China - Renewable Energy Development Project

Report No. PID6365 Project Name China-Renewable Energy Development Project Region East Asia and Pacific Sector Energy-Renewable Project ID CNPE46829 Borrower People's Republic of China Implementing Agency State Economic and Trade Commission Renewable Energy Division Energy Conservation and Resources Utilization Department 26 Xi Da Jie, Xuan Wu Men Beijing 100053 People's Republic of China Tel: 86-10-6319-3470 Fax: 86-10-6319-3460 Shanghai Municipal Electric Power Company Department of Planning and Development 181 Nanjing Road East Shanghai 200002 People's Republic of China Tel: 86-21-6329-1010 Fax: 86-10-6324-8586 Environment Category B Project Appraised June 28, 1998 Board Date June 8, 1999 Project Restructured June 14, 2001 Date PID Updated November 16, 2001 1. Country and Sector Background Development of renewable energy is regarded by the Government of China (GOC)as an important means to reducing the power sector's heavy reliance on coal, which is essential to reducing greenhouse gas (GHG) emissions as well as emissions of TSP, NOx and S02. Energy is the largest source of GHG emissions worldwide, and China accounts for 10t of global GHG emissions from energy use. China's share will grow if rapid rates of economic growth continue well into the next century, as predicted. However, macro-economic and energy modeling work show that an aggressive program to promote energy conservation and renewable energy could limit the increase in GHG emissions between 1990 and 2020, under a high economic growth scenario, from a three-fold increase to less than two-fold. Reducing local environmental damage is also important, as annual health and agricultural losses associated with coal-related air  pollution in China are estimated to be as high as 6 percent of GDP. Renewable energy is also a critical component of China's long- term energy strategy for rural development. China has strongly supported small hydropower(<25 MW), biogas, and small wind turbines over the past 35 years, to provide energy and electricity to isolated rural populations. In 1995, the GOC voiced new commitment to renewable energy, as outlined in the New and Renewable Energy Development Program, 1996-2010, developed by the State Economic and Trade Commission (SETC) and the former State Planning Commission (SPC) and State Science and Technology Commission (SSTC). This program aims at improving the efficiency of renewable energy technology applications, lowering production costs and enlarging the contribution of renewable energy to overall energy supply. The 1995 Electricity Law also extends GOC support to solar ,wind, geothermal and biomass energy for power. Recognizing the need for a strategic orientation to renewable energy development, the GOC, with Bank/GEF assistance, has undertaken sectoral analyses which has culminated in a strategy document and two detailed sector studies. The project design is based on these studies, which conclude that China needs a market-driven approach to renewable energy development which: (i) focuses on promoting commercial or near- commercial applications; (ii) combines international advances in technology with demonstrated Chinese low-cost production capabilities; and (iii) taps the large potential demand by lowering costs and improving products, system reliability, and consumer service. Following the recommendations of the above sector studies, the China Renewable Energy Development Project supports the development of the two most promising renewable energy technologies, grid-connected wind farms and solar photovoltaics (PV) for rural applications. 2. Objectives The project aims to foster development of a sustainable market for PV technologies and demonstration of the viability of commercial wind development in the coastal regions. In achieving its objectives, it would use state-of-the-art and cost-effective wind and PV technologies to supply electricity in an environmentally sustainable way and to provide modern energy to dispersed rural households and institutions. The project consists of: (a) installation and operation of grid- connected wind farms on two sites Shanghai, totaling 20 MW of installed capacity; (b) supply of about 10 MW of PV systems to 300-400,000 households and institutions in remote areas of six Northwestern provinces; and (c) support for technology upgrading to improve the performance and reduce the costs of solar PV technologies in China. Institutional strengthening is an integral part of the project, to remove barriers to market development and commercialization of the technologies. 3. Description The Project consists of three components: Wind Farm Component. For the investment in the wind farms, Shanghai Municipal Electric Power Company (SMEPC) would form a special purpose wind farm company. The wind farm company would - 2 -  be owned 35t by SMEPC, 33t by State Power Corporation of China (SPCC) and 32t by Shanghai Power Investment Corporation (SPIC, a subsidiary of SMEPC). The wind farms will be developed on a commercial basis, using power purchase agreements (PPAs) that will pave the way for private sector participation in future wind power projects. The wind farms will be sited at Chongming and Nanhui, Shanghai and be 14MW and 6MW of capacity, respectively. The sites in Shanghai are small and are expected to have relatively low capacity factors. They are intended as highly visible demonstration projects for the coastal areas of China, to provide evidence of the municipality's environmental objectives and as a way to start developing a wind equipment supply industry. The wind farm component also includes GEF-assisted technical assistance (TA) and capacity building would be provided to staff of SMEPC, the wind farm companies, and others to overcome barriers to wind farm development in areas including: Study tours and training; Strengthening of organizational and institutional capacity, in the areas of finance and operations; Wind resource assessment and wind power development planning; Public information and outreach. PV Component. A direct grant would be provided to PV system companies to assist them to market, sell, and maintain 10 MWp of PV systems, an estimated 300-400,000 systems, in Qinghai, Gansu, Inner Mongolia, Xinjiang, Xizang, western Sichuan and adjacent areas. The systems are expected to be purchased mainly by households and institutions in isolated rural areas without access to electricity. They will be used to power lights, radios, TVs, and other appliances. The companies will receive a GEF grant of $1.50per Wp of PV capacity, per system with a capacity of 10 Wp or greater. This financial support would assist companies to: (a) improve PV product quality; (b) improve warranties and after-sales service; (c) strengthen business capabilities; and (d) increase marketing efforts. Competition among companies would encourage them to reduce system costs and improve service. The direct grants will be complemented by support to the companies to assist PV market development. A Project Management Office (PMO) will manage the Program, which will overcome barriers and develop markets for PV systems, through activities including: A public information campaign to give consumers objective information about PV systems; Capacity building to increase the commercial capabilities of staff of PV companies; A study to investigate the opportunity for payment mechanisms to increase affordability (including trade-ins, consumer financing, barter trade, etc.),development of an action plan, and provision of financial assistance from the GEF to implement the plan; Market monitoring, obtaining feedback from consumers and companies, and consumer protection activities; and, Other activities such as small scale demonstrations in high - 3 -  visibility locations. While indicative budgets have been established for each of the above activities to provide a framework, the program is flexible and will be responsive to market developments. It will be defined in detail on an annual basis, within a strategic framework. To strengthen institutional capabilities for PV quality assurance and project management, the following TA will be provided: (a) capacity building for product quality assurance including establishing national PV testing and certification centers; establishing national PV component and system standards; and improving quality control procedures of PV equipment suppliers; and (b) project implementation and management, including project monitoring and evaluation. Technology Improvement Component. The technology improvement (TI) component supports the objectives of reducing cost and improving quality of PV systems. It will do so by providing financial assistance to the PV industries through: Grant-assisted technology improvement projects. Grants will be provided to share up to 50 percent of the costs of investment projects. Beneficiaries will be selected competitively, based on proposals submitted by companies or institutions, in response to invitations that would be issued periodically by the PMO. Proposals will be evaluated and ranked by technical experts (including international experts), and selected by the PMO based on the ranking, subject to the GEF/Bank's no objection; Grant-assisted small technology improvement projects. There will be a quick response fund with a limited budget that would be administered by the PMO for grant amounts for small cost-shared projects that would provide grants of up to $10,000 per project; Production investment projects assisted by loans. Concessional loans will be available to companies, through commercial banks and assisted by SETC, for purchase of production equipment, follow-up investments to grant- financed activities, or other investment activities. TA will also be provided for (a) program management, including monitoring and evaluation, and preparation of an annual plan; and, (b) institutional strengthening activities such as improving capacity of staff in manufacturing companies in areas such as contracting and legal aspects of technology transfer agreements, and carrying out special studies needed to better implement the project. 4. Financing The project costs are summarized in the table below. Component IBRD Funding million) GEF Funding million -4-  equivalen t) Other Sources million) Total million Wind farm Investment TA Subtotal 13.0 13.0 1.5 1.5 9.4 0.8 10.2 22.4 2.3 24.7 PV Market Development Investment TA Subtotal 15.0 7.0 22 .0 129.9 4.0 133.9 144. 9 11.0 155. 9 Technology Improvement -5-  Investment TA Subtotal 2.7 0.8 3.5 20.7 0.6 21.3 23.4 1.4 24.8 Total 13.0 27.0 165.4 205. 4 5. Implementation Implementation Period. The project will be implemented over five years, from January 2002 to December 2006. The construction of the wind farms is to be supervised by a special purpose wind farm company to be established by SMEPC which will also own and operate them. The wind farm technical assistance is aimed to assist the special purpose wind farm company and will be undertaken largely by its staff and those assigned to work with it. The delivery of the PV component will be by the private sector dealers participating in the project, who will be responsible for the marketing, installation and maintenance of the systems. The TI component will be undertaken by the participating firms, selected by competitive bidding. Monitoring, Evaluation and Coordination. The wind farm component will be monitored and coordinated by SMEPC, working in conjunction with the Planning and Investment Department of SPCC. A Project Management Office (PMO), already operating under SETC, is responsible for coordination of the PV and TI components, assisted by other agencies at the central and provincial level. The PMO is chaired by the Deputy Director General of the Energy Utilization and Resources Conservation Department and managed by the Project Manager in the Renewable Energy Division. SETC will convene a group of leaders from: the Departments of Basic Infrastructure and Foreign Capital Utilization of the State Development and Planning Commission (SDPC); the Ministry of Finance (MoF); the Hydropower and New Energy Development Department of SPCC; the Department of Industries of the Ministry of Science and Technology (MST); the Department of Environment and Energy, Ministry of Agriculture; and, the State Environmental Protection Agency to provide policy guidance when - 6 -  necessary for the PV and TI components. 6. Sustainability Long-term sustainability of wind farms requires cost reduction, quality improvement, as well as strengthening market mechanisms and business capabilities. The project will contribute to this through demonstration of procuring equipment through international competitive bidding, and by promoting domestic production of equipment, installation and operation in areas where local businesses have a comparative advantage. Sustainability of wind farm development is also promoted by providing technical assistance to support the management of the wind farms and technical preparatory work for further development of large coastal sites. For solar PV systems for rural use, sustainability is addressed by improving product quality and after-sales service, in addition to lowering costs and increasing affordability through appropriate payment mechanisms. The project would require that suppliers meet quality standards for both products and service. To reduce costs, and improve equipment quality the project relies on strengthened competition among suppliers and technology improvement to support local production of high quality, low cost modules and system components. 7. Lessons learned from past operations in the country/sector While energy sector projects in China have satisfactory or highly satisfactory ratings, lessons learned include: (a) the need to set specific and achievable objectives for power sector reform; (b) the need for a systematic approach to procurement including capacity building of implementing agencies; and, (c) the need for early government approval of projects. These lessons, especially those about the need for specific goals and for a systematic approach to procurement, have been taken into account during project design and preparation. Capacity building of the PMO and implementing agencies in procurement has been carried out during project preparation, and will continue during project implementation, as needed. Also, an international consultant has advised SP on preparation of the technical specifications for bids and pre-qualification of suppliers in the wind farm component. Most of the renewable energy projects supported by the World Bank and GEF are in the early stages of implementation. However, lessons have been drawn from older Bank projects and from international experience, including: Wind Farms. The project design builds on the Bank's experience with conventional power sector projects in China, which have (a) achieved significant cost reduction through economies of scale and local production of components in thermal and hydro plants; and (b) financed utility-owned projects as a first step to prepare PPAs and other commercial documents leading toward private investment. The project design also incorporates recommendations of the China: Financial Incentives Policy for Renewable Energy Technical Assistance. The study summarized the experience of six leading countries in wind power development. It indicates the importance of contractual frameworks that provide a financial incentive based on production levels (e.g., a premium price) combined with competition, to encourage -7 -  efficiency and the convergence of wind power and conventional power costs. PV Systems. Lessons from the India: Renewable Resources Development Project have been incorporated into the project design including: (a) the need to strengthen the commercial capabilities of PV companies and other participants such as testing centers before project start-up; (b) the need to allow use of commercial procurement practices rather than ICB, given the small transactions involved; (c) the ineffectiveness of providing a line of credit where there are not yet informed consumers; (d) the need to provide financial resources directly to PV distribution companies to expand their sales and service networks; and (e) the importance of quality assurance procedures and ensuring consumer satisfaction. Lessons incorporated from other Bank projects in Indonesia and Sri Lanka are: (a) the concerns of the key participants - PV companies and consumers - must be taken into account; and (b) flexibility must be built into project design so that it can be adapted to changing market conditions during implementation. This project has been designed in close collaboration with the PV system companies, to allow maximum flexibility to the companies to respond to market conditions. In addition, lessons learned from other non-Bank projects are being incorporated in project design. Local Adaptation and Production of Technology. The project team noted the successful programs for renewable energy technology development in the Netherlands, European Commission (EC), USA and Japan. These programs all incorporate competition and cost- sharing with industry as principles. Key lessons learned are: (a) the importance of clear, quantified and time bound goals; (b) the need for an active approach to solicitation of proposals; (c) the need for constant dialogue with industries on priorities and targets; and (d) the importance of careful monitoring of results. 8. Poverty Category While the project does not explicitly address poverty alleviation, it is expected to provide electricity services to rural households and institutions that would otherwise not receive services, in six provinces with substantial minority populations and per capita rural incomes well below the national average. 9. Environmental Aspects In accordance with OD 4.01 (Environmental Assessment), the project has been assigned a Category B status by the World Bank, and Environmental Management Plans (EMPs) have been prepared by the Beneficiary of the Bank loan for the wind farm investment project. The EMPs were prepared in strict accordance with World Bank requirements. Although an Environmental Assessment (EA) was not required, environmental analysis was performed for each investment project by Shanghai Investigation, Design and Research Institute as part of the wind farms' feasibility studies. The EMPs and environmental analysis presented in the feasibility studies have been reviewed by the World Bank. It has been concluded that all environmental aspects are satisfactorily addressed and in compliance with all Chinese and World Bank - 8 -  environmental regulations, policies and procedures. The project has been designed and will be implemented in accordance with modern concepts of environmental management. As part of the EMP, a monitoring program has been prepared to assure sustained integrity of the mitigation program. Possible negative social impacts of wind farms were investigated as part of the Resettlement Action Plans (RAPs) for each site and were determined to be minimal. The two wind farm projects would (i) require permanent acquisition of about 3.9 hectares and temporary acquisition of about 2.5 hectares, and (ii) affect no persons due to impact from land loss. 10. Program Objective Category Environmentally Sustainable Development Contact Point: Noureddine Berrah Task Manager The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 473-1132 Fax: (202) 522-1648 Email: nberrah@worldbank.org For more information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. This PID was processed by the InfoShop during the week ending November 30,2001 -9-