Azerbaijan: MFF Power Distribution Enhancement Investment Program - Tranche 1

Sovereign Project | 42401-015 Status: Proposed

Summary

The Power Distribution Enhancement Investment Program (the Investment Program) aims to improve efficiency of the power distribution subsector in Azerbaijan through rehabilitation and augmentation of the aged power distribution network. The Investment Program will (i) improve power supply reliability, (ii) reduce distribution network losses, (iii) improve customer service, (iv) improve operational and financial performance of Azerishiq, and (v) promote commercialization, and institutional strengthening of Azerishiq. To be implemented through 3 tranches in all 7 regional distribution networks, all 3 tranches will have identical structure with different geographic areas (Aran, Baku, Canub, Garb, Markazi Aran, Shimal, and Shimal Garb).

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Project Name MFF Power Distribution Enhancement Investment Program - Tranche 1
Project Number 42401-015
Country Azerbaijan
Project Status Proposed
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan: Power Distribution Enhancement Investment Program - Tranche 1
Ordinary capital resources US$ 250.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Sector / Subsector

Energy - Electricity transmission and distribution - Energy efficiency and conservation

Gender Equity and Mainstreaming Effective gender mainstreaming
Description

The Power Distribution Enhancement Investment Program (the Investment Program) aims to improve efficiency of the power distribution subsector in Azerbaijan through rehabilitation and augmentation of the aged power distribution network. The Investment Program will (i) improve power supply reliability, (ii) reduce distribution network losses, (iii) improve customer service, (iv) improve operational and financial performance of Azerishiq, and (v) promote commercialization, and institutional strengthening of Azerishiq. To be implemented through 3 tranches in all 7 regional distribution networks, all 3 tranches will have identical structure with different geographic areas (Aran, Baku, Canub, Garb, Markazi Aran, Shimal, and Shimal Garb).

The Government of Azerbaijan and Azerishiq are committed to improve power infrastructure and services in the country. The Investment Program aims to improve efficiency of the power distribution subsector in Azerbaijan through rehabilitation and expansion of an aged power distribution network. The Investment Program will (i) improve power supply reliability, (ii) reduce distribution network losses, (iii) improve customer service efficiency and quality, and (iv) improve operational and financial performance and institutional development.

The investment program s impact will benefit all domestic consumers through increased availability and reliability of electricity supply. The outcome will be improved efficiency and reliability of the power distribution networks. The investment program comprises three components, which is expected to be implemented through 3 tranches in all 7 regional distribution networks. All three tranches will have similar features but covering different geographic areas within the areas covered by the 7 regional distribution networks: (i) rehabilitation of distribution networks, (ii) rehabilitation of customer service lines and installation of digital meters, and (iii) support for institutional development and capacity building.

Project Rationale and Linkage to Country/Regional Strategy

The power sector, along with the oil and gas sectors, play a leading role in Azerbaijan's socio-economic growth. The total electricity production in 2014 reached 22,700 million kilowatt-hour (kWh), of which 94% was generated from thermal power and 6% from hydropower. At present, electricity production is sufficient to cover domestic demand and allow the surplus to be exported to neighboring countries, taking advantage of regional synergies. With stable and modest economic growth, domestic electricity sales are expected to grow at 3.0% annually between 2015 and 2020.

The key challenges facing the power sector are (i) the need to improve operational and financial efficiency of power utilities; and (ii) to restore and maintain high levels of services throughout the country. Despite significant investments made in generation and transmission facilities in recent years, supply of reliable electricity to customers is a constraint due to bottlenecks in the distribution network where relatively little investment has been made due to budget constraints. In 2014, the technical and commercial distribution losses were 18.8% and revenue collection was at 70%. The existing distribution networks outside of Baku and its suburban areas, particularly in secondary cities and rural areas, are in poor condition and cannot provide constant, high-quality services to customers affecting the living conditions of households and discouraging new economic activities. The majority of power distribution facilities in the districts were built during the Soviet Union era and have been in operation for 30 years or more. The equipment has reached the end of its service life, and have become less reliable with more frequent outages occurring and increasing losses. The unreliable power supply and inefficient utilization of resources has been undermining industrial competitiveness and constraining economic growth. Without a stable and reliable distribution system, any additional generated power will not be delivered to customers efficiently. Rehabilitation and expansion of the distribution network is now considered as the priority for future sector investments.

The investment program is in line with ADB's country partnership strategy (2014 -2018), and is included in the approved ADB's Country Operations Business Plan for Azerbaijan (2015 -2017). ADB is committed to support improving energy efficiency and operation performance to provide adequate and reliable energy supply throughout the country, which can stimulate new, non-oil economic activities and promote inclusive growth and reduce urban-rural disparities. The investment program contributes to achieving ADB's Energy Policy objectives of promoting energy efficiency, access to energy for all, and capacity building and governance.

Impact increased availability of reliable electricity supply to all domestic consumers.
Outcome improved power distribution efficiency and reliability.
Outputs

Distribution network including distribution lines and substations rehabilitated, expanded, and functional

Customer services lines and digital electric meters installed and operational

Institutional capacity improved and corporate reform achieved

Geographical Location
Safeguard Categories
Environment B
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects No major environmental safeguards issues envisaged. Initial environmental examination (IEE) reports including an environmental management plan have been prepared.
Involuntary Resettlement Minimal land acquisition and resettlement (LAR) or livelihood impacts may be expected for rehabilitation works requiring the construction of distribution lines and substations. A LAR framework and a due diligence report have been prepared.
Indigenous Peoples No indigenous peoples will be affected.
Stakeholder Communication, Participation, and Consultation
During Project Design Consultations will be undertaken with affected people with respect to involuntary land acquisition and resettlement and IEE findings will be made available to the interested parties. In addition, consultation will be undertaken with relevant stakeholders.
During Project Implementation field investigations, surveys, and stakeholder consultations
Business Opportunities
Consulting Services supervision consulting firm will be recruited using the quality- and cost-based selection (QCBS) method, in accordance with ADB's Guidelines on the Use of Consultants (2010, as amended from time to time) to assist the EA to implement the project.
Procurement To ensure the project administration efficiency, governance, and integrity, the Project will be implemented through a plant design, supply, and install (turnkey) contracting approach. International consulting firms were engaged to facilitate the project preparation and implementation. The project feasibility studies and preliminary technical design were already completed. The bidding documents are under preparation and expected to be completed by the first quarter 2012. The indicative procurement methods for the main work will be international competitive bidding, in accordance with ADB's Procurement Guidelines (2010, as amended from time to time).
Responsible ADB Officer Tianhua Luo
Responsible ADB Department Central and West Asia Department
Responsible ADB Division Energy Division, CWRD
Executing Agencies
Azerishig OJSC
13, A. Bakikhanov Street
AZ1065 Baku, Azerbaijan
Timetable
Concept Clearance -
Fact Finding -
MRM 11 Dec 2015
Approval 12 Apr 2016
Last Review Mission -
Last PDS Update 24 Sep 2015

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