Project Progress Report



Project Progress Report Reference number: 3050210 Promoting Development of Sustainable Energy in Azerbaijan Royal Ministry of Foreign Affairs ID: AZE-11/0006UNDP Award ID: 00060711UNDP Project ID: 00076570Implementing Partner:Ministry of Industry and Energy (MIE)/State Company on Alternative and Renewable Energy of Azerbaijan (AREA)Award start date:January 01 2011Award end date: June 30 2013Actual Project Start date:05 January 2011Period covered:01 December 2011 – 15 December 2012Section I. Summary Update on Project Outputs As reported in the last annual report, the Project continues to build on the successes achieved on the previous project 3050210 (“Technical Assistance for Promoting Development of Small Hydropower in Azerbaijan”) that covered Outputs 1 and 2. This Progress Report covers the achievements and challenges on Output 3 (“A small hydropower station is constructed”) and Output 4 (“Project Management”) which fall under the Current Project AZE-11/0006 on “Promoting Development of Sustainable Energy in Azerbaijan”. Present Status of Activities under Output 3 (“A small hydropower station is constructed”): Activity 1: Selection of the project site based on its technical and commercial viability and preparation of a preliminary technical design of the projectThe feasibility report of the selected site of the hydropower station (Sheki on Deyirmanarxi River) and its preliminary design has been completed. Activity 2: Finalization of the financing plan of the project and preparation of the tender documentsThe contract with a Design and Supervision (D&S) firm, namely Khazar from Azerbaijan, has been signed for an amount of US$ 98,740. The D&S firm has completed the detailed design of the small hydro-power station. With the help of the local branch of internationally-recognized legal company ACE Consultants LTD the tender documents for hydraulic equipment of the station were also finalized. The power station’s cost estimate of US$ 2.4 million is now final, however, the financing plan for the actual construction of the power station is still under discussion.Activity 3: Organization of the tender and evaluation of the proposals receivedThe D&S firm (Khazar) will assist AREA in the issuance of tender documents, as well as during the evaluation of proposals that are received in its response. Activity 4: Negotiations with supplier/contractor and finalisation of the required contracts and legal documentsThis activity is expected to be completed by March 2013 by when the bids will have been received and selection of the most responsive firm will have been finalized.Activity 5: Award to the turbine and electrical/mechanical supplier finalized.M/s Khazar will assist in the bidding process and award of contract to a suitable turbine and E&M equipment supplier by March 2013.Activity 6: A small hydropower station is constructedFollowing the award of construction contract as well as the E&M equipment supply/installation contract (expected in March 2013) the construction and installation activities will begin in April 2013 and are targeted for completion in December 2013.Activity 7: Final monitoring report of the demonstration project summarising the results, challenges, recommendations and lessons learntIt’s expected that at the end of the construction and installation works, in December 2013, the power station will start producing power at its full rated capacity of 817 KW. A detailed account of the above project activities is provided in Section II. Also, please see Annex I for the update of the implementation plan.Section II. Update on OutputsOutput 1: Recommendations on legal and policy modifications are made – CompletedOutput 2: Investment climate and hydropower potential is promoted – CompletedOutput 3: Construction of one small hydro-power station as a demonstration of its feasibility in Azerbaijan: As follows:Summary Status of Activity 1 (under Output 3) Timeline (as of end November 2012)Total component duration: 24 months (July 2011 to June 2013) Actual time elapsed: 17 months (71% of component duration)Resources Employed to dateInternational consultant: 3 months (100 % of the current contract)Local consultants: 4 months (100% of the current contract)Lead Project Advisor: 4 months (100% of the current contract)D&S Firm: 4 months (40% of the current contract)Present Status:25% of physical achievement reached.Delay has been encountered in the start of procurement activities, however, effort will be made to make up the lost timeRemarks: After the finalization of site selection (new site in Sheki on Deyirmanarxi River has been selected), the detailed design studies have been completed and the design has been used in the preparation of tender documents which are now ready to be floated.It is expected that the tenders will be floated in early 2013, hydraulic equipment and turbines will be ordered and the construction will start by April 2013.Detailed Status of Activity 1Planned start dateActual start date01 January 201105 January 2011Planned end dateActual end date31 December 201130 April 2012 Purpose of Activity 1Selection of the project site based on its technical and commercial viability and preparation of a preliminary technical design of the project. Description of ActivityEvaluation of 21 “candidate” hydropower sites (that were shortlisted in the framework of the previous UNDP project, namely “Technical Assistance for Promoting Development of Small Hydropower in Azerbaijan” supported by the Government of Norway). Selection of the final site of the demonstration project and its initial financial structuring (including the negotiations with potential investors), will be done. The proposed action will support the: i) needs assessment of the customers and clients, (ii) selection of the most suitable site, (iii) finalisation of the technical design and (iv) financial structuring of the demo project.Once the techno-commercial design is finalized and the financing arrangements are made, the typical project activities, i.e. preparation of the tender documents for works and equipment, invitation and evaluation of bids, negotiations with the successful bidder(s) and the actual award of contract will be launched with vigour.Progress against ActivityPreviously, in consultation with potential investor(s), the Gurjana site in Sheki rayon was selected, however, on second review it was decided to select the site on Deyirmanarxi River, also in Sheki rayon as the site of the project. Accordingly, the selected international and local consultants (Hanns Sandkuhler and Nazim Garayev, respectively) confirmed the viability of and completed the preliminary design of this site. Using the preliminary design prepared by the above-mentioned experts, the selected D&S firm (M/s Khazar from Azerbaijan) has finalized the design of power station and developed a detailed cost estimate of the project. Status of Other Activities (2 to 7)Planned start dateActual start date01 June 20121 October 2012Planned end dateActual end date31 December 201231 December 2013 (expected) Purpose of Activities 2 to 7A fully completed and operational hydropower stationDescription of ActivityOnce the techno-commercial design is finalized and the financing arrangements are made, the typical project activities, i.e. preparation of the tender documents for works and equipment, invitation and evaluation of bids, negotiations with the successful bidder(s) and the actual award of contract will be launched with vigour.This will be followed by the actual construction works which will be supervised by technical experts to achieve the timely and within-budget commissioning of the plant.Upon commissioning, the performance of the plant will be monitored closely and the lessons learned will be documented in the form of a post-completion report. Progress against ActivityUsing the preliminary design prepared by the above-mentioned experts, the selected D&S firm (M/s Khazar from Azerbaijan) has prepared the detailed design and developed a detailed cost estimate of the project. Further progress on these activities is contingent upon the finalization of financing arrangements for the construction of the power station. Discussions are presently on-going with the potential investor(s), however, there is a possibility that AREA will carry out the construction and full commissioning of the power station using its own resources rather than contract it to a private investor/constructor. Very recently, AREA informed that it has entered into negotiations with the State Company Azerenerji, who has recently shown interest to undertake the construction on its own. During the meeting with the UNDP Resident Representative in Azerbaijan Mr. Antonius Broek, held on November 27 2012, the Chairman of AREA Mr. Akim Badalov has informed that before the end of 2012 AREA will inform UNDP whether Azerenerji or the AREA is going to act as an investor. Output 4: Project ManagementPlanned start dateActual start date01 January 2011 05 January 2011Planned end dateActual end date30 June 2013On-goingPurpose of ActivityThe purpose of the activity is to ensure achievement of project targets and guarantee quality project delivery Description of ActivityManagement of the project in compliance with Reporting and Monitoring GuidelinesProgress against ActivityThe implementation of the project has been delayed as on June 1 2012 under a Presidential Decree SAARES has been converted to a State Company. As a result, the newly formed State Company for Alternative and Renewable Energy of Azerbaijan (AREA) has been heavily occupied in finalizing its full mandate under the regulations of the Government of Azerbaijan. While working on the streamlining of several institutional issues, AREA is also studying two possibilities with regard to the construction of the power station at Sheki. It is currently considering two options: (i) give the concession for the project site to a private investor/developer, which will then be responsible for arranging funds and carry out the construction, commissioning and operation of the station; or (ii) AREA to build and operate power station on its own following the same model which has been followed in the case of Gobustan Demonstration Site/PolygonAs soon as the final decision is made, the tendering of the hydraulic and other electrical and mechanical equipment will be made and the construction will start. The Project Management team is in active consultation with AREA with the aim of expediting the decision regarding the option that is to be eventually chosen. The Project Manager and the Project Manager Assistant continue to remain engaged, however, the long-term project expert Mrs. Aytan Poladova is no longer with the project team, and necessary contribution was sought and provided by short-term consultants. In addition, the implementation of the Component was supported by the Lead Project Advisor Mr. Farrukh Mian, however, his contract expired in August 2012. He continues to provide valuable advice on the project on an “as needed” basis as and when required by the project team.Annual work plans for 2012 were prepared and signed.Two meetings of the project’s Steering Committee took place during the reporting period which took important decisions for the timely achievement of the project milestones.The current Annual Progress Report for 2012 for the Donor due by December 2012 has been prepared.Section II. Update on Risks LogType of RiskDescriptionComment or Management ResponseConstructionThe Project may encounter some delays related to tendering procedures UNDP works in a transparent and competitive way. Since the amount of the tender will exceed $100,000, the tender will have to go through the clearance at the Regional Office in Bratislava. Current cost estimates show that the price of hydraulic and electric equipment together will be lower than $ 1 mln. So, due to the tendering the actual construction may start somewhere in March-April 2013. Turbine manufacturingUnanticipated delays may occur in the implementation of the project due to excessive lead times that may be involved in the manufacture of the turbine by the selected supplier.The contacts made by the project experts with leading suppliers have revealed that the turbines with the finalized design rating (817 KW) can be manufactured by them within a reasonable time-frame. In addition, the construction contract, as is usual for contracts of this type, will have appropriate clauses to impose penalties in the event of delays in project implementation. RegulatoryDelays in project implementation due to land permits, water rights, lack of electricity off-take infrastructure, etc. all pose an element of risk and could reduce the investor’s interest in the project. Legal and policy changes that will be proposed by the project may encounter resistance of various stakeholders and the population.AREA has the mandate of the Government of Azerbaijan to act as a “One Stop Shop” to remove all such implementation bottlenecks and it is fully geared up to safeguard the interest of the project stakeholders. The discussions held thus far with the key stakeholders - the MIE, AREA - and the Project Team indicate that due to the support at the highest level by the country leadership, it will be possible to overcome the resistance to legal and policy recommendations by different agencies. FinancialThe global financial crisis can diminish investors' interest in the project and lead to a lack of private investment in the demo project.A high rate of inflation can result in the original cost estimate of the project to be exceeded thus leaving the project incomplete. The impact of the global financial crisis on Azerbaijan has been marginal and local businesses continue to seek attractive investment opportunities in new areas viz. renewable energy. However, we may face the lack of interest from international investorsThe cost estimate for equipment, which is a larger valued component, will be in Euros (as it will be imported) The economic problems in Euro-zone countries have not impacted the prices for the respective equipment yet. For local works, the inflation is a concern, however, this will be mitigated as the amount is relatively small plus a contingency element will also be included in the cost estimate of the project.EnvironmentalLocal environmental guidelines could be violated by the contractor during construction of hydropower plantThe risk is considered low as the guidelines of the Ministry of Ecology and Natural Resources will be an integral part of the construction contract and will be closely monitored. StrategicAzerbaijan’s ranking in the World Bank’s Doing Business Report is low and this may discourage potential investors from exploring investment opportunities in hydropower development.As a result of combined efforts of many stakeholders and the political will demonstrated on higher level, Azerbaijan’s ranking on business environment has been significantly improved lately. Azerbaijan has made a jump from the 97th to 33rd place in the list of 181 countries according to the WB “Doing Business Report 2008”. Section III. Update on Issues LogType of IssueDescriptionComment or Management ResponseChangeAs explained above, the funds of the previous project were transferred to the new Project jointly funded by the Government of Norway and the EU for the development of renewable energy.As a result of this administrative arrangement, and benefiting from the availability of experts hired under the EU project, the hydropower component has seen a visible improvement in activities. As a result, it is expected that the construction of the hydropower station will begin in April 2013 and completed by the end of 2013. ChangeThe initial plan was to select a site from among the list of 21 sites evaluated under the previous project; However, on close review the need was felt to carry out the reconnaissance of a few additional sites that were not included in the original list but appeared to be suitable. Deyirmanarxi River site in Sheki is chosen, which was not in the original list, but has been found to be the most suitable one for the construction of the station. Furthermore, the potential investors have been collaborating with the team of experts in the site selection process and have endorsed it.Additional ActivitiesA saving of USD 70,373 is anticipated on the project as of the end of 2012, mainly as a result of prudent spending for feasibility studies, design of the station and bidding documents preparation. At the moment the Project Team is contemplating to use a part of it (approximately 28% or USD 20,000) for management expenses of the project given that there is an extension of 6 months in the project duration. Also, as it is already felt from the project’s implementation, there might be a need to involve an external consultant(s) who will study the lessons learned on the implementation of the project at Sheki. Although a study of the suitability of the investment climate was previously done, situation is now changed, especially due to the formation of a new State Company (AREA) which has been, among other things, entrusted with giving permits as well as overseeing the development of renewable energy projects. No private sector project can be built without involving the local financial system (commercial banks) as well as international financial institutions. Furthermore, the banking system of Azerbaijan has undergone a change in the preceding years and a more enabling legislation to promote renewable energy is now taking shape. This requires that a fresh report with a hydropower project investment model be developed. Such a report and model will act as an investment tool for the large-scale development of small hydropower stations throughout the country. Involving an international consultant for this activity may require about another USD 20,000.With regard to the remaining balance of the savings of about USD 30,373, given the delays in the start of the project, it may happen that some unexpected changes in the cost of equipment and its erection may require additional funding and this amount could be used for that purpose. The Financial Report attached to this Narrative Report reflects these opportunities. All these options will be communicated and discussed with the Government of Norway and the State Company AREA when forming detailed new Annual Work Plan in the beginning of 2013. ................
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