China - Renewable Energy Development Project (GEF)

Report No. PID6366 Project Name China-Renewable Energy Development Project (@) Region East Asia and Pacific Sector Energy - Renewable Project ID CNGE38121 Borrower People's Republic of China Responsible Agencies 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 State Power Corporation of China Hydropower and New Energy Development Bureau No. 137 Fuyou St. Beijing 100031 People's Republic of China Tel: 86-10-6341-5095 Fax: 86-10-6602-4928 Date PID Prepared December 10, 1998 Projected Appraisal June 1998 (upgraded from pre-appraisal mission in November 1998) Projected Board Date March 1999 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 would support the development of the two most promising renewable energy technologies, grid-connected windfarms and solar photovoltaics (PV) for rural applications. 2. Objectives The project aims to 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 190 MW of grid- connected windfarms in four provinces; (b) supply of about 10 MW of PV systems to 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 windfarm and 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: Windfarm Component. Windfarm Companies (subsidiaries of the State Power Corporation of China - SP - and provincial/municipal power companies) will install 190 MW of windfarms at five sites. Each windfarm 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 windfarms include: (a) initial large installations at Huitingxile, Inner Mongolia (100 MW on a site with 1000 MW potential) and Zhangbei, Hebei (50 MW on a site with 500 MW potential); (b) an installation at Pingtan, Fujian (20 MW on 120 MW site); and (c) very small windfarms at Chongming and Nanhui, Shanghai (14 and 6 MW). The first three sites are all prime sites with capacity factors of more than 30 percent and easy access to major power grids. The sites in Shanghai are smaller and have lower capacity factors. They are included primarily to promote the technology in locations with high public visibility. The Windfarm Component also includes institutional strengthening. GEF- assisted technical assistance (TA) and capacity building would be provided to staff of SP, the windfarm companies, and others to overcome barriers to - 2 -  windfarm development in areas including: Private sector development of windfarms Collection, analysis, and dissemination of performance data for windfarms Financial management and organizational structure Engineering, construction management, and O&M management Solar Photovoltaic (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, Tibet, 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 would be used to power lights, radios, TVs, and other appliances. The companies would receive a GEF grant of $1.50 per 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 be encouraged 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 visibility locations. While indicative budgets have been established for each of the above activities to provide a framework for the program, the program would be flexible and responsive to market developments. It would 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 activities would be supported: (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. This component would provide financial assistance to industries producing wind or PV equipment, to accelerate technology innovation aimed at reducing costs while providing high quality products and performance. Seventy percent of the grant and loan funds provided would go to projects supporting wind equipment; 30 percent to projects supporting PV equipment. The program would have three elements: -3 -  Grant-Assisted Technology Improvement Projects: Grants would be provided to share up to 50 percent of the costs of investment projects. Beneficiaries would be selected competitively, based on proposals submitted by companies or institutions, in response to invitations that would be issued periodically by the PMO. Proposals would 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 would 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 would 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. Support would 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 (preliminary) Source Million US $ IBRD 100 Global Environment Facility (GEF) 35 State Power/Power Companies 44 Domestic Commercial Banks/Other International Financial Institutions 112 Companies/End-Users 151 GOC (SETC) 2 Total 444 5. Implementation Implementation Period. Five years, from mid-1999 to mid-2004. Project Oversight and Policy Guidance. A project leading group provides overall policy guidance. This group is chaired by a Vice Minister of SETC, and includes representatives of the Resource Conservation and Comprehensive Utilization Department of SETC; the Departments of 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 SP; 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. There is a - 4 -  similar project leading group at provincial level in most provinces participating in the project. Project Coordination. A Project Management Office (PMO), already operating under SETC, is responsible for overall project coordination, assisted by other agencies at the central and provincial level. The PMO is chaired by the Deputy Director of the Resource Conservation and Comprehensive Utilization Department and managed by the Chief of the Renewable Energy Division. The PMO is assisted by a technical support group of domestic and international consultants. For the PV Component, a Project Implementation Unit (PIU) has been created under the Provincial ETCs, in provinces participating in the PV Component, to facilitate the ability of the PMO to coordinate activities at the provincial level. For the Windfarm Component, the Hydropower and New Energy Development Department of SP is responsible for coordinating project implementation 6. Sustainability Long-term sustainability of windfarms and solar PV systems for rural use requires cost reduction and quality improvement, as well as strengthening market mechanisms and business capabilities. For windfarms, costs would be reduced by economies of scale, procuring equipment through international competitive bidding, and promoting domestic production of equipment in technology areas where local manufacturers have a comparative advantage. Assistance would be provided to Windfarm Companies to strengthen their management of construction and operation and maintenance. Sustainability of windfarm development is also promoted by assisting GOC in implementing a strategy for diversifying financing of future wind power projects, and by preparing investment packages to attract private investment on one or more large windpower sites. For solar PV, 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 windfarm component. Most of the renewable energy projects supported by the World Bank and GEF are - 5 -  in the early stages of implementation. However, lessons have been drawn from older Bank projects and from international experience, including: Windfarms. 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 windpower 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 efficiency and the convergence of windpower 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 problems reported in India, where Danish designs were adapted to local wind regimes and site conditions, without adequate product and performance testing. The risks associated with relying on imported equipment were also noted, as sharp cost increases could result in the case of currency devaluation. To address these issues and further cost reduction, the Technology Improvement Component was included to support local production of windfarm and PV equipment. The Technology Improvement Component is based on 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 -6-  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 each windfarm 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 the respective provincial electric power design institutes as part of the windfarm 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 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 windfarms were investigated as part of the Resettlement Action Plans (RAPs) for each site and were determined to be minimal. The five windfarm projects would (i) require permanent acquisition of about 40 hectares and temporary acquisition of about 62 hectares, and (ii) affect 68 persons due to impact from land loss. Minimization of the scope of land acquisition was, and would continue to be, a high priority throughout the planning, design, and implementation of the proposed project. Where land acquisition is unavoidable, the resettlement plans provide for compensation, services, and resources to improve, or at least restore, the living conditions and income of the people affected by the project. 10. Program Objective Category Environmentally Sustainable Development Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending December 11, 1998. See China: Issues and Options in Greenhouse Gas Emissions Control, Summary Report, joint report of the Chinese Government, UNDP, and the World Bank, December 1994, p. 33. Clear Water, Blue Skies: China's Environment in the 21st Century, East Asia and Pacific Region, World Bank, 1997. China: A Strategy for International Assistance for Accelerating Renewable Energy Development, 1997. China: Renewable Energy for Electric Power, 1996; and China: Renewable Energy Development for Thermal Applications, 1997. - 7 -  The PV systems may be used in combination with small wind turbines to create PV/wind hybrid systems, as such hybrid systems are expected to be more cost-effective in some areas. Includes contingencies, duties, IBRD loan service fee and IDC See Financial Incentives for Renewable Energy Development: Proceedings from an International Workshop, August 1998 World Bank Discussion Paper No. 391. See Best Practices for Photovoltaic Household Electrification Programs, World Bank Technical Paper No. 324. - 8 -