China - Yixing Pumped Storage Project

Document of The World Bank Report No: 24896 PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$145 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR YIXING PUMPED STORAGE PROJECT February 21, 2003 ,Energy and Mining Sector Development Unit East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective) Currency Unit = Yuan (Y) Y1 = US$0.12 US$1 = Y8.28 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ASL Above sea level JPSPC Jiangsu Pumped Storage Power Company AAA Analytical and Advisory Activities Limited AAOV Annual Agricultural Output Value kW Kilowatt CAS Country Assistance Strategy kWh Kilowatt-hour CETIC China Electric Power Technology Import and LOLP Loss of load probability Export Corporation M Million CIF Cost, insurance, and freight MMS Mandated market share CNAO China National Audit Office MOF Ministry of Finance CNOOC China National Offshore Oil Company MOPI Ministry of Planning and Industry CNPC China National Petroleum Corporation NCB National Competitive Bidding CQ Consultants' qualifications PAP Project-affected person CRESP China Renewable Energy Scale-Up Program PIP Project Implementation Plan DC Direct contracting POE Panel of experts DO Developmnent objective PSR Project Status Reports DSCR Debt service coverage ratio QBS Quality-based selection E&M Electrical and mechanical QCBS Quality- and cost-based selection ECIDI East China Investigation and Design Institute RAP Resettlement action plan EDR Equalizing discount rate RLG Resettlement leading group EIA Enviromnental inpact assessment SBDs Standard Bidding Documents (World Bank) EMP Environnmental management plan SDB State Development Bank ESCO Energy service company SCORES State Council Office for Restructuring FIRR Financial internal rate of return Economic System FM Financial management SDPC State Development and Planning Commission FMR Financial mnanagement report SEPA State Environmental Protection Administration FYP Five-year plan SETC State Economic and Trade Commission GESP An optimization model SIDRI Shanghai Investigation, Design and Research GHG Greenhouse gas Institute GWh Gigawatt-hour SINOPEC China Oil and Petrochemical Company ICB International competitive bidding SOE Statement of expenditures IERR Internal economic rate of return SP State Power Corporation IPO Initial public offering SPERC State Power Economic Research Center IP Implementation progress SS Single-source selection IT Information technology TA Technical assistance JEPB Jiangsu Environmental Protection Bureau YPSP Yixing Pumped Storage Project JPEPC Jiangsu Provincial Electric Power Company VAT Value aded tax JPPB Jiangsu Provincial Pricing Bureau Vice President: Jemal-ud-din Kassum  CHINA YIXING PUMPED STORAGE PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 2 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 7 4. Institutional and implementation arrangements 8 D. Project Rationale 1. Project alternatives considered and reasons for rejection 9 2. Major related projects financed by the Bank and/or other development agencies 10 3. Lessons learned and reflected in the project design 11 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project: 13 E. Summary Project Analysis 1. Economic 14 2. Financial 14 3. Technical 17 4. Institutional 17 5. Environmental 19 6. Social 22 7. Safeguard Policies 23  F. Sustainability and Risks 1. Sustainability 24 2. Critical risks 24 3. Possible controversial aspects 26 G. Main Loan Conditions 1. Effectiveness Condition 26 2. Other 26 H. Readiness for Implementation 28 I. Compliance with Bank Policies 28 Annexes Annex 1: Project Design Summary 29 Annex 2: Detailed Project Description 32 Annex 3: Estimated Project Costs 39 Annex 4: Cost-Effectiveness Analysis Summary 40 Annex 5: Financial Summary 48 Annex 6: (A) Procurement Arrangements 59 (B) Financial Management and Disbursement Arrangements 67 Annex 7: Project Processing Schedule 72 Annex 8: Documents in the Project File 73 Annex 9: Statement of Loans and Credits 74 Annex 10: Country at a Glance 78 Annex 11: Environmental Summary 80 Annex 12: Financial Assessment Arrangement 88 Annex 13: Land Acquisition and Resettlement 94 Annex 14: Energy Sector Issues and Bank Strategy 102 MAP(S) IBRD No. 32270  CHINA Yixing Pumped Storage Project East Asia and Pacific Region EASEG Date: February 21, 2003 Team Leader: Jianping Zhao Sector Director: M. Farhandi Sector(s): Power (80%), General public admninistration Country Manager/Director: Yukon Huang sector (20%) Project lID: P068058 Theme(s): Infrastructure services for private sector Lending linstrument: Specific Investment Loan (SIL) development (P), Regulation and competition policy (P) Project Flannc!tg 2a ..a [X] Loan [] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Amount (US$m): 145 Borrower Rationale for Choice of Loan Terms Available on File: - Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee (FEF) on Bank loan: 1.00% Payment for FEF: Capitalize from Loan Proceeds Flnanclng gDn (o$ur: tnuce LocaI .ForeEg d Towt BORROWER 0.00 0.00 0.00 IBRD 0.00 145.00 145.00 LOCAL SOURCES OF BORROWING COUNTRY 285.28 29.04 314.32 SUB-BORROWER(S) 123.42 0.00 123.42 Total: 408.70 174.04 582.74 Borrower: CHINA Responsible agency: JIANGSU PUMPED STORAGE POWER COMPANY LIMITED Address: Yicheng Town, Yixing City, Jiangsu Province, China Contact Person: Mr. Huang Yuezhao, General Manager Tel: (86-510) 798-8098 Ext. 5085 Fax: (86-510) 797-0166 Email: jsyxpspp@pub.wx.jsinfo.net Other Agency(ies): JIANGSU PROVINCIAL ELECTRIC POWER COMPANY Address: 20 West Beijing Road, Nanjing, Jiangsu Province, China Contact Person: Mr. Xu Songda, Deputy General Manager Tel: (86-25) 330-0300 Fax: (86-25) 330-7576 Email: Estimated Disbursements ( Bank FY/US$m): FY - . 2003 2004 . 2C05.. 2006 -. 2007. - 2008-. 2009:. Annual 1.95 6.90 9.85 53.50 57.40 10.90 4.50 Cumulative 1.95 8.85 18.70 72.20 129.60 140.50 145.00 Project implementation period: 2002-2009 Expected effectiveness date: 07/01/2003 Expected closing date: 12/31/2009  A. Project Development Objective 1. Project development objective: (see Annex 1) The objective of the proposed project is to increase the overall efficiency of the power sector in Jiangsu Province in two ways: (a) Through the design and implementation of a far-reaching restructuring of the sector to further competition at the generation level and to provide large consumers access to generators (by promoting the transition from a monopoly-monopsony structure to an unbundled competitive structure: wholesale market by end 2005 and eventually retail market by 2012). (b) Through the construction of a pumped storage plant (4 x 250 MW) and associated transmnission 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. 2. Key performance indicators: (see Annex 1) Following are the key performance indicators: (a) Overall operational indicators: Implementation of the reform program according to the agreed schedule, wholesale electricity price decreased in real terms, coal consumption decreased, and reduced loss of load probability (LOLP). (b) Quality indicators: Customers satisfaction to be surveyed during the early stages of the project and after implementation of the reform; the quality of power supply to be improved upon completion of the project. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 25141 Date of latest CAS discussion: December 19, 2002 The CAS (see Annex 1) presented to the Board on December 19, 2002, emphasizes that the Bank will assist China in accomplishing its goals as set out in the report, "Two Historical Transitions-from a Rural Agricultural Society to an Urban, Industrial Society and from a Centrally Planned Economy to a More Globally Integrated Market-Based Economy-on a Sustainable Basis." The Bank's energy sector strategy contributes to this objective by focusing on assistance to the energy sector in making a smooth transition from a fully state-owned monopolistic sector to a diversely owned, market-oriented sector in which are promoted clean fuels, renewable energy, energy efficiency, and assistance to poor western areas to develop their energy resources for local growth and export to other regions. 2. Main sector issues and Government strategy: Main Issues: Reforms in China's power sector during the 1980s and 1990s incurred a series of incremental changes that have resulted in a power sector largely unrecognizable from that in the early 1980s. In early 2002, government functions were largely separated from enterprise management. All energy enterprises were corporatized and operated as commercial businesses. Budget allocations were phased out and subsidies eliminated. Investments are now financed through equity and debt from a variety of public and private sources. Electricity prices were increased to reach, on average, long-term marginal supply costs in most - 2 -  grids. In spite of this tremendous progress, the power sector still faces serious problems that are described in detail in Annex 14. These problems will gradually be addressed if the reforms, adopted by Chinese authorities at the highest level and issued by the State Council in April 2002, (Document No. 5), are adequately implemented. Government Strategy: From monopolies to competitive markets. The government's strategy seeks to (a) gradually transform the power sector of provincial and 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 reformning 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 customers with the best service at the lowest possible cost. The following tasks are planned for the 10th Five-Year Plan (FYP) (2001-05): (a) The generation assets owned by the State Power Corporation (SP) have been transferred to five newly created independent generation companies, 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 have been established to be responsible for transnission and distribution businesses. (b) Competitive and open regional markets will be developed and operated according to market codes requiring dispatching of generators according to bidding procedures. 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 mechanism will be developed, including environmental protection mechanisms that link the price paid to generators to their entissions to encourage the development of renewable energy and clean generation sources. The electricity price will be unbundled to generation, transmission, distribution, and consumer supply prices. (d) A power regulatory commission has been established under the State Council. The State Electricity Regulatory Commnission will develop power market rules and monitor market operations, ensure fair competition, recommend price adjustment to the government, supervise the service quality of power enterprises, issue and supervise licenses, and resolve 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 the following: (a) Optimization of the generation mix at the provincial and regional levels: Most of the power systems in China rely more than necessary on coal-fired 'and-base load power plants. The inadequate generation mix, especially the lack of peaking capacity, restricts the flexibility of. dispatch, which results in inefficient use of resources and reduced reliability. Without optimized generation mixes, competitive markets will 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 60-80 percent in final consumer prices). -3 -  (b) Development of transmission: Transmission networks are underdeveloped in most regions of China. Adequate functioning of provincial and regional markets requires adequate transmission systems to avoid congestion and lead to optimal use of installed capacity. (c) Transparent transactions and adequate contractual arrangement: Access of eligible consumers to generators requires open access to the transmission system. Because 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 No. 5: 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 such as China that 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 focused 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 govemment 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 Analytical and Advisory Activities (AAA) initiated during the last three years aim at bringing the Bank assistance fully in line with the new business strategy framework with special focus on poverty (Hubei Small Hydropower Development in Poor Areas Project-FY 02). These activities also aim to bring support to reform and the transition from monopolies to competitive markets (the proposed project to assist in adequate implementation of the government -4 -  reform program at the provincial or regional level and FY03 AAA to further reforms, especially pricing, at the national level and improved access to clean energy in western poor provinces). These activities also promote protection of the local and global environment (FY03 Technical Assistance (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 Commission-FY02/03, PPIAF study on separation of generation). Bank strategy and activities are described in more detail in Annex 14. 3. Sector issues to be addressed by the project and strategic choices: This project is in line with the strategy developed in the CAS which stresses that the success requires a client-driven strategy (provided it is in line with Bank mission and goals) and a program based on a steady stream of sound investment projects. The project would create a proper environment for the transition of Jiangsu's power sector to a wholesale competitive market without disruption through the following activities: (a) Increasing peak capacity (construction of a pumped storage power plant) to improve the load following capability of the system and quality of electricity supply. The improved generation mix would reduce current system inefficiencies at the generation level primarily because of uneconomic dispatch. (b) Fully separating generation from transmission and distribution and creating the conditions for open access to transmission services. This would address issues related to abuses of monopoly-monopsony power and create the environment for well-functioning competitive markets. Moreover, the ring fencing of transmission and distribution businesses (separation of organizational and managerial activities and accounts) would impose more discipline on the distribution segment and pave the way for much needed distribution restructuring. (c) Developing new guiding principles for power pricing to comply with the directives of the State Council Document No. 5. These would provide incentives to generators to produce at minimum cost, to network service providers to operate efficiently, and to customers to behave rationally. They would also ensure adequate revenues in each segment of the power supply chain after unbundling. Gradual implementation of new pricing mechanisms in Jiangsu Province would include, but not be limited to, (i) an efficient pricing scheme for peaking capacity and ancillary services, (ii) a transmission tariff, and (iii) final consumer tariffs. This would address issues related to current imbalances between the revenues of different segments of the industry and the inefficient use of resources. (d) Strengthening the institutional capacity of a major utility and preparing it to operate in a competitive environment through (i) the development and implementation of enterprise resource planning, (ii) development of risk analysis and management techniques under market environment, (iii) upgrade of system planning capacity in a competitive environment, and (iv) upgrade of management and staff skills. -5-  C. Project Description Sunmemary A. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): . , - ; . U~~~~~~ndicbt,v . 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