Project Concept Note s2

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 41438–CH

PROJECT APPRAISAL DOCUMENT

PURCHASE OF CERTIFIED CO2 EMISSION REDUCTIONS

BY THE NETHERLANDS CLEAN DEVELOPMENT FACILITY

FOR THE

Huizhou Combined Cycle GAS Turbine Thermal POWER PROJECT

November 19, 2007

Transport, Energy and Mining Sector Unit

Sustainable Development Department

East Asia and Pacific Region

CURRENCY EQUIVALENTS

(Exchange Rate Effective November 2, 2007)

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

China: Huizhou Combined Cycle Gas Turbine Thermal Power Project

Contents

A. STRATEGIC CONTEXT AND RATIONALE 1

1. Country and Sector Issues 1

2. Rationale for Bank Involvement 2

3. Higher Level Objectives to Which the Project Contributes 3

B. PROJECT DESCRIPTION 3

1. Lending Instrument 3

2. Project Development Objective and Key Indicators 3

3. Project Components 4

4. Lessons Learned and Reflected in the Project Design 5

5. Alternatives Considered and Reasons for Rejection 5

C. IMPLEMENTATION 5

1. Institutional and Implementation Arrangements 5

2. Monitoring and Evaluation of Outcomes/Results 7

3. Sustainability 7

4. Critical Risks and Possible Controversial Aspects 8

5. Loan/Credit Conditions and Covenants 8

D. APPRAISAL SUMMARY 9

1. Economic and Financial Analyses 9

2. Technical 10

3. Fiduciary: N/A 10

4. Social 10

5. Environment 10

6. Safeguard Policies Triggered 11

7. Policy Exceptions and Readiness 13

Annex 1: Country and Sector or Program Background 14

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies 20

Annex 3: Detailed Project Description 22

Annex 5: Implementation Arrangements 27

Annex 6: Economic and Financial Analysis 28

Annex 7: Safeguard Policy Issues 35

Annex 8: Project Processing 46

Annex 9: Documents in the Project File 47

Annex 10: Project Design Document 49

Annex 11: Statement of Loans and Credits 108

Annex 12: Country at a Glance 112

Annex 13: Map 114

IBRD 35775

Huizhou Combined Cycle Gas Turbine Thermal POWER PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues

1. Growing Energy Demand. China is the world’s second largest energy user and emitter of greenhouse gases (GHGs). Energy consumption in the country has increased, on average, at a rate of 5.8 percent per annum since 1990 reflecting the rapid growth of its economy. It rose from 990 million tons of coal equivalent (tce) in 1990 to 2,460million tce in 2006.[1] The growth rate is more than three times faster than the world’s average annual growth[2] and shows no sign of slowing down.

2. Predominance of Coal in China’s Energy Mix. China’s rising energy demand has been met largely by domestic coal – which accounted for 69.4 percent of primary energy consumption in 2006. Coal consumption increased from 1.06 billion tons in 1990 to 2.39billion tons in 2006 1 Even with an aggressive fuel diversification policy; coal is expected to remain the dominant energy source for the foreseeable future. All projections show that coal will still account for 60 percent or more of China’s primary energy consumption in 2020.[3] Coal has also been the predominant source of electricity generation in China. In 2006, it accounted for 76.7 percent of the electricity generated in the country, while gas accounted for 3.5 percent only.1

3. Significant Environmental Consequences. The rapid expansion of the power generation system and its primary reliance on coal has contributed to China’s severe air pollution. In particular, the combustion of bituminous coal is causing serious atmospheric pollution from air-borne particulates, emissions of sulfur dioxide (SO2) and carbon dioxide (CO2). Currently, China’s emissions of SO2 and CO2 are respectively the highest and second highest in the world — with economic losses from pollution conservatively estimated at between 3 and 7 percent of GDP. As China is projected to have the largest absolute growth in CO2 emissions between now and the year 2020, its effort to curb emissions of GHGs is paramount to the Climate Change Agenda. Nitrogen oxides (NOx), other harmful pollutants released by coal-fired power plants, contribute to ground level ozone (smog), acid rain, poor surface water quality, and climate change.

4. The Alarming Situation in Guangdong. In 2006, coal accounted for 77percent of electricity generated in Guangdong.[4] Although there is a national policy on emissions of air pollutants for thermal power plants as well as a bilateral agreement between Hong Kong and Guangdong province on the reduction of SO2 and other air pollutant emissions, the additional generation capacity in Guangdong province remains almost exclusively dependent on coal-fired units. Installed capacity of thermal power plants in Guangdong province increased by 10.75 GW from 24.43 GW in 2002 to 40.62GW in 2006, most of which are coal-fired power plants. In addition, Guangdong is one of the most affected provinces from pollution of acid rain. Around 60 percent of the total SO2 emissions in Guangdong province come from coal-fired power plants.

5. Government Strategy. The Chinese authorities are fully aware of the need to address environmental problems, and current policies focus on environmentally sustainable economic development. To this end, efforts are being made to promote efficient use of energy and cleaner energy resources. Energy efficiency is a cornerstone of the country’s energy strategy and policy during the 11th Five Year Plan (2006-10). The government is also taking aggressive actions to diversify energy sources, including an accelerated nuclear power program, an ambitious gas penetration target, and significant hydropower and renewable energy development plans. However, gas penetration has been a lot slower than planned in the mid-1990s and increased from 1.9percent in 1995 to 3.5 percent in 2006. It therefore seems unlikely that China can achieve the targeted 6percent share of gas in commercial primary energy consumption by 2010.

6. The Huizhou Gas-fired Combined Cycle Gas Turbine (CCGT) Power Plant is a pilot project linked to the China’s first Liquefied Natural Gas (LNG) import terminal.[5] It was intended to pilot commercial demonstration of large-scale CCGT plants to support the use of cleaner and high efficiency electricity generation facilities fueled by imported gas.

2. Rationale for Bank Involvement

7. The proposed project directly supports a key pillar of the Bank’s new Country Partnership Strategy (CPS) for China (2006–10), namely managing resource scarcity and environmental challenges (Pillar 3).

8. Bank Role in Expanding Gas Utilization. The proposed project is an extension of the Bank’s support to the government’s strategy to adopt cleaner energy technologies. Since the mid-1990s the Bank has supported the government’s efforts to create a policy environment conducive to the development of the gas sub-sector. These efforts have led to a significant development of the gas sector for power and urban energy. However, the share of gas remains low as coal and other energy forms continued to increase rapidly. The dramatic increase of gas price in recent years has reduced the financial attractiveness of gas projects, especially natural gas-based power generation. The Bank has also worked with the Government to devise policies to put the development of the energy sector on a sustainable track. The further diversification of the electricity generation mix and the utilization of Clean Development Mechanism (CDM) revenues to promote cleaner power generation technologies have been identified as two major strategies to achieve sustainable development of the energy sector. Bank involvement in the proposed project will improve the financial viability of the pilot LNG based CCGT power plant and promote further deployment of gas-based power generation.

9. Bank Role in Promoting Carbon Reduction in China. The Bank, as trustee of various Carbon Funds, is a world leader in mitigating climate change via market-based emission reduction purchase transactions through the CDM. China has a strong interest in benefiting from carbon finance, as it has ratified the Kyoto Protocol under the United Nations Framework Convention on Climate Change (UNFCCC). The objective of the UNFCCC is to stabilize GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Carbon financing, by providing credits that “buy down” the cost of investments in technologies to reduce carbon emissions, is critical for encouraging public/private enterprises to invest in lower carbon and/or more energy efficient technologies. The energy savings benefits alone for such projects generally do not provide financial rates of return expected by most investors.

10. The Bank approved the Project Idea Note (PIN) for the proposed project and signed a Letter of Intent to purchase Certified Emission Reductions (CERs). The carbon finance revenue will be used to overcome the strong financial barrier to the operation of a gas fired power plant in China.

Project Concept Note s2

Project Financing Data T Loan £