Download ANNEX 1: PROJECT DESIGN SUMMARY

ANNEX 1: PROJECT DESIGN SUMMARY
Narrative Summary
CAS Goal and Global Objective
Key Performance Indicators
Monitoring and Evaluation
EPB environmental data and
resident feedback
Safeguarding the environment
N/A
Reducing risk of global climate
change
Project Development and
Global Environment Objectives
Improve ambient air quality
during heating season
Critical Assumptions
(CAS goal to Bank mission)
sound economic management and
investments
consistent energy policy
(Development objective to CAS
goal)
Adequate health care system
ambient concentration of major
pollutants
readings from monitoring
stations
Global Environmental
Objective: Reduce greenhouse
gas emissions by improving fuel
structure and energy efficiency
Improve water quality in
Liangshui River system
Estimated carbon dioxide
emissions, and carbon
consumption per space heated
Aggregate fuel consumption
data by type; sample fuel
consumption and efficiency
data
sample analysis
Abatement of other greenhouse
gases, e.g. methane
Strengthen Beijing’s
environmental management and
regulatory systems
modifications in environmental
monitoring, regulation, and
incentives
official regulations and plans
Related measures such as energy
pricing remain stable or improve
Outputs
Conversion of coal burners for
use of gas (GEF-supported)
capacity converted, coal saved,
gas used
EPB registry, PUB data
(Output to development objective)
Pollution and carbon release from
other sources does not surge
Efficient gas boiler market (GEFsupported)
Improved energy efficiency in
heating based on coal or gas
(GEF-supported)
capital and maintenance cost of
gas boilers
Fuel saved per spaced heated
Procurement and project
monitoring data
Fuel consumption data and
project implementation data
Effective supporting policy and
regulatory actions
Pollution and carbon release from
other sources does not surge
power plant flue gas
desulfurization
reduction of sulfur dioxide
emission, model for other
power plants
treatment volume
Regular compliance monitoring
The emission contributes
significantly to ambient pollution;
other power plants follow suit
Upstream pollution and run-offs is
controlled
quality and timeliness of
environmental data, and
regulatory tools
EPB management reporting
sewage collection and treatment
improve environmental
information and policy know-how
Concentration of major
pollutants
Operational reports
Gas boiler technical capacity
development (GEF-supported)
Gas boiler market development
(GEF-supported)
Heating energy conservation
(GEF-supported)
The system to use the information is
improved
(Components to Outputs)
Project Components
boiler conversion and
improvement financing
Water pollution does not increase
elsewhere nearby
amount of financing, number of
conversions and improvement
cases
Number of trained and
experienced technical staff;
availability of standard and
advanced technical references
for equipment, maintenance,
and operation; frequency of gas
boiler problems; efficiency of
the technical services
Number of gas boiler orders;
number of models installed;
number of inquiries and visits
of models; boiler prices
number of boilers adopting
energy efficiency measures;
pilots visited and replicated,
number of assistance requests
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progress reports
Sufficient demand for subloans
Progress reports, including
monitoring report of user
responses
Responses and actions by gas boiler
suppliers and operators; demand for
gas boilers
Progress reports; media reports
Boiler owners’ financial conditions,
access to financing and technology,
and regulations
Progress reports
Proper design and implementation;
effective dissemination
Narrative Summary
power plant desulfurization
Key Performance Indicators
equipment installed
Monitoring and Evaluation
Progress reports
Critical Assumptions
Effective design and proper
operation of equipment
sewerage capacity
treatment capacity and sewers
installed
man-months of studies and
training; equipment procured
progress reports
Proper design and implementation
progress reports
Relevance of TA and equipment
institutional development
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ANNEX 2: INCREMENTAL COST ANALYSIS
Development Goals and Global Environment Objectives
1.
Beijing’s air quality has been persistently poor for many years. During the heating season, the
ambient concentration of major pollutants, such as sulfur dioxide and particulates, is so high over large
areas of the city as to pose long-term, and even acute, health risks (i.e. exceeding Class II and Class III
levels). The principal cause of the problem is the extensive use of coal, which supplies about 75% of the
city’s energy needs. The major environmental damage from coal is caused by the numerous scattered coalfired heating boilers in use around the city, with their low emission stacks and minimal pollution control
equipment. Relatively energy-inefficient coal-fired district heating systems add to the pollution problem.
2.
Until now, municipal pollution control measures have comprised a series of small-scale palliatives,
such as flue gas treatment, extension of district heating systems, and consolidation of scattered boilers into
large boiler houses with taller stacks and improved pollution control equipment. None of these measures
have had a significant impact. The recent switch to low sulfur coal will be more effective in decreasing
sulfur dioxide emissions, but has only a minor effect on particulates. Now the availability of natural gas
from Shanxii Province provides an opportunity to solve the local environmental problem of scattered
boilers by converting them from coal to natural gas, which will eliminate low-level releases of sulfur
dioxide and particulate matter. The conversion from coal to natural gas would also have significant global
benefits, as gas emits roughly half as much carbon dioxide as coal when burnt in heating boilers. This is
also a timely opportunity to launch an effective district heating energy efficiency program that would
further reduce GHG emissions.
Role of the GEF Alternative in Barrier Removal
3.
GEF support is required to remove the barriers to both coal-to-gas conversion and to district heating
energy efficiency improvement, as is envisaged under Operational Program 5 for the promotion of energy
conservation and efficiency. The incremental cost analysis that follows will show that gas conversion and
district heating system energy efficiency improvement involve significant incremental costs for the Beijing
government. It is therefore evident that, without GEF support, it will take many years to realize the
potential local and global environment benefits of these actions if Beijing has to rely solely on its own
limited financial means (Baseline Case). The grim Baseline scenario presented is, if anything, optimistic
though, because the numbers of initial gas conversions that are likely to result without GEF support may
well be too small for the gas conversion program to maintain any momentum and to justify the high initial
costs of gas infrastructure that Beijing has already incurred.
4.
Removing the Barriers to Gas Conversion. The primary group of boilers targeted for coal-to-gas
conversion under the GEF Alternative are scattered residential heating boilers, which are the worst
polluters. At least 2,500 conversions must be completed over a short (3-4 year) period to realize potential
economies of scale in gas boiler production, installation and service, and thereby sharply drive the cost of
conversion down to a level at which gas will be competitive with coal. GEF funds will complement initial
Beijing government conversion subsidies by financing the barrier removal initiatives required to achieve
this objective. With GEF assistance, a major global benefit can be obtained in the form of reduced carbon
dioxide emissions. Over a million tons a year of carbon release will be avoided, due to the lower carbon
content of natural gas (per heat value) and the higher efficiency of modern gas boilers.
5.
Barrier Removal to Energy Efficiency and Energy Conservation. The second area requiring
GEF support is energy efficiency improvement of district heating systems (from boiler houses to the end
users) fired by coal fired boilers that are not yet targeted for gas conversion. With support from the GEF,
an Energy Conservation Unit (ECU) would be set up under the Residential Boiler Heating Office of the
Beijing Municipal Real Estate Bureau for the purpose of promoting and demonstrating heating boiler and
system energy efficiency and conservation. This would promote both techniques already selectively used
in Beijing and measures that are well established elsewhere, but new to China, such as end user gas instead
of heat distribution, use of condensing gas boilers, and end user heat metering and control.
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6.
Unlike gas conversion, the critical needs are primarily to inform users of these options and their
economic benefits, and to promote them through audits, demonstrations and information. GEF funding
would be used for such marketing efforts to showcase new or innovative energy conservation measures.
This will include direct support for an information center, demonstration projects, and transaction costs for
energy audits and feasibility studies.
7.
GEF Strategic Context. This proposed project complements and does not duplicate the two other
Bank/GEF energy efficiency projects in China: Efficient Coal Industrial Boilers and Energy Management
Contracting. The former project is designed to overcome technology transfer barriers to the domestic
production of efficient coal boilers for industrial use. Such boilers are no longer acceptable in Beijing
because of their local pollution impacts. The proposed project will therefore target boiler types that have
not benefited from GEF support. The support for Energy Conservation Promotion in the space heating
sector would extend GEF support to a neglected energy efficiency market. It would complement and
utilize capacity that is being created by the Energy Management project.
Incremental Cost Analysis Method: Gas Boiler Conversion
8.
The incremental cost of achieving the global benefits of this component of the GEF Alternative is
based on the cost of converting the target of 5,000 scattered coal boilers from coal to gas during a period of
5 to 10 years, compared to a Baseline case. The former is termed the GEF case, or the With Case, while
the latter is referred to as the Base case, or the Without case.
9.
Base Case scenario. Without GEF support, barrier removal is not achieved in the short term and in
consequence far fewer than the programmed 5,000 boiler conversions will be achieved. It is assumed that
only 20 % of the coal boilers, those of the most financially sound operators, would be converted under the
Base Case. The remaining boilers would most likely adopt more conventional pollution control measures.
For example, some would be consolidated into district heating systems in order to obtain higher system
efficiencies, hence reducing emissions. Other old boilers would be retired and be replaced in kind (i.e.,
with coal-firing). The newer equipment will likely perform at a higher level of energy efficiency and
pollution control. The remaining boilers would simply continue operating as per normal. The most likely
scenario is a mixture of all these cases, and the following combination is assumed under the Base Case :
Consolidation into district heating
Continued use of existing boilers
Replacement with new coal boilers
Conversion to gas boilers
Total
20 %
40 %
20 %
20 %
100%
(1000 boilers)
(2000 boilers)
(1000 boilers)
(1000 boilers)
10.
GEF Case. With the financial support of GEF grants for barrier removal and Beijing municipal
government subsidies, 2,500 boiler conversions will be directly supported. It is anticipated that the cost
reduction and capacity-building benefits and demonstration effect of this project will result in a total of
5,000 conversions within 5 to 10 years. This represents about 15,000 tons/hour of hot water and steam
demand, fulfilled more efficiently by gas and with lower carbon release.
11.
Incremental Cost Assumptions. The economic and financial analysis was completed for a
period of twenty years, assuming the two alternative scenarios have equivalent economic lives. The
analysis examined capital, operating and fuel costs for each of the two cases. It was assumed that the same
heat energy was delivered each year, and that the operating revenue would be the same in both cases. The
analysis is done on a pre-tax basis, with tax consequences disregarded based on the assumption that cashflows are equivalent. A discount rate of 12% was used.
Gas boiler efficiency is about 75-80% compared to 68% for consolidated district heating boilers.
Moreover, additional losses of 13% associated with the district heating system lowers the net efficiency to
about 53%. For the other Base cases, the efficiency of existing coal boilers is about 45% and new coal
boilers is 53%.
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Capital costs vary with each option and include boiler and associated infrastructure for coal or gas. Boilers
are assumed to be of an average size of 3 ton/hour capacity. In the Base Case, land acquisition was
included for the case of district heating consolidation, since a significant amount of land is required to
construct the district heating plant and associated facilities. Land acquisition is not considered in all other
cases as this was insignificant, but an annual land rental cost was imputed by estimating the area
requirements for 3 ton/hr boilers.
Operating costs consist of fixed variable, annual variable and fuel. Costs, with the exception of
depreciation and fuel, are escalated at an annual rate of 6% for new and existing coal boilers in the Base
Case. Fuel costs are escalated according to the World Bank Commodity price forecast of the annual
percentage change in the price of crude oil.
For the financial analysis, depreciation and SO2 taxes were included. For coal, economic and financial
prices were used from 2001-2005, after which it was assumed that financial and economic prices would be
similar. Assets, excluding land, were depreciated using 12 year fixed depreciation.
The following emission factors were used to estimate carbon emission rates:
Table 1: Carbon Emission Factors
Coal
Gas
26 kg/GJ
or 546 kg/ton of coal
15 kg/GJ
or 585 kg/thousand cubic meters of gas
Incremental Cost Analysis Method: Energy Efficiency
Without GEF support, additional district heating energy conservation initiatives would not be pursued. The
Baseline is therefore operation and maintenance of coal-fired district heating boilers that are not targeted
for conversion to gas in a “business as usual” mode. The GEF Alternative would upgrade and improve the
efficiency of these same boilers. It is estimated that the GEF alternative would reduce coal use from its
present average of 35 kg/square meter to about 25 kg/square meter of heating area, and result in energy
savings of about 30% over existing energy consumption levels. An estimated 14,000 tph of boiler capacity
would be targeted over a 20 year period, which is the duration of the incremental cost analysis.
Economic And Financial Incremental Cost Analysis
12.
Economic Incremental Cost. The total economic net present value (NPV) for the Base Case is
38,143 million Yuan, compared to Y 39,420 million for the GEF Alternative Case. The incremental cost of
the gas conversion and energy efficiency components combined is therefore Y 1,277 million, or about
US$154 million. The breakdown of these costs between the two components is shown in the Incremental
Cost Matrix. China is seeking GEF grant support of $25 million (about 15%) of the incremental cost.
13.
Results of the financial analysis is shown principally to illustrate the impact of asset deprecation on
the abatement cost calculation. Under the financial method, the higher capital cost outlay for the Base Case
generates greater depreciation (e.g. for expenses), and thus a lower incremental cost for the GEF Case and a
lower abatement cost per ton of carbon.
Table 2: Summary of the Economic and Financial Analysis
NPV
NPV
NPV
Base Case
GEF Case
Incremental Cost Abatement Cost
(Y million)
(Y million)
(Y million)
(US$/ton C)
38,143
39,420
1,277
5.73
Economic Analysis
Financial Analysis
39,750
40,383
2-3
633
2.84
Emissions Analysis
14.
Carbon abatement. For the gas conversion component, the annual carbon released in the Base
Case is 2.5 million tons in year 2001, falling to 2.1 million tons in year 2020. In the GEF Case, it is 2.2
million tons a year in year 2001, down to 1.4 million in 2020. For the conservation component, total
carbon abated from 2001 to 2010 is about 4.5 million tons. Over twenty years, a cumulative reduction of
about 26.9 million tons of carbon is realized in the GEF Case compared to the Base Case. The project’s
estimated abatement cost, calculated per GEF guidelines, is therefore US$5.73/ton of carbon. The unit
abatement cost to the GEF for its proposed share of the incremental cost is $0.93 per ton carbon.
15.
Local Environmental Benefits. The project will produce some local environmental benefit. It will
decreased SO2 and particulate emissions, leading to lower ambient levels of pollution in the project area.
The resulting decrease in each of these pollutants is due primarily to the reduced combustion of coal with
some additional savings from coal handling as well.
16.
Based on the analysis, an estimated 783,735 tons of sulfur is abated over the project lifetime. The
value of this sulfur emission abatement cannot be calculated for a number of reasons. First, neither the
Chinese Government nor the World Bank have agreed a value for the damage associated with a ton of
sulfur. As in the United States, there is a large potential range of values which could be applied. Second,
given the multiple sources of sulfur emissions, it is very difficult to assign a monetary figure to benefits of
sulfur abated from one specific source on specific target populations. Third, existing data corrollating
morbidity and mortality with air quality is based on particulate emissions and not on SO2. Last, the
monetary figures applied to particulates can be very misleading as the valuation can vary by a factor of ten
depending upon which valuation method is employed.
17.
China recognizes that the project will have domestic benefits, even if they cannot be quantified.
Hence it is willing to absorb about 85% of the incremental cost and is asking the GEF to cover about 15%.
Table 3. Emissions Scenario Matrix
Baseline
Alternative
Global Carbon Emissions,
tons
Net Reduction
5,000 Boilers
46,182,095
23,885,136
22,296,960
Energy Conservation Measures
11,384,100
15,937,740
4,553,640
8,200 Boilers
75,809,514
39,171,623
36,637,891
Incremental Heating Capacity
61,862,265
38,594,406
23,268,244
TOTAL
195,238,359
117,591,904
86,756,735
Domestic Benefits
Several alternatives: coal
Gas Boilers used to
district heating and scattered generate heat
boilers are used in lieu of gas
Local Emissions (5,000 boilers in
the proposed conversion zone)
Particulates (tons)
SO2 (tons)
Fuel displacement
reduces emissions and
health costs related to
particulates
To be completed later
985,244
2-4
201,509
783,735
INCREMENTAL COST MATRIX
Component
Baseline
Alternative
Increment
Business as usual
Continued use of energy inefficient coal boilers,
slow adoption of gas boilers, and some district
heating consolidation.
Domestic benefits
Limited benefits as high levels of SO2 will still
be emitted, some minor reductions due to gas
boilers and DH consolidation
Global benefits
Energy efficiency improves marginally and the
rate of increase in GHG emissions slows.
Baseline Cost: $4.59 billion
Proposed situation
Barriers to introduction of gas boilers are removed and
they displace at least 5,000 coal boilers.
Domestic benefits
The incentive to invest in gas boilers lowers emissions
of SO2 and reduces environmental harm.
Global benefits
Considerable reduction in the emissions of carbon due
to accelerated substitution of clean, energy efficiency
fuel and energy efficiency improvements.
New features
Wide-scale introduction of gas boilers has a
carry-on affect supporting additional conversion
Domestic benefits
Improved air quality in targeted areas and a
lower incidence of health problems
Global benefits
Chinese have access to cleaner and more
efficient energy systems
GEF Cost: $4.73 billion
2. Heating Energy Conservation
Business as usual
Continued use of inefficient coal boilers
Domestic benefits
Increased levels of pollution in Beijing and
rising coal consumption. Little effect on
technological innovation.
Global benefits
None.
Component 2: Costs
Baseline Cost: $38.6 million
Proposed situation
Improved heating efficiency due to retrofit and better
management of coal-fired district heating boilers.
Domestic benefits
Reduced emission of SO2 with increased access to
technical enhancements and financing.
Global benefits
Dissemination of best practices improves energy
efficiency and encourages investments in energy
conservation.
GEF Cost: $54.3 million
Incremental Cost: $138.1 million
GEF Program Costs:
Technology Development: $7 million
Market Development: $10 million
Total: $17 million
New features
Increased energy efficiency consciousness.
Domestic benefits
Governments can use energy efficiency gains to
promote investment in new technology.
Global benefits
Implementation of best practices in energy
efficiency creates added incentives to conserve
energy.
1. Boiler Conversion
Component 1: Costs
2-5
Incremental Cost: $15.7 million
GEF Program Costs:
Best Practices for Boiler Systems: $2.5 million
Energy Efficiency for Heat: $1.5 million
Pilot Building Retrofit: $3 million
Center for Efficiency Promotion: $1 million
Total: $8 million
ANNEX 3A STAP REVIEW
6 May 1999
Comments on “Second Beijing Environment Project”,
Project ID: CN-PI-42109, GEF Supplement ID CN-GEF-64924
Comments by
William Chandler
Senior Staff Scientist
Battelle Memorial Institute
Pacific Northwest National Laboratory
General
The goal, to alleviate “significant and sustained acute air and water pollution”, is highly appropriate, and
the measures selected to accomplish that end are also appropriate.
The approach–conversion of coal boilers and stoves to gas, creation of sewers, conversion of vehicles to
LPG, and policy support–are all measures that address the most serious and sustained sources of pollution
in the nation.
This reviewer found the proposal compelling. It adequately explains the motivation and benefits of the
proposed project, and legitimately claims the project would meet the GEF additionality requirement. Of
the dozen or so proposed GEF projects this author has reviewed, this ranks as the best.
p. 2, para 2.2
The observation that growth is overwhelming successful pollution control efforts is accurate.
p. 3, para 2.3
The proposal correctly identifies air pollution as a priority pollution problem in Beijing, and correctly
identifies coal combustion as the primary source of that pollution.
p. 4, para 3.2
The suggestion that fuel oil could serve as a fall-back strategy in the event that gas were unavailable is a
reasonable contingency. It should be noted, however, that the relative carbon emissions reduction benefits,
while still positive compared to coal, would be lower than if gas were substituted for coal.
p. 4, para 3.3
If the project is to consider consolidating boilers into district systems, if may also want to consider
combined heating and power (CHP). The economics of CHP have improved so that heat or steam loads do
not have to be large to provide strong benefits.
p. 5, para 3.5
The idea of introducing LPG-fueled buses is appealing. However, it would help the credibility of the
proposal if the source and approximate cost of this fuel were mentioned.
p. 5, para 3.6
It strikes this reviewer as a little odd that problems and solutions as different as wastewater and air
pollution are considered together in one proposal. If combining them is intended to save money in
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transactions costs by having staff handle two problems at once, this motivation should be stated.
Otherwise, it is not clear why these two ideas are presented together.
p. 5, Table 3
The costs seem reasonable. However, it is not clear at this point in the proposal why only the air
pollution/boiler conversion effort requires a GEF grant, and not the water pollution problem.
p. 7, Table 4
This is a logical distribution of responsibilities.
p. 7, para 1.3
The paragraph is correct as far as it goes, but might point out that low sulfur coal would not much help the
particulate problem that is the more pressing issue.
p. 8, para 3.2
The conclusion that district heating systems are typically inefficient in China does not need to be hedged as
strongly as done here. The Bank has enough experience with conditions in these systems in transition and
planned economies that it can state the conclusion more strongly.
p. 9, para 5.1
The conclusion that residential users need the GEF “subsidy” is appropriate. This conclusion meets the
GEF additionality criterion, and is bolstered by the stated intention to demonstrate higher-efficiency
measures.
p. 10, para 5.
The statement “Clean fuel and water may have significant financial impact on lower income groups” is not
understandable. If the second part of that sentence or the following sentences are meant to explain the
statement, that intention is not clear.
p. 12 lines 3-6
This justification for the project–the potential for pollution to “overwhelm” residents–is logical and
appropriate.
p. 18, last para before 1.2
The stated intention of adding $5 million in energy efficiency measures is very appropriate, and the funding
allocated neither trivial nor excessive.
p. 18, para 1.2–table
The cost breakdown is helpful in understanding the budget. The list of items and the estimated costs appear
reasonable.
p. 3.1. Vehicle Study
No mention is made of economic instruments to control congestion and pollution. “Time of day pricing”
may be feasible with new technology and may be cheaper and more effective than clean fuel technologies.
Certainly, however, the measures proposed in the paragraph, including the introduction of catalytic
converter technology, are reasonable and appropriate.
3A-2
Annex 2: Incremental Cost Analysis, pp 21-28
The analysis indicated impressive benefits in emissions reduction (pp. 26-28). The
incremental cost analysis appears properly done, appropriate, and compelling (see
especially p. 24 and 26).
3A-3
ANNEX 3B
China: Beijing Environment II – IA response to the STAP review
The STAP review is generally supportive of the project design and proposed role of GEF
assistance. Two suggestions made by the STAP that have been adopted, namely (1)
GEF is no longer being asked to support conversions from coal to fuel oil, because of the
lower GHG abatement benefits of this option, relative to natural gas conversion. All GEF
support for the fuel conversion program will now focus on coal-to-gas conversion and (2)
we have clarified that the local environment benefits of switching to low-sulfur coal are
very modest.
In response to other suggestions or critical comments in the review that are not reflected
in the project design, we offer the following explanations:
Consider combined heat and power systems. The viability of this option is questionable
under current power supply market conditions, so we believe the potential benefits do not
justify the risks of including it in the project.
Provide more details on the proposed LPG bus sub-component and explore time of day
traffic pricing. We have dropped the entire transport component to simplify the project’s
(already complex) design.
Why combine energy and water treatment initiatives in one project? Because they are
both part of the Beijing Government’s environment program that the project is designed
to support.
Why is no GEF support requested for the water pollution problem? Because it has no
significant global benefits and is therefore not GEF-eligible.
The statement that “clean fuel and water may have significant financial impact on low income
groups” is not clear. This statement reflects the Bank’s concern over the impact of higher
heating and sewer tariffs on the poor. We are exploring with the Beijing Government options to
address this issue.
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