China - Supplemental Project to the World Bank-GEF Renewable Energy Scale-Up Program Project Bank-GEF Renewable Energy Scale-Up Program Project

Report No. PID9960 Project Name China-WB/GEF Renewable Energy Scale-up... Program (Supplemental Project) Region East Asia and Pacific Region Sector Other Power & Energy Conversion Project ID CNGE67625 Borrower(s) GOVERNMENT OF CHINA Implementing Agency Address Ministry of Finance San Li He Lu, Beijing, China 100829 Contact Person: Yang Jinlin, GEF Operational Focal Point for China Tel: (86-10) 6855-1133 Fax: (86-10) 6855-1183 Email: jl.yang@net.gov.cn Environment Category B Date PID Prepared August 17, 2000 Projected Board Date December 11, 2001 1. Country and Sector Background Main Power Sector Issues. Despite impressive progress achieved during the last decade, China's power sector is still facing the following major issues: (a) heavy reliance on coal entailing large emissions of greenhouse gases (GHG), particulates, S02 and NOx with consequent 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 monopoly/monopsony power and discrimination against independent power producers; (c) mismatch between loan maturities and economic lives of power projects combined with the "debt repayment pricing policy" resulting in front loading of electricity prices (detrimental especially for renewable electricity because of its high capital and low operating costs); (d) inadequate wholesale electricity and transmission pricing systems; (e) low efficiency of electricity supply and use; and (f) lack of access to electricity by more than 50 million people in isolated rural areas.Government of China (GoC) Strategy. The Government remains committed to power sector reform, aiming to: (a) complete restructuring of the sector, expanding competition between generators in provincial grids and developing inter-regional markets for electricity trade; (b) establish formal regulatory mechanisms at the Central and Provincial Government levels; (c) rationalize transmission pricing and generation tariff structures (where the latter are not yet determined by competitive markets); (d) expand and mainstream strategies to raise private capital including: Build-Own-Transfer (BOT) projects with foreign ownership developed through competitive bidding; joint investment projects with foreign investors; domestic and foreign equity listing of power enterprises; and securitization of existing assets to raise capital from private sources; and (e) increase energy supply efficiency by reducing  losses in generation, transmission and distribution; and expanding demand side management through pricing and energy conservation measures.The GoC is also committed to reduce the negative environmental impacts of coal-fired generation by: (a) developing large scale hydropower, promoting gas based generation in eastern provinces, and scaling-up development of renewable energy; (b) mandating the retirement of about 10 GW of small, inefficient and polluting coal fired units by 2000; (c) strongly promoting energy efficiency; and (d) using S02 emission taxes and requiring flue gas de-sulfurization technologies to be installed. Finally, the GoC continues its serious commitment to providing electricity services to all remaining households that do not have access, mainly through small hydropower and other renewable resources.Renewable Energy Strategy. China has long had one of the world's largest renewable energy programs, leading to the establishment of 20 GW of small hydropower and large-scale installation of improved woodstoves and biogas plants. The government's energy strategy in the 10th FYP emphasizes renewable energy more strongly than in the past, as one measure to 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 Plan. The renewable energy policy in the 10th FYP is still under development, but the guiding principles are the following:- The plan should adopt best international practice for renewable energy development, adapted for Chinese conditions;- The plan should include 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;- The plan should indicate how renewable electricity policies will be integrated with power sector reform;- The plan should also be integrated with strategic objectives to develop Western part of country, e.g. focus on developing small hydropower, wind energy and solar energy;- The plan and proposed policies should be developed in a transparent process, where the State Development Planning Commission (SDPC) works 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. 2. Objectives The China Renewable Energy Scale-Up Program (CRESP) aims at enabling commercial renewable electricity suppliers to provide energy to the electricity market efficiently, cost-effectively and on a large scale. The program is in line with Global Environment Facility (GEF) Operation Program (OP) 6: promotion of renewable energy by removing barriers and reducing implementation costs. In meeting its purpose, the Program would contribute to the higher level goal of displacing coal in power generation, thereby reducing environmentally damaging emissions. It would also contribute to the Government of China (GoC) strategy of economic development in the western provinces, since much of the renewable energy is in those areas.The Program would achieve its purpose by supporting the implementation of a national policy framework that would legally require a share of electricity supply to be met from renewable resources, a "mandated market policy" such as Renewable Portfolio Standard (RPS). The Program would support implementation of necessary laws and/or regulations, as well as a range of other measures to strengthen commercial capacity to scale up renewable energy markets. The mandated market policy is required to address the failure of the market price for thermal electricity to -2 -  reflect the costs of damage borne by society, resulting from pollution caused by burning fossil fuels (externalities). The policy would also support development of trading mechanisms to allow the development of the abundant renewable resources located in China's less developed regions, to meet cost effectively the electricity needs of developed regions, with large power markets and financing capabilities.The mandated market and trading approach is expected to spur development of renewable energy generating facilities by commercial companies, with significant participation of the private sector, on a large scale. Bank financing is expected to play catalytic and demonstration role by financing a few projects in Phase 1 and possibly Phase 2. However, the vast majority of facilities developed under the mandated market policy would be financed commercially with no involvement of the Bank or GEF. Investments would be financed through both equity and debt from a wide range of public, para-public and private investors.The scale-up to be achieved by the policy will be determined during preparation, but the preliminary estimate is that the target would be set to result in about 20 GW of additional renewable generating capacity by 2010. A "business as usual" approach would result in an estimated added capacity of about 10 GW, almost entirely small hydropower. The Program is expected to double the pace of development and to broaden it to include other commercially mature technologies like wind power and biomass. 3. Rationale for Bank's Involvement The World Bank and GEF helped, in collaboration with other multi- and bi-lateral agencies, SDPC in building consensus around the need to introduce a mandated market policy to scale up and sustain development of renewable energy during the preparation of the 10th FYP. SDPC and other agencies acknowledge World Bank and GEF value added in: (a) bringing up to date knowledge about and lessons learned from international experience on a timely basis; (b) identifying and mobilizing high caliber experts; and (c) defining and assisting in carrying out analyses and studies required for informed decision making. Building on the trust and momentum developed during last year's collaborative effort, the World Bank and GEF are well positioned to assist in formulating and implementing the required policies and regulations to effectively bring forward renewables capacity in a timely and cost-effective manner. Mandated market policies to develop renewable energy are relatively new and changing fast, as the technologies mature. There is no body of accumulated expertise available through the normal channels such as experienced consultants. Most of the experts are practitioners working in government, and are available as advisers for limited periods. World Bank renewable energy staff have expertise in this area, built up over some years of working with several countries, both developed and developing. Bank involvement brings also best and "neutral" (honest broker) international policy advice.Because of its long involvement with the power sector, its direct involvement in investment and power sector restructuring activities, combined with knowledge of renewables investment activities, the Bank, with the assistance of GEF, has a comparative advantage to sustain the effort initiated during the preparation of the 10th FYP to assist the government in developing and designing this Program for China. Bank involvement would ensure that:n the mandated market policy development benefits from international experience;f the Pilot Demonstration Projects will be carried out using best international practice;f the mandated market policy development and implementation will be well integrated with power sector - 3 -  reform. 4. Description The Program will consist of three Phases, as follows: Phase 1 would set up the Program, prepare the laws and regulations, as well as the administrative framework required to monitor implementation, and undertake complementary activities to strengthen the supply-side to support the large-scale uptake of renewables that would result from a mandated market. It would simultaneously test the proposed mandated market implementation processes and procedures in pilot provinces, which would be selected, preferably on a voluntary basis. Phase 2 would support: (a) expanded implementation of the mandated market in about 10 selected provinces, with special attention to adequate monitoring and enforcement; (b) continued support for technology improvement and cost reduction; and (c) continued support for development of market infrastructure. The latter two would be national in scope and would reinforce the supply side on which the program relies for building renewable energy facilities. The demand created in the 10 selected provinces would be met not only by production within the selected provinces, but also by trading with producers in provinces not covered by the mandated market. An essential challenge will be to provide adequate incentives to encourage certificate trading, which is needed for meeting the mandated market requirements at least cost and for developing Western provinces' important renewable energy potential. Trading is currently impeded by China's fiscal system, which encourages local production, rather than trade and optimal use of resources, to maximize local tax revenues. Depending on experience and the level of success achieved, an off-grid component to expand activities of the Renewable Energy Development Project to technologies other than solar PV and other geographical areas, might be included on a pilot basis. This phase would also continue TA to support the Partnership and provide program management. Phase 3 would support implementation of the mandated market in the remaining provinces to be covered. There would also be some support for technology improvement and cost reduction, and for development of market infrastructure but this would be at a reduced level compared with earlier phases and would ramp down during the course of the phase. By this stage, it is expected that the commercial market infrastructure would have reached a critical mass in terms of size, experience and skills. Depending on the success with the off-grid component, full scale implementation may also take place during phase three. Components Phase 1 of the program would consist of the components described below. While all components would continue through phases 2 and 3 with the exception of the Pilot Mandated Market, activities will evolve with the program. Mandated Market Policy Technical Assistance. This component would assist the government at national, provincial and local level in developing and implementing a mandated market policy through: Preparation, testing, and bringing into operation the legal and administrative instruments, procedures and institutional arrangements for - 4 -  the mandated market, nationally and in the pilot provinces; Development of other complementary programs, such as a voluntary "green electricity scheme" to sell "green electricity" to companies or commercial establishments willing to pay premium prices to establish an environment friendly" reputation; Development of other supporting policies and program activities, e.g. financial and fiscal measures to encourage investment in renewable energy. Pilot Mandated Markets (Phase 1 only). Three or four provinces would be selected, preferably on a voluntary basis, to pilot the development and implementation of a mandated market, including putting in place the required certification and compliance monitoring procedures at provincial level. Provincial governments would be offered incentives such as: assistance to set up the monitoring systems and enforcement procedures; early grant assistance for resource assessment and, if required, feasibility studies to develop renewable energy according to international best practice. These projects could be within or outside the pilot province. Most of the investments in this component will be in commercial renewable electricity investments, that are mandated by the proposed renewable energy policy. Full private sector ownership of wind and small hydro assets is allowed and encouraged by the government. World Bank financing is expected to be used to finance a small number of projects in selected provinces, where it would have a catalytic and demonstration effect. The purpose would be to build confidence and experience among national and international companies to enter the renewables market in China. It would largely be achieved by setting up a framework in which long-term, commercial contracts can be concluded between power suppliers at wholesale and retail levels and renewable energy companies for supply and purchase of renewable electricity. Procedures for development and purchase of the electricity would be in line with the contractual arrangements and procedures to be defined for the mandated market (for grid connected projects, PPAs, pricing, acquisition procedures for resource rights, approval processes, green certificates, etc.). Information on costs and prices as well as performance would be benchmarked against best international standards. Results related to improved efficiency and lower prices will be disseminated broadly. Technology Cost Reduction and Quality Improvement. Technology improvement support, begun under the China Renewable Energy Development Project, would be deepened to accelerate local technology development to meet the demands of an expanded market. Support will be extended to other technologies. Cost-shared grants would be provided for technology improvement projects which would result in local production of high quality/low cost renewable energy equipment components. National standards would be implemented for renewable electricity equipment, based on international standards. Support would be provided to strengthen existing institutions or create new ones to serve both as testing centers to ensure that equipment meets standards and certification requirements, and to serve as centers for training on efficient operations and maintenance. - 5 -  Development of Market Infrastructure. Assistance would be provided to build up the network of supporting information, consulting skills and access to financing that project developers must have to develop projects efficiently for provinces and firms not in the pilots. Activities would be coordinated with other programs, in particular the United Nations Development Programme (UNDP)'s Capacity Building for the Rapid Commercialization of Renewable Energy and would include: Cost-shared pre-feasibility studies (GEF/developer). Resource measurement and assessment programs for wind, small hydro and biomass, at a provincial level; Development of databases on resources and grid characteristics that would be available to potential developers on a website; Cost-shared pre-feasibility studies for projects outside the pilot provinces (GEF/developer); Assistance in increasing access to project financing, if necessary. Studies and training on integration of intermittent renewable electricity into grids; Awareness/marketing campaigns throughout the pilot phase to make sure that information and results of the program reach all audiences (including schools) and to receive feedback on the program. Identification of other barriers and development of measures to address them. Support to the GoC Partnership for Renewables. The Program forms part of a wider Government of China initiative, called the GEF Strategic Partnership for Renewable Energy (Partnership), under which the government is bringing together all the activities being undertaken by national and international agencies working on renewable energy. The Partnership is intended to ensure that individual programs and activities work in harmony rather than compete or duplicate. This component would support the Partnership by: (a) providing technical assistance for Program monitoring; (b) preparation of proposals and meetings with donors to seek support for activities not covered in the Program; and, (c) preparation of the 11th FYP. Program Management. Any program of this size would need active management to ensure that all activities contribute to the Program's objectives and where necessary, corrections and adjustments made. This would require careful monitoring through appropriate monitoring and evaluation mechanisms, and development of adequate management information systems. 5. Financing Total ( US$m) GOVERNMENT 2.4 IBRD 50.0 OTHER INTERNATIONAL AGENCIES (NOT YET IDENTIFIED) 12.5 COMMERCIAL SOURCES (NOT YET IDENTIFIED) 58.9 GLOBAL ENVIRONMENT FACILITY 39.7 Total Project Cost 163.50 -6-  Cost estimates and funding sources are very preliminary. First phase investments (pilots) are greatly dependent on the choice of pilot provinces and technologies to be supported. Bank financing is expected to play a catalytic and demonstration role by supporting a few number of pilot projects in Phase 1 and possibly Phase 2. The project is expected to induce investments more than $300 million in Phase 1 that would be financed through both equity and debt from a wide range of public, para-public and private sources. 6. Implementation Implementation Period: Completion date depends on date when trigger conditions are met, estimated to be three years for Phase 1 (2002-2005), about ten to twelve years for the total program.Program Oversight and Policy Guidance. A steering committee already exists for the preparation of the Program. The committee is co-chaired by the GEF Focal Point of Ministry of Finance and by the Director of Basic Industries of SDPC, and includes the representatives of State Economic and Trade Commission, Ministry of Science and Technology, State Power Corporation of China, State Environmental Protection Agency, Ministry of Forestry, Ministry of Agriculture, Ministry of Water Resources, China Academy of Sciences, People's Bank of China, and the China Development Bank. SDPC and MoF agreed that within two months of approval of the PCD, the Committee will be strengthened by inclusion of key representatives dealing with the power sector planning and policy in the various agencies, and its structure modified. It will become the steering committee of both the Partnership and the Program. The Program will provide assistance to the Steering Committee in planning, monitoring, Program implementation and addressing questions or issues raised by the Committee.Coordination and Management: A Project Management Office (PMO), operating under the Steering Committee, would be responsible for coordination and management of the Program and act as the executive arm of the steering committee. There would be a full-time Manager of the PMO, with senior program management and international experience. Because this is an extremely complex program in an area that is new to China, the PMO would also have at least one full-time senior expatriate technical adviser with previous experience in managing a large scale renewable energy program.Project Implementation: Primary responsibility for project implementation will rest with the PMO. The PMO will be strengthened during preparation to ensure that it has sufficient numbers and quality of staff to carry out its mission. The PMO will implement most of the national level activities such as:n Providing support to lawmakers in preparing suitable laws and regulations to implement the mandated market policy;n Developing and managing the market infrastructure component;f Selecting the pilot provinces and providing necessary financial and technical support in setting up monitoring systems, resource assessments and feasibility studies.Participation of Other International Agencies: The Program would be open to participation by multilateral and bilateral organizations and foundations. It will also encourage other international agencies to undertake complementary activities which will ease setting up and implementing the mandated market. Such activities could include, for example, strengthening of existing institutions, and private sector participants. The financing plan contains some examples of expected co-financing, but it is expected that many other opportunities will be defined during preparation. The WB/GEF will assist the GoC to develop the Program framework, with a full complement of activities. The essential elements of the framework will be -7 -  supported by the GEF/WB, to ensure the viability of the Program and the timely completion of these activities. During preparation, the possibility of UNDP, Asian Development Bank (ADB) and the Energy Foundation participating in framework activities will be explored, recognizing that agreement would depend on the feasibility of close collaboration and harmonization of internal processing requirements among the agencies.Procurement:The team includes several procurement -proficient staff. Oversight of procurement will be carried out by two staff (Noureddine Berrah and Barry Trembath) in headquarters and two (Dawei Yang and Elaine Sun) in the Beijing Office, to facilitate communication and ad-hoc response to the Beneficiaries' inquiries.The program components/activities requiring Bank or GEF involvement will be determined during project preparation. Procurement for these components will be subject to Bank policies and procedures. A workshop will be organized to familiarize the PMO and implementing entities with Bank procurement procedures. On the job training will also be provided during the preparation of the detailed procurement plan to be included in the project implementation plan. Procurement will be carried out by one of the certified trading companies which are knowledgeable about Bank procurement rules and procedures. For components or separate projects developed by private or other investors, assurances will be sought that they will be developed under procedures that will achieve economic efficiency and fulfill the Borrower's obligations to cause the program to be carried out diligently and efficiently. Financial Management Issues: No particular issues. A well defined project financial management system will be designed and in place before project implementation to ensure sufficient and proper control and monitoring of project activities processing, recording, authorization, approval, reconciliation and evaluation, and timely financial reporting in a format and content acceptable to the Bank. 7. Sustainability The project depends heavily on having an effective and enforceable mandated market measure in place, and on the design of an effective regulatory system that does not depend on the power sector regulator. The project also depends heavily on continued commitment by high level government officials, which in turn depends on macroeconomic stability being maintained. 8. Lessons learned from past operations in the country/sector APLs. A draft review of 40 APL's approved in FY98-first quarter FY00 found that 75t were rated satisfactory or better. In most projects with difficulties, they related to a lack of clarity or specificity in "triggers" for moving from one phase to the next. The project team has paid particular attention to definition of clear and specific indicators and benchmarks and to the monitoring and evaluation aspects of the project. The database planned to support program management will provide required indicators on a continuous basis.Lessons Learned in National Renewable Energy Policies. The evidence accumulated over some 20 years suggests that a complementary set of policies, coordinated and focused on market creation are necessary. They include support for research and development, standard setting, education and awareness but most importantly need to be based on mandated market policies. The history of renewable energy mandated market programs in different countries has been studied. Lessons learned include that mandated market policies should ensure that: (a) a competitive environment is developed in the renewable - 8 -  energy segment to reduce technology and project development costs; (b) flexibility is maintained with respect to changing market conditions, e.g. restructuring and deregulation of power sectors; (c) reliance on administrative procedures is minimized; and (d) exit strategies are developed and implemented as soon as barriers are removed. Chinese government agencies are being advised by consultants responsible for the policies in the UK; the voluntary/mandatory share in the Netherlands; the mandatory share in Australia; and the RPS in some of the US states. These consultants will continue to provide advice throughout preparation. Lessons learned in Renewable Energy Projects in China. Many lessons learned at the project level have already been incorporated into the project design. Additional lessons to be incorporated in project design include: (a) the need for full commitment of the Borrower and strong support from local government at different levels; (b) stakeholder participation from the early stages and throughout, to gain and maintain their support; (c) key policy reforms, conforming to government objectives should be incorporated into the project design; (d) project preparation should include detailed organizational and staffing arrangements for implementation; (e) counterpart funding should be committed before implementation, with the direct participation of relevant levels in SDPC, MoF and other agencies; (f) preparation and projects should include institutional strengthening support for implementing agencies; (g) projects crossing institutional lines are more difficult to implement and must provide adequate incentives to all participants; (h) capacity building during project preparation can achieve part of project objectives and substantially speed up implementation (e.g. see REDP); (i) power markets should be carefully assessed and periodically reassessed to ensure a demand for output from proposed projects; (j) key principles of all agreements that are essential to the project functioning as envisaged (e.g. PPAs, voluntary pilot schemes) should be established before Project Appraisal; and (k) coordination with other active agencies is essential, especially UNDP, ADB, GTZ, the Energy Foundation and the Embassy of The Netherlands in Beijing. 9. Program of Targeted Intervention (PTI) No 10. Environment Aspects (including any public consultation) Issues : There are no major environmental issues are expected. Only minor local impacts are expected, as follows:n Biomass co-generation (generally less than 5 MW) -impact would be mainly emissions, which would depend on fuel and facility size. For direct combustion of agricultural residues, impact would generally be emissions of particulates and disposal of ashes. If biogas is part of the program, possible but not likely, there could also be disposal of slurry.n Small hydropower (less than 25 MW) - since these would generally be run of the river, with no impoundment (or small with daily storage only) the main impacts would be related to construction, in particular, access roads.n Windfarm development -- impacts would include physical impacts from construction (noise, land acquisition, dust), and effects during operation (noise, impact of bird collisions, and impact of small amounts of land acquisition). 11. Contact Point: Task Manager 9  Noureddine Berrah The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 473-1132 Fax: (202) 522-1648 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID processed by the InfoShop during the week ending September 1, 2000. - 10 -