Document of The World Bank Report No: 89045-IN IMPLEMENTATION COMPLETION AND RESULTS REPORT (P119295) 29.7 MW WIND POWER PROJECT IN KARNATAKA, INDIA TO THE REPUBLIC OF THE INDIA FOR THE ACCIONA WIND ENERGY PRIVATE LIMITED (AWEPL) June 23, 2014 Sustainable Development Department India Country Unit South Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective May 15, 2014) INR 59.405 = US$ 1 US$ 1.366 = EUR 1 FISCAL YEAR July 1 – June 30 Acronyms and Abbreviations AWEPL Acciona Wind Energy Private Limited BESCOM Bangalore Electricity Supply Company Limited BvQI Bureau Veritas Quality International BWPPL Bellary Wind Power Private Limited CCGCF Climate Change Group – Carbon Finance Unit CDM Clean Development Mechanism CDM-EB CDM Executive Board CER Certified Emission Reduction CFAM Carbon Finance Assessment Memorandum CFO Carbon Finance Operation CSR Corporate Social Responsibility DANIDA Danish International Development Agency DNA Designated National Authority DOE Designated Operational Entity EMP Environmental Management Plan ENVCF World Bank Carbon Finance Unit ER Emission Reduction ERPA Emission Reduction Purchase Agreement FI Financial Institution FIT Feed-in-Tariff GHG Greenhouse Gases IBRD International Bank for Reconstruction and Development IMS Integrated Management System IRR Internal Rate of Return KPTCL Karnataka Power Transmission Corporation Limited kV Kilo Volts LOA Letter of Approval MP Monitoring Plan O&M Operations and Maintenance PCF Prototype Carbon Fund PDD Project Design Document PDO Project Development Objective PE Project Entity PPA Power Purchase Agreement SCADA Supervisory Control and Data Acquisition System SCF Spanish Carbon Fund UNFCCC United Nations Framework Convention on Climate Change Vice President: Philippe H. Le Houerou Country Director: Onno Ruhl Sector Manager: Julia Bucknall Task Team Leader: Kavita Saraswat IMPLEMENTATION COMPLETION AND RESULTS REPORT 29.7 MW WIND POWER PROJECT IN KARNATAKA, INDIA CONTENTS 1. DATA SHEET ...................................................................................................................... 1  A. Basic Information .......................................................................................................... 1  B. Key Dates ...................................................................................................................... 1  C. Ratings Summary .......................................................................................................... 1  D. Sector and Theme Codes (not applicable since all ERPA ERs have been delivered) ....................................................................................................................... 1  E. Bank Staff ...................................................................................................................... 1  F. Verified Emission Reductions (VERs) to date .............................................................. 2  2. ACHIEVEMENT OF IMPLEMENTATION OBJECTIVES AND OUTCOMES.............. 3  2.1 Basic project description and summary of any significant changes since ERPA signature ............................................................................................................. 3  2.2 Project implementation and commissioning ................................................................. 4  2.3 Monitoring, reporting, verification and issuance of ERs .............................................. 7 2.4 Lessons learned ............................................................................................................. 7  3. BANK AND PROJECT ENTITY PERFORMANCE .......................................................... 7  3.1 Assessment and rating of overall Bank performance .................................................... 7  3.2 Assessment and rating of overall project entity performance ....................................... 8  4. COMMENTS FROM PROJECT ENTITY AND OTHER PARTNERS ............................. 8  4.1 Project entity.................................................................................................................. 8  4.2 Other partners and stakeholders .................................................................................... 8  5. JUSTIFICATION FOR MOVING TO THE SECOND PHASE (CARBON FINANCE MONITORING PHASE) AND SAFEGUARDS COMPLIANCE ...................................... 9  5.1 Compliance with safeguards and implementation challenges in the first phase - supervision phase .............................................................................................. 9  5.2 Project entity’s capacity to carry out key functions related to safeguard requirements ................................................................................................................ 10  5.3 Potential issues in post completion operation, including project entity’s capacity and ability of the project to deliver the contracted Emission Reductions. .................................................................................................................. 10  5.4 Justification for moving to the second phase - carbon finance monitoring phase ............................................................................................................................ 10  5.5 Recommendations and guidance for project monitoring in the second phase - carbon finance monitoring phase .............................................................................. 10 Annex 1: Borrower's ICR ..... …………………………………………………………………11 IMPLEMENTATION COMPLETION AND RESULTS REPORT 29.7 MW WIND POWER PROJECT IN KARNATAKA, INDIA 1. DATA SHEET A. Basic Information Country: India Project Name: Karnataka Wind Power Carbon Finance Project Project ID: P119295 ICR Date: June 24, 2014 Project Design Document (PDD) Volume: 882,401 CERs (for 10 years) ER Purchase Agreement (ERPA) Volume: 178,917 CERs (for 3 years) Bank/IFC lending or grant: N/A Environmental Category: B Project Entity (PE): Acciona Wind Energy Private Limited (AWEPL), now Acciona Energy Co-financiers and Other External Partners: AWEPL – US$17.59 million Local FIs – US$27.52 million ICR prepared by: W. Nick Bowden, Kavita Saraswat, Surbhi Goyal Approved by CD: Onno Ruhl Approved by SM: Julia Bucknall B. Key Dates ERPA signing date December 23, 2009 ERPA effectiveness date December 23, 2009 ERPA amendment dates No ERPA termination date December 2, 2013 Project commissioning date September 29, 2008 C. Ratings Summary Outcomes (project performance) Satisfactory Bank performance Satisfactory Project entity performance Satisfactory D. Sector and Theme Codes Sector Codes (in %) LE – Renewable Energy 100% Theme Codes (Primary/Secondary) Climate Change (P) P E. Bank Staff Position at ICR at ERPA Signing Project Team Leader Kavita Saraswat Kavita Saraswat Position at ICR at ERPA Signing ICR Team Leader Surbhi Goyal N.A. ICR Primary Author William Nicolas Bowden N.A. Deal Manager William Nicolas Bowden Manuel Luengo Environment Specialist Gaurav D. Joshi Gaurav D. Joshi Social Safeguard Specialist N.A. Mohammed Hasan F. Certified Emission Reductions (CERs) to date: No. Monitoring Period Volume of Date of Date of Status CERs Monitoring Completion of Reported Report Verification 1. January 1, 2010 - 84,747 January 20, 2011 April 4, 2011 CERs Issued December 31, 2010 2. January 1, 2011 - 97,126 January 12, 2012 April 18, 2012 CERs Issued December 31, 2011 TOTAL 181,8731/ 1/ There is a difference of 2% in reported volume and delivered volume. The reported number of CERs is 181,873 of which 2% is deducted and allocated by the UN to an Adaptation Fund prior to crediting the balance to AWEPL. In total 178,235 CERs were credited and invoiced to IBRD. 2 2. ACHIEVEMENT OF IMPLEMENTATION OBJECTIVES AND OUTCOMES 2.1 Basic project description and summary of any significant changes since ERPA signature Objective: The project activity involved installation of a wind power plant and export of the electricity generated to the grid. The main purpose of the project activity is to reduce Greenhouse Gas (GHG) emissions by generating clean electricity from wind energy. Project Description: The project consists of 18 wind turbines of 1.65MW capacity each totaling 29.7MW spread over two locations (two villages), Arasinagundi (13.20MW) and Anabaru (16.50MW), in Davangere district of the Indian state of Karnataka. The project was started by Bellary Wind Power Private Limited (BWPPL) and was later acquired by Acciona Wind Energy Private Limited (AWEPL), a 100% subsidiary of the Spanish Acciona group of companies, i.e. Acciona Energia Internacional, S.A. and Acciona, S.A, in 2007. The delivery of the power plants was done by Vestas Wind Technology India Private Limited, which is also the present Operations and Maintenance (O&M) contractor. Both the plants are commissioned and are under operation - Arasinagundi since June 2008 and Anabaru since September 2008. Both plants have employed underground cables and fully enclosed unit transformers and switchgear keeping safety aspects in view at the generating station. A Supervisory Control and Data Acquisition (SCADA) system with remote monitoring facility is functional. The electricity generated from the project is supplied to a sub-station owned by Karnataka Power Transmission Corporation Limited (KPTCL), the state transmission utility, at Hiremallaholle, and from there it is further evacuated by the state grid. Metering is done at 66kV side, jointly by Bangalore Electricity Supply Company Limited (BESCOM), KPTCL and AWEPL through an electronic tri-vector meter installed at Hiremallanahole sub-station on a monthly basis. As per the approved PDD, the project was expected to generate approximately 94.88 Million kWh of electricity every year at a total capacity utilization factor of about 36.47% against which it has generated 100.55 Million kWh of electricity in calendar year 2009, which was the first full year after commissioning. This was 6% higher than the yearly estimate as per PDD. AWEPL has executed a 20-year Power Purchase Agreement (PPA) (with start date of March 17, 2008 for Arasinagundi and of May 2, 2008 for Anabaru) with BESCOM for sale of electricity at a fixed rate (with no escalation) of INR 3.40 per unit (kWh). As per the PPA, the tariff from the 11th year onwards will be decided by Karnataka Electricity Regulatory Commission (KERC). BESCOM can exercise its option to procure power at KERC- determined tariff, else AWEPL can enter into an agreement with another party. Main Beneficiaries: The project evacuates power to Karnataka state grid and hence to the Southern Regional Grid that consists of Andhra Pradesh, Karnataka, Kerala, Tamil Nadu, Pondicherry, and Lakshadweep. CDM Process: This carbon offset project falls under the large-scale CDM project activity category for grid connected electricity generation from renewable energy sources. The project 3 applied for CDM registration in 2007 and was registered on November 20, 20082/. The International Bank for Reconstruction and Development (IBRD) received a request to purchase CERs from AWEPL in August 2009. A Letter of Intent (LoI) was signed between the IBRD acting as the “Trustee” of the Spanish Carbon Fund (SCF) and AWEPL for the transaction of 178,917 CERs generated from the Project from January 1, 2010 until December 31, 2012. Finally, an Emission Reduction Purchase Agreement (ERPA) was signed on December 23, 2009 between AWEPL and IBRD. For the period from commissioning of project (September 2008) to end of 2009, AWEPL had an ERPA with Acciona Green Energy Developments, S.L. (AGED) for the sale of 99,211 CERs, which was successfully executed. The project actually issued 102,914 CERs3/ 4/ since CDM validation till December 2009. 2.2 Project implementation and commissioning Project Development Objective (PDO): The development objective of the project was to “result in reduction of Greenhouse Gas (GHG) emissions by supplying electricity generated from wind power to the grid”. Table 1: Basic Data S Owner Location Project Start Date for Commercial No Capacity implementation of Operation Date (MW) project 1. AWEPL Arasinagundi 13.20 MW April 27, 2007 June 6, 2008 2. Anabaru 16.50 MW September 20, 2007 September 29, 2008 Attainment of the PDO: The project has already achieved its PDO in terms of installed renewable energy generating capacity, and has been delivering clean electricity to the grid, and continues to do so. Table 2: Key Results Indicators Indicator Target Result Actual at PDD At time of ERPA Termination (Dec 2012) Renewable Energy Generation Capacity 29.7 MW 29.7 MW Load (Capacity) Factor 36.47% 35.36%5/ CERs delivered 178,917 178,235 Except during 2012, both the plants performed well in the past five years as evident from the average Plant Load Factor, higher than the original forecast as per PDD (36.47%) largely due to better predictive and timely maintenance. 2/ Project Reference no. 1949 3/ Issuance refers to the creation of certified emission reductions (CERs) equivalent to the number of greenhouse gas (GHG) reductions which have been generated, verified and certified in respect of a CDM project activity. 4/ Of these, 2% CERs were deducted by UN towards the Adaptation Fund and the balance 100,855 CERs were available to distribute, which is higher than the ERPA target with AGED. 5/ Since the operations of the plant were stopped for a few months in 2012, the load factor has been computed assuming generation if there were no stoppages. 4 Table 3: Plant Load Factor Calendar Year Actual PLF Park Availability6/ 2009 38.65% 94.15% 2010 35.02% 97.71% 2011 40.14% 98.00% 2012 35.36%7/ 67.37% 2013 39.21% 96.44% The park availability varied between 94% and 98% during 2009 to 2013, except for 2012 when it dropped to 67.37% due to forced stoppage of the plant for a few months (as explained in the Safeguards section). The following table gives details regarding electricity exported to grid during calendar years 2010 and 2011 and CERs issued to the Project. Due to current carbon market conditions, no Monitoring Reports for 2012 and 2013 have been submitted to UNFCCC and no issuance has been requested yet. Once a buyer for 2012-2013 assets is identified, these activities could be completed. Table 4: Data for Generation and CER issuance (2010 to 2011) Calendar Net Export of Electricity Total CERs Issued CERs delivered to Year to Grid (MWh) Bank under ERPA8/ 2010 91,126.80 84,747 83,052 2011 104,437.20 97,126 95,183 TOTAL - 181,873 178,235 Delivery of CERs: The ERPA executed under this project was for purchase of CERs from AWEPL by IBRD acting as trustees of the Spanish Carbon Fund. It implied that the SCF will make payment for monitored emission reductions after verification by an independent third party auditor known as a Designated Operational Entity (DOE)9/ and then certified and issued by the UNFCCC. The DOE for verification of CERs for this project is Bureau Veritas Quality International (BvQI). As summarized in Table 4 above, as per the ERPA with IBRD, the Contract Volume of the Project was defined as the first 178,917 CERs generated by the Project starting in January 2010. The Project delivered 178,235 CERs to the Trustee (IBRD) for the calendar years 2010 and 2011 and the Trustee had paid for these CERs. In email dated June 28, 2012, AWEPL and the Trustee agreed not to process the transaction of the remaining 682 CERs of the Contract Volume but, instead, to terminate the ERPA following delivery of and payment for the 178,235 CERs due to heavy transaction cost10/ involved to process the remaining number of CERs. The project has either met or exceeded the expected 6/ Park Availability considers overall park extending from the generation end i.e. wind turbine upto and including the sub-station and grid availability. 7/ Since the operations of the plant were stopped for a few months in 2012, the load factor has been computed assuming generation if there were no stoppages. 8/ Park Availability considers overall park extending from the generation end i.e. wind turbine upto and including the sub-station and grid availability. 9/ DOE, as required to be hired under CDM rules, is an independent entity accountable to the supervising bodies of the CDM and is responsible for validating the project activities and verifying the project’s anthropogenic GHG emission reductions. 10/ AWEPL had about 1600 surplus CERs from year 2009 but since CERs of this year were not included in the ERPA agreement, it was not considered prudent to amend the same. AWEPL also generated CERs in 2012 but due to high cost involved in validating a small number of CERs, it was mutually agreed between the Bank and AWEPL to waive the requirement of balance 682 CERs. 5 performance parameters in terms of generation, O&M and sustainability objectives. As compared to the certified emission reductions (CER) estimates in the PDD, the project has generated ~4% fewer CERs in calendar year 2010 and ~10% more CERs in calendar year 2011. The accrual of CERs varies as it is linked to the variation in wind power generation from year to year which is an inherent characteristic of wind and caused by the cyclic non- systematic variations in the wind patterns. The following table gives the details regarding the volume of CERs as agreed in PDD, as per ERPA with the Trustee, actual delivery of CERs to Trustee, etc. Table 5: CERs Delivered since Registration of the Project11/ S Monitoring Volume of Volume Delivery Actual Actual Remarks, if No Period CERs as of CERs Date as per Volume Delivery any per PDD as per ERPA of CERs Date to ERPA delivered Trustee 1. November 88,240 N.A N.A 64,712 N.A Not under 20, 2008 – Bank’s ERPA July 31, 2009 2. August 1, 88,240 N.A N.A 38,202 N.A Not under 2009 – Bank’s ERPA December 31, 2009 3. January 1, 88,240 59,639 On or before 84,747 April 4, Generated 2010 – September 2011 ~4% less December 30, 2011 CERs 31, 2010 compared to PDD 4. January 1, 88,240 59,639 On or before 97,126 April 18, Generated 2011 – September 2012 ~10% more December 30, 2012 CERs 31, 2011 compared to PDD 5. January 1, 88,240 59,639 On or before Request N.A Due to 2012 – March 31, for involvement December 2013 issuance of high 31, 2012 of CERs transaction yet to be cost, made requirement to purchase balance 682 CERs was waived and ERPA terminated TOTAL 441,200 178,917 284,787 Demonstration Effect: As stated in the PDD, the Project’s Internal Rate of Return (IRR) without considering CDM revenues was 11.93% (barely above the offered lending rate of 11.25%) and did not provide any risk premium. Considering CER revenues @ EUR 9 per CER the Project IRR was 13.65% which barely sufficed the return criteria factoring the risk 11/ on November 20, 2008 6 premium. Therefore, carbon finance in the form of CER revenues was necessary to obtain approval for project investment. 2.3 Monitoring, reporting, verification and issuance of ERs The monitoring of the project is done in accordance with the Monitoring Plan as described in the PDD. Monitoring reports for the first two reporting periods (2010 and 2011) were prepared by AWEPL and submitted to the DOE (BvQI) for verification. Both verifications led to the issuance of CERs. 2.4 Lessons learned 1. Carbon finance through CER sale is not an adequate incentive for investors to undertake wind power projects in India on a commercial basis, unless global negotiations have resulted in agreements and thereby the market for CERs becomes predictable. 2. The market price for CERs at the time of writing this ICR is less than $0.5/CER, which is not at all attractive. Necessary steps at the global and national levels must be taken for a CER market to be created such that it remains an important enabler to encourage investments in projects promoting sustainability such as this one. 3. Similar to creation of more predictable carbon markets, it is equally important to access concessional financing for improving project feasibility. 4. The project faces revenue constraints in spite of meeting its generation estimates due to the global CER market having collapsed since the project was set up. Hence, a CER contract that guarantees CER offtake and price, and runs from the time the project is registered until it is generating CERs, will help to largely mitigate the price and CER revenue risk. 5. Improving the responsiveness of the CDM process to changes in domestic and global environments is necessary. Changes in policy and global negotiations which are beyond the control of project entities and resultant delays in resolution of such matters place an unnecessary financial burden and uncertainty on projects, especially where the CER revenues make the project viable. 6. Specifically for the World Bank Group, it is advisable to take up carbon finance projects along with investment operations, otherwise it becomes very difficult to enforce Bank’s policies, especially safeguards, even when the project entity might be diligent and has its own robust procedures. The investment helps in accounting for the expenditure likely to accrue to enforce additional measures required to comply with the Bank’s policies and hence, easier to enforce the same on the ground. 3. BANK AND PROJECT ENTITY PERFORMANCE 3.1 Assessment and rating of overall Bank performance Rating: Satisfactory Overall, the World Bank’s performance has been satisfactory. Since signing of ERPA in December 2009, the World Bank carried out two supervision missions including the site visits over the two-year implementation period. Sufficient budget and staff resources were allocated as the project was adequately supervised and closely monitored; especially given that task team leader was Delhi-based staff, which proved to be highly effective. The World Bank responded to the needs of the Project Entity (PE) by: 7 1. Providing guidance and assistance to the PE to enable it to comply with the environmental and social safeguards requirements of the World Bank; 2. Helping the PE identify potential issues in the verification/certification of the ERs and offering solutions. In accordance with OP/BP 13.05, the Region is responsible for supervision of carbon finance projects during the implementation phase from ERPA effectiveness to project commissioning after which the project may be transferred to CCGCF. Further as per the same OP/BP, during the monitoring phase from project completion to ERPA termination, CCGCF is responsible for the monitoring of carbon finance projects according to the requirements and obligations in the ERPA. However, for this project, ERPA was signed after commissioning of the project and for the closer monitoring of the pending land transfer issue (explained in detail in safeguards section), the monitoring of the project was retained with the region. Now since the entire ERPA volume has been delivered, there will be no transfer of the Project to CCGCF. 3.2 Assessment and rating of overall project entity performance Rating: Satisfactory Overall, AWEPL’s performance has been satisfactory. AWEPL has followed robust industry practices in carrying out operation and maintenance, including safety and environment and social safeguard practices. The corporate culture includes regular reporting of safety aspects, monitoring of technical parameters, undertaking preventive maintenance, and refresher training of staff. The Project maintains a cordial relationship with the local population and directs the CSR activities towards areas identified by the local representatives. Additionally, the project has been very responsive to World Bank’s requests and requirements and accommodated World Bank’s safeguard requirements, in spite of no project funding by Bank. In stand-alone carbon finance projects, it is always a challenge to enforce Bank’s safeguard practices on the client as some aspects may have a financial implication. In particular, the PE has been extremely forthcoming in the following: 1. Monitoring the performance of the installed equipment through SCADA system to ensure compliance with the PDD and the monitoring plan; 2. Diligently preparing and sharing annual CDM Monitoring Reports with the World Bank, and; 3. Complying with Bank’s environmental and social safeguards requirements and keeping the World Bank informed of potential issues during implementation. As per AWEPL, the World Bank provided guidance and assistance to enable the project entity to comply with Bank’s environmental and social safeguards requirements. The World Bank’s review of AWEPL’s ongoing sustainability initiatives and concurrence along with suggestions for social and environmental initiatives has helped provide a further boost to sustainability and the effort for involving the local community. 4. COMMENTS FROM PROJECT ENTITY 4.1 Project entity Please refer to Annex 1. 4.2 Other partners and stakeholders N/A 8 5. JUSTIFICATION FOR MOVING TO THE SECOND PHASE (CARBON FINANCE MONITORING PHASE) AND SAFEGUARDS COMPLIANCE 5.1 Compliance with safeguards and implementation challenges in the first phase - supervision phase Transfer of Forest Land: The project was established on forest land: about 8.77 ha (entire forest land transferred to the project in December 2007) for Arsanigundi and 26.72 ha (of which 21.78 ha transferred to the project in November 2007) for Anabaru. Subsequent to taking over the project site by AWEPL, a small part of the approach road and a few spans of 33kV line were found to be located over a small land parcel of 3.464 ha (as of December 2012, this is now modified to 5.472 ha after measurements by forest department, Davangere), which was not transferred to the project. In spite of AWEPL initiating immediate action to request the transfer the land to the project, the transfer of is still awaited. This land was being used for grazing of cattle but since the project has not restricted movement of cattle, the alienation of this forest land did not adversely impact the livelihood of local people. As part of compensatory afforestation, the project identified and delineated 34 ha of waste and uncultivated land which was transferred to the State Forest Department to be taken up for a plantation program. Since October 2008, when the request for the additional 4.94 ha land was submitted with the Karnataka Forest Department, AWEPL is consistently following up with the concerned authorities for approval. This issue was known at the time of signing of ERPA and was expected to be resolved soon. The project entity has complied with all the directions of the forest department in this regard including, but not limited to, furnishing compensatory land, guarantees etc. The application has moved through some steps but the actual approval is still pending. In January 2012, the project received notice from the divisional forest office to stop operations of Anabaru power plant as it considered the construction of road and transmission line on the above mentioned piece of land unauthorized. After intense follow up by AWEPL, State Forest Department at Davangere through its letter dated April 20, 2012, allowed the plant to re-start generation for eight (8) weeks, after submitting a bank guarantee towards afforestation works on the alternate piece of land, which was already transferred to the forest department by AWEPL, and penalties, if any are imposed in the future. After complying with the requirements, the plant was restarted immediately in April 2012 itself. On June 21, 2012, AWEPL was again instructed by State Forest Department at Davangere to stop generation. On September 18, 2012, based on a writ petition filed by AWEPL before the Honorable High Court of Karnataka, a stay order was obtained against the restraining orders of the state government (of June 21, 2012). The project is functioning normally since September 26, 2012. The High Court also directed the State Government to forward the required application to the Central Government for approval and to confirm by the next hearing that they have forwarded the Project’s request for land transfer n to the Central Government for approval. The State Government has yet to file its response. CERs volume in 2012 was impacted due to temporary stoppage of the plant. Implementation of Site Related Mitigation Measures: The Environment Assessment indicated that there are no major migration routes within the project area as well as impediment to bird flight paths. AWEPL implemented underground cabling to avoid unnecessary visual intrusion. The blades of the turbines are painted in orange bands to make the contrast visible 9 from a distance. Further, during missions, it was observed that the site offices maintained sequential records of the measures taken for environmental management, including safety of workers, and handling of chemicals. Social: The project neither resulted in any involuntary resettlement nor did it adversely impact the local communities, particularly weaker sections (including scheduled castes and tribes). The contracts issued by AWEPL included the statutory requirements of (i) ensuring wages in accordance with the Minimum Wages Act of the government, (ii) not discriminating in wage payment to female workers, and (iii) non-involvement of child labor in any of the project activities. AWEPL undertakes Corporate Social Responsibility (CSR) activities such as:  Organizing cultural, sports and social welfare activities in consultation with stakeholders;  Organizing wheelchairs, crutches and lunch utensils for local school;  Facilitating annual gathering at local temple located within the project premises;  AIDS awareness camps for local population Indigenous People: The project area has nearly 25% of the population belonging to tribal groups. But the project does not adversely affect the tribal groups of the area. As noted in Appraisal Aide Memoire, AWEPL informed that these tribal groups were actually benefitted by the project through better employment opportunities. 5.2 Project entity’s capacity to carry out key functions related to safeguard requirements The PE has satisfactorily addressed all the material environmental and social safeguards issues that have been identified during the appraisal and included in the Environmental Management Plan in the CFAM and included in the monitoring plan in the PDD. The project entity is following up with the government and other parties to ensure that the pending land issue is resolved satisfactorily. 5.3 Potential issues in post completion operation, including project entity’s capacity and ability of the project to deliver the Contracted Emission Reductions. The project entity will continue to follow up with the state government as well as with the central national government to resolve the land issue. Apart from this, no safeguards issues are foreseen that could affect the project’s ability to deliver on any future CER contracts to future buyers. At present, the low market price for CERs does not justify the verification of emission reductions, but CERs could be delivered in the future when the price may increase and more buyers enter the market. 5.4 Justification for moving to the second phase - carbon finance monitoring phase There was no second phase in the said project as the ERPA was signed after commissioning of the project and immediately entered into carbon finance monitoring phase. Further, the project has satisfactorily delivered all but 682 CERs in the ERPA. Since both parties have agreed to terminate the ERPA, no monitoring was carried out by the Carbon Finance Unit and there was no transfer of the project from the region to CCGCF. 5.5 Recommendations and guidance for project monitoring in the second phase - carbon finance monitoring phase N/A 10 Annex 1 Borrower’s ICR 1. Performance of the project, including the role and value of carbon finance in improving the overall sustainability of the project a. Performance of the project The project has either met or exceeded expected performance parameters (with respect to expected generation stated in PDD as well as shared with lenders) in terms of generation, O&M and sustainability objectives. As compared to the certified emission reductions (CER) estimates in the PDD, the project has generated ~4% lesser CERs in calendar 2010 and ~10% higher CERs in calendar 2011. The accrual of CERs varies as it is linked to the variation in wind power generation from year to year which is an inherent characteristic of wind and caused by the cyclic non-systematic variations in the wind patterns. The machine availability averaged over 99% over the 2010 to 2012 period, barring a forced stoppage for some months in 2012 described below. The CERs delivered by the project since registration on 20th November 2008 are as follows (http://cdm.unfccc.int/Projects/DB/DNV-CUK1216117082.43/view) : Monitoring period CERs Annual estimated CERs 20-Nov-08 to 31-Jul-09 64,712 88,240 1-Aug-09 to 31-Dec-09 38,202 88,240 1-Jan-10 to 31-Dec-10 84,747 88,240 1-Jan-11 to 31-Dec-11 97,126 88,240 Request for issuance for CERs for calendars 2012 and 2013 is yet to be made. We expect to have approximately 61,978 CERs for 2012 and 92,982 CERs for 2013. 2012 CERs volume is impacted due to stoppage pertaining to land described in 6 a] iv] below. As per the ERPA with IBRD, the Contract Volume of the Project was defined as the first 178,917 CERs generated by the Project. The Project had delivered 178,235 CERs to the Trustee for the years 2010 and 2011 within Schedule and the Trustee had paid for such CERs. In emails dated June 28, 2012, the PE and Trustee agreed not to process the verification and issuance of the remaining 682 CERs of the Contract Volume but, instead, to terminate the ERPA following delivery of and payment for the delivered CERs. b. Role and value of carbon finance in improving the overall sustainability of the project As stated in the PDD submitted to the UNFCCC for CDM approval for the project activity in 2008, the Project IRR without considering CDM revenues was 11.93% (barely above the offered lending rate of 11.25%) and did not provide any risk premium. Considering CER revenues @ €9 per CER the Project IRR was 13.65% 11 which barely sufficed the return criteria of the project proponent factoring the risk premium. Therefore, carbon finance in the form of CER revenues were necessary to support project investment, else the project would not have been commercially. The sustainable development aspects are addressed in the para below. The market price for CERs at the time of writing this ICR is less than $0.5/CER. It is not attractive and the necessary steps at the global and national levels must be taken for a CER market to be created such that it remains an important enabler to encourage investments in projects promoting sustainability such as this one. 2. Measurement of the project's degree of success in meeting its implementation and development objectives The project was already constructed and operational at the time the ERPA with IBRD was executed. It was constructed as per schedule and generation had stabilized. The Host Country Approval from the Indian Ministry of Environment and Forests confirming that the project meets the country’s sustainability criteria had been obtained and the project was already registered as a CDM project. The project continues to meet and at times exceed its set development objectives. The project activity is achieving its sustainable development objective in the form of social, economic and environmental well-being as follows:  Substituting electricity generated using conventional fuel with wind energy. Conserving coal and other non-renewable natural resource  Mitigating the emission of GHG (CO2). Reducing pollutants like SOX, NOX etc. associated with other power plants  Arrangements made at site for storing rain water  Contributing towards reducing power shortage in the state of Karnataka. Help to bridge India’s energy deficit.  Generate local employment in areas near the project activity leading to empowerment of the vulnerable sections of society dwelling near the project area. Wage registers being maintained with labor contractors to ensure parity maintained between male and female workers  Project maintains visitors and complaints registers  The project area remains open for animal grazing  Compliance with the forestry clearance conditions for environment compliance by the project  The project maintains cordial relationship with the local community. It undertakes Corporate Social Responsibility (CSR) and environmental initiatives from time to time like:  Organizing cultural, sports and social welfare activities in consultation with stakeholders;  Organizing wheelchairs, crutches and lunch utensils for local school;  Facilitating annual gathering at local temple located within the project premises;  AIDS awareness camps for local population  Conducting plantation activity in the project and sub-station areas 12 3. O&M of the plant in line to ensure its sustainability The O&M activities continue to be carried out by Vestas who are the original equipment manufacturers through a long term O&M contract since commissioning in 2008. Both plants performed well in the past five years as evidenced through the average Plant Load Factor being higher than the original forecast as per PDD (36.47%) largely due to better predictive and timely maintenance. Calendar Year Actual PLF 2009 38.65% 2010 35.02% 2011 40.14% 2012 35.36%12/ 2013 39.21% The project has in place a Quality, Safety and Health plan for construction, installation, commissioning, maintenance and operation of the plants. The Integrated Management System (IMS) approved by an independent accredited agency complies with international norms and is strictly adhered to. Reports indicating compliance with the plan are prepared regularly by the project for their internal management. Quality and safety audits are also regularly carried out as a part of CER verification process by the accredited DOE. The project has a SCADA system in place that is connected to the India office in Bangalore and also to the central control centre in Spain. This is used to monitor the turbines 24/7 and improve operational efficiency. 4. Safeguards and safety policies/procedures that you adopted during construction/operations/maintenance The IMS referred to in the para above has been adhered to and the Bank’s team has reviewed the adoption and implementation of the laid down procedure, including the monthly reports from the O&M contractor which mentions any incidents that occurred relating to environment and accidents. Records of accidents and near misses, if any, are systematically maintained. Rain water harvesting is implemented to serve a portion of the water requirement for maintenance. 5. Lessons learned from the experience a. Carbon finance through CER sale is not an adequate incentive for investors to undertake wind power projects in India on a commercial basis, unless global negotiations have resulted in agreements and thereby the market for CERs becomes predictable. b. Project feasibility is better established with concessional financing and similar more predictable initiatives in the present CER market scenario. 12/ Since the operations of the plant were stopped for a few months in 2012, the load factor has been computed assuming generation if there were no stoppages. 13 c. The project faces revenue constraints in spite of meeting its generation estimates due to the global CER market having collapsed since the project was set up. A CER contract that guarantees CER offtake and price and runs from the time the project is registered till the time it is eligible to generate CERs, will help to largely mitigate the CER price and revenue risk. d. Improving the responsiveness of the CDM process to changes in domestic and global environments is necessary. Changes in policy and global negotiations which are beyond the control of the Project Entity and resultant delays in resolution of such matters place an unnecessary financial burden and uncertainty for the PE, especially where the CER revenues make the project viable. 6. Identification of key issues or events that may arise in the future that could impact the ability of the project to deliver the contracted emission reductions a. Additional land i. The Project Entity (PE) had applied for permission for transfer of 21.07 hectares of forest land in its name to construct the project. During the course of transfer of this land and construction the PE observed that a small project footprint was deviating from the original requested approval mainly due to topography and immediately requested for diversion of an additional 3.464 hectares on August 19, 2008. Since then the land requirement has been revised to 5.472 ha during joint measurements. ii. While the originally requested land was transferred to the PE, the additional land is yet to be transferred on the date of this ICR. The size of the additional land has been increased from 3.5 ha to 5.4 ha after subsequent measurements by forest department. iii. The PE is consistently following up with the concerned authorities for approval since its initial application in 2008. The PE has complied with all directions of the forest department in this regard including but not limited to furnishing compensatory land, guarantees etc. The application has moved through some of the steps leading to approval. However, the approval is awaited on date. iv. The project was stopped for some months by the forest department pending completion of the process for additional land approval. The project was re-started with the intervention of the Honourable High Court of Karnataka vide its order dated 18th September 2012 where the stoppage order was set aside and the State Government was directed to confirm by the next hearing of its forwarding the application to the Central Government for approval. The State Government is yet to file its response. b. Collapse of Carbon Finance Market AWEPL recognizes and appreciates the role of the World Bank Group in promoting and tooling action against Climate Change. The Carbon Finance Unit has pushed the development of clean projects in India, as per our view the renewable energy projects being most important in directing the growth of the energy sector towards a 14 clean future in a country with growing energy needs. Reports (State and Trends of Carbon Pricing) and other challenging initiatives (Partnership for Market Readiness) are also backing policy decisions towards revitalizing markets. As mentioned before, the project faces revenue constraints due to the global CER market having collapsed since the project was set up. Design and implementation of National markets/ taxes/ other policies with use of nationally generated offsets may help CER market to recover: recent examples in China, Korea, Mexico and South Africa are a good proof of it. AWEPL considers that the recognition of the sustainable development role of Indian CERs, and the development of the needed schemes to increase their value would be a good approach for India as well. There are several options of doing so: the classical offsetting in an Emission Trading or Tax Scheme, and also other more innovative like the recognition of CER contribution to CSR (Corporate Social Responsibility) policies, as the one that is being developed in India nowadays. The World Bank and its affiliates could play an important role in getting this together. c. Apart from above, no more issues are foreseen that could affect project’s ability to deliver on any future CER contracts. 7. Assessment of the potential of the project to deliver the contracted CERs The PE has completed contracted CER delivery to IBRD as mentioned. It is expected to continue generating the estimated CERs on an annual basis and deliver the same in a timely manner. Although it cannot be said with certainty, the PE expects to obtain the requested additional land approval, sometime in 2014 as it depends on the agreement reached between the Central Government and the State Government. As on the date of this ICR, the Project has no further commitment to deliver CERs to IBRD. 8. Comments on project and Bank performance from PE a. The Bank has provided guidance and assistance to enable the PE to comply with Bank’s environmental and social safeguard requirements. b. Association with the Bank’s team has been an enriching experience. The Bank’s review of the PE’s ongoing sustainability initiatives and concurrence along with suggestions for social and environment initiatives has helped provide further boost to sustainability and the effort for involving local community. Some of the actions forming part of the sustainable development initiatives listed in the para above are owed to the Bank’s suggestions. c. The Bank’s proactive approach in identifying potential issues and advice in putting in place measures to address such issues, has added value to the project. 15