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Technical Assistance Consultant‘s Report

Project Number: 46472 November 2014

People‘s Republic of China: Strengthening Capacity for Implementing the New Energy City Program in Gansu Province

Prepared by CECEP Consulting Co., Ltd.

Beijing, People‘s Republic of China

For Gansu Provincial Government Municipal governments of Dunhuang and Wuwei cities

This consultant‘s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project‘s design.

FINAL REPORT

Strengthening Capacity for Implementing New Energy City Program in Gansu Province ADB TA 8246-PRC

Submitted by CECEP Consulting Co., Ltd

October 2014

TABLE OF CONTENTS

I Executive Summary ...... 1 II International Experiences of New Energy City Programs...... 10 A. European Energy Award (EEA) ...... 10 B. Core Statements of EEA ...... 10 C. The Quality Management of EEA ...... 11 III Current Progress of National New Energy City Program...... 18 A. Policy Support for National New Energy City Program ...... 18 B. Updated Situation of National New Energy City Program...... 21

Dunhuang City ...... 17 IV Effectiveness of Implementing CNEDP in Dunhuang City ...... 22 A. Overview of CNEDP ...... 22 B. Technical Analysis of NECDP ...... 23 C. Summary of CNEDP Implementing Progress in Dunhuang...... 35 V Financing Analysis of CNEDP in Dunhuang City ...... 38 A. Budgeting and Financing Gap Analysis for Key Projects in CNEDP of Dunhuang ...... 38 B. Summary of Financing Gaps in Dunhuang ...... 46 VI Due Diligence of Priority Project in Dunhuang City ...... 48 A. Identification of Priority Project in Dunhuang City ...... 48 B. CSP-CHP Development at Home and Abroad ...... 49 C. Technical Assessment of CSP-CHP Project ...... 53 D. Financial Assessment of CSP-CHP Project ...... 61 VII Pilot Project in Dunhuang City ...... 71

Wuwei City ...... 68 VIII Effectiveness of Implementing CNEDP in Wuwei City ...... 73 A. Overview of CNEDP ...... 73 B. Technical Analysis of CNEDP ...... 75 C. Summary of CNEDP Implementing Progress in Wuwei ...... 83 IX Financing Analysis of CNEDP in Wuwei City ...... 86 A. Budgeting and Financing Gap Analysis for Key Projects in CNEDP of Wuwei ...... 86 B. Summary of Financing Gaps in Wuwei ...... 92 X Due Diligence of Priority Project in Wuwei City ...... 93 A. Identification of Priority Project in Wuwei City ...... 93 B. Solar PV Development in the PRC ...... 94 C. Priority Project of Component 1 –Gulang Xinmiao 20MW Distributed Solar PV Power Generation Project ...... 96 D. Priority Project of Component 2–Kuangou Industrial Park 6MW Distributed Solar PV Power Generation Project ...... 105 E. Risk Analysis of Priority Projects in Wuwei ...... 112 XI Pilot Project in Wuwei City ...... 114

XII Strengthening Capacity on Implementing CNEDPs in Gansu Province .. 115 A. Capacity Building Activities ...... 115 B. Proposed Financing Modalities and Instruments ...... 121 C. Administrative Management and Policy Support ...... 129 XIII Conclusions and Outlook ...... 136 Appendices ...... 139 Appendix 1. International Case Studies of Micro Grid ...... 139 Appendix 2. Evaluation Indices System of National New Energy Cities ...... 143 Appendix 3. List of Budgeting Key New Energy Projects in Dunhuang (2013-2015) ...... 145 Appendix 4. List of Budgeting Key New Energy Projects in Wuwei (2013-2015) ...... 148 Appendix 5. Report of Study Tour to Europe...... 152 Appendix 6. Report of Study Tour to Jiangsu Province ...... 160 Appendix 7. List of Reference ...... 164

LIST OF FIGURES

Fig. 1 TA Project Location Map ...... 1 Fig. 2 Countries Participating in the European Energy Award ...... 10 Fig. 3 Management Process of the European Energy Award ...... 11 Fig. 4 Key Areas of the European Energy Award ...... 13 Fig. 5 Micro Grid System Diagram ...... 24 Fig. 6 Global Distribution of Micro Grid Projects (MW) ...... 25 Fig. 7 Distribution of Micro Grid Pilot Projects in the PRC ...... 26 Fig. 8 Schematic Diagram of the Micro-Grid Project in Dunhuang Culture Industrial Park .. 28 Fig. 9 Funding Allocation of Key Projects in CNEDP of Dunhuang ...... 40 Fig. 10 Sources of the Public Expenditure in Dunhuang City ...... 41 Fig. 11 Comparison of Local Fiscal Budget for Key Projects and Total Budgeting Fiscal Receipts ...... 42 Fig. 12 Trough CSP: Valle 1 & Valle 1, Spain ...... 49 Fig. 13 Tower CSP: PS10 & PS20 and GemaSolar, Spain...... 50 Fig. 14 Stirling Dish CSP: Maricopa, U.S.A ...... 50 Fig. 15 Fresnel Linear CSP: Puerto Errado 2, Spain ...... 50 Fig. 16 The share of CSP installed capacity in the world (March 2013) ...... 51 Fig. 17 Schematic Diagram of Duhuang CSP-CHP Project ...... 53 Fig. 18 Schematic Diagram of Grid Connection ...... 59 Fig. 19 Desert Ecological Solar PV Power Plant in Wuwei ...... 78 Fig. 20 Solar BIPV Project in Energy Service Plaza of Wuwei ...... 79 Fig. 21 Funding Allocation of Key Projects in CNEDP of Wuwei ...... 87 Fig. 22 Sources of the Public Expenditure in Wuwei City ...... 88 Fig. 23 Location of two component priority projects in Wuwei city ...... 94 Fig. 24 PPP structure of priority project of component 1 ...... 104 Fig. 25 Project Organization Arrangement ...... 107 Fig. 26 PPP structure of priority project of component 2 ...... 112

Fig. 27 Workshops & Training Activities ...... 115 Fig. 28 Study Tour in Europe ...... 117 Fig. 29 On-lending Scheme through Intermediary Banks ...... 122 Fig. 30 IFC Loan Loss-sharing Reserve Fund Scheme ...... 123 Fig. 32 Financing Model through PCCs to Support Small ESCOs ...... 126 LIST OF TABLES

Table 1 New Energy-Related City Programs in Some European Countries ...... 15 Table 2 List of National Policies Related to New Energies Utilization ...... 19 Table 3 List of Micro Grid Pilot Projects in Dunhuang ...... 26 Table 4 Main Technical and Economic Parameters for Pilot Micro Grid Project ...... 28 Table 5 List of Distributed Solar PV Projects in Dunhuang ...... 29 Table 6 Main Technical and Economic Parameters for Solar PV Projects in Dunhuang ...... 31 Table 7 Main Technical and Economic Parameters for Wind Power Projects in Dunhuang ... 33 Table 8 List of Geothermal Utilization Projects in Dunhuang ...... 34 Table 9 Summary of Construction Status in Dunhuang City ...... 36 Table 10 Comparison of Target and Actual Progress of the CNEDP in Dunhuang City ...... 37 Table 11 Budget for Key New Energy Projects in Dunhuang City in 2013~2015 ...... 39 Table 12 Comparison on Situations of Fiscal Revenue Ratio of Dunhuang City ...... 41 Table 13 Budget on Key Projects with Participation of Private Companies in 2013 -2015 .... 43 Table 14 Loans from Domestic Banks to Solar PV Enterprises in Dunhuang City ...... 44 Table 15 List of IFI Projects in Dunhuang ...... 45 Table 16 Typical CSP Projects in the PRC ...... 52 Table 17 CSP-CHP Project Site Situations ...... 55 Table 18 Technical Configuration for Each Subsystem ...... 57 Table 19 Project Production Capacity ...... 60 Table 20 Basic Assumptions for the Financial Analysis ...... 63 Table 21 Cost Estimates by Components ...... 64 Table 22 Average Loan Maturity Calculation with Straight-Line Repayment Method ...... 66 Table 23 Tentative Financing Plan ...... 67 Table 24 Equipment Procurement List of ADB Pilot Project in Dunhuang ...... 72 Table 25 Summary List of Wind Power Projects in Wuwei ...... 81 Table 26 Comparison of Target and Actual Progress of the CNEDP in Wuwei City ...... 84 Table 27 Summary of Construction Status in Wuwei ...... 85 Table 28 Budget for Key New Energy Projects in Wuwei City in 2013~2015 ...... 86 Table 29 Comparison on Situations of Fiscal Revenue Ratio of Wuwei City ...... 88 Table 30 Financing Support from Domestic Banks to Large Solar PV Projects in Wuwei..... 90 Table 31 List of IFI Projects in Wuwei ...... 91 Table 32 Candidate Priority Projects of Wuwei City ...... 93 Table 33 List of Main Engineering Quantity of Component Project 1 ...... 97 Table 34 Cost Estimates by Components ...... 100 Table 35 Tentative Financing Plan of Component Project 1 ...... 101 Table 36 List of Main Engineering Quantity of Priority Project of Component 2 ...... 106 Table 37 Cost Estimates by Components ...... 108

Table 38 Tentative Financing Plan of Component Project 2 ...... 109 Table 39 Workshops & Training Activities ...... 116 Table 40 List of On-site Consultancy ...... 116 Table 41 Matrix of Administrative Management and Policy Support in the Two Cities ...... 131 LIST OF BOXES

Box 1. Brief Information of Dunhuang CSP-CHP Project ...... 48 Box 2 Brief Information of Pilot Project in Dunhuang City ...... 71 Box 3 Solar Thermal Utilization in Industry Sector ...... 76 Box 4 Solar Thermal Utilization in Agriculture Industry ...... 76 Box 5 Brief Information of Priority Project of Component 1 ...... 96 Box 6 Brief Information of Priority Project of Component 2 ...... 105 Box 7 Brief Information of Pilot Project in Wuwei City ...... 114 Box 8 Multi Government Agency Meeting System in Tai‘an City ...... 133 Box 9 Micro Grid System in Yangzhou city ...... 134 Box 10 Best Practices in Anyang city ...... 135

Introduction

In the past 30 years, The PRC has achieved significant fast economic growth. With rapid industrialization and mass urbanization, cities are major contributors to carbon dioxide (CO2) emissions due to its highly concentrated populations, energy-intensive industries and increasing energy demand. The share of energy consumption in the city of the PRC currently reaches around 80% of the overall energy consumption. In the Twelfth Five-Year Plan (12th FYP) during the year of 2011 to 2015, the PRC government intends to add significant renewable energy capacity to achieve a more diversified energy mix. By 2015, the share of renewable energy is expected to reach more than 9.5% of the overall energy mix, with annual renewable energy utilization amount of 478 million ton coal equivalent (tce)1. The National Energy Administration (NEA) initiated the National New Energy City Program as a key measure to encourage distributed energy applications in 100 demonstration cities2, most of them are second-tier cities allocated in 32 provinces. Among which, three cities of Dunhuang, Wuwei and Jinchang are encouraged to be developed in Gansu province.

The project of ―Strengthening Capacity for Implementing New Energy City Program in Gansu Province‖ (TA 8246-PRC) (referred as the TA Project) is a technical assistance project supported by the Asian Development Bank (ADB). The TA Project timely responded to the PRC government‘s priority and request for developing the National New Energy City Program, by giving the focus to establish appropriate support mechanisms to facilitate distributed renewable energy utilization in the selected two pilot cities of Dunhuang and Wuwei of Gansu province.

The TA Project is expected to appraise the priority projects identified in the City New Energy Development Plans (CNEDPs) in Dunhuang and Wuwei cities, and translate them into financially and technically viable projects; develop a best-practice model for strengthening the capacity in planning and implementing the CNEDPs of Dunhuang and Wuwei cities; support the implementation of the identified pilot project in Dunhuang and Wuwei cities; and promote the dissemination of best practices of the TA in the PRC.

1 China National Energy Administration and China National Renewable Energy Center. 2012. Key Information at a Glance: China 12th Five-Year Plan for Renewable Energy Development. Beijing 2 China National Energy Administration. 2012. China National Energy Administration on Applying for New Energy City and Industrial Park [GuoNengXinNeng (2012)156]. Beijing

I Executive Summary

A. TA project profile

The project of ―Strengthening Capacity for Implementing New Energy City Program in Gansu Province‖ (TA 8246-PRC) is a technical assistance project supported by the Asian Development Bank (ADB). The Gansu Provincial Financial Department is the executive agency (EA), the Dunhuang and Wu local financial bureaus are the implementing agencies (IAs), and CECEP Consulting Co., Ltd (CECEP Consulting) provides the consulting services. The TA Project is from 1st April 2013 to 15th December 2014. The objective of the TA is to enhance capacity of provincial and city level governments in planning, appraising, implementing and monitoring the City New Energy Development Plans (CNEDPs) in Dunhuang and Wuwei two cities of Gansu province. The TA aims at:

 Appraising the priority projects identified in the CNEDPs in Dunhuang and Wuwei cities, and translate them into financially and technically viable projects;  Developing a best-practice model for strengthening the capacity in planning and implementing the CNEDPs of Dunhuang and Wuwei cities;  Supporting the implementation of the identified pilot project in Dunhuang and Wuwei cities; and  Promoting the dissemination of best practices of the TA in the PRC.

Fig. 1 TA Project Location Map

This TA project is regarded as an important international cooperation project with regard to PRC‘s national new energy city program. Since this is a capacity building technical assistance project, during the project implementation, the consulting team analyzed local situation of new energy development and utilization in Gansu province, and especially two pilot cities of

Wuwei and Dunhuang cities, provided detailed comments and suggestions in terms of institutional, technical and financial aspects. It is expected to produce meaningful outputs not only to identify challenges faced by the second-tier cities to construct new energy cities, but also to identify possible policy support from the central government to upgrade the national new energy city program.

B. National policies for new energy city program

The TA is timely responded to the PRC government‘s priority and request for developing the National New Energy City Program. The National Energy Administration (NEA) is the authorized government agency responsible for promoting this Program.

 In May 2012, the NEA initiated the National New Energy City Program as a key measure to encourage distributed energy applications in 100 demonstration cities3.  In January 2014, NEA issued the document of ―The National Energy Administration on the List of the First Batch of Constructing New Energy Cities (Industrial Parks)‖ (Guonengxinneng [2014]14). Altogether 81 cities and 8 industrial parks are included. In terms of Gansu province, there are three cities of Dunhuang, Wuwei and Jinchang cities have been listed.  It is realized that a series of energy-related policies had been issued to facilitate the development and utilization of various renewable energies, however, up to now, no special incentive policies were arranged for the National New Energy City Program since it was launched in May 2012. C. Dunhuang city In Gansu province, the CNEDP of Dunhuang city was approved as the one of the first pilot cities in June 2011, which is much earlier than the official announcement of National New Energy City Program in May 2012. Dunhuang has rich renewable energy resources, in particular remarkable solar and wind resources. It plans to utilize renewable energies by 213,100 tce, and share of renewable energies in its energy mix will increase to 27% by the end of 2015. 1. Technical Analysis of CNEDP of Dunhuang

The technical analysis of both Dunhuang and Wuwei were made with guidance of the evaluation indices system issued by NEA. In Dunhuang city, the particular efforts were made to sort and review key projects in line with the NEA requirements. The consultant conducted technical analysis focusing on eight categories of key projects, including (i) micro grid project, (ii) solar PV projects; (iii) Concentrating Solar Project (CSP) and CSP-CHP project; (iv) solar thermal utilization project;

3 China National Energy Administration. 2012. China National Energy Administration on Applying for New Energy City and Industrial Park [GuoNengXinNeng (2012)156]. Beijing

(v) wind power generation project, (vi) geothermal utilization project, (vii) electric vehicle project and (viii) small hydro power project. It is found that Dunhuang gave priority to develop solar PV projects and CSP projects by fully utilizing its remarkable solar resources. From technical point of view, the restricting factors of grid transmission and immature CSP technology cumber sustainable development of solar energy-related projects. Besides, the consulting team observed that the development of micro grid project is facing various barriers in Dunhuang. Since lack of administrative regulations, technical support, understanding of micro grid technology, it is suggested to select one micro-grid project from the six proposed projects to be firstly studied and implemented. Dunhuang Demonstration Culture Industrial Park is proposed to be chosen as the pilot project which can be followed up in the near future. The construction progress of overall key projects of Dunhuang CNECP was summarized in Table 9 and 10. 2. Financial Assessment of CNEDP of Dunhuang

The Consultant undertook the financing gap assessment by quantitative approach on ―List of Budgeting Key New Energy Projects‖ in the CNEDPs of Dunhuang and the Wuwei cities. The major funding sources for these key projects are as follows: (i) local government financing; (ii) enterprise self-financing; and (iii) bank loans (including loans from domestic banks and international financial institutions). The assessment was conducted in accordance with these aspects by examining financing capacity of the stakeholders associated with the CNEDPs to ensure that the budget plan is feasible and implementable. It is concluded that the overall budget for key projects in CNEDP of Dunhuang is optimistic. The key issue of the financing gap depends on whether budget allocation to the 50 MW CSP-CHP project and the distributed solar PV projects in the cultural industry park would be managed successfully. According to the cost-benefit analysis in the first interim report, if the ADB loan is available by arranging investment support for CSP-CHP project, the domestic investment companies should have no problem in complementary funding. It is found that Gansu provincial government will follow domestic procedures to submit proposal to the PRC central government in hope of having this CSP CHP project listed in the country program pipeline projects. 3. Priority project of Dunhuang

After confirmation with ADB, EA and IAs, the priority project was identified, that is, Concentrating Solar Power and Heat Cogeneration (CSP-CHP) project. Dunhuang CSP-CHP priority project: CSP is a new technology in the PRC. The provinces including Gansu, Inner Mongolia, Qinghai, Xizang and Xinjiang have a good solar resource for CSP development. Although there is a capacity gap in some key technical, financial and institutional issues, Dunhuang municipal government shows an active interest on promoting CSP development. The consultant conducted due diligence of Dunhuang CSP-CHP project,

the key findings include:

 There is no precedent example for design and construction of CSP-CHP project so far, the project is expected to fill up gaps and accumulate experiences for CSP development in the PRC.  The basic demand of solar radiation resources, land, topography, fuel supply and grid connection are basically satisfactory for the project site selection. However, the distance of the heat supply is relatively large and the climatic conditions are difficult, so the CSP construction, operating and maintenance in Dunhuang will be a challenge.  The PRC is lack of CSP systematic designing and manufacturing capacity, the core technologies and equipments for sub-systems including concentrating collector, main heat exchanger and heat storage rely on importing.  The project will be confronted with operation risk since lack of CSP system integration experiences in the PRC, which will directly affect the overall project operating performance. It is suggested to introduce capable investor and professional operator to ensure the project operation and management.  Since the national policy on feed-in-tariff for CSP project is not possible to be issued soon, it will undoubtedly have an influence for CSP project development and performance at current stage. Since heat supply is mainly sourced by natural gas, and about one third heat supply comes from solar energy in the project, it is suggested to figure out the proportion of solar radiation and nature gas contribution to the overall electricity and heat production so as to get policy support in the future if possible.  According to research and international experiences, the cost for CSP in the PRC will be reduced to a competitive level along with CSP technological improvement, CSP project scaled-up development and policy support. Financial analysis for priority project in Dunhuang: The financial analysis is another outcome of the due diligence. The project cost estimate for the identified priority project has been conducted. The financing plan for the priority project is well justified by their profitability, net cash flows and financial internal return rates etc. There is no significant liquidity risk in the proposed financing plans of the priority project. FIRR is higher than the WACC rate given the financing portfolio of the project. The FIRR is also higher than the current average interest rate of loans from commercial banks in China, which is roughly at 8.0%. As for CSP-CHP Project in Dunhuang, the cost of electricity generated by different technologies depends largely upon how fast is technical innovation of the R&D and business players and how preferential are the government and development agencies‘ policies to support on-going demonstration and commercialization of the industries and technologies. From one hand, it is possible to reduce production cost in power generation and thus reduce

tariff while maintaining the financial outcome in terms of FIRR. Or on the other hand, we may realize the financial cash flow by having higher subsidies. With this financial appraisal, we conclude a viable financing plan and justification for the proposed CSP-CHP project. The existing practices in the PRC are too limited to show financial or economic viability. This type of project usually requires an investment costs over CNY1 billion per case, thus having difficulties to have all stakeholders on board to make it into reality. This project proposed in Dunhuang municipality can be a great opportunity for the government and ADB to promote CSP development, considering the size, technology and financial performance. 4. Pilot project of Dunhuang

The pilot project called ―rural solar integrated utilization pilot project‖ was identified. The project is located in Qinjiawan village of Qilizhen town, about 10 kilometers west to Dunhuang city. The project started in April 2013 and completed in November 2013. The investment of the project is 2,716,500 CNY (about 438,210 USD), in which, ADB provided grant of 90,000 USD for solar PV equipment purchase. Altogether 50 rural households will be involved in the pilot project, and it is comprised of three parts.  Rural household solar PV system: total installed capacity of 2kWp * 50 households;  Solar heating system for 50 households: supply each household with 1 ton heat water per day;  Solar lighting system: include 20 solar lamps at roadside and 50 in courtyard, with total installed capacity of 2.5 kWp.

D. Wuwei city Wuwei city has predominating conditions to develop national new energy city. Similar to Dunhuang city, Wuwei has rich solar and wind energy resources. The CNEDP of Wuwei city was evaluated in November 2012, and the formal approval document was issued in January of 2014. It aims to expand its renewable energy utilization to 177,600 tce and the share of energies in the energy mix will be increased to 8.38% by the end of 2015. 1. Technical Analysis of CNEDP of Wuwei In Wuwei city, it is found that Wuwei still gives priority to develop large-scale solar PV power projects and large-scale wind power projects. Since the national subsidy for the distributed solar PV projects was issued in August 2013, it is suggested to strengthen the distributed solar PV projects, e.g. greenhouse solar PV projects, sand control solar PV

projects, BIPV in public buildings and distributed solar PV projects in industrial park and energy-intensive enterprises. Regarding solar thermal utilization, only solar hot water projects have been implemented. No solar heating project is possible to be launched. It is suggested to promote scaled-up application of solar heating technology, establish district solar heating stations, and explore solar thermal utilization in agricultural and industrial production, so as to continuously improve the proportion of solar thermal utilization in energy consumption of Wuwei city. The updated progress of the key projects in Wuwei CNEDP is shown in Table 26 and 27. 2. Financial Assessment of CNEDP of Wuwei Wuwei City has made great success in implementing several large solar PV projects with loans from commercial banks. Compare to that, the key finding in the CNEDP of Wuwei is that these distributed solar PV projects are scattered and too small, so that professional energy companies are rather unwilling to invest. For the self-financed part of the project owners, only a few projects with very small budget can be realized, while financing for other projects are not too optimistic. It is difficult to receive financing support from the private sector and banks. This is main funding gap in the CNEDP. As the project owners are mostly government agencies and institutions, the local government should allocate certain fiscal budgets to support. There is possibility for funding if these scattered projects are bundled to apply on-lending or MFF sovereign loans from IFIs or the policy loans from China Development Bank (CDB). If we are optimistic by the Gulang Xinmiao distributed PV project with ADB private sector financing support via PPP financing mechanism, the financing gap remains more than 450 million CNY. 3. Priority project of Wuwei Altogether two priority projects have been identified in the field of distributed solar PV power generation:

 Priority project of component 1: GulangXinmiao 20MW Distributed Solar PV Power Generation Project  Priority project of component 2: TianzhuKuangou Industrial Park 6MW Distributed Solar PV Power Generation Project The solar PV power generation is a common technology after years of operation and application experiences in China. The manufacture capacity of main equipments such as solar PV modules and inverters are quite mature and can be totally acquired by domestic procurement. The two component projects are technically viable, and the construction scale and equipment selection are reasonable. It is pointed out that the PRC government issued the policy in July 2013 to stimulate distributed solar PV power generation development by giving subsidy to distributed solar PV

projects via gird companies. Recently the detailed subsidy requirement and criteria have been clarified on 30 August 2013. It is suggested that the project owner should closely follow up the policy and apply for the subsidy by coordination with the grid company. In terms of financial analysis for priority projects in Wuwei. It is found that the Xinmiao solar PV project presents more promising performance in the perspective of both payback period and FIRR than two other projects. This is likely in correlation with both technology and scale. The FIRR from the Guangou Industrial Park is significantly lower than the FIRR possibly achieved by the Xinmiao solar PV plant. Considering both projects apply same solar PV technology, we believe the difference in performance explains well the economy of scale, and the gap in electricity price paid by end users. Given the maturity of CSP industry in China, distributed solar PV power may have some new elements to promote. In the two cases in Wuwei Municipality, the Xinmiao plant is an innovative ESCO arrangement for project financing and operation; the solar power plant in Kuangou Industrial Park however will establish an incentive scheme on a PPP equity fund platform to demonstrate how the service provider of an industrial park can coordinate the resident enterprises in the utilization of green energies. 4. Pilot project of Wuwei

The pilot project called ―rural solar PV modern greenhouse pilot project‖ was identified. The project is located in Wuwei Desert Park, 20 kms east to Wuwei city. The project started in June 2013 and it was not completed yet. The investment of the project is expected to be 3,129,700 CNY (about 504,790 USD), in which, ADB is supposed to provide grant of 90,000 USD. The project plans to construct 5 rural solar PV modern greenhouses with installed capacity of 330 kWp. We analyzed the reasons why the project had been implemented so slowly. One reason is that the greenhouse structure design was not satisfactory to local soil condition of sand. The iron skeletons of the greenhouse had to be returned once they had been transported to the project site; the other reason is the solar module ordering and installing was delayed due to large solar PV projects rushed to be operated by the end of 2013, so that staff was not available for this small project. Nevertheless, this project will definitely have demonstration effect because it is combination of solar energy utilization, greenhouse and tourism. E. Strengthening capacity on implementing CNEDPs in Gansu province The consulting team made particular efforts to strengthen capacity on implementing the CNEDPs in two pilot cities of Dunhuang and Wuwei as well as Gansu provincial level. A series of training activities, i.e. workshops, international study tour to Europe, domestic study tour to Jiangsu province, as well as consultancy in forms of on-site and on-line have been taken.

1. Technical support Particular efforts have been made to introduce both international and national experiences on implementing new energy cities, and provide technical consultancy regarding micro grid, CSP and solar thermal utilization. Up to now, three formal workshops were organized with a total of more than 200 representatives participated from EA, IAs and relevant stakeholders. The training topics include:

• Introduction to recent progress of implementing national New Energy City Program; • Introduction to international best practice related to national New Energy City Program; • Introduction to domestic best practice involved in national New Energy City Program; • Introduction to micro smart-grid development in China; • Introduction to solar thermal market status and potentials in China; • Introduction to PPPs financing mechanism in energy sector; and • Introduction to financial viability, financing gap and proposed financing mechanisms in Gansu province.

In addition, a series of on-site consulting activities have been conducted in Dunhuang, Wuwei and Lanzhou cities to (i) review and appraise the CNDEPs, (ii) conduct due diligence of priority projects and apply for ADB loan; (iii) supervise and support implementation of pilot projects.

2. Proposed Financing Modalities and Instruments We understood that the implementation of the CNEDPs mainly rely on the capability for local consumption of new energy, besides big projects, its realization also depends on small projects and small businesses, while its financing is much challenging. Therefore, the viable financing schemes and possible solutions are further suggested based on the gaps concluded, including on-lending scheme, loan loss-sharing reserve fund, new energy equity funds in industrial parks, and ESCO financing model through project cooperative company. Furthermore, we provided four sets of recommendations to the provincial and local government as the planning bodies and promoters for new energy financing, to the energy companies and project owners as project investors and operators, domestic institutional institutions as loan financiers and on-lending intermediaries, and lastly the international financial institutions as the lender. 3. Administrative management and policy support In accordance with the requirements of NEA document, the consulting team analyzed current status and identified the barriers with regard to (i) local policy support, (ii) establishment of public service platform, (iii) supporting infrastructure and facilities and (iv) public dissemination of administrative management and policy support mentioned in the CNEDPs of Dunhuang and Wuwei cities, and shared national best practice with EA and IAs.

We observed that although the two cities proposed a series of policies and measures, most of them are too general and lack of detailed and practical measures to be implemented. And some administrative measures are missing in their CNEDPs as required by NEA. It is clear that the two cities are still at startup stage by just having established ―leader group‖ and not any further detailed rules have been issued. We made the suggestions by learning lessons from international experiences from European countries and domestic practices of Tai‘an, Yangzhou and Anyang cities who also involved in National New Energy City Program. Their good experiences can make some hints for the two cities and facilitate them to improve administrative management and policy support for constructing new energy cities in accordance with NEA requirement.

To sum up, This TA project is regarded as the first research study regarding the national new energy city program at the level of second-tier cities. This TA project timely responded to the NEA‘s priorities for promoting national new energy city program and fostering green and low carbon development in cities. The consulting team finished the technical and financial due diligence of the CNEDPs of Dunhuang and Wuwei cities. The successful implementation of this TA project provided a best-practice model for planning, appraising and implementing distributed renewable energy development in second-tier cities, especially in the West China. The lessons learned from this TA project were shared and discussed with NEA, the relevant cities at home and aboard, and other stakeholders.

II International Experiences of New Energy City Programs

The international best practice experiences can be benefit PRC, especially Gansu province, with practical lessons on renewable energy city programs, support actions and intelligent investments which having been successfully implemented in the European cities. In this TA Project, the focused is given to introduce the municipal energy management system of European Energy Award (EEA), which is widely and successfully implemented in Europe and has an over-all approach to municipal energy and climate change policies and is very well positioned to further implement new energies on a communal level.

A. European Energy Award (EEA) Over 1,100 communities in Europe, with a total urban population of 25 million, participate in the EEA scheme. So far, 600 municipalities have been presented the European Energy Award, with 50 of them receiving the EEA Gold Award. In the last 12 years, the EEA has successfully established itself as the energy policy and climate protection tool in Europe.

Ordinary members of the Forum

Model test/pilot municipalities

Fig. 2 Countries Participating in the European Energy Award

B. Core Statements of EEA • Collects the best practices of municipal energy and climate policies. • Supports municipalities in the development and implementation of their own sustainable energy and climate policies. • Focuses on energy- and climate issues likewise, being aware that the biggest share of climate change is energy driven. • Controlling instrument for result orientated administration (Definition of goals and targets, measures and actions, responsibilities and finances). • Comprises the municipality as a whole. With spatial planning issues, support, cooperation and communication.

• Implements a quality management systems based on a ―Total Quality Management (TQM) approach and the new ISO 50001 standards. • Process oriented approach (Integration of all ―key players‖ of the municipality, Consultant as a coach, not as a ―teacher‖). • Standardized catalogue of measures, no ―Must-measures‖. • In depth analysis of existing projects and programs. • Profound analysis of all possibilities to establish a energy policy. • Decisions by political leaders, incl. necessary finances. • Awards the best municipalities and establishes a benchmark of all participating cities and towns.

C. The Quality Management of EEA The basic principle of the European Energy Award® is the process based on the management cycle of "analyzing-planning-implementing-auditing-adjusting" that is typical in for management systems, supplemented by the "award".

Fig. 3 Management Process of the European Energy Award

1. Analyzing With the help of comprehensive EEA management tools, the energy and climate protection projects that have been carried out in the municipalities to date are comprehensively investigated and the current situation is recorded and assessed. The result of the analysis is a profile of the given municipality's strengths and weaknesses, the engagement of the different stakeholders. 2. Planning Based on the analysis of the current situation, the untapped potential of municipalities' sustainable energy and climate protection possibilities can be identified and priorities defined. The "Energy and Climate Policy Plan" is drawn up and defined with a binding action plan for the year to come, consisting of  Target setting (qualitative and quantitative)  Detailed activities  Budgeting over 4 years

 Responsibilities / Stakeholders  Controlling indicators 3. Implementation The measures specified in the Energy and Climate Policy Plan are implemented by the designated stakeholders over the 4 years period. 4. Yearly internal Audit During the implementation phase, the measures carried out are recorded and assessed. The energy team and the consultant carry out an (internal) audit once a year to verify whether the planned measures have actually been implemented and the set goals have been achieved; whether the municipalities is ―on Track‖ to achieve the defined goals and targets. 5. Adjusting and Re-Audit Every 4 years, the analysis of the current state is adjusted and updated in line with the outcome of the audit. Based on the achievements during the last 4 year period, a new activity program must be compiled. The cycle then starts again. 6. Certification Within the framework of the EEA, a distinction is made between the review of what has been achieved as conducted by the energy team in collaboration with the consultant and the review conducted by an external expert. The external EEA auditor is usually called in to review the achievements whenever the municipality has attained 50% or more of the maximum possible points in the initial assessment. This EEA auditor is also responsible for the certification. 7. Award If, after the assessment, a municipality is able to demonstrate particularly successful achievements and the result is confirmed by the auditor, then the municipality is presented with the European Energy Award® or the European Energy Award® Gold. The structure areas of the activities are defined according to activities and the stakeholders in the administration:

Fig. 4 Key Areas of the European Energy Award

D. The Instruments of EEA The municipalities receive the following tools enabling them to undertake an efficient and sustainable energy and climate protection policy: 1. The EEA management tool This is the central tool for the EEA process. It is an online tool and integrates the instruments and documentation requirements vital for  carrying out the process of analyzing the current situation,  establishment of the Energy Policy Plan (= Activity Programme),  follow-up of defined targets with specific indicators, and  process control and auditing. The EEA management tool also includes the EEA catalogue of 79 measures, which is used to analyze and evaluate the energy and climate policy work of the municipalities. The EEA management tool is structured in 6 main menus: municipalities, catalogue of measures, energy policy plan, indicators and effects, data as well as data files. 2. Evaluation of results In every participating municipality, all of the defined 79 possible measures are individually evaluated according to specific guidelines, which are individually established in each country or region. 3. The Energy and Climate Policy Plan This plan is used for data acquisition and the annual assessment of the individual activities of a municipality and is also integrated into the EEA management tool. Using the online tool, consultants, employees of the municipalities as well as the auditors are able to easily access the process-specific documents of a municipality.

E. Other New Energy Related City Programs in the World The EEA is by no means an isolated solution. At the European level, it is interlocked with other programmes and activities, such as the Smart Cities initiative and the Covenant of Mayors. The Covenant of Mayors is an initiative of the European Commission. Among other things, the signatories undertake to draw up an action plan for sustainable energy (SEAP). The Covenant of Mayors regards the European Energy Award as "an efficient tool for Sustainable Energy Action Plan (SEAP)". The DG-Energy officially recognized the European Energy Award as an implementation tool and ―Supporting Structure‖ for the Sustainable Energy Action Plan (SEAP). Besides the Covenant of Mayors, taking the opportunity of conducting a study tour to Europe under this TA project, the Consultant reviewed other new energy related city programs, some of them are bilateral projects being implemented in the PRC. The details are as shown below.

Table 1 New Energy-Related City Programs in Some European Countries

Project/Program Brief Contents 1/ European Energy • EEA is a qualified instrument for steering and controlling Awards (EEA) communal energy (and climate change) policy. • Originated in Switzerland in 1995 and officially certificated by EU in 2009. Up to now, 7 Countries (including Switzerland, Austria, Germany, France, Italy, Liechtenstein) have EEA implemented, and other 11 Countries are in a pilot phase. • Totally 501 municipalities are awarded with EEA, 49 municipalities with EEA in Gold, and more than1000 municipalities are participating. • Management system process: - Plan: political commitment/Initial review, Goals and strategies - Do: activity program, implementing measures - Check: evaluating and controlling • Act: continual improvements 2/ Covenant of Mayors • Fast growing mainstream European movement supported by the EC that involving local, regional and national authorities in the sustainable energy development and climate protection. • Over 4500 signatories in 47 countries,75 associations of local authorities signed the CS partnership agreement with DG ENER. • It is based on a voluntary commitment of municipal councils to improve EE and RE that will result in at least 20% CO2 emissions reduction by 2020. • Baseline Emission Inventory (BEI) • Sustainable Energy Action Plan (SEAP) - Political document: it must be approved by the municipal council. - Strategic document, designed in collaboration with local stakeholders & citizens. - Cornerstone for development of operational documents: the SEAP defines concrete reduction measures, time frames and assigned responsibilities, which translate the long-term strategy into action • Investment projects 3/ Intelligent Energy – • Launched in 2003 by the European Commission to Europe (IEE) support EU energy efficiency and renewable energy programme policies, with a view to reaching the EU 2020 targets.

- Energy efficiency and the rational use of energy (SAVE) - New and renewable resources (ALTENER) - Energy in transport (STEER) • Maximizing investment in sustainable energy (ELENA) 4/ 100% RE • Political decision towards 100% renewable energy in Communities in more than 130 German municipalities or regions, which Germany account for 12% in areas and 8% in population • Main barriers: co-ordination and lack of funds • Aim: sustainable and complete change towards renewable energy and reduction of energy use • Using regional sustainable energy sources to enable regional economic benefits 5/ Innovation City in • General idea - Win–Win potential pursued: combining Germany environmental goals with improved living standards, regional economic impulses and new green jobs • CO2-savings of 50% in 10 years • Bottrop as the winner from 16 competitors of an industrial driven competition aiming for climate protection and transferable blue print as starting impulse • Innovation City comprises three different pillars: Master plan – Implementation Level – Accompanying scientific reflection and support process 6/ Sino-Danish Pilot • Location: Yilan county, Heilongjiang province, northeast Project of Renewable China Energy Based Heat • Goal: 50 % RE in the heat sector Supply • Challenges: - curtailment of wind power - air quality above national standard - inexpensive and abundant coal resources • Possibilities: - significant amounts of biomass available - no biomass in current District Heating - co-firing potential - large curtailment of wind power. Solutions: - match Danish expertise and knowhow - DH system with EE buildings - integration of solar heating, biogas and ground source heat pumps • - other policy measures 7/ Sino-Danish Pilot • Location: Baicheng city, Jilin province, northeast China Project • Challenges:

of Curtailment of Wind - curtailment of wind power Power - inexpensive and abundant coal resources • Solutions: - match Danish expertise and knowhow - optimize the operation of conventional CHPs and power plants with wind power plants - other policy measures 8/Sino-German • Target: to develop an integrated low carbon, adaptation Cooperation Project of and circular economy strategy for city governments in Low Carbon Future China and Germany, to show good practice examples of Cities (LCFC) sustainable urban development, and to stimulate dialogue among stakeholders from Wuxi and Dusseldorf for mutual learning and information exchange. • Three project areas: - Scientific analysis - Sino-German stakeholder dialogue - Dissemination • Activities in Wuxi city: - Integrated status quo and trends assessment - Development of local low carbon scenario • Identification of integrated technology options + policy measures. 9/ Green Financing • Supported by KfW to assist the CITIC Bank and Changan Project in China Bank in Shaanxi province, to identify, plan, implement and assess investments reducing primary energy consumption and greenhouse gas (GHG) emissions in urban areas of China; • Key eligible criteria: - Investments in climate relevant municipal infrastructure in the building, energy, transport, water, sewerage or waste management sectors in urban areas - Investment cost of projects financed by sub-loans not exceeding RMB 50 million - - GHG emission reduction of the Projects should be at least 20% 10/ Sino-Swiss Low • Supported by SDC (Swiss Agency for Development and Carbon City China Cooperation ) (LCCC) Program • Bases on China Situation with practical Experience of 5 pilot cities • Developing ―LCCC Index System‖

III Current Progress of National New Energy City Program

The PRC government attaches much attention to the development of renewable energies. Based on Renewable Energy Law, a series of policies have been issued to promote rapid development of renewable energies. Followed by fast growth of large-scale renewable energy capacity during the period of the 11th Five-Year Plan (2006-2010)4, the renewable energy development will step into a scaling-up stage during the period of 12th FYP (2011-2015). Together with other four special plans in the areas of hydropower, wind power, solar power and biomass energies, the National Energy Administration (NEA) promulgated ―the 12th Five Year Plan for Renewable Energy Development‖ (the Plan) in August 2012. The Plan sets the target that by 2015, the share of renewable energy is expected to reach more than 9.5% of the overall energy mix, with annual renewable energy utilization amount of 478 million ton coal equivalent (tce)5. Besides, related to this TA Project, the Plan points out to scale up distributed renewable energies and initiate the National New Energy City Program as a key measure to encourage distributed energy applications in 100 demonstration cities6allocated in 32 provinces7.

A. Policy Support for National New Energy City Program

It is found by making the policy review related to energy and climate change, different to the 11th FYP, during the 12th FYP period, the PRC government addressed the cities as one of key carriers in facilitating renewable energy utilization and energy efficiency improvement, and numerous national city programs launched and administrated by different central government agencies. Such as, new energy city program (NEA), low carbon pilot cities and communities (NDRC- National Development and Reform Commission), carbon exchange pilot cities (NDRC), circular economy pilot program (NDRC), low carbon industrial parks (MIIT- Ministry of Industry and Information Technology), renewable building application pilot cities (MOHURD- Ministry of Housing and Urban-Rural Development), and new energy vehicle pilot cities (MOST- Ministry of Science and Technology) etc. It is also realized that a series of energy-related policies have been issued to facilitate the utilization of renewable energies. On one hand, these policies pave way for constructing new energy cities; on the other hand, it is the reason why NEA did not arrange special incentive policies when the National New Energy City Program was launched in May 2012.

4 By the end of 2010, the PRC reached 31 gigawatts of wind power and 0.8 gigawatts of solar power connected to the grid. 5 China National Energy Administration and China National Renewable Energy Center. 2012. Key Information at a Glance: China 12th Five-Year Plan for Renewable Energy Development. Beijing 6 China National Energy Administration. 2012. China National Energy Administration on Applying for New Energy City and Industrial Park [GuoNengXinNeng (2012)156]. Beijing 7 China National Energy Administration. 2013. China National Energy Administration on Further Promoting New Energy City Program [GuoNengXinNeng (2013)55]. Beijing

Table 2 List of National Policies Related to New Energies Utilization No. Policy documents Issued by Main contents and when New Energy City Program 1 National Energy NEA in May NEA organizes the application of new Administration on Applying for 2012 energy city and new energy industrial New Energy City and Industrial park to implement the target of Park renewable energy development during [GuoNengXinNeng (2012)156] 12th FYP period. 2 National Energy NEA in The application of new energy cities is Administration on Further February responsible by provincial DRC and Promoting New Energy City 2013 NEA. Allocation of 100 cities in 32 Program provinces. [GuoNengXinNeng (2013)55] 3 National Energy NEA in Altogether 81 cities and 8 industrial Administration on Publishing January parks were formally approved by the List of National New 2014 NEA. Energy Cities (Industrial Parks)-First Batch [GuoNengXinNeng (2014)14] 4 National Energy NEA in June All the listed new energy cities are Administration on 2014 required to develop annual work plan Strengthening Information of constructing new energy city, to Statistics and Monitoring Work identify key projects, milestone and for New Energy City policy measures will be taken. Construction [GuoNengXinNeng (2014)253] Micro Smart Grid 5 Solar Energy Power Generation NEA in July Establish 30 new energy micro grid Development Plan in 12th FYP 2012 pilot projects by 2015 to explore Period technical solution and commercial mechanism of developing renewable energy distributed power generation. Solar PV 6 The State Council on The State Strengthen exploration of distributed Promoting Solar PV Industry Council in solar PV market development, Sustainable Development July 2013 construct 100 distributed solar PV [GuoFa (2013)24] scaled-up application pilot areas and 1000 solar PV application pilot towns and villages.

7 Notice on Incentive Policy for Ministry of Subsidies will be provided to Distributed Solar PV Projects Finance in distributed solar PV projects [Caijian (2013)390] July 2013 according to its electricity generated. 8 National Development and NDRC Clarify provide subsidy of 0.42 Reform Commission on in August CNY/kWh for distributed solar PV Exerting Price Leverage 2013 project Mechanism to Promote Solar PV Development [Fagaijiage (2013)1638] Wind Power 9 Notice on Polishing Tariff Price NDRC Four areas are divided according to of Wind Power Projects in July 2009 wind resources with different [Fagaijiage (2009) 1906] feed-in-tariff prices of 0.51 CNY, 0.54 CNY, 0.58 CNY and 0.61 CNY per kWh Biomass 10 NDRC on Polishing Tariff NDRC Feed-in-tariff prices of 0.75 Price of Biomass Power in July 2010 CNY/kWh is set for biomass power Projects generation projects [Fagaijiage(2010)1579] 11 NDRC on Polishing Tariff NDRC Feed-in-tariff prices of 0.65 Price of Municipal Solid Waste in March CNY/kWh is set for MSW power Power Generation Projects 2012 generation projects [Fagaijiage(2012)801] Green Building 12 Implementation Plan for MOF and National subsidy is provided to each Renewable Energy Building MoHURD in pilot city by 50 million CNY, Application Pilot Cities July 2009 maximum 80 million Yuan. [Caijian (2009)305] Green Vehicle 13 Notice on Implementing and MOF and Encourage the application of green Energy-saving and New Energy MOST in vehicle in public sector and provide Vehicle Pilot Cities [Caijian January subsidy for purchasing energy-saving (2009)6] 2009 and new energy vehicle. Solar Thermal 14 Solar water heater is popularized in nationwide with national subsidy from 2009-2011 under the policy of ―Electronic Appliances to the Countryside‖. From the year of 2012, Solar water heater is included in ―Energy-saving Product Project‖ issued by NDRC, Ministry of Industry and Information Technology (MIIT) and MOF and get national subsidy.

B. Updated Situation of National New Energy City Program

As the authorized government agency for the National New Energy City Program, the NEA is responsible for evaluation and approval of the applicant cities. Up to now, altogether 81 cities and 8 industrial parks have been formally approved by NEA. In terms of Gansu province, there are three cities of Dunhuang, Wuwei and Jinchang cities. Undoubtedly the issuance of this official document will significantly facilitate the construction of new energy cities all over the country. It should be noted that the policy support from the central government has strengthened exploration of distributed solar PV market development by setting the targets of constructing 100 distributed solar PV scaled-up application pilot areas and 1,000 solar PV application pilot towns and villages. Furthermore, since 2013, the PRC government attached much attention to combat bad air quality in three key areas around Beijing, Shanghai and Guangzhou cities, and promulgated ―Air Pollution Prevention and Control Action Plan‖ to popularize solar hot water system, geothermal heat pump, air source heat pump, BIPV and tri-generation technologies for heat-electricity-cool supply. The share of non-fossil energy in the primary energy supply is expected to reach 13% by 2017. It is considered that the renewable energy heat supply will be one important and new trend for renewable energy development and utilization in the PRC. More importantly, it should be highlighted that the central financial leading group of PRC central government organized the 6th meeting in June 2014. Mr. Xi Jinping made remarkable speech of ―four energy revolutions + one international cooperation‖. It is stressed to promote energy consumption revolution, energy supply revolution, energy technology revolution, and energy institutional revolution. Besides, he also emphasized to strengthen international cooperation to effectively use international resources to facilitate 4 energy revolutions. In terms of diversified energy supply, it is highlighted to promote clean and effective use of coal, develop non-fossil energies, and establish a diversified energy supply system with coal, oil, natural gas, nuclear power, new energy and renewable energies. At the same time, energy transportation and transmission network as well as energy storage facilities will be strengthened.

Based on that, the NEA is newly launching a ―new city, new energy, new life‖ initiative. It is understood that this new initiative will be conducted together with new energy city program and new energy development.

Dunhuang City

• Population: 200,000 people • Area: 31,200 km2 • Approval of CNEDP: June of 2011 • Target of Renewables in 2015: totaling 213,100 tce, 27% of total local energy consumption

IV Effectiveness of Implementing CNEDP in Dunhuang City

A. Overview of CNEDP

The appraisal of CNEDPs for Dunhuang and Wuwei cities are made with guidance of the evaluation indices system in the document of National Energy Administration on Applying for New Energy City and Industrial Park [GuoNengXinNeng (2012)156]. According to that, three categories of indices are required. (i) Category I is Ratio of new energy utilization in total energy consumption 6%, (ii) Category II includes solar, wind, biomass, geothermal and other new energy utilization; (iii) Category III is administrative management and incentive policy measures. The detailed information of the evaluation indices system can be found in Appendix 2.

1. Targets

It is known that Dunghuang is one of the first two national new energy demonstration cities whose CNEDP has been approved by NEA on 17 June, 2011. According to its CNEDP, by 2015, Dunhuang targets to develop solar and wind energy based renewable energy by reaching 2.2 million tce, and the consumption of renewable energy will reach 213,100 tce, which accounts for about 27% of total local energy consumption. The realization of building new energy city in Dunhuang will mainly rely on five kinds of projects, including (i) CSP-CHP and CSP projects, (ii) city micro-grid projects, (iii) solar PV projects, (iv) electric vehicle projects, and (v) large-scaled solar PV and wind power generation projects. Since the CNEDP was completed in February 2011, much earlier than the issuance of evaluation indices system in May 2012, particular efforts were made to identify these inconsistencies and conduct technical analysis based on the evaluation indices system authorized by NEA. 2. Current Status a. Status Quo of Energy Production and Consumption

According to the CNECP, the total energy consumption in 2009 is 547,500 tce, and it is estimate to reach 777,000 tce in 2015. In terms of electricity consumption, Dunhuang totally consumed 276 million kWh in 2012 and will amount to 350 million kWh by 2015. It is noted that Dunhuang is currently under rapid development in construction of large-scale solar PV and wind power generation projects. By the year of 2014, the total installed capacity is expected over 400MW, and the electricity generated by new energies will more than 600 million kWh/a. At that time, Dunhuang will become an electrical ―export‖ city instead of an ―import‖ city up to now.

b. Power Grid Construction

Dunhuang grid is composed of two 110 kV substation and fourteen 35 kV substations, it has basically realized automatic power generation scheduling. Restricted by limited renewable power consumption locally, Dunhuang has started grid construction from the year of 2013 by adding one 330kV substation, one 330kV booster stations in solar PV industrial park, three transmission projects of 330kV booster station in the wind power industrial park, and nine 110kV booster stations. These grid construction projects are expected to be completed by the end of 2014, so as to pave way for further development of renewable energy power generation projects. c. Heat Supply

By the end of 2012, the total construction area in Dunhuang is 4,401,400 m2, in which, the residential area of 2,744,600 m2, and the public construction area of 1,656,800 m2. The heating supply areas of Dunhuang are divided into three districts: Shazhou district, west city district, and cultural industrial park. Currently, the only one heat supply plant is being operated to provide heat supply to Shazhou district of 1,800,000 m2. Besides that, there still remaining 2,720,000 m2 areas unavailable for district heating supply. During the site visit, the consultants found that the city heat supply plan is still under preparation. Dunhuang plans to build another two new heat supply plants so as to meet heating demand in the districts of west city and cultural industrial park. Furthermore, it is estimated that more than 3.5 million m2 of new buildings will be built by 2018. By then, Dunhuang will be confronted with huger heating demand and bigger gap. B. Technical Analysis of NECDP The particular efforts were made to sort and review key projects in line with the evaluation indices system authorized by NEA. The following technical analysis was made by eight categories of key projects, that is, (i) micro grid project, (ii) solar PV projects; (iii) Concentrating Solar Project (CSP) and CSP-CHP project; (iv) solar thermal utilization project; (v) wind power generation project, (vi) geothermal utilization project, (vii) electric vehicle project and (viii) small hydro power project.

1. Micro Grid Projects a. Brief Introduction to Micro Grid Technology

Micro grid is defined as a small power generation and distribution system with distributed power source, energy storage and conversion devices, and monitoring and safeguard devices. With continuous increase in proportion of renewable power connected to the grid, it requires an effective and flexible power system with combination of the existing grid system with micro grid technology. Characterized by self-adjustment, multi power supply sources and equipped with energy storage system, micro grid technology definitely has prosperous future

to realize the improvement of power supply system to be more stable, reliable and qualified. As shown in Figure 5, the micro grid system can be sourced by solar power, wind power, hydropower, gas and/or oil and other energies. Its continuous energy supply is much efficient than solar PV or wind power alone. The micro grid system can either operate independently or to be connected to the grid. Energy storage device is required to guarantee a stable, reliable and continuous power supply. Since it is small in size and distributed at the end user side, it is much easier and economical to be realized than large-scale energy storage located at power generation side.

Fig. 5 Micro Grid System Diagram b. Development Status at Home and Abroad

Micro grid technology is currently in the phase of experimental research and demonstration construction in the worldwide. According to the finding of U.S. Navigant Research，up to March 2013, altogether 480 micro grid projects in the world with total installed capacity of about 3,800 MW at the stages of planned, under construction and operation. As shown in Figure 6, the North America takes the largest share with installed capacity of 2,088 MW in total, in which, 1,459MW in demonstrated operation.

Fig. 6 Global Distribution of Micro Grid Projects (MW)

In the PRC, the researches on micro grid technology started relatively late. It is still in the phase of experimental study and preliminary demonstration, which lagged behind the international advanced level. The current researches are mainly focused on micro power source control strategy, frequency stability of micro grid, smooth switch between grid-connected and isolated operation of micro grid, optimization of micro grid operation etc. PRC could not manufacture the key equipments to give support for construction and operation of micro grid system. In July 2012, NDRC issued "The 12th Five-Year Plan for Renewable Energy Development" and "The 12th Five-Year Plan for Solar Power Generation development". It plans to put forward to build 30 national new energy micro grid pilot projects by 2015. However, the supporting policies and relevant technical standards and management regulations have not been established accordingly. Up to now, there are 14 national pilot micro-grid projects having been constructed and/or being constructed in the PRC. In which, 11 projects of them are conducted by the State Grid, as shown in Figure 7. These pilot projects are characterized by (i) low in voltage levels, 10 of them are 380 V and 4 of then are10 kV; (ii) small in size, 10 projects less than 1MW and 4 projects less than 5MW; (iii) variety in types. 8 of them are urban micro grid systems connected to the grid, 2 of them are rural micro grid systems connected to the grid in remote areas of Inner Mongolia and Hebei province, and 4 of them are isolated micro grid systems in island regions of Zhejiang and Guangdong provinces. According to practical experience of these pilot projects, the construction of pilot projects is mainly contributed to the researches of key technologies of micro grid system, which is still quite immature in terms of power switching control, on and off grid switching and energy optimized management.

Fig. 7 Distribution of Micro Grid Pilot Projects in the PRC c. Current Status in Dunhuang

Duhuang plans to realize application of micro-grid technology in the fields of industry, tourism, buildings, street lighting and emergence power. During the field survey, the consulting team found that Dunhuang DRC planned to develop several micro grid pilot projects and divided them into 6 groups. It is expected that the implementation of these micro grid pilot projects could facilitate effective connection of renewable power and its local consumption.

Table 3 List of Micro Grid Pilot Projects in Dunhuang

No. Projects Name Project Contents Project Financing 1. CSP-CHP pilot Installed capacity is 150 MW, start Total investment is 5.25 project construction in 2014 and put into billion CNY. Plans to operation in 2015. apply for ADB loan. 2. Solar traffic pilot Installed capacity is 12.5 MW, Total investment is 390 project provide electricity for street lighting million CNY. and electric vehicle charging. 3. Urban BIPV pilot Installed capacity is 5 MW, provide Total investment is 60 project electricity for public buildings and million CNY. hotels. 4. Rural solar energy Construct 100 kW distributed solar Total investment is 2.7 utilization pilot PV power generation and heating million CNY, ADB project systems in Qili town. provided grant of 90,000 USD. 5. Solar PV pilot Installed capacity is 20 MW, provide Total investment is 220 project in tourism electricity for tourism sites. million CNY. sites 6. Solar PV pilot Installed capacity is 15 MW, provide Total investment is 150 project in Culture electricity for buildings and electric million CNY. Industrial vehicle charging in the park. Demonstration Park

The consulting team verified the above projects. It showed that Dunhuang has very limited understanding of micro grid technology. It is impractical to implement micro grid projects in No 2 and No 5 projects. There is no electricity load in No. 2 project of solar traffic pilot project; and for No. 5 project of solar PV pilot project in tourism sites, since the power supply area is so big by covering several tourism sites, the power transmission must be realized by booster station. Furthermore, it is noted that the pilot projects mentioned above have not achieved any progress, expect for the project No. 4 project of rural solar energy utilization pilot project. This project was identified as pilot project under this TA, and it has been completed with financing support from ADB. It should be pointed out that micro grid technology is not adopted in this project, however, it is just a distributed solar utilization project indeed. The development of micro grid projects faces various barriers in Dunhuang, which mainly resulted from the following aspects: (i) Lack of related policies and management regulations. Although the national micro grid pilot projects had been initiated, the relevant policies and management regulations have not been established at national level. (ii) Lack of technical support. From practical experiences of the existing national pilot projects, the PRC is lack of mature micro-grid technology and qualified project design and construction companies. (iii) Lack of understanding of micro grid technology. It is realized that some proposed projects by Dunhuang were misunderstood as the micro-grid pilot projects, and they are actually distributed solar PV projects. d. Proposed technical solution

Based on the analysis of current status and barriers faced to develop micro grid in Dunhuang, it is suggested to select one micro-grid project from the six proposed projects to be firstly studied and implemented. After discussed with local authorities, it is basically agreed to choose Dunhuang Demonstration Culture Industrial Park as the pilot project. Dunhuang Demonstration Culture Industrial Park is an important component part of Chinese civilization inheritance and innovation region in Gansu, who is regarded as the first national cultural development strategy platform. It is expected that the micro-grid project in Dunhuang Demonstration Culture Industrial Park could be translated into viable project and have a good demonstration effect in Dunhuang city and Gansu province. The consulting team proposed to establish a micro-grid project connected to the grid in the park. The renewable energy power generation is sourced by solar PV with installed capacity of 10 MW and wind power of 10MW. Besides, a natural gas turbine of 10MW is equipped for alternative use. The battery system of 50 MWh as energy storage device will also be needed associated with energy conversion, monitoring and safeguard devices.

According to the draft plan of Dunhuang Demonstration Culture Industrial Park, the maximum annual electricity consumption is 50 million kWh and the actual value is about 30-35 million kWh. It is estimated that the annual utilization hours of solar PV and wind power are 1700 hours and 2400 hours respectively, they can generate renewable power by 41 million kWh per year, which can meet electricity demand of all industrial, commercial, public and residential uses in the park. In addition, the micro-grid system is proposed to set a single connection point with the power grid. It can also exchange electricity in double flows if necessary.

Fig. 8 Schematic Diagram of the Micro-Grid Project in Dunhuang Culture Industrial Park

The table below presents the main technical and economic parameters for the proposed pilot micro-grid project in the park. The cost estimate for the main equipment is about 275 million CNY. The annual output of new energy power is estimated to be 41 million kWh, which could get subsidies 7.14 million CNY for distributed solar PV and 12.96 million CNY for wind power, totaling up to 20.1 million CNY per year. It is just a preliminary solution, the detailed technical and economic feasibility studies are strongly suggested to be conducted if applied.

Table 4 Main Technical and Economic Parameters for Pilot Micro Grid Project

Solar PV Wind Natural Gas Storage Battery Capacity 10MW 10MW 10MW 50MWh Investment (million CNY) 110 85 40 40 Annual power generated (million kWh) 17 24 Alternative - Annual subsides obtained (million CNY) 7.14 12.96 - - Main equipment investment (million CNY) 275 Annual total subside (million CNY) 20.1

2. Solar Power Generation Projects Dunhuang is one of richest regions with regard to solar energy resources in the PRC. The annual sunshine hours are more than 3246.7 hours, sunshine percentage is 75%, the annual

radiation amount is 6882.57 MJ/m2, and the daily average radiation amount is 18.86 MJ/m2. The solar power generation projects in Dunhuang include three types, that is, large solar PV projects, distributed solar PV projects and solar lighting projects. a. Large Solar PV Power Generation Projects

In the year of 2010, ―the State Council on Further Supporting Social and Economic Development in Gansu Province‖ clarified to ―accelerate the construction of solar power demonstration base in Dunhuang, and strive to build one-million-kilowatt level solar power base by 2020‖. Dunhuang achieved rapid development of solar power generation in recent years. By the end of March 2014, altogether 35 solar PV power projects have been approved with total installed capacity of 1,100MW, in which, 14 projects of 343MW have completed and connected to the grid; 6 projects of 450MW were approved and under construction; 15 projects of 447MW were approved to start preparatory work. It is estimated that Dunhuang will realize the construction of over one-million-kilowatt level solar power base by 2015. b. Distributed Solar PV Projects

It is found that the distributed solar PV projects are not mentioned in its CNEDP. However, as discussed in the previous part, some so-called micro grid projects are actually distributed solar PV projects instead. The consulting team sorted out the distributed solar PV projects than has built and to be built with total installed capacity of 6,306 kW as shown below.

Table 5 List of Distributed Solar PV Projects in Dunhuang

No. Project Name Capacity Notes Utilizing residential roof and greenhouse to construct distributed Rural Solar Integrated Utilization Pilot 1 100kW solar PV and heating systems. Project in Qili town Have been completed with support of ADB grant of 90,000 USD. 2 Yumenguan Distributed Solar PV Project 15kW Hecang Town Distributed Solar PV 3 8kW Project Power supply for small single-phase inverter water pumps, had been put Han Great Wall Distributed Solar PV 4 8kW into operation. Project 5 Xuanquan Distributed Solar PV Project 25kW Yadan Geo-park Island Power Supply Had been put into operation. 6 150 kW Center Project Lutong Mining distributed PV power To be approved by local DRC 7 6,000 kW station project

Total 6,306kW

The first project in the above list is ADB pilot project identified under this TA. The project is designed and implemented by Dunhuang Matrix Photovoltaic Co., Ltd, which utilize rural households‘ roof and greenhouse to construct 100kW distributed solar PV power generation and solar heating systems. The project was completed in November 2013, but not yet connected to the grid. c. Solar Lighting Projects

According to its CNEDP, Dunhuang planned to install and build 800 sets of solar light for gardens and lawn, 15 sets of solar traffic light and 78 sets of solar light for public toilets, to reach the total installed capacity of 10.5MW by 2015. Up to now, solar lighting systems have been installed in residential communities and streets with 200 sets for street lighting and 100 sets for garden lighting, and also in so-called ―Flying‖ square and public toilet in Crescent Spring tourism site. 1300 sets of solar insecticidal lights were also installed in near rural area; and the solar lighting sculpture at the Welcome Plaza is under preparation. d. Technical Analysis Solar PV technology is becoming more and more mature, the conversion efficiency of crystalline silicon solar cells increases with 0.4% to of 0.5% annually. With raw material price drops and global solar PV market expands, the price of PV product shows a trend of rapid decline. Local Energy Bureau of Dunhuang city conducted a survey on completed large solar PV projects and the feasibility study reports of some distributed solar PV projects. According to the statistics provided, the unit cost of the large-sized solar PV project is near 10 CNY/W, and 12 CNY/W for the distributed solar PV project. It is shown that the unit cost of the large-sized solar PV project is comparatively low due to scale effect. From the viewpoint of project revenue, due to different national subsidy policies, for the large-sized solar PV project, the project revenue for feed in tariff price is fixed, while the distributed solar PV projects will be varied by different end-user type and different time-period per day. Especially for the self-consumed electricity in commercial sector, the project venue can be maximized and much better than that of the large-sized solar PV project.

Table 6 Main Technical and Economic Parameters for Solar PV Projects in Dunhuang

Large-sized Parameters Distributed Solar PV Remarks Solar PV Unit cost 12 10 In price level of 2013 (CNY/W) Feed-in tariff price of 0.9 Feed-in tariff National subsidy 0.42 CNY/kWh is applicable for price 0.9 the project put into (CNY/kWh) operation since 1 January Local benchmark tariff 0.3423 2014. Residential 0.93 Take Gansu non Self- peak-valley electricity price Revenue of consumed Industrial 0.906 of 0.51 CNY/kWh for power Commercial 1.42 residential sector, 0.4806 0.9 generation Residential CNY/kWh for industrial (CNY/kWh) Connected sector, and 1 CNY/kWh Industrial 0.7623 to the grid for commercial sector in Commercial Dunhaung. Annual Data sourced from the utilization 1700 operated solar PV projects hours (h) in Dunhuang. e. Suggestions Based on national industrial policies and local development status, it is suggested to (i) implement large-sized solar PV projects in an orderly manner, the key issue is to solve grid connection and electricity consumptive issue; (ii) strive to develop distributed solar PV projects, expand the application scale, and promote utilization of the distributed solar PV projects in commercial sector and industrial parks; (iii) broaden and push solar lighting in public sector. 3. CSP and CSP-CHP Projects

Endowed with rich solar energy resources, different from other cities, Dunhuang is ambitious to develop CSP projects. According to its CNEDP to 2015, Dunhuang Plans to build CSP projects with installed capacity of 100MW and CSP-CHP project with installed capacity of 135 MW, which can also meet the demand of 1.3 million m2 for district central heating. a. Current Status

(i) Dunhuang 150MW Trough CSP-CHP Project

It is the priority project identified under this TA. During September to October of 2013, the consulting team made in-depth technical and cost-benefit analysis and submitted the first interim report. After that, Dunhuang local government entrusted Institute of Electrical Engineering of the Chinese Academy of Sciences (IEECAS) and Inner Mongolian Electric Power Research Institute to prepare for feasibility study report by referring to the suggestions

made by the consulting team. Dunhuang government made efforts to facilitate this CSP-CHP project and expected to apply for financial support from ADB. (ii) Beijing Shouhang Aiqiwei Energy Conservation Group 10MW Tower CSP Project This project was approved by Gansu DRC in August 2013 and started the construction work. It is designed to equip with molten salt thermal storage system. (iii) CSIC 2MW Stirling Dish CSP Project This project was designed by Shanghai Marine Diesel Engine Research Institute, China Shipbuilding Industry Corporation (CSIC-711). The site selection and feasibility study report have been finished. (iv) Luneng Group 3×50MW Trough CSP Project This project has been finished the feasibility study, and now is subjected to Luneng Group for internal review. b. Suggestions As analyzed in the first interim report, CSP technology is not mature in the PRC with bigger technical and financial risks, the consulting team make the following comments and suggestions. (i) The project site should be carefully selected by considering the basic demands of solar radiation resource, land, topography, fuel supply and grid connection, especially, the anti-wind capacity for the collector system should be enhanced. (ii) The core technical equipment for CSP system including concentrating collector, main heat exchanger and heat storage need to be imported. Because of no experience in CSP system integration, there also exists project constructing and operating risks, which will definitely affect the project overall operating performance. (iii) Since the national policy on feed-in-tariff for CSP project is not possible to be issued soon, it will undoubtedly have an influence for CSP project development and performance at current stage.

4. Solar Thermal Utilization Projects

In the CNEDP, Dunhuang planned to implement solar hot water projects by accumulated reaching solar collector area of 13,000 m2 and 5,400 solar houses projects by the year of 2015. Up to now, the cumulative amount of the installed solar collector areas in Dunhuang have reached about 58,000 m2 with 8,000 sets of solar collector and more than 20 solar heating projects for hot water in communities, hotels and schools. A 100-house centralized solar hot water project with 100 householders was completed in Crescent Spring Town.

5. Wind Power Generation Projects

Endowed with its richest wind resources, it is known that Jiuquan is regarded as one of the national 10-Million-Kilowatts Wind Power Bases to be constructed in the 12th FPY period. Dunhuang city belongs to Jiuquan region, it planned to develop wind power generation projects the installed capacity of 2,000,000 kW by 2015. However, Dunhuang has just been approved 5 projects by the Gansu DRC with installed scale of 250,000 kW, in which, only 1 project with 50,000 kw was confirmed by NEA. Dunhuang is now actively applying for the new project approval and to construct wind power base with installed capacity of 1,000,000 kW by 2015. Because the state grid construction plan lagged behind the renewable energy development plan, the construction of power grid transmission can not meet the rapid development of wind power generation projects, especially the national 10-Million-Kilowatts wind power bases as planned. It is clear that wind power abandoned to the grid is a major obstacle restricting the development of wind power industry in the west of PRC, and this problem is much severer in Gansu province. The main technical and economic parameters for wind power generation projects in Dunghuang are shown as below.

Table 7 Main Technical and Economic Parameters for Wind Power Projects in Dunhuang

Parameters Value Remarks

Unit Cost 8500 CNY/kW Price level in 2012，still have space to decline Take Gansu provincial average value as published by Annual Utilization Hour 1645 h NEA

Feed-in Tariff Price 0.54 CNY/kWh Wind power benchmark price of class II resource area

Base on the above analysis, it is suggested to (i) Adjust the development target. The total installed capacity of wind power generation projects in Dunhuang was planned to reach 2 million kW by 2015. However, Dunhuang currently only get approval of 250,000 kW. It is suggested to adjust the development target, so as to avoid the wind-based renewable electricity abandoned to the grid. (ii) Explore new approaches of wind power utilization. NEA is facilitating renewable heating pilot project, especially utilizing abandoned wind power for heating in North China. Since Dunhuang has huge demand for central district heat supply, therefore, it is suggested to apply for national renewable heating pilot project to promote renewable energies to be used locally.

6. Geothermal Utilization Projects

During the site survey, it was found that some renewable energy heating projects, especially geothermal utilization projects are being developed. It is expected that heating area will reach 300,000m2, and most of them are geothermal and/or geothermal-solar joint utilization projects. The typical projects are shown as below:

Table 8 List of Geothermal Utilization Projects in Dunhuang No. Project Technology Scale Updated Situation 1. Dunhuang Academy Institute ground-source 50,000 m2 operated over 6 pump years 2. Administrative service center solar and 6,000 m2 to be completed building of Solar PV Town ground-source by early 2014 pump for heating and cooling 3. Mogao Hotel ground-source 4,000 m2 operated pump 4. Dunhuang Water Company groundwater 28,000 m2 operated since (phase I) -source pump November 2013 5. Dunhuang Water Company groundwater 172,000 m2 planned (phase II) -source pump

Note: No. 2 project of Administrative service center building of Solar PV Town is supported by Sino-Danish Renewable Energy Program cooperated with China Academy of Building Research.

7. Electric Vehicle Projects

Dunhuang planned to implement electric vehicle project by basically establishing commercial operation of electric vehicles by reaching 430 sets, and accounting for 15% of urban public services. Currently, four electric sightseeing cars in Crescent Spring tourism site and six electric patrol cars in urban transport routes have been put into operation. Dunhuang now is planning to launch new energy electric bus route equipped with a new energy charge station and two electric buses. As a famous international cultural heritage tourism city, Dunhuang can make an demonstration effect to develop renewable energy-based electric vehicle project in public sector. It is suggested to get national subsidies by applying for "New Energy Vehicle Pilot City" to facilitate utilization of electric vehicles sourced by renewable energies.

8. Small Hydropower Project

It is found that a small hydropower project is under construction. The installed capacity is 3 MW and annual electricity generated will be 19,300,000kWh. The project is expected to be completed by 2015.

C. Summary of CNEDP Implementing Progress in Dunhuang By conducting desk review and field surveys in Dunhuang, the consulting team not only reviewed the progress of the key projects in the CNEDP so far, but also found some new energy projects not mentioned in the CNECP.

 It is found that Dunhuang city made their main efforts to develop solar PV projects and CSP projects by fully utilizing its remarkable solar resources. The three factors including limited grid transmission, immature CSP technology and lack of tariff incentive policy restrict the sustainable development of solar energy projects.

 It is observed that the development of micro grid projects is facing various barriers in Dunhuang since lack of administrative regulations, technical support, insufficient understanding of micro grid technology. It is suggested to select one micro-grid project from the six proposed projects to be firstly studied and implemented. Dunhuang Demonstration Culture Industrial Park is basically agreed to be chosen as the pilot micro-grid project.

 It is identified that comparing to technical immature, the major constraints faced by Dunhuang are lack of financing channel and policy support to translate the CNEDP into viable projects contributing to the establishment of national new energy city.

The construction progress of Dunhuang CNECP is summarized as shown in Table 9 with two categories. One is the progress of key projects mentioned in the CNEDP, and the other is the projects identified during the TA study in line with NEA documents. To sum up, the effectiveness of Dunhuang‘s CNEDP was also made by comparing the targets in the CNEDP and actual action taken by the end of June 2014, see to the Table 10.

Table 9 Summary of Construction Status in Dunhuang City

Projects Progress (by June 2014) I. Key Projects in CNEDP

Rural Solar Integrated Utilization Pilot Project in Qili town has been completed with the support of ADB grant. It isn‘t a micro-grid project 1. Micro Grid Project  indeed. The other micro grid projects have not achieved any progress any more.

 Large Solar PV Projects: totally 35 solar PV power projects have been approved with total installed capacity of 1.1 million kW, in which, 14 projects of 343MW have completed and connected to the grid. 2. Solar PV Project  Solar Lighting Projects: more than 500 sets for street lighting, 60 sets for tranfic lighting, and 2400 sets for garden lighting have been installed in residential communities, streets and the Flying square and public toilet in Crescent Spring tourism site; 1300 sets of solar insecticidal light were also installed in near rural area.  Beijing Shouhang Aiqiwei Energy Conservation Group 10MW Tower CSP Project started project construction on 30 August 2014. Dunhuang 150MW Trough CSP-CHP Project: feasibility study report was revised referring to the suggestions made by the consulting team. 3. CSP (CHP) Project   CSIC 2MW Stirling Dish CSP Project finished site selection and feasibility study report.  Luneng Group 3×50MW Trough CSP Project finished feasibility study report and was waiting for internal approval of Luneng group. Installed solar collector areas have reached about 58,000 m2 with 8,000 sets of household solar collector and more than 20 large solar heating 4. Solar Thermal  projects for hot water in communities, hotels and schools. A centralized solar hot water project for 100 householders was completed in Crescent Utilization Project Spring Town.

5. Wind Power Project  Approved 5 projects with installed scale of 250 MW, only 1*50MW project was confirmed by NEA and preliminary work is being carried out. 6. Electric Vehicle  4 electric sightseeing cars in Crescent Spring tourism site and 6 electric patrol cars in urban transport routes have been put into operation, and also Project plan to launch new energy electric bus route equipped with a new energy charge station and two electric buses. Projects not mentioned in CNEDP

2 1. Geothermal Project  Geothermal and geothermal-solar utilization technology is used to provide heating by near to 100,000 m area. 2. Distributed Solar PV Project in operation with a total installed capacity is 1129 kW, including 100 kW Rural Solar Integrated Utilization Pilot Project in Qili town. Project  3. Small Hydropower Project in operation with a total installed capacity is 25.7MW, and 3MW is under construction. Project 

Table 10 Comparison of Target and Actual Progress of the CNEDP in Dunhuang City

Target of CNEDP Actual Progress (by June 2014) I. Renewable Energy I. Renewable Energy 27% Consumption Ratio 17% Consumption Ratio (Target) (Actual Progress) II. Key Projects Planned II. Key Projects Completed 1. CSP and CSP-CHP Projects 145 MW 1. CSP and CSP-CHP Projects 0 11,640 2. Micro Grid Projects 2. Micro Grid Projects 0 kW 3. Solar Power Utilization 3. Solar Power Generation 10.5 MW projects Projects 4. Solar PV and Wind Power a. Large Solar PV Power 1,100 MW Generation Projects Generation Projects a. Large Solar PV Power 1,000 b. Distributed Solar PV 1,129 kW Generation Projects MW Projects b. Large wind Power 2,000 c. Solar Lighting Projects 50 kW Generation Projects MW 10,000 4. Solar Thermal Utilization 5. Solar Hot Water Projects 58,000 m2 m2 Projects 14,000 5. Wind Power Generation 6. Solar House Project 0 m2 Projects 430 7. Electric Vehicle Projects 6. Electric Vehicle Projects 10 Vehicles 7. Geothermal Utilization Projects 88,000 m2 8. Small Hydropower Project 25.7 MW

V Financing Analysis of CNEDP in Dunhuang City

This Consultation has undertaken an financing gap assessment by quantitative approach on the key projects in the City New Energy City Plans (CNEDPs) proposed respectively by the Dunhuang and the Wuwei Municipal Government in Gansu Province. The purpose is to examine financing capacity of the stakeholders associated with the CNEDPs to ensure that the budget plan is feasible and implementable. The major funding sources for these key projects are as follows: (i) local government financing; (ii) enterprise self-financing; and (iii) bank loans (including loans from domestic banks and international financial institutions). The assessment is conducted in accordance with these aspects.

A. Budgeting and Financing Gap Analysis for Key Projects in CNEDP of Dunhuang

Dunhuang is the first batch of national new energy cities approved by NEA with abundant solar energy resources. To carry out its CNEDP and fulfill the national guidelines for local consumption of new energies, the concerned government departments of Dunhuang City planned to implement a number of key projects with technical cooperation mainly from the Institute of Electrical Engineering of Chinese Academy of Sciences (IEE CAS). It is noted that the financing analysis will made based on the list for the key projects of CNEDP during 2013-2015 see to appendix 3. The official information have been updated and confirmed by Dunhuang DRC. The following detailed analysis will be focused on 23 key projects, and the others are large solar PV and wind power projects, which are not included. Since the different projects are administrated by different authorized government agencies, and the possible investors and financing sources also differ, these key projects are divided into 6 categories and make analysis as below. The categories include: (I) urban solar BIPV and solar thermal utilization (5 projects); (II) integrated solar energy utilization in rural areas (5 projects); (III) street solar lights and billboards renovation (4 projects); (IV) solar energy applications in green transportation (4 projects); (V) solar PV applications in tourism sites (2 projects); (VI) solar energy demonstration utilization in industrial parks (3 projects).

1. Budgeting Plan of Key Projects

The budgeting plans of these key projects are summarized in Table 10. The planned investment totaled 2.685 billion CNY. Among them, the budget by local government financing amounts to 69.80 million CNY, the enterprise self-financed budget amounts to 717 million CNY and the loans from banks amount up to 1.898 billion CNY. The budgeting details for the key projects are shown in Appendix 3.

The largest funding is the Phase I project of the 150MW CSP-CHP project in Dunhuang with a total investment of 1.943 billion CNY, of which 581 million CNY is self-financed by the enterprise, and 1.362 billion CNY to be expected from an ADB loan. Meanwhile, the budget for this project accounts for 72.35% of the total city plan. Therefore, the fulfillment of funding for this CSP-CHP project is essential.

Table 11 Budget for Key New Energy Projects in Dunhuang City in 2013~2015 Unit: 1, 000 CNY No. Project Category Fiscal overall Enterprise Bank loan Planned planning Self-financing investment I urban building PV and solar 26,500.00 64,000.00 256,000.00 346,500.00 thermal utilization (5 projects) II Integrated solar energy utilization 4,250.00 26,928.00 99,232.00 130,410.00 in rural areas (5 projects) III solar street lights and billboards 31,000.00 0.00 0.00 31,000.00 renovation (4 projects) IV solar energy applications in green 1,050.00 0.00 0.00 1,050.00 transportation (4 projects) V PV application in tourism sites 7,000.00 0.00 0.00 7,000.00 (2 projects) VI solar energy demonstration 0.00 626,150.00 1,543,140.00 2,169,290.00 applications in industrial parks (3 projects) Total 69,800.00 717,078.00 1,898,372.0 00 2,685,250.00

2. Funding Allocation for Key Projects

In accordance with the requirements of the Dunhuang DRC, a company involved in the new energy project must ensure in principle that the proportion of self-financing accounts for at least 20% of total investment of such project.

 For the five projects in Category I, where the government-financed funds account for 8%, the enterprise self-financed funds account for 18%, and the bank loans account for 74%, of which, three projects are fully financed by the government;  For the five projects in Category II, the government financed budget accounts for 3%, the enterprise self-financed capital accounts for 12%, and the bank loans account for 76%, of which, two projects are fully financed by the government. It is noted that Rural Solar Integrated Utilization Pilot Project in Qili town received a grant of 550,000 CNY from ADB;  For four projects from Category III, four projects from Category IV and two projects from Category V, they are all funded by the local fiscal support from Dunhuang municipal government, without utilizing any private investment and bank loans.

 For the three projects in Category VI, the enterprise investment accounts for 29%. They will expect that the remaining 71% of the funds are supported by bank loans. The fulfillment of funds from bank loan is the key to implementation of these projects. Thus, the government funding is critical to translate 15 planned projects into financing viable projects. Namely, these projects include 3 projects of Category I, 2 project of Category II, 4 projects of Category III, 4 projects of Category IV and 2 projects of Category V. The following Figures show the ratio of project investment in Categories I, II and VI.

Fig. 9 Funding Allocation of Key Projects in CNEDP of Dunhuang

3. Complementary financing capacity of the Dunhuang Municipal Government The Table below presents a basic situation of local fiscal revenues, transfer payments from higher authorities and external debts of Dunhuang City. The local fiscal receipts account for approximately 40% of the total fiscal budget receipts.

Table 12 Comparison on Situations of Fiscal Revenue Ratio of Dunhuang City (Unit: 1,000 CNY) Years Local Transfer Total fiscal Ratio of local Domestic Domestic International International fiscal payments budget fiscal Debts debt to total Debts debts to total budget receipts receipts to fiscal fiscal budget receipts total fiscal budget receipts budget receipts receipts 2005 118,050 139,650 257,700 45.81% 105,160 40.81% 95,980 37.24% 2006 143,880 149,600 293,480 49.03% 134,500 45.83% 87,890 29.95% 2007 231,220 264,140 495,360 46.68% 147,410 29.76% 82,840 16.72% 2008 275,860 342,880 618,740 44.58% 220,820 35.69% 67,060 10.84% 2009 310,260 425,380 735,640 42.18% 275,060 37.39% 89,420 12.16% 2010 384,100 572,600 956,700 40.15% 3146,40 32.89% 81,050 8.47% 2011 446,820 735,830 1,182,650 37.78% 573,590 48.50% 71,580 6.05% 2012 550,800 939,340 1,490,140 36.96% 612,700 41.12% 66,300 4.45%

In recent years, domestic debt also becomes a very important supplement to the municipal fiscal receipts. Figure 10 shows that the government budget expenditure depends largely on the transfer payments from higher authorities and the external government debts. The receipts from transfer payments from higher authorities play an essential role in the public expenditure of Dunhuang City.

Fig. 10 Sources of the Public Expenditure in Dunhuang City

It is assumed that the total fiscal budget receipts (including local fiscal receipts and receipts from transfer payments) of Dunhuang City will grow conservatively at an annual rate of 8%

over the year 2012, and further estimate the total fiscal budget receipts in 2013-2015. Meanwhile, we will allocate the government fiscal budgets amounting to 69.8 million CNY in the CNEDP with the ratio of 20%, 40%, and 40% during the three-year period of 2013~2015 to obtain a fiscal budget in each year. Then we have a scenario to compare between both, the situations are shown in Figure 11 below. The fiscal budget for key projects in the CNEDP accounted for only 0.86%~1.48% of the annual total budget receipts, representing very small proportion. It is concluded that the local finance authority is capable enough for overall coordination of the earmarked government fiscal budget required for the planned key projects. However, in consideration of their insufficient fiscal receipts in Dunhuang, the local finance authority is unqualified to provide sovereign guarantee to the proposed CSP-CHP project if Dunhuang municipal government wants to apply for ADB sovereign loan, instead, the financing arrangement should be made at higher level of financial authorities, such as the Financial Department of Finance of Gansu Province.

Fig. 11 Comparison of Local Fiscal Budget for Key Projects and Total Budgeting Fiscal Receipts

4. The Budget Self-Financed By Enterprises

The planned key projects requiring funds self-financed by enterprises are mainly in the Category 1, 2 and 6. Table 13 shows the demand for enterprise investment in the CNEDP of Dunhuang in 2013~2015. It is summarized that (i) the CNEDP has largely mobilized the participation of new energy companies, and most of these companies have identified the projects to be invested; (ii) The motivation of enterprise investment has linkage effects with bank support. If the leverage to the loans is not managed, the enterprise investors will then become cautious. Accordingly, the project will have uncertainty; (iii) The CSP-CHP project has the largest proportion of the total budget in the CNEDP. According to the cost-benefit analysis in the first interim report of this TA, if the ADB loan is certain, the domestic enterprise investment should have no problem to provide co-financing.

Table 13 Budget on Key Projects with Participation of Private Companies in 2013 -2015

No. New Energy Project Description Construction Enterprise Possible Investor Program Period financing (1,000 CNY)

I Urban 1 Ground heat pump 2013-2014 4,000 Dunhuang Clean building PV demonstration project in Energy and solar Dunhuang Photovoltaic Park thermal Service Center utilization 5 Distributed BIPV applications in 2013-2015 60,000 Undetermined Dunhuang Cultural Industry Park

II Integrated 8 Integrate rural solar energy 2013 2,120 Suzhou matrix solar energy utilization and micro-grid photoelectric utilization in demonstration project in Qili Dunhuang Town rural areas 9 Solar water-pump demonstration 2013-2014 24,808 Dunhuang State-owned application project in Dunhuang Farm State Farm

VI Solar energy 21 Lu-Tong Mining Corporate 2013-2014 15,300 Lu-Tong Mining demonstration 6MW distributed photovoltaic and project application projects in 150 MW CSP-CHP project 22 2013-2015 580,850 Beijing TRX Dunhuang (50 MW Phase I) Industrial Parks 23 Field experiment station of solar 2013-2015 30,000 Beijing Guorun Solar energy - Phase I project

Total 2013-2015 717,078

5. Possibilities of Bank Loans Under the coordination of Dunhuang DRC and the Finance Bureau, we undertook a direct consultation with Dunhuang branches of Bank of China, the Industrial Commercial Bank of China (ICBC) and the China Agricultural Bank (ABC) to understand their current supports for the new energy industry in Dunhuang. Meanwhile, we reviewed information on various financing support from international financial institutions (IFIs).

a. Domestic Bank Participation to New Energy Industries in Dunhuang The domestic loan supports in the new energy industry in Dunhuang are mainly from the Bank of China and ICBC, they financed a few large solar PV and wind power plants in Dunhuang photovoltaic industrial park. Other banks are still evaluating the potentials over time. Table 14 provides six loans from the two domestic banks, showing these loans are considerable in terms of loan size and the proportion to the total investment.

Table 14 Loans from Domestic Banks to Solar PV Enterprises in Dunhuang City

Unit: 1,000 CNY

No. Domestic Enterprises Received Loans Year Loan Project Ratio of Remarks Bank to amount total loan to receive Investment total loans investment

1 Bank of Yi Fei Solar Energy Development Co., 2011 60,000 210,000 28.57% China Ltd of China Guangdong Nuclear

2 Bank of CGN Solar Energy Development Co., 2013 106,000 160,000 66.25% 15years China Ltd (Dunhuang)

3 ICBC China Resources Power Network 2010 180,000 600,000 30.00%

4 ICBC Zhejiang Chint Solar Technology 2011 585,000 970,000 60.31%

5 ICBC Renewable Energy Asia Group Limited - 165,000 - -

6 ICBC SDIC Dunhuang PV 2011 73,500 200,000 36.75% 10years

Total 1,169,500 2,140,000

The domestic banks are currently focused on large solar PV and wind power projects in Dunhuang City. The loan terms of 10-15 years are well in line with such long operation period and payback period of such projects. The criteria for credit approval is case-by-case, and the approval for the project loan size of less than 500 million CNY is authorized at Gansu provincial branches level, which accelerate the procedure of project credit approval. Furthermore, during the site visit, the local banks remarked that the so-called ―joint loan‖ can be launched to meet the financing need of the large projects. It was discussed that the distributed solar PV projects can be presented with more convincing cash flow model with national subsidy, and the banks are encouraged to develop more flexible and innovative financing products, e.g. collateral loan. As for the largest investment project in the CNEDP, if ADB and other IFIs are uncertain to provide financing support to CSP-CHP project, domestic banks and may also be considered.

However, the financial costs may increase, and net cash flow and return of investment (FIRR) may go down. During the site survey, we also found that the distributed solar PV projects are still not acceptable by the domestic commercial banks in the near future. Instead, it is suggested to apply for the loan from China Development Bank (CDB). CDB and NEA jointly issued a document in August 2013 titled Opinions on Supporting Financial Services for Distributed Solar PV Development. According to that, the CDB shall provide the diversified financing products for the distributed solar PV projects, which are mainly of long-term loans, and supplemented by short term loans and working capital loans. The financing scope is enlarged to development and construction companies, public institutions and other legal entities and even natural persons (households). As of August 2013, the CDB loans for solar PV power generation reached totaled 48.1 billion CNY. In term of support for constructing the distributed solar PV demonstration parks, the CDB has initially designated 18 parks throughout the country to provide the financing support, but none is in Gansu Province yet. Through the analysis above, it is concluded that enterprises participating in key projects under the CNEDP are mostly those of good reputation, and most of their investment plans can be supported by the domestic banks, and the financing plans are basically viable. b. Utilization of International Loans in Dunhuang City

It is found that accumulated six projects completed and/or being implemented are funded by IFIs in Dunhuang, these projects mainly cover medical, agricultural and natural resource sectors. The total loan scale is rather small by $ 16.2 million USD. The details are shown in Table 15. Although there is not any project related to energy sector, we are assured that this paved way for further international cooperation for development of renewable energies in Dunhuang.

Table 15 List of IFI Projects in Dunhuang

Amount Loan No. Project Name IFIs (US Dollars) Term 1 Disease prevention loan project The World Bank 25502.54 1997-2017 2 Tuberculosis loan project The World Bank 57267.35 2003-2023

3 Grass silage wrapped film project Nordic Investment Bank 6,465,600.00 2004-2015

4 Water-saving irrigation project Japan Bank for International 2,569,299.10 2004-2034 Cooperation 5 Importing medical equipment of Dunhuang The Spanish government 3,830,400.00 2005-2025 City hospital project 6 Yadan national geological park natural The World Bank 3,300,000.00 2009-2028 heritage conservation project Total 16,222,566.45

It is expected that the energy supply and energy consumption structure of Dunhuang can be fundamentally modified through facilitating solar and wind energy utilization locally. The sustainability of Dunhuang as a world tourist city will be further enhanced by implementing CNEDP. Besides, the construction of new energy city of Dunhuang provides a timely and good platform for IFIs who concern and support new energy development in the PRC. It is understood that CNEDP gives a great opportunity for Dunhuang municipal government to cooperate with ADB especially in energy sector. Our financial feasibility appraisal in the first interim report showed that the 50MW CSP-CHP project in Dunhuang City is eligible for applying ADB loan. B. Summary of Financing Gaps in Dunhuang According to our systematic analysis on the budget and financing gap of the key projects in CNEDP of Dunhuang city, our main findings regarding financing gaps for key projects in CNEDP of Dunhuang are summarized as follows:

• The 4 projects on street solar lights and billboards renovation, 4 projects on solar energy application in green transportation and 2 projects on solar PV application in tourism sites totaled 10 projects, require CNY 39.05 million. These projects are funded entirely by the Dunhuang local fiscal budget; urban building PV and solar thermal utilization projects and integrated solar energy utilization in rural areas with a total of 5 projects require CNY 30.75 million. They are also fully covered by fiscal funds. If the budget planned for the 15 projects is apportioned into three years of 2013 - 2015, the fiscal financing requirement accounts for very small percentage of the total fiscal budget receipts of Dunhuang City, so financing gap will unlikely appear.

• The CNEDP of Dunhuang has mobilized the participation of the new energy companies, and most of these companies have identified the projects to be invested. The 3 projects on solar energy demonstration application in Dunhuang Industrial Park are attractive projects, so that domestic enterprises are already interested in investing. The fulfillment of bank loans is the key to implementation of the projects. The CSP-CHP project holds the core of the CNEDP budget. According to our cost-benefit analysis, if the ADB loan is available, the domestic investment companies should have no problem in funding. The distributed solar PV projects of cultural industry park require a total investment of 300 million CNY, which is a potential gap.

• The domestic banks have provided significant loans to large solar PV projects in Dunhuang, but did not grant recognition to the distributed solar PV projects in the near future, as the banks were not optimistic to the cash flow of these projects. There are six projects in Dunhuang using loans from IFIs and foreign governments, of which these loans are rather small in scale. New energy and renewable energy

projects have never been funded, which presents new opportunities for further international cooperation. Dunhuang is a renowned tourist destination in the world, the development of new energy city of Dunhuang provides an ideal platform for international organizations and financial institutions giving concern over new energy applications. The ADB has not implemented loan projects in Dunhuang, which is also a great opportunity for cooperation. Our financial appraisal on Dunhuang 50MW CSP-CHP project showed that the project is eligible for an ADB loan.

• We are convinced that the overall budget for key projects in CNEDP of Dunhuang is optimistic. The key issue of the financing gap depends on whether budget allocation to the 50 MW CSP-CHP project and the distributed solar PV projects in the cultural industry park would be managed successfully.

VI Due Diligence of Priority Project in Dunhuang City

A. Identification of Priority Project in Dunhuang City

Through face-to-face communication with the Dunhuang municipal government, the consulting team learned that the Dunhuang plans to implement a series of regional solar micro-grid pilot projects supported by the Institute of Electrical Engineering (IEE) of Chinese Academy of Sciences (CAS). These projects include Concentrated Solar Power and Heat Cogeneration (CSP-CHP) project, solar vehicle micro-grid project, urban building integrated photovoltaic (BIPV) project, rural solar comprehensive utilization pilot project, solar PV project in travel sites and cultural industry demonstration parks, etc. It is basically agreed by ADB, EA and Dunhuang municipal government to select the CSP-CHP project as the priority project for this TA project during the site mission of May 2013. As one of the key project listed in Dunhuang‘s CNEDP, the Dunhuang municipal government had conducted some project preparation work since the year of 2011, the pre-feasibility study report was basically completed in 2013, and the feasibility study report is expected to be finished by the end of 2014. The basic project information is shown below.

Box 1. Brief Information of Dunhuang CSP-CHP Project Project Name: Dunhuang CSP-CHP project Project Location：southwest of Qili town, Dunhuang city, Gansu province Construction Content：Planned total installed capacity of 150MWe，intend to design and install 3×50MWe CSP-CHP system by phases. The first phase is to install 50MWe unit， the heat supply area is 1.3 million m2. Project Developer：Dunhuang Clean Energy Development Co., Ltd Construction Schedule：Plan to start in 2015 Total Investment & Financing Plan：The investment is 317.41million USD (1.94 billion CNY), plan to apply ADB loan of 222.51 million USDEquivalent to 1.362 billion CNY, accounting for 70% of the project total investment; other 30% will from domestic bank loans About 94.90 million USD (0. 581 billion CNY)

It is known that the development of Concentrated Solar Power (CSP) is still in its infancy in the PRC. The PRC government plans to conduct a solar resources survey for CSP system and then promote a series of CSP demonstration projects. According to Consultant‘s recent interview with the NEA in August 2013, it is clarified that the NEA concerns three aspects of CSP demonstration projects as follows:

 promote the CSP technologies with high efficiency  Industrialization of CSP equipment manufacture  the competitive price of CSP project Therefore, it is expected that the construction of Dunhuang CSP-CHP project will have a good demonstrative effect in promoting the development of solar thermal power industry in the PRC. The Dunhuang priority project can not only fill up gaps of developing CSP-CHP in the PRC, but also accumulate practical experience of CSP-CHP, and push forward CSP development in the PRC.

B. CSP-CHP Development at Home and Abroad

1. Introduction to CSP-CHP Technology

The Concentrating Solar Power (CSP) is the power generation process by converting solar energy into thermal energy (heat) and then converting the produced heat into electric power. Any power station using this light-heat-electricity conversion technology is called a solar thermal power station. Concentrating solar power with cogeneration of heat and power (CSP-CHP) refers to the production process by a solar thermal power station with heat supply (e.g. district heating) and simultaneous power generation. According to the ways of collecting solar radiation, the CSP technology can be divided into four types: Tower CSP, Trough CSP, Stirling dish CSP and Fresnel linear CSP. Among them, the Trough CSP technology (e.g. with large, U-shaped parabolic reflectors focusing mirrors) is the earliest technology which has achieved commercialization in the United States 20 years ago. It currently takes the largest share of CSP technology in the world with proportion up to about 85%.

Fig. 12 Trough CSP: Valle 1 & Valle 1, Spain

Fig. 13 Tower CSP: PS10 & PS20 and GemaSolar, Spain

Fig. 14 Stirling Dish CSP: Maricopa, U.S.A

Fig. 15 Fresnel Linear CSP: Puerto Errado 2, Spain

According to the pre-feasibility study report, the through CSP technology will be used for Dunhuang CSP-CHP project. Trough CSP generally consists of parabolic trough concentrators, heat-absorbing pipes, heat storage, steam generator and turbine generator units, etc. The parabolic trough concentrating solar collectors are interconnected in series or parallel, forming the collector field by modular layout. By tracking the sun through parabolic trough solar concentrator, trough CSP makes direct sunlight gathered onto the surface of heat-absorbing pipes to heat working fluid inside, and thus to participate in thermodynamic cycle of power generation system. While refer to the CSP-CHP system, it can be divided into two parts. The CSP part of the system mainly involves integration of solar concentration collection, heat storage and heat

exchange subsystems. The CHP part is similar to the traditional fossil-fueled CHP system. The total system efficiency of solar thermal power is the multiplication of heat-collecting efficiency in the CSP part and heat engine efficiency in the CHP part.

2. CSP Development Status Abroad

Since 1990s, the global CSP installed capacity has increased steadily. Up to March 2013, the accumulated installed capacity of global CSP exceeded 2.8GW, among which, Spain and the United States are the two main markets. In Spain, there are 45 CSP projects in commercial operation with total installed capacity of 2,050 MWe, and will reach 2,350MWe by the end of 2013; In the United States, the installed capacity of CSP projects in operation is 525MWe, besides, additional5 CSP projects are under construction, so the total capacity will add up to 1,312 MWe by the end of 2013.

Fig. 16 The share of CSP installed capacity in the world (March 2013)

Furthermore, in Israel, two CSP projects with total capacity of 220MWeare under construction; in South Africa, 100MWe Eskom tower air-cooled molten salt with 9-12h thermal storage system project will start civil construction in 2013, and is expected to be completed in 2017; and in France, two CSP projects are selected as tender projects organized by the Electricity Regulatory Commission. With the increasing operating experience, the system cost and investment risk will be gradually reduced, and the commercialized CSP projects are gaining gradual popularization in the world. It is expected that the European solar thermal power generation will no longer need support and realize commercialized operation around the year 2020. It should be noted that most of operating CSP systems in the world are solely for power generation. The international experiences shows, that heat supply can be more simply realized by coal-fired and renewable energies (including biomass and wind) based CHP plant. Since all the CSP systems are located far from towns, the supplementary facilities of heat supply requires rather big investment, nearly no case study can be found for CSP cogeneration of heat supply and power generation.

3. CSP Development in the PRC

The CSP development in the PRC is currently under the stages of development, testing and demonstration. The National 12th Five-Year Plan for Renewable Energy Development listed the solar thermal power as one of eight national key projects. According to the planning, CSP projects are facilitated to be built for demonstration in the areas with favorable solar sunlight conditions, wide area of available land, and water resource conditions. The construction scale of solar thermal power aims at reaching 1GWe in 2015 and 3GWe in 2020. Currently, despite the bidding of CSP concession project had been started in 2010,there is still lack of fixed feed-in tariff price for CSP projects, and the investment prospect for CSP project is unclear so far in the PRC. However, several domestic major electric power groups and few private enterprises have begun to invest CSP projects, and several 10MW-scale CSP projects have started successively in the Northwest and Southwest China. Up to now, about 22 CSP systems have been developed, and the total installed capacity of CSP projects are being planned to be promoted approximately 886MW. In which, most of them are under development, and some projects are inevitably to be intermitted or terminated. Some typical CSP projects in the PRC can be seen in Table 16.

Table 16 Typical CSP Projects in the PRC

Project Name Project Type Research institutions/ Project Description Developers Yanqing 1 MW Tower IEE, CAS Steam production in July experimental CSP 2011, and electricity plant, Beijing generation in August 2012 Sanya 1MW New type E-Cube Energy Technology Electricity generation in experimental CSP Modular (Shanghai) Co., Ltd. October 2012 plant, Hainan Heliostat Delingha 50MW Tower Qinghai Supcon solar power The first phase (10MW) CSP plant, Qinghai Co., Ltd. completed, and connected to the grid in July 2013 Erdos 50MW CSP Trough China Datang Corporation The first CSP concession plant, Inner Renewable Power Co., Ltd tender project in the PRC, Mongolia it will expire in September 2013, not commenced yet Jinta 50MW CSP Trough China Huadian Engineering Approved by NEA in plant, Gansu Co., Ltd. August 2011, under designing

At present, PRC has basically met certain conditions for producing some CSP major facilities, and the CSP industry is developing. However, these products have not been used in actual project yet, so the performance and quality of these CSP facilities are yet to be verified.

Moreover, since lack of CSP project construction and operation experiences, the overall system design capabilities and integration technologies, as well as CSP system modeling and simulation technologies have just started. Currently, only Delingha 50MW tower CSP project phase I (10MW) was put into operation and connected to the grid in Qinghai province in July 2013. At present, there is no precedent example for design and construction of CSP-CHP project in the PRC. According to the research of National Solar Thermal Energy Alliance (NSTEA) on CSP industry in PRC, it is forecasted that the electric power generated from CSP system will realize grid connection at consumer side in 2017 and the CSP feed-in tariff can be comparable to the current solar PV feed-in tariff (1 CNY/kWh) along with a series of policy support and scaled-up development. C. Technical Assessment of CSP-CHP Project 1. Overview of Technical Solution

The proposed CSP-CHP project is intended to adopt the Trough CSP technology featuring heat storage system. As shown in Figure 17, the system converge sunlight on the location of the focal line through trough parabolic concentrator mirror, and the tubular receiver is placed at the location of focal line, to convert the focused solar energy. When the internal oil in the tubular heat absorber is heated, the oil flows through heat exchanger to heat water and to generate steam. This steam generates electricity by means of a steam turbine. The waste heat of this process is used to prepare high temperature hot water and realize heating. The natural gas is demanded as auxiliary power associated with natural gas boiler.

Fig. 17 Schematic Diagram of Duhuang CSP-CHP Project

The CSP system consists of seven subsystems: concentrating collector subsystem, main heat exchanger subsystem, heat storage subsystem, thermal power subsystem, auxiliary power subsystem, power access subsystem and heating subsystem. The CSP part of the system including concentrating collector subsystem, main heat exchanger subsystem and heat storage subsystem, it is the core technology of the whole system; similar to traditional thermal power plants, the CHP part of the system includes thermal power subsystem, auxiliary power subsystem, power access subsystem and heating subsystem, except that for the main steam entering into the steam turbine of thermal power system, the energy is sourced from the heat generated by the solar collectors, rather than the heat traditionally generated by burning fossil fuels.

2. Technical Assessment

Based on the development status of CSP at home and abroad, the basis of technical assessment covers existing CSP research studies, international experiences of constructing and operating Trough CSP stations, and the construction and operation experience of CHP projects at home and abroad. The technical assessment will be focused on four key aspects, that is, site selection, technical configuration of sub-systems, system integration and production capacity. Based on the construction plan, the 3×50MWe CSP-CHP project designing and installing will be implemented by stages, the technical and financial due diligence will be conducted with regard to the first stage of 50MWe. a. Site Selection

The primary issue for developing CSP project is site selection.

The national ―12th Five-Year Plan for Development of Renewable Energy‖ intends to select appropriate areas to carry out CSP pilot projects. Project These areas include Highland flat along the Yellow River in Inner Gansu Mongolia Erdos desert, flat desert Hexi Corridor of Gansu and Xinjiang Turpan-Hami Basin and Tarim region, Lhasa, Tibet, Qinghai, and Ningxia. Dunghuang lies right in northwest of Hexi Corridor of Gansu, belong to the national key areas for development of CSP. The project site

of Dunhuang CSP-CHP project is shown in the picture. The main factors for CSP-CHP project includes direct normal irradiation (DNI), land, topography, water resource, climates, grid connection and distance of heat supply, etc., the project site situations are shown in Table 17.

Table 17 CSP-CHP Project Site Situations

No. Factors Situations Southwest of Qili town, Dunhuang, Gansu 1 Project location South longitude 94°33′, North latitude40°06′ 2 Altitude 1139 m o Annual Average 9.3 C ℃ 3 Temperature Highest 41.7oC Lowest -30.5oC average 2.2 m/s 4 Wind speed maximum 32.7 m/s 5 Average sandstorm days 10.7 days 6 Average strong windy days 13.5 days 7 Area can be utilized 6 km2 8 Slope of the ground (natural) 0.4% 9 Solar resource Annual DNI 1990 kWh/m2 10 Distance to water resource 7km 11 Distance to grid 3km to 35kV, 11km to 110kV 12 Distance to heat users 10.5km

Direct Normal Irradiation (DNI): According to the abroad experience, the areas where its annual DNI value between 1600-1800 kWh/m2 is possible to build CSP project, the CSP project is suitable to be constructed when the annual DNI value is above 1800 kWh/m2. For the proposed project, the annual DNI at the site selected equals to 1990 kWh/m2, which provides good conditions for CSP construction. Land and Topography: It reveals by international CSP construction experiences that a 50MW Trough type CSP needs land available of nearly 1.5 km2, and the land natural ground slope should be less than3%. For the location selected for this project, the land area available is about 6 km2 and the ground slope is nearly 0.4%, which satisfies for land and topographic requirement. Water resource supply: A CSP using heating transfer oil as working fluid in solar collector has the same demand for water resource as traditional thermal power station, the

steam turbine needs plenty of water. The project site is 7km away from the nearest water sources. Hence, the water demand can be basically safeguarded. Fuel supply: For this CSP-CHP project, natural gas is needed in large quantity, which are mainly combusted in auxiliary energy sub-system as auxiliary energy. The natural gas of Dunhuang is supplied by Sebei and Nanba gas field, which are affiliated with Qinghai oilfield. The total length of gas pipeline is 345.6km with annual gas transportation capacity of 300 million Nm3. According to the gas supply agreement with Qinghai petroleum company, the price of natural gas used by Dunhuang city is 1.7 CNY/Nm3. Currently, there are 200 million Nm3 per year available for this project. According to preliminary calculations, annual demand quantity of natural gas for the first stage is 14.61 million Nm3. Hence, this project has sufficient natural gas fuel supply. Grid connection: The project site is 3 km away from the Qili town 35 kV transformer substation and 11 km away from the Suzhou Town 110kV transformer substation. It is convenient and optional for grid connection. Distance of heat supply: The project site is 10.5km away from the heat users of Dunhuang city. The investment of corresponding heat transfer stations and heat supply pipe network will be remarkably increased. Climate condition: Compared to the CSP projects operated in U.S. and Spain, the climatic conditions of the Dunhuang CSP-CHP project are relatively difficult. There is a large temperature gas exists between day and night and there are occasionally sand storms. These factors will influence development of CSP-CHP project in Dunhuang. Generally speaking, the site selection of this project is technically rational, the basic demand of solar radiation resources, land, topography, fuel supply and grid connection can be fully satisfied and the water supply can be basically safeguarded. However, the distance of the heat supply is relatively far away from the heat users, and the climatic conditions are comparatively complicated and poor, so the construction, operating and maintenance of the CSP project in Dunhuang will be a challenge.

b. Technical Configuration of Sub-systems

The technical configurations of each sub-system for Dunhuang CSP-CHP project can be seen in Table 18.

Table 18 Technical Configuration for Each Subsystem

Subsystem Technical configuration Subsystem 1- Including solar collectors, heat transfer fluid and auxiliary equipment. Solar Concentrating collector collectors (SCA) include: mirror, back frame, collector tube, tracking system systems (including: drive, control and sensor). The heat transfer fluid is high-temperature conducting oil, which is 296oC when flowing into the solar collector, and 393oC when flowing out. Subsystem 2- Including pre-heater, steam generator, super-heater and re-heater. Double Main heat loop is used. The conducting oil is heated in the collector, generates exchanger system superheated steam after entering the primary heat exchanger subsystem, and the superheated steam generates power when entering the turbine power generation system. Subsystem 3- Heat storage medium is mixture of nitrate substances, and the heat storage Heat storage system system can guarantee operation of 7.5 hours at night. The indirect TES arrangement of the system uses synthetic oil as the heat transfer medium. The liquid molten salt is used as heat storage material for sensible heat, and the oil-salt heat exchanger is installed between the heat transfer medium and the heat storage material. Subsystem 4- Generating power of 50MW, intake pressure of 9.5MPa, inlet temperature of Thermal Power System 383oC, condensing steam turbine; the cooling system is of recycled water cooling, using cooling method of water-saving air cooling; electrical systems and measurement and control require special design and manufacturing. Subsystem 5- At night, cloudy or other conditions without sunlight, the auxiliary energy Auxiliary Energy system can be used. The Central Electricity Generating Equipment Area is System equipped with 3 units of 20MW gas boilers, 2 units in use and 1 unit for spare. Subsystem 6- The power station is internally built with a 110kV booster station, from Grid Connection System which a single circuit 110kV line is led out to 110kV substation in Dunhuang City before connecting into grid, with distance of about 11km. Subsystem 7- The heating period is 140 days, the heating area of 1.3 million square meters, Heat Supply System and the distance of 10.492km. The water supply temperature in the primary heating pipe network system is determined as 130oC, and the return water temperature is determined as 70oC.

 Sub-systems of concentrating collector, main heat exchanger and heat storage CSP industry in China is still in its infancy, there is very little experience about the quality and performance of home-made products. Currently, the core technical equipment of the concentrating collector, heat exchanger and heat storage sub-systems should be imported. Also, the key equipment of the concentrating collector and main heat exchanger for this project twill import the parabolic trough collector technology SKAL-ET from German; and for the equipment of heat storage sub-system, it is plan to introduce the technology adopted by the Andasol CSP project.

 Thermal power and auxiliary energy sub-systems The PRC has rich experiences in the field of CHP development not only for project operation but also for equipment manufacturing the designing abilities. Therefore, the CHP equipment manufacturing and procurement including steam turbine cooling systems, electrical systems, controlling devices as well as auxiliary power systems associated with natural gas boiler are available from domestic market. It is noted that according to the proposed technical solution of thermal power sub-system mentioned in the project pre-feasibility study report, the parameters at the inlet of turbine is 9.5MPa of pressure and 383℃ of temperature. The main stream is under high pressure in rather low temperature condition, the impact on the turbine efficiency remains to be argued. Furthermore, it is suggested by the consultant to use air cooling method in order to save water resource effectively.

 Grid connection sub-system Since the project site is 3 km away from 35 kV transformer substation and 11 km away from 110kV transformer substation, Dunhuang CSP-CHP project have two options for grid connection. Solution one: Build a 35 kV booster station in the power plant connecting to the Qili Town 35 kV substation using single loop, and access to the local grid; Solution two: Build a 110 kV booster station in the power plant connecting to the Suzhou Town 110 kV substation using single loop, and access to the local grid.

Although solution one is more economical, but considering Dunhuang‘s new energy production scale and capacity will keep increasing, the renewable energy-based electricity could not be completely consumed locally in the near future. Hence, with consideration of possibilities for connecting electricity to the grid, the second solution will be more rational. The schematic diagram of grid connection for the second solution is shown in Figure 18.

Fig. 18 Schematic Diagram of Grid Connection

 Heat Supply Sub-System At the back-end of CSP-CHP system, CHP is conventional thermal power technology. Generally, CHP has high thermal efficiency because of the absence of cold source loss. However, in the project pre-feasibility study report, it plans to choose condensing steam turbine, and to achieve heat supply by high-value heat concentrated by the solar collector. This would greatly decrease heat efficiency of the thermal power sub-system, and thus decrease the total efficiency of the whole system. It is advised to use extraction turbine instead of condensing turbine to improve technical configuration and systematic heat efficiency. c. System Integration

Different from conventional electricity production and solar energy applications, CSP includes multidisciplinary technologies, in particular, requires system integration experience. At present, the PRC is lack of CSP systematic design and integration capacity and experience, especially for the front-end of system, the core technologies and equipment should rely on importing. Trough type CSP technology is the first to have achieved commercialization, and have been run successfully for over 20 years in the worldwide. Given CSP industry development status in the PRC, the project's overall technical solution is feasible by introducing international advanced experience of CSP projects and integrating domestic construction experience of conventional CHP projects. However, it needs to be carefully studied whether the international experience is suitable

for domestic climatic conditions and can be simply adopted for the project. For instance, comparing to most trough CSP projects operated in the world, this project site has relatively poor climatic conditions, the wind speed and temperature gap between day and night are big, even with frequent sandstorms, Therefore, copy foreign technology and experience simply is not rational, e.g. anti-wind capacity for collector system should be enhanced based on the climatic conditions of the project site. Moreover, it should also be pointed out that this project will be confronted with operation risk because of no CSP system integration experience, which will directly affect the overall operating performance of this project. Besides, because of the including of auxiliary energy system of the overall technical configuration, fuel of natural gas is needed in large quantity for CHP. For the assessment next stage, it is quite necessary to figure it out the proportion that the solar radiation and nature gas contribution to the overall electricity and heat production, respectively. d. Production Capacity

The production capacity of the CSP-CHP project can be divided into two parts, the electricity generation and heat supply. The production capacity is closely related to the project profit. According to the consultant‘s preliminary calculation, the first phase of this project (50MW CSP-CHP) would generate electricity 252 million kWh and supply heat 69.8×104 GJ per year. The detail project production capacity is shown in Table 19.

Table 19 Project Production Capacity

I. Electricity generation 1. Annual total electricity generated 252 million kWh 2. Annual total electricity connected to the grid 224 million kWh 3. Annual utilization hours 5040 h 4. Feed-in-tariff Not been issued II. Heat supply 1. Area 1.30 million m2 2. Duration 140 days 3. Annual average heat load 57.7 MW 4. Annual total quantity 698,000 GJ 5. Heat price 23 CNY/(m2·a)

It is pointed out that the PRC government is planning to conduct resource survey and will promote a series of CSP demonstration projects. The national policy for feed-in-tariff will not be recently issued, thus this is undoubtedly policy risk for this project. Besides, by analyzing energy source of the heat supply, it is found that only 31.78% heat supply (about 224,800 GJ/a) comes from solar energy, while the other 68.22% (about 463,200 GJ/a) is

contributed by combustion of natural gas. Therefore, the cost-benefit for heat supply solution requires to be further analyzed under the condition of long distance for heat supply and big investment for pipe network construction.

3. Summary of Technical Assessment

 The site selection of this project is technically rational, which meets the basic demands of solar radiation resource, land, topography, fuel supply and grid connection. However, referring to international experiences of CSP projects, the climatic conditions of this project site are comparatively poor and complex, the anti-wind capacity for the collector system should be enhanced.

 The core technical equipment for sub-systems in the CSP part system include concentrating collector, main heat exchanger and heat storage need to be imported. The designing and manufacturing of thermal power and auxiliary power sub-systems in the CHP part of system are available from domestic market. It is suggested to conduct deep analysis and research regarding equipment selection of turbine and its main stream parameters to ensure the internal efficiency of thermal power sub-system. It is also advised to improve the technical solution for the heat supply sub-system to guarantee high value of thermal efficiency of the total system.

 Because of no experience in CSP system integration, this project will face project constructing and operating risk, which will definitely affect the overall operating performance of this project. Besides, for the technical assessment next stage, it is suggested to figure out the proportion of solar radiation and nature gas contribution to the overall electricity and heat production.

 Much more attention should be paid to feed-in-tariff policy. Since the national policy on feed-in-tariff for CSP project will not be issued soon, it will effect CSP project development and performance. Besides, with a long distance of heat supply and large investment for pipe network construction, since heat supply is mainly sourced by natural gas, the cost-benefit analysis for heat supply sub-system needs to be further conducted. D. Financial Assessment of CSP-CHP Project This financial analysis has been conducted in accordance with The ADB Guidelines for Financial Governance and Management of Investment Projects (2005) and Preparation of Presentation of Cost Estimates for Projects Financed by the ADB (2008). The objectives of this financial assessment are to test and verify a viable financing plan and support funding strategy for the investment. In preparing this financial analysis for the proposed Dunhuang 50MW solar thermal power plant it is understood that the Gansu Provincial Department of Finance (GPDF) would contract the loan based on agreed cost estimates and pass it on as sovereign-guaranteed

loan with same terms to the project Implementing Agencies (IAs) that may include local government agencies. Financial viability in terms of a full cost recovery of the capital costs is demonstrated in the financial analysis by testing and verifying whether the project can generate sufficient revenues. The data, observation and analysis provided in this financial evaluation have been based upon broad consultations with stakeholders as well as field inspection and discussions during the two field missions conducted in Dunhuang in May and June 2013, respectively. General assumptions used at the Project level are first identified followed by a discussion of project cost estimates and financing plans, the project revenue and costs assumptions and the cash flow outcome on the designed capacity to recover their capital and operating costs.

1. General Assumptions

Financial projections for the proposed Project are based on following general assumptions:

• The ADB funding will be a sovereign loan passing through the Gansu Provincial Department of Finance (GPDF) to the Dunhuang 50MW solar thermal power project, no local mark-up on the ADB interest rate;

• Capital costs of the project comprise: investment costs to civil works, purchase of O&M equipment including operations equipment and administrative and fit-out equipment, and initial working capital to be assumed if any needed;

• The financial objective of the priority project is to generate sufficient revenues to the power plant from electricity sales and urban heating supply for a full recovery of capital costs and the Operations & Maintenance costs;

• Design and construction of the Dunhuang 50MW solar thermal power plant will commence from 1 August 2014 and be completed by 31 December 2016, spreading 29 months over three years;

• The financial projections for the project are in constant prices/real terms exluding any inflation elements at the year when the project is commissioned to operations, and cover a twenty five-year period of operations; The price contingencies and currency costs during project construction and development were excluded in the cash flow analyses;

• 12 months is set as month of balance to calculate annual financial results and the accounting currency used in the evaluation is US dollars;

• The entity running the power plant, are taxable entities, and are obligated to pay both value added taxes (VAT) and income taxes;

• Net gross sales will be used directly after VAT when presenting revenues in income statements and cash flow forecasts. More specific financial assumptions and key parameters used for the analysis are showed in the following table.

Table 20 Basic Assumptions for the Financial Analysis

Parameters 2013 2014 2015 2016

International cost escalation8 1.9% 2.2% 1.9% 1.8%

Domestic cost escalation9 3.5% 3.0% 3.0% 3.0%

Foreign exchange rate 6.12 6.10 6.10 6.00

Physical contingencies 10.00% Domestic bank interest rate10 6.550%

ADB interest rate (sovereign)11 2.069%

ADB loan grace period 5 years

ADB loan repayment period 20 years

Customs Duties12 100% exemption

VAT 17% (electricity) and 13% (other utilities)

Corporate Income Tax13 25%

Exchange rates $ 1.00 = CNY 6.1208 (11 October 2013)

2. Project Investment Costs and Financing

INVESTMENT PLAN The total costs of the project are estimated at US$ 317.41 million of which US$ 222.51 million (70%) comprises foreign exchange costs and US$ 94.90 million (30%) comprises local currency costs. The base costs are prepared for the project units by expenditure category and allocated to each year over a construction period of two years and five months starting from August 2014. Implementation rates of the project are over the three years at

8 MUV index by World Bank 2012 9 ADB Development Outlook 2013 10 Base rate, PBOC, 2008 11 A sum of 5-year Swap rate 1.569%, contractual spread 0.40% and maturity premium 0.10% per annum based on our calculation of a 15.50 years average maturity for the loan period of 25 years with a 5 year grace period. 12 China‘s major technology and equipment import tax policies, MOF, 14 March 2012 13 The corporate income tax is used at rate of 25% including a three-year full tax exemption and three-year 50% tax exemption for new energy industries under the government preferential policies

following rates: Year 2014-20%, Year 2015-50%, and Year 2016-30%. The project cost includes physical and price contingencies and interest in accordance with ADB guidelines and procedures as shown in the following Table 21.

Table 21 Cost Estimates by Components

Description USD '000 Items Foreign Local Total I Base Costs A Land and compensation 0 1,247 1,247 B Resettlement 0 0 0 C Civil works 0 15,419 15,419 D Survey, investigation etc. 0 5,610 5,610 E R&D, extension/demonstration 0 2,001 2,001 F Institutional Development 0 8,045 8,045 G Equipment procurement 179,452 16,520 195,973 H Materials and installation 12,172 15,229 27,402 I Consulting service 0 494 494 J Training and fellowships 0 148 148 K Other costs 0 2,191 2,191 II Taxes and Duties 0 8,019 8,019 Subtotal (A) of Base Costs 191,625 74,923 266,548 III Contingencies L Physical 19,271 7,492 26,764 M Price 7,076 3,984 11,060 Subtotal (B) 26,347 11,477 37,824 IV Financing charges during development N Interest 4,478 8,497 12,975 O Currency losses 60 0 61 Subtotal (C) 4,539 8,497 13,036

V Total Project Cost (A+B+C) 222,510 94,898 317,408 % of Total Costs 70% 30% 100%

Land on desert is provided by the Dunhuang Municipal Government at a cost of CNY2000/mu. Foreign currency costs are to cover most equipment and facilities of the essential engineering units for which China don‘t have the manufacturing capability and technologies. The aggregated costs for the equipment and facilities of these units are:

 Concentrating collector system, US$130.97 million;  Heat exchanger and heat storage system, US$47.99;  Thermal power system, US$12.96 million;

 Auxiliary energy system, US$4.41 million;  Power access system, US$1.63 million;  Heating system, US$1.79 million. We had consultations with experts from the National Solar Thermal Power Industry Alliance on estimated rates of these units through procurements abroad. Obviously, the concentrating collector system has the most expensive costs to import. See Annex 6 the table regarding these sub-system costs which include equipment and installation as well as construction etc. The unit investment cost of this project is CNY32,227/kW, which is higher than a ―benchmark‖ unit cost CNY23,004/kW in year 2015 forecasted by the Policy Research Report on the Development of Solar Thermal Power Industry in China (May 2013, National Solar Thermal Power Industry Alliance). There may be more room to improve the technical plan over the next two years to further reduce the investment costs. Another reference is US$ 2,890/kW or CNY17,695/kW for the establishment of a solar thermal power plant SEGSVIII-IX in the United States in late 1990s. Today, the investment cost of solar PV power is reduced to CNY12,000-13,000/kW in China. The cost for wind power is CNY8,000-9,000/kW only. Overall, the solar thermal power industry requires rapid development in technologies, size, economic and management to significantly reduce its current level of investment cost.

FINANCING PLAN The proposed financing plan for the Project is set out in the Table 23. The Government of Dunhuang municipality has expected ADB to provide a sovereign loan of US$160 million plus US$4.48 million interest to be capitalized into years of operation, to finance 73% of the foreign exchange costs of the Project, mainly for the equipment import of the seven major engineering units, which are mostly not manufactured in China. The ADB sovereign loan will have a maturity of 25 years including a grace period of 5 years at a lending rate of 2.069% under the LIBOR-Based Loan Facility. We calculated a 15.50 years average maturity for the loan period of 25 years with a 5 year grace period, given the straight-line repayment method applied, implying a maturity premium 0.10% per annum. See Table 22 Calculation of the average maturity.

Table 22 Average Loan Maturity Calculation with Straight-Line Repayment Method

Years Principal Repayments Weighted Repayments (A) (B) C=(A×B) Grace Period 1.0 2.0 3.0 4.0 5.0 Repayment Period 6.0 8,000 48,000 .0 8,000 56,000 8.0 8,000 64,000 9.0 8,000 72,000 10.0 8,000 80,000 11.0 8,000 88,000 12.0 8,000 96,000 13.0 8,000 104,000 14.0 8,000 112,000 15.0 8,000 120,000 16.0 8,000 128,000 17.0 8,000 136,000 18.0 8,000 144,000 19.0 8,000 152,000 20.0 8,000 160,000 21.0 8,000 168,000 22.0 8,000 176,000 23.0 8,000 184,000 24.0 8,000 192,000 25.0 8,000 200,000

Sum 160,000 2,480,000

= Sum of C / Sum of B 15.50

The power plant developer (owner) will apply a 15-year domestic bank loan of US$98.41 million in total to cover a 27% proportion of the total foreign exchange costs and 37% of the total local costs, i.e. US$58.02 million and US$40.38 million respectively. In addition to these loans, the power plant developer will commit its own resource of US$54.52

million, 63% of the total local costs, as its equity and capital contribution to the project.

Table 23 Tentative Financing Plan

Percent % USD '000 Source of Funds Foreign Local Total Foreign Local Total Proposed ADB loan 73% 0% 53% 164,478 0 164,478 Domestic loans 27% 37% 30% 58,032 40,383 98,415 Government funds 0% 0% 0% 0 0 0 Equity and capital 0% 63% 18% 0 54,515 54,515 contribution Total 100% 100% 100% 222,510 94,898 317,408 Share of Total % 70% 30% 100%

3. Project Revenues, Costs and Profitability

OPERATING REVENUES

Operation of the proposed Dunhuang 50MW solar thermal power plant is projected to derive revenue from the two following sources:

• Electricity generated with access to state grid • Heating supply to communities in Dunhuang municipality According to the technical estimates, a total power of 252 million kWh will be generated annually, of which 224 million kWh of electricity will be connected to the grid. The total power production capacity is based on an assumption of down time for major overhaul, i.e. 960 hours per year. The plant is operated 7,800 hours per year. In addition to the down time, the technical plan also consider economic and climate factors to determine productivity and efficiency of the CSP plant. We further use 5040 hours per year provided by our technical team as the annual utilization hours to compute the revenue. There is no official tariff for solar thermal power in China. We assume a feed-in tariff to state grid at 1.38 CNY/kWh by referring to a Policy Research Report on the Development of Solar Thermal Power Industry in China (May 2013, National Solar Thermal Power Industry Alliance). In their policy findings, they recommended this tariff rate based on modeling simulation of a 50 MW solar thermal power plant with relevant technical and economic parameters. In our analysis, the total revenues (net of any remittances, VAT and other expenses taken from gross receipts) will be used directly when we present revenues from sales in income statements and cash flow forecasts. With the designed capacity, this thermal power plant can cover a total heating supply of 1.3 million square meters in urban communities which are 10.5 km from the plant at local price

CNY 23 per square meter. The heating period in Dunhuang municipality is about 140 days in the winter season.

PRODUCTION AND OPERATING & MAINTENANCE COSTS

The following costs components have been identified for estimating operating costs by direct estimation methods as follows: production costs, administrative and general expenses and financial charges. The expenses mainly include:

• Utilities including water and energy for the plant. At night, cloudy or other conditions, the Auxiliary Energy Unit will consume 14,610 thousand m3 natural gas per annum at US$0.2457/m3; the Plant will utilize 200 thousand tons of water per annum at the local water tariff US$0.3613/ton. External supply of electricity to the plant is not allowed given the government subsidies on tariff. The demand of electricity for running the plant will be met by a surplus power of 28 million kWh generated by the project annually; • Replacement of consumable materials in the Concentrating Collector Unit such as trough parabolic concentrator mirrors and tubular heat absorbers, with breakage rates at 1% and 2.5% per annum; • Payment of employees. Two shifts of operations are assumed to work 15 hours per day. A total of 30 staffs are engaged in full operations. Monthly social benefits and on-costs of salary are assumed at level of 41%. Personnel cost is CNY70.5 thousand (US$11.514 thousand) per staff; • Maintenance of civil works and O&M equipment incl. buildings, facilities and the six key power units established in the plant. This accounts for 1.5% per annum of the total fixed assets. Mirror, back frame, and collector tube are treated in replacement of consumable materials due to damage, which amounts to another 2% already; • Depreciation of O&M facilities etc over 25 years without residuals. The investments incurred during the implementation period belonging to the category of intangible assets such as R&D and deferred assets such as project costs of survey and design, consulting services etc are amortized annually over 10 years and 5 years respectively; • Financial charges are interest costs in the loan covenants with ADB and domestic bank loans. These are estimated in accordance with the financial cost factors provided in the Table in Section E.2. The ADB loan interest is capitalized to principal and reimbursed in the years of operations. Interests of the domestic bank loan will not be capitalized. • Tax and duties. Besides the rates of VAT (17%) and corporate income tax (25%), a surcharge of 8% municipal construction and educational surcharge on the VAT rate. These identified costs above under the project revenues are the base for an integrated performance evaluation in terms of forecast income statements, cash flow for financing plan and financial internal return rate (FIRR).

PROFITABILITY AND RATIOS The project schedule provides information on project profitability. After corporate income

tax, a 10% reserve fund and 5% dividend will be deduced from net surplus from ordinary activities of the Project in years of operations. It is illustrated when the project is commissioned to operation, its income after tax is US$12.02 million in the first year then reaches to the range of US$10.00 million to US$20.16 million annually for all following years. An accumulated net surplus after tax approaches to a significant high of US$335.91 million in the end. The income statements, i.e. operating margin (47.28% to 56.55%), net income ratio (22.09%-44.80%) and net income to equity ratio (21.04% to 42.41%) show that the financial performance of the Project is very promising in the whole period of planning horizon. We conclude that this project is financial viable in regard to profitability.

4. Cash Flow for Financing Plan and Financial Internal Return Rate

The annual cash flow is the surplus or deficit resulting from all sources and uses of funds for the Project. A surplus indicates the amounts available for future applications and a deficit in any period indicates the amount that must be covered by accumulated available funds or other external sources.

It shows that the cash flow from operations of the Dunhuang Solar Power Plant falls into a yearly range between US$8.72 million as the lowest in 2019 and US$29.13 million as the highest in 2039-2041. The accumulated net cash flow starts at US$22.61 million in 2017 and reaches US$418.64 million in 2041. For this project, no annual and accumulated deficit appears in any year. This shows no liquidity risk of the current financing plan and no additional working capital is required to balance any deficit. A further investigation and verification should be conducted on monthly working capital requirements within a financial year, which we would not go so far given the nature of this TA.

Net Present Value (NPV) and Financial Internal Return Rate (FIRR) are core factors to evaluate the financial viability of an investment. We go beyond the conventional cash flow analysis for the justification of financing plan, and conduct a further step to evaluate a discounted cash flow on the total capital invested. This is to evaluate the capital cost and O&M cost recovery performance of the Project by the forecast total revenues (net of any remittances, VAT and other expenses taken from gross receipts) as cash in-flow; on the opposite, we consider operating costs and investment as out-flow.

The annual NPV of the net cash flows and the annual accumulated NPV accordingly from the operations were also calculated. Based on the proposed financing portfolio of this Project, we calculated the WACC rate, 3.82%, as discount rate to compute the annual NPV. This rate is close to the WACC rate, 4.0%, from another ADB TA project (Gansu Urban Infrastructure Development and Wetland Protection, TA 7609 – PRC). We observe a stable

annual NPV between US$10.51 million and US$28.19 million and a highly linear rise of NPV accumulation in full business operations from 2017 onwards. The accumulated NPV, however, has been negative for 15 years after the power plant delivered into operation.

Attention to be drawn here is that by a 3.82% WACC discount rate, the NPV accumulation will be US$169.80 million by 2041. With 2014 as the base year, the normal payback will be realized within 12.34 years, i.e. year 2025, while the dynamic payback will take 15.35 years by year 2028. FIRR on investment amounts to 8.48%, significantly higher than the WACC rate of 3.82%, also higher than the benchmark interest rate of loans from commercial banks in China, 8.0%. These indicate very reasonable outcome from the proposed investment.

NPV to the present value of the total investment is 0.60, less than 1.0, which indicates a certain degree of liquidity risk. Therefore, the investment institutions should give attention to such risk.

Interestingly, the authoritative policy research from China National Solar Thermal Power Industry Alliance recommended a feed-in tariff at 1.38 CNY per kWh by reverse calculating method to achieve the pre-defined 8.0% FIRR of a similar scale of 50MW solar thermal power plant. Our analysis supported their suggested tariff and resulted a 8.48% FIRR on the same scale of 50MW solar thermal power plant but adding a heating unit to the technology. Their analysis also presented a scenario of concessional loans from ADB or World Bank (with interest at 2.5%) to replace the initial scenario which having the loan from China Development Bank (with interest at 5.895%). In this concessional loan scenario the feed-in tariff is reduced to 1.28 CNY to maintain 8.0% FIRR.

A benchmark in comparison with this solar thermal power is the standard tariff for solar PV power, i.e. 1.0 CNY per kWh set by NDRC (1 August 2011). Another ADB financial appraisal (ADB CDTA 43356/TA 7402, January 2012) on the 1MW Dahan tower plant in Yanqing county, Beijing, suggested that the power purchase price should be 2.27 CNY per kWh based on FIRR at 8.0%. These findings indicate a significant room for the government to set the feed-in tariff to the grid. The price depends largely upon the investment and operating cost which is so far more expensive for solar thermal power than other new energies, even than solar PV. The cost or benefit is a matter of the diseconomy of scale and technologies.

VII Pilot Project in Dunhuang City

Box 2 Brief Information of Pilot Project in Dunhuang City Project name: Rural Solar Integrated Utilization Pilot Project Project site: Qinjiawan village of Qilizhen town, about 10 kilometers west to Dunhuang city Project duration: April 2013-November 2013 Project description: Altogether 50 rural households will be involved in the pilot project, and it is comprised of three parts. (1) Rural household solar PV system: total installed capacity of 2kWp * 50 households (2) Solar heating system for 50 households: supply each household with 1 ton heat water per day (3) Solar lighting system: include 20 solar lamps at roadside and 50 in courtyard, with total installed capacity of 2.5 kWp Project cost: Total investment of 2,716,500 CNY (about 438,210 USD) (1) Rural household solar PV system: 1,500,000 CNY (about 242,000 USD) (2) Solar heating system: 500,000 CNY (about 80,645 USD) (3) Solar lighting system: 716,500 CNY (about 115,565 USD) Amount of ADB grant received: 550,000 CNY (90,000 USD)

The civil construction of the project was implemented by rural households. A professional ESCO is responsible for the project installation of solar PV system, solar heating system and solar lighting system, as well as project operation. The project was financed by ADB grant, subsidies of both city and town government, and self-financing. In which, ADB provided grant of 90,000 USD for solar PV equipment purchase. Under this TA, the consulting team worked with

Dunhuang municipal government and an ESCO called Matrix Energy Company, to establish a procurement plan and support the Dunhuang municipal government in procuring relevant equipment in line with ADB‘s Procurement Guidelines. The details of equipment procured under ADB grant is shown below.

Table 24 Equipment Procurement List of ADB Pilot Project in Dunhuang

No. Description Quantity

1 Solar panels (250W, 1650*992*40) 400

2 Inverters 5

3 Solar panel mounting racks (100kW) 1

The pilot project not only responds the new rural construction and urbanization policies, but more importantly can achieve transformation of green buildings in community by utilizing solar energy resource. It is noted that the more attention and effort should be taken to ensure sustainability of the pilot project operation and maintenance. The key factors include (i) workable business model, i.e. ESCOs; (ii) affordability of solar-bases electricity and heating; (iii) competitiveness of distributed solar PV tariff price with subsidy from both national and local governments. Since the project is located closely to large-scaled solar PV power generation base, it is expected that the pilot project can show that Dunhaung is not only a big solar and wind energy base to ―export green electricity‖, but also can be ―a smart green energy manager‖ by using solar based energy for electricity and heating in community. The consulting team found that Dunhuang municipal government gives much attention to this pilot project and wants to replicate the successful experience of the pilot project in Dunhaung.

Wuwei City

• Population: 1,822,000 people • Area: 313,000 km2 • Approval of CNEDP: January of 2014 • Target of Renewables in 2015: totaling 177,600 tce, 8.38% of total local energy consumption

VIII Effectiveness of Implementing CNEDP in Wuwei City

A. Overview of CNEDP

1. Targets

Wuwei City is located in the eastern end of the Hexi Corridor, and has excellent conditions of solar and wind resources. The central government determines the Gansu Province as a 10M kW-class wind power base and solar power demonstration base, and the Gansu provincial CPC committee and the provincial government decided to build the Hexi Region into the country's major new energy base, and lists Wuwei as a solar energy demonstration base of the province. The City New Energy Development Plan (CNEDP) of Wuwei has been successfully passed the expert review organized by the NEA in December 2012 and was approved by NEA in January 2014. Under its CNEDP, Wuwei aims to expand its renewable energy utilization to 177,600 tce and the share of renewables in the energy mix will be increased to 8.38% by the end of 2015. Among them, the solar hot water and the heating system are in use area of up to 130,000m2, equivalent to 19,500 tce; the solar PV is in total installed capacity of 45.72 MW, annual power supply of 69 million kWh, equivalent to 23,000 tce; the biomass power generation project is in installed capacity of 30 MW, annual power supply of 160 million kWh, equivalent to 105,000 tce; hydropower projects in installed capacity of 20MW, and annual power supply of 99 million kWh, equivalent to 30,200 tce. According to its CNEDP, Wuwei will give priority to utilization of solar energy development. Wuwei will explore diversified utilization of new energy technologies in the fields of electricity supply, heat supply as well as energy-saving in buildings in urban areas. On local level, Wuwei will develop household solar thermal installations, solar PV power generation, biomass power generation and small hydro power generation. Furthermore, the large-scale solar PV power generation and wind power generation projects will also be supported to meet the local electricity demand.

2. Development Overview a. Status Quo of Energy Production and Consumption

In 2012, the total energy consumption of the whole society in Wuwei City reached 2.9116 million tce, among which coal consumption is 1,940,900 tce, accounting for 66.66%; and electricity consumption is 508,100 tce, accounting for 17.45%. In 2012, the city's maximum power load was 767,000 kW, and the electricity consumption was 4.133 billion kWh. As of October 2013, the city's maximum power load was 812,000

kW, and the electricity consumption was 4.3 billion kWh. It is expected by 2015, the maximum power load will reach 1.445 million kW, and the electricity consumption amount up to 8 billion kWh. As there is no coal-fired power plant in Wuwei City, all its power is generated from new energies, including solar PV, wind and small hydro power, of which total installed capacity is about 500,000 kW. By 2015, once the planned projects of solar PV, wind power and cogeneration projects are completed, the total scale will have reached 5,000,000 kW. b. Power Grid Construction

According to the Power Planning of Wuwei City, by the year of 2015, Wuwei can only consume 1/4 of the electricity produced, and the remaining 3/4 of the power requires to be sent to the grid. Wuwei will change from ―import-type‖ power grid to ―export-type‖ power grid, so that the grid construction has also become an important and urgent task. Currently, there are a total of 79 substations in Wuwei City, among which three 330kV substations with a total capacity of 1680MVA and twenty 110kV substations with a total capacity of 1300MVA. According to its 12th Five-Year Plan, six 330kV substations will be built, of which three have been completed, and the other three will have been successively completed by 2015; seven 110kV substations will be newly constructed, and six will be expanded, so that the total number will reach up to 25 substations. c. Heat Supply

According to the heat planning of Wuwei City, five heat plants are distributed in Wuwei City. Two projects have been completed, namely the 4 × 58MW units in south of city and 4 × 58MW units in north of city. The other three projects are the 5× 91MW heating project in west of city, the 2 × 350MW Wuwei cogeneration project and the 2 × 58MW district heating project in south of city. Among them, the central heating project in west of city is applying for loan from KfW Bankengruppe (KfW) with total investment of 750 million CNY and heating scale of 8 million m2; the Wuwei cogeneration project has received government approval, and the relevant preparatory work is underway. The implementation of these projects will fully meet heating demand during future 15 years in Wuwei City. At present, the heating area of Wuwei City is 13,490,000m2. The heating area is 21.2 million m2 in the year of 2016, 26.98 million m2 in the year of 2016 to 2020, and 33 million m2 in the long-term future of 2020-2030. d. Progress of Key Projects in CNEDP

According to its CNEDP, altogether four types of new energy projects are introduced including solar thermal utilization, solar PV, biomass power generation, and small hydro power projects. As of November 2013, among the solar thermal utilization projects, the solar water heater projects have been implemented with total heat collecting area of

110,000m2; among the solar PV projects, only one distributed PV project with installed capacity of 540kW is in progress; the biomass power generation project has not yet been implemented; among the small hydropower projects, three projects have been completed with installed capacity of 84,700kW, and the scale of in-progress construction is 70,000kW. During field surveys, the consulting team learned that in addition to the key projects mentioned in the CNEDP, Wuwei City has also implemented large-scale solar PV projects, large-scale wind power projects and biogas projects. Among them, Wuwei City has implemented 59 grid-connected solar PV projects, with total installed capacity of 2.497 million kW, of which completed capacity of 555,000 kW, and in which, grid-connected capacity of 357,000 kW; implementation of 10 large-scale wind power projects, among which 2 wind power projects are completed with installed capacity of 99,000 kW, and 8 wind power projects are under construction with installed capacity of 1.25 million kW; the rural biogas project is implemented, with current size of 58,000 households, and the rural biogas users will have newly increased 40,000 households, reaching the application scale up to 100,000 households. In addition, the distributed solar PV greenhouse demonstration project supported by this TA is under construction, and the selection and evaluation work on two priority projects of distributed solar PV projects have been completed, together with relevant capacity building activities, all of which will greatly facilitate the construction of new energy city in Wuwei. B. Technical Analysis of CNEDP

The consulting team conducted site surveys to update progress of the key projects mentioned in the CNEDP and some other new energy projects beyond the CNEDP. The following technical analysis is made based on the issues identified during desk review and site visit.

1. Solar Thermal Utilization Projects a. Current Status In the CNEDP, the solar heat utilization is mainly in the form of solar water heaters. It is comprised of solar hot water and heating systems. The solar water heater is planned to reach 130,000m2 solar collector area, while the actual utilization area has currently reached 110,000m2 solar collector areas. According to the Planning for Heat Supply to the City Area of Wuwei (2012 - 2030) approved by the Gansu Provincial Construction Department, Wuwei City planned a total of five district heating projects, in which, two projects completed and currently in operation running. The implementation of these projects will fully meet current and future demand for coming 15 years.

Therefore, Wuwei is not active to develop solar heating projects, and the solar thermal utilization is still focused in the field of solar water heating systems. However, considering from broader and future context, the coal-fired heating supply pattern needs improvement by combining solar heating in the existing heating project to replace some percentage of coal consumption. It is pointed out that solar heating can not only for domestic heating, but also can be smartly used for agricultural and industrial production. The successful cases can be found in other cities of PRC as shown below. Box 3 Solar Thermal Utilization in Industry Sector Project: Dyeing companies in Jiangsu provinces Area of solar collector：15,000m2 Hot water(50℃) generated：1000 ton/day Annual steam savings: 20,000 tons Heat price of steam: 220 CNY / ton Annual cost savings: 4.4 million CNY Total revenue of 4 year ESCO contract: 15 million CNY Box 4 Solar Thermal Utilization in Agriculture Industry Project: Raisins drying in Xinjiang Drying equipment: 8 air solar collectors Size of fruit oven: 8m × 2m × 2m Drying cycle: 15 days, Drying room temperature: 45 ℃ or less Water content before drying: 75% -80%, Water content after drying: about 25% b. Technical Analysis The most important equipment in the solar hot water system is the solar collector, which is classified into vacuum tube collectors, flat plate collectors, trough collectors, disc collector and tower collector by the form of collector components. The collector temperature ranges from 60℃ to 400℃ due to the different structure of the collector. Usually the collectors with temperatures below 200℃ can meet the functional requirement. At present, vacuum tube collectors and plate collectors are the two popular types used in PRC‘s building market.

According to the data in ―Solar Heat Worldwide 2012‖, PRC has been recognized as the world's largest market and production country of solar water heaters, its thermal utilization accounts for 60.1% of the world market share. In 2012, the output and possessive quantity of solar hot water systems in the PRC reached 63.9 million square meters and 257.7 million square meters respectively, seeing output increased by 11% over the same period in 2011%. The total sales amount of solar water heating system is about 48 billion CNY. With respect to the price level, taking the compact solar water heater (Φ 58mm, 1.8m, 18 tube) as

example, the retail price of solar water heaters was around 2,100 CNY in 2012, and the compact solar water heaters accounted for 90% of the market share. It is noted that the solar water heaters have low combination with the building in the PRC. In most cases, the householders individually purchase and install the solar water heaters upon completion of the building construction. Such application patterns cause damage and impact to the building appearance and the function of the solar water heater system. In the past 10 years, the research study on integrated utilization of combing solar water heating technology with the building had been conducted, and the specific implementation methods and related national standards had been developed. Nowadays, the solar water heating technology has become the building application technology featuring the fastest industrialization and the largest market potential. Although the front-end investment of solar hot water systems is higher than electric and gas hot water systems, the average annual investment throughout the service life is significantly lower than the other two hot water systems. According to the data released by the International Energy Agency (IEA) in 2010, the average annual cost throughout the service life is $ 95 for the electric hot water system, $ 82 for the gas hot water systems, but only $ 27 for the solar hot water system. With the progress of the solar thermal utilization technology and the market expansion, in the PRC, the construction cost of solar hot water systems have been currently equal to or even lower than the cost of electric or gas hot water system. It reveals that the utilization of solar heat water system no longer requires any policy subsidies, and the technology can reach the international advanced level. c. Suggestions The national government set the target of 400 million m2 of solar collector area possession in 2015, and 800 million m2 in 2020. The policies of ―electronic appliances to the countryside‖ and ―energy-saving products benefiting people‖ also played an active role in promoting the development of solar thermal industry. It is emphasized that the PRC has established a set of completed solar thermal utilization standard system including technical requirement, quality control method and construction regulations, to ensure solar thermal industry to be developed in the direction of standardization and normalization. The Gansu provincial government issued the document14 in October 2013, and pointed out to increase proportion of solar energy utilization in buildings by striving to reach over 15% for the renewable energy consumption in the buildings by 2020. Wuwei municipal government should actively use and apply for national and provincial policy support, develop low-temperature solar hot water integration and split-type pressurized solar water heating system technologies, promote scale-up application of solar heating technology, establish district solar heating station, and explore solar thermal

14 Gansu Provincial Department of Housing and Urban-Rural Construction on the guidance opinions on promoting the construction scale applications of solar hot water system, Gan Jian Ke [2013] No. 571, October 20, 2013

utilization in agricultural and industrial production, so as to continuously improve the proportion of solar energy thermal use in energy consumption of Wuwei city. 2. Solar PV Projects a. Large Scale Solar PV projects Due to the adjustment of photovoltaic feed-in tariff15, many projects have been striven to be connected to the grid by the end of 2013. As of March 2014, altogether 59 grid-connected solar PV projects have been implemented with total installed capacity of 2.497 million kW, among which the completed projects with installed capacity of 995,000 kW, and completed grid-connected capacity of 895,000 kW. In the meanwhile, Wuwei also implemented some solar PV projects with local characteristics i.e. solar PV agricultural greenhouses, desert ecology solar PV power plants. Among them, the pattern of the desert solar PV power plant project combines the solar PV power generation, desert control and modern agriculture, shows a strong demonstration effect, as shown in Figure 19.

Fig. 19 Desert Ecological Solar PV Power Plant in Wuwei

According to the CNEDP, the power grid in Wuwei will be changed from power ―import type‖ into ―export type‖ by 2015. To meet the requirement of large-scaled solar PV projects, Wuwei is carrying out gird construction work on 330kV and 110kV substations, so as to pave way for electricity output generated by solar PV projects. b. Distributed Solar PV projects The PRC gives priority to develop the distributed PV project, which is characterized by close to the load center, low voltage level, small impact on the power grid, and flexible construction. Up to now, the only completed distributed photovoltaic project in Wuwei is 1MW photovoltaic integrated demonstration project of the Gansu Wildlife Research Center located in Liangzhou District, which was completed at the end of 2009, with the annual

15 According to the Notice of the National Development and Reform Commission on playing the role of price leverage in promoting the healthy development of the PV industry (Fa Gai Jia Ge [2013] No. 1638), the feed-in tariff will be adjusted from 1.0 Yuan / kWh to 0.9 Yuan / kWh for the solar PV projects put into operation after January 1, 2014.

generating capacity of 1.5 million kWh. According to the CNEDP, 17 distributed solar PV projects are planned to be increased, with newly installed capacity 32MW. Among them, only one project has been implemented, namely the solar BIPV project in Energy Service Plaza of Wuwei, as shown in Figure 20.

Fig. 20 Solar BIPV Project in Energy Service Plaza of Wuwei

This project is located in the administrative office area of Wuwei with solar PV installed capacity of 540kW. The building roof, south facade, east and west facades are installed with solar panels. The project has been successfully listed in the ―National List of Solar PV Building Demonstration Projects 2012‖ and obtained government subsidy of 3.5 million CNY. As of February 2014, the construction of t the main steel skeleton of the building has been completed, the PV panels have been ordered. The project is expected to be completed at the end of May 2014. In addition, the pilot project and two priority projects supported by this TA are also distributed solar PV projects. Pilot Projects- Rural Solar PV Modern Greenhouse Pilot Project The pilot project is located in Wuwei Desert Park with total installed capacity size of 0.3 MW, the total area of greenhouse is 3024 m2. The construction of the project has strong demonstration effects in term of utilizing solar energy in agricultural production, improving land utilization and increasing project economic benefit. The site preparation and civil foundation had been completed in November 2013, but the equipment installation (including the installation of the greenhouses steel structure and the solar panels) and the circuit integration part had not been completed. Priority Project 1- Kuangou Industrial Park 6MW Distributed Solar PV Power Generation Project The project has been completed with some project preparatory work, the feasibility study report was completed and the 50mu land for construction was defined. The road construction work is underway, and the water supply system will be carried out next 2014.

Priority Project 2- Gulang Xinmiao 20MW Distributed Solar PV Power Generation Project The project proposal was completed. Since the project will is implemented within the factory site, the basic condition can meet the project construction requirement and no land and road issues will be involved. These two priority projects would like to apply for ADB loan. c. Suggestions Currently, among 17 distributed solar PV projects in the CNEDP, only one project is under implementation. The main reasons resulting in slow progress of distributed solar PV projects are: (i) The stakeholders are in wait-and-see state until policy support on distributed solar PV was released in August 2013 with subsidy of 0.42 CNY/kWh; (ii) The electricity consumption of public institutions is relatively small, while the unit investment cost of distributed solar PV project is relatively higher, that is the reason why the enthusiasm for constructing distributed solar PV projects in public institution is not high; (iii) The investment companies with financing capacity are more inclined to invest in large-scaled solar PV projects rather than distributed solar PV projects considering financial benefit; (iv) the electricity tariff in Gansu is much lower than eastern coastal areas of the PRC, the industrial enterprises are not active to develop distributed solar PV projects. To meet the target of CNEDP, on one hand, to further promote the development of Building Integrated Photovoltaic (BIPV) projects through application for national financial incentives; on the other hand, to encourage industrial parks and energy-intensive enterprises to develop distributed solar PV projects. Since the benchmark tariff is 0.3423 CNY/kWh in Gansu, the revenue from distributed solar PV project with subsidy of 0.42 CNY/kWh is up to 0.8~1.2 CNY/kWh16 for industrial sector compared to 0.76 CNY/kWh for public sectors. Furthermore, from January 2014, the feed-in tariff for the large scaled solar PV projects will be adjusted to 0.9 CNY/kWh from 1 CNY/kWh. All these factors will facilitate construction of distributed solar PV projects in industrial parks and energy-intensive enterprises, and the financial benefit will become more competitive and feasible. Meanwhile, the project owners can try to utilize the Public Private Partnership (PPP) financing model for project financing as recommended by the consulting team to pilot and mobilize distributed solar PV project implementation in Wuwei, so as to accelerate the process of building Wuwei into a national new energy city.

16 Industrial tariff is 0.4~0.8CNY/kWh in Wuwei, varied with the different types of industrial enterprises and voltage levels.

3. Wind Power Projects

The wind power projects in Wuwei City are all large-scale wind power projects, of which, 3 completed projects with installed capacity of 148.5MW and 7 projects under construction with installed capacity 1,198MW. The basic project information is shown in Table 25.

Table 25 Summary List of Wind Power Projects in Wuwei

Installed Total Investment No. Projects Capacity (MW) (1,000 CNY) Total (10) 1,346.5 10,535,380 I Completed Projects (3) 148.5 1,229,310 CGNPC Minqin Hongshagang Phase I 49.5 MW 1 49.5 416,520 wind farm CGNPC Minqin Hongshagang Phase II 49.5 MW 2 49.5 408,340 wind farm Datang Renewable Hongshagang 49.5 MW wind 3 49.5 404,450 farm II Under construction (7) 1198 9,306,070 1 Lanzhou Electric Hongshagang 49.5 MW wind farm 49.5 412,160 Hongshagang million-kilowatt wind power base 2 400 3,089,040 CGNPC 400,000 kW Hongshagang million-kilowatt wind power base 3 300 2,316,070 Wuwei aerospace new energy 300,000kW Hongshagang million-kilowatt wind power base 4 300 2,310,540 Datang renewable energy 300,000kW Gansu Dingsheng Tianzhu Songshantan 49.5 MW 5 49.5 392,930 wind farm Minqin Hongshagang Hybrid Wind/Photovoltaic 6 49.5MW Wind Farm Project of Gansu Esso Energy 49.5 375,330 Technology Co., Ltd CGNPC Tianzhu County Songshan 49.5 MW wind 7 49.5 410,000 farm

Compared to ambitious increasing of large scale wind power projects, Wuwei has not implemented distributed wind power projects limited by technological, economic and policy barriers. It is the issue not only in Wuwei but also the nationwide.

In February 2013, the State Grid issued ―Opinion on Improving Services for Distributed Power Generation Projects Connected to the Grid‖ by expending the charge-free grid connection service from previous solar PV to all distributed power generation including wind power. However, the development of distributed wind power is rather slow, mainly because that the initial investment cost is too high. Different from distributed solar PV projects, the distributed wind power project also requires for land acquisition and rigorous environmental impact assessment (EIA).

4. Biomass Utilization Projects

In the CNEDP, one biomass power generation project with installed capacity of 30 MW will be built by Wuhan Kaidi Green Energy Development Co., Ltd who is one of biggest investors in biomass field in the PRC. However, it is found that the project preparatory work was not able to be completed. The main reason is biomass feedstock. The annual biomass resource supply is 2.19 million tons in Wuwei, and most of them are used for livestock feed, the rest biomass resource is not sufficient enough for energy use, and not available for biomass power generation. In addition, it is also found that some other biomass utilization projects are possible to be implemented, including biogas projects and municipal solid waste (MSW) power generation project. The biogas projects are being vigorously promoted in Wuwei. By the end of 2012, altogether 58,000 household biogas digesters and 11 biogas projects have been built. By 2015, the biogas users will be newly increased 40,000 households to reach 100,000 households of application scale. In the near future, MSW power generation project is also possible to be invested, and some enterprises showed enthusiasm for it. However, currently local government subsidies can‘t be paid for waste disposal fee, the project is lack of financial affordability.

5. Small Hydropower Projects

Small hydropower projects generally refer to the hydropower stations with capacity of less than 50,000 kW. Till now, three small hydropower projects have been built with total installed capacity of 84,700 kW. There are still some projects under construction in scale of 70,000 kW. It is expected that the total installed capacity of small hydropower will reach 150,000 kW by the end of 2015, it will greatly exceed the target of 20,000 kW mentioned in the CNEDP. It is pointed out that the hydropower resources in Wuwei have been basically fully developed and utilized, so that there is very limited potential for developing new small hydropower projects. It is suggested that Wuwei should properly operate the existing projects and complete construction of the remaining projects.

6. Geothermal Utilization Projects

At present, no geothermal utilization project has been implemented in downtown area of Wuwei city, except for 6 ground-source geothermal heat pump projects in Minqin and Tianzhu County, including: 1 geothermal heating project in Minqin, installed with 2* 583 kW heat pumps with maximum heating area of 100,000m2 and 5 geothermal heating projects in Tianzhu County installed with 11 ground-source heat pumps with heating area of 30,000 m2.

Compared with small scaled coal-fired heating supply, the geothermal heating is characterized by low environmental pollution, easy operation and management, but restricted by geothermal resources. In Wuwei, the construction of large scale geothermal projects are not available due to deep buried depth of geothermal resources, short of water resource, lack of project investment and high operating cost. It is possible to consider utilization of ground-source heat pump technology, but solar heating system must be adopted to ensure whole system operation. C. Summary of CNEDP Implementing Progress in Wuwei After a series of site survey and desk review, the consulting team updated the CNEDP progress and highlighted the following issues regarding to the construction of new energy city of Wuwei. 1. Wuwei still gives priority to develop large-scale solar PV power projects and large-scale wind power projects. Since the national subsidy for the distributed solar PV projects was issued in August 2013, it is suggested to strengthen the distributed solar PV projects, e.g. greenhouse solar PV projects, sand control solar PV projects, BIPV in public buildings and distributed solar PV projects in industrial park and energy-intensive enterprises. 2. Regarding solar thermal utilization, only solar hot water projects have been implemented. No solar heating project is possible to be launched. According to city thermal plan, five coal-fired boiler district heating projects and/or CHP projects will be built to meet local heating need. It is pointed out that Wuwei municipal should consider utilizing solar energy in city heating to avoid environmental pollution and green gas emission. It is suggested to develop low-temperature solar hot water integration and split-type pressurized solar water heating system technologies, promote scaled-up application of solar heating technology, establish district solar heating stations, and explore solar thermal utilization in agricultural and industrial production, so as to continuously improve the proportion of solar energy thermal use in energy consumption of Wuwei city. 3. The planned biomass power generation project has not been implemented, mainly due to resource constraints. In addition, followed by the newest national policy guidance, it is encouraged to develop biomass cogeneration projects or conduct technical retrofit of existing biomass power generation. From now on, the biomass direct combustion power generation projects will be difficult to get approval.

The effectiveness of Wuwei‘s CNEDP is made by comparing the targets in the CNEDP and actual action taken by the end of March 2014 as illustrated in the Table 26. Furthermore, the construction progress of the CNECP in Wuwei is summarized as shown in Table 27 with two categories. One is the progress of key projects mentioned in the CNEDP, and the other is the projects identified during the TA study in line with NEA documents.

Table 26 Comparison of Target and Actual Progress of the CNEDP in Wuwei City

(Up to June 2014)

No Key Projects in CNEDP Target of Utilization Actual Utilization Fulfillment Amount in CNEDP (tce) Amount (tce) Ratio (%) 1 Solar Thermal Utilization 19,500 19,500 100.0 Projects 2 Solar PV Projects 23,000 800 3.5 3 Biomass Utilization Projects 105,000 0 0 4 Small Hydropower Projects 30,200 63,900177 211.6 5 Total 177,600 84,200 47.4

17 The new energy power generation projects outside Liangzhou district is under the jurisdiction of Wuwei city, and the generated electricity will connected to Wuwei grid. Therefore, the new energy utilization amount shall be calculated according to the share of electric consumption of Liangzhou district in that of Wuwei city is 35%.

Table 27 Summary of Construction Status in Wuwei

Projects Progress (by June 2014) I. Key Projects in CNEDP

2 1. Solar Thermal  The solar heat utilization is mainly in the form of solar water heaters. The actual utilization area of solar water heater has reached 130,000m solar Utilization Projects collector area.

 Large solar PV projects: Altogether 59 grid-connected solar PV projects have been implemented with total installed capacity of 2.497 million kW, among which the completed projects with installed capacity of 9955,000 kW, and completed grid-connected capacity of 895,000 kW.  Distributed solar PV project: One demonstration BIPV project with installed capacity of 1MW was completed. In CNEDP, 17 distributed solar PV projects are planned to be increased, with newly installed capacity 32MW. Among them, one project was completed in June 2014, namely the 2. Solar PV Projects solar PV building integration project in Energy Service Plaza of Wuwei，with the solar PV installed capacity of 540kW.  The pilot project supported by ADB is located in Wuwei Desert Park with total installed capacity size of 0.3MW. The total area of greenhouse is 3024m2. The project will be completed by the end of October 2014.  The priority projects supported by ADB are Kuangou Industrial Park 6MW Distributed Solar PV Power Generation Project and Gulang Xinmiao 20MW Distributed Solar PV Power Generation Project. Both of them are at the stage of project preparation.

3. Biomass Utilization  The biomass utilization project of 30MW biomass power generation project was cancelled due to availability of biomass resource, instead, MSW Projects biogas comprehensive utilization project plans to be built by the end of 2015.

4. Small Hydropower  Three small hydropower projects have been built with total installed capacity of 84,700 kW. There are still some projects under construction in Projects scale of 70,000 kW. Projects not mentioned in CNEDP

1. Wind Power  The wind power projects in Wuwei City are all large-scale wind power projects, of which, 3 completed projects with installed capacity of Projects 148.5MW and 7 projects under construction with installed capacity 1198MW.

Altogether 58,000 household biogas digesters and 11 biogas projects have been built. By 2015, the biogas users will be newly increased 40,000 2. Biogas Projects  households to reach 100,000 households of application scale.

3. Geothermal  No geothermal utilization project has been implemented in downtown area of Wuwei city, except for 6 ground-source geothermal heat pump Utilization Projects projects in Minqin and Tianzhu County

IX Financing Analysis of CNEDP in Wuwei City

The methodology for financing analysis of CNEDP of Wuwei city is as same as the one in Dunhuang city as explained in Chapter VI.

A. Budgeting and Financing Gap Analysis for Key Projects in CNEDP of Wuwei

Gansu Province has been identified as national 10MW-class wind power base and solar power demonstration base, and the Gansu provincial government decided to build the Hexi Region as national major new energy base, and listed Wuwei as a provincial solar energy demonstration base. The CNEPD of Wuwei against such background relies on local renewable resources mainly of solar energy, wind energy, biomass and small hydropower. The Wuwei City plans to implement a number of new energy projects covering 22 projects18 in several key areas: (I) solar water heaters, (II) distributed solar PV, (III) biomass power generation, and (IV) small hydropower.

1. Budgeting Plan of Key Projects

The budget for the key projects listed in the CNEDP is shown in Table 28. The planned total investment is 1.124 billion CNY, among which 419 million CNY is self-financed by the enterprises and end-users, and up to 705 million CNY needs to be funded by banks. It is understood that the project financing will be mainly fulfilled through social capital and bank loan, while the government does not provide any co-financing.

Table 28 Budget for Key New Energy Projects in Wuwei City in 2013~2015

(Unit: 1, 000 CNY) No. Project Category Self-financed Bank loan Planned investment

I Solar water heaters project 60,000.00 60,000.00 II 19 Distributed solar PV projects 241,776. 80 432,320. 90 674,097.70 III Biomass power generation project 96,000.00 224,000.00 320,000.00 IV Small hydropower project 21,000.00 49,000.00 70,000.00 Total 418,776.80 705,320. 90 1,124,097.70

The biggest project financing demand is the 19 distributed solar PV projects, which require a total investment of 674 million CNY. In which, Wuwei Gulang Xinmiao 20MW distributed solar PV project and Tianzhu Kuangou Industrial Park 6MW distributed solar PV project are selected as priority projects under this TA, the consultant had completed separate financial assessment and proposed innovative financing mechanisms in the first interim report. The

18 Wuwei City plans to realize large-sized PV power generation plants with a total installed capacity of 1,450 MW and wind power generation projects with a total installed capacity of 1,346.5 MW. These large projects have been approved by the Gansu DRC to conduct preliminary work, therefore are not covered in this discussion on the key projects of CNEDP.

detailed information had been shared with Wuwei municipal government and the project stakeholders. The detailed budget list on key projects of CNEDP is shown in Appendix 4.

2. Funding Allocation for Key Projects

In accordance with the requirements of the Wuwei DRC, any company involved in the renewable energy project must ensure that the proportion of self-financing accounts for at least 20% of total project investment. The installation of solar water heaters in Category I is entirely financed by the enterprises and end-users. The following Figures illustrate the ratio of investment for the projects in Category II, III and IV. The investment for the 19 distributed solar PV projects take the largest share by 60% of the total investment for the planned projects. Therefore, the distributed solar PV project financing is critical for the fulfillment of Wuwei CNEDP. The 19 distributed solar PV projects of Category II require 36% of the funds self-financed by enterprise and 64% from bank loan. The biomass power generation project of Category III and small hydropower projects of Category IV are planned to be financed 30% by enterprise and 70% by bank loans.

Fig. 21 Funding Allocation of Key Projects in CNEDP of Wuwei

3. Complementary financing capacity of the Wuwei Municipal Government

Table below shows the basic situation of the local fiscal budget receipts, the transfer payments from the higher authority and the external debt of Wuwei City. The Wuwei Municipal fiscal budget revenues stands for only about 10% of the total annual budget revenue, relying heavily on the transfer payment from the higher authority. The sizes of domestic debt and international debt have been maintained at around 30% of total budget revenue in recent years.

Table 29 Comparison on Situations of Fiscal Revenue Ratio of Wuwei City Unit: 1,000 CNY Years Local Transfer Total fiscal Ratio of Domestic Domestic International International fiscal payments budget local fiscal Debts debt to Debts debts to total budget receipts receipts to total fiscal fiscal budget receipts total fiscal budget receipts budget receipts receipts 2005 252,580 1,474,920 1,727,500 14.62% 2,644,550 153.09% 334,350 19.35% 2006 313,040 1,910,590 2,223,630 14.08% 3,094,600 139.17% 363,130 16.33% 2007 351,890 2,648,330 3,000,220 11.73% 3,209,220 106.97% 478,790 15.96% 2008 414,340 4,177,190 4,591,530 9.02% 3,333,890 72.61% 505,980 11.02% 2009 484,430 5,685,840 6,170,270 7.85% 2,337,200 37.88% 557,200 9.03% 2010 643,020 6,662,310 7,305,330 8.80% 2,742,550 37.54% 362,630 4.96% 2011 1,017,140 8,842,090 9,859,230 10.32% 2,558,530 25.95% 322,300 3.27% 2012 1,450,000 10,861,240 12,311,240 11.78% 3,385,430 27.50% 401,940 3.26%

Figure 22 shows that the total fiscal budget receipts depend largely on the transfer payments from the higher level authority and the external debt. Compared to the situation in Dunhuang, the transfer payments hold the core position in the total fiscal budget receipts of Wuwei City, and the domestic and international debts have been playing important roles over years.

Fig. 22 Sources of the Public Expenditure in Wuwei City

It is analyzed that the local fiscal budget is confronted with difficulties, and that is the reason why the municipal government does not arrange any co-financing on the key projects in the CNEDP. Instead the projects are mainly financed by social capital and bank loan. Nevertheless, we believe on one hand, the most project owners of the 19 distributed solar PV projects are government agencies and public institutions, the fiscal support should be considered for financing arrangement; and on the other hand, restricted by the scale of fiscal budget in Wuwei City, even if the local government can‘t arrange fund for project investment, it is a necessity to initiate a few mount of government fund as guidance fund to establish a private equity (PE) fund so as to play leverage effects to support new energy development, especially for small and medium enterprises (SMEs). The government guidance fund can play as a cornerstone investment, and its management can be entrusted to the professional fund managers to achieve multi-targeted effects by not only ensuring safety of the fund operation, obtaining the expected benefit, but also realizing the investment in new energy projects. Otherwise, it is predictable that those renewable energy projects with considerable social effects are not able to be implemented.

4. The Budget Self-Financed By Enterprises

As for the solar water heater in Category I, these projects are entirely financed by the enterprises and end-users. With reference to the fact that the solar water heaters are widely used by more than 60% in the Liangzhou District of Wuwei City; it shows that the solar heaters are popularized and highly accepted in Wuwei. Therefore, we concluded that it is not difficult for realizing the projects in Category I from project financing point of view. Experiences proved that the price subsidies on solar water heater supplier or end-user would further contribute to the project implementation. Regarding the 19 distributed solar PV projects in Category II, it is known that the project financing for solar BIPV Project in Wuwei energy service plaza had already been arranged in place, and domestic bank loan will be provided for solar BIPV Project in Wuwei water service building. Except for these two solar BIPV projects, the others are still pending. We consider that since the distributed solar PV projects are characterized by small in size, scattered in distribution and not attractive in financial benefit, therefore, it is not practical for the local government to expect the distributed solar PV projects will be mainly financed by social capital, especially the energy companies and ESCOs. The biomass power generation projects in Category III require a total investment of 320 million CNY, among which 96 million CNY need to be funded by enterprise self-financing. The feed-in tariff price for biomass power generation had been increased to 0.75 CNY per kWh (tax included) which shows significant policy incentive subsidy. The project will be invested by Kaidi Green Energy Development Co., Ltd who is one of big developers of biomass power generation projects in the PRC. Therefore, from project financing point of view, the arrangement of the project investor and financing in place will be less difficult.

In Category IV, the small hydropower project requires a total investment of 70 million CNY, among which 21 million CNY is self-financed by the enterprise. It is known as renewable energy, small hydropower is supported at national level. The Agricultural Development Bank of China proposed special management measures on arrange loans for rural hydropower projects, especially in Tibetan areas of Tibet, Sichuan, Yunnan, and Gansu and Qinghai provinces. The benchmark loan rate for small hydropower keeps stable and preferential policies have been implemented for income tax and VAT. This small hydropower project is planned to be built with total installed capacity of 20MW, of which hydropower capacity is newly increased by 7MW in 2015 on the basis of 13MW at the end of 2011. The funding of this project belongs to additional investment based on the operation of project Phase I. We believe that the social capital financing for this project will be realized.

5. Possibilities of Bank Loans

The consulting team discussed with Wuwei branches of the Bank of China, ICBC and the Agricultural Bank of China to understand situations about what and how they give support to local new energy development. Meanwhile, we also gained information on international financing support in Wuwei. a. Domestic Bank Participation to New Energy Industries in Wuwei The financing support of domestic commercial banks in Wuwei City is mainly from the Agriculture Bank of China and ICBC in the fields of large-scale solar PV and wind power projects in Wuwei industrial park. Table 30 gives the detailed information. The domestic banks gave financial support for the large solar PV projects, 17 of them have been connected to the grid, 5 of them are completed and 9 of them are under construction. The total installed capacity of 31 solar PV projects are up to 984 MW with the bank loan amounting to 9.639 billion CNY, and leveraged the total investment in solar PV projects of 12.33 billion CNY. The successful experiences made in financing large solar PV projects show that as long as the project is profitable, the domestic banks are active to participate.

Table 30 Financing Support from Domestic Banks to Large Solar PV Projects in Wuwei

Unit: 1,000 CNY Project Type Installed capacity Bank loan Total investment (MW) 17 projects operated and connected to the grid 407 4,259,615. 00 5,439,360.00 5 projects completed not connected to the grid 148 1,353,913. 00 1,777,350.00 9 projects under construction 429 4,025,380.00 5,113,670.00 Total 984 9,638,908. 00 12,330,380.00

In addition, by discussing with the branches of the Agriculture Bank of China and ICBC, We also learned that the main clients of these two banks are state-owned enterprises (SOEs) and the credit approvals for the private enterprises are rather difficult. It is found that the banks

require enterprise capital fund by 30% of the total project investment. The bank loan terms are mostly between 5~15 years. To ensure good cash flow, most projects can not obtain the bank loan until the projects are completed and connected to the grid. Furthermore, these banks also believe that distributed solar PV projects do not meet the requirements to apply for the commercial bank loans in near term. It shows that the distributed solar PV projects in CNEDP will be difficult to get support from these banks. We realized that it is not applicable to totally depend on social capital and bank loan for the distributed solar PV project financing. As mentioned in Dunhuang City, we suggest that Wuwei municipal government could consider the application of financing support from CDB. b. Utilization of International Loans in Wuwei

The information regarding to the IFI supported projects in Dunhuang are sourced from the Wuwei financial department. The Table below shows that these international loan programs are mainly utilized for medical, agricultural, environmental and energy sectors, with cumulative amount of approximately $249 million USD. Among them, there are two energy-related central heating supply projects, one is Finnish government project with loan size about $ 5 million USD and the other one is KfW project with loan size of $ 90 million USD. It shows that Wuwei City has accumulated rich experiences in utilizing foreign capitals, which will help to carry our further international cooperation in the near future.

Table 31 List of IFI Projects in Wuwei

Amount No. Project Name IFIs Loan Term (US Dollars)

1 Rural water supply project The World Bank 1,174,421.64 1992-1997 2 Maternal and child health project The World Bank 743,154.49 1995-2002 3 Disease prevention programs The World Bank 327,212.13 1996-2000 4 Tuberculosis control project The World Bank 368,415.89 2001-2006 5 Wastewater treatment project The South Korean 4,083,716.18 2003-2007 government 6 Slaughtering and meat processing project The Dutch government 2,760,000.00 2004-2008 7 Wind and sand control project The Japanese government 31,430,280.54 2004-2009 8 Water-saving & irrigation project The Japanese government 10,070,768.83 2004-2009 9 Animal husbandry development project The World Bank 1,820,350.28 2004-2009 10 Western Education project The World Bank 879,835.97 2004-2009 11 CDC health project in Gansu province The German government 498,390.00 2007-2011 12 Wuwei Chengnan central heating project The Government of Finland 4,950,000.00 2007-2011 13 Urban-rural integration development The World Bank 100,000,000.00 On-going project 14 Urban central heating project KfW 90,249,000.00 On-going Total 249,355,545.95

Based on the above analysis, it is recommended that Wuwei municipal government can try to apply for IFI by innovative financing mechanism of MFF or get support from CDB, so as to solve barriers of distributed solar PV project financing. B. Summary of Financing Gaps in Wuwei Wuwei municipal government did not allocate any fiscal budget to the key projects in the CNEDP. The 19 distributed solar PV projects have the largest proportion for financing. So far, only the funds for the BIPV project on Wuwei Energy Service Plaza have been arranged, the funds for the integtrated PV project on Wuwei Water Service Plaza are settled through loans, while funding for other 17 projects are pending. Our main findings are as follows:

• These distributed solar PV projects are scattered and too small, so that professional energy companies are rather unwilling to invest. For the self-financed part of the project owners, only a few projects with very small budget can be realized, while financing for other projects are not too optimistic.

• As the project owners are mostly government agencies and institutions, the local government should allocate certain fiscal budgets to support. There is possibility for funding if these scattered projects are bundled to apply on-lending or MFF sovereign loans from IFIs or the policy loans from CDB.

• The Wuwei municipal government may consider the CDB policy supports local governments in establishing financing platform for distributed solar power generation, and apply to the CDB loan. But the rather unfavorable policy factor is that the distributed solar PV projects supported by CDB and NEA are mainly in Eastern China.

• Wuwei City has made great success in implementing several large solar PV projects with loans from commercial banks; a total of 31 solar PV projects with installed capacity of 984 MW have received bank loans amounting to 9.64 billion CNY. These banks also believes that distributed solar PV projects do not meet the conditions for commercial bank loans in near term, suggesting that the distributed solar PV projects in the CNEDP of Wuwei will be difficult to get support from these banks. Wuwei City has accumulated rich experience and capacity in utilizing foreign capital. This can be an advantage for international cooperation in the next step.

• We conclude that the distributed solar PV projects in the CNEDP of Wuwei are mostly in small-scale, and difficult to receive financing support from the private sector and banks. This is main funding gap in the CNEDP. If we are optimistic with the Gulang Xinmiao distributed PV project in Wuwei City, the financing gap remains more than 450 million CNY.

X Due Diligence of Priority Project in Wuwei City

A. Identification of Priority Project in Wuwei City It is identified in the CNEDP that key projects will be focused on solar thermal utilization, solar PV power generation, biomass power generation and small hydro power generation. Wuwei gave priority to develop distributed solar PV projects in this TA study. This was confirmed by ADB, EA and IA during the inception phase. The Consultant conducted the site mission, and altogether 10 candidate priority projects were proposed by Wuwei local DRC. All the candidate projects are distributed solar PV projects, they can be divided into two categories, 5 projects are related to agricultural production and process, and other 5 projects are related to energy intensive industry as shown in Table 32.

Table 32 Candidate Priority Projects of Wuwei City

No. Name Location/ Category Owner Gulang Xinmiao 20MW Gulang Xinmiao Fine Chemical Gulang County/ 1 Distributed Solar PV Power Co.,Ltd. (Top 100 companies in Industrial Generation Project Gansu) Jinsheng Green Energy Project Gulang County/ Gansu Gulang Jinsheng Malting 2 for 15MW Distributed Solar Industrial Co.,Ltd. PV Power Generation 5MW Distributed Solar PV Liangzhou District Wuwei Qingquan Agriculture 3 Power Generation Project /Agricultural Development Co., Ltd. 8MW Solar PV Power Liangzhou District 4 Wuwei Quansheng Gelatin Co., Ltd Generation Project / Industrial 0.3MW Factory Roof Solar PV Minqin County/ Minqin County Longfeng Industrial 5 Power Generation Project Agricultural and Trading Co., Ltd 0.1MW Factory Roof Solar PV Minqin County/ Gansu Tiansheng Biotechnology Co., 6 Power Generation Project Agricultural Ltd 1MW Factory Roof Solar PV Minqin County/ Minqin County Xingbao Industrial Co., 7 Power Generation Project Agricultural Ltd Tianzhu County Kuangou Tianzhu Jinqiang Investment & Industrial Park 6MW Tianzhu County/ Development Co., Ltd (Kuangou 8 Distributed Solar PV Power Industrial Industrial Park Administrative Generation Project Committee) Shuangmei 2MW Distributed Liangzhou District/ Gansu Shuangmei Scientific Industrial 9 Solar PV Power Generation Industrial and Trade Co., Ltd Project Huanghuatan 6MW Gulang County/ Gulang Zhongqineng Technology Co., 10 Distributed Solar PV Power Agricultural Ltd (Jiangsu Zhenfa Company) Generation Project According to the communication with Wuwei Financial Bureau and local DRC, the Consultant considered that energy intensive projects in the industrial sector have more electricity demand than agricultural projects. Therefore, it was easier to develop distributed solar PV system in energy intensive industries. Furthermore, since the agricultural-related

solar PV system had been identified as pilot project to be supported under the TA study, it is suggested that the selection of priority project should move to industry-related distributed solar PV system. Finally, the selection of priority project with two component projects was confirmed. These two component projects are in the list of key projects of the CNEDP of Wuwei. According to its CNEDP, the newly installation of distributed solar PV system will reach 33 MW by 2015, the installed capacity of the two selected priority projects are 26 MW accounting for 78.78% of its target of distributed solar PV system.

 Component project 1: GulangXinmiao 20MW Distributed Solar PV Power Generation Project  Component project 2: Tianzhu Kuangou Industrial Park 6MW Distributed Solar PV Power Generation Project

Fig. 23 Location of two component priority projects in Wuwei city

B. Solar PV Development in the PRC

1. Solar PV Technology

The solar PV technology can directly convert solar energy into electrical energy through ―photovoltaic effect‖ of semiconductor materials. The solar PV power generation has the advantages of free of fuel consumption and geographical restrictions, flexible in size, noiseless, pollution-free, safe and reliable operation and simple maintenance. A basic set of solar PV power generation system consists of solar cell array, battery, controller and inverter. The solar PV power plant can be divided into two categories: large solar PV ground station and distributed PV power plants. Large ground station also known as concentrated solar PV power plant, is mainly built in gobi and desert, featuring full use of its land resources and

solar energy resources, and exporting power energy via access to electricity grid. The distributed solar PV power plant refers to small-scale PV power plants constructed above or integrated to the building surfaces (such as walls, roofs etc.), usually self-occupied, while the excess electricity can also realize outward transmission to the grid. Currently, the conversion efficiency of PV modules is still a bottleneck to the solar PV industry. The improvement in the conversion efficiency of PV products can reduce electricity cost. If the module efficiency can increase 1%, the cost per kilowatt hour of the electricity can be decreased by 5%~7%. Another critical constraint to the development of solar PV is the energy storage technology. Once the energy storage technology becomes more mature and the costs will drop significantly.

2. Solar PV Development in the PRC

The solar PV market in the PRC has experienced a long and slow growth.

 In 2002, the ―Every Township Access to Electricity Project‖ boosted the speed of solar PV market development with the annual installed capacity stepping into megawatt-class stage.  In 2009, with the implementation of the "Golden Sun Project" and the introduction of NEA‘s concession bidding, the PRC entered the large-scale PV market development stage.  In 2011, the government issued tariff policies to further promote the rapid development of solar PV power generation market, and the amount of newly installed capacity reached 2.7GW. Compared with 450MW installed capacity added in 2010, the growth rate in 2011 is nearly 500%. The new capacity of solar PV in 2011 is among the world's top three, after Italy and Germany.  In 2012, the government increased its support for PV applications by launching two batches of "Golden Sun demonstration project" and promoting the development of large-scale distributed solar PV demonstration areas.  In 2013, the national government issued the document by providing subsidy of 0.42 CNY/kWh for distributed solar PV projects, and the market share of distributed solar PV is estimated to exceed 50% in 2015. The distributed solar PV power generation system mainly includes off-grid PV power generation system and grid-tied PV power generation system. Any solar PV system connected into the low voltage power distribution network (voltage class: 230V/400V) and medium voltage power distribution network (voltage class: 10kV/35kV) shall belong to distributed solar PV power generation system. The distributed solar PV systems in the PRC mainly consist of grid system on the commercial, industrial and public facilities, many of which are MW-class roof systems, such as the Beijing-Shanghai high-speed railway Hongqiao Station 6.68MW grid-connected solar PV

systems, Shanghai World Expo Theme Pavilion 3MW grid-connected solar PV system, Zhejiang Yiwu International Trade City 1.295MW grid-connected solar PV power plant, and Shenzhen Expo Garden 1MW grid-connected solar PV system etc.

C. Priority Project of Component 1 –Gulang Xinmiao 20MW Distributed Solar PV Power Generation Project

1 Brief Introduction

Gulang Xinmiao Fine Chemical Co., Ltd (Gulang Xinmiao Company in short) is a chemical enterprise in Gulang County in Wuwei City. The company is specialized in research, development, manufacture and sales of chemical products, such as calcium carbide, calcium cyanamide and dicyandiamide etc. The company is located in Gulang Industrial Concentration Zone, covers 2,000,000m2 areas and with convenient logistic facilities. On the basis of the power balance of Wuwei grid, there will be an electricity power gap during the 12th Five-Year-Plan Period. The total installed capacity is assumed to be 856MW, the actual balance power is 783MW, and the maximum electricity power gap will be 1379MW by the year of 2015. To make full use of the rich local solar resources and buffer the insufficient electricity power supply of Wuwei grid, it is planned to launch the construction of the 20MW distributed solar PV project in Chemistry & Construction Material Industry Park in Gulang Industrial Concentration Zone. The project basic information is shown as below. Box 5 Brief Information of Priority Project of Component 1  Project name: Gulang Xinmiao 20MW Distributed Solar PV Power Generation Project  Project site: Chemistry & Construction Material Industry Park, Gulang County, Wuwei City  Project description: Using the various factory roof and unused space in the park to build a 20 MW distributed solar PV power generation plant. Main components are solar panels and inverters.  Project owner: Gulang Xinmiao Fine Chemical Co., Ltd  Project schedule: The project plans to construct in October 2014 and will be finished in October 2015.  Project investment and financing: Total investment of 212,863,000 CNY (about 34.88 million USD), apply for ADB loan of 150,000,000 CNY (about 24,59 million USD), accounting for 71% of the total investment.

2. Construction Scale and Equipment Selection

According to the project proposal, the total installed capacity of the project is 20MW. It is planned to utilize 400,000m2 land in the factory for the project construction: 50,000m2 on roof

of buildings and 350,000m2 on open space. The 20MW solar PV arrays consist of twenty 1MWp polysilicon solar PV arrays. The direct current (DC) generated from each 1MWp solar PV array converges to two grid inverters and transformed to alternating current (AC). An office building and five inverter rooms will be constructed as well. The area of the office building is 2000m2, and the area of each inverter room is 120m2. Considering the project scale, it is suggested to assure 200,000m2 construction land for this project. The planned area of building roof and vacancy space is 400,000m2, which can meet the project requirement. It is analyzed that Gulang County has rich solar resources with 2,629h annual sunshine hours and 5,200-5,800MJ/m2 annual total solar radiation. Therefore, it is also very suitable to develop distributed solar PV projects. Based on the data of latitude and solar irradiation of Wuwei City, the equipment annual utilization hours will be about 1500 h and its annual average power output of the project is around 30 million kWh. Furthermore, Gulang Xinmiao Company is an energy extensive enterprise with the annual electricity power consumption of 700 million kWh. The electricity generated by the project will meet around 4% of the total electricity demand of the company, thus the electricity can be all consumed locally.

Table 33 List of Main Engineering Quantity of Component Project 1

No. Item Unit Quantity Procurement Method

1 Polysilicon PV panel Piece 84000 Domestic

2 Inverter set 40 Domestic

3 Combiner box set 600 Domestic

4 Box-type transformer set 20 Domestic

5 High-voltage switch cabinet set 32 Domestic

6 Power Cable km 50 Domestic

7 Earth excavation m3 9000 Domestic

8 Earth backfilling m3 8600 Domestic

9 Foundation concrete m3 400 Domestic

10 Bracket foundation pole 33600 Domestic

11 Rebar ton 25 Domestic

12 Building construction m2 3000 Domestic

Regarding the selection of solar PV modules, it is suggested to choose 240W polysilicon solar PV modules for this project. These modules have mature technique and high power

output, which is beneficial to reduce installation workload and improve system stability during operation. The solar PV modules will be installed with fixed inclined plane mode, and the generated electricity is fed in to the grid be 500kW inverters. Since the manufacturing technology is quite mature in the PRC, the main equipment‘s can be acquired by domestic procurement. The list of main engineering components is shown in Table 33.

3. Electricity Access System

The distributed solar PV power generation features volatile and random restricted by seasonal, weather and geographical factors. If not equipped with energy storage system, the solar PV power generation system cannot supply to the consumers independently. Furthermore, the distributed solar PV power system capacity is relatively small and generates power mainly in the day time when the power load is relatively high, but the PV power generation output curves depends on the solar radiation intensity, rather difficult to completely consistent with the user load curve. It means that in order to achieve the balance between demand and supply, the electricity is required to feed into the grid if PV power generation output is greater than the user electricity load, and in other period of time, however, the electricity from the grid must be used when the solar PV power generation output is smaller than the user electricity load. Therefore, the grid-connected operation is the best solution for making full use of the electricity generated by the distributed solar PV power generation system. Currently in some foreign countries, the consumer-side grid-connected distributed generation systems account for more than 80% of the solar PV market. Such system belongs to "uncontrolled units" in term of power grid, the power grid is not used for monitoring and controlling these distributed generation systems, but used for load management. If solar PV system itself has inability or poor ability to regulate, the total amount on solar PV shall be imposed restrictions, i.e. controlling the PV penetration (the ratio of the AC output of photovoltaic system and the load peak power). According to the research report of U.S. Department of Energy (DOE), the PV penetration of the distributed generation system should not exceed 15% of total power distribution network capacity, and this data is required to less than 20% in Japan. Regarding the industrial park solar PV system, the PRC initiated the development of distributed solar PV systems in some industrial parks. These parks mostly belong to the regional PV systems characterized by high-density and multi-access. Such system has many technical problems, such as complex design integration, poor condition for grid connection, and power supply of undesirable quality within the region. The research abroad in this area has just started, since the technology level of PV system is relatively backward in the PRC, more efforts should be made to strengthen technology R&D and pilot projects, so as to promote the development of the distributed solar PV systems in industrial parks in the PRC. According to the project proposal, the generated electricity power will be boosted to 10kV by

a 1000kVA step-up transformer, and then connected to 10kV/100kV transformer substation in the company to realize grid connection at consumer side. The proposed grid access is technically feasible. The construction of 10kV step-up transformer substation is available and the cost is relatively low. It is reasonable for the electricity power connection to the low voltage side of 100kV transformer substation, thus the generated electricity can be totally consumed locally.

4. Project Schedule

Up to now, the project decision and site selection have been finished. It is estimated that the project will complete project application and approval by end of December 2014, civil construction and equipment installation will be finished by September 2014, and the project will be put into operation in October 2015.

5. Project Implementation Arrangement

The project owner is Gulang Xinmiao Company, which was founded in September 2003 with the registered capital of 30 million CNY. Gulang Xinmiao Company is one of the TOP 100 enterprises in Gansu Province, specialized in chemical industry. By the end of 2012, the total assets of the company reached 547.68 million CNY and the fixed assets of 20.272 million CNY. A leading group has been founded to be responsible for the project preparation and implementation. It is found that Gulang Xinmiao Company is one of the TOP 100 enterprises in Gansu Province, which will facilitate the project preparation, arrangement and implementation. While it is also suggested that the project owner should complete the pre-project issues on time and take effective financing measures to assure the project financing. Additionally, since the project owners are lack of operating experience of solar PV power plant. It is recommended that the project owners should cooperate with ESCO to ensure project operation and management.

6. Financial Appraisal of Gulang Xinmiao Solar PV Power Project

The basic assumptions in our financial analysis for Xinmiao 20MW Distributed Solar PV Power Project in Wuwei Municipality are largely in line with those for the Dunhuang 50MW solar thermal power plant. Given the size and maturity of solar PV technology in China, design and construction of this distributed solar PV power plant would be completed within one year in 2014. The project developer (owner), Gulang Xinmiao Fine Chemical Co., Ltd, is a private company. Meanwhile the requirement on capital is rather lower than a conventional scale of ADB loans. It is appropriate for the Company to consider ADB assistance from the non-sovereign loan portfolio to support the private sector. The lending rate for such

non-sovereign will be 4.569%, which is a sum of 5-year Swap rate 1.569%, contractual spread 3.00% per annum, under the LIBOR-Based Loan Facility. a. Project Investment Costs and Financing INVESTMENT PLAN The total cost of the project is estimated at US$ 34,882 thousand to fully cover the local costs as China has its manufacturing capability and mature technologies in the solar PV power industry. No foreign exchange costs will be employed for imports to the project. We had consultations with experts in prices of the main engineering components listed in Table 34 for the plant. The base costs are prepared and further includes physical and price contingencies and interest charges.

Table 34 Cost Estimates by Components

Description USD '000

Items Foreign Local Total

I Base Costs A Land and compensation B Resettlement C Civil works 1,599 1,599 D Survey, investigation etc. 213 213 E R&D, extension/demonstration 556 556 F Institutional Development 1,227 1,227 G Equipment procurement 19,057 19,057 H Materials and installation 3,495 3,495 I Consulting service 149 149 J Training and fellowships 423 423 K Other costs 82 82 II Taxes and Duties 4,106 4,106 Subtotal (A) as at October 11, 2013 30,907 30,907 III Contingencies L Physical 3,091 3,091 M Price 510 510 Subtotal (B) 3,601 3,601 IV Financing charges during development N Interest 375 375 O Currency losses Subtotal (C) 375 375 V Total Project Cost (A+B+C) 34,882 34,882 % of Total Costs 0.00% 100.00% 100.00%

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The unit investment cost of this project is CNY CNY9,426/kW,, which is lower than the empirical cost CNY12,000-13,000/kW for solar PV power. This result suggests us to make further investigation and comparison between concentrating and distributed solar PV power technologies.

FINANCING PLAN

The proposed financing plan for the Project is set out in the Table below. Gulang Xinmiao Fine Chemical Co., Ltd will expect ADB or other international financial institutions to provide a non-sovereign loan of US$24.59 million to finance 71% of the total project costs. The non-sovereign loan will have a maturity of 20 years including a grace period of 5 years and 15 years for repayment at a lending rate of 4.569% under the LIBOR-Based Loan Facility. Under an ESCO contractual partnership framework, the company will finance US$9.92 million to balance the remaining 29% local costs. This portion is considered as equity and capital contribution. See Section D.7 for this arrangement.

Table 35 Tentative Financing Plan of Component Project 1

Percent % USD '000 Source of Funds Foreign Local Total Foreign Local Total Proposed ADB loan 100% 0% 70% 24,590 24,590 Domestic loans 0% 0% 0% 0 0 0 Government funds 0% 0% 0% 0 0 0 Equity and capital contribution 0% 100% 30% 0 10,292 10,292 Total 100% 100% 100% 24,590 10,292 34,882 Share of Total % 71% 29% 100% b. Project Profitability and Ratios Operation of the proposed Xinmiao 20MW Distributed Solar PV Power Plant is projected to derive revenue from the internal utilization of the solar PV power generated. According to the technical estimates, a total power of 30 million kWh will be generated within 1,500 operating hours annually, to be connected to the grid in the company complex for internal utilization only. According to a very recent government note (NDRC notification on price leverage to promote healthy development of the solar PV power industry, 26 August, 2013), a subsidy of CNY0.42/kWh will be granted to the distributed solar PV power plants when their generated electricity is connected to the grid. Local power price for industries is CNY0.80/kWh. The company‘s utilization of the solar power will offset its costs if otherwise using industrial electricity from the grid. We thus compute the real tariff of the solar power at CNY1.22/kWh when undertaking revenue analysis of the plant. Actually, this solar power plant will keep separate accounts for its financial performance from Gulang Xinmiao Fine

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Chemical Co., Ltd under an ESCO contractual arrangement. It is calculated that when the project is commissioned to operation, its income after tax is US$3.24 million in the first year, having the lowest level at US$1.64 million in year 6 then maintain stable at level around US$2 million in following years. After corporate income tax, a 10% reserve fund and 5% dividend will be deduced from net surplus from ordinary activities of the Project in years of operations. An accumulated net surplus after tax approaches to a significant high of US$50.30 million in the end. The ratios at the three bottom lines of the income statements, i.e. operating margin (59.88% to 63.50%), net income ratio (30.34%-59.88%) and net income to equity ratio (17.44% to 34.43%) show that the financial performance of the project is very promising in the whole period of planning horizon. We conclude that this project is financial viable in regard to profitability. c. Cash Flow for Financing Plan and Financial Internal Return Rate The cash flows for financing plan of the proposed Xinmiao Distributed Solar PV Power Plant are demonstrated. The net cash flows show a yearly range between US$911 thousand as the lowest in 2021 and US$5.82 million as the highest in 2017. The accumulated net cash flow starts at US$5.72 million in 2015 and reaches US$64.38 million in 2039. For this project, no annual and accumulated deficit appears in any year. This shows no liquidity risk of the current financing plan and no additional working capital is required to balance any deficit. The annual NPV of the net cash flows and the annual accumulated NPV accordingly from the operations are illustrated. Based on the proposed financing portfolio of this Project, we calculated the WACC rate, 5.74%, as discount rate to compute the annual NPV. We observe a stable annual NPV between US$904 thousand and US$4.22 million. However, the accumulative NPV has been negative for 10 years after the power plant delivered into operation. Using the 5.74% WACC discount rate, our NPV accumulation is US$19.80 million at the end. With 2014 as the base year, the normal payback is 8.67 years while the dynamic payback will take 11.62 years. FIRR on investment is 11.81%, significantly higher than the WACC rate of 5.74%, also higher than the benchmark interest rate of loans 8.0% from commercial banks in the PRC. These indicate very reasonable outcome from the proposed investment. This project demonstrates a better financial performance when comparing its FIRR with the Dunhuang priority project of CSP-CHP project. It may be largely due to its mature solar PV technology and low investment costs.

7. ESCO Contractual Framework for Project Financing

The project developer (owner) is Gulang Xinmiao Company. After the solar PV power plant is delivered, the project owner will utilize the solar power internally within its company

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energy complex. The generated electricity is boosted inside the company to partly replace fossil-fueled electricity purchased from the grid company and realize the grid connection at the consumer side. The company will provide a fund of 60.7 million CNY (US$9.92 million) as equity and capital contribution and expect an external financing capital of 150.51 million CNY (US$24.6 million) from financial institutions. Since the company is a private enterprise, and its need for external loans is much smaller compared to that of ADB average sovereign loans, the financing plan of the project owner does not meet the requirement for ADB sovereign loans. In view of financing, it is suggested that the project owner apply for ADB non-sovereign loan managed by its Private Sector Operations Department (PSOD), and the loan will be guaranteed for by its own assets and cash flow from the proposed power plant. Furthermore, considering the plant scale and lack of experience in the solar PV power plant management, Gulang Xinmiao Company is unlikely qualified to run the plant by itself. The introducing of ESCO is a suitable and sustainable arrangement for this project. Taking Gulang Xinmiao Company as the mainstay, a financing framework through public-private partnership (PPP) is suggested to be built with the support of local government, ADB loan, and the participation of ESCO. The local government and ADB can be considered as the public sector, while Gulang Xinmiao Company and ESCO will play roles as private partners. It is suggested that Gulang Xinmiao Company will be partnering an ESCO to set up a project company ―Gulang Xinmiao Solar PV Power Generation Project Company (Solar PV Project Company in short)‖ and self-finance equity capital of 61.3million CNY (US$10,120 thousand), meanwhile apply for a loan of 150 million CNY (US$24,776 thousand) guaranteed by Gulang Xinmiao Company. The Solar PV Project Company will take overall responsibilities for the project, and the ESCO supplies technical services to assure and run project operation. The Solar PV Project Company will be established as a limited liability company. The detailed responsibilities and financing plan is as follows:

 Local government: The local governments at municipal and county levels should provide necessary policy support so as to effectively implement national subsidy. The local financial department is also expected to be supportive for facilitating the ADB loan.  Project owner: Gulang Xinmiao Company is the first investor and key shareholder, it is also ultimate consumer of the solar PV generation plant.  ESCO: an ESCO with know-how in running solar PV generation projects is needed. ESCO will play a role not only as the manager of the Solar PV Project Company but a project operator. The ESCO should invest in the Solar PV Project Company with certain capital contribution so as to share both risks and profits upon its performance and equity.

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 ADB: Since the project does not meet the requirement for ADB sovereign loan, it is suggested that the project owner apply for the ADB non-sovereign loan managed by PSOD to settle the need of external financing capital of 150.50 million CNY (US$24.59 million), which will be guaranteed by Gulang Xinmiao Company.

Fig. 24 PPP structure of priority project of component 1

For the priority project of component 1, the consultant explored financing framework comprising both a PPP strategic arrangement and a contractual ESCO structure. The conceptual scheme of benefit distribution is shown as below:

 The Solar PV Project Company: the project supplies the electricity to Gulang Xinmiao Company. The Solar PV Project Company obtains subsidy for the distributed solar PV power from the State Grid. To ensure the reliability, it is essential to introduce a third party to certify the electricity generated by the solar PV project since the electricity will be boosted and utilized inside the company complex.  As a ultimate consumer, Gulang Xinmiao Company should pay electricity fee to the Solar PV Project Company, or make a deal with the Solar PV Project Company by keeping account;  The ESCO charges service fee based on the agreement with the Solar PV Project Company on performance;  The Solar PV Project Company repay the ADB non-sovereign loan and interest through the cash flow income from the project over years in operations;  The net surplus income after corporate tax of the Solar PV Project Company will be distributed between Gulang Xinmiao Company and the ESCO.

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D. Priority Project of Component 2–Kuangou Industrial Park 6MW Distributed Solar PV Power Generation Project

1. Brief Introduction

Kuangou Industrial Park is a circular economy industrial park. Its business scope focuses on raw material and non-petrochemical industries. The park was established in the year of 2009 with a planning area of 5,333,000 m2. By now, the park infrastructure has been completed and its transportation infrastructure is good, altogether 30 industrial enterprises have now settled in the park. At present, 14 enterprises are operational, and most of them are energy intensive enterprises. Up to now, the total electrical load is 348MW, and annual electricity consumption is 1,000 GWh. The project will provide green power to the enterprises in Kuangou Industrial Park. The basic project information is shown below. Box 6 Brief Information of Priority Project of Component 2  Project name: Kuangou Industrial Park 6MW Distributed Solar PV Power Generation Project  Project site: Kuangou Industrial Park, Tianzhu county, Wuwei city  Project description: Using the roof and unused space in the park to build a 6 MW distributed solar PV power generation plant.  Project owner: Tianzhu Jinqiang Investment & Development Co., Ltd  Project schedule: The project plans to construct in April 2014 and will be finished in November 2014.  Project investment and financing: Total investment of 76,407,000 CNY (about 12.52 million USD), apply for ADB loan of 50,000,000 CNY (about 8,321,000 USD), accounting for 69% of the total investment.

2. Construction Scale and Equipment Selection

According to the project proposal, the total installed capacity of the project is 6MW with six 1MWp polysilicon solar arrays, and each solar array includes 4200 solar cell panels (240W for one panel). It will be installed by fixed inclined plane, and use twelve 500kW solar inverters to access to the grid system. It is analyzed that Tianzhu County has rich solar resources with 2603h annual sunshine hours and 5200MJ/m2～5800MJ/m2 annual total solar radiation. Therefore it is very suitable to build distributed solar PV power generation projects. Based on the data of latitude and solar irradiance of Wuwei City, the installation‘s annual utilization hours will be about 1500h and its annual average power output is about 9 million kWh. This is equivalent to about 1% of the total electricity requirement of Kuangou Industrial Park at present. This shows that all the electricity generated by the solar PV power system can be consumed locally.

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The project will require 25,200 pieces of 240W solar PV panels. It is suggested to assure 60,000m2 construction land and/or roof space available for installation of the panels. Since the solar PV manufacturing technology is quite mature in the PRC, the main equipment‘s can be totally acquired by domestic procurement. The list of main engineering components is shown below.

Table 36 List of Main Engineering Quantity of Priority Project of Component 2

No. Item Unit Quantity Procurement Method 1 Polysilicon PV panel Piece 25200 Domestic 2 Inverter set 12 Domestic 3 Combiner box set 84 Domestic 4 Box-type transformer set 6 Domestic 5 Power Cable km 11.8 Domestic 6 Earth excavation m3 2686.5 Domestic 7 Earth backfilling m3 2617.8 Domestic 8 Foundation concrete m3 108.1 Domestic 9 Bored pile pole 10080 Domestic 10 Rebar ton 7.15 Domestic 11 Building construction m2 1679 Domestic

3. Electricity Access System According to the project proposal, this project will boost the power generated up to 35kV by a 1000kVA boosting transformer, and then connect to the low voltage side of 110kV transformer substation in the industrial park. The proposed grid access is technically feasible. Yet it is pointed out that since the construction cost of 35kV booster station is high, the Consultant suggested to boost the power generated up to 10 kV instead of 35kV if possible. The electricity access system plan should be finally approved by electric power company.

4. Project Schedule Up to now, the project decision and site selection have been finished. It is estimated that the project will begin to construct in April 2014, complete equipment ordering in June 2014, complete civil construction in July 2014, begin to equipment installation in August 2014, and put into operation in November 2014.

5. Project Implementation Arrangement The project owner is Tianzhu Jinqiang Investment &Development Co., Ltd (Tianzhu Jinqiang

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Company in short).Tianzhu Jinqiang Company is a wholly state-owned company subordinated to Industrial Parks Management and Administration Committee of Tianzhu County. It was founded in March 2013 with 1 million CNY registered capital. Its major businesses are the projects investment and development for the industrial parks, state-owned assets management and operation, land development and operation in the parks, public facilities management and maintenance etc. A leading group has been founded to be responsible for the project preparation and implementation. The project organization arrangement is shown below.

Leading Group

Financial Comprehensive Planning Construction Department Department Department Department

Responsible for Responsible for Responsible for Responsible for project financing comprehensive location the project and daily coordinate works selection and construction financial of the project planning works daily management of the project management

Fig. 25 Project Organization Arrangement

It is clear that both TianzhuJinqiang Company and Kuangou Industrial Park are subordinate to Industrial Parks Management and Administration Committee of Tianzhu County, which will facilitate the project preparation and arrangement. Furthermore, since the project has also acquired county financial support, it will help to ensure the project implementation. It is also found that the Tianzhu Jinqiang Company was founded in March 2013 with registered capital of 1 million CNY. It is suggested to adopt effective financing measures to assure the project financing. Furthermore, the project owners are lack of operating experience of solar PV power plant. It is recommended that the project owners should cooperate with ESCO to ensure project operation and management.

6. Financial Appraisal of the Kuangou Industrial Park Project

Again, the basic assumptions in our financial analysis for this Kuangou Industrial Park in Wuwei Municipality are largely in line with those for the Dunhuang 50MW solar thermal power plant and Xinmiao 20MW Distributed Solar PV Power Project. The project developer (owner), Tianzhu Jinqiang Company is a brand new management company for the Industrial Park, with very light asset and financial resource. The size of the proposed solar PV power plant is very small too. Although Tianzhu is a local SOE, it is again appropriate for the Company to consider ADB assistance from the non-sovereign loan

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portfolio to support its partnership with the private enterprises residing in the park who are actually the end users of the green solar power. See our suggestion in following part of the PPP arrangement. a. Project Investment Costs and Financing INVESTMENT PLAN

The total cost of the project is estimated at US$ 12.52 million to fully cover the local costs. Similarly to the Gulang Xinmiao Project, there is no foreign exchange costs employed for imports to the project. The base costs are prepared and further includes physical and price contingencies and interest charges.

Table 37 Cost Estimates by Components

Description CNY’000 USD’000 I Base Costs A Land and compensation B Resettlement C Civil works 7,883 1,292 D Survey, investigation etc. 1,300 213 E R&D, extension/demonstration 1,153 189 F Institutional Development 2,546 417 G Equipment procurement 35,736 5,858 H Materials and installation 6,663 1,092 I Consulting service 347 57 J Training and fellowships 878 144 K Other costs 500 82 II Taxes and Duties 8,548 1,401 Subtotal (A) as at October 11, 2013 65,554 10,747 III Contingencies L Physical 6,555 1,075 M Price 1,082 177 Subtotal (B) 7,637 1,252 IV Financing charges during development N Interest 761 125 O Currency losses 0 Subtotal (C)

V Total Project Cost (A+B+C) 73,952 12,123

The unit investment cost of this project is 10,925 CNY /kW, which is also lower than the empirical cost CNY12,000-13,000/kW for solar PV power in China.

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FINANCING PLAN

Tianzhu Jinqiang Investment & Development Co., Ltd would apply ADB or other international financial institutions to provide a non-sovereign loan of US$8.32 million in total incl. interest to be capitalized into years of operation, to finance 68% of the total project costs. The non-sovereign loan will have a maturity of 20 years including a grace period of 5 years and 15 years for repayment at a lending rate of 4.569%. Tianzhu Jinqiang Investment & Development Co., Ltd and the resident enterprises in the Park will finance US$3.80 million to balance the remaining 31% local costs under a PPP funding partnership framework. This is considered as equity and capital contribution.

Table 38 Tentative Financing Plan of Component Project 2

Percent % USD '000 Source of Funds Foreign Local Total Foreign Local Total Proposed ADB loan 100% 0% 69% 8,321 8,321 Domestic loans 0% 0% 0% 0 0 0 Government funds 0% 0% 0% 0 0 Equity and capital contribution 0% 100% 31% 3,802 3,802 Total 100% 100% 100% 8,321 3,802 12,123 Share of Total % 69% 31% 100% b. Project Profitability and Ratios Operation of the proposed Kuangou 6MW Distributed Solar PV Power Plant is projected to derive revenue from sales of the solar PV power generated to those 14 resident enterprises in the Park. A total power of 9 million kWh will be generated within 1,500 operating hours annually, to be connected to the grid in the Park for internal utilization of the resident enterprises only. Similarly to the Xinmiao solar PV plant, a subsidy of CNY0.42/kWh will be granted to the plant owner when its solar power is connected to the grid. These resident enterprises normally pay a local power price for industries at CNY0.80/kWh. To encourage these enterprises make their first choice to use the solar power generated by this new project, we suggest a preferential electricity price with 10% discount, i.e. CNY0.72. We thus compute the real tariff of the solar power at CNY1.12/kWh. According to our calculation, the project income after tax has the lowest level at US$303 thousand in year 6 after commissioning to operation. An accumulated net surplus after tax, reserve and dividend reaches US$12.04 million in the end. The ratios at the three bottom lines of the income statements, i.e. operating margin (52.58% to 56.95%), net income ratio (19.88%-52.58%) and net income to equity ratio (8.35% to 22.08%) show that the financial performance of the Project is acceptable. The net income

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ratio and net income to equity ratio are affected significantly by the interest charges after the five year grace period of the ADB loan. c. Cash Flow for Financing Plan and Financial Internal Return Rate

The cash flows for financing plan of the proposed Kuangou Solar PV Power Plant was demonstrated. The net cash flows show a low surplus of US$124 thousand and maintaining at positive level over years. This shows no liquidity risk of the current financing plan and no additional working capital is required to balance any deficit. We calculated annual NPV of the net cash flows and the annual accumulated NPV accordingly from the operations. Based on the proposed financing portfolio of this Project, we calculated the WACC rate, 5.21%, as discount rate to compute the annual NPV. We have a linear decline annual NPV from US$1,188 thousand in 2015 to US$294 thousand in 2039. The accumulative NPV has been negative for 14 years after the power plant delivered into operation. Using the 5.21% WACC discount rate, our NPV accumulation is US$4.33 million at the end. With 2014 as the base year, the normal payback is 10.58 years while the dynamic payback will take 14.87 years. FIRR on investment is 8.96%, higher than the WACC rate of 5.21%, also higher than the benchmark interest rate of loans from commercial banks in China, 8.0%. These indicate also reasonable outcomes from the proposed investment. It is obvious that, the FIRR from this project is much lower than the FIRR, 11.81%, possibly achieved by the Xinmiao solar PV plant. Considering both projects apply same solar PV technology, we believe the difference in performance explains well the economy of scale, and the gap in electricity price paid by end users. 7. Public and Private Partnership for Project Financing The project owner is Tianzhu Jinqiang Company. Once the solar PV project can be launched, the electricity generated by the project can be supplied to all the enterprises located in the industrial park. Since the project owner is lack of capital and requires an external financing capital of 50.17 million CNY (US $8.20 million), which is too small to meet the requirement for ADB sovereign loan. In view of financing, Tianzhu Jinqiang Company is a corporate legal person with registered capital of 1 million CNY (US$190.1 thousand) found in 2013. The company is not capable to raise external capital given its assets and credit limits. Since the project owner is a SOE affiliated to Industrial Parks Management and Administration Committee of Tianzhu County, meanwhile, all the enterprises residing in the park will be the electricity end users of the project, the project has a potential to be structured under a public-private partnership (PPP) financing framework of private equity fund. Under the proposed PPP structure, the local government, the Industrial Parks Management and Administration Committee of Tianzhu County and ADB can be considered as the public sector, the partnership can be built with

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private enterprises located in the industrial park through Tianzhu Jinqiang Company. It is suggested that the local government and the project owner will be partnering with the resident enterprises in the park to establish ―Kuangou Industrial Park Solar PV Generation Industry Fund (Solar PV Industry Fund in short)‖ to self-finance capital of 23.26 million CNY (US$3.80 million) and leverage an external loan of 50.17 million CNY (US $8.32 million) by government guarantee with leverage effect. This piloted PPP equity fund model if working well, we can disseminate the experience to other industrial parks. The fund can take the form of a limited liability company. The responsibilities of the suggested financing plan are as follows:

 Fund promoter: The Industrial Parks Management and Administration Committee of Tianzhu County can act as the promoter of the Solar PV Industry Fund, and take charge in coordination with the local governments. In addition, The Finance Bureau of Tianzhu County could provide a seed capital as the government equity.  Fund manager: The Tianzhu Jinqiang Company can play the role of fund manager as well as project manager. Meanwhile, the Company will be deligated as the government representative for its seed capital. Regarding of the project operation and management, the project owner should engage a professional ESCO to provide technical support in daily operation of the plant.  Fund investor: the enterprises located in the park are the project end users thus the key stakeholders. So far, altogether 30 industrial enterprises have registered in the park, among which, 14 enterprises are in operations, and most of them are energy intensive enterprises. These enterprises are considered investors to contribute initial capital as their equity in the plant, ideally between CNY400 thousand and CNY 500 thousand (US$65,329 and US$81,661) per company to the Solar PV Industry Fund.  ADB: an ADB non-sovereign loan will be provided to the Fund with counter-guarrantee by the Industrial Parks Management and Administration Committee of Tianzhu County and Finance Bureau of Tianzhu County.

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Fig. 26 PPP structure of priority project of component 2

The mechanism of interest distribution of the Solar PV Industry Fund is:

 The project provides electricity to the resident enterprises in the park. Sales of the project fund company comprise tariff for the electricity generated from the solar PV plant plus the national subsides for distributed solar PV from the grid company. The electricity generated by the project should be certified by the grid company as well;

 The resident enterprises pay electricity fee to the grid company. In order to encourage the enterprises to use the solar PV electricity, an incentive scheme is created by the Fund company to encourage the resident companies using the solar PV electricity by reimburse them 10% discount of the standard electricity tariff for industrial use;

 As standard PE fund, a management fee should be paid to Tianzhu Jinqiang Company as the fund manager, and a advisory fee to be paid to ESCO service according to agreed MEMOs;

 The fund company will pay back the ADB non-sovereign loan and interest through the cash flow income of the project over years of the project operation. The net surplus income of the project will be distributed among the investors. The fund company can either execute its final liquidation after having reimbursed all the ADB loan or continue to operate.

E. Risk Analysis of Priority Projects in Wuwei

1. Technical Risks

The solar PV power generation is a common technology after years of operation and application in the PRC. The manufacture capacity of main equipments such as solar PV modules and inverters are quite mature and can be totally acquired by domestic procurement.

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Therefore, the technical risks are relative low for the two priority projects.

2. Commercial Risks

The priority projects derive revenue from the internal utilization or sales of the solar PV power generated. Based on the calculation, the FIRRs of the projects are higher than the WACC rates given the financing portfolio of each project. The FIRRS are also higher than the current average interest rate of loans from commercial banks in China, which is roughly 8.0%. The commercial risks are low for the two projects.

3. Financial Risks

The capital amounts of external financing accounts for about 70% of the total investment for the two priority projects. Since the external financing capital is relative large, there are some financial risks in the projects. It is suggested that the project owners take PPP mode proposed by the consultants to apply ADB non-sovereign loan. Based on the financial analysis of the two component projects regarding profitability, net cash flows and financial internal return rates, it is found that there is no significant liquidity risk in the proposed financing plans of the two priority projects.

4. Policy Support

In order to facilitate renewable energy application, the PRC government gives support for both large-scaled and distributed solar PV development and gives priority to distributed solar PV projects. Followed by the national new energy city program, the PRC government issued the policy19 in July 2013 to stimulate distributed solar PV development, and recently, on 26 August 2013, the National Development and Reform Commission (NDRC) has given the detailed subsidy requirement and criteria 20 to distributed solar PV projects via gird companies with subsidy of 0.42 CNY/kWh based on electricity generated by solar PV projects. For these two distributed solar PV projects, since the maturity of solar PV technology, the policy support and the design of PPP mode, the projects are technically viable and financial affordability. The project risks are low and controllable. Furthermore, both two project owners have relatively strong capability for project preparation and implementation.

19Notice of Subsidy Policy for Distributed Solar PV Power Generation [2013] 390 issued by Ministry of Finance on July 24 2013 20Notice of Promoting the Healthy Development of Solar PV Industry by Price Leverage [2013] 1638 issued by NDRC on August 26 2013

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XI Pilot Project in Wuwei City

The pilot project of rural solar integrated utilization pilot project was identified and basically agreed by ADB, EA and IA before the TA commenced in April 2013. The basic information of the pilot project is shown below. Box 7 Brief Information of Pilot Project in Wuwei City Project name: Rural Solar PV Modern Greenhouse Pilot Project Project site: Wuwei desert park, 20 kilometers east to Wuwei city Project description: Construction of 5 rural solar PV modern greenhouses with installed capacity of 330 kWp Project schedule: completed in October 2014 Project cost: Total investment of 3,129,700 CNY (about 504,790 USD)，in which, engineering cost 2,608,100 CNY (about 420,662 USD)，construction cost 344,400 CNY (about 55,548 USD) and prearrangement cost 177,200 CNY (about 28,580 USD). Amount of ADB grant request: 558,000 CNY (about 90,000 USD)

During the field visit, the consulting team discussed the related issues with local finance bureau, local Development and Reform bureau, local grid company and the project owner. It was clear that the land for the pilot project was provided freely by the Wuwei Desert Park, and project construction was conducted by Zhongyi Construction Company.

It is believed that this project will definitely have demonstration effect because it is combination of solar energy utilization, greenhouse and tourism. Agriculture plays an important role in Wuwei by focusing on grapes and vegetable in greenhouses. However, Wuwei, even Gansu province is lack of experience in developing modern green economy by associating solar PV with greenhouses which have been successfully utilized in other parts of the PRC, such as Shandong province. Therefore, the experience of this project is expected to be utilized in other cities of Gansu province.

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XII Strengthening Capacity on Implementing the CNEDPs in Gansu Province

To ensure the effective implementation of National New Energy City Program, the NEA required the related municipal governments should identify the government departments and exact persons who will be responsible for constructing new energy cities. At the same time, the practical measures should be brought forward with regard to policy support, administrative management, financing channel and public service system. The consulting team made efforts to strengthen their capacity for implementing the CNEDPs at Dunhuang and Wuwei municipal as well as Gansu provincial levels. A series of training activities, i.e. workshops, study tour at home and abroad, as well as consultancy in forms of on-site and on-line have been taken. The four aspects were highlighted in line with NEA document of Guonengxinneng [2012] 156 as shown in appendix 2, which include (i) local policy support, (ii) establishment of public service platform, (iii) supporting infrastructure and facilities and (iv) public dissemination. A. Capacity Building Activities 1. Workshops Up to now, the total three formal workshops, inception, midterm and final workshops were organized in order to discuss the project outputs and provide the opportunity for the stakeholders to share and learn. Particular efforts have been made to (i) introduce both international and national experiences on implementing new energy cities; (ii) provide technical consultancy of micro grid, solar thermal utilization and CSP; and (iii) structure PPP financing framework. During the workshops, the consulting team organized training activities based on their experiences, knowledge and current approaches to the issues of implementing new energy cities. The key expert from Energy Research Institute of NDRC and officers from Yangzhou city of Jiangsu provinces were also invited to share their knowledge and experiences for new energy city building. More than 200 representatives attended the workshops, including those from Gansu provincial finance department, local financial bureau and local DRC of Dunhuang and Wuwei cities, stakeholders relevant to priority projects and pilot projects in this ADB TA study, as well as representatives of financial bureaus from other cities in Gansu province. The details are shown as below.

Fig. 277 Workshops & Training Activities

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Table 39 Workshops & Training Activities

No. Workshops Place & Time Subjects

1 Inception Dunhuang/ • Introduction to international best practice in New Energy workshop May 7, 2013 City Programs • Introduction to micro smart-grid development in China 2 Midterm Wuwei/ • Introduction to Financial Viability, Financing Gap and workshop December 13, Proposed Financing mechanisms 2013 • Introduction to solar thermal market status and potentials in China • Introduction to recent progress of implementing New Energy City Programs 3 Final Lanzhou/ • Introduction to the updated status of the national new Workshop May 7-8, 2014 energy city program • Best practice of building new energy city in Yangzhou city of Jiangsu province • PPP financing experiences and how to make PPP works for new energy city development

2. On-site technical consultancy Since the launching of this TA project, the consulting team worked closely with EA and IAs to conduct a series of on-site consulting activities in Dunhuang, Wuwei and Lanzhou cities to (i) review and appraise the CNDEPs, (ii) identify and conduct due diligence of priority projects; and (iii) supervise and support implementation of pilot projects.

Table 40 List of On-site Consultancy

No. Time Subjects 1 April of 2013 Site visit to Wuwei city by reviewing pilot project, discussing priority project and identifying the need and targeted group for the capacity building 2 May of 2013 Site visit to Dunhaung city by reviewing pilot project, identifying priority project and identifying the need and targeted group for the capacity building 3 June of 2013 Site visit to Wuwei city by supervising pilot project and selecting priority projects; Site visit to Dunhuang city by supervising pilot project and discussing priority projects 4 July-August of 2013 Due diligence of priority projects in Dunhuang and Wuwei cities; assisting equipment procurement of Dunhuang pilot project 5 September of 2013 Supervision of constructing pilot projects in Dunhuang and Wuwei cities 6 October of 2013 Site visits to Dunhuang and Wuwei on CNEDPs (1) updated status of

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implementing CNEDPs, (2) the financing gaps and barriers and (3) institutional capacity gap 7 November-December of Due diligence of CNEDPs in Dunhuang and Wuwei cities; 2013 preparation of PPP training at provincial level 8 January-October Supervising pilot projects in Dunhuang and Wuwei cities, assisting of 2014 for project application of Dunhuang priority project, organizing study tours to Jiangsu province and Europe

3. Study tours to Europe and Jiangsu Province a. Study tour to Europe The purpose of this study tour is to learn about international best practice experiences, which can benefit PRC, especially Gansu province with practical lessons on renewable energy city programs, support actions and intelligent investments which are successfully implemented in the European cities. The study tour was conducted from 18th -27th May 2014 in three countries of Denmark, Germany and Switzerland. The organization visited include (i) Danish Energy Agency, (ii) Technical University of Denmark, (iii) GFA Consulting Group (Germany), (iv) Wuppertal Institute for Climate, Environment and Energy (Germany), (v) ENCO Energie-Consulting AG (Switzerland), and (vi) Energie 360°AG (Switzerland). These organizations cover not only government agencies and research institutes, but also consulting companies and project developers.

Fig. 288 Study Tour in Europe

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By conducting the study tour to Denmark, Germany and Switzerland, the delegation learned a lot from international best practice experiences related to national renewable energy city program in these three countries. The key findings are summarized as below, the details see to the report of study tour to Europe in Appendix 5.

 Danish Energy Agency (DEA): Denmark and PRC has established a cooperative working framework and mechanism on energy, climate and building sectors. DEA is the responsible agency at Denmark side. Under Sino-Danish energy cooperation, there are two pilot projects in the field of renewable energy are undertaken. One is renewable energy based heat supply project in Yilan county of Heilongjiang province by comprehensive utilization of the biomass, excess wind power and geothermal for heat supply; the other one is located in Baicheng city of Jilin province by focusing on how to learn from Danish best experience of integration of wind into the heat and power system of the city. The experiences of these two pilot projects in the North China can definitely make reference for Gansu province on how to utilize rich renewable energy resources for municipal heat supply and power generation.

 Technical University of Denmark (DTU): DTU had provided technical support under Sino-Danish renewable energy cooperation program. It is sure that this visit will strengthen cooperation between DTU and Dunhuang city as well as Gansu province in constructing new energy cities and sharing know-how of renewable energy technologies in the near future.

 GFA Consulting Group: the visit to GFA provided the delegation a good opportunity to learn how to consider and build a sustainable green city from planning, policy, technology and financing points of view.

 Wuppertal Institute for Climate, Environment and Energy: it is expected to make a bridge between the Wuppertal Institute with Gansu province for the future cooperation in the fields of local energy and low carbon planning and technical support.

 ENCO Energie-Consulting AG and Energie 360°AG : this visit left a deep impression to the delegation about the management process of EEA (mayoral commitment-appoint energy team-initial review-energy policy program-implementation-certification and award-initial review), which could possible benefit to the new energy cities of Gansu province b. Study tour to Jiangsu province

The purpose of this domestic study tour is not only to learn best practice and good experiences of constructing national new energy cities in Jiangsu province, but also particularly to exchange challenges faced by these second-tier cities, both from the advanced East China (i.e. Yangzhou and Xuzhou cities in Jiangsu province) and less advanced West

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China (Dunhuang and Wuwei cities in Gansu province), are facing in attaining the targets to become a New Energy City and to identify possible central government support, if any, in fulfilling their tasks. This domestic study tour was conducted during 26 October to 1st November 2014 in Yangzhou and Xuzhou cities, Jiangsu Province. The Yangzhou and Xuzhou cities are located in the Jiangsu Province of the East China, which are much developed than Gansu Province of the northwest. As national new energy cities, Yangzhou and Xuzhou cities have its own distinguishing features and have achieved significant improvement. Yangzhou focuses on the development and utilization of solar energy, geothermal energy and biomass, also has good experiences in smart grid, ancient architectures integrated renewable energy and solar thermal etc. Xuzhou has gotten outstanding achievements in the development and utilization of biomass and distributed PV and wind energy. Besides, Yangzhou has once organized a study tour to Dunhuang, Gansu Province in 2013. The delegation and consultants had a good discussion with local DRCs in Yangzhou and Xuzhou cities. It was found that there still exist many challenges to attain the targets of becoming a New Energy City, and these barriers should be handled not only at municipal level, but also need policy support from central and provincial governments.

Although the two cities are located in the developed areas in China and achieved comparatively rapid development in terms of new energy utilization in the cities, they are still

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confronted with the following barriers as shown below: The consciousness and attention should be strengthened regarding the construction of new energy cities. At present, the municipal governments are short-sighted, and their concern is how to obtain financial support from the central government shortly after the cities were authorized as the national new energy cities. The more efforts they should make is to implement the construction of new energy city with municipal long-term development strategy. The key barrier is still financing. The financing support for building new energy city is urgent and big, currently the new energy project financing is still difficult to handle. Also, it was identified the expectation from the two cities to get possible support from the central government, including policy preference, financial support and capacity building etc. Policy preference: The quota system is currently being conducted for solar power generation project application in an up-to-bottom way from central to province then to municipal governments. Obviously the quota can be obtained at municipal level can‘t meet the actual requirement of solar power projects. It is expected that that the central and provincial government should give policy inclination to the listed national new energy cities; Priority of project development: The NEA is currently promoting the development of biomass utilization for heating. It is expected that the central government should give priority to the cities listed as national new energy cities; More green financing: The national policy and commercial banks are expected to give more financial support for national new energy city construction; More capacity building activities: It is also expected to get extra financial support from the central government for capacity building activities of the new energy cities, such as, planning, site visit, research, experience exchange; Improvement of administrative regulation: Up to now, the NEA has not issued the detailed requirements for the appraisal and verification of the first batch of 81 national new energy cities. It is expected the requirements can be published as early as possible, so that the cities can take action in accordance with the detailed requirements.

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B. Proposed Financing Modalities and Instruments Based on the desk analysis and site visits to Dunhuang and Wuwei ciites of Gansu province, our key finding is that the main difficulties and challenges faced by the two cities to implement CNEDPs is financing. The key projects financing of the two cities mainly focus on the solar utilization area, that is, CSP CHP project in Dunhuang and distributed PV power generation projects in Wuwei City. Especially for the distributed solar PV projects are crucial to the construction of new energy demonstration city, as these projects are characterized by self-generation and self-use, local consumption, small investment and quick pay-back period. However, these projects are scattered in distribution, currently both either domestic financing institutions or social capital is not active for the project financing. Therefore, innovative financing mechanism and viable instruments need to be explored. The consulting team discussed and recommended the financing instruments so as to assist both EA and IA to tackle these financial challenges.

1. On-Lending Scheme of Financial Institution

According to the Ministry of Finance (MOF) of the PRC, international and foreign government loans fall into three categories: (i) Category I- the central and provincial government bodies approved as the borrower and agree to repay the loan; (ii) Category II- the project company acts as the borrower and agrees to repay the loan, whereas the provincial finance department agrees to provide guarantee; (iii) Category III- the project company acts as the domestic borrower and agrees to repay the loan, whereas the on-lending bank is the ultimate party for repayment. In our analysis, the 50MW CSP-CHP project in Dunhuang City will be in Category II if they apply the ADB loan. The financing scheme for most distributed solar PV projects in Dunhuang and Wuwei herein belongs to Category III. If the on-lending modality is adopted, the scattered distributed solar PV projects in Dunhuang and Wuwei will be possible to be considered by the on-lending banks. The on-lending projects are classified into the following two approaches in practice:

• On-lending through intermediary banks: Successful cases include China Energy Efficiency Financing I and II loan programs to ESCOs funded by the World Bank through Huaxia Bank, Export-Import Bank of China and Minsheng Bank etc.; KfW Energy Efficiency/Renewable Energy Credit Programme through Export-Import Bank of China; Energy Efficiency and Renewable Energy on-lending programme through Merchant Bank, Huaxia Bank and Pudong Development Bank etc.;

• On-lending through financial trust companies: the classic case is the ADB loan program to Guangdong efficiency power plants (EPPs) through a provincial trust company (GFTC) in three MFF tranches.

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Most IFIs adopt the first financing scheme. Figure 29 shows the IFI on-lending scheme through intermediary banks.

Enhance demand for finance Sources and potentials of financing

Loan technical assistance Energy efficiency credit line

Intl. Financial Institution Ministry of Finance

TA Providers Partner Banks

End beneficiary: Borrowers, Businesses, End-users of utilities Energy audits, project design, act and M&E Loans/other financial services

Fig. 299 On-lending Scheme through Intermediary Banks

Our key observations: (i) This scheme will benefit domestic banks by using preferential funds and expertise of IFIs and keep the local governments not in lending activities; (ii) Loans from an IFI/bank will be agreed by national authorities to lend directly to the selected domestic banks with concessional rate and other favorable conditions. The domestic banks will re-lend such loans to EE related businesses or energy utility providers; (iii) The on-lending rates of intermediary banks are generally lower than market interest rates, at the same time, the intermediary banks must bear partial or all risks of the project loans; (iv) This lending arrangement also decompose large sum of international lending into several smaller sums of loans through intermediary banks, which are more relevant to finance the distributed solar PV projects and medium-sized energy projects in the cities of Dunhuang and Wuwei.

This working process for on-lending through financial trust companies is similar to the scheme of finance intermediation through banks but now, the loan is trusted from the central or provincial government authority to the trust firm who will re-lend the loans to local borrowers. In the bank modality, the domestic partner banks may or may not need a letter of guarantee from a guarantee firm for a specific loan while this model requests letter of guarantee from each loan applicant. The second on-lending scheme has the advantage in using finance trust institution‘s expertise in project selection, project appraisal, investment

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consultations and fund management on trust arrangement scheme.

2. Loan Guarantee Scheme of Financial Institutions

The loan guarantee mechanism is earmarked as a very useful financing tool for solving SMEs financing difficulties. The bank guarantee fund helps reduce the risk of new energy and energy efficiency project loans and enhance the willingness of borrowing, so that banks gradually become familiar with and control the characteristics and risks of such projects, and facilitate SMEs in solving the problems of difficulties in guaranty and financing. The cases we have fall into two categories of loan guarantee schemes: (i) Credit Guarantee Fund established for each individual loan from a commercial bank. This scheme is rather traditional, e.g. the World Bank example of Energy Conservation Project Phase II of a GEF credit guarantee fund/reserves of $22 million through China Investment & Guarantee Corporation (I&G) to support the development of ESCOs and energy saving SMEs; (ii) Loan loss Reserve Fund with partial or full protection for a bank portfolio of small loans as a group. A typical case is the IFC‘s CHUEE program which has been considered a key successful factor in loan leverage. Under this arrangement, IFC provided a risk fund serve as collateral for energy saving loans to SMEs from partner banks, but did not make the actual loan commitments. We hereby mainly introduce the loan loss-sharing reserve fund mechanism based on the case of IFC's CHUEE program, as illustrated in Figure 30.

2nd Loss 90%

IFC 40% Bank 60%

1st Loss 10% IFC 75% Bank 25%

Fig. 30 IFC Loan Loss-sharing Reserve Fund Scheme

Our key observations: (i) a Loan loss Reserve Fund is established, having its clients, i.e. partnering banks with loss guarantee on their loan portfolios instead of individual loans of borrowers; (ii) This is an innovative loan guarantee scheme from IFC for energy efficiency loan projects while partnering with commercial banks on new practices in risk management, having a obvious function of financing leverage; (iii) In this case, pressure from risk defaults are less on the guarantor (IFC) compared to that on the partnering banks. IFC takes risk of 43.5% of the loan portfolio and the partner bank bear a risk of 56.5%. This is a typical risk sharing mechanism between IFC and commercial banks. The primary loan losses and the

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secondary loan losses are the major factors in the program. The mechanism in combination with other financial products can provide support for all types of energy-saving projects. From the consultation with the senior representatives of domestic banks in the cities of Dunhuang and Wuwei, we learnt that their capitals are available but the new energy projects are often over-small and the reliable cash flow was a major concern, while the establishment of credit guarantee funds and such loan loss-sharing mechanism made the banks feel safer. The local government can make good use of such mechanism, e.g. the establishment of local financing platform with guarantee mechanism as the core, and obtaining credit and loans from CDB to finance new energy projects.

3. Financing Modality of Equity Funds

Many professional ESCOs lost opportunities of participating in new energy and energy efficiency projects due to the financing difficulties. In fact, the growth path of the enterprises involves two kinds of development strategies: one is the "climbing stairs strategy‖, the enterprises grow gradually relying on accumulation of their own capital like snowball; the other is the "elevator strategy", enterprises achieve rapid growth with the participation of shares from external investors. The latter strategy is represented by introducing venture capital and private equity investment. For ESCO companies with high debt/asset ratio, the strategic introduction of investment partner is an option, as the new equity capital can improve the corporate balance sheets, and meanwhile leverage the bank loans. When coming to the point that the CDB facilitates the distributed solar PV industrial parks, we conceived a PE fund model of public-private partnerships (PPP) strategic framework that can be implemented. Figure 31 shows a financing scheme of such a solar photovoltaic power generation fund in an industrial park. The photovoltaic development company (fund manager) and the park jointly set up a solar photovoltaic fund with energy-using companies residing in the park to address the self-financing need in their distributed PV solar power plant, and the loan from CDB or international financial institutions are leveraged through a government-guarantee scheme or financing platform. The new energy fund may be established in a legal form of limited company.

Our key observations: (i) the Industrial Park Administrative Committee acts as the promoter of solar photovoltaic fund (hereinafter referred to as the Fund) and coordinates the government in providing a small amount of distributed PV guiding fund as government equity; (ii) the photovoltaic development company is designed as the Fund/project manager, and meanwhile act as the representative and cornerstone investor of the government's guiding fund. From technical considerations, the photovoltaic development company may need to sign a cooperation with professional energy services company as technical service provider of the distributed power plant invested by the Fund; (iii) The companies settled in the park are direct users and stakeholders of photovoltaic power generation. The Fund can be designed so that these users invest as a limited partner to solve the self-financing part of the project, each

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company being a shareholder of the Fund; (iv) The Industrial Park Administrative Committee can operate the sovereign or non-sovereign loans from the CDB or IFIs through higher level of financial departments of the Government.

Fig. 31 Distributed Solar PV Equity Fund Structure in Industrial Park

This PE fund financing scheme was designed and discussed in the first interim report for the 6MW distributed solar PV project of Kuangou Industrial Park in Wuwei City. The project Owner is Tianzhu Jinqiang Investment Development Co., and the end-users of electricity generated by the project are those energy intensive enterprises in the park. Assessed from the perspective of financing, the Tianzhu Jinqiang Investment Development Co., Ltd. is the legal person of newly established state-owned enterprise for park management. It has a limited capital of RMB 1 million CNY which is not qualified for obtaining loans to meet budget requirement of the project. The capital amount for financing is far eligible from applying for the ADB sovereign loan. Given the project owner is state-owned affiliated under the Administrative Committee of the Tianzhu County Industrial Zone and enterprises settled in the park are end-users of renewable energy power, the project financing has significant potential for public-private partnerships (PPP). The mechanism for distribution of benefits can be found in our comprehensive design scheme for this priority project. For certain, the feasibility of financing option for Kuangou Industrial Park also depends largely on whether the Tianzhu Jinqiang Investment Development Co., Ltd. and all settled enterprises have the intention for such cooperation.

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4. Financing Energy Service Companies (ESCOs)

Most ESCO companies are small and do not have the financing capacity. We tend to encourage financing to medium and large size ESCOs. One option is to support so called Project Cooperation Company (PCC) who cooperate with smaller ESCOs as a joint consortium of energy-saving supplier and share benefits from energy saving services to clients. Figure 32 shows an energy service financing model through tri-partite partnership between banks, PCC and ESCOs. PCC will be responsible for loans from banks to finance the project and be reliable for bank loans, and bear energy efficiency performance and repayment risks. A PCC has a sound asset structure and financial strength, most importantly also a full capacity to undertake EE auditing, design, finance, implementation, monitoring and evaluation and management for energy saving projects. The utility provider or energy end-user (client) will pay the PCC for the investment from energy saving based on contract. The ESCOs will prorate the payment from the PCC according to their contract. An energy service financing model through tri-partite partnership between banks, PCC and ESCOs is shown in Figure 32.

International financial Energy-saving service organization provider

Repayment Loan Project Cooperation

Sub-loan Company (PCC)

Cooperative bank Energy service contract Client

agreement Repayment Cooperation

Energy Service Company

Fig. 31 Financing Model through PCCs to Support Small ESCOs

Our key observations: (i) Some international and national experiences have suggested that financing small ESCOs is often not cost effective arrangement; (ii) a feasible approach is to support the PCCs who cooperate with smaller ESCOs as a joint consortium of energy-saving supplier and share benefits from energy saving services to clients; (iii) the PCC has more reasonable capital structure and technological advantages for financing, and be responsible for financing and undertaking the power generation and energy efficiency performance and credit risks of projects. The financing design for Gulang Xinmiao 20MW Distributed Solar

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PV Power Generation Project is another financing modality featuring formation into the project company with ESCOs.

5. Suggestions for facilitating financing of CNEDPs of Dunhuang and Wuwei

It is realized that Dunhuang and Wuwei are most effective in implementing the solar PV industry in terms of introducing big projects, attracting big enterprises and big banks. We understand that the implementation of the CNEDPs mainly rely on the capability for local consumption of new energy, besides big projects, its realization also depends on small projects and small businesses, while its financing is much challenging. Therefore, the innovation of financing modalities and instruments is required all the more. Upon assessment of the financing and gap analysis of these key projects in the two cities, we have introduced the on-lending scheme, loan loss-sharing reserve fund, new energy equity funds in industrial parks, and ESCO financing model through project cooperative company. These instruments and tools are more relevant for financing small and scattered projects. Building on this, we provide four sets of recommendations to the provincial and local government as the planning bodies and promoters for new energy financing, to the energy companies and project owners as project investors and operators, domestic institutional institutions as loan financiers and on-lending intermediaries, and lastly the international financial institutions as the lender.

a. Recommendations to Provincial the Municipal Financial Departments in Gansu Province

• Whether the provincial finance department can establish a provincial financing guarantee platform for new energy projects by cooperating with financial and guarantee institutions. They may strive together for the financing support from CDB on distributed solar PV projects;

• The Dunhuang and Wuwei municipal governments may consider partial finance guiding funds, and set-up small new energy industry fund or energy park fund. The PPP equity fund model can be established on pilot basis. The Wuwei City should refer to experiences from the practice of Dunhuang, and allocate appropriate fiscal budget for distributed solar PV projects;

• Guiding policies on credit/loan guarantee funds. The Government may consider credit /loan guarantee funds as an option to scale up lending capital. Credit guarantee fund scheme has comparative advantage in targeting SMES, while the loan loss reserve funds have better leverage to scale up the markets for new energy and energy efficiency financing;

• Wuwei City is very successful in managing large solar PV projects and can consider how innovatively to cooperate with the private sector in promoting small distributed solar PV projects. The government should conceive viable scheme to finance ESCOs. The selection of Project Cooperative Company (PCC) is the key to success.

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b. Recommendations to energy companies and project owners

• Small ESCOs should have the willingness to cooperate with large energy companies. Project Cooperation Company (PCC) is a great option for small ESCOs with a large energy company together to form joint consortium of new energy and energy-saving supplier and share benefits from energy saving services to clients;

• The new energy investment companies may adopt an "elevator strategy" as its growth path, by achieving rapid growth with the participation of shares from external investors. The strategic introduction of investment partner is an option, as the new equity capital (VC or PE) can improve the corporate balance sheets, and meanwhile leverage the bank loans;

• The new energy investment companies may use the common BT project modality to partnering with public and government project owners to jointly develop the distributed solar PV projects.

c. Recommendations to domestic banks and other financial institutions

• Innovative credit structures and products: Formulate appropriate loan terms and offer innovative credit structures that attract a range of borrowers, as well as innovative use of risk weighted pricing of interest with the support of the Government;

• Expansion of lending scale: Use banks‘ internal and external financial sources as counterpart financing to international loans to achieve the leverage effect of international lending. Domestic commercial and policy banks may consider B loan modalities and opportunities by cooperation with international financial institutions;

• Cash flow based collaterals. In light of the on-grid subsidy system for solar power generation, the cash flow-based collaterals shall be used. Differing from the traditional assets mortgage, it is suggested that the project value and the credit guarantee arrangements are determined by cash flow and utility program. d. Recommendations to IFIs on financing support to new energy projects in the two cities

• Assist in the introduction of New financing models: financial intermediation, multi-tranche financing facility (MFF), bundled loan arrangements and loan guarantee scheme, if possible;

• Promote non-sovereign loan programs to local energy companies and support in the establishment of public-private partnership (PPP) financing modality;

• Strengthen leverage effectiveness: Given the limited lending resources to the PRC, international financial institutions should consider the leverage effectiveness when introducing a loan or a guarantee scheme to a specific project. The lending practices

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in China have already presented such differentiation of leverage effectiveness between applied financial products;

• Economy of scale in lending: In the design of new energy and energy efficiency lending through the use of finance intermediation and loan guarantee schemes, economy of scale should be a key factor to be taken into consideration when determining the size of a financial product in order to best use the internal capacity of a financial intermediary;

• Large CSP-CHP projects in the PRC are very good loan products and intervention opportunities. The financial appraisal on the project of 50 MW CSP-CHP in Dunhuang City shows that the project is eligible for sovereign guaranteed loan from IFIs. In summary, the implementation of the planning budget relies on mobilizing all the potential financial resources. Investments from energy companies are considerable in Gansu Province, Dunhuang, and Wuwei City, and these projects mainly include solar PV and wind power, as well as the field of small hydropower and biomass. The government fiscal financing as the guiding fund is often the prerequisite to realizing the planning objectives. The use of innovative financing instruments, e.g. intermediate lending, non-sovereign loans, and credit guarantee funds may bring into the largest leverage effectiveness by sharing risk between IFIs and domestic commercial banks. The provincial and municipal governments and local financial institutions of Gansu Province, Dunhuang and Wuwei cities should recognize and seize the great opportunities of promoting national new energy cities program, and actively develop appropriate fiscal policies as well as financial products and instruments to respond to various project financing needs.

C. Administrative Management and Policy Support

In accordance with the requirements of NEA document, the consulting team analyzed current status and identified the barriers with regard to (i) local policy support, (ii) establishment of public service platform, (iii) supporting infrastructure and facilities, and (iv) public dissemination of administrative management and policy support mentioned in the CNEDPs of Dunhuang and Wuwei cities. Furthermore, by conducting domestic study tour and workshops, some national practices and best practice were shared with EA and IAs.

1. Current Status in Dunhuang City

According to its CNEDP, Dunhuang municipal government planned to take following measures to ensure the implementation of the plan. a. Local Policy Support: (i) establish new energy city construction leading group and multi government department coordination management system; (ii) increase financial support for key projects, including giving fiscal support for the investment of CSP-CHP project,

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providing subsidy for the heat generated by CSP-CHP project, and giving fiscal support for the investment of micro grid project. b. Establishment of public service platform: (i) establish technical expert team by the means of making cooperation agreement and recruiting experts, to solve technical problems confronted by the key projects and make policy suggestions on how to provide local subsidies for the electricity generated by distributed power generation projects and the heat generated by CSP-CHP project; (ii) foster and introduce professional technicians in the fields of solar PV, wind power and energy storage. c. Supporting infrastructure and facilities: (i) establish renewable energies development targeting system by identifying the detailed targets and requirements in Dunhuang social & economic development plan and allocating the tasks; (ii) facilitate distributed solar energy development in terms of electricity connection and pricing d. Public dissemination: (i) widely give publicity to constructing new energy city in Dunhuang, to upgrade its well-known reputation; (ii) actively conduct communication and cooperation and organize the study tours to some seminars, exhibitions and expos. In fact, according to our field survey, it was found that Dunhuang just made some progress with regard to policy support. Over two years after its CNEDP‘s approval, Dunhuang municipal government issued ―Implementation opinions on Dunhuang constructing national new energy demonstration city‖ in September 2013. It is said that Dunhuang will take actions to strengthen financial support, improve policy measures, energy conservation and emission reduction targeting system, promote public awareness etc. After that, Dunhuang established ―leading group of Dunhuang constructing national new energy demonstration city‖ who is in charge of decision-making, coordinating and facilitating work on key issues of constructing new energy city.

2. Current Status in Wuwei

According to its CNEDP, Wuwei municipal government planned to take following measures to ensure the implementation of the plan. a. Local Policy Support: (i) set up a leading & coordinating group for new energy city construction and establish multi government department coordination management system; (ii) establish local fiscal promotion fund for new energy industry, to support key enterprises and projects, to assist key technologies R&D and industrialization, to facilitate public service platform and pilot project construction. b. Establishment of public service platform: (i) promote ESCO mechanism, establish comprehensive and optimized energy-saving technical service platform so as to provided integrated energy conservation service to the enterprises; (ii) based on existing technical support of New Energy and Dynamical Engineering Institute of Lanzhou Jiaotong University, to enhance the training of professionals in the field of new energy.

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c. Supporting infrastructure and facilities: (i) to simplify the procedure requirement for approving new energy projects including project identification, land utilization, project site selection, grid connection, electricity and water consumption etc; (ii) explore participation of

carbon trade system, especially for the CO2 emission reduction from BIPV projects can be certified and traded in the carbon market.

d. Public dissemination: organize popularization activities of new energy products, and improve social awareness of new energy utilization. The updated situation is that similar to Dunhuang, Wuwei also just made some progress with regard to policy support. In 29 November 2013, Wuwei municipal government established ―Wuwei New Energy Industry Leading Group‖, the mayor is the team leader, and the team members include chief officials from local DRC, Land and Resource Bureau, Environmental Protection Bureau, Power Bureau etc. The office of the leading group was set up in local DRC responsible for the city new energy development.

3. Barriers Identified

By reviewing administrative management and policy support mentioned in the CNEDPs of the two cities, it is found that although the two cities proposed a series of policies and measures in their CNEDPs, most of them are too general and lack of detailed and practical measures. We also observed that some administrative measures are missing in their CNEDPs followed by the requirements of NEA. The gaps exist with respect to special fund establishment, public service platform and supportive facilities. In terms of actual situations, it is clear that the two cities are still at startup stage by just having established ―leader group‖, no any further detailed measures have been issued. Besides this, the two cities nearly made any progress in this regards. The detailed information are shown as Table 41.

Table 41 Matrix of Administrative Management and Policy Support in the Two Cities Dunhuang Wuwei No. NEA Requirements CNEDP Update CNEDP Update Establishment of multi-sector coordinating √ √ √ √ Local policy management system and working mechanism 1 support Establishment of special funds to promote × × × demonstration projects and technologies √ Establishment of new energy public information × × × × Establishment service platform of public Fostering professional new energy service 2 × × × service companies √ platform Launching capacity building and training activities √ × √ × Developing effective policies and management Supporting √ × √ × 3 infrastructure mechanisms and facilities Other supportive business channels and facilities × × × × Public Dissemination of new energy knowledge, raising 4 × × × dissemination public awareness for new energy utilization √

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4. Recommendations

Based on above analysis, the consulting team make the following suggestions by learning best practice from other cities who also involved in National New Energy City Program, their good experiences can make some hints for the two cities and facilitate them to improve administrative management and policy support for constructing new energy cities in accordance with NEA requirement. a. Leveraging financial support from national and provincial levels

It is critical to obtain government support for the construction of new energy city, especially in the Western China. According to financial analysis of the CNEDPs of the two cities, we found that the government funding is critical to translate the planned projects into financing viable projects. On one hand, it is suggested to establish the provincial or municipal financing platform to apply for financing support from IFIs and national government; On the other hand, the Dunhuang and Wuwei municipal governments may consider about the partial finance guidance funds, new energy industry fund for SMEs or energy park fund to leverage financing sources via PPPs model. During the TA, a comprehensive training activity on PPPs was conducted. Main efforts were made to discuss how to make PPPs work for new energy city development, and how to leverage private sector participation for new energy development in Gansu province. Compared to other provinces in the Western China, with the technical support of ADB under this TA, Gansu provincial financial department is rather active to learn and to try PPPs in energy sector. It is suggested to make further study on PPPs and make PPPs pilot projects based on this TA. b. Initiating Multi government agency meeting system

New energy development and utilization is a systematic big programme concerning multi government agencies and industrial sectors. It requires smooth coordination and effective cooperation among local DRC, Financial Bureau, Bureau of Industrial and Information Technology, Construction Bureau, Planning Bureau, Bureau of Land and Resource and Environmental Protection Bureau. In addition to the experience of Tai‘an city of Shandong province shown below, as far as we know, the successful implementation of ADB energy efficiency loan projects in Guangdong and Hebei provinces can also illustrate how important the good coordination mechanism across multi government agencies is to ensure smooth and effective implementation of a complicated project. According to the experiences in other cities, it is suggest that the two pilot cities should consider to establish the multi government agency meeting system based on the existing ―leading team‖. By organize meetings at regular intervals, the key issues regarding new energy city construction can be discussed and solved during the meeting since the chief officials who participate the meeting can coordinate and make decision in effective way.

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Box 8 Multi Government Agency Meeting System in Tai’an City At the beginning of 2011, Taian municipal government had established this system for the purpose of implementing new energy development strategy, making decision for key projects, solving key issues of new energy development, and implementing its CNEDP. The meetings are held at regular intervals, different government agencies play different roles, such as:  Local DRC: plays leading role of new energy development, responsible for project approval and planning;  Local financial bureau: work together with local DRC for identifying the projects supported by local fiscal fund;  Local industrial and information technology bureau: establish and promote new energy equipment manufacturing projects, enterprises and industrial parks;  Local housing and urban-rural development bureau: application and popularization of solar thermal, geothermal and LED lighting utilization;  Local transportation bureau: promote new energy vehicle utilization in public transportation sector. c. Unlocking new energy consumption bottle necks

The construction of power grid connection and transmission is one of key barriers of the new and renewable energy development. It can be seen that endorsed by its rich solar and wind resources, Gansu province achieved a rapid development in terms of new and renewable energy development; however, wind power curtailment is prevalent due to excess wind power generation, and distributed solar PV projects doesn‘t work well. In the CNEDP of Dunhuang city, it emphasized to develop micro grid. However, it is observed that there is long way to go for Dunhuang to answer the questions, such as, what is micro grid, why to construct micro grid, how to develop micro grid, who do this work. It is suggested that Dunhuang could accelerate micro grid research and pilot project development to meet the demand for local utilization of new energies. Yangzhou city of Jiangsu province has made some efforts in developing micro grid in city construction, which can benefit Dunhuang city with practical lessons and experiences.

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Box 9 Micro Grid System in Yangzhou city Yangzhou pioneered to set target to establish national micro grid base in third tier cities. The micro grid comprehensive pilot project of Yangzhou Economic and Technological Park has become the micro grid pilot project of the State Grid Corporation. The internet, telecom, television and broadcast, and power transmission have been realized in the park.

It is planned that the micro grid system will cover the whole city, mainly including the sub-systems of distributed power supply, energy storage device, micro grid switching and monitoring, distribution gird control, emulation and alarm analysis, distribution power operation and monitoring, and power cut management etc. d. Building new energy public information service platform

It is urgent to establish new energy public information service platform in two cities. One approach is to strengthen energy (including new energy) statistic work. It is fundamental for municipal government to make right decision on energy (including new energy) development. The other approach is to set up new energy information platform by fully utilizing municipal management resources and internet technologies. The platform can realize several functions, such as, online monitoring of new energy projects operation, data collecting and analyzing, as well as new energy project application and approval etc. e. Introducing ESCOs in new energy development

ESCO is market based energy conservation mechanism. Nowadays it is not only used to improve energy efficiency in industrial sector, but also active in renewable energy development. It can bridge the cost and technical gaps for the projects. Currently most of ESCOs are located in Eastern China, and the share of total ESCO production value in Western China only takes 14.1%21. It is suggested to accelerate ESCOs development in two cities by cooperating with ESCO Committee of China Energy Conservation Association (EMCA)，introducing professional ESCOs to provide technical consultancy, mobilize financing channels and assist key projects implementation. f. Strengthening communication and cooperation in new energy development

Both micro grid and CSP are still at start-up stage in the PRC. The communication and cooperation at home and abroad are critical for the two cities to learn the newest progress in new energy development, to promote the key projects implementation, such as CSP-CHP project and micro grid project in Dunhuang city. Furthermore, both cities should strengthen

21 Annual Report of EMCA in 2012

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multi-cooperation with related universities, research institutes and energy enterprises. Expect for attracting some key experts to provide consulting services for new energy development, both cities should foster local specialists by establishing long-term cooperative relationship with good universities and institutions. The successful case of Anyang city is shown below. Box 10 Best Practices in Anyang city

Anyang city is located in the Central China of Henan province, who is also involved in National New Energy City Program. During 11th FYP, two notable technological cooperation platforms were established in Anyang, one is UNIDO international solar technological transfer center-solar industrialization and R&D base, the other is China Renewable Energy Society-solar industry demonstration base. Furthermore, Anyang successfully organized ―China International Gas Energy Summit‖, ―China Solar Industry Forum‖ and ―Shanghai EXPO- Global Low Carbon Action‖. All these activities effectively promoted new energy development and make solid input for construction national new energy city.

Besides, Anyang Human Resources and Social Security Bureau launched special plan for introducing professionals in new energy sector with fairly favorable treatment and welfare. Up to now, three post doctor R&D stations have been built in Anyang, which significantly facilitated its new energy development.

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XIII Conclusions and Outlook

With strong support of ADB, Gansu Provincial Finance Department, as well as the municipal governments of Dunhuang and Wuwei cities, this TA project implemented very smoothly and achieved all the expected outputs.

1. Output 1-Best practice model of capacity building for national new energy city program: This TA project is regarded as the first research study regarding the national new energy city program at the level of second-tier cities. This TA project timely responded to the NEA‘s priorities for promoting national new energy city program and fostering green and low carbon development in cities. The consulting team finished the technical and financial due diligence of the CNEDPs of Dunhuang and Wuwei cities. The successful implementation of this TA project provided a best-practice model for planning, appraising and implementing distributed renewable energy development in second-tier cities, especially in the West China. The lessons learned from this TA project were shared and discussed with NEA, the relevant cities at home and aboard, and other stakeholders.

Output 2- Capacity strengthened in planning and implementing the CNEDPs in Gansu province: Since this TA is a capacity building TA project, by organizing a series of capacity building activities, such as, workshops, on-site consultancy, and study tours at home and abroad, more than 200 relevant staffs have been trained. All the activities were organized very successfully with high-qualified training materials by focusing on the topics (i) updated policy study on national new energy city program; (ii) international and domestic best practice and lessons related to national New Energy City Program; (iii) micro smart-grid development in China; (iv) solar thermal market status and potentials in China; (v) PPPs financing mechanism in energy sector; and (vi) financial viability, financing gap and proposed financing mechanisms in Gansu province. By conducting a series of training activities, the capacity of Gansu province, particularly the two pilot cities of Wuwei and Dunhuang, in planning and implementing the CNEDP have been strengthened.

Output 3-Appraisal of priority projects and Implementation of Pilot projects: More efforts were also made for priority projects and pilot projects in the CNEDPs of Dunhuang and Wuwei cities. By coordinating with Gansu Provincial Finance Department, as well as the municipal governments of Dunhuang and Wuwei cities, the priority projects were identified, they are (i) Concentrating Solar Power and Heat Cogeneration (CSP-CHP) project in Dunhuang city and (ii) two distributed solar PV power generation projects in Wuwei city.

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Except for delivery of the appraisal reports for the three priority projects as required, the consulting team assisted the Dunhuang local DRC to prepare the project application document, and also structured the financing mechanism including ESCO arrangement and PPPs equity fund platform for the two priority projects in Wuwei city.

Outlook: If we look at the national new energy city program from longer and wider perspective, it should be highlighted that in June 2014, the central financial leading group of PRC central government organized the 6th meeting. At the meeting, Mr. Xi Jinping made remarkable speech of ―four energy revolutions + one international cooperation‖. This speech is regarded as the top guidance of the energy development in the PRC in the recent years. The key word of his speech is energy revolution. He stressed to promote energy consumption revolution, energy supply revolution, energy technology revolution, and energy institutional revolution. Besides, he also emphasized to strengthen international cooperation to effectively use international resources to facilitate 4 energy revolutions.

1. Promote the energy consumption revolution and restrain the irrational consumption. • firmly control the total energy consumption, • effectively implement energy policy priorities, • implement energy conservation throughout the whole process of economic and social development, • firmly adjust the industrial structure, • Attach great importance to energy conservation urbanization, • Establish thrifty consumer attitudes, and, • Accelerate the formation of energy-saving society. 2. Promote the energy supply revolution and build multiple energy supply system • Diversified supply based to ensure domestic energy security, • Vigorously promote clean and efficient use of coal, • Put great efforts to develop non-coal energy to form multi-energy supply system of coal, oil, gas, nuclear, new energy, and renewable energy, and, • Enhance the construction of energy transmission and distribution networks and energy storage facilities. 3. Promote the energy technology revolution and drive the industrial upgrading • Based on China's national conditions, followed by new international trends of energy technology revolution • Develop in the direction of green and low-carbon • Promote technological innovation, industrial innovation and business model innovation, and • Tightly integrated with other areas of high technology, drive energy technology and related industries to grow into new growth point of China's industrial upgrading. 4. Promote energy institutional revolution and get through the fast lane of energy

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development • Unswervingly push forward reform, • Restitute energy commodities property, • Build an effective competitive market structure and market system, • Form mechanism that energy price is mainly determined by the market, • Put changes in energy government regulation, and • Establish a sound legal energy system. 5. Strength international cooperation to guarantee the energy security under open conditions • Strengthen international cooperation in all aspects of energy production and consumption revolution, and • Effectively use of international resources.

Based on that, the NEA newly launched a ―new city (town), new energy, new life‖ initiative. It is understood that this initiative will be conducted together with new energy city program and new energy development, so as to facilitate the transformation of energy consumption pattern in urban and rural areas of China. Therefore, we believe that national new energy city program is still the priority and focus work of the NEA in coming years. This TA project stepped a very good beginning for facilitating local governments to implement national new energy city program in second-tier cities.

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Appendices

Appendix 1. International Case Studies of Micro Grid

The following case studies concentrate very much on good examples of ―Micro grids‖ or ―Smart grids‖.

1. Micro-Grids

A Micro grid is essentially a ‗normal‘ transmission and distribution grid, just on a significantly smaller scale. Micro grids are often implemented in the most rural locations.

Example of Fair Isle Fair Isle is a small island in the northern parts of Scotland and is considered to be one of the most remote inhabited islands in the UK. With a population of less than 100 it doesn‘t require much power, but electricity is needed nonetheless to provide these residents with a good quality of life. Due to its isolated location Fair Isle is not connected to a major electricity network. Prior to 1982 all electricity was obtained through two diesel generators. Due to the cost of diesel as an energy source there were very limited electrification hours Fig. Fair Island in Scotland

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With average annual wind speeds found to be about 9.95m/s wind is in abundance on the island making this an ideal choice of power generation. In 1982 Fair Isle built its first wind turbine; a 60kW generator which automatically starts when wind strength is sufficient. In 1996 a second wind turbine was built with a power rating of 100kW. Today, the system is set up using two networks. One, a higher priority services network and the other a heating network. The heating network is used to take on any electricity that would otherwise be dumped due to overproduction. If there is not enough power being generated then the heating network will remain offline and all generated power is supplied to the services network. 2. Smart Grids A smart grid is a modernized electrical grid that uses information and communications technology to gather and act on information, such as information about the behaviors of suppliers and consumers, in an automated fashion to improve the efficiency, reliability, economics, and sustainability of the production and distribution of electricity. Smart grid policy is organized in Europe as Smart Grid European Technology Platform. Roll-out of smart grid technology also implies a fundamental re-engineering of the electricity services industry, although typical usage of the term is focused on the technical infrastructure.

Fig. In a “Smart grid”, a vast variety of different decentralized and decentralized power producers interact in an intelligent way, so the variable demand can be met in a most efficient way.

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Example of “Smart Watt” in Aachen

Smart Portfolio: Intelligent Energy Management

Forecasting production Analyzing, Information, Recommendation

Optimizing Portfolio

Invoicing of innovative, Forecasting demand dynamic tariffs

Fig. Smart Grid in the region of Aachen, Germany

The pilot project Smart Watts consists of 15municipal utilities, who want to contribute in particular through the creation of interoperability and standardization in an ICT-based energy supply to an "Internet of Energy". In this project modular smart meters were developed into an energy center in the household. The goal is that household appliances independently consume primary power when it is cheap available(as high winds or sunshine) without limited comfort. In addition, customers on the basis of this infrastructure will be informed in detail about new services, e.g. via a new online energy advice provided to help increase the efficiency use of energy.

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3. Virtual Power Plant

Fig. Decentralized Energy Management System (DEMS) by Siemens

In line with Germany‘s transition to alternative sources of energy, plans call for the country to generate 80 percent of its electricity from renewables by 2050. The associated expansion of wind, photovoltaic, and biogas generation will necessitate a completely new grid infrastructure to distribute electricity. To date, power in Germany has come from a limited number of large-scale plants; in the future it will be supplied by millions of small-scale distributed generators. This will have repercussions for the current power market. Anybody with a couple of voltaic panels on his roof can become a ―prosumer‖ — both a producer and a consumer of power. This in turn will require new software systems to control and coordinate such a complex infrastructure. Here, the industry buzzword is ―virtual power plant,‖ which refers to a cluster of small-scale generators that collectively act like a single large power plant, thus avoiding the fluctuations that characterize individual wind and photovoltaic power facilities. According to a study by the corporate consultants PricewaterhouseCoopers (PwC), virtual power plants are a vital part of the transition to alternative energy sources. Example City of Munich

A smaller virtual power plant is operated by Munich‘s municipal utility, Stadtwerke München — here too with DEMS. The entity aggregates plants with a combined generating capacity of over 20 megawatts, including the utility‘s own hydroelectric plant on the Isar River, five CHP plants, a wind power plant, a photovoltaic plant, and several standby diesel generators. The smallest unit delivers 30 kilowatts. Next in line to join the conglomerate are a biogas plant, a geothermal plant, and several switchable loads such as large-scale pumps and cold-storage warehouses.

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Appendix 2. Evaluation Indices System of National New Energy Cities

Indices No. Sub-indices Detailed Requirements (by the end of CNEDP period)

Ratio of new energy consumption to the total New energy 1 ≥6% consumption in energy consumption 2 Solar energy utilization (choose l)

2, or 2.1 Solar thermal utilization Cumulative total area of solar collector≥1 million m Solar collector area per capita≥360 m2 per 1,000 persons Installation capacity of distributed solar PV 2.2 Cumulative total installed capacity≥20 MW power Installation capacity of distributed wind New energy 3 Cumulative total installed capacity≥100 MW consumption in power categories 4 Biomass energy utilization (two sub-indices must be chosen at 4.1 quantity of biomass utilization Total utilization amount ≥ 100,000 tce/a least) Energy utilization of biogas and sludge in Scientific and reasonable energy utilization plan for biogas 4.2 urban sewage treatment plant and sludge Gross floor area of large-scale geothermal heating and 5 Geothermal utilization heat pump heating (cooling) ≥3 million m2

Total annual utilization amount of other new energy in 6 Other new energy utilization addition to the above ≥ 50,000 tce/a

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Indices No. Sub-indices Detailed Requirements (by the end of CNEDP period)

(i) Establishment of multi-sector coordinating management system and working mechanism 7 Local policy support (ii) Establishment of special funds for demonstration utilization and promotion of new energy technologies, as well as other support measures to be taken

(i) Establishment of new energy public information service platform 8 Establishment of public service platform Administrative (ii) Fostering professional new energy service companies management and (iii) Launching capacity building and training activities policy support (i) Developing effective policies and management mechanisms for the development of the distributed 9 Supporting infrastructure and facilities energies (ii) Other supportive business channels and facilities for new energy development

Dissemination of new energy knowledge, raising public 10 Public dissemination awareness for new energy utilization

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Appendix 3. List of Budgeting Key New Energy Projects in Dunhuang (2013-2015) Government Enterprise Bank Loan Project Project Construction No. Construction Content Financing Self-financing Investment Categories Period (’000 (’000 CNY) (’000 CNY) CNY) (’000 RMB) Implement ground source heat pump demonstration project in 1 2013-2014 4,000.0 16,000.0 20,000.0 administrative service center building Implement PV lighting renovation project in the Mayor plaza, Yueying 2 2013-2014 1,500.0 1,500.0 Urban solar plaza, Welcome plaza, Liyuan plaza BIPV and solar and Shazhou Plaza I thermal Promote the PV lighting system in utilization 3 the new district and district has been 2013-2015 5,000.0 5,000.0 built Application of solar collector system 4 2013-2015 20,000.0 20,000.0 in urban residential Construct distributed PV power 5 station, promote the application of 2013-2015 60,000.0 240,000.0 300,000.0 BIPV Sub-total 26,500.0 64,000.0 256,000.0 346,500.0 Construct three 200-house 6 centralized ―sunlight bathroom‖ 2013-2015 solar hot water projects Integrated 2,500.0 2,500.0 Construct five 100-house centralized solar energy II 7 sunlight bathroom solar hot water 2013-2015 utilization in ― ‖ projects rural areas Rural Solar Integrated Utilization Pilot 8 2013 550.0 Project in Qili town 2,120.0 2,670.0 9 Construct solar water pump 2013-2014 24,808.0 99,232.0 124,040.0

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demonstration project in Dunhuang farm Implement solar frequency vibration 10 2013-2014 1,200.0 1,200.0 killing lamp promotion project Sub-total 4,250.0 26,928.0 99,232.0 130,410.0 Installation of PV street lights and 11 2013-2015 10,000.0 10,000.0 billboard in selected urban area Installation of PV street lights along 12 2013-2015 8,000.0 8,000.0 Street solar avenue of industrial park lights and Installation of PV street lights along 13 2013-2015 1,000.0 1,000.0 III billboards Dang river landscape renovation Installation of PV street lights along the avenue of the PV Industrial Park 14 2013-2014 12,000.0 12,000.0 and New Energy Equipment Manufacture Park Sub-total 31,000.0 0.0 0.0 31,000.0 Running two electric sightseeing 15 2013 150.0 150.0 cars in Crescent Spring tourism site Solar energy Increase four electric cruiser for the 16 2013 200.0 200.0 applications in Public Security Bureau IV green Increase four electric cruiser for the 17 2013 200.0 200.0 transportation Enforcement Bureau Installation of PV traffic signal lights 18 2013-2014 500.0 500.0 in urban area Sub-total 1,050.0 0.0 0.0 1,050.0 Solar PV Implement PV lighting renovation in applications in 19 Crescent Spring tourism reception 2014-2015 5,000.0 5,000.0 tourism sites center V Yumenguan and Xuanquan Distributed 20 2013 2,000.0 Solar PV Project 2,000.0 Sub-total 7,000.0 0.0 0.0 7,000.0

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Construct Lutong Mining 6MW 21 2013-2014 15,300.0 61,200.0 76,500.0 distributed PV power station project Solar energy Dunhuang 150MW Trough demonstration 22 CSP-CHP Project- first phase with 2013-2015 580,850.0 1,361,940.0 1,942,790.0 VI utilization in installed capacity of 50 MW industrial parks Complete the first phase of solar power 23 2013-2015 30,000.0 120,000.0 150,000.0 field experiment station Sub-total 0.0 626,150.0 1,543,140.0 2,169,290.0 Total 2013-2015 69,800.0 717,078.0 1,898,372.0 2,685,250.0

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Appendix 4. List of Budgeting Key New Energy Projects in Wuwei (2013-2015) Project Project Self-financing Bank Loan No Project Name Project Description Investment Categories (’000 CNY) (’000 CNY) (’000 CNY) Solar 20,000 solar water heaters will be Solar water heater 1 thermal added in CNEDP, and the utilization 60000.00 60000.00 installation project utilization rate in Wuwei city will be over 80% Residences and It will construct 1000 solar PV public buildings residences, and the roofs and walls of 9600.00 9600.00 along golden street the residences are installed with solar BIPV project panels. The roofs of 1~4# teaching building, training building, teaching experiment Wuwei Training building, 1~4# training plant, 1~2# College BIPV student dining hall, 1~8# student 7200.00 7200.00 project apartment and logistic service building in the college are installed with solar Distributed panels. 2 solar PV Weilong 100,000 The roofs of buildings and structures in ton wine shop BIPV Weilong organic wine Co., Ltd. are 2400.00 2400.00 project installed with solar panels. The construction area is 21,640m2. The building integrates the characteristics of Wuwei Theater theater, cinema, meeting and office 5280.00 5280.00 BIPV project work. The roofs of the building are installed with solar panels. The construction area is 18,481m2.The Gymnasium BIPV roofs of the building are installed with 4560.00 4560.00 project solar panels.

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Public health The total land area is 11929.82m2, and comprehensive the construction area is 32296m2. The 1320.00 1320.00 service plaza BIPV solar PV modules on the roofs of the project building are installed with solar panels. agriculture, forestry and animal The roofs of the main building and husbandry podium building are installed with solar 720.00 720.00 comprehensive panels. service plaza BIPV project Water The total land area is 11495m2.The comprehensive roofs of the building are installed with 480.00 480.00 plaza BIPV project solar panels. The roofs of public security bureau Public security technique buildings of Wuwei city and bureau technique 720.00 720.00 Liangzhou district are installed with plaza BIPV project solar panels. Human resources, social security and The total land area is 10498.6m2. The peasant worker roofs of the building are installed with 600.00 600.00 training center plaza solar panels. BIPV project Transport emergency The land area is 7362.8m2, and the total guarantee command construction area is 15978.3m2. The 960.00 960.00 center roofs of the building are installed with comprehensive solar panels. plaza BIPV project

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Wuwei Equipment Manufacture and New Energy Park, Wuwei Industrial Park, Huangyang The building roofs, walls and space 50400.00 117600.00 168000.00 Industrial Park and land are installed with solar panels. Ronghua Industrial Park BIPV and Distributed Solar PV Project The land area is 7200m2, and the total Land and resources construction area is 14643m2. The 4800.00 4800.00 plaza BIPV project roofs and walls of the building are installed with solar panels. Wuwei energy The building roof, south facade, east service plaza BIPV and west facades are installed with 7200.00 7200.00 project solar panels. The public building walls of Wuwei wine international forum convention Wuwei wine center are installed with solar glass international forum 13440. wall, and the space roofs of the 5760.00 19200.00 convention center 00 buildings are installed with solar PV BIPV project generation system. The construction area is 66000m2. Wuwei heavy-ion The land area is 2,000,000m2. The tumor treatment roofs of the buildings are installed with 9600.00 9600.00 center BIPV project solar PV panels. Gulang Xinmiao Using the various factory roofs and 20MW Distributed unused space in the park to build a 64051.71 149453.99 213505.70 Solar PV Power 20MW distributed solar PV power Generation Project generation plant. Main components are

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solar panels and inverters. Kuangou Industrial Using the roof and unused space in the Park 6MW park to build a 6MW distributed solar Distributed Solar PV power generation plant. Main 22925.12 51026.88 73952.00 PV Power components are solar panels and Generation Project inverters. Sunshine industrial park agricultural The roofs of cold storage, processing facilities factory, office building and greenhouse 43200.00 100800.00 144000.00 demonstration are installed with solar PV panels. district solar PV project Sub-total 241776.80 432320.90 674097.70 The biomass power generation project Wuhan Kaidi Green with installed capacity of 30 MW will Energy Biomass be built by Wuhan Kaidi Green Energy Development Co., 3 power Development Co., Ltd with the annual 96000.00 224000.00 320000.00 Ltd 30MW biomass generation biomass resource supply of 0.21 power generation million tons. The project preparatory project work is not yet completed. There are still some projects under construction in scale of 7,000 kW, including Zamu River main ditch Small 7MW small cascade hydroelectric power stations 4 21000.00 49000.00 70000.00 Hydropower hydropower project with installation capacity of 3800kW and Yindacaizi channel hydroelectric power station with installation capacity of 3200kW. Total 660553.70 1137641.70 1798195.40

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Appendix 5. Report of Study Tour to Europe

The purpose of the study tour is to learn about international best practice experiences, which can benefit PRC, especially Gansu province with practical lessons on renewable energy city programs, support actions and intelligent investments which are successfully implemented in the European cities. The study tour was conducted from 18th -27th May 2014 in three countries of Denmark, Germany and Switzerland. The organization visited include (i) Danish Energy Agency, (ii) Technical University of Denmark, (iii) GFA Consulting Group (Germany), (iv) Wuppertal Institute for Climate, Environment and Energy (Germany), (v) ENCO Energie-Consulting AG (Switzerland), and (vi) Energie 360°AG (Switzerland). These organizations cover not only government agencies and research institutes, but also consulting companies and project developers.

1. Danish Energy Agency The Danish Energy Agency (DEA) was established in 1976, and is an agency under the Ministry of Climate, Energy and Building. The DEA is responsible for the entire chain of tasks linked to energy production and supply, transportation and consumption, including energy efficiency and savings as well as Danish national CO2 targets and initiatives to limit emissions of greenhouse gasses. The DEA supports building-policy initiatives to increase the productivity and quality of building as well as the operation and maintenance of buildings, with focus on sustainable building. The DEA also collaborates with the building sector to establish a good framework for the industry. It should be pointed out that the Sino-Danish cooperation on energy, climate and building is being conducted between Denmark and PRC. DEA is the responsible agency at Denmark side, and altogether four national agencies from the PRC side are involved, including NDRC, NEA, MOHURD and MOST as shown below.

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Under Sino-Danish energy cooperation, there are two pilot projects in the field of renewable energy are undertaken. One is renewable energy based heat supply project in Yilan county of Heilongjiang province by comprehensive utilization of the biomass, excess wind power and geothermal for heat supply; the other one is located in Baicheng city of Jilin province by focusing on how to learn from Danish best experience of integration of wind into the heat and power system of the city. It is found that the experiences of these two pilot projects in the North China can definitely make reference for Gansu province on how to utilize rich renewable energy resources for municipal heat supply and power generation.

2. Technical University of Denmark Technical University of Denmark (DTU) was founded in 1829. It is ranked as one of the foremost technical universities in Europe and recognized internationally as a leading university in the areas of technology and the natural sciences and is known for its business-oriented approach, its focus on sustainability and its appealing study environment. The delegation visited the department of civil engineering by mainly focusing on research activities of solar heating at DTU, particularly with regard to collectors for solar heating plants, solar combi system and compact seasonal heat storage modules.

DTU is active in cooperation with the PRC in the solar energy utilization, such as, China Academy of Building Research, Chinese Academy of Sciences, Institute of Electrical Engineering, and Beijing Solar Energy Research Institute Group Co. Ltd. DTU has achieved remarkable improvement on compact seasonal heat storage modules. At present, a pilot project is undertaking in Hebei province, and a big market is expected after its successful operation. It is found that DTU provided technical guidance to ―Dunhuang Administrative Service Center Project‖ in Dunhuang city of Gansu province with support of Sino-Danish renewable energy cooperation program. It is sure that this visit will strengthen cooperation between DTU and Dunhuang city as well as Gansu province in this project and explore other business opportunities and technical support in the near future.

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3. GFA Consulting Group GFA Consulting Group was founded in 1982 based in Hamburg of Germany. It has a sound track record of providing effective solutions to the challenges in the global consulting market. The company relies on its international network of experts, partners and subsidiaries that implemented complex studies and projects in over 130 countries. Its consulting business cover energy & climate change, agriculture & rural development, natural resources, private sector development, financial systems development, public finance management, and water & sanitation etc.

The topics of the visit to GFA are focused on green financing in municipalities. GFA has sound experiences of providing consulting services on sustainable energy financing for KfW and EBRD projects in Asian and African countries 22 . From the year of 2012, GFA implemented KfW Green Financing Project in China, to assist CITIC and Chang‘an Banks to identify, plan, implement and assess investments reducing primary energy consumption and greenhouse gas (GHG) emissions in urban areas of China. Furthermore, the senior consultants from GFA also made presentation on sustainable energy planning and energy efficiency in cities by giving detailed explanation on (1) challenges and benefits of energy planning and energy efficiency in municipalities; (2) areas for municipal energy efficiency; (3) project development and implementation strategies; (4) major support instruments for municipal EE in Europe, ie, covenant of mayors and Intelligent Energy Europe (IEE) Program.

22 South Africa: Credit Line for EE & RE Financing, KfW (2011-2013); Indonesia: Feasibility Study and Project Preparation for Emission Reduction Investment Program, KfW (2010-2011); Kazakhstan: Sustainable Energy Financing Facility, EBRD (2008-2011); Russia: Sustainable Energy Financing Facility, EBRD (2009-2012); Turkey: Sustainable Energy Financing Facility (TurSEFF), EBRD (2010-2012); Mid-Size Sustainable Energy Financing Facility (MidSEFF), EBRD (2011-2012); Western Balkan: Private Sector Support Facility and Energy Efficiency and SME Competitiveness Facility, EBRD (2011-2012);

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It is convinced that it is a good opportunity for the delegation to learn how to consider and build a sustainable green city from planning, policy, technology and financing points of view. 4. Wuppertal Institute for Climate, Environment and Energy Wuppertal Institute for Climate, Environment and Energy (Wuppertal Institute-WI) was founded in 1991 based in Wuppertal of Germany. The Wuppertal Institute has the legal status of a non-profit limited company and receives basic funding from the Land North Rhine-Westphalia. It is in the responsibility of the Ministry for Innovation, Science and Research of the Land North Rhine-Westphalia. The research at Wuppertal Institute cover (1) future energy and mobility structures; (2) energy, transport and climate policies; (3) material flows and resource management; (4) sustainable production and consumption. The delegation visited its Berlin office. During the visit, the expert from the Wuppertal Institute mainly introduced good practice of energy city programs: (1) Sino-German cooperation project of low carbon future cities of Dusseldorf and Wuxi cities; (2) 100% RE communities; and (3) innovation city. It is noted that the Wuppertal Institute expertizes to assist the municipalities with scientific consulting and monitoring in and out of Germany. It has wide project experience in developing, assessing and evaluating climate protection concepts for municipalities and public services based on various ongoing and finalized studies on municipal emission balances. It is sure that this visit helps to make a bridge between the Wuppertal Institute with Gansu province for the future cooperation in the fields of local energy and low carbon planning and technical support.

5. European Energy Award in Switzerland European Energy Award (EEA) had its origin in Switzerland in 1995 and was officially certificated by EU in 2009. The EEA is a qualified instrument for steering and controlling communal energy (and climate change) policy. Up to now, 7 Countries (including Switzerland, Austria, Germany, France, Italy, Liechtenstein) have EEA implemented, and other 11 Countries are in a pilot phase. Totally 501 municipalities are awarded with EEA, 49 municipalities with EEA in Gold, and more than1000 municipalities are participating. The delegation had a meeting with Mr. Robert Horbaty and his company named ENCO Energie-Consulting AG. Mr. Robert Horbaty is a pioneer of EEA and managing director of energy cities association Switzerland. He illustrated EEA with good example of Zurich city in terms of urban planning, green building, energy supply from renewables, smart

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mobility, as well as internal regulation and extensive communication. He also introduced ―2000-Watt Development Site‖ Program which is currently promoted in Switzerland. Besides, Energies 360°AG, one of the key players in Switzerland with EEA was also invited to make presentation on how the company provides heat supply for municipality by transforming from natural gas to renewable energies. Energies 360°AG is municipal natural gas company with more than 96% share of city of Zurich. Since 2009, the business scope expanded from natural gas supply to wood pellets, biogas, geothermal heat and energy service. The company successfully realized the feed in of biogas into natural gas grid, for heating, cooking and process heat. The proportion of biogas is 5-20% with different price. The visit to Zurich left a deep impression to the delegation, one is the management process of EEA (mayoral commitment-appoint energy team-initial review-energy policy program-implementation-certification and award-initial review), and the other is the typical example of municipal natural gas company in Zurich.

6. Summary By conducting the study tour to Denmark, Germany and Switzerland, the delegation learned a lot from international best practice experiences related to national renewable energy city program in these three countries. The key findings are summarized as below. Table Related City Programs and Pilot Projects in Three Countries Project/Progra Description m 1/ European • EEA is a qualified instrument for steering and Energy controlling communal energy (and climate change) Awards (EEA) policy. • Originated in Switzerland in 1995 and officially certificated by EU in 2009. Up to now, 7 Countries (including Switzerland, Austria, Germany, France, Italy, Liechtenstein) have EEA implemented, and other 11 Countries are in a pilot phase. • Totally 501 municipalities are awarded with EEA, 49 municipalities with EEA in Gold, and more than1000 municipalities are participating. • Management system process: - Plan: political commitment/Initial review, Goals and strategies - Do: activity program, implementing measures - Check: evaluating and controlling • Act: continual improvements 2/ Covenant of • Fast growing mainstream European movement supported Mayors by the EC that involving local, regional and national

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authorities in the sustainable energy development and climate protection. • Over 4500 signatories in 47 countries,75 associations of local authorities signed the CS partnership agreement with DG ENER. • It is based on a voluntary commitment of municipal councils to improve EE and RE that will result in at least 20% CO2 emissions reduction by 2020. • Baseline Emission Inventory (BEI) • Sustainable Energy Action Plan (SEAP) - Political document: it must be approved by the municipal council. - Strategic document, designed in collaboration with local stakeholders & citizens. - Cornerstone for development of operational documents: the SEAP defines concrete reduction measures, time frames and assigned responsibilities, which translate the long-term strategy into action • Investment projects 3/ Intelligent • Launched in 2003 by the European Commission to Energy – Europe support EU energy efficiency and renewable energy (IEE) programme policies, with a view to reaching the EU 2020 targets. - Energy efficiency and the rational use of energy (SAVE) - New and renewable resources (ALTENER) - Energy in transport (STEER) • Maximizing investment in sustainable energy (ELENA) 4/ 100% RE • Political decision towards 100% renewable energy in Communities in more than 130 German municipalities or regions, which Germany account for 12% in areas and 8% in population • Main barriers: co-ordination and lack of funds • Aim: sustainable and complete change towards renewable energy and reduction of energy use • Using regional sustainable energy sources to enable regional economic benefits 5/ Innovation • General idea - Win–Win potential pursued: combining City in Germany environmental goals with improved living standards, regional economic impulses and new green jobs • CO2-savings of 50% in 10 years • Bottrop as the winner from 16 competitiors of an industrial driven competition aiming for climate

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protection and transferable blue print as starting impulse • Innovation City comprises three different pillars: Master plan – Implementation Level – Accompanying scientific reflection and support process 6/ Sino-Danish • Location: Yilan county, Heilongjiang province, northeast Pilot Project of China Renewable Energy • Goal: 50 % RE in the heat sector Based Heat Supply • Challenges: - curtailment of wind power - air quality above national standard - inexpensive and abundant coal resources • Possibilities: - significant amounts of biomass available - no biomass in current District Heating - co-firing potential - large curtailment of wind power. Solutions: - match Danish expertise and know-how - DH system with EE buildings - integration of solar heating, biogas and ground source heat pumps - other policy measures 7/ Sino-Danish • Location: Baicheng city, Jilin province, northeast China Pilot Project of • Challenges: Curtailment of Wind - curtailment of wind power Power - inexpensive and abundant coal resources • Solutions: - match Danish expertise and knowhow - optimize the operation of conventional CHPs and power plants with wind power plants - other policy measures 8/ Sino-German • Target: to develop an integrated low carbon, adaptation Cooperation Project and circular economy strategy for city governments in of Low Carbon China and Germany, to show good practice examples of Future Cities sustainable urban development, and to stimulate (LCFC) dialogue among stakeholders from Wuxi and Dusseldorf for mutual learning and information exchange. • Three project areas: - Scientific analysis - Sino-German stakeholder dialogue - Dissemination

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• Activities in Wuxi city: - Integrated status quo and trends assessment - Development of local low carbon scenario • Identification of integrated technology options + policy measures. 9/ Green • Supported by KfW to assist the CITIC Bank and Financing Project in Changan Bank in Shaanxi province, to identify, plan, China implement and assess investments reducing primary energy consumption and greenhouse gas (GHG) emissions in urban areas of China; • Key eligible criteria: - Investments in climate relevant municipal infrastructure in the building, energy, transport, water, sewerage or waste management sectors in urban areas - Investment cost of projects financed by sub-loans not exceeding RMB 50 million - GHG emission reduction of the Projects should be at least 20% 10/ Sino-Swiss • Supported by SDC (Swiss Agency for Development and Low Carbon City Cooperation ) China (LCCC) • Bases on China Situation with practical Experience of 5 Program pilot cities • Developing ―LCCC Index System‖

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Appendix 6. Report of Study Tour to Jiangsu Province

At the final workshop held on May 2014 in Lanzhou city, Gansu Provincial Finance Department (GPFD) proposed that the consultant should facilitate Gansu Province to organize a domestic study tour. The purpose is not only to learn best practice and good experiences of constructing national new energy cities, but also particularly to exchange challenges these second-tier cities, both from the advanced East China and less advanced West China, are facing in attaining the targets to construct new energy cities and to identify possible central government support, if any, to fulfill their tasks. The domestic study tour was conducted during 26 October to 1st November 2014 in Yangzhou and Xuzhou cities, Jiangsu Province. A total of 6 representatives from the Gansu provincial financial department, municipal financial bureaus of Dunhuang and Wuwei cities participated in the study tour. Both Yangzhou and Xuzhou cities are located in the Jiangsu Province of the East China, which are much developed than Gansu Province of the northwest China. As national new energy cities, Yangzhou and Xuzhou cities have its own distinguishing features and have achieved significant improvement on renewable energy development and utilization. A. Lessons learned in Yangzhou City The new energy utilization in Yangzhou city are mainly focused on solar energy, biomass, geothermal-based heat pump and green transport, which have been realized outstanding achievements in the construction of new energy city. The delegation visited Yangzhou from October 27 to 29 by conducting a workshop with Yangzhou local DRC, and making site visits to the "Old City New Energy" program in the Nanxiahe historic site of Yangzhou City and the Yangzhou Smart Grid Exhibition Center. Through discussion exchange, it is noted that one of their successful experiences is the establishment of an efficient administrative system to support new energy city. Since so many government departments involve the new energy city program, the Yangzhou municipal government allocated the overall task of constructing new energy city to the relevant government departments, and each department was appointed the person who in charge of specific tasks, and fulfillment of the tasks is required to undergo assessment. The Yangzhou DRC is the leader department, and the other relevant departments are required to communicate with Yangzhou DRC at regular

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interval, and report the new energy city progress to the municipal government. This administrative system fully mobilized active participation of all levels of government departments and officials in Yangzhou. Yangzhou has carried out lots of exploratory and innovative work in combination of ancient city protection and new energy utilization. The Old City New Energy Program in Nanxiahe Historic Site greatly impressed the delegation. The program blends the ancient architecture style and the modern building concept, and comprehensively uses solar photovoltaic, solar thermal, geothermal and other types of new energies, which has distinctive characteristics. In recent years, the smart grid industry in Yangzhou has been growing rapidly, and basically formed a whole industrial chain. The Yangzhou Intelligence Valley is a smart grid technology industrial park integrating R&D, demonstration, exhibition, trade, incubation, and industrial services. The delegation paid a visit to the smart grid exhibition center in the Intelligence Valley by not only knowing the advanced products and technologies in the smart grid industry of Yangzhou, but also the future development and advanced concepts of smart grid through demonstration exhibition.

The Yangzhou Intelligence Valley pooled resources through combination of production, education and scientific research, facilitated the development with market-oriented operation, and promoted the industrial and technological innovation led by the application technologies and product development of smart grid industry, and developed key smart grid technologies, products and equipment with independent intellectual property rights. The successful experience left a deep impression to the delegation.

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B. Lessons learned in Xuzhou City The delegation visited Xuzhou city on the days of October 30 and 31. The delegation firstly had a workshop with Xuzhou DRC, Xuzhou Municipal Finance Bureau, and other stakeholders from industrial parks and new energy enterprises. With the rapid economic development of Xuzhou, the Xuzhou new energy industries, especially the solar PV industry has achieved a rapid development with a whole industrial chain of solar PV and its utilization. The delegation conducted a site visit to Jiangsu Zhongneng Poly-silicon Technology Development Co. Ltd. As a professional poly-silicon manufacturer, this company has production capacity of 21,000 tons, which ranks the first in Asia, and the third largest in the world in term of capacity output. The delegation also visited Xuzhou GCL Solar Power Station. The project put into operation in 2009 with total installed capacity of 20MW, it was regarded as the largest scale of its kind in China at that year. Xuzhou seized the opportunity, relied on industrial parks and big enterprises, and made a rapid development of new energies, especially solar PV development and utilization. The delegation was deeply inspired by the Xuzhou experience.

C. Obstacles and Challenges faced By conducting the site studies in Yangzhou and Xuzhou Cities, it is also found that although the two cities achieved remarkable improvements in constructing new energy cities, they are still confronted by some prominent obstacles and challenges which are also commonly exist in other cities in the PRC. In terms of administration, the awareness of all levels of government agencies needs to be strengthened. Currently, many cities are just seeking to obtain short-term national financial support by winning the title of National New Energy City. Instead, it is more important to take the new energy city program as a starting point for implementing urban green low-carbon development by combining with the long-term development goals of the city itself. In terms of project development, the cities are confronted with conflict between policy requirement and market demand. Take solar PV project in Xuzhou City as an example, the quota for ground solar PV power generation in Xuzhou in 2014 was only 25MW, while the actual market demand for constructing solar PV projects is much bigger than the quota; with

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regard to distributed solar APV, despite the central government strives to promote its development in the nationwide, due to high cost and lack of roof resources, it did not goes well in Xuzhou city. In terms of project financing, the construction of new energy city has a big demand for financial support, however, the most new energy projects are still difficult to be financed. The project financing is common and urgent topics faced by the cities. D. Policy Support Expected During the workshops and site visits, the delegation exchanges opinions and discussed the possible support expected from the central government: Policy preferences: The quota system is currently being conducted for solar power generation project application in an up-to-bottom way from central to province then to municipal governments. Obviously the quota can be obtained at municipal level can‘t meet the actual requirement of solar power projects. It is expected that that the central and provincial government should give policy inclination to the listed national new energy cities; Priority of project development: For instance, the NEA is currently promoting the development of biomass utilization for heating. It is expected that the central government should give priority to the cities listed as national new energy cities; More green financing: The national policy and commercial banks are expected to give more financial support for national new energy city construction; More capacity building activities: It is also expected to get extra financial support from the central government for the capacity building activities of new energy cities, such as, planning, site visit, research; Improvement of administrative regulation: Up to now, the NEA has not issued the detailed requirements for the appraisal and verification of the first batch of 81 national new energy cities. It is expected the requirements can be published as early as possible, so that the cities can take action in accordance with the detailed requirements.

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Appendix 7. List of Reference

No. Literatures

1 China Energy Conservation and Emission Reduction Development Report 2013 Concentrating Solar Thermal Power Development (ADB Project Number:43356 / TA 2 7402) Development strategy and deployment planning study on CHP industry development in 3 the PRC 4 Dunhuang City 12th Five-Year Plan for Economic and Social Development

5 Dunhuang City Government Annual Reports (2010-2012)

6 Dunhuang New Energy City Development Plan

7 Dunhuang Statistic Year Book (2012)

8 Financial Management and Analysis of Projects (ADB) Gansu Urban Infrastructure Development and Wetland Protection Project (ADB Project 9 Number:44020) Guidance on Promoting the Construction of large-scale solar water heating system 10 applications [2013]571 issued by the Gansu Department of Urban and Rural Housing Construction Guidance on the Pilot Project of Equity Incentive [2013]158 issued by the Gansu 11 Government 12 Http://social.csptoday.com/

13 Implementation Plan of ADB CNEDP Pilot Project provided by Dunhuang DRC Implementing Opinions on the Construction of Dunhuang CNEDP issued by Dunhuang 14 government Incentive policy research on CHP industry development in the PRC, National Solar 15 Thermal Energy Alliance, 2013 Interim Measures on Management of Distributed Power Generation [2013]1381, issued 16 by National Energy Administration Interim Measures on pilot financial subsidies for private purchase of new energy 17 vehicle [2010]230, issued by Ministry of Finance Layout research on CHP industry support system in the PRC, National Solar Thermal 18 Energy Alliance, 2013 List of Key New Energy Projects in Dunhuang (2013-2015) provided by Dunhuang 19 DRC Micro-grid Technology and Engineering Application, Li Fusheng et. al., China Electric 20 Power Press, 2013 New Energy & Renewable Energy Industry Development Plan of Wuwei City 21 2013-2016

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Notice of Promoting the Healthy Development of Solar PV Industry by Price Leverage 22 [2013]1638 issued by National Development and Reform Commission Notice of Subsidy Policy for Distributed Solar PV Power Generation [2013]390 issued 23 by Ministry of Finance Notice on doing good the grid-accessing and consuming related work of wind power in 24 2013 [2013]65 issued by the National Energy Administration Notice on the Completing the Policy of Wind Power tariff [2009]1906, issued by the 25 National Development and Reform Commission Notice on the Establishment of New Energy Industry Development Leadership Team 26 issued by Dunhuang government Notice on the Issuance of Development Plan Energy Conservation and New Energy 27 Vehicle Industry (2012-2020) [2012]20 issued by the State Council Pre-feasibility Study Report of the Dunhuang CHP-CSP Project provided by Dunhuang 28 DRC 29 Proposal of Gulang Xinmiao 20MW Distributed Solar PV Generation Project, 2013

30 Proposal of Kuangou Industrial Park 6MW Solar PV Generation Project, 2013 Proposals on Demonstration Embodiment of Micro-grid During the 12th Five-Year 31 Plan in PRC [2012] Micro grid working grop of NEA 32 PV Development in PRC 2013 published by CREIA

33 Solar Heating and Cooling Technology Roadmap, International Energy Agency, 2013

34 Solar Photovoltaic Energy, Guo Liangui, Chemical Industry Press, 2012

35 Solar Photovoltaic Energy Technology Roadmap, International Energy Agency, 2013 Solar Thermal Utilization, He Zinian, University of Science and Technology Press, 36 2009 Some Opinions on Promoting the Healthy Development of Solar PV Industry [2013]24 37 issued by the State Council Technical Guidebook for Solar Water Heating System of Civil Buildings, Zheng 38 Ruicheng, Chemical Industry Press, 2011 Technical Handbook for Solar Heating, Zheng Ruicheng, China Architecture and Build 39 Press, 2012 40 Technical regulations on feasibility study of CHP projects [2001] issued by NDRC Technology and policy bottlenecks analysis on CHP in the PRC, National Solar 41 Thermal Energy Alliance, 2013 Technology, market and policy development status of CHP at home and abroad, 42 National Solar Thermal Energy Alliance, 2013 43 The National 12th Five-Year Plan for Renewable Energy Development

44 The National 12th Five-Year Plan for PV Power Development

45 The National 12th Five-Year Plan for Wind Power Development

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The principle and technology of CHP, Huang Suyi etc., China electric power press, 46 2012 The State Council‘s Notice on the issuance of Air Pollution Control Action Plan [2013] 47 37 issued by the State Council 48 The State Council‘s opinion on Accelerating the Development of Energy Conservation and Environmental Protection Industry [2103]30 issued by the State Council The State Council‘s Opinions on Further support economic and social development in 49 Gansu [2010]29 issued by the State Council 50 Wuwei City 12th Five-Year Plan for Economic and Social Development

51 Wuwei City‘s 12th FYP on Energy Development

52 Wuwei City Government Annual Reports (2010-2012)

53 Wuwei New Energy City Development Plan

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