China - Yixing Pumped Storage Project

Report No. PID10580 Project Name CHINA-Yixing Pumped Storage Region East Asia and Pacific Region Sector Power (80%); General public administration sector (20%) Project ID P068058 Borrower(s) GOVERNMENT OF CHINA Implementing Agency JIANGSU PROVINCIAL ELECTRIC POWER COMPANY Address: 20 Beijing Road (W), Nanjing, China Contact Person: Mr. Xu Songda, Deputy General Manager Tel: (86-25) 330-0300 Fax: (86-25) 330-7576 JIANGSU PUMPED STORAGE POWER COMPANY LIMITED Address: Yixing, Jiangsu Province, China Contact Person: Mr. Huang Yuezhao, General Manager Tel: (86-510) 798-8098 Ext.5085 Fax: (86-510) 797-0166 Email: jsyxpspp@pub.wx.jsinfo.net Environment Category A Date PID Prepared December 2, 2002 Auth Appr/Negs Date October 16, 2002 Bank Approval Date March 27, 2003 1. Country and Sector Background Main Issues: Over the two decades since 1980 a remarkable transformation has occurred, creating a very different power sector. Reform occurred in waves. In early 2002, government functions were largely separated from enterprise management. All energy enterprises were corporatized and operated as commercial businesses. Budget allocations have been phased out and subsidies eliminated. Investments are financed through equity and debt from a variety of public and private sources. Electricity prices are on average in line with long-run marginal supply costs in most grids. In spite of this tremendous progress, the power sector still faces serious problems that are described in details in Annex 14. These would be gradually addressed if the reforms adopted by the highest Chinese authorities and issued by the State Council in April 2002 (Document No5) are adequately implemented. Government Strategy: From monopolies to competitive markets. The Government's strategy seeks  to: (a) gradually transform the power sector of provincial/regional systems into a diversely owned market based industry through comprehensive restructuring and (b) create a comprehensive modern regulatory framework for the sector. The 2002 State Council Document No. 5 is a major step forward in the gradual process of reforming the power industry in China. It clearly states that the objectives of reform in China are to continue the break up of the monopolistic structure of the industry and gradually expand competition to improve the allocation and productive efficiency of the sector and ultimately provide the customers with the best service at the lower possible cost. The following tasks are planned for the 10th Five-Year Plan (2001-2005): (a) The State Power Corporation owned generation assets will be restructured into a number of independent generation companies, such that the capacity share of a generation company in a power market should not exceed 20 percent. A national grid company and a southern grid company will be established to be responsible for transmission and distribution business. (b) Competitive and open regional markets will be implemented through dispatching of generators according to bidding procedures, development of market code(s). Market trials will be initiated to allow generators to supply energy directly to large customers and to begin the phasing out of the single buyer market structure. (c) A new pricing mechanisms, including environmental protection mechanisms that link the price paid to generators to their emissions to encourage the development of renewable energy and clean generation sources, will be developed. The electricity prices will be divided into generation, transmission, distribution price and consumer supply. (d) A power regulatory agency will be established under the State Council. It will perform the duties and functions authorized by the State Council. Its principle duties include: development of power market rules and monitoring of market operations, ensuring fair competition, recommending price adjustment to the government, supervising the service quality of the power enterprises, issuing and supervising licenses, resolving market disputes. Adequate implementation of this far reaching reform program requires rigorous planning and detailed analysis to ensure a transition without disruption. Prerequisites for adequate implementation include mainly: (a) Optimization of the generation mix at the provincial and regional level: Most of the power systems in China rely more than required on coal-fired and base load power plants. The inadequate generation mix, especially the lack of peaking capacity, restricts the flexibility of dispatch resulting in inefficient use of resources and reduced reliability. Without optimized generation mixes, competitive markets would not bring about the expected efficiency gains and increased reliability of supply. Expected efficiency gains from optimized generation mixes and economic dispatch are higher than those expected from other segments of the industry (Generation costs in China account for 60 to 80% in final consumer prices). (b) Development of transmission: Transmission networks are underdeveloped in most regions of China. Adequate functioning of provincial/regional markets requires adequate transmission systems to avoid congestion and lead to optimum use of installed capacity. - 2-  (c) Transparent transactions and adequate contractual arrangement: Access of eligible consumers to generators requires open access to the transmission system. Since the latest reforms did not mandate separation of transmission and distribution in the medium term, clear separation of these functions is required within the network companies to ensure fairness to other users of the transmission system and avoid conflict of interest. Accounting of transmission and distribution functions should be separated and transactions between them based on transparent rules and procedures. (d) Alignment of Pricing Policy with the principles of Document No5: The new sector strategy outlines a pricing approach completely different from the current administered and tightly controlled approach. Delay in developing new guiding principles adapted to the competitive markets will jeopardize the development of competitive power markets and undermine achievement of the objectives sought by the government. (e) Adequate regulation: Adequate regulation is essential to development of competitive markets. It came to be considered as an integral part of the reform process even in countries like China which did not commit to full privatization of the sector. It is required to provide confidence to investors (especially in high growth countries like China) and to shield market participants and consumers from monopoly/monopsony/market power abuses. Bank Strategy: The Bank strategy has been summarized in the OED country sector evaluation of the Bank's assistance to China's energy sector as follows: The Bank's activities have been through four distinct periods. In the Early Years (1983-88), the Bank's assistance aimed at helping China's integration into the global economy. It focussed on removing bottlenecks to the country's accelerating economic growth and on institutional development (emphasizing technology transfer and capacity building). In the Years of Transition (1991-93), which followed a two-year hiatus in Bank lending the focus was on consolidating earlier assistance to the power sector, with an added emphasis on addressing the resettlement issues associated with hydroelectric projects. In the Power Reform Years (1994-97), the Bank's focus shifted to policy change and broad reform, primarily, although not exclusively, in the electric power sector. This coincided with economic reforms initiated by China in the early 1990s and the greater urgency attached to that subsector by the government in light of persistent power shortages in fast-growing Eastern China. In the Years of Diversification (since 1998), Bank assistance continued and strengthened a move beyond the power sector that had started in 1997. Lending operations were added in energy conservation, district heating, and renewable energy and AAA activities in the oil and gas sector were renewed. Only two power loans have been made since 1998, resulting in a significant decrease in overall energy lending. The Bank strategy and assistance continued to evolve to meet the changing circumstances and needs of the power sector. Lending activities and AAA initiated during the last three years aim at fully bringing the assistance strategy in line with the new business strategy framework with special focus on poverty (Hubei Small Hydro Project--FY 02), support to reform and -3 -  transition from monopolies to competitive markets (proposed FY03 Yixing Pumped Storage Project to assist in adequate implementation of the Government reform program at the provincial/regional level and FY03 AAA to assist reforms,especially pricing, at the national level), protection of local and global environment (FY03 TA clean technologies, GEF Energy Efficiency II--FY03, China Renewable Energy Scale up Program under preparation) and promotion of good governance and PSD (FY03 AAA to provide assistance to the newly created State Electricity Regulatory Agency--FY02/03, TA on PPI and PPIAF study on separation of generation.) Bank stategy and activities are described in more details in Annex 14. 2. Objectives The objective of the proposed project is to increase the overall efficiency of the power sector in Jiangsu Province through: (a) design and implementation of a far reaching of the sector to further competition at the generation level and provide large consumers access to generators (transition from a monopoly/monopsony structure to an unbundled competitive structure: wholesale market by of end 2005 and eventually retail market by 2012); and (b) construction of a pumped storage plant (4 x 250 MW) in Yixing to ease acute peaking problems and improve the generation mix that would create the conditions for more flexible dispatch and improved supply reliability, an essential requirement for well functioning competitive markets. 3. Rationale for Bank's Involvement Power sector reform and institutional development which is being achieved through Bank involvement in the sector are ultimately aimed at developing the power sector from one which initially represented a substantial drain on public finances, to one which will expand and operate in response to market forces and support public finances through taxes and through the attraction of foreign investment to the country. Experience in China and in other countries has also shown that power sector reform contributes to widespread state owned enterprise and governance reform as well as development of the financial sector The investment components are appropriate vehicles for Bank investment in segments of the sector that are not yet attractive to private investors. No pumped storage projects have been developed privately for various reasons. World Bank involvement in the project would ensure that: (a) Implementation of the Government's new power sector reform strategy, which is the main focus of the proposed project, benefits from international experience in power sector restructuring and the development of power markets. The Bank is in a unique position to bring global experience to bear in power market design in such areas as power pricing, market organization and operation; settlement systems; ancillary services pricing and transitional arrangements. Particularly since the California power crisis, many governments around the world are reconsidering their deregulation plan and it has become critical to ensure sound implementation to avoid the pitfalls experienced in some markets. (b) The pioneering work related to the commercialization of the transmission and distribution segment in Jiangsu province will provide valuable inputs to the central government decision-making process in developing a strategy to separate and commercialize the transmission and distribution business. (c) The legal and commercial arrangements defining the relationship - 4 -  between the pumped storage plant and the power market are appropriate so as to maximize the benefits of the plant to the system; (d) The technical design, construction practices and equipment selected for the pumped storage hydro plant is done in accordance with leading international practice and standards. China has limited experience in these areas of pumped storage hydro plant development and this project would significantly strengthen the capacity building initiated under two previous projects. (e) The on-going policy dialog to address the institutional aspects of wholesale electricity pricing and transmission pricing, are successfully implemented in major power systems that are likely to serve as models for other regions/provinces. (f) The piloting of consumer direct participation in Jiangsu will provide a key input to the central government in formulating restructuring strategy to create competitive markets with multiple buyers. 4. Description 1. Yixing Pumped Storage Power Plant Component The development consists of: (a) a new upper reservoir impounded by a main dam with a maximum height of 75 m and a subsidiary dam with a maximum height of 35 m, (b) expansion of an existing lower reservoir by heightening the dam to a maximum of 50 m; (c) a water conveyance system, including intakes and outlets, headrace and tailrace tunnels, and surge shafts, with the total length of about 2900 m; (d) an underground powerhouse with an installed capacity of 4 x 250 MW, (d) implementation of an environment management plan, (e) implementation of a resettlement action plan including resettlement of 43 project affected households, (f) consulting services to assist in engineering, design, procurement and construction management, and (g) a comprehensive training program to development management and technical staff capacity for both the construction and operation phases 2. Power Sector Restructuring Component. The reform program includes: (a) assistance to development of (i) a pricing policy adapted to the competitive industry structure envisaged by the Chinese Government; and (ii) a target pricing system and transition strategy for Jiangsu province based on the new pricing principles to be adapted at the national level; (b) studies and analyses for access of eligible customers to generators as a first step towards the development of a competitive wholesale (retail in the US sense) power market; and (c) adaptative of JPEPC's corporate structure and management procedures to operate efficiently in competitive environment. 3. The transmission component. A 6.3 km long double circuits 500 kV transmission line will be built to connect the Yixing Pumped Storage Plant to the East China 500 kV network 5. Financing Total ( US$m) BORROWER $0.00 IBRD $135.00 IDA LOCAL SOURCES OF BORROWING COUNTRY $319.80 SUB-BORROWER(S) $120.50 Total Project Cost $575.30 -5-  6. Implementation Implementation Period: Eight (8) Years, from 2002-2009 Executing Agency: JPEPC would be the executing agency of the restructuring component and was responsible for the preparation of the investment component in the early stage. JPEPC gained strong experience during implementation of three Bank financed projects: Xuzhou-Shanghai transmission line project (completed and rated satisfactory), Yangzhou thermal power project and East China (Jiangsu) transmission line project (ongoing and rated satisfactory ) in which JPEPC is entrusted with the implementation of the investment component. JPEPC has qualified personnel to undertake project preparation, implementation and operation. The power market and sector restructuring component would be executed by JPEPC in close coordination with State Power East China Company and with oversight from the State Power Corporation (SP), the provincial government, the State Development and Planning Commission (SDPC) and other central government agencies. JPEPC has established a "core team" fully dedicated to the preparation and implementation of the reform component with adequate resources. During the project preparation and implementation period, a comprehensive training program will be developed and implemented to upgrade the skills and knowledge of JPEPC staff, especially on concept of power sector reform, development of a competitive power market, development of pricing mechanisms adapted to a restructured and competitive environment. A legally independent entity, Jiangsu Pumped Storage Power Company Limited (JPSPC), has been created to manage the preparation, construction and operation of the pumped storage project. JPSPC's organization charts and staff plan for both the construction phase and operation have been developed. It currently has 7 departments with 46 full time staff. Many of the key personal are taken from JPEPC and other power entities, including Bank financed Pumped Storage projects. They are very experienced in project management, hydropower engineering, financial management, procurement and contracting, environment and resettlement. During project preparation and implementation, technical assistance will be provided as part of the project to upgrade management skills of the key staff and technical capabilities of the professional staff. The Shanghai Electric Power Design Institute (SEPDI) is the initial designer of the project and mainly responsible for designing the civil works. The East China Investigation and Design Institute (ECIDI) is responsible for designing the electric and mechanical works and bears the main responsibility for preparation of the bidding documents. A Panel of Experts (POEs) has been formed to provide periodic, independent reviews of the project during final design and construction. An experienced international consulting firm was hired to review the design of the upper reservoir dam and underground facilities. Another well-known international firm has been employed to assist in reviewing the final phases of the design, preparing the bidding documents and bid evaluation, and assist in construction management. Three supervising engineers (one for design and two for construction) have been contracted to provide quality for design and construction. Firms will be employed to carry out an independent evaluation of resettlement throughout the resettlement period and monitor the implementation of the environmental management plan during the entire project implementation period. JPSPC will buy power from and sell power and ancillary services to the grid owned and operated by the regional power company. The power tariff and service charge will be initially approved by the Jiangsu Provincial - 6 -  Pricing Bureau in accordance with principles established by SDPC. However, over time it is expected that such pricing arrangements will evolve towards more market oriented arrangements. Financial management and funds flow: The finance department of JPSPC, with assistance and guidance from finance division of JPEPC, will be directly responsible for monitoring, financing arrangement and financial management, etc. It will also be responsible for maintaining, monitoring and reconciling special account to be established for the project, and preparing and verifying withdrawal applications before submitting to the Bank for disbursement processing. JPEPC's knowledge of and experience in Bank's disbursement procedures will prove valuable when JPSPC is ready to withdraw Bank funds. Bank loans will flow from the Bank to the special account to be set up for the project, and/or to contractors or suppliers. Bank loan will be signed between the Bank and MOF, and on-lending arrangement for the Bank loans will be signed between MOF and JPSPC and JPEPC. Counterpart funds include equity contributions and domestic bank loans. Shareholders have been identified and shareholding arrangement finalized, and equity contribution plan has also been established. Contributions will be made by shareholders directly to JPSPC. Commitment to lending by one of the major commercial banks has also been obtained. Project Coordination: JPEPC would be responsible for overall coordination of the Project, particularly the power sector restructuring and power market development component will be closely coordinated with the policy development and regulatory reform at the central level, and the sector reform in the East China region. Project Oversight and Policy Guidance: The power sector restructuring component of the proposed Project will be supervised by the provincial government and SP, under the overall policy guidance of the State Council. The SP and the provincial government would be responsible for coordinating with central government agencies on major reform issues. The Ministry of Finance (MOF), the State Development Planning Commission (SDPC) and the State Economic and Trade Commission (SETC) will supervise project financing and advise JPEPC on all financing matters. The concerned provincial government agencies will oversee the planning and implementation of resettlement. The State Environmental Protection administration and the local environmental agencies will supervise and monitor the implementation of the environmental management plan. 7. Sustainability There are no significant environmental impacts that could affect sustainability. Social sustainability could be assured by comprehensive resettlement plans and the highly satisfactory track record of JPEPC and the Jiangsu Government in implementing these plans. Financial sustainability is assured by the pre-investment agreements and affordability of projected tariffs. The institutional sustainability is assured by the "ownership" by JPEPC of its Power Sector Reform Strategy & Implementation Plan, and the commitment to and support for reform coming from central and provincial governments. 8. Lessons learned from past operations in the country/sector Several lessons drawn from the previous two Bank financed projects in the province and completed and on-going power projects in other parts of China and the world have been incorporated in the project design and in the preparation phases to date. These are: -7-  (a) Coordination of Bank supported project activities at decentralized level with policy dialog on sector reform through economic and sector work at the national level. In design and preparation for the power sector restructuring and competitive power market and development component of the project, a close coordination has been maintained with the sector work and policy advice at the central level (sector work with SDPC on developing a strategy for power sector reform and defining a generation asset divestiture strategy, technical assistance to SCORES and SETC on the development of a modern regulatory framework), the Tongbai Pumped Storage Project (which includes a component to develop a competitive power market in Zhejiang province), the Waigaoqiao Thermal Power Project (which has a component to restructure SMEPC), the East China (Jiangsu) Power Transmission Project (which includes a component to develop power trading at the regional level within East China). The coordinated approach maximizes the likelihood of replication of successful reform efforts throughout China and ensure consistency in sector restructuring and power market development, avoiding the problems created with unclear delineation of responsibility and affecting approaches that slowed implementation of power markets in the USA. (b) The need to move power market rapidly beyond the transitional phase. In the Zhejiang pilot power market, the implementation process becomes focused on the transitional stage (i.e. single buyer with generator competition) as an end in itself. Administrative measures are used to "mimic markets" rather than to focus on reforms necessary to create a real market. During the design of the reform program under the Yixing Project, the existing sector structure is only used as a stepping-stone to wholesale competition in order to realize substantial efficiency benefits. Direct contracting between the generators and the large consumers will be permitted in the very early process of restructuring to create a multi-buyer and multi-seller market. (c) The need to increase public disclosure and transparency to foster confidence in the market. In the Zhejiang pilot market, the investors are not able to assess the risks of participating in the market. They can gain virtually no information on the market reform process or daily market operations and consequently have no confidence in the market. During the design and implementation of power market under Yixing, all the policies, rules and procedures will be widely discussed and consulted before being adopted. Duirng market operation, detailed information on the market reform process and daily market operations will be made easily available to all existing and potential market participants through well-defined procedures and channels. (d) The need to start procurement of major equipment early and to have efficient procurement management. The implementation of many power projects has been delayed considerably due to delays in the procurement of major equipment. The procurement process for such sophisticated equipment as in the case of Yixing is complicated and takes long time by nature. It needs to be started early in the preparation period so that bid award will correspond with loan effectiveness in order to avoid delays. In addition, most procurement delays which have occurred in China over recent years have been related to the qualification of bidders and offered equipment, in an environment where fully qualified bidders are continually increasing the proportion of manufacture by subsidiaries, joint-venture partners and subcontractors who are not themselves fully qualified. To a large extent, these difficulties can be avoided through pre-qualification or staged bidding processes and these have been assumed for the pump/generating unit - 8 -  package for the Yixing plant. Another difficulty which has resulted in delays in power plant equipment installation in China relates to interfaces between individual suppliers. Procurement packaging has therefore been designed to reduce the number of packages to the minimum practical level while encouraging worldwide competition. For civil works construction, which is planned to be carried out by local contractors, experience has been mixed. Therefore, JPSPC will also pre-qualify local contractors. (e) Need for early government approval of project. In recent power projects there were delays in project processing stemming from delayed internal Government approvals. These delays arose from inadequate counterpart funding sources and delayed approval of feasibility studies etc. In the current case, there is no shortage of counterpart funds and the approval process for the physical components of the project are well advanced. However, delays might be expected in view of the government's limited understanding about the nature of the pumped storage project. A workshop on the roles and economics of pumped storage project was held to improve government's awareness. A detailed preparation schedule has been prepared which clearly identifies Government approval steps, which are invariably on the critical path. JPSPC has personnel permanently stationed in Beijing to expedite approval processes. (f) Need for early agreement on key principles of service purchase. In China, several pumped storage projects were not optimally utilized in the early stages of operation, stemming from the unclear definition of the commercial arrangement between the power plants and the network operators and/or inefficient pricing scheme for peaking capacity and ancillary services. In the current case, the key principles of the service purchase and commercial arrangement have been established and agreed. A clear schedule for detailed development and implementation of the service purchase agreements will be agreed so as to ensure that the benefits of the power plants will be fully realized once it is operational. (g) Adequate resettlement planning, consultation and monitoring. The numerous lessons learned in several of the large Chinese reservoir resettlement projects (Shuikou, Ertan and Daguangba) are being brought to bear in the limited resettlement associated with Yixing. Particularly, the affected people and local communities have been closely involved in resettlement planning and identifying opportunities for maximizing development impacts from resettlement. The transmission line resettlement process will continue based on the highly successful organization and procedures developed under the East China Transmission Project. 9. Environment Aspects (including any public consultation) Issues The pumped storage plant exploits an existing lower reservoir by heightening the dam by 50 m. A new upper reservoir, together with an underground power house, is to be built. Both reservoirs are small with surface areas of 41 ha (upper) and 71 ha (lower). The reservoirs are impounded in valleys of dry hilly areas rather than constructed on a river. The power plant also involves the construction of other permanent structures and temporary works, occupying another 126 ha. A 6.3 km double circuit 500 kV transmission line will be constructed for wheeling power in/out to the 500 kV Liyang Substation, which connects to the East Chin power grid. The transmission line primarily extend through relatively undeveloped hills. As a result only about 2.4 mu of tea garden and wood land will be lost. The main impact areas are lands that will be inundated -9-  by each of the two reservoirs and land occupied by the hydropower stations, access roads and support facilities. EIA and EMP conforming to OP4.01 have been prepared and are summarized in Annex 11. A summary EIA has also been prepared and circulated to the Board in October 2002. The most important impacts are: removal of vegetation in areas designated for construction zones, roads, and transmission line rights-of-way; exposure of cut and fill slopes to the forces of erosion during construction of the hydropower projects, roads, and resettlement village; disruption to TV and Microwave stations; short-term impact of large construction work forces moving into the area; and potential for degradation of drinking water wells located downstream of the project. To obtain public opinions regarding the project and to strengthen environmental consciousness, opinion and data surveys were carried out for the project during the development of the initial draft EA, and when the draft EA was being revised to bring it into compliance with World Bank EA standards. The questionnaires, results and analyses are fully presented in the EA. Meetings were held with the local county peoples' congresses, standing committees and consultative committees, the media, workers associations, farmers, and local residents. Women and minority ethnic interests were well represented at the consultation sessions. All organizations within the project affected areas indicated strong support for the respective projects, primarily because it is believed that the projects will contribute much needed economic development within each of the four counties, thereby helping to alleviate poverty. In addition to the public consultations, project evaluation and review meetings were also held. These were attended by design institutes, academics, state and provincial project sponsors, local county environmental protection bureau staff, and staff from local county resource management agencies. The groups systematically reviewed the project environmental impacts and proposed mitigation measures. The projects were subsequently approved by the Jiangsu Province Environmental Protection Bureau, and State Power Corporation. Information on the project has been disclosed to the public via numerous public information events presented in television and radio broadcasts, and newspaper articles. In addition to being provided with information on the project, the public has been given details on how it can provide its comments and recommendations to the project authorities. An announcement was issued on the front page of the Yixing Daily Newspaper on 06 March 2001, inviting the public to review the report at the Yixing Environmental Protection Station offices, and provide comments and/or recommendations on the EIA report. Over the period 20 March 2001 to 04 April 2001, a total of fourteen members of the public reviewed the report. The most significant recommendation coming from the public was the need for improved environmental oversight of the project. In response, the project authority established its Project Environmental Management Office. - 10 -  An independent agency will be employed to monitor and measure the impact of the project on the environment during the construction and operation phase of the project. Environmental monitoring reports will be furnished to the Bank during the construction phase and during the first three years of the operation. 10. Contact Point: Jianping Zhao World Bank Beijing Office No.8, Chaoyangmen Beidajie Beijing 100027, P.R.China Tel: 86-10-65543361 Fax: 86-10-65541686 Jianping Zhao The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202 473 1132 Fax: 202 522 1648 11. For 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 components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending December 6, 2002.