Actual Project Name : Renewable Energy Market Transformation L/C Number: US$M): Project Costs (US$M

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1 Public Disclosure Authorized IEG ICR Review Independent Evaluation Group Report Number : ICRR Project Data: Date Posted : 12/30/2014 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Country: South Africa Project ID : P Appraisal Actual Project Name : Renewable Energy Project Costs (US$M US$M): Market Transformation L/C Number: Loan/Credit (US$M US$M): Sector Board : Energy and Mining Cofinancing (US$M US$M): Private Direct Prepared by : Cofinanciers : Private Sector Board Approval Date : 06/28/2007 Closing Date : 09/30/ /30/2013 Sector(s): Renewable energy (49%); Central government administration (48%); General finance sector (3%) Theme(s): Environmental policies and institutions (33% - P); Climate change (33% - P); Micro; Small and Medium Enterprise support (17% - S); Regulation and competition policy (17% - S) Mamundi G. Sri-Ram Aiyer Reviewed by : Victoria Alexeeva 2. Project Objectives and Components: ICR Review Coordinator : Christopher David Nelson Group: IEGPS1 a. Objectives: The project development objective is "to support the Recipient s efforts to establish policy and regulatory frameworks, and build institutional capacity for renewable energy development, leading to mitigation of greenhouse gas emissions, and removal of barriers to renewable energy technologies " (Global Environmental Facility Trust Fund Grant Agreement, p.5). The statement of project development objectives in the Project Appraisal Document (p. 9) is "to establish policy and regulatory frameworks and build institutional capacity for renewable energy development in South Africa ". The PAD (p.10) further lists the global environmental objective, in line with Global Environmental Facility (GEF) Operational Program No. 6, that is to remove barriers to renewable energy technologies to help mitigate greenhouse gas emissions". This ICR Review is based on the assessment of objectives as stated in the Grant Agreement. b.were the project objectives/key associated outcome targets revised during implementation? No c. Components: Component 1. Renewable Energy Power Generation (appraisal estimate US$ 5.75 million, with US$4.05 million of GEF grant, and Government funds of US$1.7 million) included technical assistance (TA) and capacity building to eliminate barriers to renewable energy (RE) based power generation in South Africa. It was to support the development of policy and regulatory frameworks for grid -connected RE generation, and conduct capacity building activities to strengthen public and private sector institutions to enable them to meet the RE generation target under the country's Renewable Energy White Paper (REWP). The TA was to help facilitate RE investments by providing

2 Matching Grants (MG) for project developers to conduct feasibility studies. Component 2. Commercial Solar Water Heating (CSWH) (appraisal estimate US$ million, with US$1.4 million of GEF grant, US$0.3 million of Government funds, and US$9 million of private funds, which represent the estimated cost of equipment to be installed by the CSWH companies ) included technical assistance and capacity building measures to address market and business barriers to developing a market for large scale commercial solar water heating in South Africa. The TA activities were to support the development of the solar water heating (SWH) industry by assisting in developing standards and codes, promotion campaigns, and training. Also, it was to provide business development support for small and medium private enterprises and demonstrate best practice for improved design, testing and installation through Matching Grants (MG) and Performance Grants (PG). Implementation support (appraisal estimate US$ 0.85 million, with US$0.55 million of GEF grant and US$0.3 million of Government funds). During project restructuring in December 2009, under the first project component s Matching Grants window, the activities for renewable energy investments were re -defined as pre-investment activities ; the eligible beneficiaries were also expanded to include entities outside the private sector (e.g., municipalities and state owned enterprises ). Under the Commercial Solar Water Heating component, which was supposed to focus only on the commercial segment, the support was expanded to include all solar water heating systems, in addition to commercial. A new category to cover operational costs was added for Implementation Support. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Project Cost : The total project cost at appraisal was estimated at US$ million. The ICR's final project cost of US$4.08 million does not seem to be correct as only the GEF grant disbursed at US$ 4.65 million at completion. Overall, the final cost was lower than estimated due to changes in activities on solar water heating, which was taken up by the Government. Financing and Borrower Contribution : Of the original GEF grant of US$ 6.0 million, US$ 4.65 million were used. The Recipient's contribution was expected at appraisal to be US$ 2.30 million, and the ICR p.22 reports that the Government complied with transfer of co-funding resources. Private sector financing of US$ 9.0 million was expected at appraisal to be spent on equipment installed by the solar water heating companies, whereas at completion the amount was US$1.37 million contributed under the matching grants program. The ICR also listed the amount of US$148 million that represented indirect private investment in solar water heater installations. Dates: The project closing date was extended by a total of two years. The first extension, in September 2011 was for 15 months to December 31, 2012 as a result of the slow pace of implementation, in particular under the performance and matching grants programs (Project restructuring paper 2011). In December 2012, the project was extended by another 9 months to September 30, 2013 to enable completion of project activities, While the target values were not changed during project restructuring, the indicators related to commercial solar water heating systems were amended to include all solar water heating systems, i.e., residential, commercial, institutional, and industrial applications (Amendment to GEF Trust Fund Grant Agreement). 3. Relevance of Objectives & Design: a. Relevance of Objectives: Substantial. At the time of entry, South Africa was experiencing power shortages and load shedding, as generation capacity had not increased over the preceding ten years despite steady growth in demand for electricity. The power sector relied on coal for 92% of its output. As the world's sixth largest coal producer, 90% of which was used for electricity generation and synthetic fuel, South Africa was the largest green house gas (GHG) emitter in Africa. The Government's White Paper on Renewable Energy (2003) prepared with Bank assistance, set a target of 10,000 GWh of renewable energy by 2013, to meet some 4% of electricity demand by The Bank was assisting the country implement the White Paper. The project development objective was relevant to the Bank s Country Partnership Strategy, which emphasized support to the national renewable energy program as part of the climate change portfolio, and the Bank s mandate from the G8 Summit at Gleneagles, Scotland to undertake a Climate Change Initiative in F+5 countries. The rationale for GEF support was to mitigate barriers to RE development, and its key role was to provide grant co-financing to jump- start the move towards the 10,000 GWh target by removing the main barriers. b. Relevance of Design: Substantial. The project was designed to provide technical assistance and capacity building for (i) renewables-based power

3 generation, and (ii) commercial solar water heating. The inputs under the first component were to support the development of policy and regulatory frameworks for grid - connected RE generation, and for capacity building activities to strengthen relevant public and private sector institutions to meet the RE generation target. The output expected was MW of RE generation capacity with GEF support. The TA activities under the second component were to support the commercial solar water heating industry to international best practice by assisting with development of standards and codes, promotion campaigns and training. They were also to provide business development support for small and medium private enterprises and demonstrate best practice for improved design, testing and installation The activities were expected to lead to the establishment of the RE policy and regulatory frameworks, and an established commercial solar water heating industry. The original project focus was on the commercial segment of solar water heating, which complemented an UNDP-GEF project focusing on the residential segment As originally conceived, the project aimed to create a participating CSWH company program" receiving performance-based grants for demonstrative sub-projects (PAD, p.11). According to the PAD (p.13) since solar water heating transactions were not linked to transmitting power over the main grid, there was no need to involve the grid operator (Eskom) in promoting this resource. As a result of the Government policy changes during implementation (Eskom was designated to procure and install SWH ), the design had to be amended to remain relevant to changes in policy environment. In particular, the definition of the commercial solar water heating (CSWH) component was expanded to include all solar water heaters (SWH) and beneficiaries were expanded to include entities outside the private sector. 4. Achievement of Objectives (Efficacy): To support the Recipient s efforts to establish policy and regulatory frameworks, and build institutional capacity for renewable energy development, leading to mitigation of greenhouse gas emissions, and removal of barriers to renewable energy technologies. Substantial. Outputs The project procured the services of a specialist energy project finance law firm to review the draft standardized power purchase agreement under the Renewable Energy Feed -In Tariff (REFIT) framework. The power planning process incorporated the review s key inputs and finalized in March 2011 with large allocations for RE. Regulations for the procurement of RE were announced in May 2011, setting the stage for large-scale implementation of the South Africa s flagship program for RE, the Renewable Energy Independent Power Producer Procurement Program (REIPPPP) announced in August A review was prepared for the 2003 Renewable Energy White Paper with a focus on modelling RE technology learning curves. The Department of Energy incorporated the approach in its Integrated Resource Plan to plan the introduction of new generation capacity through a cost -optimized model that allocated greater capacity for RE. A renewable energy (RE) resource database was developed and made available to private developers. The website included maps with high-level information on solar, wind and biomass resources. It also provided a link to the wind resource database developed by the South African Wind Energy Program supported by UNDP. 33 pre-feasibility/pre-investment studies were carried out for RE projects under the Matching Grant program to help 14 RE firms develop projects with a combined generation capacity of 275 MW. At least 5 of these projects with a capacity of 85 MW were selected as preferred bidders and accepted for implementation under the government's Renewable Energy Independent Power Producer Procurement Program, with 1 having been commissioned as of December 2013, and 4 having achieved financial closure, and at an advanced stage of construction. Another 6 projects with a generation capacity of 190 MW were on the government s reserve list for financial allocation. A concentrated solar power (CSP) workshop was held in 2009 that led to the formation of the Southern Africa Solar Thermal and Electricity Association (SASTELA), which assumed the leading role in the development of the CSP industry in South Africa by making inputs to the Integrated Resource Plan and positioning CSP as a viable peaking-power option. The project procured a consultant to provide specialized real time support to the Department of Energy, thus facilitating a review of the draft Independent System and Market Operator (ISMO) Bill that was undergoing processing by the South African parliament at project closure. The project support to the solar water heating (SWH) program was scaled back due to the successful implementation of the SWH installations by Eskom. The limited support included a training program to accredit solar water heating (SWH) installers (to receive the Eskom- administered electricity tariff-based rebates, installers had to be certified under SWH industry standards and codes that were developed by the South African Bureau of Standards in 2009), testing SWH systems on a pass/fail basis, and development and patenting of an innovative ladder design for SWH installation. The solar water heating (SWH) workshop, conference, and launch event were hosted by the project to allow multiple stakeholders to engage in the roll-out of solar water heating systems. The National Solar Water Heating Framework (NSWHF) evolved from this engagement providing more information on different market segments,

4 in particular expanding the SWH roll-out program to low-income households. The project supported the development of an SWH Business Plan for the Free State province of South Africa in Outcome The outcome indicators of avoided fossil fuel -based power generation (estimated at 422 GWh) and resulting avoided CO2 emissions (estimated 0.75 million tons) are based on the installation of 312,000 residential solar water heating systems carried out by Eskom. The achieved outcome targets represent the country s achievement in the renewable energy sector during the period of project implementation , with support of other stakeholders and development partners. The project s TA and capacity building activities made their contribution to achieving the targets, although the attribution of the project to these outcomes is weak, in particular considering the project s limited scope in support of solar water heating. 5. Efficiency: This was a technical assistance project that did not finance investments. The ex-ante economic rates of return (ERRs) were estimated for a number of potential projects to be financed by the private sector under the first component for each renewable energy technology, i.e., small hydro, sugar bagasse, wind, pulp and paper industry, and landfill gas, and a small number of demonstration commercial solar water heating systems. At project closure, the ex-post internal rate of return (IRR) was estimated for all solar water heating installations carried out by the Government in its roll-out program. The benefits calculated were the electricity savings (based on residential electricity tariff in comparison to the ex-ante analysis that used tariffs for commercial and industrial consumers, as the project was designed to focus on the commercial segment ) as well as carbon emission reductions. The ICR estimates the IRR at 16% including CO2 reductions for the national SWH roll-out program. The final grant amount was reduced by about 20% and the implementation period was two years longer than anticipated at appraisal. Non-utilization of the remaining grant funds resulted from the limited human resource capacity of the ISU during final years of implementation (ICR, p.24). There were some administrative and operational inefficiencies with regard to carrying out technical assistance and capacity building activities under the project. In particular, the project effectiveness date was delayed by more than a year, partly due to delays in appointment of a project coordinator. Procurement issues (that could have been identified and addressed at appraisal ) also resulted in early implementation delays. In addition, according to the mid-term review s aide-memoire of May 2011 (the ICR does not mention this issue), a significant amount of administrative resources was consumed to resolve procurement and financial monitoring issues. In March 2011, the total project expenditure was US$1.1 million, with 47% spent towards the Implementation Support Unit s operational expenses. Efficiency is assessed as Modest. a. If available, enter the Economic Rate of Return (ERR ERR)/Financial Rate of Return (FRR FRR) at appraisal and the re-estimated estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal ICR estimate No No * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: Relevance of objectives and design is substantial. Efficacy is rated substantial, while efficiency is assessed as modest. The overall outcome is therefore Moderately Satisfactory. a. Outcome Rating : Moderately Satisfactory 7. Rationale for Risk to Development Outcome Rating: Government Commitment: The government support through co-financing and participation in oversight functions shows a high level of ownership. It focused on ensuring that the appropriate institutional arrangements were in place to support the SWH roll-out program along with a substantial fiscal commitment equivalent to $ 470 million. Implementation Capacity: Shortage of trained SWH installers across the country presents a moderate risk to the national SWH roll-out program, pointing to the need to develop training and certification programs coupled with targeted market awareness campaigns to attract younger persons to serve them.

5 a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: a. Quality at entry: The project design was strategic as the renewable energy (RE) sector was almost non-existent at entry. The project drew upon the sound fiscal and monetary policy base, including a strong financial sector to attract RE investments provided the legal, policy and regulatory frameworks in place. The assessment was made that without appropriate support mechanisms, development of RE power generation would be limited, given that electricity prices at the time were substantially lower than costs of long run marginal capacity expansion, particularly compared with coal- based generation. The Development Bank of South Africa (DBSA) the premier development finance institution, was selected as the project implementing agency due to its expertise in both financing and managing development projects; the lack of in -house capacity on renewable energy was to be addressed through setting a separate ISU with consultants to implement the project (PAD, p.57). The adequacy of arrangements to address implementation risks and provision of adequate human resources were not addressed until implementation was underway and restructuring was needed to ensure continued progress. An issue not fully considered at appraisal related to procurement processes. The government's consideration of black economic empowerment (BEE) as an evaluation criterion in procurement differed from the Bank's requirement for selection, which are based on technical and financial bases only. As a result of these shortcomings, it took a while before the matter was resolved, resulting in early implementation delays. Quality-at at-entry Rating : Moderately Satisfactory b. Quality of supervision: The Bank team focused closely on the project's development impact throughout the implementation period, despite having limited resources for implementation support of stand alone GEF projects, and the hands -on role required to support TA activities. The team regularly engaged with government on priorities, fostered resilience in a rapidly changing policy environment, for example by reallocating the budget to provide more support for Matching Grant beneficiaries, and providing specialist support to the Department of Energy. The Bank fielded implementation support missions twice a year besides visits from the fiduciary staff, summarized issues in detailed aide memoires, issued no objection certification which were credited with short turn around times, provided post procurement reviews and financial management oversight. The team focused on the project's relevance throughout implementation, and assisted with restructuring with the rapidly evolving sector policies. Bank team members also participated in other engagements in related areas in the country, such as sector investment projects, Energy Sector Management Program (ESMAP)-supported Low Carbon Growth Strategy study, TA for the South African Cities Network on Renewable Energy Efficiency, carbon finance cooperation with DBSA, as well as had regular interactions with other agencies including the state owned utility Eskom and private companies. Quality of Supervision Rating : Satisfactory Overall Bank Performance Rating : Moderately Satisfactory 9. Assessment of Borrower Performance: a. Government Performance: The Government, represented by the Department of Energy (DOE) and the Project Steering Committee (PSC), was engaged and proactive. The Department's Clean Energy Chief Directorate, and the New and Renewable Energy Directorate were the key players in implementation. DOE officials visited sites, and were involved in evaluations, policy and regulatory framework development, Renewable Energy White Paper review, and socio economic assessment of the Integrated Resource Plan, and routine communication of priorities and exchanges with the Bank as policies changed. The proactive engagement enabled it to receive first -hand information on progress and to provide guidance and inputs to the overall policy and regulatory process. All this opened many opportunities for value addition at different stages, including the SWH roll -out program. The commitment was illustrated by the commitment of Government fiscal funds, as projected (ICR, p.22). The Project Steering Committee (PSC), chaired by the DOE was the platform for stakeholders' participation in oversight functions. The PSC and its Chair were privy to project implementation progress, including potential

6 bottlenecks, and actively participated in the mid term review, that allowed for accelerated implementation of the Matching Grant program. DOE participated in workshops, supported outreach activities making its web site available as an additional channel for dissemination of project related information, facilitated linkages with regional investment promotion agencies for workshops to help raise the quantity and quality of Matching Grant Applications. It also helped remove hurdles to implementation and made transition arrangements at closing. It was actively involved in addressing human resource issues at the Implementation Support Unit through DBSA's senior management. Government Performance Rating Highly Satisfactory b. Implementing Agency Performance: The Implementation Support Unit (ISU) in the Development Bank of South Africa (DBSA) designated as the implementing agency to allow the project to benefit from DBSA s infrastructure focus and its financial management and procurement systems--coordinated with external stakeholders and partners, hosted conferences and workshops, generated reports and disseminated information. It held regular discussions with official stakeholders and partners including the United Nations Environment Programme (UNEP), the state owned utility Eskom, Danish International Development Agency and others to coordinate activities related to the RE power generation and SWH programs in planning or implementation stages, and in the project mid term review. Developers were able to access pre investment resources in a timely manner to prepare Renewable Energy Independent Power Producer Procurement Program applications. Implementation challenges included delays in recruitment and departure of ISU team members at critical stages, including the first and final years of implementation. When new members were appointed they did their best to put matters back on track, and the Bank and DOE worked with DBSA towards a resolution. Nonetheless, the delay in reappointing, and subsequent departure of the ISU coordinator in the last year affected full disbursement and the Matching Grant program. Implementing Agency Performance Rating : Moderately Satisfactory Overall Borrower Performance Rating : Satisfactory 10. M&E Design, Implementation, & Utilization: a. M&E Design: The PAD (p 37-40) listed adequate indicators to measure progress towards the PDO, with overall responsibility for M&E with the then Department of Minerals and Energy, and day to day responsibility with the ISU overseen by DBSA. Additional consultants were to be hired by DBSA if needed. During restructuring, the target values within the results framework were not changed, while support was expanded, for example, to incorporate residential solar water heating systems (the initial focus was only on commercial SWH). The CO2 emissions avoided had calculation errors. The results framework for the TA operation included several indicators that were outside the direct scope of the project -- e.g., the design anticipated the potential leverage of external resources including those from private sources, b. M&E Implementation: The M&E system was implemented by DOE and the ISU in DBSA as planned on TA activities, CSWH companies, RE power generation. Regular reports enabled ongoing monitoring. c. M&E Utilization: Project data were used for reallocation of resources through restructuring and revised procurement plans. Data on the low percentage of successful applications in the first round of the Matching Grant program led to improving the quality of subsequent applications and support for them, on an iterative basis, resulting in significant increases in the quantity and quality of applications from project developers. Market feedback was used to reduce the allocation for SWH grants following the 2011 mid-term review, leading to focus on different market segments, including low income households. M&E Quality Rating : Substantial

7 11. Other Issues a. Safeguards: The project was rated as Category C (no environmental or social safeguard impact ) under the Bank s safeguard policies. According to the PAD p.28, it was not expected to present any environmental or social risk. Solar water heating is not a listed activity with respect to South African environmental requirements, and therefore would not be subject to the environmental screening or environmental assessment process. No land acquisition was planned, as the construction was to be within the perimeter of existing institutional, commercial, or industrial establishments (mostly on rooftops). The ICR does not report any information with regard to safeguards. b. Fiduciary Compliance: Procurement: As mentioned earlier under Bank Performance, an issue not fully considered at appraisal related to local procurement processes--the government's consideration of black economic empowerment (BEE) as an evaluation criterion in procurement differed from the Bank's requirement for selection which take into account only technical and financial bases. As a result it took a while before the matter was resolved, resulting in early implementation delays. The ISU developed an Operations Manual to clarify interfaces between the project (Bank) procurement procedures and those of DBSA. The Bank team scheduled procurement training sessions on applicable World Bank guidelines and procedures, and input from the Post Procurement Review helped strengthen ISU's capacity. DBSA also made available a procurement specialist who provided support to ISU. Financial Management: DBSA staff were familiar with regular financial management practices, procedures and reporting. The Bank provided support to the ISU and DBSA's Financial Management Unit and the ISU addressed early gaps during the process of preparing the project's first external audit. The adjustments were made in time for the start of the Matching Grant program in 2010, and following the mid-term review, as the volume and value of transactions rose. c. Unintended Impacts (positive or negative): d. Other: 12. Ratings: Outcome: Satisfactory Risk to Development Moderate Outcome: ICR IEG Review Moderately Satisfactory Moderate Reason for Disagreement /Comments Although other elements are rated as Substantial, Efficiency is rated Modest, thus leading to an overall outcome rating of Moderately Satisfactory. Bank Performance : Satisfactory Borrower Performance : Satisfactory Quality of ICR : Moderately Satisfactory Satisfactory Satisfactory IEG agrees with the ICR s individual ratings. In line with the IEG/OPCS harmonized guidelines, the overall rating becomes MS as the quality at entry is MS. NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

8 13. Lessons: IEG has selected the following lesson from the ICR, with some adaptation : Technical assistance activities could help support the overall development of RE market and enabling environment. Rather than prescribing financing of a particular type of RE technology, the project focused on removal of legal policy, regulatory, and information barriers to scale up RE. 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: The ICR is well written with considerable information on events and changes on the ground as the project progressed, with necessary details. The approach is analytical and based on main implementation activities. The ICR, however, has errors in values, and has inconsistent numbers. It is not clear on the actual project costs, i.e., while saying the Government committed its funds as planned, the actual amount is less than half as per Annex 1; GEF actual costs in Annex 1 differ from the one on p.5. The project team was requested to inform IEG if during verification of final financial data in the ICR's Annex 1, there were any substantial changes. The ICR would have benefitted from proof-reading, as for example on p. 8 the estimated investment was not inserted and indicated XYZ. The ICR lacks any information related to safeguards. a.quality of ICR Rating : Satisfactory