Letter to CDM Executive Board On Non-Additional Chinese Hydros

Friday, October 12, 2007

Barbara Haya
Consultant, International Rivers
PhD Candidate, University of California, Berkeley

Hans Jürgen Stehr
Chair CDM Executive Board
CDM Secretariat

October 12, 2007

RE: Concerns about the large number of Chinese hydropower projects currently undergoing CDM validation

Dear Hans Jürgen Stehr and other members of the CDM Executive Board,

I am writing to express my serious concerns about the hundreds of hydropower projects from China currently entering and progressing through the CDM pipeline. Evidence strongly suggests that a majority of these projects are non-additional. It appears to now be common practice for developers of business-as-usual hydro projects in China to contract consultants to write PDDs which claim additionality. The most worrying aspect of this is that there does not appear to be any mechanism within the CDM, and particularly not at the validator level, which can consistently weed out medium and large non-additional projects.

There are currently 370 hydropower projects in China for which PDDs have been made available. 200 of these are large-scale (>15 MW). The projects represent a total capacity of 11.7 GW, of which 85% is from large-scale projects. Chinese hydropower projects in the pipeline now represent 14% of all CDM projects and 9.4% of annual expected CERs.

From 1998 to 2006, China has added new hydro capacity at an average annual rate of 7.7 GW per year. According to China’s State Council, hydro will expand at a rate of 7-9 GW/year up to 2020[1]. The projects in the CDM pipeline would contribute 5.1 GW of new capacity in 2007, more than half of the estimated 9 GW of hydropower capacity expected to come on-line in China in 2007[2]. If one assumes all of the projects applying to the CDM to be additional, this would also mean assuming that non-additional hydropower additions in China would have dropped by 65% from the 11.2 GW capacity that came on-line in 2006. This is to say the least an unlikely scenario. A major drop in business-as-usual hydro expansion would be contrary to Chinese policy and economic and investment trends and can only be explained as an artifact of creative PDD writing. (See data below on 1998-2007 hydropower additions in China).

I reviewed the additionality and common practice sections of the PDDs for 70 (40%) of the medium-large (~15 MW to 200 MW) Chinese hydropower PDDs for projects which came on line or were under construction in 2007. The PDDs do not provide reasons for a sudden drop in business-as-usual hydropower capacity coming on line in 2007 compared to the previous years (see summary of additionality arguments in these PDDs below).

Of the projects explicitly named in these 70 PDDs as “similar” to the proposed CDM projects and which came on-line or were being constructed in 2007, 41 out of 45 projects were being proposed for CDM funding. Therefore these projects are not included in the common practice analysis in these PDDs, since other CDM projects do not have to be included. This also supports the claim that the large majority of medium-large hydropower projects in the country currently being constructed are pursuing registration under the CDM.

Another indication that these projects are non-additional is that of the 370 Chinese hydropower projects submitted for CDM validation, 77% are expected to start generating credits within 12 months of their validation comment period and 51% within 6 months. Normally hydropower plants take at least several years to build, confirmed by PDDs that provide a construction start date. This means that most of the Chinese hydropower projects in the CDM pipeline started construction prior to beginning the CDM validation process. Some PDDs mention that the CDM was considered prior to, or close to, the beginning of construction. Still, consideration of the CDM does not logically mean that the project would not have gone ahead without the CDM. Since construction began well before CDM registration, it is clear that these projects still would go ahead even if they were not successfully registered as CDM projects.

Additionality testing is clearly not a science. Many energy projects that are being built without help from the CDM face barriers that could pass the additionality tool barriers test. IRR values can easily be manipulated based on the assumptions made. While the CDM needs substantial restructuring to address these problems, I believe the immediate solution, since most of these hydropower projects are now in the validation stage, is to require validators to more rigorously define common practice. Large hydropower is common practice in most places in the world with hydropower resources, and it certainly is in China, the world’s largest hydropower producer. Large hydropower projects in China should be excluded from the CDM based on the fact that this technology is common practice in the country.

If the CDM is to be a viable means for supporting decarbonization in developing countries, supporting project types that need support, then the common practice criteria must be a real requirement, and the validators must be required to be real auditors, judging projects conservatively and realistically regarding their additionality, rather than just bureaucrats that ensure that all the right forms have been filled in correctly.

Evidence strongly indicates that a large portion of China’s business-as-usual hydropower projects will be requesting CDM registration in the coming months unless substantial changes are made to current validation procedures. If these projects receive registration it will be a further serious blow to the credibility of the CDM and the environmental integrity of the Kyoto Protocol.

Please feel free to contact me for more analysis or with questions. I have included a more detailed data analysis below for your reference.

Most sincerely,

Barbara Haya

Additional data on the Chinese hydropower portfolio of projects in the CDM pipeline

A closer look at the numbers – annual capacity additions during 1998-2007
To put the CDM numbers in context, installed hydropower capacity in China was 128.6 GW in December 2006[1]. The China National Energy Strategy and Policy developed by the Development Research Center of China’s State Council indicates plans to build 7-9 GW of hydropower annually through 20201. Between 2003 and 2006, following reforms to the power sector in 2002, annual hydropower capacity increases in China have fluctuated between 9 GW and 12 GW[2], and 9 GW are expected to be added in total for 2007[3]. These figures include yearly incremental additions of units from the Three Gorges Dam, expected to be completed in 2009.

In contrast, the total capacity additions of Chinese hydropower projects in the CDM pipeline (projects requesting validation and onwards) jumps up significantly between 2006 to 2007, from 0.24 GW to 5.1 GW[4] (to around half of the added capacity). For 2008, 5.0 GW are already in the CDM pipeline. If the PDDs are taken at their word, the jump in additional hydropower in China in 2007 would indicate a correspondingly drop of 65% in business-as-usual hydropower development this year, an extremely unlikely scenario.

GW at the end of the year / Chinese hydropower capacity / Change in capacity
1997 59.7
1998 65.1 5.3
1999 73 7.9
2000 79.4 6.4
2001 83 3.7
2002 86.1 3.1
2003 94.9 8.8
2004 105.2 10.3
2005 117.4 12.2
2006 128.6 11.2
2007 137.6 9

A summary of the additionality arguments used by this portfolio of projects

The most common additionality arguments used by the medium-large Chinese hydropower PDDs (15-200 MW) for projects requesting validation in 2007, based on a sample of 40% of these projects (70 projects) are as follows:

Almost all use an investment benchmark analysis based on a benchmark IRR. Many include an additional barrier analysis. The common barriers are listed here:
- The developer is a private company rather than a state-owned company, and so has more difficulty acquiring a loan than other similar projects. State-owned companies are only building the very large and mega sized plants.
- The plant is in a remote location, or in an otherwise more challenging geographic location, and therefore is more expensive to build than other similar projects.
- The plant has lower expected output than other similar projects.
- The best locations for building hydropower facilities were already developed, leaving only less desirable sites available.
- A handful name the following barrier: The plant started construction many years ago. But in the process of being built it was discovered that the costs were higher than first believed. Additional equity or debt had to be found. The CDM helped in that process.

** As mentioned above, 41 out of 45 projects named as similar in these PDDs that are expected to come on line in 2007 or later were themselves going through the CDM pipeline and so were not considered in the common practice assessment.
** None describe why there would be a substantial drop in BAU hydropower plants coming on line during 2007.

[1] http://www.cec.org.cn/news/showc.asp?id=92985
[2] http://www.eia.doe.gov/pub/international/iealf/table64h.xls, http://www.cec.org.cn/news/showc.asp?id=92985, and http://www.hdcmr.com/article/yjbg/11/01/13208.html
[3] http://www.hdcmr.com/article/yjbg/11/01/13208.html
[4] Fenhann J. October, 2007. CDM/JI Pipeline Analysis and Database. CDMPipeline.xls. UNEP Risø Centre.