Project Information Document (PID)

Country Name PeruProject Name Proposed Purchase of Emission Reductions (PCF)

Peru - Siif Andina hydroelectric umbrella projectRegion Latin America and the Caribbean RegionSector EnergyProject P081954Borrower Not applicableImplementation Agency SIIF ANDINA S.A.Environment Category ; I 0 ODate PID Prepared March 28, 2003Projected Appraisal Date April 2003Projected Board Date June 2003

1. Country and Sector Background

Power sector

The Law of Electric Concessions (Ley de Concesiones Electricas) rules the electric sector inPeru. This law was passed in 1992 and the privatization process began in 1994. These factorscaused a high growth in the electric sector. The production of electric energy had an averageannual growth of 4.3% during the 90's and the electrification coefficient grew from 55% in 1993to 73% in 2000 The average consumption per capita in Latin America and the Caribbean in year2000 was 1,500 KW, while in Peru it was only 676KWh, continuous growth in the sector isexpected.

According to current legislation, generation, transmission, distribution and commercialization ofelectric energy in Peru is perforned by private companies under a free market system The stateguarantees free and equal participation of private companies and controls quality of the servicesthat by their nature tend to be natural monopolies (transmission and distribution). Thedevelopment of the activities within the Peruvian electrical sector is ruled by the ElectricalConcessions Law (Law Decree No. 25844) regulated by Supreme Decree No. 009-93-EM and itsmodifications. The law sets forth the rules for the business of generation, transmission anddistribution of electricity, defines the structire of the electricity sector, and appoints the liabilitiesof the companies, guiding them to the competition and efficiency.

The Ministry of Energy and Mines (M.E.M.) and the Supervisory Body of Investment in Energy(OSINERG), are responsible for the enforcement of the law and the monitorilng of the sector.Under the Electricity Concessions Law there is a free price regime for supplies that exceed 1000KW on a competitive basis, while prices for small users are regulated Prices reflect the marginalcosts and are established to promote the sector efficiency. In addition, the following services aresubject to price regulation: sales to the electricity public service customers, transference of powerand energy between generators, sales of energy from generators to distribution concessionairesdesignated to the electricity public sector, and compensations of the transmission system holders.

Other main actors in the electricity sector are:

Direcci6n General de Electricidad (DGE): The DGE is the normiative-technilcal institution of theMinisterio de Energia y Minas. The DGE proposes the rules for the energy generation,transmission and distribution activities, Also they are in charge of promoting the development of

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the electric sector. The functions of the DGE are to: legislate on the electrical sector on issuesconcerning generation, transmission, distribution and commercialization, promote thedevelopment of the electrical sector; sign contracts, authorize and give electrical concessions forprivate operators.

Organismo Supervisor de la lnversi6n de Energia (OSINERG)- OSINERG is the institution thatcontrols the investment in the electrical and hydrocarbon sectors. OSTNERG is member of the"Sistema Supervisor de la Inversi6n en Energia". OSINERG functions are to: manage the electrictariff regulation, control the norms accomplishments; identify risk situations; control ofinvestments in the sectors and monitor the obligationis acquired by the investors, certificate thecompliance of the norms by the investors; propose modifications to current policies.

Comit6 de Operaci6n Econ6mica del Sistema Interconectado Nacional (COES - SINACQ: COESis a technical entity, composed of the owners of the power plants connected to the national gridand the owners of the transmission lines Its main activity is to coordinate the operation of theenergy sector with the minimum costs, assuring the quality and safety and the best use of energyresources.

Environment

There is a national legal framework regarding environlmental issues that any energy project has tofulfill. Mainly there are an Environment Code and an Environment Protection Regulation forelectric activities. (C6digo del Medio Ambiente and D.S. No 029-94-EM, Reglamento deprotecci6n ambiental en las actividades electricas).

http.//www memiei. aob.pe/wixvemii/legisla/aa/normasesp asp.

2. Objectives

The objective of the project is to support development of the international market mechanism forthe new commodity known as "Emissions Reduction" (ER), developed in the framework of theKyoto Protocol. In this particular case, the project will facilitate reduction of CO2 emissions inPeru through substituting electricity produced by thermal plants wvith electricity from a number ofhydroelectric plants currently under development by SIIF-Andina.

The project is supported by the Prototype Carbon Fund (PCF) PCF supports projects thatproduce high quality greenhouse gas ER wihich could be registered with the United NationsFramework Conventioni on Climate Chanige (UNFCCC) for the purposes of the Kyoto Protocol

3. Rationale for Bank's involvement

The PCF was established with the objective to pioneer the ER purchiase transactions. The Bank'sinvolvement was seen critical in terms of ensuring quality of the first projects, as well asinstitutionalizing experiences and ensuring replicability of the projects, while providing necessaryproject due diligence and other fiduciary responsibilities

The value-added of Bank support also includes the availability of in-lhouse expertise in managingenergy and environmental projects, ability to mobilize global experts with long experience in thefield, technical support for project preparation and supervisioni capacity.

4. Description

This project consists of several small run-of-river hydropower projects developed under the samedeveloper. All of them retain the necessary permits and licenses and are waiting to receivefinancial closing from the project sponsor, SIIF-Energies.

Depending on the scope of the financial investment, the projects will most-likely be startinggenerating ERs in the following sequence.

I . Tunnel Graton, (6.5 MW): located on the Carretera Central (Central Hwy.) about 2 hours Eastof Lima, near the City of San Mateo.

2 Moche 1&2 (20 MW): Located near the City of Trujillo, about 600 km north of Lima.

3 El Sauce (9 5 MW): located near the City of Tarapoto (not connected to the national grid), onthe Eastern slope of the Andes, facing the Amazon Jungle. The region is a growing area withcurrently 12 MW of diesel power.

4. Cerro Mulato (8MW): Project location is at Chiclayo, 150km north of Trujillo.

5. Tanguchle Il&III (50MW): Project location is Santa river between Chimbote and Trujillo.

6 Santa Rita (170MW): located in the Santa river about 20km from the water intake ofChavimochic Irrigation.

The project seeks to buy ERs from the first 65MW of generation that will be built first and thisproject proposes to commit to the amount of ERs per year whichi can be generated by differentprojects.

All the project considered in this project are conventional run-of-river hydropower projects apartfrom No. 3: El Sauce which uses an existing lagoon as intermediate pondage. Most of theprojects' locations are in the interior of Peru, bringing hydropower to remote areas that currentlyrely on expensive diesel engines for their electricity needs and/or shall assist to displace coal andgas fired generationi. Electricity from projects are fed to the national grid except El Sauce whichreplaces the existing off-grid diesel generation.

The technology to be used is traditional run-of-the-river engineering (low impact water intakes)small canals and tunnels where applicable, de-sanders and penstocks leading to turbines. Allturbinated water is discharged back to the rivers.

5. Financing

The project consist in the purchase of ER by the PCF. The payment is only against the deliveryof the certified ER. Apart from this PCF support, the project does not include any World Bank orIFC financing. The construction of the hydroelectric plants is financed by the project sponsors.

6. Implementation

Prototype Carbon Fund (PCF)

The Bank established PCF in July 1999, with the operational objective of mitigating climatechange. PCF supports projects expected to generate greenhouse gas ER while complying withrequirements of Joint Implementation (Art. 6) and the Clean Development Mechaniism (Art. 12)of the Kyoto Protocol.

PCF purchases higih quality greenilouse gas ER which could be registered with the UNFCCC forthe purposes of the Kyoto Protocol. PCF enters into irrevocable ERPA and accompanying MVPwith "project sponsors" - in this case HGV, defining the quantity, price and other deliveryconditions of ER to be purchased by PCF, as well as accompanying institutional arrangements,including the monitoring and verification systems and methods. Independent experts providebaseline validation and verification/certification procedures for emissions reductions that respondto UNFCCC rules as they develop.

Project sponsors.

Siif Andina is a special purpose company created by the project sponsors (Siif Energies and ElectricidadAndina) to identify, build and operate hydropower plants. Siif Andina SA is 80% owned by SiifEnergies (Siif), the renewable energy company of the Electricite de France Group (EdF).

Siif Energies is currently developing well over 2,000 MW of renewable energy in different partsof the world. Siif draws on experience from EdF and from local partners.

ElectricidadAndina (Andina), the local partner, has built over 50 MW in Peru. Andina has experience (50MW built over 25 years in Peru) and knowledge of local costs, laws and regulations

Note Siif Andina is currently discussing a 25% equity participation with Statkraft Norfund Power Invest, anewly formed Joint venture in Norway between Norfund and Statkraft, created to invest in hydropowerprojects in selected countries

The Government:

The role of the Governmeit in the implementation of the project will be limited and willconcentrate on two areas:

(i) Implementationi of the Kyoto Protocol and setting the rules and mechanisms allowing bothpublic and private entities to produce and sell ER, in accordance withi mechanisms established bythe Kyoto Protocol and related negotiations;

(ii) regulatory and oversight responsibilities of the respective power sector and environmentalagencies as described in section 1 above

7. Sustainability

The project will operate within the current framework and will further enhance private sectorparticipation in the electricity sector, while it will develop local capacity in Peru to promoteprojects with global environmental benefits and to access carbon financing. The stability andcontinuity of the regulatory and policy environment is highly likely because of well-establishedinstitutionial and legal framework in the sector. MEM and OSfNERG are supporting this PCF-

projects and are very interested in developing a pipeline of similar projects in order to achievelocal and global emission reductions Furthermore, the project sponsors have extensiveexperience in power projects development and operation, as well as competent technicalbackground in hydroelectric power plant development.

8. Lessons learned from past operations in the country/sector

The proposed project is the first projects of the PCF portfolio to be implemented by the privatesector in Peru. Nevertheless, the project has benefited from the coordination and consultationswith parallel PCF projects that are being developed in Latin America (Costa Rica, Colombia, andChile).

9. Program of targeted intervention (PTI) no or yes?

Not applicable

10. Environment Aspects (including any public consultation).

This category "B" project complies with the World Bank's environmental and social safeguardpolicies Due to the 'umbrella' nature of the project, meaning that all sub-projects are notidentified at the time of appraisal, a framework has been developed and agreed upon with thesponsors which addresses the key environimental and social issues of future sub-projects. All sub-projects will apply the environmental and social assessment procedures, and provide the Bankwith the relevant information for their inclusion under the umbrella. This will ensure that all sub-projects comply with all Bank Safeguard policies, guidelines, and rules on public disclosure andconsultation.

11. Contact Point:Task ManagerFrancisco Fernandez-AsinThe World Bank1818 H Street, N.W.Washington, D.C. 20433Telephone: 202-473-0611

For information on project related documents contact:The infoshopThe World Bank1818 H. Street, N.W.Washington, D.C. 20433Telephone: (202) 458-5454Fax: (202) 522-1500Web: htty://www.worldbank.org/infoshop

Note: This is information on an evolving project. Certain components may notnecessarily be included in the final project.