Comments on the El Canadá Large Hydro Project (Guatemala)

Saturday, May 10, 2003

Current Status: Registered on 2 December 2006

Comments on the World Bank PCF Project Design Document for the El Canadá Hydroelectric Project, Guatemala

Submitted to Den Norske Veritas (DNV)

Project Overview:

  • Status: 70% complete (Construction started Feb 2002; completion date Dec 2003.)
  • Location: Samaló River, western Guatemala
  • Type: 43MW "peaking run–of–river" hydropower
  • Developer: A subsidiary of Energía Global International which is in turned owned by ENEL GreenPower S.p.A of Italy
  • Claimed generation: 178 GWh/y
  • Claimed emission reductions: 144,180 tCO2/year (3.03m tCO2 over 21 years)
  • Claimed displaced generation: Diesel and fuel oil

1. Introduction

El Canadá is a non–additional business–as–usual project. It is already 70% complete. Its validation and registration as a CDM project activity will have no bearing on its completion and operation. El Canadá should not be validated as eligible for CDM credits. Validating the project would allow the governments and corporations that participate in the World Bank Prototype Carbon fund to obtain the PR and possible financial benefits of carbon credits without any carbon emissions being avoided. It would also send a message that DNV is willing to give in to lobbying from corporate special interests and allow the CDM to become a mechanism for undermining the emission reduction goals of the Kyoto Protocol.

Even leaving aside the fact that the project is non–additional, the project documentation prepared by the World Bank’s Prototype Carbon Fund is rife with important omissions and unjustified assumptions which serve to greatly exaggerate the quantity of emissions the project would be reasonably likely to displace.

One of the most troublesome aspects of the El Canadá documentation is the claim that the Marrakesh Accords "clarify that additionality is to be determined as ‘environmental additionality’." This claim is untrue – the Accords nowhere even use the phrase "environmental additionality" which, as the PCF is well aware, is a highly contentious interpretation of additionality. It is particularly disturbing that the PCF – with its supposed commitment to "high quality emission reductions" and "learning by doing" – should be party to this underhand attempt to reinterpret the Accords. Interpreting additionality as "environmental additionality" would allow industrialized countries to gain emission credits for activities which do not reduce emissions below what they would otherwise be, thus undermining the purpose and public credibility of both the CDM and Kyoto Protocol in general.

2. Lack of additionality

The "modalities and procedures" for the Clean Development Mechanism are defined in the Kyoto Protocol’s 2001 Marrakesh Accords. Paragraph 43 of the Accords states that "a CDM project activity is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity" (Decision 17/CP.7, paragraph 43). This means that a project is "additional" (and thus potentially eligible for CDM validation) only if its implementation is dependent upon its registration with the CDM.

The PCF’s Project Design Document (PDD) for El Canadá states that the plant entered construction in February 2002 and will be completed in December 2003 (p.3). It is thus around 70% complete. There is no indication in the project documentation that the project will be abandoned if it is not registered by the CDM. Indeed, as the project has secured a 10–year Power Purchase Agreement, the developers presumably have a legal obligation to provide power from the project. The PDD states (p.6) that "the additionality of a project must be clearly established in order for the project to qualify for the CDM." As El Canadá clearly cannot be additional, it clearly should not qualify for the CDM.

The PDD attempts to circumvent the fact that the plant is already under construction by claiming that the CDM only requires what has become termed "environmental additionality" ("the Project is thus environmentally additional and meets the CDM requirement of additionality" (p.8)). The Baseline Study for El Canadá further states that "The Marrakesh Accords on the CDM clarify that additionality is to be determined as "environmental additionality" (BS, p.6). This is a blatant – and one must assume deliberate – misrepresentation. The Marrakesh Accords nowhere state that "environmental additionality" is sufficient to meet the CDM requirement of additionality.

Environmental additionality is commonly understood to mean that a project would result in less emissions than an alternative scenario, regardless of whether the project required carbon credits to go ahead. A windfarm for example, can claim that it is environmentally additional compared to a coal plant, whether or not the coal plant was ever likely to be built. "Environmental additionality" thus does not result in emission reductions in developing countries to offset non–reductions in industrialized countries, and so undermines efforts to meet the Kyoto targets.

There is widespread agreement that "environmental additionality" does not do what a CDM additionality test must do – screen out business–as–usual projects. In an email to International Rivers on 25 October, 2001, Société Générale de Surveillance (SGS), wrote that "the environmental additionality test does not screen out business as usual projects." According to the European Commission’s project "Procedures for accounting and baselines for projects under Joint Implementation and the Clean Development Mechanism" (PROBASE): "The purpose of the additionality test is to make sure that projects are given credits only if they would not have happened under a business as usual scenario" (

Validating El Canadá would thus mean that DNV would be validating the fallacious claim that the Marrakesh Accords "clarify that additionality is to be determined as "environmental additionality"." This would allow special interests to achieve through the back door, and without public debate, their desired reinterpretation of the Accords and the purpose of the CDM. This is clearly a highly inappropriate role for a validator. Such a reinterpretation would be a heavy blow to the public credibility of the CDM (and baseline–and–credit trading systems in general).

Validating El Canadá will achieve no reduction in C02 emissions. It will merely increase the rate of return enjoyed by project investors – not one of the purposes of the CDM. This rate of return is clearly sufficiently attractive without emission reduction credits. Further evidence that El Canad’s developers and the PCF are gaming the CDM comes from the investment details given in the International Finance Corporation’s "summary of Project Information" for El Canadá, which nowhere mention the need for emission reduction credits to make the project financially attractive. The IFC approved its investment in the project on June 26, 2002.

The PCF claims in the PDD that "the Project is an unlikely candidate for system expansion investment." Given that the Project has already attracted investment and is being built this claim cannot be taken seriously. The PCF attempts to show (see PDD pp.6–8) that financial logic implies that El Canadá would not be built by private investors without substantial subsidies from carbon emission credits, ignoring the fact that private investors are actually building the plant without any secured emission credits.

Even if one were to suspend disbelief and pretend that El Canadá was not being built, the PCF’s rationale for additionality still fails to make sense. The PCF states that a theoretical investor in Guatemalan power generation would be most likely to put their money into the least expensive available power generation option, which it is claimed would be a 150MW coal–fired plant (p.8). According to the PCF’s argument, the private sector would only develop El Canadá before such a coal plant if carbon credits enabled the hydro project to become cheaper than the coal plant.

The theoretical 150MW coal plant is "conservatively" estimated to have a total net generation cost of $38.7/MWh. El Canadá is assumed to cost $48/MWh. Thus, for El Canadá to be more financially attractive than coal, carbon credits would have to provide a benefit of more than $9.3/MWh. Using the PDD figure of 0.81tC02/MWh saved by El Canadá gives a required price of $11.48/tCO2 for El Canadá to become financially attractive. This is nearly three times the actual price of CO2: in 2002 the PCF was contracting carbon at a maximum of $4/tC02 and there is no sign of carbon prices increasing significantly in the foreseeable future.

Thus according to the logic and calculations of the PCF, investors would not finance El Canadá even with CDM registration. The fact that investors (including the World Bank’s IFC) have already financed El Canadá shows that the methodology and calculations used in the PDD to calculate the project’s baseline and additionality are thoroughly flawed.

3. Invalid Baseline

The PDD states that "Only two alternative baseline scenarios are plausible, namely the [national grid] and its eventual expansion (a) with the proposed Project, and (b) without the proposed Project" (p.7). The baseline scenario chosen in the PDD "consists of the current plants in the Guatemalan [grid] (including electricity exports and imports) plus capacity expansion, but not the proposed Project" (p.5). In the real world, the Project is not "proposed", it is 70% complete, and barring a major disaster, will be completed. The only plausible baseline scenarios are thus ones with the Project.

The Baseline Study (BS) maintains the PDD’s refusal to accept reality by including El Canadá in a list of – potential new private sector projects" (see BS Table 3). Eleven of the 12 plants in this list are hydros, with a combined capacity of 285MW. This list is the National Interconnected System’s (NIS) generation expansion plan for 2002–2005. In order to justify its baseline of purely fossil fuel plants, the BS says that the fact that El Canadá – and other hydros under development – are included in this list "cannot be read as an indication that these projects will actually be implemented without some outside assistance" (BS p.12). But El Canadá already has "outside assistance" from the IFC and other investors as do presumably the other (unidentified and unquantified) hydros which the BS admits are being constructed (research indicates that at least four of the hydros are under construction or are now complete). The Baseline Study continues that "there is no reason to assume that these projects would actually be implemented by private developers in the face of lower–cost competition from old, depreciated plants, or from new, medium and large thermal plants" (BS, p.12–13). Yet the fact that nearly half the projects are in fact being implemented is a very good reason to assume that they will be implemented.

The PCF plays down the strong likelihood that within several years of El Canadá coming on–line Guatemala’s grid will be linked with both Mexico and its Central American neighbours, making as much as 500MW of imports available to the country and rendering obsolete the power supply assumptions in the PDD.

The PDD states that "Border trade is expected to increase significantly upon Guatemala’s connection to the Central American Interconnected System (SIEPAC), but the date of its implementation is currently unknown and highly uncertain" (p.8 emphasis added). The Baseline Study states that "implementation of SIEPAC is still uncertain and very unlikely to be realized before 2010" (BS, p.14). These claims do stand up to scrutiny. The InterAmerican Development Bank (IDB) has approved financing of $240m for the six countries in SIEPAC, including $41.4m to Guatemala’s Instituto Nacional de Electrificación (INDE) approved in September 2002 (see

On May 9, 2003, International Rivers spoke to Stephen Fisher of the IDB’s infrastructure department with responsibility for Central America. Fisher stated that the SIEPAC project, while meeting implementation difficulties before 2002, is now on track to start construction next year and to be completed by end 2006, as stated in loan documentation. The SIEPAC lines would allow reliable transmission of 300MW (3000GWh in 2007 rising to 4000GWh in 2009).

The PDD makes no mention of another significant development in Guatemala’s power sector – the building of an interconnector to allow Guatemala to import up to 200MW (c. 1400GWh) from Mexico. The IDB intends to approve $33.4m for this project in June 2003. The project is to be completed in 2006.

The only mention of geothermal power in the El Canadá PCF documentation is to say that "Geothermal resources are scarce and small in size" (BS, p.7). Yet the IDB is currently working on a joint technical assistance project with the GEF for geothermal development which aims to "provide a significant impulse to prospects for large–scale, competitive development of Guatemala’s geothermal energy resources." Guatemala already has 29 MW of geothermal on–line. Guatemala has 58MW of proven geothermal potential and a further 398MW of estimated additional capacity according to the World Energy Council’s Energy Info Centre,

Another potential source of supply for electricity in Guatemala which goes unmentioned in the El Canadá PCF documentation is a gas pipeline from Mexico. Guatemala and Mexico signed a protocol for this pipeline in December 1999. According to Pipeline Construction Outlook 2002, the gas would be used for industry and electrical generation. The $450m pipeline has not gone forward as planned, but Stephen Fisher of the IDB has told International Rivers that it "still could go ahead." According to the IDB, one of the main goals of SIEPAC is to catalyze investments in natural gas pipelines and power plants throughout Central America (’sIEPAC: Hacia una integración regional de electricidad," IDB, 2001).

Stephen Fisher has told International Rivers that SIEPAC could also stimulate investments in large hydros in Guatemala and elsewhere in Latin America. The Hydropower & Dams World Atlas 2002 states that INDE is planning to build 813 MW of hydro and hoping that the private sector will build a further 1000 MW.

4. Invalid Assumption of Displaced Generation

The Baseline Study for El Canadá argues that no significant new supply is likely to come on–line in Guatemala before 2011 other than plants which are already committed (the BS does not explain which plants these are or whether it includes El Canadá among them). It then shows (BS, Annex 3) that Guatemala is projected to have a demand deficit exceeding 1100 GWh by 2008 and 4,100 GWh by 2011. The implication of this situation is that the NIS will have to keep a group of old, inefficient fossil fuel power plants on line. Because these plants have high marginal costs, the PCF assumes that they will be dispatched last to the grid. The PCF assumes that El Canadá would displace the emissions from these plants.

The PCF’s assumptions depend upon Guatemala having a serious power deficit and not being able to take obsolete plants off–line. But the PCF appears to be both overestimating demand and underestimating supply to Guatemala’s grid.

Overestimating demand:

The demand projections given in Baseline Study Annex 3 state that demand will be 6845 GWh in 2002, rising at an annual rate that gradually declines from 7.2% in 2002 to 5% in 2010. According to the IDB, actual demand in 2001 was 5456 GWh (Proyecto GU–0171, Oct. 2002).

If the IDB’s figures are correct, the PCF’s demand numbers must be greatly overstated. To reach the power demand projected in 2002 by the PCF, demand would have had to have risen by 25% during 2001, compared to 4.2% demand growth in 2000. In 2000, Guatemala’s economic growth was 3.3%. Economic growth declined in 2001 to 2.3%, implying that electricity demand growth would have fallen below the 2000 figure of 4.2%. Economic growth in Guatemala has continued to be weak. According to the Economist Intelligence Unit, Guatemala’s "GDP growth is unlikely to exceed 2% in 2003." The power demand growth of 6.8% for 2003 given in the Baseline Study Annex 3 thus greatly overstates likely demand growth this year.

Actual demand for electricity in Guatemala in the coming years is thus likely to be significantly less than projected in the Baseline Study. Using an (optimistic) assumption of 4% demand growth from 2001–3, gives demand in 2004 of 6137 GWh, compared to the PCF’s estimate of 7835 GWh. The PCF estimates that when El Canadá comes on–line at the end of this year Guatemala would have a 2 GWh power deficit: the above calculations imply that it is more likely to have a surplus of nearly 1700 GWh. (One factor which could prevent this predicted surplus from occurring is drought, always a risk for a heavily hydropower dependent system such as Guatemala’s).

Underestimating supply:

As explained above, Guatemala is likely to have numerous new supply options in coming years, especially after the Central American (SIEPAC) and Mexican interconnections come on–line. The interconnections mean that even without any new supply coming on–line in Guatemala the country would not have a demand deficit until after 2011 – even allowing for the PCF’s likely greatly exaggerated demand projections. As shown above, over the next eight years it is likely that new geothermal plants and hydros will come on line, and possible that new gas plants will be built if the pipeline from Mexico is implemented.

It thus quite possible that Guatemala may be able to take off–line old and inefficient thermal plants, especially once the two interconnections are complete.

There is also no reason to assume that El Canadá would displace not (or not only) marginal generation from obsolete plants but would also delay investments in other planned hydros, or geothermals. As explained above, numerous hydros are planned in Guatemala and the IDB and GEF have a project to stimulate new geothermal investment. Especially in a scenario of a long–run supply surplus, it can be expected that investment in a medium–sized plant such as El Canadá would delay investments in other plants.

The Marrakesh Accords stipulate that a baseline should be established in a "conservative" manner. The baseline used for El Canadá can in no way be described as conservative, for reasons including that it has made numerous unjustified assumptions for the Guatemalan power sector which help to increase the project’s putative displaced emissions.

5. Failure to account for climate change

It is now widely accepted that global warming is impacting the hydrological cycle and that these changes (largely marked by increasing severity and frequency of floods and droughts) will increase in future (see e.g. Dialogue on Water and Climate, "Climate changes the water rules: How water managers can cope with today’s climate variability and tomorrow’s climate change," 2002). The PCF would have no reason to exist were it not for the international community’s acceptance that global warming is occurring and will worsen.

It thus quite remarkable that the PCF makes no allowance for the possible significant impacts of global warming on the project’s power production. The Baseline Study states that the project generation was calculated using the last 31 years of hydrology data for the Samaló River. No mention is made of the fact that global warming makes it less than plausible that the hydrology of the Samaló over the last 31 years is an accurate guide to the hydrology over coming decades.

Guatemala’s 2001 Primera Comunicación Nacional sobre Cambio Climático presents two different scenarios for the impacts of climate change on streamflow in Guatemala. Under the "optimistic" scenario, streamflows in the region of El Canadá would increase by 15–40%. Under the "pessimistic," streamflows in the region would decrease by 75–90%. A "conservative" estimate for El Canadá’s power generation should thus allow for the likelihood of significantly lower power output (and displaced emissions) than would appear from the record of past streamflows.

Summary of concerns:


  • El Canadá is non–additional – it is 70% completed.
  • The definition of additionality used is unacceptable.
  • Even if the above two issues are ignored, the additionality test used does not support that the project is additional.


  • The baseline ignores the impact of two large interconnections planned to be completed in 2006.
  • The baseline ignores that new hydros are receiving funding and that substantially more geothermal may be exploited.

Displacing power

  • The displacement model used to estimate emission reductions is based on a long–term scenario of power shortages. To sustain this scenario the PCF exaggerates demand growth and underplays likely new supply sources.
  • It is inaccurate to assume that the project will displace marginal dispatched power. It is just as likely to displace the building of other hydro or geothermal plants.

Failure to account for climate change

  • The power generation estimates ignore the potentially significant impact of global warming upon streamflow and thus power generation.

Patrick McCully
International Rivers
May 10, 2003