Document o f The Wor ld Bank

FOR OFFICIAL USE ONLY

Report No. 48680-IN

PROJECT APPRAISAL DOCUMENT

FOR A

PROPOSED GRANT FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND

IN THE AMOUNT OF U S 6 . 3 MILLION

AND A

PROPOSED GRANT FROM THE MULTILATERAL FUND FOR THE IMPLEMENTATION OF THE

MONTREAL PROTOCOL IN THE AMOUNT OF U S $ l MILLION

TO THE

REPUBLIC OF INDIA

IN SUPPORT OF

THE CHILLER ENERGY EFFICIENCY PROJECT

May 29,2009

Sustainable Development Department India Country Management Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

ARI

BEE CDM

CDM EB

CEEP CER

CFC co CO2e DNA DOE

EIRR EMP ER ERPA ERTA ESCOs ExCom F I GEF

GHG GO1 GDP GWP

HCFC HFC IAs IPCC

1R.R

KP

CURRENCY EQUIVALENTS (Exchange Rate Effective May 29,2009)

Currency Unit = I N R s . I N R s . 1.00 = US$0.01997 US$ 1.00 = I N R s . 50.08

INDIAN FISCAL YEAR

I

April 1 - March 31

ABBREVIATIONS AND ACRONYMS

American Air-conditioning and Refrigeration Institute Bureau of Energy Efficiency Clean Development Mechanism under the Kyoto Protocol Executive Board of the Clean Development Mechanism Chiller Energy Efficiency Project Certified Emission Reduction

Chlorofluorocarbon Carbon Monoxide Carbon Dioxide Equivalent Designated National Authority Designated Operational Entity

Economic Internal Rate of Return Environmental Management Plan Emission Reductions Emission Reductions Purchase Agreement Emissions Reduction Transfer Agreement Energy Services Companies Executive Committee of the Multilateral Fund Financial Intermediary (Le. IDBI Bank) Global Environment Facility

Greenhouse Gas Government of India Gross Domestic Product Global Warming Potential

Hydrochlorofluorocarbon Hydrofluorocarbon Implementing Agencies Intergovernmental Panel on Climate Change

Internal rate o f return

Kyoto Protocol

kw/TR

MIS MLF

MM&V

MoEF MP

M t NCCoPP NOx NPV oc

ODP ODS PCR PSU PSC RAC RMP SME S S A D

sox tC02e TA TR

UNDP UNEP

UNFCCC

Kilowatt-hour per ton of Refrigeration

Management Information Systems Multilateral Fund for the Implementation of the Montreal Protocol Measurement, Monitoring and Verification

Ministry o f Environment and Forests Montreal Protocol on Substances that Deplete the Ozone Layer metric tones (1 tonne = 1000 kg) National CFC Consumption Phase-out Plan Nitrous Oxides Net Present Value Ozone Cell of the Ministry of Environment and Forests Ozone Depleting Potential Ozone Depleting Substance Project Completion Report Public Sector Undertaking Project Steering Committee Refrigeration and Air Conditioning Refrigerant Management Plan Small and Medium Enterprise Structuring Syndication and Advisory Department, IDBI Bank Sulphur Oxides tonnes of C02 Technical Assistance Ton of Refrigeration, a unit of measure equivalent to 12,000 BTUhour United Nations Development Programme United Nations Environment Programme

United Nations Framework Convention on Climate Change

UNIDO Unite2 Nations Industrial Development Organisation

Vice President: Isabel M. Guerrero

Sector Director: John Henry Stein Sector Manager: Kar in Erika Kemper

Country Director: Roberto Zagha

Task Team Leader: Charles J. Connier

FOR OFFICIAL USE ONLY INDIA

Chiller Energy Efficiency Project

Table o f Contents I . STRATEGY CONTEXT AND RATIONALE ................................................................................................ 1

A . B . C .

Country and Sector Issues ............................................................................................................................... 1 Rationale for Bank Involvement ..................................................................................................................... 4 Higher level objectives to which the project contributes ................................................................................ 5

PROJECT DESCRIPTION .............................................................................................................................. 6

Lending instrument (Financial Modality) ....................................................................................................... 6 Project development objective and key indicators .......................................................................................... 7 Project Global Environment Objectives and K e y Indicators ........................................................................... 8 Project Components ........................................................................................................................................ 8

Component 1 : Provision o f Incentives to Accelerate Replacement o f Energy Efficient Chillers ...................... 8

I1 . A . B . C . D .

Sub-component 1.1 : Incentive to Chiller .................................................................. Sub-component 1.2: Incentive to Chiller and suppliers .............................................

Component 2: Measurement, Monitoring and Verification (MM&V) ........................................ Component 3: Technical Assistance .................................................................................................................. 11

Sub-component 3.1 : Training and Workshops on Project Awareness and Energy Efficiency opportunities for Large ................................................................. 12 gram) ................................................................................ 12

Component 4: Project Management ................................................................................................................... 12 Lessons Learned and Reflected in Project Design ........................................................................................ 13 Alternatives Considered and Reasons for Rejection ..................................................................................... 14

I11 . IMPLEMENTATION ................................................................................................................................. 15

A . Partnership Arrangements ............................................................................................................................. 15 B . Institutional and Implementation Arrangements ........................................................................................... 15 C . Monitoring and Evaluation o f OutcomeResults ........................................................................................... 17 D . Sustainability and Replicability .................................................................................................................... 18 E . Environment .................................................................................................................................................. 20 F . Crit ical Risks and Possible Controversial Aspects ........................................................................................ 22 F . Loadcredi t Conditions and Covenants ........................................................................................................ 27

APPRAISAL SUMMARY .......................................................................................................................... 27

E . F .

I V . A . B . Technical ....................................................................................................................................................... 28 C . Fiduciary ....................................................................................................................................................... 29 D . Social ............................................................................................................................................................. 32 E . Environment .................................................................................................................................................. 32 F . Safeguard Policies ......................................................................................................................................... 33 G . Policy Exceptions and Readiness .................................................................................................................. 34

ANNEX 1: COUNTRY AND SECTOR OR PROGRAM BACKGROUND ....................................................... 35

Country Background ..................................................................................................................................... 35 Sector Background ........................................................................................................................................ 36 Alternative Technologies .............................................................................................................................. 44 Chiller Supply Capacity ................................................................................................................................ 44 Barriers to Market Transformation ............................................................................................................... 45 Issues to be addressed by the Project ............................................................................................................ 46 List o f Potential CFC Chillers for Replacement during the First Year o f the Project ................................... 46

ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES.47

Economic and Financial Analyses ................................................................................................................ 27

A . B . C . D . E . F . G .

I I

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

A . B . C .

General experience from GEF-financed Energy Efficiency Projects Worldwide ......................................... 47 Specific experience from EE projects worldwide ......................................................................................... 48 Other Relevant Experience in Chiller Sector ................................................................................................ 51

ANNEX 3: RESULTS FRAMEWORK AND MONITORING ............................................................................. 52

Results Framework ....................................................................................................................................... 52 Arrangement for Results Monitoring ............................................................................................................ 54

ANNEX 4: DETAILED PROJECT DESCRIPTION .......................................................................................... 55

Component 1 : Investment in Chl ler Replacement .......................................................................................... 55 ...................................................................... 55

Sub-component 1.2: Incentive to Chiller manufacturers and s : ..................................................................... 57 Component 2: Measurement, Monitoring and Verification (MM&V) .............................................................. 57

Sub-component 2.1 : MM&V Management: ............................................................................................................... 57 Component 3: Technical Assistance .................................................................................................................. 58

Sub-component 3.1: Training and Workshops on Project Awareness and Energy Efficiency Opportunity for Large Buildings: .................................................................................................................................................. ........ 59 Sub-component 3.2: Public Awareness (Recognition Program) ................................................................................ 60

Component 4: Project Management Unit ........................................................................................................... 61 Sub-component 4.1: Project Management Unit ......................................................................................................... 61 Sub-component 4.2: Development o f a marketing tool to demonstrate cost effectiveness o f chiller replacement ..... 62

ANNEX 5: PROJECT COSTS ................................................................................................................................. 65

ANNEX 6: IMPLEMENTATION ARRANGEMENTS ........................................................................................ 66

Project Implementation Plan .............................................................................................................................. 68

ANNEX 7: FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENT ................................. 70

ANNEX 8: PROCUREMENT ARRANGEMENTS ............................................................................................ 76

A . General .......................................................................................................................................................... 76 B . Institutional and Implementation Arrangements ........................................................................................... 77 C . Procurement .................................................................................................................................................. 77 D . Assessment ofthe Agency’s Capacity to Implement Procurement ............................................................... 78 E . Procurement Plan .......................................................................................................................................... 79 F . Procurement Thresholds ................................................................................................................................ 79 G . Frequency o f Procurement Supervision ........................................................................................................ 80 H . Basic Principles for N C B Procedures ........................................................................................................... 80

Attachment 1 . Procurement details involving international competition ........................................................... 82 A . Goods and Works and non consulting services ..................................................................................................... 82 B . Consulting Services .............................................................................................................................................. 82

ANNEX 9: ECONOMIC AND FINANCIAL ANALYSIS ..................................................................................... 84

ANNEX 10: SAFEGUARD POLICY ISSUES ........................................................................................................ 92

Environmental Assessment ........................................................................................................................... 92 Environmental Management Plan ................................................................................................................. 93

ANNEX 11: PROJECT PREPARATION AND SUPERVISION ......................................................................... 96

ANNEX 12: DOCUMENTS IN THE PROJECT FILE ......................................................................................... 99

ANNEX 13: INCREMENTAL COST ANALYSIS .............................................................................................. 100

Concept and Barrier Removal Strategy ...................................................................................................... 100 Domestic Benefits, Global Environmental Benefits and Incremental Costs ............................................... 101

ANNEX 15: COUNTRY AT A GLANCE ............................................................................................................. 110

ANNEX 16: GOVERNANCE AND ACCOUNTABILITY ACTION PLAN (GAAP) ...................................... 112

A . B .

Sub-component 1.1 : Incentive to Chiller Owners: ..................

A . B .

A . B .

INDIA

CHILLER ENERGY EFFICIENCY PROJECT (CEEP)

PROJECT APPRAISAL DOCUMENT

SOUTH ASIA

SASDI

Date: May 29,2009 Team Leader: Charles Cormier Country Director: Roberto Zagha Sectors: District Heat and Energy and Sector ManagerLDirector: Karin Kemper General Energy Sector (1 00%)

Project ID: P100584, P102790, P100533 Environmental screening category: Partial

Lending. Instrument: Carbon Offset

Themes: Climate Change

Assessment Y

[I Loan [I Credit [ 3 Grant [ 3 Guarantee [ x] Other: Global Environment Facility (GEF), Multilateral Fund for the Implementation o f the Montreal Protocol (MLF), and the Clean Development Mechanism (CDM) For Loans/Credits/Others: US$6.3m from GEF, US$1 m from MLF and US$5.85 m from

Total Bank financing (US$m.): US$O ProPosed terms:

CDM'

Financing Plan (US$m) Source Local Foreign Total

BORROWER/RECPIENT 0 0 0 GEF 0 6.3 6.3 MLF 0 1 .o 1 .o CDM 0 5.85 5.85 Chiller owners (public/private) 70.12 0 70.12 Total: 70.12 13.15 83.27

Borrower: Government o f India

Responsible Agencies: Ministry o f Environment & Forests, India

Financial Intermediary: DBI Bank o f India Ltd.

Although the Spanish Carbon Fund has confirmed its intent to purchase Certified Emission reductions from the I

project, the legal agreement - Emission Reduction Purchase Agreement (ERPA) - has yet to be finalized.

F Y , Annual* Cumulative

The overall global environment objectives o f the CEEP are to reduce greenhouse gas emissions whilst simultaneously supporting the completion o f the phase-out o f consumption o f Ozone Depleting Substances required under the Montreal Protocol.

FY10 FY11 FY12 FY13 FY14 0.82 2.37 3.82 3.65 2.49

0.82 3.19 7.01 10.66 13.15

The Project Development Objectives (PDO) are to accelerate the replacement o f centrifugal chillers with efficient non-CFC-based centrihgal chillers in order to promote deployment o f energy efficient technologies and products to reduce GHG emissions, and support the phase-out o f CFC demand in India by:

i) .

ii) .

iii).

iv) .

supporting India’s efforts to comply with the Montreal Protocol obligations pertaining to the complete phase-out (including production and consumption) o f new CFCs by 201 0) and domestic commitment for the reduction in the demand for recycled or reclaimed CFCs, with minimum impact on economic development removing market and techno-economic barriers to early replacement o f inefficient chillers, with priority given to CFC chillers, through provision o f financial incentives directly to chiller owners in order to lower their opportunity costs and up-front capital costs and remove perceived technology risks; establishing an in-country mechanism to support a permanent transformation o f the chiller market in India by availing them o f GEF and MLF grants along with carbon finance revenues and strengthening national capacity for carbon finance intermediation; and demonstrating significant rate-of-return on investment o f chiller replacement which would be replicable to other low-cost and/or no-cost energy conservation measures in large buildings.

The CEEP proposes that owners who receive initial assistance from the MLF and GEF, i.e. approximately 215 chillers, would have to transfer potential carbon credits to the project. N o chiller owners will benefit from both GEFMLF and CDM. Carbon credits from those units receiving incentive payments from GEF and MLF, when certified, would then provide additional resources to the project to support the replacement o f an additional 155 chillers. This concept i s

similar to a revolving hnd where savings (in this case emission reductions (ER) revenue streams) from init ial replaced uni ts are returned to the project and are used for replacing additional units. This enables the CEEP to replace a total 370 chillers o f which approximately 215 chillers will be supported by the GEF and MLF through init ial h n d s and the remaining 155 chillers wil l receive subsidy from carbon credit revenue accruing to the GEF-MLF funded chiller. Project description [one-sentence summary of each component] Re$ PAD II.D., Technical Annex 4 Component 1: Provision of Incentives for Investment in Energy Efficient Chillers: In an effort to remove market and techno-economic barriers, the CEEP wil l provide: (a) chiller owners with either: (i) an upfront financial incentive to subsidize the cost o f the replacement o f centrihgal chillers before end o f technical life; or (ii) an annual payment from a share o f certified emission reductions to be generated from the actual energy savings achieved by the new chillers; as wel l as (b) an incentive for chiller manufacturers, suppliers and energy service companies (ESCOs) to actively participate in the project.

Component 2: Measurement, Monitoring and Verification: As per the methodology approved by the C D M Executive Board, the CEEP i s required to monitor data related to the power-output function o f the old chiller to be replaced, electrical consumption o f the new chiller, and cooling output in order to measure energy savings and emission reductions achieved.

Component 3: Technical Assistance: To support project readiness and sustainability, this component focuses on enhancing the awareness o f relevant stakeholders in energy conservation measures, enhancing the understanding o f the impact o f decision to accelerate the phase-out o f production o f CFCs on the servicing sector, and strengthening the capacity o f chiller owners and other stakeholders to monitor the performance o f new chillers and to undertake refrigerant management.

Component 4: Project Management: A Project Management Unit (PMU) wil l be established at a financial intermediary - IDBI Bank - and will be responsible for implementing al l activities under the CEEP.

Which safeguard policies are triggered, if any? Re$ PAD I K F., Technical Annex 10 Environmental Assessment (OP/BP 4.01) Significant, non-standard conditions, if any, for: None Re$ PAD IIL F. Board presentation: June 30,2009 Loadcredit effectiveness:

Execution and delivery o f GEF and OTF Grant Agreements, and Project Agreement, and provision o f a legal opinion on both Grant Agreements and Project Agreement. Finalization o f a Project Implementation Manual (PIM) acceptable to the World Bank, giving details o f guidelines and procedures agreed with the World Bank for the implementation, supervision and monitoring/evaluation o f the project, including procedures for the identification and selection o f beneficiaries o f financial incentives, and terms and conditions governing approval o f subprojects and award o f financial incentives, and details o f the Governance and Accountability Plan.

India: Chiller Energy Efficiency Project

I. STRATEGY CONTEXT AND RATIONALE

A. Country and Sector Issues

1. achieving the Mil lennium Development Goals (MDGs) and poverty reduction targets in India. As India i s already experiencing an energy shortage - which i s estimated to be in the order o f 13% at peak times - it is becoming clear that the supply o f energy wil l become a key constraint to economic growth. In i t s 1 lth Five Year Plan and the Integrated Energy Policy, the Government o f India (GoI) h l ly recognizes the need to add additional energy capacity, including from renewable energy sources. At the same time the increased demand for energy wil l undoubtedly contribute to a rise in greenhouse gases. The Go1 estimates that meeting the M D G s (without improving energy services to urban and commercial customers and supporting economic growth) alone will imply an increase o f about 18% in energy use from the current level and an additional 133 mi l l ion tomes o f COZ emissions (tCOze) per year, or 12% increase from the 2004 level. By 2030, India will need to increase energy supply by a factor o f five to six times if it i s to meet i t s growth target o f 8%, which will increase greenhouse gases by a factor o f at least four compared to current levels. Hence, the reduction in the demand for energy i s also o f prime importance if India i s to meet i t s energy, climate change and growth challenges. This i s reflected in India’s National Action Plan on Climate Change issued in June 2008, which has one its eight missions dedicated to energy efficiency.

Accelerating and maintaining the high rate o f economic growth i s the key to

2. In i t s Fourth Assessment Report, the Intergovernmental Panel on Climate Change concluded that human activity i s contributing to an unprecedented increase in the concentration o f greenhouse gases in the atmosphere, which i s causing the earth’s climate to change. On a global scale, the Earth’s average temperature has already increased, precipitation patterns have altered, sea levels have risen, and most non-polar mountain glaciers are in retreat. In response, the global community adopted the United Nations Framework Convention on Climate Change (UNFCCC), which came into force in 1994, with an objective to stabilize atmospheric concentrations o f greenhouse gases (GHG) at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time-frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production i s not threatened and to enable economic development to proceed in a sustainable manner. In 1997, the international community adopted the Kyoto Protocol (Kl?), which requires developed countries to reduce emissions by an average o f 5.2% between 2008 and 2012, compared to 1990 baseline. The Kl? has a number o f flexibility mechanisms, including the Clean Development Mechanism (CDM), which enables developed countries to reduce the costs o f compliance through the purchase o f emissions reductions from projects in developing

countries, provided that the emission reductions are real, measurable and long term, and that C D M projects meet sustainable development objectives in those countries.

3. o n 26 August 2002. India, which is the sixth largest emitter o f GHG in the world, has initiated and implemented a series o f activities to improve energy efficiency. India has also been an active player in the emerging C D M market, with the second largest number o f projects in the pipeline so far.

India ratified the UNFCCC on 1 November 1993 and subsequently ratified the Kp

4. through the implementation o f a set o f energy efficiency interventions. The implementation o f this target wi l l benefit f rom the existing regulatory structure, in particular the Energy Conservation Act (2001), which set up the Bureau o f Energy Efficiency (BEE) as the statutory body to facilitate and coordinate such initiatives at the central level and state level. The primary goal o f BEE is to reduce the energy intensity in the economy and its mission is to institutionalize energy efficiency services, enable delivery mechanisms in the country and provide leadership to the key players involved in energy conservation activities.

The 1 1 th Five Year Plan intends to increase energy efficiency by 20% by 20 16- 17

5. Go1 developed a L o w Carbon Programmatic Framework for Energy Efficiency, which was approved by the GEF in April 2008. This Programmatic Framework lays out -five distinct project components to increase market penetration o f energy efficient technologies in buildings, small and medium enterprises (SMEs) and railways. The Chiller Energy Efficiency Project (CEEP) is one o f the components included in this framework.

T o enhance synergies and improve effectiveness o f the GEF portfolio in India, the

6. harmful radiation and is a critical part o f the earth’s natural defense mechanism. Scientific investigation suggested that certain man-made substances (Chlorofluorocarbons, Halons, Carbon Tetrachloride, and Methyl Chloroform, among others) caused depletion o f the ozone layer. This was subsequently confirmed through measurements o f the ozone layer at the South Pole where the largest depletion o f the ozone layer occurs every year. This discovery and continued research stimulated international efforts to arrest and reverse this trend, largely through the complete elimination o f emissions o f Ozone Depleting Substances (ODs). The Montreal Protocol on Substances that Deplete the Ozone Layer (hereafter “MP”) binds its signatories to actions limiting and eventually phasing out the use and production o f ODs. The MP mandates a complete phase-out o f production and consumption2 o f new ODs3 in developing countries by January 1 , 20 10 and countries are requested to develop measures for the effective use o f the ODS recovered f i om the chillers to meet servicing needs in the Refrigeration and Air-conditioning (RAC) sector4.

At the same time, the earth’s stratospheric ozone layer protects l i f e o n earth f iom

* The Montreal Protocol Article 1 defmes “Consumption” as Production plus imports minus exports o f controlled substances.

Applicable to ODS belonging to Group I o f Annex A o f the M P Sixteenth Meeting o f the Parties Decision: UNEP/OzL.Pro. 16/17, Decision XVI/13

2

7. India became a party to the MP o n June 19, 1992 and has been classified as a country operating under Art icle 5, paragraph 1 o f the Protocol and as such i s eligible for financial support from the Multilateral Fund for the Implementation o f the Montreal Protocol (MLF) to cover the incremental costs o f meeting its obligations as defined under the MP. The Ministry o f Environment and Forests (MoEF) has been empowered by the Go1 with overall responsibility for implementation o f the MP. The M o E F has established an Ozone Cell (OC) with operational responsibility for implementation o f MP related activities. The GO1 also has a strong regulatory framework to implement i t s obligations under the MP. These include the Ozone Depleting Substances (Regulations and Control) Rules, 2000, under the Environment Protection Act, 1986 and a Licensing system, to regulate and monitor the import and export o f a l l controlled ODs. Registration o f a l l dealers o f ODS and ODs-based products is mandatory and since 1995, no credit financing i s provided to investments with ODS technologies.

8. India has recently decided to take a proactive stand by prohibiting the production o f new CFCs as o f August 1 , 2008 - 17 months ahead o f the existing phase-out schedule established by the MP. Additionally, i t i s mandated that the production quota for 2008 is dedicated primarily to the manufacture o f metered-dose inhaler (MDI) applications. Imports o f CFCs are restricted by the Ozone Rules’ and GO1 has recently banned the sale o f new CFCs into the domestic market for meeting servicing sector requirements, activating a concomitant increase in demand for reclaimed, recovered and recycled CFCs. The CEEP therefore i s an integral complement to GOI’s overarching strategy to meet the phase-out schedule date o f January 1,2010, as mandated by the MP, and the domestic objective to reduce the demand o f recycled or reclaimed CFCs.

9. about 20% o f ODS consumption (mostly CFCs) in the early 1 9 9 0 ’ ~ ~ GO1 strategy was to expedite the switch-over o f the manufacturing processes to non-CFC-based R 4 C equipment. The manufacturing change-over for chillers was completed by mid-1 990s and there has been l i t t le addition to CFC-based chiller population after 1998. Most new centrifugal chillers currently available in India use HCFC-123 or HFC-134a as refrigerants. These new chillers have improved chil ler system design making them more robust and reducing refrigerant leakage to less than 1% a year, compared to CFC technology with a 10% average leakage rate. They also offer significant improvement o f energy efficiency as their average energy consumption i s less than 0.63 kWRT at rated capacity.

At the Refrigeration and Air-conditioning sectoral level, which accounted for

10. the advancement in chiller technology and the resulting energy efficiency gain and potential savings does not accelerate the phase-out o f o ld and inefficient centrifhgal chillers as expected. Chiller owners are typically reluctant to undertake accelerated replacement projects in advance o f the end-of-life o f the existing chiller equipment. The India Chiller Sector Study, undertaken by the World Bank in 2002, confirmed that early

Past experience from chiller replacement demonstration projects has shown that

’ This may be revisited after 2010, for Essential U s e Nominations, as authorized by the Parties

3

switch-over to more energy efficient chillers i s not given a priority in an environment o f competing investment opportunities and resource constraints due to the high up-front capital cost, perceived technology risks and high opportunity costs. Therefore appropriate financial arrangements need to be put in place to accelerate the replacement o f o ld centrifugal chillers to new non-CFC based energy efficient chillers.

1 1. India, as a Party to both Montreal and Kyoto Protocols, i s eligible for financial and technical assistance from the MLF, the Global Environment Facility (GEF), and the Clean Development Mechanism (CDM). The CEEP meets the objective o f the KP by encouraging energy savings which in turn help in the reduction in emissions o f GHGs. I t also fits into the objective o f the GEF6 by transforming the marketplace and introducing the concept o f life-cycle based decision making in the chiller sector. The CEEP will also meet the objective o f the MP by facilitating the replacement o f o ld CFC-based chillers and reducing the burden o f CFC usage in the servicing sector. Overall, this project supports GOI’s objective of reducing the energy intensity in the economy (by reducing energy consumption by 0.3 kWRT or energy savings o f 30% against the baseline level) and also supports the phase-out o f demand for CFCs in the servicing sector.

B. Rationale for Bank Involvement

12. The World Bank is uniquely positioned to mobilize funds from a number o f sources to achieve the desired outcomes o f this project. First, i t i s the largest Implementing Agency (IA) o f the GEF and MLF7, and i s committed to implementation o f activities toward achievement o f GEF operational programs and MP goals. Second, i t i s a significant player in the global carbon market and has extensive experience in the development o f C D M methodologies, project design and implementation o f C D M interventions. On their own, the GEF, MLF and C D M mechanisms are not able to overcome the significant barriers to the accelerated replacement o f chillers, namely: (i) high opportunity costs; (ii) perceived technology risk, in particular whether energy efficiency improvements can be sustained over a long period under the operating conditions prevailing in India; (iii) lack o f awareness o f the potential savings that could be rendered by the new technology; and (iv) competing investment priorities. However, the Bank has a wealth o f experience in managing potentially complex financing mechanisms that are required for the successful delivery o f the CEEP. Finally, a comparative advantage o f the Bank is its vast experience in dealing with both large scale energy saving projects as wel l as ODS reduction projects, including those relating to the replacement o f CFC-based chillers in Mexico, Thailand and Turkey, as detailed in Annex 2.

13. The Bank has already mobilized strategic bilateral cooperation and private sector interest to support the successful implementation o f the CEEP. The U S Environmental Protection Agency (EPA) has provided financial support for the development o f a marketing tool that would outline the advantages to chiller owners. Additionally chiller

Operational Program #5: Removal o f Barriers to Energy Efficiency and Energy Conservation 6

’ Other Implementing Agencies are UNDP, UNIDO and UNEP, along with bilateral donor agencies

4

manufacturers that operate at the global level have contributed to the development o f the product - i.e. the incentive framework - and the design o f the delivery mechanism.

C. Higher level objectives to which the project contributes

14. The CEEP relates directly to the energy efficiency program in India and i s consistent with the GoI’s goal o f increasing energy efficiency by 20% by 2016-17 through the implementation o f a set o f energy efficiency interventions. Given chillers normally consume more than 30% o f the total energy consumption in large commercial buildings and industrial establishments, implementation o f this project would support India’s efforts in reaching its goal and also in raising awareness o f the potential energy savings in large energy consumers.

15. in India, whose objectives are to:

The CEEP i s part o f the Programmatic Framework Project for Energy Efficiency

i). Promote energy efficiency in buildings through increased market penetration o f energy efficient technologies, practices, products, and materials in the residential and commercial building markets;

ii). Increase deployment o f energy efficient technologies and support adoption o f energy-saving practices in the industrial sector (small- and medium-scale enterprises); and

iii). Implement energy efficient technologies and measures in Indian Railways.

16. objective, it wil l be implemented as a stand-alone project without any physical linkages to other projects under the Programmatic Framework Project.

While the objective o f the CEEP i s wel l coordinated with the overall program

17. energy-efficient chillers with better leakage control would support the GoI’s goal o f increasing energy efficiency by 20% by 201 6-1 7 through the implementation o f a set o f energy efficiency interventions and the international objective o f reducing the emission o f ODS into the atmosphere. This is in line with GOI’s ODS phase-out program, which has been under implementation since mid-1990s. GO1 has supported the conversions to non-ODS in the R A C manufacturing sector (including domestic refrigeration, mobile air- conditioning, commercial refrigeration etc) and CFC Consumption phase-out program for the servicing sector for commercial and transport refrigeration. Additionally, the CEEP wil l closely support the World Bank-GO1 program on phasing-out production o f CFCs.

Accelerated decommissioning o f old CFC-based chillers with non-ODS based

18. The CEEP will synergize the phasing out o f ODS and reduction o f GHG emissions to the atmosphere, which i s in l ine with the Bank’s Environment Strategy for protecting the global environment. I t has a direct linkage to the Bank’s Country Assistance Strategy (CAS) for FY09-12 pillar on sustainable growth, whereby the Bank will assist the GO1 to access additional funding for measures that further reduce GHGs. I t wil l also address the objectives o f the GEF’s Operational Program #5 (Removal o f

5

Barriers to Energy Efficiency and Energy Conservation) while achieving substantial leveraging effects with carbon finance revenues and mobilization o f commercial finance.

19. India, which i s seen as quite important in realizing carbon finance from bundled andor programmatic energy efficiency programs and a possible catalyst for increased energy efficiency activities. While India has the largest number o f C D M projects in its pipeline, they tend to be smaller than the world average, and there is a need to build capacity in intermediation if India i s to scale up and realize its fair share o f C D M revenues, in particular for the SME sector which accounts for 40% o f India’s gross domestic product (GDP). In addition, the CEEP wil l demonstrate the application o f the Programmatic Approach to accelerate the implementation o f the C D M for energy efficiency measures.

In carbon finance, the CEEP wil l build the capacity o f a financial intermediary in

11. PROJECT DESCRIPTION

A. Lending instrument (Financial Modality)

20. both o f which will be delivered init ial ly through provision o f financial incentives on a grant basis to support part o f chiller replacement costs. The incentive, which allows for implementation o f conversions, wil l result in additional revenues from carbon finance, since chiller owners that receive the init ial assistance from the MLF and GEF grant funds will have to surrender potential carbon credits to the overall program. I t i s expected that the CEEP wil l be able to replace 185 chillers using GEF grant funds and 30 using grant funds from the MLF. Carbon credits from these init ial conversions, which will be financed by grant funds will render additional resources to the project, when certified, to replace additional chillers, which along with chillers that wil l only receive C D M revenues will result in installation o f approximately 155 new chillers. This is similar to a revolving fund concept, where savings from init ial replaced units are returned to the project and are used for replacing additional units. While only 370 chiller replacements are being proposed init ial ly under this project, there i s an option that, once the grant funding i s exhausted, the program can be expanded to non-CFC chillers through a purely carbon finance operation.

The CEEP wil l be financed by GEF grant funds, with co-financing from the MLF,

21. As the CEEP wil l only provide incentives to attract early replacement o f chillers, significant co-financing from commercial sources wil l also be mobilized to complete the financial framework. IDBI Bank intends to offer loans on commercial terms to eligible chiller owners (which comply with eligibility norms subject to approval o f i t s delegated authority) in addition to the incentives o f the project. However, this is not a requirement and chiller owners wil l also be able to avail o f the incentives o f the project if they arrange for alternate financing to purchase chillers.

22. The CEEP is innovative in its approach, in that i t involves the use o f a financial intermediary to aggregate a number o f eligible chiller replacements and thus reduce the

6

transaction costs involved for each chiller owner in a carbon finance operation, thereby allowing many small individual projects to participate in the carbon market. The C D M Executive Board (CDM EB) has approved the methodology*, which was specifically developed for the CEEP. The Emission Reduction Purchase Agreement (ERPA) to be signed between IDBI Bank and the World Bank acting as trustee to the Spanish Carbon Fund represents one o f the f i rst examples worldwide o f a programmatic approach under the CDM, which has so far been dominated by a project-by-project approach.

B. Project development objective and key indicators

23. The project development objectives (PDO) o f the CEEP are to accelerate the replacement o f centrifugal chillers with efficient non-CFC-based centrifugal chillers in order to promote deployment o f energy efficient technologies and products to reduce GHG emissions, and support the phase-out o f CFC demand in India by:

i).

ii) .

iii).

iv) .

supporting India’s efforts to comply with the Montreal Protocol obligations pertaining to complete phase-out (including production and consumption) o f new CFCs by 201 0) and domestic commitment for the reduction in the demand for recycled or reclaimed CFCs, with minimum impact on economic development removing market and techno-economic barriers to early replacement o f inefficient chillers, with priori ty given to CFC chillers, through provision o f financial incentives directly to chiller owners in order to lower their opportunity costs and up-front capital costs and remove perceived technology risks; establishing an in-country mechanism to support a permanent transformation o f the chiller market in India by availing them o f GEF and MLF grants along with carbon finance revenues and strengthening national capacity for carbon finance intermediation; and demonstrating significant rate-of-return on investment o f chiller replacement which would be replicable to other low-cost and/or no-cost energy conservation measures in large buildings.

24. The CEEP has significant scope for replication as i t wil l develop and implement an approach that bridges the gap between the techno-economic and institutional aspects related to energy efficiency.

25. PDO, namely:

There are three key quantifiable indicators to monitor the progress toward the

i). number o f CFC-based centrihgal chillers replaced by the CEEP; ii). reduction o f demand for new CFCs in the R 4 C servicing sector

Approved baseline and monitoring methodology AM0060: “Power saving through replacement by energy efficient chillers” Version 1.1, July 2008

7

iii). emission reductions as direct and indirect benefits from the projectsg It is estimated that about 158 metric tomes (mt) o f CFC from 370 chillers will be phased out over this project over a 20 year period.

26. above quantifiable indicators.

The project design includes an exhaustive monitoring program to measure the

27. Additional indicators, which are not as easily quantifiable, include:

Market transformation through making chiller owners, including the public sector, aware o f the l i fe cycle approach to decision making; Reduced potential for illegal trade in banned substances brought about by the removal o f CFC demand from the chiller sector

0

0

C. Project Global Environment Objectives and Key Indicators

28. the global environmental agendas related to the stabilization o f atmospheric concentrations o f greenhouse gases (GHG) and the phase-out o f Ozone Depleting substances (ODs). By accelerating the phase-out o f o ld CFC-based inefficient chillers, the CEEP wil l reduce the consumption o f ODS in the domestic market by 158 mt ODP and help control the continued emissions o f ODS in old equipment. Additionally the CEEP wil l support the reduction o f the atmospheric load o f GHGs through an increase in energy efficiency.

The Project Development Objectives (PDO) are directly and primarily related to

D. Project Components

The CEEP has four key components, as defined below

Component 1: Provision of Incentives to Accelerate Replacement of Energy Efficient Chillers

29. This component will provide financial incentives (about 20% o f the equipment standardized cost) to accelerate the replacement o f o ld centrifigal chillers to non-CFC energy efficient ones, in advance o f the natural attrition rate o f the existing equipment. Following the fill implementation, the CEEP will consider expanding the scope o f work to include non-centrifugal chillers, provided that significant gains in energy efficiency can be achieved.

~

CFC demand for topping uplservicing annually usually requires about 2-5% top-up, due to leakage, wh ich implies that servicing existing units wil l require about 95 - 100 MT per year.

8

Sub-component 1.1 : Incentive to Chiller Owners

30. The grant funds from GEF and MLF will be used to provide incentives for inefficient chillers, with priority given to CFC chillers, in the initial phase o f project implementation (until grant funds are exhausted). Additional units wil l be replaced through revenues generated by carbon credits. In the init ial phase, chiller owners will have the following two choices o f incentives which they must decide upon as soon as they j o in the program:

i). Up-front grant subsidy o f 20% o f the normative cost o f new non-CFC based energy efficient centrifugal chillers; or

ii). Future carbon finance revenues to be generated by energy savings from replacing o ld chillers with new non-CFC based energy efficient centrifugal chillers.

3 1. finance revenues that would be generated from their subprojects to the program. These revenues would then be used to replace additional chillers.

For the first option, chiller owners would have to agree to relinquish future carbon

32. carbon credits earned over the previous twelve-month period until end o f FY2014 (the expected closing date o f the ERPA). The balance o f 40% will be disbursed to the FI for C D M related costs, including monitoring and verification and administrative services and requirements prescribed in the approved methodology. This option wil l also support the special circumstances o f public sector institutions who are constrained by procedural and legal implications in accepting up-front incentives from the private sector, but which are encouraged by the GO1 to participate in the carbon market.

For the second option, chiller owners would receive annual payments o f 60%", o f

33. conditions" :

Chiller owners interested in joining the program will need to fulfill the fol lowing

i). The inefficient chiller identified for replacement should have a residual technical l i f e o f more than 5 years. In order to simpli fy the demonstration o f this criterion, the C D M Methodology indicated that the eligibility would be restricted to those chillers that have been installed after 1993;

ii). The identified new centrifugal chillers must be non-CFC-based with specific energy consumption being equal or lower than 0.63 kW /RT at current ARI" condition or at the site condition confirmed during commissioning.

iii). The rated capacity o f new chillers must be within 5% o f the baseline capacity.

34. and suppliedmanufacturers to ensure continued energy-efficient operations o f the new

The project will encourage the signing o f service contracts between chiller owners

lo depending on actual costs l1 These conditions are based on the approved C D M methodology. The program i s requesting the C D M methodology panel and executive board for clarification regarding eligibility o f chillers installed prior to 1993. l2 Air-conditioning and Refrigeration Institute (AH): establishes standard for the rating and testing o f chillers

9

chillers. Procurement o f new centrifugal chillers will be carried out by project participants, based on prevailing commercial practice. Since financial incentives wil l only be a certain percentage o f the total investment cost, chiller owners wil l seek the remaining funds from other sources including their own cash resources; commercial loan finance from IDBI Bank (on commercial terms which comply with eligibility norms subject to approval o f its delegated authority) or other commercial banks, special financial arrangements with energy supply companies (ESCOs); arrangements with leasing companies; or special financial plans that may be offered by chiller manufacturers.

Sub-component 1.2: Incentive to Chiller manufacturers and suppliers

35. international manufacturers. These include inter alia: Carrier, McQuay, Trane and York from the U.S., Hitachi, Mitsubishi Heavy Industry, and Ebara from Japan; and Voltas and Blue Star from India.

Non-CFC-based centrifugal chillers are being offered by national and

36. suppliers wil l be eligible to a success fee of US$0.5 per ton o f Certified Emission Reductions per year provided they undertake the following steps:

In order to promote their participation in the program, eligible manufacturers and

i). provide up-front a list or database o f existing clients or chiller owners; For confidentiality reasons, this l i s t wil l be subject to non-disclosure for 18 months from the date o f the submission.

ii). Secure the participation to the program from clients identified in the l i s t submitted to the project (as detailed in (i) above).

37. to meet established environmental and safety requirements related to decommissioning o f baseline chillers, refiigerant management and installation o f new chillers. Chiller owners must allow access to the chiller throughout the lifetime o f the project for monitoring purposes. The CEEP also requires that CFCs extracted from retired units must be inventoried, stored and managed properly and can be used only for servicing other RAC equipment in-site or destroyed, as per specified guidelines. These requirements and monitoring arrangements are detailed in the Environment Management Plan o f the project and wil l be included in the agreements to be signed with IDBI.

Project participants (chiller owners and manufacturers/suppliers) will be obliged

38. implementation o f this project in particular to target owners o f inefficient chillers from the private sector. The CEEP has access to an inventory o f chiller owners from 2001, but chiller manufacturers and ESCOs would have a more extensive l i s t and recent contact information. To date, the majority o f manufacturers and important ESCOs have indicated their interest to actively participate in marketing efforts and are ready to sign memoranda o f understanding with the FI to formalize their involvement and arrangements on the success fee described above.

The involvement o f chiller manufacturers and ESCOs i s critical to the successful

10

Component 2: Measurement, Monitoring and Verification (MM&V)

39. monitor data related to the power-output function o f the o ld chiller to be replaced, electrical consumption o f the new chiller, and cooling output. I t necessitates a database to be established to keep track o f a l l the data generated from the individual replacement activities and to be used to generate the reports that would support the CER claims.

As per the methodology approved by the C D M EB, the program i s required to

40. establish a system for:

A qualified energy service or audit company wil l be contracted by the project to

i). measuring energy consumption o f baseline and new equipment; ii). monitoring performance o f new chillers by collecting performance parameters

o f new chillers on an on-line basis; and iii). analyzing the data collected during the lifetime o f the project.

41. and data transmitters and wil l be responsible to ensure that a l l new chillers are equipped with them. The project wil l finance the acquisition o f these data loggers and transmitters for up to 100% o f the chillers, in accordance with the C D M methodology. Data loggers and transmitters could be provided and installed directly by chiller suppliers or could be procured and installed by the MM&V consultant, provided that i t meets the specifications as identified by the MM&V consulting company. The data wil l be collected and processed by an MIS, which wil l be developed by the consultant. The MIS will be used, among others, as the tool for generating al l technical reports required by the project, and for estimating the emission reductions to be verified by a third party prior to submission to the C D M EB for certification. The verification o f emission reductions wil l be carried out by a Designated Operating Entity (DOE) to be appointed by the project, which must be selected from the pool o f f i rms accredited by the C D M EB.

The MM&V consultancy company wil l develop specifications for data loggers

42. The BEE is in the process o f establishing an Energy Efficiency Public Sector Undertaking (PSU) as announced in the National Action Plan for Climate Change, to serve as a financing platform for energy service companies (ESCOs), but which wil l also provide some program monitoring. The project wil l review any future role o f the PSU in monitoring o f MM&V component o f CEEP at Mid-term review, depending on functionality o f this PSU and implementation success o f CEEP.

Component 3: Technical Assistance

43. the different MM&V requirements and the financial assistance offered by the CEEP. To ensure sustainability, it will help build capacity o f relevant stakeholders in energy conservation measures and refrigerant management. The following activities wil l support the implementation o f the CEEP:

This component will focus on enhancing the knowledge o f project participants o f

11

Sub-component 3.1 : Training and Workshops o n Project Awareness and Energy Efficiency opportunities for Large Buildings:

44. energy efficient centrifigal chillers, the project will also explore opportunities to expand i t s coverage to other energy conservation options in large buildings and industries. The project will utilize experience and expertise o f U S EPA’s Energy Star Programs and those o f chiller manufacturers and suppliers o f ancillary equipment. A financial analysis tool has been developed to support participants in making decisions with regard to the two options being offered and will be finalized before project launch.

While the main objective o f the CEEP i s to promote the early replacement o f

45. the public o f the commencement o f the project and to invite interested parties to participate. This will be followed by project-cycle workshops, undertaken o n a regular basis to inform new participants about project requirements, processes, eligibility and finding criteria. Technical workshops will also be undertaken to inform participants about measurement, monitoring, and verification o f power consumption, energy savings and accounting for emission reductions.

A launch workshop wil l be undertaken jo int ly by IDBI Bank and M o E F to inform

Sub-component 3.2: Public Awareness (Recognition Program)

46. o f chiller owners and to promote proper maintenance o f chillers to sustain the designed performance o f the equipment. In th is regard, annual recognition awards will be presented to those chiller owners that are able to sustain high performance o f their chillers through proper operations and maintenance. These awards will also encourage participants to closely monitor performance o f their chillers, which wil l maximize C D M revenues for the project in a sustainable manner.

The objectives o f this sub-component are to overcome perceived technology risks

Component 4: Project Management

47. activities under the project. Since the CEEP aims at establishing a sustainable financial mechanism to provide the needed financial incentive for continued replacement o f CFC- based chillers, the role o f the financial intermediary (FI) i s critical in project management. The PMU, therefore, will be established within IDBI Bank and will be staffed according to the agreed Staffing Plan. The project wil l finance the PMU and al l project related activities to be undertaken (except direct procurement o f chillers which will be done by project beneficiaries). The responsibilities o f the PMU will include the following:

A Project Management Unit (PMU) will be responsible for implementing al l

i) .

ii) .

iii).

Marketing and effective outreach to target groups to enhance program participation. Screening o f potential candidates and undertaking sub-project processing procedures with identified project participants. Developing and implementing a data management system for the program.

12

iv). Disbursing fbnds according to established indicators and managing the cash- f low from the different revenue streams to ensure continued and sustained viability o f the program

v). Procurement and supervision o f appropriate consultancy services for monitoring, verification and auditing purposes.

vi). Offering loans on commercial terms to eligible participants; vii). Reporting on various components as per the requirements o f the Bank, MLF,

GEF, and CDM; and viii). Preparation and adoption o f a Project Implementation Manual acceptable to the

World Bank, giving details o f guidelines and procedures agreed with the World Bank for the implementation, supervision and monitoring/evaluation o f the project, including procedures for the identification and selection o f beneficiaries o f financial incentives, and terms and conditions governing approval o f subprojects and award o f financial incentives, and details o f the Governance and Accountability Plan.

48. The procedures o f project implementation, requisite institutional framework for implementation and monitoring o f project activities and the formats for monitoring and reporting are delineated in the PIM. A grievance handling mechanism wil l be set up by the Ozone Cell to allow feedback from the beneficiaries and potential stakeholders.

E. Lessons Learned and Reflected in Project Design

49. builds on the lessons learnt after a decade o f involvement in this program. This includes the recognition o f the advantages o f a performance-based programmatic approach, importance o f a supportive pol icy environment and the need for sound institutional arrangements and for strengthening capabilities for implementation and monitoring. Similar findings have been documented in the World Bank GEF Energy Efficiency Portfolio Review, including need for comprehensive and holistic market assessments and simple and flexible program design.

The CEEP i s closely in l ine with India's existing ODS phase-out program and

50. India Chiller sector study which was undertaken in 2002. The market barriers were quantified and employed as a basis for establishing the level o f fbnding requirement for this project, whereas the chiller manufacturers' database o f existing installations o f CFC- based centrifbgal chillers supported project design with regard to chiller population and market assessment. Project design flexibility i s achieved through national level implementation arrangement that takes into account prevailing business and commercial practices to make i t as market-oriented as possible.

The initial project design for CEEP was based on a World Bank commissioned

5 1. conducted to obtain relevant inputs for the project design. The key messages from these meetings were that, for the project to be successful, the design had to be kept simple, and any transactions or actions required by building owners, chiller suppliers, and financiers

A series o f meetings with stakeholders at the national and global levels were

13

should approximate existing commercial practices and/or existing business models as much as possible. The project design has also benefited from experience and lessons learned from demonstration projects in Mexico, Thailand and Turkey (Annex 2).

F. Alternatives Considered and Reasons for Rejection

52. The alternative approaches considered include:

0 D o nothing and let the market resolve the problem:

53. o f CFC-based chillers wil l not happen at the rate needed if left to market forces. The India chiller sector strategy study found that chiller owners, in effect, apply a discount rate o f about 30% to potential returns from chiller replacement projects. This would suggest that inefficient CFC-based centrifugal chillers would continue to be in operation until 2025. Under this scenario, India wil l continue to rely on CFCs, 15 years beyond the mandatory complete phase-out date o f 2010 as stipulated by the MP. This i s clearly not a desirable option, as this could encourage illegal trade and a continued demand o f these substances in the servicing sector (with related emissions), which would undermine the goals o f the MP. The do-nothing option would also continue to drain energy when taking into account the relative inefficiency o f the existing stock o f chillers.

Country studies and findings from the pi lot projects have shown that replacement

Embark upon a sophisticated recovery, recycling and banking project:

54. costs, difficulty in monitoring and the lack o f adequate administrative infrastructure to implement such a program successfully. The poor level o f success o f CFC recovery and recycling schemes in developing countries is well documented.

Developing countries are reluctant to pursue this approach due to high transaction

0 Enhance awareness o f diminishing CFC supply, increased cost o f servicing and potential impact on maintaining existing R A C equipment:

55. R A C equipment, including chillers, despite the forecasted shortage, increased prices and cost o f maintenance. The potential for energy savings and short payback period is also not a sufficient catalyst for stimulating the required level o f chiller replacements.

Business owners are unwilling to make large up-front investments for replacing

Implement a programmatic Clean Development Mechanism Project (without the GEF / MLF components):

56. project cannot be implemented unless a number o f chillers are bundled together or using a programmatic approach. However, the project poses significant risks if it were to be implemented from C D M resources alone as follows: (i) there is little carbon finance intermediation capacity in India (ii) the r isks o f monetizing carbon revenues upfront are

Given the high transaction costs o f registering projects with the C D M EB, a

14

significant given the delivery risks and (iii) carbon finance revenues alone could not overcome the project and delivery risks.

111. IMPLEMENTATION

A. Partnership Arrangements

57. The CEEP i s designed on a financial partnership which includes three international financial instruments (GEF, MLF and CDM), and the Bank as an implementing agency o f the GEF and MLF and Trustee to the Spanish Carbon Fund. This financial partnership model i s consistent with the GEF-4 Strategy for Climate Change, as wel l as decision made by the Parties at the 20th Anniversary o f the Montreal Protocol, and could serve as an innovative financial arrangement models for future climate related projects.

58. per unit transaction costs involved in a carbon finance operation, thereby allowing many small individual entities to access the carbon market which otherwise would not be possible. The involvement o f an FI wil l also provide demonstration benefits to the financial sector in India that energy efficiency can be a good business opportunity for future lending portfolios. IDBI Bank will coordinate with MoEF for some o f the public awareness activities and monitoring o f the environment management activities, as defined in the Environmental Management Plan (EMP).

The CEEP is innovative in i t s approach involving the use o f an FI to reduce the

B. Institutional and Implementation Arrangements

59. mandate o f different agencies at the national level. The proposed involvement would be at the pol icy level to ensure that objectives and impact o f this project are in line with the national policies. The national institutional framework for CEEP includes the following:

Since the CEEP comes under the gamut o f both MP and KP, it falls under the

i) .

ii) .

iii).

The inter-ministerial Empowered Steering Committee o f the MP, chaired by Secretary, MoEF, which has been constituted at the national level to oversee the implementation o f India’s obligations under the MP; The Ozone Cell, which has the operational and administrative responsibility for India’s MP program and reports to the Secretary, MoEF. I t is responsible for the day-to-day operations o f the MP program, including promulgation o f relevant policies and implementation and monitoring o f investment and non- investment activities. The GEF Empowered Committee, chaired by Secretary, MoEF, hnctions as an empowered body to establish national priorities, approves and endorses project proposals before submission to GEF and facilitates implementation. I t includes members from thematic divisions o f MoEF, Department o f Economic Affairs (DEA) o f the Ministry o f Finance, BEE and Planning Commission and

15

coordinates positions among various ministries. The International Cooperation and Sustainable Development (IC) wi l l continue to play i t s role as focal point for GEF in India and act as the main interlocutor between GO1 and the GEF Secretariat on this project.

iv). The Bureau o f Energy Efficiency (BEE), which i s mandated through the Energy Conservation Act o f 2001 to implement the provisions o f the Act, and spearhead the improvement in energy efficiency o f the economy through various regulatory and promotional measures. BEE i s also responsible for integrating and coordinating the GEF program (Low carbon Programmatic Framework) into the GO1 national energy conservation and efficiency strategy, and coordinating the energy efficiency mission o f the National Action Plan o n Climate Change.

v). The Designated National Authority (DNA), which is housed within the MoEF, is mandated to provide approval for a l l C D M projects in India. According to the modalities o f the KP, the DNA ensures that project entities participate in the C D M on a voluntary basis and that projects are consistent with sustainable development objectives. I t will have to issue a Letter o f Approval (LOA) as part o f the validation o f the CEEP.

60. implementation and as such, i t will appoint a National Project Director (NPD). For its part, the Ozone Cell (OC) wil l support IDBI ’s efforts in marketing and outreach to the public sector, by helping update the inventory o f chillers in the public sector over the next few months, supporting the project launch workshop by sending special invitations to the public sector agencies and direct interventions as required. Indian Railways has expressed its interest in joining the program, and OC has also informed the Army about the advantages o f th is program, given the critical shortage o f new CFCs in the market. The OC wil l be the primary responsible authority for the final destructioddisposal o f old, contaminated CFCs, as a part o f its overall responsibility for ODS destruction under the MP. A grievance redressal mechanism wil l be established by MoEF, for any complaints or observations arising from project beneficiaries and stakeholders.

The MoEF will have the over-arching responsibility for monitoring o f the project

61. internal coordinating mechanism at the project initiation workshop, whose main functions wil l be to advise on project implementation and approve annual work plans prepared by the FI, including, expected expenditures.

Whi le the OC will have monitoring responsibility, the MoEF wil l establish an

62. At the implementation level, IDBI Bank will be responsible for day-to-day operations o f the project including market development, marketing o f the incentive program, sub-project implementation, management and disbursement o f the overall project funds, reporting and auditing. To carry out these responsibilities, IDBI Bank will establish a Project Management Unit (PMU), which wil l also prepare annual work plans. In exchange for i t s services, IDBI Bank will receive a management fee to cover i t s administrative and management costs. I t wil l also be responsible for carrying out al l technical assistance activities, for which it wil l collaborate with relevant stakeholders and authorities, including the Ozone Cell. IDBI Bank will maintain separate special accounts

16

for the three fund streams and wil l institute a Financial Management Information System (FMIS) to track project expenditures and disbursements made from these respective accounts. IDBI will also consult with MOEF on a l l matters related to the C D M as required.

63. funds from the MLF and GEF to India. A Project Agreement wil l be signed between the World Bank and IDBI Bank to engage them as an executing agency for this project. IDBI Bank will also enter into an Emission Reduction Purchase Agreement (ERPA) with the World Bank as Trustee to the Spanish Carbon Fund, which has provided some financing to prepare the C D M project and already indicated the intent to purchase one mi l l ion tonnes o f certified emission reductions from the project.

The World Bank will enter into Grant Agreements with the MoEF to channel

64. The CEEP will rely on chiller manufacturershppliers and energy service companies as its major marketing force to promote chiller replacement and IDBI Bank wil l enter into agreements in the form o f a Memorandum o f Understanding (MOU) with them. Sub-grant agreements or Emission Reduction Transfer Agreements (ERTA) wil l be signed between chiller owners and IDBI Bank to describe terms and conditions including the level o f funding, disbursement schedules, transfer o f certified emission reduction rights, and obligations o f chiller owners pertaining to this project. To meet the MM&V requirements, IDBI Bank will contract a technical consulting firm to undertake project monitoring at the chiller level. This monitoring approach will rely on remote technology which wil l allow real-time monitoring o f chiller performance and also on annual physical verifications.

C. Monitoring and Evaluation o f Outcome/Results

65. level and program level. At the project level, a system will be established for measuring energy consumption o f baseline equipment and o f new equipment and for monitoring performance o f new chillers using performance parameters such as flow rate o f chilled water, inlet and outlet temperatures o f chilled water, inlet temperature o f condensing water, electricity input, etc. Data loggers and transmitters will be installed for collection o f continuous data and an M I S wil l be developed for storing and processing al l data generated by data loggers. Appropriate software wil l be developed to analyze relevant data and to determine actual energy savings and emission reduction will be developed. This software wil l generate al l the technical reports summarizing performance o f each individual chillers and performance o f the overall program. Additionally, as required by the C D M process, verification o f emission reductions will be done on an annual basis and audited by a third party auditor (DOE), which is a requirement for the project to claim for CER payments o f certified emission reductions (CERs). The DOE will then submit the annual verification report to the C D M Executive Board ( C D M EB), which will then issue the CERs.

Monitoring and evaluation will be undertaken at two levels: the project activity

66. At the program level, the monitoring indicators defined in Annex 3 are designed to accurately capture the focus o f the project including the number o f inefficient chillers

17

replaced by the project, sustainability o f energy savings from new efficient chillers, and continuing and increasing participation o f owners o f large building and industrial facilities in energy conservation activities. IDBI Bank will hire a qualified energy service or audit company to support the measurement, monitoring and verification exercise which wil l undertake technical inspection including power measurements o f baseline and new units, and subsequent inspections, if needed, f rom time to time until 2013 for the purpose o f verifying actual energy savings o f new chillers.

67. project implementation database or M I S to be developed by the project and from annual carbon emission verification reports prepared by independent auditors (DOES). In addition, the data for t r a c l n g implementation progress o f each project component would also be drawn from progress reports to be prepared by the PMU.

The data used for determining the value o f indicators will come from the main

68. Monitoring and Supervision: The M o E F will monitor the project implementation through an institutionalized system o f regular meetings, reporting formats and reporting schedules. The World Bank supervision wil l include field visits to current and prospective participants, and discussion with relevant stakeholders (manufacturers, owners etc) Government agencies and IDBI Bank. Supervision missions, which will be undertaken in collaboration with MoEF and IDBI Bank, wil l monitor subproject implementation, compliance with environmental and safety standards and training, and evaluation o f project performance according to established indicators. The Bank will also review progresdaudit, and subproject appraisal reports to assess and evaluate the overall progress in implementing national CFC phase-out and carbon emission reduction. The MoEF wil l organize regular PSC meetings to assess project implementation, provide appropriate feedback and make necessary decisions, as required.

69. during the missions. During the mid-term review which wil l be undertaken after year 2 (when grant hnding has been exhausted), the project financial flows wil l be revisited to assess whether non-CFC chillers and other types o f chillers can be included into the program.

The feedback from the grievance handling mechanism wil l also be reviewed

D. Sustainability and Replicability

70. Project ownership, an underpinning factor o f sustainability, and commitment at the country level i s already evidenced in part by the country ratification o f both the MP and the Kyoto Protocols and the compliance with the scheduled obligations with regard to CFC phase-out. The CEEP provides fundamental support towards GoI’s CFC phase- out strategy and the recent decision to cease production o f CFCs by August 1,2008. The stringent national regulatory and fiscal fkamework on ODs, already established by GOI, provide the overarching environment for sustainable project implementation.

71. The project design incorporates an incentive program to ensure the ongoing commitment o f chiller manufacturers, suppliers and owners. Additionally, since the chiller owners will be responsible for about 80% o f the capital cost, i t i s expected that

18

such a significant financial stake will further ensure their commitment, in particular since the investment can be recovered relatively fast if the energy efficiency is realized. Although chiller manufacturers and ESCOs in a country experiencing high economic growth such as India typically focus on the potential sale o f chillers in new commercial and industrial buildings, the project envisages the provision o f an incentive in the form o f a payment o f US$O.S/tC02e per annum for eligible chil lers for the period o f validity o f the ERPA, estimated to be until 2013. This incentive will ensure that manufacturers and ESCOs also focus on retrofitting existing buildings with more efficient chillers before end o f technical life.

72. which require CFCs and which are less energy efficient by design. The CEEP will necessitate the removal and destruction o f the main component o f the o ld CFC-based chiller to ensure there i s no re-use o f the old equipment and thereby no re-emergence o f demand for virgin CFCs. This destruction wil l be verified by GO1 accredited chartered engineers. The combination o f adequate institutional and regulatory capabilities, increased public awareness and understanding, and active and informed chiller owners wil l ensure project sustainability.

Sustainability in this project signifies no “backsliding” to the use o f equipment

73. energy efficiency specification^'^. In addition, they wil l be equipped with basic data loggers which wil l automatically monitor their performance, as this is a critical requirement for calculating the carbon emission reduction credits. Through MOUs, the CEEP will also encourage al l chiller manufacturers and ESCOs to grant service maintenance contracts with their clients during the project implementation period, a l l participants wil l be informed o f the energy savings gained by new chillers, which, in fact, are much higher14 than the subsidy or C D M revenues provided by the CEEP. Energy efficiency gains from the new chillers are therefore substantial and sustainable.

The project design requires that the new chillers which will be procured will meet

74. replicates the GEF and MP components to encourage additional chiller replacements. The sustainability o f the project and market transformation is highly dependent on carbon finance revenues, which can only be assured through registration o f the project with the C D M EB. In the event that the project fails to attain registration, i t wil l seek to se l l verified emission reductions (VERs) in a number o f emerging cap-and-trade systems in Australia, Canada, Japan and the United States. The sale o f VERs would enable the project to implement the revolving fund concept and achieve Project Development Objectives.

The CEEP has an inherent replication modality, given that the C D M component

l3 (i) Existing chillers (all refrigerants expect HCFC-123) with cooling capacity o f 100 TR and above to b e replaced with new non-CFC o r non-HCFC22 chdlers with energy consumption o f no t more than 0.63 kW/TR at the manufacturer’s rated capacity are eligible (ii) chillers to be replaced must b e currently be in use and located in India (iii) chillers must have been installed after 1993 and (iv) rated capacity o f new chillers must be within 5% o f baseline capacity l4 The simple payback period for an individual chil ler owner comes to 2.7 years without the inclusion o f carbon revenues.

19

E. Environment

75. improper management o f o ld chillers at the time o f servicing and decommissioning or leakages from poorly maintained chillers can result in emissions o f ODS based refrigerants, which have the following impact on the global environment:

Whi le h c t i o n i n g chillers have a very l imited impact o n the environment,

i) . ii) .

iii).

Depletion o f the ozone layer through emissions o f ODs. Adverse impact on global climate through emissions o f fugitive refrigerants with high GWPs. Consumption o f large amounts o f energy and associated emissions o f GHGs by old poorly functioning chillers.

.

76. Additionally, in an indirect manner, the energy required to run a chiller during its lifetime can result in creation o f pollutants such as particulate matter, Nitrous and sulfur oxides (NOx, Sox), carbon monoxide, lead, airborne toxic chemicals, and ground level ozone. Health r isks from these pollutants include lung cancer, chronic pulmonary disease, pulmonary heart disease, and bronchitis, which are leading causes o f sickness and death in developing countries. These pollutants also cause economic damage to buildings and environmental and economic damage to vegetation, animals, and natural resources.

77. Management Plan (EMP) to address the potential environmental risks associated with the replacement o f o ld CFC-based chiller systems. To mitigate the adverse impacts o f chiller replacement, the fol lowing components and mitigation measures have been identified in the EMP:

The CEEP i s classified as a Category B” and has developed an Environmental

78. international safety standards for the installation o f new chillersI6. This standard is directed towards safety o f persons and property on or near the premises where refrigeration facilities are located.

(i) Installation of non-CFC chillers: Chiller suppliers are required to abide by

79. prepare an Equipment Destruction and Disposal Plan to ensure that existing CFC chillers, particularly compressors, wil l be dismantled and rendered unusable in an environmentally sound manner. Installation, testing, operations and maintenance o f new non-CFC chillers, and disposal o f baseline CFC equipment and systems must strictly follow internationally recognized procedures and practice^.'^ The Plan must also l i s t any components to be retained as spare parts for servicing remaining CFC chillers within the same buildings, and those to be sold as scrap. As per the methodology approved by the C D M EB, the destruction must be witnessed, photographed and certified by an independent third party (chartered engineers). Destruction o f key components (i.e,,

(ii) Disposal o f the baseline equipment: All project beneficiaries have to

The World Bank’s Environmental Assessment policy and recommended processing are described in 15

Operational Policy (OP)/Bank Procedure (BP) 4.01 : Environmental Assessment. l6 ANSVASHRAE 15-1994 Safety Code for Mechanical Refhgeration ” ASHR4E Guideline 3 - “Reducing Emission of Halogenated Refrigerants in Refrigeration and Air Conditioning Equipment and Systems”.

20

compressors) must be done not later than successful commissioning o f new non-CFC chillers. After commissioning o f new non-CFC chillers is completed, a final report on the equipment destruction must be provided by beneficiaries or by suppliers (on behalf o f beneficiaries) to IDBI.

80. The recovery o f refrigerants must be undertaken by a certified technician, using a recovery and recycling machine and the process o f recovery o f refrigerant gas fiom retiring chillers needs to be witnessed and certified. Typically, refrigerants recovered from o ld chillers would be contaminated and therefore, these would need to be reclaimed or re-used. The EMP suggests that beneficiaries can seek the assistance o f GOI's National CFC Consumption Phase-out program (NCCoPP), being implemented by GTZ, in this regard. If the recovered CFCs need to be banked under NCCoPP, appropriate system for recording and reporting must be developed in consultation with the Ozone Cel l and the GTZ. A s per the Ozone Rules, a l l enterprises that stock or recycle recovered CFCs need to register with the Ozone Cell.

(iii) Recovery and Inventory of Refrigerant from the Decommissioned Units:

8 1. be recorded to ensure that the recovered refrigerant gases can be monitored and tracked. The purpose o f the proposed inventory i s to track future movements and utilization o f these gases, and to ensure that they are not intentionally vented into the atmosphere. The chiller owners have the options o f storing the recovered CFCs to service their existing stock o f CFC-based chillers. They also have the option o f selling or handing over al l recovered CFCs to chiller manufacturershppliers at any time'*. The methodology (referred above) requires that the recovered refrigerant is stored in suitable containers within suitable premises. Project participants (or chiller suppliers) will develop and maintain an inventory o f recovered CFCs. This inventory should be maintained throughout the monitoring period o f the sub-project and be available for inspection by IDBI Bank or the Ozone Cell.

The quantity o f CFCs recovered f i om retiring/decommissioned chiller units must

82. wil l need to be destroyed in an environmentally sound manner. As per the C D M methodology, destruction has to be undertaken by a method approved under Go1 regulations and/or pursuant to international treaties signed by India under Montreal, Kyoto or other Protocol that may apply in the future. However, the 1 8'h Meeting o f the Parties to the MP, held in October 2008, decided to provide financial and technical support to eligible countries for ODS stockpile destruction. Depending on the volume o f stockpile by the end o f 2009, based on inventory f rom this project and other ODS phaseout programs, the Ozone Cell will decide on the destruction modalities. The ultimate responsibility for the destruction o f the CFC inventory will be the Ozone Cell. However, since this technology is currently not available domestically, this issue wil l be revisited during the Mid-Term Review o f the CEEP

(iv) Destruction of CFCs: Typically at the end o f their useful lifetime, CFCs

'* As per the Ozone Rules, sale o f recovered o r recycled CFCs can be sold by registered sellers. Registration can be obtained from the Ozone Cell, MoEF.

21

83. GO1 i s committed to the following:

i). Establishment o f a domestic incineratioddestruction facility, if and when, appropriate funding from the Multilateral Fund i s approved.

ii). If option 1 does not materialize, review environmentally sound (acceptable by international standards) alternative options, for the destruction o f ODs, such as retrofitting o f existing cement kilns.

iii). A s a last option, export the contaminated CFCs for destruction (not re-use) to countries which own the appropriate technology, after obtaining al l necessary international clearances.

F. Critical Risks and Possible Controversial Aspects

84. There i s an intrinsic risk that the demand for the program may not be as high as anticipated and chiller owners may delay chiller replacement decisions, thereby reducing the number o f chillers being replaced by the program and i t s overall success. There are risks associated with the l ow to moderate uptake o f energy efficiency measures despite high rates o f return in some sectors, which may be more pronounced during the global financial crisis. The Technical Assistance component aims at informing chiller owners and general public o f energy savings potential from chiller replacements and the financial and technical problems associated with lack o f new CFCs for servicing purposes in the domestic market. The financial analysis tool, developed in cooperation with U S EPA, will demonstrate financial benefits o f chiller replacements. The CEEP intends to utilize MOEF support for attracting the public sector into the project.

85. In accordance with the mandated requirements o f the MP, and the methodology approved by the C D M EB, old, contaminated CFCs and ODS refrigerants need to be disposed /destroyed in an environmentally sound manner at the end o f their useful life. Since the existing technology is not available in India, there could be a moderate risk o f non-compliance in this regard. To ensure that there i s no i l l ic i t venting and/or resale o f old refrigerants, the project requires that these be extracted and stored appropriately and inventoried. The ultimate destruction o f this inventory i s the responsibility o f the GOI, which has committed to establishing a destruction facility, if appropriate funding is received under the MLF. If the funding fails to materialize, the GO1 wil l review alternative options such retrofitting o ld cement ki lns to operate as destruction facilities or exporting the old CFCs to countries which have destruction facilities.

86. issuance risk, as evident by the current backlog o f projects seeking registration and number o f reviews by the C D M EB at the CER issuance stage. Should the project fai l to be registered by the C D M EB, the number o f chillers replaced would drop to 2 15, which means that the project will not achieve market transformation. However, this r i sk i s mitigated by the emergence o f the voluntary carbon market, independent o f the Kyoto Protocol, and a number o f regional cap-and-trade systems which may allow the introduction o f verified emission reductions. In this project, the impact o f non-

On the carbon finance component, the CEEP poses a registration and CER

22

registration o n project outcomes would likely be fel t only by mid 2010, as the GEF and MLF components do not depend on C D M registration.

87. competent MM&V consultant and undergoing a satisfactory procurement process. Consultations with BEE and with chiller manufacturers and ESCOs have helped in identifying competent MM&V consultancy f i rms. Strict adherence to World Bank's Procurement Guidelines for hiring MM&V Consultancy and frequent monitoring will reduce the risk o f inappropriate procurement practices.

The CEEP retains a moderate risk o f identifying a technically sound and

88. The use o f alternative refrigerants - HFC-134a" and HCFC-12320 - in replacement chillers could pose an interesting dilemma that could evoke controversy if not wel l understood. While HFC-134a has a lower ODP2', but i s a GHG under the KP due to its GWP, it is considered a good alternative refrigerant that offers the advantage o f early movement away f rom CFC-based technology with associated positive impacts, including increased energy efficiency and reduced hazards (reduction o f use o f poisonous or flammable/explosive gases). A jo int working group o f technical experts (KP and MP) examined this issue and recommended that the use o f HFC-134a be supported by the MLF because the benefits far outweigh the small, but s t i l l negative contribution, to global warming. Furthermore, the new chillers using this refrigerant are much more robust and refrigerant losses have been drastically reduced.

89. the Meeting o f the Parties o f the MP decided to bring-forward the phase-out schedule o f HCFCs, in'order to synergize efforts on reducing GHGs as required under the KP. Developing countries are now mandated to phase-out consumption and production by 2030. Therefore replacement chillers using HCFCs can be procured now, and given that the useful service l i f e o f chillers i s about 20-25 years, this wil l not incur any imminent financial hardship for the owner. This project therefore i s not a pol icy invoking instrument and thus respects the full range o f technical options that are in compliance with international requirements. If technology emerges to replace HCFC-based chillers with more environmentally-friendly alternatives, these are likely to be eligible for the program, provided they can also meet the energy efficiency criteria.

HCFCs (such as HCFC-123) are a controlled substance under the MP. In 2007,

l9 Hydrofluorocarbon (1,1,1,2-Tetrafluoroethane) i s an inert gas, similar to CFC-12, but with a lower ODP, used '' Hydorchlorofluorocarbon (2,2-Dichloro-l,1 ,l-trifluoroethane) i s considered as an alternative to CFC-1 lin low pressure RAC systems, with a lower ODP. '' The ozone depletion potential (ODP) of a substance i s the ratio o f the impact on ozone o f a chemical compared to the impact of a similar mass o f CFC-11, which has an ODP o f 1 .O.

rimarily as a "high-temperature" refrigerant for domestic refrigeration and automobile air conditioners.

23

I

~ Risk factors Dewription of risk

loperation-specif ic R i s k s

Rariffl;t' of Raringa of Mitigarion mrasures re\idual

risk risk

o f chil ler owners

cooperation by chil ler manufacturers/ energy services companies to participate in the project

Risk o f non- registration o r significant delays in registration o f project with CDM EB

cooperation o n data collection, which would result in diff iculties in

Chiller owners may continue t o delay chil ler replacement as they are no t aware o f the full benefits o f chil ler replacements and the upcoming CFC production phase-out, and implications to their operations, o r because o f competit ion for other investments.

Replacement markets have been considered as l o w priori ty for suppliers o f chillers, who prefer t o focus o n the lucrative sale o f chillers to n e w buildings

Sustainability o f the CEEP i s dependent o n the successful registration with CDM EB, which has yet to approve any programmatic approaches. Delays in registration are common, i.e. average time for project registration i s more than one year after commencement o f validation In particular for those chiller owners that opt to get an upfront incentive to replace a chiller before end o f life, it may b e dif f icult

loderate

,owl loderate

4oderate

loderate

Aggressive campaign by the Ozone Cel l t o i n fo rm the public o f cessation o f CFC production by 1 August 2008 and ban o n imports, resulting in n o virgin CFCs in domestic market for servicing purposes.

Enhancing information and awareness o f energy savings potential f r o m chil ler replacements through on-going discussions and marketing workshops. A financial analysis too l t o demonstrate the financial benefits o f chil ler replacement has been developed in cooperation with U S EPA. Th is will be used as a too l t o inform chil ler owners. The CEEP intends to uti l ize MOEF support for attracting the public sector into the project. Project design includes chil ler suppliers' performance based incentive program which has been developed in close collaboration with a l l chil ler manufacturers and energy service companies.

MOUs between the F I and chil ler suppliers and energy service companies defining the scope o f cooperation and relevant incentives wil l be signed before signing o f the Grant Agreement. The r isk i s mitigated by the fact that (i) a methodology for this project was approved by the CDM EB in November 2007 (ii) a validator has already been hired, and i s ready to undertake a f ie ld visi t (iii) project did not anticipate registration until mid 2009 (iv) moderate impacts o n project outcomes may occur if project i s not registered by mid-201 0, increasing thereafter

CEEP will pay for the cost and installation o f a data logger for a sample o f the chillers as determined by the approved CDM methodology, and a consultancy wil l b e hired to coordinate the monitoring o f the results. Chil ler manufacturers will b e encouraged to sign service contracts with

Moderate

L o w

Moderate

Low

24

emission reductions

L imi ted manufacturing capacity

Performance o f new chillers no t sustainable.

Financial management

Procurement

Dmriptiun of risk

until 2013 as required in order to create carbon assets. F o r the project t o achieve i t s goal, a large percentage o f n e w chillers wou ld have to b e installed during the first 3 years o f the project implementation. Exist ing manufacturing capacity o f chil ler manufactures m a y not be able to respond to the project demand. Performance and energy savings depend no t only o n the technology but also the quality o f the maintenance.

Inadequate financial staff or financial management systems m a y affect the abi l i ty o f the implementing agency to properly account for and report o n project resources and expenditures particularly when funding i s f r o m three different sources.

Procurement o f MM&V consultancy and equipment by the FI and procurement o f chillers by project participants may have transparency issues or may have delays, which will then impact project sustainability

.ow

doderate

>ow

doderate

Mitigatiorr measures

chil ler owners, which w i l l al low them access to fix any data logging issue that m a y arise. Proposed replacement schedule has been reviewed and c o n f i i e d by chil ler suppliers and energy service companies.

CEEP encourages chil ler owners to acquire maintenance contracts for their new chillers f r o m equipment suppliers o r through energy service companies.

On-line monitoring program, through data loggers and transmitters, wil l provide real- t ime perfonnance o f new chillers. This information will be made available to chil ler owners. IDBI Bank has been engaged in the existing W o r l d Bank ODS phase-out projects, which have typically required strong financial management systems but l i t t le technical input. For t h i s project, IDBI has already assigned an additional f inancial staff during project preparation. Whi le the systems are functioning we l l as o f now, appropriate audit arrangements as per the TOR agreed with the W o r l d Bank wil l provide assurance o n the adequacy o f FM systems at a l l times. Also, the management letter to b e issued by the auditor (as per TOR) should po int out any internal control weaknesses. The TOR for the audit wil l b e agreed with the client during negotiations. The transparency issue wil l be dealt with by asking the FI and project beneficiaries to make necessary advertisement in the widely published National D a i l y News paper for inviting bid and award o f Contract - debriefing in the news paper and their web site. The FI wil l monitor the delay o f the beneficiaries and report t o the bank for remedial action if any required. Since the FI will fo l low the Bank's Procurement Guidelines for hiring MM&V

25

Low

L o w

L o w

M o d era t e

Social and environmental

Once the GEF and High MLF funds are fully exhausted, continuity o f later year the project wil l b e subject to generation o f project) additional funds from carbon finance, based on carbon emission reduction. Therefore the r i sk on account o f funds f low for the later years may be high.

(in the

o f the

There are no apparent Low/ r i sks arising out o f the socio-cultural and political contextual setting. The CEEP will not involve any resettlement or land acquisition or loss o f employment. Environmental r i sks associated to this project relate to proper handling o f CFCs removed from the retired equipment and installation o f new chillers to min imize leakage and to avoid any occupational health risks.

Moderate

Mitigatkn measures .

Consultancy and equipment contract, it w i l l be monitored by the bank through supervision mission and or through a periodical progress report submitted by FI. The task team wil l ensure the implementation o f stringent technical monitoring mechanism o f the chillers already replaced for continuous generation o f funds through carbon finance for replacement o f additional chillers and making payments for other agreed expenditure throughout the l i f e o f the project. An assessment w i l l be undertaken, within two years o f project implementation, when grant funds are nearing exhaustion, to review how to expand the scope o f the program to non-centrifugal and non-CFC based old chillers Environment Management Plan defines the appropriate guidelines o f American Society o f Heating, Refrigeration, and Air- conditioning Engineers (or an equivalent local system) which need to be complied. The EMP also defines the verification mechanism for the project to ensure that chillers replacement i s being undertaken in a safe and environmentally sound manner. Consultations were undertaken with chiller manufacturers and owners with regard to the EMP requirements and these requirements w i l l b e included into the legal documents to be signed with al l project participants.

Moderate to high

Overall Risk Overall r isk for the CEEP i s rated as “Lowh4oderate”for the following reasons: The advanced and thorough project preparation in areas o f technicaydesign issues and procurement and prolonged periods o f consultation wi th key project participants.

1. The regulatory measures and GOI’s commitments to the global environment treaties that are directly support chil lers replacement as well as financial incentives for the CFC production sector are already in place. The design o f the project includes key activities to strengthen technical capacity and project management capacity o f the implementing agency and technical assistance activities to generate public awareness and increase participation o f chiller owners. The project’s integral contribution to the global environmental objectives - ozone layer protection and energy efficiency and climate change - in India.

2.

3.

a Rating of r isks on a four-point scale - High, Substantial, Moderate, Low - according to the likelihood o f occurrence and magnitude o f potential adverse impact.

Low

Low/ Moderate

26

F. Loadcredit Conditions and Covenants

91. Effectiveness Conditions.

0

Execution and delivery o f GEF and OTF Grant Agreements, and Project Agreement, and provision o f a legal opinion on both Grant Agreements and Project Agreement. Finalization o f a Project Implementation Manual (PIM) acceptable to the World Bank, giving details o f guidelines and procedures agreed with the World Bank for the implementation, supervision and monitoring/evaluation o f the project, including procedures for the identification and selection o f beneficiaries o f financial incentives, and terms and conditions governing approval o f subprojects and award o f financial incentives, and details o f the Governance and Accountability Plan.

92. Legal Covenants:

0 Compliance with the Environmental Management Plan, and collection and compilation o f reports on status o f compliance with the EMP for submission to the World Bank on a six-monthly basis reports. Compliance with standard reporting and financial management and audit requirements Establishment and maintenance o f a Project Management Unit, with terms o f reference, membership and composition acceptable to the World Bank, to be responsible for day-to-day implementation. Recruitment o f a consultant firm or appropriate institutional arrangement to develop and maintain a management information system to collect and process data generated from the individual chiller replacement activities, using it as a tool to generate al l required technical reports, and to estimate CERs prior to third party verification and subsequent submission to the C D M EB for certification.

0

0

IV. APPRAISAL SUMMARY

A. Economic and Financial Analyses

93. The CEEP contributes to local and global public good by reducing the emissions o f ODs, GHGs, and other polluting gases such as nitrous oxides (NOx), carbon monoxide (CO) and sulfur oxides (Sox). Typical economic analyses are thus difficult and problematic at best as current methodologies do not capture the conservation o f global public goods or reduction o f local pollutants. In particular, there i s a lack o f reliable baseline and quantifiable data related to the value o f human health and impacts o f climate change on livelihoods o f Indian population. Hence, the analysis that follows will not attempt to quantify in economic terms al l o f the associated environmental benefits.

94. benefits associated with the adoption o f newer, more energy-efficient chillers. Over the

However, the most readily measurable benefits for the project are the economic

27

course o f the project, the energy savings will account for more than 3.978 mi l l ion MWh worth roughly US$398 mi l l ion (undiscounted) over 20 years o f the chiller lifetime. In addition, the demand reduction attributable to this project amounts to approximately 48 MW, saving the electric utilities roughly US$60 mi l l ion in current dollars. In undiscounted terms, the energy and demand savings o f the project come to approximately US$488 m against costs o f US$70.9 mi l l ion over the 20 year lifespan o f the newer, replacement chillers. At 10% discount rate, the NPV o f the project based solely upon energy savings and capacity reduction comes to approximately US$152.60 mi l l ion with an EIRR o f 68%. These calculations are summarized in Annex 9 on Financial and Economic Analysis and Annex 13 on incremental costs.

95. energy conservation-based estimates, although the carbon price has severe limitations given the carbon market is emerging and not yet fully liquid. Inclusion o f these revenues until 2014 would increase the EIRR to 71%.

In addition, the carbon revenue at the price o f US$12/tCOze can be added tothese

96. utilized by most private sector entities in India. Chiller owners demonstrate discount rates as high as 30%, as the alternative uses for their scarce capital resources bring high returns. Nevertheless, the simple payback period for an individual chiller owner comes to 3.3 years, the NPV equals US$33.6 thousand and the Internal rate o f Return (IRR) equals 30% over 20 years, without inclusion o f any carbon revenue.

From a private perspective, the CEEP barely meets the stringent payback criteria

97. (MLF, GEF, and CDM), technical and administrative expenses, and the proposed subsidies for early replacement o f chillers, i s provided in Annex 9. The analysis indicates that the proposed project i s financially viable.

A financial analysis o f the CEEP taking into account the three sources o f funds

98. analysis, there are unquantifiable benefits associated with the accelerated phase-out o f chillers using CFC’s. The 370 chillers to be replaced through this project will account for a reduction in the demand for CFC’s o f approximately 159 m t over the project lifetime.

Beyond the quantifiable economic and financial values associated with the above

B. Technical

99. years, namely a vapor-compression cycle, the requirements o f the MP and also an increased focus on energy efficiency standards, the technology for centrifugal chillers has made significant strides in reducing potential for leakage and in improving i t s energy efficiency performance, resulting in an improvement o f more than 30% in less than 20 years. The proposed technology is, therefore, state-of-the art and well proven with thousands o f existing installations globally. Consequently, there are no significant technical issues with the proposed technology, but there will be numerous technical issues associated with each replacement activity. These will be addressed as part o f

The basic technology utilized by chiller systems has been the same for over 50

28

project implementation as they are typical issues related to equipment replacement and facilities management and through service contracts with manufacturers and ESCOs.

C. Fiduciary

Financial Management:

100. IDBI Bank will maintain three segregated designated bank accounts for the different sources o f funds - GEF, MLF and CDM. These bank accounts will be current accounts and adequate amounts based on efficient forecasting will be placed in short term or long term fixed deposits with the objective to maximize the funds without affecting their flow for the project activities and interest earned wil l be ploughed back in to the respected sources o f hnds to be used for related project activities. These bank accounts (current as well as fixed deposits) will be maintained with the banking and commercial wing o f IDBI Bank. The Head, Structuring Syndication and Advisory Department ( S S A D ) team, o f the IDBI Bank will have the overall responsibility for recording the utilization o f the grant.

101. the overall monitoring o f the Bank’s Task Team as detailed below:

IDBI Bank will use GEF, MLF and C D M funds for the eligible activities, under

Source o f

Funding Eligible activities

GEF

Subsidy for chiller

0 Technical

Project management

replacement

assistance22

unit expenses (including management fees)

Table 4.1 MLF

Subsidy for chiller

0 Technical assistance Project management

replacement

unit expenses (including management fees) Monitoring & verification expenses

CDM

Subsidy for chiller

0 Technical assistance 0 Project management

replacement

unit expenses (including management fees)

verification expenses

chiller owners for those that have opted for the carbon finance option

0 Monitoring &

0 Annual payment to

102. subsidy or through annual payments against certified emission reductions through standard commercial banking practice. Project participants are not required to have a commercial or other bank account with IDBI Bank, unless they take a commercial loan,

IDBI Bank will facilitate payments to chiller owners either for a one-time 20%

The TA expenditures incurred by OC, MoEF, will be reimbursed by IDBI Bank in accordance with 22

approval from World Bank

29

in which case they will have to open current /no-lien account with IDBI Bank as per prevailing terms o f financial assistance, for better monitoring.

103. Bank (not through GOI’s CAAA23). The carbon finance funds will f low directly from the Carbon Finance Unit o f the Bank (as Trustee to the Spanish Carbon Fund) to IDBI Bank. IDBI Bank shall maintain the local currency (in INR) segregated designated bank accounts that will be used to deposit advances and to make payments for eligible project expenditures.

The funds from GEF and MLF sources will f low from the Wor ld Bank to IDBI

Disbursement Advance

Later Disbursement S

GEF Forecast o f

estimated expenses for two quarters.

The later disbursement to IDBI Bank will be based on quarterly interim financial reports for the expenditure incurred during a quarter to be

Table 4.2 MLF

Forecast o f estimated expenses for two quarters.

The later disbursement to IDBI Bank will be based on quarterly interim financial reports for the expenditure incurred during a quarter to be submitted to the Bank; along with forecast o f estimated expenses

CDM Carbon finance will make advance payment up to 25% o f total ERPA value under the following conditions: 1 .The chiller replacement has progressed in accordance with the implementation schedule; 2. Funding from GEF and MLF has been exhausted by 75%, evidenced by disbursement o f subsidy grant from the project entity’s special account for the funding pool; and 3.The revenue generated from the payment for the delivered contract carbon emission reductions (CERs) i s not sufficient to replenish the Funding Pool due to delay in CER issuance On annual basis, an independent verification team as accredited by the C D M EB will be contracted by the World Bank’s Carbon Finance Unit to verify emission reduction achieved by the project. Upon receipt o f the final verification report from the DOE, IDBI Bank will submit the verification report along with a request for payment directly to the Carbon Finance Unit. Thereafter, funding from

23 Controller o f Accounts Audit and Aid

30

quarters.

Disbursement GEF MLF CDM submitted to for the next two the Spanish Carbon Trust Fund

will be made available on the basis o f carbon emission reduction achieved upon issuance o f CERs from the C D M EB.

104. The overall financial management (FM) r i sk profile o f the arrangements associated with the administration and use o f the GEF and MLF grant funds i s low because of: (i) the appropriate accounting arrangements already in place at IDBI Bank; and (ii) the appropriate external audit arrangements to be put in place as per World Bank procedures and agreed TOR. The FM aspects o f these funds o f the project would be subject to the World Bank’s normal supervision procedures.

105. with initial carbon finance funding, the continuity o f the CEEP will be subject to generation o f additional funds from carbon finance based on CERs. The risk on account o f funds flow for the later years will therefore be high and the project will need to ensure stringent technical monitoring mechanism o f the chillers already replaced for continuous generation o f funds through carbon finance for replacement o f additional chillers and making payments for other agreed expenditure throughout the l i fe o f the project. As elaborated above, the World Bank’s FM role will be limited to desk review o f the audit report o f the project once GEF and MLF funds are fully exhausted; unless required otherwise for special reasons.

While the similar risk profile as for GEF and MLF funding may be associated

106. days o f the close o f each quarter will be included in the financing agreement. Administrative fee will be paid to IDBI on a quarterly basis, independent o f disbursement.

Covenants regarding audit and submission o f quarterly financial reports within 45

Procurement:

107. The major procurement o f goods and equipment would be the procurement o f chillers and data loggers and transmitters under Components 1 and 2. Procurement o f new chillers including installation, maintenance and performance guarantees (as required) shall be undertaken by the beneficiaries according to commercial practices (Clause 3.12 o f World Bank Procurement Guidelines). This i s recommended since chiller owners will typically value a long term service contract for technologies that require regular maintenance and refrigerant top-up such as chillers, and will not necessarily choose a chiller solely based on capital cost considerations. In addition, the project’s 20% upfront incentive i s dependent only on the refrigeration tonnage o f the existing chiller rather than the price, and buyers o f emissions reductions (second option available to chiller owners) usually do not get involved in procurement issues. In this case, each chiller owner will

31

select one or more chiller suppliers who can develop a sub-project(s) to optimize the beneficiary benefits and in l ine with the project requirements. Data loggers and transmitters shall be fully funded by the project and their procurement will be done by the MM&V consultant, contracted by IDBI Bank.

108. only be very small works and shall follow NCB/ Shopping procedures o f the World Bank based on the value and as agreed in the procurement plan.

Procurement o f works is not anticipated under the project, and if any, it would

109. Selection o f consultants would involve mainly the hiring o f consultants for Measurement, Monitoring and Verification (MM&V) for verification o f carbon emission reductions, which will likely also procure data loggers and transmitters, as well as consultants for workshops to be held for the purpose o f training and raising project awareness, as wel l as for marketing activities. Hiring o f consultant services will follow the World Bank Guidelines for Selection o f Consultants and standard Request for Proposals (RFP) documents. Shortlists o f consultants for services estimated to cost less than US$500,000 equivalent per contract may be comprise entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant guidelines.

110. An assessment o f the capacity o f IDBI Bank to implement the procurement arrangements was undertaken by the Bank and included (a) a review o f the organizational structure for implementing the project, and (b) interaction with the concerned procurement staff o f IDBI Bank. Most issues/ r isks concerning the procurement components have been identified in Annex 8.

D. Social

11 1. transformation through the upgrading o f equipment which will also result in elimination o f the demand o f CFCs in this sector. There are no apparent r isks arising out o f the socio-cultural and political contextual setting and, as a result, no need for an associated monitoring program in this regard. The CEEP will not involve any resettlement or land acquisition, and i s not expected to cause any adverse social impacts. There will be no loss o f employment due to replacement o f chillers. The project is expected to promote employment o f ESCOs which will indirectly result in the development o f local technical capacity and human resources for the chiller and energy service industries.

This i s a highly technical (capital funding) project, targeting a market

E. Environment

112. improper management o f old chillers at the time o f servicing and decommissioning or leakages from poorly maintained chillers can result in emissions o f ODS based refrigerants, which have the following impact on the global environment:

While functioning chillers do not have direct impacts on the environment,

32

i). Depletion o f the ozone layer through emissions o f ODs. ii). Adverse impact on global climate through emissions o f fugitive refrigerants with

high GWPs. iii). Consumption o f large amounts o f energy and associated emissions o f GHGs by

old poorly functioning chillers.

113. Additionally the energy required to run a chiller during i t s l i fet ime can result in creation o f pollutants such as particulate matter, nitrous and sulfur oxides VOX, Sox), carbon monoxide, lead, airborne toxic chemicals, and ground level ozone. Health r isks from these pollutants include lung cancer, chronic pulmonary disease, pulmonary heart disease, and bronchitis, which are leading causes o f sickness and death in developing countries. These pollutants also cause economic damage to buildings and environmental and economic damage to vegetation, animals, and natural resources.

114. The CEEP i s classified as a Category B, in accordance with World Bank’s Safeguard Operational Policies and has developed an Environmental Management Plan (EMP) to address the potential environmental r isks associated with the replacement o f o ld CFC-based chiller systems. With regard to safe handling o f refrigerants (CFCs and non- CFCs) and occupational health and safety o f technicians, the EMP requires that the project comply wi th the appropriate ASHRAE guidelines (or an equivalent local system), which relies on third party verification mechanism to ensure that chillers are replaced in an environmentally sound and safe manner. The EMP defines the requirements for maintaining an inventory o f the recovered CFCs (from decommissioned chillers). Given the lack o f technology at the present time, it has been agreed that a decision with regard to destruction o f the old CFCs will be taken during the mid-tern review o f the project.

1 15. were consulted on the general subject o f chiller replacement, including building owners, equipment suppliers, ESCOs, financial intermediaries, and relevant government authorities, including the Ozone Cell at the MOEF. As part o f the project and EMP preparation, consultations were undertaken with chiller manufacturers, chiller owners and ESCOs with regard to the EMP requirements. The EMP has been officially disclosed on the websites o f Ozone Cell and o f IDBI Bank.

In the course o f preparing the India chiller sector study, multiple stakeholders

F. Safeguard Policies

116. The CEEP triggers Operational Policy 4.01 on Environmental Assessment (EA). The key safeguard issues are related to proper installation o f new chillers and refrigerant management as described above. Mitigation measures are outlined in detail in Annex 10.

33

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [ I [XI Pest Management (OP 4.09) [ I [XI Physical Cultural Resources (OP/BP 4.1 1) [ I [XI Involuntary Resettlement (OP/BP 4.12) [ I [XI Indigenous Peoples (OP/BP 4.10) [ I [XI Forests (OPBP 4.36) [ I [XI Safety o f Dams (OP/BP 4.37) [ I [XI Projects in Disputed Areas (OPBP 7.60) [ I [XI Projects on International Waterways (OP/BP 7.50) [ I [XI

G. Policy Exceptions and Readiness

117. The CEEP will be ready for implementation as o f March 2009. The Project Implementation Plan (PIM) which includes a procurement plan, financial management plan and the institutional framework required for implementation o f this project has been put in place by IDBI Bank to enable implementation to commence immediately after project effectiveness. IDBI Bank has already established the PMU team, as defined in i t s staffing plan, and initiated the implementation o f the marketing strategy and discussions with chiller manufacturers who will assist in promoting the project among the current client base.

34

Annex 1: Country and Sector o r Program Background

India - Chiller Energy Efficiency Project

A. Country Background

1. India i s the sixth largest emitter o f GHGs in the world, and contributes some 4 % o f global GHG emissions. Importantly, India is both a low per capita emitter o f GHGs and a low carbon economy (its emissions intensity i s 20% below the world average). However, i t i s estimated that under a business as usual scenario, emissions will grow by a factor o f four to five by 2030 if India i s to meet its economic growth target o f 8%, which i s required to attain the Millenium Development objectives. In response, the GO1 has implemented a number o f initiatives to curb emissions o f GHGs, including efforts to maximize the generation o f energy fkom renewable sources. In the 1 1 th Five Year Plan (2008 - 2012), the Go1 plans to increase energy efficiency by 20 % by 2016-17 through the implementation o f a set o f energy efficiency interventions. Finally, energy efficiency i s the focus o f one o f eight missions identified in the National Action Plan on Climate Change issued in June 2008.

2. use in the economic process and set up the Bureau o f Energy Efficiency (BEE) as the statutory body with the primary objective to reduce energy intensity in the economy. BEE i s mandated to 'institutionalize' energy efficiency services, enable delivery mechanisms in the country and provide leadership to energy efficiency in all sectors o f the country. BEE has launched programs l ike a C D M based efficient lighting program for households, voluntary standards for energy efficiency in appliances and building codes, demand-side management initiatives, mandatory energy audits for energy-intensive industries, and the energy efficiency programs in small and medium enterprises (SMEs). The strategy i s to interweave the sectors with high energy efficiency potential and interventions into a comprehensive and integral program with deliverables defined in the short, medium and long term basis.

The Energy Conservation Act (2001) mandated the targeted reduction o f energy

3. In January 2008, the Go1 issued a notification bringing CERs within the purview o f Forward Contract (Regulation) Act, 1952 which governs forward contracts for goods. This landmark decision allows for the trading o f emission reductions as commodities. Based on this regulation, both the Multi Commodity Exchange o f India Ltd. and the National Commodity and Derivatives Exchange (NCDEX) launched carbon trading platforms. Over 3.lmil l ion CERs have been issued from 373 Indian projects registered with the C D M EB. In addition, India has received GEF support o f more than U S $ l 5 5 mi l l ion for the implementation o f 19 projects under the climate change focal area. These include a Programmatic Framework Project for Energy Efficiency in India, which was recently included in the GEF Work Program. This Chiller Energy Efficiency Project is part o f this Programmatic Framework.

35

4. Layer on 18 March 1991 and subsequently ratified the Montreal Protocol on Substances that Deplete the Ozone Layer and the London Amendment to the Montreal Protocol on 19 June 1992. Subsequent amendments to the Montreal Protocol including the Copenhagen Amendment, Montreal Amendment, and Beijing Amendment, were ratified on 3 March 2003. India also ratified the UN Framework Convention on Climate Change on 1 November 1993 and later ratified the Kyoto Protocol on 26 August 2002.

India ratified the Vienna Convention for the Protection o f the Stratospheric Ozone

5. The Go1 i s fully committed to meeting i t s obligations under the two treaties - Montreal and Kyoto Protocols. In that regard, i t has undertaken a number o f investment and non-investment activities to phase out the consumption and production o f ozone depleting substances and enabled the development o f a thriving carbon market mainly targeting private sector participants. So far, India’s Designated National Authority has approved more than one thousand C D M projects, o f which 468 have been registered by the C D M EB as o f January 11 , 2009. The vast majority o f the projects from India are from the private sector.

6. As o f 2007, India has phased out 46,38 1 ODP tomes o f ODS in end-use consumption sector (solvents, foams, aerosols, fire-extinguishing, and refrigeration and air-conditioning) and production sectors (CFC, CTC and halons). This was successfully achieved through the implementation o f about 300 projects, with a funding level o f US$230 mi l l ion from the MLF. The Go1 has ceased domestic production o f CFCs by August 1,2008 - 17 months ahead o f the MP requirement.

B. Sector Background

7. consumption (mostly CFCs) at the time o f India’s accession to the MP. The Go1 strategy for reducing CFC demand was straightforward: (i) to take immediate action to halt the accretion to the stock o f ODs-using equipment, i.e., to switch over to non-CFC- based refrigeration and air-conditioning equipment in the manufacturing sector; and (ii) to depend on normal attrition for the existing stock o f equipment to gradually be replaced with non-CFC equipment.

The refrigeration and air-conditioning sector accounted for roughly 20% o f ODS

8. Chiller application: Chiller-based cooling i s the predominant cooling method used in large commercial and industrial buildings and facilities. Chillers produce chilled water, or a waterhtifreeze mixture, which i s then pumped through a heat exchanger in an air handler or fan-coil unit for cooling and dehumidifying air. Heat removed from buildings i s then released into the environment through a cooling tower for water-cooled chillers or through fan-coil condensing units for air-cooled systems. Air conditioning for building comfort (NC comfort) is the predominant application, followed by air conditioning for industrial process purposes (NC process) where temperature and humidity control are critical requirements (e.g. textiles). There are some relatively few refhgeration applications in the large-chiller segment, with vapour-compression refrigeration cycle being the most widely used. Compression refrigeration chillers use mechanical energy

36

to cool the refhgerant. Common types o f compression chillers are centrifugal and positive displacement (the latter including reciprocating, screw, and scroll chillers). Compression rekgeration chillers are manufactured in capacities o f approximately 7 kW to over 35,000 kW. For a cooling load o f 300 tonnes o f refrigeration (TR)24 and above, centrifugal compressor chillers i s the most efficient technology.

Refrigerant25 ODP GWP26 CFC- 1 1 1 4,000

9. and CFC-12 refrigerant, both o f which are ozone depleting substances. Current chillers use replacement refrigerant, principally hydrochlorofluorocarbons (HCFCs) or hydrofluorocarbons (HFCs). HFCs do not release chlorine or bromine upon degradation, and consequently have an ODP o f zero. The ODP o f substances that do release chlorine or bromine upon degradation is the ratio o f i t s impact on the ozone layer to the impact o f a similar mass o f CFC-11 (the most common ODs), the ODP o f which is set at 1 .O as a benchmark. Most refrigerants have ODP that range from 0.01 to 1.0 (EPA 2002). GWP i s the ratio o f the global climate impact caused by a substance relative to a similar mass o f C02, the most common GHG, the GWP o f which i s set at 1 .O as the benchmark for other GWP values. The GWP o f HCFCs and HFCs range from 93 to 12,100. The following table presents the ODP and GWP for commonly used refrigerants.

Compression refrigeration chillers traditionally used chlorofluorocarbons CFC- 1 1

Formula CCl3F

- CFC- 1 13 0.8 5,000 C2F3Cl3 CFC- 1 14 1 9,300 C2F4C12 CFC-115 0.6 9,300 C2FsCl CFC-12 1 8,500 CC12F2

HCFC- 123 0.02 93 C2HF3C12 HCFC-22 0.055 1,700 CHF2C1 HFC-134a 0 1,300 C2H2F4

CH3CHF2 R-500 0.738 6,3 10

R-502 5,490

Source: U S EPA, 2002.

10. Chillers used in buildings are often the most significant single user o f energy in a large commercial building (1 5-20% o f total building energy use for buildings with water- cooled centrifugal chillers). This energy use i s either direct or use o f electricity, which i s

24 One ton of rekgeration i s equivalent to 12,000 BTUh (British T h e d l Units per hour). 25 When any of these substances i s used as a refrigerant, i t i s generally referred to as “refiigerant gas X ’ or “R-X.” For example, CFC-12 would be referred to as R-12 when used as a rehgerant. R-500 i s a blend of CFC-12 and HFC-152a. R-502 i s a blend of CFC-115 and HCFC-22 26 GWPs are commonly calculated over 20, 100, or 500 year time frames. The GWPs referred to here are for a 100-year time horizon.

37

usually generated through a mixture o f fuels with a high representation o f fossil fuel combustion in many countries. In either case, significant greenhouse gases (GHGs) are emitted into the atmosphere, as shown in Table A l .2 below for several representative chiller types and efficiencies.

Chiller Type Centrifugal water-cooled chiller

Table AI.2: Chiller Energy Use Warming Impact for Different Chiller Types I Lifetime C O ~ I

kWRT COP COZ/year (tomes) 0.50 7.03 130 3,250

I I I I Tomes I emissions I -

Centrifugal air-cooled chiller 0.95 3.70 247 6,175 Water-cooled rotary screw chiller 0.58 6.06 151 3,770 Air-cooled screw chiller 0.94 3.74 244 6.1 10 Direct-fired gas absorption chiller 3.41 1.03 257 6,436 Indirect-fired gas absorption chiller 2.88 1.22 217 5,434

1 1. outlining efficiency in terms o f kW/ton, and kW refrigeration / kW electric input. According to the Air-conditioning and Refrigeration Institute (ARI), this increase in energy efficiency has reduced power consumption in the U S by 7 billion-kilowatt hours per year (enough to provide the annual electrical needs o f approximately 740,000 households), saving US$480 mi l l ion in energy costs and avoiding emissions o f 4 mill ion tC02 by power plant^.^' I t i s notable that the gap between high and average efficiency levels has grown from 5-7% in the 1980s and early 1990s to 22-23% in recent years. While efficiency levels in developing countries have increased since the late 1 9 9 0 ~ ~ and even more since prior to that time when levels in developing countries were 0.8 k W t o n or more, the efficiency gap i s even greater in developing countries, as shown in the table below for average efficiencies.

Chiller energy efficiency has improved significantly over the last 20 years,

27 ARI 4/11/01 press release (www.ari.org).

38

efficiency Efficiency efficiency Country (kW/t~n)’~ Gap 30 gains31

Argentina 0.7 1 48% - Bangladesh 0.74 54% - Brazil 0.70 46% 8% China 0.73 53% 7% India 0.71 48% 5% Indonesia 0.66 37% 6% Malaysia 0.68 42% 9%

12. tend to be significantly lower than the highest efficiency chillers available, as well as lower than average levels (0.71 kW/ton versus 0.60 worldwide average and 0.48 best available). This indicates that there is significant potential to promote sales o f more energy-efficient chillers in those countries.

As the table above shows, chiller efficiency levels in most developing countries

13. following table was developed which what the total global environmental, local environmental, and economic benefits would be if an estimated 12,500 CFC chillers currently in service were converted to energy-efficient, non-CFC chillers (for illustrative purposes, an equal number o f HCFC-123 and HFC-134a chillers). The extract o f the table below provides some o f the key figures:

Based on an international study commissioned by the World Bank in 2005, the

’* Extracted f rom International Chiller Sector Energy Efficiency and CFC phaseout, ICF, Jan 2005 29 Calculated f rom energy efficiency, chillers sales, and market share data provided by Ozone Protection Units and chiller manufacturers for the period 1996-2001. Breakdowns by manufacturer and year are not shown in order to protect data confidentiality. 30 Calculated as the percentage difference between average efficiency and the best efficiency level. Since the highest efficiency levels may not be technically available o r economically feasible for a l l applications, th is should not be taken as an accurate indicator o f absolute energy savings potential. I t i s however a good indicator o f relative potential for increased sales o f energy-efficient chillers. 31 Improvement in average efficiency 1996-2001. Calculated decreases in efficiency are not shown, since these were believed to be largely due to lack o f full sales and efficiency data.

39

Table A1.4: Total Prospective Environmental and Economic Benefits of Developing Country CFC Chiller Replacement

Per Chiller Number of chillers = 12,500 Annual impact Total

ODS emissions reductions (ODP kg) Refrigerant cost savings Energy use savings (kWh) Energy use cost savings

160 1,999,500 US$1,001 US$12,5 12,500

200,000 2,500,000,000 US$12,000 US$150,000,000

Total cost savings TEWI reduction (MTCE)

US$26,43 1 US$330,387,500 4.61 1 57.641.625

Local pollution reduction (mt): NOx 0.8 10,185 N20 0.002 25 sox PM

10.6 132,696 5.0 61.959

Lifetime impact ODS emissions reductions (ODP kg) 2,399 29,992,500 Rehgerant cost savings US$15,015 US$187,687,500 Energy use savings (kWh) 3,000,000 37,500,000,000 Energy use cost savings 180,000 2,250,000,000 Total cost savings 396,465 4,9553 12,500 TEWI reduction fMTCE) 69.170 864.624.375

14. replaced with energy efficient non-CFC chillers, then:

As the above calculations show, if 12,500 inefficient CFC chillers could be

Approximately 2,000mt per year and 30,000mt total o f ODS use would be eliminated; Peak electric power demand would be reduced by 1.25 gW avoiding US$1.6 bi l l ion in new generation investment; Approximately US$1.6 bi l l ion (Net Present Value) in operating costs would be saved; Over 2.9 mi l l ion o f local air pollution would be avoided; and 3.2 bi l l ion tC02 would be avoided.

0

0

0

TEWI reduction ( tonnes C 0 4 Local Dollution reduction (mt):

40

253,623 3,170,289,375

NOx N20

.03 368 159 1.990.446

sox P M

74 929,392 0.2 1 2.61 1

15. transmission capacity i s equal to two-thirds o f the total projected investment cost for the new non-CFC, energy-efficient chillers.

I t should also be noted that the avoided investment in new power supply and

32

16. during the last twenty years in this segment o f the chiller market have been most dramatic. In India, the manufacturing change-over was completed by about the mid- 1990s, and there were very few CFC-based centrifugal chillers added to the stock o f equipment in service after 1998. The target population would primarily be chiller units utilizing CFC-11 and CFC-12 as a refrigerant, that are at least 10 years old, but with at least five years before end o f technical life, although other inefficient chillers would also be considered depending on initial and rapid success o f the project.

The CEEP focuses on centrifugal chillers given that technology advancements

17. undertaken as part o f the India Chiller Sector Study, which yielded data from four domestic manufacturers, namely Voltas, Blue Star, Kirloskar Pneumatic, and Ut i l i ty Engineer. These show that 96633 CFC chillers were produced in India between 1970 and 2000, o f capacity lOOTR or larger. By 2003, most manufacturing processes had completed their conversion and were not supplying CFC-based chillers to the domestic market in compliance with the ODS Rules. Prior to 1993, imports o f chiller equipment required special end-user licenses which presumably would have been granted only in exceptional cases, given the presence o f local manufacturers under technical license from the main international producers.

Population Count and Characteristics: In 2001, a manufacturers' survey was

18. their operations in India started around 1993 in the wake o f liberalization reforms introduced by the GoI, at which time most o f the chillers they sold were HFC-134a and HCFC-123 based.34 Therefore the target population o f CFC-based chillers (o f lOOTR capacity or more) in India i s estimated to be in the range o f 1,000-1,200, correcting for

Representatives o f India-based foreign suppliers Carrier and Trane, indicated that

32 Per chiller values shown are averaged between sample HCFC-123 and HFC-134 chllers. Economic benefits do not include the health benefits o f pollution reduction, which can be significant. Savings include energy cost (at $0.06/kWh) and refrigerant savings. Labor costs are not included, but are assumed to be substantially unchanged. Equipment installation cost i s net o f scrap value o f o ld chl ler. Ch l l e r scrap value and refrigerant prices are estimates based on data collected in 2001 in India. Refiigerant prices do not include tariffs and taxes since these vary significantly by country and should in any case not be included in an analysis o f economic benefits, since they represent transfer payments and not t rue economic costs. N e t present value figures are discounted at a real rate o f 6% per year. Voided power cost i s based o n data collected in Thailand (US$1.25 investment per watt capacity), but i s believed to be representative for other developing countries as well. Lifetime calculations are based o n a 15 year remaining lifetime for the CFC equipment replaced. The benefits shown in this table do not include the energy and investment cost savings achevable through overall building energy efficiency gains that al low reduced building cooling loads and a smaller chdler that uses less energy. Including the savings f rom the whole building approach would al low for additional energy and energy cost savings o f up to 20% or more. 33 Detailed breakdown i s omitted to respect the request o f the manufacturers that their respective data be treated as confidential.

HFC-134a i s listed as controlled substances under the Kyoto Protocol due to i t s GWP. HCFC-123 has 34

an ODP-weight o f 0.02 (compared to 1.0 for CFC-11 and CFC-12), and i s i tself subject to phase-out under the MP, but not until 2040 for developing countries.

41

imports, for machines produced prior to 1970 that are s t i l l in use, for an acknowledged undercount from Utility Engineer35 and for few CFC-based machines recently supplied by Trane and Carrier.

Age o f Chillers 0 - 5

19. distribution o f chillers in India was in the 5-10 year age category suggesting significant numbers o f young chillers. By the same token, there were also significant numbers o f super-annuated chillers which are either overdue for replacement on any measure, or will be due for replacement before the phase-out date o f 2010 for CFC production. By 2005, the inefficient CFC-based chiller population in India was estimated at about 1,045, while many chillers that were 30 years in 2001 may have already been replaced at the end o f their life, having consumed a maximum o f energy and released fugitive refrigerants.

Age distribution: At the time the chiller survey was undertaken, i.e. 2001, the age

% o f Chiller Population* 0%

6 - 10 11 - 15

15% 32%

16 - 20 20 - 25

26% 20%

20. Size distribution: With respect to the distribution o f chiller size (cooling capacity), the mode i s in the under-5OOTR size category in the large-size segment, and the frequency count becomes progressively less the larger the size category. The largest chiller emerging from the survey o f 2001 was o f 1600TR capacity and it i s estimated that the average size o f chillers as per the survey findings i s about 430 TR. The size distribution o f CFC chillers in India i s shown below.

25 - 30 7%

Cooling Capacity (TR) 200 - 400 500 - 900

21. Compressor type: In the lOOTR and above size range, the type o f compressor used i s overwhelmingly o f centrifugal type. The survey revealed that 22 o f 3 1 1 large chillers are of reciprocating type, one o f which uses CFC-12 as refrigerant, the others HCFC-22. In addition to chillers o f reciprocating type in the large-size category, some

% o f Chiller Population* 68% 24%

35 Utility Engineer i s no longer in business, but data have been provided by Trane, w h c h i s servicing existing Utility equipment, for some o f the machmes. A former director o f Utility indicates, however, that the Trane data are an undercount.

1,000 - 1,200

42

8%

chillers o f screw (rotary) type are also reported. This type o f chiller is a fairly recent introduction, and all use Protocol-compliant HCFC-22 refrigerant.

22. from 2TR at the low end to 300TR at the high end. The best technical choice, in terms o f the type o f compressor, i s a function o f the capacity and the application. In the very small capacity range, under 30TR, the best choice i s scroll technology, except for refrigeration applications where, for sizes in the sub-range above STR, the best choice would appear to be reciprocating. In the 3OTR-1OOTR size range, reciprocating machines appear to be the equipment o f choice. Centrifugal machines for their part are unchallenged in the very large size category (400TR and over) while screws appear to be emerging as the equipment type o f choice in the 15OTR-400TR category, while challenging reciprocating machines in the 100TR-150TR category.

I t may be noted that equipment o f reciprocating type spans a very large range -

23. Chiller life: The distribution o f the owners sample according to manufacturer- r e ~ o m m e n d e d ~ ~ l i f e o f the chiller ranges from a minimum o f 10 to a maximum o f 30 years, with an average o f 19, and a mode - the most frequent l i fe reported - o f 20 years. This large range o f reported expected l i fe i s due to the fact that the reported l i f e expectancy o f chillers covered all types o f compressors - from shortest l i fe o f reciprocating compressors to longest l i fe o f centrifugal chillers. While the expected l i fe o f centrifugal chillers i s about 30 years or more, in practice, owners seem to keep chillers longer than what they understand to be the manufacturer-recommended l i fe; there was at least one chiller in the sample that was 40 years old, and anecdotal reports o f chllers installed in the 1930s that were s t i l l in operation.

24. Geographical distribution: The distribution o f the chiller population by state shows Maharashtra with about 15% o f the total, followed by Gujarat (7%), Uttar Pradesh (5%), West Bengal (4%), and Tamil Nadu (4%). Apart from these leading states, the distribution i s fairly uniform across states.

25. Unconstrained Phase-out Profit:. Based on the age distribution and the l i fe distribution just discussed, it i s possible to estimate a base-line phase-out profile for CFC- based chiller capacity in the absence o f the obligations arising under the MP, further based on the sample from the survey, scaled up on the basis o f the population estimate. Base-year (year 2002) CFC chiller capacity o f an estimated 432,000 TR does not reduce to zero until the year 2025. There is a corresponding continuing demand for CFCs up until the year 2024, which must be met either from a stockpile, recycling o f refrigerant from decommissioned machines, or new CFC production and/or imports, or some combination thereof. Even assuming f i l l reclamation and recycling o f CFCs from de- commissioned machines, new production and/or imports and/or a stockpile would continue to be required up until the year 2024. In other words, if the MP phase-out requirement in terms o f CFC consumption i s to be met, i t would be necessary to

36 Rather than a "recommendation" in the strict sense, t h i s i s an expectation formed by the owner based on interaction w i th the manufacturer. However, the questionnaire i tem refers specifically to "manufacturer- recommended l i fe span."

43

accelerate the phase-out, to some degree, from what i t would be in the absence o f the Protocol.

Age of Chillers

26. Energy EfJicciency: Older chillers are also less energy efficient, as can be seen in the following power consumption (at rated capacity) for the age profile developed for the sector:

Table AI . 7: Age- Wise Specific Energy Consumption

Energy Consumption (kW/TR) 0.81 0.92

C.

15 20

1 .oo 1.07

25 30

1.12 1.17

27. a h c t i o n o f the capacity, and the application. In the very small capacity range, under 3OTR, the best choice i s scroll technology, except for refrigeration applications where, for sizes in the sub-range above 5TR, the best choice would appear to be reciprocating. Screw technology i s displacing centrifugal technology up to about 400TR capacity, beyond which centrifugals continue to hold sway. The CEEP will give priority to replacement o f centrifugal chillers as they are critical to India’s ability to meet the MP consumption phase-out obligation and the highest potential o f energy savings to be gained from technology advancement achieved in this segment during the past two decades.

Compressor type: The best technical choice, in terms o f the type o f compressor, i s

28. equipped wi th either HCFC-123 or HFC-134a. Both technologies will be allowed as replacement o f CFC chillers.

Refrigerant: Non-CFC centrifugal chillers currently available in the market are

D. Chiller Supply Capacity

29. Since 1993, India is open to chiller imports and local offices o f at least two global manufacturers are now well established. Further, it would appear that the local licensees o f the global manufacturers are not competing head-to-head, rather domestic and foreign manufacturers have divided the market among themselves, with the local manufacturers specializing in agreed niches. Therefore, supply capacity per se i s not expected to be a limiting factor. The global manufacturers are unanimous that the incremental supply called for by this project i s wel l within their present capacity limits to meet.

30. manufacturers’ sales representatives - are assigned to the task. This could become the case if sales representatives feel that their time i s better spent pursuing new sales, rather than replacement. Given the GoI’s decision to cease the entire production o f new CFCs

Supply could become constrained if insufficient numbers o f deal-makers -

44

by August 1 , 2008, replacement o f CFC chil lers would now become an urgent matter, since the exist ing populat ion w o u l d have to r e l y on reclaimed o r recycled CFCs for year ly servicing. Hence, the efforts to make sales in n e w and replacement markets would b e more or less the same. The CEEP will also employ the sales force o f ESCOs, whose m a i n business i s related to upgrading exist ing equipment through a performance- based incentive to b e agreed v i a M O U s between IDBI and chil ler manufacturers. The project design will also include a market ing and communications strategy to create awareness o f the urgent need to replace CFC chillers, benefits o f energy savings to b e obtained from n e w efficient chillers, and financial subsidy to b e provided by the project w h i c h will b e based o n a first come, f irst served basis.

E. Barriers to Market Transformation 3 1. chi l ler in both developed and developing countries. These include:

There are many barriers to early replacement o f energy-efficient and ODs-free

i) .

ii) . iii).

iv) .

v) .

First cost versus life-cycle cost. W h i l e the conceptual difference between the in i t ia l cost o f equipment and the l i fe-cycle cost, (total cost o f ownership), i s understood, i t i s often no t thoroughly investigated or intentional ly ignored. Determining the l i fe-cycle cost i s not easy, and even if the l i fe-cycle cost i s bel ieved to b e better for more energy-efficient products, i t i s not always possible to make the best long-term choice. Pressure to stay within budgets or l im i ted bor rowing capacity m a y outweigh long-term benefits. Split Incentives. If the owner or manager o f a building passes energy costs to tenants, there i s l i t t le incentive to invest in more efficient equipment. Lack of decision-making ability. E v e n where faci l i ty managers understand options for improved energy efficiency, f inancial decision makers m a y not b e aware o f or interested in options for investing in it. Management staff often come from a f inancial and/or sales background, and therefore tend to focus on what are perceived as more important business issues. Internal accounting procedures m a y increase the di f f icul ty o f obtaining management approval for purchases o f new, energy-efficient chillers, since investment in building equipment i s v iewed as a controllable cost that should b e minimized, wh i l e energy use i s an uncontrollable cost that must b e accepted. Perceived Risk. Many organizations sacrifice energy savings to avo id the perceived r isks o f changing technology, disrupting occupants, incurr ing debt, or entering into complicated agreements outside o f core business areas. Awareness. The k e y issue from the manufacturer perspective i s to make the customer understand the impact o f chi l ler purchase decisions to the bo t tom line. Financial managers make the decisions on purchase, but often do not realize the effect that energy efficiency makes on their electricity bill. Customers are however receptive to arrangements that can defray the incremental cost o f higher eff iciency through energy savings, if awareness and other barriers can b e overcome. When chi l ler eff iciency or O D S are discussed, many customers assume that the mot ivat ion o f chi l ler manufactures i s sell ing more expensive equipment to generate a higher commission.

45

vi).

vii).

viii).

ix) .

F.

32.

Unfavorable macroeconomic conditions. In conditions o f financial crises, investments that can be delayed are typically put o f f until business conditions or financial stability improved. Doubt about appropriateness of technology. particularly reluctant to acquire new technologies, due to lack o f familiarity and the fear that replacement parts or servicing will be difficult to obtain, expensive, or altogether unavailable. Incentives to over-size chiller capacity. Lack o f designers trained in energy- efficient building design generally leads to a lower o f level o f energy efficiency in overall building systems. This can lead to an increase in building cooling loads, and ultimately to the specification o f a chiller that i s larger in capacity than required. The result i s an excess use o f energy to run the over-sized systems. Data Issues. The data needed to analyze the return on a chiller replacement are either unavailable or not collected. Older chillers do not have internal logging functions. This means that an accurate financial analysis o f a chiller replacement i s not possible until after a customer has started thinking about a new chiller.

Building owners may be

Issues to be addressed by the Project

The CEEP proposes to assist India to promote early replacement o f o ld chillers (initially focusing on CFC-based chillers) to energy efficient ones by:

i) .

ii).

iii).

iv) .

G.

Removal o f market and techno-economic barriers o f early adoption o f more energy efficient centrifugal chillers through provision o f financial incentives directly to chiller owners in order to lower their opportunity costs and up-front capital costs, with priority given to the replacement o f CFC centrifugal chillers; Establishment o f an in-country mechanism to support a permanent transformation o f the chiller market in India by availing C D M revenues and strengthening national capacity for carbon finance intermediation; Increased awareness o f chiller owners and the public o f the upcoming ban o f CFC consumption and production; and Removal o f ch l ler owners’ perceived technology r isks by demonstrating significant rate-of-return on investment o f chiller replacement and other potential low-cost and/or no-cost energy conservation measures in large buildings.

List of Potential CFC Chillers for Replacement during the First Year of the Project

33. information i s confidential.

A l i s t has been developed, but it will not be made public given that the

46

Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies

India - Chiller Energy EMiciency Project

A. General ex erience from GEF-financed Energy Efficiency Projects Worldwide Y7

1. An important feature o f many GEF-financed energy efficiency (EE) projects in recent years i s the market transformation approach that seeks to improve market uptake o f EE products, services and practices. Key issues associated with market transformation efforts include: technology credibility; the nature o f financial incentives; limited capacity to enforce standards/codes; weak laboratories; and lack o f credibility o f products labels, among others. Lessons learned suggest that the success and sustainability o f this type o f projects hinge on a supportive policy framework for EE programs, strong institutional ownership o f programs, properly aligned incentives for all program agencies, products and business models based on market principles or market-oriented, up front market campaigns to generate demand for energy-efficient products and, finally, adequate attention to financial sustainability o f the program.

2. where the local financial market i s deep and liquid, consumers and investors may have limited access to local funds for EE projects due to perceptions o f high risk, high transaction costs, lack o f awareness regarding technologies and their technical and financial performance characteristics. With regard to the risk perceptions and high transaction costs, the India chiller sector study has quantified costs o f removal o f these perceptions or barriers through a comprehensive life-cycle cost analysis o f the entire CFC-based chiller population. This life-cycle approach has enabled the quantification o f these barriers in financial terms.

Experience from GEF’s overall EE portfolio suggests that, even in countries

3. importance o f transparency o f Fund management procedures, the need to rely on existing market participants, emphasis on projects wi th high rates o f return, bundling o f small projects, pro-activity o f the Fund Manager, and integration o f financial and technical expertise for the development o f a sound project portfolio. Well-defined project term sheets can be an effective tool in improving the transparency o f fund management procedures. Involvement o f market participants, including financial institutions, equipment suppliers, and equipment owners, in development o f term sheets can ensure that the project design and implementation should be simple and commercially-oriented.

Lessons learned from specialized EE Fund experience worldwide highlight the

4. principles for market transformation programs. These include: target both supply and

A recent GEF Working Paper suggested a number o f fundamental design

37

Bank Environment Department, Climate Change Team, January 2004. Based on “World Bank Energy Efficiency Portfolio Review and Practitioners Handbook”, Wor ld

47

demand sides; take a holistic view o f the market; leverage competitive market forces when possible; build flexibility into program design; consider vehicles for technical assistance and transfer o f know-how that will be workable; emphasize standards, labeling, and building codes; allocate a portion o f the program budget for activities that support replication and dissemination o f results; and begin monitoring and evaluation early.

B. Specific experience f rom EE projects worldwide

5. projects. A sample o f projects i s provided below as an illustration o f recent and current activities in this growth area.

There i s a rapidly growing volume o f international experience with innovative EE

6. Efficient Lighting Initiative: The ELI program promoted the growth o f markets for energy-efficient lighting in seven countries and was implemented in Argentina by one o f the three large uti l i t ies in the Buenos Aires metropolitan area (EDESUR - owned by Spain’s Ends). The program worked to address three main barriers to penetration o f efficient lighting in the main consumption sectors: information, product availability and quality, and financing. The program involved information and training activities, certification o f efficient lamps (CFLs), market aggregation to reduce equipment cost, and equipment financing for EDESUR consumers. The program achieved a penetration o f about 15% in the residential market o f EDESUR and lesser penetration in the rest o f the country. However, the program’s impact and sustainability was hampered by several factors:

The 2002 economic crisis reduced consumer affordability and the financial viability o f CFLs; The program could not achieve implementing regulatory changes and tariff

’ incentives for efficient lighting because o f the on-going electricity distribution concession renegotiation - a situation compounded by the temporary shadowing o f the regulatory entity (ENRE); The program focused mostly on EDESUR customers; and The program was limited to lighting - admittedly a significant contributor to electricity consumption and peak demand.

7. expanding the program to involve more utilities are the lack o f financing to sell CFLs in installments, perceived high transaction costs by small utilities and electric cooperatives, lack o f a well recognized certification and labeling system for CFLs, and lack o f information for customers who are not buying CFLs or are buying lamps o f very low quality.

Three utilities in total participated in the ELI program. Additional barriers for

8. program funded by the GEF with a grant o f US$736,250. The International Finance Corporation (IFC) was the GEF Implementing Agency and the Program was implemented in 1999 - 2001 by the International Institute for Energy Conservation

Argentina Efficient Street Lighting Program: This was a technical assistance

48

(IIEC). The Program collaborated with municipal and provincial governments, electric distribution utilities, banks, and engineering and contracting firms in Argentina. Through a range o f technical assistance activities conducted with all parties, the Program supported development, structuring and financing o f municipal street-lighting (SL) projects which use efficient lighting technologies in order to improve public S L services, save energy and money, and reduce the emission o f greenhouse gases. The Program’s legacy o f innovative model and tools for developing SL projects i s summarized in a guidebook, which has been distributed to interested parties and available on key websites. Thus, Argentine municipalities, distribution utilities, ESCOs, professional associations, government agencies, and university departments can continue to apply the Program’s methods to develop and implement efficient S L projects.

9. gas emissions by adapting high efficiency technologies to local conditions for small and medium-sized coal-fired industrial boilers. To assist the dissemination and effective use o f efficient technologies, the project would also strengthen China’s industrial-boiler engineering, operations, production management and marketing capabilities, and improve boiler technology exchange domestically. As long-term measures for barrier removal, the project supports related technical and policy studies, public awarenesshnformation dissemination, and strengthened environmental standards for the industrial boiler sector. An important lesson learned from this project i s the importance o f the project design to base on market principles and leveraging the benefit o f market forces in promoting EE products.

China Efficient Industrial Boilers: This project i s designed to reduce greenhouse

10. private sector, NGOs and cooperatives in the provision o f grid and off-grid energy services, and strengthens public and private institutional capacity to deliver energy services through renewable energy technologies and demand-side management (DSM). One o f i t s activities includes payment for first-cost subsidies for a solar home system. A microfinance organization in Sri Lanka provides consumer credit to reduce the amount o f monthly payments by a share o f the subsidy. Project implementation started in 1997 and was completed in 2002.

Sr i Lanka Energy Service Delivery: This project encourages participation o f the

1 1. The success o f the project is attributed to i t s demand driven and commercially oriented project design coupled wi th well coordinated technical and policy support to provide an enabling and empowering environment appropriate to respective stakeholders to overcome technical, financial and institutional barriers. A lesson learned from this project i s that even with improved access to capital through subsidies provided by the project, customers may s t i l l be difficult to l ine up during early part o f project implementation. Hence, an upfront pipeline development i s critical to the design o f the successful project. One o f the major reasons for the success o f this project was that the project design was flexible enough to allow different approaches and changes as and when required.

49

12. Thailand Buildinn Chiller Replacement Program: The project aimed at removing barriers preventing the widespread replacement o f low energy efficiency building chillers with highly energy efficient non-CFC chillers. This was pursued through a project approach that dealt w i th two global environmental issues, climate change and stratospheric ozone layer depletion. In view o f the potential for dual benefits, joint GEF - MLF financing was proposed to address perceived r isks associated with chiller replacements under tropical conditions, to cover increased init ial transaction costs and to resolve access to credit problems. The project successfully demonstrated credibility o f technology and established technical procedures for capturing and monitoring energy savings and performance o f building chillers. During i t s lifetime, the project succeeded in replacing 17 chillers, nearly achieving the target o f 24 as listed in the original PAD. In addition, there was evidence at the time o f project completion that more than 50 additional chillers had been replaced through project activities using private funding sources. There is high potential for these procedures to be further simplified and replicated in other projects o f a similar nature. Another important lesson learned from this project i s that the administrative costs o f operating a revolving h d can be very high and a limited in-country delivery channel o f GEF financial support could make the project less attractive. I t is clear that the project design would have been more effective with the use o f more competitive market forces in the supply o f EE products and in the mobilization o f project financing from private sector sources or from the CDM, which was not available at the time.

13. Mexico CFC-Based Chillers Replacement Project: Mexico i s currently implementing a small-scale chiller replacement project with the financial support from the MLF. FIDE, a non-profit NGO, acts as the fund manager o f the resources provided by the Multilateral Fund. Financial support i s provided to building owners to support replacements o f CFC chillers on a concessional loan basis. Loan repayment i s then used to replace additional chillers. On average, it takes about 36 months to recover the investment (average payback period from energy cost savings). By the end o f 2005, approximately 13 chillers were replaced, with the resulting reduction in consumption o f 7.8 ODP tonnes. The lessons learned from Mexico, among others, include the need for more support from equipment suppliers in terms o f monitoring o f performance and maintenance o f new chillers as loan repayment i s predicated on performance guarantees and penalties if energy savings are not realized.

14. Turkey Chillers Replacement Project: The chiller program in Turkey offered 75% as an interest-free loan and 25% as a grant. The loan must be paid back in five installments. Di f f icul ty has been experienced in convincing chiller owners to come on board. There has also been concern expressed associated with the need for a high init ial investment. The major lesson learned from this project i s the need to undertake a holistic assessment o f the market in order to identify and, to a certain extent, quantify financial resources required to remove existing barriers.

15. are not driven simply by calculations o f internal rate o f return or financial payback considered in an unconstrained abstract sense. Replacement decisions are made under

India Chiller Sector Study: The study revealed that chiller replacement decisions

50

an environment o f hard resource constraints. Chiller replacement projects have been given less priority due to other competing investment priorities. In other words, mission-critical projects must obviously be given priority over mission-marginal projects. Chiller replacements, similar to other energy efficiency products, are often considered as mission-marginal projects.

16. The mission-marginality o f the investment, coupled w i th the higher f i rs t cost, together constitute a formidable barrier to more widespread adoption o f the energy- efficient chillers. The study, based on a full life-cycle cost analysis carried out for a large sample o f chillers in India, concluded that Indian chiller owners, in effect, apply a discount rate o f about 30% to chiller replacement projects. Without any intervention, i t i s estimated that unconstrained phase-out o f CFC centrifugal chillers would not be completed until 2025. I t i s thought that the unconstrained phase-out dates for other developing countries would be similar to India.

C. Other Relevant Experience in Chiller Sector

17. energy efficiency chiller projects. Only recently have other agencies, namely UNDP and UNDO, received funding from the MLF. Countries targeted by these two agencies include: Brazil, Dominican Republic, Jamaica, Trinidad and Tobago, Colombia, Cuba, Croatia, the Former Yugoslav Republic o f Macedonia, Romania, Serbia and Montenegro, and the Syrian Arab Republic. However, none o f the projects in these countries, including, the GEF Projects in Brazil and Colombia have entered into the implementation stage.

Thus far, the Bank i s the only agency that has any experience in implementing

51

Annex 3: Results Framework and Monitoring

India - Chiller Energy Efficiency Project

A. Results Framework

PDO i).support India’s efforts to comply with the Montreal Protocol obligations pertaining to complete phase-out o f CFCs by 2010 (production and consumption o f new CFCs), with minimum impact on economic development; ii) remove market and techno-economic barriers to early replacement o f inefficient chillers, with priority given to CFC chillers, through provision o f financial incentives directly to chiller owners in order to lower their opportunity costs and up-front capital costs and remove perceived technology risks; and iii) establish an in- country mechanism to support a permanent transformation o f the chiller market in India by availing carbon finance revenues and strengthening national capacity for carbon finance intermediation; iv) demonstrating

Outcome Indicators 370 CFC-based chiller replacements undertaken

Reduction o f CFC consumption (target o f 159 mt)

Carbon emission reduction

Direct C02 Benefits Targeted, including GWP o f CFC = 4.495m tC02e

Indirect C02 Benefits targeted at up to 8.68 m tC02, over 20 years , including GWP o f CFC

MWhsavedandMW o f demand reduced through chiller replacement (target = 3.978 mi l l ion MWh over 20 year period; 48 MW o f demand reduced)

Use o f Outcome Information Yr 1 - Yr 3: Measure effectiveness o f project design and implementation arrangement

Annually: verification report identifjmg quantity o f emission reductions certified

Yr 1 : Strategic Assessment o f Overall Program Uptake and Financial Position

Yr 2: Mid- te rn review o f carbon credit earned and contribution o f decreasing demand o f CFC in the chiller sector to countries’ compliance with the Protocol

Yr 4: Forward-looking reassessment and business realignment for other EE products opportunity

52

PDO significant rate-of-return on investment o f chiller rep lac ement and other potential low-cost andor no-cost energy conservation measures in large buildings.

Component One: Provision o f Incentives for Investment in Energy Efficient Chillers

Component Two: Measurement, Monitoring and Verification

Component Three: Technical Assistance

Outcome Indicators

Results Indicators for Each Component

Number o f new energy efficient chillers installedsuccessful sub-grant agreements

Carbon emission reductions achieved by chillers replaced by the CEEP

Increased awareness o f energy conservation opportunities in large building and industrial facilities

Number o f recipients participating in the recognition program

Use o f Outcome Information

Use o f Results Monitoring

Yr 1 - Yr 2 Determine effectiveness o f the financing scheme and implementation modalities o f the CEEP by considering the success rate between the number o f proposals and number o f successful sub-grant agreements

Yr 2 Mid-term review to identify needs for any modifications to the project design and financing

Yr 1 - Yr 2 Measure effectiveness o f the technical assistance activities undertaken by the project

Yr 2 Mid-term review o f penetration o f replacement market in comparison with overall chiller market in respective countries and identification o f needs for fbrther capacity building or market development.

Yr 1 - Yr 2 Measure effectiveness o f the technical assistance activities undertaken by the project

Yr 2 Mid-term review o f penetration o f replacement market in comparison with overall chiller market in respective countries and identification o f needs for further capacity building or market development.

53

B. Arr Outcome Indicators

ngement for Results Monitoring

- YR3

- 42

- YR4 - YR5

~~

Data Collection

Responsibility

IDBI Bank

Data Collection

Instruments

Linked directly t o chil ler replacement Verif ication Reports and MM&V Database

Total Frequency and Reports

ODS Consumption Phase- out due to replacement o f Chillers3'

64 30 158 mt Annual

Cumulative Emission Reductions as direct benefits f rom the GEF- financed project (target value %)39

47

- 91

- - 150

- - 209

64.5 74 4.495 mt COz over 20 years

IDBI Bank and independent auditor contracted by Wor ld Bank IDBI Bank

Annual

MWh savings & M W demand reduction

182

-

229

-

4.08 m MWh over 20 years; 4 8 M W

Linked to Chil ler replacement

Annual

Component One: Number o f new energy efficient chillers installed /successful sub-grant agreements Component Two: Indirect Carbon emission reductions achieved by chillers replaced (t C02e)

70

- - 285

- - 100

0

-

370 Every Six Months

Progress Reports and M I S

IDBI Bank

I 332 8.868 mt

c 0 2 in 20 years

Annual Verif ication Reports and MM&V Database

IDBI Bank and independent auditor contracted by IDBI Bank 4- Component Three:

T - 81 - 100 Number o f recipients

participating in the recognition program

IDBI Bank % o f beneficiaries

100 Progress Reports and M I S

39 T h i s is calculated in terms o f the cumulative number o f chillers replaced every year

54

Annex 4: Detailed Project Description

India - Chiller Energy Efficiency Project

1. chillers with efficient non-CFC-based centrifugal chillers in order to promote deployment o f energy efficient technologies and products to reduce GHG emissions and to support the phase out o f the CFC demand in India. To address the above issues and to meet the established PDO, the project proposes to include the following components: (i) investment in chiller replacement; (ii) technical assistance and awareness activities; and

provided in Diagram 4.1

The objective o f the CEEP is to accelerate replacement o f CFC based centrifugal

’ (iii) project management. The flow-chart depicting the source and flow o f funds i s

Component 1 : Investment in Chiller Replacement

Sub-component 1.1 : Incentive to Chiller Owners:

2. adoption o f more energy efficient centrifugal chillers, the CEEP proposes to assist chiller owners to lower their opportunity costs and up-front capital costs by providing financial incentives to subsidize costs o f replacement o f inefficient chillers in advance o f the natural attrition rate o f the existing equipment. Priority will be given to those baseline chillers that are operating with CFCs as refrigerants. However, the project has the flexibility to cover replacement o f other non-CFC chillers with energy efficient non-ODS chillers.

As part o f the effort to remove market and techno-economic barriers o f early

3. centrifugal chillers with cooling capacity o f 100 TR and above. The CEEP will support replacement o f this baseline equipment to non-CFC centrifugal chillers with energy consumption at full load conditions o f not more than 0.63 kW/ TR. Baseline chillers to be replaced must be currently in use, located in India and must have a residual technical l i fe o f more than 5 years. In order to simplify the demonstration o f this criterion, the C D M Methodology indicated that the eligibility would be restricted to those chillers that have been installed after 1993. If evidence surfaces during the implementation o f the project to confirm that centrifugal chillers have a longer l i f e than 20 years, a deviation would be sought for the C D M methodology from the C D M EB.

The primary targeted chillers for replacement under this project are CFC-based

4. 1,2008. Their cooling capacity must be within 5% o f the baseline capacity. Financial incentives will be given on a f irst come, f irst served basis. The CEEP will offer two financial incentive options in order to meet different operating environment o f chiller owners in the private and public sectors. The two options are:

Replacing units must be non-CFC based technologies and installed after January

55

i) .

ii) .

5.

Up-front grant subsidy o f 20% o f the cost o f new efficient centrihgal chillers based on a normative price o f US$400 /TR multiplied by the rated cooling capacity o f the baseline unit; Annual subsidy o f around 60 %40 o f C D M revenues to be generated from actual energy savings achieved by the new chillers. Payment will be made one year after installation and commissioning o f new chillers have taken place and every year thereafter until 2013 upon successhl issuance o f CERs by the C D M EB.

For Option 1 , payment will be made immediately after new non-CFC chillers are installed and commissioned, and existing baseline chillers are rendered unusable as defined below. For Option 2, annual payments for C D M revenues in the previous calendar year will be made by June 1 o f the following year. The payment amount will be calculated on the basis o f the findings from independent verification, which will be conducted on an annual basis. The independent verification will be carried out based on the actual performance o f selected units (about 100% o f the total number o f chillers financed by the project).

6. credits to be generated by their new chillers to the project and will not receive any additional financial support. For those opting for Option 2, they would have to share up to 40 % o f C D M revenues with the IDBI Bank. The 40 % o f C D M revenues will be used for covering IDBI Bank’s costs for administration, financial management, sub- project processing, reporting, marketing and other C D M related costs. Since the CEEP offers only up to 20% o f the cost o f new chillers up front, i t is the responsibility o f chiller owners to secure necessary financial arrangement (e.g., chiller owners’ own cash resources, arrangements with leasing companies, special financing plans that may be offered by chiller manufacturers, commercial loans, and etc.) to cover the remaining costs o f chillers, although IDBI Bank can also make loans available at commercial rates for eligible participants.

Chiller owners opting for Option 1 are obliged to transfer any future carbon

7. done by certified engineers. Refhgerants must be recovered from baseline units and could be retained for servicing remaining chillers as required, or should be properly disposed. Compressors o f baseline chillers must be physically destroyed and certified by chartered engineers, while other parts could be retained as spare parts.

Decommissioning o f baseline chillers and installation o f new chillers must be

8. Project participants must allow IDBI Bank or i t s representatives access to their baseline and new chillers replaced in order to undertake technical inspection including power measurements o f baseline and new units, and subsequent inspections, if needed, from time to time until 201 3 for the purpose o f verifying actual energy savings o f new chillers. Costs associated with verification and monitoring will be borne by the project. To ensure complete and long-term cooperation by chiller owners, i t is recommended that service and maintenance contracts be established with the chiller suppliers.

40 The final figure will depend on actual project costs

56

9. chiller owners would prefer to choose Option 1. Option 2 i s likely to be selected mostly by chl ler owners in the public sector. Since no C D M revenues could be generated unti l new chillers are installed and in operation for at least one year, resources required to support implementation o f Option 1 during the f i rs t two years would come mainly from GEF and MLF. Any chillers financed by Option 2 will not require financial support up front. Hence, no GEF and MLF fhding requirement i s needed to support Option 2.

While the CEEP offers two subsidy options, i t is expected that about 60% o f

10. after the launch o f the CEEP, C D M revenues will be generated. C D M revenues will be deposited in a separate dedicated account. These revenues will be used for financing additional chiller replacements, payments to chillers replaced under Option 2, financing cost o f annual independent verifications, and other administrative costs o f the project. An average investment cost per chiller replacement is estimated at a normative price o f US$400 per TRY or about US$170,000 per chiller4*. Hence, the total investment cost o f this project i s about US$83 million.

Once the f irst emission reduction verification is carried out within 12 - 18 months

Sub-component 1.2: Incentive to Chiller manufacturers and suppliers:

1 1. cooperation o f chiller manufacturers suppliers, and/or ESCOs/auditors and support their marketing strategy. Those who participate will be obliged to provide a liddatabase o f existing centrifbgal clientdchiller owners up-front. They will then receive a success fee o f US$0.50 per ton o f CER per year based on the number o f participants that they can attract to the program from their own list.

The CEEP has devised an incentive scheme to ensure full participation and

12. For confidentiality reasons, the l i s t would be subject to non-disclosure up to 18 months from the date o f the submission. The project participants will also be obliged to meet established environmental and safety requirements related to decommissioning o f baseline chillers, installation o f new chillers and refrigerant management.

13. This component will therefore assist in the establishment o f a sustainable in- country financing mechanism to support the adoption o f energy efficient technologies, products, and practices. I t will also support the enhancement o f energy conservation awareness through incorporating life-cycle analyses or consideration as part o f the equipment replacement decision-making process o f building and equipment owners.

Component 2: Measurement, Monitoring and Verification (MM&V)

Sub-component 2.1 : MM&V Management:

15. A qualified energy service or audit company will be contracted by the project to establish a system for measuring energy consumption o f baseline equipment and o f new equipment, monitoring performance o f new chillers by collecting performance parameters o f new chillers (i.e., f low rate o f chilled water, inlet and outlet temperatures o f

41 To mitigate currency risks, the sub project agreements wil l specify the up-front incentive t o b e at 18,000 rupees per TR.

57

chilled water, inlet temperature o f condensing water, electricity input, etc.) on an on-line basis, and analyzing all the data collected. This contractor will be responsible for ensuring proper recording o f the required data and proper functioning o f data collection equipment, which will be attached to al l new chiller un i ts replaced. Specifications on the format o f the data and frequency o f data collection (every 15 or 30 minutes) will be developed by the consultant.

16. The consultant will assist IDBI Bank to develop general specifications for new chillers including technical specification for ports or connection points to be equipped with chiller units in order to allow easy attachment o f data loggers and transmitters. The consultant will assist IDBI Bank in carrying out energy consumption o f baseline equipment in accordance with the protocol developed under the C D M methodology

17. established and maintained by the consultant. Expert software to analyze relevant data and to determine actual energy savings and emission reductions will be developed by the consultant. This software will generate all the technical reports summarizing performance o f each individual chillers and performance o f the overall program. Reports from the contractor will form a basis for verification for the purposes o f C D M payments.

An M I S for storing and processing o f a l l data generated by data loggers will be

18. The MM&V consultant, to be hired by IDBI Bank will develop specifications for data loggers and data transmitters to be installed on new chillers. The CEEP will finance the acquisition o f these data loggers and data transmitters. Data loggers and transmitters could be provided and installed directly by chiller suppliers provided that they meet specifications or could be procured and installed by the MM&V consultant.

19. As required by the C D M process, verification o f emission reduction will be done on an annual basis. Verification o f emission reduction i s the requirement for the CEEP to claim for C D M payments. This task will be carried out by a Designated Operational Entity (DOE) to be appointed by the World Bank. The DOE must be selected from the pool o f firms approved by the C D M EB for energy efficiency. Verification will be conducted throughout the project implementation period, in this case until 2013 as per the terms o f the Emission Reductions Purchase Agreement (ERPA).

20. As this project i s the first chiller replacement project that seeks emission reduction credits from CDM, a methodology for determining emission reduction levels needed to be developed. The methodology was developed and approved by the C D M Board. Wi th an agreement wi th the Carbon Finance Unit o f the Bank, hnding for developing the methodology was advanced by the World Bank.

Component 3: Technical Assistance

21. The objectives o f this component are to increase awareness o f the general public o f the upcoming ban o f CFC consumption and production, and to remove chiller owners’ perceived technology r isks by demonstrating significant rate-of-return on investment o f

58

chiller replacement and other potential low-cost andor no-cost energy conservation measures in large buildings. To achieve these objectives, the CEEP proposes to include the following activities.

Sub-component 3.1 : Training and Workshops on Project Awareness and Energy Efficiency Opportunity for Large Buildings:

22. service technicians, and other stakeholders o f the opportunity for energy efficiency improvement from chiller replacement. This sub-component will also aim at increasing awareness o f the stakeholders o f other energy efficiency improvement opportunities in large buildings. Given that most CFC-based centrifbgal chillers are located in the following states: Maharashtra, Gujarat, Uttar Pradesh, West Bengal, and Tamil Nadu, implementation o f this sub-component during the f irst two years o f the project will focus on these states.

The primary goal o f this sub-component is to raise awareness o f decision makers,

23. Public awareness activities to be conducted under this sub-component would consist of:

(i) Workshops to inform chiller owners about the program and provide them the guidance on the various options available; (ii) Technical workshops to raise awareness o f chiller owners o f the importance o f proper chiller maintenance; and (iii) Training and workshops to disseminate lessons learned and success attained by the project.

24. workshops to raise awareness o f chiller owners o f the financial assistance offered by the CEEP. The financial analysis tool, detailed in sub-component 2.1, will be used extensively as a basis for training. Chiller owners and other interested parties will be shown the tool and supported in i t s utilization, which will help them in making decision regarding the most favorable option to choose. In addition, participants will be informed o f the terms and conditions and will be informed o f the project proposal template and project cycle, eligibility criteria and obligations under the project. Participants will also be informed o f the recent decision o f the Go1 to completely phase out CFC production by 1 August 2008 and i t s implications in the domestic economy. I t i s expected that during the f irst two years o f the project implementation at least one familiarization workshop will be organized by the IDBI Bank in each o f the five states mentioned above. These workshops will be jointly organized by IDBI Bank along with the Ozone Cell o f the MoEF. Expenditures incurred by OC, MoEF for TA activities will be reimbursed by IDBI Bank, in accordance with approval from World Bank.

During the first two years o f the project implementation, the focus will be on

25. Technical workshops to raise awareness by chiller owners o f the importance o f proper chiller maintenance will be focused, at least at the beginning o f the project, on managers and technicians o f participating buildings or companies. They will be trained on proper maintenance o f their new chillers. Moreover, technicians o f those facilities will be trained on how to monitor key operational parameters in order to ensure that their new

59

chillers are functioning at the designed performance. Chiller owners and technicians will be informed o f the measurement, monitoring, and verification o f power consumption and energy savings as defined by the project requirements. Training will be jointly organized by the IDBI Bank, chiller manufacturers, and ESCOs. The CEEP will also undertake training for technicians who will recover the refrigerant gas from old chillers which are being decommissioned. This will build on activities already undertaken under an existing GO1 program on national CFC consumption phase-out.

26. After the second year o f project implementation when the results o f emission reduction achieved are independently verified, case studies summarizing lessons learned and success from replacement sub-projects will be made. Workshops to inform the public and future beneficiaries o f these successes and lessons learned will be organized in key cities in those states where there are large population o f not only CFC-based but also non-CFC-based chillers. These case studies will also be posted on the website to be established by IDBI Bank as part o f the project’s management information system (MIS).

27. The various training programs and workshops will be carried out throughout the project implementation period. At init ial phase o f project, the emphasis will be on the familiarization workshops. During project implementation, the emphasis will be shifted towards the second and third types o f workshops as once chiller suppliers and ESCOs are familiar they would be able to provide direct training and awareness raising to their own clients. Funding for these activities would initially come from the GEF and MLF resources. For later part o f the project implementation when C D M revenues start flowing into the project account, costs o f these activities will be covered by part o f the C D M revenues.

28. As mentioned above, this sub-component will produce additional materials to support implementation and will serve to generate interest o f the public. Such materials include pamphlets, brochures, advertisement, radio spots, case studies, and any other materials to be determined during project implementation.

Sub-component 3.2: Public Awareness (Recognition Program)

29. The objectives o f this sub-component are to overcome perceived technology risks that chiller owners in India may have and to promote proper maintenance o f chillers in order to sustain the designed performance o f the equipment. To overcome the perceived technology risks that energy savings may not be able achievable in India, where servicing quality may not be as good as in developed countries and where operating conditions may be more severe than those in developed countries, the CEEP will assess those barriers and address those concerns. In this regard, the project proposes to carry out annual recognition awards to honor those chiller owners that properly maintain their chillers and able to sustain high performance o f their chillers. These awards will provide good incentives to all project participants to closely monitor the performance o f their chillers, which will maximize CF revenues in a sustainable manner.

60

30. As per the requirements o f the Monitoring Protocol 100% o f chiller replacements will be subject to online monitoring and annual verification by an independent auditor or DOE. Based on performance, individual chillers will be candidates for annual recognition awards.

3 1. This activity will consist o f three tasks: (i) identification o f candidates for the awards based on performance as indicated in the annual DOE report; (ii) chiller plant audit and evaluation; and (iii) an annual event to award the winners. Considerations should be given to performance o f their chillers as mentioned and their efforts in initiating other energy conservation measures beyond the scope o f the project. IDBI Bank will carry out t h s activity in close collaboration with BEE and the Ozone Cell.

32. The Sub-component 3.1 will include a series o f following training and workshops:

(a)

(b)

(c)

Launch workshop to inform the public o f the commencement o f the project and to invite interest parties to participate; Project cycle workshops to inform interested parties o f all the project requirements, eligibility and funding criteria; and Technical workshops on measurement, monitoring, and verification o f power consumption and energy savings in line with the project’s requirements.

More detailed criteria for these awards will be developed in close consultation with chiller manufacturers and chiller owners during project implementation.

Component 4: Project Management Unit

Sub-component 4.1 : Project Management Unit:

33. The Project Management Unit will be established by IDBI Bank. The PMU will be staffed by one manager, three technical staff, one financial management officer, one part-time procurement officer, and one administrative officer. The PMU will be responsible for implementing al l activities under the CEEP. In addition, i t will also be responsible for developing and updating marketing plans for this project to ensure maximum and effective outreach to the target groups:

Identifying, in collaboration with equipment suppliers and ESCOs, new eligible CFC-based centrifugal chillers; Reviewing eligibility o f the replacement applications; Developing and managing the M I S and database for the chillers inducted into the program for tracking energy savings; Developing and processing all legal agreements (Memorandum o f Understanding, Sub-Grant Agreements or Emissions Reduction Transfer Agreements) wi th project participants; Providing lending at commercial terms, if requested by eligible chiller owners;

61

Disbursement o f fimds to project beneficiaries after proof o f destruction o f the chiller and proper collection o f CFCs; Keeping an inventory o f stored CFCs from the project, and informing the MOEF on a regular basis; Managing the cash f low and maintaining accurate and updated records o f financial flows for all chillers replaced by the project; Monitoring implementation o f the SGAs and ERTAs including baseline power measurement, procurement, installation, commissioning and operations o f new non-CFC-based centrifbgal chillers, and contracting consultant services and supervising their effort to carry out power measurement and implemented monitoring and verification (MM&V) protocols; and Preparing or facilitating preparation o f financial management reports, financial audit reports, progress reports, verification reports, and any other reports that may be required by the World Bank, MLF, GEF, and/or CDM.

34. consultants when needed. The PMU will be hnded by the management fees provided by the CEEP.

In carrying out these activities, the PMU will be supported by teams o f

Sub-component 4.2: Development o f a marketing tool to demonstrate cost effectiveness o f chiller replacement.

35. To create awareness o f chiller owners o f energy saving opportunities from chiller replacement, the CEEP has developed a simple computer software with a user-friendly interface to demonstrate significant rate-of-return on investment o f chiller replacement to decision makers. This software has been developed with the support o f U S EPA, and as such it i s neutral and free from any vested interest o f chiller manufacturers.

36. the format that would be expected by facility managers contemplating a major capital expenditure, by using standard financial analysis concepts. I t would also provide an analytical model reflecting the specific financing options offered by the CEEP, which include both up-front subsidy assistance and downstream financial subsidy as a result o f carbon finance. This tool will also be utilized as a standard financial communication vehicle between chiller owners and chiller suppliershendors.

This marketing tool will produce a quick and simple financial analysis report in

37. including:

This marketing tool provides decision makers with the key financial parameters

i) . ii). iii). iv) . v). vi).

vii). viii).

internal rate o f return (IRR); net present value (NW); simple payback; comparative lifecycle costs; cash flow (with visual representation) reflecting change over time, and incorporating any downstream carbon finance payments; and gross estimates o f environmental impacts based on average country- specific generatiodfhel m ix (e.g., avoided Sox, NOx, particulates, carbon, etc.)

62

38. regard to low cost and/or no cost measures would be introduced through reproduction o f U S EPA materials. Both the computerized marketing tool and printed materials will be made available to chiller owners, suppliers, ESCOs, and other stakeholders through direct mails and at workshops financed by the project.

Moreover, USEPA’s experience from i t s Energy Star Program particularly with

39. support provided by U S EPA. It i s anticipated that further refinement o f these tools (computer software and printed materials) will be required during project implementation.

Costs o f init ial development o f these marketing tools are covered by funding

40. level o f subsidy, and obligations o f chiller owners. To facilitate preparation o f chiller replacement proposals by chiller owners and suppliers, a Project Implementation Plan (PIM) describing all steps in the project cycle from expression o f interest to installation o f new equipment and disbursement o f financial incentives has been prepared by IDBI Bank. The P I M will also delineate detailed requirements pertaining to eligibility, determination o f subsidy levels, procurement o f new equipment, and proper disposal procedures o f baseline equipment and unused refrigerants. Information related to baseline power measurement, requirements o f data loggers, sampling, monitoring and verification protocols will also be provided.

IDBI Bank has prepared a standard term sheet describing key eligibility criteria,

41. stakeholders to assist IDBI Bank to develop and continue to update a marketing plan during the course o f project implementation. Chiller suppliers and ESCOs will be invited to submit l is ts o f chiller installations in India. These lists will be kept confidential for up to 18 months. After the expiration o f the 18 month period, IDBI Bank will be allowed to share names and contact information o f chiller owners in those l is ts that have not participated in the project, with other suppliers.

This sub-component will also include incentives to chiller suppliers and relevant

42. participation o f chiller owners that are in their own l ists in the project, chiller suppliers will be compensated at the level o f US$0.50 for each ton o f carbon emission reduction generated from chillers that they replace for these particular clients. Incentives will be provided to chiller suppliers after new chillers are in operation for one year. Incentives will be provided on an annual basis until 2013. Funding for these proposed incentives will come from part o f C D M revenues.

If, within the 18 month period, chiller suppliers could facilitate the successful

63

Diagram 4.1: Sources and Flow of Funds

64

Annex 5: Project Costs

Project Components

India - Chiller Energy Efficiency Project

US$ Table A5.1: Proiect Costs

Component 1 : Investment in Chiller Replacement 1.1 Chi l ler Replacement (Option 1) 1.2 CDM Payment (Option 2)

Sub-Total Component 2: Measurement, Monitoring and Verification

2.1 I Baseline Measurement

70,124,604 7,686,370 1,877,396

79,668,370

222.000

3.4 Sub-Total

Audi ts 40,000 1.479.781

I Total I 83.273.604 I

ComDonent 1: I n v Sector I

5.730.000 264.3 16 3.569.450 70.124.604 1 79.668.370 Component 2: 0 I 206,236 I 1,365,764 I I 1,572,000 MM&V Component 3: TA

I Component4: PMU I 570,000 I 224,448 1 686,333 I I 1,479,781 0 305,000 228,453 533,453

Total I 6,300,000 I 1,000,000 I 5,850,000 I 70,124,604 I 83,273,604

65

Annex 6: Implementation Arrangements

India - Chiller Energy Efficiency Project

1. The CEEP involves the phase-out o f ODS and the reduction o f GHG emissions as a result o f replacing o ld baseline chillers with efficient chillers. The project offers co- benefits to both the ozone layer protection and climate change, and the demonstration o f energy efficiency measures. Funding to support this project is from the MLF, GEF, and CDM. At the national level, the project therefore cuts across responsibilities o f various agencies in India. For the Montreal Protocol and Climate Change Convention, implementation o f the Protocol and Convention i s within the mandate o f the MoEF, whereas energy efficiency programs are the responsibility o f the BEE.

2. responsibility for implementation o f the Montreal Protocol related activities in India. The MoEF exercises i t s responsibility through an Ozone Cell (OC) which has been established within the MoEF for this purpose. The OC is therefore responsible for day- to-day operations o f the Montreal Protocol Program under the guidance o f the MP Empowered Steering Committee representing by concerned ministries.

With regard to the Montreal Protocol, the MoEF has been assigned overall

3. With regard to the United Nations Framework Convention on Climate Change (UNFCCC), any activities related and its financial mechanism (GEF) would have to be reviewed and approved by the India GEF Empowered Steering Committee which has membership from various concerned ministries. The Project has been cleared by both empowered steering committees. The MoEF has also been appointed as the Designated National Authority (DNA) for the purposes o f the UNFCCC’s Kyoto Protocol, and as such, i t will have to issue a Letter o f Approval (LOA) as part o f the validation o f the CEEP.

4. With regard to energy conservation, the Ministry o f Power and BEE takes the lead in facilitating and coordinating energy efficiency initiatives. The Programmatic Framework Project for Energy Efficiency in India i s a strategic framework to put in place an appropriate regulatory and market transformation regime that will address numerous market failures promoting the widespread adoption o f energy efficiency products and technologies. Strengthening institutional framework, promoting markets for energy efficient products and services, and developing innovative financial instruments are some o f the measures being facilitated by BEE.

5. Steering Committee; (ii) GEF Empowered Steering Committee; (iii) DNA under the KP and (iv) BEE. The proposed involvement would be at the policy level to ensure that objectives and impact o f this project are in line with the national policies. Moreover, to ensure effective policy support from these relevant bodies, the project intends to seek participation o f representatives o f these bodies at key events (e.g., the launch workshop,

The CEEP is, therefore, designed to involve these four bodies: (i) MP Empowered

66

key public awareness events, and etc.) These bodies will also be informed o f the implementation progress o f the project on a periodic basis. Consultations with the specific bodies will be requested as needed.. The national institutional arrangement as described i s shown in Appendix I.

6. to India will be signed between GO1 and the World Bank. In addition to the Project Agreement between the World Bank and IDBI Bank, GO1 would also conclude a separate arrangement with IDBI Bank for the transfer o f the grant funds to IDBI Bank and to engage it as a FI for this project. In addition, IDBI Bank will enter into an Emission Reduction Purchase Agreement (ERPA) with the World Bank in i t s capacity as trustee to the Spanish Carbon Fund. Based on these agreements, IDBI Bank will be responsible for day-to-day operations and for managing grant resources from the MLF and GEF, and C D M revenues generated by this project on behalf o f chiller owners. In exchange for services provided by IDBI Bank, IDBI Bank will receive a management fee to cover i t s administrative and management costs.

Legal Agreements: Grant Agreements to channel funds from the MLF and GEF

7. management and implementation o f the CEEP. To carry out these responsibilities, IDBI Bank will establish a small Project Management Unit (PMU) to manage day-to-day operations o f this project, including market development, sub-project implementation, disbursement o f grant funds or C D M revenues to each sub-project, technical assistance, management o f the overall project funds including reporting and auditing as required by the Bank, and informing the Ozone Cell and BEE on any policy and regulatory support that may be required. I t i s also responsible for establishing a comprehensive M I S to keep track o f all chillers installed in India and those replaced by the CEEP. The M I S will also serve as a main database for aggregating emission reductions (ERs) from chiller replaced by the CEEP. A Project Implementation Manual (PIM) will detail the overall framework for project implementation, reporting and monitoring, the processes to be followed for the various sets o f activities and the roles and responsibilities o f the agencies executing and monitoring the program. The OC also has a role to play in project implementation primarily with regard to marketing the project to the public sector unit, and as the responsible authority for the final destruction / disposal o f old, contaminated CFCs. With regard to marketing, the OC will help update the inventory o f chillers in the public sector over the next few months, support the project launch workshop by sending special invitations to the public sector agencies and direct interventions as required.

Project Implementation Arrangement: IDBI Bank will be responsible for financial

8. will be channeled directly to segregated designated bank accounts be established by IDBI Bank while C D M revenues will be deposited in a designated account for replacement o f additional chillers and for covering expenditures related to monitoring and verification as per the C D M requirements.

Fund Flow: To facilitate the flow o f funds, resources from the MLF and GEF

9. reporting o f project expenditures financed by the GEF, MLF, and CDM. Funds received f iom these three different sources will be maintained in segregated designated bank

Financial Management: IDBI Bank will be responsible for the accounting and

67

accounts. A financial management information system (FMIS), part o f the project’s overall MIS, will be established in order to track project expenditures and disbursements made from these respective accounts. The MIS should allow the PMU staff to extract relevant information for preparation o f financial management reports, which will be maintained in accordance with the internationally accepted accounting standardpractice. To ensure that the financial management arrangements will work in a satisfactory manner, IDBI Bank will submit financial management reports for the Bank’s review based on the schedule to be agreed during the project appraisal. All project accounts will be subject to audits on an annual basis by independent auditors whose qualifications are acceptable to the Bank. Detailed financial management arrangement i s provided in Annex 7.

10. Chiller Suppliers and ESCOs: To facilitate effective market penetration, IDBI Bank will enter into an agreement in form o f Memorandum o f Understanding (MOU) with chiller suppliers and ESCOs. The project will rely on chiller suppliers and ESCOs as i t s major marketing force to promote chiller replacement. They will support the project by determining potential participants, disseminating information to beneficiaries, and assisting the submission o f project proposals to IDBI Bank. They will agree to implement terms and conditions for baseline power measurement, monitoring o f performance o f new chillers, supply new chllers and monitoring equipment in accordance with general specifications established by the CEEP.

11. Chiller Owners: Each chiller owner participating in this project will enter into a Sub-Grant Agreement or Emission Reduction Transfer Agreement (ERTA) with IDBI Bank. Critical conditions for participants i s to allow IDBI Bank or i t s representative access to their baseline and new chillers for the purpose o f establish baseline power consumption and for monitoring and verifying actual energy savings. The SGAs will describe terms and conditions including the level o f funding, disbursement schedules, and obligations o f chiller owners pertaining to this project while ERTAs will need to specify value o f each ER unit as well as the period for which CF revenues will be provided by the project. For both options, chiller owners must also agree to provide IDBI Bank and its representative an access to their chillers for the purpose o f establishing the baseline power consumption and for determining and verifying ERs during the agreed period. As the financial intermediary, IDBI Bank can make available commercial loans at prevailing rates for eligible chiller owners, if so requested.

12. Monitoring: IDBI Bank will contract a technical consulting firm to undertake project monitoring at the chiller level. This monitoring approach will rely on remote technology which will allow real-time monitoring o f chiller performance. In case there are any operational problems, immediate remedial actions could be undertaken promptly.

Project Implementation Plan

14. The CEEP will be implemented over five years, i.e., from June 2009 -June 2013. Activities financed by the GEF and MLF will be completed by December 201 1 based on current expenditure projections. Replacement and installation o f new chillers beyond

68

2010 will be financed solely by C D M revenues and co-financing by building owners. Installation o f new chillers will end in 2012. However, the project supervision will continue until June 201 3 to ensure that C D M revenues are timely disbursed and properly utilized by IDBI Bank. The following table shows the implementation plan o f the CEEP.

Replacement and Installation o f

Installation o f data loggers y d

Monitoring o f chiller

Chillers Baseline measurement

transmitter

Table A6-1: Project Implementation Plan

2009 2010 2011 2012 2013 X X X X -

X X X X X X X X X X

X X X X X performance Energy savings/Emission X X X X Reduction Validation I I I I I I Project Awareness Workshops Technic a1 Works hoD s

X X X - - - X X X X

Public Awareness (Recognition) Development o f M I S

- X X X X X

Project Management Marketing Activities

69

X X X X X X X X X X

Procurement Audit Financial Audit

X X X X X X X X

Annex 7: Financial Management and Disbursement Arrangement

India - Chiller Energy Efficiency Project

1. Summary: This assessment o f financial management arrangements for CEEP has been undertaken in accordance with OPBP 10.02 and the Financial Management Practices in World Bank Financed Investment Operations - Manual, November 2005. Funding for the CEEP will be provided by the Global Environment Facility (GEF), the Multilateral Fund (MLF), and the Spanish Carbon Trust Fund (CF) administered by the World Bank. Wh i le the task team at the World Bank wil l be monitoring the implementation o f the project, the Structuring, Syndication and Advisory Department ( S S A D ) team o f IDBI Bank will be responsible for executing the project. IDBI Bank will account for the funds received and disbursed, liaise for the technical monitoring including providing an administrative oversight to the technical monitoring processes and take necessary measures to ensure that the project outcomes are achieved. The assessment i s based on a due diligence review undertaken o f the financial management systems followed by IDBI Bank. Based on the assessment and narrative provided in the following paragraphs, the overall FM arrangements to support the implementation o f CEEP for the specified objectives over the period 2009 to 2013 are considered adequate.

2. Objective and Background: The objective o f the Chiller Energy Efficiency Project (CEEP) i s to stimulate the accelerated conversion o f CFC-based chillers to new non-CFC ones which are more energy efficient, through the provision o f financial incentives to address market and techno-economic barriers. The program will be supported by the robust policy framework regarding CFC phase-out already put in place by the Government o f India, as per it obligations under the Montreal Protocol. The sustainability o f the program will be enhanced through availing carbon finance revenues. The CEEP will also support the strengthening o f national capacity for carbon finance intermediation which will further ensure sustainability for a programmatic approach that would lead to a permanent transformation o f the chiller market. The methodology to account for emission reductions by the Kyoto Protocol's C D M EB and i t s Methodology Panel has been completed and was approved in November 2007.

3. Funding: Funding for this project i s from three sources as stated below:

a) GEF US$6.3 m b) MLF US$l.Om c) CF US$5.85.m

4. Funding from GEF and MLF will form the f irst phase o f funding pool that will be made available to IDBI Bank to finance the subsidy cost o f chillers and/or eligible costs o f goods and services; on a reimbursement basis. Funding from CF will be made available for carbon emission reductions achieved by the project on an annual basis. The chiller owners will have the option o f availing the upfront subsidy (estimated to be about 20% o f the normative cost o f a new chiller) upon completion o f installation o f new chillers and disposal o f baseline chillers in accordance with the disposal requirement o f

70

the CEEP (in which case the chiller owner agrees to give up its emission reductions to the project); or a fixed carbon emission revenue per ton o f CO2 starting from one year after completion o f installation and operation o f new chillers. I t is expected that most o f the chiller owners from the private sector will opt for upfront subsidy and the agreed CF annual revenues under the carbon finance component o f the project will then flow to IDBI Bank, which will account for them and these funds are to be re-rolled into the program as incentives to replace additional chillers and/or to fund other agreed eligible costs o f goods and services. The chiller owners from the public sector, on the other hand, are likely to be more interested in selling carbon credits upon certification by the C D M Executive Board. I t i s expected that the funding from GEF and MP may last for about two to three years within which the CF funds would start flowing in to take care o f the necessary funding o f the project till 2013. The overall project cost incorporating the accounting for generation o f CF funds, financing subsidy o f additional chiller, further generation o f CF funds etc including contributions from chiller owners would amount to around U S 7 0 m.

Sourceof Funding Eligible activities

5. Implementation Arrangements and Budgeting: The key responsibilities o f IDBI Bank under this project are to (i) develop the financial products needed to attract participants to the program o f activities conceived, (ii) market the same to the target population o f owners o f o ld chillers, in cooperation with chiller manufacturers; (iii) deliver the product in operational terms, that is, cause old chillers to be replaced with more energy efficient ones. IDBI Bank will need to sign MOUs with chiller manufacturers to ensure their sustained participation and to support project implementation; and (iv) undertake al l monitoring requirements, including any identified in the ERPA. In addition, once the ERPA is signed, IDBI Bank will enter into sub-project agreements with chiller owners to ensure that ERPA payments, as applicable, f low through the carbon finance unit o f the Bank to IDBI Bank for funding the additional chillers and other eligible costs.

GEF MLF CF

0 Subsidy for chiller Subsidy for chiller

0 Technical 0 Technical assistance Technical assistance

Subsidy for chiller replacement replacement replacement

6. IDBI Bank will maintain three segregated designated bank accounts for the different sources o f funds. These bank accounts will be current accounts and adequate amounts based on efficient forecasting will be placed in short term or long term fixed deposits with the objective o f maximizing the funds without affecting their flow for the project activities and interest earned will be ploughed back in to the respected sources o f funds to be used for related project activities. These accounts (current as well as fixed deposits) will be maintained with IDBI Bank which i s a commercial bank. The Head, S S A D team, IDBI Bank will have the overall responsibility for recording the utilization o f the grant.

7. IDBI Bank would use GEF, MLF and CF funds for the eligible activities, under the overall monitoring o f the World Bank as detailed in table 7.1 below.

Table A 7.1

71

assistance

management unit expenses For each quarter, IDBI Bank will be able to claim an amount o f the management fee to be calculated on a pro-rated basis and in accordance with the quantum o f incurred expenditures , subject to the overall 10% cap

0 Project Project management unit expenses Monitoring & verification expenses

0 For each quarter, IDBI Bank will be able to claim an amount o f the management fee to be calculated on a pro-rated basis and in accordance with the quantum o f incurred expenditures, subject to the overall 10% cap

Project management unit expenses (including management fees)

0 Monitoring & verification expenses Annual payment to chiller owners for those that have opted for the carbon finance option

8. Disbursement and Funds Flow: The hnds from GEF and MLF sources will f low from the Bank to IDBI Bank (not through CAAA). Funding for the CF will f low from the carbon financing unit o f the Bank to IDBI Bank. I t shall maintain the local currency (in INR) segregated designated bank accounts that will be used to deposit advances for the project and to make payments for eligible project expenditures. The following table 7.2 presents a detailed analysis o f the disbursements to be made to IDBI Bank.

Disbursement Advance

GEF Forecast o f estimated expenses for two quarters.

Table A 7.2 MLF

Forecast o f estimated expenses for two quarters.

CF CF will make advance payment up to 25% o f total ERPA value under the following conditions: A. The chiller replacement has been progressed in accordance with the implementation schedule; B. Funding from GEF and MLF has been exhausted by 75%, evidenced by disbursement o f subsidy grant from the project entity’s special account for the fhding pool; and C. The revenue generated from the payment for the delivered contract certified emission reductions (CERs) i s not sufficient to replenish the hnding pool due to delay in CER issuance

72

Disbursement Later

GEF The later

Disbursements

MLF The later

disbursement to IDBI Bank will be based on quarterly interim financial reports for the expenditure incurred during a quarter to be submitted to the Bank; along with forecast o f estimated expenses for the next two quarters.

disbursement to IDBI Bank will be based on quarterly interim financial reports for the expenditure incurred during a quarter to be submitted to the Bank; along with forecast o f estimated expenses for the next two quarters.

CF On annual basis, an independent verification team as accredited by the CDM board will be contracted by IDBI Bank to verify emission reduction achieved by the CEEP. Upon receipt o f the final verification report, IDBI Bank will submit the verification report along with a request for payment directly to the carbon finance unit o f the World Bank. Thereafter, funding from the Spanish Carbon Trust Fund will be made available on the basis o f carbon emission reduction achieved by the project upon issuance o f CER from the C D M EB .

9. Staffing, Accounting and Reporting: Whi le the S S A D team at IDBI Bank is responsible for planning and executing the project, the necessary payments will be processed by IDBI’s central accounting unit & Account Payable Unit after necessary checks. From organizational perspective, Deputy General Manager, S S A D team will be responsible for maintaining financial records for the project. There i s adequate additional staffing in the Finance & Accounts Department to assist for maintaining the financial records & the processing o f payments for the project.

10. A separate ledger account for GEF, MLF and CF funding with necessary line items o f expenditures will be maintained in FINACLE, the existing accounting software. Accounting for project expenditures will be maintained on cash basis. However advances paid for any goods or services will be classified as ‘advance’ until delivery andor installation i s confirmed. The financial data from FINACLE will be the primary data for the preparation o f the project interim unaudited financial reports4*, and these will be submitted to the World Bank on a quarterly basis within 45 days o f the close o f each quarter. These financial reports will also form the basis o f disbursements from GEF and MLF funds as elaborated under ‘disbursement and hnds flow’.

IDBI would prepare consolidated financial report for the project with details o f GEF, MLF and CF funds 42

in separate annexures. The interim unaudited financial reports wil l record expenditure incurred during the period as wel l cumulative expenditures for the l i fe o f the project.

73

11. Internal Control: All financial controls applicable to IDBI Bank will also apply to the expenditures made from the project. The internal audit unit o f IDBI Bank would also conduct audit o f the payments made out o f the project on annual basis and IDBI Bank would share their observations with the World Bank during missions.

Risk

12. External Audit: IDBI Bank will appoint an external auditor for the project in consultation with the Bank under agreed TOR43. Such audit report, along with annual financial statements providing sufficient information on sources and uses o f funds associated with the project and the management letter, will be submitted to the Bank within six months o f the close o f the financial year. Table 7.3 shows the audit reports that would be received and recorded by the Bank in association with the usage o f grant funds.

Residual R i s k Risk Condition o f Rating Mitigation Negotiations, Board or

Measures Effectiveness (Y/N)

Table A 7.3 1 Agencv I Audit ReDort I Audited bv I Due Date

0 Entity Level (IDBI) 0 Project Level

1 IDBI I CEEP 1 C A firm I September 30 I

L o w N L o w N

13. The FM and audit arrangements for the project have been negotiated and agreed for the entire project duration. FMS’s role will however be limited to a desk review o f the audit report o f the project once GEF and MLF funds are fully exhausted; unless required otherwise by the task team for special reasons.

Budgeting 0 Accounting 0 Internal Control

L o w N Low N

Modest Bank’s N normal swervision

I CountrvLevel I Modest I I N

I FundsFlow I L o w I I N

T h i s TOR will not include coverage o f procurement procedures as per Bank regulations as the Bank’s 43

procurement unit has indicated appointment o f a separate procurement auditor for the project due to the technical nature o f procurement.

74

Risk

Financial Reporting

Residual R i s k Risk Condition o f Rating Mitigation Negotiations, Board or

Measures Effectiveness (Y/N) L o w N

15. Wh i le the similar risk profile as for GEF and MLF funding may be associated with initial CF funding, the later continuity o f the project will be subject to generation o f additional funds from CF based on carbon emission reduction. The r i sk on account o f funds flow for the later years will therefore be high and the task team will need to ensure stringent technical monitoring mechanism o f the chillers already replaced for continuous generation o f funds through CF for replacement o f additional chillers and making payments for other agreed expenditure throughout the l i f e o f the project. As elaborated above and agreed with the task team, FMS’s role will be limited to desk review o f the audit report o f the project once GEF and MLF funds are h l l y exhausted; unless required otherwise by the task team for special reasons.

Auditing Overall Risk

16. IDBI Bank and World Bank have agreed on the Terms o f reference for the External Audit during Negotiations.

L o w N L o w N

17. Public Disclosure: Necessary financial information for the project and i t s annual audit reports will be displayed on the project website.

18. Project Covenants:

0

Submission o f quarterly IUFRS~~ within 45 days o f the close o f each quarter Audited annual report and financial statements; and the management letter with external auditor’s observations along with compliance reports on the audit to be submitted within six months o f the closure o f the financial year.

44 Interim Unaudited Financial Reports

75

Annex 8: Procurement Arrangements

India - Chiller Energy Efficiency Project

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 (revised October 2006); and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004 (revised October 2006), and the provisions stipulated in the Legal Agreement. Paragraph H o f the Guidelines summarizes the procedures for undertaking project funded procurements l ike data loggers and transmitters on the basis o f National Competitive Bidding (NCB). For each contract to be financed by the Loadcredi t the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame will be agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. The project will provide incentive to the beneficiaries (chiller owners) who opt for replacement o f chillers under Component 1, either through: (i) an upfront grant o f 20% towards the cost o f new energy efficient non-CFC based chillers; or through (ii) fbture carbon finance revenues to be generated by energy savings from replacing CFC-based chillers with new energy efficient chillers.

3. In cases o f upfront grant beneficiaries, the Project’s share o f 20% upfront grant, i s calculated on the basis o f the capacity (refiigeration tonnes) o f the replaced chillers and i s not based on the cost o f the new chillers purchased. I t shall be paid to the manufacturershppliers o f the new chillers directly, after successful running o f the new chillers for a specified period and after disposal o f the old chillers in the agreed manner. Payment o f upfront grant shall be the last payment installment to the suppliers o f the chillers. In case o f beneficiaries for future carbon finance revenues, IDBI Bank shall collect the necessary chiller data, prepare the documentation and facilitate receipt o f these credits by the beneficiaries.

4. New chillers shall be provided with data loggers and transmitters (under Component 2) for measurement o f energy consumption and for monitoring performance by collecting performance parameters so as to validate carbon emission reduction and thereby be eligible for receipt o f carbon credits. These data loggers and transmitters shall be fully funded by the project.

5. Other procurement under the project will mainly include hiring o f consultants for measurement, monitoring and verification (MM&V) for verification o f carbon emission reductions, and for running workshops for training and project awareness, and marketing

76

activities. There would be very limited procurement o f other goods & equipment, and procurement o f works i s not anticipated.

B. Institutional and Implementation Arrangements

6. A Project Agreement to engage a IDBI Bank as the executing agency for this Project will be signed with the World Bank. GO1 will enter into Grant Agreements with the World Bank to receive funds fkom the MLF and GEF, which it will transfer to the financial intermediary under a separate arrangement with the latter. In addition, IDBI Bank will enter into an Emission Reduction Purchase Agreement (ERPA) with the World Bank as Trustee to a number o f Carbon Funds.

7. IDBI Bank will be responsible for day-to-day operations o f the Project including all procurements (except procurement o f chillers to be done by the beneficiaries), market development, marketing o f the incentive program, sub-project implementation, management, reporting, ensuring compliance with the documentation o f process and auditing. In exchange for these services, IDBI Bank will receive a management fee and will establish a Project Management Unit (PMU) to manage day-to-day operations o f this Project including procurement.

C. Procurement

8. Procurement o f goods: Project funded procurements (except the procurement o f chillers by the beneficiaries) l ike data loggers and transmitters under Component 2, training materials, public awareness material, and material for marketing activities under Components 3 and 4 shall be procured by the FI/MM&V Consultant following N C B I Shopping procedures based on the value and as agreed in the procurement plan. Procurement o f goods following I C B procedures i s not anticipated. However, if any procurement i s undertaken following I C B , Bank Guidelines and Standard Bidding Documents o f the Bank shall be used.

9. Procurement o f works: Procurement o f works i s not anticipated under the project, and if any, it would only be very small works and shall follow NCB/ Shopping procedures based on the value and as agreed in the procurement plan. Procurement o f works following I C B procedures i s not anticipated. However, if any procurement i s undertaken following ICB, Bank Guidelines and Standard Bidding Documents o f the Bank shall be used.

10. Selection o f consultants: Selection o f consultants would mainly include hiring o f consultants for MM&V for verification o f carbon emission reductions, for workshops for training and project awareness, and for marketing activities. Hiring o f consultant services will follow the Bank’s standard RFP documents and Guidelines for Selection o f Consultants by IDBI Bank Ltd, Mumbai. Shortlists o f consultants for services estimated to cost less than US$500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the consultant guidelines.

77

1 1. Procurement by beneficiaries: Procurement o f new chillers including installation, maintenance and performance guarantees (as required) shall be undertaken by the beneficiaries according to commercial practices. Since the incentive to be provided by the project i s not dependent on the cost o f the chiller purchased (but on the refrigeration tomes o f the replaced chiller) and major portion o f the chiller cost i s borne by the beneficiary, i t i s in the interest o f the beneficiary to obtain the best value for his money. Each beneficiary will choose the best conditions in terms o f product, cost and financing and will select one or more chiller suppliers who can develop a sub-project(s) to optimize the beneficiary benefits and in l ine with the project requirements. A format for the sub- project agreement covering important conditions l ike warranty, performance parameters, annual maintenance, performance guarantee, service to measure and maintain the promised energy consumption and other performance parameters etc. shall be developed by IDBI Bank and shared with the World Bank.

12. Fraud and Corruption: All contracts entered into under the project whether by the beneficiaries or by IDBI Bank or any other entity shall include the World Bank’s fi-aud and corruption guidelines as well as “the right to audit” clause.

D. Assessment of the Agency’s Capacity to Implement Procurement

13. An assessment o f the capacity o f IDBI Bank to implement the procurement arrangements has been carried out by the Bank procurement team and included: (a) a review o f the organizational structure for implementing the project; and (b) interaction with the concerned procurement staff ofIDBI Bank. Since IDBI Bank i s a large financial institution in India, i t i s wel l versed with public procurement procedures. The procurement staff, however, is not yet conversant with World Bank procedures. Accordingly, IDBI Bank shall train i t s concerned staff in World Bank procurement procedures.

14. Procurement r isks and mitigation measures: Risks issues concerning the procurement components for implementation o f the project have are described below.

15. The bulk o f the procurement under the project falls under Component 1 and the incentives given to the beneficiaries are either the upfi-ont grants or future carbon finance revenues. Since the upfront grant o f 20% i s not calculated on the basis o f the cost o f the energy efficient chiller being purchased, but i s instead based on the refrigeration tomes (RT) rating o f the replaced chiller, the grant or the carbon credits are not dependent on the cost o f the chiller. As such, the project does not carry much r i sk related to the cost o f the chiller being procured and it i s in the interest o f the beneficiary to obtain the best value for his money. However, the project has to ensure that the old and the new chillers are within the eligibility criteria for chiller selection and the replaced chillers meet with the refrigerant and energy saving requirements and sufficient documentation is in place for obtaining the carbon credits. Implementation and mitigation arrangements in the project, therefore, are built around this requirement.

78

16. Other procurement under the project will be rather simple and limited both in number and value, shall mainly be carried out by the IDBI Bank, mostly, following N C B I Shopping procedures based on the value and as agreed in the procurement plan and shall be subject to regular Bank’s supervision-and reviews.

17. The agreed control measures for risk mitigation include that IDBI Bank shall review and clear the sub-proj ect proposals covering important conditions l ike warranty, performance parameters, annual maintenance, performance guarantee, service to measure and maintain the promised energy consumption so to ensure that basic project requirements for eligibility and performance are met.

18. FI will also (i) publish information o f contracts entered into by it and costing above US$25,000 (INR 1 million) on i t s website to bring about transparency; (ii) maintain separate records relating to complaints and their redressal; (iii) ensure that the project i s carried out in accordance with the provisions o f the World Bank Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits (revised October 2006); and (iv) IDBI Bank and beneficiaries wi l l maintain all records relating to procurement for Bank’s review and audit.

19. The overall project r i sk for procurement i s presently considered to be ‘High’.

E. Procurement Plan

20. A Procurement Plan for project implementation has been developed by the FI and provides the basis for the procurement methods. The copy o f this plan will be available at IDBI Tower, WTC Complex, Cuffe Parade, Mumbai, and in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs.

F. Procurement Thresholds

2 1. Goods and equipment. N o I C B procurements are anticipated. However, contracts for goods and equipment above US$200,000 equivalent (if required) will be procured following the Bank I C B procedures and Bank’s approved SBD’s. Contracts between US$200,000 and US$30,000 equivalent will be procured following N C B procedures and Bank’s approved SBD’s and contracts below US$30,000 equivalent may be procured following Shopping procedures. Proprietary items and software which meet the requirements o f Clause 3.6 o f the Procurement Guidelines may be procured following direct contracting with the Bank’s prior agreement. Small value purchases up to US$200 equivalent each may be made following direct contracting.

22. Works. I C B procurement is not anticipated. However, contracts for works above US$1 mi l l ion equivalent will be procured following the Bank ICB procedures and Bank’s approved SBDs. Contracts between US$1 mi l l ion and US$30,000 equivalent will be procured following N C B procedures and Bank’s approved SBDs and contracts below US$30,000 equivalent may be procured following Shopping procedures.

79

23. Consultancy Services. Procurement o f Consultants shall follow the standard documents o f the Bank and Guidelines for Selection and Employment o f Consultants. Except as provided in the following paragraphs, consultants’ services shall be procured under contracts awarded in accordance with the provisions o f paragraphs 2.1 through 2.31 thereof applicable to Quality and Cost Based Selection o f consultants. Shortlists o f consultants for services estimated to cost less than US$500,000 equivalent per contract may comprise entirely o f national consultants in accordance with the provisions o f paragraph 2.7 and footnote 21 o f consultant guidelines.

24. Services for assignments which the Bank agrees meet the requirements set forth in the corresponding paragraphs under Section I11 o f Consultant Guidelines, may be procured following Quality Based selection (QBS), Least Cost Selection (LCS), and Selection under a Fixed Budget (FBS).

25. Services estimated to cost less than US$lOO,OOO per contract, may be procured under contracts awarded in accordance with the provisions o f paragraphs 3.1 and 3.7 o f the Consultant Guidelines following Selection Based on Consultants’ Qualifications (CQS). Services estimated to cost less than US$lOO,OOO per contract, may, with the Association’s prior agreement be procured in accordance with the provisions o f paragraphs 3.9 through 3.1 1 o f the Consultant Guidelines following Single Source Selection (SSS).

26. Assignments that meet the requirements set forth in Section 5 o f Consultant Guidelines may be procured under contracts awarded to individual consultants. Selection o f individual consultants on sole source basis that meet the requirements o f paragraph 5.4 o f Consultant Guidelines shall be subject to prior approval o f the Bank.

G. Frequency of Procurement Supervision

27. In addition to the prior review supervision to be carried out from Bank offices, the Bank team will visit the field to cany out post review o f procurement actions once in a year. The need for these supervision missions shall reduce substantially after GEF and MLF hnds have been utilized which i s expected to be over in the f i rs t two years o f the project .

H. Basic Principles for NCB Procedures

Only the model bidding documents for N C B agreed with the Government o f India Task Force (and as amended from time to time) shall be used for bidding. Invitation to Bids shall be published in at least one widely circulated national daily newspaper and on FI’s website, at least 30 days prior to the deadline for the submission o f bids. N o special preference will be accorded to any bidder either for price or for other terms and conditions.

80

Except with the prior concurrence o f the Bank, there shall be no negotiations o f

Extension o f bid validity shall not be allowed without the prior concurrence o f price with the bidders, not even with the lowest evaluated bidder.

the Bank (i) for the first request for extension if i t is longer than four weeks; and (ii) for all subsequent requests for extension irrespective o f the period Re-bidding shall not be carried out without the prior concurrence o f the Bank. The system o f rejecting bids outside a pre-determined margin or ‘bracket’ o f prices shall not be used. Rate contracts entered into by DGS&D shall not be acceptable as a substitute for N C B procedures. Such contracts shall be acceptable for any procurement under Shopping. Two or three envelope system shall not be used.

H. Prior Review

28. With respect to each contract, for goods estimated to cost the equivalent of US$200,000 or more, and works estimated to cost the equivalent o f US$300,000 or more, and the f i rs t two contracts for goods irrespective o f value, the procedures set forth in paragraphs 2 and 3 o f Appendix I to the Guidelines shall apply.

29. With respect to each contract for the employment o f consulting f i r m s estimated to cost the equivalent o f US$lOO,OOO or more and the f irst two contracts irrespective o f value, the procedures set forth in paragraphs 2 and 3 o f Appendix 1 to the Consultant Guidelines shall apply.

30. With respect to each contract for the employment o f individual consultants estimated to cost the equivalent o f US$50,000 or more, a report on the comparison o f the qualifications and experience o f candidates (or, where applicable, the qualifications, experience), terms o f reference and terms o f employment o f the consultants shall be h i s h e d to the Association for i t s prior review and approval. The contract shall be awarded only after the said approval shall have been given. The provisions o f paragraph 3 o f Appendix 1 to the Consultant Guidelines shall also apply to such contracts.

I. Post Review

3 1. All other contracts, except for the purchase o f chillers shall be subject to post review as per procedures set forth in paragraph 5 o f Appendix 1 to the Guidelines. The procurement carried out by the beneficiaries will be reviewed on a random basis to satisfy that procurement has been carried out fair and transparent manner.

81

Attachment 1. Procurement details involving international competition

A. Goods and Works and non consulting services

1. contracting: (Ref Procurement Plan attached as Table A.8 1)

L i s t o f contract Packages which will be procured following I C B and Direct

2. chillers) above US$200,000 or equivalent and all Direct contracting (except small value purchases up to US$200 or equivalent each) will be subject to prior review by the Bank.

All contracts (other than those entered into by the beneficiaries for procurement o f

B. Consulting Services

3. Procurement Plan attached as Table A.8 1)

L i s t o f Consulting Assignments with short-list o f international f i rms. (Ref

82

‘ O N XIBM++ Irl

m 00

Annex 9: Economic and Financial Analysis

India - Chiller Energy Efficiency Project

This Annex presents the economic and financial analysis o f the project. This analysis will also be referred to in Annex 13 on incremental cost, as much o f the rationale for GEF and MLF depends upon the economic analysis o f the project, and the financial perspective o f the chiller owner.

A. Economic Analysis

1. chillers throughout the Indian market. Achieving this objective according to the project plan will have two types o f economic benefits: environmental benefits, not all o f which are readily measurable, and energy-saving benefits, which are readily measurable using traditional techniques. With respect to the energy-saving benefits, these are considered to come by way o f the reduction in electricity consumption associated with the adoption o f the new chillers and the reduction in overall electricity demand on the system. Both o f these have an economic value that can be measured in monetary terms, and it serves as the backbone o f the economic appraisal that follows.

The objective o f this project i s to accelerate the adoption o f non-CFC utilizing

2. environmental benefits o f both local and global nature. At the local level, the reduced requirement for electricity may also lead to a reduction in local pollutants, such as NOx, CO, and SOX. As these reduced local pollutants will be considered co-benefits o f the project, their possible reduction and the economic value o f that reduction wil l not be considered in this analysis. At the global environmental level, the project will contribute two types o f global environmental benefits. First, i t will reduce the consumption o f CFCs in India’s R A C sector by accelerating the replacement o f chillers utilizing CFCs. Second, because the chillers are more energy efficient and require less electricity and because CFCs have a significant global warning potential (GWP), the project will also reduce the emissions o f GHGs. These latter benefits will be measured in tCOze, and where their value can be imputed a value fi-om the global carbon market, that value will also be utilized to measure the global environmental benefits o f the project.

With respect to the environmental benefits, the project will contribute

3. Table A.9.1 summarizes the results o f the economic analysis taken over a twenty- year l i f e o f the replaced chillers. The costs are considered as the costs o f project activities plus the costs o f the chiller replacements, at an average cost o f US$170,000 per chiller. The benefits are measured in terms o f the economic value o f the energy saved using recent prices and exchange rates and the economic value o f the deferred capacity (48 MW valued at US$60 million). The analysis i s undertaken both including and excluding carbon revenues, estimated at US$12/tCO2e. The GEF and MLF grant funds

84

are used (according to World Bank’s Operational Policy45) as benefits to the project, reflecting the rest-of-the-world’s willingness to pay for the associated global environmental benefits. Using the parameters summarized in Table A.9.1, the o f the project without including carbon revenues comes to 68% with a N e t Present Value (NPV) o f US$152.5m. Including the value o f the carbon revenues enhances these figures to 71% and US$160.0 million. Clearly, from a national point o f view, the project is attractive.

Measure costs Capital Costs o f Chillers

Costs o f Removing Barriers and Administering Prorrram

Table A.9.1 Summarv of Economic Analvsis Value

US$62,900,000

us$8,000,000

Total Costs (nominal terms) US$70,900,000

Benefits Total Energy Savings

Value o f Energy Saving (undiscounted)

Deferred Capacity Value o f Deferred Capacity Total Undiscounted Value o f Benefits Value o f GEF & MLF Grants Total Value o f Carbon Revenue

Overall Economic Value N e t Present Value (without carbon revenues) ERR (without carbon revenues) NPV (with carbon revenues) US$160.1 mi l l ion

B. Financial Analysis

3.978 m MWh

US$397.8m

4 8 M W US$59.7 m

US$488.57m

US$7,300,000 US$5.85m

US$152.6 mi l l ion

68%

Units

US$l70,000/chiller * 370 Chillers US$8,000,000 undiscounted

MWh over 20 year life-span o f chillers MWh summed back to year 0- Rs 4,500MWh Rs 45 = U S $ l MW US$ @$1.25m/MW US$

US$ US$12/tonne until 2013 only

Using 10% Discount Rate

Using 10% Discount rate US$12/tonne COze until 2013 onlv

4. The financial analysis undertaken for this project falls into two categories. The f irst o f these i s from the perspective o f the individual chiller owner and helps explore the question whether or not these chiller replacements will occur without additional

45 World Bank OP: 10.04 - Economic Evaluation o f Investment Operations 46 Economic Internal Rate o f Return

85

assistance. The second o f these is the more traditional project-level financial analysis focusing on project financial health.

Measure Value costs Capital Costs o f New, Efficient, Non- CFC Using Chiller Costs o f new, efficient non-CFC Chiller with Tax

US$170,000

US$204,000

B1. Analysis from the Perspective of the Individual Owner

Units

Average cost for new Chiller at size = 430 TR 20% tax on equipment

5. a refrigerant with newer, more energy-efficient chillers making use o f non-ODS refrigerants. Most chiller owners operate commercial and industrial enterprises with numerous demands being placed upon their time and resources. As a result, unless an initiative i s directly related to increasing the output o f their facility or relieving an immediate production bottleneck, most businessmen will not consider it. Possibly, the fixthest thing from their own decision-framework would be the replacement o f chillers to reduce CFC consumption to reduce the depletion o f the ozone layer. Even investing in a new chiller in order to save electricity and reduce costs may be so marginal to their mission that they may have never considered it. As chiller-owners are businessmen, they tend to evaluate decisions from their own narrow business perspective. This i s an obstacle to the implementation o f many projects with both economic and environmental benefits-they simply are not central to the mission (and therefore, the mindset) o f the owner.

This project aims to accelerate the replacement o f older chillers utilizing CFCs as

6. In the case o f chillers, i t is possible to demonstrate this through the financial analysis o f the investment involved. An average chiller in India has a capacity o f about 430 TRY and contains roughly 430 kg o f CFC’s. A new replacement chiller will be typically 30% more energy efficient over an identical duty cycle and will cost approximately US$170,000. If it i s an imported unit, an additional 20% tax may be added to the value o f this equipment, meaning that i t will cost US$240,000. Most chiller manufacturers claim that the equipment can last up to 25 years, but surveys in developing countries, including India, indicate that they frequently remain in use for up to 30 years. But for the sake o f this analysis, the new chiller i s assumed to have a 20-year lifetime given the current lack o f credible data to demonstrate a longer operational l i fe.

7. MWh per year, worth approximately US$6 1,000 /year at current exchange rates and tariff levels. The simple payback for the chiller owner buying a chiller costing US$170,000 i s approximately 2.7 years. If a 20% tax i s added to the chiller, the simple payback extends to 3.3 years. From an energy efficiency perspective, these numbers are quite normal. The financial analysis for an individual chiller owner i s summarized in Table A.9.2 below.

A new, CFC-free, efficient chiller will result in energy savings o f roughly 614

86

Measure Benefits Energy Savings (undiscounted)

Value o f Energy Savings (undiscounted)

Value Units

12,300 MWh MWh over 20 year lifetime o f chiller

US$1,168,272 US$ over 20 year lifetime o f chiller, measured at Rs4.5kWh and Rs45/US$

Value of the Investment NPV (without tax)

10. with a 3 year payback because i t i s not central to their mission. In fact, given the large opportunity set facing the chiller owner for alternative investments, i t i s rare that a new chiller will be chosen over investments that are more central to the business’s core mission. In financial terms, the opportunity cost o f capital to the businessman i s quite high, given the other promising options open to him or her. Studies undertaken o f chiller owners around the developing world have shown that the actual expected rate o f return for these businessmen frequently runs as high as 30%. This means that in order to be attractive, the investment must not only be central to the business but also have an internal rate o f return o f at least 30%.

However, many businesses will not consider investing in an improved chiller even

US$33,558 Evaluated at 30% Discount

1 1. Applying this analysis to the case o f the chillers shows that while a chiller purchased at the average price o f US$170,000 will have an internal rate o f return o f 33%, and a net present value to the chiller owner o f US$33,881 over i t s twenty year lifetime. If the lifetime were extended further, both the rate o f return and NPV would increase. However, if the chiller were to be purchased at the higher price, reflecting the 20% tax, the IRR drops to exactly 30% and the NPV drops to US$-442 (negative). In this latter case, the investment would not be attractive as it would not beat the hurdle rate o f return without i t s l i f e being extended.

IRR (without tax) Simple payback (without tax) NPV (with tax)

IRR (with tax) Simple payback with tax)

12. demonstrates why the chiller investments are not yet taking place and are unlikely to take place without the push provided by the GEF, MLF and carbon financing. Chiller replacement is marginal to the owner’s primary business and the individual rate o f return i s probably not high enough to compete with other alternative use o f the investment funds.

These financial calculations from the perspective o f the individual chiller owner

Rate 3 6% % 2.76 Years to recover investment

(US$442.0) Evaluated at 30% Disount Rate

3 0% % 3.3 Years to recover investment

87

B2. Financial Analysis f rom the Perspective of the Project

13. the project as a whole, including the four sources o f funds (MLF, GEF, CDM, and bilateral contribution from U S EPA). I t includes an assessment o f the technical and administrative expenses, and the proposed subsidies for early replacement o f chillers, i s discussed in detail in this annex. The underlying assumption o f this financial analysis is that the subsidy to be provided by the project is about 20% o f the chiller cost and the balance will be financed by chiller owners through commercial sources.

This section undertakes a financial analysis o f the project from the perspective o f

14. consist o f grant funds provided by MLF, GEF, and U S EPA, and C D M revenues earned from carbon emission reduction achieved by new chillers. Project revenues will be used for financing implementation o f the four project components: (i) Investment; (ii) Measurement, Monitoring and Verification (MM&V); (iii) Technical Assistance; and (iv) Project Management. Utilization o f the four sources o f hnding could be summarized as follows:

Revenues: Excluding chiller owners’ contributions, the revenues o f the project

i). MLF - Investment, MM&V, Technical Assistance, and Project Management; ii). GEF - Investment, Technical Assistance, and Project Management; iii). C D M - Investment, MM&V, Technical Assistance, and Project Management.

15. The total revenues include US$1 mi l l ion o f MLF, US$6.3 mi l l ion o f GEF, US$150,000 o f US EPA, and a C D M revenue o f US$12 per tC02 less the registration fee o f US$0.20 per t COZ.

16.

0

0

Expenditures: Expenditures by project component are as follows:

Component I - Investment: To accommodate participation o f chiller owners in both private and public sectors, the project would offer two subsidy options: (i) up-front subsidy o f up to 20% o f the cost o f chiller will be provided to chiller owners upon commission and disposal o f baseline equipment; and (ii) annual subsidy based on US$12 per t C02 emission reduction achieved by the unit. I t i s expected that 60% o f participants will opt for the f irst option and the remaining 40% will opt for the second option. This estimate i s based on the chiller population o f which 60% owned by the private sector with the balance owned by the public sector. Component 2 - MM&V: Costs related to this component include costs o f conducting power consumption measurement o f baseline equipment, costs o f data loggers and transmitters to be installed with new chillers, consultant costs for monitoring performance o f all chillers replaced by the project, cost o f annual verification as required by the C D M guidelines, and the cost o f developing a C D M methodology for the project. I t i s assumed conservatively that data loggers and transmitters will be provided to every chiller replaced by the project, or 100% on-line monitoring. Regarding the methodology for the project, development costs o f US$285,000 have already been incurred. According to the MOU between the Bank and FI, these costs would be recovered from the project via the revenues from CDM. Hence, it i s proposed that repayment o f these costs will be made in 5 equal installments starting from 2009 - 2013.

88

e Component 3 - Technical Assistance: Revenues o f the project wi l l be utilized to support technical activities which mainly are public awareness workshops, technical workshops, and recognition programs to promote energy conservation practices. Activities will be carried out from 2009 until project end in 2013. Component 4 - Project Management: Expenditures related to this component include costs o f M I S development, administrative fees for FI, marketing costs, and costs o f annual financial and procurement audits throughout the project implementation period.

e

Cooling Capacity Annual Usage Specific Energy Savings Emission Factor Average Cost o f Chiller Subsidy

17. K e y parameters and assumptions employed in the project cash flow are shown in Table A.9.3. Based on these parameters and assumptions and the requirement o f positive cash flow for the whole project implementation period, the number o f chillers to be replaced each year from 2008 to 2014 i s determined. Table A9.4 provides the projected cash flow o f the project from 2008 to 2013, which confirms that the project i s viable.

430 TR 4,879 HrsNr

0.30 kW/TR 0.81 C02kWh

170,000 S$ 20%

17. as being 26%, but this is a rough approximation as the project’s cash flow falls into negative territory more than once.

The financial rate o f return (FIRR) to the project as a whole can be approximated

MM&V Management Baseline Measurement Data Logger and Transmitter

Table A.9.3. Key Financial Parameters and Assumptions Basic Assumptions

50,000 US$ 600 US$/unit

2,500 US$/unit

Annual Verification Share o f Proceed Marketing Cost (Manufacturers)

50,000 US$ 0.20 US$/CER 0.50 US$/tCO2

Project Awareness & Technical Workshops Public Awareness (Recognition) Workshops Value o f Carbon Credit

2,000 US$ 5,000 US$

12 US$/tc02

PMU Staff Procurement Audit Financial Audit

225,000 US$ 2,500 US$ 10,000 US$

89

Table A9.3:Key Parameters and Assumptions

90

Table A9.4 Projected Cash Flow

MLF GEF CDM Total

c Total Item CY2009 I 2010 I 2011 I 2012 1 2013 1 1,000,000 1,000,000 3,000,000 3,300,000 6,300,000

- 749,416 1,348,949 2,008,435 1,785,751 5,892,550 4,000,000 4,049,416 1,348,949 2,008,435 1,785,751 13,192,550

Item 2009 I 2010 1 2011 I 2012 I 2013 I Total

Expenditure Subtotal

91

1,635,000 3,112,471 4,534,247 2,767,501 I 961,466 13,010,685

Annex 10: Safeguard Policy Issues

India - Chiller Energy Efficiency Project

A. Environmental Assessment

1. Backwound: The CEEP will assist India in replacing CFC-based centrifugal chillers with efficient non-CFC-based chllers. The project will provide technical and financial support to the early phase-out o f CFC-based centrifugal chillers and replace them with energy efficient units. It aims to replace at least 370 CFC-based centrifugal chillers that are s t i l l in operation in India.

2. Environmental Impacts: Chillers impact the global environment in three principal ways. First, vapor-compression refhgeration chillers can harm the ozone layer through release o f ODS used as refrigerant and released due to leakage, servicing, and decommissioning. Second, refrigerant emitted from chillers (including non-ODS refhgerant substitutes) can also have high GWP, meaning that their accumulation in the atmosphere traps and reflects heat, potentially causing global climate change. Third, chillers consume significant amounts o f energy, either directly for absorption chillers or indirectly as electricity generated through fossil fuel combustion, both o f which produce greenhouse gases (GHG). The impact on the ozone layer and/or global warming impact o f refrigerant emissions are direct impacts.

3. a chiller during i t s lifetime can result in creation o f pollutants such as particulate matter, nitrogen oxides, sulfur dioxide, carbon monoxide, lead, airborne toxic chemicals, and ground level ozone. Health r isks from these pollutants include lung cancer, chronic pulmonary disease, pulmonary heart disease, and bronchitis, which are leading causes o f death and sickness in developing countries. These pollutants also cause economic damage to buildings and environmental and economic damage to vegetation, animals, and natural resources.

The use o f chillers also impacts the local environment. The energy required to run

4. Legal Framework: The Government o f India ratified the Montreal Protocol for the Phaseout o f Ozone Depleting substances on June 16, 1992. India is classified as a country operating under Article 5, paragraph 1 o f the Protocol and as such is eligible for financial support from the Multilateral Fund o f the Montreal Protocol to cover the incremental costs o f meeting its obligations under the Protocol. The Ministry o f Environment and Forests (MoEF) has been empowered by the Government o f India with overall responsibility for implementation o f the Montreal Protocol.

5. The Government o f India has taken a number o f policy and regulatory measures to encourage the adoption o f ozone-friendly technologies and comply with requirement to completely phase out production and consumption o f new chlorofluorocarbons (CFCs), halons, and carbon tetrachloride (CTC) by January 1,2010. Measures taken have included: the preparation o f a country program, certification o f ODS consumption in

92

phase out projects, licensing export and import o f ODs, and phase-out and phase-down o f production o f CFC and Carbon Tetrachloride respectively. The ODS Rules were promulgated in 2000 and are stringently amended and monitored.

6. support the phase-out manufacturing o f equipment with CFCs, with support from the World Bank. GO1 has also implemented a number o f other programs to phase-out ODS consumption. GO1 has prohibited the production o f new CFCs as o f August 1,2008 - 17months ahead o f the existing phase-out schedule, established by the MP. Additionally, i t i s mandated that the production quota for 2008 is dedicated primarily for the manufacture o f metered-dose inhaler (MDI) applications. Imports o f CFCs are restricted by the Ozone Rules47 and GO1 has recently banned the sale o f new CFCs into the domestic market for meeting servicing sector requirements, activating a concomitant increase in demand for reclaimed, recovered and recycled CFCs. The CEEP therefore i s an integral complement to GOI’s overarching strategy to meet the phase-out schedule date o f January 1,2010, as mandated by the MP.

With regard to centrihgal chiller sub-sector, GO1 implemented a project to

7. Management Plan (EMP) to address the potential environmental r isks associated with the replacement o f o ld CFC-based chiller systems. With regard to safe handling o f refrigerants (CFCs and non-CFCs) and occupational health and safety o f technicians, the EMP requires that the project comply with the appropriate ASHRAE guidelines (or an equivalent local system), which relies on third party verification mechanism to ensure that chillers are replaced in an environmentally sound and safe manner.

The CEEP i s classified as a Category B and has developed an Environmental

8. project: (i) disposal o f the baseline equipment; (ii) recovery and recycling o f CFCs from replaced units; and (iii) proper installation o f non-CFC chillers. Each o ld chiller i s destroyed and destruction should be monitored and certified according to an established monitoring and certification protocol. The refrigerants contained in the o ld chillers will be recovered and stored in suitable containers within suitable premises where the recovered, stored refrigerant gases may be monitored and tracked. Stored refrigerant gases may be withdrawn from storage for re-use, or for destruction by a method approved under Government regulation and/or pursuant to international treaty entered into by the Government under MP, KP or other Protocol that may in the future apply. The C D M EB suggests a cautionary approach to incineration, as there are environmental r isks involved if the incineration i s carried out at too low a temperature.

The C D M Executive Board has mandated the following requirements for this

B. Environmental Management Plan

9. Refrigeration Systems: Chiller suppliers are required to abide to safety standards prescribed by ANSYASHRAE 15 - 1994. This standard i s directed towards safety o f persons and property on or near the premises where refrigeration facilities are located. This includes specifications for fabrication o f tight systems, restrictions on refrigerant use

Safety Requirement for Design, Construction, Installation, and Operation o f

47 This may be revisited after 2010, for Essential U s e Nominations, as authorized by the Parties

93

for different types o f occupancy classification and prescribes system application requirements, including detectors (refrigerant, oxygen, and etc.) and ventilation systems for various applications. I t also prescribes, among others, general requirements for refrigeration machinery rooms; signs and identification; charging, withdrawal, and disposition o f refrigerants; refrigerant storage; periodic tests o f detector(s), alarm(s), and mechanical ventilation systems, to ensure safety o f persons and property.

10. equipment, project proposals must include an equipment destruction plan to ensure that existing CFC chillers, particularly compressors, will be dismantled and rendered unusable. Any components to be retained as spare parts for servicing remaining CFC chillers within the same buildings, and those to be sold as scrap, must be listed in the plan. Destruction o f key components (ie., compressors) must be done not later than successful commissioning o f new non-CFC chillers and should be certified by chartered engineers and/or representatives o f F I or the Ozone Cell.

Disposal o f Baseline Equipment: With regard to the disposal o f the baseline

11. equipment destruction must be provided by beneficiaries or by suppliers on behalf o f beneficiaries, to FI.

After commissioning o f new non-CFC chillers i s completed, a final report on the

12. information:

Disposal Plan: Disposal Plan for CFC Chillers should include the following

a) Name o f chiller supplier/contractor; b) Name o f chiller owner; c) Location o f chillers; and d) Description o f retiring chillers.

13. disposal o f baseline CFC equipment and systems must strictly follow procedures and practices recommended by ASHRAE Guideline 3 - “Reducing Emission o f Halogenated Refrigerants in Refrigeration and Air Conditioning Equipment and Systems”.

Installation, testing, operations and maintenance o f new non-CFC chillers, and

14. should delineate the process for which CFCs from the retiring units will be recovered or reused. The quantity o f CFCs recovered from retiring un i ts must be recorded and submitted to IDBI Bank or its representative(s) as part o f the baseline equipment disposal report. Recovery o f CFC must be undertaken by a certified technician. Typically, CFCs recovered from o ld chillers would be contaminated and therefore, these would need to be reclaimed in case o f re-use. The CEEP can seek the assistance o f GOI’s National CFC Consumption Phase-out program, being implemented by GTZ, in this regard.

Recoverv o f CFCs from the Retiring Units: The proposal from beneficiaries

15. Inventory o f Recovered CFCs: CFCs recovered from the retired uni ts should be properly recorded. The purpose o f the proposed inventory i s to track future movements and utilization o f these gases, and to ensure that they are not intentionally vented into the atmosphere. No t only do CFCs harm the ozone layer, they are also high in GWP gases. GWP o f CFC-11 is higher than carbon dioxide by more than 4,000 times and GWP o f CFC-12 is 8,500 times higher than carbon dioxide. Project participants will develop and

94

maintain an inventory o f recovered CFCs. This inventory should be maintained throughout the monitoring period o f the sub-project and be available for inspection by IDBI Bank or the Ozone Cell. In case beneficiaries decide to sell or hand over all recovered CFCs to chiller suppliers at the time new chillers are installed, chiller suppliers are responsible to develop and maintain an inventory o f recovered CFCs. This inventory should be updated and made available for inspection by IDBI Bank or the Ozone Cell.

16. be destroyed in an environmentally sound manner. The latest decision o f the Parties to the MP has agreed to provide financial and technical support to eligible countries for ODS destruction. The ultimate responsibility for the destruction o f the CFC inventory maintained by this project will be the Ozone Cell, which i s committed to the following options (i) establishment o f a domestic incineratioddestruction facility, if and when, appropriate fimding from the Multilateral Fund i s approved; (ii) if the previous option does not materialize, review environmentally sound (acceptable by international standards) alternative options, for the destruction o f ODs, such as retrofitting o f existing cement kilns; or (iii) as a last option, export the contaminated CFCs for destruction (not re-use) to countries which own the appropriate technology, after obtaining al l necessary international clearances. However, since this technology i s currently not available domestically, th is issue will be revisited during the mid-tern review o f the CEEP.

Destruction o f CFCs: At the end o f their useful life-time, these CFCs will need to

95

Annex 11: Project Preparation and Supervision

Name

India - Chiller Energy Efficiency Project

Title Unit

Planned Actual PCN Review 06/15/2006 064 5/2006 Init ial PID to PIC 01/22/2009 Init ial ISDS to PIC 01/14/2009 Appraisal 12/23/2008 12/24/2008 Negotiations 04/22/2009 BoardRVP approval 06/3 0/2009 Planned date o f effectiveness 0/0 1 /2009 Planned date o f mid-tern review 08/01/2011 Planned closing date 06/30/2014

Charles Joseph Cornier Ruma Tavorath

Key institutions and persons responsible for preparation o f the CEEP:

Sr. Environmental SpecialistITTL SASDI Sr. Environmental SPecialist/Co-TTL SASDI

Ministry of Environment and Forests 1) Mr. Vi ja i S h m a , Secretary Environment 2) Mr. J.M. Mauskar, Additional Secretary, MoEF 3) Dr. D. Duraiswamy, Director, Ozone Cell, MoEF 4) Mr. R. Srinivas, PMU Coordinator, Ozone Cell, MoEF 5) Mr. Sudhir Mital, Joint Secretary, MoEF 6) Mr. Hem Kumar Pande, GEF Coordinator, MoEF

Renganaden Soopramanien Kumaraswamy S ankaravadivelu

IDBI Bank 1) Mr. B K Batra, Executive Director 2) Mr. S. Jeyakumar, General Manager (GM), S S A D 3) Mr. B. D. Save, Deputy GM, S S A D 4) Mr. Yashpal Gupta, Deputy GM, S S A D 5) Mr. Kapi l Vaghela, Manager

Sr. Counsel LEGES Procurement Specialist SARPS

Bank staff and consultants who worked on the project included:

Arun Manuja Richard H. Hosier

Sr. Financial Management Specialist SARFM Sr. Environmental hecial ist ENVGC

Genevieve Maria Dutta Kumudni Choudhaw

Program Assistant SASDI Proaam Assistant SASDI

1 Viraj Vithoontien I Sr. Regional Coordinator IENVMP I 96

Name Bi la l Rahill

Title Unit Manager. CES ISG-I1

Nuyi Tao Klaus Omermann

Sr. Carbon Finance Specialist ENVCF Sr. Carbon Finance SDecialist ENVCF

Bank funds expended to date on project preparation: 1. Bank resources: US$O 2. Trust funds: US$415,000 3. Total US$415,000

Xueman Wang Monali Ranade

Estimated Approval and Supervision Costs: 1. Remaining cost to approval: US$50,000 2. Estimated annual supervision cost us$loo,ooo

Sr. Counsel, Carbon Finance LEGCF Technical SDecialist ENVCF

Project Supervision Plan

Shivendra Kumar Sidnev Thomas

The following strategy will be applied during project supervision:

Procurement Consultant Technical Consultant

(i) Implementation: Stafflconsultants with experience in Bank project implementation and Carbon Finance operations will undertake regular supervisions, as defined in table below. I t is expected that, as GEF and MLF funds are exhausted, supervision will be primarily undertaken by CF specialists with oversight by Bank staff, for operations, environmental safeguards, Financial Management and Procurement.

(ii) Governance and accountability risks: The Bank team will monitor risks as identified in the GAAP (See Annex 16). During supervision, the team will check progress against early warning indicators o f the GAAP.

(iii) Financial management: FM arrangements will be supervised in the following ways: a) review o f quarterly IUFRs within 45 days o f the close o f each quarter; b) review o f audited annual report and financial statements; and c) on-site supervision review o f FM and disbursement arrangements to ensure compliance with FM requirements (see Annex 7). The supervision will be undertaken by a Bank accredited FM Specialist who will participate in supervision missions, review project documentation and identify FM issues and agree on follow up actions.

(iv) Procurement: In addition to prior review supervision to be canied out by the Bank, there will be field visits to carry out post review o f procurement actions twice a year. (See Annex 8) The frequency o f supervision missions shall reduce substantially after GEF and MLF hnds have been utilized. The

97

supervision o f procurement related issues will be carried out by a Procurement Accredited Staff, who will participate in supervision missions, review project documentation and identify Procurement issues and agree on follow up actions.

Total Total cost (KUS$)

(v) A project implementation launch workshop will be organized prior to project effectiveness which will discuss key FM, procurement, organizational, reporting issues and timelines. A MTR workshop will be organized to take stock o f the issues and restructure the design, as required. Prior to launching the preparation o f the ICR, field level surveys will be undertaken.

3 3 2 2 1 100 100 100 100 60

The following table presents the timing o f formal and informal supervision missions and estimated cost:

98

Annex 12: Documents in the Project File

4)

5)

9)

14)

India - Chiller Energy Efficiency Project

India Strategy for the phase-out o f CFC in the Chiller Sector, World Bank, August 2002; International Chiller Sector Energy Efficiency and CFC Phase-out Study, prepared by ICF Consultants, World Bank, January 2005. Minutes o f the First Global Chiller Workshop, Washington, DC, September 10, 2005; Minutes o f the Second Global Chiller Workshop, Washington, DC, January 10, 2006; Multilateral Fund Project Document: Global Chiller Replacement Project, November 2005; Project Appraisal Document for a Thailand Building Chiller Replacement Project, Environment and Social Development Unit, East Asia and Pacific Region, World Bank, May 2001; Chiller Energy Efficiency Project Identification Note for Carbon Finance Chiller Energy Efficiency Project Identification Form for GEF Work Program Entry, January 22,2008; Manufacturers Survey and Chiller Owners Survey, undertaken by The Energy Research Institute (TERI), for World Bank 2001 Report o f the Refrigeration, Air-conditioning and Heat Pumps Technical Options Committee, UNEP, 1995 Assessment. Report on Strategic Options for Retrofitting o f Mobile Air-Conditioners and Chillers, UNEP, March 1994. Report o f the TEAP Chiller Task Force. UNEP, May 2004. Financing Matters: Innovative Financing for Effective ODS Phaseout, World Bank, November 2001 UNFCCC AM0060 - Baseline and monitoring methodology for power savings through replacement by energy efficient chillers;

99

Annex 13: Incremental Cost Analysis

India - Chiller Energy Efficiency Project

A. Concept and Barrier Removal Strategy

1. The CEEP aims at stimulating large scale replacement o f chillers, with priority given to CFC centrifugal chillers, in India. As per the Montreal Protocol requirement, India i s required to eliminate import and production o f CFCs after 201 0. I t i s estimated that there are about 1,000 - 1,200 CFC centrifugal chillers installed in India. CFC demand for servicing these existing units i s about 95 - 100 MT per year.

2. Technological advancements in the centrifbgal chiller industry during the last 15 - 20 years, have led to complete replacement o f CFC refrigerant in the manufacturing o f new centrifugal chillers. In addition to replacing CFCs as refrigerants for centrifbgal chillers, significant gains in energy efficiency at the rate o f 30% to 50% were also achieved by the new product design. This significant improvement in energy efficiency o f the newer models o f centrifugal chillers provides a clear private benefit to chiller owners o f early replacement o f CFC-based centrifugal chillers with non-CFC chillers as energy savings generally sufficient to pay back the init ial cost o f the new equipment purchase within 3 - 5 years. Despite this clear internal incentive to early replacement, i t has been found in country after country that early replacement does not take place at a pace that might be expected.

3. rate o f return or financial payback considered in an unconstrained abstract sense. Replacement decisions are made under an environment o f hard resource constraints. Chiller replacement projects have been given less priority due to other competing investment priorities. In other words, mission-critical projects must obviously be given priority over mission-marginal projects. Chiller replacements, similar to other energy efficiency products, are often considered as mission-marginal projects.

Chiller replacement decisions are not driven simply by calculations o f internal

4. carried out for a large sample o f chillers, concluded that Indian chiller owners, in effect, apply a discount rate o f about 30% to chiller replacement projects. As the financial analysis in Annex 9 demonstrated, the financial rate o f return without the carbon revenues associated with their replacement barely meets the 30% hurdle rate. Clearly, assistance is required from both the GEF and the MLF to move chiller replacement into a higher priority among most Indian chiller owners. CFC phase-out in this sector i s unlikely to occur prior to 2025. According to the India study, the cost o f advancing chiller owners’ decisions to replace their chillers by 10 years (from 2025), or cost o f barrier removal, i s about 20% o f the capital cost o f the units.

The chiller sector study conducted in India, based on a full life-cycle cost analysis

100

B. costs

Domestic Benefits, Global Environmental Benefits and Incremental

5. builds upon the analysis presented in more detail throughout the document, including in Annex 9.

The incremental cost matrix for the project i s summarized in Table A. 13.1. It

Baseline Description

6. In the absence o f the project, the situation would continue much as it is. Most chiller owners would not replace their chillers until the end o f their useful lifetimes, and even beyond that. Manufacturers estimate that the useful l i fet ime o f a chiller is 20 to 25 years. Evidence from India suggests that chillers are frequently utilized for as many as 30 years without some incentive to accelerate their phase-out. This project i s designed to bring forward the phase-out o f older chillers which use CFC’s as a refrigerant by as many as 13 years, on average.

7. There are currently estimated to be approximately 1 100 chillers in operation in India. These chillers use approximately 2.14 mi l l ion MWh per year or approximately 42.9 mi l l ion MWh over the twenty-year lifespan o f the equipment being deployed under this project. The value o f this electricity i s approximately US$214 m per year or about US$4.29 bi l l ion over the l i f e o f the equipment. The electrical consumption o f these chillers i s roughly estimated at 4.8 mi l l ion MWh. These chillers consume roughly 473 mt o f CFC’s, not including the quantity used to re - f i l l and replace the annual leakage amount, estimated at nearly 10% o f the total charge.

System Boundaries

8. The chiller project i s evaluated within the context o f the Indian electric power sector. Chiller owners in all eligible states will be able to access the support from the project. The system-wide co-efficient for GHG emissions used in this project i s 0.82 kg COze per kWh o f electricity.

Project Alternative

9. for their entire useful l i fet ime and beyond. The project would directly result in early replacement o f approximately 370 chillers. I t would also assist India to establish a sustainable mechanism for removing barriers preventing adoption o f energy efficient chillers. I t i s expected that the project would imprint the product life-cycle analysis as a basis for future private investment decisions, and that the mechanisms established could be used for financing other energy efficient chillers/products.

Without the project, i t is likely that all chillers in India would continue to operate

10. TR would be replaced early. These chillers would be assumed to be 30% more energy efficient than the existing chillers, and would contain no CFC’s as refhgerant. The energy required to operate these chillers would be about 1.94 mi l l ion MWh per year or about 38.9 mi l l ion MWh over their 20 year useful lifetime. The cost o f the electricity

Under the project scenario, 370 chillers with an average estimated capacity o f 430

101

used to run the chillers comes to US$3.89 bi l l ion over the 20 years o f the equipment’s useful lifetime. The total electrical load o f these chillers comes to 350 MW, representing a reduction o f 48 MW. In the project scenario, the existing chllers that are not replaced would continue to operate along with the new, more efficient CFC chillers, reducing the overall energy sector emissions o f running the chillers to 38.1 mi l l ion mt o f COze, including the ODP value o f the phased-out CFCs. The cost o f the investments comes to about US$70 million. The costs o f the barrier-removal activities associated with the project come to approximately US$7.3 million, bringing the total costs o f the alternative to U S 7 0 million.

1 1. The CEEP consists o f four components: (i) replacement o f chillers for which GEF resources will be used for replacing chillers during the first three years o f the project with additional replacements financed by C D M revenues; (ii) measurement, monitoring, and verification; (iii) technical assistance activities; and (iv) project management. All project components, except Component (ii) which i s mainly for meeting the C D M requirements, will be financed in part by GEF resources. Regarding Component (i), the total direct GHG emission reduction o f the project i s more than 3.89 mi l l ion tC02 until 2013, for which 0.488 mi l l ion tCO2 i s attributed to chiller replacement financed by the C D M revenues.

The Increment

12. Table A.13.1. There will be a savings o f electricity over the course o f the project o f 3.98 m MWh, representing a savings to chiller owners o f nearly US$398 million. To the electricity system as a whole, there i s an estimated reduction in load or capacity required o f 48 MW, plus associated transmission losses. This load reduction can be given an economic value o f nearly US$59.7 million, not counting the fuel costs associated with the generation. Overall, the total value o f the costs o f the project activities plus the estimated cost o f the investment comes to US$70.9 million.

The increment attributable to the project i s summarized in the final column o f

13. toward complete transformation. These funds are playing a critical, catalytic role. As the discussion above has shown, the GEF and MLF contributions are expected to account for about 60% o f the GHG benefits associated with the project. However, the revenues from carbon finance will account for the remaining 40% and are necessary to complete the transformation o f the market toward the more efficient, CFC-free chillers.

The GEF and MLF finds are utilized to stimulate the chiller market to move

Global Environmental Benefits

14. categories: benefits to the phase-out o f ozone depleting substances; direct C02 benefits; and indirect C02 benefits.

Under the project case, the global environmental benefits fall into three

15. will reduce the consumption 159 mt o f CFCs. This estimate does not take into account any additional CFC’s that would be required to service the 370 replaced chillers over

With respect to the global environmental benefits to the ozone layer, the CEEP

102

time. Older chillers are estimated to leak approximately 10 percent o f their charge per year.

16. With respect to the direct C02 benefits, these benefits include both the avoided CO2 emissions attributable to the energy savings plus the CO2e o f the phased-out CFC’s, estimated using a global warming potential (GW) for CFCs o f 4000. The total direct C02 benefits from this project are estimated at 3.858 mi l l ion tC02.

17. As far as the indirect C02 benefits are concerned, this project seeks to establish a process that will replace 370 out o f 1 100 CFC-based chillers in operation in India. The potential indirect benefits o f the CEEP would represent the global environmental benefits associated with replacing the remaining 660 chillers in India. The total potential indirect benefits associated with the complete transformation o f the market would be estimated as 8.9 mi l l ion tC02e over 20 years. Given the likely influence o f this project and the limited uptake to date o f the new energy-efficient non-CFC chillers, i t i s l ikely that this project can claim the entire market o f 8.9 mi l l ion tC02, as its indirect global environmental benefits . 18. approximately US$1.63/ tonne o f COze, using the total direct benefits. No attempt has been made to share these benefits out between the GEF contribution, the MLF contribution and the carbon finance contribution. However, it should be noted that the GEF and MLF contributions are covering the incentive payment for the replacement o f about 215 o f the chillers while the carbon finance revenue which originate from the payment for the replacement o f 2 15 chillers is expected to cover the incentive payments for the remaining 155 chillers.

The approximate cost-effectiveness o f the GEF contribution comes to

103

Table A.13.1: Incremental Cost Matrix

Domestic Benefit

Total number o f CFC-cooled Chillers in operation in India

Number o f CFC-free, more efficient Chillers installed

Consumption o f Electricity in Chillers in India over 20 year equipment l i fet ime

Capacity required to operate chillers (MW) Global Environment Benefit

C02 Emissions From Energy Used in Chillers

CFC Consumption (mt)

GWP equivalent o f CFC Phase-out (GWP CFC =4000)

Total CO2e

costs

Chiller Investment Costs Project Activities

Value o f Electricity Used to Power all Chillers in India

Baseline

-1 100

0

42.9m MWh

473MW

40.71 m tomes CO2e

473 mt

1.892 m tomes CO2e

42.60 m tomes C0,P

US$O US$O

US$4.29 bil l ion

Alternative

-1 100

370

38.92 m MWh

4425MW

37.49 m tomes CO2e

314 mt

1.256 m tomes CO2e

38.105 m tomes C07p

US62.9 m US$7.3 m

US3.89 billion

Increment

0

370

(-)3.98 m MWh

(-) 48 MW

(-)3.22 m tomes CO2e

(-)159 mt

(-)0.636 m tonnes CO2e

(-)4.495 m tomes c07,

US$(-)398 mill ion

104

Annex 14: Statement o f Loans and Credits

Project ID

PO94360

India - Chiller Energy Efficiency Project

Original Amount in US$ Millions

FY Purpose IBRD I D A SF GEF Cancel.

2009 National VBD Control&Polio Eradication 0.00 521.00 0.00 0.00 0.00 Orig. Undisb. Frm. Rev'd

518.38

PO96023

PO93478

P100735

P102737

P102547

2009 Orissa State Roads 250.00 0.00 0.00 0.00 0.00 250.00 0.00 0.00

2009 Orissa Rural Livelihoods Project 0.00 82.35 0.00 0.00 0.00 81.99 0.00 0.00

2009 Orissa Community Tank Management 56.00 56.00 0.00 0.00 0.00 109.69 0.00 0.00

2008 Bihar DPL 150.00 75.00 0.00 0.00 0.00 114.28 111.10 0.00

2008 Elementary Education (SSA 11) 0.00 600.00 0.00 0.00 0.00 572.33 0.00 0.00

Project

0.00 1 0.00

P101653

PO951 14

P105124

2008 Power System Development Project N 600.00 0.00 0.00 0.00 0.00 496.85 38.35 0.00

2008 Rampur Hydropower Project 400.00 0.00 0.00 0.00 0.00 364.31 -1.69 0.00

2008 H P D P L I 135.00 65.00 0.00 0.00 0.00 100.90 0.00 0.00

PO75060 1 2007 I R C H I I

I PO90764 I 2007 I BiharRuralLivelihoods Project 1 0.00 I 63.00 I 0.00 I 0.00 I 0.00 I 63.00 1 1.59 I 0.00 I 0.00 360.00 0.00 0.00 0.00 I 305.15 I 67.67 I 0.00

PO78538

PO78539

2007 Third National HIVIAIDS Control 0.00 250.00 0.00 0.00 0.00 201.47 36.73 0.00

2007 TI3 I1 0.00 170.00 0.00 0.00 0.00 134.02 -23.30 0.00

Project

I PO90768 I 2007 I TN IAM WARM I 335.00 I 150.00 I 0.00 1 0.00 I 0.00 I 444.34 I 54.22 I 0.00 I PO83187

PO90592

PO90585

2007 Uttaranchal RWSS 0.00 120.00 0.00 0.00 0.00 120.90 23.52 0.00

2007 Punjab Rural Water Supply & Sanitation 0.00 154.00 0.00 0.00 0.00 146.31 58.38 0.00

2007 Punjab State Roads Project 250.00 0.00 0.00 0.00 0.00 161.71 -31.19 0.00

I P102768 I 2007 I Stren India's Rural Credit Coops I 300.00 I 300.00 1 0.00 I 0.00 I 0.00 I 549.18 I 170.00 I 0.00 I P100789

PO71 160

PO99047

PO96019

2007 AP Community Tank Management 94.50 94.50 0.00 0.00 0.00 186.71 2.88 0.00

2007 Kamataka Health Systems 0.00 141.83 0.00 0.00 0.00 107.94 -12.71 0.00

2007 Vocational Training India 0.00 280.00 0.00 0.00 0.00 228.48 -30.25 0.00

2007 HP State Roads Project 220.00 0.00 0.00 0.00 0.00 204.27 14.67 0.00

Project

PO79708

PO83780

PO86414

I PO79675 I 2006 I KarnMunicipalReform I 216.00 I 0.00 I 0.00 1 0.00 I 0.00 I 180.15 I 35.15 I 0.00 I

2006 TN Empwr & Pov Reduction 0.00 120.00 0.00 0.00 0.00 101.74 17.34 0.00

2006 TN Urban 111 300.00 0.00 0.00 0.00 0.00 214.16 74.91 0.00

2006 Power System Development Project 111 400.00 0.00 0.00 0.00 0.00 55.27 -184.73 0.00

PO78832 I 2006 I KamatakaPanchayats StrengtheningProj I 0.00 I 120.00 I 0.00 1 0.00 I 0.00 I 91.63 I -30.86 I 0.00

PO92735 I 2006 I NAIP 1 0.00 I 200.00 1 0.00 I 0.00 I 0.00 I 185.35 I 32.35 I 0.00

PO94513

PO75058

PO73651

1 PO93720 1 2006 I Mid-Himalayan (HP) Watersheds 1 0.00 1 60.00 1 0.00 1 0.00 1 0.00 1 41.94 1 1.37 1 0.00 1 2005 India Tsunami ERC 0.00 465.00 0.00 0.00 0.00 393.80 391.03 0.00

2005 TN HEALTH SYSTEMS 0.00 110.83 0.00 0.00 20.06 65.77 53.72 38.33

2005 DISEASE SURVEILLANCE 0.00 68.00 0.00 0.00 0.00 57.52 38.57 0.00

PO73370

PO84792

2005 Madhya Pradesh Water Sector 394.02 0.00 0.00 0.00 0.00 335.55 170.73 0.00

2005 Assam Amic Competitiveness 0.00 154.00 0.00 0.00 0.00 111.54 64.97 0.00

Restructurin

I PO84790 I 2005 I MAHARWSIP I 325.00 I 0.00 I 0.00 I 0.00 I 0.00 I 271.62 I 103.62 I 0.00 I

105

Hydrology I1

Lucknow-Muzaffarpur National Highway

Rural Roads Project

Difference between expected and actual

disbursements

104.98 0.00 0.00 0.00 0.00 88.82 65.20 25.50

620.00 0.00 0.00 0.00 0.00 299.76 19.76 0.00

99.50 300.00 0.00 0.00 0.00 150.60 49.03 0.00

Original Amount in US$ Millions

RAJASTHAN HEALTH SYSTEMS DEVELOPMENT

ALLAHAEIAD BYPASS

0.00 89.00 0.00 0.00 0.00 47.50 36.96 0.00

240.00 0.00 0.00 0.00 0.00 35.78 24.98 0.00

AP RURAL POV REDUCTION

TechiEngg Qualify Improvement Project

AP C o r n Forest Mmnt

0.00 150.03 0.00 0.00 0.00 41.10 -45.67 0.00

0.00 250.00 0.00 0.00 40.11 3.81 10.77 -28.87

0.00 108.00 0.00 0.00 0.00 26.15 5.47 0.00

Gujarat Emergency Earthquake Reconstruct

M IZORAM ROADS

KARN Tank Mgmt

KERALA STATE TRANSPORT

0.00 442.80 0.00 0.00 115.24 74.98 111.86 -35.22

0.00 60.00 0.00 0.00 0.00 27.65 -2.75 0.00

0.00 98.90 0.00 0.00 25.07 116.21 53.60 26.83

255.00 0.00 0.00 0.00 0.00 101.89 101.89 0.00

Committed

IFC

Disbursed

IFC

2005

2005

2002

2003

2005

AP Paper Mills 35.00 5.00 0.00 0.00 25.00 5.00 0.00 0.00

APIDC Biotech 0.00 4.00 0.00 0.00 0.00 2.01 0.00 0.00

A T L 13.81 0.00 0.00 9.36 13.81 0.00 0.00 9.36

A T L 1 .oo 0.00 0.00 0.00 0.68 0.00 0.00 0.00

A T L 9.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00

I PO77977 I 2005

I PO82510 I 2004 KamatakaUWSImprovementProiect I 39.50 I 0.00 I 0.00 I 0.00 I 0.00 I 9.36 I 9.36 I 0.00 I I PO78550 I 2004 Uttar Wtrshed 1 0.00 I 69.62 I 0.00 I 0.00 I 0.00 I 47.52 1 1.85 I 0.00 I I PO50655 1 1:;

PO73776

I PO73369 I 2004 ~~ ~~

MAHAR RWSS I 0.00 I 181.00 I 000 1 0.00 I 0.00 I 0.35 I -20.32 I 0.00 I I PO50649 I 2003 TN ROADS I 348.00 I 0.00 1 0.00 I 0.00 I 0.00 I 120.15 I 91.15 I 0.00 I I PO67606 I 2003 UP ROADS I 488.00 I 0.00 I 0.00 I 0.00 I 0.00 I 136.05 I 136.05 I 0.00 I

PO73094

I PO76467 I 2003 Chatt DRPP I 0.00 I 112.56 I 0.00 I 0.00 I 20.06 I 59.57 I 59.53 I 0.00 I I PO50647 I 2002 UP WSRP I 0.00 I 149.20 I 0.00 I 0.00 I 40.11 I 81.87 I 91.59 I 0.00 I I PO50653 I 2002 K A R N A T A K A RWSS I1 I 0.00 I 151.60 I 0.00 I 0.00 I 15.04 I 24.03 I 11.86 I 0.00

I I 2o02 O.OO I MUMBAI URBAN TRANSPORT I 463.00 I 79.00 I 0.00 I 0.00 I 0.00 I 311.86 I 298.89 I PROJECT

I PO40610 I 2002 RAJ WSRP 1 0.00 1 140.00 I 0.00 I 0.00 I 25.84 I 47.57 I 34.81 I 0.00 I E PO7 1033

I PO72539 I 2002

I PO67216 I 2001 KAR WSHD DEVELOPMENT I 0.00 I 100.40 I 0.00 I 0.00 I 20.06 I 17.00 I 18.67 I 13.95 I I PO50657 1 2000 UP Health Systems DevelopmentProject I 0.00 I 110.00 I 0.00 1 0.00 1 30.11 I 16.96 I 35.11 I 8.45 I

Total: I 7,233.50 I 7,447.62 I 0.00 I 0.00 I 351.70 I 9,532.50 I 2,370.46 I 48.97 I

STATEMENT OF IFC Held and Disbursed Portfolio (In Mi l l i on US$)

I FY Approval I Company I Loan I Equity I Quasi I Partic. I Loan I Equity I Quasi I Partic. I I 2005 I ADPCL I 39.50 I 7.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I I 2006 I AHEL I 0.00 I 5.08 1 0.00 I 0.00 1 0.00 I 5.08 I 0.00 I 0.00 I

I 2006 I Atul Ltd I 16.77 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I I 2003 I BHF I 10.30 I 0.00 I 10.30 I 0.00 I 10.30 I 0.00 I 10.30 I 0.00 I

106

2004

2001 I BTVL 1 0.43 1 3.98 1 0.00 I 0.00 I 0.43 1 3.98 1 0.00 1 0.00 1

Committed Disbursed

IFC IFC BILT 0.00 I 0.00 I 15.00 0.00 0.00 I 0.00 I 15.00 0.00

2003 I Balrampur I 10.52 I 0.00 I 0.00 I 0.00 I 10.52 I 0.00 I 0.00 I 0.00 I

1984

2003

2006

1990

2001 1 BasixLtd. I 0.00 I 0.98 I 0.00 I 0.00 I 0.00 1 0.98 1 0.00 1 0.00 I

Bihar Sponge 5.70 0.00 0.00 0.00 5.70 0.00 0.00 0.00

CCIL 1.50 0.00 0.00 0.00 0.59 0.00 0.00 0.00

CCIL 7.00 2.00 0.00 12.40 7.00 2.00 0.00 12.40

CESC 4.61 0.00 0.00 0.00 4.61 0.00 0.00 0.00

2005 1 Bharat Biotech 1 0.00 I 0.00 I 4.50 I 0.00 I 0.00 I 0.00 1 3.30 I 0.00 I

2004

2002

2005

2006

CMS computers 0.00 10.00 2.50 0.00 0.00 0.00 0.00 0.00

COSMO 2.50 0.00 0.00 0.00 2.50 0.00 0.00 0.00

COSMO 0.00 3.73 0.00 0.00 0.00 3.73 0.00 0.00

Chennai Water 24.78 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1992 1 CESC I 6.55 I 0.00 I 0.00 I 14.59 I 6.55 I 0.00 I 0.00 1 14.59 I

2006

2005

2003

2006

2001

2004 I CGL I 14.38 I 0.00 I 0.00 I 0.00 I 7.38 I 0.00 I 0.00 I 0.00 I

DSCL 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Dabur 0.00 14.09 0.00 0.00 0.00 14.09 0.00 0.00 Dewan 8.68 0.00 0.00 0.00 8.68 0.00 0.00 0.00

Federal Bank 0.00 28.06 0.00 0.00 0.00 23.99 0.00 0.00

GTF Fact 0.00 1.20 0.00 0.00 0.00 1.20 0.00 0.00

1998

2006

1998

2005

2003 I DQEL I 0.00 1 1.50 I 1.50 I 0.00 I 0.00 I 1.50 I 1.50 I 0.00 I

IAAF 0.00 0.47 0.00 0.00 0.00 0.30 0.00 0.00

IAL 0.00 9.79 0.00 0.00 0.00 7.70 0.00 0.00

IDFC 0.00 10.82 0.00 0.00 0.00 10.82 0.00 0.00 IDFC 50.00 0.00 0.00 100.00 50.00 0.00 0.00 100.00

2005 I DSCL I 30.00 I 0.00 I 0.00 1 0.00 I 30.00 I 0.00 I 0.00 I 0.00 I

2006

1996

2001

2006

Indecomm 0.00 2.57 0.00 0.00 0.00 2.57 0.00 0.00

India Direct Fnd 0.00 1.10 0.00 0.00 0.00 0.66 0.00 0.00

Indian Seamless 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00

JK Paper 15.00 7.62 0.00 0.00 0.00 7.38 0.00 0.00

2006 I GTFFact I 0.00 I 0.00 I 0.99 I 0.00 I 0.00 I 0.00 1 0.99 I 0.00 I

2003

2006

2006

2002

2003

1994 I GVK I 0.00 1 4.83 I 0.00 I 0.00 I 0.00 I 4.83 1 0.00 I 0.00 I

L&T 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 LGB 14.21 4.82 0.00 0.00 0.00 4.82 0.00 0.00

Lok Fund 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 MMFSL 7.89 0.00 7.51 0.00 7.89 0.00 7.51 0.00

MSSL 0.00 2.29 0.00 0.00 0.00 2.20 0.00 0.00

2003 I HDFC I 100.00 I 0.00 I 0.00 I 100.00 I 100.00 I 0.00 I 0.00 I 100.00 I

I IHDC 1 6.94 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 2006 I IHDC I 7.90 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I 0.00 I

2005 I K Mahindra INDIA I 22.00 I 0.00 I 0.00 I 0.00 I 22.00 I 0.00 I 0.00 I 0.00 I 2005 1 KF'IT I 11.00 I 2.50 I 0.00 I 0.00 I 8.00 I 2.50 1 0.00 I 0.00 I

2001 I MahInfra I 0.00 I 10.00 I 0.00 I 0.00 I 0.00 I 0.79 I 0.00 I 0.00 I I Montalvo I 0.00 I 3.00 I 0.00 I 0.00 I 0.00 I 1.08 I 0.00 I 0.00 I

1996 I MoserBaer I 0.00 I 0.82 I 0.00 I 0.00 I 0.00 I 0.82 I 0.00 I 0.00 I

107

1999

1 2000 I MoserBaer I 12.75 I 10.54 I 0.00 I 0.00 I 12.75 I 10.54 I 0.00 I 0.00 I

Committed Disbursed

IFC IFC Moser Baer 0.00 I 8.74 I 0.00 0.00 0.00 I 8.74 I 0.00 0.00

I I Nevis I 0.00 I 4.00 1 0.00 I 0.00 I 0.00 I 4.00 I 0.00 I 0.00 I

2004

2003

2001

1997

I 2003 I NewPath I 0.00 I 9.31 I 0.00 I 0.00 I 0.00 I 8.31 I 0.00 I 0.00 I NewPath 0.00 2.79 0.00 0.00 0.00 2.49 0.00 0.00 Niko Resources 24.44 0.00 0.00 0.00 24.44 0.00 0.00 0.00

Orchid 0.00 0.73 0.00 0.00 0.00 0.73 0.00 0.00 Owens Coming 5.92 0.00 0.00 0.00 5.92 0.00 0.00 0.00

2004

2005

2005

2001

1997

I 2006 I PSLLimited I 15.00 I 4.74 I 0.00 I 0.00 I 0.00 1 4.54 I 0.00 I 0.00 I

Rain Calcining 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00

Ramky 3.74 10.28 0.00 0.00 0.00 0.00 0.00 0.00

Ruchi Soya 0.00 9.27 0.00 0.00 0.00 6.77 0.00 0.00

SBI 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

SREI 3.21 0.00 0.00 0.00 3.21 0.00 0.00 0.00

I 2004 I Powerlinks I 72.98 I 0.00 I 0.00 I 0.00 I 64.16 I 0.00 I 0.00 I 0.00 I

2001

2003

2004

I 2004 I RAKIndia I 20.00 I 0.00 I 0.00 I 0.00 I 20.00 I 0.00 I 0.00 I 0.00 I

Spryance 0.00 1.86 0.00 0.00 0.00 1.86 0.00 0.00

Spryance 0.00 0.93 0.00 0.00 0.00 0.93 0.00 0.00

Sundaram Finance 42.93 0.00 0.00 0.00 42.93 0.00 0.00 0.00

I 1995 I Rain Calcining I 0.00 I 2.29 I 0.00 I 0.00 I 0.00 I 2.29 I 0.00 1 0.00 I

2005

2004

1996

2005

2002

TISCO 100.00 0.00 0.00 300.00 0.00 0.00 0.00 0.00

UPL 15.45 0.00 0.00 0.00 15.45 0.00 0.00 0.00

United Riceland 5.63 0.00 0.00 0.00 5.63 0.00 0.00 0.00

United Riceland 8.50 0.00 0.00 0.00 5.00 0.00 0.00 0.00

Usha Martin 0.00 0.72 0.00 0.00 0.00 0.72 0.00 0.00

I 2000 I SREI I 6.50 I 0.00 I 0.00 I 0.00 I 6.50 I 0.00 I 0.00 I 0.00 I

2006

I 1995 I SaraFund I 0.00 I 3.43 I 0.00 I 0.00 I 0.00 I 3.43 I 0.00 I 0.00 I

iLabs Fund I1 0.00 20.00 0.00 0.00 0.00 0.00 0.00 0.00

Total portfolio: 956.52 249.41 42.30 536.35 604.74 175.91 38.60 236.35

I 2004 I SeaLion I 4.40 I 0.00 1 0.00 I 0.00 I 4.40 I 0.00 I 0.00 I 0.00 I

I 2000 I Sundaram Home I 0.00 I 2.18 I 0.00 1 0.00 I 0.00 I 2.18 I 0.00 I 0.00 I I 2002 I Sundaram Home I 6.71 I 0.00 I 0.00 I 0.00 I 6.71 I 0.00 I 0.00 I 0.00 I I 1998 I TCW/ICICI I 0.00 I 0.80 I 0.00 I 0.00 I 0.00 I 0.80 I 0.00 I 0.00 I

I 2001 I VysyaBank I 0.00 I 3.66 I 0.00 I 0.00 1 0.00 1 3.66 1 0.00 I 0.00 I I 2005 I VysyaBank I 0.00 I 3.51 I 0.00 I 0.00 I 0.00 I 3.51 1 0.00 1 0.00 I I 1997 I WIV I 0.00 I 0.37 I 0.00 I 0.00 I 0.00 I 0.37 I 0.00 1 0.00 I I 1997 I Walden-Mgt India I 0.00 I 0.01 I 0.00 I 0.00 I 0.00 I 0.01 I 0.00 I 0.00 I

108

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2004 CGL 0.01 0.00 0.00 0.00 2000 APCL 0.01 0.00 0.00 0.00 2006 Atul Ltd 0.00 0.01 0.00 0.00 2001 Vysya Bank 0.00 0.00 0.00 0.00 2006 Federal Bank 0.01 0.00 0.00 0.00 2001 GI Wind Farms 0.01 0.00 0.00 0.00 2004 Ocean Sparkle 0.00 0.00 0.00 0.00 2005 Allain Duhangan 0.00 0.00 0.00 0.00

Total pending commitment: 0.04 0.01 0.00 0.00

109

Annex 15: Country at a Glance

India - Chiller Energy Efficiency Project

POVERTY and SOCIAL India

1P3.3 GNIpercapita (Atlas method, US$) 950 GN I (Atlas method, US$ billions) 1069.4

Average annual growth, 2001-07

Population (966 14 Laborforce (%) 1a

M o s t recent estimate (latest year available, 2001-07) Poverty (% o f population belo wnatio nal po verty line) Urban population (%of to fa/ population) 29 Life expectancyat birth (pars) 64 Infant mortality (per 1,OOObve births) 57 Child malnutrition (%ofchildren under5) 44 Access to an improved water source (%o fpopulation) a9

rimary enrollment (%of school-age population) (%ofpopulation age 59 61

12 114

e 139

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

GDP (US$ billions) 276.0 Gross capital formationlGDP 22.0 Exports of goods and services/GDP 5.7 Gross domestic savings/GDP 20.6 Gross national savingslGDP 20.9

Current account balance/GDP -19 Interest payments/GDP 0.7 Total debtlGDP 20.1 Total debt servicelexports 29.7 Present value of debt/GDP Present value of debtlexports

(averege annual gro wth) GDP 5.5 6.9 GDP per capita 3.5 5.3 Exports of goods and services 115 25.4

1997

413.9 23.9

22.6 24.7

-14 11

23.0 216

13 .a

2006

9.7

18.9 a2

Lower- South middle-

Asia income

1520 3,437 aao 1887

1339 6,485

16 2.1

29 64 62 41

58

ill 134

a7

138

11 15

42 69 41 25 aa a9 111 It2 139

2006 2007

916.3 Into 36 .O 38.2 22.1 213 33.0 35.1 35.3 37.2

-11 -2.1 0.7 16.7 7.5 P.7

48.5

2007 2007-11

9.0 8.5

7.5 t3.a 7.7 7.2

)evelo pment diamond'

Life expectancy

Gross primar)

capita enrollment

I

Access to improvedwatersource

- lndia

. - . Lower-middle-incomegroup

Economlc ratios*

Trade

1 Capital formation

Domestic savings

Indebtedness

-India

- - - - - - Lower-middle-incomegroup

STRUCTURE of the ECONOMY

110

(%of GDP) Agriculture Industry

Services Manufacturing

1987 1997

29.4 26.1 26.3 26.8 13.4 13.4

44.3 47.1

Household final consumption expenditure 67.1 66.0

Imports of goods and services 7.1 P.l General gov't final consumption expenditure P.3 n 4

(average annual growth) Agriculture Industry

Services Manufacturing

1967-97 1997-07

3.5 2.7 6.3 7.2 6.6 6.8 6.8 8.5

Household final consumption expenditure 5.5 5.8 General gov't final consumption expenditure 4.2 3.9 Gross capital formation 6.8 no Imports of goods and services 42.3 M.8

2006

18.3 29.3 15.3

52.4

56.7 10 .3 25.1

2006

3.8 110 P.0 111

rJ.3 6.2 M.3

24.5

2007

0.8 29.4 13.4

52.8

54.8 10.1

24.4

2007

4.5 8.5 8.8 1D.8

7.3 5.5 13.3 7.7

Growth o f capital and GDP (%) I

I -GCF -GDP

02 03 04 05

Growth o f exports and imports (%)

T

I O7 I 02 03 04 05 OB

-Exports -1rrQorts

Note: 2007 data are preliminaryestimates. This tablewas produced from the Development Economics LDB database. *Thediamonds showfourkeyindicators in the country(in bold) comparedwith its incomegroupaverage. lfdataare missing,thediamondwill

be incamolete.

111

Annex 16: Governance and Accountability Action Plan (GAAP)

India - Chiller Energy Efficiency Project

GAAP Objective and issues:

1) The objective o f the GAAI? i s to identify the critical areas and measures to enhance the transparency, accountability and performance o f the project, and thus achieving project results and higher development impacts. Broadly, the key governance and accountability issues in the project are two fold:

i. Issues that arise from the innovative/pilot nature o f the project, and the management o f f low o f funds from three separate global financial mechanisms, each with its own eligibility criteria.

ii. Issues that arise from the institutional capacity o f the financial intermediary (FI) to effectively manage and communicate with a number o f external auditors, including Designated Operational Entities accredited under the Kyoto Protocol’s Clean Development Mechanism, energy auditors accredited by the Bureau o f Energy Efficiency and auditors that assess the proper management o f ODS which are accredited by the Ministry o f Environment and Forests. The FI will also be challenged to maintain a high standard for internal decision making framework, sound financial management and compliance with procurement requirements.

2) These and other implementation issues are outlined in the table below:

Table 1 : Kev issues identified Project cycle I Issues/ R i s k s

Eligibility Criteria

Procurement r

Poor oversight by IDBI Bank to ensure that chillers meet eligibility requirements, in particular on baseline energy consumption and residual technical l i fe

requiring that participants apply for commercial finance or open commercial account to participate in program

0 Submission o f forged documents to ensure eligibility, in particular with regard to installation date o f chiller to be redaced

Probability o f F I to add eligibility requirements, i.e.

Delay in procurement o f MMV consultant which would impact revenues accruing to project from Certified Emission Reductions

0 Poor supervision o f contracts 0 Collusion among contractors 0 Delays in bid evaluation

I Submission o f forged documents to win contracts

112

Project cycle Project Execution and Contract Management

Issues/ R i s k s Delay in registration o f the program with the C D M Executive Board, which could impact financial flows

0 Inaccurate invoicing Payments made without prior verification o f destruction o f o ld chillers, or proper management o f ODS Lack o f appropriate communication to public and communities on results

0 Probability o f IDBI Bank’s influence over the chl ler owners to open a bank account with i t or obtain commercial loan from it to art finance the chiller

Financial Management System and Internal Controls

Inadequate and unreliable FM information and

0 Lack o f compliance with established internal financial

Delays in hiring auditors 0 Inability o f auditors to provide quality and independent

0 Diversion o f funds by IDBI Bank for other purposes 0 R i s k o f failure o f IDBI Bank due to financial crises in

national and/or international commercial markets

incomplete reports

controls

opinion

Monitoring and Evaluation

0 Achievement o f PDO adversely affected by poor

For upfront subsidy, r i s k that prices are increased by

Achievement o f PDO affected by inability to apply

incentives to maintain chiller performance

chiller manufacturers to get larger share

checks and balances and implement mid-term corrections

I

113

Table 2: Governance Accountability Action P l a n

Poor oversight by FI to ensure that chillers meet eligibility requirements, in particular on baseline energy consumption and residual technical l i fe

Potential for F I to add eligibility requirements, i.e. requiring that participants apply for commercial finance or open commercial account to participate in program

(L)

Submission o f forged documents to ensure eligibility, in particular with regard to installation date o f chiller to be replaced

(MI Delay in registration o f project w i th C D M EB which would impact revenues accruing to project from Certified Emission

Agreement on three-tiered oversight function: including F I role fo r general oversight, MM&V auditor to assess indiv idual chillers and ex- post ver i f icat ion by DOE

0 Eligibility cri teria t o be clearly ident i f ied in P A D and P I M

publ icat ion on F I website o f el igible chi l lers o n quarterly basis

0 Random ver i f icat ion by MM&V consultant

0 ex-post ver i f icat ion by DOE

0 project anticipated that up to one year may b e required fo r registrat ion o f project by C D M EB

0 methodology already

MM&V

Energy auditors

DOES

F I

MM&V

DOES

WB

Agreement j u r i ng appraisal/ negotiations

Agreement during appr aisal/ negotiations

Agreement during appraisal/ negotiations

Agreement during ERPA negotiations

8 Annual veri f icat ion reports by Designated Operational Ent i ty

0 Complaints f rom potent ia l chi l ler owners

0 Complaints f rom potent ia l chi l ler owners

0 Annual ver i f icat ion reports by Designated Operational Entity

0 Delays in val idation o f the project

114

Reductions

Inaccurate invoicing o f services

(L)

Payments made without prior verification o f destruction o f o ld chillers, o r proper management o f ODS (L) Probability o f IDBI Bank’s influence over the ch l le r owners to open a bank account with it or obtain commercial loan f rom it to part fmance the chiller

(M)

Delay in procurement o f MMV consultant w h c h would impact revenues accruing to project f i o m Certified Emission Reductions

Poor supervision o f contracts (L)

(L)

approved by the C D M EB

Strengthen technical supervision

Ensure adequate capacity o f P M U FM

0 Destruction to be cert i f ied chartered engineers

ex post (annual) ver i f icat ion

A clear understanding w i t h IDBI Bank o n selection o f beneficiaries

A grievance handling mechanism to be set by MOEF, the results o f wh ich wi l l b e monitored during review missions

I t i s anticipated that up to one year may b e required fo r registration o f project by C D M EB

Ensure that procurement staf f and oversight functions are o f

115

WB

F I

DOE

WB

F I

WB

Y1 and onwards

Y1 and onwards

Y1 and onwards

Y1 and onwards

Y1 onwards

Y 1 onwards

Costs do no t match with progress o f contract milestones

Ver i f icat ion reports

Complaints f r o m potential chi l ler owners

MMV contract to b e in place at t ime o f submission o f project fo r C D M registrat ion

Lack o f proper report ing

Delays in instal lat ion o f

0 Collusion among contractors (MI

Delays in bid evaluation (M)

0 Submission o f forged documents to win contracts (M)

0 Lack o f appropriate communication to public and communities o f practice o n results (M)

adequate quali ty

major procurement wi l l be carried out by the respective beneficiaries

0 Records o f openings o f bids and disseminated within 15 days o f contract award

0 Keep accurate records o f a l l documents with data o f EOI, and bids

0 Warning in contract that any forgery i s l iable to prosecution

0 Fo l low up o n any indicators o f fraud

annual awards to recognize h igh performance chillers based o n annual veri f icat ion results

0 dissemination o f informat ion o n performance o f early chillers significant component o f marketing

116

F I

F I

F I

F I

Y 1

Y 1

Y 1

Y1 and onwards

monitor ing protocol

0 F e w bidder participates

0 Bid prices are too h igh

0 Lengthy t ime between bid opening and award

0 Number o f request fo r extensions o f bid val id i ty exceeds the acceptable standards

0 Submission o f informat ion k n o w n to b e incorrect

0 Poor uptake o f program among chi l ler owners

Early warning indicators

strategy

D Ensure FM xaining i f required

NB b Inordinate lelays in ;ubmission o f FM reports

Inadequate nd unreliable ‘M information nd incomplete eports L)

4ssessment lone at pre- appraisal; and regular assessment during future W B supervision missions

Y 1 onwards

Management System and Internal controls

Signi f icant variat ion o f expenditure and budgets

strengthen FM oversight at IDBI

1 Lack o f :ompliance vith established nternal inancial :ontrols L)

D Delays in iring auditors md overdue iudits ‘L) D Inability of iuditors to xovide quality md independent 3pinion (L)

Y 1 onwards N o evidence of hiring audi t firm during supervision

F I H i r e auditor o n retainer basis with agreed schedule

Same as above

F I Y I onwards Un t ime ly and delayed reports

Qual i f ied auditor

Prepare clear TOR and agree with the B a n k

Y 1 onwards Qual i f ied audi t reports

N o n payment t o chi l ler owners on t ime

Large amounts o f project funds in the current account for unreasonable per iod o r f o r a l ong per iod

D Potential Siversion o f hnds by IDBI Bank for other purposes (L)

Auditor’s report wou ld provide such assurance

Th is would b e reviewed by Bank task teams during missions as w e l l

0 IDBI Bank to place any surplus funds in f ixed deposits

WB

F I

Adverse economic condit ions in Ind ian f inanc ia l markets

De layed

Immediately sensitizing the WB senior management in case o f downgrading of risk rat ing o f

WB Regular reviev o f the risk ra t ing o f IDBI Bank during supervision missions or otherwise

Risk o f failure of IDBI Bank due to fmancial crises in national andor international commercial !

117

Monitoring and evaluation

L I Overall risk.

narkets :L)

B Achievement If PDO sdversely sffected by poor incentives to maintain ch l le r performance :L)

For upfront subsidy, risk that prices are increased by chiller manufacturers to get larger share

Achievement of PDO affected by inability to apply checks and balances and implement mid-term corrections

L

(L)

0

unacceptable levels

Annual veri f icat ion reports wi l l compare performance o f indiv idual chillers; FI t o contact poor performers and indicate h o w much energy savings cou ld b e achieved

a normative pr ice wi l l be used based o n expert opinion/ international survey

Carry out beneficiaries survey at mid term review t o assess perception o f chi l ler owners

I

Note: N =High; M- Moderate, L= Low

?I and MM&V

F I WB

F I

<I onwards

Y 1 onwards

~

Y2

Early warning indicators

?ayments t o :hiller owners

Large number o f poor performance against rated capacity of chillers

Prices in I n d i a diverge greatly f r o m international prices

Reports o f dissatisfaction

118

Appendix I: Implementation Arrangements * World Bank Carbon Finance Unit acting as trustee to the Spanish Carbon Fund

Financial Framework

Area

Operational/ Project

Management Framework

Area

Technical/ Implementat

ion Framework

Area

119