International Rivers Comments on Proposed CDM Methodology for Bayano Large Hydro Expansion (Panama)

International Rivers Comments on CDM Methodology NM0043 Proposed for Bayano Hydroelectric Expansion and Upgrade Project, Panama

Submitted to CDM Methodology Panel

Methodology is Poorly Described

The proposed methodology is described as applying to "grid–connected run–of–river power plants or grid–connected hydroelectric power plants" (PPD p.39). As a run–of–river plant is a hydroelectric plant this explanation is redundant.

Methodology fails to prove additionality

The arguments in the PDD which attempt to show the additionality of Bayano do not hold up to scrutiny. The PDD admits that the financing for construction was not dependent on CERs. This project, which is already mostly complete, is a non–additional, business–as–usual activity.

It should be noted that the validation of this project for CERUPT by SGS states that "the project documentation has not provided any justification that the project is anything other than business–as–usual." SGS also stated that the project document "makes it very clear that the completion of the project is not conditional [sic] the project’s registration as a CDM project."

The PDD states that "the implementation decision was taken only after considering CDM as an important contribution to the project." The evidence given to back up this statement, however, is unconvincing.

1) The "Financial Barrier" section of the PDD states that the "CERs – (in part) contributed to the project’s debt receiving a BBB– rating (investment grade) from Fitch . . . The sale of CERs helped to secure this new financing package . . ." (p.12). It is not made explicit in the PDD, but it appears from other sources that this financing package was not closed until December 2003 (original source: biz.yahoo.com/bw/031223/235365_1.html). It is not stated in the PDD, but the major part of the Bayano expansion (the new 86 MW turbine) came on line in late 2002. The other parts of the project (upgrading two existing turbines from 75 to 87 MW) were to come on line in June and December 2003 (according to the "Baseline Report" submitted to CERUPT in 2002). It now appears that the final upgrade will be completed in March 2004 (original source: biz.yahoo.com/bw/031223/235365_1.html). It is not credible to claim additionality based on a financing package that was finalized only after the project activity was essentially completed. The PDD admits that financing for construction was not dependent upon CER revenue (p.12 para 3).

2) The Bayano expansion project in any case is only a part of the 512 MW portfolio of facilities for which the December 2003 financing package was raised. The total financing package was for $320m. It seems unlikely that a projected revenue stream of CERs with a value of c. $0.2m/year (@ $5/tC0₂e) would make a substantial difference to the terms of a $320m transaction, especially given the major risks over CER delivery (e.g. Kyoto ratification, EB registration, actual number of CERs the project can deliver, etc.).

3) The EPC contract was signed in March 2001. The PDD states that "during this time" AES began to consider applying for CDM credits, and submitted a PIN to CERUPT in late 2001. The signing of the EPC contract long in advance of preparing a PIN indicates that CDM credits were not key to the decision to go ahead with the project.

4) The PDD claims that AES stock value dropped drastically while it was looking for capital "severely limiting AES Panama’s ability to access commercial financing." However when the EPC contract was signed, AES’s share price had not yet begun its dramatic fall and was at around $50 compared to a historic high in the mid $60 range. The share price did not fall through its January 2000 level until the third quarter of 2001. The price then fell to below $2 in late 2002 and has since recovered to around $9.

5) The PDD also claims additionality on the grounds of technology barriers. These claims are extremely unconvincing:

"the . . . project utilizes specific control technology not used in Panama. The upgrade project utilizes a SCADA control system . . ."

No evidence is given of any barrier to the use of SCADA systems in Panama or any explanation why this technology could be considered key to the implementation of the project. In any case SCADA technology does appear to already be used by the Panama Canal Authority (see http://www.acres.com/AcresGroup/Experience/ExpAssetMgt/Panama.html).

"under a business–as–usual scenario, hydropower technology would not be implemented."

This does not reflect the reality of power planning in Panama. According to the Energy Policy Commission: Panama’s short term expansion plan foresees the completion of the 30 MW Bonyic hydro in 2006 and the 158 MW "Changuinola 75" in 2008; Canadian consultant SNC Lavalin has identified 900 MW of hydro potential that are considered economically viable and could be developed by 2015. Further, other non–thermal plants are being planned. Provisional licenses have been granted for 103 MW of wind power and UNDP is preparing a wind project in Panama to be financed in GEF.

According to the 2003 Hydropower & Dams World Atlas:

• Panama’s Indicative Generation Expansion Plan "for next 15 years" includes 259 MW of large hydro.
• Prefeasibility studies have been completed for further 3 dams totalling 416 MW.
• Panama Canal Authority is planning 3 hydros totalling 200 MW, currently at feasibility stage.
• Panamanian subsidiary of Union Fenosa has announced plans to invest $90m in wind and hydro.

"the newly installed capacity of 110 MW only generates 60 GWh per year. This is well below the amount of electricity generated by other hydroelectric projects of this size. Therefore the average cost to generate each KWh of electricity is substantially higher than other electricity generation projects."

Actual unit costs are likely to be much lower than implied by giving simply the plant factor because of the low cost of adding additional capacity at an existing dam compared with building a new dam. The value of the electricity generated will also depend on the time of day it can be supplied. If the expansion allows AES to provide more peak power this increases the economic attractiveness of the project. Without further data it is impossible to ascertain how unit costs from Bayano expansion compare with other generation projects, or what impact the CER revenue stream would have on the project’s unit costs. If the methodology is to use unit costs as part of its argument it should clearly document those unit costs.

‘another considerable barrier to the project was related to the internal decision–making process at AES’

Without any further documentary evidence it is inappropriate to use untestable and unverifiable assertions by developers as an additionality test.

"AES Panama values . . . this project . . . also for the intangible benefits, such as positioning AES Panama in the emerging carbon market . . . gaining public recognition . . ."

Registration as a CDM project may well have intangible benefits for AES Panama – but this does nothing to prove the project’s additionality (indeed it only provides more incentive for AES Panama to game the rules on additionality so as to gain these benefits).

The PDD claims that "the United Nations" "further clarified" the importance of the CDM for Bayano in a report for the Comisión Económica Para América Latina y el Cariba (footnote p.8).

The cited report is a 93–page document entitled "Evaluación de Diez Años de Reforma en la Industria Eléctrica del Istmo Centroamericano" (Evaluation of 10 Years of Reform in the Electrical Industry of the Central American Isthmus). The report says only in this context that the expansion of Bayano was a process "in which the CDM played an important role" (p.38). The report’s authors give no evidence of having done any detailed analysis on whether the CDM was a key factor in the decision to proceed with the Bayano expansion. It is misleading to attempt to use the UN in this fashion to back up an additionality claim.

(4) Assessment of algorithms/formulae and type of data needed:

c) Explain the vintage of data used (in relation to the duration of the project crediting period) and whether the vintage of data is appropriate, indicating the period covered by the data:

The methodology should use actual avoided emissions from the date of project commencement

The major part of the project has been in operation for over a year yet no data is given on actual generation or avoided emissions. Methodologies for completed projects should use data of actual avoided emissions in estimating future avoided emissions.

The PDD should also give a timeline for project construction and make clear that the project is substantially complete.

Avoided Emissions are Calculated Using Four–Year–Old Data for the Panamanian Power Sector

The PDD, dated January 2004, states that "since 1984 no new hydroelectric capacity has been developed in Panama. Most new capacity is met with combustion turbines or internal combustion engines." (p.3) This was only true up to the year 2000. Apart from Bayano itself, AES has also developed the 120 MW Esti plant which came on–line in late 2003. In 2000 and 2001 7.4 MW was developed at three small hydros. According to the Panamanian government’s Energy Policy Commission, between 1997 and 2003 the net increase in thermal capacity has been roughly equal to the increase in hydropower capacity (COPE/MEF 2003).

The "Build Margin" estimated to be displaced by Bayano is based on data from what are supposedly the most recent five plants built (p.24). The five plants listed are all thermal. According to the Panamanian government’s Energy Policy Commission (COPE/MEF 2003), the actual most recent five plants built should include 3 hydros (Esti – 120 MW; Dolega and Macho de Monte rehabilitation and expansion – 5.6 MW; Hidro Panama 1.8 MW), and two thermals (Pedregal – 49 MW; and either – it is unclear which of the plants was completed last – Ciclo Combinado Bahia Las Minas – 100 MW or Pan Am – 96 MW). The Bahia Las Minas project is the only one to overlap with the supposed last five projects built claimed in the PDD. The methodology should require the Build Margin to be calculated from the actual last five plants built or under construction, not five plants dating back from an arbitrary past date.

The Build Margin emission factor must thus be recalculated based on the actual last five projects built.

The Operating Margin is calculated in the PDD by reference to data from 2000 and 2001. The Margin should be recalculated allowing for the presumably large impact on the power dispatch pattern of the commissioning of the large increment of new hydro capacity at Esti in 2003.

Citation: Comisión de Política Energética/Ministerio de Economia y Finanzas, Républica de Panamá (2003) "suministro Futuro de Electricidad."

Methodology does not allow for likely changes in methane emissions due to change in reservoir operation.

The characteristics of Bayano’s reservoir (e.g. large, shallow, dendritic, tropical forest lowland, macrophyte–infested, high nutrient flows from watershed, anaerobic conditions) indicate that it is likely a substantial generator of methane (World Commission on Dams 2000).

There are at least two mechanisms that could cause the Bayano expansion to lead to substantially increased methane emissions but which are ignored in the proposed methodology.

1) Increase in volume of water turbined rather than spilled.

Substantial methane emissions can result from degassing of water releases at spillways and tailraces (Galy–Lacaux et al. 1999). (Degassing occurs due to the sudden drop in water pressure – similar to what happens a fizzy drink is opened). The expansion project is leading to less water being spilled and stored and more water being turbined for energy production. It can be assumed that Bayano’s turbine intakes are lower in the reservoir than its spillway. As methane concentrations increase with depth, emissions from turbined water at Bayano may result in greater methane emissions than spilled water. The difference between the methane emissions of the extra water turbined due to the Bayano expansion and what the emissions would have been under the old operating regime with some portion of the now turbined water spilled and some portion stored should be counted as direct project emissions. (At Tucuruí Dam in Brazilian Amazonia, methane concentrations were 3.75 mg CH₄/liter at the spillway depth of 20m and 6 mg CH₄/liter at the turbine intake depth of 30m (Fearnside 2002). In their "Unqualified Validation Report" for CERUPT, SGS state that "the methane will be released from the water whether it is turbined or not and therefore the project is not causing the release of additional methane." This does not allow for the fact that CH₄ is oxidized to CO₂ as it rises through the water column – the reason why methane concentrations decrease nearer the surface and why spilled water contains less methane than turbined).

2) Changed emissions characteristics due to changed pattern of reservoir operation

The PDD states that reservoir emissions due to the capacity expansion are zero because the reservoir area has not been increased. It fails to evaluate however how changes in reservoir operation due to the expansion may change reservoir emissions. The PDD states that because more water is being used at the dam site less is being stored and so the reservoir area has been decreased "allowing the surrounding vegetation to reclaim this land." It can be presumed that to optimize power generation the reservoir capacity is being fully utilized during the rainy season, making more water available for the rest of the year. Such a reservoir operation pattern would lead to an increase in the area of seasonally flooded drawdown land. Such an increase in the drawdown would be likely to substantially increase methane emissions. As Fearnside (1999) states for the Tucuruí Dam, the drawdown land with its seasonal pattern of vegetation growth and decay "offers ideal conditions for generation of methane." Fearnside quotes findings from Samuel reservoir in Amazonia where annual emissions per unit area of seasonally flooded drawdown land were more than twice that among standing trees in permanently flooded zones. The drawdown area at Bayano may be very large due to the very dendritic shape of the reservoir, and thus its high ratio of shoreline to surface area.

The methodology in the PDD is therefore inadequate without a rigorous treatment of the impact of the project on methane emissions due to the increases in turbined water and the new reservoir operation pattern.

Methodology should use IPCC flooded land emissions factors

The methodology uses emission factors from a 1998 World Bank paper. These are superseded by the 2003 IPCC Good Practice Guidance for Land Use, Land–Use Change and Forestry (www.ipcc–nggip.iges.or.jp/lulucf/). Relevant parts are section 3.5 and Appendix 3a.3.

Methodology does not allow for effect upon the baseline of increased regional power trading capacity

The InterAmerican Development Bank (IDB) has approved $240m for the six countries including Panama that make up the Central American Interconnected System (SIEPAC) (see www.iadb.org). According to the IDB, the SIEPAC project is on track to be completed by end 2006 (pers. com. Stephen Fisher, Infrastructure Department, Central America Region, IDB, May 9, 2003). The SIEPAC lines would allow reliable transmission of 300 MW (3000 GWh in 2007 rising to 4000 GWh in 2009).

A 300 MW electric power interconnection between Panama and Colombia is also scheduled to come on line in 2007 pending completion of feasibility and environmental impact studies (COPE/MEF 2003; www.eia.doe.gov/emeu/cabs/panama.html). Colombian authorities project Panama to absorb 800 GWh from this interconnection (a larger amount of Colombian power would be exported through Panama to the rest of Central America).

The PDD makes no mention of the presumably significant impact upon the Bayano baseline of the availability of large scale power imports (expected to be mainly natural gas, hydro and geothermal) into the Panamanian grid.

It is widely accepted that global warming will have major hydrological impacts, in particular to increase the frequency and intensity of floods and droughts. This increased hydrological uncertainty should be reflected in the methodology, e.g., through a sensitivity analysis showing a range of different values of avoided emissions under different hydrological scenarios.

Patrick McCully
International Rivers
February 24, 2004

References:

Philip M. Fearnside (2002) "Greenhouse gas emissions from a hydroelectric reservoir (Brazil’s Tucuruí dam) and the energy policy implications," Water, Air, and Soil Pollution 133:1.

Corinne Galy–Lacaux et al. (1999) "Long–term greenhouse gas emissions from hydroelectric reservoirs in tropical forest regions," Global Biogeochemical Cycles 13:2.

World Commission on Dams (2000) "Dam Reservoirs and Greenhouse Gases: Report on the Workshop held on February 24 & 25. Hydro–Quebec, Montreal. Final Minutes," Thematic Review II.2 Dams and Global Change, Cape Town.