

Delivery mechanisms for rural electrification

The delivery mechanism for the installation, maintenance and financing of solar PV systems is key to successful project implementation. 

Para. 63 of the project document suggests that PV electric service would be provided by companies at the community level. This is not the only option, as service could be offered at larger scales, e.g. covering a number of communities or even an entire Departamento. While solar PV hardware is modular in nature, there are institutional economies of scale, through the bulk purchase of equipment, sharing installation and maintenance infrastructure across a larger number of users, etc. Both Chile and Argentina have given concessions over large areas to companies to provide electrification to dispersed populations in rural areas. In the Argentine case it is at the level of the province, which would be roughly equivalent to the Peruvian Departamento. 

I propose that the past experience in PV system delivery mechanisms, both in Peru and elsewhere be studied in terms of costs to users, problems of maintenance, quality of service, recycling of lead-acid batteries, and other considerations. On the basis of this experience, several different mechanisms should de selected. These delivery mechanisms should be market tested in different areas during the first two years of the project, so that the most successful models may be developed and promoted in subsequent years. This is likely to lead to a least-cost, sustainable delivery mechanism after project completion.

ANNEX IV  AVAILABLE REFERENCE DOCUMENTS

Addendum 1:  Terms of Reference: National Director
Addendum 2:  Terms of Reference: Project Co-ordinator
Addendum 3:  Terms of Reference: Co-ordination Committee
Addendum 4:  Project Institutional Arrangements
Addendum 5:  Project Expenditure by Activities
Addendum 6:  Preliminary Project Schedule
Addendum 7:  List of References