PROPOSAL FOR REVIEW

PROPOSAL FOR REVIEW

PROJECT TITLE: INDIA: SOLAR THERMAL POWER

GEF FOCAL AREA: Climate Change

GEF Eligibility:                     Under Financial Mechanism of          
                                     Convention (Ratification 1/11/93)     

Total Project Costs:                 US$245 million                        

GEF Financing:                       US$49 million                         

Government Counterpart Financing:    US$20 million                         

Co-financing:                        KfW, amount to be determined;         
                                     independent power producer            

GEF Operational Focal Point:         Department of Economic Affairs,       
                                     Ministry of Finance                   

GEF Implementing Agency:             World Bank                            

Executing Agency:                    Private Independent Power Producer    
                                     (IPP)                                 
                                     Rajasthan Energy Development Agency   
                                     (REDA)                                

Local Counterpart Agencies:          Ministry of Non-Conventional Energy   
                                     Sources Contact: Mr. Prabhakara,      
                                     Secretary                             
                                     State Government of Rajasthan         
                                     Contacts: Mr. S.P. Gupta, Secretary   
                                     Department of Mines and Energy        
                                     P. Dayal, Chief Executive and         
                                     Director                              
                                     Rajasthan Energy Development Agency   

Estimated Starting Date              March 1997                            
(Effectiveness):                                                           

Project Duration:                    Five years                            

GEF Preparation Costs:               $750,000 to $1 million

COUNTRY AND SECTOR BACKGROUND

India's power sector has a total installed capacity of approximately 77,000 MW of which 65% is coal-based, 28% hydro, and the balance gas and nuclear-based. Power shortages are estimated at about 10% of total energy and 20% of peak capacity requirements and are likely to increase in the coming years. For the period FY93 to FY97 nearly 50,000 MW of capacity additions are required, but due to financial constraints less than 20,000 MW would be realized. The bulk of capacity additions involve coal thermal stations supplemented by hydroelectric plant development. Coal-based power involve environmental concerns relating to emissions of suspended particulate matter (SPM), sulfur dioxide (SO2), nitrous oxide, carbon dioxide, methane and other gases. On the other hand, large hydroplants can lead to soil degradation and erosion, loss of forests, wildlife habitat and species diversity and most importantly, the displacement of people. To promote environmentally sound energy investments as well as help mitigate the acute shortfall in power supply, the Government of India (GOI) is promoting the accelerated development of the country's renewable energy resources and has made it a priority thrust area under India's National Environmental Action Plan (NEAP).
GOI estimates that a potential of 50,000 MW of power capacity can be harnessed from new and renewable energy sources but due to relatively high development cost experienced in the past these were not tapped as aggressively as conventional sources. Nevertheless, development of alternate energy has been part of GOI's strategy for expanding energy supply and meeting decentralized energy needs of the rural sector. The program, considered one of the largest among developing countries, is administered through the Ministry of Non-Conventional Energy Sources (MNES), energy development agencies in the various States, and the Indian Renewable Energy Development Agency Limited (IREDA). During recent years, private sector interest in the renewable energy sector increased due to several factors: (i) the Government opened the power sector to private sector participation in 1991; (ii) tax incentives are offered to developers of renewable energy systems; (iii) there has been a heightened awareness of the environmental benefits of renewable energy relative to conventional forms and of the short-gestation period for developing alternate energy schemes. Recognizing the opportunities afforded by private sector participation, MNES revised its Eighth Plan priorities in July 1993 by giving greater emphasis on promoting renewable energy technologies for power generation. Accordingly, Plan targets for power generation from renewables were raised to 2000 MW, i.e., 500 MW through wind, 600 MW small hydro, 300MW from bagasse, 40MW solar thermal and the balance from other bio-energy and solar energy sources. To date, over 550MW of windfarm capacity has been commissioned under the Eighth Plan bringing the total wind generation capacity in India to 556MW. About 115 MW capacity of small hydro has so far been installed with another 216MW under construction. But the sector's contribution to energy supply while growing is expected to remain a small fraction of the total requirements of India until such time that operational experience and cost recovery of investments are more widely achieved to render the technologies fully commercial.
Solar Energy. India is located in the equatorial sun belt of the earth, thereby receiving abundant radiant energy from the sun. The India Meteorological Department maintains a nationwide network of radiation stations which measure solar radiation and also the daily duration of sunshine. In most parts of India, clear sunny weather is experienced 250 to 300 days a year. The annual global radiation varies from 1600 to 2200 kWh/sq.m. which is comparable with radiation received in the tropical and sub-tropical regions. The equivalent energy potential is about 6,000 million GWh of energy per year. The highest annual global radiation is received in Rajasthan and northern Gujarat. In Rajasthan, large areas of land are barren and sparsely populated, making these areas suitable as locations for large central power stations based on solar energy.
The Government supports development of both solar thermal and solar photovoltaics (PV) power generation. To demonstrate and commercialize solar thermal technology in India, MNES is promoting megawatt scale projects such as the proposed 35MW solar thermal plant in Rajasthan and is encouraging private sector projects by providing financial assistance from the Ministry. Parallel efforts are underway in the area of solar PV in which pilot-scale grid-connected solar PV power systems (25kW to 100kW) are under trial operations in addition to stand-alone projects in remote unelectrified areas. In Rajasthan, the State Government is establishing a solar enterprise zone by offering a package of incentives to private investors willing to develop various solar power technologies such as solar thermal and solar PV. An international tender recently issued by Rajasthan yielded offers for a 50MW solar PV power station as well as a solar chimney facility to be operated on an independent power production (IPP) basis.

PROJECT OBJECTIVES
The main objectives of the project are: (a) To demonstrate the operational viability of parabolic trough solar thermal power generation in India; (b) promote commercial development of solar thermal technology and cost reduction; and (c) help reduce greenhouse gas (GHG) global emissions in the short and longer term. Specifically, operational viability will be demonstrated through operation of a solar thermal plant by an independent power producer (IPP) with commercial power sales and delivery arrangements with the grid. Technology development would be supported through technical assistance and training. The project would be pursued under GEF's program objective on climate change and is envisaged as the first step of a long term program for promoting solar thermal power in India and around the world that would lead to a phased deployment of similar systems in the country and in other developing nations. The project would represent the second GEF operation in the energy sector in India.

PROJECT DESCRIPTION
The project involves: (a) Construction by the private sector of a solar thermal/fossil-fuel hybrid power plant of about 140MW incorporating a parabolic trough solar thermal field of 35MW to 40 MW; and (b) Technical assistance package to support commercialization of solar thermal technology.
Investment Component. (See Annex 1) The solar thermal/hybrid power station will comprise: (i) a solar field with a collection area of 219,000 m2 to support a 35MWe to 40MWe solar thermal plant; and (ii) a power block based on mature fossil fuel technology. The proposed project will be sited at Mathania, near Jodhpur, Rajasthan in an arid region. In addition to high solar insolation levels (5.8 kWh/m2 daily average), the proposed site involves approximately 800,000 m2 of relatively level land with access to water resources and electric transmission facilities. The solar thermal/hybrid station will operate as a base load plant with an expected plant load factor of 80%. The final choice of the fossil-fired power block would be left to the bidders, subject to performance parameters set out in the tender specifications.
A likely design choice is an Integrated Solar Combined Cycle (ISCC) involving the integrated operation of the parabolic trough solar plant with a combined cycle gas turbine using fossil fuels such as fuel oil, low sulfur heavy stock (LSHS) or naphtha. Such a plant would consist of (i) the solar field; (ii) a combined cycle power block involving two gas turbines each connected to a heat recovery steam generator (HRSG) and a steam turbine connected to both HRSG; and (iii) ancillary facilities and plant services such as fire protection, fuel oil/LSHS/naphtha supply and storage system, grid interconnection system, water supply and treatment systems, etc. A control building will house a central microprocessor control system that monitors and controls plant operations
Technical assistance: The project will provide technical assistance to ensure that adequate institutional and logistical support for the technology is available for future expansion of solar thermal power. Specifically, funds will be made available for: i) the promotion of solar thermal technologies among potential investors; ii) operation and maintenance efficiency improvement program; (iii) monitoring and evaluation of the project and of overall solar thermal program in India; (iv) staff training and development of a local consultancy base; v) upgrading of test facilities; and vi) improved collection and measurement of solar insolation data and other solar resource mapping activities. Annex 3 presents a summary of the proposed technical assistance package.
Status of Preparation. Several studies were prepared since the eighties which dealt with the development of the first parabolic trough solar thermal station in the country. In 1994, MNES commissioned a feasibility study for such a scheme, with a capacity of 35MWe to be situated in Mathania. The study was prepared by a local engineering firm with technical support from international solar experts regarding the solar field. This study became the subject of further review by an engineering consultancy firm engaged by the State Government of Rajasthan (GOR) in April 1995 and supplemented by an options study conducted in October 1995 with the assistance of German consultants funded by KfW. An environmental assessment of the proposed project is underway, solar field performance requirements are to be further reviewed by an international expert, and tender specifications and evaluation criteria finalized. A GEF preparation grant of $750,000 is being applied for to cover the incremental costs of project preparation.

RATIONALE FOR GEF FINANCING
The project is consistent with GEF's operational strategy on climate change in support of long-term mitigation measures. In particular, the project will help reduce the costs of proven parabolic trough solar technology so as to enhance its commercial viability. The proposed project is expected to be the first in a multi-country series of investments which together would re-commercialize the technology. Similar projects in Mexico, Morocco, and the United States are in advanced stages of preparation. Additional solar thermal projects are under consideration in Egypt, Tunisia, Israel, Jordan, Spain, Italy and Greece (Crete). Other countries in the high insolation regions of Africa have also shown interest. While not all of these projects are expected to materialize in the near term, up to four projects including the initiative in India, are anticipated to be developed within the next five years. The combined effects of these projects will be to accelerate the process of cost reduction, demonstrate the technical performance of the technology in a wider range of climate and market conditions, and create a sustainable market for parabolic trough solar thermal technology.
The capital cost of solar thermal power generation technologies is significantly higher than fossil-based conventional power. Nevertheless, costs have been falling sharply from $5,000 per kW for the first solar thermal Luz plant, to $2,900 for the latest Luz plant in California. Recent estimates for proposed integrated solar combined cycle plants are estimated to be in the region of $2,000 per kW. The proposed GEF support which will be supplemented by a financial contribution of $20 million from the Government will directly help buy-down the installation and associated technology development cost of the solar power plant to render it competitive with other sources of power in Rajasthan.
Demonstrating the solar plant's operational viability under Indian conditions is expected to result in follow-up investments by the private sector both in the manufacture of the solar field components and in larger solar stations within India. Insights into local design and operating factors such as meteorological and grid conditions, and use of available back-up fuels, are expected to lead to its replicability under Indian conditions, opening up avenues for larger deployment of solar power plants in India and other countries with limited access to cheap competing fuels. Creation of demand for large scale production of solar facilities will in turn lead to reductions in costs of equipment supply and operation. It is also expected to revive and sustain the interest of the international business and scientific community in improving systems designs and operations of solar thermal plants.
The Project is expected to result in avoided emissions of 3.1 million tonnes of carbon over the operating life of the solar thermal plant relative to generation from a similar-sized coal-fired power station. The cost of carbon avoidance is estimated at $27 per tonne based on the avoided cost of $83 million and $15.80 per tonne based on a $49 million GEF grant.

SUSTAINABILITY AND PARTICIPATION
Government commitment to the project is evidenced by the various studies commissioned by MNES over the past years and the agreement by the Government of Rajasthan (GOR) to host this entry project and to provide the land. Support from the Government is further confirmed by the fact that grant and equity funding from MNES and GOR, respectively, are being provided to assist in making the project more attractive to the private sector and permitting the power output to be sold at a reasonable price to the state utility.
One of the prime objectives of the demonstration project is to ensure capacity build-up through 'hands on' experience in the design, operation and management of such projects under actual field conditions. Involvement in the project of various players in the energy sector, such as local industries, the private independent power producer (IPP), Rajasthan State Electricity Board (RSEB), Rajasthan Energy Development Agency (REDA), MNES and others, will help to increase the capacity and capability of local technical expertise and further sustain the development of solar power in India in the longer term.
Linkage to Power Sector Reforms. The project will be implemented in the context of on-going reforms in Rajasthan's power sector which calls for commercializing the sector and attracting private sector investments and management skills into all new generation facilities. Project sustainability will depend on to what extent the impact of the initial investment cost is mitigated, operating costs fully recovered, professional management introduced, and infrastructure and equipment support for operation and maintenance made accessible. Accordingly, (a) the solar thermal station will be operated as an IPP to be managed and jointly owned by the private sector; (b) subsidy support will be limited to capital costs; (c) fuel input, power supply and other transactions would be on a commercial basis and backed up by acceptable marketable contracts; and (d) staff selection and management would be based on business practices; (e) project site would be situated where basic infrastructure is well developed and engineering industries established. However, technology development costs associated with project operations would be clearly identified and be covered under the technical assistance program.
To ensure project sustainability, as a condition to appraisal, tariff adjustments would have to be effected by the Rajasthan State Electricity Board that would enable the utility to fully meet its cash operating expenses . Although RSEB raised its tariff by 8% in September 1995, another 10 per cent increase in average tariff is required to achieve cash break-even. In addition, agreement will be sought for GOR to implement the set of tariff reforms along the lines and timetable set forth in the proposed India: Rajasthan State Power Sector Restructuring Project.
LESSONS LEARNED AND TECHNICAL REVIEW
GEF and IDA are actively supporting MNES's revised Plan on promoting wind, solar PV and small hydro technologies through the India: Alternate Energy Project (GET28633-IN) and associated India: Renewable Resources Development Project (Cr2449-IN) . The projects were approved by the Board in December 1992 and became effective in April 1993 and involve a line of credit to IREDA to promote and finance private sector investments in these three sub-sectors. Favorable prospects for commercialization of an emerging technology in India is best reflected in the wind sector which saw a rapid growth in installed capacity in the last three years largely through private sector initiatives. An industrial base for wind equipment supply and engineering has emerged in the country with as many as 26 joint venture companies some of which are now poised to enter the export markets. Moving both the wind and solar PV program towards the commercial mainstream has involved concerted efforts on the part of the government and the private sector in removing barriers to marketing, delivery and operation of these alternate energy systems. These resulted in establishment of acceptable pricing mechanisms, contractual arrangements, performance specifications involving agreement among policymakers, power utilities, manufacturers, financial entities, investors, contractors and consultants.
On solar thermal development, key lessons learned from the California experience are the need for (a) financially credible project developers who can adequately bear the construction risks; and (b) an incentive structure that would enable prospective investors to view the operation of the solar thermal facility as an integral part of their corporate business rather than as a mere tax shield or marginal investment.
Technical Review. There are varying claims to superiority in efficiency of other active solar thermal technologies particularly those that involve direct steam generation. However, a review of the latest developments in the solar sector worldwide indicates that the solar parabolic trough LS-3 technology is the most commercially mature among solar thermal power applications. Similar plants with an aggregate capacity of 354MWe are in operation in California, USA with plant sizes ranging from 13.8MWe to 80.0MWe. Moreover, the technology lends itself to hybridization with conventional fossil-based technologies. A number of options were considered in determining the location, sizing and hybridization of the project. In addition to considering an oil-fired rankine cycle engine, consultants reviewed up to 14 ISCC variants, with the 140MW ISCC option yielding the lowest estimated levelized economic generation cost of Rs2.05 per kWh. The project proposal incorporates results of the STAP technical review.

PROJECT FINANCING AND BUDGET
Project Cost: The total investment cost of the project based on an ISSC facility is estimated at US$240 million excluding interest during construction (IDC) and taxes. The technical assistance package will involve an estimated budget of $4.5 million. Of the total plant investment, $66 million is attributable to development of the solar field, $121 million for fossil fuel-based power block, and about $52 million for engineering, site development, and initial working capital requirements. The local cost component is estimated to account for over 60 per cent of plant investments. Taxes and duties would involve an additional 10% of project costs and IDC as much as 14% of investment cost.
Project Financing. The project is proposed to be financed as follows: (a) $10 million grant from GOI (Ministry of Non-Conventional Energy Sources); (b) $10 million equity contribution from the State Government of Rajasthan (GOR); (c) GEF grant of $49 million to finance the cost of developing a 35MWe to 40MWe solar plant component and finance the TA package; (d) equity from the private sector IPP developer; and (e) the balance from Kreditanstalt fur Wiederaufbau (KfW) in the form of a mixed credit.
INCREMENTAL COSTS
The solar thermal/fossil-fired hybrid station would be operated on a base-load mode, with an 80% plant factor. In the absence of the solar thermal project, the RSEB would continue with its generation expansion plan which relies heavily on lignite and coal for base-load generation capacity. A coal-fired plant is therefore taken as the baseline case. The lifecycle cost of 140MW coal power generating station is estimated at $243 million as shown in Annex 2, Table 2-1. The estimated costs for the GEF alternative such as a 140MW ISSC is $326 million as given in Table A-2. This results in an incremental cost of $83 million.
The GOI and GOR have pledged grants of approximately $10 million each towards the Project. Co-financing requested of GEF is $45 million. While the combined grant contributions do not fully cover the full avoided cost, this is deemed sufficient given that the Project developer will also be benefiting from the co-financing terms from KfW.
The Project would provide a technical assistance package for promotion of solar technology and lay the groundwork for replication of the project in other parts of India. In the absence of the proposed Project, the scale of these activities would have been very modest, at an estimated baseline level of $500,000 over the Project period. The TA package is estimated to cost $4.5 million, with the incremental cost of $4 million proposed for GEF funding.
SOCIAL AND ENVIRONMENTAL ASPECTS
The project will have positive environmental effects: based on an ISCC configuration, it will displace 692 thousand tonnes of coal per year, and consume 181 thousand tonnes of LSHS fuel, resulting in avoided carbon emissions of 3.1 millions over the operating life of the project. The potential negative impacts of the project would have to be addressed through a comprehensive environmental assessment study and recommended mitigation plan which would have to be completed before appraisal. Particular attention would have to be given on the fuel handling and storage arrangements for the conventional power block. While displacement of population is not expected to arise, land aquisition process would be reviewed to ensure compliance with legal requirements.
ISSUES, ACTIONS AND RISKS
There are at least four areas of project risks. First, there is the financial and operational risk that the project fails to attract IPP developers who are financially and technically capable to complete the project and to manage the plant efficiently so as maintain sound financial operations. Second, there is a technical risk that the technology may not work properly in the Indian context. For instance, climatological conditions such as haze and sand storms may affect the performance of critical components of the power plant. Also, the maintenance and operation of critical solar equipment and controls may prove to be too complex. Third, there is the economic risk that the application of the technology in India may be more costly than anticipated, making it completely unaffordable. Fourth, there is the replicability risk that, even if the demonstration project works as planned, the project may not lead to its replication in India. This may be due to lack of proper policy instruments or economic resources, or simply because the conditions do not bring about a sufficiently large decrease in the production costs.
The financial and operational risk will be addressed by carefully structuring the IPP solicitation process to ensure that only financially sound and technically qualified developers are included. Requirements for risk capital contribution, performance guarantees and plant management arrangements would be established in the tenders. Other risks are being minimized through comprehensive feasibility studies of the project to assess project cost and performance under different operating scenarios. In addition, close monitoring of project implementation and operation will be undertaken in order to introduce early corrective actions which can lead to reduction in costs and improvements in plant performance. Finally, rigorous evaluation of project performance will be undertaken and feedback provided to policy planners, utilities, manufacturers, and research community. The information will also be made available to other countries in the region to help create favorable conditions for investments in solar thermal power in other developing countries and thus help bring down cost of equipment supply.
INSTITUTIONAL FRAMEWORK AND PROJECT IMPLEMENTATION
This will be the first time that a parabolic trough solar thermal plant would be pursued through competitive bidding. The IPP process will consist of having the State Government of Rajasthan issue a Request for Proposal (RFP) for a power plant to be located at Mathania with an aggregate capacity of about 140MW having a 35 to 40MWe solar plant component. Choice of secondary fuel for the power block will be left to the bidder. The amount and terms of financing available from GEF, the Central and State Government and KfW will be stated in the RFP. In order to firm up the project cost and secure the most appropriate blend of financing, it is recommended that early procurement action be taken. Sufficient lead time will need to be given to the bidders to prepare their technical proposals and a well defined draft power purchase agreement (PPA) issued at time of tender to enable the participants to bid aggressively. Appraisal would take place only after the price bids are opened and project costs firmed up. Negotiations will commence when the winning bidder is known to allow finalization of financing package. The GEF and government grant components would however remain as announced at time of tender.
The project is to operate autonomously as an IPP and would sell power to the grid based on a commercial power purchase agreement (PPA) with RSEB. Ideally, the purchase price will be fixed in a manner to enable the IPP to repay its loan obligations as well as meet all its operating expenses. A suitable escalation provision in the sale price will also be needed to ensure that the revenue stream of the IPP does not suffer because of inflation. Competitive bids for fuel oil/naphtha-based IPP plants for various load centers of Rajasthan including the Jodhpur area have been evaluated yielding prices ranging from Rs2.10 to Rs2.40 per kWh. This will serve as initial benchmark for the short-term avoided cost currently faced by the grid. While fiscal incentives during project start-up would be beneficial to the IPP, operating subsidy support would be avoided. At the minimum, project revenues should be sufficient to meet cash operating expenses even if full recovery of capital costs is not achieved.
Operation and Maintenance . The O&M arrangement would need to be clearly spelt out in the bid offer. Maintenance needs of the conventional (power block) part of the project, including turbines, heat exchangers, electrical equipment, etc., can readily be met within India. For the solar field operation and maintenance, staff exposure and intensive training at the solar thermal power plants in Kramer Junction, USA may be necessary.
Monitoring and Evaluation. It is proposed that the Government of Rajasthan would engage the services of local and international consultants to monitor and evaluate the progress of project implementation and performance from start of plant construction through the initial plant operating period. In addition, progress of technical assistance activities would also be monitored and reviewed. Regular progress reports on all components of the project would be prepared and submitted to GEF and KfW including to the scientific community and members of the Indian and international solar energy industry. A formal mid-term project review would be conducted jointly by the Bank and KfW midway through the project implementation period.
Training. Due to the demonstration nature of the project, continuous involvement of technical institutions such as MNES's Solar Energy Center, Indian Institutes of Technologies, consultancy firms and other related institutions is also expected. The project will also benefit from the expertise available at other organizations, e.g., SANDIA National Laboratories and NREL in USA, and other research and training institutions in Israel and Spain.

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