China - Second GEF Energy Conservation Project : environmental assessment

Environmental Reviews and Impacts for the China GEF Energy Conservation Project, Phase II Project Management Office SETC/WB/GEF EMC China Energy Conservation Project April, 2002 FILE COPr  Contents 1. Introduction ............................................. 1 2. Environmental Benefits from the Project ............................................. 6 3. Procedures for Environmental Review and Clearances ............................................. 8 Annexes: Annex A: Relevant Laws, Regulations and Standards for Reference (on file) .14 Annex B: List of Enterprises not Eligible for 15EMC Loan Guarantee Program Support (Negative List) .15 Annex C: Environmental Review Checklist for Proposed Subprojects .16 Annex D: Typical EMC Project Lines and Related Environmental Issues .18  1. Introduction Overview: China State's Economic and Trade Commission (SETC) and its Project Management Office (PMO) has developed a system for assessing and reporting on potential and actual environmental impacts resulting from investments supported under the EMC Loan Guarantee Program under the China Energy Conservation Phase II Project, supported by the Global Environment Facility (GEF) through the World Bank As energy efficiency projects, the subprojects will focus on technical renovations in existing enterprises. The subprojects supported by the Loan Guarantee Program will have major positive environmental benefits, as all subprojects will be projects aimed to improve energy efficiency. (To qualify for support under the Loan Guarantee Program, over one-half of the financial benefits of the project must be derived from reductions in host enterprise energy use.) In addition to reducing greenhouse gas emissions, many of these subprojects also will reduce use of other raw materials, and reduce various emissions and waste. In a few cases, however, there may be a potential for some negative environmental side effects, such as the generation of other wastes or increases in certain other emissions. Therefore, some project proposals may needed to be reviewed in details to ensure that any potential negative environmental impacts are properly mitigated. All subprojects that apply for financial support from the EMC Loan Guarantee Program must meet all local environmental regulations. Should any potential negative environmental impacts be determined, proper certifications and clearances of mitigation plans must be obtained, according to national and local regulations. Loan guarantee subproject proposals will be prepared throughout the period of project implementation, and hence are not known prior to project implementation. Therefore, the PMO has established a procedure for screening the projects for any potentially adverse environmental impacts, followed by further review and clearance of mitigation plans for any projects where potential negative impacts have been identified. This procedure is described in the subsequent sections (especially Section 3). It is necessary to disseminate key screening criteria to the new and potential energy management companies (EMCs) who will be applying for support from the Guarantee Program before the project launch, so that EMCs understand the environmental guidelines and give due consideration to these concerns when discussing potential renovations with their host enterprise customers. Summary of Experiencesfrom the Phase I Project. Phase I of the China Energy Conservation Project included support for the development of energy conservation subprojects by three major new EMCs. A large amount of data has been collected about these projects, and many of the subprojects in Phase II are expected to be similar to these Phase I projects. The types of EMC projects likely to be conducted under Phase 2, types of enterprises, and major environmental impacts. 1  The results of the demonstration EMCs in Beijing, Liaoning and Shandong supported under the first phase of the China Energy Conservation Project have been very closely monitored from the beginning. The World Bank and SETC have conducted in-depth, formal reviews together with the three EMCs at least twice per year since the EMCs were founded in 1997, as part of the project supervision process. The reviews include evaluation of each EMC's project portfolio, financial results, energy savings and carbon reduction results, management and institutional building efforts, project procurement, business plans for the future, and outstanding issues and options for their resolution. Findings are reported in PMO and EMC biannual reports, and the biannual Bank project supervision mission reports. A major Project Mid-term Review was conducted by the Bank, SETC and Ministry of Finance (MOF) in November 2000, in accordance with original plans, and the mid-term review Aide Memoire report is available in the project file. The PMO commissioned an outside, independent review of the status and work of the three EMC in 2000, which was completed by the China Energy Conservation Investment Corporation's- consulting department, and used as an input for the project mid-term review. GEF Secretariat staff also conducted independent site investigations of this project in 2000, and this and other information was utilized by the Secretariat's consultants in their preparation of a 2000/2001 review of the results of GEF-supported projects involving ESCOs. Overall progress has been quite satisfactory, with each of the three pilot EMCs developing their respective businesses. Given that their business is entirely new in the Chinese market, the progress of the three EMCs has been exceptionally good by international standards. As of March 2002, the three EMCs have entered into 208 energy performance contracts with aggregate investment of US$45.2 million (RMB 374 million). As of March 2002, EMC investments delivering an aggregate energy savings of about 750 thousand tons of coal equivalent (tce) and associated carbon dioxide emission reductions of about 400 thousand tons of carbon (t-c). The three pilot EMCs plan to enter into some 83 new performance contracts in 2002 with a total estimated investment of RMB 214 million ($25.8 million). Initial business experiences among the three EMCs, allowed each EMC to test a range of technologies and applications and identify markets to replicate successful project lines. While all three EMCs continue to offer a number of similar project lines, their project portfolios and markets have begun to develop along distinctive paths based on differences among each of the EMCs' service territories and company expertise: Beijing, which has a lighter industrial base, has focused more on heating and cooling systems in hotels and office and residential buildings (electric heaters, heat pumps); Liaoning has a high concentration of industry, particularly iron/steel and chemical plants, and has found boiler and kiln/furnace renovations to offer high marketability; Shandong has been able to replicate motor system improvements in a diverse range of host enterprises and found a few large, creditworthy enterprises in which to develop a pipeline of different technical renovations. While these individual EMC markets have shown 2  their differences,. the collective market of these three EMCs can be viewed to be more representative of the larger Chinese market. Since the companies began, the three EMCs have received World Bank/PMO approval for about 214 performance contracts in about 14 different technical project lines. Key product lines supported have included boiler renovations (layered combustion systems, boiler replacements, FBC), kilns/furnaces (cement and ceramic kilns, electric arc furnaces, glass furnaces), waste heat (waste heat recovery, ground source heat pumps, condense water recovery, fuel switching), cogeneration, steam hammer renovations, motor drive systems, power supply (electrical distribution systems, transformers), automatic control systems and lighting systems (CFLs, ballasts). A distribution of the total EMC investments by technical project line is shown in Chart 1. Buildings ery*/jl Boilers 290/o Recovery of waste Steam pipe network Steamlair hammer / \ A \ ' ' ' ' ' ' ' ' ' ','> Motor system I4Ins and / \ \ \' 2> Lighting and furnaces power diqtrib.itinn Figure 1: EMC Project Line Breakdown In terms of host enterprises, industrial projects clearly have been the largest market for the three EMCs and will likely continue to be a major market for new EMC projects. Within the industrial sector, major subsectors have included iron and steel, chemical, rubber, and textile, although many of the technical renovations (e.g., kilns, boilers, motors) are not industry specific. The three EMCs have also found a strong market for energy efficiency projects with utilities (power, heat and water) and, given their much stronger financial positions, have developed project lines for their operations. Each of the pilot EMCs has also sought to balance their portfolios with some non-industrial projects, such as heating and cooling renovations in government/commercial 3  buildings, lighting projects in hotels/tourist resorts, and projects in shopping centers, hospitals, and farms. Chart 2 contains a full breakdown of EMC customers. Hotelsl Residenfial R o Bldg Office/Comm 4% / Bldga Other 5% >L 1I2% Ublio es 16% ndusty Figure 2: EMC Host Enterprises While project lines have not changed vastly from initial plans, each EMC has found elements of competition from equipment suppliers as project lines are developed and actively marketed. Once newer technologies have been demonstrated and simpler renovations implemented, the ability for the EMCs to market these project lines while requiring high returns has steadily diminished over time. Thus a key aspect of the EMC business has been to maintain a step ahead of the market and build upon simpler renovations to improve a project line's business life. As the larger EMC industry develops in the future, it is certain that the market will continue to evolve and, as competition increases, EMC projects will grow in their levels of sophistication and diversity. Typical Sub-Project Environmental Benefits: As previously noted, the Phase II Project will generally support technical renovations for energy efficiency. As such, the investment portfolio supported under the EMC Loan Guarantee Program will have substantially more positive environmental impacts than negative impacts. These positive benefits will primarily consist of energy and fuel savings and carbon emission reductions. (As noted previous, as of March 2002, the Phase 1 Project has delivered an aggregate energy savings of about 750 thousand tons of coal equivalent (tce) and associated carbon dioxide emission reductions of about 400 thousand tons of carbon (t-c) over its four years.) These projects have also significantly reduced other emissions and particulates (e.g., SOx, NOx, TSP, etc.), reduced water consumption, lowered other plant emissions (flue gas), decreased solid waste disposal (e.g., improved combustion of coal), reduced raw material inputs, and decreased other wastes. 4  Typical Possible Sub-Project Environmental Concerns: Generally, renovations of technical systems as planned for support under the Phase II Project do not have significant environmental issues. However, there are some types of energy conservation investments that may raise environmental concerns which should be considered. Table 1 below provides a few examples of the types of potential negative environmental impacts which may arise in energy conservation projects, and some possible measures which may be adopted to mitigate these impacts, based on experience gained in the Phase I Project. These represent some of the typical environmental issues that would be reviewed under the Phase 2 Project. Table 1. Typical Possible Subproject Environmental Concerns Type of Subproject Some Potential Negative Some Possible Mitigation Environmental Impacts Measures 1. Circulating fluidized (1) Increasing TSP (1) Equipping with proper bed (CFB) boiler emission type and size dust subprojects (2) Increased fly ash catcher, to meet the wastes requiring emission standard disposal (2) Development of a fly- ash brick production line, or delivery to cement plants to produce cement 2. Industry kiln and Probable NO, emission (1) Inproving the control furnace combustion increase, due to system to control system or thermal temperature increases in furnace temperature, to insulation renovation the furnace chamber ensure NO, emissions remain below emission standard levels. (2) Addition of filtering equipment, if necessary. 3. Shallow geothermal Possible fall in local Re-injection of ground water sourcing for heat groundwater levels. water from closed loop pump air conditioning systems (allowing no systems contamination), through construction of re-injection wells to match extraction well capacity. 4. Renovation of old Possible pollution due to Adoption of measure to cooling system which the leakage of CFC during prevent the leakage of use CFCs as construction CFCs during construction. refrigerants. 5  2. Environmental Benefits from the Project The objective of the subprojects of both the three pilot EMCs in Phase I and the new EMCs in Phase II of WB/GEF China Energy Conservation Project are to improve energy efficiency and reduce pollution and greenhouse gas emission. The experience of the three pilot EMCs in Phase I to date proves that the said objective can be achieved. The environmental benefits derived from energy savings have been carefully tracked by the PMO during the Phase I Project. A Contract Signature Notification (CSN) sheet is required for all projects financed under Phase I by any of the EMCs, and the CSNs are reported to both the PMO and the World Bank. These sheets provide data on the energy savings, by fuel type, expected under the project, and the number of years of energy savings expected from the equipment installed. The data is considered quite accurate, as payment on the energy performance contracts executed between the EMCs and their host enterprises is dependent upon the energy savings achieved. Based on Chinese existing energy conservation potential and the practice of the three pilot EMCs, possible product lines for EMCs can be included in following 8 aspects: 1) industrial boiler renovation; 2) steam pipe net renovation; 3) industrial kiln and furnace renovation; 4) steam hammer renovation; 5) building energy conservation renovation; 6) recovery of industrial waste energy; 7) motor system renovation; and 8) lighting and power distribution system renovation. The following types of environmental benefits can be achieved by implementing these subprojects: (1) Reduction of greenhouse gas emission: The primary greenhouse emission is CO2 deriving from burning of coal and oil. The above project lines 1)-5) result in reductions in the direct burning of coal and/or oil, resulting in high CO2 emission reduction effects per unit investment. Recovery of waste energy enables use of the previously wasted energy to partially substitute for fuel consumption, also yielding a good CO2 emission reduction benefit. Savings of electrical energy, e.g., through motor system, lighting and power distribution system renovation, yields reductions in fossil fuel used to generate electricity (accounting for some 80% of China's electricity production), and associated CO2 emission reduction. The reduction of carbon dioxide per unit of investment in electricity conservation projects, however, is somewhat less than the other types of projects, based on the experience to date. (2) Local environmental benefits: Besides large-scale emission of C02, burning of coal and oil may generate other air pollutant (such as S02, NOx, and TSP), as well as wastewater pollution, which  bring negative impacts on the local environment. The energy efficiency subprojects of the EMCs have substantial local environmental benefit, by reducing air and water pollution from the burning of fossil fuels, especially projects involving renovation of boilers, steam pipe networks renovations, steam hammers replacement, and recovery of waste heat. Subprojects which yield some, but less, local environmental benefit include most kiln and furnace renovations, and electricity conservation subprojects, such as renovation of motor and lighting systems. (3) Natural resource conservation benefits: Of the 8 project lines, the majority involve coal savings, while the minority save petroleum in cooling system, kiln and furnace, and building renovations. Water conservation is important in some subprojects, such as renovations of boilers, of steam pipe networks, of steam/air hammers, of kilns and furnaces, and of buildings. - (4) Other benefits: Other, additional environmental benefits exists in some specific cases, depending upon the technology and local applications. An example of the types and nature of the environmental benefits of a typical EMC energy efficiency subproject is provided below: One of the, pilot EMCs has replaced 4 old chain boilers (30t/h) and 1 oil- burned boiler (65t/h) with 2 CFB boilers (75t/h) for a host enterprise, to realize cogeneration of heat and power. New electrostatic precipitators were also installed in accordance with requirements stipulated by local environmental protection authorities. Environmental benefit of this subproject is as follows: () 5417tc of CO2 emission are estimated to be reduced each year, with attendant mitigation of global climate change impacts, due to direct reductions in fuel consumption; (2) 175t of SO2 emission are estimated to be eliminated per year due to desulfurization of exhaust gases with CaCO3 inside boiler body. Due to the installation of the precipitators, following benefits were also realized: reduction of particulate concentration to 150mg/m3, reducing TSP output by 136t per year,. This allowed the enterprise to meet national and local TSP and S02 emission standards, and contributed to the improvement of the local atmosphere environment; d The heating efficiency of the new CFB boiler is comparatively high, enabling production of an extra 23 million Kwh from steam generation, 7  consequently saving 9665 tce of energy and recycling 986,000 tons of water annually; ( Waste fly-ash is being re-utilized as a raw material to produce brick. 3. Procedures for Environmental Review and Clearances All subprojects proposed by all EMCs for support from the China GEF Energy Conservation Project Phase II Project's EMC Loan Guarantee Program must pass through the environmental review and clearance procedure described below, and summarized in Chart 1. The purpose of this procedure is to (i) ensure that any potential negative environmental impacts are reviewed and mitigated as required by Chinese central and local government environmental regulations, and (ii) ensure that subprojects are not supported in certain types of enterprises which are engaged in certain potentially environmentally damaging businesses (see Annex C). In addition, the procedure also requires systematic reporting of the contracted energy savings benefits (with attendant environmental benefits) for all energy efficiency subprojects supported by the EMC Loan Guarantee Program, for centralized compilation, analysis and reporting to the World Bank and GEF, as described in the final section below. As shown in Chart 1, the environmental review and clearance procedure required for all subprojects includes the following steps and aspects: (X Environmental Screening of Subprojects. Working together with their host enterprises, the EMCs will screen all subprojects for which they are requesting support under the Guarantee Program. As energy conservation projects, the project are classified in the Chinese system as technology renovation projects. All subprojects, by definition, will have substantial positive environmental impacts through reductions in energy use. Few, if any, negative environmental impacts are expected in most of these technology renovation projects, as they involve replacement of older, inefficient equipment or renovation/modernization of backward technical processes. Often these projects also provide other positive environmental impacts, in addition to impacts associated with energy savings. A description of nature and certain environmental aspects of the eight main subproject lines developed and implemented during Phase I of the project, which also are expected to be the main types of projects supported under the Guarantee Program of Phase II, is provided in Annex D. In the screening process, the EMCs must (a) determine if there are any potential negative environmental impacts associated with the proposed subproject; and (b) eliminate any subprojects with enterprises on the "negative list" (Annex B) from further consideration. 8  Chart 1 Flow Chart for Environmental Clearance of Subprojects EMC's screen proposed subprojects using the Environment Review Checklist, rejecting subprojects with enterprises on the negative list, and deterrnining if negative environment impacts exist. Negative impacts? YES EMC asks host enterprse to request Local Environmental Protection Bureau to review proposal mitigation plan NO _ EMC provides own certification and proceeds with loan guarantee application Local EPB conducts review and deteprmines clearance NO ~ ~ ~ ~ ~ ~ ~~N YES EMC and local bank submit loan guarantee application to IA with its own certification or EPB clearance. IA ensures that proper paperwork is provided NO YES '7 IA reviews and approval determined NO YES Subproject terninated I Subproject is implemented Randomly sampled post-project reviews conducted by PMO. World Bank may request or further reviews, during supervision missions, as required 9  In its review, the EMC should assess: (i) the general situation and current environmental status of the potential subproject; (ii) the original pollutant emission and estimated status of the potential subproject from the processes concerned; (iii) the types and amounts of pollution, or other negative environmental impacts, which might be caused by the potential subproject; (iv) the types of processes and product output of the subproject enterprise, and whether or not any of those are on the "negative list." In undertaking its screening work, the EMC should complete an Environmental Review Checklist for Proposed Subprojects form for each subproject.( see Annex C) Completed forms will be required in subsequent subproject processing. The purpose of the checklist is to remind the EMC project managers of the various generic environmental issues to consider. In addition, the EMCs should consult various technical guidance on the types of environmental issues common in the various subprojects, prepared by the PMO, based- on Phase I experience, and incorporating emerging experience from Phase II, as the project progresses (an initial summary is provided in Annex D). The EMCs will be provided with further guidance and training on the EMC environmental screening process (as part of training on guarantee application procedures), during project launching work and EMC training work under the project conducted by the PMO, the Guarantee Program Implementation Agency, and the EMC Service Association. If there are potential negative environmental impacts identified during the screening, then Step 2 and 3 below will be undertaken. If no potential negative environmental impacts are determined through the screening process, than Step 2 will be skipped, and the procedure moves on to Step 4. ) Review of Environmental Impacts and Mitigation Plans. If the screening process of the EMCs determines that there 'are potential negative environmental impacts from a proposed subproject, then the following procedures will be followed: * The EMC will require that the host enterprise complete an environmental impacts appraisal report, assessing potential negative impacts, and proposing appropriate mitigations measures if need. According to Chinese regulations, the host enterprise is responsible for completion and processing of the environmental review and submission for approvals. The host enterprise is expected to engage a qualified firm to complete this work in most cases. This review and report process must follow the regular environmental protection regulation requirements of the Government of China. Subprojects are classified according to standing regulations, and reviewed and assessed accordingly. (Of the three major project environmental impact categories, however, no subprojects are expected under the "severe potential environmental impacts" category.) 10  * Following consultation with the EMC, if required, the host enterprise will submit the environmental appraisal report to the local Environmental Protection Bureau (EPB) with appropriate jurisdiction for the case, and request the EPB's review and approval. * The local EPB will examine the submitted report upon receipt, and complete its review within the normal stipulated time limits (e.g., 60 days in cases with severe potential negative impacts, 30 days in cases with average potential negative impacts, and 15 days in cases with minor potential negative impacts.) ( Approval of Environmental Reviews and Mitigation Plans. In cases where potential negative environmental impacts were determined through the initial screening, and an environmental appraisal report was submitted to the local EPB (e.g. Step 2 was followed), the EPB will determine if the proposed subproject (including any environmental impact mitigation measures, as appropriate) meets all related regulations and standards. Based on its assessment, and following any subsequent revisions in the subproject proposal in consultation with the host enterprise, the EPB will then issue approval documentation for the subproject to the host enterprise, or reject the project (which it will be excluded from consideration for support under the Guarantee Program). As per Chinese regulations, the host enterprise then assumes legal responsibilities for ensuring that any conditions and requirements associated with the EPB approval are met, and that operation of equipment, etc. follows stipulated requirements and that any stipulated emissions requirements are met.