Project Information Document (PID)

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

Peru - Tarucanii Hydroelectric PlantRegion Latin America and the CaribbeanSector EnergyProject ID Number P081955Borrower Not applicableImplementation Agency Tarucani Generating Company (TGC)Environment CategoryDate PID Prepared March 28, 2003Projected Appraisal Date April 2003Projected Board Date June 2003

1. Country and Sector Background

Power sector

The Law of Electric Concessions (Ley de Concesiones Electricas) rules the electric sector inPeru. This law was passed in 1992 and the privatization process began in 1994. These factorscaused a high growth in the electric sector The production of electric energy had an averageannual growth of 4 3% during the 90's and the electrification coefficient grew from 55% in 1993to 73% in 2000. The average consumption per capita in Latin America and the Caribbean in year2000 was 1,500 KW, while in Peru it was only 676KWh; continuous growth in the sector isexpected.

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

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

Other main actors in the electricity sector are:

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

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

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

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

Environment

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

http://w,vvw.rnern gob pe/wmem/legisla/aa/normiasesp.asp.

2. Project Objectives

The objective of the project is to support development of the international market mechanism forthe new commodity known as "Emissions Reduction" (ER), developed in the framework of theKyoto Protocol. In this particular case, the project will facilitate reduction of CO2 emissions inPeru through substitutilig electricity produced by thermal plants with electricity from the Tarucanihydroelectric plant.

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

3. Rationale for Bank's involvement

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

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

4. Project Description

The Tarucani Project consists of a hydroelectric power plant of 49 MW capacity, that utilizeswater from the Majes irrigation project that uses the water resources of the Colca River, whichare collected at the Tutti gate and will produce an average net annual generation of 375 GWh.The Majes project was built for irrigation and electricity generation purposes, and uses a 100kilometer long system of tunilels and canals that have a capacity of 34 m3/s The project is locatedin the south of Peru, approximately 180 km from the city of Arequipa. The Project consists of arun-of-river power plant, with a nominal capacity of 49 MW and an anticipated generation of 375GWh/year located in the district of Huambo in the province of Caylloma, department of Arequipain Peru. The region is scarce of vegetation including small agriculture. The power plant will beconiected to the grid through an 84 km transmission line. The plant is expected to be in operationin 2005 The water that will be used for the project comes from the ending tunnel of the MajesProject. A head of 331.75m, corresponds to the first section of a slope of approximately 1,900 m,at the exit of the Ending Tunnel. Tarucani power plant will be connected to the NationalInterconiected System (SEIN in Spanish), at Cerro Verde Substation and will generate power forindustrial and residential consumers not only for the southi region of Peru but also for all the areasconnected to the SEIN. Construction is expected to start in April 2003 and commissionilig isexpected to start in 2005.

5. Financing

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

6. Implementation

Prototype Carbon Fund (PCF):

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

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

Project sponsors

Tarucani Generation Company's (TGC) is owned by Juan Solidoro Cuellar and Miguel SuazoGiovanninii (S&Z Associated Consultants, consultant company founded in 1978). TGC'sshareholders have extensive experience in construction, assembling, mainteniance and operationof hydropower projects. S&Z associated consultants has been received in 1999, by BureauVeritas Quality lnternational(BVQI) and its recently relevant experience includes: (a) Supervisionof civil and electro mechanics works in Yuncan, 130 MW hydroelectric power plant (b) Adviserfor the adjustments of the project to the conditions of the site the engineering approval of thehydromechanics equipment in Yanango, 42 MW hydroelectric plant. (c) Supervision of Studies ofhydroelectric plants and works, Prodeis Sur, Generation and Distribution Electric Projects.

Additional prospective project sponsors include'

1) IFC Power. Is an organization of professionals experienced in the acquisition, development,financing and management of assets and related investments in the energy sector. IFC Power hasbeen involved in a number of electricity generation projects (development of more than 1500MW of coal-fired power plants in North America and in South America on the Termo Yaracuy129MW simple-cycle baseload facility and the Termo Gurico 500MW combined-cycle baseloadfacility). More information on the company is available at: www.ifcpower.com

2) Deutschle Investitions und Entiwicklungsgesellschaft mbH (DEG): Is an enterprise of theKreditanstalt fuer Wiederbau (KfW) Group, one of the largest European institutions for long-termproject an company financing. For 40 years, DEG has been financing and structuring theinvestments of private companies in developing and transition countries. It is specialized in long-term project and corporate financing. It advises private companies, structures and finances theirinvestments in Africa, Asia, and Latin America as well as in Central, Eastern and SoutheastEurope. As one of the largest European developmenit finance institutions, DEG has thus farcooperated with more than 950 companies and by financing euro 4 2 billion it has attained aninvestment volume of euro 30 billion By promoting setup and expansion of private companies indeveloping and transition countries, DEG gives new impetus for sustainable growth of theeconomy and to raising people's living standards. More information is available at.http://www.deginvest.de/english/home/frameset_frame_back.lhtm I

The Government:

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

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

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

7. Sustainability

The project will operate within the current framework and will furtlher enhance private sectorparticipation in the electricity sector, while it will develop local capacity in Peru to promoteprojects with global environmental benefits and to access carbon finanicing. The stability andcontinuity of the regulatory and policy environment is highly likely because of well-establishedinstitutional and legal framework in the sector MEM and OS1NERG are supporting this PCF-

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

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

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

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

Not applicable

10. Environment Aspects (including any public consultation).

This category "B" project complies with the World Bank's environmental and social safeguardpolicies. An environmental assessment was carried out in compliance with World Bankprocedures. The Environmental Assessment Report (EAR) was submitted to the WorldBank by project sponsors. The EAR analyzed possible negative environmental and socialimpacts of the project design, construction and operation. An environmentalmanagement plan has been prepared to avoid, where possible, or mitigate these impacts.Mitigation measures include careful siting, environmental construction guidelines, andsocial development activities for the local community.

The EAR has been reviewed and fully conforms with Bank Safeguard policies and guidelinesregarding environmental and social concerns A Safety of Dams assessment is being conductedfor an existing upstream dam. Public consultation was undertaken with affected populationsthrough the EA process.

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

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

Note: This is informationi on an evolving project. Certain components may not necessarily beincluded in the final project.