PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Public Disclosure Copy Report No.: PIDC994 Project Name Kosovo Energy Efficiency and Renewable Energy Project (P143055) Region EUROPE AND CENTRAL ASIA Country Kosovo Sector(s) Energy efficiency in Heat and Power (78%), Other Renewable Energy (22%) Theme(s) Climate change (80%), Regulation and competition policy (20%) Lending Instrument Specific Investment Loan Project ID P143055 Borrower(s) Republic of Kosovo Implementing Agency Kosovo Energy Efficiency Agency, Energy Regulatory Office (ERO) Environmental B-Partial Assessment Category Date PID Prepared/ 27-Jun-2013 Updated Date PID Approved/ 16-Jul-2013 Disclosed Estimated Date of Appraisal Completion Public Disclosure Copy Estimated Date of 27-Mar-2014 Board Approval Concept Review Track II - The review did authorize the preparation to continue Decision I. Introduction and Context Country Context As a newly independent state, Kosovo is a young country with significant economic potential. Coming out of post-conflict administration by the United Nations, Kosovo declared independence on February 17, 2008. By January 2013, Kosovo had been recognized by 98 countries. It is a least developed economy, measured through GDP per capita, and, after Moldova, it has the highest unemployment and poverty rates in the ECA region. With a gross national income (GNI) per capita of US$3,520 in 2011 it is one of the poorest countries in Europe without easy access to markets. Nevertheless, Kosovo’s economy has demonstrated a solid performance, shielded from the financial crisis in the euro area by limited trade and financial linkages. Following a real growth rate of 3.6% in 2012, 2013 GDP is estimated to increase by about 3.3%, driven by high levels of public investment, increasing domestic activity, robust inflows of remittances and credit growth. In 2012 inflation was 2.5%, and it is expected to be around 2% in 2013. These factors, together with FDI coming from the privatization of telecom and electricity distribution companies, are expected to Page 1 of 6 keep growth in 2013 at similar levels to 2012. Medium-term growth beyond 2013 is expected to remain around 4%. Public Disclosure Copy The main economic challenges for Kosovo are high unemployment rate of about 35% and poverty rate of 29.7%, both being highest in Europe. Poverty rates vary from among districts (from 18 to 53.8%). Young people are disproportionately poor, accounting for about 60 percent of people living below the poverty line. Unfortunately, the positive GDP growth in recent years has not translated into significant reductions of unemployment, mainly due to Kosovo’s demographic structure. Twenty-one percent of the population is between the ages of 15-25, of which 76% is unemployed. In addition, Kosovo has inherited significant structural unemployment, creating social and political challenges. Employment creation is therefore a key focus area of the Government of Kosovo’s (GOK’s) broader development strategy. Unreliable electricity supply is a key impediment to economic growth and poverty reduction. According to the Doing Business Report 2012, access to a reliable electricity supply is among the top five constraints to businesses in Kosovo, together with dealing with construction permits, enforcing contracts, starting a business and trading across borders. Frequent power cuts are a major obstacle to day-to-day operations and a constraint both to investment in new equipment and business expansion, in turn affecting job and employment creation and investments. Sectoral and Institutional Context Kosovo’s electricity system cannot meet current demand. Most of Kosovo’s domestic electricity generation comes from two, unreliable lignite-fired power plants (45-year-old Kosovo A, 25-year- old Kosovo B) with net operating capacity of about 840–900MW. Both plants are poorly maintained and operate well below their installed capacity. After the planned decommissioning of Kosovo A in 2017, there will be a considerable supply shortfall, requiring new generation capacity to address this shortage of supply. The 2013 electricity annual demand in Kosovo is estimated at about 5,430 gigawatt-hours (GWh) by the power utility (KEK) and the balance between supply and demand is Public Disclosure Copy being met by expensive electricity imports (annually around 10 percent, or about €45 million in 2012). Energy efficiency and renewable energy can help mitigate projected shortfalls. The World Bank Power Supply Options Study (December 2011) forecasts that electricity demand will increase by 4.6% a year to about 8,800 GWh by 2020. The Study shows that the rising demand can be met by adding about 600 MW of new (replacement) thermal generation capacity, with an additional 402 MW of renewable energy (RE) generation by 2025 and parallel progress in loss reduction (halving technical losses to 8% by 2025 and non-technical losses to 5%) and end-use energy efficiency (EE). This is consistent with the Government’s strategy which calls for reducing energy use through EE measures by 9% by 2018 (based on 2010 levels) and increasing RE generation to 25% of consumption by 2020. Heating is not financially or environmentally sustainable. The main energy sources for both space and water heating in Kosovo are biomass (mainly firewood) and electricity, together accounting for over 80% of heating consumption. The high consumption of unmanaged and unregulated firewood results in forest degradation, giving rise to adverse environmental, economic and health impacts. Electricity generated from lignite is used inefficiently and there are wide seasonal variations in demand. These exacerbate power supply interruptions and create the need for electricity imports, especially during the heating (winter) season. Kosovo has two isolated operating district heating Page 2 of 6 systems (Pristina and Gjakova), which are facing serious problems as the heat demand exceeds supply, and thermal losses are very high. The total installed capacity of 183.5 MW only produces 130 GWh/p.a. (thermal) or 3% of Kosovo’s heating demand. Public Disclosure Copy Energy prices are not yet cost-reflective. Electricity and district heating tariffs are regulated by the Kosovo Energy Regulatory Office (ERO). Household tariffs are estimated to be 20-30% below cost recovery levels; some industrial customers are subject to significantly higher prices effectively subsidizing the household sector. Current electricity tariffs (as of 1st June 2013 and remain unchanged) include three categories of tariffs for households based on consumption. The wholesale tariff for electricity is €0.0335/kWh and the average end-use tariff is about €0.058/kWh. Since all new electricity generation capacity will be more expensive that existing plants, affordability for consumers will be further impacted. For district heating, most consumers pay based on the heated area, which include a fixed component based on the heat capacity contracted (8 € cents/m2 in Pristina, 2010-11 season) and variable element based on the heat delivered (92 € cents/m2). EU accession. In addition to meeting energy security challenges, Kosovo needs to make progress on EU accession requirements in the energy sector. As a signatory to the Energy Community Treaty and with ambitions of EU accession, Kosovo will need to comply with the EU energy acquis in areas of climate change and environmental protection as well as the EU’s RE and EE targets. A key component in addressing this challenge is strengthening the existing regulatory frameworks and institutional capacity in support of EE and RE investments. Kosovo’s National Energy Efficiency Action Plan (NEEAP) 2010-2018 has set a target of 9% for EE by 2018 (based on 2010 consumption levels). According to the Kosovo Energy Efficiency Agency (KEEA), around 2.2% energy savings have been achieved during the (2010-2012) period of the NEEAP, against the 3% indicative saving target. KEEA is in the process of compiling the results of the first three-year period (2010-2012) and preparing its 2nd NEEAP for submission to the Energy Community Secretariat. Public Disclosure Copy Kosovo has high EE potential. Energy efficiency can help address issues related to energy security (current deficits and reduced imports), while reducing public expenditures on energy and environmental impacts of energy use. The World Bank Institute (WBI) conducted a preliminary assessment of market potential for EE investments covering the entire building stock of Kosovo (e. g. public, commercial, and residential) in 2013. Preliminary results were presented at a stakeholder round table in late January. The building sector (residential, public, and commercial buildings) accounts for 47.5% of final energy consumption and has been rising steadily, at an average annual rate of 3.6%, over period 2003-2011. The energy savings potential across the building sector was estimated at more than 44%. Of particular note were the high savings potential for public buildings. For municipal buildings, health buildings could save 47%, schools 38% and other municipal buildings 46%, even with modest improvements in current comfort levels to meet national norms. For central government buildings, the energy savings are estimated to be about 49%. Such savings offer substantial budgetary savings. Estimates indicate that GOK spends some €41 million per year for energy in its buildings and could save as much as €18.85 million annually through cost-effective EE measures. There is also moderate RE potential. In October 2012, Kosovo committed to set an ambitious RE target at 25% of its total energy consumption by 2020. This in line with the GOK’s commitment to becoming a member of the UNFCCC and ratifying the Kyoto Protocol. The Bank’s Power Supply Options Study estimated the percentage of installed RE and hydro capacity to increase from the Page 3 of 6 current 2% (primarily hydro) to 32% by 2025 (60 MW small hydro, 257 MW wind, 18 MG biomass and 67 MG biogas). The GOK is committed to developing a dynamic mix of resources, including very ambitious RE development for Kosovo, could achieve a well-balanced energy system. Private Public Disclosure Copy sector interest in Kosovo’s RE sector has increased substantially. To date, ERO has received 18 license applications for hydropower and wind projects totaling over 240 MW of generation capacity. EE and RE barriers exist. Despite the potential, development barriers facing the EE and RE sectors in Kosovo today include economic, institutional, legal and regulatory and financial impediments. Fundamental to the sector is the rationalization of energy prices, which when low, make RE options uncompetitive and EE improvements unattractive to end users. The legal and regulatory framework, while improving, still lack some proper secondary legislations, rulebooks, financing mechanisms and other critical elements for the country to realize its stated goals and targets. Lack of credible and complete information, with respect to RE resource availability, energy use patters, etc. also hampers greater private sector participation in these sectors. Further, there remains an insufficient enabling environment to support the EE and RE markets—lack of awareness, low technical capacity, no standardized contracts and protocols, underdeveloped financing modalities, etc. which serve to increase individual transaction costs, perceived risks, etc. thus further constraining accelerated sustainable energy investments. The proposed project will help address several of these critical barriers. Relationship to CAS The World Bank’s Country Partnership Strategy (CPS) for Kosovo (FY12 – FY15), approved in May 2012, provides comprehensive support for the implementation of the Government's strategies for (i) economic growth and employment generation, and (ii) improvements in environmental management. The CPS is divided into two pillars. Pillar I aims at accelerating broad-based and sustained growth in six main areas, one of which is strengthening infrastructure, particularly that of energy. Security of energy supply is crucial to achieve accelerated growth and job creation, improved quality of life, an improved business environment, better governance and investments in Public Disclosure Copy agriculture and human capital. Pillar II seeks to support the GOK in increasing EE and the use of RE, reducing environmental hazards, enhancing water supply, and moving toward harmonization with EU environmental standards. The proposed project would thus address both pillars. II. Proposed Development Objective(s) Proposed Development Objective(s) (From PCN) The project development objectives are to: (i) reduce energy consumption in central government- owned buildings; and (ii) enhance the policy and regulatory environment for energy efficiency and renewable energy development. To achieve these PDOs, the proposed project will provide: (i) investment finance for EE projects in all eligible central government-owned buildings; (ii) demonstrations on the commercial viability and program models for EE investments in municipal buildings and RE systems, such as solar water heating, for heating in select public buildings; (iii) support to develop a robust policy and regulatory framework which will help attract investments in and scale-up EE and RE; and (iv) support for project implementation. Key Results (From PCN) Page 4 of 6 Progress made under the proposed project will be monitored according to these key project performance indicators: - Reduced energy use in central government buildings (kWh); Public Disclosure Copy - Increased RE generation licenses approved by ERO (MW); - Development of a sustainable financing mechanism for EE investments in the municipal sector (e.g., public EE revolving fund); and - Enhanced policy and regulatory mechanisms developed and adopted to scale-up EE and RE (e.g., updated feed-in-tariff frameworks for RE technologies, rulebooks for RE grid balancing and curtailment, EE building certificates, select RE prefeasibility studies, etc.). III. Preliminary Description Concept Description A US$32.5 million IDA credit will be provided to the GOK to provide the necessary investment financing and policy support in order to meet the above PDOs. Given the nascent state of the market in Kosovo today, it is proposed that the investment component focus onthe public sector, which can demonstrate the benefits of EE/RE and help build the demand for related products and services. This will help demonstrate commercial viability and enhance awareness of the public and other stakeholders about the attractiveness of such investments, establish institutional capacity in the government agencies and suppliers, and catalyze the supply chain for necessary goods and services. The common ownership would also allow the project to be done at a greater scale than typical market-based schemes, thereby creating more consistent and stable demand while helping to foster various business models, such as energy service companies (ESCOs). In order to realize the PDOs, four components will be carried out. These include: (i) EE investments in public buildings; (ii) RE investments in public buildings; (iii) RE and EE policy and regulatory support, as well as related RE resource assessments; and (iv) project implementation support. IV. Safeguard Policies that might apply Public Disclosure Copy Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment OP/BP 4.01 ✖ Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ V. Financing (in USD Million) Total Project Cost: 34.00 Total Bank Financing: 32.50 Total Cofinancing: Financing Gap: 0.00 Financing Source Amount Page 5 of 6 BORROWER/RECIPIENT 1.50 International Development Association (IDA) 32.50 Public Disclosure Copy Total 34.00 VI. Contact point World Bank Contact: Jasneet Singh Title: Senior Energy Specialist Tel: 458-0343 Email: jsingh3@worldbank.org Borrower/Client/Recipient Name: Republic of Kosovo Contact: Title: Tel: Email: Implementing Agencies Name: Kosovo Energy Efficiency Agency Contact: Bedri Dragusha Title: Chief Executive Officer Tel: 3813820021550 Public Disclosure Copy Email: Bedri.Dragusha@rks-gov.net Name: Energy Regulatory Office (ERO) Contact: Krenar Bujupi Title: Member of the Board Tel: Email: kbujupi@ero-ks.org VII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Page 6 of 6