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1. The proposed Electricity Supply Security and Stability grant project will improve the quality and reliability of electricity service of Nauru''s electric utility (Nauru Utilities Corporation, NUC) to its customers. This will be achieved through the delivery and installation of new diesel-fired generation to provide reliable base-load power for NUC, allowing NUC to retire older generation assets and perform scheduled refurbishment of existing units to extend their service lives. The project will also include improvements to the existing structure housing NUC''s generation units (the powerhouse).

2. NUC''s power sector operations have been the subject of considerable study and review by external development agencies over the past three years. The poor state of NUC's physical assets, and weaknesses of its management systems, are well documented. Nauru''s current diesel-fired generation fleet remains dilapidated, unreliable, and extremely inefficient. All of NUC''s installed generators are operating at far below their capacity, and are nearing the end of their useful lives. The powerhouse is likewise in poor condition, which represents a vulnerability to Nauru''s supply security. While Nauru is virtually 100% electrified, service reliability is extremely poor. Unscheduled and often prolonged interruptions are frequent. As in other parts of the Pacific where significant intermittent renewable generation sources are being introduced into legacy diesel-based systems, Nauru will remain reliant on diesel generation for its baseload and for system stability and reliability for the foreseeable future.

3. The Australian Government has provided millions of dollars of support to NUC over the past decade to cover recurring costs and the procurement of distribution and generation assets. Recently, the Australian Government has shifted its support to build NUC''s capacity by funding the appointment of expatriate management-level personnel to address long-term systemic shortcomings within NUC. The European Union has recently extended a $1.3 million grant for NUC to fund the procurement and installation of distribution transformers, conductors, poles, and essential maintenance and safety equipment for linemen to bolster network reliability and efficiency.

4. Urgent investment requirements have been identified as high priorities to improve service reliability and mitigate the risk of catastrophic failure of NUC''s power generation. Among NUC''s investment priorities are structural improvements to the powerhouse and the introduction of 2.8-3.0 MW (estimated) of new diesel-fired generation to replace existing generation, improve reliability, and reduce fuel costs. NUC estimates that this will result in a 20% improvement in generation efficiency from the current 3.4 kWh to 4.1 kWh generated per liter of diesel consumed. The introduction of reliable and more efficient diesel generation will also allow NUC to schedule retirement or rehabilitation of existing, ageing assets and provide for improved reliability.

5. In consideration of the above, and following extensive consultation with Nauru stakeholders, the focus of the proposed grant will be to address the reliability of Nauru''s diesel-fired generation, which is vital to the functioning of Nauru''s economy. Procurement of new, fuel efficient generation capacity will serve near-term system reliability needs, and is entirely consistent with Nauru''s policy orientation in favor of the introduction of significant renewable (solar) capacities, as Nauru''s power system will continue to rely on diesel for baseload generation.

6. The proposed project is included in the ADB Country Operations Business Plan for Nauru (2014-2016), which prioritizes investment in improving the energy-efficiency of Nauru''s economy, characterized as the least energy-efficient in the Pacific. The project is entirely consistent with the Government of Nauru''s policy priorities and draft Energy Road Map (expected to be formally adopted in Q4 2013). The proposed project aligns well with other donors' support to Nauru''s energy sector. Australian Government support to NUC''s management is expected to continue. The European Union''s program for distribution system upgrades and rehabilitation addresses corresponding investment requirements in network capacity, reliability, and loss reduction. Improvement in reliability and efficiency of Nauru''s base-load diesel generation fits with Nauru''s long-term sector objective of increasing generation from renewable sources.