China - PCF Jincheng Coal Bed Methane Project

Initial Project Information Document (PID) Report No: AB820 Project Name CHINA - CN-PCF Jincheng Coal Bed Methane Project Region East Asia and Pacific Region Sector Power (100%) Theme Climate change (P) Project P087291 Borrower(s) Implementing Agency(ies) JINCHENG ANTHRACITE MINING GROUP /PROC Address: Beishidian Town, Jincheng, Shanxi 048006, P. R. China Contact Person: Tel: Fax: Email: Environment Category A (Full Assessment) Date PID Prepared April 7, 2004 Auth Appr/Negs Date January 6, 2004 Bank Approval Date June 30, 2004 1. Country and Sector Background In 2003 total coal production in China was about 1.6 billion tons, which represented an increase of about 15% over total coal production in 2002. At present, coal accounts for about 67% of primary commercial energy consumption in China. The production of coal in China results in the emission of methane (CH4) as a greenhouse gas (GHG) into the atmosphere that could otherwise be used as an energy source. When released into the atmosphere, GHGs contribute to global warming and methane is approximately 21 times more potent as a GHG than carbon dioxide (CO2). It is estimated that in 2002 about 6 billion cubic meter of methane produced by the mines was vented into the atmosphere. Methane is released as a result of pressure drops when underground coal is mined or exposed to surface conditions. Underground methane is highly explosive and to ensure that underground coal mines can be operated safely the methane needs to be removed during and sometimes prior to actual mine operations. Many coal mines in China have very high methane content and inefficient drainage is the main cause of frequent underground explosions, which in 2002 resulted in the death of more than 7000 miners. On the other hand, the methane is a high quality and clean energy which could be recovered and utilized for power generation. The total methane resources in place in China up to a depth of 2,000 meter are estimated at 30-35 trillion m3, which is equivalent to 100 years of China's current natural gas production. Shanxi is the largest coal producing province in China. In 2002, the province produced nearly 500 million tons of coal, about one third of the total coal production in China. Jincheng municipality, where the project is located, is in the southern part of Shanxi province. Currently, Jincheng and surrounding areas consume about 850,000 tons of coal annually. Coal consumption leads to annual emission of sulfur dioxide of about 95,000 tones and dust of about 120,000 tones a year. At the same time, coal production is causing the release of about 400 million m3 of coal mine methane (CMM) into atmosphere each year. Such venting of methane is expected to  2 PID increase further with increasing coal production at greater depths in the future. The Shanxi provincial and Jincheng municipal governments are therefore planning to reduce emissions of methane and use methane for power generation, heating and cooking purposes by residential, commercial and industrial consumers. The use of methane will also avoid the harmful emissions what would occur if such energy demand were to be met from alternative fuel, which is coal. But the low grid tariff due to abundance of cheap coal-fired generation would make new clean generation schemes difficult to compete if the global and regional environmental externality is not considered. China has realized that GHG emissions and other air pollutants will cause unacceptable local, regional and global environmental problems unless it makes a major effort to reduce them. The Bank has actively supported China's environmental sustainability objective for many years. One of the Bank's key objectives in the current Country Assistance Strategy (CAS 2003-2005, January 2003) is to facilitate China's environmentally sustainable development process, through investment lending in natural resource management, energy, and global environment projects. And the CAS explicitly lists promoting fuel switch (coal to gas) and clean coal technologies (coal bed methane is recognized as one of the clean coal technologies) as the means to achieve China's strategic objectives in energy sector that the Bank will support, in addition to prompting renewable technologies and improving energy efficiency. Hence the Bank has been providing policy advice on deployment of clean coal technologies. Applying Clean Development Mechanism (CDM) through the Prototype Carbon Fund (PCF) for the coal bed methane project is one of the key recommendations of the policy advice. 2. Objectives The first objective of the project is to reduce China's greenhouse gas emissions and to improve coal mining operation safety through effective and efficient Coal Mine Methane (CMM) recovery and utilization by applying the latest technologies in CMM drainage and CMM-based power generation. The second objective is to provide an example of CDM project to demonstrate how GHG emissions reduction credits can be obtained and traded with regard to a CMM emissions reduction project under the clean development mechanism (CDM) of the Kyoto Protocol or similar arrangements. 3. Rationale for Bank's Involvement The PCF's involvement in the project is critical because the revenue from the electricity sales alone will provide low rate of return of the project due to the low tariff rate in Shanxi province. With the additional revenue stream provided by selling carbon emission credits to PCF the economics of the project are significantly improved and the investment risk is dramatically reduced. A baseline scenario would be recovery and utilization of methane is limited to only for the internal mine and household usage, and most of the methane would be vented to the atmosphere for the safety mine operation. And the coal-fired plant would supply the least cost power production. Therefore, only with the additional support with the PCF the project will be viable. This "additionality" would be analyzed thoroughly in the baseline study and validated during the PCF's project cycle.  3 PID 4. Description The CMM project would consist of the following four components: (i) improved underground CMM drainage systems through directional drilling of long in-seam boreholes and installation of CMM gathering and drainage facilities; (ii) the construction of a 120 MW power plant composing of about 60 internal combustion engines and associated CMM storage facilities; (iii) a double circuits 6 km long 110 kV transmission lines to connect the power plant to the existing power grid; and (iv) a capacity building program and consulting services for project implementation. The total project cost is estimated at $89 million including the foreign exchange cost of $44 million and local currency cost of $45 million. An ADB loan of $44 million is to finance the direct foreign exchange cost and the remainder of the cost will be provided by an equity contribution of $22 million and a domestic loan of $23 million from the Industrial Commercial Bank of China. The total production of Emission Reductions (ERs) during the first 10 years of the project (2005-2014) will be 22.5 million tons CO2 equivalent. Based on an indicative Certified Emission Reduction (CER) price of $4.25 per ton CO2, the total Emission Reduction Purchase Agreement (ERPA) value will be approximately $96 million in which PCF will purchase around $10 million value of the CER. 5. Financing Source (Total ( US$m)) BORROWER (