Global Environmental Facility (GEF)
Concept Document for Entry in the GEF Pipeline
Country
:
People’s Republic of China
Project Name
:
Wind Power Development
GEF Focal Area
:
Climate Change
GEF OP
:
OP 6: Promoting the Adoption of Renewable Energy by
Removing Barriers and Reducing Implementation Costs
Country Eligibility
Financiers
:
:
Ratified FCCC on January 5, 1993
ADB - $60 million, Cofinancers - $20 million, GEF –
$5-10 million, Government -$24 million
Requesting Agency
:
Asian Development Bank (the Bank)
Executing Agency
GEF Implementing Agency
:
:
State Power Corporation of China (SP)
To be confirmed
PDF Block B
:
None Requested
I.
Background and Rationale
1.
The combustion of fossil fuels in the People’s Republic of China (PRC) has led to
serious local environmental problems, notably air pollution. The level of pollution is exacerbated
by inefficiencies in coal production and transportation, and by the poor quality of coal burned.
Air pollution also contributes to acid rain, which is causing increasingly serious damage to
forests, crops, and aquatic life in the south of the country. Pulmonary diseases, which are
closely related to particulate emissions, account for 26 percent of adult deaths.
2.
While the PRC’s rates of economic growth in the longer term are likely to be
more modest than over the past decade, its energy intensity is expected to decline to one third
its current level by 2020.1 As a result, commercial energy consumption is expected to grow at
about 4 percent a year in the longer term and reach 3.3 billion tons of coal equivalent (tce).
Given the programs under way to increase the use of natural gas, hydropower, and nuclear
power, their share in commercial energy supply will increase, but coal is expected to continue to
provide two thirds of the PRC’s commercial energy in 2020. This corresponds to an increase in
coal consumption from just over 1 billion tons at present to 3.1 billion tons in 2020, with
increasingly unsustainable pressure on the environment.
3.
The PRC’s fossil fuel-based energy structure implies high and rapidly increasing
greenhouse gas (GHG) emissions, which currently account for more than 10 percent of annual
global energy-related GHG emissions. Even with sharp declines in energy intensity, the PRC’s
continued economic growth will be accompanied by more than a three-fold increase in GHG
emissions by around 2020. The increases in coal use will further exacerbate the PRC’s
difficulties in mitigating problems of increasing acid rain, and deteriorating urban air quality in
most cities, where ambient air pollution concentrations commonly exceed the World Health
Organization guidelines by three to five times. An aggressive program of energy conservation
1
The energy intensity is expected to improve from 2.8 tons of oil equivalent (toe) per $1,000 gross domestic
product (GDP) in 1998 to less than 0.80 toe per $1,000 GDP in 2020 in comparable prices.
2
and development of non-coal energy alternatives, including renewable energy, could limit the
increase in GHG emissions in the longer term. With moderate action, the PRC could draw as
much as 6 percent of its energy needs in 2020 from renewable energy sources.
4.
Reducing environmental damage from coal use is an important issue, as annual
economic losses due to adverse health impacts and agricultural loss associated with coalrelated air pollution in the PRC are estimated to be as high as 6 percent of GDP.1 In addition,
more than 100 million poor rural residents in remote areas currently depend on traditional
biomass fuels for most of their energy needs and more than 75 million mostly poor people do
not have access to electricity. The expansion of renewable energy use in the PRC is therefore
important not only to reduce environmental damage, but also for improving social conditions and
reducing poverty.
5.
Despite the large renewable energy resource potential, the contribution of
renewable energy, other than hydropower, in the PRC is small due to a number of market and
non-market barriers. The installed generating capacity of wind power is 230 megawatts (MW),
installed capacity of solar photovoltaic cells is less than 30 MW (about 30 percent in dispersed
household systems), installed geothermal generating capacity is 30 MW, and biomass fueled
systems account for only 7 MW.
6.
Compared with the size of its renewable energy resources, the PRC’s renewable
energy program, excluding that for large-scale hydropower development, is relatively small and
uncoordinated. It has suffered from the lack of an overall strategy, financial incentives, and
adequate market orientation. Until now, development of renewable energy technologies in the
PRC has focused largely on research and pilot demonstrations. In the absence of a critical
minimum demand, investors are hesitant to invest in manufacturing or operating renewable
energy systems. Because of the limited number of units produced, the prices of small-scale
renewable energy technologies are high compared to what consumers are able to pay. Many
renewable energy technologies, such as bagasse cogeneration, large-scale biogas, and solar
thermal systems, are now developed to the stage where they could become competitive with
conventional commercial energy sources in certain regions of the PRC within a short time if
measures are taken to level the playing field by removing some of the economic and institutional
barriers on the former.
7.
The Government has increased its commitment to renewable energy
development, as outlined in its Program on New and Renewable Energy Development in the
PRC (1996–2010). The main reasons wind energy systems are encouraged in the PRC is to
(a) diversify the power supply (b) develop sustainable renewable energy resources, and (c)
derive the environmental benefits from such clean energy sources. As part of this program, the
Government gives priority to the development of grid-connected wind farms, targeting about 400
MW of installed capacity by 2000, and 1,500 MW by 2010.2 The projected target for 2000 may
not be met, but that for 2010 will most likely be surpassed. At present, the total installed windgenerating capacity, including smaller individual wind-based power generators, is 230 (MW),
financed mainly through concessional bilateral loans. Such developments can be sustained at
some level for a few years but the total capacity that can be achieved in this way is never going
to be significant in terms of meeting PRC’s power demand. There are 19 grid-connected wind
farms in the PRC, and limited manufacturing capability for wind turbines of 250 kilovolt (kV) and
600 kV sizes. Although the development of grid-connected wind farms in the PRC has only just
began, site assessments have identified a potential for 3,000 to 8,000 MW of grid-connected
wind farms.
1
2
World Bank. 1997. “Clear Water, Blue Skies: China’s Environment in the 21 st Century”.
SDPC’s revised estimates for installed wind power capacity.
3
8.
Given the above, it is time to move from the phase of demonstration projects to
large-scale development of wind farms. In order to achieve this, there is a need to establish a
framework that will encourage local private and foreign investments to invest in grid-connected
wind farms. In order to establish this framework a number of market and institutional barriers to
be addressed. The specific barriers targeted by the project are detailed in para 12.
9.
In 1998, the Government requested the Bank for assistance to prepare a Project
aimed at developing grid-connected wind farms in three provinces and establishing limitedliability wind power companies based on the country’s company law to construct, operate, and
maintain these wind farms on a commercial basis. As a result of this request, the Bank, in
September 1998, approved a technical assistance to assist the Government in the preparation
of an investment Project.1 In January 1999, a team of international and domestic consultants
was fielded. The Project was designed using a holistic planning approach and a two phased
approach. The first phase has been completed with the submission of the consultants’ Interim
Report in May 1999. During the first phase, the consultants made site visits to the proposed
wind farm sites to gather as much information and wind data as possible, discussed the concept
of fully commercial wind farm development and operations, reviewed the existing institutional
framework and legal/regulatory barriers that impede wind power development and operations,
and assisted with the preparation of pre-feasibility studies for the proposed wind farms.
10.
The Interim Report has confirmed that there is good wind energy potential at all
four proposed sites. To ensure the successful implementation of the second phase of the TA,
the consultants will focus on assisting the provincial electric power companies with developing
the organizational and ownership structures for the wind farm companies; firming up the scope,
cost estimates, and financial and economic viability for each of the wind farms; and preparing
load forecasts for the three concerned provinces and the electricity sale arrangements.2 At the
same time the consultants will also address the key issues mentioned in para 12. The draft final
report is expected by end of August 1999. A tripartite will be organized in the second week of
September 1999 to discuss the (a) draft final report; (b) identify further barrier removal activities
that may need to be undertaken; (c) policy dialogues for introducing green credit trading system
and the RPS in the three provinces on a pilot basis; and (d) schedule for further processing of
the Project. This is in line with the Government’s thrust to encourage foreign and joint venture
investments in the wind power companies.3 The Project is consistent with the Bank’s Country
Operational Strategy for the PRC, which emphasizes protection of the environment and energy
conservation as well as the Bank’s Energy Sector Policy. The Project will complement the
assistance being extended by the World Bank4, GEF, and the United Nations Development
Programme, as well as bilateral sources to promote wind power development in the PRC.
II.
Summary of Project Objectives
11.
The proposed Project aims at assisting the Government to (a) increase electricity
supply in an environmentally sustainable way, (b) improve the reliability of electricity supply in
1
2
3
4
PPTA 3071-PRC: Wind Power Development Project, for $600,000, approved on 21 September 1998.
At present, the cost of the wind power generated is estimated at $0.058/kilowatt-hour(kWh) and $0.053/kWh
in Xinjiang Autonomous Region and Heilongjiang province, respectively while at the two proposed sites in
Liaoning province the cost are estimated at $0.087/kWh (Taizili) and $0.07/kWh (Xiwali).
As part of restructuring the power sector in the PRC, the Government is promoting the establishment of
power companies to mobilize part of the financing requirements from local entities. Enhancing the
involvement of local entities in project management encourages competition and efficiency.
The World Bank/GEF recently approved a $135 million loan for Wind Power and Solar Photovoltaic projects.
Of which $100 million is for grid-connected wind farms with a total capacity of 190 MW (100-MW will be
installed in Inner Mongolia, 50 MW in Hebei Province, 20 MW in Shanghai Municipality, and 20 MW in Fujian
Province).
4
remote areas, (c) stimulate demand for wind-based electricity generation, and (d) reduce costs
through increased competition. These objectives will be achieved through (a) installation of 90
MW of grid-connected wind-based power generation in three provinces; (b) assistance in
strengthening the operations of existing wind farm companies, developing appropriate
institutional, regulatory, and financial framework for establishment of large-scale wind farms on
commercial basis; and (c) developing the framework for private sector participation in the
project’s four wind power companies.
12.
The physical investment, institutional support and barrier removal components of
this project are designed to develop commercial markets for wind farm projects. The investment
components would develop the first large commercial wind farms using turbines in the range of
800 kW to 1.5 MW. The institutional support component would help (a) provide training for staff
in wind farm companies in technical, financial, and legal aspects of wind farm project
development; (b) develop an appropriate institutional, regulatory, and financial framework for
commercial wind farms; and (c) identify suitable foreign joint venture participation in the four
wind farms. The barrier removal component will address the following:
(a)
Development of a Policy Framework. Need for the Government to clearly
define its strategy for developing wind energy and other renewable energy
through an Energy Policy. Policy dialogue will be held with the Government
during the Project processing to assist the Government in developing an
appropriate policy framework at the national level that will promote the use of
renewables in meeting PRC’s energy needs. Discussion will also be focused on
establishing a clear policy for developing wind power in the three provinces. This
will provide the right signal to investors that the Government is serious about
promoting renewables.
(b)
Development of Legal Framework for Private Sector Participation.
Development of large-scale wind farms with foreign private participation will be
restricted if the legal issues and regulatory framework for foreign private
participation in such projects is not suitably addressed. There is also a need to
develop and introduce standard power purchase agreements for wind power
projects.
(c)
Improved Tax incentives for Renewables. Government action is required to
remove existing policy barriers and make renewable energy developers eligible
for tax and import duty exemptions and special tax reductions.
(d)
Introduction of a Renewable Portfolio Standard (RPS). The Government is
restructuring the PRC power sector by moving away from a monopoly on
generation towards a competitive market in which consumers will have the
opportunity to choose among power suppliers. The provinces of Liaoning and
Heilongjiang, two out of the three Project provinces has been selected by the
Government to experiment the move towards competitive markets. It is essential
that to help establish new market rules in these provinces that will guide
competition. A RPS is a requirement that a minimum level of renewable energy
be included in the electricity generation portfolio. The level required could be
increased with time to create a stable market for renewable energy resources,
thereby encouraging investment in new renewable energy resources because a
secure long-term market is guaranteed. Depending on the desired objectives, the
RPS can require minimum investment in all renewable energy technologies.
Furthermore, as a market-based instrument it promotes innovation to meet the
standard and is consistent with moving to more competitive electricity supply
5
markets. The adoption of a RPS for these two provinces will be discussed during
Project processing.
(e)
Introduction of a Green Credit Trading System. RPS can be implemented in
conjunction with a “green” credit trading system whereby all energy providers
must meet the standard by providing the required amount of renewable energy
based on total generation or total electricity sales, or by purchasing credits from
other providers.
(f)
Items (d) and (e). In addressing items (d) and (e), various issues need to be
resolved with regard to the design and implementation of RPS including (i)
defining the current “base” level of renewables and assessing whether
renewables will increase or decrease over time without policy action, (ii) defining
the goal of the renewable energy policy, (iii) determining where the RPS should
be applied i.e., to electricity generators or electricity distributors, (iv) determining
whether a ‘green’ credit trading should be included, (v) deciding whether a cost
cap is required i.e., a maximum allowable cost for using renewable energy,
beyond which use of renewable energy should not be considered; and (vi) setting
a termination date for the use of the RPS. This will be discussed during Project
processing and suitably incorporated into the Project.
(g)
Institutional Strengthening of Commercial Banks and branches of National
Banks. Need to train commercial banks in renewable energy systems and
develop their capacity to evaluate viability of wind power projects or renewable
energy based projects for financing.
(h)
Development of a good wind resource database. Wind resource estimates
vary quite considerably in the PRC. Many of the measurements taken do not
indicate at what height above ground the measurements were taken or at what
pressure and temperature, so air density is also often unknown. These conditions
must be taken into account when planning wind farm projects. In addition to
these climatic conditions, the geographical consideration is also important. Given
that the PRC cover a vast area with a very uneven population distribution, the
resulting transmission distances from some of the better sites to the load centers
will have an impact on the development of wind farms. It is also important to
identify site specific areas in the three provinces for future development
(i)
Promote technology transfer for manufacturing turbines with capacity of
more than 1 MW. The obstacle to realizing the potential of wind resources is
institutional rather than technological. All technologies are commercially
available. The major challenge is to find ways to establish a viable capacity in
China for manufacturing high-quality modern wind turbines and related
technologies and management expertise in managing these technologies at
large-scale on the utility grids. One already well established institutional
mechanism that should be given serious attention as an instrument for
developing wind energy on a large-scale is through “resource development
concession”. A concept that has proved to be very effective in developing
resources in the mineral sector (petroleum, natural gas, and metals).
III.
Eligibility and Global Significance
13.
Increasing air pollution problems in the PRC, constraints on coal expansion, lack
of energy diversity, climate change concerns has led the Government to given serious
consideration to the development of large-scale wind energy. The proposed project would be
6
eligible for GEF financing under Operational Program 6, the promotion of renewable energy by
removing barriers and reducing implementation costs.
14.
The supply of clean energy through wind power generation will help reduce
carbon emissions in the three provinces. The project’s global objectives are to: (a) reduce
greenhouse gas emissions by producing electricity on a sustainable basis from wind power; (b)
reduce cost of wind power by installing large sized wind farms (>20 MW) by stimulating demand
for increased installation of wind farms to meet PRC incremental power demand and through
international competitive bidding; and (c) remove barriers to commercial wind farm
development.
IV.
Baseline Scenario and GEF Alternative
15.
The total cost of the Project including GEF cofinancing is tentatively estimated at
about $109 million. While no incremental cost analysis has been carried out yet, under the
baseline scenario, wind farm development would continue but at a relatively slow pace. Based
on current Government plans, about 20-30 MW of wind farm capacity will be installed per
annum or about 150 MW over the next five-year period. More than 90 percent of the turbine
and associated equipment would be imported, and foreign exchange financing would be largely
through tied bilateral aid.1 The installed and levelized cost for wind farms would remain above
international levels (more than $1,300 per kWh and 7.5 UScents/kWh), and would also remain
significantly higher than domestic power alternatives such as coal-fired thermal power
($600/kWh and 4.0 UScents/kWh) and hydropower ($900/kW and 5.0 UScents/kWh). Total
investment costs under the Baseline would be about $195 million (150 MW x $1,300/kW).
16.
The development of wind farms will continue to be led by government agencies,
financed by government grants and bilateral assistance. The development and focus would not
be on commercial development nor will it attract foreign private sector participation. The scale of
individual wind farms would remain too small to significantly lower costs, and will not attract
foreign joint venture participation in wind farms nor in setting up manufacturing facilities for the
turbines in the PRC. However, under the baseline scenario structural changes in the institutional
and legislative framework for power sector of the provinces to move towards competitive
markets will continue as the Government is committed to undertaking these changes and this
will affect the development of future wind farms. The calculation of incremental cost for each
province is being undertaking by the Bank-financed technical assistance. During Project
processing this would further reviewed and revised if necessary.
17.
Under the GEF alternative scenario, wind power generation will be encouraged
to take advantage of PRC’s vast wind resources, add 90 MW of grid-connected wind farm
capacity, develop local manufacturing capability for wind turbines, develop the right legal and
regulatory framework that will encourage foreign private sector participation in wind power
development, and establish wind farm companies in the three provinces with foreign joint
venture participation. Consistent with PRC’s New and Renewable Energy Development
Program, the Project will address issues related to renewable energy policy, adopting RPS,
green credit trading, tax incentives, support institutional strengthening of wind farm companies
and technology transfer opportunities through resource concessions. GEF funds will be required
to help with the:
(a)
1
development of a suitable policy and regulatory framework that will enable
increased use of wind power for power generation, thus displacing coal-based
generation in areas where there are excellent wind resources;
The Baseline scenario is similar to what has been assumed for the World Bank’s wind farm project.
7
(b)
formulation of a Renewable Energy Policy for implementation at the national
level and assisting in the provincial governments in the three provinces in
establishing clear policy for wind power development;
(c)
strengthen the institutional capacity of the four wind farms, and the train staff in
operation and maintenance, and financial and management;
(d)
establish the RPS and the green credit trading system; and
(e)
establish the framework for “resource development concession” which will
promote increased private sector involvement in wind power development.
18.
The total cost of installing 90 MW of grid-connected wind farms in the PRC is
estimated to be about $114 million, of which the Bank loan would finance the foreign exchange
costs of $60 million, foreign cofinancing of about $20 million, Government financing of about
$24 million and GEF grant of about $10 million.
19.
The project is expected to displace coal use for generation and reduce CO2
emissions. The draft final report of the project preparatory technical assistance is expected by
end of August 1999 and will provide details on the scope, costs, institutional arrangement of the
wind farm companies, technical assistance requirements, and direct incremental emission
reduction from the project.
V.
Timetable
20.
The processing schedule is to field the loan fact-finding mission from 18 to 30
October 1999. However, a Project Concept document will be submitted to the GEF Secretariat
for entry in the GEF pipeline by mid August 1999. During Project processing a detailed
component for GEF cofinancing will be defined. The Bank together with the Government will
execute the GEF grant. Processing will also take in account of the activities being undertaken
under the UNDP/GEF project and WB/GEF project and develop components that complement
the efforts of the WB and UNDP in commercializing wind energy in the PRC. The Project is to
be presented to the GEF Council in May 2000.
VI.
Implementation Arrangements
21.
At this stage, it is envisaged that the Executing Agency for the Project will be SP.
SP, through its fully or majority owned subsidiary companies (Xinjiang Electric Power Company
[XEPC], Liaoning Provincial Electric Power Company [LPEPC], and Heilongjiang Electric Power
Company [HEPC]) in the three provinces would be responsible for the establishment of the new
wind farm companies. XEPC, LPEPC and HEPC will be the implementing agencies. A Project
Implementation Agreement (PIA) between the implementing agencies and the wind farm
companies acceptable to the Bank will be established to define the implementing agencies’
responsibilities for the construction of the wind farms including procurement of equipment and
services. However, given the ongoing restructuring of the power sector in the PRC, this
arrangement may be changed during Project processing.