China - Efficient Industrial Boilers Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 30942 IMPLEMENTATION COMPLETION REPORT (TF-28484) ON A GEF GRANT IN THE AMOUNT OF SDRs 22.8 MILLION (US$32.8 MILLION EQUIVALENT) TO THE PEOPLE'S REPUBLIC OF CHINA FOR AN EFFICIENT INDUSTRIAL BOILERS PROJECT December 10, 2004 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 2004) Currency Unit = Yuan Yuan 1.00 = US$ 0.12 US$ 1.00 = Yuan 8.28 FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CFBC Circulating Fluidized Bed Combustion CO Carbon Dioxide 2 ESCO Energy Service Company GEF Global Environmental Facility GHG Green House Gas GOC Government of China MMI Ministry of Machinery Industry NDRC National Development and Reform Commission NO Nitrogen Oxides 2 PAD Project Appraisal Document PMO Project Management Office SETC State Economic and Trade Commission SMIA State Machinery Industry Administration SO Sulfur Dioxide 2 TCE Ton of Coal Equivalent TPH Ton-steam per Hour TSP Total Suspended Particulates Vice President: Jemal-ud-din Kassum Country Director David R. Dollar Sector Manager Junhui Wu Task Team Leader/Task Manager: Robert P. Taylor  CHINA EFFICIENT INDUSTRIAL BOILERS PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 8 6. Sustainability 10 7. Bank and Borrower Performance 11 8. Lessons Learned 12 9. Partner Comments 13 10. Additional Information 14 Annex 1. Key Performance Indicators/Log Frame Matrix 15 Annex 2. Project Costs and Financing 16 Annex 3. Economic Costs and Benefits 18 Annex 4. Bank Inputs 20 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 22 Annex 6. Ratings of Bank and Borrower Performance 23 Annex 7. List of Supporting Documents 24 Annex 8. Letter from Government on ICR 25  Project ID: P035693 Project Name: EFFICIENT INDUSTRIAL BOILERS PROJ Team Leader: Robert P. Taylor TL Unit: EASEG ICR Type: Core ICR Report Date: December 22, 2004 1. Project Data Name: EFFICIENT INDUSTRIAL BOILERS PROJ L/C/TF Number: TF-28484 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: District heating and energy efficiency services (96%); Central government administration (4%) Theme: Climate change (P); Environmental policies and institutions (P); Pollution management and environmental health (P) KEY DATES Original Revised/Actual PCD: 09/15/1994 Effective: 02/14/1997 02/14/1997 Appraisal: 06/30/1996 MTR: Approval: 12/23/1996 Closing: 06/30/2001 06/30/2004 Borrower/Implementing Agency: GOC/MINISTRY OF MACHINERY Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Nicholas C. Hope (Acting) Country Director: David R. Dollar Nicholas C. Hope Sector Manager: Junhui Wu Jane Loos Team Leader at ICR: Robert P. Taylor Neil Hughes ICR Primary Author: Robert P. Taylor; Feng Liu 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The principal objective of the project was to reduce greenhouse gas (GHG) emissions, as well as emissions of total suspended particulates (TSP), sulfur dioxide (SO ) and nitrogen oxides (NO ), through: (a) the 2 x development of affordable, energy-efficient and cleaner industrial boiler designs; (b) the mass production and marketing of the improved boiler models that have successfully met performance criteria; and (c) the broad dissemination of more energy-efficient and cleaner industrial boiler technologies throughout China through institutional strengthening, improved information exchange, and energy efficiency and environmental policy reform. The objective of the project was important for China and was responsive to the circumstances and development priorities of the Chinese industrial boiler sector. It was consistent with the operational policies of the Global Environmental Facility (GEF), and was closely identified with Operational Program 5 (Removing Barriers to Energy Efficiency and Energy Conservation) under the climate change focal area of GEF. It also clearly reflected the Bank's Country Assistance Strategy (CAS) for China in facilitating an environmentally sustainable development process, especially in the promotion of cleaner energy technologies, urban pollution abatement, and global environmental benefits. Coal-fired industrial boilers have been critical to China's economic growth. But they were highly inefficient and highly polluting due to a lack of technical innovation in the industry and low environmental standards. Emissions from coal-fired industrial boilers were the primary cause of severe ambient air pollution prevalent in Chinese cities and contributed to serious acid rain problems in much of south and central China, posing serious threats to public health, eroding labor productivity, and damaging agricultural production and forestry. Coal-fired industrial boilers also accounted for about 30 percent of carbon dioxide emissions in China, making them a major target in China's effort to mitigate GHG emissions. This project attempted to address some of the critical underlying causes of these problems with an assistance program designed to effect a broad impact on the Chinese industrial boiler sector. 3.2 Revised Objective: The original objectives were not changed. 3.3 Original Components: The project included the following components (estimated total project cost and GEF financing at appraisal): (i) Upgrading of existing Chinese boiler models ($53.1 million, GEF contribution of $16.5 million) through the introduction from abroad of advanced combustion systems and auxiliary equipment, especially the application of simple automatic controls; (ii) Adoption of new high efficiency boiler models ($44.1 million, GEF contribution of $13.7 million) through the introduction of modern manufacturing techniques and boiler designs suitable for burning Chinese coals; (iii) Technical assistance and training for boiler producers and consumers ($2.1 million, GEF contribution of $1.3 million); and (iv) Monitoring and evaluation, and project management ($2.1 million, GEF contribution of $1.3 million). In a nutshell, the original components (i) and (ii) involved 9 international boiler technology transfer - 2 -  packages benefiting 9 domestic boiler manufacturers and 9 domestic boiler auxiliary equipment makers, aiming to cover the main boiler types and sizes in the Chinese coal-fired boiler market, from small and medium chain grate boilers to sophisticated circulating fluidized bed combustion (CFBC) boilers. These technology transfer packages were designed to either improve existing boiler models and technologies or fill certain technology gaps in the Chinese industrial boiler sector. The selection of technologies and areas of assistance were made based on extensive market studies and were sensible, given the nature of the sector and market at the time of project appraisal. The original component (iii) included 9 technical assistance (TA) subprojects, each with specific purposes and ranging from improving training of boiler operators to upgrading of design standards. They were designed to remove specific market and institutional barriers which would either slow the market penetration of energy-efficient industrial boilers or impede the realization of their energy-saving potential. They were an integral part of the project design. The original component (iv) addressed the capacity of the implementing agency, including administrative and financial management capacity, and was important for achieving project objectives. The investment components (i) and (ii) were designed for implementation in two phases. GEF-supported technology transfer was to be completed in Phase 1, during which the beneficiaries would acquire the technologies, develop and test prototypes, and make production, financial and sales plans. Commercial production and sales of the new boilers would be supported with Phase 2 investments co-financed by GEF. A beneficiary could proceed with Phase 2 investments only after the Bank's review and approval of the prototype test results and proposed production, financial and sales plans for the new models. This phased approach was designed to ensure that only those beneficiaries who had succeeded in adopting the new technology to meet the project's performance criteria, and who had good technical and financial standing, could receive additional GEF assistance for commercial production. This mid-course evaluation between phases proved to be a successful project design feature, as it resulted in intensive dialogue with each boiler manufacturer on technical results and how best to proceed with commercial production and marketing plans. It also provided for necessary corrective actions: one of the 9 boiler manufacturers was not granted Phase 2 GEF financing because its operation was found financially unsustainable. One auxiliary equipment maker was granted with additional GEF investment financing because its GEF-supported product was gaining market share rapidly. This project was a unique, one-of-a-kind effort for both the Chinese Government and the Bank. The project also was the first large GEF investment operation to support energy efficiency efforts in China. The project design benefited directly from a large national study funded by GEF: China - Issues and Options in Greenhouse Gas Emissions Control (1994), as well as earlier Bank work in coal utilization in China: Efficiency and Environmental Impacts of Coal Use (1991). Substantial research and investigation work was done in the China GHG emission control study to evaluate GHG emission sources and mitigation options. Investment in improving coal-fired industrial boilers was identified as one the most cost-effective options with a large impact. The project components addressed some critical needs of the Chinese industrial boiler sector, from boiler design and manufacture to installation and operation, and were comprehensive in scope. 3.4 Revised Components: The original components were not changed. Two additional TA subprojects were included during implementation. One was the Sub-licensing Promotion Program designed to assist the planning and organization of technology dissemination activities beyond the completion of the project. The second was the National Sales and Marketing Promotion for GEF-supported Industrial Boilers designed to raise the general market awareness of the specific benefits of acquiring GEF-supported boilers. These additional TA activities were consistent with the original project design and addressed additional needs which emerged during project implementation. - 3 -  3.5 Quality at Entry: Quality at entry is rated satisfactory. The project objectives addressed critical energy efficiency and environmental protection needs of China and the development priorities of the Chinese industrial boiler sector. They were consistent with the operational strategies of the GEF and the Bank's CAS. The project design was based on solid and extensive knowledge of the sector. The assumptions and choices made at the time of entry were realistic and to the best knowledge of the project team. With the benefit of hindsight, the Chinese boiler market did not evolve exactly as the project design had projected, and thus there were a few misses for the project in the selection of particular boiler types or sizes. For example, since the late 1990s the small-size end of the coal-fired boiler market has been under intensive environmental pressure and has been shrinking more rapidly than expected. This development was due largely to the outright ban of coal-fired boilers below 10 ton-steam per hour (tph) capacity in many medium and large cities. However, most of the beneficiary domestic boilermakers were able to adapt new designs and technologies to larger boilers. So the technology transfer was still relevant and effective. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The outcome of the project is rated satisfactory. The impact of the project on the Chinese industrial boiler sector has been broad and is considered substantial. The technology transfer supported by the GEF was by far the largest national investment in combustion efficiency improvements in the Chinese industrial boiler sector over the project period. All nine beneficiary boiler manufacturers successfully completed the transfer of international technology planned at project appraisal, and built prototypes (verification models) which met the predetermined and ambitious energy efficiency and environmental performance criteria. Eight went on to commercial production of GEF-supported boiler models and have achieved initial sales success. The GEF-financed technology transfers resulted in practical improvements in coal-fired industrial boiler designs which typically yield increases in fuel efficiency of some 5 percentage points--a large improvement for this industry. The new boilers are generally well catered to Chinese market conditions. A trade mark of most of the GEF-supported boilers is the use of the diaphragm wall, which reduced about 50% of the weight of the furnace housing traditionally made of refractory bricks while increasing the air-tightness of the furnace. This was a major improvement in technology for the boiler industry in China. The Volund corner-tube technology employed by three of the boiler works is already gaining a wide and sound reputation in the Chinese market. Other important aspects of the GEF-financed technology transfer for chain-grate boilers included improved boiler grate design and manufacturing, and use of efficient secondary air-induction systems. In addition to fuel savings and cost savings in boiler house construction, the GEF boilers are more amenable to meeting local environmental protection requirements. Three of the new boilers are specifically geared to reduce sulfur dioxide emissions, including a new CFBC boiler design, a "differential-speed bed" boiler for burning high-sulfur coal developed for the first time in China, and a boiler model with an integrated low sulfur coal briquetting device. In addition to the specific technology transfers, the technical assistance activities of the project broadened the impact through assistance in revision and formulation of national and sector standards for boiler and boiler house designs and environmental controls, and by strengthening professional requirements for boiler operators. This further resulted in indirect energy efficiency improvements, by enhancing quality requirements across the industry, and helping to lay a foundation for improved boiler operation. Under GEF support, one national and four sector standards were formulated and promulgated, and two national and two sector standards were revised. The project also supported a major sector effort to popularize and standardize calculation methods for industrial boiler design. The technical manual and companion computer software and database developed under this project made it possible for scientific and accurate - 4 -  engineering calculations to be implemented at any boiler factory, reversing the situation where only a few major manufacturers had this capacity. The main quantitative outcome/impact indicator in the PAD is the annual sales of GEF-supported boilers, targeted at annual sales of a total boiler capacity of 17,940 tph at project completion, and 3000 tph for each beneficiary project boiler works within two years after project completion (a total of 27,000 tph of annual sales). Based on sales contracts completed by the end of October 2004, sales of GEF-supported boilers from the 8 beneficiary boiler manufacturers which have completed Phase 2 will be about 9,230 tph in 2004. The boiler works expect substantially increased sales in the coming years, but attainment of the 27,000 tph target for 2006 remains uncertain. Although a useful monitoring indicator for assessing results at the project's beneficiary boiler works, the ICR team found the tph annual sales outcome too simplistic as the main measure of the overall outcome of the project. The sales targets set at appraisal also are arbitrary, and probably, with hindsight, overly ambitious. One problem is the establishment of the same 3000 tph indicator for each boiler manufacturer. These indicators appear to have been useful targets during project supervision, to provide a benchmark for individual boiler works to gauge their work. However, with the changes in the market over the years, and especially the increasing demand for larger sized boilers at the expense of the smaller boilers, it is not reasonable to expect all of the participating boiler works to achieve the same sales outcomes. A more major problem with using these sales figures as the main measure of project impact is that they refer only to the nine boiler works. However, the project also supported technology transfer and production of high-efficiency boiler auxiliary components, such as boiler grates and blowers, for use in the nine boiler models, but also more generally in the market. Energy efficiency gains from some of these components also are major. One particularly successful example is the GEF-supported development and production of improved grates for chain-grate boilers at the Yongning Foundry Factory in Wafangdian City. This factory sold 13,000 tph equivalent of GEF-supported boiler grates by the end of August 2004, and is projected to reach about 20,000 tph equivalent annual sales in 2004, meaning that GEF-supported boiler grates will equip around 25% of all new chain grate industrial boiler capacity sold in China in 2004. That is very significant because the improved grates normally contribute to about 3-4 percentage points increases in boiler thermal efficiency. The overall market impact at project completion has met the target set in the PAD. If the impact of the GEF-supported boilers and the energy-efficient boiler grates are considered together, sales of new boilers with substantial GEF energy-efficient components would total about 21,800 tph in 2004, compared with the 19,000 tph target set in PAD. By this broader market impact measure, the ratio of new boiler to total boiler production in 2004 is about 18% (21,800/120,000), compared with PAD estimate of 19% (19,000/100,000) at project completion. Whether the 35% overall market penetration ratio two years after project completion can be achieved remains uncertain, however, primarily because of the high mark set for the direct beneficiary boiler manufacturers. The other outcome/impact indicator in the PAD, reduced CO emissions per boiler through improved coal 2 utilization, to be monitored two years after project completion, is likely to be achieved based on currently reported energy efficiency improvements of the GEF-supported boilers. As the PAD had anticipated, the price risk of the GEF-supported boiler models has been a key factor affecting their market penetration. Primarily due to an increase of steel consumption the GEF-supported boilers cost 10 to 20% more to manufacture, compared to comparable traditional models. But the higher cost of GEF-supported boiler equipment is compensated by significant operation cost savings from improved thermal efficiency, and with a pay back time shorter than three years in most cases. Due to savings in refractory materials and shorter installation time, the installed cost of some GEF-supported - 5 -  boilers are lower than those of comparable traditional boilers. These advantages are being confirmed and gaining wider notice with more GEF-supported boilers being installed. With a bit more time than originally expected the energy-efficient industrial boilers are likely to capture the market share originally anticipated, and the project's emissions reduction impact can be achieved. 4.2 Outputs by components: Upgrading of existing Chinese boiler models. This component is rated satisfactory. As one of the two investment components of the project, it was designed to improve the thermal and environmental performance of popular domestic industrial boiler models, in the 1 to 20 tph (small to medium) size range, which was the dominant market segment at the time of project appraisal. The component involved 6 boiler manufacturers and 4 auxiliary equipment makers. Five of the six boiler manufacturers have successfully adopted GEF-supported designs and manufacturing upgrades with good initial sales results. Shanghai Sifang Boiler Works and Jiangxi Boiler Works have been the most successful so far, with contracted sales of 3,150 and 2,073 tph in 2004, respectively. A particularly successful story of this component was the transfer of improved boiler grate technology from Sinto Co. of Japan to the Yongning Foundry Factory, which has become a major supplier of new, high-efficiency grates to chain-grate boiler manufacturers throughout China. This component also had its failure in Tianshan Boiler Works, which, after completing the model development and testing, could not capitalize on the new technology and filed for bankruptcy in early 2004, due to its inability to compete in a more geographically integrated market place. In addition, all of the main boiler models of this manufacturer were 1 to 10 tph boilers, which had fallen out of market favor. In summary, this component has achieved its sector policy objectives in most respects, and has fully achieved the physical objectives in boiler thermal efficiency and emissions requirements. Despite the failure in Tianshan the overall design of the component is considered appropriate for achieving the project objectives, and all other involved boiler works have been able to adapt GEF-supported technologies to their larger boiler models to meet the changing demand of the market. Adoption of new high efficiency boiler models. This component is rated satisfactory. Designed to meet the emerging demand for relatively large industrial boilers in district heating and manufacturing, this component tried to cover three important market segments of the large-sized industrial boilers, including a large-capacity hot water boiler design for district heating, a co-generation steam boiler design suitable for coal of variable quality as well as for biomass, and a CFBC boiler design that was new in China. All three technology transfers were successfully completed, met predetermined energy-efficiency and environmental performance criteria, and turned into marketable products. However, the sales records for the three beneficiary boiler manufacturers have not been very strong so far. This seems to contradict with the booming sales of large industrial boilers in recent years. A closer look at the market reveals that the large-size end of the industrial boiler (40