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PROJECT EXECUTIVE SUMMARY 1. GEF COUNCIL WORK PROGRAM SUBMISSION

FINANCING PLAN (US$) GEF PROJECT/COMPONENT AGENCY’S PROJECT ID: 2933 Project I (PHASE II) 5,767,000 GEFSEC PROJECT ID: PHASE I 5,815,000 COUNTRY: China Sub-Total GEF 11,582,000 CO-FINANCING * PROJECT TITLE: Demonstration of Fuel Cell Bus PHASE I 6,270,000 Commercialization in China: Phase II Sub-Total Co-financing (Phase I) 6,270,000 GEF AGENCY: UNDP PHASE II: OTHER EXECUTING AGENCY(IES): Ministry of UNDP 196,000 Science and Technology Ministry of Science & Technology 3,519,000 DURATION: 4 years (MOST) Municipal government - Beijing 3,536,000 GEF FOCAL AREA: Climate Change Municipal government - Shanghai 4,384,000 PERATIONAL ROGRAM GEF O P : 11 Others 1,223,000 GEF STRATEGIC PRIORITY: CC-6 Sub-Total Co-financing (Phase II) 12,858,000 th Pipeline Entry Date: 29 August 2000 (phase 1) Total Project Financing (Phase I): 12,085,000 ESTIMATED STARTING DATE: January 2006 Total Project Financing (Phase II): 18,625,000 IA FEE: US$ 519,030 Total Project Financing (Phase I & II): 30,710,000 FINANCING FOR ASSOCIATED ACTIVITIES IF ANY: LEVERAGED RESOURCES IF ANY: *Details provided under the Financial Modality and Cost Effectiveness section

CONTRIBUTION TO KEY INDICATORS OF THE BUSINESS PLAN:

 Avoided CO2 emissions during project lifetime: 163 tons of CO2 total

 CO2 reduction potential (at 20 years): 9.3 million ton CO2 per year avoided

RECORD OF ENDORSEMENT ON BEHALF OF THE GOVERNMENT(S): Wu JinKang Date: August 25, 2005 Director and GEF Operational Focal Point Division IV for International Financial Institutes, International Department, Ministry of Finance Approved on behalf of the United Nations Development Programme. This proposal has been prepared in accordance with GEF policies and procedures and meets the standards of the GEF Project Review Criteria for work program inclusion.

John Hough Project Contact Person Officer-in-Charge Nandita Mongia, Regional Coordinator UNDP-GEF, NY Climate Change, Asia and Pacific Date: 2 September 2005 Tel. and email:+66 (2) 288 2260, [email protected] 1 2. PROJECT SUMMARY

A) PROJECT RATIONALE, OBJECTIVES, OUTPUTS/OUTCOMES, AND ACTIVITIES Project Rational and Objectives The widespread use of FCBs in China has the potential to reduce both urban air pollution and GHG emissions. Given the high priority that China is giving to the development of its public bus fleets, the demand for medium to large-size (7 to 18 m) buses was estimated to grow at an average rate of 5% per year between 2000 and 2030, which would result in a Chinese bus population of more than 720,000 by 2030. An expert Chinese team, drawing on both the scientific and engineering knowledge base in China and internationally regarding FCBs, estimated that based on the expected cost of mass-produced FCBs in China FCBs will become cost-competitive with diesel buses on a lifecycle basis. The magnitude of potential reductions in CO2 (carbon dioxide) emissions achievable by widespread introduction of FCBs in China was estimated by assuming that if FCBs were to capture only 30% of the bus market by 2030 then the annual savings in emissions would be 9.3 million tonnes per year. To place this potential impact in context, greenhouse gas (GHG) emissions from the entire transportation sector in China were 60 million tonnes in 1995. By 2030, due to the rapid expected growth in the transportation sector, GHG emissions could increase to over 170 million tonnes per year. However, with the introduction of FCBs and other clean and energy efficient vehicles, the growth in emissions from this sector could be limited to about 140 million tonnes per year. The global environmental objective of this project is the reduction of GHG emissions from the urban transport sector in China. Over the immediate term of the project, FCBs fueled by hydrogen drawn from natural gas and bi-product gases with rich hydrogen will be demonstrated and tested. Over the longer term, this project will lead to an increased production in FCBs, and eventually, the reduction in their costs to the point where they will become commercially competitive with conventional, diesel buses. The Demonstration for Fuel Cell Bus (FCB) Commercialization in China project has been formulated in two Phases, with Phase I approved by the GEF Council and GEF CEO endorsed on 13 September 2002. Phase II, already in the GEF pipeline, is subject to GEF Council approval when submitted as part of a GEF Work Programme. Proceeding with Phase II of the project is triggered by the procurement of the first set of buses under Phase I. This document outlines Phase II of the project and includes information on the evaluation of Phase I. The Phase I project’s implementation contract was signed during November and December 2002, and the project officially began operation on 27 March 2003 after two months of preparation. In late 2003, the China International Center for Economic and Technical Exchanges (CICETE), entrusted by the project to lead the procurement activities, launched the international procurement process for the project. Bids were evaluated by a committee in March 2004, and DaimlerChrysler was announced as winner. In May 2004, intense negotiations were conducted with DaimlerChrysler with a supply contract for FCBs signed on 26 May 2004. Three Citaro buses are to be delivered to Beijing in September 2005. These three Citaro FCBs are similar, in terms of performance and service, to those being demonstrated in ten European cities. In addition, in May 2004, a memorandum was signed with BP for the construction of a hydrogen filling station in Beijing. Beijing SinoHytec Limited, BP, and Beijing Tongfang Co. Ltd signed agreement on cooperative construction of hydrogen filling station in Beijing in May 2005. For the UNDP-GEF project, the Fueling Station will provide compressed hydrogen. Initially, hydrogen will be generated off-site by means of water electrolysis and transported with tube trailers. Later, natural gas reforming will be established on-site. Eventually, more hydrogen will be supplied from on-site renewable energy (solar, wind). The quality and quantity of hydrogen supplied by this station will fully meet the FCB demonstration requirements in Beijing.

2 In November 2004, the evaluation of Phase I was conducted to examine the methodologies used, and results of, the selection of FCB technologies and relevant supporting infrastructure for commercializing environmentally-friendly public transportation in Chinese cities; to assess the efforts made and results achieved in partnership building among the participating agencies and companies; and, to review the approaches to access potential partners. Major observations of the evaluation included the following:  The Phase I project performance and results were found to be satisfactory despite that the project had faced technical regulations, standards and national policies constraints, which caused some difficulties with project implementation and coordination.  FCBs were purchased only for Beijing under the Phase I project due to budgetary constraints. The evaluation mission suggested that Shanghai procured a newer generation FCB in Phase II of the project. Because of the current active state of fuel cell development in China and abroad, a new generation of FCBs will likely be available within two years. These new FCBs are projected to have improved energy efficiency, reliability and durability characteristics, as well as lower costs. Thus introducing FCBs in Shanghai that are different from those implemented in Beijing will help to enlarge the benefits of the overall project. Furthermore, this phased approach would better meet the overall project objectives of advancing FCBs towards commercialization;  The project was found to have effectively built capacity within various Chinese academic and government agencies, and a major positive impact of the project to date has been to create a wider awareness within China of FCBs and the use of hydrogen fuel; and,  Given that China has the world’s largest public transit sector and has become the world’s second largest energy consumer of fossil fuels, the overall impact of a successful FCB demonstration in China was considered to be extremely significant in reducing GHG emissions and sustainability. Furthermore, the opportunity of internationally showcasing FCBs during the 2008 Olympics and possibly the World Expo 2010 was recognized as significant.

Goal, Objectives and Project Strategies The goal of the project is to reduce GHG emissions and air pollution through widespread commercial introduction of FCBs in urban areas of China. The objective of this project is to demonstrate the operational viability of FCBs and their refueling infrastructure under Chinese conditions.

The FCB project in China has several unique features that contribute to the overall GEF FCB Portfolio of projects, and will be carried out in two cities—Beijing and Shanghai which have different geography, climate, road, traffic, social and market conditions. The main strategies that shape the Phase II project are summarized as follows:  Identify new generation FCB technologies with high energy efficiency, low hydrogen consumption, good price and long durability;  Leverage additional funds from the FCB suppliers and domestic sources by establishment of long-term partnerships;  Apply flexible procurement methodologies in line with the UN regulations, such as Request for Proposals (RFP), to advance FCBs commercialization;  Demonstrate and communicate to policymakers, FCB developers and the public about the advantages and future potential of FCBs, and showcase sustainable mobility by operating the FCBs at Beijing 2008 Olympic and Shanghai 2010 World Expo; and,  Develop government policies and enhance domestic research and development capabilities to support the commercialization of FCBs in China.

The Phase II Project is to build on the experience gained from Phase I, and to use this experience to advance the technology in Phase II. The program is aware of the risks in seeking new technology in Phase II, however the gains in terms of advancing the state of the technology are considered worthwhile. This includes the development of hybrid technologies to improve fuel economy and to reduce costs.

3 Outcomes, Outputs and Activities The satisfactory progress of the Phase I project provides a basis for the success of the Phase II project implementation. The three main outcomes expected from Phase II are:  Outcome A - Six to nine FCBs and two hydrogen refueling stations operational in Beijing and Shanghai;  Outcome B - Knowledge accumulated, available and accessible for advancing commercialization of FCB technology and hydrogen refueling system; and,  Outcome C - Awareness promoted among stakeholders and creation of an enabling environment for FCB expansion and the Phase III (expanded demonstration) Project in China. Outcome A relates to Output 1; Outcome B relates to Outputs 2 and 3; and Outcome C relates to Outputs 4 through 7.

Output 1: A commercially-relevant demonstration of the technical feasibility of FCBs and their refueling infrastructure in Beijing and in Shanghai. Activities - The project will communicate with, and undertake site visits to, potential fuel cell engine suppliers and selected bus manufacturers. The goal is to understand the present status of specific companies’ technologies, their capabilities for supplying FCBs to the project, and their level of interest in responding to a bid; and, to maximize the likelihood of receiving multiple bids. The project will identify and purchase 3 to 6 FCBs with new technologies (e.g. hybrid buses with high energy efficiency and low hydrogen consumption) for Shanghai. The FCBs that have already been purchased for Beijing, and the FCBs to be purchased for Shanghai, will be placed into service. The Beijing buses will operate for 2-3 years or 4,000 operation hours or 40,000 km per FCB in revenue service under realistic operating conditions to provide the performance results to relevant policy makers and FCB developers. Similar, Shanghai buses will tentatively operate for 200,000 vehicle-km. Installation of the fueling system will precede the arrival of the initial set of buses in Shanghai, and will involve the installation, start-up, operation and maintenance of the fueling infrastructure. To showcase sustainable mobility in China, the project looks to using FCBs at the Beijing 2008 Olympic and the Shanghai 2010 World Expo. Output 2: Performance results concerning reliability and failure modes, opportunities for improving the design and reducing the cost of FCBs in China, and Chinese public ridership responses to FCBs. Activities - Through a consultative process, a protocol will be developed for quarterly reporting on the technical operations of the bus fleet. Operational data will be collected, analyzed, and evaluated. Detailed lifecycle emissions and resource-use efficiency analyses will also be carried out and compared to similar lifecycle analyses for other bus technologies. Ridership surveys will be administered to help identify potential improvements to FCB technology for China. Periodic reports will summarize data collection and overall progress. Visits and exchange experiences with other FCB demonstrations will be undertaken, with special emphasis given to interactions with the Brazil UNDP-GEF FCB project and other non-GEF FCB projects. Output 3: A core of bus company employees trained in the operation, maintenance and management of FCBs and hydrogen refueling stations. Activities - Working together with the suppliers, on-the-job training seminars for drivers, maintenance and fueling station staff will be held to ensure that operating and maintenance personnel have the capacity to the execute the immediate project and are prepared for a larger follow-on project. An examination and certification program for FCB operators and mechanics will be developed. Output 4: Policy and regulation preparations for FCB commercialization in China Activities - A policy and planning study will be prepared to evaluate options for improving/optimizing bus-company management, technologies, infrastructure, and operations in Beijing and in Shanghai. The purpose of the study is to help provide a basis for strengthening the

4 capacity of the bus companies, which will help insure sustainable, wide-scale introduction of FCBs over the long-term. Output 5: Enhanced scientific, technical, and industrial capability in China relating to FCB commercialization. Activities - National workshops for exchange of technical information relating to fuel cell vehicles among relevant organizations in China will be organized and held to ensure that organizations are informed of progress in the GEF project and to help foster the advancement of China’s scientific, technical, and manufacturing capabilities relating to FCBs. FCB (Vehicle) Certification document for future FCB commercialization in China will be prepared, which will include developing FCB standard and codes, FCB inspection rules and methods and process, and then design FCB certification requirements in China. Output 6: Increased awareness among policy makers, investors, the general public and the news media at the national and municipal levels for the development of sustainable public transport modalities, including FCBs Activities -A national seminar will be held focusing on public transport sector decision makers, other policy makers, media, investors and other key actors to raise their awareness and support for commercialization of FCBs. Using information media, the results of the demonstration project and plans for future projects will be publicized to help gain widespread public support for the expansion of FCB programs in China and other countries. Output 7: Preparation for Phase III (expanded demonstration) of the overall program Activities - Information exchange workshops will be undertaken targeting key potential Phase III/IV stakeholders. Technical, institutional, and financing feasibility studies for candidate Phase III cities will be carried out. A conceptual design for a hydrogen-powered FCB, which will meet Chinese operational conditions and is suitable for commercial manufacturing in China, will be developed. Chinese standards for hydrogen FCBs will be formulated and an initial set of operating and maintenance guidelines will be prepared. Fuel supply assessments and protocols for large-scale utilization of hydrogen FCBs will be developed, Hydrogen fuel standards and refueling protocols will be developed for electrolysis and reformer based hydrogen supply systems. Taking into consideration the experience with the Phase II demonstration and the experiences of other demonstrations abroad, a strategy for Phase III and for achieving commercial production of FCBs in China and widespread commercial introduction of FCBs and associated fuel supply systems in the major urban areas of China will be prepared.

B) KEY INDICATORS, ASSUMPTIONS, AND RISKS (FROM LOGFRAME) Key Indicators The project indicators are described in detail in Section II of the Project Document (Logical Framework).

Briefly, the indicators at the project level include the following: CO2 emissions associated with the demonstration vehicles are reduced in Beijing and Shanghai during the project; larger reductions in China and elsewhere once FCB technology is commercially deployed; FCBs operated so that operational statistics can be gathered; and, refueling stations are placed into operation. Also provided in Section II of the Project Document are the outcome-level indicators, which will include among others:  Six (6) to nine (9) FCBs in operation for 2-3years; at least 200,000 vehicle-km in Beijing and 200,000 vehicle-km in Shanghai; >40,000 km between breakdowns;  two (2) refueling stations placed into operation; hydrogen production projected target for FCB refueling (>4000 standard m3 per day in Beijing/Shanghai);

5  Bi-monthly newsletters; semi-annual reports; annual review reports; public awareness materials (semi-annual); study tour reports (post tours); and other technical, operational, managerial and planning reports and documents prepared and made available for broad use by stakeholders;  Training in Beijing and Shanghai for hydrogen stations, FCB operators and mechanics (over 20 personnel trained in each location);  More than two policy studies produced between 2006 and 2008; certification regulations developed for FCBs and hydrogen refueling station;  More than two local, national and international workshops/ seminars held and attended; whole team workshops held every year; international workshops held every two years;  Two ridership surveys conducted (600 to 1000 riders contacted during the FCBs’ first year demo; more than 1000 to 2000 riders contacted after first year);  Documentation of Chinese FCB concept design; reports on large-scale fuel supply options; Well-to-Wheel lifecycle analysis conducted; and the Phase III (expanded demonstration) strategy documents written for commercialization of FCBs in China.

Risks and Assumptions The main risks relate to the difficulties that may arise with bids from FCB suppliers. Particular concerns include a lack of bidders to supply the project, unacceptably high bid prices, and difficulties reaching agreement on contract terms with the winning bidders. There is some risk that the fuel cell engine industry is not sufficiently developed for FCBs to be secured through commercial bidding, therefore, assessing this risk has been one of the preparatory activities for this project. Based on contacts that have been made with potential fuel cell engine suppliers, it is very likely that at least two bids will be received for Shanghai. There is also some risk that prices of bids will be unacceptably high, which was the situation faced during the Phase I project that led to the procurement of only 3 FCBs. Several factors now mitigate against this risk: 1) there is an improved likelihood since the last competition that multiple bids will be received, including the possibility of a bid structured with only Chinese involvement; 2) the winning bidder is likely to be in a favorable bidding position for subsequent large orders that will be sought during Phase III and IV; and 3) FCB technology has developed considerably in the last two to three years, which should be reflected in reduced costs (e.g., Ballard’s success to reduce costs through reducing platinum loading (estimating $70/kw), allowing multiple starts from -20 degrees Celsius, and increasing its durability to 3200 hours from 2000 hours). In addition, the 2008 Olympic and 2010 World Expo will provide attractive opportunities to showcase FCBs and, moreover, China has considerable potential for commercial development. There is a somewhat greater concern that it will not be possible to agree on contract terms with the winning bidder. One issue may be delivery time. If the supplier is unable to deliver on a schedule that satisfies the project design, project completion would be delayed. While this is a risk, it is not a project- ending one. Of greater concern is reaching an agreement, especially with a foreign technology supplier, that satisfactorily protects the technology supplier’s intellectual property rights. While this risk cannot be ignored, there are several mitigating factors: 1) China has in place national laws protecting intellectual property rights and, in light of its joining the World Trade Organization, has shown increasing commitment to enforcing these regulations; 2) the successful signing of a commercial agreement with DaimlerChrysler in Phase I, with an article dealing with intellectual property; 3) the foreign technology component for which intellectual property rights are perhaps the most sensitive is the fuel cell stack (in the long term with commercial mass-production of FCBs the stack is projected to constitute a small fraction (under 10%) of the total value of an FCB, which reduces the incentive to violate intellectual property rights); and 4) if foreign suppliers will not participate in the project out of concerns over

6 intellectual property rights or other issues, there remains the strong possibility of Chinese companies supplying the project. 3. COUNTRY OWNERSHIP

A) COUNTRY ELIGIBILITY As evidence of the importance that the Chinese Government attaches to climate change issues, China signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, and in the same year, the Convention was ratified by the Standing Committee of the Chinese National People's Congress. Thus, China became one of the first countries to ratify the UNFCCC, and China is committed to developing policies to address global climate change concerns. This project has been endorsed by the GEF Operational Focal Point for China (see Section IV of the Project Document).

B) COUNTRY DRIVENNESS The Government of China has recognized the increasingly serious air pollution problems in China’s cities and has taken several measures to reduce pollution levels. Given the significant public health and economic impacts, reducing urban air pollution is a high priority. Furthermore, the Government of China views climate change as a major threat to its ability to achieve sustainable development through its priority policies, which include poverty eradication, enhancement of food security, and economic development. As Ma Songde, Deputy Director of MOST and Chairman of the FCB Project National Committee, stressed during the Phase I project kick off meeting: the “Chinese government always pays great attention to sustainable development strategy and supports the research and usage of clean energy and new generation clean vehicles.” Recent Chinese government actions include (see full details in the Project Document Section I, 1.4):  Implementing more stringent vehicle emission standards;  Working on a vehicle fuel consumption standard, which is to be released soon;  Actively driving the development of alternative fuel vehicles; and,  Actively carry out electric vehicle research and trials.

The Chinese government has established a priority to develop public transportation. The plan, developed at the national city public transportation conference held in May 2004, makes it clear that in the next five years public transportation will make up 30% of the urban traffic (in terms of passenger transit time), and large cities will have a traffic configuration using a foundation of large vehicles with gasoline/diesel and electric bus as the primary modes, and taxi and other public transportation as supplements. The Chinese government has also adopted the strategies of “sustainable development” and “developing the country by science and education”, and the policy of “priority development of public transportation in cities”. A series of measures have been carried out to push the development of clean and energy saving vehicles. China attaches great importance to hydrogen development within the country. With the support of the US Department of Energy, MOST is developing a Chinese Hydrogen Development Roadmap, which includes a description of the hydrogen economy and strategy to realize this goal. It includes a China hydrogen vision and timeframe, and the goal and timeframe of using hydrogen in transportation, power and infrastructure. 4. PROGRAM AND POLICY CONFORMITY

A) FIT TO GEF OPERATIONAL PROGRAM AND STRATEGIC PRIORITY Since the formulation of the Operational Strategy in 1995, GEF has offered support for FCBs, initially under OP 7 “Reducing Long-Term Costs of Low GHG-emitting Energy Technologies”; and more recently, under Operational Program (OP) 11, “Promoting Environmentally Sustainable Transport”. The

7 Development Objective of the UNDP-GEF FCB Programme is to reduce the long-term GHG emissions from the transport sector in GEF program countries by providing support to the commercialization of FCBs.

At the GEF Council Meeting in November 2000, the GEF jointly with UNDP summarized the outputs of a series of workshops sponsored under the UNEP Medium-sized Project “FCB and Distributed Power Generation Market Prospects and Intervention Strategy Options”. GEF made the Council decision “… GEF should develop the five FCB projects currently in its pipeline…” consistent with the objectives of OP 11. The GEF’s interest in FCBs is justified on the basis of the reduced GHG emissions that FCBs offer over conventional diesel buses. Fuel cells fired by hydrogen can offer dramatic reductions in system-wide GHG emissions from the urban transport sector if the system is carefully designed. Although fuel cells are technically proven, they are not yet commercialized: analysis based on experience learned through the commercialization of other technologies shows that early investments in the technology can reduce its costs to a commercially competitive level within 7 to 15 years. The sooner this technology becomes fully commercialized, the greater can be the impact that the technology plays in the stabilization of GHGs by the year 2100, as intended in IPCC scenarios. By supporting deployment of FCBs in GEF program countries, GEF is fulfilling its role as an important agent of technology transfer in support of the UNFCCC. By encouraging the early adoption of these buses in a process of “technological leapfrogging”, GEF is helping developing countries gain experience with the FCB early in its product cycle. GEF programme countries can then develop partnerships with technology developers, thereby increasing technological competence and adapting the technology to local needs. GEF programme countries will also benefit from reduced local air pollution, new export opportunities attributable to local manufacturing, and improved quality of public transit service. Finally, because FCBs are hydrogen fueled, the GEF will also be assisting developing countries in preparing for a future transition to newer, cleaner and more efficient fuel-supply systems.

B) SUSTAINABILITY (INCLUDING FINANCIAL SUSTAINABILITY) The research, development and demonstration of electric vehicle began in 1992 in China, which was then integrated into the Eighth Five-Year Program on High-Tech Research and Development. The support from the Chinese government increased drastically from then on. In the Ninth Five-Year Plan (1996- 2000), the total investment in the electric vehicle program (including hydrogen and fuel cells) was about 20 times that of the Eighth Program. During the Tenth Five-Year Plan (2001-2005), the relevant investment increases 15 times compared to Ninth Five-Year Plan. The Chinese government is now drafting its Mid-to-Long Term Plan on Sci-Tech Development, in which hydrogen and fuel cell R&D is given high priority. It is anticipated that greater support will be allocated to this field in the future. Some work to be conducted to prepare for the commercial or expanded demonstration (Phase III), will include the following:  Feasibility study on expanding the demonstration bus fleet and replicating it in other cities;  Conceptual design of FCBs that fits China’s situation;  Life-cycle analysis on the development of FCBs in China; and,  Study on codes, standards and regulations relevant to FCB and hydrogen filling station.

China actively participates in the International Partnership for Hydrogen Economy (IPHE), and has developed a cooperative relationship with the US, European Commission, Canada, France, Italy and the UK in the sectors of sustainable development, renewable energies and hydrogen/fuel cell. All of these activities demonstrate that China considers the UNDP-GEF FCB program as an important factor in reaching its mid-to-long term goal of commercializing FCB technology in China.

8 C) REPLICABILITY China is developing a scientific and technical mid-and-long-term development plan (2005-2020Year), and hydrogen and fuel cell technology research has been considered as important within the energy field. The Chinese Hydrogen Development Roadmap includes a description of the hydrogen economy and strategy to realize this goal. Three phases were identified:  By 2020 - Technology Development Phase: Research to meet customer requirements and to establish the business case leading to a commercialization decision;  By 2050 - Market Penetration Phase: Electric power and transport market begin to develop, infrastructure investment begins with government policies;  Beyond 2050 - Fully Developed Market and Infrastructure Phase: The hydrogen economy is realized. The project proposed here constitutes the second of a four-phase long-term program intended to culminate in the market-based commercial production and use of FCBs in China. The four phases are (1) preparation, (2) demonstration, (3) expanded demonstration and (4) mass production in China of cost competitive FCBs. Therefore, this project, in the near-term, is expected to lead to the next phase of a long-term four-phase program. Phase III, the expanded or commercialization phase, is intended to increase China’s demand for, and production of, FCBs to the point where the costs become competitive with that of conventional buses. GEF support for Phase III, however, is not currently established and will depend largely on the nature of GEF’s continuing role in climate change; the degree to which the FCB demonstrations have been successful; and the continued investment and interest in the technology within donor countries. To ensure replication, this project includes components that involve dissemination of lessons from the project. Under Outputs 3 through 7 there is heavy emphasis on data collection, training, studies, workshops, seminars, strategy development, information exchange, public awareness and media coverage. In addition, the FCB related certification preparation, and the candidate demonstration cities selection are intended to promote the project’s replication within China and abroad. The budget associated with replication activities under these activities is $2,660,000. Under the UNDP-GEF FCB Programme, communication between UNDP-GEF projects and networking with non-GEF projects is emphasized and supported. The intent is to increase technical information transfer among developing countries and between developed and developing countries. The China UNDP-GEF FCB project has also become a formal member of Fuel-Cell-Bus Club (an organization of ten European FCB Demonstration Cities and Perth Australia), eligible for participating in two workshops for information and experience exchange.

D) STAKEHOLDER INVOLVEMENT MOST will head an Advisory Committee that will provide overall advice and guidance to the project at the national level, review the project work plan, attend the semi-annual meetings and receive all project reports. The Advisory Committee will consist of representatives from UNDP, the MOST, the State Development Planning Council, the State Economic and Trade Commission, the Ministry of Finance, the State Environmental Protection Agency and UNDP. Since the Phase I project’s inception in 2003, the officials from MOST and local governments (Beijing and Shanghai), Beijing Public Transit Company, Tsinghua University, domestic and international private companies have participated in the project as project stakeholder, technology support and supplier, respectively. Technology providers, which have been major stakeholders in the Phase I project, became involved in the FCB project through the international procurement process and some as actual suppliers to the project. Technology-related stakeholders included: DaimlerChrysler (as FCB supplier); BP (as hydrogen fueling station co-partner); CUTE (Clean Urban Transportation for Europe - for exchange and sharing FCB demonstration experiences); US Department of Energy (for provision of assistance for a

9 study on China’s hydrogen roadmap, and cooperation/funding for construction of Beijing Hydrogen Energy Transportation Park); Beijing Public Transportation Corporation (FCB operation); SinoHytec, (Beijing Hydrogen Energy Transportation Park construction, including the hydrogen fueling station); Westport and Cummins (demonstration of Hythane Vehicles in the Hydrogen Park); Tsinghua TongFang Co. Ltd., (a partner responsible for construction of hydrogen fueling station); and Tsinghua University (provision of technical support and consultation on FCB preliminary specifications, technical document translation, training, and data collection system).

E) MONITORING AND EVALUATION Project monitoring and evaluation will be conducted in accordance with established UNDP and GEF procedures and will be provided by the project team and the UNDP Country Office (UNDP-CO) with support from UNDP-GEF. The Logical Framework Matrix provides performance and impact indicators for project implementation along with their corresponding means of verification. These will form the basis on which the project's Monitoring and Evaluation system will be built. The project will be subjected to at least two independent external evaluations. An independent Mid-Term Evaluation will determine progress being made towards the achievement of outcomes and will identify course correction if needed. An independent Final Evaluation will focus on the same issues as the mid- term evaluation and will also look at impact and sustainability of results, including the contribution to capacity development and the achievement of global environmental goals. The project's Monitoring and Evaluation Plan will be presented and finalized at the Project's Inception Report following a collective fine-tuning of indicators, means of verification, and the full definition of project staff responsibilities. Full details on the Monitoring and Evaluation Plan are provided in the Project Document Section IV (Part 4). 5. FINANCIAL MODALITY AND COST EFFECTIVENESS The cost of the Phase II project is $18.625 million. GEF funds in the amount of $5,767,000 are being requested, the bulk of which will cover the cost of purchasing the FCB vehicles, since their high incremental cost (relative to conventional diesel buses) represents the greatest barrier to the dissemination of the new technology today. Co-financing for the project will be provided from several sources. The central government, through the MOST, will provide $3,519,000 and the municipal governments of Shanghai and Beijing will provide $4,384,000 and $3,536,000 respectively. The municipal national and local government co-financing will include both cash and in-kind contributions as outlined in the table below. Additionally, private sector contributions of $1,223,000 are expected due to parts supplied, training provided, R&D allocated, and related costs. UNDP China will provide $196,000 to support policy-related activities. The breakdown of contributions is provided on the Cover Page, with budget details provided in Section III (Phase 1) of the Project Document.

10 TABLE 1. Description of Cofinancing Name of Co-financier Classification Type Amount (US$) Status* (source) MOST government Cash 1,232,000 Committed In-kind 2,287,000 Beijing government Cash 1,131,000 Committed In-kind 2,405,000 Shanghai government Cash 1,555,000** Committed In-kind 2,829,000** Private sector Private sector In-kind 1,223,000 UNDP China UNDP Cash 196,000 Committed Sub-Total Co-financing 12,858,000 *The above table reflects the status of discussion with co-financiers. Letters of expressions of interest and/or commitment are included in Section IV, Phase 1 of the Project Document. ** As Shanghai did not purchase their FCBs under the Phase I project, they have allocated their funds to the Phase II project.

6. INSTITUTIONAL COORDINATION AND SUPPORT

A) CORE COMMITMENTS AND LINKAGES The project has key linkages with the recently approved United Nations Development Assistance Framework (UNDAF) for China (2006-2010). The UNDAF Outcome 3 identifies: “More efficient management of natural resources and development of environmentally friendly behavior in order to ensure environmental sustainability (with special focus on energy, biodiversity and water resources)” and UNDP Outcome 3 targets: “End-use energy efficiency improved and applications of new and renewable energy technologies enhanced”. The FCB project is also consistent with the China Country Programming Document (CPD) (2006 – 2010) approved in June 2005, in particular regarding sustainable energy services for sustainable human development. As outlined in the CPD, continued assistance will be provided to fulfill obligations under multilateral environmental agreements, especially regarding China’s membership of the Kyoto Protocol. Expected results include the commercialization of new and renewable energy technologies, including fuel cells, supported through demonstration and development of strategies, guidelines, standards and regulations. The China Human Development Report (HDR) published in 2002 with title “Making Green Development A Choice” is also relevant to the FCB project. This report notes that road transport is one of the principal sources of outdoor air pollution in China and highlights health issues associated with heightened local pollution levels. Finally, the Millennium Development Goals (MDG) China Report identifies that China’s energy consumption ranks second in the world, and that the use of enhanced technologies may therefore lead to a further rapid increase in energy efficiency. The China FCB project is part of the UNDP-GEF FCB Programme as outlined in Section I, Part 2 (2.1.1) of the Project Document. As such, it is subject to the annual update report as requested by the GEF Council. In addition, UNDP-GEF provides assistance with knowledge management activities that bring together the projects of China and Brazil in various information exchange forums including workshops and virtual discussion groups.

11 B) CONSULTATION, COORDINATION AND COLLABORATION BETWEEN IAS, AND IAS AND EXAS, IF APPROPRIATE At the GEF Council Meeting in November 2000, the GEF jointly with UNDP summarized the outputs of a series of workshops sponsored under the UNEP Medium-sized Project “FCB and Distributed Power Generation Market Prospects and Intervention Strategy Options”. GEF made the Council decision “… GEF should develop the five FCB projects currently in its pipeline…” consistent with the objectives of OP 11.

C) PROJECT IMPLEMENTATION ARRANGEMENT Phase I of the project validated the effectiveness of the organizational structure used in Phase I (see below for the organigram of the project). This structure will be revised as appropriate as further experience is gained. Overall guidance at the national level will be provided by a committee consisting of representatives from the MOST (which will head the national committee), the National Development & Reform Commission, the Ministry of Finance, the Ministry of Public Security, and the Ministry of Commerce. This national guidance committee will seek advice from outside experts, as needed. The project will be nationally executed. The GEF-funded project activities will be executed by MOST, and the project activities funded by the UNDP TRAC resources will be executed by the China International Centre for Economic and Technical Exchanges (CICETE). UNDP China will be responsible for monitoring and evaluation. MOST will appoint a senior official to act as National Project Director (NPD). The NPD will take overall responsibility for ensuring that all national inputs are mobilized in a timely and effective manner, and will be responsible to the Government of China and GEF for achieving project objectives. The day-to-day implementation of the project will be conducted by the national project management office under the leadership of NPD. CICETE will provide implementation support services for the GEF input at the request of the NPD in securing deliverables (personnel, training, equipment, etc.) and facilitating the preparation of financial and administrative reports. A local project advisory committee will be formed in each of the two host municipalities, Beijing and Shanghai. Each committee will be headed by a Vice Mayor of the municipality and include representatives from the following municipal-level organizations: the Science and Technology Commission, the Economic and Trade Commission, the Development Planning Commission, and the Public Transportation Company. The municipal advisory committees will seek advice from outside experts, as needed, and will meet quarterly. The day-to-day implementation of the project in each city will be under the local project management office and FCB operation will be under the responsibility of the Beijing Public Transportation General Company and the Shanghai Bus Electric Limited Company.

12

UNDP/GEF Advisory Committee MOST, SDPC, SETC, MOF,MOF, SEPA, SEPA, UNDP UNDP,MOC

MOST MOST (Executing (NPD ,NPDDAgency)) PMO (NPD,(NPC, NPC,CTA, InternationalCTA, International and and UNDP National Experts, PMOPMO Staff) CICETE (Service Provider)

Beijing Local Shanghai Local Oversight Committee OversightOversight Committee Vice Mayor, Science & Technology, Vice Mayor, Science & Technology, Economic & Trade, Economic & Trade, Development Planning, Development Planning, Public TransportationTransportation Co. Public Transportation Co.

Beijing PMO Shanghai PMO ProjectProject Manager, Beijing Public Project MaManager,nager, Shanghai Public Transportation Company staff Transportation Company staff Staff from other agencies Staff from other agencies Technical experts Technical experts

Figure 1. Organigram of the Project

13 ANNEX A: INCREMENTAL COST ANALYSIS Baseline Under the baseline situation, the municipal transport authorities in Beijing and Shanghai will continue to provide bus transport to its population as needed. In 2003 in Beijing, there were 16,022 internal combustion engine buses. Of these 5,693 were estimated to operate on diesel. By April 2005, there were 18,693 buses1 of which 8,026 were estimated to operate on diesel. In Shanghai, the situation is even more pronounced. In 2003, 18,625 buses in Shanghai were estimated to be under operation, 16,419 of these were considered medium to heavy duty. Of these buses, more than 10,000 are estimated to operate on diesel. The urban transport sector in these two cities has a major influence on the environmental quality found in the cities. A WHO study undertaken in 1992 found Beijing to be the second most polluted mega-city in the world at that time. Shanghai ranked 19th under the same study. Urban transport plays a large role in determining this poor ambient air quality. In Beijing during heating season, traffic-related emissions account for 76% of CO; 94% of HC; and 68% of NOx. During the non-heating seasons, these figures jump to 92%, 98% and 85%, respectively. Strictly speaking, in the baseline of this project, the FCB vehicles are estimated to operate for a total of 400,000 vehicle-kilometers. During this operation, they would be anticipated to emit approximately 44.6 tonnes of C or 163 tonnes of CO2 during the project’s lifetime. The baseline cost, from which the incremental cost is determined, consists of two components. One is the cost of operating a fleet of conventional diesel buses providing the same service (total number of bus-km) as the FCBs will provide during the project. This is approximately 200,000 bus-km in Beijing and 200,000 bus kilometers in Shanghai, or a total of 400,000 bus-km. Based on the actual cost per bus-km incurred by the Beijing and Shanghai public bus systems (see Table below), the contribution to the baseline cost from diesel bus operation is US$158,000 (Beijing) plus $138,000 (Shanghai), for a total of $296,0002. Table 2: Current public transit bus costs (RMB) per bus-km Beijing Shanghai Fuel 0.68 0.85 Salaries 1.86 2.14 Maintenance 0.95 1.09 Depreciation 1.19 1.04 Insurance 0.0 0.07 Administration 1.14 0.36 Other 0.47 0.0 Tax 0.30 0.16 TOTAL 6.59 5.71 TOTAL (US$/km) 0.79 0.69 The typical cost of a new diesel public transit bus in Beijing or Shanghai is 400,000 RMB ($48,000). A depreciation period of 8 years is used for accounting purposes by the Beijing and Shanghai bus companies.

The second component of the baseline cost is the funding support that the Central Government plans to provide for research, development, and demonstrations relating to FCBs in China regardless of whether a GEF project is undertaken. Some of the activities defined for the project are aimed at enhancing such efforts. The central governments contributed 50 million RMB (US$ 5.4 million) toward broadly

1 Statistics of Beijing Public Sector 2 The total operational distance has been revised from when the Phase I project was approved. Therefore, the baseline costs have been updated to reflect that there will be fewer FCBs running fewer revenue-generating km).

14 supporting all FCB-related activities in China during the 10th 5-Year Plan, with US$ 5.4M considered baseline for this project (not including any waived import duties). 3 Since this project was originally envisaged as a single project, the incremental cost was calculated for both the Phase I and Phase II projects together. The baseline for Phase I was $2,684,000 and for Phase II is $3,012,000.

Global environmental objectives The global environmental objective is the reduction of greenhouse gas (GHG) emissions from the urban transport sector in China. Over the immediate term of the project, this will involve the demonstration and testing of FCBs fueled by hydrogen drawn from natural gas and bi-product gases with rich hydrogen. Over the longer term, assuming that this project and its successors perform as designed, this project will lead to an increased production in fuel cell propelled buses, and eventually, the reduction in their costs to the point where they will become commercially competitive with conventional diesel buses. In order for the long-term programmatic goal of the entire GEF intervention to be achieved, FCBs must be produced for use in other contexts. According to projections, after a total of 5,000 FCBs have been produced, the costs should fall to where FCBs will be roughly competitive on a lifecycle basis with modern, clean diesel buses.4 The deployment of FCBs in China will lead to significant reduction in carbon emissions from the transport sector. Although for this demonstration phase, the project will result in carbon emissions reductions of 44.6 tons of C (or 163 tons of CO2). However, the ultimate target is not a small-scale demonstration project in Beijing and Shanghai, but rather the replacement of all petroleum fueled buses in China. If 720,000 petrol -fueled buses were replaced by hydrogen FCB buses in the year 2030, with hydrogen derived from sources not emitting carbon (or the carbon being sequestered underground), the net savings in carbon emissions would be 9.1 million tons per year. While the Project expects that the penetration of hydrogen fuel cell buses for new applications will be very high, a more conservative estimate of the overall share of the market will be at least 30%, or approximately 200,000 buses by 2030. The immense worldwide potential for reducing global carbon emission can be demonstrated in the following example. If all diesel buses in developing countries in operation in the year 2025 were replaced by FCB operation from hydrogen produced from natural gas, the emission of nearly 440 million tons of

CO2 would be reduced per year (120 m tons of Carbon).

Alternative With GEF assistance, this project will procure FCBs for operation; build hydrogen refueling stations; accumulate knowledge for advancement towards commercialization of FCB technology and hydrogen refueling system; and, promote awareness among stakeholders and create an enabling environment for FCB expansion in China. MOST is contributing $3,519,000 to the Phase II project ($ 6,203,000 to the total Phase I and Phase II project). Beijing will contribute $3,536,000 to the project. This represents an increase of $1,153,000 over the initial estimate contribution (made during the formulation of the Phase I and Phase II project) due to the increased funds for the refueling station O&M. As Shanghai did not purchase their FCBs under the Phase I project, they have allocated their funds to the Phase II project. Therefore, Shanghai will contribute $4,384,000 in Phase II. The GEF is requested to contribute $5,767,000 (or approximately 31% of the total project). The total Phase II project will cost $18,625,000.

3 According to national FCB R&D officials, the funds allocated for FCB R&D were 50M RMB (UDS$5.4M) under the “tenth-five” plan 4 Hosier, R. and Larson, E.D., 2000. “GEF Participation in Fuel Cell Bus Commercialization,” Working Document, UNDP/GEF, New York, Feb. 2000

15 System boundary Although the boundary for this immediate project is the urban transport sector in Beijing and Shanghai, the project will support and draw upon resources from the global automotive industry. It should also provide important feedback for public transport agencies in other parts of the developing world. One of UNDP GEF’s roles is to ensure that the information gathered and experience gained can be shared across national and commercial boundaries. In that context, this project is important internationally for the experience to be gained and shared.

Additional benefits The project will demonstrate significant additional local benefits in terms of reduced emission of pollutants dangerous to human health and habitat. In particular, the demonstration project will reduce the emission of NOx, CO, and THC by 3.4, 2.3, and 0.7 tonnes, respectively, as detailed in the incremental cost matrix. In addition, there will be reductions in SOx and particulate emissions, for which data do not presently exist. If the same factors are used to scale-up these avoided emissions to anticipated 2030 levels 200,000 buses by 2030), annual reductions of NOx, CO, and THC might be expected to decrease by as much as 184,000 tonnes; 127,800 tonnes; and 41,700 tonnes, respectively. There are also significant benefits to the global community, the automotive industry, and the technology providers. Carbon emissions that will be avoided by operating FCBs in lieu of diesel buses in the project are an estimated 44.6 metric tons (22.3 metric tons avoided in Beijing and the same in Shanghai). 5 However, it is not meaningful to calculate a cost of saved carbon for this project alone, given that the objective of the project is to help achieve cost reductions in the technology that will ultimately enable it to be widely introduced on commercial (unsubsidized) terms. A more meaningful measure of the cost of saved carbon is based on the carbon savings that can be expected in the long term in China (once the FCBs are being used routinely on a commercial basis) and on the total incremental costs required to reach commercial cost-competitiveness. It is difficult to make such a calculation for China alone since cost-reduction developments achieved through projects throughout the world will help reduce FCB costs in China. However, Hosier and Larson have estimated the total incremental cost for the FCB technology to reach commercially-competitive costs, along with the amount of carbon that would be saved globally during one year of operation if all diesel buses in developing countries were to be converted eventually to FCBs using hydrogen made from natural gas. With these assumptions they have calculated a cost of saved carbon of about $14/tC. This suggests that the effort to buy down the cost of FCBs to cost-competitive levels will be very cost effective from a carbon mitigation standpoint.

Summary of Costs The total costs of the Phase II project are equal to $ 18,625,000 to which the GEF will be requested to contribute $5,767,000 (or approximately 31%). Incremental costs are shared between the GEF, Chinese sources, and the private sector providers of the technology. The costs for baseline, GEF alternative, and increment, including changes made in the cost estimates since the approval of the Phase I project, are provided in the table below. It should be noted that import duties are not included in the total cost of the project. While the relevant import duties for this project will still be waived, they are not included in the calculation of cofinancing for this project. Incremental Cost Matrix 5 The carbon savings is estimated as follows. The carbon (C) emissions from diesel buses traveling 400,000 km (the total bus-km for the project) with an average fuel consumption of 26 liters per 100km would be 0.26 lit/km *

400,000 km * 0.77 kgC/lit * 0.001 t/kg = 80.1 tC. For FCBs using H2 produced from natural gas by steam reforming, the C emissions (assuming energy use per km for a FCB will be half that of the equivalent diesel bus) would be 14 kgC/GJCH4 *1.25 GJCH4/GJH2 * 0.5 GJH2/GJdiesel replaced * 0.26 lit diesel repl/km * 0.039 Giddies/lit * 400,000 km * 0.001 t/kg = 35.5 tC. The net savings of C emissions for the project is 80.1 – 35.5 = 44.6 tC.

16 Baseline GEF Project Increment National  Public transit in Beijing  Commercial development of  Commercial development of impact and Shanghai continues to FCBs accelerated through GEF FCBs accelerated through GEF rely heavily on support. support. petroleum-fueled buses  Chinese assimilation of FCB  Chinese assimilation of FCB (especially diesel fuel). technology accelerated. technology accelerated.

 Diesel fuel consumption  Zero CO, HC, NOX, SO2 and  Diesel fuel use reduced. continues. particulate emissions per  Avoidance of CO, HC, NOx,

 Significant local vehicle-km. SOx, and particulate emissions emissions from 0.4 m  Reduced waste heat emission. from diesel bus traffic. veh-km diesel buses:  Reduction of Local Emissions: CO = 5.8 g/km or CO = 2.32 tonnes

2.32 tonnes NOx = 3.36 t NOx = 8.4 g/km or THC = 0.72 t 3.36 t THC = 1.79 g/km or 0.72 t  Some FCB R&D continues.

Global  Diesel bus emissions: 80.1  Carbon emissions from natural  Carbon emissions reduced by impact tonnes of Carbon or 293.6 gas reforming estimated at 35.5 44.6 tonnes C or 163.5 t CO2 tonnes of CO2 during the t C or 130.1 t CO2 during life of demonstration project’s lifetime (over the  FCB cost reduction and project 0.4 m vehicle km traveled commercialization accelerated.  If all Chinese buses in 2030 in the demo project)  “Sino-ization" of FCB are converted to fuel cells,  By 2030, 200,000 Chinese technology accelerated. 9.1m tonnes of carbon buses (30% of the market) emission per year would be are expected to emit over avoided (33m tonnes CO2); If 2.5 m tones of carbon per 30% of the Chinese buses in year (9.3 m tonnes of 2030 are converted to fuel

CO2). cells, 2.5 m tonnes of carbon emission per year would be

avoided (9.3 m tonnes CO2)  FCB cost reduction and commercialization accelerated.  "Sino-ization" of FCB technology accelerated.

17 Baseline GEF Project Increment Cost Phase I: Phase I: Phase I:  MOST R&D funding for  MOST = $2.684 million  MOST = $0 million FCBs = $2.684 million  Beijing municipal government  Beijing municipal government Phase I TOTAL: $2.684 = $ 1.968 million = $1.968 million million  Shanghai municipal  Shanghai municipal government = $0.2 million* government = $0.2 million  Private sector = $1.227 million  Private sector = $1.227 million  UNDP-China = $0.191 million  UNDP-China = $0.191 million  GEF = $5.815 million  GEF = $5.815 million Phase I TOTAL = $12.085 million Phase I TOTAL = $9.401 million

Phase II: Phase II: Phase II:  MOST = $3.519 million  MOST = $0.803 million  MOST R&D funding for  Beijing municipal government FCBs = $2.716 million  Beijing municipal government = $ 3.536 million** = $3.378 million  Beijing diesel bus  Shanghai municipal  Shanghai municipal operation = $0.79/bus-km, government = $4.246 million or $0.158 million *** government = $4.384 million*  Private sector = $1.223 million  Private sector = $1.223 million  Shanghai diesel bus  UNDP-China = $0.196 million operation = $0.69/bus-km,  UNDP-China = $0.196 million  GEF = $5.767 million or $0.138 million ***  GEF = $5.767 million Phase II TOTAL = $15.613 million Phase II TOTAL = 3.012 Phase II TOTAL = $18.625 million million

Phase I & II TOTALS Phase I & II TOTALS: Phase I & II TOTALS:  MOST = $6.203 million  MOST = $0.803 million  MOST = $5.4 million  Beijing municipal government  Beijing municipal government  Beijing = $0.158 = $ 5.504 million** = $5.346 million million***  Shanghai municipal  Shanghai municipal  Shanghai diesel bus government = $4.584 million* government = $4.446 million operation = $0.138 million***  Private sector = $2.450 million  Private sector = $2.450 million Total = $ 5.696 million  UNDP-China = $0.387 million  UNDP-China = $0.387 million  GEF = $11.582 million  GEF = $11.582 million Phase II TOTAL = $15.613 million Total = $ 30.710 million Total = $25.014 million

* As Shanghai did not purchase their FCBs under the Phase I project, they have allocated their funds to the Phase II project. ** This represents an increase of $1,153,000 over the initial estimate contribution (made during the formulation of the Phase I and Phase II project) due to the increased funds for the refueling station O&M. *** The total operational distance has been revised from when the Phase I project was approved. Therefore, the baseline costs have been updated to reflect that there will be fewer FCBs running fewer revenue-generating km).

18 ANNEX B: PROJECT LOGICAL FRAMEWORK

Table 3 - Logical Framework and Objectively Verifiable Impact Indicators Project Strategy Objectively verifiable indicators

Goal To reduce GHG emissions and air pollution through widespread commercial introduction of FCBs in urban areas of China.

Indicators Baseline Target Sources of Risks and Assumptions verification

 CO2 emissions reduced in 80 tonnes of C 6 to 9 FCBs in Final project Assumptions: Beijing and Shanghai during or 293 tonnes of operation for at least report - The technology is project CO2 during the 200,000 vehicle-km in adequate so that the FCBs  Larger reductions in China project’s both Beijing and Semi-annual and hydrogen and elsewhere once FCB lifetime Shanghai project report infrastructure can be Objective of the project: technology is commercially commercially produced. To demonstrate the deployed By 2030, 2 hydrogen refueling - The procurement operational viability of  FCBs operated so that 200,000 stations purchased and process is adequate so that FCBs and their operational statistics can be Chinese buses place into operation the buses can be refueling infrastructure gathered are expected to commercially produced.; under Chinese  Refueling stations placed into emit over 2.5 m - FCBs and hydrogen conditions operation tones of carbon stations can be procured per year (9.3m from commercial vendors

tonnes of CO2) at satisfactory cost in a timely manner.

.

19 Indicators Baseline Target Sources of Risks and Assumptions verification 1.1 Buses operating according to No such 200,000 vehicle-km in Semi-annual, Assumption: The pre-specified levels (hrs or vehicles in Beijing; annual and final procurement process is km per year) operation 200,000 vehicle-km in project reports adequate so that the buses 1.2 Breakdowns are limited in Shanghai and newsletters can therefore be frequency to acceptable No operational commercially produced. levels data available >40,000km between Vehicle log 1.3 Refueling station operates to breakdowns books and Risk that an insufficient supply H2 No such stations records number of FCB bids is in operation Installation of the received for Shanghai; risk that it is not possible Outcome A: Six to nine hydrogen fuel supply to agree on contract terms FCBs and two hydrogen stations with the winning bidder refueling stations operational in Beijing H2 available for FCB Risk that the FCBs cannot and Shanghai refueling (>4000 standard m3 per day in be procured from Beijing) commercial vendors at satisfactory cost and in a timely manner

Risk that the FCB and hydrogen suppliers cannot meet the supply requirements/ Risk of vendor failure.

20 Indicators Baseline Target Sources of Risks and Assumptions verification 2.1 Development of quarterly No Reporting forms Semi-annual, Risk that the FCBs cannot reporting forms. communications annual and final be procured from 2.2 Persons consulted in documented min 12 experts project reports commercial vendors at formulating reporting consulted satisfactory cost and in a guidelines Lack of timely manner Outcome B: Knowledge 2.3 Quarterly reports collected information on 24 quarterly reports accumulated, available 2.4 Semi-annual publication of best practices collected for both cities Risk that the FCB and and accessible for documents demonstrating and lessons hydrogen suppliers cannot advancing accumulated experience and learned Bi-monthly newsletters, meet the supply commercialization of knowledge semi-annual report, requirements/ Risk of FCB technology and 2.5 Development of a framework annual review report, vendor failure hydrogen refueling of indicators and and public awareness system recommendations to industry materials half year, and and governments for study tour reports after advancing the tours commercialization of hydrogen FCBs. 3.1 Trained operators and No trained Beijing: H2 stations – Semi-annual, mechanics personnel 10 people; FCBs more annual and final 3.2 Exam protocols (could we than 10 operators and project reports change to examination and No examination mechanics trained certification program) and certification Shanghai: H2 stations – programs 7 people; FCBs more designed and than 15 operators and available mechanics trained

protocols developed

21 Indicators Baseline Target Sources of Risks and Assumptions verification 4.1 Study tours complete 1 to 2 vendor study Semi-annual, 4.2 Policy/planning studies tours in early 2006 annual and final project reports Beijing and Shanghai FCB demonstration Outcome C: Awareness exchange visits: promoted among annually stakeholders and creation of an enabling Experience exchange environment for FCB tours with GEF or non- expansion and the GEF project: once Phase III (expanded every two years demonstration) Project in China 2-3 policy study tours

More than two policy studies produced between 2006 and 2008 5.1 Workshops held No workshops At least one workshop Semi-annual, 5.2 Fuel Cell Bus (Vehicle) on FCB held every two years annual and final Certification developed expansion project reports Fuel Cell Bus(Vehicle) No FCB Certification technical Feedback from certification document developed the workshop approaches participants on the relevance and quality of the workshop

22 Indicators Baseline Target Sources of Risks and Assumptions verification 6.1 Local, national and More than two local, Workshop international workshops/ No professional national and proceedings seminars held presentations/ international 6.2 Professional presentations/ publications workshops/ seminars Feedback from publications produced produced held and attended; the workshop 6.3 Reports in media whole team workshops participants on 6.4 Ridership surveys No information held every year; the relevance on FCBs international workshops and quality of disseminated in held every two years the workshop media >10 professional Publications/pres No surveys of presentations/ entations ridership re. publications produced FCBs Media releases >10 reports in media Survey reports Ridership survey conducted every year Annual reports (600 to 1000 riders contacted during the FCBs’ first year demo; more than 1000 to 2000 riders contacted every two years of demo)

23 Indicators Baseline Target Sources of Risks and Assumptions verification 7.1 Workshops held No workshops 2-3 workshops held Workshop 7.2 Feasibility studies prepared held 3-5 feasibility studies proceedings 7.3 Documentation of Chinese prepared FCB design No feasibility Documentation of Feedback from 7.4 Reports on large-scale fuel studies prepared Chinese FCB design the workshop supply options Reports on large-scale participants on 7.5 Lifecycle analysis (well-to- No documented fuel supply options. the relevance wheel) Chinese FCB Well-to-wheel lifecycle and quality of 7.6 Phase III strategy. design analysis conducted in the workshop 2007 No reports on Publications/pres large-scale fuel Phase III strategy entations supply options documents written. and lifecycle Annual reports analysis Phase III No Phase III strategy strategy document documented

Outputs Activities Responsibilities Output 1 A commercially-relevant demonstration of the 1.1. Communicate with vendors PMO,SH PMO, BJ PMO technical feasibility of FCBs and refueling systems 1.2. Specify technical performance targets PMO,CICETE,SH PMO, BJ PMO in Beijing and Shanghai 1.3. Issue call for tenders CICETE 1.4. Buy, install, and operate refueling systems SH PMO 1.5. Buy and operate of buses CICETE, SH PMO Output 2 Performance results concerning reliability and 2.1.Formulate reporting guidelines BJ PMO,SH PMO failure modes, opportunities for improving the 2.2. Collect and evaluate data BJ PMO, SH PMO design and reducing the cost of FCBs in China, 2.3. Survey ridership or focus groups BJ PMO, SH PMO and Chinese public ridership responses to FCBs 2.4.Prepare semi-annual reports) BJ PMO, SH PMO, PMO 2.5. Exchange information with other FCB BJ PMO, SH PMO,PMO projects around the world

24 Outputs Activities Responsibilities Output 3 A core of bus company employees trained in the 3.1. On-the job training of operators and BJ PMO, SH PMO operation, maintenance and management of the mechanics. FCBs and hydrogen refueling stations 3.2. Examination & certification program BJ PMO, SH PMO

Output 4 Policy and regulation preparations for FCB 4.1Prepare policy/planning studies evaluating PMO, BJ PMO, SH PMO commercialization in China options for improving public bus transport systems in Beijing and Shanghai. Output 5 Enhanced scientific, technical, and industrial 5.1. Hold national workshops PMO, BJ PMO, SH PMO capacity in China relating FCB commercialization 5.2.Formulate Fuel Cell Bus(Vehicle) PMO, BJ PMO, SH PMO Certification document Output 6 Increased awareness among policy makers, 6.1. Conduct national seminars PMO, BJ PMO, SH PMO investors, the general public and the news media at 6.2. Attend national and international meetings to PMO, BJ PMO, SH PMO the national and municipal levels for development present project findings of sustainable public transport modalities, 6.3. Carry out public relations campaign. PMO, BJ PMO, SH PMO including FCBs

Output 7 7.1. Organize information exchange workshops Strategies for pursuing Phase III of the overall 7.2. Carry out feasibility studies for candidate program cities to support Phase III project. 7.3. Develop conceptual design for a Chinese FCB PMO, BJ PMO, SH PMO 7.4. Carry out assessments of options for large- scale FCB fuel supply and standards and codes.) 7.5. Develop document defining detailed strategy for Phase III.

PMO – Project Management Office (entire project) SH PMO – Shanghai Project Management Office BJ PMO- Beijing Project Management Office CICETE – China International Center for Economic and Technical Exchanges

25 ANNEX C: RESPONSE TO PROJECT REVIEWS a) Convention Secretariat comments and IA/ExA response b) STAP expert review and IA/ExA response c) GEF Secretariat and other Agencies’ comments and IA/ExA response

26 STAP Review

Demonstration of Fuel-Cell Bus Commercialization in China

Dr Ausilio Bauen Research Fellow, Imperial College London, Centre for Energy Policy and Technology Director, E4tech Ltd

The responses to the STAP review are listed and underlined under each relevant comment below

Summary

This is generally a technically sound project with good potential for contributing to the advancement of the commercialisation of hydrogen fuel cell buses (FCBs). FCBs offer considerable potential for GHG and other emission reductions in the public transport sector, depending on the source of the hydrogen. Therefore, the project fits with the GEF OP11 “Promoting environmentally sustainable transport”, one of its priorities being hydrogen powered fuel cells for public or freight vehicles. The innovativeness of the project lies mainly in its integrated approach to demonstrating FCBs and related capacity-building in the context of a rapidly developing country such as China. Furthermore, China has a sound scientific and technical base which could contribute to advancing the commercialisation of FCBs. Although progress in phase 1 has not been as expected and a number of risks and issues related to phase 2 need to be clarified and considered more carefully, it is believed that the project could achieve its objective of demonstrating FCBs and related capacity-building in China. The project has a high degree of stakeholder involvement, and appropriate management of stakeholder interactions will be key to its success. There are strong links evident with other FCB demonstration projects, and greater consideration should be given to how this project can influence and be influenced by other projects. A measure of the success of the project will be its contribution to the development of scientific, technical, commercial and institutional capacity in China in relation to hydrogen FCBs, and its potential to ensure a transition to a wider demonstration of hydrogen FCBs with greater government and private sector support. A number of issues that require clarification and more detailed consideration, and that are believed to be important for the success of the project, are discussed in the following detailed review.

Detailed comments on the proposal

General

Hydrogen fuel cell buses could lead to very large reductions in CO2 emissions compared to fossil- fuelled buses if the hydrogen is produced from low or zero carbon sources or from fossil sources with carbon sequestration. In this respect, the project fits with the GEF’s OP 11. However, replacing all buses in China with hydrogen fuel cell buses by 2030 as assumed in the proposal may be optimistic. This is also not likely to be in line with the content of the Chinese hydrogen road map. The proposal should be more coherent in this regard.

Response 1: The current version of China ’s hydrogen road map estimates that commercialization of hydrogen fuelled vehicles will start with a high volume production by 2020 with penetration market during 2020-2050. FCB are anticipated to be one of the early commercialization vehicles. China has recently decided to increase its emphasis on public transportation, especially buses, so the total population of buses in China may exceed 720,000. Also, fuel cell buses will be the first and best application of hydrogen technology, due to their central re fuel ing, and their favorable economic comparisons. The Project expects that the penetration of hydrogen fuel cell buses for new applications will be very high, but it is more conservative to assume an overall share of the market will be at least

27 3 0%, or approximately 200 ,000 buses. We have changed our carbon assumptions accordingly (see revised Incremental Cost Matrix and Logframe sections on pages 50, 52, 54). The roadmap study on FCB s in Phase II will provide a better estimate of future volumes.

Citaro buses are already being demonstrated at different sites in Europe. The proposal needs to emphasize the added value of demonstrating Citaro buses in China, and how phase 1 and phase 2 of the project contribute to the commercialisation of FCBs in an integrated manner. Also, a brief discussion of how the project in question will influence and be influenced by other GEF FCB projects would help the storyline.

Response 2: The China FCB program pursued a relatively low risk approach in that the Citaro technology was proven, and the supplier (Daimler/Chrysler) was very capable in FCBs . The added value of demonstrating Citaro buses in China is as follows :  technical information gained from operating the buses under Chinese conditions as compared to the other demonstrations (benefit to Chinese stakeholders and also FCB suppliers);  experience gained by the Chinese project participants and other stakeholders regarding the operation of FCBs and the hydrogen supply;  increased technical and managerial capacity of the Chinese to procure, test, operate, and monitor FCBs;  related increase in technical capacity of research institutions participating in the project;  development of standards, protocols, appropriate policies, etc. conducive to increasing the introduction of fuel cells for transport in China;  awareness raised among Chinese stakeholders and even general public regarding possibilities of hydrogen economy to contribute to a sustainable transportation system. The above has been included in paragraph 2 of the ProDoc.

The China FCB project will also play an important role in the commercialization of FCBs in developing countries. Under the UNDP/GEF FCB Programme, both China and Brazil projects have reached advanced stages of project implementation. These two projects are significant because they are the only FCB demonstrations in developing countries. China and Brazil will pursue information exchange during the course of the Phase II project with the continued support of UNDP/GEF (see activity 2.5). UNDP-GEF provides assistance with knowledge management activities that bring together the projects of China and Brazil in various information exchange forums including workshops and virtual discussion groups (see para 94).

The proposal says that FCBs are likely to displace trolley buses. This may not lead to any benefit in terms of air quality. Also, the GHG benefit may be limited depending on the source of electricity used to power the trolley buses. Measures may need to be considered by which FCBs can be made to replace diesel buses.

Response 3: We are in agreement with the reviewer ’ s comment as t rolley s are considered zero emission vehicle s . F or urban environment, in terms of local air quality, trolleys and FCBs are essentially equivalent. In terms of GHG emissions over the short term, there would be a small benefit of FCBs as the project targets hydrogen from natural gas and trolleys in Beijing would use electricity com ing from coal. During Phase II, however, Shanghai will obtain hydrogen from a plentiful by- product from a steel plant , and other sources . However, over the longer term, hydrogen produced from renewable resources will offer GHG emissions reductions beyond trolleys. The project will review these emissions and estimate the mid-term and long-term contribution of FCBs to replace the buses that cause greatest environment pollution.

The cost of FCBs to transit authorities will be a main consideration in its commercialization. In the shorter term, FCBs will become competitive with trolley buses based on both the cost of the buses and their associated infrastructure, and sustainability. Therefore, the initial commercial acceptance of fuel cell buses is anticipated to be with transit authorities that are considering trolley installations. Over the

28 longer term, commercialization of fuel cell buses is expected to reduce costs and increase value thereby allowing for displacement of diesel buses. This strategy takes into account both the time required for fuel cell technology to realistically mature before it will be cost competitive, with the ultimate goal of displacing diesel buses. The China roadmap to do so is being informed by the experience gained from the GEF demonstration programs and from early commercialization. (see update in Para 64).

An indication of the degree of confidence should be provided on the timely delivery of the Beijing buses in September 2005. Similarly for the hydrogen refuelling station, expected to be completed in July 2005 according to the Evaluation Report. The project is already considerably behind schedule. The risks and implications (e.g. on funding flows) of further delays should be considered more carefully, and relevant actions suggested.

Response 4: C orresponding to the original project document, the delivery of Beijing FCBs was delayed. H owever, t he FCB production timing was discussed during the contract negotiation in May 2004. DC requested 14 months to produce 3 FCBs , which was longer than expected when the project was designed. The Beijing FCBs were completed in July 2005 and will be delivered to Beijing in mid Sep tember 2005. Thus , the Beijing buses will be delivered on time according the contract and the revised delivery schedule.

The construction of Beijing hydrogen refueling station will be completed before March 2006. Since the three DC buses will arrive in mid September 2005 in China, a portable refueling station will be made available for the buses in October for temporary use until the completion of the permanent station.

The delay with the Phase I refueling station was primarily one of obtaining the land and necessary approvals. This delay in securing permitting and approvals has been a common experience for all installations worldwide, at least partially explained by the immaturity of appropriate standards and regulations, and was not unique to the Chinese project.

Nevertheless, the lessons have been learned and the P hase II Project will take necessary steps to avoid the delays. Based on the length of time required for bus production and design from Phase I, w e have estimate d the bus production schedule and design ed a realistic timeframe for Shanghai bus delivery in phase II (see Table 10, FCB & H2 Station delivery and operation). The delivery schedule will not be a significant risk in Phase II, as the permitting for Shanghai is already being pursued and the ground work on standards and regulations from Phase I will apply to Phase II. In addition, t o ensure that delays in the hydrogen refueling component of the project do not delay the FCB operations, a temporary refueling s ystem will be used to allow initial operation for a few months . If similar delays are experience in the hydrogen refueling station of Shanghai, a temporary refueling system can also be used. (new para 87)

More information on the hydrogen source for Beijing should be provided e.g. source of electricity used for water electrolysis. The project mentions that at a later date natural gas reforming will be established on site. Justification needs to be given as to why this route has been chosen, in particular with respect to other possible hydrogen production routes. Also, an indication of when and how this is planned to happen should be provided. The proposal also says that “Finally, more hydrogen will be supplied from on-site renewable energy (solar, wind)”. Again, it is not clear where, why, when and how this would happen. The choice of hydrogen sources should be linked to the study that will be carried out on the assessment of hydrogen production routes.

Response 5: The initial source of hydrogen will be electrolysis, as the production of hydrogen from natural gas is under development through 2007. By 2008, work by the Chinese government with the US Department of Energy in Beijing will allow for the use of renewable sources of electricity, such as photovoltaic and wind for hydrogen . In P hase II Project, Shanghai will obtain hydrogen from a plentiful by-product from a steel plant. The Project Team anticipates that after 2020 the FCBs are in

29 commercial use, a substantial portion of electricity mix in China will be from renewable energies. The study that will be carried out on the assessment of hydrogen production routes for China will examine other options and their feasibility over the longer term. (see para 3)

The proposal says that the buses purchased for Shanghai will be based on ‘new generation FCB technologies’. This is in principle an interesting point. However, the proposal needs to consider in more detail: what it means by ‘new generation FCB technologies’ (e.g. how will this affect tender specifications?)? does this pose any technical and economic risks? what is the likelihood that suppliers will be able to supply ‘new generation FCB technologies’ in the timeframe imposed by the project tender process?

Response 6: The underlying strategy of the P hase II P ro ject is to build on the experience gained from P hase I, and to use this experience to advance the technology in P hase II. The program is aware of the risks in seeking new technology in P hase II , however the gains in terms of advancing the state of the technology are considered worthwhile . This includes the development of hybrid technologies to improve fuel economy and to reduce costs, as well as potentially developing lower cost sourcing of key part s of FCBs from China and elsewhere.

“ New generation ” FCB refers to FCB s with a hybrid propulsion configuration, with power com ing from two sources – the FC engine and battery pack s . T he max imum power of the FC engine must satisfy the max imum power demand s of the FCB in its specific driving case, such as accelerating during high speed to overtake another vehicle, climbing with high speed, running with max imum speed , etc. To meet these demands, a “ pure ” FCB (FC engine is only power source) requires a large power FC engine. In contrast, a hybrid FCB can satisfy the maximum power demands with a comparative ly small er FC engine plus battery pack. The battery pack w ould be recharged during braking, running on a decline road and idl ing , because the wheel will driv e the electric motor that becomes a n electricity generator for charging batter ies . T est reports show that the energy efficiency of the hybrid FCB developed by Toyota is 66% higher than the same-size diesel bus (now eight hybrid FCBs are demonstrating in AICHI World Expo in Japan). Another hybrid FCB developed by Thunder Power, using a small UTC FC engine (60kw), achieves 7-11 MPG (equivalent hydrogen consumption) in L o s Angeles , which is double the gas mileage of a conventional diesel bus. In addition, the FC engine is the most expensive component for a FCB thus a small FC engine and lower hydrogen consumption will significantly reduce the FCB manufacturing cost and operational cost.

T he description of purchasing hybrid FCB for Shanghai project will be brought forward in p hase II specification by project team. The program will be looking carefully at the proposals from various FCB suppliers. Partnerships with established global suppliers, and verifiable performance experience, testable prototypes and other mechanisms will be used to minimize the risk profile. The use of the RFP format for bidding allows for extensive interaction and negotiation with suppliers during the bidding process that will enable the Project Team to make a proper evaluation of the risks associated with the proposals. (see para 77)

More details should be provided on the past and future role of the project in developing and fostering international relationships. For example, what role has the project played or will it play in the memorandum of technology cooperation between China and Canada?

Response 7: The Project Team is very interested in fostering international cooperation. China is a lready a member of the International Partnership for Hydrogen Economy (IPHE). The Team has undertaken many visits to other countries to understand their experience and capability in this area, and has hosted reciprocal visits from many countries. In addition, the Team is a participant in the data - sharing project of the International Fuel Cell Bus Working Team (which includes the CUTE project , USA California Fuel Cell Partnership ), and will get support from the data-sharing project throughout Phase II Project. (see new para 41)

30 Review of Phase 1

Based on the experience of phase 1, the procurement process needs to be carefully managed. More details on how this will be done may need to be provided in the proposal. This may also have an effect on the management arrangements. The figure of “International Procurement Specialist” is mentioned but no details are provided.

It is not clear what is meant by the design feature in relation to the procurement of ‘new generation’ FCBs which states that “A flexible procurement process in Phase II will allow for procurement of the latest in FCB technology.” (p. 36 in the proposal) Please clarify.

Response 8: ITB (Invitation to Bid) and RFP (Request for P roposal) are UN D P procurement methods. During P hase I, the bidding process was based on the ITB. ITB is mostly applied for the mature commodities , like computers. The winners must bid at the lowest price. This procedure is designed to produce the lowest price bids for typical commodities, and does not allow for adequate flexibility. Based on th e experience and the advice of the International Procurement Specialist of the project , Phase II Project has plann ed to use the RFP in procurement. This allows for considerable flexibility in dealing with proposals to allow the project to select the best approach to meet the p roject requirements. RFP is better suited to a developing technology with incomplete specifications and it is anticipated that this will allow for a more efficient and effective procurement process. In the FCB procurement process, the PMO will release the preliminary specification to the potential suppliers and will communicat e and discuss these specifications with them. Then , the suppliers will submit their proposals at the deadline. The price, the suppliers’ capabilities (such as R&D, management, finance etc.) , and their experience will also be evaluated.

It is not clear in the Evaluation Report why a new generation of FCBs may not be provided by DaimlerChrysler (p.13).

Response 9: The P hase II Project will consider any proposal that meets the project timing. Daimler Chrysler is now developing a new generation of fuel cell buses with hybrid configuration .

The Evaluation Report states that “For the remaining activities of Phase I, different skill sets will be required to ensure timely delivery of the operational FCBs and the hydrogen refueling station. Current project personnel from government and academic backgrounds are somewhat untested in project implementation situations where timeliness of delivery is crucial to project success.” This issue should be addressed in more detail in the proposal, possibly under management arrangements.

Response 10: The Project Team has take n steps to strengthen the coordination among the involved parties . They have assigned several project management specialists to the team. They have also organized coordination meetings with Daimler Chrysler and BP on a regular basis to ensure smooth communication and problem solving among the three groups. (see para 113)

The Evaluation Report states that “There are continual efforts required, however, to maintain and improve the working relationships and trust between consortia members to meet critical delivery timelines.” This point should be addressed in more detail in the proposal, possibly under management arrangements.

(See above statement)

In addition, after the FCB contract was signed in May 2004, the coordination committee was set up consisting of UNDP, national PMO, Beijing PMO, DC, BP, CTA and CICETE etc. After the contract signed, six coordination meetings were held from May 2004 to August 2005 (more information can be found in response 11). At the coordination meetings, all information and problems faced were shared and raised among the participants, including the FCB delivery schedule , h ydrogen station building

31 progress, and spare parts and FCB garage issues. R egular communication had a significant influence on project implementation , f or example , local government approval procedure was greatly shortened. Other issues have also been discussed and re solved by the participants in the coordination meetings.

The recommendations provided under the “Recommendations” section of the Evaluation Report should be dealt with more specifically in the proposal (i.e. if and why they are adopted or not).

Response 11: Corresponding to evaluation report suggestions, some measures have been taken as the following:

Suggestions Measure  Construction of maintenance workshop and FCB garage is expected to complete at the end of August 2005.  Management mode, organization and operational guideline of FCB demonstration were completed in August 2005.  3 FCBs will be delivered at Beijing on 11th September 2005. Time for completion  Temporary hydrogen refuelling system will be available at the end of some of the of October 2005. activities outstanding  Basic training will be conducted by 1st September and professional from phase 1. training by October 2005.  Certification of FCBs by 15th October 2005.  Data collection system (hardware & software) will be completed at the end of August 2005.  The construction of the hydrogen refuelling station in Beijing will be completed before March 2006.  A coordination committee was set up for the implementation of Beijing FCB project, members including national PMO, Beijing PMO, UNDP, CICETE, BP, DC and CTA. Two working groups under the committee are FCB demonstration group and hydrogen Maintain and improve refuelling station group. the working  Six coordination meetings have been held from May 2004 to relationships August 2005.  Meetings for the hydrogen group were held every 1-2 month, and one telephone meeting every 1-2 weeks.  Email communication frequently. Funding  Co-financing budget increased

(see para 54)

A clearer indication should be provided on the timing for completion of some of the activities outstanding from phase 1.

The three FCBs will be delivered to Beijing in September 2005 a nd its certification will be finished in October 2005. A t emporary hydrogen refuelling s ystem will be available in October 2005. T he construction of the permanent hydrogen refuelling station in Beijing will be completed before March 2006.

It would be useful to provide a list of reports from phase 1, possibly in “Phase 5: List of documents available on request”.

Response 1 2 : The reports of P hase I Project are as follow:  T wo semi-annual reports in November 2003 and July 2005  T wo Project Implementation Reports (PIR) in June 2004 and June 2005

32  Reports of the two study tours investigation: one to Canada and Japan in September 2003 and one to German and America in November 2003.  R eports o f three policy study tours to German in September 2003, European countries in September 2004, and USA and Brazil in March 2005.  E valuation report in November 2004.  T wo Tri-partite Project Review (TPR) reports in June 2004 and August 2005 respectively.  E leven newsletters in English and Chinese. (see Section IV, Part 5)

Risks and assumptions

The proposal says that the “project had faced technical regulations, standards and national policies constraints, which caused some difficulties with project implementation and coordination.” (Executive summary p. 3) Are these issues thought to be fully resolved or do they pose a risk for phase 2?

Response 1 3 : These issues have not been fully resolved on a global basis , and it is expected that the Phase I I project will continue to work on the regulatory, standard s, policies, etc. (page 3 of Exec Sum updated).

A fter the FCB contract was signed in May 2004, the coordination committee was set up consisting of UNDP, the national PMO, Beijing PMO, DC, BP, CTA and CICETE etc. After the contract signed, six coordination meetings were held from May 2004 to August 2005 (more information can be found in response 11). At the coordination meetings, all information and problems faced were shared and raised among the participants, including the FCB delivery schedule , h ydrogen station building progress, and spare parts and FCB garage issues. R egular communication had a significant influence on project implementation , f or example , local government approval procedure was greatly shortened. Other issues have also been discussed and re solved by the participants in the coordination meetings.

In addition, since early 2005, other efforts have been made to facilitate and r e i nforce effective communication among the various stakeholders including the hydrogen suppliers. BP and Tsinghua Tongfang appointed project managers and coordinators from each side to take the lead responsibility for the work. A Chinese staff member was assigned by BP to take charge of the liaison activities. The financ ial plan, equipment procurement plan and detail ed construction schedule of the hydrogen station construction were prepared and are being reviewed periodically by Sinohytec, Tsinghua Tongfang , BP and other agencies .

Given difficulties experienced in phase 1, the proposal should provide greater comfort on risks related to the FCB procurement process, in particular: number of bidders, high bid prices, delivery times and agreement on contract terms.

During Phase I, the bidding process was based on the ITB (Invitation to Bid). This procedure is designed to produce the lowest price bids for typical commodities, and does not allow for adequate flexibility. Based on th e experience, the Phase II Project has plann ed to use the RFP (Request for P roposal) in procurement. This allows for considerable flexibility in dealing with proposals to allow the project to select the best approach to meet the p roject requirements. RFP is better suited to a developing technology with incomplete specifications and it is anticipated that this will allow for a more efficient and effective procurement process.

The proposal says that one way of mitigating risks related to high FCB prices in the bids is through increasing the private sector inputs. There is no evidence of this, in particular in the financing of phase 2 of the proposal.

33 Response 1 4 : Due to the significant potential of the hydrogen economy and the large market potential for FCB s in China, many multinational companies have already expressed interest in establishing a cooperative relationship with China. T his project is considered by many as a channel for international energy and auto companies who wish to enter or expand their presence in the Chinese market.

The major contribution of the private sector is the substantial investment they made to lower the cost of the technology and their continued commitment to improve fuel cell bus performance. It is not likely th e suppliers agree at this time to increase the subsidies (selling below the actual cost), but we do anticipate that we wi ll achieve lower prices in P hase II Project than in Phase I. (for the more information, please go to Response 30.)

Evidence should be given to support claims that “FCB technology has developed considerably in the last two to three years”.

Response 1 5 : Some examples include Ballard’s success to reduce costs through reducing platinum loading (estimating $70/kw), allowing multiple starts from -20 degrees Celsius, and increasing its durability to 3200 hours from 2000 hours. (see page 6 of Exec Sum)

Careful consideration will need to be given in the appraisal of the bids to evidence and measures that provide confidence on durability and reliability of the FCBs. Also, specialist advice will need to be used to assess the validity of the claims in relation to cost, durability and reliability contained in the bids.

Response 1 6 : The Project team will use the advice of specialists, both National and International, in evaluating the claims of the prospective bidders. In addition the RFP process allows the team to request data to support claims, including providing special testing if necessary (see Response 8). (activity 1.3 updated).

The risks associated with fear of violation of international property rights should not be underestimated. Measures that provide confidence to foreign technology suppliers should receive more careful consideration in the proposal, in the interest of an effective bidding process.

Response 1 7 : China has signed the WTO and the Project Team was able to satisfy both DaimlerChrysler and BP on the property rights under P hase I Project. The Project Team set up a number of procedures to protect suppliers , including using their employees for on-site service, etc. (see para 85)

More details and references should be provided in relation to statements on cost reductions and market penetration of FCBs: Provide reference to support claim that “According to industry projections, after a total of 5,000 FCBs have been produced, the costs should fall to where FCBs will be roughly competitive on a lifecycle basis with modern, clean diesel buses.”

Response 1 8 : The reference for the 5,000 FCBs is R. Hosier and E.D. Larson, “GEF Participation in Fuel Cell Bus Commercialization,” working document, UNDP/GEF, New York, Feb. 2000. (see footnote to para 127).

Outcomes, Outputs and Activities

Activities under Output 1 state that: “The project will communicate with, and undertake site visits to, potential fuel cell engine suppliers and selected bus manufacturers. The goal is to understand the present status of specific companies’ technologies, their capabilities for supplying FCBs to the project, and their level of interest in responding to a bid; and, to maximize the likelihood of receiving

34 multiple bids.” Given experience with costs and delays in phase 1 these activities should be initiated as soon as possible, possibly before the expected start of phase 2, and carefully managed.

This project has the opportunity of contributing scientific and technical knowledge in relation to FCB and related infrastructure. Part of the goal of the project should be the development of indicators, possibly in collaboration with other projects that assists in understanding progress being made by successive projects in the development and commercialisation of hydrogen FCBs. The project should also establish a framework for developing recommendations that can be adopted by industry and governments in advancing the commercialisation of hydrogen fuel cell buses. The development of a more detailed framework of indicators and recommendations could be included as part of the activities under Output 2. (also applies to ‘project logical framework’)

Response 19: The Project is sharing data in P hase I and is prepared to continue to share data i n P hase II with the International Fuel Cell Bus Partnership. This data will become part of a large database to be used to evaluate progress and validate potential readiness for FCB commercialisation. In addition, P hase II Project will include development of a roadmap for FCB commercialisation . (see activity 2.5).

The project will develop a detailed framework of indicators and related recommendations that can be adopted by industry and governments for advancing the commercialization of hydrogen FCBs. This framework development has been included as part of the activities under Output 2 (activity 2.5). The logical framework has been updated accordingly: indicator “Development of a framework of indicators and recommendations to industry and governments for advancing the commercialization of hydrogen FCBs”.

Under Output 2, the objectives of the surveys should be stated more clearly. These should take into consideration other studies carried out elsewhere e.g. Accept H2 study funded by the European Commission.

Response 20: The objectives of the surveys are to understand the public awareness and acceptance of the fuel cell buses, and provide possible improvements from the aspect of passengers to the FCB demonstration. (see activity 2.3)

Training programmes mentioned in Output 3. A clearer indication on when these are expected to begin and a summary of the activities carried out so far would be useful, given that FCBs are expected to be delivered in September and the H2 refueling station was expected in July.

Response 21: Training consists of basic training scheduled in September 2005 , professional training in October 2005 and on- the- job training when the buses are in operation. (see activity 3.1)

Two of the targets for Outcome C are:  2-3 policy study tours  More than two policy studies produced between 2006 and 2008 It would be useful to provide an indication of the possible objectives of the study tours and policy studies. The policy studies should also be subject to national and international peer review as a form of verification. (also applies to ‘project logical framework’)

Response 22: The objectives of the study tours and policy studies are as follows:  To understand the latest policy and planning on public transport development and FCB production and demonstration around the world  To learn how the buses are in operation so as to improve the FCB demonstration in China  To help develop a fuel cell bus development road map for China .  To evaluate options for improving and optimizing FCB demonstration/public transportation

35 and infrastructure management, planning, and operations in Beijing and in Shanghai .  To study the construction and operation of hydrogen refueling stations and how to produce hydrogen. (see Activity 4.1)

The policy studies (under Output 4) will need to address ways in which FCBs can be developed and deployed further to provide continuity to the UNDP project. This needs to be closely linked to the activities under Output 7.

Response 23: The policy studies will be used as inputs for the Commercialization Roadmap, and will also provide suggestions for improving any later demonstrations. (see Activity 4.2)

More concrete forms of verification should be suggested for Outputs 4 and 5. Relevance and quality of publications could be verified based on national and international peer review. For the workshops a suggestion could be to get feedback on the relevance and quality of the workshop from participants based on review forms. (also applies to ‘project logical framework’)

Response 24: These suggestions for improving the quality of the project’s outputs are valuable.

To help ensure that publication quality is as high as possible, national and potentially international peer review will be pursued for the project’s major publications. To ensure that workshops are relevant and have high quality, feedback will be solicited from the workshop participants through surveys administered post-workshop. The survey results will be reviewed and recommendations will be made on continually improving the relevance and quality of future workshops (see activity 5. 1 and Logframe).

Output 7. As part of the preparation for phase III a conceptual design of an FCB suitable for commercial manufacturing in China is envisaged. More details on the relevance and importance of this activity, how this activity will be carried out and the role of international collaboration would be useful.

Response 25: The conceptual design will be developed by an expert team consisting of members from universities, private industry, research institutes, etc. The conceptual design will review and assess the progress of the FCB development in other countries and the demonstration results of the UNDP/GEF FCB projects in Beijing and Shanghai . The conceptual design of the FCBs will also take into consideration the requirements of t he public transportation system , climate and road condition s in the Chinese cities. (see activity 7.3)

Potential issues related to the use of project results for the development of a Chinese FCB require more careful consideration. For example, intellectual property issues with FCB suppliers to the phase II project.

China has signed the WTO and the Project Team was able to satisfy both DaimlerChrysler and BP on the property rights under P hase I Project. The Project Team set up a number of procedures to protect suppliers , including using their employees for service, etc. (see para 85)

Phase III will need to be careful in assessing the availability of FCBs in the coming years. Also, it will need to discuss the continued involvement and effort of key stakeholders e.g. the Chinese government through Five Year Plan. Feasibility studies to expand demonstration should also be subject to national and international peer review.

The proposal (Executive summary p. 8) says that: “Some work already conducted to prepare for the commercial or volume demonstration (Phase III), includes the following:

36  Feasibility study on expanding the demonstration bus fleet and replicating it in other cities;  Conceptual design of FCBs that fits China’s situation;  Life-cycle analysis on the development of FCBs in China; and,  Study on codes, standards and regulations relevant to FCB and hydrogen filling station.” No evidence has been found of this work. What has already been done and what will be done in phase 2?

Response 26: This work has not yet been done, but will be completed as a part of Phase II. (correction on page 8 Exec Sum)

An indication of the technical reports planned for phase 2 could be provided.

Website could be improved – should contain project technical reports and more up to date project progress reports (i.e. semi-annual reports, UNDP-GEF fuel-cell bus programme updates).

Response 27: The above two recommendations will be followed. The technical reports to be included in P hase II will include, at a minimum, bus technical summary, hydrogen station operation summary, and reports of comparing different hydrogen f ue ling methods . (see new para 173 of ProDoc). The website revisions/updates will occur over the coming months.

Project funding

Are the details of the funding contributions provided in the proposal for phase 1 still valid?

Response 28: The funding levels for Phase I (revised) are included in the calculations of the incremental cost, which are provided for Phase I, II and the entire project. The costs for the P hase I Project are as follow s : MOST = $2.684 million Beijing municipal government = $1.968 million Shanghai municipal government = $0.2 million Private sector = $1.223 million UNDP = $0.191 million GEF = $5.815 million

Has a detailed review of the project costs been carried out by GEF? Some cost categories may require clarification. For example: why is there a “Refit vehicles” category under “Buy and operate fuelling systems? Is a description of the costs related to the following categories available: “On-the-job operator and mechanic training”, “Formulate certification document”, and “Conceptual design of Chinese FCB”?

Response 29: Refit vehicle is to provide for the proper fueling interface including both software and hardware. We will check the “on the job” description—it may be inaccurate. We will review and clarify these categories.

Private sector funding remains low. A stronger justification of why this is low and not increasing in phase 2 should be provided.

Response 30. Due to confidentiality issues, the supplier would not disclose the level of subsidy that it provided to the Phase I project, or how the subsidy was shared among the various parties involved in production of the Citaro Buses. The project has estimated that the commercial price for hybrid FCB s could be around $ 3 million per unit. Due to the interests of the FCB suppliers in China’s market the private sector is likely to contribut e more in the P hase II project , however, the expected cost of hybrid FCBs is lower than for pure FCBs. At this time, no FCB supplier s can enter into negotiations on the

37 specifications and cost of the project . T he project team will do its best to mobilize the highest possible input from the private sector .

Some clarifications should be provided on the Chinese government contribution. An explanation should be provided of how the baseline is determined and used. The Executive Summary (p.14) says that the MOST contribution to phase 1 and 2 is $11,582,000. Is this correct? (from the phase 1 proposal it appears to be $6,203,000)

This was indeed an error and has been revised in para 131.

More details should be provided on how specific funding to H2 and FCs has grown in China and how this project has acted as a catalyst for growth in public and private funding.

Response 3 1 : China began its fuel cell R&D in the 1960s. In the Tenth Five-Year Plan, MoST allocated more than ten million funding on fuel cells and H2, ten times compared to the figure ten years ago. In Eleventh Five-Year (2006-2010), Mo ST will plan to provide more funding on FC and H2.

Provide assumptions behind cost of hydrogen fuel in table 4.

Response 3 2 : Fuel costs during Phase I Project will be determined through negotiation between BP and the Beijing Public Transportation Corporation. Long - term costs have been estimated in many studies as between $3 to $4 per kg . (see footnote 3)

Management arrangements

The proposal says that “MOST will appoint a senior official to act as National Project Director (NPD).” Was this not done in phase 1? Providing a project structure with names associated to the key positions would be helpful. Also, it would be useful to provide a brief section on continuity in management structure, and on any significant personnel changes that may occur between phase 1 and phase 2.

Response 3 3 : Continuity of the project staff is assumed, pending the necessity for new skills and functions. (see para 110)

Timetable

Table 10 does not have delivery and operation dates for Shanghai buses and H2 refueling station.

Response 3 4 : T he delivery and operation dates for Shanghai buses and hydrogen refueling station ha ve been added in Table 10 of the project document, which states as “ 1.6 : FCB & H2 station delivery and operation ” .

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