Comments on World Bank PCF Xiaogushan Large Hydro Project (China)

Sunday, August 21, 2005

Current Status: Registered on 11 August 2006 

Submitted to Japan Consulting Institute (JCI)

Project Overview:

  • Status: Under construction.
  • Location: Heihe River, Gansu Province
  • Type: 98MW diversion hydropower
  • Project Participants: World Bank Prototype Carbon Fund (PCF); Xiaogushan Hydropower Co. Ltd. (XHC)
  • Estimated generation: 358 GWh/y
  • Claimed emission reductions: 312,368 tCO2/year (3,123,680 tCO2 over 10 years)
  • Funding: 35% from Asian Development Bank the rest ($52m) from domestic sources

Xiaogushan is non–additional and therefore cannot be validated as a CDM project. Project documentation from the Asian Development Bank clearly states that Xiaogushan was the least–cost generation option for Gansu and that revenue from CDM credits (CERs) was irrelevant to the decision to go ahead with the project. Construction began in October 2003.

The arguments in the Xiaogushan PDD as to why the project should be considered additional are completely at odds with the information in the ADB’s November 2003 "Report and Recommendations of the President" (RRP: PRC 34476) for this project. The RRP is the document upon which the ADB’s Executive Board bases its decision to support a project. The 2005 World Bank PDD – written two years after project construction began – stresses the barriers to XHP being developed without CERs. Yet the 2003 ADB RRP stresses that XHP is the least–cost alternative for generation expansion in Gansu and a priority for the state and provincial governments. There are numerous inconsistencies between the ADB RRP and the World Bank PDD. Both these documents cannot be factually accurate. Given that the project has almost been completed without CER revenue, it is safe to assume that it is the PDD which is being economical with the truth.

The PDD states that "Without CDM support, it would not have been able to reach financial closure, mitigate the high project risk, and commence the project constructions."

The RRP has a 2–page appendix on the potential benefits from the CDM. It states that an ADB fact–finding mission explained the CDM to the Chinese government and that "it was agreed to pursue tapping the CDM potential for XHC, and benefits could be channeled as seed resources to reduce poverty in the area." (emphasis added) No mention is made in the project financing plan or in any other place in the RRP of CDM benefits being in any way necessary for project construction to proceed.

The RRP states that "sensitivity analysis shows that the [Financial Internal Rate of Return] is robust under adverse conditions." It states that XHC is "aware of [project] risks and adequate steps are being taken to avoid or minimize them." No mention is made of CER revenue as one of these risk mitigation strategies.

The ADB’s financial analysis is based on an electricity tariff of CNY0.26/kWh. The World Bank’s PDD states that a lower tariff of CNY0.227/kWh is likely (although Table 4 says average hydro tariff in Gansu since 2004 ranges up to CNY0.24/kWh) and that at this tariff level, XHP "will not be able to make the investment viable." Yet this CNY0.227/kWh tariff level is consistent with the 10% reduction in tariff used in the ADB’s sensitivity analysis – and the ADB concluded that with this lower tariff the project financial viability remained "robust". (The PDD text on the serious impact of the tariff reduction also appears to be inconsistent with the sensitivity analysis table given in the PDD).

In any case this lower tariff has only come into effect after project construction started so could not have been a factor in the decision to proceed with the project.

One further discrepancy between the World Bank and ADB is the date at which XHP can start full generation, and therefore full "production" of CDM credits. The ADB projected the project to come on–line in stages between August 2006 and February 2007. According to the RRP, XHP would generate only a quarter of its long–term average annual output in 2006. The PDD does not give a clear project time–line but implies that the project will come fully on–line in January 2006 as it claims for 2006 the full annual amount of CERs. If, as the PDD implies, the project is 14 months ahead of schedule this would represent a significant financial benefit for the project sponsors weakening the World Bank’s case as to how financially fragile the project is. Yet no mention is made in the PDD of this progress being made by the project. If however the project is not significantly ahead of schedule, this should reduce the CER revenue claimed for 2006 by 75%.

The PDD claims that "the XHP project was not common practice at the time that the project was prepared." This is not credible. The PDD itself shows four other >50MW hydropower projects that entered construction in Gansu 1998–2002 and states that 2003 hydropower installed capacity in the province was 3281 MW. The ADB (RRP p.49) lists a further four hydros in the 157–300 MW range as "committed" for Gansu before 2009.

In conclusion, XHP is a non–additional project. The PCF’s attempts to show that CDM revenue is necessary for the project are disingenuous and thoroughly contradicted by the ADB’s project approval report.

Patrick McCully
International Rivers
August 21, 2005