1. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Hydro energy as CDM projects in China Marcos A. Teixeira Fengzhen Chen Instituto Superior Técnico Technical University of Lisbon Dept. Mechanical Engineering Av. Rovisco Pais 1049-001  Lisbon  PORTUGAL

2. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Summary Presenting one Registered CDM Project: Xiaogushan Hydropower Project-the first hydropower CDM project in China Information on the project –When / Where / How Methodologies Used –Baseline –Additionality Time table Final comments

3. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Xiaogushan Hydropower Project When 2003-7-19 Project Idea Note A. Project description, type, location and schedule B. Expected environmental and social benefits C. Finance PIN is available from: http://carbonfinance.org/Router.cfm?Page=DocLib&CatalogID=5937

4. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Where People’s Republic of China Gansu Province http://www.earthsearch.net/intSearch/zhangye-CH.php?showMap=-1938374&UNI=-2705625

5. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Where Gansu Province Zhangye City http://www.maps-of-china.net/province_map.html

6. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 How The project consists of : –One diversion weir with an active storage capacity of 1,3 Mm 3 –An intake power tunnel (9100m) with flow of 105,5 m 3 /s, providing a rated water head of 117m –A surface power station for three turbines 2 x 40MW and 1 x 18MW –A 110kV high voltage switchyard –27km of 110kV transmission lines for power evacuation Increased output of 394 GWh/year Connected to Gansu grid - part of the Northwest Power Network in China. PDD available on line at: http://cdm.unfccc.int/UserManagement/FileStorage/SWUTACPQTJ8KM08D347OBBTAXWOCU7

7. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 How reduce 3.128.919 tons CO 2 eq. GHGs, by displacing existing future capacity thermal power plant at 4.5 USD per ton Total investment in the project is US$ 83,5 Million –40 % from Asian Development Bank –20 % Xiaogushan Hydropower Company Ltd. –40 % Bank of China Constructed in a three-year period PDD available on line at: http://cdm.unfccc.int/UserManagement/FileStorage/SWUTACPQTJ8KM08D347OBBTAXWOCU7

8. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Main Elements weir from active storage Intake power tunnel Power station Three turbines High voltage switchyard

9. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Procedures for proving a CDM project Necessary: Emission reduction Additionality Sustainability

10. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Emission reduction Baseline project CDM project Project emissions 0 5 10 year Baseline emissions Emission reduction 312, 891

11. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Baseline Methodology Use a Consolidated Methodology –ACM0002 ver. 5 - Consolidated methodology for grid-connected electricity generation from renewable sources Available on line at: –http://cdm.unfccc.int/methodologies/view?ref=ACM0002

12. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Methodology - ACM0002 Consolidated baseline methodology for grid-connected electricity generation from renewable sources Based on other CDM methodologies: –Wigton wind farm project - Jamaica –El Gallo hydroelectricity – Mexico –Jepirachi wind power - Colombia –Haidergarh bagasse cogeneration – India –Zafarana wind power – Egypt –Bayano hydroelectric expansion & upgrade - Panama

13. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Restrictions Applied to CDM electricity sector capacity additions from –Hydro –Wind –geothermal and –solar sources Activities must be Greenfield Projects in the energetic site location New Installations i.e. they do not involve a switch from fossil fuels at the site of the project

14. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Calculation (ACM0002/Version 6) ERy = BEy – PEy – Ly Here, PEy = 0, (RE) Ly = 0, (no more reservoir increased, no more soil flooded) So, ERy = BEy BEy = EFy (EGy – EG baseline ) Here, EFy = 0.5 EF OM, y + 0.5 EF BM, y EGy = Annual Project Electricity Supply in MWh EG baseline = 0 (Greenfield Project, without modified or retrofit facilities) So, ERy = BEy = EFy EGy = (0.5 EF OM, y + 0.5 EF BM, y ) EGy

15. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Calculation (ACM0002/Version 6)

16. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Calculation Baselines must be calculated using a combined margin approach Three steps: –Calculate the OM - Operating Margin Effect of the Project on the operation of power plants on the grid –Calculate the BM - Build Margin Effect of the Project in terms of delaying or avoiding the construction of future power plants –Combine the two Margins - OM and BM – as a weighted average

17. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 OM - Operating Margin Identify which part of the existing capacity would be dispatched first when new capacity becomes available –I.E - calculate the OM by assuming the average emissions per electricity unit of all generating sources of the grid –With or without including low-cost and/or must- run sources –Attend to particular plants with specifies that are likely to appear in the margin.

18. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 BM – Build Margin Must approach the future expansion of the system The emission factor calculated as weighted average emission factor of either: –Five most recent or –The most recent 20% of power plants built or under construction in the grid –Calculated in a ex ante basis On projects of more than 60 MW, must be calculated on an ex post update annually during the crediting lifetime

19. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 CM - Combined Margin By default the weights are 50% OM and 50% BM CM = 50% OM + 50% BM But weights could differ from project to project Now Let’s see for the Xiaogushan Hydropower Project

20. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 OM – Operational Margin 1/3 Data used: –Oxidation Factor (OXIDi) from IPCC Guidelines: 0.98 = OXIDi Raw Coal 0.995 = OXIDi Coke Oven Gas/ natural Gas 0.99 = OXIDi Fuel Oil –Emission factor for Fuel (EFco2)- Country- specific values: 24.73 tC/TJ = EF co2 raw coal 20.2 tC/TJ = EF co2 coke oven gas / crude oil 15.3 tC/TJ = EF co2 Natural Gas

21. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 OM – Operational Margin 1/3 –Net calorific Value (NCVi) - Country-specific values: 209.08 TJ/ton = NCV raw coal 1672.6 TJ/M3 = NCV coke oven gas 426.52 TJ/ton = NCV Crude oil 3893.1 TJ/M3 = NCV Natural Gas –Convert 1 tC to 1CO 2 eq. = multiply per 44/12

22. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 OM – Operational Margin 2/3 3 years Statistical data on –Consumption of fuels –Electricity generated Only information on electricity generated, not on supplied, for emissions of the grid, an efficiency factor must be considered: Coal to generate 1 kWh electricity Coal to supply 1 kWh electricity to the Grid Based on available official data

23. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 OM – Operational Margin 3/3 Calculate the Emissions on tCO 2 eq. /MWk –(Amount of each fuel Calorific Value Carbon Emission Factor Oxidation Factor Efficient factor Convert 1 tC to 1CO 2 eq. ) Divided by the electricity generated Example: –ton TJ/ton tC/TJ ad. ad. 44/12 tC o2 /tC Final value = 0.982 tCO 2 eq. / MWh

24. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 BM – Build Margin 1/3 Or the 5 most recent power plants or 20% of the most recent power plants –Decided by the biggest generation 20% of Gansu Grid = 7468 GWh Total generation top 5 = 6798 GWh Coal - amount of coal to supply 1 kWh to the Grid of the most recently added power unit to the Grid as Efficiency Factor (ESCC) => 328.4 kg/MWh Page 57 – Annex 3 of the Project’s PDD

25. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 BM – Build Margin 2/3 Same principle to calculate the OM: Using IPCC default values for: Calorific Value * Carbon Emission Factor * Oxidation Factor * Efficient Factor * Convert 1 tC to 1CO 2 eq.  29.28 TJ/10 3 ton Coal * 24.73 tC/TJ * 0.98 * 328.4 kg Coal/MWh * 44/12 tCO 2 eq. /tC   0.854 tCO 2 eq. /MWh

26. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 BM – Build Margin 3/3 Calculate the mix of the 20% of the electricity supplied Energy supplied by each type of power production in the total energy supplied –Coal = 86.6 %  emission = 0.854 –Hydro = 12.7%  emissions = 0 –Wind = 0.4%  emission = 0 So the result is 86.6 % * 0.854 = 0.742 tCO 2 eq. /MWh

27. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 CM - Combine Margin & Emissions Red. Base line emissions = Combine Margin CM = 50% OM + 50% BM = CM = 0.5* 0.982 + 0.5* 0.742 = 0.862 tCO 2 eq. / MWh As Project Emissions are Zero (hydro) Emission Reductions: CM – Emissions of CDM proj. = 0.862 – 0 = 0.862 tCO 2 eq. / MWh Page 59 – Annex 3 of the Project’s PDD

28. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Additionality Test Use of the Tool for the demonstration and assessment of additionality (ver 2) Available at: –http://cdm.unfccc.int/methodologies/PAmethodologies/AdditionalityTools/ Additionality_tool.pdf Bases: –Improve Sustainability –Displace GHG emission –Generate local Development

29. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Tool UNFCCC With 6 steps That must be clearly Written in the PDD Page 18 – B.3 of the Project’s PDD

30. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 0 Present a list of documents in a time line Fist part – to present the project as unfeasible –1 and 4 – Feasibility study –2 and 3 – Loan request – with no positive replay –5 – 09/2002 – Sponsor apply for CDM project Document 7 – Links the CERs with the loan necessary to develop the project Document 8 – After DNA approval project enter the “CDM Pipeline” 9 to 11 – “the easy way down” –  money OK, Construction on move

31. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 1 Alternatives start with “where we are” –China Power Back Ground – to –Gansu Power Grid Characterization Next step, on the view of the present behaviour –Thermal from 55% (2001) to 59% (2003) presence –Plus the Official Document on the Expanding the Grid Conclude that there are two main options: –Take the CDM project –Implement new Coal Power plants

32. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 2 Adopted the Benchmark comparison –Index – IRR and NPV Standard value Adopted from: –Interring Rules on Economic Assessment of Electrical Engineering Retrofit Project – Official –Value: 8% Comparison: –IRR without CDM  7.2  With 9.3 % –NPV without CDM  -44.3  With 68.9 Plus a 10% Sensitive Analysis

33. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 How does CDM impact the financials of a project? Eron Bloomgarden, EcoSecurities Group Ltd., 2005.

34. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 3 Barrier – High project Risk –The Developer lacks experience –Loan in Foreign Currency –Long term tariff can became lower then feasibility point Barrier – No Access to Financing –Poor area of the Country –No Financial Services at local level –Use of CERs as guarantee was critical Barrier – Enforcement of the Power Purchase Agreement PPA –Long term tariff might not make investment viable

35. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 3 / B Important To make clear that the other option – Coal power plant Does not suffer in the same scale of the same barriers –Shorter construction period  impact on the cash flow –Lower Capital investment –Can be installed close to the demand  don’t need transmission line

36. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 4 The project is not common practice –At the time it was prepared –At the time the investment decision was made –At the location of the project Present list of 5 other Hydro projects –Smaller in installed power (all but one) –All supported at Province Lever, State Owned Public Company –Against the County level that is the CDM project

37. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 5 A resume of all barriers and how the CDM frame support the feasibility of the project Not to repeat all, but yet to build the New “Big picture” Like the phrase: “A hydro development in a remote poor area conducted by independent private developer with limited capacity is not a common practice given China’s electricity sector transformation toward market-oriented, merit based system.” Page 27 – B.3 of the Project’s PDD

38. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Step 5: Sustainable Development benefits Supply reliable, 0 emission, renewable energy Allow expansion of villagers’ household, educational, health, and public facilities Promotion of private power development managed by local entrepreneurs Increase local income and job generation –3000 during construction –100 permanent during operation Increase energy efficiency in the area Will offer better transport routes  new roads –This last item is clearly indirect

39. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Conclusion Demonstrated in more than one line of thought that the project is : not a Business as Usual In other words it would never happen if there were not the CER’s and the CDM/UNFCCC framework

40. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Time table Page 18,19 – B.3 of the Project’s PDD

41. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Final Comments Developed a high risk situation when committed with the CER selling with ADB and yet didn’t have the DNA approval But would need this for the project finance Chicken and Egg Situation Assumed low emission reductions for the implementation phase

42. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Final Comments Methodology chosen is easy to monitor For project developers  Cross analysis against other Hydro CDM projects Study values of CER’s (10 U$ / tCo 2 eq. ) The PDD is well structured as: –Does have the view from inside the project –And from outside the project –Not only technical – but also the economic, the social and the local Sust. Development (i.e. roads)

43. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Final Comments CDM financing is an opportunity for implementation of Renewable Energy Projects in developing countries.

44. IDMEC – IST - RGESD - Research Group on Energy and Sustainable Development CDM China – CDM Training Beijin - CHN - 26 – 30/11/2006 Thanks - Contacts Dr. Marcos Teixeira - mteixeira@ist.utl.pt Research Group on Energy and Sustainable Development – RGESD Mechanical Engineering Department Pv. Mecânica I, 2 Instituto Superior Técnico Pav. Mecânica I, 2 Av. Rovisco Pais 1049-001 Lisboa PORTUGAL http://navier.ist.utl.pt/ Phone: +351 - 21 841 7592 Fax: +351 - 21 847 5545