Document of The WorldBank FOR OFFICIAL USEONLY ReportNo: 30698-CN PROJECTAPPRAISALDOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$87MILLION AND PROPOSEDGRANT FROMTHE GLOBALENVIRONMENT FACILITY TRUST FUND INTHEAMOUNT OFUS$40.22MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THEFIRSTPHASEOFTHE RENEWABLEENERGY SCALE-UP PROGRAM May 19,2005 Energy andMining SectorUnit Infrastructure Unit East Asia andPacific Region This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCY EQUIVALENTS (exchangerate effective November 1,2004) Currency unit = Renminbi yuan 1yuan = US$0.12 1U.S. dollar = Y 8.28 FISCALYEAR January 1 - December31 ACRONYMS AND ABBREVIATIONS APL Adaptable ProgramLoan MWh Megawatt-hour CAS China Academy of Science NDRC National Development andReform CNCAA China National Certification Commission Accreditation Administration NED JiangsuGuo Xin NewEnergy CRESP China RenewableEnergy Scale-up Development Company Ltd. Program NUPC Northern UnionPower Company dBa Decibel (filter characteristiccurve a) NLYWPC Inner Mongolia NorthLong Yuan Wind Power Company EIA Environmental impact assessment OECD Organization for Economic EIRR Economic internal rate of return Cooperationand Development EMP Environment management plan PDO Project Development Objective FIRR Financial internal rate of return PIP Project ImplementationPlan FYP Five-Year Plan PIU Project ImplementationUnit FMS Financial ManagementSpecialist PPA PowerPurchaseAgreement GDP Gross domestic product PMO Project ManagementOffice GEF GlobalEnvironment Facility PPO ProvincialProject Office (Zhejiang) GHG Greenhouse gas RAP ResettlementAction Plan GIs Geographic informationsystem RE Renewableenergy GoC Governmentof China REDP RenewableEnergy Development GTZ DeutscheGesellschaftfur Technische Project (Loan 4488-CHA) Zusammenarbeit REL RenewableEnergy Law GW Gigawatt (1,000 megawatts) SEPA StateEnvironmental Protection Agency GWh Gigawatt-hour SERC StateElectricity Regulatory ICB InternationalCompetitive Bidding Commission IEC InternationalElectrotechnical SFA StateForestry Administration Commission SIL Specific investment loan IPP Independentpower producer SP StrategicPriority (GEF) LSDP Letter of Sector Development Policy TA Technical Assistance MBD ModelBidding Document TOR Terms of Reference MMP Mandated market policy TSP Total SuspendedParticulates MOA Ministryof Agriculture TW Terawatt (1,000 GW) MOF Ministryof Finance TWh Terawatt-hour MOST Ministry of ScienceandTechnology UNEP UnitedNations Environment proSram MOWR Ministry of Water Resources VSL Variable spread loan Mtce Million tons of coal equivalent ZFB Zhejiang FinanceBureau (1tce=29.3 Gigajoules) ZHPMDC Zhejiang Hydro Power Management M W Megawatt (1,000 kilowatts) DevelopmentCenter Vice President: Jemal-ud-din Kassum Country Managermirector: DavidDollar Sector Manager: Junhui Wu Task Team Leader: Noureddine Berrah FOROFFICIAL USEONLY CHINA RenewableEnergy Scale-up Program(CRESP) CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE' ........................................................................ 1 1 Country and SectorIssues....................................................................................................... . 1 2 Rationale for Bank Involvement ............................................................................................. . 2 3.Higher-Level Objectives to Which the Project Contributes ................................................... 3 B.PROJECTDESCRIPTION........................................................................................................ 3 1.LendingInstrument................................................................................................................. 3 2.Program Objective andPhases................................................................................................ 4 3.Project Development Objective andKey Indicators............................................................... 5 4.Project Components................................................................................................................ 6 5. Lessons Learned and Reflectedinthe Project Design............................................................ 8 6 Alternatives Considered andReasonsfor Rejection............................................................... . 8 C IMPLEMENTATION................................................................................................................ . 9 1.InstitutionalDevelopment andImplementationArrangements.............................................. 9 2.Monitoring andEvaluationof Outcomes andResults.......................................................... 10 3.Sustainability andReplicability ............................................................................................ 10 4. CriticalRisksandPossible Controversial Aspects ............................................................... 11 5. LoanConditions and Covenants........................................................................................... 12 D APPRAISAL SUMMARY...................................................................................................... . 12 1.Economic andFinancialAnalyses........................................................................................ 12 2.Technical............................................................................................................................... 14 3.Fiduciary ............................................................................................................................... 14 4.Social..................................................................................................................................... 15 5. Environment.......................................................................................................................... 15 6.SafeguardPolicies................................................................................................................. 15 7.PolicyExceptions and Readiness.......................................................................................... 16 This document has a restricteddistribution and may be used by recipients only in ~~ the performance of their official duties I t s contents may not be otherwise disclosed . without World Bank authorization . Annex 1: Country and Sector or ProgramBackground................................................................ 17 Annex 1A:Letter of SectorDevelopment Policy. NDRC............................................................ 21 Annex 2: Major RelatedProjects Financedby the Bank andor other Agencies .......................... 24 Annex 3: Results Framework andMonitoring.............................................................................. 27 Additional Annex 3A: Results Framework andMonitoringfor Additional AppraisedProjects .32 Anhex 4: DetailedProject Description ......................................................................................... 34 Additional Annex 4A: Project Descriptions for Additional AppraisedProjects .......................... 40 Annex 5: Project Costs.................................................................................................................. 43 Additional Annex 5A: Project Costs for Additional Appraised Projects ..................................... 44 Annex 6: Implementation Arrangements...................................................................................... 45 Additional Annex 6A: Implementation Arrangements for Additional Appraised Projects ..........48 Annex 7: FinancialManagement andDisbursement Arrangements ............................................ 49 Additional Annex 7A: FinancialManagement andDisbursement Arrangements for Additional Appraised Projects ........................................................................ 54 Annex 8: Procurement Arrangements........................................................................................... 58 Additional Annex 8A: Procurement Arrangements for Additional Appraised Projects...............68 Annex 9: Economic andFinancialAnalysis ................................................................................. 72 Annex 10: SafeguardPolicy Issues............................................................................................. 100 Additional Annex 10A: SafeguardPolicy Issues for Additional Appraised Projects ................105 Annex 11:Project Preparation and Supervision......................................................................... 109 Annex 12: Documents inthe Project File................................................................................... 111 Annex 13: Statement of Loans and Credits ................................................................................ 113 Annex 14: Country at a Glance................................................................................................... 117 Annex 15: Incremental Cost Analysis ........................................................................................ 119 Annex 16: STAP Roster Review ................................................................................................ 139 Annex 17: Map IBRD 33786...................................................................................................... 152 CHINA RenewableEnergy Scale-up Program PROJECTAPPRAISALDOCUMENT East Asia and Pacific Region EASEG Date: May 19,2005 Team Leader: Noureddine Berrah Country Director: DavidR.Dollar Sectors: Renewable energy (100%) Sector Managermirector: Junhui Wu Themes: Infrastructure services for private Project ID:PO67828 sector development (P); environmental policies Lending Instrument: Specific Investment Loan and institutions (P); climate change (P); trade facilitation and market access (S); rural services andinfrastructure (S) Environmental screening category: Partial Assessment Safeguardscreeningcategory: S2 Global Supplemental ID:PO67625 Team Leader: Noureddine Berrah LendingInstrument: Adaptable ProgramLoan Sector: Renewable energy (80%); National FocalArea: C-Climate change government administration (10%); Subnational Supplement Fully Blended? Yes government administration (10%) Themes: Infrastructure services for private sector development (P); environmental policies and institutions (P) [XILoan [ 3 Credit [XI Grant [ ]Guarantee [ ]Other: For LoansKredits/Others: Total Bank financing (US$ million): 87.00 RECONSTRUCTION AND DEVELOPMENT ~ .- - GLOBALENVIRONMENT FACILITY 19.26 20.96 40.22 LOCALFINANCIAL INTERMEDIARIES 20.64 20.64 OTHER LOCAL SOURCES INBORROWING 48.60 0.00 48.60 COUNTRY I I I I1 I I I Total: 118.26 110.56 228.82 The cofinancing sources for global environment (GE) supplemental (other local sources in borrowingcountry): US$48.60 million. This amount is not additional to the amounts shown inthe Financing Plan table above. Borrower: People's Republic of China ResponsibleAgency: National Development and ReformCommission Project implementation period: Start: September2005 End:March31,2010 Expectedeffectiveness date: September 30,2005 Expectedclosingdate: September 30, 2010 ___~ Does the project depart from the CAS incontent or other significant respects? Ref. PAD A.3 [ Yes No Does the project require any exceptions from Bank policies? [ ]Yes [XINO Ref. PAD 0.7 Have these been approvedby Bank management? I s approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risks rated "substantial" or "high"? Ref.PAD C.5 [XIYes [ ] No " Does the project meet the Regional criteria for readiness for implementation? Ref. PAD 0.7 [XIYes [ ] N o _ _ _ ~~~~ ~ Project development objective Ref. PAD B.2, TechnicalAnnex 3 The project development objective is to: 0 Create a legal, regulatory, and institutionalenvironment conducive to large-scale, renewable- basedelectricity generation; and Demonstrate early success in large-scale renewable energy development with participating local developers intwo provinces. Global Environment objective Ref. PAD B.2, TechnicalAnnex 3 The global objective of the program i s to enable commercial renewable electricity suppliers to provide energy to the electricity market efficiently, cost-effectively and on a large scale. Project description Ref. PAD B.3.a, TechnicalAnnex 4 GEF-financed Institutional Development and Capacity Building Component: Prepare and implement renewable energy laws and regulations; cost-shared technology improvement and pipeline building for renewable energy investment. Support for Wind and Biomass in Pilot Provinces Component: Investment in 100MW wind farm and 25 MW biomass power plant. Which safeguardpolicies are triggered, if any? Ref. PAD 0.6, TechnicalAnnex 10 Environmental Assessment (OP/BP 4.01), Involuntary Resettlement (OP/BP 4.12), Safety of Dams (OP/BP 4.37) Significant, nonstandard conditions, if any, for: Re$ PAD C.7 Boardpresentation: None Loadcredit effectiveness: None Covenants applicable to project implementation: Technical and financial reporting, financial performance, and maintenance of a project management office. A. STRATEGICCONTEXTAND RATIONALE 1.CountryandSector Issues China's primary energy consumption more than doubled from 600 million tons of coal equivalent (Mtce) in 1980 to about 1,300 Mtce in 2000, whereas the gross domestic product (GDP) quadrupled during the same period. Although based on slightly different growth assumptions, studies carried out in the late 1990s and early 2000s by the Government of China (GoC) and international agencies concluded that even in the case of increased and sustained energy efficiency efforts, energy consumption will continue to grow rapidly to between 1,850 and 2,150 Mtce in2010 and to between 2,500 and 3,300 Mtce in2020.' They also concluded that even with an aggressivefuel diversification policy, coal will remain the dominant energy source. As did most of the studies, the one by the Chinese Energy ResearchInstitute found that coal's share in primary energy consumption, which accounted for 66 percent in 2000, would decrease only slightly to about 65 percent by 2010, and slightly less than 60 percent in 2020 even if exceptional efforts were made in diversifying primary energy sources and improving overall energy efficiency (the "green scenario"). Under business as usual, coal's share inprimary energy consumption would decrease to about 63 percent in 2020. Evidence from the early 2000s indicates that these and other studies have underestimated primary energy consumption growth. Primary energy consumption has soaredfrom 1,300 Mtce in 2000 to around 1,700 Mtce in2004, or 80 to 95 percent of the low andhigh studies' forecasts for consumption in2010. About 50 percent of the coal consumed in 2004 was used for electricity generation. China's electric generating capacity i s projected to increase from a little less than 400 GW in 2004 to between 950 and 1,100 GW by 2020. During this same period, coal-based electric generation capacity i s expected to grow threefold to about 700 GW. This will require building about 500 to 650 GW of coal-based capacity (in the case of the more likely high growth, about 450 GW to meet the fast-growing demand and about 200 GW to replace existing capacity). Coal-based generation will remain the predominant mode of electricity generation until 2030, and will account for more than 60 percent of total capacity and supply about 70 percent of total electricity generation. The damage caused by SO2 and NO, emissions to agriculture and health i s at the center of the debate on the 1lth Five-Year Plan and the long-term energy plan (China 2020). Estimates of the costs vary, according to existing studies, from 3 to 7 percent currently and could grow to as high as 13 percent of GDP in 2020 ifenvironmental issues are not properly addressed. Emissions of carbon from coal combustion will also increasefrom about 820 million tons in 2000 to more than 1.1billion tons in 2010 and more than 1.8 billion tons in 2020 even with sustained efforts in energy efficiency and fuel diversification. Even then, China's carbon dioxide (CO2)emissions Four studies of particular relevance are (a) "Basic Concepts of the National Energy Strategy" 2004-Unpublished draft by the Development Research Center based on a study by the Chinese Energy ResearchInstitute presentedduring a workshop entitled "China Development Forum: China's National Energy Strategy and Reform," Beijing November 15-17, 2003; (b) World Energy Outlooks 2002 and 2004, InternationalEnergy Agency; and (c) International Energy Outlook 2004-Energy Information Administration, Office of IntegratedAnalysis and Forecasting,US Department of Energy. per capita would amount to only 20 to 30 percent of Organization of Economic Cooperation and Development (OECD) countries in 2010 and 2020, respectively. China's highest-level authorities recognize that a business-as-usualapproach inthe energy sector would lead to unacceptable environmental damages. They recently adopted a multipronged energy strategy aiming at (a) improving the efficiency of the energy sector and bringing energy intensity in line with international best practice; (b) increasing gas penetration and aggressively developing renewable energy use, especially for power generation; (c) further developing clean coal technologies; and (d) securing energy supply to meet the country's growing needs. Chinese authorities recognize the vital need to pursue vigorously each prong of the strategy and to rely more on market-based approaches to achieve the higher-level objectives of sustainable development and a "well-off' society. Renewable Energy Strategy. Scaling-up of renewable energy for electricity generation in particular will require a shift from off-grid and demonstration approaches to increased commercialization of high-potential technologies. China has abundant undeveloped resources of small hydropower, wind, biomass, geothermal, and solar energy. Exploitation of these resources has been constrained by an inadequate legal and regulatory framework, high costs of renewable- based electricity generation, insufficient assessment of the resource, and lack of or inadequate financing. Creation of an adequate legal and regulatory framework, cost reductions, and internalization of fossil fuel externalities and capacity building to improve design, construction, andoperation to improve competitiveness with fossil fuel-based generation are all needed. Economic studies, undertaken as part of project preparation, have demonstrated that much more of China's renewable resources can be developed to produce electricity below the system avoided cost, particularly if institutional barriers are lifted and external costs of damage caused by coal-fired generation are considered. The GoC has therefore developed a strategy for scaling up renewable energy-based capacity for power generation based on (a) development and implementation of a legal and regulatory framework, in step with the overall reform process, which supports and encourages the development of renewable energy resources; (b) access to advanced technology and techniques to improve quality, reduce cost, and permit the economic exploitation of renewable energy resources through the assimilation of best international practice in research, manufacturing, assembly, and installation as well as in operation; and (c) strengthening of the capacity of existing companies to develop, finance, construct, and operate renewable energy on a large scale and further opening of the sector to privateinvestors. The GoC has, with the Global Environment Facility (GEF) and other donor assistance, prepared a Renewable Energy Law (REL)that was approved by the Standing Committee of the National People's Congress on February 28, 2005. Implementing regulations are now under preparation. Further details on the sector background are provided in Annex 1 and the GoC's program for development of the renewable energy subsector i s set out in a letter from a vice Chairman of the NationalDevelopment and ReformCommission (NDRC), which i s reproducedinAnnex 1A. 2. Rationale for BankInvolvement The Bank and GEF provided extensive support during the preparation and discussion of the renewable energy strategy. Studies and consultation activities supported by the Bank and GEF introduced the concept of law- and regulation-based, market-oriented support for renewable 2 energy. Such support would address three critical barriers to renewable-based electricity generation: (a) the financial prices of fossil fuel- (especially coal-) based electricity generation do not reflect the costs of environmental damage; (b) the resulting incremental financial cost of renewable-based electricity cannot be passed on to the end consumer; and (c) renewable electricity generators are often unable to obtain access to the electricity grid on the same terms as other generators. The dialogue between the Bank and China has centered around the most appropriate way to overcome these obstacles. There is now general agreement on the need to work in step with the reform of the electricity sector and implement a policy mandating that either a share of the electricity delivered to end consumers by power companies comes from renewable sources or by imposing an obligation on power companies to buy renewable energy-based electricity at a government-determined price. Concomitant with that obligation are the rights of the power companies to recover the additional cost from consumers and for electricity generators to be able to connect to the grid. The term mandated market policy (MMP)i s usedinthis document to refer to systems incorporating these three principles. The continued involvement of the Bank and GEF will increase the prospects for the successful introduction of the MMP and the accompanying technology transfer and knowledge upgrade neededfor the successful and sustainedscaling-up of renewable energy use inChina. The Bank's sustained engagement, within the programmatic approach approved by the GEF Council, will facilitate the implementation of the strategy and sustain the scaling-up through (a) support and leverage of investment in renewable energy generation; (b) policy advice and institutional support during the implementation of the REL based on international best practice; and (c) transfer of technology and upgrade of renewable energy technology to improve quality and reducecost. Annex 2 provides information on related projects and the lessons learned from them. 3. Higher-Level Objectives to Which the Project Contributes The most recent full Country Assistance Strategy (CAS), discussed by the Board on December 19, 2002 (Report No. 25141-CHA), focuses on supporting China's sustainable transition from a rural to an urban society and from a centrally planned to a market-based economy. An important theme within the CAS is to facilitate an environmentally sustainable development process, including dealing with global environment and air quality issues, to which increased electricity generation from renewable energy sources will contribute. The program will also contribute to the GoC objectives of economic development in the lagging regions, because much of the renewable energy resource i s in those areas. More significant penetration of renewable energy resources will also contribute to increased security of supply and more predictable prices. B. PROJECT DESCRIPTION 1.LendingInstrument The proposed Bank specific investment loan (SIL) supports the first phase of a three-phase GEF adaptable program. The GEF program i s justified by the long-term and complex nature of the policy issueshampering the scale-up of renewable energy and the need for a flexible approachto adapt to the fast-changing environment and the priorities as they emerge during implementation. The Borrower's choice of SILs to contribute to the scale-up of renewable energy-based power 3 capacity i s justified by uncertainties about the physical investment needs and the sources of funding for them in future years. Other lending instruments, such as a sector adjustment loan on a Bank Adaptable Program Loan (APL) synchronized with the GEF program were considered, but rejected as unsuitable for the proposed project, especially because of the project approval framework in China. The Borrower has expressedpreference for a variable spread loan (VSL), which i s perceived as having the characteristics needed for the project. The lending instruments were discussed with the implementing agencies and the Ministry of Finance (MOF), and confirmed during negotiations. 2. Program Objective andPhases The program objective i s to enable commercial renewable electricity suppliers to provide energy to the electricity market efficiently, cost-effectively, and on a large scale. The core of the program i s GEF-financed support for institution and capacity building for the scale-up of renewable energy based electricity generation capacity. The Program Brief outlining this concept was approvedby the GEFCouncil inMay 2001. Phase 1 The first phase will contribute to the program's global objective through development and implementation of the legal and regulatory framework to create and gradually increase the share of renewable energy-based electricity generation, and will support its effective implementation in four pilot provinces. The REL has been enacted and will be effective on January 1, 2006. Associated implementation regulations will be prepared and promulgated during this phase. Effective implementation and enforcement, which have always been problematic and uneven for environmental laws, will be piloted in four provinces, namely Fujian, Inner Mongolia, Jiangsu, and Zhejiang and supported by well-targeted and sustained technical assistance (TA). Technology transfer at the national level will be supported through capacity building and TA, focusing particularly on wind and biomass. Investments in important technologies will be undertaken in the four pilot provinces to demonstrate the viability of large-scale, renewable energy-based electricity generation. Expected duration i s 3-4 years. GEF will provide a US$40.22 million grant to support the institutional development and capacity building component during the first phase, with cost-sharing from participants expected to contribute a further US$48.6 million for a total cost of about US$88.82 million.' Triggers to move from GEFphase 1to 2 will be basedon indicators of institutionalprogress and scale-up of renewable energy development and will include (a) issuingof required regulations to implement the REG (b) publication of resource assessments for at least two pilot provinces and technology improvement subgrants signed with at least five companies; (c) full commitment and disbursement of at least half of the GEF grant for the first phase; and (d) approval by State Council of Bank-financed investments inall four pilot provinces. ' The cost-sharing is based only on the direct costs borne by the participants in the GEF-supported, cost-shared activities (which comprise around 33 percent of the proposed GEFbudget), using a ratio of 1:3, which is based on experiencegainedduring implementation of the Renewable Energy Development Project. Indirect and other contributing programs' costs are more important, but difficult to quantify. 4 Phase 2 Phase 2 will continue to support the program's global objectives through institutional development and capacity building to further decrease cost, and to improve the financing framework and provide assistance for implementation in about 10 provinces. TA will be provided for the implementation of the REL and regulations in an increased number of provinces, as required. Continued support for technology transfer, quality improvement, and cost reduction will be provided for wind and other selectedtechnologies, buildingon Phase 1results and market needs. Expected duration i s three to four years. Total cost for TA is expected to be about US$120 million, of which about US$50 million GEF grant. Phase 2 to phase 3 triggers will be determined during appraisal of phase 2, but are likely to include measures of progress in the implementation of the law and achievement of the program performance indicators, measures of investment (Bank- and non-Bank-financed) in renewable . energy inthe phase 1and 2 provinces, and measures of progressincost reduction. Phase 3 The thirdphase will contribute to the full achievement of the program's global objective through support to the remaining less developed provinces in their implementation of the REL and regulations. TA would continue to be provided for institutional strengthening and capacity building to meet international and best practice standards in constructing and operating renewable energy-based electricity production facilities in the country. Continued support for localization, quality improvement, and cost reduction will be provided to bring selected technologies to competitiveness with fossil fuel-based electricity generation. Further lending to support investment (additional loans and repeater projects mainly to reduce processing time and, exceptionally, S L s ) will be discussed, on a need basis, with GoC. Expected duration i s three to four years. Total cost for TA i s expected to be about US$150-200 million (of which about US$50 million GEF grant). Bank Investment Support Bank investment support in the first phase is aimed at supporting scale-up in the pilot provinces. Further lendingto support investment will be discussed, on a need basis, with GoC to bridge the gap for financing needs to sustain scale-up in phase 2. Bank investment support in each phase will be on an "as required" basis. Its impact in terms of investment and scale-up of renewable energy will be assessed for their contribution toward achievement of the objectives of the program according to GEFprogramtriggers to move from one phase to the next. 3. Project Development Objective and Key Indicators The proposedphase 1project development objective is: 0 Create a legal, regulatory, and institutional environment conducive to large-scale, renewable- basedelectricity generation. 0 Demonstrate early success in large-scale, renewable energy development with participating local developersintwo provinces. 5 Measures of progress made during project implementation and the first phase of the program global objective include (a) issuing of implementing regulations for RELat the national level and initiation of their effective implementation in pilot provinces; (b) improvements to quality and reduction in cost of renewable energy equipment and services, including increases in local content; and (c) proportion of new electricity generation coming from renewable sources in the pilot provinces. Project performance indicators are set out inAnnex 3. 4. Project Components The project comprises two components: institutional development and capacity building and supportfor wind andbiomass inpilot provinces. Institutional Development and CapacityBuilding: GEF grant US$40.22 million, cost-sharing US$48.60million The InstitutionalDevelopment and Capacity Buildingcomponent was designed to meet national priorities and the needs of the pilot provinces to initiate the scale-up of renewable energy, and will include the following: IvMPresearch and implementation support. Studies on further development of the MMP and its implementation, particularly on targets, tariff levels, policy development, sharing of incremental cost, trading and carbon trading, and long-term planning and preparation of implementing regulations. The main counterparts for these activities will be government bodies, and the mainoutcome will be legislation and regulations leading to sustained scaling- upof renewable energy. Technology improvement for wind and biomass. This will cover technology development based on important local investments leveraged by small grants, cost-shared grants or both, for wind and biomass. In addition for wind, it will cover preparation of standards, development of certification and establishment of a testing center. Beneficiaries will be Chinese wind and biomass equipment and related service suppliers, government bodies dealing with standards, and testing and accreditation agencies. Long-term capacity building. Support will be provided to selected universities to enter into twinning arrangements with leading international universities to develop postgraduate-level or specialist renewable energy engineering and other related courses and to offer fellowship programs to support senior specialists studying abroad. At the provincial level, TA will be provided for effective implementation of the REL and initiation of sustainedscale-up or renewable energy: e Implementation of the MMP by focusing on the tasks to make the RELeffective in the pilot provinces, aimed principally at provincial government bodies and other stakeholders. 0 Support to ensure the success of the investment projects by providing assistance in design, procurement, construction, and operations and maintenance, as needed by each project sponsor. 6 Pilot or demonstration projects to be carried out in the pilot provinces supporting technologies other than wind, biomass, and small hydro with potential for replication in the pilot provinces component. In addition, a pilot offshore wind farm will be prepared for implementation inphase 2. Renewable resource assessments for eachof the pilot provinces. Capacity buildingfor market participants. Support for investment scale-up with the sponsors of the investment subprojects financed under the Support for Wind and Biomass in Pilot Provinces Component. The purpose i s to builda strong pipeline of bankablerenewable energy projects with strong sponsors. The Institutional Development and Capacity Building Component will include program management and will cover the sustaining costs of the Project Management Office (PMO), GoC, and donor coordination activities, monitoring and evaluation, and administration, including fiduciary duties. Supportfor Wind and Biomass in Pilot Provinces: total cost US$140million, Bankfinancing US$87million Two subcomponents, one for Fujian Province and one for Rudong Province, are submitted for Board approval. InFujian, a 100 MW wind farm at Changjiang'ao, Pingtan Island. The Pingtan wind farm will consist of wind turbines, associatedcivil and electrical works, an extension to an existing control room, a switchyard, and a 15 km, 110 kV transmission line from the wind farm to the Beicuo substation, which will be upgraded to meet the evacuation needs of the wind farm. Total cost of the subcomponent i s expected to be US$103.92 million, of which US$67 million i s to be financed by the Bank. InJiangsu, a 25 MW straw-fired biomass power plant at Mabei Village, Rudong County. The Rudongpower plant will consist of one 110ton per hour, high-temperature, high-pressure straw- fired boiler, one 25 MW steam turbine, and associated mechanical, electrical, and civil works. Total cost of the power plant i s expected to be US$36.08 million, of which US$20 million i s to be financed by the Bank. GoC has committed to the first phase of the China Renewable Energy Scale-up Program (CRESP) consisting of four pilot provinces and four investment subcomponents.The investment subcomponents, which have been appraised but which have not yet secured all the required domestic approvals, are a 100 MW wind farm at Huitengxile, Inner Mongolia, and a bundle of rehabilitation and new build small hydro projects in Zhejiang totaling 83 MW in additional capacity. The Huitengxile wind farm and the small hydro projects will be submitted for the Board's consideration as soon as they secure their domestic approvals. More detailed project descriptions for the Pingtan wind farm and the Rudong biomass power plant are inAnnex 4 and for the Huitengxile wind farm and the Zhejiang small hydro projects are inAdditionalAnnex 4A. Project Costsfor the Pingtan wind farmandthe Rudongbiomass power 7 plant are set out in Annex 5, and for the Huitengxile wind farm and Zhejiang small hydro projects inAdditional Annex 5A. 5. LessonsLearnedand Reflected inthe Project Design The evidence accumulated over some 20 years suggests that a complementary set of coordinated and focused policies i s necessary to correct market failures that prevent the adequate reflection of the costs of environmental damage in electricity prices and to develop and sustain markets for renewable energy. Supply-side policies to achieve cost reduction and quality improvement are necessary to increase the competitiveness of renewable energy technologies, but are not on their own sufficient to overcome barriers duringthe transition period. Sustainability requires (a) development of a competitive environment in the renewable energy subsector to reduce technology and project development costs; (b) flexibility to allow quick adaptation to changing market conditions, such as restructuring and deregulation of power sectors; and (c) minimal reliance on administrative procedures, and increased focus on market- basedapproaches as soon as barriers are removed. The following lessons were learnedfrom renewable energy assistanceinChina: Consensus among all concerned agencies i s vital to project success. The renewable energy resource for individual projects must be carefully assessed and checked. Attention must be paid to arrangements for procurement and construction that are in line with international bestpractice to ensure rapid and effective implementation. Agreement on important principles that are essential to the project functioning as envisaged (for example, power offtake and purchase agreements) should be established before project appraisal TA must be coordinated with the construction of the physical parts of the project to ensure that the implementing agencies have adequate and timely knowledge of construction, operation, and maintenance. Technology transfer efforts are needed to secure improvements to the supply side, includingreductions in cost and improvements inquality. Incorporation of these lessons learned in the proposed program or project required full engagement of all concerned Chinese agencies. Developing consensus on the MMF and project strategy through intensive dialogue within China took longer than expected, but despite that has taken less time than inmany other countries. 6. Alternatives Considered and Reasonsfor Rejection Various options for assisting scale-up of renewable energy in China were considered. Further investment activities following on from the successful pilot scale investment in wind under Renewable Energy Development Project (REDP; Loan 4488-CHA) were considered, but these alone would not have overcome the barriers to broadening participation nor the bias against renewable energy-based electricity generation. A GEF-supported, comprehensive, stand-alone 8 TA activity designed to introduce the necessary laws and regulations was also considered, but rejected on the basis that experience in China on implementation has been mixed and that support for effective implementation, enforcement, and investment would be needed. A program consisting mainly of TA, with limited investment support was originally contemplated and pursued, but after commitment by the GoC to embark on a large-scale development of renewable energy, it became evident that the need for investments would require strong support from both public and private sectors, and the catalytic effect of Bank financing was considered essential, especially inthe first phase, to the success of the project. C. IMPLEMENTATION 1.InstitutionalDevelopmentandImplementationArrangements Institutional Development and Capacity Building Component The Institutional and Capacity Building component will be a single national program implemented through a national PMO under the Energy Bureau of NDRC. The CRESP PMO was first formed in May 2002 to undertake project preparation and will increase its capacity by adding and training new staff when the project enters into its implementation phase. The PMO has the authority to enter into contracts on behalf of NDRC and, during preparation, demonstratedits ability to meet Bank fiduciary requirements. Supportfor Wind and Biomass in Pilot Provinces Component The developers of the Pingtan wind farm in Fujian will establish a special-purpose company in which the China Long Yuan Electric Power Group Corporation (Long Yuan), a subsidiary of Guodian Corporation, one of the five state-owned generation companies, will be the majority shareholder. Long Yuan will also be responsible for operation of the plant. It i s a credible developer and a shareholder in the wind farm financed in Shanghai under the REDP. It has the capacity to manage the technical, commercial, and fiduciary aspects of the project. Funds will be onlent directly from,theMOF to Long Yuan with a guarantee providedby Guodian Corporation. The Rudong power plant is sponsored by Jiangsu Guo Xin Investment Group Ltd (Guo Xin), which i s owned by Jiangsu Province. It has established a special purpose project company that will own and operate the power plant, Jiangsu Guo Xin New Energy Development Company Ltd. (NED).Guo Xin is a minority owner of the Yixing PumpedStorage power plant, financed by the Bank (Loan 4686-CHA), and has the capacity to manage the technical and commercial aspects of the project and has knowledge of financial management procedures. TA will be provided to address the fiduciary weaknesses identified during the financial management assessment. Funds will be onlent from the MOF to Jiangsu Province, on to Guo Xin, and thence to NED. Institutional and implementation arrangements for the Pingtan wind farm and the Rudong biomass power plant are further described inAnnex 6 and for the Huitengxile wind farm and the Zhejiang small hydro projects in Additional Annex 6A. Financial management and disbursement arrangements for the Pingtan wind farm and the Rudong biomass power plant are detailed in Annex 7, and for the Huitengxile wind farm and the Zhejiang small hydro projects in Additional Annex 7A. Procurement arrangements for the Pingtanwind farm and the Rudong biomass power 9 plant are set out in Annex 8, and for the Huitengxile wind farm and the Zhejiang small hydro projects in Additional Annex 8A. They have all been confirmed at appraisal with respective counterparts. 2. MonitoringandEvaluationof OutcomesandResults Development of capacity to enable the GoC to monitor and evaluate the impact of the RELi s an integral part of the Institutional Development and Capacity Building Component and will be undertaken by the PMO. A full-time member of the PMO will be assignedto collect information and develop databases, if they are required, to monitor the performance and progress of implementation of both components. A monitoring and evaluation plan will be prepared during the first year of implementation, and training and support will be provided to the PMO, as required. Data sources include the China statistical yearbook (national and provincial), market data, project progress reports and third-party assessments through technical and social surveys. Monitoring data on implementing the REL will be provided to relevant agencies through the PMO and NDRC management and information systems developed during project implementation. The monitoring framework for the Pingtan wind farm and the Rudong biomass power plant are described in Annex 3, and for the Huitengxile wind farm and the Zhejiang small hydro projects inAdditional Annex 3A. 3. SustainabilityandReplicability The GoC's renewed commitment to the support and development of renewable energy i s documented inthe Letter of Sector Development Policy (LSDP), which i s attachedin Additional Annex 1A. The passage of the REL introducing an MMP is a major step toward sustainable scale-up of renewable energy. Success now hinges on adequate regulations and design of an effective regulatory system with GEF support to ensure adequate implementation. Sustainability i s likely because (a) the rapid progress in developing and passing the law indicates the desire of the government to meet the sector development objectives; and (b) the programmatic approach provides a means of steadily broadening and deepening the engagement of all concerned parties, leading to the point where the environment for renewable energy has been embedded into the legal and institutional framework of the country in step with the long-term plan outlined by the GoC inits LSDP. Sustainability of the investment projects has been aided by reflecting in their institutional arrangements the principles set out in the law, namely creating a long-term requirement for renewable electricity at the provincial level, backed by Power Purchase Agreements (PPAs) and ensuring cost recovery. The project supports this goal through various activities envisaged under the InstitutionalDevelopment andCapacity Buildingcomponent. 10 4. CriticalRisks andPossible Controversial Aspects The progradproject risk was rated as high at the concept stage. In hindsight, difficulties encountered during the first two to three years of preparation and even after the approval of the GEF grant by the GEF Council justified the rating. However, continued engagement of concerned agencies through studies and consultation seminars led to a strong support of all concerned agencies to the approach and concept of the progrdproject. The risk has been loweredto substantial at this stage. Table 1:RiskMitigationMeasures Riskto Project Development RiskMitigationMeasure Risk Objective Rating Weak or failing government Continueddialogue. Support for implementation M commitment to of the RELto ensurethat the design minimizes Market-based approach and disincentives to comply. Strong support for competition effective regulation. Programmatic approach for Legal basis for mandatedmarket. GEFsupport allows exit. Implementation of REL. Enforcement of mandatedmarket. Environmental externalities not The RELandrelatedregulations mandate a price S incorporated into electricity pricing. for electricity to be providedby renewable energy. StateCouncilregulations mandate development of new pricing mechanisms that incorporate environmental externalities. Insufficient number of developers and Incentives for developers, including GEFcost- S potential investors attracted and able to shared prefeasibility studies and capacity develop projects. building.Awareness campaigns. Banks are not willing to lend to Awareness and capacity buildingfor banks. M renewable energy projects on long Cofinancing with localbanks ininvestment tenor andreasonableterms. projects . Equipment standards are not enforced. TIprogram to develop standards and S certification. Ensure that buyers are aware of the importance of standards. Renewable electricity supply costs are Only abundantresources andclose-to- M higher than expected. commercial technologies are includedinthe MMP.Targeted cost reduction activities. Cost monitoringand benchmarking, adjustment of policy to meet cost needs.Exit strategy. Regionalism causedby fiscal situation Wider government program for development of S distorts renewable electricity markets. western provinces and fiscal reformunder consideration include measures to addressthis 11 issue. Progressmade on the need for trading to optimize use of resources. Risk to ComponentResults Poor quality or highcost of equipment TA program strongly supports quality S and services and of projects in improvement. Awareness-raising activities to operation. support quality improvement efforts. Standards and certification as indicated above. Weak cooperation from agencies Pilot provinces selectedon voluntary basis. N concerned with the government and Incentives for participation, including substantial power sector inpilot provinces. TA to assistinimplementinglaw. Pilot projects do not operate at close to Pilot projects sponsoredby commercial, M international performance and price. reputable companies and prepared to international best practice, adaptedto Chinese conditions. ICB for equipment supply. OverallRiskRating S Riskratings: H(high), S (substantial), M(modest), N(negligible or low risk). No controversial aspects have beenidentified. 5. LoanConditionsand Covenants There are no unusual loan conditions or covenants. Standard effectiveness conditions will apply: execution and delivery of the loan and grant agreement must be duly authorized, and a legal opinion that the agreement i s legally binding must be furnished. Conditions of disbursement for each of the investment subcomponents will include signature of related subsidiary loan agreements, and for Long Yuan, the formation of the special-purpose company. To avoid holding up the implementation of other subcomponents, individual requirements-for example, the signature of subsidiary loan agreements between the provincial finance bureaus and the implementing companies-will be made conditions of disbursement. Implementation conditions will include agreements that sales prices and quantities for electricity and connection arrangements will be provided for each project. Financial reporting and auditing requirements will be followed, and the owners of the Pingtan wind farm andthe Rudongbiomass project will be covenanted to pay in equity and limit dividend payments out of the project companies to a maximum of net income. D.APPRAISAL SUMMARY 1.Economic andFinancialAnalyses EconomicAnalysis At the program level, economic, financial, and fiscal impact analyses of various MMP policy options have been undertaken, using a simulation model. Inthe case of business as usual and no 12 renewable energy scale-up program, the likely renewable energy-based electricity generation would be 36 TWh in 2010 or 1.2 percent of total generation. A program focused on increasing power generation from renewable energy sources, the costs of which are below the avoided financial cost of coal generation, would result in a renewable energy contributionof 79 TWh per year by 2010, excluding external costs and 89 TWh if they are included. Net annual benefits are estimated to be US$1.2 billion in 2010 and the NPV of the program estimated to be US$3.79 billion at a 12percent discount rate. It must be noted that the government has announced a more ambitious target indicating higher assumptions on values of externalities, more optimistic assumptions for cost reduction or, possibly more importantly, a lower discount rate. Additional analyses were also carried out to assess the sensitivity of the results to the different assumptions and in particular to the discount rate. A separate, additional, target of 11TWh of wind (about 4 GW of capacity) was examined because wind does not make a contribution to the 89 TWh per year in 2010 under the assumptions considered in the study (especially the 12 percent discount rate). The analysis suggested that such a program would cost about US$410 million at a 12 percent discount rate and would be economically justified at a discount rate of about 5 percent. Incremental cost analyses have been carried out for the removal of barriers to investments that are assumed to become economically viable with consideration of environmental externalities during the lifetime of the program. With the program, and ignoring the external benefits, an incremental 115 TWh of electricity would be generated from renewable sources. This would result in an incremental reduction of carbon emissions of about 800 million tons during the 20- year lifetime of the installed capacity. For a GEF incremental cost of US$140 million, this implies that the cost perton of carbon i s around US$0.17. Cost-benefit analyses of the Pingtan wind farrn and Rudong biomass power plants have been carried out, and the economic internal rates of return (EIRRs) are, respectively, 13.6 percent and 20.8 percent when externalities are taken into account. Financial Analysis Inaddition to the analysis of benefits to the economy, financial analyseshave been carried out to assess the incremental financial costs of the policies and their impact on the distribution of costs and benefits among different groups in society, including consumers, equity investors, renewable electricity producers, coal electricity producers, banks, and government. The main financial gains to the power sector are from reduced coal and financing costs. The main costs stem from increases in civil construction and taxes. Net discounted financial benefit of achieving the 89 TWhper year by 2010 is US$2.9 billion. Fiscal Impact Fiscal impact to local and provincial government i s small, with a discounted gain of about US$lOO million over the program from taxes being paid by the new power plant to provincial and local governments. 13 InvestmentProjects Financial performance of each individual investment project has also been analyzed. The financial internal rate of return (FIRR) for the Pingtan wind farm i s 6.5 percent and for the Rudong biomass plant 10.6 percent. The sensitivity and risk analyses carried out show that these results are robust andindicate an adequatefinancial viability of the proposedproject. For further discussion of the economic and financial analysis for the Pingtan wind farm and Rudong biomass power plant, see Annex 9, and for the Huitengxile wind farm and Zhejiang small hydro projects, see Additional Annex 9A. Incremental cost analysis i s discussed in more detail inAnnex 15. 2. Technical Each investment subproject has been designed in accordance with international standards and best practice. For the Pingtan wind farm, the design and layout used internationally recognized standards for wind resource assessment and energy calculation. Variable-speed pitch regulated machines meetinginternational standards will be specified for their superior performance and output power quality, which will help improve local system stability. Design specifications require wind turbines to meet local environmental conditions, including salt-laden air. The Institutional Development and Capacity Building component will provide support for the wind farm to ensure that best practices inoperation and maintenance are followed. The biomass power plant i s based on designs and components that have been commercially proven. Combustion technology has been chosen over more advanced, but commercially unproven gasification concepts. Design specifications will set out requirements for dealing with local feedstock. Feedstock availability has been carefully reviewed and risks of interruptions in fuel supply have been offset by arrangements for stockpiling and setting up multiple sources of supply. The InstitutionalDevelopment and Capacity BuildingComponent will provide financing to hire consultant support during construction and to set up fuel supply arrangements. The feasibility study has beenreviewedby the World Bank and international consultants andfound to be adequate. 3. Fiduciary FinancialManagement InFujian and Jiangsu the assessment concluded that the project companies met minimumBank financial management requirements. An action plan has been agreed to ensure that adequate financial management capacity will be in place and developed in the special purpose companies by project disbursement. The financial management capacity of the CRESP PMO, which has been responsible for implementation of the two preparation grants, was reassessed. The assessment concluded that the PMO meets minimum Bank financial management requirements and will have in place an adequate financial management system. 14 Financial management for the Pingtan wind farm and Rudong biomass power plant i s further discussed in Annex 7, and for the Huitengxile wind farm and Zhejiang small hydro projects in Additional Annex 7A. Procurement For the investment subcomponent inFujian, the procurement capacity assessment noted that the parent company has previous experience with Bank procurement. InJiangsu the parent company has extensive experience with power sector projects, but not with Bank procurement. Both companies have received additional procurement and disbursement training. Procurement risk is considered average. The procurement capacity of the CRESPPMO was assessedas adequate. For the potential projects, the Inner Mongolia North Long Yuan Wind Power Company (NLYWPC) has extensive experience with wind power projects, but not with Bank procurement. It was, however, considered to have adequate capacity to carry out procurement activities according to Bank Guidelines. NLYWPC is, in addition, now partly owned by Long Yuan, which is quite familiar with World Bank procurement procedures. The ZHPDMC has extensive experience of small hydro projects and will have a dedicated procurement section. All companies will use procurement agents familiar with Bank procedures. Procurement arrangements for the PMO, the Pingtan wind farm andthe Rudong biomass projects are in Annex 8. Arrangements for the Huiterigxile wind farm and the Zhejiang small hydro projects are discussedin Additional Annex 8A. 4. Social No major social issues have been identified. The wider social impact of the REL will be monitored during project implementation, whereas social impacts at the investment subcomponent level are subject to independent monitoring. 5. Environment The project contributes to environmentally sustainable growth and protecting people's health from environmental pollution. Reduction inlocal pollutants-S02, NOx,andparticulates, as well as COz, will be monitored by reference to the substitution of renewables for coal-based electricity. Monitoring will take account of both direct investment through the project and indirect investment induced as a result of the introductionof the MMP inpilot provinces. 6. SafeguardPolicies Safeguardscreening category i s S2, andthe environmental screening category i s B. 15 Table 2: SafeguardPolicies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [ I NaturalHabitats (OP/BP 4.04) [ I [XI PestManagement (OP 4.09) [ I [XI Cultural Property (OPN 11.03, beingrevised as OP 4.11) [ I [XI Involuntary Resettlement (OP/BP 4.12) [XI [ I Indigenous Peoples (OD 4.20, beingrevised as OP 4.10)* [ I [XI Forests (OP/BP 4.36) [ I [XI Safety of Dams (OPlE3P 4.37) [XI [ I Projects inDisputed Areas (OP/BP/GP 7.60) [ I [XI Projects on International Waterways (OP/BP/GP 7.50) [ I [XI *China uses the term "Ethnic Minorities" to describe those people covered by OD 4.20/0P 4.10. All subcomponents and subprojects will be carried out in compliance with Bank safeguard policies, and according to environment and resettlement plans that have been agreed with the Bank. No major safeguardsissues have beenidentified. For the potential investment project in Huitengxile, environment and resettlement plans have been agreed with the Bank and inZhejiang, environment andresettlement frameworks have been agreedwith the Bank andadoptedby the province. For further discussion on the Pingtan wind farm and Rudong biomass power plant, see Annex 10 and on the Huitengxile wind farm and Zhejiang small hydro projects, see Annex 10A. 7. Policy Exceptions and Readiness No policy exceptions for the project are required. Readiness conditions have beenevaluated as follows: ITable 3: ReadinessConditions Condition IPMO I Fujian I Jiangsu Fiduciary arrangements inplace Financialmanagement Yes *Yes Yes 0 Procurement Yes *Yes Yes PMO/companies mobilized Yes Yes Yes Counterpart funds/ local financing inplace n/a Yes Yes Biddocuments for first year's procurement Under Under Under preparation preparation preparation Final draft PIP available Yes Yes Yes Disclosure requirements met (safeguards) n/a Yes Yes I Landacauisition planready Yes Yes Domestic approvals secured I n/a Yes I Yes 1Yes 16 Annex 1: Country and Sector or ProgramBackground CHINA RenewableEnergy Scale-upProgram Heavy Reliance on Coal China's primary energy consumption more than doubled from 600 million tons of coal equivalent (Mtce) in 1980 to about 1,300 Mtce in 2000, whereas the GDP quadrupled during the same period. Although based on slightly different growth assumptions, several studies carried out in the late 1990s and early 2000s by GoC and international agencies concluded that even in the case of increased and sustained energy efficiency efforts, energy consumption will. continue to grow rapidly to between 1,850 and 2,150 Mtce in 2010 and to between 2,500 and 3,300 Mtce in 2020.3They also concluded that even with an aggressive fuel diversification policy, coal will remain the dominant energy source. As did most of the studies, the one by the Chinese Energy ResearchInstitute, found that coal's share in primary energy consumption, which accounted for 66 percent in 2000, would decrease only slightly, to about 65 percent by 2010, and slightly less than 60 percent in 2020 even if exceptional efforts were made in diversifying primary energy sources and improving overall energy efficiency (the "green scenario"). Under business as usual, coal's share inprimary energy consumption would decrease to about 63 percent in 2020. Evidence from the early 2000s indicates that these and other studies have underestimated primary energy consumption growth. Primary energy consumption has soared from 1,300 Mtce in 2000 to around 1,700 Mtce in 2004, or 80 to 95 percent of the low and highstudies' forecasts for consumption in2010. About 50 percent of the coal consumed in 2004 was used for electricity generation. China's electric generating capacity i s projected to increase from a little less than 400 GW now to between 950 and 1,100 GW by 2020. During this same period, coal-based electric generation capacity is expected to grow threefold to about 700 GW. This will require buildingabout 500 to 650 GW of coal-based capacity (in the case of the more likely high growth, about 450 GW to meet the fast growing demand and about 200 GW to replace existing capacity). Coal-based generation will remain the predominant mode of electricity generation until 2030, accounting for more than 60 percent of total capacity and supplying around 70 percent of total electricity generation. The damage caused by SO2 and NO, emissions to agriculture and health i s at the center of the * debate on the 11" Five-Year Plan and the long-term energy plan (China 2020). Estimates of the costs vary, according to existing studies, from 3 to 7 percent currently and could grow to as high as 13 percent of GDP in 2020, ifenvironmental issues are not properly addressed. Emissions of carbon from coal combustion will also increasefrom about 820 million tons in2000 to more than 1.1 billion tons in 2010 and more than 1.8 billion tons in 2020 even with sustained efforts in ~ The four studies usedare (a) "Basic Concepts of the National Energy Strategy" 2004-unpublished draft by the Development Research Center based on a study by the ChineseEnergy ResearchInstitutepresentedduring the "China DevelopmentForum": China's NationalEnergy Strategy and Reform," BeijingNovember 15-17,2003; (b) WorldEnergy Outlooks 2002 and 2004, InternationalEnergy Agency; and (c) International Energy Agency Outlook 2004-Energy Information Administration, Office of Integrated Analysis and Forecasting, U.S. Departmentof Energy. 17 energy efficiency and fuel diversification. Even then, China's CO2 emissions per capita would amount to only 20 and 30 percent of OECD countries in 2010 and 2020, respectively. China's highest level authorities recognize that a business as usual approach in the energy sector would lead to unacceptable environmental damages. They recently adopted a multipronged energy strategy aiming at: (a) improving the efficiency of the energy sector and bringingenergy intensity in line with international best practice; (b) fuel switching through increased gas penetration and aggressive development of renewable energy use, especially for power generation; and (c) securing energy supply to meet the country's growing needs. Chinese authorities recognize the vital need to pursue vigorously each prong of the strategy and to rely more on market based approaches to achieve the higher level objectives of sustainable development and a "well off' society. Greenhouse Gas Emission by the Power Sector This awareness results from recognition of the negative effects of emissions from the coal combustion needed to fuel economic growth-the damages to human health from air pollution and the damages to agricultural crops and natural resources caused by acid rain. In addition to severe impacts on the national environment, China's growing consumption of fossil fuels is projected to make it, by 2015, the leading producer in the world of greenhouse gas (GHG) emissions. Most of the increase in carbon emissions to 1.8 billion tons in 2020 will come as a result of a rapid increase of fossil energy con~umption.~Electricity production i s expected to generate a significant share of these emissions, as shown inTable Al.1below. 2000 2005 2010 2015 Electricity Generation(TWh) 1303 1676 2161 2855 Thermal Electricity Generation (TWh) 1071 1361 1743 2302 EstimatedEmissions (million tons) Carbon 266 337 432 571 NO, 2.7 3.4 4.4 5.8 sox 7.O 8.8 11.3 15.0 TSP 0.4 0.6 0.7 1.o A Power Sector inTransition toward Competitive Markets Reforms in China's power sector during the 1980s and 1990s incurred a series of incremental changes that have resultedin apower sector largely unrecognizable from that inthe 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 have been phased out and subsidies practically eliminated. Investments are financed through equity and debt from a variety of public and private sources. Electricity prices were increased to reach, on average, long-term marginal costs of supply inmost grids. Asian Development Bank, "ALGAS:People's Republic of China," Manila, October, 1998.As noted above, such studieshaveconsistently underestimatedthe actual energy consumption growth inChina inrecent years. 18 In April 2002, after approval by the highest authorities in China, the State Council released a comprehensive reform program inDocument No. 5: 0 Outlininga long-termvision of ex anding competition, startingwith generation and focusing on regional markets during the 10ti! Five-Year Plan (FYP); 0 Initiating, in the areas where conditions permit, market trials that would allow generators to supply electricity directly to high-voltage or large customers during the lo@' Five-Year Plan (2001-05). Price of the contracted electricity supply will be set through negotiation between the generation companies and the customers, with payments of the transmission and/or distribution service established according to the state regulated transmission andor distributiontariffs; and 0 Establishing a State Power Regulatory Agency to ensure fair competition in the competitive segments of the industry and protection of consumers from monopoly abuses in the noncompetitive segments. This i s a first step toward a modem light-handed regulation of the sector. The 2002 State Council Document No. 5 i s a major step forward. It clearly states that the objectives of the reforminChina are to continue the break up of the monopolistic structure of the industry and gradually expand competition to improve its efficiency and ultimately provide the customers with the best service at the lower possible cost. The plan details these objectives in eight points: (a) break up of monopolies; (b) introduction of competition; (c) increase of efficiency; (d) improvement of pricing mechanisms with one important requirement to link the price paid to generators to their emissions to foster the development of renewable energy and other clean generation; (e) optimization of resource allocation; (f)development of industry; (g) formation of a national grid; (h) establishment of competitive electricity markets. Despite the impressive progress achieved during the last two decades, China's power sector i s still facing the following major issues: (a) heavy reliance on coal entailing large emissions of GHGs, particulates, S02, and NO, with consequent environmental damages-potential climate change, adverse health impacts, deteriorating air quality and acid rain; (b) a piecemeal approach to restructuring of the power sector and slow development of a regulatory framework leading to inefficiencies and abuses of monopolistic or monopsonistic power, discrimination against independent and small power producers and disincentives to secure supply at least cost; (c) mismatch between loan maturities and economic lives of power projects; (d) inadequate wholesale electricity and transmission pricing systems; (e) low efficiency of electricity supply and use; and (0 lack of access to electricity for more than 30 million people in isolated rural areas. Commitment to Development of Renewable Energy China has long had one of the world's largest renewable energy programs, leading to the development of more than 30 GW of small hydropower and large-scale installation of improved woodstoves and biogas plants. The government's energy strategy in the 10thFYP emphasized renewable energy more strongly than inthe past, as one measureto reduce the power sector's use of coal in the medium to long term, and to provide modern energy services to remote rural households. For the first time, GHG emissions and climate change issues are dealt with in the 19 Plan. The renewable energy policy in the 10thFYP identifies five objectives for which policies will be developed: 0 Increasing the share of electricity production comingfrom renewable energy; 0 Introducing greater competition in supply of renewable electricity to the grid and improved incentives to do so; 0 Supporting further commercialization andlocal manufacture of renewable energy equipment; Encouraging better financing mechanisms, especially for private capital; and 0 Improving cooperation between government departments. Analyses indicated that the greatest potential for displacing coal by renewable energy was in the power sector. The technical potential for renewable electricity in China includes about 160 GW of wind power; over 75 GW of commercially exploitable small hydropower; approximately 125 GW (300 Mtce) biomass energy; about 6.7 GW of known geothermal energy resources; and an abundance of solar insolation. With respect to renewable electricity, these resources make China one of the most well endowed countries in the world. Recognizing the potential, three highlevel Commissions in 1995 jointly prepared the New and Renewable Energy Development Program for 1995-2010. However, the targets for the year 2000 have not beenrealized and there still exist formidable barriers to meeting future targets, which are recognized and set out in the LSDP contained in Annex 1A. To address these barriers the government has passed an REL. The REL achieves a major breakthrough for the development of renewable energy in China by recognizing the need for a mandated market to achieve the government's ambitious goals. The government has indicated that the law andimplementation regulations are guided by the following principles: Adoption of best international practice for renewable energy development, adapted for Chinese conditions. Promotion of policies that are detailed, practical, and achievable. Targets should be clearly specified, roles and responsibilities of different parties clearly defined, investment requirements calculated, and sources of financing identified. Integration of renewable electricity policies with power sector reform. Integration of renewable energy development plans with the strategic objective to develop Western part of country, for example, with a focus on developing small hydro power, wind energy and solar energy. Transparency during development of policies to ensure support from all stakeholders during implementation. The NDRC should work more closely than before with other agencies and consults widely with national concerned agencies, provincial and local authorities, power companies, renewable energy industry, and banks. 20 Annex 1A: Letter of Sector Development Policy, NDRC CHINA RenewableEnergy Scale-up Program November2,2004 DavidDollar Country Director ChinaandMongolia The World Bank Level 16, China WorldTower 2 No. 1 lianguommwaiAvenue 100004Beijing, P.R. China II Dear Mr.Dollar, Re: Letter of Sector DevelopmentPolicy on Renewable Energy Developmentin China China is a bigcountry bothin energy production and consumption.Along with the rapid development of China's economy and the livingstandard of the people, energy demand inChinais increasingrapidly. Underthe current energystructure,coal is the dominating resource; oil consumption depends partially on import. Environmental protection and energy security are becomingissues of particular concerns. Developmentandutilization of renewableenergy is animportantoptionto improvethe environment, adjust the energy structure, increase the energy safety, achieve diversified energy supply and ensure sustainabledevelopmentof the energy sector. China is rich in renewable energy resources, of which the amount of hydro is about 40OGW (50 MW andbelow capacityof small hydro is 120GW),; wind resourceexceeds 1,000 GW; biomass resourceexceeds 600 million tons of standardcoal, andsolar energy resources are also abundant. China has the full capacity to provide clean, secure and sustainableenergy supplyfor nationaleconomyandsocial development. Since 1992, the Govemment of Chinahas signed the Rio Declaration, UNConventionon Climate Change etc. and has issued such documents as China Agenda for 21" Century; 10 Countermeasuresfor Environment and Developmentin China.These actions indicate the determinationof the ChineseGovernmentin enforcing and implementingsustainable development strategy. The Government of China has set up a series of specific policy measures to promote the development and utilization of renewable energy and the development of the energy industry. The Chinese Government also conducted such programs as Rural Energy Comprehensive Building Program in One Hundred Counties; Development of Initial Rural ElectrificationCounties; the Programof Brightnessandthe Township ElectrificationProgram; Riding the Wind Program and the pilot wind power concessionprojects etc,. Good achievementshave been made in these programs. By the end of 2003, the total hydro power capacity in China reached IOOGW (of which small 21 capacity reached 560 MW, and electric power generation fuelled by biomass reached 2,000 MW. More than 12 million rural householdbiogas digesters and more than 2,000 large and medium-sized biogas digesters had been set up in China. Installation of solar water heaters reached more than 50 million square meters and the total capacity of PV systemswas more than 50 MW. During the International Conference for Renewable Energies Boon 2004, from 1 to 4 June, 2004, Ihave solemnly announced, on behalfofthe ChineseGovernment, that China would start to develop the Renewable Energy Law to speed up the development and utilization of renewable energy. By 2020, the share of renewable energy (excludes larger than 50MW hydro power) inthe primaryenergy consumptionwill occupy 10%. China is now draftingthe Midand LongTerm Plan on Renewable Energy Developmentand has incorporated such a plan into the national economic development plan. This will clarify the strategic objective of the renewable energy development; remove marketbarriers and firm up the incentive measures for renewable energy development; it will also help to create the social and cultural environment for renewable energy development and promotethe commercializationandscaleddevelopment of renewable energy. According to the Mid and Long Tmn Plan on Renewable Energy Development, the development target bythe year 2020 are: the installed capacityof hydro power will reach 240 GW (75 GW of which will come from small hydro) and will replace an annual consumption of 250 million tons of standard coal equivalent; the installed capacity of wind powerwill reach 20 GW and will replacean annual consumptionof 15 milliontons of standard coal equivalent; the installed capacity for biomass power will reach20 GW and will replace an annual consumption of 28 million tons of standard coal equivalent, and the total installed capacityof PV systems will reach 1,000 MW. Based on the target mentioned above, we are W n g to speed up the pilot projects on wind power concession and biomass power generation. The development speed of small hydropower and PV power is beingimplementedat a speed which is obviously faster thanbefore. However, in general, the current production cost of renewable energy in China is relatively high and is not competitive compared to the traditional energy. In order to accelerate the development of renewable energy, the Chinese Government hopes to obtain financial and technical support from international organizationssuch as the World Bank and GEF. The aim is to increase local manufacturing ability for wind power generation and biomass generation; reduce generation cost o f renewable energy; and create conditions for the development and utilization of renewableenergy. China will be keen to leam from international experiences and practices. The Chinese Government is willing to promote the commercialization and scale up o f renewableenergy development jointly with the international world and contribute to the sustainable development of the economy. The China Renewable Energy Scale-up Program (CRESP) is, for the time being, the largest international technical assistanceprogram in China. We attach high importanceto this program and hope to makejoint efforts with GEF and the World Bank so as to push 22 and promotethe preparatorywork, and makethe implementation of the programas soon as possible. Wish youhaveagreat winter. Sincerely yours, ZhangGuobao Vice Minister NationalDevelopmentandReformCommission 23 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies CHINA Renewable Energy Scale-up Program Low efficiency ADB (TA NO.2789-PRC) n/a n/a Strengthening Demand Side Management inGuangdong and Zhejiang Province Coal dominance, renewable energy UNDP/GEFChina: Capacity n/a n/a development Buildingfor the Rapid Commercialization of Renewable Energy Coal dominance, access ADB/GEF: China Agricultural n/a n/a Waste UtilizationProject Coal dominance, renewable energy -_ UNEP/GEF: Solar andWind n/a n/a development Resource Assessment (Global including China) Coal dominance, renewable energy UNDP/GEF:Promoting n/a n/a development Methane Recovery and Utilizationfrom Mixed MunicipalWaste Coal dominance, renewable energy GTZ:Researchandtraining n/a n/a development centre for wind energy Coaldominance, access GTZ:Renewable energies in n/a n/a rural areas Lessons Learnedfrom PreviousProjects The OED Report TheBank's Assistance to the Energy Sector in China (Report 21891, February 28, 2001) notedthat "With none of the 20 completed projects rated unsatisfactory and only one of the 19ongoingprojects rated a problemproject, the performance of the Chinaenergy portfolio i s without equal.'' Today in the power sector in China, there are 18 completed projects, all rated 24 satisfactory, and 8 ongoing, again all rated satisfactory. No ongoing energy sector project is rated less than satisfactory. Nonetheless,important lessonscan be drawn from previous energy sector projects, including: (a) the need for full commitment of the Borrower at all levels; (b) the importance of stakeholder participation throughout; (c) important policy reforms, in line with government objectives, should be incorporated into the project design; (d) project preparation should include detailed organizational and staffing arrangements for implementation and implementing agencies should receive institutional strengthening support; (e) counterpart funding should be committed before implementation, with the direct participation of relevant levels in NDRC, MOF, and other agencies; (f) projects crossing institutional lines are more difficult to implement and must provide adequate incentives to all participants; (g) capacity building during project preparation can achieve part of project objectives and substantially speed up implementation; and (h) power markets should be carefully assessed and periodically reassessed to ensure a demand for output from proposed projects. Lessons learned from renewable energy assistance in China include: (a) the renewable energy resource for individual projects must be carefully assessed and checked; (b) for rapid implementation, attention must be paid to ensuring arrangements are in place for procurement and construction that are in line with international best practice; (c) important principles of all agreements that are essential to the project functioning as envisaged (for example, PPAs and voluntary pilot schemes) should be established before project appraisal; and (d) TA must be coordinated with the construction of the physical parts of the project to ensure that the implementing agencies have adequate and timely knowledge of construction, operation and maintenance. Lessons learned for technology transfer and other activities to improve the supply side suggest that (a) technology transfer i s a long-term incremental task and that "single shot" efforts are not generally effective; (b) competitively awarded cost-sharing for major technology transfer activities provide incentives for equipment suppliers to reduce cost and improve quality; (c) technology transfer flourishes where market development and expansion i s taking place; (d) supporting capacity buildingto embed institutions and skills over the long term are essential to the overall technology transfer process; and (e) short term efforts including courses, study tours and other activities can have an important "bridge building" role to meet specific and identified needs, if well designed andexecuted. OtherProjectActivities Workshops, studies, study tours and other TA too numerous to mention individually have been financed by multilateral and bilateral donors and foundations in the field of the MMP, sector reform and legal frameworks supportive of renewable energy. The main bilateral donors have included Australia, Germany, the Netherlands and the UK. The Energy Foundation has been active in China with a support program for five years. Multilateral institutions providing support have included ADB, the EU,UNDP and the World Bank. The combined effect of these efforts has been to buildconsensus for (a) the MMP concept and to inform the debate on the relative merits of the price based and quantity based systems and their applicability to China; and (b) the need for a policy to be enshrined in law and regulations. The 25 outcome has been the REL and the work now starting on the implementing regulations. The lessons from this consensus are incorporated into the project design. 26 Annex 3: Results Framework andMonitoring CHINA Renewable Energy Scale-up Program TableA3.1: ResultsFramework Outcome Indicators Use of Outcome Information To enable commercial renewable Market framework implemented Gaugeprogresstoward reaching :nergy suppliersto provide energy nationwide programobjective. to the electricity marketefficiently, :ost-effectively andon a large scale Increasedrenewableelectricity over baseline (TWh) and increased renewablecapacityover baseline (GW) Cost reductions for important technologies: new andrehabilitated small hydro, new wind, new biomass cogenerationcomparedwith benchmarkestablishedinphase 1 Reducedemissionsof carbon, NO,, SO, andparticulates To: Evidence.that the market framework Gaugereadinessto move to phase2 0 Createa legal, regulatory and inpilot provinceshasbeen of CRESP institutional environment establishedthrough laws and conducive to large-scale regulations (through technical and Verify progress toward achievement renewable-basedelectricity social surveys) of PDO generation; 0 Demonstrateearly success in Evidence that inthe pilot provinces At midtermreview, gauge progress large-scalerenewableenergy the environment for developmentof and effectivenessof the Institutional developmentwith participating renewableshas improved (through Development and Capacity Building localdevelopers intwo technical and social surveys) component. At phase completion, provinces gauge readinessto move to phase2 Evidence of improved quality and of CRESP reducedcost amongmanufacturers and serviceproviders in wind and At midtermreview, gauge progress biomass (through technical and and effectivenessof support of wind, social surveys) biomassand small hydro component. Increasedrenewableelectricity over baseline(TWWyear), increased At midtermandphasecompletion, renewablecapacity over baseline gauge effectivenessof law, (GW), increasedsize of individual regulations and Support for Wind, projects Biomass and Small Hydro inPilot Provinces Component Reducedemissions (milliontonnes): Carbon NO, SOX Particulates 27 IntermediateResults ResultsIndicatorsfor Each Useof ResultsMonitoring Oneper Component Component ComponentOne: ComponentOne: ComponentOne: Legal, regulatory and institutional Enactmentof RELand issuing of Progresson enactmentof law and framework to support development regulationsto implement the law at issuingof regulations will indicate and localization of renewableenergy rlational levelby 2009 readinessfor phase2 of CRESP inplace Issuingof regulationsfor Progress inimplementationof implementation of RELand their regulationswill indicate readiness effective implementation inpilot for phase 2 of CRESP and needs for provinces (Fujian, Inner Mongoli further improvement to regulations. Jiangsu, and Zhejiang) by 2009 Issuingof national standards for Issuingof national standardsfor wind turbines, availability of testing wind turbines, availability of testing facilities andcertification by 2009 and certification and company participation intechnology developmentflags how well the culture of quality has beenadopted within Chinese manufacturing and serviceindustry andprovides directionfor further roundsof similar support. 15 companiesparticipating incost- As above sharedtechnology and services developmentactivities (with emphasis on biomassand wind) by 2009 Pipeline of renewableenergy Pipeline of renewableprojects will projects under developmentinthe indicate which areasttechnologies provinces by 2009 and servicesneedfurther support in subsequentphases. Component Two: ComponentTwo: ComponentTwo: Capacity to develop, finance, lOOMW wind farm at construct and operaterenewables Changjiang'ao, Pingtan Island, expanded Fujian selling 260 GWh/year into local grid by 2008 25MW straw-fired biomasspower plant at Mabei Village, Rudong County, Jiangsu selling 192 GWh/year into local grid by 2009 28 I I rr 0 '13 29 9 0 - \ o - u z z8 e, %a a, v1 '9 a, v1 8E B8 0 i? 0i? 2 8 d 3 a s 0 0 0 0 0 0 31 Additional Annex 3A: ResultsFrameworkand Monitoringfor AdditionalAppraised Projects CHINA RenewableEnergy Scale-up Program Table A3A.1: ResultsFramewor i IntermediateResults Useof Results Monitoring One per Component Additional PotentialInvestments lOOMW wind farm at Huitengxile, Performanceof physical investments under ComponentTwo: DeshengCounty, 1nner.Mongolia will indicate need, if any, for Capacity to develop, finance, selling 245 GWWyear into local grid additional support to market construct and operate renewables by 2008 participants to improve their expanded About 83 M W of capacity of small capacity for scale-up. hydro inZhejiang builtor rehabilitated, selling an incremental 268 GWWyearinto local gridby 2008 32 33 Annex 4: Detailed Project Description CHINA RenewableEnergy Scale-up Program The project consists of two components, each of which i s described inmore detail below. InstitutionalStrengthening and Capacity BuildingComponent The Institutional Strengthening and Capacity Building Component i s to be a single national program, implemented through the CRESP PMO. The Institutional Development and Capacity Building Component supports at the national level (a) introducing the REL and associated regulations at national level; (b) reducing cost and improving quality of renewable energy equipment and services, particularly for wind and biomass; and (c) long-term capacity building for development of wind technology. In the pilot provinces it supports (a) developing province- level regulations and other implementation tasks; (b) helping the pilot provinces meet the requirements of REL, including by undertaking resource assessments, pilot demonstration projects and capacity building. With the investment project sponsors, it supports investment scale-up. It also provides resourcesfor the managementof the program, through the PMO. GEF financing will be US$40.22 million. Where companies participate inthe project, they will contribute through cost-sharing, a proven means of technology transfer in China that has found successful application in the REDP. Cost-sharedamounts are difficult to estimate because of the decentralized nature of the individual projects that have not yet been proposed. Based on experience inthe REDP, GEF: company cost-sharing ratio i s 1:3. Applying this metric to CRESP would result in counterpart funding of US$48.6 million. Indirect effects, for example subsequent investment inproduction facilities, have not beencounted. National Level Institutional Strengtheningand Capacity Building: US$20.82 million GEF, US$33 million counterpartfunds National level institutional strengthening and capacity buildingconsists of six subcomponentsas follows: 0 MMP research (US$1 million GEF). Studies on further development of the MMP and its implementation will include (a) distributing national targets between provinces; (b) setting the tariff level for renewables; (c) transforming the policy from price-based to quantity-based (based on early versions of the law the price-based mechanism has been chosen at least as an interim measure); (d) sharing incremental costs between provinces; (e) developing trading schemes to minimize MMP cost; (f) linkingthe MMP to carbon trading mechanisms; and (g) preparing a medium- to long-term plan for renewable energy development. Financing will support consultants to undertake the studies; Support to MMP implementation (US$1.25 million GEF). Studies, capacity building and training to support implementation of the RELwill include (a) preparation of regulations that outline detailed implementation mechanisms; and (b) capacity building and training for implementing agencies, regulators, and others affected by the law. Financing will support consultants and training activities to implement this subcomponent; 0 Technology improvement for wind (US$16.17 million GEF, expected counterpart funds US$27 million). There will be four activities under this subcomponent as follows: 34 (a) Technology development by selected manufacturers. This activity will provide grants to companies to share the costs of projects to accelerate the transfer of variable speed, pitch controlled and related wind technology to China using licensing, joint ventures, technology development using international consultants or other means. Grants will be provided to share up to 50 percent of the cost of projects. Beneficiaries will be selected competitively based on proposals submitted by manufacturers that will be encouraged to collaborate with design institutes or other sources of know-how. Beneficiaries will be selectedcompetitively basedon proposals that will be evaluated and ranked by disinterested national and international experts. Selection will be guidedby the market-driven and results-oriented nature of the proposals, and their ability to yield results inthe Chinese market within five years; (b) Standard setting. Current Chinese standards for wind turbines are limited in scope and requirements and are not equivalent to international standards set by the International Standards Organization (ISO) or the International Electrotechnical Commission (IEC). This activity will support the development and adoption of standards by the Standardization Administration of China. Financing will be provided for consultant support and the formation of a technical standards committee; (c) Wind testing center. The project will provide assistance to a testing organization selected by the government to establish a wind testing facility through capacity building of staff, support to develop procedures and to become accredited as a test center by an internationally recognized standards body such as I S 0 (IS0 25) or IEC (IEC 17025). Financing will be provided for consultant support, training and the purchase of testing equipment; (d) Certification. A certification body will be supported through capacity building, training and consultant support with a "twinning" agency to bring it up to the standards that will permit it to certify wind turbine design andperformance. Consultant support will also be providedto China National Certification Accreditation Administration (CNCAA) to assist it in deciding whether to opt for mandatory or voluntary certification of turbines inChina; (e) Establishment of a National Wind Resource Assessment Center. The project will support development of resource assessment methodologies, national wind resource assessment standards, and a national wind resource database. It will also support overlay of wind mapping with geographic information system (GIS) data to convert resource measurements to identifiable projects. It will also facilitate knowledge transfer and best practices on the international status of wind resource assessment, and support the pilot provinces in planning and implementing wind resource assessment activities. A focal point for the Center will be identified duringproject start-up; (f) Long-term capacity building. Efforts to increase the supply of skilled and knowledgeable designers, engineers, manufacturing specialists and wind farm developers and operators will be supported. Two universities will be supported to set up master's level and renewable energy engineering courses, primarily focused on wind andbiomass. Universities will be selected based on their track record and reputation for quality, the relevance of the courses they propose, the courses' ability to meet market needs and cost- sharing.There will also be a fellowship program to allow more senior engineers to study abroadat existing centers of excellence; 35 (g) Studies on interconnection to the grid and turbine micrositing. The project will support studies on connection of wind farms to the grid and their impacts on grid stability. It will raise awareness of power grid operators and wind developers of interconnection requirements and transfer international best practice and knowledge. It will conduct studies on the impact of wind farms on grid stability in one province. Training on turbine micrositing, which has for some time been a weak point in wind farm design, will be providedto complement existing activities. 0 Technology improvement for biomass (US$2.4 million GEF, expected counterpart funds US$6 million). This subcomponent will provide grants to companies to share the cost of projects to improve the quality and reduce the cost of biomass technologies, particularly those related to boilers and equipment handling. Grants will be provided to share up to 50 percent of the cost of projects. Beneficiaries will be selected competitively based on proposals that will be evaluated and ranked by independent national and international experts. Selection will be guided by the ability of the proposals to yield results inthe Chinese market within five years. Supporting studies will also be undertaken inthis area; Province-levelTechnical Assistance (US$10.60million GEF, expected counterpartfunds US$9.0million) The province-level institutional strengthening and capacity building consists of five subcomponentsas set out below. Itwill take place inthe pilot provinces (Fujian, Inner Mongolia, Jiangsu, andZhejiang). 0 MMP implementation (US$2.4 million GEF). Although REL has been passed at national level, implementation will be delegatedto the provinces. Participating pilot provinces will be supported to prepare provincialrenewable energy development strategies, plans and financial incentive policies; test renewable energy promotion models and create awareness among stakeholders. This subcomponent will finance consulting services and training for provincial counterparts and renewable energy market participants; Resource assessments (US$4.2 million GEF). The purpose of this subcomponent i s to provide detailed information to the public on the renewable energy resources in each of the provinces. For each province, a cost-resource curve for the main renewable resources and a database with resource information will be prepared and published. Measurement standards will also be prepared, to permit like-for-like comparisons. In Fujian, high-resolution wind resource measurements and wind farm siting data will be prepared. In Inner Mongolia, assessments on the wind, solar energy, biomass and municipal solid waste resource and wind farm siting in 12 counties will be undertaken and published. In Jiangsu, wind and biomass resources will be assessed and published. In Zhejiang, small hydro resources capable of producing electricity below 3,000 hourdyear will be evaluated (above 3,000 hours/year i s already known). Areas of biomass concentration and wind resourcewill also be assessed. 0 Cost-shared support for scaling up renewable energy (US$3 million GEF, expected counterpart funds US$9 million). This subcomponent will help provinces carry out studies and pilot or demonstration projects in renewable energy technologies other than the one in which the investment subproject will take place. Grants will be provided for cost-shared activities, awarded on a competitive basis across the four pilot provinces. Fujian will carry out studies to identify pilot tidal and geothermal projects. Inner Mongolia will prepare biomass projects and study the potential for grid connected PV. Jiangsu will demonstrate 36 building-integrated PV systems and strengthen its existing renewable energy development center. Zhejiang will develop standards for integrating solar water heaters into buildings and prepare biogas projects. This component will also support preparation for a pilot offshore wind farm expected to be implemented during phase 2. 0 Capacity buildingfor market participants (US$1 million GEF). Capacity buildingfor market participants not directly involved in projects in the pilot provinces will be carried out under this component. It will include training for developers, banks, and technology and service providers covering the project cycle. Financing will also be provided under this subcomponent for studies on improvements to procedures for project approval, and integration of renewable energy into electricity grids and identifying and removing bottlenecks inrenewable project development. SupportingInvestmentScale-up (US$2.2 million GEF, expected counterpartfunds US$6.6 million) Based on the lessons of previous renewable energy projects, this subcomponent aims to make resources available to build a strong pipeline of bankable renewable energy projects. The companies implementing the investment projects will be provided resources to carry out feasibility studies, resource assessments and other preinvestment activities on a cost-shared basis. Training and capacity building, and access to international experience and best practice will also be eligible activities. Funds for Inner Mongolia and Zhejiang will be retained as unallocated pending finalization of the investment subcomponents in those two provinces. In Zhejiang, the Zhejiang Hydro Power Development Management Center (ZHPDMC) will implement this subcomponent in coordination with the small hydropower companies. InInner Mongolia, no GEF funds will flow to the Huitengxile wind farm subproject described below to avoid risk of commingling GEF and PCFfunds; Program Management (US$3.38million GEF) Program management will include day-to-day procurement, financial and contract management for all tasks carried out under the TA program. It will include representation of the PMO in the pilot provinces. Additional tasks expected to be carried out by the PMO at least initially include coordination with other GoC renewable energy initiatives, monitoring and evaluation of the impact of REL and CRESP, preparation of annual reports and plans on behalf of NDRC, providing liaison between the InstitutionalDevelopment and Capacity BuildingComponent and other stakeholders, including the World Bank, and preparation of phase 2 of CRESP. Also included under this component are national-level studies, to be initiated by the PMO, to address further policy development issues as they arise including, for example, development of a long- term biomass strategy. Unallocated(US$3.22 million GEF) An unallocated amount of US$3.22 million.is retained. Three million dollars of the funds are earmarked for the companies undertaking Bank-financed investment subprojects in Inner Mongolia and Zhejiang. The balance will be put toward activities where the budget proves inadequateor inresponse to unforeseenrequirements. 37 Support for Wind andBiomassinPilot ProvincesComponent The support for Wind and Biomass in Pilot Provinces Component consists of two independent subcomponents, implemented through separate agencies-the project sponsors. They are:' (a) in Fujian, a lOOMW wind farm at Changjiang'ao, Pingtan Island; and (b) in Jiangsu, a 25MW straw-fired biomass power plant at Mabei Village, Rudong County. Two additional potential projects have been appraised, but have not yet secured the necessary domestic clearances. They are: (a) in Inner Mongolia, a l O O M W wind farm at Huitengxile, Wulanchabu County; and (b) in Zhejiang, a framework to enable the Bank the Bank to finance rehabilitation and construction of new small hydro plants. At appraisal this consisted of rehabilitation of sixteen small hydro plants to increase their aggregate capacity from 35 to 51 MW andconstruction of thirty new hydropower plants, totaling 67MW of capacity. Pingtan Wind Farm, Fujiun. Estimatedcost US$103.92 million, of which US$67.00 million i s to be financed by the Bank. The Pingtan Wind Farm i s being developed by the China Long Yuan Electric Power Group Corporation (Long Yuan), which i s a subsidiary of China Guodian Corporation, one of the five generation companies that were formed on the break-up of State Power Corporation of China. The sponsor, Long Yuan, was selected to develop the wind farm under a bidding procedure managedby Fujian provincial government based on supply price, which has been agreed at 47.8 fenlkwh. The wind farm i s situated at Changjiang'ao, on the northeastern end of Pingtan Island, some 100 km south east of Fuzhou, the capital of Fujian Province, which is on the eastern side of the Taiwan Strait. The latitude and longitude of the project site i s 25'31' north and 119'47' east. Long-term data indicate that typical year annual mean wind speedat the site i s 7.8 metershecond ( d s ) at 65 m above ground level. The proposed site i s near sea level. Annual average temperature i s 19.5"C. The climate is generally humid and salty. The site i s in a coastal plain formed between two chains of mountains, one to the northwest andone to the southeast. The area i s used as farmland, interspersed with low trees, and consists of light sandy soil. The trees are planted as wind breaks and help stabilize the soil against erosion and are specially selected non- native species. An identified archaeological site falls within the perimeter of the wind farm, but will not be disturbed by construction work. The site does not contain human habitation, but there are several villages on its perimeter. There i s an existing 6 MW wind farm on the same site that has been operating for about four years, which i s owned by Long Yuan (60 percent) and Pingtan County Electric Power Company (40 percent). The project consists of the installation of turbines with an aggregate capacity of 100 MW, associated civil and electrical works, extension to an existing control room, a switchyard, and a 15 km, 110 kV transmission line from the wind farm to Beicuo. The power of the individual turbines will be inthe range 1.5-2MW, but their number and the precise layout of the wind farm will dependon the product offeredby the winning bidder. Based on feasibility study calculations using 67, 1.5MW machines (considered to be the most likely configuration), permanent land acquisition including land for turbines, roads and substations, will total 31.6 hectares within an area of approximately 14 km2.The wind farm, when fully operational, i s expected to produce 260 GWhof electricityper year. 38 Long Yuan has established a project preparation office, registered with Fujian Economic and Trade Commission (ETC), and expects ultimately to establish a special purpose company (with other investors) to own and operate the wind farm, preparation and initial project implementation will be the responsibility of Long Yuan itself. Long Yuan is inthe process of establishing a new company (Long Yuan Pingtan Wind Power Company Ltd-LYPWP). The special purpose company will be 60 percent owned by Long Yuan, 30 percent by Shandong Luneng Group, and 5 percent each by FujianWindPower Company andPingtan County Electric Power Company. Rudong Biomass Power Plant, Jiungsu Estimatedcost US$36.08 million, of which US$20.00 million i s to be financed by the Bank. The Rudong biomass power plant i s being developed by Jiangsu Guo Xin Investment Group Limited (Guo Xin), which i s an investment company wholly owned by Jiangsu Province. Guo Xin was selected by Jiangsu provincial government to develop the project for a supply price estimated at 58 fen/kWh at the feasibility study stage. Guo Xin has established a special purpose company named Jiangsu Guo Xin New Energy Development Company (NED) in which it holds 65 percent of the equity. The remaining 35 percent i s owned by RudongCounty. NED will own the plant and will be responsible for its preparation, implementation, operation andmaintenance. The project site i s in Mabei Village, Matang Town, Rudong County, Nantong Municipality, about 400 kmeast of Nanjing, the capital of Jiangsu. The straw power plant would occupy a site of about 66,000 m2,currently mainly paddy field owned by Mabei village and farmed by local inhabitants. The site adjoins the MafengRiver. There i s a made road and a substation within 300 meters of the site perimeter. The area i s predominantly agricultural with about 1.23 million tons of straw waste, mainly wheat and rice, arising each year within a radius of 25 kmof the proposed project site. The power plant requires 176,000 tons of feedstock per year. The project consists of installation of a 110thstraw-fired boiler and a 25 MW steam turbine; and associated civil, mechanical and electrical works. When operational, the plant i s expected to produce 162 GWhof electricity per year. 39 AdditionalAnnex 4A: ProjectDescriptionsfor Additional AppraisedProjects CHINA RenewableEnergyScale-upProgram Two further potential subcomponents have been appraised and are expected to be brought forward for Bank financing when their domestic approvals have been secured. Huitengxile WindFarm, Inner Mongolia Estimatedcost US$100.58 million, of which US$67.00 million would be financed by the Bank. The Huitengxile wind farm i s being developed by the NLYWPC, which i s a state-owned enterprise, 50 percent owned by Northern Union Power Company (NUPC), a holding company owning a number of power generation companies inInner Mongolia, especially inWestern Inner Mongolia. The other 50 percent is owned by Long Yuan, the same entity developing the Pingtan wind farm. The sponsor, a predecessorcompany whose operations have now been subsumedinto NLYWPC, was selected by the government of Inner Mongolia Autonomous Region to develop the wind farm; supply price i s basedon competitive biddingfor anot,herwind farm at the same site and has been agreed at 38.2 fen/kWh. Huitengxile i s about 120 km east northeast of Huhhot, the capital of Inner Mongolia Autonomous Region. Its latitude and longitude are 41'09' north and 112'32' east. The area has space sufficient for an estimated l,OOOMW, on which about 47 MW of wind has already been developed by Inner Mongolia Wind Power Company, the predecessor of NLYWPC with a further 26MW under construction. A further concession of l O O M W i s under development. The long-term annual mean wind speed has been estimated at 8.4 m/s at 40 m above ground level. The site elevation i s approximately 2100 m above sea level and consists of slightly rolling grassland, usedfor grazing. It i s owned by the county through a studfarm. The Huitengxile wind farm will consist of wind turbines, associated electrical and civil works including a substation, switchyard and control room; a 15 km, 110 kV transmission line to Desheng town; and upgrading of the existing 110 kV substation there. The power of the individual wind turbines will be in the range 0.75-1.5MW, but their number and precise layout of the wind farm will be determined at procurement and will depend on the product offered by the winning bidder. Based on feasibility study calculations using 67, 1.5MW machines (considered to be the most likely configuration), permanent land acquisition including land for turbines, roads and substations, will total 23.65 hectares within an area of about 11km2.The wind farmis expectedto produce about 245 GWh of electricityper year. NLYWPC plans to seek carbon financing for the wind farm and it is currently developing a proposal for consideration by the World Bank. The additionality of the project (for carbon financing purposes) i s based on (a) the dominance of coal in Inner Mongolia where typical power prices are around 25 fen/kWh; and (b) the demonstrated requirement for additional financing perceived by the NLYWPC, which agreed the price contingent on NLYWPC being authorizedby the government to seek carbon financing for the project. For the Pingtan wind farm, the design and layout used internationally recognized standards for wind resource assessment and energy calculation. Variable-speed pitch regulated machines meeting international standards will be specified for their superior performance andoutput power 40 quality, which will help improve local system stability. Design specifications require wind turbines to meet local environmental conditions in particular cold weather requirements. Non- GEFfunds will be usedto support the biddingprocess andensurebestpractices are employedin operation and maintenance. Small Hydro Projects, Zhejiang Estimated cost up to US$93.00 million, of which upto US$50.00 million would be financed by the Bank. In Zhejiang, the Bank would finance rehabilitation and development of selected small hydropower units. Individual state or collectively owned projects of up to 10 MW would be selected based on an appraised framework covering technical, economic, financial, safeguards and procurement criteria. The subcomponent will provide subloans to individual companies carrying out rehabilitation or new construction of small hydro projects not exceeding l O M W with guarantees from county governments. The projects are drawn from the list Zhejiang maintains of rehabilitation and new build projects requiring financing. The preliminary list of projects was agreed with Zhejiang at appraisal, but final decision will depend on projects meeting the requirements set out in the appraised framework. Thus some projects may drop out and be replacedby others from the list maintainedby Zhejiang. The subcomponent falls into two parts: (a) rehabilitation of existing small hydro sites; and (b) development of new sites. Based on the appraisedlist of projects, the rehabilitationwould consist of 16 projects with a total current capacity of 35MW, which would be increased by a further 16MW. Total costs would be US$22.14 million for which Bank financing of US$15.47 million would be sought. Thirty new buildprojects would have an aggregate capacity of 66MW with a total cost of US$70 million for which Bank financing of US$35.5 million would be sought. Zhejiang may request financing for either rehabilitation subprojects only, or both rehabilitation and new build depending on financing needs. Project design permits either a fixed number of projects to be determined beforehand or a ceiling level of Bank financing to be agreed and projects financed untilall the Bank funds have been committed. Investment requirements and therefore descriptions vary from project to project. In general the component will support new construction or rehabilitation of civil works including dams, diversion and control structures and headraces and tailraces, and supply and installation of mechanical andelectrical works. Zhejiang Hydropower Development Management Center (ZHPDMC) i s an experienced designer of small hydro power plants and would undertake technical evaluation, with reputable independent Chinese experts, of all projects that have been proposed for financing. Technical viability of individual small hydro projects in Zhejiang has beenreviewed and found adequate. Inner Zhejiang Mongolia Fiduciary arrangements inplace Financial management Yes Yes Procurement Yes Yes PMO/SP companies mobilized Yes Yes 41 Counterpart funds/ local financing inplace Yes Yes Biddocumentsfor first year's Under Under procurement preparation preparation Final draft PIP available Yes Yes Disclosure requirements met (safeguards) Yes Yes Land acquisition planready Yes Yes Domestic approvals secured Pending Pending 42 Annex 5: Project Costs CHINA RenewableEnergy Scale-up Program Project Cost B y Component andor Activity Local Foreign Total US$ million US$ million US$ million InstitutionalDevelopment andCapacity Building Component National level 46.60 7.22 53.82 Provincial level 12.00 7.60 19.60 Investment scale-up 6.60 2.20 8.80 Program managementlnational studies 2.66 0.72 3.38 Unallocated 3.22 3.22 Support for Wind andBiomass Component Pingtan wind farm 33.97 63.22 97.19 Rudongbiomass power plant 12.20 21.14 33.34 Total Baseline Cost 114.03 105.32 219.35 Physical Contingencies 2.52 2.5 1 5.03 Price Contingencies 0.00 0.00 0.00 Total Project Costs' 116.55 107.83 224.38 Interest duringconstruction 1.41 2.30 3.71 Front-endFee 0.30 0.44 0.74 Total Financing Required 118.26 110.56 228.82 'Identifiable taxes and duties are US0.525 million, andthe total project cost, net of taxes, is US440.175 million Therefore, the share of project cost net of taxes is 99.88 percent. 43 AdditionalAnnex 5A: Project Costsfor AdditionalAppraisedProjects CHINA RenewableEnergyScale-upProgram TableA5A.1: Project Costs for AdditionalAppraised Projects Project Cost By Component and/or Activity Local Foreign Total US$ million US$ million US$ million Support for Windand Small Hydro Component Huitengxile wind farm 27.42 66.18 93.60 Zhejiang small hydro plant 42.08 50.67 92.75 Total Baseline Cost 69.50 116.85 186.35 Physical Contingencies 2.16 0.21 2.37 Price Contingencies 2.00 0.20 2.20 TotalProjectCosts' 73.66 117.26 190.92 Interest duringconstruction 0.56 1.46 2.02 Front-end Fee 0.06 0.59 0.65 TotalFinancingRequired 74.28 119.30 193.58 44 Annex 6: Implementation Arrangements CHINA RenewableEnergy Scale-up Program Overview The NDRC is the government agency responsible for overall project coordination, implementation supervision of the InstitutionalDevelopment and Capacity BuildingComponent, and approving the investment projects. A PMO under NDRC will be responsible for management of the Institutional Development and Capacity Building Component, and has been operating since the start of project preparation. Project companies, as described below, will be responsible for implementation of the Support for Wind, Biomass and Small Hydro in Pilot Provinces Component. A project steering committee made up of various ministries involved in renewable energy development will provide overall policy guidance and facilitate coordination among different agencies on project implementation. This committee will be chaired by NDRC and will include representatives from the Environment and Resources Committee of the National People's Congress, the Office of Legislative Affairs of the State Council, the MOF, the People's Bank of China, the Ministry of Science and Technology (MOST), the Ministry of Water Resources (MOWR), the Ministry of Agriculture (MOA), the State Forestry Administration (SFA), the State Environmental Protection Agency (SEPA), the State Electricity Regulatory Commission (SERC), the State Grid Corporation and South Grid Corporation (South Grid), and the China Academy of Science (CAS). The organizational structure for implementation i s given at the end of this annex, and detailed institutionalarrangements are described below. Institutional Developmentand Capacity Building Component The PMO, under the Energy Bureau of NDRC, i s responsible for implementation of the Institutional Development and Capacity Building component at both national and provincial levels. For the first 18 months of implementation, a work program has been agreed between the Bank and NDRC. For subsequent years, an annual work programwill be prepared by the PMO. In implementing the work program, the PMO will be responsible for selection of consultants, including preparation of terms of reference (TOR), advertising, shortlisting, issuingrequests for proposals, evaluation of proposals, negotiating with selected consultants and contracting with those who have been selected. The PMO will also be responsible for maintenance of accounting and managementinformation systems, progressreportingto both GoC and the Bank, conducting outreach and liaison and monitoring and evaluation. Consultants will be hiredto provide advice andimplement activities inthe following areas: 0 Researchand support for implementation of MMP at national and provincial levels including the development of regulations and decrees; 0 Preparation of standards, and advice on certification; 0 Evaluation of cost-shared activities; 0 Undertaking resource assessments inthe pilot provinces; 45 0 Capacity building and training activities. Stakeholder companies will participate in cost-shared activities following evaluation and appraisal of their requestsfor funding support inthe areas o f 0 Windandbiomass technology improvement; 0 Establishment of a testing center for wind; 0 Long-termcapacity building(with universities); 0 Pilot or demonstration activities; 0 Investment scale-up (the companies sponsoring the investment sub projects described below). The PMO will be responsible for carrying out donor coordination through: (a) active collection and dissemination of renewable energy activities in China; (b) identification of important and relevant renewable energy areas that are receiving insufficient attention and support; and (c) organization of regular GoC Partnership meetings between donors supporting renewable energy andthe GoC and nongovernment agencies involvedinrenewable energy. Supportfor Windand Biomass Component Pingtan Wind Farm, Fujian. The sponsor of the Pingtan wind power i s Long Yuan, which will implement the project until LYPWP i s formed, expected when the feasibility study is approved. Long Yuan and its established project preparation office, succeeded by the LYPWP on its formation, will design, procure, supervise construction, own and operate the wind farm. When LYPWP is formed, it will assume responsibility for implementation and the onlending and project implementation agreements will be amended. Contractors will undertake ancillary civil and electrical works and a wind turbine supplier will, under single responsibility, supply and install the turbines and control systems and provide design details for towers, foundations and specialized aspects of the electrical system. Additional specialist consultants will be hired, as required, to provide TA in procurement (including bid assessment), construction management (as the owner's engineer or for quality purposes) and wind farm operations. Rudong Biomass Power Plant, Jiangsu. The Rudong power plant i s sponsored by NED. NED will design, procure, supervise construction, own and operate the power plant. It will also enter into contracts with specialist straw brokers to supply of fuel. Contractors will undertake ancillary civil and electrical works and specialist plant suppliers will, under separate responsibility, supply and install the boiler island, steam turbine island, instrumentation and control island and mechanical handling equipment. The works will be supervised by a qualifiedengineering consultant to be hiredunder a separatecontract. Additional specialist consultants will be hired, as required, to provide TA in procurement (including bid assessment), construction management (as the owner's engineer or for quality purposes) and plant operations. 46 Organization of implementation i s shown schematically inthe diagram below. InstitutionalDevelopment Supportfor Wind and and CapacityBuilding 1 Long Yuan Jiangsu National Investment TA Scale-up Development Co ................................... -.............................. Provincial Program TA Management 1- Iiiricr Mongolia Zhejimg Linkage of negotiatedprojects Smal1 47 AdditionalAnnex 6A: ImplementationArrangementsfor AdditionalAppraisedProjects CHINA RenewableEnergyScale-upProgram Huitengxile Wind Farm, Inner Mongolia. The Huitengxile wind farm i s being developed by NLYWPC, which i s 50 percent owned by the NUPC and 50 percent by Long Yuan (the company responsible for developing the Pingtan wind farm described in Annex 6). Contractors would undertake ancillary civil and electrical works and a wind turbine supplier will supply and install the turbines, control systems and towers and provide design details for foundations and specialized aspects of the electrical system. Additional specialist consultants would be hired(and financed by non-GEF funds) to provide TA in procurement (including bid assessment), construction management (as the owner's engineer or for quality purposes) and wind farm operations and maintenance. Small Hydro Projects, Zhejiang. Rehabilitation projects are mainly within state or collectively owned county-level companies. New buildprojects are mostly sponsoredby private companies. Management of the component would be under the supervision of a project leading group composed of members of Zhejiang provincial government, including the provincial People's Representative Committee, the Legislation Office, Finance Bureau, Economic and Trade Commission, Bureau of Construction, Water Resources Bureau, Agriculture Bureau, Environment Protection Agency and the Power Corporation. Individual subprojects will undergo due diligence by the provincial government, which has appointed Zhejiang Hydropower Management Development Center (ZI-PMDC) to act for it. Criteria for technical (including safety), economic, financial, environment, resettlement and procurement aspects of the due diligence have been agreed between the Bank and Zhejiang government at appraisal and set out in the Project Implementation Plan (PIP). Due diligence of individual projects will be managed by ZHPMDC and expert consultants as required. The findings of the due diligence will be recorded and reported to Zhejiang government's leading group and the Bank. On completion of due diligence, each project owner will sign a subloan agreement with Zhejiang Province. Individual subprojects will be managed by the owners, with construction being undertaken by civil works contractors and supply and installation of electrical and mechanical equipment by' specialized contractors. 48 Annex 7: FinancialManagement andDisbursement Arrangements CHINA Renewable Energy Scale-up Program Summary of Financial ManagementAssessment The Financial Management Specialist m S ) has conducted an assessment of the adequacy of the project financial management system of the CRESP, including both TA and the investment projects within the Support for Wind and Biomass in Pilot Provinces Component. The assessment, based on guidelines issued by the Financial Management Sector Board on October 15, 2003, has concluded that the project meets minimum Bank financial management requirements, as stipulated in OP/BP 10.02. Inthe opinion of the FMS, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project in the reporting format agreed with the project and as requiredby the Bank. Risk assessment for the financial managementarrangements were assessedas low to moderate in Fujian, and Jiangsu. The PMO was determined to be low risk because it was considered that the standards required by the Bank were being met and considered appropriate. A summary of the risk assessment for each of the project entities i s given inTable A7.5. No outstanding audits or audit issues exist with the implementing agencies involved in the proposed project. The task team however will continue to be attentive to financial management matters and audit covenants duringproject supervisions. Financialmanagement assessments for all the implementingagencies are heldon the project file. Audit Arrangement Inline with other Bank financed projects inChina, the project will be audited inaccordancewith International Auditing Standards and Government Auditing Standards of the People's Republic of China. For the investment subprojects the Provincial Audit Offices have been identified as auditors for the projects in their respective provinces. Annual audit reports will be issued in the name of the Provincial Audit Office and subject to reviews by China National Audit Office (CNAO). The Bank currently accepts audit reports issued by CNAO or its provincialh-egional audit bureaus/offices for which CNAO i s ultimately responsible. The annual audit requirements for the investment subprojects are summarized below. Component Submittedby Duedate Auditor Pingtanwindfarm: ProjectandEntity SPC June 30 FujianProvincialAudit Office Financial Statements Rudongbiomasspowerplant: Project NED June 30 JiangsuProvincialAudit Office andEntityFinancial Statements The Foreign Funds Application Audit Department of the China National Audit Office (CNAO) has been identified as the auditors for the GEF grant. The annual audit report on the financial statements of the GEF grant will be due at the Bank within six months of the end of each calendar year, with a separateopinion on Statement of Expenditures and Special Account. 49 Funds Flow and DisbursementArrangements The Bank loan will be signed between the Bank and the People's Republic of China through its MOF, and onlending arrangements for the Bank loans will be signed for the investment projects as follows: (a) in Fujian with Long Yuan and then between Long Yuan and the special purpose company to be established, which will implement the project, with a guarantee from Guodian, Long Yuan's parent; (b) in Jiangsu with Jiangsu Provincial Finance Bureau (JPFB) and then between JPFB and Jiangsu Guo Xin Investment Group and then between Jiangsu Guo Xin Investment Group and NED (Guo Xin), which will implement the project, with a guaranteefrom Guo Xin Investment Group; and GEFgrant will flow from the World Bank to the special account established and managedby MOF and then to the CRESP PMO. Counterpart funds will be loans from local commercial banksandequity funds from investors. The project will disburse based on traditional techniques and will not be using FMR-based disbursements, in accordancewith the agreementbetweenthe Bank and MOF. The Bank loan proceeds will flow from the Bank (a) for Pingtan wind farm, via special commitments and direct disbursement to contractors; and (b) for Rudong biomass power plant from MOF to the special account managed by Jiangsu Provincial Finance Bureau on behalf of NEDandthenceto contractors. The GEF grant proceeds will flow from the Bank to a special account managed by MOF on behalf of the PMO. Disbursements will be made from the special account to contractors. Authorized allocations for special accounts are given below: PMO(IDCB component) Jiangsu Authorized Allocation US$3 million US$2million InitialDeposit US$2million US$1.5 million Trigger US$15million US$7 million Disbursement Schedule The disbursement schedule for the Bank loan and GEF grant in millions of U.S. dollars i s given below: Table A7.3: Disbursement Schedule for Bank Loansand GEFGrants (millions of U.S. dollars) I 2006 I 2007 I 2008 I 2009 I 2010 I Loan Annual 26.60 53.40 6.00 1.oo Cumulative 26.60 80.00 86.00 87.00 Grant Annual 2.8 1 12.39 17.54 5.24 2.24 Cumulative 2.81 15.20 32.74 37.98 40.22 50 Disbursement by category for the loan and grant proceeds and percentage to be financed i s given below: Expenditure Category I Amount in US$ million Financing percentage Loan Goods 85.87 100%of foreign expenditures, 100%of localexpenditures (ex factory cost) and 75% of expenditure on other items procuredlocally Consultant services 0.70 100% Fee 0.44 100% Grant Goods 2.39 100% of foreign expenditures, 100%of local expenditures (ex factory cost) and 75% of expenditure on other items procured locally Consultant services 20.38 100% Subgrants 13.59 Upto 50% of proposedactivity PMOoperating expenses 0.64 100% Unallocated' 3.22 Use of Statements of Expenditure Loan withdrawals will be made on the basis of statements of expenditure for goods costing less than US$lOO,OOO equivalent per contract, services providedby consulting firms costing less than US$50,000 equivalent per contract, and services providedby individual consultants costing less than US$20,000 equivalent per contract. These documents will be made available for the required audits, as well as to the Bank supervision missions uponrequest. All other expenditures above the SOE thresholds will be submitted on the basis of full documentation. Grant withdrawals will be made on the basis of statements of expenditure for subgrants, goods costing less then US$lO,OOO equivalent per contract, services provided by consulting firms costing less than US$lOO,OOO equivalent per contract, and services provided by individual consultants costing less than US$50,000 equivalent per contract. These documents will be made available for the required audits, as well as to the Bank supervision missions upon request. All other expenditures above the SOE thresholds will be submitted on the basis of full documentation. SOE documentation will be retainedby the respective implementingagencies for the Support for Wind and Biomass Pilot Provinces Component and the PMO for the Institutional Development andCapacity Buildingcomponent. 51 Conditionsof disbursement The following will be conditions of disbursement: 0 InFujian; for Pingtan windfarm, establishmentof the specialpurposecompany andhiringof adequate and qualified financial accounting staff; 0 InJiangsu, for Rudongbiomasspower plant, adequateandqualifiedfinancial and accounting staff hired at NED; 0 For Fujian and Jiangsu, financial managementmanuals should be prepared and issued by the entity responsible for managing and implementing their respective project components. 52 able A7.5: Su mary RiskAssessment tisk PingtanWind Farm, Fuiian ludong BiomassPower, Jiangsu .Inherent Moderate. Itis the first time for Long rloderate. It is the first time for Guo Xin 'roject Risk Yuan to manage and for the proposed D manageand for the proposedSPC to SPC to execute aproject financed by the :xecutea project financed by the World World Bank. All the financial staff 3ank. All the financial staff to be assignedhave no prior Bank experience. issignedwould haveno prior Bank The task team will closely monitor the :xperience.The task team will closely project from the initialstage and a well- nonitor the project from the initial stage designedand focusedtraining program md a well-designed and focusedtraining will befacilitated to help the financial Irogram will be facilitated to help the staff with the assignment. inancial staff with the assignment. `I.Contro1Risk 1. Moderate.Closemonitoringby task team Iloderate. Close monitoringby task team .mplementing i s needed to ensure the implementing s neededto ensure the implementing 3ntity entity i s familiar with Bank procedures :ntity is familiar with Bank procedures and requirements. i drequirements. 3. FundsFlow Moderate.The funds will flow directly to Moderate. The funds will flow from the the SPC from the Bank. This funds flow 3ank to JiangsuFinance bureauand then arrangement is consideredmore efficient .oNED.This funds flow arrangementis andeffective comparedwith funds :onsidered more time consuming and flowing through each level's finance :lose monitoringis neededto ensure bureau. here are no significant delays. ;. Staffing Moderate. Since all the financial staff Moderate.Since all the financial staff haveno prior Bank experience,a training have no prior Bank experience, a training program will be facilitated at the initial programwill be facilitated at the initial stage and close monitoringand stage and close monitoring and supervisionwill be performed by the task supervisionwill be performedby the task team throughout the implementation team throughout the implementation process. process. d. Accounting Low. Accounting policies and procedures Low. Accounting policies andprocedures Policies and are already inplace. are alreadyinplace. Procedures e. Internal Moderate. Although an internal audit Moderate. Although an internal audit Audit departmentexists at Long Yuan, we will department exists at Guo Xin, we will not not be relyingon their work. Supervision be relyingon their work. Supervision visits by the task team along with annual visits by the task team along with annual audits performed by the external auditors, auditsby the external auditors, Jiangsu FujianProvincialAudit Office, will be Provincial Audit Office, will be utilized. utilized. f. External Low. The external auditors, Fujian Low. The external auditors, Jiangsu Audit ProvincialAudit Office, have extensive ProvincialAudit Office, have extensive audit experience with previous Bank- audit experience with previous Bank- financed projects. financed projects. g. Reporting Low. Format of financial statements and Low. Format of financial statements and and frequency of submissionhavebeen frequency of submissionhave been Monitoring clearly defined by the Bank andMOF. clearly defined by the Bank andMOF. h.Information Moderate. The computerized financial Low. The computerized financial Systems managementsystem "Yuan Guang" will managementsystem "Run Jia" is utilized be utilizedby the SPC. The task team will by Guo Xin, but it hasnot beendecided closely monitor the processingof its whether NEDwill also use it. The task accounting work inthe initial stage and team will closely monitor the processing subsequentregular supervision missions of its accounting work inthe initial stage and subsequentregular supervision missions. 53 AdditionalAnnex 7A: FinancialManagementandDisbursementArrangementsfor AdditionalAppraisedProjects CHINA RenewableEnergyScale-upProgram Summary of Financitll Management Assessment The FMS has conducted an assessment of the adequacy of the project financial management system of the CRESP, including both TA and the investment projects within the Support for Wind and Biomass in Pilot Provinces Component. The assessment, based on guidelines issued by the Financial Management Sector Board on October 15, 2003, has concluded that the project meets minimumBank financial management requirements, as stipulated in OP/BP 10.02. In the opinion of the FMS, the project will have in place an adequate project financial management systemthat can provide, with reasonableassurance, accurate andtimely informationon the status of the project inthe reporting format agreedwith the project and as required by the Bank. The financial management assessment for the Huitengxile wind farm and the Zhejiang small hydro projects assessed the financial management arrangements as low to moderate in Inner Mongolia and moderate to highinZhejiang. No outstanding audits or audit issues exist with the implementing agencies involved in the proposed project. The task team however will continue to be attentive to financial management matters andaudit covenants duringproject supervisions. Financial management assessments for both the implementing agencies are held on the project file. Audit Arrangement Inline with other Bank financed projects in China, the project would be audited in accordance with International Auditing Standards and Government Auditing Standards of the People's Republic of China. For the investment subprojects the Provincial Audit Offices have been identified as auditors for the projects in their respective provinces. Annual audit reports will be .issuedinthe name of the Provincial Audit Office and subject to reviews by ChinaNational Audit Office (CNAO). The Bank currently accepts audit reports issued by CNAO or its provincial/regional audit bureaudoffices for which CNAO i s ultimately responsible. The annual audit requirements for the investment subprojects are summarized below. Component Submitted by Duedate Auditor Huitengxilewind farm: Project and NLYWPC June 30 Inner Mongolia Autonomous Region Entity Financial Statements Audit Office Zhejiang Small Hydro: Project and ZHPDMC June 30 Zhejiang Provincial Audit Office Entity Financial Statements The Foreign Funds Application Audit Department of the China National Audit Office (CNAO) has been identified as the auditors for the GEF grant. The annual audit report on the financial 54 statements of the GEF grant will be due at the Bank within six months of the end of each calendar year, with a separate opinion on Statementof Expenditures and Special Account. Funds Flow and DisbursementArrangements The Bank loan would be signed between the Bank and the People's Republic of China through its MOF, and onlending arrangements for the Bank loans will be signed for the investment projects as follows: (a) inInner Mongolia with Inner Mongolia Finance Bureau (IMFB) and then between the IMFB andNLYWPC with a guaranteefrom the NuPC; and (b) inZhejiang with the Zhejiang Finance Bureau (ZFB), between the ZFB and county finance bureaus and from county finance bureaus to the project companies. The project would disburse based on traditional techniques and will not be using FMR-based disbursements, in accordancewith the agreementbetween the Bank andMOF. Bank loan proceeds would flow from the Bank (a) for the Huitengxile wind farm, via special commitments and direct disbursement to contractor; and (b) for Zhejiang hydro projects from MOF to the special account managedby the ZFB and thence to reimburse project implementing companies. Authorized allocation that would apply for the special account for Zhejiang i s given below: Zhejiang Authorized Allocation US$4 million InitialDeposit US$3 million Trigger US$20million Disbursement Schedule For the additional investment projects in Inner Mongolia and Zhejiang, the following disbursement schedulewould apply: 2006 2007 2008 2009 2010 Annual 50.82 56.09 9.49 0.6 Cumulative 50.82 106.91 116.40 117.00 Disbursement by category for the potential investment projects would be as follows: Expenditure Category Amount inUS$ million Financing percentage Loan Goods 66.67 100%of foreign expenditures, 100%of localexpenditures(ex 55 factory cost) and75% of expenditureon other items procuredlocally Subloans 49.75 100% Fee 0.59 100% Use of Statementsof Expenditure Loan withdrawals will be made on the basis of statements of expenditure for subloans, goods costing less than US$lOO,OOO equivalent per contract, services provided by consulting firms costing less than US$50,000 equivalent per contract, and services provided by individual consultants costing less than US$20,000 equivalent per contract. These documents will be made available for the required audits, as well as to the Bank supervision missions upon request. All other expenditures above the SOE thresholds will be submitted on the basis of full documentation. Grant withdrawals will be made on the basis of statements of expenditure for subgrants, goods costing less then US$lO,OOO equivalent per contract, services provided by consulting firms costing less than US$lOO,OOO equivalent per contract, and services provided by individual consultants costing less than US$50,000 equivalent per contract. These documents will be made available for the required audits, as well as to the Bank supervision missions upon request. All other expenditures above the SOE thresholds will be submitted on the basis of full documentation. SOE documentation will be retained by the respective implementing agencies for the Support for Wind and Biomass Pilot Provinces Component and the PMO for the Institutional Development and Capacity Buildingcomponent. Conditions of disbursement For the additional investment projects, the following conditions of disbursement would apply for: 0 Inner Mongolia after a financial management manual has been prepared and issued by NLYWPC; and 0 Zhejiang, (a) after review by the Bank of individual subprojects according to the procedures set out inthe PIP; and (b) issue by ZHPDMC of a financial management manual on behalf of the implementing companies. Summary RiskAssessment The risks identified for financial management for the potential investment projects that were appraised are set out inTable A7A.5: Risk Huitengxile Wind Farm, Inner Mongolia Zhejiang Small Hydro I.Inherent Moderate. It is the first time for Moderate. It is the first time for ZHPMDC to Project Risk NLYWPCto manageand executea manage and for all the PIUs to execute aproject project financed by the World Bank. All financed by the World Bank. All the financial staff 56 the financial staff at NLYWPC haveno OfZHPMDC andthe PIUs haveno prior Bank prior Bank experience.The task team will experience.The task team will closely monitor the closely monitor the project from the project from the initialstage and a well-designed initial stageand a well-designedand and focusedtraining program will be facilitated to focusedtraining programwill be help the financial staff with the assignment. facilitated to help the financial staff with the assignment. Moderate. Closemonitoring by task team High. Close monitoringby task team is neBdedto Implementing i s neededto ensurethe implementing ensure the implementing entity i s familiar with Entity entity is familiar with Bank procedures Bank procedures andrequirements. andrequirements. b. FundsFlow Moderate. The funds will flow fromthe Moderate. The funds will flow from the Bank to Bank to Inner MongoliaFinanceBureau, the ZFB then to countylmunicipal finance bureaus and then to NLYWPC. This funds flow and finally to PIUs. This funds flow arrangement arrangementi s consideredmore time is consideredmore time consuming andclose ~ consuming and close monitoring is monitoringi s neededto ensure that there are no neededto ensurethere are no significant significant delays. delays. c. Staffing Moderate. Since all the financial staff Moderate. Since all the financial staff have no have no prior Bank experience, a training prior Bank experience, a training program will be program will be facilitated at the initial facilitated at the initial stage and close monitoring ~ stage and close monitoringand and supervision will be performedby the task team supervision will be performed by the task throughout the implementation process. team throughout the implementation process. i Low. Accounting policies andprocedures Moderate. Accounting policies andproceduresfor Policies and are already inplace. Bank-financed projects are already inplace. Procedures e. Internal Moderate. No internal audit department Moderate. No internal audit departmentexists. exists at NLYWPC. Supervision visits by Supervision visits by the task team along with the task team along with annualaudits annual audits'performed by the external auditors, performed by the external auditors, Inner Zhejiang Provincial Audit Office, will be utilized. Mongolia Autonomous Region Audit Office, will be utilized. 1 Low. The external auditors, Inner Moderate. The external auditors, Zhejiang Audit Mongolia Autonomous Region Audit Provincial Audit Office, have extensiveaudit Office, have extensiveaudit experience experiencewith previous Bank-financedprojects. with previous Bank-financed projects. g. Reporting Low. Format of financial statements and Moderate. Format of financial statements and frequency of submissionhavebeen frequency of submissionhavebeenclearly defined Monitoring clearly defined by the Bank andMOF. by the Bank andMOF. h.Information Moderate. The computerized financial Moderate. The PIUs will all utilize manualbooks Systems managementsystem "Yuan Guang" is to account for the transactions. The task team will utilized by the NLYWPC. NLYWPC will closely monitor the processingof accounting work continue to use this software for the inthe initialstageand subsequentregular recording of the project accounts. The supervision missions. task team will closely monitor the processingof its accounting work inthe initial stage and subsequentregular supervision missions. 57 Annex 8: Procurement Arrangements CHINA Renewable Energy Scale-up Program A. GENERAL Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as requiredto reflect the actual project implementation needs andimprovements ininstitutionalcapacity. Procurement of Goods: A total of US$85.87 million worth of goods would be procured for the project, including (a) for the Pingtan wind farm, wind turbines consisting of the nacelles, blades and control system and ancillary electrical equipment including transformers, conductors and poles; (b) for the Rudong biomass power plant a boiler and steam turbine, mechanical handling equipment for fuel and ash and electrical equipment and control systems; and (c) under the grant, resource measurement equipment and office equipment for the PMO. For Pingtan and Rudong procurement will use supply and install arrangements. International CompetitiveBidding (ICB). All contracts for goods costing US$500,000 equivalent or more would be awarded through ICB procedures specified in the Procurement Guidelines. 0 National CompetitiveBidding (NCB).NCB procedureswould be usedfor procurement of goods costing less than US$500,000 equivalent per contract. Contracts each estimated to cost less than US$300,000 may be advertised only ina provincial newspaper. Shopping.Other goods would be procured usingshopping procedureswith contracts under US$lOO,OOO equivalent each. Selection of Consultants: A total of US$21 million worth of consultant services will be financed. Detaileddesign and supervision services will be procured as part of the package for the equipment to be supplied for the Pingtan wind farm and the Rudong biomass power project. Consultant services will be required under the TA component for: (a) advice on development and implementation of the mandated market policy (MMP)at national and provincial level; (b) to assist with implementation of the technology improvement and other cost-shared activities; (c) to assist in the investment scale-up work; and (d) carrying out work to support the management of the program, including the hiringof staff to work inthe PMO. Under the investment component, consultants will be hired to provide services for design, procurement support (including bid evaluation), construction management and operations and maintenance. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. In some cases, particularly providing advice for the development of the 58 MMP, universities or government research institutions may be hired if they provide unique or exceptional services, and CQS or QBS may be usedinstead of QCBS. Consulting contracts, estimated to cost US$lOO,OOO equivalent or more, will be awarded following the procedure of Quality and Cost Based Selection (QCBS) or Quality Based Selection (QBS). For consulting services estimated to cost less than US$lOO,OOO equivalent per contract under this project, Selection Based on Consultants' Qualifications (CQS) will be used. Chinese universities, design and research institutes as sources of consultants may be included in the shortlist. ProcurementDocuments:The Bank's StandardBiddingDocuments will be adoptedfor all ICB procurement. For NCB procurement, the Chinese Model Bidding Document (MBD) will be used, which were issued by the MOF in May 1997 in agreement with the Bank. The latest changes to the Bank's Standard Bidding Documents will be incorporated into the MBD as appropriate. For all contracts to be awarded following QCBS, the Bank's Standard Request for Proposals will be used. Sample procurement documents and contracts for shopping and small consulting assignments will be developed by the implementing agencies with the Bank's assistance. Operating Costs. The operating costs of the PMO will be financed from the GEF grant, including overheads and items such as travel and subsistence relating to the implementation of the program. The PMO's staffing, management procedures and proposed work plan were reviewed at appraisal and are considered satisfactory. Others. Other procurement arrangements will be made for cost-shared activities. Cost-shared activities will be supported through competitively awarded grants to commercial entities and universities and fellowship programs. Commercial entities will be selected and appraised according to procedures set out in the TA component PIP agreed at appraisal. Participating commercial entities include wind and biomass equipment suppliers and manufacturers, wind turbine testing centers, certification bodies and project developers. Activities to be supported include wind and biomass technology improvement and cost reduction, setting up of a testing and certification system for wind turbines, undertaking feasibility and prefeasibility studies, resource assessments and pilotldemonstration projects. Cost-sharing with selecteduniversities, to allow them to set up renewable energy engineering courses at master's degree level, will be undertaken in a similar way. A fellowship program, to allow senior staff to study abroad will also be established, with fellowships beingawarded along guidelines set out inthe PIP. B. ASSESSMENT THEAGENCIES' CAPACITY TOIMPLEMENTPROCUREMENT OF Procurement activities will be carried out by the following entities: 0 For the Pingtan wind farm, China Long Yuan Power Group Company (Long Yuan) and special purpose company, LYPWP, when established. The project office, which is the forerunner for LYPWP, i s staffed by a general manager, a chief engineer and a chief financial officer and functional units covering operations, construction, administration and finance and accounting. Staff handling procurement are headed by a senior engineer with experience of World Bank procurement of wind farm equipment. A further three engineers and an economist form the procurement unit. 59 For the Rudongbiomass power plant, Jiangsu Guo Xin Investment Group Limited (Guo Xin) and the special purpose company Jiangsu Guo Xin New Energy Rudong Development Company (NED).The special purpose company will be staffed by a general manager, a chief engineer and a chief financial officer and functional units covering construction, procurement and contracts, administration and finance and accounting. A group, headed by the general manager of NED will be responsible for procurement, and includes both engineering and commercial staff. Provisionhas been made for a bidevaluation committee composed of staff working on the project, but with membership from outside the company; For the TA component, the established CRESP PMO. The PMO will be increased in size to include a director, deputy director and a technical advisor. Functional staff will be assigned with responsibility for specific aspects of the TA program the one person now responsible for financial and contract management will be replaced by a small unit. Staff handling procurement are headed by the director. Existing staff with procurement responsibilities are experienced in Bank procurement and have received additional training during project preparation. An assessment of the capacity of the ImplementingAgencies to implement procurement actions for the project has been carried out by Li Xiaoping in October 2004. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for procurement. The action plan agreed to address the weaknesses include: (a) role and responsibility of each agency in handling procurement have been clearly defined in the PIPSprovidedby the implementing agencies to the Bank; (b) detailed procurement plans have been agreed at negotiations; (c) procurement training for all implementing agencies should be organized before the project implementation; (d) qualified procurement agents should be hiredand special attentions should be paidto the experience and competenceof their key staff assigned to this project; and (e) proper procurement filing system shall be established and maintained by the implementing agencies up to two years after the closing date of the Loan Agreement of the project. The overallproject risk for procurement i s average. C. PROCUREMENT PLAN The Borrower, at appraisal, developed procurement plans for project implementation, which provides the basis for the procurement methods. These plans have been agreed between the Borrower and the Project Team at negotiation and are available at (a) for the Pingtan wind farm at the project offices 216 Bei Huen Zhong Road, Fuzhou; (b) for the Rudong biomass power plant at the project offices of Guo Xin, 5 Qingyuan North Road, Jueguang Town, Rudong, Jiangsu; and (c) for the TA component at the PMO, 1718, Guohong Mansion, Muxidi Beili Jia 11,Xicheng District, Beijing 100038. They will also be available inthe project's databaseand in the Bank's external website. The Procurement Plans will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements ininstitutionalcapacity. D. FREQUENCY OFPROCUREMENTSUPERVISION In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agencies has recommended six- to eight-monthly supervision 60 missions to visit the field to carry out post review of procurement actions. Post review ratio would be one out of three contracts. E. Details of the ProcurementArrangements ProcurementMethod Thresholds of Procurement Prior Review Thresholds Methods Goods: ICB 2US$500,000 All contractsaboveUS$500,000, NCB <US$500,000 Shopping <US$100,000 Consulting QCBS 2us$loo,ooo All contractsfor first year for services IDCB component, thereafter all CQS <US$100,000 contracts aboveUS$ 100,000 for IC Assignmentsmeeting articles firms andUS$20,000 for 5.1 and 5.3 of the Guidelines individuals. For Support to Wind, ISmall Hydro and Biomass component, all contracts 61 I 0 N 5ix IB z z z Z z m m m m [r! g g x 3 0 2 9 ? W 3 N I /N m d v, 62 -I- I I ' t Ti 2 -I 8 8 8 tt E * 8 3 8 18 8 /v1 * * Q Q 0" 0" 2 2 63 I c c 5; P - - 5; P 3 cd 3 a cd 4 4>a g> g 3 3 I---- t 101 64 n2 3 2 3 . u r;a E c s E 3 2 8 9 0" 2 .*x Y 8 B I u 65 -r + ; gEI \ IB 'C 8 a : &." 8 0 M ."a I Y ? .3 Bx h I 2- s E Additional Annex SA: ProcurementArrangementsfor Additional AppraisedProjects CHINA RenewableEnergy Scale-upProgram A. GENERAL Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs andimprovements ininstitutionalcapacity. Procurement of Works: A total of US$42.4 million of works would be required for the civil works for the small hydro projects inZhejiang, consisting of dams, intake systems, power houses and other similar work. Given the small size of the contracts and the large number of competitive contractors in China, they would not be expected to attract international interest and therefore International Competitive Bidding (ICB) would not be proposed for the works contracts. All contracts would be below the current threshold for ICB Works for China of US$15 million. i)NationalCompetitiveBidding(NCB).ContractsforworksestimatedtocostUS$200,000 equivalent or more wouldbe awarded under NCB procedures acceptable to the Bank. Works contracts eachestimated to cost less than US$2 million would be advertised only ina provincial newspaper. ii)SmallCivilWorksProcurement(Shopping).Contractsforworksestimatedtocostlessthan US$200,000 equivalent per contract would be awardedthrough shopping procedures as specified inPara.3.5 of the Procurement Guidelines. These works would be suitable for lump-sumand fixed-price contracts awarded on the basis of quotations obtained from at least three qualifieddomestic contractors inresponseto a written invitation. Procurement of Goods: A total of US$132 million worth of goods would be procured for the potential investment projects, including (a) for the Huitengxile wind farm, wind turbines consisting of the nacelles, blades, towers and control system and ancillary electrical equipment including transformers, conductors and poles; and (b) for the small hydro plant in Zhejiang turbines, generators and related equipment including controls. For both projects, procurement would use supply and install arrangements. InZhejiang, with the exception of three contracts, all proposed contracts for the supply of goods would be below US$500,000 and several individual items of equipment are below US$lOO,OOO. Given the small size of the contracts and the large number of competitive suppliers in China, they would not be expected to attract international interest and therefore NCB or shopping as appropriate would be proposed for the goods contracts. For the three contracts exceeding US$500,000, Regional Procurement Advisor clearance to undertake NCB has been sought and obtained. 68 i)ZntemationalCompetitiveBidding(ICB).AllcontractsforgoodscostingUS$500,000 equivalent or more would be awardedthrough ICB procedures specified in the Procurement Guidelines. ii)NationalCompetitiveBidding(NCB).NCBprocedureswouldbeusedforprocurementof goods costing less than US$500,000 equivalent per contract, Contracts each estimated to cost less than US$300,000 may be advertised only in a provincial newspaper. iii)Shopping.Othergoodswouldbeprocuredusingshoppingprocedureswithcontractsunder US$lOO,OOO equivalent each. Selection of Consultants: No consultants are expected to be hired to support the additional investment projects. Nonetheless, the same procurement arrangements as set out for consultants for the main project would apply. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordancewith the provisions of paragraph2.7 of the Consultant Guidelines. Consulting contracts, each estimated to cost US$lOO,OOO equivalent or more, will be awarded following the procedure of Quality and Cost Based Selection (QCBS) or Quality Based Selection (QBS). For consulting services estimated to cost less than US$lOO,OOO equivalent per contract under this project, the Selection Based on Consultants' Qualifications (CQS) would be used for these contracts. Chinese universities, design andresearchinstitutes as sources of consultants may beincludedinthe shortlist. Procurement Documents: The Bank's StandardBiddingDocuments will be adoptedfor all ICB procurement. For NCB procurement, the Chinese Model Bidding Document (MBD) will be used, which was issued by the MOF in May 1997 in agreement with the Bank. The latest changes to the Bank's Standard Bidding Documents will be incorporated into the MBD, as appropriate. For all contracts to be awarded following QCBS or QBS, the Bank's Standard Request for Proposals will be used. Sample procurement documents and contracts for shopping and small consulting assignments will be developed by the implementing agencies with the Bank's assistance. B. ASSESSMENT THEAGENCIES' CAPACITYTO IMPLEMENT PROCUREMENT OF Procurement activities will be carried out by: e For the Huitengxile wind f m , NLYWPC. The company includes functional departments covering development, construction, operations and finance. The development department i s responsible for the project. Staff handling procurement include the deputy general manager, the chief engineer and the manager of the development department. Specialist members of the development department have been assigned to address specific aspects of procurement includingtechnical, financial andconstruction; e For the Zhejiang small hydro projects the Zhejiang PPO, staffed by the ZHPMDC, will be responsible for procurement. Staff handling procurement are overseen by the director of ZHPDMC, and assignedstaff for procurement are electrical engineers. An assessment of the capacity of Inner Mongolia Wind Power Company, the predecessor to NLYWPC, and ZHPMDC to implement procurement actions for the project was carried out by Li Xiaoping in November 2004. The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for 69 procurement. The action plan agreed to address the weaknesses include: (a) waivers for Bank- financed NCB procurement shall be included inthe legal agreements of the project; (b) role and responsibility of each agency inhandling procurement have been clearly defined in the PIP; (c) a detailed procurement plan has been agreed for Inner Mongolia, but i s pendingfor Zhejiang; (d) procurement training for all implementing agencies should be organized before the project implementation; (e) qualified procurement agents should be hired and special attentions should be paid to the experience and competence of their key staff assigned to this project; and (f) a proper procurement filing system shall be established and maintained by the implementing agencies up to two years after the closing date of the Loan Agreement of the project. The overall procurement risk for the additional projects was assessed as average, C. PROCUREMENTPLAN The Borrower, at appraisal, developed procurement plans for the implementation of the additional investment projects. The plan for Huitengxile has been agreed between the Borrower and the Project Team during technical discussions and i s available at the offices of NLYWPC, Power Building, South Xilin Street, Huhhot, Inner Mongolia. For the Zhejiang hydro projects, no agreement has yet been made, but a draft of the procurement plan i s available at the offices of ZHPDMC, 7 Meihuabei, Hangzhou 310009, Zhejiang. They would also be available in the project's database and in the Bank's external website. The Procurement Plans would be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs andimprovements ininstitutionalcapacity. D. FREQUENCY OFPROCUREMENTSUPERVISION In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agencies has recommended six- to eight-monthly supervision missions to visit the field to carry out post review of procurement actions. Post review ratio would be one out of three contracts. E. DETAILSOFTHEPROCUREMENTARRANGEMENTS Fable A8A.1: ProcurementArrangements ProcurementMethod I Thresholds of Procurement I PriorReviewThresholds Methods Goods: ICB 2US$500,000, except the three All contracts aboveUS$500,000, contracts aboveUS$500,000 and the first threeNCB contractsin for Zhejiang the first year of project NCB <us$500,000, and the three implementation and the first contracts above~~$500,000 contract ineachof the subsequent for Zhejiang years for Zhejiang Shopping <us$loo,ooo Works: NCB 2us$200,000 The first threeNCB contractsin the first year of project Shopping <us$200,000 implementation and the first NCB contract ineach of the subsequent years for Zhejiang Consulting QCBS 2us$loo,ooo All contracts services I I I 70 3 71 Annex 9: Economic andFinancial Analysis CHINA Renewable Energy Scale-up Program ECONOMIC ANALYSISOFPROGRAMAND OPTIMALQUANTITY OF"EWABLES Objective The objective of this section i s to provide an analytical framework for assessing and implementing a scale-up program for grid-based electricity generation from renewable energy sources by 2010. The core of the analysis i s a simulation model that generates supply curves for potential renewable energy projects; selects an optimum target quantity; and evaluates the economic and financial impacts of policy instruments designedto meet the target. The renewable energy projects in the model's database span China's 31 provinces, autonomous regions, and municipalities. They consist of ongoing, planned or potential developments in new small hydropower; rehabilitation of existing small hydropower; landfill gas; and wind energy. CRESP, in the pilot provinces, will further test the validity of the preliminary analytical results and sensitivity analyses inthis section. Policy Rationale China's power grid i s basedmainly on coal-fired electricity generation, which accounts for about 70 percent of total generation. This dependence on coal has substantial associatedenvironmental damage costs. At the same time, the country has a sizeablerenewable energy potential that could be substituted for some coal based generation and reduce environmental damage. Many renewable energy projects are economic relative to the production costs of coal. However, they do not contribute to electricity generation because of the absence of a proactive policy to incorporate them into the power grid. Furthermore, production of environmental damages stemming from coal utilization are not reflected in (internalized) its financial price. Factoring theminwould make additional amounts of renewable energy economic. Small-scale hydropower currently offers the greatest renewable energy potential for supplying grid-based electricity and China has led the world in the development of this technology. However, in the past, the focus has been on meeting the power needs of rural communities outside the gridrather than an environmental policy to substitute for coal-based generation inthe main grid. A renewable energy policy focusing on displacing coal for environmental reasons would help to reorient design practices to meet the requirements of the grid. Selection of the Economic OptimumScale-up Quantity Methodology and Assumptions. The objective of the approach i s to determine the optimal quantity of power generation based on renewable energy given a set of technical and economic assumptions. The analysis begins at the provincial level, first developing the renewable energy project database and then determining the unit costs of various renewable energy projects on a unitcost basis (in Y per kWh). Itthen constructs aprovincial supply curve relatingcost per kWh to electricity production. The selection of economically viable projects requires a comparison of project costs with the production and social cost of coal on the same per unitbasis. 72 To determine the social costs of coal use, the model calculates coal production costs in each province. It adds to these costs an estimated cost of the environmental damage that results from coal use. Since consistent data was not available for all of China's provinces, the estimate is based on the benefit transfer method-using well-established studies outside of China, but adjusting the costs for country condition^.^ The cost analysis for renewable energy i s based on production costs of the renewable energy technologies plus a capacity penalty, if applicableS6 This penalty represents the cost of not havingcontinuous power available for dispatch to the grid and the need to establish a form of back-up generating capacity, as in the case of hydropower projects without storagecapacity. The simulation model extrapolates a national supply curve for electricity generation from renewable energy from the provincial supply curves. It then allocates all electricity production from all renewable energy projects with a unit generation cost less than that of coal in the estimate of the quantity economically justified without considering environmental externalities or Q ECON. It also groups all projects with a unit cost less than the production cost of coal plus the externality cost inthe quantity Q ENV. This quantity is considered the economic optimumfrom an environmental perspective andforms the basecase of the analysis. The target year for the scale-up of renewable energy to the grid i s 2010. The quantity analysis is basedon economic costs, that is, without the inclusion of taxes and duties. Production costs were calculated as the annual operating and maintenance costs plus an annualized equivalent of capital costs. There were two important assumptions in the annualization of the capital coasts-a 20 year economic life for generating plants and a discount rate of 12 percent, the rate used by the GoC for investment projects. Other important assumptions were the externality values using the benefit transfer method for each of China's provinces. Figure A9.1 shows the estimated environmental damage cost per unit of electricity generated across all of China's provinces. Overall the data show the economic benefit of avoiding environmental damage from coal much greater for the densely populated, wealthier provinces in eastern and coastal China than in the western provinces. The damage cost analysis considers damage from three main air pollutants--oxides of sulfur (SO,), oxides of nitrogen (NO,), and particulate matter that would be emitted from plants with pollution controls (electrostatic precipitators). Although renewable energy can have some adverse environmental impact, the model does not quantify these costs, given that the magnitude of damage costs from coal use are much greater andeasily quantifiable. 73 Figure A9.1: Estimated Environmental Costs of Coal Use by Province Y / k W h 0 0 0 2 0.04 0.06 0.08 0 Beijing Tianjin H e b e i S hanxi Neimongu Liaoning Jinlin H eilo ngjia ng Shanghai Jiangsu 2hejia ng Anhui Fujian Jiangxi Shandong Henan Hubei Hunan Guangdong GHainan uang xi C hongqin Sichuan Guizhou Yunnan Xizang Shaanxl QGansu Ninghai ingxia Xinjiang The Supply Curve at the Provincial Level. Figures A9.2 illustrates the methodology at the provincial level basedon the data for Zhejiang Province. This province i s among those with coal damage costs on the high side. The supply curves result from a set of points that represent a renewable energy project in terms of cost per kWh, adjusted for the capacity penalty. Figure A9.2 expresses the costs interms of boththe production costs of coal and the social costs of coal. An avoidedcost curve, derivedby subtracting the production cost of coalfrom eachpoint, canbe produced. The advantage of this curve i s that it can be addedto the avoided cost curves of other provinces to arrive at quantity scenarios on a national basis. In contrast the cost curves that include the production cost are applicable at the provincial level only becausethe production cost varies by province, whereas the avoided damage costs per kWh are the same. Potential Levels of Electricity from Renewable Energy. Basedon the above methodology and assumptions, the simulation model arrived at three potential levels of renewable energy based generation by 2010. First, with business as usual and no renewable energy scale-up program, the likely quantity would be 35 TWh (Q BAU) or 1.2 percent of total generation in 2010. Second, a program focused on increasing power generation from economically viable renewable energy sources+ven without considering the damage costs of coal-would result in a renewable energy contribution of 79 TWh (Q ECON) or more than double Q BAU. Third, the amount of renewable energy-based generated economically justified with the inclusion of the externality costs of coal would be 89 TWh (QENV)considered the base case optimum economic quantity. A more pessimistic assumption for key base case parameters, particularly a reduction in the value of externalities, resulted in an optimum of 76 TWh. More optimistic assumptions, including a substantially higher value of externalities and a lower opportunity cost of capital, result in an optimum of 117 TWh. Figure A9.3 shows the economic optimum (QENV)broken down by Province. Technology Mix of the Economic Optimum (QEw). Table A9.1 shows a breakdown of the base case optimum quantity by type of renewable energy technology. About 75 percent of economic optimum production from renewable energy would come from new small hydropower 74 projects and an additional 13 percent from rehabilitated hydropower sites. The majority of small hydropower projects in the optimal solution have some degree of water flow. All bagasse projects would be economic without the consideration of environmental externalities. Landfill gas projects would not be economic without incorporating these externalities. No wind energy would be economic at the 12 percent discount rate used for the analysis. For wind energy to be economic at a 12 percent discount rate, the capital cost of the technology would have to decrease by 50 percent in2010 rather than the 33 percent estimated for the baseloadcase. Table A9:l: Base Case Generationfrom Renewable Energy by Technology Type Technolonv Electricitv Production (inTWhl New Small Hydropower 67 Rehabilitated Small Hydropower 12 BagasseCogeneration 8 Landfill Gas 2 WindEnergy 0 Figure A9.2: Renewable Energy Supply Curve for Zhejiang Province 0 6 0.5 0.4 f 2D O S 0.2 0 2 4 6 1wOQWh Environmental and Economic Impact at the National Level. Meeting the economic optimum target would result in only half the amount of emissions that would be produced under the business-as-usualscenario (Table A9.2) and overall would reduce overall emissions from coal in China by about five percent. At the same time, meeting this target would result in a one percent savings in the national cost of electricity and bring about a net increase in employment. The model also indicated a slight increaseinGDP, less than one percent. 75 Coal Emissions QBA u QECON QENV TSP (000tons) 15 27 32 SO, (000tons) 554 992 1,197 NO, (000tons) 111 201 239 Carbon (milliontons) 15 26 31 Comparative Provincial Results. Figure A9.3 shows the estimated economically optimum quantity of power production from renewable energy in each of China's provinces, under the baseline assumptions outlined above. The distribution of this quantity across provinces reflects variations inrenewable energy resourceendowments and the costs of coal production and related externalities. The extremes are representedby Shanghai, Sichuan, and Inner Mongolia. Shanghai has high fossil generation costs, and high externality values, but a poor renewable energy resource endowment. Therefore, its economically optimal quantity i s small, mainly limited to landfill gas projects. Incontrast, Sichuan has low generation costs and low externality values, but a large renewable energy resource endowment (mainly low cost small hydro), so its potential quantity of renewable energy is large. However, few of its small hydropower projects have water flow regulation, so the economics of small hydro are not as good as in provinces such as Zhejiang, where the corresponding proportion i s much greater. Inner Mongolia also has good wind resources, but low costs of coal-fired generation and externalities limit the economic viability of wind power. Figure A9.3: EstimatedEconomic OptimumQuantity of Renewable Energy by Province 1000 GWh 0 2 4 6 8 10 12 Beiling Tianjin Hebei Shanxi Neimongu Liaoning Jilin Heilongjiang shanghai Jiangsu Zheiiang Anhui Fvjian Jiangxi SFanaong nenan n i b s n,nan Guangoong Decisionmaking Analysis: Assessment of Important Assumptions, Alternatives and Risk. The parameters with the greatest impact on the results are the discount rate used, the estimated environmental damage costs of coal; and assumptions about reductions in the cost of wind technology. At the standard discount rate of 12 percent no wind energy would be economic. However, at 8 percent projects producing about 3 TWh are economic. At a 12 percent discount 76 rate, meetingthe same energy target would require a40 percent decreaseinthe capital cost of the technology combined with a five percent increaseinthe loadfactor. The study also reviewed environmental alternatives to promoting renewable energy development, mainly improved energy conservation and clean coal technology. It found that even if all economically justified projects were implemented substantial new coal-basedcapacity would still be required. It found the same to be the case for clean coal technology. Overall the analysis indicates the three options are complementary not mutually exclusive. A risk analysis has evaluated the impact of simultaneous changes in all of the important variables-discount rate, world oil price, GDP growth, environmental externality value, wind energy capital cost reduction. The study also constructed payoff and penalty matrices for the three possibilities for the economic optimum quantity-a base case scenario (89 TWh), a pessimistic scenario (76 TWh), and an optimistic scenario (117 TWh). The analysis found a probability of only 27 percent that the optimum economic quantity would be less than 89 TWh. Concerning the higher target of 117 TWh, the penalty matrix shows that the potential maximum penalty of this target not being the optimum i s substantially greater than the maximum benefit of the pessimistic target, indicating that it is better to underestimate rather than overestimate. This makes sense on the practical level as well since given uncertainty, it i s better to build incrementally than to incur the cost of buildingunusedcapacity. Options for Policy Instruments to Meet the Target Methodology and Assumptions. The policy focuses on how to meet the economic optimum target considering the distribution of benefits, especially to the western provinces, given the GoC's policy to promote the development of this region. The starting point for the analysis was a review of international practice and study tours to countries that have been successful in renewable energy development for grid-based power generation. Two categories of policy instruments have proven effective, which the analysis has reviewed in detail-quantity-based instruments andprice-basedinstruments. Theseinstruments rely on market forces incombination with some administrative standards or prices to stimulate the market for developing renewable energy technology. Quantity-based instruments establish a target quantity for renewable energy by a given date and allow the market to set the price. This approach has been adopted in some form by Australia, Denmark, Italy, the Netherlands and the United States. Price-based instruments guarantee a tariff that producers will obtain, allowing the market to determine the quantity. The foremost example of this approachis Germany, which is the world's leader inthe development of wind power. Box A9.1 outline four cases that have been reviewed in detail. These consist o f two quantity-based models policies-the development of a Renewable Portfolio Standard (RPS) in Texas and the bidding model of the Non-Fossil Fuel Obligation (NFFO) in the United Kingdom; one price- basedmodel-the German Feedlaw; and one combination Feedlawmidding program in China's Zhejiang Province. Theoretically, with perfect knowledge of the provincial supply curves and the externalities of coal use, the same impact should result whether the price or the quantity i s determined. However, given real-world uncertainty, the two policies may have different outcomes. The real issue i s not 77 whether to use a feedlaw rather than a quantity-based approach. What i s more important i s the extent to which either the target quantity or the feedlaw price would lead to achievement of a sound and well defined economic and environmental objectives. In the case of China, the analysis needed to take account of the varying costs of coal production and its externalities as well as different resource endowments of its provinces. Also, the analysis should address the extent to which the development of wind energy would require additional incentives to establish a domestic manufacturing industry that would be necessary in order to achieve the projected reductions inthe wind energy technology. In addition to the economic analysis of benefits to the economy, the methodology for selecting the policy instrument required a financial analysis to assess the incremental financial costs of the policies and their impact on the distribution of costs and benefits among different groups in society-consumers, equity investors, renewable electricity producers, coal electricity producers, banks, government (taxes and so forth). Table A9.3 provides a comparison of assumptions for some of the important elements inthe analysis. For example, the financial analysis usedan actual cost of capital inmarketplace at around six percent insteadof the discount rate that i s double that amount. It also includes corporate and value addedtaxes. 78 Box A9.1: Examples of Policiesto Promote Renewable Energyfor Power Generation Renewable Portfolio Standard (RPS) Concept:Legislation requiresthe productionof an agreedquantity of electricity fromaportfolio of renewable energy sources by a given target year, with penaltiesfor underperformance. Rents accrue to: Producers Costsrecoveredby: Consumers Appliedin: UnitedStates(Stateof Texas) Comment: The Texas RPS has beenone of the most successfulprogramsfor producing wind power. So far producershaveexceededtheir annualtargets considerably.An important element inthe success is the production tax credit, allowing wind projects to deliver power to the grid at less thanUS$0.03 per kWh, which is closeto the avoided cost of fossil fuel generation.Compliance with the standardhas been accomplishedby long-term contacts (10-15 years) betweenretailcompaniesand wind developers with strongpenaltiesfor underperformance. Non-Fossil Fuel Obligation (NFFO) Concept:Generatorsusingrenewableenergy inEnglandandWales bidcompetitively to receive a premium price of electricity funded by a levy on electricity sales to final consumers. Rentsaccrue to:Producers Costsrecoveredby: Consumers Applied in: EnglandandWales Comment: (What was the impact?) Feedlaw System Concept:The term comes from the original Germanlaw that means"electricity feed-in law" that provided a price guarantee for producersof wind energy. The governmentsets aFeedlaw price at the social cost of coal. Utilities are required to accept wind energyproduction from all technically qualifiedproducers. Rentsaccrue to: DevelopersJequipmentproducers Costsrecoveredby:Consumers Appliedin:Germanyand Spain Comments: Germanyleadsthe world ininstalledcapacity for wind power, butalso hadthe highest tariff under Feedlaw.The law originally applied only to wind energy, but now applies to other forms as well. InApril 2000, the Government of Germany replacedthe earlier law to correct for some of the problems of the old law, includinghighprices. FeedlawBidding Combination Concept:The Feedlawpriceprovides developers with a guaranteedoff-take price, butbiddingis requiredfor the right to develop renewableenergy sites. Rentsaccrue to: Producers/Government Costsrecoveredby :Consumers Appliedin:China (Zhejiang Province) Comments: For the systemto beeffective, there are two requirements.First,the feed-in price should not betoo far abovethe avoided cost. Second, for competition to be viable, actualproduction costs mustbe significantly below the Feedlaw price provide sufficient resourcerents to makeprojects attractive to developers. ~ ~~ ~~ ~ Table A9.3: Comparisonof the Assumptions: Economicvs. Financial Analysis Item Economic Financial Cost of capital Equity Opportunitycost of capital (12%) 18% (as intemalrate of return) Debt Opportunitycost of capital (12%) 6.2%(current Chinalendingrate) Equityratio N/A 25% Taxes Corporate IncomeTax None 33% VAT None 6.5%for smallhydroand8.5% for wind energy andlandfill gas coal Basedonborderprice Actual financial cost 79 Resultsof the Quantity-BasedOption.The analysisfocuses on determining a quantity standard for each province in order to meet the national optimum quantity target and whether the quantity based option should be considered. It evaluates two approaches for provinces to achieve this standardas shown inTable A9.4. The first is a "no trade" scheme, whereby each province would meet its standard from its own resources. The second is a system of tradable green certificates that allows provinces with higher-cost renewable energy resources to meet their target by buildingfacilities in other provinces with lower cost resources. This is the same as saying that one builds a set of renewable projects in China (totaling 89 TWh) that would yield the least aggregateproduction cost. Table A9.4: Comparison of Quantity-BasedOptions for Meeting the 89 TWh Economic Optimum Target by 2010 ExpectedBenefits Units Economic FinancialAnalysis analysis No Trade With Trade Impactof trade Annual flows, 2010 Net benefits:(financial) Y million - 8,450 8,574 124 Incrementalbenefits Y million - 5,710 6,031 321 (financial) Environmental benefits Y million 2,739 2,739 2,543 -196 (economic) SO2Emissions Reduction 1.000 tons 1,197 1,197 1,187 -9 TSP EmissionsReduction 1,000 tons 32.0 32.0 30.7 -1.3 NO, Emissions Reduction 1,000 tons 231 237 225 -8 ReductioninCoal million tons 38.9 38.9 39.4 0.5 Consumption Net Economic Benefits Annual 2010 Y billion 9.93 9.93 11.0 1.14 As NPV Y billion 31.4 31.4 36.1 4.7 The simulation model tested the economic and environmental impact of six quantity targets for 2010, ranging from a low of 65 TWh to a high of 140 TWh. Figure A9.4 indicates the tradeoff between net economic benefits and quantity of renewable energy based electricity. The evaluation shows that the highest net benefits would result from setting a quantity standardof 89 TWh for 2010 with interprovincial trade in green certificates. This case would have an NPV of Y 36.1 billion, which would be Y 4.7 billionor about 15 percent higher than setting the optimum without a TGC system (valued at Y 31.4 billion). 80 Figure A9.4: Net Economic Benefitsof Various Quantity Targets 40 I 60 100 120 140 160 target, TWh Estimated Financial Impact of Trade in Green Certificates. The analysis of the quantity based option also reviewed the financial impact of trade in green certificates on the various provinces as shown in Figure A9.5. The major winners are Xizang, Sichuan, Yunnan, and Guangxi. All of these are western provinces with good small hydro resources. Major losers are Shandong and Jiangsu, which would have a high obligation placed on them, but which have relatively few low-cost resources, meaning that to meet their obligation at least cost, they would become significant buyers of green certificates. Figure A9.5: Estimated Profitand Loss on Green Certificates net (loss)/(profit) on Green Certificate sales, Y millionlyear - - -400 -200 0 200 400 600 I I Beijing Tianjin -- Shanxi Hebe! Neimongu Liaoning ---------------- - Heiiongjiangl Jilin Shanghai Jiangsu Zhejianq Jiangxi Fujian AnhUi Shandong Henan Hunan Hubei Guangdongl Guangxi ,- Chon qing Hainan U sGuizhoun icBua YXizana unnan Shaand Qinghai Gansu Xinjiang Ningxia Evaluation of the Tariff Impact on Consumers. Although the trading system of green certificates has net economic benefits for all provinces, the tariff impact of meeting the optimum quantity will vary. Essentially it will depend on the extent to which the consumer or the producer 81 captures the surplus associatedwith the sale of the green certificates. Given the varying income levels among provinces, this impact i s a significant concern. To given an idea of the potential magnitude of the impact the simulation model created a worst-case scenario in which producers capture all of the surplus from the sale of green certificates. Although the provinces on the lower end of the per capita income scale would bear the greatest burden, even the highest tariff impact would be very small, at a 0.35 percent increase. Financial Impact on Stakeholders. FigureA9.6 shows the impact on various stakeholders. The positive amounts indicate savings to the power sector andto some combination of consumers and producers, whereas the negative amounts indicate cost. However, a financial cost to the power sector i s a financial benefit to the entity involved (and vice versa). Thus the saving to power consumers of Y 23.7 billion also represents lost revenues (that is, a cost) to the coal industry. However, the additional site cost of Y 9.2 billion in the west results in an increased financial flow to western construction industry. The expected tax impacts on local and provincial entities are small. However, there i s an apparent significant tax gain to the central government. The model accounts for the subsidy on domestic coal as a "negative tax" to the GoC.~Therefore, as coal consumption declines, the subsidy diminishes by a corresponding amount. Alternatively it would accrue to the central government or the coal industry if the coal not used for power generation i s exported instead, or usedfor some other purpose. Figure A9.6: Distributional FinancialImpact of the Quantity-BasedPolicywith Trade in Green Certificates Note: W prefix=west; Eprefix=east Positivebars:=netfinancial savingsto the power sector: Negativebars:=net financial costs "Site" = civil constructioncosts and local 0&Mcosts "Equip"=expenditus for manufacturedequipment (suchas smallhydro turbines andcoalboilers) "Equity" =retumslsubsidiesto equity holders Reconciliation of Economic and Financial Flows. FigureA9.7 summarizes the reconciliation of economic and financial flows resulting from the quantity standard with trade. The net benefit of Y 36.1 billion corresponds to the economic optimumquantity of 89 TWh inthe basecase. As the This "subsidy" arises because the economic netback value of coal (calculated on the basis of the international price at the export port) is higher than the financial cost. This is in reality a resource rent that is presently captured by coal consumers who benefit from a coal price that is below economic cost. 82 figure indicates, the loss incurredby financial institutions arises inthe reconciliation becausethe rate of financial interest i s below that of the assumed discount rate, and therefore provides an implicit subsidy to the power sector since lendat below the assumedopportunity cost of capital. Figure A9.7: Economicand Financial Flows for a Target Optimumof 89 TWh with Trade -10I I I a I a a financial taxes environment FI net total economic Evaluationof the Price-BasedOption. In a single province, with perfect information and no uncertainty, setting the price instead of a quality should result inthe same economic optimum of 89 TWh. For example, suppose Zhejiang Province were to set a Feedlaw price for all qualifying renewable energy resources at Y 40.1 per kWh, equal to the (economic) cost of coal generation plus the externality value of 6.2 fen/kWh. Then theoretically the same set of resources should be developed as in the case of setting a quantity standard of 6,994 GWh, which is the economic optimum for Zhejiang. However, in a multiprovince situation, it i s virtually impossible to design a feedlaw that gives the same result as a quantity target with tradable green certificates. Any feedlaw equalization measure necessarily would be an administrative rather than market process and the failures of the Soviet planned economy show that an administrative process cannot simulate the functioning of a real marketplace. International experience suggests that a feedlaw with a generous price can be highly effective in promoting renewable energy technology. The surplus goes to the producers, which creates incentives for technological innovation and cost reduction in turbine-generator equipment. This also creates a set of conditions that make it most likely for a domestic equipment manufacturing industry to be successfully established-which i s of particular relevance for China where the potential for reducing equipment costs through domestic manufacture i s substantial. Moreover, the certainty in feedlaw price makes it easier to finance projects than in systems where cost recovery i s through a market mechanism (such as tradable certificates) inevitably subject to greater uncertainty. Given all of these factors the feedlaw approach could prove beneficial to the development of a wind energy industry inChina Combined FeedlawmiddingApproach. The Zhejiang system for small hydro combines the features of the feedlaw price and the biddingvariant of the quantity approach. The feedlaw price provides certainty of revenues and the bidding ensures competitive prices. In principle it could be used everywhere. The system, however, needs two critical elements to be economically efficient. First the feed-in price should not be too far above the avoided cost, including externality cost. Second, for competition to work, project must be attractive to private 83 developers, meaning that the actual production costs for most projects must be significantly below the Feedlaw price. The Special Case of Wind Energy Rationale. The development of wind power might deserve special consideration for two reasons. Firstits economic potential can only be achieved inthe longrunif incentives are providedinthe short run. And second, whatever the costs of providing such incentives in the short run, they are likely to be outweighed by the long-term economic benefits. There are two main considerations for the development of a separate wind power development program. The first i s the size of the annual wind energy market to support the establishment of a domestic wind technology industry that will bring about the substantial cost reductions. The second i s whether the requisite wind energy market should be developed by setting a larger overall quantity target for renewable energy or through a technology-specific target implemented either by a Feedlaw or a quantity standard. Need for a Technology-Specific Target. At the present stage of global technology, Chinese manufacturers could reduce the cost of wind turbines by around 30 percent. As the global technology advances, even larger cost reductions over present levels may be possible. However, to achieve such cost reductions inChina, an assuredmarket will benecessary inorder to develop the necessary industrial infrastructure. Based on the global market for wind turbine-generator equipment, a domestic market size of at least 400 MW will be necessary. This suggests a 4,000 MW wind power target for 2015. Policy Options for Achieving a 4000 MW Target. There are three basic options for achieving the 4,000 MW target for wind energy development First, a feedlaw of 45 fen/kWh would induce 4,082 MW (generating 11.4 TWh), assuming the base case achievement of a 33 percent reduction in equipment cost by 2010. The second i s the establishment of a separate wind energy quantity standard amounting to 11.4 TWh, which could be implemented independently of a general 89 TWh RPS for all other renewable energy generation. There i s no reason why two types of green certificates could not be issued-one for wind and another for all other qualifying renewable energy sources. The third option i s an increase in the overall renewable energy target inorder to inducethe wind energytarget. The simulation modelindicates that anoveralltarget of 127TWh by 2010 would achieve this result. A feedlaw approachto wind energy development i s likely to require a price equalization scheme. Tariff increases to support wind energy development are likely to be unsustainable without a mechanism to spread the incremental costs among the provinces. For example, at a feedlaw price of 50 fen/kWh, the tariff increasewould be 17 percent inInnerMongolia, but only 0.3 percent in Guangdong. The funding of the equalization fund could take place through a national levy sufficient to raise the incremental costs of Y 3.4 billion, which would be distributed to wind project developers. However, matching the levy to the inherently unpredictable number of projects would be difficult. The NPVs of the quantity standard and the Feedlaw are very close-Y 32.1 billion and 32.3 billion, respectively-whereas the NPV for an increase inthe overall renewable energy target to 127 TWh has a significantly lower NPV (Y 25.3 billion). Thus, among the three options, that of 84 increasing the overall quantity standardfrom 89 TWh to 127 TWh i s clearly inferior, becauseit induces significant additional quantities of other noneconomic renewable energy technologies as well. Unlike the case of wind power, increasing the market size for small hydro i s not likely to reduce the future costs of small hydro. There are two reasonsfor this. First, the civil costs are not a function of the scale of the overall market, only of individual project size. Second, an establishedindustry for small hydro equipmentalready exists. Conclusions The conclusions of the analysis on the optimal scale-up quantity and policy instruments are basedon a set of assumptions and tests of their robustness.However the findings are provisional and not meant to be definitive policy statements. Rather the report provides the GoC with an analytical tool, basedon international best practice, which it can apply to the assumptionsit finds to be the most realistic. An important contribution of the report to the analytical literature is the methodology for determining the target quantity for electricity supplied by renewable energy. Although there are many examples of policy instruments designed to meet a given target, the basis for setting the target has been, in many cases, not subject to the type of economic analysis describedhere. Based on the methodology and assumptions in this report, the preferred option for scaling up renewable energy-based power generation in China would be to set a single national quantity target of 89 TWh by 2010 rather than technology specific targets. The most viable policy instrument for achieving this target would be a requirement that every province meet a corresponding percentage of its total consumption from new renewable energy resources, allowing for trade in green certificates to enable the provinces to attain their quantity standard at least cost. This option has the highest level of net economic benefits and provides an efficient mechanism for encouraging resource transfers to the western provinces. The establishment of a system for trading green certificates could take place gradually and would not require the immediate organization of a formal centralized market. In the early years of development, the system could work perfectly well through bilateral deals between producers and power companies who needto meet their renewable energy targets. Wind energy is the only renewable energy source likely to need a technology specific target apart from the overall renewable energy target. This should be sufficiently large to induce the development of domestic manufacturing industry. Preliminaryestimates indicate that inorder for this to take place the size of the industry should reach 4,000 MW by 2015. The analysis shows that the benefits of meeting this target using either a quantity standard a special Feedlaw would be very close and it i s advisable to look more closely into each of these options. The report finds that the alternative to each of these options-increasing the optimum renewable energy target from 89 TWh to 127TWh-would be an inferior optionbecause it could induce small hydro and other technologies that are uneconomic, but whose costs would unlikely decrease as a function of market size becausethey are already fully mature. There are several important parameters in,the economic and financial analysis that require further investigation during the pilot stage of the CRESP. On the economic side, there needs to be further study of the appropriate discount rate and the estimate of environmental damage costs 85 cause by the use of coal. On the financial side, there were several limitations in the analysis that require further study. Concerning the discount rate for the economic analysis, there are two issues that need to be resolved, The first i s whether the standard rate of 12 percent used for investment projects i s an accurate measure of the cost of capital in China. The second i s whether there i s some justification for usinga different discount rate for renewable energy development considering the fact that averting environmental damage has a strong future orientation, whereas a high discount rate indicates a strong preference for the present. In addition, there i s some environmental damage that mightbe irreversible. Many economists argue that the same rate must be used for all investment projects in a given country. However, others argue for a much lower rate for environmental projects in the order of 2-5 percent. There are precedents for differential rates in China, notably in the educational sector. However this subject i s beyond the scope of the economic analysis for this project and deserves further study and discussion during the first phase of CRESP. Another area for further study is the estimation of environmental damage costs. The values used in this report are based on studies from outside China and available estimates vary widely. There were several limitations in the financial analysis that could have an impact on the estimation of financial flows of to the various stakeholders. First, renewable energy projects located in western provinces are assumed to be developed by companies owned, located and registered in these provinces. Some uncertainty exists, however, whether the concomitant tax revenues actually accrue to the western governments, because they depend on the location, ownership and registration of the corporate entities in question, rather than the location of the project itself. Such revenues would diminish under the current tax system to the extent that companies registered, located and owned in the East would build such projects in the West. Second, based on international experience, the transaction cost of the proposed program i s assumed to be small; however this assumption needs further research and confirmation. Third, the taxes calculated in the financial analysis are based on statutory rates. However, in the past, actual taxes, especially income taxes, have been subject to negotiation between individual companies and tax authorities so that the actual tax revenues may be smaller than inthis report's financial analysis. ECONOMIC FINANCIAL AND ANALYSESOFSUBCOMPONENTSOF SUPPORTFORWIND, BIOMASSAND SMALL HYDRO COMPONENT Economic Analyses Cost-benefit analyses were carried out to estimate the ERRS of the two investment subcomponents of the proposed project (a) Fujian Pingtan Wind Power Generation Project (100 MW);and (b) Jiangsu Rudong Biomass Generation Project (25 MW). This annex summarizes the methodology, assumptions andresults of the cost-benefit analyses. Economic Costs The economic costs of the investment components include (a) total investment costs of the renewable power generation projects and associated power network connection facilities, (b) O&M costs of the generation projects and related transmission and distribution facilities; (c) fuel 86 costs for the biomass generation project; and (d) cost associated with electricity losses incurred during transmission and distribution and station uses. All the costs exclude taxes and duties and financing costs. The conversion factor i s considered as 1.0 when estimating the economic costs from financial costs because the distortions in the exchange and wage rates in the overall costs are not significant enough to justify the use of shadow prices. The currency used in these analysesi s Renminbi Yuan. Economic Benefits Two major benefits considered for the analyses are: (a) direct benefits from the sales of electricity valued by the sales prices as a proxy of consumer willingness to pay; and (b) emission reductions benefits that are estimated based on the New York Externality Model (Rowe and others 1994). Economic internal rate of return The detailed estimates of ERR for the components are shown in the following tables A9.5 for the Pingtan wind farm and A9.6 for the RudongBiomass project. The results show that EIRRsof both project components are greater than 12 percent and the project components are thus economically justified. 81 88 5 ~ o ~ ~ $ o o o o o o o o o o o o o o o o o o o ~ ~ .-~ -.--O ~ ~ N O O O o O O O O O O O O O O o o o o o ~ ~ N a E Y 89 FinancialAnalysis This section summarizes the results of the analysis of the financial soundness of the four investment project components. It consists of two parts: (a) at the project level: financial soundness of the project-the financial rate of return of the project; and (b) at the entity level: the financial structure, efficiency, and viability of the project entity. The financial analyses of the two investment subcomponents are based on the latest feasibility studies of the project components approved by the GoC and the project entities' audited historical financial accounts, as well as their latest financial projection. All the project components will be financed by IBRD loans, local loans and equity investments from the shareholders. The terms and conditions of the IBRD loans and local loans used in these analyses were those in late 2004. All the major assumptions are consistent with the current Chinese financial and taxation regulations as well as common practices inthe project areas. Financial rate of return of theprojects FuiianPingtan WindFarm Major assumptions: 0 Installedcapacity: 100.5 MW 0 Periodof construction: 2 years 0 Life of the project: 20 years 0 Depreciation rate: 6.7 percent (1/15) 0 Residual fixed asset value: 5 percent 0 O&M: 1.5 percent (the first 10-year period) and 2.5 percent (the second 10-year period) of total investment costs 0 Property insurance: 0.25 percent of the total value of the total investment costs 0 Total generation: 273.26 GWh 0 On-gridprice: Y 0.441 per kWh (excluding including VAT) 0 Value addedtax: 8.5 percent (50 percent concession) 0 Station use and line losses: 5.0 percent Results. The FIRR of this component was estimated at 6.52 percent, slightly higher than the investor's hurdle rate of 6.0 percent. The net present value at 6 percent was estimated at Y 1.33 million with a pay-back period of 12.32 years. JiangsuRudongBiomass Power Generation Proiect Major assumptions: 0 Installed capacity: 25 MW 0 Period of construction: 2 years 90 Life of the project: 20 years Depreciation rate: 6.7 percent (1/15) Residual fixed asset value: 5 percent O&M: 3.0 percent of total investment costs Total generation: 180.00 GWh On-gridprice: Y 0.615 per kWh(excluding including VAT) Value addedtax: 17 percent Corporate income tax: 33.0 percent Station use and line losses: 10.0 percent Results. The FIRR of this component was estimated at 10.56 percent, higher than the investor's hurdle rate of 6.0 percent. The net present value at 6 percent was estimated at Y 115.30 million with a pay-pack periodof 9.74 years. Financial uroiectionof the project entity Five year financial projections are carried out for (a) Long Yuan Power Group Co., the project entity of Fujian Pingtan Wind Power project, and (b) Jiangsu Guoxin Renewable Energy Development Company. The projected major financial indicators for each company are summarized infollowing tables A9.7 for LongYuan and A9.8 for NED. #ration Longyuan Electric Power Group Company Main Fiancial Indicators Unit: million yuan Item 2003 2004 2005 2006 2007 2008 2009 Operating Revenue 183.2 196.7 199.3 281.4 469.4 586.1 603.6 Operating Income 9.9 6.7 7.9 56.7 35.4 146.4 158.8 Annual Capital Expenditure 1456.1 594.4 425.3 1442.4 728.6 0.0 0.0 Rate Base 517.1 1257.3 1464.0 2016.2 3131.1 3510.3 3240.4 Long-term Debt 734.9 1119.3 1390.6 2324.5 2601.4 2377.3 2151.8 Debt Service 301.4 142.0 124.6 176.4 285.3 377.0 364.6 I Cash in Banks 160.9 150.5 254.9 190.4 252.4 249.7 225.2 Rate of Return on Net Fixed Assets ("0) 28.2 14.6 13.0 12.1 7.3 9.6 10.9 Debt Service Coverage Ratios (times) 0.8 2.0 2.3 1.9 1.7 1.6 1.7 Current Ratio (times) 1.4 1.3 1.6 1.5 1.7 1.7 1.7 Debt as O/Oof Debt and Equity (O/O) 35.5 36.3 39.5 48.1 48.4 46.4 44.5 91 Table A9.8 Projected Major Financial Indicators of Jiangsu Guoxin New Energy Development Company Rudong Company Main Fiancial Indicators Unit: million yuan As of 31 December Item Year1 Year2 Year3 Year4 Year5 Year6 Year7 Operating Revenue 0.0 0.0 99.1 116.6 116.6 116.6 116.6 Operating Income 0.0 0.0 12.2 20.6 20.6 20.6 20.6 Annual Capital Expenditure 177.8 119.0 29.1 36.0 36.2 36.2 36.5 Long-term Debt 101.3 202.5 178.3 165.5 165.5 154.5 143.5 Cash in Banks 0.0 0.0 0.3 0.3 0.3 0.3 0.3 Debt as O/Oof Debt and Equity ("10) 57.0 68.2 64.0 59.4 56.7 52.6 48.5 92 Additional Annex 9A: Economicand Financial Analysisfor Additional AppraisedProjects CHINA RenewableEnergy Scale-upProgram EconomicAnalyses Cost-benefit analyses were carried out to estimate the EIRRs of the two investment subcomponents of the proposed project and the two potential investment subcomponents. These four investment components include (a) Fujian Pingtan Wind Power Generation Project (100.5 MW); (b) Inner Mongolia Wind Power Generation Project (100.5 MW); (c) Jiangsu Rudong Biomass Generation Project (25 MW) and (d) Zhejiang Small Hydropower Development Project (46 small hydropower station with a total incremental capacity of 82.66 MW). This annex summarizes the methodology, assumptionsand results of the cost-benefit analyses. Economic Costs The economic costs of the investment components include (a) total investment costs of the renewable power generation projects and associated power network connection facilities, (b) O&M costs of the generation projects andrelated transmission and distribution facilities; (c) fuel costs for the biomass generation project; and (d) cost associated with electricity losses incurred duringtransmission and distribution and station uses. All the costs exclude taxes and duties and financing costs. The conversion factor is considered as 1.0 when estimating the economic costs from financial costs because the distortions in the exchange and wage rates in the overall costs are not significant enough to justify the use of shadow prices. The currency used in these analysesi s RenminbiYuan. Economic Benefits Two major benefits considered for the analyses are: (a) direct benefits from the sales of electricity valued by the sales prices as a proxy of consumer willingness to pay; and (b) emission reductions benefits that are estimated based on the New York Externality Model (Rowe and others 1994). Economic Internal Rate of Return The detailed estimates of EIRR for the components are shown in following tables A9A.1 for Huitengxile and A9A.2 for the Zhejiang projects. The results show that EIRRs of all the project components are greater than 12 percent hence these project components are economically justified. 93 94 Table A9A.2: Cost BenefitAnalysis for the CRESP-Zhejiang Small Hydro Projects N0.l Subproject I Location I Economic Internal Rate of Return (%I 33 Jinhua Banxi I1 Wucheng District 17 34 Jinhua Banxi 111 Wucheng District 17 35 Jinhua Banxi IV Wucheng:District 18 IWuchengDistrict I I " I 36 JinhuaLaohuiia I 17 37 Jinhua Shuangxi WuchengDistrict 18 38 Jingning Zhangchun Jingning County 17 39 DongyangDongmen Dongyang City 13 95 40 Xianju Yuxi I Xianju County 18 41 XianjuYuxi 11 Xianju County 16 42 Xianju Dacheng Xianju County 20 43 Quzhou Hengfeng Kecheng District 16 44 Pan'an Houjia Pan'an County 10 45 Pan'anxi Xialu Pan'an Countv 12 I 46 IChangshanZhaoxian IChangshanCounty I 13 I Financial Analysis This section summarizes the results of the analysis of the financial soundnessof the two potential investment project components. It consists of two parts: (a) at the project level: financial soundness of the project-the financial rate of return of the project; and (b) at the entity level: the financial structure, efficiency, and viability of the project entity. The financial analyses of the four investment components are based on the latest feasibility studies of the project components approved by the GoC and the project entities' audited historical financial accounts, as well as their latest financial projection. All the project components will be financed by IBRD loans, local loans and equity investments from the shareholders. The terms and conditions of the IBRDloans and local loans used in these analyses were those in late 2004. All the major assumptions are consistent with the current Chinese financial and taxation regulations as well as common practices inthe project areas. Financial rate of return of theprojects Inner Mongolia WindPower Project Major Assumptions: Installed capacity: 100.5 MW Periodof construction: 2 years Life of the project: 20 years Depreciation rate: 6.7 percent (1/15) Residual fixed asset value: 5 percent O&M: 1.5 percent (the first 10-year) and 2.5 percent (the second 10-year) of total investment costs Property insurance: 0.25 percent of the total value of the total investment costs Total generation: 273.26 GWh On-grid price: Y 0.382 per kWh (excluding including VAT) Value addedtax: 8.5 percent (50 percent concession) Corporate income tax: lSf and 2ndYear: 0.0 percent, after that, 15 percent (concession rate) Station use andline losses: 5.0 percent 96 Results. The FIRR of this component was estimated at 7.00 percent, slightly higher than the investor's hurdle rate of 6.0 percent. The net present value at 6 percent was estimated at Y 28.21 million with a pay-pack periodof 11.68 years. Zheiiang Small HydropowerDevelopment Proiect The FIRRs of all the 46 subprojects were estimated based following major assumptions and the results are summarized infollowing table: Major assumptions 0 Life of the project: 20 years 0 Depreciation rate: 5.0 percent (1/15) 0 Residual fixed asset value: 5 percent 0 O&M: 1.0percent of total investment costs 0 On-gridprice: Y 0.425 per kWh (excluding includingVAT) 0 Value addedtax: 17 percent 0 Corporate incometax: 33.0 percent 0 Station use and line losses: 2.0 percent Maior Results. The FIRR of all the subprojects are higher than the investor's hurdle rate of 6.0 percent as shown infollowing table A9A.3. No. Powerstation Locationof the subprojects Financialintemal rateof return(%) 1- Anji LaoshikanI Anji County 9 2 Anji XiaofengWangjiazhuang Anji County 7 3 Anji Xiaofeng Anji County 7 SongyangWutongyuan SongyangCounty 8 SongyangQingshiba SongyangCounty 11 SongyangYoutou SongyangCounty 11 JianeshanXiakou JianeshanCounty 16 ChangshanChangting ChangshanCounty 9 TiantaiTongbai Tiantai County 12 DongyangNanjiangI DongyangCity 16 DongyangNanjiangI1 DongyangCity 13 LishuiYaxi I LianduDistrict 7 WenchengXiaojiuxi WenchengCounty 7 Xianju Hebu Xianju County 10 WenchengJimengkeng WenchengCounty 7 WenchengShaqiang WenchengCounty 11 SongyangDougubu SongyangCounty 7 SongyangHexi SongyangCounty 7 97 JiangshanJinlong I JiangshanCity 8 JianeshanJinlone I1 Jianeshan Citv 8 JiangshanFushiling JiangshanCity 11 I I JiangshanTangyuankou JiangshanCity 11 I 22 JiangshanQingshi Jiangshan City 11 JiangshanHejiao JiangshanCity 10 26 JiangshanPishiqu JiangshanCity 10 ~ JiangshanYing'an JiangshanCity 9 I I JiangshanAo'tang JiangshanCity 7 I 27 JiangshanQinghu JiangshanCity 7 JiangshanTongjia JiangshanCity 9 JiangshanHangji JiangshanCity 8 JinhuaShizhutou IWucheng District I 7 I I Jinhua Banxi I WuchengDistrict 8 I 32 JinhuaBanxi I1 WuchengDistrict 8 Jinhua Banxi I11 WuchengDistrict 8 I Jinhua Banxi IV IIWuchengDistrict WuchengDistrict II 8 7 II I JinhuaLaohuiia JinhuaShuangxi WuchengDistrict 8 JingningZhangchun JingningCounty 7 DongyangDongmen DongyangCity 7 Xianiu Countv 8 I Xianiu Yuxi I k1 Ixianiu I I I xianiu Yuxi 11 County 7 Xianju Dacheng Xianju County 8 QuzhouHengfeng KechengDistrict 7 ~ Pan'an Houiia Pan'an Countv 7 I~an'anCountv I 7 I I46 ChangshanZhaoxian ChangshanCounty 7 I Financialproiectionof the proiect entity The five year financial projections are carried out for Inner Mongolia North Long Yuan Wind Power Generation Co., the project entity of Inner Mongolia Wind Power Project. The projected major financial indicators for each company are summarized in Table A9A.4. No financial projections for the entities in Zhejiang has been carried out, but it i s included as part of the due diligence requirement inthe agreedframework. 98 Table A9A.4: Projected Major Financial Indicators of Inner Mongolia North Long Yuan Wind Dwer Generation Company Ltd. mer Mongolia Beifang Longyuan Wind Power Generation Company Ltd. ain Fiancial Indicators Unit: million yuan LSof 31 December Item 2004 2005 2006 2007 2008 2009 2010 nergy Sales (GWh) 338 608 876 1087 1221 1355 verage Price (Yuan/kWh) -without VAT 0.387 0.398 0.410 0.422 0.435 0.448 verage Price 2004 Price Level (Yuan/kWh) - 0,382 0,382 0,382 0.382 0.382 0.382 perating Revenue 131.0 242.1 359.3 459.1 531.2 607.2 perating Income 41.2 71.5 94.4 126.8 192.2 225.7 nnual Capital Expenditure 814.5 832.5 815.9 987.2 503.6 553.9 ate Base 476.3 835.1 1584.9 2290.0 3016.1 3554.0 mg-term Debt 911.8 1511.8 2051.7 2691.7 2771.7 2911.7 ebt Service 96.6 124.4 147.4 90.2 82.4 143.1 ash in Banks 20.2 52.1 86.2 120.1 166.7 238.5 Rate of Return on Net Fixed Assets ("10) 9.9 9.8 7.1 6.5 7.0 6.9 Debt Service Coverage Ratios (times) 0.9 1.1 1.4 3.2 5.1 3.2 Current Ratio (times) 1.1 1.9 2.8 4.0 4.5 6.6 Debt as YOof Debt and Equity ("10) 71.6 72.3 71.6 71.5 67.4 63.9 99 Annex 10: Safeguard Policy Issues CHINA RenewableEnergy Scale-up Program Overview The wider social benefits of increased renewable energy use are clearly understood by most stakeholders and, indeed, underpin the rationale for the project. The MMP approach to support increaseduse of renewable energy has been widely discussed among government and the public sector, the power sector, renewable energy equipment and services suppliers and civil society. Several large-scale meetings have beenheldto discuss the findings of the economic analysis and the MMP while there has been unprecedented openness during preparation of the REL. There i s wide acceptance for the concept, recognizing that whereas most groups stand to gain, as does society as a whole, some stand to experience slightly lower growth-such as coal producers-as renewable energy displaces more conventional power generation (see Annex 9). Stakeholders will continue to be involvedduring project implementation, as the law and regulations are further developed. There has been extensive consultation with local stakeholders who have participated fully during preparation of the Support for Wind and Biomass in Pilot Provinces Component as part of the safeguards process. Stakeholder perceptions of the investment subprojects are generally positive since they clearly understand the expected local benefits from improved quality of electricity supply, employment opportunities and, in Jiangsu, from the sale of an otherwise troublesome waste. Project alternatives have been compared. CRESP i s underpinned by analysis that establishes that renewable energy can be the least economic cost solution for power production in China when environmental externalities are taken into consideration. The projects are intended to demonstrate the scale-up of renewables and their economic and environmental advantages over coal-firedelectricity generation. For phase I, several options were discussed with the government to select a limited number of provinces with good renewable energy resources and interest in developing them. At the same time the government i s interested in GEF support to those technologies that are at or approaching economic viability for electricity generation to scale-up and increase impact. A selection process that examined all 31provinces, autonomous regions and municipalities resulted in the selection of the four pilot provinces: Fujian, Inner Mongolia, Jiangsu, and Zhejiang not only for their interest inthe project, but also for the range of technologies that couldbe piloted. Several other sites for subprojects were considered by each of the provinces, but rejected on grounds of resource availability and site suitability. Sites chosen have been selected as the most promising for demonstration at this time. Environmental and social impact analyses have been carried out for each of the investment subprojects and are presented in environmental impact assessments (EIA) and Resettlement Action Plans (RAPs). The analyses have reviewed the project and the site, and identified the main impacts during construction and operation. In addition, participatory and awareness raising techniques have been employed during the process of preparingthe EIAs andRAPs. 100 The Borrower and implementing agencies have agreed to implement environment management plans (EMPs), acceptable to the Bank, for each subproject, which include mitigation action plans, supervision plans and monitoring plans. The sponsors appear both capable and committed to implementingand monitoringthe plans. For the two investment subcomponents, EIAs and RAPs have been disclosed as shown in Table A1O.l. 'able A1O.l: Disclosure of EIAs and RAPsfor Fuj inandJiangsu Fujian Jiangsu Dateof EIA and November 24,2004 November 24,2004 RAPto Infoshop Disclosure inChina: Date June 30,2004 (RAP) November 2,2004 Location .October 26,2004 (EIA andRAP) (EIA) RudongCounty *Pingtan County project office Offices Summaries.ofsafeguards issues and remedies are given below, by subproject. Pingtan WindFarm Potential local environment impacts duringconstruction will be noise, dust, vehicular movement, excavation and movement of spoil, temporary vegetation loss and the effects of a small workforce being located on the site. Potential impacts associated with the transmission line routing are minor. Construction duration i s expected to be 24 months. Impacts and mitigation are as follows: Noise. Some construction noise i s expected to exceed 60 dBa in some nearby villages, but will be temporary and reversible. Construction noise will be limited in areas near habitation by the use of machines meeting noise emission standards and by limiting construction to the day time; Dust and vehicular movement will occur, but is not expected to have a significant impact in the surrounding villages. Movement of spoil will be within the site andthere is no net surplus of spoil requiringdisposal; Some of the shelter trees will be cut down on the permanently acquired land and some of the temporarily acquired land. Lost trees will be replanted on temporarily acquired land; Although unlikely, it i s possible that a hitherto uncatalogued archaeological site will be uncoveredduringconstruction. Chance findprocedures have been identifiedinthe EIA; During operation, potential impacts will be noise, visual and birdstrike. Impacts and mitigation are as follows: 101 Noise levels have been examined quantitatively. With the original turbine layout design, three villages would have been potentially subject to a nighttime background noise level above the standard of 50 dBa and two (of the same three) would have been subject to daytime background noise above the standard of 60 dBa. Layout adjustments proposed inthe EIA bringall sensitive sites below nighttimeanddaytime standards; Visual impact will result from the presence of the turbines and other installations. This i s partially mitigatedby the presence of trees, but also appears to be of no importance to locals, basedon their responses to surveys. Inother areas of China, wind farms have become tourist or educational attractions; The site does not lie on a migratory birdroute or i s a migratory habitat. There are no rare or protected species at the site. Potential impacts are expected to be minimal, based on experience with the existing wind farm. Permanent land acquisition includes landfor wind machines, roads and substations, totaling 31.6 hectares, of which rural collective land i s 26.3 hectares, and 5.3 hectares i s state-owned shelter plantation. 0.3 hectares i s required for the 110 kV line, predominantly rural collective land. A further 28.6 hectares will be requiredfor temporary purposes duringconstruction, of which 23.1 hectares will be agricultural land and 5.5 hectares will be shelter plantation. Thirty one households and 147 people are affected, with none needing relocation or losing more than 4.3 percent of its income from land that i s requisitioned. Compensation rates, determined by local regulations are adequate, and a grievance procedure i s inplace. East China Investigation and Design Institution (ECIDI) prepared the EIA and RAP, which have been reviewed and revised to meet Bank's requirements. No potential indirect and/or long-term impacts are expected from future activities in the project area. Environmentalmonitoring will be carried out by the project sponsors andreported to the PingtanEnvironmentProtection Bureau. The important stakeholders for the wind farm are the national, Fujian (provincial) and Pingtan (county) government, the project sponsors, the provincial'power company (which will purchase the power), and local communities. Before preparation of the project began, the project sponsors solicited opinions from people in the affected townships and the state-owned shelter plantation firm. County government also discussedthe proposal with staff from provincialbureaus of land administration, forest, environment and power supply. Duringpreparation of the EL4 and RAP there have beenextensive local consultations, including surveys inthe surrounding villages. As part of preparation of the EIA, meetings have been held on the project's impacts and informationhas beenreleasedto the local news media. The sponsor has met township and village leaders andrepresentatives of project affected people. Project affected villagers have participated in the preparation of the RAP and are expected to continue to participate in its implementation. A grievance process has been established. Notices of the project have been displayed in the Pingtan County government offices and the draft EIA hasbeen displayed for comment inthe Pingtan County government offices. 102 Rudong Biomass Power Plant Potential local environment impacts during construction will be noise, dust and vehicular movement (and associatedair pollution) and the effects of a small workforce being located at the site. Noise. Some construction noise i s expected to reach 66 dl3a at the site boundary. Construction noise will be limited in areas near habitation by the use of machines meeting noise emission standards andby limitingconstruction to the day time; Dust resulting from excavation and movement of spoil will be within the site and will be piled and covered. Construction areas will be screened. Air pollution from construction vehicles i s expected to be minor; Potential impacts on water during construction are expected to be minor and confined to use for living purposes and potential run off from the site. Mitigation is to confine and treat wastewater and minimize runoff; Although unlikely, it is possible that a hitherto uncatalogued archaeological site will be uncovered during construction. Chance find procedures have been included in the environment managementplan. Potential impacts during operation will be from noise, atmospheric emissions, water use and transport of biomass fuel into the plant and ash out of it. There i s an increased fire hazard resulting from the storage of large quantities of straw. Noise. Main noise producing equipment will be placed at the center of the site, as far from the site boundary as possible and will be insulated where possible. Within the plant, control rooms will be insulated to protect the staff. Predicted noise at the site boundary i s expected to meet day- andnighttime standards; Atmospheric emissions. Atmospheric emissions of S02, NO, and particulates resulting from combustion will be within permitted levels and will be emitted through a 100 meter high stack; Water use. Likely water pollution will stem from water treatment (for boiler feedwater), oily residue, and sewage. Heavy metal antifouling agents will not be usedincooling tower water. Treated water will be disposed of to the Mafeng River. Treated sewage will be used for irrigation; Transport of fuel and ash. Biomass will be moved into the plant by road and river. Impacts are increased traffic, accident hazard and some vehicular pollution. Ash will be transported out of the plant for agricultural fertilizer by road. Procedures for road traffic safety and to reduce the hazards from the load are required; Fire hazard. Storage of large quantities of biomass increases the fire hazard through deliberate, accidental or spontaneous means. Extensive fire protection equipment i s included inthe feasibility study; an emergency response group is to be includedinthe staffing of the plant. Land from Mabei Village will be acquired for the project, totaling 10.5 hectares (including 6.8 hectares of paddy field, 3.1 hectares of mulberry garden and 0.2 hectares of land designated for construction). Ten residential houses will be removedand 30 tombs will be relocated. A total of 103 91people from 25 householdsare affected by the project, with an average loss of 30-36 percent of their land. Nanjing Bailing Environmental Protection Ltd. prepared the EIA, and ECIDIprepared the RAP, which have been reviewed and revised to meet Bank's standard. New Energy Office in Rudong County will be responsible for implementing the EMP, the Environmental Protection Bureau of Nantong will be responsible for supervising the implementation of the Em, and the Environmental Monitoring Station of Rudong County will be responsible for monitoring. A detailed training plan i s also proposed to build capacity of the above institutions on EMP. No potential indirect andor long-termimpacts are expectedfrom future activities inthe project area. The important stakeholders for the biomass power plant are the national, Jiangsu (provincial), and Rudong (county) governments, as well as the project sponsors, the provincial power company (which will purchase the power), and local communities. The sponsors have encouraged local participation through meetings, surveys and public awareness initiatives, includingthrough television and radio. During site selection and design, project sponsors and the Rudong County government have met township and village heads and village representatives. Relevant departmentsof local government have also beenconsulted. In preparation of the EIA, meetings and a survey were undertaken covering local institutions (schools, hospitals etc) local government departments (irrigation and environment) and the village committees. Their views have been recorded and responses provided. Local government, towns, villages and villagers have participated in the RAP process. A survey has been carried out. The implementing agency intends to prepare a resettlement informationbooklet and to hold further meetings with stakeholders.A feedback and grievance procedure has been established. 104 AdditionalAnnex 10A: SafeguardPolicy Issuesfor AdditionalAppraisedProjects CHINA RenewableEnergyScale-upProgram Ovewiew Several other sites were considered by Inner Mongolia and Zhejiang but rejected on grounds of resource availability and site suitability. Sites chosen have been selected as the most promising for demonstration at this time. Environmental and social impact analyses have been carried out for each of the investment subprojects and are presented in environmental impact assessments (EIA) and RAPs. The analyses have reviewed the project and the site, and identified the main impacts during construction and operation. In addition, participatory and awareness raising techniques have been employed duringthe processof preparing the EIAs andRAPs. The Borrower and implementing agencies have agreed to implement environment management plans (EMPs), acceptable to the Bank, for each subproject, which include mitigation action plans, supervision plans and monitoring plans. The sponsors appear both capable and committed to implementing andmonitoring the plans. The EM and RAP for Inner Mongolia and the EIA and RAP framework for Zhejiang have been disclosed as follows: InnerMongolia Zhejiang Date of EIA andRAPto Infoshop November 24,2004 November 24,2004 Disclosure inChina: Date October 31,2004 0November 22,2004 (EIA Location (EIA andRAP) andRAPframework) OChahaeryouyiCounty Offices of ZHPDMC Offices Potential impacts for each of the potential sub projects are described below. Huitengxile Wind Farm Potential local environment impacts during construction will be primarily loss of grassland. Potential impacts associatedwith the transmission line routing are expected to be minor and will be evaluated in detail at appraisal. To mitigate the grassland loss, the following mitigation measuresare proposed: 0 Soil androcks will be removed manually; 0 Machinery and equipment will be confined to designatedplaces; 0 Vehicles will runon specified roads andnot on grassland; 0 About half of the soil removed during construction will be backfilled into the wind turbine foundation and the remainingspoil will be removed to a designated site; 105 After completion of the construction, bothsides of the roadswill be afforested. Duringoperation, potential impacts will benoise, visual impacts, birdstrike, andelectromagnetic radiation. Impacts andmitigation are as follows: 0 The noise level of wind turbines is projected to be about 90 dBa at the machines. The nearest residential area i s 3 km away, and the operators will primarily work in the control room, limiting noise impact. 0 The site is not a route for migrant birds. Based on the experience with the existing wind farms, operation of the wind farm i s not expected to have impacts on indigenous species. 0 Local residents believe that wind farm operation adds to the landscape. The local authorities plan to use the wind farm as a tourist attraction, as are the existing ones. 0 The intensity of the electromagnetic radiation during wind farm operation i s expected to be much lower than the standard, resulting inno negative impacts on human health. The survey with local residents showed that existing wind farm operations do not interfere with local radio andtelevision. Permanent land acquisition includes landfor wind machines, roads and substations totaling 23.7 hectares, 0.4 hectares i s required for the 110 kV line, and a further 15.3 hectares i s required for temporary purposesduringconstruction. All these landareas are grasslandowned by Huitengxile State Farm, which has 130 staff. No individual farmer will be affected, nor are there indigenous people living in the state farm. All compensation will be paidto the state farm, at adequate rates determined by local regulations, and a grievance procedure i s inplace. Since the wind farm will occupy less than 1percent of the land areas of the State Farm, it will have little impact on its economic operations. Inner Mongolia Electric Power Survey and Design Institute prepared the EIA and RAP, which have been reviewed and revised to meet Bank's standards. Wulanchabu Environment Research Institutewill beresponsible for monitoring environment impacts. The important stakeholders for the wind farm are the national, Inner Mongolia (provincial) and Wulanchabu (county) government, the project sponsors, the provincial power company (which will purchase the power), and local communities. The project sponsors and county government solicited opinions from people in the affected areas and the state farm. Duringpreparation of the EIA and RAP there have been extensive local consultations, including meetings and surveys in the surrounding villages. The results demonstrated that local communities are quite supportive of the wind farm, which they believe will create local employment opportunities and tourist attractions. The villagers, however, emphasized the need to protect grassland. Their concerns have been taken into account inproject design andimplementation. Zhejiung Small Hydro The Zhejiang small hydro subcomponent consists of thirty newly built and sixteen rehabilitation small hydro subprojects. The Bank and the provincial government have reached an agreement on a framework approach that sets up the criteria and procedures for meeting the safeguards and fiduciary requirements for the small hydro projects. The PPO, staffed by Zhejiang Hydro Power Development Management Center (ZHPDMC) has prepared a framework EIA and RAP, which have been reviewed and revised to meet Bank's satisfaction. 106 EIA Framework. Each subproject should prepare its EL4 in accordance with the agreed upon framework, which defines the contents, procedures, and implementation responsibilities. The purpose i s to ensure that the EL4 of each subproject will be in compliance with both the Chinese laws and regulations and the procedures required for Category B projects in the World Bank's OP/ BP4.01. Project Screening. The subproject company i s responsible for preparing initial EIA. Based on GoC's regulation, EIA is required for all newly constructed subprojects. EMPs will be basedon the draft EIAs.The framework has defined the project screeningcriteria. Subproject EZAs. The EIA of each subproject should comply with the Chinese regulations on "Code for Environmental Impact Assessment of Water Conservancy and Hydropower Project" HJ/T88-2003.The framework outlined an EMPformat on environmental mitigation, supervision, and monitoringplans for bothnewly built andrehabilitation projects. For newly built small hydro projects (under 25 MW), potential localenvironment impacts during construction may be waste water, solid wastes, noise, dust, and soil erosion. Potential impacts during operation include land occupation and losses from reservoir inundation, noise, sewage, low temperature water irrigation, and decreased water flow downstream. Sponsors will be required to prepare an EIA andEMF. For rehabilitation projects, potential local environmental impacts during construction will be impacts on the consumers with lower water supply during reconstruction, waste water, solid wastes, noise, dust, and soil erosion. Potential impacts during operation include noise, and land losses from increased reservoir inundation. Sponsors will be required to prepare an EIA and EMP. EIA Review, Approval, and Disclosure. The PPO will be responsible for approving the EMPs. After being revised incorporating recommendations from the public consultation process, the EMPs will be submitted to the PPO for approval. The county, city, or district project office is responsible for disclosing the approved EMP in the affected residential areas of the project or in the nearby villages. RAP Framework Each subproject will prepare its RAP in accordance with this framework, which defines resettlement principles, implementing institutions and resettlement standards. The purpose i s to ensure RAP of each subproject consistent with the Chinese laws and regulations as well as the requirements set inOP/BP 4.12. Project screening. The resettlement survey will be organized jointly by the, city, or district project office and the design unit. The project company, the county department for resettlement and other relevant functional departments, township (town) people's government, representatives of villages and groups, resettlers, and property owners all should participate andjointly develop the project resettlement investigation materials. The PPO decides whether an RAP is required based on the resettlement survey results and agreeduponcriteria. If there are more than 10people subject to resettlement under the subproject an RAP must be prepared. For newly constructed projects, if there are no relocations, or fewer 107 than 10people need relocation, a simplifiedRAP i s required. For rehabilitation projects, if there are no relocations (including laid-off employees) and land acquisition, there i s no needto prepare RAP.The framework gives an RAPformat for eachsubproject to follow. According to preliminary surveys, all the subprojects of this project involve no households being moved, but only landacquisition. Resettlement standards and compensation criteria. The design and construction of each subproject should be consistent with the Chinese legislation for land acquisition compensation and resettlement. The compensation criteria and calculation method for affected areas and people (including land and property) are set out in the legal framework, which i s demonstrated in the framework. Public Consultation. Both EIA and RAP frameworks outlined the requirements for public consultation and disclosure. The environment divisions and resettlement team of the county, city, or district project office are responsible for notifying, organizing, carrying out, and recording public consultations, inaccordancewith the criteria and procedure outlinedinthe frameworks. Dam Safety For both new and rehabilitated projects, the Dam Safety safeguard policy (OPBP 4.37) may be triggered. The framework requires that the measures set out inOPBP 4.37 (safety inspections by an independent panel) should be met when appropriate. Chinese Reservoir Dam Safety Inspection Guidelines establish procedures for dam safety, which i s overseen by the provincial water resources committee, which acts as a regulator. These procedures have been compared with those set out in OPBP 4.37, and it has been determined that they comply with the requirements of OPBP 4.37 with the exception of the need for a single safety committee to act throughout the lifetime of the dam; this requirement has been includedinthe agreedPIP. 108 Annex 11:Project Preparationand Supervision CHINA RenewableEnergy Scale-up Program Table A11.1: Project ProcessingTimetable Planned Actual PCNreview 08-10-2000 08-07-2000 Initial PID to PIC 08-18-2000 08-31-2000 Initial ISDS to PIC 11-23-2000 11-24-2004 . Appraisal 12-01-2004 12-01-2004 Negotiations 02-14-2005 3-14-2005 BoarcURVP approval 06-21-2005 06-14-2005 Planned date of effectiveness 09-30-2005 Planned date of midtermreview Plannedclosing date 03-31-2010 Key institutions responsible for preparation of the project: NationalDevelopment and ReformCommission, China Long Yuan Electric Power Group Company NorthLong Yuan WindPower Company Zhejiang Hydro Power Management Development Center Jiangsu Guo Xin Investment Group andJiangsu Guo Xin New Energy Development Co. Ltd. Bank staff and consultants who worked on the project included: Table A11.2: Project Staff and Consultants Name Title Unit Noureddine Berrah Task Team Leader EASEG RichardSpencer Senior EnergySpecialist EASEG SusanBogach Senior Energy Specialist EASEG LeipingWang Senior Energy Specialist EASEG Xiaodong Wang Energy Specialist EASEG Carlos Escudero LeadCounsel LEGEA Mei Wang Senior Counsel LEGEA Xiaoping Li Procurement Specialist EAPCO HaixiaLi FinancialManagement Specialist EAPCO BernardBaratz Environment Specialist (Consultant) Clifford Garstang Legal (Consultant) EnnoHeijndermans Renewable Energy Specialist (Consultant) Youxuan Zhu Resettlement Specialist (Consultant) Mia0 Hong Renewable Energy Specialist (Consultant) Weigong Cao Power Engineer (Consultant) CristinaHernandez Program Assistant EASEG Chunxiang Zhang Program Assistant EASEG 109 Bank funds expendedto date on project preparation: 1. Bankresources: US$499,594.18 2. Trust funds: US$721,469.68 3. Total: US$1,221,063.86 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: US$30,000 2. Estimated annual supervision cost: US$65,000 110 Annex 12: Documentsinthe ProjectFile CHINA RenewableEnergyScale-upProgram 1. ProjectDocuments a. ProjectConceptDocument(July 2000) b. ProjectBrief to GEF (March 2001) 2. ProjectImplementationPlans a. CRESP Phase l-Institutional Developmentand CapacityBuilding (February 6,2005) b. PingtanPhase I1WindFarmProject(January 31,2005) c. 100MW HuitengxileWindFarm(January 25,2005) d. RudongBiomassPowerPlant (January 30,2005) e. Zhejiang Small Hydro (January 15,2005) 3. ProcurementPlans a. ProjectManagementOffice b. PingtanWindFarm c. HuitengxileWind Farm d. RudongBiomass e. ZhejiangSmall Hydro 4. ProcurementCapacityAssessmentReport 5. FinancialManagementAssessmentof CRESP a. CRESP b. FujianComponent c. InnerMongoliaComponent d. JiangsuComponent e. ZhejiangComponent 6. EconomicandFinancialAnalysisof CRESP a. Volume 1: The EconomicallyOptimal Quantity of Grid-connectedRenewableEnergy (September 2003). b. Volume 2: Options for Implementation(October 2003) 7. EnvironmentalImpactAssessmentReport a. EnvironmentalImpact Assessment Report-CRESP Phase IIProject of Changjiang'ao WindPowerFieldinPingtanof Fujian(June 2004) b. Environmental Impact Assessment Report-100 MW HuitengsileWind Power Project inInnerMongolia (June2004) c. Environmental Impact Assessment Report and Environmental Management Plan-CRESP Biomass Plant from Straw Combustion in Rudong, Jiangsu (October 2004) d. Environmental Impact Assessment Framework-Zhejiang Provincial Small Hydropower2004 111 8. Resettlement Action Plan a. Resettlement Action Plan for Pingtan Changiang'ao Wind Power Farm Project (June 2004) b. Resettlement Action Plan for 100 MW Huitengsile Wind Power Project in Inner Mongolia (June2004) c. Resettlement Action Plan Jiangsu Rudong Straw-fired Power Project (July 2004) d. Resettlement Policy Framework Zhejiang Provincial Recycle Energy Scaling-up Program for Small Hydropower (November 2004) 9. Feasibility Studies a. Feasibility Study for Pingtan Changjiang'ao PhaseI1WindFarmProject (May 2004) b. Straw Power Generations inRudong, JiangsuProvince (November 2004) c. Feasibility ResearchReport on the Project of the Straw Power Generation in Rudong, Jiangsu Province (November 2004) 10. Letters, Decrees, Policy Papers a. Letter of Sector Development Policy. November 2,2004 b. NDRC document No. 1248 decreeing participation in CRESP. (Chinese and English translation). December 2003 c. PositionPaper on the RenewableEnergy Law. June 9,2004 d. Policy Options for theRenewableEnergy Law. March 8,2004 11. Various ReportsandStudies a. A New Renewables Policy for China-Implementation. A Brown, CC Naish & GM Staunton (AEA Technology). May 2001. b. Analysis of Feasibility of Inclusion of Decentralized Renewable Electricity Systems into a Mandated Market Share Mechanism for China. Energy Research Institute of Netherlands (ECN). October 2003 C. Study of Integration of Decentralized Renewable Energy into CRESP. September2002 d. Renewable Energy Technology AssessmentinChina. Iberdrola. November 2000 e. Workshop Report on Renewable Energy Portfolio Standard for China. EHeijndermans. Beijing. August-September 2000. f. CRESPConcept Details-Targets (December 19,2001) g. CRESP Pilot Provinces Component (December 19,200 1) h. CRESPConcept inBrief i. CRESPMeetingtheIncrementalFinancialCostofRenewablesInvestments j. Participatory PlanningWorkshop Report. November 17-1 8, 1999 112 Annex 13: Statement of Loans and Credits CHINA RenewableEnergy Scale-upProgram Table A13.1: Statementof LoansandCredits Differencebetween expected andactual OriginalAmount inUS$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO86505 2005 CN-NingboWater & Envmt 130.00 0.00 0.00 0.00 0.00 130.00 0.00 0.00 PO57933 2005 CN-TAI BASINURBANENVMT 61.00 0.00 0.00 0.00 0.00 56.38 1.93 0.00 PO68752 2005 CN-InnerMongoliaHighway &Trade 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 Conid PO75730 2005 CN-HUNANURBANDEV 172.00 0.00 0.00 0.00 0.00 172.00 2.33 0.00 PO69862 2005 CN - AgriculturalTechnology Transfer 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 PO65035 2004 CN-Gansu&XinjiangPastoral 66.27 0.00 0.00 0.00 0.00 56.40 9.45 0.00 Development PO65463 2004 CN - JiangxiIntegratedAgric.Modem. 100.00 0.00 0.00 0.00 0.00 93.96 10.87 0.00 PO66955 2004 CN-ZHEJIANGURBANENVMT 133.00 0.00 0.00 0.00 0.00 126.67 0.42 0.00 PO69852 2004 CN-WuhanUrbanTransport 200.00 0.00 0.00 0.00 1,oo 188.00 144.41 0.00 PO73002 2004 CN-BasicEducationinWestem Areas 100.00 0.00 0.00 0.00 0.00 89.67 -10.33 0.00 PO84003 2004 CN-GEFGUANGDONGPRDURB 0.00 0.00 0.00 10.00 0.00 10.00 0.13 0.00 ENV PO81749 2004 CN-HubeiShimanHighway 200.00 0.00 0.00 0.00 1.oo 176.91 17.91 0.00 PO77615 2004 CN-GEF-Gansu& XinjiangPastoral 0.00 0.00 0.00 10.50 0.00 9.50 2.95 0.00 Develop PO77137 2004 CN-4thInlandWaterways 91.00 0.00 0.00 0.00 0.46 90.09 5.38 5.08 PO75728 2004 CN-GUANGDONGPRDUR ENVMT 128.00 0.00 0.00 0.00 0.64 120.72 -4.01 0.00 PO75602 2004 CN-2ndNationalRailways(Be-Gan 200.00 0.00 0.00 0.00 1.oo 198.00 24.00 24.00 Line) PO75035 2004 CN - GEF-HaiBasinIntegr.Wat. 0.00 0.00 0.00 17.00 0.00 15.52 2.40 0.00 Env.Man. PO70191 2003 CN-SHANGHAIURB ENVMT APLl 200.00 0.00 0.00 0.00 0.00 181.09 26.92 0.00 PO70441 2003 CN-HubeiXiaoganXiangfan Hwy 250.00 0.00 0.00 0.00 0.00 97.08 -12.92 0.00 PO76714 2003 CN-2ndAnhui Hwy 250.00 0.00 0.00 0.00 0.00 220.64 39.48 0.00 PO68058 2003 CN-YixingPumpedStorageProject 145.00 0.00 0.00 0.00 0.00 131.67 3.47 0.00 PO67337 2003 CN-2ndGEFEnergy Conservation 0.00 0.00 0.00 26.00 0.00 14.40 24.07 0.00 PO58847 2003 CN-3rdXinjiang Hwy Project . 150.00 0.00 0.00 0.00 0.00 80.16 24.32 0.00 PO40599 2003 CN-TIANJIN URB DEV I1 150.00 0.00 0.00 0.00 0.00 143.51 15.05 0.00 PO58846 2002 CN-NatlRailwayProject 160.00 0.00 0.00 0.00 0.00 25.32 16.99 0.00 PO60029 2002 CN-Sustain.ForestryDev(Natura1 0.00 0.00 0.00 16.00 0.00 11.45 8.60 0.00 Forest) PO64729 2002 CN-SUSTAINABLEFORESTRYDEV 93.90 0.00 0.00 0.00 0.00 56.69 14.87 0.00 PROJECT PO71147 2002 CN-TuberculosisControl Project 104.00 0.00 0.00 0.00 0.00 65.37 -38.63 0.00 PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 0.00 62.69 11.69 0.00 PO68049 2002 CN-HubeiHydropowerDev inPoor 105.00 0.00 0.00 0.00 0.00 65.37 27.04 0.00 Areas PO58845 2001 CN-Jiangxi11Hwy 200.00 0.00 0.00 0.00 54.77 33.95 23.05 0.00 PO56596 2001 CN-ShijiazhuangUrbanTransport 100.00 0.00 0.00 0.00 0.00 77.15 65.55 0.00 PO56516 2001 CN - WATER CONSERVATION 74.00 0.00 0.00 0.00 0.00 24.67 13.37 0.00 PO56199 2001 CN-3rdInlandWaterways 100.00 0.00 0.00 0.00 0.00 55.19 11.69 0.00 PO51859 2001 CN-LIAO RNER BASIN 100.00 0.00 0.00 0.00 0.00 40.70 24.62 0.00 PO45915 2001 CN-UrumqiUrbanTransport 100.00 0.00 0.00 0.00 0.00 36.95 36.95 0.00 113 PO47345 2001 CN-HUAIRIVER POLLUTION 105.50 0.00 0.00 0.00 0.00 67.54 -37.96 0.00 CONTROL PO42109 2000 CN-BEUINGENVIRONMENT I1 349.00 0.00 0.00 25.00 0.00 260.54 211.68 0.00 PO45264 2000 CN-SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 0.00 I.22 -0.31 0.00 PO45910 2000 CN-HEBEIURBANENVIRONMENT 150.00 0.00 0.00 0.00 0.00 90.41 52.41 0.00 PO64924 2000 CN-GEF-BEUING ENVMT I1 0.00 0.00 0.00 25.00 0.00 22.81 22.68 12.12 PO64730 2000 CN- Yangtze Dike Strengthening 210.00 0.00 0.00 0.00 0.00 93.61 93.61 0.00 Project PO58844 2000 3rd Henan ProvHwy 150.00 0.00 0.00 0.00 0.00 35.04 27.38 0.00 PO58843 2000 CN-GuangxiHighway 200.00 0.00 0.00 0.00 19.70 34.48 35.18 0.00 PO49436 2000 CN-CHONGQINGURBANENVMT 200.00 0.00 0.00 0.00 3.70 129.98 96.68 0.00 PO56424 2000 CN-TONGBAIPUMPED STORA 320.00 0.00 0.00 0.00 100.00 74.59 113.59 0.00 PO41268 1999 CN-Nat Hwy4kIubei-Hunan 350.00 0.00 0.00 0.00 0.00 32.81 31.15 0.00 PO56216 1999 CN - LOESSPLATEAU 11 100.00 50.00 0.00 0.00 0.00 3.40 5.52 -4.31 PO50036 1999 Anhui ProvincialHwy 200.00 0.00 0.00 0.00 9.60 5.53 15.13 0.00 PO51888 1999 CN- GUANZHONGIRRIGATION 80.00 20.00 0.00 0.00 0.00 14.62 14.93 0.00 PO51705 1999 CN-FujianI1Highway 200.00 0.00 0.00 0.00 0.00 43.45 43.45 0.00 PO51856 1999 ACCOUNTING REFORM& 27.40 5.60 0.00 0.00 0.00 14.39 14.29 0.00 DEVELOPMENT PO43933 1999 CN-SICHUANURBANENVMT 150.00 2.00 0.00 0.00 0.00 69.05 95.34 37.23 PO42299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 0.00 31.22 -16.45 0.00 PO41890 1999 CN-LiaoningUrbanTransport 150.00 0.00 0.00 0.00 0.00 8.04 8.04 -2.19 PO36953 1999 CN-HEALTH IX(ShiyongWang, Back. 10.00 50.00 0.00 0.00 0.40 27.65 24.82 5.50 UP) PO03653 1999 CN-ContainerTransport 71.00 0.00 0.00 0.00 18.61 2.61 21.22 2.21 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 0.00 3.81 5.41 0.00 PO58308 1999 CN-PENSIONREFORMPJT 0.00 5.00 0.00 0.00 0.00 0.54 0.50 0.00 PO49665 1999 CN-ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 0.00 8.86 9.99 -11.47 PO46829 1999 CN-RENEWABLEENERGY 100.00 0.00 0.00 0.00 0.00 2.62 89.62 2.62 DEVELOPMENT PO57352 1999 CN-RURALWATER IV 16.00 30.00 0.00 0.00 0.00 12.84 12.46 12.46 PO46564 1999 CN Gansu& InnerMongoliaPoverty - 60.00 100.00 0.00 0.00 13.30 13.25 20.26 -13.57 Red. PO60270 1999 CN-ENTERPRISEREFORMLN 0.00 5.00 0.00 0.00 0.00 0.30 1.71 1.49 PO38121 1999 CN-GEF-RENEWABLEENERGY 0.00 0.00 0.00 35.00 0.00 20.09 33.64 16.10 DEVELOPMENT PO03614 1998 CN-GuangzhouCity Transport 200.00 0.00 0.00 0.00 20.00 91.63 111.63 91.63 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 0.00 22.00 0.00 20.13 14.75 0.00 PO35698 1998 HUNANPOWERDEVELOP. 300.00 0.00 0.00 0.00 161.90 4.62 166.52 3.18 PO03566 1998 CN-BASIC HEALTH (HLTH8) 0.00 85.00 0.00 0.00 0.00 26.39 22.80 0.00 PO36414 1998 CN-GUANGXIURBANENVMT 72.00 20.00 0.00 0.00 10.19 55.28 64.43 54.66 PO03619 1998 CN-2ndInlandWaterways 123.OO 0.00 0.00 0.00 37.00 10.93 47.93 8.69 PO51736 1998 E. CHINNJIANGSU PWR 250.00 0.00 0.00 0.00 86.00 21.06 107.06 15.30 PO49700 1998 CN- MIL-2 300.00 0.00 0.00 0.00 0.00 0.61 0.61 0.61 PO46952 1998 CN- FOREST. DEV. POORAR 100.00 100.00 0.00 0.00 0.00 6.42 -92.01 5.79 PO03539 1998 CN SUSTAINABLECOASTAL - 100.00 0.00 0.00 0.00 2.06 38.67 40.73 1.85 RESOURCESDEV. PO45788 1998 CN-Tri-ProvincialHwy 230.00 0.00 0.00 0.00 0.00 15.14 15.14 0.00 PO37859 1998 CN-GEFEnergy Conservation 0.00 0.00 0.00 22.00 0.00 0.71 22.06 0.00 PO40185 1998 CN-SHANDONGENVIRONMENT 95.00 0.00 0.00 0.00 1.40 10.18 11.58 -2.96 PO03637 1997 CN-NATL RURALWATER 3 0.00 70.00 0.00 0.00 0.00 0.43 3.62 3.20 PO03650 1997 TUOKETUO POWEWINNER 400.00 0.00 0.00 0.00 102.50 22.56 125.06 22.56 114 PO36405 1997 CN WANJIAZHAIWATER TRA - 400.00 0.00 0.00 0.00 75.00 10.57 85.57 8.39 PO44485 1997 SHANGHAIWAIGAOQIAO 400.00 0.00 0.00 0.00 0.00 56.57 51.44 52.18 PO34618 1996 CN-LABOR MARKETDEV. 10.00 20.00 0.00 0.00 0.00 3.49 5.57 0.00 PO03594 1996 CN - GANSUHEX1CORRIDOR 60.00 90.00 0.00 0.00 0.00 69.18 65.02 0.00 PO03639 1995 CN-SOUTHWESTPOVERTY 47.50 200.00 0.00 0.00 0.01 0.16 24.21 24.21 REDUCTIONPROJECT PO03596 1995 CN-YangtzeBasinWater Resources 100.00 110.00 0.00 0.00 1.92 0.08 4.47 4.47 Project PO03540 1994 CN-LOESSPLATEAU 0.00 150.00 0.00 0.00 0.00 0.00 -0.68 0.00 PO03632 1993 CN-ENVIRONMENTTECH ASS 0.00 50.00 0.00 0.00 0.00 0.48 1.03 0.71 Total: 10,826.07 1,277.60 0.00 208.50 722.16 4,748.46 2,488.53 382.34 Table A13.2: China Statementof IFC'sHeldandDisbursedPortfolio (millions of U.S. dollars) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2003 Anjia 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 2004 Antai 40.00 0.00 0.00 30.00 30.86 0.00 0.00 23.14 2003 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 2005 Babei 11.00 5.00 0.00 0.00 0.00 5.oo 0.00 0.00 1999/00/02 Bankof Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2002 CDH ChinaFund 0.00 7.15 0.00 0.00 0.00 2.03 0.00 0.00 2003 CSMC 0.00 8.92 0.00 0.00 0.00 8.92 0.00 0.00 2004 CUNA Mutual 0.00 12.00 0.00 0.00 0.00 1.41 0.00 0.00 1998 ChengduHuarong 5.16 3.20 0.00 5.41 5.16 3.20 0.00 5.47 1992 ChinaBicycles 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 2004 ChinaGreen Ener 20.00 0.00 0.00 0.00 11S O 0.00 0.00 0.00 2004 China 11 28.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 ChinaReLife 0.00 1.54 0.00 0.00 0.00 1.54 0.00 0.00 1994 ChinaWalden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2004 Colony China 0.00 16.07 0.00 0.00 0.00 3.41 0.00 0.00 2002 Darong 10.00 1.50 0.00 8.00 6.67 1.50 0.00 5.33 1994 DynamicFund 0.00 5.64 0.00 0.00 0.00 3.99 0.00 0.00 2005 FangXin SHMT 6.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 FangXinLimited 0.00 5.OO 0.00 0.00 0.00 5.00 0.00 0.00 2005 FangXinSHDX 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 FangXin SHPM 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 FangXin SZFX 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Fenglin 19.00 0.00 6.00 18.00 12.45 0.00 6.00 11.62 2003 Great Infotech 0.00 3.22 0.00 0.00 0.00 2.52 0.00 0.00 2005 HiSoft Tech 0.00 4.00 0.00 0.00 0.00 3.00 0.00 0.00 2002 HuarongAMC 9.00 2.51 0.00 0.00 9.00 0.49 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 2002 IEC 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00 2004 JiangxiChenming 60.00 12.90 0.00 0.00 30.00 12.90 0.00 0.00 1998 LeshanScana 2.92 0.00 0.00 0.00 2.92 0.00 0.00 0.00 2001/05 MaanshanCarbon 11.00 1.oo 0.00 0.00 0.00 0.00 0.00 0.00 2001/05 MinshengBank 0.00 2.80 0.00 0.00 0.00 2.79 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 115 1996104 Nanjing Kumho 34.00 2.23 0.00 0.00 34.00 2.23 0.00 0.00 2001 New ChinaLife 0.00 13.21 0.00 0.00 0.00 5.83 0.00 0.00 2005 New Hope 0.00 0.00 45.00 0.00 0.00 0.00 0.00 0.00 1995 NewbridgeInv. 0.00 0.39 0.00 0.00 0.00 0.39 0.00 0.00 2005 NorthAndre 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997 OrientFinance 0.00 0.00 4.76 5.95 0.00 0.00 4.76 5.95 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 2000 SEAFSSIF 0.00 3.95 0.00 0.00 0.00 1.29 0.00 0.00 2004 SIBFI 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 1998 Shanghai Krupp 24.50 0.00 0.00 52.49 24.50 0.00 0.00 52.49 1999 Shanxi 12.61 0.00 0.00 0.00 12.61 0.00 0.00 0.00 2002 Sino Gold 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 1995 Suzhou PVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 Wanjie High-Tech 12.19 0.00 0.00 0.00 12.19 0.00 0.00 0.00 2004 Wumart 0.00 3.90 0.00 0.00 0.00 3.90 0.00 0.00 2004 X Colony China 0.00 0.84 0.00 0.00 0.00 0.17 0.00 0.00 2003 XACB 0.00 19.94 0.00 0.00 0.00 3.25 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 25.00 10.00 0.00 0.00 1993 Yantai Cement 1.53 0.00 0.00 0.00 1.53 0.00 0.00 0.00 2003 Zhengye-ADC 15.00 0.00 0.00 7.00 11.59 0.00 0.00 5.41 2002 Zhone Chen 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 Y Total portfolio: 387.41 275.84 87.36 126.91 239.48 211.76 10.76 109.41 Table A13.3: Statement of IFC Approvals PendingCommitment ApprovalsPendingCommitment FY Company Loan Equity Quasi Partic. Approval 2005 BCCB 0.00 0.06 0.00 0.00 2005 BabeiSilk Tie 0.00 0.00 0.00 0.01 2005 BioChina 0.00 0.01 0.00 0.00 2004 CCB-MSNPL 0.00 0.00 0.00 0.00 2005 ChangyuGroup 0.00 0.02 0.00 0.00 2004 ChenmingLWC 0.00 0.00 0.00 0.16 2004 ChinaGreen 0.00 0.00 0.01 0.00 2005 FangXin SHDX 0.00 0.00 0.00 0.00 2005 FangXin SHMT 0.01 0.00 0.00 0.00 2005 FangXin SZFX 0.00 0.00 0.00 0.00 2005 FiveStar 0.00 0.00 0.01 0.00 2002 HuarongAMC 0.02 0.00 0.00 0.00 2002 E C 0.00 0.00 0.01 0.00 2005 M S Shipping 0.02 0.01 0.00 0.00 2004 NCFL 0.00 0.00 0.02 0.00 2003 PeakPacific2 0.00 0.01 0.00 0.00 2004 SIBFI 0.00 0.00 0.00 0.00 2002 S M L 0.00 0.00 0.00 0.00 2002 Sin0Mining 0.01 0.00 0.00 0.01 2005 Vetroarredo 0.01 0.00 0.00 0.00 2002 ZhongChen 0.00 0.00 0.00 0.03 TotaLpending 0.07 0.11 0.05 0.21 116 Annex 14: Country at a Glance CHINA RenewableEnergy Scale-up Program China at a glance 9/21104 East Lower- POVERTYandSOCIAL Asla & mlddle- China Paclflc Income Developmentdiamond' 2003 Population,mid-year (milllons) 1,288.4 1,855 2,655 Lifeexpectancy GNI percapita (Atlasmethcd, US$) 1,100 1,080 1,480 GNI (Atlas method, US$billions) 1,411.6 2,011 3,934 Average annual growth, 1997-03 I T Population(%) 0.8 1.o 0.9 Laborforce (%) 0.9 1.1 1.2 GNI per Most recantastlmate(latestyear avallable, 1997-03) capita Poverty(% ofpopulationbelownationalpovertyline) 5 Urbanpopulation(% of toralpopulation) 39 40 50 Lifeexpectancyat birth (years) 71 69 69 Infantmortality(per 7,000livebirths) 30 32 32 Childmalnutrition(% ofchildrenunder5) 10 15 11 Accessto improvedwater source Accessto an improvedwatersource (% ofpopulation) 75 76 81 liliieracy (% ofpopulationage 1%) 9 10 10 Grossprimaryenrollment (% ofSChOOl-aQepopulation) 114 111 112 -China Male 114 112 113 - Lower-m/dd/e-awmegroup Female 114 111 111 KEY ECONOMICRATIOSandLONG-TERMTRENDS 1983 1993 2002 2003 Economlcratios. GDP (US$billions) 227.4 431.8 1,266.1 1,412.3 Grossdomestic investmenVGDP 33.8 43.3 40.4 44.4 Exportsof goodsandServicedGDP 8.3 17.1 28.9 34.3 Trade Grossdomestic savingdGDP 34.5 41.8 43.4 47.0 GrossnationalsavingdGDP 35.1 41.8 43.2 47.6 T CurrentaccOunt balance/GDP 1.7 -2.1 2.8 3.2 InterestpaymentdGDP Domestic 0.2 0.6 0.3 0.3 Investment TotaldebVGDP 4.2 19.9 13.3 13.7 savings Totaldebt service/expolts 10.1 9.4 7.9 7.2 Presentvalueof debVGDP 12.8 i Presentvalue of debffexports 41.8 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (averageannualgrowth) GDP 9.5 8.6 8.3 9.1 7.7 -China GDPpercapita 7.9 7.6 7.6 8.4 7.0 Lower-middle-incomeQIVUR Exportsof goodsandservices 6.8 15.6 29.4 26.8 12.3 STRUCTUREof the ECONOMY 1983 1993 2002 2003 (% of GDP) Agriculture 33.0 19.9 15.4 14.6 Industry 44.6 47.4 51.1 52.3 Manufacturing 36.5 34.5 35.4 39.3 Services 22.4 32.7 33.5 33.1 Privateconsumption 51.3 45.2 43.4 40.4 1 O ' O i 02 I Generalgovernmentconsumption 14.1 13.0 13.2 12.6 Importsof goods and services -GDI *GDP 1983-93 1993-03 2002 2003 I (averageannualgrowth) GrOwthof exportsandImports(%) Agriculture 4.2 3.4 2.9 2.5 I Industry 11.9 10.4 9.8 12.6 30 Manufacturing 11.5 10.3 10.0 17.0 M Services 10.7 8.2 7.5 6.6 i o Privateconsumption 11.0 7.1 6.3 6.6 0 Generalgovemmentconsumption 9.7 8.5 7.0 5.5 Grossdomestic investment 9.2 9.3 13.7 19.8 Importsof goodsandservices 9.9 13.4 27.5 24.8 Note:2003 dataarepreliminaryestimates 'Thediamondsshowfourkeyindicatorsinthecountry(inbold)comparedwithitsincome-groupaverage.Ifdataaremissing,thediamondwill be incomplete. 117 China PRICESand GOVERNMENTFINANCE I 1983 1993 2002 2003 Domesticprices Inflation(%) (% change) Consumer prices 4.5 14.7 -0.8 1.2 2 ImplicitGDP deflator 1.1 14.6 -0.6 2.2 0 Governmentfinance (% of GDP,includescurrentgrants) 2 Current revenue 23.0 13.7 18.3 18.7 -41 Current budgetbalance .. 2.2 1.o 1.3 Overallsurplusldeficit -0.7 -0.7 -3.3 -2.5 -GDP deflator ' I O I C P I TRADE 1983 1993 2002 2003 (US$millions) Exportand Importlevels(US$ mill.) Total exports (fob) 22,226 91,744 325,565 438,228 500.000T Food 2,853 8,399 14,623 17,533 Fuel 4,666 4,109 8,372 11,110 400,000 Manufactures 12,606 75,078 297,085 403,560 300,000 Total imports(cif) 21,390 103,959 295,203 412,760 Food 3,122 2,206 5,237 5,959 m,wo Fueland energy 111 5,819 19,285 29,214 100,000 "I Capital goods 3,988 45,023 137,030 192,869 0 Export priceindex (1995=100J 41 81 78 82 97 98 gs 00 01 Importprice index (1995=700) 69 88 86 95 W Exports Imports O2 Terms of trade (1995=100) 60 93 90 86 BALANCEof PAYMENTS 1983 1993 2002 2003 (US$miflions) Currentaccountbalanceto GDP (%) Exportsof goods and services 24,804 102,643 365,395 485,003 Importsof goods and services 22,545 111,776 328,013 448,924 'T Resourcebalance 2,259 -9,133 37,383 36,079 Net income 1,158 -1,284 -14,945 -7,838 Netcurrent transfers 511 1,172 12,984 17,634 Current account balance 3,928 -9,245 35,422 45,875 Financing items(net) -1,233 11,012 40,085 71,148 Changes in net reserves -2,695 -1,767 -75,507 -117,023 1 97 98 98 w 01 02 03 Memo: Reservesincludinggold (US$mi//ions) .. 27,336 297,735 416,208 Conversion rate (DEC,/oca//US$) 2.6 8.0 8.3 8.3 EXTERNALDEBTand RESOURCEFLOWS 1983 1993 2002 2003 (US$millions) Composltionof 2003 debt(US$ mlll.) Total debt outstanding and disbursed 9,609 85,928 168,337 193,567 IBRD 4 4,549 11,254 10,657 A: 10,657 IDA 67 5,160 9,423 10,314 B: 10,314 Total debt service 2,691 10,166 30,596 37,064 IBRD 3 544 2,981 2,690 IDA 1 38 180 219 Composition of net resourceflows Officialgrants 73 272 311 Officialcreditors 623 4,615 -1,206 -3,092 Private creditors 363 8,217 -4,550 -1,769 Foreigndirect investment 916 27,515 53,074 55,507 Portfolio equity 0 3,818 F:69.145 World Bank program Commitments 438 2,315 1,058 1,250 14. IBRD E Bilateral - Disbursements 71 1,845 2,020 1,616 B IDA D Other multilateral - F Private . ~ Principal repayments 0 248 2,502 2,459 C IMF .. G Short-term Net flows 71 1,597 -482 -843 Interest payments 3 333 660 450 Net transfers 68 1,264 -1,142 -1,293 ~ Development Economics 9/21I04 118 Annex 15: IncrementalCostAnalysis CHINA RenewableEnergy Scale-upProgram A. CONTEXT AND BROAD DEVELOPMENT GOALS Context Reducing the dominance of coal i s a major objective of the GoC's main planning instruments for the energy sector: the lothand llth Five-Year Plans (FYPs), covering 2001-2005 and through energy conservation and substitution by gas and renewable energy. This results from recognition of the negative effects of emissions from the coal combustion neededto fuel economic growth- the damages to human health from air pollution and the damages to agricultural crops andnatural resources causedby acid rain. Inaddition to severe impacts on the national environment, China's growing consumption of fossil fuels i s projected to make it, by 2015, the leading producer inthe world of GHG emissions. Most of the increase in carbon emissions to 1.8 billion tons in 2020 will come mostly as a result of a rapid increase of fossil energy consumption.* Electricity production alone i s projected to generate a significant share of these emissions, as shown in Table A15.1below. 2000 2005 2010 2015 ElectricityGeneration(TWh) 1303 1676 2161 2855 ThermalElectricityGeneration(TWh) 1071 1361 1743 2302 EstimatedEmissions(milliontons) Carbon 266 337 432 571 NOx 2.7 3.4 4.4 5.8 sox 7.0 8.8 11.3 15.0 TSP 0.4 0.6 0.7 1.o Inaddition to environmental benefits, development of renewable energy creates economic gains. In many remote areas, renewable energy is the least cost source of electricity for local populations or to supplement,grid supplies, as shown by China's successful small hydropower program.' Renewable energy facilities in rural areas contribute to local employment and the tax base. In addition, development of internationally competitive renewable energy industries would generate export opportunities. China already exports small hydropower equipment. China i s also beginning to export photovoltaic equipment stimulated in part by the WB-GEF REDP (Loan 4488-CHA), which has helped address quality issues: several manufacturers now produce low- cost modules meeting international standards, which have found a ready export market. Experience also suggests that the Chinese small hydropower, wind and biomass sectors are highly responsive inmeetingchanging patterns of demandboth quantitative and qualitative. The technical potential for renewableelectricity inChina includes about 160GW of wind power; more than 75 GW of commercially exploitable small hydropower; approximately 125 GW (300 Asian DevelopmentBank, "ALGAS: People's Republic of China," Manila, October 1998. As noted above, such studieshave consistentlyunderestimatedthe actual energy consumption growth inChina inrecent years. Definedas installations with capacity less than 25 MW. Large hydropower is not includedas renewableenergy for the purposeof this annex. 119 Mtce) biomass energy; about 6.7 GW of known geothermal energy resources; and an abundance of solar insolation. It i s difficult to estimate the economic market potential of the resources for electricit generation, because detailed data on resources throughout the country are very limited.1B Recognizing the potential contribution of renewable energy and to utilize abundant renewable energy resources, the NDRC has prepared a medium and long-term plan for renewable energy development, which has been incorporated into the national economic development plan. Its targets are set out in Table A15.2. There is now general consensus in China to implement a market-based policy, mandating that a share of electricity consumption comes from renewable sources along lines introduced in Australia, the Netherlands, UK and states in the US (the so- called Renewable Portfolio Standard or RPS) or imposing an obligation on electricity suppliers to buy renewable energy based electricity at a government determined price (the so-called Feed- inTariff)introduced mainly inSpain andGermany. The term mandatedmarket policy (MMP)is usedhere to refer to bothsystems. Case Capacity in2020 Replacement TWh equivalent (GW) (Mtce) Small Hydro 75 78 200 Wind 20 15 I 52 Biomass 20 28 150 PV 1 - 2 Total 116 121 404 An analysis of the economic optimum for renewable energy was performed for CRESP." The analysis looked at the amount of renewable electricity that i s economically viable based on the avoided cost of conventional electricity, first without consideration of externalities, then with inclusion of local and global externalities.I2The avoided costs of conventional generation, with and without externalities, and the market potential for renewable electricity were estimated separately for Eastern and Western China. The CRESP analysis arrived at an estimate of four levels of potential renewable energy based generation by 2010. First, with business as usual (BAU), which refers to the quantity of renewable energy that i s likely to be built even in absence of any policy, case would be 35 TWh/yr. The second analysis shows that 79 TWh/yr of renewable electricity i s economically viable at the avoided cost of conventional generation, without consideration of environmental I t i s proposedto improve data on market potential and resourcecost curves through resourcemeasurementand assessment activities duringPhase 1. See Economic and Financial Analysis of the China Renewable Energy Scale-up Program (CRESP)-Vol. I:The economically optimum quantity of grid-connected renewable energy, September 2003 (Report to the World Bank and GoC) on file Local externality damage estimates include the effects of air emissions from coal combustion of NO,, SO,, and TSP on human health and the effects of acid rain. National average damage costs were estimated in 2010 as US$1,095/ton of NO,, US$835/ton of SO, and US$3,540 per ton of TSP. Damage costs were estimated by province and were considerably higher ineasternprovinces than in westernprovinces. 120 externalities. This estimate rises to 89 TWh/yr with consideration of local externalities for air emissions. This 89 TWh/yr i s considered the economic optimum from an environmental perspective. It rises further to 101 TWh/yr with consideration of both local and global externalities, as shown in Table A15.3 below. It i s important to note that, since these results are based on partial data, estimates are tentative and likely to be conservative, especially for wind power. Table A15.3: Preliminary Illustration of Market Potential for Main Renewable Electricity Externalities The GoC decision to go beyond what the CRESP analysis suggests i s the economic optimum i s based on the recognition that future contributions from renewables will be conditional on their cost in relation to the alternative. China also sees a considerable industrial potential in years to come and recognizes the need to invest in capacity now. Inshort, GoC believes that the benefits from investing in renewable energy now are higher, or the costs are lower, or both, than those suggestedby the CRESP economic analysis. Under any case with effective MMP, the potential to replace coal i s considerable, in the medium to long term. Further investigation of resources for renewable electricity i s likely to reveal that the potential i s even greater. BroadDevelopment Goals China recognizes that large-scale exploitation of renewable energy will require reduction incosts and efficiency gains through technological advancements, economies of scale, indigenous manufacturing and lower transaction costs. It recognizes that the government needs to play an important role in developing policies that remove market barriers, attract investment by the public and private sector, and develop internationally competitive domestic manufacturing capabilities in renewable energy technologies. This objective was first articulated in the 10th FYPandhasbeencarried through into the 1lthFYP(2006-10). The higher goals of the program seek to address global environment and air quality issues. Increased renewable energy production provides a positive contribution to global environment and improved air quality while reducing the economic cost associatedwith harmfuleffects of the use of coal and GHG emissions. The program will also contribute to the GoC objective of economic development inthe laggingregions, since much of the renewable energy resource i s in those areas. 121 The GOC considers an MMP as an essential tool to catalyze large-scale renewable energy development. The MMP i s required to address the failure of the market price for thermal electricity to reflect the costs of damage borne by society, resulting from pollution caused by burning fossil fuels (externalities). The GoC stated its intention to implement an MMP to accelerate renewable electricity in the Energy Sub-Plan of the 10th FYP and has taken the first step in implementing it by introducing the REL. The law was enacted by Chinese National People's Congress on February 28, 2005; implementing regulations are required as the law is due to take effect on January 1,2006. CRESP i s designedto facilitate the effective implementation of an MMP and gradually create the conditions for sustainable scale-up of renewable energy. It would support introduction and implementation of the REL and regulations, as well as a range of other measures to strengthen commercial capacity to scale up renewable energy markets. In later phases, CRESP would also support development of trading mechanisms to allow the development of the renewable resources located inChina's less developed regions, to meet cost effectively the electricity needs of developed regions with large power markets and financing capabilities. Development of trading schemes would minimize MMP cost and linkthe MMP to carbon trading mechanisms. B. BARRIERS The main barriers that have been identified duringproject preparation by Chinese experts are set out inthe following paragraphs. Lack of policies to address thefailure of the market to reflect extemality costs.Inmost countries with large-scale renewable electricity generation, suppliers have been required by law or regulation to purchase renewable electricity. In China, there i s not yet such a legal requirement, and effective implementation of environmental laws cannot .be taken for granted. It has been difficult to develop a national renewable electricity policy inChinafor several reasons: 0 Responsibilities are fragmented among many agencies including the NDRC, Ministries of ScienceandTechnology (MOST), Agriculture (MOA) andWater Resources (MOWR); 0 There i s inadequate information on resources, especially to derive the resource cost curves required to develop national policies, estimate value of renewable resources to the grid, calculate incremental costs, and set targets; 0 The economy and power sector in China are in transition from being centrally planned to beingmarket-oriented andderegulated; High costs.High costs and limited prospect of their reduction are also limiting the market size. Each i s explained in more detail below: 0 Financial cost per kWh from renewables i s relatively high when compared with electricity from coal. The higher financial cost i s one of the main factors limiting the market size. The cost gap betweenthermal andrenewable electricity is the result of three factors: (a) Relatively immature renewable technologies face barriers to their deployment, or have yet to benefit from market growth and transformation in China or from international technology and market development, or a combination of all three; (b) The externalities of fossil fuel arenot includedinthe financial price of electricity; 122 (c) The lack of highquality localrenewable energy equipment and support services increases the cost andperception of risk inprojects. 0 Unlikely cost reduction prospectsunder "business as usual" deter early movers: (a) There is insufficient competition because projects have been developed at the county or prefecture level for small hydro projects (favoring local manufacturing) and there are limited arrangements for competition inwind projects; (b) Price regulation based on the debt repayment formula is cost plus (which does not encourage price reduction) and front loads electricity prices for technologies with high capital and low operation costs. Weak manufacturing and service industry. Though it has been effective in some respects, most notably small hydro, the renewable energy industry is not geared to commercial or competitive requirements. Equipment i s often of low quality and performs poorly, whereas the service industry i s inadequate to design, engineer, operate, maintain or service installations. PPAs are inadequate and not enforced. Resourcedata are piecemeal, inaccurate inmost instances and often not public. Commercial banks are not familiar with renewable energy projects, except small hydropower for community use. Project approval processes are complex and not transparent. In sum, the "market infrastructure" needed to support commercial project development is not in place. Poor operating record and reputation. Many of China's existing wind farms and small hydropower plants and grids have been poorly maintained and are operated inefficiently. Poor plant performance has contributed to the view that renewables are not a viable option for adequatelymeeting significant amounts of demand. Mismatched distribution of renewable resources and ability to pay. Much of the resource is located in poor western provinces with limited electricity markets and capacity to pay for renewable electricity development. For example, wind resources inInner Mongolia could supply the large North China power grid through existing interconnections, but there i s no mechanism available to spread the cost of development of these resources to consumers outside the small InnerMongoliagrid(compartmentalized grids). Little experience with some promising renewable electricity technologies. There has been little experience in China with some promising technologies, including small hydro rehabilitation, biomass generation for sale to the grid, and large wind farms using "third generation" wind technology. C. GLOBAL OBJECTIVE The program objective is to enable commercial renewable electricity suppliers to provide energy to the electricity market efficiently, cost-effectively and on a large scale. The core of the program is GEF-financed support for institution and capacity building for the scale-up of renewable energy basedelectricity generation capacity. 123 Phase 1 The first phase will contribute to the program's global objective through development and implementationof the legal and regulatory framework to create and gradually increase the share of renewable energy based electricity generation, and support its effective implementation in four provinces. Now that the RELhas been enacted, associated regulations will be prepared and promulgated during this phase. Effective implementation and enforcement, which have always been problematic and uneven for environmental laws, will be piloted in four provinces, namely Fujian, Inner Mongolia, Jiangsu, and Zhejiang and supported by well targeted and sustainedTA. Technology transfer at the national level will be supported through capacity building and TA, focusing particularly on wind and biomass. Investments in important technologies will be undertaken in the four pilot provinces to demonstrate the viability of large-scale renewable energy based electricity generation. Expected duration i s 3-4 years. GEF will provide a US$40.22 million grant to support the institutional development and capacity building component during the first phase, with cost-sharing from participants expected to contribute a further US$48.6 millionfor atotal cost of about US$88.82 mi1li0n.l~ Triggers to move from GEF phase 1to 2 will be basedon indicators of institutional progress and scale-up of renewable energy development and are expected to include: (a) issuing of required regulations to implement the REL; (b) measures of progress in implementing the law and regulations and the investments inthe pilot provinces; and (c) full commitment and disbursement of at least half of the GEF grant for the first phase. Phase 2 Phase 2 will continue to support the program's global objectives through institutional development and capacity building to decrease further cost, and improve the financing framework and provide assistance for implementation in about 10 provinces. TA will be providedfor the implementation of the REL and regulations in an increased number of provinces as required. Continued support for technology transfer, quality improvement and cost reduction will be providedfor wind and other selectedtechnologies, buildingon Phase 1results and market needs. Further lending to support investment (additional loans and repeater projects mainly to reduce processing time and, exceptionally, SILs) will be discussed, on a needbasis, with GoC to bridge the gap for financing needs to sustain scale-up inphase 2. Expected duration i s 3-4 years. Total cost for TA i s expected to be about US$120 million (of which about US$50 million GEF grant). Phase 2 to phase 3 triggers will be determined during appraisal of phase 2, but are likely to include measures of progress in the implementation of the law and achievement of the program performance indicators, measures of investment (Bank- and non-Bank-financed) in renewable energy inthe phase 1and 2 provinces, and measuresof progress incost reduction. Phase 3 The third phase will contribute to the full achievement of the program's global objective through support to the remaining (less developed) provinces in their implementation of the REL and l3 The cost-sharing i s based only on the direct costs borne by the participants in the GEF supported activities, using a ratio of 1:3, which is based on experience gained during implementation of Renewable Energy Development Project. Indirect and other contributing programs' costs are a lot more important, but very difficult to estimate. 124 regulations. TA would continue to be provided for institutional strengthening and capacity building to meet international and best practice standards in constructing and operating renewable energy based electricity production facilities in the country. Continued support for localization, quality improvement and cost reduction will be provided to bring selected technologies to competitiveness with fossil fuel based electricity generation. Further lending to support investment (additional loans and repeater projects mainly to reduce processing time and, exceptionally, SILs) will be discussed, on a need basis, with GoC. Expected duration i s 3-4 years. Total cost for TA i s expected to be about US$l50 to 200 million (of which about US$50 million GEFgrant). Bank Investment Support Bank investment support in each phase will be on an "as required" basis determined during phase preparation and processed as SILs. Their impacts in terms of investment and scale-up of renewable energy will be assessed for their contribution toward achievement of the objectives of the program according to GEFprogram triggers to move from one phase to the next. D. BASELINECASE Under the baseline case, NDRC and different ministries and agencies would continue to support renewable electricity development, focusing mainly on the supply side. These activities would not be well coordinated, as no single national policy framework for renewable electricity would be adopted. The REL might be in place, but would at best be only partially implemented. Barriers related to lack of market would remain unaddressed. Many projects that are economically viable without considering externalities would not be developed. The NDRC would continue to support wind power development, through its concession program and some supply oriented measures. Limited attention would be given to the market for power producedfrom the concessions, andhow the incremental wind power costs would be met. , . Small hydropower development would also slow, as the MWR has stopped state support to installation of small hydropower. There would be little small hydropower rehabilitation, as the county and township governments would not be aware of opportunities, nor have the technical support and access to financing required to make investments. Significant development of biomass generation would not take place because of lack of technical support, locally available equipment, financing and PPAs. Fragmented TA activities on various aspects of the law would be carried out with international support from UNDP, ADB, bilateral donors Energy Foundation and others, but no implementing framework would be adopted or provisions put in place to ensure its effectiveness. Locally manufactured equipment would remain of poor quality and outdated technology as there i s insufficientmarket tojustify investmentintechnology improvement (development and transfer). Barrier RemovalActivities inBaseline Barrier removal activities would take place, as summarized in Table A15.4. These include activities by GoC agencies, as well as internationally assisted activities (for example, the UNDP/GEF Capacity Building for Rapid Commercialization of Renewable Energy, the World BanWGEF REDP, the Deutsche Gesellschaft fur Technische Zusammenarbeit (GTZ's) wind 125 energy support program, support of about US$0.5 milliordyear from the Energy Foundation for renewable electricity policy development, and many other activities). The concession program-which targets 3,000 Mw of new wind capacity over 10 years-provides a mechanism for developers to propose projects and be connected to the grid under a PPA. The program is still in its early stages and so its effect on removal of barriers, especially to newer technologies, i s difficult to assess. Table A15.4: Expendituresfor Barrier RemovalActivities, ncludingGOCai InternationalAssistance, inBaseline Case2001-10 Activity BaselineCosts ExpectedResult US$ llion Phase Phase 1 2 and 3 Period Period Policy 8.2 11.0 Adoption of REL through limited TA activities, but Development ineffective implementation. Policy 5.O 8.0 Agencies implement limited supply side policies (for Implementation example, financial incentives) at provincial, national and local level. Technology 8.0 Development risky. Demonstration 20.0 25.0 Some biomass generation activities planned. Limited Investment demonstration investment planned for wind and small hydro rehabilitation. Coordination 1.o 1.0 There will be some joint activities, but little true coordination among Chinese agencies or among international donors. Total 42.2 49.0 Government sfipport and donor activities continue to focus on the supply side. Fundamental market barriers remain, even for projects that are economically viable today. IncrementalInvestments inRenewable Electricity Projects The total result expected in the business as usual case would be 35 TWh/yr of new renewable electricity, from 7.0 GW capacity by 2010. Capacity installed would be mainly of new small hydropower, in those provinces where the government takes a strong role in encouraging this development for social and economic reasons. It i s possible that significant wind capacity may be added, but the prospectsremainuncertain. 126 Emission Reduction BenefitsinBaseline Under the above estimates, during the 20-year lifetime of the investments emission reductions from renewable electricity generation installed 2001-2010 will amount to about 300 million tons of carbon; 2.2 million tons of NO,; 11million tons of SO,, and 300,000 tons of total suspended particulates (TSP). E. GEFALTERNATIVE--PHASE 1 Under the GEF Alternative, Phase 1, legal and regulatory framework will be prepared for the MMP along with support for its implementation in the pilot provinces to initiate actions to achieve program objectives countrywide. Phase 1barrier removal activities would aim to result in a high proportion of those investments that are economically viable at the avoided cost, not including environmental externalities. This represents a conservative approach, but assumes the MMP will not be fully introduceduntilthe endof phase 1. IncrementalBarrier Removal Activities under Phase 1 Phase 1 components and barrier removal activities will be completed as described below and summarized inTable A15.5. National Level InstitutionalStrengtheningand Capacity Building: US$20.82million GEF, US$33 million counterpartfunds National level institutional strengthening and capacity building consists of six subcomponents as follows: MMP research (US$1 million GEF). Studies on further development of the MMP and its implementation will include (a) distributing national targets between provinces; (b) setting the tariff level for renewables; (c) transforming the policy from price-based to quantity-based (based on early versions of the law the price-based mechanism has been chosen at least as an interim measure); (d) sharing incremental costs between provinces; (e) developing trading schemes to minimize MMF cost; (f) linkingthe MMP to carbon trading mechanisms; and (g) further preparing the medium- to long-term plan for renewable energy development. Financing will support consultants to undertake the studies; Support to MMP implementation (US$1.25 million GEF). Studies, capacity building and training to support implementation of the RELwill include (a) preparation of regulations that outline detailed implementation mechanisms; and (b) capacity building and training for implementing agencies, regulators and others affected by the law. Financing will support consultants and training activities to implement this subcomponent Technology improvement for wind (US$16.17 million GEF, expected counterpart funds US$27 million). There will be four activities under this subcomponent as follows: (a) Technology development by selected manufacturers. This activity will provide grants to companies to share the costs of projects to accelerate the transfer of variable speed; pitch controlled and related wind technology to China using licensing, joint ventures, technology development using international consultants or other means. Grants will be provided to share up to 50 percent of the cost of projects. Beneficiaries will be selectedcompetitively basedon proposals submitted by manufacturers that will be encouraged to collaborate with design 127 institutes or other sources of know-how. Beneficiaries will be selected competitively based on proposals that will be evaluated and ranked by disinterested national and international experts. Selection will be guided by the market-driven and results-oriented nature of the proposals, and their ability to yield results inthe Chinesemarket within five years; (b) Standard setting. Current Chinese standards for wind turbines are limited in scope and requirements and are not equivalent to international standards set by the International Standards Organization (ISO) or the International Electrotechnical Commission (IEC). This activity will support the development and adoption of standards by Standardization Administration of China. Financing will be provided for consultant support and the formation of a technical standards committee; (c) Wind testing center. The project will provide assistanceto a testing organization selected by the government to establish a wind testing facility through capacity building of staff, support to develop procedures and to become accredited as a test center by an internationally recognized standards body such as I S 0 (IS0 25) or IEC (IEC 17025). Financing will be provided for consultant support, training andthe purchaseof testing equipment; (d) Certification. A certification body will be supported through capacity building, training and consultant support with a "twinning" agency to bring it up to the standards that will permit it to certify wind turbine design and performance. Consultant support will also be provided to the CNCAA to assist it in deciding whether to opt for mandatory or voluntary certification of turbines inChina; (e) Establishment of a National Wind ResourceAssessment Center. The project will support development of resource assessment methodologies, national wind resource assessment standards and a national wind resource database. It will also support overlay of wind mapping with GIS data to convert resource measurementsto identifiable projects. It will also facilitate knowledge transfer and best practices on international status of wind resource assessment, and support the pilot provinces in planning and implementing wind resource assessment activities. A focal point for the Center will be identifiedduringproject start-up; (f) Long-termcapacity building.Efforts to increasethe supply of skilled and knowledgeable designers, engineers, manufacturing specialists and wind farm developers and operators will be supported. Two universities will be supported to set up master's level and renewable energy engineering courses, primarily focused on wind and biomass. Universities will be selected based on their track record and reputation for quality, the relevance of the courses they propose, the courses' ability to meet market needs and cost-sharing. There will also be a fellowship program to allow more senior engineers to study abroad at existing centers of excellence; (g) Studies on interconnection to the grid and turbine micrositing. The project will support studies on connection of wind farms to the grid and their impacts on grid stability. It will raise awarenessof power grid operators and wind developers of interconnection requirements and transfer international best practice and knowledge. It will conduct studies on the impact of wind farms on grid stability in one province. Training on turbine micrositing, which has for some time been a weak point in wind farm design, will be provided to complement existing activities. Technology improvement for biomass (US$2.4 million GEF, expected counterpart funds US$6 million). This subcomponent will provide grants to companies to share the cost of projects to improve the quality and reduce the cost of biomass technologies, particularly 128 those related to boilers and equipment handling. Grants will be provided to share up to 50 percent of the cost of projects. Beneficiaries will be selected competitively based on proposals that will be evaluated and ranked by disinterested national and international experts. Selection will be guided by the market-driven and results-oriented nature of the proposals, and their ability to yield results in the Chinese market within five years. Supporting studies will also be undertakeninthis area; Province-levelTA (US$lO.6 million GEF, expected counterpartfunds US$9.0million) The province-level institutional strengthening and capacity building consists of five subcomponentsas set out below. It will take place inthe pilot provinces (Fujian, InnerMongolia, Jiangsu, and Zhejiang). MMP implementation (US$2.4 million GEF).Although RELwill be passedat national level, implementation will be delegatedto the participating pilot provinces. They will be required to prepare regulations and decrees, promulgate them and ensure their compliance. Inaddition they will also need to prepareprovincial renewable energy development strategies, plans and financial incentive policies; testing renewable energy promotion models and creating awareness among stakeholders. This subcomponent will finance consulting services and trainingfor provincial counterpartsandrenewable energy market participants; Resource assessments (US$4.2 million GEF). The purpose of this subcomponent i s to provide detailed information to the public on the renewable energy resources in each of the provinces. For each province, a cost-resource curve for the main renewable resources and a database with resource information will be prepared and published. Measurement standards will also be prepared, to permit like-for-like comparisons. In Fujian, high-resolution wind resource measurements and wind farm siting data will be prepared. In Inner Mongolia, assessments on the wind, solar energy, biomass and municipal solid waste resource and wind farm siting in 12 counties will be undertaken and published. In Jiangsu, wind and biomass resources will be assessed and published. In Zhejiang, small hydro resources capable of producing electricity below 3,000 hourdyear will be evaluated (above 3,000 hourdyear i s already known). Areas of biomass concentration and wind resource will also be assessed. Cost-shared support for scaling up renewable energy (US$3 million GEF, expected counterpart funds US$9 million). This subcomponent will help provinces carry out studies and pilot or demonstration projects in renewable energy technologies other than the one in which the investment subproject will take place. Grants will be provided for cost-shared activities, awarded on a competitive basis across the four pilot provinces. Fujian will carry out studies to identify pilot tidal and geothermal projects. Inner Mongolia will prepare biomass projects and study the potential for grid connected PV. Jiangsu will demonstrate building-integrated PV systems and strengthen its existing renewable energy development center. Zhejiang will develop standards for integrating solar water heaters into buildings and prepare biogas projects. This component will also support preparation for a pilot offshore wind farmexpected to be implemented duringphase 2. Capacity buildingfor market participants (US$l million GEF). Capacity buildingfor market participants not directly involved in projects in the pilot provinces will be carried out under this component. It will include training for developers, banks, technology and service providers covering the project cycle. Financing will also be provided under this subcomponent for studies on improvements to procedures for project approval, and 129 integration of renewable energy into electricity grids and identifying and removing bottlenecks inrenewable project development. SupportingInvestment Scale-up (US$2.2 million GEF, expected counterpartfunds US$6.6 million) Based on the lessons of previous renewable energy projects, this subcomponent aims to make resources available to build a strong pipeline of bankable renewable energy projects. The companies implementing the investment projects will be provided resources to carry out feasibility studies, resource assessments and other preinvestment activities on a cost-shared basis. Training and capacity building, and access to international experience and best practice will also be eligible activities. In Zhejiang, the Zhejiang Hydro Power Development Management Center (ZHPDMC) will implement this subcomponent in coordination with the small hydro companies. In Inner Mongolia, GEF funds will be provided to Long Yuan and not the company implementing the wind farm, to avoid risk of commingling GEF and PCF funds in the Huitengxile wind farm subproject described below; Program Management and Coordination (US$3.38million GEF) Program management will include day-to-day procurement, financial and contract management for all tasks carried out under the TA program. It will include representation of the PMO in the pilot provinces. Additional tasks expected to be carried out by the PMO at least initially include coordination with other GoC renewable energy initiatives, monitoring and evaluation of the impact of REL and CRESP, preparation of annual reports and plans on behalf of NDRC, providing liaison between the InstitutionalDevelopment and Capacity Building Component and other stakeholders, including the World Bank, and preparation of phase 2 of CRESP. Also included under this component are national-level studies, to be initiated by the PMO, to address further policy development issues as they arise including, for example, development of a long- term biomass strategy. Unallocated (US$3.22 million GEF) An unallocated amount of US$3.22 million is retained. US$3 million of the funds are earmarked for the companies undertaking Bank-financed investment subprojects in Inner Mongolia and Zhejiang. The balance will be put toward activities where the budget proves inadequate or in responseto unforeseenrequirements. Table A15.5: Incremental Expenditures for Barrier Removal Activities, including GoC and Activity Subcomponents CRESPcosts ExpectedResult Phase 1 (millionUS$) Total GEF National Level 53.82 20.82 Development and adoption of national renewable Institutional electricity policy, basedonMMP,and including Strengtheningand supporting measures such as mechanismsto uass on - IPolicy 1.0 I 1.0I Establishtarifflevel for the renewable development- Minimize MMPcost and link MMPto trading (MMPresearch) mechanisms 130 L= Activity Subcomponents Expected Result Policy 1.L.J 1.L.J 3uildcapacity andstrengthenimplementingagencies, implementation- egulators andaffected parties for implementation of REL, (Support to MMP ncluding drafting of regulations for the law. implementation) Market and 43.17 16.17 I Cost-sharing to catalyze investments and accelerate the technology transfer of technology to develop local wind technology development)- through joint venture andlicensing agreements with (Technology local design centers andsources of know-how. improvement- I Adoption of intemational standards (IS0 or IEC) for wind) localwind turbines. I Establishment of anintemationally accredited(IS0 25 or IEC 17025) wind testing facility runby certified staff. Development of a certificationbody to certify or providepermitfor wind turbine design and performance. 1 Long-termcapacity building to increase skill levels in . design, engineering, manufacturing, andoperation of wind farms. Studies on interconnectiona dmicrositing. Market and 8.4 2.4 Cost-sharingto catalyze investments indevelopmentof technology biomass combustiontechnology (boilers andequipment development- handling) (Technology improvement- biomass) 19.6 10.6 capacity buildingand .. institutional Policy 2.4 2.4 Prepareregulations and decree to implementRELand implementation- ensureits compliance infour pilot provinces. (MMP Prepareprovincia! renewableenergy development implementation) strategy, testing renewable energy promotion models andcreating awareness among stakeholders. Market and 4.2 4.2 Prepareresource assessment standards andfor each technology province a resource-costcurve, ina databaseto be development- publishedanddisseininated for public use. (Resource I assessment) Demonstration 12 3 Conduct studiesanddevelop pilot or demonstration investment- projects inof renewable energy technologies for projects (Cost-shared other than the one allocated technology for eachfour .. supportfor scaling provinces. up RE ) Market and 1.o 1.o Training of stakeholders(banks,developers, technolog) technology andserviceproviders) during pilot projects. development- Conduct studieson improvementinproject procedure, (Capacity building approval process, integrationof renewableenergy into for market electricity grids andidentifyingand removing participants) bottlenecks inrenewable project development. Supporting 8.8 2.2 Assist project companiesinbuildingpipeline of renewablc Investment Scale-up energy projects. Program 3.38 3.38 Programmanagementtracks activities, coordinates, management monitors, corrects activities as necessaryto ensure Phase 1 objective reached. Coordinates other GoC renewable energy activities. Unallocated 3.22 3.22 131 Activity Subcomponents CRESPcosts ExpectedResult Phase 1 (million US$) Total GEF 1 Total 88.82 40.22 Commercial renewable electricity suppliers demonstratethat a conducive environmenthas been created for renewable electricity generation inChina's four provinces. Incremental Investments inElectricity Projects as a Result of Phase 1 It is expected that Phase 1would remove barriers to a substantial proportion of investments that are economically viable without consideration of environmental externalities. Most of the incremental investments would focus on biomass and small hydro rehab. The result would be to scale up renewable electricity development from business as usual (BAU) generation of about 35 TWh/yr (7.0 GW) by 2010 inthe baseline to an estimated 60 TWh/yr (111.9 GW) by 2010. This would increase incremental renewable electricity generation over the baselineby 71percent. Incremental EmissionReductionBenefits as a Result of Phase 1 Under the estimates of incremental investments outlined above, reductions of carbon emissions from renewable electricity generation added between 2001 and 2010 will increase from 300 million tons under the baseline to 455 million tons in the GEF Alternative-Phase 1. In addition, there will be an incremental reduction over the baseline of 1.2 million tons of NO,; 5.9 million tons of SO, and 162,000 tons of TSP. All emission reductions are measured over the 20-year lifetime of the investments. F. GEFALTERNATIVE-PHASES 2AND 3 GOC plans to install 116 GW of additional renewable energy capacity (small hydro wind, biomass and PV systems) by 2020 that will displace approximately 221 million tons of coal per year and contribute around 404 TWh per year of electrical generation. CRESP Phases 2 and 3 would contribute to that target but, given the differing time span and uncertainties surrounding it, it i s difficult to make an estimateof its contribution. Incremental Barrier Removal Activities inPhases 2 and 3 Activities to be carried out in Phases 2 and 3 and their timings will be defined in Phase 1. Currently foreseen activities under CRESP Phases 2 and 3 are summarized in Table 6 below. These phases focus on implementing the policy framework more widely and technology development support and are assumed to take place by 2015. Both aim at major long-term barriers highcosts and the mismatch of locationof resources and ability to pay. Support for other activities continues, but the focus shifts to implementation of the MMP policy framework. 132 Table A15.6: IncrementalExpendituresfor Barrier Removal Activities, includingGoC and International A sistance, under GEFAlternative Phases2-3 Activity CRESP costs Expected Result Phases 2 and 3 Total GEF Policydevelopment 4.0 Follow through onMMPand developmentof supporting measures. 20.0 Implementationof MMPpolicy framework nationally, including all necessary instrumentsfor compliance monitoringand verification and support at provincial level for implementation. 54.0A number of local suppliersof internationally market development competitive suppliers' of wind turbines, smalihydro turbines, steamturbines andboilers for biomass and control equipmentwould operateand sell equipment ~ ~~ inChina andfor export. Investments 225.0 0.0 Secondstage of support for investment of technologies such as continuedhydrorehabilitation,biomasscogeneration, further wind. Inthisphase, TA andinvestmentsupport wouldbeextendedto about 10provinces. Support for investment 10.0 Furtherrenewableenergy investorsreceive support to scale scale-u up andprofessionalizetheir operations. Programmanagement, 12.0 Programmanagement tracks activities, coordinates, coordinationand monitors, corrects activities as necessary to ensure contingency Phase 2/3 objective reached. Parallel or related projects would be underway initiatedby GoC/GEF Partnership.These projects would make a measurable contribution to developmentof renewableenergy. Fivepercentof funds available for unforeseen activities. 525.0 ~ 100.0 Commercial renewable electricity suppliers provide energy to the electricity market efficiently, cost- effectively, and ona large scalethroughout China. Incremental Investments inElectricity Projects as a Result of Phases 2 and 3 A conservative assumption would be that incremental investment inelectricity projects inphase 2 would be that suggested by the CRESP economic analysis. This would imply that, with the MMP in place, the economic optimum of renewables, including local externalities, would be achieved since the external costs of coal would be reflected in the price paid for renewables. On that basis, there would be a scaling up from 60 TWh to 89 TWh/yr (based on installed capacity in 2010 of 17.5 GW) during Phase 2. An estimated 150 TWh/yr from 29.6GW of installed renewable electricity capacity i s taken as the tentative end of Phase 3 target, though this will be further refined during phase preparation. This assumption i s conservative given the GoC's own target of 404 TWh in 2020. Most of the investments would be shared between new and rehabilitated small hydropower, biomass and wind. Incremental Emission Reduction Benefits as a Result of Phases 2 and 3 Assuming the investments described above are made as a result of phases 2 and 3, incremental reductions of carbon emissions from renewable electricity generation between phase 1and 2 of 133 165 million tons and a further 486 million tons between phase 2 and 3, incremental increases over the baseline of 320 million tons and 806 million tons, respectively. In addition, phase 2 would yield an incremental reduction over Phase 1of 1.3 million tons of NO,; 6.9 million tons of SO, and 160,000 tons of TSP. Phase 3 would yield further incremental reductions of 3.6 million tons of NOx, 19 million tons of SO, and 580,000 tons of TSP. All emission reductions are measuredover the lifetime of the investments. G. GEFALTERNATIVE: SUMMARY OF RESULTSOF WHOLEPROGRAM Table 7 below summarizes expected results and costs of the Program, incremental to the Baseline. Table A15.7: Incremental Results and Costsof CRESP, over the Baseline, 2000-15 Phase1 I Phases2& 3 I Program 1 * Over 20-year lifetime of facilities. GlobalBenefits According to the illustrative results above, during CRESP's lifetime, there would be an incremental reduction of carbon emissions above the Baseline of about 800 million tons. At a GEF cost for the Program of US$140 million, carbon cost would be about US$0.17 per ton during the 20 years lifetime of facilities. Inaddition, the CRESP Phase 2 and 3 activities would lay a solid basis for continued installation of renewable electricity facilities after the Program terminates. These indirect benefits have not been calculated, but would reduce the incremental costs of carbon further. A sensitivity analysis has been performed on emission reduction on different targets. The business as usual case with 35 TWh target i s taken as a low case, but would result in zero incremental emissions (and presumably no GEF program could be justified). The CRESP case for economically optimum target (79 TWh) without environmental externalities i s selected as a "minimum likely" on the basis that phases 2 and 3 will not go ahead without the framework in place to achieve that level. As an upper bound, the GoC target of 404TWWyear by 2020 i s selected as the high case (see Table 8). The analysis indicates a range of GEF cost US$0.07 to US$0.64 per ton of carbon for 2015. 134 Table A15.8: SensitivityAnalysis of GEF Alternative EmissionReductions Cost To 2010 Targets I Case IBusiness IEconomically I GoC As Usual Optimum Case Target by 2010 (Wyr) 36 79 404 LifetimeIncrementalReduction(20 0 220 2,020* vears),million tons of Carbon - ProgramCost (millionUS$) 0 140 140 GEFCostltonCarbon(US$) 0 0.64 0.07 Inner Mongolia and Zhejiang) for carbon'was ahopted from P: Meier; Economic I and Financial Analysis of the CRESP-Vol. 1 (September 2003) to calculate the lifetime emissionsreductionsof carbonfrom GoC targets. H. SUSTAINABILITY After implementation of the CRESP, a policy framework i s inplace to address the failure of the market to incorporate renewable electricity. If the financial market price of conventional electricity i s still below the financial price of renewable electricity at the end of the Program, the MMP framework and target would still be in place, encouraging further renewable electricity growth. Therefore, sustainability i s ensured. At the point where renewable electricity i s financially competitive, the MMP tool i s no longer required and renewable electricity growth would be sustained by market forces. If a market develops for international trading in global environmental benefits and China chooses to participate, this would further ensure the sustainability of the results from the program. 135 I z 2 i e 3d t t 7 3 8 I I c - 0 us 8 M u 137 I x7 0 N c! 8 Annex 16: STAP Roster Review CHINA Renewable Energy Scale-up Program A. STAP REVIEWER COMMENTS INDEPENDENT TECHNICAL REVIEW By Dr.Jan Hamrin Executive Director, Center for ResourceSolutions In general, this project is a well thought out, comprehensive approach to the development of cost-effective, grid-connected renewable electricity technologiesin China. Most of the suggested modifications mentioned below arefocused on making explicit what is implied in the program plan. There are also some small additions that might sharpen the potential effectiveness of the planned actions. Important Issues Scientific and technical soundness of the project Has the most appropriate and effective approach been used to remove the barriers? Generally, the approach to reducing the barriers i s sound. Iwould recommend, however, the Bank look at one of the main barriers that i s not addressed-development of a local industry, both equipment manufacturers and project developers (such as resource assessors, business plan developers, financial experts). Work on clarifying regulations and enforcing PPAs should go a long way toward creating an independent power producer (PP) industry, but TA should probably be provided to help train market entrants on important issues-calculating good resource assessments (especially for wind energy), business plan development, financing, and so forth. A separate but related component of this can be to preselect a group of interested and willing financial institutions that can receive training on financing for renewable energy projects. This i s important because the Bank aims to catalyze commercial investments in renewable energy, and this will require financing from China's bankingsector andor international banks andinvestors. Discussion: The section that discusses the barriers to further renewable energy development in China-although a good summary-is missingone barrier that is reflected throughout the entire document-the lack of any renewable energy industry in China-either domestic manufacturing or joint ventures with foreign companies. The reasons for the lack of a renewable energy (RE) manufacturing base are all of the barriers listed in this section. Yet if all of these barriers are changed overnight, there would still a significant lack of capacity to: fully assess renewable resources (particularly wind), design and conduct detailed feasibility studies, develop a complete business plan, obtain financing and, most importantly, procure equipment at the lowest possible cost without relying on imports. The lack of a well-developed indigenous industry includes not just renewable energy manufacturers, but PPs that can operate facilities. The STAP report correctly points out that 139 PPAs are poorly developed and not enforced, but again, if this changed overnight, the lack of IPPs inthe market would still constrain the development of the projects. Inthis sense, the Bank has a role in catalyzing the entrance of IPPs in the market-a role not clearly spelled out in the STAPreport. Has the most appropriate and egective approach been used to reduce the costs of the technologies? Again, the focus on changing market conditions-through an MMP-is critical, but a component that is not made explicit (though implied) is the creation of an indigenous manufacturing base. The reliance on importedtechnologies raises the costs of renewable energy, and a way to reduce those costs is domestic manufacturing. If the Bank encouraged the GoC to adopt investment incentives, such as tax holidays and concessional loans on manufacturing equipment (combined with a strong effort to ensure this equipment meets international standards), this would be quite helpful. This TA will be relatively small over the course of the entire project. Although local equipment will lower the cost of the technologies, other financial incentives will lower the cost of the electricity generation itself. In addition to the VAT on equipment being reduced to 6 percent (as it i s for small hydro), a modest effort could help ensure that the custom duties of importing parts of a wind turbine are made less than the duties on an entire turbines (as it the case now), For example, a recent report by Tsinghua University illustrates the potential cost reductions of smart incentive policies. Iam not suggesting that the Bank try and change all of what i s listed below-it i s just to demonstrate the potential. I understandthat the Bank is uncomfortable with subsidies as they can distort marketinvestments; however incentives inrenewable energy (particularly inthe U.S. andEurope) are often passedon the basis that these subsidies do not approach the level of direct and indirect public support for fossil fuels. This i s particularly true for China. Listed below are some examples for wind generation: 1. Income Tax: If the current income tax rate of percent were reduced to 15 percent and 0, the cost of wind generation per kWh would be reduced by 4.3 percent and 8 percent, respectively. 2. VAT: If the current 17 percent value added tax on electricity sales were reduced to 6 percent and 0, the cost of wind generation would decreaseby 9.6 percent and 14.6 percent, respectively (this incentive is tied to generation because the exemption only comes when a kWhi s sold); 3. VAT ZZ: If the current 17 percent VAT on wind-generation equipment sold to developers were reduced to 6 percent and 0, the cost of wind power would decline by 8 percent and 12.4 percent, respectively. 4. Low-ZnterestLoans: If the interest rate of a long-termloan were reduced from 15 percent to 7 percent, the overall cost of wind power would be reduced by 21.7 percent. 3.2 Strategic Choices: This section compares the range of options for promoting renewable energy development and talks specifically of financial incentives. The second to last paragraph, incorrectly talks about the failures of subsidies. Yes, all of the problems discussed can happen with renewable energy incentives, but our experience has shown that subsidies can be effective 140 in spurring RE development without being indiscriminate and open to abuse. The U.S. production tax credit-in combination with other market policies-has accelerated the installation of thousandsof megawattsof wind energy. In addition, when combined with a mandated market, such as the RPS, one can calculate the costs of the subsidy with a fair degree of accuracy. In addition, one can calculate the benefits in terms of jobs created and costs of renewable electricity reduced (not just through subsidies, but through economies of scale encouraged by the subsidy).l4Ibelieve that intelligently designed incentives are important in bringing projects to fruition, particularly incentives related to the previous point above-the development of a local REmanufacturingbase. Was the potential market determined on the basis of renewable energy technology data and databases?Yes, a good analysis of the economic potential under different time frames and cost assumptions was performed and contrasted with the resource potential that i s much higher. A range of policy targets was also tested againstthe base case and various policy scenarios. Has an evaluation of the demand-side mechanisms to support after-sales service been undertaken?I'm not sure what this means, but my comment would be that CRESP aims to create the demand for renewable energy, so right now, there i s not very much after-sales service to evaluate. An exception is the solar hot water industry, a well-developed technology in China. In 1990- 1998, the total heat collection area used for solar water heaters increased by ten times. Today, about 1,000 enterprises are engaged in the development, manufacturing, marketing and installation of solar water heaters. The industry, with an annual growth rate of 20-30 percent, i s also exporting to Southeast Asia and Europe. In terms of after-sales service, this i s a major problem. Many of the manufacturers pay little attention to after-sales service and have no system to service consumer problems. For example, the U.S. had 40 solar water heater manufacturers and 116 technical service firms in 1997. That 1:3 ratio i s completely reversed in China and approaches 4: 1. Consumers are rightfully concerned that there will be no place to turn if they have trouble with their systems. Many Chinese companies are small businesses with loose distributionnetworks andfew quality guarantees. To expand the market, the industry needs to provide more technical support, perhaps through an expansion of their service business network. And this is with a mature, commercial technology. With CRESP overall, this is an issue that the Bank will have to address and gets to the point above about creating a market infrastructure. Even if the policy signals are there-through an M M S , for example-the Bank will needto develop the market infrastructure. Adequacy of the introducedfinancial incentives? The Bank's work on policy reform (MMS) is the most important component. Financing incentives, however, must follow. Isuggest the Bank consider using its loadgrant money to guarantee a loan from a local financial institution to help l4 Inaddition, the Bank must not forget any of its fossil fuel projects inChina are subject to subsidization, inthis case from the GoC. Although a coal plant might be built on a market basis-with sales of its electricity sold at market levels-the fuel for that plant comes from state-owned and highly subsidized mines, thus artificially lowering the costs of coal generation. Ifthese subsidies were taken into account, the price of renewable energy might look much more attractive. 141 catalyze financing. This might be a good use of World Bank resources to catalyze involvement of the Chinese financial sector in renewable energy. Aid has a similar guarantee program in easternEurope and it has helpedget energy efficiency projects off the ground there. In addition, as mentioned earlier, the Bank should be looking at renewable energy industry development in China. This couldtake the form of financial incentives for domestidjoint venture firms to buildmanufacturing facilities for renewable energy generating equipment (for example, tax holidays and low-interest loans) Comments on the design of demonstration project? Istrongly support the pilot approach although a good deal of thinking will be needed in the selection process. The APL approach i s important to help ensure strong Chineseparticipation at all levels. On pages 11-12, the Bank outlines its plans for Phase 1 of CRESP-selecting three pilot provinces and developing the legal and institutional capacity to implement a provincewide MMS. What appears to be missing and what Ibelieve to be critically important i s renewable energy credit trading. The Bank correctly points out that credit trading i s a way to lower the cost of an M M S and provide additional flexibility to support renewable energy where the resources are strongest. However, experience in the U.S. has shown that there are many technical and legal issues surrounding credit trading, and we believe the Bank will need to work on this issue from the very start.15 On page 34, in the key indicators section, the Bank mentions a renewable certificate database developed and a system for issuing credits tested. This is critically important, and Isuggest carrying out some "mock" trades in the pilot province just to get the M M S administrators ready for this task. Of course, this will depend on the Bank's 1) selecting and training the RPS or trading program administrator on the provincial level and 2) developing the software to record and monitor trades and similar transactions. Modifying existing software from the Dutch or Texas programs might be the best way to proceed. Finally, the Bank should consider trying as quickly as possible to develop credit trading outside the province, so the company/utility facing the M M S burden can, if it i s cost-effective, finance the construction of renewable energy facilities in other regions of the country (particularly the Western regions). This might be tried in Phase 1. As the pilot program expands to 10 provinces and then beyond, it will be critical to sort out the conflicting roles of various state agencies, specifically SDPC, SETC and MOST. Although the Bank i s working on setting up Phase 1, it also needs to sort out these longer-term issues that mightnot get resolved untilPhases 2-3. What the Bank should be striving for is an independent, professional regulatory authority with responsibility over the important aspects of the power Iincludedthisinourlastcomments,butwillreiteratehereincasethereisadifferentaudience.Wewouldmake as clear as possible the criteria for selecting the pilot provinces. Maybe start with a matrix to score each potential pilot site with desired criteria. The Bank might want think ahead of time what kinds of specific commitment they might seek to help ensure success in the pilots. If only two provinces seem really interested, maybe drop the third and focus on the first two. The criteria include the level of environmental pollution, relative wealth, renewable resources, level of free market orientation (makes REC trading easier), and most importantly-demonstrable commitment from provincial planning commissions, people's congresses, local mayors.This could come inthe formof a letter, promise of in-kindcontributions, or the like. 142 sector, including the administration of the M M S policies. However, Idon't believe this should be left to Phases 2-3; it should be going on concurrently with Phase 1, given the length of time it may be required to clarify who will have authority over the energy sector. A second, related comment is that the CRESP program should work completely in tandem with the Bank's broader power sector reform efforts in China. It seems to me (although Iam on the outside) that CRESP and the Bank's power sector reform team are working somewhat independently of each other. Experience in the U.S. and elsewhere shows that 1) M M S policies come within the context of broader utility restructuring and 2) that political opposition to M M S policies tend to be reduced when utilities feel they are getting more of what they want duringthe broader reformprocess. This is important because Idon't believe the power sector reform team is taking into account environmental or public benefit programs at all. The team i s working very closely with SPC and its supporters in the government. If the power sector reform team and CRESP could have a unified message that within the context of utility restructuring, the GoC needs to take into account issues other issuesI6 that would be very helpful to both Bank initiatives. This i s particularly important because the M M S policy-the cornerstone of the CRESP approach-is fundamentally a political process that can be stopped if more powerful forces in SPC (in particular) and the GoC (ingeneral) believe it i s counter to their interests. Will a process be put in place to monitor the project? Isuggest that the Bank rely on outside experts that are already working in China, such as the Energy Foundation, CRS, UNDP and Chinese institutions, such as Tsinghua University, to help refine and improve the program. This might take the form of a working group that meets once or twice a year in China to review the status of the program. Identificationof global environmental benefits Given the pivotal role of China inGHGemissions and the projections for China's GHGemission trajectory in the future, a program that could significantly impact the direction and magnitude of these emissions in the China's power sector i s critically important. The global environmental benefit of this project-299 million tons-is a 63 percent increase from the baseline. In addition, if the project is a technical and economic success and contributes to the longer term cost reduction of renewable generating plants so that they are cost competitive, could result in significant replicationin other regions of the world. How the projectfits within the context of the goals of the GEF This project has a good fit with the GEFOperational Program#6. Regional Context This project also has an excellent fit within the regional context. Replicability of the project To the extent that this program i s successful, it has tremendously positive replication potential throughout the world. The policy framework and approach being tested here i s applicable l6 These issues being reducing costs as much as possible and designing as market-oriented a power sector as possible. 143 anywhere in the world. Since China i s an emerging economy, it can serve as a role model for both developed and developing countries. Though the form of China's government i s very different from many other countries, the program can be easily tailored to other political systems. Sustainability of the project As stated in the project description, "if the financial market price of conventional electricity is still below the financial price of renewable electricity at the end of the program, the M M S target would still be in place, encouraging further renewable electricity growth. Therefore, sustainability i s ensured. At the point where renewable electricity i s financially competitive, the M M S tool is no longer required and renewable electricity growth would be sustained by market forces.'' The greatest threat to the success of the project i s a failure in electricity sector reform that undermines the ability to implementthe policies recommended. Other Issues Page 9, The last line in the last paragraph i s an overstatement. Moreover, there i s not a real distinction between mandated markets and mandated market share. Iwould delete the mandated markets discussion inthat both the NFFO and PURPA could fall under this heading as described though they are discussedinthe next section. Page 10: It i s important to point out that the difference between a feed-in law and an RPS i s that with the former, one will know the price of renewable electricity-but not how much will be produced. With an RPS, one will know how much will be produced, but not what the price will be. The RPS i s infavor today because more than the feed-in law, it aims to stimulate competition and minimize cost. Experience has shown, however, that feed-in laws have done a better job of creating local manufacturing and development infrastructure. In the end, the Bank will need to help China develop an M M S policy that works in the Chinese context. That might mean some combination of M M S policies from Europe and the U.S. (see Table 1 a further comparison between feed-in laws and RPS policies-an expanded version of this analysis i s available from CRS). ITable A16.1: Comparing the RPS andFeed-inLaw Policies Policy Objective I RPS and Related Policies I Feed-inLaws Incentives for cost significant competitive few inherent incentives to minimize cost minimization pressures Ability to maintain direct result of purchase cannot know in advance whether feed-in targets for renewable obligation tariff will stimulate a specific amount of energy supply Assurance of possible with bands and easier to implement than under RPS resource diversity tiers, but administrative drawbacks Political viability depends on depends on circumstances-unclear in circumstances-unclear in China China Local industry needs companion policies experience shows that feed-in tariffs can development to ensure local create localmanufacturing and 144 develoDment I develoDment infrastructure with an appropriate phase- compatible with existingregulatory and in,RPS appears compatible industry structure, butperhapsnot regulatory structure with industry and competitive electricity market of the regulatory structure in future China Policy stability provides lesser certainty often provides highdegree of stability I than feed-in tariffs Competitive parity yes-same standard only if cost-sharing mechanisms are applies to utilities and established developers Integration of incentives for full fewer incentives than under RPS to renewable energy integration andbarrier reduceinstitutional barriers supplies reduction Simplicity more challenging policy to high degree of design, administration, designand administer, and enforcement, contractual, and more complex contractual development simplicity and development process I for generators Secondary Issues Linkages to other focal areas Nocomment. Linkages to other programs This project potentiallyhas linkages to projects throughout the world. The comprehensive nature , of the approach, ifsuccessful, could form a model for both emerging economies and developing countries throughout the region. Other beneficial or damaging environmental effects All of the major environmental effects have been noted in the STAP document. However, the beneficial effects of the project related to NO,, SO,, particulates and mercury have not yet been quantified. When they are, Ibelieve these will be very significant for China. The SO, benefits will be significant for the whole region, whereas the other air pollution benefits will be local with their significance depending upon the locationof the generation they displace. Degree of involvement of stakeholdersinthe project It appears that this has been significant involvement of stakeholders in the project, though participation alone i s not enough. The project will benefit when it can be less dogmatic and more supportive of input and program design evolution by the stakeholders who are involved. It will be virtually impossible for outsiders, including officials from Beijing, to really understand the local dynamic that i s critical to program implementation andultimately to the program's success. Capacity buildingaspects The central focus of this project i s on capacity building. 145 Innovativeness of the project The focus on capacity building and a comprehensive policy framework make this program innovative within the Bank itself. If successful, it should set a new and beneficial standard for programdesign. Conclusions This program proposal is well thought out. Successful execution will be challenging though the potential rewards make it well worth the effort. 146 B. BANKPROJECTTEAMRESPONSE Table A16.2: BankProject TeamResponse ISSUE AND RESPONSE REFERENCEIN PROGRAM BRIEF SCIENTIFIC AND TECHNICAL SOUNDNESS Iwould recommend, however, that theBank look at one of the main barriers that is not addressed-development of a local industry, both equipment manufacturers and project developers (resource assessors, business plan developers,financial experts, etc.)....A separate but related component of this can be to pre-select a group of interested and willingfinancial institutions that can receive training onfinancing for renewable energy projects. CRESP aims to create a market, the most important element needed to foster an Section B4 industry.When CRESP succeeds increatinga market, these investments will follow. Two CRESP components would also help the development of an industry to serve this market. One, Technology Cost Reduction and Quality Improvement, is targeted mainly at assisting local equipment manufacturers to improve the quality and reduce the cost of their products, through cost-sharing early technology development investments. Principal beneficiaries will be manufacturers, equipment suppliers, and standards, testing and certification institutes. The other component, Development of Market Infrastructure, is designed to help the "software" (service industry) develop. It will support the development of enterprises so that they can offer the full range of services from resource assessment, through design, engineering, construction, commissioning, acceptance, to operations, maintenance, rehabilitation and decommissioning. This component i s also targeted at the financial services sector, in particular the commercial banks, and would offer financing to undertake studies, product development and TA for: risk management instruments, (for example guarantees and insurance); project financing structures; contract arrangements; project bundling; fund formation; and evaluating and appraising renewable energy investments. Assistance would be provided to build up the network of supporting information, including a public resource database, consulting skills and access to financing that local and international PPs must have to develop projects efficiently The Program Brief has been amended to bring out the role of these components in supportingthe development of a local industry. The section that discusses the barriers tofirther renewable energy development in China-although a good summary-is missing one barrier that is reflected throughout the entire document-the lack of any renewable energy industry in China-either domesticmanufacturing orjoint-ventures withforeign companies. We-and those Chinese experts who participated in the November 1999-believe that the barriers listed underlie the lack of the renewable energy industry. The main SectionB3.1 barrier i s the lack of policies to create a market and pay the incremental costs. As SectionB4 shown by the small hydropower industry inChina, if the market exists, the industry l will grow. The small hydro industry in China i s well developed, with more than 20GW of small hydro installed, mostly based on locally designed and implemented projects using locally manufactured equipment. The wind industry i s less advanced, but there are a number of joint ventures with major international companies as well as some local component manufacture and service industries. The newex 147 technologies, including those relating to landfill gas, are less well developed. In parallel with market creation through the MMS policy, the Technology Cost Reduction and Quality Improvement and Development of Market Infrastructure Components would encourage new entrants as well as improve the capacity of the existing industry. Power purchase agreementsarepoorly developedand not enforced, but again, if this changed overnight, the lack of ZPPs in the market would still constrain the development of the projects. In this sense, the Bank has a role in catalyzing the entrance of IPPs in the market-a role not clearly spelled out in the ... report. The Policy Development and Market Infrastructure Components will explicitly address the issues of how to ensure that the market created by the M M S i s open to iection B4 (discussion private sector developers, (IPPs), and how to support the development of domestic )nMMSPolicy and IPPsfor renewable electricity. rlarket Infrastructure If the Bank encouragedthe GoCto adopt investment incentives,such as tax holidays and concessional loans on manufacturing equipment (combined with a strong effort to ensure this equipmentmeets international standards). ..local equipment will lower the cost of the technologies, other financial incentives will lower the cost of the electricity generation itsev In addition to the VAT on equipment being reduced to 6 percent (as it is for small hydro), a modest effort could help ensure that the custom duties of importing parts of a wind turbine are made less than the duties on an entire turbines (as it the case now). The GoC and some provincial govemments have adopted a number of investment incentives and are contemplating others, in parallel with the introduction of a Section A1 Mandated Market Share (MMS). Examples of existing or planned incentives for SectionB4 (discussion wind include reduced customs duties on equipment imports and income tax on investments. As part of policy work in Phase 1, TA will be provided to study the 3nMMS Policy Framework), existingfinancial incentives structure, possibly recommend additional incentives, and Section C2 ensure that the combined package of financial incentives, price to be paid by the utility, and contracting terms are attractive to investors. Financial incentives are an integral part of CRESP and ensuring that they are harmonized with the M M S i s an important part of the Program. The Brief has been amended to bring this out more clearly Section B3.2 Strategic Choices: This section...incorrectly talks about thefailures q subsidies...our experience has shown that subsidies can be eflective in spurring RL development without being indiscriminate, open to abuse, etc. The U.S. productior tax credit-in combination with other market policies-has accelerated tht installation of thousands of megawatts of wind energy...I believe that intelligently designed incentives are important in bringing projects to fruition, particularlj incentives related to the previous point above-the development of a local RL manufacturing base The section makes the point that subsidies have drawbacks. The main point of tht discussion on financial incentives, however, i s the conclusion that on their own the! have not tended to be successful in developing the market for renewables. Thc Section B3.2 section goes on to 'make the case that incentives combined with an M M S appear to bc the most successful approach. The Brief has been amended to express more clearly tc the intention of the CRESP, to use the M M S policy together with a package of financial incentives to create an attractive environment for investors. Section B3.2 Strategic Choices: The last line in the last paragraph [of page 91 is an overstatement...Moreover, there is not a real distinction between mandated markets and mandated market share. I would delete the mandated markets discussion in that both the NFFO and PURPA couldfall under this heading as described though they are discussed in the next section. Section B3.2 Strategic Choices: It is important to point out that the difference between afeed in law and an RPS is that with theformer, one will know the price of renewable electricity-but not how much will be produced. With an RPS, one will know how much will beproduced, but not what theprice will be. TheRPS is infavor today because more than the feed-in law, it aims to stimulate competition and minimize cost. Experience has shown, however, thatfeed-in laws have done a better job of creating local manufacturing and development infrastructure. In the end, the Bank will need to help China develop an MMS policy that works in the Chinese context. The Program Brief has been amended to take the first comment into account, and to bring out more clearly the ideas expressed in the second comment, which the task Section B3.2 team shares and intends to realize. EVALUATIONDEMANDSIDEMECHANISMSTOSUPPORTAFTER-SALESSERVICE OF CRESP aims to create the demandfor renewable energy, so right now, there is not very much afer-sales service to evaluate ...Anexception is the solar hot water industry, a well-developed technology in China.. .With CRESP overall, this is an issue that the Bank will have to address and gets to thepoint above about creating a market infrastructure. Even if the policy signals are there-through an MMS,for example-the Bank will need to developthe market infrastructure. The Task Team made an early strategic decision to exclude heat-producing renewables applications from the Program. SectionD1 Note the comments above about the Market Infrastructure Component, which i s Section B4 aimed directly at creating the neededmarket infrastructure. Onpages 11-12, the Bank outlines its plansfor Phase I of CRESP-selecting three pilot provinces and developing the legal and institutional capacity to implement a province-wide MMS. What appears to be missing and what I believe to be critically important is renewable energy credit trading. The Bank correctly points out thal credit trading is a way to lower the cost of an MMS andprovide additionalflexibility to support renewable energy where the resources are strongest...Isuggest carrying out some "mock" trades in the pilot province just to get the MMS administrators readyfor this task. Renewable energy credit trading i s only applicable to one generic type of MMS, SectionB 4 namely the Renewable Portfolio Standard (RPS). Other approaches use different means of ensuring the M M S i s met at least cost and so puttingin place and testing a trading mechanism may not be appropriate. The current plan, subject to confinnation of feasibility at appraisal and early implementation, i s to introduce an RPS-type 149 LlMS with certificate trading. Issuing of certificates for verification, and possibly rading, and trading itself are included as activities in the provincial pilots during Phase 1. The Program Brief has been amended to reflect the comment and to bring Dut more clearly the intentionas expressedinthis response. It will be critical to sort out the conjlicting roles of various state agencies, vpec@cally SDPC, SETC and MOST. Although the Bank is working on setting up Phase 1, it also needs to sort out these longer-term issues that might not get resolved until Phases 2-3. What the Bank should be striving for is an independent, vrofessional regulatory authority with responsibility over the key aspects of the vower sector, including the administration of the MMS policies...A second, related romment is that the CRESP program should work completely in tandem with the Bank's broader power-sector reform efforts in China. It seems to me (although I am vn the outside) that CRESP and the Bank's power sector reform team are working yomewhat independentlyof eachother. Fragmentation of responsibilities i s recognized as an issue. Program oversight and policy guidance i s furnished by a steering committee co-chaired by the MOF and Section B3.1 (Lack of State Development Planning Commission (SDPC) with members representing State Policies) Economic and Trade Commission (SETC) and Ministry of Science and Technology Section C4 (MOST) and many other ministries and agencies are also represented on the steering Section E4. committee. The PMO, will be responsible to this committee for the implementation of the project, and will work closely with a smaller working group of key officials from different agencies on policy development. During Phase 1, the institutional arrangements for implementation of the M M S policy at national and provincial level will be outlined. The GoC strategy i s to set upSection B2 (GoC formal power sector regulatory mechanisms at the Central and Provincial level. It Strategy) may be necessary initially to designate an independent regulatory body for the M M S Section C2 and certification, ifrestructuringi s slow. The task team agrees on the close relationship of the MMS to power sector reform, and the need for collaboration with power sector reform. The PMO has already begun to work with the Working Party on the Electricity Law of the Legislative Committee of the National People's Congress. It i s likely that the vehicle for the M M S will be through revision of the Electricity Law, which will also introduce the broader power sector reform. SDPC i s responsible for power sector reformand the CRESP (together with MOF, in the case of CRESP). Within the Bank, the Task Team Leader for CRESP is also involved inpower sector reform activities and the Task Team Leaders for the major reform activities are also team members for CRESP. The Program Brief will be amended to stress the close connection. I suggest that the Bank rely on outside experts that are already working in China, such as the Energy Foundation, CRS, UNDP and Chinese institutions, such as Tsinghua University, to help refine and improve the program. This might take the form of a working group that meets once or twice a year in China to review the status of theprogram. The CRESP will make every effort to involve outside experts in preparation and 150 implementation of the CRESP, both through direct participation and parallel Section C4 activities. Also, in addition to the steering committee, there i s a regular meeting of donors, including the Bank, ADB, UNDP, bilaterals, and others every six months, which i s able informally to provide feedback DEGREE INVOLVEMENTOFSTAKEHOLDERSINTHEPROJECT OF The project will benefit when it can be less dogmatic and more supportive of input and program design evolution by the stakeholderswho are involved. The Components in the CRESP specifically address the barriers identified by Section B4, (MMS stakeholders inthe Workshop held inNovember 99. Stakeholder consultationwill be Policy Framework and increasingly important as the program moves toward implementation. Substantial Pilot Phase) consultative and stakeholder participationi s anticipated inthe runup to appraisal and after effectiveness, particularly in the policy development and pilot components, but by no means confined to them. We will amend the Program Brief to describe better the plannedprocess. 151
Группа Всемирного банка · Project Appraisal Document
China - Renewable Energy Scale-Up Program (Chine - Programme à l’appui du développement des énergies renouvelables) ,الصين ــ برنامج تطوير الطاقة المتجددة,China - Programa de mejora de las energías renovables
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