PROJECT INFORMATION DOCUMENT (PID)CONCEPT STAGE

Report No.: AB6767Project Name Geothermal Exploratory Drilling ProjectRegion Middle East and North AfricaCountry Republic of DjiboutiSector 50% Other renewable: 50% Thermal PowerLending Instrument SILProject ID P127143{If Add. Fin.} Parent Project IDBorrower(s) Republic of DjiboutiImplementing Agency Electricité de DjiboutiEnvironmental Screening Category

[ ]A [X]B [ ]C [ ]FI [ ]TBD (to be determined)

Date PID Prepared October 27, 2011Estimated Date of Appraisal Completion

January 25, 2012

Estimated Date of Board Approval

March 15, 2012

Concept Review Decision Following the review of the concept, the decision was taken to proceed with the preparation of the operation.

I. Introduction and Context

Country Context

1. With aspirations of positioning itself as a maritime and international business hub for East Africa, Djibouti a country of 864,000 (2009) people, is strategically located on the 20 mile strait of Bab-el-Mandeb between the Red Sea and the Gulf of Aden. Its rent based economy with a GDP of USD1.05 billion is dependent on providing military bases for the United States and France as well as providing services as an international transshipment port, refueling center and regional transit port. In 2004, the Djibouti Free Zone was created to allow the import, storage, transformation and re-exportation of goods without being subject to protective tariffs or non-tariff barriers. Currently, 85% of Djibouti’s container terminal imports and exports serve its landlocked neighbor Ethiopia.

2. With an unemployment rate estimated between 50% and 60%, two thirds of the population lives in Djibouti City. The other third consists mainly of shanty-dwellers relying on the informal sector, rural farmers and nomadic shepherds. Forty-two percent of Djibouti’s population is determined to be below the poverty line.

3. Djibouti has little industry and is therefore heavily dependent on foreign assistance to help support its balance of payments and to finance development projects. With less than 1,000 km2 of arable land (0.04% of 23,200 km2) and an average annual rainfall of 5.1 inches, most food must be imported. Natural resources in the form of mineral deposits are minimal other than low profit yielding salt. However, Djibouti’s land mass encompasses the Afar Triangle of the East

African Rift where the sea feeds the movement of three tectonic plates to form a promising geothermal energy resource.

Sectoral and Institutional Context

4. Djibouti is entirely dependent on imports to meet its electricity needs. Until this year, the country relied solely on heavy fuel oil (HFO) to supply electricity but over the last few months, it began importing electricity surplus from Ethiopia during the dry season. Electricity is provided by the state-owned national power company, Electricité de Djibouti (EDD), which supplies power mainly to the capital. The hourly load data shows system demand ranging between a low of 15 MW in the winter to a high of 63 MW in the summer in 2009.

5. Electricity access remains unaffordable for most people in Djibouti. Estimates indicate only about half of the population has access to electricity. Most villages, outside of Djibouti are not connected to the grid. EDD’s 2008 social (i.e. life line) tariff price was USD 0.283/kWh. The tariff price for shops and government buildings was USD 0.397/kWh while industry and military bases were charged USD 0.424/kWh. EDD’s generation cost is approximately USD 0.25/kWh with marginal power reliability and quality. According to the small and medium-sized enterprises (SMEs) surveyed for a February 2008 study commissioned by the World Bank, the lack of reliable, secure and low-cost energy supply was cited by more than half of interviewees as the single most severe constraint to doing business in Djibouti.

6. The interconnector now provides low cost supply of energy when available, limited by hydrological conditions and excess energy available in Ethiopia. In 2011, the new 230 kVA transmission interconnect between Addis Ababa, Ethiopia and Djibouti City was completed. Under the terms of the Power Purchase Agreement (PPA), between 180 and 300 GWh will be sold to Djibouti annually which represents 22.35 to 37.24 MW of continuous generation (no PPA energy sales during Ethiopia’s dry season peak hours). Ethiopia’s wet season, during which its hydro-based generation is in excess of its demand, correlates with Djibouti’s high demand summer months. Correspondingly, Djibouti’s low demand winter months correlate with Ethiopia’s dry season when it must depend on thermal generation to meet its daily peaks. The supply from Ethiopia is not considered to be ‘firm’, meaning that it is a source of energy (kWh) when available but not necessarily available throughout the day for 24 hours. The interconnector however helps reduce Djibouti’s reliance on imported fuel products, thus lowering the cost of electricity supply. This is significant for Djibouti, where the state’s budget is often being used to avoid escalating electricity prices. The European Union intends to further strengthen the interconnection with Ethiopia.

7. EDD’s generation capacity consists of 18 diesel generating units operating on HFO in Boulaos and Marabout, two centrally located power plants. While total installed capacity is of 119 MW, the capacity is aging. One 15 MW generator is less than 5 years old (2007), fourteen generators (78 MW) are between 5 and 15 years old and the remaining capacity is 20 years and older. EDD is currently considering developing a 150 MW oil fired power plant to replace its aging capacity. This option however raises concerns as the country is heavily indebted and engagement of public funds can only be made for investments that are proven to be sustainable over time. The construction of a new oil-fired plant was not identified as the least cost option by

the Energy Master Plan (Parsons Brinckerhoff 2009), which was commissioned by the World Bank to help the country define the optimal investment program for the development of its electric generation, transmission and distribution system for the next 25 years. With soaring petroleum prices, oil-fired plants are costly options for oil dependant countries such as Djibouti. Moreover, the typical size of an economic oil-fired steam plant is too large for Djibouti’s system and the cost of oil-fired electricity would be much too high to be exported to Ethiopia, even during dry season.

8. Djibouti’s Geothermal potential has been demonstrate through exploration and research. Further studies, drilling and exploration are required in order to determine if this resource is suitable for large-scale power generation. In the event that Djibouti’s geothermal resource can be exploited for large scale power generation, investment in a new oil-fired plant would be questionable when compared to a more modest investment in upgrading main capacities installed in the existing power plants, so that they can perform intermediate and peaking operations while geothermal provides base load. Due to the continuous steam flow produced from geothermal wells, geothermal power is a base load application indeed. By virtue of the inverse relationship between Ethiopia’s and Djibouti’s peak demand seasons and the introduction of the transmission interconnection, Djibouti is not limited to developing its geothermal reserves to only serve its continuous base load of approximately 20MW. In fact, the terms of the PPA contemplate the possibility of future energy sales from Djibouti to Ethiopia. The proposed project could enable Djibouti to produce electricity at an attractive tariff for potential exports towards Ethiopia, therefore potentially creating a new and significant source of export revenues for the country.

Project History

9. Djibouti’s Lac Assal geothermal resource was first drilled in 1975 (Assal Wells 1 & 2) resulting in confirmation of a high temperature saline fluid and consequently, the belief that it could be used for power generation. In 1987, a second exploratory program drilled Assal wells 3 through 6 which once again confirmed a high potential geothermal resource but fell short of quantifiably testing the resource to prove its power generation potential. In 1989, IDA funds were approved for a Geothermal Development Project (Credit 2055-DJI) which included installation of 11 MW of generation, a desalination plant and a transmission line. In November 1991, the mainly Afar-supported Front for the Restoration of Unity and Democracy (FRUD) began fighting the Issa-dominated government. Sporadic attacks continued in 1997 and 2000. On May 12, 2001, President Ismail Omar Guelleh presided over the signing of the final peace accord officially ending the decade-long civil war. Credit 2055-DJI was however canceled due to long delays in both its activation and implementation in the context of the civil unrest.

10. The African Rift Geothermal Facility (ARGeo) program (aimed at developing geothermal resources in the East African regions) in line with the Icelandic Government and the Icelandic companies Reykjavik Energy Invest (REI) and ISOR re-initiated the geothermal development program with the aim to finally validate an exploitable geothermal resource. After in-depth feasibility studies, in 2010, a REI-led Independent Power Producer (IPP) proposed a USD 0.13/kWh tariff based on performing additional exploratory drilling and then developing, engineering, procuring and constructing (EPC) a 50 MW geothermal power plant. The proposal

was rejected based on price, before the IPP went bankrupt due to the global financial crisis. A subsequent study revealed that approximately 35% of the proposed price was attributable to a US$30 million IPP equity tranche used for exploratory drilling which was accrued at a 25% return on equity (ROE) for 5 years prior to plant operation (i.e. the payback period). In other words, removing exploratory drilling risks could potentially bring the tariff down to USD 0.08/kWh, a tariff that would enable Djibouti to sell geothermal electricity surplus through the interconnector. This is all the more important that a 50 MW geothermal power plant would indeed lead the country to have unused capacities in the winter period of Djibouti, which is the peak demand season in Ethiopia.

II. Proposed Development Objective(s)

11. The project development objective is to quantify the applicability of geothermal resources for large-scale power generation by shifting the risk and cost of exploratory drilling and resource testing to the public sector through the use of donor grants and soft loans.

12. If proven viable, the proposed project will recommend an IPP international tender to develop and EPC a geothermal power plant based on the exploratory test results. By removing the geothermal exploration risk and cost from the IPP’s scope of supply, the remaining EPC and plant operations scope which is traditionally taken by the IPP should result in significant international interest and a significantly lower tariff. This, in turn, could enable Djibouti to export electricity surplus through the interconnector, thereby creating a new and significant source of export revenues.

Key Results

13. This project is designed to use drilling techniques and certified test protocol to either quantify the Lac Assal geothermal resource as financially viable for large-scale power generation or to specifically identify why the resource is not viable. Project success must therefore be measured through the following indicators:

Development of an exploratory drilling program that fully incorporates the latest drilling techniques as well as available knowledge of the Lac Assal geology and previous drilling program results to best target drilling locations that are agreed upon through consensus of expert geologists in the geothermal field.

Development of geothermal well test protocol that when performed to a certified standard, will provide the necessary information to allow an IPP to prepare a properly quantified geothermal power plant cost estimate and tariff proposal.

Obtain test results from each exploratory well which are certified by a qualified geothermal testing company to have been obtained pursuant to the predefined testing protocol.

Recommend whether to either move or not move forward with a competitive international tender for an IPP geothermal power plant. The recommendation will be based on Completion Report that includes; i) certified test data (including raw field data) for each exploratory well; ii) a consensus through consultation with geothermal IPP developers concerning whether or not the exploratory well test results represent a financially viable resource for power generation; and, iii) a recommendation to either move or not move forward with a competitive international tender for an IPP geothermal power plant.

Reduce GHG emissions by around 600,000 tons of CO2 per year in case of successful drilling and subsequent power plant construction and operation.

III. Preliminary Description

14. The project aims to confirm the viability of geothermal resources for large-scale power generation by taking on the risks and costs associated with exploratory drilling, thereby reducing tariffs that IPPs would offer to build, own and operate the subsequent geothermal plant. It is being structured using three primary service contracts with the scope of work outlined as follows:

Contract 1 – Program Consultant (PC): The PC can be either an independent consultant or the employee of a consulting firm; however, the intention of this contract is for one qualified individual to fill the PC role in order to support the project management unit gain stakeholder trust and provide continuity through the duration of the project. Primary responsibilities will include: i) the preparation and management of the Drilling Consultants tendering process pursuant to World Bank procurement rules; ii) providing PMU capacity as contract negotiator and executive project manager as needed; iii) the facilitation of effective communication, decision making and when necessary, dispute administration and resolution; and iv) interfacing with expert geothermal consultants for review and comment of the well targeting analysis.

Contract 2 – Drilling Consultant (DC): The DC will need to be qualified as a reputable geothermal exploration company with sound financial capacity and experience. The DC’s primary responsibilities will include: i) complete design of the exploratory drilling program and well test protocol; ii) preparation and management of the Drilling Service Company’s tendering process; iii) on site management of the drilling program; iv) on site well testing and certification of test result compliance with the test protocol; v) analysis of test results to confirm (or not) viability of geothermal resource as a fuel for large-scale

power generation; and vi) compilation of test results for inclusion in an IPP tender document.

Contract 3 – Drilling Service Company (DSC): The DCS will need to be qualified as a reputable geothermal drilling company with sufficient financial capacity and experience, preferably in the region. The DCS will be responsible for the performance of field based operations and drilling activities pursuant to the requirements of the approved drilling program. The DCS will operate under the technical management of the DC but will be contracted directly by the PMU.

15. Project design and implementation will be carried out in line with the components outlined below:

Component 1: Exploratory Drilling - This component will finance the recruitment of a DSC to undertake the field based operations and drilling activities pursuant to the requirements of the approved drilling program.

Component 2: Technical Assistance - This component will provide funding for technical assistance needed for the design and management of the drilling program and well testing protocol, preparation of tender documents for the DSC and its subsequent management when hired, certification of test results and accompanying analysis needed to confirm geothermal resources, expert geothermal geologist reviews of the well targeting analysis, and the recruitment of a PC to assist the local Project Management Unit (PMU) with the tendering process, contract negotiation, etc.

Component 3: Program Management Unit - This component will support the PMU and fiduciary management of the project.

IV. Safeguard Policies that might applySafeguard Policies Triggered by the Project Yes No TBDEnvironmental Assessment (OP/BP 4.01) XNatural Habitats (OP/BP 4.04) XPest Management (OP 4.09) XPhysical Cultural Resources (OP/BP 4.11) XInvoluntary Resettlement (OP/BP 4.12) XIndigenous Peoples ( OP/BP 4.10) XForests (OP/BP 4.36) XSafety of Dams (OP/BP 4.37) XProjects in Disputed Areas (OP/BP 7.60)* XProjects on International Waterways (OP/BP 7.50) X

V. Tentative financing{Same as in AUS}

Source: ($m.)Borrower/Recipient 0.00

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

IBRDIDAOthers (specify)GEF (Requested by Djibouti Govt. To be confirmed by GEF)

OFID

0.006.00

6.647.00

Total 19.64VI. Contact point

World Bank Contact: Ilhem SalamonTitle: Sr. Energy EconomistTel: (202) 473-0076Email: Isalamon@worldbank.org

Borrower/Client/RecipientContact: H.E. M. Ilyas Moussa DawalehTitle: Minister of Economy and FinanceFax: (253) 35 65 01Email: N/A

Implementing AgenciesContact: Djama A. GuellehTitle: Director of EDDTel: (253) 35 53 68Email: Direction@edd.dj

VII. For more information contact:

The InfoShopThe World Bank1818 H Street, NWWashington, D.C. 20433Telephone: (202) 458-4500Fax: (202) 522-1500Web: http://www.worldbank.org/infoshop