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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 A-1 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 A-2 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. 2-1 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%. 2-2 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 3A-1 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. 3B-1