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Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 33018-CN PROJECT APPRAISAL DOCULMENT ON A Public Disclosure Authorized PROPOSED LOAN IN THE AMOUNT OF US$86.33 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE FOLLOW UP PROJECT TO THE Public Disclosure Authorized FIRST PHASE OF THE CHINA RENEWABLE ENERGY SCALE-UP PROGRAM January 5,2006 Energy and M[ining Sector Unit Infrastructure Unit East Asia and Pacific Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange rate effective September 1, 2005) Currency unit = Renminbi yuan 1 yuan = US$0.12 1 U.S. dollar = Y 8.09 FISCAL YEAR January 1 - December31 ACRONYMS AND ABBREVIATIONS APL Adaptable Program Loan NDRC National Development and Reform CAS Country Assistance Strategy Commission CER Carbon Emission Reductions NUPG Northem Union Power Group CRESP China Renewable Energy Scale-up IMNLYWPC Inner Mongolia North Long Yuan Program - Phase 1 (Loan 4792-CHA) Wind Power Company dBa Decibel (filter characteristic curve a) OECD Organization for Economic ELA Enviromnental impact assessment Cooperation and Development EIRR Economic intemal rate of return CF Carbon Fund EMP Environment management plan PDO Project Development Objective ERPA Emission Reduction Purchase Agreement PIP Project Implementation Plan FIRR Financial internal rate of return PIU Project Implementation Unit FYP Five-Year Plan PPA Power Purchase Agreement FMS Financial Management Specialist PMO Project Management Office GDP Gross domestic product PPO Provincial Project Office (Zhejiang) GEF Global Environment Facility RAP Resettlement Action Plan GHG Greenhouse gas RE Renewable energy GoC Govermnent of China REDP Renewable Energy Development GTZ Deutsche Gesellschaft fur Technische Project (Loan 4488-CHA) Zusanuenarbeit REL Renewable Energy Law GW Gigawatt (1,000 megawatts) SIL Specific investment loan GWh Gigawatt hour TA Technical Assistance ICB Intemational Competitive Bidding TSP Total Suspended Particulates IPP Independent power producer TW Terawatt (1,000 GW) LSDP Letter of Sector Development Policy TWh Terawatt hour MBD Model Bidding Document UNEP United Nations Environment P nogman MMP Mandated market policy VSL Variable spread loan MOF Ministry of Finance ZFB Zhejiang Finance Bureau Mtce Million tons of coal equivalent ZHPMDC Zhejiang Hydro Power Management (1 tce = 29.3 Gigajoules) Development Center MW Megawatt (1,000 kilowatts) MWh Megawatt hour Acting Vice President: Jeffrey Gutman Country Manager/Director: David Dollar Sector Manager: Junhui Wu Task Team Leader: Noureddine Berrah FOR OFFICIAL USE ONLY CHINA Follow up Project to the First Phase of the China Renewable Energy Scale-up Program CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................... , . , . 1 1. Country and Sector Issues ........................... .. 1 2. Rationale for Bank Involvement .4 3. Higher-Level Objectives to Which the Project Contributes .4 B. PROJECT DESCRIPTION ...................... .. 4 1. Lending Instrument ....................................... I., , , . , . , . 4 2. Project Development Objective and Key Indicators ..................................... , . 5 3. Project Components .5 4. Lessons Leamed and Reflected in the Project Design ..................................... ,. 6 5. Alternatives Considered and Reasons for Rejection .7 C. IMPLEMENTATION .................. ... 7 1. Institutional Development and Implementation Arrang e ments .7 2. Monitoring and Evaluation of Outcomes and Results ...................................... ,,.9 3. Sustainability and Replicability .9 4. Critical Risks and Possible Controversial Aspects .9 5. Loan Conditions and Covenants .11 D. APPRAISAL SUMMARY .................... 11 1. Economic and Financial Analyses .11 2. Technical.. 12 3. Fiduciary ....... 13 4. Social .13 5. Environment ........... 13 6. Safeguard Policies ........... 13 7. Policy Exceptions and Readiness .14 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Annex 1: Country and Sector or Program Background ..................... .......................... 15 Annex 1A: Letter of Sector Development Policy, NDRC .............................................. 23 Annex 3: Results Framework and Monitoring ............................................... 28 Annex 4: Detailed Project Description .............................................. 30 Annex 5: Project Costs ............................................... 34 Annex 6: Implementation Arrangements ............................................... 35 Annex 7: Financial Management and Disbursement Arrangements ........................................... 38 Annex 8: Procurement Arrangements ............................................... 42 Annex 9: Economic and Financial Analysis ............................................... 47 Annex 10: Safeguard Policy Issues ............................................... 53 Annex 11: Project Preparation and Supervision ............................................... 57 Annex 12: Documents in the Project File ............................................... 59 Annex 13: Statement of Loans and Credits ............................................... 61 Annex 14: Country at a Glance ............................................... 66 Annex 15: Carbon Finance ............................................... 68 Annex 16: Maps ............................................... 71 Maps IBRD 34208 IBRD 34209 CHINA Follow up Project to the First Phase of the China Renewable Energy Scale-up Program PROJECT APPRAISAL DOCUMENT East Asia and Pacific Region EASEG Date: January 5, 2006 Team Leader: Noureddine Berrah Country Director: David R. Dollar Sectors: Renewable energy (100%) Sector Manager/Director: Junhui Wu Themes: Infrastructure services for private Project ID: P096158 sector development (P); environmental policies Lending Instrument: Specific Investnent Loan and institutions (P); climate change (P); trade facilitation and market access (S); rural services and infrastructure (S) Environmental screening category: Partial Assessment Safeguard screening category: S2 [R] Loan 1 Credit D Grant O Guarantee 1 Other: For Loans/Credits/Others: Total Bank financing (US$ million): 86.33 Pro osed terms: VSL, 20 years maturity, five years' grace R Xw~~~~~01 BORROWER/RECIPIENT 28.33 1.75 30.08 INTERNATIONAL BANK FOR 0.00 86.33 86.33 RECONSTIRUCTICON AND DEVELOPMENT LOCAL FINANCIAL INTERMEDIARIES 16.01 0.00 16.01 Total: 44.33 88.08 132_42 Borrower: People's Republic of China Responsible Agency: National Development and Refonn Commission SH,,$aSg' 'u kiea , BY 2006 2007 2008 2009 2010 _ _ Annual 7.80 26.02 18.90 17.06 16.56 _ Cunulative 7.80 33.81 52.71 69.77 86.33 _ L Project implementation period: Start: April 3,2006 End: March 31, 2010 Expected effectiveness date: March 31, 2006 Expected closing date: September 30, 2010 Does the project depart from the CAS in content or other significant respects? C Yes x No Ref: PAD A.3 Does the project require any exceptions from Bank policies? 1 Yes IZi No Ref; PAD D.7 Have these been approved by Bank management? 1 Yes a No Is approval for any policy exception sought from the Board? 12 Yes 12 No Does the project include any critical risks rated "substantial" or "high"? 1 Yes El No Ref PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref. PAD D. 7 1 Yes O No Project development objective Ref; PAD B.2, Technical Annex 3 The project development objective is to demonstrate early success in large-scale renewable energy investments with participating local developers in one pilot autonomous region and one pilot province. Project description Ref PAD B.3.a, TechnicalAnnex 4 Construction of a 100 MW wind farm at Huitengxile, Inner Mongolia; rehabilitation of eleven small hydropower plants to replace and increase the existing from about 40 to about 52 MW and construction of seven new small hydropower plants totaling about 16 MW in Zhejiang Province. Which safeguard policies are triggered, if any? Ref PAD D.6, Technical Annex 10 Environmental Assessment (OP/BP 4.01), Involuntary Resettlement (OP/BP 4.12), Safety of Dams (OP/BP 4.37) Significant, nonstandard conditions, if any, for: Ref. PAD C. 7 Board presentation: None Loan/credit effectiveness: None Covenants applicable to project implementation: Technical and financial reporting, financial performance, maintenance of a project company in Inner Mongolia and a project implementation unit in Zhejiang. A. STRATEG][C CONTEXT AND RATIONALE 1. Country and Sector Issues China's primary energy consumption more than doubled from 600 million tons of coal equivalent (Mtce) in 1980 to about 1,300 Mtce in 2000, whereas the gross domestic product (GDP) quadrupled during the same period. Although based on slightly different growth assumptions, studies carried out in the late 1990s and early 2000s by the Government of China (GoC) and international agencies concluded that even in the case of increased and sustained energy efficiency efforts, energy consumption will continue to grow -rapidly to between 1,850 and 2,150 Mtce in 2010 and to between 2,500 and 3,300 Mtce in 2020.1 They also concluded that even with an aggressive fuel diversification